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Medicare FFS consists of Part A, hospital insurance, which covers inpatient stays, care in skilled nursing facilities, hospice care, and some home health care; and Part B, which covers certain physician visits, outpatient hospital treatments, and laboratory services, among other services. Most persons aged 65 and older, certain individuals with disabilities, and most individuals with end-stage renal disease are eligible to receive coverage for Part A services at no premium. Individuals eligible for Part A can also enroll in Part B, although they are charged a Part B premium. MA plans are required to provide benefits that are covered under the Medicare FFS program. Most Medicare beneficiaries who are eligible for Medicare FFS can choose to enroll in the MA program, operated through Medicare Part C, instead of Medicare FFS. All Medicare beneficiaries, regardless of their source of coverage, can choose to receive outpatient prescription drug coverage through Medicare Part D. Beneficiaries in both Medicare FFS and MA face cost-sharing requirements for medical services. In Medicare FFS, cost sharing includes a Part A and a Part B deductible, the amount beneficiaries must pay for services before Medicare FFS begins to pay. Medicare FFS cost sharing also includes coinsurance—a percentage payment for a given service that a beneficiary must pay, and copayments—a standard amount a beneficiary must pay for a medical service. Medicare allows MA plans to have cost-sharing requirements that are different from Medicare FFS’s cost-sharing requirements, although an MA plan cannot require overall projected average cost sharing that exceeds what beneficiaries would be expected to pay under Medicare FFS. MA plans are permitted to establish dollar limits on the amount a beneficiary spends on cost sharing in a year of coverage, although Medicare FFS has no total cost-sharing limit. MA plans can use both out-of-pocket maximums, limits that can apply to all services but can exclude certain service categories, and service-specific maximums, which are limits that apply to a single service category. These limits help provide financial protection to beneficiaries who might otherwise have high cost- sharing expenses. MA plans projected that, on average, they would allocate most of the rebates to beneficiaries as reduced cost sharing and reduced premiums for Part B services, Part D services, or both. In 2007, almost all MA plans in our study (1,874 of the 2,055 plans, or 91 percent) received a rebate payment from Medicare that averaged $87 PMPM. MA plans projected they would allocate 69 percent of the rebate ($61 PMPM) to reduced cost sharing and 20 percent ($17 PMPM) to reduced premiums. MA plans projected they would allocate relatively little of the rebates (11 percent or $10 PMPM) to additional benefits that are not covered under Medicare FFS. (See fig. 1.) On average, for plans that provided detailed cost estimates, the projected dollar amounts of the common additional benefits ranged from a low of $0.11 PMPM for international outpatient emergency services to $4 PMPM for dental services. Additional benefits commonly offered included dental services, health education services, and hearing services. About 41 percent of beneficiaries, or 2.3 million people, were enrolled in an MA plan that also charged additional premiums to pay for additional benefits, reduced cost sharing, or a combination of the two. The average additional premium charged was $58 PMPM. Based on plans’ projections, we estimated that about 77 percent of the additional benefits and reduction in beneficiary cost sharing was funded by rebates, with the remainder being funded by additional beneficiary premiums. For 2007, MA plans projected that MA beneficiary cost sharing, funded by both rebates and additional premiums, would be 42 percent of estimated cost sharing in Medicare FFS. Plans projected that their beneficiaries, on average, would pay $49 PMPM in cost sharing, and they estimated that the Medicare FFS equivalent cost sharing for their beneficiaries was $116 PMPM. Although plans projected that beneficiaries’ overall cost sharing was lower, on average, than Medicare FFS cost-sharing estimates, some MA plans projected that cost sharing for certain categories of services was higher than Medicare FFS cost-sharing estimates. This is because overall cost sharing in MA plans is required to be actuarially equivalent or lower compared to overall cost sharing in Medicare FFS, but may be higher or lower for specific categories of services. For example, 19 percent of MA beneficiaries were enrolled in plans that projected higher cost sharing for home health services, on average, than in Medicare FFS, which does not require any cost sharing for home health services. Similarly, 16 percent of MA beneficiaries were in plans with higher projected cost sharing for inpatient services relative to Medicare FFS. (See table 1.) Some MA beneficiaries who frequently used these services with higher cost sharing than Medicare FFS could have had overall cost sharing that was higher than what they would pay under Medicare FFS. Cost sharing for particular categories of services varied substantially among MA plans. For example, with regards to inpatient cost sharing, more than half a million beneficiaries were in MA plans that had no cost sharing at all. In contrast, a similar number of beneficiaries were in MA plans that required cost sharing that could result in $2,000 or more for a 10-day hospital stay and $3,000 or more for three average-length hospital stays. In Medicare FFS in 2007, beneficiaries paid a $992 deductible for the first hospital stay in a benefit period, no deductible for subsequent hospital stays in the same benefit period, and a 20 percent coinsurance for physician services that averaged $73 per day for the first 4 days of a hospital stay and $58 per day for subsequent days in the stay. Figure 2 provides an illustrative example of an MA plan that could have exposed a beneficiary to higher inpatient costs than under Medicare FFS. While the plan in this illustrative example had lower cost sharing than Medicare FFS for initial hospital stays of 4 days or less as well as initial hospital stays of 30 days or more, for stays of other lengths the MA plan could have cost beneficiaries more than $1,000 above out-of-pocket costs under Medicare FFS. The disparity between out-of-pocket costs under the MA plan and costs under Medicare FFS was largest when comparing additional hospital visits in the same benefit period, since Medicare FFS does not charge a deductible if an admission occurs within 60 days of a previous admission. Some MA plans had out-of-pocket maximums, which help protect beneficiaries against high spending on cost sharing. As of August 2007, about 48 percent of beneficiaries were enrolled in plans that had an out-of- pocket maximum. However, some plans excluded certain services from the out-of-pocket maximum. Services that were typically excluded were Part B drugs obtained from a pharmacy, outpatient substance abuse and mental health services, home health services, and durable medical equipment. For 2007, MA plans projected that of their total revenues ($783 PMPM), they would spend approximately 87 percent ($683 PMPM) on medical expenses. Plans further projected they would spend approximately 9 percent of total revenue ($71 PMPM) on nonmedical expenses, such as administration expenses and marketing expenses, and approximately 4 percent ($30 PMPM) on the plans’ profits, on average. There was variation among individual plans in the percent of revenues projected to be spent on medical expenses. For example, about 30 percent of beneficiaries—1.7 million—were enrolled in plans that projected spending less than 85 percent on medical expenses. While there is no definitive standard for the percentage of revenues that should be spent on medical expenses, Congress adopted the 85 percent threshold to require minimum thresholds for MA plans in the Children’s Health and Medicare Protection Act of 2007. MA plans projected expenses separately for certain categories of nonmedical expenses, including marketing and sales. One type of MA plan—Private Fee-for-Service (PFFS)—allocated a larger percentage of revenue to marketing and sales than other plan types. On average, as a percentage of total revenue, marketing and sales expenses were 3.6 percent for PFFS plans compared to 2.4 percent for all MA plans. Medicare spends more per beneficiary in MA than it does for beneficiaries in Medicare FFS, at an estimated additional cost to Medicare of $54 billion from 2009 through 2012. In 2007, the average MA plan receives a Medicare rebate equal to approximately $87 PMPM, on average. MA plans projected they would allocate the vast majority of their rebates—approximately 89 percent—to beneficiaries to reduce premiums and to lower their cost- sharing for Medicare-covered services. Plans projected they would use a relatively small portion of their rebates—approximately 11 percent—to provide additional benefits that are not covered under Medicare FFS. Although the rebates generally have helped to make health care more affordable for many beneficiaries enrolled in MA plans, some beneficiaries may face higher expenses than they would in Medicare FFS. Further, because premiums paid by beneficiaries in Medicare FFS are tied to both Medicare FFS and MA costs, beneficiaries covered under Medicare FFS are subsidizing the additional benefits and lower costs that MA beneficiaries receive. Whether the value that MA beneficiaries receive in the form of reduced cost sharing, lower premiums, and extra benefits is worth the increased cost borne by beneficiaries in Medicare FFS is a decision for policymakers. However, if the policy objective is to subsidize health-care costs of low-income Medicare beneficiaries, it may be more efficient to directly target subsidies to a defined low-income population than to subsidize premiums and cost sharing for all MA beneficiaries, including those who are well off. As Congress considers the design and cost of the MA program, it will be important for policymakers to balance the needs of beneficiaries—including those in MA plans and those in Medicare FFS—with the necessity of addressing Medicare’s long-term financial health. Mr. Chairman, this completes my prepared remarks. I would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact James Cosgrove at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Christine Brudevold, Assistant Director; Jennie Apter, Alexander Dworkowitz, Gregory Giusto, Drew Long, and Christina C. Serna made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Although private health plans were originally envisioned in the 1980s as a potential source of Medicare savings, such plans have generally increased program spending. In 2006, Medicare paid $59 billion to Medicare Advantage (MA) plans--an estimated $7.1 billion more than Medicare would have spent if MA beneficiaries had received care in Medicare fee-for-service (FFS). MA plans receive a per member per month (PMPM) payment to provide services covered under Medicare FFS. Almost all MA plans receive an additional Medicare payment, known as a rebate. Plans use rebates and sometimes additional beneficiary premiums to fund benefits not covered under Medicare fee-for-service; reduce premiums; or reduce beneficiary cost sharing. In 2007, MA plans received about $8.3 billion in rebate payments. This testimony is based on GAO's report, Medicare Advantage: Increased Spending Relative to Medicare Fee-for-Service May Not Always Reduce Beneficiary Out-of-Pocket Costs ( GAO-08-359 , February 2008). For this testimony, GAO examined MA plans' (1) projected allocation of rebates, (2) projected cost sharing, and (3) projected revenues and expenses. GAO used 2007 data on MA plans' projected revenues and covered benefits, accounting for 71 percent of beneficiaries in MA plans. GAO found that MA plans projected they would use their rebates primarily to reduce cost sharing, with relatively little of their rebates projected to be spent on additional benefits. Nearly all plans--91 percent of the 2,055 plans in the study--received a rebate. Of the average rebate payment of $87 PMPM, plans projected they would allocate about $78 PMPM (89 percent) to reduced cost sharing and reduced premiums and $10 PMPM (11 percent) to additional benefits. The average projected PMPM costs of specific additional benefits across all MA plans ranged from $0.11 PMPM for international outpatient emergency services to $4 PMPM for dental care. While MA plans projected that, on average, beneficiaries in their plans would have cost sharing that was 42 percent of Medicare FFS cost-sharing estimates, some beneficiaries could have higher cost sharing for certain service categories. For example, some plans projected that their beneficiaries would have higher cost sharing, on average, for home health services and inpatient stays, than in Medicare FFS. If beneficiaries frequently used these services that required higher cost sharing than Medicare FFS, it was possible that their overall cost sharing was higher than what they would have paid under Medicare FFS. Out of total revenues of $783 PMPM, on average, MA plans projected that they would allocate about 87 percent ($683 PMPM) to medical expenses. MA plans projected they would allocate, on average, about 9 percent of total revenue ($71 PMPM) to nonmedical expenses, including administration and marketing expenses; and about 4 percent ($30 PMPM) to the plans' profits. About 30 percent of beneficiaries were enrolled in plans that projected they would allocate less than 85 percent of their revenues to medical expenses. As GAO concluded in its report, whether the value that MA beneficiaries receive in the form of reduced cost sharing, lower premiums, and additional benefits is worth the additional cost to Medicare is a decision for policymakers. However, if the policy objective is to subsidize health care costs of low-income Medicare beneficiaries, it may be more efficient to directly target subsidies to a defined low-income population than to subsidize premiums and cost sharing for all MA beneficiaries, including those who are well off. As Congress considers the design and cost of MA, it will be important for policymakers to balance the needs of beneficiaries and the necessity of addressing Medicare's long-term financial health.

Since the early 1990s, the explosion in computer interconnectivity, most notably growth in the use of the Internet, has revolutionized the way organizations conduct business, making communications faster and access to data easier. However, this widespread interconnectivity has increased the risks to computer systems and, more importantly, to the critical operations and infrastructures that these systems support, such as telecommunications, power distribution, national defense, and essential government services. Malicious attacks, in particular, are a growing concern. The National Security Agency has determined that foreign governments already have or are developing computer attack capabilities, and that potential adversaries are developing a body of knowledge about U.S. systems and methods to attack them. In addition, reported incidents have increased dramatically in recent years. Accordingly, there is a growing risk that terrorists or hostile foreign states could severely damage or disrupt national defense or vital public operations through computer-based attacks on the nation’s critical infrastructures. Since 1997, in reports to the Congress, we have designated information security a governmentwide high-risk area. Our most recent report in this regard, issued in January, noted that, while efforts to address the problem have gained momentum, federal assets and operations continue to be highly vulnerable to computer-based attacks. To develop a strategy to reduce such risks, in 1996, the President established a Commission on Critical Infrastructure Protection. In October 1997, the commission issued its report, stating that a comprehensive effort was needed, including “a system of surveillance, assessment, early warning, and response mechanisms to mitigate the potential for cyber threats.” The report said that the Federal Bureau of Investigation (FBI) had already begun to develop warning and threat analysis capabilities and urged it to continue in these efforts. In addition, the report noted that the FBI could serve as the preliminary national warning center for infrastructure attacks and provide law enforcement, intelligence, and other information needed to ensure the highest quality analysis possible. In May 1998, PDD 63 was issued in response to the commission’s report. The directive called for a range of actions intended to improve federal agency security programs, establish a partnership between the government and the private sector, and improve the nation’s ability to detect and respond to serious computer-based attacks. The directive established a National Coordinator for Security, Infrastructure Protection, and Counter-Terrorism under the Assistant to the President for National Security Affairs. Further, the directive designated lead agencies to work with private-sector entities in each of eight industry sectors and five special functions. For example, the Department of the Treasury is responsible for working with the banking and finance sector, and the Department of Energy is responsible for working with the electric power industry. PDD 63 also authorized the FBI to expand its NIPC, which had been originally established in February 1998. The directive specifically assigned the NIPC, within the FBI, responsibility for providing comprehensive analyses on threats, vulnerabilities, and attacks; issuing timely warnings on threats and attacks; facilitating and coordinating the government’s response to cyber incidents; providing law enforcement investigation and response; monitoring reconstitution of minimum required capabilities after an infrastructure attack; and promoting outreach and information sharing. PDD 63 assigns the NIPC responsibility for developing analytical capabilities to provide comprehensive information on changes in threat conditions and newly identified system vulnerabilities as well as timely warnings of potential and actual attacks. This responsibility requires obtaining and analyzing intelligence, law enforcement, and other information to identify patterns that may signal that an attack is underway or imminent. Since its establishment in 1998, the NIPC has issued a variety of analytical products, most of which have been tactical analyses pertaining to individual incidents. These analyses have included (1) situation reports related to law enforcement investigations, including denial-of-service attacks that affected numerous Internet-based entities, such as eBay and Yahoo and (2) analytical support of a counterintelligence investigation. In addition, the NIPC has issued a variety of publications, most of which were compilations of information previously reported by others with some NIPC analysis. Strategic analysis to determine the potential broader implications of individual incidents has been limited. Such analysis looks beyond one specific incident to consider a broader set of incidents or implications that may indicate a potential threat of national importance. Identifying such threats assists in proactively managing risk, including evaluating the risks associated with possible future incidents and effectively mitigating the impact of such incidents. Three factors have hindered the NIPC’s ability to develop strategic analytical capabilities. First, there is no generally accepted methodology for analyzing strategic cyber-based threats. For example, there is no standard terminology, no standard set of factors to consider, and no established thresholds for determining the sophistication of attack techniques. According to officials in the intelligence and national security community, developing such a methodology would require an intense interagency effort and dedication of resources. Second, the NIPC has sustained prolonged leadership vacancies and does not have adequate staff expertise, in part because other federal agencies have not provided the originally anticipated number of detailees. For example, as of the close of our review in February, the position of Chief of the Analysis and Warning Section, which was to be filled by the Central Intelligence Agency, had been vacant for about half of the NIPC’s 3-year existence. In addition, the NIPC had been operating with only 13 of the 24 analysts that NIPC officials estimate are needed to develop analytical capabilities. Third, the NIPC did not have industry-specific data on factors such as critical system components, known vulnerabilities, and interdependencies. Under PDD 63, such information is to be developed for each of eight industry segments by industry representatives and the designated federal lead agencies. However, at the close of our work in February, only three industry assessments had been partially completed, and none had been provided to the NIPC. To provide a warning capability, the NIPC established a Watch and Warning Unit that monitors the Internet and other media 24 hours a day to identify reports of computer-based attacks. As of February, the unit had issued 81 warnings and related products since 1998, many of which were posted on the NIPC’s Internet web site. While some warnings were issued in time to avert damage, most of the warnings, especially those related to viruses, pertained to attacks underway. The NIPC’s ability to issue warnings promptly is impeded because of (1) a lack of a comprehensive governmentwide or nationwide framework for promptly obtaining and analyzing information on imminent attacks, (2) a shortage of skilled staff, (3) the need to ensure that the NIPC does not raise undue alarm for insignificant incidents, and (4) the need to ensure that sensitive information is protected, especially when such information pertains to law enforcement investigations underway. However, I want to emphasize a more fundamental impediment. Specifically, evaluating the NIPC’s progress in developing analysis and warning capabilities is difficult because the federal government’s strategy and related plans for protecting the nation’s critical infrastructures from computer-based attacks, including the NIPC’s role, are still evolving. The entities involved in the government’s critical infrastructure protection efforts have not shared a common interpretation of the NIPC’s roles and responsibilities. Further, the relationships between the NIPC, the FBI, and the National Coordinator for Security, Infrastructure Protection, and Counter-Terrorism at the National Security Council have been unclear regarding who has direct authority for setting NIPC priorities and procedures and providing NIPC oversight. In addition, the NIPC’s own plans for further developing its analytical and warning capabilities were fragmented and incomplete. As a result, there were no specific priorities, milestones, or program performance measures to guide NIPC actions or provide a basis for evaluating its progress. The administration is currently reviewing the federal strategy for critical infrastructure protection that was originally outlined in PDD 63, including provisions related to developing analytical and warning capabilities that are currently assigned to the NIPC. On May 9, the White House issued a statement saying that it was working with federal agencies and private industry to prepare a new version of a “national plan for cyberspace security and critical infrastructure protection” and reviewing how the government is organized to deal with information security issues. In our report, we recommend that, as the administration proceeds, the Assistant to the President for National Security Affairs, in coordination with pertinent executive agencies, establish a capability for strategic analysis of computer-based threats, including developing related methodology, acquiring staff expertise, and obtaining infrastructure data; require development of a comprehensive data collection and analysis framework and ensure that national watch and warning operations for computer-based attacks are supported by sufficient staff and resources; and clearly define the role of the NIPC in relation to other government and private-sector entities. PDD 63 directed the NIPC to provide the principal means of facilitating and coordinating the federal government’s response to computer-based incidents. In response the NIPC undertook efforts in two major areas: providing coordination and technical support to FBI investigations and establishing crisis management capabilities. First, the NIPC provided valuable coordination and technical support to FBI field offices, which established special squads and teams and one regional task force in its field offices to address the growing number of computer crime cases. The NIPC supported these investigative efforts by (1) coordinating investigations among FBI field offices, thereby bringing a national perspective to individual cases, (2) providing technical support in the form of analyses, expert assistance for interviews, and tools for analyzing and mitigating computer-based attacks, and (3) providing administrative support to NIPC field agents. For example, the NIPC produced over 250 written technical reports during 1999 and 2000, developed analytical tools to assist in investigating and mitigating computer-based attacks, and managed the procurement and installation of hardware and software tools for the NIPC field squads and teams. While these efforts benefited investigative efforts, FBI and NIPC officials told us that increased computer capacity and data transmission capabilities would improve their ability to promptly analyze the extremely large amounts of data that are associated with some cases. In addition, FBI field offices were not yet providing the NIPC with the comprehensive information that NIPC officials say is needed to facilitate prompt identification and response to cyber incidents. According to field office officials, some information on unusual or suspicious computer-based activity had not been reported because it did not merit opening a case and was deemed to be insignificant. To address this problem, the NIPC established new performance measures related to reporting. Second, the NIPC developed crisis management capabilities to support a multiagency response to the most serious incidents from the FBI’s Washington, D.C., Strategic Information Operations Center. From 1998 through early 2001, seven crisis action teams had been activated to address potentially serious incidents and events, such as the Melissa virus in 1999 and the days surrounding the transition to the year 2000, and related procedures have been formalized. In addition, the NIPC coordinated development of an emergency law enforcement plan to guide the response of federal, state, and local entities. To help ensure an adequate response to the growing number of computer crimes, we recommend in our report that the Attorney General, the FBI Director, and the NIPC Director take steps to (1) ensure that the NIPC has access to needed computer and communications resources and (2) monitor implementation of new performance measures to ensure that field offices fully report information on potential computer crimes to the NIPC. Information sharing and coordination among private-sector and government organizations are essential for thoroughly understanding cyber threats and quickly identifying and mitigating attacks. However, as we testified in July 2000,establishing the trusted relationships and information-sharing protocols necessary to support such coordination can be difficult. NIPC success in this area has been mixed. For example, the InfraGard Program, which provides the FBI and the NIPC with a means of securely sharing information with individual companies, had grown to about 500 member organizations as of January 2001 and was viewed by the NIPC as an important element in building trust relationships with the private sector. NIPC officials recently told us that InfraGard membership has continued to increase. However, of the four information sharing and analysis centers that had been established as focal points for infrastructure sectors, a two-way, information-sharing partnership with the NIPC had developed with only one—the electric power industry. The NIPC’s dealings with two of the other three centers primarily consisted of providing information to the centers without receiving any in return, and no procedures had been developed for more interactive information sharing. The NIPC’s information-sharing relationship with the fourth center was not covered by our review because the center was not established until mid-January 2001, shortly before the close of our work. Similarly, the NIPC and the FBI have made only limited progress in developing a database of the most important components of the nation’s critical infrastructures—an effort referred to as the Key Asset Initiative. While FBI field offices had identified over 5,000 key assets, at the time of our review, the entities that own or control the assets generally had not been involved in identifying them. As a result, the key assets recorded may not be the ones that infrastructure owners consider to be the most important. Further, the Key Asset Initiative was not being coordinated with other similar federal efforts at the Departments of Defense and Commerce. In addition, the NIPC and other government entities had not developed fully productive information-sharing and cooperative relationships. For example, federal agencies have not routinely reported incident information to the NIPC, at least in part because guidance provided by the federal Chief Information Officers Council, which is chaired by the Office of Management and Budget, directs agencies to report such information to the General Services Administration’s Federal Computer Incident Response Capability. Further, NIPC and Defense officials agreed that their information-sharing procedures needed improvement, noting that protocols for reciprocal exchanges of information had not been established. In addition, the expertise of the U.S. Secret Service regarding computer crime had not been integrated into NIPC efforts. The NIPC has been more successful in providing training on investigating computer crime to government entities, which is an effort that it considers an important component of its outreach efforts. From 1998 through 2000, the NIPC trained about 300 individuals from federal, state, local, and international entities other than the FBI. In addition, the NIPC has advised several foreign governments that are establishing centers similar to the NIPC. To improve information sharing, we recommend in our report that the Assistant to the President for National Security Affairs direct federal agencies and encourage the private sector to better define the types of information necessary and appropriate to exchange in order to combat computer-based attacks and to develop procedures for performing such exchanges, initiate development of a strategy for identifying assets of national significance that includes coordinating efforts already underway, and resolve discrepancies in requirements regarding computer incident reporting by federal agencies. In our report, we also recommend that the Attorney General task the FBI Director to formalize information-sharing relationships between the NIPC and other federal entities and industry sectors and ensure that the Key Asset Initiative is integrated with other similar federal activities.

The National Infrastructure Protection Center (NIPC) is an important element of the U.S.' strategy to protect the nation's infrastructures from hostile attacks, especially computer-based attacks. This testimony discusses the key findings of a GAO report on NIPC's progress in developing national capabilities for analyzing cyber threats and vulnerability data and issuing warnings, enhancing its capabilities for responding to cyber attacks, and establishing information-sharing relationships with governments and private-sector entities. GAO found that progress in developing the analysis, warning, and information-sharing capabilities has been mixed. NIPC began various critical infrastructure protection efforts that have laid the foundation for future governmentwide efforts. NIPC has also provided valuable support and coordination related to investigating and otherwise responding to attacks on computers. However, the analytical and information-sharing capabilities that are needed to protect the nation's critical infrastructures have not yet been achieved, and NIPC has developed only limited warning capabilities. An underlying contributor to the slow progress is that the NIPC's roles and responsibilities have not been fully defined and are not consistently interpreted by other entities involved in the government's broader critical infrastructure protection strategy. This report summarized an April report (GAO-01-323).

DHS, DOE and FERC have taken various actions to address electromagnetic risks to the electric grid, and these actions generally fall into four categories: (1) standards, guidelines, tools and demonstration projects; (2) research reports; (3) strategy development and planning; and (4) training and outreach. Additionally, some of the actions DHS and DOE have taken generally aligned with recommendations made by the EMP Commission. Because federal agencies generally do not own electric grid infrastructure, federal actions to address GMD risks are more indirect through such things as developing standards and guidelines, and conducting research that could benefit electric grid owners and operators. Federal agencies have also been involved in strategy development and planning, as well as training and outreach efforts, as a means of preparing federal officials and others to respond to both EMP and GMD events, and enhancing knowledge about electromagnetic risks. For example, DHS’s Science and Technology Directorate (S&T) led the design and development of a prototype transformer that can be more easily transported to another location to help restore electric power in a timelier manner. DHS has also participated in various training and outreach events to enhance understanding of EMP and GMD events. DOE’s primary efforts include supporting research to enhance the understanding of the potential impacts to the electric grid from electromagnetic events. More detailed information on key federal agencies’ actions taken since 2008 to address electromagnetic risks can be found in Appendix II of our March 2016 report. Although DHS and DOE did not report that any of their actions were taken in response to the EMP Commission recommendations, some actions taken by both agencies have aligned with some of the recommendations. Specifically, of the seven recommendations made by the EMP Commission related to the electric grid, some of the actions that DHS and DOE took aligned with four of them: conducting research to better understand the interdependencies of critical infrastructures, addressing the vulnerability of control systems to an EMP attack; identifying responsibilities for responding to an EMP attack; and utilizing industry and other governmental institutions to assure the most cost-effective outcomes. For example, with respect to the recommendation on conducting research to better understand interdependencies of critical infrastructures, DHS’s Sector Resilience Report: Electric Power Delivery includes some assessment of how various critical infrastructures— including the energy, communications, and transportation sectors, among others—are interdependent in maintaining operations. For more detailed information regarding how identified federal actions align with these seven EMP Commission recommendations, see Appendix III of our March 2016 report. In our March 2016 report, we found that DHS had not clearly identified internal roles and responsibilities for addressing electromagnetic risks to the electric grid or communicated these to external federal and industry partners. While multiple DHS components and offices, including the National Protection and Programs Directorate (NPPD), the Federal Emergency Management Agency (FEMA), and S&T, had each conducted independent activities addressing electromagnetic risks to the electric grid, none had been tasked with lead responsibility for coordinating related activities within the department or with federal and industry stakeholders. As a result, during the course of our review for our March 2016 report, we experienced ongoing challenges in identifying applicable DHS personnel and related departmental actions. For example, NPPD officials had difficulty identifying their specific roles and activities addressing electromagnetic risks to the electric grid, including efforts to collect or synthesize available risk information to provide input into department-wide risk assessments. Furthermore, industry representatives and other federal officials told us it is not clear who within DHS is responsible for addressing electromagnetic risks. The 2008 EMP Commission report recommended that DHS make clear its authority and responsibilities, as well as delineate the functioning interfaces with other governmental institutions, regarding EMP response efforts. We concluded that designating internal roles and responsibilities within DHS regarding electromagnetic risks and communicating these to federal and industry partners could provide additional awareness of related activities and help ensure more effective and coordinated engagement with other federal agencies and industry stakeholders, and could help reduce the risk of potential duplication, overlap, or fragmentation within the department or across federal agencies. In our March 2016 report, we recommended DHS designate roles and responsibilities within the department for addressing electromagnetic risks and communicate these to federal and industry partners. DHS concurred with our recommendation and reported that their Office of Policy is coordinating across the department to identify and document applicable roles and responsibilities regarding electromagnetic issues to ensure full mission coverage while minimizing potential overlap or redundancy and expects to complete this effort by December 2016. These actions, if implemented effectively, should address the intent of our recommendation. In our March 2016 report, we found that DHS and DOE had not taken actions to identify key electrical infrastructure assets as required given their respective critical infrastructure responsibilities under the NIPP. The NIPP explicitly states that to manage critical infrastructure risk effectively, partners must identify the assets, systems, and networks that are essential to their continued operation, considering associated dependencies and interdependencies of other infrastructure sectors. The 2008 EMP Commission report also recommended that DHS and DOE prioritize nodes that are critical for the rapid recovery of other key sectors that rely upon electricity to function, including those assets that must remain in service or be restored within hours of an EMP attack. Neither DHS nor DOE reported any specific actions taken to identify critical electrical infrastructure as part of risk management efforts for the energy sector, including any systematic review of a 2013 FERC analysis of critical substations, or any further collaboration to determine the key elements of criticality that they believe should be considered when evaluating the vast array of infrastructure assets constituting the U.S. electric grid. The extensive size and scope of the electric power system necessitates collaboration among partners to ensure all individual expertise is effectively leveraged. As a result, we recommended in our March 2016 report that DHS and DOE direct responsible officials to review FERC’s electrical infrastructure analysis and collaborate to determine whether further assessment is needed to adequately identify critical electric infrastructure assets. DHS and DOE each concurred with our recommendation. DHS reported that NPPD is to collaborate with FERC to identify critical electrical infrastructure assets beginning with the evaluation of critical substations identified by FERC, and will explore elements of criticality that might not have been considered by FERC, in coordination with DOE. DOE stated that its Office of Electricity Delivery and Energy Reliability will review FERC’s electrical infrastructure analysis and will work with FERC and DHS to identify any additional elements of criticality and determine if further assessment is needed. Both DHS and DOE expect to complete these efforts by March 2017. These actions should address the intent of our recommendation. We found in March 2016 that although DHS components had independently conducted some efforts to assess electromagnetic risks, the department had not fully leveraged available risk information or conducted a comprehensive analysis of these risks. Within the Office of Policy, there is recognition that “space weather” and “power grid failure” are significant risk events, which DHS officials have determined pose great risk to the security of the nation. However, DHS officials were unable to provide detailed information about the specific risk inputs— namely threat, vulnerability, and consequence information—that were used to assess how electromagnetic events compared to other risk events, or how these inputs were used to inform DHS’s applicable risk- management priorities. Further, officials within NPPD were unable to identify any specific actions taken or plans to systematically collect or analyze risk information regarding electromagnetic impacts to the electric grid as part of department-wide risk assessment efforts. According to the NIPP, to assess risk effectively, critical infrastructure partners—including owners and operators, sector councils, and government agencies—need timely, reliable, and actionable information regarding threats, vulnerabilities, and consequences. Additionally, the electric grid remains vulnerable to other potential threats, such as physical and cyberattacks. We concluded that better collection of threat, vulnerability, and consequence information through existing DHS programs and strengthened collaboration with federal partners could help DHS better assess the relative risk ranking of electromagnetic events versus other risks and help inform asset protection priorities. Moreover, according to subject-matter experts, the impact to the electric grid from electromagnetic threats may vary substantially by location, network and operating characteristics, and other factors. For example, key reports on GMD indicate that high-voltage transformers located at higher latitudes in the United States are likely subject to increased potential for adverse impacts from GMD events than those at lower latitudes. Further collection of information on sector interdependencies could also help DHS to assess the potential economic consequences associated with long-term power outages and provide information to help assess the cost- effectiveness of various mitigation strategies. In our March 2016 report, we recommended that DHS’s NPPD and Office of Infrastructure Protection (IP) work with other federal and industry partners to collect and analyze key inputs on threat, vulnerability, and consequences related to electromagnetic risks. DHS concurred with our recommendation and reported that the department has initiated efforts to assess electromagnetic risk and help determine priorities. For example, DHS stated the Department has a joint study with DOE underway that will analyze the hazard environments, impacts, and consequences of different sources of EMP and GMD on the electric grid to determine events of concern and potential means of mitigation. DHS expects to implement these efforts by December 2016 and if implemented effectively, should address the intent of our recommendation. We also found in March 2016 that key federal agencies, including DHS and DOE, as well as industry partners had not established a fully coordinated approach to identifying and implementing risk management activities to address EMP risks. According to the NIPP Risk Management Framework, such activities include identifying and prioritizing research and development efforts, and evaluating potential mitigation options, including the cost-effectiveness of specific protective equipment. The publication of the National Space Weather Action Plan in October 2015 identified many key federal activities in these areas regarding the GMD risk; however, no similar efforts had been proposed regarding EMP risks to the electric grid. DHS officials stated an EMP attack generally remains a lower risk priority compared to other risk events with higher probability such as natural disasters or cyberattacks. DOE officials also noted resource limitations and competing priorities as the key driver for not pursuing additional risk management activities specifically related to EMP events. However, we found that even if an EMP attack is not determined to be among the highest resource priorities for DHS and DOE relative to other risk events, there are opportunities for enhanced collaboration among federal agencies and industry stakeholders to address identified gaps and help ensure that limited resources are more effectively coordinated and prioritized. For example, recent reports issued by DOE and a leading research organization for the electric industry identified gaps in the information available regarding likely EMP impacts to modern grid technologies and electronic control systems. They noted that such information remains important for developing applicable protective guidelines and equipment design specifications. In our March 2016 report, we recommended that DHS and DOE engage with federal partners and industry stakeholders to identify and implement key EMP research and development priorities, including opportunities for further testing and evaluation of potential EMP protection and mitigation options. DHS and DOE concurred with our recommendation and each identified actions to convene applicable stakeholders to jointly determine mitigation options and conduct further testing and evaluation. DHS stated S&T will work with DOE and the Electricity Subsector Coordinating Council to develop a joint government and industry approach to identify options for mitigating the consequences of an EMP event. DHS expects to implement this effort by September 2016. In addition, DOE stated it is working with the Electric Power Research Institute to develop an EMP Strategy that is scheduled for completion by August 31, 2016, and the strategy is to be followed by a more detailed action plan identifying research and development priorities and specific opportunities to test and evaluate EMP mitigation and protection measures. If implemented effectively, DHS and DOE’s actions should address the intent of our recommendation. We will continue to monitor DHS and DOE actions taken to address our March 2016 recommendations and have also recently initiated two additional reviews. One is evaluating the electromagnetic event preparedness of U.S. electricity providers and the other is a technical assessment of protective equipment designed to mitigate the potential impacts of a GMD on electrical infrastructure. We expect these projects to be completed by mid-2017. Chairman Perry, Ranking Member Watson Coleman, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff members have any questions concerning this testimony, please contact Chris Currie, Director, Homeland Security and Justice at (404) 679-1875 or CurrieC@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions include Dawn Hoff, Assistant Director; Chuck Bausell, Kendall Childers, Josh Diosomito, Ryan Lambert, Tom Lombardi, Steven Putansu, John Rastler, and Cody Raysinger. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony summarizes the information contained in GAO's March 2016 report, entitled Critical Infrastructure Protection: Federal Agencies Have Taken Actions to Address Electromagnetic Risks, but Opportunities Exist to Further Assess Risks and Strengthen Collaboration , GAO-16-243 . Key federal agencies have taken various actions to address electromagnetic risks to the electric grid, and some actions align with the recommendations made in 2008 by the Commission to Assess the Threat to the United States from Electromagnetic Pulse Attack (EMP Commission). Since 2008, the Department of Homeland Security (DHS), the Department of Energy (DOE), and the Federal Energy Regulatory Commission (FERC) have taken actions such as establishing industry standards and federal guidelines, and completing EMP-related research reports. GAO found that their actions aligned with some of the EMP Commission recommendations related to the electric grid. For example, DHS developed EMP protection guidelines to help federal agencies and industry identify options for safeguarding critical communication equipment and control systems from an EMP attack. Further, agency actions and EMP Commission recommendations generally align with DHS and DOE critical infrastructure responsibilities, such as assessing risks and identifying key assets. Additional opportunities exist to enhance federal efforts to address electromagnetic risks to the electric grid. Specifically, DHS has not identified internal roles and responsibilities for addressing electromagnetic risks, which has led to limited awareness of related activities within the department and reduced opportunity for coordination with external partners. Doing so could provide additional awareness of related activities and help ensure more effective collaboration with other federal agencies and industry stakeholders. Moreover, although DHS components have independently conducted some efforts to assess electromagnetic risks, DHS has not fully leveraged opportunities to collect key risk inputs—namely threat, vulnerability, and consequence information—to inform comprehensive risk assessments of electromagnetic events. Within DHS, there is recognition that space weather and power grid failure are significant risk events, which DHS officials have determined pose great risk to the security of the nation. Better collection of risk inputs, including additional leveraging of information available from stakeholders, could help to further inform DHS assessment of these risks. DHS and DOE also did not report taking any actions to identify critical electrical infrastructure assets, as called for in the National Infrastructure Protection Plan. Although FERC conducted a related effort in 2013, DHS and DOE were not involved and have unique knowledge and expertise that could be utilized to better ensure that key assets are adequately identified and all applicable elements of criticality are considered. Finally, DHS and DOE, in conjunction with industry, have not established a coordinated approach to identifying and implementing key risk management activities to address EMP risks. Such activities include identifying and prioritizing key research and development efforts, and evaluating potential mitigation options, including the cost-effectiveness of specific protective equipment. Enhanced coordination to determine key research priorities could help address some identified research gaps and may help alleviate concerns voiced by industry regarding the costs and potential adverse consequences on grid reliability that may be caused by implementation of such equipment.

The National Response Framework discusses several elements of effective response and response planning. The term response, as used in the National Response Framework, includes the immediate actions to save lives, protect property and the environment, and meet basic human needs. Response also includes the execution of emergency plans and actions to support short-term recovery. An effective, unified national response—including the response to any large-scale incident—requires layered, mutually supporting capabilities—governmental and nongovernmental. Indispensable to effective response is an effective unified command, which requires a clear understanding of the roles and responsibilities of each participating organization. The National Response Framework employs the following criteria to measure key aspects of response planning: Acceptability. A plan is acceptable if it can meet the requirements of anticipated scenarios, can be implemented within the costs and time frames that senior officials and the public can support, and is consistent with applicable laws. Adequacy. A plan is adequate if it complies with applicable planning guidance, planning assumptions are valid and relevant, and the concept of operations identifies and addresses critical tasks specific to the plan’s objectives. Completeness. A plan is complete if it incorporates major actions, objectives, and tasks to be accomplished. The complete plan addresses the personnel and resources required and sound concepts for how those will be deployed, employed, sustained, and demobilized. It also addresses timelines and criteria for measuring success in achieving objectives and the desired end state. Including all those who could be affected in the planning process can help ensure that a plan is complete. Consistency and standardization of products. Standardized planning processes and products foster consistency, interoperability, and collaboration, therefore, emergency operations plans for disaster response should be consistent with all other related planning documents. Feasibility. A plan is considered feasible if the critical tasks can be accomplished with the resources available internally or through mutual aid, immediate need for additional resources from other sources (in the case of a local plan, from state or federal partners) are identified in detail and coordinated in advance, and procedures are in place to integrate and employ resources effectively from all potential providers. Flexibility. Flexibility and adaptability are promoted by decentralized decisionmaking and by accommodating all hazards ranging from smaller-scale incidents to wider national contingencies. Interoperability and collaboration. A plan is interoperable and collaborative if it identifies other stakeholders in the planning process with similar and complementary plans and objectives, and supports regular collaboration focused on integrating with those stakeholders’ plans to optimize achievement of individual and collective goals and objectives in an incident. Under the Post-Katrina Emergency Management Reform Act, FEMA has responsibility for leading the nation in developing a national preparedness system. FEMA has developed standards—the Comprehensive Preparedness Guide 101—that call for validation, review, and testing of emergency operations plans (EOP),. According to the Comprehensive Preparedness Guide 101, plans should be reviewed for conformity to applicable regulatory requirements and the standards of federal or state agencies (as appropriate) and for their usefulness in practice. Exercises offer the best way, short of emergencies, to determine if an EOP is understood and “works.” Further, conducting a “tabletop” exercise involving the key representatives of each tasked organization can serve as a practical and useful means to help validate the plan. FEMA’s guidance also suggests that officials use functional and full-scale emergency management exercises to evaluate EOPs. Plan reviews by stakeholders also allow responsible agencies to suggest improvements in an EOP based on their accumulated experience. We also identified the need for validated operational planning in the aftermath of Hurricane Katrina, noting that to be effective, national response policies must be supported by robust operational plans. In September 2006, we recommended, among other things, that DHS take the lead in monitoring federal agencies’ efforts to meet their responsibilities under the National Response Plan (now the National Response Framework) and the National Preparedness Goal (now the National Preparedness Guidelines), including the development, testing, and exercising of agency operational plans to implement their responsibilities. DHS concurred with our recommendation. The Post-Katrina Emergency Management Reform Act transferred preparedness responsibilities to FEMA, and we recommended in April 2009 that FEMA should improve its approach to developing policies and plans that define roles and responsibilities and planning processes by developing a program management plan, in coordination with DHS and other federal entities, to ensure the completion of the key national preparedness policies and plans called for in legislation, presidential directives, and existing policy and doctrine; to define roles and responsibilities and planning processes; as well as to fully integrate such policies and plans into other elements of the national preparedness system. FEMA concurred with our recommendation and is currently working to address this recommendation. Other national standards reflect these practices as well. For example, according to Emergency Management Accreditation Program (EMAP) standards, the development, coordination and implementation of operational plans and procedures are fundamental to effective disaster response and recovery. EOPs should identify and assign specific areas of responsibility for performing essential functions in response to an emergency or disaster. Areas of responsibility to be addressed in EOPs include such things as evacuation, mass care, sheltering, needs and damage assessment, mutual aid, and military support. EMAP standards call for a program of regularly scheduled drills, exercises, and appropriate follow-through activities—designed for assessment and evaluation of emergency plans and capabilities—as a critical component of a state, territorial, tribal or local emergency management program. The documented exercise program should regularly test the skills, abilities, and experience of emergency personnel as well as the plans, policies, procedures, equipment, and facilities of the jurisdiction. The exercise program should be tailored to the range of hazards that confronts the jurisdiction. We reported in April 2009 that FEMA lacked a comprehensive approach to managing the development of emergency preparedness policies and plans. Specifically, we reported that FEMA had completed many policy and planning documents, but a number of others were not yet completed. For example, while DHS, FEMA, and other federal entities with a role in national preparedness have taken action to develop and complete some plans that detail and operationalize roles and responsibilities for federal and nonfederal entities, these entities had not completed 68 percent of the plans required by existing legislation, presidential directives, and policy documents as of April 2009. Specifically, of the 72 plans we identified, 20 had been completed (28 percent), 3 had been partially completed (that is, an interim or draft plan has been produced—4 percent), and 49 (68 percent) had not been completed. Among the plans that have been completed, FEMA published the Pre-Scripted Mission Assignment Catalog in 2008, which defines roles and responsibilities for 236 mission assignment activities to be performed by federal government entities, at the direction of FEMA, to aid state and local jurisdictions during a response to a major disaster or an emergency. Among the 49 plans that had not been completed were the National Response Framework incident annexes for terrorism and cyberincidents as well as the National Response Framework’s incident annex supplements for catastrophic disasters and mass evacuations. In addition, operational plans for responding to the consolidated national planning scenarios, as called for in Homeland Security Presidential Directive 8, Annex 1, remained outstanding. In February 2010, DHS’s Office of Inspector General reviewed the status of these planning efforts and reported that the full set of plans for any single scenario had not yet been completed partly because of the time required to develop and implement the Integrated Planning System. The Integrated Planning System, required by Annex 1 to Homeland Security Presidential Directive 8 (December 2007), is intended to be a st comprehensive approach to national planning. The Directive calls for the Secretary of Homeland Security to lead the effort to develop, in coordination with the heads of federal agencies with a role in homeland security, the Integrated Planning System followed by a series of related andard and planning documents for each national planning scenario. The Homeland Security Council compressed the 15 National Planning Scenarios into 8 key scenario sets in October 2007 to integrate planning for like events and to conduct crosscutting capability development. The redacted version of the Inspector General’s report noted that DHS had completed integrated operations planning for 1 of the 8 consolidated national planning scenarios—the terrorist use of explosives scenario. FEMA officials reported earlier this month that the agency’s efforts to complete national preparedness planning will be significantly impacted by the administration's pending revision to Homeland Security Presidential Directive-8. Once the new directive is issued, agency officials plan to conduct a comprehensive review and update to FEMA’s approach to national preparedness planning. In addition to FEMA’s planning efforts, FEMA has assessed the status of catastrophic planning in all 50 States and the 75 largest urban areas as part of its Nationwide Plan Review. The 2010 Nationwide Plan Review was based on the 2006 Nationwide Plan Review, which responded to the need both by Congress and the President to ascertain the status of the nation’s emergency preparedness planning in the aftermath of Hurricane Katrina. The 2010 Nationwide Plan Review compares the results of the 2006 review of states and urban areas' plans, functional appendices and hazard-specific annexes, on the basis of: Consistency with Comprehensive Preparedness Guide 101, Date of last plan update, Date of last exercise, and A self-evaluation of the jurisdiction’s confidence in each planning document’s adequacy, feasibility and completeness to manage a catastrophic event. FEMA reported in July 2010 that more than 75 percent of states and more than 80 percent of urban areas report confidence that their overall basic emergency operations plans are well-suited to meet the challenges presented during a large-scale or catastrophic event. Oil spills are a special case with regard to response. For most major disasters, such as floods or earthquakes, a major disaster declaration activates federal response activities under the provisions of the Robert T. Stafford Disaster Relief and Emergency Assistance Act. However, for oil spills, federal agencies may have direct authority to respond under specific statutes. Response to an oil spill is generally carried out in accordance with the National Oil and Hazardous Substances Pollution Contingency Plan. The National Response Framework has 15 functional annexes, such as search and rescue, which provide the structure for coordinating federal interagency support for a federal response to an incident. Emergency Support Function #10, the Oil and Hazardous Materials Response Annex, governs oil spills. As described in Emergency Support Function #10, in general, the Environmental Protection Agency is the lead for incidents in the inland zone, and the U.S. Coast Guard, within DHS, is the lead for incidents in the coastal zone. The difference in responding to oil spills and the shared responsibility across multiple federal agencies underscores the importance of including clear roles, responsibilities, and legal authorities in developing operational response plans. In conclusion, Mr. Chairman, emergency preparedness is a never-ending effort as threats evolve and the capabilities needed to respond to those threats changes as well. Realistic, validated, and tested operational response plans are key to the effective response to a major disaster of whatever type. Conducting exercises of these plans as realistically as possible is a key component of response preparedness because exercises help to identify what “works” (validates and tests) and what does not. This concludes my statement. I will be pleased to respond to any questions you or other members of the committee may have. For further information on this statement, please contact William O. Jenkins, Jr. at (202) 512-8757 or JenkinsWO@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this statement were Stephen Caldwell, Director, Chris Keisling, Assistant Director, John Vocino, Analyst-In-Charge, Linda Miller, Communications Analyst. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Among the lessons learned from the aftermath of Hurricane Katrina was that effective disaster response requires planning followed by the execution of training and exercises to validate those plans. The Federal Emergency Management Agency (FEMA) is responsible for disaster response planning. This testimony focuses on (1) criteria for effective disaster response planning established in FEMA's National Response Framework, (2) additional guidance for disaster planning, (3) the status of disaster planning efforts, and (4) special circumstances in planning for oil spills. This testimony is based on prior GAO work on emergency planning and response, including GAO's April 2009 report on the FEMA efforts to lead the development of a national preparedness system. GAO reviewed the policies and plans that form the basis of the preparedness system. GAO did not assess any criteria used or the operational planning for the Deepwater Horizon response. FEMA's National Response Framework identifies criteria for effective response and response planning, including (1) acceptability (meets the requirement of anticipated scenarios and is consistent with applicable laws); (2) adequacy (complies with applicable planning guidance); (3) completeness (incorporates major actions, objectives, and tasks); (4) consistency and standardization of products (consistent with other related documents); (5) feasibility (tasks accomplished with resources available); (6) flexibility (accommodating all hazards and contingencies); and (7) interoperability and collaboration (identifies stakeholders and integrates plans). In addition to the National Response Framework, FEMA has developed standards that call for validation, review, and testing of emergency operations plans. According to FEMA, exercises offer the best way, short of emergencies, to determine if such plans are understood and work. FEMA's guidance also suggests that officials use functional and full-scale emergency management exercises to evaluate plans. Other national standards reflect these practices as well. For example, the Emergency Management Accreditation Program standards call for a program of regularly scheduled drills, exercises, and appropriate follow-through activities, as a critical component of a state, territorial, tribal, or local emergency management program. GAO reported in April 2009 that FEMA lacked a comprehensive approach to managing the development of emergency preparedness policies and plans. Specifically, GAO reported that FEMA had completed many policy and planning documents, but a number of others were not yet completed. In February 2010, the Department of Homeland Security's (DHS) Office of Inspector General reviewed the status of these planning efforts and reported that the full set of plans for any single scenario had not yet been completed partly because of the time required to develop and implement the Integrated Planning System. The Integrated Planning System, required by Annex 1 to Homeland Security Presidential Directive 8 (December 2007), is intended to be a standard and comprehensive approach to national planning. Oil spills are a special case with regard to response. The National Response Framework has 15 functional annexes that provide the structure for coordinating federal interagency support for a federal response to an incident. Emergency Support Function #10--Oil and Hazardous Materials Response Annex--governs oil spills. Under this function, the Environmental Protection Agency is the lead for incidents in the inland zone, and the U.S. Coast Guard, within DHS, is the lead for incidents in the coastal zone. This difference underscores the importance of including clear roles, responsibilities, and legal authorities in developing operational response plans. GAO is not making any new recommendations in this testimony but has made recommendations to FEMA in previous reports to strengthen disaster response planning, including the development of a management plan to ensure the completion of key national policies and planning documents. FEMA concurred and is currently working to address this recommendation.

FAA has made progress in several areas to improve its implementation of NextGen. FAA has set performance goals for NextGen through 2018, including goals to improve the throughput of air traffic at key airports by 12 percent over 2009 levels, reduce delays by 27 percent from 2009 levels, and achieve a 5 percent reduction in average taxi-time at key airports. The setting of NextGen performance goals is a positive step, but much work remains in identifying measurable and reasonable performance metrics and targets for specific NextGen activities. FAA has undertaken a number of NextGen initiatives to improve system efficiency. For example, FAA has begun work to streamline its procedure approval processes—including its environmental reviews of new procedures—and has expanded its capacity to develop new performance- based navigation routes and procedures. In 2010, FAA produced over 200 performance-based navigation routes and procedures, exceeding its goal of 112. FAA reports thousands of gallons of fuel savings from the performance-based navigation routes in operation at Atlanta and the continuous descents being used into Los Angeles and San Francisco. However, aircraft operators have complained that FAA has not produced the most useful or beneficial routes and procedures to date. To address these concerns, FAA has undertaken thorough reviews in a number of areas. FAA has completed initial work to identify improvements needed in the airspace in Washington, D.C.; North Texas; Charlotte, North Carolina; Northern California; and Houston, Texas—focusing on routes and procedures that will produce benefits for operators. While the specific benefits from this work are not yet fully known, FAA expects to achieve measurable reductions in miles flown, fuel burn, and emissions from these actions. In addition, airport surface management capabilities—such as shared surface surveillance data and new techniques to manage the movement of aircraft on the ground—installed in Boston and New York have saved thousands of gallons of fuel and thousands of hours of taxi- out time, according to FAA. With respect to the continuing implementation of NextGen systems and capabilities, our ongoing work has preliminarily found that some key NextGen-related programs are generally proceeding on time and on budget (see table 1). Some key acquisitions may soon encounter delays, which can increase overall acquisition costs, as well as costs to maintain current systems. For example, delays in implementing the ERAM program is projected to increase costs by $330 million, as well as an estimated $7 to $10 million per month in additional costs to continue maintaining the system that ERAM was meant to replace. Moreover, due to the integrated nature of NextGen, many of its component systems are mutually dependent on one or more other systems. For example, ERAM is critical to the delivery of ADS-B because ADS-B requires the use of some ERAM functions. ERAM is also pivotal to the on-time implementation of two other key NextGen acquisitions—Data Communications and SWIM. In part due to ERAM’s delay, FAA pushed the Data Communications program’s start date from September 2011 to February 2012, plans to revise the original SWIM- segment 1 cost and schedule plan, and delayed the SWIM-segment 2 start date from 2010 to December 2012. The long-term result of this decision is not yet known but it could delay certain SWIM capabilities and hinder the progress of other capabilities that depend, in turn, on the system integration that SWIM is intended to provide. Thus, looking more broadly, the implementation of NextGen—both in the midterm (through 2018) and in the long term (beyond 2018)—will be affected by how well FAA manages program interdependencies. Delays in program implementation, as described above, and budget constraints have also affected FAA’s capital budget planning. The Administration has proposed reducing FAA’s capital budget by a total of $2.8 billion, or 20 percent, for fiscal years 2012 through 2015 largely due to governmentwide budget constraints. Most of this proposed reduction is on NextGen and NextGen-related spending, as reflected in FAA’s revised 5-year Capital Investment Plan for fiscal years 2012 through 2016. Congress has not completed FAA’s appropriation for fiscal year 2012, but current House and Senate appropriation bills propose to fund the agency near or above 2011 levels. FAA will have to balance its priorities to ensure that NextGen implementation stays on course while also sustaining the current infrastructure—which is needed to prevent failures and maintain the reliability and efficiency of current operations. To maintain credibility with aircraft operators that NextGen will be implemented, FAA must deliver systems and capabilities on time so that operators have incentives to invest in the avionics that will enable NextGen to operate as planned. As we have previously reported, a past FAA program’s cancellation contributed to skepticism about FAA’s commitment to follow through with its plans. That industry skepticism, which we have found lingers today, could delay the time when significant NextGen benefits—such as increased capacity and more direct, fuel- saving routing—are realized. A number of NextGen benefits depend upon having a critical mass of properly equipped aircraft. Reaching that critical mass is a significant challenge because the first aircraft operators to equip will not obtain a return on their investment until many other operators also equip. Stakeholders have proposed various equipage incentives. For example, one such proposal is for a private equity fund, backed by federal guarantees, to provide loans or other financial assistance to operators to help them equip, with payback of the loans dependent on FAA meeting its schedule commitments to implement capabilities that will produce benefits for operators. In addition, the NextGen Advisory Committee has begun to identify the specific avionics requirements for particular NextGen capabilities through the midterm, as well as identifying who—in terms of which parts of the fleet operating in which regions—should be targeted for additional incentives to equip. Our past and ongoing work examining aspects of NextGen have highlighted several other challenges facing FAA in achieving timely and successful implementation. For this statement, we would like to highlight a few specific areas: the potential effect of program delays on international harmonization efforts, the need for FAA to ensure that it addresses human factors and workforce training issues to successfully transition to a new air transportation system, the need for FAA to continue to address potential environmental impacts, and the need for FAA to improve the management and governance of NextGen. Effect of delays on FAA’s ability to collaborate with Europe. Delays to NextGen programs, and potential reductions in the budget for NextGen activities, could delay the schedule for harmonization with Europe’s air traffic management modernization efforts and the realization of these benefits. FAA officials indicated that the need to address funding reductions takes precedence over previously agreed upon schedules, including those previously coordinated with Europe. For example, FAA officials responsible for navigation systems told us that FAA is restructuring plans for its ground-based augmentation system (GBAS) because of potential funding reductions. While final investment decisions concerning GBAS have yet to be made, these officials said that FAA might have to stop its work on GBAS while Europe continues its GBAS development, with the result that Europe may have an operational GBAS, while FAA does not. A delay in implementing GBAS would require FAA to continue using the current instrument landing system which does not provide the benefits of GBAS, according to these officials. Such a situation could again fuel stakeholder skepticism about whether FAA will follow through with its commitment to implementing NextGen, and in turn, increase airlines’ hesitancy to equip with NextGen technologies. Need to address human factors and training issues. Under NextGen, pilots and air traffic controllers will rely to a greater extent on automation, which will change their roles and responsibilities in ways that will necessitate an understanding of the human factors issues involved and require that training be provided on the new automated systems. FAA and the National Aeronautics and Space Administration (NASA)—the primary agencies responsible for integrating human factors issues into NextGen—must ensure that human factors issues are addressed so that controllers, pilots, and others will operate NextGen components in a safe and efficient manner. Failure to do so could delay implementation of NextGen. We recently reported that FAA has not fully integrated human factors into the development of some aviation systems. For example, we noted that controllers involved in the initial operations capabilities tests of ERAM at an air traffic control center in Salt Lake City found using the system cumbersome, confusing, and difficult to navigate, thus indicating that FAA did not adequately involve controllers who operate the system in the system’s early development. In response to our recommendations in that report, FAA has created a cross-agency coordination plan in cooperation with NASA that establishes focus areas for human factors research, inventories existing facilities for research, and capitalizes on past and current research of all NextGen issues. In addition to integrating human factors research into NextGen systems, FAA and NASA will have to identify and develop the training necessary to address controllers’ and pilots’ changing roles, and have this training in place before NextGen is fully realized (when some aircraft will be equipped with NextGen systems and others will not). Need to address environmental impacts of NextGen. Another challenge to implementing NextGen is expediting environmental reviews and developing strategies to address the environmental impacts of NextGen. As we stated in our recent report on environmental impacts at airports, with the changes in aircraft flight paths that will accompany NextGen efforts, some communities that were previously unaffected or minimally affected by aircraft noise will be exposed to increased noise levels. These levels could trigger the need for environmental reviews, as well as raise community concerns. Our report found that addressing environmental impacts can delay the implementation of operational changes, and indicated that a systematic approach to addressing these impacts and the resulting community concerns may help reduce such delays. To its credit, FAA has been working to develop procedures for streamlining environmental review processes that affect NextGen activities. Need to improve management and governance. FAA has embarked on an initiative to restructure a number of organizations within the agency. We have previously reported on problems with FAA’s management and oversight of NextGen acquisitions and implementation. Specifically, FAA plans to abolish and merge a number of committees to improve decision making and reduce time requirements of senior FAA executives. It also plans to make the NextGen organization the responsibility of the Deputy Administrator and to create a new head of program management for NextGen- related programs to ensure improved oversight of NextGen implementation. Further, the Air Traffic Organization will be divided into two branches: operations and NextGen program management. Operations will focus on the day-to-day management of the national air space and the program management branch will be responsible for developing and implementing programs while working with operations to ensure proper integration. While elimination of duplicative committees and focus on accountability for NextGen implementation is a positive step, it remains to be seen whether this latest reorganization will produce the desired results. Chairman Petri, Ranking Member Costello, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions that you may have at this time. For further information on this testimony, please contact Gerald L. Dillingham, Ph.D. at (202) 512-2834 or dillinghamg@gao.gov. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Paul Aussendorf, Maria Edelstein, Heather Krause, Ed Laughlin, and Andrew Von Ah (Assistant Directors); Colin Fallon, Bert Japikse, Ed Menoche, and Dominic Nadarski. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony discusses the current progress toward implementing the Next Generation Air Transportation System (NextGen). NextGen will impact nearly every aspect of air transportation and will transform the way in which the air transportation system operates today. It will do so, in part, by (1) using satellite-based surveillance as opposed to ground-based radars, (2) using performance-based navigation instead of cumbersome step-by-step procedures, (3) replacing routine voice communications with data transmissions, and (4) organizing and merging the disjointed data that pilots, controllers, airports, airlines, and others currently rely on to operate the system. The Federal Aviation Administration (FAA) has been planning and developing NextGen since 2003, and is now implementing near-term (through 2012) and mid-term (through 2018) capabilities. Over the years, concerns have been raised by the Congress and other stakeholders that despite years of effort and billions of dollars spent, FAA has not made sufficient progress in deploying systems and producing benefits. In past reports, we have made a number of recommendations to FAA to address delays in development and acquisitions, improve its processes, and focus on accountability and performance. Others have also made recommendations to FAA to improve its implementation of NextGen. For example, the Department of Transportation's Office of the Inspector General recently made recommendations regarding specific NextGen programs, and the NextGen Midterm Implementation Task Force--whose creation was requested by FAA--resulted in consensus recommendations from industry on specific capabilities FAA should prioritize. Over the last 2 years, FAA has taken several steps and instituted many changes to address several of these issues. This statement today discusses (1) the results of NextGen programs and improvements to date and (2) ongoing issues that will affect NextGen implementation. This statement today is based on our NextGen-related reports and testimonies over the last 2 years; ongoing work for this subcommittee that includes our analysis of selected NextGen acquisitions and our analysis of FAA's efforts to harmonize NextGen with air traffic control modernization efforts in Europe; our review of FAA's 2025 Strategic Plan, 2011 NextGen Implementation Plan, 2012 Budget Submission, and other documents; and selected program updates from FAA officials. In summary, FAA has improved its efforts to implement NextGen and is continuing its work to address critical issues that we, stakeholders, and others have identified over the years. In some areas, FAA has implemented NextGen capabilities that have demonstrated measurable benefits for system users, such as fuel savings. FAA has also made progress in streamlining its processes, improving its capacity to develop new flight procedures, and focusing its efforts on specific procedures that are needed in key metropolitan areas. Furthermore, we found that several NextGen-related acquisitions are generally on time and on budget. However, some acquisitions have been delayed, which has impacted the timelines of other dependent systems, and the potential exists for other acquisitions to also encounter delays. These delays have resulted in increased costs and reduced benefits. Going forward, FAA must focus on delivering systems and capabilities in a timely fashion to maintain its credibility with industry stakeholders, whose adoption of key technologies is crucial to NextGen's success. FAA must also continue to monitor how delays will affect international harmonization issues, focus on human factors issues, streamline environmental approvals, mitigate environmental impacts, and focus on improving management and governance.

Rule of law reform must take place within China’s legal and political system, and any assessment of rule of law development should be judged in the context of Chinese institutions. China’s current legal system is relatively new and is based, to a great extent, on the civil law codes of Germany as adopted by Japan, and, to some extent on the legal institutions of the former Soviet Union and China’s traditional legal system. Two important characteristics of Chinese legal development since 1949 have been the subordination of law to Communist Party policy and the lack of independence of the courts. Another characteristic is the large number of legal measures used to implement a law, including administrative regulations, rules, circulars, guidance, Supreme People’s Court interpretations, and similar local government legal measures. China’s central government laws, regulations, and other measures generally apply throughout China. Although local governments enact laws and regulations, these must be consistent with central government measures. In 1996, a number of China’s top leaders emphasized the principle of administering the country in accordance with law. Several years later, China amended its constitution to incorporate this principle. A substantial number of the many commitments that China has made to the WTO can be characterized as related to developing rule of law practices. In a broad sense, China’s WTO commitments suggest that in its commercial relations China is on the way to becoming a more rules-based society, contingent on the faithful implementation of its WTO accession agreement. This agreement is highly detailed and complicated, running to over 800 pages including annexes and schedules. It is the most comprehensive accession package for any WTO member. As part of this package, China agreed to ensure that its legal measures would be consistent with its WTO obligations. About 10 percent of the more than 600 commitments that we identified in China’s accession package specifically obligate China to enact, repeal, or modify trade-related laws and regulations. These commitments cover such trade policy areas as agricultural tariff-rate quotas, export and import regulation, technical barriers to trade, intellectual property rights, and nondiscrimination. In addition, by becoming a WTO member, China has agreed to abide by the underlying WTO agreements, such as the General Agreement on Tariffs and Trade, the General Agreement on Trade in Services, the Agreement on Trade-Related Aspects of Intellectual Property Rights and the Understanding on the Rules and Procedures Governing the Settlement of Disputes. China also has made a substantial number of important, specific commitments in the rule of law-related areas of transparency, judicial review, uniform enforcement of legal measures, and nondiscrimination in its commercial policy. In the area of transparency, China has agreed to designate an official journal for publishing trade-related laws and regulations and to provide a reasonable period for public comment before implementing them. China has also agreed to designate an enquiry point where individuals, business enterprises, and WTO members can request information relating to these published laws and regulations. Transparency requirements and commitments to report information to the WTO together represent about a quarter of the commitments we identified in China’s accession package. In the area of judicial review, China has agreed to establish or designate tribunals to promptly review trade-related actions of administrative agencies. These tribunals are required to be impartial and independent of the administrative agencies taking these actions. In the area of uniform enforcement, China has agreed that all trade-related laws and regulations shall be applied uniformly throughout China and that China will establish a mechanism by which individuals and enterprises can bring complaints to China’s national authorities about cases of nonuniform application of the trade regime. Finally, in the area of nondiscrimination, China agreed that it would provide the same treatment to foreign enterprises and individuals in China as is provided to Chinese enterprises. China also agreed to eliminate dual pricing practices as well as differences in treatment provided to goods produced for sale in China and those produced for export. (See the appendix for examples of rule of law-related commitments included in China’s WTO accession agreement.) Chinese government officials have stated their commitment to make WTO- related reforms that would strengthen the rule of law. Furthermore, China’s plans for reform go beyond conforming its laws and regulations to China’s WTO commitments and include a broad legal review, as well as reforms of judicial and administrative procedures. Chinese officials with whom we spoke discussed the numerous challenges they face in these areas and said that these reforms will take time to implement. They also stated their need for outside assistance to help them with their reform efforts. First, Chinese government officials are in the midst of a comprehensive, nationwide review of laws, regulations, and practices at both the central and provincial levels. This review is to lead to repeals, changes, or new laws. According to one report, Chinese officials have identified more than 170 national laws and regulations and more than 2,500 ministry regulations as being WTO related. Officials whom we interviewed from the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) contend that generally China has done a good job of implementing its WTO obligations to date. MOFTEC officials said that complete implementation will take time and that part of their role is to teach other ministries how to achieve reform according to WTO commitments. They noted the importance of their efforts to coordinate WTO-related reforms with other ministries because Chinese laws tend not to be very detailed and, as a result, it is difficult to incorporate the language of specific WTO commitments into Chinese laws. Officials said that, consequently, Chinese laws will sometimes use general, open-ended phrases that refer to WTO commitments, such as the services annexes, while the detail is set forth in the implementing regulations . Provincial authorities are still reviewing their laws and regulations to see if they are consistent with national laws. Provincial-level officials told us that in some cases they were still waiting for the national government to finish its legislative and regulatory processes. This process will guide their own review of laws and regulations at their level. Prior to their enforcement, provincial-level laws, regulations, and other regulatory measures that implement the central government’s legal measures are submitted to the central government for review. Chinese officials told us that they have found many provincial regulations that did not conform to national laws and regulations. MOFTEC officials estimated that it would take a year or two to complete this entire reform process, while some provincial officials estimated 2-3 years. Second, China is undertaking reform of its judicial processes to ensure that they are compatible with its WTO commitments. The Supreme People’s Court informed us that since China’s accession it has been revising hundreds of judicial interpretations about laws that do not conform to WTO rules. It has also instructed the judiciary throughout the country to follow the revised interpretations and to undertake similar work at their respective levels. Officials told us that the court is also involved in reforms related to the WTO areas of judicial independence and uniform application of legal measures. For example, with regard to judicial independence, in February of this year the court issued new regulations to improve the adjudication of civil and commercial cases involving foreign parties. Under these regulations, mid-level and high-level courts, in contrast to the basic-level courts, will directly adjudicate cases involving, among other subjects, international trade, commercial contracts, letters of credit, and enforcement of international arbitration awards and foreign judgments. Furthermore, China recently amended its Judges Law to require that new judges pass a qualifying exam before being appointed to a judicial position. Third, China is reforming its administrative procedures and incorporating the rule of law into decision-making. About one third of the commitments we identified in China’s WTO accession agreement relate to guidance about how a particular commitment should be carried out. Officials told us that they are attempting to reduce the number of layers necessary to approve commercial activities and to make these processes more transparent. These actions can help implement rule of law practices at the day-to-day level. These reforms are also still underway at the central and provincial levels. For example, State Economic and Trade Commission (SETC) officials told us that they have identified 122 administrative procedures that must be changed to conform to WTO rules but that 40 percent of these must still be changed. In Shanghai, officials said that they have eliminated 40 percent of government approvals under their jurisdiction and that they are working to make the remaining 60 percent more efficient. Some Chinese officials with whom we spoke acknowledged challenges in completing all these reforms in a timely manner. These challenges include insufficient resources, limited knowledge of WTO requirements, and concerns about the effects on the economy of carrying out particular WTO commitments. For example, Chinese officials said that the effects of the changes needed to conform their tariff-rate quota administration process to WTO requirements were so difficult that they were unable to allocate the quota and issue certificates in time to meet the deadlines set forth in China’s WTO commitments. A number of Chinese officials also indicated that it has been very difficult to fulfill a WTO transparency commitment that requires China to translate all its trade laws, regulations, and other measures into an official WTO language—English, French, or Spanish. This difficulty is due in part to the abundance of the materials to be translated and the highly technical quality of many legal measures. Many Chinese officials we interviewed emphasized the importance of the steps they had taken at both the national and subnational levels to increase the training of government officials about WTO rules. For example, the State Economic and Trade Commission and the General Administration of Customs said they have been holding training sessions for over a year at the national, provincial, and municipal levels on general WTO rules and China’s WTO obligations. In addition, the National Judges College plans to train 1,000 judges from local courts across the country and send others for training abroad. Furthermore, governments in Shanghai, Guangzhou, and Shenzhen have established WTO affairs consultation centers that organize training and international exchange programs for midlevel Chinese officials on implementing WTO reforms. Despite these efforts, Chinese officials acknowledged that their understanding of WTO rules remains limited and that more training is needed. According to several Chinese government officials we interviewed, China continues to lack the expertise and the capacity to provide all the training necessary to implement WTO rules and, therefore, it has asked for technical assistance both multilaterally and bilaterally from outside China. As a result, the WTO secretariat, the European Union, the United States, and other WTO member countries have either given or plan to give training assistance to China in numerous areas, including rule of law-related programs. For its part, the U.S. government has provided limited training on a range of WTO-related topics, including standards, services, antidumping requirements, and intellectual property rights. The U.S. private sector also has provided technical assistance. In our interviews of U.S. businesses in China, almost one third of respondents said that they had given some assistance to China that related to implementation of China’s WTO commitments. Preliminary data from our written survey indicate that China’s WTO commitments related to rule of law reforms are some of the most important for U.S. businesses with a presence in China. For example, more than 90 percent of businesses that have responded to date indicated that the following reform commitments were important or somewhat important to their companies: consistent application of laws, regulations, and practices (within and among national, provincial & local levels); transparency of laws, regulations, and practices; enforcement of contracts and judgments/settlement of disputes; and enforcement of intellectual property rights. When asked to identify the three commitments that were most important to their companies, two WTO rule of law-related areas received the greatest number of responses in our written survey — consistent application of laws, regulations, and practices; and enforcement of intellectual property rights. We will include a more complete analysis of these and other issues considered in our business survey in a report to be released this fall. A majority of businesses answering our survey expected these rule of law commitments to be difficult for China to implement relative to its other WTO commitments. Businesses cited a number of reasons for this relative difficulty, including (1) the cultural “sea change” required to increase transparency; (2) a reluctance to crack down on intellectual property right violations stemming from a fear of destabilizing the labor force; and (3) the challenge of implementing laws, rules, and regulations consistently among provinces and within and among ministries. Similarly, in our interviews, company officials noted the magnitude of WTO-related reforms, including those that would strengthen the rule of law. They said that successful implementation would require long-term effort. Commensurate with the expected difficulty in carrying out reforms, we heard numerous specific individual complaints from U.S. companies, including concerns about vague laws and regulations that create uncertainty for foreign businesses; lack of transparency, which denied foreign companies the ability to comment on particular draft laws or regulations or to respond to administrative decisions; conflicting and inconsistent interpretations of existing laws and regulations from Chinese officials; unfair treatment by, and conflicts of interest, of Chinese regulators; and uneven or ineffective enforcement of court judgments. Nevertheless, U.S. businesses in China believe that the Chinese leadership is strongly committed to reform and that the leadership has communicated this commitment publicly. Several private sector officials noted a more open, receptive, and helpful attitude on the part of the government officials with whom they had contact. Other private sector officials noted more specific positive actions. For example, officials noted improvements in intellectual property right protections including crackdowns against counterfeiters in Shanghai, and a case where a U.S. company won a judgment against a counterfeiter in a Chinese court that included an order to cease the operations of the copycat company. First, it is very clear that China has shown considerable determination in enacting the numerous laws, regulations, and other measures to ensure that its legal system and institutions, on paper, are WTO compatible. Nevertheless, the real test of China’s movement toward a more rule of law- based commercial system is how China actually implements its laws and regulations in fulfilling its WTO commitments. At this point, it is still too early for us to make any definitive judgments about China’s actual implementation. Second, as you know, it has been the hope of U.S. government officials and others that China’s accession to the WTO would constitute a significant step forward in China’s development toward becoming a more rule of law-oriented society. It is worth noting that China’s reform efforts, which have been ongoing for more than 20 years, have included substantial legal developments that could be described as rule of law related. These include the enactment of numerous laws, regulations, and other measures that apply to many aspects of Chinese society beyond the WTO, the recent proliferation of law schools and legal training, and the recognition of the need for judicial reform. It is still too early to know where this process will lead, but there is hope that the many rules-based commitments that China made to become a WTO member will influence legal developments in other areas. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Commission may have at this time. For future contacts regarding this testimony, please call Susan Westin at (202) 512-4128. Adam Cowles, Richard Seldin, Michelle Sager, Matthew Helm, Simin Ho, Rona Mendelsohn also made key contributions to this testimony.

This testimony describes China's development of rule of law practices related to the commitments China made to the World Trade Organization (WTO), which it joined in November 2001. When China joined the WTO, it agreed that its legal measures would be consistent with its WTO obligations. GAO found 60 commitments that specifically obligate China to enact, repeal, or modify trade-related laws or regulations. In addition, China has made a substantial number of other WTO commitments related to the rule of law in transparency, judicial review, uniform enforcement of laws, and nondiscriminatory treatment. Chinese government officials described how their efforts for reform go beyond China's WTO commitments and include broad reforms of laws and regulations at the national and provincial levels, as well as reforms of judicial and administrative procedures. However, Chinese officials acknowledged the challenges they face in completing the necessary reforms and identified the need for outside training assistance. According to GAO's survey, U.S. businesses in China consider rule of law-related WTO commitments to be important, especially the consistent application of laws, regulations, and practices in China, and enforcement of intellectual property rights. However, a majority of businesses answering the survey anticipated that these rule of law commitments would be difficult for the Chinese to implement, and they identified some concerns over specific implementation issues.

Since the September 11, 2001, terrorist attacks there has been concern that certain radioactive material could be used in the construction of a radiological dispersion device (RDD). An RDD disperses radioactive material over a particular target area, which could be accomplished using explosives or by other means. The major purpose of an RDD would be to create terror and disruption, not death or destruction. Depending on the type, form, amount, and concentration of radioactive material used, direct radiation exposure from an RDD could cause health effects to individuals in proximity to the material for an extended time; for those exposed for shorter periods and at lower levels, it could potentially increase the long- term risks of cancer. In addition, the evacuation and cleanup of contaminated areas after dispersal could lead to panic and serious economic costs on the affected population. In 2003, a joint NRC/Department of Energy (DOE) interagency working group identified several radioactive materials (including Americium-241 and Cesium-137) as materials at higher risk of being used in an RDD, describing these as “materials of greatest concern.” In its risk-based approach to securing radioactive sources, NRC has made a commitment to work toward implementing the provisions of IAEA’s Code of Conduct. This document provides a framework that categorizes the relative risk associated with radioactive sources. While NRC has recently focused on upgrading its capacity to track, monitor, and secure category 1 and 2 sources, which are considered high risk, category 3 sources are not a primary focus of NRC regulatory efforts. Category 3 sources include byproduct material, which is radioactive material generated by a nuclear reactor, and can be found in equipment that has medical, academic, and industrial applications. For example, a standard type of moisture gauge used by many construction companies contains small amounts of Americium-241 and Cesium-137. According to NRC, it would take 16 curies of Americium-241 to constitute a high-risk category 2 quantity, and 1.6 curies of Americium-241 is considered a category 3 quantity. In October and November 2006, using fictitious names, our investigators created two bogus companies—one in an agreement state and one in a non-agreement state. After the bogus businesses were incorporated, our investigators prepared and submitted applications for a byproduct materials license to both NRC and the department of the environment for the selected agreement state. The applications, mailed in February 2007, were identical except for minor differences resulting from variations in the application forms. Using fictitious identities, one investigator represented himself as the company president in the applications, and another investigator represented himself as the radiation safety officer. The license applications stated that our company intended to purchase machines with sealed radioactive sources. According to NRC guidance finalized in November 2006 and sent to agreement states in December 2006, both NRC and agreement state license examiners should consider 12 screening criteria to verify that radioactive materials will be used as intended by a new applicant. For example, one criterion suggests that the license examiner perform an Internet search using common search engines to confirm that an applicant company appears to be a legitimate business that would require a specific license. Another screening technique calls for the license examiner to contact a state agency to confirm that the applicant has been registered as a legitimate business entity in that state. If the examiner believes there is no reason to be suspicious, he or she is not required to take the steps suggested in the screening criteria and may indicate “no” or “not applicable” for each criteria. If the license examiner takes additional steps to evaluate a criterion, he or she should indicate what publicly available information was considered. If there is concern for a potential security risk, the guidance instructs license examiners to note the basis for that concern. Nine days after mailing their application form to NRC, our investigators received a call from an NRC license examiner. The NRC license examiner stated that the application was deficient in some areas and explained the necessary corrections. For example, the license examiner asked our investigators to certify that the machines containing sealed radioactive source material, which are typically used at construction sites, would be returned to the company office before being transported to a new construction site. The license examiner explained that this was a standard security precaution. Even though we did not have a company office or a construction site, our investigators nevertheless certified their intent to bring the machines back to their office before sending them to a new location. They made this certification via a letter faxed to NRC. Four days after our final correction to the license application, NRC approved our application and mailed the license to the bogus business in the non- agreement state. It took a total of 4 weeks to obtain the license. See figure 1 for the first page of the transmittal letter we received from NRC with our license. The NRC license is printed on standard 8-1/2 x 11 inch paper and contains a color NRC seal for a watermark. It does not appear to have any features that would prevent physical counterfeiting. We therefore concluded that we could alter the license without raising the suspicion of a supplier. We altered the license so that it appeared our bogus company could purchase an unrestricted quantity of sealed source materials rather than the small amounts of Americium-241 and Cesium-137 listed on the original license. We determined the proper language for the license by reviewing publicly available information. Next, we contacted two U.S. suppliers of the machines specified in our license. We requested price quotes and faxed the altered license to the suppliers as proof that we were certified to purchase the machines. Both suppliers offered to sell us the machines and provided us price quotes. One of these suppliers offered to provide twice as many machines as we requested and offered a discount for volume purchases. In a later telephone call to one of the suppliers, a representative of the supplier told us that his company does not check with NRC to confirm the terms listed on the licenses that potential customers fax them. He said that his company checks to see whether a copy of the front page of the license is faxed with the intent to purchase and whether the requested order exceeds the maximum allowable quantity a licensee is allowed to possess at any one time. Although we had no legitimate use for the machines, our investigators received, within days of obtaining a license from NRC, price quotes and terms of payment that would have allowed us to purchase numerous machines containing sealed radioactive source materials. These purchases would have substantially exceeded the limit that NRC approved for our bogus company. If these radioactive materials were unsealed and aggregated together, the machines would yield an amount of Americium-241 that exceeds the threshold for category 3 materials. As discussed previously, according to IAEA, category 3 sources are dangerous if not safely managed or securely protected and “could cause permanent injury to a person who handled them, or was otherwise in contact with them, for some hours. It could possibly—although it is unlikely—be fatal to be close to this amount of unshielded radioactive material for a period of days to weeks.” Importantly, with patience and the proper financial resources, we could have accumulated, from other suppliers, substantially more radioactive source material than what the two suppliers initially agreed to ship to us—potentially enough to reach category 2. According to IAEA, category 2 sources, if not safely managed or securely protected, “could cause permanent injury to a person for a short time (minutes to hours), and it could possibly be fatal to be close to this amount of unshielded material for a period of hours to days.” Ten days after mailing their application form to the agreement state’s department of environment, our investigators received a call from a department license examiner. The license examiner stated that the application was deficient in some areas and said that she would send us a letter outlining what additional information the state required before approving the license. The examiner further stated that before the license was granted, she would conduct a site visit to inspect the company office and storage facilities cited in our application. Our investigators subsequently decided not to pursue the license in this state and requested that their application be withdrawn. According to an official in the department of environment for this state, the license examiner followed the required state procedure in requesting a site visit. The official told us that as a matter of long-standing state policy, license examiners in this state conduct site visits and interview company management (especially radiation safety officers) before granting new licenses for radioactive materials. This state policy is more stringent than the guidance NRC provided agreement states in December 2006. The NRC guidance identified a site visit as one possible screening criterion to use in evaluating a new license application, but, as discussed above, a site visit is not required under the NRC guidance. On June 1, 2007, we contacted NRC and discussed the results of our work. An NRC official indicated that NRC would take immediate action to address the weaknesses we identified. After this meeting, we learned that NRC suspended its licensing program for specific licenses until it could determine what corrective actions were necessary to resolve the weaknesses. NRC also held a teleconference with a majority of the 34 agreement states to discuss our work. On June 12, 2007, NRC issued supplemental interim guidance with additional screening criteria. These criteria are intended to help a license examiner determine whether a site visit or face-to-face meeting with new license applicants is required. NRC told us that it planned to convene a working group to develop improved guidance addressing the weaknesses we identified. NRC’s goal is to provide licenses to only those entities that can demonstrate that they have legitimate uses for radioactive materials. However, our work shows that there continues to be weaknesses in the process NRC uses to approve license applications. In our view, a routine visit by NRC staff to the site of our bogus business would have been enough to reveal our lack of facilities and equipment. Furthermore, if NRC license examiners had conducted even a minimal amount of screening— such as performing common Web searches or making telephone calls to local government or business offices—they would have developed serious doubts about our application. Once we received our license, the ease with which we were able to alter the license and obtain price quotes and commitments to ship from suppliers of radioactive materials is also cause for concern. Accordingly, we are making the following three recommendations to the Chairman of the NRC: First, to avoid inadvertently allowing a malevolent individual or group to obtain a license for radioactive materials, NRC should develop improved guidance for examining NRC license applications. In developing improved screening criteria, NRC should consider whether site visits to new licensees should be mandatory. These improved screening criteria will allow NRC to provide reasonable assurance that licenses for radioactive materials will only be issued to those with legitimate uses. Second, NRC should conduct periodic oversight of license application examiners so that NRC will be assured that any new guidance is being appropriately applied. Third, NRC should explore options to prevent individuals from counterfeiting NRC licenses, especially if this allows the purchase of more radioactive materials than they are approved for under the terms of the original license. Mr. Chairman, this concludes our statement. We would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-7455 or kutzg@gao.gov or Gene Aloise at (202) 512-3841 or aloisee@gao.gov. Contacts points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Nuclear Regulatory Commission (NRC) regulates domestic medical, industrial, and research uses of sealed radioactive sources. Organizations or individuals attempting to purchase a sealed source must apply for a license and gain the approval of either NRC or an "agreement state." To become an agreement state, a state must demonstrate to NRC that its regulatory program is compatible with NRC regulations and is effective in protecting public health and safety. NRC then transfers portions of its authority to the agreement state. In 2003, GAO reported that weaknesses in NRC's licensing program could allow terrorists to obtain radioactive materials. NRC took some steps to respond to the GAO report, including issuing guidance to license examiners. To determine whether NRC actions to address GAO recommendations were sufficient, the Subcommittee asked GAO to test the licensing program using covert investigative methods. By using the name of a bogus business that existed only on paper, GAO investigators were able to obtain a genuine radioactive materials license from NRC. Aside from traveling to a non-agreement state to pick up and send mail, GAO investigators did not need to leave their office in Washington, D.C., to obtain the license from NRC. Further, other than obtaining radiation safety officer training, investigators gathered all the information they needed for the license from the NRC Web site. After obtaining a license from NRC, GAO investigators altered the license so it appeared that the bogus company could purchase an unrestricted quantity of radioactive sealed sources rather than the maximum listed on the approved license. GAO then sought to purchase, from two U.S. suppliers, machines containing sealed radioactive material. Letters of intent to purchase, which included the altered NRC license as an attachment, were accepted by the two suppliers. These suppliers gave GAO price quotes and commitments to ship the machines containing radioactive materials. The amount of radioactive material we could have acquired from these two suppliers was sufficient to reach the International Atomic Energy Agency's (IAEA) definition of category 3. According to IAEA, category 3 sources are dangerous if not safely managed or securely protected. Importantly, with patience and the proper financial resources, we could have accumulated substantially more radioactive source material. GAO also attempted to obtain a license from an agreement state, but withdrew the application after state license examiners indicated they would visit the bogus company office before granting the license. An official with the licensing program told GAO that conducting a site visit is a standard required procedure before radioactive materials license applications are approved in that state. As a result of this investigation, NRC suspended its licensing program until it could determine what corrective actions were necessary to resolve the weaknesses GAO identified. On June 12, 2007, NRC issued supplemental interim guidance with additional screening criteria. These criteria are intended to help a license examiner determine whether a site visit or face-to-face meeting with new license applicants is required.

Both DOE and DOD have established offices, designated staff, and promulgated policies to provide a framework for the OUO and FOUO programs. However, their policies lack sufficient clarity in important areas, which could result in inconsistencies and errors. DOE policy clearly identifies the office responsible for the OUO program and establishes a mechanism to mark the FOIA exemption used as the basis for the OUO designation on a document. However, our analysis of DOD’s FOUO policies shows that it is unclear which DOD office is responsible for the FOUO program, and whether personnel designating a document as FOUO should note the FOIA exemption used as the basis for the designation on the document. Also, both DOE’s and DOD’s policies are unclear regarding at what point a document should be marked as OUO or FOUO, and what would be an inappropriate use of the OUO or FOUO designation. In our view, this lack of clarity exists in both DOE and DOD because the agencies have put greater emphasis on managing classified information, which is more sensitive than OUO or FOUO information. DOE’s Office of Security issued an order, a manual, and a guide in April 2003 to detail the requirements and responsibilities for DOE’s OUO program and to provide instructions for identifying, marking, and protecting OUO information. DOE’s order established the OUO program and laid out, in general terms, how sensitive information should be identified and marked, and who is responsible for doing so. The guide and the manual supplement the order. The guide provides more detailed information on the applicable FOIA exemptions to help staff decide whether exemption(s) may apply, which exemption(s) may apply, or both. The manual provides specific instructions for managing OUO information, such as mandatory procedures and processes for properly identifying and marking this information. For example, the employee marking a document is required to place on the front page of the document an OUO stamp that has a space for the employee to identify which FOIA exemption is believed to apply; the employee’s name and organization; the date; and, if applicable, any guidance the employee may have used in making this determination. According to one senior DOE official, requiring the employee to cite a reason why a document is designated as OUO is one of the purposes of the stamp, and one means by which DOE’s Office of Classification encourages practices consistent with the order, guide, and manual throughout DOE. Figure 1 shows the DOE OUO stamp. With regard to DOD, its regulations are unclear regarding which DOD office controls the FOUO program. Although responsibility for the FOUO program shifted from the Director for Administration and Management to the Office of the Assistant Secretary of Defense, Command, Control, Communications, and Intelligence (now the Under Secretary of Defense, Intelligence) in October 1998, this shift is not reflected in current regulations. Guidance for DOD’s FOUO program continues to be included in regulations issued by both offices. As a result, which DOD office has primary responsibility for the FOUO program is unclear. According to a DOD official, on occasion this lack of clarity causes personnel who have FOUO questions to contact the wrong office. A DOD official said that the department began coordination of a revised Information Security regulation covering the FOUO program at the end of January 2006. The new regulation will reflect the change in responsibilities and place greater emphasis on the management of the FOUO program. DOD currently has two regulations, issued by each of the offices described above, containing similar guidance that addresses how unclassified but sensitive information should be identified, marked, handled, and stored. Once information in a document has been identified as for official use only, it is to be marked FOUO. However, unlike DOE, DOD has no departmentwide requirement to indicate which FOIA exemption may apply to the information, except when it has been determined to be releasable to a federal governmental entity outside of DOD. We found, however, that one of the Army’s subordinate commands does train its personnel to put an exemption on any documents that are marked as FOUO, but does not have this step as a requirement in any policy. In our view, if DOD were to require employees to take the extra step of marking the exemption that may be the reason for the FOUO designation at the time of document creation, it would help assure that the employee marking the document had at least considered the exemptions and made a thoughtful determination that the information fit within the framework of the FOUO designation. Including the FOIA exemption on the document at the time it is marked would also facilitate better agency oversight of the FOUO program, since it would provide any reviewer/inspector with an indication of the basis for the marking. In addition, both DOE’s and DOD’s policies are unclear as to the point at which the OUO or FOUO designation should actually be affixed to a document. If a document might contain information that is OUO or FOUO but it is not so marked when it is first created, the risk that the document could be mishandled increases. DOE policy is vague about the appropriate time to apply a marking. DOE officials in the Office of Classification stated that their policy does not provide specific guidance about at what point to mark a document because such decisions are highly situational. Instead, according to these officials, the DOE policy relies on the “good judgment” of DOE personnel in deciding the appropriate time to mark a document. Similarly, DOD’s current Information Security regulation addressing the FOUO program does not identify at what point a document should be marked. In contrast, DOD’s September 1998 FOIA regulation, in a chapter on FOUO, states that “the marking of records at the time of their creation provides notice of FOUO content and facilitates review when a record is requested under the FOIA.” In our view, a policy can provide flexibility to address highly situational circumstances and also provide specific guidance and examples of how to properly exercise this flexibility. In addition, we found that both DOE’s and DOD’s OUO and FOUO programs lack clear language identifying examples of inappropriate usage of OUO or FOUO markings. Without such language, DOE and DOD cannot be confident that their personnel will not use these markings to conceal mismanagement, inefficiencies, or administrative errors, or to prevent embarrassment to themselves or their agency. While both DOE and DOD offer training to staff on managing OUO and FOUO information, neither agency requires any training of its employees before they are allowed to identify and mark information as OUO or FOUO, although some staff will eventually take OUO or FOUO training as part of other mandatory training. In addition, neither agency has implemented an oversight program to determine the extent to which employees are complying with established policies and procedures. While many DOE units offer training on DOE’s OUO policy, DOE does not have a departmentwide policy that requires OUO training before an employee is allowed to designate a document as OUO. As a result, some DOE employees may be identifying and marking documents for restriction from dissemination to the public or persons who do not need to know the information to perform their jobs, and yet may not be fully informed as to when it is appropriate to do so. At DOE, the level of training that employees receive is not systematic and varies considerably by unit, with some requiring OUO training at some point as a component of other periodic employee training, and others having no requirements at all. DOD similarly has no departmentwide training requirements before staff are authorized to identify, mark, and protect information as FOUO. The department relies on the individual services and field activities within DOD to determine the extent of training that employees receive. When training is provided, it is usually included as part of a unit’s overall security training, which is required for many but not all employees. There is no requirement to track which employees received FOUO training, nor is there a requirement for periodic refresher training. Some DOD components, however, do provide FOUO training for employees as part of their security awareness training. Neither DOE nor DOD knows the level of compliance with OUO and FOUO program policies and procedures because neither agency conducts any oversight to determine whether the OUO and FOUO programs are being managed well. According to a senior manager in DOE’s Office of Classification, the agency does not review OUO documents to assess whether they are properly identified and marked. This condition appears to contradict the DOE policy requiring the agency’s senior officials to assure that the OUO programs, policies, and procedures are effectively implemented. Similarly, DOD does not routinely conduct oversight of its FOUO program to assure that it is properly managed. Without oversight, neither DOE nor DOD can assure that staff are complying with agency policies. We are aware of at least one recent case in which DOE’s OUO policies were not followed. In 2005, several stories appeared in the news about revised estimates of the cost and length of the cleanup of high-level radioactive waste at DOE’s Hanford Site in southeastern Washington. This information was controversial because this multibillion-dollar project has a history of delays and cost overruns, and DOE was restricting a key document containing recently revised cost and time estimates from being released to the public. This document, which was produced by the U.S. Army Corps of Engineers for DOE, was marked Business Sensitive by DOE. However, according to a senior official in the DOE Office of Classification, Business Sensitive is not a recognized marking in DOE. Therefore, there is no DOE policy or guidance on how to handle or protect documents marked with this designation. This official said that if information in this document needed to be restricted from release to the public, then the document should have been stamped OUO and the appropriate FOIA exemption should have been marked on the document. In closing, the lack of clear policies, effective training, and oversight in DOE’s and DOD’s OUO and FOUO programs could result in both over- and underprotection of unclassified yet sensitive government documents. Having clear policies and procedures in place can mitigate the risk of program mismanagement and can help DOE and DOD management assure that OUO or FOUO information is appropriately marked and handled. DOE and DOD have no systemic procedures in place to assure that staff are adequately trained before designating documents OUO or FOUO, nor do they have any means of knowing the extent to which established policies and procedures for making these designations are being complied with. These issues are important because they affect DOE’s and DOD’s ability to assure that the OUO and FOUO programs are identifying, marking, and safeguarding documents that truly need to be protected in order to prevent potential damage to governmental, commercial, or private interests. Mr. Chairman, this concludes GAO’s prepared statement. We would be happy to respond to any questions that you or Members of the Subcommittee may have. For further information on this testimony, please contact either Davi M. D’Agostino at (202) 512-5431 or dagostinod@gao.gov, or Gene Aloise at (202) 512-3841 or aloisee@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony included Ann Borseth, David Keefer, Kevin Tarmann, and Ned Woodward. Routine internal personnel matters such as performance standards and leave practices; internal matters the disclosure of which would risk the circumvention of a statute or agency regulation, such as law enforcement manuals 3. Specifically exempted from disclosure by federal statute Nuclear weapons design (Atomic Energy Act); tax return information (Internal Revenue Code) Scientific and manufacturing processes (trade secrets); sales statistics, customer and supplier lists, profit and loss data, and overhead and operating costs (commercial/financial information) Memoranda and other documents that contain advice, opinions, or recommendations on decisions and policies (deliberative process); documents prepared by an attorney in contemplation of litigation (attorney work-product); confidential communications between an attorney and a client (attorney-client)

In the interest of national security and personal privacy and for other reasons, federal agencies place dissemination restrictions on information that is unclassified yet still sensitive. The Department of Energy (DOE) and the Department of Defense (DOD) have both issued policy guidance on how and when to protect sensitive information. DOE marks documents with this information as Official Use Only (OUO) while DOD uses the designation For Official Use Only (FOUO). GAO was asked to (1) identify and assess the policies, procedures, and criteria DOE and DOD employ to manage OUO and FOUO information; and (2) determine the extent to which DOE's and DOD's training and oversight programs assure that information is identified, marked, and protected according to established criteria. As GAO reported earlier this month, both DOE and DOD base their programs on the premise that information designated as OUO or FOUO must (1) have the potential to cause foreseeable harm to governmental, commercial, or private interests if disseminated to the public or persons who do not need the information to perform their jobs; and (2) fall under at least one of eight Freedom of Information Act (FOIA) exemptions. While DOE and DOD have policies in place to manage their OUO or FOUO programs, our analysis of these policies showed a lack of clarity in key areas that could allow inconsistencies and errors to occur. For example, it is unclear which DOD office is responsible for the FOUO program, and whether personnel designating a document as FOUO should note the FOIA exemption used as the basis for the designation on the document. Also, both DOE's and DOD's policies are unclear regarding at what point a document should be marked as OUO or FOUO and what would be an inappropriate use of the OUO or FOUO designation. For example, OUO or FOUO designations should not be used to conceal agency mismanagement. In our view, this lack of clarity exists in both DOE and DOD because the agencies have put greater emphasis on managing classified information, which is more sensitive than OUO or FOUO. In addition, while both DOE and DOD offer training on their OUO and FOUO policies, neither DOE nor DOD has an agencywide requirement that employees be trained before they designate documents as OUO or FOUO. Moreover, neither agency conducts oversight to assure that information is appropriately identified and marked as OUO or FOUO. DOE and DOD officials told us that limited resources, and in the case of DOE, the newness of the program, have contributed to the lack of training requirements and oversight. Nonetheless, the lack of training requirements and oversight of the OUO and FOUO programs leaves DOE and DOD officials unable to assure that OUO and FOUO documents are marked and handled in a manner consistent with agency policies and may result in inconsistencies and errors in the application of the programs.

SSA projects that its current data center will not be adequate to support the demands of its growing workload. In fiscal year 2008, SSA’s benefit programs provided a combined total of approximately $650 billion to nearly 55 million beneficiaries. According to the agency, the number of beneficiaries is estimated to increase substantially over the next decade. In addition, SSA’s systems contain large volumes of medical information, which is used in processing disability claims. About 15 million people are receiving federal disability payments, and SSA has been contending with backlogs in processing disability claims. According to SSA officials, the agency plans to use a large portion of the $1 billion in funding that it was allocated by the Recovery Act primarily to help build a large-scale data center and to develop new software to reduce the backlog of disability claims. The act provides $500 million from the stimulus package for data center expenses, of which $350 million is slated for the building infrastructure and part of the remaining funding for IT-related upgrades. This is not the entire projected cost: SSA has indicated that it needs a total of about $800 million to fund a new IT infrastructure, including the new data center—the physical building, power and cooling infrastructure, IT hardware, and systems applications. The Recovery Act’s goals, among other things, include creating or saving more than 3.5 million jobs over the next two years and encouraging renewable energy and energy conservation. According to the Office of Management and Budget (OMB), the act’s requirements include unprecedented levels of transparency, oversight, and accountability for various aspects of Recovery Act planning and implementation. These requirements are intended to ensure, among other things, that ● funds are awarded and distributed in a prompt, fair, and reasonable ● the recipients and uses of all funds are transparent to the public, and the public benefits of these funds are reported clearly, accurately, and in a timely manner; ● funds are used for authorized purposes and instances of fraud, waste, error, and abuse are mitigated; ● projects funded under the act avoid unnecessary delays and cost ● program goals are achieved, including specific program outcomes and improved results on broader economic indicators. An effort as central to SSA’s ability to carry out its mission as its planned new data center requires effective IT management. As our research and experience at federal agencies has shown, institutionalizing a set of interrelated IT management capabilities is key to an agency’s success in modernizing its IT systems. These capabilities include, but are not limited to ● strategic planning to describe an organization’s goals, the strategies it will use to achieve desired results, and performance measures; ● developing and using an agencywide enterprise architecture, or modernization blueprint, to guide and constrain IT investments; ● establishing and following a portfolio-based approach to investment implementing information security management that ensures the integrity and availability of information. The Congress has recognized in legislation the importance of these and other IT management controls, and OMB has issued guidance. We have observed that without these types of capabilities, organizations increase the risk that system modernization projects will (1) experience cost, schedule, and performance shortfalls and (2) lead to systems that are redundant and overlap. They also risk not achieving such aims as increased interoperability and effective information sharing. As a result, technology may not effectively and efficiently support agency mission performance and help realize strategic mission outcomes and goals. All these management capabilities have particular relevance to the data center initiative. ● IT strategic planning. A foundation for effective modernization, strategic planning is vital to create an agency’s IT vision or roadmap and help align its information resources with its business strategies and investment decisions. An IT strategic plan, which might include the mission of the agency, key business processes, IT challenges, and guiding principles, is important to enable an agency to consider the resources, including human, infrastructure, and funding, that are needed to manage, support, and pay for projects. For example, a strategic plan that identifies interdependencies within and across modernization projects helps ensure that these are understood and managed, so that projects—and thus system solutions—are effectively integrated. Given that the new data center is to form the backbone of SSA’s automated operations, it is important that the agency identify goals, resources, and dependencies in the context of its strategic vision. ● Enterprise architecture. An enterprise architecture consists of models that describe (in both business and technology terms) how an entity operates today and how it intends to operate in the future; it also includes a plan for transitioning to this future state. More specifically, it describes the enterprise in logical terms (such as interrelated business processes and business rules, information needs and flows, and work locations and users) as well as in technical terms (such as hardware, software, data, communications, and security attributes and performance standards). It provides these perspectives both for the enterprise’s current environment and for its target environment, as well as a transition plan for moving from one to the other. In short, it is a blueprint for organizational change. Using an enterprise architecture is important to help avoid developing operations and systems that are duplicative, not well integrated, unnecessarily costly to maintain and interface, and ineffective in supporting mission goals. Like an IT strategic plan (with which an enterprise architecture should be closely aligned), an enterprise architecture is an important tool to help SSA ensure that its data center initiative is successful. Using an enterprise architecture will help the agency ensure that the planning and implementation of the initiative take full account of the business and technology environment in which the data center and its systems are to operate. ● IT investment management. An agency should establish and follow a portfolio-based approach to investment management in which IT investments are selected, controlled, and monitored from an agencywide perspective. In this way, investment decisions are linked to an organization’s strategic objectives and business plans. Such an approach helps ensure that agencies allocate their resources effectively. In 2008, we evaluated SSA’s investment management approach and found that it was largely consistent with leading investment management practices. SSA had established most practices needed to manage its projects as investments; however it had not applied its process to all of its investments. For example, SSA had not applied its investment management process to a major portion of its IT budget. We recommended that for full accountability, SSA should manage its full IT development and acquisitions budget through its investment management board. We also made several recommendations for improving the evaluation of completed projects, including the use of quantitative measures of project success. Going forward, ensuring that best practices in investment management are applied to the data center initiative will help the agency effectively use funds appropriated under the Recovery Act. For example, projects funded under the act are to avoid unnecessary delays and cost overruns and are to achieve specific program outcomes and improved results on broader economic indicators. Robust investment management controls are important tools for achieving these goals. For example, developing accurate cost estimates—an important aspect of investment management— helps an agency evaluate resource requirements and increases the probability of program success. We have issued a cost estimating guide that provides best practices that agencies can use for developing and managing program cost estimates that are comprehensive, well-documented, accurate, and credible, and that provide management with a sound basis for establishing a baseline to formulate budgets and measure program performance. The guide also covers the use of earned value management (EVM), a technique for comparing the value of work accomplished in a given period with the value of the work expected. EVM metrics can alert program managers to potential problems sooner than tracking expenditures alone. Finally, the Recovery Act emphasizes the importance of energy efficiency and green building projects. Applying rigorous investment management controls to the planning and implementation of the data center design will help SSA determine the optimal approach to aligning its initiative with these goals. Because of the large power requirements and the heat generated by the equipment housed in data centers, efficient power and cooling are major concerns, particularly in light of evolving technology and increasing demand for information. To optimize their power and cooling requirements, agencies need to quantify cooling requirements and model these into data center designs. Such considerations affect the choice of locations for a new data center, facility requirements, and even floor space designs. Ways to improve energy efficiencies in data center facilities could include such cost-effective practices as reducing the need for artificial light by maximizing the use of natural light and insulating buildings more efficiently. For example, installing green (planted) roofs can insulate facilities and at the same time absorb carbon dioxide. ● Information security. For any organization that depends on information systems and computer networks to carry out its mission or business, information security is a critical consideration. It is especially important for government agencies like SSA, where maintaining the public’s trust is essential. Information security covers a wide range of controls, including general controls that apply across information systems (such as access controls and contingency planning) and business process application-specific controls to ensure the completeness, accuracy, validity, confidentiality, and availability of data. For the data center initiative, security planning and management will be important from the earliest stages of the project through the whole life cycle. In today’s environment, in which security threats are both domestic and international, operational and physical security is required to sustain the safety and reliability of the data center’s services on a day-to-day basis. An agency needs to have well-established security polices and practices in place and provide periodic assessments to ensure that the information and the facility are protected. Organizations must design and implement controls to detect and prevent unauthorized access to computer resources (e.g., data, programs, equipment, and facilities), thereby protecting them from unauthorized disclosure, modification, and loss. Specific access controls could include means to verify personnel identification and authorization. Further, because a data center is the backbone of an organization’s operations and service delivery, continuity of operations is a key concern. Data centers need to be designed with the ability to efficiently provide consistent processing of operations. Even slight disruptions in power can adversely affect service delivery. Data centers are vulnerable to a variety of service disruptions, including accidental file deletions, network failures, systems malfunctions, and disasters. In the design of a data center, continuity of operations needs to be addressed at every level—including applications, systems, and businesses. An agency needs to articulate, in a well defined plan, how it will process, retrieve, and protect electronically maintained information in the event of minor interruptions or a full- blown disaster. Disaster recovery plans should address all aspects of the recovery, including where to move personnel and how to maintain the business operations. Agency leaders need to prioritize business recovery procedures and to highlight the potential issues in such areas as application availability, data retention, speed of recovery, and network availability. ____________________________________________________________ In summary, given the projected increase in beneficiaries and the exceptional volume of medical data processed, these IT management capabilities will be imperative for SSA to follow as it pursues the complex data center initiative. Mr. Chairman, this completes my prepared statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have. If you should have any questions about this statement, please contact me at (202) 512-6304 or by e-mail at melvinv@gao.gov. Other individuals who made key contributions to this statement are Barbara Collier, Christie Motley, and Melissa Schermerhorn. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The American Recovery and Reinvestment Act of 2009 (Recovery Act) provides resources to the Social Security Administration (SSA) to help replace its National Computer Center. This data center, which is 30 years old, houses the backbone of the agency's automated operations, which are critical to providing benefits to nearly 55 million people, issuing Social Security cards, and maintaining earnings records. The act makes $500 million available to SSA for the replacement of its National Computer Center and associated information technology (IT) costs. In this testimony, GAO was asked to comment on key IT management capabilities that will be important to the success of SSA's data center initiative. To do so, GAO relied on previously published products, including frameworks that it has developed for analyzing IT management areas. GAO has not performed a detailed examination of SSA's plans for this initiative, so it is not commenting on the agency's progress or making recommendations. For an effort as central to SSA's mission as its planned new data center, effective practices in key IT management areas are essential. For example: (1) Effective strategic planning helps an agency set priorities and decide how best to coordinate activities to achieve its goals. For example, a strategic plan identifying interdependencies among modernization project activities helps ensure that these are understood and managed, so that projects--and thus system solutions--are effectively integrated. Given that the new data center is to form the backbone of SSA's automated operations, it is important that the agency identify goals, resources, and dependencies in the context of its strategic vision. (2) An agency's enterprise architecture describes both its operations and the technology used to carry them out. A blueprint for organizational change, an architecture is defined in models that describe (in business and technology terms) an entity's current operation and planned future operation, as well as a plan for transitioning from one to the other. An enterprise architecture can help optimize SSA's data center initiative by ensuring that its planning and implementation take full account of the business and technology environment. (3) For IT investment management, an agency should follow a portfoliobased approach in which investments are selected, controlled, and monitored from an agencywide perspective. By helping to allocate resources effectively, robust investment management processes can help SSA meet the accountability requirements and align with the goals of the Recovery Act. For example, projects funded under the act are to avoid unnecessary delays and cost overruns and are to achieve specific program outcomes. Investment management is aimed at precisely such goals: for example, accurate cost estimating (an important aspect of investment management) provides a sound basis for establishing a baseline to formulate budgets and measure program performance. Further, the act emphasizes energy efficiency--also a major concern for data centers, which have high power and cooling requirements. Investment management tools are important for evaluating the most cost-effective approaches to energy efficiency. (4) Finally, information security should be considered throughout the planning, development, and implementation of the data center. Security is vital for any organization that depends on information systems and networks to carry out its mission--especially for government agencies like SSA, where maintaining the public's trust is essential. One part of information security management is contingency and continuity of operations planning--vital for a data center that is to be the backbone of SSA's operations and service delivery. Data centers are vulnerable to a variety of service disruptions, including accidental file deletions, network failures, systems malfunctions, and disasters. Accordingly, it is necessary to define plans governing how information will be processed, retrieved, and protected in the event of minor interruptions or a full-blown disaster. These capabilities will be important in helping to ensure that SSA's data center effort is successful and effectively uses Recovery Act funds.

The Knutson-Vandenberg Trust Fund, as authorized by the Act of June 9, 1930, as amended (16 U.S.C. 576-576b), allows portions of the receipts from timber sales to be deposited into the K-V Fund to be used to reforest timber sale areas. In addition to being used for planting trees, these deposits may also be used for eliminating unwanted vegetation and for protecting and improving the future productivity of the renewable resources on forest land in sale areas, including sale area improvement operations, maintenance, construction, and wildlife habitat management. Reforestation is needed where timber harvests or natural disasters have depleted the existing timber stands. In fiscal year 1997, about $166 million was expended from the K-V Fund for reforestation and related projects. The majority of the K-V moneys—about $115 million in fiscal year 1997—was used to fund direct reforestation activities. In addition to the direct reforestation expenditures, about $51 million was used for costs incurred to support and manage the reforestation program, such as rents, utilities, computer equipment, or the salaries of program support staff. Federal law permits the Forest Service to transfer amounts from the K-V Fund, as well as other Forest Service appropriations, to supplement the Forest Service’s firefighting funds when emergencies arise. The Forest Service is authorized to advance money from any of its appropriations and trust funds to pay for fighting forest fires. The Forest Service is not authorized to restore amounts so transferred. Congressional action is required to restore such funds. The Forest Service’s oversight and management of the K-V Fund and the reforestation program are decentralized. Forest Service headquarters and the nine regional offices establish policy and provide technical direction to forest offices. The forest offices, in turn, provide general oversight to district offices and help the districts plan K-V projects. The district ranger is responsible for overseeing the planning and implementation of K-V projects. Between 1990 and 1996, the Forest Service transferred about $645 million from the K-V Fund for emergency firefighting activities that had not been fully reimbursed. Since these transfers had not been reimbursed, these funds were unavailable for K-V projects. In the past, when such transfers were made, the Department of Agriculture requested and received supplemental appropriations to restore the transferred moneys, generally within 2 years of the original transfer. However, in more recent time, the Department of Agriculture had not submitted a request for a supplemental appropriation to the Congress. It was not until March 15, 1996, that the Department of Agriculture submitted a request for supplemental appropriations to the Office of Management and Budget for the $420 million transferred during fiscal years 1990, 1992, and 1995. After an additional $225 million was transferred from the K-V Fund in 1996, the Congress, in 1997, provided $202 million from the emergency firefighting appropriation as a partial reimbursement of the K-V Fund. At the beginning of fiscal year 1998, the K-V Fund had an unrestored balance of about $493 million. To provide the Congress with the information it needs to consider any future requests for appropriations to restore previously transferred funds, we recommended that the Secretary of Agriculture report to the Congress on the financial status of the K-V Fund. The Department of Agriculture has informed the Congress about the general dimensions of the K-V funding issue on several occasions, and that information has resulted in some replenishment of the K-V Fund. For example, the Fiscal Year 1997 Omnibus Appropriation Bill provided additional appropriations for emergency firefighting, and $202 million was apportioned to the K-V Fund in January 1997. In addition, the Department has begun providing the Congress with information on the K-V Fund balance at the beginning of each fiscal year, expected K-V collections during the year, and expected K-V expenditures so that the impact of future firefighting transfers can be assessed. Although the Forest Service acknowledged that failure to restore the amounts transferred from the K-V Fund would potentially disrupt the K-V program, forest and district offices continued to operate and plan for future reforestation projects as if the transfers had not occurred. Furthermore, the Forest Service had not informed the Congress of the impact that the funding shortfall would have on the agency’s reforestation activities or developed a plan or strategy for reallocating the remaining funds to the highest-priority projects. Although timber receipts of as much as $200 million had been added to the fund annually, the Forest Service will not be able to pay for all of its planned projects, estimated in fiscal year 1996 at about $942 million, unless the moneys transferred from the K-V Fund for firefighting purposes are restored. We recommended that if the administration decides not to forward to the Congress the Department’s request for restoration of the funds transferred for firefighting purposes, or the Congress decides not to restore these funds during the fiscal year 1997 budget considerations, the Secretary of Agriculture should direct the Chief of the Forest Service, by the end of fiscal year 1997, to revise the list of planned K-V projects to take into account the actual balance in the K-V Fund. The Department has not implemented this recommendation and believes that the Forest Service had sufficient funding to meet all K-V requirements for 1998 and that revising the list of K-V projects downward to match the reduced K-V funding would be both speculative and not creditable. The Department added that it would not require such a list until it was certain that K-V funding for the year was inadequate. In that event, it would provide the Congress with a generic description of the types of K-V activities that would be dropped. The K-V Act requires that the K-V Fund expenditures in any one sale area not exceed the amount collected in that sale area. To facilitate the management of K-V projects and the accounting for K-V funds, however, the Forest Service allows each forest to pool its K-V collections for each timber sale into a forest-level fund, commonly called a K-V pool. At the end of each fiscal year, each forest is required to create a balance sheet showing the cash available for its K-V projects, the projected collections from ongoing sales, and the estimated costs for planned projects. The Forest Service does not have the financial management information and controls needed to ensure compliance with the K-V Act prohibition limiting K-V Fund expenditures on individual sale areas to the collections from those same sale areas. Collections are recorded for individual sales, whereas expenditures are managed and recorded in total at the district level rather than by individual sales. By allowing each forest to pool K-V collections without adequate financial controls and information, the Forest Service cannot ensure that trust fund expenditures do not exceed collections for a given sale area. We recommended that the Secretary of Agriculture direct the Chief of the Forest Service to perform, in consultation with the Chief Financial Officer, an analysis of alternatives (including the costs and benefits of each alternative) to obtain the financial data necessary to ensure that the K-V Fund’s expenditures in one sale area are limited to the amounts collected from that area, as required by the K-V Act. The Secretary of Agriculture did not request that the Forest Service analyze alternatives to the sale-by-sale accounting system that would ensure compliance with the K-V Act. The Secretary indicated that he did not believe such an analysis was necessary and that the current Forest Service methods fulfilled requirements of the K-V Act. We continue to believe that the Forest Service’s current information systems and controls do not provide assurance that the expenditures in one sale area do not exceed the collections from that sale area as required by law. The Forest Service collects a certain amount of K-V funds on each timber sale to pay for the costs of supporting the program at all organizational levels. The regions and forests issue guidance that specifies the percentage of K-V funds that should be collected from individual sale areas to support the program at the forest, regional, and Washington offices. The agency’s overall guidance, however, does not explain how individual regions or forests should calculate and limit amounts for program support. If the allocations for support costs are not limited to the amount collected, however, funds available for project expenditures in sale areas could be insufficient. Only one forest we visited during our 1996 review limited its use of K-V funds for program support to the amounts collected for that purpose. For three of the forests, the regions did not restrict their expenditures for program support to the amounts that had been collected, nor did the forests limit the amount spent for program support at the forest level. For example, if a project costs $100, the forest might instruct the district to collect an additional 20 percent of the project’s cost, or $20, to cover the cost of supporting the program. When the forest allocated funds for a project to the district, it withheld funds to cover the forest’s support costs. However, rather than limiting these withholdings—to continue our example—to 20 percent of the project’s cost, or $20, the forest would withhold 20 percent of the total cost ($120) or $24. This method of determining support costs would reduce the amount available for project work to $96, $4 less than the projected need. We recommended that the Secretary of Agriculture direct the Chief of the Forest Service to require all organizational levels to use a standardized methodology for assessing and withholding the support costs for the K-V program that would limit expenditures for program support to the amounts collected for such purposes. The Secretary of Agriculture directed the Chief of the Forest Service to establish a standardized methodology for assessing and withholding program support costs for the K-V program, and the Forest Service formed a task force to recommend what that standardized methodology would be. The task force completed its work in November 1997, and the Forest Service estimates that the corrective action will be fully implemented when the recommended changes become part of the agency’s directives in September 1998. Mr. Chairman, on the basis of the Department of Agriculture’s response to our recommendations, it appears that it has taken positive actions on our recommendations to better inform the Congress about the magnitude of transfers from the K-V Fund for firefighting purposes and the need to establish a standardized methodology for assessing and withholding program support costs for the K-V program. The Department of Agriculture has not implemented our recommendations concerning revising the list of K-V projects downward because of inadequate funding or performing an analysis of alternatives to a sale-by-sale accounting of K-V Fund expenditures. We continue to believe that action is needed in these areas. 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Pursuant to a congressional request, GAO discussed the shortcomings in the Forest Service's administration of the Knutson-Vandenberg Trust Fund (K-V Fund), focusing on the: (1) transfers from the K-V Fund that have not been fully restored; (2) effect of unrestored transfers on planned projects; (3) lack of financial information to ensure compliance with the K-V Act requirements; and (4) lack of a standardized methodology for calculating and limiting program support costs. GAO noted that: (1) between 1990 and 1996, $645 million was transferred from the K-V Fund to support emergency firefighting activities that was not reimbursed; (2) to assist Congress in its consideration of any future requests for appropriations to restore previously transferred funds, GAO recommended that the Secretary of Agriculture report to Congress on the financial status of the K-V fund; (3) the Department has begun providing Congress with additional information on the financial status of the K-V Fund; (4) in fiscal year 1997, Congress acted upon that information by providing $202 million to partially repay moneys transferred from the K-V Fund; (5) the Secretary of Agriculture has not directed the Forest Service to revise the list of planned K-V projects to take into account the actual balance in the K-V Fund; (6) although the K-V Act requires that K-V Fund expenditures in one sale area be limited to amounts collected in the same area, the Forest Service does not collect expenditure data on a sale-by-sale basis; (7) GAO recommended that the Secretary of Agriculture direct the Forest Service to perform an analysis of alternatives to obtain the financial data necessary to ensure that the K-V Fund's expenditures in one sale area are limited to the amounts collected from that area, as required by the K-V Act; (8) the Secretary of Agriculture indicated that such an analysis was not necessary and that the current Forest Service methods fulfilled the requirements of the K-V Act; (9) at the time of GAO's 1996 report, the Forest Service did not have a system in place to ensure the consistent handling of program support charges for the K-V program agencywide; and (10) since that time, the Forest Service has completed an analysis of the methodological changes that are needed to standardize the Forest Service's practices for assessing and withholding program support costs for the K-V program and the results of the agency's work should be implemented when the practices become part of the Forest Service's directives in September 1998.

TSA receives thousands of air passenger screening complaints through five centralized mechanisms but does not have an agencywide policy, consistent processes, or an agency focal point to guide the receipt of these complaints, or “mine” these data to inform management about the nature and extent of the screening complaints to help improve screening operations and customer service. For example, TSA data indicate the following: From October 2009 through June 2012, TSA received more than 39,000 screening complaints through its TSA Contact Center (TCC), including more than 17,000 complaints about pat-down procedures. From October 2009 through June 2012, TSA’s Office of the Executive Secretariat received approximately 4,000 complaints that air passengers submitted by mail. From April 2011 (when it was launched) through June 2012, the agency’s Talk to TSA web-based mechanism received approximately 4,500 air passenger screening complaints, including 1,512 complaints about the professionalism of TSA staff during the screening process. However, the data from the five centralized mechanisms do not reflect the full nature and extent of complaints because local TSA staff have discretion in implementing TSA’s complaint processes, including how they receive and document complaints. For example, comment cards were used in varying ways at 6 airports we contacted. Specifically, customer comment cards were not used at 2 of these airports, were on display at 2 airports, and were available upon request at the remaining 2 airports we contacted. TSA does not have a policy requiring that complaints submitted using the cards be tracked or reported centrally. We concluded that a consistent policy to guide all TSA efforts to receive and document complaints would improve TSA’s oversight of these activities and help ensure consistent implementation. TSA also uses TCC data to inform the public about air passenger screening complaints, monitor operational effectiveness of airport security checkpoints, and make changes as needed. However, TSA does not use data from its other four mechanisms, in part because the complaint categories differ, making data consolidation difficult. A process to systematically collect information from all mechanisms, including standard complaint categories, would better enable TSA to improve operations and customer service. Further, at the time of our review, TSA had not designated a focal point for coordinating agencywide policy and processes related to receiving, tracking, documenting, reporting, and acting on screening complaints. Without a focal point at TSA headquarters, the agency does not have a centralized entity to guide and coordinate these processes, or to suggest any additional refinements to the system. To address these weaknesses, we recommended that TSA establish a consistent policy to guide agencywide efforts for receiving, tracking, and reporting air passenger screening complaints; establish a process to systematically compile and analyze information on air passenger screening complaints from all complaint mechanisms; and designate a focal point to develop and coordinate agencywide policy on screening complaint processes, guide the analysis and use of the agency’s screening complaint data, and inform the public about the nature and extent of screening complaints. The Department of Homeland Security (DHS) concurred with the recommendations and indicated actions that TSA had taken, had underway, and was planning to take in response. For example, DHS stated that TSA would review current intake and processing procedures at headquarters and in the field and develop policy, as appropriate, to better guide the complaint receipt, tracking, and reporting processes. We believe that these are beneficial steps that would address the recommendation, provided that the resulting policy refinements improve the existing processes for receiving, tracking, and reporting all air passenger screening complaints, including the screening complaints that air passengers submit locally at airports through comment cards or in person at security checkpoints. In commenting on a draft of our November 2012 report, TSA also stated that the agency began channeling information from the Talk to TSA database to the TCC in October 2012. However, DHS did not specify in its letter whether TSA will compile and analyze data from the Talk to TSA database and its other centralized mechanisms in its efforts to inform the public about the nature and extent of screening complaints, and whether these efforts will include data on screening complaints submitted locally at airports through customer comment cards or in person at airport security checkpoints. DHS also did not provide sufficient detail for us to assess whether TSA’s planned actions will address the difficulties we identified in collecting standardized screening data across different complaint categories and mechanisms. DHS stated that the Assistant Administrator for the Office of Civil Rights & Liberties, Ombudsman and Traveler Engagement was now the focal point for overseeing the key TSA entities involved with processing passenger screening complaints. It will be important for the Assistant Administrator to work closely with, among others, the office of the Assistant Administrator of Security Operations because this office oversees screening operations at commercial airports and security operations staff in the field who receive screening complaints submitted through customer comment cards or in person at airport security checkpoints. We will continue to monitor TSA’s progress in implementing these recommendations. TSA has several methods to inform passengers about its complaint processes, but does not have an agencywide policy or mechanism to ensure consistent use of these methods among commercial airports. For example, TSA has developed standard signs, stickers, and customer comment cards that can be used at airport checkpoints to inform passengers about how to submit feedback to TSA; however, we found inconsistent use at the 6 airports we contacted. For example, customer comment cards were displayed in the checkpoints at 2 airports, while at 2 others the cards were provided upon request. However, we found that passengers may be reluctant to ask for such cards, according to TSA. TSA officials at 4 of the 6 airports also said that the agency could do more to share best practices for informing passengers about complaint processes. For example, TSA holds periodic conference calls for its Customer Support Managers—TSA staff at certain commercial airports who work in conjunction with other local TSA staff to resolve customer complaints and communicate the status and resolution of complaints to air passengers—to discuss customer service. However, Customer Support Managers have not used this mechanism to discuss best practices for informing air passengers about processes for submitting complaints, according to the officials we interviewed. Policies for informing the public about complaint processes and mechanisms for sharing best practices among local TSA officials could help provide TSA reasonable assurance that these activities are being conducted consistently and help local TSA officials learn from one another about what practices work well. We recommended that TSA establish an agencywide policy to guide its efforts to inform air passengers about the screening complaint processes and establish mechanisms, particularly at the airport level, to share information on best practices for informing air passengers about the screening complaint processes. DHS concurred with the recommendation and stated that TSA would develop a policy to better inform air passengers about the screening complaint processes. We will continue to monitor TSA’s progress in implementing this recommendation. TSA’s complaint resolution processes do not fully conform to standards of independence to ensure that these processes are fair, impartial, and credible, but the agency is taking steps to improve independence. Specifically, TSA airport officials responsible for resolving air passenger complaints are generally in the same chain of command as TSA airport staff who are the subjects of the complaints. While TSA has an Ombudsman Division that could help ensure greater independence in the complaint processes, the division primarily focuses on handling internal personnel matters and is not yet fully equipped to address external complaints from air passengers, according to the head of the division. TSA is developing a new process for referring air passenger complaints directly to the Ombudsman Division from airports and for providing air passengers an independent avenue to make complaints about airport security checkpoint screening. In August 2012, TSA’s Ombudsman Division began addressing a small number of air passenger complaints forwarded from the TCC, according to the head of that division. TSA also began advertising the division’s new role in addressing passenger screening complaints via the TSA website in October 2012. According to the Assistant Administrator of TSA’s Office of Civil Rights & Liberties, Ombudsman and Traveler Engagement, the division will not handle complaints for which there exists an established process that includes an appeals function, such as disability complaints or other civil rights or civil liberties complaints, in order to avoid duplication of currently established processes. According to the Assistant Administrator, the agency also plans to initiate a Passenger Advocate Program by January 2013, in which selected TSA airport staff will be trained to take on a collateral passenger advocate role, respond in real time to identify and resolve traveler-related screening complaints, and assist air passengers with medical conditions or disabilities, among other things. It is too early to assess the extent to which these initiatives will help mitigate possible concerns about independence. TSA officials stated that the agency is undertaking efforts to focus its resources and improve the passenger experience at security checkpoints by applying new intelligence-driven, risk-based screening procedures and enhancing its use of technology. One component of TSA’s risk-based approach to passenger screening is the Pre✓™ program, which was introduced at 32 airports in 2012, and which the agency plans to expand to 3 additional airports by the end of the calendar year. The program allows frequent flyers of five airlines, as well as individuals enrolled in other departmental trusted traveler programs—where passengers are pre-vetted and deemed trusted travelers—to be screened on an expedited basis. This program is intended to allow TSA to focus its resources on high-risk travelers. According to TSA, more than 4 million passengers have been screened through this program to date. Agency officials have reported that with the deployment of this program and other risk-based security initiatives, such as modifying screening procedures for passengers 75 and over and active duty service members, TSA has achieved its stated goal of doubling the number of passengers going through expedited screening. According to TSA, as of the end of fiscal year 2012, over 7 percent of daily passengers were eligible for expedited screening based on low risk. However, the estimated number of passengers that will be screened on an expedited basis is still a relatively small percentage of air passengers subject to TSA screening protocols each year. We plan to begin an assessment of TSA’s progress in implementing the TSA Pre✓™ program in 2013. Chairman Petri, Ranking Member Costello, and Members of the Subcommittee, this concludes my prepared remarks. I look forward to responding to any questions that you may have. For questions about this statement, please contact Steve Lord at (202) 512-4379 or lords@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include Jessica Lucas-Judy (Assistant Director), David Alexander, Thomas Lombardi, Anthony Pordes, and Juan Tapia-Videla. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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This testimony discusses the findings of our November 2012 report assessing the Transportation Security Administration's (TSA) efforts to improve the air passenger screening complaints processes. TSA screens or oversees the screening of more than 650 million air passengers per year at 752 security checkpoints in more than 440 commercial airports nationwide, and must attempt to balance its aviation security mission with competing goals of efficiency and respecting the privacy of the traveling public. The agency relies upon multiple layers of security to deter, detect, and disrupt persons posing a potential risk to aviation security. These layers focus on screening millions of passengers and pieces of carry-on and checked baggage, as well as tons of air cargo, on a daily basis. Given TSA's daily interaction with members of the traveling public, air passenger screening complaints reflect a wide range of concerns about, for example, the systems, procedures, and staff that TSA has used for screening air passengers at security checkpoints. This includes concerns related to the use of Advanced Imaging Technology and enhanced pat-down procedures. TSA screens or oversees the screening of more than 650 million air passengers per year at 752 security checkpoints in more than 440 commercial airports nationwide, and must attempt to balance its aviation security mission with competing goals of efficiency and respecting the privacy of the traveling public. The agency relies upon multiple layers of security to deter, detect, and disrupt persons posing a potential risk to aviation security. These layers focus on screening millions of passengers and pieces of carry-on and checked baggage, as well as tons of air cargo, on a daily basis. TSA has processes for addressing complaints about air passengers' screening experience at security checkpoints, but concerns have been raised about these processes. Also, TSA is implementing a Pre✓™ program to expedite screening at security checkpoints. This statement primarily based on our November 2012 report and, like the report, discusses the extent to which TSA has (1) policies and processes to guide the receipt of air passenger screening complaints, and uses this information to monitor or enhance screening operations, (2) a consistent process for informing passengers about how to make complaints, and (3) complaint resolution processes that conform to independence standards to help ensure that these processes are fair and impartial. As requested, the statement also describes TSA's recent efforts to make the screening process more risk-based and selective through use of TSA's Pre✓™ program. In summary, TSA receives thousands of air passenger screening complaints through five central mechanisms, but does not have an agencywide policy, consistent processes, or a focal point to guide receipt and use of such information. Also, while the agency has several methods to inform passengers about its complaint processes, it does not have an agencywide policy or mechanism to ensure consistent use of these methods among commercial airports. In addition, TSA's complaint resolution processes do not fully conform to standards of independence to ensure that these processes are fair, impartial, and credible, but the agency is taking steps to improve independence. To address these issues, we made four recommendations to TSA with which the agency concurred, and it indicated actions it is taking in response. Finally, TSA officials stated that the agency is undertaking efforts to focus its resources and improve the passenger experience at security checkpoints by applying new intelligence-driven, risk-based screening procedures, including expanding its Pre✓™ program. TSA plans to have this program in place at 35 airports by the end of the calendar year and estimates that it has screened more than 4 million passengers to date through this program.

The law and regulations that govern federal procurement are designed to foster competition and to promote desirable social objectives, among other goals. The Congress has long encouraged agencies to ensure that small businesses have an opportunity to participate in federal procurements and has authorized agencies to reserve certain requirements for award to small businesses. For example, in 1988 the Congress established an annual governmentwide goal of awarding not less than 20 percent of prime contract dollars to small businesses and in 1997 increased this goal to 23 percent. When all the laws and regulations to achieve the procurement system's objectives were considered, some came to believe that the result was a complex and unwieldy system that left little room for agencies to exercise sound business judgment in satisfying their needs. Two pieces of reform legislation—the Federal Acquisition Streamlining Act of 1994 (FASA) and the Clinger-Cohen Act of 1996—were passed to address these problems as well as other government acquisition and investment-related concerns. Each act included provisions designed to streamline the procurement system, increase its responsiveness, and make it more efficient. As agencies began to implement acquisition reform initiatives, representatives of small businesses began to express concerns that the initiatives would have an adverse effect on small businesses. Agencies combined existing contracts into fewer, larger contracts—referred to as "bundled contracts"—to streamline procurement and reduce contract administration costs. Questions were raised about the extent to which contract requirements were being bundled and the effect that such bundling had on small businesses' ability to participate in federal procurement. In light of these concerns, the Congress amended the Small Business Act to create a legislative definition of contract bundling. As amended, the act defines contract bundling as the consolidation of two or more procurement requirements for goods or services previously provided or performed under separate, smaller contracts into a solicitation of offers for a single contract that is likely to be unsuitable for award to a small business concern because of the diversity, size, or specialized nature of the elements of the performance specified; the aggregate dollar value of the anticipated work; the geographic dispersion of performance sites; or any combination of these three criteria. The statute also defines a "separate, smaller contract" as a contract that has been performed by one or more small businesses or was suitable for award to one or more small businesses. The Small Business Act, as amended, states that, to the maximum extent practicable, agencies shall avoid unnecessary and unjustified bundling of contract requirements that precludes small businesses' participation in procurements as prime contractors. For those contracts considered to be bundled, the Small Business Act establishes criteria for determining whether contract bundling was necessary and justified, and requires agencies that intend to bundle requirements to document that these criteria have been met. Our analysis of overall data on construction contract awards indicates that small businesses are continuing to win work and that their ability to compete is not being impaired. Since 1997, construction contract awards to small businesses have increased steadily in the face of a decline in overall construction awards. As table 1 shows, awards to small businesses increased from about $1.6 billion to about $1.9 billion from fiscal year 1997 through fiscal year 2000 (in constant fiscal year 1999 dollars) while overall awards declined from about $6.6 billion to about $5.9 billion. Consequently, the share of awards going to small businesses increased from about 25 to about 32 percent. Our analysis also showed that this trend occurred despite an increase in awards to foreign firms and domestic firms performing abroad. The proportion of total DOD construction awards going to such firms increased from 10 percent in fiscal year 1997 to 14 percent in fiscal year 2000. Contracting officials pointed out that small business construction firms generally confine their operations to a specific region or geographic area, sometimes pursuing work only in the metropolitan area where the firm is headquartered. According to the officials, small business construction firms would typically not have the resources to perform work abroad and would be very unlikely to win contracts for such projects. Because the overall data do not identify bundled contracts, we were not able to measure the extent of contract bundling directly. Accordingly, we reviewed selected contracts to assess whether agencies were consolidating requirements. Of the 26 contracts we reviewed, 5 were large contracts that consolidated requirements to the point of limiting small businesses' participation. These particular contracts combined the components of a multiple-facility project under a single contract. Officials analyzed these projects to assess whether the work could accommodate smaller contractors but concluded that only by having a single contractor build the entire project could the work be performed efficiently. For example, the Navy requested proposals for the construction of a complex of eight facilities at the Stennis Space Center in Mississippi to house a Special Operations Forces unit. The Navy estimated the cost of the complex at $24.2 million. A large business received the contract, and the Navy official responsible for monitoring small business contracting indicated that small businesses would have had difficulty undertaking a project of this size. The contracting officer told us that because these facilities were clustered on a compact site and were served by common cooling and mechanical systems, a single contract was awarded for constructing the entire complex. Space at the construction site would not have accommodated multiple contractors. Contracting officials told us that when contracting to construct a multiple-facility project, they have historically considered whether components of the project can be acquired through separate, smaller contracts suitable for award to small businesses. However, if an analysis of site and project characteristics indicated that a single contractor would be necessary in order for the work to be performed efficiently, a single contract would be awarded. In cases like these, Small Business Administration (SBA) representatives normally review planned construction contracts and—when it appears unlikely that small businesses will be able to compete for a contract—may recommend alternative contracting approaches that will increase opportunities for small businesses. At the two locations we visited, contracting officers had submitted each of the contracts we reviewed to the appropriate SBA representatives and received approval to proceed with their planned contracting approach. Another six of the contracts we reviewed involved ordering construction projects under task-order contracts. In these cases, small businesses were able to participate. Task-order contracts define the broad outlines of the government's needs and permit the government to place orders to acquire specific work over a fixed period within stated dollar limits. Under FASA, agencies may award task-order contracts as part of initiatives to streamline federal procurement. To encourage competition, the Congress established a preference for awarding task-order contracts to multiple contractors rather than to a single one and for providing each of the contractors an opportunity to be considered for specific orders. To preserve the simplicity and flexibility of administering task-order contracts, the Congress provided contracting officers broad discretion to define the procedures used to evaluate offers and select contractors when placing orders. According to contracting officials, placing orders under task-order contracts allows them to acquire construction work more quickly and with less administrative effort than awarding individual contracts. Small businesses won some task-order contracts at the locations we visited. For example, the Army awarded six task-order contracts that provided for ordering construction and incidental design services over a 4- year period, including options. While the Army expected that individual projects would be valued in the $100,000 to $500,000 range, the Army could order up to $5 million in work annually or $20 million over the 4- year period. The contracts called for contractors to submit competitive proposals on orders and for the Army to select the most advantageous proposal. The Army awarded two of the six task-order contracts through competitions limited to small disadvantaged businesses participating in the 8(a) program. In the competition for orders under the contracts, these two small disadvantaged businesses won $4 million, or about 28 percent, of the work acquired under the six contracts through November 2000. Another nine of the contracts we reviewed combined the requirements for design and construction work on a single facility under a single contract. In these cases, again, small businesses were able to participate. Agencies have traditionally awarded separate contracts for design and construction work. As part of the Clinger-Cohen Act's initiatives to streamline federal procurement, however, the Congress authorized agencies to award single contracts covering both design and construction work, referred to as "design-build contracts." Under the statute, agencies use a two-phase approach to selecting a design-build contractor, initially inviting contractors to submit information on their qualifications and technical approach to the work. Agencies use this information to identify the most highly qualified contractors and invite these firms to submit more-detailed information, such as design concepts and cost or price data. On the basis of their experience to date, officials indicated that using design-build contracts has enabled them to reduce project completion times and costs. Small businesses competed successfully for design-build contracts at the locations we visited. For example, the Navy requested proposals for the design and construction of a wharf and an associated administrative, shop, and storage building estimated to cost about $8.4 million. Initially, 12 firms submitted information on their capabilities and past performance. After evaluating this information, the Navy concluded that two small businesses and one large business were best qualified to undertake the project and invited these firms to submit a design proposal and price for the work. Navy evaluators considered the design solutions submitted by the two small businesses to be superior to that submitted by the large business. Since one of the small businesses also proposed the lowest price, this firm was awarded a contract for the work. Contracting officials pointed out that, to compete successfully for design-build contracts, construction firms must team up with design firms. Of these nine design-build contracts, small businesses won two and were considered among the most highly qualified contractors in the competition for two others. Lastly, of the remaining six contracts, five were separate contracts covering the construction of single facilities for which complete designs had been previously prepared. Small businesses won three of these five contracts. Finally, the last of the six contracts covered the design and construction of two closely related facilities. This final project was modest in scope, having an estimated cost of $5.7 million and—although this contract was not awarded to a small business—two small businesses were considered among the most highly qualified contractors competing for the contract. DOD and SBA reviewed a draft of this report. DOD's Director of Small and Disadvantaged Business Utilization told us that DOD had no comments on the draft. SBA's written comments are contained in appendix I. SBA indicated that the report's analysis is useful in improving an understanding of contract bundling and contract consolidation. SBA noted that the report does not discuss the Small Business Competitiveness Demonstration Program and its applicability to construction contracts. An evaluation of this program was beyond the scope of this review. SBA suggested that we include an appendix detailing the cases reviewed. Accordingly, we have incorporated a list of the contracts reviewed in our discussion of the scope and methodology of the review. To identify trends in DOD's contracting for construction and use of small business contractors, we analyzed data from DOD's prime contract database for fiscal years 1997 through 2000. Using this database, we determined trends in total obligations on contracts for construction work by converting obligations into constant fiscal year 1999 dollars and using gross domestic product deflator indexes in the President's Budget submission applicable to military outlays. In addition, we determined the shares of total obligations going to various classifications of business entities. We did not independently verify the accuracy of the information in DOD's database. To assess the extent to which DOD's contracting officers had combined construction requirements, we reviewed the laws and implementing regulations defining contract bundling and reviewed large contracts for construction awarded at selected contracting offices. Using DOD's prime contract database, we ranked DOD's contracting offices in terms of total dollars awarded for general repair and construction work in fiscal year 1999. (Data for fiscal year 2000 were not available at the time we were planning our work.) After ranking DOD's contracting offices, we reviewed contracts at the highest-ranked Army and Navy contracting offices: the Army Corps of Engineers' Mobile District, Mobile, Alabama, and the Naval Facilities Engineering Command's Southern Division, Charleston, South Carolina. At these two locations, we reviewed all contracts valued at $5 million or more awarded during fiscal year 2000 for construction in the United States. We did not review contracts at an Air Force contracting office because the Army and Navy provide the Air Force with contracting support and the 28 highest-ranked offices were either Army or Navy contracting offices. Table 2 lists the 26 contracts—valued at $347 million— selected for review. For these contracts, we reviewed contract documentation to determine whether requirements had been combined, the reasons cited for combining requirements, and the extent of small businesses' participation in competition for the contracts. We also discussed these issues with contracting officials, the contracting offices' small business utilization monitors, and SBA representatives responsible for overseeing the selected contracting offices. Our results cannot be generalized to the universe of construction contract awards. We conducted our review from November 2000 through May 2001 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of Defense and the Acting Administrator of the Small Business Administration. We will make copies available to others on request. If you have any questions regarding this report, please contact me on (202) 512-4841 or Ralph Dawn on (202) 512-4544. Other key contributors to this report were Monty Peters, Ralph Roffo, and John Van Schaik. Small Business: Trends in Federal Procurement in the 1990s (GAO-01-119, Jan. 18, 2001). Federal Procurement: Trends and Challenges in Contracting With Women-Owned Small Businesses (GAO-01-346, Feb. 16, 2001). Small Businesses: Limited Information Available on Contract Bundling's Extent and Effects (GAO/GGD-00-82, Mar. 31, 2000). Defense Contracting: Sufficient, Reliable Information on DOD's Mentor- Protege Program Is Unavailable (GAO/NSIAD-98-92, Mar. 30, 1998). Base Operations: DOD's Use of Single Contracts for Multiple Support Services (GAO/NSIAD-98-82, Feb. 27, 1998).

Congress appropriates billions of dollars annually to construct buildings and other facilities for military training and operations. Small business have carried out a significant portion of this work. Congress and small business advocates, however, had become concerned that agencies were combining requirements into larger contracts that small businesses could not win. GAO examined the contract bundling of military construction requirements. GAO determined whether (1) overall data on construction contract awards to small businesses indicated that their ability to compete for contracts had been impaired and (2) selected Department of Defense (DOD) contracting offices had combined construction requirements in ways that hampered small businesses' ability to compete. Overall data on military construction contract awards to small businesses revealed that small businesses are generally continuing to win work and that their ability to compete is not being impaired. The Small Business Administration reviewed and approved of DOD's plan to determine whether the construction work being done could accommodate smaller contractors. Small businesses were able to compete for the remaining contracts.

Through the impartial and independent investigation of citizens’ complaints, federal ombudsmen help agencies be more responsive to the public, including people who believe that their concerns have not been dealt with fully or fairly through normal channels. Ombudsmen may recommend ways to resolve individual complaints or more systemic problems, and may help to informally resolve disagreements between the agency and the public. While there are no federal requirements or standards specific to the operation of federal ombudsman offices, the Administrative Conference of the United States recommended in 1990 that the President and the Congress support federal agency initiatives to create and fund an external ombudsman in agencies with significant interaction with the public. In addition, several professional organizations have published relevant standards of practice for ombudsmen. Both the recommendations of the Administrative Conference of the United States and the standards of practice adopted by various ombudsman associations incorporate the core principles of independence, impartiality (neutrality), and confidentiality. For example, the ABA’s standards define these characteristics as follows: Independence—An ombudsman must be and appear to be free from interference in the legitimate performance of duties and independent from control, limitation, or penalty by an officer of the appointing entity or a person who may be the subject of a complaint or inquiry. Impartiality—An ombudsman must conduct inquiries and investigations in an impartial manner, free from initial bias and conflicts of interest. Confidentiality—An ombudsman must not disclose and must not be required to disclose any information provided in confidence, except to address an imminent risk of serious harm. Records pertaining to a complaint, inquiry, or investigation must be confidential and not subject to disclosure outside the ombudsman’s office. Relevant professional standards contain a variety of criteria for assessing an ombudsman’s independence, but in most instances, the underlying theme is that an ombudsman should have both actual and apparent independence from persons who may be the subject of a complaint or inquiry. According to ABA guidelines, for example, a key indicator of independence is whether anyone subject to the ombudsman’s jurisdiction can (1) control or limit the ombudsman’s performance of assigned duties, (2) eliminate the office, (3) remove the ombudsman for other than cause, or (4) reduce the office’s budget or resources for retaliatory purposes. Other factors identified in the ABA guidelines on independence include a budget funded at a level sufficient to carry out the ombudsman’s responsibilities; the ability to spend funds independent of any approving authority; and the power to appoint, supervise, and remove staff. The Ombudsman Association’s standards of practice define independence as functioning independent of line management; they advocate that the ombudsman report to the highest authority in the organization. According to the ABA’s recommended standards, “the ombudsman’s structural independence is the foundation upon which the ombudsman’s impartiality is built.” One aspect of the core principle of impartiality is fairness. According to an article published by the U.S. Ombudsman Association on the essential characteristics of an ombudsman, an ombudsman should provide any agency or person being criticized an opportunity to (1) know the nature of the criticism before it is made public and (2) provide a written response that will be published in whole or in summary in the ombudsman’s final report. In addition to the core principles, some associations also stress the need for accountability and a credible review process. Accountability is generally defined in terms of the publication of periodic reports that summarize the ombudsman’s findings and activities. Having a credible review process generally entails having the authority and the means, such as access to agency officials and records, to conduct an effective investigation. The ABA recommends that an ombudsman issue and publish periodic reports summarizing the findings and activities of the office to ensure its accountability to the public. Similarly, recommendations by the Administrative Conference of the United States regarding federal ombudsmen state that they should be required to submit periodic reports summarizing their activities, recommendations, and the relevant agency’s responses. Federal agencies face legal and practical constraints in implementing some aspects of these standards because the standards were not designed primarily with federal agency ombudsmen in mind. However, ombudsmen at the federal agencies we reviewed for our 2001 report reflected aspects of the standards. We examined the ombudsman function at four federal agencies in addition to EPA and found that three of them—the Federal Deposit Insurance Corporation, the Food and Drug Administration, and the Internal Revenue Service—had an independent office of the ombudsman that reported to the highest level in the agency, thus giving the ombudsmen structural independence. In addition, the ombudsmen at these three agencies had functional independence, including the authority to hire, supervise, discipline, and terminate their staff, consistent with the authority granted to other offices within their agencies. They also had control over their budget resources. The exception was the ombudsman at the Agency for Toxic Substances and Disease Registry, who did not have a separate office with staff or a separate budget. This ombudsman reported to the Assistant Administrator of the agency instead of the agency head. In our July 2001 report, we recommended, among other things, that EPA modify its organizational structure so that the function would be located outside of the Office of Solid Waste and Emergency Response, whose activities the national ombudsman was charged with reviewing. EPA addresses this recommendation through its placement of the national ombudsman within the OIG, where the national ombudsman will report to a newly-created position of Assistant Inspector General for Congressional and Public Liaison. OIG officials also told us that locating the national ombudsman function within the OIG offers the prospect of additional resources and enhanced investigative capability. According to the officials, the national ombudsman will likely have a small permanent staff but will also be able to access OIG staff members with expertise in specific subject matters, such as hazardous waste or water pollution, on an as-needed basis. Further, OIG officials anticipate that the ombudsman will adopt many of the office’s existing recordkeeping and reporting practices, which could help address the concerns we noted in our report about accountability and fairness to the parties subject to an ombudsman investigation. Despite these aspects of EPA’s reorganization, several issues merit further consideration. First and foremost is the question of intent in establishing an ombudsman function. The term “ombudsman,” as defined within the ombudsman community, carries with it certain expectations. The role of an ombudsman typically includes program operating responsibilities, such as helping to informally resolve program-related issues and mediating disagreements between the agency and the public. Assigning these responsibilities to an office within the OIG would conflict with statutory restrictions on the Inspector General’s activities. Specifically, the Inspector General Act, as amended, prohibits an agency from transferring any function, power, or duty involving program responsibilities to its OIG. However, if EPA omits these responsibilities from the position within the OIG, then it will not have established an “ombudsman” as the function is defined within the ombudsman community. In our April 2001 report, we noted that some federal experts in dispute resolution were concerned that among the growing number of federal ombudsman offices there are some individuals or activities described as “ombuds” or “ombuds offices” that do not generally conform to the standards of practice for ombudsmen. A related issue is that ombudsmen generally serve as a key focal point for interaction between the government, or a particular government agency, and the general public. By placing the national ombudsman function within its OIG, EPA appears to be altering the relationship between the function and the individuals that make inquiries or complaints. Ombudsmen typically see their role as being responsive to the public, without being an advocate. However, EPA’s reorganization signals a subtle change in emphasis: OIG officials see the ombudsman function as a source of information regarding the types of issues that the OIG should be investigating. Similarly, rather than issue reports to complainants, OIG officials expect that the national ombudsman’s reports will be addressed to the EPA Administrator, consistent with the reporting procedures for other OIG offices. The officials told us that their procedures for the national ombudsman function, which are still being developed, could provide for sending a copy of the final report or a summary of the investigation to the original complainant along with a separate cover letter when the report is issued to the Administrator. Based on the preliminary information available from EPA, the reorganization raises other issues regarding the consistency of the agency’s ombudsman function with relevant professional standards. For example, under EPA’s reorganization, the national ombudsman will not be able to exercise independent control over budget and staff resources, even within the general constraints that are faced by federal agencies. According to OIG officials, the national ombudsman will have input into the hiring, assignment, and supervision of staff, but overall authority for staff resources and the budget allocation rests with the Assistant Inspector General for Congressional and Public Liaison. OIG officials pointed out that the issue our July 2001 report raised about control over budget and staff resources was closely linked to the ombudsman’s placement within the Office of Solid Waste and Emergency Response. The officials believe that once the national ombudsman function was relocated to the OIG, the inability to control resources became much less significant as an obstacle to operational independence. They maintain that although the ombudsman is not an independent entity within the OIG, the position is independent by virtue of the OIG’s independence. Despite the OIG’s argument, we note that the national ombudsman will also lack authority to independently select and prioritize cases that warrant investigation. According to EPA, the Inspector General has the overall responsibility for the work performed by the OIG, and no single staff member—including the ombudsman—has the authority to select and prioritize his or her own caseload independent of all other needs. Decisions on whether complaints warrant a more detailed review will be made by the Assistant Inspector General for Congressional and Public Liaison in consultation with the national ombudsman and staff. EPA officials are currently reviewing the case files obtained from the former ombudsman, in part to determine the anticipated workload and an appropriate allocation of resources. According to OIG officials, the national ombudsman will have access to other OIG resources as needed, but EPA has not yet defined how decisions will be made regarding the assignment of these resources. Under the ABA guidelines, one measure of independence is a budget funded at a level sufficient to carry out the ombudsman’s responsibilities. However, if both the ombudsman’s budget and workload are outside his or her control, then the ombudsman would be unable to assure that the resources for implementing the function are adequate. Ombudsmen at other federal agencies must live within a budget and are subject to the same spending constraints as other offices within their agencies, but they can set their own priorities and decide how their funds will be spent. EPA has also not yet fully defined the role of its regional ombudsmen or the nature of their relationship with the national ombudsman in the OIG. EPA officials told us that the relationship between the national and regional ombudsmen is a “work in progress” and that the OIG will be developing procedures for when and how interactions will occur. Depending on how EPA ultimately defines the role of its regional ombudsmen, their continued lack of independence could remain an issue. In our July 2001 report, we concluded that the other duties assigned to the regional ombudsmen—primarily line management positions within the Superfund program—hamper their independence. Among other things, we cited guidance from The Ombudsman Association, which states that an ombudsman should serve “no additional role within an organization” because holding another position would compromise the ombudsman’s neutrality. According to our discussions with officials from the Office of Solid Waste and Emergency Response and the OIG, the investigative aspects of the ombudsman function will be assigned to the OIG, but it appears that the regional ombudsmen will respond to inquiries and have a role in informally resolving issues between the agency and the public before they escalate into complaints about how EPA operates. For the time being, EPA officials expect the regional ombudsmen to retain their line management positions. Finally, including the national ombudsman function within the Office of the Inspector General raises concerns about the effect on the OIG, even if EPA defines the ombudsman’s role in a way that avoids conflict with the Inspector General Act. By having the ombudsman function as a part of the OIG, the Inspector General could no longer independently audit and investigate that function, as is the case at other federal agencies where the ombudsman function and the OIG are separate entities. As we noted in a June 2001 report on certain activities of the OIG at the Department of Housing and Urban Development, under applicable government auditing standards the OIG cannot independently and impartially audit and investigate activities it is directly involved in. A related issue concerns situations in which the national ombudsman receives an inquiry or complaint about a matter that has already been investigated by the OIG. For example, OIG reports are typically transmitted to the Administrator after a review by the Inspector General. A process that requires the Inspector General to review an ombudsman- prepared report that is critical of, or could be construed as reflecting negatively on, previous OIG work could pose a conflict for the Inspector General. OIG officials are currently working on detailed procedures for the national ombudsman function, including criteria for opening, prioritizing, and closing cases, and will have to address this issue as part of their effort. In conclusion, Mr. Chairman, we believe that several issues need to be considered in EPA’s reorganization of its ombudsman function. The first is perhaps the most fundamental—that is, the need to clarify the intent. We look forward to working with Members of the Subcommittee as you consider the best way of resolving these issues.

The Environmental Protection Agency's (EPA) hazardous waste ombudsman was first established within the Office of Solid Waste and Emergency Response as a result of the 1984 amendments to the Resource Conservation and Recovery Act. Over time, EPA expanded the national ombudsman's jurisdiction to include Superfund and other hazardous waste programs managed by the Office of Solid Waste and Emergency Response, and, by March 1996, EPA had designated ombudsmen in each of its 10 regional offices. Although the national ombudsman's activities ranged from providing information to investigating the merits of complaints, in recent years, the ombudsman played an increasingly prominent role through his investigations of citizen complaints. Pending legislation would reauthorize an office of the ombudsman within EPA. In November 2001, the EPA Administrator announced that the national ombudsman would be relocated from the Office of Solid Waste and Emergency Response to the Office of Inspector General (OIG) and would address concerns across the spectrum of EPA programs. Although there are no federal requirements or standards specific to the operation of ombudsman offices, several professional organizations have published standards of practice relevant to ombudsmen who deal with inquiries from the public. If EPA intends to have an ombudsman function that is consistent with the way the position is typically defined in the ombudsman community, placing the national ombudsman within the OIG does not achieve that objective. The national ombudsman, as the position is currently envisioned, still will not be able to exercise independent control over the budget and staff resources needed to implement the function. Prior to the reorganization, the national ombudsman could independently determine which cases to pursue; however, according to EPA, the Inspector General has the overall responsibility for the work performed by the Office, and no single staff member has the authority to select and prioritize his or her own caseload independent of all other needs. Finally, placing the ombudsman in the OIG could also affect the activities of the Inspector General.

Although more than 70 federal agencies have foreign language needs, some of the largest programs are concentrated in the Army, the State Department, the Central Intelligence Agency, and the Federal Bureau of Investigation. Office of Personnel Management (OPM) records indicate that the government employs just under a thousand translators and interpreters in the job series reserved for this group. The government also employs tens of thousands of individuals who use foreign language skills in positions such as FBI special agents and legal attachés, State Department Foreign Service officers, and Department of Commerce Foreign Commercial Service (FCS) officers. For the four agencies we reviewed, a total of nearly 20,000 staff are employed in positions that require some foreign language proficiency. Agency management of these resources takes place against the backdrop of an emerging federal issue—strategic human capital management. The foreign language staffing and proficiency shortfalls we discuss in our report can be seen as part of a broader pattern of human capital weaknesses and poor workforce planning that has impacted the operations of agencies across the federal government. In fact, GAO recently designated human capital management as a governmentwide high-risk area on the basis of specific problem areas identified in prior GAO reports.For example, GAO previously testified that the Department of Defense faces looming shortages of intelligence analysts, computer programmers, and pilots. In a subsequent report on trends in federal employee retirements, we found that relatively large numbers of individuals in key math and science fields will be eligible to retire by the end of fiscal year 2006: These include physics (47 percent); chemistry (42 percent); computer specialists (30 percent); and electronics and electrical engineering (27 percent and 28 percent, respectively). In response to these risks, the administration, the Office of Management and Budget (OMB), OPM, and GAO have issued guidance on how agencies can begin the process of strategically managing their staffing resources. For example, OPM has developed a five-step workforce planning model that outlines the basic tenets of effective workforce planning. The president and OMB’s guidance stresses that agencies should seek to address shortages of skills by conducting thorough workforce analyses, by using existing personnel flexibilities available to federal agencies, and by identifying additional authorities or flexibilities they might need to remove current obstacles and barriers to effective workforce management. GAO guidance emphasizes the use of a self-assessment checklist for better aligning human capital with strategic planning and core business practices. Officials in the four agencies we reviewed reported varied types and degrees of foreign language shortages depending on the agency, job position, language, and skill level. They noted shortages of translators and interpreters and people with skills in specific languages, as well as a shortfall in proficiency level among people who use foreign language skills in their jobs. The Army’s greatest foreign language needs were for translators and interpreters, cryptologic linguists, and human intelligence collectors. The State Department has not filled all of its positions requiring foreign language skills. And, although the Foreign Commercial Service has relatively few positions that require foreign language proficiency, it had significant shortfalls in personnel with skills in six critical languages. While the FBI does not have a set number of positions for its special agent linguists, these agents must have some level of foreign language proficiency that they can use in conducting investigations. (When identified by language, FBI staffing and proficiency data are classified and are discussed in the classified report mentioned earlier.) While our report provides detailed staffing and proficiency shortfall data for four agencies, I would like to use the data we obtained for the U.S. Army to illustrate the nature and extent of some of these shortfalls. The Army provided us data on translator and interpreter positions for six languages it considers critical: Arabic, Korean, Mandarin Chinese, Persian- Farsi, Russian, and Spanish (our analysis excluded Spanish because the Army has a surplus of Spanish language translators and interpreters). As shown in table 1, the Army had authorization for 329 translator and interpreter positions for these five languages in fiscal year 2001 but only filled 183 of them, leaving a shortfall of 146 (44 percent). In addition to its needs for translators and interpreters, the Army also has a need for staff with applied language skills. We obtained detailed information on two key job series involving military intelligence— cryptologic linguists and human intelligence collectors. As shown in table 2, the Army had a shortfall of cryptologic linguists in two of the six foreign languages it viewed as most critical—Korean and Mandarin Chinese. Overall, there were 142 unfilled positions, which amounted to a 25 percent shortfall in cryptologic linguists in these two languages. The Army also had a shortfall of human intelligence collectors in five of the six foreign languages it viewed as most critical in this area—Arabic, Russian, Spanish, Korean, and Mandarin Chinese.Overall, there were 108 unfilled positions, which amounted to a 13 percent shortfall in these five languages. The greatest number of unfilled human intelligence collector positions was in Arabic, but the largest percentage shortfall was in Mandarin Chinese. Table 3 provides data on these shortfalls, by language. The shortages that agencies reported can have a significant impact on agency operations. Although it is sometimes difficult to link foreign language skills to a specific outcome or event, foreign language shortages have influenced some agency activities. Here are a few examples: The Army has noted that a lack of linguists is affecting its ability to conduct current and anticipated human and signal intelligence missions. As a result, the Army said that it does not have the linguistic capacity to support two concurrent major theaters of war. The need for Spanish speakers has been an issue in pursuing Florida health care fraud cases. The assistant U.S. attorney in Miami in charge of health care fraud investigations recently advised the FBI that his office would decline to prosecute health care fraud cases unless timely translations of Spanish conversations were available. This situation has important implications, since the Miami region has the nation’s largest ongoing health care fraud investigation. The FBI estimates that Medicare and Medicaid losses in the region are in excess of $3 billion. The FBI’s Los Angeles office has also cited a critical need for Spanish language specialists and language monitors for cases involving violent gang members. According to the Bureau, being able to target these gang members will save lives in Los Angeles but is contingent on the availability of Spanish linguists to assist with these investigations. The need for foreign language speakers has hindered State Department operations. The deputy director of the State Department's National Foreign Affairs Training Center recently testified on this topic. She said that shortfalls in foreign language proficiency have contributed to a lack of diplomatic readiness. As a result, the representation and advocacy of U.S. interests abroad has been less effective; U.S. exports, investments, and jobs have been lost; and the fight against international terrorism and drug trafficking has been weakened. Finally, the lack of translators has thwarted efforts to combat terrorism. For instance, the FBI has raised concern over the thousands of hours of audio tapes and pages of written material that have not been reviewed or translated due to a lack of qualified linguists. Our second objective was to examine federal agencies’ strategies to address these foreign language shortages. The agencies we reviewed are pursuing three general strategies to meet their foreign language needs. First, agencies are focusing on staff development by training staff in foreign languages, providing pay incentives for individuals using those skills, and ensuring an attractive career path for linguists or language-proficient employees. Second, agencies are making use of external resources. This effort can include contracting staff as needed; recruiting native or U.S.-­ trained language speakers; or drawing on the expertise of other agency staff, reservists, or retirees. Third, several agencies have begun to use technology to leverage limited staff resources, including developing databases of contract linguists, employing language translation software, and performing machine screening of collected data. Figure 1 provides an overview of these categories and related strategies. While these assorted efforts have had some success, current agency strategies have not fully met the need for some foreign language skills, as evidenced by the continuing staffing and proficiency shortfalls that each agency we reviewed faces. Limited Progress Made Our third objective was to analyze federal agencies’ efforts to implement an on Workforce Planning overall strategic workforce plan to address current and projected foreign language shortages. To help fill existing skills shortages, some agencies have begun to adopt a strategic approach to human capital management and workforce planning. As I mentioned earlier, OPM has issued a workforce planning model that illustrates the basic tenets of strategic workforce planning. We used this model to assess the relative maturity of workforce planning at the four agencies we reviewed. As shown in figure 2, this model suggests that agencies follow a five-step process that includes setting a strategic direction, documenting the size and nature of skills gaps, developing an action plan to address these shortages, implementing the plan, and evaluating implementation progress on an ongoing basis. This is a model that could be used to guide workforce planning efforts as they relate to other skills needed in the federal government such as math, science, and information technology. We found that the FBI has made an effort to address each of the five steps in OPM’s model. For instance, the FBI has instituted an action plan that links its foreign language program to the Bureau's strategic objectives and program goals. This action plan defines strategies, performance measures, responsible parties, and resources needed to address current and projected language shortages. We found that the FBI’s work in the foreign language area was supported by detailed reports from field offices that documented the Bureau’s needs. The FBI reviewed these reports along with workload statistics from its regional offices. FBI officials noted that implementation progress is routinely tracked and adjustments to the action plan are made as needed. In contrast, the other three agencies have yet to pursue this type of comprehensive strategic planning and had only completed some of the steps outlined in OPM’s planning model. The Army has limited its efforts to developing a plan partially outlining a strategic direction and identifying its available supply and demand for staff with foreign language skills (addressing only steps 1 and 2 of the OPM model). The State Department has not yet set a strategic direction for its language program; however, the department has addressed step 2 in the workforce planning model through its annual survey of ambassadors regarding foreign language needs at their posts on a position-by-position basis. State has yet to develop an action plan and the related implementation and monitoring steps described in OPM’s model. Finally, the status of the Foreign Commercial Service’s language program closely mirrored the situation we found at the State Department. One difference, however, is that the agency surveys senior officers regarding a post’s foreign language needs every 3 years instead of annually. Another difference is that FCS officials indicated that they have begun a workforce planning initiative that is designed to address the key components outlined in the OPM model. In closing, I would like to note that foreign language shortages have developed over a number of years. It will take time, perhaps years, to overcome this problem. Effective human capital management and workforce planning, however, offer a reasonable approach to resolving such long-standing problems. Mr. Chairman and members of the Subcommittee, this concludes my prepared statement. I will be happy to answer any questions the Subcommittee members may have.

Federal agencies' foreign language needs have increased during the past decade because of increasing globalization and the changing security environment. At the same time, agencies have seen significant reductions-in-force and no-growth or limited-growth environments during the last decade. As a result, some agencies now confront an aging core of language-capable staff while recruiting and retaining qualified new staff in an increasingly competitive job market. The four agencies GAO reviewed reported shortages of translators and interpreters and other staff, such as diplomats and intelligence specialists, with foreign language skills. These shortfalls varied depending on the agency, job position, language, and skill level. The agencies reported using a range of strategies to address their staffing shortfalls, such as providing employees with language training and pay incentives, recruiting employees with foreign language skills, hiring contractors, or taking advantage of information technology. One of the four agencies has adopted a strategic approach to its workforce planning efforts. In contrast, the other three agencies have yet to pursue overall strategic planning in this area.

Historically, most farm programs have been implemented at the county office level. The current county-based delivery structure originated in the 1930s, when the first agricultural acts established farm support programs. At that time, more than one-fourth of all Americans engaged in farming, and the lack of an extensive communication and transportation network limited the geographic boundaries that could be effectively served by a single field office. In addition, most farm programs required farmers to visit the local office to learn about and sign up for these programs. FSA staff assisted farmers in completing the administrative requirements, including the necessary paperwork, associated with the programs. Over the last 60 years, the number of farms in the United States has declined significantly, as has the number of people engaged in farming. Improvements in communication and transportation in rural areas have mitigated some of the problems associated with large distances between farmers and program resources. Additionally, two recent legislative changes have significantly affected USDA’s delivery of farm programs. The Federal Crop Insurance Reform and Department of Agriculture Reorganization Act of 1994 (P.L. 103-354, Oct. 13, 1994) directed the Secretary of Agriculture to streamline and reorganize USDA to achieve greater efficiency, effectiveness, and economies in its organization and management of programs and activities. In addition, the Federal Agriculture Improvement and Reform Act of 1996 (P.L. 104-127, Apr. 4, 1996) fundamentally changed the federal government’s role in supporting production agriculture by replacing traditional commodity programs and reducing many of the administrative requirements related to the remaining agriculture programs. Prior to the 1996 act, farmers participating in federal commodity programs were restricted to planting certain types and amounts of crops. Following the 1996 act, farmers are expected to plant and market crops by considering market conditions rather than by relying on government programs. As a result of the 1994 act, USDA has closed more than 300 offices, or about 14 percent of the 2,773 offices that were operating at the end of 1994. These closures required the farmers served by those offices to travel to a neighboring county for assistance. In addition to these office closings, USDA reduced FSA’s nonfederal staff from 13,432 in 1995 to 11,399 in 1997, a reduction of 2,033 employees, or about 15 percent. According to the 1998 budget proposal, USDA is scheduled to close 500 additional offices and reduce FSA’s county office staff by an additional 57 percent, from 11,399 employees in 1997 to 4,879 by 2002. The proposal’s estimated savings would total more than $1 billion for the 6 years through 2002. To date, USDA’s reductions in county office staff have been achieved primarily by reducing the staff at larger county offices and by closing or consolidating smaller county offices (those with three or fewer employees). Furthermore, USDA is undertaking an effort to streamline its administrative activities at the state and national level, which may affect the quality of service farmers receive. In December 1997, the Secretary of Agriculture approved a plan that will consolidate a number of administrative activities at headquarters and in state offices. The plan establishes a Support Services Bureau in headquarters and one state administrative support unit in each state. This organization will provide administrative services—including financial management, human resources, services supporting civil rights, information technology, and management services (including procurement)—to field-based agencies. USDA also has contracted for an independent study to examine FSA, the Natural Resources Conservation Service, and the Rural Development mission area for opportunities to improve overall customer service and the efficiency of the delivery system. The results of this study, expected to be completed in October 1998, will be incorporated into the future iterations of FSA’s strategic plan. Despite recent office closings and staff reductions, most farmers continue to be very satisfied with the quality of service they have been receiving from USDA, according to a USDA survey and our discussions with farmers. In USDA’s 1997 national survey, 90 percent of the more than 4,000 respondents said that they were very satisfied with the service they received from their county office and that local staff were responsive to their needs, provided reliable service, and showed empathy towards customers when conducting business. In addition, the participants said that “personalized face-to-face service” was important to them. In fact, when asked to identify alternative ways of doing business with the county office, such as by computer or telephone, nearly 60 percent of the farmers said that they did not want any changes and preferred to continue to conduct most business in person. According to all 60 farmers we spoke with by telephone, the quality of service in late 1997 was the same or better than it was in 1995, despite staff reductions and office closures. These farmers lived in all parts of the nation and had participated in the Conservation Reserve Program, the farm loan programs, and/or the commodity programs. In some cases, these farmers lived in counties in which their local county office had been closed. They stated that the quality of service was high because FSA staff were efficient and knowledgeable. One farmer said that service in the county office was good because the county office employees took the time to become familiar with each farmer’s operation. Farmers we spoke with were particularly pleased with FSA staff’s performance in the following areas: Completing paperwork. FSA staff have historically completed most farmers’ paperwork for the commodity programs for them. FSA staff told us that by completing the paperwork, they reduce the possibility of errors that would occur if farmers completed the paperwork on their own. Many farmers we talked to said that they like having FSA staff fill out their paperwork because it is very complex and they would have difficulty doing it by themselves. Storing and maintaining records. FSA staff maintain farmers’ commodity program records because, according to one FSA county executive director, many farmers like FSA to keep their historical farming records, such as acreage reports, on file in case farm programs change and the information is needed to establish eligibility for the new programs. Reminding farmers about key sign-up dates. FSA uses mail and telephone calls to remind farmers of key dates for enrolling in a program because officials are concerned that some farmers may otherwise forget to sign up. One farmer said that he appreciated receiving postcards from his county office when it was time for him to visit the office. Under the commodity programs, for example, FSA staff reminded farmers 15 days prior to the ending date of a sign-up period that they had not enrolled in the current year’s programs. Providing prompt walk-in service. At most county offices, farmers can visit without an appointment and receive prompt service for commodity programs. This service could range from answering simple questions to filling out a farmer’s paperwork. Farmers like the flexibility of coming into the office when it is convenient for them—when the weather is bad, for instance, without having to make an appointment. In commenting on a draft of this report, FSA officials noted that while the results of USDA’s survey and our discussions with farmers indicate that most farmers are satisfied with the service that they receive, some are not. For example, some small and minority farmers involved in the farm loan programs have criticized USDA recently for not providing adequate service. FSA officials stated that they would like to provide a better level of service for participants in the farm loan programs, but they lack adequately trained staff. As of December 1997, FSA had 2,396 offices and 11,399 county office employees. These office and staffing levels reflect the closing of more than 300 offices and staff reductions of about 15 percent since December 1994. If the 1998 budget proposal to further reduce staffing by an additional 50 percent and to close an additional 500 offices were carried out, FSA would average about two to three employees per office, in comparison with the current average of about five. As we have previously reported, county offices need a minimum of two staff just to conduct the administrative functions for maintaining basic office operations, such as obtaining and managing office space and processing the paperwork for the payroll. As a result, FSA staff in these smaller offices will have less time to provide service to farmers than they did when county offices were staffed more fully. The proposed staffing reductions will result in more county office closures than the 500 proposed, according to FSA officials we interviewed. As FSA closes offices, farmers will have to travel farther and visit offices that serve more farmers. Although they stated that they are still receiving quality service, some farmers we spoke with whose county office had recently closed have already experienced the service impacts associated with these changes. For example, according to one farmer—whose current county office is 45 miles away compared with his former office, which was 10 miles away—the staff at the new office did not have personal knowledge of his specific operations, such as the crops he grows, the farming techniques he uses, and the programs in which he normally participates. FSA officials recognize that additional staff reductions and office closings will reduce the level of personalized service to farmers and require them to accept greater responsibility for program requirements, including completing paperwork. At the same time, officials recognize that the 1996 act places more responsibility on farmers for planting and marketing decisions. In this regard, FSA officials told us that they are beginning to talk with farmers and the various groups involved in farming about the types of services FSA should provide in the future. We met with USDA officials, including the Associate Administrator for the Farm Service Agency, the Deputy Administrator for Farm Programs, and the Deputy Administrator for Farm Loan Programs. USDA generally agreed with the information presented in the report. In their comments, however, the officials noted that the services provided to farmers vary among the USDA programs. For example, Farm Service Agency officials stated that because the staff for the farm loan programs are not located in each county, these staff are not able to provide the same level of service that farmers participating in the traditional commodity programs received, such as having their paperwork filled out for them. Furthermore, these officials stated that some small and minority farmers have recently criticized USDA for not providing adequate service. We made changes to the report to reflect these concerns. In addition, USDA provided technical and clarifying comments that we incorporated as appropriate. To determine farmers’ opinions of the quality of service FSA provides in county offices, we reviewed selected aspects of the results of USDA’s National Customer Service Survey of farmers in 1997. Specifically, we analyzed and summarized responses on (1) the services that matter the most to farmers and (2) farmers’ general satisfaction with services provided by USDA’s service centers. This survey included over 4,000 farmers nationwide who participated in various farm programs. To verify and update these results, we obtained a database from USDA of the names, location, and phone numbers of farmers who had previously completed a USDA customer service survey. We judgmentally selected 90 farmers who had participated in the Conservation Reserve Program, the farm loan programs, and/or the Acreage Reduction Program in 1995. We were able to contact 60 of these farmers across the nation by telephone to obtain information on the quality of service in FSA county offices in 1997 compared with the quality of service in 1995. Some of these farmers lived in counties in which the local county office had been closed. We also visited FSA officials at headquarters and FSA state and county office officials in eight states to discuss the quality of service farmers currently receive. The offices we visited were located in California, Connecticut, Illinois, Massachusetts, Missouri, Nebraska, North Carolina, and Washington State. In most of these county offices, we met with the county executive director, agricultural credit manager, and farmers from the FSA county committee. We also met with the state executive director in six states and members of the state committee in two states. We conducted our work from October 1997 through April 1998 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days after the date of this letter. At that time, we will provide copies to the House and Senate Committees on Agriculture; other interested congressional committees; the Secretary of Agriculture; and the Director of the Office of Management and Budget. We will also make copies available to others on request. Please call me at (202) 512-5138 if you or your staff have any questions about this report. Major contributors to this report were Ronald E. Maxon, Jr.; Fred Light; Renee D. McGhee-Lenart; Paul Pansini; Carol Herrnstadt Shulman; and Janice M. Turner. Robert A. Robinson Director, Food and Agriculture Issues The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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Pursuant to a congressional request, GAO reviewed the impact of actual and proposed staff reductions and office closings by the Farm Service Agency (FSA) on the quality of service to farmers. GAO noted that: (1) FSA's staff reductions and office closures to date do not appear to have affected the quality of service provided to farmers; (2) according to the Department of Agriculture's 1997 customer survey and GAO's recent discussions with farmers and FSA officials, most farmers are highly satisfied with the service they receive from their local office of FSA; (3) farmers are still generally able to receive prompt service when they walk into their county office and have FSA staff complete most of their required paperwork; (4) if FSA's staffing continues to be reduced and county offices are closed, however, the traditional level of service provided to farmers is likely to decrease; and (5) among other things, farmers will be required to accept greater responsibility for program requirements, including completing paperwork; with less assistance from agency staff, however, this change is consistent with changes in the 1996 Federal Agriculture Improvement and Reform Act, which reduces federal controls over production and places more responsibility on farmers for planting and marketing decisions.

Our investigator was easily able to obtain four genuine U.S. passports using counterfeit or fraudulently obtained documents. In the most egregious case, our investigator obtained a U.S. passport using counterfeit documents and the SSN of a man who died in 1965. In another case, our undercover investigator obtained a U.S. passport using counterfeit documents and the genuine SSN of a fictitious 5-year-old child—even though his counterfeit documents and application indicated he was 53 years old. State and USPS employees did not identify our documents as counterfeit in any of our four tests. Although we do not know what checks, if any, State performed when approving our fraudulent applications, it issued a genuine U.S. passport in each case. All four passports were issued to the same GAO investigator, under four different names. Our tests show a variety of ways that malicious individuals with even minimal counterfeiting capabilities and access to another person’s identity could obtain genuine U.S. passports using counterfeit or fraudulently obtained documents. Table 1 below shows the month of passport application, type of counterfeit or fraudulently obtained documents used, and the number of days that passed between passport application and passport issuance for each of our four tests. Our investigator used a genuine U.S. passport obtained by using counterfeit or fraudulently obtained documents to pass through airport security. In January 2009, our investigator purchased an airline ticket for a domestic flight using the fictitious name from one of our test scenarios. He then used the fraudulently obtained passport from that test as proof of identity to check in to his flight, get a boarding pass, and pass through the security checkpoint at a major metropolitan-area airport. Figure 1 below shows the boarding pass. After our investigator successfully passed through the checkpoint, he left the airport and cancelled his airline ticket. Our first test found that USPS did not detect the counterfeit West Virginia driver’s license our undercover investigator presented as proof of his identity during the passport application process. Further, State issued our investigator a genuine U.S. passport despite the counterfeit New York birth certificate he used as proof of his U.S. citizenship. In July 2008, our investigator entered a USPS office in Virginia and approached a USPS employee to apply for a passport. The USPS employee greeted the investigator and took his application form, counterfeit New York birth certificate, and counterfeit West Virginia driver’s license. On these documents, we used a fictitious identity and a SSN that we had previously obtained from SSA for the purpose of conducting undercover tests. The USPS employee reviewed the application materials line by line to make sure that the information on the application form matched the information on the birth certificate and driver’s license. After she completed her review of the application materials, the USPS employee took the investigator’s birth certificate and funds to pay for the application fee. She administered an oath, and then told the investigator that he should receive the passport within 1 to 4 weeks. State issued a genuine U.S. passport to our undercover investigator 8 days after he submitted his application. About a week after State issued the passport, it arrived at the mailing address indicated on the application materials. Our second test found that State did not detect a counterfeit New York birth certificate our undercover investigator presented to prove his U.S. citizenship in support of a passport application. In July 2008, our investigator—the same investigator as in the first test above—obtained a genuine identification card from the Washington, D.C., Department of Motor Vehicles using counterfeit documents, which he then used to apply for a U.S. passport. In August 2008, the same investigator entered State’s regional Washington, D.C., passport-issuing office with a completed passport application form, a counterfeit New York birth certificate, the genuine D.C. identification card, two passport photographs, sufficient funds to pay for the application fee, and an electronic ticket (e-ticket) confirming that he had a flight to Germany. For this test, we used a fictitious identity and SSN that we had previously obtained from SSA for the purpose of conducting undercover investigations. The investigator presented his application form and materials to a State employee, who went line by line through the application form matching the information to the accompanying documents. The State employee provided the investigator with a number and instructed him to wait until his number was called. After his number was called, the investigator proceeded to a window to speak with another State employee. The second employee looked over his materials to make sure that he had all of the necessary documentation, took his birth certificate and money, and administered an oath. A few days later, the investigator returned to the same passport facility and picked up his passport. State issued the passport on the same day that the investigator submitted his application, in the fictitious name presented on the fraudulently obtained and counterfeit documents. As with our first test, our third test found that USPS did not detect the counterfeit West Virginia driver’s license our undercover investigator presented as proof of his identity during the passport application process. Further, State issued our investigator a genuine U.S. passport based on a counterfeit New York birth certificate as proof of U.S. citizenship. In October 2008, our investigator—the same investigator as in the first two tests mentioned above—entered a USPS office in Maryland to apply for a U.S. passport. A USPS employee greeted the investigator and took his application form, as well as his counterfeit New York birth certificate and counterfeit West Virginia driver’s license. The application materials used the name and genuine SSN of a fictitious 5-year-old child, which we obtained from a previous investigation. However, our investigator listed his age as 53 on the application materials, which clearly did not match the date of birth associated with the SSN used in this test. The USPS employee reviewed the application materials, including meticulously matching the information on the application form to the birth certificate and driver’s license. After she completed her review of the application materials, the USPS employee took the investigator’s birth certificate and payment for the application fee, administered an oath, and told the investigator that he should receive the passport within 2 to 4 weeks. State issued a genuine U.S. passport to our investigator, in the fictitious name based on the counterfeit documents, 7 days after he submitted his application. The passport arrived at the mailing address indicated by our investigator on the application materials a few days after its issuance. As with our first and third tests, our fourth test found that USPS did not detect the counterfeit identification document—a bogus Florida driver’s license—our undercover investigator presented to support his passport application. Further, State issued our investigator a genuine U.S. passport based on a counterfeit New York birth certificate as proof of U.S. citizenship. In December 2008, our investigator—the same investigator as in the three tests mentioned above—entered a USPS office in Maryland to apply for a U.S. passport. A USPS employee greeted the investigator and took his application form, as well as his counterfeit New York birth certificate and counterfeit Florida driver’s license. His application materials used a name and SSN that was issued to a person who died in 1965, and who would have been 59 years old at the time of our test had he still been alive. The USPS employee reviewed the application materials, matching the information on the application form to the birth certificate and driver’s license. After completing the review of application materials, the USPS employee took the investigator’s birth certificate and funds to pay for the application fee. The USPS employee administered an oath then told the investigator that he should receive the passport within 4 to 6 weeks. Four days after our investigator submitted his application, State issued a genuine U.S. passport in the fictitious name presented on the counterfeit documents. The passport arrived at the mailing address indicated by our investigator on the application materials. We briefed State officials on the results of our investigation. They agreed that our findings expose a major vulnerability in State’s passport issuance process. According to State officials, the department’s ability to verify the information submitted as part of a passport application is hampered by limitations to its information sharing and data access with other agencies at the federal and state levels. They said that some federal agencies limit State’s access to their records due to privacy concerns or the fact that State is not a law enforcement agency. In addition, they said that State does not currently have the ability to conduct real-time verification of the authenticity of birth certificates presented by passport applicants. They added that birth certificates present an exceptional challenge to fraud detection efforts, as there are currently thousands of different acceptable formats for birth certificates. Further, they indicated that there are difficulties with verifying the authenticity of drivers’ licenses. Moreover, they said that although State attempts to verify SSN information submitted on passport applications on a daily basis with SSA, the results of this data- sharing process are imperfect. For example, State officials said that many of the mismatches identified through this verification process are actually due to typos or other common errors. However, they said that while these data checks may not identify all cases in which an applicant’s data do not match the information in SSA’s records, in some instances—such as cases in which an SSN is tied to a deceased individual—investigators from the Passport Fraud Branch of State’s Bureau of Diplomatic Security will attempt to check publicly available databases to resolve the mismatch. State officials acknowledged that they have issued other fraudulently obtained passports but did not offer an estimate of the magnitude of the problem. In order to improve State’s current passport fraud detection capabilities, officials said that State would need greater cooperation from other agencies at both the federal and state levels, and the ability to access other agencies’ records in real time. Subsequent to our briefing, State officials informed us that they identified and revoked our four fraudulently obtained U.S. passports, and that they would study the matter further to determine what steps would be appropriate to improve passport issuance procedures. We did not verify the accuracy of these State officials’ statements. We also briefed a representative of USPS on the results of our investigation, who did not offer any comments at the time of our briefing. We are sending copies of this report to the Secretary of State and other interested parties. The report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-6722 or kutzg@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report.

A genuine U.S. passport is a vital document, permitting its owner to travel freely in and out of the United States, prove U.S. citizenship, obtain further identification documents, and set up bank accounts, among other things. Unfortunately, a terrorist or other criminal could take advantage of these benefits by fraudulently obtaining a genuine U.S. passport from the Department of State (State). There are many ways that malicious individuals could fraudulently obtain a genuine U.S. passport, including stealing an American citizen's identity and counterfeiting or fraudulently obtaining identification or citizenship documents to meet State requirements. GAO was asked to proactively test the effectiveness of State's passport issuance process to determine whether the process is vulnerable to fraud. To do so, GAO designed four test scenarios that simulated the actions of a malicious individual who had access to an American citizen's personal identity information. GAO created counterfeit documents for four fictitious or deceased individuals using off-the-shelf, commercially available hardware, software, and materials. An undercover GAO investigator then applied for passports at three United States Postal Service (USPS) locations and a State-run passport office. GAO's investigation shows that terrorists or criminals could steal an American citizen's identity, use basic counterfeiting skills to create fraudulent documentation for that identity, and obtain a genuine U.S. passport from State. GAO conducted four tests simulating this approach and was successful in obtaining a genuine U.S. passport in each case. In the most egregious case, an undercover GAO investigator obtained a passport using counterfeit documents and the Social Security Number (SSN) of a man who died in 1965. In another case, the investigator obtained a passport using counterfeit documents and the genuine SSN of a fictitious 5-year-old child GAO created for a previous investigation--even though the investigator's counterfeit documents and application indicated he was 53 years old. All four passports were issued to the same GAO investigator, under four different names. In all four tests, GAO used counterfeit and/or fraudulently obtained documents. State and USPS employees did not identify GAO's documents as counterfeit. GAO's investigator later purchased an airline ticket under the name used on one of the four fraudulently obtained U.S. passports, and then used that passport as proof of identity to check in to his flight, get a boarding pass, and pass through the security checkpoint at a major metropolitan-area airport. At a briefing on the results of GAO's investigation, State officials agreed with GAO that the investigation exposes a major vulnerability in State's passport issuance process. According to State officials, State's fraud detection efforts are hampered by limitations to its information sharing and data access with other federal and state agencies. After GAO's briefing, State officials notified GAO that they identified and revoked GAO's four fraudulently obtained U.S. passports, and were studying the matter to determine the appropriate steps for improving State's passport issuance process.

Among mandatory spending programs—and indeed tax expenditures—the health area is especially important because the long-term fiscal challenge is largely a health care challenge. Contrary to public perceptions, health care is the biggest driver of the long-term fiscal challenge. While Social Security is important because of its size, health care spending is both large and projected to grow much more rapidly. Our most recent simulation results illustrate the importance of health care in the long-term fiscal outlook as well as the imperative to take action. Simply put, our nation’s fiscal policy is on an imprudent and unsustainable course. These long-term budget simulations show, as do those published last December by the Congressional Budget Office (CBO), that over the long term we face a large and growing structural deficit due primarily to known demographic trends and rising health care costs and lower federal revenues as a percentage of the economy. Continuing on this unsustainable fiscal path will gradually erode, if not suddenly damage, our economy, our standard of living, and ultimately our national security. Our current path also will increasingly constrain our ability to address emerging and unexpected budgetary needs and increase the burdens that will be faced by future generations. Figures 3 and 4 present our long-term simulations under two different sets of assumptions. In figure 3, we start with CBO’s 10-year baseline— constructed according to the statutory requirements for that baseline. Consistent with these requirements, discretionary spending is assumed to grow with inflation for the first 10 years and tax cuts scheduled to expire are assumed to expire. After 2016, discretionary spending is assumed to grow with the economy, and revenue is held constant as a share of GDP at the 2016 level. In figure 4, two assumptions are changed: (1) discretionary spending is assumed to grow with the economy after 2006 rather than merely with inflation, and (2) all expiring tax provisions are extended. For both simulations, Social Security and Medicare spending is based on the 2005 Trustees’ intermediate projections, and we assume that benefits continue to be paid in full after the trust funds are exhausted. Medicaid spending is based on CBO’s December 2005 long-term projections under mid-range assumptions. As these simulations illustrate, absent significant policy changes on the spending and/or revenue side of the budget, the growth in mandatory spending on federal retirement and especially health entitlements will encumber an escalating share of the government’s resources. Indeed, when we assume that all the temporary tax reductions are made permanent and discretionary spending keeps pace with the economy, our long-term simulations suggest that by 2040 federal revenues may be adequate to pay only some Social Security benefits and interest on the federal debt. Neither slowing the growth in discretionary spending nor allowing the tax provisions to expire—nor both together—would eliminate the imbalance. Although revenues will be part of the debate about our fiscal future, assuming no changes to Social Security, Medicare, Medicaid, and other drivers of the long-term fiscal gap would require at least a doubling of taxes—and that seems highly implausible. Economic growth is essential, but we will not be able to simply grow our way out of the problem. The numbers speak loudly: our projected fiscal gap is simply too great. Closing the current long-term fiscal gap would require sustained economic growth far beyond that experienced in U.S. economic history since World War II. Tough choices are inevitable, and the sooner we act the better. Accordingly, substantive reform of the major health programs and Social Security is critical to recapturing our future fiscal flexibility. Ultimately, the nation will have to decide what level of federal benefits and spending it wants and how it will pay for these benefits. Our current fiscal path will increasingly constrain our ability to address emerging and unexpected budgetary needs and increase the burdens that will be faced by future generations. Continuing on this path will mean escalating and ultimately unsustainable federal deficits and debt that will serve to threaten our future national security as well as the standard of living for the American people. The aging population and rising health care spending will have significant implications not only for the budget, but also the economy as a whole. Figure 5 shows the total future draw on the economy represented by Social Security, Medicare, and Medicaid. Under the 2005 Trustees’ intermediate estimates and CBO’s 2005 long-term Medicaid estimates under mid-range assumptions, spending for these entitlement programs combined will grow to 15.7 percent of gross domestic product (GDP) in 2030 from today’s 8.4 percent. It is clear that, taken together, Social Security, Medicare, and Medicaid represent an unsustainable burden on future generations. Furthermore, most of the long-term growth is in health care. While Social Security in its current form will grow from 4.3 percent of GDP today to 6.4 percent in 2080, Medicare’s burden on the economy will quintuple—from 2.7 percent to 13.8 percent of the economy—and these projections assume a growth rate for Medicare spending that is below historical experience! As figure 5 shows, unlike Social Security which grows larger as a share of the economy and then levels off, within this projection period we do not see Medicare growth abating. Whether or not the President’s Budget proposals on Medicare are adopted, they should serve to raise public awareness of the importance of health care costs to both today’s budget and tomorrow’s. This could serve to jump start a discussion about appropriate ways to control the major driver of our long-term fiscal outlook—health care spending. As noted, unlike Social Security, Medicare spending growth rates reflect not only a burgeoning beneficiary population, but also the escalation of health care costs at rates well exceeding general rates of inflation. The growth of medical technology has contributed to increases in the number and quality of health care services. Moreover, the actual costs of health care consumption are not transparent. Consumers are largely insulated by third-party payers from the cost of health care decisions. The health care spending problem is particularly vexing for the federal budget, affecting not only Medicare and Medicaid but also other important federal health programs, such as for our military personnel and veterans. For example, Department of Defense health care spending rose from about $12 billion in 1990 to about $30.4 billion in 2004—in part, to meet additional demand resulting from program eligibility expansions for military retirees, reservists, and the dependents of those two groups and for the increased needs of active duty personnel involved in conflicts in Iraq, Bosnia, and Afghanistan. Expenditures by the Department of Veterans Affairs have also grown—from about $12 billion in 1990 to about $26.8 billion in 2004—as an increasing number of veterans look to federal programs to supply their health care needs. The challenge to rein in health care spending is not limited to public payers, however, as the phenomenon of rising health care costs associated with new technology exists system-wide. This means that addressing the unsustainability of health care costs is also a major competitiveness and societal challenge that calls for us as a nation to fundamentally rethink how we define, deliver, and finance health care in both the public and the private sectors. A major difficulty is that our current system does little to encourage informed discussions and decisions about the costs and value of various health care services. These decisions are very important when it comes to cutting-edge drugs and medical technologies, which can be incredibly expensive but only marginally better than other alternatives. As a nation, we are going to need to weigh unlimited individual wants against broader societal needs and decide how responsibility for financing health care should be divided among employers, individuals, and government. Ultimately, we may need to define a set of basic and essential health care services to which every American is ensured access. Individuals wanting additional services, and insurance coverage to pay for them, might be required to allocate their own resources. Clearly, such a dramatic change would require a long transition period—all the more reason to act sooner rather than later. In recent years, policy analysts have discussed a number of incremental reforms that take aim at moderating health care spending, in part by unmasking health care’s true costs. (See fig. 6 for a list of selected reforms.) Among these reforms is to devise additional cost-sharing provisions to make health care costs more transparent to patients. Currently, many insured individuals pay relatively little out of pocket for care at the point of delivery because of comprehensive health care coverage—precluding the opportunity to sensitize these patients to the cost of their care. Develop a set of national practice standards to help avoid unnecessary care, improve outcomes, and reduce litigation. Encourage case management approaches for people with expensive acute and chronic conditions to improve the quality and efficiency of care delivered and avoid inappropriate care. Foster the use of information technology to increase consistency, transparency, and accountability in health care. Emphasize prevention and wellness care, including nutrition. Leverage the government’s purchasing power to control costs for prescription drugs and other health care services. Revise certain federal tax preferences for health care to encourage the more efficient use of appropriate care. Create an insurance market that adequately pools risk and offers alternative levels of coverage. Develop a core set of basic and essential services with supplemental coverage being available as an option but at a cost. Use the Federal Employees Health Benefits Program (FEHBP) model as a possible means to experiment and see the way forward. Limit spending growth for government-sponsored health care programs (e.g., percentage of the budget and/or the economy). Other steps include reforming the policies that give tax preferences to insured individuals and their employers. These policies permit the value of employees’ health insurance premiums to be excluded from the calculation of their taxable earnings and exclude the value of the premium from the employers’ calculation of payroll taxes for both themselves and employees. Tax preferences also exist for health savings accounts and other consumer-directed plans. These tax exclusions represent a significant source of forgone federal revenue and work at cross-purposes to the goal of moderating health care spending. As figure 7 shows, in 2005 the tax expenditure responsible for the greatest revenue loss was that for the exclusion of employer contributions for employees’ insurance premiums and medical care. Another area conducive to incremental change involves provider payment reforms. These reforms are intended to induce physicians, hospitals, and other health care providers to improve on quality and efficiency. For example, studies of Medicare patients in different geographic areas have found that despite receiving a greater volume of care, patients in higher use areas did not have better health outcomes or experience greater satisfaction with care than those living in lower use areas. Public and private payers are experimenting with payment reforms designed to foster the delivery of care that is proven to be both clinically and cost effective. Ideally, identifying and rewarding efficient providers and encouraging inefficient providers to emulate best practices will result in better value for the dollars spent on care. The development of uniform standards of practice could lead to ensuring that people with chronic illnesses, a small but expensive population, received more and cost-effective and patient- centered care while reducing unwarranted medical malpractice litigation. The problem of escalating health care costs is complex because addressing federal programs such as Medicare and the federal-state Medicaid program will need to involve change in the health care system of which they are a part—not just within federal programs. This will be a major societal challenge that will affect all age groups. Because our health care system is complex, with multiple interrelated pieces, solutions to health care cost growth are likely to be incremental and require a number of extensive efforts over many years. In my view, taking steps to address the health care cost dilemma system-wide puts us on the right path for correcting the long-term fiscal problems posed by the nation’s health care entitlements. I have focused today on health care because it is a driver of our fiscal outlook. Indeed, health care is already putting a squeeze on the federal budget. Health care is the dominant but not the only driver of our long-term fiscal challenge. Today it is hard to think of our fiscal imbalances as a big problem: the economy is healthy and interest rates seem low. We, however, have an obligation to look beyond today. Budgets, deficits, and long-term fiscal and economic outlooks are not just about numbers: they are also about values. It is time for all of us to recognize our stewardship obligation for the future. We should act sooner rather than later. We all must make choices that may be difficult and unpleasant today to avoid passing an even greater burden on to future generations. Let us not be the generation who sent the bill for its consumption to its children and grandchildren. Thank you Mr. Chairman, Mr. Spratt, and members of the Committee for having me today. We at GAO, of course, stand ready to assist you and your colleagues as you tackle these important challenges. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony discusses entitlement and other mandatory spending programs in light of our nation's long-term fiscal outlook and the challenges it poses for the budget and oversight processes. In our report entitled 21st Century Challenges: Reexamining the Base of the Federal Government, we presented illustrative questions for policy makers to consider as they carry out their responsibilities. These questions look across major areas of the budget and federal operations including discretionary and mandatory spending, and tax policies and programs. We hope that this report, among other things, will be used by various congressional committees as they consider which areas of government need particular attention and reconsideration. Congress will also receive more specific proposals, some of them will be presented within comprehensive agendas. Our report provides examples of the kinds of difficult choices the nation faces with regard to discretionary spending; mandatory spending, including entitlements; as well as tax policies and compliance activities. Mandatory spending programs--like tax expenditures--are governed by eligibility rules and benefit formulas, which means that funds are spend as required to provide benefits to those who are eligible and wish to participate. Since Congress and the President must change substantive law to change the cost of these programs, they are relatively uncontrollable on an annual basis. Moreover, as we reported in a 1994 analysis, their cost cannot be controlled by the same "spending cap" mechanism used for discretionary spending. By their very nature mandatories limit budget flexibility. Mandatory spending has grown as a share of the total federal budget. Under both the Congressional Budget Office baseline estimates and the President's Budget, this spending would grow further. While the long-term fiscal outlook is driven by Medicare, Medicaid and Social Security, it does not mean that all other mandatory programs should be "given a pass." As we have noted elsewhere, reexamination of the "fit" between government programs and the needs and priorities of the nation should be an accepted practice. So in terms of budget flexibility--the freedom of each Congress and President to allocate public resources--we cannot ignore mandatory spending programs even if they do not drive the aggregate. While some might suggest that mandatory programs could be controlled by being converted to discretionary or annually appropriated programs, that seems unlikely to happen. If we look across the range of mandatories we see many programs have objectives and missions that contribute to the achievement of a range of broad-based and important public policy goals such as providing a floor of income security in retirement, fighting hunger, fostering higher education, and providing access to affordable health care. To these ends, these programs--and tax expenditures--were designed to provide benefits automatically to those who take the desired action or meet the specified eligibility criteria without subjecting them to an annual decision regarding spending or delay in the provision of benefits such a process might entail. Although mandatory spending is not amenable to "caps," that does not mean that mandatory programs should be permitted to be on autopilot and grow to an unlimited extent. Since the spending for any given entitlement or other mandatory program is a function of the interaction between the eligibility rules and the benefit formula--either or both of which may incorporate exogenous factors such as economic downturns--the way to change the path of spending for any of these programs is to change those rules or formulas. We recently issued a report on "triggers"--some measure which, when reached or exceeded, would prompt a response connected to that program. By identifying significant increases in the spending path of a mandatory program relatively early and acting to constrain it, Congress may avert much larger and potentially disruptive financial challenges and program changes in the future.

Inherently governmental functions require discretion in applying government authority or value judgments in making decisions for the government; as such, they should be performed by government employees—not private contractors. The Federal Acquisition Regulation (FAR) provides 20 examples of functions considered to be, or to be treated as inherently governmental (see Appendix I), including determining agency policy and priorities for budget requests, directing and controlling intelligence operations, approving contractual requirements, and selecting individuals for government employment. The closer contractor services come to supporting inherently governmental functions, the greater the risk of their influencing the government’s control over and accountability for decisions that may be based, in part, on contractor work. Table 1 provides examples of the range of services contractors provide to the federal government—from basic activities, such as custodial and landscaping, to more complex professional and management support services—and their relative risk of influencing government decision making. The potential for the loss of government management control and accountability for decisions is a long-standing governmentwide concern. For example, in 1981, we found that the level of contractor involvement in management functions at the Departments of Energy and Defense was so extensive that the agencies’ ability to develop options other than those proposed by the contractors was limited. More recently, in 2006, government, industry, and academic participants in GAO’s forum on federal acquisition challenges and opportunities and the congressionally mandated Acquisition Advisory Panel noted how an increasing reliance on contractors to perform services for core government activities challenges the capacity of federal officials to supervise and evaluate the performance of these activities. FAR and Office of Federal Procurement Policy (OFPP) guidance state that services that tend to affect government decision-making, support or influence policy development, or affect program management are susceptible to abuse and require a greater level of scrutiny and an enhanced degree of management oversight. This would include assigning a sufficient number of qualified government employees to provide oversight and to ensure that agency officials retain control over and remain accountable for policy decisions that may be based in part on a contractor’s performance and work products. A broad range of program-related and administrative activities was performed under the professional and management support services contracts we reviewed. DHS decisions to contract for these services were largely driven by the need for staff and expertise to get programs and operations up and running. While DHS has identified core mission-critical occupations and plans to reduce skill gaps in core and key competencies, it has not directly addressed the department’s use of contractors for services that closely support the performance of inherently governmental functions. A broad range of activities related to specific programs and administrative operations was performed under the professional and management support services contracts we reviewed. The categories of policy development, reorganization and planning, and acquisition support were among the most often requested in the 117 statements of work, as well as in the nine case studies. For example, TSA obligated $1.2 million to acquire contractor support for its Acquisition and Program Management Support Division, which included assisting with the development of acquisition plans and hands-on assistance to program offices to prepare acquisition documents. A $7.9 million OPO human capital services order provided a full range of personnel and staffing services to support DHS’s headquarters offices, including writing position descriptions, signing official offer letters, and meeting new employees at DHS headquarters for their first day of work. Contractor involvement in the nine case studies ranged from providing two to three supplemental personnel to staffing an entire office. Figure 1 shows the type and range of services provided in the nine cases and the location of contractor performance. Many of the program officials we spoke with said that contracting for services was necessary because they were under pressure to get program and administrative offices up and running quickly, and they did not have enough time to hire staff with the right expertise through the federal hiring process. For example: According to officials at TSA, federal staff limitations was a reason for procuring employee relations support services. Specifically, the agency needed to immediately establish an employee relations office capable of serving 60,000 newly hired airport screeners—an undertaking TSA Office of Human Resources officials said would have taken several years to accomplish if they hired qualified federal employees. DHS human capital officials said there were only two staff to manage human resources for approximately 800 employees, and it would have taken 3 to 5 years to hire and train federal employees to provide the necessary services. In prior work, GAO has noted that agencies facing workforce challenges, such as a lack of critical expertise, have used strategic human capital planning to develop long-term strategies for acquiring, developing, motivating, and retaining staff to achieve programmatic goals. While DHS’s human capital strategic plan notes that the department has identified core mission-critical occupations and seeks to reduce skill gaps in core and key competencies, DHS has not determined the right mix of government performed and contractor performed services or assessed total workforce deployment across the Department to guide decisions on contracting for selected services. We have noted the importance of focusing greater attention on which types of functions and activities should be contracted out and which ones should not, while considering other reasons for using contractors, such as a limited number of federal employees. DHS’s human capital plan is unclear as to how this could be achieved and whether it will inform the Department’s use of contractors for services that closely support the performance of inherently governmental functions. While program officials generally acknowledged that their professional and management support services contracts closely supported the performance of inherently governmental functions, they did not assess the risk that government decisions may be influenced by, rather than independent from, contractor judgments—as required by federal procurement policy. In addition, none of the program officials and contracting officers we spoke with was aware of these requirements, and few believed that their professional and management support service contracts required enhanced oversight. Federal guidance also states that agency officials must retain control over and remain accountable for policy and program decisions. For the nine cases we reviewed, the level of oversight DHS provided did not always help ensure accountability for decisions or the ability to judge whether contractors were performing as required; however, DHS’s Chief Procurement Officer is implementing an acquisition oversight program with potential to address this issue. To help ensure the government does not lose control over and accountability for mission-related decisions, long-standing federal procurement policy requires attention to the risk that government decisions may be influenced by, rather than independent from, contractor judgments when contracting for services that closely support inherently governmental functions. The nine cases we reviewed in detail provided examples of conditions that we have found need to be carefully monitored to help ensure the government does not lose control over and accountability for mission-related decisions. Contractors providing services integral to an agency’s mission and comparable to those provided by government employees: In seven of the nine cases, contractors provided such services. For example, one contractor directly supported DHS efforts to hire federal employees, including signing offer letters. In another case, a contractor provided acquisition advice and support while working alongside federal employees and performing the same tasks. Contractors providing ongoing support: In each of the nine case studies, the contractor provided services for more than 1 year. In some of these cases, the original justification for contracting had changed, but the components extended or recompeted services without examining whether it would be more appropriate for federal employees to perform the service. For example, OPO established a temporary “bridge” arrangement without competition that was later modified 20 times, and extended for almost 18 months, to avoid disruption of critical support including budget, policy, and intelligence services. Subsequently, these services were competed and awarded to the original contractor under six separate contracts. Broadly defined requirements: In four of the case studies, the statements of work lacked specific details about activities that closely support inherently governmental functions. In addition, several program officials noted that the statements of work did not accurately reflect the program’s needs or the work the contractors actually performed. For example, a Coast Guard statement of work for a $1.3 million order initially included services for policy development, cost- benefit analyses, and regulatory assessments, though program officials told us the contractors provided only technical regulatory writing and editing support. The statement of work was revised in a later contract to better define requirements. Federal acquisition guidance highlights the risk inherent in services contracting—particularly those for professional and management support services—and federal internal control standards require assessment of risks. OFPP staff we met with also emphasized the importance of assessing the risk associated with contracting for services that closely support the performance of inherently governmental functions. While contracting officers and program officials for the nine case studies generally acknowledged that their professional and management support services contracts closely supported the performance of inherently governmental functions, none assessed whether these contracts could result in the loss of control over and accountability for mission-related decisions. Furthermore, none were aware of federal requirements for enhanced oversight of such contracts. Contracting officers and program officials, as well as DHS acquisition planning guidance, did not cite services that closely support the performance of inherently governmental functions as a contracting risk and most did not believe enhanced oversight of their contracts was warranted. Current DHS initiatives may have the potential to address oversight when contracting for services that closely support inherently governmental functions. DHS’s Chief Procurement Officer is in the process of implementing an acquisition oversight program that is intended to assess contract administration, business judgment, and compliance with federal acquisition guidance. This program was designed to allow flexibility to address specific procurement issues and is based on a series of reviews at the component level that could address selected services. Both the FAR and OFPP policy state that when contracting for services— particularly for professional and management support services that closely support the performance of inherently governmental functions—a sufficient number of qualified government employees assigned to plan and oversee contractor activities is needed to maintain control and accountability. While most contracting officers and program officials that we spoke with held the opinion that the services they contracted for did not require enhanced oversight, we found cases in which the components lacked the capacity to oversee contractor performance due to limited expertise and workload demands. For example: One Contracting Officer’s Technical Representative (COTR) was assigned to oversee 58 tasks, ranging from acquisition support to intelligence analysis to budget formulation and planning, across multiple offices and locations. Program and contracting officials noted the resulting oversight was likely insufficient. To provide better oversight for one of the follow-on contracts, the program official assigned a new COTR to oversee just the intelligence work and established monthly meetings between the COTR and the program office. According to program officials, this change was made to ensure that the contract deliverables and payments were in order, not to address the inherent risk of the services performed. Similarly, a DHS Human Capital Services COTR assigned to oversee an extensive range of personnel and staffing services provided by the contractor lacked technical expertise, which the program manager believed affected the quality of oversight provided. To improve oversight for the follow-on contract, the program manager assigned a COTR with more human resources experience along with an employee with human resources expertise to assist the COTR. DHS components were also limited in their ability to assess contractor performance, which is necessary to ensure control and accountability, in a way that addressed the risk of contracting for professional and management support services that closely support the performance of inherently governmental functions. Assessing contractor performance requires a plan that outlines how services will be delivered and establishes measurable outcomes. However, none of the related oversight plans and contract documents we reviewed contained specific measures for assessing contractors’ performance of the selected services. Until the department provides greater scrutiny and enhanced management oversight of contracts for selected services—as required by federal guidance—it will continue to risk transferring government responsibility to contractors. To improve the department’s ability to manage the risk associated with contracting for services that closely support the performance of inherently governmental functions and help ensure government control and accountability, the report we are releasing today recommends that the Secretary of Homeland Security take several actions. These actions include establishing strategic-level guidance for determining the appropriate mix of government and contractor employees, assessing the risk of using contractors for selected services, more clearly defining contract requirements, assessing the ability of the government workforce to provide sufficient oversight when using selected services, and reviewing contracts for selected services as part of the acquisition oversight program. DHS generally concurred with our recommendations and provided information on what actions would be taken to address them. However, DHS partially concurred with our recommendation to assess the risk of selected services as part of the acquisition planning process and modify existing guidance and training, noting that its acquisition planning guidance already provides for the assessment of risk. Our review found that this guidance does not address the specific risk of services that closely support the performance of inherently governmental functions. DHS also partially concurred with our recommendation to review selected services contracts as part of the acquisition oversight program. DHS stated that rather than reviewing selected services as part of the routine acquisition oversight program, the Chief Procurement Officer will direct a special investigation on selected issues as needed. We did not intend for the formal oversight plan to be modified, rather we recognize that the program was designed with flexibility to address specific procurement issues as necessary. We leave it to the discretion of the Chief Procurement Officer to determine how to implement the recommendation. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other members of the committee may have at this time. For further information regarding this testimony, please contact me at (202) 512-4841 or (huttonj@gao.gov). Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this product. Staff making key contributions to this statement were Amelia Shachoy, Assistant Director; Katherine Trimble; Jennifer Dougherty; Karen Sloan; Julia Kennon; and Noah Bleicher. Federal Acquisition Regulation (FAR) section 7.503 provides examples of inherently governmental functions and services or actions that are not inherently governmental, but may approach being inherently governmental functions based on the nature of the function, the manner in which the contractor performs the contract, or the manner in which the government administers contractor performance. These examples are listed in tables 1 and 2.

In fiscal year 2005, the Department of Homeland Security (DHS) obligated $1.2 billion to procure four types of professional and management support services. While contracting for such services can help DHS meet its needs, using contractors to provide services that closely support inherently governmental functions increases the risk of government decisions being influenced by, rather than independent from, contractor judgments. This testimony summarizes our September 2007 report to this Committee and others and focuses on (1) the types of professional and management support services DHS has contracted for and the circumstances that drove its contracting decisions, and (2) DHS's consideration and management of risk when contracting for such services. GAO analyzed 117 statements of work and 9 case studies in detail for selected contracts awarded in fiscal year 2005 by the Coast Guard, the Office of Procurement Operations, and the Transportation Security Administration. A broad range of program-related and administrative activities was performed under the four types of professional and management support services contracts we reviewed--program management and support, engineering and technical, other professional, and other management support. DHS decisions to contract for these types of services were largely driven by the need for staff and expertise to get programs and operations up and running. While DHS has identified core mission critical occupations and plans to reduce skill gaps in core and key competencies, it is unclear whether this will inform the department's use of contractors for services that closely support the performance of inherently governmental functions. Program officials generally acknowledged that their professional and management support services contracts closely supported the performance of inherently governmental functions, but they did not assess the risk that government decisions may be influenced by, rather than independent from, contractor judgments--as required by federal procurement guidance. In addition, none of the program officials and contracting officers we spoke with was aware of these requirements, and few believed that their professional and management support service contracts required enhanced oversight. Federal guidance also states that agency officials must retain control over and remain accountable for policy and program decisions. For the nine cases we reviewed, the level of oversight DHS provided did not always help ensure accountability for decisions or the ability to judge whether contractors were performing as required. DHS's Chief Procurement Officer is implementing an acquisition oversight program--designed to allow flexibility to address specific procurement issues--with potential to address this issue.

In May 2001, the Subcommittee’s predecessor held a hearing on USAID financial management. Using that hearing as a baseline, we evaluated, using primarily USAID IG reports, the progress made to improve USAID’s financial management systems, processes, and human capital (people) in the past 2 years. At the time of the May 2001 hearing, USAID was one of three federal agencies subject to the CFO Act that had such significant problems that they were unable to produce financial statements that auditors could express an opinion on. The hearing focused on actions needed to resolve USAID’s financial management issues. At that time, the Acting Assistant Administrator for the Bureau of Management told the Subcommittee that actions to correct reported material weaknesses in financial management were completed or in process and that all reported weaknesses would be resolved by 2002. While USAID has made progress in its financial management since that hearing, it has not achieved the success that it had expected. Rather, its progress relates primarily to improved opinions on USAID’s financial statements. Table 1 below shows that USAID has been able to achieve improved opinions on its financial statements over the past 3 years. Fiscal year 2001 marked the first time that the USAID IG was able to express an opinion on three of USAID’s financial statements—the Balance Sheet, Statement of Changes in Net Position, and Statement of Budgetary Resources. However, as noted above, the opinions were qualified and achieved through extensive efforts to overcome material internal control weaknesses. Further, the IG remained unable to express an opinion on USAID’s Statement of Net Cost and Statement of Financing. Fiscal year 2002 marked additional improvements in the opinions on USAID’s financial statements. All but one of USAID’s financial statements received unqualified opinions. The Statement of Net Cost received a qualified opinion. The IG reported that “…on the Statement of Net Cost, the opinion was achieved only through extensive effort to overcome material weaknesses in internal control” and “lthough these efforts resulted in auditable information, did not provide timely information to USAID management to make cost and budgetary decisions throughout the year.” Compounding USAID’s systems difficulties has been the lack of adequate financial management personnel. Since the early 1990s, we have reported that USAID has made limited progress in addressing its human capital management issues. A major concern is that USAID has not established a comprehensive workforce plan that is integrated with the agency’s strategic objectives and ensures that the agency has skills and competencies necessary to meet its emerging foreign assistance challenges. While a viable financial management system is needed, and offers the capacity to achieve reliable data, it is not the entire answer for improving USAID’s financial management information. Qualified personnel must be in place to implement and operate these systems. In addition to the improved opinions for fiscal year 2002, the IG reported that while USAID had made improvements in its processes and procedures, a substantial number of material weaknesses, reportable conditions, and noncompliance with laws and regulations remain. The report also noted that USAID’s financial management systems do not meet federal financial system requirements. Table 2 shows that while USAID’s opinions on its financial statements improved, reported material weaknesses, reportable conditions, and noncompliance increased. The increase in reported material weaknesses, reportable conditions, and noncompliance is, in part, due to the full scope audits that were not possible in prior years. As financial information improved over the years, it has assisted the USAID IG in identifying additional internal control and system weaknesses. Identifying these additional weaknesses is constructive in that they highlight areas that management needs to address in order to improve the overall operations of the agency and provide accurate, timely, and reliable information to management and the Congress. Several of the weaknesses reported by the USAID IG are chronic in nature and resolution has been a challenge. For example, similar to the USAID fiscal year 2002 material weakness, in 1993 we reported that USAID did not promptly and accurately report disbursements. At that time, USAID could not ensure that disbursements were made only against valid, preestablished obligations and that its recorded unliquidated obligations balances were valid. Additionally, we reported USAID did not have effective control and accountability over its property. The chronic nature of the reported weaknesses at USAID reflect challenges with people (human capital), processes, and financial management systems. USAID management represented to us that, over time, they have lost a significant number of staff in this area and face challenges recruiting and retaining financial management staff. Further, according to IG representatives, many of the individuals that financial managers must depend on to provide the data that are used for financial reports are not answerable to the financial managers and often do not have the background or training necessary to report the data accurately. Also contributing to the challenge are USAID’s nonintegrated systems that require data reentry, supplementary accounting records, and lengthy and burdensome reconciliation processes. Transforming USAID’s financial and business management environment into an efficient and effective operation that is capable of providing management and the Congress with relevant, timely, and accurate information on the results of operation will require a sustained effort. Improved financial systems and properly trained financial management personnel are key elements of this transformation. While these challenges are difficult, they are not insurmountable. Without sustained leadership and oversight by senior management, the likelihood of success is diminished. In its fiscal year 2002 Performance and Accountability Report, USAID noted that it was in the process of implementing an agencywide financial management system. USAID reported that the system has been successfully implemented in Washington. In June 2003, USAID awarded a contract for the implementation of the system overseas. According to USAID officials, they anticipate this effort to be completed by fiscal year 2006. While we are encouraged by USAID’s progress toward implementing an integrated system, it should be noted that this is the second attempt in the past 10 years to implement an agencywide integrated financial management system. To provide reasonable assurance that the current effort is successful, top management must be actively involved in the oversight of the current project. Management must have performance metrics in place to ensure the modernization effort is accomplished on time, within budget, and provides the planned and needed capabilities. In this regard, in fiscal year 2002, USAID redesigned its overall governance structure for the acquisition and management of information technology. Specifically, USAID created the Business Transformation Executive Committee, chaired by the Deputy Administrator and with membership including key senior management. The committee’s purpose is to provide USAID-wide leadership for initiatives and investments to transform USAID business systems and organizational performance. The committee’s roles and responsibilities include: Guiding business transformation efforts and ensuring broad-based cooperation, ownership, and accountability for results. Initiating, reviewing, approving, monitoring, coordinating, and evaluating projects and investments. Ensuring that investments are focused on highest pay-off performance improvement opportunities aligned with USAID’s programmatic and budget priorities. Active, substantive oversight by this committee over USAID’s information technology investments, including its agencywide integrated financial management system initiative, will be needed for business reform efforts to succeed. In addition to improved business systems, it is critical that USAID have sustained financial management leadership and the requisite personnel and skill set to operate the system in an efficient and effective manner once it is in place. We have reported for years and USAID acknowledges that human capital is one of the management challenges that must be overcome. As previously noted, since the early 1990s we have reported that USAID has made limited progress in addressing its human capital management issues. Within the area of financial management, progress in this area has also been slow, with no specific plan of action on how to address shortages of trained financial managers. USAID represented to us that as part of its agencywide human capital strategy, it plans to specifically address its financial management personnel challenges. In addition to addressing systems and human capital challenges, USAID is working to improve its processes and internal controls. Effective processes and internal controls are necessary to ensure that whatever systems are in place are fully utilized and that its operations are as efficient and effective as possible. USAID is working to eliminate the material weaknesses, reportable conditions, and noncompliance reported by the USAID IG in fiscal year 2002. For fiscal year 2003, the Administrator of USAID and the IG agreed to work together to provide for the issuance of audited financial statements by November 15, 2003, in line with the Office of Management and Budget’s accelerated timetable for reporting. To meet this tight timeframe, the CFO must provide timely and reliable information that can withstand the test of audit with little to no needed adjustment. However, given the continued financial management system, process, and human capital challenges, meeting this goal will be difficult. USAID appears to be making a serious attempt to reform its financial management, as evidenced by initiatives to improve its human capital, internal controls, and business systems. However, progress to date is most evident in the improvement in the opinions on its financial statements, which reflect USAID’s ability to generate reliable information one time a year, rather than routinely for purposes of management decision making. Through fiscal year 2002 these improved opinions reflect a significant “heroic” effort to overcome human capital, internal control, and systems problems. Although these improved opinions represent progress, the measures of fundamental reform will be the ability of USAID to provide relevant, timely, reliable financial information and sound internal controls to enable it to operate in an efficient and effective manner. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions you or other members of the Subcommittee may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-9095 or kutzg@gao.gov or John Kelly at (202) 512-6926 or kellyj@gao.gov. Other key contributors to this testimony include Stephen Donahue, Dianne Guensberg, and Darby Smith. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

GAO has long reported that the U.S. Agency for International Development (USAID) faces a number of performance and accountability challenges that affect its ability to implement its foreign economic and humanitarian assistance programs. These major challenges include human capital, performance measurement, information technology, and financial management. Effective financial management as envisioned by the Chief Financial Officers Act of 1990 (CFO Act) and other financial management reform laws is an important factor to the achievement of USAID's mission. USAID is one of the federal agencies subject to the CFO Act. In light of these circumstances, the Subcommittee on Government Efficiency and Financial Management, House Committee Government Reform asked GAO to testify on the financial management challenges facing USAID, as well as the keys to reforming USAID's financial management and business practices and the status of ongoing improvement efforts. USAID has made some progress to improve financial management, primarily in achieving audit opinions on its financial statements. Through the rigors of the financial statement audit process and the requirements of the Federal Financial Management Improvement Act of 1996 (FFMIA), USAID has gained a better understanding of its financial management weaknesses. However, pervasive internal control weaknesses continue to prevent USAID management from achieving the objective of the CFO Act, which is to have timely, accurate financial information for day-to-day decision making. USAID's inadequate accounting systems make it difficult for the agency to accurately account for activity costs and measure its program results. Compounding USAID's systems difficulties has been the lack of adequate financial management personnel. Since the early 1990s, we have reported that USAID has made limited progress in addressing its human capital management issues. While some improvements have been made over the past several years, significant challenges remain. Transforming USAID's financial and business environment into an efficient and effective operation that is capable of providing timely and accurate information will require a sustained effort. USAID has acknowledged the challenges it faces to reform its financial management problems and has initiatives underway to improve its systems, processes, and internal controls. USAID has also recognized the need for a specific human capital action plan that addresses financial management personnel shortfalls.

Since 1986, VBA has been trying to modernize its old, inefficient information systems. It reportedly spent an estimated $294 million on these activities between October 1, 1986, and February 29, 1996. The modernization program can have a major impact on the efficiency and accuracy with which about $20 billion in benefits and other services is paid annually to our nation’s veterans and their dependents. Software development is a critical component of this modernization effort. Also, a mature software development capability will provide added assurance that software developers will be able to effectively make changes to the software needed to address the Year 2000 computing problem. To evaluate VBA’s software development processes, in 1996, we applied the Software Engineering Institute’s (SEI) software capability evaluation methodology to those projects identified by VBA as using the best development processes. This evaluation compares agencies’ and contractors’ software development processes against SEI’s five-level software capability maturity model, with 5 being the highest level of maturity and 1 being the lowest. In June 1996, we reported that VBA was operating at a level 1 capability. At this level, VBA cannot reliably develop and maintain high-quality software on any major project within existing cost and schedule constraints, which places VBA software development projects at significant risk. Accordingly, VBA must rely on the various capabilities of individuals rather than on an institutional process that will yield repeatable, or level 2, results. VBA did not satisfy any of the criteria for a repeatable or level 2 capability, the minimum level necessary to significantly improve productivity and return on investment. For example, VBA is extremely weak in the requirements management, software project planning, and software subcontract management areas, with no identifiable strengths or improvement activities. Because of VBA’s software development weaknesses, we recommended that the Secretary of Veterans Affairs obtain expert advice to improve VBA’s ability to develop high-quality develop and expeditiously implement an action plan that describes a strategy for reaching the repeatable (level 2) level of process maturity; ensure that any future contracts for software development require the contractor to have a software development capability of at least level 2; and delay any major investment in new software development—beyond what is needed to sustain critical day-to-day operations—until the repeatable level of process maturity is attained. In commenting on a draft of the June 1996 report, VBA agreed with three of our recommendations but disagreed with delaying major investments in software development. VBA stated that while it agreed that a repeatable level of process maturity is a goal that must be attained, it disagreed that “all software development beyond that which is day-to-day critical must be curtailed.” VBA stated that the payment system replacement projects, the migration of legacy systems, and other activities to address the change of century must continue. In our response to VBA’s comments, we agreed that the change of century and changes to legislation must be continued, and we characterized these changes as sustaining day-to-day operations. However, for those projects that do not meet this criterion, we continue to believe that VBA should delay software development investments until a maturity of level 2 is reached. To assess actions taken by VBA to improve its software capability, we reviewed VBA documents, such as its “Software Process Improvement Initiative Strategic Plan,” dated March 1997; the Best Practices Round Up Method; and the Interagency Agreement with the Air Force, dated September 1996, to obtain expert software process improvement assistance. We also reviewed SEI’s IDEALSM: A User’s Guide for Software Process Improvement, dated February 1996, and technical report on Best Training Practices Within the Software Engineering Industry, dated November 1996. In addition, we reviewed VBA contracts, correspondence to contractors, and supporting documents to determine what VBA has done to ensure that VBA’s software development contractors are at the repeatable level. We interviewed VBA officials and contractor personnel involved with the software process improvement effort to determine what actions VBA has taken to improve its software capability. We also interviewed selected VBA project managers involved in new systems development on their knowledge of the software process improvement initiative. We performed our work from October 1996 through August 1997 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Secretary-Designate of Veterans Affairs. The Secretary-Designate provided us with written comments, which are discussed in the “Agency Comments and Our Evaluation” section and reprinted in appendix I. VBA has initiated several actions to improve its software development capability. For example, in response to our recommendation that it obtain expert assistance, VBA has hired a contractor—SEI—to (1) assist it in developing an integrated set of software practices that will position VBA for successful, lasting improvements, (2) help formulate a software improvement program, and (3) provide expertise in executing software improvement activities. SEI is also expected to provide expertise in strategic and tactical planning, training, policy preparation, and action planning. In addition, in response to our recommendation that it develop and implement an action plan describing a strategy for reaching the repeatable level, VBA launched a software process improvement initiative in June 1996 to lay the foundation and build the context for sustainable, measurable improvements to its software development capability. It has developed a strategic plan that describes the purpose and goals of this improvement initiative. One of the plan’s goals is to establish organization policies and guidelines for the management, planning, and tracking of software projects that will enable VBA to repeat earlier successes on projects with similar applications. VBA has also recently initiated two software process improvement projects. The first project, called “Best Practices Round Up,” will identify software development practices that VBA software development teams are doing correctly. VBA believes that there are “pockets of excellence” within its organization not identified in our June 1996 report that it can build upon. The Best Practices Round Up project team started its review in April 1997 and briefed VBA’s chief information officer on its results in August 1997. The second project, called “Standards, Policies, and Procedures,” will assess whether VBA’s software development teams are following current software development policies, procedures, and standards. This project was initiated in June 1997 and is expected to be completed by the end of September 1997. The project team is expected to make recommendations to ensure compliance with standards. Although VBA has launched a software process initiative and an accompanying strategic plan, VBA has not yet clearly presented how it intends to move from an ad hoc and chaotic level of software development capability to a repeatable level. SEI’s IDEALSM: A User’s Guide for Software Process Improvement requires that a plan be developed that includes a schedule for initial activities, basic resource requirements, and benefits to the organization. VBA’s current plan contains no milestones—beginning, interim, or completion dates—by which to measure the agency’s progress and to identify problems. The plan also contains no analysis or information on costs, benefits, or risks. VBA officials stated that they recognize that the agency’s strategic plan for software process improvement lacks this specificity. At the conclusion of our review, these officials said that VBA intends to address this area in an upcoming action plan for the software process improvement initiative. VBA has also not yet established a baseline from which to measure its software process improvements. According to the SEI IDEALSM: A User’s Guide for Software Process Improvement, an organization needs to understand its current software process baseline so that it can develop a plan to achieve the business changes necessary to reach its software process improvement goals. At the conclusion of our review, VBA officials told us that they plan to use as their baseline the results of our June 1996 report, along with the results from their Best Practices Round Up and Standards, Policies, and Procedures projects. They stated that the baseline should be established by September 1997. Training of key staff is critical to achieving level 2 repeatability. According to SEI’s technical report entitled, Best Practices Within the Software Engineering Industry, best training practices include defining a process for software engineering education. Although VBA has provided process improvement training to many of the managers in its software engineering process group and management steering group, key software personnel—software developers, project managers, and line managers—have not been trained in the process improvement methodology, the principles behind it, and the key process areas. VBA’s software process improvement project manager explained that these key people had not yet been trained because VBA did not want to train them too long before implementing the process improvement projects. The project manager said that VBA plans to train these staff during fiscal years 1998 and 1999. However, VBA does not have a documented training plan to help ensure that these personnel receive training. Unless these individuals are trained in the process improvement methodology, its principles, and the key process areas, it will be difficult for them to implement the new policies and procedures required to reach the repeatable level. At the conclusion of our review, VBA officials stated that a training plan is now under development and will be made part of the software process improvement initiative action plan. In responding to our recommendation that it ensure that contractors have a repeatable software development capability, VBA intends to use a new provision in future software development contracts. This provision, however, does not require potential contractors to submit supporting documentation to VBA certifying their level of maturity. Validation of potential contractors’ software development capability maturity level should be a key factor in VBA’s software contracting decisions. The Internal Revenue Service, for example, recently started requiring that all current, in-process, and future contract solicitations for software development services require that contractors submit documentation to verify how their software development practices and processes satisfy the repeatable key process areas specified by SEI’s capability maturity model. The Internal Revenue Service plans to use this information when selecting software development services. Also, the Department of the Air Force’s acquisition policy states that software capability evaluations should be used for selecting software contractors. Although VBA has asserted that two of its current contractors are at the repeatable level, VBA could not provide documentation to support this. VBA subsequently requested the documentation from the contractors, but the information the contractors provided did not clearly show that they were at the repeatable level. In one case, the contractor presented information on how it assisted federal agencies in achieving the repeatable and/or higher levels of software development capability but did not provide documentation that the contractor was certified. In the second case, a component of the contractor’s organization asserted that it was at the repeatable level but did not provide documentation supporting this assertion. Recognizing the importance of a mature software development capability, VBA has initiated actions to address the weaknesses identified in our June 1996 report. These actions will help it move toward a repeatable software capability maturity level, but additional efforts are needed. Specifically, VBA has not (1) developed a detailed strategy for how VBA plans to achieve a repeatable level of software development capability, (2) established a baseline to measure performance improvements, (3) trained its software development teams in the process improvement methodology, and (4) established a process for ensuring that its software development contractors are at the repeatable level. Recognizing that these deficiencies need to be addressed, VBA has efforts underway to do so. If these deficiencies are not sufficiently addressed, VBA’s software development capability will remain ad hoc and chaotic, subjecting the agency to continuing risk of cost overruns, poor quality software, and schedule delays. We recommend that the Secretary of Veterans Affairs direct the Under Secretary for Benefits, in conjunction with VBA’s chief information officer, to define the milestones, costs, tasks, and risks of the software process improvement initiative in order to provide a clear strategy for how VBA plans to improve its software development capability to a repeatable level; develop and use a baseline showing VBA’s current software development capability from which to measure VBA’s software improvement effort; ensure that a training plan is developed and implemented that will provide key software development staff training in the software process improvement methodology, its principles, and key process areas; and establish a source selection process to ensure that VBA’s software development contractors have the mature processes necessary for timely, high-quality software development, including evaluating and validating documentation provided by potential contractors establishing that they are at the repeatable level or higher. In comments on a draft of this report, VA concurred with our recommendations. VA also agreed that a repeatable level of process maturity is a goal that VBA must attain and described a number of activities underway to improve its software development capability. For example, VBA has developed a draft action plan to define a strategy to reach the repeatable level and specify the activities/tasks, milestones, costs, and timeliness associated with the process improvement effort. VBA also was reviewing and revising the draft plan to fully address the issues raised in our report. VA added that a significant amount of work still remains before this plan is finalized. We are encouraged by VBA’s response and will continue to monitor the agency’s progress in implementing its software improvement effort. We are sending copies of this report to the Ranking Minority Member of the Subcommittee on Oversight and Investigations and the Chairman and Ranking Minority Member of the Subcommittee on Benefits, House Committee on Veterans’ Affairs. We will also provide copies to the Chairmen and Ranking Minority Members of the House and Senate Committees on Veterans’ Affairs and the House and Senate Committees on Appropriations; the Secretary-Designate of Veterans Affairs; and the Director of the Office of Management and Budget. Copies will also be made available to other parties upon request. Please contact me at (202) 512-6253 or by e-mail at willemssenj.aimd@gao.gov if you have any questions concerning this report. Major contributors to this report are listed in appendix II. The following is GAO’s comment on the Department of Veterans Affairs letter dated September 4, 1997. 1. Enclosure (2) has not been included. Helen Lew, Assistant Director Leonard J. Latham, Technical Assistant Director K. 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Pursuant to a congressional request, GAO conducted a follow-up review to determine the actions taken by the Veterans Benefits Administration (VBA) to address management and technical weaknesses identified in the June 19, 1996, hearing on the agency's modernization effort, focusing on the agency's actions to improve its software development capability. GAO noted that: (1) VBA has taken action to improve its software development capability; (2) among other things, it has launched a software process improvement initiative, chartered a software engineering process group, and obtained the services of an experienced contractor to assist in developing and implementing a software process improvement effort; (3) although it has made progress, VBA has not yet fully addressed needed software development improvements; (4) these include a need for: (a) a defined strategy to reach the repeatable level and a baseline to measure improvements; (b) a process improvement training program for its software developers; and (c) a process to ensure that VBA's software development contractors are at the repeatable level; (5) VBA generally agrees that these issues need to be addressed and has efforts under way to do so; and (6) until these deficiencies are sufficiently addressed, VBA's software development capability remains ad hoc and chaotic, subjecting the agency to continuing risk of cost overruns, poor quality software, and schedule delays in software development.

Our review of the pilot test identified several challenges related to pilot planning, data collection, and reporting, which affected the completeness, accuracy, and reliability of the results. DHS did not correct planning shortfalls that we identified in our November 2009 report. We determined that these weaknesses presented a challenge in ensuring that the pilot would yield information needed to inform Congress and the card reader rule and recommended that DHS components implementing the pilot—TSA and USCG—develop an evaluation plan to guide the remainder of the pilot and identify how it would compensate for areas where the TWIC reader pilot would not provide the information needed. DHS agreed with the recommendations; however, while TSA developed a data analysis plan, TSA and USCG reported that they did not develop an evaluation plan with an evaluation methodology or performance standards, as we recommended. The data analysis plan was a positive step because it identified specific data elements to be captured from the pilot for comparison across pilot sites. If accurate data had been collected, adherence to the data analysis plan could have helped yield valid results. However, TSA and the independent did not utilize the data analysis plan. According to officials test agentfrom the independent test agent, they started to use the data analysis plan but stopped using the plan because they were experiencing difficulty in collecting the required data and TSA directed them to change the reporting approach. TSA officials stated that they directed the independent test agent to change its collection and reporting approach because of TSA’s inability to require or control data collection to the extent required to execute the plan. We identified eight areas where TWIC reader pilot data collection, supporting documentation, and recording weaknesses affected the completeness, accuracy, and reliability of the pilot data 1. Installed TWIC readers and access control systems could not collect required data on TWIC reader use, and TSA and the independent test agent did not employ effective compensating data collection measures. The TWIC reader pilot test and evaluation master plan recognizes that in some cases, readers or related access control systems at pilot sites may not collect the required test data, potentially requiring additional resources, such as on-site personnel, to monitor and log TWIC card reader use issues. Moreover, such instances were to be addressed as part of the test planning. However, the independent test agent reported challenges in sufficiently documenting reader and system errors. For example, the independent test agent reported that the logs from the TWIC readers and related access control systems were not detailed enough to determine the reason for errors, such as biometric match failure, an expired TWIC card, or that the TWIC was identified as being on the list of revoked credentials. The independent test agent further reported that the inability to determine the reason for errors limited its ability to understand why readers were failing, and thus it was unable to determine whether errors encountered were due to TWIC cards, readers, or users, or some combination thereof. 2. Reported transaction data did not match underlying documentation. A total of 34 pilot site reports were issued by the independent test agent. According to TSA, the pilot site reports were used as the basis for DHS’s report to Congress. We separately requested copies of the 34 pilot site reports from both TSA and the independent test agent. In comparing the reports provided, we found that 31 of the 34 pilot site reports provided to us by TSA did not contain the same information as those provided by the independent test agent. Differences for 27 of the 31 pilot site reports pertained to how pilot site data were characterized, such as the baseline throughput time used to compare against throughput times observed during two phases of testing. However, at two pilot sites, Brownsville and Staten Island Ferry, transaction data reported by the independent test agent did not match the data included in TSA’s reports. Moreover, data in the pilot site reports did not always match data collected by the independent test agent during the pilot. 3. Pilot documentation did not contain complete TWIC reader and access control system characteristics. Pilot documentation did not always identify which TWIC readers or which interface (e.g., contact or contactless interface) the reader used to communicate with the TWIC card during data collection.different readers were tested. However, the pilot site report did not identify which data were collected using which reader. For example, at one pilot site, two 4. TSA and the independent test agent did not record clear baseline data for comparing operational performance at access points with TWIC readers. Baseline data, which were to be collected prior to piloting the use of TWIC with readers, were to be a measure of throughput time, that is, the time required to inspect a TWIC card and complete access-related processes prior to granting entry. However, it is unclear from the documentation whether acquired data were sufficient to reliably identify throughput times at truck, other vehicle, and pedestrian access points, which may vary. 5. TSA and the independent test agent did not collect complete data on malfunctioning TWIC cards. TSA officials observed malfunctioning TWIC cards during the pilot, largely because of broken antennas. If a TWIC with a broken antenna was presented for a contactless read, the reader would not identify that a TWIC had been presented, as the broken antenna would not communicate TWIC information to a contactless reader. In such instances, the reader would not log that an access attempt had been made and failed. 6. Pilot participants did not document instances of denied access. Incomplete data resulted from challenges documenting how to manage individuals with a denied TWIC across pilot sites. Specifically, TSA and the independent test agent did not require pilot participants to document when individuals were granted access based on a visual inspection of the TWIC, or deny the individual access as may be required under future regulation. This is contrary to the TWIC reader pilot test and evaluation master plan, which calls for documenting the number of entrants “rejected” with the TWIC card reader system operational as part of assessing the economic impact. Without such documentation, the pilot sites were not completely measuring the operational impact of using TWIC with readers. 7. TSA and the independent test agent did not collect consistent data on the operational impact of using TWIC cards with readers. TWIC reader pilot testing scenarios included having each individual present his or her TWIC for verification; however, it is unclear whether this actually occurred in practice. For example, at one pilot site, officials noted that during testing, approximately 1 in 10 individuals was required to have his or her TWIC checked while entering the facility because of concerns about causing a traffic backup. Despite noted deviations in test protocols, the reports for these pilot sites do not note that these deviations occurred. Noting deviations in each pilot site report would have provided important perspective by identifying the limitations of the data collected at the pilot site and providing context when comparing the pilot site data with data from other pilot sites. 8. Pilot site records did not contain complete information about installed TWIC readers’ and access control systems’ design. TSA and the independent test agent tested the TWIC readers at each pilot site to ensure they worked before individuals began presenting their TWIC cards to the readers during the pilot. However, the data gathered during the testing were incomplete. For example, 10 of 15 sites tested readers for which no record of system design characteristics were recorded. In addition, pilot reader information was identified for 4 pilot sites but did not identify the specific readers or associated software tested. According to TSA, a variety of challenges prevented TSA and the independent test agent from collecting pilot data in a complete and consistent fashion. Among the challenges noted by TSA, (1) pilot participation was voluntary, which allowed pilot sites to stop participation at any time or not adhere to established testing and data collection protocols; (2) the independent test agent did not correctly and completely collect and record pilot data; (3) systems in place during the pilot did not record all required data, including information on failed TWIC card reads and the reasons for the failure; and (4) prior to pilot testing, officials did not expect to confront problems with nonfunctioning TWIC cards. Additionally, TSA noted that it lacked the authority to compel pilot sites to collect data in a way that would have been in compliance with federal standards. In addition to these challenges, the independent test agent identified the lack of a database to track and analyze all pilot data in a consistent manner as an additional challenge to data collection and reporting. The independent test agent, however, noted that all data collection plans and resulting data representation were ultimately approved by TSA and USCG. As required by the SAFE Port Act and the Coast Guard Authorization Act of 2010, DHS’s report to Congress on the TWIC reader pilot presented several findings with respect to technical and operational aspects of implementing TWIC technologies in the maritime environment. However, DHS’s reported findings were not always supported by the pilot data, or were based on incomplete or unreliable data, thus limiting the report’s usefulness in informing Congress about the results of the TWIC reader pilot. For example, reported entry times into facilities were not based on data collected at pilot sites as intended. Further, the report concluded that TWIC cards and readers provide a critical layer of port security, but data were not collected to support this conclusion. Because of the number of concerns that we identified with the TWIC pilot, in our March 13, 2013, draft report to DHS, we recommended that DHS not use the pilot data to inform the upcoming TWIC card reader rule. However, after receiving the draft that we sent to DHS for comment, on March 22, 2013, USCG published the TWIC card reader notice of proposed rulemaking (NPRM), which included results from the TWIC card reader pilot. We subsequently removed the recommendation from our final report, given that USCG had moved forward with issuing the NPRM and had incorporated the pilot results into the proposed rulemaking. In its official comments on our report, DHS asserted that some of the perceived data anomalies we cited were not significant to the conclusions TSA reached during the pilot and that the pilot report was only one of multiple sources of information available to USCG in drafting the TWIC reader NPRM. We recognize that USCG had multiple sources of information available to it when drafting the proposed rule; however, the pilot was used as an important basis for informing the development of the NPRM, and the issues and concerns that we identified remain valid. Given that the results of the pilot are unreliable for informing the TWIC card reader rule on the technology and operational impacts of using TWIC cards with readers, we recommended that Congress should consider repealing the requirement that the Secretary of Homeland Security promulgate final regulations that require the deployment of card readers that are consistent with the findings of the pilot program; and that Congress should consider requiring that the Secretary of Homeland Security complete an assessment that evaluates the effectiveness of using TWIC with readers for enhancing port security. This would be consistent with the recommendation that we made in our May 2011report. These results could then be used to promulgate a final regulation as appropriate. Given DHS’s challenges in implementing TWIC over the past decade, at a minimum, the assessment should include a comprehensive comparison of alternative credentialing approaches, which might include a more decentralized approach, for achieving TWIC program goals. Chairman Mica, Ranking Member Connolly, and members of the subcommittee, this concludes my prepared statement. I would be happy to respond to any questions that you may have. For questions about this statement, please contact Steve Lord at (202) 512-4379 or lords@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include Dave Bruno, Assistant Director; Joseph P. Cruz; and James Lawson. Key contributors for the previous work that this testimony is based on are listed within each individual product. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony discusses GAO's work examining the Department of Homeland Security's (DHS) Transportation Worker Identification Credential (TWIC) program. Ports, waterways, and vessels handle billions of dollars in cargo annually, and an attack on our nation's maritime transportation system could have serious consequences. Maritime workers, including longshoremen, mechanics, truck drivers, and merchant mariners, access secure areas of the nation's estimated 16,400 maritime-related transportation facilities and vessels, such as cargo container and cruise ship terminals, each day while performing their jobs. The TWIC program is intended to provide a tamper-resistant biometric credential to maritime workers who require unescorted access to secure areas of facilities and vessels regulated under the Maritime Transportation Security Act of 2002 (MTSA). TWIC is to enhance the ability of MTSA-regulated facility and vessel owners and operators to control access to their facilities and verify workers' identities. Under current statute and regulation, maritime workers requiring unescorted access to secure areas of MTSA-regulated facilities or vessels are required to obtain a TWIC, and facility and vessel operators are required by regulation to visually inspect each worker's TWIC before granting unescorted access. Prior to being granted a TWIC, maritime workers are required to undergo a background check, known as a security threat assessment. This statement today highlights the key findings of a report GAO released yesterday on the TWIC program that addressed the extent to which the results from the TWIC reader pilot were sufficiently complete, accurate, and reliable for informing Congress and the TWIC card reader rule. For the report, among other things, GAO assessed the methods used to collect and analyze pilot data since the inception of the pilot in August 2008. GAO analyzed and compared the pilot data with the TWIC reader pilot report submitted to Congress to determine whether the findings in the report are based on sufficiently complete, accurate, and reliable data. Additionally, we interviewed officials at DHS, TSA, and USCG with responsibilities for overseeing the TWIC program, as well as pilot officials responsible for coordinating pilot efforts with TSA and the independent test agent (responsible for planning, evaluating, and reporting on all test events), about TWIC reader pilot testing approaches, results, and challenges.

DOD provides active duty servicemembers with a comprehensive compensation package that includes a mix of cash, such as basic pay; noncash benefits, such as health care; and deferred compensation, such as retirement pension. The foundation of each servicemember’s compensation is regular military compensation, which consists of basic pay, housing allowance, subsistence allowances, and federal income tax advantage. The amount of cash compensation that a servicemember receives varies according to rank, tenure of service, and dependency status. For example, a hypothetical servicemember with 1 year of service at the rank of O-1 and no dependents would currently receive an annual regular military compensation of $54,663, whereas a hypothetical servicemember with 4 years of service at the rank of E-5 and one dependent would receive an annual regular military compensation of $52,589. In addition to cash compensation, DOD offers current and retired servicemembers a wide variety of noncash benefits. These range from family health care coverage and education assistance to installation- based services, such as child care, youth, and family programs. While many studies of active duty military compensation have attempted to assess the value of the compensation package, most did not consider all of the components of compensation offered to servicemembers. CBO, RAND, and CNA have assessed military compensation using varying approaches. All of their studies include some components of compensation—for example, cash compensation beyond basic pay, which includes housing and subsistence allowances, the federal income tax advantage, and, when possible, special and incentive pay. However, these studies did not assess all components of compensation offered to servicemembers. Thus, the results of these studies differ based on what is being assessed, the methodology used to conduct the assessment, and the components of compensation included in the calculations. The most recent study, a 2008 DOD-sponsored study performed by CNA, assessed military compensation using regular military compensation and some benefits (specifically, health care, the military tax advantage, and retirement benefits). In particular, the results of this study state that in 2006, average enlisted servicemembers’ compensation ranged from approximately $40,000 at 1 year of service to approximately $80,000 at 20 years of service. Additionally, in 2006 the average officers’ compensation ranged from approximately $50,000 at 1 year of service to approximately $140,000 at 20 years of service. Our analysis of CNA’s 2008 study found that overall, CNA used a reasonable approach to assessing military compensation; however, we provided comments on two issues. In general, we agree that when assessing military compensation for the purpose of comparing it with civilian compensation, it is appropriate to include regular military compensation and benefits (as many as can be reasonably valued from the servicemembers’ perspective). For example, in order to value health care, CNA estimated the difference in value between military and civilian health benefits, because servicemembers receive more comprehensive health care than most civilians. As mentioned previously, we identified two areas for comment with regard to CNA’s approach. First, with regard to retirement, health care, and tax advantage, CNA’s methodology makes various assumptions that allow the study to calculate approximate values for these benefits. While the assumptions are reasonable, we note that other, alternative assumptions could have been made, and thus, in some cases, could have generated substantially different values. Second, the CNA study omits the valuation of retiree health care, which is a significant benefit provided to servicemembers. Nevertheless, we note that CNA’s study and other studies of military compensation illustrate that valuing total military compensation from a servicemember’s perspective is challenging, given the variability across the large number of pays and benefits, the need to make certain assumptions to estimate the value of various benefits, and the utilization of benefits by servicemembers or their dependents, among other reasons. In comparing military and civilian compensation, CNA’s study as well as a 2007 CBO study, found that military pay generally compares favorably with civilian pay. CNA found that in 2006, regular military compensation for enlisted personnel averaged $4,700 more annually than comparable civilian earnings. Similarly, CNA found that military officers received an average of about $11,500 more annually than comparable civilians. Further, CNA found that the inclusion of three military benefits—health care, retirement, and the additional tax advantage for military members— increased the differentials by an average of $8,660 annually for enlisted servicemembers and $13,370 annually for officers. A 2007 CBO study similarly found that military compensation compares favorably with civilian compensation. For example, CBO’s report suggested that DOD’s goal to make regular military compensation comparable with the 70th percentile of civilian compensation has been achieved. We note that the major difference between the two studies lies in their definitions of compensation. CNA asserted, and we agree, that the inclusion of benefits allows for comparisons of actual levels of compensation and provides some useful comparison points for determining whether servicemembers are compensated at a level that is comparable to that of their civilian peers, although the caveats that we discuss below should be considered. CBO also noted, and we agree, that including benefits can add another level of complexity to such analytical studies. However, while these studies and comparisons between military and civilian compensation in general provide policymakers with some insight into how well military compensation is keeping pace with overall civilian compensation, we believe that such broad comparisons are not sufficient indicators for determining the appropriateness of military compensation levels. For example, the mix of skills, education, and experience can differ between the comparison groups, making direct comparisons of salary and earnings difficult. While some efforts were made by CNA to control for age (as a proxy for years of experience) and broad education levels, CNA did not control for other factors, such as field of degree or demographics (other than age), that we feel would be needed to make an adequate comparison. As another example, one approach that is sometimes taken to illustrate a difference, or “pay gap,” between rates of military and civilian pay is to compare over time changes in the rates of basic pay with changes in the Employment Cost Index. We do not believe that such comparisons demonstrate the existence of a pay gap or facilitate accurate comparisons between military and civilian compensation because they assume that military basic pay is the only component of compensation that should be compared to changes in civilian pay and exclude other important components of military compensation, such as the housing and subsistence allowances. We note that CBO also previously discussed three other shortcomings of making such comparisons in a 1999 report. Specifically, CBO noted that such comparisons (1) select a starting point for the comparison without a sound analytic basis, yet the results of the pay gap calculation are very sensitive to changes in that starting point; (2) do not take into account differences in the demographic composition of the civilian and military labor forces; and (3) compare military pay growth over one time period with a measure of civilian pay growth over a somewhat different period. The 10th QRMC’s recommendation to include regular military compensation and select benefits when comparing military and civilian compensation appears reasonable to us because it provides a more complete measure of military compensation than considering only cash compensation. Given the large proportion of servicemember compensation that is comprised of in-kind and deferred benefits, the 10th QRMC emphasized that taking these additional components of compensation into account shows that servicemember compensation is generous relative to civilian compensation—more so than traditional comparisons of regular military compensation suggest. The 10th QRMC also recommended that in order to maintain the standard established by the 9th QRMC’s 70th percentile (which includes only regular military compensation), DOD adopt the 80th percentile as its goal for military compensation when regular military compensation and the value of some benefits, such as health care, are included in the analysis. In general, when comparing military and civilian compensation, a more complete or appropriate measure of compensation should include cash and benefits. When considering either a military or a civilian job, an individual is likely to consider the overall compensation—to include pay as well as the range and value of the benefits offered between the two options. The challenge with this approach, as mentioned previously, lies in determining how to “value” the benefits, and which benefits to include in the comparison. Prior to issuing our report earlier this month the Deputy Under Secretary of Defense for Military Personnel Policy provided us with oral comments on a draft of the report. The Deputy Under Secretary generally agreed with our findings, noting that numerous studies have attempted to estimate the value military members place on noncash and deferred benefits and that each study has found that identifying relevant assumptions, valuing these benefits, and finding appropriate benchmarks and comparisons are significant challenges. Noting the variation in the results of these studies, the Deputy Under Secretary stated that further study is necessary before DOD is willing to consider measuring and benchmarking military compensation using a measurement that incorporates benefits. While comparisons between military and civilian compensation are important management measures, they alone do not necessarily indicate the appropriateness or adequacy of compensation. Another measure is DOD’s ability to recruit and retain personnel. We have reported in the past that compensation systems are tools used for recruiting and retention purposes. Similarly, in 2009, CBO stated that ultimately, the best barometer of the effectiveness of DOD’s compensation system is how well the military attracts and retains high-quality, skilled personnel. Since 1982, DOD has only missed its overall annual recruiting target three times—in 1998 during a period of very low unemployment, in 1999, and most recently in 2005. Given that (1) the ability to recruit and retain is a key indicator of the adequacy of compensation and (2) DOD has generally met its overall recruiting and retention goals for the past several years, it appears that regular military compensation is adequate at the 70th percentile of comparable civilian pay as well as at the 80th percentile when additional benefits are included. We note that although the services have generally met their overall recruiting goals in recent years, certain specialties, such as medical personnel, continue to experience recruiting and retention challenges. As a result, permanent, across-the-board pay increases may not be seen as the most efficient recruiting and retention mechanism. In fact, our previous work has shown that use of targeted bonuses may be more appropriate for meeting DOD’s requirements for selected specialties where DOD faces challenges in recruiting and retaining sufficient numbers of personnel. In closing, we note that comparisons between military and civilian compensation are important management tools—or measures—for the department to use to assess the adequacy and appropriateness of its compensation. However, such comparisons present both limitations and challenges. For example, data limitations and difficulties valuing nonmonetary benefits prevent exact comparisons between military and civilian personnel. Moreover, these comparisons represent points in time and are affected by other factors, such as the health of the economy. To illustrate, it is not clear the degree to which changes in the provision of civilian health care or retirement benefits affect the outcome of comparing military and civilian compensation. In addition, valuing military service is complicated. While serving in the military offers personal and professional rewards, such service also requires many sacrifices—for example, frequent moves and jobs that are arduous and sometimes dangerous. Ultimately, DOD’s ability to recruit and retain personnel is an important indicator of the adequacy—or effectiveness—of its compensation. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or members of the subcommittee may have at this time. For further information about this testimony, please contact Brenda S. Farrell, Director, Defense Capabilities and Management, at (202) 512-3604, or farrellb@gao.gov. Key contributors to this statement include Marion A. Gatling, Assistant Director; K. Nicole Harms; Wesley A. Johnson; Susan C. Langley; Charles W. Perdue; Jennifer L. Weber; and Cheryl A. Weissman. Other contributors include Natalya Barden, Margaret Braley, Timothy J. Carr, and Patrick M. Dudley. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony discusses our most recent report on military and civilian pay comparisons and the challenges associated with those types of comparisons. The Department of Defense's (DOD) military compensation package, which is a myriad of pays and benefits, is an important tool for attracting and retaining the number and quality of active duty servicemembers DOD needs to fulfill its mission. Since DOD transitioned to an all-volunteer force in 1973, the amount of pay and benefits that servicemembers receive has progressively increased. When it is competitive with civilian compensation, military compensation can be appropriate and adequate to attract and retain servicemembers. However, comparisons between the two involve both challenges and limitations. Specifically, as we have previously reported, no data exist that would allow an exact comparison between military and civilian personnel with the same levels of work experience. Also, nonmonetary considerations complicate such comparisons, because their value cannot be quantified. For example, military service is unique in that the working conditions for active duty service carry the risk of death and injury during wartime and the potential for frequent, long deployments, unlike most civilian jobs. In addition, there is variability among past studies in how compensation is defined (for example, either pay or pay and benefits) and what is being compared. Most studies, including those done by the Congressional Budget Office (CBO) and RAND Corporation, have compared military and civilian compensation but limit such comparisons to cash compensation--using what DOD calls regular military compensation--and do not include benefits. The National Defense Authorization Act for Fiscal Year 2010 required that we conduct a study comparing the pay and benefits provided by law to members of the Armed Forces with those of comparably situated private-sector employees, to assess how the differences in pay and benefits affect recruiting and retention of members of the Armed Forces. Earlier this month, we issued our report. This testimony today summarizes the findings of that report. Comparisons between military and civilian compensation are important management tools--or measures--for the department to use to assess the adequacy and appropriateness of its compensation. However, such comparisons present both limitations and challenges. For example, data limitations and difficulties valuing nonmonetary benefits prevent exact comparisons between military and civilian personnel. Moreover, these comparisons represent points in time and are affected by other factors, such as the health of the economy. To illustrate, it is not clear the degree to which changes in the provision of civilian health care or retirement benefits affect the outcome of comparing military and civilian compensation. In addition, valuing military service is complicated. While serving in the military offers personal and professional rewards, such service also requires many sacrifices--for example, frequent moves and jobs that are arduous and sometimes dangerous. Ultimately, DOD's ability to recruit and retain personnel is an important indicator of the adequacy--or effectiveness--of its compensation.

Airports are a linchpin in the nation’s air transportation system. This is true for both the 71 largest airports, as well as for the nation’s 3,233 smaller commercial and general aviation airports. While small airports handle only about 10 percent of scheduled passenger traffic in total , they also serve a majority of the nation’s general aviation activity. For many communities, a small airport is their primary access to air transportation. Smaller airports also provide important economic benefits to their communities in the form of jobs and transport. The National Civil Aviation Review Commission—established by the Congress to determine how to fund U.S. civil aviation—reported in December 1997 that more funding is needed, not only to develop system capacity at the larger airports but also to preserve smaller airports. In 1996, tax-exempt bonds, the Airport Improvement Program (AIP), and passenger facility charges (PFC) together provided about $6.6 billion of the total $7 billion in funding for large and small airports. State grants and airport revenue contributed the remaining funding for airports. Table 1 lists these sources of funding and their amounts in 1996. The amount and type of funding varies significantly with airports’ size. The nation’s 3,233 smaller national system airports obtained about $1.5 billion in funding in 1996, about 22 percent of the total for 1996. As shown in figure 1, smaller airports relied on AIP grants for half of their funding, followed by tax-exempt airport and special facility bonds,and state grants. PFCs accounted for only 7 percent of smaller airports’ funding mix. Conversely, larger airports received more than $5.5 billion in funding, relying on airport bonds for 62 percent of their total funding, followed by PFC collections. AIP grants accounted for only 10 percent of larger airports’ funding. Small airports’ planned capital development during 1997 through 2001 may cost nearly $3 billion per year, or $1.4 billion per year more than these airports raised in 1996. Figure 2 compares small airports’ total funding for capital development in 1996 with their annual planned spending for development. Funding for 1996, the bar on the left, is shown by source (AIP, PFCs, state grants, and bonds). Planned spending for small airports, the bar on the right, is shown by the relative priority FAA has assigned to the projects, as follows: Reconstruction and mandated projects, FAA’s highest priorities, total $750 million per year and are for projects to maintain existing infrastructure (reconstruction) or to meet federal mandates, including safety, security, and environmental requirements (including noise mitigation requirements). Other high-priority projects, primarily adding capacity, account for another $373 million per year. Other AIP-eligible projects, a lower priority for FAA, such as bringing airports up to FAA’s design standards, add another $1.37 billion per year, for a total of nearly $2.5 billion per year in projects eligible for AIP funding. Finally, small airports anticipate another $465 million per year on projects that are not eligible for AIP funding, such as expanding commercial space in terminals and constructing parking garages. Planned development 1997 through 2001 (annualized) Given this picture of funding and planned spending for development for small airports, it is difficult to develop a precise estimate of the extent to which AIP-eligible projects are deferred or canceled because some form of funding cannot be found for them. FAA does not maintain information on whether eligible projects that do not receive AIP funding are funded from other sources, deferred, or canceled. We were not successful in developing an estimate from other information sources, mainly because comprehensive data are not kept on the uses to which airport and special facility bonds are put. But even if the entire bond financing available to smaller airports were spent on AIP-eligible projects, these airports would have, at a minimum, about $945 million a year in AIP-eligible projects that are not funded. Conversely, if none of the financing from bonds were applied to AIP-eligible projects, then the full $1.41 billion funding shortfall for smaller airports would apply to these projects. As a proportion of total funding, the potential funding shortfall for smaller airports is more significant than it is for large airports. For large airports, the difference between 1996 funding and planned development is about $1.5 billion. However, because large airports obtained $5.5 billion in funding in 1996 versus $1.5 billion for small airports, large airports’ potential shortfall represents 21 percent of their planned development costs as compared to small airports’ potential shortfall of 48 percent. Therefore, while larger and smaller airports’ respective shortfalls are similar in size, the greater scale of larger airports’ planned development causes their shortfall to differ considerably in proportion. Proposals to increase airport funding or make better use of existing funding vary in the extent to which they would help smaller airports and close the gap between their funding and the costs of planned development. For example, increasing AIP funding would help smaller airports more than larger airports because current funding formulas would channel an increasing proportion of AIP funds to them. Conversely, any increase in PFC funding would help larger airports almost exclusively because they handle more passengers and are more likely to have a PFC in place. Changes to the current design of AIP or PFCs could, however, lessen the concentration of benefits on one group of airports. FAA has also used other mechanisms to better use and extend existing funding sources, such as state block grants and pilot projects to test innovative financing. So far, these mechanisms have had mixed success. Under the existing distribution formula, increasing total AIP funding would proportionately help smaller airports more than large and medium hub airports. Appropriated AIP funding for fiscal year 1998 was $1.7 billion; smaller airports received about 60 percent of this total. We calculated how much funding each group would receive under the existing formula, at funding levels of $2 billion and $2.347 billion. We chose these funding levels because the National Civil Aviation Review Commission and the Air Transport Association (ATA), the commercial airline trade association, have recommended that future AIP funding levels be stabilized at a minimum of $2 billion annually, while two airport trade groups—the American Association of Airport Executives and the Airports Council International-North America—have recommended a higher funding level, such as AIP’s authorized funding level of $2.347 billion for fiscal year 1998. Table 2 shows the results. As indicated, smaller airports’ share of AIP would increase under higher funding levels if the current distribution formula were used to apportion the additional funds. Increasing PFC-based funding, as proposed by the Department of Transportation and backed by airport groups, would mainly help larger airports, for several reasons. First, large and medium hub airports, which accounted for nearly 90 percent of all passengers in 1996, have the greatest opportunity to levy PFCs. Second, such airports are more likely than smaller airports to have an approved PFC in place. Finally, large and medium hub airports would forgo little AIP funding if the PFC ceiling were raised or eliminated. Most of these airports already return the maximum amount that must be turned back for redistribution to smaller airports in exchange for the opportunity to levy PFCs. If the airports currently charging PFCs were permitted to increase them beyond the current $3 ceiling, total collections would increase from the $1.35 billion that FAA estimates was collected during 1998. Most of the additional collections would go to larger airports. For every $1 increase in the PFC ceiling, we estimate that large and medium hub airports would collect an additional $432 million, while smaller airports would collect an additional $46 million (see fig. 2). In total, a $4 PFC ceiling would yield $1.9 billion, a $5 PFC would yield $2.4 billion, and a $6 PFC would yield $2.8 billion in total estimated collections. In recent years, the Congress has directed FAA to undertake steps to find ways to extend existing AIP funds, especially for small airports that rely more extensively on AIP funds than do large airports. The airport community’s interest in these efforts has varied. For example, the state block grant program, which allows the participating states to direct grants to smaller airports, has been proven successful. Others efforts, such as pilot projects to test innovative financing and privatization, have received less interest from airports and are still being tested. Finally, one idea, using AIP grants to capitalize state revolving loan funds, has not been attempted but could help smaller airports. Implementing this idea would require legislative changes. In 1996, we testified before this Subcommittee that FAA’s pilot program for state block grants was a success. The program allows FAA to award AIP funds in the form of block grants to designated states, which, in turn, select and fund AIP projects at small airports. In 1996, the program was expanded from seven to nine states and made permanent. Both FAA and the participating states believe that they are benefiting from the program. In recent years, FAA, with congressional urging and direction, has sought to expand airports’ available capital funding through more innovative methods, including the more flexible application of AIP funding and efforts to attract more private capital. The 1996 Federal Aviation Reauthorization Act gave FAA the authority to test three new uses for AIP funding—(1) projects with greater percentages of local matching funds, (2) interest costs on debt, and (3) bond insurance. These three innovative uses could be tested on up to a total of 10 projects. Another innovative financing mechanism that we have recommended—using AIP funding to help capitalize state airport revolving funds—while not currently permitted, may hold some promise. FAA is testing 10 innovative uses of AIP funding totaling $24.16 million, all at smaller airports. Five projects tested the benefits of the first innovative use of AIP funding—allowing local contributions in excess of the standard matching amount, which for most airports and projects is otherwise fixed at 10 percent of the AIP grant. FAA and state aviation representatives generally support the concept of flexible matching because it allows projects to begin that otherwise might be postponed for lack of sufficient FAA funding; in addition, flexible funding may ultimately increase funding to airports. The remaining five projects test the other two mechanisms for innovative financing. Applicants have generally shown less interest in these other options, which, according to FAA officials, warrant further study. Some federal transportation, state aviation, and airport bond rating and underwriting officials believe using AIP funding to capitalize state revolving loan funds would help smaller airports obtain additional financing. Currently, FAA cannot use AIP funds for this purpose because AIP construction grants can go only to designated airports and projects. However, state revolving loan funds have been successfully employed to finance other types of infrastructure projects, such as wastewater projects and, more recently, drinking water and surface transportation projects.While loan funds can be structured in various ways, they use federal and state moneys to capitalize the funds from which loans are then made. Interest and principal payments are recycled to provide additional loans. Once established, a loan fund can be expanded through the issuance of bonds that use the fund’s capital and loan portfolio as collateral. These revolving funds would not create any contingent liability for the U.S. government because they would be under state control. Declining airport grants and broader government privatization efforts spurred interest in airport privatization as another innovative means of bringing more capital to airport development, but thus far efforts have shown only limited results. As we previously reported, the sale or lease of airports in the United States faces many hurdles, including legal and economic constraints. As a way to test privatization’s potential, the Congress directed FAA to establish a limited pilot program under which some of these constraints would be eased. Starting on December 1, 1997, FAA began accepting applications from airports to participate in the pilot program on a first-come, first-served basis for up to five airports, at least one of which must be a general aviation airport. Thus far, two airports—one general aviation and one nonhub commercial service airport—have applied to be part of the program. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Pursuant to a congressional request, GAO discussed airport funding issues as they apply to smaller airports, focusing on: 1) how much funding has been made available to airports, particularly smaller airports, for their capital development and what are the sources of these funds; (2) comparing airports' plans for future development with current funding levels; and (3) what effect will various proposals to increase or make better use of existing funding have on smaller airports' ability to fulfill their capital development plans. GAO noted that: (1) in 1998, GAO reported that the 3,304 airports that make up the federally supported national airport system obtained about $7 billion from federal and private sources for capital development; (2) the nation's 3,233 smaller airports accounted for 22 percent of this total, or about $1.5 billion; (3) as a group, smaller airports depend heavily on federal grants, receiving half of their funding from the federally-funded Airport Improvement Program (AIP) and the rest from airport bonds, state grants, and passenger facility charges; (4) by contrast, the 71 largest airports in the national airport system obtained $5.5 billion in funding, mostly from tax-exempt bonds and relied on AIP for only 10 percent of their funding; (5) small airports planned to spend nearly $3 billion per year for capital development during 1997 through 2001, or $1.4 billion per year more than they were able to fund in 1996; (6) smaller airports' planned development consists of projects eligible for AIP grants, like runways, and projects not eligible for grants, like terminal retail space; (7) at least $945 million and as much as $1.4 billion of smaller airports' planned development that are eligible for grants may not be funded on an annual basis; (8) the difference between funding and planned development is much greater for smaller commercial and general aviation airports than it is for large airports; (9) several initiatives to increase or make better use of existing funding have emerged in recent years, including increasing the amount of AIP funding and raising the maximum amount airports can levy in passenger facility charges; (10) under current formulas, increasing the amount of AIP funding would help smaller airports more than larger airports, while raising passenger facility charges would mainly help larger airports; and (11) other initiatives for making better use of federal grant monies, such as AIP block grants to states, have primarily been directed toward smaller airports, but none appears to offer a major breakthrough in reducing the shortfall between funding and the levels airports plan to spend on development.

The U.S. Border Patrol, within the Department of Homeland Security’s (DHS) U.S. Customs and Border Protection (CBP), is responsible for patrolling 8,000 miles of the land and coastal borders of the United States to detect and prevent the illegal entry of aliens and contraband, including terrorists, terrorist weapons, and weapons of mass destruction. As of October 2006, the Border Patrol had 12,349 agents stationed in 20 sectors along the southwest, northern, and coastal borders. In May 2006, the President called for comprehensive immigration reform that included strengthening control of the country’s borders by, among other things, adding 6,000 new agents to the Border Patrol by the end of December 2008. This would increase the total number of agents from 12,349 to 18,319, an unprecedented 48 percent increase over the next 2 years. As shown in figure 1, this increase is nearly equivalent to the number of agents gained over the past 10 years. In addition, legislation has been proposed in Congress that would authorize an additional 10,000 agents, potentially increasing the size of the Border Patrol to about 28,000 agents by the end of 2012. FLETC is an interagency training provider responsible for basic, advanced, and specialized training for approximately 82 federal agencies, including CBP’s Border Patrol. Under a memorandum of understanding, FLETC hosts the Border Patrol’s training academy in Artesia, New Mexico, and shares the cost of providing training with the Border Patrol. For example, FLETC provides the facilities, some instructors (e.g., retired Border Patrol agents), and services (e.g., laundry and infirmary) that are paid for out of FLETC’s annual appropriations. CBP’s Office of Training and Development designs the training curriculum (in conjunction with the Border Patrol and with input from FLETC) for the academy, administers the Border Patrol Academy, and provides permanent instructors and staff. Basic training for new Border Patrol agents consists of three components: (1) basic training at the academy, (2) postacademy classroom training administered by the academy but conducted in the sectors, and (3) field training conducted on the job in the sectors. The academy portion of the training is currently an 81-day program consisting of 663 curriculum hours in six subject areas: Spanish, law/operations, physical training, driving, firearms, and general training. After graduating from the academy, new Border Patrol agents are required to attend classroom instruction at their respective sectors in Spanish and law/operations 1 day a week for a total of 20 weeks. Finally, new agents are generally assigned to senior agents in a sector’s field training unit for additional on-the-job training intended to reinforce new agents’ skills in safely, effectively, and ethically performing their duties under actual field conditions. The Border Patrol’s basic training program exhibits attributes of an effective training program. GAO’s training assessment guide suggests the kinds of documentation to look for that indicate that a training program has a particular attribute in place, such as incorporating measures of effectiveness into its course designs. As shown in table 1, the Border Patrol was able to document that its training program had key indicators in place for the applicable attributes of an effective training program. In addition, the Border Patrol is pursuing accreditation of its training program from the Federal Law Enforcement Training Accreditation organization. The core training curriculum used at the Border Patrol Academy has not changed since September 11, but the Border Patrol added new material on responding to terrorism and practical field exercises. For example, the Border Patrol added an antiterrorism course that covers, among other things, what actions agents should take if they encounter what they believe to be a weapon of mass destruction or an improvised explosive device. The Border Patrol also incorporated practical field exercises that simulate a variety of situations that agents may encounter, such as arresting an individual who is armed with a weapon, as shown in figure 2. With regard to capacity, Border Patrol officials told us they are confident that the academy can accommodate the large influx of new trainees anticipated over the next 2 years. In fiscal year 2006, the average cost to train a new Border Patrol agent at the academy was about $14,700. This cost represents the amounts expended by both the Border Patrol and FLETC. (See table 2.) The Border Patrol paid about $6,600 for the trainee’s meals and lodging, and a portion of the cost of instructors, and FLETC paid about $8,100 for tuition, a portion of the cost of instructors, and miscellaneous expenses such as support services, supplies, and utilities. The $14,700 cost figure does not include the costs associated with instructors conducting postacademy and field training in the sectors. For fiscal year 2007, the average cost to train a new agent will increase to about $16,200. This is primarily due to an increase in the number of instructors hired, which increased CBP’s instructor costs from about $2,800 to $6,100 per student. The Border Patrol’s average cost per trainee at the academy is consistent with that of training programs that cover similar subjects and prepare officers for operations in similar geographic areas. For example, the estimated average cost per trainee for a BIA police officer was about $15,300; an Arizona state police officer, $15,600; and a Texas state trooper, $14,700. However, differences in the emphasis of some subject areas over others dictated by jurisdiction and mission make a direct comparison difficult. For example, while both the Border Patrol and the Texas Department of Public Safety require Spanish instruction, the Border Patrol requires 214 hours of instruction, compared with 50 hours for a Texas state trooper. Similarly, the Border Patrol does not provide instruction in investigative techniques, while BIA, Arizona, and Texas require 139, 50, and 165 hours of such instruction, respectively. Table 3 shows a comparison of Border Patrol’s basic training program with other federal and nonfederal law enforcement basic training programs. The Border Patrol is considering several alternatives to improve the efficiency of basic training delivery and to return agents to the sectors more quickly. For example, in October 2007 the Border Patrol plans to implement a proficiency test for Spanish that should allow those who pass the test to shorten their time at the academy by about 30 days. According to Border Patrol officials, this could benefit about half of all trainees, because about half of all recruits already speak Spanish. The Border Patrol also plans to convert postacademy classroom training to computer-based training beginning in October 2007, allowing agents to complete the 1-day- a-week training at their duty stations rather than having to travel to the sector headquarters for this training. As a result, fewer senior agents will be required to serve as instructors for postacademy training. Finally, the Border Patrol is considering what other training it can shift from the academy to postacademy and field training conducted in the sectors, which could further reduce the amount of time trainees spend at the academy. While these strategies may improve the efficiency of training at the academy, officials expressed concern about the sectors’ ability provide adequate supervision and continued training once the new agents arrive at the sectors. Some Border Patrol officials are concerned with having enough experienced agents available in the sectors to serve as first-line supervisors and field training officers for these new agents. According to the Chief of the Border Patrol, agencywide the average experience level of Border Patrol agents is about 4 or 5 years of service. However, in certain southwest border sectors the average experience level is only about 18 months. Moreover, the supervisor-to-agent ratio is higher than the agency would like in some southwest sectors. Border Patrol officials told us that a 5-to-1 agent-to-supervisor ratio is desirable to ensure proper supervision of new agents, although the desired ratio in certain work units with more experienced agents would be higher. Our analysis of Border Patrol data showed that as of October 2006, the overall agent-to-supervisor ratios for southwest sectors, where the Border Patrol assigns all new agents, ranged from about 7 to 1 up to 11 to 1. These ratios include some work units with a higher percentage of experienced agents that do not require the same level of supervision as new agents. To augment the supervision of new agents, the Border Patrol is considering using retired Border Patrol agents to act as mentors for new agents. Nevertheless, given the large numbers of new agents the Border Patrol plans to assign to the southwest border over the next 2 years, along with the planned reassignment of experienced agents from the southwest border to the northern border, it will be a challenge for the agency to achieve the desired 5-to-1 ratio for new agents in all work units in those sectors receiving the largest numbers of new agents. In addition to concerns about having a sufficient number of experienced agents to serve as supervisors and field training officers, the Border Patrol does not have a uniform field training program that establishes uniform standards and practices that each sector’s field training should follow. As a result, Border Patrol officials are not confident that all new trainees currently receive consistent postacademy field training. Moreover, the addition of new training expectations may complicate this situation. The Border Patrol is in the process of developing a uniform field training program that it plans to implement beginning in fiscal year 2008. While Border Patrol officials are confident that the academy can accommodate the large influx of new trainees anticipated over the next 2 years, the larger challenge will be the sectors’ capacity to provide adequate supervision and training. The rapid addition of new agents along the southwest border, coupled with the planned transfer of more experienced agents to the northern border, will likely reduce the overall experience level of agents assigned to the southwest border. In turn, the Border Patrol will be faced with relying on a higher proportion of less seasoned agents to supervise these new agents. In addition, the possible shifting of some training from the academy to the sectors could increase demand for experienced agents to serve as field training officers. Moreover, without a standardized field training program, training has not been consistent from sector to sector, a fact that has implications for the sectors’ ability to add new training requirements and possibly consequences for how well agents will perform their duties. To ensure that these new agents become proficient in the safe, effective, and ethical performance of their duties, it will be extremely important that new agents have the appropriate level of supervision and that the Border Patrol have a sufficient number of field training officers and a standardized field training program. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other members of the subommittee may have at this time. For further information about this testimony, please contact me at (202) 512-8816 or by e-mail at Stanar@gao.gov. Key contributors to this testimony were Michael Dino, Assistant Director; Mark Abraham; E. Jerry Seigler; and Julie Silvers. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In May 2006, the President called for comprehensive immigration reform that included strengthening control of the country's borders by, among other things, adding 6,000 new agents to the U.S. Border Patrol by the end of December 2008. This unprecedented 48 percent increase over 2 years raises concerns about the ability of the Border Patrol's basic training program to train these new agents. This testimony is based on a recent report for the ranking member of this subcommittee on the content, quality, and cost of the Border Patrol's basic training program for new agents and addresses (1) the extent to which the Border Patrol's basic training program exhibits the attributes of an effective training program and the changes to the program since September 11, 2001; (2) the cost to train a new agent and how this compares to the costs of other similar law enforcement basic training programs; and (3) any plans the Border Patrol has developed or considered to improve the efficiency of its basic training program. To address these issues, GAO reviewed relevant documents; observed classroom training and exercises at the Border Patrol Academy in Artesia, New Mexico; assessed the methodologies of training cost estimates; and interviewed Border Patrol officials. The Border Patrol's basic training program exhibits attributes of an effective training program. GAO's training assessment guide suggests the kinds of documentation to look for that indicate that a training program has a particular attribute in place. The Border Patrol's training program included all of the applicable key attributes of an effective training program. The core curriculum used at the Border Patrol Academy has not changed since September 11, but the Border Patrol added new material on responding to terrorism and practical field exercises. Border Patrol officials are confident that the academy can accommodate the large influx of new trainees anticipated over the next 2 years. In fiscal year 2006, the average cost to train a new Border Patrol agent at the academy was about $14,700. While differences in programs make a direct comparison difficult, it appears that the Border Patrol's average cost per trainee at the academy is consistent with that of training programs that cover similar subjects and prepare officers for operations in similar geographic areas. For example, the estimated average cost per trainee for a Bureau of Indian Affairs police officer was about $15,300; an Arizona state police officer, $15,600; and a Texas state trooper, $14,700. The Border Patrol is considering several alternatives to improve the efficiency of basic training delivery at the academy and to return agents to the field more quickly. For example, in October 2007 the Border Patrol plans to implement a proficiency test for Spanish that should allow those who pass the test to shorten their time at the academy by about 30 days. The Border Patrol is also considering what training it can shift from the academy to postacademy training conducted in the field, which could further reduce the amount of time trainees spend at the academy. However, Border Patrol officials have expressed concerns with having a sufficient number of experienced agents available to serve as first-line supervisors and field training officers. The Border Patrol also currently lacks uniform standards and practices for field training, and shifting additional training responsibilities to the field could complicate this situation.

The ability to accurately and reliably measure pollutant concentrations is vital to successfully implementing GLI water quality criteria. Without this ability, it is difficult for states to determine if a facility’s discharge is exceeding GLI water quality criteria and if a discharge limits are required. For example, because chlordane has a water quality criterion of 0.25 nanograms per liter but can only be measured down to a level of 14 nanograms per liter, it cannot always be determined if the pollutant is exceeding the criterion. As we reported in 2005, developing the analytical methods needed to measure pollutants at the GLI water quality criteria level is a significant challenge to fully achieving GLI goals. Although methods have been developed for the nine BCCs for which GLI water quality criteria have been established, EPA has only approved the methods to measure mercury and lindane below GLI’s stringent criteria levels. Analytical methods for the other BCCs either have not received EPA approval or cannot be used to reliably measure to GLI criteria levels. Once EPA approves an analytical method, Great Lakes states are able to issue point source permits that require facilities to use that method unless the EPA region has approved an alternative procedure. According to EPA officials, specific time frames for developing and approving methods that measure to GLI criteria have not yet been established. EPA officials explained that developing EPA-approved methods can be a time- consuming and costly process. Table 1 shows the status of the methods for the nine BCCs. As we reported in 2005, if pollutant concentrations can be measured at or below the level established by GLI water quality criteria, enforceable permit limits can be established on the basis of these criteria. The Great Lakes states’ experience with mercury illustrates the impact of sufficiently sensitive measurement methods on identifying pollutant discharges from point sources. Methods for measuring mercury at low levels were generally not available until EPA issued a new analytical method in 1999 to measure mercury concentrations below the GLI water quality criterion of 1.3 nanograms per liter of water. This more sensitive method disclosed a more pervasive problem of high mercury levels in the Great Lakes Basin than previously recognized and showed, for the first time, that many facilities had mercury levels in their discharges that were exceeding water quality criteria. Since this method was approved, the number of permits with discharge limits for mercury rose from 185 in May 2005 to 292 in November 2007. Moreover, EPA and state officials are expecting this trend to continue. As EPA officials explained, it may take up to two permit cycles—permits are generally issued for 5-year periods—-to collect the monitoring data needed to support the inclusion of discharge limits in permits. EPA officials are expecting a similar rise in permits with discharge limits for polychlorinated biphenyls (PCBs) when detection methods are approved. Permit flexibilities often allow facilities’ discharges to exceed GLI water quality criteria. These flexibilities can take several forms, including the following: Variance. Allows dischargers to exceed the GLI discharge limit for a particular pollutant specified in their permit. Compliance schedule. Allows dischargers a grace period of up to 5 years in complying with a permitted discharge limit. Pollutant Minimization Program (PMP). Sets forth a series of actions by the discharger to improve water quality when the pollutant concentration cannot be measured down to the water quality criterion. A PMP is often used in conjunction with a variance. Mixing Zone. Allows dischargers to use the areas around a facility’s discharge pipe where pollutants are mixed with cleaner receiving waters to dilute pollutant concentrations. Within the mixing zone, concentrations of pollutants are generally allowed to exceed water quality criteria as long as standards are met at the boundary of the mixing zone. This flexibility expires in November 2010 with some limited exceptions. These flexibilities are generally only available to permit holders that operated before March 23, 1997, and are in effect for 5 years or the length of the permit. GLI allows states to grant such permit flexibilities under certain circumstances, such as when the imposition of water quality standards would result in substantial and widespread economic and social impacts. Table 2 shows the number and type of BCC permit flexibilities being used as of November 2007 in the Great Lakes Basin for mercury, PCBs, and dioxin, as well as BCC discharge limits contained in permits. According to EPA and state officials, in many cases, facilities cannot meet GLI water quality criteria for a number of reasons, such as technology limitations, and the flexibilities are intended to give the facility time to make progress toward meeting the GLI criteria. With the exception of compliance schedules, the GLI allows for the repeated use of these permit flexibilities. As a result, EPA and state officials could not tell us when the GLI criteria will be met. In our 2005 report, we described several factors that were undermining EPA’s ability to ensure progress toward achieving consistent implementation of GLI water quality standards. To help ensure full and consistent implementation of the GLI and to improve measures for monitoring progress toward achieving GLI’s goals, we made a number of recommendations to the EPA Administrator. EPA has taken some actions to implement the recommendations contained in our 2005 report, as the following indicates: Ensure the GLI Clearinghouse is fully developed. We noted that EPA’s delayed development of the GLI Clearinghouse—a database intended to assist the states in developing consistent water quality criteria for toxic pollutants—was preventing the states from using this resource. To assist Great Lakes states in developing water quality criteria for GLI pollutants, we recommended that EPA ensure that the GLI Clearinghouse was fully developed, maintained, and made available to Great Lakes states. EPA launched the GLI Clearinghouse on its Web site in May 2006 and in February 2007, EPA Region 5 provided clearinghouse training to states. The clearinghouse currently contains criteria or toxicity information for 395 chemicals. EPA officials told us that the clearinghouse is now available to the states so they can independently calculate water quality criteria for GLI pollutants. EPA officials told us that some states, including Ohio, Wisconsin, and Illinois, plan on updating their water quality standards in the near future and believe that the clearinghouse will benefit them as well as other states as they update their standards. Gather and track information to assess the progress of GLI implementation. In 2005, we reported that EPA’s efforts to assess progress in implementing the GLI and its impact on reducing point source discharges have been hampered by lack of information on these discharges. To improve EPA’s ability to measure progress, we recommended that EPA gather and track information on dischargers’ efforts to reduce pollutant loadings in the basin. EPA has begun to review the efforts and progress made by one category of facilities— municipal wastewater treatment facilities—to reduce their mercury discharges into the basin. However, until EPA develops additional sources of information, it will not have the information needed to adequately assess progress toward meeting GLI goals. Increase efforts to resolve disagreements with Wisconsin. Although we found that the states had largely completed adoption of GLI standards, EPA had not resolved long-standing issues with Wisconsin regarding adoption and implementation of GLI provisions. To ensure the equitable and timely implementation of GLI by all the Great Lakes states, we recommended that that the EPA Administrator direct EPA Region 5, which is responsible for Wisconsin, to increase efforts to resolve disagreements with the state over inconsistencies between the state’s and the GLI’s provisions. Wisconsin officials believe the GLI provisions are not explicitly supported by Wisconsin law. Subsequently, EPA and Wisconsin officials have held discussions on this matter, and neither Wisconsin nor EPA officials believe that these disagreements are significantly affecting GLI implementation. However, they have been unable to completely resolve these issues. We found that similar issues have also surfaced with New York. Issue a permitting strategy for mercury. Because we found that Great Lakes’ states had developed inconsistent approaches for meeting the GLI mercury criterion, including differences in the use of variances, we recommended that EPA issue a permitting strategy to ensure a more consistent approach. EPA disagreed with this recommendation, asserting that a permitting strategy would not improve consistency. Instead, the agency continued to support state implementation efforts by developing guidance for PMPs, evaluating and determining compliance, and assessing what approaches are most effective in reducing mercury discharges by point sources. One such effort is EPA Region 5’s review of mercury PMP language in state-issued permits for wastewater treatment facilities. This review resulted in recommendations to the states in May 2007 to improve the enforceability and effectiveness of PMP provisions. However, additional efforts will be needed to ensure consistency at other types of facilities, such as industrial sites, across the Great Lakes states. In closing, Madam Chairwoman and Members of the Subcommittee, although progress has been made with mercury detection and increased knowledge of wastewater treatment facilities’ pollutant discharges to the Great Lakes, information is still lacking on the full extent of the problem that BCCs pose in the Great Lakes. As methods are developed to determine whether facilities’ discharges for other BCCs meet GLI criteria and EPA approves them, and as more permits include discharge limits, more information will be available on pollutant discharges in the basin. Even with these advances, however, extensive use of permit flexibilities could continue to undercut reductions in pollution levels and the ultimate achievement of GLI’s goals. This concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have at this time. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. For further information about this testimony, please contact David Maurer at (202) 512-3841 or maurerd@gao.gov. Key contributors to this testimony were Greg Carroll, Katheryn Summers Hubbell, Sherry L. McDonald, and Carol Herrnstadt Shulman. Other contributors included Jeanette Soares and Michele Fejfar. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Millions of people in the United States and Canada depend on the Great Lakes for drinking water, recreation, and economic livelihood. During the 1970s, it became apparent that pollutants discharged into the Great Lakes Basin from point sources, such as industrial and municipal facilities, or from nonpoint sources, such as air emissions from power plants, were harming the Great Lakes. Some of these pollutants, known as bioaccumulative chemicals of concern (BCC), pose risks to fish and other species as well as to the humans and wildlife that consume them. In 1995, the Environmental Protection Agency (EPA) issued the Great Lakes Initiative (GLI). The GLI established water quality criteria to be used by states to establish pollutant discharge limits for some BCCs and other pollutants that are discharged by point sources. The GLI also allows states to include flexible permit implementation procedures (flexibilities) that allow facilities' discharges to exceed GLI criteria. This testimony is based on GAO's July 2005 report, Great Lakes Initiative: EPA Needs to Better Ensure the Complete and Consistent Implementation of Water Quality Standards (GAO-05-829) and updated information from EPA and the Great Lakes states. This statement addresses (1) the status of EPA's efforts to develop and approve methods to measure pollutants at the GLI water quality criteria levels, (2) the use of permit flexibilities, and (3) EPA's actions to implement GAO's 2005 recommendations. As GAO reported in 2005, developing the sensitive analytical methods needed to measure pollutants at the GLI water quality criteria level is a significant challenge to achieving GLI's goals. Of the nine BCCs for which criteria have been established, only two--mercury and lindane--have EPA-approved methods that will measure below those criteria levels. Measurement methods for the other BCCs are either not yet approved or cannot reliably measure to GLI criteria. Without such measurement, it is difficult for states to determine whether a facility is exceeding the criteria and if discharge limits are required in the facility's permit. As methods become available, states are able to include enforceable discharge limits in facilities' permits. For example, since EPA approved a more sensitive method for mercury in 1999, the number of permits with mercury limits has increased from 185 in May 2005 to 292 in November 2007. EPA and state officials expect this trend to continue. Similar increases may occur as more sensitive analytical methods are developed and approved for other BCCs. Flexibilities included in permits allow facilities' discharges to exceed GLI water quality criteria. For example, one type of flexibility--variances--will allow facilities to exceed the GLI criteria for a pollutant specified in their permits. Moreover, the GLI allows the repeated use of some of these permit flexibilities, and does not set a time frame for facilities to meet the GLI water quality criteria. As a result, EPA and state officials do not know when the GLI criteria will be met. In the 2005 report, GAO made a number of recommendations to EPA to help ensure full and consistent implementation of the GLI and to improve measures for monitoring progress toward achieving GLI's goals. EPA has taken some actions to implement the recommendations. For example, EPA has begun to review the efforts and progress made by one category of facilities--municipal wastewater treatment plants--to reduce their mercury discharges into the basin. However, until EPA gathers more information on the implementation of GLI and the impact it has had on reducing pollutant discharges from point sources, as we recommended, it will not be able to fully assess progress toward GLI goals.

Before 2006, companies choosing to participate in the Medicare Advantage program were required to annually submit an ACRP to CMS for review and approval for each plan they intended to offer. The ACRP consisted of two parts—a plan benefit package and the adjusted community rate (ACR). The plan benefit package contained a detailed description of the benefits offered, and the ACR contained a detailed description of the estimated costs to provide the package of benefits to an enrolled Medicare beneficiary. These costs were to be calculated based on how much a plan would charge a commercial customer to provide the same benefit package if its members had the same expected use of services as Medicare beneficiaries. CMS made payments to the companies monthly in advance of rendering services. In 2003, Congress enacted the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA). MMA included provisions that established a bid submission process to replace the ACRP submission process, as well as a new prescription drug benefit, both effective for 2006. Under the bid process, an organization choosing to participate in Medicare Advantage is required to annually submit a bid for review and approval for each plan they intend to offer. The bid submission includes the organization’s estimate of the cost of delivering services (submitted on a bid form) to an enrolled Medicare beneficiary and a plan benefit package that provides a detailed description of the benefits offered. In addition, each MA organization and prescription drug plan that offers prescription drug benefits under Part D is required to submit a separate prescription drug bid form, a formulary, and a plan benefit package to CMS for its review and approval. On the bid forms, MA organizations include an estimate of the per-person cost of providing Medicare-covered services. BBA requires CMS to annually audit the submissions of one-third of MA organizations. In defining what constituted an organization for the purpose of selecting one-third for audit, CMS officials explained that they determined the number of participating organizations based on the number of contracts they awarded. Under each contract, an organization can offer multiple plans. Further, an organization like Humana Inc. can have multiple contracts. CMS contracts with accounting and actuarial firms to perform these audits. For audits of the contract year 2006 bid forms, CMS contracted in September 2005 with six firms. CMS gave the auditors guidance. It is important to note that the audit guidance includes procedures to verify information used in the projection or estimation of costs submitted in the bids, not actual results or costs each year, as the bids do not report actual costs. According to our analysis of available CMS data, CMS did not meet the statutory requirement to audit the financial records of at least one-third of the participating MA organizations for contract years 2001 through 2005, nor has it done so yet for the 2006 bid submissions. We performed an analysis to determine whether CMS had met the requirement because CMS could not provide documentation to support the method it used to select the ACRs and bids for audit, nor did CMS document whether or how it met the one-third requirement for contract years 2001 through 2006. Our analysis shows that between 18.6 and 23.6 percent, or fewer than one- third, of the MA organizations (as defined by the number of contracts each year) for contract years 2001 through 2005 were audited each year. Similarly, we determined that only 13.9 percent of the MA organizations and prescription drug plans with approved bids for 2006 were audited, as of the end of our review. Table 1 summarizes our results. As stated earlier, CMS selects organizations to meet the one-third audit requirement based on the number of contracts awarded and not the total number of plans offered under each contract. However, to present additional perspective, we also analyzed the percentage of plans audited of the total number of plans offered by each audited organization. Our analysis shows that with the exception of contract year 2002, the level of audit coverage achieved by CMS audits has progressively decreased in terms of the percentage of plans audited for those organizations that were audited. Audit coverage has also decreased in terms of the percentage of plans audited of all plans offered by participating organizations each contract year. In contract year 2006, a large increase in the number of bid submissions meant that the 159 plans audited reflected only 3.2 percent of all the plans offered. Table 2 summarizes our analysis. Regarding contract years 2001 through 2004, CMS officials told us that they did not know how the MA organizations were selected for audit, and the documentation supporting the selections was either not created or not retained. For contract year 2005 audits, CMS officials told us that the selection criteria included several factors. They said that the criteria considered included whether the MA organization had been audited previously and whether it had significant issues. With respect to contract year 2006, CMS officials acknowledged the one- third requirement, but they stated that they did not intend for the audits of the 2006 bid submissions to meet the one-third audit requirement. They explained that they plan to conduct other reviews of the financial records of MA organizations and prescription drug plans to meet the requirement for 2006. In September 2006, CMS hired a contractor to develop the agency’s overall approach to conducting reviews to meet the one-third requirement. Draft audit procedures prepared by the contractor in May 2007, indicate that CMS plans to review solvency, risk scores, related parties, direct medical and administrative costs, and, where relevant, regional preferred provider organizations’ (RPPO) cost reconciliation reports for MA bids. For Part D bids, CMS indicated it also plans to review other areas, including beneficiaries’ true out-of-pocket costs. However, when our review ended, CMS had not yet clearly laid out how these reviews will be conducted to meet the one-third requirement. Further, CMS is not likely to complete these other financial reviews until almost 3 years after the bid submission date (see figure 1) for each contract year, in part because it must first reconcile payment data that prescription drug plans are not required to submit to CMS until 6 months after the contract year is over. Such an extended cycle for conducting these reviews greatly limits their usefulness to CMS and hinders CMS’ ability to recommend and implement timely actions to address identified deficiencies in the MA organizations’ and prescription drug plans’ bid processes. In its audits for contract years 2001-2005, CMS did not consistently ensure that the audit process provided information needed for assessing the potential impact of errors on beneficiaries’ benefits or payments to the MA organizations. The auditors reported findings ranging from lack of supporting documentation to overstating or understating certain costs, but did not identify how the errors affected beneficiary benefits, copayments, or premiums. In addition, although the auditors categorized their results as findings and observations, with findings being more significant, depending on their materiality to the average payment rate reported in the ACR, the distinction between findings and observations, was based on judgment, and therefore varied among the different auditors. In our 2001 report, we reported that CMS planned to require auditors, where applicable, to quantify in their audit reports the overall impact of errors. Further, during the work for the 2001 report, CMS officials stated that they were in the process of determining the impact on beneficiaries and crafting a strategy for audit follow-up and resolution. CMS did not initiate any actions to attempt to determine such impact until after the contract year 2003 audits were completed. CMS took steps to determine such impact and identified a net of about $35 million from the contract year 2003 audits that beneficiaries could have received in additional benefits. The only audit follow-up action that CMS has taken regarding the ACR audits was to provide copies of the audit reports to the MA organizations and instruct them to take action in subsequent ACR filings. In CMS’ audits of the 2006 bid submissions, 18 (or about 23 percent) of the 80 organizations audited had material findings that have an impact on beneficiaries or plan payments approved in bids. CMS defined material findings as those that would result in changes in the total bid amount of 1 percent or more or in the estimate for the costs per member per month of 10 percent or more for any bid element. CMS officials told us that they will use the results of the bid audits to help organizations improve their methods in preparing bids in subsequent years and to help improve the overall bid process. Specifically, they told us they could improve the bid forms, bid instructions, training, and bid review process. CMS’ audit follow-up process has not involved pursuing financial recoveries from Medicare Advantage organizations based on audit results even when information was available on deficiencies or errors that could impact beneficiaries. CMS officials told us they do not plan to pursue financial recoveries from MA organizations based on the results of ACR or bid audits because the agency does not have the legal authority to do so. According to our assessment of the statutes, CMS has the authority to pursue financial recoveries, but its rights under contracts for 2001 through 2005 are limited because its implementing regulations did not require that each contract include provisions to inform organizations about the audits and about the steps that CMS would take to address identified deficiencies, including pursuit of financial recoveries. Regarding the bid process that began in 2006, our assessment of the statutes is that CMS has the authority to include terms in bid contracts that would allow it to pursue financial recoveries based on bid audit results. CMS also has the authority to sanction organizations, but it has not. CMS officials believe the bid audits provide a “sentinel or deterrent effect” for organizations to properly prepare their bids because they do not know when the bids may be selected for a detailed audit. Given the current audit coverage, CMS is unlikely to achieve significant deterrent effect, however, because only 13.9 percent of participating organizations for contract 2006 have been audited. Appropriate oversight and accountability mechanisms are key to protecting the federal government’s interests in using taxpayer resources prudently. When CMS falls short in meeting the statutory audit requirements and in a timely manner resolving the findings arising from those audits, the intended oversight is not achieved and opportunities are lost to determine whether organizations have reasonably estimated the costs to provide benefits to Medicare enrollees. Inaction or untimely audit resolution also undermines the presumed deterrent effect of audit efforts. While the statutory audit requirement does not expressly state the objective of the audits or how CMS should address the results of the audits, the statute does not preclude CMS from including terms in its contracts that allow it to pursue financial recoveries based on audit results. If CMS maintains the view that statute does not allow it to take certain actions, the utility of CMS’ efforts is of limited value. In our recent report, we made several recommendations to the CMS Administrator to improve processes and procedures related to its meeting the one-third audit requirement and audit follow-up. We also recommended that CMS amend its implementing regulations for the Medicare Advantage Program and Prescription Drug Program to provide that all contracts CMS enters into with MA organizations and prescription drug plan sponsors include terms that inform these organizations of the audits and give CMS authority to address identified deficiencies, including pursuit of financial recoveries. We further recommended that if CMS does not believe it has the authority to amend its implementing regulations for these purposes, it should ask Congress for express authority to do so. In response to our report, CMS concurred with our recommendations and stated it is in the process of implementing some of our recommendations. For information about this statement, please contact Jeanette Franzel, Director, Financial Management and Assurance, at (202) 512-9471 or franzelj@gao.gov or James Cosgrove, Acting Director, Health Care, at (202) 512-7029 or cosgrovej@gao.gov. Individuals who made key contributions to this testimony include Kimberly Brooks (Assistant Director), Christine Brudevold, Paul Caban, Abe Dymond, Jason Kirwan, and Diane Morris. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In fiscal year 2006, the Centers for Medicare & Medicaid Services (CMS) estimated it spent over $51 billion on the Medicare Advantage program, which serves as an alternative to the traditional feefor- service program. Under the Medicare Advantage program, CMS approves private companies to offer health plan options to Medicare enrollees that include all Medicare-covered services. Many plans also provide supplemental benefits. The Balanced Budget Act (BBA) of 1997 requires CMS to annually audit the financial records supporting the submissions (i.e., adjusted community rate proposals (ACRP) or bids) of at least onethird of participating organizations. BBA also requires that GAO monitor the audits. This testimony provides information on (1) the ACRP and bid process and related audit requirement, (2) CMS' efforts related to complying with the audit requirement, and (3) factors that cause CMS' audit process to be of limited value. Before 2006, companies choosing to participate in the Medicare Advantage program were annually required to submit an ACRP to CMS for review and approval. In 2006, a bid submission process replaced the ACRP process. The ACRPs and bids identify the health services the company will provide to Medicare members and the estimated cost for providing those services. CMS contracted with accounting and actuarial firms to perform the required audits. According to our analysis, CMS did not meet the requirement for auditing the financial records of at least one-third of the participating Medicare Advantage organizations for contract years 2001-2005. CMS is planning to conduct other financial reviews of organizations to meet the audit requirement for contract year 2006. However, CMS does not plan to complete the financial reviews until almost 3 years after the bid submission date each contract year, which will affect its ability to address any identified deficiencies in a timely manner. CMS did not consistently ensure that the audit process for contract years 2001-2005 provided information to assess the impact on beneficiaries. After contract year 2003 audits were completed, CMS took steps to determine such impact and identified an impact on beneficiaries of about $35 million. CMS audited contract year 2006 bids for 80 organizations, and 18 had a material finding that affected amounts in approved bids. CMS officials took limited action to follow up on contract year 2006 findings. CMS officials told us they do not plan to sanction or pursue financial recoveries based on these audits because the agency does not have the legal authority to do so. According to our assessment of the statutes, CMS had the authority to pursue financial recoveries, but its rights under contracts for 2001-2005 were limited because its implementing regulations did not require that each contract include provisions to inform organizations about the audits and about the steps that CMS would take to address identified deficiencies. Further, our assessment of the statute is that CMS has the authority to include terms in bid contracts that would allow it to pursue financial recoveries. Without changes in its procedures, CMS will continue to invest resources in audits that will likely provide limited value.

Since 1998 VA and DOD have been trying to achieve the capability to share patient health care data electronically. The original effort—the government computer-based patient record (GCPR) project—included the Indian Health Service (IHS) and was envisioned as an electronic interface that would allow physicians and other authorized users at VA, DOD, and IHS health facilities to access data from any of the other agencies’ health information systems. The interface was expected to compile requested patient information in a virtual record that could be displayed on a user’s computer screen. Our prior reviews of the GCPR project determined that the lack of a lead entity, clear mission, and detailed planning to achieve that mission made it difficult to monitor progress, identify project risks, and develop appropriate contingency plans. Accordingly, reporting on this project in April 2001 and again in June 2002, we made several recommendations to help strengthen the management and oversight of GCPR. Specifically, in 2001 we recommended that the participating agencies (1) designate a lead entity with final decision-making authority and establish a clear line of authority for the GCPR project, and (2) create comprehensive and coordinated plans that included an agreed-upon mission and clear goals, objectives, and performance measures, to ensure that the agencies could share comprehensive, meaningful, accurate, and secure patient health care data. In 2002, we recommended that the participating agencies revise the original goals and objectives of the project to align with their current strategy, commit the executive support necessary to adequately manage the project, and ensure that it followed sound project management principles. VA and DOD took specific measures in response to our recommendations for enhancing overall management and accountability of the project. By July 2002, VA and DOD had revised their strategy and had made some progress toward electronically sharing patient health data. The two departments had renamed the project the Federal Health Information Exchange (FHIE) program and, consistent with our prior recommendation, had finalized a memorandum of agreement designating VA as the lead entity for implementing the program. This agreement also established FHIE as a joint effort that would allow the exchange of health care information in two phases. The first phase, completed in mid-July 2002, enabled the one-way transfer of data from DOD’s existing health information system to a separate database that VA clinicians could access. A second phase, finalized this past March, completed VA’s and DOD’s efforts to add to the base of patient health information available to VA clinicians via this one-way sharing capability. The departments reported total GCPR/FHIE costs of about $85 million through fiscal year 2003. The revised strategy also envisioned the pursuit of a longer term, two-way exchange of health information between DOD and VA. Known as HealthePeople (Federal), this initiative is premised upon the departments’ development of a common health information architecture comprising standardized data, communications, security, and high-performance health information systems. The joint effort is expected to result in the secured sharing of health data required by VA’s and DOD’s health care providers between systems that each department is currently developing—DOD’s Composite Health Care System (CHCS) II and VA’s HealtheVet VistA. DOD began developing CHCS II in 1997 and has completed the development of its associated clinical data repository—a key component for the planned electronic interface. The department expects to complete deployment of all of its major system capabilities by September 2008. It reported expenditures of about $464 million for the system through fiscal year 2003. VA began work on HealtheVet VistA and its associated health data repository in 2001, and expects to complete all six initiatives comprising this system in 2012. VA reported spending about $120 million on HealtheVet VistA through fiscal year 2003. Under the HealthePeople (Federal) initiative, VA and DOD envision that, upon entering military service, a health record for the service member will be created and stored in DOD’s CHCS II clinical data repository. The record will be updated as the service member receives medical care. When the individual separates from active duty and, if eligible, seeks medical care at a VA facility, VA will then create a medical record for the individual, which will be stored in its health data repository. Upon viewing the medical record, the VA clinician would be alerted and provided access to the individual’s clinical information residing in DOD’s repository. In the same manner, when a veteran seeks medical care at a military treatment facility, the attending DOD clinician would be alerted and provided with access to the health information in VA’s repository. According to the departments, this planned approach would make virtual medical records displaying all available patient health information from the two repositories accessible to both departments’ clinicians. VA officials have stated that they anticipate being able to exchange some degree of health information through an interface of their health data repository with DOD’s clinical data repository by the end of calendar year 2005. While VA and DOD are making progress in agreeing to and adopting standards for clinical data, they continue to face significant challenges in providing a virtual medical record based on the two-way exchange of data as part of their HealthePeople (Federal) initiative. Specifically, VA and DOD do not have an explicit architecture that provides details on what specific technologies they will use to achieve the exchange capability; a fully established project management structure that will ensure the necessary day-to-day guidance of and accountability for the departments’ investment in and implementation of the exchange; and a project management plan describing the specific responsibilities of each department in developing, testing, and deploying the interface and addressing security requirements. VA’s and DOD’s ability to exchange data between their separate health information systems is crucial to achieving the goals of HealthePeople (Federal). Yet, successfully sharing health data between the departments via a secure electronic interface between each of their data repositories can be complex and challenging, and depends significantly on the departments’ having a clearly articulated architecture, or blueprint, defining how specific technologies will be used to achieve the interface. Developing, maintaining, and using an architecture is a best practice in engineering information systems and other technological solutions. An architecture would articulate, for example, the system requirements and design specifications, database descriptions, and software descriptions that define the manner in which the departments will electronically store, update, and transmit their data. VA and DOD lack an explicit architecture that provides details on what specific technologies they will use to achieve the exchange capability, or just what they will be able to exchange by the end of 2005—their projected date for having this capability operational. While VA officials stated that they recognize the importance of a clearly defined architecture, they acknowledged that the departments’ actions were continuing to be driven by the less specific, high-level strategy that has been in place since September 2002. Officials in both departments stated that a planned pharmacy prototype initiative, begun this past March in response to requirements of the National Defense Authorization Act of 2003, would assist them in defining the electronic interface technology needed to exchange patient health information. The act mandated that VA and DOD develop a real-time interface, data exchange, and capability to check prescription drug data for outpatients by October 1, 2004. In late February, VA hired a contractor to develop the planned prototype but the departments had not yet fully determined the approach or requirements for it. DOD officials stated that the contractor was expected to more fully define the technical requirements for the prototype. In late April, the departments reported approval of the contractor’s requirements and technical design for the prototype. While the pharmacy prototype may help define a technical solution for the two-way exchange of health information between the two departments’ existing systems, there is no assurance that this same solution can be used to interface the new systems under development. Because the departments’ new health information systems—major components of HealthePeople (Federal)—are scheduled for completion over the next 4 to 9 years, the prototype may only test the ability to exchange data in VA’s and DOD’s existing health systems. Thus, given the uncertainties regarding what capabilities the pharmacy prototype will demonstrate, it is difficult to predict how or whether the prototype initiative will contribute to defining the architecture and technological solution for the two-way exchange of patient health information for the HealthePeople (Federal) initiative. Industry best practices and information technology project management principles stress the importance of accountability and sound planning for any project, particularly an interagency effort of the magnitude and complexity of HealthePeople (Federal). Based on our past work, we have found that a project management structure should establish relationships between managing entities with each entity’s roles and responsibilities clearly articulated. Further, it is important to establish final decision- making authority with one entity. However, VA and DOD have not fully established a project management structure that will ensure the necessary day-to-day guidance of and accountability for the departments’ investment in and implementation of the two-way capability. According to officials in both departments a joint working group and oversight by the Joint Executive Council and VA/DOD Health Executive Council has provided the collaboration necessary for HealthePeople (Federal). However, this oversight by the executive councils is at a very high level, occurs either bimonthly or quarterly, and encompasses all of the joint coordination and sharing efforts for health services and resources. Since a lead entity has not been designated, neither department has had the authority to make final project decisions binding on the other. Further, the roles and responsibilities for each department have not been clearly articulated. Without a clearly defined project management structure, accountability and a means to monitor progress are difficult to establish. In early March, VA officials stated that the departments had designated a program manager for the planned pharmacy prototype and were establishing roles and responsibilities for managing the joint initiative to develop an electronic interface. Just this month, officials from both departments told us that this individual would be the program manager for the electronic interface. However, they had not yet designated a lead entity or provided documentation for the project management structure or their roles and responsibilities for the HealthePeople (Federal) initiative. An equally important component necessary for guiding the development of the electronic interface is a project management plan. Information technology project management principles and industry best practices emphasize that a project management plan is needed to define the technical and managerial processes necessary to satisfy project requirements. Specifically, the plan should include, among other things, the authority and responsibility of each organizational unit; a work breakdown structure for all of the tasks to be performed in developing, testing, and deploying the software, along with schedules associated with the tasks; and a security policy. However, the departments are currently operating without a project management plan for HealthePeople (Federal) that describes the specific responsibilities of each department in developing, testing, and deploying the interface and addressing security requirements. This month, officials from both departments stated that a pharmacy prototype project management plan that includes a work breakdown structure and schedule was developed in mid-March. They further stated that a work group that reports to the integrated project team has been given responsibility for the development of security and information assurance provisions. While these actions should prove useful in guiding the development of the prototype, they do not address the larger issue of how the departments will develop and implement an interface to exchange health care information between their systems by 2005. Without a project management plan, VA and DOD lack assurance that they can successfully develop and implement an electronic interface and the associated capability for exchanging health information within the time frames that they have established. VA and DOD officials stated that they have begun discussions to establish an overall project plan. Achieving an electronic interface that will enable VA and DOD to exchange patient medical records is an important goal, with substantial implications for improving the quality of health care and disability claims processing for the nation’s military members and veterans. In seeking a virtual medical record based on the two-way exchange of data between their separate health information systems, VA and DOD have chosen a complex and challenging approach that necessitates the highest levels of project discipline, including a well-defined architecture for describing the interface for a common health information exchange; an established project management structure to guide the investment in and implementation of this electronic capability; and a project management plan that defines the technical and managerial processes necessary to satisfy project requirements. These critical components are currently lacking; thus, the departments risk investing in a capability that could fall short of expectations. The continued absence of these components elevates concerns about exactly what capabilities VA and DOD will achieve—and when. To encourage significant progress on achieving the two-way exchange of health information, we recommend that the Secretaries of Veterans Affairs and Defense instruct the Acting Chief Information Officer for Health and the Chief Information Officer for the Military Health System, respectively, to develop an architecture for the electronic interface between their health systems that includes system requirements, design specifications, and software descriptions; select a lead entity with final decision-making authority for the initiative; establish a project management structure to provide day-to-day guidance of and accountability for their investments in and implementation of the interface capability; and create and implement a comprehensive and coordinated project management plan for the electronic interface that defines the technical and managerial processes necessary to satisfy project requirements and includes (1) the authority and responsibility of each organizational unit; (2) a work breakdown structure for all of the tasks to be performed in developing, testing, and implementing the software, along with schedules associated with the tasks; and (3) a security policy. The Secretary of Veterans Affairs provided written comments on a draft of this report and we received comments via e-mail from DOD’s Interagency Program Integration and External Liaison for Health Affairs; both concurred with the recommendations. Each department’s comments are reprinted in their entirety as appendixes I and II, respectively. In their comments, the officials also provided information on actions taken or underway that, in their view, address our recommendations. We are sending copies of this report to the Secretaries of Veterans Affairs and Defense and to the Director, Office of Management and Budget. Copies will also be available at no charge on GAO’s Web site at www.gao.gov. Should you have any question on matters contained in this report, please contact me at (202) 512-6240, or Barbara Oliver, Assistant Director, at (202) 512-9396. We can also be reached by e-mail at koontzl@gao.gov and oliverb@gao.gov, respectively. Other key contributors to this report were Michael P. Fruitman, Valerie C. Melvin, J. Michael Resser, and Eric L. Trout.

A critical element of the Department of Veterans Affairs' (VA) information technology program is its continuing work with the Department of Defense (DOD) to achieve the ability to exchange patient health care information and create electronic medical records for use by veterans, active-duty military personnel, and their health care providers. While VA and DOD continue to move forward in agreeing to and adopting standards for clinical data, they have made little progress since last winter toward defining how they intend to achieve an electronic medical record based on the two-way exchange of patient health data. The departments continue to face significant challenges in achieving this capability. VA and DOD lack an explicit architecture--a blueprint--that provides details on what specific technologies will be used to achieve the electronic medical record by the end of 2005. The departments have not fully implemented a project management structure that establishes lead decision-making authority and ensures the necessary day-to-day guidance of and accountability for their investment in and implementation of this project. They are operating without a project management plan describing the specific responsibilities of each department in developing, testing, and deploying the electronic interface. In seeking to provide a two-way exchange of health information between their separate health information systems, VA and DOD have chosen a complex and challenging approach--one that necessitates the highest levels of project discipline. Yet critical project components are currently lacking. As such, the departments risk investing in a capability that could fall short of what is expected and what is needed. Until a clear approach and sound planning are made integral parts of this initiative, concerns about exactly what capabilities VA and DOD will achieve--and when--will remain.

We defined the financial services industry to include the following sectors: depository credit institutions, which include commercial banks, thrifts (savings and loan associations and savings banks), and credit unions; holdings and trusts, which include investment trusts, investment companies, and holding companies; nondepository credit institutions, which extend credit in the form of loans, and which include federally sponsored credit agencies, personal credit institutions, and mortgage bankers and brokers; the securities sector, which is made up of a variety of firms and organizations (e.g., broker-dealers) that bring together buyers and sellers of securities and commodities, manage investments, and offer financial advice; and the insurance sector, including carriers and insurance agents that provide protection against financial risks to policyholders in exchange for the payment of premiums. The financial services industry is a major source of employment in the United States. EEO-1 data showed that the financial services firms we reviewed for this work, which have 100 or more staff, employed nearly 3 million people in 2004. Moreover, according to the U.S. Bureau of Labor Statistics, employment in the financial services industry was expected to grow at a rate of 1.4 percent annually from 2006 through 2016. EEO-1 data for 1993 through 2006 generally do not show substantial changes in representation by minorities and women at the management level in the financial services industry, but some racial/ethnic minority groups experienced more change in representation than others. Figure 1, which is based on information that we obtained in preparation for our June 2006 report, shows that overall management-level representation by minorities increased from 11.1 percent to 15.5 percent from 1993 through 2004. Specifically, African-Americans increased their representation from 5.6 percent to 6.6 percent, Asians from 2.5 percent to 4.5 percent, Hispanics from 2.8 percent to 4.0 percent, and American Indians from 0.2 to 0.3 percent. Management-level representation by white women was largely unchanged at slightly more than one-third during the period, while representation by white men declined from 52.2 percent to 47.2 percent. As shown in figure 2, EEO-1 data also show that the depository and nondepository credit sectors, as well as the insurance sector, were somewhat more diverse at the management level than the securities and holdings and trust sectors. In 2004, minorities held 19.9 percent of management-level positions in nondepository credit institutions, such as mortgage banks and brokerages, but 12.4 percent in holdings and trusts, such as investment companies. In preparation for this testimony, we contacted EEOC to obtain and analyze EEO-1 for 2006 and found that diversity remained about the same at the management level in the financial services industry (see fig. 3) as it had in previous years. For example, the 2006 EEO-1 data show that African-Americans and Asians represented about 6.4 percent and 5.0 percent, respectively, of all financial services managers in 2006. In addition, the 2006 EEO-1 data show that commercial banks and insurance companies continued to have higher representation by minorities and women at the management level than securities firms. However, it is important to keep in mind that EEO-1 data may actually overstate representation levels for minorities and white women in the most senior-level positions, such as Chief Executive Officers of large investment firms or commercial banks, because the category that captures these positions—“officials and managers”—covers all management positions. Thus, this category includes lower-level positions (e.g., Assistant Manager of a small bank branch) that may have a higher representation of minorities and women. Recognizing this limitation, starting in 2007, EEOC revised its data collection form for employers to divide the “officials and managers” category into two subcategories: “executive/senior-level officers and managers” and “first/midlevel officials.” We hope that the increased level of detail will provide a more accurate picture of diversity among senior managers in the financial services industry over time. However, it is too soon to assess the impact of this change on diversity measures at the senior management level. Officials from the firms that we contacted said that their top leadership was committed to implementing workforce diversity initiatives, but they noted that making such initiatives work was challenging. In particular, the officials cited ongoing difficulties in recruiting and retaining minority candidates and in gaining employees’ “buy-in” for diversity initiatives, especially at the middle management level. Minorities’ rapid growth as a percentage of the overall U.S. population, as well as increased global competition, have convinced some financial services firms that workforce diversity is a critical business strategy. Since the mid-1990s, some financial services firms have implemented a variety of initiatives designed to recruit and retain minority and women candidates to fill key positions. Officials from several banks said that they had developed scholarship and internship programs to encourage minority students to consider careers in banking. Some firms and trade organizations have also developed partnerships with groups that represent minority professionals and with local communities to recruit candidates through events such as conferences and career fairs. To help retain minorities and women, firms have established employee networks, mentoring programs, diversity training, and leadership and career development programs. Industry studies have noted, and officials from some financial services firms we contacted confirmed, that senior managers were involved in diversity initiatives. Some of these officials also said that this level of involvement was critical to success of a program. For example, according to an official from an investment bank, the head of the firm meets with all minority and female senior executives to discuss their career development. Officials from a few commercial banks said that the banks had established diversity “councils” of senior leaders to set the vision, strategy, and direction of diversity initiatives. A 2005 industry trade group study and some officials also noted that some companies were linking managers’ compensation with their progress in hiring, promoting, and retaining minority and women employees. A few firms have also developed performance indicators to measure progress in achieving diversity goals. These indicators include workforce representation, turnover, promotion of minority and women employees, and employee satisfaction survey responses. Officials from several financial services firms stated that measuring the results of diversity efforts over time was critical to the credibility of the initiatives and to justifying the investment in the resources such initiatives demanded. While financial services firms and trade groups we contacted had launched diversity initiatives, officials from these organizations, as well as other information, suggest that several challenges may have limited the success of their efforts. These challenges include the following: Recruiting minority and women candidates for management development programs. Available data on minority students enrolled in Master of Business Administration (MBA) programs suggest that the pool of minorities, a source that may feed the “pipeline” for management-level positions within the financial services industry and other industries, is relatively small. In 2000, minorities accounted for 19 percent of all students enrolled in MBA programs in accredited U.S. schools; in 2006, that student population had risen to 25 percent. Financial services firms compete for this relatively small pool not only with one another but also with firms from other industries. Fully leveraging the “internal” pipeline of minority and women employees for management-level positions. As shown in figure 4, there are job categories within the financial services industry that generally have more overall workforce diversity than the “official and managers” category, particularly among minorities. For example, minorities held 22 percent of “professional” positions in the industry in 2004 as compared with 15 percent of “officials and managers” positions. According to a 2006 EEOC report, the professional category represented a possible pipeline of available management-level candidates. The EEOC report states that the chances of minorities and women (white and minority combined) advancing from the professional category into management-level positions is lower when compared with white males. Retaining minority and women candidates that are hired for key management positions. Many industry officials said that financial services firms lack a critical mass of minority men and women, particularly in senior-level positions, to serve as role models. Without a critical mass, the officials said that minority or women employees may lack the personal connections and access to informal networks that are often necessary to navigate an organization’s culture and advance their careers. For example, an official from a commercial bank we contacted said he learned from staff interviews that African-Americans believed that they were not considered for promotion as often as others partly because they were excluded from informal employee networks needed for promotion or to promote advancement. Achieving the “buy-in” of key employees, such as middle managers. Middle managers are particularly important to the success of diversity initiatives because they are often responsible for implementing key aspects of such initiatives and for explaining them to other employees. However, some financial services industry officials said that middle managers may be focused on other aspects of their responsibilities, such as meeting financial performance targets, rather than the importance of implementing the organization’s diversity initiatives. Additionally, the officials said that implementing diversity initiatives represents a considerable cultural and organizational change for many middle managers and employees at all levels. An official from an investment bank told us that the bank has been reaching out to middle managers who oversaw minority and women employees by, for example, instituting an “inclusive manager program.” In closing, despite the implementation of a variety of diversity initiatives over the past 15 years, diversity at the management level in the financial services industry has not changed substantially. Further, diversity at the most senior management positions within the financial services industry may be lower than the overall industry management diversity statistics I have discussed today. While EEOC has taken steps to revise the EEO-1 data to better assess diversity within senior positions, this data may not be available for some period of time. Initiatives to promote management diversity at all levels within financial services firms appear to face several key challenges, such as recruiting and retaining candidates and achieving the “buy-in” of middle managers. Without a sustained commitment to overcome these challenges, management diversity in the financial services industry may continue to remain generally unchanged over time. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have. For further information about this testimony, please contact Orice M. Williams on (202) 512-8678 or at williamso@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Wesley M. Phillips, Assistant Director; Emily Chalmers; William Chatlos; Kimberly Cutright; Simin Ho; Marc Molino; and Robert Pollard. 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As the U.S. workforce has become increasingly diverse, many private and public sector organizations have recognized the importance of recruiting and retaining minority and women candidates for key positions. However, previous congressional hearings have raised concerns about a lack of diversity at the management level in the financial services industry, which provides services that are essential to the continued growth and economic prosperity of the country. This testimony discusses findings from a June 2006 GAO report and more recent work on diversity in the financial services industry. Specifically, GAO assesses (1) what the available data show about diversity at the management level from 1993 through 2006 and (2) steps that the industry has taken to promote workforce diversity and the challenges involved. To address the testimony's objectives, GAO analyzed data from the Equal Employment Opportunity Commission (EEOC); reviewed select studies; and interviewed officials from financial services firms, trade organizations, and organizations that represent minority and women professionals. GAO's June 2006 report found that, from 1993 through 2004, overall diversity at the management level in the financial services industry did not change substantially, but some racial/ethnic minority groups experienced more change in representation than others. EEOC data show that management-level representation by minority women and men increased overall from 11.1 percent to 15.5 percent during the period. Specifically, African-Americans increased their representation from 5.6 percent to 6.6 percent, Asians from 2.5 percent to 4.5 percent, Hispanics from 2.8 percent to 4.0 percent, and American Indians from 0.2 percent to 0.3 percent. In preparation for this testimony, GAO collected EEOC data for 2006, which shows that diversity at the management level in the financial services industry remained about the same as it had in previous years. Financial services firms and trade groups have initiated programs to increase workforce diversity, but these initiatives face challenges. The programs include developing scholarships and internships, partnering with groups that represent minority professionals, and linking managers' compensation with their performance in promoting a diverse workforce. Some firms have developed indicators to measure progress in achieving workforce diversity. Industry officials said that among the challenges these initiatives face are recruiting and retaining minority candidates, as well as gaining the "buy-in" of key employees, such as the middle managers who are often responsible for implementing such programs. Without a sustained commitment to overcoming these challenges, diversity at the management level may continue to remain generally unchanged over time.

The American Diabetes Association’s (ADA) clinical care recommendations, which reflect the published research evidence and expert opinion, are widely accepted as guidance on what constitutes quality diabetes care. We selected for review six of ADA’s recommended monitoring services that can be measured using Medicare claims data (see table 1). The service frequencies recommended in table 1 generally apply to the average person with noninsulin-dependent diabetes, the type that accounts for more than 90 percent of diabetics in Medicare. Of course, some individuals may need more or fewer services depending on their age, medical condition, whether they use insulin, or how well their blood sugar is controlled. Eye exam (dilated) Flu shot (in season) As figure 1 shows, our cohort of about 168,000 Medicare beneficiaries with diabetes in fee-for-service delivery fell far short of the recommended frequencies of most monitoring services in 1994. Although 94 percent of the beneficiaries received at least two physician visits, less than half (42 percent) received an eye exam, only 21 percent received the recommended two glycohemoglobin tests, and 53 percent had a urinalysis. The fact that 70 percent received a serum cholesterol test may reflect both the successful public education campaign in the late 1980s and the frequent inclusion of cholesterol in automated blood tests. We believe the flu shot (44 percent) is underreported in Medicare claims data, because many people receive flu shots in nonmedical settings. Utilization rates are even lower when the monitoring services are considered as a unit. (See fig. 2.) About 12 percent of our diabetes cohort did not receive any of four key monitoring services: at least one each of the eye exam, glycohemoglobin test, urinalysis, and serum cholesterol test. About 11 percent showed Medicare claims for all four of these services. We analyzed utilization rates by patient characteristics and found that rates were generally similar for men and women and for all age groups over age 65. However, only 28 percent of beneficiaries under age 65 (who were eligible for Medicare because of disability) received an eye exam, compared with 43 percent of those aged 65 to 74 and 44 percent of those 75 and older. We also found that white beneficiaries with diabetes received the six monitoring services at consistently higher rates than beneficiaries who were black or of another racial group, but the differences were not great. We were unable to conduct a similar analysis of the six monitoring services’ use rates among beneficiaries with diabetes who were enrolled in Medicare HMOs because HCFA does not require its HMO contractors to report patient-specific utilization data. According to the limited data we obtained from published research and other sources, however, it appears that use rates are also below recommended levels in Medicare HMOs. Although it is unclear what specifically accounts for the less-than-recommended use of monitoring services found in our study, a number of factors—including patient and physician attitudes and practices—may contribute to the situation. Some experts expressed concern that both patients and physicians need to take diabetes more seriously and make the effort to manage it more aggressively. Patients with a chronic condition such as diabetes bear much of the responsibility for successful disease management; but for many patients, self-management does not become a priority until serious complications develop. Then, difficult lifestyle changes may be required, such as weight loss, smoking cessation, and increased exercise. Patients may lack the knowledge, motivation, and adequate support systems to make these changes in addition to undertaking the active self-monitoring and preventive service regimens that are necessary to control diabetes. The substantial out-of-pocket costs of active self-management also may discourage Medicare beneficiaries with diabetes. Diabetes-related supplies that are used at home, such as insulin, syringes, and blood glucose-testing strips, are not fully covered by Medicare. For example, insulin costs about $40 to $70 for a 90-day supply, syringes cost $10 to $15 per 100, and glucose-testing strips cost 50 to 72 cents each (or about $1,000 a year for a diabetic who tests four times a day). Another factor in the underutilization of recommended preventive and monitoring services may be physicians and other health care providers who are not familiar with the latest diabetes guidelines and research supporting the efficacy of treatment. Moreover, many Medicare beneficiaries with diabetes have several serious medical conditions, and in the limited time of a patient visit, a physician is likely to focus on the patient’s most urgent concerns, perhaps neglecting ongoing diabetes management and patient education. Finally, managed care plans and physician practices alike tend to lack service-tracking systems capable of reminding physicians and patients when routine preventive and monitoring services are needed. range of diabetes management efforts, and a few were developing comprehensive programs; but most plans’ efforts were limited primarily to educational approaches. Most efforts were initiated recently, and little is known yet about their effectiveness. Every HMO in our survey reported using at least one approach to educate enrollees with diabetes about appropriate diabetes management. The most common approach—used by 82 of the 88 plans—was featuring articles about diabetes in publications for all enrollees. In addition, some plans provided comprehensive manuals to their diabetic enrollees. Sixty-eight HMOs reported having diabetes-related health professionals, such as nurses, certified diabetes educators, and nutritionists available to educate enrollees. A number of plans offered classes for several levels of diabetes education ranging from basic to advanced. Ten plans contracted with disease management companies to provide diabetes education services, and a few reported telephone advice services. Most of the HMOs reported they also had undertaken educational efforts directed to their physicians, stressing the importance of preventive care through such means as written materials and meetings. Nearly three-fourths of the HMOs reported using clinical practice guidelines for diabetes care. In one HMO, endocrinologists meet regularly with small groups of primary care physicians to provide training on important diabetes topics, such as diabetic eye disease and foot care. This plan also has developed a physician training video on diabetic foot care. Although information and education may produce short-term behavioral changes, they may not be enough to sustain the long-term behavioral and lifestyle changes necessary to achieve good diabetes control. Recognizing this, many of the HMOs in our survey reported using additional approaches to continuously encourage appropriate diabetes management. For example, about half of the HMOs reported one or more types of reminders for enrollees and physicians, such as wallet-sized scorecards for enrollees to chart receipt of recommended services and posters in examining rooms reminding patients to take off their shoes and socks to prompt physicians to check their feet. As another example, 52 of the 62 plans that used clinical practice guidelines for diabetes reported having a system to monitor physicians’ compliance with the guidelines and, in some cases, to provide feedback to the physicians. In our follow-up interviews with 12 HMOs that reported using a variety of diabetes services, 5 told us they have committed substantial resources to develop systemwide, comprehensive diabetes management programs. For example, one HMO has based its approach to diabetes management around the long-term goals of improving patient health status and satisfaction as well as on plan performance on cost and utilization. Through a variety of interventions, such as diabetes care clinics, patient self-management notebooks, and diabetes education by telephone, this HMO tries to improve patient outcome measures ranging from improved blood glucose control and prevention of microvascular disease to the patient’s assessment of improved quality of life and sense of well-being. Interventions designed to help physicians provide better diabetes care include an online diabetes registry updated monthly, use of evidence-based clinical practice guidelines, outcomes reports for physicians, and training by diabetes expert teams. Even the HMOs reporting the most comprehensive programs, however, generally had little information about the extent to which their diabetes management approaches had affected the use of recommended preventive and monitoring services. At best, they tended to collect utilization data on five or fewer services, and they began collecting these data only in 1993 or 1994. The service monitored most frequently, by 58 of the plans, was the diabetic eye exam. This was probably due to the eye exam’s inclusion in HEDIS (the Health Plan Employer Data and Information Set), the performance-reporting system for commercial HMOs. Although little information exists on the relative effectiveness of specific diabetes management approaches, experts generally believe that intensive and sustained interventions, such as in-person counseling and education rather than telephone calls or mailings, are most likely to support long-term behavior change. Because intensive interventions probably are more expensive than other approaches, it is important to measure their effectiveness before committing resources to them. diabetes as well as patient and provider education about diabetes and practice guidelines. HCFA works with local peer review organizations (PRO), each of which currently is required to implement at least one diabetes-related quality improvement project involving the providers in its state or states. A total of 33 diabetes-related projects were under way in late 1996. Finally, HCFA is sponsoring a multistate evaluation of diabetes intervention strategies, the Ambulatory Care Diabetes Project, which involves fee-for-service and HMO providers and PROs in eight states. The project has completed its baseline data collection and intervention stages, and began remeasurement for outcomes analysis in January 1997. HCFA also wants to encourage development of better data collection systems for improved service utilization tracking. The agency anticipates requiring its Medicare HMO contractors to report the new HEDIS 3.0 performance measures, which include the diabetic eye exam and flu shot rates, and may add a measure of the glycohemoglobin test in the future. Moreover, HCFA is supporting research on other process- and outcomes-based performance measurement systems and is considering testing the feasibility of performance measurements in fee-for-service Medicare. Like the diabetes management approaches we learned about in our survey of Medicare HMOs, HCFA’s initiatives either have been undertaken recently or are still in the planning stages, and it is too soon to tell which of these projects will prove most effective. At the same time, some diabetes specialists have suggested that HCFA should be doing more, such as studying the effects of easing current coverage limitations on diabetes self-management training and supplies like blood-testing strips. Diabetes care is a microcosm of the challenges facing the nation’s health care system in managing chronic illnesses among the elderly. The prevalence and high cost of diabetes make it an opportune target for better management efforts. When beneficiaries receive less than the recommended levels of preventive and monitoring services, the result may be increased medical complications and Medicare costs. Conversely, following the recommendations may enhance beneficiaries’ quality of life. physicians. Among HMOs, where coordinated care and prevention are expected to receive special emphasis, many plans are exploring ways to improve diabetes management; but providers may be reluctant to invest in expensive approaches until their cost-effectiveness is more evident. HCFA, also recognizing the importance of this issue, has initiated a promising strategy of testing a variety of approaches to learn what works best in Medicare—that is, what is effective and what can be implemented at reasonable cost. Mr. Chairman, this concludes my statement. I would be happy to answer any questions from you and other members of the Subcommittee. Thank you. This testimony was prepared under the direction of Bernice Steinhardt, Director, Health Services Quality and Public Health Issues, who may be reached at (202) 512-7119 if there are any questions. Other key contributors include Rosamond Katz, Assistant Director, and Ellen M. Smith, Jennifer Grover, Evan Stoll, and Stan Stenersen, Evaluators. 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GAO discussed its recent report on preventive and monitoring services provided to Medicare beneficiaries with diabetes, focusing on: (1) the extent to which Medicare beneficiaries with diabetes receive recommended levels of preventive and monitoring services; (2) what Medicare health maintenance organizations (HMO) are doing to improve delivery of recommended diabetes services; and (3) the activities that the Health Care Financing Administration (HCFA) supports to address these service needs for Medicare beneficiaries with diabetes. GAO noted that: (1) while experts agree that regular use of preventive and monitoring services can help minimize the complications of diabetes, most Medicare beneficiaries with diabetes do not receive these services at recommended intervals; (2) this is true both in traditional fee-for-service Medicare, which serves about 90 percent of all beneficiaries, and in managed care delivery; (3) the efforts of Medicare HMOs to improve diabetes care have been varied but generally limited, with most plans reporting that they have focused on educating their enrollees with diabetes about self-management and their physicians about the need for preventive and monitoring services; (4) very few plans have developed comprehensive diabetes management programs; and (5) at the federal level, HCFA has targeted diabetes for special emphasis and has begun to test preventive care initiatives, but like the HMOs, HCFA's efforts are quite recent and the agency does not yet have results that would allow it to evaluate effectiveness.

In its April 2013 report to Congress, in response to the National Defense Authorization Act for Fiscal Year 2013 requirement that DOD provide a cost-benefit analysis and a risk-based assessment of the Aerospace Control Alert mission as it relates to expected future changes to the budget and force structure of such mission,report on any new analyses because, according to DOD officials, DOD was not weighing competing Aerospace Control Alert basing location alternatives in response to any future budget or force structure changes. DOD reported on its previous analyses that consisted of (1) three risk assessments DOD conducted to support the 2012 decision that determined which two alert basing locations could be reduced with the least amount of risk and (2) cost savings estimates DOD developed after making the 2012 decision to take two alert basing locations (one in Duluth, Minnesota, and the other in Langley, Virginia) off 24-hour alert status. DOD did not conduct or In our prior reports on the Aerospace Control Alert mission, we stated that GAO’s risk-based management framework noted that risk assessments should contain three key elements: an analysis of threat, an estimation of vulnerability, and an identification of consequences. Following a decision by DOD that two alert basing locations should be taken off 24- hour alert status, three risk assessments were conducted to support the 2012 decision of which two locations, once removed from 24-hour alert status, would have the least amount of increase in risk to the overall Aerospace Control Alert mission. DOD’s April 2013 report provided a summary of the final results of these three risk assessments. These risk assessments were performed by NORAD, the Office of the Secretary of Defense Office of Cost Assessment and Program Evaluation, and the Continental U.S. NORAD Region, which included consideration of threat, vulnerability, and consequence. All three of these assessments came to similar conclusions regarding which of the two alert locations would cause the least increase in risk if taken off of 24-hour alert status. NORAD’s risk assessment analysis was based on quantitative modeling of fighter basing and, in our February 2013 report, we noted that NORAD had improved its risk analysis by changing some of the assumptions used We also discussed the to address vulnerability and consequence.separate analysis conducted by the Office of Cost Assessment and Program Evaluation, which similarly relied on modeling to aid its evaluation of risk. Finally, in our February 2013 report, we described the analysis resulting from a panel of subject matter experts convened by Continental U.S. NORAD Region, which reached conclusions consistent with NORAD and the Cost Assessment and Program Evaluation modeling. NORAD officials stressed to us that there was an increase in risk that resulted from removing two basing locations from 24-hour alert status, but the risk assessments informed decision making as to which two bases removal would have the least increase in risk. According to DOD officials, no additional risk analysis was conducted following these three studies. According to DOD officials, DOD does not expect to make future changes to the budget and force structure of the mission beyond the decision already made to remove two sites from 24-hour alert status. In addition, the April 2013 DOD report notes that any further reductions in 24-hour alert sites would affect cross-border operations with Canada as well as mission accomplishment. Regarding the cost savings estimate, DOD’s April 2013 report states that removing the 24-hour alert status from the Duluth and Langley alert basing locations would result in an estimated savings of over $73 million over the fiscal year 2013-17 time period. The report states that these estimated cost savings are primarily from shifting personnel from full-time to part-time status at the two sites no longer on 24-hour alert status. We reported on these same cost savings estimates in February 2013 and noted that the cost savings were estimated by the Air Force after the decision was made to eliminate alert basing locations at Duluth, Minnesota, and Langley, Virginia, from 24-hour alert status. DOD has reported Air Force cost information for the Aerospace Control Alert mission in its budget displays but has not yet reported the comprehensive cost of the mission. Standards for Internal Control in the Federal Government notes that financial information is needed for periodic external reporting and, on a day-to-day basis, to make operating decisions, monitor performance, and allocate resources. Pertinent cost information should be identified, captured, and distributed in a form and time frame that permits people to perform their duties efficiently. Accurate and timely reporting of operational and financial data can assist program managers in determining whether they are meeting their agencies’ plans and meeting their goals for accountability for effective and efficient use of resources. Without comprehensive cost information, decision-makers may not know what resources are allocated and used in support of the Aerospace Control Alert mission. Pub. L. No. 110-417, § 354 (2008). weak internal controls limited DOD’s ability to accurately identify Air Sovereignty Alert mission expenditures. In addition, according to Air National Guard officials, not all National Guard Bureau costs are included in total Aerospace Control Alert mission costs. For example, the Air Force calculates the costs for each basing location based on formulas that do not consider the base’s location and the unit’s home station. However, according to Air National Guard officials, the actual costs of each basing location can vary depending on a number of factors, such as whether the personnel at the location are Air National Guard or active duty Air Force personnel or whether the assigned unit is home-based or a detachment unit—temporarily relocated from their usual duty station. The Air Force budget justification displays submitted for fiscal years 2010-14 include personnel costs for Air Force, Air National Guard, and Air Force Reserve personnel, but do not include costs, such as military personnel costs, that other military services have in conjunction with the Aerospace Control Alert mission. In addition to the 2009 requirement, the National Defense Authorization Act for Fiscal Year 2013 requires that DOD provide a consolidated budget justification display that fully identifies the Aerospace Control Alert budget for each of the military services and encompasses all programs and activities of the Aerospace Control Alert mission for each of the following: (1) procurement; (2) operations and maintenance; (3) research, development, testing, and evaluation; and (4) military construction. However, the act does not require any additional military personnel cost reporting. DOD has not yet developed a consolidated budget display in response to this new requirement. However, according to DOD officials, such a display is being developed for inclusion with the department’s fiscal year 2015 budget submission to include the four budget categories specifically identified by the act. As a result, DOD’s consolidated budget display for the fiscal year 2015 budget submission may not include military personnel costs associated with the other services, particularly the Army. The consolidated budget displays required by the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 and the National Defense Authorization Act for Fiscal Year 2013 should help provide Congress and senior DOD decision makers with a more complete picture of Aerospace Control Alert mission costs. However, in addition to Air Force, Air National Guard, and Air Force Reserve personnel costs, personnel costs from the other DOD components also support the mission—including the Army and the Army National Guard personnel providing ground-based air defense capabilities in support of the mission. Unless this additional information is included in DOD’s revised budget display, DOD decision makers will not have comprehensive cost information to make fully informed resource allocation decisions to support the Aerospace Control Alert mission. The Aerospace Control Alert mission is critical to defending U.S. airspace. Once completed, the budget justification displays required by the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 and the National Defense Authorization Act for Fiscal Year 2013 should aid in the identification of many program and activity costs for each of the military services associated with the Aerospace Control Alert mission. A comprehensive identification and reporting of all costs associated with the mission, including all military personnel costs, could aid DOD in exercising effective management of this mission and its associated resources. Comprehensive reporting of all costs of the mission would also provide the Congress with a fuller accounting of these costs to aid in its oversight of the mission. As DOD expands its cost reporting in the consolidated budget justification displays as required by section 354 of the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 and section 352 of the National Defense Authorization Act for Fiscal Year 2013, we recommend that the Secretary of Defense direct the Under Secretary of Defense (Comptroller) and responsible DOD organizations, as appropriate, to ensure that all Aerospace Control Alert program and activity costs for each of the military services are captured, including military personnel costs of the Army and Army National Guard. In written comments on a draft of this report, DOD concurred with our recommendation to ensure that all Aerospace Control Alert program and activity costs for each of the military services are captured, including those of the Army and Army National Guard. DOD stated that the Office of the Secretary of Defense (Comptroller) will include these costs in its Fiscal Year 2015 budget submission. DOD’s written comments are reprinted in their entirety in appendix I. We are sending copies of this report to the Secretaries of Defense and Homeland Security; the Commanders of NORAD, U.S. Northern Command, and U.S. Pacific Command; the Secretaries of the Army and of the Air Force; the Commandant of the Coast Guard; the Chief of the National Guard Bureau; and the Director of the Office of Management and Budget. In addition, this report will be available at no charge on our website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-4523 or leporeb@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 key contributions to this report are listed in appendix II. Brian J. Lepore, (202) 512-4523 or leporeb@gao.gov. In addition to the contact named above, key contributors to this report were Mark A. Pross, Assistant Director; Adam Anguiano; Brent Helt; Mae Jones; Jeff Tessin; and Michael Willems.

To protect U.S. airspace, DOD performs the Aerospace Control Alert mission, which includes military forces arrayed in a rapid response posture to conduct both air sovereignty and air defense operations against airborne threats over the United States and Canada. The National Defense Authorization Act for Fiscal Year 2013 required that the Secretary of Defense submit a report to Congress that provides a cost-benefit analysis and risk-based assessment of the Aerospace Control Alert mission as it relates to expected future changes to the budget and force structure of the mission. The act also requires that GAO review DOD's report and submit any findings to the congressional defense committees. In response to this mandate, GAO examined (1) DOD's April 2013 reporting of a risk-based assessment and cost-benefit analysis of the Aerospace Control Alert mission as they relate to expected future changes to the budget and force structure of that mission and (2) the extent to which DOD has reported the total cost of the Aerospace Control Alert mission. GAO reviewed DOD's April 2013 report to Congress and Aerospace Control Alert budget justification displays, and interviewed knowledgeable DOD officials. In its April 2013 report to Congress, the Department of Defense (DOD) did not provide any new analyses, but provided the results of previous analyses related to the Aerospace Control Alert mission because, according to DOD officials, DOD was not expecting any future changes to the budget or force structure of the mission, including consideration of any basing location alternatives. DOD's April 2013 report summarized the results of three risk assessments that were conducted to support DOD's 2012 decision on which two alert basing locations could be removed from 24-hour alert status with the least amount of risk. The North American Aerospace Defense Command (NORAD), the Office of the Secretary of Defense Office of Cost Assessment and Program Evaluation, and the Continental U.S. NORAD Region performed these assessments and all concluded that, given the 2012 DOD decision that two alert basing locations would be removed from 24-hour alert status, the removal of the locations at Duluth, Minnesota, and Langley, Virginia, would provide the least increase in risk. DOD's April 2013 report also summarized a cost savings estimate developed after the decision to remove these basing locations from 24-hour alert status. Along with the submission of DOD's budget requests for fiscal years 2010-14, the Air Force reported cost information for components of the Aerospace Control Alert mission in budget displays required by the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, but DOD did not report the comprehensive cost of the Aerospace Control Alert mission. Standards for Internal Control in the Federal Government notes that financial information is needed for periodic external reporting and, on a day-to-day basis, to make operating decisions, monitor performance, and allocate resources. The Air Force provided budget displays containing information related to Air Force and Air National Guard military personnel costs, flying hours, and certain other costs along with DOD's budget justification materials for fiscal years 2010-14. However, DOD did not report other military service costs associated with the Aerospace Control Alert mission. The National Defense Authorization Act for Fiscal Year 2013 now requires, in addition to the Air Force cost information required by the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009, that DOD provide a consolidated budget justification display that fully identifies the Aerospace Control Alert budget for each of the military services and encompasses all programs and activities of the Aerospace Control Alert mission for each of the following: procurement; operations and maintenance; research, development, testing, and evaluation; and military construction. According to DOD officials, such a display is being developed for inclusion with the fiscal year 2015 budget submission. These consolidated budget displays should help provide a more complete picture of Aerospace Control Alert mission costs. However, other military personnel costs, including those associated with the Army and the Army National Guard personnel providing ground-based air defense capabilities, support the mission as well. Inclusion of this information, in addition to the information required in the budget justification displays, could provide decision makers with more comprehensive cost information to make fully informed resource allocation decisions to support the Aerospace Control Alert mission. GAO recommends that DOD, as it expands its cost reporting in response to current reporting requirements, ensure that all personnel costs related to the Aerospace Control Alert mission, including those of the Army and Army National Guard, are included in DOD's budget displays. DOD concurred with GAO's recommendation.

Families of OSP scholarship award recipients, as consumers, need complete and timely information about participating schools to make informed decisions about what school is best for the student. Further, federal internal control standards state that organizations must have relevant, reliable, and timely communications, and adequate means of communicating with external parties who may have an impact on the organization achieving its goals. During our 2013 review, we found that OSP provided information to prospective and current OSP families through a variety of outreach activities. However, families lacked key information necessary to make informed decisions about school choice because the directory of participating schools—a key communication tool—was not published in a timely fashion and did not contain key information about tuition, fees, and accreditation. Additionally, scholarships to students were awarded several months after many schools had completed their admissions and enrollment processes, limiting the amount of time and choice in selecting schools. To address these issues, we recommended that Education take steps to ensure that the OSP administrator improve the timing of key aspects of program administration and program information for prospective and participating families. In late October 2015, Education described to us actions that had been taken to address these issues. For example, Education stated that the OSP administrator published its school directory in a timely manner in 2013 and 2014. The SOAR Reauthorization Act, which recently passed in the House and has been introduced in the Senate, includes provisions to address accreditation of participating schools. Effective policies and procedures: During our 2013 review, we found that OSP’s policies and procedures lacked detail in several areas related to school compliance and financial accounting, which may weaken overall accountability for program funds. Policies and procedures are a central part of control activities and help ensure necessary actions are taken to address risks to achievement of an organization’s objectives. The absence of detailed policies and procedures reflect weak internal control in the areas of risk assessment, control activities, information and communication, and control environment. For example, we found that OSP relied on schools’ self-reported information to ensure school compliance and did not have a process for independently verifying information, such as a school’s student academic performance, safety, and maintenance of a valid certificate of occupancy. Without a mechanism or procedures to verify the accuracy of the information provided, OSP cannot provide reasonable assurance that participating schools meet the criteria established for participation in the program. As a result, there is a risk that federal dollars will be provided for students to attend schools that do not meet the education and health and safety standards required by the District. Further, at the time of our review, OSP’s policies and procedures lacked sufficient detail to ensure each participating school in OSP has the financial systems, controls, policies, and procedures in place to ensure federal funds were used according to federal law. OSP’s policies and procedures for the financial stability review of participating schools did not identify the specific risk factors that should be considered when assessing schools’ financial sustainability information. As a result, the OSP administrator was unable to confirm that all schools participating in the program were financially sustainable. In addition, OSP lacked detailed policies and procedures for dealing with schools not in compliance with program rules. Furthermore, policies and procedures for fiscal years 2010 through 2012 did not specify how to track administrative expenses, including what should be included, and OSP had little documentation to support administrative expenses incurred during these years. Therefore, while federal law limits the administrative expenses to 3 percent of the annual grant amount, the true cost of administering the OSP program during these years is not known and could be higher or lower than the 3 percent allotted. Without sufficiently detailed policies and procedures for all aspects of a school choice program, the program administrator cannot effectively monitor program operation and may not be able to account for all federal or public dollars spent. To address these issues, we recommended Education require the OSP program administrator to add additional detail to their policies and procedures to more efficiently manage day-to-day program operations. OSP amended its policies and procedures in August 2013 which addressed some of these issues, but OSP did not address all of the weaknesses described and the policies and procedures had not been fully implemented at the time of our review. In addition, in late October 2015, Education described to us actions that they had taken to address these issues. For example, Education stated that its Office of Risk Management Services provided feedback on the OSP administrator’s internal policies and procedures. The SOAR Reauthorization Act recently passed by the House and introduced in the Senate includes a provision to address how the program administrator will ensure that it uses internal fiscal and quality controls for OSP. Accurate, Up-to-Date Student Information: According to the internal controls framework, information should be communicated to management and within an organization in a form and time frame that enables officials to carry out their responsibilities and determine whether they are meeting their stated objectives. For example, in OSP—and other eligibility-based choice programs—it is important to have accurate, up-to-date student application information in order to meet program objectives, such as determining eligibility and awarding program scholarships in an efficient and timely manner. However, at the time of our 2013 review OSP’s database containing past and current student and school information had several weaknesses, including a lack of documentation and automated checks, and a deficient structure, which left the database open to errors. For example, there were many records with missing fields and data that were partially entered, and the database did not have automated data checks, which would reduce the risk that significant errors could occur and remain undetected and uncorrected. We found these deficiencies also negatively affected day-to-day program management, and impeded efforts to communicate information about the program to families and Education. In addition, the database’s current structure hampers OSP’s ability to look at historical trends and use them as an effective management tool. We also found incomplete records from past years which will continue to be a problem for future program administrators who need them for effective program implementation and oversight. In addition, because a key variable in the OSP database used in the student selection process was unreliably populated, OSP’s ability to accurately select students based on established priorities for the program may have been compromised. To address issues with the database, we recommended Education have the program administrator improve the program database to provide reasonable assurance that there is sufficiently reliable data regarding the operation of OSP. In late October 2015, Education stated that OSP did not have the capacity or financial resources to update the database and Education could not require them to make the suggested updates. As noted above, the SOAR Reauthorization Act recently passed by the House and introduced in the Senate includes a provision intended to ensure the entity uses internal fiscal and quality controls for OSP. Timely Financial Reporting: Reliable published financial statements, such as those required by the Single Audit Act, are needed to meet program requirements and to ensure federal funds are being used appropriately. The Single Audit Act requires that recipients submit their Single Audit reports to the federal government no later than 9 months after the end of the period being audited. However, the required audit documents for the year ended Sept. 30, 2010 were issued by the program administrator on Jan. 31, 2013—more than 2 years after the end of its 2010 fiscal year. As a result, until these reports were issued Education did not have the financial reports required to properly account for the federal funds expended for OSP. To address these issues we recommended Education explore ways to improve monitoring and oversight of the program administrator. In 2014, Education stated that OSP was current with all required financial audits and provided documentation that, OSP’s 2014 Grant Award Notification imposed a special condition due to OSP’s history of untimely financial reporting. Specifically, the award notification stated that Education could impose sanctions, such as withholding a percentage of or entirely suspending federal awards, if OSP fails to submit a timely financial audit or written explanation. Internal control activities help ensure that actions are taken to address risks, and include a wide range of activities such as approvals, authorizations, and verifications. According to the MOU between Education and the District, the District is responsible for conducting regulatory inspections of participating schools and providing the administrator with the results of those inspections. However, we found that requirements under the MOU were not being met. For example, inspections of participating private schools were often not conducted. For our 2013 report, OSP told us they did not receive any information from the District as a result of any inspections, nor did the administrator follow up with District agencies to inquire about them. Given that the program administrator is responsible for ensuring that participating schools continue to be eligible to receive federal dollars through OSP, notifying the District agencies about inspections is important in ensuring appropriate oversight of participating schools. The MOU includes a responsibility for the program administrator to notify District agencies to conduct these inspections, but because the program administrator is not a signatory to the MOU, OSP officials were not fully aware of this responsibility, they said. As a result, activities crucial to the successful implementation of the program—such as building, zoning, health, and safety inspections—may not be occurring for all participating schools. To address these issues, we recommended Education work with the Mayor of the District of Columbia to revise the MOU that governs OSP implementation to include processes that ensure the results of OSP school inspections are communicated to the program administrator. In late October 2015, Education described to us actions that they had taken to address these issues. For example, Education stated that it ensured that the OSP administrator informed the appropriate District agency of the names of the participating schools for the purpose of conducting required inspections. The SOAR Reauthorization Act recently passed by the House and introduced in the Senate includes provisions that require Education and the District to revise their MOU to, among other things, address some of these issues. In conclusion, OSP has provided low-income families in the District additional choices for educating their children and has likely made private school accessible to some of these children who would not otherwise have had access. However, to help ensure that OSP efficiently and effectively uses federal funds for their intended purpose—that is, to provide increased opportunities to low-income parents to send their children, particularly those attending low-performing schools, to private schools—any entity responsible for operating a school choice program such as OSP needs a strong accountability infrastructure that incorporates the elements of internal control discussed above. Well- designed and executed operational and financial management policies and procedures and the underlying systems help provide reasonable assurance that federal funds are being used for the purposes intended and that funds are safeguarded against loss from error, abuse, and fraud. Education stated that they had addressed some of the issues that we identified, but we were unable to assess the extent to which they had implemented our recommendations in time for this statement. We continue to believe that by fully addressing our nine remaining recommendations for the OSP program, Education would promote more efficient and effective program implementation and accountability over federal funds, regardless of which entity is administering the program. Mr. Chairman Johnson, Ranking Member Carper, and Members of the Committee, this concludes my statement for the record. If you or your staff have any questions about this statement, please contact Jacqueline M. Nowicki at (617) 788-0580. You may also reach me by email at nowickij@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this statement include Nagla’a El-Hodiri (Assistant Director), Jamila Jones Kennedy, and Michelle Loutoo Wilson. In addition, key support was provided by Susan Aschoff, William Colvin, Julianne Cutts, Alexander Galuten, Gretta L. Goodwin, Sheila McCoy, Kimberly McGatlin, Jean McSween, John Mingus, Linda Siegel, Deborah Signer, and Jill Yost. Other contributors to the report on which the statement is based are Hiwotte Amare, Carl Barden, Maria C. Belaval, Edward Bodine, Melinda Cordero, David Chrisinger, Carla Craddock, Kristy Kennedy, John Lopez, Mimi Nguyen, James Rebbe, Ramon Rodriguez, George A. Scott, Aron Szapiro, and Helina Wong. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

School vouchers are one of many school choice programs. Vouchers provide students with public funds to attend private schools and are often featured in discussions on education reform. The District of Columbia’s (District) Opportunity Scholarship Program (OSP) has garnered national attention as the first federally-funded private school voucher program in the United States. Since the program’s inception, Congress has provided more than $180 million for OSP, which has, in turn, provided expanded school choice to low-income students by awarding more than 6,100 scholarships to low-income students in the District. GAO’s 2013 report was in response to a request from the Chairman of the Subcommittee on Financial Services and General Government, Committee on Appropriations, U.S. Senate that GAO review the extent to which OSP was meeting its stated goals and properly managing federal funds. This statement is based on GAO’s 2013 report, and discusses the importance of ensuring effective implementation of OSP and any future similar federal school choice programs and providing sufficient accountability for public funds. Students in the District of Columbia (District) have many choices for K-12 schooling including charter, magnet, and traditional public schools, as well as private schools through the federally funded Opportunity Scholarship Program (OSP). Strong fiscal monitoring and oversight of the various schools that participate in choice programs is critical to ensuring that these programs have effective internal controls that help them meet the goal of providing a quality education to students. Internal control is broadly defined as a process designed to provide reasonable assurance that an organization can achieve its objectives. Five internal control standards—control environment, risk assessment, control activities, information and communication, and monitoring—should be an integral part of a system that managers use to regulate and guide an agency’s operations. During GAO’s 2013 review of OSP, most families GAO spoke with were generally happy with their children’s participation in the program, citing increased safety and security at their children’s OSP schools and improved quality of education. However, GAO found weaknesses in three areas—access to timely and complete program and award information, effective controls to safeguard federal funds, and clearly defined and properly executed roles and responsibilities—that are the result of internal control deficiencies that may limit the effectiveness of OSP and its ability to meet its goal of providing a quality education experience for students in the District. Strong internal controls in these areas would strengthen the OSP and are critical to the success of any similar federally funded school voucher program. In 2013, GAO made 10 recommendations to Education to improve OSP. To date, one recommendation has been closed as implemented. In October 2015, Education told GAO that it had addressed some of the issues that GAO identified in the 2013 report, but GAO was unable to assess the extent to which they had implemented our recommendations in time for this statement. GAO continues to believe that the 2013 recommendations would address weaknesses previously identified in OSP, and would improve the implementation and effectiveness of OSP—and any future federally funded choice programs.

The federal government has enriched uranium for use by commercial nuclear power plants and for defense-related purposes for more than 40 years at three plants, located near Oak Ridge, Tennessee; Paducah, Kentucky; and Portsmouth, Ohio (see fig. 1). The Oak Ridge plant, known as East Tennessee Technology Park, is located on 1,500 acres of land; the oldest of the three plants, it has not produced enriched uranium since 1985. The Paducah plant, located on about 3,500 acres, continues to enrich uranium for commercial nuclear power plants under a lease to a private company, the United States Enrichment Corporation (USEC). The Portsmouth plant, a 3,700-acre site, ceased enriching uranium in May 2001 because of reductions in the commercial market for enriched uranium. Later that year, the plant was placed on cold standby (an inactive status that maintains the plant in a usable condition), so that production at the facility could be restarted in the event of a significant disruption in the nation’s supply of enriched uranium. USEC was awarded the contract to maintain the plant in cold standby, a condition that continues today. Yet because of newer, more efficient enrichment technologies and the globalization of the uranium enrichment market, all three uranium enrichment plants have become largely obsolete. Therefore, DOE now faces the task of decontaminating, decommissioning, and undertaking other remedial actions at these large and complex plants, which are contaminated with hazardous industrial, chemical, nuclear, and radiological materials. In 1991, at the request of the House Subcommittee on Energy and Power, GAO analyzed the adequacy of a $500 million annual deposit into a fund to pay for the cost of cleanup at DOE’s three uranium enrichment plants. We reported that a $500 million deposit indexed to inflation would likely be adequate, assuming that deposits would be made annually into the fund as long as cleanup costs were expected to be incurred, which, at the time of our study, was until 2040. Additionally, in a related report, we concluded that the decommissioning costs at the plants should be paid by the beneficiaries of the services provided by DOE—in this case, DOE’s commercial and governmental customers. In 1992, the Congress passed the Energy Policy Act, which established the Uranium Enrichment Decontamination and Decommissioning Fund to pay for the costs of decontaminating and decommissioning the nation’s three uranium enrichment plants. The Energy Policy Act also authorized the Fund to pay remedial action costs associated with the plants’ operation, to the extent that funds were available, and to reimburse uranium and thorium licensees for the portion of their cleanup costs associated with the sale of these materials to the federal government. The act authorized the collection of revenues for 15 years, ending in 2007, to pay for the authorized cleanup costs. Revenues to the Fund are derived from (1) an assessment, of up to $150 million annually, on domestic utilities that used the enriched uranium produced by DOE’s plants for nuclear power generation and (2) federal government appropriations amounting to the difference between the authorized funding under the Energy Policy Act and the assessment on utilities. Congress specified that any unused balances in the Fund were to be invested in Treasury securities and any interest earned made available to pay for activities covered under the Fund. DOE’s Office of Environmental Management is responsible for managing the Fund and plant cleanup activities, which, through fiscal year 2003, were mostly carried out by DOE contractor Bechtel Jacobs. The department’s Oak Ridge Operations Office in Oak Ridge, Tennessee, had historically provided day-to-day Fund management and oversight of cleanup activities at all three plants. In October 2003, however, DOE established a new office in Lexington, Kentucky, to directly manage the cleanup activities at the Paducah and Portsmouth plants. The Oak Ridge Operations Office continues to manage the Fund and the cleanup activities at the Oak Ridge plant. Currently, the Fund is used to pay for the following activities: Reimbursements to uranium and thorium licensees. The Energy Policy Act provides that the Fund be used to reimburse licensees of active uranium and thorium processing sites for the portion of their decontamination and decommissioning activities, reclamation efforts, and other cleanup costs attributable to the uranium and thorium they sold to the federal government. From fiscal year 1994, when the Fund began incurring costs, through fiscal year 2003, $447 million was used from the Fund for uranium and thorium reimbursements (in 2004 dollars). Cleanup activities at the uranium enrichment plants. Cleanup activities at the plants include remedial actions, such as assessing and treating groundwater or soil contamination; waste management activities, such as disposing of contaminated materials; the surveillance and maintenance of the plants, such as providing security and making general repairs to keep the plants in a safe condition; the decontamination and decommissioning of inactive facilities by either cleaning them up so they can be reused or demolishing them; and other activities, such as covering litigation costs at the three plants and supporting site-specific advisory boards. From fiscal year 1994 through fiscal year 2003, a total of $2.7 billion from the Fund was used for these cleanup activities (in 2004 dollars). Under a variety of models using DOE’s projected costs and revenues, the Fund will be insufficient to cover all of its authorized activities. Using DOE’s projections that 2044 would be the most likely date for completion of cleanup at the plants, we estimated that cleanup costs would exceed Fund revenues by $3.8 billion to $6.2 billion (in 2007 dollars). Because DOE had not determined when decontamination and decommissioning work would begin at the Paducah and Portsmouth plants, and because federal contributions to the Fund have been less than the authorized amount, we developed several alternative models to assess the effects of different assumptions on the Fund’s sufficiency. Specifically, we developed the following models: Baseline model. This model was developed in consultation with DOE and its contractor officials about what the most likely cleanup time frames would be and used cost estimates assuming that cleanup at all plants would be completed by 2044. Accelerated model. Because DOE had not determined when the final decontamination and decommissioning would begin at its Paducah and Portsmouth plants, we developed the accelerated model under the assumption that cleanup work could be completed faster than under the baseline model, given unconstrained funding. DOE and its contractor officials provided additional cost estimates, where Paducah’s final work would begin in 2010 and be completed by 2024 and Portsmouth’s final decontamination and decommissioning work would begin in 2007 and be completed by 2024. Deferred model. This model was developed under the assumption that, given current funding constraints, it may not be realistic for two major decontamination and decommissioning projects to be done concurrently. Thus, deferred time frames were determined by DOE, assuming that all work would be completed at the Portsmouth plant first and then initiated at the Paducah plant. For the deferred model, Portsmouth’s final decontamination and decommissioning work was estimated to be completed from 2010 to 2037 and Paducah’s from 2038 to 2052. Revenue-added model. This model was developed to assess the effect of the government’s meeting its total authorized annual contributions on the balance of the Fund, which by the start of fiscal year 2004, was $707 million less than authorized under the Energy Policy Act. For the revenue-added model, we used baseline time frames but assumed that government contributions to the Fund would continue annually at the 2004 authorized level until all government contributions as authorized by law had been met, which would occur in fiscal year 2009. Revenue-added-plus-interest model. For this model, we built on the revenue-added model to include the effect of forgone interest that the Fund could have earned had the government contributed the full authorized amount. We assumed that these additional payments would be made to the Fund in the same amounts as the 2004 annual authorized amount and extended payments through fiscal year 2010. Irrespective of which model we used, we found that the Fund would be insufficient to cover the projected cleanup costs at the uranium enrichment plants (see table 1). At best, assuming no additional funding is provided beyond the 2007 authorized amount, Fund costs could outweigh revenues by $3.8 billion (in 2007 dollars). Even with current authorized amounts extended out through fiscal year 2010, the Fund could still be insufficient by close to $0.46 billion (in 2007 dollars). Although our analysis was able to capture several uncertainties potentially affecting the Fund—including interest rates, inflation rates, cost and revenue variances, and the timing of decontamination and decommissioning—additional uncertainties exist that we could not capture. These uncertainties included possible changes to the scope of the cleanup; whether the Fund would be required to pay for additional activities, such as long-term water monitoring once the plants were closed; and the extent of potential future litigation costs that the Fund would have to support. For example, a risk analysis completed by DOE in 2004 for the Paducah plant indicated that changes in the scope of cleanup could increase cleanup costs by more than $3 billion and extend the time frame for cleanup to more than 30 years past the original scheduled date of 2019. In addition, when they developed their cleanup cost estimates, DOE officials assumed that the costs of long-term stewardship activities—such as groundwater monitoring, which may continue after all necessary cleanup costs have been completed—would be covered by a separate funding source. DOE officials acknowledged, however, that if another funding source were not available, they may be required to use resources from the Fund. Uncertainty over the extent of the Fund’s insufficiency remains because DOE has not issued plans that identify the most probable time frames and costs for the decontamination and decommissioning of the Paducah and Portsmouth plants. DOE was required to develop a report to Congress containing such information, but because DOE was significantly revising its cost estimates, it determined the report would not be accurate and did not finalize it. According to DOE officials, it is now in the process of finalizing a report that contains new schedule and cost information for both plants and addresses the sufficiency of the Fund. This report was due to Congress in October 2007 but has yet to be issued by DOE. Because the report has not been finalized, DOE officials were unwilling to provide us with updated information on current schedule and cost estimates. As a result, we are unable to assess how any new information may affect the Fund’s sufficiency. Until DOE resolves uncertainties surrounding the plants’ cleanup, including when cleanup activities are expected to both begin and end, it is not possible to more precisely determine the total funding needed to cover the authorized cleanup activities. If, however, closure and cleanup time frames extend past the originally projected schedules at the plants, then the total costs the Fund is authorized to support may increase, particularly costs for maintenance, safety, and security activities and other fixed costs that must be maintained until cleanup work at the plants is complete. In closing, we believe that an extension to the Fund may be necessary to cover cleanup costs at the nation’s three uranium enrichment plants. The information currently available on the projected costs and revenues authorized by the Fund suggests that it may be insufficient by up to several billion dollars. DOE appears to be taking steps to develop new, detailed time frames and cost estimates for the decontamination and decommissioning of its uranium enrichment plants. However, until this detailed information is made available, we cannot assess how DOE’s updated time frames and cost estimates may affect the Fund’s sufficiency. As a result, we believe that DOE should finalize plans for the Paducah and Portsmouth plants so that it can better determine the extent to which Fund extensions may be needed. Unless the Fund is extended beyond its current expiration in 2007, cleanup activities that could not be paid for from the Fund because of a shortfall may have to be financed entirely by the federal government and could add an additional fiscal burden at a time when our government is facing already significant long-term fiscal challenges. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information, please contact Robin M. Nazzaro at (202) 512-3841 or nazzaror@gao.gov. Sherry L. McDonald, Assistant Director; Ellen W. Chu, Alyssa M. Hundrup, Mehrzad Nadji, and Barbara Timmerman made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Cleaning up the nation's three uranium enrichment plants will cost billions of dollars and could span decades. These plants--located near Oak Ridge, Tenn.; Paducah, Ky.; and Portsmouth, Ohio--are contaminated with radioactive and hazardous materials. In 1992, the Energy Policy Act created the Uranium Enrichment Decontamination and Decommissioning Fund (Fund) to pay for plant cleanup. Fund revenues come from an assessment on domestic utilities and federal government appropriations. In 2004, GAO reported on the Fund's sufficiency to cover authorized activities. GAO recommended that Congress consider reauthorizing the Fund for 3 more years, to 2010, and require the Department of Energy (DOE) to reassess the Fund's sufficiency before it expired to determine if further extensions were needed. Because decisions not yet made by DOE could affect the cost of cleanup and the Fund's sufficiency, GAO also recommended that DOE develop decontamination and decommissioning plans for the Paducah and Portsmouth plants that would identify the most probable time frames and costs for completing the cleanup work. This testimony is based on GAO's 2004 report. It summarizes the extent to which the Fund may be sufficient to cover authorized activities and the status of DOE's progress in developing decontamination and decommissioning plans for the Paducah and Portsmouth plants. GAO's analysis showed that the Fund will be insufficient to cover all authorized activities. Using DOE's estimates for the cleanup costs at the three plants and current and likely revenue projections, GAO developed a number of simulation models that factored in annual cost and revenue projections and uncertainties surrounding inflation rates, costs, revenues, and the timing of the final cleanup work at the Paducah and Portsmouth plants. Specifically, GAO's baseline model demonstrated that by 2044, the most likely date for completing all cleanup activities at the plants, cleanup costs will have exceeded revenues by $3.8 billion to $6.2 billion (in 2007 dollars). Importantly, GAO found that the Fund would be insufficient irrespective of which estimates were used or what time frames were assumed. DOE has not yet issued plans for the decontamination and decommissioning of the Paducah and Portsmouth plants as GAO recommended. According to DOE officials, the department is developing a report to Congress that will contain updated information for both plants. DOE did not make that information available to GAO, however, and hence GAO was unable to assess how any new schedule or cost estimates may affect the Fund's sufficiency. Until DOE issues plans that provide the most probable time frames and costs for completing decontamination and decommissioning at the Paducah and Portsmouth plants, it is not possible to more precisely determine the total funding needed to cover the authorized cleanup activities.

The introduction of significantly redesigned currency began in March 1996, with the introduction into circulation of the newly designed $100 note. Redesigned lower denomination notes were expected to be introduced into circulation at subsequent 9- to 12-month intervals, but the introduction of the $50 note has been delayed because of efforts to make the denomination easier to read by the visually impaired. The note is now expected to be introduced later this month. The redesigned currency includes several new security features. Some of these features are overt; that is, they are designed to be recognized by the public. The other features are covert; that is, they are intended to be used by the banking system. One of the overt security features on the $50 note is concentric fine lines printed in the oval shape that is behind Ulysses S. Grant’s portrait on the front of the note. During the initial production of the newly designed $50 notes, BEP detected flaws in some of the notes, specifically a gap, or white space, between some of the concentric lines surrounding Grant’s portrait. Neither BEP nor the Federal Reserve know specifically how many flawed notes are among the 217.6 million redesigned notes produced before September 8, 1997. Although both BEP and the Federal Reserve have done some inspections to identify flawed notes, neither has done a complete count or a statistically projectable sample. BEP said it is not prepared to estimate the number of flawed notes without more thorough sampling, which it plans to do. In Philadelphia, Federal Reserve officials looked at 200 of the $50 notes and estimated that 50 to 60 percent were flawed. On September 30, 1997, we and Federal Reserve officials jointly reviewed judgmentally selected samples of newly redesigned $50 notes that had been shipped to the Philadelphia and Richmond Federal Reserve banks. We jointly determined that 56 percent of the 1,200 notes we reviewed that were produced before September 8, 1997, and were shipped to Philadelphia did not meet the Federal Reserve’s standards for circulation concerning the clarity of the concentric lines surrounding President Grant’s portrait. At Richmond, we jointly inspected 1,000 $50 notes produced before September 8, 1997, and found that 45 percent contained similar flaws. We also jointly inspected 1,000 $50 notes at Richmond that were printed after September 7, 1997, and found that 2 percent were flawed. On September 30, 1997, we independently inspected 1,664 $50 notes at BEP headquarters that were printed after September 7, 1997, and found that 12 percent were flawed. A better estimate of the number of flawed notes at BEP and the Federal Reserve banks cannot be made until more rigorous and scientific sampling procedures are used for the note inspections. more lines not printing completely. These gaps were inconsistently distributed throughout the notes, thus making them difficult to correct. BEP viewed the problem as a start-up issue to be expected with production of a completely new note design. BEP officials told us that although they viewed the new notes as acceptable for distribution to the Federal Reserve and for circulation, they believed that the quality of the concentric lines needed to be improved. Accordingly, they made a number of changes in their production, including adjustments to printing presses, changes in the ink, and changes to the printing plates used to create the face of the new note. For example, BEP made modifications to the printing plates by cutting small horizontal grooves into the concentric lines, called dams, that permit ink to be deposited more successfully on the paper. According to BEP, these changes reduced, but did not eliminate the concentric line gaps in some of the $50 notes. In September, Federal Reserve and BEP officials, at a regularly scheduled meeting, discussed the importance of note quality. Immediately after that meeting, BEP invited the Federal Reserve to view some of the new $50 notes that it had produced to get its customer’s input on the quality of the notes. According to Federal Reserve officials, this was the first time they were informed of the problems with the concentric lines surrounding President Grant’s portrait. BEP officials said they did not tell the Federal Reserve about the problem earlier because they believed the notes were of acceptable quality and that the production problems were typical of those that could be expected in producing a newly designed note. According to Federal Reserve and BEP officials, the printing problems with the concentric lines did not appear in test notes that BEP supplied to the Federal Reserve prior to full scale production of the notes. BEP officials stated that printing difficulties often appear only in the production process. They said that test currency is produced under more carefully controlled conditions and is not produced at the same press speeds and volumes. concentric lines behind the portrait to be certain that they are clear. In mid-September, Federal Reserve officials met with BEP, U.S. Secret Service, and other Treasury representatives who agreed with the Federal Reserve’s concerns and also agreed on quality standards for determining note acceptability. These standards were then programmed into BEP’s automated currency inspection equipment. BEP and the Federal Reserve refer to notes produced before the dams were cut as phase I notes, and those produced after the dams were cut as phase II notes. They refer to notes produced after BEP’s currency inspection devices were recalibrated as phase III notes. BEP and Federal Reserve officials believe phase II notes are of higher quality than phase I notes, and that the quality of phase III notes is higher than that of both phase I and II notes. Beginning in June 1997, BEP produced a total of 160 million phase I notes, of which about 59.5 million were shipped to 16 Federal Reserve banks and 100.5 million are stored at BEP headquarters. Beginning around August 1, 1997, BEP produced 57.6 million phase II notes, all of which are stored at BEP. Production of phase III notes began around September 8, 1997, and as of September 24, 1997, BEP reported having shipped about 11.7 million of the phase III notes to Federal Reserve banks and storing about 4.3 million of the phase III $50 notes in its inventory. Secret Service, Federal Reserve, and BEP officials said the flaws in the notes did not increase the risk of counterfeiting or further delay the notes’ introduction. According to a Secret Service official, issuing the flawed notes would not make them more susceptible to counterfeiting or impede counterfeiting detection. However, the official noted that the flaw in the concentric lines could result in increased public questions about the note’s authenticity. Federal Reserve officials voiced similar concerns, particularly in regard to foreign countries where U.S. currency is often more closely scrutinized. Much of their concern stemmed from the emphasis given to the concentric lines in the promotional material being disseminated on the new $50 note. Federal Reserve and BEP officials stated that the flawed notes would not cause a further delay in the issuance of the new note to the public because the $50 note represents a relatively small portion of BEP’s total production, and it does not take long for it to make enough notes to meet the public demand. As of September 29, 1997, Federal Reserve officials told us that they had not decided what to do with the flawed notes but expect to decide by the end of the year. According to Federal Reserve officials, there is no need to rush to make a decision because the newly designed $50 notes are not scheduled to be released for circulation until October 27, 1997, and they believe that they will have enough of the good notes to put into circulation. The Federal Reserve has identified three options that it is considering: destroy all 217.6 million phase I and phase II $50 notes and replace them; inspect the 217.6 million phase I and phase II $50 notes and destroy and replace only those notes that are found to be flawed; or circulate the 217.6 million phase I and phase II $50 notes after the higher quality new notes have been in circulation for a few years. Before decisions can be made on which option to select, Federal Reserve officials described several steps that they planned to take. First, they said they would determine costs of developing and installing sensors on their currency processing equipment to inspect the phase I and phase II $50 notes. The Federal Reserve said that although its equipment—normally used to inspect recirculating notes—has the capability to check certain aspects of individual notes, it does not have the sensors needed to detect the gaps in the background of the portrait. According to BEP, its equipment can detect the gaps in the background of the portrait but only in its normal production format—that is, in sheets of 32 notes. Since all the phase I and phase II notes have been cut into individual notes, BEP’s detection equipment cannot be used for such an inspection. Thus, sensors that have the capability to detect such gaps would need to be developed by a vendor and then purchased by the Federal Reserve. The second planned step would be to determine how much it would cost to identify the acceptable notes and reprint only those that were unacceptable. The third planned step would entail the Federal Reserve and BEP conducting scientific samples of the entire inventory to identify what portion is acceptable and unacceptable. Finally, the fourth step would be to use the data obtained in the first three steps to determine the most cost beneficial option between destroying and replacing all the notes or identifying and destroying and replacing only the flawed notes. According to Federal Reserve officials, they do not believe that there is a high probability that they would choose the third option of distributing all 217.6 million phase I and phase II notes at a later time. The Federal Reserve has not estimated the complete costs of reproducing the flawed $50 notes. As an example to provide perspective on the costs of the options under consideration, according to BEP and Federal Reserve officials, if the Federal Reserve were to decide to destroy all 217.6 million of the $50 notes and replace them, it would cost approximately $7.2 million for printing replacement notes plus an additional $360,000 to destroy the notes at the Federal Reserve banks and BEP and to ship the replacement notes. This amount is about $1 million less than the $8.7 million the Federal Reserve initially paid for the phase I and phase II $50 notes because the replacement production costs do not include charges for capital equipment and fixed costs that were already included in the charges for the original production runs. The Federal Reserve was not able to estimate the costs associated with option two because the costs of obtaining and installing the sensor equipment are not known at this time; nor does it yet know what proportion of the 217.6 million notes are acceptable or what the costs of inspecting them would be. According to the Federal Reserve, the costs associated with the third option would probably be minimal and would be mostly storage costs. All costs incurred by the Federal Reserve due to the replacement of the flawed notes would result in a reduction in the amount of money the Federal Reserve returns to the Department of the Treasury after it subtracts its operating expenses from its revenues. Mr. Chairman, while our review of this matter has not been extensive, we have made two observations that should prove useful in the future production of redesigned currency. These observations relate to (1) the Federal Reserve’s and other stakeholder involvement in inspecting BEP production and limiting the number of notes produced until production problems are resolved and (2) resolving the problems with printing fine concentric lines before new denominations are produced. currency production, primarily because BEP has generally produced high quality currency; the currency designs have not significantly changed for many years; and BEP experienced no major problems with the printing of the newly designed $100 note last year. Federal Reserve officials said that they are now reassessing their approach to monitoring the quality of currency production. Both BEP and Federal Reserve officials said that they agree that early inspection of BEP production would be worthwhile after the experience with the production of the newly designed $50 note, but said they have not yet agreed on the specifics of the Federal Reserve’s early involvement. Once BEP and the Federal Reserve reach agreement on the details, we believe it would be helpful for them to formalize their agreement in writing. In addition, BEP and the Federal Reserve may wish to include Secret Service and other Treasury officials in their discussions and agreements. Based on the problems encountered with the newly designed $50 note, the BEP and Federal Reserve might also want to limit the production of newly designed currency until all production problems are resolved and to include such a limitation in their written agreement. Our second observation deals with the resolution of problems in printing concentric fine lines surrounding the portrait on denominations lower than the $50 note, which the Treasury Department and the Federal Reserve plan to introduce at 9- to 12- month intervals following the introduction of the $50 note. According to BEP, the fine concentric line design on the face of the new $50 note poses particularly difficult challenges to print clearly, and the fine concentric lines will be somewhat different for each denomination because the configuration of the portraits will vary. For example, BEP officials said that printing the fine concentric lines on the newly designed $100 note, which has a portrait of Benjamin Franklin with long hair taking up a large area of the oval surrounding Franklin’s portrait, has not been as difficult as printing the lines on the newly designed $50 note, which has a portrait of Ulysses S. Grant with relatively shorter hair taking up a smaller area of the surrounding oval. It may prove helpful for BEP to explore whether design changes would lessen the chances of production problems for future denominations. very limited observations of $50 note production this week, we observed some imperfect concentric line backgrounds, but it is important to note that our sampling was not statistically representative and we cannot make any projections on the overall rate of imperfection. In view of the experience with the early production of the redesigned $50 note, we recommend that the Secretary of the Treasury and the Board of Governors of the Federal Reserve: Formalize an agreement to have Federal Reserve, BEP, Secret Service, and other relevant Treasury officials involved early in the currency production process for future redesigned notes to inspect production and agree on an acceptable level of quality; Limit initial production of newly designed currency to the number that would be necessary to provide reasonable assurance that all production problems are resolved, and include such a limitation in their written agreement; and Explore the feasibility of design changes that might lessen the potential for production problems for future redesigned denominations. Mr. Chairman, that concludes my prepared statement and I will be happy to answer any questions that the Subcommittee may have. The first copy of each GAO report and testimony is free. 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GAO discussed issues related to the Treasury's recent production of flawed, newly redesigned $50 notes. GAO noted that: (1) neither the Bureau of Engraving and Printing (BEP) nor the Federal Reserve know specifically how many flawed notes are among the 217.6 million redesigned notes produced before September 8, 1996; (2) BEP views the problem as a start-up issue to be expected with production of a completely new note design; and (3) Federal Reserve officials have not decided what to do with the flawed notes, but have identified three options: (a) destroy all 217.6 million redesigned notes and replace them; (b) inspect the 217.6 million notes and destroy and replace only those notes that are found to be flawed; or (c) circulate the 217.6 million notes after the higher quality new notes have been in circulation for a few years.

Established in 1965, Head Start is a federally funded early childhood development program that served over 900,000 children at a cost of $6.8 billion in 2004. Head Start offers low-income children a broad range of services, including educational, medical, dental, mental health, nutritional, and social services. Children enrolled in Head Start are generally between the ages of 3 and 5 and come from varying ethnic and racial backgrounds. Head Start is administered by HSB within ACF. HSB awards Head Start grants directly to local grantees. Grantees may develop or adopt their own curricula and practices within federal guidelines. Grantees may contract with other organizations—called delegate agencies—to run all or part of their local Head Start programs. Each grantee or delegate agency may have one or more centers, each containing one or more classrooms. In this report, the term “grantee” is used to refer to both grantees and delegate agencies. Figure 1 provides information on the numbers of Head Start grantees, delegate agencies, centers and classrooms. Since the inception of Head Start, questions have been raised about the effectiveness of the program. In 1998, we reported that Head Start lacked objective information on performance of individual grantees and Congress enacted legislation requiring HSB to establish specific educational standards applicable to all Head Start programs and allowed development of local assessments to measure whether the standards are met. HSB implemented this legislation by developing the Child Outcomes Framework to guide Head Start grantees in their ongoing assessment of the progress of children. The Framework covers a broad range of child skill and development areas and incorporates each of the legislatively mandated goals, such as that children “use and understand an increasingly complex and varied vocabulary” and “identify at least 10 letters of the alphabet.” Since 2000, HSB has required every Head Start grantee to include each of the areas in the Framework in the child assessments that each grantee adopts and implements. The eight broad areas included in the Framework are language development, literacy, mathematics, science, creative arts, social and emotional development, approaches to learning, and physical health and development. Grantees are permitted to determine how to assess children’s progress in these areas. These assessments are to align with the grantee’s curriculum; as a result the specific assessments vary across the grantees. The assessments occur 3 times each year and generally involve observing the children during normal classroom activities. The results of the assessments are used for the purposes of individual program improvement and instructional support and are not aggregated across grantees or systematically shared with federal officials. The NRS, prompted by the April 2002 announcement of President Bush’s Good Start, Grow Smart initiative, builds on the 1998 legislation by requiring all Head Start programs to implement the same assessment, twice a year, to all 4- and 5-year-old Head Start participants who will attend kindergarten the following year. When President Bush announced this initiative in April 2002, it called for full implementation in fall 2003; as a result the NRS was developed and preparations for implementation occurred within an 18-month period. See figure 2. Shortly after the President announced this initiative, HSB hired a contractor to assist it in developing and implementing the NRS. The contractor, working closely with HSB, was responsible for the design and field testing of the NRS, including developing training materials to support national implementation of the reporting system by grantees. HSB also worked with the Technical Work Group and others throughout implementation of the NRS. The Technical Work Group includes 16 experts in such areas as child development, educational testing, and bilingual education. They advised HSB on the selection of assessments, the appropriateness of the assessments in addressing the mandated indicators, the technical merit of the assessments, and the overall design of the NRS. While the Technical Work Group members offered advice, the group members were not always in agreement with each other and HSB was not obligated to act on any of the advice it received. A list of the Technical Work Group members and their professional affiliations is included in appendix I. Through focus groups, teleconferences, and various correspondences, HSB officials communicated to Head Start grantees the purpose of the NRS and their plans for administering the assessment. Focus groups and discussions were held with various interested parties, including Head Start managers and directors and experts from universities and the public sector, on issues ranging from strengths and limitations of various assessment tools to strategies for assessing non-English speaking children. HSB also received input through a 60-day public comment period, from mid-April to June 2003. Another contractor developed a Computer-Based Reporting System (CBRS) for the NRS. Local Head Start staff use the CBRS to enter descriptive information about their grantees, centers, classrooms, teachers, and children, as shown in table 1, as well as to keep track of which children have been assessed. HSB analyzes the descriptive information from the CBRS in conjunction with the child assessment data to develop reports on the progress of specific subgroups of children. For example, HSB can report separately on the average scores of children enrolled in part-day programs and those enrolled in full-day programs. HSB, with assistance from the contractors, worked to ensure local staff received adequate training on administering the assessment and using the CBRS, and provided guidance on how to obtain consent from parents. Training and certification of all assessors was required so that all assessors would administer the NRS in the same way. Two-and-a-half day training sessions were held at eight sites throughout the U.S. and Puerto Rico during July and August 2003. Roughly 2,800 individuals completed the training, of which 484 were certified in both English and Spanish. In turn, these certified trainers held training sessions locally to train and certify additional staff who would be able to administer assessments. The development of educational tests is a science in itself, to which university departments, professional organizations, and private companies are devoted. Among the most important concepts in test development are validity and reliability. Validity refers to whether the test results mean what they are expected to mean and whether evidence supports the intended interpretations of test scores for a particular purpose. Reliability refers to whether or not a test yields consistent results. Validity and reliability are not properties of tests; rather, they are characteristics of the results obtained using the tests. For example, even if a test designed for 4th graders were shown to produce meaningful measures of their understanding of geometry, this wouldn’t necessarily mean that it would do so when administered to 2nd or 6th graders or with a change in directions allowing use of a compass and ruler. Test developers typically implement “pilot” tests that represent the actual testing population and conditions and they use data from the pilot to evaluate the reliability and validity of a test. This process generally takes more than 1 year, especially if the test is designed to measure changes in performance. In the remainder of the report, we will discuss how the focus of the NRS was determined and the assessment was developed, HSB’s response to problems in initial implementation as well as some implementation issues that remain unaddressed, and the extent to which the assessment meets the professional and technical standards to support specific purposes identified by HSB. The NRS assesses vocabulary, letter recognition, simple math skills, and screens for understanding of spoken English. As initially conceived by HSB, the NRS was to gauge the progress of Head Start children in 13 congressionally mandated indicators of learning. However, time constraints and technical matters precluded HSB from assessing children on all of the indicators and led HSB to consider, and eventually adopt, portions of other assessments for use in the NRS. The 18 months from announcing the Good Start, Grow Smart initiative, of which the NRS is a part, to implementing the assessment was not enough time for HSB to develop a completely new assessment. Therefore, HSB, with the advice of its contractor and the Technical Work Group, chose to borrow material from existing assessments. Concerns raised by Technical Work Group members and the contractor about the length and complexity of the assessment and the technical adequacy of individual components eventually led to limiting the areas assessed in the NRS, from 13 skills to 6. The six legislatively mandated skills that HSB targeted included whether children in Head Start: use increasingly complex and varied spoken vocabulary; understand increasingly complex and varied vocabulary; identify at least 10 letters of the alphabet; know numbers and simple math operations, such as addition and subtraction; for non-English speaking children, demonstrate progress in listening to and understanding English; and for non-English speaking children, show progress in speaking English. In April and May of 2003 an assessment that included 5 components covering the 6 skills was field tested with 36 Head Start programs to examine the basic adequacy of the NRS, as well as the method for training assessors, and the use of the CBRS. The field test also included a Spanish version of the NRS. Based on the field test, one component–-phonological awareness, or one’s ability to hear, identify, and manipulate sounds–-was eliminated. While this component examined an area that experts have linked to prevention of reading difficulties, the test used to assess it was problematic. HSB moved forward with the other components of the NRS. The four components of the NRS each measure one or more of the six legislatively-mandated indicators. The four components that comprise the NRS are from the following tests: Oral Language Development Scale (OLDS) of the Pre-Language Assessment Scale 2000 (Pre-LAS 2000), Third Edition of the Peabody Picture Vocabulary Test (PPVT-III), Head Start Quality Research Centers (QRC) letter-naming exercise, and Early Childhood Longitudinal Study of a kindergarten cohort (ECLS-K) math assessment. Some or all of each test was previously used for other studies, and the PPVT and letter naming were previously used in studies of Head Start children. Three of the four tests were modified from their original version, as shown in table 2. Figures 3 and 4 are examples from the letter naming and early math skills components of the NRS. Figure 5 is an example of the type of item used in the vocabulary (PPVT) component of the NRS. Here are some letters of the alphabet. GESTURE WITH A CIRCULAR MOTION AT LETTERS AND SAY: Point to all the letters that you know and tell me the name of each one. Go slowly and show me which letter you’re naming. INDICATE ONLY CORRECTLY NAMED LETTERS ON ANSWER SHEET. WHEN CHILD STOPS NAMING LETTERS, SAY: Look carefully at all of them. Do you know any more? KEEP ASKING UNTIL CHILD DOESN’T KNOW ANY MORE.

In September 2003, the Head Start Bureau, in the Department of Health and Human Services (HHS) Administration for Children and Families (ACF), implemented the National Reporting System (NRS), the first nationwide skills test of over 400,000 4- and 5-year-old children. The NRS is intended to provide information on how well Head Start grantees are helping children progress. Given the importance of the NRS, this report examines: what information the NRS is designed to provide; how the Head Start Bureau has responded to concerns raised by grantees and experts during the first year of implementation; and whether the NRS provides the Head Start Bureau with quality information. The Head Start Bureau developed the NRS to gauge the extent to which Head Start grantees help children progress in specific skill areas, including understanding spoken English, recognizing letters, vocabulary, and early math. Due to time constraints and technical matters, the Head Start Bureau adapted portions of other assessments for use in the NRS. Head Start Bureau officials have responded to some concerns raised during the first year of NRS implementation, but other issues remain. For example, the Head Start Bureau has modified training materials and is exploring the feasibility of sampling. However, it is not monitoring whether grantees are inappropriately changing instruction to emphasize areas covered in the NRS. Head Start Bureau officials have said NRS results will eventually be used for program improvement, targeting training and technical assistance, and program accountability; however, the Head Start Bureau has not stated how NRS results will be used to realize these purposes. Currently, results from the first year of the NRS are of limited value for accountability purposes because the Head Start Bureau has not shown that the NRS meets professional standards for such uses, namely that (1) the NRS provides reliable information on children's progress during the Head Start program year, especially for Spanish-speaking children, and (2) its results are valid measures of the learning that takes place. The NRS also may not provide sufficient information to target technical assistance to the Head Start centers and classrooms that need it most.

Our April 2014 report noted that VA has experienced substantial delays in executing new outpatient-clinic lease projects; nearly all of the delays occurred in the planning stages prior to entering into a lease agreement with the developer. Specifically, we found that 39 of the 41 outpatient- clinic projects for which a prospectus was submitted experienced schedule delays, ranging from 6 months to 13.3 years, with an average delay of 3.3 years, while 2 projects experienced schedule time decreases. Our data analysis showed that 94 percent of these delays occurred in the planning stages prior to entering into the lease agreement. For all but one of the projects that experienced a delay, the delay occurred during the pre-lease agreement stage. We also compared the length of delays that occurred during the pre-lease agreement stage to the length of delays that occurred once a lease agreement was entered into with the development firm. We found that the average delay during the pre-lease agreement stages for all 41 projects totaled nearly 3.1 years. Conversely, the average project delay once a lease agreement was finalized totaled approximately 2.5 months, and 11 outpatient-clinic projects actually experienced schedule decreases during this stage. VA officials at 6 of the 11 outpatient-clinic projects selected for detailed review mentioned that the large majority of schedule delays occur during the planning stages prior to entering into a lease agreement. For the 41 lease projects we reviewed, we found that several factors contributed to delays: VHA’s late or changing requirements: According to data we analyzed and VA officials we interviewed, late or changing VHA requirements were the most common reasons for delays. Requirements can pertain to facility size, types of treatment rooms, types of medical equipment, electrical voltage needs, and other details. We found in many instances, either that CFM either did not receive VHA’s requirements on time or that VHA changed its requirements during the solicitation of offers, necessitating a re-design that affected the schedule. In evaluating VA data, we found that 23 of the 41 leasing projects (56 percent) experienced delays because VHA was late in submitting space requirements to CFM, or VHA changed space requirements and thus the scope of the project. For example, the size of the Jacksonville outpatient clinic had increased by 29 percent, and the Austin outpatient-clinic site we visited had increased by 36 percent from the time the prospectuses for these projects were submitted to Congress to the time they were completed. Site Selection Challenges: In analyzing VA data, we found that 20 of the 41 outpatient-clinic projects we reviewed (49 percent) experienced delays due to difficulties in locating or securing a suitable site. For example, an increase in scope to the Jacksonville project resulted in a larger building design that then required more land. To accommodate these changes, the landowner worked to acquire additional properties around the already selected site. Although the developer was ultimately successful in obtaining additional land for the project, this process led to delays. According to VA officials, prior to entering into the lease agreement, there were delays associated with difficult negotiations with the developer. However, the officials said that the negotiations resulted in keeping project costs lower. In addition, there were significant environmental clean-up requirements at the site, requirements that needed to be satisfied before construction began. The original site’s location was obtained in December 2002, but the larger site was not obtained until December 2009, a delay of 7 years. Outdated Guidance: At the sites we reviewed, we found that outdated policy and guidelines resulted in challenges for VA staff to complete leasing projects on time. For example, officials from the four Las Vegas outpatient sites we visited stated that VA’s policies for managing leases seem to change for each project, creating uncertainty regarding CFM job responsibilities. In addition to substantial delays, our April 2014 report noted that VA also experienced cost increases to its outpatient-clinic projects when compared to the costs in the projects’ prospectuses. VA provided cost data for its outpatient-clinic lease projects in January 2014. For the 31 projects with complete cost data, we found that “total first-year costs,” when compared to the prospectus costs, increased from $153.4 million to $172.2 million, an increase of nearly $19 million (12 percent). However, for the 31 projects, the total “prospectus first-year rent” was estimated at $58.2 million, but the total awarded first-year rent for these projects equaled $92.7 million as of January 2014, an increase of $34.5 million (59 percent).because the department must pay the higher rent over the lifetime of the lease agreement. For example, all 31 VA lease projects included in this cost analysis have lease terms of 20 years, and the increase in rent must be paid for the duration of the contract. Although first year’s rents increased for the 31 projects—increasing overall total costs—VA’s total “build-out” costs were lower than reported in the projects’ prospectuses. Build-out costs are one-time, lump-sum payments VA makes to developers for special purpose, medically related improvements to buildings when VA accepts the projects as completed. VA officials said the decrease in build-out costs from those originally estimated in the prospectuses was due to the national downturn in the commercial real estate market starting in 2008. The downturn created more competition among developers and helped VA realize more competitive pricing on its medical build-out requirements than was anticipated in the prospectuses. Such increases in rent have long- term implications for VA, The causes of the total cost increase can be attributed primarily to increases in the projects’ awarded first-year rent due to the schedule delays and changes to the design or scope of a project that we discussed previously. Schedule delays can increase costs because of changes in the local leasing market during the period of the delay. Therefore, when VA estimates costs as part of the prospectuses submitted to Congress in the annual budget request, an automatic annual escalation is applied to each project to account for rising costs and market forces that make construction and leased space more expensive over time. VA officials said the escalation ensures that the authorized cost of the project is in line with the realities of the real estate and construction markets. Because VA annually adjusts a project’s cost by an increase of 4 percent for each year the project is delayed, project delays directly result in cost increases. Additionally, we found that projects we reviewed increased in total size by 203,000 square feet. Changes in a project’s size expand the scope of the project, requiring design changes, which can result in schedule delays, further adding to costs. Our April 2014 report found that VA has made some progress in addressing issues with its major medical-facilities leasing program. Specifically, in April 2012, VA formed a high level council, the Construction Review Council, to oversee the department’s capital asset program, including leasing. Based on the findings of the council and our work for the April 2012 report on VA’s major leased outpatient clinics, VA is planning the following improvements to the major medical-facilities- leasing program: requiring detailed design requirements earlier in the design process to help avoid the delays, scope changes, and cost increases. However, these improvements were in the early stages, and their success will depend on how quickly and effectively VA implements them. Requiring detailed design requirements earlier in the facility-leasing process. VA issued a guidance memorandum in January 2014 directing that beginning with fiscal year 2016, VA should develop detailed space and design requirements before submitting the prospectus to Congress: Developing a process for handling scope changes. In August 2013, VA approved a new concept to better address scope changes to both major construction and congressionally authorized lease projects. According to VA officials, among other improvements, this process ensures a systematic review of the impact of any ad-hoc changes to projects in scope, schedule, and cost; Plans to provide Congress with clearer information on the limitations associated with costs of proposed projects. VA’s 2014 budget submission did not clarify that its estimates for future lease projects included only one year’s rent, which does not reflect the total costs over the life of the leases, costs that VA states cannot be accurately determined in early estimates. VA officials clarified this estimate beginning with VA’s 2015 budget submission. However, we also found that while VA has updated and refined some guidance for specific aspects of lease projects—including design guidance for the construction of outpatient clinics—to better support VA’s leasing staff and prevent project delays, it has not updated its VHA guidance for clinic leasing (used by staff involved with projects) since 2004. We reviewed VHA’s 2004 Handbook 1006.1, Planning and Activating Community-Based Outpatient Clinics, VHA’s overall guidance for leasing outpatient clinics. This Planning Handbook is intended to establish consistent planning criteria and standardized expectations. The Planning Handbook is widely used by VA officials and provides important guidance, in particular, clarifying the differing responsibilities of officials and departments and the legal authorities of the leasing process. However, this guidance is out of date and no longer adequately reflects the roles and responsibilities of the various VA organizations involved in major medical-facilities-leasing projects. According to VA officials, the close collaboration of these organizations is necessary for a successful lease project. As of November 2013, VHA’s leasing program has a long-term liability of $5.5 billion, but its guidance on outpatient clinics is a decade old and no longer relevant. Standards for Internal Control in the Federal Government calls for federal agencies to develop and maintain internal control activities, which include policies and procedures, to enforce management’s directives and help ensure that actions are taken to address risks. Such activities are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of government resources and for achieving effective results. The lack of updated guidance can affect coordination among stakeholders and could contribute to schedule delays and cost increases. Using outdated guidance can lead to miscommunications and errors in the planning and implementing of veterans’ leased clinics. Furthermore, the policy, planning criteria, and business plan format in the Planning Handbook were developed based on an old planning methodology that VA no longer uses; thus, the guidance does not reflect VA’s current process. In our April 2014 report, we recommended that the Secretary of Veterans Affairs update VHA’s guidance for leasing outpatient clinics to better reflect the roles and responsibilities of all VA staff involved in leasing projects. VA concurred with our recommendation and reported that it had created a VHA Lease Handbook that was in the concurrence process to address the roles and responsibilities of staff involving in leasing projects. In October 2014, VA reported that it had revised its clinic leasing guidance in response to GAO’s recommendation and that its leasing authority was now under the General Services Administration (GSA) and the handbook was undergoing further revisions to incorporate GSA leasing processes. Chairman DeSantis and Ranking Member Lynch, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you have any questions about matters discussed in this testimony, please contact Dave Wise, (202) 512-2834 or WiseD@gao.gov. Other key contributors to this testimony include Ed Laughlin, Assistant Director; Nelsie Alcoser; George Depaoli; Jessica Du; Raymond Griffith; Amy Rosewarne; and Crystal Wesco. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

VA operates one of the nation's largest health-care delivery systems. To help meet the changing medical needs of the veteran population, VA has increasingly leased medical facilities to provide health care to veterans. In April 2014, GAO reported that VHA's leasing program had long-term liability of $5.5 billion and was growing. This statement discusses VA outpatient clinic lease issues, specifically, (1) the extent to which schedule and costs changed for selected VA outpatient clinics' leased projects since they were first submitted to Congress and factors contributing to the changes and (2) actions VA has taken to improve its leasing practices for outpatient clinics and any opportunities for VA to improve its project management. It is based on GAO's April 2014 report ( GAO-14-300 ) along with selected updates conducted in August and October 2014 to obtain information from VA on actions it has taken to address GAO's prior recommendation. For that report, GAO reviewed all 41 major medical leases that were associated with outpatient clinic projects for which a prospectus had been submitted to Congress, as required by law. In its April 2014 report, GAO found that schedules were delayed and costs increased for the majority of the Department of Veterans Affairs' (VA) leased outpatient projects reviewed. As of January 2014, GAO found that 39 of the 41 projects reviewed—with a contract value of about $2.5 billion—experienced schedule delays, ranging from 6 months to 13.3 years, with an average delay of 3.3 years. The large majority of delays occurred prior to entering into a lease agreement, in part due to VA's Veterans Health Administration (VHA): 1) providing project requirements late or changing them or 2) using outdated guidance. Costs also increased for all 31 lease projects for which VA had complete cost data, primarily due to delays and changes to the scope of a project. For example, first-year rents increased a total of $34.5 million—an annual cost which will extend for 20 years (the life of these leases). GAO's report also found that VA had taken some actions to address problems managing clinic-leased projects. First, it established the Construction Review Council in April 2012 to oversee the department's capital asset programs, including the leasing program. Second, consistent with the council's findings and previous GAO work, VA was planning the following improvements: Requiring detailed design requirements earlier in the facility-leasing process . VA issued a guidance memorandum in January 2014 directing that beginning with fiscal year 2016, VA should develop detailed space and design requirements before submitting the prospectus to Congress. Developing a process for handling scope changes. In August 2013, VA approved a new concept to better address scope changes to both major construction and congressionally authorized lease projects. According to VA officials, among other improvements, this process ensures a systematic review of the impact of any ad-hoc changes to projects in scope, schedule, and cost. Plans to provide Congress with clearer information on the limitations associated with costs of proposed projects. VA's 2014 budget submission did not clarify that its estimates for future lease projects included only one year's rent, which does not reflect the total costs over the life of the leases, costs that VA states cannot be accurately determined in early estimates. VA officials clarified this estimate beginning with VA's 2015 budget submission. However, these improvements were in the early stages, and their success will depend on how quickly and effectively VA implements them. Finally, GAO reported that VA was also taking steps to refine and update guidance on some aspects of the leasing process, for example the VA's design guides, but VHA has not updated the overall guidance for clinic leasing (used by staff involved with projects) since 2004. In October 2014, VA reported that it was in the process of revising its clinic leasing guidance in response to GAO's recommendation and that its leasing authority was now under the General Services Administration (GSA) and the handbook was undergoing further revisions to incorporate GSA leasing processes. In its April 2014 report, GAO recommended that VA update VHA's guidance for the leasing of outpatient clinics. VA concurred with GAO's recommendation and is taking actions to implement the recommendation.

In the United States, the practice of pharmacy is regulated by state boards of pharmacy, which establish and enforce standards intended to protect the public. State boards of pharmacy also license pharmacists and pharmacies. To legally dispense a prescription drug, a licensed pharmacist working in a licensed pharmacy must be presented a valid prescription from a licensed health care professional. The requirement that drugs be prescribed and dispensed by licensed professionals helps ensure patients receive the proper dose, take the medication correctly, and are informed about warnings, side effects, and other important information about the drug. Under the Federal Food, Drug, and Cosmetic Act (FDCA), as amended, FDA is responsible for ensuring the safety, effectiveness, and quality of domestic and imported drugs. To gain approval for the U.S. market, a drug manufacturer must demonstrate that a drug is safe and effective, and that the manufacturing methods and controls that will be used in the specific facility where it will be manufactured meet FDA standards. The same drug manufactured in another facility not approved by FDA—such as a foreign- made version of an approved drug—may not be sold legally in the United States. Drugs are subject to other statutory and regulatory standards relating to purity, labeling, manufacturing, and packaging. Failure to meet these standards could result in a drug being considered illegal for sale in the United States. The FDCA requires that drugs be dispensed with labels that include the name of the prescriber, directions for use, and cautionary statements, among other things. A drug is considered misbranded if its labeling or container is misleading, or if the label fails to include required information. Prescription drugs dispensed without a prescription are also considered misbranded. In addition, if a drug is susceptible to deterioration and must, for example, be maintained in a temperature-controlled environment, it must be packaged and labeled in accordance with regulations and manufacturer standards. Drugs must also be handled to prevent adulteration, which may occur, for example, if held under unsanitary conditions leading to possible contamination. FDA-approved drugs manufactured in foreign countries, including those sold over the Internet, are subject to the same requirements as domestic drugs. Further, imported drugs may be denied entry into the United States if they “appear” to be unapproved, adulterated, or misbranded, among other things. While the importation of such drugs may be illegal, FDA has allowed individuals to bring small quantities of certain drugs into the United States for personal use under certain circumstances. We obtained 1 or more samples of 11 of the 13 drugs we targeted, both with and without a patient-provided prescription. Drug samples we received from other foreign pharmacies came from Argentina, Costa Rica, Fiji, India, Mexico, Pakistan, Philippines, Spain, Thailand, and Turkey. Most of the drugs—45 of 68—were obtained without a patient-provided prescription. These included drugs for which physician supervision is of particular importance due to the possibility of severe side effects, such as Accutane, or the high potential for abuse and addiction, such as the narcotic painkiller hydrocodone. (See table 2.) Although most of the samples we received were obtained without a patient-provided prescription, prescription requirements varied. Five U.S. and all 18 Canadian pharmacies from which we obtained drug samples required the patient to provide a prescription. The remaining 24 U.S. pharmacies generally provided a prescription based on a general medical questionnaire filled out online by the patient. Questionnaires requested information on the patient’s physical characteristics, medical history, and condition for which drugs were being purchased. Several pharmacy Web sites indicated that a U.S.-licensed physician reviews the completed questionnaire and issues a prescription. The other foreign Internet pharmacies we ordered from generally had no prescription requirements, and many did not seek information regarding the patient’s medical history or condition. The process for obtaining a drug from many of these pharmacies involved only selecting the desired medication and submitting the necessary billing and shipping information. (See table 3.) None of the 21 prescription drug samples we received from other foreign Internet pharmacies included a dispensing pharmacy label that provided patient instructions for use, and only 6 of these samples came with warning information. Lack of instructions and warnings on these drugs leaves consumers who take them at risk for potentially dangerous drug interactions or side effects from incorrect or inappropriate use. For example, we received 2 samples purporting to be Viagra, a drug used to treat male sexual dysfunction, without any warnings or instructions for use. (See fig. 1.) According to its manufacturer, this drug should not be prescribed for individuals who are currently taking certain heart medications, as it can lower blood pressure to dangerous levels. Additionally, two samples of Roaccutan, a foreign version of Accutane, arrived without any instructions in English. (See fig. 2.) Possible side effects of this drug include birth defects and severe mental disturbances. Compounding the concerns regarding the lack of warnings and patient instructions for use, none of the other foreign pharmacies ensured patients were under the care of a physician by requiring that a prescription be submitted before the order is filled. We observed other evidence of improper handling among 13 of the 21 drug samples we received from other foreign Internet pharmacies. For example, 3 samples of Humulin N were not shipped in accordance with manufacturer handling specifications. Despite the requirement that this drug be stored under temperature-controlled and insulated conditions, the samples we received were shipped in envelopes without insulation. (See fig. 3.) Similarly, 6 samples of other drugs were shipped in unconventional packaging, in some instances with the apparent intention of concealing the actual contents of the package. For example, the sample purporting to be OxyContin was shipped in a plastic compact disc case wrapped in brown packing tape—no other labels or instructions were included, and a sample of Crixivan was shipped inside a sealed aluminum can enclosed in a box labeled “Gold Dye and Stain Remover Wax.” (See fig. 4.) Additionally, 5 samples we received were damaged and included tablets that arrived in punctured blister packs, potentially exposing pills to damaging light or moisture. (See fig. 5.) One drug manufacturer noted that damaged packaging may also compromise the validity of drug expiration dates. Among the 21 drug samples from other foreign pharmacies, manufacturers determined that 19 were not approved for the U.S. market for various reasons, including that the labeling or the facilities in which they were manufactured had not been approved by FDA. For example, the manufacturer of one drug noted that 2 samples we received of that drug were packaged under an alternate name used for the Mexican market. The manufacturer of another drug found that 3 samples we received of that drug were manufactured at a facility unapproved to produce drugs for the U.S. market. In all but 4 instances, however, manufacturers determined that the chemical composition of the samples we received from other foreign Internet pharmacies was comparable to the chemical composition of the drugs we had ordered. Two samples of one drug were found by the manufacturer to be counterfeit and contained a different chemical composition than the drug we had ordered. In both instances the manufacturer reported that samples had less quantity of the active ingredient, and the safety and efficacy of the samples could not be determined. Manufacturers also found 2 additional samples to have a significantly different chemical composition than that of the product we ordered. In contrast to the drug samples received from other foreign Internet pharmacies, all 47 of the prescription drug samples we received from Canadian and U.S. Internet pharmacies included labels from the dispensing pharmacy that generally provided patient instructions for use and 87 percent of these samples (41 of 47) included warning information. Furthermore, all samples were shipped in accordance with special handling requirements, where applicable, and arrived undamaged. Manufacturers reported that 16 of the 18 samples from Canadian Internet pharmacies were unapproved for sale in the United States, citing for example unapproved labeling and packaging. However, the samples were all found to be comparable in chemical composition to the products we ordered. Finally, the manufacturer found that 1 sample of a moisture- sensitive medication from a U.S. Internet pharmacy was inappropriately removed from the sealed manufacturer container and dispensed in a pharmacy bottle. Table 4 summarizes the problems we identified among the 68 samples we received. We observed questionable characteristics and business practices of some of the Internet pharmacies from which we received drugs. We ultimately did not receive six of the orders we placed and paid for, suggesting the potential fraudulent nature of some Internet pharmacies or entities representing themselves as such. The six orders were for Clozaril, Humulin N, and Vicodin, and cost over $700 in total. Five of these orders were placed with non-Canadian foreign pharmacies and one was placed with a pharmacy whose location we could not determine. We followed up with each pharmacy in late April and early May of 2004 to determine the status. Three indicated they would reship the product, but as of June 10, 2004, we had not received the shipments. Three others did not respond to our inquiry. We determined that at least eight of the return addresses included on samples we received from other foreign Internet pharmacies were shipped from locations that raise questions about the entities that provided the samples. For example, we found a shopping mall in Buenos Aires, Argentina, at the return address provided on a sample of Lipitor. Authorities assisting us in locating this address found it impossible to identify which, if any, of the many retail stores mailed the package. The return address for a sample of Celebrex was found to be a business in Cozumel, Mexico, but representatives of that business informed authorities that it had no connection to an Internet pharmacy operation. Finally, the return addresses on samples of Humulin N and Zoloft were found to be private residences in Lahore, Pakistan. Certain practices of Internet pharmacies may render it difficult for consumers to know exactly what they are buying. Some non-Canadian foreign Internet pharmacies appeared to offer U.S. versions of brand name drugs on their Web sites, but attempted to substitute an alternative drug during the order process. In some cases, other foreign pharmacies substituted alternative drugs after the order was placed. For example, one Internet pharmacy advertised brand name Accutane, which we ordered. The sample we received was actually a generic version of the drug made by an overseas manufacturer. About 21 percent of the Internet pharmacies from which we received drugs (14 of 68) were under investigation by regulatory agencies. The reasons for the investigations by DEA and FDA include allegations of selling controlled substances without a prescription; selling adulterated, misbranded, or counterfeit drugs; selling prescription drugs where no doctor-patient relationship exists; smuggling; and mail fraud. The pharmacies under investigation were concentrated among the U.S. pharmacies that did not require a patient-provided prescription (nine) and other foreign (four) pharmacies. One Canadian pharmacy was also included among those under investigation. Consumers can readily obtain many prescription drugs over the Internet without providing a prescription—particularly from certain U.S. and foreign Internet pharmacies outside of Canada. Drugs available include those with special safety restrictions, for which patients should be monitored for side effects, and narcotics, where the potential for abuse is high. For these types of drugs in particular, a prescription and physician supervision can help ensure patient safety. In addition to the lack of prescription requirements, some Internet pharmacies can pose other safety risks for consumers. Many foreign Internet pharmacies outside of Canada dispensed drugs without instructions for patient use, rarely provided warning information, and in four instances provided drugs that were not the authentic products we ordered. Consumers who purchase drugs from foreign Internet pharmacies that are outside of the U.S. regulatory framework may also receive drugs that are unapproved by FDA and manufactured in facilities that the agency has not inspected. Other risks consumers may face were highlighted by the other foreign Internet pharmacies that fraudulently billed us, provided drugs we did not order, and provided false or questionable return addresses. It is notable that we identified these numerous problems despite the relatively small number of drugs we purchased, consistent with problems recently identified by state and federal regulatory agencies. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have at this time. For future contacts regarding this testimony, please call Marcia Crosse at (202) 512-7119. Other individuals who made key contributions include Randy DiRosa, Margaret Smith, and Corey Houchins-Witt. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

As the demand for and the cost of prescription drugs rise, many consumers have turned to the Internet to purchase them. However, the global nature of the Internet can hinder state and federal efforts to identify and regulate Internet pharmacies to help assure the safety and efficacy of products sold. Recent reports of unapproved and counterfeit drugs sold over the Internet have raised further concerns. This testimony summarizes a GAO report: Internet Pharmacies: Some Pose Safety Risks for Consumers, GAO-04-820 (June 17, 2004). GAO was asked to examine (1) the extent to which certain drugs can be purchased over the Internet without a prescription; (2) whether the drugs are handled properly, approved by the Food and Drug Administration (FDA), and authentic; and (3) the extent to which Internet pharmacies are reliable in their business practices. GAO attempted to purchase up to 10 samples of 13 different drugs, each from a different pharmacy Web site, including sites in the United States, Canada, and other foreign countries. GAO assessed the condition of the samples it received and forwarded the samples to their manufacturers to determine whether they were approved by FDA, safe, and authentic. GAO also confirmed the locations of several Internet pharmacies and undertook measures to examine the reliability of their business practices. GAO obtained most of the prescription drugs it sought from a variety of Internet pharmacy Web sites without providing a prescription. GAO obtained 68 samples of 11 different drugs--each from a different pharmacy Web site in the United States, Canada, or other foreign countries, including Argentina, Costa Rica, Fiji, India, Mexico, Pakistan, Philippines, Spain, Thailand, and Turkey. Five U.S. and all 18 Canadian pharmacy sites from which GAO received samples required a patient-provided prescription, whereas the remaining 24 U.S. and all 21 foreign pharmacy sites outside of Canada provided a prescription based on their own medical questionnaire or had no prescription requirement. Among the drugs GAO obtained without a prescription were those with special safety restrictions and highly addictive narcotic painkillers. GAO identified several problems associated with the handling, FDA-approval status, and authenticity of the 21 samples received from Internet pharmacies located in foreign countries outside of Canada. Fewer problems were identified among pharmacies in Canada and the United States. None of the foreign pharmacies outside of Canada included dispensing pharmacy labels that provide instructions for use, few included warning information, and 13 displayed other problems associated with the handling of the drugs. For example, 3 samples of a drug that should be shipped in a temperature-controlled environment arrived in envelopes without insulation. Manufacturer testing revealed that most of these drug samples were unapproved for the U.S. market because, for example, the labeling or the facilities in which they were manufactured had not been approved by FDA; however, manufacturers found the chemical composition of all but 4 was comparable to the product GAO ordered. Four samples were determined to be counterfeit products or otherwise not comparable to the product GAO ordered. Similar to the samples received from other foreign pharmacies, manufacturers found most of those from Canada to be unapproved for the U.S. market; however, manufacturers determined that the chemical composition of all drug samples obtained from Canada were comparable to the product GAO ordered. Some Internet pharmacies were not reliable in their business practices. Most instances identified involved pharmacies outside of the United States and Canada. GAO did not receive six orders for which it had paid. In addition, GAO found questionable entities located at the return addresses on the packaging of several samples, such as private residences. Finally, 14 of the 68 pharmacy Web sites from which GAO obtained samples were found to be under investigation by regulatory agencies for reasons including selling counterfeit drugs and providing prescription drugs where no valid doctor-patient relationship exists. Nine of these were U.S. sites, 1 a Canadian site, and 4 were other foreign Internet pharmacy sites.

As part of our undercover investigation, we produced counterfeit documents before sending our two teams of investigators out to the field. We found two NRC documents and a few examples of the documents by searching the Internet. We subsequently used commercial, off-the-shelf computer software to produce two counterfeit NRC documents authorizing the individual to receive, acquire, possess, and transfer radioactive sources. To support our investigators’ purported reason for having radioactive sources in their possession when making their simultaneous border crossings, a GAO graphic artist designed a logo for our fictitious company and produced a bill of lading using computer software. Our two teams of investigators each transported an amount of radioactive sources sufficient to manufacture a dirty bomb when making their recent, simultaneous border crossings. In support of our earlier work, we had obtained an NRC document and had purchased radioactive sources as well as two containers to store and transport the material. For the purposes of this undercover investigation, we purchased a small amount of radioactive sources and one container for storing and transporting the material from a commercial source over the telephone. One of our investigators, posing as an employee of a fictitious company, stated that the purpose of his purchase was to use the radioactive sources to calibrate personal radiation detectors. Suppliers are not required to exercise any due diligence in determining whether the buyer has a legitimate use for the radioactive sources, nor are suppliers required to ask the buyer to produce an NRC document when making purchases in small quantities. The amount of radioactive sources our investigator sought to purchase did not require an NRC document. The company mailed the radioactive sources to an address in Washington, D.C. On December 14, 2005, our investigators placed two containers of radioactive sources into the trunk of their rental vehicle. Our investigators – acting in an undercover capacity – drove to an official port of entry between Canada and the United States. They also had in their possession a counterfeit bill of lading in the name of a fictitious company and a counterfeit NRC document. At the primary checkpoint, our investigators were signaled to drive through the radiation portal monitors and to meet the CBP inspector at the booth for their primary inspection. As our investigators drove past the radiation portal monitors and approached the primary checkpoint booth, they observed the CBP inspector look down and reach to his right side of his booth. Our investigators assumed that the radiation portal monitors had activated and signaled the presence of radioactive sources. The CBP inspector asked our investigators for identification and asked them where they lived. One of our investigators on the two-man undercover team handed the CBP inspector both of their passports and told him that he lived in Maryland while the second investigator told the CBP inspector that he lived in Virginia. The CBP inspector also asked our investigators to identify what they were transporting in their vehicle. One of our investigators told the CBP inspector that they were transporting specialized equipment back to the United States. A second CBP inspector, who had come over to assist the first inspector, asked what else our investigators were transporting. One of our investigators told the CBP inspectors that they were transporting radioactive sources for the specialized equipment. The CBP inspector in the primary checkpoint booth appeared to be writing down the information. Our investigators were then directed to park in a secondary inspection zone, while the CBP inspector conducted further inspections of the vehicle. During the secondary inspection, our investigators told the CBP inspector that they had an NRC document and a bill of lading for the radioactive sources. The CBP inspector asked if he could make copies of our investigators’ counterfeit bill of lading on letterhead stationery as well as their counterfeit NRC document. Although the CBP inspector took the documents to the copier, our investigators did not observe him retrieving any copies from the copier. Our investigators watched the CBP inspector use a handheld Radiation Isotope Identifier Device (RIID), which he said is used to identify the source of radioactive sources, to examine the investigators’ vehicle. He told our investigators that he had to perform additional inspections. After determining that the investigators were not transporting additional sources of radiation, the CBP inspector made copies of our investigators’ drivers’ licenses, returned their drivers’ licenses to them, and our investigators were then allowed to enter the United States. At no time did the CBP inspector question the validity of the counterfeit bill of lading or the counterfeit NRC document. On December 14, 2005, our investigators placed two containers of radioactive sources into the trunk of their vehicle. Our investigators drove to an official port of entry at the southern border. They also had in their possession a counterfeit bill of lading in the name of a fictitious company and a counterfeit NRC document. At the primary checkpoint, our two-person undercover team was signaled by means of a traffic light signal to drive through the radiation portal monitors and stopped at the primary checkpoint for their primary inspection. As our investigators drove past the portal monitors and approached the primary checkpoint, they observed that the CBP inspector remained in the primary checkpoint for several moments prior to approaching our investigators’ vehicle. Our investigators assumed that the radiation portal monitors had activated and signaled the presence of radioactive sources. The CBP inspector asked our investigators for identification and asked them if they were American citizens. Our investigators told the CBP inspector that they were both American citizens and handed him their state-issued drivers’ licenses. The CBP inspector also asked our investigators about the purpose of their trip to Mexico and asked whether they were bringing anything into the United States from Mexico. Our investigators told the CBP inspector that they were returning from a business trip in Mexico and were not bringing anything into the United States from Mexico. While our investigators remained inside their vehicle, the CBP inspector used what appeared to be a RIID to scan the outside of the vehicle. One of our investigators told him that they were transporting specialized equipment. The CBP inspector asked one of our investigators to open the trunk of the rental vehicle and to show him the specialized equipment. Our investigator told the CBP inspector that they were transporting radioactive sources in addition to the specialized equipment. The primary CBP inspector then directed our investigators to park in a secondary inspection zone for further inspection. During the secondary inspection, the CBP inspector said he needed to verify the type of material our investigators were transporting, and another CBP inspector approached with what appeared to be a RIID to scan the cardboard boxes where the radioactive sources was placed. The instrumentation confirmed the presence of radioactive sources. When asked again about the purpose of their visit to Mexico, one of our investigators told the CBP inspector that they had used the radioactive sources in a demonstration designed to secure additional business for their company. The CBP inspector asked for paperwork authorizing them to transport the equipment to Mexico. One of our investigators provided the counterfeit bill of lading on letterhead stationery, as well as their counterfeit NRC document. The CBP inspector took the paperwork provided by our investigators and walked into the CBP station. He returned several minutes later and returned the paperwork. At no time did the CBP inspector question the validity of the counterfeit bill of lading or the counterfeit NRC document. We conducted corrective action briefings with CBP and NRC officials shortly after completing our undercover operations. On December 21, 2005, we briefed CBP officials about the results of our border crossing tests. CBP officials agreed to work with the NRC and CBP’s Laboratories and Scientific Services to come up with a way to verify the authenticity of NRC materials documents. We conducted two corrective action briefings with NRC officials on January 12 and January 24, 2006, about the results of our border crossing tests. NRC officials disagreed with the amount of radioactive material we determined was needed to produce a dirty bomb, noting that NRC’s “concern threshold” is significantly higher. We continue to believe that our purchase of radioactive sources and our ability to counterfeit an NRC document are matters that NRC should address. We could have purchased all of the radioactive sources used in our two undercover border crossings by making multiple purchases from different suppliers, using similarly convincing cover stories, using false identities, and had all of the radioactive sources conveniently shipped to our nation’s capital. Further, we believe that the amount of radioactive sources that we were able to transport into the United States during our operation would be sufficient to produce two dirty bombs, which could be used as weapons of mass disruption. Finally, NRC officials told us that they are aware of the potential problems of counterfeiting documents and that they are working to resolve these issues. Mr. Chairman and Members of the Subcommittee, this concludes my statement. I would be pleased to answer any questions that you or other members of the Subcommittee may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-7455 or kutzg@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Given today's unprecedented terrorism threat environment and the resulting widespread congressional and public interest in the security of our nation's borders, GAO conducted an investigation testing whether radioactive sources could be smuggled across U.S. borders. Most travelers enter the United States through the nation's 154 land border ports of entry. Department of Homeland Security U.S. Customs and Border Protection (CBP) inspectors at ports of entry are responsible for the primary inspection of travelers to determine their admissibility into the United States and to enforce laws related to preventing the entry of contraband, such as drugs and weapons of mass destruction. GAO's testimony provides the results of undercover tests made by its investigators to determine whether monitors at U.S. ports of entry detect radioactive sources in vehicles attempting to enter the United States. GAO also provides observations regarding the procedures that CBP inspectors followed during its investigation. GAO has also issued a report on the results of this investigation (GAO-06-545R). For the purposes of this undercover investigation, GAO purchased a small amount of radioactive sources and one secure container used to safely store and transport the material from a commercial source over the telephone. One of GAO's investigators, posing as an employee of a fictitious company located in Washington, D.C., stated that the purpose of his purchase was to use the radioactive sources to calibrate personal radiation detection pagers. The purchase was not challenged because suppliers are not required to determine whether prospective buyers have legitimate uses for radioactive sources, nor are suppliers required to ask a buyer to produce an NRC document when purchasing in small quantities. The amount of radioactive sources GAO's investigator sought to purchase did not require an NRC document. Subsequently, the company mailed the radioactive sources to an address in Washington D.C. The radiation portal monitors properly signaled the presence of radioactive material when our two teams of investigators conducted simultaneous border crossings. Our investigators' vehicles were inspected in accordance with most of the CBP policy at both the northern and southern borders. However, GAO's investigators, using counterfeit documents, were able to enter the United States with enough radioactive sources in the trunks of their vehicles to make two dirty bombs. According to the Centers for Disease Control and Prevention, a dirty bomb is a mix of explosives, such as dynamite, with radioactive powder or pellets. When the dynamite or other explosives are set off, the blast carries radioactive material into the surrounding area. The direct costs of cleanup and the indirect losses in trade and business in the contaminated areas could be large. Hence, dirty bombs are generally considered to be weapons of mass disruption instead of weapons of mass destruction. GAO investigators were able to successfully represent themselves as employees of a fictitious company present a counterfeit bill of lading and a counterfeit NRC document during the secondary inspections at both locations. The CBP inspectors never questioned the authenticity of the investigators' counterfeit bill of lading or the counterfeit NRC document authorizing them to receive, acquire, possess, and transfer radioactive sources.

During fiscal years 2002 through 2008, the United States spent approximately $16.5 billion to train and equip the Afghan army and police forces in order to transfer responsibility for the security of Afghanistan from the international community to the Afghan government. As part of this effort, Defense—through the U.S. Army and Navy—purchased over 242,000 small arms and light weapons, at a cost of about $120 million. As illustrated in figure 1, these weapons include rifles, pistols, shotguns, machine guns, mortars, and launchers for grenades, rockets, and missiles. In addition, CSTC-A has reported that 21 other countries provided about 135,000 weapons for ANSF between June 2002 and June 2008, which they have valued at about $103 million. This brings the total number of weapons Defense reported obtaining for ANSF to over 375,000. The Combined Security Transition Command-Afghanistan (CSTC-A) in Kabul, which is a joint service, coalition organization under the command and control of Defense’s U.S. Central Command is primarily responsible for training and equipping ANSF. As part of that responsibility, CSTC-A receives and stores weapons provided by the United States and other international donors and distributes them to ANSF units. In addition, CSTC-A is responsible for monitoring the use of U.S.-procured weapons and other sensitive equipment. Lapses in weapons accountability occurred throughout the supply chain, including when weapons were obtained, transported to Afghanistan, and stored at two central depots in Kabul. Defense has accountability procedures for its own weapons, including (1) serial number registration and reporting and (2) 100 percent physical inventories of weapons stored in depots at least annually. However, Defense failed to provide clear guidance to U.S. personnel regarding what accountability procedures applied when handling weapons obtained for the ANSF. We found that the U.S. Army and CSTC-A did not maintain complete records for an estimated 87,000—or about 36 percent—of the 242,000 weapons Defense procured and shipped to Afghanistan for ANSF. Specifically: For about 46,000 weapons, the Army could not provide us serial numbers to uniquely identify each weapon provided, which made it impossible for us to determine their location or disposition. For about 41,000 weapons with serial numbers recorded, CSTC-A did not have any records of their location or disposition. Furthermore, CSTC-A did not maintain reliable records, including serial numbers, for any of the 135,000 weapons it reported obtaining from international donors from June 2002 through June 2008. Although weapons were in Defense’s control and custody until they were issued to ANSF units, accountability was compromised during transportation and storage. Organizations involved in the transport of U.S.- procured weapons into Kabul by air did not communicate adequately to ensure that accountability was maintained over weapons during transport. In addition, CSTC-A did not maintain complete and accurate inventory records for weapons at the central storage depots and allowed poor security to persist. Until July 2008, CSTC-A did not track all weapons at the depots by serial number and conduct routine physical inventories. Without such regular inventories, it is difficult for CSTC-A to maintain accountability for weapons at the depots and detect weapons losses. Moreover, CSTC-A could not identify and respond to incidents of actual or potential compromise, including suspected pilferage, due to poor security and unreliable data systems. Illustrating the importance of physical inventories, less than 1 month after completing its first full weapons inventory, CSTC-A officials identified the theft of 47 pistols intended for ANSF. During our review, Defense indicated that it would begin recording serial numbers for all weapons it obtains for ANSF, and CSTC-A established procedures to track weapons by serial number in Afghanistan. It also began conducting physical inventories of the weapons stored at the central depots. However, CSTC-A officials stated that their continued implementation of these new accountability procedures was not guaranteed, considering staffing constraints and other factors. Despite CSTC-A training efforts, ANSF units cannot fully safeguard and account for weapons, placing weapons CSTC-A has provided to ANSF at serious risk of theft or loss. In February 2008, CSTC-A acknowledged that it was issuing equipment to Afghan National Police units before providing training on accountability practices and ensuring that effective controls were in place. Recognizing the need for weapons accountability in ANSF units, Defense and State deployed hundreds of U.S. trainers and mentors to, among other things, help the Afghan army and police establish equipment accountability practices. In June 2008, Defense reported to Congress that it was CSTC-A’s policy not to issue equipment to ANSF without verifying that appropriate supply and accountability procedures are in place. While CSTC-A has established a system for assessing the logistics capacity of ANSF units, it has not consistently assessed or verified ANSF’s ability to properly account for weapons and other equipment. Contractors serving as mentors have reported major ANSF accountability weaknesses. Although these reports did not address accountability capacities in a consistent manner that would allow a systematic or comprehensive assessment of all units, they highlighted the following common problems relating to weapons accountability. Lack of functioning property book operations. Many Afghan army and police units did not properly maintain property books, which are fundamental tools used to establish equipment accountability and are required by Afghan ministerial decrees. Illiteracy. Widespread illiteracy among Afghan army and police personnel substantially impaired equipment accountability. For example, a mentor noted that illiteracy in one Afghan National Army corps was directly interfering with the ability of supply section personnel to implement property accountability processes and procedures, despite repeated training efforts. Poor security. Some Afghan National Police units did not have facilities adequate to ensure the physical security of weapons and protect them against theft in a high-risk environment. In a northern province, for example, a contractor reported that the arms room of one police district office was behind a wooden door that had only a miniature padlock, and that this represented the same austere conditions as in the other districts. Unclear guidance. Afghan government logistics policies were not always clear to Afghan army and police property managers. Approved Ministry of Interior policies outlining material accountability procedures were not widely disseminated, and many police logistics officers did not recognize any of the logistical policies as rule. Additionally, a mentor to the Afghan National Army told us that despite new Ministry of Defense decrees on accountability, logistics officers often carried out property accountability functions using Soviet-style accounting methods and that the Ministry was still auditing army accounts against those defunct standards. Corruption. Reports of alleged theft and unauthorized resale of weapons are common, including one case in which an Afghan police battalion commander in one province was allegedly selling weapons to enemy forces. Desertion. Desertion in the Afghan National Police has also resulted in the loss of weapons. For example, contractors reported that Afghan Border Police officers at one province checkpoint deserted to ally themselves with enemy forces and took all their weapons and two vehicles with them. In July 2007, Defense began issuing night vision devices to the Afghan National Army. These devices are considered dangerous to the public and U.S. forces in the wrong hands, and Defense guidance calls for intensive monitoring of their use, including tracking by serial number. However, we found that CSTC-A did not begin monitoring the use of these sensitive devices until October 2008—about 15 months after issuing them. Defense and CSTC-A attributed the limited monitoring of these devices to a number of factors, including a shortage of security assistance staff and expertise at CSTC-A, exacerbated by frequent CSTC-A staff rotations. After we brought this to CSTC-A’s attention, it conducted an inventory and reported in December 2008 that all but 10 of the 2,410 night vision devices issued had been accounted for. We previously reported that Defense cited significant shortfalls in the number of trainers and mentors as the primary impediment to advancing the capabilities of ANSF. According to CSTC-A officials, as of December 2008, CSTC-A had only 64 percent of the nearly 6,700 personnel it required to perform its overall mission, including only about half of the over 4,000 personnel needed to mentor ANSF units. In summary, we have serious concerns about the accountability for weapons that Defense obtained for ANSF through U.S. procurements and international donations. First, we estimate that Defense did not systematically track over half of the weapons intended for ANSF. This was primarily due to staffing shortages and Defense’s failure to establish clear accountability procedures for these weapons while they were still in U.S. custody and control. Second, ANSF units could not fully safeguard and account for weapons Defense has issued to them, despite accountability training provided by both Defense and State. Poor security and corruption in Afghanistan, unclear guidance from Afghan ministries, and a shortage of trainers and mentors to help ensure that appropriate accountability procedures are implemented have reportedly contributed to this situation. In the report we are releasing today we make several recommendations to help improve accountability for weapons and other sensitive equipment that the United States provided to ANSF. In particular, we recommend that the Secretary of Defense (1) establish clear accountability procedures for weapons while they are in the control and custody of the United States, including tracking all weapons by serial number and conducting routine physical inventories; (2) direct CSTC-A to specifically assess and verify each ANSF unit’s capacity to safeguard and account for weapons and other sensitive equipment before providing such equipment, unless a specific waiver or exception is granted; and (3) devote adequate resources to CSTC-A’s effort to train, mentor, and assess ANSF in equipment accountability matters. In commenting on a draft of our report, Defense concurred with our recommendations and has begun to take corrective action. In January 2009, Defense directed the Defense Security Cooperation Agency to lead an effort to establish a weapons registration and monitoring system in Afghanistan, consistent with controls mandated by Congress for weapons provided to Iraq. If Defense follows through on this plan and, in addition, clearly requires routine inventories of weapons in U.S. custody and control, our concern about the lack of clear accountability procedures will be largely addressed. According to Defense, trainers and mentors are assessing the ability of ANSF units to safeguard and account for weapons. For the Afghan National Army, mentors are providing oversight at all levels of command of those units receiving weapons. For the Afghan National Police, most weapons are issued to units that have received instruction on equipment accountability as part of newly implemented training programs. We note that at the time of our review, ANSF unit assessments did not systematically address each unit’s capacity to safeguard and account for weapons in its possession. We also note that Defense has cited significant shortfalls in the number of personnel required to train and mentor ANSF units. Unless these matters are addressed, we are not confident the shortcomings we reported will be adequately addressed. Defense also indicated that it is looking into ways of addressing the staffing shortfalls that hamper CSTC-A’s efforts to train, mentor, and assess ANSF in equipment accountability matters. However, Defense did not state how or when additional staffing would be provided. Mr. Chairman and members of the subcommittee, this concludes my prepared statement. I will be happy to answer any questions you may have. To address our objectives, we reviewed documentation and interviewed officials from Defense, U.S. Central Command, CSTC-A, and the U.S. Army and Navy. On the basis of records provided to us, we compiled detailed information on weapons reported as shipped to CSTC-A in Afghanistan by the United States and other countries from June 2002 through June 2008. We traveled to Afghanistan in August 2008 to examine records and meet with officials at CSTC-A headquarters, visit the two central depots where the weapons provided for ANSF are stored, and meet with staff at an Afghan National Army unit that had received weapons. While in Afghanistan, we attempted to determine the location or disposition of a sample of weapons. Our sample was drawn randomly from a population of 195,671 U.S.-procured weapons shipped to Afghanistan for which Defense was able to provide serial numbers. We used the results of our sampling to reach general conclusions about CSTC-A’s ability to account for weapons purchased by the United States for ANSF. We also discussed equipment accountability with cognizant officials from the Afghan Ministries of Defense and Interior, the U.S. Embassy, and contractors involved in building ANSF’s capacity to account for and manage its weapons inventory. We performed our work from November 2007 through January 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. For questions regarding this testimony, please contact Charles Michael Johnson, Jr. at (202) 512-7331 or johnsoncm@gao.gov. Albert H. Huntington III, Assistant Director; James Michels; Emily Rachman; Mattias Fenton; and Mary Moutsos made key contributions in preparing this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony discusses the GAO report on accountability for small arms and light weapons that the United States has obtained and provided or intends to provide to the Afghan National Security Forces (ANSF)--the Afghan National Army and the Afghan National Police. Given the unstable security conditions in Afghanistan, the risk of loss and theft of these weapons is significant, which makes this hearing particularly timely. This testimony today focuses on (1) the types and quantities of weapons the Department of Defense (Defense) has obtained for ANSF, (2) whether Defense can account for the weapons it obtained for ANSF, and (3) the extent to which ANSF can properly safeguard and account for its weapons and other sensitive equipment. During fiscal years 2002 through 2008, the United States spent approximately $16.5 billion to train and equip the Afghan army and police forces in order to transfer responsibility for the security of Afghanistan from the international community to the Afghan government. As part of this effort, Defense--through the U.S. Army and Navy--purchased over 242,000 small arms and light weapons, at a cost of about $120 million. These weapons include rifles, pistols, shotguns, machine guns, mortars, and launchers for grenades, rockets, and missiles. In addition, CSTC-A has reported that 21 other countries provided about 135,000 weapons for ANSF between June 2002 and June 2008, which they have valued at about $103 million. This brings the total number of weapons Defense reported obtaining for ANSF to over 375,000. The Combined Security Transition Command-Afghanistan (CSTC-A) in Kabul, which is a joint service, coalition organization under the command and control of Defense's U.S. Central Command is primarily responsible for training and equipping ANSF.3 As part of that responsibility, CSTC-A receives and stores weapons provided by the United States and other international donors and distributes them to ANSF units. In addition, CSTC-A is responsible for monitoring the use of U.S.-procured weapons and other sensitive equipment.

Microelectronics focuses on the study and manufacture of micro devices, such as silicon integrated circuits, which are fabricated in submicron dimensions and form the basis of all electronic products. In DOD research, microelectronics extends beyond silicon integrated circuits and cuts across scientific disciplines such as biological sciences, materials sciences, quantum physics, and photonics. DOD research also covers many different types of materials, devices, and processes. For example, DOD service laboratories conduct research in materials other than silicon, such as gallium nitride, indium arsenide, and silicon carbide—materials that could provide higher performing or more reliable devices to meet DOD needs. DOD’s overall budget authority for fiscal year 2005 was approximately $400 billion. About $69 billion, or 17 percent of the overall budget, was directed toward research and development activities. The vast majority of this funding goes to development programs for major systems such as the Joint Strike Fighter and the Space Based Infrared System High. About $5.2 billion, or about 1.3 percent of the overall budget, was directed toward research (see fig. 1). Because DOD tracks funding by funding category, not by specific technology area, the microelectronics portion of this funding category cannot be broken out. DOD research and technology development is conducted by universities, DOD laboratories, industry, and other organizations. Universities and DOD laboratories are primarily involved in research. Once a new device is proven and has potential application for DOD, the technology is transferred to industry to further develop and ultimately produce and integrate into defense systems. These organizations may collaborate on microelectronics projects through various arrangements, such as cooperative research and development agreements and collaborative technology alliances. Figure 2 shows the distribution of DOD research and advanced technology development funding by performing organizations. Microelectronics production and research prototyping require specialized equipment and facilities. To prevent flaws in production, microelectronic devices are produced in clean rooms where the air is constantly filtered, and temperature, humidity, and pressure may be regulated. Clean rooms are rated according to a federal standard. For example, a class 1000 clean room has no more than 1000 particles larger than 0.5 microns in a cubic foot of air, while a class 100 clean room has no more than 100 particles. The people who work in clean rooms wear special protective clothing that prevents workers from contaminating the room (see fig. 3). The equipment found at research facilities and at production facilities are similar but are used for different purposes. Because research facilities focus on developing new device concepts, materials, and processes, the equipment is set up for flexibility because it is used for different experiments to prove concepts and validate theories. Once a technology is sufficiently developed, a small quantity is prototyped in a production environment to prove the design. Production facilities are set up to produce higher volumes of microelectronics and have more automation and multiple sets of equipment to increase productivity. At the time of our review, eight DOD and FFRDC facilities that received funding from DOD were involved in microelectronics research prototyping or production. Three military facilities focused solely on research; three primarily focused on research but had limited production capabilities; and two focused solely on production (see fig. 4). The three military facilities provide basic and applied research covering a wide spectrum of microelectronic devices and materials. For example, the Naval Research Laboratory facility is conducting basic research on the potential application of nonsilicon materials in microelectronic devices. Through its applied research, the Air Force Research Laboratory facility developed a process to improve the performance and reliability of microwave devices needed for military radar and communications systems. This technology was ultimately transferred from the Air Force to various contractors and used in a number of systems, including the Joint Strike Fighter. The Army Research Laboratory facility conducts both basic and applied research, primarily on multifunction radiofrequency, optoelectronics, and power conversion. Three other facilities also conduct research but can produce prototypes or limited numbers of devices if commercial sources are not available. For example, the Lincoln Laboratory’s facility—which primarily focuses on applied research in sensing and signal processing technologies—has developed components for the space-based visible sensor because no commercial source was available to meet this DOD need. Sandia’s facility primarily focuses on research and design of radiation hardened microelectronics. However, because the number of commercial producers able to meet the radiation requirements of the Department of Energy and DOD has dwindled to two suppliers, Sandia maintains limited in-house production capability to fill near-term critical needs. According to Sandia officials, they have not been called upon to produce microelectronics for DOD in recent years. The SPAWAR facility, which recently closed, primarily conducted research on radiation-hardened microelectronics, but at one time produced these devices for the Navy’s Trident missile system. When production of these devices was transferred to a commercial supplier, the facility maintained capability to produce microelectronics as a back-up to the commercial supplier. Two facilities focused only on production—one on leading edge technology and one on lagging edge technology. NSA’s microelectronics facility focuses on producing cryptographic microelectronics—devices not readily obtainable on the commercial market because of their unique and highly classified requirements. DMEA fills a unique role within DOD by providing solutions to microelectronics that are no longer commercially available. DMEA acquires process lines that commercial firms are abandoning and, through reverse-engineering and prototyping, provides DOD with these abandoned devices. In some cases, DMEA may produce the device. The type and complexity of research conducted or device produced largely determines a facility’s clean room class and size and its equipment replacement costs. For example, to produce cryptographic electronics, NSA has a 20,000 square foot class 10 clean room facility. In contrast, the Naval Research Laboratory conducts research in a 5,000 square foot class 100 clean room facility, with some class 10 modules where greater cleanliness is required. In general, research does not require state-of-the- art equipment to prove concepts, and tools can be purchased one at a time and are often second-hand or donated. Table 1 summarizes the eight facilities’ microelectronics focus, clean room class and size, and equipment replacement costs. Since we began our review, the SPAWAR facility closed on October 31, 2004, making Sandia the only backup to the two remaining commercial radiation-hardened suppliers to DOD. Officials from the facility told us that without funds from the Trident program, operating the facility became cost prohibitive. Further, NSA’s microelectronics facility is slated for closure in 2006. NSA estimated that it would cost $1.7 billion to upgrade its equipment and facility to produce the next generation of integrated circuits. NSA is contracting with IBM to take over production of the microelectronic devices produced at its facility. Part of the contract costs includes security requirements for IBM to produce classified circuits. There may be changes to other facilities pending the review of the Base Realignment and Closure Commission for 2005. As a result of prior commission recommendations, the Army constructed a new facility to consolidate Army specialized electronics research into one location. DOD has several mechanisms in place aimed at coordinating and planning research conducted by the Air Force, Army, Navy, and defense agencies. In electronics and microelectronics research, DOD works with industry to review special technology areas and make recommendations about future research. DOD’s Defense Reliance process provides the Department with a framework to look across science and technology (S&T) efforts of the Defense Advanced Research Projects Agency, Defense Threat Reduction Agency, and the Missile Defense Agency as well as the Army, Navy, and Air Force. Each service and defense agency updates its own S&T plans with the needs of each organization in mind. The Defense Reliance process is intended to improve coordination and determine if the overall DOD S&T vision and strategy are being met. The Defense Science and Technology Strategy document is updated periodically to provide a high-level description of what the science and technology programs aim to accomplish. The Defense Reliance process includes the development of three planning documents, which taken together provide a near-, mid-, and long-term look at DOD specific research needs (see table 2). The planning documents present the DOD S&T vision, strategy, plan, and objectives for the planners, programmers, and performers of defense S&T and guide the annual preparation of the defense program and budget. Figure 5 illustrates the relationship between the planning documents and overall reliance process. Science and technology efforts are planned and funded through service and defense agency plans. To obtain a perspective across DOD, a portion of the service and agency efforts are represented in the various Defense Reliance planning documents. DOD’s goal is to have about half of the investment in service and agency efforts represented in defense technology objectives. According to DOD officials, this goal is aimed at balancing flexibility—which services and defense agencies need to pursue research that is important to their organizations—with oversight and coordination. DOD officials stated that looking at a portion of the efforts provide an adequate perspective of the S&T research across the services and defense agencies to help ensure the goals of DOD’s S&T strategy are being met. These projects are generally considered high priority, joint efforts, or both. Two key components in the Defense Reliance process are the defense technology objectives and technology area review and assessments. Defense technology objectives are intended to guide the focus of DOD’s science and technology investments by identifying the following objectives, the specific technology advancements that will be developed or payoffs, the specific benefits to the warfighter resulting from the challenges, the technical barriers to be overcome; milestones, planned dates for technical accomplishments, including the anticipated date of technology availability; metrics, a measurement of anticipated results; customers sponsoring the research; and funding that DOD estimates is needed to achieve the technology advancements. Both the Joint Warfighting and Defense Technology Area plans are comprised of defense technology objectives that are updated annually. In its 2004 update, DOD identified 392 defense technology objectives —130 in the Joint Warfighting Science and Technology Plan across five joint capabilities, and 262 in the Defense Technology Area Plan across 12 technology areas. Microelectronics falls within the sensors, electronics, and electronic warfare area. There are 40 defense technology objectives in this area; five were identified as microelectronics (see fig. 6). However, according to DOD officials, research relating to microelectronics is not limited to these five defense technology objectives because microelectronics is an enabling technology found in many other research areas. For example, research in electronic warfare is highly dependent on microelectronics. To provide an independent assessment of the planned research, DOD uses Technology Area Review and Assessment panels. DOD strives to have a majority of the Technology Area Review and Assessment team members from outside DOD, including other government agencies, FFRDCs, universities, and industry. Most team members are recognized experts in their respective research fields. The Technology Area Review and Assessment panels assess DOD programs against S&T planning guidance, defense technology objectives, affordability, service-unique needs, and technology opportunities; and provide their assessments and recommendations to the Defense Science and Technology Advisory Group. For the electronics research area, additional industry and university insight is obtained through the Advisory Group on Electron Devices. DOD established this advisory group to help formulate a research investment strategy by providing ongoing reviews and assessments of government- sponsored programs in electronics, including microelectronics. The advisory group is comprised of experts representing the government, industry, and universities, who provide DOD with current knowledge on the content and objectives of various programs under way at industry, university, and government laboratories. Periodically, the advisory group conducts special technology area reviews to evaluate the status of an electronics technology for defense applications. The advisory group also serves as a bridge between electronic system and component developers within DOD by establishing regular, periodic interactions with system program offices, industry system developers, and government and industry components developers. We provided a draft of this report to DOD for review. In its response, DOD did not provide specific written or technical comments (see app. II). We are sending copies of this report to interested congressional committees; the Secretary of Defense; and the Director, Office of Management and Budget. We will 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. Please contact me at (202) 512-4841 if you or your staff has any questions concerning this report. Major contributors to this report are listed in appendix III. To identify and describe DOD and FFRDC facilities that receive funding from DOD for microelectronics production or research prototyping, we visited all eight facilities identified by DOD as having capability to produce or prototype microelectronics. Using a set of structured questions, we interviewed officials at each facility to determine their microelectronics focus, clean-room and equipment characteristics, and types of research, production and/or research prototyping the facility provides. We also obtained and analyzed supporting documents and toured the facilities. We did not include in our scope universities or commercial firms that also conduct DOD research and have microelectronics facilities. Because microelectronics is a part of a much broader area of research, we looked at DOD’s overall research coordination in addition to microelectronics-specific areas. To determine how DOD coordinates its research investments, we interviewed officials from the Executive Staff of the Defense Science and Technology Reliance process; the Office of the Deputy Under Secretary of Defense for Science and Technology (Space and Sensor Technology); and the Advisory Group on Electron Devices. We also obtained and reviewed DOD’s defense research planning- documents—including the Basic Research Plan, the Defense Technology Area Plan, Joint Warfighting Science and Technology Plan, and the Defense Technology Objectives document. We also met with Defense Advanced Research Projects Agency officials to discuss their role in sponsoring DOD research and development activities. In addition, at the DOD service laboratories that we visited, we obtained information on microelectronics related research projects. We performed our review from November 2003 to January 2005 in accordance with generally accepted government auditing standards. In addition to the individual named above, Bradley Terry, Lisa Gardner, Karen Sloan, Hai Tran, Brian Eddington, and Steven Pedigo made key contributions to this report.

The Department of Defense's (DOD) ability to provide superior capabilities to the warfighter is dependent on its ability to incorporate rapidly evolving, cutting-edge microelectronic devices into its defense systems. While many commercial microelectronics advances apply to defense systems, DOD has some unique microelectronics needs not met by industry. Therefore, to maintain military superiority, DOD has the challenge of exploiting state-of-the-art commercial microelectronics technology and focusing its research investments in areas with the highest potential return for defense systems. Given the importance of advanced microelectronics to defense systems and the rapid changes in these technologies, Congress asked GAO to (1) identify and describe DOD and federally funded research and development center (FFRDC) facilities that receive funding from DOD for microelectronics production or research prototyping and (2) describe how DOD coordinates investments in microelectronics research. At the time of our review, eight DOD and FFRDC facilities that received funding from DOD were involved in microelectronics research prototyping or production. Three of these facilities focused solely on research; three primarily focused on research but had limited production capabilities; and two focused solely on production. The research conducted ranged from exploring potential applications of new materials in microelectronic devices to developing a process to improve the performance and reliability of microwave devices. Production efforts generally focus on devices that are used in defense systems but not readily obtainable on the commercial market, either because DOD's requirements are unique and highly classified or because they are no longer commercially produced. For example, one of the two facilities that focuses solely on production acquires process lines that commercial firms are abandoning and, through reverse-engineering and prototyping, provides DOD with these abandoned devices. During the course of GAO's review, one facility, which produced microelectronic circuits for DOD's Trident program, closed. Officials from the facility told us that without Trident program funds, operating the facility became cost prohibitive. These circuits are now provided by a commercial supplier. Another facility is slated for closure in 2006 due to exorbitant costs for producing the next generation of circuits. The classified integrated circuits produced by this facility will also be supplied by a commercial supplier. DOD has several mechanisms in place aimed at coordinating and planning research conducted by the military services and defense agencies. One key mechanism is identifying defense technology objectives--the specific technology advancements that will be developed or demonstrated across multiple joint capabilities and technology areas. As of February 2004, there were almost 400 defense technology objectives; five of these were identified as microelectronics. DOD also collaborates with industry to review and assess special technology areas and make recommendations about future electronics and microelectronics research.

The JSF program is a joint program between the Air Force, Navy, and Marine Corps for developing and producing next-generation fighter aircraft to replace aging inventories. The program is currently in year 3 of an estimated 11-year development phase. The current estimated cost for this phase is about $40.5 billion. In October 2001 Lockheed Martin was awarded the air system development contract now valued at over $19 billion. Lockheed Martin subsequently awarded multi-billion-dollar subcontracts to its development teammates—Northrop Grumman and BAE Systems—for work on the center and aft fuselage, respectively. Lockheed Martin has also subcontracted for the development of major subsystems of the aircraft, such as the landing gear system. This is a departure from past Lockheed Martin aircraft programs, where the company subcontracted for components (tires, brakes, etc.) and integrated them into major assemblies and subsystems (the landing gear system). In addition to the Lockheed Martin contract, DOD has prime contracts with both Pratt & Whitney and General Electric to develop two interchangeable aircraft engines. Pratt & Whitney’s development contract is valued at over $4.8 billion. Rolls Royce plc (located in the United Kingdom) and Hamilton Sundstrand are major subcontractors to Pratt & Whitney for this effort. General Electric is currently in an early phase of development and has a contract valued at $453 million. Rolls Royce Corporation (located in Indianapolis, Ind.) is a teammate and 40 percent partner for the General Electric engine program. The General Electric/Rolls Royce team is expected to receive a follow-on development contract in fiscal year 2005 worth an estimated $2.3 billion. All the prime contracts include award fee structures that permit the JSF Program Office to establish criteria applicable to specific evaluation periods. If, during its regular monitoring of contract execution, the program office identifies the need for more emphasis in a certain area—such as providing opportunities for international suppliers or reducing aircraft weight—it can establish related criteria against which the contractor will be evaluated to determine the extent of its award fee. The Buy American Act and Preference for Domestic Specialty Metals clause implementing Berry Amendment provisions apply to the government’s purchase of manufactured end products for the JSF program. Currently, only one JSF prime contractor—Pratt & Whitney— will deliver manufactured end products to the government in this phase of the program. Under its current contract, Pratt & Whitney is to deliver 20 flight test engines, 10 sets of common engine hardware, and certain other equipment. The other engine prime contractor, General Electric, will not deliver manufactured end products under its current contract. However, its anticipated follow-on development contract will include the delivery of test engines that will be subject to Buy American Act and Specialty Metals requirements. Finally, Lockheed Martin will not deliver any manufactured end products under its development contract. The company is required to deliver plans, studies, designs, and data. Lockheed Martin will produce 22 test articles (14 flight test aircraft and 8 ground test articles) during this phase of the program, but these are not among the items to be delivered. Although the Buy American Act will apply to manufactured end products delivered to DOD during the JSF program, its restrictions will have little impact on the selection of suppliers because of DOD’s use of the law’s public interest exception. This exception allows the head of an agency to determine that applying the domestic preference restrictions would be inconsistent with the public interest. DOD has determined that countries that sign reciprocal procurement agreements with the department to promote defense cooperation and open up defense markets qualify for this exception. The eight JSF partners have all signed these agreements and are considered “qualifying countries.” Under defense acquisition regulations implementing the Buy American Act, over 50 percent of the cost of all the components in an end product must be mined, produced, or manufactured in the United States or “qualifying countries” for a product to qualify as domestic. Our analysis of JSF development subcontracts awarded by prime contractors and their teammates showed that nearly 100 percent of contract dollars awarded by the end of 2003 went to companies in the United States or qualifying countries. (See appendix II for Joint Strike Fighter System Development and Demonstration Subcontract Awards to the United States, Qualifying Countries, and Nonqualifying Countries). The Preference for Domestic Specialty Metals clause applies to articles delivered by Lockheed Martin, Pratt & Whitney, and General Electric under JSF contracts. Generally, this clause requires U.S. or qualifying country sources for any specialty metals, such as titanium, that are incorporated into articles delivered under the contract. This restriction must also be included in any subcontract awarded for the program. To meet Specialty Metals requirements, Lockheed Martin and Pratt & Whitney have awarded subcontracts to domestic suppliers for titanium; and Lockheed Martin has also extended to its subcontractors the right to buy titanium from its domestic supplier at the price negotiated for Lockheed Martin. General Electric does not exclusively use domestic titanium in its defense products. However, in 1996, the company received a class deviation from the clause that allows it to use both domestic and foreign titanium in its defense products, as long as it buys sufficient domestic quantities to meet DOD contract requirements. For instance, if 25 percent of the General Electric’s business in a given year comes from DOD contracts, then at least 25 percent of its titanium purchases must be procured from domestic sources. Similar to the Buy American Act, the Specialty Metals clause contains a provision related to “qualifying country” suppliers. It provides that the clause does not apply to specialty metals melted in a qualifying country or incorporated in products or components manufactured in a qualifying country. As a result, a qualifying country subcontractor would have greater latitude under the clause than a U.S. subcontractor. Specifically, the specialty metals incorporated into an article manufactured by a qualifying country may be from any source, while an article manufactured by a U.S. subcontractor must incorporate specialty metals from a domestic or qualifying country source. (See fig. 1.) The data we collected on JSF subcontracts show that by December 31, 2003, the prime contractors and their teammates had awarded over $14 billion in subcontracts for the development phase of the program. These subcontracts were for everything from the development of subsystems—such as radar, landing gear, and communications systems—to engine hardware, engineering services, machine tooling, and raw materials. The recipients of these contracts included suppliers in 16 foreign countries and the United States; 73.9 percent of the subcontracts by dollar value went to U.S. companies and 24.2 percent went to companies in the United Kingdom (the largest foreign financial contributor to the JSF program). (See appendix I for Joint Strike Fighter Partner Financial Contributions and Estimated Aircraft Purchases and appendix II for Joint Strike Fighter System Development and Demonstration Subcontract Awards). Finally, 2,597 of 4,488 subcontracts or purchase orders we obtained information on went to U.S. small businesses. Although these businesses received only 2.1 percent of the total dollar value of the subcontracts awarded, DOD and contractor officials have indicated that all companies in the development phase are in good position to receive production contracts, provided that cost and schedule goals are met. The gathering of these data, which most of the contractors have made available to the JSF Program Office and DCMA, has increased the breadth of knowledge available to DOD and the program office on the JSF supplier base. Neither DOD nor the JSF program office previously collected this information because, according to program officials, this information is not necessary in order to manage the program. At least one major subcontractor, on its own initiative, is now separately tracking JSF subcontracts on a monthly basis. While the JSF Program Office maintains more information on subcontractors than required by acquisition regulations, this information does not provide the program with a complete picture of the supplier base. The JSF Program Office collects and maintains data on subcontract awards for specific areas of interest—international suppliers and U.S. small businesses. The program office has used the award fee process to incentivize the prime contractors to report on both small business awards through the third tier and subcontract opportunities and awards to international suppliers. In addition, the program office has some visibility over certain subcontracts through mechanisms such as monthly supplier teleconferences, integrated product teams, informal notifications of subcontract awards, and DCMA reports on the performance of major suppliers. Finally, the JSF Program Office maintains limited information on the companies responsible for supplying critical technologies. The JSF Program Office’s information on the suppliers of key or critical technologies is based on lists that the prime contractors compile as part of the program protection strategy. These program protection requirements—not the supplier base—are the focus of DOD’s and the JSF Program Office’s approach toward critical technologies. DOD acquisition regulations require program managers to maintain lists of a program’s key technologies or capabilities to prevent the unauthorized disclosure or inadvertent transfer of leading-edge technologies and sensitive data or systems. The lists include the names of key technologies and capabilities, the reason the technology is sensitive and requires protection, and the location where the technology resides. The lists do not provide visibility into the lower-tier subcontracts that have been issued for developing or supplying these technologies. Given the limited supplier information these lists provide, the JSF Program Office is aware of two instances where a foreign company is the developer or supplier of an unclassified critical technology for the program. In both cases, a U.S. company is listed as a codeveloper of the technology. The JSF program has the potential to significantly impact the U.S. defense industrial base. Suppliers chosen during the JSF development phase will likely remain on the program through production, if they meet cost and schedule targets, and will reap the benefits of contracts potentially worth over $100 billion. Therefore, contracts awarded now will likely affect the future shape of the defense industrial base. The JSF supplier base information currently maintained by the JSF Program Office is focused on specific areas of interest and does not provide a broad view of the industrial base serving the program. In our July 2003 report, we recommended that the JSF Program Office assume a more active role in collecting information on and monitoring the prime contractors’ selection of suppliers to address potential conflicts between the international program and other program goals. DOD concurred with our recommendation, but did not specify how it plans to collect and monitor this information. Collecting this information will be an important first step for providing DOD with the knowledge base it needs to assess the impact of the program on the industrial base. We provided DOD a draft of this report for review. DOD provided only technical comments, which we incorporated as appropriate. To obtain information on the Buy American Act and the Preference for Domestic Specialty Metals clause implementing Berry Amendment provisions, we reviewed applicable laws and regulations. We interviewed DOD officials in the JSF Program Office, the Office of the Deputy Under Secretary of Defense (Industrial Policy), the Office of the Director of Defense Procurement and Acquisition Policy, and the Defense Contract Management Agency to obtain information on the applicability of the Buy American Act and other domestic source restrictions, critical foreign technologies, and DOD oversight of subcontracts. We reviewed prime contracts for the JSF program and met with JSF prime contractors, including Lockheed Martin and the engine contractors, Pratt & Whitney and General Electric, to discuss the applicability of the Buy American Act and other domestic source restrictions and to collect data on first-tier subcontract awards for the System Development and Demonstration phase. Furthermore, we collected data on subcontract awards for the JSF System Development and Demonstration phase from companies that were identified as partners or teammates by Lockheed Martin, Pratt & Whitney, and General Electric. These companies included Northrop Grumman, BAE Systems, Rolls Royce plc, Hamilton Sundstrand, and Rolls Royce Corporation. We did not independently verify subcontract data but, instead, relied on DCMA’s reviews of contractors’ reporting systems to assure data accuracy and completeness. We performed our review from August 2003 to March 2004 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this report. We will then send copies of this report to interested congressional committees; the Secretary of Defense; the Secretaries of the Navy and the Air Force; the Commandant of the Marine Corps; and the Director, Office of Management and Budget. 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 regarding this report, please contact me at (202) 512-4841; or Thomas J. Denomme, Assistant Director, at 202-512-4287. Major contributors to this report were Robert L. Ackley, Shelby S. Oakley, Sylvia Schatz, and Ronald E. Schwenn.

As the Department of Defense's (DOD) most expensive aircraft program, and its largest international program, the Joint Strike Fighter (JSF) has the potential to significantly affect the worldwide defense industrial base. As currently planned, it will cost an estimated $245 billion for DOD to develop and procure about 2,400 JSF aircraft and related support equipment by 2027. In addition, the program expects international sales of 2,000 to 3,500 aircraft. If the JSF comes to dominate the market for tactical aircraft as DOD expects, companies that are not part of the program could see their tactical aircraft business decline. Although full rate production of the JSF is not projected to start until 2013, contracts awarded at this point in the program will provide the basis for future awards. GAO was asked to determine the limits on and extent of foreign involvement in the JSF supplier base. To do this, GAO (1) determined how the Buy American Act and the Preference for Domestic Specialty Metals clause apply to the JSF development phase and the extent of foreign subcontracting on the program and (2) identified the data available to the JSF Program Office to manage its supplier base, including information on suppliers of critical technologies. DOD provided technical comments on a draft of this report, which GAO incorporated as appropriate. The Buy American Act and Preference for Domestic Specialty Metals clause implementing Berry Amendment provisions apply to the government's purchase of manufactured end products for the JSF program. Currently, only one of the three JSF prime contractors is under contract to deliver manufactured end products to the government in this phase of the program. The Buy American Act will apply to manufactured end products delivered to DOD during subsequent phases, but it will have little impact on the selection of suppliers because of DOD's use of the law's public interest exception. DOD, using this exception, has determined that it would be inconsistent with the public interest to apply domestic preference restrictions to countries that have signed reciprocal procurement agreements with the department. All of the JSF partners have signed such agreements. DOD must also apply the Preference for Domestic Specialty Metals clause to articles delivered under JSF contracts. All three prime contractors have indicated that they will meet these Specialty Metals requirements. While the JSF Program Office maintains more information on subcontractors than required by acquisition regulations, this information does not provide the program with a complete picture of the supplier base. The program office collects data on subcontract awards for international suppliers and U.S. small businesses. In addition, it maintains lists of the companies responsible for developing key or critical technologies. However, the lists do not provide visibility into the lower-tier subcontracts that have been issued for developing or supplying these technologies.

Over the last 50 years, the composition of the American household has changed dramatically. During this period, the proportion of unmarried individuals in the population increased steadily as couples chose to marry at later ages and cohabit prior to marriage—and as divorce rates rose (see fig. 1). From 1960 to 2010, the percentage of single-parent families also rose. In fact, from 1970 through 2012, the estimated proportion of single-parent families more than doubled, increasing from 13 to 32 percent of all families. The decline in marriage and rise in single parenthood over this period were more pronounced among low-income, less-educated individuals, and some minorities. For example, from 1960 to 2010, the proportion of married, 45- to 54-year old men in the highest income quintile declined modestly while the proportion of married men in the lowest income quintile declined from an estimated 71 to 27 percent (see fig. 2). Similarly, the percentage of single parents among 45- to 54-year-old men and women in the highest income quintile remained flat, while there was a steep rise in the percentage of single parents in the lowest income quintile, according to our estimates. In terms of education, among individuals age 18 years and older, the rise in single parenthood was steeper for those without a high school diploma in comparison to their counterparts with 4 or more years of college. Over the same period, the labor force participation rate of married women increased (see fig. 3). In 1960, labor force participation rates among married men, single men, married women, and single women ranged from 89 percent for married men to 32 percent for married women, according to our estimates. Since then, the differences in labor force participation rates for these four groups have narrowed, with labor force participation among married and single women within 3 percentage points in 2010. As a result of married women’s increasing labor force participation, the proportion of married couples with two earners has risen—along with the wives’ contributions to household income. According to the Bureau of Labor Statistics, from 1970 through 2010, women’s median contribution to household income rose from 27 to 38 percent. Further, from 1987 through 2010, the percentage of households in which the wives’ earnings exceeded their husband’s rose from 24 to 38 percent. As marriage and workforce patterns have changed, the U.S. retirement system has undergone its own transition. Specifically, over the last two decades employers have increasingly shifted away from offering their employees traditional DB to DC plans, and roughly half of U.S. workers do not participate in any employer-sponsored pension plan. DB plans typically offer retirement benefits to a retiree in the form of an annuity that provides a monthly payment for life, including a lifetime annuity to the surviving spouse, unless the couple chooses otherwise. In contrast, under a DC plan, workers and employers may make contributions to individual accounts. Depending on the options available under the plan, at retirement DC participants may take a lump sum, roll their plan savings into an IRA, leave some or all of their money in the plan, or purchase an annuity offered through the plan. Further, many of the remaining DB plans now offer lump sums as one of the form-of-payment options under the plan. Participants who elect a lump sum forgo a lifetime annuity. Some DB plan sponsors have also begun offering special, one-time lump sum elections to participants who are already retired and receiving monthly pension benefits. Taken together, the trends in marriage and workforce participation have implications for the receipt of Social Security retirement benefits, especially for women. Specifically, the proportion of women who are not eligible to receive Social Security spousal benefits because they were either never married, or divorced after less than 10 years of marriage— the length of time required for eligibility for Social Security divorced spouse benefits—has increased over the last two decades. The decline in the proportion of women with marriages that qualify them for spousal benefits—coupled with the rise in the percentage of women receiving benefits based on their own work record—has resulted in fewer women today receiving Social Security spousal and survivor benefits than in the past.been more dramatic. In general, the trend away from women receiving spousal benefits is projected to continue, with the largest shift occurring among black women, according to SSA analyses. For many elderly, this shift is likely to be positive, reflecting their higher earnings and greater capacity to save for retirement. However, elderly women with low levels of lifetime earnings, who have no spouse or do not receive a spousal benefit—a group that is disproportionately represented by black women— For blacks, the rise in ineligibility for spousal or widow benefits has are expected to have correspondingly lower Social Security retirement benefits relative to those with higher incomes. These trends have also affected household savings behavior and the financial risks households face in retirement. Households with DC plans have greater responsibility to save and manage their retirement savings so that they have sufficient income throughout retirement. However, our analysis of SCF data shows that many households approaching retirement still have no or very limited retirement savings (see fig. 4). Married households—in which many women now make significant contributions to retirement savings—are more likely to have retirement savings, but their median savings are low. The majority of single-headed households have no retirement savings. Single parents, in particular, tend to have fewer resources available to save for retirement during their working years and are less likely to participate in DC plans. In addition to challenges with accumulating sufficient savings for retirement, individuals may also find it difficult to determine how to invest their savings during their working years and spend down their savings when they reach retirement. During their working years, DC plan participants typically must determine the size of their contributions and choose among various investment options offered by the plan. At retirement or separation from their employer, plan participants must decide what to do with their plan savings. Participants in DB plans also face similar decisions if the plan offers a lump sum option, including whether to take the annuity or lump sum, and if a lump sum is elected, how to manage those benefits. GAO has found that these decisions are difficult to navigate because the appropriate investment strategy depends on many different aspects of an individual’s circumstances, such as anticipated expenses, income level, health, and each household’s tolerance for risk. In addition, individuals with DC plans face challenges comparing their distribution options, in part due to a host of complicated factors that must be considered in choosing among such options. They may also lack objective information to inform these complicated decisions. In fact, while financial experts GAO has interviewed typically recommended that retirees convert a portion of their savings into an income annuity, or opt for the annuity provided by an employer-sponsored DB pension instead of a lump sum withdrawal, we found that most retirees pass up opportunities for additional lifetime retirement income. These choices coupled with increasing life expectancy may result in more retirees outliving their assets. Lastly, the transition from DB to DC plans has increased the vulnerability of some spouses due to differences in the federal requirements for spousal protections between these two types of retirement plans. For DB plans, spousal consent is required if the participant wishes to waive the survivor annuity for his or her spouse. In contrast, for DC plans, spousal consent is not required for the participant to withdraw funds from the account—either before or at retirement—and DC plans do not generally offer annuities at all, including those with a survivor benefit. While this may not be a concern among many couples, it is a concern for some, especially those who depend on their spouse for income. While the trends described above have the potential to affect many Americans, it is likely that they will impact the nation’s most vulnerable more severely. Despite the role Social Security has played in reducing poverty among seniors, poverty remains high among certain groups (see fig. 5). These groups include older women, especially those who are unmarried or over age 80, and nonwhites. Moreover, individuals nearing retirement who experience economic shocks, such as losing a job or spouse, are also vulnerable to economic insecurity. During the 2007-2009 recession, unemployment rates doubled for workers aged 55 and older. When older workers lose a job they are less likely to find other employment. In fact, the median duration of unemployment for older workers rose sharply from 2007 to 2010, more than tripling for workers 65 and older and increasing to 31 weeks from 11 weeks for workers age 55 to 64. Prior GAO work has shown that long- term unemployment can reduce an older worker’s future retirement income in numerous ways, including reducing the number of years the worker can accumulate savings, prompting workers to claim Social Security retirement benefits before they reach their full retirement age, Similarly, our and leading workers to draw down their retirement assets.past work has shown that divorce and widowhood in the years leading up to and during retirement have detrimental effects on an individual’s assets and income, and that these effects were more pronounced for women. As a result of the trends described above, these vulnerable populations may face increasing income insecurity in old age and be in greater need of assistance. For example, during the 2007-2009 recession, the demand for food assistance rose sharply among older adults. Specifically, from fiscal year 2006 to 2009, the average number of households with a member age 60 or older participating in the Supplemental Nutrition Assistance Program rose 25 percent, while the population in that age group rose by 9 percent. Pub. L. No. 89-73, 79 Stat. 218 (codified as amended at 42 U.S.C. §§ 3001-3058ff). past work, we noted that the national funding formula used to allocate funding to states does not include factors to target older adults in greatest need, such as low-income older adults, although states are required to consider such factors when developing the intrastate formulas they use to allocate funds among their local agencies. We found that certain formula changes to better target states with elderly adults with the greatest need would have disparate effects on states, depending on their characteristics. We have also found that lack of federal guidance and data make it difficult to know whether those with the greatest need are being served. Our findings underscore how retirement security can be affected by changing circumstances in the American household and the economy. As the composition of the American family continues to evolve and as our retirement system transitions to one that is primarily account-based, vulnerable populations in this country will face increasing risk of saving sufficiently and potentially outliving their assets. For those with little or no pension or other financial assets, ensuring income in retirement may involve difficult choices, including how long to wait before claiming Social Security benefits, how long to work, and how to adjust consumption and lifestyle to lower levels of income in retirement. Poor or imprudent decisions may mean the difference between a secure retirement and poverty. Planning for these needs will be crucial if we wish to avoid turning back the clock on the gains we have achieved over the past 50 years from Social Security in reducing poverty among seniors. Chairman Nelson, Ranking Member Collins, and Members of the Committee, this completes my statement. I would be happy to answer any questions you might have. In addition to the above, Charlie Jeszeck, Director; Michael Collins, Assistant Director; Jennifer Cook, Erin M. Godtland, Rhiannon Patterson, and Ryan Siegel made significant contributions to this testimony and the related report. In addition, James Bennett, David Chrisinger, Sarah Cornetto, Courtney LaFountain, Kathy Leslie, Amy Moran Lowe, Sheila McCoy, Susan Offutt, Marylynn Sergent, Frank Todisco, and Shana Wallace made valuable contributions. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Over the past 50 years, poverty rates among older Americans have declined dramatically, in large part due to the availability and expansion of Social Security benefits. Social Security is now the most common type of income for retirees. Social Security retirement benefits are available not only to those who qualify based on their own work history, but also to spouses, widows/widowers, and in some cases former spouses of workers who qualify. However, in recent decades, marriage has become less common, women have entered the workforce in greater numbers, and many employers have shifted from offering DB to DC plans. In light of these trends, GAO is reporting on: (1) the trends in marriage and labor force participation in the American household and in the U.S. retirement system, (2) the effect of those trends on the receipt of retirement benefits and savings, and (3) the implications for vulnerable elderly populations and current challenges in assisting them. This statement draws from previously issued GAO work and a recently issued report, which was based on an analysis of nationally representative survey data including the Survey of Consumer Finances, the Survey of Income and Program Participation, and the Current Population Survey (CPS); and a broad literature review. GAO also interviewed agency officials and a range of experts in the area of retirement security. GAO is making no recommendations. The decline in marriage, rise in women's labor force participation, and transition away from defined benefit (DB) plans to defined contribution (DC) plans have resulted in changes in the types of retirement benefits households receive and increased vulnerabilities for some. Since the 1960s, the percentage of unmarried and single-parent families has risen dramatically, especially among low-income, less-educated individuals, and some minorities. At the same time, the percentage of married women entering the labor force has increased. The decline in marriage and rise in women's labor force participation have affected the types of Social Security benefits households receive, with fewer women receiving spousal benefits today than in the past. In addition, the shift away from DB to DC plans has increased financial vulnerabilities for some due to the fact that DC plans typically offer fewer spousal protections. DC plans also place greater responsibility on households to make decisions and manage their pension and financial assets so they have income throughout retirement. As shown in the figure below, despite Social Security's role in reducing poverty among seniors, poverty remains high among certain groups of seniors, such as minorities and unmarried women. These vulnerable populations are more likely to be adversely affected by these trends and may need assistance in old age. Note: The category “White” refers to people who are white only, non-Hispanic. “Black” refers to people who are black only, non-Hispanic. “Asian” refers to people who are either Asian only, Pacific Islander only or Asian and Pacific Islander, and are non-Hispanic. Hispanic people may be any race. Percentage estimates for poverty rates have margins of error ranging from 0.6 to 8.6 percentage points. See the hearing statement for more information on confidence levels and the data.

DOD provides information to the public about its animal use projects through two main sources—an annual report to the Congress and the BRD. The annual report to the Congress provides information in a summary form on animal use activities, including numbers and types of animals used, general purposes for which animals were used, and DOD’s animal care and use oversight procedures. DOD provided its first annual report in 1994 in response to the direction of the House Armed Services Committee, as contained in its Committee Report on the National Defense Authorization Act for the Fiscal Year 1993. In House Report 103-499, however, the House Armed Services Committee noted that DOD’s annual report had not provided sufficient detail about its animal research programs and activities. The House Report directed DOD to “develop a mechanism for providing the Congress and interested constituents with timely information . . . about its animal use programs, projects, and activities, both intramural and extramural.” One mechanism, according to the House Report, would be a database with information about the research goal and justification, cost, procedures, kinds and numbers of animals used, and information about the pain to which these animals are subjected. In response to that report, in October 1995 DOD established the BRD, a database about individual projects using animals that is accessible by the public through the Internet. For each ongoing DOD animal use project, it provides a project summary that includes the funding amount, the location of the research, and a brief statement of the project’s research objectives and methods. Research projects cover a broad range of topics such as using animals in the development of vaccines to protect against biological warfare agents and technologies to improve treatment methods for combat casualty care. Information for the BRD is collected from DOD agencies and military commands, organizations, and activities involved in the performance and funding of animal care and use programs. Typically the researcher or the veterinary services department at each facility provides the information about each research project for the BRD and the annual report. This is information that facilities routinely maintain as part of the process of granting researchers the approval to conduct research and then subsequently ordering animals for the research project. The BRD includes research funded by DOD as well as research performed by DOD that is funded by external sources such as the National Institutes of Health and the Alzheimer Association. The BRD, which is updated annually, contained 805 project summaries for fiscal year 1996. It was updated to reflect fiscal year 1997 projects on October 1, 1998, one year after the fiscal year ended; project summaries for fiscal year 1996 were replaced by those for fiscal year 1997. DOD has made progress in making information available to the public on its animal research programs and activities. Prior to the creation of the BRD, information on animal research was contained as part of a larger Defense Technology Information Center (DTIC) database, which includes the broad range of DOD research and development projects. However, DOD did not require all of its animal research activities, such as those involving clinical training or investigations, to be reported to the DTIC database. DOD now requires all animal research projects to be reported separately in the BRD. In addition, the BRD is publicly available on the Internet, while the DTIC database has restricted public access. The fiscal year 1996 BRD had a number of problems, including inaccurate and incomplete disclosure of information about DOD’s animal use projects. These problems stem from DOD not collecting certain valuable information from animal use facilities and not reporting certain other information that it did collect. Other problems of inaccuracy or inconsistency in the database were due to flawed data reported to DOD by facilities. The BRD is inaccurate with respect to the number of animal use projects. For example, in the course of performing our work, we found seven projects or research protocols that were not included in the database. These projects were performed at three different DOD organizations: the Armed Forces Radiobiology Research Institute, the Army’s Landstuhl Regional Medical Center, and the Marine Corp’s Camp Lejeune Field Medical Service School. The animals used included goats, sheep, rodents, and nonhuman primates. Alternatively, we identified 19 projects in the fiscal year 1996 BRD related to medical research for biological defense that did not involve the use of animals that year (although they did involve animals in other years). In addition, we identified one project that was reported twice in the database—two different DOD organizations reported the same project. Cost information provided in the BRD is not always accurate and consistent. For example, the fiscal year 1996 funding amount provided in the BRD for some projects covered a longer period than just fiscal year 1996. In other cases, the amounts of funding shown was inconsistent because the funding for some projects was listed as an abbreviated notation of a larger amount without providing adequate explanation. For example, in the case of the project erroneously reported twice, one project summary showed funding as “28,” while the other showed the amount as “28000.” These discrepancies make it difficult, if not impossible, to accurately determine from the BRD the cost of these animal research projects for the fiscal year. Additionally, the BRD does not disclose the funding source for the projects, making it impossible to determine which projects were funded by DOD and which by external sources. Furthermore, the BRD does not contain certain information identified in House Report 103-499. For instance, it does not provide the numbers and species of animals used for DOD projects nor does it include information about the pain to which animals were subjected. Summary information is provided for numbers and types of animals used and pain categories in DOD’s annual reports to the Congress, but these reports lack information on individual programs and activities. Another type of information that was mentioned in the House report is generally absent in BRD project summaries. Few project summaries identify the military or nonmilitary justification of the project. Although some of the projects are directly tied to a military goal, such as developing more effective transfusion fluids for combat casualties, others are not tied to a military goal but are still being done under a specific congressional directive, such as DOD’s extensive breast cancer research program. Without this information the Congress and the public cannot identify projects by the type of requirement they support. DOD does not collect information on the justification of each project as part of its data collection for the BRD. The version of the BRD available to the public also does not contain a data field that describes the broader animal use categories listed in DOD’s annual report to the Congress on animal care and use. Examples of these categories are research on infectious diseases, research relating to combat casualty care, and training for medical personnel. The absence of this information prevents the public from identifying how individual research projects link together into these broader research areas. We also found variations in the levels of specificity reported on the projects in the BRD. Whereas most of the 805 project summaries represent an individual line of research, several summaries report broad groups of research projects. For example, the Uniformed Services University of Health Sciences placed 64 separate project summaries in the BRD reflecting detailed distinctions among its various clinical research activities, such as “Virulence Mechanisms of Salmonella Typhi.” In contrast, Fitzsimons Army Medical Center reports only two clinical research project summaries that are described broadly as “Animal-Facilitated Clinical Medicine Studies in Support of Graduate Medical Education” and “Animal-Facilitated Clinical Surgical Studies in Support of Graduate Medical Education.” These two summaries merged as many as 29 separate projects. DOD guidance to the animal use facilities on preparing project summaries allows facilities broad discretion in determining what constitutes a project. We identified one classified project in the BRD that involved research on animals for the development of a weapon system. While we found no problem with the information reported in the BRD for this project, it appears inconsistent with DOD’s fiscal year 1996 annual animal care and use report to the Congress, which stated that no animals had been used for offensive weapons testing during fiscal year 1996. We recommend that the Secretary of Defense continue to take steps to improve the BRD. Specifically, the Secretary should improve the data collection and reporting procedures to ensure that the BRD contains accurate, detailed information about individual animal research projects, including information on the number and species of animals used in each project, the research goal and justification, and the pain categories for each project as identified in House Report 103-499. In addition, to improve public accountability, we recommend that the Secretary provide other information in the BRD, such as the appropriate animal use categories for each project, consistent with information reported in the DOD’s annual reports to the Congress, and ensure that the information contained in the BRD be presented in a uniform manner for all projects. In written comments on a draft of this report (see app. I), DOD partially concurred with our first recommendation and concurred with our second recommendation. Specifically, DOD said it will provide additional training to on-site veterinarians who are responsible for submitting data, take steps to clarify funding information for individual project summaries, include animal use categories for each project summary, and require reporting of all projects that have any animal use. They stated that they will institute these changes prior to the fiscal year 1999 annual report. DOD, however, expressed a concern that our recommendation to provide further detail on the number and species of animals, the research goals and justifications, and pain categories for each project summary would require an extensive upgrade of the existing BRD software and hardware capacity, duplicate information that is already available in the DOD annual report on animal use activities, and would not improve animal welfare. DOD also contended that information in the BRD is uniformly presented. DOD also provided technical comments, which we incorporated where appropriate. The changes that DOD proposes adopting will improve the quality of the BRD. But we believe that additional detail on each project summary is necessary to respond to the original direction of the House Armed Services Committee as well as to improve public accountability. Moreover, we feel that this detail can be provided in the BRD without a significant increase in resource expenditures. As pointed out in this report, the number and species of animals used and the pain category of the research are collected on a routine basis by DOD research and training facilities as a means of monitoring and tracking animal use activities. Furthermore, much of this information is already gathered for the DOD annual report although it is only reported in terms of aggregate animal use and not by individual projects. DOD also needs to ensure a more consistent level of reporting of animal use activities. Facilities conducting clinical research, for example, should submit summaries for the BRD at a project rather than program level. Incorporating these additional changes would further improve what is an important source of information on animal welfare to the public. In the course of our work examining issues related to DOD’s oversight of its animal research programs, we are reviewing the BRD because it contains information on individual animal use projects. As we reviewed information contained in the BRD, conducted interviews with DOD officials, reviewed relevant congressional reports, and performed data analyses to address the objectives for our study, we identified problems with information in the BRD. The BRD is prepared annually by DOD based on a questionnaire that it sends to those of its laboratories and contractors who use animals for research or training purposes. We reviewed the BRD in two forms. First, we selectively reviewed a version that is publicly available on the Internet (at http://ocean.dtic.mil/basis/matris/www/biowww/sf). Second, DOD supplied us with an electronic file that also identified the animal use category (for example, research on infectious diseases) on the 805 projects in the 1996 database. We reviewed all the projects in three animal use categories involving medical research—biological defense, combat casualty care, and ionizing radiation. These categories comprise approximately 22 percent of the 805 projects. We reviewed the summaries in these categories and compared the information contained in them with other sources, including DOD’s annual report to the Congress on its animal care and use programs for 1996. We interviewed officials from DOD’s Office of the Director of Defense for Research and Engineering; the Armed Forces Radiobiology Research Institute; the Uniformed Services University of the Health Sciences; the Office for Naval Research; the Naval Medical Research Institute; and Walter Reed Army Institute of Research in the Washington, D.C., area. We also interviewed officials from the U.S. Army Medical Research and Materiel Command in Frederick, Maryland; the Air Force Research Laboratory and the U.S. Army Clinical Investigations Regulatory Office in San Antonio, Texas; and the Army’s Landstuhl Regional Medical Center in Landstuhl, Germany. We reviewed DOD documents and reports relevant to animal care and use as well as related congressional reports. Our review was not based on a random sample of records from the BRD and, as a result, we have not drawn conclusions about the extent to which certain of our observations are present in the database as a whole. We conducted our review from October 1997 to October 1998 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to other interested congressional committees, the Secretary of Defense, and other interested parties. We will also make copies available to others upon request. Please contact us if you or your staff have questions concerning this report. Kwai-Cheung Chan can be reached at (202) 512-3652. Stephen Backhus can be reached at (202) 512-7101. Other major contributors are listed in appendix II. Bruce D. Layton, Assistant Director Jaqueline Arroyo, Senior Evaluator Greg Whitney, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. 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Pursuant to a congressional request, GAO examined several issues related to the Department of Defense's (DOD) administration of its animal research programs, focusing on: (1) the extent to which DOD's research using animals addresses validated military objectives, does not unnecessarily duplicate work done elsewhere, and incorporates methods to reduce, replace, and refine the use of animals; and (2) problems with the accuracy of information in the Biomedical Research Database (BRD). GAO noted that: (1) the BRD provides improved public access to information about DOD's use of animals in its research activities; (2) GAO found instances in which the information in the BRD was inaccurate, incomplete, and inconsistent, resulting in inadequate public disclosure; (3) specifically, the fiscal year 1996 BRD: (a) misstated the number of animal use projects because it omitted some projects that used animals and included others that did not involve animals; (b) did not include information, such as the numbers and types of animals used, that was identified in House Report 103-499; and (c) contained significant differences in specificity reported for the research projects; and (4) although GAO did not quantify the full extent of these problems, the problems it has identified suggest a need for DOD action to improve the accuracy and extent of the information in the database.

As of December 2004, IRS classified approximately $7.7 billion in delinquent tax debt as potentially available for private debt collection— $5.5 billion in low-priority work and $2.2 billion that was not likely to be assigned to IRS employees for collection. In the American Jobs Creation Act of 2004, Congress authorized IRS to contract with private sector debt collection companies to collect federal tax debts. Based on this authority, IRS awarded contracts in March 2006 to three PCAs for tax collection services. IRS began referring taxpayer cases to PCAs in September 2006. Because of legal restrictions, PCAs can only take certain defined steps to collect tax debts—including locating taxpayers, requesting full payment of the tax debt or offering taxpayers installment agreements if full payments cannot be made, and obtaining financial information from taxpayers. PCAs have limited authorities and are not allowed to adjust the amount of tax debts or to use enforcement powers to collect the debts, which IRS believes are inherently governmental functions to be performed only by IRS employees. Additionally, PCAs do not actually collect the debts, but instruct taxpayers to forward payments to IRS. PCAs are paid on a fee-for- service basis ranging from 21 percent to 24 percent of the debt collected based on the balance of the account at the time of referral. IRS only referred those cases in which the taxpayer had not disputed the debt (e.g., taxpayers who filed form 1040, 1040A, or 1040EZ and owe a balance) and delinquency exists for one or more tax periods. Under the IRS policy and procedures guide, PCAs are required, within 10 calendar days of receiving delinquent account information from IRS, to send a taxpayer notification letter to an address provided by IRS. This letter states that the taxpayer’s account has been placed with an IRS contractor for collection. According to IRS guidance, no sooner than 2 days after the PCA sends the notification letter, PCA employees may attempt to contact the taxpayer by telephone. However, to comply with 26 U.S.C. § 6103—which establishes a taxpayer’s right to privacy of tax information—PCA employees must not disclose any tax information until they are certain the person with whom they are speaking is the taxpayer. When a PCA employee makes a call to a taxpayer and reaches an answering machine, the only information the employee may leave on a recording is his or her name (no pseudonyms), company name, telephone number, the name of the taxpayer the PCA is attempting to reach, and the fact that the PCA is calling about a debt (i.e., rather than specifically a tax debt). In August 2006, IRS began working with a consulting company to develop and administer a taxpayer survey for PCA contacts. On November 27, 2006, the consulting company began administering the survey. Under guidance issued by IRS, PCAs were instructed to invite every right party contact to take the survey. If the contacts agreed to take the survey, they were transferred to the automated survey line. For the first 3 months of survey administration, the consulting company was required to issue overall satisfaction scores every month, followed by a quarterly report containing responses to all survey questions with information subdivided by each PCA. According to IRS, early in 2007, IRS did not execute the option to renew one of the PCA contracts. As of the date of this testimony, only two of the PCAs we reviewed are now under contract with IRS. According to the PCAs, 37,030 tax debt cases were referred by IRS from September 2006 through February 2007. In addition, we were informed that the survey was not offered until November 27, 2006—almost 3 full months after PCAs began to contact taxpayers. PCAs reported a total number of 13,630 right party contacts from September 2006 through February 2007, with 6,793 of these contacts made after the survey was available. Because PCAs began calling taxpayers in September 2006 before the survey was available, about 50 percent of all right party contacts identified during the period of our review were not eligible to take the survey. According to the consulting company, the validity of the survey was based on the key underlying assumption that all right party contacts would be offered a chance to take the survey. Although IRS instructed the PCAs to offer the survey to all right party contacts, we could not obtain information on how many of the 6,793 contacts were offered the survey. One PCA reported that it offered the survey to 999 right party contacts and made 2,694 right party contacts during this period. Officials at this PCA told us that from November 27, 2006, through February 13, 2007, taxpayers were randomly selected to take the survey using a structured method that offered the survey to every first or third contact during a specified time of day. The second PCA told us that it offered the survey to all right party contacts, but it did not keep any records to substantiate this claim. The third PCA told us that the survey was offered to all right party contacts, unless the PCA representative was aware that the contact was driving, if the contact had stated that he or she needed to get off the phone, or the contact said he or she was late for something. This PCA also did not have records regarding how many right party contacts were offered the survey, but an official noted that they were implementing procedures to track this information in the future. See table 1 for a summary of the PCA approaches to offering the survey during the period of our review. Beginning in early April 2007, IRS officials reemphasized the need for PCAs to offer the survey to all right party contacts and to keep records in this regard. These instructions have been incorporated in additional guidance for the PCAs. The consulting company that administered the survey provided us with records indicating that of those offered the survey, 1,572 right party contacts agreed to be transferred to the automated survey system from November 27, 2006, through February 28, 2007. Of these, records further indicate that 1,011 individuals completed the survey. A consulting company representative told us that the company was not aware, until several months after the survey was first offered, that the PCAs had used differing methodologies for offering the survey and that not all right party contacts were offered it. Table 2 provides summary information on the data we gathered from IRS, the PCAs, and the consulting company. We also made several related observations during the course of our work: PCAs were given some information about taxpayers with delinquent debt, including the taxpayers’ name, Social Security numbers, and last known addresses per IRS records. According to IRS, it did not provide PCAs with telephone numbers for the taxpayers as a matter of policy. As a result, in attempting to contact taxpayers by telephone, PCA representatives tried to determine the taxpayers’ phone numbers through electronic searches, for example, through the Lexis-Nexis database. PCAs told us that they made a total of 252,173 outbound connected telephone calls from September 2006 through February 2007 in an attempt to resolve the 37,030 cases referred by IRS. PCAs indicated that 89,781 calls—or about 36 percent of all connected outbound calls—resulted in messages left on answering machines, voice mail, or with third parties. In an attempt to make contact with the right party, PCAs may have contacted a substantial number of taxpayers who were not part of the 37,030 cases referred to PCAs by IRS—these taxpayers represent a potentially large group of incorrect contacts. Incorrect contacts were not offered the survey. Examples of individuals who were not offered the survey would include individuals who refused to provide personal information to the PCAs and individuals who provided personal information but were not authenticated as part of the 37,030 IRS referrals. The overall satisfaction rating reported by the consulting company, and quoted by IRS, represents the answer to 1 question on a 20-question automated survey. The question was “Everything considered, whether you agree or disagree with the final outcome, rate your overall satisfaction with the service you received during this call.” Respondents were allowed to rate their satisfaction on a scale of one to five—with one being “very dissatisfied” and five being “very satisfied.” Of the survey questions, 15 related to customer satisfaction; the other questions were to gather more information about the respondents themselves. Those respondents who completed the entire survey had their results counted by the consulting company. Satisfaction ratings for other survey questions ranged from 81 percent (ease of understanding letters received from PCAs) to 98 percent (courtesy of PCA representatives). Officials at IRS and the consulting company confirmed that some right party contacts were offered (and may have taken) the survey more than once because they had multiple discussions with a PCA representative. Thus, some of the 1,011 right party contacts who completed the survey may represent duplicate respondents. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the Committee may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-7455 or kutzg@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Key contributors to this testimony were John Ryan, Assistant Director; Bruce Causseaux, Jennifer Costello, Heather Hill, Wilfred Holloway, Jason Kelly, and Andrew McIntosh. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Every year the Internal Revenue Service (IRS) does not collect tens of billions of dollars in delinquent taxes. In 2004, Congress authorized IRS to use private collection agencies (PCA) to help collect some of these debts. To ensure that taxpayers are treated properly and that the program achieves the desired results, IRS contracted with a consulting company to perform a survey of right party contacts--those individuals who confirmed their identity and tax debt to PCAs over the telephone. The consulting company reported overall taxpayer satisfaction ratings from 94 to 96 percent for contacts made from November 2006 through February 2007. At the request of the Chairman, House Committee on Ways and Means, GAO attempted to obtain, for the period September 2006 through February 2007, the number of tax debt cases IRS referred to PCAs, right party contacts who were offered the taxpayer survey, and right party contacts who took the survey. GAO was also asked to report any other key observations related to the PCA program and taxpayer survey. To perform this work, GAO collected information and interviewed officials from IRS, the consulting group that administered the survey, and the PCAs. According to the PCAs, 37,030 tax debt cases were referred to them by IRS from September 2006 through February 2007. PCAs reported making contact with, and authenticating the identity of, 13,630 right party contacts. Of these, 6,793 were eligible to take the taxpayer survey which did not start until the end of November 2006. According to the consulting company, the validity of the survey was based on the key underlying assumption that all right party contacts would be offered a chance to take the survey. However, GAO could not determine the number of right party contacts offered the survey because not all PCAs kept records on who was offered it. Further, the three PCAs used different methods to determine which right party contacts were offered the survey. The consulting company that administered the survey told GAO that between November 27, 2006, and February 28, 2007, 1,572 of the individuals offered the survey, agreed to take the survey, and 1,011 of these individuals completed the survey. A consulting company representative told GAO that the company was not aware, until several months after the survey was first offered, that the PCAs used differing methodologies for offering the survey and that not all right party contacts were offered an opportunity to complete the survey. According to IRS, beginning in April 2007, PCAs began offering the survey to all right party contacts. Among other key observations, IRS advised GAO that they did not provide the PCAs with taxpayer telephone contact information for referred cases. As a result, in attempting to contact taxpayers by telephone, PCA representatives tried to determine the taxpayers' phone numbers through electronic searches. PCA representatives told GAO that they made a total of 252,173 outbound connected telephone calls from September 2006 through February 2007 in an attempt to make contact with the 37,030 tax debt cases IRS referred. PCAs did not offer the survey to incorrect contacts, such as individuals who provided personal information but were not authenticated as right party contacts.

We identified three key factors that affect delivery of humanitarian assistance to people inside Syria. First, the increasingly violent and widespread Syrian conflict has hindered effective delivery of humanitarian assistance. Based on our analysis of monthly UNSG reports on the situation inside Syria, as well as interviews with officials providing assistance to Syria based both inside and outside of the country, humanitarian assistance is routinely prevented or delayed from reaching its intended target due to shifting conflict lines, attacks on aid facilities and workers, an inability to access besieged areas, and other factors related to active conflict (see fig. 1). Second, administrative procedures put in place by the Syrian government have delayed or limited the delivery of humanitarian assistance, according to UNSG reports. These reports detail multiple instances of unanswered requests for approvals of convoys, denial or removal of medical supplies from convoys, difficulty obtaining visas for humanitarian staff, and restrictions on international and national NGOs’ ability to operate. As of May 2016, the UNSG reported that 4.6 million people inside Syria are located in hard-to-reach areas and more than 500,000 of those remain besieged by Islamic State of Iraq and Syria, the government of Syria, or non-State armed opposition groups. The UN further reported that in 2015, only 10 percent of all requests for UN interagency convoys to hard-to-reach and besieged areas were approved and assistance delivered. In addition, according to implementing partner officials based in Damascus, Syria, even when these convoys were approved, the officials participating in delivering the assistance were subjected to hours-long delays. Third, due to restrictions, USAID and State staff manage the delivery of humanitarian assistance in Syria remotely from neighboring countries. The U.S. government closed its embassy in Damascus, Syria, in 2012 due to security conditions and the safety of personnel, among other factors. In the absence of direct program monitoring, USAID and State officials noted that they utilize information provided by implementing partners to help ensure effective delivery of assistance and to help their financial oversight, including mitigating risks such as fraud, theft, diversion, and loss. However, USAID officials in the region explained to us that while partners provide data and information, their inability to consistently access project sites—due to factors such as ongoing fighting, bombing raids, and border closures—limited the extent to which partners could obtain and verify progress. Past audit work has shown challenges to such an approach, including cases of partners not fully implementing monitoring practices, resulting in limited project accountability. Further, USAID Office of Inspector General (OIG) has reported that aid organizations providing life-saving assistance in Syria and the surrounding region face an extremely high-risk environment, and that the absence of adequate internal controls, among other challenges, can jeopardize the integrity of these relief efforts and deny critical aid to those in need. State, USAID, and their implementing partners have assessed some types of risk to their programs inside Syria, but most partners have not assessed the risk of fraud. Risk assessment involves comprehensively identifying risks associated with achieving program objectives; analyzing those risks to determine their significance, likelihood of occurrence, and impact; and determining actions or controls to mitigate the risk. In the context of Syria, such risks could include theft and diversion; fraud; safety; security; program governance; and implementing partner capacity risks. Most of the implementing partners in our sample have conducted formal risk assessments for at least one type of risk, especially security risk, and several maintain risk registers that assess a wide variety of risks (see table 1). However, few implementing partners have conducted risk assessments for the risk of fraud (four of nine), or for the risk of loss due to theft or diversion (four of nine). According to GAO’s A Framework for Managing Fraud Risks in Federal Programs, effective fraud risk management involves fully considering the specific fraud risks the agency or program faces, analyzing the potential likelihood and impact of fraud schemes, and prioritizing fraud risks. In addition, risk assessment is essential for ensuring that partners design appropriate and effective control activities. Control activities to mitigate the risk of fraud should be directly connected to the fraud risk assessments and, over time, managers may adjust the control activities if they determine that controls are not effectively designed or implemented to reduce the likelihood or impact of an inherent fraud risk to a tolerable risk level. Although most of the implementing partners in our sample did not conduct assessments of the risk of fraud, there are elevated risks for fraud in U.S. funded humanitarian assistance projects for people inside Syria. According to officials at USAID OIG, they have four ongoing investigations of allegations of fraud and mismanagement related to programs for delivering humanitarian assistance to people inside Syria. Two of the investigations involve allegations of procurement fraud, bribery, and product substitution in USAID funded humanitarian cross- border programs related to procurements of non-food items. One of these investigations found that the subawardee of the implementing partner failed to distribute nonfood items in southern Syria, instead subcontracting the distribution to another organization, but nevertheless billed USAID for the full cost of the project. Additionally, the subawardee was reliant on one individual to facilitate the transfer of materials and salaries, and this individual was involved in the alteration and falsification of records related to the distribution of the nonfood items. According to the USAID OIG, senior leadership at the subawardee was aware of these facts. Further, in May 2016, USAID OIG reported the identification of bid- rigging and multiple bribery and kickback schemes related to contracts to deliver humanitarian aid in Syria, investigations of which resulted in the suspension of 14 entities and individuals involved with aid programs from Turkey. Without documented risk assessments, implementing partners may not have all of the information needed to design appropriate controls to mitigate fraud risks, and State and USAID may not have visibility into areas of risk, such as fraud and loss due to theft and diversion. We found that partners in our sample had implemented controls to mitigate certain risks of delivering humanitarian assistance inside Syria. For instance, many partners in our sample implemented controls to account for safety and security risks to their personnel and beneficiaries receiving assistance. Some partners identified aerial targeting of humanitarian aid workers and beneficiaries at distribution points as a major vulnerability and implemented controls to mitigate this risk, such as distributing goods to beneficiaries on overcast days and making door-to- door deliveries of aid packages. In addition, partners in our sample implemented controls to mitigate risks of fraud and loss within their operations. For example, officials from two implementing partners we interviewed in Amman, Jordan, stated that they conducted spot checks of assistance packages in warehouses to confirm the quantity of the contents and ensure that the quality of the items complied with the terms of the contract. According to another implementing partner, officials from its organization visit the vendor warehouses before signing contracts to verify that U.S. government commodity safety and quality assurance guidelines are met. However, the majority of controls to mitigate risks of fraud and loss were not informed by a risk assessment (see table 2). State and USAID have taken steps to oversee partner programs delivering humanitarian assistance inside Syria; nevertheless, opportunities to assess and mitigate the potential impact of fraud risks remain. U.S. officials cited a variety of oversight activities. For instance, State officials in the region conduct quarterly meetings with partners and collect information on programmatic objectives and on partner programs. State also has enhanced monitoring plans in place with its implementing partners to augment quarterly reporting with information on risks of diversion of assistance. Similarly, USAID officials in Washington, D.C., told us they screen proposals from partners to identify risk mitigation activities and USAID officials in the region noted they maintain regular contact with partners, attend monthly meetings with them, conduct random spot-checks of aid packages at warehouse facilities, and coordinate activities among partners to reduce or eliminate duplication or overlap of assistance. Moreover, according to USAID officials, the USAID OIG has conducted fraud awareness training for officials in the region to improve their ability to detect fraud, such as product substitution, when they conduct spot-checks of aid packages at warehouse facilities. Further, in October 2015, USAID’s Office of U.S. Foreign Disaster Assistance hired a third party monitoring organization to review its projects in Syria. By February 2016, field monitors had conducted site visits and submitted monitoring reports to USAID, providing information on the status of projects and including major concerns that field monitors identified. We found that fraud oversight could be strengthened. Based on our analysis, USAID’s third party monitoring contract and supporting documentation contain guidelines for verifying the progress of activities in Syria; however, they do not clearly instruct field monitors to identify potential fraud risks as they conduct site assessments of projects in Syria. Furthermore, the monitoring plan and site visit templates do not contain specific guidance on how to recognize fraud, and field monitors have not received the USAID OIG fraud awareness training, according to USAID officials. Leading practices in fraud risk management suggest evaluating outcomes using a risk-based approach and adapting activities to improve fraud risk management. This includes conducting risk-based monitoring and evaluation of fraud risk management activities with a focus on outcome measurement and using the results to improve prevention, detection, and response. The monitoring plan associated with the contract contains guidelines for field monitors to document their assessment of the project at the completion of a site visit. However, it lacks specific guidelines to identify potential fraud risks during site visits. Additionally, the templates created by the third party monitoring organization to document site visits instruct monitors to verify the presence or absence of supplies and their quality, among other instructions, but lack specific fraud indicators to alert field monitors to collect information on and identify potential fraud. Furthermore, the monitoring plan contains a training curriculum for field monitors, which has several objectives designed to familiarize them with the protocols, procedures, and instruments used for data collection and reporting. However, the curriculum does not have specific courses for recognizing potential or actual instances of fraud that may occur on site. Given the opportunity for fraud that exists in humanitarian assistance programs, as well as the ongoing USAID OIG investigations, without instructions to specifically collect data on fraud and training to identify it, USAID may be missing an opportunity to assist in its activities to mitigate fraud risks and design appropriate controls. We made several recommendations in our report. To provide more complete information to assist the agencies in conducting oversight activities, State and USAID should require their implementing partners to conduct fraud risk assessments. In addition, USAID should ensure its field monitors (1) are trained to identify potential fraud risks and (2) collect information on them. State and USAID concurred with our recommendations. Chairman Ros-Lehtinen, Ranking Member Deutch, Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. For further information about this testimony, please contact Thomas Melito, Director, International Affairs and Trade at (202) 512-9601 or melitot@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Elizabeth Repko (Assistant Director), Jennifer Young, Kyerion Printup, Justine Lazaro, Cristina Norland, Karen Deans, Kimberly McGatlin, Diane Morris, Justin Fisher, and Alex Welsh. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony summarizes the information contained in GAO's July 2016 report, entitled Syria Humanitarian Assistance: Some Risks of Providing Aid inside Syria Assessed, but U.S. Agencies Could Improve Fraud Oversight ( GAO-16-629 ). Delivery of U.S. humanitarian assistance to people inside Syria is complicated by three factors including a dangerous operating environment, access constraints, and remote management of programs. Active conflict creates a dangerous environment characterized by attacks on aid facilities and workers, and humanitarian organizations face difficulties accessing those in need. Additionally, U.S. agency officials must manage programs in Syria remotely, increasing risks to the program, including opportunities for fraud. Despite these challenges, according to the U.S. Agency for International Development (USAID), U.S. humanitarian assistance has reached 4 million people inside Syria per month. The Department of State (State), USAID, and their implementing partners have assessed some types of risk to their programs inside Syria, but most partners have not assessed the risk of fraud. Of the 9 implementing partners in GAO's sample of funding instruments, most assessed risks related to safety and security, but only 4 of 9 assessed fraud risks. Such an assessment is important as USAID's Office of Inspector General (OIG) has uncovered multiple instances of fraud affecting U.S. programs delivering humanitarian assistance to Syria. In May 2016, USAID OIG reported that 1 of its active fraud investigations resulted in the suspension of 14 entities and individuals. Given the challenging environment in Syria, fraud risk assessments could help U.S. agencies better identify and address risks to help ensure aid reaches those in need. Partners have implemented controls to mitigate certain risks, but U.S. agencies could improve financial oversight. For example, almost all partners in our sample have controls to mitigate safety risks and some use technology to monitor the transport of goods. Additionally, U.S. agencies have taken steps to oversee activities in Syria, such as quarterly meetings with partners and spot checks of partner warehouses. Further, in October 2015, USAID hired a third party monitor to improve oversight of its activities and help verify progress of its programs. However, the monitors' training curriculum lacks modules on identifying fraud risks. Without such training, monitors may overlook potential fraud risks and miss opportunities to collect data that could help USAID improve its financial oversight.

Fiscal sustainability presents a national challenge shared by all levels of government. The federal government and state and local governments share in the responsibility of fulfilling important national goals, and these subnational governments rely on the federal government for a significant portion of their revenues. To provide Congress and the public with a broader perspective on our nation’s fiscal outlook, we developed a fiscal model of the state and local sector. This model enables us to simulate fiscal outcomes for the entire state and local government sector in the aggregate for several decades into the future. Our state and local fiscal model projects the level of receipts and expenditures for the sector in future years based on current and historical spending and revenue patterns. This model complements GAO’s long-term fiscal simulations of federal deficits and debt levels under varying policy assumptions. We have published long-term federal fiscal simulations since 1992. We first published the findings from our state and local fiscal model in 2007. Our model shows that the state and local government sector faces growing fiscal challenges. The model includes a measure of fiscal balance for the state and local government sector for each year until 2050. The operating balance net of funds for capital expenditures is a measure of the ability of the sector to cover its current expenditures out of current receipts. The operating balance measure has historically been positive most of the time, ranging from about zero to about 1 percent of gross domestic product (GDP). Thus, the sector usually has been able to cover its current expenses with incoming receipts. Our January 2008 report showed that this measure of fiscal balance was likely to remain within the historical range in the next few years, but would begin to decline thereafter and fall below the historical range within a decade. That is, the model suggested the state and local government sector would face increasing fiscal stress in just a few years. We recently updated the model to incorporate current data available as of August 2008. As shown in Figure 1, these more recent results show that the sector has begun to head out of balance. These results suggest that the sector is currently in an operating deficit. Our simulations show an operating balance measure well below the historical range and continuing to fall throughout the remainder of the simulation timeframe. Since most state and local governments are required to balance their operating budgets, the declining fiscal conditions shown in our simulations suggest the fiscal pressures the sector faces and are a foreshadowing of the extent to which these governments will need to make substantial policy changes to avoid growing fiscal imbalances. That is, absent policy changes, state and local governments would face an increasing gap between receipts and expenditures in the coming years. One way of measuring the long-term challenges faced by the state and local sector is through a measure known as the “fiscal gap.” The fiscal gap is an estimate of the action needed today and maintained for each and every year to achieve fiscal balance over a certain period. We measured the gap as the amount of spending reduction or tax increase needed to maintain debt as a share of GDP at or below today’s ratio. As shown in figure 2, we calculated that closing the fiscal gap would require action today equal to a 7.6 percent reduction in state and local government current expenditures. Closing the fiscal gap through revenue increases would require action of the same magnitude to increase state and local tax receipts. Growth in health-related costs serves as the primary driver of the fiscal challenges facing the state and local sector over the long term. Medicaid is a key component of their health-related costs. CBO’s projections show federal Medicaid grants to states per recipient rising substantially more than GDP per capita in the coming years. Since Medicaid is a federal and state program with federal Medicaid grants based on a matching formula, these estimates indicate that expenditures for Medicaid by state governments will rise quickly as well. We also estimated future expenditures for health insurance for state and local employees and retirees. Specifically, we assumed that the excess cost factor—the growth in these health care costs per capita above GDP per capita—will average 2.0 percentage points per year through 2035 and then begin to decline, reaching 1.0 percent by 2050. The result is a rapidly growing burden from health-related activities in state and local budgets. Our simulations show that other types of state and local government expenditures—such as wages and salaries of state and local workers, pension contributions, and investments in infrastructure—are expected to grow slightly less than GDP. At the same time, most revenue growth is expected to be approximately flat as a percentage of GDP. The projected rise in health- related costs is the root of the long-term fiscal difficulties these simulations suggest will occur. Figure 3 shows our simulations for expenditure growth for state and local government health-related and other expenditures. On the receipt side, our model suggests that most of these tax receipts will show modest growth in the future—and some are projected to experience a modest decline—relative to GDP. We found that state personal income taxes show a small rise relative to GDP in coming years. This likely reflects that some state governments have a small degree of progressivity in their income tax structures. Sales taxes of the sector are expected to experience a slight decline as a percentage of GDP in the coming years, reflecting trends in the sector’s tax base. While historical data indicate that property taxes—which are mostly levied by local governments—could rise slightly as a share of GDP in the future, recent events in the housing market suggest that the long-term outlook for property tax revenue could also shift downward. These differential tax growth projections indicate that any given jurisdiction’s tax revenue prospects are uniquely tied to the composition of taxes it imposes. The only source of revenue expected to grow rapidly under current policy is federal grants to state governments for Medicaid. That is, we assume that current policy remains in place and the shares of Medicaid expenditures borne by the federal government and the states remain unchanged. Since Medicaid is a matching formula grant program, the projected escalation in federal Medicaid grants simply reflects expected increased Medicaid expenditures that will be shared by state governments. These long-term simulations do not attempt to assume how recent actions to stabilize the financial system and economy will be incorporated into the federal budget estimates in January 2009. The outlook presented by our state and local model is exacerbated by current economic conditions. During economic downturns, states can experience difficulties financing programs such as Medicaid. Economic downturns result in rising unemployment, which can lead to increases in the number of individuals who are eligible for Medicaid coverage, and in declining tax revenues, which can lead to less available revenue with which to fund coverage of additional enrollees. For example, during the most recent period of economic downturn prior to 2008, Medicaid enrollment rose 8.6 percent between 2001 and 2002, which was largely attributed to states’ increases in unemployment. During this same time period, state tax revenues fell 7.5 percent. According to the Kaiser Commission on Medicaid and the Uninsured, in 2008, most states have made policy changes aimed at controlling Medicaid costs. Recognizing the complex combination of factors affecting states during economic downturns—increased unemployment, declining state revenues, and increased downturn-related Medicaid costs—this Committee and several others asked us to assist them as they considered a legislative response that would help states cope with Medicaid cost increases. In response to this request, our 2006 report on Medicaid and economic downturns explored the design considerations and possible effects of targeting supplemental assistance to states when they are most affected by a downturn. We constructed a simulation model that adjusts the amount of funding a state could receive on the basis of each state’s percentage increase in unemployment and per person spending on Medicaid services. Such a supplemental assistance strategy would leave the existing Medicaid formula unchanged and add a new, separate assistance formula that would operate only during times of economic downturn and use variables and a distribution mechanism that differ from those used for calculating matching rates. This concept is embodied in the health reform plan released by Chairman Baucus last week. Using data from the past three recessions, we simulated the provision of such targeted supplemental assistance to states. To determine the amount of supplemental federal assistance needed to help states address increased Medicaid expenditures during a downturn, we relied on research that estimated a relationship between changes in unemployment and changes in Medicaid spending. Our model incorporated a retrospective assessment which involved assessing the increase in each state’s unemployment rate for a particular quarter compared to the same quarter of the previous year. Our simulation included an economic trigger turned on when 23 or more states had an increase in the unemployment rate of 10 percent or more compared to the unemployment rate that existed for the same quarter 1 year earlier (such as a given state’s unemployment rate increasing from 5 percent to 5.5 percent). We chose these two threshold values—23 or more states and increased unemployment of 10 percent or more—to work in tandem to ensure that the national economy had entered a downturn and that the majority of states were not yet in recovery from the downturn. These parameters were based on our quantitative analysis of prior recessions. As shown in figure 4, for the 1990-1991 downturn, 6 quarters of assistance would have been provided beginning with the third quarter of 1991 and ending after the fourth quarter of 1992. Analysis of recent unemployment data indicate that such a strategy would already be triggered based on changes in unemployment for 2007 and 2008. In other words, current data confirm the economic pressures currently facing the states. Considerations involved in such a strategy include: Timing assistance so that it is delivered as soon as it is needed, Targeting assistance according to the extent of each state’s downturn, Temporarily increasing federal funding so that it turns off when states’ economic circumstances sufficiently improve, and Triggering so the starting and ending points of assistance respond to indicators of states’ economic distress. Any potential legislative response would need to be considered within the context of broader health care and fiscal challenges—including continually rising health care costs, a growing elderly population, and Medicare and Medicaid’s increasing share of the federal budget. Additional criteria could be established to accomplish other policy objectives, such as controlling federal spending by limiting the number of quarters of payments or stopping payments after predetermined spending caps are reached. The federal government depends on states and localities to provide critical services including health care for low-income populations. States and localities depend on the federal government to help fund these services. As the largest share of federal grant funding and a large and growing share of state budgets, Medicaid is a critical component of this intergovernmental partnership. The long-term structural fiscal challenges facing the state and local sector further complicate the provision of Medicaid services. These challenges are exacerbated during periods of economic downturn when increased unemployment leads to increased eligibility for the Medicaid program. The current economic downturn presents additional challenges as states struggle to meet the needs of eligible residents in the midst of a credit crisis. Our work on the long-term fiscal outlook for state and local governments and strategies for providing Medicaid-related fiscal assistance is intended to offer the Committee a useful starting point for considering strategic evidence-based approaches to addressing these daunting intergovernmental fiscal issues. For information about this statement for the record, please contact Stanley J. Czerwinski, Director, Strategic Issues, at (202) 512-6806 or czerwinskis@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony and related products include: Kathryn G. Allen, Director, Quality and Continuous Improvement; Thomas J. McCool, Director, Center for Economics; Amy Abramowitz, Meghana Acharya, Romonda McKinney Bumpus, Robert Dinkelmeyer, Greg Dybalski, Nancy Fasciano, Jerry Fastrup, Carol Henn, Richard Krashevski, Summer Lingard, James McTigue, Donna Miller, Elizabeth T. Morrison, Michelle Sager, Michael Springer, Jeremy Schwartz, Melissa Wolf, and Carolyn L. Yocom. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

GAO was asked to provide its views on projected trends in health care costs and their effect on the long-term outlook for state and local governments in the context of the current economic environment. This statement addresses three key points: (1) the state and local government sector's long-term fiscal challenges; (2) rapidly rising health care costs which drive the sector's long-term fiscal difficulties, and (3) the considerations involved in targeting supplemental funds to states through the Medicaid program during economic downturns. To provide Congress and the public with a broader perspective on our nation's fiscal outlook, GAO previously developed a fiscal model of the state and local sector. This model enables GAO to simulate fiscal outcomes for the sector in the aggregate for several decades into the future. GAO first published the findings from the state and local fiscal model in 2007. This statement includes August 2008 data to update the simulations. This Committee and others also asked GAO to analyze strategies to help states address increased Medicaid expenditures during economic downturns. GAO simulated the provision of such supplemental assistance to states. As we previously reported, the simulation model adjusts the amount of funding states would receive based on changes in unemployment and spending on Medicaid services. Rapidly rising health care costs are not simply a federal budget problem. Growth in health-related spending also drives the fiscal challenges facing state and local governments. The magnitude of these challenges presents long-term sustainability challenges for all levels of government. The current financial sector turmoil and broader economic conditions add to fiscal and budgetary challenges for these governments as they attempt to remain in balance. States and localities are facing increased demand for services during a period of declining revenues and reduced access to capital. In the midst of these challenges, the federal government continues to rely on this sector for delivery of services such as Medicaid, the joint federal-state health care financing program for certain categories of low-income individuals. Our model shows that in the aggregate the state and local government sector faces growing fiscal challenges. Incorporation of August 2008 data shows that the position of the sector has worsened since our January 2008 report. The long-term outlook presented by our state and local model is exacerbated by current economic conditions. During economic downturns, states can experience difficulties financing programs such as Medicaid. Downturns result in rising unemployment, which can increase the number of individuals eligible for Medicaid, and declining tax revenues, which can decrease revenue available to fund coverage of additional enrollees. GAO's simulation model to help states respond to these circumstances is based on assumptions under which the existing Medicaid formula would remain unchanged and add a new, separate assistance formula that would operate only during times of economic downturn. Considerations involved in such a strategy could include: (1) timing assistance so that it is delivered as soon as it is needed, (2) targeting assistance according to the extent of each state's downturn, (3) temporarily increasing federal funding so that it turns off when states' economic circumstances sufficiently improve, and (4) triggering so the starting and ending points of assistance respond to indicators of economic distress.

Posing as private citizens, our undercover investigators purchased several sensitive excess military equipment items that were improperly sold to the public at DOD liquidation sales. These items included three ceramic body armor inserts identified as small arms protective inserts (SAPI), which are the ceramic inserts currently in demand by soldiers in Iraq and Afghanistan; a time selector unit used to ensure the accuracy of computer- based equipment, such as global positioning systems and system-level clocks; 12 digital microcircuits used in F-14 Tomcat fighter aircraft; guided missile radar test sets used to check the operation of the data link antenna on the Navy’s Walleye (AGM-62) air-to-ground guided missile; and numerous other electronic items. In instances where DOD required an EUC as a condition of sale, our undercover investigator was able to successfully defeat the screening process by submitting bogus documentation and providing plausible explanations for discrepancies in his documentation. In addition, we identified at least 79 buyers for 216 sales transactions involving 2,669 sensitive military items that DOD’s liquidation contractor sold to the public between November 2005 and June 2006. We are referring information on these sales to the appropriate federal law enforcement agencies for further investigation. Our investigators also posed as DOD contractor employees, entered DRMOs in two east coast states, and obtained several other items that are currently in use by the military services. DRMO personnel even helped us load the items into our van. These items included two launcher mounts for shoulder-fired guided missiles, an all-band antenna used to track aircraft, 16 body armor vests, body armor throat and groin protectors, six circuit card assemblies used in computerized Navy systems, and two Palm V personal data assistant (PDA) organizers. Using a fictitious identity as a private citizen, our undercover investigator applied for and received an account with DOD’s liquidation sales contractor. Our investigator was then able to purchase several sensitive excess military items noted above that were being improperly sold to the public. During our undercover purchases, our investigator engaged in numerous conversations with liquidation sales contractor staff during warehouse inspections of items advertised for sale and with DRMS and DLA’s Criminal Investigative Activity (DCIA) staff during the processing of our EUCs. On one occasion our undercover investigator was told by a DCIA official that information provided on his EUC application had no match to official data and that he had no credit history. Our investigator responded with a plausible story and submitted a bogus utility bill to confirm his mailing address. Following these screening procedures, the EUC was approved by DCIA and our undercover investigator was able to purchase our targeted excess military items. Once our initial EUC was approved, our subsequent EUC applications were approved based on the information on file. Although the sensitive military items that we purchased had a reported acquisition cost of $461,427, we paid a liquidation sales price of $914 for them—less than a penny on the dollar. We observed numerous sales of additional excess sensitive military items that were improperly advertised for sale or sold to the public, including fire control components for weapon systems, body armor, and weapon system components. The demilitarization codes for these items required either key point or total destruction rather than disposal through public sale. Although we placed bids to purchase some of these items, we lost to higher bidders. We identified at least 79 buyers for 216 public liquidation sales transactions involving 2,669 sensitive military items. On July 13, 2006, we briefed federal law enforcement and intelligence officials on the details of our investigation. We are referring public sales of sensitive military equipment items to the federal law enforcement agencies for further investigation and recovery of the sensitive military equipment. During our undercover operations, we also noted 13 advertised sales events, including 179 items that were subject to demilitarization controls, where the items were not sold. In 5 of these sales involving 113 sensitive military parts, it appears that DOD or its liquidation sales contractor caught the error in demilitarization codes and pulled the items from sale. One of these instances involved an F-14 fin panel assembly that we had targeted for an undercover purchase. During our undercover inspection of this item prior to sale, a contractor official told our investigator that the government was in the process of changing demilitarization codes on all F-14 parts and it was likely that the fin panel assembly would be removed from sale. Of the remaining 8 sales lots containing 66 sensitive military parts, we could not determine whether the items were not sold because DOD or its contractor caught the demilitarization coding errors or because minimum bids were not received during the respective sales events. Our investigators used publicly available information to develop fictitious identities as DOD contractor personnel and enter DRMO warehouses (referred to as DRMO A and DRMO B) in two east coast states on separate occasions in June 2006, to requisition excess sensitive military parts and equipment valued at about $1.1 million. Our investigators were able to search for and identify excess items without supervision. In addition, DRMO personnel assisted our investigators in locating other targeted items in the warehouse and loading these items into our van. At no point during either visit, did DRMO personnel attempt to verify with the actual contractor that our investigators were, in fact, contractor employees. During the undercover penetration at DRMO A, our investigators obtained numerous sensitive military items that were required to be destroyed when no longer needed by DOD to prevent them from falling into the wrong hands. These items included two guided missile launcher mounts for shoulder-fired missiles, six Kevlar body armor fragmentation vests, a digital signal converter used in naval electronic surveillance, and an all- band antenna used to track aircraft. Posing as employees for the same DOD contractor identity used during our June 2006 penetration at DRMO A, our investigators entered DRMO B a day later for the purpose of testing security controls at that location. DRMO officials appeared to be unaware of our security penetration at DRMO A the previous day. During the DRMO B undercover penetration, our investigators obtained 10 older technology body armor fragmentation vests, throat and groin protection armor, six circuit card assemblies used in Navy computerized systems, and two Palm V personal digital assistants (PDA) that were certified as having their hard drives removed. Because PDAs do not have hard drives, after successfully requisitioning them, we asked our Information Technology (IT) security expert to test them and our expert confirmed that all sensitive information had been properly removed. Shortly after leaving the second DRMO, our investigators received a call from a contractor official whose employees they had impersonated. The official had been monitoring his company’s requisitions of excess DOD property and noticed transactions that did not appear to represent activity by his company. He contacted personnel at DRMO A, obtained the phone number on our bogus excess property screening letter, and called us. Upon receiving the call from the contractor official, our lead investigative agent explained that he was with GAO, and we had performed a government test. Because significant numbers of new, unused A-condition excess items still being purchased or in use by the military services are being disposed of through liquidation sales, it was easy for our undercover investigator to pose as a liquidation sales customer and purchase several of these items for a fraction of what the military services are paying to obtain these same items from DLA supply depots. For example, we paid $1,146 for several wet-weather and cold-weather parkas, a portable field x-ray enclosure, high-security locks, a gasoline engine that can be used as part of a generator system or as a compressor, and a refrigerant recovery system used to service air conditioning systems on automobiles. The military services would have paid a total acquisition cost of $16,300 for these items if ordered from supply inventory, plus a charge for processing their order. Several of the items we purchased at liquidation sales events were being ordered from supply inventory by military units at or near the time of our purchase, and for one supply depot stocked item—the portable field x-ray enclosure—no items were in stock at the time we made our undercover purchase. At the time of our purchase, DOD’s liquidation contractor sold 40 of these x-ray enclosures with a total reported acquisition cost of $289,400 for a liquidation sales price of $2,914—about a penny on the dollar. We paid a liquidation sales price of $87 for the x-ray enclosure which had a reported acquisition cost of $7,235. In another example, we purchased a gasoline engine in March 2006 for $355. The Marine Corps ordered 4 of these gas engines from DLA supply inventory in June 2006 and paid $3,119 each for them. At the time of our undercover purchase, 20 identical gasoline engines with a reported acquisition cost of $62,380 were sold to the public for a total liquidation sales price of $6,221, also about a penny on the dollar. In response to recommendations in our May 2005 report, DOD has taken a number of actions to improve systems, processes, and controls over excess property. Most of these efforts have focused on improving the economy and efficiency of DOD’s excess property reutilization program. However, as demonstrated by our tests of security controls over sensitive excess military equipment, DOD does not yet have effective controls in place to prevent unauthorized parties from obtaining these items. For example, although DLA and DRMS have emphasized policies that prohibit batch lotting of sensitive military equipment items, we observed many of these items being sold in batch lots during our investigation and we were able to purchase several of them. In addition, DLA and DRMS have not ensured that DRMO personnel and DOD’s liquidation sales contractor are verifying demilitarization codes on excess property turn-in documentation to assure appropriate disposal actions for items requiring demilitarization. Further, although DLA and DRMS implemented several initiatives to improve the overall reutilization rate for excess A-condition items, our analysis of DRMS data found that the reported reutilization rate as of June 30, 2006, remained the same as we had previously reported—about 12 percent. This is primarily because DLA reutilization initiatives are limited to using available excess A-condition items to fill customer orders and to maintain established supply inventory retention levels. As a result, excess A-condition items that are not needed to fill existing orders or replenish supply inventory are disposed of outside of DOD through transfers, donations, and public sales, which made it easy for us to purchase excess new, unused DOD items. Despite the limited reutilization supply systems approach for reutilization of A-condition excess items, DLA and DRMS data show that overall system and process improvements since the Subcommittee’s June 2005 hearing have saved $38.1 million through June 2006. According to DLA data, interim supply system initiatives using the Automated Asset Recoupment Program, which is part of an old DOD legacy system, achieved reutilization savings of nearly $2.3 million since July 2005 and Business System Modernization supply system initiatives implemented in January 2006 as promised at the Subcommittee’s June 2005 hearing, have resulted in reutilization savings of nearly $1.1 million. In addition, DRMS reported that excess property marketing initiatives implemented in late March 2006 have resulted in reutilization savings of a little over $34.8 million through June 2006. These initiatives include marketing techniques using Web photographs of high-dollar items and e-mail notices to repeat customers about the availability of A-condition items that they had previously selected for reutilization. Our most recent work shows that sensitive military equipment items are still being improperly released by DOD and sold to the public, posing a significant national security risk. The sensitive nature of these items requires particularly stringent internal security controls. Our tests, which were performed over a short duration, were limited to our observations, meaning that the problem may likely be more significant than what we identified. Although we have referred the sales of items identified during our investigation to federal law enforcement agencies for follow-up, the solution to this problem is to enforce controls for preventing improper release of these items outside DOD. Further, liquidation sales of items that military units are continuing to purchase at full cost from supply inventory demonstrates continuing waste to the taxpayer and inefficiency in DOD’s excess property reutilization program. Mr. Chairman and Members of the Committee, this concludes my statement. I would be pleased to answer any questions that you or other members of the committee may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-7455 or kutzg@gao.gov. Major contributors to this testimony include Mario L. Artesiano, Donald L. Bumgardner, Matthew S. Brown, Paul R. Desaulniers, Stephen P. Donahue, Lauren S. Fassler, Gayle L. Fischer, Cinnimon Glozer, Jason Kelly, John Ledford, Barbara C. Lewis, Richard C. Newbold, John P. Ryan, Lori B. Ryza, Lisa M. Warde, and Emily C. Wold. Technical expertise was provided by Keith A. Rhodes, Chief Technologist, and Harold Lewis, Assistant Director, Information Technology Security, Applied Research and Methods. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

In light of GAO's past three testimonies and two reports on problems with controls over excess DOD property, GAO was asked to perform follow-up investigations to determine if (1) unauthorized parties could obtain sensitive excess military equipment that requires demilitarization (destruction) when no longer needed by DOD and (2) system and process improvements are adequate to prevent sales of new, unused excess items that DOD continues to buy or that are in demand by the military services. GAO investigators posing as private citizens purchased several sensitive military equipment items from DOD's liquidation sales contractor, indicating that DOD has not enforced security controls for preventing sensitive excess military equipment from release to the public. GAO investigators at liquidation sales purchased ceramic body armor inserts currently used by deployed troops, a cesium technology timing unit with global positioning capabilities, a universal frequency counter, two guided missile radar test sets, 12 digital microcircuits used in F-14 fighter aircraft, and numerous other items. GAO was able to purchase these items because controls broke down at virtually every step in the excess property turn-in and disposal process. GAO determined that thousands of military items that should have been demilitarized (destroyed) were sold to the public. Further, in June 2006, GAO undercover investigators posing as DOD contractor employees entered two excess property warehouses and obtained about $1.1 million in sensitive military equipment items, including two launcher mounts for shoulder-fired guided missiles, several types of body armor, a digital signal converter used in naval surveillance, an all-band antenna used to track aircraft, and six circuit cards used in computerized Navy systems. At no point during GAO's warehouse security penetration were its investigators challenged on their identity and authority to obtain DOD military property. GAO investigators posing as private citizens also bought several new, unused items currently being purchased or in demand by the military services from DOD's excess property liquidation sales contractor. Although military units paid full price for these items when they ordered them from supply inventory, GAO paid a fraction of this cost to purchase the same items, demonstrating continuing waste and inefficiency.

The United States imports substantial amounts of food. In 1993, the value of food imports from countries other than Canada amounted to about $21 billion. Similarly, the value of Canadian food imports from countries other than the United States totaled about $3.2 billion. The United States and Canada are concerned about imported foods since these foods are produced and processed under unknown conditions. Each country has several federal agencies that regulate and monitor the safety of imported foods. In the United States, the Department of Health and Human Services’ Food and Drug Administration (FDA) is the federal agency responsible for overseeing the safety of most domestic and imported food products, including fish and seafood. The U.S. Department of Agriculture’s Food Safety and Inspection Service (FSIS) is responsible for ensuring the safety of domestic and imported meat and poultry products. In general, Health Canada establishes the standards for food safety and has overall responsibility for ensuring that all food sold in Canada meets federal health and safety standards. Health Canada shares responsibility for inspections with Agriculture and Agri-Food Canada, which is responsible for inspecting meat, poultry, fruits, vegetables, dairy products, and eggs, and with Fisheries and Oceans Canada, which is responsible for inspecting fish and seafood. The two countries’ systems and standards for ensuring the safety of imported foods are similar. For meat and poultry, both FSIS and Agriculture and Agri-Food Canada certify that foreign countries’ processing and inspection systems are equivalent to the respective U.S. and Canadian domestic systems, then supplement that certification with inspections of foreign plants and spot checks of imports. For other foods, the two countries generally exercise control by selectively inspecting imports as they enter the country, although FDA and Fisheries and Oceans Canada inspect some foreign plants as well. The United States and Canada each inspect a limited amount of imported foods. The countries determine which foods to inspect on the basis of factors such as experience with the products and producers and their resources. In the United States, FSIS samples and examines about 15 percent of the meat and poultry imported from countries other than Canada. FDA samples and analyzes, on average, less than 2 percent of all other imported foods; inspection rates are higher for high-risk foods, such as seafood and low-acid canned foods, and those with a significant history of violations. In Canada, Agriculture and Agri-Food Canada inspects about 20 percent of the imported meat and poultry and lesser amounts of other foods. Fisheries and Oceans Canada inspects, on average, about 17 percent of the imported seafood. In both countries, foods that do not pass inspection may be conditioned, destroyed, or reexported at the discretion of the importer with one exception—meat rejected by Canada cannot be conditioned. Some imported products, such as those with a history of violations, are detained automatically when they enter either the United States or Canada; inspectors must specifically determine that these foods comply with applicable standards. Other products are inspected according to a sampling plan determined by such factors as the risk of contamination. Recent international events are smoothing the way for increased trade in foods. Under the General Agreement on Tariffs and Trade, the world’s nations are moving toward equivalent food safety standards that are expected to facilitate trade and thus increase food imports into the United States and Canada. Furthermore, the North American Free Trade Agreement (NAFTA) promises to lessen customs restrictions on trade between the United States and Canada, making it easier for foods imported into one country to pass into the other. Finally, U.S. and Canadian efforts under the Canada-United States Free Trade Agreement and NAFTA are helping harmonize the two countries’ food safety standards, making it easier for the two countries to share information and to rely on each other’s food safety information. Recognizing the value of sharing information about imported foods, the United States and Canada have, over time, developed an ad hoc system for communicating selected information about unsafe food imports. Agency-to-agency arrangements have been established between (1) FSIS and Agriculture and Agri-Food Canada for meat and poultry products, (2) FDA and Fisheries and Oceans Canada for fish and seafood products, and (3) FDA and Health Canada for all other food products. In addition, some officials communicate with one another at the regional level. For example, FDA officials in Blaine, Washington, work closely with officials of Fisheries and Oceans Canada, located about 40 miles away in Vancouver, Canada. Table 1 describes selected regional and agency-to-agency arrangements for sharing information on potentially unsafe imports, foods rejected as unsafe, and inspections of foreign plants. Opportunities exist for improving the current U.S.-Canada information-sharing system in two areas: (1) shipments of unsafe foods refused at one country’s port of entry and (2) inspections of foreign food-processing plants. In addition, although each country inspects some foreign plants that export to it, the two countries do not maximize the use of limited resources by coordinating inspections of plants that export to both countries. While the current ad hoc system alerts each country to some problems with unsafe imported foods detected by the other, it does not ensure that all relevant information is exchanged. Neither the United States nor Canada informs the other country of refused shipments being returned to the country of origin, even though those shipments could be rerouted once they leave port. Furthermore, the two countries do not always notify each other about shipments rejected at their respective borders that are then sent directly to the other country. For example, in 1993 the Canadian government notified U.S. officials about rejected shipments in 25 of 37 instances. Similar information on U.S. notifications to Canada was not available because the U.S. agencies do not consistently document this information. The United States is even less systematic in notifying Canada of such refused shipments, in part because FDA officials, unlike their Canadian counterparts, usually do not know where the shipments are going until they have left the country. The U.S. Customs Service, which is responsible for ensuring that rejected shipments of food leave the United States, generally does not notify FDA until after the shipments have left. Even when U.S. officials are notified of problem shipments, their follow-up is sporadic. For example, for the 25 rejected shipments that Canadian officials reported to the United States in 1993, the United States traced 11 shipments and part of another, while 13 shipments and part of another remained unaccounted for. FSIS was responsible for eight of the unaccounted-for shipments. FSIS either did not track or did not document its tracking of these shipments. FDA, which was responsible for the remaining unaccounted-for shipments, could not track them because it either could not identify the port of entry or had no record of the Canadian notification. Officials from FDA and FSIS cited scarce resources as their reason for not putting more emphasis on tracking each rejected shipment. For details on Canada’s tracking of shipments rejected by the United States, see the accompanying OAG report. The United States and Canada have an opportunity to build on each other’s information about foreign food-processing plants that ship products to North America. Although both countries inspect these plants, they share little information on the results of those inspections or recurring problems with the plants. For meat-processing plants, where most U.S. foreign inspections occur, the only inspection information shared is FSIS’ required annual list of plants that have been certified and decertified. Agriculture and Agri-Food Canada receives a copy of this published list. However, neither FSIS nor Agriculture and Agri-Food Canada asks for or provides the results of its inspections to its counterpart agency. For foreign seafood-processing plants, FDA and Fisheries and Oceans Canada began, in February 1994, to discuss sharing the results of their inspections annually. To date, FDA has provided a list of the foreign plants it has inspected and the results to Fisheries and Oceans Canada. A more routine exchange of information would enable both countries to learn where duplication is occurring or coverage is lacking and help them identify problem plants for future inspections. Additional information about each country’s experiences in inspecting foreign plants could, in turn, enable the United States and Canada to maximize scarce inspection resources by coordinating such inspections. For example, between 1991 and 1993, FSIS and Agriculture and Agri-Food Canada inspected the same meat and poultry plants 103 times—6 percent of the United States’ annual inspections and 76 percent of Canada’s inspections. During the same period, FDA and Fisheries and Oceans Canada inspected five of the same tuna-processing plants—3 percent of FDA’s inspections of low-acid canned food plants and 33 percent of Fisheries and Oceans Canada’s inspections. At the same time, many foreign food-processing plants were not inspected by either country. For example, in 1991, 1992, and 1993, neither FSIS nor Agriculture and Agri-Food Canada inspected 300 (on average) of the 750 foreign meat-processing plants certified to export to the United States. For the same period, neither country inspected over 35,000 of the estimated 36,000 processing plants that export seafood or low-acid canned food to the United States. The disparity between the way the United States covers meat-processing plants and other food-production plants in foreign countries occurs largely because of the way U.S. laws divide responsibility and resources for inspecting such plants between FSIS and FDA. For example, FSIS, which oversees approximately 750 foreign plants certified to export to the United States, spent $2.5 million to inspect foreign plants in fiscal year 1993. FDA, which spent about $300,000 to inspect foreign plants in the same period, is responsible for the safety of all other imported foods, including high-risk foods, from over 36,000 foreign plants. U.S. and Canadian officials acknowledge the need to avoid duplicating effort and to enhance coverage by sharing inspection results. According to officials from both governments, the two nations would have to establish that their foreign inspection systems were comparable before they could fully depend on the results of each other’s foreign inspections. The domestic inspection programs for meat and poultry in both countries are considered to be equivalent. Therefore, U.S. agency officials believe that the two countries’ systems for inspecting all foods are probably similar enough so that the United States and Canada could use each other’s inspection results when planning upcoming inspections in order to target their resources more efficiently and effectively. As the border between the United States and Canada becomes more open, the two countries are becoming increasingly aware of the value of cooperating fully to ensure that unsafe food does not enter either country and of making better use of each country’s limited resources. Agencies and some agency officials have taken actions on their own to establish informal cross-border arrangements to share information about unsafe imported foods. We believe these efforts are commendable. By notifying each other about rejected shipments and making each other aware of which processing plants have passed or failed inspection, the United States and Canada could build on the current system and better ensure that unsafe food does not enter either country. Furthermore, inspection coverage of foreign food-processing plants could be more comprehensive if the two countries coordinated inspections. To better ensure the safety of imported foods and to make better use of limited resources, we recommend that the Secretaries of Agriculture and of Health and Human Services take the lead in developing, in concert with their Canadian counterparts and to the extent necessary with the U.S. Customs Service, a more comprehensive system for sharing crucial information on and coordinating activities for unsafe imported foods. As part of this comprehensive system, the agencies should consider coordinating U.S. and Canadian inspections of foreign food-processing plants. While developing a comprehensive bilateral system will take some time, there are shorter-term steps that U.S. agencies could take to tighten control over unsafe food that has been rejected by one country and routed to the other. Specifically, we recommend that the Secretaries of Agriculture and of Health and Human Services direct that FSIS and FDA ensure that available information on rejected shipments being sent to Canada is transmitted to the Canadian government and that information from the Canadian government on such shipments being sent to the United States is consistently followed up. We discussed a draft of this report with FSIS’ Director, Review and Assessment Programs, and FDA’s Director, Division of Import Operations Policy. They generally agreed with the information we presented, and we incorporated their suggestions where appropriate. In developing information for this report, we spoke with and obtained documentation from FDA and FSIS officials at headquarters and at selected regional and port sites in the states of Washington, California, and New York. We provided relevant parts of this information to our counterpart OAG team. In turn, we received from the OAG team information from officials at Agriculture and Agri-Food Canada, Fisheries and Oceans Canada, and Health Canada in headquarters and corresponding regional locations. We conducted our review between November 1993 and October 1994 in accordance with generally accepted government auditing standards. We are sending copies of this report to appropriate congressional committees; interested Members of Congress; the Canadian Parliament; the Secretaries of Agriculture and Health and Human Services; the Commissioner, Food and Drug Administration; the Acting Administrator, Food Safety and Inspection Service; and other interested parties. We will also make copies available to others on request. Robert A. Robinson, Associate Director Edward M. Zadjura, Assistant Director Karla J. Springer, Project Leader Keith W. Oleson, Adviser Marci D. Kramer, Evaluator Donya Fernandez, Evaluator Carol Herrnstadt Shulman, Communications Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066. Each day, GAO issues a list of newly available reports and testimony. 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GAO reviewed how the United States and Canada share information on and coordinate activities for shipments of unsafe imported foods, focusing on whether opportunities exist to make better use of limited inspection resources and thereby increase the likelihood that unsafe imported foods would be stopped from entering the United States and Canada. GAO found that: (1) U.S. and Canadian food safety officials share information through generally informal agency-to-agency exchanges and cross-border contacts at ports of entry; (2) U.S.-Canadian information sharing efforts focus primarily on shipments of potentially unsafe foods, food shipments refused at one port of entry that may be rerouted to the other port, and inspections of foreign food-processing plants; (3) opportunities exist for the United States and Canada to develop a more comprehensive system for sharing information about shipments of unsafe foods and inspections of foreign food-processing plants and for coordinating these inspections; and (4) improvements in U.S. and Canadian information sharing efforts would enable the two nations to better target their limited inspection resources.

Peer review is well established as a mechanism for assuring the quality, credibility, and acceptability of individual and institutional work products. This assurance is accomplished by having the products undergo an objective, critical review by independent reviewers. Peer review has long been used by academia, professional organizations, industry, and government. Within EPA, peer review has taken many different forms, depending upon the nature of the work product, the relevant statutory requirements, and office-specific practices and needs. In keeping with scientific custom and/or congressional mandates, several offices within EPA have used peer review for many years to enhance the quality of science within the agency. In response to a panel of outside academicians’ recommendations in 1992, EPA issued a policy statement in 1993 calling for peer review of the major scientific and technical work products used to support the agency’s rulemaking and other decisions. However, the Congress, GAO, and others subsequently raised concerns that the policy was not being implemented consistently across the agency. In response to these concerns, in 1994 EPA reaffirmed the central role that peer review plays in ensuring that the agency’s decisions are based on sound science and credible data and revised its 1993 policy. The new policy, while retaining the essence of the prior one, was intended to expand and improve the use of peer review throughout EPA. The 1994 policy continued to stress that major products should normally be peer reviewed, but it also recognized that statutory and court-ordered deadlines, resource limitations, and other constraints might limit or even preclude the use of peer review. The policy applied to major work products that are primarily scientific or technical in nature and that may contribute to the basis for policy or regulatory decisions. In contrast, other products used in decision-making are not covered by the policy, nor are the ultimate decisions themselves. While peer review can take place at several different points along a product’s development, such as during the planning stage, it should be applied to a relatively well-developed product. The 1994 policy also clarified that peer review is not the same thing as the peer input, stakeholders’ involvement, or public comment—mechanisms used by EPA to develop products, to obtain the views of interested and affected parties, and/or to build consensus among the regulated community. While each of these mechanisms serves a useful purpose, the policy points out that they are not a substitute for peer review because they do not necessarily solicit the same unbiased, expert views that are obtained through peer review. EPA’s policy assigned responsibility to each Assistant and Regional Administrator to develop standard operating procedures and to ensure their use. To help facilitate consistent EPA-wide implementation, EPA’s Science Policy Council—chaired by EPA’s Deputy Administrator—was directed to help the offices and regions develop their procedures and identify products that should be peer reviewed. The Council was also given the responsibility for assessing agencywide progress and developing any needed changes to the policy. However, the ultimate responsibility for implementing the policy was placed with the Assistant and Regional Administrators. We found that—2 years after EPA established its peer review policy— implementation was still uneven. We concluded that EPA’s uneven implementation was primarily due to (1) inadequate accountability and oversight to ensure that all products are properly peer reviewed by program and regional offices and (2) confusion among agency staff and management about what peer review is, what its significance and benefits are, and when and how it should be conducted. According to the Executive Director of the Science Policy Council, the unevenness could be attributed to a number of factors. First, while some offices within EPA—such as the Office of Research and Development (ORD)—have historically used peer review for many years, other program offices and regions have had little prior experience. In addition, the Director and other EPA officials told us that statutory and court-ordered deadlines, budget constraints, and problems in finding and obtaining qualified, independent peer reviewers also contributed to the problem. EPA’s oversight primarily consisted of a two-part reporting scheme that called for each office and region to annually list (1) the candidate products nominated for peer review during the upcoming year and (2) the status of the products previously nominated. If a candidate product was no longer scheduled for peer review, the list had to note this and explain why peer review was no longer planned. Although we found this to be an adequate oversight tool for tracking the status of previously nominated products, we pointed out that it does not provide upper-level managers with sufficient information to ensure that all products warranting peer review have been identified. This fact, together with the misperceptions about what peer review is and the deadlines and budget constraints that project officers often operate under, has meant that the peer review program to date has largely been one of self-identification, allowing some important work products to go unlisted. According to the Science Policy Council, reviewing officials would be much better positioned to determine if the peer review policy and procedures are being properly and consistently implemented if, instead, EPA’s list contained all major products along with what peer review is planned and, if none, the reasons why not. We noted that the need for more comprehensive oversight is especially important given the policy’s wide latitude in allowing peer review to be forgone in cases facing time and/or resource constraints. As explained by the Executive Director of EPA’s Science Policy Council, because so much of the work that EPA performs is in response to either statutory or court-ordered mandates and the agency frequently faces budget uncertainties or limitations, an office under pressure might argue for nearly any given product that peer review is a luxury the office cannot afford in the circumstances. However, as the Executive Director of the Science Advisory Board (SAB)told us, not conducting peer review can sometimes be more costly to the agency in terms of time and resources. He told us of a recent Office of Solid Waste rulemaking concerning a new methodology for delisting hazardous wastes in which the Office’s failure to have the methodology appropriately peer reviewed resulted in important omissions, errors, and flawed approaches in the methodology; these problems will now take from 1 to 2 years to correct. The SAB also noted that further peer review of the individual elements of the proposed methodology is essential before the scientific basis for this rulemaking can be established. Although EPA’s policy and procedures provide substantial information about what peer review entails, we found that some EPA staff and managers had misperceptions about what peer review is, what its significance and benefits are, and when and how it should be conducted. Several cases we reviewed illustrate this lack of understanding about what peer review entails. Officials from EPA’s Office of Mobile Sources (OMS) told the House Commerce Committee in August 1995 that they had not had any version of the mobile model peer reviewed. Subsequently, in April 1996, OMS officials told us they recognize that external peer review is needed and that EPA planned to have the next iteration of the model so reviewed. We found similar misunderstandings in several other cases we reviewed. EPA regional officials who produced a technical product that assessed the environmental impacts of tributyl tin told us that the contractor-prepared product had been peer reviewed. While we found that the draft product did receive some internal review by EPA staff and external review by contributing authors, stakeholders, and the public, it was not reviewed by experts independent of the product itself or of its potential regulatory ramifications. When we pointed out that—according to EPA’s policy and the region’s own peer review procedures—these reviews are not a substitute for peer review, the project director said that she was not aware of these requirements. In two other cases we reviewed, there were misunderstandings about the components of a product that should be peer reviewed. For example, in the Great Waters study—an assessment of the impact of atmospheric pollutants in significant water bodies—the scientific data were subjected to external peer review, but the study’s conclusions that were based on these data were not. Similarly, in the reassessment of dioxin—an examination of the health risks posed by dioxin—the final chapter summarizing and characterizing dioxin’s risks was not as thoroughly peer reviewed. In both cases, the project officers did not have the conclusions peer reviewed because they believed that the development of conclusions is an inherently governmental function that should be performed exclusively by EPA staff. However, some EPA officials with expertise in conducting peer reviews disagreed, maintaining that it is important to have peer reviewers comment on whether or not EPA has properly interpreted the results of the underlying scientific and technical data. EPA’s quality assurance requirements also state that conclusions should be peer reviewed. During our review, we found that EPA had recently taken a number of steps to improve the peer review process. Although we believed that these steps should prove helpful, we concluded that they did not fully address the previously-discussed underlying problems and made some recommendations for improvement. EPA agreed with our findings and recommendations and has recently undertaken steps to implement them. While it is too early to gauge the effectiveness of these efforts, we are encouraged by the attention peer review is receiving by the agency’s upper-level management. Near the completion of our review, in June 1996, EPA’s Deputy Administrator directed the Science Policy Council’s Peer Review Advisory Group and ORD’s National Center for Environmental Research and Quality Assurance to develop an annual peer review self-assessment and verification process to be conducted by each office and region. The self-assessment was to include information on each peer review completed during the prior year as well as feedback on the effectiveness of the overall process. The verification would consist of the signature of headquarters, laboratory, or regional directors to certify that the peer reviews were conducted in accordance with the agency’s policy and procedures. If the peer review did not fully conform to the policy, the division director or the line manager must explain significant variances and actions needed to limit future significant departures from the policy. The self-assessments and verifications were to be submitted and reviewed by the Peer Review Advisory Group to aid in its oversight responsibilities. According to the Deputy Administrator, this expanded assessment and verification process would help build accountability and demonstrate EPA’s commitment to the independent review of the scientific analyses underlying the agency’s decisions to protect public health and the environment. During our review, we also found a number of efforts under way within individual offices and regions to improve their implementation of peer review. For example, the Office of Water drafted additional guidance to further clarify the need for, use of, and ways to conduct peer review. The Office of Solid Waste and Emergency Response formed a team to help strengthen the office’s implementation of peer review by identifying ways to facilitate good peer review and addressing barriers to its successful use. Additionally, EPA’s Region 10 formed a Peer Review Group with the responsibility for overseeing the region’s reviews. We concluded that the above efforts should help address the problems we found. However, we also concluded that the efforts aimed at improving the oversight of peer review fell short by not ensuring that all relevant products had been considered for peer review and did not require documenting the reasons why products were not selected. Similarly, we noted that the efforts aimed at better informing staff about the benefits and use of peer review would be more effective if they were done consistently throughout the agency. EPA agreed with our findings and conclusions and has recently undertaken a number of steps to implement our recommendations. On November 5, 1996, the Deputy Administrator asked ORD’s Assistant Administrator, in consultation with the other Assistant Administrators, to develop proposals to strengthen the peer review process. In response, ORD’s Assistant Administrator proposed a three-pronged approach consisting of (1) audits of a select number of work products to determine how well the peer review policy was followed; (2) a series of interviews with office and regional staff involved with peer review to determine the processes used to implement the policy; and (3) training to educate and provide help to individuals to improve the implementation of the peer review policy. Significantly, the Deputy Administrator has echoed our message that EPA needs to improve its oversight to ensure that all appropriate products are peer reviewed. In a January 14, 1997, memorandum to the Assistant and Regional Administrators, the Deputy stated, “I want you to ensure that your lists of candidates for peer review are complete.” To help accomplish this goal, each organization is directed to use, among other things, EPA’s regulatory agenda and budget planning documents to help identify potential candidates for peer review. While we agree that this should prove to be a useful tool, we continue to encourage EPA to expand its existing candidate list to include all major work products, along with explanations of why individual products are not nominated for peer review. An all-inclusive list such as this will be extremely useful to those overseeing the peer review process to determine whether or not all products have been appropriately considered for peer review. In summary, peer review is critical for improving the quality of scientific and technical products and for enhancing the credibility and acceptability of EPA’s decisions that are based on these products. We are encouraged by the renewed attention EPA is giving to improving the peer review process. Although it is too early for us to gauge the success of these efforts, the involvement of the agency’s upper-level management should go a long way to ensure that the problems we identified are resolved. Mr. Chairman, this concludes my prepared statement. I will be happy to respond to your questions or the questions of Subcommittee members. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. 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GAO discussed its recent report on the Environmental Protection Agency's (EPA) implementation of its peer review policy, focusing on EPA's: (1) progress in implementing its peer review policy; and (2) efforts to improve the peer review process. GAO noted that: (1) despite some recent progress, peer review continues to be implemented unevenly; (2) although GAO found some cases in which EPA's peer review policy was properly followed, it also found cases in which key aspects of the policy were not followed or in which peer review was not conducted at all; (3) GAO believes that two of the primary reasons for this uneven implementation are: (a) inadequate accountability and oversight to ensure that all relevant products are properly peer reviewed; and (b) confusion among EPA's staff and management about what peer review is, its importance and benefits, and how and when it should be conducted; (4) EPA officials readily acknowledge this uneven implementation and, during the course of GAO's work, had a number of efforts under way to improve the peer review process; (5) although GAO found these efforts to be steps in the right direction, it concluded that EPA was not addressing the underlying problems that GAO had identified; (6) accordingly, GAO recommended that EPA ensure that: (a) upper-level managers have the information they need to know whether or not all relevant products have been considered for peer review; and (b) staff and managers are educated about the need for and benefits of peer review and their specific responsibilities in implementing policy; (7) EPA agreed with GAO's recommendations and has several efforts under way to implement them; (8) for example, EPA plans to initiate a peer review training program for its managers and staff in June 1997; and (9) while it is still too early to be certain if these efforts will be fully successful, GAO is encouraged by the high-level attention being paid to this very important process.

Based on state responses to our survey, we estimated that nearly 617,000, or about 89 percent of the approximately 693,000 regulated tanks states manage, had been upgraded with the federally required equipment by the end of fiscal year 2000. In comparison, EPA data at that time showed that about 70 percent of the total number of tanks its regions regulate on tribal lands had been upgraded, but the accuracy of this data varied among the regions. For example, one region reported that it had no information on the actual location of some of the 300 tanks it was supposed to regulate and therefore could not verify whether these tanks had been upgraded. Even though most tanks have been upgraded, we estimated from our survey data that more than 200,000 of them, or about 29 percent, were not being properly operated and maintained, increasing the risk of leaks. EPA’s most current program data from the end of fiscal year 2002 show that these conditions have not changed significantly; tank compliance rates range from an estimated 19 to 26 percent. However, program managers estimate these rates are too high because some states have not inspected all tanks or reported their data in a consistent manner. The extent of operational and maintenance problems we identified at the time of our survey varied across the states, as figure 1 illustrates. Some upgraded tanks also continue to leak, in part because of operational and maintenance problems. For example, in fiscal year 2000, EPA and the states confirmed a total of more than 14,500 leaks or releases from regulated tanks, with some portion coming from upgraded tanks. EPA’s most recent data show that the agency and states have been able to reduce the rate of new leaks by more than 50 percent over the past 3 years. The states reported a variety of operational and maintenance problems, such as operators turning off leak detection equipment. The states also reported that the majority of problems occurred at tanks owned by small, independent businesses; non-retail and commercial companies, such as cab companies; and local governments. The states attributed these problems to a lack of training for tank owners, installers, operators, removers, and inspectors. These smaller businesses and local government operations may find it more difficult to afford adequate training, especially given the high turnover rates among tank staff, or may give training a lower priority. Almost all of the states reported a need for additional resources to keep their own inspectors and program staff trained, and 41 states requested additional technical assistance from the federal government to provide such training. EPA has provided states with a number of training sessions and helpful tools, such as operation and maintenance checklists and guidelines. According to program managers, the agency recognizes that many states, because of their tight budgets, are looking for cost-effective ways of providing training, such as Internet-based training. To expand on these efforts, we recommended that EPA regions work with their states to identify training gaps and develop strategies to fill these gaps. In addition, we suggested that the Congress consider increasing the amount of funds it provides from the trust fund and authorizing states to spend a limited portion on training. According to EPA’s program managers, only physical inspections can confirm whether tanks have been upgraded and are being properly operated and maintained. However, at the time of our survey, only 19 states physically inspected all of their tanks at least once every 3 years— the minimum that EPA considers necessary for effective tank monitoring. Another 10 states inspected all tanks, but less frequently. The remaining 22 states did not inspect all tanks, but instead generally targeted inspections to potentially problematic tanks, such as those close to drinking water sources. In addition, one of the three EPA regions that we visited did not inspect tanks located on tribal land at this rate. According to EPA program managers, limited resources have prevented states from increasing their inspection activities. Officials in 40 states said that they would support a federal mandate requiring states to periodically inspect all tanks, in part because they expect that such a mandate would provide them needed leverage to obtain the requisite inspection staff and funding from their legislatures. Figure 2 illustrates the inspection practices states reported to us in our survey. While EPA has not established any required rate of inspections, it has been encouraging states to consider other ways to increase their rate of inspections, for example by using third-party inspectors, and a few have been able to do so. However, to obtain more consistent coverage nationwide, we suggested that the Congress establish a federal requirement for the physical inspections of all tanks on a periodic basis, and provide states authority to spend trust fund appropriations on inspection activities as a means to help states address any staff or resource limitations. In addition to more frequent inspections, a number of states said that they needed additional enforcement tools to correct problem tanks. As figure 3 illustrates, at the time of our survey, 27 states reported that they did not have the authority to prohibit suppliers from delivering fuel to stations with problem tanks, one of the most effective tools to ensure compliance. According to EPA program managers, this number has not changed. EPA believes, and we agree, that the law governing the tank program does not give the agency clear authority to regulate fuel suppliers and therefore prohibit their deliveries. As a result, we suggested that the Congress consider (1) authorizing EPA to prohibit delivery of fuel to tanks that do not comply with federal requirements, (2) establishing a federal requirement that states have similar authority, and (3) authorizing states to spend limited portions of their trust fund appropriations on enforcement activities. At the end of fiscal year 2002, EPA and states had completed cleanups of about 67 percent (284,602) of the 427,307 known releases at tank sites. Because states typically set priorities for their cleanups by first addressing those releases that pose the most risks, states may have already begun to clean up some of the worst releases to date. However, states still have to ensure that ongoing cleanups are completed for another 23 percent (99,427) and that cleanups are initiated at a backlog of 43,278 sites. EPA has also established a national goal of completing 18,000 to 23,000 cleanups each year through 2007. However, in addition to their known workload, states may likely face a potentially large but unknown future cleanup workload for several reasons: (1) as many as 200,000 tanks may be unregistered or abandoned and not assessed for leaks, according to an EPA estimate; (2) tens of thousands of empty and inactive tanks have not been permanently closed or had leaks identified; and (3) some states are reopening completed cleanups in locations where MTBE was subsequently detected. This increasing workload poses financial challenges for some states. In the June 2002 Vermont survey of state funding programs, nine states said they did not have adequate funding to cover their current program costs, let alone unanticipated future costs. For example, while tank owners and operators have the financial responsibility for cleaning up contamination from their tanks, there are no financially viable parties responsible for the abandoned tanks that states have not yet addressed. In addition, MTBE is being detected nationwide and its cleanup is costly. States reported that it could cost more to test for MTBE because additional steps are needed to ensure the contamination is not migrating farther than other contaminants, and MTBE can cause longer plumes of contamination, adding time and costs to cleanups. If there are no financially viable parties responsible for these cleanups, states may have to assume more of these costs.

Nationwide, underground storage tanks (UST) containing petroleum and other hazardous substances are leaking, thereby contaminating the soil and water, and posing health risks. The Environmental Protection Agency (EPA), which implements the UST program with the states, required tank owners to install leak detection and prevention equipment by the end of 1993 and 1998 respectively. The Congress asked GAO to determine to what extent (1) tanks comply with the requirements, (2) EPA and the states are inspecting tanks and enforcing requirements, (3) upgraded tanks still leak, and (4) EPA and states are cleaning up these leaks. In response, GAO conducted a survey of all states in 2000 and issued a report on its findings in May 2001. This testimony is based on that report, as well as updated information on program performance since that time. GAO estimated in its May 2001 report that 89 percent of the 693,107 tanks subject to UST rules had the leak prevention and detection equipment installed, but that more than 200,000 tanks were not being operated and maintained properly, increasing the chance of leaks. States responding to our survey also reported that because of such problems, even tanks with the new equipment continued to leak. EPA and the states attributed these problems primarily to poorly trained staff. While EPA is working with states to identify additional training options, in December 2002, EPA reported that at least 19 to 26 percent of tanks still have problems. EPA and states do not know how many upgraded tanks still leak because they do not physically inspect all tanks. EPA recommends that tanks be inspected once every 3 years, but more than half of the states do not do this. In addition, more than half of the states lack the authority to prohibit fuel deliveries to problem tanks--one of the most effective ways to enforce compliance. States said they did not have the funds, staff, or authority to inspect more tanks or more strongly enforce compliance. As of September 2002, EPA and states still had to ensure completion of cleanups for about 99,427 leaks, and initiation of cleanups at about another 43,278. States also face potentially large, but unknown, future workloads in addressing leaks from abandoned and unidentified tanks. Some states said that their current program costs exceed available funds, so states may seek additional federal support to help address this future workload.

The September 11, 2001, terrorist attacks had a devastating effect on the U.S. financial markets with significant loss of life, extensive physical damage, and considerable disruption to the financial district in New York. Damage from the collapse of the World Trade Center buildings caused dust and debris to blanket a wide area of lower Manhattan, led to severe access restrictions to portions of lower Manhattan for days, and destroyed substantial portions of the telecommunications and power infrastructure that served the area. Telecommunications service in lower Manhattan was lost for many customers when debris from the collapse of one the World Trade Center buildings struck a major Verizon central switching office that served approximately 34,000 business and residences. The human impact was especially devastating because about 70 percent of the civilians killed in the attacks worked in the financial services industry, and physical access to the area was severely curtailed through September 13, 2001. Although most stock exchanges and clearing organizations escaped direct damage, the facilities and personnel of several key broker-dealers and other market participants were destroyed or displaced. Market participants and regulators acknowledged that the reopening of the stock and options markets could have been further delayed if any of the exchanges or clearing organizations had sustained serious damage. The stock and options exchanges remained closed as firms, that were displaced by the attacks attempted to reconstruct their operations and reestablish telecommunications with their key customers and other market participants. In the face of enormous obstacles, market participants, infrastructure providers, and the regulators made heroic efforts to restore operations in the markets. Broker-dealers that had their operations disrupted or displaced either relocated their operations to backup facilities or other alternative facilities. These facilities had to be outfitted to accommodate normal trading operations and to have sufficient telecommunications to connect with key customers, clearing and settlement organizations, and the exchanges and market centers. Some firms did not have existing backup facilities for their trading operations and had to create these facilities in the days following the crisis. For example, one broker-dealer leased a Manhattan hotel to reconstruct its operations. Firms were not only challenged with reconstructing connections to their key counterparties but, in some cases, they also had the additional challenge of connecting with the backup sites of counterparties that were also displaced by the attacks. The infrastructure providers also engaged in extraordinary efforts to restore operations. For example, telecommunications providers ran cables above ground rather than underground to speed up the restoration of service. By Friday September 14, 2001, exchange officials had concluded that only 60 percent of normal market trading liquidity had been restored and that it would not be prudent to trade in such an environment. In addition, because so many telecommunications circuits had been reestablished, market participants believed that it would be beneficial to test these telecommunications circuits prior to reopening the markets. Officials were concerned that without such testing, the markets could have experienced operational problems and possibly have to close again, which would have further shaken investor confidence. The stock and options markets reopened successfully on Monday, September 17, 2001 and achieved record trading volumes. Although the government securities markets reopened within 2 days, activity within those markets was severely curtailed, as there were serious clearance and settlement difficulties resulting from disruptions at some of the key participants and at one of the two banks that clear and settle government securities. Some banks had important operations in the vicinity of the attacks, but the impact of the attacks on the banking and payment systems was much less severe. Regulators also played a key role in restoring market operations. For example, the Federal Reserve provided over $323 billion in funding to banks between September 11 and September 14, 2001, to prevent organizations from defaulting on their obligations and creating a widespread solvency crisis. SEC also granted regulatory relief to market participants by extending reporting deadlines and relaxed the rules that restrict corporations from repurchasing their shares. The Department of the Treasury also helped to address settlement difficulties in the government securities markets by conducting a special issuance of 10-year Treasury notes. Although financial market participants, regulators, and infrastructure providers made heroic efforts to restore the functioning of the markets as quickly as they did, the attacks and our review of 15 key financial market organizations—including 7 critical ones—revealed that financial market participants needed to improve their business continuity planning capabilities and take other actions to better prepare themselves for potential disasters. At the time of the attacks, some market participants lacked backup facilities for key aspects of their operations such as trading, while others had backup facilities that were too close to their primary facilities and were thus either inaccessible or also affected by the infrastructure problems in the lower Manhattan area. Some organizations had backup sites that were too small or lacked critical equipment and software. In the midst of the crisis, some organizations also discovered that the arrangements they had made for backup telecommunications service were inadequate. In some cases, firms found that telecommunication lines that they had acquired from different providers had been routed through the same paths or switches and were similarly disabled by the attacks. The 15 stock exchanges, ECNs, clearing organizations, and payment systems we reviewed had implemented various physical and information security measures and business continuity capabilities both before and since the attacks. At the time of our work—February to June 2002—these organizations had taken such steps as installing physical barriers around their facilities to mitigate effects of physical attacks from vehicle-borne explosives and using passwords and firewalls to restrict access to their networks and prevent disruptions from electronic attacks. In addition, all 15 of the organizations had developed business continuity plans that had procedures for restoring operations following a disaster; and some organizations had established backup facilities that were located hundreds of miles from their primary operations. Although these organizations have taken steps to reduce the likelihood that their operations would be disrupted by physical or electronic attacks and had also developed plans to recover from such events, we found that some organizations continued to have some limitations that would increase the risk of their operations being impaired by future disasters. This issue is particularly challenging for both market participants and regulators, because addressing security concerns and business continuity capabilities require organizations to assess their overall risk profile and make business decisions based on the trade-offs they are willing to make in conducting their operations. For example, one organization may prefer to invest in excellent physical security, while another may choose to investment less in physical security and more in developing resilient business continuity plans and capabilities. Our review indicated that most of the 15 organizations faced greater risk of operational disruptions because their business continuity plans did not adequately address how they would recover if large portions of their critical staff were incapacitated. Most of the 15 organizations were also at a greater risk of operations disruption from wide-scale disasters, either because they lacked backup facilities or because these facilities were located within a few miles of their primary sites. Few of the organizations had tested their physical security measures, and only about half were testing their information security measures and business continuity plans. Securities and banking regulators have made efforts to examine operations risk measures in place at the financial market participants they oversee. SEC has conducted reviews of exchanges, clearing organizations, and ECNs that have generally addressed aspects of these organizations’ physical and information security and business continuity capabilities. However, reviews by SEC and the exchanges at broker-dealers generally did not address these areas, although SEC staff said that such risks would be the subject of future reviews. Banking regulators also reported that they review such issues in the examinations they conduct at banks. Regulators also have begun efforts to improve the resiliency of clearing and settlement functions for the financial markets. In August 2002, the Federal Reserve, Office of the Comptroller of the Currency, and SEC jointly issued a paper entitled the Draft Interagency White Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System. This paper sought industry comment on sound business practices to better ensure that clearance and settlement organizations would be able to resume operations promptly after a wide-scale regional disaster. The regulators indicated that the sound practices would apply to a limited number of organizations that perform important clearing functions, as well as to between 15 and 20 banks and broker-dealers that also perform clearing functions with sizeable market volumes. The regulators that developed the white paper appropriately focused on clearing functions to help ensure that settlement failures do not lead to a broader financial crisis. However, the paper did not similarly address restoring critical trading activities in the various financial markets. The regulators that developed the paper believed that clearing functions were mostly concentrated in single entities for most markets or in a very few entities for others and thus posed a greater potential for disruption. In theory, multiple stock exchanges and other organizations that conduct trading activities could substitute for each other in the event of a crisis. Nevertheless, trading on the markets for corporate securities, government securities, and money market instruments is also vitally important to the economy; and the United States deserves similar assurance that trading activities also would be able to resume when appropriate—smoothly and without excessive delay. The U.S. economy has demonstrated that it can withstand short periods during which markets are not trading. After some events occur, having markets closed for some limited time could be appropriate to allow emergency and medical relief activities, permit operations to recover, and reduce market overreaction. However, long delays in reopening the markets could be harmful to the economy. Without trading, investors lack the ability to accurately value their securities and cannot adjust their holdings. The September 11, attacks demonstrated that the ability of markets to recover could depend on the extent to which market participants have made sound investments in business continuity capabilities. Without clearly identifying strategies for recovery, determining the sound practices needed to implement these strategies, and identifying the organizations that could conduct trading under these strategies, the risk that markets may not be able to resume trading in a fair and orderly fashion and without excessive delays is increased. Goals and strategies for resuming trading activities could be based on likely disaster scenarios and could identify the organizations that are able to conduct trading in the event that other organizations could not recover within a reasonable time. Goals and strategies, along with guidance on business continuity planning practices, and more effective oversight would (1) provide market participants with the information they need to make better decisions about improving their operations, (2) help regulators develop sound criteria for oversight, and (3) assure investors that trading on U.S. markets could resume smoothly and in a timely manner. SEC has begun developing a strategy for resuming stock trading for some exchanges, but the plan is not yet complete. For example, SEC has asked the New York Stock Exchange (NYSE) and NASDAQ to take steps to ensure that their information systems can conduct transactions in the securities that the other organizations normally trade. However, under this strategy NYSE does not plan to trade all NASDAQ securities, and neither exchange has fully tested its own or its members’ abilities to trade the other exchanges’ securities. Given the increased threats demonstrated by the September 11 attacks and the need to assure that key financial market organizations are following sound practices, securities and banking regulators’ oversight programs are important mechanisms to assure that U.S. financial markets are resilient. SEC oversees the key clearing organizations and exchanges through its Automation Review Policy (ARP) program. The ARP program—which also may be used to oversee adherence to the white paper’s sound practices— currently faces several limitations. SEC did not implement this ARP program by rule but instead expected exchanges and clearing organizations to comply with various information technology and operations practices voluntarily. However, under a voluntary program, SEC lacks leverage to assure that market participants implement important recommended improvements. While the program has prompted numerous improvements in market participants’ operations, we have previously reported that some organizations did not establish backup facilities or improve their systems’ capacity when the SEC ARP staff had identified these weaknesses. Moreover, ARP staff continue to find significant operational weaknesses at the organizations they oversee. An ARP program that draws its authority from an issued rule could provide SEC additional assurance that exchanges and clearing organizations adhere to important ARP recommendations and any new guidance developed jointly with other regulators. To preserve the flexibility that SEC staff considers a strength of the current ARP program, the rule would not have to mandate specific actions but could instead require that the exchanges and clearing organizations engage in activities consistent with the ARP policy statements. This would provide SEC staff with the ability to adjust their expectations for the organizations subject to ARP, as technology and industry best practices evolve, and provide clear regulatory authority to require actions as necessary. SEC already requires ECNs to comply with ARP guidance; and extending the rule to the exchanges and clearing organizations would place them on similar legal footing. In an SEC report issued in January 2003, the Inspector General noted our concern over the voluntary nature of the program. Limited resources and challenges in retaining experienced ARP staff also have affected SEC’s ability to more effectively oversee an increasing number of organizations and more technically complex market operations. ARP staff must oversee various industrywide initiatives, such as Year 2000 or decimals pricing, and has also expanded to cover 32 organizations with more complex technology and communications networks. However, SEC has problems retaining qualified staff, and market participants have raised concerns about the experience and expertise of ARP staff. The SEC Inspector General also found that ARP staff could benefit from increased training on the operations and systems of the entities overseen by the ARP program. At current staff levels, SEC staff report being able to conduct examinations of only about 7 of the 32 organizations subject to the ARP program each year. In addition, the intervals between examinations were sometimes long. For example, the intervals between the most recent examinations for seven critical organizations averaged 39 months.

The September 11, 2001, terrorist attacks exposed the vulnerability of U.S. financial markets to wide-scale disasters. Because the markets are vital to the nation's economy, GAO's testimony discusses (1) how the financial markets were directly affected by the attacks and how market participants and infrastructure providers worked to restore trading; (2) the steps taken by 15 important financial market organizations to address physical security, electronic security, and business continuity planning since the attacks; and (3) the steps the financial regulators have taken to ensure that the markets are better prepared for future disasters. The September 11, 2001, terrorist attacks severely disrupted U.S. financial markets as the result of the loss of life, damage to buildings, loss of telecommunications and power, and restrictions on access to the affected area. However, financial market participants were able to recover relatively quickly from the terrorist attacks because of market participants' and infrastructure providers' heroic efforts and because the securities exchanges and clearing organizations largely escaped direct damage. The attacks revealed limitations in the business continuity capabilities of some key financial market participants that would need to be addressed to improve the ability of U.S. markets to withstand such events in the future. GAO's review of 15 stock exchanges, clearing organizations, electronic communication networks, and payments system providers between February and June 2002 showed that all were taking steps to implement physical and electronic security measures and had developed business continuity plans. However, some organizations still had limitations in one or more of these areas that increased the risk that their operations could be disrupted by future disasters. Although the financial regulators have begun efforts to improve the resiliency of clearance and settlement functions within the financial markets, they have not fully developed goals, strategies, or sound practices to improve the resiliency of trading activities. In addition, the Securities and Exchange Commission's (SEC) technology and operations risk oversight, which is increasingly important, has been hampered by program, staff, and resource issues. GAO's report made recommendations designed to better prepare the markets to deal with future disasters and to enhance SEC's technology and operations risk oversight capabilities.

OMB Circular A-126 sets forth executive branch policy with respect to the management and use of government aviation assets. The purpose of the circular is to minimize cost and improve the management of government aircraft. The circular provides that government aircraft must be operated only for official purposes. Under the circular, there are three kinds of official travel: Travel to meet mission requirements: Mission requirements are defined as “activities that constitute the discharge of an agency’s official responsibilities,” and the circular provides examples of these kinds of activities. For purposes of the circular, mission requirements do not include official travel to give speeches, attend conferences or meetings, or make routine site visits. Required use travel: Agencies are permitted to use government aircraft for nonmission travel where it is required use travel—which is travel that requires the use of government aircraft to meet bona fide communications needs, security requirements, or exceptional scheduling requirements of an executive agency. Other travel for the conduct of agency business: Government aircraft are also available for other travel for the conduct of agency business when no commercial airline or aircraft is reasonably available to fulfill the agency requirement or the actual cost of using a government aircraft is not more than the cost of using commercial airline or aircraft service. In addition to other requirements for federal agencies, the circular directs agencies that use government aircraft to report semiannually to GSA each use of such aircraft for nonmission travel by senior federal officials, members of the families of such officials, and any nonfederal travelers, with certain exceptions. The circular provides that the format of the report is to be specified by GSA, but must list all travel during the preceding 6-month period and include the following information: the name of each such traveler, the official purpose of the trip, and the destination(s), among other things. The circular provides for one exception to these reporting requirements: Agencies using the aircraft are not required to report classified trips to GSA, but must maintain information on those trips for a period of 2 years and have the data available for review as authorized. In addition, in a memorandum to the heads of executive departments and agencies and employees of the Executive Office of the President, the President specifically directed that “all use of Government aircraft by senior executive branch officials shall be documented and such documentation shall be disclosed to the public upon request unless classified.” The OMB bulletin implementing this memorandum explains that “it is imperative that we not spend hard-earned tax dollars in ways that may appear to be improper.” GSA has issued regulations applicable to federal aviation activities. The FTR implements statutory requirements and executive branch policies for travel by federal civilian employees and others authorized to travel at government expense. The FMR generally pertains to the management of federal property and includes a specific part on management of government aircraft. As shown in table 1, the FTR specifically exempts from reporting trips that are classified, but does not contain any exemption for reporting by intelligence agencies. In contrast, the FMR states that intelligence agencies are exempt from the requirement to report to GSA on government aircraft. According to senior GSA officials, although the exemption for intelligence agencies is contained in the FMR—which largely deals with the management of federal property—it applies to reporting requirements in the FTR for senior federal officials who travel on government aircraft. Through issued executive branch documents, agencies are required to provide data about senior federal official nonmission travel—except for classified trips—to GSA, and GSA has been directed to collect this specified information. Accordingly, through its regulations, GSA has directed agencies to report required information on senior federal official travel; however, its regulations allow certain trips not to be reported, in addition to classified trips. Specifically, GSA exempted intelligence agencies from reporting any information on senior federal travel on government aircraft regardless of whether it is classified or unclassified. This is inconsistent with executive branch requirements we indentified. GSA has not articulated a basis—specifically, a source of authority or rationale—that would allow it to deviate from collecting what it has been directed to collect by the President and OMB. This could undermine the purposes of these requirements, which include aiding in the oversight of the use of government aircraft and helping to ensure that government aircraft are not used for nongovernmental purposes. Further, GSA officials stated that it is the agency’s practice to implement regulations that do not introduce real or potential conflicts with other authorities. According to GSA senior officials, the agency is unable to identify the specific historical analysis for inclusion of the intelligence agencies’ reporting exemption in the FMR. GSA added the exemption for intelligence agency reporting of information on government aircraft to the FMR in 2002; however, there is no explanation for the inclusion of the exemption in the regulation or implementing rule. GSA senior officials told us that the exemption for intelligence agencies enabled intelligence agencies to comply with Executive Order 12333, which requires the heads of departments and agencies with organizations in the intelligence community or the heads of such organizations, as appropriate, to “protect intelligence and intelligence sources and methods from unauthorized disclosure with guidance from the Director of Central Intelligence.” However, GSA has not articulated how an exemption for senior federal official travel data for nonmission purposes is necessary for agencies to Identifying an adequate basis for comply with Executive Order 12333.the intelligence agency reporting exemption or removing the exemption from its regulations if an adequate basis cannot be identified could help GSA ensure its regulations for senior federal official travel comply with executive branch requirements. GSA aggregates the data reported by agencies on senior federal travel to produce publically available reports describing the use of government aircraft by senior federal officials and how government aircraft are used to support agency missions. Specifically, these Senior Federal Travel Reports provide analysis on the number of trips taken by senior federal officials, the costs of such trips, the number of agencies reporting, and the number and costs of trips taken by cost justification. The reports also list those departments, agencies, bureaus, or services that report no use of senior federal official travel during the reporting time frame. According to the reports, they are intended to provide transparency and better management and control of senior federal official use of government aircraft and the ability to examine costs as they relate to trip use justifications. Specifically, according to the FBI, the exemption contained in FMR § 102-33.385 applies to all data on government aircraft stated in FMR § 102-33.390, which includes senior federal travel information. The FBI also determined that the exemption applies to all of the FBI, not just the intelligence elements, and includes all flights, both mission and nonmission. did not indicate that additional flights may have been omitted on the basis of GSA’s exemption for intelligence agencies. GSA senior officials told us that they cannot identify which organizations, components, or offices of departments or agencies within the intelligence community do not report senior federal official travel data to GSA. These officials stated that this is because they do not distinguish between instances where an agency reports no information because the agency is invoking the exemption and instances where the agency reports no information for some other reason, such as that no flights were taken on agency aircraft. Asking agencies to identify instances where they are invoking the exemption would better position GSA to collect and report on this information. Standards for Internal Control in the Federal Government calls for agencies to establish controls, such as those provided through policies and procedures, to provide reasonable assurance that agencies and operations comply with applicable laws and regulations. These standards also call for the accurate and timely recording of transactions and events to help ensure that all transactions are completely and accurately recorded, as well as for an agency to have relevant, reliable, and timely Further, GSA officials stated that it could be possible communications. to obtain follow-up information from agencies that did not provide travel data in order to determine why agencies had not reported data. Collecting additional information on which agencies are invoking the exemption and including such information in its reports could help ensure more complete reporting on the use of government aircraft, which could help provide GSA with reasonable assurance that its Federal Official Travel Reports are accurate and also provide the public a more comprehensive understanding of these trips. departments and agencies, the only exception for the reporting of this kind of travel is for classified trips. However, GSA has established an exception to these reporting requirements that is inconsistent with the executive branch requirements that gave GSA authority to collect senior federal travel data. GSA has not identified the basis—specifically, a source of authority or rationale—for this exemption as applied to senior federal official travel for nonmission purposes that would allow for it to deviate from executive branch specifications. Identifying an adequate basis for the intelligence agency reporting exemption or removing the exemption from its regulations if an adequate basis cannot be identified could help GSA ensure its regulations for senior federal official travel comply with executive branch requirements. In addition, collecting additional information on which agencies or organizations within the federal government are utilizing this exemption, and including such information in its Senior Federal Travel Reports, could help provide GSA with reasonable assurance that its published reports using these data are accurate. We recommend that the Administrator of GSA take the following two actions: To help ensure that GSA regulations comply with applicable executive branch requirements, identify an adequate basis for any exemption that allows intelligence agencies not to report to GSA unclassified data on senior federal official travel for nonmission purposes. If GSA cannot identify an adequate basis for the exemption, GSA should remove the exemption from its regulations. To help ensure the accuracy of its Senior Federal Official Travel Reports, collect additional information from agencies on instances where travel is not being reported because of an exemption for intelligence agencies, as opposed to some other reason, and include such information in its reports where departmental data do not include trips pursuant to an agency’s exercise of a reporting exemption. We provided a draft of this report to GSA for review and comment. GSA provided written comments which are reprinted in appendix I and summarized below. In commenting on our report, GSA concurred with both of the recommendations and identified actions to address them. In response to our recommendation that GSA identify an adequate basis for the intelligence agency exemption as applied to senior federal official travel for nonmission purposes, or remove it from its regulations, GSA stated that it will remove the exemption. Specifically, GSA stated that it will remove section 102.33.390(b) in Subpart E of the FMR, "Reporting Information on Government Aircraft.” This action will remove the reporting requirement related to senior federal official travel from the FMR and such reporting will continue to be governed by the FTR. As a consequence, the exemption for intelligence agencies, which is only contained in the FMR, will no longer be applicable to unclassified data on senior federal official travel for nonmission purposes. In response to our recommendation that GSA collect and report additional information from agencies on instances where travel is not being reported because of an exemption for intelligence agencies, GSA stated that it will add indicator data elements for agencies to identify when classified data is withheld from the senior federal official travel data they submit to GSA. These actions, when fully implemented, will address both of our recommendations. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Attorney General and other interested parties. This report will also be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-9627 or maurerd@gao.gov. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. In addition to the contact named above, Chris Currie, Assistant Director; Chris Ferencik, Analyst in Charge; Janet Temko, Senior Attorney; and Mary Catherine Hult made significant contributions to the work.

The federal government owns or leases over 1,700 aircraft to accomplish a wide variety of missions. Federal agencies are generally required to report trips taken by senior federal officials on their aircraft to GSA unless the trips are classified pursuant to executive branch requirements. In February 2013, GAO reported on DOJ senior executives' use of DOJ aviation assets for nonmission purposes for fiscal years 2007 through 2011. GAO identified several issues with respect to the implementation of a provision of GSA regulations that exempts intelligence agencies from reporting information about government aircraft to GSA and that provision's application to unclassified data on senior federal official travel for nonmission purposes. GAO was asked to review GSA's oversight of executives' use of government aircraft for nonmission purposes. This report addresses the extent to which (1) GSA's reporting exemption for intelligence agencies is consistent with executive branch requirements and (2) GSA ensures the accuracy of its reporting on the use of government aircraft by senior federal officials. GAO reviewed relevant executive branch requirements and GSA regulations, as well as data submitted by DOJ to GSA on trips taken by senior federal officials on DOJ aircraft and interviewed GSA officials. The exemption in General Services Administration (GSA) regulations that allows intelligence agencies not to report unclassified data on senior federal official travel for nonmission purposes is not consistent with executive branch requirements, and GSA has not provided a basis for deviating from these requirements. Specifically, executive branch documents—including Office of Management and Budget (OMB) Circular A-126, OMB Bulletin 93-11, and a 1993 presidential memorandum to the heads of all executive departments and agencies—require agencies to report to GSA, and for GSA to collect data, on senior federal official travel on government aircraft for nonmission purposes, except for trips that are classified. As a result, GSA is not collecting all specified unclassified data as directed, and GSA has not provided a basis for deviating from executive branch requirements. Identifying an adequate basis for the intelligence agency reporting exemption or removing the exemption from its regulations if a basis cannot be identified could help GSA ensure its regulations for senior federal official travel comply with executive branch requirements. GSA aggregates data on senior federal official travel to create publically available Senior Federal Official Travel Reports that, among other things, provide transparency of senior federal officials' use of government aircraft. However, GSA does not determine which agencies' travel is not reported under the exemption for intelligence agencies. For example, in February 2013 GAO found that the Federal Bureau of Investigation (FBI)—which is a member of the intelligence community—did not report to GSA, based on the intelligence agency exemption, information for 395 unclassified nonmission flights taken by the Attorney General, FBI Director, and other Department of Justice (DOJ) executives from fiscal years 2009 through 2011. However, GSA's Senior Federal Official Travel Reports GAO reviewed for those years provided information on flights for other DOJ components but did not indicate that additional flights may have been omitted on the basis of GSA's exemption for intelligence agencies. GSA senior officials stated that they do not collect this information because they do not distinguish between instances where an agency reports no information because it is invoking the exemption or some other reason, such as that no flights were taken on its aircraft. However, these officials also stated that it could be possible to obtain follow-up information from agencies that did not provide travel data in order to determine why agencies had not reported data. Consistent with Standards for Internal Control in the Federal Government , if GSA collected additional information from agencies on instances where nonmission travel was not reported because of the exemption for intelligence agencies, as opposed to some other reason, and included such information in its reports, it could help GSA ensure the accuracy of its Senior Federal Official Travel Reports. GAO recommends that GSA identify the basis of its reporting exemption, and collect additional information when travel is not being reported. GSA concurred and identified actions to address our recommendations.

Our preliminary analysis of NSF data indicates that for fiscal years 2000 through 2016, indirect costs on NSF awards ranged from 16 percent to 24 percent of the total annual amounts the agency awarded, though the percentage generally has increased since 2010. In fiscal year 2016, for example, NSF awards included approximately $1.3 billion budgeted for indirect costs, or about 22 percent of the total $5.8 billion that NSF awarded. Figure 1 illustrates annual funding for indirect costs over the 17- year period. NSF officials told us that variation in indirect costs from year to year can be due to a variety of factors such as (1) differences in the types of organizations awarded, (2) the types of activities supported by the individual awards—research vs. individuals or students vs. infrastructure, (3) the type of research activity, and (4) the disciplinary field of awards. As part of our ongoing review, we plan to conduct further analysis of these factors. The indirect costs on individual awards varied more widely than the year- to-year variations for each award. Most NSF awards included indirect costs in their budgets—for example, about 90 percent of the 12,013 awards that NSF made in fiscal year 2016 included indirect costs. Our preliminary analysis of those awards indicated that the proportion of funding for indirect costs ranged from less than 1 percent to 59 percent of the total award. Our preliminary analysis also indicates that average indirect costs budgeted on awards varied across types of awardees. NSF’s data categorized awardees as federal; industry; small business; university; or other, a category that includes nonprofits and individual researchers. Figure 2 illustrates our preliminary analysis on the average percentage of total awards budgeted for indirect costs in fiscal year 2016, by type of awardee. As shown in the figure, our preliminary analysis indicates that university awardees had the highest average indirect costs—about 27 percent of the total amount of awards—and federal awardees had the lowest average indirect costs—about 8 percent of the total amount of awards. According to NSF officials, certain types of projects, such as those carried out at universities, typically involve more indirect costs than others. The officials said that this is because, for example, of universities’ expense of maintaining scientific research facilities, which may be included as an indirect cost in awards. Because universities receive the bulk of NSF’s award funding and have relatively high indirect costs, our preliminary analysis of NSF data indicates that universities accounted for about 91 percent of the approximately $1.3 billion budgeted for indirect costs in fiscal year 2016. As previously noted, NSF does not set the indirect cost rate for the universities to which it makes awards, as those rates are set by HHS or DOD. Our analysis also showed that awards to organizations for which NSF had cognizance (e.g., nonprofits, professional societies, museums, and operators of large shared-use facilities) had lower average budgeted indirect costs than awards to organizations for which other federal agencies had cognizance. As shown in figure 3, our preliminary analysis of NSF data indicates that, on average, NSF budgeted about 23 percent of award amounts for indirect costs on awards to organizations for which NSF did not have indirect cost cognizance and about 11 percent for indirect costs on awards to organizations for which NSF had cognizance. Our preliminary observations show that in fiscal year 2016, NSF made most of its awards to organizations for which it did not have cognizance. Our preliminary observations show that among the approximately 110 organizations for which NSF has cognizance, negotiated indirect cost rates can vary because of the type of work being funded by awards and the ways in which different organizations account for their costs. For example, salaries for administrative or clerical staff may be included as either an indirect or direct cost, as long as they are consistently treated across an organization’s awards. Our preliminary analysis of the rate agreement case files for nine organizations in a nongeneralizable sample of files we reviewed showed the rates ranged from 5.5 percent to 59.8 percent. An organization may choose to budget indirect costs for an award at a level close to its negotiated indirect cost rate for the organization, or it may choose to budget the costs differently. For example, one of the organizations in our sample had a negotiated indirect cost rate of 51 percent in fiscal year 2016. In that year, the organization received one NSF award for $535,277 that budgeted $180,772 for indirect costs (or about 34 percent of the award)—a calculated indirect cost rate on the award of about 51 percent. Another organization in our sample had a negotiated indirect cost rate of 5.5 percent in 2016, and one of its NSF awards in fiscal year 2016, for $1,541,633, did not budget for any indirect costs. We based our preliminary analyses of indirect costs on data from the budgets of NSF awards—the only available NSF data on indirect costs. According to NSF officials, prospective awardees are required to provide direct and indirect costs in their proposed budgets using the organization’s negotiated indirect cost rate. After an award is made, NSF does not require awardees to report information about indirect costs when requesting reimbursements for work done on their awards for projects. Specifically, NSF’s Award Cash Management $ervice—NSF’s online approach to award payments and post-award financial processes—does not collect data about indirect costs, although NSF is permitted to do so by OMB guidance. According to NSF officials, doing so would unnecessarily increase the reporting burden on awardees. Our preliminary review of NSF’s guidance for setting indirect cost rates and a nongeneralizable sample of nine indirect cost rate files indicates that NSF has issued internal guidance that includes procedures for staff to conduct timely and uniform reviews of indirect cost rate proposals, collect data, set rates, and issue letters to formalize indirect cost rate agreements. However, we also found that NSF staff did not consistently apply the guidance. The guidance also includes tools and templates for staff to use to consistently set rates and procedures for updating the agency’s tracking system for indirect cost rate proposals. However, in our preliminary analysis of NSF guidance, we found that (1) NSF staff did not consistently follow guidance for updating the tracking system, (2) the guidance did not include specific procedures for how supervisors are to document their review of staff workpapers, and (3) NSF had not updated the guidance to include procedures for implementing new provisions issued under the Uniform Guidance. In 2008, NSF created a database to track indirect cost rate proposals and developed guidance for updating the tracking database with proposal information. However, our preliminary analysis of reports from the tracking database indicates that NSF staff have not consistently followed the guidance for updating the tracking database with current data about the awardees for which NSF has cognizance and the status of indirect cost rate proposals. For example, in our preliminary analysis, we identified eight awardees for which NSF was no longer the cognizant agency but that still appeared in the tracking database on a list of agencies from which proposals were overdue. Cognizance for these awardees had been transferred to other agencies from 2009 through 2014. In addition, we identified 46 instances in which NSF staff had not followed the guidance to update the tracking database to reflect the current status of awardees’ proposals, including instances in which the tracking database was missing either the received date or both the received and closed dates. In addition, while NSF’s guidance describes procedures that staff are to follow for setting indirect cost rates, it only includes broad procedures for supervisory review—NSF’s primary quality control process for setting indirect cost rates. The guidance does not describe specific steps that supervisors need to take when reviewing the work performed by staff when setting indirect cost rates, nor does it include how supervisors should annotate the results of their reviews in the workpapers. In our preliminary review of a nongeneralizable sample of nine NSF rate files, we did not find any documentation that a supervisor had reviewed the work performed by staff, such as verifying that staff had checked the accuracy of the total amount of awards over which an awardee’s indirect costs were distributed. Such reviews are meant to provide reasonable assurance that only allowable, allocable, and reasonable indirect costs have been proposed and that such costs have been appropriately allocated to federally funded awards. Moreover, our preliminary observations on NSF’s guidance indicates that it does not include procedures for implementing certain aspects of OMB’s Uniform Guidance, which became effective for grants awarded on or after December 26, 2014. For example, a new provision under the Uniform Guidance allows research organizations that currently have a negotiated indirect cost rate to apply for a onetime extension of that rate for a period of up to 4 years; however, NSF guidance does not specify criteria for NSF staff to determine the circumstances under which an awardee could be given an extension. In closing, I would note that we are continuing our ongoing work to examine NSF’s data on indirect costs for its awards over time and its implementation of its guidance for setting indirect cost rates for organizations over which it has cognizance. NSF awards billions of dollars to organizations each year and, given the constrained budget environment, it is essential that NSF ensures efficient and effective use of federal science funding. We look forward to continuing our work to determine whether NSF actions may be warranted to promote this objective. We plan to issue a report in fall 2017. Chairwoman Comstock, Chairman LaHood, Ranking Members Lipinski and Beyer, and Members of the Subcommittees, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff members have any questions concerning this testimony, please contact me at (202) 512-3841 or neumannj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals who made key contributions to this testimony include Joseph Cook, Assistant Director; Kim McGatlin, Assistant Director; Rathi Bose; Ellen Fried; Ruben Gzirian; Terrance Horner, Jr.; David Messman; Lillian Slodkowski; Kathryn Smith; and Sara Sullivan. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

NSF awards billions of dollars to institutions of higher education (universities), K-12 school systems, industry, science associations, and other research organizations to promote scientific progress by supporting research and education. NSF reimburses awardees for direct and indirect costs incurred for most awards. Direct costs, such as salaries and equipment, can be attributed to a specific project that receives an NSF award. Indirect costs are not directly attributable to a specific project but are necessary for the general operation of an awardee organization, such as the costs of operating and maintaining facilities. For certain organizations, NSF also negotiates indirect cost rate agreements, which are then used for calculating reimbursements for indirect costs. Indirect cost rate negotiations and reimbursements are to be made in accordance with federal guidance and regulation and NSF policy. This testimony reflects GAO's preliminary observations from its ongoing review that examines (1) what is known about NSF's indirect costs for its awards over time, and (2) the extent to which NSF has implemented guidance for setting indirect cost rates for organizations. GAO reviewed relevant regulation, guidance, and agency documents; analyzed budget data, a nongeneralizable sample of nine indirect cost rate files from fiscal year 2016 selected based on award funding; and interviewed NSF officials. GAO's preliminary analysis of National Science Foundation (NSF) data indicates that for fiscal years 2000 through 2016, indirect costs on NSF awards ranged from 16 percent to 24 percent of the total annual amounts awarded, though the percentage generally has increased since 2010 (see fig.). NSF officials stated that variation in indirect costs from year to year can be due to a variety of reasons, such as the types of organizations awarded and the disciplinary field of awards. GAO's observations are based on data from planned budgets on individual NSF awards, rather than actual indirect cost expenditures, because NSF does not require awardees to report indirect costs separately from direct costs in their reimbursement requests. According to NSF officials, collecting such information would unnecessarily increase the reporting burden on awardees. NSF has issued guidance for negotiating indirect cost rate agreements that includes procedures for staff to conduct timely and uniform reviews of indirect cost rate proposals. GAO's preliminary review of NSF's guidance and a sample of nine indirect cost rate files found that (1) NSF staff did not consistently follow guidance for updating the agency's tracking database with current data about some awardees, (2) the guidance did not include specific procedures for how supervisors are to document their review of staff workpapers, and (3) NSF had not updated the guidance to include procedures for implementing certain aspects of Office of Management and Budget guidance that became effective for grants awarded on or after December 26, 2014, such as the circumstances in which NSF can provide an awardee with an extension of indirect cost rates. GAO is not making any recommendations in this testimony but will consider making recommendations, as appropriate, as it finalizes its work.

Intellectual property has a broad range—anywhere from inventions, to technological enhancements, to methods of doing business, to computer programs, to literary and musical works and architectural drawings. Government-sponsored research has an equally broad range—from research in mathematical and physical sciences, computer and information sciences, biological and environmental sciences, and medical sciences, to research supporting military programs of the Department of Defense (DOD) and the atomic energy defense activity of the Department of Energy. The objective of some of this research, for example, cancer research, is to gain more comprehensive knowledge or understanding of the subject under study, without specific application. According to the National Science Foundation, about 3 percent of DOD’s R&D funding and 41 percent of R&D funding by other agencies goes toward this type of study. Other research is directed at either gaining knowledge to meet a specific need or to develop specific materials, devices, or systems—such as a weapon system or the International Space Station. About 97 percent of DOD’s R&D dollars and 55 percent of R&D dollars from other agencies supports applied research. The primary vehicles for funding research efforts are grants, cooperative agreements, and contracts. Today, our focus is largely on intellectual property rights that the government acquires through research done under contracts, which primarily fund applied research. As illustrated in the figure below, the R&D landscape has changed considerably over the past several decades. While the federal government had once been the main provider of the nation’s R&D funds, accounting for 54 percent in 1953 and as much as 67 percent in 1964, as of 2000, its share amounted to 26 percent, or about $70 billion, according to the National Science Foundation. Patents, trademarks, copyrights, and trade secrets protect intellectual property. Only the federal government issues patents and registers copyrights, while trademarks may also be registered by states that have their own registration laws. State law governs trade secrets. Anyone who uses the intellectual property of another without proper authorization is said to have ‘infringed’ the property. Traditionally, an intellectual property owner’s remedy for such unauthorized use would be a lawsuit for injunctive or monetary relief. Prior to 1980, the government generally retained title to any inventions created under federal research grants and contracts, although the specific policies varied among agencies. Over time, this policy increasingly became a source of dissatisfaction. First, there was a general belief that the results of government-owned research were not being made available to those who could use them. Second, advances attributable to university-based research funded by the government were not pursued because the universities had little incentive to seek use for inventions to which the government held title. Finally, the maze of rules and regulations and the lack of a uniform policy for government-owned inventions often frustrated those who did seek to use the research. The Bayh-Dole Act was passed in 1980 to address these concerns by creating a uniform patent policy for inventions resulting from federally sponsored research and development agreements. The act applied to small businesses, universities, and other nonprofit organizations and generally gave them the right to retain title to and profit from their inventions, provided they adhered to certain requirements. The government retained nonexclusive, nontransferable, irrevocable, paid-up (royalty-free) licenses to use the inventions. A presidential memorandum issued to the executive branch agencies on February 18, 1983, extended the Bayh-Dole Act to large businesses. It extended the patent policy of Bayh-Dole to any invention made in the performance of federally funded research and development contracts, grants, and cooperative agreements to the extent permitted by law. On April 10, 1987, the president issued Executive Order 12591, which, among other things, required executive agencies to promote commercialization in accordance with the 1983 presidential memorandum. Below are highlights of requirements related to the Bayh-Dole Act and Executive Order 12591. In addition to the traditional categories of intellectual property protections, government procurement regulations provide a layer of rights and obligations known as “data rights.” These regulations describe the rights that the government may obtain to two types of data, computer software and technical data, delivered or produced under a government contract. These rights may include permission to use, reproduce, disclose, modify, adapt, or disseminate the technical data. A key feature of the DOD framework for data rights, and one implicit in the civilian agency framework, is that the extent of the government’s rights is related to the degree of funding the government is providing. In some cases, the government may decide that it is in its best interest to forgo rights to technical data. For example, if the government wants to minimize its costs of having supercomputers developed exclusively for government use, it could waive its rights in order to spur commercial development. At the same time, situations arise where the government has a strong interest in obtaining and retaining data rights—either unlimited rights or government-purpose rights. These include long-term projects, such as cleanup at nuclear weapon sites, where the government may want to avoid disrupting the program if a change in contractors occurs. These also include projects that affect safety and security. For example, the Transportation Security Administration recently purchased the data rights for an explosives detection system manufactured by one company. The agency believed data rights were necessary in order to expand production of these machines and meet the congressionally mandated deadline for creating an explosives detection capability at airports. We contacted multiple agencies responsible for $191 billion or 88 percent of federal procurements in fiscal year 2001. At these agencies, we met with those officials responsible for procurement, management and oversight of contractor-derived intellectual property. We also analyzed agency and industry studies as well as agency guidance and requirements. In addition, we met with representatives from (1) commercial enterprises that either contract with the government or develop technologies of interest to the government as well as (2) associations representing commercial firms doing business with the government. Both industry and agency officials covered by our review had concerns about the effectiveness and the efficiency of successfully negotiating contracts with intellectual property issues. These concerns include a lack of good planning and expertise within the government and industry’s apprehensions over certain government rights to data and inventions as well as the government’s ability to protect proprietary data. Industry officials were particularly concerned about the span of rights the government wants over technical data. Industry officials asserted that rather than making a careful assessment of its needs, some contracting officers wanted to operate in a “comfort zone” by asking for unlimited rights to data, even when the research built on existing company technology. This was disconcerting to potential contractors because it meant that the government could give data to anyone it chose, including potential competitors. Some companies mentioned specific instances in which they delayed or declined participation in government contracts. These situations occurred when companies believed their core technologies would be at risk and the benefits from working with the government did not outweigh the risk of losing their rights to these technologies. Most agency officials said that intellectual property issues were at times hotly contested and could become the subject of intense negotiations. While agency officials indicated that problems related to intellectual property rights may have limited access to particular companies, they did not raise or cite specific instances where the agency was unable to acquire needed technology. In some situations, agencies exerted flexibility to overcome particular concerns and keep industry engaged in research efforts. DOD officials viewed intellectual property requirements and the manner in which these requirements are implemented as significantly affecting their ability to attract leading technology firms to DOD research and development activities. This concerns DOD, which believes it needs to engage leading firms in joint research efforts in order to promote development of commercial technologies that meet military needs. Last, agency officials, particularly DOD officials, voiced concerns about having access to technical data necessary to support and maintain systems over their useful life as well as the ability to procure some systems competitively, especially smaller systems. These officials stated that if they did not obtain sufficient data rights, they could not use competitive approaches to acquire support functions or additional units. We have reported on the difficulties that occurred when appropriate data rights were not obtained. In one instance, when the Army tried to procure data rights later in the system’s life cycle, the manufacturer’s price for the data was $100 million—almost as much as the entire program cost ($120 million) from 1996 through 2001. We have recommended, among other things, that DOD place greater emphasis on obtaining priced options for the purchase of technical data at the time proposals for new weapon systems are being considered—when the government’s negotiating leverage is the greatest. Agency officials we spoke with generally agreed that some actions could be taken to address concerns about limited awareness of flexibilities and expertise without any legislative changes. Specifically, agencies could promote greater use of the flexibilities already available to them. DOD, for example, is advocating greater use of its “other transaction authority.” This authority enables DOD to enter into agreements that are generally not subject to the federal laws and regulations governing standard contracts, grants, and cooperative agreements. By using this authority, where appropriate, DOD can increase its flexibility in negotiating intellectual property provisions and attract commercial firms that traditionally did not perform research for the government. A second example of agency flexibility to address industry concerns over the allocation of rights under the Bayh-Dole Act is a form of waiver, known as a determination of exceptional circumstances. This waiver has been used, for example, to work out intellectual property rights between pharmaceutical companies and universities or other firms. In these cases, pharmaceutical companies provide compounds that NIH tests to identify whether these compounds are effective in treating additional diseases or ailments. Universities and other commercial firms perform these tests. The exceptional circumstances determination allows the pharmaceutical companies to retain the intellectual property rights to any discoveries coming out of these tests, rather than the performer of the tests. An NIH official explained that a determination of exceptional circumstances could be made in these cases because the program would not exist in the absence of such a determination. Agencies could also strengthen advance planning on data requirements. For example, attention needs to be paid to what types of maintenance or support strategies will be pursued and what data rights are needed to support alternative strategies. Also, consideration could be given to obtaining priced options for the purchase of data rights that may be needed later.

Improperly defined intellectual property rights in a government contract can result in the loss of an entity's critical assets or limit the development of applications critical to public health or safety. Conversely, successful contracts can spur economic development, innovation, and growth, and dramatically improve the quality of delivered goods and services. Contracting for intellectual property rights is difficult. The stakes are high, and negotiating positions are frequently ill-defined. Moreover, the concerns raised must be tempered with the understanding that government contracting can be challenging even without the complexities of intellectual property rights. Further, contractors often have reasons for not wanting to contract with the government, including concerns over profitability, capacity, accounting and administrative requirements, and opportunity costs. Within the commercial sector, companies identified a number of specific intellectual property concerns that affected their willingness to contract with the government. These included perceived poor definitions of what technical data is needed by the government, issues with the government's ability to protect proprietary data adequately, and unwillingness on the part of government officials to exercise the flexibilities available concerning intellectual property rights. Some of these concerns were on perception rather than experience, but, according to company officials, they nevertheless influence decisions not to seek contracts or collaborate with federal government entities. Agency officials shared many of these concerns. Poor upfront planning and limited experience/expertise among the federal contracting workforce were cited as impediments. Although agency officials indicated that intellectual property rights problems may have limited access to particular companies, they did not cite specific instances where the agency was unable to acquire needed technology. Agency officials said that improved training and awareness of the flexibility already in place as well as a better definition of data needs on individual contracts would improve the situation.

During the three decades in which uranium was used in the government’s nuclear weapons and energy programs, for every ounce of uranium that was extracted from ore, 99 ounces of waste were produced in the form of mill tailings—a finely ground, sand-like material. By the time the government’s need for uranium peaked in the late 1960s, tons of mill tailings had been produced at the processing sites. After fulfilling their government contracts, many companies closed down their uranium mills and left large piles of tailings at the mill sites. Because the tailings were not disposed of properly, they were spread by wind, water, and human intervention, thus contaminating properties beyond the mill sites. In some communities, the tailings were used as building materials for homes, schools, office buildings, and roads because at the time the health risks were not commonly known. The tailings and waste liquids from uranium ore processing also contaminated the groundwater. Tailings from the ore processing resulted in radioactive contamination at about 50 sites (located mostly in the southwestern United States) and at 5,276 nearby properties. The most hazardous constituent of uranium mill tailings is radium. Radium produces radon, a radioactive gas whose decay products can cause lung cancer. The amount of radon released from a pile of tailings remains constant for about 80,000 years. Tailings also emit gamma radiation, which can increase the incidence of cancer and genetic risks. Other potentially hazardous substances in the tailings include arsenic, molybdenum, and selenium. DOE’s cleanup authority was established by the Uranium Mill Tailings Radiation Control Act of 1978. Title I of the act governs the cleanup of uranium ore processing sites that were already inactive at the time the legislation was passed. These 24 sites are referred to as Title I sites. Under the act, DOE is to clean up the Title I sites, as well as nearby properties that were contaminated. In doing so, DOE works closely with the affected states and Indian tribes. DOE pays for most of this cleanup, but the affected states contribute 10 percent of the costs for remedial actions. Title II of the act covers the cleanup of sites that were still active when the act was passed. These 26 sites are referred to as Title II sites. Title II sites are cleaned up mostly at the expense of the private companies that own and operate them. They are then turned over to the federal government for long-term custody. Before a Title II site is turned over to the government, NRC works with the sites’ owners/operators to make sure that sufficient funds will be available to cover the costs of long-term monitoring and maintenance. The cleanup of surface contamination consists of four key steps: (1) identifying the type and extent of contamination; (2) obtaining a disposal site; (3) developing an action plan, which describes the cleanup method and specifies the design requirements; and (4) carrying out the cleanup using the selected method. Generally, the primary cleanup method consists of enclosing the tailings in a disposal cell—a containment area that is covered with compacted clay to prevent the release of radon and then topped with rocks or vegetation. Similarly, the cleanup of groundwater contamination consists of identifying the type and extent of contamination, developing an action plan, and carrying out the cleanup using the selected method. According to DOE, depending on the type and extent of contamination, and the possible health risks, the appropriate method may be (1) leaving the groundwater as it is, (2) allowing it to cleanse itself over time (called natural flushing), or (3) using an active cleanup technique such as pumping the water out of the ground and treating it. Mr. Chairman, we now return to the topics discussed in our report: the status and cost of DOE’s surface and groundwater cleanup and the factors that could affect the federal government’s costs in the future. Since our report was issued on December 15, 1995, DOE has made additional progress in cleaning up and licensing Title I sites. As of February 1996, DOE’s surface cleanup was complete at 16 of the 24 Title I sites, under way at 6 additional sites, and on hold at the remaining 2 sites.Of the 16 sites where DOE has completed the cleanup, 4 have been licensed by NARC as meeting the standards of the Environmental Protection Agency (EPA). Ten of the other 12 sites are working on obtaining such a license, and the remaining two sites do not require licensing because the tailings were relocated to other sites. Additionally, DOE has completed the surface cleanup at about 97 percent of the 5,276 nearby properties that were also contaminated. Although DOE expects to complete the surface cleanup of the Title I sites by the beginning of 1997, it does not expect all of Narc activities to be completed until the end of 1998. As for the cleanup of groundwater at the Title I sites, DOE began this task in 1991 and currently estimates completion in about 2014. Since its inception in 1979, DOE’s project for cleaning up the Title I sites has grown in size and in cost. In 1982, DOE estimated that the cleanups would be completed in 7 years and that only one pile of tailings would need to be relocated. By 1992, however, the Department was estimating that the surface cleanup would be completed in 1998 and that 13 piles of tailings would need to be relocated. The project’s expansion was caused by several factors, including the development of EPA’s new groundwater protection standards; the establishment or revision of other federal standards addressing such things as the transport of the tailings and the safety of workers; and the unexpected discovery of additional tailings, both at the processing sites and at newly identified, affected properties nearby. In addition, DOE made changes in its cleanup strategies to respond to state and local concerns. For example, at the Grand Junction, Colorado, site the county’s concern about safety led to the construction of railroad transfer facilities and the use of both rail cars and trucks to transport contaminated materials. The cheaper method of simply trucking the materials would have routed extensive truck traffic through heavily populated areas. Along with the project’s expansion came cost increases. In the early 1980s, DOE estimated that the total cleanup cost—for both the surface and groundwater—would be about $1.7 billion. By November 1995, this estimate had grown to $2.4 billion. DOE spent $2 billion on surface cleanup activities through fiscal year 1994 and expects to spend about $300 million more through 1998. As for groundwater, DOE has not started any cleanup. By June 1995, the Department had spent about $16.7 million on site characterization and various planning activities. To make the cleanup as cost-effective as it can, DOE is proposing to leave the groundwater as it is at 13 sites, allow the groundwater to cleanse itself over time at another 9 sites, and to use an active cleanup method at 2 locations in Monument Valley and Tuba City, Arizona. The final selection of cleanup strategies depends largely on DOE’s reaching agreement with the affected states and tribes. At this point, however, DOE has yet to finalize agreements on any of the groundwater cleanup strategies it is proposing. At the time we issued our report, the cleanups were projected to cost at least another $130 million using the proposed strategies, and perhaps as much as $202 million. More recently, a DOE groundwater official has indicated that the Department could reduce these costs by shifting some of the larger costs to earlier years; reducing the amounts built into the strategies for contingencies, and using newer, performance-based contracting methods. Once all of the sites have been cleaned up, the federal government’s responsibilities, and the costs associated with them, will continue far into the future. What these future costs will amount to is currently unknown and will depend largely on how three issues are resolved. First, because the effort to clean up the groundwater is in its infancy, its final scope and cost will depend largely on the remediation methods chosen and the financial participation of the affected states. It is too early to know whether the affected states or tribes will ultimately persuade DOE to implement more costly remedies than those the Department has proposed or whether any of the technical assumptions underlying DOE’s proposed strategies will prove to be invalid. If either of these outcomes occurs, DOE may implement more costly cleanup strategies than it has proposed, thereby increasing the final cost of the groundwater cleanup. DOE has already identified five sites where it believes it may have to implement more expensive alternatives than the ones it initially proposed. In addition, the final cost of the groundwater cleanup depends on the affected states’ ability and willingness to pay their share of the cleanup costs. According to a DOE official, Pennsylvania, Oregon, and Utah may not have funding for the groundwater cleanup program. DOE believes that it is prohibited from cleaning up the contamination if the states do not pay their share. Accordingly, as we noted in our report, we believe that the Congress may want to consider whether and under what circumstances DOE can complete the cleanup of the sites if the states do not provide financial support. Second, DOE may incur further costs to dispose of uranium mill tailings that are unearthed in the future in the Grand Junction, Colorado, area. DOE has already cleaned up the Grand Junction processing site and over 4,000 nearby properties, at a cost of about $700 million. Nevertheless, in the past, about a million cubic yards of tailings were used in burying utility lines and constructing roads in the area and remain today under the utility corridors and road surfaces. In future years, utility and road repairs will likely unearth these tailings, resulting in a potential public health hazard if the tailings are mishandled. In response to this problem, DOE is working with NRC and Colorado officials to develop a plan for temporarily storing the tailings as they are unearthed and periodically transporting them to a nearby disposal cell—referred to as the Cheney cell, located near the city of Grand Junction—for permanent disposal. Under this plan, the city or county would be responsible for hauling the tailings to the disposal cell, and DOE would be responsible for the cost of placing the tailings in the cell. The plan envisions that a portion of the Cheney disposal cell would remain open, at an annual cost of several hundred thousand dollars. When the cell is full, or after a period of 20 to 25 years, it would be closed. However, DOE does not currently have the authority to implement this plan because the law requires that all disposal cells be closed upon the completion of the surface cleanup. Accordingly, we suggested in our report that the Congress might want to consider whether DOE should be authorized to keep a portion of the Cheney disposal cell open to dispose of tailings that are unearthed in the future in this area. Finally, DOE’s costs for long-term care are still somewhat uncertain. DOE will ultimately be responsible for long-term custody, that is, the surveillance and maintenance, of both Title I and Title II sites, but the Department only bears the financial responsibility for these activities at Title I sites. For Title II sites, the owners/operators are responsible for funding the long-term surveillance and maintenance. Although NRC’s minimum one-time charge to site owners/operators is supposed to be sufficient to cover the cost of long-term custody so that they, not the federal government, bear these costs in full, NRC has not reviewed its estimate of basic surveillance costs since 1980, and DOE is currently estimating that basic monitoring will cost about 3 times more than NRC estimates. Moreover, while DOE maintains that ongoing routine maintenance will be needed at all sites, NRC’s charge does not provide any amount for ongoing maintenance. In light of the consequent potential shortfall in maintenance funds, our report recommended that NRC and DOE work together to update the charge for basic surveillance and determine if routine maintenance will be required at each site. On the basis of our recommendations, NRC officials agreed to reexamine the charge and determine the need for routine maintenance at each site. They also said that they are working with DOE to clarify the Department’s role in determining the funding requirements for long-term custody. Mr. Chairman, this concludes our prepared statement. We will be pleased to answer any questions that you or Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the status and cost of the Department of Energy's (DOE) uranium mill tailings cleanup program and the factors that could affect future costs. GAO noted that: (1) surface contamination cleanup has been completed at two-thirds of the identified sites and is underway at most of the others; (2) if DOE completes its surface cleanup program in 1998, it will have cost $2.3 billion, taken 8 years longer than expected, and be $261 million over budget; (3) DOE cleanup costs increased because there were more contaminated sites than anticipated, some sites were more contaminated than others, and changes were needed to respond to state and local concerns; (4) the future cost of the uranium mill tailings cleanup will largely depend on the future DOE role in the program, the remediation methods used, and the willingness of states to share final cleanup costs; and (5) the Nuclear Regulatory Commission needs to ensure that enough funds are collected from the responsible parties to protect U.S. taxpayers from future cleanup costs.

During the first year of the advocacy review panel requirements’ implementation, OSHA convened a panel for one draft rule and published two other proposed rules for which panels were not held. SBA’s Chief Counsel for Advocacy agreed with OSHA’s certification that neither of these two proposed rules required an advocacy review panel. As of November 1, 1997, EPA had convened advocacy review panels for four draft rules. EPA also published 17 other proposed rules that were reviewed by OIRA for which panels were not held because EPA certified that the proposed rules would not have a significant economic impact on a substantial number of small entities. SBA’s Chief Counsel said that EPA should have convened panels for 2 of these 17 proposed rules—the rules setting national ambient air quality standards for ozone and for particulate matter. Some of the small entity representatives that we interviewed also said that EPA should have convened advocacy review panels for these two proposed rules. EPA officials said that review panels were not required for the ozone and particulate matter rules because they would not, by themselves, have a significant economic impact on a substantial number of small entities. The officials said that any effects that the rules would have on small entities would only occur when the states determine how the standards will be specifically implemented. However, SBA’s Chief Counsel for Advocacy disagreed with EPA’s assessment. He said that the promulgation of these two rules cannot be separated from their implementation, and that effects on small entities will flow “inexorably” from the standards EPA established. We could not determine whether EPA should have convened advocacy review panels for the ozone and particulate matter rules because there are no clear governmentwide criteria for determining whether a rule has a “significant economic impact on a substantial number of small entities.” Specifically, it is unclear whether health standards that an agency establishes by regulation should be considered separable from implementation requirements established by state governments or other entities. The Regulatory Flexibility Act (RFA), which SBREFA amended, does not define the term “significant economic impact on a substantial number of small entities.” Although the RFA requires the SBA Chief Counsel for Advocacy to monitor agencies’ compliance with the act, it does not expressly authorize SBA or any other entity to interpret key provisions. In a previous report we noted that agencies had different interpretations regarding how the RFA’s provisions should be interpreted. In another report, we said that if Congress wishes to strengthen the implementation of the RFA it should consider amending the act to provide clear authority and responsibility to interpret key provisions and issue guidance. In our report that is being issued today, we again conclude that governmentwide criteria are needed regarding what constitutes a “significant economic impact on a substantial number of small entities.” Therefore, we said that if Congress wishes to clarify and strengthen the implementation of the RFA and SBREFA, it should consider providing SBA or another entity with clear authority to interpret the RFA’s key provisions. We also said that Congress could consider establishing, or requiring SBA or some other entity to develop, governmentwide criteria defining the phrase “significant economic impact on a substantial number of small entities.” Specifically, those criteria should state whether the establishment of regulatory standards by a federal agency should be separated from implementation requirements imposed by other entities. Governmentwide criteria can help ensure consistency in how the RFA and SBREFA are implemented across federal agencies. However, those criteria must be flexible enough to allow for some agency-by-agency variations in the kinds of impacts that should be considered “significant” and what constitutes a “substantial” number of small entities. As of November 1, 1997, EPA and OSHA had convened five advocacy review panels. OSHA convened the first panel on September 10, 1996, to review its draft standard for occupational exposure to tuberculosis (TB). EPA convened panels to review the following four draft rules: (1) control of emissions of air pollution from nonroad diesel engines (Mar. 25, 1997); (2) effluent limitations guidelines and pretreatment standards for the industrial laundries point source category (June 6, 1997); (3) stormwater phase II—national pollutant discharge elimination system (June 19, 1997); and (4) effluent limitations guidelines and standards for the transportation equipment-cleaning industry (July 16, 1997). The panels, EPA and OSHA, and SBA’s Chief Counsel for Advocacy generally followed SBREFA’s procedural requirements on how those panels should be convened and conducted. For example, as required by the statute: EPA and OSHA notified the SBA Chief Counsel before each of the panels and provided him with information on the potential impacts of the draft rules and the types of small entities that might be affected. The Chief Counsel responded to EPA and OSHA no later than 15 days after receipt of these materials and helped identify individuals representative of the affected small entities. Each of the five panels reviewed materials that the regulatory agencies had prepared and collected advice and recommendations from the small entity representatives. However, there were a few minor inconsistencies with SBREFA’s specific statutory requirements in the five panels we reviewed. For example, three of the panels took a few days longer than the 60 days allowed by the statute to conclude their deliberations and issue a report. Also, EPA did not formally designate a chair for its panels until June 11, 1996—about 6 weeks later than the statute required. Members of Congress and congressional staff viewed this as an attempt to prejudice the panel members’ consideration, and the practice was changed. For subsequent panels, EPA developed a summary of the comments it had received from small entities before the panels were convened, which it provided to the panel members. The panel members themselves then gathered advice and recommendations from the small entity representatives and drafted the final reports. As of November 1, 1997, two of the draft rules for which EPA and OSHA held advocacy review panels had been published as notices of proposed rulemaking in the Federal Register—OSHA’s proposed rule on the occupational exposure to TB and EPA’s proposed rule to control nonroad diesel engine emissions. The panels’ recommendations for these draft rules focused on providing small entities with flexibility in how to comply with the rules and on the need to consider potentially overlapping local, state, and federal regulations and enforcement. OSHA and EPA primarily responded to the panels’ recommendations in the supplementary information sections of the proposed rules, although OSHA also made some changes to the text of its rule. For example, one of the TB panel’s major recommendations was that OSHA reexamine the application of the draft rule to homeless shelters. In the supplementary information section of the proposed rule, OSHA said that it was conducting a special study of this issue and would hold hearings on issue\ related to TB exposure in homeless shelters. The TB panel also recommended that OSHA examine the potential cost savings associated with allowing TB training that a worker received in one place of employment to be used to satisfy training requirements in another place of employment. In response, OSHA changed the text of the draft rule to allow the portability of nonsite specific training. officials had already decided how the rules would be written before convening the panels, and that the officials were not interested in making any significant changes to the rules. Although most of the 32 small entity representatives with whom we spoke said that they thought the review panel process was worthwhile, about three-fourths of them suggested changes to improve that process. Their comments primarily focused on the following four issues: (1) the time frames in which the panels were conducted, (2) the composition of the groups of small entity representatives commenting to the panels, (3) the methods the panels used to gather comments, and (4) the materials about the draft rules that the regulatory agencies provided. Seven of the small entity representatives said they would have liked more advance notice of panel meetings and telephone conference calls with the panels. Some of these representatives said that short notices had prevented them from participating in certain panel efforts. Fourteen representatives said they were not given enough time to study the materials provided before being asked to comment on the draft rules. Five representatives suggested holding the panels earlier in the rulemaking process to increase the likelihood that the panels could affect the draft rules. Fourteen small entity representatives thought that the composition of those providing input to the panels could be improved. Specifically, they said that the panels should have obtained input from more representatives of (1) individual small entities, not just representatives from associations; (2) certain types of affected small entities that were not included (e.g., from certain geographic areas); (3) small entities that would bear the burden of implementing the draft rules (e.g., small municipalities); and (4) small entities that were reviewing the draft rule for the first time, and that had not been previously involved in developing the draft rules. Nine of the small entity representatives said that the conference calls that OSHA and EPA typically used to obtain their views limited the amount of discussion that could take place. Most of these representatives expressed a preference for face-to-face meetings because they believed the discussions would be fuller and provide greater value to the panels. informed discussion of the rules’ potential impacts on small entities, eight representatives said they believed the materials could have been improved. Six thought the materials were too vague or did not provide enough information. However, two representatives said that the materials were too voluminous and complex to expeditiously review. The agency officials we interviewed also offered suggestions for improving the panels. Because you will be hearing from those same officials later in this hearing, I will not go into detail about those suggestions. However, their comments centered on some of the same issues raised by the small entity representatives, including the timing of the panels, the materials provided to the representatives, and the manner by which comments are obtained. Many of the agency officials and small entity representatives that we interviewed said they believed the panel process has provided an opportunity to identify significant impacts on small entities and has given the agencies a better appreciation of the small entities’ concerns. However, implementation of the panel process has not been without controversy or concern. Our greatest concern about the panel process is the lack of clarity regarding whether EPA should have convened advocacy review panels for its national ambient air quality standards for ozone and for particulate matter. That concern is directly traceable to the lack of agreed-upon governmentwide criteria as to when a rule has a “significant economic impact on a substantial number of small entities” under the RFA. If governmentwide criteria had been established regarding when initial regulatory flexibility analyses should be prepared (and, therefore, when SBREFA advocacy review panels should be convened), the dispute regarding whether EPA should have convened additional panels would likely not have arisen. In particular, governmentwide criteria should address whether the establishment of regulatory standards by a federal agency should be separated from the subsequent implementation requirements imposed by states or other entities. Some of the concerns that small entity representatives expressed about the panel process may be difficult to resolve. When panels are held earlier in the process, it is less likely that the materials will be fully developed to provide detailed data and analyses to the small entity representatives. However, delaying the panels until such data are available could limit the opportunity for small entities to influence key decisions. How agencies implement the advocacy review panel process will have a pronounced effect on its continued viability. If small entity representatives are given the opportunity to discuss the issues they believe are important and see that their input is taken seriously, it is likely that they will continue to view the panel process as a useful opportunity to provide their comments on draft rules relatively early in the rulemaking process. Mr. Chairman and Madam Chairwoman, this completes my prepared statement. I would be pleased to answer any questions. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the Small Business Regulatory Enforcement Fairness Act's (SBREFA) advocacy review panel provisions, focusing on: (1) whether the Environmental Protection Agency (EPA) or the Occupational Safety and Health Administration (OSHA) had applied the advocacy review panel requirements to all applicable rules that they proposed in the first year of the panel requirements; (2) whether the EPA and OSHA panels, the regulatory agencies themselves, and the Small Business Administration's (SBA) Chief Counsel for Advocacy followed the statute's procedural requirements; (3) identify any changes that EPA and OSHA made to the draft rules as a result of the panels' recommendations; and (4) identify any suggestions that agency officials and small entity representatives had regarding how the advocacy review panel process could be improved. GAO noted that: (1) as of November 1, 1997, EPA and OSHA had convened five review panels; (2) EPA and SBA's Chief Counsel for Advocacy disagree regarding the applicability of the panel requirements to two other rules that EPA proposed in December 1996--the national ambient air quality standards for ozone and for particulate matter; (3) specifically, EPA and the Chief Counsel disagree regarding whether the effects of states' implementation of these health standards can be separated from the standards themselves in determining whether EPA's rules may have a significant economic impact on a substantial number of small entities; (4) GAO suggested that Congress resolve this issue by taking steps to clarify the meaning of the term "significant impact"; (5) the agencies and the panels generally met SBREFA's procedural requirements, but there were several differences in how the panels operated; (6) the panels' recommendations regarding the two proposed rules that had been published as of November 1, 1997, focused on various issues, such as providing small entities with greater compliance flexibility and considering the effects of potentially overlapping regulations; (7) the agencies generally responded to those recommendations in the supplementary information sections of the proposed rules; and (8) the small entity representatives with whom GAO spoke and, to a lesser extent, the agency officials GAO interviewed, offered several suggestions to improve the advocacy review panel process.

In November 2013, we reported that (1) peer-reviewed, published research we reviewed did not support whether nonverbal behavioral indicators can be used to reliably identify deception, (2) methodological issues limited the usefulness of DHS’s April 2011 SPOT validation study, and (3) variation in referral rates raised questions about the use of indicators. In November 2013, we reported that our review of meta-analyses (studies that analyze other studies and synthesize their findings) that included findings from over 400 studies related to detecting deception conducted over the past 60 years, other academic and government studies, and interviews with experts in the field, called into question the use of behavior observation techniques, that is, human observation unaided by technology, as a means for reliably detecting deception. The meta- analyses we reviewed collectively found that the ability of human observers to accurately identify deceptive behavior based on behavioral cues or indicators is the same as or slightly better than chance (54 percent). We also reported on other studies that do not support the use of behavioral indicators to identify mal-intent or threats to aviation. In commenting on a draft of our November 2013 report, DHS stated that one of these studies, a 2013 RAND report, provides evidence that supports the SPOT program. However, the RAND report, which concludes that there is current value and unrealized potential for using behavioral indicators as part of a system to detect attacks, refers to behavioral indicators that are defined and used significantly more broadly than those in the SPOT program. The indicators reviewed in the RAND report are not used in the SPOT program, and, according to the RAND report’s findings, could not be used in real time in an airport environment. Further, in November 2013, we found that DHS’s April 2011 validation study does not demonstrate effectiveness of the SPOT behavioral indicators because of methodological weaknesses. The validation study found, among other things, that some SPOT indicators were predictive of outcomes that represent high-risk passengers, and that SPOT procedures, which rely on the SPOT behavioral indicators, were more effective than a random selection protocol implemented by BDOs in identifying outcomes that represent high-risk passengers. While the April 2011 SPOT validation study is a useful initial step and, in part, addressed issues raised in our May 2010 report, methodological weaknesses limit its usefulness. Specifically, as we reported in November 2013, these weaknesses include, among other things, the use of potentially unreliable data and issues related to one of the study’s outcome measures. First, the data the study used to determine the extent to which the SPOT behavioral indicators led to correct screening decisions at checkpoints were from the SPOT database that we had previously found in May 2010 to be potentially unreliable. In 2010, we found, among other things, that BDOs could not record all behaviors observed in the SPOT database because the database limited entry to eight behaviors, six signs of deception, and four types of serious prohibited items per passenger referred for additional screening, though BDOs are trained to identify 94 total indicators.subsequent to our May 2010 report, the validation study used data that were collected from 2006 through 2010, prior to TSA’s improvements to the SPOT database. Consequently, the data were not sufficiently reliable for use in conducting a statistical analysis of the association between the indicators and high-risk passenger outcomes. Although TSA made changes to the database Second, our analysis of the validation study data regarding one of the primary high-risk outcome measures—LEO arrests—suggests that the screening process was different for passengers depending on whether they were selected using SPOT procedures or the random selection protocol. Specifically, different levels of criteria were used to determine whether passengers in each group were referred to a LEO, which is a necessary precondition for an arrest. Because of this discrepancy between the study groups, the results related to the LEO arrest metric are questionable and cannot be relied upon to demonstrate the effectiveness of the SPOT program’s behavioral indicators. In November 2013, we also reported on other methodological weaknesses, including design limitations and monitoring weaknesses, that could have affected the usefulness of the validation study’s results in determining the effectiveness of the SPOT program’s behavioral indicators. In November 2013, we reported that variation in referral rates and subjective interpretation of the behavioral indicators raise questions about the use of indicators, but TSA has efforts under way to study the indicators. Specifically, we found that SPOT referral data from fiscal years 2011 and 2012 indicate that SPOT and LEO referral rates vary significantly across BDOs at some airports, which raises questions about the use of SPOT behavioral indicators by BDOs. The rate at which BDOs referred passengers for SPOT referral screening ranged from 0 to 26 referrals per 160 hours worked during the 2-year period we reviewed. Similarly, the rate at which BDOs referred passengers to In November 2013, we LEOs ranged from 0 to 8 per 160 hours worked.also reported that BDOs and TSA officials we interviewed said that some of the behavioral indicators are subjective and TSA has not demonstrated that BDOs can consistently interpret the behavioral indicators. We found that there is a statistically significant relationship between the length of time an individual has been a BDO and the number of SPOT referrals the individual makes. This suggests that different levels of experience may be one reason why BDOs apply the behavioral indicators differently. TSA has efforts underway to better define the behavioral indicators currently used by BDOs, and to complete an inter-rater reliability study. The inter- rater reliability study could help TSA determine whether BDOs can consistently and reliably interpret the behavioral indicators, which is a critical component of validating the SPOT program’s results and ensuring that the program is implemented consistently. According to TSA, the current contract to study the indicators and the inter-rater reliability study will be completed in 2014. In November 2013, we reported that TSA plans to collect and analyze additional performance data needed to assess the effectiveness of its behavior detection activities. In response to a recommendation in our May 2010 report to develop a plan for outcome-based performance measures, TSA completed a performance metrics plan in November 2012. The plan defined an ideal set of 40 metrics within three major categories that TSA needs to collect to measure the performance of its behavior detection activities. As of June 2013, TSA had collected some information for 18 of 40 metrics the plan identified, but the agency was collecting little to none of the data required to assess the performance and security effectiveness of its behavior detection activities or the SPOT program specifically. For example, TSA did not and does not currently collect the data required to determine the number of passengers meaningfully assessed by BDOs, BDOs’ level of fatigue, or the impact that fatigue has on their performance. To address these and other deficiencies, the performance metrics plan identifies 22 initiatives that are under way or planned as of November 2012. For example, in May 2013, TSA began to implement a new data collection system, BDO Efficiency and Accountability Metrics, designed to track and analyze BDO daily operational data, including BDO locations and time spent performing different activities. According to TSA officials, these data will allow the agency to gain insight on how BDOs are utilized, and improve analysis of the SPOT program. However, according to the performance metrics plan, TSA will require at least an additional 3 years and additional resources before it can begin to report on the performance and security effectiveness of its behavior detection activities or the SPOT program. Without the data needed to assess the effectiveness of behavior detection activities or the SPOT program, we reported in November 2013 that TSA uses SPOT referral, LEO referral, and arrest statistics to help track the program’s activities. As shown in figure 1, of the approximately 61,000 SPOT referrals made during fiscal years 2011 and 2012 at the 49 airports we analyzed, approximately 8,700 (13.6 percent) resulted in a referral to a LEO. Of the SPOT referrals that resulted in a LEO referral, 365 (4 percent) resulted in an arrest. TSA has taken a positive step toward determining the effectiveness of its behavior detection activities by developing the performance metrics plan, as we recommended in May 2010. However, as we reported in November 2013, TSA cannot demonstrate the effectiveness of its behavior detection activities, and available evidence does not support whether behavioral indicators can be used to identify threats to aviation security. According to Office of Management and Budget (OMB) guidance accompanying the fiscal year 2014 budget, it is incumbent upon agencies to use resources on programs that have been rigorously evaluated and determined to be effective, and to fix or eliminate those programs that have not demonstrated results. As we concluded in our November 2013 report, until TSA can provide scientifically validated evidence demonstrating that behavioral indicators can be used to identify passengers who may pose a threat to aviation security, the agency risks funding activities that have not been determined to be effective. Therefore, in our November 2013 report, we recommended that TSA limit future funding for its behavior detection activities. DHS did not concur with our recommendation. The negatively and significantly related indicators were more commonly associated with passengers who were not identified as high-risk, than with passengers who were identified as high-risk. available. However, as described in the report, in addition to the meta- analyses of over 400 studies related to detecting deception conducted over the past 60 years that we reviewed, we also reviewed several documents on behavior detection research that DHS officials provided to us, including documents from an unclassified and a classified literature review that DHS had commissioned. Finally, in stating its nonconcurrence with the recommendation to limit future funding in support of its behavior detection activities, DHS stated that TSA’s overall security program is composed of interrelated parts, and to disrupt one piece of the multilayered approach may have an adverse impact on other pieces. As we reported in November 2013, TSA has not developed the performance measures that would allow it to assess the effectiveness of its behavior detection activities compared with other screening methods, such as physical screening. As a result, the impact of behavior detection activities on TSA’s overall security program is unknown. Further, not all screening methods are present at every airport, and TSA has modified the screening procedures and equipment used at airports over time. These modifications have included the discontinuance of screening equipment that was determined to be unneeded or ineffective. Therefore, we concluded that providing scientifically validated evidence that demonstrates that behavioral indicators can be used to identify passengers who may pose a threat to aviation security is critical to the implementation of TSA’s behavior detection activities. Consequently, we added a matter for congressional consideration to the November 2013 report. Specifically, we suggested that Congress consider the findings in the report regarding the absence of scientifically validated evidence for using behavioral indicators to identify aviation security threats when assessing the potential benefits of behavior detection activities relative to their cost when making future funding decisions related to aviation security. Such action should help ensure that security-related funding is directed to programs that have demonstrated their effectiveness. Chairman Hudson, Ranking Member Richmond, and members of the subcommittee, this concludes my prepared testimony. I look forward to answering any questions that you may have. For questions about this statement, please contact Steve Lord at (202) 512-4379 or lords@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this statement include David Bruno (Assistant Director), Nancy Kawahara, Elizabeth Kowalewski, Susanna Kuebler, Grant M. Mallie, Amanda K. Miller, Linda S. Miller, and Douglas M. Sloane. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony discusses GAO's November 2013 report assessing the Department of Homeland Security (DHS) Transportation Security Administration's (TSA) behavior detection activities, specifically the Screening of Passengers by Observation Technique (SPOT) program. The recent events at Los Angeles International Airport provide an unfortunate reminder of TSA's continued importance in providing security for the traveling public. TSA's behavior detection activities, in particular the SPOT program, are intended to identify high-risk passengers based on behavioral indicators that indicate mal-intent. In October 2003, TSA began testing the SPOT program, and by fiscal year 2012, about 3,000 behavior detection officers (BDO) had been deployed to 176 of the more than 450 TSA-regulated airports in the United States. TSA has expended a total of approximately $900 million on the program since it was fully deployed in 2007. This testimony highlights the key findings of GAO's November 8, 2013, report on TSA's behavior detection activities. Specifically, like the report, this statement will address (1) the extent to which available evidence supports the use of behavioral indicators to identify aviation security threats, and (2) whether TSA has data necessary to assess the effectiveness of the SPOT program in identifying threats to aviation security. In November 2013, GAO reported that (1) peer-reviewed, published research we reviewed did not support whether nonverbal behavioral indicators can be used to reliably identify deception, (2) methodological issues limited the usefulness of DHS's April 2011 SPOT validation study, and (3) variation in referral rates raised questions about the use of indicators. GAO reported that its review of meta-analyses (studies that analyze other studies and synthesize their findings) that included findings from over 400 studies related to detecting deception conducted over the past 60 years, other academic and government studies, and interviews with experts in the field, called into question the use of behavior observation techniques, that is, human observation unaided by technology, as a means for reliably detecting deception. The meta-analyses GAO reviewed collectively found that the ability of human observers to accurately identify deceptive behavior based on behavioral cues or indicators is the same as or slightly better than chance (54 percent). GAO also reported on other studies that do not support the use of behavioral indicators to identify mal-intent or threats to aviation. GAO found that DHS's April 2011 validation study does not demonstrate effectiveness of the SPOT behavioral indicators because of methodological weaknesses. The validation study found, among other things, that some SPOT indicators were predictive of outcomes that represent high-risk passengers, and that SPOT procedures, which rely on the SPOT behavioral indicators, were more effective than a random selection protocol implemented by BDOs in identifying outcomes that represent high-risk passengers. While the April 2011 SPOT validation study is a useful initial step and, in part, addressed issues raised in GAO's May 2010 report, methodological weaknesses limit its usefulness. Specifically, as GAO reported in November 2013, these weaknesses include, among other things, the use of potentially unreliable data and issues related to one of the study's outcome measures.

As we move further into the 21st century, it becomes increasingly important for the Congress, OMB, and executive agencies to face two overriding questions: What is the proper role for the federal government? How should the federal government do business? GPRA serves as a bridge between these two questions by linking results that the federal government seeks to achieve to the program approaches and resources that are necessary to achieve those results. The performance information produced by GPRA’s planning and reporting infrastructure can help build a government that is better equipped to deliver economical, efficient, and effective programs that can help address the challenges facing the federal government. Among the major challenges are instilling a results orientation, ensuring that daily operations contribute to results, understanding the performance consequences of budget decisions, coordinating crosscutting programs, and building the capacity to gather and use performance information. The cornerstone of federal efforts to successfully meet current and emerging public demands is to adopt a results orientation; that is, to develop a clear sense of the results an agency wants to achieve as opposed to the products and services (outputs) an agency produces and the processes used to produce them. Adopting a results-orientation requires transforming organizational cultures to improve decisionmaking, maximize performance, and assure accountability—it entails new ways of thinking and doing business. This transformation is not an easy one and requires investments of time and resources as well as sustained leadership commitment and attention. Based on the results of our governmentwide survey in 2000 of managers at 28 federal agencies, many agencies face significant challenges in instilling a results-orientation throughout the agency, as the following examples illustrate. At 11 agencies, less than half of the managers perceived, to at least a great extent, that a strong top leadership commitment to achieving results existed. At 26 agencies, less than half of the managers perceived, to at least a great extent, that employees received positive recognition for helping the agency accomplish its strategic goals. At 22 agencies, at least half of the managers reported that they were held accountable for the results of their programs to at least a great extent, but at only 1 agency did more than half of the managers report that they had the decisionmaking authority they needed to help the agency accomplish its strategic goals to a comparable extent. Additionally, in 2000, significantly more managers overall (84 percent) reported having performance measures for the programs they were involved with than the 76 percent who reported that in 1997, when we first surveyed federal managers regarding governmentwide implementation of GPRA. However, at no more than 7 of the 28 agencies did 50 percent or more of the managers respond that they used performance information to a great or very great extent for any of the key management activities we asked about. As I mentioned earlier, we are now moving to a more difficult but more important phase of GPRA—using results-oriented performance information on a routine basis as a part of agencies’ day-to-day management and for congressional and executive branch decisionmaking. GPRA is helping to ensure that agencies are focused squarely on results and have the capabilities to achieve those results. GPRA is also showing itself to be an important tool in helping the Congress and the executive branch understand how the agencies’ daily activities contribute to results that benefit the American people. To build leadership commitment and help ensure that managing for results becomes the standard way of doing business, some agencies are using performance agreements to define accountability for specific goals, monitor progress, and evaluate results. The Congress has recognized the role that performance agreements can play in holding organizations and executives accountable for results. For example, in 1998, the Congress chartered the Office of Student Financial Assistance as a performance- based organization, and required it to implement performance agreements. In our October 2000 report on agencies’ use of performance agreements, we found that although each agency developed and implemented agreements that reflected its specific organizational priorities, structure, and culture, our work identified five common emerging benefits from agencies’ use of results-oriented performance agreements. (See fig. 1.) Strengthens alignment of results-oriented goals with daily operations Fosters collaboration across organizational boundaries Enhances opportunities to discuss and routinely use performance information to make program improvements Provides results-oriented basis for individual accountability Maintains continuity of program goals during leadership transitions Performance agreements can be effective mechanisms to define accountability for specific goals and to align daily activities with results. For example, at the Veterans Health Administration (VHA), each Veterans Integrated Service Network (VISN) director’s agreement includes performance goals and specific targets that the VISN is responsible for accomplishing during the next year. The goals in the performance agreements are aligned with VHA’s, and subsequently the Department of Veterans Affairs’ (VA), overall mission and goals. A VHA official indicated that including corresponding goals in the performance agreements of VISN directors contributed to improvements in VA’s goals. For example, from fiscal years 1997 through 1999, VHA reported that its performance on the Prevention Index had improved from 69 to 81 percent. A goal requiring VISNs to produce measurable increases in the Prevention Index has been included in the directors’ performance agreements each year from 1997 through 1999. The Office of Personnel Management recently amended its regulations for members of the Senior Executive Service requiring agencies to appraise senior executive performance using measures that balance organizational results with customer, employee, and other perspectives in their next appraisal cycles. The regulations also place increased emphasis on using performance results as a basis for personnel decisions, such as pay, awards, and removal. We are planning to review agencies’ implementation of the amended regulations. Program evaluations are important for assessing the contributions that programs are making to results, determining factors affecting performance, and identifying opportunities for improvement. The Department of Agriculture’s Animal and Plant Health Inspection Service (APHIS) provides an example of how program evaluations can be used to help improve performance by identifying the relationships between an agency’s efforts and results. Specifically, APHIS used program evaluation to identify causes of a sudden outbreak of Mediterranean Fruit Flies along the Mexico-Guatemala border. The Department of Agriculture’s fiscal year 1999 performance report described the emergency program eradication activities initiated in response to the evaluation’s findings and recommendations, and linked the continuing decrease in the number of infestations during the fiscal year to these activities. However, our work has shown that agencies typically do not make full use of program evaluations as a tool for performance measurement and improvement. After a decade of government downsizing and curtailed investment, it is becoming increasingly clear that today’s human capital strategies are not appropriately constituted to adequately meet current and emerging needs of the government and its citizens in the most efficient, effective, and economical manner possible. Attention to strategic human capital management is important because building agency employees’ skills, knowledge, and individual performance must be a cornerstone of any serious effort to maximize the performance and ensure the accountability of the federal government. GPRA, with its explicit focus on program results, can serve as a tool for examining the programmatic implications of an agency’s strategic human capital management challenges. However, we reported in April 2001 that, overall, agencies’ fiscal year 2001 performance plans reflected different levels of attention to strategic human capital issues. When viewed collectively, we found that there is a need to increase the breadth, depth, and specificity of many related human capital goals and strategies and to better link them to the agencies’ strategic and programmatic planning. Very few of the agencies’ plans addressed succession planning to ensure reasonable continuity of leadership; performance agreements to align leaders’ performance expectations with the agency’s mission and goals; competitive compensation systems to help the agency attract, motivate, retain, and reward the people it needs; workforce deployment to support the agency’s goals and strategies; performance management systems, including pay and other meaningful incentives, to link performance to results; alignment of performance expectations with competencies to steer the workforce towards effectively pursuing the agency’s goals and strategies; and employee and labor relations grounded in a mutual effort on the strategies to achieve the agency’s goals and to resolve problems and conflicts fairly and effectively. In a recent report, we concluded that a substantial portion of the federal workforce will become eligible to retire or will retire over the next 5 years, and that workforce planning is critical for assuring that agencies have sufficient and appropriate staff considering these expected increases in retirements. OMB recently instructed executive branch agencies and departments to submit workforce analyses by June 29, 2001. These analyses are to address areas such as the skills of the workforce necessary to accomplish the agency’s goals and objectives; the agency’s recruitment, training, and retention strategies; and the expected skill imbalances due to retirements over the next 5 years. OMB also noted that this is the initial phase of implementing the President’s initiative to have agencies restructure their workforces to streamline their organizations. These actions indicate OMB’s growing interest in working with agencies to ensure that they have the human capital capabilities needed to achieve their strategic goals and accomplish their missions. Major management challenges and program risks confronting agencies continue to undermine the economy, efficiency, and effectiveness of federal programs. As you know, Mr. Chairman, this past January, we updated our High-Risk Series and issued our 21-volume Performance and Accountability Series and governmentwide perspective that outlines the major management challenges and program risks that federal agencies continue to face. This series is intended to help the Congress and the administration consider the actions needed to support the transition to a more results-oriented and accountable federal government. GPRA is a vehicle for ensuring that agencies have the internal management capabilities needed to achieve results. OMB has required that agencies’ annual performance plans include performance goals for resolving their major management problems. Such goals should be included particularly for problems whose resolution is mission-critical, or which could potentially impede achievement of performance goals. This guidance should help agencies address critical management problems to achieve their strategic goals and accomplish their missions. OMB’s attention to such issues is important because we have found that agencies are not consistently using GPRA to show how they plan to address major management issues. A key objective of GPRA is to help the Congress, OMB, and executive agencies develop a clearer understanding of what is being achieved in relation to what is being spent. Linking planned performance with budget requests and financial reports is an essential step in building a culture of performance management. Such an alignment infuses performance concerns into budgetary deliberations, prompting agencies to reassess their performance goals and strategies and to more clearly understand the cost of performance. For the fiscal year 2002 budget process, OMB called for agencies to prepare an integrated annual performance plan and budget and asked the agencies to report on the progress they had made in better understanding the relationship between budgetary resources and performance results and on their plans for further improvement. In the 4 years since the governmentwide implementation of GPRA, we have seen more agencies make more explicit links between their annual performance plans and budgets. Although these links have varied substantially and reflect agencies’ goals and organizational structures, the connections between performance and budgeting have become more specific and thus more informative. We have also noted progress in agencies’ ability to reflect the cost of performance in the statements of net cost presented in annual financial statements. Again, there is substantial variation in the presentation of these statements, but agencies are developing ways to better capture the cost of performance. Virtually all of the results that the federal government strives to achieve require the concerted and coordinated efforts of two or more agencies. There are over 40 program areas across the government, related to a dozen federal mission areas, in which our work has shown that mission fragmentation and program overlap are widespread, and that crosscutting federal program efforts are not well coordinated. To illustrate, in a November 2000 report, and in several recent testimonies, we noted that overall federal efforts to combat terrorism were fragmented. These efforts are inherently difficult to lead and manage because the policy, strategy, programs, and activities to combat terrorism cut across more than 40 agencies. As we have repeatedly stated, there needs to be a comprehensive national strategy on combating terrorism that has clearly defined outcomes. For example, the national strategy should include a goal to improve state and local response capabilities. Desired outcomes should be linked to a level of preparedness that response teams should achieve. We believe that, without this type of specificity in a national strategy, the nation will continue to miss opportunities to focus and shape the various federal programs combating terrorism. Crosscutting program areas that are not effectively coordinated waste scarce funds, confuse and frustrate program customers, and undercut the overall effectiveness of the federal effort. GPRA offers a structured and governmentwide means for rationalizing these crosscutting efforts. The strategic, annual, and governmentwide performance planning processes under GPRA provide opportunities for agencies to work together to ensure that agency goals for crosscutting programs complement those of other agencies; program strategies are mutually reinforcing; and, as appropriate, common performance measures are used. If GPRA is effectively implemented, the governmentwide performance plan and the agencies’ annual performance plans and reports should provide the Congress with new information on agencies and programs addressing similar results. Once these programs are identified, the Congress can consider the associated policy, management, and performance implications of crosscutting programs as part of its oversight of the executive branch. Credible performance information is essential for the Congress and the executive branch to accurately assess agencies’ progress towards achieving their goals. However, limited confidence in the credibility of performance information is one of the major continuing weaknesses with GPRA implementation. The federal government provides services in many areas through the state and local level, thus both program management and accountability responsibilities often rest with the state and local governments. In an intergovernmental environment, agencies are challenged to collect accurate, timely, and consistent national performance data because they rely on data from the states. For example, earlier this spring, the Environmental Protection Agency identified, in its fiscal year 2000 performance report, data limitations in its Safe Drinking Water Information System due to recurring reports of discrepancies between national and state databases, as well as specific misidentifications reported by individual utilities. Also, the Department of Transportation could not show actual fiscal year 2000 performance information for measures associated with its outcome of less highway congestion. Because such data would not be available until after September 2001, Transportation used projected data. According to the department, the data were not available because they are provided by the states, and the states’ reporting cycles for these data do not match its reporting cycle for its annual performance. Discussing data credibility and related issues in performance reports can provide important contextual information to the Congress. The Congress can use this discussion, for example, to raise questions about the problems agencies are having in collecting needed results-oriented information and the cost and data quality trade-offs associated with various collection strategies.

This testimony discusses the Government Performance and Results Act (GPRA) of 1993. During the last decade, Congress, the Office of Management and Budget, and executive agencies have worked to implement a statutory framework to improve the performance and accountability of the executive branch and to enhance executive branch and congressional decisionmaking. The core of this framework includes financial management legislation, especially GPRA. As a result of this framework, there has been substantial progress in the last few years in establishing the basic infrastructure needed to create high-performing federal organizations. The issuance of agencies' fiscal year 2000 performance reports, in addition to updated strategic plans, annual performance plans, and the governmentwide performance plans, completes two full cycles of annual performance planning and reporting under GPRA. However, much work remains before this framework is effectively implemented across the government, including transforming agencies' organizational cultures to improve decisionmaking and strengthen performance and accountability.

Several federal laws and policies—predominantly the Federal Information Security Modernization Act of 2014 and its predecessor, the Federal Information Security Management Act of 2002 (both referred to as FISMA)—provide a framework for protecting federal information and IT assets. The purpose of both laws is to provide a comprehensive framework for ensuring the effectiveness of information security controls over information resources that support federal operations and assets. The laws establish responsibilities for implementing the framework and assign those responsibilities to specific officials and agencies: The Director of the Office of Management and Budget (OMB) is responsible for developing and overseeing implementation of policies, principles, standards, and guidelines on information security in federal agencies, except with regard to national security systems. Since 2003, OMB has issued policies and guidance to agencies on many information security issues, including providing annual instructions to agencies and inspectors general for reporting on the effectiveness of agency security programs. More recently, OMB issued the Cybersecurity Strategy and Implementation Plan for the Federal Civilian Government in October 2015, which aims to strengthen federal civilian cybersecurity by (1) identifying and protecting high- value information and assets, (2) detecting and responding to cyber incidents in a timely manner, (3) recovering rapidly from incidents when they occur and accelerating the adoption of lessons learned, (4) recruiting and retaining a highly qualified cybersecurity workforce, and (5) efficiently acquiring and deploying existing and emerging technology. OMB also recently updated its Circular A-130 on managing federal information resources to address protecting and managing federal information resources and on managing PII. The head of each federal agency has overall responsibility for providing appropriate information security protections for the agency’s information and information systems, including those collected, maintained, operated or used by others on the agency’s behalf. In addition, the head of each agency is required to ensure that senior agency officials provide information security for the information and systems supporting the operations and assets under their control, and the agency chief information officer (CIO) is delegated the authority to ensure compliance with the law’s requirements. The assignment of information security responsibilities to senior agency officials is noteworthy because it reinforces the concept that information security is a business function as well as an IT function. Each agency is also required to develop, document, and implement an agency-wide information security program that involves an ongoing cycle of activity including (1) assessing risks, (2) developing and implementing risk-based policies and procedures for cost-effectively reducing information security risk to an acceptable level, (3) providing awareness training to personnel and specialized training to those with significant security responsibilities, (4) testing and evaluating effectiveness of security controls, (5) remedying known weaknesses, and (6) detecting, reporting, and responding to security incidents. As discussed later, our work has shown that agencies have not fully or effectively implemented these programs and activities on a consistent basis. FISMA requires the National Institute of Standards and Technology (NIST) to develop information security standards and guidelines for agencies. To this end, NIST has developed and published federal information processing standards that require agencies to categorize their information and information systems according to the impact or magnitude of harm that could result if they are compromised and specify minimum security requirements for federal information and information systems. NIST has also issued numerous special publications that provide detailed guidelines to agencies for securing their information and information systems. In 2014, FISMA established the Department of Homeland Security’s (DHS) oversight responsibilities, including (1) assisting OMB with oversight and monitoring of agencies’ information security programs, (2) operating the federal information security incident center, and (3) providing agencies with operational and technical assistance. Other cybersecurity-related laws were recently enacted, which include the following: The National Cybersecurity Protection Act of 2014 codifies the role of DHS’s National Cybersecurity and Communications Integration Center as the federal civilian interface for sharing information about cybersecurity risks, incidents, analysis, and warnings for federal and non-federal entities, including owners and operators of systems supporting critical infrastructure. The Cybersecurity Enhancement Act of 2014, among other things, authorizes NIST to facilitate and support the development of voluntary standards to reduce cyber risks to critical infrastructure and, in coordination with OMB, to develop and encourage a strategy for the adoption of cloud computing services by the federal government. The Cybersecurity Act of 2015, among other things, sets forth authority for enhancing the sharing of cybersecurity-related information among federal and non-federal entities, gives DHS’s National Cybersecurity and Communications Integration Center responsibility for implementing these mechanisms, requires DHS to make intrusion and detection capabilities available to any federal agency, and calls for agencies to assess their cyber-related workforce. Our work has identified the need for improvements in the federal government’s approach to cybersecurity. While the administration and agencies have acted to improve the protections over their information and information systems, additional actions are needed. Federal agencies need to effectively implement risk-based entity- wide information security programs consistently over time. Since FISMA was enacted in 2002, agencies have been challenged to fully and effectively develop, document, and implement agency-wide programs to secure the information and information systems that support the operations and assets of the agency, including those provided or managed by another agency or contractor. For example, in fiscal year 2015, 19 of the 24 major federal agencies covered by the Chief Financial Officers Act of 1990 reported that information security control deficiencies were either a material weakness or significant deficiency in internal controls over financial reporting. In addition, inspectors general at 22 of the 24 agencies cited information security as a major management challenge for their agency. The following actions will assist agencies in implementing their information security programs. Enhance capabilities to effectively identify cyber threats to agency systems and information. A key activity for assessing cybersecurity risk and selecting appropriate mitigating controls is the identification of cyber threats to computer networks, systems, and information. In 2016, we reported on several factors that agencies identified as impairing their ability to identify these threats to a great or moderate extent. The impairments included an inability to recruit and retain personnel with the appropriate skills, rapidly changing threats, continuous changes in technology, and a lack of government-wide information-sharing mechanisms. Addressing these impairments will enhance the ability of agencies to identify the threats to their systems and information and be in a better position to select and implement appropriate countermeasures. Implement sustainable processes for securely configuring operating systems, applications, workstations, servers, and network devices. We routinely determine that agencies do not enable key information security capabilities of their operating systems, applications, workstations, servers, and network devices. Agencies were not always aware of the insecure settings that introduced risk to the computing environment. Establishing strong configuration standards and implementing sustainable processes for monitoring and enabling configuration settings will strengthen the security posture of federal agencies. Patch vulnerable systems and replace unsupported software. Federal agencies consistently fail to apply critical security patches in a timely manner on their systems, sometimes years after the patch is available. We also consistently identify instances where agencies use software that is no longer supported by their vendors. These shortcomings often place agency systems and information at significant risk of compromise since many successful cyberattacks exploit known vulnerabilities associated with software products. Using vendor-supported and patched software will help to reduce this risk. Develop comprehensive security test and evaluation procedures and conduct examinations on a regular and recurring basis. The information security assessments performed for agency systems were sometimes based on interviews and document reviews, limited in scope, and did not identify many of the security vulnerabilities that our examinations identified. Conducting in-depth security evaluations that examine the effectiveness of security processes and technical controls is essential for effectively identifying system vulnerabilities that place agency systems and information at risk. Strengthen oversight of contractors providing IT services. As demonstrated by the Office of Personnel Management data breach of 2015, cyber attackers can sometimes gain entrée to agency systems and information through the agency’s contractors or business partners. Accordingly, agencies need to ensure that their contractors and partners are adequately protecting the agency’s information and systems. In August 2014, we reported that five of six selected agencies were inconsistent in overseeing the execution and review of security assessments that were intended to determine the effectiveness of contractor implementation of security controls, resulting in security lapses. In 2016, agency chief information security officers (CISO) we surveyed reported that they were challenged to a large or moderate extent in overseeing their IT contractors and receiving security data from the contractors, thereby diminishing the CISOs’ ability to assess how well agency information maintained by the contractors is protected. Effectively overseeing and reviewing the security controls implemented by contractors and other parties is essential to ensuring that the organization’s information is properly safeguarded. The federal government needs to improve its cyber incident detection, response, and mitigation capabilities. Even agencies or organizations with strong security can fall victim to information security incidents due to previously unknown vulnerabilities that are exploited by attackers to intrude into an agency’s information systems. Accordingly, agencies need to have effective mechanisms for detecting, responding to, and recovering from such incidents. The following actions will assist the federal government in building its capabilities for detecting, responding to, and recovering from security incidents. DHS needs to expand capabilities, improve planning, and support wider adoption of its government-wide intrusion detection and prevention system. In January 2016, we reported that DHS’s National Cybersecurity Protection System (NCPS) had limited capabilities for detecting and preventing intrusions, conducting analytics, and sharing information. In addition, adoption of these capabilities at federal agencies was limited. Expanding NCPS’s capabilities for detecting and preventing malicious traffic, defining requirements for future capabilities, and developing network routing guidance would increase assurance of the system’s effectiveness in detecting and preventing computer intrusions and support wider adoption by agencies. Improve cyber incident response practices at federal agencies. In April 2014 we reported that 24 major federal agencies did not consistently demonstrate that they had effectively responded to cyber incidents. For example, agencies did not determine the impact of incidents or take actions to prevent their recurrence. By developing complete policies, plans, and procedures for responding to incidents and effectively overseeing response activities, agencies will have increased assurance that they will effectively respond to cyber incidents. Update federal guidance on reporting data breaches and develop consistent responses to breaches of personally identifiable information (PII). As we reported in December 2013, eight selected agencies did not consistently implement policies and procedures for responding to breaches of PII. For example, none of the agencies documented the evaluation of incidents and lessons learned. In addition, OMB’s guidance to agencies to report each PII-related incident—even those with inherently low risk to the individuals affected—within 1 hour of discovery may cause agencies to expend resources to meet reporting requirements that provide little value and divert time and attention from responding to breaches. Updating guidance and consistently implementing breach response practices will improve the effectiveness of government-wide and agency-level data breach response programs. The federal government needs to expand its cyber workforce planning and training efforts. Ensuring that the government has a sufficient number of cybersecurity professionals with the right skills and that its overall workforce is aware of information security responsibilities remains an ongoing challenge. These actions can help meet this challenge: Enhance efforts for recruiting and retaining a qualified cybersecurity workforce. This has been a long-standing dilemma for the federal government. In 2012, agency chief information officers and experts we surveyed cited weaknesses in education, awareness, and workforce planning as a root cause in hindering improvements in the nation’s cybersecurity posture. Several experts also noted that the cybersecurity workforce was inadequate, both in numbers and training. They cited challenges such as the lack of role-based qualification standards and difficulties in retaining cyber professionals. In 2016, agency CISOs we surveyed reported that difficulties related to having sufficient staff; recruiting, hiring, and retaining security personnel; and ensuring security personnel have appropriate skills and expertise pose challenges to their abilities to carry out their responsibilities effectively. Improve cybersecurity workforce planning activities at federal agencies. In November 2011, we reported that only five of eight selected agencies had developed workforce plans that addressed cybersecurity. Further, agencies reported challenges with filling cybersecurity positions, and only three of the eight had a department- wide training program for their cybersecurity workforce. In summary, federal law and policy set forth a framework for addressing cybersecurity risks to federal systems. However, implementation of this framework has been inconsistent, and additional action is needed to address ongoing challenges. Specifically, agencies need to address control deficiencies and fully implement organization-wide information security programs, cyber incident response and mitigation efforts need to be improved across the government, and establishing and maintaining a qualified cybersecurity workforce needs to be a priority. Chairman Donilon, Vice Chair Palmisano, and distinguished members of the Commission, this concludes my prepared statement. I would be happy to answer any questions you have. If you have any questions about this statement, please contact Gregory C. Wilshusen at (202) 512-6244 or wilshuseng@gao.gov. Other staff members who contributed to this statement include Larry Crosland and Michael Gilmore (assistant directors), Chris Businsky, Franklin Jackson, Kenneth A. Johnson, Lee McCracken, Scott Pettis, and Adam Vodraska. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The dependence of federal agencies on computerized information systems and electronic data makes them potentially vulnerable to a wide and evolving array of cyber-based threats. Securing these systems and data is vital to the nation's safety, prosperity, and well-being. Because of the significance of these risks and long-standing challenges in effectively implementing information security protections, GAO has designated federal information security as a government-wide high-risk area since 1997. In 2003 this area was expanded to include computerized systems supporting the nation's critical infrastructure, and again in February 2015 to include protecting the privacy of personally identifiable information collected, maintained, and shared by both federal and nonfederal entities. GAO was asked to provide a statement on laws and policies shaping the federal IT security landscape and actions needed for addressing long-standing challenges to improving the nation's cybersecurity posture. In preparing this statement, GAO relied on previously published work. Over the past several years, GAO has made about 2,500 recommendations to federal agencies to enhance their information security programs and controls. As of September 16, 2016, about 1,000 have not been implemented. Cyber incidents affecting federal agencies have continued to grow, increasing about 1,300 percent from fiscal year 2006 to fiscal year 2015. Several laws and policies establish a framework for the federal government's information security and assign implementation and oversight responsibilities to key federal entities, including the Office of Management and Budget, executive branch agencies, and the Department of Homeland Security (DHS). However, implementation of this framework has been inconsistent, and additional actions are needed: Effectively implement risk-based information security programs. Agencies have been challenged to fully and effectively establish and implement information security programs. They need to enhance capabilities to identify cyber threats, implement sustainable processes for securely configuring their computer assets, patch vulnerable systems and replace unsupported software, ensure comprehensive testing and evaluation of their security on a regular basis, and strengthen oversight of IT contractors. Improve capabilities for detecting, responding to, and mitigating cyber incidents. Even with strong security, organizations can continue to be victimized by attacks exploiting previously unknown vulnerabilities. To address this, DHS needs to expand the capabilities and adoption of its intrusion detection and prevention system, and agencies need to improve their practices for responding to cyber incidents and data breaches. Expand cyber workforce and training efforts. Ensuring that the government has a sufficient cybersecurity workforce with the right skills and training remains an ongoing challenge. Government-wide efforts are needed to better recruit and retain a qualified cybersecurity workforce and to improve workforce planning activities at agencies.

SBA was established by the Small Business Act of 1953 to fulfill the role of several agencies that previously assisted small businesses affected by the Great Depression and, later, by wartime competition. SBA’s stated purpose is to promote small business development and entrepreneurship through business financing, government contracting, and technical assistance programs. In addition, SBA serves as a small business advocate, working with other federal agencies to, among other things, reduce regulatory burdens on small businesses. SBA also provides low-interest, long-term loans to individuals and businesses to assist them with disaster recovery through its Disaster Loan Program—the only form of SBA assistance not limited to small businesses. Homeowners, renters, businesses of all sizes, and nonprofit organizations can apply for physical disaster loans for permanent rebuilding and replacement of uninsured or underinsured disaster-damaged property. Small businesses can also apply for economic injury disaster loans to obtain working capital funds until normal operations resume after a disaster declaration. SBA’s Disaster Loan Program differs from the Federal Emergency Management Agency’s (FEMA) Individuals and Households Program (IHP). For example, a key element of SBA’s Disaster Loan Program is that the disaster victim must have repayment ability before a loan can be approved whereas FEMA makes grants under the IHP that do not have to be repaid. Further, FEMA grants are generally for minimal repairs and, unlike SBA disaster loans, are not designed to help restore the home to its predisaster condition. In January 2005, SBA began using DCMS to process all new disaster loan applications. SBA intended for DCMS to help it move toward a paperless processing environment by automating many of the functions staff members had performed manually under its previous system. These functions include both obtaining referral data from FEMA and credit bureau reports, as well as completing and submitting loss verification reports from remote locations. Our July 2006 report identified several significant limitations in DCMS’s capacity and other system and procurement deficiencies that likely contributed to the challenges that SBA faced in providing timely assistance to Gulf Coast hurricane victims as follows: First, due to limited capacity, the number of SBA staff who could access DCMS at any one time to process disaster loans was restricted. Without access to DCMS, the ability of SBA staff to process disaster loan applications in an expeditious manner was diminished. Second, SBA experienced instability with DCMS during the initial months following Hurricane Katrina, as users encountered multiple outages and slow response times in completing loan processing tasks. According to SBA officials, the longest period of time DCMS was unavailable to users due to an unscheduled outage was 1 business day. These unscheduled outages and other system-related issues slowed productivity and affected SBA’s ability to provide timely disaster assistance. Third, ineffective technical support and contractor oversight contributed to the DCMS instability that SBA staff initially encountered in using the system. Specifically, a DCMS contractor did not monitor the system as required or notify the agency of incidents that could increase system instability. Further, the contractor delivered computer hardware for DCMS to SBA that did not meet contract specifications. In the report released in February, we identified other logistical challenges that SBA experienced in providing disaster assistance to Gulf Coast hurricane victims. For example, SBA moved urgently to hire more than 2,000 mostly temporary employees at its Ft. Worth, Texas disaster loan processing center through newspaper and other advertisements (the facility increased from about 325 staff in August 2005 to 2,500 in January 2006). SBA officials said that ensuring the appropriate training and supervision of this large influx of inexperienced staff proved very difficult. Prior to Hurricane Katrina, SBA had not maintained the status of its disaster reserve corps, which was a group of potential voluntary employees trained in the agency’s disaster programs. According to SBA, the reserve corps, which had been instrumental in allowing the agency to provide timely disaster assistance to victims of the September 11, 2001 terrorist attacks, shrank from about 600 in 2001 to less than 100 in August 2005. Moreover, SBA faced challenges in obtaining suitable office space to house its expanded workforce. For example, SBA’s facility in Ft. Worth only had the capacity to house about 500 staff whereas the agency hired more than 2,000 mostly temporary staff to process disaster loan applications. While SBA was able to identify another facility in Ft. Worth to house the remaining staff, it had not been configured to serve as a loan processing center. SBA had to upgrade the facility to meet its requirements. Fortunately, in 2005, SBA was also able to quickly reestablish a loan processing facility in Sacramento, California, that had been previously slated for closure under an agency reorganization plan. The facility in Sacramento was available because its lease had not yet expired, and its staff was responsible for processing a significant number of Gulf Coast hurricane related disaster loan applications. As a result of these and other challenges, SBA developed a large backlog of applications during the initial months following Hurricane Katrina. This backlog peaked at more than 204,000 applications 4 months after Hurricane Katrina. By late May 2006, SBA took about 74 days on average to process disaster loan applications, compared with the agency’s goal of within 21 days. As we stated in our July 2006 report, the sheer volume of disaster loan applications that SBA received was clearly a major factor contributing to the agency’s challenges in providing timely assistance to Gulf Coast hurricane. As of late May 2006, SBA had issued 2.1 million loan applications to hurricane victims, which was four times the number of applications issued to victims of the 1994 Northridge, California, earthquake, the previous single largest disaster that the agency had faced. Within 3 months of Hurricane Katrina making landfall, SBA had received 280,000 disaster loan applications or about 30,000 more applications than the agency received over a period of about 1 year after the Northridge earthquake. However, our two reports on SBA’s response to the Gulf Coast hurricanes also found that the absence of a comprehensive and sophisticated planning process contributed to the challenges that the agency faced. For example, in designing DCMS, SBA used the volume of applications received during the Northridge, California, earthquake and other historical data as the basis for planning the maximum number of concurrent agency users that the system could accommodate. SBA did not consider the likelihood of more severe disaster scenarios and, in contrast to insurance companies and some government agencies, use the information available from catastrophe models or disaster simulations to enhance its planning process. Since the number of disaster loan applications associated with the Gulf Coast hurricanes greatly exceeded that of the Northridge earthquake, DCMS’s user capacity was not sufficient to process the surge in disaster loan applications in a timely manner. Additionally, SBA did not adequately monitor the performance of a DCMS contractor or stress test the system prior to its implementation. In particular, SBA did not verify that the contractor provided the agency with the correct computer hardware specified in its contract. SBA also did not completely stress test DCMS prior to implementation to ensure that the system could operate effectively at maximum capacity. If SBA had verified the equipment as required or conducted complete stress testing of DCMS prior to implementation, its capacity to process Gulf Coast related disaster loan applications may have been enhanced. In the report we issued in February, we found that SBA did not engage in comprehensive disaster planning for other logistical areas—such as workforce or space acquisition planning—prior to the Gulf Coast hurricanes at either the headquarters or field office levels. For example, SBA had not taken steps to help ensure the availability of additional trained and experienced staff such as (1) cross-training agency staff not normally involved in disaster assistance to provide backup support or (2) maintaining the status of the disaster reserve corps as I previously discussed. In addition, SBA had not thoroughly planned for the office space requirements that would be necessary in a disaster the size of the Gulf Coast hurricanes. While SBA had developed some estimates of staffing and other logistical requirements, it largely relied on the expertise of agency staff and previous disaster experiences—none of which reached the magnitude of the Gulf Coast hurricanes—and, as was the case with DCMS planning, did not leverage other planning resources, including information available from disaster simulations or catastrophe models. In our July 2006 report, we recommended that SBA take several steps to enhance DCMS, such as reassessing the system’s capacity in light of the Gulf Coast hurricane experience and reviewing information from disaster simulations and catastrophe models. We also recommended that SBA strengthen its DCMS contractor oversight and further stress test the system. SBA agreed with these recommendations. I note that SBA has completed an effort to expand DCMS’s capacity. SBA officials said that DCMS can now support a minimum of 8,000 concurrent agency users as compared with only 1,500 concurrent users for the Gulf Coast hurricanes. Additionally, SBA has awarded a new contract for the project management and information technology support for DCMS. The contractor is responsible for a variety of DCMS tasks on SBA’s behalf including technical support, software changes and hardware upgrades, and supporting all information technology operations associated with the system. In the report released in February, we identified other measures that SBA had planned or implemented to better prepare for and respond to future disasters. These steps include appointing a single individual to coordinate the agency’s disaster preparedness planning and coordination efforts, enhancing systems to forecast the resource requirements to respond to disasters of varying scenarios, redesigning the process for reviewing applications and disbursing loan proceeds, and enhancing its long-term capacity to acquire adequate facilities in an emergency. Additionally, SBA had planned or initiated steps to help ensure the availability of additional trained and experienced staff in the event of a future disaster. According to SBA officials, these steps include cross-training staff not normally involved in disaster assistance to provide back up support, reaching agreements with private lenders to help process a surge in disaster loan applications, and reestablishing the Disaster Active Reserve Corps, which had reached about 630 individuals as of June 2007. While SBA has taken a variety of steps to enhance its capacity to respond to disasters, I note that these efforts are ongoing and continued commitment and actions by agency managers are necessary. In June 2007, SBA released a plan for responding to disasters. While we have not evaluated the process SBA followed in developing its plan, according to the SBA plan, the agency is incorporating catastrophe models into its disaster planning processes as we recommended in both reports. For example, the plan states that SBA is using FEMA’s catastrophe model, which is referred to as HAZUS, in its disaster planning activities. Further, based on information provided by SBA, the agency is also exploring the use of models developed by private companies to assist in its disaster planning efforts. These efforts to incorporate catastrophe models into the disaster planning process appear to be at an early stage. SBA’s plan also anticipates further steps to ensure an adequate workforce is available to respond to a disaster, including training and using 400 non- disaster program office staff to assist in responding to the 2007 hurricane season and beyond. According to SBA officials, about 200 of these staff members will be trained in reviewing loan applications and providing customer service by the end of this month and the remainder will be trained by this Fall. We encourage SBA to actively pursue initiatives that may further enhance its capacity to better respond to future disasters, and we will monitor SBA’s efforts to implement our recommendations. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions at this time. For further information on this testimony, please contact William B. Shear at (202) 512- 8678 or Shearw@gao.gov. Contact points for our Offices of Congressional Affairs and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony included Wesley Phillips, Assistant Director; Triana Bash; Alison Gerry; Marshall Hamlett; Barbara S. Oliver; and Cheri Truett. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Small Business Administration (SBA) helps individuals and businesses recover from disasters such as hurricanes through its Disaster Loan Program. SBA faced an unprecedented demand for disaster loan assistance following the 2005 Gulf Coast hurricanes (Katrina, Rita, and Wilma), which resulted in extensive property damage and loss of life. In the aftermath of these disasters, concerns were expressed regarding the timeliness of SBA's disaster assistance. GAO initiated work and completed two reports under the Comptroller General's authority to conduct evaluations and determine how well SBA provided victims of the Gulf Coast hurricanes with timely assistance. This testimony, which is based on these two reports, discusses (1) challenges SBA experienced in providing victims of the Gulf Coast hurricanes with timely assistance, (2) factors that contributed to these challenges, and (3) steps SBA has taken since the Gulf Coast hurricanes to enhance its disaster preparedness. GAO visited the Gulf Coast region, reviewed SBA planning documents, and interviewed SBA officials. GAO identified several significant system and logistical challenges that SBA experienced in responding to the Gulf Coast hurricanes that undermined the agency's ability to provide timely disaster assistance to victims. For example, the limited capacity of SBA's automated loan processing system--the Disaster Credit Management System (DCMS)--restricted the number of staff who could access the system at any one time to process disaster loan applications. In addition, SBA staff who could access DCMS initially encountered multiple system outages and slow response times in completing loan processing tasks. SBA also faced challenges training and supervising the thousands of mostly temporary employees the agency hired to process loan applications and obtaining suitable office space for its expanded workforce. As of late May 2006, SBA processed disaster loan applications, on average, in about 74 days compared with its goal of within 21 days. While the large volume of disaster loan applications that SBA received clearly affected its capacity to provide timely disaster assistance to Gulf Coast hurricane victims, GAO's two reports found that the absence of a comprehensive and sophisticated planning process beforehand likely limited the efficiency of the agency's initial response. For example, in designing the capacity of DCMS, SBA primarily relied on historical data such as the number of loan applications that the agency received after the 1994 Northridge, California, earthquake--the most severe disaster that the agency had previously encountered. SBA did not consider disaster scenarios that were more severe or use the information available from disaster simulations (developed by federal agencies) or catastrophe models (used by insurance companies to estimate disaster losses). SBA also did not adequately monitor the performance of a DCMS contractor or completely stress test the system prior to its implementation. Moreover, SBA did not engage in comprehensive disaster planning prior to the Gulf Coast hurricanes for other logistical areas, such as workforce planning or space acquisition, at either the headquarters or field office levels. While SBA has taken steps to enhance its capacity to respond to potential disasters, the process is ongoing and continued commitment and actions by agency managers are necessary. As of July 2006, SBA officials said that the agency had completed an expansion of DCMS's user capacity to support a minimum of 8,000 concurrent users as compared with 1,500 concurrent users supported for the Gulf Coast hurricanes. Further, in June 2007, SBA released a disaster plan. While GAO has not evaluated the process SBA followed in developing its plan, consistent with recommendations in GAO reports, the plan states that SBA is incorporating catastrophe models into its planning process, an effort which appears to be at an early stage. GAO encourages SBA to actively pursue the use of catastrophe models and other initiatives that may further enhance its capacity to better respond to future disasters.

Before presenting additional preliminary results, I would like to provide some information on our scope and methodology. Specifically, we are interviewing key OWCP and Postal Service officials in Washington, D.C., to discuss and collect pertinent information regarding the employees’ claims for WCP eligibility and for compensation for lost wages and schedule awards. Additionally, we collected and reviewed a total of 483 Postal Service employee WCP case files located at the 12 OWCP district offices throughout the country. For the 12-month period beginning July 1, 1997, we randomly selected the claims and obtained case file records for injuries that occurred or were recognized as job-related during this period on the basis of the type of injury involved: traumatic or occupational; and on the basis of their approval or nonapproval for WCP benefits and compensation or schedule award payments. We chose this period of time because we believed it was current enough to reflect ongoing operations, yet historical enough for most, if not all, of the claims to have been decided upon. Also, in discussing the preliminary results, we generally present our analyses of claim processing times in terms of the “median” time to process cases covered by our review. This means that 50 percent of the cases were processed in the median time or less, and 50 percent of the cases were processed in more time than the median. We did our work from January to May 2002 in accordance with generally accepted government auditing standards. We have not had enough time to fully analyze all of the data we collected, including analyzing the total percentage of claims processed within specified processing standards, or to fully discuss the data with Postal Service or OWCP officials. Accordingly, we are limiting our discussion to median time intervals between the major steps in the WCP claims process up until the time of the decision on the claim and initial compensation payment. Among other things, prior to this hearing, we did not have the time to (1) pinpoint and evaluate specific problems that may have affected the time to process the cases we reviewed, (2) address issues OWCP raised on how the claims processing times might be affected by “administrative closures” or schedule awards, or (3) evaluate numerous other factors that may have affected overall claims processing. Our work has not included an analysis of any time involved in the appeal process of any claim we reviewed, nor did we evaluate the appropriateness of OWCP’s decisions on approving or denying the claims. More detail about our sampling plan is presented in appendix I. Although OWCP is charged with implementing the WCP, there is a federal partnership between OWCP and the employing federal agencies for administering the WCP. In this partnership, federal agencies, including the Postal Service, provide the avenue through which injured federal employees prepare and submit their notice of injury forms and claims for WCP benefits and services to OWCP. Additionally, employing agencies are responsible for paying normal salary and benefits to those employees who miss work for up to 45 calendar days, during a 1-year period, due to a work-related traumatic injury for which they have applied for WCP benefits. After receiving the claim forms from the employing agencies, OWCP district office claims examiners review the forms and supporting evidence to decide on the claimant’s entitlement to WCP benefits or the need for additional information or evidence, determine the benefits and services to be awarded, approve or disapprove payment of benefits and services, and manage and maintain WCP employee case file records. If additional information or other evidence is needed before entitlement to WCP benefits can be determined, OWCP generally corresponds directly with the claimant or the WCP contact at the applicable Postal Service locations. OWCP regulations require that evidence needed to determine a claimant’s entitlement to WCP benefits meet five requirements. These requirements are as follows: 1. The claim was filed within the time limits specified by law. 2. The injured or deceased person was, at the time of injury or death, an employee of the United States. 3. The injury, disease, or death did, in fact, occur. 4. The injury, disease, or death occurred while the employee was in the performance of duty. 5. The medical condition for which compensation or medical benefits is claimed is causally related to the claimed job-related injury, disease, or death. Such evidence, among other things, must be reliable and substantial as determined by OWCP claims examiners. If the claimant submits factual evidence, medical evidence, or both, but OWCP determines the evidence is not sufficient to meet the five requirements, OWCP is required to inform the claimant of the additional evidence needed. The claimant then has at least 30 days to submit the evidence requested. Additionally, if the employer–in this case, the Postal Service–has reason to disagree with any aspect of the claimant’s report, it can submit a statement to OWCP that specifically describes the factual allegation or argument with which it disagrees and provide evidence or arguments to support its position. According to the files we reviewed, about 99 percent of the Postal Service employees’ traumatic injury claims contained evidence related to the five requirements set by OWCP regulations. About 1 percent of the traumatic injury claims were not approved, according to the case files we reviewed, because evidence was not provided for one or more of the requirements. About 97 percent of the claims filed by Postal Service employees for occupational disease claims contained evidence related to the five requirements. The remaining claims, or about 3 percent, did not include all of the required evidence. Generally, the evidence not provided for both types of claims pertained to either (1) the employee’s status as a Postal Service employee or (2) whether the claim was filed within the time limits specified by law. We did not evaluate OWCP’s decisions regarding the sufficiency of the information provided. During the period covered by our review, OWCP regulations required an employee who sustained a work-related traumatic injury to give notice of the injury in writing to OWCP using Form CA-1, “Federal Employee’s Notice of Traumatic Injury and Claim for Continuation of Pay/ Compensation,” in order to claim WCP benefits. To claim benefits for a disease or illness that the employee believed to be work-related, he or she was also required to give notice of the condition in writing to OWCP using Form CA-2, “Notice of Occupational Disease and Claim for Compensation.” Both notices, according to OWCP regulations, should be filed with the Postal Service supervisor within 30 days of the injury or the date the employee realized the disease was job-related. Upon receipt, Postal Service officials were supposed to complete the agency portion of the form and submit it to OWCP within 10 working days if the injury or disease was likely to result in (1) a medical charge against OWCP, (2) disability for work beyond the day or shift of injury, (3) the need for more than two appointments for medical examination/or treatment on separate days leading to time lost from work, (4) future disability, (5) permanent impairment, or (6) COP. OWCP regulations, during the period covered by our review, did not provide time frames for OWCP claims examiners to process these claims. Instead, OWCP’s operational plan for this period specified performance standards for processing certain types of WCP cases within certain time frames. Specifically, the performance standard for processing traumatic injuries specified that a decision should be made within 45 days of its receipt in all but the most complex cases. The performance standards for decisions on occupational disease claims specified that decisions should be made within 6 to 12 months, depending on the complexity of the case. The case files we reviewed indicated that the length of time taken to process a claim–from the date of traumatic injury or the date an occupational disease was recognized as job-related to the date the claimant’s entitlement to benefits was determined–varied widely. For example, we estimate that 25 percent of the claims were processed in up to 48 days for traumatic injury and in up to 78 days for occupational disease. We estimate that 90 percent of the claims were processed in up to 307 days for traumatic injury and in up to 579 days for occupational disease. Finally, we estimate that 50 percent of the claims were processed in up to 84 days for traumatic injuries and in up to 136 days for occupational disease. Specifically, Postal Service employee claims for injuries or diseases covered by our review took the median times shown in table 1 to complete. The median elapsed time taken by Postal Service employees and Postal Service supervisors met the applicable time frames set forth in OWCP regulations. As shown in table 1, the median time taken by Postal Service employees to prepare and submit the claim forms needed to make a determination on their entitlement to WCP benefits for traumatic injuries to the Postal Service supervisor was 2 days from the date of the injury, well within the 30-day time frame set by OWCP regulations. For occupational disease, Postal Service employees signed and submitted the notice of disease form to the Postal Service supervisor in a median time of 26 days from the date the disease was recognized as job-related, or 4 days less than the 30-day time frame set by OWCP regulations. Upon receipt, the Postal Service supervisor then took up to a median time of 11 calendar days–also within the time limit of 10 working days set forth in the regulations–to complete the form and transmit it to OWCP. Also as shown in table 1, once OWCP received the form from the Postal Service, our preliminary analysis showed that OWCP claims examiners processed these notice of injury forms for traumatic injuries in a median time of 59 days to determine a claimant’s entitlement to WCP benefits. As mention earlier, the performance standard for these types of cases was 45 days, or 14 days less than the median time taken. According to OWCP officials, the 59-day median processing time inappropriately included the time during which certain types of claims were “administratively closed,” then reopened later when a claim for compensation was received. We plan to determine the effect to which these types of claims may have affected the processing times as we complete our review. For occupational disease claims, the data showed that OWCP processed these forms at the median time of 63 days, which was within the 6 to 12-month time frame for simple to complex occupational disease cases specified by OWCP’s performance standards. During the period covered by our review, OWCP regulations stated that when an employee was disabled by a work-related injury and lost pay for more than 3 calendar days, or had a permanent impairment, the employer is supposed to furnish the employee with Form CA-7, “Claim for Compensation Due to Traumatic Injury or Occupational Disease.” This form was used to claim compensation for periods of disability not covered by COP as well as for schedule awards. The employee was supposed to complete the form upon termination of wage loss–the period of wage loss was less than 10 days or at the expiration of 10 days from the date pay stopped if the period of wage loss was 10 days or more–and submit it to the employing agency. Upon receipt of the compensation claim form from the employee, the employer was required to complete the agency portion of the form and as soon as possible, but not more than 5 working days, transmit the form and any accompanying medical reports to OWCP. For the period covered by our review, OWCP regulations did not provide time limits for OWCP claims examiners to process these claims. Instead, OWCP’s annual operational plan for the period of our review specified a performance standard for processing wage loss claims. Specifically, the performance standard stated that all payable claims for traumatic injuries– excluding schedule awards–should be processed within 14 days. This time frame was to be measured from the date OWCP received the claim form from the employing agency to the date the payment was entered into the automated compensation payment system. No performance standard was specified for occupational disease compensation claims. The case file data showed that the processing time—from the date the claim for compensation was prepared to the date the first payment was made–varied widely. For example, we estimate that to process 25 percent of the claims, it took up to 28 days for traumatic injuries and up to 32 days for occupational diseases. To process 90 percent of the claims, it took up to 323 days for traumatic injuries and up to 356 days for occupational diseases. To process 50 percent of the claims, it took up to 49 days for the traumatic injuries and up to 56 days for the occupational diseases. Specifically, the median times to process the claims for compensation for the traumatic injury and occupational disease claims covered by our review are shown in table 2. The case files we reviewed did not contain the information that would have enabled us to determine whether the claims for compensation were prepared and filed by the employees within the time frame set forth by OWCP regulations. However, as shown in table 2, once a claim was prepared, at the median time, we found that after receipt of a claim for compensation for a traumatic injury, the Postal Service supervisor completed the agency portion of the form and transmitted it to OWCP in 4 calendar days, which was less than the 5 working days required by OWCP regulations. For occupational disease compensation claims, we found that upon receipt of the claim form from the employee, the Postal Service supervisor took 7 calendar days, which was also within the 5 working day requirement imposed by OWCP regulations, to transmit the claims to OWCP. As also, as shown in table 2, once OWCP received a traumatic injury compensation claim form, the median time for OWCP claims examiners to process the claim was 23 days, which was longer than the 14 days specified by OWCP’s performance standard–excluding schedule awards. However, our data included claims for schedule awards. As mentioned earlier, prior to this hearing we did not have time to evaluate the effect that schedule awards might have had on the median processing time. We plan to do so in our analysis for the final report. For occupational disease claims, our analysis showed that upon receipt, OWCP claims examiners, at the median processing time, took 22 days to make the initial payment for the approved claims. OWCP did not specify a performance standard for occupational disease claims. Finally, our preliminary analysis of case file data showed that during the time between the date of injury or recognition of a disease as job-related, injured employees often (1) continued working in a light-duty capacity, (2) received COP while absent from work, or (3) went on paid annual or sick leave until the time they actually missed work and their pay stopped. In fact, the data showed that the median elapsed time from the date the injury occurred or the disease was recognized as job-related to the beginning date of the compensation period was 98 days for traumatic injuries and 243 days for occupational disease claims. Mr. Chairman, this concludes my prepared statement. I will be pleased to answer any questions you or other Members of the Subcommittee may have. For further information regarding this testimony, please contact Bernard Ungar, Director, or Sherrill Johnson, Assistant Director, Physical Infrastructure Issues, at (202) 512-4232 and (214) 777-5699, respectively. In addition to those named above, Michael Rives, Frederick Lyles, Melvin Horne, John Vocino, Scott Zuchorsky, Maria Edelstein, Lisa Wright- Solomon, Brandon Haller, Jerome Sandau, Jill Sayre, Sidney Schwartz, and Donna Leiss made key contributions to this statement.

In fiscal year 2002, U.S. Postal Service employees accounted for one-third of both the federal civilian workforce and the $2.1 billion in overall costs for the Federal Workers' Compensation Program (WCP). Postal workers submitted half of the claims for new work-related injuries that year. Postal Service employees with job-related traumatic injuries or occupational diseases almost always provided the evidence required to make a determination on their entitlement. In two percent of the cases, the Office of Workers' Compensation Program (OWCP) found that evidence was missing for one or more of the required elements. However, the length of time taken to process claims varied widely even though all were subject to the same OWCP processing standards. OWCP claims examiners took 59 days to process traumatic injury claims after receiving the notice of injury claim forms from the Postal Service--a process that should take 45 days for all but the most complex cases, according to OWCP performance standards. The case files lacked the information necessary to determine whether the claims for compensation were prepared and filed by the employees within the time frame set by OWCP regulations. OWCP claims examiners took 23 days to process traumatic injury compensation claims for wage loss and schedule awards. OWCP's performance standard states that all payable claims should be processed within 14 days from the date of receipt.

Countries provide food aid through either in-kind donations or cash donations. In-kind food aid is food procured and delivered to vulnerable populations, while cash donations are given to implementing organizations to purchase food in local, regional, or global markets. U.S. food aid programs are all in-kind, and no cash donations are allowed under current legislation. However, the administration has recently proposed legislation to allow up to 25 percent of appropriated food aid funds to purchase commodities in locations closer to where they are needed. Other food aid donors have also recently moved from providing primarily in-kind aid to more or all cash donations for local procurement. Despite ongoing debates as to which form of assistance are more effective and efficient, the largest international food aid organization, the United Nations (UN) World Food Program (WFP), continues to accept both. The United States is both the largest overall and in-kind provider of food aid to WFP, supplying about 43 percent of WFP’s total contributions in 2006 and 70 percent of WFP’s in-kind contributions in 2005. Other major donors of in-kind food aid in 2005 included China, the Republic of Korea, Japan, and Canada. In fiscal year 2006, the United States delivered food aid through its largest program to over 50 countries, with about 80 percent of its funding allocations for in-kind food donations going to Africa, 12 percent to Asia and the Near East, 7 percent to Latin America, and 1 percent to Eurasia. Of the 80 percent of the food aid funding going to Africa, 30 percent went to Sudan, 27 percent to the Horn of Africa, 18 percent to southern Africa, 14 percent to West Africa, and 11 percent to Central Africa. Over the last several years, funding for nonemergency U.S. food aid programs has declined. For example, in fiscal year 2001, the United States directed approximately $1.2 billion of funding for international food aid programs to nonemergencies. In contrast, in fiscal year 2006, the United States directed approximately $698 million for international food aid programs to nonemergencies. U.S. food aid is funded under four program authorities and delivered through six programs administered by USAID and USDA; these programs serve a range of objectives, including humanitarian goals, economic assistance, foreign policy, market development, and international trade. (For a summary of the six programs, see app. I.) The largest program, P.L. 480 Title II, is managed by USAID and represents approximately 74 percent of total in-kind food aid allocations over the past 4 years, mostly to fund emergency programs. The Bill Emerson Humanitarian Trust, a reserve of up to 4 million metric tons of grain, can be used to fulfill P.L. 480 food aid commitments to meet unanticipated emergency needs in developing countries or when U.S. domestic supplies are short. U.S. food aid programs also have multiple legislative and regulatory mandates that affect their operations. One mandate that governs U.S. food aid transportation is cargo preference, which is designed to support a U.S.-flag commercial fleet for national defense purposes. Cargo preference requires that 75 percent of the gross tonnage of all government-generated cargo be transported on U.S.-flag vessels. A second transportation mandate, known as the Great Lakes Set-Aside, requires that up to 25 percent of Title II bagged food aid tonnage be allocated to Great Lakes ports each month. Multiple challenges in logistics hinder the efficiency of U.S. food aid programs by reducing the amount, timeliness, and quality of food provided. While in some cases agencies have tried to expedite food aid delivery, most food aid program expenditures are for logistics, and the delivery of food from vendor to village is generally too time-consuming to be responsive in emergencies. Factors that increase logistical costs and lengthen time frames include uncertain funding processes and inadequate planning, ocean transportation contracting practices, legal requirements, and inadequate coordination in tracking and responding to food delivery problems. While U.S. agencies are pursuing initiatives to improve food aid logistics, such as prepositioning food commodities and using a new transportation bid process, their long-term cost-effectiveness has not yet been measured. In addition, the current practice of selling commodities to generate cash resources for development projects—monetization—is an inherently inefficient yet expanding use of food aid. The current practice of selling commodities as a means to generate resources for development projects—monetization—is an inherently inefficient yet expanding use of food aid. Monetization entails not only the costs of procuring, shipping, and handling food, but also the costs of marketing and selling it in recipient countries. Furthermore, the time and expertise needed to market and sell food abroad requires NGOs to divert resources from their core missions. However, the permissible use of revenues generated from this practice and the minimum level of monetization allowed by the law have expanded. The monetization rate for Title II nonemergency food aid has far exceeded the minimum requirement of 15 percent, reaching close to 70 percent in 2001 but declining to about 50 percent in 2005. Despite these inefficiencies, U.S. agencies do not collect or maintain data electronically on monetization revenues, and the lack of such data impedes the agencies’ ability to fully monitor the degree to which revenues can cover the costs related to monetization. USAID used to require that monetization revenues cover at least 80 percent of costs associated with delivering food to recipient countries, but this requirement no longer exists. Neither USDA nor USAID was able to provide us with data on the revenues generated through monetization. These agencies told us that the information should be in the results reports, which are in individual hard copies and not available in any electronic database. Various challenges to implementation, improving nutritional quality, and monitoring reduce the effectiveness of food aid programs in alleviating hunger. Since U.S. food aid assists only about 11 percent of the estimated hungry population worldwide, it is critical that donors and implementers use it effectively by ensuring that it reaches the most vulnerable populations and does not cause negative market impact. However, challenging operating environments and resource constraints limit implementation efforts in terms of developing reliable estimates of food needs and responding to crises in a timely manner with sufficient food and complementary assistance. Furthermore, some impediments to improving the nutritional quality of U.S. food aid, including lack of interagency coordination in updating food aid products and specifications, may prevent the most nutritious or appropriate food from reaching intended recipients. Despite these concerns, USAID and USDA do not sufficiently monitor food aid programs, particularly in recipient countries, as they have limited staff and competing priorities and face legal restrictions on the use of food aid resources. Some impediments to improving nutritional quality further reduce the effectiveness of food aid. Although U.S. agencies have made efforts to improve the nutritional quality of food aid, the appropriate nutritional value of the food and the readiness of U.S. agencies to address nutrition- related quality issues remain uncertain. Further, existing interagency food aid working groups have not resolved coordination problems on nutrition issues. Moreover, USAID and USDA do not have a central interagency mechanism to update food aid products and their specifications. As a result, vulnerable populations may not be receiving the most nutritious or appropriate food from the agencies, and disputes may occur when either agency attempts to update the products. Although USAID and USDA require implementing organizations to regularly monitor and report on the use of food aid, these agencies have undertaken limited field-level monitoring of food aid programs. Agency inspectors general have reported that monitoring has not been regular and systematic, that in some cases intended recipients have not received food aid, or that the number of recipients could not be verified. Our audit work also indicates that monitoring has been insufficient due to various factors including limited staff, competing priorities, and legal restrictions on the use of food aid resources. In fiscal year 2006, although USAID had some non-Title II-funded staff assigned to monitoring, it had only 23 Title II- funded USAID staff assigned to missions and regional offices in 10 countries to monitor programs costing about $1.7 billion in 55 countries. USDA administers a smaller proportion of food aid programs than USAID and its field-level monitoring of food aid programs is more limited. Without adequate monitoring from U.S. agencies, food aid programs may not effectively direct limited food aid resources to those populations most in need. As a result, agencies may not be accomplishing their goal of getting the right food to the right people at the right time. U.S. international food aid programs have helped hundreds of millions of people around the world survive and recover from crises since the Agricultural Trade Development and Assistance Act (P.L. 480) was signed into law in 1954. Nevertheless, in an environment of increasing emergencies, tight budget constraints, and rising transportation and business costs, U.S. agencies must explore ways to optimize the delivery and use of food aid. U.S. agencies have taken some measures to enhance their ability to respond to emergencies and streamline the myriad processes involved in delivering food aid. However, opportunities for further improvement remain to ensure that limited resources for U.S. food aid are not vulnerable to waste, are put to their most effective use, and reach the most vulnerable populations on a timely basis. To improve the efficiency of U.S. food aid—in terms of its amount, timeliness, and quality—we recommended in our previous report that the Administrator of USAID and the Secretaries of Agriculture and Transportation (1) improve food aid logistical planning through cost- benefit analysis of supply-management options; (2) work together and with stakeholders to modernize ocean transportation and contracting practices; (3) seek to minimize the cost impact of cargo preference regulations on food aid transportation expenditures by updating implementation and reimbursement methodologies to account for new supply practices; (4) establish a coordinated system for tracking and resolving food quality complaints; and (5) develop an information collection system to track monetization transactions. To improve the effective use of food aid, we recommended that the Administrator of USAID and the Secretary of Agriculture (1) enhance the reliability and use of needs assessments for new and existing food aid programs through better coordination among implementing organizations, make assessments a priority in informing funding decisions, and more effectively build on lessons from past targeting experiences; (2) determine ways to provide adequate nonfood resources in situations where there is sufficient evidence that such assistance will enhance the effectiveness of food aid; (3) develop a coordinated interagency mechanism to update food aid specifications and products to improve food quality and nutritional standards; and (4) improve monitoring of food aid programs to ensure proper management and implementation. DOT, USAID, and USDA—the three U.S. agencies to whom we directed our recommendations—have submitted written statements to congressional committees, as required by law, to report actions they have taken or begun to take to address our recommendations. In May 2007, these agencies established an interagency Executive Working Group to identify ways to respond to several of our recommendations. DOT stated that it strongly supported the transportation-related initiatives we recommended, noting that they offer the potential to help U.S. agencies achieve efficiencies and reduce ocean transportation costs while supporting the U.S. merchant fleet. USAID outlined actions it is considering, has initiated, or intends to take to address each of our nine recommendations. USDA stated that in general it found our recommendations to be helpful and cited some of its ongoing efforts to improve its food aid programs. However, USDA questioned some of our conclusions that it believed were the result of weaknesses in our methodology. For example, USDA does not agree that the current practice of monetization as a means to generate cash for development projects is an inherently inefficient use of resources. We maintain that it is an inherently inefficient use of resources because it requires food to be procured, shipped, and eventually sold, and the revenues from monetization may not recover shipping, handling, and other costs. Furthermore, U.S. agencies do not electronically collect data on monetization revenues, without which their ability to adequately monitor the degree to which revenues cover costs is impeded. We stand by our conclusions and recommendations, which are based on a rigorous and systematic review of multiple sources of evidence, including procurement and budget data, site visits, previous audits, agency studies, economic literature, and testimonial evidence collected in both structured and unstructured formats. Madam Chair and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions that you may have. Should you have any questions about this testimony, please contact Thomas Melito, Director, at (202) 512-9601 or MelitoT@gao.gov. Other major contributors to this testimony were Phillip Thomas (Assistant Director), Carol Bray, Ming Chen, Debbie Chung, Martin De Alteriis, Leah DeWolf, Mark Dowling, Etana Finkler, Kristy Kennedy, Joy Labez, Kendall Schaefer, and Mona Sehgal. The United States has principally employed six programs to deliver food aid: Public Law (P.L.) 480 Titles I, II, and III; Food for Progress; the McGovern-Dole Food for Education and Child Nutrition; and Section 416(b). Table 1 provides a summary of these food aid programs.

The United States is the largest global food aid donor, accounting for over half of all food aid supplies to alleviate hunger and support development. Since 2002, Congress has appropriated an average of $2 billion per year for U.S. food aid programs, which delivered an average of 4 million metric tons of food commodities per year. Despite growing demand for food aid, rising business and transportation costs have contributed to a 52 percent decline in average tonnage delivered between 2001 and 2006. These costs represent 65 percent of total emergency food aid, highlighting the need to maximize its efficiency and effectiveness. This testimony is based on a recent GAO report that examined some key challenges to the (1) efficiency of U.S. food aid programs and (2) effective use of U.S. food aid. Multiple challenges hinder the efficiency of U.S. food aid programs by reducing the amount, timeliness, and quality of food provided. Factors that cause inefficiencies include (1) insufficiently planned food and transportation procurement, reflecting uncertain funding processes, that increases delivery costs and time frames; (2) ocean transportation and contracting practices that create high levels of risk for ocean carriers, resulting in increased rates; (3) legal requirements that result in awarding of food aid contracts to more expensive service providers; and (4) inadequate coordination between U.S. agencies and food aid stakeholders in tracking and responding to food and delivery problems. U.S. agencies have taken some steps to address timeliness concerns. USAID has been stocking or prepositioning food domestically and abroad, and USDA has implemented a new transportation bid process, but the long-term cost effectiveness of these initiatives has not yet been measured. The current practice of using food aid to generate cash for development projects--monetization--is also inherently inefficient. Furthermore, since U.S. agencies do not collect monetization revenue data electronically, they are unable to adequately monitor the degree to which revenues cover costs. Numerous challenges limit the effective use of U.S. food aid. Factors contributing to limitations in targeting the most vulnerable populations include (1) challenging operating environments in recipient countries; (2) insufficient coordination among key stakeholders, resulting in disparate estimates of food needs; (3) difficulties in identifying vulnerable groups and causes of their food insecurity; and (4) resource constraints that adversely affect the timing and quality of assessments, as well as the quantity of food and other assistance. Furthermore, some impediments to improving the nutritional quality of U.S. food aid may reduce its benefits to recipients. Finally, U.S. agencies do not adequately monitor food aid programs due to limited staff, competing priorities, and restrictions on the use of food aid resources. As a result, these programs are vulnerable to not getting the right food to the right people at the right time.

The United States’ nuclear weapons stockpile comprises nine nuclear weapons types, all of which were designed during the Cold War. Two of these systems—the B61 and the W76—are currently being refurbished to extend their useful lives for up to 30 years through NNSA’s Life Extension Program. In May 2008, we reported that, over the past few years, NNSA and DOD have considered a variety of scenarios for the future composition of the nuclear stockpile that would be based on different stockpile sizes and the degree to which the stockpile would incorporate new RRW designs. For example, NNSA and DOD have considered how large the stockpile needs to be in order to maintain a sufficiently robust and responsive manufacturing infrastructure to respond to future global geopolitical events. In addition, NNSA and DOD have considered the number of warheads that will need to be either refurbished or replaced in the coming decades. However, NNSA and DOD have not issued requirements defining the size and composition of the future stockpile. We discussed one effect of this lack of clear stockpile requirements in our May 2008 report on plutonium pit manufacturing. Specifically, we found that in October 2006, NNSA proposed building a new, consolidated plutonium center at an existing DOE site that would be able to manufacture pits at a production capacity of 125 pits per year. However, by December 2007, NNSA stated that instead of building a new, consolidated plutonium center, its preferred action was to upgrade the existing pit production building at LANL to produce up to 80 pits per year. Although DOD officials agreed to support NNSA’s plan, these officials also stated that future changes to stockpile size, military requirements, and risk factors may ultimately lead to a revised, larger rate of production. This uncertainty has delayed NNSA in issuing final plans for its future pit manufacturing capability. Once a decision is made about the size and composition of the stockpile, NNSA should develop accurate estimates of the costs of transforming the nuclear weapons complex. In September 2007, a contractor provided NNSA with a range of cost estimates for over 10 different Complex Transformation alternatives. For example, the contractor estimated that the cost of NNSA’s preferred action would be approximately $79 billion over the period 2007 through 2060. This option was also determined to be the least expensive. In contrast, the contractor’s estimate for a consolidated nuclear production center—another alternative that would consolidate plutonium, uranium, and weapons assembly and disassembly at one site—totaled $80 billion over the same period. Although these estimates differ by only $1 billion over 53 years, they are based on significantly different assumptions. Specifically, NNSA’s preferred action assumes a manufacturing capacity of up to 80 pits per year, and the alternative for a consolidated nuclear production center assumes a capacity of 125 pits per year. In addition, the contractor cautioned that because its cost analysis was not based on any specific conceptual designs for facilities such as the consolidated nuclear production center, it had not developed cost estimates for specific projects. As a result, the contractor stated that its estimates should not be used to predict a budget-level project cost. Historically, NNSA has had difficulty developing realistic, defensible cost estimates, especially for large, complex projects. For example, in March 2007, we found that 8 of the 12 major construction projects that DOE and NNSA were managing had exceeded their initial cost estimates. One project, the Highly Enriched Uranium Materials Facility nearing completion at the Y-12 Plant, has exceeded its original cost estimate by over 100 percent, or almost $300 million. We reported that the reasons for this cost increase included poor management and contractor oversight. In addition, NNSA’s cost estimate for constructing the Chemistry and Metallurgy Research Replacement Facility has more than doubled—from $838 million to over $2 billion—since our April 2006 testimony. This revised cost estimate is so uncertain that NNSA did not include any annual cost estimates beyond fiscal year 2009 in its fiscal year 2009 budget request to the Congress. Finally, the preliminary results of our ongoing review of NNSA’s Life Extension Program for this Subcommittee show that NNSA’s cost estimate for refurbishing each B61 nuclear bomb has doubled since 2002. NNSA does not expect to issue a record of decision on Complex Transformation until later this year. As a result, we do not know the ultimate decision that NNSA will make—whether to modernize existing sites in the weapons complex or consolidate operations at new facilities. We expect that once NNSA makes this decision, NNSA will put forward a transformation plan with specific milestones to implement its decision. Without such a plan, NNSA will have no way to evaluate its progress, and the Congress will have no way to hold NNSA accountable. However, over the past decade, we have repeatedly documented problems with NNSA’s process for planning and managing its activities. For example, in a December 2000 report, we found that NNSA needed to improve its planning process so that there were linkages between individual plans across the Stockpile Stewardship Program and that the milestones contained in NNSA’s plans were reflected in contractors’ performance criteria and evaluations. However, in February 2006, we reported similar problems with how NNSA is managing the implementation and reliability of the nuclear stockpile. Specifically, we found that NNSA planning documents did not contain clear, consistent milestones or a comprehensive list of the scientific research being conducted across the weapons complex in support of NNSA’s Primary and Secondary Assessment Technologies programs. These programs are responsible for setting the requirements for the computer codes and experimental data needed to assess and certify the safety and reliability of nuclear warheads. We also found that NNSA had not established adequate performance measures to determine the progress of the weapons laboratories in developing and implementing this new methodology. As we noted in July 2003, one of the key practices for successfully transforming an organization is to ensure that top leadership sets the direction, pace, and tone for the transformation. One of the key problems that NNSA has experienced has been its inability to build an organization with clear lines of authority and responsibility. We also reported in January 2004 that NNSA, as a result of reorganizations, has shown that it can move from what was often called a “dysfunctional bureaucracy” to an organization with clearer lines of authority and responsibility. In this regard, we stated in our April 2006 testimony that NNSA’s proposed Office of Transformation needed to be vested with the necessary authority and resources to set priorities, make timely decisions, and move quickly to implement those decisions. It was our view that the Office of Transformation should (1) report directly to the Administrator of NNSA; (2) be given sufficient authority to conduct its studies and implement its recommendations; and (3) be held accountable for creating real change within the weapons complex. In 2006, NNSA created an Office of Transformation to oversee its Complex Transformation efforts. This office has been involved in overseeing early activities associated with Complex Transformation, such as the issuance of the December 2007 draft report on the potential environmental impacts of alternative Complex Transformation actions. However, the Office of Transformation does not report directly to the Administrator of NNSA. Rather, the Office reports to the head of NNSA’s Office of Defense Programs. In this respect, we are concerned that the Office of Transformation may not have sufficient authority to set transformation priorities for all of NNSA, specifically as they affect nuclear nonproliferation programs. Because NNSA’s ultimate decision on the path forward for Complex Transformation has not yet been made, it remains to be seen whether the office has sufficient authority to enforce transformation decisions or whether it will be held accountable within NNSA for these decisions. Madam Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have at this time. For further information on this testimony, please contact me at (202) 512- 3841 or aloisee@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Ryan T. Coles, Assistant Director; Allison Bawden; Jason Holliday; Leland Cogliani; Marc Castellano; and Carol Herrnstadt Shulman made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. This published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Over the past several years, a serious effort has begun to comprehensively reevaluate how the United States maintains its nuclear deterrent and what the nation's approach should be for transforming its aging nuclear weapons complex. The National Nuclear Security Administration (NNSA), a separately organized agency within the Department of Energy (DOE), is responsible for overseeing this weapons complex, which comprises three nuclear weapons design laboratories, four production plants, and the Nevada Test Site. In December 2007, NNSA issued a draft report on potential environmental impacts of alternative actions to transform the nuclear weapons complex, which NNSA refers to as Complex Transformation. NNSA's preferred action is to establish a number of "distributed centers of excellence" at sites within the existing nuclear weapons complex, including the Los Alamos National Laboratory for plutonium capabilities, the Y-12 Plant for uranium capabilities, and the Pantex Plant for weapons assembly, disassembly, and high explosives manufacturing. NNSA would continue to operate these facilities to maintain and refurbish the existing nuclear weapons stockpile as it makes the transition to a smaller, more responsive infrastructure. GAO was asked to discuss NNSA's Complex Transformation proposal. This testimony is based on previous GAO work. Transforming the nuclear weapons complex will be a daunting task. In April 2006 testimony before the Subcommittee on Energy and Water Development, House Committee on Appropriations, GAO identified four actions that, in its view, were critical to successfully achieving the transformation of the complex. On the basis of completed and ongoing GAO work on NNSA's management of the nuclear weapons complex, GAO remains concerned about NNSA's and the Department of Defense's (DOD) ability to carefully and fully implement these four actions. For this reason, GAO believes that the Congress must remain vigilant in its oversight of Complex Transformation. Specifically, NNSA and DOD have not established clear, long-term requirements for the nuclear weapons stockpile. While NNSA and DOD have considered a variety of scenarios for the future composition of the nuclear weapons stockpile, no requirements have been issued. It is GAO's view that NNSA will not be able to develop accurate cost estimates or plans for Complex Transformation until stockpile requirements are known. Further, recent GAO work found that the absence of stockpile requirements is affecting NNSA's plans for manufacturing a critical nuclear weapon component. NNSA has had difficulty developing realistic cost estimates for large, complex projects. In September 2007, a contractor provided NNSA with a range of cost estimates for over 10 different Complex Transformation alternatives. However, the contractor stated that (1) its analysis was based on rough order-of-magnitude estimates and (2) NNSA should not use its cost estimates to predict budget-level project costs. In addition, in March 2007 GAO reported that 8 of 12 major construction projects being managed by DOE and NNSA had exceeded their initial cost estimates. NNSA will need to develop a transformation plan with clear, realistic milestones. GAO expects that once NNSA decides the path forward for Complex Transformation later this year, NNSA will put forward such a plan. However, GAO has repeatedly documented problems with NNSA's ability to implement its plans. For example, in February 2006 GAO reported problems with the planning documents that NNSA was using to manage the implementation of its new approach for assessing and certifying the safety and reliability of the nuclear stockpile. Successful transformation requires strong leadership. In 2006, NNSA created an Office of Transformation to oversee its Complex Transformation activities. However, GAO is concerned that the Office of Transformation may not have sufficient authority to set transformation priorities for all of NNSA, specifically as they affect nuclear nonproliferation programs.

Our review of medical records for a sample of newly enrolled veterans at six VA medical centers found several problems in medical centers’ processing of veterans’ requests that VA contact them to schedule appointments, and thus not all newly enrolled veterans were able to access primary care. For the 60 newly enrolled veterans in our review who requested care but had not been seen by primary care providers, we found that 29 did not receive appointments due to the following problems in the appointment scheduling process: Veterans did not appear on VHA’s New Enrollee Appointment Request (NEAR) list. We found that although 17 newly enrolled veterans in our review requested that VA contact them to schedule appointments, medical center officials said that schedulers did not contact the veterans because they had not appeared on the NEAR list. According to VHA policy, as outlined in its July 2014 interim scheduling guidance, VA medical center staff should contact newly enrolled veterans to schedule appointments within 7 days from the date they were placed on the NEAR list. Medical center officials were not aware that this problem was occurring, and could not definitively tell us why these veterans never appeared on the NEAR list. VA medical center staff did not follow VHA scheduling policy. We found that VA medical centers did not follow VHA policies for contacting newly enrolled veterans for 12 veterans in our review. VHA policy states that medical centers should document three attempts to contact each newly enrolled veteran by phone, and if unsuccessful, send the veteran a letter. However, for 5 of 12 newly enrolled veterans, our review of their medical records revealed no attempts to contact them, and medical center officials could not tell us whether the veterans had ever been contacted to schedule appointments. Medical center staff attempted to contact the other 7 veterans at least once each, but failed to reach out to them with the frequency required by VHA policy. For the remaining 31 of 60 newly enrolled veterans included in our review who did not have a primary care appointment: 24 were unable to be contacted to schedule appointments or upon contact, declined care, according to VA medical center officials. These officials said that in some cases they were unable to contact veterans due to incorrect or incomplete contact information in veterans’ enrollment applications; in other cases, they said veterans were seeking a VA identification card, for example, and did not want to be seen by a provider at the time they were contacted. 7 had appointments scheduled but had not been seen by primary care providers at the time of our review. Four of those veterans had initial appointments that needed to be rescheduled, which had not yet been done at the time of our review. Appointments for the remaining 3 veterans were scheduled after VHA provided us with a list of veterans who had requested care. For the 120 newly enrolled veterans across the six VA medical centers in our review who requested care and were seen by primary care providers, we found the average number of days between newly enrolled veterans’ initial requests that VA contact them to schedule appointments and the dates the veterans were seen by primary care providers ranged from 22 days to 71 days. Slightly more than half of the 120 veterans in our sample were seen by providers in less than 30 days; however, veterans’ experiences varied widely, even within the same medical center, and 12 of the 120 veterans in our review waited more than 90 days to be seen by a provider. We found that two factors generally impacted newly enrolled veterans’ experiences regarding the number of days it took to be seen by primary care providers: 1. Appointments were not always available when veterans wanted to be seen, which contributed to delays in receiving care. For example, one veteran was contacted within 7 days of being placed on the NEAR list, but no appointment was available until 73 days after the veteran’s preferred appointment date, and a total of 94 days elapsed before the veteran was seen by a provider. In another example, a veteran wanted to be seen as soon as possible, but no appointment was available for 63 days. Officials at each of the six medical centers in our review told us that they have difficulty keeping up with the demand for primary care appointments for new patients because of shortages in the number of providers, or lack of space due to rapid growth in the demand for these services. 2. Weaknesses in VA medical center scheduling practices may have impacted the amount of time it took for veterans to see primary care providers and contributed to unnecessary delays. Staff at the medical centers in our review did not always contact veterans to schedule appointments in accordance with VHA policy, which states that attempts to contact newly enrolled veterans to schedule appointments must be made within 7 days of their addition to the NEAR list. Among the 120 veterans included in our review that were seen by primary care providers, 37 (31 percent) were not contacted within 7 days to schedule an appointment; compliance varied across medical centers. As a result of these findings, we recommended that VHA review its processes for identifying and documenting newly enrolled veterans requesting appointments and revise as appropriate, to ensure that all veterans requesting appointments are contacted in a timely manner to schedule them. VHA concurred with this recommendation, and indicated that by December 31, 2016, it plans to review and revise the process from enrollment to scheduling to ensure that newly enrolled veterans requesting appointments are contacted in a timely manner. VHA also indicated that it will implement internal controls to ensure its medical centers are appropriately implementing the process. VHA’s oversight of veterans’ access to primary care is hindered, in part, by data weaknesses and the lack of a comprehensive scheduling policy, both of which are inconsistent with federal internal control standards. These standards call for agencies to have reliable data and effective policies to achieve their objectives, and for information to be recorded and communicated to the entity’s management and others who need it to carry out their responsibilities. A key component of VHA’s oversight of veterans’ access to primary care, particularly for newly enrolled veterans, relies on monitoring appointment wait times. However, VHA monitors only a portion of the overall time it takes newly enrolled veterans to access primary care. For newly enrolled veterans, VHA calculates primary care appointment wait times starting from veterans’ preferred dates, rather than the dates veterans initially requested that VA contact them to schedule appointments. (A preferred date is the date that is established when a scheduler contacts the veteran to determine when he or she wants to be seen.) Therefore, these data do not capture the time veterans wait prior to being contacted by schedulers, making it difficult for officials to identify and remedy scheduling problems that may arise prior to making contact with veterans. (See fig. 1.) Our review of medical records for 120 newly enrolled veterans found that, on average, the total amount of time it took to be seen by primary care providers was much longer when measured from the dates veterans initially requested VA contact them to schedule appointments than it was when using appointment wait times calculated using veterans’ preferred dates as the starting point. For example, we found one veteran applied for VHA health care benefits in December 2014, which included a request to be contacted for an initial appointment. The VA medical center contacted the veteran to schedule a primary care appointment 43 days later. When making the appointment, the medical center recorded the veteran’s preferred date as March 1, 2015, and the veteran saw a provider on March 3, 2015. Although the medical center’s data showed the veteran waited 2 days to see a provider, the total amount of time that elapsed from the veteran’s request until the veteran was seen was actually 76 days. Further, ongoing scheduling errors, such as incorrectly revising preferred dates when rescheduling appointments, understated the amount of time veterans waited to see providers. For example, during our review of appointment scheduling for 120 newly enrolled veterans, we found that schedulers in three of the six VA medical centers included in our review had made errors in recording veterans’ preferred dates when making appointments. For example, in some cases primary care clinics cancelled appointments, and when those appointments were re-scheduled, schedulers did not always maintain the original preferred dates in the system, but updated them to reflect new preferred dates recorded when the appointments were rescheduled. We found 15 appointments for which schedulers had incorrectly revised the preferred dates. In these cases, we recalculated the appointment wait time based on what should have been the correct preferred dates, according to VHA policy, and found the wait- time data contained in the scheduling system were understated. Officials attributed these errors to confusion by schedulers resulting from the lack of an updated standardized scheduling directive, which VHA rescinded and replaced with an interim directive in July 2014. As in our previous work, we continue to find scheduling errors that affect the reliability of wait-time data used for oversight, which make it difficult to effectively oversee newly enrolled veterans’ access to primary care. As a result of these findings, we recommended that VHA monitor the full amount of time newly enrolled veterans wait to receive primary care, and issue an updated scheduling directive. VHA concurred with both of these recommendations, and indicated that by December 31, 2016, it plans to begin monitoring the full amount of time newly enrolled veterans wait to be seen by primary care providers. It also indicated that it plans to submit a revised scheduling directive for VHA-wide internal review by May 1, 2016. This most recent work on veterans’ access to primary care expands further the litany of VA health care deficiencies and weaknesses that we have identified over the years, particularly since 2010. As of April 1, 2016, there were about 90 GAO recommendations regarding veterans’ health care awaiting action by VHA. These include more than a dozen recommendations to address weaknesses in the provision and oversight of veterans’ access to timely primary and specialty care, including mental health care. Until VHA can make meaningful progress in addressing these and other recommendations, which underscore a system in need of major transformation, the quality and safety of health care for our nation’s veterans is at risk. Chairman Miller, Ranking Member Brown, and Members of the Committee, this concludes my prepared statement. I would be pleased to answer any questions that you may have at this time. If you or your staff members have any questions concerning this testimony, please contact Debra A. Draper at (202) 512-7114 or draper@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals who made key contributions are Janina Austin, Assistant Director; Jennie F. Apter; Emily Binek; David Lichtenfeld; Vikki L. Porter; Brienne Tierney; and Emily Wilson. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This testimony summarizes the information contained in GAO's March 2016 report, entitled VA Health Care: Actions Needed to Improve Newly Enrolled Veterans' Access to Primary Care , GAO-16-328 . GAO found that not all newly enrolled veterans were able to access primary care from the Department of Veterans Affairs' (VA) Veterans Health Administration (VHA), and others experienced wide variation in the amount of time they waited for care. Sixty of the 180 newly enrolled veterans in GAO's review had not been seen by providers at the time of the review; nearly half were unable to access primary care because VA medical center staff did not schedule appointments for these veterans in accordance with VHA policy. The 120 newly enrolled veterans in GAO's review who were seen by providers waited from 22 days to 71 days from their requests that VA contact them to schedule appointments to when they were seen, according to GAO's analysis. These time frames were impacted by limited appointment availability and weaknesses in medical center scheduling practices, which contributed to unnecessary delays. VHA's oversight of veterans' access to primary care is hindered, in part, by data weaknesses and the lack of a comprehensive scheduling policy. This is inconsistent with federal internal control standards, which call for agencies to have reliable data and effective policies to achieve their objectives. For newly enrolled veterans, VHA calculates primary care appointment wait times starting from the veterans' preferred dates (the dates veterans want to be seen), rather than the dates veterans initially requested VA contact them to schedule appointments. Therefore, these data do not capture the time these veterans wait prior to being contacted by schedulers, making it difficult for officials to identify and remedy scheduling problems that arise prior to making contact with veterans. Further, ongoing scheduling errors, such as incorrectly revising preferred dates when rescheduling appointments, understated the amount of time veterans waited to see providers. Officials attributed these errors to confusion by schedulers, resulting from the lack of an updated standardized scheduling policy. These errors continue to affect the reliability of wait-time data used for oversight, which makes it more difficult to effectively oversee newly enrolled veterans' access to primary care.

The tens of thousands of individuals who responded to the September 11, 2001, attack on the WTC experienced the emotional trauma of the disaster and were exposed to a noxious mixture of dust, debris, smoke, and potentially toxic contaminants, such as pulverized concrete, fibrous glass, particulate matter, and asbestos. A wide variety of health effects have been experienced by responders to the WTC attack, including injuries and respiratory conditions such as sinusitis, asthma, and a new syndrome called WTC cough, which consists of persistent coughing accompanied by severe respiratory symptoms. Commonly reported mental health effects among responders and other affected individuals included symptoms associated with post-traumatic stress disorder, depression, and anxiety. Behavioral health effects such as alcohol and tobacco use have also been reported. There are six key programs that currently receive federal funding to provide voluntary health screening, monitoring, or treatment at no cost to responders. The six WTC health programs, shown in table 1, are (1) the FDNY WTC Medical Monitoring and Treatment Program; (2) the New York/New Jersey (NY/NJ) WTC Consortium, which comprises five clinical centers in the NY/NJ area; (3) the WTC Federal Responder Screening Program; (4) the WTC Health Registry; (5) Project COPE; and (6) the Police Organization Providing Peer Assistance (POPPA) program. The programs vary in aspects such as the HHS administering agency or component responsible for administering the funding; the implementing agency, component, or organization responsible for providing program services; eligibility requirements; and services. The WTC health programs that are providing screening and monitoring are tracking thousands of individuals who were affected by the WTC disaster. As of June 2007, the FDNY WTC program had screened about 14,500 responders and had conducted follow-up examinations for about 13,500 of these responders, while the NY/NJ WTC Consortium had screened about 20,000 responders and had conducted follow-up examinations for about 8,000 of these responders. Some of the responders include nonfederal responders residing outside the NYC metropolitan area. As of June 2007, the WTC Federal Responder Screening Program had screened 1,305 federal responders and referred 281 responders for employee assistance program services or specialty diagnostic services. In addition, the WTC Health Registry, a monitoring program that consists of periodic surveys of self-reported health status and related studies but does not provide in- person screening or monitoring, collected baseline health data from over 71,000 people who enrolled in the registry. In the winter of 2006, the registry began its first adult follow-up survey, and as of June 2007 over 36,000 individuals had completed the follow-up survey. In addition to providing medical examinations, FDNY’s WTC program and the NY/NJ WTC Consortium have collected information for use in scientific research to better understand the health effects of the WTC attack and other disasters. The WTC Health Registry is also collecting information to assess the long-term public health consequences of the disaster. In February 2006, the Secretary of HHS designated the Director of NIOSH to take the lead in ensuring that the WTC health programs are well coordinated, and in September 2006 the Secretary established the WTC Task Force to advise him on federal policies and funding issues related to responders’ health conditions. The chair of the task force is HHS’s Assistant Secretary for Health, and the vice chair is the Director of NIOSH. NIOSH has not ensured the availability of screening and monitoring services for nonfederal responders residing outside the NYC metropolitan area, although it has taken steps toward expanding the availability of these services. Initially, NIOSH made two efforts to provide screening and monitoring services for these responders, the exact number of whom is unknown. The first effort began in late 2002 when NIOSH awarded a contract for about $306,000 to the Mount Sinai School of Medicine to provide screening services for nonfederal responders residing outside the NYC metropolitan area and directed it to establish a subcontract with AOEC. AOEC then subcontracted with 32 of its member clinics across the country to provide screening services. From February 2003 to July 2004, the 32 AOEC member clinics screened 588 nonfederal responders nationwide. AOEC experienced challenges in providing these screening services. For example, many nonfederal responders did not enroll in the program because they did not live near an AOEC clinic, and the administration of the program required substantial coordination among AOEC, AOEC member clinics, and Mount Sinai. Mount Sinai’s subcontract with AOEC ended in July 2004, and from August 2004 until June 2005 NIOSH did not fund any organization to provide services to nonfederal responders outside the NYC metropolitan area. During this period, NIOSH focused on providing screening and monitoring services for nonfederal responders in the NYC metropolitan area. In June 2005, NIOSH began its second effort by awarding $776,000 to the Mount Sinai School of Medicine Data and Coordination Center (DCC) to provide both screening and monitoring services for nonfederal responders residing outside the NYC metropolitan area. In June 2006, NIOSH awarded an additional $788,000 to DCC to provide screening and monitoring services for these responders. NIOSH officials told us that they assigned DCC the task of providing screening and monitoring services to nonfederal responders outside the NYC metropolitan area because the task was consistent with DCC’s responsibilities for the NY/NJ WTC Consortium, which include data monitoring and coordination. DCC, however, had difficulty establishing a network of providers that could serve nonfederal responders residing throughout the country—ultimately contracting with only 10 clinics in seven states to provide screening and monitoring services. DCC officials said that as of June 2007 the 10 clinics were monitoring 180 responders. In early 2006, NIOSH began exploring how to establish a national program that would expand the network of providers to provide screening and monitoring services, as well as treatment services, for nonfederal responders residing outside the NYC metropolitan area. According to NIOSH, there have been several challenges involved in expanding a network of providers to screen and monitor nonfederal responders nationwide. These include establishing contracts with clinics that have the occupational health expertise to provide services nationwide, establishing patient data transfer systems that comply with applicable privacy laws, navigating the institutional review board process for a large provider network, and establishing payment systems with clinics participating in a national network of providers. On March 15, 2007, NIOSH issued a formal request for information from organizations that have an interest in and the capability of developing a national program for responders residing outside the NYC metropolitan area. In this request, NIOSH described the scope of a national program as offering screening, monitoring, and treatment services to about 3,000 nonfederal responders through a national network of occupational health facilities. NIOSH also specified that the program’s facilities should be located within reasonable driving distance to responders and that participating facilities must provide copies of examination records to DCC. In May 2007, NIOSH approved a request from DCC to redirect about $125,000 from the June 2006 award to establish a contract with a company to provide screening and monitoring services for nonfederal responders residing outside the NYC metropolitan area. Subsequently, DCC contracted with QTC Management, Inc., one of the four organizations that had responded to NIOSH’s request for information. DCC’s contract with QTC does not include treatment services, and NIOSH officials are still exploring how to provide and pay for treatment services for nonfederal responders residing outside the NYC metropolitan area. QTC has a network of providers in all 50 states and the District of Columbia and can use internal medicine and occupational medicine doctors in its network to provide these services. In addition, DCC and QTC have agreed that QTC will identify and subcontract with providers outside of its network to screen and monitor nonfederal responders who do not reside within 25 miles of a QTC provider. In June 2007, NIOSH awarded $800,600 to DCC for coordinating the provision of screening and monitoring examinations, and QTC was to receive a portion of this award from DCC to provide about 1,000 screening and monitoring examinations through May 2008. According to a NIOSH official, QTC’s providers began conducting screening examinations in summer 2007. Screening and monitoring the health of the people who responded to the September 11, 2001, attack on the World Trade Center are critical for identifying health effects already experienced by responders or those that may emerge in the future. In addition, collecting and analyzing information produced by screening and monitoring responders can give health care providers information that could help them better diagnose and treat responders and others who experience similar health effects. While many responders have been able to obtain screening and follow-up physical and mental health examinations through the federally funded WTC health programs, other responders may not always find these services available. Specifically, many responders who reside outside the NYC metropolitan area have not been able to obtain screening and monitoring services because available services are too distant. Moreover, HHS has repeatedly interrupted its efforts to provide services outside the NYC area, resulting in periods when no such services were available. HHS continues to fund and coordinate the WTC health programs and has key federal responsibility for ensuring the availability of services to responders. HHS and its agencies have taken steps to move toward providing screening and monitoring services to nonfederal responders living outside of the NYC area. However, these efforts are not complete, and the stop-and-start history of the department’s efforts to serve these responders does not provide assurance that the latest efforts to extend screening and monitoring services to them will be successful and will be sustained over time. Therefore we recommended in July 2007 that the Secretary of HHS take expeditious action to ensure that health screening and monitoring services are available to all people who responded to the attack on the WTC, regardless of where they reside. As of January 2008, the department has not responded to this recommendation. Mr. Chairman, this completes my prepared remarks. I would be happy to respond to any questions you or other members of the subcommittee may have at this time. For further information about this testimony, please contact Cynthia A. Bascetta at (202) 512-7114 or bascettac@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Helene F. Toiv, Assistant Director; Hernan Bozzolo; Frederick Caison; Anne Dievler; Anne Hopewell; and Roseanne Price made key contributions to this statement. September 11: Improvements Needed in Availability of Health Screening and Monitoring Services for Responders. GAO-07-1229T. Washington, D.C.: September 10, 2007. September 11: HHS Needs to Ensure the Availability of Health Screening and Monitoring for All Responders. GAO-07-892. Washington, D.C.: July 23, 2007. September 11: HHS Has Screened Additional Federal Responders for World Trade Center Health Effects, but Plans for Awarding Funds for Treatment Are Incomplete. GAO-06-1092T. Washington, D.C.: September 8, 2006. September 11: Monitoring of World Trade Center Health Effects Has Progressed, but Program for Federal Responders Lags Behind. GAO-06-481T. Washington, D.C.: February 28, 2006. September 11: Monitoring of World Trade Center Health Effects Has Progressed, but Not for Federal Responders. GAO-05-1020T. Washington, D.C.: September 10, 2005. September 11: Health Effects in the Aftermath of the World Trade Center Attack. GAO-04-1068T. Washington, D.C.: September 8, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Six years after the attack on the World Trade Center (WTC), concerns persist about health effects experienced by WTC responders and the availability of health care services for those affected. Several federally funded programs provide screening, monitoring, or treatment services to responders. GAO has previously reported on the progress made and implementation problems faced by these WTC health programs. This testimony is based primarily on GAO's testimony, September 11: Improvements Needed in Availability of Health Screening and Monitoring Services for Responders ( GAO-07-1229T , Sept. 10, 2007), which updated GAO's report, September 11: HHS Needs to Ensure the Availability of Health Screening and Monitoring for All Responders ( GAO-07-892 , July 23, 2007). In this testimony, GAO discusses efforts by the Centers for Disease Control and Prevention's National Institute for Occupational Safety and Health (NIOSH) to provide services for nonfederal responders residing outside the New York City (NYC) area. For the July 2007 report, GAO reviewed program documents and interviewed Department of Health and Human Services (HHS) officials, grantees, and others. GAO updated selected information in August and September 2007 and conducted work for this statement in January 2008. In July 2007, following a reexamination of the status of the WTC health programs, GAO recommended that the Secretary of HHS take expeditious action to ensure that health screening and monitoring services are available to all people who responded to the WTC attack, regardless of where they reside. As of January 2008, the department has not responded to this recommendation. As GAO testified in September 2007, NIOSH has not ensured the availability of screening and monitoring services for nonfederal responders residing outside the NYC area, although it has taken steps toward expanding the availability of these services. In late 2002, NIOSH arranged for a network of occupational health clinics to provide screening services. This effort ended in July 2004, and until June 2005 NIOSH did not fund screening or monitoring services for nonfederal responders outside the NYC area. In June 2005, NIOSH funded the Mount Sinai School of Medicine Data and Coordination Center (DCC) to provide screening and monitoring services; however, DCC had difficulty establishing a nationwide network of providers and contracted with only 10 clinics in seven states. In 2006, NIOSH began to explore other options for providing these services, and in 2007 it took steps toward expanding the provider network.

Consistent with the premise that physicians play a central role in the generation of most health care expenditures, some health care purchasers employ physician profiling to promote efficiency. We selected 10 health care purchasers that profiled physicians in their networks—that is, compared physicians’ performance to an efficiency standard to identify those who practiced inefficiently. To measure efficiency, the purchasers we spoke with generally compared actual spending for physicians’ patients to the expected spending for those same patients, given their clinical and demographic characteristics. Most purchasers said they also evaluated physicians on quality. The purchasers linked their efficiency profiling results and other measures to a range of physician-focused strategies to encourage the efficient provision of care. Some of the purchasers said their profiling efforts produced savings. The 10 health care purchasers we examined used two basic profiling approaches to identify physicians whose medical practices were inefficient. One approach focused on the costs associated with treating a specific episode of illness—such as a stroke or heart attack. The other approach focused on costs, within a specific period, associated with the patients in a physician’s practice. Both approaches used information from medical claims data to measure resource use and account for differences in patients’ health status. In addition, both approaches assessed physicians (or physician groups) based on the costs associated with services that they may not have provided directly, such as costs associated with a hospitalization or services provided by a different physician. Although the methods used by purchasers to predict patient spending varied, all used patient demographics and diagnoses. The methods they used generally computed efficiency measures as the ratio of actual to expected spending for patients of similar health status. In addition, all of the purchasers we interviewed profiled specialists and all but one also profiled primary care physicians. Several purchasers said they would only profile physicians who treated an adequate number of cases, since such analyses typically require a minimum sample size to be valid. The health care purchasers we examined directly tied the results of their profiling methods to incentives that encourage physicians in their networks to practice efficiently. The incentives varied widely in design, application, and severity of consequences. Purchasers used incentives that included educating physicians to encourage more efficient care, designating in their physician directories those physicians who met efficiency and quality standards, dividing physicians into tiers based on efficiency and giving enrollees financial incentives to see physicians in particular tiers, providing bonuses or imposing penalties based on efficiency and quality excluding inefficient physicians from the network. Evidence from our interviews with the health care purchasers suggests that physician profiling programs may have the potential to generate savings for health care purchasers. Three of the 10 purchasers reported that the profiling programs produced savings and provided us with estimates of savings attributable to their physician-focused efficiency efforts. For example, 1 of those purchasers reported that growth in spending fell from 12 percent to about 1 percent in the first year after it restructured its network as part of its efficiency program, and an actuarial firm hired by the purchaser estimated that about three quarters of the reduction in expenditure growth was most likely a result of the efficiency program. Three other purchasers suggested their programs might have achieved savings but did not provide savings estimates, while four said they had not attempted to measure savings at the time of our interviews. Having considered the efforts of other health care purchasers in profiling physicians for efficiency, we conducted our own profiling analysis of physician practices in Medicare and found individual physicians who were likely to practice medicine inefficiently in each of 12 metropolitan areas studied. We focused our analysis on generalists—physicians who described their specialty as general practice, internal medicine, or family practice. We did not include specialists in our analysis. We selected areas that were diverse geographically and in terms of Medicare spending per beneficiary. Under our methodology, we computed the percentage of overly expensive patients in each physician’s Medicare practice. To identify overly expensive patients, we grouped the Medicare beneficiaries in the 12 locations according to their health status, using diagnosis and demographic information. Patients whose total Medicare expenditures— for services provided by all health providers, not just physicians—far exceeded those of other patients in their same health status grouping were classified as overly expensive. Once these patients were identified and linked to the physicians who treated them, we were able to determine which physicians treated a disproportionate share of these patients compared with their generalist peers in the same location. We classified these physicians as outliers—that is, physicians whose proportions of overly expensive patients would occur by chance less than 1 time in 100. We concluded that these outlier physicians were likely to be practicing medicine inefficiently. Based on 2003 Medicare claims data, our analysis found outlier generalist physicians in all 12 metropolitan areas we studied. In two of the areas, outlier generalists accounted for more than 10 percent of the area’s generalist physician population. In the remaining areas, the proportion of outlier generalists ranged from 2 percent to about 6 percent of the area’s generalist population. Medicare’s data-rich environment is conducive to identifying physicians who are likely to practice medicine inefficiently. Fundamental to this effort is the ability to make statistical comparisons that enable health care purchasers to identify physicians practicing outside of established standards. CMS has the tools to make statistically valid comparisons, including comprehensive medical claims information, sufficient numbers of physicians in most areas to construct adequate sample sizes, and methods to adjust for differences in patient health status. Among the resources available to CMS are the following: Comprehensive source of medical claims information. CMS maintains a centralized repository, or database, of all Medicare claims that provides a comprehensive source of information on patients’ Medicare-covered medical encounters. Using claims from the central database, each of which includes the beneficiary’s unique identification number, CMS can identify and link patients to the various types of services they received and to the physicians who treated them. Data samples large enough to ensure meaningful comparisons across physicians. The feasibility of using efficiency measures to compare physicians’ performance depends, in part, on two factors: the availability of enough data on each physician to compute an efficiency measure and numbers of physicians large enough to provide meaningful comparisons. In 2005, Medicare’s 33.6 million fee-for-service enrollees were served by about 618,800 physicians. These figures suggest that CMS has enough clinical and expenditure data to compute efficiency measures for most physicians billing Medicare. Methods to account for differences in patient health status. Because sicker patients are expected to use more health care resources than healthier patients, the health status of patients must be taken into account to make meaningful comparisons among physicians. Medicare has significant experience with risk adjustment. Specifically, CMS has used increasingly sophisticated risk adjustment methodologies over the past decade to set payment rates for beneficiaries enrolled in managed care plans. To conduct profiling analyses, CMS would likely make methodological decisions similar to those made by the health care purchasers we interviewed. For example, the health care purchasers we spoke with made choices about whether to profile individual physicians or group practices; which risk adjustment tool was best suited for a purchaser’s physician and enrollee population; whether to measure costs associated with episodes of care or the costs, within a specific time period, associated with the patients in a physician’s practice; and what criteria to use to identify inefficient practice patterns. Our experience in examining what health care purchasers other than Medicare are doing to improve physician efficiency and in analyzing Medicare claims has enabled us to gain some insights into the potential of physician profiling to improve Medicare program efficiency. A primary virtue of profiling is that, coupled with incentives to encourage efficiency, it can create a system that operates at the individual physician level. In this way, profiling can address a principal criticism of the SGR system, which only operates at the aggregate physician level. Although savings from physician profiling alone would clearly not be sufficient to correct Medicare’s long-term fiscal imbalance, it could be an important part of a package of reforms aimed at future program sustainability. Mr. Chairman, this concludes my prepared remarks. I will be pleased to answer any questions you or the subcommittee members may have. For future contacts regarding this testimony, please contact A. Bruce Steinwald at (202) 512-7101 or at steinwalda@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals who made key contributions include James Cosgrove and Phyllis Thorburn, Assistant Directors; Todd Anderson; Alex Dworkowitz; Hannah Fein; Gregory Giusto; Richard Lipinski; and Eric Wedum. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Medicare's current system of spending targets used to moderate spending growth for physician services and annually update physician fees is problematic. This spending target system--called the sustainable growth rate (SGR) system--adjusts physician fees based on the extent to which actual spending aligns with specified targets. In recent years, because spending has exceeded the targets, the system has called for fee cuts. Since 2003, the cuts have been averted through administrative or legislative action, thus postponing the budgetary consequences of excess spending. Under these circumstances, policymakers are seeking reforms that can help moderate spending growth while ensuring that beneficiaries have appropriate access to care. For today's hearing, the Subcommittee on Health, House Committee on Energy and Commerce, which is exploring options for improving how Medicare pays physicians, asked GAO to share the preliminary results of its ongoing study related to this topic. GAO's statement addresses (1) approaches taken by other health care purchasers to address physicians' inefficient practice patterns, (2) GAO's efforts to estimate the prevalence of inefficient physicians in Medicare, and (3) the methodological tools available to identify inefficient practice patterns programwide. GAO ensured the reliability of the claims data used in this report by performing appropriate electronic data checks and by interviewing agency officials who were knowledgeable about the data. Consistent with the premise that physicians play a central role in the generation of health care expenditures, some health care purchasers examine the practice patterns of physicians in their network to promote efficiency. GAO selected 10 health care purchasers for review because they assess physicians' performance against an efficiency standard. To measure efficiency, the purchasers we spoke with generally compared actual spending for physicians' patients to the expected spending for those same patients, given their clinical and demographic characteristics. Most purchasers said they also evaluated physicians on quality. The purchasers linked their efficiency analysis results and other measures to a range of strategies--from steering patients toward the most efficient providers to excluding a physician from the purchaser's provider network because of poor performance. Some of the purchasers said these efforts produced savings. Having considered the efforts of other health care purchasers in evaluating physicians for efficiency, GAO conducted its own analysis of physician practices in Medicare. GAO used the term efficiency to mean providing and ordering a level of services that is sufficient to meet patients' health care needs but not excessive, given a patient's health status. GAO focused the analysis on generalists--physicians who described their specialty as general practice, internal medicine, or family practice--and selected metropolitan areas that were diverse geographically and in terms of Medicare spending per beneficiary. GAO found that individual physicians who were likely to practice medicine inefficiently were present in each of 12 metropolitan areas studied. The Centers for Medicare & Medicaid Services (CMS), the agency that administers Medicare, also has the tools to identify physicians who are likely to practice medicine inefficiently. Specifically, CMS has at its disposal comprehensive medical claims information, sufficient numbers of physicians in most areas to construct adequate sample sizes, and methods to adjust for differences in beneficiary health status. A primary virtue of examining physician practices for efficiency is that the information can be coupled with incentives that operate at the individual physician level, in contrast with the SGR system, which operates at the aggregate physician level. Efforts to improve physician efficiency would not, by themselves, be sufficient to correct Medicare's long-term fiscal imbalance, but such efforts could be an important part of a package of reforms aimed at future program sustainability.

The Federal Acquisition Regulation (FAR) establishes the policies and procedures governing suspension and debarment actions related to federal contracts. The Nonprocurement Common Rule (NCR) establishes the policies and procedures governing suspension and debarment for discretionary nonprocurement awards (i.e., grants, cooperative agreements, scholarships, or other assistance). The FAR and the NCR specify numerous causes for suspensions and debarments, including fraud, false statements, theft, bribery, tax evasion, and any other offense indicating a lack of business integrity. A suspension is a temporary exclusion pending the completion of an investigation or legal proceeding which generally may not last longer than 18 months, while a debarment is an exclusion for a reasonable, specified period depending on the seriousness of the cause, but generally should not exceed 3 years. A suspension or debarment under either the FAR or NCR has government-wide effect for all purposes, so that a party precluded from participating in federal contracts is also precluded from receiving grants, loans, and other assistance, and vice versa. OMB has the authority to issue guidelines for nonprocurement suspensions and debarments and the Office of Federal Procurement Policy within OMB provides overall direction for government-wide procurement policies, including those on suspensions and debarments under the FAR. ISDC, established in 1986, monitors the government- wide system of suspension and debarment. The ISDC consists of representatives from 24 federal agencies, as well as 18 independent agencies and government corporations. The Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 augmented and clarified certain ISDC functions to include providing assistance to help agencies achieve operational efficiencies in their suspension and debarment programs. The ISDC was also made responsible for coordinating lead- agency responsibility when multiple agencies have a potential interest in pursuing suspension and debarment of the same entity. In 2011, we made recommendations to improve agency and government- wide suspension and debarment efforts. We reviewed 10 agencies and found that the four agencies with the most procurement-related suspension and debarment cases shared common characteristics: a suspension and debarment program with dedicated staff, detailed policies and procedures, and practices that encourage an active referral process. Agencies are required to establish procedures for referring appropriate matters to their suspension and debarment official for consideration. The six agencies with few or no procurement-related suspensions or debarments for the period we reviewed—Commerce, HHS, Justice, State, Treasury, and DHS’s FEMA—did not have these characteristics regardless of each agency’s volume of contracting activity. To improve their suspension and debarment programs, we recommended these agencies take action to incorporate the characteristics associated with active programs. We also reported that government-wide efforts to oversee and coordinate suspensions and debarments faced a number of challenges. For example, we reported that the ISDC relies on agencies’ participation and resources to fulfill its missions. To improve suspension and debarment programs at all agencies and enhance government-wide oversight, we recommended that OMB issue government-wide guidance that (1) describes the elements of an active suspension and debarment program, and (2) emphasizes the importance of coordinating with the ISDC. We found that the Departments of Commerce, HHS, Justice, State, the Treasury, and DHS’s FEMA all took action since we made recommendations in 2011 to incorporate characteristics associated with active suspension and debarment programs.agencies have addressed staffing issues through actions such as defining roles and responsibilities, adding positions, and consolidating the suspension and debarment function into one office. The six agencies also have taken actions such as issuing formal policy and promulgating detailed guidance. Finally, the six agencies have engaged in practices that encourage an active referral process, including establishing positions to ensure cases are referred, developing case management tools that Since 2011, all six allow for referral tracking and case reporting, and establishing training programs. Table 1 summarizes the actions that agencies have taken since 2011. We found that all six agencies reported an increase in the number of suspension and debarment actions from fiscal year 2009 to 2013 as shown in table 2. The agencies generally experienced a notable increase starting in fiscal year 2011 when they began to take action to incorporate the characteristics associated with active suspension and debarment programs. Agency officials told us that the actions taken since 2011 to incorporate the characteristics associated with active suspension and debarments programs have resulted in an increased level of suspension and debarment activity at their respective agencies, though officials emphasized different factors. For example, officials from the Departments of Commerce, State, and the Treasury stated that improved coordination between the Office of the Inspector General and the Suspension and Debarment Official coupled with increased training and awareness resulted in more referrals and the processing of more actions. While the number of actions Treasury reported for fiscal years 2009 through 2013 has been modest, officials told us that 62 actions have been processed in the first 5 months of fiscal year 2014 and they expect continued increases in the number of referrals. Justice officials stated that one factor that may have contributed to an increased number of referrals and actions is the Attorney General’s January 2012 memorandum to all litigating authorities and the Director of the Federal Bureau of Investigation, reminding them to consider whether the facts of a case could be used as a basis for an exclusion or debarment and to coordinate with agency suspension and debarment authorities. HHS officials noted that an increased number of actions have resulted in part from the Office of Inspector General providing additional resources for training investigators and auditors on how to make suspension and debarment referrals involving procurement and nonprocurement matters. Officials from DHS attributed an increase in the number of actions at FEMA and across DHS to having a centralized suspension and debarment office, a directive establishing common standards, increased staffing, and training. The number of suspension and debarment actions government-wide has increased in recent years, more than doubling from 1,836 in fiscal year 2009 to 4,812 in fiscal year 2013, as shown in figure 1. ISDC officials do not consider the overall number of suspensions and debarments as the only measure of success, and emphasized that increased suspension and debarment activity has been coupled with agencies’ increased capability to use suspension and debarment appropriately and adhere to the principles of fairness and due process as laid out in the governing regulations. According to ISDC officials, the programmatic improvements made by many agencies are due in part to increased management attention within individual agencies, guidance from OMB, and support from the ISDC. OMB and ISDC have taken a number of actions to strengthen government-wide suspension and debarment efforts. In response to GAO’s recommendations, on November 15, 2011, OMB directed agencies to take a number of actions to address program weaknesses and reinforce best practices in their suspension and debarment programs, including the following: Appoint a senior accountable official, if one has not already been designated, to be responsible for assessing the agency’s suspension and debarment program and the adequacy of available resources, ensuring that the agency maintains effective internal controls and tracking capabilities, and ensuring that the agency participates regularly on the ISDC. Review internal policies, procedures, and guidance to ensure that suspension and debarment are being considered and used effectively. ISDC reported in September 2012 that each of the 24 agencies said it had an accountable official in place responsible for suspension and debarment activities, including assessing the adequacy of available training and resources; taken steps to address resources, policies, or both—in some cases by dedicating greater staff resources to handle referrals and manage cases and in others by entering into agreements to be mentored by the managers of successful programs; and procedures to forward possible actions to the suspending and debarring official. The ISDC also has increased its efforts to coordinate government-wide suspension and debarment efforts by promoting best practices and coordinating mentoring and training activities. For example, the ISDC maintains an online library of documents aimed at promoting standardization and has efforts to help agencies develop their suspension and debarment programs to ensure appropriate attention to administrative due process in accordance with the governing regulations. ISDC officials cite robust participation in the ISDC, including agencies with mature suspension and debarment programs, which has enabled the ISDC to assist agencies in making program improvements and, in some cases, standing up programs where none existed before. The ISDC also conducts training for member agencies, including cosponsoring with the Council of the Inspectors General on Integrity and Efficiency an annual debarment workshop. Also, ISDC members provide instructors for the debarment training courses offered by the Federal Law Enforcement Training Centers.understanding of suspension and debarment and holds monthly meetings to discuss topics, including specific suspension and debarment actions and selected agencies’ suspension and debarment procedures and tracking tools. Finally, the ISDC undertakes outreach to promote The six agencies we reviewed reported that they highly value the functions performed by the ISDC as a focal point for government-wide suspension and debarment efforts. For example, Treasury officials told us that they designed their suspension and debarment program around the best practices identified by the ISDC, taking advantage of templates, guidance, and mentoring available through the committee. Officials from several agencies noted that the ISDC is instrumental in managing an informal process to help agencies coordinate lead agency responsibility when multiple agencies have a potential interest in pursuing suspension and debarment of the same entity. According to officials from the agencies we reviewed, the ISDC regularly distributes information on new potential cases reported by the agencies. The agencies take into consideration factors such as financial, regulatory, and investigative interests in determining which agency should take the lead in the case. Several of the agencies we reviewed reported that this process helps identify the most appropriate lead, while also involving other agencies that may have a stake in a particular action. Officials from several agencies also reported that ISDC monthly meetings provide an important forum through which suspension and debarment officials can seek advice from agency counterparts on a range of issues. In addition to speaking with officials from the six agencies we reviewed in 2011, we also reviewed the VA’s suspension and debarment program to determine if government-wide efforts had affected the program. Based on our review, we found that the VA currently has the characteristics associated with active suspension debarment programs. For example, VA has a Debarment and Suspension Committee with a staff of about 10 positions that review all referrals for procurement-related suspension and debarment actions, conduct fact-finding, and present facts and recommendations to the Suspension and Debarring Official. Officials reported that VA has taken action to improve its suspension and debarment program in part in response to government-wide efforts. For example, VA’s Suspension and Debarment Committee is currently drafting standard operating procedures to reflect leading practices. VA officials reported that the number of procurement-related suspension and debarment actions at VA has increased from 34 in fiscal year 2011 to 73 in fiscal year 2013. We provided a draft of this report to OMB and the Departments of Commerce, Health and Human Services, Justice, Homeland Security, State, the Treasury, and Veterans Affairs for review and comment. In an email response, the Associate Administrator of the Office of Federal Procurement Policy commented that OMB is pleased with the progress agencies have been making to strengthen their capabilities to consider the use of suspension and debarment when necessary. Further, OMB credits the work of the Interagency Suspension and Debarment Committee in helping to make many of the achievements possible. None of the seven agencies we reviewed provided substantive comments, but the Departments of Commerce, Health and Human Services, and Homeland Security provided technical comments which we incorporated, as appropriate. We are sending copies of this report to interested congressional committees; the Director of the Office of Management and Budget; the Attorney General and the Secretaries of Commerce, Health and Human Services, Homeland Security, State, the Treasury, and Veterans Affairs. The report also will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4841 or woodsw@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Individuals who made key contributions to this report were Marie Mak, Director; Tatiana Winger, Assistant Director; Kristine R. Hassinger; Angie Nichols-Friedman; and Russ Reiter.

To protect the government's interests, agencies can use suspension and debarment to exclude individuals, contractors, and grantees from receiving future contracts, grants, and other federal assistance due to various types of misconduct. In 2011, GAO reviewed ten agencies and found that agencies issuing the most procurement related suspensions and debarments shared common characteristics: dedicated staff, detailed policies and procedures, and an active referral process. GAO recommended that six agencies—the Departments of Commerce, Health and Human Services, Justice, State, the Treasury, and the Federal Emergency Management Agency—incorporate those characteristics, and that OMB issue guidance to improve oversight and government-wide suspension and debarment efforts. GAO was asked to review actions taken to implement the 2011 recommendations. This report examines (1) actions taken by the six agencies to incorporate characteristics of active suspension and debarment programs; (2) changes in the level of suspension and debarment activity; and (3) actions taken to improve oversight and government-wide efforts. To do so, GAO reviewed suspension and debarment programs, interviewed agency officials, verified the accuracy of agency data, and reviewed government-wide efforts. GAO is not making any new recommendations in this report. OMB commented that it is pleased with the progress that agencies have made and with the work of the ISDC.The other agencies did not provide substantive comments. The six agencies GAO reviewed all took action to incorporate characteristics associated with active suspension and debarment programs. Since GAO made recommendations to do so in 2011, the agencies have addressed staffing issues through actions such as defining roles and responsibilities, adding positions, and consolidating suspension and debarment functions. The agencies also have issued formal policies and promulgated detailed guidance. Finally, the agencies have engaged in practices that encourage an active referral process, such as establishing positions to ensure cases are referred for possible action, and developing case management tools. The number of suspension and debarment actions government-wide has more than doubled from 1,836 in fiscal year 2009 to 4,812 in fiscal year 2013. The number of suspension and debarment actions for the six agencies increased from 19 in fiscal year 2009 to 271 in fiscal year 2013 (see table below). The six agencies generally experienced a notable increase starting in fiscal year 2011 when the agencies began to take action to incorporate the characteristics associated with active suspension and debarment programs. The Office of Management and Budget (OMB) and the Interagency Suspension and Debarment Committee (ISDC) have taken action to strengthen government-wide suspension and debarment efforts. In November 2011, OMB directed agencies to address weaknesses and reinforce best practices in their suspension and debarment programs. The ISDC reported to Congress in September 2012 that, per OMB direction, the 24 standing member agencies of the ISDC had an accountable official in place responsible for suspension and debarment; taken steps to address resources, policies, or both; and procedures to forward matters to the suspension and debarment official for possible action. The ISDC has promoted best practices, coordinated mentoring and training, and helped coordinate lead agency responsibility when multiple agencies have an interest in pursuing suspension and debarment of the same entity. Reported increases in the number of suspension or debarment actions suggest that its efforts have been effective. ISDC officials emphasized that increased activity has been coupled with an increased capability to use suspension and debarment appropriately while adhering to the principles of fairness and due process.

The Food Stamp Program provides a safety net to the millions of low-income individuals and families nationwide who do not otherwise have the means to obtain a healthy diet. Food stamp benefits are calculated to ensure that households have the resources needed to purchase a model diet plan based on the National Academy of Sciences’ Recommended Dietary Allowances. USDA’s Food and Nutrition Service (FNS) administers the program in partnership with the states, funding all of the program’s benefits and about 50 percent of the states’ administrative costs. FNS develops program policy and guidance, such as nationwide criteria for determining who is eligible for assistance and the amount of benefits recipients are entitled to receive, and oversees the states’ activities. The states are responsible for the day-to-day operation of the program, including meeting with applicants and determining their eligibility and benefit levels. Food stamp recipients must use their benefits only to purchase allowable food products from retail food stores that FNS authorizes to participate in the program. Recipients use food stamp coupons or an electronic benefit transfer (EBT) card to pay for these items. EBT systems use the same electronic funds transfer technology that many grocery stores use for their debit card payment systems. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 mandates that all states implement EBT systems by October 1, 2002, unless USDA waives the requirement. As of March 1998, 16 states had implemented EBT systems statewide, with all other states in some earlier stage of implementation. Collectively, about 40 percent of all food stamp benefits are now delivered through EBT systems. Fraud and abuse in the Food Stamp Program generally occurs in the form of either overpayments to food stamp recipients or trafficking. Overpayments occur when ineligible persons are provided food stamps, as well as when eligible persons are provided more than they are entitled to receive. In 1996, the latest year for which data are available, the states overpaid recipients an estimated $1.5 billion, or 7 percent of the approximately $22 billion in food stamps issued. Approximately 57 percent of the overpayments were caused by recipient errors (36 percent unintentional and 21 percent intentional), and 43 percent were caused by caseworkers’ errors. It should also be noted that recipient and caseworker errors can result in underpayments. According to FNS’ data, food stamp recipients were underpaid by about $518 million in fiscal year 1996. In March 1997, we reported on one specific kind of food stamp overpayment—payments to households that included inmates of correctional institutions. Federal regulations prohibit prisoners from participating in the Food Stamp Program. By matching automated food stamp records and prison records in four states—California, Florida, New York, and Texas—we identified over 12,000 inmates who were included in the households receiving food stamps in calendar year 1995. These households improperly collected an estimated $3.5 million in food stamps in 1995. Subsequently, in August 1997, the Balanced Budget Act of 1997 (P.L. 105-33, Aug. 5, 1997) included a provision directing the states to ensure that individuals who are under federal, state, or local detention for more than 30 days are not participating in the Food Stamp Program. In February 1998, we reported on another type of food stamp overpayment—payments made to households that included deceased individuals as members. By matching automated food stamp records from the four states previously mentioned with death information from the Social Security Administration’s (SSA) Death Master File, we identified nearly 26,000 deceased individuals who were included in households receiving food stamps in 1995 and 1996. These households improperly collected an estimated $8.5 million in food stamp benefits. Subsequently, in March 1998, you, Mr. Chairman, introduced legislation that would require the Commissioner of SSA to use all of SSA’s death information to notify state agencies when an individual receiving food stamp benefits is deceased. At your request, Mr. Chairman, we are currently reviewing the extent to which individuals are included in food stamp households in more than one state during the same time period, referred to as “duplicate participation.” While some states conduct matches of their food stamp rolls with neighboring states, our review is focussed on non-neighboring states. For example, we will determine whether duplicate participation occurs between New York and Florida or between California and Texas. Our preliminary results indicate that such duplicate participation is occurring on a significant scale and that there is no national mechanism in place to identify and eliminate it. Regarding trafficking—the second main area of fraud and abuse in the Food Stamp Program—a 1995 FNS study estimated that up to $815 million,or about 4 percent of the food stamps issued, was exchanged for cash by authorized retailers during fiscal year 1993. The study found that the trafficking rate was highest, 13 percent of food stamps redeemed, among small, privately owned food retailers that generally do not stock a full line of food. In contrast, supermarkets and large grocery stores had an average trafficking rate of less than 2 percent of the benefits redeemed. Data on the extent to which food stamps are exchanged between individuals prior to reaching authorized retailers are unavailable. In our March 1998 report on food stamp trafficking, conducted at your request, Mr. Chairman, we found that retail store owners and retail store clerks share almost equal responsibility for the food stamp trafficking problem. Specifically, in the 432 trafficking cases we reviewed, store owners alone were caught trafficking in about 40 percent of the cases, clerks alone were involved in 47 percent of the cases, and store owners and clerks together were caught in 13 percent of the trafficking cases. FNS took administrative action against all the store owners that were trafficking but took no actions against the store clerks because it lacks the authority to do so. However, some clerks were subject to court-ordered actions, including financial penalties or jail sentences. The Food Stamp Program is inherently susceptible to some level of fraud and abuse because of the sheer number of program participants (about 23 million in fiscal year 1997), the basic approach used to determine a household’s eligibility and benefit amount, and the process used to authorize and monitor a sufficient number of retailers to accept food stamps. In making eligibility decisions, state caseworkers rely on applicants to provide accurate information on, among other things, household composition, and to report subsequent changes, such as the loss of a household member. Only “questionable” cases are investigated. In general, the agencies take this approach in an effort to make the program convenient for clients and simple to administer, and to ensure accurate payments; consequently, controls over determining household composition are not as rigorous as they could be. For example, FNS’ regulations do not require caseworkers to verify client-provided information on household composition, unless such information is deemed “questionable,” as defined by the state agency. Investigators attempt to verify this information through techniques such as visiting the home and/or contacting neighbors and landlords, however, they characterize these efforts as time-consuming, costly, and often unreliable. With respect to trafficking, it is difficult to track the flow of food stamps after they are issued to recipients. Federal and state officials agree that food stamps have essentially become a second currency exchanged by some recipients for cash or non-food items. Trafficked food stamps may change hands several times, but all food stamps must eventually pass through an FNS-authorized retailer because only such a retailer can redeem food stamps for cash from the government. FNS is responsible for monitoring program compliance by the approximately 185,000 stores that currently are authorized to redeem food stamps. Our 1995 report found that, at that time, FNS’ controls and procedures for authorizing and monitoring the retailers that participate in the Food Stamp Program did not deter or prevent retailers from trafficking in food stamps. Since our report, FNS has initiated several actions to reduce trafficking in the program, such as contracting with different companies to make 35,000 to 40,000 store visits by the end of fiscal year 1998. These visits are being made to verify that the stores are bonafide grocery operations. In addition, FNS is improving its Store Tracking and Redemption System by, for example, developing a profile that enables FNS to better identify stores that may be trafficking. USDA’s data show that overpayments in the Food Stamp Program have declined since 1993. According to the data, the overpayment error rate at the national level has decreased from 8.27 percent of the total benefits provided in fiscal year 1993 to 6.92 percent in fiscal year 1996, the lowest error rate ever achieved in the program. With the support of the Congress, FNS has increased its emphasis on achieving payment accuracy and has employed various initiatives to assist the states in reducing the number of errors. For example, FNS sponsored national, regional, and state conferences, provided direct technical assistance to the states, and facilitated the exchange of state information on effective strategies for determining accurate payments. While these efforts have been useful in reducing fraud and abuse, we believe that FNS could achieve even greater success by taking a leading role in promoting the use and sharing of automated information by state agencies. Given the program’s strong reliance on applicants, clients and retailers to comply with program regulations and provide accurate and timely information, state agencies need to have access to information that will allow them to independently and cost effectively verify the information they are provided and identify noncompliance. Our reviews have demonstrated that useful information can be obtained from (1) matching state food stamp rolls against other state databases, such as prisoner rolls, and (2) reconfiguring existing federal databases to provide additional useful information to state agencies, such as death notices. Additional opportunities to use computerized resources to verify information exist, as seen in our ongoing review of duplicate participation in non-neighboring states. Both an FNS study and our own experiences demonstrate that automated data matches by the states using food stamp records provides a cost-effective means of reducing fraud and improving program integrity. The cost of conducting computer matches is relatively low for the return generated, which includes identifying ineligible individuals in the application process before any benefits are issued and preventing additional issuance once an ineligible participant is identified. State agencies have already implemented computerized matches on their own initiative, such as neighboring state matches for duplicate participation. Two state agencies we visited have taken steps to obtain information from credit reporting services to ensure that applicants are eligible for benefits. In addition to recouping overpayments, matching efforts help the program realize savings by identifying erroneous information during the application process, according to states. Furthermore, the states said that these efforts have a deterrent effect on applicants who may be considering fraudulent activities. Relatedly, while EBT will not eliminate all types of fraud, it shows promise as a means to identify redemption patterns that indicate potential trafficking. By eliminating paper coupons that may be lost, stolen, or sold without any record of sale and creating an electronic record of transactions, EBT can help identify and reduce food stamp trafficking. However, because EBT systems are simply another vehicle for distributing benefits, they cannot correct fraud and abuse that occurs during the process of determining eligibility and benefit levels. Also, like any computer system, food stamp EBT systems can be susceptible to security breaches that result in new forms of fraud and abuse. FNS can further expand on its recent successes in reducing overpayments by actively encouraging the states to identify ways to use computerized information to verify information provided by applicants and to encourage states to share their techniques and information with each other. FNS can demonstrate its leadership in this regard by identifying sources of information that would be useful to the states and ensuring that states have access to that information. Thank you again for the opportunity to appear before you today. We would be pleased to answer any questions you may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. 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GAO discussed fraud and abuse in the Food Stamp Program, focusing on the: (1) nature and extent of the problem; (2) reasons it often goes undetected; and (3) ways computerized information can be used to identify and reduce it. GAO noted that: (1) fraud and abuse in the Food Stamp Program generally occurs in the form of either overpayments to food stamp recipients or trafficking; (2) overpayments occur when ineligible persons are provided food stamps, as well as when eligible persons are provided more than they are entitled to receive; (3) overpayments are caused by inadvertent and intentional errors made by recipients and errors made by state caseworkers; (4) the latest available information indicates that overpayments in 1996 totalled about $1.5 billion, or about 7 percent of the food stamp benefits issued that year; (5) errors also result in underpayments; in fiscal year 1996, such underpayments totalled about $518 million; (6) with regard to trafficking, the Department of Agriculture (USDA) estimated that in 1993 about $815 million in food stamps, approximately 4 percent of the food stamps issued, were traded for cash at retail stores; (7) no one knows the extent of trafficking between individuals before the food stamps are redeemed at authorized retailers; (8) participation in the Food Stamp Program by ineligible recipients occurs, and often goes undetected, because the information used to determine a household's eligibility and benefit amount for the program is not always accurate; (9) state agencies that administer the program determine household membership on the basis of unverified information provided by food stamp applicants; (10) food stamp trafficking takes place when recipients collaborate with unscrupulous retailers to convert food stamp benefits to cash or other non-food items; (11) these retailers make a profit by giving the recipients a discounted cash payment for the stamps, then redeeming the stamps at full face value to the government; (12) while USDA has reduced the overpayment rate in recent years, further reductions could result if food stamp rolls were matched against computerized information held by various sources; (13) computer matching provides a cost-effective mechanism to accurately and independently identify ineligible participants; (14) some states already conduct data matching programs; (15) by taking a leading role in promoting the use and sharing of information among federal and state agencies, USDA can enhance the states' effectiveness in identifying ineligible participants and reducing overpayments; and (16) in addition, the congressionally mandated use of electronic benefit transfers, while not the answer to eliminating all fraud, has the potential to reduce trafficking by providing an electronic trail of transactions.

With respect to its workload and workforce, EPA has struggled for years to identify its human resource needs and to deploy its staff throughout the agency in a manner that would do the most good. In 2010, we reported that rather than establishing a process for budgeting and allocating human resources that fully considered the agency’s workload, EPA requested funding and staffing through incremental adjustments based largely on historical precedent. We noted that the agency had not comprehensively analyzed its workload and workforce since the late 1980s to determine the optimal numbers and distribution of staff agencywide. Moreover, EPA’s human capital management systems had not kept pace with changing legislative requirements and priorities, changes in environmental conditions in different regions of the country, and the much more active role that states now play in carrying out the day-to-day activities of federal environmental programs. We recommended, among other things, that EPA link its workforce plan to its strategic plan and establish mechanisms to monitor and evaluate its workforce planning efforts. EPA generally agreed with these recommendations. Our recent work has also identified additional challenges related to workload and workforce management. For example, in July 2011, we reported that EPA had made considerable progress in meeting goals to contain and control contamination at high-risk hazardous waste sites. We also reported, however, that EPA had not rigorously analyzed its remaining workload or the resources it needed to meet its cleanup goals. We recommended that EPA assess its remaining cleanup workload, determine whether the program has adequate resources, and take steps to reallocate its resources or revise its goals. An assessment could also help EPA develop budget estimates and requests that align with program needs. EPA agreed with the recommendation. Also in July 2011, we identified challenges EPA faces in managing its laboratories and its related workforce. EPA operates a laboratory enterprise consisting of 37 laboratories housed in 170 buildings and facilities located in 30 cities across the nation. We reported that EPA had not fully addressed findings and recommendations of independent evaluations of its science activities dating back to 1992 and that its laboratory activities were largely uncoordinated. We also found that, consistent with our 2010 report on workforce planning, EPA did not use a comprehensive planning process for managing its laboratories’ workforce. Specifically, we reported that EPA did not have basic information on its laboratory workload and workforce, including demographic data on the number of federal and contract employees working in its laboratories. Without such information, we reported, EPA could not successfully undertake succession planning and management to help the organization adapt to meet emerging and future needs. Because of the challenges identified in this report, we made recommendations to address workforce and workload planning decisions. EPA generally agreed with our findings and recommendations. In September 2010, we reported on EPA’s library network and found that EPA had not completed a plan identifying an overall strategy for its libraries, implementation goals, or a timeline. EPA had developed a draft strategic plan, but it did not describe how funding decisions were made. We reported that setting out details for such decisions, to ensure that they are informed and transparent, was especially important because of the decentralized nature of the library network. We recommended, among other things, that EPA complete its strategic plan for the library network, including implementation goals and timelines. As part of this effort, we recommended that EPA outline details for how funding decisions were to be made to ensure they are informed and transparent. EPA concurred with our recommendations. Finally, our July 2011 report on EPA laboratories also identified challenges related to EPA’s management of its real property. Federal real property management is an area we have identified as part of our high- risk series because of long-standing problems with over reliance on leasing, excess and underused property, and protecting federal facilities. The need to better manage federal real property was underscored in a June 2010 presidential memorandum that directed agencies to accelerate efforts to identify and eliminate excess properties to help achieve a total of $3 billion in cost savings by 2012. In July 2010 EPA reported to the Office of Management and Budget (OMB) that it did not anticipate the disposal of any of its owned laboratories and major assets in the near future because these assets were fully used and considered critical for the mission of the customer and agency as a whole. However, we found that EPA did not have accurate and reliable information called for by OMB on (1) the need for facilities, (2) property use, (3) facility condition, and (4) facility operating efficiency, to inform such a determination. We made several recommendations for EPA to improve its physical infrastructure and real property planning, including improving the completeness and reliability of operating-cost and other data needed to manage its real property and report to external parties. EPA concurred with the recommendations. EPA relies on other federal and state agencies to help implement its programs. Given the federal deficit and the government’s long-term fiscal challenges, it is important that EPA improve coordination with its federal and state partners to reduce administrative burdens, redundant activities, and inefficient uses of federal resources. We have identified key practices for enhancing and sustaining collaboration among federal agencies, such as establishing the roles and responsibilities of collaborating agencies; leveraging their resources; and establishing a process for monitoring, evaluating, and reporting to the public on the results of collaborative efforts. In a September 2011 report on Chesapeake Bay restoration efforts, for example, we found that federal and state agencies were not working toward the same strategic goals. We also surveyed federal officials who said that some form of collaboration was necessary to achieve the goals of a strategy for protecting and restoring the Chesapeake Bay watershed. This collaboration could be between federal agencies, federal and state agencies, or federal agencies and other entities. We recommended, among other things, that EPA work with federal and state stakeholders to develop common goals and clarify plans for assessing progress. EPA generally agreed with the recommendations. In an August 2011 report on pharmaceuticals in drinking water, we found that an interagency work group of eight federal agencies (including EPA) tasked with developing a better understanding of the risks from pharmaceuticals in drinking water and identifying areas for future federal collaboration had disbanded in 2009 without producing a final report. We also reported that EPA coordinated informally with the Food and Drug Administration and the United States Geological Survey to collect data that could support regulatory decisions, but it did not have a formal mechanism for sustaining this collaboration in the future. We recommended that EPA establish a work group or formal mechanism to coordinate research on pharmaceuticals in drinking water. EPA agreed with the recommendation. In a 2009 report on rural water infrastructure, we reported that, from fiscal years 2000 through 2008, EPA and six federal agencies obligated $1.4 billion for drinking water and wastewater projects to assist communities in the U.S.-Mexico border region. We found that the agencies’ efforts to fund these projects were ineffective because the agencies, except the Indian Health Service, had not comprehensively assessed the region’s needs and did not have coordinated policies and processes for selecting and building projects. As a result, we suggested that Congress consider establishing an interagency task force to develop a plan for coordinating funding to address the region’s most pressing needs. Related to our findings on interagency coordination issues, our past and present work seeks to assist Congress and federal agencies in identifying actions needed to reduce duplication, overlap, and fragmentation; achieve cost savings; and enhance revenues. In March 2011, we issued our first annual report to Congress in response to a new statutory requirement that GAO identify federal programs, agencies, offices, and initiatives—either within departments or government-wide—which have duplicative goals or activities. The report identified 34 areas where agencies, offices, or initiatives had similar or overlapping objectives or provided similar services to the same populations or where government missions were fragmented across multiple agencies or programs. The report also identified 47 additional areas—beyond those directly related to duplication, overlap, or fragmentation—offering other opportunities for agencies or Congress to consider taking action that could either reduce the cost of government operations or enhance revenue to the Treasury. With respect to EPA, the report included our findings on rural water infrastructure, as well as the agency’s role in duplicative efforts to support domestic ethanol production. Related to the statutory requirement that GAO identify and report on federal programs, agencies, offices, and initiatives with duplicative goals or activities, we are monitoring developments in the areas already identified and will address any additional significant instances of duplication as well as opportunities for cost savings in future annual reports. We are developing a methodology to ensure that we conduct a systematic review across the federal government and report on the most significant instances of duplication, overlap, or fragmentation through the issuance of annual reports in 2012 and 2013, as well as the report we issued in March 2011. Our 2012 and 2013 reports will include the results of present and planned work related to EPA. In addition to our published work, we periodically assist appropriations and authorizing committees by reviewing agency budget justification documents. To this end, we review agencies’ budget requests, conduct selected analyses, and evaluate the support for and adequacy of agencies’ justifications for these requests. We often review the justification for programs of congressional interest, new programs and initiatives, and existing programs and practices. We typically provide the results of our analysis in data sheets or briefings to appropriating and authorizing committees. Over the years, our periodic review of EPA’s budget justification documents has led to two recurring observations. First, EPA has not consistently provided detailed justification for its activities when requesting new or expanded funding. In some cases, we have noted that such requests have not included (1) clear justification for the amount of funding requested or a detailed description of the type and scope of activities the funding would support, or (2) information on the management controls, such as a schedule for spending the requested funds, EPA would use to ensure the efficient and effective use of requested funding. Second, our reviews have often focused on the agency’s efforts to make use of unliquidated balances, or those funds that have been appropriated and properly obligated but not expended. In particular, this situation results from circumstances where no-year budget authority was obligated to a contract, grant, or interagency agreement that has expired with some level of funding remaining unexpended. Over the years, we have encouraged EPA to recover these unliquidated amounts through a process known as “deobligation.” When EPA deobligates funds from expired contracts, grants, or interagency agreements, it can “recertify” and re-use these funds, subject to certain restrictions, assuming the amounts have not expired and remain available for new obligations. Use of recertified funds can offset some need for new funding. Over the years, we have observed that EPA has made progress in its efforts to recover unliquidated funds from expired contracts, grants, and interagency agreements. For example, in 2010, EPA deobligated and recertified about $163 million, primarily in its Superfund, State and Tribal Assistance Grants, and Leaking Underground Storage Tanks accounts. While we have observed progress in recovering these funds, we have also observed that EPA’s budget justification documents do not describe the amount of deobligated and recertified funding available for new obligations. We have also observed that such information could be useful to Congress because the availability of recertified amounts could partially offset the need for new funding. Chairman Stearns, Ranking Member DeGette, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions that you may have at this time. For further information about this testimony, please contact David Trimble at (202) 512-3841 or trimbled@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Contributors to this testimony include Michael Hix (Assistant Director), Ross Campbell, Ellen W. Chu, Tim Guinane, Kristin Hughes, Karen Keegan, Felicia Lopez, Jamie Meuwissen, and Cheryl Peterson. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Environmental Protection Agency (EPA) faces a number of management and budgetary challenges, which are particularly important as Congress seeks to decrease the cost of government while improving its performance. EPA operates in a highly complex and controversial regulatory arena, and its policies and programs affect virtually all segments of the economy, society, and government. From fiscal years 2000 through 2010, the agency's budget rose in nominal terms from $7.8 billion to $10.4 billion, but has remained relatively flat over this period in real terms. This testimony highlights some of the major management challenges and budgetary issues facing a range of EPA programs and activities today. This testimony focuses on (1) management of EPA's workload, workforce, and real property; (2) coordination with other agencies to more effectively leverage limited resources; and (3) observations on the agency's budget justifications. This testimony is based on prior GAO products and analysis.. Recent GAO work has identified challenges with EPA's efforts to manage its workload, workforce, and real property and made recommendations to address these challenges. In 2010, GAO reported that EPA had not comprehensively analyzed its workload and workforce since the late 1980s to determine the optimal numbers and distribution of staff agencywide. GAO recommended, among other things, that EPA link its workforce to its strategic plan and establish mechanisms to monitor and evaluate their workforce planning efforts. A 2011 review of EPA's efforts to control contamination at hazardous waste sites found that the program was making progress toward its goals but that EPA had not performed a rigorous analysis of its remaining workload to help inform budget estimates and requests in line with program needs. Regarding real property management--an area that GAO has identified as part of its high-risk series--GAO reported that EPA operated a laboratory enterprise consisting of 37 laboratories housed in 170 buildings and facilities in 30 cities. GAO found that EPA did not have accurate and reliable information on its laboratories to respond to a presidential memorandum directing agencies to accelerate efforts to identify and eliminate excess properties. The report recommended that EPA address management challenges, real property planning decisions, and workforce planning. GAO has reported on opportunities for EPA to better coordinate with other federal and state agencies to help implement its programs. Given the federal deficit and the government's long-term fiscal challenges, it is important that EPA improve its coordination with these agencies to make efficient use of federal resources. In a September 2011 report on the Chesapeake Bay, GAO found that federal and state agencies were not working toward the same strategic goals and recommended that EPA establish a working group or formal mechanism to develop common goals and clarify plans for assessing progress. In a 2009 report on rural water infrastructure, GAO reported that EPA and six other federal agencies had funded water and wastewater projects in the U.S.-Mexico border region. GAO suggested that Congress consider establishing an interagency task force to develop a plan for coordinating this funding. These findings were included in GAO's March 2011 report to Congress in response to a statutory requirement for GAO to identify federal programs with duplicative goals or activities. Periodic GAO reviews of EPA's budget justifications have led to two recurring observations. First, with respect to proposals for new or expanded funding that GAO has examined, EPA has not consistently provided clear justification for the amount of funding requested or information on the management controls that the agency would use to ensure the efficient and effective use of requested funding. Second, GAO's reviews have found that EPA's budget justification documents do not provide information on funds from appropriations in prior years that were not expended and are available for new obligations. Such information could be useful to Congress because these funds could partially offset the need for new funding. The work cited in this testimony made a number of recommendations intended to address management and related budget challenges, including improving the agency's workforce and workload planning, as well as its coordination with other federal agencies. EPA generally agreed with these recommendations.

Congressional oversight of rulemaking using the CRA can be an important and useful tool for monitoring the regulatory process and balancing and accommodating the concerns of American citizens and businesses with the effects of federal agencies’ rules. As we noted early in the implementation of CRA, it is important to assure that executive branch agencies are responsive to citizens and businesses about the reach, cost, and impact of regulations, without compromising the statutory mission given to those agencies. CRA seeks to accomplish this by giving Congress an opportunity to review most rules before they take effect and to disapprove those found to be too burdensome, excessive, inappropriate, duplicative, or otherwise objectionable. With certain exceptions, CRA applies to most rules issued by federal agencies, including the independent regulatory agencies. Under CRA, two types of rules, major and nonmajor, must be submitted to both Houses of Congress and GAO before they can take effect. CRA defines a “major” rule as one which results or is likely to result in (1) an annual effect on the economy of $100 million or more; (2) a major increase in costs or prices for consumers, individual industries, government agencies, or geographic regions; or (3) significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of U.S.-based enterprises to compete with foreign-based enterprises in domestic and export markets. CRA specifies that the determination of what rules are major is to be made by the Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget (OMB). Major rules cannot be effective until 60 days after publication in the Federal Register or submission to Congress and GAO, whichever is later. Nonmajor rules become effective when specified by the agency, but not before they are filed with Congress and GAO. CRA established a procedure by which members of Congress may disapprove agencies’ rules by introducing a resolution of disapproval that, if adopted by both Houses of Congress and signed by the President, can nullify an agency’s rule. If such a resolution becomes law, the rule then cannot take effect or continue in effect. In addition, CRA prohibits an agency from reissuing such a rule in substantially the same form, or a new rule that is substantially the same as the disapproved rule, unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule. Members of Congress seldom have attempted to use this disapproval process. Over the past decade, 37 joint resolutions of disapproval have been introduced regarding 28 rules. Only once has Congress used this disapproval process to nullify a rule, when it disapproved the Department of Labor’s rule on ergonomics in 2001. GAO’s only stated role under CRA is to provide Congress with a report on each major rule concerning GAO’s assessment of the promulgating federal agency’s “compliance with the procedural steps” required by various acts and executive orders governing the regulatory process. These include preparation of a cost-benefit analysis, when required, and compliance with the Regulatory Flexibility Act, the Unfunded Mandates Reform Act of 1995 (UMRA), the Administrative Procedure Act (APA), the Paperwork Reduction Act, and Executive Order 12866. GAO’s report must be sent to the congressional committees of jurisdiction within 15 calendar days of the publication of the rule or submission of the rule by the agency, whichever is later. While the CRA is silent with regard to GAO’s role concerning nonmajor rules, we found that basic information about those rules also should be collected in a manner that can be of use to Congress and the public. To compile information on all the rules submitted to us under CRA, we established a database, available to the public on the Internet. Our database gathers basic information about the 15–20 major and nonmajor rules that we receive each day, including the title, the agency, the Regulation Identification Number, the type of rule, the proposed effective date, the date published in the Federal Register, the congressional review trigger date, and any joint resolutions of disapproval that may have been introduced. We created a standardized submission form available on the Internet, which is used by almost all the agencies, to allow more consistent information collection. Since CRA was enacted on March 29, 1996, we have received and submitted timely reports on 610 major rules and entered 41,218 nonmajor rules into the database. As noted earlier, before a rule can become effective, it must be filed in accordance with CRA. We conduct an annual review to determine whether all final rules covered by the Act and published in the Federal Register have been filed with the Congress and us. We perform the review to both verify the accuracy of our database and to ascertain the degree of agency compliance with CRA. We forward a list of unfiled rules to OIRA for their handling, and, in the past, they have disseminated the list to the agencies, most of which file the rules or offer an explanation of why they do not believe a rule is covered by CRA. Although we reported that agencies’ compliance with CRA requirements was inconsistent during the first years after CRA’s enactment, compliance improved over time. In general, we have found the degree of compliance to have remained fairly constant, with roughly 200 nonmajor rules per year not filed with our office. In the 10 years since CRA was enacted, all major rules have been filed in a timely fashion. In the past 10 years, we also have issued eight opinions regarding what constitutes a “rule” under CRA in response to requests from congressional committees and members concerning various agency pronouncements and memorandums. CRA contains a broad definition of the term “rule,” including more than the usual notice and comment rulemakings published in the Federal Register under APA. Under CRA, “rule” means the whole or part of an agency statement of general applicability and future effect designed to implement, interpret, or prescribe law or policy. For example, in 1996 we concluded that a memorandum issued by the Secretary of Agriculture in connection with the Emergency Salvage Timber Sale Program constituted a rule under CRA and should have been submitted to Congress and GAO before it could become effective. Similarly, in 2001, we concluded that a Fish and Wildlife Service Record of Decision entitled “Trinity River Mainstem Fishery Restoration” was a rule covered by CRA. We believe these opinions have strengthened the reach of CRA by insuring compliance with the main thrust of the Act, which was to insure that agency actions, whether labeled a “rule” by the agency or not, are subject to congressional review. We have noted that certain congressional committees, such as the Joint Committee on Taxation, were taking an active role in overseeing agency compliance with CRA. As a result, for example, Internal Revenue Service procedures, rulings, regulations, notices, and announcements are forwarded as CRA submittals. The one major area of noncompliance with the requirements of the Act has been that agencies have not always delayed the effective date of major rules for 60 days as required by the Act. Agencies have filed 610 major rules with our office, and, for 71 of those rules, the agencies did not delay the effective date for the required 60 days. One reason for noncompliance with the 60-day delay is that the agencies have misapplied the “good cause” exception which waives the delay of the rule if it would be impracticable, unnecessary, or contrary to the public interest. Since the enactment of CRA, our office has consistently held that the “good cause” exception is only available if a notice of proposed rulemaking was not published and public comments were not received. Many agencies, following a notice of proposed rulemaking and receipt of comments, have stated in the preamble to the final major rule that “good cause” existed for not providing the 60-day delay. The other reason for noncompliance is that the statute that an agency is implementing by issuing the final major rule contains a date by which the Secretary or Administrator must issue the regulation, and the date, in many instances, does not permit the 60-day delay. However, the CRA states that it shall apply notwithstanding any other provision of law. Agencies and GAO have provided Congress a considerable amount of information about forthcoming rules in response to CRA. The limited number of CRA joint resolutions introduced might suggest that this information generates little additional oversight of rulemaking. However, as we found in our review of the information generated on federal mandates under UMRA, the benefits of compiling and making information available on potential federal actions should not be underestimated. Further, as we also found regarding UMRA, the availability of procedures for congressional disapproval may have some deterrent effect. The Congressional Research Service has reported that several rules have been affected by the presence of the review mechanism, suggesting that the CRA review scheme has had some influence. Still, as I noted in my testimony before this Subcommittee last November, efforts to enhance presidential oversight of agencies’ rulemaking appear to have been more significant and widely employed in recent years than similar efforts to enhance congressional oversight. In particular, our reviews have noted the growing influence and authority of OIRA in the oversight of the regulatory process. Some of this increased activity reflects administration initiatives, but it also includes some new responsibilities assigned by Congress through statute, such as the requirement for OMB to issue governmentwide guidance to implement the Information Quality Act. In contrast, there does not appear to have been a similar expansion of direct congressional influence and authority over the regulatory process, although bills have been introduced over the years to enhance the mechanisms available for congressional oversight of agencies’ rulemaking. Some recent legislative proposals have focused on expanding the information and analysis available to Congress on pending rules, while others focus on enhancing the mechanisms that Congress could employ for its own review—and potential disapproval—of agencies’ rules. As the major example of the first category of proposals, Congress passed the Truth in Regulating Act (TIRA) in 2000 to provide a mechanism for it to obtain more information about certain rules. In contrast to the essentially procedural reviews that GAO now conducts under CRA, TIRA contemplated a 3-year pilot project during which GAO would perform independent evaluations of “economically significant” agency rules when requested by a chairman or ranking member of a committee of jurisdiction of either House of Congress. However, during the 3-year period contemplated for the pilot project, Congress did not enact any specific appropriation to cover TIRA evaluations, as called for in the Act, and the authority for the 3-year pilot project expired on January 15, 2004. Therefore, we have no information on the potential effectiveness of this mechanism. Congress has considered reauthorizing TIRA, and we have strongly urged that any reauthorization of TIRA continue to contain language requiring a specific annual appropriation for GAO before we are required to undertake independent evaluations of major rulemakings. Such an expansion of GAO’s current lines of business without additional dedicated resources would pose a serious problem for us, especially in light of what will likely be increasing budgetary constraints in the years ahead. It would also likely serve to adversely affect our ability to provide the same level of service to the Congress in connection with our existing statutory authorities. We have also recommended that TIRA evaluations be conducted under a pilot project basis. Members of Congress have also introduced several bills over the past year that would provide additional mechanisms for direct review and approval (or disapproval) of agencies’ rules. Some of these proposals would modify how Congress reviews information submitted under CRA and how the disapproval procedures would work. These bills could, for example, create a joint committee that would be tasked with reviewing all rules to determine whether a disapproval resolution under CRA should be introduced. We have conducted no work that would provide information on the potential effectiveness of such changes. Mr. Chairman, this concludes my prepared statement. Once again, I appreciate the opportunity to testify on these important issues. I would be pleased to address any questions you or other Members of the Subcommittee might have at this time. If additional information is needed regarding this testimony, please contact J. Christopher Mihm, Managing Director, Strategic Issues, at (202) 512-6806 or mihmj@gao.gov. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

This year marks the 10th anniversary of the Congressional Review Act (CRA). Congressional oversight of rulemaking using the CRA can be an important and useful tool for monitoring the regulatory process and balancing and accommodating the concerns of American citizens and businesses with the effects of federal agencies' rules. This statement provides an overview of the purpose and provisions of CRA; GAO's role and activities in fulfilling its responsibilities under the Act; and trends on CRA within the broader context of developments in presidential and congressional oversight of federal agencies' rulemaking. CRA gives Congress an opportunity to review most rules before they take effect and to disapprove those found to be too burdensome, excessive, inappropriate, duplicative, or otherwise objectionable. Under CRA, two types of rules, major and nonmajor, must be submitted to both Houses of Congress and GAO before they can take effect. The Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget specifies which rules are designated as major rules based on criteria set out in the CRA. Major rules cannot be effective until 60 days after publication in the Federal Register or submission to Congress and GAO, whichever is later. Congress may disapprove agencies' rules by introducing a resolution of disapproval that, if adopted by both Houses of Congress and signed by the President, can nullify an agency's rule. Members of Congress seldom have attempted to use this process. GAO's role under CRA is to provide Congress with a report on each major rule concerning GAO's assessment of the promulgating federal agency's compliance with the procedural steps required by various acts and executive orders governing the regulatory process. GAO compiles information on the rules it receives under CRA in a database containing basic information about major and nonmajor rules. GAO also conducts an annual review to determine whether all final rules covered by the Act and published in the Federal Register have been filed with the Congress and GAO. Although we reported that agencies' compliance with CRA requirements was inconsistent during the first years after CRA's enactment, compliance improved over time. There have been a limited number of CRA joint resolutions, but the benefits of compiling and making information available on potential federal actions should not be underestimated. The procedures for congressional disapproval also may have some deterrent effect. Efforts to enhance presidential oversight of agencies' rulemaking appear to have been more significant and widely employed in recent years than similar efforts to enhance congressional oversight. Some recent legislative proposals have focused on expanding the information and analysis available to Congress on pending rules, while others focus on enhancing the mechanisms that Congress could employ for its own review--and potential disapproval--of agencies' rules.

Several different federal agencies are involved with the implementation of the Subtitle B program, including Labor, HHS, and Energy. However, Labor has primary responsibility for administering the program. Labor receives the claims, determines whether the claimant meets the eligibility requirements, and adjudicates the claim. When considering the compensability of certain claims, Labor relies on dose reconstructions developed by NIOSH, under HHS. To avoid gathering similar information for each claim associated with a particular facility, NIOSH compiles facility-specific information in “site profiles,” which assist NIOSH in completing the dose reconstructions. NIOSH contracted with Oak Ridge Associated Universities and the Battelle Corporation to develop site profiles and draft dose reconstructions. Energy is responsible for providing Labor and NIOSH with employment verification, estimated radiation dose, and facility-wide monitoring data. Labor does not refer all claims to NIOSH for dose reconstruction. For example, reconstructions are not needed for workers in the special exposure cohort. For special exposure cohort claimants, Labor verifies the employment and illness, and develops a recommended compensability decision that is issued to the claimant. The act specified that classes of workers from four designated locations would constitute the special exposure cohort and authorized the Secretary of HHS to add additional classes of employees. Classes of workers may petition HHS to be added to the cohort. A class of employees is generally defined by the facility at which they worked, the specific years they worked, and the type of work they did. NIOSH collects and evaluates the petitions and gives the results of its evaluations to the advisory board for review. The board, in turn, submits a recommendation to the Secretary of HHS to accept or deny the petition. To date, 13 classes of workers have been approved at 10 sites, and petitions from 9 additional sites have been qualified for evaluation. A petition from one site has been evaluated and denied. Our May 2004 report identified various problems with Energy’s processing of Subtitle D cases. Energy got off to a slow start in processing cases but had taken some steps to reduce the backlog of cases waiting for review by a physician panel. For example, Energy took steps to expand the number of physicians who would qualify to serve on the panels and recruit more physicians. Nonetheless, a shortage of qualified physicians continued to constrain the agency’s capacity to decide cases more quickly. Further, insufficient strategic planning and systems limitations made it difficult to assess Energy’s achievement of goals relative to case processing and program objectives, such as the quality of the assistance provided to claimants in filing for state workers’ compensation. We concluded that in the absence of changes that would expedite Energy’s review, many claimants would likely wait years to receive the determination they needed from Energy to pursue a state workers’ compensation claim, and in the interim their medical conditions might worsen or they might even die. We made several recommendations to Energy to help improve its effectiveness in assisting Subtitle D claimants in obtaining compensation. Specifically, we recommended that Energy take additional steps to expedite the processing of claims through its physician panels, enhance the quality of its communications with claimants, and develop cost- effective methods for improving the quality of case management data and its capabilities to aggregate these data to address program issues. Energy generally agreed with these recommendations. Our May 2004 report also identified structural problems that could lead to inconsistent benefit outcomes for claimants whose illness was determined by a physician panel to be caused by exposure to toxic substances while employed at an Energy facility. Our analysis of cases associated with Energy facilities in nine states indicated that a few thousand cases would lack a “willing payer” of workers’ compensation benefits; that is, they would lack an insurer that—by order from, or agreement with, Energy— would not contest these claims. As a result, in some instances, these cases may have been less likely to receive compensation than cases for which there was a willing payer. We identified various options for restructuring the program to improve payment outcomes and presented a framework of issues to consider in evaluating these options. Congress subsequently enacted legislation that dramatically restructured the program, transferred it from Energy to Labor, and incorporated features of some of the options we identified. Labor told us it has taken actions to address each of the recommendations we made to the Secretary of Energy in our report. For example, Labor has compiled a data base of the toxic substances that may have been present at Energy facilities and linked them to medical conditions to help expedite the processing of claims. In addition, Labor has rebuilt its case management system which tracks all Subtitle E claims transferred from Energy and enhanced the system’s performance and reliability. Our September 2004 report on the Subtitle B program found that in the first 2½ years of the program, Labor and NIOSH had fully processed only 9 percent of the more than 21,000 claims that were referred to NIOSH for dose reconstruction. NIOSH officials reported that the backlog of dose reconstruction claims arose because of several factors, including the time needed to get the necessary staff and procedures in place for performing dose reconstructions and to develop site profiles. NIOSH learned from its initial implementation experience that completing site profiles is a critical element for efficiently processing claims requiring dose reconstructions. To enhance program management and promote greater transparency with regard to timeliness, we recommended that the Secretary of HHS direct agency officials to establish time frames for completing the remaining site profiles, which HHS has done. Our February 2006 report discussed the roles of certain federal agency officials involved in the advisory board’s review of NIOSH’s dose reconstructions and site profiles that raised concerns about the independence of this review. The project officer who was initially assigned responsibility for reviewing the monthly progress reports and monitoring the technical performance of the contractor reviewing NIOSH’s dose reconstruction activities for the advisory board was also a manager of the NIOSH dose reconstruction program. In addition, the person assigned to be the designated federal officer for the advisory board, who is responsible for scheduling and attending board meetings, was also the director of the dose reconstruction program being reviewed. In response to concerns about the appearance of conflicting roles, the director of NIOSH replaced both of these officials in December 2004 with a senior NIOSH official not involved in the program. The contractor and members of the board told us that implementation of the contract improved after these officials were replaced. Since credibility is essential to the work of the advisory board and the contractor assisting the board, we concluded that continued diligence by HHS is required to prevent such problems from recurring when new candidates are considered for these roles. With regard to structural independence, we found it appropriate that the contracting officers managing the contract on behalf of the advisory board were officials from the Centers for Disease Control and Prevention, NIOSH’s parent agency, who do not have responsibilities for the NIOSH program under review and are not accountable to its managers. In addition, advisory board members helped facilitate the independence of the contractor’s work by playing the leading role in developing and approving the initial statement of work for the contractor and the independent government cost estimate for the contract. Our February 2006 report identified further improvements that could be made to the oversight and planning of the advisory board’s contracted review of NIOSH’s dose reconstructions and site profiles. We found that this review presented a steep learning curve for the various parties involved. In the first 2 years, the contractor assisting the board had spent almost 90 percent of the $3 million that had been allocated to the contract for a 5-year undertaking. In addition, the contractor’s expenditure levels were not adequately monitored by the agency in the initial months and the contractor’s monthly progress reports did not provide sufficient details on the level of work completed compared to funds expended. The advisory board had made mid-course adjustments to the contractor’s task orders and review procedures, such as by revising task orders to reduce the number of reviews to be completed or extend completion dates. However, the board had not comprehensively reexamined its long-term plan for the overall project to determine whether the plan needed to be modified in light of knowledge gained over the past few years. Finally, without a system to track the actions taken by NIOSH in response to the findings and recommendations of the advisory board and contractor, there was no assurance that needed improvements were being made. We made three recommendations to HHS to address these shortcomings. First, we recommended that HHS provide the board with more integrated and comprehensive data on contractor spending levels compared with work actually completed, which HHS has done. Second, we recommended that HHS consider the need for providing HHS staff to collect and analyze pertinent information to help the advisory board comprehensively reexamine its long-term plan for assessing the NIOSH site profiles and dose reconstructions. HHS is considering the need for such action. Third, we recommended that the Director of NIOSH establish a system to track actions taken by the agency in response to the board and contractor’s findings and recommendations. NIOSH now tracks agency actions to resolve the board and contractor’s comments. As part of our ongoing work, we are examining to what extent, if any, Labor is involved in certain Subtitle B activities. While the director of Labor’s Office of Workers’ Compensation Programs stated that Labor has not taken any actions to implement the options outlined in the OMB memorandum, Labor’s internal correspondence reflects major concerns about the potential for rapidly expanding costs in Subtitle B benefits resulting from adding new classes of workers to the special exposure cohort. One aspect of our ongoing work is determining whether Labor is involved in activities that have been tasked to NIOSH, the advisory board, or the contractor assisting the board, and if so, whether these activities reflect an effort to constrain the costs of benefits. Our work in this area is still ongoing and we have not drawn any conclusions. Nonetheless, we would like to briefly highlight the types of issues we will be analyzing as our work proceeds. NIOSH has, in some cases, shared draft versions of key documents with Labor before finalizing and sending them to the advisory board for review. For example, NIOSH has shared draft special exposure cohort petition evaluations with Labor. Similarly, NIOSH has agreed to allow Labor to review and comment on drafts of various technical documents such as site profiles, technical basis documents, or technical information bulletins, all of which are used to help perform dose reconstructions. Labor has provided comments on some of these draft documents. Labor officials told us that the basis of their involvement is Labor’s designation as lead agency with primary responsibility for administering the program. Labor officials added that their reviews of these documents focus on changes needed to promote clarity and consistency in the adjudication of claims. In addition, Labor has reviewed individual dose reconstructions completed by NIOSH. Labor officials told us that they review all NIOSH dose reconstructions and return them for rework if, for example, they find errors in factual information or in the way the dose reconstruction methodology was applied. We are currently examining the extent, nature, and outcome of Labor’s comments on these various documents. As our review proceeds, we plan to obtain more information on key issues such as the timing, nature, and basis of Labor’s activities in light of the program’s design and assignment of responsibilities. Mr. Chairman, this concludes my prepared remarks. I will be pleased to answer any questions you or other Members of the Subcommittee may have. For further information regarding this testimony, please contact me at (202) 512-7215. Key contributors to this testimony were Claudia Becker, Meeta Engle, Robert Sampson, Andrew Sherrill, and Charles Willson. Department of Energy, Office of Worker Advocacy: Deficient Controls Led to Millions of Dollars in Improper and Questionable Payments to Contractors. GAO-06-547. Washington, D.C.: May 31, 2006. Energy Employees Compensation: Adjustments Made to Contracted Review Process, but Additional Oversight and Planning Would Aid the Advisory Board in Meeting Its Statutory Responsibilities. GAO-06-177. Washington, D.C.: Feb. 10, 2006. Energy Employees Compensation: Many Claims Have Been Processed, but Action Is Needed to Expedite Processing of Claims Requiring Radiation Exposure Estimates. GAO-04-958. Washington, D.C.: Sept. 10, 2004. Energy Employees Compensation: Even with Needed Improvements in Case Processing, Program Structure May Result in Inconsistent Benefit Outcomes. GAO-04-516. Washington, D.C.: May 28, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Energy Employees Occupational Illness Compensation Program Act (EEOICPA) was enacted in 2000 to compensate Department of Energy employees and contractors who developed work-related illnesses such as cancer and lung disease. Energy administered Subtitle D of the program. Subtitle B of the program is administered by the Department of Labor, which uses estimates of workers' likely radiation exposure to make compensation decisions. The estimates, known as dose reconstructions, are performed by the National Institute for Occupational Safety and Health (NIOSH) under the Department of Health and Human Services (HHS). The act specified that the President establish an Advisory Board on Radiation and Worker Health to review the scientific validity of NIOSH's dose reconstructions and recommend whether workers should be part of special exposure cohorts whose claimants can be compensated without dose reconstructions. A recent memorandum from the Office of Management and Budget (OMB) to Labor has raised concern about potential efforts to unduly contain the cost of benefits paid to claimants. This testimony presents GAO's past work on program performance and the work of the advisory board. It also highlights GAO's ongoing work relevant to issues raised by the OMB memorandum. GAO interviewed key officials and reviewed contract and other agency documents. GAO issued two reports in 2004 that focused on claims processing and program structure. The first report found that Energy got off to a slow start in processing Subtitle D claims and faced a backlog of cases. In addition, limitations in data systems made it difficult to assess Energy's performance. GAO recommended that Energy take actions to expedite claims processing, enhance communication with claimants, and improve case management data. The report also highlighted problems with program structure that could lead to inconsistent benefit outcomes and GAO presented various options for restructuring the program. Congress subsequently incorporated features of some of these options in enacting new legislation that dramatically restructured the program and transferred it from Energy to Labor. Labor has taken action to address the recommendations GAO made to Energy. The second report found that Labor and NIOSH faced a large backlog of claims awaiting dose reconstruction. To enhance program management and transparency, HHS implemented GAO's recommendation to establish time frames for completing profiles of Energy work sites, which are a critical element in efficiently processing claims that require dose reconstruction. GAO's February 2006 report found that the roles of two key NIOSH officials involved with the work of the advisory board may not have been sufficiently independent because these officials also represented the dose reconstruction program under review. In response, NIOSH replaced them with a senior official not involved in the program. Since credibility is essential to the advisory board's work, GAO concluded that ongoing diligence by HHS is required to avoid actual or perceived conflicts of roles when new candidates are considered for these roles. GAO also found that the board's work presented a steep learning curve, prompting adjustments to the work done by the contractor assisting the board. GAO recommended actions to provide the board with more comprehensive data on contractor spending levels compared to work actually completed, assist the board in reexamining its long-term plan for reviewing NIOSH's work, and better track agency actions taken in response to board and contractor findings. HHS has implemented these recommendations. One aspect of GAO's ongoing work especially relevant to the OMB memorandum is the extent to which Labor's concerns over potentially escalating benefit costs may have led the agency to be involved in activities tasked to NIOSH, the advisory board, or the contractor assisting the board. NIOSH agreed to provide Labor with draft versions of some of its evaluations of special exposure cohort petitions and other NIOSH technical documents before sending them for board review. Labor has commented on some of these draft documents. Labor officials told us that their reviews focus on changes needed to promote clarity and consistency in the adjudication of claims. As the review proceeds, GAO plans to obtain more information on key issues such as the timing, nature, and basis of Labor's activities in light of the program's design and assignment of responsibilities.

The Internet is a worldwide network of networks made up of servers, routers, and backbone networks. To send a communication from one computer to another, a series of addresses is attached to information sent from the first computer to route the information to its final destination. The protocol that guides the administration of the routing addresses is the Internet protocol. The most widely deployed version of IP is version 4 (IPv4). The two basic functions of IP include (1) addressing and (2) fragmentation of data, so that information can move across networks. An IP address consists of a fixed sequence of numbers. IPv4 uses a 32-bit address format, which provides approximately 4.3 billion unique IP addresses. By providing a numerical description of the location of networked computers, addresses distinguish one computer from another on the Internet. In some ways, an IP address is like a physical street address. For example, if a letter is going to be sent from one location to another, the contents of the letter must be placed in an envelope that provides addresses for the sender and receiver. Similarly, if data are to be transmitted across the Internet from a source to a destination, IP addresses must be placed in an IP header. Figure 1 is a simplified illustration of this concept. In addition to containing the addresses of sender and receiver, the header also contains a series of fields that provide information about what is being transmitted. Limited IPv4 address space prompted organizations that need large numbers of IP addresses to implement technical solutions to compensate. For example, network administrators began to use one unique IP address to represent a large number of users. In other words, to the outside world, all computers behind a device known as a network address translation router appear to have the same address. While this method has enabled organizations to compensate for the limited number of globally unique IP addresses available with IPv4, the resulting network structure has eliminated the original end-to-end communications model of the Internet. Because of the limitations of IPv4, in 1994 the Internet Engineering Task Force (IETF) began reviewing proposals for a successor to IPv4 that would increase IP address space and simplify routing. The IETF established a working group to be specifically responsible for developing the specifications and standardization of IPv6. Over the past 10 years, IPv6 has evolved into a mature standard. A complete list of the IPv6 documents can be found at the IETF Web site. Interest in IPv6 is gaining momentum around the world, particularly in parts of the world that have limited IPv4 address space to meet their industry and consumer communications needs. Regions that have limited IPv4 address space, such as Asia and Europe, have undertaken efforts to develop, test, and implement IPv6 deployments. As a region, Asia controls only about 9 percent of the allocated IPv4 addresses, and yet has more than half of the world’s population. As a result, the region is investing in IPv6 development, testing, and implementation. For example, the Japanese government’s e-Japan Priority Policy Program mandated the incorporation of IPv6 and set a deadline of 2005 to upgrade existing systems in both the public and private sectors. The government has helped to support the establishment of an IPv6 Promotion Council to facilitate issues related to development and deployment and is providing tax incentives to promote deployment. In addition, major Japanese corporations in the communications and consumer electronics sectors are also developing IPv6 networks and products. Further, the Chinese government has reportedly set aside approximately $170 million to develop an IPv6-capable infrastructure. The European Commission initiated a task force in April 2001 to design an IPv6 Roadmap. The Roadmap serves as an update and plan of action for development and future perspectives. It also serves as a way to coordinate European efforts for developing, testing, and deploying IPv6. Europe currently has a task force that has the dual mandate of initiating country/regional IPv6 task forces across European states and seeking global cooperation around the world. Europe’s Task Force and the Japanese IPv6 Promotion Council forged an alliance to foster worldwide deployment. The key characteristics of IPv6 are designed to increase address space, promote flexibility and functionality, and enhance security. For example, IPv6 dramatically increases the amount of IP address space available from the approximately 4.3 billion in IPv4 to approximately 3.4 × 10This large number of IPv6 addresses means that almost any electronic device can have its own address. While IP addresses are commonly associated with computers, they are increasingly being assigned to other items such as cellular phones, consumer electronics, and automobiles. In contrast to IPv4, the massive address space available in IPv6 will allow virtually any device to be assigned a globally reachable address. This change fosters greater end-to-end communications between devices with unique IP addresses and can better support the delivery of data-rich content such as voice and video. In addition to the increased number of addresses, IPv6 improves the routing of data, provides mobility features for wireless, and eases automatic configuration capabilities for network administration, quality of service, and security. These characteristics are expected to enable advanced Internet communications and foster new software applications. While applications that fully exploit IPv6 are still in development, industry experts have identified various federal functions that might benefit from IPv6-enabled applications, such as border security, first responders, public health, and information sharing. The transition to IPv6 is under way for many federal agencies because their networks already contain IPv6-capable software and equipment. For example, most major operating systems, printers, and routers currently support IPv6. Therefore, it is important for agencies to note that the transition to IPv6 is different from a software upgrade because, when it is installed, its capability is also being integrated into the software and hardware. Besides recognizing that an IPv6 transition is already under way, other key considerations for federal agencies to address in an IPv6 transition include significant IT planning efforts and immediate actions to ensure the security of agency information and networks. Important planning considerations include the following: ● Developing inventories and assessing risks—An inventory of equipment (software and hardware) provides management with an understanding of the scope of an IPv6 transition and assists in focusing agency risk assessments. These assessments are essential steps in determining what controls are required to protect a network and what level of resources should be expended on controls. ● Creating business cases for an IPv6 transition—A business case usually identifies the organizational need for the system and provides a clear statement of the high-level system goals. One key aspect to consider while drafting the business case for IPv6 is to understand how many devices an agency wants to connect to the Internet. This will help in determining how much IPv6 address space is needed for the agency. Within the business case, it is crucial to include how the new technology will integrate with the agency’s existing enterprise architecture. ● Establishing policies and enforcement mechanisms—Developing and establishing IPv6 transition policies and enforcement mechanisms are important considerations for ensuring an efficient and effective transition. Furthermore, because of the scope, complexities, and costs involved in an IPv6 transition, effective enforcement of agency IPv6 policies is an important consideration for management officials. ● Determining the costs—Cost benefit analyses and return-on- investment calculations can be used to justify investments. During the year 2000 (Y2K) technology challenge, the federal government amended the Federal Acquisition Regulation and mandated that all contracts for information technology include a clause requiring the delivered systems or service to be ready for the Y2K date change. This helped prevent the federal government from procuring systems and services that might have been obsolete or that required costly upgrades. Similarly, proactive integration of IPv6 requirements into federal acquisition requirements can reduce the costs and complexity of the IPv6 transition of federal agencies and ensure that federal applications are able to operate in an IPv6 environment without costly upgrades. ● Identifying timelines and methods for the transition—Timelines and process management can assist a federal agency in determining when to authorize its various component organizations to allow IPv6 traffic and features. Additionally, agencies can benefit from understanding the different types of transition methods or approaches that can allow them to use both IPv4 and IPv6 without causing significant interruptions in network services. As IPv6-capable software and devices accumulate in agency networks, they could be abused by attackers if not managed properly. For example, IPv6 is included in most computer operating systems and, if not enabled by default, is easy for administrators to enable either intentionally or as an unintentional byproduct of running a program. We tested IPv6 features and found that, if firewalls and intrusion detection systems are not appropriately configured, IPv6 traffic may not be detected or controlled, leaving systems vulnerable to attacks by malicious hackers. Further, in April 2005, the United States Computer Emergency Response Team (US-CERT), located at the Department of Homeland Security (DHS), issued an IPv6 cyber security alert to federal agencies based on our IPv6 test scenarios and discussions with DHS officials. The alert warned federal agencies that unmanaged or rogue implementations of IPv6 present network management security risks. Specifically, the US-CERT notice informed agencies that some firewalls and network intrusion detection systems do not provide IPv6 detection or filtering capability and that malicious users might be able to tunnel IPv6 traffic through these security devices undetected. Further, one feature of IPv6, known as automatic configuration (where a device that is IPv6 enabled will derive its own IP address from neighboring routers without an administrator’s intervention), could allow devices to automatically configure themselves with an IPv6 address without authorization. US-CERT provided agencies with a series of short-term solutions including ● determining if firewalls and intrusion detection system products support IPv6 and implement additional IPv6 security measures and identifying IPv6 devices and disabling if not necessary. The Department of Defense’s transition to IPv6 is a key component of its business case to improve interoperability among many information and weapons systems, known as the Global Information Grid (GIG). The IPv6 component of GIG facilitates DOD’s goal of achieving network-centric operations by exploiting the key characteristics of IPv6, including ● enhanced mobility features, ● enhanced configuration features, ● enhanced quality of service, and ● enhanced security features. The department’s efforts to develop policies, timelines, and methods for transitioning to IPv6 are progressing. In 2004, Defense established an IPv6 Transition Office to provide the overall coordination, common engineering solutions, and technical guidance across the department to support an integrated and coherent transition to IPv6. The Transition Office is in the early stages of its work and has developed a set of products, including a draft system engineering management plan, risk management planning documentation, budgetary documentation, requirements criteria, and a master schedule. The management schedule includes a set of implementation milestones that include DOD’s goal of transitioning to IPv6 by fiscal year 2008. In parallel with the Transition Office’s efforts, the Office of the DOD Chief Information Officer has created an IPv6 transition plan. The Chief Information Officer has responsibility for ensuring a coherent and timely transition and for establishing and maintaining the overall departmental transition plan, and is the final approval authority for any IPv6 transition waivers. Although DOD has made substantial progress in developing a planning framework for transitioning to IPv6, the department still faces several challenges, including developing a full inventory of IPv6-capable software and hardware, finalizing its IPv6 systems engineering management plan, monitoring its operational networks for unauthorized IPv6 traffic, and developing a comprehensive enforcement strategy, including using its existing budgetary and acquisition review process. Unlike DOD, the majority of other federal agencies reporting have not yet initiated transition planning efforts for IPv6. For example, of the 22 agencies that responded to our survey, 4 agencies reported having established a date or goal for transitioning to IPv6. The majority of agencies have not addressed key planning considerations. For example, ● 22 agencies reported not having developed a business case, ● 21 agencies reported not having plans, ● 19 agencies reported not having inventoried their IPv6-capable ● 22 agencies reported not having estimated costs. Agency responses demonstrate that few efforts outside DOD have been initiated to address IPv6. If agency planning is not carefully monitored, it could result in significant and unexpected costs for the federal government. To address the challenges IPv6 presents to federal networks, in our report we recommended that federal agencies begin addressing key IPv6 planning considerations. Specifically, we recommended that the Director of OMB instruct agencies to begin developing inventories and assessing risks, creating business cases for the IPv6 transition, establishing policies and enforcement mechanisms, determining the costs, and identifying timelines and methods for transition, as appropriate. To help ensure that IPv6 would not result in unexpected costs for the federal agencies, we recommended that the Director consider amending the Federal Acquisition Regulation with specific language that requires that all information technology systems and applications purchased by the federal government be able to operate in an IPv6 environment. Finally, because poorly configured and unmanaged IPv6 capabilities present immediate risks to federal agency networks, we recommended that agency heads take immediate action to address the near-term security risks. Such actions could include determining what IPv6 capabilities they may have and initiating steps to ensure that they can control and monitor IPv6 traffic to prevent unauthorized access. In summary, transitioning to IPv6 is a pervasive, crosscutting challenge for federal agencies that could result in significant benefits to agency services and operations. But such benefits may be diminished if action is not taken to ensure that agencies are addressing the attendant challenges, including addressing key planning considerations and acting to ensure the security of agency information and networks. If agencies do not address these key planning issues and do not seek to understand the potential scope and complexities of IPv6 issues—whether agencies plan to transition immediately or not—they will face potentially increased costs and security risks. Mr. Chairman, this completes our prepared statement. We would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information, please contact David Powner at (202)-512- 9286 or Keith Rhodes at (202)-512-6412. We can also be reached by e-mail at pownerd@gao.gov and rhodesk@gao.gov respectively. Key contributors to this testimony were Scott Borre, Lon Chin, West Coile, Camille Chaires, John Dale, Neil Doherty, Nancy Glover, Richard Hung, Hal Lewis, George Kovachick, J. Paul Nicholas, Christopher Owens, Eric Trout, and Eric Winter. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Internet protocol (IP) provides the addressing mechanism that defines how and where information such as text, voice, and video moves across interconnected networks. Internet protocol version 4 (IPv4), which is widely used today, may not be able to accommodate the increasing number of global users and devices that are connecting to the Internet. As a result, IP version 6 (IPv6) was developed to increase the amount of available IP address space. The new protocol is gaining increased attention from regions with limited IP addresses. For its testimony, GAO was asked to discuss the findings and recommendations of its recent study of IPv6 (GAO-05-471). In this study, GAO was asked to (1) describe the key characteristics of IPv6; (2) identify the key planning considerations for federal agencies in transitioning to IPv6; and (3) determine the progress made by the Department of Defense (DOD) and other major agencies in the transition to IPv6. The key characteristics of IPv6 are designed to increase address space, promote flexibility and functionality, and enhance security. For example, by using 128-bit addresses rather than 32-bit addresses, IPv6 dramatically increases the available Internet address space from approximately 4.3 billion in IPv4 to approximately 3.4 x 10^38 in IPv6. Key planning considerations for federal agencies include recognizing that the transition is already under way, because agency networks already include IPv6-capable software and equipment. Other important agency planning considerations include developing inventories and assessing risks; creating business cases that identify organizational needs and goals; establishing policies and enforcement mechanisms; determining costs; and identifying timelines and methods for transition. Managing the security aspects of transition is also an important consideration because poorly managed IPv6 capabilities can put agency information and systems at risk. DOD has made progress in developing a business case, policies, timelines, and processes for transitioning to IPv6. Unlike DOD, the majority of other major federal agencies reported that they have not yet initiated key planning efforts for IPv6. In its report, GAO recommended, among other things, that the Director of the Office of Management and Budget (OMB) instruct agencies to begin to address key planning considerations for the IPv6 transition and that agencies act to mitigate near-term IPv6 security risks. Officials from OMB, DOD, and Commerce generally agreed with the contents of the report.

Historically, the U.S. government has granted federal recognition through treaties, congressional acts, or administrative decisions within the executive branch—principally by the Department of the Interior. In a 1977 report to the Congress, the American Indian Policy Review Commission criticized the department’s tribal recognition policy. Specifically, the report stated that the department’s criteria for assessing whether a group should be recognized as a tribe were not clear and concluded that a large part of the department’s policy depended on which official responded to the group’s inquiries. Nevertheless, until the 1960s, the limited number of requests for federal recognition gave the department the flexibility to assess a group’s status on a case-by-case basis without formal guidelines. However, in response to an increase in the number of requests for federal recognition, the department determined that it needed a uniform and objective approach to evaluate these requests. In 1978, it established a regulatory process for recognizing tribes whose relationship with the United States had either lapsed or never been established—although tribes may also seek recognition through other avenues, such as legislation or Department of the Interior administrative decisions, which are unconnected to the regulatory process. In addition, not all tribes are eligible for the regulatory process. For example, tribes whose political relationship with the United States has been terminated by the Congress, or tribes whose members are officially part of an already recognized tribe, are ineligible to be recognized through the regulatory process and must seek recognition through other avenues. The 1978 regulations lay out seven criteria that a group must meet before it can become a federally recognized tribe. Essentially, these criteria require the petitioner to show that it is descended from a historic tribe and is a distinct community that has continuously existed as a political entity since a time when the federal government broadly acknowledged a political relationship with all Indian tribes. The burden of proof is on petitioners to provide documentation to satisfy the seven criteria. The technical staff within Interior’s Office of Federal Acknowledgment, consisting of historians, anthropologists, and genealogists, reviews the submitted documentation and makes recommendations on a proposed finding either for or against recognition. Staff recommendations are subject to review by Interior’s Office of the Solicitor and senior officials within the Office of the Assistant Secretary for Indian Affairs. The Assistant Secretary for Indian Affairs makes the final decision regarding the proposed finding, which is then published in the Federal Register, and a period of public comment, document submission, and response is allowed. The technical staff reviews the comments, documentation, and responses and makes recommendations on a final determination that are subject to the same levels of review as a proposed finding. The process culminates in a final determination by the Assistant Secretary who, depending on the nature of further evidence submitted, may or may not rule the same way as the proposed finding. Petitioners and others may file requests for reconsideration with the Interior Board of Indian Appeals. Congressional policymakers have struggled with the tribal recognition issue for decades. Since 1977, 28 bills have been introduced to add a statutory framework for the tribal recognition process (see table 1). Of the House bills, only H.R. 4462 from the 103rd Congress was passed by the full House (on October 3, 1994). None of the Senate bills have been passed by the full Senate. Additional bills have also been introduced to recognize specific tribes; provide grants to local communities or Indian groups involved in the tribal recognition process; or, more recently, address the timeliness of the recognition process. For example, H.R. 4933 and H.R. 5134, introduced in the 108th Congress, and H.R. 512, which was introduced last week, have focused on the timeliness of the recognition process. BIA’s regulations outline a process for active consideration of a completed petition that should take about 2 years. However, because of limited resources, a lack of time frames, and ineffective procedures for providing information to interested third parties, we reported in 2001 that the length of time needed to rule on tribal petitions for federal recognition was substantial. At that time, the workload of the BIA staff assigned to evaluate recognition decisions had increased while resources had declined. There was a large influx of completed petitions ready to be reviewed in the mid- 1990s. The chief of the branch responsible for evaluating petitions told us that based solely on the historic rate at which BIA had issued final determinations, it could take 15 years to resolve all the completed petitions then awaiting active consideration. Compounding the backlog of petitions awaiting evaluation in 2001 was the increased burden of related administrative responsibilities that reduced the proportion of time available to BIA’s technical staff to evaluate petitions. Although they could not provide precise data, members of the staff told us that this burden had increased substantially over the years and estimated that they spent up to 40 percent of their time fulfilling administrative responsibilities. In particular, there were substantial numbers of Freedom of Information Act (FOIA) requests related to petitions. Also, petitioners and third parties frequently filed requests for reconsideration of recognition decisions that needed to be reviewed by the Interior Board of Indian Appeals, requiring the staff to prepare the record and respond to issues referred to the Board. Finally, the regulatory process had been subject to an increasing number of lawsuits from dissatisfied parties—those petitioners who had completed the process and had been denied recognition, as well as by petitioners who were dissatisfied with the amount of time it was taking to process their petitions. Technical staff represented the vast majority of resources used by BIA to evaluate petitions and perform related administrative duties. Despite the increased workload faced by BIA’s technical staff, the available staff resources to complete the workload had decreased. The number of BIA staff assigned to evaluate petitions peaked in 1993 at 17. However, from 1996 through 2000, the number of staff averaged less than 11, a decrease of more than 35 percent. While resources were not keeping pace with workload, the recognition process also lacked effective procedures for addressing the workload in a timely manner. Although the regulations established timelines for processing petitions that, if met, would result in a final decision in approximately 2 years, these timelines were routinely extended, either because of BIA resource constraints or at the request of petitioners and third parties (upon showing good cause). As a result, only 12 of the 32 petitions that BIA had finished reviewing by 2001 were completed within 2 years or less, and all but 2 of the 13 petitions under review in 2001 had already been under review for more than 2 years. While BIA could extend the timelines, it had no mechanism to balance the need for a thorough review of a petition with the need to complete the decision process. As a result, the decision process lacked effective timelines that would have created a sense of urgency to offset the desire to consider all information from all interested parties in the process. In fiscal year 2000, BIA dropped its long-term goal of reducing the number of petitions actively being considered from its annual performance plan because the addition of new petitions would have made this goal impossible to achieve. We also found that as third parties, such as local municipalities and other Indian tribes, became more active in the recognition process—for example, initiating inquiries and providing information—the procedures for responding to their increased interest had not kept pace. Third parties told us they wanted more detailed information earlier in the process so that they could fully understand a petition and effectively comment on its merits. However, in 2001 there were no procedures for regularly providing third parties more detailed information. For example, while third parties were allowed to comment on the merits of a petition before a proposed finding, there was no mechanism to provide any information to third parties before the proposed finding. As a result, third parties were making FOIA requests for information on petitions much earlier in the process and often more than once in an attempt to obtain the latest documentation submitted. Since BIA had no procedures for efficiently responding to FOIA requests, staff members hired as historians, genealogists, and anthropologists were pressed into service to copy the voluminous records of petitions to respond to FOIA requests. In light of these problems, we recommended in our November 2001 report that the Secretary of the Interior direct BIA to develop a strategy to improve the responsiveness of the process for federal recognition. Such a strategy was to include a systematic assessment of the resources available and needed that could lead to the development of a budget commensurate with the workload. The department generally agreed with this recommendation. In response to our report, Interior’s Office of Federal Acknowledgment has hired additional staff and taken a number of other important steps to improve the responsiveness of the tribal recognition process. However, it still could take 4 or more years, at current staff levels, to work through the existing backlog of petitions currently under review, as well as those ready and waiting for consideration. In response to our report, two vacancies within Interior’s Office of Federal Acknowledgment were filled, resulting in a professional staff of three research teams, each consisting of a cultural anthropologist, historian, and genealogist. In September 2002, the Assistant Secretary for Indian Affairs estimated that three research teams could issue three proposed findings and three final determinations per year and eliminate the backlog of petitions in approximately 6 years, or by September 2008. Through additional appropriations in fiscal years 2003 and 2004, the Office of Federal Acknowledgment was also able to utilize two sets of contractors to assist with the tribal recognition process. The first set of contractors included two FOIA specialists/record managers. The second set of contractors included three research assistants who worked with a computer database system scanning and indexing documents to help expedite the professional research staff evaluation of a petition. Both sets of contractors helped make the process more accessible to petitioners and interested parties, while increasing the productivity of the professional staff by freeing them of administrative duties. In addition, the September 2002 Strategic Plan, issued by the Assistant Secretary for Indian Affairs in response to our report, has been almost completely implemented by the Office of Federal Acknowledgment. Among other things, the Office of Federal Acknowledgment has developed a CD-ROM compilation of prior acknowledgment decisions and related documents that is a valuable tool for petitions and practitioners involved in the tribal recognition process. The main impediment to completely implementing the Strategic Plan and to making all of the information that has been compiled more accessible to the public is the fact that BIA continues to be disconnected from the Internet because of ongoing computer security concerns involving Indian trust funds. Even though Interior’s Office of Federal Acknowledgment has increased staff resources for processing petitions and taken other actions that we recommended, as of February 4, 2005, there were 7 petitions in active status and 12 petitions in ready and waiting for active consideration status. Eight of the 12 petitions have been waiting for 7 years or more, while the 4 other petitions have been ready and waiting for active consideration since 2003. In conclusion, although Interior’s recognition process is only one way by which groups can receive federal recognition, it is the only avenue to federal recognition that has established criteria and a public process for determining whether groups meet the criteria. However, in the past, limited resources, a lack of time frames, and ineffective procedures for providing information to interested third parties resulted in substantial wait times for Indian groups seeking federal recognition. While Interior’s Office of Federal Acknowledgment has taken a number of actions during the past 3 years to improve the timeliness of the process, it will still take years to work through the existing backlog of tribal recognition petitions. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information, please contact Robin M. Nazzaro on (202) 512- 3841. Individuals making key contributions to this testimony and the report on which it was based are Charles Egan, Mark Gaffigan, and Jeffery Malcolm. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Bureau of Indian Affairs' (BIA) regulatory process for recognizing tribes was established in 1978. The process requires groups that are petitioning for recognition to submit evidence that they meet certain criteria--basically that the petitioner has continuously existed as an Indian tribe since historic times. Critics of the process claim that it produces inconsistent decisions and takes too long. Congressional policymakers have struggled with the tribal recognition issue for over 27 years. H.R. 4933 and H.R. 5134, introduced in the 108th Congress, and H.R. 512, which was introduced last week, have focused on the timeliness of the recognition process. This testimony is based in part on GAO's report, Indian Issues: Improvements Needed in Tribal Recognition Process ( GAO-02-49 , November 2, 2001). Specifically, this testimony addresses (1) the timeliness of the recognition process as GAO reported in November 2001 and (2) the actions the Department of the Interior's Office of Federal Acknowledgment has taken since 2001 to improve the timeliness of the recognition process. In November 2001, GAO reported that BIA's tribal recognition process was ill equipped to provide timely responses to tribal petitions for federal recognition. BIA's regulations outline a process for evaluating a petition that was designed to take about 2 years. However, the process was being hampered by limited resources, a lack of time frames, and ineffective procedures for providing information to interested third parties, such as local municipalities and other Indian tribes. As a result, there were a growing number of completed petitions waiting to be considered. In 2001, BIA officials estimated that it could take up to 15 years for all the completed petitions to be resolved. To correct these problems, we recommended that BIA develop a strategy that identified how to improve the responsiveness of the process for federal recognition. Such a strategy was to include a systematic assessment of the resources available and needed that could lead to the development of a budget commensurate with the workload. While Interior's Office of Federal Acknowledgment has taken a number of important steps to improve the responsiveness of the tribal recognition process, it still could take 4 or more years, at current staff levels, to work through the existing backlog of petitions currently under review, as well as those that are ready and waiting for consideration. In response to GAO's 2001 report, two vacancies within the Office of Federal Acknowledgment were filled, resulting in a professional staff of three research teams, each consisting of a cultural anthropologist, historian, and genealogist. In addition, the September 2002 Strategic Plan, issued by the Assistant Secretary for Indian Affairs in response to GAO's report, has been almost completely implemented by the Office of Federal Acknowledgment. The main impediment to completely implementing the Strategic Plan and to making all of the information that has been compiled more accessible to the public is the fact that BIA continues to be disconnected from the Internet because of ongoing computer security concerns involving Indian trust funds.

GPRA is intended to shift the focus of government decisionmaking, management, and accountability from activities and processes to the results and outcomes achieved by federal programs. New and valuable information on the plans, goals, and strategies of federal agencies has been provided since federal agencies began implementing GPRA. Under GPRA, annual performance plans are to clearly inform the Congress and the public of (1) the annual performance goals for agencies’ major programs and activities, (2) the measures that will be used to gauge performance, (3) the strategies and resources required to achieve the performance goals, and (4) the procedures that will be used to verify and validate performance information. These annual plans, issued soon after transmittal of the President’s budget, provide a direct linkage between an agency’s longer-term goals and mission and day-to-day activities. Annual performance reports are to subsequently report on the degree to which performance goals were met. The issuance of the agencies’ performance reports, due this year by March 31, represents a new and potentially more substantive phase in the implementation of GPRA—the opportunity to assess federal agencies’ actual performance for the prior fiscal year and to consider what steps are needed to improve performance and reduce costs in the future. NSF’s mission is to promote the progress of science; to advance the national health, prosperity, and welfare; and to secure the national defense. NSF carries out its mission primarily by making merit-based grants and cooperative agreements to individual researchers and groups in partnership with colleges, universities, and other public and private institutions. For fiscal year 2001, NSF has a budget of $4.4 billion and a staff of about 1,200 government employees to accomplish its mission. Implementing GPRA has been a challenge for NSF, whose mission involves funding research activities, because the substance and timing of research outcomes are unpredictable and research results can be difficult to report quantitatively. With OMB’s approval, NSF uses an alternative format—a qualitative scale for the assessment of outcomes—for which it relies on independent committees of scientific experts. These committees determine the level of NSF’s success in achieving its goals. NSF uses quantitative goals for its management and investment process goals. This section discusses our analysis of NSF’s performance in achieving the selected key outcomes, as well as the strategies it has in place— particularly strategic human capital management and information technology strategies—for achieving these outcomes. In discussing these outcomes, we have also provided information drawn from our prior work on the extent to which NSF has provided assurance that the performance information it is reporting is accurate and credible. NSF, in its fiscal year 2000 performance report, states that it met its discoveries outcome and cites numerous examples of its achievements in such scientific fields as mapping the Arctic Ocean floor and extra-solar planetary discovery. NSF judged its performance as successful on the basis of assessments by independent committees of scientific experts. In compiling committee members’ scores and aggregating their comments, NSF took into account only those reports with substantive comments and ratings that were clearly justified. NSF officials told us that, for the scientific discoveries outcome goal, all of the committees judged NSF as successful in achieving it and justified their assessments. However, the performance report did not provide information on the specific numbers of reports it included and excluded in reaching its judgments for this outcome or any of the other outcomes. Furthermore, NSF discussed the independent scientific committees’ results for only one of the scientific discoveries five areas of emphasis—namely, the balance of innovative, risky, and interdisciplinary research area. Instead of providing a more complete analysis of the scientific committees’ assessments, NSF contracted with an external third party—PricewaterhouseCoopers—to make an independent assessment of the performance results. PricewaterhouseCoopers concluded that NSF’s fiscal year 2000 results were valid and verifiable. NSF’s fiscal year 2002 performance plan included a new section on the means and strategies for success related to this outcome that includes strategies that generally are clear and reasonable. To implement its outcome goal, NSF has both (1) process strategies, such as supporting the most promising ideas through merit-based grants and cooperative agreements, and (2) program strategies, such as supporting programmatic themes identified as areas of emphasis. However, NSF’s plan generally does not address key components of strategic human capital management, although its “people” and “management” outcome goals include such human capital initiatives as workforce diversity, an NSF Academy for workforce training, and a survey on the work environment. NSF is in the process of developing a 5-year strategic plan on its workforce needs that must be submitted to OMB by July 20, 2001. This strategic plan will guide NSF’s future effort in this area. NSF reported that it made substantial progress, achieving most of its performance goals related to the award and administration of research grants. While not listed as an outcome goal, the administration of grants includes many of NSF’s management and investment process goals. For example, NSF exceeded by 21 percent one of its management performance goals—to receive at least 60 percent of full grant proposal submissions electronically through a new computer system called FastLane. NSF also exceeded by 5 percent another management goal that at least 90 percent of its funds will be allocated to projects reviewed by appropriate peers external to NSF and selected through a merit-based competitive process. NSF continued to miss one of its investment process goals—to process 70 percent of proposals within 6 months of receipt—dropping from 58 percent to 54 percent in fiscal year 2000. As part of its review of NSF, PricewaterhouseCoopers concluded that NSF’s fiscal year 2000 processes were valid and verifiable and relied on sound business processes, system and application controls, and manual checks of system queries to confirm the accuracy of reported data. NSF’s fiscal year 2002 performance plan generally includes strategies for achieving NSF’s performance goals that appear to be clear and reasonable. However, in some cases, the strategies are vague, and how NSF will use them to achieve its performance goals is unclear. For example, one of NSF’s three strategies for identifying best management practices for its large infrastructure projects is to ensure input from members of the external community who build, operate, and utilize research facilities. Furthermore, while NSF has strategies for the process of funding awards, it does not generally address the oversight needs to ensure that funding recipients meet the awards’ requirements. NSF’s 5-year workforce strategic plan is addressing concerns regarding the management of a growing portfolio of program activities with relatively flat personnel levels—a key issue for developing strategic human capital management strategies. For the selected key outcomes, this section describes major improvements or remaining weaknesses in NSF’s (1) fiscal year 2000 performance report in comparison with its fiscal year 1999 report and (2) fiscal year 2002 performance plan in comparison with its fiscal year 2001 plan. It also discusses the degree to which the agency’s fiscal year 2000 report and fiscal year 2002 plan address concerns and recommendations by NSF’s Inspector General. NSF improved its fiscal year 2000 performance report, making major changes to address the weaknesses we reported in the prior year’s performance report. Our prior year’s review noted that NSF did not discuss either its reasons for falling short of a performance goal or its strategies for attaining the goal in the future. NSF’s 2000 report corrected this weakness. For example, regarding the technology-related goal to submit, review, and process proposals electronically, the report states that the reason for not achieving the goal was due to the technological, financial, and legal issues related to electronic signatures. The strategy for addressing the technological issue was to demonstrate the paperless review capability by conducting 10 pilot paperless projects in 2001 that manage the review process in an electronic environment. We also questioned the quality of the information in the 1999 performance report, noting that it provided virtually no assurance that the information was credible. As mentioned earlier, NSF contracted with PricewaterhouseCoopers to review aspects of its GPRA data collection efforts and its performance assessment results. PricewaterhouseCoopers found no basis for questioning the integrity of the results. NSF can improve its future reports in several ways. The results of the independent committees’ reviews would benefit from more detailed information, such as including all of the areas of emphasis and the results. In addition, last year, we noted that the 1999 performance report did not describe NSF’s financial role in the examples of scientific successes presented. Such information, we said, would help to judge the extent of NSF’s role in achieving these successes. NSF officials maintain that determining NSF’s financial role in these successes would be extremely difficult and would take a considerable effort. NSF officials told us that the successes they identified for this outcome were primarily due to NSF awards. That statement would have been useful in assessing the 2000 performance report. NSF made improvements to its fiscal year 2002 performance plan. For example, last year, we reported that the performance plan contained little useful information about NSF’s intended strategy to achieve its goals, including a discussion of the problems. The 2002 plan includes a new section on the means and strategies for success. For example, for its new goal of award oversight and management, NSF will ensure that the internal committee reviewing the oversight activities for large infrastructure projects has broad disciplinary expertise and experience in managing facilities. As previously mentioned, NSF is also addressing data quality concerns, providing confidence that future performance information will be credible. Furthermore, NSF revised its outcome goal such that it does not have to succeed in demonstrating significant achievement in discoveries that advance the frontiers of science, engineering, or technology. Rather, discoveries is now one of six performance indicators for which NSF will consider itself successful when a majority is achieved. Last year, we also reported that the strategies for achieving the goals were not clearly discussed. NSF includes a new section on the means and strategies for success under each goal. NSF can improve its future performance plans by addressing its resource needs. Last year, we noted that the plan did not clearly discuss the resources for achieving the goals or the specific links between the resources and the areas of emphasis. The 2002 performance plan still does not do so. As discussed earlier, NSF’s 5-year workforce strategic plan is expected to address human capital issues, providing a basis for addressing this issue in next year’s performance plan. GAO has identified two governmentwide high-risk areas: strategic human capital management and information security. Regarding strategic human capital management, we found that NSF’s performance plan generally did not have goals and measures related to strategic human capital management, and NSF’s performance report did not explain its progress in resolving strategic human capital management challenges. However, as mentioned earlier, NSF is developing a 5-year workforce strategic plan. With respect to information security, we found that NSF’s performance plan had a goal and measures related to information security. While NSF’s performance report did not explain its progress in resolving information security challenges, it did indicate that NSF has internal management controls that continually monitor data security. We provided NSF and the Office of the Inspector General with a draft of this report for their review and comment. We met with NSF officials, including the Chief Information Officer and the Inspector General. The NSF officials generally agreed with the report. However, they noted that the fiscal year 2000 performance report did not respond to some of the Inspector General’s management challenges primarily because these challenges were identified in a November 30, 2000, letter. The Inspector General agreed that some of these management challenges were new. The NSF officials recognize that certain challenges not in the current plan and report are important, and they noted that these challenges are being addressed through internal management controls and processes. They added that NSF will continue to consider these challenges for incorporation in future performance plans. The NSF officials also provided technical clarifications, which we incorporated as appropriate. Our evaluation was generally based on the requirements of GPRA, the Reports Consolidation Act of 2000, guidance to agencies from OMB for developing performance plans and reports (OMB Circular A-11, Part 2), previous reports and evaluations by us and others, our knowledge of NSF’s operations and programs, GAO’s identification of best practices concerning performance planning and reporting, and our observations on NSF’s other GPRA-related efforts. We also discussed our review with NSF officials in the Office of Information and Resource Management; the Office of Budget, Finance, and Award Management; the Office of Integrative Activities; and the Office of Inspector General. The agency outcomes that were used as the basis for our review were identified by the Ranking Minority Member of the Senate Committee on Governmental Affairs as important mission areas for NSF and do not reflect the outcomes for all of NSF’s programs or activities. The major management challenges confronting NSF, including the governmentwide high-risk areas of strategic human capital management and information security, were identified by (1) our January 2001 high-risk update and (2) NSF’s Office of Inspector General in November 2000. We did not independently verify the information contained in the performance report and plan, although we did draw from other GAO work in assessing the validity, reliability, and timeliness of NSF’s performance data. We conducted our review from April through June 2001 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to appropriate congressional committees; the Director, NSF; and the Director of OMB. Copies will also be made available to others on request. If you or your staff have any questions, please call me at (202) 512-3841. Key contributors to this report were Richard Cheston, Alan Stapleton, Elizabeth Johnston, and Sandy Joseph. The following table discusses the major management challenges confronting the National Science Foundation (NSF), including the governmentwide high-risk areas of strategic human capital management and information security, identified by our January 2001 high-risk update and NSF’s Office of Inspector General (IG) in November 2000. The first column of the table lists the management challenges identified by our office and NSF’s IG. The second column discusses NSF’s progress, as discussed in its fiscal year 2000 performance report, in resolving these challenges. The third column discusses the extent to which NSF’s fiscal year 2002 performance plan includes performance goals and measures to address each of these challenges. We found that while the fiscal year 2000 performance report discussed NSF’s progress in resolving most of its major challenges, it did not discuss NSF’s progress in resolving the following challenges: (1) addressing strategic human capital management issues regarding strategic human capital planning and organizational alignment, leadership continuity and succession planning, and creating results-oriented organizational cultures; (2) developing appropriate data security controls to reduce the ever increasing risk of unauthorized access; (3) developing a more coherent award administration program that ensures that grantees comply with NSF’s award requirements; (4) ensuring that NSF grantees meet their cost-sharing obligations; and (5) providing the science, operations, and logistics support needed to manage the U.S. Antarctic Program. Of NSF’s 10 major management challenges, its fiscal year 2002 performance plan (1) had goals and measures that were directly related to 5 of the challenges; (2) had goals and measures that were indirectly applicable to 1 challenge; (3) had no goals and measures related to 1 challenge but discussed strategies to address it; and (4) did not have goals, measures, or strategies to address 3 challenges.

This report reviews the National Science Foundation's (NSF) fiscal year 2000 performance report and fiscal year 2002 performance report plan required by the Government Performance and Results Act. Specifically, GAO discusses NSF's progress in addressing several key outcomes that are important to NSF's mission. NSF reported that it made substantial progress in achieving its key outcomes. Although the planned strategies for achieving these key outcomes generally are clear and reasonable, some are vague and do not identify the specific steps for achieving the goals. NSF's fiscal year 2000 performance report and fiscal year 2002 performance plan reflect continued improvement compared with the prior year's report and plan. Although the 2002 performance plan does not substantially address NSF's human capital management, NSF is developing a five-year workforce strategic plan to address strategic human capital management issues that must be submitted to the Office of Management and Budget by July 20, 2001. NSF's performance report did not explain its progress in resolving information security challenges, but NSF indicated that it has internal management controls that continually monitor data security.

Annually, the Forest Service receives appropriations to operate its nationwide programs. On the basis of these appropriations, the Forest Service allocates a portion to each of its regions to carry out the regional and field office programs. In the case of the Alaska Region, appropriations are further allocated to (1) the regional office, which provides overall direction and support for programs and activities in the region as well as funds for the State and Private Forestry operations located in Anchorage, Alaska; (2) the centralized field costs, which fund programs or activities that usually have regionwide benefits; (3) the four field offices to operate “on the ground” programs; and (4) reserve accounts from which distributions are made during the year to the field offices. As shown on table 1, the Alaska Region’s operating costs ranged from $108 million to $127 million annually during fiscal years 1993 through 1997 and were estimated to be about $106 million for fiscal year 1998. Until fiscal year 1998, the Alaska Region used a category of operating costs, known as centralized field costs, as a means to improve efficiency by having one office—either the regional office or one of the field units—manage certain programs or activities for the benefit of multiple offices. Centralized field costs include activities such as payments to the National Finance Center for payroll and accounting services. Overall, the centralized field costs established by the region increased from about $5 million in fiscal year 1993 to almost $9 million in fiscal year 1997, and the number of programs or activities included in these costs fluctuated from 24 to 41 during the same period. However, this overall increase is not reflective of the increases or decreases in individual centralized field costs during this period because the same programs or activities were not funded each year nor did the amounts of individual centralized field costs remain constant. As a component of the Alaska Region’s overall operating budget, these costs averaged about 5 percent of the total. Regional office budget officials viewed the use of these centralized field costs as a means to better achieve efficiency because the costs of certain programs or activities generally would be managed centrally rather than allocating each unit’s share of the cost and then requiring each unit to pay its proportional amount. Field office officials cited both the advantages and disadvantages of using centralized field costs. Yet none of these field office officials could provide us with specific examples of disadvantages that negatively affected their operations or what more they could have accomplished if centralized field costs had not existed. In the conference report for the Forest Service’s fiscal year 1998 appropriations, the conferees expressed concern “about the appearance that expenditures for regional office operations and centralized field costs have risen significantly as a proportion of annual appropriated funds since 1993.” As a result, in the appropriations act the Congress limited the Alaska Regional Office’s expenditures for the regional office’s operations and centralized field costs to $17.5 million, without 60 days prior notice to the Congress. The preliminary budget allocation for fiscal year 1998 regional office operations and centralized field costs totaled about $26.5 million. According to a regional budget official, the region is currently implementing the following measures to meet the congressional limitation: Eliminating all existing centralized field costs by allocating the funds directly to the field units whenever the office and amounts are known. Placing unallocated funds into a reserve account and distributing them as decisions are reached as to which office will receive the money. Separating the costs associated with the State and Private Forestry organizational unit from the regional office’s expenses. According to the regional budget official, the region eliminated centralized field costs and was able to reduce the planned regional office cost allocations to about $18.7 million as of March 4, 1998. Although this estimate exceeds the $17.5 million congressional limitation, according to an Alaska Region budget official, further adjustments will be made as the year progresses to ensure that regional office operating expenses do not exceed the amount allowed by the Congress. He also stated that centralized field costs will not be used in the future. The Alaska Region establishes reserves because of the uncertainty about the timing or the amount of funds needed for certain projects. Once the specific amount or responsible unit is determined, the region distributes the necessary reserves to the unit responsible for making the payment. In fiscal years 1995 through 1997, the Alaska Region distributed reserves ranging from $6 million to $12 million. The four field offices received from 87 to 98 percent of the reserves during this period, and the remainder went to the region for regional office operations. Any ending balance in the reserve category becomes the carryover amount for the next fiscal year. To determine whether reserves play a positive or negative role in effectively implementing programs, we spoke with officials of each of the four field offices. The officials agreed that establishing a reserve amount to facilitate the accounting for unknowns was an effective procedure and believed that the region’s actions in this case generally led to less paperwork for the local units. In most cases, the field offices viewed reserves as a reasonable approach to addressing the uncertainties related to contracting, such as delays, cost increases, or the lack of appropriate bids. Thus, overall, the field office officials generally supported the process of establishing reserves and the manner in which the regional office approached the distribution of these funds. Beginning in fiscal year 1995, the Forest Service’s Pacific Research Station scientists performed work in connection with the Tongass Land Management Plan. The work of the Research Station scientists was jointly funded: Part of the expenses was funded from the Alaska Region’s portion of the National Forest System appropriation, which is normally used for forest planning activities, and another part was funded by the Research Station’s portion of the Research appropriation, which is used for research activities. The work performed by the Research Station scientists dealt with (1) the revision of the Tongass Land Management Plan, including resource conservation assessments, resource analyses, workshops, and risk assessment panels and (2) the post-plan priority research studies identified in the plan as important for further amendments or revisions to the plan. Although we asked for documentation of the rationale for decisions about the funding split for the particular work performed by the research scientists, neither of these organizations could provide us with adequate explanations or documentation. According to the Forest Service’s records, for fiscal years 1995 through 1998 the work of the scientists will have cost about $4.7 million, of which $2.8 million was funded by the National Forest System appropriation and $1.9 million was funded by the Research appropriation. Our analysis of these data showed that the Research Station scientists used 60 percent of the funds for the revision of the plan and 40 percent for post-plan studies. According to an Intra-Agency Agreement, the Alaska Region and the Research Station plan to continue funding post-plan studies at about $1.35 million annually in future years with $900,000 and $450,000 from the National Forest System and Research appropriations, respectively. The Congress provided the National Forest System appropriation for the management, protection, improvement, and utilization of the National Forest System and for forest planning, inventory, and monitoring, all of which are non-research activities. We asked regional budget and fiscal officials to provide (1) justification for the charges to the National Forest System appropriation for the work of the Pacific Research Station scientists and (2) the criteria that they used to make this determination. These officials said that such a determination was not made and that they could not provide us with information on the types of tasks performed by the scientists with National Forest System funds. They also could not provide us with any criteria, such as agency guidance or procedures, that were available in 1995 to make such a determination. In effect, when the Research Station scientists requested National Forest System funds for work on the Tongass Land Management Plan, the Alaska Region provided the funds requested, but it did not determine if the activities funded were a proper charge to the appropriation. On March 4, 1998, the Alaska Region provided us with its final budget allocation for fiscal year 1998, and again we asked the budget officials for their justification for charges to the National Forest System appropriation for the work of the Pacific Northwest Research Station scientists, including the documentation required by the August 1997 revision to the Forest Service’s Service-Wide Appropriations Handbook. These officials said that such a justification was not made and that they had not complied with the documentation requirements of the Handbook. The Forest and Rangeland Research appropriation was provided by the Congress for the Forest Service’s research stations to conduct, support, and cooperate in investigations, experiments, tests, and other activities necessary to obtain, develop, and disseminate the scientific information required to protect and manage forests and rangelands, all of which are research activities. We asked the Pacific Northwest Research Station staff, including the Science Manager for the Tongass Land Management Plan team, to provide justification for the charges to the Research appropriation for the work of the Research Station scientists and the criteria used to make the determination. This official said that such a determination was not documented and that he could not provide us with documentation on the types of tasks performed using research funds. Also, the official could not provide us with any criteria to make such a determination. On March 4, 1998, the Research Station provided us with the estimated budget allocation for fiscal year 1998, and again we asked the Pacific Northwest Research Station’s Science Manager for justification for the charges to the Research appropriation for the work of the Research Station scientists, including the documentation required by the August 1997 revision to the Forest Service’s Service-Wide Appropriations Handbook. This official said that such a justification was not made and that the Research Station had not complied with the documentation requirements of the handbook, although it is in the process of developing a procedure to address the handbook’s requirements. The Department of Agriculture’s Office of Inspector General addressed a similar issue in its May 1995 report on the use of the National Forest System appropriation for research studies performed by the Forest Service’s research stations. The report pointed out that the Forest Service’s directives did not provide clear guidance for determining the type of reimbursable work that research stations could do for the Forest Service’s other units. According to the Inspector General’s report, this situation resulted in unauthorized augmentation of the Forest Service’s Forest and Rangeland Research appropriation. The Inspector General recommended that the Forest Service supplement its direction in its manual that provides guidance on the type of reimbursable work that research stations may perform for the Forest Service’s other units and establish procedures for reviewing the work that research stations perform for other units to ensure that it is in compliance with appropriations law and the direction in the manual. On August 28, 1997, the Forest Service issued an interim directive to its Service-Wide Appropriations Handbook that provides direction on jointly funded projects, including preparing financial plans and determining the appropriate funding allocations However, as of the date of our report, neither the Alaska Region nor the Research Station have complied with the August 1997 directive. Furthermore, because of the lack of documentation or adequate explanations, we could not determine whether the National Forest System and the Research appropriations were used appropriately or inappropriately in fiscal years 1995 through 1998. This type of documentation is particularly important when projects, such as the revision of the Tongass Land Management Plan and post-plan studies, are jointly funded by two appropriations that were provided for specifically different purposes, because the tasks funded by each must be identified and charged to the correct appropriation. Clearly, the use of one appropriation to accomplish the purpose of another is improper. It is imperative that the Forest Service in general and the Alaska Region in particular have procedures in place to ensure that appropriations are made available only for their stated purposes and that controls are in place to ensure that the procedures are used throughout the Forest Service. In our report, we recommended that the Chief of the Forest Service direct the Alaska Regional Forester and the Pacific Northwest Research Station Director to (1) fully comply with the Forest Service’s August 28, 1997, direction on special Research funding situations, which requires the preparation of financial plans and documentation of the determination of the appropriate funding allocations, and (2) establish procedures to ensure compliance with appropriations law Forest Service-wide. To date, we have not received the Forest Service’s statement of actions taken on our recommendations required by 31 U.S.C. 720. Mr. Chairman, this concludes our prepared statement. We will be pleased to respond to any questions that you or the Members of the Committee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed: (1) the National Forest Service's Alaska Region's allocation of funds for its operating costs for fiscal year (FY) 1993 through FY 1998; (2) the nature, purpose, and allocation of centralized field costs and the steps the Alaska Region is taking to comply with the congressional limitation on the expenditures for the regional office and centralized field costs; (3) the rationale for and the distribution of regional reserve funds; and (4) whether the Forest Service's National Forest System and Research appropriations were used appropriately to pay for work performed by the Pacific Northwest Research Station in connection with the revision of the Tongass Land Management Plan and for post-plan studies. GAO noted that: (1) the Alaska Region's operating costs ranged from $108 million to $127 million annually during FY 1993 through FY 1997; (2) the region allocated 71 to 76 percent of these funds to field offices carrying out local programs, 13 to 17 percent for managing regional office operations, 4 to 7 percent for centralized field costs, 2 to 5 percent for regional reserves, and 2 to 4 percent for state and private forestry operations; (3) for FY 1998, the region's estimated allocations totalled about $106 million to carry out these regional programs; (4) until FY 1998, the Alaska Region used centralized field costs to manage certain programs or activities for the benefit of multiple offices; (5) the Forest Service's FY 1998 appropriations act limited the Alaska Regional Office's expenditures for regional office operations and centralized field costs to $17.5 million; (6) to comply with this legislative requirement, the Alaska Region eliminated the use of the centralized field cost category, included unallocated funds in regional reserve accounts until the funds are distributed to the field units, and separated the costs for state and private forestry operations from the operations of the regional office; (7) the Alaska Region establishes reserves because of the uncertainty about the timing or the amount of funds needed for certain projects; (8) once the specific amount or responsible unit is determined, the region distributes the necessary reserves to the unit responsible for making the payment; (9) any ending balance in the reserve category becomes the carryover amount for the next fiscal year; (10) beginning in FY 1995, both the Alaska Region's portion of the National Forest System appropriation and the Pacific Northwest Research Station's portion of the Forest and Rangeland Research appropriation funded the work performed by the Research Station scientists on the revision of the Tongass Land Management Plan and post-plan studies; (11) documentation of the rationale for decisions about the funding split for particular work performed by the research scientists could not be provided; and (12) GAO could not determine whether the National Forest System and Research appropriations were used appropriately or inappropriately for FY 1995 through FY 1998.

In general, drug abuse is defined by the level and pattern of drug consumption and the severity of resulting functional problems. People who are dependent on drugs often use multiple drugs and have substantial health and social problems, including mental health disorders. One of the many challenges to providing effective treatment for addiction is the complicated nature of the disorder. Unlike other chronic diseases, drug addiction extends beyond physiological influence to include significant behavioral and psychological aspects. For example, specific environmental cues that a drug abuser associates with drug use can trigger craving and precipitate relapse, even after long periods of abstinence. Therefore, drug abusers may enter treatment a number of times, often reducing drug use incrementally with each treatment episode. Despite the potential for relapse to drug use, not all drug users require treatment to discontinue use. For those who require treatment, services are provided in either outpatient or inpatient settings and via two major approaches—pharmacotherapy and behavioral therapy—with many programs combining elements of both. Although abstinence from illicit drug use is the central goal of all drug abuse treatment, researchers and program staff commonly accept reductions in drug use and criminal behavior as realistic, interim goals. these funds support services provided by state and local grantees, which are given broad discretion in how best to use them. In numerous large-scale studies examining the outcomes of drug abuse treatment provided in a variety of settings, researchers have concluded that treatment is beneficial. Clients receiving treatment report reductions in drug use and criminal activity as well as other positive outcomes. The studies have also demonstrated that better treatment outcomes are associated with longer treatment periods but have found that retaining clients in treatment programs is problematic. Comprehensive analyses of the effectiveness of drug abuse treatment have been conducted by several major, federally funded studies over a period of nearly 30 years: the Drug Abuse Treatment Outcome Study (DATOS), the National Treatment Improvement Evaluation Study (NTIES), the Treatment Outcome Prospective Study (TOPS), and the Drug Abuse Reporting Program (DARP). These large, multisite studies—conducted by research organizations independent of the groups operating the treatment programs being assessed—were designed to measure people’s involvement in illicit drug and criminal activity before, during, and after treatment. Although the studies report on reductions in drug use from the year prior to treatment to the year after, most also track a subset of treatment clients for followup interviews over longer time periods. For example, DARP followed clients for as long as 12 years, TOPS for 3 to 5 years following treatment, and DATOS researchers are planning additional followup to determine long-term outcomes. These studies are generally considered by the research community to be the major evaluations of drug abuse treatment effectiveness, and much of what is known about “typical” drug abuse treatment outcomes comes from these studies. or outpatient methadone maintenance—regardless of the drug and client type. DATOS found that, of the individuals in long-term residential treatment, 66 percent reported weekly or more frequent cocaine use in the year prior to treatment, while 22 percent reported regular cocaine use in the year following treatment. Also, 41 percent of this same group reported engaging in predatory illegal activity in the year prior to treatment, while 16 percent reported such activity in the year after treatment. Previous studies found similar reductions in drug use and criminal activity. For example, researchers from the 1980s TOPS study found that across all types of drug abuse treatment, 40 to 50 percent of regular heroin and cocaine users who spent at least 3 months in treatment reported near abstinence during the year after treatment, and an additional 30 percent reported reducing their use. Only 17 percent of NTIES clients reported arrests in the year following treatment—down from 48 percent during the year before treatment. Another finding across these studies is that clients who stay in treatment longer report better outcomes. For the DATOS clients that reported drug use when entering treatment, fewer of those in treatment for more than 3 months reported continuing drug use than those in treatment for less than 3 months. DATOS researchers also found that the most positive outcomes for clients in methadone maintenance were for those who remained in treatment for at least 12 months. Earlier studies reported similar results. Both DARP and TOPS found that reports of drug use were reduced most for clients who stayed in treatment at least 3 months, regardless of the treatment setting. recommended at least 6 months in treatment; for both program types, the median treatment episode was 3 months. Because all of the effectiveness studies relied on information reported by the clients, the level of treatment benefit reported may be overstated. Typically, drug abusers were interviewed before they entered treatment and again following treatment and asked about their use of illicit drugs, their involvement in criminal activity, and other drug-related behaviors.Although this data collection method is commonly used in national surveys and drug abuse treatment evaluations, recent questions about the validity of self-reported drug use raise concerns about this approach. In general, self-reporting is least valid for (1) the more stigmatized drugs, such as cocaine; (2) recent use; and (3) those involved with the criminal justice system. A recent National Institute on Drug Abuse (NIDA) review of current research on the validity of self-reported drug use highlights the limitations of data collected in this manner. According to this review, recent studies conducted with criminal justice clients (such as people on parole, on probation, or awaiting trail) and former treatment clients suggest that 50 percent or fewer current users accurately report their drug use in confidential interviews. As questions have developed about the accuracy of self-reported data,researchers have begun using more objective means, such as urinalysis, to validate such data. For example, NTIES researchers found that 20 percent of those in a validation group acknowledged cocaine use within the past 30 days, but urinalysis revealed recent cocaine use by 29 percent. TOPS researchers reported that only 40 percent of the individuals testing positive for cocaine 24 months after treatment had reported using the drug in the previous 3 days. Because results from the major studies of treatment effectiveness were not adjusted for the likelihood of underreported drug use, reductions in drug use found may be overstated. However, researchers emphasize that client reporting on use of illicit drugs during the previous year (the outcome measure used in most effectiveness evaluations) has been shown to be more accurate than client reporting on current drug use (the measure used to assess the validity of self-reported data). Therefore, they believe that the overall findings of treatment benefits are still valid. Although supplementary data collection, such as hair analysis or urinalysis, can help validate the accuracy of self-reported data, these tools also have limitations. Urine tests can accurately detect illicit drugs for about 48 hours following drug use but do not provide any information about drug use during the previous year. In addition, individual differences in metabolism rates can affect the outcomes of urinalysis tests. Hair analysis has received attention because it can detect drug use over a longer time—up to several months. However, unresolved issues in hair testing include variability across drugs in the accuracy of detection, the potential for passive contamination, and the relative effect of different hair color or type on cocaine accumulation in the hair. We have reported on the limitations of using self-reported data in estimating the prevalence of drug use and concluded that hair testing merited further evaluation as a means of confirming self-reported drug use. Using federal treatment dollars most effectively requires an understanding of which approaches work best for different groups of drug abusers, but on this subject, research findings are less definitive. Although strong evidence supports methadone maintenance as the most effective treatment for heroin addiction, less is known about the best ways to provide treatment services to cocaine users or adolescents. treatment or psychiatric status, can significantly affect the patient’s performance in treatment. Current research generally does not account for these factors in evaluating the effectiveness of alternative approaches for specific groups of drug abusers. Methadone maintenance is the most commonly used treatment for heroin addiction, and numerous studies have shown that those receiving methadone maintenance treatment have better outcomes than those who go untreated or use other treatment approaches. Methadone maintenance reduces heroin use and criminal activity and improves social functioning. HIV risk is also minimized, since needle usage is reduced. As we have previously reported, outcomes among methadone programs have varied greatly, in part because of the substantial differences in treatment practices across the nation. For example, in 1990, we found that many methadone clinics routinely provided clients dosage levels that were lower than optimum—or even subthreshold—and discontinued treatment too soon. In late 1997, a National Institutes of Health consensus panel concluded that people who are addicted to heroin or other opiates should have broader access to methadone maintenance treatment programs and recommended that federal regulations allow additional physicians and pharmacies to prescribe and dispense methadone. Similarly, several studies conducted over the past decade show that when counseling, psychotherapy, health care, and social services are provided along with methadone maintenance, treatment outcomes improve significantly. However, the recent findings from DATOS suggest that the provision of these ancillary services—both the number and variety—has eroded considerably during the past 2 decades across all treatment settings. DATOS researchers also noted that the percentage of clients reporting unmet needs was higher than the percentage in previous studies. researchers have relied on cognitive-behavioral therapies to treat cocaine addiction. Studies have shown that clients receiving cognitive-behavioral therapy have achieved long periods of abstinence and have been successful at staying in treatment. The cognitive-behavioral therapies are based largely on counseling and education. One approach, relapse prevention, focuses on teaching clients how to identify and manage high-risk, or “trigger,” situations that contribute to drug relapse. A study of this approach showed cocaine-dependent clients were able to remain abstinent at least 70 percent of the time while in treatment. Another technique, community reinforcement/contingency management, establishes a link between behavior and consequence by rewarding abstinence and reprimanding drug use. A program using this approach found that 42 percent of the participating cocaine-dependent clients were able to achieve nearly 4 months of continuous abstinence. A third approach, neurobehavioral therapy, addresses a client’s behavioral, emotional, cognitive, and relational problems at each stage of recovery. One neurobehavioral program showed that 38 percent of the clients were abstinent at the 6-month followup. Drug use among teenagers is a growing concern. It is estimated that 9 percent of teenagers were current drug users in 1996—up from 5.3 percent in 1992. Unfortunately, no one method has been shown to be consistently superior to others in achieving better treatment outcomes for this group. Rather, studies show that success in treatment for adolescents seems to be linked to the characteristics of program staff, the availability of special services, and family participation. poor parent supervision—have been identified as risk factors for the development of substance abuse among adolescents. However, NIDA acknowledged in a recently published article that further research is needed to identify the best approach to treating adolescent drug abusers.Similarly, the American Academy of Child and Adolescent Psychiatry acknowledged in its 1997 treatment practice parameters that research on drug abuse treatment for adolescents has failed to demonstrate the superiority of one treatment approach over another. With an annual expenditure of more than $3 billion—20 percent of the federal drug control budget—the federal government provides significant support for drug abuse treatment activities. Monitoring the performance of treatment programs can help ensure that we are making progress to achieve the nation’s drug control goals. Research on the effectiveness of drug abuse treatment, however, is problematic given the methodological challenges and numerous factors that influence the results of treatment. Although studies conducted over nearly 3 decades consistently show that treatment reduces drug use and crime, current data collection techniques do not allow accurate measurement of the extent to which treatment reduces the use of illicit drugs. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you and other members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed its recent report on drug abuse treatment research findings, focusing on: (1) the overall effectiveness of drug abuse treatment; (2) the methodological issues affecting drug abuse treatment evaluations; and (3) what is known about the effectiveness of specific treatments for heroin, cocaine, and adolescent drug addiction. GAO noted that: (1) it found that large, multisite, longitudinal studies have produced considerable evidence that drug abuse treatment is beneficial to the individual undergoing treatment and to society; (2) the studies have consistently found that a substantial proportion of clients being studied report reductions in drug use and criminal activity following treatment; (3) the studies also show that clients who stay in treatment for longer periods report better outcomes; (4) however, drug abuse treatment research is complicated by a number of methodological challenges that make it difficult to accurately measure the extent to which treatment reduces drug use; (5) in particular, growing concerns about the validity of self-reported data, which are used routinely in the major evaluations of drug abuse treatment, suggest that the treatment benefit reported by these studies may be somewhat overstated; (6) in addition, the research evidence to support the relative effectiveness of specific treatment approaches or settings for particular groups of drug abusers is limited; and (7) while one specific treatment approach--methadone maintenance--has been shown to be the most effective treatment for heroin addiction, research on the best treatment approach or setting for cocaine addiction or adolescent drug users is less definitive.

Mr. Chairman and Members of the Committee: I am pleased to be here today to discuss our observations on the Department of Justice’s August draft of its strategic plan. The Government Performance and Results Act of 1993 (the Results Act) requires that all executive branch agencies submit their plans to Congress and the Office of Management and Budget (OMB) by September 30, 1997. My statement focuses on Justice’s August draft strategic plan, which builds on our July comments regarding Justice’s February draft plan. Specifically, my statement will focus on the August plan’s compliance with the Act’s requirements and on the extent to which it covered crosscutting program activities, management challenges, and Justice’s capacity to provide reliable performance information. In summary, Justice’s February draft of its strategic plan was incomplete in that of the six elements required by the Act, three—the relationship between long-term goals/objectives and the annual performance plans, the key factors external to Justice that could affect Justice’s ability to meet its goals, and a program evaluation component—were not specifically identified in the draft plan. The remaining three elements—the mission statement, goals and objectives, and strategies to achieve the goals and objectives—were discussed. The August plan includes two of the three missing elements but the plan does not include a required discussion on a third element—how the long-term goals and objectives are tied to Justice’s annual performance plans. In addition, the revised plan would better meet the purposes of the Act if it provided more complete coverage of crosscutting programs, management challenges, and performance information. In the 1990s, Congress put in place a statutory framework to address long-standing weaknesses in federal government operations, improve federal management practices, and provide greater accountability for achieving results. This framework included as its essential elements financial management reform legislation, information technology reform legislation, and the Results Act. In enacting this framework, Congress sought to create a more focused, results-oriented management and decisionmaking process within both Congress and the executive branch. These laws seek to improve federal management by responding to a need for accurate, reliable information for congressional and executive branch decisionmaking. This information has been badly lacking in the past, as much of our work has demonstrated. Implemented together, these laws provided a powerful framework for developing fully integrated information about agencies’ missions and strategic priorities, data to show whether or not the goals are achieved, the relationship of information technology investment to the achievement of those goals, and accurate and audited financial information about the costs of achieving mission results. The Results Act focuses on clarifying missions, setting goals, and measuring performance toward achieving those goals. It emphasizes managing for results and pinpointing opportunities for improved performance and increased accountability. Congress intended for the Act to improve the effectiveness of federal programs by fundamentally shifting the focus of management and decisionmaking away from a preoccupation with tasks and services to a broader focus on results of federal programs. program evaluations were used to establish and revise strategic goals and a schedule for future program evaluations. Justice’s strategic plan is organized around what Justice has identified as its seven core functions: (1) investigation and prosecution of criminal offenses; (2) assistance to state and local governments; (3) legal representation, enforcement of federal laws, and defense of federal government interests; (4) immigration; (5) detention and incarceration; (6) protection of the federal judiciary and improvement of the justice system; and (7) management. Justice’s February draft of its strategic plan was incomplete and did not provide Congress with critical information for its consultations with Justice. Justice’s August version added two of the three required elements that were missing in the February plan. As a result, the August plan includes, to some degree, a discussion on five of the six required elements—a mission statement, goals and objectives, key external factors, a program evaluation component, and strategies to achieve the goals and objectives. The August plan does not include a required discussion of a sixth element—the relationship between Justice’s long-term goals/objectives and its annual performance plans. “Our mission at the United States Department of Justice is to enforce the law and defend the interests of the U.S. according to the law, provide Federal leadership in preventing and controlling crime, seek just punishment for those guilty of unlawful behavior, administer and enforce the Nation’s immigration laws fairly and effectively and ensure fair and impartial administration of justice for all Americans.” Justice’s mission statement covers six of the seven core functions that Justice identified but does not specify the detention and incarceration function, which is one of Justice’s largest budget items. The plan does incorporate the detention and incarceration function in the discussion of goals and objectives and in its strategies to achieve those goals and objectives. Justice officials said that it was their intent to cover the detention and incarceration function by the phrases “seek just punishment . . .” and “ensure fair and impartial administration of justice . . .” While we agree that mission statements may vary in the extent to which they specify particular activities, we believe that it would be helpful to explicitly include the detention and incarceration function in this case. Our belief is based on Justice’s decision to specify all of the other major functions in its mission statement and our concern that the Department’s stakeholders may not interpret the phrases cited by Justice officials as indicating that the detention and incarceration component is part of its mission. Justice’s goals and objectives cover its major functions and operations and are logically related to its mission. However, they are not as results oriented as they could be and some focus on activities and processes. For example, one set of results-oriented goals involves reducing violent, organized, and gang-related crime; drug-related crime; espionage and terrorism; and white collar crime. However, goals in other areas are more process oriented, such as “Represent the United States in all civil matters for which the Department of Justice has jurisdiction,” “Promote the participation of victims and witnesses throughout each stage of criminal and juvenile justice proceedings at the Federal, State, and local levels,” and “Make effective use of information technology.” Another concern we have with some of the goals is that they are not always expressed in as measurable a form as intended by OMB guidance. For example, two of Justice’s goals in the legal representation, enforcement of federal laws, and defense of U.S. interests core function are to protect the civil rights of all Americans and safeguard America’s environment and natural resources. It is not clear from the August plan how Justice will measure its progress in achieving these goals. The Results Act and OMB Circular A-11 indicate that agency strategic plans should describe the processes the agencies will use to achieve their goals and objectives. Our review of Justice’s strategic plan, specifically the strategies and performance indicators, identified areas where the plan did not fully meet the Act’s requirements and OMB Circular A-11 guidance. programs and activities have contributed to changes in violent crime, availability and abuse of illegal drugs, espionage and terrorism, and white collar crime. Similarly, in its immigration core function, Justice has a goal to maximize deterrence to unlawful migration by reducing the incentives of unauthorized employment and assistance. It is likewise unclear how Justice will be able to determine the effect of its efforts to deter unlawful migration, as differentiated from the effect of changes in the economic and political conditions in countries from which illegal aliens originated. The plan does not address either issue. Some of Justice’s performance indicators are more output than outcome related. For example, one cited strategy for achieving the goal of ensuring border integrity is to prevent illegal entry by increasing the strength of the Border Patrol. One of the performance indicators Justice is proposing as a measure of how well the strategy is working is the percentage of time that Border Patrol agents devote to actual border control operations. While this measure may indicate whether agents are spending more time controlling the border, it is not clear how it will help Justice assess its progress in deterring unlawful migration. The Act requires that agencies’ plans discuss the types of resources (e.g., human skills, capital, and information technology) that will be needed to achieve the strategic and performance goals and OMB guidance suggests that agencies’ plans discuss any significant changes to be made in resource levels. Justice’s plan does not include either discussion. This information could be beneficial to Justice and Congress in agreeing on the goals, evaluating Justice’s progress in achieving the goals, and making resource decisions during the budget process. In its August plan, Justice added a required discussion on key external factors that could affect its plan outcomes. Justice discusses eight key external factors that could significantly affect achievement of its long-term goals. These factors include emergencies and other unpredictable events (e.g., the bombing of the Alfred P. Murrah building), changing statutory responsibilities, changing technology, and developments overseas. According to Justice, isolating the particular effects of law enforcement activity from these eight factors that affect outcomes and over which Justice has little control is extremely difficult. This component of the plan would be more helpful to decisionmakers if it included a discussion of alternatives that could reduce the potential impact of these external factors. In its August plan, Justice added a required discussion on the role program evaluation is to play in its strategic planning efforts. Justice recognizes that it has done little in the way of formal evaluations of Justice programs and states that it plans to examine its evaluation approach to better align evaluations with strategic planning efforts. The August plan identifies ongoing evaluations being performed by Justice’s components. OMB guidance suggests that this component of the plan include a general discussion of how evaluations were used to establish and revise strategic goals, and identify future planned evaluations and their general scope and time frames. Justice’s August plan does neither. Under the Results Act, Justice’s long-term strategic goals are to be linked to its annual performance plans and the day-to-day activities of its managers and staff. This linkage is to provide a basis for judging whether an agency is making progress toward achieving its long-term goals. However, Justice’s August plan does not provide such linkages. In its August plan, Justice pointed out that its fiscal year 1999 annual performance planning and budget formulation activities are to be closely linked and that both are to be driven by the goals of the strategic plan. It also said that the linkages would become more apparent as the fiscal year 1999 annual performance plan and budget request are issued. how Justice and the Department of the Treasury, which have similar responsibilities concerning the seizure and forfeiture of assets used in connection with illegal activities (e.g., money laundering) will coordinate and integrate their operations; how INS will work with the Bureau of Prisons and state prison officials to identify criminal aliens; and how INS and the Customs Service, which both inspect arriving passengers at ports of entry to determine whether they are carrying contraband and are authorized to enter the country, will coordinate their resources. Along these lines, certain program areas within Justice have similar or complementary functions that are not addressed or could be better discussed in the strategic plan. For example, both the Bureau of Prisons and INS detain individuals, but the plan does not address the interrelationship of their similar functions or prescribe comparable measures for inputs and outcomes. As a second example, the plan does not fully recognize the linkage among Justice’s investigative, prosecutorial, and incarceration responsibilities. One purpose of the Results Act is to improve the management of federal agencies. Therefore, it is particularly important that agencies develop strategies that address management challenges that threaten their ability to achieve both long-term strategic goals and this purpose of the Act. Over the years, we as well as others, including the Justice Inspector General and the National Performance Review (NPR), have addressed many management challenges that Justice faces in carrying out its mission. In addition, recent audits under the Chief Financial Officers Act of 1990 (CFO Act), expanded by the Government Management Reform Act, have revealed internal control and accounting problems. Justice’s draft strategic plan is silent on these issues. contains a new section on “Issues and Challenges in Achieving Our Goals,” which was not in its February plan. This new section discusses Justice’s process for managing its information technology investments, steps taken to provide security over its information systems, and its strategy to ensure that computer systems accommodate dates beyond the year 2000. However, neither this new section nor the “Management” core function addresses some of the specific management problems that have been identified over the years and the status of Justice’s efforts to address them. In its August draft plan, Justice also added a discussion on “accountability,” which points out that Justice has an internal control process that systematically identifies management weaknesses and vulnerabilities and specifies corrective actions. This section also recognizes the role of Justice’s Inspector General. However, the plan would be more helpful if it included a discussion of corrective actions Justice has planned for internally and externally identified management weaknesses, as well as how it plans to monitor the implementation of such actions. In addition, the plan does not address how Justice will correct significant problems identified during the Inspector General’s fiscal year 1996 financial statement audits, such as inadequate safeguarding and accounting for physical assets and weaknesses in the internal controls over data processing operations. To efficiently and effectively operate, manage, and oversee its diverse array of law enforcement-related responsibilities, Justice needs reliable data on its results and those of other law enforcement-related organizations. Further, Justice will need to rely on a variety of external data sources (e.g., state and local law enforcement agencies) to assess the impact of its plan. These data are needed so that Justice can effectively measure its progress and monitor, record, account for, summarize, and analyze crime-related data. Justice’s August strategic plan contains little discussion about its capacity to provide performance information for assessing its progress toward its goals and objectives over the next 5 years. and reliable budget, accounting, and performance data to support decisionmaking, and (2) integrating the planning, reporting and decisionmaking processes. These strategies could assist Justice in producing results-oriented reports on its financial condition and operating performance. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the Department of Justice's August 1997 draft strategic plan developed in compliance with the Government Performance and Results Act of 1993, focusing on the plan's compliance with the Act's requirements and on the extent to which it covered crosscutting program activities, management challenges, and Justice's capacity to provide reliable performance information. GAO noted that: (1) Justice's plan discusses, to some degree, five of the six required elements--mission statement, goals and objectives, key external factors, a program evaluation component, and strategies to achieve the goals and objectives; (2) the plan does not include a required discussion on the relationship between Justice's long-term goals/objectives and its annual performance plans; (3) the draft plan could better address how Justice plans to: (a) coordinate with other federal, state, and local agencies that perform similar law enforcement functions, such as the Defense and State Departments regarding counter-terrorism; (b) address the many management challenges it faces in carrying out its mission, such as internal control and accounting problems; and (c) increase its capacity to provide performance information for assessing its progress in meeting the goals and objectives over the next 5 years.

In the early 1970s, BIA began giving tribes more training, involvement, and influence in BIA’s budget process, in efforts that evolved into TPA. At that time, according to BIA officials, few tribes were experienced in budgeting or contracting, and most depended on BIA for services. Over the years, tribes have become more experienced and sophisticated in TPA budgeting, are more involved in directly contracting and managing their TPA activities, and have more flexibility in shifting funds between activities within TPA. Since 1991, through amendments to the Indian Self-Determination and Education Assistance Act, 206 tribes have entered into self-governance agreements with the federal government. Under the terms of these agreements, the tribes assume primary responsibility for planning, conducting, and administering programs and services—including those activities funded under TPA. Of the $757 million in TPA funds that the Congress appropriated in fiscal year 1998, about $507 million was for base funding, and about $250 million was for non-base funding. Base funding was distributed in three components: $468 million generally on the basis of historical funding levels, $16 million to supplement funding for “small and needy” tribes, and $23 million in a general funding increase. According to Interior officials, how TPA base funds for tribes were initially determined is not clearly documented, and adjustments may have been made over time in consideration of specific tribal circumstances. While most increases in the TPA budget prior to the 1990s resulted from congressional appropriations for specific tribes, subsequent increases have generally been distributed on a pro rata basis. The $468 million in base funds may be used by tribes for such activities as law enforcement, social services, and adult vocational training. Tribes may move these funds from one TPA activity to another. In 1998, the Congress appropriated TPA funds for BIA to supplement historical distribution levels for “small and needy” tribes; as a result, $16 million in additional base funds was distributed to 292 tribes. The designation “small and needy” was developed by the Joint Tribal/BIA/DOI Advisory Task Force on Bureau of Indian Affairs Reorganization in 1994.The task force recommended that tribes with service populations of less than 1,500 have available minimum levels of TPA base funds—$160,000 in the lower 48 states and $200,000 in Alaska—to allow them to develop basic self-government capacity. Because some small tribes were receiving less than $160,000, the Congress directed BIA to supplement TPA base funds with the 1998 distribution so that each of these tribes would receive $160,000. For fiscal year 1999, BIA has requested an additional $3 million to move the “small and needy” tribes in Alaska closer to the task force-recommended minimum funding level of $200,000. The $23 million general increase in base funds was evenly distributed among BIA’s 12 area offices, as recommended in January 1998 by a special task force assembled under the 1998 Interior Appropriation bill. Each equal portion was subsequently distributed to tribes and BIA offices according to various considerations. For example, the tribes in BIA’s Sacramento area each received an equal share of the area office’s $1.95 million allocation. The tribes in BIA’s Juneau area each received $4,000, and the remainder was distributed on the basis of population and TPA base funding levels. The remaining $250 million is non-base funds and is generally distributed according to specific formulas that consider tribal needs. In general, tribes may not shift these funds to other activities without special authorization. Road maintenance, housing improvement, welfare assistance, and contract support are all included in this category. For example, road maintenance funds are distributed to BIA’s area offices based on factors such as the number of miles and types of roads within each area. Housing improvement funds are distributed to area offices on the basis of an inventory of housing needs that includes such things as the number of units in substandard condition and the number of units needing renovation or replacement. As of March 1998, 95 percent of the $757 million in TPA funds had been distributed among the tribes and BIA offices. Our per capita analysis shows that the distributions ranged from a low of $121 per tribal member within BIA’s Muskogee area to a high of $1,020 within the Portland area. However, according to Interior officials, there are reasons for the differences in TPA distributions and the differences should not all be perceived as inequities. For example, BIA is required to fund law enforcement and detention in states that do not have jurisdiction over crimes occurring on Indian lands, so tribes located in those states may receive more TPA funds for these purposes than tribes located in other states. Similarly, BIA has a trust responsibility for natural resources on reservations, so tribes that have large land bases may receive more TPA funds for this purpose than tribes with small land bases. Furthermore, tribes with self-governance agreements may include funds in their TPA base amount that are not included for tribes without self-governance agreements. BIA officials also noted that they do not consider the service population figures, which are estimated by tribes, to be reliable—although they did not offer other figures that they believed to be more accurate. They also noted that TPA funds are distributed to tribes, rather than individuals, and that a lower per capita figure may reflect that tribes in one area have larger memberships but smaller land bases than tribes in another area. Appendix I presents the distributions and per capita analyses for BIA’s area offices. The remaining 5 percent of TPA funds not distributed to tribes includes $30 million, primarily for welfare assistance and contract support, that will be distributed later in the fiscal year on the basis of tribal need. While most of the contract support and welfare assistance funds are distributed on the basis of the prior year’s expenditures, between 15 and 25 percent is withheld until later in each fiscal year, when tribes’ actual needs are better known. An additional $9 million not distributed to tribes is for other uses, including education funding to non-tribal entities (such as states and public schools) and payments for employees displaced as a result of tribal contracting. Nonfederal entities—including tribes—meeting the federal assistance thresholds for reporting under the Single Audit Act (those receiving at least $100,000 in federal funds before 1997 and those expending at least $300,000 in 1997 or later) must submit an audited general-purpose financial statement and a statement of federal financial assistance. We examined all 326 financial statements on file with Interior that were most recently submitted by tribes; these statements generally covered fiscal years 1995 or 1996. The tribes’ financial statements varied in the type and amount of information reported. While some statements included only federal revenues, others also included revenues from state, local, and private sources; some included financial information only for tribal departments that expended federal funds, while others provided more complete reporting on their financial positions. In total, the statements reported that these tribes received more than $3.6 billion in revenues during the years covered by them. These revenues included such things as taxes and fees, lease and investment income, and funds received through governmental grants and contracts. About half of the financial statements we examined also included some information on tribal businesses. Tribal businesses include, for example, gaming operations, smokeshops or convenience stores, construction companies, and development of natural resources such as minerals or timber. The tribes that reported the results of their businesses had operating income totaling over $1.1 billion. Not all of these tribes reported a profit, however—about 40 percent reported operating losses totaling about $50 million. The reliability of the general-purpose financial statements we reviewed varied. Of the 326 we reviewed, 165—or about half—of the statements were certified by independent auditors as fairly presenting the financial position of the reporting entity and received “unqualified” auditors’ opinions. However, auditors noted that 38 of the “unqualified” statements were limited to certain funds and were not intended to represent the financial position of the tribe as a whole. The independent auditors’ opinions for the remaining financial statements indicated that the statements were deficient to varying degrees. Tribes with gaming operations are required under the Indian Gaming Regulatory Act to submit annual financial reports to the National Indian Gaming Commission. In 1997, we reported that 126 tribes with class II and class III gaming operations (which include bingo, pull-tabs, slot machines, and other casino games) reported a total of about $1.9 billion in net income from their gaming operations in 1995. About 90 percent of the gaming facilities included in that report generated net income, and about 10 percent generated net losses. Because the financial statements we examined covered different fiscal years and did not always include gaming revenues, we did not attempt to reconcile them to information reported to the Gaming Commission. In deciding whether to consider tribal revenues or business income in order to determine the amount of TPA funds tribes should receive, information that might be useful to the Congress could include (1) financial information for all tribes, including those tribes not submitting reports under the Single Audit Act; (2) more complete information on the financial resources available to tribes from tribal businesses, including gaming; and (3) more reliable data on tribes’ financial positions. However, there are several impediments to obtaining this information. For fiscal year 1997 and later, nonfederal entities (including tribes) expending less than $300,000 in federal funds are not covered by the Single Audit Act. Tribes reporting under the act do not have to report financial information for their tribal businesses if those businesses do not receive, manage, or expend federal funds. Interior officials also noted that under the terms of the Alaska Native Claims Settlement Act, Congress established for-profit native corporations as separate legal entities from the non-profit arms that receive federal financial assistance; for this reason, financial information on the for-profit arms would not be reported under the Single Audit Act. Further, financial information submitted by Alaskan villages that have formed an association or consortium or operate under self-governance agreements reflect only the operations of the umbrella organization and do not provide information regarding the separate tribal governments. Interior officials further noted that some tribes that meet the reporting threshold of the act have not submitted financial statements annually as required, or have not submitted them in a timely manner, and that BIA has few sanctions to encourage these tribes to improve their reporting. Finally, the financial statements we examined included a range of auditors’ opinions, and the reliability of the information in the statements varied. Mr. Chairman, this concludes my prepared statement. I will be pleased to respond to any questions that you or Members of the Subcommittee may have. We obtained information about (1) BIA’s bases for distributing 1998 TPA funds; (2) distributions of TPA funds in fiscal year 1998; (3) revenue and business income reported by tribes under the Single Audit Act; and (4) additional revenue and income information that might be useful to the Congress in deciding whether to distribute TPA funds considering total financial resources available to tribes. We contacted officials with the Department of the Interior’s Bureau of Indian Affairs, Office of Audit and Evaluation, and Office of Self-Governance in Washington, D.C., and its Office of Audit and Evaluation in Lakewood, Colorado. We analyzed distribution data provided by BIA and Office of Self-Governance officials to determine specific amounts distributed to area offices and tribes in fiscal year 1998. We did not independently verify the distribution or population data. At Interior’s Office of Audit and Evaluation in Washington, D.C. and Lakewood, Colorado, we examined all 326 of the most recent financial statements on file that were submitted under the Single Audit Act by tribes, tribal associations, and tribal enterprises. We excluded statements for some entities, such as tribal housing authorities and community colleges, because they are financially separate from the tribes. Of the 326 financial statements, 290 were for federally recognized tribes, 20 were for tribal businesses or components of tribes, 14 were for consortia or associations representing over 170 individual tribes, and 2 were for tribes not federally recognized. From each of the financial statements we examined, we obtained information about the independent auditor’s opinion, revenues for all fund types reported, and operating income for tribes that included tribal business information in their statements. We performed our review from November 1997 through April 1998 in accordance with generally accepted government auditing standards. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO discussed the preliminary results of its review of the Bureau of Indian Affairs' (BIA) distribution of Tribal Priority Allocation (TPA)--or TPA--funds, focusing on: (1) BIA's basis for distributing 1998 TPA funds; (2) total distributions of TPA funds in fiscal year (FY) 1998 and a per-capita analysis of those distributions; (3) revenue and business income information reported by tribes under the Single Audit Act; and (4) what additional revenue and income information may be useful to Congress in deciding whether to distribute TPA funds to tribes. GAO noted that: (1) two-thirds of the 1998 TPA funds were distributed primarily on the basis of historical levels, and tribes may shift these base funds among TPA activities according to their needs; (2) the remaining one-third, known as non-base funds, are used for such activities as road maintenance and housing improvement and were generally distributed on the basis of specific formulas; (3) in total, 95 percent of the TPA funds appropriated in FY 1998 have been distributed; (4) average TPA distributions varied widely among BIA's 12 area offices when analyzed and compared on a per-capita basis; (5) the per-capita averages ranged from $121 per tribal member with BIA's Muskogee area to $1,020 per tribal member within BIA's Portland area; (6) according to Interior officials, there are reasons for differences in TPA distributions, and they do not consider the population estimates to be reliable; (7) nonfederal entities--including tribes--meeting certain federal assistance thresholds must submit audited financial statements annually under the Single Audit Act; (8) GAO reviewed all 326 financial statements on file with the Department of the Interior that were most recently submitted by tribes; the statements generally covered fiscal years 1995 or 1996; (9) while some tribes reported only their federal revenues, others included revenues from state, local and private sources; (10) in total, the statements reported that these tribes received more than $3.6 billion in revenues during the years covered by them; (11) these revenues included such things as taxes and fees, lease and investment income, funds received through governmental grants and contracts; (12) some tribes also reported income from their businesses for the periods covered by the statements; (13) however, the quality of the information reported in the statements varied; only about half of the statements received unqualified opinions from auditors, while the others were deficient to varying degrees; (14) in deciding whether to consider tribal revenues or business income in distributing TPA funds, information that might be useful to Congress could include more complete and reliable financial information for all tribes; (15) however, there are several impediments to obtaining this information; and (16) for example, under the Single Audit Act, financial statements must be submitted by those nonfederal entities expending at least $300,000 of federal funds in a year and may not include income from tribes' businesses.

As part of our undercover investigation, we produced counterfeit documents before sending our two teams of investigators out to the field. We found two NRC documents and a few examples of the documents by searching the Internet. We subsequently used commercial, off-the-shelf computer software to produce two counterfeit NRC documents authorizing the individual to receive, acquire, possess, and transfer radioactive sources. To support our investigators’ purported reason for having radioactive sources in their possession when making their simultaneous border crossings, a GAO graphic artist designed a logo for our fictitious company and produced a bill of lading using computer software. Our two teams of investigators each transported an amount of radioactive sources sufficient to manufacture a dirty bomb when making their recent, simultaneous border crossings. In support of our earlier work, we had obtained an NRC document and had purchased radioactive sources as well as two containers to store and transport the material. For the purposes of our current undercover investigation, we purchased a small amount of radioactive sources and one container for storing and transporting the material from a commercial source over the telephone. One of our investigators, posing as an employee of a fictitious company, stated that the purpose of his purchase was to use the radioactive sources to calibrate personal radiation detectors. Suppliers are not required to exercise any due diligence in determining whether the buyer has a legitimate use for the radioactive sources, nor are suppliers required to ask the buyer to produce an NRC document when making purchases in small quantities. The amount of radioactive sources our investigator sought to purchase did not require an NRC document. The company mailed the radioactive sources to an address in Washington, D.C. On December 14, 2005, our investigators placed two containers of radioactive sources into the trunk of their rental vehicle. Our investigators – acting in an undercover capacity – drove to an official port of entry between Canada and the United States. They also had in their possession a counterfeit bill of lading in the name of a fictitious company and a counterfeit NRC document. At the primary checkpoint, our investigators were signaled to drive through the radiation portal monitors and to meet the CBP inspector at the booth for their primary inspection. As our investigators drove past the radiation portal monitors and approached the primary checkpoint booth, they observed the CBP inspector look down and reach to his right side of his booth. Our investigators assumed that the radiation portal monitors had activated and signaled the presence of radioactive sources. The CBP inspector asked our investigators for identification and asked them where they lived. One of our investigators on the two-man undercover team handed the CBP inspector both of their passports and told him that he lived in Maryland while the second investigator told the CBP inspector that he lived in Virginia. The CBP inspector also asked our investigators to identify what they were transporting in their vehicle. One of our investigators told the CBP inspector that they were transporting specialized equipment back to the United States. A second CBP inspector, who had come over to assist the first inspector, asked what else our investigators were transporting. One of our investigators told the CBP inspectors that they were transporting radioactive sources for the specialized equipment. The CBP inspector in the primary checkpoint booth appeared to be writing down the information. Our investigators were then directed to park in a secondary inspection zone, while the CBP inspector conducted further inspections of the vehicle. During the secondary inspection, our investigators told the CBP inspector that they had an NRC document and a bill of lading for the radioactive sources. The CBP inspector asked if he could make copies of our investigators’ counterfeit bill of lading on letterhead stationery as well as their counterfeit NRC document. Although the CBP inspector took the documents to the copier, our investigators did not observe him retrieving any copies from the copier. Our investigators watched the CBP inspector use a handheld Radiation Isotope Identifier Device (RIID), which he said is used to identify the source of radioactive sources, to examine the investigators’ vehicle. He told our investigators that he had to perform additional inspections. After determining that the investigators were not transporting additional sources of radiation, the CBP inspector made copies of our investigators’ drivers’ licenses, returned their drivers’ licenses to them, and our investigators were then allowed to enter the United States. At no time did the CBP inspector question the validity of the counterfeit bill of lading or the counterfeit NRC document. On December 14, 2005, our investigators placed two containers of radioactive sources into the trunk of their vehicle. Our investigators drove to an official port of entry at the southern border. They also had in their possession a counterfeit bill of lading in the name of a fictitious company and a counterfeit NRC document. At the primary checkpoint, our two-person undercover team was signaled by means of a traffic light signal to drive through the radiation portal monitors and stopped at the primary checkpoint for their primary inspection. As our investigators drove past the portal monitors and approached the primary checkpoint, they observed that the CBP inspector remained in the primary checkpoint for several moments prior to approaching our investigators’ vehicle. Our investigators assumed that the radiation portal monitors had activated and signaled the presence of radioactive sources. The CBP inspector asked our investigators for identification and asked them if they were American citizens. Our investigators told the CBP inspector that they were both American citizens and handed him their state-issued drivers’ licenses. The CBP inspector also asked our investigators about the purpose of their trip to Mexico and asked whether they were bringing anything into the United States from Mexico. Our investigators told the CBP inspector that they were returning from a business trip in Mexico and were not bringing anything into the United States from Mexico. While our investigators remained inside their vehicle, the CBP inspector used what appeared to be a RIID to scan the outside of the vehicle. One of our investigators told him that they were transporting specialized equipment. The CBP inspector asked one of our investigators to open the trunk of the rental vehicle and to show him the specialized equipment. Our investigator told the CBP inspector that they were transporting radioactive sources in addition to the specialized equipment. The primary CBP inspector then directed our investigators to park in a secondary inspection zone for further inspection. During the secondary inspection, the CBP inspector said he needed to verify the type of material our investigators were transporting, and another CBP inspector approached with what appeared to be a RIID to scan the cardboard boxes where the radioactive sources was placed. The instrumentation confirmed the presence of radioactive sources. When asked again about the purpose of their visit to Mexico, one of our investigators told the CBP inspector that they had used the radioactive sources in a demonstration designed to secure additional business for their company. The CBP inspector asked for paperwork authorizing them to transport the equipment to Mexico. One of our investigators provided the counterfeit bill of lading on letterhead stationery, as well as their counterfeit NRC document. The CBP inspector took the paperwork provided by our investigators and walked into the CBP station. He returned several minutes later and returned the paperwork. At no time did the CBP inspector question the validity of the counterfeit bill of lading or the counterfeit NRC document. We conducted corrective action briefings with CBP and NRC officials shortly after completing our undercover operations. On December 21, 2005, we briefed CBP officials about the results of our border crossing tests. CBP officials agreed to work with the NRC and CBP’s Laboratories and Scientific Services to come up with a way to verify the authenticity of NRC materials documents. We conducted two corrective action briefings with NRC officials on January 12 and January 24, 2006, about the results of our border crossing tests. NRC officials disagreed with the amount of radioactive material we determined was needed to produce a dirty bomb, noting that NRC’s “concern threshold” is significantly higher. We continue to believe that our purchase of radioactive sources and our ability to counterfeit an NRC document are matters that NRC should address. We could have purchased all of the radioactive sources used in our two undercover border crossings by making multiple purchases from different suppliers, using similarly convincing cover stories, using false identities, and had all of the radioactive sources conveniently shipped to our nation’s capital. Further, we believe that the amount of radioactive sources that we were able to transport into the United States during our operation would be sufficient to produce two dirty bombs, which could be used as weapons of mass disruption. Finally, NRC officials told us that they are aware of the potential problems of counterfeiting documents and that they are working to resolve these issues. Mr. Chairman and Members of the Subcommittee, this concludes my statement. I would be pleased to answer any questions that you or other members of the committee may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-7455 or kutzg@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

To address the threat of dirty bombs and other nuclear material, the federal government has programs in place that regulate the transportation of radioactive sources and to prevent illegal transport of radioactive sources across our nation's borders. The Department of Homeland Security through the U.S. Customs and Border Protection (CBP) uses radiation detection equipment at ports of entry to prevent such illicit entry of radioactive sources. The goal of CBP's inspection program is to "...thwart the operations of terrorist organizations by detecting, disrupting, and preventing the cross-border travel of terrorists, terrorist funding, and terrorist implements, including Weapons of Mass Destruction and their precursors." Deploying radiation detection equipment is part of CBP's strategy for thwarting radiological terrorism and CBP is using a range of such equipment to meet its goal of screening all cargo, vehicles, and individuals coming into the United States. Most travelers enter the United States through the nation's 154 land border ports of entry. CBP inspectors at ports of entry are responsible for the primary inspection of travelers to determine their admissibility into the United States and to enforce laws related to preventing the entry of contraband, such as drugs and weapons of mass destruction. Our investigation was conducted at Congressional request as a result of widespread congressional and public interest in the security of our nation's borders, given today's unprecedented terrorism threat environment. Our investigation was conducted under the premise that given today's security environment, our nation's borders must be protected from the smuggling of radioactive sources by terrorists. For the purposes of this undercover investigation, we purchased a small amount of radioactive sources and one container used to store and transport the material from a commercial source over the telephone. One of our investigators, posing as an employee of a fictitious company located in Washington, D.C., stated that the purpose of his purchase was to use the radioactive sources to calibrate personal radiation detection pagers. The purchase was not challenged because suppliers are not required to determine whether a buyer has a legitimate use for the radioactive sources, nor are suppliers required to ask the buyer to produce an NRC document when making purchases in small quantities. The radiation portal monitors properly signaled the presence of radioactive material when our two teams of investigators conducted simultaneous border crossings. Our investigators' vehicles were inspected in accordance with most of the CBP policy at both the northern and southern borders. However, our investigators were able to enter the United States with enough radioactive sources to make two dirty bombs using counterfeit documents. Specifically, they were able to successfully represent themselves as employees of a fictitious company and present a counterfeit bill of lading and a counterfeit NRC document during the secondary inspections at both locations. The CBP inspectors never questioned the authenticity of the investigators' counterfeit bill of lading or the counterfeit NRC document authorizing them to receive, acquire, possess, and transfer radioactive sources.

Prior to 1940, U.S. presidents or their descendents typically retained ownership of papers documenting their terms of office. The fate of these papers was up to the former president or his descendents, and some were lost forever. In 1940, Franklin D. Roosevelt was the first president to arrange to have a library built using privately raised funds and to then transfer both the facility and his papers to the federal government. Through its Office of Presidential Libraries, NARA operates presidential libraries housing the papers of all subsequent presidents through George W. Bush, as well as President Roosevelt’s predecessor in the White House, Herbert Hoover. At the end of a president’s term, NARA staff begin working with the president’s official records and other materials. This work goes on during library construction and during the period between the dedication of the library facility and its transfer to the federal government. Table 1 provides facts about the 13 presidential libraries and museums operated by NARA. For most of the libraries, as the president’s term was coming to a close or after it ended, friends and supporters of the president created a private charitable foundation to collect donations to construct a library. Under current law, NARA collaborates with each presidential library foundation on the construction of the library facility, and when the facility construction is complete, the foundation deeds or gives the right to use the library facility or a portion of the facility to NARA. The Presidential Libraries Act of 1986 also requires that the National Archives Trust Fund receive an operating endowment for each library before NARA can accept the transfer of the library. These endowments fund some of the federal government’s costs for the operation and maintenance of the presidential libraries. Figure 1 captures key steps of the current process of establishing a presidential library. Some variations from this process may exist. Each library is operated by a director who is a NARA employee, and other library staff who are also NARA employees. The staffs typically include an administrative officer, facility manager, education and exhibits specialists, archivists, archives technicians, and clerks, among other staff. The director of a presidential library is appointed by the Archivist of the United States, the head of NARA, who consults with the former president in selecting a candidate. The Office of Presidential Libraries is headed by the Assistant Archivist for Presidential Libraries. The Office of Presidential Libraries is responsible for overseeing the management of records at the libraries, the development of policies and procedures for the management and operation of presidential libraries, and the development and coordination of plans, programs, and resource allocations at presidential libraries. The Office of Presidential Libraries is also involved in the creation of new presidential libraries. Funds appropriated by Congress support NARA’s staffing, administration, security, maintenance, and renovation projects at the library. In fiscal year 2009, NARA spent more than $68 million in appropriations to operate the presidential libraries. In addition, for fiscal year 2009 NARA received $41.5 million in special appropriations for repairs and restoration to the John F. Kennedy Presidential Library and Museum ($22 million), the Franklin D. Roosevelt Presidential Library and Museum ($17.5 million), and the Lyndon Baines Johnson Library & Museum ($2 million). Each private foundation is operated by a director, president, or CEO and other staff that may include a chief financial officer and director of communications, among other positions. Foundation support enables the libraries to expand their research and archival functions, as well as undertake additional projects such as public outreach efforts. The foundations’ level of involvement in the activities at their associated library, such as collaboration on public and educational programs, varies from library to library. Foundations may also sponsor their own programs and activities, such as hosting a lecture series or academic discussion or producing a newsletter. NARA officials told us that, in most cases, these kinds of programs and activities are offered in conjunction with and supported by library staff. For example, a foundation may pay for a lecture series that is held in NARA-controlled space. The foundations may also generally support their associated libraries with additional funding for new facilities and equipment and for updating permanent exhibits, adding program space, and giving the library the use of foundation staff time for library activities. Foundations provide these resources directly to their associated library. This process generally is handled at the library level based on the relationship between the library and the foundation. Each presidential library also has a trust fund that receives revenue from the sale of publications, museum shop sales, document reproductions, audio-visual reproductions, library admissions, public space rentals, educational conferences, and interest income. Trust- fund money helps the library cover the cost of museum shop inventory, personnel, operational and financial systems, equipment, and supplies. These funds may also support exhibit-related and public-programming expenses. In fiscal year 2009, the trust funds for presidential libraries had a total end-of-year balance of approximately $15 million. In addition to trust funds, presidential libraries also maintain funds from gifts donated to a library for general library support or for specific projects or programs. The federal laws specific to presidential libraries focus primarily on the design and construction of library facilities and, once constructed, the deeding of the library facilities, or the rights to use the facilities, to the federal government. Congress has enacted three primary statutes that provide the legal rules for the design, construction, and transfer of library facilities. NARA’s building-use regulations outline the permissible and prohibited uses of the presidential library facilities by other groups. According to the regulations, other groups may request the use of presidential library facilities when the activity is sponsored, cosponsored, or authorized by the library; conducted to further the library’s interests; and does not interfere with the normal operation of the library. The regulations prohibit the use of the facilities for profit-making, commercial advertisement or sales, partisan political activities, or sectarian activities. When NARA considers it to be in the public interest, NARA may allow for the occasional, nonofficial use of rooms and spaces in a presidential library and charge a reasonable fee for such use. Additionally, the regulations require outside organizations to apply for the use of library space by writing to the library director and submitting an Application for Use of Space in Presidential Libraries. Applying organizations must agree to review their event plans with library staff and that the plans will conform to library rules and procedures. The application also confirms that the organization will not charge admission fees, make indirect assessment fees for admission, or take collections for their events. Further, the application prohibits the organization from suggesting that the library endorses or sponsors the organization. Federal laws and regulations specify for all federal employees—including federal employees working at presidential libraries—what they may and may not do in their official capacity. For example, federal employees may not engage in commercial or political activity associated with their federal positions. According to NARA’s General Counsel, there are no special laws or regulations that apply only to how library employees interact with the foundation or, if applicable, university associated with their library, but the laws and regulations that apply throughout the federal government also apply to library employees. The Hatch Act provides the rules for the activities of library employees at events such as candidate debates or speeches by candidates that sometimes take place at the libraries. The Hatch Act, which is enforced by the U.S. Office of Special Counsel (OSC), prohibits certain political activities for federal employees. At an event such as these (or at any other time) a library employee may not use official authority to interfere with an election; solicit, accept, or receive political contributions from any person; run for nomination or as a candidate for election to a partisan political office; or solicit or discourage the political activity of any person connected to the business of the employee’s office. NARA employees must also follow the Standards of Ethical Conduct for Employees of the Executive Branch issued by the Office of Government Ethics. The standards emphasize that employees have a responsibility to the U.S. government and its citizens to place loyalty to the Constitution, laws, and ethical principles above private gain, and set forth 14 general principles. Among other things, the standards describe limitations on actions an employee may take while seeking other employment, and require that employees use the time they are serving in an official capacity in an honest effort to perform official duties. NARA’s Office of Presidential Libraries oversees the 13 presidential libraries. That office has developed systemwide policies, including the Presidential Libraries Manual, which discusses museum activities and records topics, and the NARA / Office of Presidential Libraries Architecture and Design Standards for Presidential Libraries. The Office of Presidential Libraries also works with the NARA General Counsel on the development of policies governing the library–foundation relationship. The NARA General Counsel has issued legal opinions on foundations’ use of library facilities, when and how library staff can support foundation activities, and if library staff can fundraise for the foundations. Additionally, NARA officials explained that the NARA General Counsel and the Office of Presidential Libraries negotiate with the foundations on the agreements establishing the relationship between a new library and its associated foundation. According to NARA officials, library directors at the individual libraries consult with the NARA General Counsel about activities that could have political undertones before allowing a program or event. For example, library directors have contacted NARA General Counsel to inquire about using libraries as polling places. NARA approved the use of libraries as polling places as long as certain requirements were met such as that no political solicitation occurs on library-controlled property. In another example, a local political party requested but was not allowed to hold a political forum at the library. NARA officials told us that NARA does not have internal directives specifically regarding the supervision of library and foundation staff. They said that when library staff are concerned about supervision or other issues while working on a collaborative project with the foundations, they are expected to seek advice from the NARA General Counsel’s ethics program staff. Table 3 provides a summary of NARA policies and NARA General Counsel opinions concerning library–foundation activities and other outside uses of the libraries. Each presidential library has a written agreement with its associated foundation and, if applicable, the associated university that governs aspects of the relationship between the entities. These agreements differ in format; content; and the extent to which they address use of facilities, library and foundation staff relationships, and political activities. These agreements must be consistent with the applicable statutes and NARA regulations. At some libraries, the library–foundation relationship is addressed by more than one agreement due to the updating or supplementing of original documents, or to the changing format of the agreements over time. Some of the oldest agreements are primarily a series of Letters of Offer and Acceptance between the foundation and the General Services Administration (GSA), with later agreements taking the form of a mutually signed agreement between the foundation and NARA. For example, the Ford museum and the Hoover, Truman, Eisenhower, and Kennedy library agreements (from 1957 to 1980) include one or more Letters of Offer and Acceptance between the foundation and the GSA. Later agreements from more-recently established libraries, as well as earlier libraries that updated their agreements, include mutually signed agreements between the foundation and NARA. Of these later agreements, some focus on a specific project or aspect of the library–foundation relationship, while some focus broadly on the library–foundation relationship. We reviewed the library–foundation agreements and found that, over time, the agreements have become increasingly more detailed, especially regarding staff, each entity’s use and control of the different parts of the facilities, and political activities. Earlier agreements are largely focused on the transfer of property from the foundation to the United States, while later agreements address additional aspects of the library–foundation relationship. For example, later agreements address which entity controls specific parts of the facilities, including details related to one entity’s use of the other’s space (such as the permitted purposes for using the other’s space, and reimbursing the other entity for costs associated with using its space). Later agreements are also more likely to clarify the different roles and responsibilities of library and foundation staff, and address activities or tasks that library staff are not allowed to perform. Some of the later agreements also address potential conflicts of interest between the library and the foundation. For example, two of the later agreements state that foundation staff are to act in the best interests of the foundation, and NARA staff are to act in the best interests of NARA and the United States. Regarding political activities, two of the later agreements state that library space is not allowed to be used for partisan political activities. Also, NARA regulations give library directors the authority to establish supplemental policies. According to NARA officials, these supplemental policies may provide further detail on the library–foundation relationship regarding facilities, staff, and political activities. Our review was limited to NARA- wide policies and library–foundation agreements and we did not review any local library supplemental policies. NARA officials explained that the written agreements between individual libraries and the foundations are important, but that they also do not fully prescribe the relationships between the entities. They said that the relationships are shaped over time and by factors such as the particular foundation’s interest in collaborating with the library or doing charitable work elsewhere. For example, the Harry S. Truman Library and Museum and its associated foundation, the Truman Library Institute, are colocated and often collaborate on educational programs. The foundation describes itself as working with the library to “fulfill the Truman Library’s commitment to research and education.” In contrast, the mission of the foundation associated with the Jimmy Carter Library and Museum, The Carter Center, does not directly focus on the library, but rather “to advance peace and health worldwide.” NARA officials said that interaction between individual libraries and their foundations vary, but they also stressed that no one foundation’s emphasis is more correct than another. These are examples of differences among foundations and how those differences shape the level of involvement by a foundation with a library. We provided a draft of this report to NARA. NARA had no substantive comments and provided technical comments by e-mail, which we incorporated as appropriate. NARA’s letter is reprinted in appendix I. We will send a copy of this report to the Archivist of the United States. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-9110 or brostekm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. In addition to the contact named above, David Lewis, Assistant Director; Sonya Phillips; Juliann Gorse; Brianna Benner; Sabrina Streagle; Lois Hanshaw; Susan Christiansen; Lindsay Read; and Jessica Thomsen made key contributions to this report.

The National Archives and Records Administration (NARA) operates presidential libraries for all of the former U.S. presidents since Herbert Hoover. These libraries received over 2.4 million visits in 2009, including researchers, public program attendees, and museum visitors. Each library is associated with a private foundation, which raised the funds to build the library and then turned the library facility over to the federal government. These foundations typically have ongoing relationships with the libraries they built, and some of these library-foundation relationships involve sharing of staff and facilities. Per congressional request, this report describes the principal laws, regulations, and NARA policies that govern library-foundation relationships and the appropriate use of library facilities and staff. GAO reviewed specific laws governing presidential libraries, and NARA regulations and policies. We also reviewed applicable laws and regulations governing activities held on government property and acceptable activities of federal employees. Further, we interviewed relevant NARA officials. NARA reviewed a draft of this report and had no substantive comments. NARA made technical suggestions which we incorporated as appropriate. GAO is not making any recommendations in this report. The federal laws specific to presidential libraries focus primarily on the design and construction of library facilities and, once constructed, the deeding of the library facilities, or the rights to use the facilities, to the federal government. NARA building-use regulations outline the permissible and prohibited uses of presidential library facilities by outside organizations. Prohibited uses include profit-making, commercial advertisement or sales, partisan political activities, or sectarian activities. Other laws and regulations govern what federal employees may and may not do in their official capacity. As federal employees, NARA library employees must follow these rules in their interactions with the foundation associated with the library. NARA's Office of Presidential Libraries has developed a policy manual and standards that address topics such as museum activities and records. This office also works with the NARA General Counsel to develop guidance governing the library-foundation relationship, such as those related to the foundations' use of library facilities and when and how library staff can support foundation activities. The libraries also have one or more written agreements with their associated foundation that govern different aspects of the relationship. These agreements differ in format; content; and the extent to which they address use of facilities, library and foundation staff relationships, and political activities.

Information systems can be complex undertakings consisting of a multitude of pieces of equipment and software products, and service providers. Each of these components may rely on one or more supply chains. Obtaining a full understanding of the sources of a given information system can also be extremely complex. According to the Software Engineering Institute, the identity of each product or service provider may not be visible to others in the supply chain. Typically, an acquirer, such as a federal agency, will only know about the participants directly connected to it in the supply chain. In addition, the complexity of corporate structures, in which a parent company (or its subsidiaries) may own or control companies that conduct business under different names in multiple countries, presents additional challenges to fully understanding the sources of an information system. As a result, the acquirer will have little visibility into the supply chains of its suppliers. Federal procurement law and policies promote the acquisition of commercial products when they meet the government’s needs. Commercial providers of IT use a global supply chain to design, develop, manufacture, and distribute hardware and software products throughout the world. Many of the manufacturing inputs required for those products— whether physical materials or knowledge—are acquired from various sources around the globe. Figure 1 depicts the potential countries of origin of common suppliers of various components within a commercially available laptop computer. The Federal Information Security Management Act of 2002 (FISMA) establishes federal agency information security program requirements that support the effectiveness of information security controls over information resources that support federal operations and assets. Its framework creates a cycle of risk management activities necessary for an effective security program, and it assigns responsibilities to the National Institute of Standards and Technology (NIST) for providing standards and guidelines on information security. In its August 2009 revision of Special Publication (SP) 800-53 (Revision 3), which provides recommended security controls for federal agencies and organizations, NIST included for the first time a security control for supply chain protection (SA-12). SA-12 identified several specific measures organizations could use to provide additional supply chain protections, such as conducting due diligence reviews of suppliers; using trusted shipping and warehousing; and employing independent analysis and penetration testing of IT systems, components, and products. In addition, SP 800-53, Revision 3, includes a security control for system and service acquisition policies and procedures (SA-1). Thus, for systems where both controls are selected, agencies should develop, disseminate, and review acquisition policy and implementing procedures that help protect against supply chain threats throughout the system development life cycle. Further, in March 2011, NIST published SP 800- 39, an approach to organizationwide management of information security risk, which states that organizations should monitor risk on an ongoing basis as part of a comprehensive risk management program. Reliance on a global supply chain introduces multiple risks to federal information systems and underscores the importance of threat assessments and risk mitigation. Supply chain threats are present at various phases of a system’s development life cycle. Key threats that could create an unacceptable risk to federal agencies include the following: installation of hardware or software containing malicious logic, which is hardware, firmware, or software that is intentionally included or inserted in a system for a harmful purpose; installation of counterfeit hardware or software, which is hardware or software containing non-genuine component parts or code; failure or disruption in the production or distribution of critical products resulting from manmade or natural causes; reliance on a malicious or unqualified service provider for the performance of technical services; and installation of hardware or software that contains unintentional vulnerabilities, such as defects in code that can be exploited. Such threats can have a range of impacts, including allowing attackers to take control of systems and read, modify, or delete sensitive information; decreasing the reliability of IT equipment; decreasing the availability of material needed to develop systems; or allowing remote attackers to cause a denial of service, among other things. Threat actors can introduce these threats into federal information systems by exploiting vulnerabilities that could exist at multiple points in the global supply chain. In addition, supply chain vulnerabilities can include weaknesses in agency acquisition or security procedures, controls, or implementation related to an information system. Examples of types of vulnerabilities that could be exploited include acquisition of IT products or parts from sources other than the original manufacturer or authorized reseller, such as independent distributors, brokers, or on the gray market; applying untested updates and software patches to information acquiring equipment, software, or services from suppliers without understanding their past performance or corporate structure; and using delivery or storage mechanisms that are not secure. If a threat actor exploits an existing vulnerability, it could lead to the loss of the confidentiality, integrity, or availability of the system and associated information. Although the four agencies in our review—the Departments of Energy, Homeland Security (DHS), Justice, and Defense—have acknowledged the risks presented by supply chain vulnerabilities, they varied in the extent to which they have addressed these risks by (1) defining supply chain protection measures for department information systems, (2) developing implementing procedures for these measures, and (3) establishing capabilities for monitoring compliance with and the effectiveness of such measures. Three of the four departments have made limited progress in addressing supply chain risk: In May 2011, the Department of Energy revised its information security program, which requires Energy components to implement provisions based on NIST and Committee on National Security Systems guidance. However, the department was unable to provide details on implementation progress, milestones for completion, or how supply chain protection measures would be defined. Because it had not defined these measures or associated implementing procedures, the department was also not in a position to monitor compliance or effectiveness. Although its information security guidance mentions the NIST control related to supply chain protection, DHS has not defined the supply chain protection measures that system owners should employ. The department’s information security policy manager stated that it was in the process of developing policy that would address supply chain protection, but did not provide details on when it would be completed. In addition, in the absence of such a policy, DHS was not in a position to develop implementation procedures or to monitor compliance or effectiveness. The Department of Justice has defined specific security measures for protecting against supply chain threats through the use of provisions in vendor contracts and agreements. Officials identified (1) a citizenship and residency requirement and (2) a national security risk questionnaire as two provisions that address supply chain risk. However, Justice has not developed procedures for ensuring the effective implementation of these protection measures or a mechanism for verifying compliance with and the effectiveness of these measures. By contrast, the Department of Defense has made more progress. Specifically, the department’s supply chain risk management efforts began in 2003 and include a policy requiring supply chain risk to be addressed early and across a system’s entire life cycle and calling for an incremental implementation of supply chain risk management through a series of pilot projects; a requirement that every acquisition program submit and update a “program protection plan” that is to, among other things, help manage risks from supply chain exploits or design vulnerabilities; procedures for implementing supply chain protection measures, such as an implementation guide describing 32 specific measures for enhancing supply chain protection and procedures for program protection plans identifying ways in which programs should manage supply chain risk; and a monitoring mechanism to determine the status and effectiveness of supply chain protection pilot projects, as well as monitoring compliance with and effectiveness of program protection policies and procedures for several acquisition programs. In addition, the four national security-related agencies participate in interagency efforts to address supply chain security, including participation in the Comprehensive National Cybersecurity Initiative,development of technical and policy tools, and collaboration with the intelligence community. In support of the cybersecurity initiative, Defense and DHS jointly lead an interagency initiative on supply chain risk management to address issues of globalization affecting the federal government’s IT. Also, DHS has developed a comprehensive portfolio of technical and policy-based product offerings for federal civilian departments and agencies, including technical assessment capabilities, acquisition support, and incident response capabilities. Further, the four national security-related departments participate in an Office of the National Counterintelligence Executive-led initiative to (1) develop a common methodology for conducting threat assessments on entities that do business with the national security community and (2) request from agencies and centrally store copies of threat assessments for future use by components of the national security community. To assist the three national security-related agencies in better addressing IT supply chain-related security risks for their departmental information systems, we made several recommendations to the Secretaries of Energy and Homeland Security and the Attorney General. Specifically, we recommended that Energy develop and document departmental policy that defines which security measures should be employed to protect against supply chain threats; develop, document, and disseminate procedures to implement the supply chain protection security measures defined in departmental policy; and develop and implement a monitoring capability to verify compliance with, and assess the effectiveness of, supply chain protection measures. In commenting on our report, Energy stated that it concurred with the spirit of our recommendations. Energy also expressed concern that the recommendations are not fully aligned with the administration’s initiatives and stated that it believes policies and standards to address IT supply chain risk management must be coordinated at the national level, not independently through individual agencies. We agree that national or federal policies and standards should be coordinated and promulgated at the national or federal level. However, we also believe–as intended by our recommendations—that federal departments are responsible for developing departmental policies and procedures that are consistent and aligned with federal guidance. Our recommendations to Energy are based on and consistent with federal guidance on supply chain risk management. In addition, we recommended that DHS develop and document departmental policy that defines which security measures should be employed to protect against supply chain threats; develop, document, and disseminate procedures to implement the supply chain protection security measures defined in departmental policy; and develop and implement a monitoring capability to verify compliance with, and assess the effectiveness of, supply chain protection measures. In commenting on a draft of our report, DHS concurred with our recommendations and described steps the department is taking to address them, including developing departmental policy to define supply chain protection measures, examining risk management procedures, and exploring options for verifying compliance with and effectiveness of its supply chain protection measures. We also recommended that Justice develop, document, and disseminate procedures to implement the supply chain protection security measures defined in departmental policy; and develop and implement a monitoring capability to verify compliance with, and assess the effectiveness of, supply chain protection measures. Justice concurred with the recommendations. In summary, the global IT supply chain introduces a myriad of security vulnerabilities to federal information systems that, if exploited, could introduce threats to the confidentiality, integrity, and availability of federal information systems. Thus the potential exists for serious adverse impact on an agency’s operations, assets, and employees. These risks highlight the importance of national security-related agencies fully addressing supply chain security by defining measures and implementation procedures for supply chain protection and monitoring compliance with and the effectiveness of these measures. Until these agencies develop comprehensive policies, procedures, and monitoring capabilities, increased risk exists that they will be vulnerable to IT supply chain threats. Chairman Stearns, Ranking Member DeGette, and Members of the Subcommittee, this completes my statement. I would be happy to answer any questions you have at this time. If you have any questions regarding this statement, please contact Gregory C. Wilshusen at (202) 512-6244 or wilshuseng@gao.gov. Other key contributors to this statement include Michael W. Gilmore (Assistant Director), Bradley W. Becker, Kush K. Malhotra, and Lee McCracken. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Information technology (IT) systems and the products and services that support them are essential to the operations of the federal government. These products and services are delivered through a complex global supply chain, and the exploitation of vulnerabilities in the IT supply chain is an emerging threat. Federal law requires establishment of information security programs, and implementing standards and guidelines provide for managing supply chain risk. GAO was asked to testify on its recently issued report that, among other things, identified key risks associated with the supply chains used by federal agencies to procure IT equipment, software, and services, and assessed the extent to which four national security-related agencies have addressed such risks. In producing that report, GAO analyzed federal acquisition and information security laws, regulations, standards, and guidelines; examined departmental policies and procedures; and interviewed officials from four national security-related departments, the intelligence community, and nonfederal entities. Reliance on a global supply chain introduces multiple risks to federal information systems and underscores the importance of threat assessments and mitigation. Supply chain threats are present at various phases of a system’s development life cycle and could create an unacceptable risk to federal agencies. Key supply chain-related threats include installation of intentionally harmful hardware or software (i.e., containing “malicious logic”); installation of counterfeit hardware or software; failure or disruption in the production or distribution of critical products; reliance on malicious or unqualified service providers for the performance of technical services; and installation of hardware or software containing unintentional vulnerabilities, such as defective code. These threats can have a range of impacts, including allowing attackers to take control of systems or decreasing the availability of critical materials needed to develop systems. These threats can be introduced by exploiting vulnerabilities that could exist at multiple points in the supply chain. Examples of such vulnerabilities include acquisition of products or parts from unauthorized distributors; application of untested updates and software patches; acquisition of equipment, software, or services from suppliers without knowledge of their past performance or corporate structure; and use of insecure delivery or storage mechanisms. These vulnerabilities could by exploited by malicious actors, leading to the loss of the confidentiality, integrity, or availability of federal systems and the information they contain. The four national security-related agencies in GAO’s review—the Departments of Energy, Homeland Security, Justice, and Defense—varied in the extent to which they have addressed supply chain risks. Specifically, Energy and Homeland Security had not yet defined supply chain protection measures for department information systems and are not in a position to develop implementing procedures and monitoring capabilities. Justice has defined supply chain protection measures but has not developed implementation procedures or monitoring capabilities. Until these agencies develop comprehensive policies, procedures, and monitoring capabilities, increased risk exists that they will be vulnerable to IT supply chain threats. By contrast, the Department of Defense has made greater progress: it has defined supply chain protection measures and implementing procedures and initiated efforts to monitor compliance and effectiveness. In addition, various interagency efforts are under way to address supply chain risks affecting federal IT. In its report, GAO recommended that the Departments of Energy, Homeland Security, and Justice take steps, as needed, to develop and document policies, procedures, and monitoring capabilities that address IT supply chain risk. In commenting on a draft of the report, the departments generally concurred with the recommendations.

OPAP was established by the Secretary of State following the August 1998 bombings of U.S. embassies in Nairobi, Kenya, and Dar es Salaam, Tanzania. The panel was formed to consider the future of U.S. overseas representation, to appraise its condition, and to develop practical recommendations on how best to organize and manage embassies and consulates. Citing weaknesses in security, infrastructure, technology, human capital, and management, OPAP concluded that the U.S. overseas presence was “perilously close to the point of system failure.” OPAP made recommendations in eight areas, including that of creating the right size and location for U.S. overseas presence. A key OPAP theme stressed that a rightsizing process should consider the relationship between embassy size and security. Specifically, OPAP recommended that rightsizing be used to reduce the number of people at risk overseas. OPAP made five additional recommendations regarding the size and location of overseas posts: Rightsize the U.S. overseas presence; reduce the size of some posts, close others, reallocate staff and resources, and establish new posts where needed to enhance the American presence where the bilateral relationship has become more important. Form a new Interagency Overseas Presence Committee—a permanent committee to regularly adjust U.S. presence to U.S. goals and interests. Adopt explicit criteria to guide size and location decisions. Support the concept of small posts. Encourage ambassadors to initiate rightsizing. OPAP also recommended that some administrative services be performed at regional centers or in the United States—actions that would lessen the need for administrative staff at some posts, thereby reducing security vulnerabilities. In February 2000, President Clinton directed the Secretary of State to lead an interagency effort to implement OPAP’s recommendations. In a March 2000 report to the Congress, the Department of State said that the interagency committee planned to complete pilot studies by June 2000 to assess staffing levels, to recommend necessary changes at the study posts, and to develop decision criteria applicable to subsequent rightsizing reviews to be conducted at all overseas posts over a 5-year period. State anticipated that reviews at half the posts (about 130 posts) would be completed within 2 years. In early 2000, State organized an interagency rightsizing committee representing key agencies, including the Departments of Agriculture, Commerce, Defense, Transportation, Energy, Justice, the Treasury, and State; the intelligence community; and the U.S. Agency for International Development (USAID). Pilot studies were conducted at six embassies— Amman, Jordan; Bangkok, Thailand; Mexico City, Mexico; New Delhi, India; Paris, France; and Tbilisi, Georgia, from March to May 2000. Teams with representatives from State, the intelligence community, Defense, Justice, USAID, and the Treasury visited all six posts; officials from other agencies made some of the trips. These embassies were selected because of the complexity of their missions and because they represented broad geographical and agency coverage. The Department of State told us that the interagency teams did not have written guidelines. Moreover, according to agency representatives who participated in the studies, the teams did not systematically assess staffing at the pilot posts. According to the former interagency committee leader, the teams attempted to use the criteria that OPAP suggested for making staffing decisions, but found that the criteria were too broad to guide determinations on specific post size. Prior to travel, the teams reviewed each embassy’s Mission Performance Plan describing objectives and priorities. In addition, the Department of State directed the teams to draft a list of general questions that linked staffing to the goals and objectives laid out in each embassy’s Mission Performance Plan, as a discussion guide. At each embassy, the teams received a briefing from the ambassador and then concentrated on interviewing key agency representatives, to obtain information and opinions on agencies’ staffing levels and workload. The teams spent a few days at each post. For example, a team was in Tbilisi for 2 days, Paris for about 3 days, and Mexico City for 5 days. Some team members and representatives of the interagency rightsizing committee told us that 2 to 5 days at an embassy was too little time to permit detailed analysis of workload or to fully explore alternative ways of conducting business, such as regionalizing operations or outsourcing administrative functions. This is partly attributable to the size and complexity of embassy operations at the posts visited. Four of the embassies—Bangkok, Mexico City, New Delhi, and Paris—are among the largest and most complex in the world. Though smaller, the remaining two embassies both have substantial numbers of U.S. and foreign national employees, from multiple agencies. The ambassador who led three of the pilot studies told us that a comprehensive review of staff levels would take much longer than the 2 to 5 days the teams spent at the embassies, and that the pilot studies were not designed for that purpose. However, he believed that the length of visit was sufficient to identify potential functions that warranted additional study to determine if staffing levels should be adjusted. The interagency committee’s June 2000 report to the Under Secretary of State summarizing results of the pilot studies concluded that it was impractical to develop a staffing methodology that would be applicable to all posts, as OPAP had recommended, because no two posts are sufficiently similar. In addition, the report questioned the need for additional rightsizing of overseas posts, stating that agencies had adjusted staff levels during the 1990s in response to budget constraints to ensure that only the most essential overseas functions were performed. As a result, the report concluded that agencies had already performed rightsizing. The report also concluded that planned rightsizing reviews of additional posts over 5 years should not be conducted, as the benefits of rightsizing may not outweigh the costs of conducting the reviews. Regarding OPAP’s recommendation to establish an interagency board to review staff levels at overseas posts, the committee’s report concluded that an interagency advisory board could be helpful as a forum to discuss programmatic issues with major overseas staffing implications and to provide informal and nonbinding advice to agencies and ambassadors. However, some agencies opposed the establishment of an interagency board, even on an advisory basis, because they believed it was unnecessary and would limit agency independence in making staffing decisions. Although the interagency committee did not recommend major changes in staff levels as a general theme in its June 2000 report, it did recommend that the regional financial service centers in Bangkok and Paris be relocated to the United States, and that several other potential opportunities for staff level reductions be explored. In addition, the report raised concerns about heavy embassy staff workloads, an issue not specifically addressed by OPAP. According to the committee’s report, an expanded American role in promoting and protecting U.S. interests overseas has imposed a dramatic and often overwhelming burden of work and responsibility on embassy staff. The committee found a common perception at each post that “Washington’s demands for reports, demarches, and other initiatives are numerous, un-prioritized, unrealistic, and insatiable.” The report also noted concerns about the ambassador’s ability to manage embassy staff and resources, noting that several ambassadors had indicated reluctance to challenge staffing levels of non- State agencies. The summary report also endorsed the initiation of separate interagency law enforcement pilot studies that the Attorney General had recommended in April 2000. These studies were intended to determine a methodology for deciding the appropriate type and number of law enforcement personnel to be assigned overseas, and to review the law enforcement policy role and staffing requirements at U.S. diplomatic missions. As part of this pilot, the law enforcement working group visited Mexico City, Bangkok, and Paris. State officials are unclear as to how the results of the working group will eventually affect staffing levels or rightsizing efforts. They noted, however, that law enforcement agencies have significantly increased their presence at a number of overseas posts in recent years. Table 1 summarizes the observations and conclusions for each post contained in the summary report on the pilot studies. Regarding staffing in Paris, the interagency committee’s report noted that the ambassador had testified to the Congress that staff could be significantly reduced, but had not recommended which specific positions should be eliminated. The report recommended that the ambassador identify specific positions for elimination by September 2000. In addition, an informal “lessons learned” paper, prepared by the study team, suggested that staffing in Paris should be the subject of urgent, interagency review with a view toward reducing work demands, privatizing some administrative positions, and moving some functions to the United States. The ambassador who led the pilot study team said that reduction of work demands could be achieved if the White House, through the Office of Management and Budget, established relative policy priorities and questioned, and perhaps overrode, staffing decisions made by individual agencies. The study team also cited examples of work that may not need to be performed in Paris, or that could be privatized, including some translation services and reporting on information available in public sources. In addition, the team noted that there may be ways to reduce the amount of embassy staff time spent in supporting the large number of official visitors. After the pilot studies were completed, the ambassador at the U.S. Embassy in Paris asked headquarters agencies to review workload requirements, with a view toward reducing workload so that rightsizing could take place. In October 2000, State provided guidance to the ambassador on work requirements and priorities for the embassy. In November 2000, the ambassador said that this guidance would not permit him to reduce staff, as it would not be fair to cut staff and ask the remaining staff to take on an undiminished workload. Although the ambassador expressed disappointment in this effort to identify potential workload and staff reductions, he reiterated his position that staff reductions were needed in view of security concerns at the post, and in the interest of achieving operational efficiencies. The concern regarding embassy security in Paris was attributable to the absence of “setback” from public streets, making the embassy highly vulnerable to terrorist attack. According to Department of State officials, the departure of the ambassador in late 2000, the November 2000 U.S. elections, and the change in administrations detracted from follow-up on the potential rightsizing actions in Paris, as well as on the rightsizing committee’s observations and conclusions concerning the other pilot posts. However, the current administration has made the embassy rightsizing process a priority by including it as one of the President’s management initiatives, and it may revisit the observations of the pilot studies as a part of this process. State’s August 2001 Final Report on Implementing the Recommendations of the Overseas Presence Advisory Panel agreed with the recommendations of OPAP to rightsize the overseas presence, rather than with the positions taken in the interagency committee’s report on the pilot studies. State’s final report also stated that the administration will analyze and review overall U.S. government presence and will develop a credible and comprehensive overseas staffing allocation process. However, it did not include a timetable for implementation or indicate whether more reviews of staffing issues at specific posts will be conducted. State’s report mentioned only one specific action taken that would directly affect staff levels at the pilot posts—the relocation of the Paris Regional Financial Service Center to Charleston, South Carolina, proposed by Congress prior to the pilot studies. State did not indicate any additional rightsizing actions taken or planned for the embassy in Paris, nor did it comment on any of the other five pilot posts. On August 25, 2001, the President announced that the rightsizing of embassies and consulates would be one of 14 initiatives in the President’s Management Agenda. The Office of Management and Budget is currently formulating a strategy for leading this initiative. In view of the September 11 terrorist attacks, the rightsizing of embassies and consulates has become more important than ever. Regrettably, the pilot studies conducted in 2000 do not provide a strong basis upon which the administration can pursue rightsizing, as they did not result in a methodology or blueprint for rightsizing around the world. Nevertheless, the studies did suggest that there may be opportunities to reduce embassy size, for example by moving some activities to the United States or to regional centers. If these suggestions prove feasible, their implementation could reduce security vulnerabilities at some overseas posts and could potentially free up resources to meet foreign policy needs elsewhere. We are currently planning work to further examine the suggestions raised by the pilot studies, as well as other issues to be considered as the administration implements the embassy rightsizing initiative. The Director of the Department of State’s Office of Management Policy and Planning, which has overall responsibility for rightsizing initiatives in the department, provided oral comments on a draft of this report. He said that the department agrees with the report’s conclusion and, on the whole, agrees with the report’s observations regarding the pilot studies. He said that the department is working closely with the Office of Management and Budget on rightsizing activities. We contacted officials in the Departments of State, Defense, the Treasury, Justice, and Commerce, and in the USAID, who participated in the interagency rightsizing committee effort, to discuss how the pilot studies, were carried out and the studies’ observations and results. We also obtained internal reports on the studies from some of these agencies. We interviewed Department of State personnel involved in the rightsizing studies, including the former Under Secretary of State for Management; the Director of the Office of Management Policy and Planning, which had responsibility for the pilot studies; and the former ambassador who led the pilot studies in Mexico City, Paris, and Tbilisi, and who was a co-chair for the overall pilot study exercise. We were unable to interview the other co- chair who prepared the June 2000 interagency report summarizing results of the pilot studies, as she is retired and unavailable. To explore the relationship between rightsizing and embassy security in OPAP’s report, we interviewed the Chairman of OPAP. We conducted our review from April to September 2001, in accordance with generally accepted government auditing standards. We are sending copies of this report to interested congressional committees and to the Secretary of State. We will make copies available to others upon request. Please contact me at (202) 512-4128 if you or your staff have any questions about this report. Major contributors to this report are John Brummet and Lynn Moore.

The Department of State is leading an interagency assessment of staffing needs in U.S. embassies and consulates to improve mission effectiveness and reduce security vulnerabilities and costs. This process, called "rightsizing," was begun in response to the recommendations of the Overseas Presence Advisory Panel. In the aftermath of the August 1998 bombings of U.S. embassies in Africa, the Panel determined that overseas staffing levels had not been adjusted to reflect changing missions and requirements; thus, some embassies and consulates were overstaffed, and others were understaffed. The Panel recommended a rightsizing strategy to improve security by reducing the number of embassy staff at risk. The Panel also recommended the establishment of a permanent committee to regularly adjust the U.S. presence, and the adoption of explicit criteria to guide decisions on the size and location of posts. A State-led interagency committee conducted pilot studies at six embassies in 2000 to (1) develop a methodology for assessing staffing at embassies and consulates during the next five years and (2) recommend adjustments to staffing levels at the embassies studied. The interagency committee formed teams that visited U.S. embassies in Amman, Jordan; Bangkok, Thailand; Mexico City, Mexico; New Delhi, India; Paris, France; and Tbilisi, Georgia. The pilot studies did not result in a staffing methodology at all embassies and consulates, as had been anticipated. The interagency committee said that it was impractical to develop explicit criteria for staffing levels at all posts because each post has unique characteristics and requirements. Contrary to the Panel's recommendations, the committee's report also questioned the need for rightsizing and establishing a permanent committee to adjust U.S. presence. The report did recommend the relocation of the regional finance centers in France and Thailand, and it identified instances in which additional study was needed.

The space shuttle is the world’s first reusable space transportation system. It consists of a reusable orbiter with three main engines, two partially reusable solid rocket boosters, and an expendable external fuel tank. Since it is the nation’s only launch system capable of carrying people to and from space, the shuttle’s viability is important to NASA’s other space programs, such as the International Space Station. NASA operates four orbiters in the shuttle fleet. Space systems are inherently risky because of the technology involved and the complexity of their activities. For example, thousands of people perform about 1.2 million separate procedures to prepare a shuttle for flight. NASA has emphasized that the top priority for the shuttle program is safety. The space shuttle’s workforce shrank from about 3,000 to about 1,800 full- time equivalent employees from fiscal year 1995 through fiscal year 1999. A major element of this workforce reduction was the transfer of shuttle launch preparation and maintenance responsibilities from the government and multiple contractors to a single private contractor. NASA believed that consolidating shuttle operations under a single contract would allow it to reduce the number of engineers, technicians, and inspectors directly involved in the day-to-day oversight of shuttle processing. However, the agency later concluded that these reductions caused shortages of required personnel to perform in-house activities and maintain adequate oversight of the contractor. Since the shuttle’s first flight in 1981, the space shuttle program has developed and incorporated many modifications to improve performance and safety. These include a super lightweight external tank, cockpit display enhancements, and main engine safety and reliability improvements. In 1994, NASA stopped approving additional upgrades, pending the potential replacement of the shuttle with another reusable launch vehicle. NASA now believes that it will have to maintain the current shuttle fleet until at least 2012, and possibly through 2020. Accordingly, it has established a development office to identify and prioritize upgrades to maintain and improve shuttle operational safety. Last year, we reported that several internal studies showed that the shuttle program’s workforce had been negatively affected by downsizing. These studies concluded that the existing workforce was stretched thin to the point where many areas critical to shuttle safety—such as mechanical engineering, computer systems, and software assurance engineering— were not sufficiently staffed by qualified workers. (Appendix I identifies all of the key areas that were facing staff shortages). Moreover, the workforce was showing signs of overwork and fatigue. For example, indicators on forfeited leave, absences from training courses, and stress- related employee assistance visits were all on the rise. Lastly, the program’s demographic shape had changed dramatically. Throughout the Office of Space Flight, which includes the shuttle program, there were more than twice as many workers over 60 years old than under 30 years old. This condition clearly jeopardized the program’s ability to hand off leadership roles to the next generation. According to NASA’s Associate Administrator for the Office of Space Flight, the agency faced significant safety and mission success risks because of workforce issues. This was reinforced by NASA’s Aerospace Safety Advisory Panel, which concluded that workforce problems could potentially affect flight safety as the shuttle launch rate increased. NASA subsequently recognized the need to revitalize its workforce and began taking actions toward this end. In October 1999, NASA’s Administrator directed the agency’s highest-level managers to consider ways to reduce workplace stress. The Administrator later announced the creation of a new office to increase the agency’s emphasis on health and safety and included improved health monitoring as an objective in its fiscal year 2001 performance plan. Finally, in December 1999, NASA terminated its downsizing plans for the shuttle program and initiated efforts to begin hiring new staff. Following the termination of its downsizing plans, NASA and the Office of Management and Budget conducted an overall workforce review to examine personnel needs, barriers to achieving proper staffing levels and skill mixes, and potential reforms to help address the agency’s long-term requirements. In performing this review, NASA used GAO’s human capital self-assessment checklist. The self-assessment framework provides a systematic approach for identifying and addressing human capital issues and allows agency managers to (1) quickly determine whether their approach to human capital supports their vision of who they are and what they want to accomplish and (2) identify those policies that are in particular need of attention. The checklist follows a five-part framework that includes strategic planning, organizational alignment, leadership, talent, and performance culture. NASA has taken a number of actions this year to regenerate its shuttle program workforce. Significantly, NASA’s current budget request projects an increase of more than 200 full-time equivalent staff for the shuttle program through fiscal year 2002—both new hires and staff transfers. According to NASA, from the beginning of fiscal year 2000 through July 2001, the agency had actually added 191 new hires and 33 transfers to the shuttle program. These new staff are being assigned to areas critical to shuttle safety—such as project engineering, aerospace vehicle design, avionics, and software—according to NASA. As noted earlier, appendix I provides a list of critical skills where NASA is addressing personnel shortages. NASA is also focusing more attention on human capital management in its annual performance plan. The Government Performance and Results Act requires a performance plan that describes how an agency’s goals and objectives are to be achieved. These plans are to include a description of the (1) operational processes, skills, and technology and (2) human, capital and information resources required to meet those goals and objectives. On June 9, 2000, the President directed the heads of all federal executive branch agencies to fully integrate human resources management into agency planning, budget, and mission evaluation processes and to clearly state specific human resources management goals and objectives in their strategic and annual performance plans. In its Fiscal Year 2002 Performance Plan, NASA describes plans to attract and retain a skilled workforce. The specifics include the following: Developing an initiative to enhance NASA’s recruitment capabilities, focusing on college graduates. Cultivating a continued pipeline of talent to meet future science, math, and technology needs. Investing in technical training and career development. Supplementing the workforce with nonpermanent civil servants, where it makes sense. Funding more university-level courses and providing training in other core functional areas. Establishing a mentoring network for project managers. We will provide a more detailed assessment of the agency’s progress in achieving its human capital goals as part of our review of NASA’s Fiscal Year 2002 Performance Plan requested by Senator Fred Thompson. Alongside these initiatives, NASA is in the process of responding to a May 2001 directive from the Office of Management and Budget on workforce planning and restructuring. The directive requires executive agencies to determine (1) what skills are vital to accomplishing their missions, (2) how changes expected in the agency’s work will affect human resources, (3) how skill imbalances are being addressed, (4) what challenges impede the agency’s ability to recruit and retain high-quality staff, and (5) what barriers there are to restructuring the workforce. NASA officials told us that they have already made these assessments. The next step is to develop plans specific to the space flight centers that focus on recruitment, retention, training, and succession and career development. If effectively implemented, the actions that NASA has been taking to strengthen the shuttle workforce should enable the agency to carry out its mission more safely. But there are considerable challenges ahead. For example, as noted by the Aerospace Safety Advisory Panel in its most recent annual report, NASA now has the difficult task of training new employees and integrating them into organizations that are highly pressured by the shuttle’s expanded flight rates associated with the International Space Station. As we stressed in our previous testimony, training alone may take as long as 2 years, while workload demands are higher than ever. The panel also emphasized that (1) stress levels among some employees are still a matter of concern; (2) some critical areas, such as information technology and electrical/electronic engineering, are not yet fully staffed; and (3) NASA is still contending with the retirements of senior employees. Officials at Johnson Space Center also cited critical skill shortages as a continuing problem. Furthermore, NASA headquarters officials stated that the stress-related effects of the downsizing remain in the workforce. Addressing these particular challenges, according to the Aerospace Safety Advisory Panel, will require immediate actions, such as expanded training at the Centers, as well as a long-term workforce plan that will focus on retention, recruitment, training, and succession and career development needs. The workforce problems we identified during our review are not unique to NASA. As our January 2001 Performance and Accountability Series reports made clear, serious federal human capital shortfalls are now eroding the ability of many federal agencies—and threatening the ability of others—to economically, efficiently, and effectively perform their missions. As the Comptroller General recently stated in testimony, the problem lies not with federal employees themselves, but with the lack of effective leadership and management, along with the lack of a strategic approach to marshaling, managing, and maintaining the human capital needed for government to discharge its responsibilities and deliver on its promises.To highlight the urgency of this governmentwide challenge, in January 2001, we added strategic human capital management to our list of federal programs and operations identified as high risk. Our work has found human capital challenges across the federal government in several key areas. First, high-performing organizations establish a clear set of organizational intents—mission, vision, core values, goals and objectives, and strategies—and then integrate their human capital strategies to support these strategic and programmatic goals. However, under downsizing, budgetary, and other pressures, agencies have not consistently taken a strategic, results-oriented approach to human capital planning. Second, agencies do not have the sustained commitment from leaders and managers needed to implement reforms. Achieving this can be difficult to achieve in the face of cultural barriers to change and high levels of turnover among management ranks. Third, agencies have difficulties replacing the loss of skilled and experienced staff, and in some cases, filling certain mission-critical occupations because of increasing competition in the labor market. Fourth, agencies lack a crucial ingredient found in successful organizations: organizational cultures that promote high performance and accountability. At this time last year, NASA planned to develop and begin equipping the shuttle fleet with a variety of safety and supportability upgrades, at an estimated cost of $2.2 billion. These upgrades would affect every aspect of the shuttle system, including the orbiter, external tank, main engine, and solid rocket booster. Last year, we reported that NASA faced a number of programmatic and technical challenges in making these upgrades. First, several upgrade projects had not been fully approved, creating uncertainty within the program. Second, while NASA had begun to establish a dedicated shuttle safety upgrade workforce, it had not fully determined its needs in this area. Third, the shuttle program was subject to considerable scheduling pressure, which introduced the risk of unexpected cost increases, funding problems, and/or project delays. Specifically, the planned safety upgrade program could require developing and integrating at least nine major improvements in 5 years—possibly making it the most aggressive modification effort ever undertaken by the shuttle program. At the same time, technical requirements for the program were not yet fully defined, and upgrades were planned to coincide with the peak assembly period of the International Space Station. Since then, NASA has made some progress but has only partially addressed the challenges we identified last year. Specifically, NASA has started to define and develop some specific shuttle upgrades. For example, requirements for the cockpit avionics upgrade have been defined. Also, Phase I of the main engine advanced health monitoring system is in development, and Friction Stir Welding on the external tank is being implemented. In addition, according to Shuttle Development Office officials, staffing for the upgrade program is adequate. Since our last report, these officials told us that the Johnson Space Center has added about 70 people to the upgrade program, while the Marshall Space Flight Center has added another 50 to 60 people. We did not assess the quality or sufficiency of the added staff, but according to the development office officials, the workforce’s skill level has improved to the point where the program has a “good” skill base. Nevertheless, NASA has not yet fully defined its planned upgrades. The studies on particular projects, such as developing a crew escape system, are not expected to be done for some time. Moreover, our previous concerns with the technical maturity and potential cost growth of particular projects have proven to be warranted. For example, the implementation of the electric auxiliary power unit has been delayed indefinitely because of technical uncertainties and cost growth. Also, the estimated cost of Phase II of the main engine advanced health monitoring system has almost doubled, and NASA has canceled the proposed development of a Block III main engine improvement because of technological, cost, and schedule uncertainties. Compounding the challenges that NASA is facing in making its upgrades is the uncertainty surrounding its shuttle program. NASA is attempting to develop alternatives to the space shuttle, but it is not yet clear what these alternatives will be. We recently testified before the Subcommittee on Space and Aeronautics, House Committee on Science on the agency’s Space Launch Initiative. This is a risk reduction effort aimed at enabling NASA and industry to make a decision in the 2006 time frame on whether the full-scale development of a reusable launch vehicle can be undertaken. However, as illustrated by the difficulties NASA experienced with another reusable launch vehicle demonstrator—the Lockheed Martin X-33—an exact time frame for the space shuttle’s replacement cannot be determined at this time. Consequently, shuttle workforce and upgrade issues will need to be considered without fully knowing how the program will evolve over the long run. In conclusion, NASA has made a start at addressing serious workforce problems that could undermine space shuttle safety. It has also begun undertaking the important task of making needed safety and supportability upgrades. Nevertheless, the challenges ahead are significant—particularly because NASA is operating in an environment of uncertainty and it is still contending with the effects of its downsizing effort. As such, it will be exceedingly important that NASA sustain its attention and commitment to making space shuttle operations as safe as possible. Mr. Chairman, this concludes my statement. I would be happy to answer any questions that you or Members of the Subcommittee may have. For further contact regarding this testimony, please contact Allen Li at (202) 512-4841. Individuals making key contributions to this testimony included Jerry Herley, John Gilchrist, James Beard, Fred Felder, Vijay Barnabas, and Cristina Chaplain.

In August 2000, the National Aeronautics and Space Administration's (NASA) space shuttle program was at a critical juncture. Its workforce had declined significantly since 1995, its flight rate was to double to support the assembly of the International Space Station, and costly safety upgrades were planned to enhance the space shuttle's operation until at least 2012. Workforce reductions were jeopardizing NASA's ability to safely support the shuttle's planned flight rate. Recognizing the need to revitalize the shuttle's workforce, NASA ended its downsizing plans for the shuttle program and began to develop and equip the shuttle fleet with various safety and supportability upgrades. NASA is making progress in revitalizing the shuttle program's workforce. NASA's current budget request projects an increase of more than 200 full-time equivalent staff through fiscal year 2002. NASA has also focused more attention on human capital management in its annual performance plan. However, considerable challenges still lie ahead. Because many of the additional staff are new hires, they will need considerable training and will need to be integrated into the shuttle program. Also, NASA still needs to fully staff areas critical to shuttle safety; deal with critical losses due to retirements in the coming years; and, most of all, sustain management attention to human capital reforms. Although NASA is making strides in revitalizing its workforce, its ability to implement safety upgrades in a timely manner is uncertain.

The National Cemeteries Act of 1973 (P.L. 93-43) authorized NCS to bury eligible veterans and their family members in national cemeteries. Before 1973, all national cemeteries were operated under the authority of the Department of the Army. However, P.L. 93-43 shifted authority to VA for all national cemeteries except Arlington National Cemetery and the U.S. Soldiers’ and Airmen’s Home National Cemetery. NCS operates and maintains 115 national cemeteries located in 39 states and Puerto Rico. NCS offers veterans and their eligible family members the options of casket interment and interment of cremated remains in the ground (at most cemeteries) or in columbaria niches (at nine cemeteries). NCS determines the number and type of interment options available at each of its national cemeteries. The standard size of casket grave sites, the most common burial choice, is 5 feet by 10 feet, and the grave sites are prepared to accommodate two caskets stacked one on top of the other. A standard in-ground cremains site is 3 feet by 3 feet and can generally accommodate one or two urns. The standard columbarium niche used in national cemeteries is 10 inches wide, 15 inches high, and 20 inches deep. Niches are generally arrayed side by side, four units high, and can hold two or more urns, depending on urn size. In addition to burying eligible veterans and their families, NCS manages the State Cemetery Grants Program, which provides aid to states in establishing, expanding, or improving state veterans’ cemeteries. State veterans’ cemeteries supplement the burial service provided by NCS. The cemeteries are operated and permanently maintained by the states. A State Cemetery grant may not exceed 50 percent of the total value of the land and the cost of improvements. The remaining amount must be contributed by the state. The State Cemetery Grants Program funded the establishment of 28 veterans’ cemeteries, including 3 cemeteries currently under development, located in 21 states, Saipan, and Guam. The program has also provided grants to state veterans’ cemeteries for expansion and improvement efforts. As the veteran population ages, NCS projects the demand for burial benefits to increase. NCS has a strategic plan for addressing the demand for veterans’ burials up to fiscal year 2003, but the plan does not address longer term burial needs—that is, the demand for benefits during the expected peak years of veteran deaths, when pressure on the system will be greatest. Beyond the year 2003, NCS officials said they will continue using the basic strategies contained in the current 5-year plan. According to its 5-year strategic plan (1998-2003), one of NCS’ primary goals is to ensure that burial in an open national or state veterans’ cemetery is an available option for all eligible veterans and their family members. The plan sets forth three specific strategies for achieving this goal. First, NCS plans to build, when feasible, new national cemeteries. NCS is in various stages of establishing four new national cemeteries and projects that all will be operational by the year 2000. A second strategy for addressing the demand for veteran burials is through expansion of existing cemeteries. NCS plans to complete construction in order to make additional grave sites or columbaria available for burials at 24 national cemeteries. NCS also plans to acquire land needed for cemeteries to continue to provide service at 10 cemeteries. Third, NCS plans to encourage states to provide additional grave sites for veterans through participation in the State Cemetery Grants Program. According to the plan, NCS plans to increase the number of veterans served by a state veterans’ cemetery by 35,000 per year beginning in fiscal year 1998. Also, NCS is in the early stages of developing information designed to assist states in the establishment of a state veterans’ cemetery. veterans who will have access to a veterans’ cemetery stop at the year 2003. Although NCS has a 5-year strategic plan for addressing the demand for veterans’ burials during fiscal years 1998 through 2003, plans to address the demand beyond 2003 are unclear. For example, NCS’ strategic plan does not articulate how NCS will mitigate the effects of the increasing demand for burial services. According to NCS’ Chief of Planning, although its strategic plan does not address long-term burial needs, NCS is always looking for opportunities to acquire land to extend the service period of national cemeteries. Also, to help address long-range issues, NCS compiles key information, such as mortality rates, number of projected interments and cemetery closures, locations most in need of veterans’ cemeteries, and cemetery-specific burial layout plans. In addition, NCS officials pointed out that the Government Performance and Results Act of 1993 (the Results Act) requires a strategic plan to cover a 5-year period. However, the Results Act requires that an agency prepare a strategic plan that covers at least a 5-year period and allows an agency to articulate how it plans to address future goals. For example, the National Aeronautics and Space Administration’s plan articulates a “strategic roadmap” that outlines agencywide goals. This roadmap lists separate goals for near-, mid-, and long-term time periods over the next 25 years and beyond. The Environmental Protection Agency’s plan also articulates goals that are not bound by the 5-year time period. For example, it includes an objective to reduce toxic air emissions by 75 percent in 2010 from 1993 levels. Although NCS projects annual interments to increase about 42 percent from 73,000 in 1995 to 104,000 in 2010, peaking at 107,000 in 2008, its strategic plan does not indicate how the agency will begin to position itself to handle this increase in demand for burial benefits. We believe that, given the magnitude of the projected increase in demand for burial benefits, NCS’ strategic plan should discuss how its current strategies will be adjusted to address the demand during the peak years of veterans’ deaths. through the State Cemetery Grants Program. According to NCS’ Chief of Planning, NCS will encourage states to locate cemeteries in areas where it does not plan to operate and maintain national cemeteries. Since the State Cemetery Grants Program’s inception in 1978, fewer than half of the states have established veterans’ cemeteries, primarily because, according to NCS officials, states must provide up to half of the funds needed to establish, expand, or improve a cemetery as well as pay for all equipment and annual operating costs. Furthermore, the Director of the State Cemetery Grants Program told us that few states, especially those with large veteran populations, have shown interest in legislation that VA proposed in its 1998 and 1999 budget submission in order to increase state participation. This proposed legislation would increase the federal share of construction costs from 50 to 100 percent and permit federal funding for up to 100 percent of initial equipment costs. In fact, according to the Director, state veterans’ affairs officials said they would rather have funding for operating costs than for construction. NCS officials told us they will continue to evaluate locations for additional national cemeteries in the future, based on demographic needs. However, according to NCS officials, VA currently has no plans to request construction funds for more than the four new cemeteries, which will be completed by the year 2000. Officials said that even with the new cemeteries, interment in a national or state veterans’ cemetery will not be “readily accessible” to all eligible veterans and their family members. According to NCS officials, the majority of areas not served will be major metropolitan areas with high concentrations of veterans, such as Atlanta, Georgia; Detroit, Michigan; and Miami, Florida. the average columbarium interment cost would be about $280, compared with about $345 for in-ground cremains burial and about $655 for casket burial. Our analysis also showed that the service delivery period would be extended the most using columbarium interment. For example, using columbarium interment in a total of 1 acre of land could extend the service delivery period by about 50 years, while in-ground cremains interment would extend the service period about 3 years and casket burials about half a year. While historical data imply that the majority of veterans and eligible dependents prefer a casket burial, NCS national data show that the demand for cremation at national cemeteries is increasing. For example, veterans choosing cremation increased about 50 percent between 1990 and 1996, and NCS officials expect demand for cremation to continue to increase in the future. The incidence of cremation also continues to increase in the general population. The Cremation Association of North America projects that cremation will account for about 40 percent of all burials by 2010. designed to increase state participation by increasing the share of federal funding. Therefore, NCS needs to rely more on extending the service periods of its existing cemeteries. Columbaria can more efficiently utilize available cemetery land at a lower average interment cost than the other interment options and can also extend the service period of existing national cemeteries. Using columbaria also adds to veterans’ choice of services and recognizes current burial trends. While we recognize that cremation may not be the preferred interment option for many veterans, identifying veterans’ burial preferences, as NCS plans to do, would enable it to better manage limited cemetery resources and more efficiently meet veterans’ burial needs. Mr. Chairman, this concludes my prepared statement. I will be glad to answer any questions you or Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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GAO discussed the National Cemetery System's (NCS) plans to accommodate the increasing demand for burial benefits and what it can do to extend the service period of existing cemeteries. GAO noted that: (1) NCS has adopted a 5-year strategic plan for fiscal years 1998 through 2003 with the goal of ensuring that burial in a national or state veterans' cemetery is an available option for all veterans and their eligible family members; (2) strategies outlined in NCS' plan include: (a) building new national cemeteries; (b) expanding existing cemeteries; and (c) encouraging states to provide additional burial sites through participation in the State Cemetery Grants Program; (3) however, it is unclear how NCS will address the veterans' burial demand during the peak years, when pressure on it will be greatest, since NCS' strategic plan does not indicate how it will begin to position itself to handle the increasing demand for burial benefits; (4) NCS officials stated that beyond 2003, NCS will continue using the basic strategies contained in its current 5-year plan; (5) for example, NCS plans to encourage states to establish veterans' cemeteries in areas where it does not plan to operate national cemeteries; (6) however, since the grant program's inception in 1978, fewer than half of the states have established veterans' cemeteries; (7) states have also shown limited interest in a legislative proposal designed to increase state participation by increasing the share of federal funding; (8) given the magnitude of the projected increase in demand for burial benefits, GAO continues to believe that it is important for NCS to articulate to Congress and other stakeholders how it plans to address the increasing demand; (9) as annual interments increase, cemeteries reach their burial capacity, thus increasing the importance of making the most efficient use of available cemetery space; (10) to identify feasible approaches to extending the service period of existing cemeteries, GAO analyzed the impact of adding burial sites to an acre of land in an existing cemetery; (11) GAO's analysis of three interment options showed that columbaria offered the most efficient option because they would involve the lowest average interment cost and would significantly extend a cemetery's service period; and (12) morever, while the majority of veterans and eligible family members prefer a casket burial, cremation is an acceptable interment option for many, and the demand for cremation, which varies by region, continues to increase.

The Troops to Teachers program is a federal program that began operations in 1994 with two goals: (1) to help military personnel affected by downsizing become teachers and (2) to ease the teacher shortage, especially in math and science and in areas with concentrations of children from low-income families. The program offers information on state teacher certification requirements and job referral and job placement assistance to active and former military personnel who are interested in pursuing teaching as a second career after leaving the military. According to TTT program data, military officers represent a major participant group. During 1994 and 1995, the program also offered financial incentives to military personnel and school districts to participate in the program. Participants who received stipends of up to $5,000 and became certified were required to teach for 5 years. School districts could receive grants of up to $50,000 paid over 5 years for each TTT participant they hired. The program stopped awarding new stipends and grants after 1995 when funds were no longer appropriated for this purpose. The program is administered by DoD’s Defense Activity for Non- Traditional Education Support (DANTES). DANTES and 24 state TTT offices carry out the program’s efforts to ease former military personnel into teaching. (See fig. 1.) States voluntarily join the TTT program. States that wish to join submit proposals to DANTES describing the services they plan to provide and the activities in which they plan to engage to achieve the TTT program goals. If the proposal is approved, DANTES signs a memorandum of agreement with the state agency responsible for the TTT program, most often the state’s department of education. DANTES provides funds for state program expenses, although the state TTT representatives are not federal employees. From fiscal year 1994 through 2000, DANTES spent $5.5 million on program administration and provided states with a total of $12.1 million to operate their TTT offices, according to program officials. States that joined the program have had a great deal of flexibility in how they operate the TTT program in their state. State offices determine their own organizational structure, the amount of resources they will devote to the program, and the services they will provide. Sixteen states had joined TTT by 1995 and 8 more joined between 1998 and 2000. DANTES and state TTT offices operate as a network to provide services to military personnel interested in becoming teachers. As part of this network, DANTES serves the following functions: Acting as the central liaison for all the military services and the state education offices and promoting the program at a national level. Approving and monitoring the memorandum of agreements. Working with the states to share recruitment practices. Maintaining the TTT program web site with links to state offices. Facilitating the transition from military life to teaching in the 26 states and the District of Columbia without TTT placement assistance offices. Monitoring the teaching commitments of the people who received stipends and any school districts that received grants on behalf of persons who applied to the TTT program during 1994 and 1995. For their part, most state offices provide a broad range of services, including providing personalized counseling and advice to those who wish to promoting the TTT program to school districts and the military promoting military personnel as potential teachers, maintaining an 800 number and the state link on the TTT web site with information and school district openings, and working to lessen costs and time required for military personnel to obtain certification. The environment in which TTT functions has changed in ways that have implications for the program’s future operations. In 1998, the military downsizing leveled off, essentially removing the first goal of the TTT program. DANTES’ responsibility for monitoring the teaching commitments of those who received stipends and grants between 1994 and 1995 will end in a few years. Thirteen additional states currently have contacted DANTES and are waiting to join the program, either independently or as a consortium. The Congress appropriated $3 million for TTT in fiscal year 2001 under the Eisenhower Professional Development Program, placing TTT within Education’s broader initiative to support teacher recruitment. The Eisenhower Program also provides additional funds in grants to states and/or organizations that wish to develop new avenues for attracting teachers, especially second-career teachers. The President’s 2002 budget proposes to support and expand TTT activities through the Transition to Teaching program. The $30 million budget proposed for Transition to Teaching would assist nonmilitary as well as military professionals with becoming teachers. According to TTT records, 3,821 of the 13,756 people accepted into the program were hired as teachers from fiscal years 1994 through 2000. However, this number probably underrepresents the number of people who have used program services and become teachers. Of those participants hired as teachers, over 90 percent remained in teaching past the first year. TTT program records show that 17,459 people applied to the program from fiscal years 1994 through 2000 and, of these, 13,756 were accepted into the program. Of these participants, 3,821, or 28 percent, became teachers. (See table 1.) More than 85 percent of the TTT teachers were hired in states with TTT offices. While no formal documentation was maintained on reasons for the withdrawals of 8,554 applicants accepted in the program who did not become teachers, the TTT program director provided several reasons why some participants withdrew from the program. For instance, some military personnel said they had found a better paying job, some realized that they would not like teaching, and others thought the cost and time of the alternative certification process was onerous. It is difficult to ascertain the full extent of TTT program participation, because program data are incomplete. When the stipends and incentive grants ended after 1995, it became difficult to track the number of people using the program’s resources because they were less inclined to complete application forms and respond to surveys that tracked program retention. In addition, with the creation of the TTT web site, people could access information they needed to find certification programs and teaching positions and do so without applying to the program. Consequently, the number of people who used the program to become teachers is probably understated. DANTES officials told us that they believe their numbers undercount the total number of teachers hired as a result of the TTT program. Similarly, some state TTT officials said that DANTES records may substantially undercount the number of former military personnel they have placed in teaching positions. Six of the 10 state TTT officials that we contacted said this was the case, but only 4 states—Colorado, Mississippi, South Carolina, and Texas—kept records with additional information on military persons whom they placed in teaching positions whether or not they completed a TTT program application. Table 2 shows the difference between DANTES’ records and state records for the number of teachers hired within these states. Available TTT program data also show that over 90 percent of TTT teachers remained in teaching after their first year. The percent of TTT teachers who remain in teaching for at least 3 years is about the same as that for all teachers nationwide, and the percent of TTT teachers that remain for 5 years is markedly better. (See table 3.) However, these retention rates should be considered in light of the fact that TTT teachers who received stipends had to teach for 5 years to pay off their financial commitment. In addition, these data are based solely on teachers who received funding (2,135) and do not include those who did not. However, a TTT program survey done in 1999 of school districts that hired TTT teachers—including those who completed applications and follow-up surveys but did not receive funding—showed similar results. According to TTT program records and NCEI survey data, a higher percentage of TTT teachers overall taught math, science, special education, and vocational education and taught in inner city schools and high schools than all teachers nationwide. (See table 4.) For example, 20 percent of TTT teachers compared with 5 percent of teachers nationwide taught general special education. Also, a higher percentage of TTT teachers are male (86 percent) and minority (33 percent) than the national percentages (26 percent and 11 percent, respectively). Many states that joined the TTT program said that they did so because the program would enable them to fill positions in subjects or geographic areas in which they had shortages, especially in math, science, special education, and vocational education and in inner city schools. They also cited the program’s potential for increasing the diversity of its teacher workforce, some specifically mentioned male and minority teachers as a factor in their decisions to join the TTT program. Several factors may have affected—both positively and negatively—the number of military personnel applying to the TTT program and the number hired as teachers. The positive factors were (1) the TTT stipends, (2) the TTT incentive grants, (3) the increased demand for teachers, and (4) accomplishments of state TTT offices. The negative factors were (1) increased demands for specialized workers, (2) economic growth, and (3) a reduction in the number of officers leaving the military. The following factors may have increased the number of TTT applicants and/or teachers hired. Stipends. During the first 2 years of the program, stipends lowered the cost of obtaining teacher certification for TTT participants. In a DANTES survey of TTT teachers who had completed their 5-year teaching commitment for receiving the stipend, 59 percent reported that the TTT program was very important in making their decision to become a teacher, and 68 percent reported that the stipend was the most important feature of the TTT program. Incentive grants. During the first 2 years of the program, TTT incentive grants lowered the cost to school districts of hiring TTT teachers relative to other job candidates, thereby increasing the demand for TTT teachers. The increased probability of being hired would have made the program more attractive to applicants. Demand for teachers. Education data show that teacher shortages became more widespread in 1998, thus the demand for teachers expanded and intensified. The increased likelihood of employment for TTT teachers after certification could have increased the number of applicants to the program. Accomplishments of state TTT offices. State TTT offices have experienced some success in decreasing the time and cost of teacher certification for military personnel and in increasing the demand among school districts for TTT hires. Both of these accomplishments probably made the program more attractive to potential applicants. More alternative teacher certification programs are available to persons pursuing second careers as teachers, including military personnel, sometimes as a direct result of the TTT program. For example, the Florida, Wisconsin, and Washington state TTT offices played roles in convincing their state legislatures in 2000 to authorize new alternative teacher certification programs. Some state TTT offices, working with DANTES, created opportunities for military personnel to satisfy some teacher certification requirements while still on active duty. For example, the Texas TTT office, working in conjunction with three Texas universities, implemented a distance learning program in the Fall 2000 offering teacher certification classes at military bases worldwide. Texas also worked with DANTES to make its teacher certification examination available at military bases worldwide. Some states lowered the cost of teacher certification for military personnel in response to the efforts of their state TTT office. For example, California and Washington reduced the fees they charged military personnel to take courses at state universities. Outreach and promotional activities by state TTT offices increased school districts’ demand for TTT hires. For example, the Colorado, Illinois, North Carolina, and Ohio TTT offices increased the number of school districts that posted their teacher vacancies on the TTT data base. The following factors may have decreased the number of TTT applicants and/or teachers hired. Demand for specialized workers. A nationwide increase in demand for workers with math/science backgrounds, especially in information technology and the sciences, which generally pay higher salaries than teaching, may have attracted potential military personnel with these skills away from pursuing a teaching career. Between 1994 and 1999, the number of workers employed in the mathematical and computer sciences increased by almost 56 percent while total employment increased by about 8.5 percent. Economic growth. The general growth in the economy in the 1990s increased the number of alternative job opportunities for those leaving the military. An important indicator of economic growth and the demand for labor is the unemployment rate. The greater the economic growth, the greater the demand for labor and the lower the unemployment rate. Between 1994 and 1999, the unemployment rate declined from 6.1 percent to 4.2 percent. Reduction in supply of applicants. The number of retired commissioned officers, warrant officers, and high-graded noncommissioned officers declined from 34,335 to 26,612 between 1994 and 1999. This group comprised 76 percent of all TTT applicants during this period. The TTT program is currently functioning in an environment that differs greatly from when it began 7 years ago. Its first purpose, to place military persons affected by downsizing initiatives in the classroom, has essentially been eliminated while its second purpose, to address teacher shortages, has become a more critical national issue. Also, the transition to teacher from a different profession has become easier in many states through new or expanded alternative teacher certification programs. With the recent transfer of TTT from DoD to Education, it is too early to determine how TTT will fit into Education’s mission and its broader teacher recruitment and retention initiatives. However, this new environment presents opportunities for Education to explore how best to coordinate the TTT program with other education programs to address the nation’s growing teacher shortage problem. We provided Education and DoD with a draft of this report for review, and both agencies provided comments via e-mail. Education noted that it has other programs to increase the number of qualified teachers, including the Transition to Teacher and Eisenhower Professional Development programs, and that the information in the report will be valuable as the Department continues to explore ways that these programs can collaborate and strengthen services. DoD said that it has reviewed the report and accepted the report’s conclusions. We are sending copies of this report to the Honorable Roderick R. Paige, Secretary of the Department of Education, and other interested parties. We will also make copies available to others on request. If you or your staffs have any questions about this report, please contact me on (202) 512-7215 or Karen Whiten at (202) 512-7291. Key contributors to this report were Mary Roy, Ellen Habenicht, Richard Kelley, Barbara Smith, and Patrick DiBattista.

In response to a shortage of math and science teachers and reductions in U.S. military personnel, Congress created the Troops to Teachers (TTT) program in 1992. Until 1995, the program, which was run by the Defense Department, offered stipends to program participants and incentive grants to school districts to hire TTT teachers. Congress transferred the program from DOD to the Department of Education in 1999. This report reviews the program from its beginning in January 1994 until its transfer to Education. GAO found that 13,756 former military personnel applied to the program and were accepted. Of these, 3,821 were hired as teachers from 1994 through 2000; more than 90 percent of those applicants hired as teachers remained in teaching after the first year. However, these participation figures most likely represent the minimum number of former military personnel who used the program's services and became teachers because the figures include only those persons who formally applied to the TTT program and who completed follow-up surveys. Compared with all teachers nationwide, a higher percentage of TTT teachers overall taught math, science, special education, and vocational education and taught in inner city schools and high schools. Factors such as stipends, incentive grants, economic conditions, and state initiatives may have influenced the number of people who applied to the program and became teachers.

Over their lifetimes, men and women differ in many ways that have consequences for how much they will receive from Social Security and pensions. Women make up about 60 percent of the elderly population and less than half of the Social Security beneficiaries who are receiving retired worker benefits, but they account for 99 percent of those beneficiaries who receive spouse or survivor benefits. A little less than half of working women between the ages of 18 and 64 are covered by a pension plan, while slightly over half of working men are covered. The differences between men and women in pension coverage are magnified for those workers nearing retirement age—over 70 percent of men are covered compared with about 60 percent of women. Labor force participation rates differ for men and women, with men being more likely, at any point in time, to be employed or actively seeking employment than women. The gap in labor force participation rates, however, has been narrowing over time as more women enter the labor force, and the Bureau of Labor Statistics predicts it will narrow further. In 1948, for example, women’s labor force participation rate was about a third of that for men, but by 1996, it was almost four-fifths of that for men. The labor force participation rate for the cohort of women currently nearing retirement age (55 to 64 years of age) was 41 percent in 1967 when they were 25 to 34 years of age. The labor force participation rate for women who are 25 to 34 years of age today is 75 percent—an increase of over 30 percentage points. Earnings histories also affect retirement income, and women continue to earn lower wages than men. Some of this difference is due to differences in the number of hours worked, since women are more likely to work part-time and part-time workers earn lower wages. However, median earnings of women working year-round and full-time are still only about 70 percent of men’s. The lower labor force participation of women leads to fewer years with covered earnings on which Social Security benefits are based. In 1993, the median number of years with covered earnings for men reaching 62 was 36 but was only 25 for women. Almost 60 percent of men had 35 years with covered earnings, compared with less than 20 percent of women. Lower annual earnings and fewer years with covered earnings lead to women’s receiving lower monthly retired worker benefits from Social Security, since many years with low or zero earnings are used in the calculation of Social Security benefits. On average, the retired worker benefits received by women are about 75 percent of those received by men. In many cases, a woman’s retired worker benefits are lower than the benefits she is eligible to receive as the spouse or survivor of a retired worker. Women tend to live longer than men and thus may spend many of their later retirement years alone. A woman who is 65 years old can expect to live an additional 19 years (to 84 years of age), and a man of 65 can expect to live an additional 15 years (to 80 years of age). By 2070, the Social Security Administration projects that a 65-year-old woman will be able to expect to live another 22 years, and a 65-year-old-man, another 18 years. Additionally, husbands tend to be older than their wives and so are likely to die sooner. Differences in longevity do not currently affect the receipt of monthly Social Security benefits but can affect income from pensions if annuities are purchased individually. women. The authors estimated that, after 35 years of participation in the plan at historical yields and identical contributions, the difference in investment behavior between men and women can lead to men having a pension portfolio that is 16 percent larger. Social Security provisions and pension plan provisions differ in several ways (see app. I for a summary). Under Social Security, the basic benefit a worker receives who retires at the normal retirement age (NRA) is based on the 35 years with the highest covered earnings. The formula is progressive in that it guarantees that higher-income workers receive higher benefits, while the benefits of lower-income workers are a higher percentage of their preretirement earnings. The benefit is guaranteed for the life of the retired worker and increases annually with the cost of living. may elect, along with the spouse, to take a single life annuity or a lump-sum distribution if allowed under the plan. When workers retire, they are uncertain how long they will live and how quickly the purchasing power of a fixed payment will deteriorate. They run the risk of outliving their assets. Annuities provide insurance against outliving assets. Some annuities provide, though at a higher cost or reduced initial benefit, insurance against inflation risk, although annuity benefits often do not keep pace with inflation. Many pension plans are managed under a group annuity contract with an insurance company that can provide lifetime benefits. Individual annuities, however, tend to be costly. Under Social Security, the dependents of a retired worker may be eligible to receive benefits. For example, the spouse of a retired worker is eligible to receive up to 50 percent of the worker’s basic benefit amount, while a dependent surviving spouse is eligible to receive up to 100 percent of the deceased worker’s basic benefit. Furthermore, divorced spouses and survivors are eligible to receive benefits under a retired worker’s Social Security record provided they were married for at least 10 years. If the retired worker has a child under 18 years old, the child is eligible for Social Security benefits, as is the dependent nonelderly parent of the child. The retired worker’s Social Security benefit is not reduced to provide benefits to dependents and former spouses. Pensions, both public and private, generally do not offer the same protections to dependents as Social Security. Private and public pension benefits are based on a worker’s employment experience and not the size of the worker’s family. At retirement, a worker and spouse normally receive a joint and survivor annuity so that the surviving spouse will continue to receive a pension benefit after the retired worker’s death. A worker, with the written consent of the spouse, can elect to take retirement benefits in the form of a single life annuity so that benefits are guaranteed only for the lifetime of the retired worker. payment options. Under this act, a joint and survivor annuity became the normal payout option and written spousal consent is required to choose another option. This requirement was prompted partly by testimony before the Congress by widows who stated that they were financially unprepared at their husbands’ death because they were unaware of their husbands’ choice to not take a joint and survivor annuity. Through the spousal consent requirement, the Congress envisioned that, among other things, a greater percentage of married men would retain the joint and survivor annuity and give their spouses the opportunity to receive survivor benefits. The monthly benefits under a joint and survivor annuity, however, are lower than under a single life annuity. Moreover, pension plans do not generally contain provisions to increase benefits to the retired worker for a dependent spouse or for children. As under Social Security, divorced spouses can also receive part of the retired worker’s pension benefit if a qualified domestic relations order is in place. However, the retired worker’s pension benefit is reduced in order to pay the former spouse. The three alternative proposals of the Social Security Advisory Council would make changes of varying degrees to the structure of Social Security. The key features of the proposals are summarized in appendix II. The Maintain Benefits (MB) plan would make only minor changes to the structure of current Social Security benefits. The major change that would affect women’s benefits is the extension of the computation period for benefits from 35 years to 38 years of covered earnings. Currently, earnings are averaged over the 35 years with the highest earnings to compute a worker’s Social Security benefits. If the worker has worked less than 35 years, then some of the years of earnings used in the calculation are equal to zero. Extending the computation period for the lifetime average earnings to 38 years would have a greater impact on women than on men. Although women’s labor force participation is increasing, the Social Security Administration forecasts that fewer than 30 percent of the women retiring in 2020 will have 38 years of covered earnings, compared with almost 60 percent of men. The Individual Accounts (IA) plan would keep many features of the current Social Security system but add an individual account modeled after the 401(k) pension plan. Workers would be required to contribute an additional 1.6 percent of taxable earnings to their individual account, which would be held by the government. Workers would direct the investment of their account balances among a limited number of investment options. At retirement, the distribution from this individual account would be converted by the government into an indexed annuity. The IA plan, like the MB plan, would extend the computation period to 38 years; it would also change the basic benefit formula by lowering the conversion factors at the higher earnings level. This plan would also accelerate the legislated increase in the normal retirement age and then index it to future increases in longevity. As a consequence of these changes, basic Social Security benefits would be lower for all workers, but workers would also receive a monthly payment from the annuitized distribution from their individual account, which proponents claim would offset the reduction in the basic benefit. In addition to extending the computation period, elements of the IA plan that would disproportionately affect women are the changes in benefits received by spouses and survivors, since women are much more likely to receive spouse and survivor benefits. The spouse benefit would be reduced from 50 percent of the retired worker’s basic benefit amount to 33 percent. The survivor benefit would increase from 100 percent of the deceased worker’s basic benefit to 75 percent of the couple’s combined benefit if the latter was higher. These changes would probably result in increased lifetime benefits for many women. Additionally, at retirement a worker and spouse would receive a joint and survivor annuity for the distribution of their individual account unless the couple decided on a single life annuity. Security payroll tax into the account, which would not be held by the government. Proponents of the PSA plan claim that over a worker’s lifetime the tier I benefits plus the tier II distribution would be larger than the lifetime Social Security benefits currently received by retired workers. The worker would direct the investment of his or her account assets. At retirement, workers would not be required to annuitize the distribution from their personal security account but could elect to receive a lump-sum payment. This could potentially affect women disproportionately, since the worker is not required to consult with his or her spouse regarding the disposition of the personal account distribution. Under the PSA plan, the tier I benefit for spouses would be equal to the higher of their own tier I benefit or 50 percent of the full tier I benefit. Furthermore, spouses would receive their own tier II accumulations, if any. The tier I benefit for a survivor would be 75 percent of the benefit payable to the couple; in addition, the survivor could inherit the balance of the deceased spouse’s personal security account assets. Many of the proposed changes to Social Security would affect the benefits received by men and by women differently. The current Social Security system is comparable to a defined benefit plan’s paying a guaranteed lifetime benefit that is increased with the cost of living. Each of the Advisory Council proposals would potentially change the level of that benefit, and two of the proposals would create an additional defined contribution component. Not only would retired worker benefits be changed by these proposals, but the level of benefits for spouses and survivors would be affected. the account balances at retirement would depend on the contributions made to the worker’s account and investment returns or losses on the account assets. Since women tend to earn lower wages, they would be contributing less, on average, than men to their accounts. Furthermore, even if contributions were equal, women tend to be more conservative investors than men, which could lead to lower investment returns. Consequently, women would typically have smaller account balances at retirement and would receive lower benefits than men. The difference in investment strategy could lead to a situation in which men and women with exactly the same labor market experiences receive substantially different Social Security benefits. The extent to which investor education can close the gap in investment behavior between men and women is unknown. The two Advisory Council proposals with individual or personal accounts differ in the handling of the distribution of the account balances at retirement. The IA plan would require annuitization of the distribution at retirement, and choosing a single life annuity or a joint and survivor annuity would be left to the worker and spouse. If the single life annuity option for individual account balances was chosen, then the spouse would receive the survivor’s basic benefit after the death of the retired worker plus the annuitized benefit based on the work records of both individuals. The PSA plan would not require that the private account distribution be annuitized at retirement. A worker and spouse could take the distribution as a lump sum and attempt to manage their funds so that they did not outlive their assets. If the assets were exhausted, the couple would have only their basic tier I benefits, plus any other savings and pension benefits. Furthermore, even if personal account tier II assets were left after the death of the retired worker, the balance of the PSA account would not necessarily have to be left to the survivor. If a worker and spouse chose to purchase an annuity at retirement, then the couple would receive a lower monthly benefit than would be available from a group annuity. although the expected lifetime payments would be the same, the monthly payments to the woman would be lower, since women have longer life expectancies. Even though the current provisions of Social Security are gender neutral, differences during the working and retirement years may lead to different benefits for men and women. For example, differences in labor force attachment, earnings, and longevity lead to women’s being more likely than men to receive spouse or survivor benefits. Women who do receive retired worker benefits typically receive lower benefits than men. As a result of lower Social Security benefits and the lower likelihood of receiving pension benefits, among other causes, elderly single women experience much higher poverty rates than elderly married couples and elderly single men. Social Security is a large and complex program that protects most workers and their families from income loss because of a worker’s retirement. Public and private pension plans do not offer the social insurance protections that Social Security does. Pension benefits are neither increased for dependents nor generally indexed to the cost of living as are Social Security benefits. Typically, at retirement a couple will receive a joint and survivor annuity that initially pays monthly benefits that are 15 to 20 percent lower than if they had chosen to forgo the survivor benefits with a single life annuity. Furthermore, under a qualified domestic relations order, a divorced retired worker’s pension benefits may be reduced to pay benefits to a former spouse. While the three alternative proposals of the Social Security Advisory Council are intended to address the long-term financing problem, they would make changes that could affect the relative level of benefits received by men and women. Each of the proposals has the potential to exacerbate the current differences in benefits between men and women. Narrowing the gap in labor force attachment, earnings, and investment behavior may reduce the differences in benefits. But as long as these differences remain, men and women will continue to experience different outcomes with regard to Social Security benefits. This concludes my prepared statement. I would be happy to answer any questions you or other Members of the Subcommittee may have. For more information on this testimony, please call Jane Ross on (202) 512-7230; Frank Mulvey, Assistant Director, on (202) 512-3592; or Thomas Hungerford, Senior Economist, on (202) 512-7028.

GAO discussed the impacts of proposals to finance and restructure the Social Security system, specifically the impacts on the financial well-being of women. GAO noted that: (1) its work shows that, despite the provisions of the Social Security Act that do not differentiate between men and women, women tend to receive lower benefits than men; (2) this is due primarily to differences in lifetime earnings because women tend to have lower wages and fewer years in the workforce; (3) women's experience under pension plans also differs from men's not only because of earnings differences but also because of differences in investment behavior and longevity; (4) moreover, public and private pension plans do not offer the same social insurance protections that Social Security does; (5) furthermore, some of the provisions of the Social Security Advisory Council's three proposals may exacerbate the differences in men and women's benefits; (6) for example, proposals that call for individual retirement accounts will pay benefits that are affected by investment behavior and longevity; and (7) expected changes in women's labor force participation rates and increasing earnings will reduce but probably not eliminate these differences.

The 2010 NPR report described the administration’s approach to maintaining the U.S. nuclear deterrent capability while pursuing further reductions in nuclear weapons. The 2010 NPR was the third comprehensive assessment of U.S. nuclear policy and strategy conducted by the United States since the end of the Cold War; previous reviews were completed in 1994 and 2001. The Office of the Secretary of Defense and the Joint Staff led the effort in consultation with the Departments of State and Energy. Other organizations participated, including the military departments, the combatant commands, the Departments of Homeland Security and Treasury, the Office of the Director of National Intelligence, and the National Security Council and its supporting interagency bodies. The 2010 NPR report focused on five objectives: 1. preventing nuclear proliferation and nuclear terrorism; 2. reducing the role of U.S. nuclear weapons in the U.S. national security 3. maintaining strategic deterrence and stability at lower nuclear force 4. strengthening regional deterrence and reassuring U.S. allies and 5. sustaining a safe, secure, and effective nuclear arsenal. The third of these objectives—maintaining strategic deterrence and stability at reduced nuclear force levels—emphasizes the importance of bilateral and verifiable reductions in strategic nuclear weapons in coordination with Russia. In support of this objective, the United States signed a new Strategic Arms Reduction Treaty with Russia—known as New START—on April 8, 2010, which entered into force on February 5, 2011. New START gives Russia and the United States 7 years to reduce their strategic delivery vehicles and strategic nuclear warheads—under the counting rules outlined in the treaty—and will remain in force for 10 years. According to DOD’s April 2014 report on its plan to implement New START, DOD plans to maintain 400 deployed intercontinental ballistic missiles; 240 deployed submarine-launched ballistic missiles; and 60 deployed heavy bombers. The 60 heavy bombers consist of B-52s and B-2s. Taken together, these add up to 700 deployed delivery vehicles and fall within the New START limits that go into force in 2018. DOD and military service officials told us these numbers reflect DOD’s current planned strategic force structure for implementing New START. Figure 1 shows DOD’s planned deployed strategic force structure for implementing New START, including the number of delivery vehicles for each leg of the triad. In 2011, the President directed DOD to conduct a follow-on analysis to the NPR, which reviewed U.S. nuclear deterrence requirements. The review resulted in the development of the President’s nuclear employment guidance and a DOD report on this nuclear employment guidance, which was completed in June 2013. The review was led by DOD and included senior-level participation by the Office of the Secretary of Defense, the Joint Chiefs of Staff, Strategic Command, the Department of State, the Department of Energy, the Office of the Director of National Intelligence, and the National Security Staff (now known as the National Security Council). As indicated in DOD’s 2013 report on the President’s nuclear employment guidance, the review assessed what changes to nuclear employment strategy could best support the five key objectives of the 2010 NPR and a sixth objective: achieve U.S. and allied objectives if deterrence fails. In June 2013, DOD completed a Strategic Choices Management Review, which, according to DOD officials, considered reductions in nuclear forces, among other things. According to the Secretary of Defense, the purpose of the Strategic Choices Management Review was to understand the effect that further budget reductions would have on the department and to develop options to deal with these reductions. Figure 2 shows a timeline of events and reviews related to DOD’s assessment of U.S. nuclear forces from 2010 through 2014. DOD assessed the need for each leg of the strategic triad in support of the 2010 NPR and considered other reductions to nuclear forces in subsequent reviews. The department identified advantages of each leg of the triad and concluded that retaining all three would help maintain strategic deterrence and stability. The 2010 NPR report states that the administration considered various options for U.S. nuclear force structure, including options in which the United States would eliminate one leg of the triad. DOD officials also told us that the department had assessed nuclear force reductions as part of subsequent reviews, including during the development of the President’s nuclear employment guidance, the 2013 Strategic Choices Management Review, and the development of DOD’s plan to implement New START. The 2010 NPR report identified advantages of each leg of the triad that DOD decided warrant retaining all three, even in light of the planned reductions under New START. These advantages—including the survivability of the sea-based leg; the intercontinental ballistic missiles’ contribution to stability; and the ability of the nuclear-capable bombers to visibly forward deploy—are further described in Navy and Air Force acquisition documents completed both before and after the 2010 NPR, from 2008 through 2014. These acquisition documents do not include an assessment of the strategic triad as a whole but help define and clarify the advantages that are identified in the 2010 NPR report. In addition to identifying the advantages of each leg, the 2010 NPR report indicates that retaining all three legs best maintains strategic stability at reasonable cost while reducing risk against potential technical problems or vulnerabilities. The 2010 NPR report states that for the planned reductions under New START, DOD considered force structure options in which the department would eliminate a leg of the triad. DOD officials told us that in senior-level force structure meetings in support of the NPR, DOD and key stakeholders discussed and considered alternatives to a triad for U.S. strategic force structure. DOD officials were unable to provide us documentation of the NPR’s analysis of the strategic force structure options that were considered; officials from the Office of the Secretary of Defense, Joint Staff, and Strategic Command told us that much of the NPR analysis on the consideration of different strategic force structure options was discussed in senior-level meetings and was not documented. In addition to the discussions and analysis of options for alternative strategic force structures that occurred during the development of the 2010 NPR, Strategic Command, Air Force, and Navy officials told us that they had also analyzed alternative strategic force structures in advance of the NPR discussions. We reviewed examples of Air Force and Strategic Command analyses and reported on these in our classified report. DOD’s 2013 unclassified report on the President’s nuclear employment guidance states that DOD also assessed potential reductions in U.S. nuclear forces in the follow-on review to the NPR that led to the development of the 2013 Presidential nuclear employment guidance. The report says that, in that review, the President determined that the United States can safely pursue up to a one-third reduction in deployed nuclear weapons from the level established in New START, while still ensuring the security of the United States and U.S. allies and partners and maintaining a strong and credible strategic deterrent. DOD officials told us that to avoid large disparities in nuclear capabilities, the report also stated the administration’s intent to seek negotiated cuts with Russia. However, such negotiations have not yet begun as of August 2016. DOD officials told us that, in the June 2013 Strategic Choices Management Review—which supported the department’s budget review—the department considered cutting nuclear forces and capabilities. The purpose of the Strategic Choices Management Review was to examine the potential effect of additional anticipated budget reductions on the department and generally review how DOD would allocate resources when executing its fiscal year 2014 budget and preparing its fiscal years 2014 through 2019 budget plans. According to DOD officials, the administration and the department ultimately decided against the options to reduce nuclear forces that were considered in the 2013 Strategic Choices Management Review. As we have previously reported, DOD considered alternatives to its strategic force structure in senior-level meetings for implementing New START. According to DOD officials, in these senior-level meetings— which were organized by the Joint Staff and led by the Office of the Under Secretary of Defense for Policy—DOD finalized its recommendations to the National Security Council for the strategic force structure to implement the treaty. DOD officials told us that, during these meetings, DOD participants considered options to comply with the treaty. They also told us that DOD ultimately recommended maintaining 400 deployed intercontinental ballistic missiles, 240 deployed submarine-launched ballistic missiles, 60 deployed heavy bombers, 54 nondeployed intercontinental ballistic missile silos, 40 nondeployed submarine- launched ballistic missile launch tubes, and 6 nondeployed nuclear- capable heavy bombers. According to officials, the National Security Council approved this recommendation, which is reflected in DOD’s April 2014 report on its plan to implement New START. We provided a draft of the classified version of this report to DOD for review and comment. In response to that draft report, DOD provided technical comments that we have incorporated as appropriate. We are providing copies of this report to the appropriate congressional committees, the Secretary of Defense, the Secretary of the Air Force, the Secretary of the Navy, the Secretary of the Army, the Joint Staff, and the Under Secretary of Defense for Policy. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-9971 or kirschbaumj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in the appendix. Joseph W. Kirschbaum, (202) 512-9971 or kirschbaumj@gao.gov. In addition to the contact named above, Penney Harwell Caramia (Assistant Director), Scott Fletcher, Jonathan Gill, Joanne Landesman, Amie Lesser, Brian Mazanec, Timothy Persons, Steven Putansu, Michael Shaughnessy, and Sam Wilson made key contributions to this report.

Since the 1960s, the United States has deployed nuclear weapons on three types of strategic delivery vehicles collectively known as the strategic triad. The triad comprises the sea-based leg (submarine-launched ballistic missiles), ground-based leg (intercontinental ballistic missiles), and airborne leg (nuclear-capable heavy bombers). As a result of arms control agreements and strategic policies, the number of U.S. nuclear weapons and strategic delivery vehicles has been reduced substantially; however, the strategic triad has remained intact. DOD and the Department of Energy are planning to invest significant resources to recapitalize and modernize the strategic triad in the coming decades. The departments projected in 2015 that the costs of maintaining U.S. nuclear forces for fiscal years 2016 through 2025 would total $319.8 billion, and DOD expects recapitalization and modernization efforts to extend into the 2030s. GAO was asked to review DOD's analysis of the decision to retain all three legs of the strategic triad. This report describes the processes DOD used in supporting that decision. GAO reviewed documentation and interviewed officials from DOD and the military services on the key reviews DOD carried out from 2009 to 2014— including the 2010 Nuclear Posture Review—in analyzing its strategic force structure. The Department of Defense (DOD) assessed the need for each leg of the strategic triad in support of the 2010 Nuclear Posture Review and considered other reductions to nuclear forces in subsequent reviews. The department identified advantages of each leg of the triad and concluded that retaining all three would help maintain strategic deterrence and stability. The advantages DOD identified include the survivability of the sea-based leg, the intercontinental ballistic missiles' contribution to stability, and the ability of the nuclear-capable bombers to visibly forward deploy. The 2010 Nuclear Posture Review Report states—and DOD officials also told GAO—that the administration has considered various options for the U.S. nuclear force structure, including options in which DOD would eliminate one leg of the triad. For example, Strategic Command, Air Force, and Navy officials told GAO that they had analyzed alternative strategic force structures in preparation for the 2010 Nuclear Posture Review. DOD officials also told GAO that the department had assessed nuclear force reductions as part of reviews conducted after the Nuclear Posture Review, including during the development of the President's 2013 nuclear employment guidance, the 2013 Strategic Choices Management Review, and DOD's 2014 plan to implement the New Strategic Arms Reduction Treaty (New START) with Russia. The figure shows DOD's current planned strategic force structure for implementing New START, including the number of delivery vehicles that would be retained for each leg of the triad. This is a public version of a classified report GAO issued in May 2016. It excludes classified information on warhead levels, the specific advantages of each leg of the triad, and some of the analyses of alternatives that were considered. GAO is not making any recommendations in this report. DOD provided technical comments, which were incorporated as appropriate.

Medicare is a federal health insurance program designed to assist elderly and disabled beneficiaries. Hospital insurance, or part A, covers inpatient hospital, skilled nursing facility, hospice care, and certain home health services. Supplemental medical insurance, or part B, covers physician and outpatient hospital services, laboratory and other services. Claims are paid by a network of 49 claims administration contractors called intermediaries and carriers. Intermediaries process claims from hospitals and other institutional providers under part A while carriers process part B claims. The intermediaries’ and carriers’ responsibilities include: reviewing and paying claims; maintaining program safeguards to prevent inappropriate payment; and educating and responding to provider and beneficiary concerns. Medicare contracting for intermediaries and carriers differs from that of most federal programs. Most federal agencies, under the Competition in Contracting Act and its implementing regulations known as the Federal Acquisition Regulation (FAR), generally may contract with any qualified entity for any authorized purpose so long as that entity is not debarred from government contracting and the contract is not for what is essentially a government function. Agencies are to use contractors that have a track record of successful past performance or that demonstrate a current superior ability to perform. The FAR generally requires agencies to conduct full and open competition for contracts and allows contractors to earn profits. Medicare, however, is authorized to deviate from the FAR under provisions of the Social Security Act enacted in 1965. For example, there is no full and open competition for intermediary or carrier contracts. Rather, intermediaries are selected in a process called nomination by provider associations, such as the American Hospital Association. This provision was intended at the time of Medicare’s creation to encourage hospitals to participate by giving them some choice in their claims processor. Currently, there are three intermediary contracts, including the national Blue Cross Blue Shield Association, which serves as the prime contractor for 26 local member plan subcontractors. When one of the local Blue plans declines to renew its subcontract, the Association nominates the replacement contractor. Carriers are chosen by the Secretary of Health and Human Services from a small pool of health insurers, and the number of such companies seeking Medicare claims-processing work has been dwindling in recent years. The Social Security Act also generally calls for the use of cost-based reimbursement contracts under which contractors are reimbursed for necessary and proper costs of carrying out Medicare activities but does not expressly provide for profit. Further, Medicare contractors cannot be terminated from the program unless they are first provided with an opportunity for a public hearing––a process not afforded under the FAR. Medicare could benefit from various contracting reforms. Freeing the program to directly choose contractors on a competitive basis from a broader array of entities able to perform needed tasks would enable Medicare to benefit from efficiency and performance improvements related to competition. It also could address concerns about the dwindling number of insurers with which the program now contracts. Allowing Medicare to have contractors specialize in specific functions rather than assume all claims-related activities, as is the case now, also could lead to greater efficiency and better performance. Authorizing Medicare to pay contractors based on how well they perform rather than simply reimbursing them for their costs, as well as allowing the program to terminate contracts more efficiently when program needs change or performance is inadequate, could also result in better program management. Since Medicare was implemented in 1966, the program has used health insurers to process and pay claims. Before Medicare’s enactment, providers feared that the program would give the government too much control over health care. To win acceptance, the program was designed to be administered by health insurers like Blue Cross and Blue Shield. Subsequent regulations and decades of the agency’s own practices have further limited how the program contracts for claims administration services. The result is that agency officials believe they must contract with health insurers to handle all aspects of administering Medicare claims, even though the number of such companies willing to serve as Medicare contractors has declined and the number of other entities capable of doing the work has increased. While using only health insurers for claims administration may have made sense when Medicare was created, that may be much less so today. The explosion in information technology has increased the potential for Medicare to use new types of business entities to administer its claims processing and related functions. Additionally, the need to broaden the pool of entities allowed to be contractors has increased in light of contractor attrition. Since 1980, the number of contractors has dropped by more than half, as many have decided to concentrate on other lines of business. This has left the program with fewer choices when one contractor withdraws, or is terminated, and another must be chosen to replace it. Since 1993, the agency has repeatedly submitted legislative proposals to repeal the provider nomination authority and make explicit its authority to contract for claims administration with entities other than health insurers. Just this month, the Secretary of Health and Human Services told the Senate Finance Committee that CMS should be able to competitively award contracts to the entities best qualified to perform these functions and stated that such changes would require legislative action. With such changes, when a contractor leaves the program, CMS could award its workload on a competitive basis to any qualified company or combination of companies—including those outside the existing contractor pool, such as data processing firms. Allowing Medicare to have separate contractors for specific claims administration activities—also called functional contracting—could further improve program management. Functional contracting would enable CMS to select contractors that are more skilled at certain tasks and allow these contractors to concentrate on those tasks, potentially resulting in better program service. For example, the agency could establish specific contractors to improve and bring uniformity to efforts to educate and respond to providers and beneficiaries, efforts that now vary widely among existing contractors. Currently, CMS interprets the Social Security Act and the regulations implementing it as constraining the agency from awarding separate contracts for individual claims administration activities, such as handling beneficiary inquiries or educating providers about program policies. Current regulations stipulate that, to qualify as an intermediary or carrier, the contracting organization must perform all of the Medicare claims administration functions. Thus, agency officials feel precluded from consolidating one or more functions into a single contract or a few regional contracts to achieve economies of scale and allow specialization to enhance performance. CMS has had some experience with functional contracting under authority granted in 1996 to hire entities other than health insurers to focus on program safeguards. CMS has contracted with 12 program safeguard contractors (PSC) who compete among themselves to perform task- specific contracts called task orders. These entities represent a mix of health insurers, including many with prior experience as Medicare contractors, along with consulting organizations, and other types of firms. The experience with PSCs, however, makes clear that functional contracting has challenges of its own, which are discussed later in this testimony. Allowing Medicare to offer financial incentives to contractors for high- quality performance also may have benefits. According to CMS, the Social Security Act now precludes the program from offering such incentives because it generally stipulates that payments be based on costs. Contractors are paid for necessary and proper costs of carrying out Medicare activities but do not make a profit. Repeal of cost-based restrictions would free CMS to award different types of contracts–– including those that provide contractors with financial incentives and permit them to earn profits. CMS could test different payment options to determine which work best. If effective in encouraging contractor performance, such contracts could lead to improved program operations and, potentially, to lower administrative costs. Again, implementing performance-based contracting will not be without significant challenges. Allowing Medicare to terminate contractors more efficiently may also promote better program management. The Social Security Act now limits the agency’s ability to terminate intermediaries and carriers, and the provisions are one-sided. Intermediaries and carriers may terminate their contracts without cause simply by providing CMS with 180 days notice. CMS, on the other hand, must demonstrate, that (1) the contractor has failed substantially to carry out its contract or that (2) continuation of the contract is disadvantageous or inconsistent with the effective administration of Medicare. CMS must provide the contractor with an opportunity for a public hearing prior to termination. Furthermore, CMS may not terminate a contractor without cause as can most federal agencies under the FAR. In past years, the agency has requested statutory authority to eliminate the public hearing requirement and the ability of contractors to unilaterally initiate contract termination. Such changes would bring Medicare claims administration contractors under the same legal framework as other government contractors and provide greater flexibility to more quickly terminate poor performers. Eliminating contractors’ ability to unilaterally terminate contracts also may help address challenges the agency faces in finding replacement contractors on short notice. While Medicare could benefit from greater contracting flexibility, time and care would be needed to implement changes to effectively promote better performance and accountability and avoid disrupting program services. Competitive contracting with new entities for specific claims administration services in particular will pose new challenges to CMS–– challenges that will likely take significant time to fully address. These include preparing clear statements of work and contractor selection criteria, efficiently integrating the new contractors into Medicare’s claims processing operations, and developing sound evaluation criteria for assessing performance. Because these challenges are so significant, CMS would be wise to adopt an experimental, incremental approach. The experience with authority granted in 1996 to hire special contractors for specific tasks related to program integrity can provide valuable lessons for CMS officials if new contracting authorities are granted. If given authority to contract competitively with new entities, CMS would need time to accomplish several tasks. First among these would be development of clear statements of work and associated requests for proposals detailing work to be performed and how performance will be assessed. CMS has relatively little experience in this area for Medicare claims administration because current contracts instead incorporate by reference all regulations and general instructions issued by the Secretary of Health and Human Services to define contractor responsibilities. CMS has experience with competitive contracting from hiring PSCs. It did take 3 years to determine how best to implement the new authority through its broad umbrella contract, develop the statement of work, issue the proposed regulations governing the PSCs, develop selection criteria, review proposals, and select contractors. Program officials have told us they are optimistic about their ability to act more quickly if contracting reform legislation were enacted, given the lessons they have learned. However, we expect that it would take CMS a significant amount of time to develop its implementation strategy and undertake all the necessary steps to take full advantage of any changes in its contracting authority. CMS took an incremental approach to awarding its PSC task orders, and the same would be prudent for implementing any changes in Medicare’s claims administration contracting authorities. Even after new contractors are hired, CMS should not expect immediate results. The PSC experience demonstrates that it will take time for them to begin performing their duties. PSCs had to hire staff, obtain operating space and equipment, and develop the systems needed to ultimately fulfill contract requirements––activities that often took many months to complete. Without sufficient start-up time, new contractors might not operate effectively and services to beneficiaries or providers could be disrupted. Developing a strategy for how to incorporate functional contractors into the program and coordinate their activities is key. While there may be benefits from specialization, having multiple companies performing different claims administration tasks could easily create coordination difficulties for the contractors, providers, and CMS staff. For example, between 1997 and 2000, HCFA contracted with a claims administration contractor that subcontracted with another company for the review of the medical necessity of claims before they were paid. The agency found that having two different contractors perform these functions posed logistical challenges that could make it difficult to complete prepayment reviews without creating a backlog of unprocessed claims. The need for effective coordination was also seen in the PSC experience. PSCs and the claims administration contractors need to coordinate their activities in cases where the PSCs assumed responsibility for some or all of the program safeguard functions previously performed by the contractors. In these situations, HCFA officials had to ensure that active claims did not get lost or ignored while in the processing stream. Coordination is also necessary to ensure that new efficiencies in one program area do not adversely affect another area. For example, better review of the medical necessity of claims before they are paid could lead to more accurate payment. This would clearly be beneficial, but could also lead to an increase in the number of appeals for claims denials. Careful planning would be required to ensure adequate resources were in place to adjudicate those appeals and prevent a backlog. CMS has not stated how claims administration activities might be divided if the agency could do functional contracting. It would be wise for CMS to develop a strategy for testing different options on a limited scale. In our report on HCFA’s contracting for PSC services, we recommended, and the agency generally agreed, that it should adopt such a plan because HCFA was not in a position to identify how best to use the PSCs to promote program integrity in the long term. Taking advantage of benefits from competition and performance-based contracting hinges on being able to identify goals and objectives and to measure progress in achieving them. Specific and appropriate evaluation criteria would be needed to effectively manage any new arrangements under contracting reform. Effective evaluations are dependent, in part, upon clear statements of expected outcomes tied to quantifiable measures and standards. Because it has not developed such criteria for most of its PSC task orders, we reported that CMS is not in a position to effectively evaluate its PSCs’ performance even though 8 of the 15 task orders had been ongoing for at least a year as of April 2001. If CMS begins using full and open competition to hire new entities for other specific functions, it should attempt to move quickly to develop effective outcomes, measures, and standards for evaluating such entities. Effective criteria are also critical if financial incentives are to be offered to contractors. Prior experiments with financial incentives for Medicare claims administration contractors generally have not been successful. This experience raises concerns about the possibility for success of any immediate implementation of such authority without further testing. For example, between 1977 and 1986, HCFA established eight competitive fixed-price-plus-incentive-fee contracts designed to consolidate the workload of two or more small contractors on an experimental basis. Contractors could benefit financially by achieving performance goals in certain areas at the potential detriment of performance in other activities. In 1986, we reported that two of the contracts generated administrative savings estimated at $48 million to $50 million. However, the two contractors’ activities also resulted in $130 million in benefit payment errors (both overpayments and underpayments) that may have offset the estimated savings. One of these contractors subsequently agreed to pay over $140 million in civil and criminal fines for its failure to safeguard Medicare funds. Removing the contracting limitations imposed at Medicare’s inception to promote full and open competition and increase flexibility could help to modernize the program and lead to more efficient and effective management. However, change will not yield immediate results, and lessons learned from the experience with PSC contractors underscore the need for careful and deliberate implementation of any reforms that may be enacted. This concludes my statement. I would be happy to answer any questions that either Subcommittee Chairman or Members may have. For further information regarding this testimony, please contact me at (312) 220-7600. Sheila Avruch, Bonnie Brown, Paul Cotton, and Robert Dee also made key contributions to this statement.

Discussions about how to reform and modernize the Medicare Program have, in part, focused on whether the structure that was adopted in 1965 is optimal today. Questions have been raised about whether the program could benefit from changes to the way that Medicare's claims processing contractors are chosen and the jobs they do. Medicare could benefit from full and open competition and its relative flexibility to promote better performance and accountability. If the current limits on Medicare contracting authority are removed, the Centers for Medicare and Medicaid Services could (1) select contractors on a competitive basis from a broader array of entities capable of performing needed program activities, (2) issue contracts for discrete program functions to improve contractor performance through specialization, (3) pay contractors based on how well they perform rather than simply reimbursing them for their costs, and (4) terminate poor performers more efficiently.

After five years of receiving an unqualified opinion on its financial statements, on February 22, 2002, NASA’s new independent auditordisclaimed an opinion on the agency’s fiscal year 2001 financial statements. Specifically, the audit report states that NASA was unable to provide the detailed support needed to determine the accuracy of the agency’s reported obligations, expenses, property, plant, and equipment, and materials for fiscal year 2001. According to the report, each of NASA’s 10 centers uses a different financial management system—each of which has multiple feeder systems that summarize individual transactions on a daily or monthly basis. Financial information from the centers may be summarized more than once before it is uploaded into NASA’s General Ledger Accounts System (GLAS). The successive summarization of data through the various systems impedes NASA’s ability to maintain an audit trail through the summary data to the detailed transaction-level source documentation. Current OMB and GAO guidance on internal control requires agencies to maintain transaction-level documentation and to make the transaction-level documentation readily available for review. NASA was unable to provide sufficient transaction-level documentation to support certain obligation and expense transactions and certain transaction-level cost allocations that the auditors had selected for testing. In addition, the fiscal year 2001 audit report identifies a number of significant internal control weaknesses related to accounting for space station material and equipment and to computer security. The report also states that NASA’s financial management systems do not substantially comply with federal financial management systems requirements and applicable federal accounting standards. While the fiscal year 2001 auditor’s report draws attention to the issue, NASA’s financial management difficulties are not new. The weaknesses discussed in the auditor’s report are consistent with the findings discussed in our previous reports. We have reported on NASA’s contract management problems, misstatement of its Statement of Budgetary Resources, lack of detailed support for amounts reported against certain cost limits, and lack of historical cost data for accurately projecting future cost. We first identified NASA’s contract management as an area at high risk in 1990 because of vulnerabilities to waste, fraud, abuse, and mismanagement. Specifically, we found that NASA lacked effective systems and processes for overseeing contractor activities and did not emphasize controlling costs. While NASA has made progress in managing many of its procurement practices, little progress has been made in correcting the financial system deficiencies that prevent NASA from effectively managing and overseeing its procurement dollars. As a result, contract management remains an area of high risk. The agency’s financial management systems environment is much the same as it was in 1993, the last time we performed comprehensive audit work in that area. It is comprised of decentralized, nonintegrated systems with policies, procedures, and practices that are unique to each of its 10 centers. For the most part, data formats are not standardized, automated systems are not interfaced, and on-line financial information is not readily available to program managers. As a result, NASA cannot ensure that contracts are being efficiently and effectively implemented and budgets are executed as planned. NASA’s long-standing problems in developing and implementing integrated financial management systems contributed to a $644 million misstatement in NASA’s fiscal year 1999 Statement of Budgetary Resources (SBR), which we discussed in our March 2001 report. This error was not detected by NASA Chief Financial Officer (CFO) personnel or by its auditor, Arthur Andersen. Instead, the House Committee on Science discovered the discrepancy in comparing certain line items in the NASA SBR to related figures in the President’s Budget. NASA used an ad hoc process involving a computer spreadsheet to gather the information needed for certain SBR line items because the needed data were not captured by NASA’s general ledger systems. Because each of NASA’s 10 reporting units maintained different accounting systems, none of which were designed to meet FFMIA requirements, it was left up to the units to determine how best to gather the requested data. This cumbersome, time-consuming process ultimately contributed to the misstatement of NASA’s SBR. The SBR is intended to provide information on an agency’s use of budgetary resources provided by the Congress. If reliable, the SBR can provide valuable information for management and oversight purposes to assess the obligations related to prior-year agency activities and to make decisions about future funding. Based on this work, we questioned NASA management’s and its auditor’s determination that NASA’s systems were in substantial compliance with the requirements of FFMIA. As I mentioned earlier, and it bears repeating, FFMIA builds on previous financial management reform legislation by emphasizing the need for agencies to have systems that can generate timely, accurate, and useful information with which to make informed decisions and to ensure accountability on an ongoing basis. This is really the end goal of financial management reforms. In particular, we questioned whether NASA complied with the federal financial management systems requirements for using integrated financial management systems. NASA’s financial management problems were also highlighted in our effort to verify amounts NASA reported to the Congress against legislatively imposed spending limits on its International Space Station and Space Shuttle programs. Since NASA began the current program to build the space station, the program has been characterized by a series of schedule delays, reduction in space station content and capabilities, and a substantial development cost overrun. In February 2001, NASA revealed that the program faced a $4 billion cost overrun that would raise the cost of constructing the space station to $28 billion to $30 billion, 61 percent to 72 percent above the original 1993 estimate. In part to address concerns regarding the escalating space station costs, section 202 of the National Aeronautics and Space Administration Authorization Act for Fiscal Year 2000 (P.L. 106-391), establishes general cost limitations on the International Space Station and Space Shuttle programs. The act requires that NASA, as part of its annual budget request, update the Congress on its progress by (1) accounting for and reporting amounts obligated against the limitations to date, (2) identifying the amount of budget authority requested for the future development and completion of the space station, and (3) arranging for the General Accounting Office to verify the accounting submitted to the Congress It was our intention to verify NASA’s accounting for the space station and shuttle limits by testing the propriety of charges to various agency programs to ensure that all obligations charged to the space station and shuttle programs were appropriate and that no space station or shuttle obligations were wrongly charged to other programs. However, NASA was unable to provide the detailed obligation data needed to support amounts reported to the Congress against the space station and shuttle program cost limits. NASA’s inability to provide detailed data for amounts obligated against the limits is again due to its lack of a modern, integrated financial management system. As I mentioned earlier, NASA’s 10 centers operate with decentralized, nonintegrated systems and with policies, procedures, and practices that are unique to each center. Consequently, the systems have differing capabilities with respect to providing detailed obligation data. According to NASA officials, only 5 of its 10 centers are able to provide complete, detailed support for amounts obligated during fiscal years 1994 though 2001—the period in which NASA incurred obligations related to the limits. In fact, at one center, detailed obligation data are not available for even current-year obligations. As part of our effort to verify NASA accounting for the space station and shuttle cost limits, we also found that NASA was not able to provide support for the actual cost of completed space station components— either in total or by subsystems or elements. For example, NASA cannot identify the actual costs of individual space station components such as Unity (Node 1) or Destiny (U.S. Lab). Although in its audited fiscal year 2000 financial statements, NASA capitalized the cost of Unity, Destiny, and other items in orbit or awaiting launch at about $8 billion, according to NASA officials, these amounts are based primarily on cost estimates, not actual costs. NASA officials stated that its accounting systems were designed prior to the implementation of current federal cost accounting standards and financial systems standards that require agencies to track and maintain cost data needed for management activities, such as estimating and controlling costs, performance measurement, and making economic trade- off decisions. As a result, NASA’s systems do not track the cost of individual space station subsystems or elements. According to NASA officials, the agency manages and tracks space station costs by contract and does not need to know the cost of individual subsystems or elements to effectively manage the program. To the contrary, we found that NASA estimates potential and probable future program costs to determine the impact of canceling, deferring, or adding space station content. These cost estimates often identify the cost of specific space station subsystems. However, because NASA does not attempt to track costs by element or subsystems, the agency does not know the actual cost of completed space station components and is not able to reexamine its cost estimates for validity once costs have been realized. We continue to believe that NASA needs to collect, maintain, and report the full cost of individual subsystems and hardware so that NASA can make valid comparisons between estimates and final costs and so that the Congress can hold NASA accountable for differences between budgeted and actual costs. Modernizing NASA’s financial management system is essential to providing timely, relevant, and reliable information needed to manage cost, measure performance, make program-funding decisions, and analyze outsourcing or privatization options. However, technology alone will not solve NASA’s financial management problems. The key to transforming NASA’s financial management organization into a customer-focused partner in program results hinges on the sustained leadership of NASA’s top executives. As we found in our study of leading private sector and state organizations, clear, strong executive leadership—combined with factors such as effective organizational alignment, strategic human capital management, and end-to-end business process improvement—will be critical for ensuring that NASA’s financial management organization delivers the kind of analysis and forward-looking information needed to effectively manage NASA’s many complex space programs. Specifically, as discussed in the executive guide, to reap the full benefit of a modern, integrated financial management system, NASA must go beyond obtaining an unqualified audit opinion toward (1) routinely generating reliable cost and performance information and analysis, (2) undertaking other value- added activities that support strategic decision-making and mission performance, and (3) building a finance team that supports the agency’s mission and goals. An independent task force created by NASA to review and assess space station costs, budget, and management reached a similar conclusion. In its November 1, 2001, report the International Space Station (ISS) Management and Cost Evaluation (IMCE) Task Force found that the space station program office does not collect the historical cost data needed to accurately project future costs and thus perform major program-level financial forecasting and strategic planning. The task force also reported that NASA’s ability to forecast and plan is weakened by diverse and often incompatible center level accounting systems and uneven and non- standard cost reporting capabilities. The IMCE also concluded that the current weaknesses in financial reporting are a symptom, not a cause, of the problem and that enhanced reporting capabilities, by way of a new integrated financial management system, will not thoroughly solve the problem. The root of the problem, according to the task force, is that finance is not viewed as intrinsic to NASA’s program management decision process. The taskforce concluded that under the current organizational structure, the financial management function is centered upon tracking and documenting what “took place” rather than what “could and should take place” from an analytical cost planning standpoint. NASA has cited deficiencies with its financial management system as a primary reason for not having the necessary data required for both internal management and external reporting purposes. To its credit, NASA recognizes the urgency of successfully implementing an integrated financial management system. The stakes are particularly high, considering this is NASA’s third attempt since 1988 to implement a new system. The first two attempts were abandoned after 12 years and after spending about $180 million. NASA expects to complete the current systems effort by 2006 at a cost of $475 million. The President’s Management Agenda includes improved financial management performance as one of his five governmentwide management goals. In addition, in August 2001, the Principals of the Joint Financial Management Improvement Program—the Secretary of the Treasury, the Director of the Office of Management and Budget, the Director of the Office of Personnel Management, and the Comptroller General—began a series of quarterly meetings that marked the first time all four of the Principals had gathered together in over 10 years. To date, these sessions have resulted in substantive deliberations and agreements focused on key issues such as better defining measures for financial management success. These measures include being able to routinely provide timely, reliable, and useful financial information and having no material internal control weaknesses. Our experience has shown that improvements in several key elements are needed for NASA to effectively address the underlying causes of its financial management challenges. These elements, which will be key to any successful approach to financial management reform, include: addressing NASA’s financial management challenges as part of a comprehensive, integrated, NASA-wide business process reform; providing for sustained leadership by the Administrator to implement needed financial management reforms; establishing clear lines of responsibility, authority, and accountability for such reform tied to the Administrator; incorporating results-oriented performance measures and monitoring tied to financial management reforms; providing appropriate incentives or consequences for action or inaction; establishing an enterprisewide system architecture to guide and direct financial management modernization investments; and ensuring effective oversight and monitoring. In this regard, NASA’s new Administrator comes to the position with a strong management background and expertise in financial management.

In fiscal years 1996 to 2000, the National Aeronautics and Space Administration (NASA) was one of the few agencies that received an unqualified opinion on its financial statements and was in substantial compliance with the Federal Financial Management Improvement Act (FFMIA). This suggested that NASA could generate reliable information for annual external financial reporting and could provide accurate, reliable information for day-to-day decision-making. In contrast with the unqualified or "clean" audit opinions of its previous auditor, Arthur Andersen, NASA's new independent auditor, PricewaterhouseCoopers, disclaimed an opinion on the agency's fiscal year 2001 financial statements because of significant internal control weaknesses. PricewaterhouseCoopers also concluded that NASA's financial management systems do not substantially comply with the requirements of FFMIA. Modernizing NASA's financial management system is essential to providing accurate, useful information for external financial reporting as well as internal management decision-making. NASA is working on an integrated financial management system that it expects to have fully operational in fiscal year 2006 at an estimated cost of $475 million. This is NASA's third attempt to implement a new financial management system. The first two efforts were abandoned after 12 years and $180 million. Given the high stakes involved, NASA's top management must provide the necessary direction, oversight, and sustained attention to ensure the project's success.

Long-term simulations can be useful for comparing potential outcomes of alternative policies within a common economic framework. Given the broad range of uncertainty about future economic changes, however, any simulations should not be interpreted as forecasts of the level of economic activity 30 years in the future. Instead, simulation results provide illustrations of the budget or economic outcomes associated with alternative policy paths. In our most recent work, we used a long-term economic growth model to simulate three of the many possible fiscal paths through the year 2025: a “no action” path that assumed the continuation of fiscal policies in effect at the end of fiscal year 1994; a “muddling through” path that assumed annual deficits of approximately 3 percent of gross domestic product (GDP); and a path that reaches balance in 2002 and sustains it. To suggest some of the trade-offs facing policymakers in choosing among fiscal policies, we examined some long-term economic and fiscal outcomes of these paths. We also simulated how some types of early action on the deficit, including early action on health care spending, might affect the long-term deficit outlook. Finally, we examined the prospects for sustaining balance over the long term. While we discuss the consequences of alternative fiscal paths, we do not suggest any particular course of action, since only the Congress can resolve the fundamental policy question of choosing the fiscal policy path and the composition of federal activity. In our simulations we employed a model originally developed by economists at the Federal Reserve Bank of New York (FRBNY) that relates long-term GDP growth to economic and budget factors. Details of that model and its assumptions can be found in our reports. As we noted in 1992 and 1995, important and compelling benefits can be gained from shifting to a new fiscal policy path. As illustrated in figure 1, chronic deficits have consumed an increasing share of a declining national savings pool, leaving that much less for private investment. Lower investment will ultimately show up in lower economic growth. Future generations of taxpayers will pay a steep price for this lower economic growth in terms of lower personal incomes and a generally lower standard of living at a time when they will face the burden of supporting an unprecedented number of retirees as the baby boom generation reaches retirement. The problem has been that the damage done by deficits is long-term, gradual, and cumulative in nature and may not be as visible as the short-term costs involved in reducing deficits. This has presented, and continues to present, a difficult challenge for public leaders who must mount a compelling case for deficit reduction—and for the steps required to achieve it—that can capture public support. The updated simulations we presented to you and Chairman Domenici last spring confirmed that the nation’s current fiscal policy path is unsustainable over the longer term. Specifically, a fiscal policy of “no action” on the deficit through 2025 implies federal spending of nearly 44 percent of GDP, and as figure 2 shows, a deficit over 23 percent of GDP. Let me explain these ominous trends. The increased spending is principally a function of escalating federal spending on health care and Social Security, which is driven by projected rising health care costs and the aging of our population. Spending on interest on our national debt also rises as annual deficits and accumulated public debt expand. Essentially, current commitments in these areas become progressively unaffordable for the nation over time. Without any significant changes in spending or revenues, such an expanding deficit would result in collapsing investment, declining capital stock, and, inevitably, a declining economy by 2025. As emphasized in both our 1992 and 1995 reports, we do not believe that such a scenario would take place. Rather, we believe that the prospect of economic decline would prompt action before the end of our simulation period. Nevertheless, this “no action” scenario, by illustrating the future logic of existing commitments, powerfully makes the case that we have no choice but to take action on the deficit. The questions that remain are when and how. Our 1995 simulations also confirm the long-term economic and fiscal benefits of deficit reduction. We assessed the long-term impacts of balancing the budget by 2002, as was contemplated in the fiscal year 1996 budget resolution and in the recent executive-congressional discussions over budget policy, and of sustaining such a posture through 2025. We also estimated the effects of following a path that we called “muddling through”—that is, running deficit of about 3 percent of GDP over the next 30 years. Although current policy is better than this in the near term, it is still a useful illustration. A fiscal policy of balance would yield a stronger economy in the long term than either a policy of no action or of muddling through. Table 1 shows that a budget balance reached in 2002 and sustained until 2025 would, over time, lead to increased investment, increased capital stock, a larger economy, and a much lower national debt than either of the other scenarios. This means that Americans could enjoy a higher standard of living than they might otherwise experience. Reaching and sustaining balance would also shrink the share of federal spending required to pay interest costs, thereby reducing the long-term programmatic sacrifice necessary to attain deficit reduction targets. Even “muddling through” with deficits of 3 percent of GDP would exact a price through higher interest costs and thus require progressively harder fiscal choices as time progresses. Under the balance path, debt per capita would decline from $13,500 in 1994 to $4,800 in 1995 dollars by 2025; debt as a percentage of the economy would drop from about 52 percent to 13 percent. Because of this shrinkage in the debt, by 2025 a balance path could bring interest costs down from about 12 percent in 1994 to less than 5 percent of our budget, compared to about 18 percent under “muddling through” and almost a third of our budget with no action. These differences are illustrated in figure 3. Alarming as these model results may appear, they are probably understated. Our model incorporates conservative assumptions about the relationship between savings, investment and GDP growth that tend to understate the differences between the economic outcomes associated with alternative fiscal politicize. Furthermore, budget projections for the near term and those assumed in our long-term model results may not tell the whole story. By convention, baseline budget projections do not include all the legitimate claims that may be made on the budget in the future. Rather, budget projections ignore many future claims and the costs of unmet needs unless they are the subject of policy proposals in the budget. Examples of such claims and needs would include the cost of cleaning up and restructuring the Department of Energy’s (DOE) nuclear weapons production complex, the cost of hazardous waste pollution clean-up at military facilities, and cost overruns in weapons systems. In short, most of the risks to future budgets seem to be on the side of worse-than-expected, rather than better-than-expected outcomes. I make this observation not to create despair but to underline the need to continue efforts at deficit reduction. Not all spending cuts have the same impact over the long run. Decisions about how to reduce the deficit will reflect—among other considerations—judgments about the role of the federal government and the effectiveness of individual programs. I would like to call attention today to two significant considerations in deficit reduction: (1) the importance of federal investment in infrastructure, human capital, and research and development (R&D), and (2) the importance of addressing the fast-growing programs in the budget. In our 1992 work, we drew particular attention to the importance of well-chosen federal investment in infrastructure, human capital, and R&D. A higher level of national savings is essential to the achievement of a higher rate of economic growth but, by itself, is not sufficient to assure that result. Certain other ingredients are necessary—including the basic stability with which this nation has been blessed in its social, political, and economic environment. In addition, however, economic growth depends on an efficient public infrastructure, an educated work force, an expanding base of knowledge, and a continuing infusion of innovations. In the past, the federal government, through its investments in these areas, has played an important role in providing an environment conducive to growth. Thus the composition of federal spending, as well as overall fiscal policy, can affect long-term economic growth in significant ways. The extent to which deficit reduction affects spending on fast-growing programs also matters. Although a dollar is a dollar in the first year it is cut—regardless of what programmatic changes it represents—cutbacks in the base of fast-growing programs generate greater savings in the future than those in slower-growing programs, assuming the specific cuts are not offset by increases in the growth rates of the programs. Figure 4 illustrates this point by comparing the long-run effects of a $50 billion cut in health spending with those of the same dollar amount cut from unspecified other programs. For both paths the cut occurs in 1996 and is assumed to be permanent but, after 1996, spending is assumed to continue at the same rates of growth as those shown in the “no action” simulation. We used the simple assumption that a reduction in either health or other programs would not alter the expected growth rates simply to illustrate the point that a cut in high-growth areas of spending will have a greater fiscal effect in the future than the same size cut in low-growth areas. A $50 billion cut in health spending in 1996 leads to a deficit in 2025 that is about 4 percent of GDP lower than would be the case from a $50 billion cut in a low-growth program. Further, our simulations show that even if a balanced budget is achieved early in the next century, deficits would reappear if we fail to contain future growth in health, interest, and social security costs. We conclude from these simulations that how and when deficit reduction occurs can have important long-term implications for the future economy and future budgets. As noted earlier, the benefits of deficit reduction in the long run may not seem as compelling as the short-term costs necessary to reduce the deficit. Nevertheless our work on the deficit reduction experiences in other nations shows that significant fiscal improvement is indeed possible in modern democracies, at least for a time. To reach fiscal balance or surplus, the governments we studied instituted often painful measures while generating and maintaining political support. Spending control proved the dominant policy tool used to achieve fiscal goals, although few programs were actually eliminated. Notably, however, several countries restrained social benefit commitments in their quest for savings. Government leaders sought to gain support or at least defuse potential opposition by bringing key interest groups that would be affected into the decision-making process. In addition, the design of the specific deficit-reducing strategies helped. Approaches such as reducing benefits instead of eliminating programs, targeting benefit cuts to higher-income beneficiaries, and deferring or shifting painful adjustments all helped maintain political support for spending reductions. The deficit reduction brought about in these governments provided significant fiscal benefits by slowing or reversing the growth of public debt, thereby slowing or reversing the growth of government interest costs. As we simulated in our long-term growth model, what was once a “vicious” circle of rising deficits, debt, and interest, which can in turn increase deficits, became a “virtuous” circle of falling deficits or rising surpluses, accrued even though most governments we studied did not sustain fiscal balance or surplus, possibly in part because public support for austerity was frequently linked to relatively short-run concerns. Despite this return to deficit, the increases in savings and investment resulting from deficit reduction may have boosted economic prospects for the long-term future, as well as provided fiscal benefits in the short run. Although the experiences of the nations in GAO’s study suggest that resolving deficits is possible in advanced democracies, they also indicate that sustaining fiscal discipline over the longer term is difficult. Thus, deficit reduction strategies designed to promote long-term fiscal progress may help ensure that future budgets are better positioned to withstand future economic and political pressures. For the United States, reaching budgetary balance in 2002 would indeed represent an achievement that by itself would bring about fiscal and economic benefits. Yet this achievement will not eliminate the need for future fiscal discipline. In fact, the needs of an aging society will be more easily met if fiscal balance—or even surplus—is both achieved and sustained for several years. In conclusion, Mr. Chairman, I would repeat our view that current policy is unsustainable. The question, therefore, is not whether to reduce the deficit but when and how. We believe those choices matter. Mr. Chairman, this concludes my written statement. I would be happy to answer any questions you or your colleagues might have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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GAO discussed its work on the budget deficit and long-term economic growth. GAO noted that: (1) its long-term simulations show that unless the budget deficit is reduced or eliminated, economic growth, personal incomes, national investment, and the standard of living will be sharply reduced; (2) the nation's present fiscal policy is unsustainable in the long term; (3) reaching and sustaining a balanced budget would reduce federal spending on interest, a fast-growing segment of federal spending; (4) reductions in spending on fast-growing health, social security, and interest costs would be most beneficial and would have the most sustained effects; and (5) foreign governments' deficit reduction efforts have been painful but have provided significant fiscal benefits.

As we reported in July 2013, DHS has not yet fulfilled the 2004 statutory requirement to implement a biometric exit capability, but has planning efforts under way to report to Congress in time for the fiscal year 2016 budget cycle on the costs and benefits of such a capability at airports and seaports. Development and implementation of a biometric exit capability has been a long-standing challenge for DHS. Since 2004, we have issued a number of reports on DHS’s efforts to implement a biometric entry and exit system. For example, in February and August 2007, we found that DHS had not adequately defined and justified its proposed expenditures for exit pilots and demonstration projects and that it had not developed a complete schedule for biometric exit implementation. Further, in September 2008, we reported that DHS was unlikely to meet its timeline for implementing an air exit system with biometric indicators, such as fingerprints, by July 1, 2009, because of several unresolved issues, such as opposition to the department’s published plan by the airline industry. In 2009, DHS conducted pilot programs for biometric air exit capabilities in airport scenarios, and in August 2010 we found that there were limitations with the pilot programs—for example, the pilot programs did not operationally test about 30 percent of the air exit requirements identified in the evaluation plan for the pilot programs—that hindered DHS’s ability to inform decision making for a long-term air exit solution and pointed to the need for additional sources of information on air exit’s operational impacts. In an October 2010 memo, DHS identified three primary reasons why it has been unable to determine how and when to implement a biometric exit capability at airports: (1) The methods of collecting biometric data could disrupt the flow of travelers through airport terminals; (2) air carriers and airport authorities had not allowed DHS to examine mechanisms through which DHS could incorporate biometric data collection into passenger processing at the departure gate; and (3) challenges existed in capturing biometric data at the point of departure, including determining what personnel should be responsible for the capture of biometric information at airports. In July 2013, we reported that, according to DHS officials, the challenges DHS identified in October 2010 continue to affect the department’s ability to implement a biometric air exit system. With regard to an exit capability at land ports of entry, in 2006, we reported that according to DHS officials, for various reasons, a biometric exit capability could not be implemented without incurring a major impact on land facilities. For example, at the time of our 2006 report, DHS officials stated that implementing a biometric exit system at land ports of entry would require new infrastructure and would produce major traffic congestion because travelers would have to stop their vehicles upon exit to be processed. As a result, as of April 2013, according to DHS officials, the department’s planning efforts focus on developing a biometric exit capability for airports, with the potential for a similar solution to be implemented at seaports, and DHS’s planning documents, as of June 2013, do not address plans for a biometric exit capability at land ports of entry. Our July 2013 report found that since April 2011, DHS has taken various actions to improve its collection and use of biographic data to identify potential overstays. For example, DHS is working to address weaknesses in collecting exit data at land borders by implementing the Beyond the Border initiative, through which DHS and the Canada Border Services Agency exchange data on travelers crossing the border between the Because an entry into Canada constitutes a United States and Canada. departure from the United States, DHS will be able to use Canadian entry data as proxies for U.S. departure records. As a result, the Beyond the Border initiative will help address those challenges by providing a new source of biographic data on travelers departing the United States at land ports on the northern border. Our July 2013 report provides more information on DHS’s actions to improve its collection and use of biographic entry and exit data. In 2011, DHS directed S&T, in coordination with other DHS component agencies, to research long-term options for biometric air exit. In May 2012, DHS reported internally on the results of S&T’s analysis of previous air exit pilot programs and assessment of available technologies, and the report made recommendations to support the planning and development In that report, DHS concluded that the of a biometric air exit capability.building blocks to implement an effective biometric air exit system were available. In addition, DHS’s report stated that new traveler facilitation tools and technologies—for example, online check-in, self-service, and paperless technology—could support more cost-effective ways to screen travelers, and that these improvements should be leveraged when developing plans for biometric air exit. However, DHS officials stated that there may be challenges to leveraging new technologies to the extent that U.S. airports and airlines rely on older, proprietary systems that may be difficult to update to incorporate new technologies. Furthermore, DHS reported in May 2012 that significant questions remained regarding (1) the effectiveness of current biographic air exit processes and the error rates in collecting or matching data, (2) methods of cost-effectively integrating biometrics into the air departure processes (e.g., collecting biometric scans as passengers enter the jetway to board a plane), (3) the additional value biometric air exit would provide compared with the current biographic air exit process, and (4) the overall value and cost of a biometric air exit capability. The report included nine recommendations to help inform DHS’s planning for biometric air exit, such as directing DHS to develop explicit goals and objectives for biometric air exit and an evaluation framework that would, among other things, assess the value of collecting biometric data in addition to biographic data and determine whether biometric air exit is economically justified. DHS reported in May 2012 that it planned to take steps to address these recommendations by May 2014; however, as we reported in July 2013, according to DHS Office of Policy and S&T officials, the department does not expect to fully address these recommendations by then. In particular, DHS officials stated that it has been difficult coordinating with airlines and airports, which have expressed reluctance about biometric air exit because of concerns over its effect on operations and potential costs. To address these concerns, DHS is conducting outreach and soliciting information from airlines and airports regarding their operations. In addition, DHS officials stated that the department’s efforts to date have been hindered by insufficient funding. In its fiscal year 2014 budget request for S&T, DHS requested funding for a joint S&T-CBP Air Entry/Exit Re-Engineering Apex project. Apex projects are crosscutting, multidisciplinary efforts requested by DHS components that are high- priority projects intended to solve problems of strategic operational importance. According to DHS’s fiscal year 2014 budget justification, the Air Entry/Exit Re-Engineering Apex project will develop tools to model and simulate air entry and exit operational processes. Using these tools, DHS intends to develop, test, pilot, and evaluate candidate solutions. As of April 2013, DHS Policy and S&T officials stated that they expect to finalize goals and objectives for a biometric air exit system in the near future and are making plans for future scenario-based testing. Although DHS’s May 2012 report stated that DHS would take steps to address the report’s recommendations by May 2014, DHS officials told us that the department’s current goal is to develop information about options for biometric air exit and to report to Congress in time for the fiscal year 2016 budget cycle regarding (1) the additional benefits that a biometric air exit system provides beyond an enhanced biographic exit system and (2) costs associated with biometric air exit. However, as we reported in July 2013, DHS has not yet developed an evaluation framework, as recommended in its May 2012 report, to determine how the department will evaluate the benefits and costs of a biometric air exit system and compare it with a biographic exit system. According to DHS officials, the department needs to finalize goals and objectives for biometric air exit before it can develop such a framework, and in April 2013 these officials told us that the department plans to finalize these elements in the near future. However, DHS does not have time frames for when it will subsequently be able to develop and implement an evaluation framework to support the assessment it plans to provide to Congress. According to A Guide to the Project Management Body of Knowledge, which provides standards for project managers, specific goals and objectives should be conceptualized, defined, and documented in the planning process, along with the appropriate steps, time frames, and milestones needed to achieve those results. In fall 2012, DHS developed a high-level plan for its biometric air exit efforts, which it updated in May 2013, but this plan does not clearly identify the tasks needed to develop and implement an evaluation framework. For example, the plan does not include a step for developing the methodology for comparing the costs and benefits of biometric data against those for collecting biographic data, as recommended in DHS’s May 2012 report. Furthermore, the time frames in this plan are not accurate as of June 2013 because DHS is behind schedule on some of the tasks and has not updated the time frames in the plan accordingly. For example, DHS had planned to begin scenario-based testing for biometric air exit options in August 2013; however, according to DHS officials, the department now plans to begin such testing in early 2014. A senior official from DHS’s Office of Policy told us that DHS has not kept the plan up to date because of the transition of responsibilities within DHS; specifically, in March 2013, pursuant to the explanatory statement for DHS’s 2013 appropriation, DHS established an office within CBP that is responsible for coordinating DHS’s entry and exit policies and operations.process as of June 2013, and CBP told us that it planned to establish an integrated project team in July 2013 that will be responsible for more detailed planning for the department’s biometric air exit efforts. DHS Policy and S&T officials agreed that setting time frames and milestones is important to ensure timely development and implementation of the evaluation framework in accordance with DHS’s May 2012 recommendations. According to DHS officials, implementation of a biometric air exit system will depend on the results of discussions between the department and Congress after the department provides this assessment of options for biometric air exit. In summary, we concluded in our July 2013 report that without robust planning that includes time frames and milestones to develop and implement an evaluation framework for this assessment, DHS lacks reasonable assurance that it will be able to provide this assessment to Congress for the fiscal year 2016 budget cycle as planned. Furthermore, any delays in providing this information to Congress could further affect possible implementation of a biometric exit system to address statutory requirements. Therefore, we recommended that the Secretary of Homeland Security establish time frames and milestones for developing and implementing an evaluation framework to be used in conducting the department’s assessment of biometric exit options. DHS concurred with this recommendation and indicated that its component agencies plan to finalize the goals and objectives for biometric air exit by January 31, 2014, and that these goals and objectives will be used in the development of an evaluation framework that DHS expects to have completed by June 30, 2014. Chairman Miller, Ranking Member Jackson Lee, and members of the subcommittee, this completes my prepared statement. I would be happy to respond to any questions you may have at this time. For information about this statement, please contact Rebecca Gambler, Director, Homeland Security and Justice, at (202) 512-8777 or gamblerr@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals making key contributions include Kathryn Bernet, Assistant Director; Frances A. Cook; Alana Finley; and Ashley D. Vaughan. 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This testimony discusses the status of the Department of Homeland Security's (DHS) efforts to implement a biometric exit system. Beginning in 1996, federal law has required the implementation of an entry and exit data system to track foreign nationals entering and leaving the United States. The Intelligence Reform and Terrorism Prevention Act of 2004 required the Secretary of Homeland Security to develop a plan to accelerate implementation of a biometric entry and exit data system that matches available information provided by foreign nationals upon their arrival in and departure from the United States. In 2003, DHS initiated the U.S. Visitor and Immigrant Status Indicator Technology (US-VISIT) program to develop a system to collect biographic data (such as name and date of birth) and biometric data (such as fingerprints) from foreign nationals at U.S. ports of entry. Since 2004, DHS has tracked foreign nationals' entries into the United States as part of an effort to comply with legislative requirements, and since December 2006, a biometric entry capability has been fully operational at all air, sea, and land ports of entry. However, GAO has identified a range of management challenges that DHS has faced in its effort to fully deploy a corresponding biometric exit capability to track foreign nationals when they depart the country. For example, in November 2009, GAO found that DHS had not adopted an integrated approach to scheduling, executing, and tracking the work that needed to be accomplished to deliver a biometric exit system. In these reports, GAO made recommendations intended to help ensure that a biometric exit capability was planned, designed, developed, and implemented in an effective and efficient manner. DHS generally agreed with our recommendations and has taken action to implement a number of them. Most recently, in July 2013, GAO reported on DHS's progress in developing and implementing a biometric exit system, as well as DHS's efforts to identify and address potential overstays--individuals who were admitted into the country legally on a temporary basis but then overstayed their authorized period of admission. This statement is based on GAO's July 2013 report and, like that report, discusses the extent to which DHS has made progress in developing and implementing a biometric exit system at air ports of entry, which is DHS's priority for a biometric exit capability. GAO concluded in its July 2013 report that without robust planning that includes time frames and milestones to develop and implement an evaluation framework for this assessment, DHS lacks reasonable assurance that it will be able to provide this assessment to Congress for the fiscal year 2016 budget cycle as planned. Furthermore, any delays in providing this information to Congress could further affect possible implementation of a biometric exit system to address statutory requirements. Therefore, GAO recommended that the Secretary of Homeland Security establish time frames and milestones for developing and implementing an evaluation framework to be used in conducting the department's assessment of biometric exit options. DHS concurred with this recommendation and indicated that its component agencies plan to finalize the goals and objectives for biometric air exit by January 31, 2014, and that these goals and objectives will be used in the development of an evaluation framework that DHS expects to have completed by June 30, 2014.

must not increase or decrease total Medicare payments. Physicians could, however, experience increases or decreases in their payments from Medicare, depending on the services and procedures they provide. HCFA published a notice of proposed rulemaking in the June 18, 1997, Federal Register describing its proposed revisions to physician practice expense payments. HCFA estimated that its revisions, had they been in effect in fiscal year 1997, would have reallocated $2 billion of the $18 billion of the practice expense component of the Medicare fee schedule that year. The revisions would generally increase Medicare payments to physician specialties that provide more office-based services while decreasing payments to physician specialties that provide primarily hospital-based services. The revisions could also affect physicians’ non-Medicare income, since many other health insurers use the Medicare fee schedule as the basis for their payments. Some physician groups argued that HCFA based its proposed revisions on invalid data and that the reallocations of Medicare payments would be too severe. Subsequently, the Balanced Budget Act of 1997 delayed implementation of the resource-based practice expense revisions until 1999 and required HCFA to publish a revised proposal by May 1, 1998. The act also required us to evaluate the June 1997 proposed revisions, including their potential impact on beneficiary access to care. HCFA faced significant challenges in revising the practice expense component of the fee schedule—perhaps more challenging than the task of estimating the physician work associated with each procedure. Practice expenses involve multiple items, such as the wages and salaries of receptionists, nurses, and technicians employed by the physician; the cost of office equipment such as examining tables, instruments, and diagnostic equipment; the cost of supplies such as face masks and wound dressings; and the cost of billing services and office space. Practice expenses are also expected to vary significantly. For example, a general practice physician in a solo practice may have different expenses than a physician in a group practice. For most physician practices, the total of supply, equipment, and nonphysician labor expenses is probably readily available. However, Medicare pays physicians by procedure, such as a skin biopsy; therefore, HCFA had to develop a way to estimate the portion of practice expenses associated with each procedure—information that is not readily available. representative sample of physician practices. However, the feasibility of completing such an enormous data collection task within reasonable time and cost constraints is doubtful, as evidenced by HCFA’s unsuccessful attempt to survey 5,000 practices. After considering this option and the limitations of survey data already gathered by other organizations, HCFA decided to use expert panels to estimate the relative resources associated with medical procedures and convened 15 specialty-specific clinical practice expense panels (CPEP). Each panel included 12 to 15 members; about half the members of each panel were physicians, and the remaining members were practice administrators and nonphysician clinicians such as nurses. HCFA provided national medical specialty societies an opportunity to nominate the panelists, and panel members represented over 60 specialties and subspecialties. Each panel was asked to estimate the practice expenses associated with selected procedure codes. Some codes, called “redundant codes,” were assigned to two or more CPEPs so that HCFA and its contractor could analyze differences in the estimates developed by the various panels. For example, HCFA included the repair of a disk in the lower back among the procedures reviewed by both the orthopedic and neurosurgery panels. We believe that HCFA’s use of expert panels is a reasonable method for estimating the direct labor and other direct practice expenses associated with medical services and procedures. We explored alternative primary data-gathering approaches, such as mailing out surveys, using existing survey data, and gathering data on-site, and we concluded that each of those approaches has practical limitations that preclude their use as reasonable alternatives to HCFA’s use of expert panels. Gathering data directly from a limited number of physician practices would, however, be a useful external validity check on HCFA’s proposed practice expense revisions and would also help HCFA identify refinements needed during phase-in of the fee schedule revisions. HCFA staff believed that each of the CPEPs developed reasonable relative rankings of their assigned procedure codes. However, they also believed that the CPEP estimates needed to be adjusted to convert them to a common scale, eliminate certain inappropriate expenses, and align the panels’ estimates with data on aggregate practice expenses. While we agree with the intent of these adjustments, we identified methodological weaknesses with some and a lack of supporting data with others. HCFA staff found that labor estimates varied across CPEPs for the same procedures and therefore used an adjustment process referred to as “linking” to convert the different labor estimates to a common scale. HCFA’s linking process used a statistical model to reconcile significant differences between various panels’ estimates for the same procedure (for example, hernia repair). HCFA used linking factors derived from its model to adjust CPEP’s estimates. HCFA’s linking model works best when the estimates from different CPEPs follow certain patterns; however, we found that, in some cases, the CPEP data deviated considerably from these patterns and that there are technical weaknesses in the model that raise questions about the linking factors HCFA used. HCFA applied two sets of edits to the direct expense data in order to eliminate inappropriate or unreasonable expenses: one based on policy considerations, the other to correct for certain estimates HCFA considered to be unreasonable. The most controversial policy edit concerned HCFA’s elimination of nearly all expenses related to physicians’ staff, primarily nurses, for work they do in hospitals. HCFA excluded these physician practice expenses from the panels’ estimates because, under current Medicare policy, those expenses are covered by payments to hospitals rather than to physicians. We believe that HCFA acted appropriately according to Medicare policy by excluding these expenses. However, shifts in medical practices affecting Medicare’s payments may have resulted in physicians absorbing these expenses. In a notice published in the October 1997 Federal Register, HCFA asked for specific data from physicians, hospitals, and others on this issue. After we completed our field work, HCFA received some limited information, which we have not reviewed. HCFA officials said that they will review that information to determine whether a change in their position is warranted. If additional data indicate that this practice occurs frequently, it would be appropriate for HCFA to determine whether Medicare reimbursements to hospitals and physicians warrant adjustment. HCFA also limited some administrative and clinical labor estimates that it believes are too high. Specifically, HCFA believes that (1) the administrative labor time estimates developed by the CPEPs for many diagnostic tests and minor procedures seemed excessive compared with the administrative labor time estimates for a midlevel office visit; and (2) the clinical labor time estimates for many procedures appeared to be excessive compared with the time physicians spend in performing the procedures. Therefore, HCFA capped the administrative labor time for several categories of services at the level of a midlevel office visit. Furthermore, with certain exceptions, HCFA capped nonphysician clinical labor at 1-1/2 times the number of minutes it takes a physician to perform a procedure. HCFA has not, however, conducted tests or studies that validate the appropriateness of these caps and thus cannot be assured that they are necessary or reasonable. Various physician groups have suggested that HCFA reclassify certain administrative labor activities as indirect expenses. Such a move could eliminate the need for limiting some of the expert panels’ administrative labor estimates, which some observers believe are less reliable than the other estimates they developed. HCFA officials said that they are considering this possibility. Finally, HCFA adjusted the CPEP data so that it was consistent in the aggregate with national practice expense data developed from the American Medical Association’s (AMA) Socioeconomic Monitoring System (SMS) survey—a process that it called “scaling.” HCFA found that the aggregate CPEP estimates for labor, supplies, and equipment each accounted for a different portion of total direct expenses than the SMS data did. For example, labor accounted for 73 percent of total direct expenses in the SMS survey data but only 60 percent of the total direct expenses in the CPEP data. To make the CPEP percentages mirror the SMS survey percentages, HCFA inflated the CPEPs’ labor expenses for each code by 21 percent and the medical supply expenses by 6 percent and deflated the CPEPs’ medical equipment expenses by 61 percent. that supports all or nearly all services provided by a practice, such as an examination table, HCFA assumed a utilization rate of 100 percent. Scaling provided HCFA with a cap on the total amount of practice expenses devoted to equipment that was not dependent upon the equipment rate assumptions HCFA used. While HCFA officials acknowledge that their equipment utilization rate assumptions are not based on actual data, they claim that the assumptions are not significant for most procedures since equipment typically represents only a small fraction of a procedure’s direct expenses. The AMA and other physician groups that we contacted have said, however, that HCFA’s estimates greatly overstate the utilization of most equipment, which results in underestimating equipment expenses used in developing new practice expense fees. HCFA agrees that the equipment utilization rates will affect each medical specialty differently, especially those with high equipment expenses, but HCFA staff have not tested the effects of different utilization rates on the various specialties. In a notice in the October 1997 Federal Register, HCFA asked for copies of any studies or other data showing actual utilization rates of equipment, by procedure code. This is consistent with the Balanced Budget Act of 1997 requirement that HCFA use actual data in setting equipment utilization rates. It is not clear whether beneficiary access to care will be adversely affected by Medicare’s new fee schedule payments for physician practice expenses. This will depend upon such factors as the magnitude of the Medicare payment reductions experienced by different medical specialties, other health insurers’ use of the fee schedule, and fees paid by other purchasers of physician services. 20 percent, and 11 percent, respectively, for these specialties once the new practice expense component of the fee schedule is fully implemented in 2002. Additionally, Medicare payments for surgical services were reduced by 10.4 percent beginning in 1998 as a result of provisions contained in the Balanced Budget Act. The combined impact of the proposed and prior changes on physicians’ incomes will affect some medical specialties more than others. Therefore, there is a continuing need to monitor indicators of beneficiary access to care, focusing on services and procedures with the greatest reductions in Medicare payments. Even though HCFA has made considerable progress developing new practice expense fees, much remains to be done before the new fee schedule payments are implemented starting in 1999. For example, HCFA has not collected actual data that would serve as a check on the panels’ data and as a test of its assumptions and adjustments. Furthermore, HCFA has done little in the way of conducting sensitivity analyses to determine which of its adjustments and assumptions have the greatest effects on the proposed fee schedule revisions. There is no need, however, for HCFA to abandon the work of the expert panels and start over using a different methodology; doing so would needlessly increase costs and further delay implementation of the fee schedule revisions. The budget neutrality requirement imposed by the Congress means that some physician groups would benefit from changes in Medicare’s payments for physician practice expenses to the detriment of other groups. As a result, considerable controversy has arisen within the medical community regarding HCFA’s proposed fee schedule revisions, and such controversy can be expected to continue following issuance of HCFA’s next notice of proposed rulemaking, which is due May 1, 1998. Similar controversy occurred when Medicare initially adopted a resource-based payment system for physician work in 1992. Since that time, however, medical community confidence in the physician work component of the fee schedule has increased. give physicians greater assurance that the revisions HCFA proposes are appropriate and sound. HCFA officials said that they would carefully review and consider each of our recommendations as they develop their rule. Mr. Chairman, this concludes my statement. I will be happy to answer your questions. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed the efforts of the Health Care Financing Administration (HCFA) to revise the practice expense component of Medicare's physician fee schedule. GAO noted that: (1) HCFA's general approach for collecting information on physicians' practice expenses was reasonable; (2) HCFA convened 15 panels of experts to identify the resources associated with several thousand services and procedures; (3) HCFA made various adjustments to the expert panels' data that were intended to: (a) convert the panels' estimates to a common scale; (b) eliminate expenses reimbursed to hospitals rather than to physicians; (c) reduce potentially excessive estimates; and (d) ensure consistency with aggregate survey data on practice expenses for equipment, supplies, and nonphysician labor; (4) while GAO agrees with the intent of these adjustments, GAO believes that some have methodological weaknesses, and other adjustments and assumptions lack supporting data; (5) HCFA has done little in the way of performing sensitivity analyses that would enable it to determine the impact of the various adjustments, methodologies, and assumptions, either individually or collectively; (6) such sensitivity analyses could help determine whether the effects of the adjustments and assumptions warrant additional, focused data gathering to determine their validity; (7) GAO believes this additional work should not, however, delay phase-in of the fee schedule revisions; (8) since implementation of the physician fee schedule in 1992, Medicare beneficiaries have generally experienced very good access to physician services; (9) the eventual impact of the new practice expense revisions on Medicare payments to physicians is unknown at this time, but they should be considered in the context of other changes in payments to physicians by Medicare and by other payers; (10) recent successes in health care cost control are partially the result of purchasers and health plans aggressively seeking discounts from providers; (11) how Medicare payments to physicians relate to those of other payers will determine whether the changes in Medicare payments to physicians reduce Medicare beneficiaries' access to physician services; and (12) this issue warrants continued monitoring, and possible Medicare fee schedule adjustments, as the revisions are phased in.

DOD’s MCRS-16, which was completed in February 2010, was to provide senior leaders with a detailed understanding of the range of mobility capabilities needed for possible future military operations and help leaders make investment decisions regarding mobility systems. The study was driven by strategy current at the time. The study scope included, among other things, the way changes in mobility systems affect the outcomes of major operations and an assessment of the associated risks. MCRS-16 had several objectives, including to determine capability shortfalls (gaps) and excessesmobility force structure, provide a risk assessment, and identify the capabilities and requirements to support national strategy. (overlaps) associated with programmed In order to assess mobility capabilities, DOD officials responsible for the MCRS-16 used three cases to evaluate a broad spectrum of military operations that could be used to inform decisions regarding future mobility capabilities. The three cases are described below: Case 1: U.S. forces conduct two nearly simultaneous large-scale land campaigns and at the same time respond to three nearly simultaneous homeland defense events. Case 2: U.S. forces conduct a major air/naval campaign concurrent with the response to a large asymmetricsignificant homeland defense event. campaign and respond to a Case 3: U.S. forces conduct a large land campaign against the backdrop of an ongoing long-term irregular warfare respond to three nearly simultaneous homeland defense events. Irregular warfare is a violent struggle among state and nonstate actors for legitimacy and influence over the relevant population(s). required, a potential shortfall would exist and there could be a risk that the mission might not be accomplished. If DOD had more aircraft than required, a potential excess could exist, and there could be risk that resources could be expended unnecessarily on a mobility capability. In January 2012, DOD issued Sustaining U.S. Global Leadership: Priorities for 21st Century Defense, which describes the projected security environment and the key military missions for which DOD will prepare. DOD may make force and program decisions in accordance with the strategic approach described in this guidance, which could differ from the guidance—the National Military Strategy—that was used by the MCRS-16 to determine requirements. The new strategic guidance is intended to help inform decisions regarding the size and shape of the force, recognizing that fiscal concerns are a national security issue. To support the new strategic guidance and remain within funding constraints, the Air Force has proposed changes concerning the retirement of aircraft in its airlift fleet. Specifically, in February 2012, the Air Force proposed to Retire the oldest 27 C-5 aircraft, thereby reducing the fleet to 275 strategic airlift aircraft—which, according to the Air Force, would consist of 223 C-17s and 52 C-5s. Retire the 65 oldest C-130 aircraft—the primary aircraft used in DOD’s intratheater airlift mission—thereby reducing the fleet to 318 C-130s. Retire or cancel procurement of all 38 planned C-27 aircraft, which were intended to meet time-critical Army missions. While the MCRS-16 included some useful information concerning air mobility systems, the report did not clearly meet two of its objectives because it did not provide decision makers with specific information concerning (1) shortfalls and excesses associated with the mobility force structure or (2) risks associated with shortfalls or excesses of its mobility capabilities. Moreover, the MCRS-16 generally did not make recommendations about air mobility capabilities. These weaknesses in the MCRS-16 raise questions about the ability of the study to provide decision makers with information needed to make programmatic decisions. In addition, DOD’s January 2012 strategic guidance could affect its air mobility requirements. I will first address the issues related to DOD’s MCRS-16, and then turn to a discussion of the new strategic guidance. The MCRS-16 did not meet its objective to identify shortfalls and excesses in most of its assessments of mobility systems. For each of the three cases of potential conflicts or natural disasters DOD used in the MCRS-16, the department identified the required capabilities for air mobility systems. However, the MCRS-16 stopped short of explicitly stating whether a shortfall or excess existed. Moreover, it did not make recommendations regarding the need for any changes to air mobility assets based on any shortfalls or excesses. Using DOD data from the MCRS-16, we were able to discern possible shortfalls or potential capacity that could be considered excess or used as an operational reserve even though the MCRS-16 report was ambiguous regarding whether actual shortfalls or excess capabilities existed (see figure). The C-27 Spartan is a mid-range, multifunctional aircraft. Its primary mission is to provide on-demand transport of time-sensitive, mission-critical supplies and key personnel to forward-deployed Army units, including those in remote and austere locations. Its mission also includes casualty evacuation, airdrop, troop transport, aerial sustainment, and homeland security. As shown in the figure, the MCRS-16 determined that in each case, there was unused strategic airlift capacity, but the study did not specifically state whether the unused capacity represented excesses or identify excesses by aircraft type. When an excess exists, decision makers need to know which aircraft and how many could be retired. Specifically, the MCRS-16 did not identify the required number of C-5s or excesses of C-5 aircraft; but at the time of our report, the Air Force stated its intention to seek the retirement of 22 C-5s, which it increased to 27 and proposed again in February 2012. Furthermore, the MCRS-16 did not identify the most combat-effective or the most cost-effective fleet of aircraft even though DOD had previously stated that the MCRS-16 would set the stage to address the cost-effectiveness of its strategic aircraft. Decision makers rely on studies such as the MCRS-16 so that they can make informed choices to address mobility shortfalls and excesses. In our December 2010 report, we recommended that DOD explicitly identify the shortfalls and excesses in the mobility systems that DOD analyzed for the MCRS-16 and provide this additional analysis to DOD and congressional decision makers. In commenting on our draft report, DOD disagreed with our recommendations, stating that the MCRS-16 explicitly identifies shortfalls and excesses in the mobility system. DOD identified strategic airlift as an example of an excess. While the MCRS-16 showed that there was unused capacity associated with strategic airlift, it was not clear from the study whether this unused capacity could serve as an operational reserve. If the study had clearly identified an excess in strategic lift capabilities, decision makers may have chosen to retire aircraft and reallocate resources to other priorities or to keep an operational reserve to militate against unforeseen events. Similarly, if the study had identified a shortfall in strategic lift capabilities, decision makers may have chosen to accept the operational risk or sought to address the shortfall by increasing capabilities. DOD has not taken action based on our recommendation, but we continue to believe that explicitly identifying the shortfalls and excesses in mobility systems is useful to decision makers in making programmatic decisions. The MCRS-16 also did not clearly achieve its study objective to provide Assessing risk related to shortfalls and excesses is risk assessments.important—the risk associated with shortfalls is that the mission might not be accomplished, while the risk associated with excesses is that resources may be expended unnecessarily on a mobility capability. However, the MCRS-16 did not include risk assessments of airlift systems. For example, the MCRS-16 showed potential excesses in strategic and intratheater aircraft but did not identify the risk associated with these potential excesses. Furthermore, the MCRS-16 identified a reduced intratheater airlift fleet (401 C-130s) in comparison with the previous fleet (a maximum of 674 C-130s), but it did not describe the level of risk associated with this reduced fleet size. Concerning air refueling, the MCRS-16 reported that airborne tanker demand exceeded tanker capacity by 20 percent in MCRS-16 case two but did not identify the risk associated with that potential shortfall. In our December 2010 report, we recommended that DOD provide a risk assessment for potential shortfalls and excesses and provide this additional analysis to department and congressional decision makers. DOD disagreed, stating that MCRS-16 included a risk assessment which links the ability of mobility systems to achieve warfighting objectives. Therefore, DOD has not taken action on this recommendation. While warfighting risk metrics can inform decision makers concerning overall mobility capabilities, decision makers would benefit from knowing the risk associated with particular mobility systems as they make force structure decisions. Quantifying the risk associated with specific mobility systems could help with decisions to allocate resources, enabling decision makers to address the most risk at the least cost. In January 2012, DOD issued new strategic guidance, Sustaining U.S. Global Leadership: Priorities for 21st Century Defense, that will help guide decisions regarding the size and shape of the force. The strategic guidance is to ensure that the military is agile, flexible, and ready for the full range of contingencies. However, the strategic guidance includes changes from previous strategy—for example, U.S. forces will no longer be sized to conduct large-scale, prolonged stability operations.past, DOD has translated strategic guidance into specific planning In the scenarios, which DOD has used in studies (such as the MCRS-16) to generate requirements that inform force structure decisions. Based on the new strategic guidance, the Air Force has proposed changes to the mobility air fleet, including the retirement or cancellation of procurement of 130 mobility aircraft. According to Air Force officials, the proposals ensure that the Air Force can deliver the capabilities required by the new strategic guidance and remain within funding levels. However, the Air Force’s February 2012 document that outlines its proposed aircraft retirements does not provide details of any analyses. Given the new strategic guidance—which articulates priorities for a 21st century defense—it is unclear the extent to which the requirements developed from the MCRS-16 are still relevant. In weighing the Air Force’s proposal, decision makers will require additional information concerning what types of potential military operations are envisioned by the strategic guidance and to what extent DOD has analyzed its planned force structure using cases that reflect the new strategic guidance. In conclusion, the MCRS-16 study did not fully provide congressional decision makers with a basis for understanding what mobility systems are needed to meet requirements, how many are needed, and what are the risks of having too many or not enough of each aircraft to meet defense strategy. While DOD disagreed with our recommendations, we continue to believe that the study missed opportunities to identify specific shortfalls and excesses and did not provide associated risk assessments. Further, the MCRS-16 study was completed more than 2 years ago using defense planning guidance in effect at that time. With DOD’s newly issued strategic guidance on defense priorities, the department’s potential scenarios may have changed. Decision makers would benefit from a clear understanding from DOD of the basis for the proposed aircraft retirements and DOD’s ability to execute its new strategic guidance with its planned air mobility force structure. Chairman Akin and Ranking Member McIntyre, and members of the subcommittee, this concludes my prepared statement. I am happy to answer any questions that you may have at this time. For further information regarding this testimony, please contact Cary Russell at (404) 679-1808 or russellc@gao.gov. In addition, contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals who made key contributions to this testimony are Alissa H. Czyz, Assistant Director, James P. Klein, Ronald La Due Lake, Richard B. Powelson, Michael C. Shaughnessy, Jennifer B. Spence, Amie M. Steele, Joseph J. Watkins, and Stephen K. Woods. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Over the past 30 years, the Department of Defense (DOD) has invested more than $140 billion in its airlift and tanker forces. In 2010, DOD published its Mobility Capabilities and Requirements Study 2016 (MCRS-16), which was intended to provide an understanding of the range of mobility capabilities needed for possible military operations. In January 2012, DOD issued new strategic guidance, Sustaining U.S. Global Leadership: Priorities for 21st Century Defense , affecting force structure decisions. This testimony addresses GAO’s previous findings on the MCRS-16 and air mobility issues to consider in light of DOD’s new strategic guidance. GAO’s December 2010 report on the MCRS-16 (GAO-11-82R) is based on analysis of DOD’s executive summary and classified report, and interviews with DOD officials. The Mobility Capabilities and Requirements Study 2016 (MCRS-16) provided some useful information concerning air mobility systems—such as intratheater airlift, strategic airlift, and air refueling—but several weaknesses in the study raised questions about its ability to fully inform decision makers. In particular, the MCRS-16 did not provide decision makers with recommendations concerning shortfalls and excesses in air mobility systems. In evaluating capabilities, the MCRS-16 used three cases that it developed of potential conflicts or natural disasters and identified the required capabilities for air mobility systems. Based on data in the MCRS-16, GAO was able to discern possible shortfalls or potential capacity that could be considered excess or an operational reserve, even though the MCRS-16 was ambiguous regarding whether actual shortfalls or excess capabilities exist. It also did not identify the risk associated with potential shortfalls or excesses. Identifying the risk associated with specific mobility systems could help with decisions to allocate resources. The Department of Defense (DOD) issued new strategic guidance in January 2012, which is intended to help guide decisions regarding the size and shape of the force. In the past, DOD has translated strategic guidance into specific planning scenarios, which it used in studies (such as the MCRS-16) to generate requirements that inform force structure decisions. Based on the new strategic guidance, the Air Force has proposed reducing its mobility air fleet by 130 aircraft, which would leave 593 mobility aircraft in the airlift fleet. According to Air Force officials, the proposals will enable the Air Force to deliver the airlift capabilities required to implement the new strategic guidance and remain within funding levels. However, the Air Force’s document that outlines its proposed aircraft retirements does not provide details of any analyses used to support the reductions. Given the new strategic guidance, it is unclear the extent to which the requirements developed from MCRS-16 are still relevant. In weighing the Air Force’s proposal, decision makers would benefit from a clear understanding from DOD of the basis for the proposed aircraft retirements and DOD’s ability to execute its new strategic guidance with its planned air mobility force structure. GAO previously recommended that DOD clearly identify shortfalls and excesses in the mobility force structure and the associated risks. DOD did not concur with the recommendations, stating that the MCRS-16 identified shortfalls and excesses and included a risk assessment. GAO disagreed, noting for example, that DOD’s MCRS-16 study did not explicitly identify excess aircraft and did not include mobility system risk assessments when potential shortfalls existed.

Mr. Chairman and Members of the Subcommittee: I am pleased to be here today to share our observations on the principal methodological similarities and differences of three reports on bankruptcy debtors’ ability to pay their debts. These reports endeavor to address an important public policy issue—whether some proportion of debtors who file for personal bankruptcy have sufficient income, after expenses, to pay a “substantial” portion of their debts. The three reports were issued by the Credit Research Center (Credit Center), Ernst & Young, and Creighton University/American Bankruptcy Institute (ABI). Last year we reported on our analyses of the Credit Center and Ernst & Young reports. It is important to emphasize that our review of the ABI study is still underway. Consequently, it is too early for us to discuss the results of our analysis of the ABI report. Our objective in reviewing each of these reports has been the same—to assess the strengths and limitations, if any, of the report’s assumptions and methodology for determining debtors’ ability to pay and the amount of debt that debtors could potentially repay. We have used the same criteria to review each report. year repayment plan would successfully complete the plans—an assumption that historical experience suggests is unlikely. However, the reports have some methodological differences, including different (1) groupings of the types of debts that could be repaid; (2) gross income thresholds used to identify those debtors whose repayment capacity was analyzed, (3) assumptions about debtors’ allowable living expenses, (4) treatment of student loans that debtors had categorized as unsecured priority debts; and (5) and assumptions about administrative expenses. The remainder of my statement discusses in greater detail the similarities and differences in the findings and methodologies of the three reports. A summary of these similarities and differences is found in attachment I. Debtors who file for personal bankruptcy usually file under chapter 7 or chapter 13 of the bankruptcy code. Generally, debtors who file under chapter 7 of the bankruptcy code seek a discharge of their eligible dischargeable debts. Debtors who file under chapter 7 may voluntarily reaffirm—that is, voluntarily agree to repay—any of their eligible dischargeable debts. Debtors who file under chapter 13 submit a repayment plan, which must be confirmed by the bankruptcy court, for paying all or a portion of their debts over a period not to exceed 3 years unless for cause the court approved a period not to exceed 5 years. Personal bankruptcy filings have set new records in each of the past 3 years, although there is little agreement on the causes for such high bankruptcy filings in a period of relatively low unemployment, low inflation, and steady economic growth. Nor is there agreement on (1) the number of debtors who seek relief through the bankruptcy process who have the ability to pay at least some of their debts and (2) the amount of debt such debtors could repay. Several bills have been introduced in the 105th and 106th Congresses that would implement some form of “needs-based” bankruptcy. Each of these bills includes provisions for determining when a debtor could be required to file under chapter 13, rather than chapter 7. Currently, the debtor generally determines whether to file under chapter 7 or 13. Generally, these bills would establish a “needs-based” test, whose specific provisions vary among the bills. H.R. 3150, the bill used in the Ernst & Young and ABI analyses, would require a debtor whose gross monthly income met a specified income threshold to file under chapter 13 if the debtor’s net monthly income after allowable expenses was more than $50 and would be sufficient to pay 20 percent of the debtor’s unsecured nonpriority debt over a 5-year period. Debtors who did not meet these criteria would be permitted to file under chapter 7. Under the bankruptcy code, a debtor’s debts may be grouped into three general categories for the purposes of determining creditor payment priority: (1) secured debts, for which the debtor has pledged collateral, such as home mortgage or automobile loans; (2) unsecured priority debt, such as child support, alimony, and certain taxes; and (3) unsecured nonpriority debt, such as credit card debts. In analyzing debtors’ ability to pay, the three reports have focused principally on the percentage of total unsecured nonpriority debt that debtors could potentially repay. The Credit Center, Ernst & Young, and ABI reports have each attempted to estimate (1) how many debtors who filed under chapter 7 may have had sufficient income, after expenses, to repay a “substantial” portion of their debts, and (2) what proportion of their debts could potentially be repaid. Each of the reports used to some degree data from the financial schedules that debtors file with their bankruptcy petitions. Although these schedules are the only source of the detailed data needed for an analysis of debtors’ repayment capacity, the data in the schedules are of unknown accuracy and reliability. There are no empirical studies of the accuracy and reliability of the data debtors’ report in their financial schedules, and the National Bankruptcy Review Commission’s report recommended that these schedules be randomly audited. schedules, would remain unchanged over the 5-year repayment period. Historically, only about one-third of chapter 13 debtors have successfully completed their repayment plans, suggesting that for two-thirds of debtors something changed between the time the plans were confirmed by the bankruptcy court and the time the actual repayment plan was to be successfully completed. The three reports focus on the potential debt that debtors could repay should more debtors be required to file under chapter 13. However, should the number of debtors who file under chapter 13 increase, there would also be additional costs for bankruptcy judges and administrative support requirements that would be borne by the government. This is because bankruptcy judges would be involved in debtor screening to a greater extent than they are now and chapter 13 cases require more judicial time than chapter 7 cases do. None of the reports estimated these additional costs, although the ABI report acknowledges that such additional costs could accompany means-testing of bankruptcy debtors. In addition, the Religious Liberty and Charitable Donation Protection Act of 1998 permits chapter 13 bankruptcy debtors to include certain charitable deductions of up to 15 percent of their annual gross income in their allowable living expenses. The implementation of this statute could affect the estimates in each of the three reports. The potential effect could be to reduce (1) the number of bankruptcy debtors who could be required under the “needs- based” tests to file under chapter 13 or (2) the amount of debt repaid to unsecured nonpriority creditors by those debtors who are required to file under chapter 13. The act was enacted after the Credit Center and Ernst & Young issued their reports. The ABI report noted the act could effect the results of debtor means-testing, but did not attempt to apply the act to its sample of debtors. The reports differed in the types of debts that they estimated debtors could repay, their sampling methods, the calendar period from which each report’s sample cases were selected, and the assumptions used to estimate debtors’ allowable living expenses and debt repayments. The ABI report classified student loans differently than the other two reports. We have not analyzed the impact these differences may have had on each report’s findings and conclusions. The Credit Center report estimated the percentage of chapter 7 debtors who could repay a percentage of their “nonhousing, nonpriority debt.” These debts included secured nonhousing debt and unsecured nonprority debt. The Credit Center estimated that 30 percent of the chapter 7 debtors in its sample could repay at least 21 percent of their nonhousing, nonpriority debts, after deducting from their gross monthly income monthly mortgage payments and monthly living expenses. The Ernst & Young and ABI reports estimated the proportion of debtors who had sufficient income, after living expenses, to repay over a 5-year repayment period: • all of their nonhousing secured debt, such as automobile loans (debtors’ payments on home mortgage debt were included in the debtors’ living expenses); • all of their secured priority debts, such as back taxes, alimony, and child support (child support and alimony payments were assumed to continue for the full 5-year payment period unless otherwise noted in the debtors’ financial schedules); and • at least 20 percent of their unsecured nonpriority debts. The Ernst & Young and ABI reports estimated that 15 percent and 3.6 percent, respectively, of the chapter 7 debtors in their individual samples met all of these criteria. chapter 7 case filings from calendar year 1995 in 7 judgmentally selected districts. The Credit Center and ABI reports have one district—Northern Georgia—in common. It is possible that there are differences in each sample’s debtor characteristics that could affect each report’s estimate of debtor repayment capacity. The differences could result from the different time periods and the different sampling methods for selecting districts and filers within each district. Such differences, should they exist, could have affected each report’s estimate of the percentage of chapter 7 debtors who could potentially repay a substantial portion of their debts and how much they could repay. Both the Credit Center and Ernst & Young reports assumed that debtors would incur no additional debt during the 5-year repayment period. The ABI report assumed that debtors could potentially incur expenses for major repairs or replacement of automobiles during the course of the 5- year repayment plan, but that they would incur no other additional debt. The Credit Center report was completed before H.R. 3150 was introduced, and its repayment capacity analysis was not based on any specific proposed legislation. The Credit Center report analyzed the repayment capacity of all the chapter 7 debtors in its sample, regardless of their annual gross income. The Ernst & Young and ABI report used the “needs-based” provisions of different versions of H.R. 3150 as the basis for their analysis of debtor repayment capacity. H.R. 3150 passed the House in June 1998. Under the provisions of H.R. 3150 as introduced and as it passed the House, debtors must pass three tests to be required to file under chapter 13: • debtors must have monthly gross income that exceeds a set percentage of the national median income for households of comparable size (debtors below this threshold are presumed to be eligible to file under chapter 7); • debtors must have income of more than $50 per month after allowable living expenses and payments on secured and unsecured priority debts; and, • debtors could repay at least 20 percent of their unsecured nonpriority debts over a 5-year period if they used this remaining income for such payments. passed by the House of Representatives. The principal effect of using the two different versions of H.R. 3150 was that each report used a different threshold of gross annual income to screen debtors for further repayment analysis. In the Ernst & Young analysis, debtors whose gross annual income was 75 percent or less of the national median income for a household of comparable size were deemed eligible for chapter 7. Debtors whose gross annual income was more than 75 percent of the national median household income were subject to further analysis of their repayment capacity. In the ABI report’s analysis, debtors whose gross annual income was at least 100 percent of the national median income for households of comparable were subject to further repayment analysis. The three reports used different estimates of debtors’ allowable living expenses. The Credit Center report established its own criteria for debtors’ living expenses. Basically, the Credit Center’s analysis used the debtor’s living expenses as reported on the debtor’s schedule of estimated monthly living expenses. The Ernst & Young and ABI reports used the Internal Revenue Service’s (IRS) Financial Collection Standards, as specified in H.R. 3150. However, Ernst & Young and ABI interpreted them somewhat differently. The principal difference was for transportation expenses. Ernst & Young did not include an automobile ownership allowance for debtors who leased cars or whose cars were debt-free. ABI included an ownership allowance for leased cars and for debtors with debt-free cars. The ABI report noted that this difference in allowable transportation expenses accounted for “a substantial part” of the difference between the ABI and Ernst & Young estimates of the percentage of chapter 7 debtors who could potentially repay at least 20 percent of their unsecured nonpriority debt. ABI also deducted from the debtors’ total unsecured priority debt the value of any student loans and added the value of these loans to debtors total unsecured nonpriority debt. To the extent this was done, it had the effect of freeing debtor income to pay unsecured nonpriority debt. Finally, the ABI report assumed that administrative expenses, such as the trustee fee, would consume about 5.6 percent of debtors’ nonhousing payments to creditors under a 5-year repayment plan. The Credit Center and Ernst & Young reports assumed that none of the debtors’ payments would be used for administrative expenses, but that 100 percent of debtors’ payments would be used to pay creditors. the number of debtors who would be required to file under chapter 13 and the amount of debt that such debtors could potentially repay. However, the assumptions and data used in these reports lead to different estimates of debtors’ repayment capacity and require the reader to use caution in interpreting and comparing the results of each report. The actual number of chapter 7 debtors who could repay at least a portion of their nonhousing debt could be more or less than the estimates in these studies. Similarly, the amount of debt these debtors could potentially repay could also be more or less than the reports estimated. We agree that there are likely some debtors who file for bankruptcy under chapter 7 who have the financial ability to repay at least a portion of their debt, and that those who are able to repay their debts should do so. But we believe that more research is needed to verify and refine the estimates of debtors’ repayment capacity to better inform policymakers. Mr. Chairman, this concludes my prepared statement. I would be pleased to answer any questions that you or other Members of the Subcommittee may have.

Pursuant to a congressional request, GAO discussed the principal methodological similarities and differences of three reports on bankruptcy debtors' ability to pay their debts. The three reports were issued by the Credit Research Center, Ernst & Young, and Creighton University/American Bankruptcy Institute (ABI). GAO noted that: (1) the Credit Center report estimated that 30 percent of the chapter 7 debtors in its sample could pay at least 21 percent of their nonhousing, nonpriority debt, after deducting their mortgage debt payments and living expenses (exclusive of debt payments); (2) Ernst & Young and ABI estimated that 15 percent and 3.6 percent, respectively, of the debtors in their individual samples had sufficient income, after deducting allowable living expenses, to pay all of their nonhousing secured debts, all of their unsecured priority debts, and at least 20 percent of their unsecured nonpriority debts; (3) the reports have some characteristics in common, such as the use of debtor-prepared income, expense and debt schedules, the assumption that the debtor's income would remain stable over a 5-year repayment period, and the assumption that all debtors who entered a 5-year repayment plan would successfully complete the plans--an assumption that historical experience suggests is unlikely; (4) however, the reports have some methodological differences, including different: (a) groupings of the types of debts that could be repaid; (b) gross income thresholds used to identify those debtors whose repayment capacity was analyzed; (c) assumptions about debtors' allowable living expenses; (d) treatment of student loans that debtors had categorized as unsecured priority debts; and (e) assumptions about administrative expenses; and (5) these methodological differences contributed to the reports' different estimates of debtors' repayment capacity.

The implications of the current lack of clarity with regard to the term “significant impact” and the discretion that agencies have to define it were clearly illustrated in a report that we prepared for the Senate Committee on Small Business 2 years ago. One part of our report focused on a proposed rule that EPA published in August 1999 that would, upon implementation, lower certain reporting thresholds for lead and lead compounds under the Toxics Release Inventory program from as high as 25,000 pounds to 10 pounds. At the time, EPA said that the total cost of the rule in the first year of implementation would be about $116 million. The agency estimated that approximately 5,600 small businesses would be affected by the rule, and that the first-year costs of the rule for each of these small businesses would be from $5,200 to $7,500. However, EPA certified that the rule would not have a significant impact, and therefore did not trigger certain analytical and procedural requirements in the RFA. EPA’ determination that the proposed lead rule would not have a significant impact on small entities was not unique. Its four major program offices certified about 78 percent of the substantive proposed rules that they published in the 2 ½ years before SBREFA took effect in 1996, but certified 96 percent of the proposed rules published in the 2 ½ years after the act’s implementation. In fact, two of the program offices—the Office of Prevention, Pesticides and Toxic Substances and the Office of Solid Waste—certified all 47 of their proposed rules in this post-SBREFA period as not having a significant impact. The Office of Air and Radiation certified 97 percent of its proposed rules during this period, and the Office of Water certified 88 percent. EPA officials told us that the increased rate of certification after SBREFA’s implementation was caused by a change in the agency’s RFA guidance on what constituted a significant impact. Prior to SBREFA, EPA’s policy was to prepare a regulatory flexibility analysis for any rule that the agency expected to have any impact on any small entities. The officials said that this guidance was changed because the SBREFA requirement to convene an advocacy review panel for any proposed rule that was not certified made the continuation of the agency’s more inclusive RFA policy too costly and impractical. In other words, EPA indicated that SBREFA—the statute that Congress enacted to strengthen the RFA— caused the agency to use the discretion permitted in the RFA and conduct fewer regulatory flexibility analyses. EPA’s current guidance on how the RFA should be implemented includes numerical guidelines that establish what appears to be a high threshold for what constitutes a significant impact. Under those guidelines, an EPA rule could theoretically impose $10,000 in compliance costs on 10,000 small businesses, but the guidelines indicate that the agency can presume that the rule does not trigger the requirements of the RFA as long as those costs do not represent at least 1 percent of the affected businesses’ annual revenues. The guidance does not take into account the profit margins of the businesses involved or the cumulative impact of the agency’s rules on small businesses—even within a particular subject area like the Toxics Release Inventory. We have issued several other reports in recent years on the implementation of the RFA and SBREFA that, in combination, illustrate both the promise and the problems associated with the statutes. For example, in 1991, we examined the implementation of the RFA with regard to small governments and concluded that each of the four federal agencies that we reviewed had a different interpretation of key RFA provisions. We said that the act allowed agencies to interpret when they believed their proposed regulations affected small government, and recommended that Congress consider amending the RFA to require the Small Business Administration (SBA) to develop criteria regarding whether and how to conduct the required analyses. In 1994, we examined 12 years of annual reports prepared by the SBA Chief Counsel for Advocacy and said the reports indicated variable compliance with the RFA—a conclusion that the Office of Advocacy also reached in its 20-year report on the RFA. SBA repeatedly characterized some agencies as satisfying the act’s requirements, but other agencies were consistently viewed as recalcitrant. Other agencies’ performance reportedly varied over time or varied by subagency. We said that one reason for agencies’ lack of compliance with the RFA’s requirements was that the act did not expressly authorize SBA to interpret key provisions in the statute and did not require SBA to develop criteria for agencies to follow in reviewing their rules. We said that if Congress wanted to strengthen the implementation of the RFA, it should consider amending the act to (1) provide SBA with authority and responsibility to interpret the RFA’s provisions and (2) require SBA, in consultation with the Office of Management and Budget (OMB), to develop criteria as to whether and how federal agencies should conduct RFA analyses. In our 1998 report on the implementation of the small business advocacy review panel requirements in SBREFA, we said that the lack of clarity regarding whether EPA should have convened panels for two of its proposed rules was traceable to the lack of agreed-upon governmentwide criteria as to whether a rule has a significant impact. Nevertheless, we said that the panels that had been convened were generally well received by both the agencies and the small business representatives. We also said that if Congress wished to clarify and strengthen the implementation of the RFA and SBREFA, it should consider (1) providing SBA or another entity with clearer authority and responsibility to interpret the RFA’s provisions and (2) requiring SBA or some other entity to develop criteria defining a “significant economic impact on a substantial number of small entities.” In 1999, we noted a similar lack of clarity regarding the RFA’s requirement that agencies review their existing rules that have a significant impact within 10 years of their promulgation. We said that if Congress is concerned that this section of the RFA has been subject to varying interpretations, it may wish to clarify those provisions. We also recommended that OMB take certain actions to improve the administration of these review requirements, some of which have been implemented. Last year we issued two reports on the implementation of SBREFA. One report examined section 223 of the act, which required federal agencies to establish a policy for the reduction and/or waiver of civil penalties on small entities. All of the agencies’ penalty relief policies that we reviewed were within the discretion that Congress provided, but the policies varied considerably. Some of the policies covered only a portion of the agencies’ civil penalty enforcement actions, and some provided small entities with no greater penalty relief than large entities. The agencies also varied in how key terms such as “small entities” and “penalty reduction” were defined. We said that if Congress wanted to strengthen section 223 of SBREFA it should amend the act to require that agencies’ policies cover all of the agencies civil penalty enforcement actions and provide small entities with more penalty relief than other similarly situated entities. Also, to facilitate congressional oversight, we suggested that Congress require agencies to maintain data on their civil penalty relief efforts. The other report that we issued on SBREFA last year examined the requirement in section 212 that agencies publish small entity compliance guides for any rule that requires a final regulatory flexibility analysis under the RFA. We concluded that section 212 did not have much of an impact on the agencies that we examined, and its implementation also varied across and sometimes within the agencies. Some of the section’s ineffectiveness and inconsistency is traceable to the definitional problems in the RFA that I discussed previously. Therefore, if an agency concluded that a rule imposing thousands of dollars of costs on thousands of small entities did not trigger the requirements of the RFA, section 212 did not require the agency to prepare a compliance guide. Other problems were traceable to the discretion provided in section 212 itself. Under the statute, agencies can designate a previously published document as its small entity compliance guide, or develop and publish a guide with no input from small entities years after the rule takes effect. We again recommended that Congress take action to clarify what constitutes a “significant economic impact” and a “substantial number of small entities,” and also suggested changes to section 212 to make its implementation more consistent and effective. Two years ago we convened a meeting at GAO on the rule review provision of the RFA, focusing on why the required reviews were not being conducted. Attending that meeting were representatives from 12 agencies that appeared to issue rules with an impact on small entities, representatives from relevant oversight organizations (e.g., OMB and SBA’s Office of Advocacy), and congressional staff from the House and Senate committees on small business. The meeting revealed significant differences of opinion regarding key terms in the statute. For example, some agencies did not consider their rules to have a significant impact because they believed the underlying statutes, not the agency-developed regulations, caused the effect on small entities. There was also confusion regarding whether the agencies were supposed to review rules that had a significant impact on small entities at the time the rules were first published in the Federal Register or those that currently have such an impact. It was not even clear what should be considered a “rule” under the RFA’s rule review requirements—the entire section of the Code of Federal Regulations that was affected by the rule, or just the part of the existing rule that was being amended. By the end of the meeting it was clear that, as one congressional staff member said, “determining compliance with (the RFA) is less obvious than we believed before.” Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions.

The Regulatory Flexibility Act of 1980 (RFA) requires agencies to prepare an initial and a final regulatory flexibility analysis. The Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) seeks to strengthen RFA protections for small entities, and some of the act's requirements are built on "significant impact." GAO has reviewed the implementation of RFA and SBREFA several times in recent years, with topics ranging from specific provisions in each statute to the overall implementation of RFA. Although both of these reforms have clearly affected how federal agencies regulate, GAO believes that their full promise has not been realized, and key questions about RFA remain unanswered. These questions lie at the heart of RFA and SBREFA, and their answers can have a substantive effect on the amount of regulatory relief provided through those statutes. Because Congress did not answer these questions when the statutes were enacted, agencies have had to develop their own answers, and those answers differ.

We defined the financial services industry to include the following sectors: depository credit institutions, which include commercial banks, thrifts (savings and loan associations and savings banks), and credit unions; holdings and trusts, which include investment trusts, investment companies, and holding companies; nondepository credit institutions, which extend credit in the form of loans and include federally sponsored credit agencies, personal credit institutions, and mortgage bankers and brokers; the securities sector, which is made up of a variety of firms and organizations (e.g., broker-dealers) that bring together buyers and sellers of securities and commodities, manage investments, and offer financial advice; and the insurance sector, including carriers and insurance agents that provide protection against financial risks to policyholders in exchange for the payment of premiums. The financial services industry is a major source of employment in the United States. EEO-1 data showed that financial services firms we reviewed for this work, which have 100 or more staff, employed over 3 million people in 2008. Moreover, according to the U.S. Bureau of Labor Statistics, employment in the financial services industry was expected to grow by 5 percent from 2008 to 2018. Employment in the credit intermediation and related activities industry, which includes banks, is expected to account for 42 percent of all new jobs within the finance and insurance sector. As discussed in our 2006 report, overall diversity in management-level positions did not change substantially from 1993 through 2004. Specifically, figure 1 shows that diversity in senior positions increased from 11.1 percent to 15.5 percent during that period. Regarding the change within specific groups, African-Americans increased their representation from 5.6 percent to 6.6 percent, Asians from 2.5 percent to 4.5 percent, Hispanics from 2.8 percent to 4.0 percent, and American Indians from 0.2 to 0.3 percent. Management-level representation by white women was largely unchanged at slightly more than one-third during the period, while representation by white men declined from 52.2 percent to 47.2 percent. Revised EEO-1 data for the period 2005 through 2008 show an increase in minority representation in management positions from 15.5 percent to 17.4 percent (fig. 2). This increase was largely driven by the growing representation of Asians in management positions—an increase of nearly a full percentage point from 4.7 percent to 5.5 percent during the period. Meanwhile, African-American representation remained stable at about 6.3 percent from 2005 through 2008, while Hispanic representation increased by half of a percentage point from 4.3 to 4.8 percent. Management-level representation by white women and white men both decreased by about one percentage point from 2005 through 2008. However, before 2008 EEO-1 data generally overstated representation levels for minorities and white women in the most senior-level positions, such as chief executive officers of large investment firms or commercial banks, because the category that captured these positions—”officials and managers”—covered all management positions. Thus, this category included lower-level positions (e.g., assistant manager of a small bank branch) that may have a higher representation of minorities and women. Recognizing this limitation, starting in 2007 EEOC revised its data collection form for employers to divide the “officials and managers” category into two subcategories: “executive/senior-level officers and managers” and “first/midlevel officials.” EEOC’s revised data, as reported in 2008, indicate that minorities accounted for 10 percent of senior positions in the financial services industry. As I discussed previously, the percentage in the broader data category was 17.4 percent. Moreover, as shown in figure 3, white men accounted for approximately 64 percent of senior-level management positions. In contrast, African Americans held 2.8 percent of such senior management positions, while Hispanics held 3.0 percent and Asians 3.5 percent. Officials from the firms that we contacted for our previous work said that their top leadership was committed to implementing workforce diversity initiatives but noted that making such initiatives work was challenging. In particular, the officials cited ongoing difficulties in recruiting and retaining minority candidates and in gaining employees’ “buy-in” for diversity initiatives, especially at the middle management level. Some firms noted that they had stepped up efforts to help ensure a diverse workforce. However, the recent financial crisis has raised questions about their ongoing commitment to initiatives and programs that are designed to promote workforce diversity. Minorities’ rapid growth as a percentage of the overall U.S. population, as well as increased global competition, convinced some financial services firms that workforce diversity was a critical business strategy. Since the mid-1990s, some financial services firms have implemented a variety of initiatives designed to recruit and retain minority and women candidates to fill key positions. Officials from several banks said that they had developed scholarship and internship programs to encourage minority students to consider careers in banking. Some firms and trade organizations had also developed partnerships with groups that represent minority professionals and with local communities to recruit candidates through events such as conferences and career fairs. To help retain minorities and women, firms have established employee networks, mentoring programs, diversity training, and leadership and career development programs. Industry studies have noted, and officials from some financial services firms we contacted confirmed, that senior managers were involved in diversity initiatives. Some of these officials also said that this level of involvement was critical to success of a program. For example, according to an official from an investment bank, the head of the firm meets with all minority and female senior executives to discuss their career development. Officials from a few commercial banks said that the banks had established diversity “councils” of senior leaders to set the vision, strategy, and direction of diversity initiatives. A 2007 industry trade group study and some officials also noted that some companies were linking managers’ compensation to their progress in hiring, promoting, and retaining minority and women employees. However, the study found that most companies reported that they still did not offer managers financial rewards for improving diversity performance. This study also found that firms, overall, have significantly increased accountability for driving diversity results. For example, more firms reported that they were holding managers accountable for improving diversity. Performance reviews and management-by-objectives were the top two methods for measuring managers’ diversity performance. Finally, firms whose representation of women and minorities was above the median for the survey group were considerably more likely to use certain diversity management strategies and practices. A few firms had also developed performance indicators to measure progress in achieving diversity goals. These indicators include workforce representation, turnover, promotion of minority and women employees, and employee satisfaction survey responses. Officials from several financial services firms stated that measuring the results of diversity efforts over time was critical to the credibility of the initiatives and to justifying the investment in the resources such initiatives demanded. While financial services firms and trade groups we contacted had launched diversity initiatives, officials from these organizations and other information suggested that several challenges may have limited the success of their efforts. These challenges include the following: Recruiting minority and women candidates for management development programs. Available data on minority students enrolled in Master of Business Administration (MBA) programs suggest that the pool of minorities, a source that may feed the “pipeline” for management-level positions within the financial services industry and other industries is a limiting factor. In 2000, minorities accounted for 19 percent of all students enrolled in MBA programs in accredited U.S. schools; in 2006, that student population had risen to 25 percent. Financial services firms compete for minorities in this pool not only with one another but also with firms from other industries. Fully leveraging the “internal” pipeline of minority and women employees for management-level positions. As shown in figure 4, there are job categories within the financial services industry that generally have more overall workforce diversity than the “Executive/Senior Level Officials & Managers” category, particularly among minorities. For example, minorities held almost 25 percent of “professional” positions in the industry in 2008, compared with 10 percent of “executive/senior level officials & managers” positions. According to a 2006 EEOC report, the professional category represented a possible pipeline of available management-level candidates. The EEOC report stated that the chances of minorities and women (white and minority combined) advancing from the professional category into management-level positions were lower than they were for white males. Retaining minority and women candidates that are hired for key management positions. Many industry officials said that financial services firms lack a critical mass of minority men and women, particularly in senior-level positions, to serve as role models. Without a critical mass, the officials said that minority or women employees might lack the personal connections and access to informal networks that are often necessary to navigate an organization’s culture and advance their careers. For example, an official from a commercial bank we contacted said he learned from staff interviews that African-Americans believed that they were not considered for promotion as often as others partly because they were excluded from informal employee networks needed for promotion or to promote advancement. Achieving the “buy-in” of key employees, such as middle managers. Middle managers are particularly important to the success of diversity initiatives because they are often responsible for implementing key aspects of such initiatives and for explaining them to other employees. However, some financial services industry officials said that middle managers may be focused on other aspects of their responsibilities, such as meeting financial performance targets, rather than the importance of implementing the organization’s diversity initiatives. Additionally, the officials said that implementing diversity initiatives represented a considerable cultural and organizational change for many middle managers and employees at all levels. An official from an investment bank told us that the bank had been reaching out to middle managers who oversaw minority and women employees by, for example, instituting an “inclusive manager program.” In closing, with the implementation of a variety of diversity initiatives over the past 15 years, diversity at the management level in the financial services industry has improved but not changed substantially. Further, EEOC’s new EEO-1 data provide a clearer view of diversity within senior executive ranks, showing that diversity is lower than the overall industry management diversity statistics had indicated. Initiatives to promote management diversity at all levels within financial services firms face several key challenges, such as recruiting and retaining candidates and achieving the “buy-in” of middle managers. The impact of the recent financial crisis on diversity also warrants ongoing scrutiny. Without a sustained commitment to overcoming these challenges, management diversity in the financial services industry may continue to remain largely unchanged over time. Mr. Chairman and Madam Chairwoman, this concludes my prepared statement. I would be pleased to respond to any questions you or other members of the subcommittees may have. For further information about this testimony, please contact Orice M. Williams Brown on (202) 512-8678 or at williamso@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Wesley M. Phillips, Assistant Director; Emily Chalmers; William Chatlos; John Fisher; Simin Ho; Marc Molino; and Linda Rego. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

As the U.S. workforce has become increasingly diverse, many private and public sector organizations have recognized the importance of recruiting and retaining minority and women candidates for key positions. However, previous congressional hearings have raised concerns about a lack of diversity at the management level in the financial services industry, which provides services that are essential to the continued growth and economic recovery of the country. The recent financial crisis has renewed concerns about the financial services industry's commitment to workforce diversity. This testimony discusses findings from a June 2006 GAO report (GAO-06-617), February 2008 testimony (GAO-08-445T), and more recent work on diversity in the financial services industry. Specifically, GAO assesses (1) what the available data show about diversity at the management level from 1993 through 2008 and (2) steps that the industry has taken to promote workforce diversity and the challenges involved. To address the testimony's objectives, GAO analyzed data from the Equal Employment Opportunity Commission (EEOC); reviewed select studies; and interviewed officials from financial services firms, trade organizations, and organizations that represent minority and women professionals. To the extent possible, key statistics have been updated. EEOC data indicate that overall diversity at the management level in the financial services industry did not change substantially from 1993 through 2008, and diversity in senior positions remains limited. In general, EEOC data show that management-level representation by minority women and men increased from 11.1 percent to 17.4 percent during that period. However, these EEOC data overstated minority representation at senior management levels, because the category includes mid-level management positions, such as assistant branch manager, that may have greater minority representation. In 2008, EEOC reported revised data for senior-level positions only, which showed that minorities held 10 percent of such positions compared with 17.4 percent of all management positions. The revised data also indicate that white males held 64 percent of senior positions in 2008, African-Americans held 2.8 percent, Hispanics 3 percent, and Asians 3.5 percent. Financial services firms and trade groups have initiated programs to increase workforce diversity, but these initiatives face challenges. The programs include developing scholarships and internships, partnering with groups that represent minority professionals, and linking managers' compensation with their performance in promoting a diverse workforce. Some firms have developed indicators to measure progress in achieving workforce diversity. Industry officials said that among the challenges these initiatives faced were recruiting and retaining minority candidates, and gaining the "buy-in" of key employees such as the middle managers who are often responsible for implementing such programs. Without a sustained commitment to overcoming these challenges, diversity at the management level may continue to remain generally unchanged over time.

Based on state responses to our survey, we estimated that nearly 617,000, or about 89 percent of the approximately 693,000 regulated tanks, had been upgraded with the federally required equipment by the end of fiscal year 2000. EPA data showed that about 70 percent of the total number of tanks that its regions regulate on tribal lands had also been upgraded. With regard to the approximately 76,000 tanks that we estimated have not been upgraded, closed, or removed as required, 17 states and the 3 EPA regions we visited reported that they believed that most of these tanks were either empty or inactive. However, another five states reported that at least half of their non-upgraded tanks were still in use. EPA and states assume that the tanks are empty or inactive and therefore pose less risk. As a result, they may give them a lower priority for resources. However, states also reported that they generally did not discover tank leaks or contamination around tanks until the empty or inactive tanks were removed from the ground during replacement or closure. Consequently, unless EPA and the states address these non-compliant tanks in a more timely manner, they may be overlooking a potential source of soil and groundwater contamination. Even though most tanks have been upgraded, we estimated from our survey data that more than 200,000 of them, or about 29 percent, were not being properly operated and maintained, increasing the risk of leaks. The extent of operations and maintenance problems varied across the states, as figure 1 illustrates. The states reported a variety of operational and maintenance problems, such as operators turning off leak detection equipment. The states also reported that the majority of problems occurred at tanks owned by small, independent businesses; non-retail and commercial companies, such as cab companies; and local governments. The states attributed these problems to a lack of training for tank owners, installers, operators, removers, and inspectors. These smaller businesses and local government operations may find it more difficult to afford adequate training, especially given the high turnover rates among tank staff, or may give training a lower priority. Almost all of the states reported a need for additional resources to keep their own inspectors and program staff trained, and 41 states requested additional technical assistance from the federal government to provide such training. To date, EPA has provided states with a number of training sessions and helpful tools, such as operation and maintenance checklists and guidelines. One of EPA’s tank program initiatives is also intended to improve training and tank compliance with federal requirements, such as setting annual compliance targets with the states. At the time of our review, the Agency was just beginning to work out the details of how it will implement this initiative and had set up a working group of state and EPA representatives to begin work on compliance targets. According to EPA’s program managers, only physical inspections can confirm whether tanks have been upgraded and are being properly operated and maintained. However, only 19 states physically inspect all of their tanks at least once every 3 years—the minimum that EPA considers necessary for effective tank monitoring. Another 10 states inspect all tanks, but less frequently. The remaining 22 states do not inspect all tanks, but instead generally target inspections to potentially problematic tanks, such as those close to drinking water sources. In addition, not all of EPA’s own regions comply with the recommended rate. Two of the three regions that we visited inspected tanks located on tribal land every 3 years. Figure 2 illustrates the states’ reported inspection practices. According to our survey results, some states and EPA regions would need additional staff to conduct more frequent inspections. For example, under staffing levels at the time of our review, the inspectors in 11 states would each have to visit more than 300 facilities a year to cover all tanks at least once every 3 years, but EPA estimates that a qualified inspector can only visit at most 200 facilities a year. Moreover, because most states use their own employees to conduct inspections, state legislatures would need to provide them additional hiring authority and funding to acquire more inspectors. Officials in 40 states said that they would support a federal mandate requiring states to periodically inspect all tanks, in part because they expect that such a mandate would provide them needed leverage to obtain the requisite inspection staff and funding from their state legislatures. In addition to more frequent inspections, a number of states stated that they need additional enforcement tools to correct problem tanks. EPA’s program managers stated that good enforcement requires a variety of tools, including the ability to issue citations or fines. One of the most effective tools is the ability to prohibit suppliers from delivering fuel to stations with problem tanks. However, as figure 3 illustrates, 27 states reported that they did not have the authority to stop deliveries. In addition, EPA believes, and we agree, that the law governing the tank program does not give the Agency clear authority to regulate fuel suppliers and therefore prohibit their deliveries. Almost all of the states said they need additional enforcement resources and 27 need additional authority. Members of both an expert panel and an industry group, which EPA convened to help it assess the tank program, likewise saw the need for states to have more resources and more uniform and consistent enforcement across states, including the authority to prohibit fuel deliveries. They further noted that the fear of being shut down would provide owners and operators a greater incentive to comply with federal requirements. Under its tank initiatives, EPA has said that it will attempt to obtain state commitments to increase its inspection and enforcement activities, or it may supplement state activities in some cases. EPA’s regions have the opportunity, to some extent, to use the grants that they provide to the states for their tank programs as a means to encourage more inspections and better enforcement. However, the Agency does not want to limit state funding to the point where this further jeopardizes program implementation. The Congress may also wish to consider making more funds available to states to improve tank inspections and enforcement. For example, the Congress could increase the amount of funds it provides from the Leaking Underground Storage Tank trust fund, which the Congress established to specifically provide funds for cleaning up contamination from tanks. The Congress could then allow states to spend a portion of these funds on inspections and enforcement. It has considered taking this action in the past, and 40 states said that they would welcome such funding flexibility. In fiscal year 2000, EPA and the states confirmed a total of more than 14,500 leaks or releases from regulated tanks, although the Agency and many of the states could not verify whether the releases had occurred before or after the tanks had been upgraded. According to our survey, 14 states said that they had traced newly discovered leaks or releases that year to upgraded tanks, while another 17 states said they seldom or never detected such leaks. The remaining 20 states could not confirm whether or not their upgraded tanks leaked. EPA recognizes the need to collect better data to determine the extent and cause of leaks from upgraded tanks, the effectiveness of the current equipment, and if there is a need to strengthen existing equipment standards. The Agency has launched studies in several of its regions to obtain such data, but it may have trouble concluding whether leaks occurred after the upgrades. In a study of local tanks, researchers in Santa Clara County, California, concluded that upgraded tanks do not provide complete protection against leaks, and even properly operated and maintained tank monitoring systems cannot guarantee that leaks are detected. EPA, as one of its program initiatives, plans to undertake a nationwide effort to assess the adequacy of existing equipment requirements to prevent leaks and releases and if there is a need to strengthen these requirements, such as requiring double-walled tanks. The states and the industry and expert groups support EPA’s actions. In closing, the states and EPA cannot ensure that all regulated tanks have the required equipment to prevent health risks from fuel leaks, spills, and overfills or that tanks are safely operated and maintained. Many states are not inspecting all of their tanks to make sure that they do not leak, nor can they prohibit fuel from being delivered to problem tanks. EPA has the opportunity to help its regions and states correct these limitations through its tank initiatives, but it is difficult to determine whether the Agency’s proposed actions will be sufficient because it is just defining its implementation plans. The Congress also has the opportunity to help provide EPA and the states the additional inspection and enforcement authority and resources they need to improve tank compliance and safety. Therefore, to better ensure that underground storage tanks meet federal requirements to prevent contamination that poses health risks, we have recommended to the Administrator, EPA, that the Agency 1. work with the states to address the remaining non-upgraded tanks, such as reviewing available information to determine those that pose the greatest risks and setting up timetables to remove or close these tanks, 2. supplement the training support it has provided to date by having each region work with each of the states in its jurisdiction to determine specific training needs and tailored ways to meet them, 3. negotiate with each state to reach a minimum frequency for physical inspections of all its tanks, and 4. present to the Congress an estimate of the total additional resources the Agency and states need to conduct the training, inspection, and enforcement actions necessary to ensure tank compliance with federal requirements. In addition, the Congress may want to consider EPA’s estimate of resource needs and determine whether to increase the resources it provides for the program. For example, one way would be to increase the amount of funds it appropriates from the trust fund and allow states to spend a limited portion on training, inspection, and enforcement activities, as long as cleanups are not delayed. The Congress may also want to (1) authorize EPA to require physical inspections of all tanks on a periodic basis, (2) authorize EPA to prohibit fuel deliveries to tanks that do not comply with federal requirements, and (3) require that states have similar authority to prohibit fuel deliveries. For further information, please contact John Stephenson at (202) 512-3841. Individuals making key contributions to this testimony were Fran Featherston, Rich Johnson, Eileen Larence, Gerald Laudermilk, and Jonathan McMurray.

Contaminated soil or water resulting from leaks at underground storage tanks can pose serious health risks. In 1984, Congress created the Underground Storage Tank (UST) program to protect the public from potential leaks. Under the program, the Environmental Protection Agency required tank owners to install new leak detection equipment and new spill-, overfill-, and corrosion-prevention equipment. GAO found that about 1.5 million tanks have been permanently closed since the program was created, but more than half of the states do not inspect all of their tanks often enough to meet the minimum rate recommended by EPA--at least once every three years. States reported that even tanks with the required leak prevention and detection equipment continue to leak, although the full extent of the problem is unknown.

Our financial audits have found that IRS’ financial statement amounts for revenue, in total and by type of tax, were not derived from its revenue general ledger accounting system or its master files of detailed individual taxpayer records. The revenue accounting system does not contain detailed information by type of tax, such as individual income tax or corporate tax, and the master file cannot summarize the taxpayer information needed to support the amounts identified in the system. As a result, IRS relied without much success on alternative sources, such as Treasury schedules, to obtain the summary total by type of tax needed for its financial statement presentation. To substantiate the Treasury figures, our audits attempted to reconcile IRS’ master files—the only detailed records available of tax revenue collected—with Treasury records. For fiscal year 1994, for example, we found that IRS’ reported total of $1.3 trillion for revenue collections taken from Treasury schedules was $10.4 billion more than what was recorded in IRS’ master files. Because IRS was unable to satisfactorily explain, and we could not determine the reasons for this difference, the full magnitude of the discrepancy remains uncertain. In addition to the difference in total revenues collected, we also found large discrepancies between information in IRS’ master files and the Treasury data used for the various types of taxes reported in IRS’ financial statements. For fiscal year 1994, for example, some of the larger reported amounts in IRS’ financial statement for which IRS had insufficient support were $615 billion in individual taxes collected—this amount was $10.8 billion more than what was recorded in IRS’ master files; $433 billion in social insurance taxes collected—this amount was $5 billion less than what was recorded in IRS’ master files; and $148 billion in corporate income taxes—this amount was $6.6 billion more than what was recorded in IRS’ master files. Thus, IRS did not know and we could not determine if the reported amounts were correct. These discrepancies also further reduce our confidence in the accuracy of the amount of total revenues collected. Contributing to these discrepancies is a fundamental problem in the way tax payments are reported to IRS. IRS’ tax receipt, return, and refund processes are highlighted in figure 1. About 80 percent, or about $1.1 trillion, of total tax payments are made by businesses and typically include (1) taxes withheld from employees’ checks for income taxes, (2) Federal Insurance Compensation Act (FICA) collections, and (3) the employer’s matching share of FICA. IRS requires business taxpayers to make tax payments using federal tax deposit coupons, shown in figure 2. The payment coupons identify the type of tax return to which they relate, such as a Form 941, Quarterly Wage and Tax Return, but do not specifically identify either the type of taxes being paid or the individuals whose tax withholdings are being paid. For example, the payment coupon in figure 2 reports that the deposit relates to a Form 941 return, which can cover payments for employees’ tax withholding, FICA taxes, and employers’ FICA taxes. Since only the total dollars being deposited are indicated on the form, IRS knows that the entire amount relates to a Form 941 return but does not know how much of the deposit relates to the different kinds of taxes covered by that type of return. Consequently, at the time tax payments are made, IRS is not provided information on the ultimate recipient of the taxes collected. Furthermore, the type of tax being collected is not distinguished early in the collection stream. This creates a massive reconciliation process involving billions of transactions and subsequent tax return filings. For example, when an individual files a tax return, IRS initially accepts amounts reported as a legitimate record of a taxpayer’s income and taxes withheld. For IRS’ purposes, these amounts represent taxes paid because they cannot be readily verified to the taxes reported by an individual’s employer as having been paid. At the end of each year, IRS receives information on individual taxpayers’ earnings from the Social Security Administration. IRS compares the information from the Social Security Administration to the amounts reported by taxpayers with their tax returns. However, this matching process can take 2 and a half years or more to complete, making IRS’ efforts to identify noncompliant taxpayers extremely slow and significantly hindering IRS’ ability to collect amounts subsequently identified as owed from false or incorrectly reported amounts. Consistent with this process, IRS’ system is designed to identify only total receipts by type of return and not the entity which is to receive the funds collected, such as the General Fund at Treasury for employee income tax withholdings or the Social Security Trust Fund for FICA. Ideally, the system should contain summarized information on detailed taxpayer accounts, and such amounts should be readily and routinely reconciled to the detailed taxpayer records in IRS’ master files. Also, IRS has not yet established an adequate procedure to reconcile the revenue data that the system does capture with data recorded and reported by Treasury. Further, documentation describing what IRS’ financial management system is programmed to do is neither comprehensive nor up-to-date, which means that IRS does not have a complete picture of the financial system’s operations—a prerequisite to fixing the problems. Beginning with our audit of IRS’ fiscal year 1992 financial statements, we have made recommendations to correct weaknesses involving IRS’ revenue accounting system and processes. They include addressing limitations in the information submitted to IRS with tax payments by requiring that payments identify the type of taxes being collected; implementing procedures to complete reconciliations of revenue and refund amounts with amounts reported by the Treasury; and documenting IRS’ financial management system to identify and correct the limitations and weaknesses that hamper its ability to substantiate the revenue and refund amounts reported on its financial statements. With a contractor’s assistance, an IRS task force attempted to document IRS’ financial management system transaction flows. Because the contractor is not expected to complete this work until July 1996, it was not done in time to be useful in our fiscal year 1995 audit. Federal accounting standards provide new criteria for determining revenue, effective for fiscal year 1998. This will require IRS to account for the source and disposition of all taxes in a manner that enables accurate reporting of cash collections and accounts receivable and appropriate transfers of revenue to the various trust funds and the general fund. To achieve this, IRS’ accounting system will need to capture the flow of all revenue-related transactions from assessment to ultimate collection and disposition. We could not verify the validity of either the $113 billion of accounts receivable or the $46 billion of collectible accounts receivables that IRS reported on its fiscal year 1995 financial statements. Consequently, these financial statements cannot be relied on to accurately disclose the amount of taxes owed to the government or the portion of that amount which is collectible. This is not a new problem, as we first identified IRS’ accounts receivable accounting and reporting problems in fiscal year 1992 and again in each subsequent fiscal year’s financial audit. In our audit of IRS’ fiscal year 1992 financial statements, after performing a detailed analysis of IRS’ receivables as of June 30, 1991, we estimated that only $65 billion of about $105 billion in gross reported receivables that we reviewed was valid and that only $19 billion of the valid receivables was collectible. At the time, IRS had reported that $66 billion of the $105 billion was collectible. Subsequently, we helped IRS develop a statistical sampling method that, if properly applied, would allow it to reliably estimate and report valid and collectible accounts receivable on its financial statements. We evaluated and tested IRS’ use of the method as part of our succeeding financial audits and found that IRS made errors in carrying out the statistical sampling procedures, which rendered the sampling results unreliable. This year, for the first time, IRS tried, also without success, to specifically identify its accounts receivable. Reliable financial information on these amounts is important to IRS and the Congress for assessing the results of enforcement and collection efforts, measuring performance in meeting IRS’ mission and objectives, and allocating resources and staffing; reviewing the collectibility of accounts, determining trends in accounts receivable balances, and deliberating on the potential for increased collections and related budgetary needs; and assessing the effect of potential collections of accounts receivables in reducing the deficit. The importance of having credible financial information for these purposes is underscored by the magnitude of IRS’ inventory of uncollected assessments and by IRS’ problems in collecting tax receivables, which we have monitored since 1990 as part of our high-risk program. IRS’ reported inventory of uncollected assessments, which at September 30, 1995, was $200 billion, is composed of both compliance assessments, which are not yet but may become accounts receivable, and financial receivables, which are valid accounts receivable. In the case of compliance assessments, IRS records an assessment to a taxpayer’s account, but neither the taxpayer nor a court has agreed that the assessment is appropriate. Normally, IRS makes these assessments to encourage compliance with the tax laws. For example, when a taxpayer is identified by an IRS matching program as being delinquent in filing a return, IRS creates an assessment using the single filing status and standard deduction. This action is to encourage the taxpayer to file a tax return in the right amount. The taxpayer has an opportunity to refute an estimated assessment, and often does, because the amount may be overstated or may not apply. On the other hand, financial receivables arise when taxpayers agree to assessments or a court determines that an amount is owed. These receivables may also include cases in which IRS and a taxpayer agree, or a court determines, that the amount of a compliance assessment is due. Financial receivables can include other situations as well, such as when taxpayers file returns but do not pay the full amounts due or they are making payments against amounts due. Figure 3 shows IRS’ reported inventory of uncollected assessments for June 30, 1991, and each fiscal year from 1992 through 1995.

GAO discussed its financial audits of the Internal Revenue Service for fiscal years 1992 through 1995. GAO noted that: (1) IRS relied on alternative sources to obtain revenue totals by type of tax for its financial statements; (2) IRS financial statements include various discrepancies that cannot be explained because of weaknesses in IRS information and collection systems; (3) the validity of IRS accounts receivable and collectible accounts receivable can not be verified; (4) many uncollected compliance assessments and financial receivables are uncollectible; (5) IRS has been unable to accurately account and report its total inventory of accounts receivable; (6) while IRS has made some improvements in accounting and reporting on its operating costs, significant problems remain; (7) IRS can not confirm when and if goods and services were received; and (8) the accuracy of the IRS Fund Balance with Treasury accounts cannot be verified.

With the National and Community Service Trust Act of 1993 (P.L. 103-82), the Congress created the largest national and community service program since the Civilian Conservation Corps of the 1930s. AmeriCorps*USA allows participants to earn education awards to help pay for postsecondary education in exchange for performing community service that matches priorities established by the Corporation. Participants earn an education award of $4,725 for full-time service or half of that amount for part-time service. A minimum of 1,700 hours of service within a year is required to earn the full $4,725 award. The Corporation requires that programs devote some portion, but no more than 20 percent, of participants’ service hours to nondirect service activities, such as training or studying for the equivalent of a high school diploma. To earn a part-time award, a participant must perform 900 hours of community service within 2 years (or within 3 years in the case of participants who are full-time college students). Individuals can serve more than two terms; however, they can only receive two education awards. The awards, which are held in trust by the U.S. Treasury, are paid directly to qualified postsecondary institutions or student loan lenders and must be used within 7 years after service is completed. In addition to the education award, AmeriCorps*USA participants receive a living allowance stipend that is at least equal to, but no more than double, the average annual living allowance received by Volunteers in Service to America (VISTA) participants—about $7,640 for full-time participants in fiscal year 1994. Additional benefits include health insurance and child care assistance for participants who need them. Individuals can join a national service program before, during, or after postsecondary education. A participant must be a citizen, a national, or a lawful permanent resident of the United States. A participant must also be a high school graduate, agree to earn the equivalent of a high school diploma before receiving an education award, or be granted a waiver by the program. Selection of participants is not based on financial need. Corporation used about $149 million of its fiscal year 1994 appropriations to make about 300 grants to nonprofit organizations and federal, state, and local government agencies to operate AmeriCorps*USA programs. Grant recipients use grant funds to pay up to 85 percent of the cost of participants’ living allowances and benefits (up to 100 percent of child care expenses) and up to 75 percent of other program costs, including participant training, education, and uniforms; staff salaries, travel, transportation, supplies, and equipment; and program evaluation and administrative costs. Grants are based in part on the number of participants the program estimates it will enroll during the year. If participants leave the program during the year, the Corporation may either allow the program to redirect participant stipend and benefit funds to other program expenses or take back any unused portion of the grant. To ensure that federal Corporation dollars are used to leverage other resources for program support, grantees must also obtain support from non-Corporation sources to help pay for the program. This support, which can be cash or in-kind contributions, may come from other federal sources as well as state and local governments, and private sources. In-kind contributions include personnel to manage AmeriCorps*USA programs as well as to supervise and train participants; office facilities and supplies; and materials and equipment needed in the course of conducting national service projects. Consistent with AmeriCorps’s enacting legislation, some federal agencies received grants during the initial 2 program years to support AmeriCorps*USA participants who performed work furthering the agencies’ missions. Federal agency grantees could use their own resources in addition to the Corporation grant to integrate national service more fully into their mission work. the smallest share of resources, amounting to about 12 percent (or about $41 million). Most of the Corporation’s funding for AmeriCorps*USA projects went to providing operating grants and education awards. Of the Corporation’s funding, 61 percent financed operating grants. Slightly over one-quarter supported participants’ education awards, while the remainder went toward Corporation program management and administration. Most of the matching contributions AmeriCorps*USA programs received came from public as opposed to private sources. About 69 percent of all matching resources came from either a federal or a state or local government source, with the split between cash and in-kind contributions being about 43 percent (about $57 million) and 26 percent (about $34 million), respectively. The remaining 31 percent of matching resources were from private sources, with cash and in-kind contributions accounting for 17 percent (about $23 million) and 14 percent (about $18 million), respectively. In calculating resources available on a per-participant and per-service-hour basis (see table 1), we found that the average from all sources per AmeriCorps*USA participant was about $26,654 (excluding in-kind contributions from private sources). This amounted to about $16 per service hour or about $20 per direct service hour, assuming 20 percent of the 1,700 hours of total service was nondirect service time. These figures represent resources available for all program expenses and are not the equivalent of annual salaries or hourly wages for participants. National Service Programs: AmeriCorps*USA—First-Year Experience and Recent Program Initiatives Corporation for National and Community Service We calculated available resources per participant on a full-time-equivalent (FTE) basis. It is important not to equate our funding information with cost data. Because most AmeriCorps*USA programs were still implementing their first year of operations, actual cost could not be determined. Funding and in-kind contributions from sources other than the Corporation were reported to us in May 1995 as resources already received or those that program directors were certain of receiving by the end of their current operating year. Therefore, actual resource and expenditure levels could be higher or lower than indicated by the estimates reported to us. federal agency grantees had about $15,500 in cash and in-kind contributions available per participant from federal sources other than the Corporation. Non-Corporation federal funds accounted for about 50 percent of total resources available to federal grantees. Nonfederal AmeriCorps*USA grantees received resources of less than $800 per participant from non-Corporation federal sources, or about 3 percent of their total resources. The appendix contains more detailed program resource information by sponsoring agency. In its mission statement, the Corporation had identified several objectives that spanned a wide range of accomplishments, from very tangible results to those much harder to quantify. During our site visits, we observed local programs helping communities. AmeriCorps*USA has also sponsored an evaluation of its own that summarized results at a sample of programs during their first 5 months of operation and identified diverse achievements related to each service area. participants renovating inner-city housing, assisting teachers in elementary schools, maintaining and reestablishing native vegetation in a flood control area, analyzing neighborhood crime statistics to better target prevention measures, and developing a program in a community food bank for people with special dietary needs. AmeriCorps’s legislation identified renewing the spirit of community as an objective, and the program’s mission includes “strengthening the ties that bind us together as a people.” We observed several projects focused on rebuilding communities. For example, a multifamily house being renovated was formerly a congregating spot for drug dealers. Program officials believe that after completion, it will encourage other neighborhood improvements. Another team built a community farm market and renovated a municipal stadium, both of which a town official said will continue to provide economic and social benefits to the community. Another way to meet this objective was to have participants with diverse backgrounds working together. Participants of several programs we visited spanned a wide age range, from teenagers to retirees. Teams also showed diversity in educational, economic, and ethnic backgrounds. Participants said that a valuable aspect of the program was working with others with different backgrounds and benefiting from their strengths. Another of AmeriCorps*USA’s program objectives was to foster civic responsibility. We saw evidence of this at programs such as one where participants devoted half of each Friday to working on community service projects they devised and carried out independently. Participants at another program, in which they organized meetings to establish relationships between at-risk youth and elderly people, commented that this work had taught them how to organize programs, experience they believed would be helpful as they took on roles in their communities. Training periods included conflict resolution techniques and team-building skills. education or job training. At the sites we visited, participants indicated that the education award was an important part of their decision to participate in AmeriCorps*USA. Programs also supported participants in obtaining high school diplomas or the equivalent. According to Corporation regulations, a full-time participant who does not have a high school diploma or its equivalent generally must agree to earn one or the other before using the education award. In one program, a general equivalency diploma (GED) candidate was receiving classroom instruction and individual tutoring. She had recently passed the preliminary GED test after failing the GED test five times. After doing some extra preparation for the math portion, she will take the actual GED test again. A larger program that recruited at-risk youth, most of whom do not have high school diplomas, provided classroom instruction related to the service that participants performed, such as a construction-based math curriculum. Program officials said most of the participants are enrolled in high school equivalency courses and that at least five have already passed the GED test. We also saw programs that offer participants the chance to get postsecondary academic credit. One such program, affiliated with a private college, offered participants the option of pursuing an environmental studies curriculum through which they can earn up to six upper-level credits at a reduced tuition. Half of the participants have chosen to do so. A second program allowed participants to earn 36 credit hours toward an associate’s degree in the natural sciences through their service, which can lead to state certification as an environmental restoration technician. Since we reported on the program last October, both the Congress and the Corporation have implemented measures aimed at lowering AmeriCorps’s cost. On the legislative side, the Congress mandated new funding restrictions for the Corporation. On the programmatic side, the Corporation, after consulting with Members of Congress, has revised its grant guidelines. These new measures will only affect programs receiving grants for the upcoming 1996-97 program year. federal agencies ineligible to receive AmeriCorps grants. The law also requires that to the maximum extent possible, the Corporation (1) increase the amount of matching contributions provided by the private sector and (2) reduce the total federal cost per participant in AmeriCorps programs. As part of the fiscal year 1996 appropriations act, the Congress also mandated that GAO further study the Corporation’s operations. We expect to complete our study by the end of this fiscal year. In recent months, the Corporation has worked with Members of Congress to identify ways to reduce AmeriCorps’s program costs. Subsequently, the Corporation has revised its grant application guidelines for programs receiving funding in the upcoming 1996-97 program year. For example, in response to congressional concerns over the cost of mandating the purchase and use of uniforms, the AmeriCorps*USA uniform package (t-shirt, sweatshirt, button, and so on) is no longer a program requirement. The Corporation also has directed grantees exceeding a program year 1995-96 cost per participant of $13,800 to reduce their proposed program year 1996-97 per-participant costs by an overall average of 10 percent. The Corporation has also increased the grantee’s share of total program operating costs from 25 to 33 percent for grants awarded for the 1996-97 program year. The Corporation’s revised grant guidelines also seek to reduce costs by encouraging a program requesting increased funding to add additional participants, thereby reducing its cost per participant. The guidelines also encourage programs to seek additional funding only for education awards. Corporation’s words—“get things done.” Total resources available means many things. It means cash and in-kind contributions that pay participants’ living allowances, social security taxes, health insurance, child care, and the education awards they earn in exchange for their service. It means resources available to pay local program staff who manage operations and supervise staff; to pay rent for office space and purchase supplies; to pay for travel and transportation for program staff and participants; and to pay for materials needed to conduct national service projects. It means resources available to pay for planning grants used to design and formalize future national service programs. And it means resources available to pay for the staff and operations of the Corporation for National and Community Service. Our objective was not to draw conclusions about whether AmeriCorps*USA was cost-effective. Rather, it was to gather information on the total amount of resources available to AmeriCorps*USA programs nationwide and to provide this information by resource stream—that is, by federal, state, and local government and private sources. Though not precise cost data, this information illustrated the funding levels that may be needed to support new program endeavors of similar scale in the future. It also indicated the degree of partnership between the public and private sectors. Since we completed our review, the Congress and the Corporation have undertaken a number of measures that are intended to reduce the costs of AmeriCorps. Because many of these initiatives will not take effect until the upcoming 1996-97 program year, it is too early to determine their impact. Madam Chairman, that concludes my statement for the record. For more information about this testimony, please call Wayne B. Upshaw at (202) 512-7006 or Carol L. Patey at (617) 565-7575. Other major contributors to this testimony included C. Jeff Appel, Nancy K. Kintner-Meyer, and James W. Spaulding. Corporation award (adjusted) $12,071,004 $31,881,332 $3,470,008 $2,333,452 (Table notes on next page) The first copy of each GAO report and testimony is free. 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GAO discussed the Corporation for National and Community Service's AmeriCorps*USA service program. GAO noted that: (1) for program year 1994 to 1995, the Corporation provided almost $149 million for grantee projects; (2) about 69 percent of matching project contributions came from public sources; (3) total resources available per participant, exclusive of private in-kind contributions, averaged $26,654, of which federal sources provided 74 percent, state and local governments 14 percent, and the private sector 12 percent; (4) cost data could not be determined because most AmeriCorps programs are too new; (5) total available resources for AmeriCorps*USA grantees averaged about $16 per service hour; (6) grantees' projects are designed to meet unmet human, educational, environmental, and public safety needs, strengthen communities, develop civic responsibility, and expand educational opportunities for program participants and others; and (7) to reduce government costs in the 1996-1997 program year, Congress has reduced program appropriations and prohibited federal agencies from receiving AmeriCorps grants, and the Corporation has required certain grantees to reduce proposed costs by 10 percent and all grantees to pay a higher share of program operating costs.

The government contracting process provides for consideration of various aspects of contractor performance at multiple points: Past performance as source selection factor: Only relatively recently have federal agencies been required to consider past performance in selecting their contractors. In 1997, the Federal Acquisition Regulation (FAR) was modified to require that agencies consider past performance information as an evaluation factor in source selection. Past performance is now required to be an evaluation factor in selecting contractors, along with factors such as price, management capability, and technical approach to the work. Responsibility determinations: Once a contractor is selected for award, the contracting officer must make an affirmative determination that the prospective awardee is capable and ethical. This is known as a responsibility determination, and includes, for example, whether a prospective awardee has adequate financial resources and technical capabilities to perform the work, has a satisfactory record of integrity and business ethics, and is eligible to receive a contract under applicable laws and regulations. As part of the responsibility determination, the contracting officer also must determine that the prospective awardee has a “satisfactory performance record” on prior contracts. This determination of the prospective awardee’s responsibility is separate from the comparison of the past performance of the competing offerors conducted for purposes of source selection. Surveillance of performance under the current contract: Once a contract is awarded, the government should monitor a contractor’s performance throughout the performance period. Surveillance includes oversight of a contractor’s work to provide assurance that the contractor is providing timely and quality goods or services and to help mitigate any contractor performance problems. An agency’s monitoring of a contractor’s performance may serve as a basis for past performance evaluations in future source selections. GAO reported in March, 2005 on shortfalls at DOD in assigning and training contract surveillance personnel, and recommended improvements in this area. Suspension and debarment: Contractor performance also comes into play in suspensions and debarments. A suspension is a temporary exclusion of a contractor pending the completion of an investigation or legal proceedings, while a debarment is a fixed-term exclusion lasting no longer than 3 years. To protect the government’s interests, agencies can debar contractors from future contracts for various reasons, including serious failure to perform to the terms of a contract. Suspensions and debarments raise a whole set of procedural and policy issues beyond past performance, not the least of which is the question of whether these are useful tools in an environment in which recent consolidations have resulted in dependence on fewer and larger government contractors. Questions have also been raised about whether delinquent taxes or an unresolved tax lien should result in suspension or debarment. A proposed revision to the FAR would list these tax issues as grounds for suspension or debarment. In July 2005, GAO reported on the suspension and debarment process at several federal agencies and recommended ways to improve the process. In the Federal Acquisition Streamlining Act (FASA) of 1994, Congress stated that in the award of contracts, agencies should consider the past performance of contractors to assess the likelihood of successful performance of the contract. FASA required the adoption of regulations to reflect this principle, and the FAR now requires the consideration of past performance in award determinations. The Office of Federal Procurement Policy (OFPP) has issued guidance on best practices for using past performance information in source selection, and individual agencies have issued their own guidance on implementing the FAR requirements. For agencies under the FAR, a solicitation for a contract must disclose to potential offerors all evaluation factors that will be used in selecting a contractor. Agencies are required to consider past performance in all negotiated procurements above the simplified acquisition threshold of $100,000 and in all procurements for commercial goods or services. Although past performance must be a significant evaluation factor in the award process, agencies have broad discretion to set the precise weight to be afforded past performance relative to other factors in the evaluation scheme. Whatever they decide about weights, agencies must evaluate proposals in accordance with the evaluation factors set forth in the solicitation, and in a manner consistent with applicable statutes and regulations. Agencies must allow offerors to identify past performance references in their proposals, but also may consider information obtained from any other source. In evaluating an offeror’s past performance, the agency must consider the recency and relevance of the information to the current solicitation, the source and context of the information, and the general trends in the offeror’s past performance. Offerors who do not have any past performance may not be evaluated favorably or unfavorably. That is, they must receive a neutral rating. In addition, the OFPP has issued guidance on best practices for considering past performance data. Consistent with the FAR, OFPP guidance states that agencies are required to assess contractor performance after a contract is completed and must maintain and share performance records with other agencies. The guidance encourages agencies to make contractor performance records an essential consideration in the award of negotiated acquisitions, and gives guidelines for evaluation. It also encourages agencies to establish automated mechanisms to record and disseminate performance information. If agencies use manual systems, the data should be readily available to source selection teams. Performance records should specifically address performance in the areas of: (1) cost, (2) schedule, (3) technical performance (quality of product or service), and (4) business relations, including customer satisfaction, using a five-point rating scale. Agencies may also issue their own supplemental regulations or guidance related to past performance information. All of the three largest departments in federal procurement spending - the Department of Defense, the Department of Energy, and the Department of Homeland Security - provide at least some additional guidance in the use of past performance data, addressing aspects such as the process to be followed for considering past performance during contract award and what systems will be used to store and retrieve past performance data. Below are some examples that illustrate the types of guidance available. DOD offers instruction on using past performance in source selection and contractor responsibility determinations through the Defense Federal Acquisition Regulation Supplement and related Procedures, Guidance, and Information. DOD’s Office of Defense Procurement and Acquisition Policy also has made available a guide that provides more detailed standards for the collection and use of past performance information, including criteria applicable to various types of contracts. DOE also provides additional guidance to contracting officers in the form of an acquisition guide that discusses current and past performance as a tool to predict future performance, including guidelines for assessing a contractor’s past performance for the purpose of making contract award decisions as well as for making decisions regarding the exercise of contract options on existing contracts. At DHS, the department’s supplemental regulations outline which systems contracting officers must use to input and retrieve past performance data. Specifically, contracting officers and contracting officer representatives are required to input contractor performance data into the Contractor Performance System, managed by the National Institutes of Health, and use the Past Performance Information Retrieval System (PPIRS) - which contains contractor performance ratings from multiple government systems - to obtain information on contractor past performance to assist with source selection. Although a seemingly simple concept, using past performance information in source selection can be complicated in practice. GAO has not evaluated the practices that agencies use regarding contractor past performance information in source selection or whether those practices promote better contract outcomes. Our bid protest decisions, however, illustrate some of the complexities of using past performance information as a predictor of future contractor success. Some of these issues are listed below. In all of these cases, the key consideration is whether the performance evaluated can reasonably be considered predictive of the offeror’s performance under the contract being considered for award. Who: One issue is whose performance agencies should consider. Source selection officials are permitted to rate the past performance of the prime contractor that submits the offer, the key personnel the prime contractor plans to employ, the major teaming partners or subcontractors, or a combination of any or all of these. For example, in one case, GAO found that the agency could consider the past performance of a predecessor company because the offeror had assumed all of the predecessor’s accounts and key personnel, technical staff, and other employees. In another case, GAO held that an agency could provide in a solicitation for the evaluation of the past performance of a corporation rather than its key personnel. What: Also at issue is what information agencies are required or permitted to consider in conducting evaluations of past performance. The issue is one of relevancy. Agencies must determine which of the contractor’s past contracts are similar to the current contract in terms of size, scope, complexity, or contract type. For example, is past performance building single family homes relevant to a proposal to build a hospital? Agencies do not have to consider all available past performance information. However, they should consider all information that is so relevant that it cannot be overlooked, such as an incumbent contractor’s past performance. In one case, GAO found that an agency reasonably determined that the protester’s past performance on small projects was not relevant to a contract to build a berthing wharf for an aircraft carrier. When: Agencies also have to determine the period of time for which they will evaluate the past performance of contractors. Agencies are required to maintain performance data for 3 years after the conclusion of a contract although agencies have discretion as to the actual length of time they consider in their evaluation of past performance and could, for example, choose a period longer than 3 years. In one case, GAO held that although the solicitation required the company to list contracts within a 3-year time frame, the agency could consider contract performance beyond this timeframe because the solicitation provided that the government may “consider information concerning the offeror’s past performance that was not contained in the proposal.” Where: Once agencies determine who they will evaluate, what information they will consider, and the relevant time frame, they still may have difficulties obtaining past performance information. Agencies can obtain past performance information from multiple sources, including databases such as PPIRS - a centralized, online database that contains federal contractor past performance information. However, in 2006, the General Services Administration noted that PPIRS contains incomplete information for some contractors. Agencies may also obtain information from references submitted with proposals and reference surveys. One case illustrates how an agency evaluated a company based on limited past performance information. The agency assigned the company a neutral rating because the agency did not receive completed questionnaires from the company’s references listing relevant work and the solicitation provided that it was the company’s obligation to ensure that the past performance questionnaires were completed and returned. These are just some of the many issues that have been the subject of protests involving the use of past performance. Our cases are not necessarily representative of what may be occurring throughout the procurement system, but they do provide a window that allows us to get a glimpse of how the issue is handled across a number of agencies. At a minimum, however, our cases suggest that the relatively straightforward concept of considering past performance in awarding new contracts has given rise to a number of questions that continue to surface as that concept is implemented. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For further information regarding this testimony, please contact William T. Woods at (202) 512-4841 or woodsw@gao.gov. Individuals making key contributions to this testimony included Carol Dawn Petersen, E. Brandon Booth, James Kim, Ann Marie Udale, Anne McDonough-Hughes, Kelly A. Richburg, Marcus Lloyd Oliver, Michael Golden, Jonathan L. Kang, Kenneth Patton, and Robert Swierczek. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The federal government is the largest single buyer in the world, obligating over $400 billion in fiscal year 2006 for a wide variety of goods and services. Because contracting is so important to how many agencies accomplish their missions, it is critical that agencies focus on buying the right things the right way. This includes ensuring that contracts are awarded only to responsible contractors, and that contractors are held accountable for their performance. Use of contractor performance information is a key factor in doing so. This testimony covers three main areas concerning the use of contractor performance information: (1) the various ways in which a contractor's performance may be considered in the contracting process; (2) how information on past performance is to be used in selecting contractors, as well as the various mechanisms for how that occurs; and (3) some of the key issues that have arisen in considering past performance in source selection, as seen through the prism of GAO's bid protest decisions. GAO has previously made recommendations for improving the use of contractor performance information, but is not making any new recommendations in this testimony. The government contracting process provides for consideration of various aspects of contractor performance at multiple points: (1) Source selection: Past performance is required to be an evaluation factor in selecting contractors, along with factors such as price, management capability, and technical approach to the work. (2) Responsibility determinations: Once a contractor is selected for award, the contracting officer must make a responsibility determination that the prospective awardee is capable and ethical. This includes, for example, whether the prospective awardee has a satisfactory performance record on prior contracts. (3) Surveillance under the current contract: Once a contract is awarded, the government monitors a contractor's performance throughout the performance period, which may serve as a basis for performance evaluations in future source selections. (4) Debarment: To protect the government's interests, agencies can debar, that is preclude, contractors from receiving future contracts for various reasons, including serious failure to perform to the terms of a contract. Agencies are required to consider past performance in all negotiated procurements above the simplified acquisition threshold of $100,000 and in all procurements for commercial goods or services. Although past performance must be a significant evaluation factor in the award process, agencies have broad discretion to set the precise weight to be afforded to past performance relative to other factors in the evaluation scheme. Whatever they decide about weights, agencies must evaluate proposals in accordance with the evaluation factors set forth in the solicitation, and in a manner consistent with applicable statutes and regulations. In evaluating an offeror's past performance, the agency must consider the recency and relevance of the information to the current solicitation, the source and context of the information, and general trends in the offeror's past performance. The key consideration is whether the performance evaluated can reasonably be considered predictive of the offeror's performance under the contract being considered for award. Although a seemingly simple concept, using past performance information in source selections can be complicated in practice. GAO bid protest decisions illustrate some of the complexities of using past performance information as a predictor of future contractor success. Some of the questions raised in these cases are: (1) Who: Whose performance should the agencies consider? (2) What: What information are agencies required or permitted to consider in conducting evaluations of past performance? (3) When: What is the period of time for which agencies will evaluate the past performance of contractors? (4) Where: Where do agencies obtain contractor performance information?

Mr. Chairman and Members of the Subcommittee: I am pleased to be here today to discuss our work on federal advisory committees as the Subcommittee explores possible changes to the Federal Advisory Committee Act (FACA) and the advisory committee process. Last November we presented to the Subcommittee an overview of advisory committees since 1993. We have issued two reports on FACA since then on issues that you, Mr. Chairman, and Senator John Glenn asked us to examine. The most recent of these reports, which is being released today, gathered the views of federal advisory committee members and federal agencies on specific FACA matters. The other report, which was issued last month, assessed the General Services Administration’s (GSA) efforts in carrying out its oversight responsibilities under FACA. My statement today will focus on these two reports, as you requested. As you are well aware, federal agencies often receive advice from advisory committees, and this advice covers a range of topics and issues, including national policy and scientific matters. In fiscal year 1997, federal agencies could turn to 963 advisory committees for advice. Most of these committees were discretionary; that is, they were created by agencies acting under their own authority or were authorized—but not mandated—by Congress. The rest were mandated by Congress or the President. Congress has long recognized the importance of federal agencies receiving advice from knowledgeable individuals outside of the federal bureaucracy. Nevertheless, Congress enacted FACA in 1972 out of concern that federal advisory committees were proliferating without adequate review, oversight, or accountability. FACA provisions are intended to ensure that (1) valid needs exist for establishing and continuing advisory committees, (2) the committees are properly managed and their proceedings are as open to the public as is feasible, and (3) Congress is regularly informed of the committees’ activities. responsible for all matters relating to advisory committees. GSA has developed guidelines to assist agencies in implementing FACA; has provided training to agency officials; and was instrumental in creating, and has collaborated with, the Interagency Committee on Federal Advisory Committee Management. Although FACA was enacted to temper the growth in advisory committees, the number of advisory committees grew steadily from fiscal year 1988 until fiscal year 1993, when the number totaled 1,305. In February 1993, the President issued Executive Order 12838, which directed agencies to reduce the number of discretionary advisory committees by at least one-third by the end of fiscal year 1993. Under authority provided by the executive order, the Office of Management and Budget (OMB) established ceilings for each agency on its maximum allowable number of discretionary committees. Subsequently, the number of advisory committees declined from 1,305 in 1993 to 963 in fiscal year 1997, the most recent fiscal year for which complete data are available. Although the number of advisory committees has decreased, the average number of members per committee and the average cost per committee have increased. On average, between fiscal years 1988 and 1997, the number of members per advisory committee increased from about 21 to 38, and the cost per advisory committee increased from $90,816 to $184,868. In constant 1988 dollars, the average cost per advisory committee increased from $90,816 to $140,870 over the same period. A total of 36,586 individuals served as members of the 963 committees in fiscal year 1997. According to data published by GSA, the cost to operate the 963 committees last fiscal year was about $178 million. To gather the views of advisory committee members on committee operations for our report being released today, we surveyed a statistically representative sample of advisory committee members. The questionnaire responses we received from 607 members are generalizable to the approximately 28,500 committee members for whom we had names and addresses. We also sent a questionnaire to 19 federal agencies to obtain their views on FACA requirements, and all 19 completed the questionnaire. These 19 agencies account for about 90 percent of the federal advisory committees. reviewed committee charters and justification letters, annual reports for advisory committees, and other pertinent documents; applicable laws and regulations; and GSA’s guidance to federal agencies. We also interviewed Committee Management Secretariat officials at GSA and committee management officers at nine agencies. The information from these two reports led us to three general observations. 1. Advisory committees appear to be adhering to the requirements of FACA and Executive Order 12838. These requirements do not appear to be overly burdensome to agencies. 2. Concerns surfaced about certain advisory committee requirements that the Subcommittee may wish to explore in its consideration of FACA. 3. GSA has fallen short of fulfilling its FACA oversight responsibilities. In response to our June 1998 report, GSA said it will take immediate action to improve its oversight. I will turn now to each of these observations in more detail. In examining the responses of advisory committee members to our questionnaire, we determined the overall response to each question and, in addition, separately reported the responses of peer review panel members and general advisory committee members where appropriate. The answers the committee members gave to our survey showed that, generally, they believed that their advisory committees were providing balanced and independent advice and recommendations. The committee members also reported that they believed their committees had a clear and worthwhile purpose and that the committees’ advice and recommendations were consistent with that purpose and considered by the agencies. These responses are shown graphically in the following two figures, which group together by topic a number of the specific questions that we asked committee members. FACA sets out requirements for agencies and advisory committees to follow, and we asked the 19 agencies about their perceptions of how useful or burdensome those requirements were. With regard to the requirements in general, figure 3 shows the range of agencies’ responses. The largest number of agencies considered the requirements to be useful. agencies whether FACA had prohibited them from receiving or soliciting input on issues or concerns from public groups (other than from advisory committees). Most of the agencies—16 of the 19—answered no. There has been some question about whether the possibility of litigation over compliance with FACA requirements has inhibited agencies from forming new advisory committees. The most frequent response—received from 14 of the 19 agencies—was that this possibility did not inhibit the formation of new committees. As I noted earlier, Executive Order 12838 established ceilings for each agency on its maximum allowable number of discretionary advisory committees. A majority of the agencies (12) said that the ceilings did not deter them from seeking to establish new advisory committees. Seven agencies, however, said the ceilings did deter them. An agency could request approval from OMB to establish a committee that would place it over its ceiling. Two of the seven agencies had done so during fiscal years 1995-1997, and OMB approved their requests. Although committee members and agencies responding to our questionnaires generally provided a more positive than negative image of FACA, their responses also pointed to concerns and issues that the Subcommittee may wish to explore in its consideration of FACA. We list these concerns in no particular order of priority. About 13 percent of the general advisory committee members said that agency officials had asked their advisory committees on occasion to give advice or make recommendations on the basis of inadequate data or analysis. A majority of the 19 agencies reported that two FACA requirements—preparing an annual report on closed advisory committee meetings and filing advisory committee reports with the Library of Congress—required little labor on their part but offered little value, at least in the agencies’ estimation. Seven agencies offered suggestions for changing the FACA requirements, including two that suggested that rechartering be required every 5 years instead of the current 2 year cycle. Under FACA, peer review panels are treated as advisory committees, and six agencies indicated that they used peer review panels. Five of these agencies said that panels should be exempt from some, most, or all FACA requirements. Agencies identified 26 congressionally mandated committees that they believed should be terminated. GSA regulations allow agencies to determine whether members of the public may speak at advisory committee meetings. (Members of the public are allowed to submit their remarks in writing.) All 19 agencies allowed members of the public to speak before at least some advisory committees. However, agencies placed restrictions on the public’s ability to speak at committee meetings (e.g., only if time permitted), and the restrictions varied from agency to agency. Advisory committees may also have subcommittees. Meetings of subcommittees may be exempt from FACA requirements, and agencies reported that about 27 percent of the meetings subcommittees held during fiscal year 1997 were not covered by FACA. For these meetings, the subcommittees may voluntarily follow FACA requirements. However, the extent to which the requirements are followed appears to vary. For example, of the eight agencies that responded, only two said Federal Register notices were given for all or most subcommittee meetings. Five said a designated federal officer attended all or most subcommittee meetings. Although 16 agencies said FACA had not prohibited them from soliciting or receiving input from the public, 3 agencies said it had prohibited them. One agency said that it had to limit its prior practice of forming working groups or task forces to address specific local projects or programs. Another agency said that FACA had made it more cumbersome to seek citizen input because of the staff time required to complete FACA paperwork. And, the third agency said that solicitation of a consensus opinion from a task force or working group could lead to that task force or working group being considered subject to FACA. Finally, there appears to be some concern among agencies about the possibility of being sued for noncompliance with FACA if they obtain input from parties who are outside of the agency and its advisory committees. Although 10 agencies said the possibility of such litigation has inhibited them to little or no extent from obtaining outside input independent of FACA, 8 agencies said that it has inhibited them to some, a moderate, or very great extent. The Director of GSA’s Committee Management Secretariat said that the responses from committee members and agencies had suggested areas that should be examined further, several of which GSA already had been examining and others that GSA plans to examine. Although the GSA Committee Management Secretariat does not have authority to stop the formation or continuation of an advisory committee, FACA and GSA regulations assign it certain responsibilities for overseeing the federal advisory committee program. These responsibilities include ensuring that advisory committees are established with complete charters conducting a comprehensive review annually to independently assess whether each advisory committee should be continued, merged, or terminated; submitting information to the President in time to meet the statutory due date for the President’s annual report to Congress on advisory committees; and ensuring that agencies provide Congress with follow-up reports on recommendations made by presidential advisory committees. We concluded in our June report that the Secretariat had not carried out each of these four responsibilities. For example, even though all charters and justification letters had been reviewed by the Secretariat, 36 percent of the 203 charters and 38 percent of the 107 letters from October 1996 through July 1997 that we reviewed were missing one or more items required by FACA or GSA regulations. When reviewing the advisory committees’ annual reports for fiscal year 1996, the Secretariat did not independently assess whether committees should be continued, merged, or terminated. For 8 of the last 10 annual presidential reports on advisory committees, GSA submitted its report to the President after the President’s report was due to Congress. The Secretariat did not ensure that agencies prepared for Congress the 13 follow-up reports required on recommendations made by presidential advisory committees in fiscal years 1995 and 1996, and in fact none had been prepared. Based on our findings, we recommended that the GSA Administrator direct the Committee Management Secretariat to fully carry out the responsibilities assigned to it by FACA in a timely and accurate manner. In response to that recommendation, the GSA Administrator said the Associate Administrator for Govermentwide Policy will ensure that the Committee Management Secretariat takes immediate and appropriate action to implement our recommendation. there appear to be areas in which those requirements warrant a fresh look. In addition, there is room for GSA’s Committee Management Secretariat to improve its fulfillment of its FACA oversight responsibilities. GSA says that it is acting on both fronts. Still, the Subcommittee may wish to explore the concerns surfaced in our reports as it considers ways to improve FACA. Mr. Chairman, this concludes my statement. I will be pleased to answer any questions you or other Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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GAO discussed the: (1) views of federal advisory committee members and federal agencies on specific Federal Advisory Committee Act (FACA) matters; and (2) General Services Administration's (GSA) efforts in carrying out its oversight responsibilities under FACA. GAO noted that: (1) advisory committees appear to be adhering to the requirements of FACA and Executive Order 12838, which led to the establishment of ceilings for each agency on the number of discretionary advisory committees; (2) these requirements do not appear to be overly burdensome to agencies; (3) although the responses of committee members and agencies portrayed a more positive than negative image of FACA, their responses did raise concerns and issues that the House Committee on Government Reform and Oversight, Subcommittee on Government Management, Information, and Technology may wish to explore in its consideration of FACA; (4) there appears to be some concern among agencies about the possibility of being sued for noncompliance with FACA if they obtain input from parties who are outside of the agency and its advisory committees; (5) GSA's Committee Management Secretariat has fallen short of fulfilling its FACA oversight responsibilities; (6) further, GSA did not ensure that the advisory committees were established with complete charters and justification letters; (7) 36 percent of the 203 advisory committee charters and 38 percent of the 107 justification letters from October 1996 through July 1997 that GAO reviewed were missing one or more items required by FACA or GSA regulations; and (8) GSA said that it will take immediate action to improve its oversight.