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gao_GAO-10-333 | gao_GAO-10-333_0 | American Samoa Wages, Employment, Employer Actions, Inflation-Adjusted Earnings, and Worker Views
Wages. Responses to our American Samoa large-employer questionnaire indicate that the hourly wages of about three-quarters of private sector workers employed by respondents were low enough to be affected by the first $.50 minimum wage increase, in July 2007. From 2007 to 2009, as a result of the first three wage increases, median hourly wages rose by almost $1.50 (44 percent) among tuna canning workers employed by questionnaire respondents, compared with $1.00 (25 percent) among other private sector respondents’ employees. In addition, the 2007 through 2009 wage increases narrowed the wage gap between the lowest and highest paid employees of questionnaire respondents by 37 percent. Based on American Samoa large-employer questionnaire responses about workers’ wages as of June 2009, the minimum wage increases scheduled for 2010 through 2016 would affect the wages of close to 95 percent of those private sector workers by 2016.
Employment. Available data show that from 2006 to 2007, the total number of people employed in American Samoa grew by 5.5 percent (from 17,551 to 18,518) and that from 2007 to 2008, employment growth slowed to 3 percent (from 18,518 to 19,060). Questionnaire responses show that employment of workers employed by respondents dropped about 12 percent from 2008 to 2009. Although data for all of 2009 are not yet available, employment in American Samoa dropped further with the loss of 2,000 jobs when the cannery closed in September 2009. Public and private sector officials expressed concern about the significant impact on employment if future minimum wage increases led the remaining cannery to close or made it more difficult to attract new industries to the territory.
Employer actions. American Samoa employers responding to our questionnaire reported having taken cost-cutting actions, including freezing hiring and reducing workers’ benefits, since the minimum wage increases began. Employers also reported plans to reduce costs by the end of 2010, including laying off workers. Employers representing 84 percent of private sector workers employed by respondents, including the cannery that has now closed, said they planned to close or relocate. More employers attributed their actions largely to the minimum wage increases than attributed their actions to other factors, such as transportation and shipping costs. Tuna cannery officials said that minimum wage increases were a significant contributing factor in the closure of one cannery, in addition to other factors. Our analysis shows that outsourcing cleaning operations from low labor-cost areas, such as Thailand, provides opportunities to significantly reduce cannery operating costs.
Inflation-adjusted earnings. Earnings data from SSA and consumer price data show that from 2006 to 2008, median inflation-adjusted earnings dropped by about 6 percent, resulting from a rise in median annual earnings of about 8 percent while local prices rose by about 15 percent. Although earnings data do not allow for a direct comparison of median and minimum-wage annual earnings or for tracking the earnings of workers who lost their jobs, we estimate that inflation-adjusted earnings of full-time minimum wage workers who retained their jobs and full benefits rose by about 14 percent from 2006 to 2008.
Worker views. Workers participating in discussion groups said that their support for the minimum wage increases had dwindled because of the closure of one cannery and uncertainty about the future of the remaining cannery, as well as concern about job security and reductions in benefits related to the wage increases. Workers also expressed an obligation to support extended families and the broader community negatively affected by the minimum wage increases. In addition, workers expressed a belief that wages had increased less than the cost of living. Cannery workers we spoke with generally opposed future minimum wage increases, but the attitudes of other community members varied.
See table 1 for key findings and appendixes III and V for detailed findings and tables on American Samoa.
CNMI Wages, Employment, Employer Actions, Inflation-Adjusted Earnings, and Worker Views
Wages. About a third of private sector workers employed by CNMI questionnaire respondents were directly affected by the first minimum wage increase, in July 2007, according to large-employer questionnaire responses. From 2007 through 2009, as a result of the first three wage increases, the median wage rose by about 19 percent in the tourism industry compared with about 18 percent for the rest of the private sector, for workers employed by questionnaire respondents. The gap between the lowest and highest paid workers narrowed by 9 percent. Based on questionnaire responses about workers’ wages as of June 2009, the future minimum wage increases would affect the wages of 82 percent of those private sector workers by 2015.
Employment. From 2006 through 2008, the total number of people employed fell by about 27 percent, according to CNMI government tax data, largely reflecting the garment factories’ closure. Small employers and other private sector officials expressed mixed views about the future minimum wage increases, including concern that they would make it more difficult to attract new industries to the CNMI; however, many expressed greater concerns about changes to immigration law. Public sector officials said CNMI government employees will be more directly affected by future increases, increasing budget pressures.
Employer actions. CNMI employers responding to our questionnaire reported having taken cost-cutting actions, such as freezing hiring, since the minimum wage increases began. Employers also reported planning to take such actions by the end of 2010, and some attributed their planned actions largely to the minimum wage increases. Employers also noted other factors, such as changes to immigration law and increased shipping and maintenance costs, that contributed to their actions. Based on an analysis of responses from CNMI employers in the hotel industry, we found that raising room rates to cover higher wage costs may cause a 2.6 to 13.7 percent decline in visits to the CNMI.
Inflation-adjusted earnings. CNMI government tax data and consumer price data show that, from 2006 to 2008, average inflation-adjusted earnings dropped by about 6 percent, resulting from a rise in average annual earnings of about 12 percent while local prices rose by about 19 percent. Although earnings data do not allow for a direct comparison of average and minimum wage annual earnings or for tracking the earnings of workers who lost their jobs, we estimate that inflation-adjusted earnings for CNMI minimum wage workers who retained their jobs and full hours rose by about 12 percent from 2006 to 2008.
Worker views. Workers participating in our discussion groups generally expressed support for the minimum wage increases and cited other factors affecting living standards. Participants observed that although the wage increases had led some employers to reduce benefits for foreign workers, the wage increases had benefited local workers. In addition, participants expressed concern about the implementation of U.S. immigration law.
See table 2 for key findings and appendixes IV and VI for detailed findings and tables on the CNMI.
Agency Comments and Our Evaluation
We provided a draft of this report to officials in DOC, DOI, DOL, SSA, and in the governments of American Samoa and the CNMI for review and comment. We received written comments from DOI, the American Samoa government, and the CNMI government, which are reprinted in appendixes VIII, IX, and X, respectively. We also received technical comments from DOL and DOC, which we incorporated as appropriate. SSA had no comments. We shared excerpts of the draft with several private sector entities and experts and incorporated their comments as appropriate.
Following are summaries of the written comments from DOI, the American Samoa government, and the CNMI government, with our responses.
Department of the Interior. In its written comments, DOI agreed with our findings and noted that the report contained useful information on American Samoa and the CNMI. However, DOI commented that the report included insufficient commentary on the future impact of minimum wage increases in American Samoa and the CNMI. We note that information on the potential impact of future minimum wage increases appears in the report’s discussions of employment, employer actions, and worker views for both American Samoa and the CNMI.
American Samoa. In its written comments, the American Samoa government generally agreed with our findings. In addition, the comments stated that the report findings lead to the conclusion that without a change to the existing incremental minimum wage increases, American Samoa will face very serious economic difficulties. The comments further stated that the economy was losing jobs more quickly than expected and that with the closure of one cannery and continuing significant job losses in the private sector, government revenues and funding available for government services and employment will decrease. American Samoa’s comments also noted that increases in shipping costs due to decreased tuna exports will likely further increase the cost of imported goods and the overall cost of living. Appendix IX provides our more detailed evaluation of the American Samoa government’s letter.
CNMI. In its written comments, the CNMI government agreed with some of our findings but raised concerns about several aspects of our report methodology and analysis. Specifically, the CNMI government expressed concerns about our large-employer questionnaire’s coverage, noting that the questionnaire covers employers with 50 or more employees but excludes smaller employers. In response, we note that because key federal sources of data on the U.S. labor market do not cover the insular areas, we collected our own data on employers through the questionnaire, discussion groups, and other methods such as interviews. Our report appropriately states the limitations of the questionnaire data and repeatedly observes that the data may not be representative of all CNMI workers and employers. Moreover, our report summarizes the views of small employers based on the method that we determined would be most effective and efficient in collecting information from them—through discussion groups targeting small employers (see app. IV, employment section). The CNMI government also expressed concern about the questionnaire’s response rate, given that 33 of 61 employers responded to our questionnaire. While we spent considerable effort to obtain as high a response rate as possible, employers were not required to respond, and the response rate reflects the individual decisions of CNMI employers who received the questionnaire about whether to provide information regarding the extent to which minimum wage increases had affected their operations. Further, the CNMI government states that it questions our findings related to worker views based on our discussion groups, because of the limitations of this approach. Given the relevance of the minimum wage increases to workers, we considered it critical to include their views; however, no existing federal data source provided this information. We believe the discussion groups were an appropriate and worthwhile approach for collecting and including the views of workers.
In addition to expressing concerns about our methodology, the CNMI government expressed concern that the annual minimum wage increases will greatly and negatively affect the CNMI economy, particularly small employers. The CNMI government proposes capping the minimum wage in the CNMI at the current rate of $4.55 to allow an in-depth assessment of the effects of the minimum wage increases on the private and public sectors, including small employers, and it proposes allowing the economy to adjust to the $4.55 minimum wage level. The CNMI government also stated that we should ask for more time to study the effects of the minimum wage increases; however, the American Recovery and Reinvestment Act does not permit additional time for this report. Appendix X provides our more detailed evaluation of the CNMI government’s letter.
We are sending copies of this report to interested congressional committees. We also will provide copies of this report to the U.S. Secretaries of Commerce, the Interior, Labor, to the Commissioner of Social Security, and to the Governors of American Samoa and the CNMI. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staffs have questions about this report, please contact David Gootnick at (202) 512-3149 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix XI.
Appendix I: Objectives, Scope, and Methodology
This report describes, for American Samoa and the Commonwealth of the Northern Mariana Islands (CNMI) since 2007—the year the minimum wage increases began—(1) wages, (2) employment, (3) employer actions, (4) inflation-adjusted earnings, and (5) workers’ views regarding the minimum wage increases.
To describe wages, we collected wage data through a large-employer questionnaire during site visits in each area. To describe employment, we analyzed data from the large-employer questionnaire, earnings data from the Social Security Administration (SSA), and tax data from the CNMI government, and we conducted interviews with public and private sector officials. To describe employer actions, we collected responses through the large-employer questionnaire. To describe inflation-adjusted earnings, we analyzed SSA data and tax data from the CNMI government, and we adjusted earnings data using Consumer Price Index (CPI) data for each area. To describe workers’ views, we conducted discussion groups with workers. We provide additional information on each data source below.
In preparing this report, we interviewed officials from the U.S. Departments of the Interior (DOI), Commerce (DOC), and Labor (DOL), as well as from SSA. We reviewed relevant reports and data from DOL and other U.S. government sources. We also reviewed U.S. minimum wage laws and other relevant laws and regulations. We did not focus on the extent to which laws were properly enforced or implemented, although we considered enforcement as appropriate. The scope of our study also does not include workers in the underground economy.
Site Visits
Because key federal sources of data on the U.S. labor market do not cover the insular areas, we collected our own data in each area. We visited American Samoa in August 2009, after one tuna cannery announced it would close and just before it actually closed, and we visited the CNMI in September 2009, after the closure of all garment factories. During our visits, we conducted interviews and discussion groups with government officials, smaller employers, other private sector representatives, workers, and community members to obtain views and information on the minimum wage increases and related topics. In each area, we held an open public meeting and established e-mail accounts to obtain comments from the public. We also collected detailed data from large employers in each area including through a questionnaire, as described below.
In American Samoa, we visited the island of Tutuila and interviewed officials in the Office of the Governor, the Department of Commerce, the Department of Human Resources, the Department of the Treasury, the Department of Program Planning and Budget Development, the Office of Samoan Affairs, and other American Samoa agencies, as well as the legislature. We also interviewed representatives of the private sector, including representatives from the tuna canneries, and workers.
In the CNMI, we visited the islands of Saipan and Tinian and interviewed officials in the Office of the Governor, the Department of Commerce, the Department of Labor, the Department of Finance, and the Marianas Visitors Authority, as well as several other CNMI agencies. We also interviewed representatives of the private sector, including representatives from hotels, and workers. We also visited the island of Rota in January 2010 and interviewed several employers.
Employer Questionnaire
We collected detailed data from large employers in each area through a questionnaire on employment, wage structure, past and planned employer actions, and related topics for the years 2006 to 2009. We defined a large employer as one that employed 50 or more workers in recent years. The employers selected to receive the questionnaire comprised for-profit, not- for-profit, and public sector employers. We sent the questionnaire only to employers with 50 or more workers because we did not have sufficiently reliable frames from which to draw a probability sample of employers and because we could contact only a limited number of employers in each area, given available resources. By limiting our questionnaire to the largest employers, we were able to concentrate data collection efforts on those who employed a disproportionately large percentage of the workforce.
For American Samoa, we used local tax return data to identify employers that filed 50 or more employee wage and tax statements (i.e., Form W-2) in either 2007 or 2008, and we verified this list with the American Samoa government and Chamber of Commerce. We sent questionnaires to 40 employers in American Samoa, covering approximately 84 percent of the American Samoa public and private sector workforce.
For the CNMI, we did not receive local tax return data in time to develop our list. We generated our original list from 2007 Labor and Immigration Identification and Documentation System data from the CNMI government. Because the data include only foreign workers, the CNMI government and Saipan Chamber of Commerce identified additional employers that likely had more than 50 employees. We sent questionnaires to 63 employers in the CNMI, covering approximately 37 percent of the CNMI public and private sector workforce, with greater coverage among public sector workers. The percentage of the workforce covered by our large-employer questionnaire was later calculated by the CNMI government’s Department of Finance.
In accordance with other federal employment surveys, our large-employer questionnaire asked for wage data for the 2007, 2008, and 2009 pay periods containing June 12. We selected June as the reference month because it spanned one month before the first minimum wage increase (July 2007) and one month after the most recent increase (May 2009), allowing us to study changes since before the first minimum wage increase and through the most recent increase. The questionnaire asked separately for data regarding workers paid an hourly wage and workers paid an annual salary. The questionnaire also included detailed questions about changes in benefits, about employers’ past and possible future actions, and about the extent to which employers attributed these actions to past and future minimum wage increases. (The questionnaire is reproduced in app. VII.)
Before sending the questionnaire to employers, we pretested it over the phone with three employers in the CNMI and two in American Samoa to make sure that the questions were clear and comprehensive, the data were readily obtainable, and the questionnaire did not place an undue burden on employers. Pretest participants included business owners or general managers and, where applicable, financial personnel responsible for maintaining the payroll system. The questionnaire was also reviewed by members of the American Samoa, Saipan, and Tinian Chambers of Commerce, which also provided their endorsements, and an independent GAO reviewer. We made appropriate changes to the content and format of the questionnaire after the pretests and independent reviews.
Most employers received the questionnaire by e-mail in an attached Microsoft Word form that they could return electronically after marking checkboxes or entering responses in open-answer boxes. Questionnaires were sent 1 to 2 weeks prior to the start of our visits to each insular area. If we could not obtain an e-mail address for an employer, we delivered a paper copy of the questionnaire during our visits. Employers returned questionnaires by e-mail, mail, or fax. The deadline for the questionnaire was set midway through our visits so that we could conduct nonresponse follow-up in person and by phone while in the insular areas. We also contacted nonrespondents by e-mail and phone after returning from the insular areas. In addition, we contacted respondents to clarify responses and request any missing data.
In American Samoa, 20 of the 40 employers completed the questionnaire, resulting in an unweighted response rate of 50 percent, as shown in table 3. These respondents represented about 87 percent of the workforce employed by questionnaire recipients (those with 50 or more employees) in 2008 and about 72 percent of the total workforce, including 57 percent of the private sector workforce. Questionnaire respondents represented about 99 percent of the public sector workforce in 2008 (all public sector employers received the questionnaire). American Samoa questionnaire respondents provided wage data on a total of 9,685 full-time workers as of June 2009. American Samoa questionnaire respondents included the two tuna canneries and other employers in the sectors of manufacturing, wholesale and retail trade, food services, hotel, construction, transportation, publishing and communication, and health care, as well as the American Samoa government and other public sector employers.
In the CNMI, 33 of the 61 employers completed the questionnaire, resulting in an unweighted response rate of 54 percent, as shown in table 4. We confirmed that two employers had closed, and thus we did not count them in the final response rate. The respondents represented about 79 percent of the workforce employed by questionnaire recipients (those with 50 or more employees) in 2008 and about 29 percent of the total workforce, including 20 percent of the total private sector workforce. Questionnaire respondents represented about 89 percent of the public sector workforce employed by questionnaire recipients and about 87 percent of the total public workforce in 2008 (4 public sector employers were not covered by questionnaire because they had fewer than 50 employees). CNMI questionnaire respondents provided wage data on a total of 7,535 full-time workers as of June 2009. CNMI questionnaire respondents included hotels and other employers in the sectors of food service, utilities, construction, manufacturing, retail, and transportation, as well as the CNMI government and other public sector employers.
In reporting the percentages for questionnaire responses throughout our report, we weighted each percentage to reflect the proportion of workers employed by the responding employers relative to all workers employed by all questionnaire respondents. As a result, the responses of larger employers affect our findings more than those of smaller employers. We determined the number of employees at each employer by summing the number of hourly and salaried workers that employers reported in questionnaire responses. In addition to asking a direct question about number of employees, the questionnaire asked respondents to complete a separate table listing the number of employees at each wage or salary level. Separate tables were required for hourly wage and salaried workers. In cases in which the employers completed the table but did not answer the direct question, the sum of the tabled responses were used as the weight. In the few cases in which employers did not report any employees, they were assigned a weight of zero. To apply the weights, we cross- multiplied the number of employees by the employer response, then divided by the total number of employees in the sample. For example, if three of five employees attributed an action to the minimum wage to a moderate extent, the unweighted response would be 60 percent. However, if those three employers represented 300 of 400 employees, the weighted response that we report would be 75 percent.
From our questionnaire, we obtained information on earnings and employment for both hourly wage and salaried workers during the pay periods that included June 12, 2007, 2008, and 2009. For hourly wage workers, respondents were asked to provide the number of employees paid at each wage rate, and the number of both regular and overtime hours worked during the pay period. For salaried workers, respondents were asked the number of full-time and part-time workers paid in salary ranges (such as from $10,000 to $19,999). In order to determine the wage rate for salaried workers, we assumed that each worker was paid at the midpoint of the range. Because it was unclear the hours each worked, we excluded part-time employees. For any given employer, this may either over or under estimate the wage rate, depending on whether more employees for that employer tend to be at the top or bottom of the range. This particularly affected our reported data regarding government workers. To determine the number of workers affected by each minimum wage increase, we assumed that all workers employed by questionnaire respondents were legally required to receive the minimum wage. If some are not covered or are exempt, the minimum wage increases would affect fewer workers.
After recording the questionnaire data, we verified all keypunched records by comparing them with the corresponding questionnaires and corrected the errors we found. Less than 0.5 percent of the data items we checked had random keypunch errors that would not have been corrected during data processing. Analysis programs were also independently verified. However, we did not independently verify that the wage and other information provided to us were correct.
The questionnaire responses cannot be used to make inferences about all employers and workers in each insular area, particularly in the CNMI. First, because the lists of employers that received the questionnaire were intended to include only those with more than 50 employees, the lists were not representative of all employers. Second, we were unable to survey employers that had closed between 2007 and our questionnaire date, including those in the CNMI garment industry. Third, some nonresponse bias may exist in some of the questionnaire responses, since characteristics of questionnaire respondents may differ from those of nonrespondents in ways that affect the responses (e.g., if those that employ a larger number of workers would have provided different responses than those that employ a smaller number). Last, it is possible that some employers’ views of the minimum wage increases may have influenced their responses.
In addition, the tuna canneries and local government in American Samoa employed a large percentage of workers employed by all questionnaire respondents, as in the actual American Samoa workforce; as a result, these employers’ responses significantly affected our reported questionnaire data. Among CNMI employer responses, the CNMI government accounted for a higher percentage of workers employed by questionnaire respondents than in the actual CNMI workforce, so the government’s responses disproportionately affect our questionnaire results on the public and private sectors combined.
SSA Data
We obtained SSA data on the earnings, employment, and demographic characteristics of individual taxpayers in American Samoa and the CNMI from 2005 to 2008. While the SSA data cover all types of workers in American Samoa and were sufficiently reliable for our purposes, three large groups of people in the CNMI were not required to report earnings to SSA and thus are excluded from the SSA data—Filipino, Korean, and CNMI government workers. In 2008, these three groups represented approximately half of all CNMI workers, according to CNMI government tax data. We have chosen not to report the CNMI SSA data due to these coverage gaps.
For American Samoa, SSA told us that all employees were subject to SSA withholding—no group was systematically excluded. In addition, the data were generally consistent with information from other sources, including local American Samoa W-2 data and our questionnaire results. We used SSA data to review trends in employment in American Samoa since the federal minimum wage increases were implemented. We used SSA earnings data to determine two aspects of employment of American Samoa workers from 2005 to 2008. First, we used SSA data to determine the level of employment. Our count of employed people was based on the number of people that had positive reported earnings to SSA. Second, we reported the median earnings per employed person in American Samoa. Because of data limitations, we were unable to report earnings that were not reported to SSA, either because of a failure on the part of the employer or because the earnings were not subject to SSA withholding. We also were unable to report on earnings that exceeded the SSA withholding cap.
To assess the reliability of the data, we interviewed agency officials at SSA. As discussed above, to the extent possible, we compared employment counts from the SSA data to counts from other sources. We determined that the available data were adequate and sufficiently reliable for the purposes of depicting trends in employment and earnings in American Samoa.
Discussion Groups
We conducted structured discussion groups with Chamber of Commerce members in American Samoa, Saipan, and Tinian to collect information on the impact of the minimum wage increases on employers not covered by our large-employer questionnaire, although several participants did receive the questionnaire. For each discussion group, the president of the Chamber of Commerce invited members to participate. In the CNMI, we also held discussion groups with hotel human resources managers and members of the Korean and Chinese business communities. Participants in these groups were also invited by their organizations’ leadership. The number of participants in each group ranged from 4 to 10 business owners or managers.
To collect information on current living standards and workers’ views of the minimum wage increases, we conducted structured discussion groups with various worker and community groups with different organizational affiliations. In each case, we asked the organizations’ leadership to invite members to the discussion groups. In American Samoa, we conducted two worker discussion groups at each of the two canneries, one group with the U.S. Department of Agriculture’s Women, Infants, and Children (WIC) program recipients, and one group recruited by the Office of Samoan Affairs in the American Samoa government. In the CNMI, we conducted discussion groups with hotel workers at two different hotels, one group with the U.S. Department of Agriculture’s Nutrition Assistance Program (NAP) recipients, one group with Filipino workers, one group with former garment factory workers, and one group recruited by the DOI Labor Ombudsman’s Office in the CNMI. The number of participants in each group ranged from 4 to 13. We also distributed questionnaires to WIC recipients in Saipan and Tinian who visited the WIC office on the day we were there. The questionnaires asked about changes in living standards and views on the minimum wage increases.
All discussion groups were moderated by a GAO employee following a structured guide with open-ended questions about current living standards and the effects of the minimum wage. At the end of each discussion group, we also collected written responses to our questionnaire about changes in living standards and views on the minimum wage increases. Discussion groups are generally designed to obtain in-depth information about specific issues that cannot be easily obtained from single interviews. Methodologically, they are not designed to provide results generalizable to a larger population or provide statistically representative samples or quantitative estimates. They represent the views only of the participants in our 18 groups and may or may not be representative of the population of employers and workers in these insular areas. Therefore, the experiences of other employers and workers may be different from those who participated in our discussion groups. In addition, while we attempted to hold discussion groups with as many groups as our resources allowed, the groups and participants in the groups were not random samples of employers and workers in these insular areas.
Local Administrative Data We also analyzed available American Samoa administrative and survey data, including the American Samoa Department of the Treasury’s tax revenues and demographic data from the American Samoa Department of Commerce. We analyzed available CNMI administrative and survey data, including CNMI data on the number and wages of workers from the CNMI Department of Finance’s tax returns. The CNMI tax data provide ranges of earnings, including all payments to employees such as overtime, shift differentials, cash housing and meal allowances, bonuses, etc. The data cover both public and private sector workers and both citizens and noncitizens, and we analyzed data for 2005 to 2008.
We also obtained data on federally funded income-based programs administered by the insular area governments. We obtained data from the U.S. Department of Agriculture’s Food and Nutrition Service on the beneficiaries’ participation in the WIC Nutrition Program in American Samoa for fiscal years 2005 to 2008. We also obtained data on approved, withdrawn and terminated cases, as well as submitted and denied applications from the CNMI Division of Nutrition Assistance Program for 2006 to 2009. We estimated the number of active cases as the difference between those approved and those withdrawn and terminated.
In addition, we obtained historical data on the CPI from both areas. The quarterly CPI series for American Samoa cover the time period from the third quarter in 1997 to the second quarter in 2009, and those for CNMI cover the period from the second quarter of 1988 to the second quarter of 2009. However, both areas have revised the CPI series at several points in time, including updating the weights of individual components and adding more groups in the CPI composition. For American Samoa, because the CPI was rebased in the fourth quarter of 2007, we recalculated the quarterly index series from the fourth quarter of 2008 back to the fourth quarter of 2007 by finding a rebasing factor such that the old and new indexes in the fourth quarter of 2007 were identical. We averaged the quarterly price indexes to compute an annual price level to use in computing year-to-year changes in earnings. We also use the annual price indexes to estimate annual inflation for the 2006 through 2008 period on a consistent basis.
Limitations and Data Reliability
Our review had certain limitations in addition to those already noted. In particular, although our approach yielded information on trends in employment, wages, and earnings in both areas, it is difficult to distinguish between the effects of minimum wage increases and of other factors, including the global recession in 2009, fluctuations in energy prices, global trade liberalization, and the application of U.S. immigration law to the CNMI.
In general, to establish the reliability of the data that we used for reporting trends and statistics for both American Samoa and the CNMI, we systematically obtained information about the way in which data were collected and tabulated. When possible, we checked for consistency across data sources. While the data had some limitations, we determined that the available data were adequate and sufficiently reliable for the purposes of our review.
We conducted our work from April 2009 to April 2010 in accordance with all sections of GAO’s Quality Assurance Framework that are relevant to our objectives. The framework requires that we plan and perform the engagement to obtain sufficient and appropriate evidence to meet our stated objectives and to discuss any limitations in our work. We believe that the information and data obtained, and the analysis conducted, provide a reasonable basis for any findings and conclusions in this product.
Appendix II: Background
American Samoa comprises five volcanic islands and two coral atolls, covering a land area of 76 square miles—slightly larger than Washington, D.C.—about 2,600 miles southwest of Hawaii. In 2005, American Samoa had a population of about 63,780. Its capital, Pago Pago, is on the main island of Tutuila, which consists mostly of rugged terrain with relatively little level land; most economic activity and government operations on Tutuila take place in the Pago Pago Bay area.
Commonwealth of the Northern Mariana Islands
The CNMI is a group of 14 islands in the western Pacific Ocean, lying just north of Guam and 5,500 miles from the U.S. mainland. Most of the CNMI population—65,927 in 2005— resides on the island of Saipan, with additional residents on the islands of Tinian and Rota.
CNMI–U.S. Relations
The United States took control of the Northern Mariana Islands from Japan during the latter part of World War II. After World War II, the U.S. Congress approved the Trusteeship Agreement that made the United States responsible to the United Nations for the administration of the islands. Later, the Northern Mariana Islands sought self-government and permanent ties with the United States. In 1976, after almost 30 years as a trust territory, the District of the Mariana Islands entered into a covenant with the United States establishing the island territory’s status as a self- governing commonwealth in political union with the United States. This covenant grants the CNMI the right of self-governance over internal affairs and grants the United States complete responsibility and authority for matters relating to foreign affairs and defense affecting the CNMI. The covenant initially made many federal laws applicable to the CNMI, including laws that provide federal services and financial assistance programs. The covenant preserved the CNMI’s exemption from certain federal laws that had previously been inapplicable to the Trust Territory of the Pacific Islands, including federal immigration laws with certain limited exceptions and certain federal minimum wage provisions. However, under the terms of the covenant, the federal government has the right to apply federal law in these exempted areas without the consent of the CNMI government.
Until recently, the CNMI retained legislative authority over most aspects of immigration, regulating entry into the CNMI through a permit system. In 2008, federal legislation amended the U.S.-CNMI Covenant to establish federal control of CNMI immigration; the law includes several provisions affecting access to the CNMI by foreign workers, tourists, and foreign investors that were implemented beginning in November 2009. As we reported in August 2008, the potential impact of the legislation’s implementation on the CNMI’s labor market will largely depend on decisions that the U.S. Departments of Homeland Security and DOL make in implementing a program to provide foreign workers temporary permits to work in the CNMI during a transition period that ends in 2014. Although modest reductions in CNMI-only permits for foreign workers would cause minimal impact, any substantial and rapid decline in the availability of CNMI-only work permits for needed workers would have a negative effect on the economy, given foreign workers’ prominence in key CNMI industries.
In fiscal year 2008, the CNMI government spent approximately $51.5 million in grants from several federal agencies, including DOI, DOC, DOL, the Department of Homeland Security, and the Department of Health and Human Services. For example, in 2008, the CNMI government spent $9.35 million provided by DOI. The CNMI also has begun receiving federal funds under the Recovery Act that temporarily supplement local government revenues.
CNMI Economy
The CNMI’s garment and tourism industries have contributed directly to its economy by generating employment and bringing revenue from outside the CNMI via exports. For example, in 1999, these two industries accounted for about 85 percent of the CNMI’s total economic activity and 96 percent of its exports.
Several developments in international trade caused the CNMI’s garment industry to decline dramatically. In January 2005, in accordance with a World Trade Organization 10-year phaseout agreement, the United States eliminated quotas on textile and apparel imports from other textile- producing countries, exposing the CNMI apparel industry’s shipments to the United States to greater competition. Subsequently, the value of CNMI textile exports to the United States dropped from a peak of $1.1 billion in 1998, to $98.2 million in 2008, to close to zero in 2009 (see fig. 3). The number of licensed CNMI apparel manufacturers decreased rapidly, from 34 firms in 1999 to 6 firms as of July 2008. By the end of the first quarter of 2009, the last garment factory in the CNMI had closed.
In addition, the CNMI economy has been negatively affected by trends in the tourism industry. For example, tourism in the CNMI experienced a sharp decline in the late 1990s as a result of the Asian financial crisis. In 2003, according to CNMI officials, tourism slowed for several months in reaction to the SARS epidemic, which originated in Asia, and the war in Iraq. Visitors from Japan account for the greatest share of visitor arrivals in the CNMI—56 percent of the total in fiscal year 2009. Total visitor arrivals to the CNMI dropped from a peak of 726,690 in 1997 to 375,808 in 2009, a decline of 48 percent (see fig. 4). The CNMI tourism industry also may be affected by the November 28, 2009, implementation of final rules for a joint visa waiver program for visitors to the CNMI and Guam, as part of the application of U.S. immigration law.
During the expansion of the CNMI garment and tourism industries prior to 1995, the CNMI economy became dependent on foreign labor, as the CNMI government used its authority over its own immigration policy to bring in large numbers of foreign workers and investors. In 1995, two-thirds of the CNMI working population were temporary residents, including about 93 percent of workers in the garment industry and slightly over 72 percent in the tourism industry. In contrast, in the same year, U.S. citizens and permanent residents of the CNMI held about 96 percent of jobs in the public sector. As a result, the CNMI economy developed a two-tiered wage structure, with U.S. citizens and permanent residents earning 3.5 times more than temporary residents in 1995. However, with the decline of the garment and tourism industries, the number and proportion of noncitizens in the CNMI labor force and population has decreased (see fig. 5). Noncitizen workers in the CNMI are predominantly Chinese or Filipino. As noted above, the application of U.S. immigration law might result in further changes in the composition of the CNMI’s workforce.
In addition, the CNMI’s economy may be affected in the future by the planned build-up of the U.S. military in neighboring Guam, possibly bringing new business and tourism opportunities for the CNMI. The U.S. Department of Defense aims to move 8,000 Marines and an estimated 9,000 dependents from Okinawa, Japan, to Guam by 2014, increasing Guam’s current population by an estimated 25,000 active duty military personnel and dependents.
Current federal data on income and poverty levels in the CNMI do not exist; however, the most recent available data show that the CNMI had lower income and higher poverty rates than the mainland United States. For example: In 2004, the CNMI median household income was $17,138, while the U.S. 50-state median household income was $44,389.
In 2004, the CNMI poverty rate for all persons was 53.5 percent, while the U.S. 50-state poverty rate for persons age 15 and older was 12.7 percent.
Minimum Wage Law
U.S. Minimum Wage Law
The federal minimum wage was first enacted as part of the Fair Labor Standards Act of 1938 (FLSA). As of July 2009, the federal minimum wage was set at $7.25 per hour. Federal minimum wage laws apply generally to any employee engaged in commerce, with limited exceptions and exemptions. Certain employees who would otherwise be covered under the FLSA definitions are exempted by law from the minimum wage requirements—for example, employees involved with seafood at sea are exempt. Employees not covered by FLSA include, for example, individuals engaged in agriculture, if the employer is an immediate family member.
DOL’s Wage and Hour division enforces a variety of U.S. labor laws, including laws related to minimum wage, overtime pay, child labor, and family medical leave. The division uses a number of strategies, including investigations and partnerships with external groups, such as states, foreign consulates, and employee and employer organizations.
Minimum Wage Law in American Samoa
From 1956 to 2007, employers in American Samoa were allowed to pay their employees at hourly rates less than the federal minimum wage. During that period, rates were set by special industry committees established by DOL. The special industry committees system continued to exist until May 2007, when Congress required an incremental increase in the minimum wage for all industries in American Samoa, at $.50 per year in each industry, until it reaches the full federal minimum wage. For example, if the current federal minimum wage of $7.25 remains unchanged, the minimum wage for American Samoa tuna canning industry workers will reach $7.25 in 2014 (see table 5).
Under the terms of the CNMI-U.S. covenant, until May 2007, the CNMI was exempt from the minimum wage provisions of the FLSA and maintained control over its own minimum wage system. The most recent legislative changes to the federal minimum wage specified that the CNMI would be subject to the federal minimum wage, through a staged $.50 incremental approach. The law raised the CNMI established minimum wage from $3.05 to $3.55 per hour in July 2007 and requires a $.50 increase every year thereafter until the FLSA-CNMI minimum wage equals the full federal minimum wage (see table 6).
Prior Studies of Minimum Wage Increases in American Samoa and the CNMI
The federal government has conducted or funded several reports on minimum wage increases in American Samoa and the CNMI in recent years.
In May 2007, DOL’s Wage and Hour Division issued a report on the minimum wage in American Samoa as part of DOL’s biennial review process under the special industry committees. The report analyzes American Samoa’s wage and employment structure based on a 2006 employment and wage survey, and it provides the numbers of employees in each industry who would be affected by a range of possible minimum wage increases.
In January 2008, DOL issued a report on the economic impact of minimum wage increases in both American Samoa and the CNMI, as required by the 2007 supplemental appropriations bill. For American Samoa, the study noted concern that the tuna canneries would close before the minimum wage reached the U.S. federal minimum wage of $7.25 per hour, causing substantial job losses. For the CNMI, the study found that although data were not available to precisely quantify the impact of the scheduled minimum wage increases, it seemed likely that the CNMI’s existing economic decline would be made worse and that the CNMI population would continue to decline.
DOI funded studies of the American Samoa and CNMI economies, including the minimum wage increases.
A February 2008 study assessing the relationships between different sectors of the American Samoa economy found that a doubling of American Samoa’s minimum wage in a 7-year period could result in the end of the fish processing industry and serious consequences for the economy.The authors predicted that costs would rise, and that, under a worst-case scenario, American Samoa could lose 46 percent of all jobs in the territory.
An October 2008 study of the CNMI examined the impact of both federal immigration policy and the minimum wage increases. In framing this analysis, the study found that lifting of quotas on garment imports to the United States had rendered the CNMI’s garment industry unfeasible and estimated that the loss of 16,800 garment jobs could ultimately cost the CNMI economy about 25,200 jobs, about 60 percent of peak employment in 2004. The study projects the combined effect of the closure of the garment industry with the implementation of the federal minimum wage and an application of federal immigration policy, whereby almost the entire foreign workforce is removed from the CNMI economy. In this projection, the employment of U.S.- qualified residents increases by 21 percent from 2005 to 2015, but real wages and salaries of U.S.-qualified residents fall by 19 percent. In addition, immigration-policy changes quickly remove foreign workers on government-approved contracts from the economy, and U.S.- qualified residents take jobs in the visitor industry. Despite the increased minimum wage, most of the jobs are projected to pay lower wages than U.S.-qualified residents had come to expect. The study also provides an alternative projection under which the minimum wage is held at $4.05, foreign labor is not restricted, and an aggressive promotion program successfully doubles visitor arrivals by 2015. In this projection, the employment of U.S.-qualified residents increases by 4 percent from 2005 to 2015, and real wages and salaries of U.S.- qualified residents increase by 15 percent. The authors suggested, among other recommendations, that the law extending the minimum wage requires further analysis and notes that officials are seeking to modify the scheduled increases. Possible modifications include lengthening the period over which the minimum wage is increased, basing increases on measures of worker productivity, or using a special program for adjustment as had previously been done in American Samoa.
Appendix III: American Samoa Wages, Employment, Employer Actions, Inflation- Adjusted Earnings, and Worker Views
In American Samoa, the first minimum wage increase raised the wages of about three-quarters of workers of large private sector employers that responded to GAO’s questionnaire. Based on June 2009 wage data from our questionnaire, the future minimum wage increases would affect the wages of 95 percent of those private sector workers by 2016. Federal data show that employment grew from 2006 to 2008, while questionnaire responses show that employment dropped from 2008 to 2009. Since the September 2009 closure of one tuna cannery, employment has continued to drop. Public and private sector officials expressed concern that future increases could impact the remaining cannery and American Samoa’s ability to attract new industries. Employers representing many workers employed by questionnaire respondents reported taking cost-cutting actions, including those affecting workers’ income and benefits, since the increases began. Private sector employers also reported planning actions such as leaving American Samoa or closing by the end of 2010. More employers attributed their past and planned actions to the minimum wage increases than to other factors. Cannery company officials said in interviews that the minimum wage increases were a significant contributing factor in the cannery’s closure, in addition to other factors. Our analysis shows that outsourcing cleaning operations from low labor- cost areas, such as Thailand, provides opportunities to significantly reduce cannery operating costs. Earnings data from SSA show that median annual inflation-adjusted earnings in American Samoa declined by about 6 percent from 2006 to 2008. Although earnings data do not allow for a direct comparison of median and minimum-wage annual earnings or for tracking the earnings of workers who lost their jobs, we estimated that inflation-adjusted earnings for full-time minimum wage workers who retained their jobs and hours rose by about 14 percent. In discussion groups, workers generally said that their support for the wage increases had dwindled because of concerns such as the cannery closure, job insecurity, and loss of benefits.
Minimum Wage Increases through 2016 Would Affect Wages of Almost All American Samoa Private Sector Workers Employed in 2009, Particularly in Canning Industry
Wages of Most Private Sector Workers Were Low Enough to Be Raised By Minimum Wage Increases in 2007-2009
According to wage data provided in large private sector employers’ responses to our questionnaire, before the first minimum wage increase in July 2007 about 74 percent of those employers’ workers earned wages close enough to the minimum to be affected by that first increase (see fig. 6).
Tuna canning industry. About 80 percent (3,784 of 4,751) of canning industry workers employed by questionnaire respondents earned no more than 50 cents over that industry’s minimum wage.
Other private sector industries. About 35 percent (260 of 747) of hourly workers employed by questionnaire respondents in other private sector industries earned no more than 50 cents over the minimum wages for those industries.
For the first three minimum wage increases in 2007 through 2009, wage data provided by respondents to our large-employer questionnaire showed the following: In July 2007, about 86 percent of private sector workers in American Samoa had wages no more than $1.50 over the minimum and therefore would have been affected by the minimum wage increases in 2007 through 2009.
In the public sector, according to American Samoa responses to our questionnaire, at most 30 percent of government workers earned wages no more than $1.50 over the minimum in 2007 and therefore were directly affected by the first three minimum wage increases.
Rise in Median Wage after Three Increases Was Greatest for Canning Industry Employees
After the first three minimum wage increases, the median wage for the tuna canning industry increased more than for other parts of the private sector. Based on large employers’ responses to our questionnaire, our analysis shows that from June 2007 to June 2009—the period of the $1.50 total increase in the minimum wage—the median wage for the canning industry rose by $1.46 (44 percent) while the median wage for the rest of the private sector rose by $1.00 (25 percent) (see table 7). For American Samoa public sector workers, the median salary, based on questionnaire responses, remained unchanged in a range between $10,000 and $20,000.
Responses to our questionnaire indicate that the minimum wage increases narrowed the gap between the wages of lower- and higher-paid workers in American Samoa (see fig. 7). Workers earning the 25th percentile of wages—that is, higher than 25 percent of all American Samoa workers employed by questionnaire respondents—experienced a larger increase in wages than workers earning the 75th percentile of wages. Workers earning the 75th percentile of wages experienced no increase in wages. Specifically, the gap between wages of workers at the 25th percentile and workers at the 75th percentile dropped from $3.91 in 2007 to $2.45 in 2009, a decline of 37 percent.
As the minimum wage increases continue, they will affect a growing percentage of workers in American Samoa. Based on large employers’ questionnaire responses about workers’ wages as of June 2009, in the private sector, the minimum wage increases scheduled for 2010 through 2016 would affect the wages of roughly 95 percent of those employers’ workers by 2016 (see fig. 8). Information provided in the large-employer questionnaire also show that in the public sector, the scheduled increases would affect at most about 69 percent of workers by 2016.
However, uncertainty about the future of the American Samoa labor market and economy makes it difficult to project the distribution of wages in American Samoa in 2010 and subsequent years. In particular, the cannery closure in September 2009, the consequent losses of cannery jobs and cannery industry-related jobs, and the loss of cannery demand for supplies and services may impact the labor market, as well as the general economy, in ways that our analysis does not reflect. Moreover, if the remaining cannery were to close, the labor market and the economy would be affected still further.
American Samoa Employment Dropped after Minimum Wage Increases Began
Employment in American Samoa Grew after First Minimum Wage Increase but Dropped after Second Increase and Cannery Closure
Total employment in American Samoa grew from 2006 to 2008, before dropping from 2008 to 2009. As shown in figure 9, according to SSA data, total employment increased by 5.5 percent (from 17,551 to 18,518) from 2006 to 2007 and then slowed to 3 percent (from 18,518 to 19,060) from 2007 to 2008. SSA data for 2009 were not available at the time of our work.
Questionnaire responses from employers representing about 72 percent of the American Samoa workforce indicate that employment among the workers employed by respondents increased by 2 percent from June 2007 to June 2008 (from 10,865 to 11,050) and dropped by about 12 percent from June 2008 to June 2009 (from 11,050 to 9,685).
Moreover, the September 2009 closure of one cannery, which employed more than 2,000 workers, as well as reductions in staff at the other cannery, have very likely led to further decreases in overall employment. Public and private sector officials told us it would be difficult for laid-off workers to find new jobs. Many laid-off workers may leave American Samoa rather than seeking new jobs; 84 percent of the laid off workers from the closed tuna cannery are from independent Samoa, and some may return to their home country. However, some of the laid-off workers may have been temporarily re-employed to assist with reconstruction after the September 2009 tsunami. The federal government has paid approximately $8 million under the Recovery Act and approved roughly $23 million for tsunami relief, both of which have funded the creation of temporary jobs. creation of temporary jobs. Additional temporary jobs are available to assist with the 2010 Census. Additional temporary jobs are available to assist with the 2010 Census.
Public and private sector officials expressed concern that the ripple effect from the closure of one cannery, increasing costs, and future minimum wage increases may force the remaining cannery to close. The closure of one cannery is likely to raise operating costs for the remaining cannery and has ripple effects on other businesses. The remaining cannery will now be responsible for all waste water, waste discharge, and maintenance costs, which the two canneries previously shared. The utility company has announced that it was raising utility rates on remaining customers once one cannery closed. In addition, the closure of one cannery reduced shipping needs and therefore is likely to increase shipping costs of imported goods, including produce and consumer products. Officials expressed concern that closure of the remaining cannery would cause further loss of employment.
Employers who participated in our discussion groups for small employers also discussed the effects that cannery closure would have on their operations. Many said cannery closure would not only affect the employment and income of the cannery workers, but also consumer confidence and spending and government revenues. In addition, many small employers said that as a result of the minimum wage increases, they had to lay off workers; cut benefits, hours, and overtime pay; and increase costs for customers, when possible. Some said that they had raised pay only for minimum wage workers, which had decreased the morale of workers who did not receive raises. Furthermore, some small employers said that they wanted workers to earn as much as possible because the cost of living is continuously increasing. While many opposed the minimum wage increases as scheduled, some said they did not oppose minimum wage increases in general but rather advocated a rational approach for setting the increases.
Public sector officials also expressed concern about increased fiscal strain and difficulties in attracting new businesses to American Samoa. In their view, the minimum wage increases will raise costs to the government as more public sector employees are covered by the increases and will coincide with increased fiscal stress on the American Samoa government.
A report for the American Samoa legislature on the consequences of one cannery’s closure estimated that government revenue would decline by roughly 25 percent in fiscal year 2010 compared to fiscal year 2009 revenues. Officials we interviewed said rising minimum wages add to the challenges the territory faces in attracting new industries, such as call centers, in addition to existing factors. For example, a person from a group interested in opening call centers in American Samoa said that local workers must be prepared to work for wages lower than those in the United States until their skill levels improve, and that the U.S. government’s failure to consider this in imposing the U.S. minimum wage had caused potential investors to shy away from the territory. In July 2009, the American Samoa government reported that it had collected 12,000 signatures to a petition to the President to repeal the minimum wage increases in American Samoa, leaving only the first $.50 increase.
American Samoa Employers Reported Past and Planned Actions to Reduce Costs and Raise Prices, with More Attributing Actions to Minimum Wage Increases Than to Other Factors
Respondents to our large-employer questionnaire reported having taken a number of cost-cutting actions—some of which affect workers’ income or benefits—as well as raising prices since the minimum wage increases began in June 2007. Employers also reported planning to take additional such actions within 18 months of completing our questionnaire, or by the end of 2010. Widely varying percentages of employers—weighted by numbers of employees—attributed these actions largely to the minimum wage increases, and more attributed their actions largely to the wage increases than to other factors. (See app. V for a complete listing of American Samoa employers’ past and planned actions, as well as the percentages that reported them and that attributed them to the minimum wage increases and other factors.)
Employers Reported Actions to Cut Costs and Raise Prices from 2007 to 2009, and Many Attributed Actions to Minimum Wage Increases
Cost-Cutting Actions Affecting Workers’ Income and Benefits in 2007-2009 Closed or relocated. Employers, including one of the canneries, representing 43 percent of workers employed by private sector respondents reported closing temporarily or relocating outside American Samoa (see fig. 10). Of employers that reported closing temporarily, none attributed the action largely to the past minimum wage increases. Of those that reported relocating, employers representing 4 percent of workers employed by these respondents attributed the action largely to the past minimum wage increases.
Laid off hourly workers. Employers representing 24 percent of workers employed by all respondents reported having laid off hourly workers (see fig. 10). Of these, employers representing 68 percent of workers employed by these respondents attributed the action largely to the past minimum wage increases.
Froze hiring. Employers representing 93 percent of workers employed by all respondents reported having implemented a hiring freeze. Of these, employers representing 23 percent of workers employed by these respondents attributed the action largely to the past minimum wage increases.
Decreased benefits. Employers representing 42 percent of workers employed by all respondents reported that they had decreased the level of hourly workers’ benefits. Of these, employers representing 41 percent or workers employed by these respondents attributed the action largely to the past minimum wage increases.
Additional Cost-Cutting Actions in 2007-2009 Implemented labor-saving strategies or technology. Employers representing 29 percent of workers employed by all respondents reported that they had implemented labor-saving strategies or technology. Of these, employers representing 67 percent of workers employed by these respondents attributed the action largely to the past minimum wage increases.
Implemented other cost-saving strategies. Employers representing 94 percent of workers employed by all respondents reported that they had implemented other cost-saving strategies, such as energy-saving technologies. Of these, employers representing 23 percent of workers employed by these respondents attributed the action largely to the past minimum wage increases.
Reduced capacity or services. Employers representing 45 percent of workers employed by all respondents reported that they had reduced their operating capacity or customer services. Of these, employers representing 1 percent of workers employed by these respondents attributed the action largely to the past minimum wage increases.
Raised prices. Employers representing 96 percent of workers employed by all respondents reported that they had raised prices of goods or services. Of these, employers representing 1 percent of workers employed by these respondents attributed the action largely to the past minimum wage increases.
Employers Reported Plans to Close or Relocate and Take Other Actions by the End of December 2010, with Many Citing Minimum Wage Increases
Planned Cost-Cutting Actions Affecting Workers’ Income or Benefits Close or relocate. Employers representing 84 percent of all private sector workers employed by questionnaire respondents—including the cannery that closed in September 2009—reported planning to relocate their business outside American Samoa or close permanently by the end of 2010 (see fig. 10). Of those planning to relocate, employers representing 87 percent of workers employed by these respondents attributed the planned action largely to the minimum wage increases. Of those planning to close, employers representing 85 percent of workers employed by these respondents attributed the planned action largely to the minimum wage increases.
Lay off hourly workers. Employers representing 46 percent of all workers employed by questionnaire respondents reported planning to lay off hourly workers (see fig. 10). Of these, employers representing 91 percent of workers employed by these respondents attributed the planned action largely to the minimum wage increases.
Freeze hiring. Employers representing 31 percent of all workers employed by questionnaire respondents reported planning to freeze hiring. Of these, employers representing 35 percent of workers employed by these respondents attributed the planned action largely to the minimum wage increases.
Decrease benefits. Employers representing 25 percent of all workers employed questionnaire respondents reported planning to decrease hourly workers’ benefits. Of these, employers representing 85 percent of workers employed by these respondents attributed the planned action largely to the minimum wage increases.
Implement labor-saving strategies. Employers representing 50 percent of all workers employed by questionnaire respondents reported planning to implement labor-saving strategies or technology. Of these, employers representing 88 percent of workers employed by these respondents attributed the planned action largely to the minimum wage increases.
Implement other cost-saving strategies. Employers representing 97 percent of all workers employed by questionnaire respondents reported planning to implement other cost-saving strategies, such as energy-saving technologies. Of these, employers representing 28 percent of workers employed by these respondents attributed the planned action largely to the minimum wage increases.
Reduce capacity or services. Employers representing 89 percent of all workers employed by questionnaire respondents reported planning to reduce operating capacity or customer services. Of these, employers representing 29 percent of workers employed by these respondents attributed the planned action largely to the minimum wage increases.
Raise prices. Employers representing 7 percent of all workers employed by questionnaire respondents reported planning to raise prices of goods and services. Of these, employers representing 8 percent of workers employed by these respondents attributed the planned action largely to the minimum wage increases.
Selected planned employer action and attribution to minimum wae increaClose or relocate (private sector)
Lay off hourly workers (public and private sectors)
Fewer Employers Attributed Their Actions to Factors Other Than the Minimum Wage Increases Than Attributed Actions to the Increases
Employers also reported that, in addition to the minimum wage increases, factors such as rising costs of utilities and of transportation and shipping contributed to their decisions and plans to cut costs and raise prices. However, fewer employers attributed their actions, in general, largely to these other factors than attributed specific actions to the minimum wage increases. (See app. V for a complete list of the other reported factors and the percentages of employers reporting these factors.) For example, in contrast to the double-digit percentages of employers citing minimum wage increases for many of the actions above, employers representing 6 percent or less of workers employed by questionnaire respondents attributed actions from June 2007 to June 2009 to each possible contributing factor named in our questionnaire.
Company Officials Said Minimum Wage Increases Played Role in Cannery Closure
By raising the hourly minimum wage for cannery workers in American Samoa from $3.26 in 2006 to $4.76 in May 2009—a total increase of 46 percent—the three minimum wage increases to date have further widened the wage gap between American Samoa and other Pacific regions with tuna canning facilities, such as Thailand, which has a minimum wage level of less than $1 an hour. Cannery company officials we met with stated that minimum wage increases were a significant factor in the closure of one of the two canneries in American Samoa. According to cannery representatives, in addition to minimum wage increases, other factors that contributed to the cannery’s closing include (1) the highly competitive market for tuna products, limiting canneries’ ability to pass on increased labor and operating costs to consumers; (2) an attractive environment for investment in alternative locations; (3) the rising cost of shipping and utility costs—owing to increased fuel costs in recent years; (4) the lessening of the value of tariff protection, owing to global trade liberalization; (5) loss of certain U.S. tax benefits; and (6) high costs associated with environmental regulations.
Officials from the remaining cannery report that its operations in American Samoa are no longer viable at the current $4.76 minimum wage for cannery workers. The company testified to Congress that it had reduced employment by nearly 1,000 workers since May 2008. The company also reported that its costs to operate in American Samoa were $23 million higher than they would be in alternative locations. In addition, officials said trade liberalization made it easier for domestic competitors to outsource labor-intensive work away from American Samoa and into low-wage countries.
The firm that owned the American Samoa cannery that closed adopted a business model aimed at reducing labor costs by moving the labor- intensive part of the operation—cleaning, cutting, and cooking the fish to produce cleaned loins ready to be canned—to low labor-cost locations and exporting cleaned loins to the United States for canning. (See text box and fig. 11 for a comparison of the cost factors of the new business model with those of the model previously used by both firms operating canneries in American Samoa.)
Comparison of Two Tuna Canning Business Models Different business models exist in the tuna canning industry. We compared the two models used by firms that produce for the U.S. market to illustrate how the major cost components differ under each model. Under model A, used by the firm that owns the cannery remaining in American Samoa, a firm conducts loining (cleaning, cutting, and cooking the fish) and canning in American Samoa and exports canned tuna to the U.S. market tariff-free. Under model B, used by the firm that closed its cannery in American Samoa and now operates in the U.S. state of Georgia, the firm sources fish loins from low labor-cost regions outside American Samoa, exports the frozen loins to the United States, pays U.S. tariffs, and cans tuna in the United States. Assuming that the production and employment level are similar to those of the firm that closed its cannery in American Samoa, we found that the annual savings on labor costs ($12 million) under model B will more than offset the increased tariff costs ($320,000) per year. We were not able to quantify other production costs, such as utility costs and shipping costs.
Wage costs. Wage costs are significantly lower under model B than under model A. After May 2009 and before the May 2010 increase, the minimum wage for tuna cannery workers in American Samoa is $4.76 per hour; in contrast, the minimum wage in Thailand is less than $1 per hour. Assuming that a plant employs 2,000 people, under model A, all 2,000 employees would earn a minimum wage of $4.76 per hour, while under model B, 1,700 foreign employees would earn $0.75 per hour for loining and 300 U.S.-based employees would earn $7.25 per hour for canning. We estimate that the firm that closed its cannery in American Samoa can save approximately $12 million in wages in the first year using model B.
Tariff costs. Tariff costs will be higher under model B than under model A. American Samoa exports benefit from tariff-free access to the U.S. market, while the United States imposes tariffs on imported loins. Assuming that a firm imports the same amount of cleaned loin to produce the same amount of canned tuna under model B as under model A, we estimate the additional tariff on cleaned loins from Thailand under model B to be around $320,000 annually.
Other costs. It is not clear which business model has an advantage in terms of shipping cost and prices of fish. According to one cannery official, because tuna is harvested throughout the western Pacific Ocean, and given American Samoa’s location, fishing vessels generally deliver directly to the Samoan canneries. Shipping fish to Thailand for cleaning might be more costly than shipping directly to American Samoa. However, an official from a different cannery said economies of scale and other factors may lead to lower cost for fish in Thailand than in American Samoa and to little or no difference in shipping costs. Additionally, the firm using model B may save on other shipping costs. For example, a high-level firm representative told us that under the new business model, the firm will now avoid the high costs of shipping cans and condiments to American Samoa. The company representative also said that the firm will pay less for utilities in Thailand than in American Samoa. In addition, company representatives said the Thai government offers incentives that provide advantages over American Samoa. (Other costs are not shown in fig. 11).
Estimated wage cost (U.S. dollars)
Tariff cost (U.S. dollars)
Cnnerie locted in AmericSamo hire locnd foreign worker to loin (clen, cook, nd ct) nd cn the fih.
The cnned t from AmericSamo exported to the United Ste nd enefit from triff-free ccess to the U.S. mrket.
The loining opertion—the mot labor-intenive prt of the opertion—move to low labor-cot contrie, such as Thilnd, Trinidd, Fiji, or Mauritius, where the fih loin i frozen.
The frozen fih i exported to the United Ste, where it inned.
Model B result in net cosaving as compred to Model A.
Under Model B, nnual labor cosaving re ignificntly $320,000 The minimum wage for the tuna canning industry in American Samoa was $3.26 in 2006 and $4.76 as of May 25, 2009. The minimum wage is scheduled to increase to $7.25 on September 30, 2014.
Annual wage cost of business model A in 2009: $4.76/hour*2000 hours*2,000 employees=$19 million. Annual wage cost of business model B in 2009: $0.75/ hour*2000 hours*1,700 employees + $7.25/hour*2,000 hours*300 employees=$6.9 million. Our analysis assumes that all cannery workers in American Samoa are paid the minimum wage; however, some workers would likely earn somewhat higher wages.
The tariff on cleaned loins is $11 per metric ton under model B.
American Samoa Median Annual Inflation-Adjusted Earnings Declined, but Estimated Earnings for Minimum Wage Workers Who Remained Employed Increased
Median Inflation-Adjusted Earnings Declined from 2006 to 2008
Although data show that median annual earnings of workers employed in American Samoa rose from 2006 to 2008, inflation eroded these income gains; as a result, median inflation-adjusted annual earnings in American Samoa declined by about 6 percent from 2006 to 2008. According to earnings data from the federal government, median annual earnings rose by about 8 percent to $7,858 from 2006 to 2008. However, average prices increased by about 15 percent over the same period (see table 8).
Although earnings data do not allow for a direct comparison of median and minimum wage annual earnings or for tracking the earnings of workers who lost their jobs, we estimate that inflation-adjusted earnings of a full-time minimum wage worker who retained a job and full hours rose by about 14 percent from 2006 to 2008. We assume, based on minimum wage data, that a minimum wage worker earned $3.26 per hour in 2006 and $4.26 per hour in 2008. Using these assumptions, we estimate that a minimum wage worker who worked 2,000 hours per year in each calendar year earned $6,520 in 2006 and $8,520 in 2008.
While the minimum wage for many workers increased by 31 percent from 2006 to 2008 (from $3.26 to $4.26), local prices increased by a smaller percentage, resulting in a rise in estimated inflation-adjusted earnings for a minimum wage worker who retained full employment and hours. In 2007, average prices rose by about 3.7 percent but earnings rose by 15.3 percent; as a result, inflation-adjusted earnings of a minimum wage worker increased by about 11.2 percent. In 2008, the rise in inflation-adjusted earnings was smaller, owing to higher average prices (see table 9).
According to the American Samoa government, 90 percent of the economy of American Samoa is dependent on foreign and U.S. imports. As a result, the increase in local prices from 2006 to 2008 appears to have been largely due to rising prices of imported goods such as food, utilities, and transportation. The American Samoa Consumer Price Index shows that prices rose by about 14.6 percent from 2006 to 2008. Over the same period, the price of imports such as food rose by more than 22.2 percent; the price of transportation, including the price of new cars and fuel costs, which are primarily imports, rose by 13.5 percent; and the price of housing and utilities such as electricity rose by 18.4 percent. In contrast, the price of education and communication services, mostly a domestic product, increased by only 0.3 percent in 2008.
Available Data for 2006-2008 Do Not Suggest Link Between Changes in Poverty-related Program Participation and Changes in Inflation-Adjusted Earnings
Minimum wage increases disproportionately affect households at the lower end of the income distribution. However, direct measures of American Samoa poverty rates are not available for recent years. Available data for federal need-based assistance in American Samoa in 2006 to 2008 do not suggest that changes in inflation-adjusted earnings led to significant changes in poverty-related program participation.
Data from the U.S. Department of Agriculture’s WIC Nutrition Program show that the program participation trend in American Samoa remained stable for the last 4 years, as shown in table 10. Assuming that there was no change in the percentage of the eligible population actually reached and covered by the program, this suggests that the number of people earning less than 185 percent of the U.S. poverty line in American Samoa did not change much during the period.
American Samoa Workers Said Support for Increases Had Dwindled over Time, Particularly Due to Cannery Closure
Workers Said in Discussion Groups That Their Support for the Increases Has Diminished over Time
Discussion group participants said that their views about the minimum wage increases had grown more negative over time. Participants gave various reasons for their dwindling support of minimum wage increases. For example: Cannery closure. Discussion group participants said that their views related to the minimum wage increases had been negatively affected by the closure of one cannery, which they attributed to the wage increases, as well as uncertainty about the remaining cannery’s future. Participants told us they worried about the large number of unemployed workers and their families and possible additional layoffs at the remaining cannery. One cannery worker said that cannery management had attributed layoffs and benefit cuts to the wage increases.
Job insecurity. Participants said that businesses were laying people off because they could not afford to pay all workers the minimum wage. Participants commented that they would rather have a secure job without the minimum wage increases than lose their jobs because of the increases. Participants also told us that if a person resigns or retires, companies eliminate the position instead of hiring a new person and that store owners are not hiring but are relying on family members for help. Cannery workers also indicated that keeping their jobs was particularly important because there were no alternative employment opportunities.
Loss of benefits. Participants said that they have experienced reduction in benefits. Cannery workers told us that they had lost many benefits, including free night shift transportation, paid holidays, end-of-year bonuses, overtime pay, pensions, and sick leave.
Workers Expressed Obligation to Support Extended Families and Broader Community Negatively Affected by Minimum Wage Increases
Many residents we spoke with told us that they live in large households of extended family members and that when a household member experiences a loss of income, the family experiences an obligation to help. Workers reported that Samoans are also expected to share their resources with unemployed relatives who are not immediate family members. Therefore, residents expressed concern about relatives getting laid off as a result of the minimum wage increases and their responsibility to provide for them.
Workers Said Purchasing Power Shrank because Wages Grew Less Than Prices
Participants stated that their incomes had been stretched owing to increases in the prices of groceries, such as infant formula, as well as increases in the prices of fuel, water and electricity, bus fares, hospital care, and private school tuition. In addition, workers said that minimum wage increases have not kept pace with the cost of living. Workers stated that they still cannot afford things despite the raises because the cost of living has increased more.
Cannery Workers Generally Opposed Future Minimum Wage Increases
Comments by the cannery workers who participated in our discussion groups indicated that although the higher wage was welcomed by some, the past wage increases were unpopular among many cannery workers and most opposed the future minimum wage increases as scheduled. All of the discussion group participants in one cannery strongly opposed future minimum wage increases, and the majority of participants in the second cannery said they wanted minimum wage increases to stop for fear of company closure and job losses.
Non-Cannery-Workers Expressed Various Views on Future Minimum Wage Increases
Among discussion group participants outside the canneries, views on the minimum wage increases varied. Among those who welcomed the wage increases, some participants said that they supported future minimum wage increases because of inevitable growth in the cost of living. One participant said that the minimum wage increase was needed and would have positive effects in the long term and that the economy would have to adjust. Among those who opposed the increases, participants said that the wage increases would have no lasting benefit because inflation would diminish purchasing power. Another participant argued for revisiting the question of whether to continue raising the minimum wage after the wage reached about $5 per hour.
The text box lists some of the comments by discussion group participants.
American Samoa Workers’ Views Based on Discussion Groups Support for the American Samoa minimum wage increases has dwindled over time for several reasons. “I’m worried about the cannery closure, the unemployed thousands, and their families.” “This is the worst nightmare here at the plant… with the worries.” “The cannery next door is closing next month. It is the impact of the minimum wage increase, and we don’t want that to happen here.” “When management has announced layoffs and benefit cuts, they have said it’s because of the wage increases.” “We would rather have little pay than zero pay.” “We just want to make sure jobs are secure. “ “As wages increase there are no jobs.” “There is nothing else to do once we lose jobs.” “Since the minimum wage went into effect, there have been no more benefits or paid holidays.” “Businesses are laying people off because they can’t afford to pay everyone the minimum wage.”
Workers expressed obligation to support extended families and the broader community affected by minimum wage increases. “We have family obligations in American Samoa, including and church obligations… If your family needs help, you help them. My family asks for more money, because more is available. I see relatives hungry and can’t be selfish. We can budget for what we need now and can share with unemployed relatives. I’m worried about relatives getting laid off, getting hungry, and knocking on my door. Who will feed the cannery layoffs? We will. I think about it day and night.” [Others participants nodding] “I have dependents who are sisters and brothers. Since the raise, I’ve been trying hard to support my family. We are expected to respect and support our parents. Like for the funeral yesterday, we are required to contribute a lot of money, such as $100 per person. We will have to ask people at work if they can share money. Right now, if someone at work has a coffee, we all share it.”
Workers said purchasing power has decreased because wages rose less than prices. “Prices have gone up, stretching incomes.” “We still can’t afford things with the raise, because the cost of living is going up more.”
Cannery workers generally oppose future minimum wage increases, although the higher wage is welcomed by some. “They should stop increasing wages. It’s enough—we should stop right now. Everyone wants the minimum wage to stop right now.” “We are begging—we don’t want the $.50.” “I don’t support any more increases in the minimum wage and don’t support petitions to reduce it to the first $.50 increase level. Because going back to the initial increase when cost of living is so high doesn’t make sense, unless there is a system to reduce the cost of living. I support leaving the minimum wage as is, with no increase or decrease.”
Non-cannery-workers expressed varying views about the future minimum wage increases. “It has to happen. The cost of living will go up whether you have the raise or not. I support the minimum wage because of this.” “The person who goes from $4 to $7.25 won’t come out ahead, because everything they purchase will cost more, decreasing buying power.” “With the prospect of losing the canneries, it is not good in the short term. But it is positive in the long term: 10 to 15 years from now. The economy will have to adjust. It will not be in a poverty state. It will be painful, but it has to happen.”
Appendix IV: CNMI Wages, Employment, Employer Actions, Inflation-Adjusted Earnings, and Worker Views
In the CNMI, the first minimum wage increase raised wages for about a third of workers of private sector employers that responded to GAO’s questionnaire. Based on June 2009 wage data from our questionnaire, the future minimum wage increases would affect the wages of 82 percent of those private sector workers by 2015. CNMI government data show that following the 2007 wage increase, employment continued an existing downward trend largely reflecting the garment factory closures. Small employers and other private sector officials expressed mixed views about the future minimum wage increases, and many expressed greater concerns about changes to immigration law. In questionnaire responses, employers reported having taken cost-cutting actions, such as freezing hiring, since the increases began. They also reported planning such actions by the end of 2010. Employers attributed their actions both to the minimum wage increases and to other factors. Based on an analysis of responses from CNMI employers in the hotel industry, we found that raising room rates to cover higher wage costs may cause a 2.6 to 13.7 percent decline in visits to the CNMI. CNMI government tax data show that average annual inflation- adjusted earnings declined by about 6 percent from 2006 to 2008. Although earnings data do not allow for a direct comparison of average and minimum wage annual earnings or for tracking the earnings of workers who lost their jobs, GAO estimated that annual inflation-adjusted earnings for minimum wage full-time workers who retained their jobs and hours rose by about 12 percent. In discussion groups, CNMI workers generally expressed support for the minimum wage increases and cited other factors affecting living standards.
Minimum Wage Increases through 2016 Would Affect Wages of the Majority of CNMI Private Sector Workers Employed in 2009
Wages of Some CNMI Private Sector Workers Were Low Enough to Be Raised by Minimum Wage Increases in 2007-2009
Responses to our questionnaire show that before the first minimum wage increase, in July 2007, about a third (36 percent) of private sector workers employed by the respondents earned wages close enough to the $3.05 minimum to be affected by the increase (see fig. 12).
Tourism industry. About 40 percent (897 of 2,217) of tourism workers earned no more than $.50 over the $3.05 minimum wage.
Other private sector industries. About 30 percent (542 of 1,774) of workers in other private sector industries earned no more than $.50 over the $3.05 minimum wage. Although we were unable to include garment factories in our questionnaire because they had closed before the time of our work, based on past work, we assume that a large percentage of employed garment workers were affected by the minimum wage increases.
In June 2007, the local minimum wage was $3.05. The first minimum wage increase occurred in July 2007.
For the first three minimum wage increases in 2007 through 2009, wage data provided by respondents to our large-employer questionnaire showed the following: About 61 percent of CNMI private sector workers outside the garment industry earned wages low enough—that is, no more than $1.50 over the minimum—in July 2007 to be affected by the three minimum wage increases.
In the public sector in 2007, according to data provided by the CNMI government, only about 2 percent of CNMI government workers earned wages within $1.50 over the minimum—that is, close enough to the minimum to be affected by the first three increases.
Rise in Median Wage Was Slightly Larger for CNMI Tourism Workers
After the first three minimum wage increases, median wages for the tourism industry rose slightly more than for other sectors of the CNMI economy. Our analysis, based on large employers’ responses to our questionnaire, shows that from June 2007 to June 2009—the period of the $1.50 total increase in the minimum wage—the median wage for the tourism sector rose by 19.2 percent compared with 17.6 percent for the rest of the private sector (see table 11). For CNMI public sector workers, the median annual salary, based on questionnaire responses, remained unchanged in a range between $20,000 and $30,000.
The minimum wage increases in 2007 through 2009 somewhat narrowed the gap between the wages of lower- and higher-paid workers employed by questionnaire respondents. As figure 13 shows, based on employer questionnaire responses, the wages of workers at the 25th percentile rose while the wages of workers at the 75th percentile remained constant. Specifically, the gap between wages of workers at the 25th percentile and workers at the 75th percentile dropped from $8.04 in 2007 to $7.32 in 2009, a decline of 9 percent.
As the minimum wage increases continue, they will affect a growing number of workers in the CNMI. Based on large employers’ questionnaire responses about workers’ wages as of June 2009, in the private sector, the increases scheduled for 2010 through 2015 would affect the wages of about 82 percent of those employers’ workers by 2015 (see fig. 14). In the public sector, the scheduled increases would affect at most about 38 percent of workers by 2015.
However, uncertainty about several critical variables not reflected in our analysis makes it difficult to project the distribution of wages in the CNMI following the minimum wage increases in September 2010 and subsequent years.
Impact of U.S. immigration law. Although the application of U.S. immigration law in the CNMI as of November 2009 may affect the size and composition of the CNMI workforce, it is too soon to assess the extent of such impacts.
Changes in CNMI labor market. Changes in the CNMI labor market could affect the wage distribution of workers. For example, the departure of the garment industry may continue to affect other industry sectors, decreasing the number of workers at the lower end of the wage distribution.
CNMI Employment Continued to Drop as Minimum Wage Increased, and Future Increases Could Have Growing Impact on Employment
Total CNMI Employment Continued to Drop as Minimum Wage Rose
During the period following the first minimum wage increase, total employment in the CNMI continued a downward trend that existed before the minimum wage increases went into effect. From 2006 through 2008, total employment fell by about 27 percent, from 48,945 to 35,907, according to CNMI government tax data (see fig. 15). In addition, questionnaire responses from large employers representing about 30 percent of the CNMI workforce indicate that among the represented workers, employment dropped by about 6 percent from June 2008 to June 2009.
Some employment loss coincided with increases in the minimum wage, and the closure of the garment factories, for multiple reasons, likely contributed substantially to employment loss. According to CNMI tax data, much of the decline in employment was due to the reduction in the number of foreign workers, many of whom worked in the garment industry. These data show that in 2006 there were approximately 14,000 tax records for garment industry workers and that by 2008, the number of garment worker tax records was approximately 3,000. According to a CNMI economic study, the phasing out of quotas for garment trade led to the decline of the CNMI industry prior to the minimum wage increases. According to industry officials, the wage increases caused the remaining factories to close more quickly.
Small Employers and Other Private Sector Officials Expressed Mixed Views about Future Increases, While Government Officials Were Concerned about Growing Budget Pressures
Small business owners and managers told us in discussion groups that they wanted workers to have higher incomes and that CNMI employers had not paid workers enough before the minimum wage increases were implemented. However, they expressed concern that local businesses might not be able to afford future cost increases, and they stated that it would be difficult for the economy to sustain wage increases while it was experiencing other difficulties. For example, the owners stated that the garment factory closures have resulted in increased shipping costs, decreased government tax revenues, and decreased demand for goods and services provided by local businesses. Some small business owners said that they could more easily afford to cover the costs of scheduled minimum wage increases if they did not provide room and board, medical insurance, and work permit fees for foreign workers.
Small employers participating in discussion groups also said that the application of U.S. immigration law had increased uncertainty for small businesses and was more important than the minimum wage increases. Participants noted that without a policy regarding foreign workers, it was difficult to plan for the future. Because of the uncertainty regarding U.S. immigration law, participants said that firms preferred not to hire foreign workers, but they needed to train local residents before they would be able to replace foreign workers. In addition, small business owners from other countries expressed anxiety about not knowing whether they will be able to remain in the CNMI under U.S. immigration law.
Similarly, many larger private sector employers we interviewed expressed greater concern about the economic effects of U.S. immigration law on the CNMI economy than about the effects of minimum wage increases. For example, the CNMI’s tourism industry association observed that although the minimum wage increases could lead to greater interest in tourism- related employment among locally-born CNMI residents, application of U.S. immigration law would result in the elimination of some tourism- related jobs in the CNMI. Other private sector officials expressed concern that the scheduled wage increases would make it more difficult to attract new businesses, such as call centers and new tourism businesses, to the CNMI. For example, the CNMI’s dial-tone provider said that although past minimum wage increases in the CNMI had not impeded the company’s ability to offer call-center services in the CNMI, the wage increases had affected the company’s subscriber base by causing other businesses to close. The company also said that future minimum wage increases could prevent the company from competing internationally for call-center services from the CNMI.
In addition, public sector officials said that the CNMI government will be more directly affected by future than past minimum wage increases as budget pressures grow. CNMI government officials whom we interviewed noted that although past minimum wage increases had not substantially increased their agencies’ labor costs, subsequent increases could cover more employees and thus raise costs. Although we found that the minimum wage increases would not substantially affect CNMI government workers until 2014 and 2015, they will likely coincide with an existing high degree of fiscal stress on the CNMI government. For example, the NMI Retirement Fund’s actuarial assessment for fiscal year 2007 reports unfunded pension liabilities of $369 million. In addition, the financial audit conducted of the Fund’s Group Health and Life Insurance Trust Fund for fiscal years 2007 to 2008 indicates a net deficit in the government’s group health and life insurance trust fund of $18.3 million.
CNMI Employers Reported Past and Planned Actions to Reduce Costs and Raise Prices, Attributing Actions Both to Minimum Wage Increases and to Other Factors
Respondents to our CNMI large-employer questionnaire reported having taken a number of cost-cutting actions, some of which directly affect workers’ wages or benefits, and raising prices. However, few—weighted by numbers of employees—attributed these actions largely to the minimum wage increases. Employers also reported planning to take such actions by the end of 2010, and some attributed their plans largely to the minimum wage increases. CNMI employers also attributed their actions largely to other factors. (See app. VI for a complete listing of employers’ past and planned actions, as well as the percentages that reported them and that attributed them to the minimum wage increases and other factors to a small, moderate, or large extent.)
CNMI Employers Reported Cutting Costs and Raising Prices in June 2007- June 2009, but Few Attributed These Actions Largely to Minimum Wage Increases
Cost-Cutting Actions Directly Affecting Wages and Benefits Closed or relocated. Employers representing 2 percent of all private sector workers employed by questionnaire respondents reported closing temporarily or relocating outside the CNMI (see fig. 16). Of these employers, none attributed the decisions to close temporarily or to relocate largely to past minimum wage increases.
Laid off hourly workers. Employers representing 11 percent of all workers employed by questionnaire respondents reported having laid off hourly workers (see fig. 16). Of these, employers representing 2 percent of workers employed by these respondents attributed the action largely to the past minimum wage increases.
Froze hiring. Employers representing 72 percent of all workers employed by questionnaire respondents reported having implemented a hiring freeze. Of these, employers representing 17 percent of workers employed by these respondents attributed the action largely to the past minimum wage increases.
Decreased benefits. Employers representing 17 percent of all workers employed by questionnaire respondents reported that they had decreased the level of hourly workers’ benefits. Of these, employers representing 2 percent of workers employed by these respondents attributed the action largely to the past minimum wage increases.
Additional Cost-Cutting Actions in 2007-2009 Implemented labor-saving strategies or technology. Employers representing 42 percent of all workers employed by questionnaire respondents reported that they had implemented labor-saving strategies or technology. Of these, employers representing 10 percent of workers employed by these respondents attributed the action largely to the past minimum wage increases.
Implemented other cost-saving strategies. Employers representing 44 percent of all workers employed by questionnaire respondents reported that they had implemented other cost-saving strategies, such as energy- saving technologies. Of these, employers representing 20 percent of workers employed by these respondents attributed the action largely to the past minimum wage increases.
Reduced capacity or services. Employers representing 27 percent of all workers employed by questionnaire respondents reported that they had reduced their operating capacity or customer services. Of these, employers representing 8 percent of workers employed by these respondents attributed the action largely to the past minimum wage increases.
Raised prices. Employers representing 75 percent of all workers employed by questionnaire respondents reported that they had raised prices of goods or services. Of these, employers representing 6 percent of workers employed by these respondents attributed the action largely to the past minimum wage increases.
CNMI Employers Reported Planning to Cut Costs and Raise Prices by December 2010, and Some Attributed These Actions Largely to Minimum Wage Increases
Planned Cost-Cutting Actions Directly Affecting Wages or Benefits Close or relocate. Employers representing 5 percent of all private sector workers employed by questionnaire respondents reported planning to close permanently or to relocate their business outside the CNMI (see fig. 16). Of these, employers representing 3 percent of workers employed by these respondents attributed the decision to close, and employers representing 3 percent attributed the decision to relocate, largely to the minimum wage increases.
Lay off hourly workers. Employers representing 15 percent of all workers employed by questionnaire respondents reported planning to lay off hourly workers (see fig. 16). Of these, employers representing 12 percent of workers employed by these respondents attributed the planned action largely to the minimum wage increases.
Freeze hiring. Employers representing 72 percent of all workers employed by questionnaire respondents reported planning to freeze hiring. Of these, employers representing 54 percent of workers employed by these respondents attributed the planned action largely to the minimum wage increases.
Decrease benefits. Employers representing 19 percent of all workers employed by questionnaire respondents reported planning to decrease hourly workers’ benefits. Of these, employers representing 11 percent of workers employed by these respondents attributed the planned action largely to the minimum wage increases.
Implement labor-saving strategies. Employers representing 22 percent of all workers employed by questionnaire respondents reported planning to implement labor-saving strategies or technology. Of these, employers representing 44 percent of workers employed by these respondents attributed this planned action largely to the minimum wage increases.
Implement other cost-saving strategies. Employers representing 79 percent of all workers employed by questionnaire respondents reported planning to implement other cost-saving strategies (e.g., energy-saving technologies). Of these, employers representing 29 percent of workers employed by these respondents attributed the planned action largely to the minimum wage increases.
Reduce capacity or services. Employers representing 22 percent of all workers employed by questionnaire respondents reported planning to reduce operating capacity or customer services. Of these, employers representing 34 percent of workers employed by these respondents attributed the planned action largely to the minimum wage increases.
Raise prices. Employers representing 34 percent of all workers employed by questionnaire respondents reported planning to raise prices of goods and services. Of these, employers representing 15 percent of workers employed by these respondents attributed the planned action largely to the minimum wage increases.
Selected planned employer action and attribution to minimum wae increaClose or relocate (private sector)
Lay off hourly workers (public and private sectors)
CNMI Employers Attributed Past Actions Largely to Several Factors Other Than Minimum Wage
CNMI employers reported that, in addition to the minimum wage increases, factors such as changes to U.S. immigration laws and increased transportation and shipping costs contributed to their past actions and plans to cut costs and raise prices. Questionnaire respondents identified factors other than the minimum wage increases that contributed largely to the actions they reported having taken. (See app. VI for a complete list of the other reported factors and the percentages of employers reporting these factors.) For example, employers representing 64 percent of workers employed by respondents cited changes to U.S. immigration laws; employers representing 45 percent of workers cited fewer customers; employers representing 33 percent of workers cited increased transportation or shipping costs; and employers representing 26 percent of workers cited increased cost of materials as contributing to a large extent to their reported actions.
Minimum Wage Increases and CNMI Hotels Like other employers in the CNMI, hotels’ payroll costs will rise as the minimum wage increases. A hotel’s capacity to absorb the higher payroll costs, given its number of workers and wage structure, will depend in part on its ability to raise prices of rooms and services to cover the higher costs. All hotels that responded to our large-employer questionnaire reported having raised prices from June 2007 to June 2009, and hotels representing 75 percent of hotel workers employed by respondents to our questionnaire reported planning to raise prices in the future. We estimate that for the hotels that responded to our questionnaire, the minimum wage increases through 2010 and 2015 will raise average annual payroll costs by approximately $300,000 and $1.3 million, respectively, from their average payroll costs in 2008. As a result, payroll costs as a percentage of total operating costs will increase from approximately 27 percent in 2008 to 38 percent in 2015. Figure 17 shows the estimated average impact of the minimum wage increases on these hotels’ payroll costs in 2010 and 2015, assuming that the number of employees and other operating costs remain at the levels reported by the hotels for 2008.
Whether the hotels can increase their prices to cover the additional wage costs will depend on price elasticity—that is, how visitors respond to the higher prices of visiting the CNMI. To estimate the effect of higher hotel prices on total trip cost, we used data from a 2009 survey by the Hotel Association of the Northern Mariana Islands and estimated that the ratio of workers to hotel rooms sold is approximately 1.18. Using our projection of the percentage of hotel workers who will be affected by the future minimum wage increases, we estimated that the total trip cost per visitor will need to increase by approximately 3.2 percent to cover the minimum wage increases for the hotel workers through 2015 (see table 12). Using the elasticity estimates from the literature, including one used in a study commissioned by the Department of Homeland Security study, we found that raising prices to cover higher costs from the minimum wage increases through 2015 for hotel workers may cause visits to the CNMI to decline by approximately 2.6 percent to 13.7 percent. However, hotels may have different abilities to raise prices. For example, hotels that cater to budget conscious visitors might be less able to raise prices than hotels catering to visitors for whom prices are less important. In addition, the current business environment may make it difficult to increase prices. The CNMI hotel industry group noted recent declines in the tourism sector, reflected in declining room rates from 2008 to 2009, declining occupancy rates from 2005 to 2009, and declining revenues from 2006 to 2009.
CNMI Average Inflation- Adjusted Earnings Dropped as Estimated Earnings of Minimum Wage Workers Who Remained Employed Rose
Average Inflation-Adjusted Earnings Declined in 2006-2008
From 2006 to 2008, average annual inflation-adjusted earnings in the CNMI declined by about 6 percent. In particular, according to CNMI government tax data, average annual earnings rose by about 12 percent to $12,781 in 2008. However, from 2006 to 2008 average prices increased by about 19 percent. Therefore, inflation eroded all income gains over the 2006-2008 period. (See table 13.)
Although earnings data do not allow for a direct comparison of average and minimum wage annual earnings or for tracking the earnings of workers who lost their jobs, we estimate that inflation-adjusted earnings for CNMI minimum wage workers who retained their jobs and full hours rose by about 12 percent from 2006 to 2008. We estimate that annual minimum wage earnings increased by 33 percent from 2006 to 2008 (from $3.05 to $4.05), while Consumer Price Index data show that local prices increased by 19 percent.
To estimate total annual earnings of a minimum wage worker from 2006 to 2008, we assumed that a minimum wage worker earned $3.05 per hour in 2006 and $4.05 per hour in 2008 and that a minimum wage worker worked 2,000 hours per year in each calendar year. As a result, we estimate that total earnings of a minimum wage worker were $6,100 in 2006 and $8,100 in 2008. Because in 2007 average prices rose by about 13.5 percent but earnings rose by 16.4 percent, inflation-adjusted earnings of a minimum wage worker increased by about 2.5 percent. In 2008, the increase in purchasing power was larger (8.9 percent) owing to a similar increase in annual earnings (about 14.1 percent) but a smaller increase of average prices (4.8 percent) (see table 14).
However, for foreign workers whose employers chose to add charges for food and lodging after the minimum wage increases, inflation-adjusted earnings may have increased less or have decreased since 2006. According to the CNMI government, employers providing room and board are permitted to deduct up to $100 for lodging and $100 for food per month from the wages of foreign workers. Employers and workers we spoke with told us that in response to minimum wage increases, some employers started to make these deductions from foreign workers’ paychecks.
Therefore, we estimate that in 2008, foreign workers could earn from $5,700 to $8,100, depending on deductions for food and lodging. As a result, those workers may have experienced a range of changes in their inflation-adjusted earnings from 2006 to 2008, from a 12 percent increase with no change in deductions to a 21.4 percent decrease with the maximum allowable deduction.
Inflation in 2006-2008 Resulted Mainly from Higher Import Prices
According to the CNMI government, most consumer goods in the CNMI are imported. As a result, the increase in local prices from 2006 to 2008 appears to have been largely due to price increases in imported goods such as food and utilities. In particular, the CNMI Consumer Price Index shows that prices rose by about 19 percent from 2006 to 2008. Over the same period, the price of imports such as food increased by about 8 percent and the price of housing and utilities such as electricity increased by 53.5 percent. According to data from the CNMI’s Commonwealth Utilities Corporation, electricity rates increased by 25 percent in 2007 alone. In contrast, the price of education and communication services, mostly a domestic product, has dropped from 2006 to 2008 by 0.5 percent.
Data Available for 2006-2008 Do Not Suggest Link between Changes in Poverty-Related Program Participation and Changes in Inflation-Adjusted Earnings
Minimum wage increases generally disproportionately affect households at the lower end of the income distribution. However, direct measures of the CNMI poverty rate are not available for recent years. Available data for federal need-based assistance in the CNMI in 2006 to 2008 do not suggest that changes in inflation-adjusted earnings, resulting from the wage increases, led to changes in poverty-related program participation.
Our analysis of CNMI Nutrition Assistance Program data shows that from 2006 to 2009, there was no significant observable trend in the number of program beneficiaries (local residents and U.S.-born children of nonlocal residents) (see table 15). The relatively constant number of program beneficiaries suggests that the low-income population remained about constant.
CNMI Workers Generally Expressed Support for Minimum Wage Increases and Cited Other Factors Affecting Living Standards
Discussion Group Participants Generally Supported Higher Wages for Workers
Salaried and hourly workers we spoke with generally expressed support for the minimum wage increases. For example, the majority of WIC recipients we spoke with in Saipan and Tinian favored future minimum wage increases. Hotel human resources staff also stated that the minimum wage increases were long overdue. Local workers in the discussion groups expressed their desire to earn higher wages to cope with increasing costs. However, some workers also said they were uncertain whether increases in labor costs due to the minimum wage increases had been responsible for price increases.
Workers Said Closure of Garment Factories and Events Affecting Tourist Arrivals Had Lowered Living Standards for Residents
Discussion group participants said that the closure of the garment factories and external factors affecting tourist arrivals had negatively affected living standards for CNMI residents. Workers stated that the closure of the garment factories had a ripple effect in the economy. Statements by discussion group participants indicated that they were less concerned about the minimum wage increases than about other factors beyond their control that affect living standards. For example, as human resource managers from the hotel industry observed, the week before we convened the group, hundreds of reservations were cancelled as a result of the global alarm over the H1N1 virus. Other participants mentioned the effects on the CNMI of the SARS virus and the recent financial crises in the Korean and Japanese markets. Hotel employees noted that hours worked depend on occupancy rates and any factors that negatively affect tourist arrivals decrease earnings.
Local Workers Stated That Minimum Wage Increases Had Helped Improve Their Living Standards, but They Need Additional Training to Replace Foreign Workers
Discussion group participants also told us the minimum wage increases had benefited some local workers. For example, hotel human resources staff said that local workers were learning how to plan rather than live from paycheck to paycheck, as their income earned became more significant. The hotel staff told us that as the workers’ spending power had increased, they had become more careful in budgeting their expenses. Other local workers also indicated that the higher wages had helped their families better cover their living expenses. However, discussion group participants said local workers needed additional training to replace foreign workers. Workers participating in discussion groups expressed concern that it is difficult for locals to find jobs because many local workers lack skills needed for minimum wage jobs previously held by foreign workers.
Workers Indicated That Minimum Wage Increases Had Not Improved Living Standards of Foreign Workers
Workers we talked with stated that the minimum wage increases had generally not directly improved the living standards of foreign workers. According to workers participating in our discussion groups, benefits had decreased as income increased; for example, some foreign workers reported that since the first minimum wage increase, their employers had begun requiring them to pay up to $200 per month for housing and food. Further, many foreign workers lost their jobs as a result of the demise of the garment industry, and many of these workers have left the CNMI. Ex- garment workers still living in Saipan told us that they were drawing on their savings, relying on help for their U.S.-born children from the Nutrition Assistance Program, and looking for work.
Foreign Workers Expressed Concern about Immigration Changes and Requirements
Discussion group participants in Saipan and Tinian said that the application of U.S. immigration law had increased uncertainty about the employment of foreign workers. Foreign workers expressed anxiety over not knowing whether they will be able to remain in the CNMI under U.S. immigration law. Moreover, laid-off foreign workers said that employers had begun asking job applicants whether they were U.S. citizens because employers did not know how long they would be able to retain foreign workers under U.S. immigration law.
The text box lists some comments by CNMI discussion group participants.
CNMI Workers’ Views Based on Discussion Groups Some discussion group participants supported higher wages for workers. “There is no price control, minimum wage is up and prices are up. Prices have been going up regardless of the minimum wage. Without the minimum wage increases we would have been worse off.” “Minimum wage is way overdue. We can’t deny raises. People come in and want a job and it is hard to deny them that.”
Workers said closure of garment factories and decreased tourist arrivals had lowered living standards for all residents. “This week hundreds of nights cancelled due to the H1N1. Occupancy rates were sad.” “If Japan goes into recession, so does the CNMI.” “I was a manager in the factory for 9 years…December of 2008 the factory closed. This was the last factory that closed. Now the factory’s wall is torn and the place is deserted. I am on a student visa now, using up my savings.”
Local workers stated that minimum wage increases had helped improve their living standards, but they need additional training to replace foreign workers. “The minimum wage has had some good impact due to the increased spending power. People are trying to make their pay check last longer.” “Now local people are more careful what they can afford.
Before they used to live paycheck to paycheck, the paycheck would be spent by the end of the weekend. It is re-education of the population.” “Before, the wages were so insignificant, people just went out and spent it. Now they are learning how to plan.” “Coming from someone has a home here, is a local resident, it’s definitely more positive. The wages are good for my family.” “It is hard to find a job, need to have degrees, finished college, employers want experience.”
Workers indicated that minimum wage increases have not improved the living standards of foreign workers. “Income has increased but benefits have decreased [for foreign workers]…the employer gets more back.” “—low minimum wage, benefits for contract workers. Now, higher minimum wage, lower benefits…we lose more.” “Reductions for staff housing, before it was free. Same for food. Deduction is $100 for housing and same for food.”
Foreign workers expressed concern about immigration changes and requirements. “I think economy very low because of immigration problem…Some people who have been here long time can’t stay.” “I am using an extension, after an extension. Federalization is the issue for me.” “I have a family, company is source of bread and butter. If I need to leave, big impact on life… I don’t have idea if I can stay.”
Appendix V: American Samoa Employers’ Reported Actions and Contribution of Minimum Wage Increases and Other Factors, Based on GAO Large- Employer Questionnaire Responses
Data shown cover large employers—generally, those with at least 50 employees. Data do not include smaller employers and employers that have closed, none of whom are covered by our questionnaire. Data also do not include employers that did not respond to our questionnaire. Although questionnaire responses covered about 72 percent of the American Samoa workforce, they may not be representative of all American Samoa workers and employers. In addition, the tuna canneries and local government employed a large percentage of workers employed by all questionnaire respondents, as in the actual American Samoa workforce; as a result, these employers’ responses significantly affected our reported questionnaire data. a. Increased utility costs b. Increased costs of materials e. Decreased number of customers f. Changes to U.S. immigration g. Changes in business taxes or Data shown cover large employers—generally, those with at least 50 employees. Data do not include smaller employers and employers that have closed, none of whom are covered by our questionnaire. Data also do not include employers that did not respond to our questionnaire. Although questionnaire responses covered about 72 percent of the American Samoa workforce, they may not be representative of all American Samoa workers and employers. In addition, the tuna canneries and local government employed a large percentage of workers employed by all questionnaire respondents, as in the actual American Samoa workforce; as a result, these employers’ responses significantly affected our reported questionnaire data.
Some rows do not add up to 100 percent due to rounding or the category “do not know,” which is not reported here.
Data shown cover large employers—generally, those with at least 50 employees. Questionnaire responses do not include smaller employers; employers that had closed, or employers that did not respond to our questionnaire. Although questionnaire responses covered about 72 percent of the American Samoa workforce, they are not necessarily representative of all American Samoa workers and employers. In addition, the tuna canneries and local government employed a large percentage of workers employed by all questionnaire respondents, as in the actual American Samoa workforce; as a result, these employers’ responses significantly affected our reported questionnaire data.
Employers reported actions that they planned to take within 18 months of our August 2009 questionnaire. a. b. c. d. e. Decreased number of customers f. Changes to U.S. immigration g. Changes in business taxes or Data shown cover large employers—generally, those with at least 50 employees. Data do not include smaller employers and employers that have closed, none of whom are covered by our questionnaire. Data also do not include employers that did not respond to our questionnaire. Although questionnaire responses covered about 72 percent of the American Samoa workforce, they may not be representative of all American Samoa workers and employers. In addition, the tuna canneries and local government employed a large percentage of workers employed by all questionnaire respondents, as in the actual American Samoa workforce; as a result, these employers’ responses significantly affected our reported questionnaire data.
Some rows do not add up to 100 percent due to rounding or the category “do not know,” which is not reported here.
Employers reported contribution to actions that they planned to take within 18 months of our August 2009 questionnaire.
Appendix VI: CNMI Employers’ Reported Actions and Contribution of Minimum Wage Increases and Other Factors, Based on GAO Large-Employer Questionnaire Responses
Introduce other cost-saving strategies (e.g., energy-saving technologies)
Data shown cover large employers—generally, those with at least 50 employees. Data do not include smaller employers and employers that have closed, including garment factories, none of whom are covered by our questionnaire. Data also omit employers that did not respond to our questionnaire. Questionnaire responses cover about 29 percent of the CNMI public and private sector workforce. As a result, the data may not be representative of all CNMI workers and employers. In addition, the CNMI government accounted for a higher percentage of workers employed by questionnaire respondents than in the actual CNMI workforce, so the government’s responses disproportionately influence our questionnaire results on the public and private sectors combined.
Changes to U.S. immigration laws Changes in business taxes or fees Data shown cover large employers—generally, those with at least 50 employees. Data do not include smaller employers and employers that have closed, including garment factories, none of whom are covered by our questionnaire. Data also omit employers that did not respond to our questionnaire. Questionnaire responses cover about 29 percent of the CNMI public and private sector workforce. As a result, the data may not be representative of all CNMI workers and employers. In addition, the CNMI government accounted for a higher percentage of workers employed by questionnaire respondents than in the actual CNMI workforce, so the government’s responses disproportionately influence our questionnaire results on the public and private sectors combined.
Some rows do not add up to 100 percent due to rounding or the category “do not know,” which is not reported here.
Data shown cover large employers—generally, those with at least 50 employees. Questionnaire responses do not include smaller employers; employers that have closed, including garment factories; or employers that did not respond to our questionnaire. Questionnaire responses cover about 29 percent of the CNMI public and private sector workforce. As a result, the data may not be representative of all CNMI workers and employers. In addition, the CNMI government accounted for a higher percentage of workers employed by questionnaire respondents than in the actual CNMI workforce, so the government’s responses disproportionately influence our questionnaire results on the public and private sectors combined.
Employers reported actions that they planned to take within 18 months of our September 2009 questionnaire. a. b. Increased costs of materials d. e. Decreased number of customers f. Changes to U.S. immigration g. Changes in business taxes or Data shown cover large employers—generally, those with at least 50 employees. Data do not include smaller employers and employers that have closed, including garment factories, none of whom are covered by our questionnaire. Data also omit employers that did not respond to our questionnaire. Questionnaire responses cover about 29 percent of the CNMI public and private sector workforce. As a result, the data may not be representative of all CNMI workers and employers. In addition, the CNMI government accounted for a higher percentage of workers employed by questionnaire respondents than in the actual CNMI workforce, so the government’s responses disproportionately influence our questionnaire results on the public and private sectors combined.
Some rows do not add up to 100 percent due to rounding or the category “do not know,” which is not reported here.
Employers reported actions that they planned to take within 18 months of our September 2009 questionnaire.
Appendix VII: GAO Questionnaire Used in Report
Appendix VII: GAO Questionnaire Used in Report Instructions for Completing the Questionnaire Onscreen Please use your mouse to navigate, clicking on the field or check box you wish to answer.
To select a check box or a button, click on the center of the box.
To change or deselect a check box response, click on the check box and the ‘X’ will disappear.
To answer a question that requires that you write a comment, click on the answer box and begin typing.
The box will expand to accommodate your answer.
NOTE: The reporting unit for this questionnaire is an establishment. An establishment is generally (1) a single physical location where business is conducted or where services or industrial operations are performed or (2) a permanent office, payroll office, or other place where business activities are conducted.
PART I. ESTABLISHMENT INFORMATION These questions cover basic information about this establishment. Responses will be used to classify the establishment based on location, years in operation, ownership structure, and type of business. These questions also ask about this establishment’s competitors and position in the global marketplace. These responses will be used to assess how susceptible this establishment is to global competition in the goods-and-services market. 1. What is the 9-digit Employer Identification Number (EIN) for this establishment?
If you or your employer operates establishment in American Samoa with more than one EIN, please fill out one questionnaire per EIN. (Please enter numerals only) 2. What is this establishment’s name? 3. Since what year has this establishment been in continuous operation?
If this establishment has ever shut down temporarily but later reopened under the same EIN (e.g., seasonal closure or remodel), please count this temporary shutdown as part of the continuous operation. (Please enter in YYYY format) 4. Which category listed below best describes this establishment? (Please check only ONE box)
For-profit business................................................... Continue with QUESTION 5 Not-for-profit organization...................................... Skip to QUESTION 12 Government administrative agency or government-owned enterprise (e.g. public utility or hospital).............................................. Skip to QUESTION 12 Other........................................................................ Please specify: 5. Are the majority of this establishment’s owners U.S. citizens or nationals, U.S. or American Samoan permanent residents, or citizens of the Freely Associated States (FAS)? (Please check only ONE box)
Yes……................................................................... Continue with QUESTION 6 No……. ................................................................... Skip to QUESTION 7 Don’t know ............................................................. Skip to QUESTION 8 Which of the following best describes the majority ownership of this establishment? (Please check only ONE box)
U.S. citizen – CNMI born (Chamorro or Carolinian)………. U.S. citizen – CNMI born (NOT Chamorro or Carolinian) U.S. citizen – not CNMI born......................................... ...……… Chinese citizen................................................................ ...……… Filipino citizen................................................................ ...……… Japanese citizen .............................................................. ...……… Korean citizen................................................................. ...……… Other.... .......................................................................... ………. Don’t know/ unable to determine ................................... ...……… 6. Are the majority of this establishment’s owners of American Samoan heritage? (Please check only ONE box)
Yes……................................................................... Skip to QUESTION 8 No……. ................................................................... Skip to QUESTION 8 Don’t know ............................................................. Skip to QUESTION 8 7. What is the citizenship status of the majority ownership of this establishment? (Please check only ONE box)
Australian citizen .................................................... Chinese citizen ........................................................ Filipino citizen......................................................... Japanese citizen ....................................................... Korean citizen ......................................................... New Zealand citizen ............................................... Other........................................................................ Please specify: Don’t know.............................................................. Please explain: 8. Which one of the following best describes this establishment’s principal kind of business? (Please check only ONE box)
Agriculture, forestry, fishing and hunting ............... Mining, quarrying, and oil and gas extraction......... Utilities ................................................................... Construction ............................................................ Manufacturing ......................................................... Wholesale trade ....................................................... Retail trade .............................................................. Transportation and warehousing ............................. Publishing, broadcasting, and telecommunications ................................... Finance and insurance ............................................. Real estate and rental and leasing............................ Professional, scientific, and technical services ....... Educational services ................................................ Health care/ social assistance .................................. Accommodations (i.e., hotels)................................. Food service ............................................................ Arts, entertainment, and recreation ......................... Repair and maintenance services............................. Other........................................................................ Please specify: 9. Thinking about where your customers primarily reside, approximately what percentage of the goods or services that this establishment provides is sold to (a) local residents of American Samoa, (b) temporary visitors to American Samoa, and (c) consumers who reside outside of American Samoa?
The percentages across the three groups should roughly equal 100 percent. (Please check only ONE box per customer group) a. Local residents of American Samoa: None… ................................................................... Less than 20 percent…… ........................................ 20 to 39 percent……. .............................................. 40 to 59 percent ...................................................... 60 to 79 percent ...................................................... More than 80 percent .............................................. Don’t know ............................................................. b. Temporary visitors to American Samoa, such as tourists or business travelers: None… ................................................................... Less than 20 percent…… ........................................ 20 to 39 percent……. .............................................. 40 to 59 percent ...................................................... 60 to 79 percent ...................................................... More than 80 percent .............................................. Don’t know ............................................................. c. Consumers who reside outside of American Samoa and are not temporary visitors: None… ................................................................... Less than 20 percent…… ........................................ 20 to 39 percent……. .............................................. 40 to 59 percent ...................................................... 60 to 79 percent ...................................................... More than 80 percent .............................................. Don’t know ............................................................. 10. Does this establishment compete for customers with others that provide similar goods or services in the following markets, and if yes, where are the other establishments located in each market listed below?
If this establishment does not compete in the market, please check the box in column 1.
Establishment does compete in this market (Please check all that apply)
Outside the U.S. a. Goods or services sold to local residents of American Samoa.......................................................................... b. Goods or services sold to temporary visitors to American Samoa, such as tourists or business travelers …………………………………………….. c. Goods or services sold to consumers outside of American Samoa…………..………………………. 11. What are this establishment’s competitive advantages, if any, in the markets for which you compete for customers? (Please check ONE box per advantage) a. State-of-the-art technology........................................................................... b. Brand name................................................................................................... c. Skilled workforce…………………………………………………………. d. High-quality goods or services…………………………………………... e. Low production costs (both labor and operating costs)................................ f. Location………………………………………………………………….. g. Access to U.S. markets……………………………………………………. h. Government tax incentives………………………………………………... i. Others (please specify): ________________________________________________________ PART II. EXPENSES AND INCOME These questions ask about this establishment’s labor and capital expenses in order to better understand this establishment’s cost structure and ability to absorb cost increases. 12. The questions in Part II will refer to the 12-month period that includes June 12th in a given year. How does your establishment prefer to provide expense data — for a calendar year (January through December) or for a fiscal year as defined by your establishment?
Calendar year……................................................... Skip to QUESTION 13 Fiscal year……........................................................
12a. What is the first and last month of your establishment’s fiscal year that includes June 12th? (MM) (MM)
The data reported in questions 13 to 15 will be used to determine this establishment’s total costs incurred for its employees. Each question asks you to report a different type of employee cost that most establishments incur— total payroll, FICA contributions, and costs of employee benefits. Specific definitions of each of these three categories are provided below. 13. What was the total U.S. dollar amount of this establishment’s payroll before employee deductions for taxes and benefits for the 12-month period for 2006, 2007, and 2008 identified in question 12?
For each year, only include the following as payroll expenses: 12-month period that includes June 12th If did not incur any expenses, please write in 0.
Wages and salaries, including overtime pay, (Please round to the nearest whole dollar)
Paid holidays, vacation, sick leave, and other paid leave for all employees $ , , . 00 $ , , . 00 14. What was the total U.S. dollar amount of this establishment’s FICA contributions for the 12-month period for 2006, 2007, and 2008 identified in question 12?
If did not incur any expenses, please write in 0. (Please round to the nearest whole dollar) $ , , . 00 $ , , . 00 $ , , . 00 15. What was the total U.S. dollar amount of this establishment’s payments for employee benefits (other than FICA) for the 12-month period for 2006, 2007, and 2008 identified in question 12?
For each year, only include the following as benefits if offered to any employee who earned an annual salary or an hourly wage: 12-month period that includes June 12th If did not incur any expenses, please write in 0. (Please round to the nearest whole dollar)
Housing or food allowances Transportation payments for local or international $ , , . 00 travel Payments for education expenses Workers’ compensation Other benefits not listed above $ , , . 00 16. Excluding payroll, FICA contributions, and employee benefits, what was the total U.S. dollar amount of this establishment’s other operating expenses for the 12-month period for 2006, 2007, and 2008 identified in question 12?
If did not incur any expenses, please write in 0. (Please round to the nearest whole dollar)
Merchandise purchased for resale Equipment that was expensed (rather than $ , , . 00 capitalized)
Depreciation and amortization charges Business taxes and fees Other expenses not listed above, except expenses reported in questions 13 to 15 17. What was the total U.S. dollar amount of this establishment’s capital expenditures for the 12-month period for 2006, 2007, and 2008 identified in question 12?
For each year, only include the following as capital expenditures: 12-month period that includes June 12th If did not incur any expenses, please write in 0.
Value of new construction completed Value of physical improvements made to (Please round to the nearest whole dollar) establishment’s facilities that were completed Equipment that was capitalized (rather than $ , , . 00 $ , , . 00 $ , , . 00 18. What was the approximate total U.S. dollar amount of this establishment’s income (before taxes, if applicable) for the 12-month period for 2006, 2007, and 2008 identified in question 12?
Please do not include the value of sales or other taxes collected directly from customers and paid directly to a federal or local tax agency. (Please check ONE box per year) a. Less than $500,000....................................................................................... b. $500,000 to $749,999 ................................................................................... c. $750,000 to $999,999 ................................................................................... d. $1 million to $2,999,999…………………………………………………. e. $3 million to $4,999,999…………………………………………………. f. $5 million to $6,999,999............................................................................... g. $7 million to $8,999,999…………………………………………………. h. $9 million or higher (please specify to nearest million dollar below): i. Don’t know................................................................................................... j. Not applicable............................................................................................... 19. What percentage increase in operating costs would cause this establishment to close its operation in American Samoa? (Please check only ONE box)
Less than 10 percent…… ........................................ 10 to 19 percent……. .............................................. 20 to 29 percent ...................................................... 30 to 39 percent……. .............................................. 40 to 49 percent ...................................................... More than 50 percent .............................................. Don’t know ............................................................. Not applicable .........................................................
PART III. EMPLOYMENT, WAGES, AND BENEFITS DATA These questions ask for detailed data about employment, wages, and benefits for employees at this establishment for 2007, 2008, and 2009. These data are necessary to establish a historical time series of comparable employment and wage data for large employers in American Samoa.
NOTE: The questions in Part III ask about employees on this establishment’s payroll. When answering, please refer to the following definition of employee: Include the following in your count of employees: Full- and part-time employees, including executives, who earn an hourly wage or annual salary Employees on paid leave during any part of the stated pay period Exclude the following in your count of employees: Employees on the payroll of establishments with a different EIN from this establishment Proprietors, owners, or partners of unincorporated establishments Employees on unpaid leave for the entire stated pay period Unpaid family members Several questions in Part III also ask about employees covered by the Fair Labor Standards Act (FLSA). The FLSA establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in federal, state, and local governments. 20. Approximately what percentage of the employees at this establishment is female? (Please check only ONE box)
Less than 20 percent…… ........................................ 20 to 39 percent……. .............................................. 40 to 59 percent ...................................................... 60 to 79 percent ...................................................... More than 80 percent .............................................. Don’t know ............................................................. 21. Are any of the employees on this establishment’s payroll covered by the FLSA? (Please check only ONE box)
Yes……................................................................... No……. ................................................................... Don’t know ............................................................. 22. Are any of the employees on this establishment’s payroll paid an hourly wage instead of an annual salary? (Please check only ONE box)
Yes……................................................................... Continue with QUESTION 23 No……. ................................................................... Skip to QUESTION 32 Don’t know ............................................................. Skip to QUESTION 32 23. The reporting period for questions in Part II was either a calendar or fiscal year. The reporting period for the questions in Part III will now be a pay period. A pay period is a recurring length of time over which employee work time is recorded and paid. What length of time defines a pay period for employees paid an hourly wage at this establishment? (Please check only ONE box) 1 week...................................................................... 2 weeks ................................................................... 1 month ................................................................... Other........................................................................ Please specify: 24. For employees paid an hourly wage, what were the start and end dates of the pay period including June 12th for 2007, 2008, and 2009?
If this establishment was not in operation during the pay period that included June 12th in any year, please check the appropriate box in the last column of the table. (Please enter two numerals per answer box)
End date of pay period that includes June 12, 2007 Day includes June 12, 2007 MonthDay (MM) (DD) (MM) (DD)
End date of pay period that includes June 12, 2008 Day includes June 12, 2008 MonthDay (MM) (DD) (MM) (DD)
End date of pay period that includes June 12, 2009 Day includes June 12, 2009 MonthDay (MM) (DD) (MM) (DD) 25. What was the total number of employees paid an hourly wage on this establishment’s payroll during the pay periods that included June 12th for 2007, 2008, and 2009 who were (a) U.S. citizens, nationals, or permanent residents; (b) American Samoa permanent residents and citizens of the FAS; (c) citizens or permanent residents of nations other than the U.S., American Samoa, or the FAS?
If this establishment was not in operation during the pay period that included June 12th in any year, please enter a “0” in the corresponding box. (Please enter numerals in each box below) (a) U.S. citizens, nationals, or permanent residents (b) American Samoa permanent residents and citizens of the FAS (c) citizens or permanent residents of nations other than the U.S., American Samoa, or the FAS 26. If the number of employees paid an hourly wage at this establishment increased or decreased between 2007 and 2009, can you please describe below some of the factors that contributed to the increase or decrease? 27. The next three tables ask for detailed information about employees who were paid different base hourly wages (before deductions) during the pay period that included June 12th in 2007, 2008, and 2009. Question text and instructions are provided at the top of each column.
Please do not include employees paid an annual salary in these tables. Data for employees paid an annual salary will be reported separately in question 34.
You may also submit the requested data in an Excel spreadsheet or as a computer printout instead of reentering the data into the tables below. a. For each of the questions below, please answer for the pay period that included June 12, 2007: (B) (C) (D) (E) (F) (G)
Base hourly wage rate before deductions (in U.S. dollars)
How many employees earned the base hourly wage listed in (A)?
How many of the employees listed in (B) are covered by the FLSA? (Please enter in $XX.XX format for each hourly wage earned by employees at your establishment)
How many total overtime hours did employees who earned this base hourly wage work during this pay period? (Please enter only numerals) (Please enter only numerals)
How many of the employees listed in (B) are U.S. citizens or nationals, U.S. or American Samoan permanent residents, or citizens of the FAS?
How many total hours (not including overtime hours) did employees who earned this base hourly wage work during this pay period?
What were the total earnings (before taxes and deductions) of employees who earned this wage during this pay period, including overtime, bonuses, and commissions? (Please report hours rounded to the quarter hour and to two decimal places) (Please report hours rounded to the quarter hour and to two decimal places)
Please do not include the value of employee benefits. (Please enter only numerals) (Please round to the nearest whole dollar) $ 1 , 763 . 00 $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 b. For each of the questions below, please answer for the pay period that included June 12, 2008: (B) (C) (D) (E) (F) (G)
Base hourly wage rate before deductions (in U.S. dollars)
How many employees earned the base hourly wage listed in (A)?
How many of the employees listed in (B) are covered by the FLSA? (Please enter in $XX.XX format for each hourly wage earned by employees at your establishment) (Please enter only numerals) (Please enter only numerals)
How many of the employees listed in (B) are U.S. citizens or nationals, U.S. or American Samoan permanent residents, or citizens of the FAS?
How many total hours (not including overtime hours) did employees who earned this base hourly wage work during this pay period?
How many total overtime hours did employees who earned this base hourly wage work during this pay period?
What were the total earnings (before taxes and deductions) of employees who earned this wage during this pay period, including overtime, bonuses, and commissions? (Please report hours rounded to the quarter hour and to two decimal places) (Please report hours rounded to the quarter hour and to two decimal places)
Please do not include the value of employee benefits. (Please enter only numerals) (Please round to the nearest whole dollar) $ 1 , 763 . 00 $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 c. For each of the questions below, please answer for the pay period that included June 12, 2009: (B) (C) (D) (E) (F) (G)
Base hourly wage rate before deductions (in U.S. dollars)
How many employees earned the base hourly wage listed in (A)?
How many of the employees listed in (B) are covered by the FLSA? (Please enter in $XX.XX format for each hourly wage earned by employees at your establishment) (Please enter only numerals) (Please enter only numerals)
How many of the employees listed in (B) are U.S. citizens or nationals, U.S. or American Samoan permanent residents, or citizens of the FAS?
How many total hours (not including overtime hours) did employees who earned this base hourly wage work during this pay period?
How many total overtime hours did employees who earned this base hourly wage work during this pay period?
What were the total earnings (before taxes and deductions) of employees who earned this wage during this pay period, including overtime, bonuses, and commissions? (Please report hours rounded to the quarter hour and to two decimal places) (Please report hours rounded to the quarter hour and to two decimal places)
Please do not include the value of employee benefits. (Please enter only numerals) (Please round to the nearest whole dollar) $ 1 , 763 . 00 $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . $ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 $ , .00 28. Did this establishment change any benefits offered to a typical U.S. citizen, national, or permanent resident paid an hourly wage between the pay periods for 2007 and 2009 that included June 12th?
Please do not include American Samoa permanent residents or citizens of the FAS.
Changes in benefits include: Introduction of a new benefit Change in the level of a benefit offered Elimination of a benefit (Please check ONE box per benefit) a. Paid vacation or personal leave (not including sick leave) ............................ b. Paid sick leave ....................................... c. Paid holidays ......................................... d. Health insurance or reimbursement for expenses................................................ e. Disability ............................................... f. Retirement benefits, such as 401(k)s or pensions ................................................ g. Housing allowances............................... h. Food allowances .................................... i. Local transportation allowances ........... j. Transportation to employees’ home countries ............................................... k. Others (Please specify): 29. If any benefit was added, eliminated, or was increased or decreased, can you please describe the changes below? 30. Did this establishment change any benefits offered to a typical non-U.S. citizen, national, or permanent resident paid an hourly wage between the pay periods for 2007 and 2009 that included June 12th?
Changes in benefits include: Introduction of a new benefit Change in the level of a benefit offered Elimination of a benefit (Please check ONE box per benefit) a. Paid vacation or personal leave (not including sick leave) ............................ b. Paid sick leave ....................................... c. Paid holidays ......................................... d. Health insurance or reimbursement for expenses................................................ e. Disability ............................................... f. Retirement benefits, such as 401(k)s or pensions ................................................ g. Housing allowances............................... h. Food allowances .................................... i. Local transportation allowances ........... j. Transportation to employees’ home countries ............................................... k. Others (Please specify): 31. If any benefit was added, eliminated, or was increased or decreased, can you please describe the changes below? 32. Are any of the employees on this establishment’s payroll paid an annual salary instead of an hourly wage? (Please check only ONE box)
Yes……................................................................... Continue with QUESTION 33 No……. ................................................................... Skip to QUESTION 39 Don’t know ............................................................. Skip to QUESTION 39 33. What was the total number of employees paid an annual salary on this establishment’s payroll during the pay periods that included June 12th for 2007, 2008, and 2009 who were (a) U.S. citizens, nationals, or permanent residents; (b) American Samoa permanent residents and citizens of the FAS; (c) citizens or permanent residents of nations other than the U.S., American Samoa, or the FAS?
If this establishment was not in operation during the pay period that included June 12th in any year, please enter a “0” in the corresponding box. (Please enter numerals in each box below) (a) U.S. citizens, nationals, or permanent residents (b) American Samoa permanent residents and citizens of the FAS (c) citizens or permanent residents of nations other than the U.S., American Samoa, or the FAS 34. During the pay period for 2007, 2008, and 2009 that includes June 12th, how many full- and part-time employees on this establishment’s payroll were paid an annual salary in the following ranges, and how many of these employees were covered under the FLSA?
Please do not include employees paid an hourly wage. Data for employees paid an hourly wage were reported separately in question 27.
Full-time employees are those who typically worked 35 or more hours per week; part-time employees are those who typically worked less than 35 hours per week. If this establishment was not in operation during the pay period, please enter a 0 for that year in each box. (Please enter numerals only in each box below)
Annual salary range before deductions for taxes and benefits (in U.S. dollars)
Less than 10,000 10,000 to 19,999 20,000 to 29,999 30,000 to 39,999 40,000 to 49,999 50,000 to 59,999 60,000 to 69,999 70,000 to 79,999 80,000 to 89,999 90,000 to 99,999 100,000 or more 35. Did this establishment change any benefits offered to a typical U.S. citizen, national, or permanent resident paid an annual salary between the pay periods for 2007 and 2009 that included June 12th?
Please do not include American Samoa permanent residents or citizens of the FAS.
Changes in benefits include: Introduction of a new benefit Change in the level of a benefit offered Elimination of a benefit (Please check ONE box per benefit) a. Paid vacation or personal leave (not including sick leave) ............................ b. Paid sick leave ....................................... c. Paid holidays ......................................... d. Health insurance or reimbursement for expenses................................................ e. Disability ............................................... f. Retirement benefits, such as 401(k)s or pensions ................................................ g. Housing allowances............................... h. Food allowances .................................... i. Local transportation allowances ........... j. Transportation to employees’ home countries ............................................... k. Others (Please specify): 36. If any benefit was added, eliminated, or was increased or decreased, can you please describe the changes below? 37. Did this establishment change any benefits offered to a typical non-U.S. citizen, national, or permanent resident paid an annual salary between the pay periods for 2007 and 2009 that included June 12th?
Changes in benefits include: Introduction of a new benefit Change in the level of a benefit offered Elimination of a benefit (Please check ONE box per benefit) a. Paid vacation or personal leave (not including sick leave) ............................ b. Paid sick leave ....................................... c. Paid holidays ......................................... d. Health insurance or reimbursement for expenses................................................ e. Disability ............................................... f. Retirement benefits, such as 401(k)s or pensions ................................................ g. Housing allowances............................... h. Food allowances .................................... i. Local transportation allowances ........... j. Transportation to employees’ home countries ............................................... k. Others (Please specify): 38. If any benefit was added, eliminated, or was increased or decreased, can you please describe the changes below?
If you checked YES for ANY of these actions, continue to questions 40.
If you checked YES for ANY of these actions, continue to question 44.
If you did not check YES for any of these actions, skip to question 46. 44. To what extent do you think the minimum wage increases will contribute to this establishment’s decision to implement each action listed in question 43 for which you checked YES? (Please check ONE box per action) a. Introduce labor-saving strategies or technology.............................. b. Introduce other cost-saving strategies (e.g., energy-saving technologies) .................................................................................. c. Reduce operating capacity or services offered ................................ d. Delay expansion of business…………………………………… e. Relocate business outside of American Samoa ............................... f. Close establishment temporarily ..................................................... g. Lay off salaried employees.............................................................. h. Lay off employees who are paid an hourly wage............................ i. Reduce regular work hours for employees paid an hourly wage..... j. Reduce overtime work hours for employees paid an hourly wage.. k. Decrease level of benefits for salaried employees………………. l. Decrease level of benefits for employees paid an hourly wage… m. Implement a hiring freeze................................................................ n. Raise prices of goods or services .................................................... o. Close establishment permanently .................................................... p. Others (Please specify): _______________________________________________________ 45. To what extent do you think each of the following factors will contribute to this establishment’s decision to implement the actions listed in question 43? (Please check ONE box per cost) a. Increased utility costs ............................... b. Increased costs of materials....................... c. Increased transportation/ shipping costs... e. Decreased number of customers……….. f. Changes to U.S. immigration laws…… g. Changes in business taxes or fees……… f. Others (please specify): ___________________________________ 46. Would you like to provide any other comments regarding the impact the increases in the minimum wage or other factors had or will have on this establishment or its employees? 47. What is the name, title, and contact information of the primary person who completed this questionnaire in case GAO needs to follow up on information provided in this questionnaire? a. Name of person completing the questionnaire: b. Title of person completing the questionnaire: c. E-mail address of person completing the questionnaire: d. Phone number of person completing the questionnaire: e. Fax number of person completing the questionnaire: 48. What is this establishment’s mailing address?
This concludes the questionnaire. Thank you very much for your assistance!
Appendix VIII: Comments from the Department of the Interior
Appendix IX: Comments from the American Samoa Government
The following is GAO’s comment on the American Samoa government’s letter, dated March 10, 2010.
GAO Comment
1. The American Samoa government developed and cited its own estimates of employment loss based on the information included in our report. It stated that after the first three minimum wage increases, total employment fell by 4,287, or by 22 percent, including losses of 2,287 even before the cannery closure. Our report does not include an estimate of the total number of jobs lost during this time period; however, we were able to replicate the American Samoa government’s estimate by applying our finding that employment among large- employer questionnaire respondents decreased 12 percent from June 2008 to June 2009 to our statement that SSA data show 19,060 American Samoa workers in 2008. We did not include this type of estimate because, as noted in the report, although questionnaire responses covered about 72 percent of the American Samoa workforce, they are not necessarily representative of all American Samoa workers and employers. In addition, our questionnaire measured employment by respondents in June of each year, while the SSA data measured the entire year’s employment.
Appendix X: Comments from the Commonwealth of the Northern Mariana Islands Government
The following are GAO’s comments on the CNMI government’s letter, dated March 11, 2010.
GAO Comments
1. The CNMI government stated that our summary-level finding regarding CNMI wages is insufficient and not representative of the overall CNMI workforce because of our large-employer questionnaire’s coverage. First, it noted that the questionnaire covers employers with 50 or more employees but excludes smaller employers. Because key federal sources of data on the U.S. labor market do not cover these insular areas, we collected our own data on employers through the questionnaire, discussion groups, and other methods such as interviews. Our report appropriately states the limitations of the questionnaire data and repeatedly notes that the data may not be representative of all CNMI workers and employers. In addition, we determined that the most effective and least burdensome method of collecting information from small employers would be to conduct discussion groups targeting these employers. Both the Saipan and Tinian Chambers of Commerce assisted us in inviting small employers to discussion groups in the CNMI, and our report summarizes their views (see app. IV, employment section). Small employers also were invited, among others, to share their views at a public forum we held in the CNMI and to send comments to an e-mail account we established for this purpose. Furthermore, while we use the terms “large employers” and “small employers” in our report for clarity, the U.S. Small Business Administration generally defines small employers as having, depending on the industry and other factors, employees numbering from 500 to 1,500 or fewer. By these definitions, our questionnaire covers many small employers. Second, the CNMI government expressed concern about the questionnaire’s response rate, given that 33 out of 61 employers responded to our questionnaire. While we spent considerable effort to obtain as high a response rate as possible, employers were not required to respond, and the response rate reflects the individual decisions of CNMI employers who received the questionnaire about whether to provide information regarding the extent to which minimum wage increases had affected their operations.
2. The CNMI government incorrectly stated that the report does not include findings related to employees in the public sector. Our findings related to public sector employees are included in multiple sections of appendix IV. In addition, the CNMI government stated that our summary-level finding related to wages should note that the questionnaire included greater coverage of public than private sector employees. We disagree. Our report findings on public and private sector employees combined note that the CNMI government accounted for a higher percentage of workers employed by questionnaire respondents than in the actual CNMI workforce, so the government’s responses disproportionately influence our questionnaire results on the public and private sectors combined. However, this limitation is not relevant to findings on public sector workers alone or on private sector workers alone. 3. The CNMI government stated that GAO’s findings related to employer actions understate the negative impact of minimum wage increases on small employers. We note that the employer actions section does not address the actions of small employers because they were not covered by the questionnaire; however, findings related to small employers are included in the preceding report section on employment. 4. The CNMI government comments on the inflation-adjusted earnings findings reflect misunderstanding of the analysis presented. The CNMI government commented that the analysis of changes in earnings should, but does not, account for changes in local prices. In fact, the inflation-adjusted earnings data we present account for changes in local prices, using local Consumer Price Index data from the CNMI Department of Commerce. Accordingly, the findings based on the earnings analyses for both average wage earners and minimum wage earners fully account for CNMI price increases. 5. The CNMI government stated that it questions the findings related to worker views based on our discussion groups. As we note in the report’s objectives, scope, and methodology section, discussion groups are not designed to provide results generalizable to a larger population or to provide quantitative estimates. However, discussion groups are a qualitative research method capable of adding valuable information that may be difficult or impossible to collect through quantitative methods. Given the relevance of the minimum wage increases to workers, we considered it critical to include their views; however, no existing federal data source provided this information. We believe the discussion groups were an appropriate and worthwhile approach for collecting and including the views of workers.
6. The CNMI government stated that we should ask for more time to study the effects of minimum wage increases; however, the law does not permit additional time for this report. The American Recovery and Reinvestment Act of 2009 requires that GAO report annually on the impact of past and future minimum wage increases in American Samoa and the CNMI, and the reports are due between March 15 and April 15 of each year.
Appendix XI: GAO Contacts and Staff Acknowledgments
David Gootnick, (202) 512-3149 or [email protected].
Tom McCool, (202) 512-2642 or [email protected].
Staff Acknowledgments
In addition to the contacts named above, Emil Friberg, Assistant Director, Mark Speight, Assistant General Counsel, Marissa Jones, analyst-in-charge, Ashley Alley, Benjamin Bolitzer, Joe Carney, Ming Chen, Gergana Danailova-Trainor, Jill Lacey, Reid Lowe, Luann Moy, Ramzi Nemo, and Vanessa Taylor made key contributions to this report. Technical assistance was provided by Kate Brentzel, Muriel Brown, Giulia Cangiano, Holly Dye, Lawrance Evans, Etana Finkler, Kay Halpern, Dave Hancock, and Michael Kendix. | Why GAO Did This Study
In 2007, the United States enacted a law incrementally raising the minimum wages in American Samoa and the Commonwealth of the Northern Mariana Islands (CNMI). The law applied the first $.50 per hour increase in July 2007 and mandated additional increases in each subsequent year until the minimum wages reach the level of the U.S. minimum wage--currently $7.25 per hour. American Samoa's lowest paid will reach that wage in 2016, and the CNMI in 2015. In American Samoa, one of two tuna canneries employing almost a third of workers closed in September 2009. In the CNMI, where the garment industry was one of two major employers, the last garment factory closed in early 2009. The American Recovery and Reinvestment Act requires GAO to report annually on the impact of the minimum wage increases in American Samoa and the CNMI. In this report GAO describes, since the increases began, wages, employment, employer actions, inflation-adjusted earnings, and worker views. GAO reviewed existing information from federal and local sources. GAO also collected data from large employers (at least 50 employees) through a questionnaire and from small employers and workers through discussion groups, in addition to conducting interviews during visits to each area. GAO shared the report with relevant federal agencies and the governments of American Samoa and the CNMI and incorporated their comments as appropriate.
What GAO Found
In American Samoa, the first minimum wage increase raised the wages of about three-quarters of workers at private sector employers that responded to GAO's questionnaire. June 2009 wage data from GAO's questionnaire indicate that by 2016, the minimum wage increases would affect the wages of close to 95 percent of those employers' private sector workers. Earnings data show that employment grew from 2006 to 2008, while questionnaire responses show that employment dropped from 2008 to 2009; since the September 2009 closure of one tuna cannery, employment has very likely continued to drop. Cannery officials said that minimum wage increases were a significant contributing factor in the closure of one cannery, in addition to other factors. Public and private sector officials expressed concern about the significant impact on employment if future minimum wage increases lead the remaining cannery to close or make attracting new industries more difficult. Many employers reported having taken cost-cutting actions, such as freezing hiring and cutting worker benefits, since the increases began. Employers also reported planning actions such as leaving American Samoa or closing by the end of 2010. More employers attributed their actions to the minimum wage increases than to other factors. Federal data show that median annual inflation-adjusted earnings in American Samoa declined by about 6 percent from 2006 to 2008. GAO estimated that inflation-adjusted earnings for full-time minimum wage workers who retained their jobs and hours rose by about 14 percent. In discussion groups, workers generally said that their support for the wage increases had dwindled because of concerns about issues such as the cannery closure, job insecurity, and loss of benefits. In the CNMI, the first minimum wage increase raised wages for about a third of workers at private sector employers that responded to GAO's questionnaire. June 2009 wage data from GAO's questionnaire indicate that the future increases will affect the wages of more than 80 percent of those employers' workers by 2015. CNMI government data show that following the 2007 wage increase, employment continued an existing downward trend largely reflecting the garment factory closures. Small employers and other private sector officials expressed mixed views about the future increases, and many expressed greater concern about immigration changes. In questionnaire responses, employers reported having taken cost-cutting actions, such as freezing hiring, since the increases began and also reported planning such actions by the end of 2010. Employers attributed their actions both to the minimum wage increases and to other factors. Based on an analysis of responses from CNMI employers in the hotel industry, GAO found that raising room rates to cover higher wage costs may cause a 2.6 to 13.7 percent decline in visits to the CNMI. CNMI government tax data show that average annual inflation-adjusted earnings declined by about 6 percent from 2006 to 2008. GAO estimated that annual inflation-adjusted earnings for minimum wage full-time workers who retained their jobs and hours rose by about 12 percent. In discussion groups, CNMI workers generally expressed support for the minimum wage increases and cited other factors affecting living standards. |
gao_OP-98-1 | gao_OP-98-1_0 | Preface
Each year, GAO’s work contributes to many legislative and executive branch actions that result in significant financial savings and other improvements in government operations. Some, but not all, are identified through GAO’s system for periodically following up to determine the status of actions taken on the recommendations made in its audit and evaluation reports. About 70 percent of the recommendations made over the past 5 years have been implemented.
This report includes summaries highlighting the impact of GAO’s work and associated key open recommendations—those recommendations which have not been fully implemented. It also includes a set of computer diskettes with details of all open recommendations. This information should help congressional and agency leaders prepare for upcoming appropriations and oversight activities and stimulate further actions to achieve the desired improvements in government operations.
The diskettes have several menu options to help users find information easily. For example, a user may search for an open recommendation by using product numbers, titles, dates, names of federal entities, congressional committees, or any other word or phrase that may appear in the report. Instructions for operating the electronic edition have been enclosed with the diskettes and are also in appendix I of this publication.
The name and telephone number of the GAO manager to contact for information or assistance about a product is included in the diskettes. Information or questions not related to a specific product or recommendation should be referred to GAO’s Office of Congressional Relations on 202/512-4400.
Copies of complete GAO printed products may be ordered by calling 202/512-6000 (or TDD 202/512-2537) or by facsimile at 202/512-6061.
Improving National Security and International Affairs Programs
Defense Acquisitions Issue Area (Budget Function 050)
Impact of GAO’s Work
Although the national defense budget has declined significantly over the past decade, the Department of Defense (DOD) still spends almost $80 billion annually to research, develop, and acquire weapon systems. DOD’s leadership has emphasized its commitment to streamlining and improving the acquisition process to reduce acquisition costs while ensuring technological leadership and a strong, competitive industrial and technology base. The National Aeronautics and Space Administration (NASA) has similar efforts underway.
During fiscal year 1997, we reviewed (1) the justifications for new and modified systems to determine whether they are reasonable and support the national military strategy, (2) system development programs to determine whether systems are being acquired in an effective and efficient manner, and (3) acquisition strategies to determine whether DOD and NASA have selected the lowest risk and least costly acquisition strategies consistent with the need for the planned system or modification. Our reviews included systems such as the B-2, F/A-18E/F, F-22, C-17, and F-14 aircraft and unmanned aerial vehicles. We also continued our work on DOD’s development of space systems, including the Defense Satellite Communications System and Expandable Launch Vehicle Program.
To determine whether DOD and NASA are streamlining and improving their acquisition processes, practices, and infrastructure, we evaluated the implementation of governmentwide acquisition reform legislation and reviewed new proposals. We also assessed DOD’s efforts to utilize opportunities for international cooperation in the development and production of weapon systems. In addition, we assisted the Senate and House Appropriations Committees, the Senate Armed Services Committee, and the House National Security Committee, by examining DOD’s fiscal year 1998 budget and prior years’ appropriations and identifying opportunities to reduce DOD’s procurement and RDT&E funding by about $1.38 billion.
We provided Congress with information to assist in its oversight responsibility on many occasions. For example, we reported that DOD needs to reorient its aircraft investment strategy to recognize the reality of a constrained overall defense budget for the future. Otherwise, a significant imbalance is likely to result between the funding requirements, particularly the major commitments for the initial procurement of all the planned aircraft programs (such as the F/A-18E/F and F-22) over the next several years, and available funding.
Our work on the use of major weapon systems warranties resulted in Congress repealing 10 U.S.C. 2403 and reducing DOD’s procurement budget by $75 million for fiscal year 1998 to account for potential savings. We reported that Theater High Altitude Area Defense project had not achieved a successful intercept during the four tests conducted in the engineering, manufacturing, and development phase of RDT&E. Subsequently, Congress denied DOD’s program request for $262 million for fiscal year 1998.
Our work regarding defense industry restructuring showed that DOD did not include data on grants provided by the Department of Labor in its annual restructuring reports to Congress. As a result, DOD agreed to include such information in future reports in order to provide Congress more complete information about federal funding used to assist workers affected by restructuring. We also found that tracing savings into contract prices was extremely difficult given other factors that affect a contractor’s operations and costs. Subsequently, Congress requested that we determine whether defense contract prices are lower than they would have been had restructuring not occurred and to evaluate the impact of defense industry consolidation on competition.
Our work on the Federal Acquisition Computer Network (FACNET) showed that agencies had good business and technical reasons for not using FACNET and recommended that the government needs a coherent strategy and flexibility to implement alternative electronic commerce technologies and purchasing methods that make good business sense and are aligned with commercial applications. As a result, the fiscal year 1998 Defense Authorization Act repealed the mandated use of FACNET. In addition, the President’s Management Council tasked a high-level management committee to review electronic commerce implementation government wide and develop a more integrated federal strategy.
Our work on whether DOD provides Congress accurate information on contracts for advisory and assistance services showed that DOD may be significantly underreporting those costs. In the President’s budget submission, DOD reported fiscal year obligations of about $3 billion on advisory and assistance service contracts. Our analysis of DOD’s contract data indicated fiscal year 1996 obligations of almost $12 billion for services involving advising or assisting DOD management. As a result, the Congress reduced DOD’s budget by $300 million and attributed this reduction to our work. Subsequently, the Senate Appropriations Committee requested a review to more fully examine the reasons for the underreporting on contracts for advisory and assistance services.
High-Risk Areas
Defense Acquisitions is the point of contact for three areas that have been designated as high-risk—Defense Weapon Systems Acquisition, Defense Contract Management, and NASA Contract Management.
Defense Weapon Systems Acquisition
In fiscal year 1997, we reported that despite DOD’s past and current efforts to reform its acquisition system, wasteful practices still add billions of dollars to defense acquisition costs. Many new weapon systems cost more and do less than anticipated, and schedules are often delayed. Moreover, the need for some of these costly weapons is questionable, particularly since the collapse of the Soviet Union.
DOD’s goal is to become the world’s smartest buyer, continuously reinventing and improving the acquisition process while taking maximum advantage of emerging technologies that enable business process reengineering. DOD is pursuing a number of positive initiatives that could, over time, improve the cost-effectiveness of its acquisition processes and is reporting some success in terms of cost savings or avoidance and other benefits. The ultimate effectiveness of these initiatives cannot be fully assessed because many are in various stages of implementation. Therefore, it may be several years before tangible results can be documented and sustained.
Defense Contract Management
Further, as with many other elements of defense, contract administration and audit resources have been reduced, and further reductions are planned. At the same time, DOD continues to look to additional outsourcing opportunities, and it plans to significantly increase its procurement budgets in the coming years. Both these actions may increase contracting actions and the need for effective contract administration and audit. To maintain appropriate controls over contract expenditures with reduced resources, DOD will need to improve the efficiency of its contract management.
NASA Contract Management
Over the past several years, NASA has improved its contract management by changing its policies and practices to better influence its contractors’ performance and improve oversight of its procurement activities. Since NASA spends about $13 billion annually, it is likely to have problems periodically. The key is early identification to prevent the problems from becoming systemic. We are concerned about the systems and processes NASA uses to oversee its procurement activities and the ability of these systems and processes to routinely produce accurate and reliable management information. NASA has told us that it has made improvements in these areas.
Key Open Recommendations
Our work in contract management concluded that unless DOD achieves cost-effective control over its payment process, it will continue to risk hundreds of millions of dollars in potential overpayments and other financial management and accounting control problems. Further, improving the efficiency of the payment process could save additional millions of dollars annually in reduced processing costs. We recommended that DOD (1) thoroughly evaluate the information requirements of the user, procurement, and accounting communities in terms of their impact on the payment process’ ability to produce useful information; (2) evaluate whether the structure that the Columbus Center uses to charge its customers for accounting services needs to better reflect the cost of servicing contracts; (3) establish a DOD-wide policy for closing out existing contracts that cannot be reconciled because accurate and complete data are lacking; and (4) explore increased opportunities for using best practices. (GAO/NSIAD-97-37, GAO/HR-97-4)
In May 1995, we reported that the unclear lines of jurisdiction over stealth-related items may lead to the inappropriate export of military sensitive materials and technology. We recommended that the State Department clarify the licensing jurisdiction between the Commerce Control List and U.S. Munitions List for all stealth-related commodities and technologies with a view towards ensuring adequate controls under the Arms Export Control Act for all sensitive stealth-related items. (GAO/NSIAD-95-140)
Our work on the Defense Satellite Communications System (DSCS) showed (1) DOD’s anticipated increase in requirements for high capacity satellite communications, (2) the relative high cost of leasing commercial satellite communications and apparent cost-effectiveness of acquiring commercial-like satellites instead of leasing equivalent services from commercial providers, and (3) the potential for saving about $2.8 billion in future years if the first launch of the replacement satellite were to occur in fiscal year 2003. We recommended that DOD accelerate the introduction of a DSCS replacement system from fiscal year 2006 to 2003, or as soon as practicable, if the emerging requirements are deemed valid, the estimated acquisition and commercial costs are considered credible, and the necessary acquisition funds can be made available. (GAO/NSIAD-97-159)
In our work on the Navy’s Cooperative Engagement Capability program on the transfer of certain frequency spectrum to the Federal Communications Commission for reallocation to the private sector, we reported that fragmented DOD management responsibilities have resulted in inadequate coordination within DOD on spectrum issues and preparation of long-range plans. We recommended that DOD assign responsibility for overall DOD spectrum management to a specific organization. (GAO/NSIAD-97-131)
In May 1997, we reported that the Army’s current Hellfire missile requirement of 12,722 may be overstated by over 8,300 missiles and that significant cost reductions can be achieved with lower missile quantities. We recommended that the Army (1) reduce Longbow Hellfire missile procurement requirements to reflect the current information on the number of missiles that the Apache can carry, the correct residual readiness computational procedures, and the appropriate Hellfire II to Longbow Hellfire mix ratio and (2) prepare a new procurement strategy that reflects the reduced equipment and recomputed expected cost. (GAO/NSIAD-97-93)
See also chapter 5, Financial and Information Management Programs, Defense Financial Audit Issue Area and Information Resources Management Issue Area Systems.
Defense Management Issue Area (Budget Functions 050)
Impact of GAO’s Work
Defense managers are confronted with many challenges to their ability to continue accomplishing their missions as they strive to streamline operations, reduce existing infrastructures, improve the management of closed/realigned facilities, enhance the effectiveness and efficiency of the defense supply chain, and better control high interest programs.
Our overall strategy for Defense Management issues is to identify new initiatives that are innovative, efficient, and cost effective approaches to improving DOD’s management and in reducing defense costs. It focuses on the implementation and effectiveness of DOD cost reduction initiatives as they apply to DOD’s support infrastructure activities with special emphasis on logistics-related business activities which include operations and functions such as depot maintenance, the purchase of parts and supplies for inventory, storage and disposal, and transportation. Our work encourages the reengineering and streamlining of DOD operations through new processes and best management practices and, where appropriate, the privatization or outsourcing of defense functions and activities.
Defense logistics-related business activities and infrastructure functions consume a major share of DOD’s budget—perhaps as much as $80 billion in fiscal year 1997. DOD recognizes the need to cut these costs and is seeking a reduction of $20 billion annually in order to fund acquisitions for weapon systems modernization. Initiatives DOD has undertaken to achieve reductions include privatization, acquisition reform, technology insertion, organizational streamlining and consolidation, management process reengineering, base and facility closures, personnel reductions, inventory reductions, and private sector use of facilities.
Key areas we focused on in fiscal year 1997 included the transition of former bases to civilian use, depot maintenance workloads, inventory management, property disposal activities, and opportunities to improve operations through the use of best management practices. We also addressed DOD environmental costs and programs and problems associated with the disposal of the chemical weapons stockpile.
High-Risk Areas
Defense Management is the point of contact for the following two high-risk areas: Defense Inventory Management and Defense Infrastructure.
Defense Inventory Management
It is estimated that about half of DOD’s secondary inventory—spare and repair parts, clothing, medical supplies, and other items—are not needed to be on hand to support war reserve or current operating requirements. DOD has clearly had some success in addressing its inventory management problems. However, it has not yet succeeded in developing the management tools needed to solve these problems on a long-term basis. In the near term, DOD needs to emphasize the efficient operation of its existing inventory systems. In the long term, DOD must establish goals, objectives and milestones for changing its culture and adopting new management tools and practices. Further, DOD must continue to explore other alternatives such as using business case analysis to identify opportunities for outsourcing logistics functions and to implement best management practices.
Defense Infrastructure
Over the past 7 to 10 years, DOD has taken actions to reduce its operations and support costs, however, billions of dollars continue to be wasted annually on inefficient and unneeded activities. In recent years, DOD has substantially downsized its force structure yet it has not achieved commensurate reductions in operations and support costs. Progress in reducing the cost of excess infrastructure activities is critical to maintaining high levels of military capabilities and in providing the funding source for weapon systems modernization. Reductions of this nature are difficult and painful because achieving significant cost savings requires up-front investments, the closure of installations, and the elimination of military and civilian jobs.
Key Open Recommendations
To achieve management improvements, increase operations efficiencies, and produce dollar savings, DOD needs to take action on the following key recommendations.
The Secretary of Defense should identify options and take steps to minimize the impediments to interservicing to realize potentially significant savings in base support costs through interservicing-type arrangements. (GAO/NSIAD-96-108)
The Secretary of Defense should establish reasonable timeframes for concluding negotiated sales of surplus real property and when practical, rent unoccupied, surplus housing and other facilities as a means of preserving property pending final disposition. (GAO/NSIAD-96-149)
The Secretary of the Army should begin the disposal determination process for (1) all excess real property not needed for replenishment requirements at the Kansas, Louisiana, and Sunflower Army Ammunition plants, and (2) all inactive plants retained only for their unique capabilities when those capabilities can be adequately provided by other sources. An integral part of this process will be identifying the costs involved in accomplishing the disposal of unneeded properties. (GAO/NSIAD-97-56)
The Secretary of the Navy, working with the Defense Logistics Agency, should develop a demonstration project to determine the extent to which the Navy can apply best practices to its logistics operations. The specific practices that should be tested are (1) inducting parts at repair depots soon after they break, (2) reorganizing repair workshops using the cellular concept to reduce repair time, (3) using integrated supplier programs to shift consumable inventory responsibilities to suppliers, (4) using local supplier distribution centers for quick shipment of parts to mechanics, and (5) expanding the use of third-party logistics services to store and distribute spare parts. (GAO/NSIAD-96-156)
The Secretary of Defense should direct the defense transportation reengineering efforts to simultaneously address process and organizational structure improvements including (1) the need for separate traffic management component command headquarters staff, (2) the consolidation of separate field subordinate command traffic management staff, and (3) the elimination of all remaining duplicative field-based subordinate command support staff. Further, the Secretary of Defense should clarify which U.S. Transportation Command mobilization costs should be passed along to its customers. (GAO/NSIAD-96-60)
The Secretary of Defense should, at a minimum, explain the methodology used to estimate savings in future Base Realignment and Closure (BRAC) budget submissions and these submissions should note that all BRAC-related costs are not included. (GAO/NSIAD-96-67)
In order to strengthen DOD’s budgeting process and ensure that correct assumptions are being made regarding expected reductions in base operating costs, DOD needs to improve its periodic updating and reporting of savings projected from prior BRAC decisions. Accordingly, the Secretary of Defense should provide guidance to ensure that its components have and follow a clear and consistent process for updating savings estimates associated with prior BRAC decisions. (GAO/NSIAD-97-151)
Further, if Congress authorizes future BRAC rounds, the Secretary of Defense should (1) work with the Task Force on Defense Reform and the National Defense Panel to address the important organizational and policy issues in various cross-service areas, (2) convene a DOD joint working group, as soon as practical, to develop policy guidance, improve BRAC processes and decision-making tools, and (3) ensure full audit access to all parts of DOD’s BRAC process. (GAO/NSIAD-97-151)
If Congress considers legislation for future BRAC rounds, it may wish to (1) model it on the 1990 BRAC legislation as a starting point, (2) pass such legislation early to allow the lead time needed for DOD and the Commission to organize their processes, and (3) consider the relationship between new BRAC authority and section 277 of the National Defense Authorization Act for Fiscal Year 1996 pertaining to laboratories and test and evaluation facilities. (GAO/NSIAD-97-151)
See also chapter 5, Financial and Information Management Programs, Defense Financial Audit Issue Area and Information Resources Management Issue Area.
International Relations and Trade Issue Area (Budget Function 150)
Impact of GAO’s Work
The Congress is continuing to rethink the U.S. role in international affairs, including the level of resources devoted to and the effectiveness of current programs in advancing U.S. political and economic interests. To assist the Congress in this regard, our work focused on assessing the relevancy, priority, effectiveness, and management of international affairs activities, and addressed issues of current national concern, such as U.S. involvement in Bosnia, North Atlantic Treaty Organization (NATO) enlargement, and the North American Free Trade Agreement (NAFTA). Our reviews examined the rationale, structure, and reform agenda of the international organizations that receive U.S. funding, and examined the cost, management, and results of the U.S. bilateral programs and activities in critical regions of the world, including the broad range of programs designed to enhance U.S. security and those aimed at reducing the flow of illegal drugs into the United States. In addition, we completed work that assisted the debate on current trade issues and examined the need for U.S. government export and investment promotion programs. The work has had a significant impact on efforts to address major international relations and trade issues.
Our assessment of the Bosnia peace operation concluded that only limited progress had been made toward achieving the Dayton Agreement’s goal of establishing a unified, democratic government that respects the rule of law. This situation, we noted, was due principally to the failure of Bosnia’s political leaders to fulfill their obligations under the Dayton Agreement and to promote political and social reconciliation. This report was a seminal assessment of the Bosnia issue and was instrumental in influencing the administration’s decision to revise its Bosnia strategy. Our assessments of U.S. programs and those of other NATO member countries showed that they are helping former Eastern Bloc countries prepare for possible membership in the NATO. In a separate study that examined the likely cost of NATO enlargement, we concluded that DOD’s estimated cost of about $27-35 billion was speculative and that the actual enlargement costs could be substantially higher or lower. This work led to a request for GAO to testify at an October 1997 hearing as additional congressional concerns were raised about the impact of NATO expansion on DOD’s budget. Our work on NAFTA addressed concerns about the economic impact of the agreement, examined the implementation of the supplemental side agreements on labor and the environment, and described the agreement’s dispute settlement process and the efforts made to help workers displaced by imports from Mexico or Canada.
We continued to examine the extent to which U.S. participation in multilateral institutions advance U.S. interests and whether there are opportunities to reduce costs. Our examination of U.N. peacekeeping operations showed that there are eight costly, long-standing, and marginally effective operations for which the State Department had not established clear exit strategies. In response to our recommendation, the State Department outlined exit strategies and criteria for these operations and notified the Congress that it would continue to review this matter to ensure effective reforms were implemented. We also completed a major review of the United Nations Development Program (UNDP)—the central financing and coordinating mechanism for development assistance within the U.N. system—to determine the progress that it had made in reducing administrative costs and improving its management of projects. The recommendations we made for improved project management are currently being implemented.
Our comprehensive examination of the U.S. Agency for International Development (USAID) found that 5 years of reform have resulted in a smaller aid bureaucracy that has achieved some operational efficiencies but that the full benefits were not yet clear and fundamental questions about the effectiveness and relevance of these programs remain.
Our evaluations of how the federal government manages its overseas real estate identified deficiencies that resulted in additional and unnecessary costs. We recommended that DOD negotiators obtain and use estimates of the market value of installations in negotiating with foreign governments on recouping the residual value of closed overseas facilities. The additional revenue realized in fiscal years 1996 and 1997 from implementing this recommendation was estimated to be $222 million. During fiscal year 1997, the State Department sold three of the properties, we identified as unnecessary, for $7.6 million.
With respect to arms control, we reported that progress has been made in reducing the threat from weapons of mass destruction through the dismantling of nuclear weapons in the former Soviet Union, the provision of better international accountability for nuclear materials, and the imposition of effective export controls. Acting on a recommendation we made in our 1995 report on DOD’s Cooperative Threat Reduction program, DOD improved its reporting on program management and assistance. Our evaluation of whether U.S. export control policy toward Hong Kong will adequately protect U.S. national security interests after Hong Kong’s reversion to China revealed Hong Kong will continue to have easier access to sensitive technology that is more tightly controlled for China. We also found that the U.S. government has limited ability to monitor such technology to ensure that it is not diverted. We made recommendations to improve these weaknesses. This report could form the cornerstone of any congressional deliberations to change the application of U.S. export controls to Hong Kong. We also reported on issues surrounding the sales of high performance computers to Russia’s nuclear weapons laboratories. This testimony influenced the legislative debate over whether the recently relaxed export control rules need to be reexamined.
The Congress has a continuing interest in the operations and the effectiveness of U.S. counternarcotics programs. Our comprehensive report on the U.S. drug control effort was based on over 10 years of review of various aspects of U.S. drug control strategy. The report concluded that despite long-standing efforts and expenditures of billions of dollars—about $20 billion over the past 10 years—these efforts have not materially reduced the availability of drugs.
During the past year, we completed comprehensive reviews of U.S. programs aimed at promoting U.S. interests through export and investment promotion and greater market accessibility. These reviews focused on the continuing relevance of these programs and whether increased efficiencies and reduced costs are possible. Our reports on the U.S. Export-Import Bank (Eximbank) (1) presented options for saving millions of dollars in subsidy costs by raising fees or reducing program coverage in higher-risk markets, (2) documented the amount of the funding and programs of competitor nations, and (3) summarized the results of the Eximbank’s efforts to meet the financing needs of small business and to comply with laws governing the financing of dual-use (civilian and military) defense exports. Our work at the Overseas Private Investment Corporation (OPIC) identified important changes in the private sector’s willingness to invest in foreign markets and ways that the risks of OPIC’s programs could be reduced. We also discussed a number of issues that would need to be addressed if the agency were not reauthorized. Our review of the 1994 U.S.-Japan Insurance Agreement found that most U.S. insurance providers in Japan were of the opinion that Japanese government actions to implement the agreement did not result in significant liberalization and had no effect on their ability to compete in the Japanese insurance market. Our assessment of U.S. agricultural export assistance programs found mixed evidence regarding the continued relevance of these programs.
Key Open Recommendations
In 1994, we recommended that the State Department develop a fully integrated, objective, quantifiable methodology to help ensure a sound basis for allocating personnel in line with U.S. interests overseas. State plans on using this methodology in making its staffing resource decisions in fiscal year 1998. Because stationing staff overseas is costly, State must be able to ensure that it places no more staff than is needed at each of its overseas posts. (GAO/NSIAD-94-228)
In 1995, we recommended that the Congress terminate USAID’s Housing Guarantee Program because it was not achieving its original goals and objectives. This program was not terminated by the Congress, but its appropriation was reduced in fiscal years 1996 and 1997. (GAO/NSIAD-95-108)
In 1996, we reported that the State Department had done relatively little to implement reforms and streamline its operations to save money. We concluded that State needed to (1) plan how it could become a smaller, more efficient, and less expensive organization; and (2) conduct a fundamental rethinking of functions, locations, and practices to determine what is essential and affordable to support U.S. interests. In addition, we reported that State could generate millions of dollars by selling unneeded real estate at its overseas locations. We identified a number of options that the State Department could take to address possible budget reductions, including developing a downsizing strategy for adjusting to potentially lower funding. Actions have not been taken on these recommendations because State objects to the report’s overall premise that major budget reductions will occur, saying that such reductions could undermine the U.S. foreign policy infrastructure. (GAO/NSIAD-96-124)
In 1996, we recommended that the Director of the Office of National Drug Control Policy (ONDCP) develop a regional action plan focused on the Caribbean transit zone for cocaine coming to the United States. This plan should determine resources and staffing needs and delineate a comprehensive strategy to improve Caribbean nations’ antidrug-trafficking capabilities and commitment to counternarcotics interdiction. ONDCP is considering our recommendation as part of an ongoing evaluation of the entire drug control strategy. In 1997, we recommended that the Director, ONDCP, develop a long-term plan with meaningful performance measures and multiyear funding needs that are linked to the goals and objectives of the international drug control strategy. ONDCP says that in fiscal year 1998 it will present the Congress with a 10-year strategy with multiyear budget plans and measurable performance objectives. (GAO/NSIAD-96-119 and GAO/NSIAD-97-75)
Also in 1996, we recommended that the Secretary of the Treasury monitor and periodically report to the Congress measurable indicators of the World Bank’s progress in reforming its operations to improve their effectiveness. If the indicators do not show satisfactory progress, we recommended that the Secretary should report on the actions taken to do so. The Treasury Department is monitoring the World Bank’s new reform initiative, called the Strategic Compact, and will report on the results of this initiative in the upcoming year. (GAO/NSIAD-96-212)
Military Operations and Capabilities Issue Area (Budget Function 050)
Impact of GAO’s Work
DOD faces unprecedented challenges as it strives to plan and budget for military operations that range from peacekeeping and disaster relief to humanitarian assistance and warfare at the highest level of intensity. To effectively meet these challenges, DOD must maintain a high readiness level and strike the proper balance between the need to fund weapons modernization and the need to maintain dedicated and high-quality personnel.
Our overall strategy to assist Congress with military operations and capabilities issues is to: (1) identify potential reductions to operations and maintenance budgets, while recommending ways to improve planning for future military operations; (2) identify shortfalls and excesses in capability in relation to military requirements; (3) alert Congress to existing or projected readiness shortfalls that could leave military forces ill-prepared to conduct effective operations; and (4) recommend ways to improve DOD’s ability to recruit, train, and retain a high-quality active, reserve, and civilian workforce.
In fiscal year 1997, we completed reviews of DOD’s fiscal year 1998 budget requests for operations and maintenance and military personnel programs, and identified changes to other military programs that could save millions of dollars. We also provided Congress with information on the readiness of war reserve equipment prepositioned afloat; reviewed DOD’s chemical and biological defense capabilities; identified DOD efforts to protect U.S. forces from terrorist attacks; assessed the telemedicine strategies among DOD, other federal agencies and the private sector; and evaluated DOD’s study on the need to increase the number of general and flag officers.
During our review of DOD’s $94 billion operations and maintenance budget requests, we identified potential budget reductions of about $3.7 billion. Of this amount, about $1.6 billion is for the purchase of inventory in excess of current operating and war reserve requirements. Likewise, we identified potential reductions of about $390 million in the services’ military personnel requests. Of this amount, about $304 million can be reduced because the services began fiscal year 1998 with 12,300 fewer active military personnel than budgeted for.
We identified significant per-year dollar savings that could result from our recommended changes in other military programs. For example, the Navy could save about $140 million annually by turning over the operation of eight multiproduct (oil, ammunition) ships to the Military Sealift Command for crewing with civil service mariners. These savings are due primarily to a much smaller crew size than has been traditional on military crewed auxiliary ships. Likewise, DOD could save as much as $95 million annually by converting roughly 9,500 administrative and support positions, now held by military officers, to lower-cost positions that could be filled by civilians. Since the 1950s, a DOD Directive has required the services to staff positions with civilian personnel unless the services deem a position military essential. Moreover, DOD could save about $54 million per year in personnel costs once the Army removes unneeded war reserve equipment from central Europe and aligns its resources with the reduced mission.
During our assessment of the readiness of the Army’s war reserve equipment prepositioned on ships, we found that 25 percent of the unit sets do not meet the Army’s readiness goal for full mission capability. We reported that, as of April 1997, equipment in 13 of 51 reportable unit sets did not meet the 90-percent readiness goal. Factors contributing to lower readiness status include the deterioration of the equipment while in storage aboard ships and the limited ability to conduct maintenance on the equipment while in storage. The Army plans to conduct maintenance on prepositioning ships every 30 months.
Our examination of U.S. chemical and biological defense capabilities resulted in two classified reports. One report contained a series of recommendations to the Secretary of Defense aimed at improving the protection of U.S. forces from biological agents. DOD is in the process of implementing several corrective actions, after concurring with all of our recommendations. The other report addressed U.S. chemical and biological protection at critical ports and airfields in high threat areas overseas. This work contributed to a refocusing of some Commander-in-Chief’s priorities, doctrinal changes, and other actions designed to improve various aspects of chemical and biological defense.
Our work on DOD’s efforts to protect U.S. forces overseas from terrorist attacks showed these forces to be better protected today than in June 1996, when a bomb detonated near the Khobar Towers military complex and killed 19 U.S. service personnel. During our visits to 30 overseas sites, we found security improvements were most evident where the risk of terrorism appeared greatest, such as Turkey and the Middle East. DOD has initiated several changes aimed at improving its antiterrorism program, including a newly-created office for combating terrorism on the Joint Staff.
During our work examining DOD’s use of telemedicine (the use of communications technology to help deliver medical care without regard to the distance that separates the participants), we found that DOD was the largest federal investor between fiscal years 1994 to 1996. Of the nine federal departments and independent agencies that collectively invested at least $646 million in telemedicine projects during this period, DOD invested more than any other agency and is considered a leader in developing this technology. Opportunities exist for federal agencies to share lessons learned and exchange technology. In 1995, the Joint Working Group on Telemedicine was created within the Department of Health and Human Services to help coordinate federal programs.
The National Defense Authorization Act for Fiscal Year 1997 required us to examine DOD’s study on general and flag officer requirements. Due to DOD’s delay in issuing a final report, we issued an interim report on DOD’s draft report. Our review showed that DOD’s draft does not clearly identify requirements for general and flag officers and does not explain the basis for its recommendations to increase the number of officers by 54 active and 32 reserve positions. We estimate the cost of implementing DOD’s draft recommendations would be at least $1.2 million annually, assuming the services reduce the number of colonels/Navy captains by the same amount as the increase in general and flag officers. However, the cost will exceed $1.2 million if the services do not reduce their colonels/Navy captains.
Key Open Recommendations
We made several recommendations to the Secretary of Defense to address the weaknesses we identified in 1996 in the chemical and biological defense areas. Among them was a recommendation that the Secretary reevaluate the priority and emphasis given to this area throughout DOD. Also included was a recommendation that the Secretary consider modifying the services’ readiness reporting requirements so that unit reports would more directly capture the units’ chemical and biological readiness status and more accurately reflect shortcomings in their abilities to meet existing chemical and biological training standards. (GAO/NSIAD-96-103)
U.S. Special Operations Forces are considered highly capable, elite forces that are trained and maintained to address critical U.S. national security objectives. In response to our questionnaire, many unit leaders of these special forces are convinced that the high use has adversely affected readiness, retention, and morale. To maintain the readiness of these forces to support national security objectives and help ensure that readiness is not degraded through overuse or improper use, we recommended that the Secretary of Defense direct the Commander of the U.S. Special Operations Command to complete efforts to develop an information system for monitoring how the Command’s forces are used and establish a methodology for periodically comparing these forces’ usage with the Commanders-in-Chief’s priorities and special forces training needs. We also recommended that the Secretary direct the Commander to exploit potential opportunities to reduce deployments that do not prepare these forces for unique missions in support of national security objectives and that can be performed by conventional forces. (GAO/NSIAD-97-85)
During the Cold War, the Army stored about nine brigade sets of equipment in central Europe. The Army plans to remove seven brigade sets of equipment due to its reduced European mission. Since DOD could save about $54 million per year in personnel costs once the equipment is removed, we recommended that the Secretary of Defense, among other things, direct the Secretary of the Army and the Commander of the Army Materiel Command to develop a specific and timely disposition plan for all equipment not needed in central Europe. (GAO/NSIAD-97-158)
Thousands of recruits are separated from military service in the first 6 months because the services do not adequately screen applicants for disqualifying medical conditions or for preservice drug use. All military services agree that reducing early attrition is desirable. To this end, three services have attrition-reducing targets that could realize immediate short-term annual savings ranging from around $5 million to $12 million. Possible long-term savings could range from more than $15 million to $39 million. To reduce the attrition of enlisted personnel during the first 6 months of their terms of enlistment, we recommended that the Secretary of Defense, among other things, issue implementing guidance on DOD’s separation codes and direct the services to strengthen their recruiter incentive and medical screening systems. We also recommended that drug testing for all the services be moved to the Military Entrance Processing Command. (GAO/NSIAD-97-39)
See also chapter 5, Financial and Information Management Programs, Defense Financial Audit Issue Area and Information Resources Management Issue Area.
National Security Analysis Issue Area (Budget Function 050)
Impact of GAO’s Work
DOD continues to face difficult policy, programmatic, and budgetary decisions as it seeks to strike a balance between maintaining sufficient force structure to address current dangers, while also investing in the new systems and technologies needed for the future. DOD’s recently completed Quadrennial Defense Review (QDR) stated a preference for reducing the size and cost of defense infrastructure in order to make the investments needed to modernize the future force. The QDR also recognized the challenge of making these choices in a fiscally constrained environment, marked by a national consensus to balance the Federal budget by year 2002. Our reports and testimonies on budget, force structure, strategy implementation, and intelligence issues have been cited frequently by the Congress as it debates how best to prepare America’s armed forces for this new environment.
Budget
For the fourth straight budget year since 1995, DOD’s execution of its overall program has been inconsistent with its goals of reducing infrastructure costs and increasing funding for weapons modernization. DOD wants to increase procurement spending to $60 billion a year by shifting resources from infrastructure activities to modernization of weapon systems. However, our analysis showed that DOD has not been successful enough in reducing and streamlining infrastructure. Our analysis of DOD’s 1998 budget and Future Years Defense Program (FYDP) show substantial risks that the current defense program will not be executed as planned. For example, the 1998 FYDP projects billions of dollars in savings due to management initiatives, but DOD does not have details on how all of the savings will be achieved. Further, DOD projects no real growth in the costs of the Defense Health Program during 1998-2003. This appears to be unrealistic, given that operation and maintenance (O&M) funding of DOD’s health program increased 73 percent in real terms during 1985-96. After we informed Congress that DOD’s future health program costs were likely to exceed their estimate, DOD submitted a budget amendment to redress its understated funding request for the program. Another reason we believe the 1998 FYDP poses risks is that the estimates for procurement spending, in relation to DOD’s operation and maintenance projections, run counter to DOD’s own experience over the last 30 years. Specifically, DOD estimates it can increase procurement spending over 40 percent and concurrently reduce O&M resources by 8 percent. Historically, O&M costs do not decline but rise in proportion to increases in procurement.
We provided Congress with detailed analyses of DOD’s appropriations to show the trends over the years by various program categories. Our analysis has identified infrastructure activities that could be consolidated and streamlined to gain more efficiency. We also continued to inform Congress of the projected cost of U.S. military operations in Bosnia. For its deliberations on the supplemental request for fiscal year 1997 funds, we provided Congress with the most up-to-date information on the status of costs. In July 1997 we reported that recent operational decisions will increase the cost estimate for 1998 and that other decisions, such as changes in the size and composition of the force and the timing of withdrawal, could lead to further increases in the O&M cost estimate for 1998.
Force Structure
There is continued congressional interest and debate over the size and composition of U.S. military forces. Our analysis of the active end strength requirements of the Army, Navy, and Air Force helped the Congress assess DOD’s efforts to shape its force for the post cold war world and prepare for the next century. For example, our analysis of Army active endstrength showed that while a smaller active Army support force could increase the Army’s risk of carrying out current defense policy, new initiatives being explored by the Army regarding its combat and nondeployable support forces could lead to a smaller active Army in the future. We identified areas where the Army could improve its process for assessing its need for deployable support forces, and recommended that the Army develop an analytical basis for assessing its requirements for nondeployable support personnel. In response, the Army implemented a number of our recommendations, and the House National Security Committee cited our analysis in its deliberations on Army civilian personnel management.
Our prior work identified considerable Army National Guard combat structure that was not needed to meet the National Security Strategy. Building on that analysis, we recommended that the Secretary of Defense, as part of the Quadrennial Defense Review, validate requirements for the Guard’s combat structure. We also recommended that he eliminate structure which is not needed to carry out the strategy. DOD’s Quadrennial Defense Review determined that excess structure existed in the Guard. Subsequently, the Guard agreed to cut 17,000 personnel over the next three fiscal years.
Our report on Air Force endstrength issues found that potential exists to reduce the active Air Force below the minimum level set by Congress, without adversely affecting the Air Force’s war-fighting capability. Our analysis showed that approximately two-thirds of the Air Force’s 381,000 active duty personnel are now allocated to infrastructure functions such as installation support and acquisition. Further, internal Air Force analyses showed that the Air Force could support reductions in its endstrength by 9,400 positions in fiscal year 1998 and by as many as 75,000 beyond fiscal year 1998 in order to free up resources for modernization. These reductions would primarily occur in infrastructure related positions.
We also helped Congress evaluate recent reductions in Navy personnel by assessing past, ongoing and planned actions to achieve force level objectives, how various segments of the force were affected by the reductions, and the adequacy of the force to implement the national military strategy. We also noted that the long-standing lack of adequate management attention to the shore-based personnel requirements process could preclude programs intended to further reduce personnel levels from achieving their purpose, or ensure the force is appropriately sized. We made suggestions to strengthen management oversight.
As Congress debated the modernization of tactical air power, we testified on the results of our extensive study of air power documented in a series of reports issued in 1996 and 1997. We provided the Congress with detailed information on the size and capabilities of U.S. combat air power and contrasted this with the limited air defense capabilities of potential adversaries. We described the type of joint mission assessments that need to be completed to aid the Chairman of the Joint Chiefs of Staff to carry out his responsibilities as the senior military advisor to the Secretary of Defense on the requirements, programs, and budgets of the military services.
Strategy Implementation
Presence is a key element of U.S. national security strategy, and the U.S. spends large sums to maintain presence throughout the world. To help Congress assess this aspect of strategy, we examined changes in DOD’s approaches to achieve overseas presence since the Cold War and DOD’s process for allocating resources to meet presence requirements. We reported that DOD does not have a specific process for determining requirements nor does it currently compile information on presence approaches. We recommended that DOD compile and analyze information on requirements in a manner that would allow it to assess the effectiveness of current levels and mixes of forces and activities used to achieve presence and whether more cost-effective alternatives exist. DOD agreed with our suggestion and is taking action to improve its assessment of certain presence requirements and approaches.
In recent years, the threat of terrorism has clearly been of increasing concern, prompting the National Security Council to issue expanded U.S. policy, strategy, and operational guidelines on combating terrorism both at home and abroad. In response to Congressional requests, we examined this issue across government —identifying the roles, responsibilities, programs, and activities of the numerous federal agencies, bureaus, and offices involved in implementing the national policy and strategy, as well as mechanisms in place for interagency coordination. Our discussions with various congressional oversight committees suggest the report will help them understand what federal agencies are expected to do to prevent and counter terrorism in this more than $6 billion crosscutting program. We expect continued congressional interest in terrorism issues, and have been asked to perform additional analysis evaluating interagency counterterrorism preparedness and how DOD and other agencies are implementing legislation requiring training of local first responders to deal with terrorists using weapons of mass destruction. The legislation is aimed at establishing local capabilities to provide immediate response to such incidents.
Intelligence
Missile defense for the United States has been one of the most frequently discussed and debated security issues during the past few years. As requested, we assessed the adequacy of the Intelligence Community’s National Intelligence Estimate on the foreign missile threat to the United States, and subsequently testified before the Senate Select Committee on Intelligence. Our work was cited by a former Director of Central Intelligence in his critique of the threat estimate and was also used by a panel created by the National Defense Authorization Act for Fiscal Year 1997 that reviewed the estimate.
Key Open Recommendations
A key recommendation stemming from our work on aircraft requirements calls for the Secretary of Defense to direct the Secretary of the Air Force to develop and use supportable and consistent criteria to justify backup aircraft inventories and future procurement of backup aircraft as the Navy is doing. (GAO/NSIAD-95-180)
After assessing key combat air power missions, we recommended that the Secretary of Defense develop an assessment process that yields more comprehensive information on joint mission requirements and capabilities than current processes provide. Our recommendation described the scope of these assessments and the general procedures for conducting them. The Department of Defense plans to spend hundreds of billions on new fighter and attack aircraft over the next several decades, and tens of billions of dollars more on weapons for combat air power missions. If implemented, these assessments would improve the information available to assist decisionmakers in making key decisions on air power plans, programs, and budgets. (GAO/NSIAD-96-177, GAO/NSIAD-96-72, GAO/NSIAD-96-45)
In our report assessing Air Force aircraft, we recommended that the Secretary of Defense, in his efforts to reduce the Department of Defense’s infrastructure costs, should require the Secretary of the Air Force to develop an implementation plan to operate the Air Force’s fighter force in larger, more cost-effective squadrons. If the Secretary of Defense believes that the plan could reduce costs, he should seek congressional support for it. (GAO/NSIAD-96-82)
See also chapter 5, Financial and Information Management Programs, Defense Financial Audit Issue Area and Information Resources Management Issue Area.
Improving Resources, Community, and Economic Development Programs
Energy, Resources, & Science Issue Area (Budget Function 250, 270, 300)
Impact of GAO’s Work
The Energy, Resources, and Science issue area encompasses a broad and diverse group of agencies with concerns and topics ranging from cleaning up the nuclear weapons complex—estimated to cost up to $265 billion—to finding better ways to manage the 650 million acres of land owned by the federal government, equal to almost one-third of our Nation’s total land surface. Agency responsibilities include the Department of Energy (DOE) and related agencies, such as the Nuclear Regulatory Commission (NRC), the Federal Energy Regulatory Commission, and Tennessee Valley Authority (TVA). A second grouping encompasses various land management and natural resource agencies, including the Department of the Interior, the Forest Service within the Department of Agriculture, and the Army Corps of Engineers. Finally, there’s an array of science and technology-related agencies, including the National Science Foundation (NSF), the Department of Commerce’s National Institute of Standards and Technology, the Patent and Trademark Office, the National Oceanic and Atmospheric Administration, and the National Technical Information Service. Programs and activities within these agencies account for over $60 billion in gross federal obligations each year with annual revenues of about $10 billion spanning 10 of the government’s 19 budget functions. But, more importantly, the activities of these agencies pose significant implications for the nation’s security, environment, and economic well-being.
Our primary objective is to assist the Congress in examining the role of government in this broad area of responsibility, with particular emphasis on finding ways to promote a more efficient and cost-effective government. Our efforts this past year have gone a long way in contributing to this objective and many of our key open recommendations, as outlined in the section below, are intended to help focus the debate on some difficult choices that still need to be made.
Examples of our contributions this past year include helping the Congress: continue to assess questions and issues regarding the role and missions of DOE and how to restructure it in a post-Cold War environment; better ensure that the government will receive a fair price in the planned sale of the Naval Petroleum Reserves at Elk Hills, deliberate on the potential privatization of DOE’s five power marketing continue its search for an acceptable alternative for disposing of nuclear waste and in assessing the safety, reliability, and security of our nation’s nuclear arsenal; evaluate U.S. vulnerability to oil disruptions; develop legislation to prevent U.S. funding to the United Nations from going to the development of Cuban reactors; deliberate on the U.S./North Korean nuclear reactor agreement; leverage the use of “carry-over” balances and find other ways to reduce DOE’s, NRC’s and Commerce’s budgets; consider legislation that was ultimately passed to terminate the federal receive the first-ever comprehensive accounting of western water projects, including the costs associated with providing interest-free financing of irrigation projects; and make more informed decisions about the future of the Patent and Trademark Office.
Other recommendations led to administrative actions to improve government programs. For example, based on our work:
DOE postponed and later canceled an unneeded waste vitrification project at its Hanford site, reducing costs $823.3 million.
DOE strengthened its controls over the amount and type of litigation expenses it will reimburse its contractors, resulting in a savings of $25 million.
NRC established criteria for determining when states’ radiation regulatory programs are in compliance with NRC’s requirements and developed procedures for suspending or terminating certain state programs that are in non-compliance.
DOE began consolidating the purchase of laboratory analyses and, since then, has experienced a 30 percent reduction in its costs.
DOE developed a strategic plan for spending U.S. funds to upgrade Soviet-designed nuclear reactors.
NSF terminated its Academic Research Infrastructure Program, as a savings of $50 million.
The Forest Service took action—for the first time ever—to recover the costs of granting special use permits within the national forests even though it had authority to do so since 1952.
The Bureau of Reclamation took action to recoup or share future costs to operate and maintain recreation facilities at reclamation projects.
The Department of the Interior adopted regulations to strengthen its ability to prevent unauthorized activities on hardrock mineral claims on federal lands.
The Department of Interior revised its regulations to ensure that lessees on federal lands will not be issued new coal mining leases unless they have met statutory coal production requirements.
The National Park Service took action to correct erroneous financial information and made significant progress in its financial reporting.
High-Risk Area
We designated DOE contracting as a high-risk area in 1990 based on its vulnerability for waste, fraud, and abuse.
DOE Contracting
Contracting was considered particularly vulnerable because DOE’s missions rely heavily on contractors and DOE has a history of weak contractor oversight, stemming from the Manhattan Project where special contracting arrangements, such as least interference in the contractor’s work and indemnification of a contractor’s liability, were considered necessary steps in developing the atomic bomb during World War II. Decades later, DOE continued to enter into contracts in which competition was the exception, reimbursement of virtually any contractor cost was the practice, and lax contractor oversight was the norm.
Over the years, we issued a series of reports and testimonies documenting DOE’s contracting practices and problems and identifying some of the costly effects. These products have contributed to the Congress’ budget deliberations and provided an impetus for DOE to reform its practices. However, changing the way DOE does business has not come easily or quickly. DOE has taken various actions in the past to improve its contracting, and a recent contract reform effort that has received high priority and visibility appears promising. Given the magnitude of these reforms, implementation problems are to be expected. However, they must be identified and corrected for contract reform to succeed. Therefore, DOE’s continuance of high-level monitoring and oversight will be needed to further identify problems, standardize the best practices, and make needed corrections as DOE makes its way through these changes.
Key Open Recommendations
Decommissioning of Nuclear Facilities
In May 1989, we recommended that to enhance regulatory oversight of nuclear facilities’ decommissioning efforts, the Chairman of the NRC should ensure that licensees decontaminate their facilities in accordance with guidelines from NRC before NRC releases a site for unrestricted use. NRC agreed and in June 1992 issued a regulatory guide on acceptable radiological surveys in support of license termination. In addition, NRC, in cooperation with the Environmental Protection Agency and the Departments of Energy and Defense, is developing a manual that uses a common survey method to determine residual radioactive contamination. NRC expects to issue the manual in January 1998. Finally, in July 1997, NRC published a final rule establishing radiological criteria for license termination and expects to issue related guidance for implementing these criteria in 1998. (GAO/RCED-89-119)
National Laboratories
In January 1995, we recommended that the Secretary of Energy evaluate alternatives for managing the laboratories that more fully support the achievement of clear and coordinated missions, including strengthening the Department’s Office of Laboratory Management. If DOE is unable to refocus the laboratories’ missions and develop a management approach consistent with these new missions, we suggested that the Congress may wish to consider alternatives to the present DOE-Laboratory relationship.
Such alternatives, we said, might include placing the laboratories under the control of different agencies or creating a separate structure for the sole purpose of developing a consensus on the laboratories’ missions.
DOE’s Laboratory Operations Board, created to provide focus and direction for DOE’s laboratories, has developed an initial strategic plan for the laboratories. Among other things, the Board is trying to determine whether some of DOE’s laboratories—particularly the small, missions specific ones—are still needed or whether they could be closed or privatized. Further, the Board is taking steps to implement the recommendations made by the Galvin Task Force, an independent panel created by DOE to recommend better ways to manage the national labs. Many of the Task Force’s recommendations address issues raised in our report. The Board has also recommended that DOE streamline its organizational structure. The current Secretary of Energy recently announced that the Board’s work will continue. Meanwhile, various bills have been introduced in the Congress calling for restructuring the laboratories. (GAO/RCED-95-10)
Nuclear Regulation
In May 1994, we recommended that the NRC—in order to ensure the health and safety of workers the public—establish acceptable limits for radioactivity in sludge, ash, and related by-products at sewage treatment plants that receive radioactive materials from NRC licensees. NRC has been working with the Environmental Protection Agency (EPA) and other interested parties to develop a national approach to ensuring the protection of treatment workers and the public. Among other things, they are conducting a national survey to assess the extent of radioactive contamination in sludge, ash, and byproducts, and plan to issue final guidance on radioactive materials, including acceptable levels of radioactivity—in 1998. (GAO/RCED-94-133)
In another report—in May 1997—we recommended that NRC develop strategies to more aggressively act on safety deficiencies they discover in commercial nuclear power plants. Specifically, we urged NRC to better document how plant owners are addressing their problems and to advise owners on how NRC will respond to uncorrected problems. We also recommended that NRC assess the competency of plant management. NRC acknowledges weaknesses in their regulatory program and is making changes in response to our report. They are streamlining their process for identifying potential problem plants at an earlier stage, and are improving the way they track plant owner commitments to address safety problems. NRC also plans to study ways of evaluating management competency. (GAO/RCED-97-145)
Contract Management
In August 1994, we recommended that DOE, in contracting with the University of California for the management of three national laboratories, (1) adopt standard contract clauses where there is not a sound basis for deviating from them, (2) require advance DOE approval for University-sponsored research projects at the laboratories, and (3) ensure that fees paid to contractors for increased financial risks are cost-effective by developing criteria for measuring their costs and benefits. DOE has reviewed the non-standard clauses in the contracts with the University of California, identified the relevant changes that are needed, and plans to have the new contract completed by late 1997. Modifications have also been made to the contracts requiring that information regarding university-sponsored research be submitted to DOE for review. DOE is still in the process of developing a new fee policy for profit and nonprofit management and operating contractors which relates fees to anticipated risk. DOE anticipates sending the policy to the Office of Management and Budget (OMB) in early 1998 for publication in the federal register. (GAO/RCED-94-202)
In another report—in December 1996—we recommended that DOE (1) clearly link management and operating contract goals with its strategic plan and annual performance goals, (2) include a mandatory standard clause in all management and operating contracts that gives DOE the exclusive authority to set contract goals and incentives that support the strategic plans and missions of the Department, and (3) adopt federal contract pricing policies such as those contained in the Federal Acquisition Regulation (FAR). DOE agrees with these recommendations and is in the process of developing implementing policies. (GAO/RCED-97-18)
Nuclear Waste Disposal
In September 1991, we recommended that DOE plan for the increasing likelihood that it might not be able to accept utilities’ nuclear waste for storage or disposal beginning in 1998. We also suggested that the Congress explore whether additional legislation is desirable to address the likelihood that DOE will be unable to begin accepting the waste by that year. Recently, a federal circuit court of appeals ruled that DOE is obligated to begin accepting nuclear waste in 1998. Also, the Congress has been considering legislative proposals that would, among other things, authorize and require DOE to store utilities’ nuclear waste at a federal facility until DOE completes a facility for permanent disposal of the waste. (GAO/RCED-91-194)
Uranium Enrichment
In September 1995, we recommended that the Congress require the Secretary of the Treasury, not the Board of Directors of the United States Enrichment Corporation (USEC), take the lead role on behalf of the Nation’s taxpayers throughout the privatization process for the USEC, which was authorized by the Energy Policy Act of 1992. Our September 1995 report also found fault with how USEC had calculated its value in its July 1995 privatization plan and suggested that the Secretary of Treasury consider options to ensure that the government obtains a fair price for the corporation if it is privatized. In April 1996, the President signed into law the USEC Privatization Act which, among other things, requires the Secretary of the Treasury to take a more active role in the USEC privatization process. However, the President has not yet directed USEC and the Secretary of the Treasury to proceed with the privatization plan and thus a final decision on whether the corporation will be sold directly to a private company or through a public stock sale has not been made. (GAO/RCED-95-245)
Technology Investment
In June 1996, we recommended that the Secretary of Energy develop and implement a Department-wide policy for requiring repayment of the federal investment in successfully commercialized cost-shared technologies. We said the policy should provide criteria and flexibility for determining which programs and projects are appropriate for repayment. DOE officials agree with this recommendation and is conducting a comprehensive review of its existing authorities, the experiences of other agencies, and other matters as a basis for adopting a new policy to accommodate it. (GAO/RCED-96-141)
Intellectual Property Fees
In May 1997, we noted in our report to the Senate Committee on the Judiciary that the Congress may wish to reconsider whether intellectual property fees should be more closely aligned with the costs of the services provided by the government. Regarding patent fees, we suggested considering whether (1) the fee differentials between large and small businesses should be continued, (2) a larger proportion of the fees should be tied to the actual examination process, and (3) applicants requiring more examination time and/or creating delays in examination should pay larger fees. Regarding copyright fees, we suggested considering whether the Copyright Office, like the Patent and Trademark Office (PTO), should be self-sustaining through fees. We recommended that the Copyright Office itself, also like PTO, raise fees to account for inflation when given the authority to do so administratively. Since the issuance of our report, the Congress has been using our analyses in their deliberations on bills to restructure PTO, although final action has not yet taken place. The Copyright Office has assured us that it will raise fees administratively in the future as we recommended. (GAO/RCED-97-113)
Fair Market Value
In April 1996, we reported that the Forest Service is not receiving fair market value for right-of-way fees on Forest Service lands. We recommended that an appropriate fee system be implemented. Both the Forest Service and major industry groups, representing private companies that have rights-of-way to operate power lines, pipelines, and communications lines across Forest Service lands, agree on the need for a new fee system. The Forest Service is working with the Bureau of Land Management to develop a common fee system for rights of way, more reflective of fair market value and expects to implement it by fiscal year 1999. (GAO/RCED-96-84)
National Park Service Employee Housing
While the Park Service has a long-standing tradition of providing housing to some of its employees, the backlog of housing repair, rehabilitation, and replacement needs, currently estimated at more than $500 million, and a tight federal budget dictate that the Park Service examine options to deal with its housing needs. In an August 1994 report, we made recommendations that, if implemented, would (1) better define the Park Service’s housing needs and identify opportunities for reducing its inventory and (2) obtain nonfederal funds to help the Park Service meet its housing needs. In November 1996, the Congress passed Public Law 104-333 that, among other things, requires the Park Service to (1) review and revise its criteria for providing employees housing, and (2) assess the conditions of, and need for, its employee housing units. The Park Service is currently reviewing the scope of its employee housing program and is exploring ways to increase private sector involvement in helping to address the housing need. (GAO/RCED-94-284)
Oil and Gas Royalties
The federal government receives royalties from offshore oil and gas leases, calculated using the volume and price of the oil and gas sold and a royalty rate. It is essential that oil and gas production be verified to help ensure accurate determination of royalties. In an August 1990 report we concluded that Interior’s Minerals Management Service had been slow in verifying offshore oil and gas production, and we recommended that the agency implement an ongoing production verification program. The Service conducted a pilot program and now plans to develop regulations for a permanent program, with a target for issuance by early 1998. (GAO/RCED-90-193)
Federal Water Subsidies
Water subsidies, in which rights to use water are bought and sold, are seen by many resource economists as a mechanism for reallocating scarce water to new users by allowing those who place the highest economic value on the water to purchase it. At the same time, such transactions may allow Interior’s Bureau of Reclamation to share in the profits, thereby reducing the costs to the government of providing the subsidized water. In a May 1994 report, we (1) identified several matters for the Congress to consider if it decides to further encourage water transfers and (2) recommended several actions that the Secretaries of the Army and the Interior could take to clarify guidance on approving water transfers to more clearly outline the requirements that must be met. The Bureau of Reclamation has taken various actions to implement these recommendations and the Army Corps of Engineers is coordinating with the Bureau to take others. (GAO/RCED-94-35)
Environmental Protection Issue Area (Budget Function 300)
Impact of GAO’s Work
Protecting the environment will remain an important and challenging objective for the nation as we move into the next century. The Environmental Protection Agency (EPA) has designed its new strategic plan to assist the Congress with its renewed interest in environmental protection. Since EPA’s inception more than 25 years ago, the nation has seen and come to expect continued improvements in the quality of its air, water, and other resources. These improvements, moreover, have come with increasingly higher compliance costs. Further increases are expected. Real spending for environmental compliance grew 7.3 percent in 1994—according to the government’s latest available estimates. This growth rate represents the largest single-year increase in a decade. (Prior year increases were about 3 percent.) In 1994 the nation spent $122 billion in current 1996 dollars on environmental protection—or 3 percent of the Gross Domestic Product. Thus, EPA’s almost $7 billion budget has a significant impact on the nation’s economy.
Rising costs, demands for more environmental protection, and efforts to reduce government spending highlight the need for innovative approaches and demonstrated results. In the past, the nation has taken a strict “command and control” approach toward environmental protection. Under this approach, EPA has set specific limitations on pollutant discharges and prescribed, in detail, how these limits are to be met. While this strategy may have served its purpose in the past, a consensus among industry, regulators, and even some in the environmental community is growing that this approach will not effectively control future sources of pollution. This prescriptive approach has also strained relationships between EPA and the states. Both the Congress and EPA seem poised to allow states, localities, and business more flexibility to carry out their environmental responsibilities without extensive direction or oversight from EPA.
Our work has been in the forefront, highlighting our nation’s recurring environmental problems and recommending ways in which the Congress and EPA can effectively address those concerns. In an effort to seek a more realistic balance between environmental expectations and available resources, we have continued to review EPA’s efforts to incorporate strategic planning into the agency’s management and operations. This approach would help ensure that limited resources are targeted to high-risk environmental and public health problems. For example, we have recommended that the agency establish benchmarks for implementing and monitoring a complex project directed towards integrating its management processes for planning, budgeting, and ensuring accountability. This project’s success is important for EPA to better measure the costs and results of its programs. Finally, our work over the past several years has stressed the need to adequately fund those programs that address high risks to the public and to adopt more cost-effective methods of achieving environmental results through alternatives and supplements to traditional regulatory approaches, including pollution taxes, pollutant trading, public disclosure of emissions, and pollution prevention. EPA has started to implement these key recommendations—several of which will require years to fully put in place. Also, EPA and the Congress appear increasingly open to alternatives to traditional regulatory approaches as the environmental statutes go through the reauthorization process.
High-Risk Area
We designated EPA’s Superfund program management as a high risk area.
Superfund Program Management
EPA’s Superfund program began in 1980 as a relatively short-term project to clean up abandoned hazardous waste sites. At that time, the country’s hazardous waste problems were thought to be limited. Since then, thousands of waste sites have been discovered. Furthermore, cleaning up these sites—many of which are owned by the federal government—has proved to be far more complicated and costly than anticipated. Recent estimates show that cleaning up these sites could amount to over $300 billion in federal costs and many billions more in private expenditures.
Under the Superfund law, EPA can compel the private parties responsible for abandoned or inactive hazardous waste sites to clean them up, or it can conduct the cleanup and demand reimbursement of its costs from the responsible parties. Currently, EPA has negotiated with private parties to do over 70 percent of the cleanups. To pay for EPA’s cleanups, the agency draws on a legislatively established trust fund that is primarily financed by a tax on crude oil and certain chemicals and by an environmental tax on corporations. (In December 1995, the authority to collect these taxes expired and taxes are no longer being collected. However, because the trust fund still has an unappropriated balance, it has continued to be used to finance the Superfund program.) Federal agencies generally use their annual appropriations to finance cleanups of the facilities under their jurisdiction.
In 1990, GAO identified Superfund as one of its high-risk programs because of certain long-standing management problems. First, EPA and other federal agencies have not consistently allocated their cleanup resources to reduce the most significant threats to human health and the environment. Second, although EPA is responsible for pursuing reimbursement when it funds a cleanup, the agency has recovered from responsible parties only a fraction of the moneys that it has spent. Finally, while about half of the Superfund program’s budget annually goes to contractors, EPA has had long-term problems with controlling the contractors’ costs.
EPA and other federal agencies have taken steps toward addressing these areas. For instance, EPA has begun using a risk-based process to set priorities and allocate some of its cleanup funds. Other federal agencies have made uneven progress in (1) taking the first step toward setting priorities—that is, developing a complete inventory of the waste sites that need cleanup—and (2) implementing systems to rank sites for cleanup according to risk.
EPA has also made some improvements in its cost recovery program, although it still recovers only a small percentage of its costs when it does the cleanup work. While some costs are not expected to be recovered, EPA’s historically low recovery rate in part results from the agency’s slow pace in revising its policy that limits the recovery of indirect program costs. EPA estimates that the value of these excluded costs has grown to $3.8 billion through fiscal year 1995—up from a value of $1.1 billion 3 years earlier.
Finally, while EPA has focused attention on strengthening its management of Superfund contracts, past problems still persist: (1) EPA’s regions are still too dependent upon the contractors’ own cost proposals to establish the price of cost-reimbursable work, (2) EPA continues to pay its cleanup contractors a high percentage of total contract costs to cover administrative expenses rather than ensuring that the maximum amount of available moneys is going toward the actual cleanup work, and (3) little progress has been made in improving the timeliness of audits to verify the accuracy of billions of dollars in Superfund contract charges.
Thus, despite improvements, further actions are needed to safeguard the government’s investment.
Key Open Recommendations
Air Quality
The Clean Air Act Amendments of 1990 required EPA to issue a series of regulations—many with ambitious milestones—to address some of the more serious air pollution problems facing the nation. Because of the billions in estimated annual costs to implement these requirements, the Congress required EPA to report on the benefits and costs of the agency’s regulatory actions pursuant to this act. We found that EPA’s benefit-cost analyses were inconsistent in their use and reporting of certain key economic assumptions and recommended that EPA make several changes to ensure that its analyses were more consistent in using and reporting key economic assumptions. Consequently, EPA is taking such steps. In addition, because the act’s statutory mandates requires EPA to develop and issue rules at an unprecedented rate, we recommended that EPA implement a tracking system that would allow the agency to identify and correct problems in its rulemaking process. In response, EPA has modified several of its existing information systems and plans to use the previously mentioned accountability system that is being developed as well as governmentwide cost accounting requirements to obtain this information. (GAO/RCED-97-38, GAO/RCED-95-70)
Clean Water
Interest continues to grow in the use of pollutant trading as an economical means for addressing remaining pollution problems. This approach uses cost savings as an incentive for reducing pollution. For example, to address water pollution, a pollutant trading approach allows a group of dischargers of wastewater to help determine (with EPA or state assistance and approval) how their collective discharges can be reduced to preapproved levels in a cost-effective manner. We have reported that pollutant trading could be an economical supplement to traditional regulatory programs. However, trading had been limited and, under the Clean Water Act, this limited use has been attributed largely to the uncertainties surrounding its legal status. Accordingly, we suggested the Congress consider amending the act to explicitly authorize trading. (GAO/RCED-92-153)
Toxic Substances
We made a number of recommendations in 1994 to help strengthen EPA’s ability to regulate toxic chemicals. Under the Toxic Substances Control Act, EPA can limit or prohibit the manufacture, distribution, and use of toxic chemicals. However, EPA has issued only a few regulations under the act because the act’s legal standards are very high, and the burden of proof is essentially on EPA. EPA has reviewed the risks of only a small percent of some 62,000 chemicals and must use cumbersome procedures to acquire test data. New chemicals are marketed without EPA having sufficient data to fully assess potential risks. EPA also believes that industry has made excessive claims of confidential business information for data submitted under the act. Among other things, we suggested the Congress consider improving EPA’s ability to conduct chemical reviews by requiring industry to submit additional data on new chemicals and by shifting to industry some of the burden for compiling data on existing chemicals. (GAO/RCED-94-103)
Because little is know about the risks posed by many chemicals, EPA is planning to develop a Chemical Use Inventory. Debate on this effort has focused on certain key issues, such as the chemicals to be included. Although EPA has not made final plans, the agency has considered collecting data on up to 12,000 chemicals. Many think the number should be substantially smaller. Also, our past work has shown that EPA does not have the resources to effectively compile and analyze data on such a large number of chemicals. Consequently, we recommended that EPA begin its inventory with a smaller number of chemicals—such as those suspected of presenting the greatest risk to human health and the environment—and then expand the inventory as appropriate. EPA is taking our recommendation into account as it develops its proposal to establish an inventory. (GAO/RCED-95-165)
Hazardous Waste Management
As previously mentioned in the High-Risk Area section, we suggested the Congress consider amending the Superfund legislation to develop a consistent process for assessing and ranking the relative risks of hazardous waste sites and employ this process as a factor in setting priorities for federal hazardous waste cleanups nationwide. Also, we recommended that EPA expeditiously broaden its definition of indirect costs that it could recover and increase the program costs that it seeks to recover. EPA is planning to review its Superfund cost accounting system in light of the new government cost accounting standards and to provide data describing the indirect costs that result from the new standards. Beginning in fiscal year 1998, the agency intends to use that data to determine what and how site costs would be affected if the new accounting definitions were used to set indirect rates for cost recovery. On the basis of that analysis, EPA will decide what steps need to be taken next to increase the recovery of its indirect program costs. (GAO/RCED-96-150, GAO/RCED-94-196)
In the Superfund program, EPA has used incineration to clean up some of the most toxic forms of contamination at hazardous waste sites. To promote the safe operation of incinerators at hazardous waste sites, EPA relies on four methods, such as establishing site-specific standards for incinerator’s emissions and providing for on-site observation. However, the agency has not used two other techniques—inspections of incinerators and the compiling and sharing of lessons learned—that it also intended to use. We recommended that EPA use these two additional methods as it originally planned to better ensure the safe operation of these on-site incinerators. The agency is taking steps to do so. (GAO/RCED-97-43)
Moreover, after spending nearly two decades and billions of dollars for cleanups, the nation still has thousands of hazardous waste sites to address. To reduce this backlog of contaminated sites, some states have created voluntary cleanup programs, which rely on incentives not enforcement to accomplish cleanups. Some incentives include the reduction in requirements to expedite cleanups and reduce costs and some assurance of relief from future state liability. Our review of these voluntary programs found that the federal role in these cleanups needed clarification. Since EPA has been working with states to establish some guidance in this area, we recommended that EPA, in its final guidance, provide some criteria that would better define when EPA would enter into agreements that would limit its involvement at such sites. (GAO/RCED-97-66)
State/Federal Relations
Most federal environmental programs are designed to be administered at state and local levels. Accordingly, once a state demonstrates that it is capable of implementing an environmental program, EPA authorizes states to implement most of the day-to-day responsibilities. After authorization, EPA regions, with guidance from headquarters, continue to set goals for the states, provide them with financial assistance, and monitor their performance in meeting grant and program requirements. States authorized to manage federal environmental programs have been unable to meet some of the requirements to implement these programs. Many states have had difficulty in performing key functions, such as monitoring environmental quality, issuing permits, and enforcing compliance. As a result, states have become increasingly reluctant to accept additional responsibilities associated with recent environmental laws. Resource limitations have been identified as a major factor in the states’ reluctance. Federal funding has not kept pace with these new requirements, and the states have been unable to make up the funding difference. We recommended that EPA work with states to identify how each state’s limited funds can be most efficiently allocated within each program to address the state’s highest environmental priorities and take steps to increase the agency’s flexibility in dealing with states to achieve improvements in environmental quality. We also recommended actions that EPA could take to strengthen its working relationships with states. EPA has a number of initiatives underway to improve its communication with the states and bring greater flexibility in its oversight of state activities. (GAO/RCED-95-64)
See also chapter 5, Financial and Information Management Programs, Information Resources Management Issue Area.
Food and Agriculture Issue Area (Budget Function 350)
Impact of GAO’s Work
The Food and Agriculture Issue Area covers the domestic food and agriculture programs at the U.S. Department of Agriculture (USDA), the third largest civilian agency in the federal government, with a budget of about $57 billion. USDA, and the food and agriculture industry it supports, is a vital part of the lives of millions of Americans. Approximately two-thirds of the Department’s budget, or about $39 billion, is spent on federal food and nutrition assistance programs for needy citizens. Each year, American agriculture accounts for about 13.5 percent of the gross domestic product and for about 10 percent of all exports. In addition, about 23 million Americans have jobs related to the food and agriculture economy.
In 1997, many of USDA’s programs changed dramatically. Many of these changes, most of which were mandated by the Congress in 1994 and 1996, reflect a body of work produced by the Food and Agriculture Issue Area, particularly in the farm commodity program, farm credit, and food safety areas. Specifically, USDA began implementing the provisions of the 1996 Farm Bill, which, among other things, pushed farm assistance programs to a more market-oriented approach and strengthened the integrity of the farm lending programs. USDA also began to implement the provisions of Hazard Analysis and Critical Control Point (HACCP), which fundamentally changes the approach to food safety inspections. Additionally, USDA’s Food Stamp Program has changed significantly as the result of the major changes to federal welfare programs. While these program changes are occurring, USDA is undergoing the most massive reorganization in its history.
During the past year, we have assisted the Congress and the Department in assessing USDA’s implementation of these changes. For example, we reported on conflict-of-interest problems within the newly organized Farm Service Agency’s state and county offices; reported on the progress USDA has made in meeting congressionally mandated reorganization and streamlining changes; identified opportunities for reducing government costs to deliver crop insurance through private sector companies; analyzed the strengths and weaknesses of options to increase availability of credit to rural America; evaluated the financial condition of $43 billion loan portfolio held by USDA’s Rural Utilities; evaluated alternatives for improving the delivery of the more than $6 billion federal school meal programs; and evaluated the impact of the 1996 Farm Bill on USDA’s county office workload.
Furthermore, during this past year, a number of our prior recommendations have been implemented by USDA and the Congress. For example, the following occurred as a result of our work:
The Congress enacted legislation requiring states to ensure that prisoners are not counted in households for purposes of providing food stamps.
USDA will routinely monitor the expenses of crop insurance reinsurance companies to ensure that the administrative expense reimbursement is reasonable for the service provided.
The Congress did not provide any budget authority for the enrollment of additional acres in the Conservation Reserve Program in fiscal year 1997, which reduced the federal budget by $48.6 million, because the program had already reached its legislative acre limit.
The Congress combined two USDA food distribution programs to streamline administration of these programs.
USDA agreed to improve the monitoring and administration of food service management companies’ contracts to ensure that these contracts comply with federal requirements.
USDA submitted a legislative proposal that would allow it to recover overpayments to farmers regardless of whether the overpayments were made in error or the repayment would cause the farmer a hardship.
High-Risk Area
We designated USDA’s farm loan programs as a high risk area in 1992.
Farm Loan Programs
USDA’s farm loan programs are intended to provide temporary financial assistance to farmers and ranchers who are unable to obtain commercial credit at reasonable rates and terms. In operating the farm loan programs, USDA faces the conflicting tasks of providing temporary credit to high-risk borrowers so that they can stay in farming until they are able to secure commercial credit and of ensuring that the taxpayers’ investment is protected. We reported on the federal government’s exposure to financial loss in GAO’s December 1992 and February 1995 high-risk series reports. In our most recent high-risk series report (Feb. 1997), we reported that the Congress has enacted legislation that, if implemented properly, should significantly reduce the financial risks associated with the farm lending programs. Specifically, Title VI of the Federal Agriculture Improvement and Reform (FAIR) Act of 1996 made fundamental changes to the program’s loan-making, loan-servicing, and property management policies. CBO has projected savings from these actions at approximately $69 million over 7 years.
Overall, the extensive reforms mandated by the FAIR Act, combined with USDA’s actions to improve compliance with program standards, should reduce the farm lending programs’ vulnerability to loss. However, USDA is still in the process of implementing the mandated reforms, and their impact on the loan portfolio’s financial condition will not be known for some time.
Key Open Recommendations
Food Safety
Our past work has been instrumental in the implementation of the new HACCP approach to food safety. This new program may address many of the problems we identified in our reports, and we will monitor the progress USDA and the Food and Drug Administration (FDA) make in implementing the HACCP regulations. In addition, however, we identified some shortcomings in the federal food safety program that need solutions beyond a HACCP-based food inspection program. Specifically, we identified the need for Congress to (1) create a uniform set of food safety laws that are administered by a single food safety agency, (2) provide that agency with the flexibility to target its inspection resources to the most serious food safety risks, and (3) consider extending the Food Safety and Inspection Service’s (FSIS) discretionary inspection authority and requiring FSIS to implement a discretionary inspection program for meat and poultry processors. (GAO/RCED-92-152, and GAO/RCED-94-110)
Similarly, federal programs designed to ensure that foods are not contaminated with unsafe chemicals need improvement. To overcome the fundamental weaknesses in the federal government’s programs for monitoring chemical residues and environmental contaminants in food, we identified the need for the Congress to enact a uniform set of food safety laws that includes consistent standards for chemical residues and contaminants in food and provides the federal agencies with the authorities needed to effectively carry out their oversight responsibilities. (GAO/RCED-94-192)
Regarding a uniform inspection system, the Congress has been considering action for many years. Most recently, in its mark-up of the FSIS’ fiscal year 1998 budget, the House Appropriations Committee, Subcommittee on Agriculture, urged the Administration to proceed with the development of a single-food safety agency. Regarding flexibility to target FSIS’ inspection resources and implementing discretionary inspections, in July 1996, FSIS proposed redesigning and enhancing the role of FSIS inspectors by moving traditional carcass-by-carcass examination duties to industry and having FSIS inspectors concentrate on sampling carcasses for pathogen reduction checks and verifying HACCP procedures.
Foreign Pests and Diseases
Foreign pests and diseases entering the United States cost an estimated $41 billion annually in lost production and expenses for prevention and control. USDA’s Animal and Plant Health Inspection Service (APHIS) is responsible for minimizing the risks of infestation and disease and protecting the health of U.S. agriculture. On the basis of our review of APHIS, we recommended several actions to better ensure that APHIS identifies harmful pests and diseases through the inspections it conducts. APHIS agreed with problems noted in our report and is developing an action plan to correct these problems. (GAO/RCED-97-102)
Rural Development
The Empowerment Zone/Enterprise Community (EZ/EC) program was created by the Congress in 1993 to help distressed communities develop comprehensive approaches for dealing with their social and economic problems. This program involves significant levels of federal funds. In fact, we estimated that federal funding will total more than $1 billion over the 10-year life of the program. On the basis of our review, we recommended that USDA and Department of Health and Human Services (HHS) take several actions intended to better ensure that these funds are spent in accordance with appropriate financial standards and that there is sufficient capability to oversee the progress of the program’s implementation. Both USDA and HHS are in the process of taking actions to implement these recommendations. We will monitor their progress. (GAO/RCED-97-75)
See also chapter 5, Financial and Information Management Programs, Information Resources Management Issue Area.
Housing and Community Development Issue Area (Budget Functions 370, 450)
Impact of GAO’s Work
There are more than 300 federal programs and activities, scattered among 28 agencies, that are aimed at providing decent, affordable housing and healthy, vibrant communities. The Department of Housing and Urban Development (HUD), including the Federal Housing Administration (FHA), is the principal federal agency responsible for about 240 of these programs and activities. Other key agencies with housing or community development programs include the Department of Veterans Affairs (VA), the Rural Housing Service, the Small Business Administration (SBA), and the Federal Emergency Management Agency (FEMA).
The Congress continues to deliberate significant changes in the structure and functions of some of the aforementioned agencies. Major debate also exists regarding how the federal government should address the housing needs of its citizens, especially in light of welfare reform. Also, heightened sensitivity exists within the Congress regarding future budget needs—over $100 billion—for these agencies’ programs. The Housing and Community Development Issue Area’s work has significantly added to congressional debate and decision-making on the future of housing and community development at the federal and state levels. Highlights of some of our work are listed below.
In congressional hearings, we (1) discussed HUD’s management deficiencies, its progress on reforms, and remaining challenges; (2) questioned the need for hundreds of millions of dollars in potentially duplicative Section 8 funding and premature community development aid included in HUD’s fiscal year 1998 budget request; (3) discussed the challenges facing HUD’s Indian Housing Program; and (4) discussed SBA’s estimates of credit subsidies for the guaranteed business loan and certified development company programs.
In our report on a Congressional proposal to dismantle HUD, we provided the Congress with critical information on the consequences of coupling reduced federal funding with basic changes in the federal role in housing and community development.
Our report on HUD’s portfolio reengineering proposal discussed the potential costs and savings associated with the proposal and key issues that must be considered in formulating legislation on that subject.
Our report on HUD’s $1.58 billion HOPE VI-Urban Revitalization Demonstration Program will assist Congressional decisionmakers on the future of this program.
We identified substantial problems with HUD’s Preservation Program that need to be addressed, either through program reforms or its termination.
Our report on HUD’s Economic Development Loan Fund made recommendations to correct monitoring and information management problems we identified.
We presented the Congress with information on the impact of a reduction in FHA’s insurance coverage on (1) home mortgage lenders, the home mortgage market, and the types of borrowers served by FHA; (2) the financial condition of FHA’s insurance fund; and (3) HUD’s Government National Mortgage Association.
The work we have performed in past years has influenced the Congress, HUD and its agencies to take actions during fiscal year 1997 that will result in financial benefits and program improvements. Examples of these improvements are shown below.
The Congress did not appropriate $845 million to HUD for bonus funding during fiscal year 1997 for high-performing grantees in four of its six new block grants since adequate performance measures and supporting information systems had not been developed.
HUD, SBA, and FEMA revised their strategic plans to comply more fully with the requirements of the Government Performance and Results Act.
HUD directed its field offices to discontinue utilities once HUD acquires an FHA foreclosed property. This will reduce costs by $5.5 million over a 2-year period.
FHA now conducts an annual analysis of recent multifamily rental property loan defaults to test the validity of its loan loss reserve assumptions about defaults, which will allow FHA to better estimate its billions of dollars in loan loss reserves.
HUD has established procedures to monitor the financial performance of facilities in its nursing home portfolio and issued new program underwriting guidance, which will help prevent loan defaults and make underwriting loans less risky.
FHA has established a data base that will allow lenders and investors to evaluate and price the risk of multifamily housing loans and issued new program guidance for participating institutions.
The Rural Housing Service implemented centralized servicing of their single family housing loan portfolio, which will save the federal government about $69.7 million over a 2-year period.
The Federal Housing Finance Board issued new regulations that we consider key in ensuring that the Federal Home Loan Banks continue to meet their statutory and regulatory obligations under the Affordable Housing Program.
HUD has taken steps to improve oversight of approximately 3,000 public housing authorities through training and increased emphasis on mandatory oversight activities.
HUD implemented new lead-based paint regulations that will help ensure safe housing and that children are protected from further exposure to lead-based paint hazards.
For surplus properties to be used to shelter the homeless, HHS revised its lease to include language holding the federal government harmless for injuries that may occur.
HUD revised its Community Development Block Grant regulations that includes an incentive for grantees to fund projects that will produce high quality jobs.
SBA has improved its oversight and management of its Small Business Investment Company (SBIC) Program, which will help identify financially troubled firms and allow the federal government to recover an estimated $304.4 million in losses.
We identified an error that substantially inflated SBA’s estimates of the costs of its loans. Correction of this error enabled SBA to make $2.47 billion in additional small business loans.
FEMA has modified its appropriation request to show the estimates of funds required for past disasters, which should prevent depletion of the Disaster Relief Fund and subsequent suspension of disaster assistance to stricken communities.
High-Risk Area
We have designated HUD as a high-risk area in 1994.
HUD’s missions have resulted in a Department that is intricately woven into the nation’s financial and social framework and that interacts with a number of diverse constituencies, such as public housing authorities, private property owners, and nonprofit groups. HUD also spends a significant amount of tax dollars in carrying out its missions. The total budget outlays for HUD’s programs were just over $36 billion in fiscal year 1996, the vast majority of which was for assisted and public housing programs. HUD is also responsible for managing more than $426 billion in mortgage insurance, $497 billion in guarantees of mortgage-backed securities, and about $170 billion in prior years’ budget authority for which it has future financial commitments. In 1994, we designated HUD as a high-risk area because of four long-standing, department-wide deficiencies: weak internal controls, inadequate information and financial management systems, an ineffective organizational structure, and an insufficient mix of staff with the proper skills.
In February 1997, we reported that HUD had formulated approaches and initiated actions to address these deficiencies. However, we also reported that HUD’s efforts were far from reaching fruition; that HUD programs continued to pose a high risk to the government in terms of their vulnerability to waste, fraud, abuse, and mismanagement; that HUD needed to complete its corrective actions; and that HUD and the Congress needed to work together to implement a restructuring strategy that focuses HUD’s mission and consolidates, reengineers, or reduces HUD’s programs so as to bring the Department’s responsibilities in line with its management capacity. In June 1997, HUD announced its HUD 2020 Management Reform Plan that seeks to realign the agency’s programs and activities, increase accountability, and restore the public’s trust. The plan calls for reducing the number of programs or activities from over 300 to 70; reducing staffing levels from about 10,600 to 7,500 by the end of fiscal year 2000; retraining the majority of staff; reorganizing the 81 field offices; modernizing and integrating the financial and management information systems; developing and strengthening internal controls; and increasing program monitoring and measurement. Many of the reforms are expected to be implemented by the end of fiscal year 1998.
Key Open Recommendations
Low-Income Housing
In a July 1994 testimony, we said that we had found deplorable conditions in various low income project-based properties and recommended that the Secretary of HUD (1) promptly identify all properties with severe physical problems and offer affected tenants temporary assistance to relocate to safe and decent housing, (2) systematically notify owners of the problems, and (3) take appropriate enforcement actions against owners not bringing their properties into compliance with housing quality standards. HUD’s 2020 Management Reform Plan contains a strategy to address the very poor physical conditions at properties supported by HUD’s project-based assistance. Under its reform plan, HUD would create a Department-wide Real Estate Assessment Center, which would review projects’ physical inspection results and financial performance data to identify problem properties early. A Multifamily Center would also be created to provide improved asset management. If HUD’s strategy is successfully implemented, it would meet the intent of our recommendations. (GAO/T-RCED-94-273)
In a February 1989 report, we recommended that the Congress establish one low-income rental assistance subsidy program that would provide a unified approach to delivering housing assistance, equalize the benefits to program recipients, and quiet the debate over which program is preferable. Both the House and Senate have pending legislation to merge current programs. (GAO/RCED-89-20)
Lead-Based Paint Hazards
The risk of poisoning from lead-based paint continues to threaten the lives of young children living in low-income housing that was constructed before the sale of such paint was banned in 1978. Exposure to lead, even at low levels may cause serious health, learning, and behavioral problems in children—especially those under the age of 7. In 1993, we issued a report that found (1) public housing authorities were not complying with emergency abatement or relocation regulations for children with elevated blood lead levels and (2) HUD was not complying with 1988 legislative requirements aimed at abating lead-based paint hazards from public housing nor ensuring that public housing administrations were complying with its testing, abatement, and notification requirements. In the June 7, 1996, Federal Register, HUD published a proposed rule covering notification, evaluation, and reduction of lead-based paint in federally-owned and assisted housing. However, HUD has not yet published a final rule. (GAO/RCED-93-138)
Transportation and Telecommunications Issue Area (Budget Function 400)
Impact of GAO’s Work
Transportation issues significantly affect many aspects of our daily lives. The transportation sector is crucial to maintaining a healthy economy, as well as ensuring our competitiveness in the world markets and serving the expanding demands of our businesses and industries, as well as the American public. Despite the vast federal, state, and local resources that go to maintain this infrastructure, with the forecasted dramatic increase in air travel in the next decade and no slowdown expected in the demand for surface and water transportation, there is concern about the adequacy of the present infrastructure to continue to meet the needs of the traveling public safely.
As detailed below, our work has focused on budget, program management, and safety related issues. It has influenced the Congress, the Department of Transportation (DOT) and its agencies to take many actions that should improve transportation safety and the efficiency and the effectiveness of transportation policies and programs.
In the wake of major airline these crashes in 1996, we provided numerous reports and testimonies which highlighted the need forthe Federal Aviation Administration (FAA) to undertake actions more quickly to protect the flying public from the threat of explosives. During 1997, in response to our recommendations, FAA convened consortia at major airports to develop vulnerability assessments and action plans for addressing identified vulnerabilities; and assessed commercially available explosive detection equipment for screening checked baggage and purchased 54 such systems for deployment at airports.
During 1997, FAA also took action on two of our key open recommendations concerning a long-term national strategy to improve aviation security and monitoring progress in implementing a series of safety improvements. FAA has established short- and long-range target dates to address the recommendations of the White House Commission Report on Aviation Safety and Security, which provides a comprehensive framework for improving aviation security; is deploying a computerized training and testing system to improve screener performance; and created an implementation plan that outlines the objectives for its safety improvements, provides points of contact for each, and links those recommendations to ones made by other FAA safety studies.
Our work also influenced the Congress to enact legislation which impacted aviation funding. For instance, the Congress passed legislation which reinstated the taxes which financed the Airport and Airway Trust Fund, averting a major funding shortfall and providing $2.7 billion in tax revenue for fiscal year 1997. Also, based on our recommendations, the Congress eliminated the set-aside funding for reliever airports, resulting in cost reductions of $123 million for fiscal years 1997 and 1998; and reduced FAA’s fiscal year 1997 appropriations by $34.5 million.
Finally, in response to findings that FAA’s culture was contributing to persistent problems in its air traffic control system modernization efforts, FAA issued a report entitled “Strategy for Acquisition Culture Change.” This report will serve as an important building block toward long-term efforts to change FAA’s culture.
In 1997, DOT, its agencies, and the Congress took action on several recommendations dealing with surface transportation and the Coast Guard. For example,
DOT provided the Congress with the estimated cost and funding sources for each of the 55 action items that it identified to improve highway-rail crossing safety;
The Federal Highway Administration (FHWA) increased its role in state environmental planning by assisting the Council on Economic Quality in (1) publishing a handbook that explains how to assess a project’s cumulative impact on the environment, and (2) planning a series of workshops for environmental assessment practitioners on how to use the handbook;
FHWA corrected errors in programming transportation enhancement funds and took steps to ensure that future funds were programmed only for eligible projects; the Congress eliminated a total of $122.6 million in federal funding from two very large transportation projects—San Francisco’s rapid transit extension to its airport and the Los Angeles Red Line Subway; and the Congress decided not to fund the Coast Guard’s $6 million request for procurement of additional systems and reduced the agency’s 1997 budget request by $15.9 million.
Finally, in 1997, the Coast Guard took action on our key recommendation to explore less costly alternatives to its plans to expand installation of Vessel Traffic Service systems.
Key Open Recommendations
Although many actions and initiatives have been taken by the Congress, DOT, and its agencies in response to our recommendations, some important recommendations remain open and warrant priority attention.
Aviation Security and Safety
During their first 5 years of operations, new airlines, on average, had nearly twice the accident and incident rates of established airlines and received more than twice the number of enforcement actions that established airlines received. However, our analysis showed that FAA is not targeting inspections on those airlines with the most serious safety problems. For example, Valujet—a new airline that experienced an accident in which 110 passengers and crew died—had an incident rate that was 40 percent higher than average, but was inspected one-third as frequently as all new large airlines through calendar year 1994. We recommended that the FAA closely monitor the performance of new airlines, particularly during the early years of operations and conduct increased and/or comprehensive inspections of those new airlines that experience elevated rates of safety-related problems. FAA is in the process of developing a national certification team to assist in reviews of newly certified air carriers and is developing handbooks for use in evaluation and surveillance of these carriers. However, the certification team is not yet fully staffed. (GAO/RCED-97-2)
Global Positioning System
When augmented, the Global Positioning System could provide substantial safety and efficiency benefits for airlines and other users of the National Airspace System. One of the main benefits of the Global Positioning System will be prevention of accidents and the associated casualties. For example, the use of the Global Positioning System might have prevented the American Airlines crash in Columbia when the ground-based navigational aids were out of service and the pilot got lost in mountainous terrain. Additionally, airlines will save hundreds of millions through more efficient and direct routings and approaches. Finally, production of the Global Positioning System-related equipment for aircraft and other transportation modes is expected to be an $8 billion per year industry. In May 1995, we recommended that FAA prepare a comprehensive plan for augmenting the Global Positioning System, transitioning to the augmented system, and updating the plan regularly. The plan should include, among other things, schedule and cost estimates for developing and implementing the wide and local area augmentation systems as well as information on the probability that FAA will meet these estimates. FAA completed the public version of the Global Positioning System Transition Plan in July 1996, and is initiating work on the Global Positioning System Transition Plan Library which is intended to address other users’ needs. The Library’s completion is expected late in 1997. However, FAA has not yet developed plans for developing, acquiring, fielding, or implementing a local area augmentation system—needed to support precision approaches—as we had recommended. (GAO/RCED-95-26)
Fees for Registering and Certifying Aircraft
A potential option for dealing with limited FAA resources, is to establish new user fees or increase existing ones for the services it provides, taking into consideration the government’s costs, the value of the services to the user, and the public policy or interest served. In 1993, we reported that FAA is not fully recovering the cost of processing aircraft registration applications and estimated, that, by not increasing fees since 1968 to recover costs, FAA had foregone about $6.5 million in additional revenue. In accordance with our recommendations, DOT is processing a Notice of Proposed Rulemaking to increase aircraft registration fees and expects to issue it in March, 1998. (GAO/RCED-93-135} In 1996, we recommended that DOT reevaluate the appropriateness of the Office of the Secretary increasing its fees and FAA establishing fees for services to certify new airlines. In November, 1996, FAA formed a working group to focus on this issue. FAA anticipates issuance of a Notice of Proposed Rulemaking to establish such fees in late 1997. (GAO/RCED-96-8)
See also Information Resources Management—Federal Aviation Administration in this chapter.
Boston Central Artery/Tunnel
Since 1995, we have been monitoring the cost and financing plans for the Central Artery/Tunnel project—one of the largest, most complex, and most expensive highway construction projects ever undertaken. As of March 1997, Massachusetts estimated the project’s total cost at $10.8 billion. The state’s cost estimate depends on meeting the aggressive cost containment goals established for the project. If current trends continue, further cost increases seem likely and the project’s cost could increase by between $100 million and $500 million. Additionally, the State’s December 1996 feasibility study identified a funding gap of $1.8 billion to $2.3. billion between fiscal years 1998 and 2002. Massachusetts has implemented a plan to finance its share of the project’s cost, including a strategy to finance funding shortfalls. However this plan may not be sufficient to meet the project’s funding needs because, among other things, it does not recognize cost increases that occurred through March 1997. We recommended that the project’s next finance plan include (1) a revised estimate of the project’s costs and funding needs that more closely reflects the state’s actual experience with its cost containment program, and (2) a contingency plan for financing the project if costs increase further or if the sources of financing are not sufficient. (RCED-97-170)
Track Safety Inspections
In reporting on the Federal Railroad Administration’s (FRA) Track Safety Inspection Program, we recommended that the FRA provide guidance to track inspectors on options available when excepted track deficiencies constitute an imminent threat of derailment or another safety hazard. Such action would strengthen the current regulations governing the excepted track provision and improve safety on excepted track. DOT agreed to issue revised guidance to its inspectors once the FRA finalizes the new Track Safety Standards. DOT issued a Notice of Proposed Rulemaking in July, 1997, and expects to issue revised guidance to its inspectors by December 1997. (GAO/RCED-94-56)
Information Resources Management— Federal Aviation Administration (Budget Function 990)
Impact of GAO’s Work
Our work has been aimed at strengthening FAA’s ability to meet its mission of providing safe and efficient air travel. To this end, we have designated FAA’s air traffic control modernization, a $34 billion dollar effort to develop and implement over 200 projects ranging from facility upgrades to software-intensive information system projects, as a high risk area and focused our attention on identifying the root causes of past modernization project failures, and making recommendations to correct these problems. We have also continued to follow-up on past recommendations concerning other aviation safety functions that FAA performs.
During this fiscal year, we issued several reports on FAA’s air traffic control system modernization. These reports addressed systemic weaknesses in the modernization’s management structure and processes, including the organizational placement of the Chief Information Officer, the definition and enforcement of a complete systems architecture, the maturity of software acquisition processes, and the adequacy of cost estimating and cost accounting practices. FAA has acted to address many of the recommendations made in the reports.
During this year, FAA implemented our recommendations to improve a key modernization project, which contributed to the project being completed ahead of schedule, as well as our recommendations to improve the quality of the data used by FAA’s safety analysis system, which will strengthen FAA’s ability to target limited inspection resources. Each of these accomplishments is discussed below.
Display Channel Complex Rehost
We reported that acquisition of software-intensive systems, like the Display Channel Complex Rehost, is inherently risky. Best practices used in government and private sector acquisition and development activities include the use of formal risk management to proactively and continually identify, assess, track, control, and report risks. While FAA had formal strategies and efforts underway to address certain key risks, two risks—associated with FAA’s plan to concurrently conduct factory acceptance testing, site acceptance testing, and operations testing—were not being formally managed. These two risks were (1) contention for human test resources and (2) control of the test baseline configuration. Therefore, FAA could not assure that either risk would be carefully and effectively mitigated. The Department of Transportation and FAA officials agreed with our recommendation and began formal management of both risks. FAA subsequently completed this acquisition ahead of schedule.
Safety Performance Analysis System
In 1995, we reported that the Safety Performance Analysis System—a decision support system to better target limited inspection resources—would not be effective if its data quality were not improved. We recommended that FAA develop and implement a comprehensive and coordinated strategy specifying how the quality of all data residing on source data systems would be brought to the minimum level needed for the Safety Performance Analysis System to meet operational requirements. We specified that the strategy must include, among other things, (1) clear statements of organizational responsibility and authority for improving the source systems’ data quality, (2) both interim and long-term milestones for attaining stated quality objectives that tie closely to the development schedules, and (3) estimates of resource requirements to meet stated objectives and agency commitments to providing these resources. FAA officials agreed and, in response, are implementing a “Comprehensive Data Quality Plan” for the Flight Standards Service that satisfies these specifications.
High-Risk Area
We have designated the FAA’s Air Traffic Control Modernization program as a high risk area.
Air Traffic Control Modernization
Faced with rapidly growing air traffic volumes and aging air traffic control equipment, the FAA in 1981 initiated an ambitious Air Traffic Control modernization program. This effort—expected to cost $34 billion through fiscal year 2003—mostly involves investments in a multitude of software-intensive computer systems.
Over the past 15 years, the modernization program has experienced cost overruns, schedule delays, and performance shortfalls of large proportions—particularly in the $7.6 billion former centerpiece of the modernization known as the Advanced Automation System, which FAA restructured in 1994. The acquisition of that system failed because FAA did not recognize the technical complexity of the effort, did not realistically estimate the resources required, did not adequately oversee its contractors’ activities, and did not effectively control system requirements. With $11 billion planned to be spent on the Air Traffic Control program from fiscal years 1998 through 2003, and billions more to follow, it is critical that FAA overcome the weaknesses that threaten the effort.
FAA continues to face formidable challenges. For example, the many systems comprising the modernization effort have long proceeded without a complete systems architecture, or overall blueprint, to guide development and evolution. The result has been unnecessarily high spending to buy, integrate, and maintain hardware and software. Also exacerbating the modernization’s problems is unreliable cost information—both future estimates of costs and accumulations of actual costs. The lack of adequate cost estimating processes and cost accounting practices needed to measure actual cost performance against cost estimates leaves FAA at risk of making ill-informed decisions on critical multimillion, even billion, dollar Air Traffic Control systems. Additionally, FAA’s Air Traffic Control modernization software acquisition processes are ad hoc and sometimes chaotic, and are not repeatable even on a project-by-project basis.
Key Open Recommendations
Our work on FAA’s Air Traffic Control modernization showed pervasive and fundamental problems in FAA’s approach to managing the modernization. To address these problems, we have made a series of detailed recommendations aimed at correcting key modernization management problems.
Our report on FAA’s system architecture recommended that FAA ensure a complete architecture is defined and enforced before FAA decides on the architectural characteristics for replacing the Host Computer System. We also recommended that FAA establish an effective management structure for developing, maintaining, and enforcing the complete Air Traffic Control systems architecture, including adopting a Chief Information Officer (CIO) structure similar to that required under the Clinger-Cohen Act. The agency has actions underway to expand on past architectural efforts. (GAO/AIMD-97-30)
Our report on FAA’s cost estimating processes and cost accounting practices found numerous weaknesses. We recommended that FAA institutionalize defined processes for estimating Air Traffic Control projects’ costs that include (1) a corporate memory, (2) structure approaches for estimating software size and complexity, (3) cost models calibrated to past experiences, (4) audit trails that record cost model inputs, (5) approaches for dealing with cost and schedule constraints, and (6) data collection and feedback processes. We also recommended that FAA should disclose the inherent uncertainty in all Air Traffic Control projects’ official cost estimates presented to the Congress and executive oversight agencies, should acquire or develop and implement a managerial cost accounting capability, and should report its lack of a cost accounting capability as a material internal control weakness in the Department’s FMFIA reports. FAA agreed to implement all but the final recommendation. It has since formed a life cycle cost estimating working group to develop cost estimating processes in line with GAO’s recommendations; it has committed to disclosing the inherent uncertainty in projects’ cost estimates; and it plans to implement an initial cost accounting capability by October 1, 1997, and a full cost accounting system by October 1, 1998. FAA did not implement the final recommendation because it believes that its current lack of a cost accounting capability is not a material weakness. We disagree and until FAA has a full cost accounting capability system, it will continue to lack adequate cost information needed to effectively manage Air Traffic Control system acquisitions. Disclosure of such a management control weakness is one of the objectives of the FMFIA, and therefore should be reported as a material weakness. (GAO/AIMD-97-20)
Our report on FAA’s software acquisition process maturity reiterated our earlier recommendation for FAA to implement a CIO structure similar to that specified in the Clinger-Cohen Act and recommended that FAA improve its software acquisition processes by (1) assigning responsibility for software acquisition process improvement to FAA’s CIO, (2) providing FAA’s CIO with the authority to implement and enforce Air Traffic Control modernization software acquisition process improvements, (3) requiring the CIO to develop and implement a formal plan for Air Traffic Control software acquisition process improvement based on GAO’s software acquisition capability maturity model (SA-CMM) evaluation results, (4) allocating adequate resources to ensure that planned initiatives are implemented and enforced, and (5) requiring that, before being approved, every Air Traffic Control modernization acquisition project have software acquisition processes that satisfy at least SA-CMM level 2 requirements. FAA has efforts underway to address some of the recommendations. (GAO/AIMD-97-47)
See also Transportation and Telecommunication Issue Area of this chapter.
Improving Human Resource Programs
Education and Employment Issue Area (Budget Function 500)
Impact of GAO’s Work
The Education and Employment issue area focuses on the nation’s educational efforts—from preschool through higher education programs—and its efforts to develop skilled workers, link potential workers with employment, and ensure basic workplace protections. The quality of life in this country and our ability to compete in the international marketplace are heavily influenced by the nation’s investment in educational and employment programs. The Departments of Education and Labor are the federal agencies with primary responsibility for overseeing this investment. Working with state and local governments, the federal government invests over $60 billion annually to promote access to quality education and to advance opportunities for productive employment under safe and equitable conditions.
Our education work continues to alert the Congress and executive branch agencies to important issues. In this regard, the next section discusses the multibillion dollar federal student financial aid programs—one of the high-risk areas that GAO has identified as being vulnerable to waste, fraud, abuse, and mismanagement. Our latest high-risk series report summarizes and updates both our continuing concerns about the Department of Education’s vulnerabilities in managing and overseeing the student aid programs as well as progress in strengthening the programs’ fiscal and management control systems. Our work on proprietary schools revealed that students are obtaining federal student financial aid for training in occupations with a surplus of trained workers. In May 1997, we reported the potential inability of the District of Columbia Public Schools to manage the magnitude of work involved in doing repairs before the 1997-98 school year. As a result, a request for supplemental federal funds for this purpose was withdrawn, creating a $37 million savings for taxpayers. We have also provided the Congress information on numerous other education topics, including the existence of multiple federal youth programs, comparative per pupil funding in poor and wealthy school districts, the relationship between school performance and reliance on federal student financial aid in the proprietary school sector, comparative levels of activity in the direct and guaranteed student loan programs, and the role of state commissions in implementing the AmeriCorps national service program.
The focus of our workforce skills and jobs work has been on identifying ways in which federal programs can better assist workers to acquire the skills they need to become economically self-sufficient and help employers recruit and hire qualified employees. Our work on various aspects of Job Corps has been a major part of this effort. For example, we reported on the extent to which Job Corps participants are served in centers located within their state of residence and the Job Corps program capacity within each state relative to the number of participants from that state. With respect to the Employment Service, which is administered jointly by the Department of Labor and the states, we recommended that the Secretary of Labor work with the states to identify and solve problems affecting Employment Service quality and performance. As a result, the Labor Department now recognizes states as partners in program management. Several Employment Service revitalization projects involve state and local partners as standard operating practice in efforts to improve program performance.
With respect to worker protection, our work has focused on the maintenance of workplace protections for employees while minimizing the regulatory compliance burden on employers. Our work played a major role in the development of recent initiatives that the Department of Labor’s Occupational Safety and Health Administration (OSHA) took to improve its policies and procedures. We recommended that OSHA promulgate a regulation requiring employers to submit evidence of the corrective actions taken to abate safety and health hazards. On March 31, 1997, OSHA issued an abatement verification regulation requiring employers to document the corrective actions that have been taken to abate hazards. We also recommended that OSHA implement procedures for ensuring that employers accurately record occupational injuries and illnesses. In response, OSHA has initiated a records audit program under which it will conduct 250 record audits each year. In addition, we recommended the National Labor Relations Board identify labor law violators who receive federal contracts. Procedures have been established for the Board to obtain tax identification numbers, which will allow the Board to use Treasury Department records to determine if a labor law violator is also a federal contractor. These procedures will enable the National Labor Relations Board to use federal administrative and income tax refund offsets to enforce compliance with orders to restore wages.
Further, in other work involving unemployment insurance, we made recommendations that would prevent military reservists from being overpaid in unemployment insurance benefits. We recommended that the components of the military notify all reservists of their income-reporting responsibilities with respect to state unemployment insurance benefits in a message included on their leave and earnings statement. Such messages are now included annually in reservists’ leave and earnings statements. We also recommended that the Department of Labor provide assistance to state unemployment insurance programs in reviewing the administrative forms or procedures used to gather information about a prospective or continuing claimant’s wages and making revisions to clearly identify to claimants the types of reserve income they must report for the offset of benefits. The Department has provided assistance through correspondence.
Finally, we reviewed several of the draft strategic plans that federal agencies were required to prepare under the Government Performance and Results Act of 1993 (the Results Act). The agencies used many of our observations and suggestions to produce substantially improved final plans. For example, we highlighted numerous ways Labor’s draft plan could be improved so that Labor could most benefit from this strategic planning process and be in compliance with the Results Act. In a letter to the House Committee on Education and the Workforce transmitting a revised version of its plan, Labor noted that our findings provided the impetus and guidance to advance its plan. The final plan addressed many concerns we had raised. As a result of the improvements made in Labor’s plan and in others, the agencies will now be able to take greater advantage of the strategic planning process envisioned by the act and be in a better position to manage their organizations.
High-Risk Area
We have designated student financial aid as a high-risk area.
Student Financial Aid
Although the Department of Education has shown a commitment to improving its management of the student financial aid programs, the financial risk to U.S. taxpayers remains substantial. The major student aid programs—the Federal Family Education Loan Program, Federal Direct Loan Program, and Pell Grant Programs—employ complex and cumbersome processes with many participants, as they provide over $35 billion of aid for postsecondary education students. The addition of the Federal Direct Loan Program made the management of the student aid programs an even greater challenge for the Department. Also, to maximize access to aid funds, the Higher Education Act placed nearly all the financial risk of loan defaults (which totals over $2.5 billion in 1996) on the federal government.
Management shortcomings are another major problem. Reviews by us, congressional committees, and the Department’s Inspector General have shown that the Department (1) did not adequately oversee schools that participate in the programs; (2) relied too heavily on managing each title IV program through separate administrative structures, with poor or little communication among programs; (3) used inadequate management information systems that contained unreliable data; and (4) did not have sufficient and reliable student loan data to determine the liability associated with outstanding loan guarantees.
The Department has generally been responsive to addressing problems in its student aid programs, and many of those actions appear to be achieving some results. For example, annual collections on defaulted loans have increased over the last 5 years from $1 billion to $2.4 billion. The Department has also begun a major reengineering effort that it expects will resolve problems with data reliability and communication among programs in the next several years. It is envisioned as a student-based, integrated data system through which all management and control functions will be conducted.
Key Open Recommendations
Department of Education Management
In our 1992 transition series report, we recommended that the Department of Education have information and financial management systems that provide needed data and protect the federal government’s financial interests from waste, fraud, and mismanagement. We recognized that corrective actions would require new systems and revised regulations, or legislation, or both. The Department is continuing the redesign of its core financial management systems. However, in September 1997, the Department suspended all computer purchases to focus its management information systems resources on solving the problem of how to handle information pertaining to January 1, 2000, and beyond. Although the Department has made progress in implementing our recommendation, even without the need to refocus resources on the year 2000 problem, its initiatives are long term efforts that will require more time to complete. (GAO/OCG-93-18TR)
See also chapter 5, Financial and Information Management Programs, Information Resources Management Issue Area.
Head Start
In our April 1997 report on research studies of the impact of the current Head Start program, we reported that although research has been conducted, it does not provide information on whether today’s Head Start is making a positive difference in the lives of participants. While we acknowledged the difficulties of conducting impact studies of programs such as Head Start, we concluded that research could be done that would allow the Congress and the Department of Health and Human Services (HHS) to know with more certainty whether the $4 billion investment in Head Start is making a difference. We recommended that the HHS Secretary include in HHS’ research plan an assessment of the impact of Head Start programs. In commenting on a draft of our report, the Department indicated that it plans to evaluate the feasibility of conducting impact studies such as we recommended; however, the Department has not yet initiated action on our recommendation. (GAO/HEHS-97-59)
See also chapter 5, Financial and Information Management Programs, Information Resources Management Issue Area.
Davis-Bacon Act Wage Determinations
During our 1996 study of the Department of Labor’s prevailing wage determination process under the Davis-Bacon Act, we found that Labor’s wage determination process is based on voluntary participation by employers and third parties in surveys that report wage and fringe benefits data on construction projects. We also found that this process contains weaknesses that could permit the use of fraudulent or inaccurate data in the setting of prevailing wage rates. We recommended that the Department request a sample of participating employers to submit appropriate documentation to support their data submissions or to conduct a limited number of on-site inspection reviews of employer wage data. In response, in July 1996, Labor officials advised regional offices to start collecting documentation of wages paid from a selected group of employers included in its current and ongoing wage survey process. Three of five regional offices have begun selective verification, and Department officials will review the results. Department officials are also changing survey training materials to emphasize verification of reported wage data. Further, in its report accompanying the bill to provide fiscal year 1998 funds for the Department, the House Committee on Appropriations directed the Department to ensure that an appropriate portion of the funds appropriated for the Davis-Bacon wage survey program be expended to randomly sample all data submissions to verify their accuracy, and that a sample of all data submissions be selected for on-site data verification against actual payroll records. The Congress also directed GAO to review the Department’s activities to determine whether they will improve the timeliness, accuracy, and reliability of Davis-Bacon wage determinations. (GAO/HEHS-96-130)
U.S. Commission on Civil Rights
We recommended that the U.S. Commission on Civil Rights develop and document policies and procedures that (1) assign responsibility for management functions to the staff director and other Commission officials; and (2) provide mechanisms for holding them accountable for properly managing the Commission’s day-to-day operations. We specified that this effort should include establishing a management information system for commissioners and staff to use to plan projects and track progress using the best information available about projects’ expected and actual costs, time frames, staffing levels and completion dates. The Commission is in the process of implementing our recommendation. For example, a management information system that will track the status of projects and the resources committed to them is nearing completion. (GAO/HEHS-97-125)
Veterans’ Affairs and Military Health Care Issue Area (Budget Functions 050, 550, 700 & 753)
Impact of GAO’s Work
The Veterans’ Affairs and Military Health Care issue area is responsible for GAO’s evaluations of health care directly provided by the federal government as well as nonhealth benefits provided by the Department of Veterans Affairs (VA). Our work on health care delivery focuses primarily on the services provided to over 34 million veterans and military beneficiaries by VA and DOD through their $32 billion systems of hospitals, clinics, and managed care contracts. We also evaluate health care provided by the Indian Health Service and Bureau of Prisons. For VA nonhealth benefits, our evaluations address disability compensation, pensions, vocational rehabilitation, and life insurance. These programs serve over 3 million veterans and cost about $18 billion a year.
Rising health care costs and substantial budget deficits have prompted major congressional concerns about whether these agencies are delivering quality health care to their beneficiaries as efficiently and cost-effectively as possible. The downsizing of the military forces and the declining but aging veteran population has also prompted a concern about the structure of DOD and VA health delivery and VA’s benefits systems.
Our objectives are to (1) identify opportunities to improve existing VA and DOD health care systems’ and VA benefit programs’ management and accountability; (2) assess efforts to structurally reform VA and DOD health care and VA benefits systems to better accomplish their missions; (3) evaluate the implementation of, and lessons learned from, managed health care strategies in VA and DOD; and (4) determine whether federal agencies are effectively serving the unique health care needs of special populations.
DOD Programs
In fiscal year 1997, we continued to focus on issues related to the reform and restructuring of the military health care system, particularly TRICARE, the managed care program DOD began to implement in 1995 and is continuing to phase in across the country. On the basis of previous GAO recommendations, DOD is making substantive changes to its TRICARE contracting process. For example, DOD has (1) made improvements in how it monitors contractor performance; (2) initiated procedures for reviewing, approving, and budgeting for proposed contract modifications; (3) begun redesigning its health care contract specifications to reflect best industry practices; and (4) initiated actions to recover millions of dollars in overpayments to contractors.
Our study on options to enhance older military retirees’ health benefits was influential in Congress’ decision to authorize a 3-year test of the Medicare subvention option, rather than moving ahead systemwide. Moreover, our previous work on DOD health issues has resulted in significant financial benefits. DOD has now substantially implemented our recommendation that its CHAMPUS reimbursement rate structure be in line with Medicare rates, for example. DOD savings are estimated to be nearly $1.5 billion in fiscal year 1997 and future years. Actions the Congress has taken, upon our recommendation, to prevent double billing for Uniformed Services Treatment Facilities care provided to Medicare-eligible DOD beneficiaries and to reduce the Uniformed Services Treatment Facilities fiscal year 1997 appropriation level, will save millions.
VA Health Care Programs
During the past year, our work has examined VA’s efforts to increase the efficiency of its health care system, adopt managed care strategies, and serve special populations, including Persian Gulf War veterans.
We testified that VA’s 5-year plan to reduce its per patient cost by 30 percent, increase patients served by 20 percent, and finance 10 percent of its expenditures using nonappropriated revenues by the year 2002 could limit VA’s contributions to deficit reduction and potentially put low-income, uninsured veterans at risk. We determined that VA could operate as a health care safety net for several years at its current $17 billion appropriation or less, without increasing users or expanding revenues. However, VA’s plans to attract new users focus primarily on attracting insured and higher-income veterans with other health care options rather than on addressing the unmet needs of veterans with service-connected conditions and low-income veterans. Moreover, we concluded that VA will have difficulty increasing recoveries from private health insurance—a key component of its planned efforts to increase nonappropriated revenues.
We continue to examine ways in which VA could more cost-effectively operate its hospital system. We identified lessons learned from VA’s medical facility integrations that could help enhance VA’s process for planning and implementing integrations, including adopting a more comprehensive planning approach and completing planning before implementing changes. Our previous work on VA’s proposed $278 million hospital construction project at Travis Air Force Base identified several more efficient alternatives that are available to VA which could effectively meet veterans’ demand for VA health care. On the basis of our conclusion that the hospital project was not justified, VA has abandoned its plans to construct a new hospital and instead plans to open new outpatient clinics to improve veterans’ access to care.
We reported that VA’s new resource allocation method, the Veterans Equitable Resource Allocation system, shows promise for correcting long-standing regional funding imbalances that have impeded veterans’ equitable access to services. On the basis of our recommendations, VA has linked the Veterans Equitable Resource Allocation system to its strategic planning process so that allocations are more closely associated with VA’s long-range goals, performance standards, and workload priorities. However, VA monitoring and oversight efforts are inadequate to ensure that Veterans Equitable Resource Allocation system’s potential for creating equitable access to services will be realized.
Regarding special populations, we testified that Persian Gulf War veterans appeared to be confused by, and frustrated with, VA and the care they received for their illnesses. We are continuing to examine VA’s diagnosis, treatment, and monitoring of Persian Gulf War veterans and the health problems they report.
Moreover, our past work on VA’s pharmacies’ dispensing practices has resulted in significant benefits. VA has now substantially implemented our recommendation that pharmacies dispense maintenance drugs in 90-day supplies (rather than in the 30 or 60 day supplies previously dispensed) when VA physicians prescribe veterans’ use of such drugs for periods of 90 days or longer. VA pharmacies reported that 90-day supplies had allowed pharmacies to dispense drugs almost 16 million fewer times in 1997, reducing costs about $29 million in that year alone.
VA Nonhealth
Our work in this area has addressed VA’s services to Benefits Programs veterans, including vocational rehabilitation, disability compensation, and burial benefits. We have emphasized the need for VA to focus on program results as well as cost-effective service delivery, as envisioned by the Government Performance and Results Act of 1993. In testimony and a report, for example, we noted that the most significant deficiency in the draft strategic plan VA has developed is the lack of results-oriented goals for major VA programs, particularly for benefit programs.
Our past work has demonstrated that, despite legislation requiring VA to focus its vocational rehabilitation program on finding disabled veterans suitable employment, VA continues to place few veterans in jobs. On the basis of our recommendations, VA has established a multiagency task force to strengthen working relationships between VA, the Department of Labor, and state rehabilitation agencies, and conducted an attrition study to examine reasons why veterans drop out before successfully completing their vocational rehabilitation programs.
We also reported that VA’s disability rating schedule, which has served as a basis for distributing compensation among disabled veterans since 1945, does not reflect the many changes that medical and socioeconomic conditions may have had on veterans’ earning capacity over the last 51 years. Thus, the ratings may not accurately reflect the levels of economic loss that veterans currently experience as a result of their disabilities.
VA, through its Readjustment Counseling Service, operates over 200 community-based facilities, known as Vet Centers, which help certain veterans make a successful transition from military to civilian life. On the basis of our recommendations, VA has directed the Service to develop a systematic approach for evaluating, on a continuing basis, the effectiveness of Vet Centers in meeting veterans’ psychological needs.
On the basis of our concerns about Persian Gulf War veterans’ undiagnosed illness claims, VA agreed to provide veterans with better information regarding acceptable claims evidence. We are continuing to monitor VA’s efforts to improve its processing of these claims. We are also examining VA’s efforts to improve its disability claims processing and adjudication, a subject of continuing concern to the Congress.
Key Open Recommendations
We reported that DOD resource-sharing arrangements with TRICARE support contractors were resulting in about 5 percent of the estimated $700 million in new savings, potentially causing financial losses for both DOD and the contractors and higher TRICARE costs. We recommended that DOD pursue promising resource sharing arrangements while also seeking alternatives to resource sharing in its existing and future contracts. We also recommended that DOD continue to focus on implementing needed contract change order process improvements, and to link TRICARE contractors’ administrative payments to actual health care costs. DOD is in the process of improving its TRICARE contracting procedures. (GAO/HEHS-97-130 and GAO/HEHS-97-141)
Also of key importance are our recommendations that DOD begin gathering certain data on who is using DOD health care under the TRICARE program, as well as DOD’s success in providing timely access to its beneficiaries. This data will be critical in the eventual evaluation of TRICARE’s overall success. (GAO/HEHS-96-128)
VA has struggled for years to develop a method for equitably allocating resources among its facilities nationwide. To enhance the potential for success of VA’s new allocation system—the Veterans Equitable Resource Allocation system, we recommended that VA (1) develop more timely and detailed indicators of changes in key system workload measures and medical care practices, and (2) improve oversight of Veterans Integrated Services Networks’ allocation of resources to their facilities to help ensure that veterans receive equitable access to appropriate care. (GAO/HEHS-97-178; GAO/HEHS-96-48)
VA hospitals too often serve patients whose care could be more efficiently provided in alternative settings, such as outpatient clinics or nursing homes. In July 1996 we testified and reported that VA facilities could save billions by reducing nonacute admissions and days of care in VA hospitals. Toward this end, we recommended that VA establish an independent, external preadmission certification program for hospitals. On the basis of our recommendation, VA has directed its Veterans Integrated Services Networks to establish preadmission certification programs. However, the program VA established did not involve contracts with independent external reviewers or establish any financial risk/incentives for VA physicians to adhere to the review findings. (GAO/HEHS-96-121)
As the number of veterans aged 65 and older increases, nursing home care is becoming an increasingly important health care service. As part of VA’s ongoing efforts to improve nursing home resource management decisions, we recommended that VA more accurately accumulate and report nursing home costs, assess the availability of community nursing home resources, and identify locations where current reimbursement rates are not competitive. (GAO/HEHS-97-27)
In an effort to enhance veterans’ access to health care and place more emphasis on primary care, VA has begun to establish free-standing outpatient clinics. In doing so, VA has identified what could be a cost-effective way to enhance the availability of health care, especially for veterans residing in underserved areas. However, VA has not developed a plan to ensure that outpatient clinics are established in an affordable manner. We recommended that VA provide the Congress with a report that presents the overall VA plan and time schedule for the systemwide establishment of outpatient clinics to assist Congress in determining the affordability of the VA plan. VA has stated its intent to establish a work group to develop a plan for the systemwide establishment of outpatient clinics. (GAO/HEHS-97-7)
Three VA-administered life insurance programs have and for the foreseeable future will continue to have sufficient excess funds to pay their own administrative costs. This would save an estimated $27 million annually in appropriated monies. In order to pay for this, veterans’ annual dividends (which currently range from $274 to $373) would be reduced by about $10. Insured veterans have no statutory or contractual right to excess funds. However, because the law now requires the government to pay the administrative costs, a legislative change would be required to allow these programs to pay their own administrative costs. Thus, in March 1992 we recommended that the Congress amend 38 U.S.C. 1982 to require that the three VA insurance programs pay administrative costs from excess interest income. (GAO/HRD-92-42)
In response to our recommendations focusing on preventing overpayments in compensation and benefits claims, VA is determining the causes of overpayments and developing strategies for targeting preventive efforts. (GAO/HEHS-95-88)
Health Financing and Systems Issue Area (Budget Function 550)
Impact of GAO’s Work
Our work on the nation’s public and private health insurance programs encompasses some of the most important and expensive issues facing the country. Medicare and Medicaid are the primary insurers for more than 70 million people and the federal government will spend an estimated $315 billion on these programs in fiscal year 1997 with the states contributing an additional $72 billion to Medicaid. Although enactment of the Balanced Budget Act of 1997 shored up the Medicare Hospital Insurance trust fund, extending its expected depletion data from 2001 to 2010, the program still faces longer term problems with the aging of the baby boom generation who will begin turning 65 in 2010. As the main insurer of long-term care, Medicaid also will be facing increased costs as the population ages, and especially as the number of those over 85 increases.
We continued to assess the ongoing transition in the Medicare and Medicaid programs from fee-for-service to various forms of managed care, including the effects of this evolution on the insured as well as on providers of care. At the same time, we examined new developments in the private insurance sector, helping congressional decision making on issues such as (1) the new children’s health insurance program, authorized by Balanced Budget Act of 1997, that is envisioned to cover uninsured children with expenditures of $20 billion over 5 years; (2) federal efforts to help citizens gain access to insurance through implementation of new provisions enacted in the Health Insurance Portability and Accountability Act of 1996; and (3) other trends in coverage under employer-sponsored health plans, such as decreasing coverage for retirees.
One unifying theme to much of our work this year was a focus on improving the design of public health insurance programs. During the Congress’ consideration of the Balanced Budget Act of 1997, we provided, through reports and testimonies, many suggestions for how Medicare and Medicaid reform proposals could be made more effective, the kinds of issues that needed to be addressed, and information on the likely effects of actions. We also raised a number of issues surrounding the design of prospective payment systems for Medicare home health and skilled nursing facility services including selection of the unit of service for payment purposes, the adequacy of current data for rate-setting purposes, the importance of utilization and quality monitoring systems under prospective payment, and the potential effect of payment systems design decisions on these monitoring systems. We addressed problems with how Medicare sets payment rates for health maintenance organizations and the need for enhanced monitoring of, and furnishing beneficiaries more information about, these organizations. Many of these matters were addressed in the final legislation.
GAO also provided key information on a public health insurance design issue that preceded the landmark Balanced Budget Act of 1997 provisions. Under 1993 legislation, HHS had been required to establish a data bank containing information on about 160 million employees and their dependents covered by employer group plans. Its purpose was to identify those Medicare and Medicaid beneficiaries with other insurance that they should have used to pay medical bills before drawing on their Medicare or Medicaid coverage. In 1994 and 1995, we reported and testified that the proposed data bank would create an avalanche of unnecessary paperwork for both HCFA and employers and would likely achieve little or no savings while costing millions. In fiscal year 1997, Congress repealed the Medicare and Medicaid Coverage Data Bank, resulting in identifiable budgetary savings of $55 million.
In another area, the debate over the creation and design of a children’s health insurance program last year, a critical issue was how to allocate federal monies to the states, particularly because the new program—unlike Medicaid—has a limit on funding. We provided information to the Congress and assisted in devising a method of allocating federal funds to the states. We also provided assistance in the revision of an Older Americans Act formula for allocating federal monies among the states to assist the elderly with independent living. In addition, we assisted the Substance Abuse, Mental Health Services Administration in implementing an improved cost of services indicator to be used as a criterion for allocating federal funds among the states.
We also provided important information to Congress showing the share of federal dollars—in the form of state Medicaid disproportionate share payments—that were going to institutions for mental diseases. Limits on such payments, which became part of the budget agreement, will result in substantial savings in future years.
High-Risk Area
We designated Medicare as a high-risk area.
Medicare
Numerous GAO reports have highlighted problems the nation’s insurers in general and Medicare in particular face in controlling waste, fraud, abuse, and mismanagement. Our high risk series report on Medicare summarized our work in the area and where the program stood in addressing waste, fraud, abuse, and mismanagement issues. We pointed out that many of Medicare’s vulnerabilities are inherent to its size and mission which make it an attractive target for exploitation requiring constant vigilance for the foreseeable future to protect the program. In July 1997, the Department of Health and Human Services’ (HHS) Office of Inspector General (OIG) reported that the estimated amount of Medicare fee-for-service payments attributable to fraud, abuse, or error ranged from $17.8 billion to $28.6 billion, or about 11 percent to 17 percent of payments.
The Health Care Financing Administration (HCFA), which administers Medicare, has invested substantially in developing a new claims processing system, the Medicare Transaction System, to provide, among other things, better protection from fraud and abuse. In the past, GAO has reported on risks associated with this project, including a plan to implement the system in a single stage, rather than incrementally; difficulty in defining requirements; and significant schedule problems. Although HCFA had responded to these concerns in various ways, including changing its single-stage implementation approach, the Medicare Transaction System project all but collapsed in August 1997 when HCFA terminated the contract. This is a significant setback for HCFA’s anti-fraud-and-abuse efforts, bringing into question the ability of HCFA and its contractors to perform the data-intensive analyses needed to detect abusive billing schemes. We will continue to monitor and evaluate HCFA’s efforts to modernize this important information system as a key anti-fraud-and-abuse mechanism.
Two recent laws—the Health Insurance Portability and Accountability Act of 1996 and the Balanced Budget Act of 1997—incorporated many of our recommendations designed to help control waste, fraud, and abuse. For example, the former addressed our longstanding call to provide stable funding for program safeguard activities by appropriating an annually increasing amount over the fiscal year 1997-2002 period. The Balanced Budget Act of 1997, among other things, mandated that prospective payment systems replace cost-based reimbursement methods in paying for certain Medicare services. Adoption of these prospective payment provisions responded in part to concerns that we and the HHS OIG have raised about the overutilization and billing abuse problems reflected in Medicare’s expenditures for home health and skilled nursing facility services. Other provisions gave HCFA and the OIG many new tools to fight waste, fraud, abuse, and mismanagement.
Key Open Recommendations
Excessive Medicare Payments for Costly Technologies
Provider costs and Medicare reimbursements for medical procedures involving new technologies, such as magnetic resonance imaging (MRI), are often high in order to offset initial expenditures for equipment and low rates of usage. We reported, however, that HCFA does not make timely adjustments to the Medicare reimbursement rates as new medical technologies mature and unit costs decline. Therefore, we recommended that HCFA (1) survey facility costs and revise the Medicare fee schedule to more accurately reflect the costs that are incurred and (2) periodically review and adjust the Medicare reimbursements for procedures using high-cost, revolving technologies.
To help bring Medicare payment rates more into line with actual costs, the Congress has enacted several mandates to reduce rates for specific procedures and services—including payments for MRI scans. In addition, HCFA has three rate-reduction projects planned or under way: a revision of the Medicare Fee Schedule to reflect the actual cost of staff, equipment, and supplies associated with medical procedures; a review to identify and correct any excessive Medicare payments for 100 items of medical equipment and supplies; and a demonstration project to evaluate a competitive bidding process to set Medicare payment levels for some medical equipment and supplies.
However, none of these projects targets new and expensive technologies. We continue to believe that significant program savings would result from an ongoing, systematic process for evaluating the reasonableness of Medicare payment rates for maturing technologies. (GAO/HRD-92-59)
Rapid Spending Growth in Home Health Care
Since 1990, Medicare outlays on home health care services—provided to beneficiaries who are home-bound and need skilled care—have grown at an average rate of over 30 percent a year. We reported that the increase in home health outlays is largely due to increased usage that has accompanied deterioration in program controls. Funding for review of claims has declined by over a third. In addition, a court struck down HCFA’s interpretation of benefit coverage requirements; this court ruling in effect widened Medicare coverage of home health. Consequently, we suggested that the Congress may wish to consider providing extra resources to strengthen controls against abuse of the home health benefit and clarifying the scope of the benefit. At issue is whether this benefit should continue to be more of a long-term care benefit or whether it should be limited primarily to post-acute care. (GAO/HEHS-96-16)
Medicare Reimbursement for Therapy in Nursing Homes
Nursing home residents receive therapy services (e.g., physical therapy) from various providers. We reported that Medicare is vulnerable to overcharges by unscrupulous providers, due in part to its flawed reimbursement methods, in part to its inadequate screening of providers. Consequently, we recommended that HCFA set explicit limits to ensure that Medicare pays no more for therapy services than would any prudent purchaser. HCFA has proposed salary guidelines for various therapy services. In addition, the Balanced Budget Act of 1997 required that, beginning July 1998, skilled nursing facilities begin consolidated billing for the many services provided to Medicare beneficiaries. Furthermore, we recommended that Medicare certification requirements be strengthened so that those entities billing Medicare would be more accountable for the services they provide to beneficiaries. (GAO/HEHS-95-23)
Excessive Payments for Medical Supplies
Medicare reimburses providers of certain medical items and supplies according to fee schedules that do not reflect substantially lower market prices. For example, Medicare pays $2.32 for a pad of gauze that is available at the wholesale level for 19 cents. Excessive fees invite submission of abusive claims by unscrupulous providers. Coupled with inadequate review of such claims, these above-market fees and payment rates lead to Medicare and the taxpayer losing hundreds of millions of dollars.
Because current law imposes cumbersome administrative requirements that HCFA must follow when adjusting payment rates, for HCFA to make such an adjustment can take 3 years or more. In addition, for some items HCFA lacks authority to adjust payment rates. We recommended that the Congress give HHS the flexibility to adjust fee schedules promptly when overpriced services and supplies are identified. The Balanced Budget Act of 1997 provided HHS some flexibility to adjust fees through a somewhat less onerous process; however, this flexibility is applicable only when the fee adjustment is 15 percent or less. (GAO/HEHS-95-171)
Medicare HMO Oversight
Beneficiaries’ confidence in Medicare managed care depends significantly on the effectiveness of HCFA oversight. Although HCFA has instituted several promising improvements, its monitoring and enforcement of performance standards for Medicare HMOs still falls short; quality assurance reviews are not comprehensive, enforcement actions are too often weak, and the appeal process for beneficiaries is slow. We recommended that HHS develop more consumer-oriented oversight of the Medicare HMO program, including (a) routinely publishing comparative data on HMO’s performance and on known deficiencies and (b) assigning sufficient, trained staff to monitor and verify the effectiveness of HMOs’ quality assurance practices. The Balanced Budget Act of 1997 mandated that Medicare beneficiaries be provided comparative information on HMOs, including disenrollment rates, enrollee satisfaction, health outcomes, and managed care plans’ compliance record with Medicare requirements. HCFA has efforts in process that will begin to respond to these recommendations and the new Balanced Budget Act mandates. (GAO/HEHS-95-155)
Medicaid Excluded Providers
Providers are removed from state Medicaid programs for health care fraud, abuse, or quality-of-care problems. Such excluded providers should also be removed from participation in other federal programs including Medicare and Medicaid programs in other states. We found that weaknesses in the HHS Office of the Inspector General’s excluded provider process had allowed providers excluded from one state’s Medicaid program to continue to provide services in another state or in other federal health programs and sometimes inappropriately receive thousands of dollars in program payments. In response to our concerns, the OIG implemented a tracking system to provide improved accountability over case referrals for exclusion actions. In addition, at our urging, HCFA began transmitting exclusion data to states over the Internet.
In addition to these changes, we recommended that the OIG: clarify to states that settlements and provider withdrawals to avoid formal sanctions should be reported to the OIG, in accordance with its regulations; provide ongoing, clear, and consistent guidance to the state on the documentation needed for timely processing of exclusion actions; and establish consistent standards—including performance goals or benchmarks—for the timely processing of state referrals. (GAO/HEHS-97-63)
Oversight of Care in Intermediate Care Facilities for the Mentally Retarded
Medicaid funds provide support to more than 400 large intermediate care facilities for the mentally retarded that are owned and operated primarily by state governments. In 1996, we reported that serious quality-of-care deficiencies continued to occur in some of these institutions despite federal standards, oversight by state agencies and HCFA, and on going Justice Department investigations. While state agencies have primary responsibility for ensuring that their institutions meet federal standards, they do not identify all deficient care practices nor take sufficient enforcement actions to prevent their recurrence. Although HCFA has recently taken steps to improve the inspection process and more efficiently target limited federal and state resources, several oversight weaknesses remain.
We identified several means to address these weaknesses and strengthen accountability for quality of care. Specifically, we recommended that HCFA assess the effectiveness of its new inspection process, address the potential conflict of interest that occurs when states are both the operators and primary inspectors of such intermediate care facilities, and determine whether a wider range of enforcement mechanisms would lead to more effective correction of deficient care. In response, HCFA has increased federal oversight of these institutions and will maintain increased oversight if warranted. Also, through the Balanced Budget Act, HCFA acquired legislative authority to apply alternative enforcement sanctions to non-compliant facilities. Pending the results of an evaluation of alternative sanctions in nursing homes expected in 1998, HCFA plans to assess whether a similar approach for intermediate care facilities for the mentally retarded will be appropriate. (GAO/HEHS-96-131)
See also chapter 5, Financial and Information Management Programs, Information Resources Management Issue Area.
Health Services Quality & Public Health Issue Area (Budget Functions 550 and 570)
Impact of GAO’s Work
The Health Services Quality and Public Health issue area focuses on evaluating access to high-quality health care and on measuring the outcomes and effectiveness of federally funded health and medical programs, research, and regulatory activities.
GAO’s work on health services quality and public health issues concentrates on: evaluating whether the programs administered by public health service agencies are ensuring the public’s health efficiently and effectively, assessing opportunities for ensuring the quality of health care under fee-for-service and managed care payment arrangements, assessing opportunities for improving the nation’s access to health care and improving accountability, and appraising the implications of emerging biomedical research, health care technologies, and information systems.
In the course of our work, we have examined the ongoing transformation of U.S. health care, its effects on local markets and public health institutions, information about health care quality, and the performance of public health agencies. The federal public health agencies, including the Food and Drug Administration (FDA), the National Institutes of Health, the Centers for Disease Control and Prevention, the Health Resources and Services Administration, the Substance Abuse and Mental Health Services Administration, the Indian Health Service, the Agency for Health Care Policy and Research, and the Office of Public Health and Science (formerly the Office of the Assistant Secretary for Health), spend $24 billion annually. More efficient and effective use of these resources could improve agency performance in promoting the public’s health.
Access to Health Care
Many communities contain populations that may have difficulty obtaining health care services for reasons such as geographic isolation or, more often, inability to pay for care. Our work has identified many instances in which federal programs have provided aid to communities without ensuring that this aid has been used to improve access to primary care. The rural health clinic program, established two decades ago, allows higher Medicare and Medicaid reimbursements to support health care professionals in underserved areas that are too sparsely populated to sustain a physician’s practice. We found that many of the recently established clinics are in fairly well-populated areas that already have extensive health care delivery systems in place. To bring about improvements needed to direct assistance toward those rural areas that the program was originally intended to serve, we recommended that both the Congress and the Secretary of Health and Human Services establish additional eligibility criteria and controls over the cost-reimbursement benefit of the program. Congress incorporated these recommendations into the Balanced Budget Act of 1997.
To address physician shortages in underserved areas in the country, a growing number of locations are turning to non-U.S. citizens who have just completed their graduate medical education in the United States. These physicians generally enter the United States under a visa which requires them to leave the country when their medical training is done, but this requirement can be waived at the request of a federal agency or a state. We reported that four federal agencies and 23 states requested waivers for foreign physicians to practice in underserved areas in 1995, but found that these efforts are not coordinated among the federal agencies or with the states and that monitoring efforts and accountability are limited. Based largely on our review, the Department of Housing and Urban Development continued a moratorium on its visa waiver activities and stopped processing requests for waivers for physicians to practice in underserved areas. In addition, to address our concerns, the Appalachian Regional Commission changed its policies and instituted additional measures to improve monitoring and to ensure that the waivered physicians will be providing substantial services to those segments of the population that are underserved.
Quality of Care
The best method known to reduce breast cancer mortality is early detection, and mammography is the single most effective tool for detecting breast cancer at its earliest stages. To address concerns about the quality of mammography services offered by more than 10,000 facilities throughout the United States, Congress passed legislation in 1992 requiring the accreditation and annual inspection of mammography facilities. Our review of FDA actions during the first 18 months of the inspection program revealed two problem areas. First, FDA’s inspection procedures for an important test of mammography equipment were inadequate. Second, FDA lacked procedures to guarantee that all violations of standards were both promptly and adequately corrected. Our report contained several recommendations to the Commissioner of FDA to establish procedures, guidance, and training to help ensure timely compliance with mammography quality standards by facilities. FDA has implemented all of our recommendations.
Preventive services for early detection and treatment of a condition can save lives and dollars. Diabetes is a chronic condition that affects at least 10 percent of Medicare beneficiaries. Although experts agree that close medical and patient monitoring is important to slow or prevent costly complications of the disease, we reported that diabetic Medicare beneficiaries are not receiving recommended levels of physicals, eye exams, blood tests, and other screening services. We testified about our findings, and Congress included Medicare preventive services provisions for diabetes self-management training and blood testing strips in the Balanced Budget Act of 1997.
Quality of care issues and quality of life issues are closely intertwined. In 1990, Congress passed the Patient Self-Determination Act, requiring health care providers to increase public awareness about the use of “advance directives”—a living will or health care power of attorney that spells out how life-support decisions should be carried out should the patient become terminally ill and unable to communicate his or her wishes. In 1995, we reported the act’s implementation and the effectiveness of advance directives in ensuring patient self-determination. Our report was used in reopening the Congressional debate on end-of-life care issues and to make changes in the act. As a result, the Balanced Budget Act of 1997 requires that an individual’s advance directive be placed in a prominent part of that individual’s current medical record.
Key Open Recommendations
Medical Device Monitoring
FDA is responsible for protecting the American public from unsafe and ineffective medical devices, which range from simple household items, such as thermometers, to implanted heart valves. FDA uses an adverse event reporting system that records problems associated with medical devices after they have been approved for public use. The Safe Medical Devices Act of 1990 expanded the reporting requirements to include user facilities, such as hospitals and nursing homes, and medical device distributors. We found that although FDA collects reports from users, hospitals, nursing homes, manufacturers, and others about problems with medical devices, FDA does not act systematically to ensure that reported problems are resolved promptly, thus defeating the system’s usefulness as an early warning about defective medical devices. We made recommendations to the Commissioner of the Food and Drug Administration to improve FDA’s adverse event reporting system’s ability to serve as an early warning system about medical device problems. FDA has several actions underway to address our recommendations. For example, FDA’s reengineering task force is using our report to identify the actions needed to address problems with post marketing surveillance of medical devices. (GAO/HEHS-97-21)
Safety of Blood Supply
We assessed the current risks of transfusion, examined the content and quality of data collected to assess these risks, and evaluated the FDA’s safeguards and their ability to ensure the safety of the nation’s blood supply. Our analysis showed that the U.S. blood supply is safer today than at any time in recent history, with risks from blood transfusions quite small compared with the benefits of transfusion in saving lives. We reported, however, that FDA can strengthen the safety of the blood supply in some areas. For example, the lack of mandatory notification to donors whose blood donations must be deferred allows some donors who have tested positive for viruses to unwittingly attempt to donate again; untested units donated for self-use may be mistakenly used for unintended recipients; and unlicensed facilities—those that do not sell or exchange blood products across state lines—are not required to report errors and accidents. FDA inspections of both licensed and unlicensed blood facilities appear to be inconsistent in focus, scope, and documentation. Moreover, FDA does not maintain a central repository for inspection reports and, therefore, does not examine national trends. We made recommendations by which the Secretary of Health and Human Services (HHS) could improve the safety of the nation’s blood supply. Six of the recommendations concern gaps in the layers of safety, one has to do with error and accident reporting, and two relate to HHS’s regulations and FDA inspection processes. Thus far, in response to our recommendations, FDA has established a group of specialized investigators with the goals of improving consistency, timeliness, and quality in inspections of blood facilities. (GAO/PEMD-97-1 and GAO/PEMD-97-2)
Health Professions Education
During the past decade, the supply of nearly all health professionals has increased faster than has the population. For most health professions, however, data are unavailable to show whether this increased supply has translated into more access to care in rural and underserved areas. Our findings are similar for minority recruitment. Although the number of minority health professionals is increasing, data are inconclusive about whether further increases will improve access to health care for underserved populations. Although nearly $2 billion has been provided to 30 programs under title VII and VIII of the Public Health Service Act during the last 10 years, HHS has not gathered the information necessary to evaluate whether these programs have had a significant effect on changes in the national supply, distribution, and minority representation of health professionals or their impact on access to care. The effectiveness of these programs will remain difficult to measure as long as they are authorized to support a broad range of health care objectives without common goals, outcome measures, and reporting requirements. We recommended that the Congress establish or direct the Secretary of Health and Human Services to establish more specific goals, outcome measures, and funding criteria. Our work was used as the basis for program reauthorization hearings and proposed legislation to reauthorize the programs. (GAO/HEHS-94-164)
Hospital Construction
The Federal Housing Administration’s (FHA) Hospital Mortgage Insurance Program insures loans to finance hospital renovation and construction. FHA mortgage insurance protects lenders against losses they might incur if hospitals fail to make their mortgage payments. The concentration of insured projects and the largest loans amounts in New York exposes the program and threatens its stability. Further, trends in health care and changes in state and federal health care policies that reduce hospitals’ revenues will affect hospitals participating in the program. The implications of these health care trends for program hospitals were not factored into FHA’s methodology for estimating potential loan losses. In addition, FHA’s approach to determining default and loss rate assumptions was unreliable. FHA did not consider the full loss exposure in estimating reserves for hospitals that it had identified as having high default probabilities. As a result of these flaws, the reliability of FHA’s loan loss reserve estimate is limited. We made recommendations to the Secretary of Housing and Urban Development (HUD) to improve the reliability of FHA’s loan loss reserve estimate, ensure future compliance with federal performance measurement requirements, and minimize potential financial losses from future projects. HUD officials have said that they are monitoring each individual loan and, to date, have not had a claim. FHA has hired a management consultant to develop timeliness measures and expects to implement them in fiscal year 1998. FHA is drafting regulations for risk sharing, and HUD has established a reserve to cover uncertainty stemming from changes in health care payment policies. (GAO/HEHS-96-29)
Methadone Maintenance
We reviewed the activities of a number of methadone maintenance treatment programs. Methadone maintenance is the most commonly used treatment for heroin addiction. Many of the methadone programs are established by private not-for-profit organizations while others are private for-profit or public programs. We found wide variation among program policies with respect to urine testing, dismissing patients, counselor staffing levels, and methadone dosage levels. For example, in the 24 programs we visited, average methadone dosage levels ranged from 21 to 67 milligrams. Nearly one-half the programs that we visited were not effective in achieving the benefits of methadone maintenance. We recommended that the Secretary of Health and Human Services direct FDA or the National Institute on Drug Abuse to monitor and assess methadone maintenance treatment programs. The National Institute on Drug Abuse is developing and testing a performance evaluation system for methadone treatment programs and anticipates issuing a report about its feasibility and utility in the summer of 1998. (GAO/HRD-90-104)
Income Security Issue Area (Budget Functions 600, 650)
Impact of GAO’s Work
Income security programs operating through the Social Security Administration (SSA), the Department of Health and Human Services (HHS), and the Department of Labor (DOL) account for nearly 40 percent of all federal spending. Millions of Americans rely upon programs like Social Security, Disability Insurance (DI), Supplemental Security Income (SSI), and various means-tested programs for financial support and services. In addition, Americans are dependent on DOL to provide oversight of private pension plans, an important source of income for millions of retired workers.
Our work provided information and recommendations directed at (1) ensuring that public assistance program funds are spent efficiently and protected from fraud and abuse, (2) improving SSA’s service to the public at reduced cost, (3) evaluating the adequacy of Social Security and public and private pension systems for future retirees, (4) redesigning the nation’s disability programs to provide disabled people with greater opportunities to work, (5) monitoring implementation of the 1996 welfare reform legislation, and (6) assessing government efforts to protect children’s welfare.
The work has contributed significantly to legislative and executive actions that will result in financial savings and improvements in program efficiency and cost effectiveness. For example, relying on our analysis of weaknesses in administering the Individualized Functional Assessment, as a part of last year’s welfare reform law, Congress eliminated the Individualized Functional Assessment as a basis for awarding benefits to disabled SSI children. Specifically, SSI eligibility criteria for disabled children have been tightened, and less severely impaired children are no longer eligible for SSI. As a result, SSA anticipates removing 135,000 children from the disability rolls and awarding benefits to fewer children, at an estimated savings of nearly $5.4 billion over the next 6 years.
Based on the results of our work, the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 contained a provision that allows states to use recoupment to collect any Food Stamp overpayments, including those caused by agency error. This provision will result in a yearly $40 million savings from 1997 through 1999 and a yearly $45 million savings from 2000 through 2002.
Our work has resulted in several actions taken to improve SSA’s disability claims process. For example, in response to our recommendations, SSA revised its implementation strategy for redesigning its disability claims process to address major program delays and management obstacles. It reduced the number of initiatives and selected those critical in producing significant measurable reductions in claims-processing time and administrative costs to ensure that dramatic results could be achieved. Further, we had reported that the management of the Administrative Law Judges underlies many of the problems affecting SSA’s disability programs and that SSA had not consistently defined what actions it could legally employ to better manage Administrative Law Judges’ activities. Citing our work, the Commissioner of SSA requested a review of any conflict between Administrative Law Judges’ decisional independence and SSA’s management authority over them. As a result of the review, SSA’s authority in setting program policy and ensuring those policies are carried out was clarified. This authority also included the ability to establish production targets and similar goals critical to addressing the appeals backlog. Finally, we reported that SSA’s Short Term Disability Plan had enhanced the Office of Hearings and Appeals’ ability to dispose of appealed cases, helped decrease the number of cases awaiting a written decision, and reduced processing time for some cases. Based on our recommendation, SSA extended the Short Term Disability Plan’s key initiatives, which will result in SSA’s disposing of approximately 39,000 additional cases between January 1, 1997, and September 30, 1997.
High-Risk Area
We have designated the Supplemental Security Income program as a high-risk area.
Supplemental Security Income Program
SSA administers the SSI program, which pays cash benefits to the low-income aged, blind, and disabled. About 6.6 million SSI beneficiaries now receive roughly $22 billion in federal benefits. To date, our work has shown that several longstanding problems have affected SSA’s ability to manage the program and protect taxpayer dollars from being overspent. These problems involve SSA’s failure to adequately (1) verify recipients’ initial and continuing financial eligibility, (2) minimize and collect overpayments, (3) address program fraud and abuse, (4) determine whether SSI recipients remain disabled, and (5) help SSI recipients enter the workforce and ultimately leave the program. The above deficiencies have affected program size and integrity and contributed to significant annual increases in SSI overpayments. During 1996, more than $2.3 billion in overpaid benefits was owed to the agency, including $895 million in newly detected overpayments for the year.
While attempts have been made by SSA in the past to make the SSI program more efficient, significant problem areas remain unaddressed. As a result, our concerns continue about underlying SSI program vulnerabilities and the level of SSA attention devoted to these vulnerabilities. To more precisely identify “root” causes of longstanding SSI problems and the actions necessary to address them, we are presently conducting a broad-based review of the program. This work is designed to explore program design issues, operational policy, management philosophy and agency culture, and programmatic and legislative options for achieving substantive change. We anticipate issuing our report in early 1998.
Key Open Recommendations
Social Security
In October 1993, we reported that while SSA had made progress in solving its management problems, opportunities still existed for SSA to continue to improve. We made several recommendations, among them that SSA complete the implementation of a strategic management process to guide planning, implementation, and evaluation of long-term strategic initiatives. SSA completed its strategic plan on September 30, 1997, and has in place a tracking and monitoring system to monitor the progress of key agency initiatives and the attainment of performance targets and plans to establish a new methodology to ensure appropriate attention to key agency initiatives. (GAO/HRD-94-22)
Disability Programs
SSA’s plan for achieving self-support (PASS) program was established in 1972 as an SSI work incentive program to help SSI and DI recipients achieve self-support, thus reducing or eliminating future benefit costs. However, very few recipients have left the federal disability rolls by returning to work. In February 1996, we reported that SSA has done a poor job implementing and managing the PASS program. We found that, among other things, the impact of PASS on employment is unknown because SSA lacks basic data on PASS participation and outcomes and recommended that SSA gather additional management data on PASS program participation and impact and use these data to evaluate the impact of PASS program participation on employment. SSA has experienced many technical problems establishing such a database, and SSA does not consider the data to be reliable. SSA officials, however, are continuing efforts to develop a data base that would provide needed data for managing the PASS program. In addition, we recommended that the Congress consider legislation to eliminate DI beneficiary eligibility for SSI benefits through the use of PASS. While SSA has proposed such legislation, the Administration has not submitted it. (GAO/HEHS-96-51)
In April 1996, we reported that weaknesses in the design and implementation of DI and SSI program components have limited SSA’s capacity to identify and assist in expanding beneficiaries’ productive capacities. We noted that eligibility requirements and the application process encourage people to focus on their inabilities, not their abilities; work incentives offered by the programs do not overcome the risk of returning to work for many beneficiaries, and the complexities of work incentives can make them difficult to understand and challenging to implement; and beneficiaries receive little encouragement to use rehabilitation services, which are relatively inaccessible to beneficiaries seeking them. We recommended that SSA take immediate action to place greater priority on return to work, including (1) designing more effective means to more accurately identify and expand beneficiaries’ work capacities and (2) better implementing existing return-to-work mechanisms. Similarly, in July 1996, we reported return-to-work strategies and practices employed by the private sector in the U.S and by social insurance programs in Germany and Sweden may hold the potential for improving federal disability programs by helping people with disabilities return to productive activity in the workplace and at the same time reduce program costs. We recommended that, in line with placing greater emphasis on return to work, SSA should develop a comprehensive return-to-work strategy that integrates, as appropriate, earlier intervention, earlier identification and provision of necessary return-to-work assistance for applicants and beneficiaries, and changes in the structure of cash and medical benefits. In both reports, we also recommended that SSA identify legislation needed to implement the recommended program changes. SSA noted that it is currently placing a high priority on return to work, citing its expansion of the pool of vocational rehabilitation providers and its proposed “tickets to independence” (vouchers for vocational rehabilitation) as a new demonstration to attempt to improve return-to-work outcomes. In addition, SSA has affirmed its interest in determining whether return-to-work practices of other systems could help improve the return-to-work rate in its disability programs. While such steps are in the right direction, they do not constitute the fundamental redirection of goals and practices needed to move the disability programs to much greater emphasis on return to work. Finally, SSA emphasized that efforts to improve the return-to-work rate in its disability programs can be fruitful only if all parties affecting federal disability policy are involved. While we agree that all relevant parties must be involved, we believe that, as the primary manager of the disability programs and the entity with fiduciary responsibility for the trust funds, SSA must take the lead in forging the partnerships and cooperation needed to redesign federal disability programs. (GAO/HEHS-96-62 and GAO/HEHS-96-133)
In August 1996, we reported that for many years, SSA has lacked an effective program to detect SSI recipients in county and local jails. It has relied primarily on (1) recipients or their representative payees to voluntarily report incarceration and (2) redetermination. Neither of these mechanisms has been completely effective; as a result, SSA has erroneously paid millions to thousands of prisoners in county and local jails. While SSA initiated action to obtain better information on SSI recipients currently in jail, they had not attempted to develop information on SSI recipients who may have been incarcerated and received payments in prior years. We recommended that SSA obtain information on former prisoners from county and local facilities and identify and attempt to recover any erroneous payments. SSA has initiated a pilot project to determine the feasibility and cost benefit of implementing our recommendations. (GAO/HEHS-96-152)
We also reported in August 1996 that the SSI program could be administered more efficiently and, more importantly, millions in overpayments could be prevented or more quickly detected if information needed for claims processing were available immediately on-line during initial and subsequent assessments of eligibility. We estimated that direct on-line access to state computerized income information could have prevented or more quickly detected about $131.3 million in overpayments caused by unreported or underreported income nationwide in one 12-month period. However, in SSA field offices where such direct access to computerized state information has been implemented, its staff did not use it for overpayment detection. They did use it, however, to process claims more efficiently, and SSA’s preliminary results have shown that its use has reduced the administrative costs of the program. We recommended that SSA require claims representatives to use online access to routinely check for unreported sources of income when initial and subsequent assessments of eligibility are done, provided it is cost-effective to do so and that the data available online pertain to the time periods covered by SSI payments. Further, we recommended that SSA develop automatic interfaces with state databases that comply with laws and standards governing computer matching, privacy, and security that can (1) more fully automate the earnings and Unemployment Insurance computer matches and (2) identify additional income sources that do not currently have computer matches. SSA has requested a study of the cost-effectiveness of these recommendations. (GAO/HEHS-96-163)
SSA is required by law to conduct periodic examinations, called continuing disability reviews, to determine whether a beneficiary has medically improved to the extent that the person is no longer considered disabled. In October 1996, we recommended that, to ensure that as many disabled individuals as possible become self-sufficient, SSA should test the use of continuing disability reviews’ contact with beneficiaries to determine individuals’ rehabilitation service needs and help them obtain the services and employment assistance they need to reenter the workforce. SSA is currently in the process of testing various strategies to better identify applicants and beneficiaries with rehabilitation potential to better encourage their return to work. The agency has developed an agenda to conduct demonstrations that would assist in encouraging return to work and intends to test using continuing disability reviews’ contact to assess recipients’ potential for and to promote vocational rehabilitation services. (GAO/HEHS-97-1 and GAO/HEHS-97-2)
In June 1997, we reported that although benefits paid to persons receiving SSI must be reduced when they enter nursing homes covered by Medicaid, SSA is not always notified of the change and full benefits continue to be paid. These overpayments may exceed approximately $100 million annually. To prevent the overpayments or detect them sooner, we recommended that HHS direct the Health Care Financing Administration to require states, as part of their Medicaid Management Information Systems requirements, to make nursing home admissions data available to SSA electronically. In its comments on our report, HHS noted HCFA’s willingness to provide the data it receives from states to SSA on a quarterly rather than annual basis. However, we believe that having HCFA involved in the pass-through of information causes unnecessary expenditures for HCFA and delays for SSA. SSA needs to obtain nursing home admissions data as quickly as possible after the actual admissions to minimize the overpayments it makes. We further recommended that SSA (1) electronically obtain nursing home admissions data directly from states, (2) obtain computer tapes or paper listings of nursing home admissions to identify overpayment situations, while states adapt their systems to provide the information electronically, and (3) determine the reliability of state data for implementing an automated computer interface to automatically adjust the benefits of SSI recipients admitted to nursing homes. SSA is considering a study in the fall of 1997 to determine the best mechanism for obtaining nursing home admissions data in a timely manner and will assess the reliability of state Medicaid data to cause automatic benefit reductions. (GAO/HEHS-97-62)
Child Support Enforcement
In June 1992, GAO reported on the opportunity to defray the burgeoning federal and state non-AFDC costs in the child support program by charging a minimum percentage fee on collections. Non-AFDC administrative costs increased from $644 million in 1990 to $1.4 billion in 1995, while recovered costs remained stagnant at about $33 million in 1995. As part of an overall effort to revise the child support financing structure, the Congress currently is developing legislation to revise the child support incentive formula used to reward the states. As program costs continue to increase, measures to increase cost recovery, such as charging fees, may eventually be considered. (GAO/HRD-92-91 and GAO/T-HEHS-95-181)
Improving Justice and General Government Programs
Administration of Justice Issue Area (Budget Function 750)
Impact of GAO’s Work
Americans continue to rank crime and fear of crime as top national concerns. The Administration of Justice issue area focuses on the federal role in protecting the public. We provide analysis and information on, and recommendations for improvements to, federal criminal justice programs. Within our purview are issues related to (1) law enforcement; (2) grant programs supporting criminal justice research and evaluation and assisting states and localities in meeting their public safety needs; (3) immigration; and (4) litigative and judicial activities. Criminal justice program responsibilities cross the jurisdictions of several federal departments and agencies, and they involve close interaction with state and local law enforcement officials, as well as private academicians and researchers. As a result, a broad theme of our work is to seek coordination among policymakers across jurisdictions to avoid duplication and put available resources to the most effective use.
Law Enforcement
Over the years, we have issued numerous reports on the nation’s drug control efforts. These reports show a consistent theme: the effort to control illegal drugs is complex, fragmented among more than 50 agencies, and hindered by the absence of meaningful performance measures to gauge programs and to guide decisionmaking. As a result of these findings, we have concluded that there is a continuing need for a central planning agency to coordinate the national drug control strategy. We advised a House Government Reform and Oversight Subcommittee to reauthorize the Office of National Drug Control Policy—an executive office created in 1988—with this mission.
The Attorney General identified health care fraud as a top national law enforcement priority. We reported on the advantages and disadvantages of establishing a centralized health care fraud database to better coordinate enforcement efforts among the law enforcement agencies that investigate health care fraud. Reference to our work, citing the extent of health care fraud and the need for enforcement coordination, was contained in the legislative history of the Health Insurance Portability and Accountability Act of 1996. The law established a national health care fraud and abuse program, which included a requirement to report certain final adverse actions against health care providers, suppliers, and practitioners.
Since the Waco siege and other incidents, the Treasury Department’s Bureau of Alcohol, Tobacco, and Firearms (ATF) has come under public criticism and congressional scrutiny concerning allegations of using excessive force in carrying out its enforcement responsibilities. Our report on ATF’s use-of-force policies provided objective, independent information on this highly sensitive issue. Subsequently, the House Appropriations Committee report and the Conference report on the fiscal year 1997 Treasury appropriation included recommendations calling for the creation of an Office of Professional Responsibility within Treasury’s Office of the Undersecretary for Enforcement. The new office would oversee, among other things, use-of-force allegations involving ATF and other Treasury law enforcement agencies. The Committee report also called for outside representation on ATF’s Shooting Incident Review Board and Professional Review Board. In response, Treasury is in the process of creating an Office of Professional Responsibility within its Office of Enforcement. In March 1997, ATF added two outside representatives—one each from the Customs Service and the Internal Revenue Service—to its review boards.
We also reported on ATF’s compliance with legal restrictions on maintaining firearms licensee data. We determined that ATF was narrowly interpreting an annual appropriations rider prohibiting the consolidation or centralization of data from firearms licensee records and, as a result, had not systematically reviewed its data systems and its information practices. In response, ATF (1) adopted our broader interpretation of the appropriations rider; (2) reviewed the applicable data bases and found them to be in compliance with the revised interpretation; and (3) reported the results of its review to a House Appropriations Subcommittee.
With regard to federal fugitive apprehension activities, we reported that different federal agencies used different time criteria for entering fugitives’ data into the National Crime Information Center’s Wanted Person File. Many fugitives, even those classified as dangerous, were entered into the File long after their arrests were authorized. Justice and Treasury generally implemented our recommendations to improve agencies’ policies and practices relating to the timing of entering fugitives’ data into the Wanted Person File.
Grant Programs
The Violent Crime Control and Law Enforcement Act of 1994 (Crime Control Act) established what officials describe as the largest grant program ever administered by the Department of Justice. It authorized $8.8 billion in grants for fiscal years 1995 to 2000, with the goals of promoting community policing and adding 100,000 officer positions to the streets of communities nationwide. In view of its large size and scope, we reviewed the community policing grant program’s design, operation, and management. We found that Justice did limited monitoring of how state and local law enforcement agencies spent the community policing grants they were awarded during the first two and a half years of the program. This was due, in part, to an early program focus on processing applications to get officers on the street. During the course of our review, Justice was taking steps to increase its level of monitoring and improve its oversight of this multibillion dollar program.
Also funded under the 1994 Crime Control Act was a program providing grants for state and local drug courts. The purpose of the drug court programs is to use the authority of the court to reduce crime by changing defendants’ drug-using behavior. Under this concept, in exchange for the possibility of dismissed charges or reduced sentences, defendants are diverted to drug court programs in various ways and at various stages of the judicial process depending on the circumstances. Components common to most drug court programs include provisions for treatment of offenders, prescribed sanctions and rewards, and frequent court status hearings. Based on data from federal funding sources and drug court program officials, over $125 million had been made available for drug court programs since 1989. Over $80 million was from federal sources—primarily from the Departments of Justice and Health and Human Services. In response to a legislative mandate, we provided information on drug court programs and made recommendations for improving evaluations of them. In addition to assisting Congressional decisionmakers, the report will assist state and local jurisdictions in their efforts to implement or enhance drug court programs, and help evaluators and researchers to improve upon their efforts to study the impact and effectiveness of the drug court programs.
Immigration
The Department of Justice’s Immigration and Naturalization Service (INS) has received considerable public attention in recent years as immigration, especially illegal immigration, has become a focus of national attention. From fiscal year 1993 to fiscal year 1997, INS’ budget more than doubled, and its personnel resources increased by about 45 percent to more than 26,000 positions. At the same time, we have reported that INS experienced severe management problems in a variety of areas.
In July 1997, we issued a follow-on report on selected management problems that we had discussed in our 1991 general management review of INS. We reported that INS had made progress toward addressing some management problems that we had identified in 1991, but that much remained to be done, and the attention of top management was required to make improvements. More specifically, we found that internal communications continued to be problematic, guidance on policies and procedures were not current, workload information was not consistently factored into resource allocation decisions, and budgetary decisionmaking was hampered by inaccurate financial data and an antiquated financial management system.
We testified on the need for INS to improve processes under its Institutional Hearing Program for identifying imprisoned aliens and deporting them when they are released from prison. We found that INS had not fully complied with statutory requirements that it initiate deportation proceedings against certain types of felons while they are in prison and take them into custody upon their release. Among the reasons for problems in the Institutional Hearing Program were staff attrition, delays in hiring, and the use of lower level INS agents to replace rather than supplement higher level agents. Had INS completed proceedings for all aliens released from state and federal prisons before they were released, it could have avoided nearly $63 million in detention costs during fiscal year 1995.
In a December 1994 report, we found that procedures in effect at the time of our review for verifying completion of criminal record and fingerprint checks needed to be improved. We pointed out that INS’ assumption that an applicant for naturalization had no criminal history because there was no record of a criminal history in his or her file could prove to be incorrect. Results of criminal history reports might have been delayed or not filed in a timely manner. We also reported that INS examiners could not determine whether FBI fingerprint checks had been completed because, at INS’ request, the FBI returned a report only if a criminal history record was found.
Litigative and Judicial Activities
In our 1995 report on defender services, we found that costs were rising for court-appointed attorneys for eligible federal criminal defendants and that data explaining the reasons for the increases were either not available or unreliable. In 1997, we critiqued a report from the Administrative Office of the Courts on the causes of the rapid rise in the cost of defending capital cases. We have continued to provide Congressional appropriations subcommittees with analyses of defender services budget requests. Based on our support, a House subcommittee directed the Administrative Office of the Courts to do a new study on increased defender services costs and consult with us on the methodology to be used.
High-Risk Area
We designated the federal government’s management of its asset forfeiture programs as a high-risk area.
Asset Forfeiture Management
Property seized from criminals and forfeited to the federal government in asset forfeiture programs includes businesses, cash, bank accounts, automobiles, jewelry, and real estate, as well as thousands of tons of illegal drugs and counterfeit items. Inventories were valued at about $2 billion in 1995.
The federal asset forfeiture programs, administered by the Departments of the Treasury (Customs Service) and Justice (Marshals Service), were part of our original high-risk list in 1990 because the programs did not adequately focus on managing the items seized. Since then, we have continued to make recommendations to improve the management of the programs and to monitor the progress being made. Although Treasury and Justice have made many improvements to their asset forfeiture programs over the years, we continue to include asset forfeiture as a high-risk area. We found that significant enhancements to internal controls and property management were still needed in order to effectively reduce the vulnerability of the programs to theft and misappropriation of seized property.
Legislation enacted in 1988 required Customs and Justice to develop a plan to consolidate postseizure administration of certain properties. In June 1991, we recommended that Customs and Justice consolidate the postseizure management and disposition of all noncash seized properties. A 1995 House Appropriations Committee report stated that “the consolidation of asset management and disposition functions of Justice and Treasury could address duplication and provide cost savings to the management and disposal process.” In our February 1995 and 1997 high-risk reports, we pointed out that the issue of the consolidation of postseizure management and disposition of seized properties still needed to be addressed.
Key Open Recommendations
Law Enforcement
In our testimony on the misuse of criminal justice information in the National Crime Information Center, we identified numerous examples of misuse and recommended that Congress enact legislation with strong criminal sanctions for such misuse. The FBI, the Information Center’s Advisory Policy Board, and state and local law enforcement agencies that use the National Crime Information Center generally support such legislation as a deterrent to further misuse. Various bills relating to our recommendation have been introduced since our testimony in 1993. (GAO/T-GGD-93-41)
Grant Programs
In our study on drug court programs, we identified significant limitations in available evaluation studies that prevented us from drawing firm conclusions on the impact of drug court programs. We noted that outcomes of future evaluations of drug court programs may be hindered by the lack of follow-up data on program participants, which drug court programs do not currently collect. We pointed out that if issues raised by Congress and others about the efficacy of drug court programs are to be addressed, following up on program participants and similarly situated nonparticipants for some period after they leave their respective program(s) would be important. Accordingly, we recommended that the Attorney General and the Secretary of Health and Human Services require drug court programs funded by various federal grants to collect and maintain follow-up data on program participants’ criminal recidivism to the extent permitted by law. We also recommended that they collect data, to the extent feasible, on participants’ drug use relapse. We also recommended that the Attorney General, the Secretary of Health and Human Services, and the executive director of the State Justice Institute require that future impact evaluations of drug court programs funded by their respective agencies include an assessment of program participants’ postprogram criminal recidivism and drug use relapse. We noted that whenever feasible, they should compare drug court program participants with similar nonparticipants. The recommendations were generally agreed to by the federal agencies involved and are currently under consideration. (GAO/GGD-96-106)
Immigration
In our report on INS management problems, we recommended that INS clarify roles and responsibilities under its four executive associate commissioners and establish milestones for issuing manuals of current policies and procedures. INS agreed with our findings concerning improvements needed in internal communications and written guidance and indicated that its staff was working to implement these recommendations. (GAO/GGD-97-132)
We made several recommendations to improve the operations of and outcomes from INS’ Institutional Hearing Program, under which INS is to initiate deportation procedures against deportable aliens while they are still in prison so that they can be quickly removed from the country upon their release. We recommended that the INS Commissioner give priority under the program to aliens serving time for aggravated felonies by establishing controls to ensure that these aliens are identified from among the universe of foreign-born inmates provided by the Bureau of Prisons and the states, are placed into deportation proceedings while in prison, and are taken into custody upon their release. Other recommendations included (1) establishing and using a nationwide data system to track the status of each foreign-born inmate reported to INS by federal and state corrections systems; (2) identifying the causes of immigration agent attrition and taking steps to ensure that staffing is adequate to achieve the goals of the Institutional Hearing Program; (3) establishing and effectively communicating a clear policy on the role of special agents in the program; and (4) setting program goals for district directors, through the use of a workload analysis model. INS is currently focusing on trying to reduce the attrition of agents in the Institutional Hearing Program. The agency is considering ways to revamp the jobs to make them more attractive and reduce turnover. (GAO/GGD-97-154)
We also recommended, as a result of work on INS’ procedures for determining the criminal history of aliens applying for benefits such as permanent residency and naturalization, that INS obtain the results from the FBI of all of its record and fingerprint checks, including those for aliens who did not have criminal history records. INS agreed to implement the recommendation, but it had not done so as of September 1996. Subsequently, INS found that of the 1 million aliens who were naturalized between September 1995 and September 1996, almost 180,000 of them may not have been checked by the FBI for their criminal history. Had INS implemented our recommendations, it would not have naturalized these 180,000 aliens without first obtaining the results of the FBI’s criminal history check. (GAO/GGD-97-154)
See also chapter 5, Financial and Information Management Programs, Information Resources Management Issue Area.
Federal Management and Workforce Issue Area (Budget Function 800)
Impact of GAO’s Work
The Federal Management and Workforce issue area focuses on cross-cutting management, workforce, and statistical issues. These include government performance goals and measurement, restructuring and downsizing, regulatory reform, privatization, oversight of the civil service, human resource management, and the quality, reliability, and dissemination of census and other social and economic statistical data. Agencies within the purview of the issue area are the Executive Office of the President, the Office of Management and Budget, Office of Personnel Management, Merit Systems Protection Board, Office of Special Counsel, Federal Labor Relations Authority, Office of Government Ethics, Department of Commerce, Government Printing Office, Bureau of Labor Statistics, Library of Congress, and the National Archives.
However, managerial, personnel, and statistical/information issues involve all other agencies as well.
In 1997, GAO continued to contribute to congressional oversight of the implementation of the landmark Government Performance and Results Act (known as GPRA or the Results Act) and the use of the Act to improve decisionmaking. The issue area’s support for Congress was centered on three key efforts: (1) assisting Congress as it reviewed agencies’ draft strategic plans, highlighting the key strategic planning issues most in need of sustained attention, (2) providing Congress with information and perspectives on how the Results Act can be used to improve congressional decisionmaking, and (3) assessing agencies’ progress in implementing the Act. Most prominently, our June 1997 report on the prospects for effective implementation of the Results Act showed the progress that had been made during the Act’s pilot phase, but also pinpointed the key challenges that remain.
In addition to work on the Results Act, we analyzed other major management initiatives as well. For example, the issue area’s often cited work on states’ experiences with public sector privatization initiatives has been used within Congress to consider how best to structure federal efforts. We also testified on initiatives to bring a more market-like orientation to federal management and the proposed creation of performance based organizations.
In response to recommendations in GAO’s report on 185 “reinvention labs” established under the National Performance Review (NPR), an NPR task force announced that the National Academy of Public Administration would serve as a needed clearinghouse for propagation of validated operational improvements.
We have also contributed to oversight of the federal regulatory system. For example, the Unified Agenda of Federal Regulatory and Deregulatory Actions is used to satisfy the requirements of section 610 of title 5, which requires agencies to identify the rules it will review pursuant to the Regulatory Flexibility Act during the next 12 months to determine whether they should be amended, rescinded, or continued. However, we concluded that the size of the Unified Agenda makes it difficult for the public to locate those items that are being reviewed. Therefore, we recommended that the Unified Agenda contain an index or special section for rules that agencies plan to review. In June 1997, the Administrator of OMB’s Office of Information and Regulatory Affairs notified all regulatory policy officers that the October 1997 edition of the Unified Agenda would have a separate index for section 610 entries.
During 1997, Congress and the executive branch continued to press for a more streamlined, effective, and efficient civil service system. Trimming the federal workforce continued, but we found that six agencies’ fiscal year 1997 buyouts were better planned and implemented than was generally the case among non-defense agencies in 1994 and 1995. These agencies generally linked their buyouts to achieving specific organizational objectives and implemented their buyout programs in ways that tended to increase savings. Indeed, based on our analysis of five agencies where demographic data was readily available, we estimated that by using buyouts to separate 887 employees, three agencies generated over $3.75 million more in fiscal year 1997 savings than if they had used reduction-in-force. The two remaining agencies we examined will start accruing savings in fiscal year 1998. The improvements in agencies’ buyouts came on the heels of our earlier work which found that buyouts typically offer greater savings than reductions-in-force. It also followed our work demonstrating that agencies needed better workforce and strategic planning to guide their downsizing decisions. Congress incorporated requirements for such planning in recent buyout legislation.
Although downsizing has reduced the federal workforce to levels not seen since the 1960s, the federal government remains a major employer with attendant personnel management concerns. We published several reports that contributed to deliberations on possible changes to federal compensation and benefits. For example, our report comparing federal physicians compensation under title 5 and compensation of physicians in private practice and under other federal pay plans contributed to Congress’ decision to reauthorize physicians’ comparability allowances. Our seven reports on federal retirement program issues, including our comparison of federal and private sector retirement program benefits and our analyses of options for potential budgetary savings, added a factual foundation and valuable perspectives for decisions affecting this core element of the federal employee compensation system.
As agencies move toward the Results Act mandate of managing for results and being held accountable for achieving those results, agencies are increasingly interested in gaining greater flexibility in the management of their human resources. DOD and the Internal Revenue Service (IRS) are but two of the largest agencies seeking revamped personnel systems more tailored to their circumstances. Our report on the excepted service profiled the agencies already having statutory flexibilities differing from those available under title 5 and identified the complexities of determining whether those flexibilities have paid off in improved performance.
In the information and statistics area, we issued reports detailing the governmentwide costs of subscriptions and news clippings, as well as the costs and distribution of government-maintained web sites on the Internet. We also contributed to the growing congressional debate on the best way to conduct the 2000 Census, concluding that incomplete information on the effects of the Census Bureau’s plan to incorporate sampling into its design was contributing to its inability to reach agreement with Congress over the design and funding.
High-Risk Area
We designated the 2000 Decennial Census as a high-risk area..
2000 Decennial Census
The decennial census, the nation’s most comprehensive statistical data-gathering program, is required by the Constitution. The results are critical for apportioning seats in the House of Representatives and are also used to (1) draw district boundaries within states, cities, and counties, (2) allocate billions in federal funding for numerous programs, (3) provide a baseline for comparative data collection and analysis for the ensuing decade, and (4) guide the plans and decisions of government, business, education, and health institutions in the multibillion dollar investments they make. Agreement is needed between the administration and Congress on an approach that will both minimize risk of an inaccurate census and keep the cost within reasonable bounds. Over the years, the methodology used by the Census Bureau to conduct the decennial census has produced results that were less accurate and more expensive. On several occasions since 1992, we have testified on the need for careful advance planning to avoid the risk of a very expensive and seriously flawed census in 2000.
The Congress has the authority to approve the manner in which the census will be taken, but the Census Bureau has not demonstrated convincingly to the Congress what effects sampling and estimation would have at different levels of geographical detail.
The longer the delay in securing agreement over design and funding, the more difficult it will be to execute an effective census, and the more likely it will be that we will have spent billions and still have demonstrably inaccurate results. Given the dependence of many decisions affecting governments, businesses, and citizens on the results of the census, the country can ill afford an unsatisfactory census at the turn of the century, especially if it comes at a substantially higher cost than previous censuses.
Key Open Recommendations
We reported in 1994 that one reason for agencies’ lack of compliance with the Regulatory Flexibility Act is that the act does not expressly authorize the Small Business Administration (SBA) to develop criteria for agencies to follow in reviewing their rules. Although the act says SBA should monitor agencies’ compliance, SBA has not issued guidance defining key terms in the act. Therefore, we recommended that, if Congress wishes to strengthen the implementation of the act, it should consider amending the act to provide SBA with clearer authority and responsibility to interpret the act’s provisions. Although the Small Business Regulatory Enforcement Fairness Act of 1996 made several changes to the Regulatory Flexibility Act, it did not clarify SBA’s authority or responsibility to interpret the act’s provisions. (GAO/GGD-94-105)
In reviewing the fiscal year 1997 buyout programs of six agencies, we found that they had been better managed than was generally the case governmentwide during the 1994 and 1995 non-defense buyout window. However, we also concluded that opportunities for still further savings may have been identified if OMB had required agencies to not only estimate the savings generated by buyouts, but to compare them to estimated savings produced by alternative separation strategies, such as reductions-in-force. To achieve the full potential savings consistent with other organizational objectives, we recommended that the Director of OMB require all agencies to include in any future requests for buyouts information comparing the costs and savings of buyouts versus other separation strategies for the separation year and a reasonable number of subsequent years for which accurate assumptions and estimates could be made. (GAO/GGD-97-124)
In the area of equal employment opportunity, our recommendations addressed the guidance that the Equal Employment Opportunity Commission provides to federal agencies for affirmative employment planning. According to the Commission, it has made substantial revisions to its proposed management directive and continues to discuss these changes with the Department of Justice. Once these discussions are complete and the proposed directive is approved within the Commission, the directive will be sent to external agencies for comment. (GAO/GGD-91-86, GAO/T-GGD-92-2, GAO/GGD-94-71)
We reported in 1992 that the basic design of the decennial census had exhausted its potential for counting the population accurately and cost-effectively. We reported also that the key to a successful reform effort would be vigorous congressional oversight. We therefore recommended that Congress schedule oversight hearings throughout the decade to ensure that consistent progress is being made in designing and planning the 2000 census. In a 1997 report we concluded that the Bureau of the Census needed to provide Congress with detailed data, updated as necessary to meet the objective of full and open disclosure, on the expected effects of the Bureau’s census design proposals. (GAO/GGD-97-142)
We reported that the current practice of updating the expenditure weights used in the Consumer Price Index only every 10 years was a source of inaccuracy in this key economic indicator. We recommended that the Commissioner of the Bureau of Labor Statistics update the weights on a more frequent schedule. (GAO/GGD-98-2)
Financial Institutions and Markets Issue Area (Budget Function 800)
Impact of GAO’s Work
Financial institutions and markets continue to change at a rapid rate. Banks and thrifts, which used to be clearly distinct institutions, perform increasingly similar functions. In an attempt to increase profits and maintain a customer base, banks are increasingly taking on new lines of business—such as mutual funds and securities underwriting—which make them look more like securities firms. The products offered by banks, securities firms, and insurance companies look more and more similar. As markets become more global, foreign and domestic institutions perform similar functions and interact with savers and investors in similar ways. Our work explores the implications of these changes for the industry, its customers, and its regulators. We examine these issues to provide information, analyses, and recommendations to Congress and regulators on changes in and oversight of the financial services industry. We analyze: (1) various emerging issues in the financial services industry; (2) regulatory practices to see if they work as intended; and (3) the continued appropriateness of federal policies governing financial institutions and markets.
Our work has improved the operation of the financial system as a whole and individual components of it. Our primary mission—work on safety and soundness issues—helps protect the taxpayer from the need to rescue one or more financial institutions or sectors. Our work also has an investor/customer focus to help ensure that financial services industry customers get what they pay for. Our work on agency operations has led to improvements in their effectiveness.
Our recent review of the operations of the Federal Reserve suggests that the System is facing a number of major challenges that could affect the nature, size, and distribution of its activities and resources. We found that the System needs to become more cost conscious and that it should undertake a thorough re-examination of its mission, structure, and work processes to assure that it is operating as efficiently and effectively as possible.
Our work on over-the-counter derivatives market has provided the framework for debating the complex issue. Our report suggested that linkages among major U.S. dealers, especially bank dealers, represented a potential threat to the financial system if one or more major dealers were to fail or withdraw from the market. The report also identified major gaps in the regulatory structure.
Our work on the Federal Home Loan Bank System identified the need for major reform. We expressed concerns about the System’s capital structure and the mixture of voluntary and mandatory members. We also expressed substantial concern about whether the Federal Housing Finance Board could act as an arm’s-length regulator, and recommended a single regulator for all three housing-related government sponsored enterprises. This report helped to spur an ongoing debate in this Congress on how to reform the System.
Key Open Recommendations
Financial Institution Reforms
In our reports on credit unions, we recommended regulatory and legislative actions to ensure the future soundness of the industry, including changes to (1) maintain safe and sound insurance operations, (2) upgrade the regulation and supervision of credit unions, and (3) clarify the “common bond” characteristic distinguishing credit unions from banks and thrifts. The National Credit Union Administration is addressing our concerns. (GAO/GGD-91-85 and GAO/GGD-95-107)
Our report on the Federal Home Loan Bank System recommended reforming its capital structure, its mixture of voluntary and mandatory members, and potential cost saving reforms. The report also recommended a single regulator for all three housing-related government-sponsored enterprises. The Administration and the Congress have been working on a legislative plan to address our recommendations. (GAO/GGD-94-38)
Our reviews of the Community Reinvestment Act, the Equal Credit Opportunity Act and the Fair Housing Act concluded that the lending and regulatory communities still face challenges in effectively implementing these laws. We recommended that the regulators: develop uniform fair lending examination procedures; adequately train examiners to review and test for lending discrimination; and use their full range of resources, including enforcement actions to ensure accurate, timely Home Mortgage Disclosure Act data. We further recommended that the agencies determine what resources and examination techniques were needed to meet the requirements of the recently revised Community Reinvestment Act regulations. We also recommended that the Attorney General provide updated guidance to the bank regulators on the characteristics of referable “pattern or practice” cases under the Equal Credit Opportunity Act and the Fair Housing Act. In addition, we suggested that Congress may wish to consider alleviating the legal risks of self-testing for discrimination done by the lenders. These recommendations are under consideration by the regulators. (GAO/GGD-96-23 and GAO/GGD-96-145)
Our report on Federal Reserve operations noted a number of areas in which the Federal Reserve could be more efficient. We recommended that the Federal Reserve undertake a thorough review of its mission, structure, and work processes to identify ways to become more efficient and effective in the future. We suggested that the Federal Reserve carefully examine the need for its 12 regional Banks and its 25 branches. We also recommended that the Federal Reserve develop criteria for maintaining its surplus rather than the rule of thumb it has been using. (GAO/GGD-96-128)
Our testimony and report on modernizing the U. S. bank structure made suggestions that incorporate the many of the advantages we found in foreign bank regulatory systems. We noted that consolidation of agencies responsible for bank oversight was one logical step in modernization. We recommended that the Federal Reserve System and Treasury be part of the oversight structure in any financial modernization effort. Congress is considering these proposals as part of proposed financial services modernization legislation. (GAO/GGD-97-23 and GAO/T-GGD-96-117)
Securities
Our over-the-counter derivatives market report identified the actions needed to ensure that this rapidly growing segment of the financial market does not become a source of systemic risk. We made several recommendations calling for congressional action to address the weaknesses and gaps we identified that are impeding the regulatory process. Additionally, we made several recommendations to the regulators involved with regulating the over-the-counter derivatives market that address the weaknesses and gaps within their control. Regulators are in the process of implementing many of our recommendations. (GAO/GGD-94-133 and GAO/GGD/AIMD-97-8)
Our work on the National Association of Stock Dealers Hotline suggested that many investors did not know about the hotline, but that investors would find additional information about broker-dealers useful in making investment decisions. We recommended that the National Association of Stock Dealers Regulation explore ways of publicizing the hotline to a wider audience and provide hotline callers with all the relevant disciplinary-related information available. (GAO/GGD-96-171)
See also chapter 5, Financial and Information Management Programs, Budget Issue Area, Corporate Audits and Standards Issue Area, and Information Resources Management Issue Area.
Government Business Operations Issue Area (Budget Function 800)
Impact of GAO’s Work
Our work focuses primarily on two of the government’s largest business entities: the General Services Administration (GSA), which controls or oversees over $60 billion in annual government spending, and the United States Postal Service (USPS), which has annual revenues of more than $55 billion. Their activities have far-reaching implications for federal agencies and the general public. Through them, the federal government owns and controls assets worth hundreds of billions of dollars and provides goods and services to federal agencies that directly affect mission accomplishment.
Also, this past year, our work has involved the activities of other entities, including the Treasury, Federal Communications Commission, National Oceanic and Atmospheric Administration, Smithsonian Institution, Kennedy Center for the Performing Arts, Library of Congress, Government Printing Office, Architect of the Capitol, Federal Prison Industries, Administrative Office of the U.S. Courts, and governmentwide assignments dealing with construction project labor agreements, user fees, and employee relocation costs.
The reforms that GSA has made in recent years appear responsive to many of the concerns we and NPR have continued to express. GSA is deeply involved in government downsizing and reinvention issues, contracting out some of this effort while adjusting to new leadership. It has reorganized its Public Buildings Service to separate its policy/oversight and service-provider responsibilities and help facilitate the delivery of real estate services to federal agencies. We continue to emphasize several key obstacles—such as Federal Buildings Fund shortfalls, budget scorekeeping rules, and the lack of strategic focus and planning—that impede GSA’s and the Congress’ ability to pursue the most cost-effective housing and asset management options for meeting federal space needs and managing existing federal buildings. Key areas of work this past year have involved the design, construction, and use of federal courthouses; construction of and the housing plan for the Ronald Reagan Federal Building and International Trade Center; proposed disposal of the Toledo Federal Building; federal building security upgrades; and GSA actions to deal with the $846 million Federal Buildings Fund shortfall in fiscal year 1997.
Our efforts at USPS have continued to focus on persistent problems as well as the prospect that major reform legislation may place USPS in a more competitive arena with its private-sector counterparts. The problems include poor labor-management relations, an inability to properly control the receipt of mail and ensure proper revenue collection, as well as the need to control costs in order to reap projected benefits from major automation investments. In both reports and testimonies, we have highlighted the major issues facing USPS: (1) how competition will affect both the Service’s revenues, costs, and rates (domestically and internationally) and the federal government’s role in mail delivery; (2) how poor controls have resulted in revenue losses and mismanagement in some major purchases; and (3) how efforts to improve labor-management relations have been fragmented and difficult to sustain. Our postal work made major contributions to the postal reform legislation reintroduced in 1997.
We also handled a wide range of congressional requests covering diverse agencies and issues. For example, we reported that, contrary to reports in the press, the Library of Congress did not violate the Buy America Act in its contracts to convert printed materials into electronic formats, portions of which were done in Jamaica and the Philippines. In the currency area, we testified that pending proposals to change the denominational mix of the coins and currency could significantly affect capital investment plans of the Mint and the Bureau of Engraving and Printing; Treasury studies on merging the two agencies were inconclusive; Treasury has not pursued further outsourcing of money production; and strategic plans of the Mint and the Bureau do not consider total government production and distribution costs or alternative mixes of coins and currency. In another area, we reported on the potential for duplication of audit efforts resulting from a mandated GAO audit of the Kennedy Center’s use of appropriated funds. Further, we reported on the Center’s development of a facility management structure and the related systems required to manage and operate the facility since Congress gave the Center’s Board responsibility for operation and maintenance and capital improvement in 1994.
Examples of our contributions this past year include the following:
GSA ended its virtual monopoly in providing leased office space to federal agencies by delegating authority to lease general purpose space, regardless of geographic location, to the heads of all federal agencies.
Congress approved a measure, which the President signed, barring the payment of surcharges to sponsors of commemorative coins until all of the Mint’s costs associated with that coin are recovered.
The Postal Service implemented actions to reduce Express Mail Corporate Account Losses, which amounted to about $800,000 in revenue during fiscal year 1995.
The Smithsonian Institute and the Library of Congress collaborated in the acquisition of artifacts, thereby ensuring that the government’s cost of acquiring material for its collections were not driven up by competitive bidding by the agencies.
The National Archives implemented a new systemic approach to identify customers’ needs, compare those needs with services provided, and examine how to meet shortfalls.
GSA increased direct delivery of supplies by adding supply system features such as (1) ordering direct-delivery products over the Internet, (2) lowering the direct-delivery threshold for items that have limited shelflives, and (3) adding a supplies contract that promotes the use of a contractor to supply agencies directly.
Key Open Recommendations
General Services Administration
The Congress, the Judiciary, and GSA have embarked on a $10 billion courthouse construction initiative. In response to various criticisms about inadequate management and oversight, GSA established a courthouse management group to develop a more disciplined approach that would reduce costs and provide for better decisionmaking. This group is working closely with the Administrative Office of the U.S. Courts—the administrative arm of the Judiciary—to improve communication and respond to specific recommendations that we made during our testimony for improvement in the overall management and oversight of courthouse construction. The group is also establishing a mechanism to monitor and assess the use of flexible design guidance with a view toward striking a better balance in the choices made about courthouse designs. (GAO/T-GGD-96-19)
U.S. Postal Service
USPS, unions, and management associations should develop a long-term framework on an agreement to change the workplace climate in mail processing and delivery functions. The agreement should provide for the following principles and values: (1) a work structure to give employees greater responsibility and accountability for results; (2) incentives to encourage all employees to share in the tasks necessary for success and to allow for recognition and reward for corporate and unit performance; (3) training employees and holding them accountable, with a focus on customer service; (4) selection and training of supervisors to be facilitators/counselors who will have the skills, experience, and interest to treat employees with respect, motivate them, recognize and reward them, promote teamwork, and deal with poor performers; and (5) counseling, training, and if necessary, removal of supervisors and employees who show a lack of commitment to work-unit goals, values, and principles. The Postmaster General and the leaders of the unions and management associations have taken some initial steps toward arranging a summit at which they can discuss approaches to try to address persistent labor-management relations problems. (GAO/GGD-94-201A)
If the Congress wants USPS to keep or gain business customers in parcel post and Express Mail, it should consider reexamining the provisions of section 403(c) of the Postal Reorganization Act. The Congress should determine if volume discounting by USPS, in which all customers would be given the same volume discounts, would result in undue or unreasonable discrimination among mailers and undue or unreasonable preference being given to mailers since private carriers commonly use this pricing strategy. (GAO/GGD-92-49)
The Congress should reexamine the act’s ratemaking criteria and consider amending it to state that (1) in allocating institutional costs, demand factors are to be weighted to take into account the need to maintain the long-term viability of USPS as a nation-wide, full-service provider of postal services, and (2) such use of demand factors will not be inconsistent with the rate criterion requiring the establishment of an equitable rate schedule as long as each mail class recovers the direct and indirect costs attributable to that service and contributes to institutional costs. (GAO/GGD-92-49)
Treasury Issues
Our 1993 report on the dollar coin recommended that Congress eliminate the paper dollar and replace it with a well-designed dollar coin. Hearings were held in 1995, but no legislation was passed. (GAO/GGD-93-56)
Tax Policy and Administration Issue Area (Budget Function 800)
Impact of GAO’s Work
The Tax Policy and Administration issue area’s mission is to provide Congress, the executive branch, and the public with timely, accurate, and objective analyses and information to improve our nation’s tax system and its administration. Accordingly, this issue area’s responsibility encompasses the revenue side of the budget—the $1.4 trillion in tax receipts that finance federal government operations and the $400 billion in tax expenditures used to promote numerous social and economic objectives—and the federal agency responsible for tax administration—the Internal Revenue Service (IRS).
The federal treasury will realize over $1.8 billion in increased tax revenues and cost reductions over 2 years as a result of statutory and administrative changes we recommended during the last few years. Of that total, (1) about $1.1 billion comes from a phaseout of the Section 936 tax credit in U.S. possessions; (2) about $514 million from a reduction in the fiscal year 1997 Tax System Modernization appropriation; (3) about $90 million from the cancellation of IRS’ corporate accounts processing system; (4) about $82 million comes from additional tax collections by sending semiannual reminder notices to delinquent taxpayers; and (5) about $27 million comes from the termination of a pilot program for private debt collection assistance.
The increased tax revenues represent only one aspect of our work’s impact. For example, in response to our recommendations, (1) federal agency Chief Financial Officers must certify that procedures for issuing information returns on payments to corporations providing services are in place; (2) IRS developed a definition of taxpayer complaints; (3) IRS created the Office of the Taxpayer Advocate; (4) IRS changed the requirement that Treasury’s General Counsel review all offers-in-compromise greater than $500; (5) IRS reduced the volume of its undeliverable mail; (6) IRS has limited the prior audit protection rule in Section 530; (7) IRS made changes to improve the processing of undeliverable mail; (8) IRS initiated a program to use private companies in collecting delinquent debt; (9) IRS established a government program management office; and (10) congressional spending limits for IRS’ fiscal year 1997 information systems appropriation were approved.
High-Risk Areas
At IRS, we designated the problems in the management and collection of billions in taxes and the significant levels of tax filing fraud as two high-risk areas.
Tax Accounts Receivable
IRS is the government’s primary tax collection agency and collects over a trillion dollars annually. However, since many taxpayers are either unable or unwilling to pay their taxes when due, IRS has accumulated accounts receivable estimated to be in the tens of billions of dollars. Unfortunately, IRS’ long-term efforts to efficiently and effectively collect these delinquent taxes have been seriously hampered, primarily by outdated equipment and processes, old accounts that are difficult to collect, incomplete information needed to better target collection efforts, and the absence of a comprehensive strategy and detailed plan that address the systemic nature of the underlying problems.
IRS has undertaken many initiatives to deal with some of its accounts receivable problems. These include correcting errors in the accounting records of tax receivables, developing more information on the makeup of the inventory of tax debts, developing research systems to identify characteristics of delinquent taxpayers and appropriate collection techniques, attempting earlier telephone contact with delinquent taxpayers, revising the format of bills sent to taxpayers, and automating many of the processes performed by collection employees in field offices.
While some of these initiatives appear to have had some positive impact, correcting the problems and improving collections will require long-term and continuous efforts. To ensure that these efforts are on the right track, IRS needs a comprehensive strategy that involves all aspects of IRS’ operations. As part of this strategy, IRS must set priorities; modernize outdated equipment and processes; and establish goals, timetables, and a system to measure progress.
Filing Fraud
We first identified filing fraud as a high-risk area in February 1995 after the amount of fraudulent refunds identified by IRS had risen from $42.9 million in 1991 to $160.5 million in 1994. A great majority of those fraudulent refunds involved Earned Income Credit claims. More recently, as noted in our 1997 high-risk series, the amount of detected fraud had declined, but there was insufficient information available to determine whether the decline was due to staff reductions in IRS’ primary fraud detection program, changes in the program’s operating or reporting procedures, or a general decline in the incidence of fraud.
Since our high-risk series was issued, IRS released a report on the results of its study of Earned Income Credit claims on tax year 1994 individual income tax returns. That study, which provides the most recent data on a major source of filing fraud, showed that of the $17.2 billion in Earned Income Credit claims on tax year 1994 returns, 25.8 percent was erroneously claimed. It was unclear from IRS’ study, however, how many of those erroneous claims were due to fraud. IRS expected some of this noncompliance to be mitigated by a provision in the Welfare Reform Act of 1996 that allowed IRS, beginning in 1997, to treat missing or incorrect Social Security Numbers as math errors and to automatically reduce the taxpayer’s refund.
Other provisions enacted as part of the Taxpayer Relief Act of 1997 are intended to further reduce Earned Income Credit noncompliance. Those provisions include certain restrictions on future Earned Income Credit claims by persons who are found to have fraudulently claimed an Earned Income Credit and certain penalties against tax return preparers who are found to have failed to exercise due diligence against improper Earned Income Credit claims in preparing tax returns. In testimony before the House Committee on Ways and Means before those provisions were enacted, we stated that various questions about the provisions needed to be answered, the most significant being whether they get at the real causes of EIC noncompliance. (GAO/T-GGD-97-105)
Key Open Recommendations
Taxpayer Compliance
The Low-Income Housing Tax Credit is the largest federal program to fund the development and rehabilitation of rental housing for low-income households. Under the program, states allocate federal tax credits as an incentive to the private sector to develop these projects. The annual cost of the credits could be as much as $3 billion. IRS is responsible for ensuring that taxpayers take no more credits than allowed and that the states allocate no more credit than they are authorized to allocate. We recommended that IRS (1) establish clear requirements to ensure independent verification on sources and uses of funds submitted to states by developers that form the basis of decisions about the value of tax credits granted for low-income housing projects; (2) require that states report sufficient information about monitoring inspections or reviews, including the number and types of inspections made so that IRS can determine whether states have complied with their monitoring plans; (3) require that states’ monitoring plans include specific steps that will provide information to permit IRS to more effectively ensure that the Internal Revenue Code’s habitability requirements are met; and (4) explore alternative ways to obtain better information to verify that states’ allocations do not exceed tax credit authorizations and to evaluate taxpayers’ and housing projects’ compliance with the requirements of the Code. IRS is taking steps to address these recommendations. (GAO/GGD/RCED-97-55)
Sole proprietors, who account for about 13 percent of individual taxpayers, are responsible for about 40 percent of the taxable income earned by individuals but not reported for tax purposes. Much of this noncompliance is attributable to sole proprietors who operate as independent contractors, e.g., self-employed individuals who provide services to others. Given the persistently high levels of noncompliance over the years, we have recommended that IRS adopt a more comprehensive and coordinated compliance program. We also recommended that Congress consider compliance-enhancing legislation, for example, extending withholding and information reporting requirements to cover independent contractors. Since January 1995, at least four legislative proposals for clarifying the rules have been submitted. We had testified annually from 1992 to 1996. (GAO/GGD-92-108)
Annually, about two-thirds of all additional tax assessments recommended as a result of IRS audits are attributable to the nation’s 1,700 largest corporations. Although audits of these large corporations consume about 20 percent of IRS’ examination resources, IRS collects only about $1 of every $5 of recommended tax assessments. We recommended that IRS take a number of steps to help ensure that it meets its mission of collecting the proper amount of tax at the least cost. They are that IRS (1) provide more authority over budget and staffing allocations in the field to the National Office executive who manages this audit program, (2) improve controls to ensure that the auditors receive the information that the corporations submitted to IRS’ appeals function, and (3) analyze recurring tax disputes and propose legislative changes for minimizing such recurrence. IRS is taking steps to address these recommendations. (GAO/GGD-94-70)
IRS also has an audit program dealing with tax returns filed by about 45,000 other large corporations. Between 1988 and 1994, IRS had been investing additional time in doing these audits but recommending fewer additional taxes per hour invested. IRS had been collecting about $1 of every $4 in additional taxes recommended during the audit. These results raised issues about the productivity of such audits. Our recommendations strove to improve that productivity. For example, we recommended that IRS (1) develop more specific criteria to guide the selection of tax returns and tax issues on those returns with high audit potential, (2) encourage the management of the field auditors and lawyers to work together on finding cost-effective ways for auditors to get the necessary legal assistance, and (3) provide feedback to auditors on how IRS’ appeals function settled tax disputes with the large corporations so that the auditors could prepare better support for tax issues that could be sustained if appealed. (GAO/GGD-97-62)
Through negative withholding, low-paid wage earners may receive a proration of the earned income tax credit during the tax year. Such an advance payment of the tax credit presents a potential compliance problem because the credit is paid before IRS can ensure that the wage earners are eligible. Ensuring compliance becomes more problematic if the affected wage earners do not report the advance payment on their tax returns or do not file tax returns. We recommended that IRS (1) send to individuals who do not file tax returns a notice explaining their requirement to file; and (2) explore ways to identify those individuals who claim the credit in advance but do not report it, so as to prevent them from receiving the credit a second time. While IRS subsequently took steps directed at taxpayer reporting, we believe that IRS needs to do more to identify and deal with those who do not file correct returns. (GAO/GGD-92-26)
At the beginning of fiscal year 1993, IRS had an inventory of about 10 million individual and business nonfilers. IRS estimated that unpaid taxes on nonfiled individual income tax returns for 1992 alone totaled more than $10 billion. Concerned about this noncompliance, IRS began a strategy in fiscal year 1993 to bring nonfilers into the system and keep them there. IRS’ strategy was generally successful in (1) reducing the size of the nonfiler inventory, (2) eliminating unproductive cases, and (3) increasing the number of returns secured from individual nonfilers. However, it is unclear whether voluntary taxpayer compliance actually improved and whether IRS’ enforcement resources were effectively managed. We identified several areas where opportunities existed to improve IRS’ nonfiler strategy and recommended that IRS (1) become more timely in making telephone contact with nonfilers; (2) use lower graded staff, paraprofessionals, and administrative staff for more of the nonfiler work; and (3) consider revising procedures for dealing with nonfilers who are brought into compliance and then become nonfilers again. (GAO/GGD-96-72)
Concerns about continued noncompliance levels led IRS to change its tax compliance philosophy. In addition to the use of enforcement methods, it is researching ways to improve compliance for entire market segments—specific groups of taxpayers that share certain characteristics or behaviors. IRS’ goal is to increase total compliance with the tax laws from an estimated 87 percent to 90 percent by 2001, and IRS believes its new compliance research approach will uncover ways to help meet this goal. We recommended that IRS (1) develop support from its employees for the new approach and monitor the success of its developmental effort; (2) ensure that reliable compliance data will be available when needed; (3) set a schedule for completion and monitor it; and (4) establish milestones and monitoring mechanisms for the research effort and for evaluating the effort. (GAO/GGD-96-109)
Tax Systems Modernization
Available compliance data indicate that overstated deductions by small businesses are a significant noncompliance area—about $40 billion annually. Our review work showed that it was technically feasible for IRS to use computer-matching techniques and available information returns to identify a portion of this noncompliance. We recommended that IRS implement such matching techniques where tests showed that it would be cost-effective. We also recommended that IRS consider actions that could be taken to expand computer matching as part of its Tax Systems Modernization effort. (GAO/GGD-93-133)
We reviewed IRS’ plans to maximize electronic filing, which is the cornerstone of IRS’ plan to move from the traditional paper-based return filing. We found that (1) if electronic filing continued at the current pace, IRS would fall far short of its goal of 80 million electronic returns by 2001; (2) IRS was having little success in broadening the appeal of electronic filing to those taxpayers who file more complex returns; and (3) unless IRS can increase electronic filing, its customer service and paper-processing workloads may overwhelm its planned staffing and alter various aspects of its modernization efforts. We recommended that the Commissioner (1) identify those groups of taxpayers who offer the greatest opportunity to reduce IRS’ paper-processing workload and operating costs if they were to file electronically and develop strategies that focus IRS resources on eliminating or alleviating impediments that inhibit those groups from participating in the program, including the impediment posed by the program’s cost; (2) adopt goals for electronic filing that focus on reducing IRS paper-processing workload and operating costs; and (3) prepare contingency plans for the possibility that the electronic filing program will fall short of expectations. (GAO/GGD-96-12)
Accounts Receivable Collection
IRS is losing the potential to collect hundreds of millions in overdue taxes because of shortcomings in its processes for determining which accounts are currently collectible and which are not. We recommended that IRS develop information on the characteristics of the accounts written off to determine whether additional cost-effective collection measures can be developed and applied. (GAO/GGD-91-89)
We reviewed IRS’ Offer-in-Compromise Program, which affords taxpayers the opportunity to settle tax debts for less than the amount owed. While IRS was pleased with the results of the program, it had not demonstrated that the program’s objectives of increased collections and improved compliance would be met. We recommended that IRS develop the indicators necessary to evaluate the Offer-in-Compromise Program as a collection and compliance tool. (GAO/GGD-94-47)
We studied private sector and state collection techniques to determine whether IRS could improve its collection of delinquent taxes. We recommended, among other things, that IRS restructure its collection program to use collection staff in earlier, more productive phases of the collection cycle, develop detailed information on delinquent taxpayers for customized collection procedures, and identify ways to increase cooperation with state governments. (GAO/GGD-93-67)
Tax Simplification
Our work showed that the rules for claiming dependent exemptions were too complex and too burdensome for many taxpayers. We recommended that Congress simplify the rules by substituting a residency test similar to that used in the earned income tax credit. (GAO/GGD-93-60)
To determine their tax liabilities (e.g., employer portion of Social Security taxes) and take the appropriate steps to meet the requirements of other laws, businesses need to be able to readily distinguish between workers who are “employees” and those who are “independent contractors.” But the IRS rules for classifying workers are unclear and subject to conflicting interpretations. This situation puts employers at risk of large penalties and retroactive tax assessments. We recommended congressional intervention to help clarify the rules. (GAO/T-GGD-96-130 and GAO/GGD-92-108)
Tax simplification also involves efforts to make IRS correspondence easier for taxpayers to understand. In this regard, we recommended that IRS modify its correspondence practices to (1) make certain system improvements and (2) monitor taxpayer satisfaction with IRS correspondence. (GAO/GGD-94-118)
IRS Management
Knowing how much it costs to carry out programs and activities is indispensable for planning and decision-making. For example, IRS management needs information to compare what it costs to run IRS at various times and at locations doing similar work. To strengthen IRS’ financial management, we recommended that IRS develop a comprehensive cost accounting system, one that accounts for all IRS costs and identifies the organizational components and functions to which they relate. (GAO/GGD-89-1)
IRS is undergoing a major effort to modernize its information systems and restructure its organization. This effort involves several components, one of which IRS calls its “customer service vision,” which seeks to improve IRS’ interactions with taxpayers and fold parts of IRS’ field structure into 23 customer service centers. These centers would work primarily by telephone to provide taxpayer service, take orders for tax forms, collect unpaid taxes, and adjust taxpayer accounts. They would absorb current IRS telephone operations and try to convert much of IRS’ written correspondence work to the telephone. However, a lack of clarity in management responsibilities has, to some extent, hampered IRS in implementing its customer service plans. First, because the work units and related resources that are to make up the new customer service-organization belong to two separate IRS organizations, we recommended that IRS clarify criteria for assigning process owners. Second, at lower management levels, we found instances in which “products” were being developed for use in the customer service sites that had no clearly designated process owners; thus, we recommended that IRS define process owners’ roles and responsibilities. Third, we identified two instances in which IRS officials had assumed ownership roles for interactive telephone systems but had not carried out their duties to establish the quality measures critical to evaluating the systems’ performance. Thus, we recommended that IRS emphasize the need for timely input for quality measures. (GAO/GGD-96-03)
Taxpayer Service
Successful implementation of IRS’ one-stop service initiative is crucial to IRS’ plans for improving customer service, that is , to reduce taxpayer burden in terms of additional time and frustration associated with making numerous contacts with IRS to resolve a single problem. In August 1994, we concluded that a flawed measurement process had led IRS to overstate its progress in providing one-stop service and recommended that a different measurement system be adopted. This followed an earlier recommendation aimed at improving taxpayer access to IRS. We recommended that IRS develop a reliable measure of toll-free telephone accessibility so that it can make appropriate decisions on making services available. (GAO/GGD-94-131 and GAO/GGD-92-132)
Three prototype interactive telephone systems—designed to reduce correspondence between IRS and taxpayers and to make IRS more accessible—suffer from too many menu options and other problems. Resolving these shortcomings is essential if IRS is to achieve its goal of handling 45 percent of taxpayer calls by using interactive phone systems. IRS’ telephone-routing system requires taxpayers to remember up to eight menu options, even though the contractor guidelines called for no more than four, and does not allow taxpayers to return to the main menu when they make a mistake or want to resolve other issues. IRS has not done a cost-benefit analysis of the use of multiple toll-free numbers, which we recommended as a solution to the problem of too many menu options. IRS complied with government security requirements when developing its first three interactive telephone systems. However, future interactive systems will allow taxpayers greater access to tax information, and more secure features, such as a personal identification number, may be needed to protect taxpayer data. Currently there are 7 interactive applications located in 10 customer service centers. According to IRS, fiscal year 1997 will provide the best overview of the role interactive telephone systems will play and fiscal year 1998 will provide the best data for determining how well the interactive systems are working and what problems may still exist. (GAO/GGD-96-74)
See also chapter 4, Improving Justice and General Government Programs, Information Resources Management—Internal Revenue Service Issues and chapter 5, Financial and Information Management Programs, Civil Audits Issue Area, and Information Resources Management Issue Area.
Information Resources Management— Internal Revenue Service Issues (Budget Function 990)
Impact of GAO’s Work
Over the last decade, IRS has been trying to modernize its tax processing systems, which are used to annually collect and account for over $1 trillion in revenue. IRS’ efforts to modernize these systems have been largely unsuccessful. Our work has concentrated on identifying the causes of the agency’s past modernization failures and recommending solutions to these problems. Our work has also focused on strengthening security over IRS’ computer resources and facilities and its taxpayer data.
In July 1995, we identified serious management and technical weaknesses in the modernization program that jeopardize its successful completion, recommended many actions to fix the problems, and designated IRS’ modernization as a high-risk area. During this year, we closely monitored IRS’ progress in implementing these recommendations, particularly its efforts to develop and enforce a systems architecture, develop and enforce disciplined investment management processes, and implement mature software development and acquisition processes. Through report recommendations, testimonies, and congressional briefings, we worked to restrict IRS spending until it fully implements these recommendations, thereby putting in place the internal capability to effectively invest in systems. Additionally, this year we identified and recommended corrective action for many weaknesses in IRS’ computer security program that place tax processing operations at risk of being disrupted and taxpayer data being improperly used, modified, or destroyed.
IRS has started implementing virtually all of our recommendations to improve its modernization management and technical capability and to strengthen computer security. This has resulted in hundreds of millions in cost reductions through the cancellation of poorly managed modernization projects—initial steps in improving modernization management and technical capabilities, greater attention to computer security, and elimination of some computer security weaknesses. Each of these accomplishments is discussed below.
Tax Systems Modernization
Responding to our recommendations and congressional direction, the Department of Treasury increased its management oversight of IRS’ modernization efforts. For example, it (1) established a Modernization Management Board as the primary review and decision-making body for modernization and for policy and strategic direction; (2) scaled back the overall size of the modernization by approximately $2 billion; (3) reduced IRS’ fiscal year 1997 budget request for modernization from $850 million to $664; and (4) has guided IRS to obtain additional contractor staff to accomplish modernization efforts.
During the past year, the Congress has continued to oversee the modernization and, more specifically, Treasury’s and IRS’ efforts to correct management and technical weaknesses. In the fiscal year 1997 Omnibus Consolidated Appropriations Act, Congress directed IRS to (1) submit by December 1, 1996, a schedule for transferring a majority of its modernization development and deployment to contractors by July 31, 1997, and (2) establish a schedule for implementing our recommendations by October 1, 1997. In its conference report on the act, Congress directed the Secretary of the Treasury to (1) provide quarterly reports on the status of IRS’ corrective actions and modernization spending and (2) submit by May 15, 1997, a technical architecture for the modernization that has been approved by Treasury’s Modernization Management Board. Additionally, the Board was directed to prepare a request for proposal by July 31, 1997, to acquire a prime contractor to manage modernization deployment and implementation. Congress also reduced IRS’ budget request for modernization from $664 million to $336 million.
Treasury and IRS have responded by continuing to take steps to implement our recommendations and respond to congressional direction. For example, IRS hired a new Chief Information Officer. It also created an investment review board to select, control, and evaluate its information technology investments. Thus far, the board has reevaluated and terminated selected major modernization development projects, such as the Document Processing System, avoiding the costs of over a billion dollars. Additionally, IRS provided a report to Congress that set forth IRS’ strategic plan and schedule for shifting modernization development and deployment to contractors.
Further, IRS prepared a schedule for implementing our recommendations and provided it to Congress. In May 1997, IRS issued levels one and two of its four-level “Modernization Blueprint.”
IRS initiated or continued to work on other actions we recommended to strengthen tax systems modernization management. For example, it is finalizing a comprehensive strategy to maximize electronic filing that is scheduled for completion in late 1997. It is also updating its system development life cycle methodology and is working across various IRS organizations to define disciplined processes for software requirements management, quality assurance, configuration management, and project planning and tracking.
In our testimonies before the Congress during this year, we reported that although we recognize that IRS has initiated a number of actions and is making some progress in correcting its management and technical weaknesses, IRS has not yet fully implemented any of our recommendations, and we remain concerned because a great deal remains to be done to fully implement essential improvements.
Furthermore, despite persisting weaknesses in both software development and acquisition capabilities, IRS continues to request hundreds of millions of dollars for systems modernization efforts. Specifically, in its fiscal year 1998 budget request, IRS is seeking $131 million for system development initiatives. However, the request does not include a credible, verifiable justification and states that IRS does not know how it plans to spend these funds because its modernization architecture and deployment plan have not yet been completed. In addition, the Administration is proposing to establish an Information Technology Investments Account to fund future modernization investments at IRS. It is seeking $500 million in each of the next two fiscal years ($1 billion in total) for “yet-to-be-specified” modernization efforts. This request is also not based on analytical data or derived using formal cost estimating techniques. Accordingly, we recommended that the Congress consider not funding either the $131 million request for system development or the $1 billion capital account until the management and technical weaknesses in IRS’ modernization program are resolved and justifications completed.
Computer Security
IRS has also taken steps to address many serious computer security weaknesses, including the continued browsing of electronic taxpayer records by IRS employees. For example, in response to our recommendations, IRS (1) appointed a single official to be responsible for computer security agencywide, (2) developed an action plan to correct all weaknesses and corrected some weaknesses at some facilities, and (3) reported to the Congress on an evaluation of the adequacy of IRS’ current management approach to computer security.
High-Risk Area
We have designated IRS Tax System Modernization as a high-risk area.
Tax Systems Modernization
In 1995, we added IRS’ modernization to our high-risk list. Since then, IRS and Treasury have together taken steps, some of which are described above, to implement our recommendations. However, none of our recommendations have been fully implemented and much remains to be done to fully implement essential improvements. Increasing the use of contractors, for example, will not automatically increase the likelihood of successful modernization because IRS does not have the technical capability needed to manage all of its current contractors. As a case in point, IRS’ Cyberfile—a system development effort led by contractors to enable taxpayers to personally prepare and file their tax returns electronically—exhibited many undisciplined software acquisition practices as well as inadequate financial and management controls. Eventually, IRS canceled the Cyberfile project after spending over $17 million and without fielding any of the system’s promised capabilities. Therefore, if IRS is to use additional contractors effectively, it will have to first strengthen and improve its ability to manage those contractors. Likewise, until disciplined systems life cycle processes are defined and implemented throughout IRS, and all systems life cycle products (including the architecture) are completed and validated, IRS will not be ready to begin developing or acquiring information systems.
IRS needs to continue to make concerted, sustained efforts to fully implement our recommendations and respond to congressional direction. It will take both management commitment and technical discipline for IRS to do this effectively. Accordingly, we plan to continue assessing IRS’ progress in its critical endeavor to modernize.
Key Open Recommendations
Our work on Tax Systems Modernization identified pervasive management and technical weaknesses with IRS’ approach to managing its modernization. It also highlighted that IRS does not have disciplined software acquisition practices and requisite financial and management controls to effectively manage all of its contractors.
Our work on computer security found many serious weaknesses remain uncorrected, leading us to conclude that IRS’ current approach to computer security is ineffective. To address these problems, we made a series of specific recommendations aimed at correcting key modernization management and technical weaknesses and strengthening the effectiveness of IRS’ management of computer security.
Our report on IRS’ modernization weaknesses recommended that IRS (1) formulate a comprehensive business strategy for maximizing electronic filings; (2) improve IRS’ strategic information management by implementing a process for selecting, prioritizing, controlling, and evaluating the progress and performance of all major information systems investments, (3) implement disciplined, consistent procedures for software requirements management, quality assurance, configuration management, and project planning and tracking, and (4) complete and enforce an integrated systems architecture, including security and data subarchitectures. In June and September 1996, we reported that although IRS had initiated actions to implement our recommendations, none had been fully implemented. Over the past year, we have reported to the Congress that although IRS continues make some progress in correcting its management and technical weaknesses, a great deal remains to be done to fully implement essential improvements specified in our recommendations. (GAO/AIMD-95-156 and GAO/AIMD-96-106)
In our report on IRS’ acquisition of its Cyberfile electronic filing system, we recommended, among other things, that the Commissioner report to congressional appropriations, authorization, and oversight committees on (1) the weaknesses in IRS’ acquisition and financial management processes and controls that permitted Cyberfile mismanagement to occur, (2) actions to correct the weaknesses, and (3) IRS’ plans for completing the project. While IRS subsequently canceled the project, it has yet to report to the congressional committees as recommended. An IRS official told us that IRS had prepared a report and submitted it to the Department of the Treasury for approval. Until we can assess the report’s contents, we will not know what steps IRS has taken to (1) correct these serious problems and (2) ensure that it has the disciplined processes and controls in place to effectively acquire and manage all of its contractors. (GAO/AIMD-96-140)
Our report on IRS’ computer security weaknesses recommended that the Commissioner (1) prepare a plan for correcting all the weaknesses identified at the five data processing facilities that we visited as well as identifying and correcting security weaknesses at the other IRS facilities, (2) provide the plan to congressional appropriations, authorization, and oversight committees, (3) report on IRS’ progress against the plan in its fiscal year 1999 budget submission, and (4) identify the computer security weaknesses we found as being material in IRS’ Federal Managers’ Financial Integrity Act report to Treasury. In addition, because longstanding computer security problems continue to plague IRS operations, the report reiterated our prior recommendation that the Commissioner, through the Deputy Commissioner, strengthen computer security management, including reevaluating IRS’ current approach to computer security, preparing plans for improvement, and reporting the results to the congressional committees cited above. The report also recommended that the Commissioner (1) ensure that IRS completely and consistently monitors, records, and reports the full extent of electronic browsing for all systems that can be used to access taxpayer data and (2) report disciplinary action taken against employees caught browsing and include these statistics and an assessment of progress in eliminating browsing in IRS’ annual budget submission. (GAO/AIMD-97-49)
IRS is working to correct the computer security weaknesses and implement our recommendations. For example, IRS assigned sole responsibility for computer security, including employee browsing, to a single office within the Office of the Chief Information Officer. In addition, IRS provided to congressional committees an action plan for correcting the weaknesses and a report containing the results of its computer security management reevaluation. IRS also has taken the necessary steps to correct some of the identified weaknesses. Taken together, these steps represent a good start for the IRS, but a sustained, disciplined effort will be needed to ensure that all the remaining weaknesses are corrected in a timely fashion. Until then, IRS runs the risk of its tax processing operations being disrupted and taxpayer data being improperly used, modified, or destroyed. (GAO/AIMD-97-49)
See also chapter 4, Improving Justice and General Government Programs, Tax Policy and Administration Issue Area and chapter 5, Financial and Information Management Programs, Budget Issue Area.
Financial and Information Management Programs
Budget Issue Area (Budget Function 990)
Impact of GAO’s Work
During fiscal year 1997, we focused on deficit reduction and opportunities to improve the budgetary information available to policymakers and the public. We are the primary issue area in GAO examining the budget and budget process of the U.S. government. An important part of our mission is to make GAO’s work more accessible to and usable by those involved in the congressional budget debate. The following paragraphs discuss our work in various areas.
Deficit Reduction
In the area of deficit reduction, we produced the fourth annual report on the budgetary implications of selected GAO work. The report, a collaborative effort with the Congressional Budget Office (CBO) and the Joint Committee on Taxation, provided the Congress with 147 deficit reduction options—most with associated savings estimates—based on GAO’s work.
Also, we identified the long-term economic impact of current fiscal policy by updating our simulations of the long-term economic impact of the deficit and provided basic information on the composition and size of the federal debt. Lastly, our report on the design of federal grants has been used by both GAO staff and outside experts when considering the devolution of responsibilities to the states and how grant design improvements can help scarce federal resources go further.
Improving Budgetary Choices
Our work in the area of structuring, presenting, and analyzing the budget to assist the Congress in making resource allocation decisions was extensive. It included studies and analysis on proposed changes to the current budget process, budgeting for federal insurance programs, linking accounting and budgeting to improve financial management and budget decision-making, and ways that performance measures might be integrated into the budget process. We provided information to the Chairman of the Senate Appropriations Committee on the difficulty in tracking whether agencies were deferring needed maintenance on plant and equipment, and we analyzed the ways agencies successfully budget for federal capital. We provided a compendium of budget accounts developed to give users a convenient way to sort out the budgetary structure of the federal government and to determine the level of resources used for individual departments, bureaus, and accounts. We issued reports on federal fiscal trends over the past 24 years and on federal investment outlays. We worked with audit groups on the consolidated financial statement audit and on translating financial audit findings into terms and concepts familiar to the House and Senate budget committees.
This past year we saw some of our previous work on budget structure and process bear fruit in legislative proposals and changes in law. GAO’s work assisting in the early stages of the implementation of the Government Performance and Results Act (GPRA) has included our widely used report comparing GPRA to earlier initiatives, as well as our work on account structures, on the relationship of GPRA to the appropriations process, and on program overlap and fragmentation.
We worked closely with the Federal Management and Workforce Issues group on several joint products dealing with management in the federal government and on GPRA implementation. Our previous work on divestiture and privatization practices in other nations led to the President’s proposal in the fiscal year 1998 budget request to create an office of privatization within the Department of the Treasury.
In addition, we continue to work on the linkage of budgeting and accounting concepts. We have worked to draw road maps from financial statement information to the budget process. Our forthcoming report on budgeting for insurance explores an area in which federal commitments are under-recognized in the budget. Several staff serve on the Federal Accounting Standards Advisory Board (FASAB) and CFO task forces and subgroups. In addition, we are active participants in discussions about the audit of the consolidated financial statement and how to make that information most useful in debates about fiscal and budget policy. We also worked with the Environmental Protection Issues group on a joint product that assessed the process for budgeting and setting operating priorities at the National Park Service and with the Government Business Operations Issues group on a report on GSA’s cost estimates for obtaining office space.
We have also worked with OMB on a range of products. We were involved extensively from the outset in shaping OMB’s guide to agencies on capital programming. Our best practices examples from our ongoing work will be folded into OMB’s capital guide. We participated in an OMB-led task force on cost accounting and the budget culminating in a CFO Council guide to agencies.
Key Open Recommendations
Federal Credit Reform
We have issued a series of reports examining several highly technical issues related to the implementation of the Federal Credit Reform Act of 1990. In our July 1994 report on coverage and compliance issues, we stated that Government National Mortgage Association (GNMA) guarantees were covered by the Credit Reform Act, but that GNMA had not fully complied with the act’s requirements. We recommended that the OMB Director require GNMA to budget for guarantees using the issuance dates of the guarantees to determine whether their costs should be included in the financing account or the liquidating account. Although the fiscal year 1998 Budget included some changes in budgetary treatment for GNMA, it did not include a requirement that GNMA budget for guarantees using the issuance dates. It is possible, however, that recent changes to the Credit Reform Act may prompt GNMA acceptance of our recommendations. (GAO/AIMD-94-57)
See also chapter 4, Improving Justice and General Government Programs, Financial Institutions and Markets Issue Area.
Tax Expenditures
In a joint effort with the Tax Policy and Administration Issue Area, we responded to a congressional request to examine the growth of tax expenditures and alternatives for limiting their growth. Our June 1994 report contained a recommendation to the Congress, matters for congressional consideration, and recommendations to the OMB Director. We recommended that the congressional tax-writing committees explore, within the existing framework, opportunities to exercise more scrutiny over indirect “spending” through tax expenditures. Although these committees have considered revisions to various existing tax expenditures over the years to either eliminate such expenditures or more narrowly restrict eligibility, no specific action has been taken on our recommendation. (GAO/AIMD/GGD-94-122)
In this report, we also stated that should the Congress wish to address tax expenditure efforts in the broader context of the allocation of federal resources, it could consider further integrating those efforts into the current budget process. One option would be for the Congress to consider whether it wanted to seek a specified level of tax expenditure savings during its annual deliberations on the congressional budget resolution. Several proposals for better controlling tax expenditures have been offered, but no specific action has been taken on our recommendation. (GAO/AIMD/GGD-94-122)
In the same report, we made several recommendations to the OMB Director.
First, we recommended that the Director, in consultation with the Secretary of the Treasury, revise the budgetary presentation of tax expenditure information to highlight the fiscal and other consequences associated with tax expenditures. OMB revised its fiscal year 1995 budget to highlight information about tax expenditures in two respects: (1) the budget presents estimated tax expenditures over the 5-year budget window, as well as estimated expenditures for the current fiscal year and actual expenditures for the prior fiscal year, and (2) present-value estimates are reported for tax expenditures involving deferrals and similar long-term revenue effects. Although OMB agreed in principle that the combined presentation of outlays and tax expenditures within functional areas would be helpful and is exploring the feasibility of presenting this information on a selective basis, OMB made no significant additions for the fiscal year 1997 budget. The Department of the Treasury is deferring to OMB on this recommendation. (GAO/AIMD/GGD-94-122)
Second, we recommended that to the extent practical, OMB incorporate tax expenditures into the annual budget review process. OMB has announced its intentions to begin such a process and has initiated preliminary actions to implement joint reviews of tax expenditures and related outlay programs as part of its annual budget review. (GAO/AIMD/GGD-94-122)
Third, we recommended that OMB, working with the Treasury, design and test a basic structure for tax expenditure performance reviews before developing the governmentwide framework GPRA requires by May 1997. OMB has not yet developed this framework. We also recommended that once the initial determinations were made, OMB, along with the Treasury, conduct case studies of the proposed performance review process. This would enable OMB and the Treasury to gauge how well the proposed framework might function. In addition, we recommended that once tax expenditure performance data were developed, OMB consult with the Treasury to consider how to present tax expenditure performance information in the budget. OMB is scheduled to begin action on the above recommendations according to the time frames established in GPRA. The Department of the Treasury is deferring to OMB on this recommendation. (GAO/GGD/AIMD-94-122)
See also chapter 4, Improving Justice and General Government Programs, Tax Policy and Administration Issue Area, and Information Resources Management—Internal Revenue Service Issues.
Civil Audits Issue Area (Budget Function 990)
Impact of GAO’s Work
Our civil agency audit work continues to demonstrate the importance of reliable financial information and effective systems in strengthening accountability and improving control over the federal government’s financial resources and program activities. The preparation and audit of accurate and useful financial statements depends upon the quality, usefulness, and availability of the financial information on which they are based and, ultimately, the adequacy of the underlying systems and related internal controls. Overall, progress is being made. But much remains to be accomplished to successfully implement the Chief Financial Officers (CFO) Act—especially as it relates to improving systems and the quality and accuracy of the information maintained and produced by them for decision makers.
Chief Financial Officers Act of 1990
The CFO Act establishes a solid foundation for greatly needed, comprehensive reform of federal financial management. Since its enactment in 1990 and the enactment of the Government Management Reform Act of 1994, financial statement preparation and audit coverage have significantly increased. The Government Management Reform Act expanded the CFO Act’s requirements by requiring that, beginning with fiscal year 1996, financial statements be prepared on an organization-wide basis, i.e., cover all of an agency’s programs and activities. However, most of the agencies did not receive unqualified audit opinions on their fiscal year 1996 financial statements.
Our experience has shown that preparation and audit of annual financial statements incrementally improves the reliability of financial information. Also such recurring audits are providing a more complete view of agencies’ financial conditions, highlighting control weaknesses and high-risk areas that need to be resolved, and identifying actual and potential savings. In fiscal year 1997, we continued our work with OMB and with agency CFOs and IGs in connection with the audits of the agencywide financial statements and our first audit of the Federal Government’s consolidated financial statements.
Other Financial Management Improvements
Our audits at civil agencies over the past several years continue to result in significant financial management improvements. We assessed the effectiveness of agency efforts to implement CFO Act requirements. Through this effort, we were able to work collaboratively with agency management and Inspectors General in identifying problems and potential solutions as agencies continue to work to meet the audit and reporting requirements of the CFO Act and the Government Management Reform Act.
Agencies have long had problems in managing credit programs and collecting tax and nontax debt. As of September 30, 1996, governmentwide delinquent debt reached $51 billion. In our June 1997 report on debt collection, we noted that better data and key analyses are crucial aspects of federal efforts to measure success in accomplishing the charter for a more business-like credit management environment as set out by the Debt Collection Improvement Act of 1996. Such data is central to effective day-to-day management in terms of selecting collection strategies and deploying available staff and contract resources. We have recommended that Treasury, in conjunction with major credit agencies and OMB, revise the framework and data requirements for agency reporting on debt collection to ensure that reports to the Congress offer an evaluation of agency use of individual collection tools and highlight any significant backlogs in collection activity meriting administrative or legislative consideration.
For the first time IRS received a qualified opinion on its fiscal year 1996 Statement of Administrative Financial Position. In our report on IRS’ 1996 Administrative financial statements, we noted that progress has been made and actions are underway by IRS to try to resolve the material weaknesses in internal controls and financial management problems reported in our prior year audits. For example, IRS’ inadequate procedures for reconciling its Fund Balance with Treasury accounts resulted in years of accumulated unreconciled amounts that were not regularly researched and were difficult to resolve when the amounts were required to be audited. Over the past 3 years, IRS has implemented procedures for reconciling and reducing these significant unreconciled amounts. At the completion of our fiscal year 1996 audit, IRS had reconciled its September 30, 1996, Fund Balance with Treasury accounts.
Federal agencies use the OMB credit subsidy model to calculate the subsidy cost of direct loan and loan guarantee programs for budget and financial reporting purposes. With outstanding direct loan and guaranteed loan balances for federal credit programs approaching a reported $1 trillion, accountants, auditors, and budget analysts need to have assurance that the OMB model calculates a reliable subsidy cost and is maintained and operated under a system of adequate controls. As a result of our work with the OMB credit subsidy model, certain issues surfaced relating to the use of the OMB model that need to be addressed as part of the financial statement audits of user agencies. With assistance from the Federal Audit Executive Council, credit agencies’ inspectors general, representatives of the Governmentwide Credit Reform Subgroup, and OMB, we prepared a list of supplemental audit procedures to help provide assurance that federal credit agencies are using the model properly. These audit procedures were sent to all credit agencies’ inspectors general.
The monthly process used by federal departments and agencies, and Treasury in reconciling the Fund Balances with Treasury accounts is a primary control over federal receipts and disbursements. With disbursements and receipts each amounting to over $1 trillion annually, accountants and auditors need to have assurance that this reconciliation process is operating effectively. Based on our work on the overall reconciliation process and with the assistance of the Federal Audit Executive Council, we issued correspondence to the Inspectors General and Chief Financial Officers of the 24 agencies covered under the Chief Financial Officers Act. This correspondence (1) provided information on key Treasury and agency processes and procedures for reconciliations of Fund Balance with Treasury accounts and alerted the IGs to concerns and certain issues related to these reconciliations that emerged during our work, and (2) provided guidance and suggested audit procedures for Fund Balances with Treasury accounts to assist the IGs in developing audit plans for their audits of fiscal year 1997 financial statements.
High-Risk Areas
During the past year, we focused on two high risk areas—Customs financial management and IRS financial management. Congress has shown significant interest in both areas in 1997.
Customs Financial Management
Customs continues to address significant weaknesses in its financial management and internal control systems. These actions include, for example, statistically sampling compliance of commercial importations through ports of entry to better focus enforcement efforts and to project and report lost duties, taxes, and fees due to noncompliance. Customs also developed a methodology to estimate and disclose the liability for future claims for drawback payments and other refunds. In addition, meaningful steps toward correcting its computer access problems were taken.
Further, Customs reorganized its Office of Finance and established financial advisor positions in key organizational units to more effectively meet financial management responsibilities.
Although these actions have resulted in substantial progress, Customs still has not fully corrected problems in these areas, which continue to be identified during audits of Customs’ financial statements under the CFO Act. These problems continue to hinder Customs’ ability to reasonably ensure that duties, taxes, and fees on imports are properly assessed and collected and refunds of such amounts are valid; sensitive data maintained in its automated systems, such as critical information used to monitor Customs’ law enforcement operations, are adequately protected from unauthorized access and modification; and core financial systems capture all activities that occurred during the year and provide reliable information for management to use in controlling operations.
We have made several recommendations to Customs in an effort to promote better financial management and strengthen its controls. Although actions have been initiated on all key open recommendations and improvements continue, recommendations deemed critical to improving the assessment and collection of revenue, strengthening automated systems security, and integrating core financial systems remain open. We realize that most of these problems require long-term efforts to effectively plan and implement solutions to address the long-standing root causes. (GAO/AIMD-94-119 and GAO/HR-97-30)
IRS Financial Management
IRS has made progress in addressing its financial management problems and has developed an action plan, with specific timetables and deliverables, to address the issues our financial statement audits have identified. For example, as noted above, IRS has identified substantially all of the reconciling items for its Fund Balance with Treasury accounts. Additionally, it has begun designing both a short-term and a long-term strategy to fix the problems that contribute to its nonpayroll expenses being unsupported or reported in the wrong period. Further, in the revenue accounting area, IRS has designed an interim approach to capture the detailed support for revenue and accounts receivable until longer-term solutions can be identified and implemented. The issues with IRS’ revenue accounting operations are complex, and the remedies needed are multifaceted and encompass organizational, managerial, technological, and procedural improvements. IRS’ revenue accounting problems are complicated by automated data processing systems that were implemented many years ago and thus not designed to support the financial reporting requirements ushered in by the CFO Act. IRS is working on a long-term systems improvement plan that would ultimately result in software, hardware, and procedural changes needed to create reliable subsidiary accounts receivable and revenue records that are fully integrated with the general ledger.
Over the past 4 years, we have made 59 recommendations to improve IRS’ financial management systems and reporting. IRS has completed action on several of these recommendations and has efforts under way to address almost all of the remaining areas. (GAO/T-AIMD-97-34 and GAO/HR-97-2)
Key Open Recommendations
Agency-Specific Recommendations
We continue to make agency-specific recommendations to correct problems involving fundamental accounting procedures, including serious internal control and accounting system weaknesses. The following recommendations deserve priority attention. Major improvements are needed to restore integrity to the federal government’s financial management operations. Key elements of successful federal financial management reform are high-quality leadership; an effective CFO organizational structure; effective long-range planning; and preparation of meaningful and auditable component level, agencywide, and governmentwide financial statements. Though agencies have made some progress in these areas, substantive and lasting improvement will depend on prompt action needed to implement our recommendations and to meet the requirements of the CFO Act.
Bureau of Indian Affairs
Our work at the Department of the Interior’s Office of the Special Trustee for American Indians and its Bureau of Indian Affairs showed continuing trust fund management problems, and the need for the Secretary to (1) adequately report to the Senate Committee on Indian Affairs and the House Committee on Resources on the tribes that accept or dispute their reconciled account balances, and the Secretary’s plan for resolving disputes, (2) implement trust fund management subsidiary systems, and (3) provide additional information to support proposals in the Special Trustee’s strategic plan for Indian trust funds management improvements. (GAO/T-AIMD-95-94 and GAO/T-AIMD-97-138)
OMB Subsidy Credit Model
Our review of OMB’s credit subsidy model resulted in the following recommendations for improving the model’s reliability and controls: (1) revise the model’s discounting equations to follow standard finance theory; (2) implement a structured software development methodology to ensure the production of quality, reliable, software; (3) improve documentation; (4) enhance the model’s printed output to provide an audit trail showing which data the model used to calculate the subsidy cost; and (5) provide credit agencies with guidance to establish logical access controls surrounding use of the model. OMB has indicated that it plans to take actions consistent with our recommendations when it develops a new model that is tentatively expected to be completed in mid-1998. (GAO/AIMD-97-145)
Federal Family Education Loan Program
Financial audits continue to identify significant issues related to determining the Federal Family Education Loan Program’s costs, effectively monitoring payments to guaranty agencies and lenders, and ensuring accurate financial reporting. Because the Department of Education has begun corrective actions in these areas and has demonstrated a commitment to resolving financial management problems, we believe the Department is making progress. However, because guaranty agencies and lenders have a crucial role in the implementation and ultimate cost of this education loan program, the Department should complete steps underway for improving oversight of guaranty agencies and lenders. The Department of Education has issued revised audit guidance for its lenders, lender servicers and guaranty agencies which requires their independent auditors to perform procedures to report on the integrity of billings. However, to use this guidance as an effective monitoring tool for the guaranty agencies, the Department needs to monitor the receipt of audit reports and follow-up on audit findings in a timely manner. Furthermore, the Department needs to continue its plans for (1) revising the role of guaranty agencies and the manner in which they are compensated, (2) establishing and maintaining subsidiary ledgers for the Federal Family Education Loan Program, and (3) finalizing reasonability edits and analyzing variances between the Department of Education’s Federal Family Education Loan Program subsystems and lenders’ billing data. (GAO/AIMD-96-22).
District of Columbia
Our work at the District of Columbia has shown that little progress has been made to improve its financial condition, its health care, or its prison system. We identified structural issues relating to the District’s limitation on significantly increasing its revenue at the District and federal level. Congress recently addressed these issues in the Balanced Budget Act of 1997 which provided financial relief to the District. The legislation (1) transferred the responsibility for the $4.8 billion unfunded pension liability to the federal government (2) reduced the District’s non-federal share of medicaid expenditures from 100 percent to 30 percent resulting in a $273 million savings based on the 1997 budget submission, and (3) transferred certain responsibilities for the prison system to the federal government. Our work also shows continuing financial and management problems and the need to (1) clean up existing data in financial systems and place special emphasis on ensuring that basic accounting policies and procedures are followed, and (2) establish a process of accountability for implementation of management initiatives. (GAO/T-AIMD-96-126 and GAO/T-AIMD-95-176)
Corporate Audits and Standards Issue Area (Budget Function 990)
Impact of GAO’s Work
The issue area includes accounting and auditing standard setting in both the public and private sectors. The issue area also includes audit work at largely independent government agencies referred to as government corporations and mandated assistance related to legislative entities.
Accounting and Auditing Standards
In cooperation with OMB and the Department of the Treasury, GAO sets accounting standards for the federal government based on standards recommended by the Federal Accounting Standards Advisory Board (FASAB). GAO also establishes audit standards for audits of government organizations, programs, activities, functions, and assistance.
We have continued to focus on evaluating whether generally accepted accounting principles and auditing standards provide an adequate basis for fairly and consistently reporting financial condition and operating performance. As a member of FASAB, we provided leadership in developing the recently completed accounting standards to facilitate consistent and reliable agency financial reporting as envisioned by the Chief Financial Officers Act of 1990 (CFO Act). These standards have provided a unique financial reporting model and “core” standards to guide federal agencies in accounting and financial reporting on many of the major categories of items under their cognizance. They are designed to provide information on the federal government’s financial condition, as well as on the cost of its programs and related exposures to high risk. Moreover, the new standards that have resulted from FASAB’s work are central to effectively meeting the CFO Act’s financial management goals. We were also instrumental in developing an improved reporting model that focuses users on an entity’s costs of programs and the relationship of those costs to its budgetary obligations. We have continually provided technical assistance on the application of FASAB accounting standards. GAO also works with the Financial Accounting Standards Board (FASB), the Government Accounting Standards Board (GASB) for state and local governmental entities, the American Institute of Certified Public Accountants (AICPA), the International Federation of Accountants (IFA), and others to provide input to accounting and auditing standards established for the private sector and state and local governments.
Over the past year we have also conducted a variety of activities to increase the understanding of Government Auditing Standards, to help ensure the consistent application of these standards, and to broaden the acceptance of the standards by the auditing community. For example, GAO staff have provided technical assistance in response to frequent telephone inquiries, made numerous speeches at major conferences, provided technical training throughout the government auditing community, and explained the standards in several videotapes, which have been viewed by thousands of auditors.
We have also reinstituted the Advisory Council on Government Auditing Standards to advise the Comptroller General on revisions to Government Auditing Standards. The Council met twice during fiscal year 1997. Results of the meetings include (1) a revised approach to issuing auditing standards which should result in issuing standards more timely, (2) agreement to issue other product lines in addition to the standards, such as interpretive guidance and a question and answer forum on the INTERNET to provide answers to frequently asked questions concerning government auditing standards and Single Audit Act audit requirements, and (3) the identification of several audit issues that may necessitate revisions to the auditing standards.
We also worked with OMB over the past year to develop audit requirements for the annual financial statement audits required by the CFO Act for the government’s 24 major agencies, the Federal Financial Managers Improvement Act of 1996 (FFMIA), and the Single Audit Act Amendments of 1996.
Regarding the CFO Act, we issued the CFO Act Checklist in 1995 to assist agencies and auditors in complying with the requirements of accounting standards when preparing financial reports mandated by the Act. We are revising the checklist to incorporate the requirements of several standards issued after 1995, and will release the revised checklist for comment in December 1997. Regarding the FFMIA, we have prepared a detailed checklist (similar to the CFO Act Checklist) to assist agencies and auditors in complying with the systems requirements of the Act. The checklist is out for comment. Regarding the Single Audit Act amendments, we have worked closely with OMB to make the necessary revisions to OMB Circular A-133 and the related Compliance Supplement, and are currently working with the AICPA and OMB to issue guidance for auditing federal awards.
GAO’s Policy and Procedures Manual For Guidance of Federal Agencies provides accounting and internal control standards and guidelines for executive agencies to follow. GAO provides interpretations and explanations of the standards and guidelines to assist agencies in operating effective systems and reporting reliable information. As a result of (1) the National Performance Review’s effort to create better government at less cost, (2) the downsizing taking place, and (3) the ability of technology (computer systems) to automate traditional manual controls, a number of agencies have sought GAO’s approval to implement compensating controls involving interpretations of GAO’s fiscal and internal control standards. We have worked effectively with the agencies to streamline operations in their payments processing, document retention, and travel voucher processing resulting in estimated cost reductions of over $7 million. We have also revised the portion of the manual covering reporting standards to reflect the issuance of Volume I of the codification of the new federal accounting standards. This revision should assist the CFO, IG, and accounting/auditing community by providing one document containing all federal accounting standards. GAO is also revising the internal control standards (Appendix II of Title 2) which will be released for comment.
In response to our 1996 report on the accounting profession that discussed concerns over auditor independence, the Securities and Exchange Commission and the AICPA jointly created the Independence Standards Board. The Board, which is responsible for setting improved independence standards for auditors of public companies, is expected to provide solutions to challenges facing auditing firms that pursue new service areas and form new, complex business and professional relations.
Government Corporations
Government corporations conduct a variety of missions that are an integral part of the nation’s economy, such as deposit insurance; buying and selling mortgages, loans, and other forms of credit for housing and other national purposes; transportation; and utilities. Regarding the nation’s financial industries, trillions of dollars of support are provided in the form of guarantees and insurance.
We have focused our efforts on the government corporations with significant exposure presented by the government’s deposit insurance guarantee. For the past several years, financial institutions have been reporting record profits. This financial performance contributed to the health of the two insurance funds administered by the Federal Deposit Insurance Corporation (FDIC), as relatively few institution failures occurred over the past several years. However, billions of dollars in assets from past failed institutions still remain that need to be managed and disposed of.
In March 1995, we reported to the Congress that FDIC, and ultimately the taxpayers, were facing significant exposure from problems remaining from the thrift industry crisis. In September 1996, in response to issues raised in our report which contained a range of policy options to address this exposure, the Congress passed the Deposit Insurance Funds Act of 1996 which authorized FDIC to charge a special assessment on assessable deposits of the Savings Association Insurance Fund. The special assessment resulted in a net inflow of $4.5 billion and fully capitalized the insurance fund.
In response to issues identified through our audits, FDIC has made several significant improvements in key processes and systems affecting its accounting and financial reporting for the deposit insurance program and the continued liquidation activities for failed thrifts. FDIC has improved its process for estimating the recoveries from assets from failed institutions, thus improving the information used to record key estimates in the financial statements. FDIC has also improved its time and attendance reporting process, resulting in improved accounting for expenses. FDIC also took actions to improve weaknesses we identified in its electronic data processing controls.
Our financial audit of FDIC for fiscal year 1996 resulted in an unqualified (clean) opinion on each of FDIC’s three funds’—the Bank Insurance Fund, the Savings Association Insurance Fund, and the Federal Savings and Loan Insurance Corporation Resolution Fund—financial statements. However, our audits identified needed improvements in internal controls over (1) the integrity of information used to calculate the allowance for losses on receivables from resolution activities and investment in corporate-owned assets, and (2) FDIC’s oversight of asset servicers contracted to manage and dispose of failed financial institution assets. We are currently working closely with FDIC in its development of action plans to address the above weaknesses.
To address our recommendations to the Federal Reserve Board concerning the quality of bank examinations and inspections of bank holding companies, the Board developed internal control review procedures and inspection procedures that are based on a risk assessment of controls and bank activities. The Board also developed documentation and supervisory review procedures.
We audited the Panama Canal Commission’s financial statements to assist the Congress in monitoring the Commission’s financial progress in being able to meet its obligations by the year 2000 when the Canal is turned over to the Panamanian government. In addition to the general purpose financial statements, we reported on the Commission’s financial viability to meet its financial liabilities on December 31, 1999, and that the Commission’s liability for severance pay could greatly increase from $10 million to as much as $68 million if a proposed rule to amend the severance pay regulations is not issued by the Office of Personnel Management. During the past year, the Commission acted on our recommendations to improve its methodology for estimating post retirement medical care costs. The Commission’s previous methodology had underestimated the cost by about $1 million. Also, the Commission corrected an error we identified in its process for calculating interest payments to the U. S. Treasury on the government’s investment. This resulted in the U. S. Treasury receiving about $213,000 additional interest from the Commission.
Legislative Branch Entities
We continued to work with the Congress and legislative entities to provide timely and effective audit and other assistance and to encourage consideration of annual financial audits for legislative entities similar to those being conducted for the executive branch under the CFO Act. Specifically, our audit and assistance efforts have included financial audits of the Congressional Award Foundation, Capitol Preservation Fund, and the Senate Restaurants; review and related procedures related to the House Interparliamentary Groups and Committee on House Oversight financial reports; and advice and/or other assistance to the Secretary of the Senate and Senate Sergeant at Arms. We provided the Congress and the management for the legislative entities with valuable assurance on the reliability and accuracy of their financial information and reports and made recommendations designed to strengthen financial operations and controls and to improve the usefulness of financial information and reports.
We are monitoring the Library of Congress’ efforts to address internal control and system-related weaknesses identified previously in the audit of the Library’s fiscal year 1995 financial statements. Although the Library has made considerable progress, several of the problem areas, such as conducting risk assessments of its collections, require long-term efforts.
Key Open Recommendations
FDIC’s Internal Controls
In our 1996 financial audits of FDIC’s three funds, we found that the corporation continued to make progress in addressing internal control weaknesses identified during our previous financial audits. However, while much progress has been made, FDIC continues to face internal control weaknesses relating to the integrity of information used to calculate the allowance for losses on receivables from resolution activities and the oversight of asset servicers contracted to manage and dispose of failed financial institution assets. FDIC is addressing these internal control issues. We agree with the Corporation’s planned corrective actions and will monitor its progress. (GAO/AIMD-95-102 and GAO/AIMD-97-111)
Bank Examinations
Our 1993 report on the quality of bank examinations performed by the Office of the Comptroller of the Currency contains a recommendation concerning sampling methodologies. In response to our recommendation, the Office of the Comptroller of the Currency is revising the statistical section of its examiner handbook, and plans to issue the revision by the end of 1997. We will monitor the Office of the Comptroller of the Currency’s progress in addressing our recommendation. (GAO/AFMD-93-13)
See also chapter 4, Improving Justice and General Government Programs, Financial Institutions and Markets Issue Area.
Library of Congress’ Internal Controls and Collections Security
The audit of the Library’s fiscal year 1996 financial statements, conducted by a CPA firm under the direction of the Library’s IG, confirmed the Library’s progress in improving financial management and in implementing recommendations made as part of the audit of the Library’s fiscal year 1995 financial statements. However, the 1996 audit noted that more needs to be done to strengthen accounting and security controls, including conducting a comprehensive risk assessment for the Library’s collections and developing a security plan to safeguard its collections. We will monitor the Library’s efforts to respond to the recommendations made as part of the fiscal year 1995 audit. (GAO/T-GGD/AIMD-96-115)
Defense Financial Audit Issue Area (Budget Function 990)
Impact of GAO’s Work
Long-standing, serious weaknesses in DOD’s financial operations continue not only to severely limit the reliability of its financial information, but also have resulted in wasted resources, and undermined the Department’s ability to carry out its stewardship responsibilities. While DOD prepared its first set of DOD-wide financial statements for fiscal year 1996, they were unauditable. Nonetheless, the effort to produce and attempt to audit these statements has generated increased pressure on DOD to fix its serious financial problems. As envisioned by the Chief Financial Officers Act of 1990, and expanded by the Government Management Reform Act of 1994, audited financial statement will provide an annual public scorecard to measure DOD’s other agencies’ progress in resolving financial management deficiencies.
Effectively addressing DOD’s widespread and severe financial management problems is critical to effectively managing the Department’s vast resources.
DOD is responsible for over $1 trillion in assets, 3 million military and civilian personnel, and a budget of an estimated $250 billion for fiscal year 1997. We now have a multi-faceted audit approach that focuses on identifying (1) opportunities to improve DOD’s ability to comply with current and upcoming financial statement preparation and audit requirements and (2) actions needed to address the fundamental problems contributing to the Department’s inability to produce reliable financial information. We are also continuing to work with the Inspectors General at the Department of State, AID, and NASA to ensure that financial audit work at these agencies is sufficient, reliable, and conducted in accordance with applicable standards.
This audit approach focuses on promoting more efficient and cost-effective program operations, as well as on strengthening accountability. Our efforts this past year have gone a long way in contributing to this objective. Many of our key recommendations, as outlined in the following section, are intended to help the Congress, as well as top DOD and other cognizant agencies’ officials, to better understand the full extent and nature of the financial management challenges confronting them.
Examples of our contributions this past year include: developing an approach for conducting the first world-wide verification of DOD’s estimated multi-billion dollar investment in mission assets; improved controls over the DOD system used to process payments to hundreds of thousands of DOD civilian employees; correction of errors and related improvements in the overall reliability of the system used to track the Air Force’s billions of dollars invested in aircraft and missiles; and improvements in NASA’s ability to effectively carry out its cost accounting and property accountability responsibilities.
High-Risk Area
In February 1995, we designated DOD’s financial management operations as a high-risk area.
DOD’s Financial Management
We characterized DOD’s financial operations as “one of the worst in government and the product of many years of neglect”. Since 1990, we and DOD auditors have made over 400 recommendations to correct DOD’s most pressing financial management weaknesses.
In our February 1997 high-risk series, we reported that the past few years have been marked by DOD leadership’s recognition of the importance of tackling the broad range of problems in this area. However, we added that DOD had a long way to go to meet the challenges of managing its vast and complex operations with the business-like efficiency demanded by the Congress and the American public. DOD has a number of reform initiatives underway that are intended to address its financial management deficiencies. If its envisioned financial management reforms are to realize meaningful financial management improvements, they must address challenging problems in six critical areas—systems, cost accounting, disbursements, personnel, internal controls, and business processes. It will take a focused, sustained effort for DOD to fully resolve these fundamental deficiencies.
Key Open Recommendations
The following are among our most important recommendations that have yet to be fully implemented.
DOD-wide Programs
In January 1997, we reported that DOD does not have a complete inventory of the systems it uses to record, accumulate, classify, and report financial information. An accurate inventory is a critical first step if DOD is to develop reliable financial management systems and resolve its long-standing financial management problems. (GAO/AIMD-97-29)
According to DOD, its disbursement transactions paid at one location, but accounted for at another location—commonly referred to as Transactions-by-Others—have been the costliest, most time-consuming, complicated, and error-prone segment of its disbursement accounting operations. In March 1997, we reported on key issues that limited DOD’s ability to effectively and promptly achieve its goal of improving processing for Transactions-by-Others. We recommended that DOD develop more comprehensive information on the causes of problems and ensure that resources dedicated to addressing those problems are properly prioritized. (GAO/AIMD-97-45)
In September 1997, we reported that the system DOD selected to account for its multi-billion dollar investment in real and personal property, as designed, did not provide the information needed to meet new federal accounting requirements. We recommended a number of actions to improve DOD’s ability to achieve its desired goal of financial control and accountability over its general property, plant, and equipment by the year 2000. Specifically, we recommended that DOD take a number of actions, including: (1) develop a concept of operations for the property function, (2) develop a detailed implementation plan, and (3) expand the system functionality to ensure that it can meet both current and pending federal accounting requirements. (GAO/AIMD-97-150)
In September 1997, we identified significant control deficiencies concerning the actuarial process and in the general controls over the electronic data processing support operations for the DOD Military Retirement Trust Fund. This Fund is used to finance an estimated $548 billion DOD liability for military retirement and survivor benefits. We recommended a number of actions to address weaknesses in the Fund’s actuarial process and electronic data processing general controls. (GAO/AIMD-97-128)
In November 1995, we testified that given the serious and pervasive nature of DOD’s financial management problems, and the need for more immediate progress, DOD needed to consider additional steps to fix its longstanding weaknesses. Specifically, we reported that to turn the Secretary’s “Blueprint” for reforming the department’s financial management into substantive improvements, DOD should (1) assess the number and skill levels of its financial management workforce, and (2) establish an outside board of experts to provide counsel, oversight, and perspective to its reform efforts. (GAO/T-AIMD-96-1)
Army Programs
In December 1993, we reported that the Army’s budget execution system had fundamental weaknesses that limited the Army’s ability to ensure its compliance with the Antideficiency Act. The report also pointed out that inaccurate reporting could cause the Army to underestimate its future required outlays. In addition, we reported that the lack of sustained DOD leadership had impaired Army’s ability to strengthen financial accountability. We recommended that the DOD Chief Financial Officer (1) evaluate and resolve budget execution and disbursement problems, (2) implement existing security access policies and automated data processing contingency plans, and (3) develop and implement a comprehensive plan, with specific milestones, for identifying and monitoring improvements in DOD and Army financial management, including personnel qualifications, organizational structures, and systems used to carry out Army financial management. (GAO/AIMD-94-12).
Navy Programs
A critical factor in achieving the financial management improvement objectives envisioned by the Chief Financial Officers Act and other recent reform legislation is ensuring that agencies have well trained and experienced financial personnel in key positions. In the Navy, comptrollers serve in positions of critical importance for ensuring that the Department effectively manages its operations and meets the requirements of recent reform legislation. However, we reported in May 1997 that Navy personnel practices did not provide a career path for Navy officers to develop and maintain the core competencies needed by a comptroller. We recommended a number of actions to address this situation, including establishing a financial management career path that will ensure that military officers are prepared, both in terms of education and work experience, for comptrollership responsibilities. (GAO/AIMD-97-58)
In September 1996, we reported that our reviews of general controls at locations processing Navy and Marine Corps data revealed serious weaknesses that would allow both computer hackers and hundreds of thousands of legitimate users with valid access privileges to improperly modify, steal, inappropriately disclose, and destroy sensitive DOD data. We found deficiencies across the board, undermining DOD’s ability to protect sensitive personnel, payroll, disbursement, and inventory information maintained in DOD computer systems. To resolve these deficiencies, we recommended that DOD’s chief information officer take a leadership role in implementing a series of actions directed at establishing, implementing, and monitoring a comprehensive DOD-wide computer security management program. (GAO/AIMD-96-144)
In September 1996, we reported on improvements needed in the Standard Accounting and Reporting System (STARS), which had been selected to serve as Navy’s system for general fund accounting. We found that the planned STARS implementation was expected to produce some net cost savings. However, its implementation plans were hampered by the lack of a target systems architecture—or blueprint—that would define the systems’ expected functions, features, and attributes, including interfaces and data flows. To increase the likelihood that the STARS enhancement project will result in an efficient, effective, and integrated Navy general fund accounting system, we recommended that DOD and the Navy expeditiously develop a target STARS architecture and that action plans reflect specific steps needed to achieve this architecture, identifying responsible parties, and establishing realistic milestones. (GAO/AIMD-96-99)
In August 1996, we reported that Navy’s item managers did not have adequate visibility over $5.7 billion in operating materials and supplies. This lack of visibility increased the risk that millions could be spent unnecessarily to purchase items that could be obtained from excess stock at operating unit-level locations. For example, we determined that, for the first half of fiscal year 1995, the Navy will incur unnecessary expenses of approximately $27 million. We recommended that the Navy take a number of actions directed at eliminating operating material and supply redistribution centers and ensuring that asset visibility efforts facilitate complete, reliable financial reporting of Navy operating materials and supplies. (GAO/AIMD-96-94)
In July 1996, we reported that the Navy’s Plant Property accounting and reporting was unreliable. Specifically, we reported that there was no assurance that all plant property was reported. We identified over $24 billion of real property that was reported twice. We recommended several actions directed at updating requirements, monitoring compliance, and ensuring that appropriate training is provided to correct the observed deficiencies. (GAO/AIMD-96-65)
In March 1996, we issued a report to complete our initial reviews of each of the military services’ financial management operations. We expressed our concern that the Navy had not taken advantage of the 5 years since the passage of the CFO Act or the experiences of its counterparts in the Army and the Air Force to address the pervasive and long-standing financial management problems hampering the Navy’s financial operations. We concluded that the Navy and Defense Finance and Accounting Service must now play “catch up” by giving the area a higher priority and sense of urgency if it is to meet the objectives of the CFO Act. We recommended that the DOD Comptroller and the Navy’s Assistant Secretary for Financial Management take a number of actions to improve the credibility of the Navy’s financial reports. Our recommendations focused on placing high priority on implementing basic required financial controls over Navy accounts and reports, and developing a plan for producing reliable financial statements that will address (1) staffing issues, (2) short-term measures to improve data quality in existing financial systems, (3) strategies for promptly meeting U.S. general ledger requirements, and (4) offices or positions that will be held accountable for identified actions. (GAO/AIMD-96-7)
See also chapter 1, Improving National Security and International Affairs Programs.
Audit Oversight and Liaison Issue Area (Budget Function 990)
Impact of GAO’s Work
This issue area focuses on four objectives: (1) improving the quality and use of single audits, (2) strengthening the inspector general concept, (3) improving the financial accountability of several federal activities, and (4) making the intergovernmental auditing process more useful.
We have worked with OMB, federal program and IG offices, and state organizations to improve the quality and use of single audits. The Single Audit Act requires annual audits of federal financial assistance—over $200 billion annually received by state and local governments and nonprofit organizations. We have worked closely with OMB to revise and reissue Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, dated June 1997, and the related Compliance Supplement that assists non-Federal entities and auditors in meeting their responsibilities under the Single Audit Act. We have met with representatives of IG organizations to determine their intended use of single audit results, and to stress the critical role that single audits often play in the agencywide financial statement audits required by the Chief Financial Officers Act. We also frequently interact with representatives of program and IG offices and state and local organizations to respond to questions on the Single Audit Act in such areas as the use of the recently developed risk-based audit approach and the interpretation of various provisions of Circular A-133 and the related Compliance Supplement.
Federal IGs have devoted considerable effort since passage of the IG Act in 1978 to establishing controls to ensure compliance with professional standards and to measuring savings and other accomplishments from their work. At the request of a congressional committee, we recently began a comprehensive review of the current IG concept, including key areas such as strategic planning, performance measures, quality assurance, reporting, expertise, and independence in order to identify and assess opportunities to strengthen IGs’ effectiveness.
We perform financial audits of several federal activities, such as independent counsels, commemorative coin recipients, and White House operations. These audits, typically mandated by law, have resulted in numerous recommendations and suggestions that the audited organizations have implemented, including improvements in internal controls over financial operations. We also review the results of mandated financial audits of federally chartered corporations to ensure that those audits are conducted in accordance with generally accepted government auditing standards, as required by law.
The issue area provides guidance and support to the National Intergovernmental Audit Forum and 10 regional intergovernmental audit forums. The forums include federal, state, and local auditors as well as members of the public accounting profession. The forums have provided the foundation for the development and recognition of professional auditing standards for audits of governmental entities and the means to ensure that those audits help ensure accountability over public funds. In that regard, the forums have been an excellent resource in developing and implementing recommendations to make the single audit process more useful for program oversight and in preparing and auditing federal agency financial statements.
Key Open Recommendations
Audits of employee benefit plans are a key safeguard for protecting assets held by plans. As of 1988, the most recent year for which we have data, an estimated 5.2 million plans covered by the Employee Retirement Income Security Act of 1974 had assets of about $1.75 trillion. The Act currently allows plan administrators to exclude from the scope of those audits investments held by certain regulated institutions, such as banks and insurance companies. The Congress has not enacted legislation we recommended to eliminate this limited scope provision in the Act. (GAO/AFMD-92-14)
Information Resources Management Issue Areas (Budget Function 990)
Impact of GAO’s Work
The federal government’s dependence on computer systems, networks, and electronic records to carry out its work continues to accelerate. Information systems are now integral to virtually every aspect of over $1.5 trillion in annual government operations and spending—from national defense and air traffic control to revenue collection and benefit payments. Yet despite an annual investment of approximately $26 billion for information technology (IT) products and services, agencies continue to face chronic problems in reducing operating costs, improving performance, supporting sound financial management, and providing quality service to the American public.
Our work focuses on the most complex and difficult technology challenges facing the federal government today, including multi-billion dollar, high-risk efforts to modernize government information initiatives to improve mission performance by adopting the best public and private sector practices for strategic information management, the Year 2000 problem which, for many agencies, will be the largest project ever managed and implemented by their information resource management organizations, the increasing need for agencies to provide adequate security over the integrity, privacy, and availability of the data they rely on, and the government’s ability to use its telecommunications resources to improve service to the public and reduce the cost of operations.
Examples of some of our accomplishments include the following.
The Bureau of Land Management has saved millions on its Automated Land and Mineral Record System, identified system performance problems, and strengthened testing and evaluation.
The Department of Education is developing a departmentwide systems architecture to guide the development of its student financial aid systems.
We published a Guide for Evaluating Federal Agencies’ IT Investment Decision-making which provides agencies with detailed guidance on the best practices for selecting, controlling, and evaluating their information technology projects. This approach was embodied in the Clinger-Cohen Act of 1996 and in subsequent OMB guidance on capital investments in technology.
The Department of Housing and Urban Development consolidated several grant management systems to save millions.
The National Oceanic and Atmospheric Administration revised its procurement plans for satellites in the Geostationary Operational Environmental Satellite program. Specifically, the procurement of follow-on satellites will use open competition.
DOD is reengineering temporary duty travel processing, a traditionally wasteful and burdensome operation. Pilot results reported nearly a 100 percent increase in customer satisfaction, a 48 percent decrease in both average cycle time and travel process steps, a 63 percent decrease in average voucher processing time, and a 56 percent decrease in average processing costs. The Congress reduced DOD’s request for operations and maintenance funds for fiscal year 1996 by $128.5 million.
The U.S. Department of Agriculture has initiated a moratorium on IT purchases and restructured its overall IT program. USDA has deferred spending millions on major IT investments for its field service centers until business processes are fully reengineered.
NASA has revised its telecommuncations network consolidation strategy with the expectation of achieving cost reductions. For example, officials at the Goddard Space Flight Center estimated that the agency can save an additional $94.5 million, beyond the savings originally estimated for the consolidation effort.
High-Risk Areas
The management of information as well as information technology continues to be a high-risk area for the government. Of particular concern across the government is the Year 2000 conversion and information security. Two other multibillion dollar technology programs—DOD’s Corporate Information Management Initiative and the National Weather Service’s modernization—are also designated as high-risk.
Year 2000 Conversion
The Year 2000 conversion is one of the rapidly emerging problems in information technology. This problem stems from the common practice of abbreviating years by their last two digits. Computer systems could interpret “00” as the year 1900 instead of the year 2000, “01” as 1901, and so on. The resulting miscalculations involving dates and the computation of elapsed time could cascade through all kinds of activities, such as loans, mortgages, pensions, tax records, and benefit payments. Moreover, the impact of Year 2000 failure could be widespread, costly, and debilitating to important warfighting and military missions. Our Year 2000 audit effort has focused on assessing whether agencies are sufficiently prepared to handle the massive and complex management task of correcting their information systems and to assist governmentwide efforts to improve the effectiveness of Year 2000 programs.
Our series of reviews of Defense Year 2000 computer problems revealed critical flaws in DOD’s processes for addressing Year 2000 problems, particularly with respect to (1) project planning, (2) risk assessments, (3) contingency plans, (4) identifying and correcting interfaces, and (5) availability of testing resources.
In response, DOD has agreed to address specific weaknesses we identified. The Defense Finance and Accounting Service and the Defense Logistics Agency, for the most part, have agreed to implement our recommendations. These actions should greatly improve the DOD’s ability to address the problem successfully .
As a result of our 1997 efforts involving the Veterans Benefit Administration’s year 2000 problem, the Veterans Benefit Administration is taking steps to avert serious future disruptions in its ability to disseminate benefits to millions of people.
Information Security
Electronic information and increasingly interconnected automated systems are essential to virtually all major federal operations. These factors, combined with serious weaknesses in agency security controls, are placing billions of dollars in federal assets at risk of loss, critical operations at risk of disruption, and enormous amounts of sensitive data at risk of inappropriate disclosure. Over the past year our efforts in this area have concentrated on identifying for the Congress ways in which to manage the risks and develop solutions to this complex problem.
Our recent reports have highlighted these risks and raised the visibility of this issue among congressional oversight committees and groups with central management responsibilities, such as the CIO and CFO Councils. As a result, information security is beginning to be recognized as a high priority issue in strategic plans, and congressional interest in balancing the benefits of new technology with security and privacy concerns is growing. In particular, our work at individual agencies has assisted the Congress in monitoring progress on long-standing problems, such as security weaknesses at IRS, and in understanding the security implications of new issues, such as the Social Security Administration’s move to allow access to individuals’ earnings data through the Internet.
Our review of DOD’s computer security disclosed that unknown and unauthorized individuals are increasingly attacking and gaining access to highly sensitive, but unclassified information on DOD’s computer systems. In response, DOD initiated action to implement several of the recommendations. Most notably, it has updated its computer security policies and procedures, included computer security as one of four cornerstones of its strategic information technology plan, begun to recruit and train additional information systems security professionals, and begun to use more intrusion detection software in its computer networks.
Our May 1997 testimony highlighted general privacy and security considerations that federal agencies must address to safeguard sensitive information made available as a public service via the Internet.
DOD’s Corporate Information Management
In a series of reports on DOD’s Corporate Information Management initiative related to depot maintenance, materiel management, and the transportation business areas, we found that DOD’s on-going migration system strategies were not likely to produce the dramatic gains in efficiency and effectiveness that were anticipated. Partially as a result of our work, DOD has revised these business area implementation strategies resulting in savings of over $330 million, primarily from elimination of unnecessary systems development work.
National Weather Service’s Modernization
We continued to identify major risks associated with the development of the National Weather Service’s $550 million Advanced Weather Interactive Processing System. The Weather Service is currently pursuing our recommendations on the need for a systems architecture and more rigorous software testing and contract oversight.
Key Open Recommendations
The following paragraphs discuss some of the key open recommendations in the areas of information technology, information security, and telecommunications management as well as agency-specific recommendations.
Office of Management and Budget
Under the Clinger-Cohen Act, the Director of OMB is given significant governmentwide IT leadership and oversight responsibilities. In September 1996, we made extensive recommendations to OMB based upon our review of several agencies’ IT investment decision-making processes. Specifically, we recommended that OMB develop guidance requiring agencies to (1) implement IT investment decision-making processes, (2) periodically analyze their entire portfolio of IT investments, (3) design control and evaluation processes that include cost, schedule, and quantitative performance measures, and (4) set minimum data quality standards for data used to assess cost, benefit, and risk decisions. In addition, we recommended that OMB develop its recommendations for the President’s budget based on agency actual track records in delivering mission performance for IT funds expended. OMB agreed with these recommendations and has issued implementation guidance to assist agencies in designing their IT investment processes. (GAO/AIMD-96-64)
Department of Defense
Our past work on DOD’s logistics system improvement actions resulted in a number of recommendations aimed at improving the management of these major investments. Specifically, we recommended that DOD develop a strategic information resources management plan that anchors its use of information technology resources to priority business objectives. We also recommended that DOD limit or halt deployment of segments of its failed migration strategies in these logistics areas until they can be linked with evolving outsourcing/privatization plans and show a favorable return on investment. While some actions were taken in response to these recommendations—notably a strategic plan was developed, and the depot maintenance and material management strategies were significantly modified—none of these actions were justified within the guidelines of the Clinger-Cohen Act’s investment criteria. Further, oversight and review of the modified strategies that would verify an acceptable return on investment prior to continued implementation of the strategies has not occurred. (GAO/AIMD-96-81, GAO/AIMD-96-109, GAO/AIMD-97-6 and GAO/AIMD-95-110)
See also chapter 1, Improving National Security and International Affairs Programs, Defense Management Issue Area.
U. S. Department of Agriculture
While USDA has taken some actions to reengineer its business processes for the Department’s farm service and rural development agencies, these actions have not been fully responsive to our recommendations. Therefore, it is unclear how successful USDA will be in improving the way it does business as it implements the revised process. We are monitoring USDA’s efforts to modernize information technology for the field service and are working with agency officials, OMB, and congressional committees to ensure that sound business process reengineering principles and practices are followed. (GAO/AIMD-94-156)
To correct its financial management systems problems, USDA has taken steps to provide more authority to the CFO but has yet to fully address all our other recommendations. We are continuing to work with USDA on actions underway to integrate and improve financial management systems. (GAO/AIMD-95-222)
See also chapter 2, Improving Resources, Community, and Economic Development Programs, Food and Agriculture Issue Area.
Year 2000 Conversion
We have issued four reports identifying weaknesses and recommending corrective actions for the Year 2000 programs of specific DOD components. We recommended that Defense quickly modernize its departmentwide systems inventory with state-of-the-art access capabilities and additional data fields that will allow Defense agency personnel to enter system status information and use this data to track progress of correction efforts. At the Defense Finance and Accounting Service and the Defense Logistics Agency our recommendations included the need for improved project planning, formal system risk assessments, contingency plans, interface agreements, and testing resource assessments. Defense has concurred with all of our recommendations and plans to take corrective actions. (GAO/AIMD-97-106, GAO/AIMD-97-112, GAO/AIMD-97-117 and GAO/AIMD-97-120R)
See also chapter 1, Improving National Security and International Affairs Programs,Defense Management Issue Area.
Office of Management and Budget
In September 1996, we recommended that the Director of OMB promote the CIO Council’s (1) adoption of information security as one of its top priorities and (2) development of a strategic plan for increasing awareness of the importance of information security, especially among senior agency executives, and improving information security program management governmentwide. As of August 1997, the CIO Council’s draft strategic plan included “Privacy and Security” as one of nine strategic goals. The goals will be finalized later in 1997. Although performance goals have been specified in the draft plan, a more detailed approach has not yet been developed. (GAO/AIMD-96-110)
Department of Defense
Our report issued last year on computer attacks at the DOD highlighted risks to our national security and the damage that has already been caused. DOD agreed with our report and acknowledges, however, that it has much more to do to improve its information security posture. More attention needs to be given to increasing the awareness and accountability among computer users as to their security responsibilities. Many installations still do not have full-time dedicated information systems security officers and are not fully aware of the security risks of computer systems connected to the Internet. And, securing DOD systems will require an ongoing concerted process whereby risks are identified and controls are implemented as appropriate. (GAO/AIMD-96-84)
See also chapter 1, Improving National Security and International Affairs Programs, Defense Management Issue Area.
National Weather Service Modernization
In our report on the National Weather Service’s modernization program, we recommended that more rigorous software testing and contract oversight to reduce major risks associated with the development of its $550 million Advanced Weather Interactive Processing System. In addition, we identified planning risks associated with the National Oceanic and Atmospheric Administration’s multi-billion dollar weather satellite program and we are monitoring the Administation’s actions to address these risks. (GAO/AIMD-94-28, GAO/AIMD-95-24 and GAO/AIMD-97-37)
Department of Defense
In our November 1996 report on the Defense Information Systems Network acquisition, we recommended that DOD develop performance measures needed to gauge the success of the program. At a minimum, these measures should address the concerns of customers and should correspond to the five factors—requirements, technology enhancement, schedule, management, and cost—that the Defense Systems Information Agency used to select its acquisition strategy. While DOD concurred, it has yet to finalize any Defense Information Systems Network performance measures. (GAO/AIMD-97-9)
In August 1997, we reported the Defense Finance and Accounting Service (DFAS) had not thoroughly reviewed or revalidated its requirements for telecommunication equipment and services as prescribed by DOD. Our study of utilization data for DFAS’ data communication lines indicated that many of the lines may have excess capacity. DOD’s Deputy Chief Financial Officer agreed with our recommendation that DFAS reassess its telecommunication requirements stating that such a reassessment would be performed in September and October 1997. (GAO/AIMD-97-100)
See also chapter 1, Improving National Security and International Affairs Programs, Defense Management Issue Area.
U.S. Department of Agriculture
We reported on the need for telecommunications management improvements at Interior and U.S. Department of Agriculture (USDA) and identified missed opportunities to save hundreds of millions of dollars because the Departments were not sharing telecommunications resources. For instance, Interior and USDA’s Forest Service often use parallel radio systems. However, they were planning to collectively spend up to several hundred million dollars acquiring their own separate radio systems over the next 8 years and had failed to jointly determine the extent to which they could reduce these costs by sharing radio equipment and services. In response to our recommendations, both agreed to implement a systematic process for identifying opportunities to share telecommunications resources and to stop further radio purchases until radio sharing opportunities are fully analyzed. (GAO/AIMD-97-67)
Similarly, at USDA, after acknowledging the potential for saving tens of millions of dollars each year, the Department also acted on our recommendations to improve telecommunications management, consolidate telecommunications resources, and eliminate unnecessary services. Initial efforts have already yielded millions in savings. (GAO/AIMD-95-97, GAO/AIMD-95-203, and GAO/AIMD-96-59)
See also chapter 2, Improving Resources, Community, and Economic Development Programs, Food and Agriculture Issue Area.
Veterans Benefit Administration
In our continuing review of the Veteran Benefits Administration modernization project, we have noted that it has taken steps toward fulfilling our recommendations. However, as discussed in our 1996 testimony, it still needs to take aggressive action to effectively address serious management and technical weaknesses if its modernization effort is to succeed. (GAO/T-AIMD-96-103)
In response to our review which found its software development capability to be ad hoc and chaotic, the Veterans Benefit Administration has made progress. However, its actions have not yet fully addressed needed software development improvements. These include a need for a defined strategy to reach the repeatable level, a baseline to measure improvements, and a process to ensure that its software development contractors have a repeatable maturity level. The Veterans Benefit Administration generally agrees that these issues need to be addressed. (GAO/AIMD-96-90)
See also chapter 3, Improving Human Resource Programs, Veterans’ Affairs and Military Health Care Issue Area.
National Student Loan Data System
In our review of the Department of Education’s efforts to integrate the National Student Loan Data System with other student financial aid databases that support title IV programs, we recommended that Education (1) develop and enforce a departmentwide systems architecture and (2) ensure that the architecture addresses the title IV systems integration. We also recommended that the Secretary direct that, as of July 1, 1998, the Department’s information technology investments conform to the developed architecture and funding for all projects be predicated on such conformance, unless careful, thorough, and documented analysis supports an exception. Education agreed with our recommendations. (GAO/AIMD-97-122)
See also chapter 3, Improving Human Resource Programs, Education and Employment Issue Area.
Child Support
At HHS, our review of efforts by the states to develop automated child support enforcement systems found that HHS’ Office of Child Support Enforcement (OCSE) had not provided adequate leadership and oversight of these efforts. Consequently, states have not always made efficient and effective use of the government’s $2 billion investment for these systems and many state systems may not be certified on time. We recommended a number of actions to strengthen OCSE leadership and increase the likelihood of developing more effective state automated child support enforcement systems. HHS is acting on our recommendations. (GAO/AIMD-97-72)
See also chapter 3, Improving Human Resource Programs.
Medicare Transaction System
Since 1994, we have reported and testified on the need for the Health Care Financing Administration (HCFA) to reduce risks associated with its acquisition of the Medicare Transaction System. While HCFA has made some improvements, we reported in 1997 that serious management and technical weaknesses persist. To address these weaknesses, we recommended a number of actions to (1) improve management of the interim Medicare processing environment and the changes necessary for operating beyond the year 2000, (2) ensure that the Medicare Transaction System is managed as investment, and (3) ensure that sound system-development practices are followed. HCFA has begun to implement our recommendations. (GAO/AIMD-97-78)
See also chapter 3, Improving Human Resource Programs, Health Services Quality and Public Health Issue Area.
Department of Commerce, U.S. Customs Service
In reporting on Customs’ efforts to modernize its automated systems, we recommended in 1996 that Customs (1) identify and analyze its business requirements before selecting an enterprisewide architecture and (2) manage information systems as investments. Based on our recommendations, the House and Senate Committees on Appropriations withheld almost $3.5 million of the $15 million appropriated for fiscal year 1997 for development of the Automated Commercial Environment system. In 1997, we reported on Customs’ progress in addressing these recommendations, which included (1) hiring a contractor to conduct the appropriate analyses and recommend an architecture and (2) designating an investment review board. Customs has not finalized the investment review board’s policies and procedures or implemented an investment review process. (GAO/AIMD-96-57, GAO/AIMD-97-43R and GAO/T-AIMD-97-96)
See also chapter 4, Improving Justice and General Government Programs, Administration of Justice Issue Area.
Environmental Protection Agency
At the Environmental Protection Agency (EPA), we recommended that EPA determine what information is needed to oversee states’ implementation of Resource Conservation and Recovery Act and develop a cost-effective solution for meeting these needs. EPA has completed an information strategy plan which is the first step in the information engineering process. Also, in response to our report on improving EPA’s ability to recover costs associated with cleaning up hazardous waste sites, EPA is implementing procedures to help ensure the accuracy and completeness of Superfund cost recovery data. However, further action is needed to fully implement all our recommendations. (GAO/AIMD-95-167 and GAO/AIMD-95-177)
See also chapter 2, Improving Resources, Community, and Economic Development Programs, Environmental Protection Issue Area.
Geostationary Operational Environmental Satellite
Our report on planning for the future of the Geostationary Operational Environmental Satellite program highlighted the need for a “next generation” system to be developed in order to reduce costs and improve mission results. We recommended that the National Oceanic and Atmospheric Administration prepare a formal analysis of the costs and benefits of several alternatives for the timing, funding, and scope of its follow-on program. Agency officials have said that they will examine a number of options for the follow-on program. (GAO/AIMD-97-37)
Immigration and Naturalization Service
Our review of the Immigration and Naturalization Service’s (INS) initiative, the Law Enforcement Support Center, to devise and implement a system that would assist INS and law enforcement agencies in determining whether arrested individuals are aliens, and our evaluation of the reliability of the related criminal alien information disclosed several weaknesses. As a result, we made recommendations to improve the effectiveness of the Law Enforcement Support Center and data reliability. INS has taken some steps to ensure that the Support Center can be used to effectively assist in the positive identification of criminal aliens and to improve its systems data; however, much additional effort is needed. (GAO/AIMD-95-147)
See also chapter 4, Improving Justice and General Government Programs, Administration of Justice Issue Area.
Defense Working Capital Fund
The Defense Working Capital Fund is expected to operate on a break-even basis over time—that is, not to make a profit nor incur a loss but simply to recover all costs. However, the Navy ordnance business area incurred losses totaling $212 million from fiscal year 1994 through 1996. To ensure that the Navy ordnance business area operates on a break-even basis, we recommended that Navy develop a plan to streamline the Navy ordnance operations and reduce its infrastructure costs, especially overhead costs. This plan should (1) concentrate on eliminating unnecessary infrastructure, including overhead, (2) identify specific actions that need to be accomplished, (3) include realistic assumptions about the savings that can be achieved, (4) establish milestones, and (5) clearly delineate responsibilities for performing the tasks in the plan. (GAO/AIMD/NSIAD-97-74)
Our report on DOD’s use of a stabilized rate to price items sold to foreign countries under the foreign military sales program disclosed that DOD’s Working Capital Funds were not including all costs in its stabilized rate to ensure full recovery of pension and postretirement health benefit costs. We reported that the exclusion of these costs had resulted in over $40.5 million of losses to the U. S. Government between fiscal years 1992 and 1996. Accordingly, we recommended that DOD implement policies and procedures as soon as possible to require DOD’s Working Capital Funds to include pension and postretirement health benefit costs in the prices it charges foreign military sales customers. We also recommended that DOD make every reasonable attempt to bill for and collect the over $40.5 million of undercharges we identified during our review. DOD agreed with our recommendations and immediately changed its policies and procedures to require these costs be included in future prices. DOD also agreed to bill foreign customers for the past undercharges in those cases where it proved to be cost-effective to do so. (GAO/AIMD-97-134)
See also chapter 1, Improving National Security and International Affairs Programs, Defense Management Issue Area.
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gao_GAO-10-850 | gao_GAO-10-850_0 | Background
Biocontainment laboratories—designed with specific environmental, storage, and equipment configurations—support containment efforts in the day-to-day work with biological agents. These labs are designed, constructed, and operated to (1) prevent accidental release of infectious or hazardous agents within the laboratory and (2) protect lab workers and the environment external to the lab, including the community, from exposure to the agents. For example, the biological safety cabinet (BSC) is laboratory safety equipment that is used when manipulating infectious organisms. BSCs are enclosed cabinets with mechanisms for pulling air away from the worker and into a HEPA filter, which provides protection for the worker and prevents releases into the environment. BSCs might be designed with a limited workspace opening, or they might be completely enclosed with only gloved access and air pressure indicators to alert users to potential microbial releases. The selection of the BSC would depend on the (1) lab’s risk assessment for the specific agent and (2) nature of work being conducted, as guided by the Biosafety in Microbiological and Biomedical Laboratories (BMBL), and other relevant guidance, such as OSHA regulations and National Institutes of Health (NIH) guidelines for research involving recombinant DNA.
There are four biosafety levels (BSL). These levels—consisting of a combination of laboratory practices, safety equipment, and laboratory facilities—are based on the type of work performed, information about the infectious agent, and the function of the laboratory. These levels include combinations of laboratory practices and techniques, safety equipment, and facilities that are recommended for labs that conduct research on infectious mircro-organisms and toxins: Biosafety level 1 (BSL-1) is suitable for work with agents not known to consistently cause disease in healthy adults and present minimal potential hazard to laboratory personnel and the environment.
Biosafety level 2 (BSL-2) is suitable for work with agents that pose moderate risks to personnel and the environment.
Biosafety level 3 (BSL-3) is suitable for work with indigenous or exotic agents that may cause serious and potentially lethal disease, if inhaled.
Biosafety level 4 (BSL-4) is required for work with dangerous and exotic agents that pose a high risk of life-threatening disease or have aerosol or unknown transmission risk.
Examples of agents and toxins used within these labs include those that primarily affect humans and animals, such as Botulinum neurotoxin, a naturally occurring poison, lethal to humans and animals, but used for medical and cosmetic purposes in drugs such as Botox; animals, such as foot-and-mouth disease (FMD), a highly contagious viral disease of cloven-hoofed animals—such as cattle, swine, and sheep—that causes debilitation and losses in meat and milk production (while FMD does not have human health implications it does have severe economic consequences); and plants, such as certain varieties of Xylella Fastidiosa, which can kill citrus plants, but does not have human health implications.
Lab levels can also vary depending on their use. For example, research that involves animal or plant pathogens may be designated as animal biosafety levels (ABSL) 1-4 or BSL-3-AG. Similarly, some people may refer to BSL-3 labs as “high-containment” labs and BSL-4 labs as “maximum containment” labs. There are also several types of labs—including clinical, research, teaching, public health (or reference), and production (or commercial)—which are generally categorized on the basis of the work conducted. While these labs all involve work with infectious micro- organisms, there are regulatory, accrediting, and risk differences associated with each type. For example, clinical labs within hospitals test patient samples and may often be unaware of the micro-organism they are handling until their tests have identified it. In contrast, research, reference, and production (commercial) labs, while they each have different purposes and environments, tend to be aware of the micro-organisms they are handling. Clinical labs also have specific accrediting and state reporting requirements, and their control structure for handling illnesses is different from other types of labs. We use the general term “biological lab” to include biological labs of all levels or types that handle micro-organisms or clinical samples. We use this general and inclusive term because SRSs could be used in any environment with safety risks, including different types or levels of labs. However, this does not necessarily imply that a single SRS is appropriate or applicable to all labs of varying type or level, although an SRS that encompasses the largest view of a domain as possible has significant advantages. For example, one national SRS would provide information that can cross boundaries where common and similar practices exist and avoid the “stove-piping” of safety information.
Many different federal agencies have some connection with biological labs. Such agencies are involved with these labs in various capacities, including as users, owners, regulators, and funding sources. The CDC and APHIS regulate entities that possess, use, and transfer select agents and toxins. In addition, entities are required to report the theft, loss, or release of any select agent or toxin to the CDC or APHIS, although we had found reporting failures at some labs subject to this requirement.
Along with environmental, storage, and equipment configurations, various guidelines for lab practices support worker and public safety. These biosafety guidelines offer general and agent-specific containment and risk assessment practices. For example, the BMBL suggests microbial practices, safety equipment, and facility safeguards that vary by type of agent and intended use. These documents are updated periodically—the BMBL is currently in its fifth edition—in order to “refine guidance based on new knowledge and experiences and to address contemporary issues that present new risks that confront laboratory workers and the public health.” While the BMBL and other guidelines are useful for promoting safety, they also recognize there are unknown and emerging laboratory safety risks and that ongoing efforts to gather information about those risks is essential for continued safety improvement. One of the key information sources for these updates is published reports of LAIs. However, it is widely recognized that these reports reflect only a fraction of actual LAIs.
To develop evidence-based guidelines and safety-improvement initiatives, other industries with inherent risks to workers and the general public— such as aviation, commercial nuclear power, and health care—collect and analyze safety data. These data can come from safety events. Safety event levels—depicted in terms of a risk pyramid (see fig. 1)—increase in severity as they decrease in likelihood. Whether and where the lines are drawn—between accidents (fatal or nonfatal), incidents, and hazards— varies (1) across industries and (2) according to whether the safety event resulted in no ill effects, minor injuries, or severe injuries or deaths.
Events at the top of the pyramid—generally identified as “accidents” (sometimes further divided depending on fatality)—have significant potential for harm or result in actual harm to one or more individuals. These events can include radiological exposure, industrial chemical spills or explosions, airline crashes (with or without loss of life), patient medication errors that result in illness or death, and LAIs. Accidents— especially fatal ones—are generally infrequent, hard to conceal, and often required to be reported. Events at the center of the risk pyramid— generally referred to as “incidents”—are those that could have resulted in serious harm but did not. Incidents occur more frequently than accidents and include near misses, close calls, or other potential or actual adverse events and violations, although definitions vary within and across industries. For events at the base of the pyramid—generally referred to as “hazards”—no incident or accident need occur. These events include observations about the work environment, procedures, equipment, or organizational culture that could be improved relative to safety.
Safety data from accidents, incidents, and hazards provide the source information for analysis of accident precursors—the building blocks of events that can lead to injury or death. The focus on precursor data arose as a result of the limited amount of data that could be identified from accident investigations. Such data are often “too sparse, too late and too statistically unreliable to support effective safety management.” In addition, the severity and sometimes fatal consequences of accidents often preclude investigators from gathering sufficient detail to fully understand systemic (as opposed to individual) causes of the accident. Incident data are a particularly rich source of precursor information because incidents occur more frequently than accidents. Moreover, incidents do not often rise to the level of regulatory or legal violation because no serious harm has occurred. Workers are therefore generally less fearful of punishment in reporting their mistakes at this level.
Collection of safety data and analysis of accident precursors focus on trying to identify systemic, rather than individual, causes of error. Industries often take this system-based approach to risk management because they recognize that “blaming problems on ‘human error’ may be accurate, but it does little to prevent recurrences of the problem. If people trip over a step x times per thousand, how big must the x be before we stop blaming people for tripping and start focusing on the step?” The system-based approach focuses on analyzing accident precursors to understand “how and why the defenses failed.” According to this approach, blaming individuals for accidents—as in the person-based approach—not only fails to prevent accidents, but also limits workers’ willingness to provide information about systemic problems. When precursor information from accidents, incidents, and hazards are analyzed as part of a system, evidence-based, industrywide safety improvements are possible. For example, analysis of reports of health care workers improperly medicating patients has helped identify and address systemic problems with medication labeling and storage. In such cases, hospitals could have punished an individual for the error. Instead, they focused on learning rather than blame, which encouraged worker reporting and led to needed changes in medication labeling and storage. This, in turn, improved patient safety because any health care worker—not just the one that reported the error—will be less likely to improperly medicate patients in the future.
SRSs—both mandatory and voluntary—are the key tool for capturing detailed safety data. Many industries have recognized that the costs of repeated accidents or managing the aftermath of an accident can far outweigh the costs to establish and maintain a reporting system. Despite vast differences across industries, the sources of risk—humans, technology, and environment—are the same. Consequently, the tools— such as SRSs—that industries other than biological labs use to understand these risks can also support evidence-based, industrywide biosafety improvement efforts. This is especially significant in understanding the risks in biological labs because current biosafety guidelines are based on limited information.
While individual states or labs may have reporting mechanisms, no formal system exists for sharing data among all labs. In addition, while data reported through academic journals or state disease registries is accessible industrywide, there are significant reporting barriers. For example, before information about an incident becomes available to others through academic publications, infections must be recognized as laboratory-acquired, deemed scientifically interesting, written up and submitted for peer review, and accepted for inclusion in an academic journal. Furthermore, concerns about losing funding or negative publicity can create barriers to an institution’s willingness to encourage publication of LAI information. Reports of infections through state disease registries are also limited because information about the source of the infection is generally not collected and not all infectious diseases are required to be reported. In addition, the infected individual must see a health practitioner who recognizes the status of the disease as reportable and takes steps to report it. Finally, releases without infection—or without recognized infection as a result of a release—are unlikely to be reported at all, despite the valuable precursor data that could be gleaned from the event.
A system for collecting safety data from across the lab community has been proposed as a means to improve the evidence base for biosafety guidelines. However, as indicated by reporting lapses to the mandatory system for theft, loss, and release of select agents, implementation of a reporting system does not immediately create a highly useful one, to which all workers instantaneously submit data on their errors. Finally, when initiating any reporting system, it is important to consider up front and throughout a myriad of design and implementation issues so as to ensure the system is operating as effectively as possible. Consequently, we look to research and experience to inform design and implementation choices.
Program Goals and Organizational Culture Guide Safety Reporting System Design and Implementation in Three Key Areas
According to lessons from our review of the literature, the design and implementation of an effective safety reporting system (SRS) includes consideration of program goals and organizational culture for decisions in three key areas: reporting and analysis, reporter protection and incentives, and feedback mechanisms. Each of the key areas contains subcategories of related decision areas, which should also tie into program goals and organizational culture. Figure 1 illustrates the relationship among program goals, organizational culture, and the three key areas with associated areas with associated subcategories. subcategories.
Program Goals and Organizational Culture
A program can have a variety of goals in the design and implementation of an SRS, apart from the primary goal of improving safety, according to the literature. For example, an SRS can be used for regulatory purposes or for organizational learning—a distinction that will fundamentally affect design decisions, such as whether reporting will be mandatory or voluntary, what types of reporter incentives and protections should be included, who will analyze SRS reports, and what feedback will be provided. An SRS can be designed and implemented to meet a variety of subgoals as well. Subgoals can include capabilities for trend analyses, accountability improvement, liability reduction, and performance indicators. The overall goals and subgoals should be determined in advance of design decisions, so that decisions in the three key areas support program goals. Identification and agreement on program goals is best accomplished through the involvement of appropriate stakeholders, such as management, workers, industry groups, accrediting bodies, and relevant federal entities, according to the literature.
Even with well-defined goals, the success of any SRS is intertwined with the organizational culture in which it will operate. Organizational culture—the underlying assumptions, beliefs, values, attitudes, and expectations shared by those in the workplace—affects implementation of programs in general and, in particular, those designed to change that underlying culture. SRSs are fundamentally tools that can be used to facilitate cultural change—to develop or enhance a type of organizational culture known as a culture of safety. A culture of safety implies individual and organizational awareness of and commitment to the importance of safety. It also refers to the personal dedication and accountability of all individuals engaged in any activity that has a bearing on safety in the workplace. Development of a positive safety culture often involves a shift in how workers view and address safety-related events. This shift is supported by data on safety-related events provided by SRSs. Accordingly, an environment in which workers can report safety events without fear of punishment is a basic requirement for a safety culture and an effective SRS. In addition, an important consideration in design and implementation is where on the safety culture continuum an organization is currently positioned and where it would like to be positioned. It is unlikely that workers would report safety events in organizations with punishment-oriented cultures—where workers are distrustful of management and each other. To promote reporting in such environments, systems can be designed with features that help alleviate these worker concerns. However, understanding where the organizational culture is in relation to reporting is essential for choosing system features that will address these concerns.
Changing organizational culture is also generally recognized as a long-term effort that takes at least 5 to 10 years. In high-risk industries, reporting systems are often developed in conjunction with other efforts to make safety a priority, and as the culture changes from these efforts, so might the reporting system to reflect the changing culture. For example, as safety events become more visible or well-defined, reporting forms or requirements can be modified to reflect this new understanding. Similarly, if reporting is waning but safety events continue to occur, adjustments to reporting incentives, definitions of events, and other features may be necessary to improve reporting. Such ongoing assessment of organizational culture can also help identify areas where system adjustments are needed and support efforts to evaluate the contributions of the SRS to safety culture improvement. As with any tool for cultural change, the value of the SRS will be commensurate with the investment in its use. If an SRS is to support overall safety improvement, training, outreach, and management support are necessary to instruct staff in the desired culture and use of the new system.
Lessons from the literature on the role of program goals and organizational culture in SRSs include the need to define overarching program goals and subgoals up front; involve stakeholders (e.g., management, industry groups, associations, and workers) in developing program goals and designing the SRS to increase support among key populations; assess the organizational culture to guide system design choices in the three key areas; and ensure that reporters and system administrators receive adequate training regarding the function and application of the reporting system.
First Key Area: Reporting and Analysis
Among the first design decisions for an SRS are those that cover reporting and analysis. Decisions in this key area include basic questions about the (1) level of event that should be reported to the system, (2) classification of events, (3) report format and mode, (4) management of reporting, and (5) analysis of the reported data.
Level of Event: The Severity of Events Captured Generally Determines Whether an SRS Is Mandatory or Voluntary
The severity of events can vary from safety concerns to mass casualties, and what is considered a “reportable event” has implications for whether reporting should be mandatory or voluntary. Mandatory reporting is generally preferred when program goals are focused on enforcement. Serious events—such as accidents resulting in injuries or deaths—are typically the level of event collected in mandatory SRSs. Mandatory reporting is also generally preferred where there is potential or realized association with injury or death and related regulatory and legal implications, as in accidents. Voluntary reporting is generally preferred when the program goal is learning—identifying actions, processes, or environmental factors that lead to accidents. Voluntary reporting in these cases is more appropriate because the goal is improvement rather than compliance. Events at the incident level—errors without harm, near misses, close calls, and concerns—are less serious than accidents and are typically collected through voluntary SRSs. Both mandatory and voluntary reporting systems are often employed concurrently—sometimes independently and sometimes in complementary roles—because programs face the dual requirements of regulating and promoting safety improvement.
The level of event to be reported also depends on the organizational culture. Industries new to safety reporting—in particular, those in which the definition or recognition of an accident is unclear—may find it particularly difficult to identify a reportable incident or hazard. If the reporting threshold is set too high, significant safety hazards may go undetected and unreported. In such environments, a low initial threshold for reporting might be helpful, raising it over time as workers develop familiarity with reportable events. However, because of the greater frequency of incidents and safety concerns, voluntary SRSs can be overwhelmed by the volume of submitted reports. SRSs that focus on a particular type of incident or hazard area may help to counteract this problem. In addition, if the reporting threshold is set too low, reporters may feel events are too trivial for reporting and that the SRS has little value. For example, surveys of nurses and doctors have shown a range of opinions that constitute a barrier to reporting, including beliefs that not all near-miss errors should be reported or that reporting close calls could result in significant change. The prevalence of these beliefs may reflect that a “reporting culture”—one in which staff recognize and submit reportable events—is not fully established.
Lessons from the literature on determining the level of event for reporting include the need to base the decision for mandatory or voluntary reporting on (1) the level of event of interest and (2) whether the SRS will be used primarily for enforcement or learning and set reporting thresholds that are not so high that reporting is curtailed, but not so low that the system is overwhelmed by the number and variety of reportable events.
Classification of Error: Error Classification Can Guide Reporting and Facilitate Information Sharing, but Can Limit Information Flow if Too Restrictive
To facilitate data-sharing across the organization or industry, classification schemes provide standardized descriptions of accidents, incidents, and concerns. Effective classification schemes can facilitate safety improvement across organizations and industry by providing a common language for understanding safety events and precursors. For example, if several hospitals use a standard classification scheme to submit incident reports to a patient SRS, the resulting data can be used to examine incident data across hospitals. Such data allow benchmarking of similar occurrences and promote a better understanding of core hazards that exist across an industry. Clearly defined and familiar classification terminology can also help workers understand when and what to report. However, achieving a well-defined and clear classification scheme—especially one that can be used across an industry—can be difficult because different groups within an organization or across an industry may classify events differently. For example, one study on medical error reporting found that nurses classify late administration of medication as a medical error, whereas pharmacists do not.
Classification schemes should be broad enough to capture all events of interest, but also well-defined enough to minimize receipt of extraneous information. For example, organizational learning systems, like FAA’s NASA-run Aviation Safety Reporting System (ASRS), include a broad definition of safety-related events to facilitate voluntary reporting of all events. Alternatively, mandatory systems may include a more specific classification scheme to capture deviations from standard operating procedures. However, overly restrictive schemes may lead workers to focus on certain events and neglect to report others. For example, if a classification scheme is developed to consider only compliance with an industry’s standard operating procedures, workers may not report safety- related incidents that involve factors other than compliance. Similarly, overly detailed classification schemes may be confusing for reporters if they do not know the appropriate codes to apply. In addition, a classification scheme must be clear enough for workers to understand what counts as a reportable incident. Otherwise, underreporting or misreporting of incidents may result. If possible, use of pre-existing industry-specific terminology in the classification scheme can support information flow across the industry and help workers—especially in industries new to safety reporting—adapt to the SRS. Lastly, a classification scheme may require the flexibility to allow different sites to adapt fields and elements to match their own program goals and organizational cultures.
Design of a classification scheme may incorporate several strategies, including (1) using an existing classification scheme from another SRS, (2) modifying an existing classification scheme for use in a new SRS, (3) developing a classification scheme based on incident reports from the new or a similar SRS, or (4) using experts to develop a classification scheme.
Lessons from the literature on designing classification schemes and associated terms include the need to develop classification schemes and associated terms that are clear, easy to understand, and easy to use by drawing on terms already well understood in the industry; test whether classification terms are clearly understood by different groups in the organization; allow sufficient flexibility to (1) avoid narrowing the scope of reporting in a way that limits all events of interest at the chosen level of event, (2) allow different sites—if multiple sites will be reporting to the same system—to adapt fields and elements to match their own organizational culture, and (3) capture different types of events and precursors, as they can change over time; and develop a classification scheme that best suits the analytical requirements and the comfort level of the organizational culture with safety reporting and safety event terms.
Format and Mode: Report Mode and Format Must Balance Needs for Quality and Quantity of Reported Information with Reporter Burden and Proclivity to Report
Reporting must be readily accessible and allow for sufficient description of safety events without overburdening reporters with extensive narrative requirements. Data collection considerations include the format of the report (that is, the types of questions included on the reporting form) and the mode of the report (that is, how a report is physically submitted to the SRS, for example, by paper or Internet). Both the report format and mode can affect the incentive to report; the ease of reporting; and the type, quantity, and quality of data collected. Decisions regarding the format and mode of reporting are closely tied to the type of data desired from the SRS and the organizational culture.
Report formats affect the quantity and quality of reports. For example, question formats that allow workers to explain the incident through narrative description may yield extensive details about the incident. The literacy skills of the reporting population are important considerations as well. Long narratives might be simple for the highly educated but intimidating to those with less writing proficiency. However, if workers are resistant to reporting, structured question formats that use check- boxes or drop-down boxes with categories may decrease the time it takes to complete an incident report and thereby increase the incentive to report. Using structured question formats will also decrease the amount of coding and qualitative analysis that must be performed to examine the data. One limitation of structured question formats, however, is that in industries new to safety reporting, classification terms may not be well developed or understood by the reporting population.
Options for SRS modes include paper, telephone, or electronic or Web- based form. Although Web-based forms may increase the ease with which data are collected, workers may be fearful of entering incident reports using a Web-based form because reports can be traced back to them. If workers perceive that the culture is punitive, mail reports—especially to an outside entity that manages the system—can be the most effective mode choice to alleviate these concerns. However, accessibility of reporting forms can also affect the likelihood of reporting. For example, if paper forms are outside the immediate work area and require effort beyond the normal routine to complete, then reporting may be curtailed. Since many workers have ready access to the Web, a combination of Web and mail reporting may address both access and sensitivity concerns.
Lessons from the literature on format and mode choice include the need to base decisions about report formats on (1) the type of data needed for analysis, (2) capabilities of the reporting population, and (3) maturity of existing safety event classification schemes within the industry and base decisions about report mode on (1) the accessibility of the mode to the reporting population and (2) workers’ concerns about and willingness to report.
Reporting Management: SRS Administration and the Designated Reporting Population Can Affect Willingness to Report and Analytical Possibilities
Reporting management includes decisions about SRS administration— who will collect, analyze, and disseminate reports—as well as decisions about who is allowed to submit reports. The choice of the entity responsible for collecting, maintaining, analyzing, and disseminating may affect the willingness of workers to submit reports. For example, if workers perceive a punitive organizational culture or a lack of confidentiality, they may be unwilling to submit reports to an SRS within the workplace. An SRS managed by an independent, external entity might alleviate these concerns. However, an organization may have better awareness than an outside entity of internal safety issues, expertise in analyzing and addressing them, and mechanisms for encouraging participation in safety reporting. Consequently, decision makers must weigh a variety of culture-related and resource considerations in deciding how to administer an SRS.
The openness of reporting—whether reporting is available to all workers or only to those in select occupations or positions—will also affect the type and volume of data collected. For example, many individuals— including pilots, ground crew, and controllers—can submit reports to FAA’s NASA-run ASRS, whereas only airlines can submit reports to the Voluntary Disclosure Reporting Program (VDRP). An open SRS, which accepts reports from different staff levels or occupations, offers the potential for analysis of events from several perspectives. However, such an SRS may be subject to staff hierarchies that can limit reporting among certain employee groups or professions. For example, in the medical industry, even when reporting is open to both doctors and nurses, several studies have shown that nurses have a greater awareness of and are more likely to submit reports to an SRS than doctors. Similarly, reporting may be attenuated if events must be reported up a chain of command, rather than directly by those involved in an event. Direct reporting—regardless of position or occupation—can increase the likelihood of reporting on a particular event.
Lessons from the literature on system administration and the reporting population include the need to base the decision for internal or external system administration on (1) workers’ degree of concern over punishment and confidentiality and (2) availability of internal expertise and resources to analyze and encourage reporting and base decisions about who will be allowed to report on (1) awareness of reporting hierarchies and (2) the type of information desired for analysis.
Analytical Process: Report Prioritization, Data-Mining Techniques, and Technical Expertise Can Enhance Results
Analytical processes that focus on identifying safety improvements—using report prioritization, data-mining techniques, and safety and industry experts—can enhance the usefulness of reported information. Frequently, the first step in analyzing reported data is determining whether immediate action should be taken to address a safety concern. Subsequently, analyses that explore why a particular event may have occurred—such as root cause analysis—may be used to understand the contributing factors to safety events and to design solutions to the problem. Data-mining techniques, including those that combine safety reports with other databases, can also be used to look for patterns of events across organizations or a broad range of reports. Data mining requires the capability to search for clusters of similar events and reports that share common characteristics. Technical expertise, as well as specialized software, access to other data sources, and data format requirements, affects data-mining capabilities. For example, data-mining searches may be more complicated when error reports include both structured and open text (narrative) formats because open text must be made suitable for data mining. In addition to these retrospective analytical techniques, probabilistic risk assessment methods may also be used as a proactive approach to examine all factors that might contribute to an event. Literature on SRS use in industries, such as nuclear power and aviation, advocate using a combination of these approaches to provide a more thorough analysis of reported data.
Finally, using data analysis techniques to prioritize incident reports can facilitate analysis by identifying which reports require further analysis or demand immediate review because they represent serious safety concerns. Because analysts must have the technical skills and relevant knowledge to make sense of the data, decisions about the analysis will be linked with system administration and whether technical and industry expertise reside within the organization. Thorough analysis may require multidisciplinary committees that contribute a variety of expert perspectives, but the breadth of expertise required may not be readily available within an organization. For example, analysis of medication error reports may be conducted through multidisciplinary committees that include physicians, nurses, pharmacists, quality managers, and administrators. In the airline industry, an event review team (ERT), consisting of representatives from the air carrier, the employee labor association, and the FAA, is used to analyze reports as part of the Aviation Safety Action Program (ASAP).
Lessons from the literature on analytical process include the need to use a report prioritization process to quickly and efficiently address key safety issues as they arise and align analysis decisions with (1) report formats, (2) system administration and location of technical expertise, and (3) availability of other relevant data needed for analysis.
Second Key Area: Reporter Protections and Incentives
SRSs—whether mandatory and voluntary—depend on the willingness of workers to report mistakes they or others have made. It is unlikely that workers would take the risk of reporting without protections that provide confidence that their reports will be kept private and incentives to report their errors. There are a variety of ways to design SRSs to protect the identity of the reporter and to encourage reporting, including (1) accepting anonymous reports, (2) providing effective confidentiality protections on reported data, and (3) deidentifying data sets. The principle reporting incentive is limited immunity—whereby workers are granted protection from certain administrative penalties when they report errors. There are advantages and disadvantages to anonymous and confidential reporting, and decisions about which to use should be guided by program goals and culture-related considerations.
Anonymity Is the Surest Method for Protecting Reporter Identity, but Can Limit Reporting Data
Anonymity—reporting without identifying information—protects reporters against legal discovery should the data be requested in a subpoena. Because an individual’s name is not tied to an incident report, anonymity may lower the psychological barrier to reporting, including fears about admitting a mistake or looking incompetent, disclosure, and litigation. Anonymity may be critical in motivating reporting among workers in an organizational culture seen as punitive, especially when legal protections for reporter confidentiality may not be feasible or well established. Report mode is also linked with reporter protection choices. For example, one SRS for medication errors was developed as a paper- based system because administrators felt any electronic system could not be truly anonymous.
Despite the protection anonymity offers reporters, there are distinct disadvantages, including the inability to obtain clarification or further information from reporters. This limitation may compromise the integrity of system data because investigators have no means for validating and verifying the reported information. In addition, anonymous data sets tend to be less detailed than identified data sets. Initial reports from identified data sets can be supplemented by follow-up interviews with reporters. The need to follow up with reporters may also make anonymous reporting unfeasible, even in organizations where significant reporting concerns exist. Anonymous reporting also tends to limit the number of data elements that can be derived from reports, making these data sets less useful than others, particularly when trying to identify patterns of error. For example, if fields that could identify reporters—such as occupation, location, and position—are not collected, statistics on safety events across organizational subunits or occupations would be impossible.
Another disadvantage of anonymity is that reporters cannot be contacted for clarification or to provide direct feedback—a useful technique for obtaining worker buy-in to the system. If reporters are given specific feedback on actions taken to address issues brought up in their reports and the outcomes of these actions, then reporters are more likely to (1) attribute value to the SRS and (2) continue submitting reports. Some SRSs have addressed this problem by offering a compromise. Reporters can receive a unique identification number that allows them to track the progress of their reports through the SRS. However, if reporters are mistrustful enough that anonymous reporting is necessary, they may not feel comfortable using an optional identification number provided by the SRS. Even anonymity may not be enough to alleviate reporters’ fear of retribution. Other disadvantages of anonymous reporting include the potential for (1) workers to falsely report on the behavior of others in the absence of report validation and (2) managers to discredit information about concerns or incidents as reports of “troublemakers.” Yet another disadvantage is the inability to maintain anonymity in small reporting populations or where the circumstances surrounding an incident are so specific (to an organization, individual, date, and time) that any mention of them would disclose the parties involved.
Confidentiality Enables Follow- up with Reporters but Includes the Potential for Compromising Reporter Identity
Confidential reports allow investigators to follow up with reporters to gain a better understanding of reported incidents because the link between the reporter and report is maintained. However, fear of providing identifying information may limit reporting. Confidentiality is accomplished through legislative, regulatory, or organizational provisions to protect reporter privacy. Such provisions can include exemptions from subpoena or disclosure, protections against civil or criminal lawsuits for reporting, or criminalizing confidentiality breaches. For example, some state-based mandatory SRSs for medical errors include statutory provisions that protect reporters from some potential legal liability. One international aviation SRS has legislation making confidentiality breaches a punishable offense.
Maintaining identifying information enables data analysis across professions and organizations, which can aid in benchmarking. Such information can reveal whether recurring incidents indicate problems within a specific organization or profession as opposed to those that are industrywide, thereby targeting interventions to areas in greatest need. Reporting formats may be less burdensome for confidential systems than for anonymous systems, which must gather all details up front. Confidential reporting allows investigators to gather significant information through follow-up interviews, so less detail needs to be provided on the reporting form. In the literature, report follow-up was associated with a variety of positive results. For example, it can (1) add to reporters’ long-term recall of the event, enhancing the quantity and richness of information collected; (2) support event validation and clarification; and (3) bring closure to an incident and assure reporters their information is being taken seriously, thus increasing the likelihood of future reporting.
A potential disadvantage of a confidential SRS is that workers may be fearful of the consequences—real or implied—of reporting. Moreover, for systems untried by the legal system, the surety of confidentiality provisions can be—in reality or perception—tenuous. For example, the Applied Strategies for Improving Patient Safety (ASIPS) is a multi- institutional reporting system designed to analyze data on medical errors and is funded by the Agency for Healthcare Research and Quality (AHRQ). This voluntary SRS for patient safety events relies on confidential reports provided by clinicians and office staff. While this reporting system promises reporters confidentiality within the system, the program can offer no protection against potential legal discovery. However, because ASIPS is funded by AHRQ, ASIPS reporters would be protected by the confidentiality provision in AHRQ’s authorizing legislation, although the protections provided by this provision have never been tested through litigation. Because of the uncertainty of confidentiality protections, administrators of ASIPS chose to build strong deidentification procedures—removal of identifying information from reported data—into the system rather than rely solely on confidentiality protections. Another potential disadvantage of confidential SRSs is that costs may be higher than an anonymous system if follow-up interviews with reporters are part of SRS requirements. Sufficient resources are required for investigation and follow-up with reporters; however, resource constraints may limit these actions. Additional resource commitments (in the form of follow-up interviews) are also assumed by those who submit confidential reports.
Data Deidentification Provides Additional Reporter Protection
Data deidentification supports confidentiality provisions since the deidentification process makes it difficult to link reports to specific individuals or organizations. Deidentification can also support feedback mechanisms because the data can be readily shared within and across organizations and industries. Data can be deidentified at the source or in summary reports and data systems. Source deidentification involves removal and destruction of all identifying information from reports after follow-up and investigation have been completed. Secondary data deidentification involves removal of identifying information in summary reports or databases for sharing safety information and alerts. Deidentification of source reports strengthens confidentiality protection because records are unavailable even if they are subpoenaed. Source report deidentification may require (1) technical solutions if reports are collected electronically and (2) special processes if collected in another format. Eliminating the link between the reporter and the report can help reinforce the confidential nature of an SRS and provide an incentive for reporting, as long as the process for deidentification is understood by the reporting population. Deidentified data can be readily shared within or across organizations and industries, enhancing analytical possibilities by increasing the number of reported incidents available for analysis.
Limited Immunity Provides Reporting Incentive
Limited immunity provisions can increase the volume of reports, particularly when there are emotional barriers, such as fear about reporting one’s mistakes. These provisions offer protection from certain legal or regulatory action if certain requirements are met. For example, the ASRS offers limited immunity from enforcement actions provided certain requirements are met and the incidents do not involve criminal or negligent behavior. The literature suggests that the immunity provisions offer a strong incentive to report and that pilots would not submit ASRS reports if these provisions did not exist. Numerous international SRSs also contain immunity provisions, including the Danish aviation SRS and patient care SRSs in both Australia and Israel.
Lessons from the literature on choosing reporter protections and incentives include the need to base the choice between anonymity and confidentiality on (1) organizational culture, especially workers’ degree of concern about punishment and confidentiality, and (2) the amount of detail required for analysis and whether it can be collected without follow- up; consider hybrid systems in which confidential and anonymous reporting are used simultaneously if there is a conflict between organizational culture and data need; develop data deidentification measures to support confidentiality and data-sharing efforts; and consider limited immunity provisions to increase the reporting incentive.
Third Key Area: Feedback Mechanisms
Because a primary SRS function is safety improvement, the system must include feedback mechanisms for (1) providing actionable safety information to the relevant populations and (2) improving the SRS through identification of reporting gaps across occupations or locations and evaluation of the effectiveness of the system as a safety tool.
Feedback to Reporters and Industry Promotes Safety Improvement and Reinforces Reporting
To support its primary function of safety improvement, an SRS must include feedback mechanisms for providing actionable safety information to the relevant populations. A variety of populations can benefit from SRS feedback, including (1) reporters, (2) managers, (3) organizations and the industry at large, and (4) system administrators. Feedback to reporters is essential in order to promote safety and reinforce the benefits of reporting. If workers who report safety events do not see any evidence that their report has been used, they may question the value of the system and discontinue reporting. Feedback among managers promotes management awareness of safety concerns, management buy-in, and top-level efforts to address those concerns. Feedback across the organization or industry can provide tangible evidence of the value of the SRS by alerting management and workers to important safety issues. Industry feedback can also provide a benchmark to compare safety across similar organizations when data are (1) collected at the local level and (2) compiled in a centralized regional or national database. Use of such benchmarks may help decision makers identify gaps in performance and practices that may improve safety conditions in their own organization.
Feedback on System Performance Supports Targeted Outreach and System Improvement
Feedback mechanisms for system evaluation are also important in ensuring the SRS’s continued effectiveness. Feedback on reporting gaps across occupations or locations can help identify nonreporting populations. When these reporting gaps are compared with other data— such as reports from comparable sites—they can help identify areas in need of targeted outreach and training. In addition, feedback from safety culture and system-user surveys, which assess safety and reporting attitudes, can be used to evaluate the effectiveness of an SRS. Performance metrics on safety improvement can be incorporated into these surveys, providing information on the degree to which program goals are being met and identifying areas of needed system improvement.
Lessons from the literature on choosing feedback mechanisms include the need to provide direct feedback to reporters to foster worker-specific buy-in provide regular, timely, and routine feedback—for example, in the form of newsletters, alerts, Web sites, and searchable databases—to support overall organizational buy-in for reporting; provide positive feedback to managers who receive a high volume of reports to demonstrate the importance of reporting and counteract the perception that error reporting reflects poorly on management; use the data to identify reporting gaps for targeted outreach and evaluate the effectiveness of the SRS to support ongoing modification and improvement.
Case Studies Demonstrate the Need for Assessment and Resources in Design and Implementation and Suggest Certain Features in the Three Key Areas
Lessons from case studies of safety reporting systems (SRS) in three industries—aviation, commercial nuclear power, and health care— indicate the importance of cultural assessment and resource dedication in SRS design and implementation, and suggest certain features in the three key areas. Although the industries differ in type of work, regulation, and ownership, all three face substantial inherent risks to health and public safety and have made significant investments in promoting safety through voluntary SRS programs. Consequently, their experiences suggest lessons that can be applied to the design and implementation of an SRS for biological labs. Collectively, these SRSs reflect 70 years of safety reporting experience. In particular, the FAA’s NASA-run Aviation Safety Reporting System (ASRS) in aviation, the Institute of Nuclear Power Operation’s (INPO®) Significant Event Evaluation—Information Network (SEE-IN®) system in commercial nuclear power, and VA’s internally managed Patient Safety Information System (PSIS) and NASA-run Patient Safety Reporting System (PSRS) in VA health care provide the basis for the following four lessons for SRS design and implementation: 1. Assessment, dedicated resources, and management focus are needed to understand and improve safety culture. 2. Broad reporting thresholds, experience-driven classification schemes, and processing at the local level can be useful SRS features in industries new to safety reporting. 3. Strong legal protections and incentives encourage reporting and help prevent confidentiality breaches. 4. A central industry-level entity facilitates lesson sharing and evaluation.
Lesson 1: Assessment, Dedicated Resources, and Management Focus Are Needed to Understand and Improve Safety Culture
The case studies demonstrate that establishing a robust safety culture is neither quick nor effective without a multipronged effort—involving assessment, dedicated resources, and management focus—to recognize safety challenges and improve safety culture. Despite the costs and challenges of implementing an SRS, the industries recognized they could not continue to operate without safety improvements and their SRSs were a key tool in these efforts.
Assessing Safety Culture Can Alert Management to Workplace Safety Issues
Each of the three industries created its SRS after recognizing that existing operations and safety culture posed an unacceptable risk to workers and the public. In both the aviation and the commercial nuclear power industries, SRS initiation was prompted by serious accidents rather than a proactive assessment of the safety culture. The Veterans Health Administration proactively initiated an SRS program after its administrators and patient safety advocates recognized the need to redesign systems “to make error difficult to commit.” Such assessments can reveal systemic safety culture problems before they become critical.
The concept of a voluntary aviation reporting system was suggested in 1975 by the National Transportation Safety Board (NTSB), the FAA, and the aviation industry following an investigation of a fatal airline accident near Berryville, Virginia. The NTSB found that the accident might have been averted if previous crews’ reports about their near-miss problems in that area had been shared. These problems included inadequate aviation maps and the cockpit crews’ misunderstanding related to the air traffic controllers’ terminology. The NTSB reported that the industry culture made it difficult to report these problems. These cultural barriers were apparently known, although a safety culture assessment might have afforded proactive efforts to correct them. As one solution to these problems, the NTSB suggested an aviation SRS, initially managed by the FAA and known as the Aviation Safety Reporting Program. But within a few months, the FAA had received few reports. It therefore transferred operation and management of the program to NASA and renamed it the Aviation Safety Reporting System (ASRS).
In 1979, the partial meltdown of a reactor at Three Mile Island (TMI) in Pennsylvania led to the creation of INPO, an industry-initiated technical organization that collects, studies, and shares safety lessons throughout the industry using the SEE-IN program. The INPO program was developed and is managed independently of the Nuclear Regulatory Commission (NRC) regulatory requirements. Although the NRC regulates the safety of commercial nuclear power generation, at the time of TMI, nuclear utilities had been operating with a high degree of autonomy and were fairly insular, according to a 1994 study. The 1994 study of the safety culture at nuclear reactors found that the management style reflected the culture of conventional energy plants—a “hands-off management” and “fossil fuel mentality” that emphasized maximum energy production as the highest value. An industry official explained that the TMI accident was a shock for the industry, which became determined to operate its nuclear reactor facilities safely and reliably, thereby convincing the American public it could be responsible and safe. The entire U.S. commercial nuclear power industry joined INPO within months of the TMI incident, and remains members today. The industry focused early efforts on plant evaluations to understand the culture that had led to the TMI accident. Within a year, INPO produced the first of its Significant Operating Event Reports, which provide information on identified safety problems and make recommendations for improvement.
Despite safety advances in the decades after INPO was established, the industry was once again reminded of the importance of safety culture assessment in 2002, when corrosion ate a pineapple-sized hole in the reactor vessel head at the Davis-Besse plant in Ohio. Prior to this incident, INPO had given individual plants the responsibility for assessing their safety culture—assuming that they had a good understanding of it. Investigation revealed that a weak safety culture contributed to the incident. After the Davis-Besse incident, INPO re-emphasized the importance of proactively assessing safety culture before critical safety failures occur. In response to the incident, they recommended that safety culture assessments be a permanent, periodic requirement.
After VA hospital accidents that had resulted in harm to patients, the VA established the National Center for Patient Safety (NCPS) in 1999. That unit designed and launched two options for reporting—one internal (the PSIS) and one contracted (the PSRS) to the same NASA center that operates ASRS for the FAA. The VA launched its SRS program guided by a vision emerging in the medical community to “create a culture in which the existence of risk is acknowledged and injury prevention is recognized as everyone’s responsibility.” The VA hired management with experience in NASA’s safety programs, who surveyed safety culture as they initiated the SRS. In addition, the NCPS has conducted three nationwide safety culture surveys, beginning in 2000, to understand the attitudes and motivations of its frontline workers. The most recent, in 2009, allowed the NCPS to identify a subcategory of caregivers for intervention.
Improving Safety Culture Requires Dedicated Resources, Including Time, Training, and Staff Investment
Safety culture improvement depends on a robust reporting culture, which requires considerable investment of time and resources. As the experiences of the three industries demonstrate and as shown by SRS data from two of the case industries, these investments pay off in an increase, over time, in the volume of safety reports. Figure 3 illustrates time frames and growth in SRS reporting for FAA’s ASRS and the VA’s PSIS.
Through conventional classroom and seminar training, workers in some industries learned the terms, goals, and instruments of the new voluntary SRS. Several innovative training opportunities were also marshaled, including on-the-job training and employee loan and training programs focused on improving teamwork. Both types of training supported safety culture change and developed trust in the SRS. Staff time and investment at all levels were necessary to accomplish these training goals.
From the inception of ASRS, the volume of aviation safety reports grew slowly, indicating an increasing understanding among reporters of the multiple factors that contribute to safety. However, a 1994 National Academy of Public Administration (NAPA) evaluation, requested by the FAA, found that FAA funding provided to NASA for the operation and management of the ASRS had not kept pace with the work. According to a NASA ASRS official, because resources were insufficient to perform a detailed analysis on all the reports, reports are triaged. Only those deemed most hazardous receive deeper analysis. The NAPA report also noted that the aviation community broadly affirms the safety value of ASRS and uses the data for training and safety awareness. By contrast, some FAA line employees said ASRS was of limited use. As a result of the NAPA report and congressional actions, the FAA modestly increased funding. After the NAPA recommendation to modernize, the ASRS transitioned from paper to electronic report submissions. A recent FAA-sponsored study recognizes the importance of training and retraining all SRS stakeholders, offering best practices for formal and informal training. Reporting has increased. ASRS currently receives about 50,000 reports per year, which demonstrates a sustained level of trust in reporting. However, the study of best practices in FAA’s voluntary reporting options recommended that SRS managers assess the availability of resources and plan for acquiring them, as resource needs are likely to increase over time. In further recognition of the importance of resources to ASRS, the latest Memorandum of Understanding between the FAA and NASA also includes a yearly inflation factor for the ASRS budget.
Safety reporting to INPO’s SEE-IN program began in 1980. The volume of reports forwarded to INPO from the plants is between 3,000 and 4,000 annually. Early safety reports tended to focus on technical failures and INPO realized that reporting on human error needed to increase, according to an INPO liaison. Moving beyond reporting equipment failure required significant training. To encourage reporting of both equipment and human factor issues, INPO established and continues to accredit training courses. Recognizing the importance of having staff with industry knowledge to communicate the relevance of safety and reporting in a way that is palatable to industry, INPO began a second wave of hiring of people with nuclear industry experience to ensure the safety science message was managed and communicated in a way that both sides could understand. Despite increases in reporting, however, the Davis-Besse incident in 2002 highlighted the serious consequences of lapses in safety culture. Among other actions, INPO issued its safety principles document in 2004, which provides a framework for assessing safety culture. The document outlines aspects of positive safety culture, such as workers’ questioning attitudes that support reporting and managers’ demonstrated commitment to safety through coaching, mentoring, and personal involvement in high-quality training.
Reporting to the VA’s PSIS grew strongly, from 300 incidents reported annually at local hospitals in 2000 to 75,000 in 2005. Yet, the initiation of a voluntary safety reporting system in the VA health care facilities has faced considerable cultural and institutional challenges. For example, one study found the various professions within hospitals disagreed—when presented with scenarios such as late administration of medication—as to whether an error had occurred. In congressional testimony in 2000, we had observed that if the VA hospital system was to implement an SRS, the VA would face a challenge in creating an atmosphere that supports reporting because hospital staff have traditionally been held responsible for adverse patient outcomes. In our 2004 report, we also found that power relationships, such as nurses reluctant to challenge doctors, can be obstacles to patient safety. However, after the first 3 years of the VA health care system’s SRS, the cultural change that supports safety reporting was under way at three of four facilities studied, as a result of experiential training in addition to conventional classroom training. The growth in reported events to the VA SRS over the last 10 years and our 2004 study suggest that the actions that the VA took can be successful in supporting a safety culture and reporting.
Experiential—that is, on-the-job—training, in addition to conventional classroom experience, fostered the habit of reporting safety events at many VA hospitals. Since the initial years of the VA’s hospital SRS, clinicians and other VA workers have been selected to participate in the hospital-based analysis of SRS reports so that they could learn how the reports would be used. Once patient safety managers prioritized reports, interdisciplinary teams of hospital staff, including local frontline clinicians, looked for underlying causes and devised systemic fixes. Through this experience, clinicians and other hospital staff saw first-hand the rule-driven and dispassionate search for root causes that resulted in a systemic fix or policy change rather than punishment. We found that (1) this training fostered a cultural shift toward reporting systemic problems by reducing fear of blame, and (2) staff were impressed with the team analysis experience because it demonstrated the switch from blame and the value of reporting close calls. In addition, the VA brought together facility-level workers, including patient safety managers from VA medical centers across the nation, to introduce them to the SRS. Through these seminars, staff were introduced to SRS terms, tools, goals, and potential obstacles. They heard success stories from industry and government, findings from the early VA safety culture surveys, and recent alerts and advisories.
Changing Safety Culture Requires Management Focus
To overcome cultural barriers to safety reporting—such as fear of punishment, lack of trust between coworkers and management, and hierarchical prohibitions on communication—management demonstrations of support for the SRS are important. In the three industries, this support was demonstrated through the deliberate use of tactics shown to be effective at changing safety culture and supporting safety reporting such as (1) open communication across the workplace hierarchy encouraged in small group discussions and meetings with managers; (2) storytelling, a tool to direct changes in norms and values; and (3) rewards for participation in safety reporting or open communication in meetings.
The three decades of ASRS experience demonstrate the importance of consistent focus versus episodic efforts to publicize and support the SRS. In the early stages of ASRS implementation, the FAA and ASRS staff relied on small group briefings and promotional documents to foster awareness and trust in reporting. For example, the FAA, through its Advisory Circular, notified the aviation community that the system was operational and, along with NASA, issued press releases and conducted briefings about the system. In addition, industry groups and airlines publicly expressed support for the system, and, according to a 1986 NASA report, an advisory group carried “the word about ASRS program plans and accomplishments back to their respective constituencies.” Other early promotional efforts included the distribution of descriptive brochures and posters to operators, FAA field offices, air traffic control facilities, and airline crew facilities. As a result of these efforts, according to NASA’s 1986 report, the number of reports coming into the system in the early years exceeded expectations. However, a NAPA study 8 years later raised concerns about the lack of publicity. That study found that pilots lacked knowledge of the ASRS and the immunity features and questioned the FAA’s credibility. NASA responded with a second promotional surge by (1) publishing its first CALLBACK, a monthly online bulletin, and (2) touring FAA regional headquarters to promote the SRS. However, the NAPA study concluded that the lack of internal FAA support for the ASRS had limited the degree to which FAA uses ASRS data, and led to questioning the legitimacy of ASRS products and activities. That study also found that FAA line officers (with the exception of the Office of Aviation Safety) thought the ASRS had limited utility, and some even suspected bias in reporting as a result of reporters’ interest in earning immunity from FAA enforcement actions. To address these concerns, the FAA has recently been advised to elevate the importance of establishing an initial shared vision among all stakeholders through open discussion and training and sustained promotion efforts.
INPO focused on leaders and employee loan programs to change the industry’s safety culture one employee and one plant at a time. Leadership’s demonstrated commitment to safety is a key INPO principle for a robust safety culture. This key principle stems from the philosophy of having “eyes on the problem.” That is, plant managers must be out in the work areas, seeing things and talking to employees in order to reinforce a safety culture. This principle also includes reinforcing standards and encouraging candid dialogue when safety issues arise. Such reinforcement can be in the form of rewards for reporting, such as being congratulated at plant meetings for a “good catch.” Managers also have incentives to encourage workers to report. Following its biannual inspections, INPO summarizes its assessment of the plant’s safety conditions, providing a numeric score, partly based on the robustness of the plant’s SRS. These safety scores are important to plant managers because they can affect regulatory oversight and insurance premiums. Scores range from 1 to 5, with 1 as the top safety rating. While these assessments may result in more attention and assistance for safety improvements, they also instill pride in the plant, and at annual managers’ meetings, managers of plants with the highest scores receive recognition.
INPO has also facilitated active peer review and employee loan programs to break down the insularity of the TMI era. When individuals with in- depth industry experience participate in the inspection process and work at INPO headquarters, they see firsthand the excellence other plants practice and how those practices relate to INPO safety initiatives.
The VA hospitals used small group meetings, storytelling, and small rewards to reinforce safety reporting. At the most successful VA hospital we reviewed in 2004, administrators held more than 100 small group meetings where storytelling was used in order to introduce the new SRS. VA hospital administrators used examples from aviation wherein two airline pilots failed to communicate well enough to avoid a fatal crash. The crash might have been avoided had the first officer challenged the captain. This story raised parallels with the medical hierarchy and led to discussions about similar unequal power relationships in the hospital. Administrators introduced more effective ways to challenge authority, naming it “cross-checking.” An early report to the VA SRS, which involved nearly identical packaging for an analgesic and a potentially dangerous drug, was made into a poster as part of the campaign for the SRS. The more successful VA hospitals rewarded the month’s best safety report with a plate of cookies or certificates to the cafeteria. This playful openness reduced secrecy and fears of punishment and increased comfort with reporting, according to our 2004 analysis.
Lesson 2: Broad Reporting Thresholds, Experience- Driven Classification Schemes, and Processing at the Local Level Are Useful Features in Industries New to Safety Reporting
After the three industries instituted a voluntary SRS, workers experienced a sharp learning curve in recognizing a reportable event and developing trust in reporting. The industries encouraged early reporting in a variety of ways. Overall, their experiences demonstrate that reporting is enhanced when (1) reportable events are broadly defined and allow reporting from a wide range of workers; (2) workers are able to describe the details of an incident or concern in their own words, with classification schemes applied by specialists at a higher level; and (3) both internal and external reporting options are available, along with some degree of report processing at the local level.
Broad Thresholds and Open Reporting Are Useful Features When Starting an SRS
In the three case industries, an early challenge was workers’ lack of understanding of what should be reported. In each of the industries, the creation of an SRS involved broadening workers’ concepts of safety events, in addition to accidents, that were worthy of reporting. Nevertheless, early reporting still tended toward accidents and technical issues—accidents because they were fairly evident and harder to hide and technical issues (as opposed to human factors) because the external nature of the fault provided some distance from individual blame. Reporting these technical events helped workers become more comfortable with reporting and provided objective links between their reports and systemic safety improvements, according to several industry officials. Over time, workers’ ability to identify less concrete, but equally unsafe, nontechnical issues grew. The industries managed this growth, in part, by keeping the threshold and definitions for reportable events simple. In some cases, direct reporting—as opposed to reporting hierarchically, up the chain of command—was used to eliminate the fear that workers might have about reporting a mistake to the boss. Open reporting of events from several workers—especially those in different occupations—provided more raw data in the search for underlying causes, as well as information about the event from a variety of perspectives.
The ASRS used a broad definition of reportable events and allowed all frontline aviation personnel to report them. Any actual or potential hazard to safe aviation operations are included in reportable events, thus expanding to areas on the risk pyramid beyond “accident.” Serious accidents are not reported to the ASRS, since they are already covered by the NTSB. While reporting is available to all participants in the national aviation system, for several decades, the majority of reports were from pilots. After outreach and initiatives—such as revised specialized forms— the ASRS has in recent years seen modest increases in reports from diverse groups of workers, such as maintenance workers, enhancing the potential for analysis of single incidents from a variety of perspectives. To reduce the loss of information that could occur if reports from frontline workers are filtered through work hierarchies, the ASRS makes it possible for individual aviation workers to report directly to the central collection unit within NASA.
Individual nuclear plants operate corrective action reporting programs, which feed into INPO’s SEE-IN system. The plant-level corrective action programs have a zero threshold for reporting—that is, workers can report anything of concern. To make the definition for reporting clear to workers, INPO characterizes the reporting threshold in terms of asking workers to report events that they would want to know about if the event had happened elsewhere. In addition to establishing low reporting thresholds, a broad spectrum of workers are encouraged to report to the plant’s corrective action programs. Open reporting and low reporting thresholds are necessary to ensure the fullest coverage of significant event reporting, according to an INPO liaison. While the individual plants are expected to assess and address the bulk of reports, they must also identify the most significant reports to send to INPO. Plants forward between 3,000 and 4,000 concerns to INPO each year from the estimated 400,000 concerns reported and resolved at the plant level through their corrective action programs. To ensure all staff are encouraged to report any event of interest, INPO examines the robustness of the plant’s reporting culture during biannual plant inspections. As part of this process, INPO also compares corrective action reports to SEE-IN data to determine whether there are reports in the corrective action system that were not forwarded to INPO that should have been. If such discrepancies arise, these cases are discussed with plant managers to educate and clarify the plant’s reporting thresholds to INPO.
Prior to the SRS program, VA hospital workers were accustomed to reporting only the most serious events, such as inpatient suicides or wrong-site surgery. The VA SRS program expanded the definition of reportable events to include incidents—such as close calls or errors that caused no patient harm—in recognition of the value of incident data in detecting systemic safety problems. Despite the conceptual shift in reporting expectations, in our 2004 report, we found that 75 percent of clinicians we surveyed at four facilities understood these new reporting requirements. In addition, the SRS program was designed to allow direct reporting from any member of the medical center staff to the patient safety manager. This expansion—beyond the previous expectation that nurses would report to their supervisors—was made in recognition of the power relationships among clinicians that might inhibit reporting. As a patient safety manager noted, the change in reporting expectations was evidenced when a chief surgeon came to report instances of mistaken patient identity in the surgery.
Encouraging Workers to Report Incidents in Their Own Words Facilitates Reporting Initially
In all three industries, delaying the launch of an SRS for development of a formal error classification scheme would have been unpalatable in light of significant pressure to implement solutions following serious events. Further, some safety experts believe rigid early classification of error can limit new knowledge and insights. In the absence of such schemes, the industries allowed reporters to give detailed narrative accounts of the incidents or concerns in their own words. As the industries’ comfort with error terminology develops, some SRSs may encourage reporters to classify certain aspects of events in order to facilitate industrywide analyses.
ASRS reports are primarily experiential narratives in the words of the reporters. Although the heavily regulated aviation industry had event definitions for rule enforcement, studies have concluded that the ASRS was begun without a formal classification of errors. The unstructured nature of the narrative reports is an analytic challenge. However, the ASRS has developed a set of 1,200 separate codes that facilitate the analysis of aviation risk. Recent FAA activities are focused on the benefits of an integrated data system for safety events that combines ASRS’s narrative reports and other reporting systems. Understandably, international aviation safety organizations have declared common reporting methods— including terms and forms—best practices.
The corrective action reporting programs at each plant collect information as narratives in the workers’ own words. Corrective action reports are reviewed at the plant level by a team of managers and specialists. As part of this review, the team determines what actions, if any should be taken to address the issue, and reports are sorted and some level of classification is applied. Most corrective action reports are dealt with at the plant level. Only reports that rise to a defined level of significance—as determined through the review process—are sent on to INPO. While the reports sent to INPO do maintain narrative description of the event, they also classify specific aspects of the event. INPO further sorts and classifies these reports and produces various levels of industry alerts based on this review.
According to a VA official, the SRS program was launched without an error classification system at the reporter level. Considering that even now the science for developing a formula for public reporting is evolving, he noted that the time it would have taken the VA to develop such a system would have delayed the launch by several years. Instead, the classification is done centrally. The VA has maintained this process because it believes that application of an error classification scheme is best done at higher levels by, for example, the patient safety managers. The VA official observed that the Agency for Healthcare Research and Quality (AHRQ) has been working on a set of error terms for nearly 5 years; however, there is, to date, no industrywide agreement on error or adverse event terminology in health care, although one for select health care institutions is under review.
Reporting Options with Some Local-Level Processing Facilitates Reporting Initially
The initiation of SRS programs in two industries was driven by urgent circumstances, before there was time to assess workers’ willingness to report. However, while program developers did not know everything about the problem, they did know that existing knowledge about the workforce culture could provide some basis for planning—that is, if employers suspect they have a mistrustful workforce, they can plan for it. In addition, the industries recognized that the value of local-level processing for improving safety culture and awarding responsibility for safety to the frontline was too great to completely give to an outside entity. Therefore, they developed a bilevel process for assessing safety data at both the local and industry levels.
The airline industry manages the tension between trust and ownership in SRS reporting by offering a variety of internal and external, as well as local- and industry-level, reporting options. The ASRS (an external reporting option) was originally managed by the FAA, but within a year, it was moved to NASA—an honest broker—because of concerns that reporting directly to the regulator would discourage reporting. While separating the reporting function from regulation encouraged reporting, it may have fostered unconstructive perceptions of the ASRS among some FAA staff. Specifically, the 1994 NAPA evaluation found that FAA workers may not understand the ASRS and, consequently, devalue it. While the ASRS receives reports directly from reporters, the FAA’s Voluntary Safety Programs branch (VSP) launched a bilevel SRS program in which 73 airlines are primarily responsible for receiving and processing reports and implementing solutions. By selecting a private structure for these SRSs, the FAA gets the entity closest to the local context to analyze reports and develop and implement solutions. A selection of the systemic problem reports is transmitted to the FAA’s Aviation Safety Information Analysis and Sharing program, which the FAA uses to develop industrywide guidance and regulations to improve safety. More than 60 percent of reports to the ASRS also appear in the other VSP’s SRSs.
In the commercial nuclear power industry, most safety reports—an estimated 400,000 annually—are managed at the plant level, according to an INPO liaison. There is no confidentiality for individual reporters to their plant’s SRS; instead, the reporting system relies on developing an open reporting culture. Each plant is responsible for sorting, analyzing, and implementing corrections for most of the reports to their corrective actions program. The reporter’s identity is not revealed when the more serious events are sent on to INPO. INPO created a bilevel reporting structure because it lacked the resources to handle 400,000 reports annually and because it sought to involve the plants by giving them some ownership of the safety improvement system. However, recognizing the need for an industry-level assessment of safety data, INPO uses the more serious event reports from plants to develop industry alerts and safety recommendations.
In the absence of specific information about workers’ trust in reporting to an internal system, the VA could not be certain it had a safety culture that would support open local reporting. However, they knew nurses and pharmacists were “rule followers,” while physicians had more discretion. The VA handled this uncertainty by initiating both internal and external reporting options. One reporting option, which emulated the ASRS model, was designed to enable workers to report directly to NASA—a contracted, external entity—confidentially. After operating both reporting options for nearly 10 years, the NASA-run system was discontinued for budgetary reasons at the end of fiscal year 2009. While the PSIS enables workers to report to an internal entity—the hospital’s patient safety manager—the external NASA option provided more confidentiality and some measure of anonymity; the internal option provides personal contact and confidentiality, but not anonymity. Even with its much lower report volume—about a 1 to 1,000 ratio of reporting for the PSRS compared to the PSIS—for over 8 years, the system contracted to NASA provided a confidential alternative for workers who felt that they could not report to their own hospital, providing a safety valve or insurance policy of sorts. In addition to dual reporting options, the VA also planned for internal and external processing options. The NCPS intended that hospital-level report collection and processing—including root cause analysis and the development of systemic changes—be deliberately assigned to the individual hospitals to give workers on-the-job learning, and we found the experience drove home to clinicians that the SRS was a nonpunitive, solution-developing system. While reports are processed by a higher-level entity, the NCPS, to facilitate identification of issues with systemwide safety implications, local-level processing is also maintained because it provides a sense of ownership and immediacy in solving problems.
Lesson 3: Strong Legal Protections and Incentives Encourage Reporting and Help Prevent Confidentiality Breaches
Each industry we examined grappled with how to balance the regulatory tradition of punishing workers (or entities) for safety events with legal protections and incentives for reporting. Under most current laws, reports generated before an accident are considered discoverable evidence afterwards. Such laws may deter companies from soliciting and collecting reports about safety problems and workers from reporting them. To address these concerns, the three industries offered a variety of mechanisms for protecting and encouraging reporting, including confidentiality provisions, process protections, and reporting incentives. Confidentiality provisions, rather than anonymous reporting, are the most common approach to protecting reporters’ identities because they allow follow-up with the reporters; however, their protections are not ironclad. And, as SRS program managers in some of the industries discovered, even the perception that confidentiality can be, or has been, breached can discourage reporting. In the three industries, most of the laws supporting SRS confidentiality protections are a patchwork of older laws not originally intended to back up an SRS. Most also have exceptions to confidentiality if Congress or law enforcement agencies demand access to the protected documents. Some of the systems rely on existing laws, such as exceptions in the Freedom of Information Act (FOIA); other systems have a legal and regulatory basis crafted for related purposes. As SRS failures in other countries illustrate, legal protections can be strengthened or weakened through legislative action.
Recognizing the fragility of confidentiality provisions, the three industries also relied on processes and incentives to protect and encourage reporting. Processes, such as deidentification of reports, support confidentiality provisions. Some industries apply it to both the reporter and the organization or unit involved. Data deidentification at the organizational level supports organizational buy-in for reporting, makes it less likely that reporters will be discouraged from reporting, and facilitates industrywide sharing by removing fear of reprisal. In addition, limited immunity provisions or small rewards were used, in some industries, as incentives to encourage safety reporting, especially in environments of mistrust. Limited immunity provisions apply when certain requirements— such as timely reporting—are met. These provisions provide reporters (individuals or organizations) with a means for avoiding or mitigating civil or regulatory penalties. With respect to rewards, even seemingly small incentives can be effective in promoting trust in reporting.
The FAA protects its reporters through a combination confidentiality and limited immunity, relying on regulation, policy statements, and procedural or structural arrangements. For the much older ASRS, confidentiality is maintained both as part of the interagency agreement between NASA and the FAA and through procedural efforts, such as deidentification of reports, as well as regulation. Section 91.25 of the Federal Aviation Regulations prohibit the FAA from using information obtained solely from these ASRS reports in enforcement actions against reporters unless criminal actions or accidents are involved. Specifically, after following up with the reporter and analyzing the report, the NASA office removes information that could identify the reporter, including the reporter’s name, the facility, airline, or the airport. NASA destroys the identity portions of the original reports so that no legal demands could reveal them. The ASRS’s information processing and deidentification of reports has ensured the confidentiality of its reports for over 30 years, despite pressures from the regulator and outside entities to reveal them. To strengthen the confidentiality agreement between the FAA and NASA, the FAA has determined by regulation that it will generally not use reports submitted to NASA in enforcement actions and provides some disciplinary immunity for pilots involved in errors. In contrast, for several of the carrier-run SRSs initiated since 1997, reports are protected from legal enforcement action by the FAA only by policy. However, despite the combined legal and procedural bases for protecting aviation SRS data—for both the ASRS and the other SRSs the FAA supports—there are pressures to violate SRS confidentiality. After recent judicial decisions forced disclosures from an SRS managed by the VSP branch, four major airlines withdrew from a voluntary program but have since rejoined.
INPO operates under considerable confidentiality and maintains the ability to withstand legal challenges. Protecting the confidentiality of plants was central to the inception of INPO’s safety efforts, according to industry officials. While guaranteeing its member utilities confidentiality similar to that in a doctor-patient relationship, INPO has also cultivated an open questioning attitude as the wellspring of safety reporting. While individual reporters receive no confidentiality, the reporting system relies on developing an open reporting culture. Under an INPO-NRC Memorandum of Agreement, reports and information that INPO makes available to the NRC will be treated as proprietary commercial information and will not be publicly disclosed. INPO maintains legal resources for future confidentiality challenges. In INPO’s bilevel system, reports sent to INPO do not identify the reporter, and INPO’s confidentiality includes carefully guarding the identity of individual plants or utilities. For example, INPO does not reveal plants’ safety scores. NRC officials reported that their process also guards against release of INPO information, such as looking at INPO’s reports but not taking possession of them.
Plants’ interests in avoiding negative consequences also serve as an incentive for reporting. In particular, plants’ fear of exclusion from INPO and interest in avoiding negative comparisons to other plants are tools the industry uses to promote reporting and workplace safety. An industry reality is that U.S. nuclear power plants are “hostages of each other,” in that poor safety on the part of one plant could damage the entire industry’s future. In addition, the NRC and insurers would be made aware of a plant’s exclusion from INPO, leading to increased insurance costs, as well as a loss of accreditation for training programs, which would result in more regulatory involvement by the NRC. The NRC and INPO identified other incentives that encourage nuclear plants in their current safety efforts, including (1) NRC credit on penalties if a plant identifies and corrects its own accident precursors, (2) the high cost of corrections, (3) the negative effect of safety events on stock values, (4) the loss of public confidence, and (5) insurance rates.
The confidentiality of the SRS records that the VA hospital administration maintains is protected from disclosure by 38 U.S.C. § 5705—a law that predated the establishment of the SRS by over 15 years. This law prohibits the disclosure of records that are part of programs to improve the quality of health care. Sanctions, including monetary fines, are attached to disclosure violations, but there are exceptions to the confidentiality of the records, including demands by law enforcement agencies or Congress. More recently, the Patient Safety and Quality Improvement Act of 2005 provided similar confidentiality provisions, including fines for disclosure, for voluntarily submitted SRS-related documents from all U.S. hospitals.
The bilevel structure of the VA’s internal SRS facilitates deidentification. Individual hospitals collect and analyze reports and develop systemic fixes for their own hospital. Subsequently, the hospital sends reports and analyses—which are stripped of information that could identify individuals—to the central NCPS. The external, NASA-run SRS also deidentified reports. In addition, NASA destroyed the identification section of original reports in a process similar to that used for ASRS reports.
The VA does not grant immunity for intentionally unsafe acts or criminal behavior, nor does the safety program replace VA’s existing accountability systems. However, individual facilities have used rewards as incentives, such as cafeteria coupons or cookies, to encourage reporting. In addition, hospital-level awards, such as awards to VA Medical Center directors from the NCPS, have also been used to encourage their support for reporting, analyzing selected reports in a timely way, and following up to mitigate risks identified in their reports and analyses.
Lesson 4: A Central, Industry-Level Entity Facilitates Lesson-Sharing and Evaluation
While some of the SRSs in the three industries have local-level processes for analyzing safety reports, they also have a central, industry-level entity that collects, analyzes, and disseminates safety data and makes recommendations. These industry-level entities facilitate feedback and evaluation by (1) elevating facility-level safety data to industrywide lessons and disseminating them across the industry, including internationally, and (2) assessing safety culture and identifying units or worker subgroups in need of outreach or intervention.
Some industry SRSs offer direct reporting to a central, industry-level entity, which is responsible for processing, analysis, and dissemination. For others, reporting takes place at the local level. While some level of report processing, analysis, and dissemination takes place at these local facilities, full or deidentified safety data are sent to a central, industry-level entity. Sending reports up to a central entity ensures that safety fixes identified through local processes are not lost to the rest of the industry. At the same time, local analysis and feedback can demonstrate the system’s value to workers and reinforce reporting. Because the central entity receives safety data from multiple organizations—whether through direct reporting or from local-level systems—the volume and variety of information increase the potential for identifying systemic issues and improving safety industrywide. In addition, the industries recognize that a central, industry-level entity might be necessary for bringing some difficult safety problems to light. This is because the central entity is more likely to consider the interests of the industry, whereas local-level managers might resist identifying systemic issues that would put personal or organizational interests at risk. These central entities, because of their position as industry representatives, are also in a better position to disseminate lessons across the industry and internationally. They provide a single source for industrywide notices of varying urgency, regular online newsletters, policy changes, briefings, and data systems. In addition, some of these entities have staff with internationally recognized safety experts— expertise which has been leveraged worldwide to inform international safety recommendations and SRS design.
The central, industry-level entities are also in a better position to facilitate evaluation, including safety culture assessment; identification of reporting gaps (access to safety data from across the industry offers the potential for analysis of gaps across particular locations, organizations, or occupations); and needed system modifications. Furthermore, such entities often have access to other safety data, such as inspection information. This information can be compared with reporting data in order to identify sites in need of outreach and training. Such systemwide visibility provides an ideal position from which to conduct SRS evaluations. Industry experts we spoke with believe that their industries are safer, in part, as a result of their SRS programs. In limited cases, the central entities have been able to conduct evaluations or use performance metrics to assess safety culture improvements and the role of the SRS in those efforts, as is recommended under the Government Performance and Results Act.
The ASRS shares lessons with all levels of the domestic aviation community and has served as a model of aviation safety reporting worldwide. NASA’s ASRS issues a series of industrywide notices based on ASRS reports, which are graded on the basis of the urgency and importance of identified safety issues, and it has been recognized worldwide as a model for collecting data from frontline workers. NASA provides “alerting” messages to the FAA and the airlines on safety issues that require immediate attention. NASA also disseminates ASRS information via a monthly online bulletin, CALLBACK, to 85,000 members of the aviation community on safety topics such as summaries of research that have been conducted on ASRS data. Unions and airlines use this information in safety training. Among the SRSs we are aware of, only the ASRS offers access to its event database for outside researchers to conduct analysis and for ASRS staff to perform specially requested analyses for the FAA, NTSB, and others. The FAA also maintains an industry-level office—the VSP branch—which oversees seven different voluntary reporting systems, including the ASRS. Data from these SRSs provide information on events that would otherwise be unknown to FAA or others, and VSP’s role is to facilitate sharing of these data at the airline and industry levels. We observed VSP and ASRS staff representing U.S. airline safety interests at an international aviation safety reporting meeting to share lessons on aviation safety and SRS design and implementation. Such participation offers opportunities for safety improvement in aviation worldwide. For example, VSP and ASRS staff have supported efforts to develop safety reporting systems worldwide because aviation safety does not stop at the U.S. border. Most foreign aviation SRSs have been based on the ASRS model. The international aviation safety organization, the International Civil Aviation Organization, has called for each country to have an independent aviation safety reporting system similar to ASRS.
Despite the benefits of these SRSs, formal evaluation has provided insights for system improvement. For example, the FAA requested the NAPA evaluation of ASRS, which recommended the ASRS modernize by implementing actions, such as collecting and disseminating reports in electronic formats to better meet the needs of the aviation community. Currently, ASRS safety reports and monthly newsletters are primarily transmitted by e-mail. In addition to ASRS-specific evaluations, the FAA has access to more investigations of aviation safety culture conducted over the last decade. For example, special studies of aviation specialists, such as controllers and maintenance workers, have identified reasons for their lower reporting rates. These studies revealed specific aspects of cultures in these professions that would discourage reporting. For example, controllers were highly focused on bureaucratic boundaries that enabled them to define away—rather than report—unsafe conditions they perceived to be outside their responsibility. Alternatively, according to FAA officials, they found a strongly punitive culture among maintenance workers that led workers to assume that if a supervisor told them to violate a rule, it did not create an unsafe—and hence reportable— condition. These studies made possible targeted efforts, such as a reporting program just for controllers, that resulted in a growing proportion of safety reports from nonpilots.
INPO’s lesson-sharing program uses the Nuclear Network—an industry intranet—for sharing safety information. This network houses event data that plants can access and is a platform for INPO to disseminate alerts. Information transmitted via this system includes Significant Operating Event Reports—the highest-level alert document—as well as experiential and nuclear technical information. Plants can also use the network to ask questions or make comments that can be sent to one, several, or all users. Apart from the direct feedback reporters receive from the plant, the key to getting workers to participate in reporting was through seeing—via the Nuclear Network—the corrective actions developed in response to reports they had made, according to the INPO liaison. INPO is seen as a model for other national and supranational nuclear safety organizations, such as the World Association of Nuclear Operators, an organization representing the global nuclear community. As such, INPO has recently begun to participate in the Convention on Nuclear Safety, a triannual international commercial nuclear safety effort.
INPO also evaluates plants’ safety improvement programs, although the evaluations are generally not publicly available, according to an INPO liaison. INPO performs a type of “gap analysis” at the biannual on-site plant inspections and conducts safety culture surveys with a sample of staff before each. Reporting gaps are evaluated at the plant level (not by occupation or work group) by looking for reductions in report volume and mining the plant’s corrective action reports. A reduction in reporting year to year is interpreted as an indicator of a potential problem rather than an improvement in safety conditions, because such reductions can indicate a lack of management support for reporting. In addition, if a plant receives a low safety score as a result of inspection findings, INPO provides extra attention and assistance by assigning a team of industry experts to engage in weekly consultations with plant directors, review corrective actions, discuss plant needs, develop solutions, and provide peer assistance and accompaniment to seminars.
In its position as the industry-level entity responsible for the VA SRS, NCPS creates and disseminates key policy changes to the VA health care system in response to trends identified from patient safety reports. For example, the NCPS (1) designed and implemented a program that promotes checklist-driven pre- and postsurgical briefings that, according to the SRS program director, have been associated with reduced surgical mortality across the VA hospital system and (2) developed new requirements for CO2 detectors on every crash cart for checking safe intubations outside of operating room settings. The NCPS has played a role in disseminating its SRS model and tools for safety improvement to other U.S. states and federal agencies, including the AHRQ. Specifically, the NCPS provided training to all 50 states and the District of Columbia via the Patient Safety Improvement Corps, a program funded by the AHRQ.
The VA -supplied state training contributed heavily toward building a common national infrastructure to support implementation of effective patient safety practices. Further, after attending the VA seminars, several foreign countries implementing their own SRSs have adopted tools developed by the VA.
The NCPS has also conducted evaluations of the SRS program, which have provided information for SRS and safety culture improvements. For example, in 2008, the NCPS published a study of the effectiveness of actions hospitals developed in response to SRS reports of adverse drug events. They found that changes in clinical care at the bedside—such as double- checking high-risk medications—and improvements to computers and equipment were effective solutions, but training was not. In addition NCPS has conducted three safety culture surveys, the most recent of which enabled identification of safety culture differences among staff subgroups in order to target outreach and training. To support future evaluations of this kind, the NCPS established several criteria to assess the quality of local-level processes for reporting, analysis, and safety improvement.
The CDC and APHIS Have Taken Steps to Improve the Usefulness of the TLR Reporting System; Lessons from the Literature and Case Studies Suggest Additional Steps
The CDC and APHIS Select Agent Program (SAP) has taken steps to improve reporting and enhance the usefulness of the theft, loss, and release (TLR) reporting system as a safety tool. Additional steps to improve the TLR system, as suggested by the literature and case studies, include increased awareness of the culture in biological labs and improvements in the three key areas—reporting and analysis, protections and incentives, and feedback mechanisms. See appendix II for a summary of lessons derived from the literature and case studies that can be applied to the TLR system.
The CDC and APHIS Recognize the TLR Reporting System’s Usefulness as a Safety Tool; Lessons Indicate That Increased Awareness of Labs’ Culture Could Enable Targeted Outreach and Training
Recognizing the usefulness of the TLR system as a safety tool, the CDC and APHIS SAP has dedicated resources to manage the system. The TLR reporting system for select agents was developed in 2002, after the 2001 anthrax attacks. As the number and types of reported incidents increased, an outcome of the new reporting requirements, the agencies implemented processes to utilize the TLR system as a tool to manage the Select Agent Program. In addition, the CDC reassessed its administration of the system to consider how it could be used as a safety tool, rather than just a recording system. To its credit, the CDC employed a safety science expert to manage the TLR reporting system and is now exploring ways of using the TLR data to identify systemic safety issues. APHIS has also utilized the TLR as a tool to identify trends such as (1) gaps in administrative oversight of personnel and training and (2) weaknesses in safety and security policies and procedures in regulated entities. Each TLR is reviewed by a compliance officer, security manager, and subject matter experts to identify trends and areas of concern. Identified issues are subsequently discussed with the reporting facility’s senior management, with additional monitoring and inspections as needed.
The CDC and APHIS also rely on periodic on-site lab inspections to get an understanding of the culture, with respect to safety and reporting, and identify areas for outreach and training. The agencies inspect labs to ensure that they are in compliance with the safety, security, training, and record-keeping provisions outlined in the regulations. As part of this process, the agencies use checklists developed from regulations and nationally recognized safety standards to review laboratory safety and security and to develop observations. In addition, the agencies interview lab staff and examine documentation, such as medical surveillance documents, exposure or incident records, and minutes from Institutional Biosafety Committee meetings. Review of such documentation can provide an indication of possible incidents with select agents or toxins. During these inspections, the CDC and APHIS officials seek to (1) identify gaps in knowledge about safety and reporting and (2) report on areas needing improvement.
The information the agencies derive from these inspections and from TLR reports can provide useful information about the culture of safety and reporting within labs. However, lessons from the literature also suggest that systematic assessment of the culture, such as through ongoing surveys or studies, can provide invaluable information about how the specific working environment can affect perceptions of safety and reporting requirements. These perceptions—and variations, for example, within or across working environments or occupations—can affect what is considered a reportable event; feelings of responsibility for or fear of reporting; and the value of reporting safety events. For example, studies examining the effects of culture on safety and reporting in the aviation and health care industries have found that perceived occupational hierarchies, such as between doctors and nurses or pilots and cabin crew; authority structures; organizational factors; concepts of justice; and other factors can affect safety and reporting.
According to CDC and APHIS officials, they have no plans to arrive at such an awareness through cultural assessment. Nevertheless, agency officials agree that culture matters when it comes to safety and reporting. For example, they noted that culture may differ by a lab’s size and level of resources. Larger labs or labs with more resources tend to have better safety and reporting. Other agency officials noted that, based on career experiences, they have become aware of safety differences across different types or levels of labs. According to a CDC official, staff in higher-level labs, such as BSL-4 labs, have recognized the danger of the material they are working with. These facilities are also more likely to have biosafety officers, whose presence, according to the CDC official, tends to make workers more conscientious about safety. Another official noted that, while you might find sandwiches or soda in the refrigerator of a BSL-2 lab, these items would never be found in BSL-4 labs. Safety culture differences between clinical and research labs were also noted by CDC officials. Such variation in culture across labs was also noted by domestic and international biosafety specialists we spoke with. Despite recognition of such variation across labs, officials stated, the CDC does not have a unified position on the issue, and the research does not exist to definitively establish safety culture differences by lab type, occupation, or sector. Greater awareness of cultural influences and how they affect safety and reporting in the labs could (1) help the agencies better target outreach and training efforts and (2) provide insights into whether reporting system design and implementation changes are needed to address lab variations in safety and reporting.
The CDC and APHIS Have Taken Steps to Better Define Reportable Events; Lessons Indicate That a Broadened Definition Could Further Enhance Collection of Safety Data
The CDC and APHIS SAP has taken steps to better define reportable events, which can increase the likelihood that workers will report when required. For example, in early 2008, the CDC and APHIS published the Select Agents and Toxins Theft, Loss and Release Information Document, which includes detailed scenarios on what and when to report. Since the TLR reporting program was established in 2002, the agencies have seen reports increase substantially; since a 2008 initiative to better inform the lab community of incident-reporting requirements, the CDC and APHIS noted that they receive approximately 130 incident reports per year. The types of labs reporting have also broadened. According to the CDC, the increased reporting is the result of better awareness of and compliance with reporting requirements, rather than an increase in thefts, losses, or releases. Indeed, of the reported TLRs, there have been no confirmed thefts, one loss, and only eight confirmed releases.
To clarify reportable events, the Select Agent Regulations require that the individual or entity immediately notify the CDC or APHIS upon discovery of a release of an agent or toxin causing occupational exposure, or release of a select agent or toxin outside of the primary barriers of the biocontainment area. The agencies’ Select Agents and Toxins Theft, Loss and Release Information Document further clarifies reportable events. The document defines a release as a discharge of a select agent or toxin outside the primary containment barrier due to a failure in the containment system, an accidental spill, occupational exposure, or a theft. Furthermore, any incident that results in the activation of medical surveillance or treatment should also be reported as a release. The document also emphasizes that occupational exposure includes any event in which a person in a registered facility or lab is not appropriately protected in the presence of an agent or toxin. For example, a sharp injury from a needle being used in select agent or toxin work would be considered an occupational exposure. While these reporting requirements are fairly broad, they do require a degree of certainty about the occurrence of an event. But, in some cases, recognition of a reportable event may come only when consequences are realized.
While the agencies’ steps to better define reportable events can increase the likelihood that recognized events will be reported, according to the literature and biosafety specialists, lab workers are often unaware that a release has occurred unless or until they become sick. For example, early studies of LAIs found that as many as 80 percent of all reported LAIs could not be traced back to a particular lab incident. A more recent study found similar results. The absence of clear evidence of the means of transmission in most documented LAIs highlights the importance of being able to recognize potential hazards because the likely cause of these LAIs is often unobserved. While a great deal is known about micro-organisms to support safe lab practices, microbiology is a dynamic and evolving field. New infectious agents have emerged, and work with these agents has expanded. In addition, while technological improvements have enhanced safety, they can also introduce new safety challenges. For example, failures in a lab system designed to filter aerosols led to a recent company recall of this system. The dynamic nature of the field, coupled with the difficulty of identifying causal incidents in LAIs, suggests substantial potential for unintentional under-reporting. In such an environment— where workers are waiting for an obvious event to occur before reporting—a significant amount of important, reportable safety information could be lost. Consequently, while reporting requirements for releases may now be clear for many incidents or for observed consequences, broader reporting thresholds may be necessary to accommodate emerging safety issues and the unobserved nature of many LAI events.
According to lessons from the literature and case studies, expanding reporting thresholds—in this case, to include observed or suspected hazards—can help capture valuable information for accident prevention. The industries in the case studies all struggled with how to recognize, and thus report, such events. However, over time, the feedback they received from these reports, in the form of specific safety improvements, helped workers develop familiarity and comfort with recognizing and reporting such events. An example in the lab community might be the practice of mouth pipetting, drawing an agent into a pipette by sucking on one end. At one time, mouth pipetting was a common practice, despite the high risk of exposure. Even though not every instance resulted in exposure or an LAI, some did, and eventually the activity was recognized as a potential hazard—an accident precursor. Expanding the TLR reporting threshold to include hazards could provide additional data that might be useful for safety improvement efforts. For example, INPO encourages reporting of events at all levels of the risk pyramid—including the hazard level—for the corrective actions reporting programs of nuclear power plants. This level of reporting ensures as complete coverage as possible of potential safety issues. For the TLR, reporting at this level could be voluntary or mandatory. Moreover, until a labwide voluntary reporting system is implemented, reporting at this level could further develop the reporting culture among select agent labs.
The CDC and APHIS Have Taken Steps to Protect Confidentiality, Which Can Encourage Reporting; Lessons Indicate That Limited Immunity Could Further Encourage Reporting
The CDC and APHIS SAP has taken steps to incorporate deidentification measures to further protect the confidentiality of entities reporting thefts, losses, or releases. While entity-specific information is protected from release under FOIA, there was an instance when specific entity information was somehow leaked to the media after the CDC provided the data in response to a congressional request. As a result, the agency provides only deidentified report forms in response to congressional requests. In addition, to further support reporter confidentiality in the event of audit or congressional requests to view TLR information, the CDC has established an access-controlled reading room for viewing these reports. It expects these measures to prevent any future prohibited disclosure of entity-specific data, while special-need access to information about thefts, losses, or releases is provided. According to lessons from the literature and case studies, even the perception of a confidentiality breach can quash reporting. Consequently, the agencies’ measures to ensure confidentiality can increase confidence in reporting.
Apart from the requirement to report, labs also have some incentive for reporting. One such incentive, according to CDC officials, is labs’ interest in avoiding increased oversight. In addition, lab officials know that (1) select agents are on the list because they are dangerous and (2) it is of critical importance to promptly report incidents to ensure proper care of workers and the public. CDC officials stated, however, that too much discretion about what and when to report could result in the under- reporting of more serious events. As the experiences of the case industries illustrate, protection of reporter confidentiality is an ongoing effort, even when strong legislative provisions exist to protect reporters’ identities. Because, as mentioned above, even the perception of a confidentiality breach can quash reporting, strong incentives for reporting—such as limited immunity provisions—can balance these fears and encourage continued reporting, according to lessons from the literature and case studies.
If the CDC or APHIS discovers possible violations of the select agent regulations, the following types of enforcement actions may occur: (1) administrative actions, including denial of application or suspension or revocation of certificate of registration, (2) civil money penalties or criminal enforcement, and (3) referral to the Department of Justice for further investigation or prosecution. Currently, even if entities report violations, there are no provisions for receiving immunity from these enforcement actions. In the aviation industry, pilots face the possibility of similar enforcement actions for violations of regulations. However, the FAA provides some disciplinary immunity for pilots reporting violations of regulations to ASRS. Such immunity is in recognition of the fact that (1) information about pilots’ errors is essential for identification of systemic problems and (2) pilots would be unlikely to report their errors without some incentive to do so. Similar provisions for limited immunity from administrative action or reduced monetary penalty could be offered to labs for some violations of select agent regulations. Although the CDC and APHIS have not yet explored this option, such an incentive could be a powerful tool for ensuring reporting compliance.
The CDC and APHIS are Uniquely Positioned to Support Data Sharing and Feedback Efforts, Including Evaluation
The CDC and APHIS are uniquely positioned to support feedback and evaluation efforts that are based on TLR information. The agencies’ oversight responsibilities for registered labs and their recognized expertise in laboratory safety practices provides them visibility and authority across the lab community. Such a position, according to lessons from the literature and case studies, is ideal for (1) disseminating feedback from SRSs and (2) evaluating the effectiveness of the reporting program. Currently, the agencies have a process for providing feedback to the reporting institution, and are beginning to explore avenues for sharing safety lessons across the labs and internationally.
In addition, the CDC has begun using the data to develop lessons learned from reported information. Although deidentified reports are not available to the general public, they are being used for special research studies sponsored by the Select Agent Program. For example, information from deidentified reports has been used for conferences such as the yearly Select Agent Workshops, sponsored by the CDC, APHIS, and the Federal Bureau of Investigation. The agencies are also analyzing data on select agent release reports and plan to publish the findings in a publicly available, peer-reviewed journal. Such feedback demonstrates the value of reporting, according to lessons from the literature and case studies. Lessons from the case studies also indicate that using SRS data to develop guidance and sharing such information internationally can support industrywide safety improvement efforts. For example, TLR data could provide valuable information for updates to the BMBL and World Health Organization guidelines, which can benefit the worldwide lab community.
When a lab reports a TLR, the CDC or APHIS provides feedback and, if necessary, follows up to determine the root cause or initiate surveillance. While the CDC recognizes the usefulness of TLR reports for generating data that can (1) help spot trends, (2) highlight areas for performance improvement, and (3) show limitations in current procedures, it is just beginning to collect enough data to see patterns of nonreporting, according to CDC officials. The CDC expects that in the future, it will have collected enough data, including inspection data, to identify reporting patterns and conduct targeted outreach to nonreporting labs. However, the agencies do not yet have a specific plan to identify reporting gaps in order to develop targeted outreach and training or to assess the system’s effectiveness. To further support targeted outreach, as well as system modification, evaluation is needed. As we have previously reported, such evaluation can be a potentially critical source of information for assessing the effectiveness of strategies and the implementation of programs. Evaluation can also help ensure that goals are reasonable, strategies for achieving goals are effective, and corrective actions are taken in program implementation. For example, an evaluation of the ASRS program revealed the need to improve the usefulness of the system through system modifications and increased outreach to certain populations. According to CDC Select Agent Program officials, they have had general reviews, such as an HHS Office of Inspector General review and a federally funded, third-party review of procedures conducted by Homeland Security. However, these reviews did not focus on the effectiveness of the TLR reporting system.
Existing Information on Biological Labs and Lessons from the Literature and Case Studies Suggest Specific SRS Design and Implementation Considerations
Safety reporting system evaluation literature and case studies of SRSs in three U.S. industries—aviation, commercial nuclear power, and health care—provide lessons for design and implementation considerations for a national biological lab SRS. First among these lessons is the need to set system goals and assess organizational culture, as illustrated in figure 4. However, assessment of organizational culture is difficult in the context of U.S. biological labs because there is an unknown number of labs and, except for labs in the Select Agent Program, no entity is responsible for overseeing all labs. While many federal agencies have labs and are involved in the industry, no single regulatory body has the clear responsibility or directive for the safety of all laboratories. Consequently, an important part of the goal-setting and assessment process for a biological lab SRS is determining the scope of labs to which the system would apply. For example, specific system goals, such as the ability to identify trends or incidence rates, may be possible with one type or level of lab, but not another. Similarly, assessment may reveal that differences in organizational cultures across lab types is so significant that appropriate SRS features for one type of lab would not apply well to another. Consequently, the scope of labs to which an SRS might apply could be addressed as part of the goal-setting and assessment process.
Until such a goal-setting and assessment process is completed, design and implementation options in the three key areas—reporting and analysis, reporter protections and incentives, and feedback mechanisms—can be considered in the context of available information on organizational culture in biological labs and potential goals for a biological lab SRS. In particular, the following can provide some context to guide early decisions for the design and implementation of an SRS for the lab community: biosafety research, experiences with the TLR reporting system and biosafety specialists’ perspectives. Such context can be further refined once assessment and stakeholder input are obtained. In addition, the NIH has begun developing a prototype reporting system for a subset of its intramural research labs. Lessons from how this prototype system works for a subset of labs could also inform design and implementation considerations for a national biological lab reporting system.
In the Context of Existing Information, Lessons Suggest Several Features for Reporting and Analysis
Existing information about the potential goals for a biological lab SRS and the organizational culture of these labs suggest certain design and implementation features in the first key area: reporting and analysis. Figure 5 shows the relationship of program goals and organizational culture to this key area.
The level of event of interest, probable SRS goals, and organizational culture all suggest voluntary reporting for a biological lab SRS. While the TLR reporting system for select agents is focused on incidents or accidents that pose the greatest danger to workers and the public, an SRS for nonselect agents could be used to gather information on hazards and potentially less serious incidents and accidents in order to collect precursor data. Systems that focus on less serious events and that collect precursor data to support learning rather than enforcement goals are generally associated with voluntary reporting, according to lessons learned. Voluntary reporting for a biological lab SRS also corresponds with the views of biosafety specialists we spoke with.
Laboratory Community’s Limited Experience with Reporting to an SRS Suggests an Initially Open Classification Scheme
Reporting to an SRS—especially for incidents beyond LAIs or the theft, loss, or release of select agents—would be relatively new to the lab community. And although select agent labs have become familiar with reporting theft, loss, or release incidents, previous reporting failures indicate that, even among this subset of labs, reportable events may still be unclear. In such situations, allowing workers to report events in their own words, rather than asking them to classify the event as a certain type of hazard or error in order to report, can facilitate reporting. Classifying events—that is, applying standardized descriptions of accidents, incidents, and hazards—can facilitate safety improvement across the industry by providing a common language for understanding safety events. But classification can also limit reporting if workers are unsure of how to apply it. One solution for industries new to SRS reporting is to apply classification at a higher level, for example, through the event review or analysis process.
Ensuring the reporting process is as clear and simple as possible is especially important for the lab community. Although LAIs are widely recognized as under-reported, there is, at least, a long history of reporting these events among lab workers. However, lab workers do not have as much experience reporting events without an obvious outcome, such as an LAI. Many of the biosafety specialists we spoke with had difficulty envisioning the types of events—apart from LAIs—that might be reportable. In addition, even when LAIs do occur, many are never linked with a specific causative incident, so information about potential event precursors is never communicated or is difficult to identify. Difficulty recognizing exposure is a reality of work in these labs. LAIs often occur through aerosol exposure, and the activities that can create such conditions are numerous. However, all three case-study industries grappled with similar difficulties in recognizing and reporting events that did not result in obviously negative outcomes. One way the industries addressed this difficulty was to allow workers to report a broad range of events in their own words. Over time, as workers saw concrete results from their reports, such as improved processes or guidance, their ability to identify less concrete, but equally unsafe hazards and incidents—even those without obvious consequences—grew. Expecting lab workers to classify events in order to report them would likely limit reporting. In such situations, lessons learned suggest allowing workers to report events in their own words to facilitate reporting.
Diversity of Lab Community and Uncertainty about Reporting Population Suggest Multimode and Open Format Reporting Options, with Direct and Open Reporting
The lab community is organizationally diverse and the population of labs is unknown. Opening reporting to all workers, and offering multiple reporting modes (e.g., Web and postal), and using forms with open- question formats that allow workers to report events in their own words can facilitate reporting in the face of such uncertainty, according to lessons from the literature and case studies. Biological labs operate across a wide range of employment sectors, locations, and levels of containment. There are BSL-2, 3, and 4 labs in private, academic, and public settings across the United States. Staffing models for these labs are likely as different as the lab populations. Safety culture and reporting proclivity also vary across lab types. For example, according to biosafety specialists, clinical and academic labs—in contrast to government and private labs— face greater challenges to creating a safety culture and reporting events. According to one biosafety specialist, in academic labs, students expected to complete lab work before they have received adequate safety training may not feel they are in a position to demand such training. Specialists also indicate that higher-level labs (BSL-3 and 4)—especially the larger ones with better resources—have personnel, equipment, and/or processes to better support safety culture than lower-level, smaller labs with fewer resources. Furthermore, the consequences of accidents are so great at higher-level labs that the culture is generally more cautious. At lower-level labs, the perception of risk and actual risk are lower, so practices are not as stringent as they would be at higher-level ones.
The work environment at biological labs also varies. In particular, some work is done in teams and some individually, and some is completed overnight because of time-sensitive experiments in the research. In addition, the solo nature of much lab research means that a single lab worker may be the only one who knows about an incident. For lab work, the external visibility of accidents and incidents present in aviation or some areas of health care may not exist. Bioresearch errors are also a lot harder to spot than errors in other industries. For example, nuclear safety officers can use radiation detectors to determine whether breaches of protocol have occurred by identifying hot spots in suspicious areas, such as a phone outside the lab. No similar tracking mechanism exists for bioresearch. Therefore, the only objective proof of most accidents is that someone became ill. In addition, lab workers have little incentive to report if the incident occurred as a result of their own error, according to biosafety specialists. Although one specialist believes there is a fair degree of reporting on equipment failures because researchers generally want to ensure that the equipment is fixed.
Such variation has consequences for reporting. According to lessons from the literature and case studies, assessments can provide information about aspects of organizational cultures, structures, or processes that can affect reporting. However, a comprehensive assessment of this sort is difficult because (1) the population of labs is unknown and (2) no entity is responsible for conducting such an assessment. Given the uncertainty about cultural influences that may affect reporting behavior, more inclusive reporting options can facilitate reporting, according to lessons from the literature and case studies. For example, uncertainty about lab workers’ access to reporting forms or ability to complete detailed forms can be minimized if (1) workers can report in whichever mode is most accessible to them (Web or postal) and (2) the forms do not require overly detailed or technical explanations.
In an environment where much of the work is done alone and incentives may not exist for reporting, an SRS that is open to all lab workers (including security and janitorial staff) can facilitate reporting where none might occur. Accepting reports from workers not directly involved in research can increase the volume of safety data that can be obtained. Multimode and open-reporting formats, as suggested above, support open reporting since staff with varying knowledge of biosafety terms—such as janitorial, security, or animal care staff—are still able to report incidents or hazards in their own words in the way that is most convenient to them.
Historically, the preferred model of biosafety reporting is hierarchical. This ensures that workers receive timely medical intervention and surveillance. Although it is important that workers have a mechanism for receiving immediate medical attention and surveillance when needed, a lot of important safety information could be lost if only supervisors or managers are allowed to report. Hierarchical reporting structures may limit the amount of useful safety data that can be received because a filtering process takes place at each level in the reporting hierarchy. As the information moves up the reporting structure, each person assesses whether the event is reportable. If the person decides that it is, he or she will report his or her own interpretation of events. Allowing all workers to directly report to an SRS removes this filter and can increase the number of reports and the amount of information collected from reports. For example, reports from multiple sources can enable analysis of events from multiple perspectives. While workers should always be encouraged to report potential exposures and other hazards to their supervisors so that they can receive timely medical attention, they should also be able to report incidents directly to an SRS.
Advantages and Disadvantages Inherent in Industry-Level and Local-Level SRS Administration Suggest a Dual Reporting Option
The HHS and USDA—as central, recognized authorities in the biological lab community—represent the kind of industry-level entities that, according to lessons learned, are necessary for effective dissemination and evaluation activities. However, the agencies’ regulatory role in the Select Agent Program could inhibit voluntary reporting, suggesting that an alternative reporting mechanism may be necessary. According to lessons from the case studies, dual reporting options can facilitate reporting in such situations. For example, if workers are concerned about reporting safety events—either to an internally managed SRS or to the regulator—an external, independently managed SRS can be useful. Alternatively, if workers are comfortable reporting to a local SRS, these programs can be very effective when the information from local systems is fed to a central, industry-level entity that can analyze data across the industry and disseminate safety improvements industrywide.
While each case study industry differs in its approach, all three rely on dual (or multiple) reporting options. Specifically, the FAA relies on the independently run ASRS, as well as seven other key reporting programs, to collect safety data. Events that meet reporting requirements can be reported to the ASRS—meeting the need for an independent reporting mechanism for those concerned about reporting to either their local (airline-run) SRSs or to the regulator. In addition, as part of the FAA’s other reporting programs, the FAA receives SRS data from the airlines, which they use to develop industrywide safety improvements. The commercial nuclear power industry also has reporting options. While each plant has a reporting system for corrective actions, a portion of the more significant reports are passed on to INPO for development of industrywide safety improvements. Individuals and plants also have the option to report to NRC’s Allegation Program. Finally, in designing its reporting program, the VA created two reporting options—one externally managed by NASA and one local, hospital-based program in which safety data are sent on to VA’s National Center for Patient Safety (NCPS) for development of industrywide safety improvements. While the industries might encourage workers to use one option over another, they are still able to report to the system most comfortable for them. Both options, however, utilize an entity with industrywide visibility and recognized authority to disseminate SRS information and direct system evaluations.
An external, independently managed SRS for the lab community offers several advantages, including the (1) potential to reduce workers’ fear of being punished for reporting, (2) ability to contract for system management, and (3) centralization of safety data. Nevertheless, since the individual labs have the most intimate knowledge of staff, pathogens, and operations, several biosafety specialists adamantly indicated that the lab facility was the appropriate level for reporting and analysis. According to lessons from the literature, as well as the perspectives of biosafety specialists, analysis of safety reports should be done by qualified biosafety professionals and others with appropriate expertise or knowledge. In addition, processes for local-level collection and analysis of SRS reports can facilitate worker buy-in for reporting, according to lessons from the case studies. However, not all labs have the same resources for collecting and analyzing reports. Furthermore, the focus on safety culture across the lab community may not be sufficient to support an SRS program that operates only at the local level. But local-level support—as well as encouragement of reporting, receptivity to safety concerns, and regard for the field of biosafety—is central to a robust reporting program. Even if there is receptivity to biosafety issues, when safety is the responsibility of those internal to the organization, there may be conflicts of interest in addressing safety issues. While safety improvements are most useful when shared across the lab community, sharing this information may raise institutional concerns about funding streams, public perception of the institution, and professional standing of lab workers, according to biosafety specialists we spoke with.
Given the advantages and disadvantages of SRS administration at both the local and agency levels, dual reporting options may be necessary, at least initially. For example, the VA initiated its safety reporting program with both internal and external options. Although the VA canceled the NASA- run program after nearly 10 years, in recognition of the importance of an external reporting option, some efforts to reestablish the system continue.
In the Context of Existing Information, Lessons Suggest Several Features for Reporter Protections and Incentives
Existing information about the potential goals for a biological lab SRS and the organizational culture of these labs suggest certain design and implementation features in the second key area: reporter protections and incentives. Figure 6 shows the relationship of program goals and organizational culture to this key area.
Voluntary reporting to an SRS—especially of incidents that do not result in LAIs—would be a new expectation for some lab workers. As mentioned earlier, even the perception of a confidentiality breach can quash reporting. And given that entity information from the TLR reporting system was leaked to the press, lab workers might have reason for concern about reporting similar incidents to a voluntary system. In addition, the literature and biosafety specialists noted, confidentiality concerns are among the barriers SRS managers will face in implementing a successful reporting program. Therefore, concerns about confidentiality suggest that a biological lab SRS will require strong confidentiality protections, data deidentification processes, and other incentives to encourage reporting, according to lessons learned. In addition, while the literature suggests anonymous reporting as one solution for minimizing confidentiality concerns, it is not an ideal one here. The complexity of biosafety issues would require a mechanism for follow-up with the worker or reporting entity because interpretation of the incident from a written report can often differ from interpretation of the incident from talking with the reporter, according to biosafety specialists.
Biosafety specialists also noted that developing trust in reporting has the potential to be problematic because of labs’ existing reporting culture. For example, specialists noted the following influences on lab workers’ likelihood of reporting accidents or incidents: realization that there is risk associated with laboratory work; difficulty recognizing that an incident has occurred, and knowing that this disincentives for reporting, such as the threat of punishment for reporting or concerns about (1) the reputation of both the worker and the institution, (2) the potential loss of research funds, and (3) the fact that reporting may take time away from work; and lack of perceived incentives for reporting, such as the failure to see the value of reporting accidents or incidents, as well as the fact that lab work may be done alone, which does not provide an incentive for self-reporting of errors.
Given the confidentiality concerns and other difficulties of introducing a voluntary reporting system into the biological lab community, deidentification of safety reports takes on more importance. For example, according to biosafety specialists at one university, a primary concern with the establishment of their SRS was anonymity, especially for those in the agricultural labs. These researchers were concerned that if their identities became known, they could suffer from retaliation from organizations opposed to their research. While the SRS managers chose to make the reports available to the public via the Web, they also deidentified the reports to prevent individuals outside the lab community from being able to identify individuals or specific labs. However, because the university research community is a small one and lab work is fairly specific, it is not overly difficult for those in the lab community to determine who was involved in an incident if a report mentions a particular pathogen and what was being done with it. As a result, deidentification measures may have to go beyond simply removing reporter information. In addition, if deidentification measures are insufficient for maintaining confidentiality, workers and entities may need added incentives to encourage reporting in light of the fact that their identities may become known.
There are several incentives for the lab community to report, according to biosafety specialists. For example, deidentified SRS data can enhance the evidentiary foundation for biosafety research since it provides an extensive, heretofore unavailable data source. Such analyses benefit the overall lab community by providing greater evidentiary basis for risk based decisions for—or against—expensive or burdensome lab safety protocols. In addition, workers’ trust in reporting can be developed over time at the local level, through rewarding, nonpunitive reporting experiences. The relationship workers have with the lab’s safety staff is central to this effort, according to biosafety specialists. Trust in an institution’s Occupational Health Service, biosafety officer, or other official responsible for safety encourages workers to overcome ignorance, reluctance, or indifference to reporting. Biosafety specialists at one university credit the success of their nonpunitive SRS to the safety-focused relationship among the biosafety officer and lab staff. At first, according to these biosafety specialists, the researchers were afraid that SRS reports would be used to punish them academically or professionally. Over time, however, they saw the implementation of a nonpunitive system that had positive outcomes for safety improvements in the lab.
While biosafety specialists believed that development of a reporting culture might be difficult, they offered a number of suggestions for overcoming reporting barriers, including (1) developing a safety office in conjunction with the research staff, (2) ensuring continued interaction and shared conferences on safety issues with researchers and the biosafety office to show the value of reported information, and (3) reinforcing the importance of reporting by showing a concern for the individual that is exposed rather than focusing on punishment. In addition, the CDC noted the importance of biosafety training, which is an important part of laboratory safety culture that has an impact on workers’ ability to recognize and report safety issues. This type of continued support for reporting—as evidenced through positive feedback, awards, and nonpunitive experiences and training—fosters trust and willingness to report, according to lessons learned.
In the Context of Existing Information, Lessons Suggest Several Features for Feedback Mechanisms
Existing information about the potential goals for a biological lab SRS and the organizational culture of these labs suggest certain design and implementation features in the third key area: feedback mechanisms. Figure 7 shows the relationship of program goals and organizational culture to this key area.
The CDC and NIH—as recognized authorities on working safely with infectious diseases—disseminate safety information to the entire lab community. For example, documents such as the BMBL and recombinant DNA guidelines provide the foundational principles for lab safety practices; they are updated periodically to reflect new information about infectious agents and routes of exposure. In addition, the CDC’s MMWR reports provide alerts as emerging safety issues are identified. Lessons suggest that entities with industrywide visibility and recognized authority are ideally situated to ensure SRS data and safety improvement initiatives are disseminated across the industry. Such entities would be better positioned than individual labs, facilities, states, or others to disseminate SRS-based alerts or other safety reports in a way that reaches all labs. In addition, in order to counter the potential conflicts of interest that can arise with sharing data across labs, biosafety specialists we spoke with supported the notion of an “industry-level” entity for disseminating safety data. In particular, the specialists noted that the typical reporting relationship between the biosafety officer and lab management is not independent; this relationship might therefore inhibit sharing of safety data beyond the individual lab. Thus, a central, industry-level unit— responsible for collecting and disseminating SRS reports from either workers or organizations—minimizes such concerns and facilitates industrywide sharing of SRS data, according to lessons learned.
SRS data can also support training, which is a key component of biosafety. These data can provide the experiential basis for specific safety precautions. For example, one biosafety specialist noted that staff want to know this information in order to accept the need for precautions and procedures. Currently, there is no such experiential database; however, an industry-level entity could facilitate the creation and maintenance of such a database from SRS data.
Biosafety Specialists Note the Importance of Monitoring Safety Culture
Some of the biosafety specialists we spoke with noted the importance of ongoing monitoring of safety culture, for example, through a lab director’s personal investment of time and direct observation and communication with lab workers. Without such observation and communication, as well as feedback from workers, managers will remain unaware of areas where the safety culture is likely to lead to serious problems. While specialists did not specifically note the need for formal evaluation to solicit this feedback, lessons learned suggest that evaluation is useful in this regard. Specifically, evaluation can help identify (1) problem areas in the safety culture and (2) where targeted outreach and training or program modification might lead to better reporting and safety improvement. Such evaluation is important in ensuring the system is working as effectively as possible, according to lessons from the literature and case studies.
Conclusions
Safety reporting systems (SRS) can be key tools for safety improvement efforts. Such systems increase the amount of information available for identifying systemic safety issues by offering a means through which workers can report a variety of events that shed light on underlying factors in the work environment that can lead to accidents. Our extensive review of SRS evaluation literature and case studies of SRS use in three industries provides an empirical, experience-based foundation for developing a framework for SRS design and implementation. This framework can be applied across a wide variety of industrial, organizational, professional, and cultural contexts. The industries we studied, despite their differences, shared similar experiences designing and using SRSs for safety improvement. The commonalities they shared provide the basis for our lessons—the pros and cons and successes and failures—relating to particular design and implementation choices across a wide variety of work environments. However, it is important to recognize the uniqueness of any work environment. The biological lab community is undoubtedly a unique working environment and blindly applying an SRS from one industry to the lab community would be a mistake. This observation underlies the leading finding among our lessons: in choosing the system features most appropriate for the environment in which the SRS will operate, consideration of program goals and organizational culture is essential. Such consideration provides the context for choosing features in three key areas of system design and implementation—reporting and analysis, reporter protections and incentives, and feedback mechanisms.
The Centers for Disease Control and Prevention (CDC) and Animal and Plant Health Inspection Service (APHIS) Select Agent Program (SAP) manage a mandatory reporting system for theft, loss, and release (TLR) of select agents. Although this system is compliance-based, it can be used— like the SRSs in our study—to identify systemic safety issues. In fact, the agencies have taken steps to use the system in this way. For example, the agencies have dedicated expert resources to manage the system, developed guidance to clarify reportable events and procedures to ensure reporter confidentiality, and used information from the system to provide feedback about safety issues to the select agent lab community. However, lessons from the literature and case studies suggest additional actions in assessment and the three key areas that could further improve reporting and the usefulness of the system as a source for safety data. These elements include an assessment of organizational culture, a lower threshold for reportable events, limited immunity provisions, and mechanisms for international lesson sharing and evaluation. Through these actions, efforts to identify areas for system improvement, target outreach and training, and encourage reporting could be supported.
While other industries have developed industrywide SRSs, one does not exist for the broader laboratory community. However, recognizing the potential of such a system for the laboratory community, an interagency task force on biosafety recommended it and Congress proposed legislation to develop one. While current safety guidance for biological labs is based on many years of experience working with infectious organisms and analyses of laboratory-acquired infections (LAI), there are some limitations to these data. For example, a widely recognized limitation is the high rate of under-reporting of LAIs. In addition, accident and illness data are incomplete, and reported information usually does not fully describe factors contributing to the LAIs. Such issues limit the amount of information available for identification of systemic factors that can lead to accidents. A national laboratorywide voluntary SRS that is accessible to all labs and designed around specific goals and organizational culture would facilitate collection of such data to inform safety improvements. Analysis of these data could support evidence-based modifications to lab practices and procedures, reveal problems with equipment use or design, and identify training needs and requirements.
Establishing such an SRS for the lab community, however, would require addressing some unique issues. Although our findings suggest that reporting systems should be tied to program goals and a clear sense of the organizational culture, this is problematic for biological labs because they are not a clearly identified or defined population. In addition, there is no agency or entity with the authority to direct such assessments across the entire lab community. Proposed federal legislation, if enacted, would establish a role for an SRS for the lab community to be administered by the Department of Health and Human Services (HHS) and the Department of Agriculture (USDA). If HHS and USDA are directed to develop such an SRS, certain features for the three key areas are suggested by existing studies, the CDC’s and APHIS’s experiences with the TLR reporting system, and biosafety specialists’ knowledge of organizational culture in labs and experiences with safety reporting. Lessons developed from experiences with the National Institutes of Health’s (NIH) prototype reporting system for its intramural research labs might inform design and implementation considerations as well. In addition, stakeholder involvement in goal setting is particularly important given the issues related to visibility and oversight of the broader lab population. The greater the stakeholder involvement, the greater the likelihood the perspectives of labs with varying environments and cultures will be represented. Stakeholders may also have knowledge of, and access to, labs that can support cultural assessments and encourage reporting. Such assessments are important for understanding differences in organizational cultures across the diverse types and levels of labs that could affect choices for system scope and features.
Until a cultural assessment is conducted, existing information about likely system goals and labs’ organizational culture suggests certain features in the three key areas—reporting and analysis, reporter protections and incentives, and feedback mechanisms. With respect to reporting and analysis, a variety of factors suggest voluntary reporting for labs outside the Select Agent Program, including likely system goals for learning rather than enforcement and the need to collect information on incidents and hazards as opposed to serious accidents. In addition, the lab community’s limited experience with this type of reporting, the diversity of lab environments, and uncertainty about the reporting population suggest an initially open classification scheme that allows workers to report events in their own words, using multimode (Web or postal) and open-format reporting options that are available to all workers. These options can facilitate reporting in such situations. Lastly, the advantages and disadvantages inherent in SRS administration at either the local or higher level suggest that dual reporting options may be necessary. Such options— present in different forms in all three case industries—allow workers to submit reports to whichever level is most comfortable for them. For example, workers would have the choice of whether to report to an internal, lab-managed reporting program that feeds data to a central authority or to an independent, externally managed SRS. Both of these reporting options will also require strong confidentiality protections, data deidentification, and other reporting incentives to foster trust in reporting. Finally, feedback mechanisms for disseminating safety data or recommendations and evaluations are needed to promote worker buy-in for reporting, identify areas for targeted outreach and training, and identify areas for system improvement.
Matters for Congressional Consideration
In developing legislation for a national reporting system for the biological laboratory community, Congress should consider provisions for the agency it designates as responsible for the system to take into account the following in design and implementation: include stakeholders in setting system goals; assess labs’ organizational culture to guide design and implementation make reporting voluntary, with open-reporting formats that allow workers to report events in their own words and that can be submitted by all workers in a variety of modes (Web or postal), with the option to report to either an internal or external entity; incorporate strong reporter protections, data deidentification measures, and other incentives for reporting; develop feedback mechanisms and an industry-level entity for disseminating safety data and safety recommendations across the lab community; and ensure ongoing monitoring and evaluation of the safety reporting system and safety culture.
Recommendations for Executive Action
To improve the system for reporting the theft, loss, and release of select agents, we recommend that the Centers for Disease Control and Prevention and Animal and Plant Health Inspection Service Select Agent Program, in coordination with other relevant agencies, consider the following changes to their system: lower the threshold of event reporting to maximize collection of information that can help identify systemic safety issues, offer limited immunity protections to encourage reporting, and develop (1) mechanisms for sharing safety data for international lab safety improvement efforts and (2) processes for identifying reporting gaps and system evaluation to support targeted outreach and system modification.
Agency Comments and Our Evaluation
We provided a draft of this report to the Department of Transportation (DOT), HHS, INPO, NASA, NRC, USDA, and VA for review and comment. In written comments, the DOT, INPO, NASA, NRC, and VA agreed with our findings and conclusions and provided technical comments, which we addressed, as appropriate. The DOT’s FAA and NASA also provided positive comments on the quality of our review. In particular, the FAA reviewer indicated that it was an excellent report that addressed the factors that should be considered by an organization planning to implement a safety reporting system. Similarly, the NASA reviewer noted that this was an excellent document describing the many aspects of safety reporting systems, and that it had captured the complexity and dynamic nature of the SRS approach to obtaining safety information from the frontline.
In written comments, the HHS noted that GAO’s thorough case studies of long-standing industrywide safety reporting systems would be helpful when considering the important issue of reporting systems in biological laboratories. However, the HHS disagreed with two of our recommendations, and partially agreed with a third, to improve the theft, loss, and release (TLR) reporting system for select agents. Specifically, the HHS disagreed with our first recommendation—to lower the threshold for reportable events to maximize information collection—noting that their current mandatory reporting thresholds for the Select Agent Program (SAP) provides sufficiently robust information. While we appreciate the CDC and APHIS Select Agent Program’s efforts to clarify reporting requirements to ensure all thefts, losses, and releases are reported, lowering reporting thresholds could further ensure all relevant reports are received. With lower reporting thresholds, questionable events are less likely to go unreported because of confusion about whether to report. Furthermore, we note that reporting below the currently established threshold could be voluntary, thereby offering registered entities a convenient, optional mechanism for sharing identified hazards. This is similar to the agencies’ recently initiated, anonymous fraud, waste, and abuse reporting system. However, reporting to the TLR system would enable follow-up and feedback with the reporting lab because of its confidential, as opposed to anonymous, nature. Lastly, biosafety specialists we spoke with, as well as HHS staff involved in updating the BMBL, specifically noted the lack of available data for developing evidence-based biosafety guidelines. Data collected through the TLR system—especially if it is more comprehensive—could provide such data.
The HHS also disagreed with our second recommendation--to offer limited immunity protections to encourage reporting. While the HHS agrees that identification of safety issues is important, they believe they do not have statutory authority to offer limited immunity. The Public Health Security and Bioterrorism Preparedness and Response Act of 2002 required the Secretary of HHS to promulgate regulations requiring individuals and entities to notify HHS and others in the event of the theft, loss, or release of select agents and toxins. Violations of the Select Agent Regulations may result in criminal or civil money penalties. While we do not want to suggest that the HHS waive these penalties under a limited immunity provision, the Act sets maximum civil money penalties for Select Agent Regulations violations at $250,000 for individuals and $500,000 for entities, which provides the HHS Secretary, now delegated to the HHS Inspector General, discretion to charge penalties up to those maximum amounts. In addition, while reporting is required by law, individuals or entities may be concerned that reporting thefts, losses, or releases may lead to increased inspections by the CDC or referral to the Inspector General of the Department of Health and Human Services for investigation and possible penalties. Therefore, we recommend the CDC, in conjunction with other pertinent oversight agencies, examine whether adding limited immunity protections into the TLR reporting system would ease individuals' and entities' fears of reporting and encourage them to provide more complete information on thefts, losses, and releases. One possible way to incorporate limited immunity protections into the TLR reporting system would be to lower the civil money penalty for those individuals or entities who properly filed a TLR report should penalties be appropriate for the theft, loss, or release being reported. We believe the Secretary of HHS has sufficiently broad authority under the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 to provide such immunity protections. The literature and our case studies identified limited immunity as a key incentive for reporting, and HHS' Trans-Federal Task Force on optimizing biosafety and biocontainment oversight noted the potential of the Aviation Safety Reporting System--and its associated immunity provisions--as a model for a national SRS for biological labs.
Lastly, the HHS partially agreed with the third recommendation. While the agency agreed with the recommendation to develop processes for identifying reporting gaps and system evaluation to support targeted outreach and system modification, they disagreed with the recommendation to share TLR data for international lab safety improvement efforts. In particular, the HHS notes its lack of authority to regulate foreign laboratories and suggests such activities might be better placed elsewhere in the CDC. As the literature and case studies illustrate, it is important to share safety lessons as broadly as possible. Sharing TLR lessons does not involve regulation of foreign labs, so additional authority is not required. Furthermore, the recommendation is directed to the CDC SAP because they manage the TLR system. If the CDC SAP wished to delegate the responsibility for sharing TLR lessons with the international lab community to another HHS entity, it would satisfy the intent of the recommendation.
The HHS also commented on the matters for congressional consideration, for example, suggesting additional matters that fall outside the scope of this review. The agency disagreed with GAO on several issues, such as (1) the scope of the recommendations, (2) the extent to which the biological lab industry might benefit from an SRS, (3) particular SRS features noted in the matters for congressional consideration, and (4) reporting thresholds and system management. These general comments and our responses to them are included in appendix IV. The HHS also provided technical comments which we addressed, as appropriate.
In written comments, the USDA concurred with our recommendations, although they noted several disagreements in their detailed responses. With respect to our first recommendation—to lower reporting thresholds—the USDA noted, like the HHS, that (1) they believe the current reporting thresholds (providing 130 reports a year) are sufficiently robust and (2) APHIS’s other monitoring and surveillance activities are sufficient for monitoring safety and security conditions in select agent labs. As noted above, we believe that with lower reporting thresholds, questionable events are less likely to go unreported because of confusion about whether to report. Furthermore, we note that reporting below the currently established threshold could be voluntary, thereby offering registered entities a mechanism for sharing identified hazards in a system that would enable follow-up and feedback with reporters. Lastly, data collected through the TLR system—especially if it is more comprehensive—could provide data for updates to biosafety guidelines.
In response to our second recommendation—to offer limited immunity protections—the USDA, like the HHS, believes it lacks statutory authority to offer such protections. As noted above, we believe the Secretary of USDA has sufficiently broad authority under the Agricultural Bioterrorism Protection Act of 2002 to provide such immunity protections for the TLR reporting system. However, in recognition that such provisions might require coordination with other agencies, we added this clarification to the recommendations.
Lastly, in response to our third recommendation—to (1) share TLR data for international lab safety improvement efforts and (2) identify reporting gaps and conduct system evaluation—the USDA noted that they did not believe additional regulatory oversight was needed and that targeted education and safety training in high-risk areas would likely be more cost effective. Our recommendation does not suggest any additional regulatory oversight. It is focused on broadly sharing lessons learned from the TLR system and on identifying areas—through analysis of TLR data and evaluation—for targeted outreach and training and system modification. These actions are methods through which the USDA can better identify the “high-risk areas” the agency notes should be targeted for education and training. The USDA also noted that an example we provided of unreported LAIs demonstrates that these types of infections are infrequent. However, this is just one example of LAI underreporting and their consequences. As noted in the footnote prior to this example, in a review of LAI literature, the authors identified 663 cases of subclinical infections and 1,267 overt infections with 22 deaths. The authors also note that these numbers “represent a substantial underestimation of the extent of LAIs.” SRSs are key tools for bringing forward such safety information—currently recognized as substantially underreported—in order to benefit the entire industry. USDA’s written comments are included in appendix IV.
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Appendix I: Objectives, Scope, and Methods
This appendix details the methods we used to identify lessons for designing and implementing an effective safety reporting system (SRS) from (1) the literature and (2) case studies of SRSs in the airline, commercial nuclear power, and health care industries; and apply those lessons to (3) assess the theft, loss, and release (TLR) reporting system for the Select Agent Program and (4) suggest design and implementation considerations for a national SRS for all biological labs.
To develop lessons from the literature, we used an iterative approach to search several venues (academic journals, agency and organization publications, and grey literature) for literature related to human factors, safety science, and SRS evaluation. We reviewed the publications generated through automated searches to identify (1) search terms for additional automated queries and (2) citations for publications that might be within our scope of interest. We ended the formal search for additional literature after reaching saturation in the publications generated from our search (i.e., no or few new publications). The literature we reviewed generally fell into one of two categories—safety science (including human factors and organizational safety) literature and descriptions of SRS features and evaluations. The safety science literature serves as background information and was also used to develop familiarity with safety science terms and theories required for our assessment of the SRS evaluation literature. The literature related to SRS features and evaluations was used to develop lessons for the first objective. We assessed the SRS evaluation literature for both methodological rigor and findings related to SRS design and implementation. For the methodological review, we assessed the appropriateness of the methods relative to the study objectives for all articles, and a sample (about half) received a secondary, independent review of methodological rigor. Studies that met our standards of methodological rigor were incorporated into the assessment, and findings related to system goals, cultural considerations, reporting and analysis features, reporter protections and incentives, and feedback mechanisms were coded to identify effective features and processes for SRS design and implementation. See the Bibliography of Articles Used to Develop SRS Lessons from the Literature for a list of the literature used to develop these lessons.
To develop lessons from case studies of three industries, we (1) reviewed studies and documentation on a variety of SRSs in the three industries; (2) interviewed agency and organization officials knowledgeable about safety science and human factors engineering, reporting systems, and their own SRS programs; and (3) attended a variety of SRS and safety conferences. We chose to focus on the aviation, commercial nuclear power, and health care industries because they are moderate- to high-risk industries that represent a variety of (1) organizational cultures, (2) length of experience using SRSs for safety improvement, and (3) feature and design choices in their SRS programs. While we collected information on a wide variety of safety reporting programs and systems in these industries—and in some cases comment on these different programs—we primarily developed our lessons from one reporting program in each of the three industries. Specifically, we developed lessons from the Federal Aviation Administration’s (FAA) National Aeronautic and Space Administration (NASA)-run Aviation Safety Reporting System (ASRS) in aviation, the Institute of Nuclear Power Operation’s (INPO®) Significant Event Evaluation-Information Network (SEE-IN®) system in commercial nuclear power, and the VA’s internally managed Patient Safety Information System (PSIS) and NASA-managed Patient Safety Reporting System (PSRS) in VA health care. We chose to focus on these systems because they represent fairly long-standing, nonregulatory, domestic, industrywide or servicewide reporting programs. For example, NASA’s ASRS has been in operation for 34 years; INPO’s SEE-IN, for 30 years; and VA’s PSIS and PSRS, for 10 years. Although we primarily developed our lessons from these key SRSs, we also collected information on other notable SRSs in the industries, including the Nuclear Regulatory Commission’s (NRC) Allegations Program, the FAA’s Aviation Safety Action Program (ASAP), and the Agency for Healthcare Research and Quality’s (AHRQ) Patient Safety Organizations (PSO) program, among others.
To assess the TLR reporting system, we interviewed agency officials, reviewed agency and other documentation, and applied lessons from the literature and case studies to these findings. Specifically, using a standard question set, we interviewed HHS officials from the Coordinating Center for Infectious Disease, Office of Health and Safety, and Division of Select Agents and Toxins, and received responses to our question set from the USDA’s Animal and Plant Health Inspection Service (APHIS). In addition, we attended an agency conference on select agent reporting and reviewed documents from this conference and from the National Select Agent Registry (NSAR) Web site, detailing TLR reporting requirements and scenarios. We also reviewed GAO testimony and reports on previously identified TLR reporting issues. Using the lessons for SRS design and implementation derived from the literature and case studies, we applied these criteria to identify areas for TLR improvements.
To propose design and implementation considerations for a national biological laboratory reporting system, we reviewed studies and other reports on biosafety, interviewed HHS officials and domestic and international biosafety specialists, attended conferences on biosafety and incident reporting, and applied lessons from the literature and case studies to these findings. We interviewed HHS officials and biosafety specialists to get a sense of the culture-related context for, and potential barriers to, an SRS for biological labs. Specifically, we used a standardized question set to gather specialists’ views about overall design and implementation considerations for a labwide reporting program, as well as how lab culture and safety orientation (1) vary by level and type of lab; (2) affect reporting under current requirements; and (3) might affect reporting to a national biological lab SRS.
We conducted this performance audit from March 2008 through September 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
Appendix II: Summary of Lessons from the Literature and Case Studies
(1) Define overarching program goals and subgoals up front.
(2) Involve stakeholders (e.g., management, industry groups, associations, and workers) in development of program goals and SRS design to increase support among key populations. (1) Assessment, dedicated resources, and management focus are needed to understand and improve safety culture. (1a) Assessing safety culture can alert management to workplace safety issues. (3) Assess organizational culture to guide system design choices in the three key areas. (4) Ensure that reporters and system administrators receive adequate training regarding the function and application of the reporting system. (1b) Improving safety culture requires dedicated resources, including time, training, and staff investment. (1c) Changing safety culture requires management focus. (1) Base the decision for mandatory or voluntary reporting on (a) the level of event of interest and (b) whether the SRS will be used primarily for enforcement or learning. (2) Broad reporting thresholds, experience- driven classification schemes, and processing at the local level can be useful SRS features in industries new to safety reporting. (2) Set reporting thresholds that are not so high that reporting is curtailed, nor so low that the system is overwhelmed by the number and variety of reportable events. (2a) Broad thresholds and open reporting are useful features when starting an SRS. (1) Develop classification schemes and associated terms that are clear, easy to understand, and easy to use by drawing on terms already well understood in the industry. (2b) Encouraging workers to report incidents in their own words facilitates reporting initially. (2) Test whether classification terms are clearly understood by different groups in the organization. (3) Allow sufficient flexibility to (a) avoid narrowing the scope of reporting in a way that limits all events of interest at the chosen level of event, (b) allow different sites—if multiple sites will be reporting to the same system—to adapt fields and elements to match their own organizational culture, and (c) capture different types of events and precursors as they can change over time. (4) Develop a classification scheme that best suits analytical requirements and the comfort level of the organizational culture with safety reporting and safety event terms. (1) Base decisions about report mode on (a) the accessibility of the mode to the reporting population and (b) workers’ concerns about and willingness to report. (2) Base decisions about report formats on the (a) type of data needed for analysis, (b) capabilities of the reporting population, and (c) maturity of existing safety event classification schemes within the industry. (2c) Reporting options with some local-level processing facilitates reporting initially. (1) Base the decision for internal or external system administration on (a) workers’ degree of concern over punishment and confidentiality and (b) the availability of internal expertise and resources to analyze and encourage reporting. (2) Base decisions about who will be allowed to report on (a) awareness of reporting hierarchies and (b) the type of information desired for analysis. (1) Use a report prioritization process to quickly and efficiently address key safety issues as they arise. (2) Align analysis decisions with (a) report formats, (b) system administration and location of technical expertise, and (c) availability of other relevant data needed for analysis. (1) Base the choice between anonymity and confidentiality on (a) organizational culture, especially workers’ degree of concern about punishment and confidentiality, and (b) the amount of detail required for analysis and whether it can be collected without follow-up. (3) Strong legal protections and incentives encourage reporting and help prevent confidentiality breaches. (2) Consider a hybrid system in which confidential and anonymous reporting are used simultaneously if there is conflict between organizational culture and data need. (1) Develop data deidentification measures to support confidentiality and data-sharing efforts. (1) Consider limited immunity provisions to increase the reporting incentive. (4) A central, industry-level unit facilitates lesson sharing and evaluation. (1) Provide direct feedback to reporters to foster worker-specific buy-in for reporting. (2) Provide regular, timely, and routine feedback—for example in the form of newsletters, e-mail alerts, Web sites, and searchable databases—to support overall organizational buy-in for reporting. (3) Provide positive feedback to managers who receive a high volume of reports to demonstrate the importance of reporting and counteract the perception that error reporting reflects poorly on management. (1) Use the data to identify reporting gaps for targeted outreach and training. (2) Evaluate the effectiveness of the SRS to support ongoing modification and improvement.
Appendix III: Comments from the Department of Health and Human Services
The following are GAO’s comments on the Department of Health and Human Services’ letter, dated August 16, 2010.
GAO Comments
1. We disagree. We do understand that the scope of statutory authority for the Select Agent Program is limited to registered entities. That is why our recommendations for improvements to the TLR program are directed to the CDC and APHIS, while recommendations for a national SRS for all labs are directed to Congress through matters for consideration. We do not make recommendations for the national SRS to the CDC or APHIS because they do not have authority for labs outside the Select Agent Program.
Furthermore, the recommendations, as well as the matters for congressional consideration, are directly linked and logically follow from the data presented in the report. This report has two objectives (the third and fourth) related to an SRS for biological labs and two sets of recommendations that flow from those objectives. We have structured our report this way because we recognize that the statutory authority for the Select Agent Program is limited to the oversight of biosafety at registered entities and that creation of a new safety reporting system would require new authority and resources, in particular: Objective 3—applying lessons from SRS literature and case studies to assess the theft, loss, and release (TLR) reporting system, part of the Select Agent Program—focuses on the TLR system, and thus applies to only registered entities and associated labs. The recommendations derived from this review of the TLR system are directed to the CDC and APHIS Select Agent Program because they have the statutory authority for this system.
Objective 4—applying lessons from SRS literature and case studies to suggest design and implementation considerations for a national safety reporting system—applies to all biological laboratories, in particular those outside the Select Agent Program. Because there is currently no agency with specific authority for such a system to whom we could direct recommendations, they are directed to Congress through Matters for Congressional Consideration. 2. We disagree. We recognize that implementation of any program has costs. However, evidence from the literature indicates that the benefits of an SRS can far outweigh the costs; this position was also endorsed by experts from the three case study industries. While we certainly encourage the NIH and CDC Select Agent Program efforts to share information that is currently reported, assessing the sufficiency of existing data was not within the scope of this engagement. In its comments to an earlier report on oversight of high-containment labs (GAO-09-574), the HHS agreed with our recommendation that lessons learned should be synthesized and shared with the broader community. They further noted that while the HHS and USDA have the ability to gather such data for laboratories registered with the Select Agent Program, a separate mechanism must be identified to gather information about releases in laboratories that do not work with select agents. A national SRS for all biological laboratories is such a mechanism. In addition, the Trans-federal Task Force on Optimizing Biosafety and Biocontainment Oversight—co-chaired by the HHS and USDA—recommended a new voluntary, nonpunitive incident-reporting system, and pending legislation in both the House and Senate would establish such a system. For these reasons, we did not revisit the issue of whether a nationwide SRS for biological labs is necessary. Instead, we agreed to examine the literature and SRSs in other industries to support effective design and implementation of such a system, should it be established. 3. The concerns raised here do not accurately characterize the message and matters conveyed in the report, and are not supported by evidence from the literature and our case studies. Specifically, (1) our recommendation to allow workers to report in their own words does not equate to “free-form reporting.” Rather, it relates to how errors are classified and labeled and where in the process that should take place. (See sections “Lesson 2: Broad Reporting Thresholds, Experience- Driven Classification Schemes, and Processing at the Local Level Are Useful Features in Industries New to Safety Reporting” and “Encouraging Workers to Report Incidents in Their Own Words Facilitates Reporting Initially” for further detail.) In commenting on this issue, an internationally recognized SRS expert at NASA noted that, while highly structured reporting forms may decrease the analytical workload, the data quality is largely sacrificed for this false sense of efficiency. Requiring the reporter to also be the analyst— evaluating aspects of the event—creates unreliable assessments because of the variability in workers’ perspectives. Open-field narrative has the best hope of providing insights that are largely unknown by personnel who invent the structured questions. Consequently, allowing workers to report in their own words and applying error classifications at the analytical level serve to improve, rather than degrade, data quality.
In addition, an SRS does not inherently produce unintelligible reports, redundant data, lack of quality control, and unreliable statistics. One of our key messages is that determining system goals—such as for specific analytical capabilities or means to identify specific locations or groups—is essential to do up front, in order to select system features compatible with these goals. In the section “Program Goals and Organizational Culture Guide Safety Reporting System Design and Implementation in Three Key Areas,” we describe the pros and cons of different system features and how choices for specific features should logically flow from system goals and assessment of organizational culture. We have recommended, for congressional consideration, certain features for a national SRS for biological labs that appear best aligned with existing information about system goals and lab culture. 4. The importance of culture in SRS design and implementation is foundational in our report, and is reflected in our graphics, findings, conclusions, and matters for congressional consideration. 5. We agree that this is a useful clarification and have made this change, as appropriate, throughout the report. 6. We do not confuse the TLR with a safety reporting system. We are aware that the system serves a regulatory function, and recognize this in the body of the report. However, we also recognize that this is not a dichotomy—the TLR’s regulatory function does not preclude its usefulness as a safety tool. In fact, we commend the CDC and APHIS Select Agent Program for recognizing the TLR’s potential beyond its mere regulatory function. In particular, in the section “The CDC and APHIS have Taken Steps to Improve the Usefulness of the TLR Reporting System; Lessons from the Literature and Case Studies Suggest Additional Steps,” we comment on the agencies’ recognition of the system’s usefulness for providing safety improvement data and our recommendations reflect enhancements to the system for this purpose. In addition, while we agree that a national reporting system might address the issue of capturing events (such as near misses or identified hazards) that are below the threshold for reporting to the TLR system, no such system currently exists. Consequently, the TLR system is the only system ideally situated to capture this information. 7. We recognize that implementation of any program has costs. However, evidence from the literature indicates that the benefits of an SRS can far outweigh the costs, a position that was also endorsed by experts from the three case study industries. We agree that dedicating resources is essential to successfully implement an SRS program, and this is reflected in the first lesson derived from the case studies— ”Assessment, dedicated resources, and management focus are needed to understand and improve safety culture.” However, it is outside the scope of this report to add a matter for congressional consideration to assess the relative priority of implementing a safety reporting system as compared to other biosafety improvements. See also comment #2 above, in response to HHS’s earlier remark about evaluating whether, and not how, to develop a national SRS for biological labs. 8. We agree this is an important consideration. In the section “Level of Event: The Severity of Events Captured Generally Determines Whether an SRS Is Mandatory or Voluntary,” we note that mandatory reporting is generally preferred when program goals are focused on enforcement of regulations. Serious events—such as accidents resulting in injuries or deaths—are typically the level of event collected in mandatory SRSs, whereas voluntary reporting is generally preferred when learning is the goal. The purpose of a national SRS for all labs would likely be for learning rather than compliance because the SAP program, through the TLR system, already manages the regulatory function for the most dangerous pathogens. Accordingly, it is logical that a national SRS for all biological labs would be a voluntary, nonregulatory system. 9. Evidence from the literature and our case studies does not support this argument. While we appreciate the NIH’s concerns about the clarity of reporting requirements, we found that mandatory and voluntary systems are often employed concurrently—sometimes independently and sometimes in complementary roles—because programs face the dual requirements of regulating and promoting safety improvement. In order to ensure appropriate levels of reporting, however, we also note the importance of setting clear goals and reporting thresholds for each system and communicating reporting requirements to the lab community. In addition, evaluation is an important tool for identifying and addressing such problems. Consequently, we recommended evaluation for both the TLR system and the national SRS for biological labs.
Appendix IV: Comments from the Department of Agriculture
Appendix V: GAO Contact and Staff Acknowledgments
Staff Acknowledgments
In addition to the contact named above, Rebecca Shea, Assistant Director; Amy Bowser; Barbara Chapman; Jean McSween; Laurel Rabin; and Elizabeth Wood made major contributions to this report.
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As the number of biological labs increases, so too do the safety risks for lab workers. Data on these risks--collected through a safety reporting system (SRS) from reports of hazards, incidents, and accidents--can support safety efforts. However, no such system exists for all biological labs, and a limited system--managed by the Centers for Disease Control and Prevention (CDC) and the Animal and Plant Health Inspection Service (APHIS)--applies to only a subset of these labs. While a national SRS has been proposed, design and implementation are complex. In this context, GAO was asked to identify lessons from (1) the literature and (2) case studies; and to apply those lessons to (3) assess CDC and APHIS's theft, loss, or release (TLR) system for select agents, such as anthrax, and (4) suggest design and implementation considerations for a labwide SRS. To do its work, GAO analyzed SRS literature; conducted case studies of SRSs in aviation, commercial nuclear, and health care industries; and interviewed agency officials and biosafety specialists.
What GAO Found
According to the literature, effective design and implementation of a safety reporting system (SRS) includes consideration of program goals and organizational culture to guide decisions in three key areas: (1) reporting and analysis, (2) reporter protection and incentives, and (3) feedback mechanisms. Program goals are best identified through stakeholder involvement and organizational culture, through assessment. Case studies of SRSs in three industries--aviation, commercial nuclear, and health care--indicate that (1) assessment, dedicated resources, and management focus are needed to understand and improve safety culture; (2) broad reporting thresholds, experience-driven classification schemes, and local-level processing are useful SRS features in industries new to safety reporting; (3) strong legal protections and incentives encourage reporting and prevent potential confidentiality breaches; and (4) a central, industry-level unit facilitates lesson sharing and evaluation. While the CDC and APHIS Select Agent Program (SAP) has taken steps in the three key areas to improve the usefulness of the TLR system for select agents, steps for improvement remain. Specifically, the agencies have taken steps to better define reportable events, ensure the confidentiality of reports, and dedicate resources to use TLR data for safety improvement. However, lessons from the literature and case studies suggest additional steps in the three key areas to enhance the usefulness of the system. For example, lowering reporting thresholds could provide precursor data and limited immunity could increase the incentive to report. Finally, the CDC and APHIS are in a unique position--as recognized authorities in the lab community and with access to TLR reports from across the industry--to guide SRS evaluation and ensure safety lessons are broadly disseminated. For a national safety reporting system for all biological labs, existing information--about labs' organizational culture and the lab community's limited experience with SRSs--suggests the following features in the three key areas: (1) Reporting and analysis. Reporting should be voluntary; available to all workers; cover hazards, incidents, and less serious accidents; accessible in various modes (Web and postal); and with formats that allow workers to report events in their own words to either an internal or external SRS system. (2) Reporter protections and incentives. Strong confidentiality protections, data deidentification processes, and other reporting incentives are needed to foster trust in reporting. (3) Feedback mechanisms. SRS data should be used at both the local and industry levels for safety improvement. An industry-level entity is needed to disseminate SRS data and to support evaluation.
What GAO Recommends
GAO recommends that, in developing legislation for a national SRS for biological labs, Congress consider provisions for certain system features. GAO also recommends three improvements to the CDC and APHIS TLR system. HHS disagreed with the first two recommendations and partially agreed with the third. USDA agreed with the three recommendations. |
gao_GGD-95-9 | gao_GGD-95-9_0 | Introduction
The Generalized System of Preferences (GSP) was proposed by the United Nations Conference on Trade and Development (UNCTAD) in the 1960s as a way to promote economic growth in developing countries. GSP allows developing countries to enjoy import tariff “preferences” (tariff elimination or reduction) when shipping certain goods to industrialized nations. Because these preferences are applied only to developing countries, however, GSP is inconsistent with article I of the General Agreement on Tariffs and Trade (GATT). Article I is commonly referred to as the most-favored-nation (MFN) clause. Therefore, in 1971, the GATT organization granted a 10-year waiver of article I and made it permanent in 1979.
The United States implemented its GSP Program in 1976. The program grants duty-free preferences to certain designated items from eligible countries, although there are restrictions on GSP benefits. Legislative provisions prevent certain products and countries from ever receiving eligibility. Benefits for eligible items may be restricted based upon (1) a product’s “import sensitivity,” that is, the degree to which a foreign product will compete with and negatively affect a U.S. product; or (2) the competitiveness of certain beneficiary developing countries (BDCs) in exporting specific items to the United States. Countries may be completely removed from the program if they no longer meet various eligibility requirements, such as by exceeding a specific gross national product (GNP) per capita level or failing to provide internationally recognized worker rights.
In 1992, $35.7 billion in GSP-eligible imports entered the United States from beneficiary developing countries. About $16.7 billion, or 47 percent, of these imports actually received GSP duty-free entry. The U.S. GSP Program provided benefits to 145 developing countries and territories as of March 1994 and included 4,578 items on the U.S. Harmonized Tariff Schedule (HTS).
Over the years, GSP programs have been introduced by numerous nations; 16 programs are currently in effect. The two other major GSP programs, those of the European Union (EU) and Japan, are structured quite differently from the U.S. system and were considered more complex by UNCTAD and foreign officials we interviewed.
The Creation of the GSP Program
The GSP concept was first proposed by UNCTAD in the mid-1960s. According to an UNCTAD official, UNCTAD’s GSP developers were strong advocates of the idea that “trade, not aid” was an effective way for industrialized nations to assist developing countries. GSP was viewed as a way to promote economic growth and industrialization in developing countries through, for example, increased foreign investment and exports of manufactured goods. This would allow beneficiary countries to earn foreign exchange and interact on a global scale. Another UNCTAD official added that GSP was viewed as a particularly effective “assistance program” because it rewarded competitiveness and encouraged increased participation in international trade based on market demands. UNCTAD fully endorsed the GSP concept in 1968 and completed it by passing a resolution in UNCTAD’s Special Committee on Preferences in 1970.
As originally envisioned by UNCTAD, GSP was to follow three primary principles: (1) GSP was to be “generalized,” meaning that all “donor” countries that granted GSP benefits were to implement basically the same GSP program; (2) GSP was to be “nonreciprocal,” with donor countries exacting no concessions from benefiting nations in return for the tariff preferences; and (3) GSP was to be “nondiscriminatory” so that every eligible developing country would enjoy the same benefits as every other eligible developing country. According to an UNCTAD official, none of these goals has been met: each of the 16 donor countries (including the EU) has adopted its own separate version of a GSP scheme; demands for reciprocity have clearly been made through imposition of eligibility obligations such as U.S. “country practice” requirements related to worker rights and intellectual property rights (IPR) (discussed in ch. 5); and discrimination among developing countries exists within schemes.
Granting GSP tariff preferences to developing countries is inconsistent with the GATT’s article I MFN provision because it excludes developed countries. Therefore, during the creation of GSP, the contracting parties to GATT determined that the authority for the GSP Program would have to be in the form of a GATT waiver to the MFN clause. The waiver, which was granted in 1971 for 10 years, authorized each industrial country to establish its own GSP program, provided that these programs benefited all “developing countries.” However, it was left to each industrial country to define what it considered to be a “developing country.” Thus, although the GATT waiver established the GSP framework, a great deal of individual discretion was left to each nation implementing a GSP program.
The 10-year GATT waiver would have expired in 1981. However, as part of the Tokyo Round negotiations, the contracting parties to GATT entered into a new derogation, or exception, from the MFN principle of article I in 1979, this time on a permanent basis, in a declaration entitled “Differential and More Favorable Treatment, Reciprocity, and Fuller Participation of Developing Countries.” This declaration, commonly referred to as the “enabling clause,” stated that “ontracting parties may accord differential and more favorable treatment to developing countries, without according such treatment to other contracting parties. . .,” notwithstanding the provisions of the GATT MFN clause.
According to a GATT official, this permanent waiver makes GSP autonomous and outside the GATT legal system. He stated that GSP beneficiaries have no formal legal recourse under GATT to seek changes in GSP programs over historically contentious GSP issues. These issues include, for example, the U.S. practice of maintaining “differential treatment,” or unequal product coverage, among GSP countries. A developing country may, however, apply to GATT for consultations as provided for in the enabling clause. The GATT official said that GSP programs have been employed in a more restrictive manner in the last few years, with a trend toward discretionary removal of GSP benefits for certain products from specific countries. However, for political reasons, no developing country has yet requested a consultation.
The GATT official added that the country practice provisions currently in U.S. GSP law may be contrary to the spirit of the enabling clause due to their nontrade nature. However, in granting the GSP waiver from GATT, no guidelines, principles, or other criteria were provided on how to structure a GSP program. Further, the areas addressed in country practice provisions have been outside the purview of issues currently addressed by GATT. The official said that, essentially, the waiver provided donor countries with a carte blanche that allows them to implement this unilateral “gift” as they see fit.
The GSP Program Director said he did not concur with the categorical nature of some of the statements made by the GATT official. He said that by ratifying the GATT enabling clause, countries have agreed that their GSP programs would grant “generalized, nonreciprocal, and nondiscriminatory preferences.” Interpretation of these terms is unclear. However, one interpretation has been that the intention of this provision is to prevent GSP donors from using GSP to obtain explicit tariff concessions, especially “reverse preferences.” Moreover, the provision could be interpreted as involving explicit obligations, subject to GATT dispute settlement procedures.
Aside from the autonomy of GSP from GATT rules, an official within the Office of the U.S. Trade Representative (USTR) said that the GATT enabling clause itself establishes a foundation to justify a previously mentioned, historically controversial aspect of the U.S. GSP Program: maintaining “differential treatment,” or unequal product coverage, among BDCs. This provision of the U.S. program, which allows the President selectively to remove GSP eligibility for certain items from particular countries that ship these items competitively, has been criticized by some BDCs. They note that GSP was meant to be a nondiscriminatory program. Such removal is commonly referred to as “product graduation.”
According to USTR’s General Counsel (in October 1992), GSP is meant to temporarily assist developing countries to progressively become full GATT participants. USTR points out that one provision in the enabling clause speaks to the possible improved ability of developing countries to make “contributions or negotiated concessions or take other mutually agreed action” under the provisions of GATT as their economies develop and their trade situations improve. When a particular industry in a developing country has become sufficiently advanced so as to be globally competitive, it no longer needs GSP benefits to compete with industries in developed countries. With respect to that competitive industry, the developing country is expected to participate “fully” in GATT. This process envisions differentiation or product graduation—removing GSP benefits for items from particular BDCs that export the articles competitively, while maintaining benefits on these items for other BDCs. A GATT official agreed with this analysis, stating that because product graduation deals specifically with trade in goods, it is possible for USTR to interpret this section of the enabling clause in this manner. He added, however, that USTR could not “invoke” this argument on a legal basis within GATT since no direct link exists between this provision of the enabling clause and the GSP Program.
The Structure and Usage of the U.S. GSP Program
The U.S. GSP Program is administered by the GSP Subcommittee, a staff-level working group of the interagency Trade Policy Staff Committee (TPSC). Agency representatives from the Departments of Agriculture, Commerce, the Interior, Labor, State, and the Treasury are on the GSP Subcommittee. TPSC comprises officials from these agencies at the office director level. TPSC, in turn, reports to the Trade Policy Review Group (TPRG), the policy-making body composed of subcabinet level officials. All three groups are chaired by USTR.
The GSP Subcommittee administers an annual review process for petitions to add products to or remove products from GSP coverage, as well as petitions related to country eligibility. The GSP annual review is a 13-month cycle, with petitions submitted by June 1 and triggering a two-stage decision cycle. In the first stage, a decision is made on which petitions to accept for review; in the second stage, the accepted petitions are fully reviewed and a decision is made on which petitions to grant or deny for GSP coverage. All GSP eligibility changes go into effect on the following July 1.
The GSP Program has undergone several changes since its implementation that tend to limit benefits available under the program. Legislative restrictions on eligible products and countries have been added. As a result of the program’s restrictions on benefits, not all imports that are technically eligible under the program actually receive duty-free entry.
The Original Structure of the U.S. GSP Program
The U.S. GSP Program was originally authorized by title V of the 1974 Trade Act (P.L. 93-618, Jan. 3, 1975), codified in title 19 of the U.S. Code (U.S.C.). The program became operational on January 1, 1976, and provides duty-free entry for designated items from eligible developing countries and territories. According to the 1974 act, the GSP Program was meant to provide fair and reasonable access to products of less-developed countries in the U.S. market. Statutory restrictions placed on product eligibility indicate that the need to protect domestic producers and limit use of the program by competitive countries was also to be recognized in administering the program.
The 1974 Trade Act allows the President to designate BDCs, as well as specific articles, as eligible under the program. He must consider several factors when making country designations, such as the effect of GSP preferences on the economic development of BDCs and the anticipated impact of granting GSP on U.S. domestic producers. The 1974 act enumerated several factors that automatically eliminate countries from consideration for GSP eligibility, such as whether a country is communist (unless certain criteria are met); is a member of the Organization of Petroleum Exporting Countries (OPEC); or has expropriated U.S. property without compensation, negotiation, or arbitration. Some additional, discretionary factors to be considered in granting (or maintaining) GSP status for a country include the country’s level of economic development and the country’s provision of equitable and reasonable access to its markets.
The 1974 Trade Act contains several provisions that limit potential product benefits available under the program. Items such as most textiles, footwear, and other import-sensitive articles are statutorily prohibited from GSP eligibility. Further, items that are granted eligibility can later be restricted from actually receiving duty-free entry in many ways. For example, GSP has a “rule of origin” requirement. This requirement states that at least 35 percent of the content and processing of an item shipped under GSP must have come from the shipping BDC in order to receive duty-free entry. The item must also be shipped directly from the BDC to the United States.
In addition, as previously mentioned (see pp. 21-22), the 1974 act provides for “graduation,” or the permanent removal of GSP benefits, under the section that allows the President to withdraw, suspend, or limit preferences at any time for any article or beneficiary country. Finally, the program contains a “competitive need limit” (CNL) exclusion provision, which is the temporary removal of GSP preferences for a particular item from a particular BDC. This provision automatically suspends GSP preferences if, in any 1 calendar year for any individual item, a beneficiary country ships above a statutorily determined import level. Benefits can be reinstated subsequently if the BDC’s exports fall below the legislated limits. (These limitations are further discussed in ch. 3.)
The Structure of the U.S. GSP Program as Amended in 1984
When GSP was reauthorized by the Trade and Tariff Act of 1984 (P.L. 98-573, Oct. 30, 1984), some of the program’s benefits were reduced, and the program became more reciprocal in nature. The 1984 act states that GSP is intended to promote the economic development of BDCs and notes that trade, rather than aid, is a more effective way of achieving this goal. The 1984 legislation also points out that the amended GSP law is meant to provide trade and development opportunities for BDCs without adversely affecting U.S. producers and workers and “to integrate developing countries into the international trading system with its attendant responsibilities in a manner commensurate with their development.” U.S officials whom we interviewed reinforced this last idea, pointing out that GSP has an increased focus as a leveraging tool that can be used to encourage desired behaviors in beneficiary countries in exchange for continued GSP benefits.
As a result, the 1984 act’s eligibility criteria for countries and products under GSP are stricter. For example, a country must now have taken or be taking steps to afford internationally recognized worker rights in order to be eligible for GSP. The provision of adequate and effective protection of intellectual property by beneficiaries is also assessed in determining whether to grant (or maintain) GSP eligibility. Further, a GNP per capita eligibility limit was enacted, excluding countries that exceed the ceiling.
The 1984 law also required the administration to conduct a general review of the GSP Program, and, based upon that review, to identify products from individual countries that could be considered sufficiently competitive. Results of the review were published in 1987. Many sufficiently competitive items shipped from specific BDCs were identified and are now subject to reduced statutorily defined CNL import levels. However, at the same time, the amended law gave the President the authority to waive these CNL exclusions if a country exceeds the legislated limits.
Utilization of the U.S. GSP Program
The value of imports under the U.S. GSP Program has grown substantially over the years. In 1978, soon after the program was implemented, GSP-eligible imports (all imports from BDCs that are technically eligible to receive GSP duty-free access) amounted to $9.7 billion in 1978 dollars.Fifty-three percent of this amount ($5.2 billion) actually received GSP duty-free entry into the United States. By 1992, the value of GSP-eligible imports was $35.7 billion, with 47 percent of this amount ($16.7 billion) actually entering duty free under GSP. An additional $2.9 billion (8 percent of eligible imports) received duty-free access through other programs. Forty-five percent of the GSP-eligible imports that entered the United States in 1992 were actually assessed MFN tariffs due to the legislative reasons stated earlier (see pp. 23-24).
Table 1.1 shows that as of March 1994, 119 independent countries and 26 nonindependent countries and territories were eligible for the U.S. GSP Program. The most recent countries to be designated as eligible were Kazakhstan and Romania, which were granted GSP status in February 1994. Russia, which was granted GSP eligibility status on September 30, 1993, had exports to the United States of $46.2 million in goods that would have been eligible for GSP benefits in 1992. All former Soviet republics combined (excluding Estonia, Latvia, and Lithuania, which have already been designated as GSP beneficiary countries) shipped $56.9 million in goods to the United States that would have been eligible in that year. As of January 1, 1994, half of the items at the 8-digit level of the U.S. HTS (4,578) were eligible for GSP out of the 9,219 total items.
GSP Programs Worldwide
According to an UNCTAD GSP official, there are 16 GSP programs throughout the world (which includes 1 program for all 12 member states of the EU) that have been introduced over a number of years. The EU and Japan introduced their GSP programs in 1971, East European countries throughout 1972, Australia and Canada in 1974, and the United States in 1976.
The GSP Program of the EU is quite different from that of the United States and was generally considered to be more complicated by foreign officials and industry representatives with whom we met. The program is divided into four product areas for eligible countries: industrial, textile (including items subject to the Arrangement Regarding International Trade in Textiles for some countries), agricultural, and steel products. For agricultural items, tariffs are eliminated or reduced. Specified items in all other areas enjoy total duty-free entry. Some items are subject to fixed duty-free amounts, or tariff quotas beyond which MFN rates are automatically reinstated. For other items, MFN duties may be reintroduced once a duty-free import tariff ceiling amount is met, based on an exchange of information between the member states and EU authorities. GSP access is reinstated at the end of the calendar year for all items. The amount eligible for preferential entry often varies by product and beneficiary country for specific items (though not for agricultural products, which are subject to global reduced-duty amounts). An UNCTAD official told us that the EU has been waiting until the completion of the Uruguay Round of multilateral trade negotiations before it renews its GSP Program.
The Japanese GSP Program, which has been extended to the year 2001, is also structured very differently from the U.S. system. This system was cited as complex by eligible beneficiary country officials we interviewed. The Japanese program comprises a positive list of agricultural items that are eligible for GSP, and a negative list of industrial goods (including textiles) that are ineligible. Similar to the EU’s GSP, the Japanese program provides for duty-free as well as reduced-duty access under GSP. Reduced duties apply to both agricultural and industrial items. Import ceilings apply to some industrial products (though not agricultural goods) and may lead to a reinstatement of MFN tariff rates; imported products posing no threat or injury to Japan’s domestic industry can continue to receive GSP preferences even after a country exceeds ceiling levels. Japan has adopted a graduation policy, whereby a particular country can lose its GSP benefits for a specific product when the beneficiary is viewed as internationally competitive.
From a beneficiary’s perspective, Australia’s GSP program has been mentioned by UNCTAD officials as straightforward and simple. They explained that Australia’s GSP scheme includes almost every item on its tariff schedule, with all developing countries receiving a tariff reduction of 5 percentage points. Australia’s average tariff is around 10 percent, so the program offers a duty preference of about 50 percent.
Objectives, Scope, and Methodology
At the request of Senators Harris Wofford and Byron Dorgan and Representatives Steve Gunderson, William Hughes, Collin Peterson, and David Obey, we analyzed (1) benefits provided to beneficiary developing countries, (2) limitations on GSP imports, (3) administration of the program for adding or removing products from GSP coverage, and (4) administration of program provisions requiring that countries follow certain intellectual property and worker rights practices.
To assess the benefits and limitations experienced from the GSP Program, we obtained, through the Office of the U.S. Trade Representative, computer tapes of data on GSP imports. These data are maintained by the Department of Commerce’s Bureau of the Census. We did not verify the accuracy of these data. We examined data for 1989-92. We also assessed overall imports by GSP-eligible countries using data from the COMPRO system maintained by the Census Bureau. All dollar amounts in this report are current dollar figures, unless otherwise noted.
The database figures we analyzed contained specific semiannual information on the amount (U.S. dollars) of GSP-eligible imports. These imports were categorized in the data by those imports that received GSP duty-free entry (with flags identifying those that entered duty free due to competitive need limit waivers), those that were dutied (with flags identifying imports dutied due to graduation or competitive need limits), and those that were eligible for GSP but instead entered the United States duty free under another preferential option. In order to determine imports dutied because of administrative exclusions, we subtracted those imports specifically tagged as dutied due to graduation or competitive need limits from the total dutied imports figure for each of the 4 years of data.
We compiled data to identify the top country exporters for each year, as well as the top products that were shipped. We estimated U.S. duties forgone figures due to the GSP Program by multiplying the GSP duty-free amount that entered for each product by its MFN tariff rate and then adding these amounts together. We frequently consulted USTR and International Trade Commission (ITC) officials to discuss the accuracy of our methodologies and data.
To assess the degree to which BDC representatives and others believe they are benefiting from or experiencing restrictions in using the U.S. GSP Program, we interviewed BDC government officials and business representatives in six case study countries: Brazil, Thailand, Malaysia, the Dominican Republic, Hungary, and Turkey. We also interviewed Mexican embassy officials in Washington, D.C. During early 1993, we discussed the program with several U.S. businesses, primarily importers, many of whom contacted us after learning about this study from the American Association of Exporters and Importers, or business associations representing importers. We also reviewed documents submitted to ITC by U.S. companies that were, or could have been, in competition with GSP imports in 1991.
To analyze concerns related to the administration of the program for adding or removing products and examine whether the program was generally well structured, we interviewed a broad spectrum of participants in the GSP process. These participants included GSP Subcommittee officials; former GSP officials; ITC officials; U.S. embassy and foreign government officials in our six case study countries as well as Mexican embassy officials in the United States; and UNCTAD, GATT, and USTR officials in Geneva, Switzerland. We also interviewed trade experts, academics, and industry and trade association representatives in the United States and the six case study countries. We reviewed GSP and ITC interagency documents, including certain case study petition files. We examined 45 cases out of 175 considered in the 1991 GSP Program review and 1991 Special Review for Central and Eastern Europe, with our selection based on the cases (1) being designated by USTR as controversial (and thereby being elevated from the GSP Subcommittee to the TPSC and TPRG), (2) being filed by petitioners in our six case study countries, or (3) resulting in recommendations for differential treatment. We also attended USTR, ITC, and congressional GSP hearings. We did not review U.S. Customs’ administration of imports under the program.
To determine the President’s authority for allowing differential treatment of BDCs through permanent product graduation under U.S. GSP law and the U.S.’ GATT obligations, our Office of General Counsel obtained and reviewed a written explanation of such legal authority from USTR’s Office of General Counsel. We interviewed GSP officials and examined the GSP statute and the legislative history of the program. We also interviewed GATT officials to obtain their views on this issue.
To analyze concerns about the administration of country practice provisions and the amount of leverage available from the GSP Program, we interviewed a broad spectrum of GSP participants in the United States, in the six case study countries, and at UNCTAD and GATT in Geneva. In addition, we interviewed representatives of the major IPR and worker rights advocacy groups in the United States that have participated in the GSP Program. These included, for IPR, the International Intellectual Property Alliance (IIPA), the Motion Picture Association of America (MPAA), and the Pharmaceutical Research and Manufacturers of America (PRMA); and for worker rights, the American Federation of Labor-Congress of Industrial Organizations (AFL-CIO), the International Labor Rights Education and Research Fund (ILRERF), and Human Rights Watch. In the Dominican Republic, we interviewed representatives of MPAA and the Dominican Cable Operators Association, as well as representatives of a pharmaceutical manufacturers’ group. We interviewed representatives of labor groups and the free trade zone owners’ association; we also visited three factories in a free trade zone. In Malaysia and Thailand, we interviewed representatives of labor groups and manufacturers’ associations. We also examined data on overall country practice petition results since 1984, as well as eight cases in the 1990-92 annual reviews. We selected these cases based on (1) our finding that they were filed against one of our six case study countries and (2) our desire to obtain a cross-section of IPR and worker rights cases. The cases selected were not a statistically representative sample.
We performed our review from May 1992 to May 1994 in accordance with generally accepted government auditing standards.
USTR, on behalf of the administration, provided written comments on a draft of this report. USTR comments are presented and evaluated in chapters 4 and 5 and are reprinted in appendix III. USTR also suggested technical changes and clarifications that, to the extent we deemed appropriate, have been incorporated into the report. In addition, ITC provided us with technical comments on the section in chapter 4 that addresses ITC’s role in the GSP Program. We considered these comments and revised the report as appropriate.
Duty-Free Benefits Under the GSP Program
The primary goal of the GSP Program is to assist BDCs in strengthening their economic development by granting preferential tariff access to the U.S. market. This preferential access can help BDCs to realize benefits, such as increased production and exporting of industrial goods, greater foreign investment in their countries, and increased foreign exchange earnings. However, it is not possible to measure the extent to which these objectives have been realized specifically because of GSP. The impact of GSP cannot be isolated from other factors, such as foreign assistance or internal policies adopted by BDCs that promote increased commercial activity and stable economic growth.
Though the impact of GSP on BDC economies cannot be accurately determined, it is possible to examine the GSP Program as a part of total U.S. trade and assess the level and composition of duty-free access to the U.S. market provided to BDCs by the GSP Program. These figures serve as an indicator of the value of the GSP Program to developing countries.
GSP duty-free imports into the United States in 1992 were $16.7 billion. This figure was less than half of the $35.7 billion in imports that were eligible to receive GSP preferences and amounted to 3 percent of total U.S. imports. U.S. import duties forgone on GSP imports were almost $900 million in 1992. In that year 3,370 eligible items shipped to the United States received GSP duty-free entry on some shipments; 9 percent of these items had MFN tariff rates of at least 10 percent. The value of the difference between GSP zero tariff preferences and MFN tariff rates (i.e., duties forgone) would decrease if the MFN tariff reductions achieved under the Uruguay Round of multilateral trade negotiations are enacted.
Imports under the GSP Program are dominated by a handful of countries. Mexico, which was removed from the program upon the implementation of the North American Free Trade Agreement (NAFTA) on January 1, 1994, accounted for 44 percent of all GSP-eligible imports and 29 percent of all GSP duty-free imports in 1992. The top 10 exporting countries of GSP duty-free items in 1992, including Mexico, Malaysia, Thailand, Brazil, and the Philippines, accounted for 85 percent of the value of all duty-free shipments from the 127 countries that shipped eligible items under the program. For the 1989 and 1990 GSP annual reviews, which we reviewed, top shipping countries also submitted the majority of petitions to grant GSP status to new products.
From a product perspective, GSP duty-free import values are dominated by industrial articles. The legislative exclusion of textile goods from GSP eligibility was an issue of concern raised by foreign officials we interviewed. Finally, numerous items that were eligible to receive GSP benefits actually entered the United States duty free or partially duty free under alternative programs or provisions.
Overview of the U.S. GSP Program
In 1992, imports receiving GSP duty-free entry constituted 47 percent of all imports that were eligible under the program. This proportion is a slight increase from 1989, when GSP duty-free imports were 41 percent of all eligible imports.
The benefit of not having to pay duties under the GSP Program is referred to as “duties forgone.” In 1992, this amount was almost $900 million. In that year, 3,370 items, including 302 with MFN tariff rates of 10 percent or higher, received some duty-free entry. The advantage of these duties forgone would decrease if the Uruguay Round market access commitments, which would require the United States to lower its MFN tariff rates, are enacted.
The Value of Shipments Under the GSP Program
GSP imports are a small component of overall U.S. imports, as shown in table 2.1.
The value of GSP duty-free imports increased steadily between 1989 and 1992, as can be seen in table 2.1, though their share of total U.S. imports has remained small. Eligible imports grew by 46 percent overall from 1989 to 1992, which was much faster than the 27-percent growth in total U.S. imports from beneficiary countries during that period. Over these years, GSP duty-free imports under the program grew even faster, by 67 percent. In 1992, 33 percent of the almost $110 billion in imports from GSP beneficiaries were eligible for GSP. As shown in table 2.2, the share of eligible imports that received GSP duty-free entry increased somewhat, from 41 percent in 1989 to 47 percent in 1992. It should also be noted that in 1992, of total U.S. imports from the BDCs, duty-free shipments under GSP accounted for 15 percent.
Mexico’s participation in the GSP Program was terminated when NAFTA was implemented on January 1, 1994. Because Mexico was the largest shipper under the program in 1992, we examined the structure of the GSP Program with Mexico data excluded. Since a high proportion (67 percent) of Mexico’s GSP-eligible shipments were dutied in that year, the program’s coverage changes significantly if that country’s figures are removed. For 1992, GSP-eligible imports without Mexico would have been $20.2 billion, dutied imports from BDCs would have been $5.7 billion, and GSP duty-free imports would have been $12 billion. Therefore, as shown in figure 2.1, without Mexico a higher proportion, 59 percent, of eligible imports would have received GSP duty-free entry, while 28 percent of imports would have been subject to duties.
Dutied imports with Mexico Other duty-free imports without Mexico GSP duty-free imports without Mexico Note 1: With Mexico: GSP-eligible imports were $35.7 billion, with GSP duty-free imports at $16.7 billion, dutied imports at $16.1 billion, and other duty-free imports at $2.9 billion.
Note 2: Without Mexico: GSP-eligible imports would have been $20.2 billion, with GSP duty-free imports at $11.9 billion, dutied imports at $5.7 billion, and other duty-free imports at $2.6 billion.
Duties Forgone Due to the GSP Program
Table 2.3 shows that as GSP duty-free imports increased between 1989 and 1992, duties forgone by the United States under the GSP Program increased as well, from an estimated $569 million in 1989 to $894 million in 1992. Duty-free imports grew by 11 percent in 1990 from the 1989 level, and then increased by 23 percent and 22 percent in 1991 and 1992, respectively. Duties forgone followed a similar pattern, but at slower rates, growing 11 percent in 1990 compared to 1989, and then increasing by 19 percent and 20 percent in the following years, respectively. Since the level of duty-free imports increased more quickly over this period than did duties forgone, it is apparent that the average tariff savings and the associated advantage provided by the program have decreased. The average tariff that would apply to all duty-free imports in the absence of GSP fell slightly, from almost 5.7 percent in 1989 to just over 5.3 percent in 1992.
The level of duties forgone will now likely be smaller than in past years due to the removal of two BDCs. In 1992, duties forgone attributable to GSP imports from Mexico and Israel (which is being removed from the program over a 2-year period ending July 1, 1995) amounted to an estimated $243 million and $26 million, respectively. This $269 million was 30 percent of total duties forgone for the year.
In 1992, 3,370 GSP-eligible items had some shipments that entered the United States GSP duty free. The top item responsible for duties forgone was raw cane sugar, with duties forgone estimated at $29.5 million. Other top items and their duties forgone included telephone sets ($26.7 million), tequila ($17.2 million), precious metal jewelry ($15.5 million), and cordless handset phones ($12.3 million).
Certain items shipped under GSP have high MFN tariff rates. Of the 3,370 items that received some GSP duty-free preferences, 302 of them (9 percent) had MFN tariff rates of 10 percent or higher, and 44 of these 302 items had MFN rates of 20 percent or more. The highest MFN tariff rate was an estimated 81.4 percent for undenatured ethyl alcohol for beverages. The 302 items accounted for 19 percent of the total value of duties forgone.
The Congressional Budget Office calculates the revenue loss from the GSP Program to the United States by estimating duties forgone and then applying a standard 25-percent offset. This offset, which is employed in estimating costs for all programs or initiatives that reduce customs duties, recognizes that imports will decrease in cost. This reduction will, assuming a constant GNP, put incomes at higher levels than if MFN duties were in force. As a result, government direct tax revenues (corporate, individual, and payroll) will also be higher. Therefore, the overall cost of the GSP Program is considered lower than the actual value of duties forgone.
The advantage of duty preferences for GSP (and other preferential programs) will erode if the results of the Uruguay Round of multilateral trade negotiations under GATT are enacted. Specifically, as a result of tariff negotiations, the United States will have lower committed or “bound” MFN tariff levels. The United States already has a comparatively low average tariff level; the average tariff on all goods subject to duties that were imported into the United States in 1991 was 5.3 percent. As a result of the Uruguay Round, U.S. tariffs are expected to fall on average by around one-third. The United States has agreed to largely eliminate tariffs for GSP-eligible items such as pharmaceuticals, toys, and furniture. The Director of the GSP Program has estimated that if the results of the Uruguay Round are enacted, the trade-weighted average tariff for GSP goods will decrease from around 5.5 percent to about 3 percent once all tariff reductions are implemented. This would mean that tariffs for GSP-eligible goods will be reduced by an estimated 48 percent over 10 years, according to the Office of Management and Budget (OMB). An OMB official said that 95 percent of these tariff reductions would be phased in within the first 5 years and around 25 percent during the first year.
Finally, although GSP duty-free exports are a small component of trade for GSP beneficiaries, these countries still enjoy strong duty-free market access to the United States, as can be seen by examining the combined results of GSP with exports that enter the United States from BDCs under an MFN tariff rate of zero. As of January 1, 1994, 1,420 items at the 8-digit level of the U.S. HTS had MFN rates of zero. We analyzed the top 50 imports from all GSP beneficiaries (at the 8-digit U.S. HTS level) in 1992 that accounted for $56.3 billion, or over half (51 percent), of total imports to the United States from BDCs. Of this amount, around $1.8 billion, or 3 percent of the total value of the top 50 imports, received GSP duty-free entry. In addition, another $14.8 billion (26 percent) entered MFN duty free. Therefore, almost 30 percent of these imports entered the United States duty free for these two reasons. Furthermore, several GSP countries are able to further augment their duty-free access through other preferential or reciprocal arrangements, described later in this chapter (see p. 44).
GSP Shipments by Eligible Countries
As previously noted (see pp. 34-37) and as shown in figure 2.2, Mexico was the dominant BDC in terms of the value of imports shipped to the United States under the GSP Program. In 1992, Mexico accounted for $15.6 billion of GSP-eligible imports to the United States, or 44 percent of all such imports from GSP countries. While the $4.8 billion in GSP duty-free imports from Mexico accounted for 29 percent of all such imports, that country also had 65 percent of the GSP imports into the United States that were dutied. Other top duty-free shippers that accounted for the majority of shipments under the program included Malaysia, Thailand, and Brazil.
Table I.1 in appendix I (see p. 129) shows in more detail that the program’s GSP-eligible imports are clearly dominated by just a few countries. The top 10 shipping countries accounted for 87 percent of all eligible imports in 1992, and the top 25 countries accounted for 97 percent. For the year, GSP-eligible imports came from 127 countries. The percentages of imports of GSP duty-free goods from the top shipping countries were similar.
For the top four GSP countries shipping duty-free items (other than Mexico), these duty-free imports into the United States accounted for around 20-30 percent of each country’s total shipments to the United States in 1992. In contrast, Venezuela, the ninth largest GSP duty-free beneficiary, had GSP duty-free shipments equal to only 4 percent of that country’s total shipments to the United States. The ratio of GSP duty-free shipments to total shipments for each BDC that received GSP duty-free entry in 1992 is listed in table I.2 in appendix I (see pp. 130-133).
The top-shipping BDCs have dominated the process of petitioning to add products eligible for GSP preferences. GSP exporters that ranked among the top 20 shippers of GSP duty-free goods had submitted all of the 81 petitions granted in the 1989 and 1990 review cycles. These petitioners had the highest percentage of duty-free shipments of any BDC after GSP status was granted for about half or more of the new items that BDCs exported. Our analysis also showed that granting eligibility to items did not ensure that they would be shipped by the petitioner or any other BDC, or that GSP export values would increase. These figures related to product additions are discussed in more detail in appendix II (see pp. 146-147).
GSP Shipments by Eligible Products
The industrial and other goods contained in chapters 25-96 of the U.S. HTS accounted for 90 percent of all GSP duty-free imports in 1992. Most of the value of GSP-eligible and duty-free imports comes from industrial goods concentrated in a few chapters of the U.S. HTS. In 1992, imports under U.S. HTS chapter 85 (electrical machinery and equipment, etc.) had the highest import value of any one chapter, with $10.9 billion in GSP-eligible imports. These imports received GSP duty-free entry on $3.7 billion in shipments. As shown in figure 2.3, this amount accounted for 22 percent of all GSP duty-free imports for 1992. More complete information is provided in table I.3 of appendix I (see pp. 134-145).
Chapter 84 (Nuclear reactors and machinery, etc.) 8% Chapter 94 (Furniture and bedding, etc.) 5% Chapter 95 (Toys, etc.) 4% Chapter 87 (Vehicles other than railway, etc.)
Agricultural items included in chapters 1-24 accounted for almost $3.8 billion (11 percent) of all GSP-eligible imports in 1992. Of this amount, 43 percent received GSP duty-free entry into the United States. This percentage is slightly lower than the overall average of GSP-eligible goods that received duty-free access (47 percent). U.S. HTS chapter 17 (sugars and sugar confectionery) had the highest level of agricultural imports receiving duty-free entry, at about $387 million.
The top five items having the highest value in GSP duty-free shipments in 1992 were auto seat parts ($373 million), telephone sets ($315 million), precious metal jewelry ($239 million), raw cane sugar ($225 million), and display units for automatic data processing equipment ($215 million). These items had duty-free shipments totaling $1.37 billion, or 8 percent of total duty-free shipments under GSP.
Textile items were cited by BDC officials as an area where BDCs have potential for improved GSP utilization: about 15 percent or more of the total exports of several BDCs comprised textiles and clothing in 1991. Textile and apparel articles are largely precluded from receiving GSP benefits due to a statutory exclusion that prevents items subject to textile agreements from receiving GSP benefits (see fn. 13 on p. 27). Total U.S. imports of BDC textile and apparel items in U.S. HTS chapters 50-63 amounted to $14.7 billion in 1992. This amount equaled 13 percent of total U.S. imports from BDCs. At the same time, GSP-eligible imports of these same items totaled $461 million, or 1 percent of total GSP-eligible imports into the United States.
Alternative Duty Preference Options That Complement GSP Benefits
Other duty preference options exist for GSP beneficiaries that replace some duty-free benefits that could have been realized under the GSP Program: many items that are eligible under the GSP Program instead receive tariff preferences through alternative means. These options include the Caribbean Basin Economic Recovery Act (CBERA), the U.S.-Israel Free Trade Agreement (FTA), and the Andean Trade Preference Act (ATPA). BDCs can also ship items under U.S. HTS chapter 98, subchapter II (“9802”) or utilize the temporary duty suspensions contained in U.S. HTS chapter 99, subchapter II (most of which recently expired). In 1992, $2.9 billion (8 percent) of the $35.7 billion in imports that were eligible for GSP entered the United States under a duty preference provision other than GSP. When this amount is combined with the $16.7 billion that entered duty free under GSP, the data show that 55 percent of all GSP-eligible goods received duty-free entry.
Conclusions
While many BDCs ship under GSP, the preponderance of benefits provided by the program’s duty elimination are concentrated toward the relatively small number of more advanced or larger BDCs that can produce and export goods that meet U.S. market demands. In addition, GSP is furthering developmental goals in that industrial products, rather than agricultural products, dominate duty-free imports.
Limitations on Benefits Under the GSP Program
A number of factors limit the level of duty-free benefits that BDCs receive under the GSP Program. In 1992, 45 percent of the $35.7 billion in GSP-eligible imports did not receive duty-free entry. During recent years, administrative program provisions, such as the requirement for a certain percent of domestic content in exported products or for direct shipment of goods from the BDC to the United States, have increasingly become the factor that excludes GSP-eligible imports from receiving duty-free preferences. Administrative exclusions accounted for 56 percent of all exclusions in 1992, up from 31 percent in 1989. However, the removal of Mexico, which accounted for the majority of these exclusions, from the program is one factor that may alter this trend.
Some import-sensitive items, such as textiles and footwear, are legislatively prohibited from receiving GSP eligibility. For those items that are granted GSP eligibility, the GSP law permits improvements in BDC competitiveness to limit duty-free imports for specific products from particular countries. Such exclusions include discretionary permanent “product graduation” or removal from the program of a product shipped by a particular BDC, as well as legislated annual import ceilings for individual items beyond which GSP preferences will automatically be suspended for a country. Product graduations have accounted for only a very small proportion of all exclusions. The statutory ceilings, called “competitive need limits” or CNL, were responsible for the majority of exclusions from GSP duty-free entry during 1989 and 1990, but had lost some importance by 1992. As a result of the 1989 GSP annual review, a policy was adopted that makes it easier for products from more economically advanced BDCs that are excluded under CNL to regain GSP status. However, CNL exclusions for certain countries have grown quickly in recent years. In 1992, all CNL exclusions were responsible for 42 percent of total exclusions. Although the overall value of shipments excluded from GSP due to CNL declined between 1989 and 1992, foreign officials we interviewed cited CNL as the main obstacle to obtaining GSP duty-free entry for eligible articles. Further, BDC officials we interviewed said that CNL exclusions actually result in a reduced ability to export to the United States, although items are excluded because the United States believes a BDC is competitive in exporting them. In examining two cycles of CNL exclusions, we found an immediate loss of market share once a CNL was implemented in a majority of cases for the country involved (though no causal link was identified).
If BDCs are unable to produce and export eligible items, then they cannot participate in the program. Conversely, if a country is found to be competitive overall or sufficiently developed, then it can be permanently removed from the GSP Program. Such removal has been applied to several countries and in some cases has proven controversial.
Administrative Exclusions
As shown in sable 3.1, there are several reasons why GSP-eligible imports into the United States did not actually receive GSP duty-free entry. The prominence of the different types of exclusions from GSP duty-free entry has changed between 1989 and 1992, with administrative exclusions now dominating limitations under the program. Administrative exclusions can occur for reasons such as a failure to meet program requirements on product domestic content (rule of origin) or on direct shipment of an item from a GSP country to the United States. Inadequate customs paperwork can also lead to this type of exclusion. In 1989, administrative exclusions amounted to $3.8 billion and accounted for 31 percent of all exclusions. By 1992, they had grown substantially to over $9 billion to become the primary reason (56 percent) for exclusions from GSP duty-free entry in that year.
Some trade experts and U.S. officials we interviewed commented on one type of administrative exclusion as being in need of change—domestic content or “rule of origin” requirements. Title 19 U.S.C., subsection 2463(b), establishes specific criteria (rules of origin) that articles must meet in order to be eligible for GSP preferences. These criteria are in place to determine an imported good’s “legal nationality.” Under these rules, GSP duty-free entry is allowed only if the cost or value of materials produced in the beneficiary country, plus the direct costs of processing in the country, equals at least 35 percent of the appraised value of an article upon its entry into the United States. Product components from a third country must be “substantially transformed” into new and different constituent materials, of which the eligible article is composed, in the exporting BDC before they can be considered part of this 35-percent domestic content rule. For the GSP Program there is no measurable definition of the term substantially transformed, and the determination as to whether such a requirement has been met is made on a case-by-case basis that involves subjective judgment. In addition, goods must be imported directly from the beneficiary country into the customs territory of the United States to obtain the duty preference (although entrepôt trade may be allowed in some instances).
There has been criticism of this type of rule of origin requirement, with U.S. officials we interviewed claiming that BDCs may have no predictable (i.e., clear) way of knowing before shipment whether foreign components will be considered to have been substantially transformed and can be included as part of the 35-percent domestic content. Therefore, some U.S. officials and one trade expert have suggested that the GSP Program should adopt a different rule of origin approach, similar to that of NAFTA, where substantial transformation is clearly defined by changing a product’s tariff classification. Under NAFTA, goods containing imported materials from outside the free trade area are generally considered NAFTA originating if the foreign materials undergo processing or assembly in North America sufficient to result in a specified change in the HTS tariff classification. Under this tariff-shift rule, depending on the good involved, NAFTA requires non-NAFTA components to be in a predetermined different HTS chapter, heading, subheading, or tariff item than the final product if the final product is to receive the agreement’s preferential duty treatment. Therefore, North American exporters know whether they have met NAFTA rule of origin requirements before shipments are sent. In January 1994, the U.S. Customs Service proposed adopting a change of tariff classification system that would affect GSP and other preferential programs (though the 35-percent rule would remain independent) and was collecting public comments on this possibility until early April.
U.S. government officials and a trade expert we interviewed said that the NAFTA approach is clear and leaves little doubt as to whether a partially non-NAFTA item has been substantially transformed and will, therefore, qualify as having sufficient North American content. However, some contend that an attempt to create such a system for the GSP Program could lead to disagreements over what constitutes adequate transformation or could result in an overly protective scheme. An ITC official also pointed out that a tariff classification change system would require massive paperwork for BDC companies where documentation would be involved at every stage of transformation in order to substantiate the required change. Such a process could make compliance with rule of origin requirements difficult and discourage BDCs from using the GSP Program.
Another issue was raised about the current rule of origin system related to U.S. source content of GSP items. Currently, the GSP Program does not allow for U.S. components of BDC items shipped to be considered in any way in meeting domestic content requirements (unless substantially transformed). Private sector officials expressed concern over this situation and suggested that U.S. component input be included as counting toward the 35-percent requirement.
In 1992, Mexico accounted for 67 percent of all administrative exclusions. Foreign and U.S. government officials told us that they believed Mexico’s large proportion of such exclusions could possibly be attributed to high levels of imports that were eligible for GSP but instead were shipped under HTS chapter 98, subchapter II (“9802”), which provides for partial tariff elimination. These items were not shipped under GSP presumably because they could not meet GSP’s 35-percent domestic content rule of origin or simply because 9802 was the preferred option. The dutiable value of all GSP-eligible goods imported under 9802 is categorized as an administrative exclusion. In 1991, Mexico was the largest beneficiary of 9802. However, in that year $7 billion of dutiable U.S. imports from Mexico were shipped under 9802.
Import Sensitivity and Competitiveness Exclusions
Restrictions on GSP benefits have been enacted due to the need to balance benefits provided to BDCs with concerns over the impact on domestic interests. Further, these restrictions draw upon a recognition that GSP benefits to a BDC are meant to be temporary. The restrictions are based upon the import sensitivity of domestically produced items that would compete with GSP imports and the level of competitiveness of BDC GSP exports.
Statutorily Excluded Import-Sensitive Items
Some goods are statutorily prohibited from ever obtaining GSP eligibility due to the sensitivity of specific domestic sectors to the effects of imports. These items are listed in 19 U.S.C., subsection 2463(c), and include certain textile and apparel articles and watches, as well as footwear, handbags, luggage, flat goods, work gloves, and leather wearing apparel that were not eligible for GSP on April 1, 1984. This subsection also excludes import-sensitive electronics, steel, and glass items. These exclusions are not captured in GSP data because they are not eligible for the program in the first place. Excluded textile articles were named by foreign officials we interviewed as a sector in which BDCs could benefit greatly from tariff preferences, as discussed in chapter 2.
Further, any article determined to be “import-sensitive in the context of the Generalized System of Preferences” is ineligible for the program. This criterion lacks any clear definition and, as such, GSP Subcommittee members noted, allows for flexibility in administering a program that involves thousands of items in the U.S. HTS. Decisions are open to individualized considerations during the annual decision-making process, discussed in chaper 4.
Product Graduation
Articles that are granted eligibility under GSP can also be restricted from actually receiving GSP duty-free entry entirely or with respect to specific countries. According to USTR’s General Counsel (as of October 1992), 19 U.S.C., sections 2461 and 2464, can limit benefits available under the GSP Program once specific countries are deemed to be competitive in exporting specific items. Title 19 U.S.C., section 2461(4), allows the President to grant GSP benefits while keeping in mind “the extent of the beneficiary developing country’s competitiveness with respect to eligible articles.” Title 19 U.S.C., subsection 2464(a)(1), gives the President discretionary authority to “withdraw, suspend or limit the application of duty-free treatment accorded under 19 U.S.C., section 2461, with respect to any article or with respect to any country.” These provisions allow either for the permanent removal of countries (country graduation), or the removal of items from particular countries (product graduation), from GSP eligibility status.
In 1981, the administration committed itself to fully utilizing product graduation policy. Product graduation is more common than the graduation of an entire country and has been controversial because it does not treat all BDCs uniformly (see pp. 20-22). USTR documents state that product graduation determinations are made after considering, among other things, the competitiveness of the BDC involved, as well as the effect of GSP treatment on U.S. interests. However, the GSP Director told us that the focus for these decisions rests on the former: an acknowledgement that a BDC’s industry is competitive, making GSP preferences no longer necessary. Permanent product graduations come about as a result of petitions submitted during the annual review process (typically by competing U.S. interests), or by precluding specific BDCs from GSP eligibility on newly designated articles.
Trade experts and U.S. government officials we interviewed said that this surgical approach of graduating specific items for particular countries has increasingly become a preferred tool for the GSP Program. They said it recognizes the competitive capabilities of certain BDCs and might allow for a more even distribution of benefits among countries. One former GSP Program official told us that BDC representatives were previously openly hostile to product graduation, due to its discriminatory nature, when the United States initially committed to use it in the early 1980s. However, she said that BDCs are now accepting the credibility and usefulness of this approach, as well as the intended temporary nature of benefits under GSP. A former GSP Program director told us that since the 1989 graduation of the four Asian “newly industrializing economies” (NIE) that had dominated the program, the pressure to use product graduation to target exclusions toward competitive BDCs has been greatly diminished.
Compared to other types of exclusions, permanent product graduationsdo not pose much of a barrier for GSP countries. As shown in table 3.1, exclusions from GSP benefits due to product graduations amounted to $293 million in 1989 and were $276 million in 1992. Product graduations have remained constant at 2 percent of total exclusions every year between 1989 and 1992. Only a few countries have been graduated for specific products. In 1992, countries shipping affected articles were Mexico (three items dutied on almost $156 million in U.S. imports); Brazil (five items dutied on almost $68 million); two of the four eligible republics of the former Yugoslavia; Venezuela; and Israel.
Competitive Need Limit Exclusions
Title 19 U.S.C., subsection 2464(c), allows for the suspension, often temporary, of GSP preferences for shipments of a particular item from a particular country that are defined as competitive. U.S. government officials say that these restrictions are in place because BDCs exporting at high levels tend to be more industrialized and have better export-oriented development strategies; therefore they do not need assistance to be competitive. In order to define competitiveness, the subsection enumerates specific annual import levels for any GSP-eligible item that, if exceeded in 1 calendar year by a beneficiary country, will lead to the suspension of GSP duty-free preferences for shipments of the item by the BDC that exceeded the limit. These levels equal 50 percent of total U.S. imports of an item or an absolute import value that changes from year to year. This type of exclusion is referred to as a competitive need limit.
Following a statutorily mandated general review of the GSP Program that ended in January 1987, some CNL exclusions were made more restrictive. USTR reviewed itemized GSP imports from BDCs and determined which ones had “a sufficient degree of competitiveness” (relative to other BDCs). These particular articles shipped from individual BDCs are now subject to reduced CNL levels. These lower levels equal 25 percent of total U.S. imports of the item, or an absolute value. Though CNL exclusions occur much more frequently and involve more countries than product graduations, they are not necessarily permanent.
A country whose exports of a CNL-excluded item subsequently fall below the percentage or value levels that initially led to the CNL exclusion may have the item “redesignated” as eligible for GSP duty-free preferences, according to 19 U.S.C., subsection 2464(c)(5). Until 1989, U.S. policy was to graduate—through failing to redesignate—products from more economically advanced BDCs. Beginning in 1989, this policy was eased, and redesignation decisions for all BDCs are now made on the same basis. These decisions are at the discretion of the President. Numerous redesignations have subsequently been made, as discussed on page 58.
In addition, 19 U.S.C., subsection 2464(c)(3), states that GSP benefits can be reinstated (a waiver can be granted) for items subject to CNL restrictions. Waivers can be granted for parties that submit a petition during the annual review process. For items subject to reduced and regular CNL, a petitioned waiver can be granted for either just the lower, more restrictive limits, or for both the lower and upper limits. A waiver will remain in effect until the President determines that it is no longer warranted due to changed circumstances. In deciding whether to grant a petition for a CNL waiver, the President shall give “great weight” to accessibility to the BDC’s markets for U.S. goods and services, as well as the extent to which the BDC provides reasonable and effective protection of U.S. intellectual property rights.
A CNL waiver may also be granted when total U.S. imports of a product are small, or de minimis. In 1992, the level of imports for a particular good to become eligible for a de minimis waiver was $11.8 million. All CNL waivers are automatically granted for items that were not produced in the United States on January 3, 1985, and for all items shipped from the 35 BDCs that have been designated as least developed countries by USTR (see p. 26 for a listing).
Numerous Concerns Over CNL Exclusions
Foreign business representatives we interviewed expressed concern about the unpredictable nature of CNL exclusions, under which a country will lose GSP for a certain item with only a few months’ prior notice. After the exclusion, a BDC has no way of knowing when, or even if, GSP eligibility will be reinstated through a waiver or redesignation. A former GSP director agreed with foreign and U.S. officials we interviewed that USTR’s 10-month “warning list” of items that are approaching CNL limits (using data through October and published in the Federal Register in January of the next calendar year) is essentially useless as a tool to alert countries to potential CNL problems so that action can be taken to avoid the exclusion (though it is useful as an informational source). This situation is further compounded by the lack of data on GSP exports by beneficiary countries themselves. For example, as of 1992, Brazil, the program’s fourth largest user, maintained no official data on its exports to the United States under GSP (although a computerized trade data system is being developed that would capture GSP exports). An official from the Ministry of Industry, Commerce, and Tourism told us that the Brazilian government relies on UNCTAD for data on its GSP exports to the United States.
Foreign company representatives in affected industries we interviewed said that they experience immediate production and export planning problems once they learn that their article will lose GSP. Foreign government officials said that businesses also experience long-term planning problems. Further, one foreign businessman noted that not only is future planning disrupted by a loss of GSP, but past planning efforts that were aimed at initially entering the U.S. market are lost. Foreign industry officials we interviewed said that the effect on profitability due to a lost tariff differential of just a few percentage points can be very great. A Brazilian economist working for the United Nations (U.N.) noted that the impact could be particularly strong for undifferentiated items where price is the primary factor that distinguishes the beneficiary’s product in the U.S. marketplace.
Suggestions were offered to soften the perceived severe impact of CNL exclusions. Foreign and UNCTAD officials we spoke with suggested that a longer adjustment period should be granted to businesses to plan for the tariff change and to find potential alternate markets before CNL exclusions are implemented. One point made by BDC government and industry officials was that CNL exclusions should be based on sustainable GSP export performance, rather than on only 1 year’s data. Unusual circumstances in 1 year that trigger a CNL exclusion may not be typical or indicative of an industry’s capability to export at competitive levels over the long run from a specific country. For example, a representative of one Brazilian sector (rods/bars of copper-zinc base) explained that the industry found itself subject to a CNL export percentage exclusion in 1991 even though its exports to the United States had not changed significantly from previous years. However, exports to the United States from other countries had decreased, and so the Brazilian industry’s proportion of U.S. imports of the item had exceeded the CNL percentage level.
A former GSP Program director questioned these requests for increased leniency before exclusions are implemented, pointing out that BDCs should be taking a more active role in reducing the impact of CNL exclusions. He noted that BDCs should act to avoid CNL exclusions altogether. BDC governments should more closely monitor U.S. import statistics to determine which industries may be at future risk of exceeding competitive need limits. The BDC government could then alert industry representatives, who could file for a CNL waiver during the annual review process before any CNL level was even exceeded. The industry would then be unaffected by any future CNL exclusion if the waiver were granted. Another former GSP Program official suggested that once a product from a BDC exceeds CNL levels for a certain number of years, U.S. policy should be to completely graduate the item for the country involved. This action would add an element of predictability to the process of reducing GSP benefits for specific countries.
Decreasing Size of CNL Exclusions
Some foreign government officials and an industry official we interviewed referred to CNL exclusions as the major barrier to receiving benefits from the program; however, as discussed previously (see pp. 47-48), we found that the majority of exclusions from duty-free entry were due to administrative reasons in 1991 and 1992. In 1989, total CNL exclusions accounted for the largest share (66 percent) of all exclusions and were valued at $8.2 billion. Reduced CNL, which affected primarily Mexico and Brazil, accounted for 17 percent of total CNL exclusions. By 1992, total CNL exclusions had dropped to $6.7 billion (42 percent of total exclusions), with 13 percent of all CNL exclusions due to reduced CNL.
One Brazilian trade association official suggested that the reason for the decreased level of CNL exclusions may be that companies simply stopped shipping the items subject to CNL or graduation limitations because of a lost crucial competitive edge. This situation would make CNL exclusions appear relatively less serious than they actually were, when compared to other types of exclusions. (This argument could also be made for permanent product graduations.) Our analysis, based on exclusions in force in 1992, concluded that the assertion that countries completely stopped shipping CNL-excluded items was mistaken, at least for that year. At the end of 1992, although 245 product/BDC pairs were officially excluded from GSP eligibility, 225 (92 percent) items had been shipped by the affected country despite a lack of GSP duty-free benefits.
Instead, the recent proportional decrease in the importance of CNL relative to other exclusions over the years can be attributed to the fact that (1) administrative exclusions have increased substantially and (2) fewer items are now subject to continued CNL limitations for key countries, primarily Mexico and Brazil, because of an eased redesignation policy adopted as part of the 1989 annual review. Following implementation of this policy, the value of CNL exclusions for these countries has decreased.
Mexico and Brazil accounted for the majority of CNL exclusions in 1989 and 1990 (with Mexico continuing to account for over half of all CNL exclusions in 1991 and 1992), and the size of their CNL exclusions has, to a large degree, dictated the importance of CNL in the program overall over time. The number and value of Mexican and Brazilian CNL exclusions were greatly reduced by 1992. As shown in figure 3.1, Mexico and Brazil had a smaller share of total CNL exclusions in that year when compared to 1989.
At the end of 1989, Mexico was officially subject to exclusions for 285 items. Following implementation of the eased redesignation policy, Mexico had 209 items that were returned to GSP-eligible status in 1990. By the end of 1992, Mexico was officially subject to limitations for 91 products. Similarly, at the end of 1989, Brazil had 132 items that were officially excluded from receiving GSP preferences. As with Mexico, Brazil had many items (90) that regained GSP eligibility after the redesignation policy was altered. At the end of 1992, Brazil was officially excluded from GSP duty-free entry for 55 items, most of which were eligible for redesignation.
Just as the eased redesignation policy has allowed items to return to GSP status, so, too, have CNL waivers lessened the impact of CNL exclusions in recent years. Items entering with CNL waivers have increased in value and proportion, from $533 million (2 percent of eligible imports) entering GSP duty free under waivers in 1989, to $2.5 billion (7 percent of eligible imports) in 1992. As seen in figure 3.2, the two countries that benefited most from CNL waivers in 1992 were Mexico and Malaysia. Mexico was the primary beneficiary, with $1.1 billion entering duty free under waivers (45 percent of all waiver benefits). While Malaysia had $593 million in imports to the United States dutied under CNL in 1992, $906 million entered duty free under CNL waivers. However, Thailand and Brazil, in addition to being two of the countries most affected by CNL exclusions, shipped no items that benefited from CNL waivers.
The reduced size of CNL exclusions may not last. While smaller CNL restrictions for Mexico (in particular) and Brazil have resulted in a reduced importance for CNL exclusions in the program overall, other top shipping countries, such as Malaysia and Thailand, have had very different experiences. These two countries had growth rates in GSP duty-free shipments of about 31 and 27 percent, respectively, between 1991 and 1992. However, they had even higher increases in shipments to the United States dutied under CNL that year. Thailand had about $845 million in GSP imports enter the United States dutied because of CNL in 1992, an increase of 33 percent from 1991. Malaysia reached a level of $593 million in shipments to the United States dutied under CNL in 1992, a 245-percent increase from 1991. This growth was largely due to increased levels of exports of the same excluded items over time, rather than an increase in the number of items excluded. For example, Malaysia’s CNL exclusions in 1992 were attributable to just six products. Malaysia and Thailand now rank ahead of Brazil for imports entering the United States subject to duties due to CNL exclusions. Continued rapid growth in these CNL exclusions, combined with the graduation of Mexico, could result in an increased relative impact of CNL on the GSP Program.
The Impact of CNL Exclusions
Due to the concern expressed about CNL exclusions by foreign business and government officials, we examined exports to the United States of (1) the affected BDC, (2) other BDCs, and (3) ineligible countries following a CNL exclusion. BDC company officials we interviewed said that a loss of GSP tariff preferences means a decreased ability to compete for sales. However, some U.S. officials said that BDCs are competitive without GSP if they are exporting beyond the statutory limits and that CNL exclusions provide increased opportunities for other BDCs.
We examined data on 57 CNL product exclusions that took effect in 1990 (40 items) and 1991 (17 items) to assess the import position for the affected BDC, other BDCs, and non-GSP countries. Many of these exclusions were applied to Mexico. Our analysis showed that the results were mixed. Following the CNL exclusion, the affected BDC experienced a reduced competitive position, measured as a loss in U.S. import market share, in about 65 percent of the cases for both sets of exclusions by July 1992. The range of this share loss varied widely, from a few percentage points to a 100-percent loss. There was no pattern of share loss or gain for certain types of products.
However, the excluded country was actually able to maintain or increase its import market share in up to 35 percent of the cases after the exclusion. Further, subsequent redesignations or CNL waivers softened the impact of lost import market share for about half of the 25 items excluded in 1990 that regained GSP status in 1991. The amount of GSP duty-free shipments before the CNL exclusion did not appear to be predictive of the impact the exclusion would have on the particular BDC.
In addition, our analysis showed that the import market share lost by excluded BDCs was somewhat more likely to accrue to non-GSP countries, although other BDCs also improved their share, and often for the same items as non-GSP countries. In cases where the excluded BDC lost share, non-GSP countries increased their import market share for over 70 percent, while remaining BDCs increased their share for over 60 percent, of the items.
Awareness of the Program and Ability of BDCs to Produce and Export GSP-Eligible Products
In addition to the legislative prohibition of eligibility for certain items, there are other reasons for limited use of the GSP Program that are not captured in data. It is possible that GSP is not used as much as it might be because exporters simply are not familiar with GSP, particularly in countries that are not large users of the program. For example, a U.S. government official in Turkey, as well as a Turkish government official, said that the Turkish government does an inadequate job of informing Turkish exporters about the opportunities provided by the GSP Program. A business representative in Brazil said that smaller firms in that country do not even know that the program exists.
In addition, some U.S. government officials and GSP experts we interviewed told us that they believe an important limitation on GSP participation is that many BDCs cannot produce and export items that are eligible under the program. This conclusion led to varying opinions by these officials on the appropriate country focus of the GSP Program.
Some U.S. government officials said that there is little that the United States can do to increase use of the program for many countries. They explained that the United States should realize that domination of the program by the few countries that can produce and export is to be expected. A former GSP director pointed out that too many people mistakenly view the GSP Program as a traditional aid program, believing that if the U.S. government removes benefits from some countries, it can allocate more to other countries. He said that such an action simply is not possible with the GSP Program, where the benefits of tariff preferences are not transferable to countries that are not strong producers or exporters of the GSP-eligible goods shipped by a graduated country.
For example, our analysis of CNL exclusions showed that, in the short run, other BDCs were often able to increase their U.S. import market shares when certain BDCs were excluded from receiving GSP preferences for particular items. However, these increases in market share occurred for remaining BDCs that were already shipping the affected articles. This conclusion suggests that the universe of remaining eligible BDCs that could benefit in the short run from an exclusion, whether it is a CNL, product graduation, or country graduation exclusion, is limited to those countries that are already shipping the relevant articles. The impact in the long run for all remaining BDCs is not clear.
Country Graduation
In opposing the views just mentioned, some U.S. government and trade experts said that the program should refocus its efforts to assisting and promoting growth in the less developed BDCs, rather than leaving most GSP benefits to countries that are already on the road to industrialization and would export regardless of the GSP Program. They saw the original intention of the GSP Program as one of working to improve the economic condition of the developing countries that need an extra advantage to begin or increase exporting. They said that the largest, most competitive program beneficiaries should be completely removed, or graduated, from GSP eligibility.
As with product graduations, 19 U.S.C., subsection 2464(a), allows the President to graduate an entire country on a discretionary basis after examining criteria in the law used to determine a country’s original eligibility status. Since the late 1980s, eight countries or economies have been graduated from the GSP Program (Bermuda, Brunei, Hong Kong, Mexico, Nauru, Singapore, South Korea, and Taiwan), and an additional country (Israel) is in the process of being removed from the program.
According to some U.S. government officials and trade experts, complete graduation from the GSP Program is appropriate for countries that realize high exporting levels under the program (although most government officials interviewed felt that product graduation was a more effective way to deal with competitive GSP exporters.) They stated that strong exports indicate competitiveness, probable improved economic development, and a subsequent decreased need for tariff preferences. Further, they contended that graduation of competitive and dominating countries could provide improved exporting and market opportunities for the remaining BDCs.
Some U.S. government and industry officials felt that current prominent GSP users, such as Malaysia and Thailand, should be graduated from the program. One U.S. official added that if graduation is not undertaken for top-shipping BDCs, then at the very least, these countries should be held to higher standards in areas such as intellectual property protection or BDC market access.
Graduation of the Four Asian NIEs
The most visible use of country graduation occurred in January of 1989, when the four NIEs (Hong Kong, South Korea, Singapore, and Taiwan) were graduated from the GSP Program. This graduation came about because of (1) concern expressed about the dominant position these four countries held in the GSP Program (58 percent of all GSP-eligible imports and 54 percent of GSP duty-free imports in 1988) and (2) a determination that the economic development of these countries had reached a level that no longer justified their participation in the program. Formal criteria cited in making the decision to remove the NIEs, in addition to their GSP shipment levels, were GNP per capita, economic growth rates, and an ability to export manufactured items into the United States. While some hoped that the graduations would improve exporting opportunities under GSP for other BDCs, others argued that it would be just as likely that developed, non-GSP countries would increase their exports of these goods.
The circumstances surrounding Singapore’s graduation were often singled out as unacceptable by trade experts we interviewed. Throughout most of the 1980s, Singapore did not protect U.S. (or any foreign) copyrighted goods. According to an official representing U.S. intellectual property interests, the U.S. government, pointing out the magnitude of financial losses to U.S. interests due to pirating of copyrighted U.S. works, informed Singapore that if copyright protection for U.S. goods were not soon provided, then that country would lose GSP benefits. Singapore, the fourth largest beneficiary under GSP, had duty-free shipments under the program of $1.3 billion in 1987.
This industry representative pointed out that in order to protect U.S. copyrighted goods, Singapore needed to (1) pass a new copyright law and (2) either sign a multilateral convention to protect copyrighted works of other signatories (such as the Berne Convention for the Protection of Literary and Artistic Works) or enter into a bilateral agreement with the United States to afford reciprocal protection. Singapore passed a new copyright law in February 1987, and the United States and Singapore subsequently extended reciprocal copyright protection, through a bilateral agreement, in April of that year.
With this newly enacted protection of U.S. copyrighted works, Singapore believed its status under GSP to be secure. However, just 9 months later, in January 1988, the United States announced that Singapore would be graduated entirely from the program beginning in 1989. Many U.S. intellectual property representatives were alarmed by this move, stating that it signaled bad faith on the part of the United States. One industry official stated that Singapore still resents and raises this issue, which has made current intellectual property discussions with that country more difficult. A former USTR official we interviewed countered that the decision to graduate Singapore was made based on overriding trade and economic factors entirely apart from IPR, and, under the political climate of the time, the country would have been removed regardless of the status of its IPR regime.
Although the graduation of the four Asian NIEs had a great impact on the overall GSP Program figures and saw the imports of GSP-eligible goods from the four NIEs decrease, the action appears to have had an unclear effect on the level of GSP-eligible exports of the remaining BDCs, as shown in table 3.2. In 1988, the last year of program eligibility for the four Asian NIEs, total GSP-eligible imports to the United States from all BDCs amounted to almost $50 billion. Over $18 billion received GSP duty-free entry. The NIEs shipped almost $29 billion, or 60 percent, of eligible imports, and $9.85 billion of this amount received duty-free entry. Once the NIEs were graduated, GSP-eligible imports from BDCs dropped by over 50 percent, to $24.4 billion in 1989, while duty-free imports fell by 45 percent, to $10 billion.
The four NIEs accounted for almost 19 percent of total U.S. imports of GSP-covered articles in 1988. This U.S. import market share dropped upon graduation to about 16 percent in 1989 and reached a low of just over 13 percent in 1992. With the NIEs now among their ranks, non-GSP countries increased their share of GSP-eligible U.S. imports in 1989 to over 86 percent, from about 68 percent in 1988. This share has been decreasing slightly ever since. All GSP-eligible countries increased their share of U.S. imports of eligible items every year following the graduations, rising from almost 14 percent in 1989 to 17 percent in 1992.
However, it is difficult to conclude that the modest increase in U.S. import market share of imports from GSP-eligible countries was specifically due to the NIEs’ 1989 graduations, since these BDCs had increased their portion of eligible imports even before the graduations. Further, the NIEs had been losing U.S. import market share before the graduations occurred.
An evaluation of country graduation done through the U.N.’s Economic and Social Commission for Asia and the Pacific in 1992 suggested, as did our analysis, that the trade impact on the graduated countries was negative. The evaluation also claimed that remaining Asian GSP-eligible countries realized an influx of foreign direct investment after the NIEs’ graduation at the expense of the four NIEs. The U.N. study stated that other Asian BDCs were able to increase imports to the United States somewhat because of the NIE graduations. However, these countries maintained internal production and regulatory barriers that have kept them from fully exploiting any increased opportunities provided by the removal of the NIEs from the program. Officials from some of the program’s current top user countries told us that they did not believe their countries had been able to benefit more from GSP after the NIE graduations.
Some U.S. government officials said that they do not believe country graduation based on economic development will be used again any time soon. They pointed out that there are not likely to be cases as clear-cut as the Asian NIEs in the near future. A U.S. Department of Agriculture (USDA) official pointed out that even Mexico is not yet at the development level of the Asian NIEs. Other top-ranking users of the program, such as Brazil, have such disparate development levels within the countries themselves that it could be counterproductive to the BDC development goals of the GSP Program to graduate an entire country, including sectors that use GSP and are located in underdeveloped regions of the country.
GNP Per Capita and Country Graduation
Title 19 U.S.C., subsection 2464(f), mandates that no country may continue to receive GSP preferences if it exceeds a specific GNP per capita level. The GNP per capita ceiling for GSP eligibility in 1984 was $8,500, and increases in this amount are pegged to growth in U.S. GNP. The GNP per capita ceiling in 1992 was $10,647.
In 1988, Bahrain, Bermuda, Brunei, and Nauru were removed from GSP eligibility due to their having per capita GNPs that were over the legislated limit. Bahrain was reinstated in 1990, after an analysis of revised national income data and a subsequent determination that the country had in fact not exceeded the statutory GNP per capita limit. Having a high GNP per capita level was the stated reason for graduating Israel over a 2-year period, to be completed in July 1995. The Bahamas, a current BDC, has a GNP per capita (1991 GNP per capita of $11,720) over the legislated limit.
Conclusions
Nearly half of GSP-eligible imports did not receive duty-free entry in 1992. Although administrative exclusions have accounted for the majority of total exclusions in recent years, it is probable that with Mexico’s removal from the program, along with the rapid growth in competitive need limit exclusions for top shippers such as Malaysia and Thailand, competitive need limits will again become the primary type of exclusion. The BDCs we visited have legitimate concerns over CNL. The premise behind the automatic CNL exclusions—that a BDC’s industry is a competitive exporter once these levels are reached and so no longer needs GSP—can be questioned. Only 1 year of data is used in order to trigger an exclusion, during which time external factors that may have little to do with a specific BDC industry’s competitiveness can affect U.S. import levels. While CNL exclusions are intended to remove products that are considered competitive, our data indicated that a loss of GSP due to CNL was often followed by a decrease in import market share. Further, unlike product graduation, domestic interests have no input into this process, and no U.S. government judgment is made concerning particular items and their competitiveness.
The implementation of a CNL exclusion can be disruptive and destabilizing for the BDC industry and U.S. importers affected. GSP duty-free preferences are lost for at least a year, unless the industry has the foresight to apply for a waiver a year before it is needed. Once a CNL exclusion is triggered, the industry has only a few months’ notice to prepare for the loss of GSP duty elimination. This circumstance undermines the program’s intent of fostering economic growth and stability for BDCs.
It is possible that granting a longer period before CNL exclusions take effect could counteract these problems. For example, after a BDC’s industry exceeds the CNL, the industry could be granted an additional 1-year period during which the BDC industry could apply for a waiver and a second year of data would be collected. At the end of this additional year, a decision would be made whether to grant the waiver or, if the data show an import situation consistent with the first year for the industry, to deny it and allow the CNL exclusion to take effect. Any domestic concerns over whether to extend duty-free preferences with a waiver could be assessed on a case-by-case basis during the additional year. For example, product graduation could be applied to BDC items that are found to be exported competitively as a result of examining domestic concerns.
Product graduation, while currently accounting for a small percentage of exclusions, is an effective way of targeting competitive BDC products for exclusion from GSP. Concerned U.S. producers, at their request, can receive relief from imports that they consider competitive. Further, product graduation is executed in a targeted manner that does not disrupt a country’s less competitive industries, as can happen when an entire BDC is graduated. However, once a certain overall level of country development is reached, country graduation is appropriate.
GSP rules of origin cause problems due to the lack of predictability. BDC shippers cannot be sure that their products will meet the rules and qualify for GSP. In addition, the current rule states that at least 35 percent of the product must originate or be substantially transformed within the BDC and does not allow for any consideration of U.S. source material in meeting this requirement.
NAFTA, and the Canadian Free Trade Agreement before it, has rules of origin largely based on an imported product’s change of U.S. HTS tariff heading from its constituent parts. This system has generally proven to be simpler and surer to administer and allows exporters to know their eligibility status before shipping. However, it may be more difficult for BDCs to comply with the paperwork requirements associated with a change in tariff classification system.
In addition, some items utilize provisions of trade law (U.S. HTS heading 9802) that allow the U.S.-origin content of certain goods to reenter the United States duty free. Therefore, it seems inconsistent to U.S. interests to disqualify items from entering GSP duty free because they have significant U.S. input that precludes the items from attaining 35-percent BDC content.
Matters for Congressional Consideration
In considering whether to reauthorize the GSP Program, Congress may wish to consider altering the competitive need limit process in order to allow for a more thorough assessment of the competitiveness of the affected imports by, for example, extending the amount of time before exclusions under CNL are implemented. This would allow for a more thorough assessment of the competitiveness of the affected imports and allow affected industries more time to adjust.
Congress may also wish to consider whether to alter the GSP rules so that items are not penalized for having U.S. content. For example, any U.S.-origin value of a shipped item could be subtracted from the total value of the item before the 35-percent BDC origin value added is calculated.
Administrative Process for Product Cases
The GSP Program has a generally well-structured administrative process for consideration of petitions to add or remove products from GSP coverage. The interagency structure of the GSP Subcommittee and its consensus decision-making process is designed to ensure that the program’s goals are balanced to provide benefits to BDCs while taking care not to unduly harm domestic interests. The annual petition review process, with clearly delineated procedures and time frames, provides an effective means for management of the program. The GSP review process is transparent up to the decision-making point. It provides interested parties with the opportunity to petition for changes and for a public hearing on these petitions. It allows all parties to know who is petitioning or opposing a petition and the evidence they have presented to support their position, as well as an opportunity to rebut opposing views.
A number of specific issues were raised in our interviews, however, about certain aspects of the administrative process. Decision-making criteria, such as the “import sensitivity” of a product or the achievement of “sufficient competitiveness” in the U.S. market, that are provided in the GSP statute are undefined. Such criteria are difficult to articulate or quantify, requiring case-by-case judgments. This difficulty was the source of much of the controversy in the product petitions we reviewed. While most petitions were not controversial and were routinely decided based on economic merit, we found that the more controversial the case and the higher in the trade policy structure it was elevated, the more other policy factors became determinative. Another issue raised related to the transparency of the reasoning behind decisions on whether to grant or deny a product petition. USTR makes no public statement, although by regulation it must respond in writing to a written request for information by the petitioner. During the 1991 Special Review for Central and Eastern Europe, the administrative waiver of the rule that 3 years must pass before a product addition petition is refiled caused much controversy. The waiver created the perception among affected domestic industries that the program had been politicized, and they questioned the credibility of the program. Finally, the GSP Subcommittee has occasionally accepted petitions that did not contain information required in the regulations. Although the regulations allow such an action if the petitioner made a good faith effort to obtain the missing information, domestic producers felt they were disadvantaged because often very little information was available to oppose a petition.
A fundamental issue was also raised about providing differential treatment to BDCs under a generalized system. Specifically questioned was whether differential treatment was legal under the U.S.’ GATT obligations, and whether the President had statutory authority and discretion to make such differential decisions. “Differential treatment” means that imports of a particular product from a particular BDC lose GSP eligibility if such imports are deemed to be sufficiently competitive. Such decisions (“permanent product graduations”) are made at the discretion of the President. We found that the GSP statute provides the President with full authority to differentiate between countries as well as to make product designations on a differential basis. Further, the practice is not inconsistent with U.S. obligations under GATT because the GSP Program is exempt from GATT obligations, according to a GATT official. (See also ch. 1.)
The GSP law requires ITC advice on the probable economic impact of granting GSP duty-free treatment to a product. Most of the GSP Subcommittee members we spoke to said that this advice is valuable to the interagency decision-making process as an impartial analysis of the likely economic effects on U.S. producers and consumers. However, U.S. industry officials expressed some concern that the usefulness of ITC advice might be limited by outdated information used in ITC analyses. U.S. industry officials also complained that USTR’s classifying as confidential ITC’s assessment of probable economic effect undercuts program transparency.
Decision-Making Process in Product Cases
USTR’s annual review of product eligibility focuses on petitions to add or remove items, which petitioners must submit by the June 1 deadline. At that time, USTR launches a two-stage decision cycle. In the first stage, June 1 to about mid-July, a decision is made on which petitions to accept for review. In the second stage, late July to around the end of the following April, the accepted petitions are reviewed and a decision is made on which petitions should be granted and which denied. GSP eligibility changes go into effect on July 1. This GSP decision-making time frame and the broad outlines of the review process are stipulated in the GSP regulations.
GSP petitions are reviewed by members of the interagency GSP Subcommittee. One agency takes the lead on each petition, providing a written report and recommendation on each. Generally, the Departments of Commerce and Agriculture review the largest number of petitions because they have the relevant industry sector expertise. However, GSP officials repeatedly stressed that the recommendation of the lead agency is not always followed. The GSP Subcommittee deliberates on each case and makes its decisions by consensus.
Decisions are made by consensus because the GSP Subcommittee tries to balance the basic program objective of assisting developing countries against possible harm to domestic industries. The GSP Subcommittee includes the various government agencies that are integral to achieving this balance of interests. ITC and GSP agency officials told us that generally, USTR, State, and the Treasury support free trade and enhancing assistance to BDCs, while Agriculture, Commerce, and the Interior represent their particular domestic constituencies. Labor, while concerned with product petitions, is more focused on worker rights petitions (discussed in ch. 5). The need for consensus forces the GSP Subcommittee to balance the diverse views and interests of its members.
In the first stage of the annual review, which begins on June 1, the GSP Subcommittee has a 6-week period in which to decide which petitions to accept for full review. It checks that none of the petitions had been submitted and denied in the past 3 years and that none of the products already had duty-free status under MFN. It reviews import statistics for the prior 3 years and the first quarter of the current year to identify growth rates and trends over time. The recommendation of the lead agency is considered, together with views of other members. At the end of the 6-week period, the GSP Subcommittee makes its consensus recommendations, which are submitted for approval to TPSC and TPRG and then forwarded for the President’s final decision. The decision on which petitions to accept for full review is published in the Federal Register. This notification also announces the hearing schedule and invites interested parties to testify or submit written statements.
The second stage of the GSP decision-making process, the full interagency review of accepted petitions, begins in mid-July and ends the following April. USTR requests economic impact advice from ITC, as mandated by GSP law. The GSP Subcommittee and ITC hold separate hearings to receive public comment. USTR makes a point of ensuring that the public comment process and hearings are as “transparent” as possible by making petitions and all submissions by interested parties publicly available in the USTR reading room. It allows all parties to know who is petitioning or opposing a petition and the evidence they have presented to support their position, as well as an opportunity to rebut opposing views. USTR will also accept subsequent written submissions by interested parties right up to the point at which the GSP Subcommittee’s recommendations are due.
The GSP Subcommittee does not officially solicit advice on petitions from either Industry Sector Advisory Committees or Agricultural Technical Advisory Committees as a part of the review process, according to the GSP Deputy Director. However, he said that such advice would be welcome at GSP hearings or during the review process and that members of these advisory committees have testified at hearings and sent written comments in the past.
After its review of petitions is completed and a consensus is reached, the GSP Subcommittee makes its recommendations in a draft TPSC paper that is circulated among TPSC members for their approval. Because the agencies are encouraged to take positions and resolve differences at the GSP Subcommittee level, disputes are generally settled there, according to subcommittee members. However, if consensus is not reached by the GSP Subcommittee, TPSC will meet to resolve disputes.
GSP Subcommittee members noted that no agency agrees on all recommendations, but that they operate on a consensus basis. The subcommittee’s draft TPSC paper is a package, and is approved as a package, even though an agency may not agree on all the individual cases. Depending on how strong an agency’s opposition is, it may go along with the group consensus or fight certain recommendations at the TPSC or the TPRG level.
The members of TPRG are generally political appointees at the under secretary level, or their representatives. TPRG is chaired by a deputy U.S. Trade Representative. TPRG focuses on resolving areas of disagreement and is considered to be “the end of the line” in resolving disputes over petitions. According to the GSP Director, no problems have been elevated to the cabinet level. The TPRG recommendation is sent for approval to the U.S. Trade Representative, who in turn sends the decision package to the President.
The White House has its own deliberations on any contentious issues. Under the GSP statute, the President has the ultimate authority to decide GSP petitions. The GSP Subcommittee, TPSC, or TPRG can only recommend; the decision is the President’s. White House staff may request additional facts from USTR. However, according to the GSP Director, they normally defer to the recommendations of TPRG as forwarded to the White House by the U.S. Trade Representative. Then the President makes the decision for each petition, leaving no written explanation behind.
According to the GSP Deputy Director, no voting record is available for the GSP Subcommittee, TPSC, or TPRG. The decision process is consensus based and, for the GSP Subcommittee and TPSC, the members usually vote on a package, not on individual petitions.
GSP Petition Results
We compiled information on decisions made on petitions filed in the 1989-91 annual reviews and the two special reviews in 1989 and 1991. Table 4.1 shows petition results in these five reviews.
In the 1990 and 1989 annual reviews and the 1989 Andean special review, about 50-60 percent of the petitions were granted to add or remove items, or to waive competitive need limits. Approvals dropped to 35 percent in the 1991 annual review because all petitions submitted by Mexico were denied in order not to undercut ongoing NAFTA negotiations. However, without the petitions related to Mexico, 67 percent of the cases were granted. In the 1991 Central and East European special review, 80 percent of the cases were granted.
However, the number of petitions granted should also be looked at in the context of the potential import value of the items. For example, the 74 items granted and added in the 1991 special review had imports valued at $19 million from the target Central and East European countries and $52 million from all GSP beneficiaries in 1991, the year before the inclusion of these items in GSP. In contrast, while only 23 new items were granted and added in the 1991 annual review, their imports in 1991 reached a value of over $400 million, of which one item (oriental tobacco) alone had imports valued at $248 million. Therefore, though far more items were granted and added in the 1991 special review, the potential value of GSP shipments was far greater as a result of the 23 items added in the 1991 annual review.
Concerns Raised About the GSP Process
Most interested parties we interviewed were generally satisfied with the administrative structure of the GSP Program in regard to product petition cases, although some specific concerns were raised about program administration, particularly by some U.S. producers. A positive assessment of GSP was provided over a broad spectrum of “interested parties”—foreign government officials, UNCTAD officials, U.S. and foreign business representatives, trade experts, and trade association officials—whom we interviewed. We found that there was a general view that the GSP Subcommittee has done a good job in administering the program for product petitions. The exception to this opinion was in the U.S. agricultural sector, where there were mixed views, and the chemical sector, where there were negative views.
UNCTAD officials knowledgeable about GSP praised the U.S. program as being the most transparent and among the simplest of GSP programs worldwide. Many foreign government officials and business representatives, as well as U.S. business representatives, believed that the U.S. program was fairly and transparently administered and gave them adequate opportunity to present their views on product cases of interest to them.
However, some U.S. agricultural and chemical producers had negative views, asserting that the GSP Program’s duty-free imports could harm the competitiveness of their companies. Such concern was expressed by agricultural sectors such as the dairy and cheese industry, wine producers, and California pear growers.
A number of specific issues were raised, however, pertaining to program administration. We analyzed concerns that were raised about the GSP process relating to decision-making criteria, decision-making based on economic merit or policy considerations, transparency of the reasoning used in decisions, waiver of the 3-year rule, and completeness of petitions.
Decision-Making Criteria Are Not Defined
Statutory criteria for decision-making in GSP cases, such as “import sensitivity” and “sufficient competitiveness,” are not defined. Some foreign government officials, business representatives, and petitioners noted that a lack of objective criteria allows the GSP Subcommittee to interpret GSP provisions subjectively and makes it difficult for petitioners to assess the strength of their cases, detracting from the transparency of the program.
The GSP statute, in section 2463(c), provides that the President may not designate any article as an eligible article that he determines to be import sensitive in the context of GSP. (The GSP statute is found in title V of the Trade Act of 1974, as amended.) However, the statute does not define import sensitivity in the GSP context. In section 2464(c)(2)(B), the statute provides that the reduced competitive need limits provision will apply if, after a general review, the President determines that “a beneficiary developing country has demonstrated a sufficient degree of competitiveness (relative to other beneficiary developing countries) with respect to any eligible article . . . .” Again, no definition of what constitutes “sufficient competitiveness” is provided.
According to GSP officials, ITC officials, and trade experts, such definitions are difficult to articulate or quantify. They run the risk of being so broad as to be meaningless or so narrowly and rigidly defined as to be limiting. What is import sensitive or sufficiently competitive is essentially a judgment that needs to be made on a case-by-case basis for each product and beneficiary country. The records of the interagency deliberations and public hearing briefs provided ample evidence that, even when the same data were used, differing parties could arrive at vastly different judgments. And in most cases, opposing parties were not in agreement on the data, let alone the economic impact.
Many of the GSP Program experts that we interviewed said that although well-defined and articulated GSP criteria would be nice to have, they did not believe such definitions were feasible. Further, they feared that an attempt to statutorily define these criteria would result in rigid, narrowly focused definitions that could hamper achieving program objectives.
The GSP Subcommittee has, however, developed its own informal guidelines for use in its decision-making process. According to the GSP Director, some key factors the GSP Subcommittee considers in determining import sensitivity include (1)the current share of the U.S. market accounted for by imports, both from GSP and non-GSP countries; (2)growth trends, both of imports and of U.S. production, consumption, and exports; (3)the current tariff levels; (4)the overall health of the U.S. industry and trends in U.S. industry performance; (5)the international competitiveness of imports from GSP countries, in terms of factors such as price and quality; and (6)the extent to which GSP imports could be expected to displace imports from non-GSP countries, as opposed to U.S. production.
However, the GSP Subcommittee has not formalized these guidelines or made them publicly available.
A related issue raised by some domestic industries was whether the GSP Subcommittee assessed injury or threat of injury to U.S. industry when considering a product petition. The GSP Director said that the subcommittee does not directly consider injury or threat of injury during its deliberations. The concept of injury or threat of injury does not arise in the GSP statute. Rather, the statute requires that the President base a decision regarding a product’s eligibility on whether it is import sensitive. However, the GSP Director stressed that import sensitivity clearly has a lower threshold than injury: if an industry is injured, it is import sensitive, but it can be import sensitive long before the industry is injured. In addition, GSP coverage is affected by other U.S. government trade actions, such as antidumping duties or duties levied to counteract foreign government subsidies.
Decision-Making Based on Economic Merit
The difficulty in defining what is import sensitive or sufficiently competitive has direct implications for decision-making in GSP cases. According to current and former GSP Subcommittee members, most product petitions are not controversial and do not lead to strong opposition by domestic producers. GSP Subcommittee recommendations are routinely based on economic merit. However, when petitions are controversial, decision-making becomes more complex. Our review of 45 cases in the 1991 annual review and the 1991 Central and Eastern Europe special review indicated that the inability to reach consensus on what is import sensitive or sufficiently competitive is often at the heart of the interagency debate. And clearly, the more controversial the case and the higher it is elevated in the trade policy structure, the more other policy factors become determinative. BDC governments may use foreign policy leverage; Members of Congress weigh in for or against; and domestic producers and industry associations, as well as importers, may stress their view of the petition’s potential impact.
A relatively small percentage of the cases in the 1991 annual review or the 1991 special review were controversial. GSP Subcommittee members emphasized that most petitions were not opposed by domestic producers and were decided based on their economic merits. Typically, from 80 to 130 petitions may be considered during the stage two full review (see table 4.1), and only a few are controversial. In the 1991 annual review and the 1991 special review, about 15 percent of cases were considered to be problematic enough to elevate to TPRG for resolution. In both reviews, the controversial cases included multiple petitions for various types of the same general product (i.e., four petitions on four different kinds of widgets).
We examined the case study records and interagency documents to see how the decision-making process worked in cases that caused interagency controversy or were strongly opposed by a domestic industry. We found that in cases in which the GSP Subcommittee reached consensus that a product was not import sensitive and that the petition should be granted, but domestic producers were vehemently opposed, the petition was generally elevated to TPSC or TPRG for resolution. In cases in which the GSP Subcommittee was unable to reach consensus, it was usually because one or two agencies strongly dissented from the majority view. The stronger the dissent, the higher the case was elevated in the trade policy structure. Invariably, in these high-profile cases, there were deep divisions on what the economic impact would be, to what extent domestic producers were import sensitive, and what constituted a level of imports that would harm domestic industry.
The recommendations of the GSP Subcommittee were at times reversed by TPSC or TPRG, and the President decided cases differently from the recommendations forwarded to him as well. In 14 of the 45 cases we studied, recommendations were reversed, with 5 by TPSC, 6 by TPRG, and 3 by the President. In most cases, the action was to reverse a petition approval to a denial. This reversal rate is not representative of the reversal rate for all cases because we specifically included all of the controversial cases in our case study analysis, and, according to the GSP Director, the 1991 special review had a higher number of controversial cases than normal. This selection of cases may account for a higher percentage of changed results than would be usual.
Trade policy is generally acknowledged to be a part of foreign policy; it is also a function of domestic policy. The fact that the GSP Program sits at the juxtaposition of these two sometimes opposing forces is at the heart of the balancing act required of the GSP Subcommittee: to assist developing countries to increase exports to the U.S. market while not harming domestic producers. The easy decisions on petitions only happened when the product was not domestically produced or when the BDC only took market share away from developed country exports, resulting in a neutral impact for the domestic market. But where there were domestic producers who were likely to lose any notable degree of market share, then the debate over what level of imports causes harm was triggered. The debate became even more contentious when there were domestic importers who did want the benefit of duty-free entry of that product. Obviously, the domestic producer was not enthusiastic about any loss of market share, while domestic importers generally disputed estimates of harmful impact and stressed potential benefits to themselves, U.S. consumers, and the BDC producers.
One of the problems related to perspective. ITC and the GSP Subcommittee looked at the big picture and at aggregate or economywide effects (“only 3 percent potential loss of U.S. market share”). The domestic producer whose plant may have been the one experiencing a hefty portion of the potential 3-percent sales loss took a strongly micro view (“losses of this magnitude may put me out of business and mean a loss of hundreds/thousands of local jobs”).
In our case studies, the higher in the trade policy structure the controversial cases were elevated, the more other policy considerations assumed importance. GSP Subcommittee members and a GSP expert confirmed that when a petition becomes controversial and is elevated in the trade policy decision-making structure, economic merit becomes less determinative and other policy considerations become more determinative of the final decision. In the end the decision is made by the President, who is the ultimate arbiter of policy decisions. We believe this is in keeping with the tenor of the GSP statute, which gives the President broad discretion in decision-making.
Transparency of Reasons for Product Decisions
The GSP Program is highly transparent in terms of receiving public comments from all interested parties and holding public hearings on petitions accepted for full review. However, once the public comment and hearing process is completed and the interagency decision-making process begins, transparency largely ends. The decision-making process itself is confidential. Only the membership of the GSP Subcommittee is made public; the membership of TPSC and TPRG is not disclosed. The internal deliberations of the GSP Subcommittee, TPSC, TPRG, and the White House are kept confidential. The reason given by USTR is the desire to avoid pressure on individuals by foreign or domestic interests. Many parties we interviewed accepted this process but complained that there is no public statement explaining the decision made by the President.
GSP regulations require that a written request by a petitioner for an explanation of a decision will receive a written response from the GSP office. The GSP Director stated that such requests are honored and noted that such responses are the only public information about decisions in product cases. Foreign participants in the GSP Program expressed concern that many parties were unaware of the reasoning for petition decisions and often did not know that they had a right to request and receive an explanation. Some said that they simply assumed petitions were denied due to protectionism—that domestic interests had prevailed. Likewise, a domestic agricultural industry association representative said that his membership generally has not gotten any feedback on decisions. He also noted that his association had lost very few cases and had not requested explanations.
Waiver of the 3-Year Rule
GSP regulations (15 C.F.R. 2007.0(a)(1)) state that a petition to add a product, once denied, cannot be refiled for 3 years. The rule was added in 1984 to preclude the filing of the same GSP petition year after year, which can unduly burden the GSP review process. Defending against repetitive petitions was also seen as an unacceptable burden for domestic producers.
Our review indicated that the first waiver of the 3-year rule, during the 1991 Central and East European special review, was an administrative action that caused particular concern for domestic industries. The administration decision to rereview five cases that had been denied in the 1990 annual review just 97 days earlier created the perception in the affected industries that the GSP Program had been politicized. This perception undermined the credibility of the program and the sense of stability of those industries.
The administration had decided as a matter of policy that it would examine every petition that it could legally accept in order to demonstrate its commitment to assisting the emerging democracies in Central and Eastern Europe. USTR officials advised Members of Congress and domestic industries on numerous occasions that this did not predispose the results of the special review; the administration just needed to take a comprehensive look as part of the President’s Trade Enhancement Initiative for the region.
The affected domestic industries did not assume that the five rereviewed cases would again be denied. The industries had to mobilize and fund opposition in another review cycle, which they said they bitterly resented in the midst of the 1991 recession.
In the end, as shown in table 4.2, the President decided to grant GSP status for two rereviewed cases and deny it for two others. One case was withdrawn by the original petitioner.
Interviews with affected domestic industries, and information in hearing records, made it clear that the waiver of the 3-year rule undercut the credibility of the GSP Program and its image of fairness. Although the affected industries said they were sympathetic to U.S. assistance to the emerging democracies in Central and Eastern Europe, the waiver of the 3-year rule for GSP cases that had just been decided was not acceptable to them. The domestic industries said that GSP reauthorization should codify the 3-year rule and disallow waivers. In spring 1993, the U.S. Trade Representative assured Members of Congress that no cases would be rereviewed during the interval before program renewal.
The Director of the GSP Program advised us that TPSC’s action was not a waiver of the 3-year rule, but its self-initiation of cases as allowed by the GSP regulations at 15 C.F.R. 2007.0(f). Subsection (f) states that TPSC “may at any time, on its own motion, initiate any of the actions described in paragraph (a) or (b) of this section” to request reviews of GSP eligibility for products and BDCs. He said that TPSC had erred in originally referring to its action as a waiver of the 3-year rule in the Federal Register notice announcing the special review. However, he also acknowledged that this action had the same effect as a waiver.
The GSP Director’s position was that the 3-year rule applies to new petitions to add products and not to reviews self-initiated by TPSC. Therefore, the 3-year rule did not have to be waived and was not waived. It is our opinion that there is merit in the Director’s position that the “at any time” language in subsection (f) could overcome the 3-year rule in subsection (a).
Further, the USTR General Counsel’s position is that USTR has the right to waive the 3-year rule, which is its own procedural rule, since the rule did not vest a right in a party, nor did it confer a substantive benefit. Thus, TPSC could have waived the 3-year rule. We believe there is merit in the General Counsel’s argument that TPSC could waive the 3-year rule since it is merely a procedural rule designed to reduce the possibility that articles would be subjected to repeated and overburdening review. Regulations, whether substantive or procedural, are generally considered to be either statutory (legislative), which have the effect of a statute and therefore bind the agency, or interpretive, which may or may not be binding on the agency. It would appear that 15 C.F.R. 2007.0(a)(1) is not a statutory regulation and therefore is not presumed to be binding.
Completeness of Petitions Accepted for Review
The GSP Subcommittee has on occasion accepted for review product-addition petitions that did not fully meet all the regulatory information requirements, if it believed the petition may have had merit and the petitioner had made a good faith effort to obtain the information. This acceptance helps BDCs that often do not have the resources to adequately prepare petitions. A subcommittee member told us the subcommittee felt that the BDC should at least have the benefit of a full review if it makes a good faith effort. This action is allowed under the GSP regulations and is consistent with the program’s objectives of assisting BDCs. The GSP Director stressed that the subcommittee looked at trade data from all BDCs, not just the BDC petitioning. He said that the purpose of the review is to look at all available information; there is no presumption that an item will get GSP coverage.
Domestic producers, on the other hand, said that they had to protect their interests in regard to all relevant petitions, which was costly and time-consuming; they particularly resented having to do so in response to petitions that were not well developed. In addition, domestic producers complained that acceptance of incomplete petitions effectively shifted the burden of proof from the petitioner to those opposing the petition. Incomplete petitions are difficult to oppose because there may be few other sources of information on the BDC petitioner or other potential BDC suppliers. GSP product-addition petitions require detailed information such as (1) actual production figures and capacity utilization, and their estimated increase with GSP; (2) total exports, including principal markets, total quantity and value, and trends in exports; and (3) exports to the United States in terms of quantity, value, and price, and considerations that affect the competitiveness of these exports relative to exports by other beneficiary countries.
Presidential Discretion and Differential Treatment of BDCs Under Graduation Policy
Another major issue in the administration of the GSP Program was differential treatment of BDCs under the graduation policy. Specific questions raised by the requesters of this report were whether it is appropriate to restrict preferences for some BDCs under a generalizedsystem, whether such differential treatment is legal under the U.S.’ GATT obligations, and whether the President has statutory authority and discretion to make such differential decisions. The U.S. GSP Program is normally administered to extend the opportunity for benefits equally to all BDCs (consistent with the most-favored-nation principle of GATT). However, the program does provide for terminating duty-free entry for a particular product from individual BDCs when they are considered to be sufficiently competitive without the GSP benefit. This “permanent product graduation” is a major element of GSP graduation policy. Such decisions are made at the discretion of the President, based on recommendations of the GSP Subcommittee. It is our opinion that the GSP statute gives the President authority to make such decisions for differential treatment.
Criteria for Differential Treatment
“Differential treatment” refers to the exclusion of a particular beneficiary country for a particular product under GSP, at the discretion of the President. Such product graduation can take place as the result of (1) granting a petition requesting such a product graduation during an annual review, (2) excluding an individual BDC from GSP eligibility on products added to GSP coverage, and (3) denying a redesignation or waiver to BDCs eligible for reinstatement of GSP status on specific articles subject to a competitive need limit exclusion.
GSP’s graduation policy considers: (1)the BDC’s developmental level; (2)the BDC’s competitive position in the product concerned; (3)the BDC’s practices relating to trade, investment, and worker rights; and (4)the overall economic interests of the United States, including the effect continued GSP treatment would have on the relevant U.S. producers, workers, and consumers.
GSP Exemption From GATT MFN Principles
According to USTR officials, differential treatment of BDCs under GSP graduation policy is grounded in the international trade rules in GATT. As discussed in chapter 1 (see pp. 20-22), GSP itself is an exception to the GATT’s MFN treatment in providing temporary preferential tariff treatment for developing countries. Specifically, it was left to each donor country to define “developing country” for purposes of GSP eligibility. This discretion is viewed as the basis for permitting nongeneralized application of the GSP status. The idea that developing countries are to graduate from programs of preferential treatment as their economies develop is contained in the enabling clause specifically incorporating GSP into GATT in 1979. Thus, the enabling clause serves as the legal basis permitting differential treatment, both in allowing preferential GSP treatment for BDCs in the first place and also in limiting the extent of preferences granted.
USTR’s General Counsel also stated that other GSP programs, such as those of the EU and Japan, similarly differentiate among developing countries with respect to particular products. UNCTAD and GATT officials agreed that GSP programs can differentiate among BDCs. They said that GSP is outside the GATT legal system and, as such, is a unilateral “gift” that the donor countries can structure as they wish.
Legal Basis for Differential Treatment in the GSP Statute
It is the position of the USTR General Counsel that there is a statutory basis for the President’s discretionary decisions differentiating between GSP-eligible products and countries in 19 U.S.C. sections 2461 and 2464(a)(1). Section 2461 states that the President “may” extend GSP coverage to “any eligible article” from a BDC. In taking any such action, the President is required to consider, among other things, the extent of the BDC’s competitiveness with respect to eligible articles (19 U.S.C. 2461(4)).
Section 2464(a)(1) authorizes the President to limit an individual BDC’s GSP preference, stating that “he President may withdraw, suspend, or limit the application” of GSP duty-free treatment “with respect to any article or with respect to any country.” According to the USTR General Counsel, because the phrase uses the singular “country,” this provision authorizes the President to limit any one country’s participation in the GSP Program without limiting others.
Further evidence of the President’s discretion to limit an individual country’s benefits is found in the legislative history of section 2461(4). The House Ways and Means Committee report, House Report 98-1090, states that Congress was authorizing the President to differentiate among countries as to their eligibility for GSP benefits with respect to particular articles based upon a country’s competitiveness. A country could be found competitive with respect to a certain article either on the basis of statutory criteria (the “competitive need limit” in section 2464(c)) or as an exercise of the President’s authority under section 2461.
We believe that the GSP statute does provide the basis for differentiating among countries as well as making product designations on a differential basis.
ITC Economic Impact Advice
The GSP law requires ITC advice on the probable economic impact of the designation of a product as an eligible article to receive GSP duty-free treatment and whether the grant of a waiver of the competitive need limits would be likely to adversely affect any industry in the United States. ITC’s impartial advice is to balance the more partisan analyses of GSP agencies, petitioners, and U.S. producers. Based on a review of the ITC reports to USTR, a review of 45 case study records, and interviews with GSP and ITC officials, this advice is valuable to the interagency decision-making process as an impartial analysis of the likely economic effects on U.S. producers and consumers. However, some U.S. industry officials were concerned that the value of ITC advice might be limited by outdated information used in ITC analyses. U.S. industry officials also objected to USTR’s requirement that the economic impact advice be classified as confidential.
ITC Role in GSP Review Process
The ITC role in the GSP Program is twofold: first, to provide USTR the best available information for each product being considered for GSP designation and, second, to provide its judgment of the likely economic impact on U.S. interests if GSP status is granted to the product under consideration. The Trade Act of 1974 requires that USTR obtain ITC advice on the probable economic effect of granting GSP eligibility before it changes the list of GSP-eligible articles. ITC is to consider the effect on U.S. industries producing like or directly competitive articles and on U.S. consumers. According to ITC and USTR officials, ITC does not make recommendations to USTR on whether a product petition should be granted or denied. ITC’s judgment as to the probable economic effect of GSP designation is considered along with other factors in USTR’s decision-making process.
According to an ITC official, ITC plays a limited role in the first stage decisions on whether to accept petitions for review. An ITC technical person advises the GSP Subcommittee on tariff classification or nomenclature issues to help ensure that products are correctly classified at the appropriate 8-digit tariff line. ITC also provides USTR with preliminary import data for the previous 3 years.
During the second stage of full review of product petitions, USTR officially requests ITC advice on the list of products accepted for review. ITC generally has about 3 months to hold public hearings, complete its analysis, and report back to USTR by November, according to an ITC official.
ITC reports to USTR on GSP products have a standard digest of information for each product, including (1) product description, (2) U.S. market profile, (3) imports from GSP countries and share of U.S. consumption, (4) competitiveness profiles of GSP suppliers, (5) summaries of statements submitted by interested parties in support of or opposition to the petition, and (6) summary of probable economic effects. The sixth information block, providing ITC bottom-line advice on economic effect, is classified by USTR and is not made public; it is deleted from the public version of the ITC report. In it, ITC gives its judgment on (1) the effect on U.S. imports, including the extent to which GSP imports will likely substitute for other non-GSP countries’ imports or displace U.S. products; (2) the probable effect on U.S. industry; and (3) the probable effect on U.S. consumers.
Value of ITC Advice as Impartial Benchmark
Most of the current and former GSP Subcommittee members we spoke to felt that the ITC economic impact advice was very valuable to the decision-making process. Although the advice was clearly considered to be only one factor in deciding a petition, several former subcommittee members said that it was valued as an impartial benchmark against which other more partisan analyses of economic impact could be assessed.
An ITC official stated that the ITC standards for economic analysis under GSP are as stringent as for other tariff reduction advice, although ITC operates under a very short time frame in the GSP review cycle. While GSP law gives ITC 6 months to render its advice, in practice ITC does so within 90 days.
ITC officials, GSP Subcommittee members, and former GSP directors confirmed that there is often conflicting advice coming from ITC and the GSP Subcommittee agencies. An ITC official said that this reflects the constitutent pressures on the agencies and that each agency—Agriculture, Commerce, etc.—protects its constituents. This is part of the balancing act of the GSP process. Some agency officials, however, felt that the discrepancy between ITC and agency advice was due to the greater depth and breadth of agency expertise in individual commodities.
ITC officials indicated that one reason for the divergence in analyses was that ITC looked at the potential impact of GSP imports on the overall U.S. industry. For instance, in agricultural products ITC did not consider the impact on any agricultural price support system. USDA, however, is concerned about this impact. An ITC official noted that USDA also does not want to give any competitive advantage to a foreign country. Even if the overall industry is not harmed, a particular company or region may be, and therefore USDA will oppose almost all petitions to grant GSP product status. Another ITC official said that when a conflict in analysis occurs, ITC has no vote, and the GSP agencies generally defer to the lead agency for that petition.
Limitations on the Usefulness of ITC Advice
Domestic producers expressed concern that ITC used outdated information in GSP investigations. Because ITC has used full-year data, there was a 10-month gap for current-year data when it gave USTR its report in November. By the time the petition was decided some 4 or 5 months later, another full year of data had become available, sometimes changing the picture significantly. Some U.S. industry representatives felt that this time lag undercut the usefulness of ITC advice.
ITC has recently addressed this concern. It changed its practice of providing only full-year data in its GSP report for the 1993 annual review. It also included trade data for the first 9 months of the year.
However, ITC and other GSP agency officials said that there will always be a time lag, due to the nature of the GSP review cycle. ITC officials also stated that trends in data are more important than monthly levels. They noted that TPSC can request updated data at any time and that industry sources are generally efficient in providing such updated data to USTR. The GSP agency officials reiterated that the ITC advice, although important, is only one factor in the decision-making process.
Classification of the ITC economic impact assessment as confidential was also cited as a problem. This information is classified at USTR’s direction. We found that it was generally thought that ITC’s GSP advice was classified in order to preclude disclosure of business-confidential information. Several domestic industry representatives and a trade attorney disagreed with such a policy. They said that revealing the bottom-line conclusion—whether or not a product was import sensitive under GSP—would not threaten business-proprietary information such as profit margins or productivity of industry members: these need not be disclosed. They said this policy undercuts the transparency of the program. Several GSP Subcommittee members said that public disclosure of this information would jeopardize the validity of ITC investigations. They said that companies provide ITC with sensitive business information critical to the ITC analysis only because the companies know that it will be kept strictly confidential. Without this assurance, the quality and accuracy of future information disclosures would be undermined.
ITC and GSP officials subsequently told us that concern for business-proprietary information was not the reason USTR classified the ITC economic impact advice as confidential. GSP officials said that there were several reasons for this policy. They said that the ITC probable economic effect advice under GSP is given pursuant to the same statutory basis as for trade negotiations. Confidentiality is necessary for such negotiations and historically has also been extended to GSP advice. The officials said another reason is that releasing ITC’s advice could unduly highlight this advice as being more significant than it is in the GSP review process. ITC advice has been valued for its impartiality but has been treated as only one factor in the GSP Subcommittee’s review. A final reason given is concern that revealing ITC’s advice could have a chilling effect on the impartiality of the ITC analysis, which is now shielded from outside pressures.
Conclusions
The GSP Program has a generally well-structured administrative process for consideration of product petitions, including a highly transparent procedure for accepting public comments from all interested parties and holding public hearings on accepted petitions. However, this transparency largely stops once the interagency decision-making process begins. Decision-making criteria are not defined in the statute, and judgments are made on a case-by-case basis for each product and BDC, based on informal guidelines the GSP Subcommittee has developed. Although USTR is obligated to respond to written requests by petitioners to explain petition decisions, many parties were apparently unaware of this right.
The waiver of the 3-year rule during the 1991 Central and East European special review undermined the credibility of the program with the affected domestic industries. They strongly supported adding the 3-year rule, and a provision disallowing waivers, to the GSP law during program reauthorization. We found merit in USTR’s position that the current regulations allow USTR to waive the 3-year rule or to self-initiate cases, which can have the same effect as a waiver. This situation presents a policy dilemma in which a choice must be made between fairness to the domestic producers and the administration’s desire to preserve this option.
The GSP Subcommittee’s acceptance of petitions that do not contain information required in the regulations can place U.S. producers at a disadvantage because in many instances there are few independent sources of information on the BDC petitioner or other potential BDC suppliers. Domestic producers believe that acceptance of petitions that did not fully meet all the regulatory information requirements effectively shifted the burden of proof from the petitioner to those opposing the petition.
Recommendations
In order to provide greater transparency to the GSP decision-making process and the GSP petition process, we recommend that the U.S. Trade Representative (1)make public the guidelines the GSP Subcommittee uses in analyzing product petitions, with the stipulation that the guidelines provide a framework for, but do not limit the extent of, the Subcommittee’s analysis; (2)indicate clearly in Federal Register notices of final decisions on GSP petitions that petitioners can write to request a written explanation of any decision; and (3)modify GSP regulations to specify a mandatory core of information required for acceptance of product petitions.
Matter for Congressional Consideration
If Congress considers whether or not to incorporate the 3-year rule, and a provision disallowing its waiver, in the GSP statute, it should recognize that the TPSC regulatory authority to self-initiate cases can have the same effect. Congress may wish to consider stipulating whether or not self-initiation of cases should be allowed where it would have the effect of waiving the 3-year rule.
Agency Comments and Our Evaluation
USTR did not agree with our recommendation that it make public the guidelines the GSP Subcommittee uses in analyzing product petitions. It agreed to indicate clearly in the Federal Register notices of final decisions on GSP petitions that petitioners can write to request a written explanation of any decision. Finally, in response to our draft recommendation that USTR accept only product petitions that include all required information, USTR responded that it was proposing to modify GSP regulations to specify a mandatory core of information that all petitions must contain to be accepted for review. We believe that this proposal, together with certain other proposals that enhance transparency of program decisions, could potentially address the concerns underlying our initial recommendation. As a result, we have revised our recommendation to support this course of action.
Making Public the Guidelines Used in Analyzing Product Petitions
USTR said that the administration’s GSP reauthorization proposal would clarify the type of information required in product petitions and would affirmatively require TPSC to consider import and production data from all principal beneficiaries in accepting petitions. However, USTR disagreed with our recommendation that it make public the guidelines used in analyzing product petitions. Instead, USTR reiterated its view that the indexes currently listed in the GSP regulations are all potentially relevant to determining import sensitivity. It maintained that no one group of indexes or “guidelines” would be applicable or appropriate in every case; thus, such a list of guidelines, unless it were quite broad and long, could be misleading. USTR said that the personal communication that occurs between the GSP Subcommittee, petitioners, and repondents is the best way in which such interested parties can obtain a better understanding of the various factors considered material in their case.
We continue to believe that greater public knowledge and understanding of the guidelines used by the GSP Subcommittee in analyzing product petitions would contribute to better prepared and potentially more realistic petitions. It would also assist domestic producers in more effectively preparing evidence to oppose petitions. The administration’s response to our recommendation focuses to a greater degree on the information provided by petitioners. Our focus was on greater explication of the analytical framework used by the GSP Subcommittee, e.g., that its evaluation of a product is based on such factors as (a) the import-to-consumption ratio and (b) the extent to which GSP duty-free imports of a product could be expected to displace imports from non-GSP countries rather than U.S. production. These are factors that guide analysis; they are not information provided by petitioners. We believe that greater understanding and transparency of the analysis used in the decision-making process will be even more important in the future if the administration’s proposal to review product-addition petitions only every 3 years is implemented. In response to the administration’s concern, we modified our draft recommendation to clearly indicate that any discussion of factors used in the guidelines should not be considered as limiting the analysis.
Information Required for Acceptance of Product Petitions
In its GSP renewal proposal, the administration has proposed specifying a mandatory core of information that all petitions must contain in order to be accepted for review. In addition, it has proposed affirmatively requiring TPSC to accept product-addition petitions only when there is “substantial information” demonstrating compliance with statutory criteria for product eligibility (whether provided by the petition or by TPSC agencies). TPSC would be required to provide this information, after its decision, upon request to any interested party.
We believe that this proposal could potentially address the concerns underlying our draft recommendation by clarifying the information that is actually required and by requiring TPSC to be sure there is substantial information demonstrating product eligibility. Further, by subsequently providing this information to interested parties, potentially including agency-held information that previously would not have been released, this provision could increase program transparency. It may also alleviate domestic producers’ concerns that the burden of proof disproportionately falls upon them when incomplete petitions are accepted. We have, therefore, revised our recommendation to support this course of action.
Controversy Over the GSP Program’s Country Practice Provisions
The Trade and Tariff Act of 1984 reauthorized the GSP Program but added stricter eligibility criteria for BDCs. These criteria stipulated that a BDC provide (1) adequate and effective protection of IPR and (2) internationally recognized worker rights. These so-called “country practice” criteria have remained very contentious. Developing countries have resented what they see as inappropriate conditions (“conditionality”) attached to a trade assistance program that had traditionally required no reciprocal action by BDCs. Advocates of these provisions, in turn, have maintained that the GSP Program’s objective of aiding economic development will not be adequately achieved without parallel development of adequate IPR and worker rights standards.
We also found concern about how these country practice provisions have been implemented. In our estimation, adding country practice cases onto the existing GSP annual review process for product cases has not worked well because these two types of cases are fundamentally different. Treating them the same has led to administrative problems in the rigid annual review cycle. There have also been concerns about the program’s policies for accepting country practice petitions for review.
Much of the controversy over the way in which country practice provisions have been administered is rooted in the differing expectations held by GSP officials, IPR advocates, and worker rights advocates. GSP Subcommittee members generally believe that the country practice provisions have been pursued and have provided leverage to get BDCs to initiate changes, to the best degree possible, given other trade and foreign policy concerns. However, IPR and worker rights advocates said they want country practice cases more vigorously pursued and sanctions more frequently exercised. Worker rights advocates are particularly concerned, especially since IPR advocates can pursue more powerful provisions in U.S. trade law. The GSP worker rights provision, however, is the linchpin for most worker rights provisions in other U.S. trade laws. These laws depend on GSP sanctions to trigger their own actions.
IPR and worker rights advocates and GSP officials recommended changes to GSP administrative processes as part of the GSP Program’s reauthorization. All recommended disengaging country practice cases from the annual review process used for product petition cases. IPR and worker rights advocates also proposed strengthening their respective provisions.
However, many U.S. government officials and trade experts indicated that the GSP Program can provide only a modest degree of leverage in encouraging BDC governments to change their practices. Further, the prospect during GSP renewal of additional country practice provisions being proposed, particularly for environmental protection purposes where there are no international standards, was generally held to be a mistake by those we interviewed who currently participate in the GSP Program. It was frequently pointed out that adding new provisions would reduce the leverage of existing provisions and put too high a price on GSP benefits for many BDCs. In addition, the successful conclusion of the Uruguay Round of GATT and its resulting tariff reductions would, if enacted, reduce the value of the tariff elimination provided by GSP. This tariff elimination would decrease GSP leverage, making it that much more difficult to add new requirements to country practice provisions.
Country Practice Provisions in GSP Law
The GSP statute provides for a number of country practice provisions, which address issues such as market access, expropriation, and international terrorism, as well as IPR and worker rights. We have focused on the latter two provisions, which were the most contentious and the subject of the greatest number of petitions. Of the 113 country practice petitions filed in the annual reviews from 1985 through 1993, all but 14 (12 percent) were IPR or worker rights petitions. Of these cases, 11 were conducted in the General Review completed in 1987, all of which were worker rights cases.
The IPR provision in the GSP statute, which lists factors determinative of whether to designate a country as a BDC, states that the President “shall take into account . . . the extent to which such country is providing adequate and effective means under its laws for foreign nationals to secure, to exercise, and to enforce exclusive rights in intellectual property, including patents, trademarks, and copyrights.”
This IPR provision envisions that a BDC provides an adequate IPR regime and enforces it, but leaves application of the provision to the President’s discretion. The GSP statute does not define what constitutes “adequate and effective” IPR protection. The GSP Director said that USTR has interpreted this provision based on a well-developed intellectual property policy that relies on U.S. as well as international standards. He said USTR uses as guidelines the international standards that have already been set in international agreements on IPR and by the World Intellectual Property Organization (WIPO), which is a part of the U.N. structure. The Trade-Related Aspects of Intellectual Property Rights (TRIPs) agreement reached in the Uruguay Round of the GATT has now set a single international standard that the United States accepts as a minimum IPR standard, but not in all cases as an adequate standard. Application of the IPR provision in the GSP Program is also based on the level of development of a BDC. While less developed BDCs may be given more leeway on the minimum standard, the more advanced BDCs may be expected to go beyond these minimum international standards to meet the higher U.S. standard.
There is also an IPR provision that provides that BDCs are ineligible for GSP designation under certain circumstances if such country “has nationalized, expropriated, or otherwise seized ownership or control of property, including patents, trademarks, or copyrights owned by a United States citizen or by a corporation, partnership, or association which is 50 percent or more beneficially owned by United States citizens,” or has taken certain steps that would have this effect.
The worker rights provision in the GSP statute states that the President, in determining whether a developing country should benefit from GSP, “shall take into account . . . whether or not such country has taken or is taking steps to afford workers in that country (including any designated zone in that country) internationally recognized worker rights.” The statute defines internationally recognized worker rights as including (A) the right of association; (B) the right to organize and bargain collectively; (C) a prohibition on the use of any form of forced or compulsory labor; (D) a minimum age for the employment of children; and (E) acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.
The worker rights criterion is one of “taking steps” to meet international standards, rather than being in full compliance with those standards. The international standards have been set by the International Labor Organization (ILO), which is part of the U.N. structure. Again, the President has great discretion in the application of the provision.
Continuing Controversy Over Inclusion of Country Practice Provisions in GSP Program
The country practice provisions added to the GSP Program during program reauthorization in 1984 have been very contentious. The U.S. GSP Program is the only one to have such added “conditionalities”; developing countries have strongly opposed these provisions and regard them as penalties. The U.S. and foreign officials, trade experts, business representatives, trade association representatives, and academics we interviewed were divided on the inclusion of country practice provisions in the GSP Program; there were strong advocates of both points of view. In addition, we found more resistance to the worker rights provision than to the IPR provision’s being included in GSP.
Views Opposing Country Practice Provisions
An UNCTAD official said that the application of country practice provisions was a misuse of reciprocity and pointed out that the United States was the only GSP donor with such conditionalities. He feared that the United States would be led to continue to add such provisions, because they are not technically illegal with respect to GATT. Another UNCTAD official noted that, by their nature, country practice provisions are too volatile because of the political nature of such leverage. He felt that such problems could better be handled through other U.S. laws, such as Section 301 of the 1974 Trade Act (see p. 113).
In September 1992, 13 BDCs sent a joint letter to USTR conveying their views on the importance of renewing the GSP Program. Regarding country practice issues, they noted that they have a strong commitment to the reform of their economies into strong market economies and to participation in the multilateral trade negotiations to address outstanding issues. They saw country practice conditions in GSP as “(a) edundant because the issues they address are being dealt with at the Uruguay Round; and (b) ounter-productive because most developing countries are resolving these matters on their own initiative despite domestic opposition. Our Governments are in need of incentives, not penalties.”
U.S. embassy officials in the six case study countries we visited had conflicting views on the worker rights and IPR provisions in the GSP legislation. Some felt that such conditionalities should not be attached to a trade measure or that better means exist to pressure BDCs to improve IPR and worker rights practices (e.g., treaty negotiations or Special 301 provisions (see p. 111)). Also, these officials generally agreed that the program should not hold BDCs to a U.S. standard. However, at the same time, many of these embassy officials also acknowledged that GSP’s country practice provisions had helped to raise the level of consciousness in their host countries about the importance of IPR and worker rights and had oftentimes resulted in some degree of improvements.
There was a general feeling among many trade experts we interviewed, including some U.S. government officials, that the GSP country practice petitions went against the spirit of GATT, at a minimum, and were possibly in conflict with GATT. Others felt that while IPR and worker rights were important issues, they should be handled in another forum, not in GSP, which they felt should remain a trade assistance program as originally intended. Many pointed to the TRIPs negotiations in the Uruguay Round as negating the need for an IPR provision under GSP. To a significant degree, we also found a greater acceptance of IPR as a trade issue, in contrast to worker rights, which was not generally accepted as a trade issue by those we interviewed.
Many of the officials and trade experts we talked to particularly questioned including the worker rights provision in the GSP Program. One trade expert commented that she had never understood how suspending GSP would help workers in that BDC. An academic expert on GSP said that BDCs see U.S. country practice provisions as interference in their internal affairs, with the U.S. dictating appropriate domestic policies.
One reason why IPR has been accorded greater acceptance in trade policy circles than worker rights was offered by the GSP Director. He noted that trade policy historically is an arm of commercial policy. He pointed out that IPR advocates can point directly to dollars lost from piracy abroad, but that worker rights advocates have a more difficult time showing direct damage to U.S. commercial and trade interests from abuses of foreign workers’ rights. In addition, many U.S. commercial interests benefit from GSP duty-free benefits. Thus, he said it appears to many that the United States is being asked to take economic action that might harm its commercial/trade interests, as well as its bilateral political relationship, for benefits that are unclear at best. He noted that worker rights groups argue that the greater protection of worker rights abroad helps protect U.S. jobs, but said that this connection was again hard to demonstrate. It may be true that U.S. workers are being undercut by lower wages in developing countries, but it seemed clear that that would remain the case, by virtue of their lower level of development, even if bargaining rights, for example, were improved. This does not necessarily imply that it is not in the U.S. interest to promote those rights, only that a direct commercial benefit is difficult to demonstrate.
Views Supporting IPR
IPR advocates responded to UNCTAD and BDC charges that the GSP IPR provision is a conditionality that is not trade related, stressing that IPR is a trade issue. They said that a fundamental problem they face in the developing world is that many BDCs do not accept that intellectual property is really property. The same government that would never consider expropriating a shoe factory will, however, allow pirating of computer software, videos, or pharmaceuticals.
Intellectual property industries are very dependent on copyright, patent, or trademark protection. Their industries are based on innovation and have in common that all research and development costs are incurred up front, before a product is placed on the market, and the ensuing products can easily, quickly, and cheaply be copied or stolen by pirates. For example, the high level of research and development cost and risk faced by the pharmaceutical industry was highlighted in a February 1993 Office of Technology Assessment report, Pharmaceutical R&D: Costs, Risks and Rewards. This study found that the average cost to develop a new drug in the 1980s was roughly $194 million after taxes, in 1990 dollars. It also found that the research and development process took 12 years on average.
Representatives of the International Intellectual Property Alliance, Motion Picture Association of America, and Pharmaceutical Research and Manufacturers of America all said that another critical factor is that respect for innovation and intellectual property is a key ingredient for development, the objective of the GSP Program. Economies that do not respect and protect IPR inhibit the development of domestic intellectual property industries or investment by foreign intellectual property industries. The PRMA representative gave the example of India, which he stated officially sanctions pharmaceutical piracy. He believed that lack of IPR protection was one reason that India had fallen behind other Asian countries. A 1990 study conducted for PRMA, “Benefits and Costs of Intellectual Property Protection in Developing Countries,” National Economic Research Associates, Inc., found a causal linkage between the presence of efficient property rights, including intellectual property rights, and economic modernization.
IIPA, in turn, pointed out that intellectual property industries are large export earners for the United States, with over $36 billion in foreign sales in 1991. IIPA has estimated U.S. trade losses due to piracy of copyrighted works in 1992 at around $15 billion to $17 billion. This figure does not include losses to patent industries, including pharmaceuticals and high-technology firms, which could be substantial.
Views Supporting Worker Rights
Worker rights advocates also contended that worker rights are a trade issue. They believe that worker rights provisions are critical to the GSP Program in order to assure that economic development and increased exports do not come at the expense of abused workers. An AFL-CIO official said that the worker rights provision is needed because producers of goods imported into the United States under preferential terms should not enjoy benefits at the expense of exploited workers. A representative of the International Labor Rights Education and Research Fund (ILRERF) explained that its goal is to inject into U.S. trade policy a means to encourage broad-based development worldwide. Free trade is healthy only if it is not based on competition that degrades workers in the countries trying to obtain trade benefits. He said that a mechanism is needed to distribute the benefits of trade, which in this case means improved circumstances for workers through worker rights and good working conditions. The ILRERF official added that poor labor conditions or artificially low wages overseas also encourage U.S. companies to relocate to cut production costs, putting pressure on U.S. workers. He said that companies can even obtain negotiated concessions from U.S. workers simply by threatening to relocate to a foreign country.
The position that country practice issues should be handled in multilateral forums has not succeeded in the case of worker rights. The U.S. government tried to get GATT members to consider worker rights issues under the Uruguay Round and could not generate any support, according to a U.S. government official. This official complained that even the U.S. proposal for a GATT study group was turned down. Advocates of labor issues are left with ILO as their only international forum. However, ILO conventions on international labor standards are voluntary and have no sanctions. The official said that BDCs like to point out that the United States has signed few ILO conventions. He said that ILO has issued over 170 binding labor conventions and that the United States has signed only 11 of them. However, he said that the reason for this situation was not any problem with the standards, but because labor issues in the United States fall largely under the authority of individual states.
Administrative Issues
Country practice petitions are administered together with product petitions in the GSP Program’s annual review process. Based on our review of cases in the 1990 and 1991 annual reviews and the views of a variety of interested parties—including U.S. officials, IPR and worker rights advocates, and trade experts—this combined procedure does not appear to have been successful. Country practice cases are fundamentally different from product cases, and a number of administrative problems have resulted from trying to handle these cases simultaneously within the same procedural framework.
When the country practice provisions relating to IPR and worker rights were added to the GSP statute in the 1984 renewal act, they were simply appended to the existing annual review process for product petitions (discussed in ch. 4). The same “annual review cycle” framework and interagency decision-making process has been used by the GSP Subcommittee in administering these petitions. The same filing and decision-making time frames have also been used. When cases could not be resolved in the 1-year cycle, the subcommittee simply “pended,” or held over, cases to the next review cycle, sometimes for 2 or 3 years.
There were important administrative differences, however, between the country practice cases and product cases we reviewed. The most important difference was that resolution of a product case was an internal U.S. government decision. Whether a product received GSP duty-free benefits was based upon the information provided to the GSP Subcommittee and its recommendation on import sensitivity or competitiveness of the product (which must subsequently be ratified by TPSC, TPRG, and the President). Further, the impact of the petition was generally limited: whether BDCs would be able to ship frozen peas or alarm clocks duty free or not was usually of immediate concern only to those domestic and foreign industries. Country practice cases were fundamentally different in that they involved changes in the internal practices of another sovereign nation and triggered government-to-government negotiations or representations. While the GSP Subcommittee made its ultimate recommendation based on the information it received, the bilateral negotiations or representations that had been initiated by the filing of the petition were the real focus of the cases.
Our review of cases and interviews with GSP officials indicated that in IPR cases, USTR’s IPR office generally takes the lead. The IPR negotiator works together with the State Department country desk officer and embassy officials in the BDC to pursue resolution of the petition issue. As needed, they get technical assistance from the U.S. Patent and Trademark Office. Often, they negotiate directly with counterparts in the BDC government and work together to develop acceptable standards in a new copyright or patent law. The U.S. IPR advocacy group will likely be closely involved in this process. USTR’s IPR negotiators will work with the GSP Subcommittee on how to use the GSP process and what options are available to them.
In worker rights cases, until recently USTR has had no real role in resolving the issue giving rise to the petition. The main U.S. government actors have been (1) the State Department, through its embassy in-country, its country desk officer, and its Labor Advisory Office; and (2) the Labor Department’s International Labor Affairs Bureau. High-level representations are made by the U.S. Ambassador and senior government officials to counterparts in the country and to the BDC’s Ambassador in Washington. Worker rights advocacy groups were not generally involved in these representations. The worker rights review, unlike the IPR review, would not be limited to the petition issue only, but would be enlarged to scrutinize the overall labor regime of the BDC in light of the five internationally recognized worker rights criteria stated in the GSP law (see pp. 99-100).
According to the GSP Director, the process used for worker rights cases has changed over the past year, and these cases have a higher priority now. As documented in our review of selected cases in the 1990 and 1991 annual reviews, the GSP Subcommittee did not previously get involved in working to resolve the substance of country practice cases. The Director said that this situation has changed, and the GSP Subcommittee is now taking the lead on worker rights cases due to the greater expertise developed over the years and the precedents set by cases reviewed to date. The subcommittee now also has greater interaction with worker rights advocates on cases.
The particular problems that have resulted from administering country practice cases in a review process designed for product petition cases include (1) the rigidity of the annual review cycle and (2) the program’s policies for accepting petitions for review.
Rigid Annual Review Cycle
The June 1 deadline for submission of all GSP petitions for consideration during the annual review cycle is considered by IPR and worker rights groups as too rigid for country practice cases. Since these cases involve international standards of behavior, rather than trade flows, events can precipitate crises at any time during the year. For this reason, IPR and worker rights groups believed that they should be able to file petitions at any time during the year when a crisis occurs and receive expedited review. According to worker rights groups, a particularly harsh, but telling, example of such a crisis for worker rights involved the case of Sudan. On June 30, 1989, a coup d’état overthrew the Sudanese government, and the new government immediately issued a decree to abolish labor unions and forbid strikes. Widespread cases of detention and abuse of trade unionists were reported. However, due to the GSP rules, Africa Watch and the AFL-CIO were not able to file a petition until 11 months later, on June 1, 1990. While Sudan was ultimately suspended from the GSP Program, the decision was not handed down until May 1991, at the conclusion of the 1990 annual review cycle. Sudan, therefore, continued to receive GSP benefits for almost 2 years after the coup.
IPR groups concurred on the need for out-of-cycle filing when a crisis occurs. For instance, situations can arise when a major piracy production and export center is established in a BDC, flooding a region with pirated videos. In such situations, IIPA members want to have a means of quick response before too much damage is done in the marketplace. Waiting on the annual review cycle makes this quick response impossible as far as using GSP leverage.
Another problem with the rigid annual review cycle concerns the need to continually hold over country practice cases to the next review cycle. Because country practice cases involve changes in the internal practices of another sovereign nation, triggering government-to-government negotiations or representations and usually requiring passage of national legislation, they generally take a long time to resolve. Out of 53 country practice cases accepted for full review before the 1993 annual review, 23 were held over to at least one subsequent annual review. The 41 cases that were completed by the start of the 1993 annual review took an average of 1.3 years to resolve. Of the 24 country practice cases reviewed in the 1993 annual review, 12 have been held over from previous years.
The GSP Subcommittee has recently begun to address some of these concerns. For instance, although it has not accepted petitions out of cycle during the review year, the subcommittee did accept an IPR petition on Cyprus for expedited review in the 1993 annual review. IIPA filed the petition on June 1, 1993, the normal filing date, with the request that the review and actions to be taken be expedited. The review concluded that Cyprus’ GSP benefits should be suspended due to failure to adequately protect IPR. However, the suspension was deferred due to Cyprus’ intent to implement a new and greatly improved copyright law on January 1, 1994, according to USTR.
Standards for Accepting Petitions for Review
A second general administrative issue concerns the lack of standards in the GSP law or regulations for accepting country practice petitions for review. To deal with this problem, the GSP Subcommittee has adopted internal policy guidelines for how it will consider petition requests. However, cases are complex and the outcome of policies may not always be clear or consistent. The GSP Director acknowledged that this situation has sometimes created confusion among GSP agencies and outside groups. Advocacy groups said that acceptance standards can be subjective and highly political. In particular, worker rights groups said that all petitions that are not legally “frivolous” should be accepted for review. They also said that they especially do not agree with two of the policies used in the decision whether to accept worker rights petitions for review: (1) the classification of a petitioned offense as a human rights rather than a worker rights problem and, therefore, outside the purview of the GSP Program; and (2) the “new information” standard used to deny consideration of petitions in subsequent years on a petition that has been denied, unless substantially new information is brought.
In the annual reviews from 1985 through 1993, 113 country practice cases were filed, as shown in table 5.1. The GSP Subcommittee accepted 65 (58 percent) of these cases for full review, including 12 IPR, 46 worker rights, 3 expropriation, and 4 reinstatement petitions. Of the 61 annual review cases accepted for review that were filed to remove benefits and the 11 general review cases, 11 (15 percent) resulted in the BDC’s GSP benefits being suspended or removed. Four of these 11 BDCs were later reinstated; the 4 granted reinstatement petitions were filed by 3 BDCs that had been suspended for worker rights violations and 1 BDC for expropriation violations.
IPR advocates, who filed relatively few cases under GSP, generally felt that the GSP Program had played a beneficial role in securing improved IPR protection in GSP beneficiary countries. A number of BDCs have improved their IPR laws as a result of GSP petitions. IPR advocates were less concerned about acceptance of petitions and more concerned about more “vigorous” use of the IPR provision, resulting in more BDCs being suspended for IPR violations.
Worker rights advocates were far more concerned about acceptance of worker rights petitions and were generally very disappointed with the implementation of the provision under the GSP Program. Although they acknowledged that the provision had led to progress in a number of BDCs, it was apparent that the results had not met their expectations. Their main area of concern was with the standards for acceptance of petitions for review. They said that the GSP Subcommittee needed to articulate clear and specific standards for acceptance or rejection of petitions for full review. They said that all worker rights petitions should be accepted, as long as they were not legally frivolous.
In 1990, 23 labor and human rights groups filed suit against the administration in the U.S. District Court for the District of Columbia. The parties to the lawsuit included almost every group that had filed a worker rights petition under the GSP Program. They charged that the administration had failed to enforce the worker rights provision. They lost their case in district court and their appeal in the U.S. Court of Appeals for the District of Columbia Circuit. However, the lawsuits were dismissed on the technical ground that the parties lacked standing to bring the lawsuits or that the particular court lacked jurisdiction to consider the lawsuit; the substance of the lawsuits was never addressed.
One of the primary concerns labor groups have had about acceptance of petitions has been based on the GSP Program’s policy of distinguishing between human rights and worker rights violations. For instance, the murder of a trade union leader is classified as a human rights violation and is not accepted as the basis of a worker rights petition. Labor groups disagreed with this policy, stating that in most cases it is very clear that the reason a labor leader has been murdered was due to worker rights advocacy.
GSP officials pointed out that in developing countries that have serious human rights problems, it is usually not possible to clearly establish the motivating cause for the violation. The GSP Director said that the policy line between human rights and worker rights has been a difficult one in some cases. Generally, the GSP Subcommittee looked for firm evidence that abuses against individuals were in some way related to their work as labor or union activists. This proves difficult in cases of widespread civil unrest or civil war. Moreover, it is difficult in such instances, where the perpetrating party is unclear, and where the government of the country may lack effective legal control over events, to determine the extent to which the government could take or was taking effective steps to prevent such abuses. However, he cited the recent case with Malawi, where a labor leader was imprisoned by the government for sedition, in which the GSP Program did have the clear evidence it needed. The GSP Subcommittee pursued the issue with the Malawi government, and the labor leader was finally released.
Another policy that is controversial is the “new information” standard in the GSP regulations. This regulation states that in order to re-petition on a worker rights case that has been dismissed (whether not accepted for full review or reviewed and found insufficient to establish a GSP violation), substantial new information must be brought. The reasons for the regulation are similar to the reasons behind the 3-year rule for product addition petitions: to prevent repeated petitioning on the same issue that would harass the petitioned party and unduly burden the GSP review process. Country practice petitions can be refiled every year; there can be no 3-year rule because the IPR and worker rights practices of a BDC can change at any time. However, labor groups said that the new information standard undermines their effective use of the worker rights provision. If a BDC is found to be taking steps toward, but is not in compliance with, worker rights standards, this regulatory standard makes it difficult to revisit the situation when labor groups feel progress on those issues stopped as soon as the GSP pressure ended.
Worker rights advocates said that the petition filed against Malaysia in 1988 is a good example of this problem with the new information standard. After the petition, which stated that Malaysia was suppressing unions in its electronics sector, was accepted for review, the Malaysian government announced an end to the ban on electronics unions. Later, a Malaysian government official clarified the announcement to indicate that only in-house unions would be permitted, even though unions in Malaysia are generally organized at the national level. The United States found Malaysia to be taking steps to improve its labor regime, and the case was concluded at the end of the review cycle in spring 1989. However, the U.S. Trade Representative noted in her April 1989 letter to the Malaysian Prime Minister informing him of this decision that much progress was needed. She also cited the fact that the government did not allow full freedom for workers to associate and form labor unions of their own choosing in certain export industries such as the electronics industry. Notwithstanding this admonition, subsequent petitions filed in 1990 and 1991 were rejected for review because of determinations that they failed to provide new information.
During our visit to Kuala Lumpur in November 1992, the embassy official responsible for labor issues said that the embassy’s analysis had shown that the 1990 and 1991 petitions did not contain new information. He also confirmed that the embassy did not conduct any follow-up work to determine whether the Malaysian government had taken any corrective actions in the areas identified by the GSP Subcommittee.
The AFL-CIO filed another petition on this issue in June 1993. The decision on whether to accept the petition for review was deferred until January 1994. USTR stated that additional time was needed to determine if a second review was warranted, or if worker rights progress had continued over the past several years.
The GSP Director said that there had been a change in recent months to interpret the new information regulation more broadly. He said that the GSP Subcommittee has been more willing to accept petitions a second time. For example, the worker rights petition filed against the Dominican Republic in June 1989 resulted in a finding in April 1991 that the Dominican government was taking steps to improve worker rights by drafting a new labor law. Another petition was filed in June 1991, but was rejected because the Dominican government was still in the process of enacting the new labor law. However, 2 years later, in June 1993, a further petition was filed stating that the new law was not being adequately enforced. The GSP Director said that the GSP Subcommittee considered the new information that the Dominican Republic was not enforcing its new labor law and accepted the case for review. He also noted that GSP summary reports at the conclusion of reviews are now more explicit on worker rights cases. If the BDC is taking steps, the GSP Subcommittee notes the action and then goes on to record what additional steps the subcommittee expects. He said that this expectation is the “hook” for a new petition.
Differing Expectations From Implementation of Country Practice Provisions
There is an important difference in perspectives among GSP Subcommittee officials, IPR advocates, and worker rights advocates on the degree to which GSP leverage should be pursued in investigations and negotiations with BDC governments and, ultimately, used in actual sanctions. GSP officials generally said they feel that the country practice provisions have been used as much as possible to encourage improved BDC practices, given other foreign policy and trade concerns. In contrast, IPR and worker rights advocates generally said they want to see more cases accepted for review and more BDCs sanctioned through suspension from the GSP Program. However, the fact that worker rights advocates have reacted more strongly, to the point of filing suit against the administration, also reflects the relative standing of IPR and worker rights provisions in U.S. trade law. While IPR advocates have other, more powerful, trade law options available to them, worker rights provisions in other trade laws are linked to the exercise of GSP sanctions. Thus GSP sanctions are critical to worker rights advocates’ pursuit of other legal avenues.
U.S. Government Perspectives
The GSP Program Director said that the country practice reviews have been worthwhile and have produced substantive results in many BDCs. Other GSP Subcommittee officials concurred, saying that the country practice provisions of the GSP Program have resulted in important improvements in some BDCs’ practices. In IPR cases, new copyright laws were passed in a number of countries, including Singapore, Indonesia, the Dominican Republic, and Malta. GSP leverage was also effectively used when Mexico enacted major IPR improvements in order to receive about $2 billion in competitive need limit waivers in June 1991. More recently, progress has been made in the cable signal piracy petitions filed by MPAA against the Dominican Republic and Honduras, although these cases remain incomplete. A third case filed against Guatemala was withdrawn in summer 1994 after an agreement was reached.
In worker rights cases, the Central African Republic, Paraguay, and Chile were pointed out as BDCs that were suspended from GSP and later improved their practices and were reinstated. More recently, in December 1993, two new worker rights cases filed against Costa Rica and Paraguay were settled, and the AFL-CIO withdrew its petitions after new legislation was enacted. The GSP Director said that progress was also being made in El Salvador and Indonesia. Just as importantly, GSP officials said that these provisions have resulted in raising the consciousness of BDC governments on the importance of IPR and worker rights protections and are having a longer term impact as BDC development levels increase.
Generally speaking, according to government officials, the approach they take in administering country practice provisions is that of using the GSP provisions to encourage improved IPR and worker rights practices by BDCs. While they are willing to use the leverage provided by GSP benefits to push hard for improvements, they do not want to have to actually exercise GSP sanctions to punish BDCs. Once sanctions are imposed, leverage is lost in encouraging future improvements in any of the country practice provisions. And, just as important for the administration, bilateral trade and foreign relations are damaged. It is for this reason, we found, that country practice cases are usually held over until a resolution can be worked out.
Government officials stressed that they have to take a broad view of bilateral relations to balance competing interests. They said that they cannot afford to take a narrowly focused position, as many advocacy groups do, that country practice petitions should be pursued at all costs, no matter what the impact will be on the commercial and bilateral relationship with a BDC. A myriad of equally important objectives may be held in the balance at any given time. A notable example of such inherent constraints was with the 1988 worker rights petition against Syria, which was held over for 3 additional years while the Middle East hostage situation was going on. Only when that extremely sensitive situation was resolved was Syria suspended from the GSP Program in the summer of 1992.
IPR Advocates’ Perspectives and Standing in U.S. Trade Law
The GSP Program is only one of three trade law measures under which IPR issues can be pursued with U.S. trading partners, and the least forceful. The “big gun” is Section 301 of the 1974 Trade Act, followed by the Special 301 provision, and finally the GSP Program. The most egregious IPR cases have been pursued through these first two provisions, rather than through GSP. GSP’s main value for IPR advocates is as a first level of response, leaving negotiating room to increase the pressures with the threat or use of Section 301 and/or Special 301. Several IPR representatives told us that they preferred to use GSP when possible because it caused the least damage to bilateral trade relations.
Section 301 of the Trade Act of 1974, as amended, provides a domestic procedure under which affected enterprises or individuals may petition the U.S. Trade Representative to initiate actions to enforce U.S. rights under trade agreements, or to respond to unjustifiable, unreasonable, or discriminatory foreign government practices that burden or restrict U.S. commerce. One of Section 301’s main uses has been to obtain more effective protection worldwide for U.S. intellectual property. Actions taken may include (1) suspension of bilateral trade agreement concessions; (2) imposition of duties, fees, or other import restrictions on products and services; and (3) entry into agreements with the subject country to eliminate the offending practice or to provide compensatory benefits for the United States. Actions may be instituted against any goods or economic sectors, without regard to whether the goods or economic sectors were the subject of the investigation.
Special 301 focuses exclusively on IPR issues, unlike Section 301 cases. Here, Congress has expressed its clear intent that intellectual property issues warrant unique coverage. Special 301 requires USTR to identify countries that deny adequate and effective protection of intellectual property rights or that deny fair and equitable market access to U.S. persons relying on intellectual property protection. Special 301 can be used to pressure foreign countries to improve their IPR regimes and can ultimately be used to trigger mandatory expedited Section 301 investigations.
GATT Impact on GSP IPR Provision
The conclusion of the Uruguay Round of GATT, which, if enacted, would bring IPR under the international trading system for the first time, would also have ramifications for the GSP Program. Although the full implications are still being sorted out, it is believed that the GSP IPR provision may now become more important to advocacy groups.
The Agreement on Trade-Related Aspects of Intellectual Property Rights reached in the GATT negotiations would establish improved standards for the protection of a full range of IPR and the enforcement of those standards both internally and at the border. The intellectual property rights covered by the agreement are copyrights, patents, trademarks, industrial designs, trade secrets, integrated circuits (semiconductor chips), and geographical indications. The TRIPs text is covered by the Uruguay Round Dispute Settlement Understanding, thus ensuring application of the improved dispute settlement procedures, including the possibility of imposing trade sanctions (such as increasing tariffs) if another GATT member violates TRIPs obligations.
GSP may become more important in the future if the use of Section 301 and Special 301 is limited. Since most IPR areas would be covered by GATT, the unilateral use of the Section 301 and Special 301 process may be restricted. Petitioners may be required to go through GATT dispute settlement, rather than the United States taking unilateral action, to impose sanctions. According to the GSP Director, the critical policy question for USTR would be when petitioners not willing to go through dispute settlement would want to bring their cases instead to GSP, which is a unilateral program outside GATT commitments. USTR would have to make a difficult policy decision of determining which IPR cases to accept under GSP. It would have to establish whether or not cases involving areas covered by TRIPs should be encouraged to go to dispute settlement instead.
Indeed, IPR industries are beginning to take the position that Section 301 and Special 301 still could be used for TRIPs-covered areas if the sanction employed is in an area not covered by GATT, such as GSP. An IIPA official agreed that the GSP IPR provision would be more important to IPR industries if TRIPs is enacted. He said that as more areas would be bound under GATT’s new World Trade Organization and IPR coverage would be brought under GATT, the United States’ unilateral use of Section 301 would be limited. Fewer areas outside of GATT would be available for the imposition of unilateral sanctions. Therefore, GSP is very useful because it is outside GATT. According to this official, GSP would be even more important because developing countries would have a 5-year transition period under the Uruguay Round GATT agreement before they would have to be in full compliance (except for pharmaceuticals and agrichemicals, where they would have 10 years). IIPA is very concerned that a number of BDCs were on the verge of taking action to protect intellectual property under bilateral commitments they had made. IIPA emphatically does not want to see these BDCs backslide and take advantage of the extra 5 years to provide IPR protection. As a result, the IIPA official saw great potential for bilateral engagement even though IPR should soon have GATT coverage.
Worker Rights Advocates’ Perspectives and Standing in U.S. Trade Law
Legislation making trade conditional upon governments’ observance of worker rights has been attached to the following trade programs or provisions:(1) the Caribbean Basin Economic Recovery Act in 1983, (2) the GSP Program in 1984, (3) the Overseas Private Investment Corporation in 1985, (4) the Multilateral Investment Guarantee Agency in 1987, (5) Section 301 in the Omnibus Trade and Competitiveness Act of 1988 (P.L. 100-418), (6) the Andean Trade Preference Act in 1991, and (7) Section 599 of the fiscal year 1993 Foreign Operations Appropriations Act in 1992.
However, only the GSP Program has a review and decision process to implement sanctions designed to enforce the worker rights provision. CBERA, the Overseas Private Investment Corporation, the Multilateral Investment Guarantee Agency, and ATPA do not have reviews, and their worker rights provisions are linked to GSP Program determinations. The Section 301 worker rights provision of the Omnibus Trade and Competitiveness Act of 1988 has never been used. Finally, the section 599 provisions restricting U.S. foreign assistance programs (primarily for the Agency for International Development) will likely have little impact on worker rights practices in Caribbean Basin countries. The result is that the worker rights provision of the GSP Program is the primary worker rights legislation available to advocacy groups, and action under GSP also triggers actions under most of the worker rights provisions in U.S. trade law. It is for this reason, to a large degree, that worker rights advocates have reacted so strongly to concerns about the implementation of the GSP worker rights provision.
Proposals to Modify Country Practice Provisions
IPR and worker rights advocates, as well as GSP officials, have suggested modifications of the GSP administrative process for country practice provisions to be considered during renewal of the GSP Program. Advocacy groups have also proposed substantive changes to further strengthen their respective provisions.
Proposed Modifications to IPR Provision
IIPA has proposed two major administrative changes that it believes will significantly improve the administration of the GSP IPR provision. Under this proposal, administration of the GSP IPR provision would be disengaged from the current GSP annual review process and instead would track the Special 301 review process. Thus, GSP IPR petitions would be filed simultaneously with Special 301 petitions in February rather than in June as at present and would be considered within the context of Special 301 submissions and on a similar timetable. IIPA believes that since both petitions require review by USTR of the adequacy and effectiveness of a foreign country’s IPR protection, combining the two reviews would significantly reduce overlapping reviews and negotiations by USTR. The same underlying facts must be provided by the private sector in both cases.
However, accepting the IIPA proposal would also mean making significant changes in the current administrative process for GSP IPR petitions. Special 301 does not require extensive submissions, and IIPA would like to see such procedural requirements dropped for GSP purposes as well. It would only be at the end of the review process, when USTR made a determination to sanction a country, that petitioners would make submissions and a public hearing would be held to permit all those affected by either the Special 301 or GSP sanctions to be heard. IIPA believes that this revised procedure would streamline the entire process for reviewing a country’s IPR practices without diminishing the independent functioning of either trade program.
Although the IPR standard is the same for both GSP and Special 301 petitions and the IPR office at USTR leads both investigations, there are important differences as well. Fundamental differences in GSP and Special 301 petitions are reflected in the disparities in the functions of their hearings. Acceptance of a GSP petition for full review is a serious indication that there is an IPR problem. The GSP Subcommittee’s investigation establishes the extent of the problem, and negotiations are then undertaken to try to reach a resolution so that the BDC is not suspended, according to GSP officials. Public hearings are held immediately so that all sides to the issue can establish their positions and present evidence. Then at the conclusion of the annual review process, the President may (1) find that the BDC has met the standards of the law or has taken actions to meet the standard and concludes the review, (2) hold the case over to allow time to take actions, or (3) suspend the BDC from GSP benefits.
In contrast, under Special 301, acceptance by USTR of a petition is tantamount to an indictment. The Special 301 process is designed to work in the following way: Countries are placed on the watch list or the priority watch list as a warning that matters are increasingly serious on IPR issues. When a country is designated a “priority foreign country” under Special 301, triggering a Section 301 investigation, there is no question of the seriousness of the matter and of its potential impact on bilateral relations. No hearings are held upon initiation of a Special 301 investigation because USTR immediately enters into consultations with the foreign government on the IPR issue. All parties are fully informed. Under Special 301, a hearing is only held if requested at the end of the investigation if the dispute cannot be resolved and USTR determines that it will take retaliatory measures. The purpose of the hearing is to allow affected parties to express their views on the impact of the proposed sanctions and the potential level of their losses, especially where another product sector is affected.
Should the IIPA proposal be implemented, the likely result would be that GSP IPR reviews would be directly linked to Special 301. Currently, there is an indirect linkage, since there has been a Special 301 case that sanctioned a country by reducing GSP benefits. As a result of a Special 301 case on pharmaceuticals, India’s pharmaceutical exports no longer receive GSP treatment. However, by directly linking the GSP IPR provision to the Special 301 review process, GSP then becomes an instrument of Special 301 law.
Given the impact that the GATT agreement reached in the TRIPs negotiations would have, as discussed previously (see pp. 114-115), such linkage would likely result in further making GSP the de facto preferred first-line sanction for Special 301 cases.
IIPA has also proposed that GSP IPR petitions be permitted to be filed at any time when there are instances of piracy that (1) are unexpected and (2) have potential for causing severe harm to the copyright holder if the holder must wait for the annual filing procedure. This second proposal seems to be consistent with the intent of the IPR provision. In addition, there is certainly adequate precedent provided by past acceptance by the GSP Subcommittee of emergency product petitions. For example, in 1991 a petition on Malaysian vulcanized rubber thread exports was accepted for expedited consideration as an emergency petition. The GSP Program has recently taken steps in this direction: Under the 1993 annual review, USTR has accepted an IPR petition on Cyprus for expedited review, as mentioned previously (see p. 107). However, GSP has not yet accepted petitions outside the designated annual filing date of June 1.
Proposed Modifications to Worker Rights Provision
Both worker rights advocates and GSP officials recommended that the process for consideration of worker rights cases be separated from the annual review process designed for product cases. However, they had differing views on how worker rights cases should be administered once disengaged from the current annual review framework. Worker rights advocates also proposed various modifications they believed would substantively strengthen the worker rights provision.
Petition Process Modifications
Worker rights advocates suggested that worker rights cases be reviewed separately from product cases and that a separate advisory panel of government labor experts should assess worker rights petitions. AFL-CIO and ILRERF officials said that product petition and worker rights investigations should be separated since they are very distinct issues with different scopes and implications. They also supported having a separate panel of labor experts advise USTR. The ILRERF official also believed that the Labor Department’s International Labor Affairs Bureau should administer worker rights cases rather than USTR.
Human Rights Watch and ILRERF officials proposed that the petition-driven structure of the GSP review process be changed. They believed that U.S. government officials had the duty under the GSP law to determine compliance with worker rights standards, rather than to do nothing unless a petition was filed. The GSP Subcommittee could start with the State Department’s human rights reports, which include reporting on worker rights. GSP officials disagreed with this proposal, saying that all country practice reviews are petition driven in order not to undermine bilateral relations with a BDC. They said that it is difficult enough to address these sensitive issues bilaterally with a BDC when the petition is filed by a private party. If the government were to self-initiate cases, this action would constitute a very serious step for bilateral relations.
Suggestions to modify the petition process for worker rights cases were also made by GSP officials. They believed that it would be beneficial to disengage the worker rights petition process from the annual review process for product petitions. A GSP official suggested that all worker rights petitions should be examined in a preliminary stage one review that would be extended to 4-6 months to allow time for adequate investigation. He said that often BDC governments are willing to resolve an issue before it becomes more controversial and politically more difficult. He said that in other instances, petitions are filed based on new laws being interpreted as anti-worker rights, but upon investigation, there really is no problem. Such cases could be settled in an extended stage one review, leaving the serious cases for a full stage two review that lasts for 9-12 months.
Substantive Worker Rights Modifications
The worker rights advocacy groups, including the AFL-CIO, ILRERF, and Human Rights Watch, all recommended strengthening the worker rights provision. All argued that it was important to accept petitions out of cycle when mandated by the urgency of events. They stressed the importance of accepting all petitions that are not frivolous, whether or not they are politically controversial.
The worker rights advocacy groups also supported a proposal to use partial sanctions in worker rights cases. They see the current sanction—total suspension of the BDC from GSP—as too blunt an instrument in many cases. It is a sanction so potentially damaging to the relationship between the United States and the BDC that it becomes very difficult to actually use with BDC trading partners. They recommended employing a partial sanction in appropriate cases to target the industry involved in the worker rights abuses and to deny its GSP benefits, rather than having the BDC’s benefits totally suspended.
The GSP Director agreed that the flexibility provided by a partial sanction could be helpful in worker rights cases. He also said that USTR believes that the discretion to take partial sanctions is already in the GSP law. At the same time, he cautioned that it may not be possible to use partial sanctions in many cases. He estimated that half or more of the worker rights problems have been found in the textile and apparel industry, which is not covered under GSP. However, in instances in which the worker rights abuses did occur in an industry covered by GSP, partial sanctions targeting that industry could potentially not only be useful, but also more equitable.
Each worker rights advocacy group also had its own additional list of priority changes to strengthen the worker rights provision. These proposed changes included (1) enunciating clear and specific criteria for acceptance or rejection of petitions for review; (2) basing the definition of worker rights and human rights on ILO standards; (3) reducing the time that cases are held over; and (4) revising the new information standard in the regulations, as discussed previously.
There is also a proposal to strengthen the language concerning “taking steps” in the current GSP statute to instead require compliance with all five ILO standards (see p. 99). GSP officials disapproved of a full compliance standard for the worker rights provision. They said that no developing country could possibly fully meet all five ILO worker rights standards. They also pointed out that while worker rights advocates say that they only want a standard that IPR advocates already have, the issue is not that simple. While the IPR standard calls for full compliance rather than just taking steps, IPR petitions under GSP are narrowly focused and call for resolution of a single issue, not full compliance with all IPR standards. GSP officials said that worker rights cases, in contrast, are handled differently, with all five ILO standards being scrutinized in a BDC.
Another proposal is to add a sixth criterion to the worker rights provision, requiring BDCs not to discriminate on the basis of sex, race, or religion in the workplace. GSP officials dismissed such an eligibility criterion as too idealistic. They said that, clearly, no BDC can meet this standard.
Limits of GSP Leverage and Implications for Program Renewal
Many U.S. government officials and trade experts indicated that the GSP Program can provide only a modest degree of leverage in encouraging BDC governments to change their practices. They said that this leverage is greater with smaller countries that need GSP benefits more, and more limited with large BDCs, like Thailand or Malaysia, which benefit significantly from but do not depend on GSP. Leverage is also increased where GSP benefits are tied to other trade preference benefits, such as the Caribbean Basin Initiative (CBI).
A former GSP Director pointed out that if articles considered to be critical to BDCs, such as textiles and apparel, were granted wider GSP eligibility, then the United States might gain stronger leverage from the program. A U.S. government official dismissed the idea of granting textiles and apparel GSP status as a political impossibility that would disrupt U.S. industries. However, the basic point remains that leverage is largely a function of the degree of benefits provided.
It should also be noted that a certain amount of leverage is derived not so much from the prospect of losing GSP tariff elimination benefits, but from a desire by BDC governments to avoid international damage to their image and loss of foreign investment. As with human rights issues, other governments do not want the U.S. government to publicly declare that they are condoning piracy or are stifling creativity or innovation through inadequate copyright or patent laws. Moreover, BDC governments do not want a U.S. determination that they are not providing their workers with rights they should have. Governments do not want it pointed out that they are not enforcing their own laws. This sensitivity is, thus, the source of the controversy over these provisions in GSP, as well as the source of some degree of its leverage. But exercising this leverage exacts a price on the bilateral relationship.
Almost everyone we discussed this issue with who currently participates in the GSP Program said that it would be a mistake to enact additional country practice provisions. It was frequently pointed out that adding new provisions would reduce the leverage of existing provisions and put too high a price on GSP benefits for many BDCs. In this regard, the prospect of adding environmental protection provisions to GSP was almost universally deemed a mistake. They said that there are no international standards, like WIPO standards for IPR or ILO standards for worker rights, by which to measure the adequacy of environmental protection actions, and it was considered inappropriate to hold developing countries to U.S. standards.
Further, the successful conclusion of the Uruguay Round of GATT negotiations would, if enacted, decrease tariffs and, thus, also the value of GSP benefits. Many experts questioned the usefulness of adding country practice provisions when the available leverage in encouraging improved practices is decreasing.
As one former GSP Director said, GSP is at the vulnerable end of U.S. trade policy because of its unilateral, nonreciprocal nature. It is essentially a gift given to developing countries. As such, GSP often serves as a vanguard for addressing special issues in U.S. trade law, since it is a small unilateral program easily altered without much opposition. He said there is no domestic constituency to support GSP, outside of the domestic importers who use it, many of whom are not organized to lobby for it. The former GSP Director said that it is important that GSP not fall subject to the “Christmas tree” effect during renewal, with too many country practice provisions added that will, in the end, reduce GSP’s overall effectiveness.
Conclusions
Administration of country practice petitions within the review process designed for product petitions has not worked well. Country practice cases require a separate time frame and review procedures that better fit their different dynamics. The acceptance of emergency petitions for review out of cycle, as well as for expedited review, would improve the timeliness and, potentially, the effectiveness of these provisions. Criteria for accepting emergency petitions would have to be developed. There are no standards in the GSP statute or regulations for acceptance of country practice petitions for full review. The GSP Subcommittee has developed its own internal guidelines, which are used on a case-by-case basis but have not been made public. A public explanation of these guidelines would help petitioners in preparing better petitions and, in turn, would promote more efficient administration of the program. The regulations do have a standard requiring that resubmitted petitions contain new information. However, as currently administered, this standard has prevented further review of worker rights cases in which a BDC’s promised progress has stopped after the GSP review was concluded. Although the GSP Director said that the GSP Subcommittee is interpreting the new information standard more broadly in accepting petitions for a second review, this change did not extend to the types of cases raised here. Finally, the current sanction in GSP country practice cases is the total suspension of a BDC from GSP benefits. A partial sanction, in which a specific BDC industry sector is suspended from GSP rather than the entire BDC, would provide greater flexibility and, in some cases, would be more equitable.
The controversy over the extent to which GSP leverage can and should be used goes to the heart of the policy debate over the compatibility of country practice provisions with the original objectives of the GSP Program. A workable balance needs to be maintained between using GSP as originally envisioned—as a measure to assist BDCs in furthering their economic development by enhancing exports and foreign investments—and its use to pursue other objectives in trade-related or nontrade areas. If greater emphasis is placed on country conditions, then care must be taken to balance the conditions imposed with the leverage created by the benefits provided.
Recommendations
In order to improve the administration of country practice petitions, we recommend that the U.S. Trade Representative (1) review country practice petitions on a separate and more flexible time frame from product petitions that better fits their different dynamics; (2) accept emergency petitions for expedited review out of cycle, when warranted by events; (3) make public the guidelines used in deciding whether or not to accept country practice petitions for full review; (4) clarify the “new information” standard in the GSP regulations to indicate that failure of a BDC to fulfill the promises of progress that were instrumental in the decision to deny a petition would constitute substantial new information that could be the basis for acceptance of a petition; and (5) take all steps necessary to expand the range of sanctions that can be taken when BDCs have not met GSP country practice standards to include partial sanctions when appropriate.
Agency Comments and Our Evaluation
USTR, on behalf of the administration, generally agreed with our recommendations that it (a) review country practice petitions on a separate time frame from product petitions, (b) make public the guidelines used in deciding whether or not to accept country practice petitions for review, and (c) expand the range of sanctions to include partial sanctions. Its GSP reauthorization proposal includes a number of provisions that make modifications along these lines.
USTR did not fully agree with our recommendation concerning the acceptance of emergency petitions for expedited review out of cycle when warranted by events. In response to our recommendation that it revise the “new information” standard to allow acceptance of petitions demonstrating a lack of promised progress, USTR said that its standard already allows for such an action. We have revised our draft recommendation to recommend that USTR clarify GSP regulations to indicate that failure by a BDC to fulfill the promises of progress that were instrumental in the decision to deny a petition would constitute substantial new information that could be the basis for acceptance of a petition.
Acceptance of Emergency Petitions
While noting that nothing in the regulations precludes it from accepting country practice petitions on an emergency basis, USTR said that such situations have been and should continue to be rare events. Its reasons were that (1) it is very difficult to show that a domestic interest is so seriously affected by a country practice that an emergency review is warranted and (2) country practice determinations are the result of careful review of a great volume of information and deliberation that are not consistent with the notion of “emergency” circumstances.
We do not agree with USTR’s strong reluctance to accept country practice petitions on an emergency basis. First, there is no requirement in either the IPR or worker rights provisions in the GSP statute that direct and serious harm to U.S. interests be demonstrated. The focus of these provisions is entirely on whether the BDC in question is adequately meeting, or taking steps to meet, certain international standards. Thus, using such a test for acceptance of emergency petitions is not required.
Second, while it may be true that it can be difficult to show direct and serious harm to a domestic interest in worker rights cases, this may not be the case in IPR petitions. If, for instance, a major regional video or software pirating center is set up, the copyright holders may suffer serious losses in that market. Should the U.S. industry provide solid evidence of such piracy, then there would be reason to initiate a review of whether the BDC is providing “adequate and effective” IPR protection, as required by the GSP statute. At that time, the necessary due deliberation and careful review of information, as well as government-to-government consultations to resolve the issue, could be fully undertaken.
Clarification of “New Information” Standard
USTR did not believe that there is any need to revise the “new information” standard to allow acceptance of petitions demonstrating a lack of promised progress. Its position was essentially that such a revision is unnecessary because, when pertinent, progress in fulfilling past promises is already considered. USTR also pointed out, as discussed in our report, that the GSP Subcommittee has said that it now more clearly explains its rationale and expectations in finding a BDC to be “taking steps,” potentially making it easier for petitioners to justify the lack of expected progress as “new information.” While acknowledging that there can be disagreement about what constitutes “substantial new information” in any particular case, USTR said that the real issue is one of ascertaining the facts and determining their significance in relation to a previous finding of “taking steps.”
In response to USTR’s comments, we have revised our recommendation to clarify that the “new information” standard already allows acceptance of petitions demonstrating a lack of promised progress. However, we believe that it would be beneficial for the GSP Program to explicitly point out in its regulations that failure by a BDC to fulfill promises of progress would constitute new information that could be the basis for acceptance of a petition. The concept of making progress to meet international standards is at the heart of GSP country practice provisions; it is especially critical for worker rights, given the “taking steps” language in the statute. Thus, such a clarification is needed precisely because making the judgment as to whether sufficient progress has occurred has been so controversial with worker rights advocates.
Implications for Reauthorization of the GSP Program
The GSP Program is a trade preference program that aims to promote development of less industrialized countries through trade rather than aid. Most GSP benefits go to the relatively small number of more advanced or larger developing countries that can better meet U.S. market demands. These goods are by value predominantly industrial goods, rather than agricultural goods. At the same time, the exclusions built into the program provide U.S. industries with extensive protection against undue harm. In 1992, less than half of the eligible goods received duty-free treatment.
The benefits of the GSP Program may be reduced in value in the near future. The tariff reductions negotiated in the Uruguay Round, if enacted, would reduce the value of GSP benefits by an estimated 40 percent. In addition, several major BDCs have been graduated, substantially reducing the level of imports under the program. However, the Uruguay Round agreement may provide potentially meaningful growth in GSP product coverage of textile and apparel articles. If the Uruguay Round results are enacted and the Multifiber Arrangement is phased out over 10 years, textile and apparel articles legislatively excluded from the program due to their MFA status may be considered for GSP eligibility.
The United States has made GSP benefits conditional on compliance with certain trade-related or nontrade country practice conditions. The IPR and worker rights provisions are the most contentious of the existing eligibility conditions, but provisions targeting new issues such as environmental protection are also being proposed for consideration during program reauthorization. Many government officials and trade experts believed that the ability of the GSP Program to provide leverage to pursue additional objectives, however, is modest and would decrease as its benefits are reduced. Adding new provisions would further reduce the leverage to achieve the objectives of existing provisions. Furthermore, if too many conditions are imposed, beneficiary countries may feel the compliance burden is too great and give up all benefits, thereby eliminating the existing leverage in the program.
A key consideration for Congress in deciding whether to reauthorize GSP is the leverage created by the program and the purposes for which that limited leverage should be used. | Why GAO Did This Study
Pursuant to a congressional request, GAO reviewed the effectiveness of the U.S. Generalized System of Preferences Program (GSP), focusing on: (1) the benefits provided to beneficiary developing countries (BDC); (2) the limitations on GSP imports; (3) how products are removed from or added to GSP coverage; and (4) whether program provisions requiring that countries follow certain intellectual property and worker rights practices are enforced.
What GAO Found
GAO found that: (1) only a few of the more advanced or larger developing countries receive GSP benefits; (2) although imports from BDC have increased annually, overall imports from several GSP countries have decreased because of their economic graduation; (3) new General Agreement on Tariffs and Trade tariff reductions have reduced the value of GSP duty-free benefits and U.S. leverage to demand compliance with GSP requirements; (4) BDC believe that the GSP program has helped their economic development; (5) in 1992, GSP benefits totalled $16.7 billion and the United States lost nearly $900 million in foregone duties; (6) over the last few years, Mexico has received the most GSP benefits; (7) several GSP program provisions limit duty-free entry in specific cases; (8) administrative exclusions under GSP should diminish, since Mexico has graduated from the GSP program and competitive need limit exclusions have been increasing for other beneficiary countries; (9) although the administrative process for considering petitions to add or remove products from GSP coverage is generally effective and well-structured, opportunities exist to improve program administration through better information dissemination and strengthened product petition acceptance requirements; and (10) adding new provisions to strengthen intellectual property and worker rights during program renewal may place too many conditions on beneficiary countries for their continued program participation. |
gao_GAO-11-881 | gao_GAO-11-881_0 | Background
In November 2002, the Homeland Security Act was enacted into law, creating DHS. This act defined the department’s missions to include preventing terrorist attacks within the United States; reducing U.S. vulnerability to terrorism; and minimizing the damages, and assisting in the recovery from, attacks that occur within the United States. The act also specified major responsibilities for the department, including to analyze information and coordinate the protection of critical infrastructure; coordinate efforts to develop countermeasures against chemical, biological, radiological, nuclear, and other emerging terrorist threats; secure U.S. borders and transportation systems; and manage the federal government’s response to terrorist attacks and major disasters. Various laws have been enacted and presidential directives have been issued that, among other things, expand, modify, or clarify DHS’s missions and responsibilities. For example, these laws and directives have reorganized departmental offices and functions; clarified DHS’s roles and responsibilities, such as for emergency preparedness and response; and directed DHS to complete various strategic documents or implement specific programs within certain time frames. For example, the Aviation and Transportation Security Act, enacted in November 2001, established the Transportation Security Administration (TSA) and, among other things, included requirements for deploying a federal screening workforce at airports and screening all checked baggage transported on passenger aircraft using explosive detection systems. The Maritime Transportation Security Act of 2002 and the Security and Accountability For Every Port Act of 2006 (SAFE Port Act), among other things, established and modified a maritime security framework to include U.S. vessel and port facility security requirements, an international port security assessment program, and programs for scanning cargo containers. The Intelligence Reform and Terrorism Prevention Act of 2004 included provisions related to intelligence, immigration enforcement, border security, and aviation security, such as those calling for an increase in the number of Border Patrol agents and full-time investigators for violations of immigration law, subject to the availability of appropriations, and requiring DHS to develop a national strategy for transportation security. The Post-Katrina Emergency Management Reform Act of 2006 required changes to the Federal Emergency Management Agency’s (FEMA) organizational and management structure, and addressed other emergency management areas, such as emergency communications, and national planning and preparedness. The Implementing Recommendations of the 9/11 Commission Act of 2007 includes provisions related to critical infrastructure protection, transportation security, and chemical, biological, radiological, and nuclear threats, among other areas. The law references the recommendations made by the National Commission on Terrorist Attacks Upon the United States (known as the 9/11 Commission).
DHS began operations in March 2003, and its establishment represented a fusion of 22 federal agencies to coordinate and centralize the leadership of many homeland security activities under a single department. The department’s total budget authority has increased from about $39 billion in fiscal year 2004 to about $55 billion in fiscal year 2011. The department’s fiscal year 2012 budget request is about $57 billion in total funding. Table 1 provides information on DHS’s budget authority for each fiscal year from 2004 though 2011, as reported by DHS.
A variety of factors have affected DHS’s efforts to implement its mission functions since its establishment, including several departmental reorganizations. Most notably, in 2005 DHS announced the outcome of its Second Stage Review, a systematic evaluation of DHS’s operations, policies, and structures. As a result of this review, the department realigned existing directorates. The Post-Katrina Emergency Management Reform Act provided for the further reorganization of functions within the department by, in particular, realigning DHS’s emergency preparedness and response responsibilities. Further, as a result of the Implementing Recommendations of the 9/11 Commission Act of 2007, DHS reorganized its intelligence-related operations. In addition to these reorganizations, domestic and international events have affected DHS’s implementation efforts. For example, Hurricanes Katrina and Rita, the 2009 H1N1 pandemic, the attempted airline attack on December 25, 2009, and the 2010 Gulf oil spill required rapid responses from the department and impacted DHS’s plans and operations for mitigating vulnerabilities and addressing threats, and its progress in implementing its missions. Figure 1 provides a timeline of selected events that have affected DHS’s implementation efforts.
DHS Continues to Implement and Strengthen Its Mission Functions, but Key Operational and Management Challenges Remain
Since DHS began operations in March 2003, it has developed and implemented key policies, programs, and activities for implementing its homeland security missions and functions that have created and strengthened a foundation to achieve its potential as it continues to mature. However, the department’s efforts have been hindered by challenges faced in leading and coordinating the homeland security enterprise; implementing and integrating its management functions for results; and strategically managing risk and assessing, and adjusting as necessary, its homeland security efforts. DHS has made progress in these three areas, but needs to take additional action, moving forward, to help it achieve its full potential.
DHS Has Made Progress in Implementing Its Mission Functions, but Program Weaknesses and Management Issues Have Hindered Implementation Efforts
DHS has made important progress in implementing and strengthening its mission functions over the past 8 years. DHS implemented key homeland security operations and achieved important goals and milestones in many areas. The department’s accomplishments include developing strategic and operational plans across its range of missions; hiring, deploying and training workforces; establishing new, or expanding existing, offices and programs; and developing and issuing policies, procedures, and regulations to govern its homeland security operations. Specifically: DHS issued strategic and operational plans to guide its homeland security efforts, such as the QHSR, which provided a strategic framework for homeland security, and the National Response Framework, which is built upon coordinating structures to align key roles and responsibilities across the nation, linking all levels of government, nongovernmental organizations, and the private sector. DHS successfully hired, trained, and deployed workforces, such as a federal screening workforce at airports nationwide. DHS also has about 20,000 agents to patrol the U.S. land borders and about 20,600 officers to conduct screening at air, land, and sea ports of entry. DHS created new programs and offices, or expanded existing ones, to implement key homeland security responsibilities, such as establishing the U.S. Computer Emergency Readiness Team to, among other things, coordinate the nation’s efforts to prepare for, prevent, and respond to cyber threats to systems and communications networks. DHS also expanded programs for identifying and removing aliens subject to removal from the United States and for preventing unauthorized aliens from entering the country. DHS issued policies and procedures addressing, among other things, the screening of passengers at airport checkpoints, inspecting travelers seeking entry into the United States, and assessing immigration benefit applications and processes for detecting possible fraud.
Establishing these elements and others are important accomplishments and have been critical for the department to position and equip itself for fulfilling its homeland security missions and functions.
However, our work has shown that more work remains for DHS to address weaknesses in its current operational and implementation efforts and to strengthen the efficiency and effectiveness of those efforts to achieve its full potential. For example, we have reported that many DHS programs and investments have experienced cost overruns, schedule delays, and performance problems, including, for instance, DHS’s recently canceled technology program for securing U.S. borders, known as the Secure Border Initiative Network, and some technologies for screening passengers at airport checkpoints. DHS also has not yet fully implemented its roles and responsibilities for developing and implementing key homeland security programs and initiatives. For example, FEMA has not yet developed a set of target capabilities for disaster preparedness or established metrics for assessing those capabilities to provide a framework for evaluating preparedness, as required by the Post-Katrina Emergency Management Reform Act of 2006. Further, DHS has not yet fully deployed technologies to meet key missions for border, aviation, and maritime security. Our work has also shown that DHS should take additional action to improve the efficiency and effectiveness of a number of its programs and activities by, for example, improving program management and oversight, and better assessing homeland security requirements, needs, costs, and benefits, such as for key acquisition and technology programs.
Table 2 provides additional information on key progress and work remaining in each of DHS’s functional mission areas, as identified by our work and supplemented by that of the DHS IG, with an emphasis on work completed since 2008. We have made approximately 1,500 recommendations to DHS to help address these issues, and DHS has addressed about half of them and has actions underway to address others. Appendixes III through XII provide more detailed information on our assessment of progress made and work remaining in each functional, including recommendations we have made and the department’s efforts to implement them.
Impacting the department’s ability to efficiently and effectively satisfy its missions are: the need to integrate and strengthen its management functions; the need for increased utilization of performance assessments; the need for an enhanced use of risk information to inform planning, programming, and investment decision-making; limitations in effective sharing and use of terrorism-related information; partnerships that are not sustained or fully leveraged; and limitations in developing and deploying technologies to meet mission needs.
DHS made progress in addressing these areas, but more work is needed, going forward, to further mitigate these challenges and their impact on DHS’s mission implementation. As we have previously reported, while it is important that DHS continue to work to strengthen each of its functional areas, it is equally important that these areas be addressed from a comprehensive, departmentwide perspective to help mitigate longstanding issues that have impacted the department’s progress.
Table 3 provides examples of crosscutting issues that have impacted the department’s progress, as identified by our work. Appendixes XIII through XVIII provide more detailed information on our assessment of progress made and work remaining in each crosscutting area, including recommendations we have made and DHS’s efforts to implement them.
Our work on the functional mission areas and crosscutting issues discussed in this report has identified several key themes—leading and coordinating the homeland security enterprise, implementing and integrating management functions for results, and strategically managing risks and assessing homeland security efforts—that have impacted the department’s progress since it began operations. These themes provide insights that can inform DHS’s efforts, moving forward, as it works to implement its missions within a dynamic and evolving homeland security environment, one in which a broad range of threats face the nation—from terrorists’ possible use of a chemical or biological agent to carry out an attack to cyber threats and intrusions to natural disasters and infectious diseases. DHS made progress and had successes in all of these areas, but our work found that these themes have been at the foundation of DHS’s implementation challenges, and need to be addressed from a departmentwide perspective to position DHS for the future and enable it to satisfy the expectations set for it by the Congress, the administration, and the country.
Leading and coordinating the homeland security enterprise. While DHS is one of a number of entities with a role in securing the homeland, it has significant leadership and coordination responsibilities for managing efforts across the homeland security enterprise. To satisfy these responsibilities, it is critically important that DHS develop, maintain and leverage effective partnerships with its stakeholders, while at the same time addressing DHS-specific responsibilities in satisfying its missions. Before DHS began operations, we reported that the quality and continuity of the new department’s leadership would be critical to building and sustaining the long-term effectiveness of DHS and achieving homeland security goals and objectives. In particular, we reported that top leadership involvement and clear lines of accountability for making improvements would be critical to marshalling the needed resources and building and maintaining organizationwide commitment to new ways of doing business. We further reported that to secure the nation, DHS must form effective and sustained partnerships between components and also with a range of other entities, including federal agencies; state, local, and tribal governments; the private and nonprofit sectors; and international partners. Critical aspects of DHS’s success depend on well-functioning relationships with third parties, and DHS needs to continue to create and maintain a structure that can leverage partnerships to effectively implement homeland security efforts. Eight years after its establishment, DHS has made important strides in providing leadership and coordinating efforts across the enterprise as it continues to work to implement and strengthen its effectiveness across its range of missions. For example, DHS strengthened its partnerships and collaboration with foreign governments to coordinate and standardize security practices for aviation security. It has also improved coordination and clarified roles and responsibilities with state, local, and tribal governments for emergency management. In addition, DHS operates the Protective Security Advisor Program, which deploys critical infrastructure protection and security specialists to local communities to help foster effective information sharing with the private sector and local communities.
However, our work has found that DHS made limited progress in forging effective partnerships and sharing information throughout the enterprise early in its existence and as it matured, and although DHS continues to make improvements in this area, it faces challenges in building and leveraging these partnerships and information. These challenges have impeded the department’s progress, affecting its ability to effectively and efficiently satisfy its missions. For example, we found that DHS has not effectively overseen key interagency forums its components have established with other federal, state, local, tribal, and foreign law enforcement agencies to secure the border, raising the risk of duplication, overlap, and an inefficient use of resources.
In 2005 we designated information sharing for homeland security, for which DHS has key responsibilities, as high risk because the federal government faced serious challenges in analyzing information and sharing it among partners in a timely, accurate, and useful way to protect against terrorist threats. We reported that DHS must effectively share terrorism-related information with state and local law enforcement agencies because they depend on it to maintain awareness of emerging threats and to allocate homeland security resources, among other things. Further, gaps in sharing, such as agencies' failure to link information about the individual who attempted to conduct the December 25, 2009, airline bombing, prevented the individual from being included on the federal government’s consolidated terrorist watchlist, a tool used by DHS to screen for persons who pose a security risk.
The federal government and DHS have made progress in this area, but more work remains to strengthen and streamline existing information sharing mechanisms and better address partners’ information needs. These gaps have contributed to, among other things, DHS not realizing the full potential and contributions that its partners can provide, and not maximizing its effectiveness in achieving its missions. For example, with regard to cybersecurity, private sector stakeholders reported that they expect their federal partners, including DHS, to provide usable, timely, and actionable cyber threat information and alerts and a secure mechanism for sharing information, among other things. However, according to private sector stakeholders, federal partners are not consistently meeting these expectations. Without improvements in meeting private and public sector expectations for sharing cyber threat information, private-public partnerships will remain less than optimal, and there is a risk that owners of critical infrastructure will not have the information and mechanisms needed to thwart sophisticated cyber attacks that could have catastrophic effects on our nation’s cyber-reliant critical infrastructure. Moreover, we have identified the potential for overlap between various mechanisms DHS uses for sharing security- related information with public transit agencies. DHS needs to continue to streamline its mechanisms for sharing information with public transit agencies to reduce the volume of similar information these agencies receive from DHS, making it easier for them to discern relevant information and take appropriate actions to enhance security. Moving forward, it will be important that DHS continue to enhance its focus and efforts to strengthen and leverage the broader homeland security enterprise, and build off the important progress that it has made thus far. In addressing ever changing and complex threats, and with the vast array of partners with which DHS must coordinate, continued leadership and stewardship will be critical in achieving this end.
Implementing and integrating management functions for results. Following its establishment, the department focused its efforts primarily on implementing its various missions to meet pressing homeland security needs and threats, and less on creating and integrating a fully and effectively functioning department from 22 disparate agencies. This initial focus on mission implementation was understandable given the critical homeland security needs facing the nation after the department’s establishment, and the enormous challenge posed by creating, integrating, and transforming a department as large and complex as DHS. As the department matured, it has put into place management policies and processes and made a range of other enhancements to its management functions—acquisition, information technology, financial, and human capital management. However, the department has not effectively executed these processes in a number of instances, across the range of its management functions, and has not fully integrated these functions across components and among departmental missions. These issues have contributed to performance problems in programs aimed at delivering important mission capabilities. For example, DHS did not sufficiently define what capabilities and benefits would be delivered, by when, and at what cost for US-VISIT—which is to verify the identities of foreign visitors entering and exiting the United States by storing and processing biometric and biographic information—and has not yet reached a decision on deploying an exit capability. Not defining these capabilities and benefits contributed to development and deployment delays. In another example, with respect to the cargo advanced automated radiography system to detect certain nuclear materials in vehicles and containers at ports, DHS pursued the acquisition and deployment of the system without fully understanding that it would not fit within existing inspection lanes at ports of entry. DHS subsequently canceled this program.
In 2003, GAO designated the transformation and implementation of DHS as high risk because the department had to transform 22 agencies— several with major management challenges—into one department, and failure to effectively address DHS’s management and mission risks could have serious consequences for U.S. national and economic security. Eight years later, DHS remains on our high-risk list. DHS has made important strides in working to strengthen its management functions, has established plans to strengthen and integrate these functions, and in recent years has demonstrated strong leadership support to address these long-standing issues. In particular, DHS developed various management policies, directives, and governance structures, such as acquisition and information technology management policies and controls, to provide enhanced guidance on investment decision-making. DHS also reduced its financial management material weaknesses in internal control over financial reporting and developed strategies to strengthen human capital management, such as its Workforce Strategy for Fiscal Years 2011-2016. However, more work remains to position these management areas for success. For example, DHS does not yet have enough skilled personnel to carry out activities in some key programmatic and management areas, such as for acquisition management, and was ranked 28 out of 32 agencies in the 2010 Partnership for Public Service’s Best Places to Work in the Federal Government rankings. DHS also has not yet implemented an integrated financial management system, impeding its ability to have ready access to information to inform decision-making, and has been unable to obtain a clean audit opinion on the audit of its consolidated financial statements since its establishment. Moving forward, addressing these management challenges will be critical for DHS’s success, as will the integration of these functions across the department to achieve efficiencies and effectiveness.
Strategically managing risks and assessing homeland security efforts. Forming a new department while working to implement statutorily mandated and department-initiated programs and initiatives, and responding to adapting adversaries and evolving threats was and is a significant challenge facing DHS. Key threats and incidents that have emerged, both domestically and internationally, such as the anthrax attacks, Hurricanes Katrina and Rita, and a number of attempted attacks against the aviation sector, have impacted and altered the department’s approaches and investments. For example, DHS made key changes to its processes and technology investments for screening passengers and baggage at airports in part as a result of threats facing commercial aviation. DHS also changed its processes and clarified roles and responsibilities for emergency management in the aftermath of Hurricanes Katrina and Rita.
It is understandable that these events and threats had to be addressed as they arose. However, our work has shown, throughout the department, that limited strategic and program planning, as well as assessment and evaluation to inform approaches and investment decisions, have contributed to programs not meeting strategic needs or doing so effectively and efficiently. For example, as we reported in July 2011, the Coast Guard’s planned acquisitions through its Deepwater Program, which began before DHS’s creation and includes efforts to build or modernize ships and aircraft and supporting capabilities that are critical to meeting the Coast Guard’s core missions in the future, is unachievable due to cost growth, schedule delays, and affordability issues. In addition, because FEMA has not yet developed a set of target disaster preparedness capabilities and a systematic means of assessing those capabilities, as required by the Post-Katrina Emergency Management Reform Act of 2006 and Presidential Policy Directive 8: National Preparedness, it cannot effectively evaluate and identify key capability gaps and target limited resources to fill those gaps. We have also reported that while DHS has made important progress in assessing and analyzing risk across sectors, it has more work to do in using this information to inform planning and resource allocation decisions. Risk management has been widely supported by Congress and DHS as a management approach for homeland security, enhancing the department’s ability to make informed decisions and prioritize resource investments. Since DHS does not have unlimited resources and cannot protect the nation from every conceivable threat, it must make risk- informed decisions regarding its homeland security approaches and strategies.
Moreover, we have reported on the need for enhanced performance assessment, that is, evaluating existing programs and operations to determine whether they are operating as intended or are in need of change, across DHS’s missions. Information on the performance of programs is critical for helping the department, the Congress, and other stakeholders more systematically assess strengths and weaknesses and inform decision-making. In recent years, DHS has placed an increased emphasis on strengthening its mechanisms for assessing the performance and effectiveness of its homeland security programs. For example, DHS established new performance measures, and modified existing ones, to better assess many of its programs and efforts. Enhanced assessment of programs’ performance and the use of that information to inform decisions will provide the department with important insights in determining the extent to which programs and operations are meeting intended goals and results and at what cost.
However, our work has found that DHS continues to miss opportunities to optimize performance across its missions because of a lack of reliable performance information or assessment of existing information; evaluation of feasible alternatives; and, as appropriate, adjustment of programs or operations that are not meeting mission needs. For example, TSA’s program for research, development, and deployment of passenger checkpoint screening technologies lacked a risk-based plan and performance measures to assess the extent to which checkpoint screening technologies were achieving the program’s security goals, and thereby reducing or mitigating the risk of terrorist attacks. As a result, TSA had limited assurance that its strategy targeted the most critical risks and that it was investing in the most cost-effective new technologies or other protective measures. Further, with regard to border security efforts, CBP established performance measures for its checkpoints to indicate checkpoint contributions toward apprehending removable aliens and seizing illegal drugs, but the lack of information on those passing through checkpoints undetected continued to challenge CBP’s ability to measure checkpoint effectiveness and provide public accountability. As the department further matures and seeks to optimize its operations, DHS will need to look beyond immediate requirements; assess programs’ sustainability across the long term, particularly in light of constrained budgets; and evaluate tradeoffs within and among programs across the homeland security enterprise. Doing so should better equip DHS to adapt and respond to new threats in a sustainable manner as it works to address existing ones.
Concluding Observations
Given DHS’s role and leadership responsibilities in securing the homeland, it is critical that the department’s programs and activities are operating as efficiently and effectively as possible, that these programs are sustainable, and that they continue to mature, evolve, and adapt to address pressing security needs. DHS has made significant progress throughout its missions since its creation, but more work is needed to further transform the department into a more integrated and effective organization. Specifically, DHS has taken many actions to (1) develop strategic and operational plans across its range of missions; (2) hire, deploy and train workforces; (3) establish new, or expand existing, offices and programs; and (4) develop and issue policies, procedures, and regulations to govern its homeland security operations. DHS has also made important progress in strengthening partnerships with stakeholders, improving its management processes and sharing of information, and enhancing its risk management and performance measurement efforts. These accomplishments are especially noteworthy given that the department has had to work to transform itself into a fully functioning cabinet department while implementing its missions—a difficult undertaking for any organization and one that can take years to achieve even under less daunting circumstances.
Impacting the department’s efforts have been a variety of factors and events, such as attempted terrorist attacks and natural disasters, as well as new responsibilities and authorities provided by Congress and the administration. These events collectively have forced DHS to continually reassess its priorities and reallocate resources as needed, and have impacted its continued integration and transformation. Given the nature of DHS’s mission, the need to remain nimble and adaptable to respond to evolving threats, as well as to work to anticipate new ones, will not change and may become even more complex and challenging as domestic and world events unfold, particularly in light of reduced budgets and constrained resources. To better position itself to address these challenges, our work has shown that DHS should place an increased emphasis and take additional action in supporting and leveraging the homeland security enterprise, managing its operations to achieve needed results, and strategically planning for the future while assessing and adjusting, as needed, what exists today. Addressing these issues will be critically important for the department to strengthen its homeland security programs and operations. We have made about 1,500 recommendations to DHS to address these issues, which the department has or is working to implement, but more work remains. Eight years after its establishment and 10 years after the September 11, 2001, terrorist attacks, DHS has indeed made significant strides in protecting the nation, but has yet to reach its full potential.
Agency Comments and Our Evaluation
We provided a draft of this report to DHS for its review and comment. We received written comments on the draft report from DHS, which are reproduced in full in appendix XIX. DHS also provided technical comments, which we incorporated as appropriate.
DHS acknowledged our work to assess the progress the department has made in enhancing the nation’s security and the challenges that still exist. The department discussed its views of its accomplishments since 2001. For example, the department noted its creation and management of the Visa Security Program, which is operational at 19 posts in 15 countries; the increase in the number of deployed Border Patrol agents since 2001; the establishment of fusion centers to serve as focal points for the analysis and sharing of threat and vulnerability-related information; passenger screening and prescreening efforts; and support to state, local, tribal and territorial partners’ efforts to enhance emergency communications capabilities, among other things. DHS further noted its issuance of the Quadrennial Homeland Security Review in February 2010, which outlined a strategic framework for homeland security. We recognize the department's progress in these and other areas in the report, as well as discuss existing challenges that will be important for DHS to address moving forward.
The department also stated that the report does not address all of DHS’s homeland security-related activities and efforts, and that assessments in each area are not comprehensive because we and the DHS IG have completed varying levels of work in each area. The report notes that the results are based on our work on DHS since it began operations, supplemented with work completed by the DHS IG, with an emphasis on work completed since 2008. We also examined updated information and documentation provided by the department in July and August 2011. As identified in the report, we highlighted our work on key DHS programs and efforts, but neither addressed all products that we and the DHS IG issued related to DHS, nor addressed all of DHS’s homeland security- related activities and efforts. In addition, each mission area appendix provides examples of other DHS programs and efforts on which we and the DHS IG have not reported or have completed limited work. Thus, this report was not intended to cover all of DHS’s homeland security-related activities and efforts. Further, as discussed in the report, because we and the DHS IG have completed varying degrees of work (in terms of the amount and scope of reviews completed) for each functional area, and because different DHS components and offices provided us with different amounts and types of information, our assessments of DHS’s progress in each area reflect the information available for our review and analysis and are not necessarily equally comprehensive across all 10 areas.
In addition, DHS provided examples of activities and programs that it stated are not reflected in our report that demonstrate progress DHS made in preparing the nation to respond to threats. These programs include the Western Hemisphere Travel Initiative and increased coordination across the federal government to analyze travel-related data, such as through watchlist centers that provide information regarding potential terrorist travel—the Federal Bureau of Investigation’s Terrorist Screening Center, the National Counterterrorism Center, the National Targeting Center, and the Human Smuggling and Trafficking Center. This report discusses progress made and work remaining related to the Western Hemisphere Travel Initiative within the border security area. With regard to the various centers, this report acknowledges the activities of the National Targeting Center, but we did not include it in our assessments of progress because we and the DHS IG have completed limited work on it. The other three centers identified by DHS are not managed by the department. Because this report is focused on DHS- specific programs and efforts on which we have previously reported, supplemented by the work of the DHS IG, this report does not discuss these centers.
This report will be available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions concerning this report, please contact me at (202) 512-3404, or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors are listed in appendix XX.
Appendix I: Department of Homeland Security Functional Mission Areas, Sub- Areas, and Performance Expectations
Table 4 presents the performance expectations and sub-areas we identified for each Department of Homeland Security (DHS) functional mission area.
Appendix II: Scope and Methodology
This report addresses the following question: What progress has the Department of Homeland Security (DHS) made in implementing its mission functions since it began operations; what work, if any, remains; and what crosscutting and management issues have affected DHS’s implementation efforts?
This report is based primarily on work that we have completed since DHS began its operations in March 2003, with an emphasis on reports issued since 2008 to reflect our most recent work, supplemented by DHS Office of Inspector General (IG) reports and updated information and documentation provided by the department in July and August 2011. It is also based on our ongoing work on key DHS programs for various congressional committees, as noted throughout the report. For this ongoing work, we examined program documentation and interviewed agency officials, among other things.
To determine what progress DHS has made in implementing its mission functions and what work, if any, remains, we identified 10 DHS functional areas within its missions, which we define as categories or areas of DHS’s homeland security responsibilities. These functional areas are based on those areas we identified for DHS in our August 2007 report on DHS’s progress in implementing its mission and management functions, and our analysis of DHS’s Quadrennial Homeland Security Review (QHSR) and budget documents, such as its congressional budget justifications. We discussed these functional areas with our subject matter experts and DHS officials and incorporated their feedback as appropriate. These areas include: (1) aviation security; (2) chemical, biological, radiological, and nuclear (CBRN) threats; (3) critical infrastructure protection—physical assets; (4) surface transportation security; (5) border security; (6) maritime security; (7) immigration enforcement; (8) immigration services; (9) critical infrastructure protection—cyber assets; and (10) emergency preparedness and response. Within these functional areas, we identified performance expectations, which we define as composites of the responsibilities or functions that the department is to achieve or satisfy based on requirements, responsibilities, and goals set for the department by Congress, the administration, and DHS and its components. In particular, we used expectations identified in our August 2007 report as a baseline, and updated, or added to, these expectations by analyzing: Homeland security-related laws enacted since September 2006 to identify legislative requirements for each DHS functional area. Examples of such laws include the Implementing Recommendations of the 9/11 Commission Act of 2007, the Security and Accountability For Every Port Act of 2006 (SAFE Port Act), and the Post-Katrina Emergency Management Reform Act of 2006. DHS appropriation acts and accompanying conference reports for fiscal years 2006 through 2011 to identify requirements established and guidance provided to DHS for each functional area. Presidential directives and executive orders that have been issued since September 2006 to identify expectations set for DHS by the administration for each functional area. Examples of such directives include Homeland Security Presidential Directive 25: Arctic Region Policy, and Presidential Policy Directive 8: National Preparedness. Homeland security-related national strategies that have been issued since September 2006 to identify expectations set for DHS by the administration for each functional area. Examples of such strategies include the 2010 National Security Strategy and 2007 National Strategy for Homeland Security. Strategic plans and documents that have been issued since September 2006 by DHS and its component agencies to identify goals and measures established by the department for each functional area. Examples of such strategic plans and documents include the QHSR and Bottom-Up Review (BUR) reports, as well as component level strategic plans, such as the U.S. Immigration and Customs Enforcement (ICE) Strategic Plan (Fiscal Year 2010-2014).
We then grouped the expectations we identified within each functional area into broader sub-areas. Table 5 provides an example of performance expectations and sub-areas for the border security functional area. Appendix I provides the complete list of functional areas, sub-areas, and performance expectations.
To identify the performance expectations and sub-areas, one analyst independently reviewed the source documents to identify expectations and sub-areas for a functional area. A second analyst then independently reviewed and verified each analysis. We also obtained and incorporated feedback from our subject matter experts on the expectations and sub- areas. In addition, we obtained feedback from DHS and component officials on the expectations and sub-areas we identified, and incorporated their feedback as appropriate.
Further, we then aligned our functional areas to the five Quadrennial Homeland Security Review (QHSR) missions based on our review of the QHSR and BUR reports and DHS’s fiscal year 2012 budget documents (see table 6). Within these documents, DHS identified how its initiatives, programs, and activities align or support each QHSR mission, with some supporting more than one mission. For example, U.S. Customs and Border Protection (CBP) identified that its efforts related to inspections at ports of entry and facilitation of trade primarily support QHSR Mission 2: Securing and Managing Our Borders, but also, to a lesser extent, support QHSR Mission 1: Preventing Terrorism and Enhancing Security and Mission 3: Enforcing and Administering Our Immigration Laws. On the basis of DHS’s alignment of its initiatives, programs, and activities to QHSR missions, we grouped the 10 functional areas under DHS’s QHSR missions. In doing so, we recognized that our functional areas, as well as those key sub-areas that comprise the functional areas, may pertain to more than one QHSR mission area. For example, under our functional area of immigration enforcement, our work addressing the sub-area investigations of immigration offenses addresses DHS programs and activities that relate to more than one QHSR mission—primarily Mission 3: Enforcing and Administering Our Immigration Laws, and also Mission 2: Securing and Managing Our Borders and Mission 1: Preventing Terrorism and Enhancing Security. In those cases when a functional area aligned to more than one QHSR mission, we categorized it under the QHSR mission that it primarily supported on the basis of our review of DHS’s QHSR and budget-related documents. In cases when sub-areas within a functional area supported more than one QHSR mission, we kept the sub-area with its functional area (e.g., aviation security) and noted to which other QHSR missions it aligned. We provided DHS with our alignment of the functional areas to the QHSR missions, and incorporated the department’s feedback, as appropriate.
To identify key areas of progress and work that remains in the DHS functional areas, we examined our and the DHS IG’s past reports on DHS missions, programs, and operations, including recommendations we and the DHS IG have made, and actions DHS has taken or has underway to address them. We also identified preliminary observations from our ongoing work in some key areas. In doing so, we identified factors that have affected DHS progress in the functional areas. Our work and the work of the DHS IG have covered many of DHS’s key programs, operations, and activities. In this report, we highlight our key work in these areas, but do not address all products we or the DHS IG have issued related to DHS, nor did we address all of the sub-areas or DHS’s homeland security-related activities and efforts. We selected, in consultation with our subject matter experts, key work we and the DHS IG have completed related to the functional areas and sub-areas. We examined the methodologies used by the DHS IG in its reports, including reviewing the scope, methodological steps, and limitations. We determined that the DHS IG reports were sufficiently reliable for the purposes of our report to provide examples, and to supplement our work, of DHS’s progress and work remaining. In addition, we obtained data from DHS on its budget authority for fiscal years 2004 through 2011, and funding and staffing levels related to the functional areas, and assessed the reliability of that data by available documentation. We determined that the data were sufficiently reliable for the purposes of our report.
We obtained and incorporated feedback on our assessments within the sub-areas and functional areas from our subject matter experts. In addition, we provided DHS with drafts of our assessments of DHS progress and work remaining in each functional area and obtained and analyzed updated information provided by DHS on these areas. In some cases, DHS provided us with updated data on its efforts, such as statistics on technology deployments or program activities. We assessed the reliability of these data by reviewing available documentation from DHS. We determined that the data were sufficiently reliable for the purposes of our report. We included updated information in our assessments of each sub-area and functional area, based on our review of this information and our prior work. In some cases, we could not make an assessment of the updated information DHS provided because we did not have prior work upon which to base an assessment, or DHS’s reported actions were in the early stages of implementation, and thus it was too early to assess the results of these efforts. We noted these instances in our report.
To identify crosscutting and management issues that have affected DHS’s implementation efforts, we analyzed the assessments of progress and work that remains in each functional area. We also examined our and the DHS IG’s past reports on crosscutting issues, related recommendations, and actions taken by DHS or that are underway to address the recommendations. We obtained and incorporated feedback on the crosscutting issues we identified from our subject matter experts. In addition, we obtained and incorporated feedback from DHS on our assessment of crosscutting issues that have affected the department’s mission implementation efforts, including updated information from DHS pertaining to these crosscutting issues. We incorporated updated information into our assessments based on our review of this information and our prior work. In some cases, we could not make an assessment of the updated information DHS provided because we did not have prior work upon which to base an assessment. We noted these instances in our report.
Our assessments of the progress made by DHS in the functional areas and sub-areas, as well as our analyses of crosscutting issues, are based primarly on our issued reports, and supplemented by DHS IG reports. As such, the assessments of progress do not reflect, nor are they intended to reflect, the extent to which DHS’s actions have made the nation more secure in each area. Additionally, we do not intend to imply that our discussion of progress and work remaining in the functional areas and sub-areas, considered separately or together, reflect DHS’s progress in implementing all of its missions. We also did not assign a qualitative rating of progress for each area. DHS developed other performance measures against which to gauge its progress in fiscal year 2011, but has not yet reported on these measures. As such, the department did not have data available across a consistent baseline against which to assess its progress from fiscal years 2004 through 2011. Therefore, we were not able to assess DHS’s progress against a baseline for each functional area and sub-area, and we did not apply a weight to the expectations or sub-areas. We also did not consider DHS component agencies’ funding levels or the extent to which funding levels have affected the department’s ability to carry out its missions as this was not included in the scope of our prior reviews. Further, we did not consider the extent to which competing priorities; external and internal events, such as departmental reorganizations; and resource demands have affected DHS’s progress in each area relative to other areas, although competing priorities, events, and resource demands have affected DHS’s progress in specific areas.
In addition, because we and the DHS IG have completed varying degrees of work (in terms of the amount and scope of reviews completed) for each functional area and because different DHS components and offices provided us with different amounts and types of information, our assessments of DHS’s progress in each area reflect the information available for our review and analysis and are not necessarily equally comprehensive across all 10 areas. Further, for some sub-areas, we were unable to make an assessment of DHS’s progress because we and the DHS IG have not conducted recent work in that area or have conducted limited work. More detailed information on those sub-areas for which we did not make an assessment is included in appendices III through XII.
We conducted this performance audit from April 2011 through September 2011, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
Appendix III: Aviation Security
What This Area Includes
The Transportation Security Administration (TSA), within the Department of Homeland Security (DHS), is the lead federal agency responsible for securing all modes of transportation, including aviation. As part of these responsibilities, TSA performs or oversees the performance of security operations at the nation’s more than 460 commercial airports.Key elements that comprise aviation security include: the aviation security workforce, including hiring, training, and deploying a screening workforce; passenger prescreening—comparing passenger information to the Selectee and No Fly lists; passenger checkpoint screening, including using staff, policies and procedures, and technology to address potential vulnerabilities; checked baggage screening, including deploying explosives detection systems and other technologies to screen baggage for explosives; air cargo screening, which involves using staff, policies and procedures, and technology to screen domestic and high-risk international inbound air cargo transported on passenger aircraft; and security of airports, including airport perimeter security and access controls.
For fiscal year 2011, TSA had about 54,800 personnel and its budget authority was about $7.7 billion. Aviation security falls primarily within the Quadrennial Homeland Security Review Mission 1: Preventing Terrorism and Enhancing Security.
For the purposes of this report, we are focusing generally on key areas on which we or the DHS Office of Inspector General (IG) have recently reported and not on areas in which our two agencies have not reported or have conducted limited audit work. For example, while DHS's responsibilities related to aviation security also include aviation security strategic planning and coordination, we are not reporting on this area. TSA also relies upon additional programs to deter, detect, and disrupt persons or threats posing a potential risk to aviation security, such as travel document checkers, who examine tickets and forms of identification; random employee screening; intelligence gathering and analysis; random canine team searches at airports; federal air marshals, who provide federal law enforcement presence on selected flights; and reinforced cockpit doors; as well as other measures both visible and invisible to the public. Further, TSA has additional plans and programs related to aviation security, such as TSA’s plans to conduct a pilot program on expedited checkpoint screening for low-risk travelers, and TSA’s Transportation Systems Integration Facility which supports the development and deployment of new technologies. We have not completed work on these areas upon which to make an assessment of DHS’s progress.
Key Progress and Work Remaining
Our work, supplemented by the work of the DHS IG, has shown that over the past 10 years, TSA has enhanced aviation security in key areas related to the aviation security workforce, passenger prescreening, passenger checkpoint screening, checked baggage screening, air cargo security, and security of airports. For example, TSA hired, trained, and deployed a federal screening workforce. Additionally, after initial difficulty in fielding the program, TSA developed and implemented Secure Flight, a passenger prescreening program through which the federal government now screens all passengers on all domestic and international commercial flights to, from, and within the United States. DHS also developed new programs and is utilizing new technologies to screen passengers and checked baggage, and enhanced the security of domestic and in-bound air cargo. TSA also strengthened security at U.S. airports by assessing risks to airport perimeters and access controls. However, our work has shown that more work remains in these areas. For example, a risk-based strategy and a cost-benefit analysis of airport checkpoint technologies would improve passenger checkpoint screening. Further, TSA does not yet have a procurement plan and schedule for checked baggage screening technologies that would better position TSA to meet recently enhanced explosive detection requirements. Additionally, TSA does not yet have a mechanism to verify the accuracy of domestic and inbound air cargo screening data. Finally, the security of airports would be strengthened by establishing an evaluation plan for pilot tests to screen workers. Table 7 provides more detailed information on our assessment of DHS’s progress and remaining work in key areas on which we have reported, with an emphasis on work completed since 2008.
GAO Contact
For additional information about this area, contact Steve Lord at (202) 512-4379 or [email protected].
Appendix IV: Chemical, Biological, Radiological, and Nuclear Threats
What This Area Includes
The Department of Homeland Security (DHS) leads federal interagency coordination and planning for emergency response to catastrophic events such as chemical, biological, radiological, and nuclear (CBRN) incidents in the United States, and is responsible for assessing the risks posed by various CBRN agents. These efforts include (1) assessing risks, and (2) developing and deploying capabilities to detect and mitigate CBRN threats. Within DHS, the Science and Technology Directorate (S&T) is responsible for developing, in consultation with other appropriate executive agencies, a national policy and strategic plan for identifying priorities, goals, objectives and policies for, and coordinating the federal government’s civilian efforts to identify and develop countermeasures to chemical and biological threats. The Domestic Nuclear Detection Office (DNDO) is responsible for developing, acquiring, and supporting the deployment of a system to detect and report on attempts to develop, transport, or use unauthorized nuclear explosive, fissile, or radiological materials or explosives in the United States. The Office of Health Affairs provides health and medical expertise in support of the DHS mission to prepare for, respond to, and recover from all threats, and leads and coordinates the department’s biological and chemical defense activities.
For fiscal year 2011, S&T had about 450 personnel and budget authority of about $830 million. For fiscal year 2011, DNDO had about 130 personnel and budget authority of approximately $340 million. For fiscal year 2011, the Office of Health Affairs had about 95 personnel and budget authority of approximately $140 million. Chemical, biological, radiological, and nuclear threats assessment, detection, and mitigation primarily falls within the Quadrennial Homeland Security Review Mission 1: Preventing Terrorism and Enhancing Security.
For the purposes of this report, we are focusing generally on key areas on which we or the DHS Office of Inspector General (IG) have recently reported and not on areas in which our two agencies have not reported or have conducted limited audit work. DHS has developed and implemented other efforts related to CBRN assessments and detection and mitigation capabilities on which we are not reporting. For example, DHS has initiated efforts related to incidents involving contaminated debris, biodefense exercises and notification procedures for biological attacks. Further, in August 2011 DHS reported to us that it had (1) developed a strategic plan and issued guidance for biological threat prevention and response; (2) established a steering committee for anthrax preparedness and response; and (3) established a program that is developing best practices guidance and decision support tools for federal, state, and local stakeholders for preparedness and response to high consequence chemical incidents. DHS also reported launching a National Nuclear Forensics Expertise Development Program in fiscal year 2008 to enhance academic programs and expertise development opportunities in nuclear forensics. Moreover, DHS reported that it was leading development of a national strategic plan for improving nuclear forensics capabilities in the United States. We have not completed work on these areas upon which to make an assessment of DHS’s progress.
Key Progress and Work Remaining
Our work has shown that DHS made progress in assessing risks posed by CBRN threats, developing CBRN detection capabilities, planning for nuclear detection, and conducting radiation detection. However, important efforts related to these areas have not been completed. For example, DHS conducted risk assessments for CBRN agents, but should better coordinate with the Department of Health and Human Services by developing written policies and procedures governing development of the assessments. DHS also developed the BioWatch program, which provides early detection of biological threats. However, the next generation of the system, which is to have additional detection capability, has not yet been operationally deployed. Further, DHS established the National Biosurveillance Integration Center, but the center lacks resources necessary for operations, such as data and personnel from its partner agencies. In August 2011, DHS reported that, among other actions, its Office of Health Affairs had begun to develop a new strategy for the Center. DNDO coordinated the development of a strategic plan for the global nuclear detection architecture—a multidepartment effort to protect against terrorist attacks using nuclear and radiological materials through coordinated activities—and DHS made progress in deploying radiation detection equipment. However, work remains in implementing the global nuclear detection strategy, and DHS faced difficulties in developing new technologies to detect radiological and nuclear materials. For example, DHS’s strategic plan for the global nuclear detection architecture addressed some key components of what we previously recommended be included in a strategic plan, such as identifying the roles and responsibilities for meeting strategic objectives. However, the plan did not identify funding needed to achieve the strategic plan’s objectives, or employed monitoring mechanisms for determining programmatic progress and identifying needed improvements. Table 8 provides more detailed information on our assessment of DHS’s progress and remaining work in key areas on which we have reported, with an emphasis on work completed since 2008.
GAO Contacts
For additional information about this area, contact William O. Jenkins, Jr. at (202) 512-8757 or [email protected], or Gene Aloise at 202-512- 6870 or [email protected].
Appendix V: Critical Infrastructure Protection—Physical Assets
What This Area Includes
Under the Homeland Security Act of 2002, the Department of Homeland Security (DHS) has wide-ranging responsibility to lead and coordinate the nation’s efforts to secure critical infrastructure. DHS’s key responsibilities and efforts include (1) risk assessment and planning; (2) protection and resiliency; and (3) partnerships and coordination mechanisms. DHS leads and coordinates the nation’s efforts to enhance protection and resiliency for 18 critical infrastructure sectors. Within DHS, three components are charged with lead responsibility over 11 of the 18 sectors. Specifically, within DHS’s National Protection and Programs Directorate (NPPD), the Office of Infrastructure Protection is responsible for the chemical; commercial facilities; critical manufacturing; dams; emergency services; and nuclear reactors, materials, and waste sectors. Also within NPPD, the Office of Cybersecurity and Communications is responsible for the communications and information technology sectors, and the Federal Protective Service (FPS) is responsible for the government facilities sector. The Transportation Security Administration (TSA) is responsible for the postal and shipping sector and in turn shares responsibility with the U.S. Coast Guard for the transportation systems sector. As the primary component responsible for critical infrastructure protection via its Office of Infrastructure Protection, for fiscal year 2011 NPPD had about 2,800 personnel and its budget authority was about $2.3 billion. Critical infrastructure protection of physical assets primarily falls within the Quadrennial Homeland Security Review Mission 1: Preventing Terrorism and Enhancing Security.
For the purposes of this report, we are focusing generally on key areas on which we or the DHS Office of Inspector General (IG) have recently reported and not on areas in which our two agencies have not reported or have conducted limited audit work. DHS has developed and implemented other efforts related to critical infrastructure protection on which we are not reporting. For example, according to DHS, it is currently developing measures for critical infrastructure protection and resiliency as part of its efforts to develop the National Preparedness Goal and National Preparedness System directed by Presidential Policy Directive 8: National Preparedness. DHS stated that as part of this effort, it is examining the extent to which these measures incorporate crosscutting considerations such as sustainability, durability, and energy efficiency. As these efforts relate to critical infrastructure protection, we have not completed work on them upon which to make an assessment of DHS’s progress.
Key Progress and Work Remaining
Our work, supplemented by the DHS IG’s work, has shown that DHS expanded its efforts to conduct risk assessments and planning, provide for protection and resiliency, and implement partnerships and coordination mechanisms for physical critical assets. DHS updated the National Infrastructure Protection Plan to include an emphasis on resiliency (the capacity to resist, absorb, or successfully adapt, respond to, or recover from disasters), and an enhanced discussion about DHS risk management. Also, in the National Infrastructure Protection Plan, DHS expanded the discussion of its program to prioritize assets and systems for each of the 18 sectors according to their importance, nationally or regionally. Further, DHS took steps to coordinate with critical infrastructure protection stakeholders through information sharing mechanisms such as council meetings. However, our work and that of the DHS IG has shown that key challenges remain in these areas. For example, DHS’s state and local partners who are to provide data for the development of annual lists of critical infrastructure assets and systems noted that time and resource constraints can adversely affect the process. Furthermore, DHS has not fully implemented an approach to measure its effectiveness in working with critical asset owners and operators in their efforts to adopt measures to mitigate resiliency gaps identified during various vulnerability assessments. Moreover, the scope of some risk assessments has been limited and assessment results have not been consistently incorporated into planning efforts. In addition, DHS should take additional action to address barriers faced in sharing information about resiliency strategies with critical infrastructure partners. Table 9 provides more detailed information on our assessment of DHS’s progress and remaining work in key areas on which we have reported, with an emphasis on work completed since 2008.
GAO Contacts
For additional information about this area, contact Stephen L. Caldwell at (202) 512-9610 or [email protected] for overall critical infrastructure protection, or Mark Goldstein at (202) 512-2834 or [email protected] for government facilities.
Appendix VI: Surface Transportation Security
What This Area Includes
The Transportation Security Administration (TSA), within the Department of Homeland Security (DHS), is the lead federal agency responsible for overseeing security of all surface transportation modes, which include passenger and freight rail; mass transit; highways, including commercial vehicles; and pipelines. Although TSA has primary responsibility for overseeing surface transportation security, this responsibility is shared with federal, state, and local governments and the private sector. For example, public and private operators are responsible for securing their transportation systems. Key areas within surface transportation security include: (1) risk assessment and planning; (2) standards, inspections, and training; (3) grants; and (4) information sharing. As the primary component responsible for surface transportation security, for fiscal year 2011, TSA had about 54,800 personnel and its budget authority was about $7.7 billion for fiscal year 2011, most of which is devoted to aviation security functions. Surface transportation security falls primarily within the Quadrennial Homeland Security Review Mission 1: Preventing Terrorism and Enhancing Security.
For the purposes of this report, we are generally focusing on key areas on which we or the DHS Office of Inspector General (IG) have recently reported, and not on areas in which our two agencies have not reported or have conducted limited audit work. DHS developed and implemented additional efforts related to surface transportation security on which we are not reporting. These include, among other things, the Surface Transportation Security Priority Assessment—a public-private study which identified recommendations to enhance surface transportation security; the National Explosives Detection Canine Program; the Baseline Assessment for Security Enhancement—a security assessment program designed to evaluate 17 security and emergency management action items for mass transit and passenger rail networks; a training program in Pueblo, Colorado for highway surface transportation inspectors; the Intermodal Security Training and Exercise Program, which is a training and exercise program for the transportation industry developed by TSA, in collaboration with other federal agencies and commercial security vendors; and standard processes for law enforcement to identify and report suspicious incidents or activities throughout the Amtrak rail system and share that information nationally so it can be analyzed to identify broader trends. We have not completed work in these areas upon which to make an assessment of DHS’s progress.
Key Progress and Work Remaining
Our work, supplemented by the work of the DHS IG, has shown that DHS, particularly TSA, expanded its efforts in key areas on which we have reported, such as risk assessments and strategic planning; surface transportation inspector workforce; grants administration; and information sharing. For example, in 2009 we reported that TSA had begun conducting threat and vulnerability assessments of the commercial vehicle industry and that TSA and other DHS agencies conducted threat, vulnerability, and consequence assessments of highway infrastructure, freight rail, and mass transit. TSA also developed a transportation sector security risk assessment that assessed risk within and across the various transportation modes. In addition, since 2008, TSA more than doubled its surface transportation inspector workforce and reported that, as of July 2011, its surface inspectors conducted over 1,300 site visits to mass transit and passenger rail stations to complete station profiles, among other things. Moreover, we reported in June 2009 that DHS used a risk analysis model to allocate Transit Security Grant Program funding and award grants to higher-risk transit agencies. Further, TSA expanded its sharing of surface transportation security information by establishing information networks.
However, we have identified work remaining in these areas. For example, TSA has strengthened its risk assessments for surface transportation modes, but efforts to further improve elements of these assessments are in the early stages of implementation. Further, TSA has not yet completed an analysis of its surface inspector workforce to direct current and future program needs. Moreover, TSA has not issued regulations for security training programs for mass transit, rail, and bus employees, as required by the Implementing Recommendations of the 9/11 Commission Act of 2007. Additionally, we found that TSA should strengthen the management of its program for providing grant funds to transit agencies, and that its information sharing efforts would benefit from improved streamlining and coordination. Table 10 provides more detailed information on our assessment of DHS’s progress and remaining work in key areas on which we have reported, with an emphasis on work completed since 2008.
GAO Contact
For additional information about this area, contact Steve Lord at (202) 512-4379 or [email protected].
Appendix VII: Border Security
What This Area Includes
Within the Department of Homeland Security (DHS), U.S. Customs and Border Protection (CBP) is the lead agency responsible for implementing the department’s border security mission. Key areas include inspecting travelers at ports of entry; inspecting cargo and goods at ports of entry while facilitating commerce; securing the border between ports of entry, for example, to reduce illegal immigration through the use of fencing and technology; enhancing visa adjudication security and preventing travel document collaborating with other stakeholders on border security efforts.
As the primary component responsible for border security, for fiscal year 2011, CBP had approximately 61,000 personnel and its budget authority was about $11.3 billion. Border security primarily falls within the Quadrennial Homeland Security Review Mission 2: Securing and Managing our Borders.
For the purposes of this report, we are focusing generally on key areas on which we or the DHS Office of Inspector General (IG) have recently reported and not on areas in which our two agencies have not reported or have conducted limited audit work. For example, while DHS's responsibilities related to border security also include managing border security resources, such as facilities, assets and human capital, we are not reporting on DHS's progress and work remaining in these areas. DHS also has other border security efforts underway on which we are not reporting. For example, CBP developed and implemented a number of border security programs and efforts to, among other things, address threats posed by the illicit narcotics trade, and acquire or develop new technologies for the southern and northern borders—such as detection sensors to detect illicit tunnels at the southern border. CBP also developed new border security strategies with Canada and Mexico. Other specific programs implemented by CBP include the Immigration Advisory Program, in which CBP officers are posted at foreign airports and work with host countries’ border security agencies and airlines to identify potentially inadmissible aliens, including those who may have ties to terrorism, prior to boarding commercial aircraft to the United States; and the National Targeting Center and the Automated Targeting System for identifying high-risk travelers and cargo. We have not completed recent work on these areas upon which to make an assessment of DHS’s progress.
Key Progress and Work Remaining
Our work, supplemented by the work of the DHS IG, has shown that DHS has expanded its efforts in key border security areas, such as inspection of travelers, cargo, and goods at ports of entry; security of the border between ports of entry; visa adjudication and travel document security; and collaboration with other border security stakeholders. For example, our work has shown that DHS has undertaken efforts to keep terrorists and other dangerous people from entering the country, and from October 1, 2010, through June 30, 2011, CBP reported encountering over 164,000 individuals at ports of entry who were found to be inadmissible into the United States. In addition, checkpoints generally located 25 to 100 miles from the border have contributed to DHS’s ability to seize illegal drugs, apprehend removable aliens, and encounter known or suspected terrorists. According to Border Patrol data, checkpoint operations accounted for over one-third of the Border Patrol’s total drug seizures. However, our work and that of the IG have shown that key challenges remain in these efforts. For example, addressing weaknesses in port of entry traveler inspection procedures and infrastructure would increase assurance that dangerous people and illegal goods would be interdicted at the border. DHS has also not yet decided how to implement a biometric system for recording foreign nationals’ exit from the United States. Further, DHS experienced schedule delays and performance problems with its information technology program for securing the border between ports of entry—the Secure Border Initiative Network (SBInet)—which DHS canceled. Because of the program’s decreased scope, uncertain timing, unclear costs, and limited life cycle management, it was unclear whether DHS’s pursuit of the program was cost-effective. DHS is transitioning to a new approach for border technology, which we are assessing. DHS also should establish performance measures or management controls for key border security programs. Table 11 provides more detailed information on our assessment of DHS’s progress and remaining work in key areas on which we have reported, with an emphasis on work completed since 2008.
GAO Contact
For additional information about this area, contact Richard M. Stana at (202) 512-8816 or [email protected].
Appendix VIII: Maritime Security
What This Area Includes
Within the Department of Homeland Security (DHS), the U.S. Coast Guard has primary responsibility for maritime security, while various component agencies also contribute to maritime security efforts, including U.S. Customs and Border Protection (CBP), the Transportation Security Administration (TSA), and the Domestic Nuclear Detection Office (DNDO). Key areas within maritime security include (1) port facility and vessel security; (2) maritime domain awareness and information sharing; and (3) international supply chain security. The Coast Guard is responsible for ensuring the safety and security of U.S. maritime interests and leading homeland security efforts in the maritime domain. In this capacity, among other things, it conducts port facility inspections, leads the coordination of maritime information sharing efforts, and promotes domain awareness in the maritime environment. CBP is responsible for the maritime screening of incoming commercial cargo for the presence of contraband, such as explosives, while facilitating the flow of legitimate trade, cargo, and passengers. TSA and the Coast Guard have responsibility for the implementation and enforcement, respectively, of the Transportation Worker Identification Credential program to manage the access of maritime workers to regulated maritime facilities. DNDO is responsible for acquiring and supporting the deployment of radiation detection equipment, including portal monitors. As one of the primary components responsible for maritime security protection, for fiscal year 2011 the Coast Guard had about 50,000 personnel, including civilian and military, and its budget authority was about $10.2 billion. Maritime security primarily falls within the Quadrennial Homeland Security Review Mission 2: Securing and Managing our Borders.
For the purposes of this report, we are generally focusing on key areas on which we and the DHS Office of Inspector General (IG) have recently reported, and not on areas in which our two agencies have not reported or have conducted limited audit work. For example, while DHS's responsibilities related to maritime security also include maritime security national planning, we are not discussing DHS's progress and work remaining in this area. DHS has developed and implemented other efforts related to maritime security. For example, according to the Coast Guard, its maritime security programs are part of a layered strategy that begins far from our ports. Coast Guard officials noted that their security regime includes close coordination with international and regional organizations (such as the International Maritime Organization and the European Union), and individual country's coast guard equivalent agencies; security inspections of, and technical assistance to, foreign ports; and maintaining a multi-mission fleet of cutters patrolling our coastal approaches. The Coast Guard also noted that some of its other missions—those not directly part of its ports, waterways, and coastal security mission—can contribute to homeland security.
Further, in July 2011, the Coast Guard reported that it had specific initiatives underway to enhance maritime security planning at the port level, on which we have not previously reported. Specifically, Coast Guard reported that it had updated 43 port-level Area Maritime Security Plans that covered prevention, protection, security response, and short- term recovery, and that these plans were approved by Coast Guard district and area commanders. The Coast Guard further reported that it was working closely with maritime committees and stakeholders to maintain and annually exercise these port-level plans. We have not completed work on these areas upon which to make an assessment.
Key Progress and Work Remaining
Our work, supplemented by the work of the DHS IG, has shown that DHS’s components, particularly the Coast Guard and CBP, have expanded their efforts in key areas, such as port facility and vessel security; maritime domain awareness and information sharing; and international supply chain security. The Coast Guard strengthened risk management through the development of a risk assessment model, and developed a strategy and programs intended to address risks to maritime facilities and passenger and commodity vessels. In addition, the Coast Guard increased maritime domain awareness through interagency operational centers, implementing a vessel tracking system, and identifying awareness gaps in the Arctic. For example, in July 2011, DHS reported that it had completed an interagency review of maritime domain awareness requirements resulting in the publication of a document that included key strategic capabilities, objectives, resources, and evaluative methods needed to maintain maritime domain awareness. Further, in July 2011 DHS reported that CBP developed the Small Vessel Reporting System to allow for better tracking of small boats arriving from foreign locations, and deployed this system to eight of CBP’s field locations. DHS also developed a layered security strategy for cargo container security, including deploying screening technologies and partnering with foreign governments.
However, our work and that of the DHS IG has shown that more work remains. For example, DHS components’ efforts to assess the effectiveness of programs to secure maritime facilities should be improved. We found that because of a lack of technology capability, DHS does not electronically verify identity and immigration status of foreign seafarers as part of its admissibility inspection process, thus limiting the assurance that fraud could be identified among documents presented by them. DHS also had not assessed the risks of not having this capability, which is not expected to be available for several years. Further, DHS and its partners should enhance efforts to improve maritime domain awareness by, for example, further strengthening tracking of small vessels. In addition, although DHS developed the Transportation Worker Identification Credential program, we found that the program’s controls were not designed to provide reasonable assurance that only qualified applicants acquire credentials. For example, during covert tests of the Transportation Worker Identification Credential at several selected ports, our investigators were successful in accessing ports using counterfeit credentials and authentic credentials acquired through fraudulent means. Table 12 provides more detailed information on our assessment of DHS’s progress and work remaining in key areas on which we have reported, with an emphasis on work completed since 2008.
GAO Contact
For additional information about this area, contact Stephen L. Caldwell at (202) 512-9610 or [email protected].
Appendix IX: Immigration Enforcement
What This Area Includes
The Department of Homeland Security (DHS) is responsible for enforcing U.S. immigration and customs laws, and within DHS, U.S. Immigration and Customs Enforcement (ICE) is primarily responsible for immigration and customs enforcement efforts. ICE’s key responsibilities and efforts within immigration enforcement include (1) investigating and taking action to address individuals who have committed immigration and customs offenses, such as overstays; addressing immigration law violations at the workplace; investigating human trafficking and smuggling operations; and combating illicit smuggling of firearms, narcotics, and illicit proceeds; and (2) identifying, detaining, and removing aliens subject to removal. As the primary component responsible for immigration and customs enforcement, for fiscal year 2011 ICE had about 20,000 personnel, and its budget authority was about $5.8 billion. Immigration enforcement falls primarily within the Quadrennial Homeland Security Review Mission 3: Enforcing and Administering Our Immigration Laws.
For the purposes of this report, we are focusing generally on key areas on which we or the DHS Office of Inspector General (IG) have recently reported, and not on areas in which our two agencies have not reported or have conducted limited audit work. For example, while DHS's responsibilities related to immigration enforcement also include the management and training of immigration enforcement human capital, we are not reporting on DHS's progress in this area. Additionally, ICE’s customs enforcement efforts include investigations of such offenses as money laundering and other financial crimes. Specifically, ICE reports efforts to address money laundering, including coordinating with federal, state, local, and foreign law enforcement to conduct multi-jurisdictional criminal investigations targeting organizations involved in the movement and smuggling of illicit proceeds. ICE also reported developing, in collaboration with Mexico, a study of the processes and methods used by transnational criminal organizations to move illicit money from the United States into other countries. We have not completed work on these areas upon which to make an assessment of DHS’s progress.
Key Progress and Work Remaining
Our work, supplemented by the work of the DHS IG, has shown that DHS, particularly ICE, expanded its immigration and customs enforcement programs and activities in key areas on which we have reported, such as overstay enforcement, compliance with workplace immigration laws, alien smuggling, and firearms trafficking. For example, ICE increased its resources for investigating overstays and alien smuggling operations, and deployed border enforcement task forces to investigate illicit smuggling of people and goods, including firearms. In addition, DHS took action to improve the E-Verify program, which provides employers a voluntary tool for verifying an employee’s authorization to work in the United States. Specifically, in April 2011 we reported that DHS increased the E-Verify program’s accuracy by expanding the number of databases it can query, took actions to safeguard the privacy of personal information for employees who are processed through E-Verify, and implemented steps to prepare for possible mandatory implementation of E-Verify for all employers nationwide. ICE also expanded its programs for identifying and removing aliens from the United States to include, for example, entering into agreements with state and local jurisdictions to assist in identifying aliens subject to removal. However, our work has shown that work remains in these areas. For example, ICE took action to address a small portion of the estimated overstay population in the United States, and lacks measures for assessing its progress in addressing overstays. Moreover, ICE should better leverage opportunities to strengthen its alien smuggling enforcement efforts by assessing the possible use of various investigative techniques, and CBP should better assess progress made in achieving its alien smuggling-related program objectives. We have also reported on weaknesses with the E-Verify program, including challenges in accurately estimating E-Verify costs that put DHS at an increased risk of not making informed investment decisions and developing justifiable budget requests for future E-Verify use and potential mandatory implementation of it. Table 13 provides more detailed information on our assessment of DHS’s progress and remaining work in key areas on which we have reported, with an emphasis on work completed since 2008.
GAO Contact
For additional information about this area, contact Richard M. Stana at (202) 512-8816 or [email protected].
Appendix X: Immigration Services
What This Area Includes
Within the Department of Homeland Security (DHS), U.S. Citizenship and Immigration Services (USCIS) is the agency primarily responsible for providing immigration services in the United States and internationally at U.S. embassies, consulates and refugee centers. USCIS’s key responsibilities and efforts within immigration services include: administering immigration benefits, such as processing millions of applications and petitions received each year for about 50 types of immigration benefits for persons seeking to study, work, visit, or live in the United States, and to become U.S. citizens; and detecting and resolving suspicious information about and reviewing evidence provided by benefits applicants and petitioners and referring them for fraud investigation and possible sanctioning by other DHS components or external agencies, as appropriate.
As the primary component responsible for immigration services, for fiscal year 2011 USCIS had about 12,000 personnel, and its budget authority was about $2.6 billion. Immigration enforcement falls primarily within the Quadrennial Homeland Security Review Mission 3: Enforcing and Administering Our Immigration Laws.
For the purposes of this report, we are focusing generally on key areas on which we or the DHS Office of Inspector General (IG) have recently reported and not on areas in which our two agencies have not reported or have conducted limited audit work. For example, while DHS's responsibilities related to immigration services also include immigrant integration, we have not reported on DHS's progress and work remaining in this area. According to USCIS documentation provided to us in July 2011, the agency has undertaken initiatives to support immigrant integration, particularly related to citizenship, including, among other things, outreach, grants for education programs, and improved tools and resources on the citizenship and naturalization process. We currently have work underway for the House Committee on Homeland Security assessing USCIS’s immigrant integration efforts, and plan to report on the results of our work later this year.
Key Progress and Work Remaining
Our work, supplemented by the work of the DHS IG, has shown that DHS, particularly USCIS, improved the quality and efficiency of the immigration benefit administration process, and strengthened its immigration fraud detection and deterrence efforts. For example, USCIS initiated efforts to modernize its immigration benefit administration infrastructure; improve the efficiency and timeliness of its application intake process; and ensure quality in its benefit adjudication processes. In September 2008 we reported that the USCIS Asylum Division designed training programs and quality reviews to help ensure the integrity of asylum adjudications. In addition, in 2004 DHS established the Office of Fraud Detection and National Security, now a directorate, to lead immigration fraud detection and deterrence efforts, and this directorate has since developed and implemented strategies for this purpose. Further, in July 2011, USCIS reported that it completed the development of a database for analyzing fraud—the Fraud Detection and National Security Data System—which it uses to collect data on fraud and national security concerns. In addition, among other things, USCIS implemented the Administrative Site Visit and Verification Program, through which it conducts pre-and post-adjudication site visit inspections to verify information contained in certain visa petitions.
However, our work and that of the DHS IG have shown that work remains in these areas. For example, USCIS’s program for transforming its immigration benefit processing infrastructure and business practices from paper-based to digital systems missed its planned milestones by more than 2 years, and has been hampered by management challenges, such as insufficient planning and not preparing key DHS acquisition planning documents before selecting a contractor to obtain the capabilities needed to transition to an electronic adjudication process. USCIS should also take additional action to address vulnerabilities identified in its assessments intended to determine the extent and nature of fraud in certain applications. Further, in September 2008 we reported that, despite mechanisms USCIS had designed to help asylum officers assess the authenticity of asylum claims, such as identity and security checks and fraud prevention teams, asylum officers cited challenges in identifying fraud as a key factor affecting their adjudications. Table 14 provides more detailed information on our assessment of DHS’s progress and remaining work in key areas on which we have reported, with an emphasis on work completed since 2008.
GAO Contact
For additional information about this area, contact Richard M. Stana at (202) 512-8816 or [email protected].
Appendix XI: Critical Infrastructure Protection—Cyber Assets
What This Area Includes
The Department of Homeland Security (DHS) has overall responsibility for coordinating critical infrastructure protection efforts for 18 critical infrastructure sectors—such as energy, water, and communications. Within DHS, the National Protection and Programs Directorate’s (NPPD) Office of Cybersecurity and Communications (CS&C) is charged with enhancing the security, resiliency, and reliability of the nation's cyber and communications infrastructure. CS&C’s key responsibilities and efforts related to cybersecurity include (1) risk assessment and planning; (2) protection and resiliency; and (3) partnerships and coordination mechanisms. As the primary DHS component responsible for safeguarding physical and cyber assets, in fiscal year 2011 NPPD, which includes CS&C, had about 2,800 personnel and its budget authority was about $2.3 billion. Critical infrastructure protection of cyber assets primarily falls within the Quadrennial Homeland Security Review Mission 4: Safeguarding and Securing Cyberspace. but in the February 2011 high-risk update we identified several areas of responsibility that required further attention, such as advancing cyber analysis and warning capabilities, acquiring sufficient analytical and technical capabilities, and strengthening the effectiveness of the public- private sector partnerships in securing cyber critical infrastructure. In January 2011, DHS provided us with a corrective action plan for this high- risk area. We provided DHS with feedback on this plan noting, for example, that the plan included objectives, milestones, and planned accomplishments related to DHS’s cybersecurity responsibilities. However, we identified aspects of the plan that should be strengthened, such as clarifying whether DHS’s 2010 goals and objectives for its corrective actions were met, and identifying resources needed and planned milestones for 2011 activities.
For the purposes of this report, we are focusing generally on key areas on which we or the DHS Office of Inspector General (IG) have recently reported and not on areas in which our two agencies have not reported or have conducted limited audit work. DHS has other ongoing efforts related to cyber critical infrastructure protection, such as the assessment of cybersecurity measures implemented at high-risk chemical facilities as part of its Chemical Facility Anti-Terrorism Standards program, on which we have not reported. DHS also established the National Cybersecurity and Communications Integration Center in October 2009 to serve as a national cyber and communications operations center to fuse information from federal civilian agencies, law enforcement, intelligence, state and local government, and the private sector. Further, DHS signed a memorandum of agreement with the Department of Defense to improve cyber coordination. In addition, according to DHS officials, NPPD’s Office of Infrastructure Protection and the National Cyber Security Division collaborated to integrate cybersecurity elements into the Office of Infrastructure Protection’s facility security and vulnerability assessments. The National Cyber Security Division also conducts cyber assessments in support of the Office of Infrastructure Protection’s Regional Resiliency Assessment Program and major national events, according to DHS. We have not completed work on these areas upon which to make an assessment of DHS’s progress.
Key Progress and Work Remaining
Our work, supplemented by the work of the DHS IG, has shown that DHS expanded its efforts to conduct cybersecurity risk assessments and planning, provide for the protection and resilience of cyber assets, and implement cybersecurity partnerships and coordination mechanisms. For example, DHS updated the National Infrastructure Protection Plan to include an emphasis on cybersecurity issues by listing progress made and new initiatives related to cybersecurity. In addition, DHS took steps to secure external network connections in use by the federal government by establishing the National Cybersecurity Protection System, operationally known as Einstein, to analyze computer network traffic information to and from agencies. Additionally, the agency made progress in enhancing its cyber analysis and incident warning capabilities through the establishment of the U.S. Computer Emergency Readiness Team, which, among other things, coordinates the nation’s efforts to prepare for, prevent, and respond to cyber threats to systems and communications networks. DHS is also working to improve cyber-related partnerships with public and private stakeholders by developing new information-sharing arrangements and addressing corrective actions based on a cybersecurity exercise. In September 2008, we reported that since conducting a major cyber attack exercise, called Cyber Storm, DHS demonstrated progress in addressing lessons it had learned from these efforts to strengthen public and private incident response capabilities.
However, our work and that of the DHS IG has also shown that key challenges remain in these efforts. For example, to expand its protection and resiliency efforts, DHS needs to lead a concerted effort to consolidate and better secure Internet connections at federal agencies. DHS also faces challenges in fully establishing a comprehensive national cyber analysis and warning capability. For example, in July 2008, we reported that the U.S. Computer Emergency Readiness Team did not fully address 15 key attributes of cyber analysis and warning capabilities. Moreover, the DHS IG reported that DHS needs to establish a consolidated, multiple classification level portal that can be accessed by federal partners with real-time incident response related information and reports. Additionally, expectations of private sector stakeholders are not being met by their federal partners in areas related to sharing information about cyber-based threats to critical infrastructure. We also reported that public sector stakeholders believed that improvements could be made by improving private sector sharing of sensitive information. Table 15 provides more detailed information on our assessment of DHS’s progress and remaining work in key areas on which we have reported, with an emphasis on work completed since 2008.
Area
DHS took steps to secure external network connections in use by the federal government, and to coordinate the nation’s efforts to prepare for, prevent, and respond to cyber threats to systems and communications networks. However, to expand protection and resiliency efforts, concerted effort is needed to consolidate and secure Internet connections at federal agencies. DHS also faces challenges in establishing a comprehensive national cyber analysis and warning capability.
Summary of key progress and work remaining We recommended that DHS (1) assess whether existing sector-specific planning processes should continue to be the nation’s approach to securing cyber and other critical infrastructure, and consider whether other options would provide more effective results; and (2) collaborate with the sectors to develop plans that fully address cybersecurity requirements. DHS concurred and reported, for example, that it worked with sector officials to update sector plans with the goal of fully addressing cyber-related requirements. In 2010, the sectors issued 18 updated plans to be reviewed by federal agencies, such as the Office of Management and Budget and DHS. As of August 2011, DHS officials stated that 17 plans were finalized and 1 was in the process of being reviewed. DHS officials were not able to provide milestones for when the remaining plan would be finalized, as it is under federal interagency review. We have not yet reviewed these plans to determine the extent to which they address specified security requirements. Having plans with complete updates that address cybersecurity requirements will be important in providing the nation with information on where we are in implementing associated protective measures designed to secure and protect the nation’s cyber and other critical infrastructure.
Area
Summary of key progress and work remaining What remains to be done: Although we found that agencies reported benefits from the Trusted Internet Connection Initiative, none of the 23 agencies we reviewed met all of the requirements of the Trusted Internet Connections Initiative, as of September 2009.
Area
Summary of key progress and work remaining In addition, DHS officials stated that the department piloted Einstein 3 (the Comprehensive National Cybersecurity Initiative 3), which is intended to be an intrusion prevention system that is to automatically detect and respond appropriately to cyber threats before harm is done. According to DHS officials, once fully deployed, Einstein 2 and 3 will provide cyber protection capabilities to more than 110 federal civilian executive branch departments and agencies. As of July 2011, DHS reported that Einstein 2 was deployed at 16 of 19 access provider agencies and active at 15 of them, and that it is fully deployed and active at each of the 4 private telecommunications service providers through which non-access provider agencies seek Managed Trusted Internet Protocol Services. Taking steps to expand cyber protection capabilities to additional federal departments and agencies should help to improve the nation’s cyber infrastructure if those capabilities are implemented effectively. However, we have not yet assessed the effectiveness of these efforts as DHS is in the process of deploying Einstein 2 and 3. With the establishment of the U.S. Computer Emergency Readiness Team, DHS took steps to coordinate the nation’s efforts to prepare for, prevent, and respond to cyber threats to systems and communications networks. However, DHS faces challenges in establishing a comprehensive national cyber analysis and warning capability. Key progress: When incidents such as data loss or theft, computer intrusions, and privacy breaches occur, agencies are to notify the U.S. Computer Emergency Readiness Team. Over the past 5 years, the number of incidents reported by federal agencies to the U.S. Computer Emergency Readiness Team has increased; from 5,503 incidents in fiscal year 2006 to 41,776 incidents in fiscal year 2010, an increase of over 650 percent. We currently have work underway assessing the adequacy and effectiveness of agency information security policies and practices, and agencies' implementation of the Federal Information Security Management Act of 2002 requirements, and plan to report on our results later this year. What remains to be done: In July 2008, we reported that the U.S. Computer Emergency Readiness Team did not fully address 15 key attributes of cyber analysis and warning capabilities. These attributes are related to (1) monitoring network activity to detect anomalies, (2) analyzing information and investigating anomalies to determine whether they are threats, (3) warning appropriate officials with timely and actionable threat and mitigation information, and (4) responding to the threat. For example, the U.S. Computer Emergency Readiness Team provided warnings by developing and distributing a wide array of notifications; however, these notifications were not consistently actionable or timely. We recommended that the department address shortfalls associated with the 15 attributes in order to fully establish a national cyber analysis and warning capability. DHS generally concurred and stated that it is taking steps to implement them, such as opening two 24-hour centers to increase communication channels and organize cyber response efforts.We are currently working with DHS officials to more fully determine the status of their efforts to address these recommendations.
Area
Federal partners, including DHS, developed new information- sharing arrangements, and DHS completed corrective actions based on a cybersecurity exercise. However, efforts to meet the expectations of private sector stakeholders in areas related to sharing information about cyber-based threats to critical infrastructure should be improved.
Summary of key progress and work remaining The DHS IG also identified challenges with the U.S. Computer Emergency Readiness Team analysis and warning program, which DHS took steps to address. In June 2010 the DHS IG reported that the U.S. Computer Emergency Readiness Team made progress in implementing a cybersecurity program to assist federal agencies in protecting their information technology systems against cyber threats. However, the IG reported that the team could further improve its analysis and warning program. For example, the IG reported that the team could improve its management oversight by developing a strategic plan and establishing performance measures. Additionally, the IG reported that the team should improve its information sharing and communications coordination efforts with the public. Several factors have hampered DHS’s ability to share information with its partners, including that threat information from intelligence agencies is classified. The DHS IG recommended, among other things, that DHS establish a consolidated, multiple classification level portal that can be accessed by federal partners that includes real-time incident response related information and reports. In addition, the DHS IG recommended the establishment of specific outcome-based performance measures and a strategic plan to ensure that the team can achieve its mission, objectives, and milestones. DHS concurred with these recommendations, and took action to implement them. For example, DHS reported that it established performance measures and a strategic plan, concept of operations, and standard operating procedures for the U.S. Computer Emergency Readiness Team. In July 2011 DHS also reported that it was taking steps to establish a multiple classification level portal. DHS developed new information-sharing arrangements and completed corrective actions based on a cybersecurity exercise. However, additional action is needed to better ensure that expectations of private sector stakeholders are met by their federal partners in areas related to sharing information about cyber-based threats to critical infrastructure. Key progress: DHS completed corrective actions based on lessons learned from a cybersecurity exercise. In September 2008, we reported that since conducting a major cyber attack exercise, called Cyber Storm, DHS demonstrated progress in addressing 8 lessons it had learned from this exercise to strengthen public and private incident response capabilities. In the months following its first exercise, DHS identified 66 activities that address one or more of the lessons, including hosting meetings with key cyber response officials from foreign, federal, and state governments and private industry, and refining their operating procedures. We reported in September 2008 that DHS’s actions to address the lessons had not been fully implemented, and consequently recommended that DHS schedule and complete all of the corrective activities identified to strengthen coordination between public and private sector participants in response to significant cyber incidents. As of September 2010, DHS demonstrated that it had completed all 66 of the corrective actions addressing lessons learned from the exercise.
Area
Summary of key progress and work remaining What remains to be done: Federal policy, including DHS’s National Infrastructure Protection Plan, calls for a partnership model that includes public and private councils to coordinate policy and information sharing and analysis centers to gather and disseminate information on threats to physical and cyber-related infrastructure.In July 2010, we reported that while federal partners, such as DHS, were developing new information-sharing arrangements, they were not meeting the key expectations of the private sector. We also reported that public sector stakeholders believed that improvements could be made to the partnership, including improving private sector sharing of sensitive information. We recommended, among other things, that DHS use our findings to focus its information-sharing efforts on the most desired services, including access to sensitive or classified information and a secure mechanism for sharing information. DHS concurred with our recommendations and stated that it took steps to implement them, such as initiating pilot programs to enable the mutual sharing of cybersecurity information at various classification levels. However, as DHS is initiating these pilot programs, it is too early to assess the extent to which they address the challenges we identified.
GAO Contact
For additional information about this area, contact Gregory C. Wilshusen at (202) 512-6244 or [email protected].
Appendix XII: Emergency Preparedness and Response
What This Area Includes
The Federal Emergency Management Agency (FEMA), within the Department of Homeland Security (DHS), is the federal agency primarily responsible for emergency preparedness and response efforts. FEMA’s key responsibilities and efforts include national emergency preparedness and response planning, such as developing the National Response Framework and a national preparedness goal; providing emergency assistance and services, such as temporary housing assistance after a disaster; and supporting the federal government’s state, local, and tribal partners’ efforts to enhance their emergency management and homeland security capabilities, such as emergency communications, through grants and technical assistance. As the primary component responsible for emergency preparedness and response, in fiscal year 2011 FEMA had approximately 7,300 personnel, and its budget authority was about $10.5 billion. Emergency preparedness and response falls within the Quadrennial Homeland Security Review Mission 5: Ensuring Resilience to Disasters.
For the purposes of this report, we are focusing generally on key areas on which we or the DHS Office of Inspector General (IG) have recently reported and not on areas in which our two agencies have not reported or have conducted limited audit work. For example, while DHS’s responsibilities related to emergency preparedness and response also include areas such as human capital management and training and exercise programs, we are not reporting on DHS’s progress and work remaining in these areas. With regard to human capital, FEMA reported to us in July 2011 that it planned to increase its staffing levels to enhance FEMA’s investigative operations and fraud awareness training initiatives by 50 percent in fiscal year 2011, and by another 50 percent in fiscal year 2012. We have not completed recent work on these areas upon which to make an assessment of DHS’s progress.
Key Progress and Work Remaining
Our work, supplemented by that of the DHS IG, has shown that FEMA expanded its efforts to improve national emergency preparedness and response planning; improved its emergency assistance services; supported state, local, and tribal partners’ disaster preparedness and response capabilities; and enhanced emergency communications. For example, FEMA developed various plans for disaster preparedness and response. In particular, FEMA issued the National Response Framework, which outlines the guiding principles and major roles and responsibilities of government, nongovernmental organizations, and private sector entities for disaster response. It is also finalizing a National Disaster Recovery Framework, intended to provide a model to identify and address challenges that arise during the disaster recovery process. Moreover, DHS issued the National Emergency Communications Plan— the first strategic document for improving emergency communications nationwide. We also reported that FEMA awards certain preparedness grants based on a reasonable risk methodology. However, more work remains in FEMA’s efforts to assess capabilities for all-hazards preparedness, provide long-term disaster recovery assistance, and strengthen alert systems. For example, FEMA has faced difficulties in collecting reliable and consistent data and developing measurable target capabilities for national preparedness. Further, with regard to long-term disaster recovery assistance, FEMA’s criteria for when to provide the assistance were vague, and, in some cases, FEMA provided assistance before state and local governments had the capacity to work effectively with FEMA. Further, FEMA has faced technical challenges in implementing the Integrated Public Alert and Warning System related to systems integration and alerts for individuals with disabilities, among other things. Additionally, FEMA should improve the efficacy of the grant application and review process by mitigating duplication or redundancy within the agency’s various preparedness grant programs. Table 16 provides more detailed information on our assessment of DHS’s progress and remaining work in key areas on which we have reported, with an emphasis on work completed since 2008.
Area
Summary of key progress and work remaining What remains to be done: In April 2009 we reported that FEMA had not yet completed about two-thirds of the plans to operationalize the policies it had established to define emergency preparedness and response roles and responsibilities. As a result, the roles and responsibilities of key officials involved in responding to a catastrophe had not been fully defined and, thus, could not be tested in exercises. We recommended that FEMA establish a program management plan to ensure that the plans that were called for as part of the national preparedness system were developed in a timely and integrated fashion. FEMA generally concurred and has actions underway to address it. For example, FEMA told us that since we last reported, it has revised or completed six concept plans and approximately 28 hazard-specific regional plans. FEMA also reported working to implement elements of Presidential Policy Directive 8: National Preparedness. This directive instructs the Secretary of Homeland Security to develop a national preparedness goal and national preparedness system to meet that goal through an integrated set of guidance, programs, and processes. Specifically, FEMA reported in August 2011 that in response to Presidential Policy Directive 8, FEMA is leading the development of a Federal Interagency All-Hazards Response Plan, to include scenario-specific annexes that integrate prior earthquake, hurricane, and catastrophic planning efforts. To implement Presidential Policy Directive 8, FEMA will need to review its current and pending policies to ensure that they are consistent with the goals and requirements of the Directive, and make any adjustments that may be needed. Despite ongoing efforts to measure preparedness and assess capabilities, FEMA faced difficulties in collecting reliable and consistent data, and developing measurable target capabilities. Key progress: DHS, particularly FEMA, implemented efforts to measure preparedness by assessing capabilities and addressing related challenges. In September 2007, DHS issued the National Preparedness Guidelines that describe a national framework for capabilities-based preparedness as a systematic effort that includes sequential steps to first determine capability requirements and then assess current capability levels. As a companion to the Guidelines, FEMA issued a Target Capabilities List, designed to provide a national-level generic model of capabilities defining all-hazards preparedness. FEMA also made progress in developing a system for assessing national preparedness capabilities by, among other things, establishing reporting guidance for state preparedness and issuing a federal preparedness report. Presidential Policy Directive 8, issued in March 2011, requires the development of a national preparedness goal, system, and report. The implementation plan for the directive calls for the development of the national preparedness goal by September 25, 2011, and the development of other documents by September 25, 2012.
Area
Summary of key progress and work remaining What remains to be done: The success of FEMA’s efforts to measure preparedness has been limited due to, among other things, missing quantifiable metrics to measure capabilities. In April 2009, we reported that establishing quantifiable metrics for target capabilities was a prerequisite to developing assessment data that can be compared across all levels of government. At the time of our review, FEMA was in the process of refining the target capabilities to make them more measurable and planned to develop quantifiable metrics for each of the capabilities. We reported in October 2010 that FEMA had not yet developed national preparedness capability requirements based on established metrics to provide a framework for assessing preparedness. FEMA officials told us that evaluation efforts that they used to collect data on national preparedness capabilities were useful for their respective purposes, but that the data collected were limited by data reliability and measurement issues related to the lack of standardization. Until a framework for assessing preparedness is in place, we reported that FEMA would not have a basis on which to operationalize and implement its conceptual approach for assessing local, state, and federal preparedness capabilities against capability requirements and identify capability gaps for prioritizing investments in national preparedness. In our April 2009 report, we recommended that FEMA improve national preparedness by enhancing its project management plan for assessing capabilities to include reporting on the progress of preparedness assessments and developing quantifiable metrics for capabilities. DHS concurred, and in July 2011 FEMA reported that it took steps to establish a preparedness baseline and the accompanying foundation for assessing preparedness, including determining how effective grants are in improving preparedness. FEMA also reported that it was working with its emergency response partners to identify end-states, capabilities, and performance objectives for each emergency preparedness mission area as part of its development of the National Preparedness Goal. FEMA further will provide a summary of the progress being made towards developing and maintaining performance objectives required to deliver the capabilities described in the goal. In August 2011, FEMA reported that it had established a Program Executive Office to ensure that the target dates for implementation of Presidential Policy Directive 8 are met and stakeholders are engaged in the process. As these efforts are recent, we have not conducted work to assess their effectiveness in measuring preparedness. However, in the past FEMA has had difficulty meeting target dates, thus it will be important for FEMA to effectively consult with and incorporate the input of its many stakeholders to support meeting this schedule.
Area
FEMA improved emergency assistance services and oversight of disaster-related emergency assistance, but should further strengthen its management of emergency response and recovery assistance programs.
Summary of key progress and work remaining DHS and FEMA have strengthened nationwide recovery planning efforts, but efforts are in the early stages. Key progress: In February 2010, FEMA released a draft National Disaster Recovery Framework, which is intended to provide a model to collectively identify and address challenges that arise during the disaster recovery process. This Framework is designed to help the emergency management community work better together to support individuals, households, and communities as they rebuild and restore their ways of life following a disaster. FEMA later reported that since March 2010, it has received hundreds of comments and recommendations from federal agencies and departments on the proposed Framework. In March 2010, we reported that FEMA assisted local communities with developing long-term disaster recovery plans as part of its post-disaster assistance. For example, one way FEMA assisted Iowa City’s recovery from major floods in 2008 by, among other things, identifying possible federal funding sources for specific projects in the city’s recovery plan and advising the city on how to prepare effective project proposals. Local officials credited this assistance with helping the city to be able to secure federal funding. What remains to be done: We have identified areas where FEMA’s recovery assistance to local communities should be improved. For example, state and local officials in Texas recovering from Hurricane Ike in 2008 said that FEMA’s process of ranking projects in the City of Galveston’s recovery plan had the effect of fostering unrealistic expectations among the public about what projects would be funded. We recommended that FEMA more clearly communicate the objectives and processes it uses when assessing the value of specific recovery projects to help prevent unrealistic expectations about the implementation of such projects among members of the affected community. DHS agreed and stated that it would further examine the tools it used to communicate with impacted communities as part of the implementation of the National Disaster Recovery Framework. With regard to Framework, in July 2011, FEMA reported that the revised draft of the Framework was in the final stages of interagency review and interagency teams had been working to develop draft annexes for the six core functional areas of the Framework. Since FEMA has not yet finalized this framework, it is too early to assess its results. FEMA improved the provision and oversight of emergency assistance and services, but work remains in its management and operation of emergency response and recovery assistance programs. Key progress: FEMA has provided and coordinated the provision of assistance to state and local governments, non-profit organizations, and individuals after disasters—-including helping communities develop long- term recovery plans. In June 2011, the DHS IG reported that it had identified 128 programs that provide disaster assistance and that DHS administers 69, or approximately 54 percent, of these programs. For example, FEMA operates the Public Assistance program, which provides grants to state, local, and tribal governments and certain non-profit organizations.
Area
Summary of key progress and work remaining FEMA also took steps to improve its disaster assistance program oversight. In December 2008, we identified challenges in the Public Assistance program related to project development, information sharing and tracking the status of projects, project approvals and appeals, and human capital. For example, disagreements between applicants and FEMA, as well as changes to project scope decisions, contributed to slowing down project development. We reported that DHS had addressed these challenges, including finalizing a public assistance catastrophic disaster recovery concept plan that recognized the need to more easily tailor projects to meet post-disaster conditions; developing new management information systems to better track and manage projects and increase the transparency of public assistance funding; and creating a credentialing program for employees. Further, in July 2011, FEMA reported that it had established two Public Assistance review panels within the Public Assistance appeals process for the purpose of expediting final eligibility decisions for disputed projects. With respect to employee credentialing, FEMA reported in July 2011 that its newly created FEMA Qualification System is intended to build upon previous efforts to credential FEMA’s disaster response personnel. According to FEMA, the system is expected to improve workforce qualification and certification of FEMA personnel deployed for incident management and support operations. We are conducting ongoing work related to FEMA’s disaster assistance workforce and plan to report on our results in 2012. What remains to be done: In March 2010, we identified two broad challenges related to FEMA’s long-term disaster recovery assistance efforts. First, the criteria for when FEMA was to provide long-term recovery assistance in a specific disaster were vague, which resulted in uncertainty among other federal agencies and state recovery officials. Second, in some cases, FEMA assistance began before state and local governments had the capacity to effectively work with FEMA and ended before critical long-term recovery coordination and planning needs were fully addressed. We recommended, among other things, that DHS develop clear and consistent criteria that identify factors that determine whether and how the entity responsible for coordinating long-term recovery will become involved in a specific disaster. We also recommended that DHS establish a long- term recovery structure that more effectively aligns the timing and level of involvement of the entity responsible for coordinating long-term community recovery assistance with both the capacity of state and local governments to work with them and the need for coordination assistance. DHS concurred and reported in July 2011 that it had developed an assessment tool to assist a coordinating officer or state when attempting to determine if activating the long term recovery mission is appropriate. These are positive steps that should help strengthen FEMA’s efforts to address timing issues with its disaster recovery, but they are still in the early stages of implementation.
Area
DHS and FEMA made strategic progress in enhancing emergency and interoperable communications. However, specific alert systems, such as the Integrated Public Alert and Warning System, have technical challenges, such as message delivery limitations.
Summary of key progress and work remaining Additionally, FEMA reported in July 2011 that it sought to increase its disaster reservist cadre with professionals in areas of community planning, city management, and economic recovery to also provide an enhanced technical resource to local governments early in recovery efforts to assist in launching recovery planning. These are positive steps that should assist FEMA in its recovery efforts. However, because of the long-term nature of disaster recovery, it will take time to determine the impact of these efforts in enhancing recovery from such recent disasters as the tornados that devastated areas of Alabama and Missouri. DHS and FEMA released key emergency communications strategic documents and made grants available for interoperability, but have made limited progress to enhance emergency alert systems. Key progress: Continuity of communications, capacity, and interoperability are primary areas of vulnerability in emergency communications. Emergency communications breakdowns undermined response efforts during terrorist attacks in 2001 and Hurricane Katrina in 2005. In response, federal agencies, including DHS, increased efforts to enhance emergency communications. In June 2009, we reported that DHS and other federal agencies took steps to enhance emergency communications by issuing key documents such as the National Emergency Communications Plan— the first strategic document for improving emergency communications nationwide. Further, DHS and other federal agencies made numerous grants for interoperable communications available and increasingly aligned them with national and state plans. In addition, we reported that federal agencies, including DHS, took strategic steps to assist first responders. In March 2010, we reported that the Emergency Communications Preparedness Center had been established. At that time, the members were developing a working definition of the scope of emergency communications to define the scope of their mission and the types of information that should be included in an emergency communications clearinghouse. As of July 2011, DHS reported that the membership of the Preparedness Center expanded to 14 federal agencies, and the members had developed strategic objectives and an action plan to implement these objectives. FEMA also reported that it established and implemented working groups and a Disaster Emergency Communications Division to support emergency and interoperable communications.
Area
Summary of key progress and work remaining Further, in September 2009, we reported on the Emergency Alert System, the primary national-level public warning system, and FEMA’s Integrated Public Alert and Warning System, which is intended to integrate new and existing alert capabilities, including the Emergency Alert System, into a “system of systems” to become the country’s comprehensive public alert system. We reported that FEMA faced coordination issues in developing and implementing the system. For example, many stakeholders we contacted during our work knew little about the Integrated Public Alert and Warning System and expressed the need for better coordination with FEMA. Among other things, we recommended that FEMA develop strategic goals and processes for deployment of the Integrated Public Alert and Warning System and report periodically on program progress to the Congress and to the Secretary of Homeland Security in order to improve program transparency and accountability. DHS concurred and published an Integrated Public Alert and Warning System Strategic Plan in June 2010 that identified the vision, mission, goals and objectives of the program. What remains to be done: In September 2009, we reported that FEMA faced technical challenges in implementing the Integrated Public Alert and Warning System related to systems integration, standards development, the development of geo-targeted and multilingual alerts, and alerts for individuals with disabilities. For example, FEMA’s standard intended to facilitate integration of alert systems was under development and not widely used. As a result, we reported that integration with state and local systems would likely be a significant challenge due to potential incompatibility, and FEMA did not yet have logistical plans to integrate these systems. Further, we reported that to demonstrate the integration and expansion of new alerting technologies, and to work toward the functionality described in the executive order, FEMA had implemented pilot projects, but they ended inconclusively, with few documented lessons learned. We recommended, among other things, that FEMA establish and implement a plan to verify the dependability and effectiveness of systems used to disseminate alerts. FEMA concurred and, in July 2011, reported that it had engaged with a range of agencies, organizations, and private sector entities to promote Integrated Public Alert and Warning System capabilities and opportunities for the integration of alert and warning technologies for people with access and functional needs. FEMA reported that it had partnered with organizations to demonstrate products that incorporate technologies for alerting persons with access and functional needs. Further, FEMA reported that it was developing an infrastructure of alert and warning capabilities that expands on the traditional Emergency Alert System by, for example, allowing individuals with enabled mobile devices to receive text-like messages alerting them of imminent threats in their geographic area. FEMA reported that in March 2011 it deployed the Integrated Public Alert and Warning System-Open Platform for Emergency Networks, a set of securely hosted Web services that enable the routing of alerts and warnings between various third-party systems, networks, and devices. As DHS has recently implemented this system and its pilot products have not yet been deployed, it is too early to assess the effectiveness of these efforts.
Overall assessment FEMA made progress in allocating homeland security grants using a reasonable risk assessment methodology. However, challenges remain regarding the coordination of grant programs.
Summary of key progress and work remaining FEMA used a reasonable risk assessment methodology to allocate the Urban Areas Security Initiative and State Homeland Security grants, but FEMA should coordinate the application and review process for its preparedness grants. Key progress: Within FEMA, the Grant Programs Directorate is responsible for business operations, training, policy, oversight of all FEMA grants, and the program management of preparedness grants. FEMA’s grant programs vary from enhancing capabilities that focus on counterterrorism and catastrophic events, to specific first-responder disciplines that strengthen capabilities for addressing hazards of all types. For example, the State Homeland Security Program provides funding in an effort to address the identified planning, organization, equipment, training, and exercise needs at the state and local levels to prevent, protect against, respond to, and recover from acts of terrorism and other catastrophic events. The Urban Areas Security Initiative program provides funding to address the unique planning, organization, equipment, training, and exercise needs of high-threat, high-density urban areas, and assists them in building an enhanced and sustainable capacity to prevent, protect against, respond to, and recover from acts of terrorism. In June 2008, we reported that DHS had constructed a reasonable methodology to assess risk and allocate the Urban Area Security Initiative and State Homeland Security grants, but that this methodology did not account for vulnerability differences among jurisdictions. In July 2011, DHS reported that it modified its methodology for fiscal year 2011 to address the measurement of vulnerability in its risk-based grant allocation model. Specifically, FEMA reported creating a separate vulnerability assessment that accounts for 20 percent of the overall risk assessment for states, and territories, and the top 100 metropolitan areas for use in the State Homeland Grant Program and the Urban Areas Security Initiative grant program. We have ongoing work assessing these homeland security grant programs, and plan to report on the results later this year.
Area
Summary of key progress and work remaining The IG recommended, among other things, that FEMA identify grant programs that may overlap or duplicate with other programs. FEMA concurred and reported it planned to take action to address them. For example, FEMA reported in July 2011 that it was working with DHS and other federal departments to consolidate existing preparedness grant programs and entering into a memorandum of understanding with the Departments of Health and Human Services and Transportation to clarify roles among the departments regarding their emergency preparedness- related grants. These are positive steps and should help strengthen FEMA’s grant management. However, our work and that of the DHS IG has shown that FEMA should further benefit from examining its grant programs and coordinating its application process to eliminate or reduce redundancy among grant recipients and program purposes.
Appendix XII: Emergency Preparedness and Response We are conducting this work for the House Committee on Homeland Security; the Senate Committee on Homeland Security and Governmental Affairs; and the Senate Committee on Commerce, Science, and Transportation.
GAO Contacts
For additional information about this area, contact William O. Jenkins, Jr. at (202) 512-8757 or [email protected].
Appendix XIII: Department of Homeland Security Transformation and Implementation
What This Area Includes
In 2003, we designated implementing and transforming the Department of Homeland Security (DHS) as high risk because DHS had to transform 22 agencies—several with major management challenges—into one department, and failure to effectively address DHS’s management and mission risks could have serious consequences for U.S. national and economic security. This high-risk area includes challenges in strengthening DHS’s management functions, the impact of those challenges on DHS’s mission implementation, and challenges in integrating management functions within and across the department and its components.
For the purposes of this report, we are highlighting examples of DHS transformation and implementation efforts in key areas on which we have recently reported, and not on areas on which we have not reported or have conducted limited audit work. DHS has other transformation and implementation efforts underway at the department and component levels. We have not completed work on these areas upon which to base an assessment of DHS’s progress.
Key Progress and Work Remaining
workforce goals, objectives, and performance measures for human capital management. However, DHS continues to face significant weaknesses in these areas that hinder the department’s transformation efforts and its ability to meet its missions. For example, because of acquisition and information technology management weaknesses, major programs have not met capability, benefit, cost, and schedule expectations. Further, we reported that financial management internal control weaknesses have impeded DHS from providing reliable and timely financial data to support daily operational decision making. Moreover, human capital challenges have affected departmental and component efforts to implement their missions. As DHS continues to mature as an organization, it will be critical that the department continue to work to strengthen its management functions and their implementation, since the effectiveness of these functions and their implementation directly affects its ability to fulfill its homeland security and other missions.
DHS has developed and begun to implement its strategy to address the high-risk area, but has not yet demonstrated sustainable, measurable progress in its implementation efforts. In our 2011 high- risk update, we reported that DHS has taken action to implement, transform, and strengthen its management functions. The Secretary and Deputy Secretary of Homeland Security, and other senior officials, have demonstrated commitment and top leadership support to address the department’s management challenges. In January 2011, DHS provided us with its Integrated Strategy for High Risk Management, which summarized the department’s preliminary plans for addressing the high- risk area, and DHS updated this strategy in June 2011. We provided DHS with feedback on the January 2011 strategy and have worked with the department to monitor implementation efforts. For example, we noted that the January 2011 strategy was generally responsive to actions and outcomes we identified for the department to address the high-risk area. However, we noted that, in most cases, the strategy did not identify the specific resources needed to implement planned corrective actions, making it difficult to assess the extent to which DHS has the capacity to implement these actions. Additionally, we noted that the strategy did not provide information on the underlying metrics or factors DHS used to rate its progress, making it difficult for us to assess DHS’s overall characterizations of progress. In the June 2011 update, DHS provided ratings of its progress in implementing corrective actions related to each management function. We are assessing DHS’s ratings and the June 2011 update, and plan to provide the department with our feedback later this year.
Going forward, to address the long-standing problems in its management functions and in the integration of those functions, DHS needs to implement its Integrated Strategy for High Risk Management; continue its efforts to identify and acquire resources needed to achieve key actions and outcomes; implement a program to monitor and validate its corrective actions; and show measurable, sustainable progress in implementing corrective actions and achieving key outcomes.
DHS developed processes and policies for managing its acquisitions, but faces significant challenges in ensuring proper implementation. DHS has taken steps to strengthen acquisition oversight processes, but it continues to face obstacles in managing its acquisitions and ensuring proper implementation and departmentwide coordination. We previously reported that DHS faced challenges related to acquisition oversight, cost growth, and schedule delays. In August 2007, DHS established the Acquisition Program Management Division under the Office of the Chief Procurement Officer to help strengthen acquisition management within the department. Further, in June 2010, we reported that DHS continued to develop its acquisition oversight function and had begun to implement a revised acquisition management directive that includes more detailed guidance for programs to use when informing component and departmental decision making. We also reported that the senior-level Acquisition Review Board had met more frequently and provided programs decision memorandums with action items to improve performance. However, while the Acquisition Review Board reviewed 24 major acquisition programs in fiscal years 2008 and 2009, more than 40 major acquisition programs had not been reviewed, and programs had not consistently implemented action items identified as part of the review by established deadlines. In July 2011, DHS reported that the Acquisition Program Management Division in 2009 started conducting annual portfolio program reviews with components with the goal of ensuring that major programs receive at least one review on an annual basis, and that DHS had conducted reviews of additional programs through the Acquisition Review Board in fiscal years 2010 and 2011.
Our work has also shown that departmental concerns exist about the accuracy of cost estimates for some of DHS’s major programs. In addition, over half of the programs we reviewed for our June 2010 report awarded contracts to initiate acquisition activities without component or department approval of documents essential to planning acquisitions, such as mission need statements outlining the specific functional capabilities required to accomplish DHS’s mission and objectives; operational requirements; and acquisition program baselines. Additionally, in November 2010, leveraging our work, the DHS Office of Inspector General (IG) identified acquisition management as a major challenge facing the department. We have made a number of recommendations to DHS to strengthen its acquisition management functions, such as establishing a departmental joint requirements oversight board to review and approve acquisition requirements, and ensuring major investments comply with established component and departmental review policy standards. DHS generally agreed and is working to address them by, among other things, establishing an Investment Review Board to help oversee the status of all acquisition investments; expanding its Acquisition Corps to provide trained procurement and program management professionals to manage DHS’s most critical acquisition programs; developing a tool to track programs’ cost, schedule, and performance indicators; and evaluating the effectiveness of award fees and performance incentives. These are positive actions that should better position DHS to meet its acquisition needs. However, moving forward, DHS will need to continue to demonstrate sustainable progress in implementing these actions and delivering programs that meet cost, schedule, and performance expectations. interrelated management controls and capabilities. For example, DHS continued to issue annual updates to its enterprise architecture that added previously missing scope and depth, and further improvements were planned to incorporate the level of content, referred to as segment architectures, needed to effectively introduce new systems and modify existing ones. In addition, in July 2011, DHS reported that the department had begun tracking implementation of our Enterprise Architecture Management Maturity Framework and had developed plans to improve enterprise architecture maturity within each component and departmentwide. We further reported that DHS redefined its information technology acquisition and investment management policies, practices, and structures, including establishing a system life cycle management methodology, and increased its information technology acquisition workforce. In addition, in August 2011, DHS reported that it had efforts underway to establish an information technology program manager certification track intended to assist in managing information technology program management challenges.
Nevertheless, challenges remain relative to, for example, fully defining key system investment and acquisition management policies and procedures for information technology. Moreover, the extent to which DHS implemented these investment and acquisition management policies and practices on major information technology programs has been inconsistent. For example, our work showed that major information technology acquisition programs were not subjected to executive-level acquisition and investment management reviews. As a result, major programs aimed at delivering important mission capabilities had not lived up to their capability, benefit, cost, and schedule expectations. those for configuring desktop computers and wireless communication devices. Additionally, in November 2010, the DHS IG identified information technology management as a major challenge facing the department. For example, the DHS IG reported that the department faces challenges as it attempts to create a unified information technology infrastructure for effective integration and agencywide management of information technology assets and programs. We made recommendations to strengthen DHS information technology management, such as establishing procedures for implementing project- specific investment management policies, and policies and procedures for portfolio-based investment management. DHS is working to strengthen these areas by, for example, developing a process for information technology acquisition management to help ensure that each investment begins with a successful plan and road map for its life cycle and by establishing executive steering committees to monitor the cost and schedule performance of all high-risk information technology investments. While these are positive steps that should better position the department in managing its information technology investments moving forward, DHS will need to continue to make measurable progress in implementing these actions and successfully developing and deploying information technology programs. consolidate its disparate systems. In addition, DHS has not been able to obtain an unqualified audit opinion on its consolidated financial statements (i.e., prepare a set of financial statements that are considered reliable). For fiscal year 2010, the independent auditor issued a disclaimer on DHS’s consolidated financial statements and identified deficiencies in DHS’s internal control over financial reporting. Until these weaknesses are resolved, DHS will not be in position to provide reliable, timely, and useful financial data to support day-to-day decision making. In addition, as a result of these weaknesses, in November 2010 the DHS IG assessed financial management as one of the major management challenges facing the department. DHS has taken steps to prepare and implement corrective action plans for its internal control weaknesses through its Internal Control Playbook, DHS’s annual plan to design and implement departmentwide internal controls. Further, in fiscal year 2010 DHS committed to the goal of receiving a qualified audit opinion on its consolidated balance sheet in fiscal year 2011, and the department is working toward that goal by, for example, focusing on strengthening budgetary resource processes and payment management, and remediating financial management issues at the U.S. Coast Guard. These are positive first steps toward achieving a successful full scope audit of the department’s consolidated financial statements and, if implemented effectively, should help DHS strengthen its financial management functions. objectives, and performance measures for human capital management. These strategies are promising, but DHS has faced challenges in implementing its human capital functions, including hiring people with the needed skills and abilities in areas such as acquisition management, for example. Further, our prior work suggests that successful organizations empower and involve their employees to gain insights about operations from a frontline perspective, increase their understanding and acceptance of organizational goals and objectives, and improve motivation and morale. However, DHS’s scores on the Partnership for Public Service’s 2010 rankings of the Best Places to Work in the Federal Government improved from prior years, but in 2010, it was ranked 28 out of 32 agencies in the Best Places to Work ranking on overall scores for employee satisfaction and commitment. steering committee to provide oversight of the department’s language requirements. DHS reported that it is also working to address its human capital management challenges by, among other things, developing component operational plans for the Workforce Strategy, tracking those plans against a common set of performance measures, and implementing comprehensive workforce planning to link the department’s strategic goals, mission critical occupations, and workforce capacity and capabilities. These are positive actions that should better position DHS in assessing and meeting its human capital needs, but more work remains. on DHS’s updated plan for management integration and will monitor implementation efforts.
GAO Contacts
For additional information about this area, contact David Maurer at (202) 512-9627 or [email protected] for transformation, human capital management, and management integration; John Hutton at (202) 512- 4841 or [email protected] for acquisition management; David A. Powner at (202) 512-9286 or [email protected] for information technology management; or Paula Rascona at (202) 512-9816 or [email protected] for financial management.
Appendix XIV: Performance Measurement
What This Area Includes
Performance measurement underpins federal efforts to assess and report on progress in strengthening programs and operations. We reported on the importance of the development of outcome-based performance goals and measures as part of results management efforts across government. Performance goals and measures are intended to provide Congress and agency management with information to systematically assess a program’s strengths, weaknesses, and performance. A performance goal is the target level of performance expressed as a tangible, measurable objective against which actual achievement will be compared. A performance measure can be defined as an indicator, statistic, or metric used to gauge program performance. Outcome-oriented measures show results or outcomes related to an initiative or program in terms of its effectiveness, efficiency, or impact.
For the purposes of this report, we are generally highlighting examples of Department of Homeland Security (DHS) performance measurement efforts in key areas on which we have recently reported, and not on areas on which we have not reported or have conducted limited audit work. DHS has other performance measurement efforts underway at the department and component levels. We have not completed work on these areas upon which to base an assessment of DHS’s progress.
Key Progress and Work Remaining
department’s performance goals and measures to help strengthen DHS’s efforts in this area. Our feedback was based on our work on and subject matter knowledge of the programs, activities, and areas being measured, as well as our work on effective practices for performance measurement. This feedback ranged from pointing out components’ limited use of outcome-oriented performance measures to assess the results or effectiveness of programs, to raising questions about the steps DHS or its components took to ensure the reliability and verification of performance data. DHS also implemented internal efforts to strengthen its performance measures. For example, as part of our ongoing review of the QHSR, we found that DHS worked to align its performance measures to the QHSR missions and goals. The department also provided components with guidance that outlines how to assess QHSR missions and related training, and formed working groups to discuss implementing specific performance measure concepts. Further, DHS reported that after the QHSR was issued, DHS senior leaders held meetings to discuss how to revise existing performance measures, and components worked to develop improved performance measures.
In response to its internal efforts and our feedback, DHS developed and revised its performance goals and measures for some areas to strengthen its ability to assess its outcomes and progress. For fiscal year 2011, DHS identified 85 strategic measures for assessing its progress in achieving its QHSR missions and goals. In addition to these strategic measures, the department has 132 management measures, which DHS uses for assessing programmatic performance and for resource allocation and other internal decision making purposes, such as program evaluation. In addition, in July 2011, DHS reported that the department has identified 24 areas for focused efforts to develop enhanced measures, based on guidance from DHS leadership and the Office of Management and Budget. These areas address gaps in both strategic and management measures for specific mission areas. DHS also plans to continue its annual process for reviewing and working to strengthen its performance measures. of programs lack outcome goals and measures, which may hinder the department’s ability to effectively assess results or fully assess whether the department is using resources effectively and efficiently. We have recognized that DHS faces some inherent difficulties in developing performance goals and measures to address its unique mission and programs, such as in developing measures for the effectiveness of its efforts to prevent and deter terrorist attacks. In such instances, proxy measures—or indirect indicators—should be designed to assess the effectiveness of program functions. Outcome measures are helpful to departmental decision makers and managers, as they describe the products and services delivered by a program over a period of time. However, we have reported that many of DHS’s components have not developed adequate proxy or outcome-based performance measures or mechanisms to monitor, assess, and evaluate the effectiveness of their plans and performance. Such measures, along with output and process measures, would help DHS track progress being made toward specific goals and provide managers with important information upon which to base their decisions. improve the measurement and reporting of checkpoint effectiveness. CBP agreed and reported plans to develop and better use data on checkpoint effectiveness.
Further, we reported that U.S. Immigration and Customs Enforcement (ICE) and CBP did not have measures for assessing the performance of key immigration enforcement programs. For example, in April 2011 we reported that ICE did not have measures for its overstay enforcement efforts, and in July 2010 that CBP did not have measures for its alien smuggling investigative efforts, making it difficult for these agencies to determine progress made in these areas and evaluate possible improvements. We recommended that ICE and CBP develop performance measures for these two areas. They generally agreed and reported actions underway to develop these measures. In addition, in July 2011, DHS stated that CBP was leading a multiyear effort to develop measures for border security to position the department to be able to assess the impact of security measures, such as tactical infrastructure, on border security. DHS also reported that it has measures for assessing its border security and immigration enforcement efforts, such as measures related to detaining and removing criminal aliens while maintaining compliance with detention standards. However, our work has shown that within key border security and immigration enforcement programs, DHS and its components can strengthen its measures for assessing program results. units and was unable to control the distribution of the Ready Campaign messages or measure whether the messages were changing the behavior of individuals. We noted that by examining the feasibility of approaches to verify data on its community preparedness programs, FEMA would be better positioned to begin to explore why programs that no longer exist were disbanded and develop possible strategies for reconstituting local programs or developing new ones. Among other things, we recommended that FEMA examine the feasibility of developing various approaches for ensuring the accuracy of program data.
In July 2011, FEMA reported taking additional action to strengthen its performance measures by, for example, implementing a priority goal focusing on ensuring resilience to disasters by strengthening disaster preparedness and response capabilities, and beginning in fiscal year 2010, requiring its offices to develop and report on activity-level (or operational level) performance measures to align to each of FEMA’s budget activity lines. These steps should help FEMA strengthen its performance measurement efforts. However, FEMA should continue to work toward implementing a comprehensive set of measures for assessing national preparedness capabilities.
GAO Contact
For additional information about this area, contact David Maurer at (202) 512-9627 or [email protected].
Appendix XV: Risk Management
What This Area Includes
Risk management has been widely supported by the President and Congress as a management approach for homeland security. According to the Department of Homeland Security (DHS), risk information is usually one of many factors—and typically not the sole factor—that departmental decision makers consider when deciding which strategy to pursue. We have previously reported that defining an acceptable, achievable (within constrained budgets) level of risk is imperative to address current and future threats, and on the need to make risk-informed decisions related to homeland security. Many have pointed out, as did the Gilmore and 9/11 Commissions, that the nation will never be completely safe and total security is an unachievable goal. Within its sphere of responsibility, DHS cannot afford to protect everything against all possible threats. As a result, DHS must make choices about how to allocate its scarce resources to most effectively manage risk, and a risk management approach can help inform these decisions.
To provide guidance to agency decision makers, we developed a risk management framework which is intended to be a starting point for applying risk-informed principles. Our risk management framework, shown in figure 2, entails a continuous process of managing risk through a series of actions, including setting strategic goals and objectives, assessing risk, evaluating alternatives, selecting initiatives to undertake, and implementing and monitoring those initiatives.
Key Progress and Work Remaining
within and across the various aviation and surface transportation modes, such as freight rail, passenger rail, and pipelines.
In addition, our work shows that DHS and its components conducted risk assessments across a number of areas, but should strengthen these assessments. For example, with regard to surface transportation securit in February 2009 we reported that DHS had conducted threat assessments of the commercial vehicle sector and was in the early stages of conducting vulnerability assessments for this sector. However, we reported that TSA’s commercial vehicle threat assessments generally did not identify the likelihood of specific threats, as directed by the National Infrastructure Protection Plan, and that TSA had not yet determined the scope, method, and time frame for completing vulnerability assessments. We also noted that TSA had not yet conducte consequence assessments, and a approach for securing the commercial vehicle sector addressed the highest priority security needs. Moreover, in January 2009 we reported that federal entities, including DHS, had efforts underway to assess threat, vulnerability, and consequence for highway infrastructure, but these efforts were not systematically coordinated among key federal partners and the results were not routinely shared. In August 2010, we s a result, could not be sure that its further reported that TSA developed a pipeline risk assessment model that combined threat, vulnerability, and consequence to create a risk score for each system. However, we reported that DHS should improve the model’s consequence component to take account of additional impacts from a possible pipeline attack, such as public health and safety, as called for in the National Infrastructure Protection Plan. of 2007, such as those for the trucking and school bus industries; and developed assessments for highway infrastructure, bus, commercial truck, and port interfaces that were incorporated into the Transportation Sector Security Risk Assessment. Moreover, in July 2011 TSA repo rted that it added data columns for consequence and vulnerability components in its pipeline risk ranking tool to address pipelines in highly populated and high consequence areas. These are important actions that should strengthen TSA’s risk assessment efforts across the transportation modes. We have not yet assessed these efforts, and thus cannot an assessment of TSA’s efforts.
In addition, with regard to maritime security, the Coast Gua risk assessment model, the Maritime Security Risk Analysis Model, to assess risk across ports. In April 2010, we reported that the Coast Guard had assessed the risks to cruise ships and facilities using this model. However, our work has shown that the Coast Guard has used the model to assess offshore energy facilities, but faces challenges in doing assessments because of difficulties in determining the types of attack scenarios that could cause significant consequences, and in calcula secondary economic effects. In July 2011, the Coast Guard reported that it is working to improve the accuracy, utility, and standardization of its model, as the modeling, simulation, and analysis of terror attack scenarios improves. We are currently conducting work examining the Maritime Security Risk Analysis Model as well as the extent to which DHS is allocating port security resources based on risk.We plan to report the results from this work later this year. the department’s risk management capability, to strengthen DHS’s mission performance, improve departmental management, and increase accountability. In our ongoing review of DHS’s QHSR, we found that DHS considered various factors in identifying high priority BUR initiatives for implementation in fiscal year 2012, but did not include risk information as one of these factors. Consideration of risk information could help strengthen DHS’s prioritization of mechanisms for implementing the QHSR, including determining which BUR initiatives could be implemented in the short or longer term, and the resources required for implementation. We plan to report on the final results of this work later this year.
Also, with regard to transportation security, DHS has not fully utilized risk information in its strategic planning and prioritization efforts. For example, in March 2009 we reported that TSA had developed an approach to prioritization of its security activities based primarily on intelligence instead of comprehensive risk assessments. We reported that DHS had not reviewed or validated the methodology for this approach; thus, TSA lacked assurance that its approach provided the information needed to guide investment decisions to ensure resources were allocated to the highest risks. Further, with regard to planning efforts, in October 2009, we reported that TSA’s strategic plan to guide research, development, and deployment of passenger checkpoint screening technologies was not risk- based. We noted that lacking such information, DHS could not provide reasonable assurance that its strategy was effectively addressing security gaps, prioritizing investments based on risk, and targeting resources toward security measures that would have the greatest impact. Among other things, we recommended that DHS conduct a complete risk assessment related to TSA’s passenger screening program and incorporate the results into the program’s strategy. DHS generally concurred and reported actions underway to address them. For example, in July 2011, TSA reported beginning to use a risk management analysis process to analyze the effectiveness and efficiency of potential countermeasures and impact on the commercial aviation system. While these are positive steps, it is too early to assess the extent to which they will improve DHS’s use of risk information in strategic planning and investment decision making.
GAO Contact
For additional information about this area, contact Cathleen A. Berrick at (202) 512-3404 or [email protected].
Appendix XVI: Information Sharing
What This Area Includes
Since September 11, 2001, terrorist threats and attempted attacks have emphasized the importance of developing a national information sharing capability to efficiently and expeditiously gather, analyze, and disseminate terrorism-related information, such as law enforcement, homeland security, and public safety information. The Department of Homeland Security (DHS) has responsibility for sharing terrorism-related information as appropriate with its state and local partners. In 2005, we designated information sharing for homeland security as high risk because the government faced serious challenges in analyzing information and sharing it among federal, state, local, and other security partners in a timely, accurate, and useful way to protect against terrorist threats. We have further reported that DHS must effectively share terrorism-related information with state and local law enforcement because they depend on it to maintain awareness of emerging threats and to allocate homeland security resources, among other things. Further, gaps in sharing, such as agencies' failure to link information about the individual who attempted the December 25, 2009, airline bombing, prevented him from being included on the federal government’s terrorist watchlist, a tool used by DHS to screen for persons who pose a security risk.
For the purposes of this report, we are generally highlighting examples of key DHS areas related to information sharing on which we have recently reported and not on areas on which we have not reported or conducted limited audit work. Our work has focused primarily on the sharing of terrorism-related information to identify threats and help prevent terrorist incidents. DHS has other ongoing efforts related to information sharing on which we are not reporting, such as information sharing with the government of Canada for emergency management purposes. We have not completed work on these areas upon which to make an assessment of DHS’s progress.
Key Progress and Work Remaining
functioning environment, and the Program Manager and agencies have not yet identified the incremental costs necessary to implement it or addressed our 2008 recommendation to develop procedures for determining what work remains. DHS is one of the five federal agencies with responsibility for implementing the Environment, and has the lead for sharing information with state, local, tribal, territorial, and private sector partners. Related to this responsibility, DHS has been implementing its information sharing policy and governance structure to improve how it collects, analyzes, and shares homeland security information across the department and with these state and local partners.
DHS expanded and enhanced its sharing of information, but should improve its assistance and services to state and local homeland security partners and streamline some of its information sharing mechanisms. In January 2011, DHS issued a plan for addressing the areas for which it has responsibility under the terrorism-related information sharing high-risk area. DHS identified strategies and initiatives it had planned or underway to address our high-risk criteria and outcomes we identified as important to successfully managing risks that exist due to gaps in information sharing. For example, the plan discussed steps for developing a governance structure for information sharing and beginning efforts to develop a set of metrics for measuring information sharing performance and results. We provided DHS with feedback on this plan. Among other things, we noted the department needs to move toward a system where it accounts for information sharing initiatives against a baseline set of defined capabilities—such as information sharing mechanisms, personnel, and technology—that are needed, to help decision makers weigh progress achieved and remaining to inform investments. Subsequent to our feedback, in July 2011, DHS reported that it had established performance measures for assessing its information sharing efforts. These measures include, for example, the percent of intelligence reports customers rated as “satisfactory” in enabling customers to anticipate emergency threats. DHS plans to report on these metrics beginning in fiscal year 2012. While these are positive steps, our work has shown that developing outcome-based performance measures that gauge information sharing efforts and results would strengthen accountability for these efforts.
Specific to its mission to share information with state and local partners, in December 2010 we reported that DHS’s Office of Intelligence and Analysis had initiatives underway to identify these partners’ information needs and obtain feedback on intelligence products. The office determined information needs—which are owned and controlled by the states—for 9 of the 50 states and was working with the remaining states to identify their needs. However, we reported that the Office of Intelligence and Analysis had not established mutually agreed upon milestones for completing this effort. We also reported that in addition to intelligence products, the office provided a number of other services to its state and local partners—primarily through these partners’ fusion centers where homeland security, terrorism, and intelligence information is shared—that had generally been well received by the center officials we contacted. For example, the Office of Intelligence and Analysis deployed more than 60 intelligence officers to fusion centers nationwide to assist state and local partners in areas such as obtaining relevant intelligence products and leveraging DHS capabilities to support their homeland security missions. However, the office had not yet defined how it planned to meet its state and local information-sharing mission by identifying and documenting the specific programs and activities that are most important for executing this mission. Moreover, its performance measures did not allow the office to demonstrate the expected outcomes and effectiveness of programs and activities that support state and local partners. gaps, and collection requirements. According to DHS, this guidebook will help fusion centers identify and document a more accurate and actionable set of information needs and gaps. These actions should help DHS better assess the performance of its information sharing activities. However, it is too early to assess possible results, since they have only recently been, or are in the process of being, implemented.
Moreover, in September 2010 we reported that since 2001, all 50 states and some major urban areas established fusion centers—totaling 72 centers as of July 2011, according to DHS. These centers have cited DHS grant funding as critical to achieving baseline capabilities—the standards the government and fusion centers have defined as necessary for centers to be considered capable of performing basic functions. To provide data about the baseline capabilities of fusion centers nationwide, DHS and other agencies are conducting an ongoing systematic assessment of fusion centers’ capabilities. According to DHS senior officials and fusion center representatives, the results of the assessment are intended to provide centers with the information needed to develop more accurate and specific investment justifications. However, DHS had not set standard performance measures for the centers. We recommended that DHS define the steps it will take to design and implement such a set of measures and commit to a target timeframe for completing them. DHS concurred and stated that it has started to develop a framework to demonstrate the value and impact of the national network of fusion centers, and is using nationwide assessment data to support the development of specific performance measures. These efforts should help DHS strengthen its assessment of fusion centers’ performance, but it is too soon to assess results as DHS is in the process of implementing these efforts. As we have reported, if centers are to receive continued federal financial support, it is important that they are also able to demonstrate their impact and value added to the nation’s information sharing goals. sector, there are sites for different transportation modes, such as public transit. We found in September 2010 that 75 percent of the public transit agencies we surveyed reported being generally satisfied with the security- related information they received.
However, we have identified several challenges to DHS’s information sharing efforts for surface transportation security. For example, some public transit agencies cited the need to streamline the information they received, and we identified the potential for overlap between the Public Transportation Information Sharing and Analysis Center, the Public Transit Portal of DHS’s Homeland Security Information Network, and the Transportation Security Information Sharing and Analysis Center, which all communicate similar unclassified and security-related information to public transit agencies. Also, preliminary observations from interviews and open-ended responses to a survey as part of our ongoing work indicate that some freight rail stakeholders would prefer to receive more analysis or actionable information from TSA, such as trend analysis of incidents or suggestions for improving security arrangements, that could help predict how certain events may affect rail systems. In addition, DHS and TSA have not developed performance goals and outcome-oriented measures to gauge the effectiveness of their information-sharing networks. intelligence and security information that had been disseminated by multiple sources. Further, in July 2011 TSA reported that it and key industry groups were engaged in an ongoing process to develop, improve, and refine its information sharing mechanisms. In addition, TSA reported that it continues to work with its stakeholders to determine how available intelligence and other security incident data can be leveraged to provide stakeholders with meaningful information to help guide actions in the field. We are continuing to assess TSA’s efforts related to sharing security information with stakeholders in the aviation, rail, and highway modes and will report the final results later this year.
GAO Contact
For additional information about this area, contact Eileen Larence at (202) 512-6510 or [email protected].
Appendix XVII: Partnerships and Coordination
What This Area Includes
The Department of Homeland Security (DHS) provides federal leadership for homeland security, but also plays a large role in coordinating the homeland security activities of other federal, state, local, private sector, and international stakeholders. We reported that successful partnering and coordination involves collaborating and consulting with stakeholders to develop and agree on goals, strategies, and roles to achieve a common purpose; identify resource needs; establish a means to operate across agency boundaries, such as compatible procedures, measures, data, and systems; and agree upon and document mechanisms to monitor, evaluate, and report to the public on the results of joint efforts. If these entities do not effectively coordinate their implementation activities, they may waste resources by creating ineffective and incompatible pieces of a larger security program. For example, because the private sector owns or operates a majority of the nation’s critical infrastructure, DHS must partner with individual companies and sector organizations to protect vital national infrastructure, such as the nation’s water supply, transportation systems, and chemical facilities.
For the purposes of this report, we are generally highlighting examples of key DHS areas related to partnerships and coordination on which we have recently reported. We are generally not addressing areas on which we have not reported or have conducted limited audit work. For example, DHS has ongoing efforts related to coordinating with homeland security partners within and across its various mission areas and programs, such as for combating nuclear terrorism and conducting biological research to support the nation’s biodefense preparedness. We have not completed work on these areas upon which to make an assessment of DHS’s progress.
Key Progress and Work Remaining
coordination of standards and practices, use of enhanced technology, and assessments of foreign airports. We also reported that DHS and TSA coordinated with foreign governments to harmonize air cargo security practices to address the statutory mandate to screen 100 percent of air cargo transported on U.S.-bound passenger aircraft. In July 2011, TSA reported that it had requested air carrier feedback on their ability to accomplish 100 percent of screening on international inbound air cargo by December 2011, and is evaluating industry comments to finalize its strategy and establish a feasible timeline for implementing the screening requirement.
With regard to critical infrastructure protection, in September 2010 we reported that DHS’s National Protection and Programs Directorate (NPPD) operates the Protective Security Advisor Program, which deploys critical infrastructure protection and security specialists, called Protective Security Advisors, to local communities throughout the country. These advisors lead NPPD’s efforts in these locations and act as a link between state, local, tribal, and territorial organizations and DHS infrastructure mission partners. DHS also reported that these advisors work to maintain relationships with the private sector and local communities to help foster effective information sharing and disseminate information to the private sector during times of increased threat.
July 2011 that it was taking additional action by, for example, establishing cybersecurity working groups, interagency coordination groups, and a performance measure for fiscal year 2012 to seek public and private sector feedback on the extent to which DHS cybersecurity products are actionable and timely. However, as DHS is in the processing of implementing these efforts, it is too early to assess their effectiveness.
With regard to border security, in December 2010 we reported that federal, state, local, tribal, and Canadian law enforcement partners reported improved DHS coordination to secure the northern border. For example, interagency forums helped establish a common understanding of border security threats, while joint operations helped to achieve an integrated and effective law enforcement response. However, challenges remained in sharing information and resources useful for operations along the northern border. For example, partners in all four sectors we visited cited ongoing challenges in sharing information and resources for daily border security-related to operations and investigations, and we reported that oversight by management at the component and local level had not ensured consistent compliance with provisions of interagency agreements, such as those related to information sharing. In November 2010, we reported that information sharing and communication among the Departments of Agriculture, Homeland Security, and Interior for securing federal and tribal lands along the border had increased, but that critical gaps remained. For example, these agencies had established forums and liaisons to exchange information; however, in one sector they did not coordinate to ensure that federal land law enforcement officials maintained access to threat information and compatible secure radio communications for daily operations. Coordination in these areas could better ensure officer safety and an efficient law enforcement response to illegal activity. and border management programs or its approaches relative to addressing outcomes shared by those programs. As a result, we concluded that the department risked suboptimizing how its programs collectively supported its immigration and border management goals and objectives. We have made recommendations to DHS to strengthen its border security coordination efforts. For example, we recommended that DHS provide oversight to ensure efficient use of border security interagency forums and compliance with interagency agreements; take necessary action to ensure that personnel conduct early and continued consultations to coordinate on, among other things, threat information for federal lands that is timely and actionable; and fully define relationships between the US-VISIT program and other programs.
DHS concurred and reported, for example, that it plans to review the inventory of interagency forums through its strategic and operational planning efforts to assess efficiency and identify challenges. Further, in July 2011, the US-VISIT program office reported taking action to coordinate with other immigration and border security programs. For example, it reported that it had established a governance board to enhance border security solutions to meet congressional mandates, and supported the expansion of immigration enforcement related programs, such as Secure Communities through which U.S. Immigration and Customs Enforcement works with state and local law enforcement agencies to identify and remove immigration violators. While these are positive steps, DHS needs to demonstrate that these efforts have helped the department to fully define relationships between the US-VISIT program and other programs. and continuity beyond the tenure of any given official or individual office, and recommended that the departments develop these practices. DHS concurred with our recommendation.
GAO Contact
For additional information about this area, contact Cathleen A. Berrick at (202) 512-3404 or [email protected].
Appendix XVIII: Developing and Deploying New Technologies for Homeland Security
What This Area Includes
Since beginning operations in 2003, the Department of Homeland Security (DHS) has spent billions of dollars on research and development of technologies and other countermeasures to address threats and conduct its missions. DHS programs represent hundreds of billions of dollars in life-cycle costs and support a wide range of missions and investments, including border surveillance and screening equipment, nuclear detection equipment, information systems that help detect and interdict the planning of terrorist acts, and technologies used to screen airline passengers and baggage for explosives. Within DHS, the Science and Technology Directorate (S&T) has the authority to coordinate overall research and development efforts to improve homeland security. Among other things, S&T works with DHS components to provide assistance in researching and developing technologies to meet their specific missions, while the components themselves are responsible for developing, testing, and acquiring these technologies. For instance, the Transportation Security Administration (TSA) works with S&T to research, develop, and deploy technologies to, for example, screen airline passengers and their baggage. DHS’s Domestic Nuclear Detection Office (DNDO) is responsible for developing, acquiring, and supporting the deployment of programs and systems to detect and report on attempts to develop, transport, or use unauthorized nuclear explosive, fissile, or radiological materials or explosives in the United States.
For the purposes of this report, we are generally highlighting examples of DHS efforts related to developing and deploying new technologies on which we have recently reported, and are generally not addressing areas on which we have not reported or have conducted limited audit work. While this section addresses examples on which we have reported, which focus on DHS’s efforts related to technologies for border, transportation, and maritime security, DHS has other efforts related to developing and deploying new technologies, such as technologies for intelligence. DHS also reported that it has taken steps intended to formalize requirements definition and technology development. We have not completed work on these areas upon which to make an assessment of DHS’s progress.
Key Progress and Work Remaining
DHS took action to develop and deploy new technologies to help meet its homeland security missions. However, in some instances DHS pursued acquisitions without ensuring that the technologies met defined requirements and faced challenges in conducting and documenting testing and evaluation and performing cost-benefit analyses. DHS developed and deployed various technologies within its functional areas, including maritime and transportation security. For example, in September 2010, we reported that DHS made progress in researching and developing container security technologies. Specifically, we reported that since fiscal year 2004 DHS conducted research and development for four container security technology projects to monitor cargo tampering and, according to DHS, provide a global communication system to securely transmit information to DHS components responsible for port security. Moreover, in June 2010 we reported that DHS made significant progress in deploying radiation detection equipment to scan cargo and conveyances entering the United States through fixed land and sea ports of entry for nuclear and radiological materials. Specifically, we reported that DHS deployed more than 1,400 radiation portal monitors to ports of entry. Further, TSA continues to deploy technologies to screen checked baggage. As of July 2011, TSA reported that it had about 2,300 explosives detection systems in its fleet, about 1,900 of which were deployed at airports in the United States. At airports and terminals that do not use these systems, explosives trace detection machines are used for primary checked-baggage screening, typically at smaller airports. As of July 2011, TSA estimated that there were about 5,000 explosives trace detection machines used for the primary or secondary screening of checked baggage at U.S. commercial airports. In addition, in June 2010 we reported that DHS, the United States Postal Service, and the Department of Defense developed and implemented technologies to sample the air and test for specific biological agents. In particular, DHS’s BioWatch program had been implemented in more than 30 metropolitan areas and tests for the presence of multiple biological agents.
However, our work has shown that DHS made acquisition decisions without ensuring that the systems met program and performance requirements.
In September 2010, we reported that DNDO was simultaneously engaged in the research and development phase while planning for the acquisition phase of its cargo advanced automated radiography system to detect certain nuclear materials in vehicles and containers at ports. DNDO pursued the acquisition and deployment of the cargo advanced automated radiography system without fully understanding that it would not fit within existing inspection lanes at ports of entry. This occurred because, during the first year or more of the program, DNDO and U.S. Customs and Border Protection (CBP) had few discussions about operating requirements for primary inspection lanes at ports of entry. DHS announced the termination of the program in 2010. In July 2011, we reported that TSA revised its explosives detection system requirements to better address current threats in screening checked baggage, and plans to implement these requirements in a phased approach. However, we reported that some number of systems in TSA’s fleet was configured to detect explosives at the levels established in the 2005 requirements and that the remaining systems were configured to detect explosives at 1998 levels. When TSA established the 2005 requirements, it did not have a plan with time frames to deploy the explosives detection systems to meet the new requirements. We recommended that TSA develop a plan to deploy and operate explosives detection systems to meet the most recent requirements. TSA concurred and, in July 2011, reported that it intends to finalize a plan by the fourth quarter of fiscal year 2012. proceed to the next acquisition phase. However, the office did not consistently document its review and approval of components’ test agents—a government entity or independent contractor carrying out independent operational testing for a major acquisition. In addition, the office did not document its review of other component acquisition documents, such as those establishing programs’ operational requirements. In March 2011, we reported that the independent testing and evaluation of the Secure Border Initiative Network’s virtual fence Block 1 capability to determine its operational effectiveness and suitability was not complete at the time DHS reached its decision regarding the future of the Secure Border Initiative Network, or requested fiscal year 2012 funding to deploy the new Alternative (Southwest) Border Technology.We reported that because the new Alternative (Southwest) Border Technology incorporates a mix of technology that includes an Integrated Fixed Tower surveillance system similar to that currently used in the Secure Border Initiative Network, such testing and evaluation could have informed DHS’s decision about moving forward with the new technology deployment. In September 2010, we reported that S&T’s master plans for conducting operational testing of container security technologies did not reflect all of the operational scenarios that CBP was considering for implementation. For example, S&T did not include certain scenarios necessary to test how a cargo container would be transported throughout the maritime supply chain. Until the container security technologies are tested and evaluated consistent with all of the operational scenarios, S&T cannot provide reasonable assurance that the technologies will function as intended. process. Further, in July 2011, S&T and CBP reported starting a joint pilot program to implement a new supply chain security technology on selected rail and truck cargo routes from Mexico and Canada into the United States to evaluate land cargo security devices intended to monitor unauthorized door openings or anomalies and to provide encrypted in- transit tracking.
In addition, DHS has not consistently included cost-benefit analyses in its acquisition decision making. Our prior work shows that cost-benefit analyses help decision makers assess and prioritize resource investments and consider potentially more cost-effective alternatives. For example, in 2006, we recommended that DHS’s decision to deploy next- generation radiation-detection equipment, or advanced spectroscopic portals, used to detect smuggled nuclear or radiological materials, be based on an analysis of both the benefits and costs and a determination of whether any additional detection capability provided by the portals was worth their additional cost.DHS subsequently issued a cost-benefit analysis, but we reported that this analysis did not provide a sound analytical basis for DHS’s decision to deploy the portals. In June 2009, we also reported that an updated cost-benefit analysis might show that DNDO’s plan to replace existing equipment with advanced spectroscopic portals was not justified, particularly given the marginal improvement in detection of certain nuclear materials required of advanced spectroscopic portals and the potential to improve the current-generation portal monitors’ sensitivity to nuclear materials, most likely at a lower cost. At that time, DNDO officials stated that they planned to update the cost- benefit analysis. In July 2011, DHS announced that DNDO and CBP would end the advanced spectroscopic portal project as originally conceived given the challenges the program faced. DHS reported that it plans to deploy the existing units to field locations to gather operational data to support future planning efforts. investment life cycle and participate in new councils and boards DHS is planning to create to help ensure that test and evaluation methods are appropriately considered as part of DHS’s overall research and development investment strategies. In addition, DHS reported that the new councils and boards it is planning to establish would be responsible for, among other things, making decisions on research and development initiatives based on factors such as viability and affordability, and overseeing key acquisition decisions for major programs using baseline and actual data. According to DHS, S&T will help ensure that new technologies are properly scoped, developed, and tested before being implemented. In July 2011, S&T reported that it established a new group to work with DHS components to, among other things, help ensure that operational requirements are completely specified and validated and that comprehensive cost-benefit analyses are performed to identify the best alternative for meeting identified mission needs. However, as DHS has recently established this group, it is too soon to assess its effectiveness. DHS also reports that it is working with components to improve the quality and accuracy of cost estimates and increased its staff during fiscal year 2011 to develop independent cost estimates, a best practice, to ensure the accuracy and credibility of program costs. DHS reports that four cost estimates for level 1 programs have been validated to date. The actions DHS reported taking or underway to address the management of its acquisitions and the development of new technologies are positive steps and, if implemented effectively, could help the department address a number of these challenges.
GAO Contact
For additional information about this area, contact David Maurer at (202) 512-9627 or [email protected].
Appendix XIX: Comments from the Department of Homeland Security
Appendix XX: GAO Contact and Staff Acknowledgments
GAO Contact
Staff Acknowledgments
In addition to the person named above, Rebecca Gambler, Assistant Director; Taylor Matheson, Analyst-in-Charge; Melissa Bogar; Susan Czachor; Lorraine Ettaro; Sarah Kaczmarek; Tracey King; Dawn Locke; Jan Montgomery; Jessica Orr; and Meghan Squires made key contributions to this report. Other contributors to this report included Joel Aldape; David Alexander; Gene Aloise; Rodell Anderson; Aditi Archer; Sarah Arnett; Neil Asaba; Ben Atwater; Jonathan Bachman; Charles Bausell; Claudia Becker; Scott Behen; Carolyn Blocker; David Bruno; Carissa Bryant; Rochelle Burns; Alicia Cackley; Stephen Caldwell; Lisa Canini; Caitlin Carlberg; Tammy Conquest; Christopher Currie; Ryan Consaul; Frances Cook; Joseph Cruz; Anthony DeFrank; Davi D'Agostino; Kay Daly; Deborah Davis; Katherine Davis; Vanessa Dillard; Michael Dino; Rick Eiserman; Eric Erdman; Jeanette Espinola; Alana Finley; Edward George; Robin Ghertner; Michael Gilmore; Kathryn Godfrey; Robert Goldenkoff; Mark Goldstein; Barbara Guffy; Geoffrey Hamilton; Christopher Hatscher; Brent Helt; David Hinchman; Richard Hung; John Hutton; William O. Jenkins, Jr.; Amanda Jones; Yvonne Jones; Valerie Kasindi; Christopher Keisling; Anjalique Lawrence; Michael Lenington; Eileen Larence; Marya Link; Thomas Lombardi; Stephen Lord; Robert Lowthian; Jessica Lucas Judy; David Lysy; Gary Malavenda; Kush Malhotra; David Maurer; Linda Miller; Lara Miklozek; Anthony Moran; Steve Morris; John Mortin; Gary Mountjoy; Suzanne Murphy; Robin Nye; Jean Orland; Sabine Paul; David Powner; Paula Rascona; Janay Sam; Debra Sebastian; Richard M. Stana; Kevin Tarmann; Nathan Tranquilli; Katherine Trimble; Meg Ullengren; Sarah Veale; Gregory Wilshusen; Michelle Woods; and Edwin Woodward.
Related Reports
GAO. Aviation Security: TSA Has Taken Actions to Improve Security, but Additional Efforts Remain. GAO-11-807T. Washington, D.C.: July 13, 2011.
GAO. Aviation Security: TSA Has Enhanced Its Explosives Detection Requirements for Checked Baggage, but Additional Screening Actions Are Needed. GAO-11-740. Washington, D.C.: July 11, 2011.
GAO. Transportation Worker Identification Credential: Internal Control Weaknesses Need to Be Corrected to Help Achieve Security Objectives. GAO-11-657. Washington, D.C.: May 10, 2011.
GAO. Aviation Security: Progress Made, but Challenges Persist in Meeting the Screening Mandate for Air Cargo. GAO-11-413T. Washington, D.C.: March 9, 2011.
GAO. Aviation Security: TSA’s Revised Cost Comparison Provides a More Reasonable Basis for Comparing the Costs of Private-Sector and TSA Screeners. GAO-11-375R. Washington, D.C.: March 4, 2011.
GAO. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011.
GAO. Aviation Security: TSA Has Made Progress but Faces Challenges in Meeting the Statutory Mandate for Screening Air Cargo on Passenger Aircraft. GAO-10-446. Washington, D.C.: June 28, 2010.
GAO. Aviation Security: Efforts to Validate TSA’s Passenger Screening Behavior Detection Program Underway, but Opportunities Exist to Strengthen Validation and Address Operational Challenges. GAO-10-763. Washington, D.C.: May 20, 2010.
GAO. GAO Review of the Department of Homeland Security’s Certification of the Secure Flight Program—Cost and Schedule Estimates. GAO-10-535R. Washington, D.C.: April 5, 2010.
GAO. Aviation Security: TSA Is Increasing Procurement and Deployment of the Advanced Imaging Technology, but Challenges to This Effort and Other Areas of Aviation Security Remain. GAO-10-484T. Washington, D.C.: March 17, 2010.
GAO. Transportation Worker Identification Credential: Progress Made in Enrolling Workers and Activating Credentials but Evaluation Plan Needed to Help Inform the Implementation of Card Readers. GAO-10-43. Washington, D.C.: November 18, 2009.
GAO. Aviation Security: DHS and TSA Have Researched, Developed, and Begun Deploying Passenger Checkpoint Screening Technologies, but Continue to Face Challenges. GAO-10-128. Washington, D.C.: October 7, 2009.
GAO. Aviation Security: A National Strategy and Other Actions Would Strengthen TSA's Efforts to Secure Commercial Airport Perimeters and Access Controls. GAO-09-399. Washington, D.C.: September 30, 2009.
GAO. Transportation Security: Comprehensive Risk Assessments and Stronger Internal Controls Needed to Help Inform TSA Resource Allocation. GAO-09-492. Washington, D.C.: March 27, 2009.
GAO. Aviation Security: Federal Air Marshal Service Has Taken Actions to Fulfill Its Core Mission and Address Workforce Issues, but Additional Actions Are Needed to Improve Workforce Survey. GAO-09-273. Washington, D.C.: January 14, 2009.
GAO. Aviation Security: TSA’s Cost and Performance Study of Private- Sector Airport Screening. GAO-09-27R. Washington, D.C.: January 9, 2009.
GAO. Aviation Security: Transportation Security Administration Has Strengthened Planning to Guide Investments in Key Aviation Security Programs, but More Work Remains. GAO-08-1024T. Washington, D.C.: July 24, 2008.
GAO. Transportation Security: Efforts to Strengthen Aviation and Surface Transportation Security Continue to Progress, but More Work Remains. GAO-08-651T. Washington, D.C.: April 15, 2008.
GAO. Aviation Security: Transportation Security Administration Has Strengthened Planning to Guide Investments in Key Aviation Security Programs, but More Work Remains. GAO-08-456T. Washington, D.C.: February 28, 2008.
GAO. Aviation Security: Risk, Experience, and Customer Concerns Drive Changes to Airline Passenger Screening Procedures, but Evaluation and Documentation of Proposed Changes Could Be Improved. GAO-07-634. Washington, D.C.: April 16, 2007.
GAO. Aviation Security: Systematic Planning Needed to Optimize the Deployment of Checked Baggage Screening Systems. GAO-05-365. Washington, D.C.: March 15, 2005.
Department of Homeland Security Office of Inspector General. Transportation Security Administration’s Management of Its Screening Workforce Training Program Can Be Improved, OIG-11-05. Washington, D.C.: October 26, 2010.
Department of Homeland Security Office of Inspector General. Transportation Security Administration’s Controls over SIDA Badges, Uniforms, and Identification Cards, OIG-08-92. Washington, D.C.: September 12, 2008.
Chemical, Biological, Radiological, and Nuclear Threats
GAO. Combating Nuclear Smuggling: DHS has Developed a Strategic Plan for its Global Nuclear Detection Architecture, but Gaps Remain. GAO-11-869T. Washington, D.C.: July 26, 2011.
GAO. National Preparedness: DHS and HHS Can Further Strengthen Coordination for Chemical, Biological, Radiological, and Nuclear Risk Assessments. GAO-11-606. Washington, D.C.: June 21, 2011.
GAO. DHS Science and Technology: Additional Steps Needed to Ensure Test and Evaluation Requirements are Met. GAO-11-596. Washington, D.C.: June 15, 2011.
GAO. Combating Nuclear Smuggling: DHS Has Made Some Progress but Not Yet Completed a Strategic Plan for Its Global Nuclear Detection Efforts or Closed Identified Gaps. GAO-10-883T. Washington, D.C.: June 30, 2010.
GAO. Biosurveillance: Efforts to Develop a National Biosurveillance Capability Need a National Strategy and a Designated Leader. GAO-10-645. Washington, D.C.: June 30, 2010.
GAO. Biosurveillance: Developing a Collaboration Strategy Is Essential to Fostering Interagency Data and Resource Sharing. GAO-10-171. Washington, D.C.: December 18, 2009.
GAO. Combating Nuclear Smuggling: DHS Improved Testing of Advanced Radiation Detection Portal Monitors, but Preliminary Results Show Limits of the New Technology, GAO-09-655. Washington, D.C.: May 21, 2009.
GAO. Nuclear Detection: Domestic Nuclear Detection Office Should Improve Planning to Better Address Gaps and Vulnerabilities. GAO-09-257. Washington, D.C.: January 29, 2009.
GAO. Combating Nuclear Smuggling: Lessons Learned from DHS Testing of Advanced Radiation Detection Portal Monitors. GAO-09-804T. Washington, D.C.: June 25, 2009.
GAO, Combating Nuclear Smuggling: DHS’s Phase 3 Test Report on Advanced Portal Monitors Does Not Fully Disclose the Limitations of the Test Results, GAO-09-979. Washington, D.C.: September 30, 2008.
Critical Infrastructure Protection—Physical Assets
GAO. Rail Security: TSA Improved Risk Assessment but Could Further Improve Training and Information Sharing. GAO-11-688T. Washington, D.C.: June 14, 2011.
GAO. Critical Infrastructure Protection: DHS Efforts to Assess and Promote Resiliency Are Evolving but Program Management Could Be Strengthened. GAO-10-772. Washington, D.C.: September 23, 2010.
GAO. Homeland Security: Preliminary Observations on the Federal Protective Service’s Workforce Analysis and Planning Efforts. GAO-10-802R. Washington, D.C.: June 14, 2010.
GAO. Critical Infrastructure Protection: Update to National Infrastructure Protection Plan Includes Increased Emphasis on Risk Management and Resilience. GAO-10-296. Washington, D.C.: March 5, 2010.
GAO. Emergency Communications: Vulnerabilities Remain and Limited Collaboration and Monitoring Hamper Federal Efforts. GAO-09-604. Washington, D.C.: June 26, 2009.
GAO. Freight Rail Security: Actions Have Been Taken to Enhance Security, but the Federal Strategy Can Be Strengthened and Security Efforts Better Monitored. GAO-09-243. Washington, D.C.: April 21, 2009.
GAO. Transportation Security: Comprehensive Risk Assessments and Stronger Internal Controls Needed to Help Inform TSA Resource Allocation. GAO-09-492. Washington, D.C.: March 27, 2009.
GAO. Highway Infrastructure: Federal Efforts to Strengthen Security Should Be Better Coordinated and Targeted on the Nation’s Most Critical Highway Infrastructure. GAO-09-57. Washington, D.C.: January 30, 2009.
Department of Homeland Security Office of Inspector General, Efforts to Identify Critical Infrastructure Assets and Systems, OIG-09-86. Washington, D.C.: June 30, 2009.
Surface Transportation Security
GAO. Rail Security: TSA Improved Risk Assessment but Could Further Improve Training and Information Sharing. GAO-11-688T. Washington, D.C.: June 14, 2011.
GAO. Public Transit Security Information Sharing: DHS Could Improve Information Sharing through Streamlining and Increased Outreach. GAO-10-895. Washington, D.C.: September 22, 2010.
GAO. Pipeline Security: TSA Has Taken Actions to Help Strengthen Security, but Could Improve Priority-Setting and Assessment Processes. GAO-10-867. Washington, D.C.: August 4, 2010.
GAO. Surface Transportation Security: TSA Has Taken Actions to Manage Risk, Improve Coordination, and Measure Performance, but Additional Actions Would Enhance Its Efforts. GAO-10-650T. Washington, D.C.: April 21, 2010.
GAO. Transportation Security: Key Actions Have Been Taken to Enhance Mass Transit and Passenger Rail Security, but Opportunities Exist to Strengthen Federal Strategy and Programs. GAO-09-678. Washington, D.C.: June 24, 2009.
GAO. Transit Security Grant Program: DHS Allocates Grants Based on Risk, but Its Risk Methodology, Management Controls, and Grant Oversight Can Be Strengthened. GAO-09-491. Washington, D.C.: June 8, 2009.
GAO. Freight Rail Security: Actions Have Been Taken to Enhance Security, but the Federal Strategy Can Be Strengthened and Security Efforts Better Monitored. GAO-09-243. Washington, D.C.: April 21, 2009.
GAO, Transportation Security: Comprehensive Risk Assessments and Stronger Internal Controls Needed to Help Inform TSA Resource Allocation. GAO-09-492. Washington, D.C.: March 2009.
GAO. Commercial Vehicle Security: Risk-Based Approach Needed to Secure the Commercial Vehicle Sector. GAO-09-85. Washington, D.C.: February 27, 2009.
GAO. Highway Infrastructure: Federal Efforts to Strengthen Security Should Be Better Coordinated and Targeted on the Nation’s Most Critical Highway Infrastructure. GAO-09-57. Washington, D.C.: January 30, 2009.
GAO. TSA’s Explosives Detection Canine Program: Status of Increasing Number of Explosives Detection Canine Teams. GAO-08-933R. Washington, D.C.: July 31, 2008.
GAO. Department of Homeland Security Progress Report on Implementation of Mission and Management Functions. GAO-07-454. Washington, D.C.: August 17, 2007.
Department of Homeland Security Office of Inspector General, DHS Grants Used for Mitigating Risks to Amtrak Rail Stations. OIG-11-93. Washington, D.C.: June 27, 2011.
Department of Homeland Security Office of Inspector General, Use of American Recovery and Reinvestment Act Funds by the Federal Emergency Management Agency for the Transit Security Grant Program. OIG-11-18. Washington, D.C.: December 9, 2010.
Border Security
GAO. Border Security: DHS Progress and Challenges in Securing the U.S. Southwest and Northern Borders. GAO-11-508T. Washington, D.C.: March 30, 2011.
GAO. Border Security: Preliminary Observations on the Status of Key Southwest Border Technology Programs. GAO-11-448T. Washington, D.C.: March 15, 2011.
GAO. Visa Waiver Program: DHS Has Implemented the Electronic System for Travel Authorization, but Further Steps Needed to Address Potential Program Risks. GAO-11-335. Washington, D.C.: May 5, 2011.
GAO. Border Security: DHS's Visa Security Program Needs to Improve Performance Evaluation and Better Address Visa Risk Worldwide. GAO-11-315. Washington, D.C.: March 31, 2011.
GAO. Border Security: Enhanced DHS Oversight and Assessment of Interagency Coordination Is Needed for the Northern Border. GAO-11-97. Washington, D.C.: December 17, 2010.
GAO. Secure Border Initiative: DHS Needs to Strengthen Management and Oversight of Its Prime Contractor. GAO-11-6. Washington, D.C.: October 18, 2010.
GAO. Homeland Security: US-VISIT Pilot Evaluations Offer Limited Understanding of Air Exit Options. GAO-10-860. Washington, D.C.: August 10, 2010.
GAO. Border Security: CBP Lacks the Data Needed to Assess the FAST Program at U.S. Northern Border Ports. GAO-10-694. Washington, D.C.: July 19, 2010.
GAO. Secure Border Initiative: DHS Needs to Reconsider Its Proposed Investment in Key Technology Program. GAO-10-340. Washington, D.C.: May 5, 2010.
GAO. Secure Border Initiative: DHS Has Faced Challenges Deploying Technology and Fencing Along the Southwest Border. GAO-10-651T. Washington, D.C.: May 4, 2010.
GAO. Secure Border Initiative: DHS Needs to Address Testing and Performance Limitations That Place Key Technology Program at Risk. GAO-10-158. Washington, D.C.: January 29, 2010.
GAO. Homeland Security: Key US-VISIT Components at Varying Stages of Completion, but Integrated and Reliable Schedule Needed. GAO-10-13. Washington, D.C.: November 19, 2009.
GAO. Secure Border Initiative: Technology Deployment Delays Persist and the Impact of Border Fencing Has Not Been Assessed. GAO-09-896. Washington, D.C.: September 9, 2009.
GAO. Border Patrol: Checkpoints Contribute to Border Patrol’s Mission, but More Consistent Data Collection and Performance Measurement Could Improve Effectiveness. GAO-09-824. Washington, D.C.: August 31, 2009.
GAO. Border Security: Despite Progress, Weaknesses in Traveler Inspections Exist at Our Nation’s Ports of Entry. GAO-08-219. Washington, D.C.: November 5, 2007.
Department of Homeland Security Office of Inspector General. CBP’s Efficacy of Controls Over Drug Seizures. OIG-11-57. Washington, D.C.: March 17, 2011.
Department of Homeland Security Office of Inspector General. Customs and Border Protection Needs to Improve Its Inspection Procedures for the Western Hemisphere Travel Initiative. OIG-11-43. Washington, D.C.: February 11, 2011.
Maritime Security
GAO. Maritime Security: Progress Made but Further Actions Needed to Secure the Maritime Energy Supply. GAO-11-883T. Washington, D.C.: August 24, 2011.
GAO. Transportation Worker Identification Credential: Internal Control Weaknesses Need to Be Corrected to Help Achieve Security. GAO-11-657. Washington, D.C.: May 10, 2011.
GAO. Maritime Security: Federal Agencies Have Taken Actions to Address Risks Posed by Seafarers, but Efforts Can be Strengthened. GAO-11-195. Washington, D.C.: January 14, 2011.
GAO. Maritime Security: Ferry Security Measures Have Been Implemented, but Evaluating Existing Studies Could Further Enhance Security. GAO-11-207. Washington, D.C.: December 3, 2010.
GAO. Combating Nuclear Smuggling: Inadequate Communication and Oversight Hampered DHS Efforts to Develop an Advanced Radiography System to Detect Nuclear Materials. GAO-10-1041T. Washington, D.C.: September 15, 2010 GAO. Maritime Security: DHS Progress and Challenges in Key Areas of Port Security. GAO-10-940T. Washington, D.C.: July 21, 2010.
GAO. Supply Chain Security: DHS Should Test and Evaluate Container Security Technologies Consistent with All Identified Operational Scenarios to Ensure the Technologies Will Function as Intended. GAO-10-887. Washington, D.C.: September 29, 2010.
GAO. Coast Guard: Efforts to Identify Arctic Requirements Are Ongoing, but More Communication about Agency Planning Efforts Would Be Beneficial. GAO-10-870. Washington, D.C.: September 15, 2010.
GAO. Maritime Security: Varied Actions Taken to Enhance Cruise Ship Security, but Some Concerns Remain. GAO-10-400. Washington, D.C.: April 9, 2010.
GAO. Combating Nuclear Smuggling: Recent Testing Raises Issues About the Potential Effectiveness of Advanced Radiation Detection Portal Monitors. GAO-10-252T. Washington, D.C.: November 17, 2009.
GAO. Supply Chain Security: Feasibility and Cost-Benefit Analysis Would Assist DHS and Congress in Assessing and Implementing the Requirement to Scan 100 Percent of U.S.-Bound Containers. GAO-10-12. Washington, D.C.: October 30, 2009.
GAO. Combating Nuclear Smuggling: Lessons Learned from DHS Testing of Advanced Radiation Detection Portal Monitors. GAO-09-804T. Washington, D.C.: June 25, 2009.
GAO. Combating Nuclear Smuggling: DHS Improved Testing of Advanced Radiation Detection Portal Monitors, but Preliminary Results Show Limits of the New Technology. GAO-09-655. Washington, D.C.: May 21, 2009.
GAO. Maritime Security: Vessel Tracking Systems Provide Key Information, but the Need for Duplicate Data Should Be Reviewed. GAO-09-337. Washington, D.C.: March 17, 2009.
GAO. Maritime Security: Coast Guard Inspections Identify and Correct Facility Deficiencies, but More Analysis Needed of Program's Staffing, Practices, and Data. GAO-08-12. Washington, D.C.: February 14, 2008.
GAO. Maritime Security: The SAFE Port Act: Status and Implementation One Year Later. GAO-08-126T. Washington, D.C.: October 30, 2006.
Department of Homeland Security Office of Inspector General. Customs and Border Protection’s Importer Self-Assessment Program. OIG-10-113. Washington, D.C.: August 30, 2010.
Department of Homeland Security Office of Inspector General. CBP's Container Security Initiative Has Proactive Management and Oversight but Future Direction Is Uncertain. OIG-10-52. Washington, D.C.: February 3, 2010.
Department of Homeland Security Office of Inspector General. Cargo Targeting and Examinations. OIG-10-34. Washington, D.C.: January 6, 2010.
Department of Homeland Security Office of Inspector General. CBP's Ability to Detect Biological and Chemical Threats in Maritime Cargo Containers. OIG-10-01. Washington, D.C.: October 7, 2009.
Immigration Enforcement GAO. Overstay Enforcement: Additional Mechanisms for Collecting, Assessing, and Sharing Data Could Strengthen DHS’s Efforts but Would Have Costs. GAO-11-411. Washington, D.C.: April 15, 2011.
GAO. Employment Verification: Agencies Have Improved E-Verify, but Significant Challenges Remain. GAO-11-522T. Washington, D.C.: April 14, 2011.
GAO. Employment Verification: Federal Agencies Have Taken Steps to Improve E-Verify, but Significant Challenges Remain. GAO-11-146. Washington, D.C.: December 17, 2010.
GAO. Moving Illegal Proceeds: Challenges Exist in the Federal Government’s Effort to Stem Cross-Border Currency Smuggling, GAO-11-73, Washington, D.C.: October 25, 2010.
GAO. Alien Smuggling: DHS Needs to Better Leverage Investigative Resources and Measure Program Performance along the Southwest Border. GAO-10-328. Washington, D.C.: May 24, 2010.
GAO. Firearms Trafficking: U.S. Efforts to Combat Arms Trafficking to Mexico Face Planning and Coordination Challenges. GAO-09-709. Washington, D.C.: June 18, 2009.
GAO. Immigration Enforcement: Better Controls Needed over Program Authorizing State and Local Enforcement of Federal Immigration Laws. GAO-09-109. Washington, D.C.: January 30, 2009.
Department of Homeland Security Office of Inspector General. U.S. Immigration and Customs Enforcement Identification of Criminal Aliens in Federal and State Custody Eligible for Removal from the United States. OIG-11-26. Washington, D.C.: January 10, 2011.
Department of Homeland Security Office of Inspector General. The Performance of the 287(g) Agreements Report Update. OIG-10-124. Washington, D.C.: September 30, 2010.
Department of Homeland Security Office of Inspector General. The Performance of 287(g) Agreements. OIG-10-63. Washington, D.C.: March 4, 2010.
Immigration Services
GAO. Immigration Benefits: Actions Needed to Address Vulnerabilities in Process for Granting Permanent Residency. GAO-09-55. Washington, D.C.: December 5, 2008.
GAO. U.S. Asylum System: Agencies Have Taken Actions to Help Ensure Quality in the Asylum Adjudication Process, but Challenges Remain. GAO-08-935. Washington, D.C.: September 25, 2008.
GAO. Immigration Benefits: Internal Controls for Adjudicating Humanitarian Parole Cases Are Generally Effective, but Some Can Be Strengthened. GAO-08-282. Washington, D.C.: February 6, 2008.
GAO. USCIS Transformation: Improvements to Performance, Human Capital and Information Technology Management Needed as Modernization Proceeds. GAO-07-1013R. Washington, D.C.: July 17, 2007.
Department of Homeland Security Office of Inspector General. U.S. Citizenship and Immigration Services' Progress in Modernizing Information Technology. OIG-09-90. Washington, D.C.: July 13, 2009.
Department of Homeland Security Office of Inspector General. Management Oversight of Immigration Benefit Application Intake Processes, OIG-09-37. Washington, D.C.: March 5, 2009.
Department of Homeland Security Office of Inspector General. Review of the USCIS Benefit Fraud Referral Process, OIG-08-09. Washington, D.C.: April 29, 2008.
Critical Infrastructure Protection—Cyber Assets
GAO. Cybersecurity: Continued Attention Needed to Protect Our Nation’s Critical Infrastructure. GAO-11-865T. Washington, D.C.: July, 26, 2011.
GAO. Cybersecurity: Continued Attention Needed to Protect Our Nation’s Critical Infrastructure and Federal Information Systems. GAO-11-463T. Washington, D.C.: March 16, 2011.
GAO. Critical Infrastructure Protection: Key Private and Public Cyber Expectations Need to Be Consistently Addressed. GAO-10-628. Washington, D.C.: July 15, 2010.
GAO. Cybersecurity: Continued Attention Is Needed to Protect Federal Information Systems from Evolving Threats. GAO-10-834T. Washington, D.C.: June 16, 2010.
GAO. Information Security: Concerted Effort Needed to Consolidate and Secure Internet Connections at Federal Agencies. GAO-10-237. Washington, D.C.: March 12, 2010.
GAO. Critical Infrastructure Protection: Update to National Infrastructure Protection Plan Includes Increased Emphasis on Risk Management and Resilience. GAO-10-296. Washington, D.C.: March 5, 2010.
GAO. Critical Infrastructure Protection: Current Cyber Sector-Specific Planning Approach Needs Reassessment. GAO-09-969. Washington, D.C.: September 24, 2009.
GAO. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 2009.
GAO. Critical Infrastructure Protection: DHS Needs To Fully Address Lessons Learned from Its First Cyber Storm Exercise. GAO-08-825. Washington, D.C.: September 9, 2008.
GAO. Cyber Analysis and Warning: DHS Faces Challenges in Establishing a Comprehensive National Capability. GAO-08-588. Washington, D.C.: July 31, 2008.
Department of Homeland Security Office of Inspector General. U.S. Computer Emergency Readiness Team Makes Progress in Securing Cyberspace, but Challenges Remain. OIG-10-94. Washington, D.C.: June 7, 2010.
Emergency Preparedness and Response
GAO. Cybersecurity: Continued Attention Needed to Protect Our Nation’s Critical Infrastructure. GAO-11-865T. Washington, D.C.: July 26, 2011 GAO. Measuring Disaster Preparedness: FEMA Has Made Limited Progress in Assessing National Capabilities. GAO-11-260T. Washington, D.C.: March 17, 2011.
GAO. Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011.
GAO. FEMA Has Made Limited Progress in Efforts to Develop and Implement a System to Assess National Preparedness Capabilities. GAO-11-51R. Washington, D.C.: October 29, 2010.
GAO. Recovery Act: FEMA Could Take Steps to Protect Sensitive Port Security Grant Details and Improve Recipient Reporting Instructions. GAO-11-88. Washington, D.C.: October 15, 2010.
GAO. Disaster Recovery: FEMA's Long-term Assistance Was Helpful to State and Local Governments but Had Some Limitations. GAO-10-404. Washington, D.C.: March 30, 2010.
GAO. Emergency Communications: Establishment of the Emergency Communications Preparedness Center and Related Interagency Coordination Challenges. GAO-10-463R. Washington, D.C.: March 3, 2010.
GAO. Combating Nuclear Terrorism: Actions Needed to Better Prepare to Recover from Possible Attacks Using Radiological or Nuclear Materials. GAO-10-204. Washington, D.C.: January 29, 2010 GAO. Combating Nuclear Terrorism: Preliminary Observations on Preparedness to Recovery from Possible Attacks Using Radiological or Nuclear Materials. GAO-09-996T. Washington, D.C.: September 14, 2009 GAO. Emergency Preparedness: Improved Planning and Coordination Necessary for Modernization and Integration of Public Alert and Warning System. GAO-09-834. Washington, D.C.: September 9, 2009.
GAO. Hurricanes Gustav and Ike Disaster Assistance: FEMA Strengthened Its Fraud Prevention Controls, but Customer Service Needs Improvement. GAO-09-671. Washington, D.C.: June 19, 2009.
GAO. Emergency Communications: Vulnerabilities Remain and Limited Collaboration and Monitoring Hamper Federal Efforts. GAO-09-604. Washington, D.C.: June 19, 2009.
GAO. National Preparedness: FEMA Has Made Progress, but Needs to Complete and Integrate Planning, Exercise, and Assessment Efforts. GAO-09-369. Washington, D.C.: April 30, 2009.
GAO. Disaster Recovery: FEMA's Public Assistance Grant Program Experienced Challenges with Gulf Coast Rebuilding. GAO-09-129. Washington, D.C.: December 18, 2008.
GAO. Homeland Security: DHS Risk-Based Grant Methodology Is Reasonable, But Current Version's Measure of Vulnerability is Limited. GAO-08-852. Washington, D.C.: June 27, 2008.
GAO. National Flood Insurance Program: Financial Challenges Underscore Need for Improved Oversight of Mitigation Programs and Key Contracts. GAO-08-437. Washington, D.C.: June 16, 2008.
GAO. National Response Framework: FEMA Needs Policies and Procedures to Better Integrate Non-Federal Stakeholders in the Revision Process. GAO-08-768. Washington, D.C.: June 11, 2008.
Department of Homeland Security Office of Inspector General. Efficacy of DHS Grants Programs. OIG-10-69. Washington, D.C.: March 22, 2010.
DHS Transformation and Implementation
GAO. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 2011.
GAO. Information Security: Federal Agencies Have Taken Steps to Secure Wireless Networks, but Further Actions Can Mitigate Risk. GAO-11-43. Washington, D.C.: November 30, 2010.
GAO. Department of Homeland Security: Assessments of Selected Complex Acquisitions. GAO-10-588SP. Washington, D.C.: June 30, 2010.
GAO. Department of Homeland Security: DHS Needs to Comprehensively Assess Its Foreign Language Needs and Capabilities and Identify Shortfalls. GAO-10-714. Washington, D.C.: June 22, 2010.
GAO. Information Security: Agencies Need to Implement Federal Desktop Core Configuration Requirements. GAO-10-202. Washington, D.C.: March 12, 2010.
GAO. Financial Management Systems: DHS Faces Challenges to Successfully Consolidating Its Existing Disparate Systems. GAO-10-76. Washington, D.C.: December 4, 2009.
GAO. Department of Homeland Security: Actions Taken Toward Management Integration, but a Comprehensive Strategy Is Still Needed. GAO-10-131. Washington, D.C.: November 20, 2009.
GAO. Homeland Security: Despite Progress, DHS Continues to Be Challenged in Managing Its Multi-Billion Dollar Annual Investment in Large-Scale Information Technology Systems. GAO-09-1002T. Washington, D.C.: September 15, 2009.
GAO. Equal Employment Opportunity: DHS Has Opportunities to Better Identify and Address Barriers to EEO in Its Workforce. GAO-09-639 Washington, D.C.: August 31, 2009.
GAO. Department of Homeland Security: Billions Invested in Major Programs Lack Appropriate Oversight. GAO-09-29. Washington, D.C.: November 18, 2008.
GAO. Department of Homeland Security: Better Planning and Assessment Needed to Improve Outcomes for Complex Service Acquisitions. GAO-08-263. Washington, D.C.: April 22, 2008.
GAO. Homeland Security: Departmentwide Integrated Financial Management Systems Remain a Challenge. GAO-07-536. Washington, D.C.: June 21, 2007.
GAO. Information Technology Investment Management: A Framework for Assessing and Improving Process Maturity, version 1.1. GAO-04-394G. Washington, D.C.: March 2004.
GAO. High-Risk Series: Strategic Human Capital Management. GAO-03-120. Washington, D.C.: January 2003.
GAO. Determining Performance and Accountability Challenges and High Risks. GAO-01-159SP. Washington, D.C.: November 2000.
Department of Homeland Security Office of Inspector General. Major Management Challenges Facing the Department of Homeland Security. OIG-11-11. Washington, D.C.: November 10, 2010.
Performance Measurement GAO. Overstay Enforcement: Additional Mechanisms for Collecting, Assessing, and Sharing Data Could Strengthen DHS’s Efforts but Would Have Costs. GAO-11-411. Washington, D.C.: April 15, 2011.
GAO. Measuring Disaster Preparedness: FEMA Has Made Limited Progress in Assessing National Capabilities. GAO-11-260T. Washington, D.C.: March 17, 2011.
GAO. Department of Homeland Security: Progress Made in Implementation and Transformation of Management Functions, but More Work Remains. GAO-10-911T. Washington, D.C.: September 30, 2010.
GAO. Alien Smuggling: DHS Needs to Better Leverage Investigative Resources to Measure Program Performance along the Southwest Border. GAO-10-328. Washington, D.C.: May 24, 2010.
GAO. Emergency Preparedness: FEMA Faces Challenges Integrating Community Preparedness Programs into Its Strategic Approach. GAO-10-193. Washington, D.C.: January 29, 2010.
GAO. Secure Border Initiative: Technology Deployment Delays Persist and the Impact of Border Fencing Has Not Been Assessed. GAO-09-1013T. Washington, D.C.: September 17, 2009.
GAO. Border Patrol: Checkpoints Contribute to Border Patrol’s Mission, but More Consistent Data Collection and Performance Measurement Could Improve Effectiveness. GAO-09-824. Washington, D.C.: August 31, 2009.
GAO. Department of Homeland Security: Progress Report on Implementation of Mission and Management Functions. GAO-07-454. Washington, D.C.: August 17, 2007.
Risk Management
GAO. National Preparedness: DHS and HHS Can Further Strengthen Coordination for Chemical, Biological, Radiological, and Nuclear Risk Assessments. GAO-11-606. Washington, D.C.: June 21, 2011.
GAO. Pipeline Security: TSA Has Taken Actions to Help Strengthen Security, but Could Improve Priority-Setting and Assessment Processes. GAO-10-867. Washington, D.C.: August 4, 2010.
GAO. Aviation Security: DHS and TSA Have Researched, Developed, and Begun Deploying Passenger Checkpoint Screening Technologies, but Continue to Face Challenges. GAO-10-128. Washington, D.C.: October 7, 2009.
GAO. Freight Rail Security: Actions Have Been Taken to Enhance Security, but the Federal Strategy Can Be Strengthened and Security Efforts Better Monitored. GAO-09-243. Washington, D.C.: April 21, 2009.
GAO. Transportation Security: Comprehensive Risk Assessments and Stronger Internal Controls Needed to Help Inform TSA Resource Allocation. GAO-09-492. Washington, D.C.: March 27, 2009.
GAO. Commercial Vehicle Security: Risk-Based Approach Needed to Secure the Commercial Vehicle Sector. GAO-09-85. Washington, D.C.: February 27, 2009.
GAO. Highway Infrastructure: Federal Efforts to Strengthen Security Should Be Better Coordinated and Targeted on the Nation’s Most Critical Highway Infrastructure. GAO-09-57. Washington, D.C.: January 30, 2009.
GAO. Homeland Security: DHS Risk-Based Grant Methodology Is Reasonable, But Current Version’s Measure of Vulnerability Is Limited. GAO-08-852. Washington, D.C.: June 27, 2008.
GAO. Risk Management: Progress Report on Implementation of Mission and Management Functions. GAO-07-454. Washington, D.C.: August 17, 2007.
GAO. Department of Homeland Security: Further Refinements Needed to Assess Risks and Prioritize Protective Measures at Ports and Other Critical Infrastructure. GAO-06-91. Washington, D.C.: December 15, 2005.
Information Sharing for Homeland Security
GAO. Information Sharing Environment: Better Road Map Needed to Guide Implementation and Investments. GAO-11-455. Washington, D.C.: July 21, 2011.
GAO. Rail Security: TSA Improved Risk Assessment but Could Further Improve Training and Information Sharing. GAO-11-688T. Washington, D.C.: June 14, 2011.
GAO. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 2011.
GAO. Information Sharing: DHS Could Better Define How It Plans to Meet Its State and Local Mission and Improve Performance Accountability. GAO-11-223. Washington, D.C.: December 16, 2010.
GAO. Information Sharing: Federal Agencies Are Helping Fusion Centers Build and Sustain Capabilities and Protect Privacy, But Could Better Measure Results. GAO-10-972. Washington, D.C.: September 29, 2010.
GAO. Public Transit Security Information Sharing: DHS Could Improve Information Sharing through Streamlining and Increased Outreach. GAO-10-895. Washington, D.C.: September 22, 2010.
GAO. Surface Transportation Security: TSA Has Taken Actions to Manage Risk, Improve Coordination, and Measure Performance, but Additional Actions Would Enhance Its Efforts. GAO-10-650T. Washington, D.C.: April 21, 2010.
Partnerships and Coordination
GAO. Border Security: Enhanced DHS Oversight and Assessment of Interagency Coordination Is Needed for the Northern Border. GAO-11-97. Washington, D.C.: December 17, 2010.
GAO. Aviation Security: DHS Has Taken Steps to Enhance International Aviation Security and Facilitate Compliance with International Standards, but Challenges Remain. GAO-11-238T. Washington, D.C.: December 2, 2010.
GAO. Border Security: Additional Actions Needed to Better Ensure a Coordinated Federal Response to Illegal Activity on Federal Lands. GAO-11-177. Washington, D.C.: November 18, 2010.
GAO. Critical Infrastructure Protection: DHS Efforts to Assess and Promote Resiliency Are Evolving but Program Management Could Be Strengthened. GAO-10-772. Washington, D.C.: September 23, 2010.
GAO. Critical Infrastructure Protection: Key Private and Public Cyber Expectations Need to Be Consistently Addressed. GAO-10-628. Washington, D.C.: July 15, 2010.
GAO. Emergency Preparedness: Improved Planning and Coordination Necessary for Modernization and Integration of Public Alert and Warning System. GAO-09-834. Washington, D.C.: September 9, 2009.
GAO, National Response Framework: FEMA Needs Policies and Procedures to Better Integrate Non-Federal Stakeholders in the Revision Process. GAO-08-768. Washington, D.C.: June 11, 2008.
GAO. Homeland Security: Strategic Solution for US-VISIT Program Needs to Be Better Defined, Justified, and Coordinated. GAO-08-361. Washington, D.C.: February 29, 2008.
GAO. Department of Homeland Security: Progress Report on Implementation of Mission and Management Functions. GAO-07-454. Washington, D.C.: August 17, 2007.
Developing and Deploying New Technologies for Homeland Security
GAO. Homeland Security: DHS Could Strengthen Acquisitions and Development of New Technologies. GAO-11-829T. Washington, D.C.: July 15, 2011.
GAO. Aviation Security: TSA Has Enhanced Its Explosives Detection Requirements for Checked Baggage, but Additional Screening Actions Are Needed. GAO-11-740. Washington, D.C.: July 11, 2011.
GAO. DHS Science and Technology: Additional Steps Needed to Ensure Test and Evaluation Requirements Are Met. GAO-11-596. Washington, D.C.: June 15, 2011.
GAO. Border Security: Preliminary Observations on the Status of Key Southwest Border Technology Programs. GAO-11-448T. Washington D.C.: March 15, 2011.
GAO. Supply Chain Security: DHS Should Test and Evaluate Container Security Technologies Consistent with All Identified Operational Scenarios to Ensure the Technologies Will Function as Intended. GAO-10-887. Washington D.C.: September 29, 2010.
GAO. Combating Nuclear Smuggling: Inadequate Communication and Oversight Hampered DHS Efforts to Develop an Advanced Radiography System to Detect Nuclear Materials. GAO-10-1041T. Washington D.C.: September 15, 2010.
GAO. Combating Nuclear Smuggling: DHS Has Made Some Progress but Not Yet Completed a Strategic Plan for Its Global Nuclear Detection Efforts or Closed Identified Gaps. GAO-10-883T. Washington, D.C.: June 30, 2010.
GAO. Biosurveillance: Efforts to Develop a National Biosurveillance Capability Need A National Strategy and a Designated Leader. GAO-10-645. Washington, D.C.: June 30, 2010.
GAO. Combating Nuclear Smuggling: Recent Testing Raises Issues About the Potential Effectiveness of Advanced Radiation Detection Portal Monitors. GAO-10-252T. Washington, D.C.: November 17, 2009.
GAO. Combating Nuclear Smuggling: Lessons Learned from DHS Testing of Advanced Radiation Detection Portal Monitors. GAO-09-804T. Washington, D.C.: June 25, 2009.
GAO. Combating Nuclear Smuggling: DHS’s Program to Procure and Deploy Advanced Radiation Detection Portal Monitors Is Likely to Exceed the Department’s Previous Cost Estimates. GAO-08-1108R. Washington, D.C.: September 22, 2008. | Why GAO Did This Study
The events of September 11, 2001, led to profound changes in government policies and structures to confront homeland security threats. Most notably, the Department of Homeland Security (DHS) began operations in 2003 with key missions that included preventing terrorist attacks from occurring in the United States, and minimizing the damages from any attacks that may occur. DHS is now the third-largest federal department, with more than 200,000 employees and an annual budget of more than $50 billion. Since 2003, GAO has issued over 1,000 products on DHS's operations in such areas as border and transportation security and emergency management, among others. As requested, this report addresses DHS's progress in implementing its homeland security missions since it began operations, work remaining, and issues affecting implementation efforts. This report is based on GAO's past and ongoing work, supplemented with DHS Office of Inspector General reports, with an emphasis on reports issued since 2008. GAO also analyzed information provided by DHS in July and August 2011 on recent actions taken in response to prior work.
What GAO Found
Since it began operations in 2003, DHS has implemented key homeland security operations and achieved important goals and milestones in many areas to create and strengthen a foundation to reach its potential. As it continues to mature, however, more work remains for DHS to address gaps and weaknesses in its current operational and implementation efforts, and to strengthen the efficiency and effectiveness of those efforts to achieve its full potential. DHS's accomplishments include developing strategic and operational plans; deploying workforces; and establishing new, or expanding existing, offices and programs. For example, DHS (1) issued plans to guide its efforts, such as the Quadrennial Homeland Security Review, which provides a framework for homeland security, and the National Response Framework, which outlines disaster response guiding principles; (2) successfully hired, trained, and deployed workforces, such as a federal screening workforce to assume security screening responsibilities at airports nationwide; and (3) created new programs and offices to implement its homeland security responsibilities, such as establishing the U.S. Computer Emergency Readiness Team to help coordinate efforts to address cybersecurity threats. Such accomplishments are noteworthy given that DHS has had to work to transform itself into a fully functioning department while implementing its missions--a difficult undertaking that can take years to achieve. While DHS has made progress, its transformation remains high risk due to its management challenges. Examples of progress made and work remaining include: Border security. DHS implemented the U.S. Visitor and Immigrant Status Indicator Technology program to verify the identities of foreign visitors entering and exiting the country by processing biometric and biographic information. However, DHS has not yet determined how to implement a biometric exit capability and has taken action to address a small portion of the estimated overstay population in the United States (individuals who legally entered the country but then overstayed their authorized periods of admission). Aviation security. DHS developed and implemented Secure Flight, a program for screening airline passengers against terrorist watchlist records. DHS also developed new programs and technologies to screen passengers, checked baggage, and air cargo. However, DHS does not yet have a plan for deploying checked baggage screening technologies to meet recently enhanced explosive detection requirements, a mechanism to verify the accuracy of data to help ensure that air cargo screening is being conducted at reported levels, or approved technology to screen cargo once it is loaded onto a pallet or container. Emergency preparedness and response. DHS issued the National Preparedness Guidelines that describe a national framework for capabilities-based preparedness, and a Target Capabilities List to provide a national-level generic model of capabilities defining all-hazards preparedness. DHS is also finalizing a National Disaster Recovery Framework, and awards preparedness grants based on a reasonable risk methodology. However, DHS needs to strengthen its efforts to assess capabilities for all-hazards preparedness, and develop a long-term recovery structure to better align timing and involvement with state and local governments' capacity. Chemical, biological, radiological and nuclear (CBRN) threats. DHS assessed risks posed by CBRN threats and deployed capabilities to detect CBRN threats. However, DHS should work to improve its coordination of CBRN risk assessments, and identify monitoring mechanisms for determining progress made in implementing the global nuclear detection strategy. GAO's work identified three themes at the foundation of DHS's challenges. This report contains no new recommendations. |
gao_GAO-10-782 | gao_GAO-10-782_0 | Background
The ratings produced by the NRSROs generally are letter-based symbols intended to reflect assessments of credit risk for entities issuing securities in public markets. Typically, credit rating agencies designate issuers or securities considered investment-grade, or lower risk, with higher letter ratings, and issuers or securities considered speculative-grade, or higher risk, with lower letter ratings. For example, Standard & Poor’s and Fitch Ratings (Fitch) designate investment-grade, long-term debt with ratings of AAA, AA, A, and BBB, and speculative-grade, long-term debt with ratings of BB, B, CCC, CC, and C. The rating scale employed by Moody’s Investors Service (Moody’s) uses Aaa, Aa, A and Baa for investment-grade, long-term debt, and Ba, B, Caa, Ca, and C for speculative-grade, long-term debt. Rating agencies may employ different rating scales for different regions, sectors, jurisdictions, or types of securities. For example, the rating scale that a ratings agency uses to assign short-term obligations may differ from the scale it uses for long-term obligations.
NRSRO credit ratings are designed to measure the likelihood of default for an issue or issuer, although some also measure other variables, such as the expected value of dollar losses given a default. These assessments reflect a variety of quantitative and qualitative factors that vary based on sector. The NRSROs describe ratings as intended only to reflect credit risk, not other valuation factors such as liquidity or price risk. To determine an appropriate rating, credit analysts use publicly available information, and market and economic data, and may obtain nonpublic information from the issuer and engage in discussions with its senior management. However, not all NRSROs rely on nonpublic information in producing credit ratings.
Issuers seek credit ratings for a number of reasons, such as to improve the marketability or pricing of their financial obligations, or to satisfy investors, lenders, or counterparties. In certain markets, such as the U.S. long-term corporate debt market, a single-rated debt issue may be priced below an issue with similar ratings from two agencies, because the absence of a second rating is interpreted as an issuer’s inability to obtain another equivalent rating. However, in other markets such as the ABS market, a single rating may be adequate confirmation of asset quality.
Institutional investors, such as mutual funds, pension funds, and insurance companies, are among the largest owners of debt securities in the United States and are substantial users of credit ratings. Retail participation in the debt markets generally takes place indirectly through these fiduciaries. Institutional investors may use credit ratings as one of several important inputs to their own internal credit assessments and investment analysis, or to identify pricing discrepancies for their trading operations. Broker- dealers that make recommendations and sell securities to their clients also use ratings. These firms often act as dealers in markets that place significant importance on credit ratings. For example, in the over-the- counter derivatives markets, broker-dealers tend to use credit ratings (when available) to determine acceptable counterparties, as well as collateral levels for outstanding credit exposures. Large broker-dealers also frequently obtain credit ratings as issuers of long- and short-term debts.
Academic literature suggests that credit ratings affect financial markets both by providing information to investors and other market participants and by their use in regulations. Several studies suggest that bond prices, stock returns, and credit-default swap spreads vary with credit ratings downgrades. Other studies find that obtaining a credit rating generally increases a firm’s access to capital markets and that firms with credit ratings have different capital structures than firms without them as a result. Furthermore, some studies suggest that firms adjust their capital structure to achieve a particular credit rating. One explanation for these relationships is that rating agencies have access to private information about the issuers and issues they rate, and the ratings they assign incorporate this information. Thus, ratings are a mechanism for communicating this otherwise unavailable information to market participants. Alternatively, at least in market segments with rating-based regulations, investors’ willingness and ability to purchase bonds with credit ratings above a regulatory threshold could be greater than their willingness and ability to purchase bonds with ratings below the threshold. Thus, firms with credit ratings above the regulatory threshold have lower costs of capital than those with credit ratings below the threshold.
NRSROs today operate primarily under one of two compensation models: issuer-pays or subscriber-pays. Under the issuer-pays model, issuers pay the NRSRO for a rating. These ratings are generally free to the public, although users may have to purchase access to in-depth reports explaining the basis for the rating. Under the subscriber-pays model, users pay a subscription to the NRSRO for access to its ratings.
Trading and Markets administers and executes the agency’s programs relating to NRSRO oversight, which includes administration of the NRSRO registration program and rulemaking. OCIE administers SEC’s nationwide examination and inspection program. Within OCIE, the NRSRO examination team within the Office of Market Oversight conducts NRSRO examinations. The purpose of an NRSRO examination is to promote compliance with applicable laws and rules, identify any violations of such laws and rules, and ensure remedial action. Examinations also serve to inform SEC and SEC staff of NRSROs’ compliance with their regulatory obligations and noteworthy industry developments. If OCIE discovers potential violations of federal securities laws or rules during an NRSRO examination, it may refer the case to Enforcement, which is responsible for further investigating these potential violations; recommending SEC action when appropriate, either in a federal court or before an administrative law judge.
NRSRO Application Review Process Limits SEC Staff’s Ability to Ensure That Applicants Meet the Act’s Requirements and NRSRO Examination Program Faces Staffing Challenges
SEC’s implementation of the Act involved developing an NRSRO application review process and an examination program. As currently implemented and staffed, both programs require further attention. First, in June 2007, SEC adopted final rules that established a voluntary registration program for recognizing credit rating agencies as NRSROs. Over the past 3 years, SEC has registered 10 credit rating agencies as NRSROs, instituted proceedings to determine whether to deny registration to one applicant, and has begun examinations. However, as implemented, the registration process potentially limits the staff’s ability to ensure that applicants meet the Act’s requirements and may create a situation in which ratings from an NRSRO that may not meet the Act’s requirements are used by investors and for regulatory purposes. Second, although SEC has established an OCIE branch dedicated to the examination of NRSROs and hired individuals with experience in credit rating analysis and structured finance to fill these positions, OCIE has not completed timely examinations of the NRSROs and has expressed concerns about its ability to meet its planned NRSRO routine examination schedule of examining the three largest NRSROs every 2 years and the other NRSROs every 3 years. While SEC requested additional resources that it anticipated using to fully staff this oversight function, it will likely need to revisit those requests due to the passage of the Dodd-Frank Act, which among other things, requires that each NRSRO be examined every year and that SEC establish an Office of Credit Ratings to carry out these examinations. Formalizing a plan to assess not only the number of staff it needs for this office but also the skills required of this staff would help SEC be strategically positioned to implement the Dodd-Frank Act requirements. SEC may face challenges in meeting the required examination timetable and providing quality oversight over NRSROs unless it develops a plan that ensures SEC has sufficient staff that have the appropriate qualifications and are appropriately trained.
SEC Established a Formal Registration and Oversight Program for NRSROs and Continues Rulemaking under the Act
SEC adopted final rules for a formal regulatory and oversight program for NRSROs in June 2007. The rules establish a voluntary registration program for those credit rating agencies that seek to be recognized as NRSROs and require that NRSROs make and retain certain records, furnish financial reports to SEC, and establish procedures to address uses of material nonpublic information. The rules also require the disclosure of certain performance measures and ratings methodologies, prohibit certain conflicts of interest and require the management of other conflicts of interest, and prohibit specified coercive and unfair practices by NRSROs. SEC amended several of these rules in February and December 2009 with the goal of further increasing transparency of NRSRO rating methodologies, strengthening the disclosures of ratings performance, prohibiting NRSROs from engaging in certain practices, and enhancing NRSRO record keeping. These amendments were designed in part to address concerns that SEC staff identified in its July 2008 report about the integrity of the process by which the three largest NRSROs rated structured finance products. Table 1 summarizes the rules and amendments to those rules adopted by SEC under the Act.
The Act replaced the SEC staff no-action letter process for recognizing credit rating agencies as NRSROs with a speedier and more transparent registration system. It created a registration process with required information for applicants to submit, a specific time frame for SEC’s review of the application, and specific reasons for which SEC could deny an application. According to the Senate report accompanying the Act’s passage, the new registration program does not favor any particular business model, thus encouraging purely statistical models to compete with the qualitative models of the dominant rating agencies and subscriber-pays models to compete with issuer-pays models. The Senate Report stated that the new registration program would enhance competition and provide investors with more choices, higher-quality ratings, and lower costs.
The Act added new section 15E to the Exchange Act, which provides, in pertinent part, that a credit rating agency electing to register as an NRSRO must submit the following information to SEC: statistics that measure the performance of credit ratings over short-, mid-, the procedures and methodologies the applicant uses in determining credit ratings; policies or procedures the applicant adopted and implemented to prevent the misuse of material, nonpublic information; the organizational structure of the applicant; its code of ethics and, if one does not exist, why not; any conflicts of interest relating to the issuance of credit ratings; the categories for which the applicant intends to apply for registration; on a confidential basis, a list of the 20 largest issuers and subscribers that use its credit rating services; on a confidential basis, written certification from 10 or more qualified institutional buyers (QIB) that have used the credit ratings of the applicant for at least 3 years immediately preceding the data of the certification; and any other information and documents concerning the applicant and any person associated with such applicant as SEC, by rule, may prescribe as necessary or appropriate in the public interest or for the protection of investors.
In implementing Section 15E of the Exchange Act, SEC created and adopted Form NRSRO to collect the required information as well as audited financial statements and revenue and compensation information. Form NRSRO requires certification by the applicant that the information contained is accurate in all significant respects.
Section 15E(a)(2) sets forth the application review requirements. SEC must either grant registration or institute proceedings to determine if registration should be denied within 90 calendar days of a credit rating agency furnishing its application to SEC. The deadline can be extended if the applicant consents. If SEC institutes proceedings, it has to provide the applicant a notice of the grounds for denial under consideration and an opportunity for a hearing and conclude the proceedings not later than 120 days after the date on which the application for registration was furnished. SEC can extend the conclusion of the proceedings for up to 90 days, if it finds good cause for such extension and publishes its reasons for so finding, or for longer periods if the applicant consents. The Act requires that SEC shall grant registration if it finds the requirements of section 15E are satisfied, unless it makes either of two findings (in which case registration must be denied): first, that the applicant does not have adequate financial and managerial resources to consistently produce credit ratings with integrity and to materially comply with the procedures and methodologies disclosed in Form NRSRO as well as with the requirements of the Act regarding the prevention of misuse of nonpublic information, management of conflicts of interest, prohibited conduct, and the designation of a compliance officer. Second, that the applicant or a person associated with it committed or omitted any act such that if the applicant were registered, its registration would be subject to suspension or revocation under subsection (d) of Section 15E of the Exchange Act.
SEC Staff View Their Ability to Ensure That an NRSRO Applicant Meets the Act’s Requirements as Limited
The NRSRO registration program has provided greater transparency and shortened the time between application and SEC recognition. However, as currently implemented, the registration process potentially limits staff’s ability to ensure information provided on applications is accurate and lacks criteria needed to recommend that SEC deny an application. Since the implementation of Section 15E, 11 credit rating agencies have applied for NRSRO registration. To apply, a credit rating agency must fill out Form NRSRO and submit it and the required accompanying information to SEC. Trading and Markets staff review these documents and draft a memorandum to the Commission with the results of their review and recommendation for registration or denial of the application. We reviewed 10 memoranda that Trading and Markets provided the Commission and found that staff recommended that all be registered. The Commission has instituted proceedings to deny the application of the eleventh applicant.
A few of the 10 memoranda we reviewed described concerns that Trading and Markets had with the applications.
Staff told us these concerns generally were not resolved before registration for several reasons: (1) staff lacked criteria against which to measure certain concerns, (2) staff lacked the ability to examine the credit rating agencies before registration, and (3) staff came up against the 90- day time frame for the review of applications. According to Trading and Markets staff, some of these concerns were not addressed because they were qualitative in nature and would have required subjective judgments by the staff for which section 15E, implementing rules, or Form NRSRO do not provide criteria. For example, staff noted a concern about one applicant’s managerial resources because the designated compliance officer lacked experience as a credit analyst. However, because section 15E, the rules implementing section 15E, and Form NRSRO do not prescribe minimum qualifications for the compliance officer position, staff were unable to support a finding that the applicant lacked the necessary managerial resources. As previously noted, a finding that the applicant did not have adequate financial and managerial resources would have been grounds for denying registration.
Staff noted that because of the newness of the registration and oversight programs and the rules, no history of regulatory compliance could be used as a benchmark or criteria by which SEC could evaluate whether the applicant had adequate financial or managerial resources. Staff reviewed financial statements, other required financial information, and required managerial information, and provided summaries of the information in their memoranda.
Trading and Markets staff also stated that for some of the concerns raised, they likely would need to conduct examinations to obtain the information necessary to assess if the concerns were legitimate. However, staff stated they cannot examine the applicants’ books and records to investigate qualitative concerns because an applicant does not become subject to SEC’s oversight authority until it becomes a registered NRSRO. For example, staff noted that one NRSRO appeared to produce ratings that are significantly more volatile than those of other applicants. Staff noted that appropriate explanations for the ratings volatility could exist but without the ability to examine the applicant, determining the causes of this volatility would be difficult, as would determining whether or not it demonstrated inadequate managerial resources. Similarly, staff said that any assessment of financial sufficiency would have to be determined through an examination because of the uniqueness of the applicants’ business models. For example, they said a firm that uses only publicly available information and a quantitative model to produce its ratings likely needs far fewer financial resources than a firm that uses qualitative information and must employ analysts to assess this information.
In addition to qualitative concerns, staff also noted factual concerns about the veracity of some information provided on Form NRSRO. However, staff said that the 90-day deadline for action and the lack of express authority to conduct an examination of the applicant did not allow for the resolution of these types of concerns during the application process. The deadline can be extended with the applicant’s consent but to date only two applicants have done so.
Staff said that even if SEC had authority to examine an NRSRO applicant prior to acting on its application, the Act’s 90-day deadline for acting on an application would not provide enough time for a more thorough review. An application is deemed “furnished” to SEC, and thus begins the 90-day time frame, when SEC receives a complete and properly executed Form NRSRO. Staff said the Act does not provide SEC with any way to extend the review period without the applicant’s consent or an SEC decision to institute proceedings (which would extend the deadline by 30 days, or an additional 90 days based upon a finding of good cause or upon the applicant’s consent). Staff said that generally speaking, they would not recommend that SEC institute proceedings absent sufficient evidence to support the findings necessary to deny an application. While possible, they said that providing sufficient material on Form NRSRO to support the institution of proceedings would be unlikely.
Trading and Markets staff said their principal purpose in raising qualitative and factual concerns in memoranda was to inform the Commission and notify OCIE so these issues could be monitored through future examinations. Trading and Markets staff said that conducting the lengthy examinations that likely would be needed to resolve many of these qualitative issues in effect could be viewed as a return to the prior staff no- action letter process in which examinations were used to make qualitative and subjective assessments of a credit rating agency seeking NRSRO designation. Staff pointed to the legislative history of the Act as illustrating that Congress clearly found that the prior staff no-action letter process created artificial barriers to entry to NRSRO registration, and that the Act specifically was designed to replace that process with a more efficient and transparent registration program. For this reason, staff told us they have interpreted the Act to mean it is not appropriate for SEC to institute proceedings to deny an application merely to resolve staff questions about an application, and absent sufficient evidence at the application stage to support one of the statutory grounds for denial of registration. As Trading and Markets staff interpret the NRSRO registration program, they believe that the Commission must find an applicant has satisfied the requirements of Section 15E if the applicant meets the definition of a credit rating agency, submits the required material, and is capable of complying with the applicable U.S. securities laws.
Because the Act allows SEC to deny an application if the applicants are found to have inadequate managerial or financial resources, the investing public may have some expectation that SEC determined that applicants had the financial and managerial resources to produce ratings with integrity before registering them. Furthermore, because each applicant must certify the accuracy of its information and statements, an expectation could exist that the information provided to SEC and on which the Commission bases its approval decision was accurate and complete. This not only includes the qualified institutional buyer certifications, which are used to determine whether or not the market recognizes and uses the ratings provided by the NRSRO, but also the public disclosures, such as the descriptions of the ratings methodologies. We identified other registration processes that have built in greater authority and flexibility for the staff to clarify issues before registering applicants. For example, both FINRA’s registrant application process for broker-dealers and SEC’s registration process for investment advisors require applicants to provide specific information and utilize deadlines to ensure an efficient process. According to staff from these programs, they are able to clarify any outstanding questions they have regarding information required on the application and to delay registering the applicant until they are satisfied the applicant has met all of the necessary requirements. However, because the NRSRO registration program requires SEC to act within 90 days of receiving the application and SEC has limited ability to extend that deadline, staff have recommended granting registration to credit rating agencies as NRSROs with some concerns outstanding about their meeting the Act’s requirements. Furthermore, the uncertainty as to the extent of SEC’s authority to compel the production of certain additional information that could be used to verify the information provided on Form NRSRO and the lack of specific criteria against which to assess the application may lead to SEC granting registration to an applicant that does not fully meet Section 15E’s requirements as an NRSRO.
New Dedicated Teams in SEC Provide Input on Regulatory Initiatives and Examine NRSROs
In December 2008, Trading and Markets created an NRSRO monitoring unit to provide input on regulatory initiatives related to NRSROs. The members of this unit are responsible for meeting periodically with NRSROs to establish an ongoing dialogue and discuss topics such as updates to rating methodologies and practices, financial results, and compliance and internal audit activity. The unit is also responsible for preparing internal periodic profile reports of each NRSRO and the annual report to Congress on NRSROs, and analyzing and preparing reports on topics of interest or potential concern. According to documents we reviewed, the unit also is supposed to meet periodically with NRSROs to discuss issues specifically related to model development, validation, and governance to gain a better understanding of the models and the controls around each. As of August 2, 2010, this unit has three members with qualifications and experience, ranging from a former rating agency managing director with more than 20 years experience to an analyst with 6 years of experience as a corporate credit analyst.
Following its registration as an NRSRO, a credit rating agency immediately becomes subject to SEC oversight, including compliance examinations and enforcement. OCIE, which conducts NRSRO examinations, in May 2009 reorganized the Office of Market Oversight to create a new NRSRO examination team (a branch chief, a senior specialized examiner, and three staff examiners) to perform NRSRO examinations. The senior specialized examiner and three staff examiners were new SEC employees and include two former NRSRO analysts (both former managing directors of a major rating agency with over 20 and over 10 years experience respectively) and attorneys with experience in structured finance products and corporate law. According to OCIE staff, the new examiners have received standard OCIE training and on-the-job training from the branch chief and other examiners who completed previous NRSRO examinations. In addition, OCIE is considering incorporating NRSRO-specific training into its standard examiner training and has developed written guidance to assist examiners and foster consistency in examinations.
Based on our review of OCIE’s NRSRO examination guidelines and interviews with OCIE staff, OCIE plans to conduct routine and special NRSRO examinations. Routine examinations assess an NRSRO for compliance with the Act and applicable rules and regulations at regular intervals. Special, or cause, examinations typically originate from a tip or need to gather specific information (limited scope) or follow up on past examination findings and recommendations. OCIE expects to conduct special or cause examinations as necessary. According to the guidelines, each routine examination will generally begin with an initial risk assessment and scope analysis of the NRSRO to be reviewed. Specific review areas for each examination (such as conflicts of interest or document retention) are determined during the risk assessment process and throughout the examination. OCIE explained that all examinations are based on risk assessment to maximize the examination team’s time and resources.
NRSRO examination staff typically review, among other things, whether the NRSRO adequately has (1) disclosed a description of its ratings procedures and methodologies; (2) documented internally its ratings procedures and methodologies; (3) documented its ratings process in ratings files, including making and retaining required documentation; and (4) adhered to its ratings policies and procedures in the creation of ratings. OCIE examinations do not assess whether the NRSRO produces accurate ratings, as SEC is prohibited from evaluating the substance of credit ratings or the procedures and methodologies by which an NRSRO determines credit ratings. Areas of review may include credit rating and surveillance process, record retention, prevention of the misuse of material nonpublic information, conflicts of interest, prohibited acts and practices, financial operations, marketing, compliance, internal audit, and unsolicited ratings. For example, under the conflicts of interest area, the guidance provides a description of the applicable rule (17g-5) and a description of the disclosure requirements. It suggests OCIE request all current written policies and procedures related to conflicts of interest, and then assess if these policies and procedures were designed reasonably, captured all the relevant conflicts, and were followed. OCIE has been working with the NRSROs to standardize the level of detail that the examiners would expect to see. This process is ongoing and examiners likely will have to complete a few examinations before determining exactly what they would need to see to make compliance determinations. If deficiencies were found, OCIE would send a deficiency letter to the NRSRO requesting that it make the appropriate corrections and notify OCIE of how it plans to make those corrections. In cases of potential violations, OCIE may refer the NRSRO to the Enforcement Division for further review.
OCIE completed its first series of examinations of the largest NRSROs in July 2008. The examinations focused on the rating of subprime RMBS by Standard & Poor’s, Moody’s, and Fitch and were initiated in response to the recent mortgage crisis. OCIE conducted these examinations jointly with Trading and Markets and made its examination results public.
Although these examinations occurred after the enactment of the Act, the period subject to examination predated the Act.
Among other things, the examinations found that RMBS and collateralized debt obligations (CDO) deals substantially increased in number and complexity since 2002, and some of the rating agencies appear to have struggled with that growth; significant aspects of the rating process were not always disclosed; the management of conflicts of interest raised some concerns; and the surveillance processes the ratings agencies used appeared to have been less robust than the processes used for initial ratings.
The examinations also resulted in remedial actions that the examined NRSROs stated they would take to address the findings of these examinations and additional rulemaking by SEC. Examples of remedial actions included that the examined NRSROs evaluate, both at that time and on a periodic basis, whether they have sufficient staff and resources to manage their volume of business and meet their obligations under Section 15E of the Exchange Act and the rules applicable to NRSRO, and that each NRSRO conduct a review of its current disclosures relating to process and methodologies for rating RMBS and CDOs to assess whether it is fully disclosing its ratings methodologies in compliance with Section 15E of the Exchange Act and the rules applicable to NRSROs. The additional rulemaking included amendments to SEC’s rules identifying a series of conflicts of interest that NRSROs must disclose and manage and others that were outright prohibited.
In October 2008, OCIE began routine examinations of four of the remaining seven NRSROs. As of August 30, 2010, OCIE had completed three examinations and closed the remaining examination. OCIE staff explained these routine examinations took longer to complete than anticipated because of the transition from the old to the new staff, the resignation or departure from the area of some examination staff, and the need to conduct other examinations and initiatives. For example, OCIE also has completed three special (limited scope) examinations and begun another special (cause) examination since the NRSRO examination program started. Given the small number of NRSRO examiners, the need to conduct these additional examinations slowed progress on the routine examination schedule. NRSRO examiners also have been conducting outreach initiatives for designated compliance officers of the NRSROs, which are intended to educate them on SEC’s expectations with regard to compliance officers’ skills and backgrounds. As a result, with the current level of staffing it is unlikely that OCIE would have been able to meet its planned routine examination schedule of examining the three largest NRSROs every 2 years and the remaining NRSROs every 3 years depending on staffing resources, and two examinations have taken over 18 months to complete. SEC requested additional resources which it anticipated using to fully staff this oversight function.
Under the recently passed Dodd-Frank Act, SEC must establish an Office of Credit Ratings and conduct annual examinations of each NRSRO. The Dodd-Frank Act also outlines eight specific areas these examinations must review and requires that the Commission produce an annual public report summarizing the findings of these examinations. According to OCIE staff, in August 2010, the NRSRO examination team will begin new examinations of all NRSROs as mandated by the Dodd-Frank Act. OCIE staff said they are relying on currently designated NRSRO examiners and examiners from other OCIE examinations programs to staff the teams.
The Dodd-Frank Act requires SEC to staff the office sufficiently to carry out these requirements. Although SEC may be able to staff the teams needed to conduct the first round of annual examinations by using staff from other examination programs, such an approach is not sustainable in the long term. In creating this new office, developing a plan to assess not only the number of staff it needs but also the skills required of this staff would help SEC be strategically positioned to meet the Act’s requirements. Without a plan that helps ensure SEC has sufficient staff that have the appropriate qualifications and are appropriately trained, SEC may face challenges in meeting the required examination timetable and providing quality oversight over NRSROs.
SEC Has Increased the Amount of Performance-related Data NRSROs Are Required to Disclose, but These Data Have Limited Usefulness
Since the implementation of the Act, SEC has made several revisions to the Form NRSRO that are intended to make more information publicly available for evaluating and comparing NRSRO performance. The revised Form NRSRO requires NRSROs to disclose credit rating performance statistics over 1-, 3-, and 10-year periods. SEC has also required NRSROs to make ratings history data publicly available. SEC intended these disclosures to allow users to better evaluate and compare NRSRO performance. However, because SEC did not specify how NRSROs should calculate these statistics, the NRSROs used varied methodologies, limiting their comparability. Further, we found that the ratings history data sets do not contain enough information to construct comparable performance statistics and are not representative of the population of credit ratings at each NRSRO. Without better disclosures, the information being provided will not serve its intended purpose of increasing transparency.
SEC-required Performance Statistics Have Increased the Data Available from NRSROs, but Their Comparability Is Limited
Pursuant to the requirements of section 15E of the Exchange Act, NRSROs are required to disclose credit rating performance statistics over short-, mid-, and long-term periods, as applicable. Form NRSRO specifies that these statistics must at a minimum show the performance of credit ratings in each class of class for which an NRSRO is registered over 1-, 3-, and 10- year periods, including, as applicable, historical transition and default rates for each rating category and notch. The statistics must include defaults relative to initial ratings. Transition rates compare ratings at the beginning of a time period with ratings at the end of the time period, while default rates show the percentage of ratings with each rating that defaulted over a given time period. SEC requires NRSRO applicants to furnish the required transition and default rates as part of their NRSRO application on Form NRSRO, and once registered, to update the statistics annually. As part of these disclosures, NRSROs must define the credit rating categories they use and explain these performance measures, including the inputs, time horizons, and metrics used to determine them.
SEC Intended Statistics to Facilitate Comparison of Credit Rating Performance among NRSROs
In adopting these requirements, SEC stated that these types of statistics are important indicators of the performance of a rating agency in terms of its ability to assess the creditworthiness of issuers and, consequently, would be useful to users of ratings in evaluating a rating agency’s performance. SEC specified the 1-, 3-, and 10-year periods so that the performance statistics the NRSROs generated would be more easily comparable. SEC also stated that requiring NRSROs to define the ratings categories used and explain their performance statistics would assist users of ratings in understanding how the measurements were derived and in comparing the measurement statistics of different NRSROs.
In deciding which statistics to require, SEC identified default and transition rates as common benchmarks. To compute 1-year transition rates by rating category, an NRSRO will form cohorts by grouping all of the entities (issues or issuers) with ratings outstanding at the beginning of the year by their rating at the beginning of the year. The NRSRO then calculates the number or percentage of entities in each cohort that have each possible rating at the end of the year. Table 2 provides a hypothetical example of a 1-year transition matrix for cohorts of rated entities for 2009.
The rows of the matrix show all possible credit ratings an entity could have at the beginning of the year, by rating category. The columns of the matrix show all possible credit ratings an entity could have at the end of the year, also by rating category. The matrix also includes columns for defaults (D) and withdrawals (W), since an entity could default or have its rating withdrawn during the course of the year. The table cells show the rates at which ratings migrate upward, downward, or stay the same. For example, 1.3 percent of the entities rated A at the beginning of the year were rated AA at the end of the year, 6.9 percent of the entities rated A at the beginning of the year were rated BBB at the end of the year, and 91.3 percent of the entities rated A at the beginning of the year were rated A at the end of the year.
By showing the number or fraction of entities in each cohort with stable ratings—that is, with the same beginning-of-year and end-of-year ratings— transition matrixes allow users to compare the stability of different rating categories (for the same NRSRO). Table 1 shows that 93.3 percent of entities rated AAA at the beginning of the year were still rated AAA at the end of the year, but 90.4 percent of entities rated BBB at the beginning of the year were still rated BBB at the end of the year. Thus, AAA ratings demonstrated more stability than BBB ratings. In general, an NRSRO’s credit ratings are intended to order rated entities by their creditworthiness, with high ratings indicating relatively more creditworthiness than low ratings. One aspect of creditworthiness is the extent to which it changes over time, with more creditworthy entities demonstrating greater stability. Thus, an NRSRO’s higher ratings should exhibit more stability than its lower ratings. Transition rates illustrate how well a particular rating scale rank orders credit risk on this margin.
As previously stated, default rates show the percentage of entities with each rating that defaulted over a given time period. For example, to calculate simple 1-year default rates relative to beginning-of-year ratings, an NRSRO will form cohorts by grouping all of the entities with ratings outstanding at the beginning of the year by their rating at the beginning of the year. The NRSRO then calculates the fraction of entities in each cohort that default during the year. Table 2 shows hypothetical 1-year default rates for the 2009 cohorts of rated entities. For example, no bonds rated AAA defaulted during 2009, while 20 percent of bonds rated CC defaulted during this period.
SEC rules require that NRSROs disclose on their Form NRSRO 1-, 3-, and 10-year default rates relative to initial ratings. For example, to calculate simple 1-year default rates relative to initial ratings, an NRSRO could form cohorts by grouping all of the entities assigned initial ratings during a given time period by their initial rating. The NRSRO could then calculate the fraction of entities in each cohort that default within 1 year after they receive their initial rating. As previously discussed, an NRSRO’s credit ratings are intended to put rated entities in order of their creditworthiness. It follows that entities with higher credit ratings should default less often than entities with lower credit ratings. Default rates also illustrate how accurately a particular rating scale rank orders credit risk on this margin.
NRSROs’ Differing Methodologies for Calculating Performance Statistics Limit Their Comparability
We reviewed the 2009 performance statistics published by the 10 NRSROs as part of their annual update to Form NRSRO, focusing on the corporate and structured finance asset classes. The required disclosures increased the amount of information publicly available about the performance of some NRSROs, particularly those that were newly registered. However, SEC did not specify how the NRSROs were to calculate the required performance statistics, and, as a result, the NRSROs used different methodologies for calculating the transition and default rates. For the transition rates, they differed by whether they (1) were for a single cohort or averaged over many cohorts, (2) constructed cohorts on an annual basis or monthly basis, (3) were adjusted for entities that have had their ratings withdrawn or unadjusted, and (4) allowed entities to transition to default or not. Because of these differences, users cannot use the performance statistics to compare transition rates across NRSROs, as the rule intended.
First, some NRSROs provided transition rates for individual cohorts for the most recent 1-, 3-, and 10-year period. These NRSROs provided statistics summarizing the transition rates for individual cohorts—for example, 1-year transition rates for the 2009 cohort, 3-year transition rates for the 2007 cohort, and 10-year transition rates for the 2000 cohort. Other NRSROs provided average transition rates for multiple 1-, 3-, and 10-year time periods over a range of years. For example, one NRSRO calculated 1-year transition rates for every annual cohort from 1981 to 2009 (obtaining 28 separate 1- year transition rates) and then averaged the rates in those matrixes to obtain average 1-year transition rates for each rating category and notch. The NRSRO used the same methodology to calculate average 3-year and average 10-year transition rates over the same period.
Single and average cohort approaches provide different information about an NRSRO’s performance. The single cohort approach uses information from only the most recent 1-, 3-, and 10-year periods and thus describes the NRSRO’s performance at specific points in time. As such, it is useful for describing the historical experience of a particular group of ratings under a particular set of circumstances. Single cohort transition matrixes are thus useful as predictors of the performance of ratings in future time periods under similar circumstances, but they are less useful as predictors of the performance of ratings in future time periods under different economic and other conditions. On the other hand, the average cohort approach uses information from multiple time periods and thus describes the NRSRO’s performance during an average 1-, 3-, or 10-year time period. As such, average cohort transition rates are useful indicators of expected transition rates in the future, given that future economic and other conditions are unknown. Both approaches are valid, depending on the needs of the user, but they do not yield comparable information.
Second, the NRSROs differ in whether they construct cohorts on an annual or monthly cohort basis. The frequency with which the cohorts are formed affects the accuracy of average transition rates. The higher the sampling frequency—the shorter the time period between cohort formation dates—the more observations are available for calculating the averages and the more accurate the transition rates are for predictive purposes. Most of the NRSROs used annual cohorts (that is, they formed a new cohort on December 30 or 31 or January 1 of each year), but one NRSRO used monthly cohorts (that is, it formed a new cohort on the first day of each month). Using monthly cohorts means that 12 times as many observations contribute to average transition rates.
Third, we found some NRSROs adjusted their transition rates to reflect those entities with ratings that were withdrawn during the time period, while others did not. NRSROs withdraw ratings for a number of reasons. In many cases, the issue matures and the rating is no longer needed. In other cases, the NRSRO discontinues a rating for lack of information. Transition rates that include entities with withdrawn ratings in the cohorts are called “unadjusted” rates, while those that exclude entities with withdrawn ratings are called “withdrawal-adjusted” rates. The treatment of withdrawn ratings in calculating transition rates can have a significant impact on the magnitude of the rates. For example, suppose a cohort with an initial BBB rating has 100 rated entities at the beginning of the time period, and suppose that 25 are withdrawn during the period and the remainder are still rated BBB at the end of the period. The unadjusted transition rate from BBB to BBB would be 75 percent (75/100) and the withdrawal-adjusted transition rate would be 100 percent (75/75). For one NRSRO, we could not determine from the disclosures how it treated withdrawals in its transition rates.
Fourth, one NRSRO did not include transitions to default in its transition rates. As a result, its performance statistics do not include information on the number of ratings that moved from a particular rating category to default during the 1-, 3-, or 10-year periods. This information is important to the investor, because ratings that move from a higher rating category (such as AAA, AA, or A) directly to default within the time period may signal poor ratings performance by the NRSROs. Table 3 summarizes the variation in the calculation of transition rates that we found in reviewing the NRSROs’ 2009 performance statistics.
NRSROs also used different methodologies for calculating default rates. In general, default rates differed by whether they were (1) relative to ratings at the beginning of a given time period or relative to initial ratings, (2) adjusted for entities that had their ratings withdrawn or unadjusted, (3) adjusted for how long entities survived without defaulting or unadjusted, (4) calculated using annual or monthly cohorts, and (5) calculated for a single cohort or averaged over many cohorts. Because of these differences, users cannot compare default rates across NRSROs, as the rule intended.
First, most NRSROs reported default rates relative to ratings at the beginning of a specific time period, while two reported default rates relative to initial rating. Calculating default rates relative to ratings at the beginning of a given time period is similar to calculating transition rates relative to ratings at the beginning of a given time period. NRSROs form cohorts by grouping entities that had the same outstanding rating on a specific date, and then calculating the number or fraction of entities in each group that defaulted over a given time period. To calculate default rates relative to initial rating, NRSROs form cohorts by grouping entities that were assigned the same initial rating, regardless of when the initial ratings were assigned. One NRSRO calculated the default rates relative to initial ratings over the entire period for which it had historical ratings data, from 1983–2009. Issuers that were assigned initial ratings of AAA at any point during that 26-year period were grouped, as were issuers that were assigned initial ratings of AA, and so forth. The NRSRO then determined whether there had been any defaults at any time for any of those issuers over the 26 years and calculated the default rate. Another NRSRO used a different methodology and provided default rates relative to the initial ratings only for those ratings that were outstanding at the beginning of the most recent 1-, 3-, and 10-year periods. For example, for the 1-year period, this NRSRO determined the ratings that had been outstanding as of December 31, 2008, grouped them according to their initial ratings, determined whether any defaulted in 2009, and calculated the default rates.
Default rates for entities based on their initial rating omit important information about the performance of NRSRO ratings over time. In some asset classes (specifically corporate, financial institution, and insurance company), performance statistics are based on issuer ratings, not the ratings on specific securities of those issuers. For some issuers, their ratings history spans decades or longer. The initial rating given to those firms is not relevant information at the time the issuer defaulted, because the performance of the issuer likely changed throughout the years. For example, an issuer initially could have been rated AAA 30 years ago but deteriorated in the last few years. An investor likely would be more interested in the last ratings the NRSRO provided for the issuer to determine whether it accurately predicted the default. In contrast, structured finance products typically do not have maturities that last for decades, so calculating defaults relative to initial ratings may provide more useful information in that sector.
Second, as with transition rates, some NRSROs calculated their default rates adjusting for withdrawn ratings, while others did not. In addition to affecting the relative magnitude of default rates, the treatment of withdrawn ratings also provides different information about default risk. Unadjusted default rates describe the historical frequency of defaults for a cohort during a given time period and treat entities with withdrawn ratings as if they had remained in the data sample for the entire period. They can be used to predict the expected probability of default for entities over a time period that is at most as long as the period used to calculate the default rate. However, unadjusted default rates likely underestimate actual default rates for a cohort because NRSROs are less likely to observe defaults among entities with withdrawn ratings, either because they choose not to track those entities or because they have less access to information about them. Furthermore, unadjusted default rates are only useful for predicting default rates for entities that have withdrawal patterns similar to those of the cohort used to calculate the unadjusted default rates. The greater the differences in the withdrawal experience of two groups of rated entities, the less useful the unadjusted default rates for one group are for predicting defaults in the other group. For one NRSRO, we could not determine from the disclosures how it treated withdrawals in its default rates.
On the other hand, withdrawal-adjusted default rates describe the historical frequency of defaults for entities during a given time period conditional on those entities having a rating outstanding for the entire period. These statistics treat entities with withdrawn ratings as if they faced the same likelihood of default as entities with ratings that were not withdrawn. Withdrawal-adjusted default rates can be used to predict the expected probability of default for entities over the same length of time as the period used to calculate the default rate. The usefulness of the prediction does not depend on similarities in withdrawal patterns for the entities. However, withdrawal-adjusted default rates assume that withdrawals are random and not correlated with the likelihood that an entity defaults. Withdrawal-adjusted default rates can be biased downward or upward if entities with withdrawn ratings are more or less likely to default, respectively, than entities with ratings that were not withdrawn.
Third, some NRSROs reported simple default rates while others reported default rates conditioned on how long the entities went without defaulting or withdrawing. NRSROs calculate simple default rates by dividing the number of defaults that occurred over a specific time period by the number of rated entities in the cohort at the beginning of the time period. For example, some NRSROs reported the simple 3-year default rate for the 2007 cohort. To calculate this, they formed cohorts for 2007, took the number of defaults that occurred over the 3-year period in each cohort, and divided them by the number of rated entities included in each cohort. NRSROs calculate conditional default rates by adjusting for the fact that entities can default at different points during the chosen time period. This method is called conditional because default rates are conditioned upon those issuers that “survived” for a particular amount of time. Simple defaults rates are equal to conditional defaults rates if neither are adjusted for withdrawals. However, simple withdrawal-adjusted default rates are larger than conditional withdrawal-adjusted default rates. The former assume that all withdrawals occurred at the beginning of the period and thus never had an opportunity to default. The latter reflect the fact that withdrawals occur at different times during the period, so the number of ratings that could default are larger at the beginning of the period than at the end.
Fourth, as with transition rates, the frequency with which the cohorts are formed affects the accuracy of average transition rates. Again, most of the NRSROs used annual cohorts, but two NRSROs used monthly cohorts.
Fifth, some NRSROs reported default rates for the most recent 1-, 3-, and 10-year periods for individual cohorts, while others reported average 1-, 3-, and 10-year default rates for multiple cohorts. For example, some NRSROs reported simple 3-year default rates for the 2007 cohort. However, one NRSRO reported average simple 3-year default rates for 1990–2009. It did so by first calculating simple 3-year default rates for every cohort from 1990 through 2009 and then averaging those default rates.
Table 4 summarizes the variation in the calculation of the default rates that we found in our review of the 2009 performance statistics.
Besides not specifying how the NRSROs should calculate their transition and default rates, SEC did not specify how the NRSROs should present their performance statistics. For example, four NRSROs reported their transition and default rates as percentages, but did not report the absolute number of ratings in each cohort. As a result, these disclosures have limited utility for comparison purposes. All else being equal, transition and default rates will be more precise, and thus more meaningful, the greater the number of observations used to calculate them. Furthermore, defaults are relatively rare events that may not be observed at all in samples that are too small. Knowing the absolute numbers of ratings in each cohort is thus important for comparative purposes to give users an idea of precisely how transition and default rates are calculated and the total numbers of entities involved in each rate. That is, if an NRSRO’s default rate is 20 percent, it is useful for users to know if one out of five rated entities defaulted, or if 10,000 out of 50,000 rated entities defaulted. As another example, if an NRSRO’s default rate increases from 10 to 12 percent in different years, it is useful for users to know whether that 2 percentage point difference resulted from the default of 20 or 2,000 additional rated entities.
At least one SEC-designated asset classes may be too broadly defined to be meaningful. Two NRSROs may rate the same asset class, but differences in ratings performance may reflect the differences between the sets of rated issues and issuers, and not necessarily provide insights into the relative merits of the ratings methodology used. For example, several NRSROs specialize in rating certain asset classes. Realpoint only rates commercial mortgage-backed securities (CMBS) while Japan Credit Rating Agency and Ratings and Investment, the two Japanese NRSROs, focus on Japanese issues. Thus, comparing the transition and default rates of these NRSROs with those of other NRSROs that may rate more types of structured finance products or focus on other geographic regions, may not be meaningful. In structured finance, the NRSROs that rate ABS generally present performance statistics for this asset class by sectors in their voluntary disclosures; that is, CMBS, RMBS, and ABS backed by auto, student, or credit card loans. These ABS sectors have risk characteristics that vary significantly. Thus, presenting performance statistics for the ABS asset class as whole, instead of by sectors, may not be useful. SEC has not yet re-evaluated the appropriateness of the currently designated asset classes to determine if they are appropriate for presenting performance statistics.
Trading and Markets staff said SEC issued rules requiring the NRSRO to publish performance statistics under tight time frames. Because this is a new area for SEC, staff said they wanted to focus on drafting a rule that would be appropriate. They said that once SEC, NRSROs, and the market obtain some experience with these disclosures, SEC could respond to any issues or comments with further rulemakings. Because the NRSROs do not have specific guidance for calculating and presenting their currently required performance statistics, they used different methodologies. As a result, users of these statistics cannot compare ratings performance across NRSROs. Further, asset classes that are defined too broadly limit the usefulness of the disclosures.
Under the Dodd-Frank Act, SEC must adopt rules requiring the NRSROs to publicly disclose information on the initial credit ratings determined by each NRSRO for each type of obligor, security, and money market instruments, and any subsequent changes to such credit ratings. The purpose of these rules is to allow users of credit ratings to evaluate the accuracy of ratings and compare the performance of ratings by different NRSROs. At a minimum, these disclosures must be comparable among NRSROs, clear and informative for investors having a wide range of sophistication who use or might use credit ratings, and include information over a range of years and for a variety of credit ratings, including those credit ratings that the NRSROs withdraw. In developing these new disclosure requirements, it will be important for SEC to provide clear and specific guidance to the NRSROs. Otherwise, the resulting disclosures may lack comparability.
Although Using Consistent Methodologies to Generate Performance Statistics Is Helpful, Other Differences Can Make Comparisons among NRSROs Difficult
Even if NRSROs use the same methodologies to generate and present performance statistics, there are differences in NRSROs’ measures of creditworthiness, ratings scales, ratings methodologies, and other processes. It is important that users of NRSRO performance statistics be aware of this contextual information when comparing NRSRO performance.
NRSROs vary in how they measure creditworthiness. For example, some NRSROs’ credit ratings measure the likelihood of default, while others also measure other characteristics, such as the anticipated severity of dollar losses given a default.
NRSROs also vary in how they define the elements of their ratings scales.
As previously discussed, NRSRO rating scales rank rated entities according to their relative creditworthiness, with higher ratings indicating higher creditworthiness. However, the creditworthiness associated with each rating category can vary across NRSROs. Even within a rating scale, the assignment of ratings in the same rating category to issuers and issues may not fully reflect small differences in the degrees of risk. Moreover, the degree of risk within a particular rating scale can change over time.
NRSROs can differ in how they determine when to withdraw a rating. As previously discussed, withdrawals typically occur when an issue matures, but NRSROs also exercise judgment on whether or not to withdraw ratings in other cases, such as when they believe they do not have sufficient information to provide a rating. They also can vary in the extent to which they track withdrawn ratings. We obtained information from four NRSROs on their treatment of withdrawn ratings. Three NRSROs continue to track the issue or issuer after a rating is withdrawn to determine whether it eventually defaulted. These NRSROs then update their performance statistics to account for these defaults. One NRSRO did not. NRSROs that track post-withdrawal defaults will show a higher default rate than those that do not, all other things being equal.
NRSROs can differ in how they define default. Therefore, some agencies may have higher default rates than others as a result of a broader set of criteria for determining that a default has occurred.
Differences in NRSROs’ rating methodologies can affect the relative stability of ratings. For example, in their public disclosures, two NRSROs stated that they rate through the business cycle, meaning that their ratings are intended to measure how an issuer will weather a variety of macroeconomic conditions, relative to other issuers. These rating agencies, upon receiving new information about the issuer, may not immediately revise the rating. As a result, ratings that reflect a through- the-cycle approach are less likely to fluctuate over time. However, another NRSRO told us that it updates ratings more frequently to reflect current market information and conditions. NRSROs that use this approach likely will have transition rates that show more volatility than the transition rates of NRSROs that rate through the business cycle.
Users of NRSRO performance statistics can obtain some of this contextual information from other disclosures NRSROs are required to make under Form NRSRO. As previously discussed, NRSRO applicants and registered NRSROs are required to disclose general descriptions of their policies and procedures for determining ratings. For example, these disclosures discuss each NRSRO’s approach to measuring creditworthiness, identifying defaults, and determining when to withdraw a rating. As part of their required disclosures of performance statistics, NRSROs also must describe the rating categories for their ratings scales. However, these descriptions define only the rank ordering of the elements of the rating scale, and do not give any indication of the actual degree of risk associated with a rating category.
When it proposed rules to require performance disclosures from the NRSROs, SEC requested comments on whether the performance statistics should use standardized inputs, time horizons, and metrics to allow for greater comparability. Some commenters opposed the use of standardized measures, stating that such measures would be impractical because credit rating agencies use different methodologies to determine credit ratings and different definitions of default and that the use of such measures could interfere with the methodologies for determining credit ratings. However, a few commenters supported the use of standardized measures because it would make it easier to compare NRSROs. In light of the different views expressed, SEC stated it would continue considering this issue to determine the feasibility and potential benefits and limitations of devising measurements that would allow reliable comparisons of performance between NRSROs. SEC’s ability to achieve comparability on some of these margins may be limited, however, given Section 15E prohibits SEC from regulating credit ratings and the procedures and methodologies used to determine them.
Required Disclosures of Ratings History Data Have Limited Usefulness for Generating Comparative Performance Statistics
In February 2009, SEC adopted a rule requiring issuer-pays rating agencies to disclose a random 10 percent sample of outstanding ratings in each class of ratings in which they have more than 500 issuer-paid ratings. In December 2009, SEC issued a second rule requiring all NRSROs to disclose 100 percent of the histories of their ratings actions for credit ratings initiated on or after June 26, 2007. SEC intended the two rules to be complementary and allow users to generate a variety of performance measures and comparative studies. However, we found that the data disclosed under the 10 percent sample disclosure requirement do not contain enough information to construct comparable performance statistics and are not representative of the population of credit ratings at each NRSRO and that the data disclosed under the 100 percent disclosure requirement likely present similar issues.
Factors Limiting Utility of 10 percent Samples Include Lack of Information on Ratings Types and Variables, and Sampling Methodologies
According to SEC, the 10 percent sample requirement is intended to foster accountability and comparability—and hence, competition—among NRSROs. SEC stated in the final rule that market observers should be able to develop performance statistics based on the data to compare the rating performance of different NRSROs, which will foster NRSRO competition. The rule specified that the ratings histories NRSROs must provide for each security that is part of their sample should include (1) all ratings actions (initial rating, upgrades, downgrades, placements on watch for upgrade or downgrade, and withdrawals); (2) the date of such actions; (3) the name of the security or issuer rated; and (4) if applicable, the CUSIP number of a rated security or CIK number of a rated issuer. New ratings actions must be disclosed no later than 6 months after they are taken.
We reviewed the 10 percent samples from the seven issuer-paid NRSROs. We could not use these samples to generate reliable performance statistics for the NRSROs, as the rule intended, for the following reasons: (1) the data fields the NRSROs included in their disclosures were not always sufficient to identify complete ratings histories for the rated entities comprising each sample, (2) the data fields did not always give us enough information to identify specific types of ratings for making comparisons, (3) the data fields did not always give us enough information to identify the beginning of the ratings histories in all of the samples, (4) SEC rules do not require the NRSROs to publish a codebook or any explanation of the variables used in the samples, (5) not all NRSROs are disclosing defaults in the ratings histories provided as part of their 10 percent samples, and (6) SEC guidance to the NRSROs for generating the random samples does not ensure that the methods used will create a sample that is representative of the population of credit ratings produced by each NRSRO. As a result, users cannot generate valid comparative performance statistics that can be compared across NRSROs.
First, SEC did not specify the data fields the NRSROs were to disclose in the rule, and the data fields provided by the NRSROs were not always sufficient to identify a complete rating history for ratings in each of the seven samples. If users cannot identify the rating history for each rating in the sample, they cannot develop performance measures that track how an issue or issuer’s credit rating evolves.
Second, the data fields did not always give users enough information to identify specific types of ratings for making comparisons. In one sample, we could not distinguish between issue ratings and issuer ratings. Distinguishing issuer rating histories from issue rating histories is important because, as we previously discussed, performance statistics for some asset classes, such as corporate issuers, financial institutions, and insurance companies, typically are calculated using issuer ratings, while performance statistics for issuers of ABS typically are calculated using issue ratings. Distinguishing between issuer and issue ratings is important for evaluating comparable entities across agencies. Comparing the performance of one agency’s issuer ratings with another agency’s issue ratings would not be meaningful. For ABS, one NRSRO told us that its sample did not have enough information to identify the individual tranches that constitute a deal. Without this ability, users cannot construct meaningful performance measures for ABS.
Third, the data fields did not always give us enough information to consistently identify the beginning of the ratings histories in all of the samples. One NRSRO did not include a variable describing rating actions, so we could not identify the initial rating in the rating histories. As a result, we could not calculate transitions or defaults relative to initial rating for this sample. We also could not calculate measurements, such as path-to- default or time-to-default, which depend upon comparing a starting point to the state of a rating at the time of default. The rating histories in three NRSROs’ samples did not always begin with an initial rating action. Those histories could not be used to calculate the performance statistics discussed above for the three NRSROs.
Fourth, SEC rules do not require NRSROs to publish a codebook or any explanation of the variables used in the samples, and none voluntarily publish one to accompany its sample data. For several NRSROs, we had to contact them to obtain an explanation of variables used in the samples. Without the ability to easily determine what data the variables represent, users could not begin to construct performance statistics.
Fifth, not all NRSROs have been disclosing defaults in the ratings histories provided as part of their 10 percent samples. As previously discussed, SEC requires that the ratings histories disclosed as part of the sample include all ratings actions taken. However, not all NRSROs consider the designation of “default” as a rating action. For example, one NRSRO does not consider default as part of its rating scale, so it does not disclose any defaults for any of the ratings that are part of its sample. Without this information, users cannot calculate any default statistics or other statistics that incorporate default rates for this sample.
Sixth, SEC guidance to the NRSROs for generating the random samples does not help ensure that the methods used will create a sample that is representative of the population of credit ratings at each NRSRO. The rule requires NRSROs to generate a random 10 percent sample of the outstanding ratings in each asset class for which the NRSRO is registered, but does not specify what kind of ratings to draw the sample from. Depending on how NRSROs construct their universe of outstanding credit ratings from which they draw the 10 percent samples, the samples may not represent similar ratings. For example, two NRSROs said they draw the 10 percent sample from the total number of entities that are rated, while two other NRSROs said they draw the sample from the total number of ratings. A corporate issuer may have a long-term debt rating and a short-term debt rating. An NRSRO drawing the sample from the total number of entities rated would count the corporate issuer as one rated entity. However, an NRSRO drawing the sample from the total number of ratings would count the ratings on both the issuer and the issue. Further, where samples include both issuer and issue ratings for asset classes such as corporate, financial institutions, or insurance companies, the user may have to first separate out the issuer ratings in order to calculate performance statistics. However, the fraction of issuers represented in the samples varies across asset classes and NRSROs and users do not know what these fractions are. Where NRSROs construct their universe of ratings based on the total number of ratings issued, and provide multiple kinds of ratings, the fraction of the sample that represents rated issuers is likely to be relatively small. Because NRSROs are not required to draw the sample from the rating types that are typically analyzed in each asset class, users may not have enough observations to generate statistically valid performance measures or develop comparable measures.
Furthermore, NRSROs are not required to redraw the 10 percent samples periodically. The rule requires that NRSROs re-examine their samples periodically to make sure that they remain 10 percent of outstanding ratings. We obtained information from five NRSROs on their methods for maintaining compliance with the rule. Two NRSROs told us they create a larger-than-required sample so that over time it is unlikely to dip below 10 percent of outstanding ratings. The other three NRSROs said they review the samples periodically to identify those securities that have matured or been withdrawn and replace them with randomly selected outstanding issues. These NRSROs do not redraw the samples. However, in both methodologies, the distribution of some ratings types will become less representative over time. For example, some ratings mature and are withdrawn at a faster rate than others, but these may be replaced with ratings that mature more slowly. If the NRSROs do not periodically redraw their samples, over time, statistics generated from the samples will become less representative of the population of credit ratings.
Most importantly, an NRSRO’s 10 percent sample is representative only of the NRSRO’s currently outstanding ratings, a subset of all the ratings the NRSRO has produced. That is, they do not represent ratings that have been withdrawn in prior time periods. As previously discussed, the methodologies used by some NRSROs for constructing default and transitions rates over time factor in ratings that have been withdrawn so that the statistics represent the population of ratings that were in effect during the period studied. Moreover, because withdrawn ratings may be systematically different from outstanding ratings, the 10 percent samples may not be representative of the underlying populations of all ratings the NRSROs have issued. Thus, historical performance statistics calculated using an NRSRO’s sample may contain biases that are not present in the universe of ratings that the NRSROs use to compose cohorts in their own studies. Furthermore, the extent of these biases may differ across NRSROs. Because the samples do not contain information on withdrawn ratings, they also do not contain information on the post-withdrawal performance of such ratings. As previously discussed, some NRSROs track issuers for evidence of default after their ratings are withdrawn. They then count these defaults as part of their own studies. One NRSRO said that defaults on withdrawn ratings account for about 20 percent of all the defaults it reports in its performance statistics for corporate issuers, financial institutions, and insurance companies. Unless NRSROs include withdrawn ratings as part of their samples, users cannot calculate performance statistics that are representative of the underlying population.
Exclusion of Many Issuers Limits Utility of 100 Percent Requirement for Comparative Purposes
As previously mentioned, SEC adopted a second rule in December 2009 requiring all NRSROs to disclose 100 percent of their ratings actions histories for credit ratings initiated on or after June 26, 2007. In the case of issuer-paid credit ratings, each new ratings action must be disclosed no later than 12 months after it is taken. For ratings actions that are not issuer-paid, each new ratings action must be disclosed no later than 24 months after it is taken. SEC stated in the final rule that the 100 percent requirement will help individual users of credit ratings design their own performance metrics. SEC also noted in the final rule that the 10 percent requirement and 100 percent requirement will provide different types of data sets with which to analyze and compare the performance of NRSROs’ credit ratings.
For example, SEC stated in the final rule that because the 10 percent sample requirement applies to all outstanding and future credit ratings in the rule’s scope, initially it will provide information that is much more retrospective and include histories for ratings that have been outstanding for much longer periods. However, SEC stated that because the 100 percent requirement is broader in scope, the disclosure eventually will provide for a more granular comparison of ratings performance. SEC stated that, unlike the 10 percent requirement, it will permit users of credit ratings and others to take a specific debt instrument and compare the ratings history of each NRSRO that rated it. SEC also noted that while the 10 percent sample requirement is limited to issuer-paid credit ratings, the 100 percent requirement covers all credit ratings, thereby allowing comparisons of a broader set of NRSROs.
The 100 percent requirement will make a larger amount of data available to users over time than the 10 percent requirement; however, several factors may limit the usefulness of the data for generating meaningful and comparable performance statistics. First, according to Trading and Markets staff, the rule does not require that these data include the ratings of any issuer that was rated before June 26, 2007. Officials from two NRSROs told us their samples thus exclude issuer ratings on many major American corporations. We searched the data disclosed by a third NRSRO pursuant to this rule, and could not find issuer ratings for several issuers that this NRSRO currently rates, such as the Allstate Corporation, Ford Motor Company, and General Electric Company. As performance statistics for several asset classes, including corporate issuers, are based on issuer, not issue ratings, performance statistics calculated using data that do not include the ratings of issuers rated prior to June 26, 2007, would not reflect the overall rating performance of NRSROs and may not be representative of the universe of issuer ratings. For example, one NRSRO told us that new issuers, especially new nonfinanical companies, generally are rated speculative. It said that its ratings history data would include ratings on only these issuers, and not the older, more established issuers. Where the data do not contain the types of ratings typically analyzed for a particular asset class, they will have limited usefulness for generating performance statistics.
Second, as with the 10 percent samples, data on withdrawn ratings and any subsequent defaults on withdrawn ratings are not required to be disclosed. To the extent that withdrawn ratings are not included in the data, users will not be able to generate withdrawal-adjusted statistics and the data will underrepresent defaulted issuers and issues. Finally, SEC required that NRSROs disclose the same ratings history information for the 100 percent disclosure requirement as for the 10 percent sample disclosure requirement (ratings action, date of such actions, the name of the issuer or issue, and the CUSIP or CIK number), but again, did not specify the data fields NRSROs were to include in their disclosures. As we discussed, the data fields provided by the NRSROs in their 10 percent samples were not always sufficient to ensure that the rating histories had enough information to allow the user to construct complete ratings histories or identify specific types of ratings for making comparisons. Without additional SEC guidance to NRSROs on how to format and describe the data, the 100 percent data sets likely will present challenges similar to those for 10 percent sample for users seeking to construct ratings histories and develop comparable performance statistics.
NRSROs’ Different Methodologies for Counting Total Outstanding Ratings Limit the Usefulness of These Disclosures
SEC requires that each NRSRO publicly disclose on its initial application and annual certification of Form NRSRO the approximate number of total outstanding ratings by each of the five major asset classes. In requiring public disclosure of this information, SEC said that users of credit ratings will find this information useful in understanding an NRSRO. For example, SEC said it would provide information to users of credit ratings as to how broad an NRSRO’s coverage is within a particular class of credit ratings.
However, SEC did not specify how the NRSROs were to count their outstanding ratings. As a result, the NRSROs used diverse methodologies to count up their outstanding ratings. For example, in the corporate issuers, financial institutions, insurance company, and government securities asset classes, some NRSROs counted the number of issuers rated, others counted the number of ratings on issues (which could be multiple) and others counted the number of rated issuers and issues. As another example, in the structured finance asset class some NRSROs counted the number of issuers whose deals they rated, some counted the number of deals, others counted the number of tranches underlying each deal, and others counted the number of ratings on each tranche (which could also be multiple). The NRSROs did not disclose how they determined their total outstanding ratings, so users have no way of knowing that these differences exist. Because of the inconsistencies in how the NRSROs count their total outstanding ratings, users cannot rely on the disclosures to assess how broad an NRSRO’s coverage is within a particular class of credit ratings.
As SEC Works to Remove NRSRO References from SEC Rules, It Will Need To Ensure It Has the Staff with the Requisite Skills to Evaluate Compliance with Any Alternative Creditworthiness Standard
In July 2008, SEC proposed amendments to multiple rules and forms that would have removed the references to NRSRO ratings from those rules. While SEC removed references from six rules and two forms, it retained the use of the ratings or delayed further action on two rules. These rules govern money market fund investments and the amount of capital broker- dealers must hold and use NRSRO references as risk-limiting measures. We found that OCIE examiners had concerns with these proposals. For example, in the securities rule regulating money-market fund investments, SEC proposed to remove NRSRO references, which the rule used to define the minimum credit quality of the securities a money market fund could hold, and relying instead solely on the existing requirement that fund boards independently assess the credit quality of portfolio securities and determine that each presents minimal credit risks to the fund. OCIE examiners expressed concerns that the proposed rule might allow money market funds to invest in riskier securities than the current rule allows. SEC opted not to remove references at that time. The recently adopted Dodd-Frank Act requires SEC and other federal agencies to remove references to NRSRO ratings from their regulations and substitute an alternative standard of creditworthiness. Given the Dodd-Frank Act requirements, SEC’s previous experience with proposals to remove credit rating references highlights the importance of developing a plan to help ensure that (1) any adopted alternative standards of creditworthiness for a particular rule facilitate its purpose (e.g., that money market funds invest only in high-quality securities or that broker-dealers hold sufficient capital against their investments), and (2) examiners have the requisite skills to apply the adopted standards. Without such a plan, SEC may develop alternative standards of creditworthiness that are not effective in supporting the purpose of a particular rule.
SEC Has Removed References from Multiple SEC Rules and Forms but Retained Their Use or Delayed Action on Two Rules
In the past 2 years, SEC has proposed or made changes to regulations that rely on the use of NRSRO ratings. Federal securities and banking regulations rely on NRSRO ratings for a variety of purposes. For example, NRSRO ratings are components of the definition of a mortgage-related security and establish criteria for eligibility for certain types of securities registration. According to a recent Joint Forum survey, U.S. federal banking and securities statutes, legislation, regulations, and guidance contain 81 references to NRSRO ratings, 45 of which are in SEC regulations or guidance and 36 in the statutes, regulations or guidance of various banking regulators.
In particular, SEC has proposed removing references to NRSRO ratings from Investment Company Act rule 2a-7, which contains provisions that limit the types of securities a money market fund can hold, and from Exchange Act rule 15c3-1 (the “net capital rule”), which includes provisions to designate the capital that broker-dealers must hold against their assets. Rule 2a-7 governs the operations of money market funds. Unlike most other investment companies, money market funds seek to maintain a stable share price, typically $1.00 per share. The Investment Company Act and applicable rules generally require investment companies to calculate current net asset value per share by valuing portfolio instruments at market value or, if market quotations are not readily available, at fair value as determined in good faith by, or under the direction of, the board of directors. Rule 2a-7 exempts money market funds from these provisions, but contains conditions on the investments of the fund such as maturity, quality, liquidity, and diversification, which are designed to minimize the deviation between a fund’s stabilized share price and the market value of its portfolio. If the deviation becomes significant, the fund may be required to take certain steps to address the deviation, including selling and redeeming its shares at less than $1.00 (breaking the buck). Among these risk-limiting conditions, rule 2a-7 limits a money market fund’s portfolio investments to eligible securities. Under rule 2a-7, eligible securities are those securities that have received a credit rating from the “requisite NRSROs” in one of the two highest, short-term rating categories or are comparable unrated securities. Rule 2a-7 further restricts money market funds to holding securities that the fund’s board of directors (or those on whom they rely) determines present minimal credit risks. This second requirement specifically requires that the determination “be based on factors pertaining to credit quality in addition to any rating assigned to such securities by an NRSRO.”
The net capital rule requires broker-dealers to maintain, at all times, a minimum amount of net capital and uses NRSRO ratings as a third-party assessment of credit risk in prescribing the level of capital required to be held. The rule was adopted to create uniform capital requirements for and help ensure the liquidity of all registered broker-dealers. In computing net capital, broker-dealers must deduct from their net worth certain percentages of the market value of their proprietary securities positions. The deductions are known as haircuts and serve to provide a margin of safety against losses broker-dealers might incur as a result of market fluctuations in the prices of, or lack of liquidity in, their proprietary positions. SEC allows broker-dealers to apply reduced haircuts for certain types of securities they hold that at least two NRSROs rate as investment- grade because these securities typically are more liquid and less volatile in price than securities not so highly rated. That is, the more highly rated the security, the more it counts toward the total amount of capital the broker- dealers are required to hold. In addition to NRSRO ratings, the net capital rule uses measures such as position concentration, maturity, and type of security to determine appropriate haircuts.
SEC proposed removing references to ratings in rule 2a-7 and the net capital rule in July 2008. Among other reasons, SEC proposed these amendments to address the risk that the references to and use of NRSRO ratings in SEC rules could be interpreted by investors as an endorsement of the quality of the rating and might encourage investors to place undue reliance on them. For rule 2a-7, SEC proposed eliminating the requirement that portfolio securities have a certain NRSRO rating (or be a comparable unrated security), while retaining the requirement that portfolio securities be limited to those that the fund’s board of directors determines present minimal credit risks. The proposal also would have specifically required the board’s determination to be based on factors pertaining to credit quality and the issuer’s ability to meet its short-term financial obligations.
The proposal would have eliminated the requirement that money market funds restrict themselves to investing in securities highly rated by NRSROs (or comparable unrated securities), and instead relied on the existing requirement that the fund’s board of directors determine that the securities present minimal credit risks. Under the proposal, fund boards could have continued to use quality determinations prepared by outside sources, including NRSRO ratings, if they concluded these ratings were credible for making credit risk determinations. In the rule proposal, SEC stated it expected that boards of directors (or their designees) would understand the basis for the rating and make an independent judgment of credit risk. In February 2010, SEC adopted amendments to rule 2a-7, which continues to use NRSRO ratings in defining eligible securities. The amendments require money market fund boards to designate, at least once each calendar year, at least four NRSROs, the credit ratings of which the boards deem to be sufficiently reliable for use by their funds to comply with rule 2a-7’s eligible security requirements.
As proposed in July 2008, the revisions to the net capital rule would substitute two new standards for the current NRSRO ratings-based categories. For determining haircuts on commercial paper, SEC proposed to replace the top tiers of ratings-based categories with a requirement that the instrument be subject to a minimal amount of credit risk and have sufficient liquidity so that it could be sold at or near its carrying value almost immediately. For determining haircuts on nonconvertible debt securities, SEC proposed a requirement that the instrument be subject to “no greater than moderate” credit risk and have sufficient liquidity so that it could be sold at or near its carrying value in a reasonably short time. According to SEC, the proposed standards are meant to serve the same purpose as the prior standards. Thus, securities with “no greater than moderate” credit risk would encompass all so-called investment-grade securities. SEC believes broker-dealers have the financial sophistication and the resources necessary to make the basic determination of whether or not a security meets the requirements in the proposed amendments and distinguish between securities subject to minimal credit risk and those subject to moderate credit risk. Under the proposal, broker-dealers would have to be able to explain how the securities they used for net capital purposes met the standards in the proposed amendments. However, SEC stated it would be appropriate, as one means of complying with the proposed amendments, for broker-dealers to refer to NRSRO ratings for the purposes of determining haircuts under the rule. SEC decided to delay any action on this proposal and as of June 2010, continued to solicit comments.
In October 2009, SEC adopted amendments to six rules and two forms that removed the references to NRSRO ratings made in these rules. Four of these rules and the two forms originally were adopted in 1998 as part of SEC’s new framework for regulation of exchanges and alternative trading systems and utilized “investment-grade” and “non-investment-grade” to distinguish between classes of securities. The adopted amendments and changes to forms eliminated the distinction between classes of securities and the use of “investment grade” and “non-investment-grade.” The remaining two rules utilize the terms “highest rating category from an NRSRO” and “investment-grade rating from at least one NRSRO” to define securities exempted from specific requirements or define a class of securities eligible for purchase by funds when the security’s principal underwriter had certain relationships with the fund or its investment adviser. In both cases, the adopted amendments remove the references to ratings and either remove the exemption or redefine the class of eligible securities.
Developing a Plan to Address the Implications of the Adopted Alternative Standards May Help SEC Ensure It Has the Skills and Resources Necessary to Evaluate Compliance with the Standards
The proposed changes to rules 2a-7 and 15c3-1 would have eliminated the bright-line creditworthiness standard OCIE examiners used to determine that money market funds invested in high quality securities or the appropriateness of the haircut a broker-dealer took for net capital purposes on a security. We reviewed OCIE’s 2a-7 examination module and 65 OCIE money market fund examinations (for FY 2003–2009) identified as having 2a-7 deficiencies to understand how OCIE examiners assess compliance with the rule’s requirements for determining an “eligible security” and minimal credit risks and how the removal of NRSRO references would affect SEC’s ability to oversee a fund’s exposure to credit risks.
As stated above, rule 2a-7 limits money market funds investments to those securities that are rated in one of the two highest short-term categories by an NRSRO or comparable unrated securities and that the fund’s board determines present minimal credit risks for the fund. OCIE examiners examine money market funds for compliance with this provision by reviewing the NRSRO ratings at the time of purchase for securities held. Examiners typically identify if securities held by a money market fund are eligible securities by requesting a list of all portfolio holdings, including the current NRSRO rating for each holding, and verify the NRSRO ratings by reviewing the published ratings on Bloomberg or on the NRSRO Web site.
OCIE examiners then typically review a fund’s compliance and procedures manuals to help ensure that the board has established minimal credit risk guidelines and receives periodic credit risk updates and reports from the adviser verifying that all the securities comply. Examiners further request and review a small sample of credit analysis packages that demonstrate that the securities are eligible and a sample of the materials presented to the fund’s security evaluation committee as evidence of ongoing reviews that a security continues to present minimal credit risks. According to OCIE examiners, policies, procedures, and practices for conducting minimal credit risk analysis vary widely.
Of the 65 examinations of money market funds OCIE completed in FY 2003-2009 that we reviewed, 36 examinations identified 42 deficiencies in the funds’ compliance with the requirement for a minimal credit risk determination. They generally could be categorized as deficiencies in fund board oversight, policies and procedures, or credit file documentation. According to OCIE examiners, citing funds for a deficiency in documenting its analysis of minimal credit risk in an examination is not unusual. For example, in one examination deficiency letter OCIE found no current written documentation in the credit files substantiating that the fund adequately determined that each security purchased presented minimal credit risks and requested that the fund bring its files up-to-date. According to Enforcement staff, SEC has not brought any enforcement actions against a money market fund for violations of this requirement.
OCIE examiners expressed concerns with the proposed rule because they believed it might allow money market funds to invest in riskier securities than the current rule allows. Under the proposed rule, a money market fund could invest in any security it finds to present a minimal credit risk. OCIE examiners stated they would have likely continued to evaluate for compliance with the minimal credit risk determination requirement as they do under the current rule. As such, OCIE only examines a fund’s policies and procedures to assess if they effectively address credit risk and to assess whether a fund follows its policies and procedures in making credit risk determinations. It does not evaluate the standards used to determine whether a security is deemed to represent a minimal credit risk, dictate the types of analyses that must be included in a minimal credit risk determination, or make any of its own determinations as to whether the security represents a minimum credit risk to that fund. According to Investment Management staff, the minimum credit risk requirement was not designed for these purposes as the rule recognizes that funds can have different investment objectives and positions, and as such, the same security could present different risks to different funds. One fund might consider a particular security an appropriate investment, while another would not. OCIE examiners stated that the proposed rule eliminated the floor, in terms of creditworthiness, that NRSRO references provided and it was unclear how, if at all, the standard for eligible securities under the proposed rule would ensure that money market funds continued to invest only in securities of the highest credit quality.
Further, if OCIE examiners were given the authority to evaluate funds’ credit risk determinations, OCIE staff told us that additional resources and skill sets would be needed to conduct such examinations and they questioned OCIE’s ability to evaluate the credit risk determinations. To date, examiners have not needed to have these skills because examiners, as dictated by the rules and interpretations, relied on NRSRO ratings. OCIE examiners told us that as proposed, they likely would approach compliance examinations by continuing to focus on ensuring that funds had reasonable policies and procedures in place for determining what constituted an eligible security and documentation demonstrating that those policies and procedures were followed and an analysis of credit risk completed.
The proposal to remove NRSRO references from the net capital rule also would eliminate the credit-risk criteria OCIE examiners currently use, among other factors, to determine whether a broker-dealer was taking appropriate haircuts. Under the current rule, broker-dealers use a variety of factors, including whether the security is rated investment grade, to determine the haircut they must take on debt securities when determining their net worth for regulatory capital purposes. OCIE examiners generally confirm the net capital calculation by reviewing and confirming a firm’s inventory, selecting a sample of securities with which to verify the existence of a ready market, and verifying that the haircuts were accurate and considered in the net capital computation. Under the proposed rule, broker-dealers would be responsible for determining the level of risk a security presented and the amount of the subsequent haircut, which could be different for each broker-dealer, depending on the methods used.
Going forward, the Dodd-Frank Act requires SEC to remove NRSRO ratings from its rules. SEC’s previous experience with proposals to remove credit rating references highlights the importance of developing a plan to help ensure that (1) any adopted alternative standards of creditworthiness for a particular rule facilitate its purpose (e.g., that money market funds invest only in high-quality securities or that broker-dealers hold sufficient capital against their investments), and (2) examiners have the requisite skills to determine that the adopted standards have been applied. Without such a plan, SEC may develop alternative standards of creditworthiness that are not effective in supporting the purpose of a particular rule.
The Number of NRSROs Has Increased since the Act Was Implemented but Industry Concentration Remains High
Since the implementation of the Act, the number of NRSROs has increased from 7 to 10. However, the market remains highly concentrated. Continued concentration is likely a result of multiple factors. First, relatively little time has passed since SEC implemented the NRSRO registration program and NRSRO rulemaking. Second, credit rating agencies face barriers in entering the credit rating industry and registering as an NRSRO. Academic research suggests that increasing competition among NRSROs improves information availability but the impact on ratings quality is unclear.
The Number of NRSROs Has Increased from 7 to 10, but the Industry Remains Concentrated
Since the implementation of the Act, the number of NRSROs has increased from 7 to 10; however, the market remains highly concentrated. As previously discussed, 7 credit rating agencies had received SEC staff no- action letters recognizing them as NRSROs prior to the Act. When the NRSRO registration program became effective, these firms applied to register as NRSROs and received SEC approval. All of these operate primarily under an issuer-pays business model. SEC also granted NRSRO registration to 3 additional credit rating agencies that operate primarily under a subscriber-pays business model.
Figure 1 indicates when the 10 NRSROs began producing credit ratings and the year that SEC first recognized them as NRSROs, either through the he no-action letter process or the NRSRO registration program. no-action letter process or the NRSRO registration program.
None of the 10 NRSROs, including the 3 newly registered subscriber-pays NRSROs, is a new entrant into the credit rating industry. Further, all 10 NRSROs have been producing ratings for a number of years. A.M. Best, Fitch, Moody’s, and Standard & Poor’s have been producing ratings the longest—for more than 80 years. Several of these NRSROs have undergone mergers with or acquisitions of other rating agencies or NRSROs over the years. For example, Poor’s Publishing and Standard Statistics merged in 1941 to form Standard & Poor’s, and Moody’s was acquired by Dun and Bradstreet in 1962. Fitch merged with IBCA Ltd in 1997, and in April 2000, acquired Duff & Phelps Credit Rating Company and Thomson BankWatch. More recently, in May 2010 Realpoint was acquired by Morningstar, Inc.
Credit rating agencies can apply to register as NRSROs in five distinct asset classes: financial institutions, insurance companies, corporate, ABS, and government securities. Table 5 describes the asset classes in which each NRSRO is registered.
Some NRSROs, such as Moody’s, Standard & Poor’s, and Fitch, cover a wide range of securities that span all five asset classes. Others have specialized in a particular asset class, sector, or geographic region. For example, although Realpoint is designated in ABS, it specializes in one type of ABS, specifically CMBS. LACE is designated in four asset classes, but specializes in rating financial institutions. Similarly, A.M. Best is designated in four asset classes, but specializes in rating insurance companies and related securities. Japan Credit Rating Agency and Ratings and Investment, Inc., are Japanese rating agencies that mainly rate Japanese issuers.
Although the number of NRSROs has increased, the credit rating industry remains highly concentrated. To assess the impact of the Act on competition among NRSROs, we calculated the HHI, a key statistical measure used to assess market concentration and the potential for firms to exercise their ability to influence market prices. The HHI reflects the number of firms in the industry and each firm’s market share. It is calculated by summing the squares of the market shares of each firm competing in the market. The HHI also reflects the distribution of market shares of the top firms and the composition of the market outside the top firms. The HHI is measured on a scale of 0 to 10,000, with larger values indicating more concentration. According to DOJ, markets in which the value of the HHI is between 1,500 and 2,500 points are considered to be moderately concentrated, and those in which the value of the HHI is in excess of 2,500 points are considered to be highly concentrated, although other factors also play a role.
We calculated the HHI by summing the squares of the market shares of all the firms competing in the industry. Doing so requires defining what constitutes the industry and specifying our measure of market share. We defined the relevant industry as the set of credit rating agencies that have NRSRO status, and we used a variety of market share definitions to ensure that any trends in industry concentration we observed were robust to alternative specifications of NRSROs’ market shares. A firm’s market share typically is measured in terms of dollars, as either its sales or revenue as a fraction of total sales or revenue for all firms in the industry, or in terms of quantities, such as its output as a fraction of total output produced by all firms in the industry.
We first calculated the HHI using market shares based on total revenues earned by the NRSROs. NRSROs generally earn revenues from a number of activities related to the production of credit ratings. Issuer-pays NRSROs earn the bulk of their revenues from the fees paid by issuers to have their issues rated. However, issuer-pays NRSROs offer other services as well, including subscription services to users of credit ratings. Subscriber-pays NRSROs earn their revenues from subscription fees and other services. Some of the types of services offered by the subscriber- pays NRSROs are data and valuation and proxy services for financial institutions.
NRSRO applicants and registered NRSROs must provide data on the total revenues earned in the prior calendar year to SEC on Form NRSRO. We used these data to calculate the HHI from 2006 to 2009. Table 6 provides the results of these calculations.
The table shows that while the HHI declined between 2006 and 2009, the industry remains highly concentrated according to DOJ standards. This decline is likely influenced by the entrance of the three new NRSROs in late 2007.
An NRSRO’s total revenue does not necessarily reflect its total output; that is, the number of ratings it produces. For example, both issuer-pays and subscriber-pays NRSROs could provide ratings on the same group of entities, but receive vastly different revenues. Because market shares based on numbers of ratings can differ from those based on total revenue, so can the HHI, possibly revealing a different trend in industry concentration. To assess industry concentration using an output-based measure of market share, we attempted to calculate the HHI using market shares based on the number of each NRSRO’s outstanding ratings. However, as previously discussed, we found inconsistencies in the methods that the NRSROs use to count their outstanding ratings. As such, the data were not valid for purposes of calculating the HHI.
As an alternative assessment of industry concentration using an output- based measure of market share, we calculated the HHI using market shares based on the number of issuers each NRSRO rates (see table 7). We obtained data from nine of the NRSROs on the number of issuers they rated in each asset class in 2006–2009 and used it to calculate the HHI for these 4 years. We were unable to obtain data on the number of rated issuers from one NRSRO because it said it did not track rated organizations by whether or not they issue debt securities. However, this NRSRO did provide us with the total number of organizations it rated.
The table shows that the industry is concentrated in every asset class in every year according to DOJ standards, although the industry has become less concentrated in corporate issuers, financial institutions, insurance companies, and issuers of ABS asset classes with the HHIs decreasing by 5 percent, 4 percent, 10 percent, and 2 percent, respectively, between 2007 and 2009. The industry has become more concentrated in the issuers of government securities asset class, with the HHI increasing by about 2 percent between 2007 and 2009. These results, however, assume that none of the organizations rated by the 10th NRSRO issues debt securities.
To assess the sensitivity of these results to the missing data from the NRSRO that did not track which of its rated organizations issue debt securities, we recalculated the HHIs assuming that all of the organizations this NRSRO reported rating issue debt securities. We did so because it is likely that some of the organizations this NRSRO rates do issue debt securities, but we cannot determine how many. Calculating the HHIs based on the alternative assumption that all of the organizations this NRSRO rates issue debt securities gives us a range within which the true value of the HHI is likely to fall.
The main difference between our alternative and baseline estimates is in the HHI for the financial institutions asset class. The alternative assumption produces estimates of the HHI for the financial institutions asset class for 2008 and 2009 that are 133 percent and 136 percent, respectively, larger than our baseline estimates. The two estimates differ because the NRSRO that did not provide us with data rates at least 10 times as many organizations in the financial institutions asset class as any other NRSRO. Assuming that all of these organizations issue debt securities produces high HHI estimates because it implies that the excluded NRSRO has a relatively high market share and thus that the industry is relatively highly concentrated.
Finally, to assess trends in concentration in the market for rating structured finance securities, we calculated the HHI for January 2004–June 2010 using market shares based on the dollar value of issuance of U.S.- issued ABS rated by an NRSRO. Issuance-based HHI declined by about 18 percent over this time period (1 percent during 2004-2007 and 17 percent since 2007), indicating that this market has become less concentrated (see table 8). We note that the market for ABS declined considerably since 2007. According to data from Asset-Backed Alert, the number of ABS deals declined from over 3,000 in 2006 to about 370 in 2009. For 2010, 223 deals were reported as of the end of June.
Since the U.S. ABS asset class includes distinct products, we also examined five sectors in the ABS asset class to determine if trends in market concentration varied across these sectors (table 8). The five sectors are traditional ABS (that is, securities backed by student loans, auto loans and credit card loans, but not by mortgages), prime RMBS, nonprime RMBS, CMBS, and CDO. We calculated the HHI for the market for rating securities in each of these sectors using market shares based on the dollar value of issuance rated by an NRSRO. The 17 percent reduction in the HHI for the market for rating securities in the ABS asset class as a whole since 2007 was driven primarily by the reduction in concentration in the market for rating traditional ABS and CMBS. For these markets, the issuance-based HHI declined by about 7 percent and 13 percent, respectively, since 2007. On the other hand, the markets for rating prime RMBS, and CDOs have become more concentrated since 2007. While the market for rating nonprime RMBS also has become more concentrated since 2007, the number of issuances offered since then has declined so rapidly that trends in the HHI are difficult to interpret.
The HHI indicates that the market for rating ABS remains highly concentrated by DOJ standards, even in those sectors in which concentration has declined since 2007. To assess which NRSROs are dominating this market, we examined the NRSROs’ annual market coverage. Annual market coverage is an indication of the quantity of ratings an NRSRO produces relative to the quantity of issues or issuers that are available to be rated. Because more than one NRSRO can rate an issue or issuer, the sum of each NRSRO’s annual market coverage can add to more or less than 100 percent. We measure an NRSRO’s annual market coverage as the dollar volume an NRSRO rates as a fraction of the total volume issued. We did not assess the causal factors behind any trends we observed.
Trends in annual market coverage from January 2004 through June 2010 among the six NRSROs that rated U.S. ABS issuance generally shifted beginning in 2007 (see fig. 2). These six were the only NRSROs to rate new U.S. ABS issuance during this period. From 2004-2007, Standard & Poor’s, Moody’s, and Fitch provided the most annual market coverage in this asset class, rating an average of about 94 percent, 89 percent, and 49 percent, respectively, of issuance. Starting in 2008, Standard & Poor’s and Moody’s annual market coverage began to decline. For the first half of 2010, Standard & Poor’s and Moody’s were rating only about 73 percent and 62 percent, respectively, of issuance. Fitch’s annual market coverage peaked in 2009 at about 59 percent of issuance, and then declined to about 31 percent for the first half of 2010. On the other hand, DBRS increased its coverage from about 4 percent in 2007 and 2008 to about 33 percent in June 2010.
We also examined NRSROs’ coverage of the five sub-sectors in the ABS asset class and found that trends in annual market coverage varied across sectors. Trends in coverage of traditional ABS are similar to those for the ABS asset class as a whole, the main difference being that Fitch’s coverage did not peak in 2009 before declining (see fig. 3).
In prime RMBS, Moody’s market coverage began to decline in 2007 from about 88 percent to about 6 percent in June 2010. Standard & Poor’s annual market coverage of prime RMBS began to decline in 2008, falling from about 94 percent in 2007 to about 42 percent in 2009, but it has since increased to about 63 percent (see fig. 4). Fitch’s market share peaked in 2009 at about 62 percent, but has since declined to about 9 percent.
Trends in coverage of the nonprime RMBS market are the most dramatic, with both Standard & Poor’s and Moody’s coverage plummeting from more than 90 percent to zero for 2009 and 2010, and Fitch’s coverage falling from about 57 percent for 2005 to about 1 percent for 2008 (see fig. 5). On the other hand, DBRS coverage of nonprime RMBS increased from about 14 percent for 2005, and 12 percent in 2006–2007 to about 73 percent for 2008. Furthermore, DBRS was the lead NRSRO to rate the most nonprime RMBS deals issued in 2009 and the first half of 2010, rating three more than Moody’s.
Declines in Standard & Poor’s, Moody’s, and Fitch’s coverage of the CMBS market through 2009 were almost as dramatic as those in the nonprime RMBS market, but they have not been matched by correspondingly dramatic increases in DBRS’s coverage of the nonprime RMBS market (see fig. 6). Rather, Realpoint’s CMBS coverage has increased from virtually zero through 2008 to 19 percent in 2010. In addition, Standard & Poor’s, Moody’s, and Fitch’s coverage of the CMBS market have all rebounded somewhat in 2010, with Fitch’s annual market coverage in 2010 about equal to its annual market coverage in 2005 (about 56 percent).
Finally, in the CDO market, Moody’s coverage fell from about 97 percent in 2007 to about 39 percent in 2009 (see fig. 7).
Moody’s CDO coverage was about the same as Standard & Poor’s in 2007, but has declined steadily since then to about 40 percent in 2009. It has since increased to 100 percent. Fitch’s CDO coverage declined from about 35 percent in 2004 to zero in 2010 (with a brief increase in 2009 covering about 22 percent of the market). DBRS’s CDO coverage has remained negligible throughout the period.
In December 2009, SEC adopted rule amendments that are intended, in part, to increase competition in the rating of ABS. Beginning in June 2010, the amended rule requires an NRSRO hired by arrangers to rate a structured finance product to disclose on its password-protected Website each structured finance product it has been hired to rate, along with the type of structured finance product, the name of the issuer, the date the rating process began, and the Web site at which the issuer will disclose the information it has provided to the NRSRO for the rating. The amended rule requires the arranger to provide representations to the hired NRSRO that it will make available the information it has provided to the hired NRSRO for determining an initial rating or for monitoring a rating on the issuer’s password-protected Web site. The issuer must also provide representations to the hired NRSRO that it will allow other NRSROs access to the information so that the other NRSROs can produce unsolicited ratings on the same structured finance product. SEC proposed these rule amendments after its examinations of the three largest NRSROs identified issues in the management of conflicts of interest particular to structured finance ABS. In particular, SEC found that analysts appeared to be aware of NRSROs’ business interest in securing the rating of the deal and that rating agencies did not appear to take steps to prevent considerations of market share and other business interests from influencing ratings or rating criteria. In the proposed rule amendments, SEC stated it believed that the issuer-pays conflict is particularly acute in the case of structured finance products because certain arrangers of structured finance products bring repeat business to NRSROs. As such, SEC believes that some arrangers have the potential to influence NRSROs on structured finance products more than on corporate securities.
In the amended rule, SEC stated that one of its goals is to facilitate the issuance of credit ratings for structured finance products by nonhired NRSROs at the same time as the hired NRSRO and provide investors with more views on the creditworthiness of the structured finance product. SEC stated this practice may serve to increase unsolicited ratings for structured finance products, mitigate ratings shopping, and affect competition among NRSROs by having more ratings in the market. Furthermore, SEC stated that market participants could use unsolicited ratings to evaluate the ratings issued by the hired rating agency. Specifically, SEC intends that by opening up the ratings process to more NRSROs, hired NRSROs will find it easier to resist any pressure by the arranger to obtain better-than-warranted ratings, because of the likelihood that any steps taken to inappropriately favor the arranger could be exposed to the market through credit ratings issued by other NRSROs.
Although not enough time has passed to assess the impact of the amended rule on competition, we found that one NRSRO has withdrawn its NRSRO registration in this asset class and the other NRSROs had varying views on its potential effectiveness. One NRSRO said that the high cost of establishing and maintaining the data systems could negatively impact both NRSROs and issuers. Further, this NRSRO said the amended rule could deter issuers from taking innovative structured finance products to the market because they would have to disclose proprietary information. Another NRSRO said the cost of implementing the rule could burden nonhired NRSROs, who may need to post only very limited information under the rule, and thus compromise the effectiveness of the rule. In May 2010, one NRSRO announced it was withdrawing its NRSRO registration in this asset class. This NRSRO said it made this decision in part because it believed that the funds raising activities through structured finance products in the geographic region it serves might be negatively affected. A fourth NRSRO agreed that publishing unsolicited ratings could enhance the transparency of the ratings process, but said that rating new structured finance issuances was too costly without fees from an issuer. For example, this NRSRO said that its costs were approximately $2,500 to verify the data underlying the security in an ABS that it rates. Additionally, this NRSRO said that legal costs for analyzing the securities in a deal ranged from $25,000 to $50,000. However, another NRSRO was not concerned with the costs associated with implementing the rule and believed the new rule could be effective.
Multiple Factors Likely Account for Continued Concentration among NRSROs
The continued concentration among NRSROs since the implementation of the Act likely resulted from several factors. First, little time has passed since the Act took effect. Second, the three new NRSROs registered under the new program have not had much time to build market share. Furthermore, SEC rules implementing the new NRSRO registration program and requiring disclosures of ratings performance, ratings methodologies, and conflicts of interest have been in place since June 2007, and have been amended twice. Finally, the credit crunch and the ensuing financial crisis occurred soon after the implementation of the Act, substantially slowing certain sectors of the credit market.
Generally speaking, barriers to becoming an NRSRO create challenges for newer and smaller credit rating agencies. Two types of barriers to entry likely contributed to the continued concentration of the industry: entering the credit rating industry and registering as an NRSRO.
We have identified three barriers to entering the credit rating industry. First, credit rating agencies may have relatively high fixed costs. Credit rating agencies that are established can produce ratings in volume leading to economies of scale. The combination of high fixed costs and economies of scale favor larger established rating agencies and pose barriers to smaller firms entering the market. And, the markets for some asset classes may be more difficult for rating agencies to enter than others. For example, a credit rating agency told us it is difficult for a credit rating agency to get into the credit rating market for the structured finance class because of costs associated with acquiring the expertise to rate this type of product. Further, rating methodologies for structured finance products are complex, requiring expertise to develop and apply the models needed to rate this type of product.
Second, establishing a reputation takes time. The better a rating agency’s reputation for producing ratings, the more business it will be able to attract as compared with a credit rating agency without a reputation. However, given the nature of the ratings, reputation can take years to establish. In most cases, ratings are intended to predict the likelihood of default over the life of the bond, but some securities take from 10 to 30 years to mature. When a new rating agency begins to rate securities, evaluating the quality of those ratings at the time of purchase is difficult. Instead, users need to see how the ratings perform over the life of the bond to determine how accurate and timely they are. Several NRSROs have commented that their reputation is critical to their success. One NRSRO said that a reputation is difficult to earn and easy to lose.
Third, network effects pose a challenge to entry in the ratings industry and favor the larger, more established credit rating agencies. The more securities a specific NRSRO rates, the more value to assigning ratings to that same NRSRO, because comparing securities rated by that NRSRO would be easier for investors and other market participants. Network effects can make gaining market share difficult for new entrants if investors and other market participants already are using an existing NRSRO’s ratings. NRSRO references have been widely embedded in numerous federal and state laws and regulations. Further, many investment guidelines and private contracts reference specific NRSROs, which makes marketing to investors, other users, or issuers more difficult for newer NRSROs. Several institutional investors and investment advisors with whom we spoke told us they use the big three NRSROs’ ratings either because of investor guidelines, regulatory guidelines, or depth of ratings coverage. Although there is no limit on the number of NRSROs that can rate a particular issue, asset managers may face budgetary constraints that limit their ability to subscribe to NRSROs beyond those their investment agreements require them to consider. For example, one asset manager told us that they have a limited budget for subscriptions to ratings and that purchasing subscriptions for each analyst in the credit research department is costly. They told us they have subscription services with four NRSROs but have a limited working relationship with the others. Three issuers with whom we spoke told us that their choice of NRSRO is driven by investor expectations, which directs them to the big three firms.
A credit rating agency also encounters barriers to entry when registering as an NRSRO. Despite the efficiency and transparency of the new NRSRO registration program, compliance with the Act and SEC rules may result in higher costs for smaller NRSROs and may inhibit credit rating agencies from registering as NRSROs. For example, one small NRSRO estimated it spent $500,000 annually to maintain the NRSRO designation. Two rating agencies with which we spoke said they would not register because of the regulatory burden associated with being in compliance with the Act. Furthermore, one NRSRO told us it might de-register as an NRSRO should regulation became too costly.
Besides barriers to entry, differences between NRSROs’ compensation models and a degree of specialization may also contribute to market concentration. For example, subscriber-pays NRSROs may be limited in their ability to rate newly issued securities. One NRSRO explained that it uses the subscriber-pays model to provide ongoing surveillance of rated securities in the secondary market, which it produces using publicly available information. However, it said it could not use the subscriber-pays model to rate the initial offering of securities because, under this model, it would not have access to the data provided by the issuer to complete the analysis and produce an initial ratings. To the extent the subscriber-pays NRSROs are not rating new issues, market coverage of these securities will be concentrated among issuer-pays NRSROs. As another example, the difference between the issuer-pays and the subscriber-pays compensation models could also impact market concentration when it is measured in terms of total revenues. As previously discussed, both issuers-pays and subscriber-pays NRSROs could provide ratings on the same group of entities, but receive vastly different revenues. Issuer-pays NRSROs charge the issuers fees for every rating produced, while subscriber-pays NRSROs are charging users a subscription fee for access to their ratings. Thus, if issuer-pays and subscriber-pays rate the same entities, total revenue will likely be concentrated among NRSROs using the compensation model that generates the greatest revenues per rated entity. Finally, to the extent certain NRSROs specialize in a particular asset class, sector, or geographic, the overall credit rating industry will likely be highly concentrated among those NRSROs, which rate across asset classes, sectors, and geographic regions. However, a specialized NRSRO could have a significant presence in its market.
Academic Research Suggests Increasing Competition in the Credit Rating Industry Improves Information Availability, but the Impact on Rating Quality Is Unclear
The impact of increasing competition on the quality of credit ratings is not yet well understood. Academic researchers generally measure the quality of credit ratings according to how much information they convey about the risk of default or of loss in the event of default. Their findings suggest that the entry of new credit rating agencies can improve overall information available to investors and other market participants. However, the effect of entry on the quality of ratings produced by any one rating agency is not clear. Moreover, there have been few studies investigating the effect of new entrants and competition in the credit rating industry. These studies are unpublished and, thus, their findings should be viewed as preliminary in nature.
We reviewed three studies that examined the impact of competition on ratings quality. Based on an analysis of insurance company ratings, one study suggests that entry of a new credit rating agency improves the amount of information available to investors and other market participants. This study suggests that new entrants have stricter criteria than incumbents for assigning the same rating, assuming they both use the same rating scale. It is more difficult for an issuer to get the highest rating from the new rating agency than from the incumbent rating agency. An issuer can choose to be rated by the incumbent rating agency, by the new rating agency, or both. Furthermore, the two ratings agencies’ criteria are different. As a result, an issuer can communicate more information about its riskiness to the market by its choice of ratings agency and the combination of ratings it gets than it could communicate when there was only one rating agency.
A different study of CDO ratings also suggests that the number of rating agencies from which an issuer requests ratings is informative. Specifically, tranches rated by more than one rating agency were less likely to be downgraded than those rated by a single rating agency. This result is consistent with the hypothesis that issuers of less-risky CDOs were more likely to request two or more ratings.
Based on ratings of corporate issuers, insurance companies, and financial institutions, a third study analyzes the impact of competitive pressure from a new credit rating agency on the quality of an incumbent rating agency’s ratings. The study uses three alternative indicators of quality. The first indicator is the correlation between a bond’s rating and its yield, with lower correlations indicating that ratings are less informative about bond repayment and thus are of lower quality. The second indicator is the magnitude of the effect of a downgrade on an issuer’s stock price, with larger magnitudes indicating that the downgrade is worse news. The last indicator is the rating it assigns to an issuer or a bond, with higher ratings presumed to be more favorable to the issuer and thus of lower quality. This study suggests that the incumbent credit rating agencies produce lower-quality ratings in market segments in which smaller, newer credit rating agencies have higher market share.
Together, the three studies’ findings have implications for the amount of information available to credit market participants and for the quality of credit ratings and may offer some preliminary observations about the impact of new entrants on rating quality and competition. The first and second studies both suggest that entry of new credit rating agencies will allow issuers and other rated entities to communicate more information to the market, both by the numbers of ratings they request and by the combination of ratings they receive from different rating agencies. The findings of the second and third studies together seem to suggest that entry of new credit rating agencies will lead incumbent rating agencies to produce lower-quality ratings, either relative to the new entrant’s ratings or relative to their own ratings in markets in which they face less competitive pressure. However, it is difficult to predict what the effect will be on the incumbent rating agencies’ ratings when a new entrant enters the market.
Models Proposing Alternative Means of Compensating NRSROs Intend to Address Conflicts of Interests in the Issuer- Pays Model
As part of an April 2009 roundtable held to examine oversight of credit rating agencies, SEC requested perspectives from users of ratings and others on whether it should consider additional rules to better align the raters’ interest with those who rely on those ratings, and specifically, whether one business model represented a better way of managing conflicts of interest than another. In response, some roundtable participants proposed alternative models for compensating NRSROs, and market observers have proposed others in congressional hearings and academic literature. We identified five unique models that have been proposed, although they are in various stages of development. To assist Congress and others in assessing these proposals, we created an evaluative framework of seven factors that any compensation model should address to be effective. By applying these factors, users of the framework can identify the potential benefits of the model consistent with policymakers’ goals as well as any tradeoffs.
Proposed Alternative Compensation Models
In recent years, academic researchers and industry experts have begun to develop a number of alternative compensation models for credit rating agencies in response to concerns about conflict of interest, ratings integrity, and competition. In a July 2008 report discussing the examinations of the three most active NRSROs and their performance of in rating subprime RMBS and related CDOs, SEC staff identified issues in the management of conflicts of interest resulting from the issuer-pays model the firms used. NRSROs using this model have an interest in generating business from the firms that seek the rating, which could conflict with providing quality ratings. In response to the examination findings, SEC introduced new and amended rules intended to improve the management of conflicts of interest in the issuer-pays model. In April 2009, as part of the roundtable held to examine oversight of credit rating agencies, SEC requested perspectives from users of ratings and others on whether SEC should consider additional rules to better align the NRSROs’ interest with those who rely on those ratings, and specifically, whether one form of model represented a better way of managing conflicts of interest than another.
In response, some roundtable participants proposed alternative models for compensating NRSROs. These models generally intend to address the conflict of interest in the issuer-pays model, better align the NRSROs’ interest with users of ratings, or improve the incentives NRSROs have to produce reliable and high-quality ratings. Other models with similar goals have been presented in Congressional hearings and in academic literature. Below, we provide a summary of the key provisions of five distinct alternative models for compensating NRSROs (alternative compensation models). Given their theoretical nature, they vary greatly in the amount of detail currently available. None of these models has been implemented to date.
Five alternative compensation models have been proposed: random selection model, investor-owned credit rating agency model, stand-alone model, designation model, and user-pay model.
Random Selection Model
Under the random selection model, a ratings clearinghouse randomly would select a credit rating agency to rate a new issuance. All issuers or sponsors that wanted to obtain ratings for their issuances would be required to request ratings from the clearinghouse, which would use a random number generator, such as a computerized algorithm, to assign a credit rating agency. The clearinghouse would notify the credit rating agency of the opportunity to rate the issuance and provide basic information pertaining to the type of issuance, but not the issuer’s name. Not until the credit rating agency agreed to complete the rating would the clearinghouse disclose to the credit rating agency the identity of the issuer and the details of the issuance. If the selected credit rating agency agreed to rate the issuance, the issuer would pay a fee to the ratings clearinghouse. The clearinghouse then would distribute the fees to the credit rating agency upon the completion of the initial and maintenance ratings. The letter rating would be free of charge to the public. In addition to this function another primary role of the clearinghouse would be to design the criteria by which new entrants could qualify as a credit rating agency.
According to the proposed model, the ratings clearinghouse could be a nonprofit organization, a governmental agency such as SEC, or a private- public partnership. Funding for this ratings clearinghouse would be paid for by the issuer, on top of that required to rate the security, to cover clearinghouse costs. The ratings clearinghouse also would be responsible for setting the ratings fees for the credit rating agency depending on the type of security issued.
The proposal incorporates a peer comparison review to create an incentive for credit rating agencies to produce quality ratings. As part of this review, the ratings clearinghouse would evaluate the performance of all credit rating agencies on the basis of two empirical tests. As one potential test, the proposal suggests an analysis of the magnitude of debt instruments that default or lose substantial value for investment-grade debt instruments. If the default percentage for a given credit rating agencies differed from its peers by a set parameter, then it would be subject to sanctions, which would range from losing a percentage of business to losing a percentage of rating fees. The second potential test would evaluate annual yields, as set by the market, to be compared to identically rated debt securities from different asset classes for each credit rating agency. Securities in different asset classes that are rated similarly should have the same yield. If a threshold differential exists between the yields of identically-rated securities for a credit rating agency, then it would be subject to sanctions.
According to the architect of the model, this model would eliminate the conflict of interest when an issuer pays a credit rating agency for a rating by making the compensation neutral, eliminating the linkage between the credit rating agency and the issuer (the conflict of interest). The elimination of the conflict of interest would remove a barrier to entry and would allow for new competition. Furthermore, he believes that the peer comparison review coupled with economic sanctions for poor performance would motivate the credit rating agencies to continually adjust their rating models and produce quality ratings.
Investor-Owned Credit Rating Agency Model
Under the investor-owned credit rating agency (IOCRA) model, sophisticated investors—termed highly sophisticated institutional purchasers (HSIP)—would create and operate an NRSRO that would produce ratings. Issuers would be required to obtain two ratings; one from the IOCRA and the second from their choice of NRSRO. More specifically, an NRSRO would be prohibited from publicly releasing a rating that was paid for by the issuer or sponsor, unless the NRSRO received written notification that the issuer had made arrangements and paid an IOCRA to publicly release its rating. The IOCRA would publish its rating simultaneously when the NRSRO published its rating.
Institutional investors would have to qualify as an HSIP before forming an IOCRA or joining an existing one. To qualify as an HSIP, an institutional investor would have to demonstrate that it was large and sophisticated, managed billions of dollars in assets, and could be relied upon to represent the buy-side interest in accurately rating debt market instruments. The HSIPs would hold a majority voting and operational control over the IOCRA. The proposal contemplates that the IOCRA could be a for-profit or a not-for-profit entity. There would not be a regulatory limit on the number of IOCRAs that could be formed.
Under the proposal, market forces would set IOCRA fees, which likely would be comparable to fees currently charged by the dominant NRSROs. The letter rating and the underlying research would be free to the public.
Proponents of this model believe it would improve the rating process by changing the incentive structure of the NRSROs’ business. They said the IOCRA would affect competition and ratings quality by introducing new competition to the industry, and the investors’ interest would be counter- balanced against the interest of the issuers.
Stand-Alone Model
Under the stand-alone model, NRSROs only would be permitted to produce credit ratings. The NRSROs would be able to interact with and advise organizations being rated, but could not charge fees for providing advice. Instead of receiving issuer fees, the NRSROs would be compensated through transaction fees imposed on original issuance and on secondary market transactions. Part of the fee would be paid by the issuer or secondary-market seller, and the other portion of the fee by the investor purchasing the security in either the primary or secondary market. The NRSRO would be compensated over the life of the security based on these transaction fees. The letter rating would be free to the public.
Proponents of this model believe that by creating a funding source that is beyond the influence of both issuers and investors, the focus of the NRSRO will be on producing the most accurate and timely credit analysis rather than on satisfying the desires of any other vested interest.
Designation Model
Under the designation model, all NRSROs would have the option of rating a new issuance, and security holders would direct, or designate, fees to the NRSROs of their choice, based on the proportion of securities that they owned. When an issuer decided to bring a security to market, it would be required to provide all interested NRSROs with the information to rate the issuance. The issuer would pay the rating fees to a third-party administrator, which would manage the designation process. When the security was issued, the security holders would designate which of the NRSROs that rated the security should receive fees, based on their perception of research underlying the ratings. The security holders could designate one or several NRSROs. The third-party administrator would be responsible for disbursing the fees to the NRSROs in accordance with the security holders’ designations. After the initial rating, the issuer would continue to pay maintenance rating fees to the third-party administrator, which bond holders also would allocate through the designation process every quarter over the life of the security. When the debt was repaid (or repurchased by the issuer), a final rating fee would be paid in conjunction with the retirement of the security. The letter rating would be free to the public, while the research underlying it would be distributed to securityholders and (at the discretion of the relevant NRSROs) to potential securityholders.
The proposed model suggests that the issuer’s transfer agent could perform the responsibilities of the third-party administrator. The transfer agent currently is responsible for maintaining ownership records of the security holders.
The authors of this model believe this model would eliminate the conflict of interest between the issuers paying for the rating and the NRSRO and would increase competition by encouraging NRSROs to prepare unsolicited ratings, because each NRSRO would be assured of receiving compensation for its rating, provided some group of investors or other users of ratings found them useful enough to allocate to the provider a portion of the fees they designated or paid.
User-Pay Model
Under the user-pay model, issuers would not pay for ratings. Rather, to address the free-rider problem, the model specifies that all users of ratings would be required to enter into a contract with the NRSRO and pay for the rating services of an NRSRO. The proposal defines “user” as any entity that included a rated security, loan, or contract as an element of its assets or liabilities as recorded in an audited financial statement. Users of ratings would include holders of long or short positions in a fixed-income instrument, as well as parties that refer to a credit rating in contractual commitments (that is, as parties to a lease) or that are parties to derivative products that rely on rated securities or entities. A user would be required to pay for ratings services supplied during each period in which it booked the related asset or liability.
The model relies on third-party auditors to ensure that NRSROs receive payment from users of ratings for their services. Any entity that required audited financial statements in which the rated instrument or covenant was included among the assets or liabilities would be required to demonstrate to the auditors that the holder had paid for the rating services. No audit opinion would be issued until the auditor was satisfied that the rating agencies had been properly compensated. The model would require the close cooperation of the auditing community and the Public Company Auditing Oversight Board.
The architects of this model believe that, while more cumbersome, the model attempts to capture “free riders”—those users of ratings that do not compensate NRSROs for the use of their intellectual property and require them to pay for the ratings.
Framework to Evaluate Alternative Compensation Models
In this report, we are not evaluating the proposed alternative compensation models. Instead, we are providing a framework that Congress and others can use to evaluate or craft alternative compensation models for NRSROs. The framework contains seven factors, all of which are essential for a compensation model to be fully effective. Furthermore, we have provided key questions under each factor that can be applied to an alternative compensation model to identify its relative strengths and weaknesses, potential trade offs (in terms of policy goals), or areas in which further elaboration or clarification would be warranted. Similarly, the framework could be used to further develop proposals or identify aspects of current regulations to make them more effective and appropriate for addressing the limitations of the current credit rating system. 1. Independence. The ability for the compensation model to mitigate conflicts of interest inherent between the entity paying for the rating and the NRSRO.
What potential conflicts of interest exist in the alternative compensation model?
What controls, if any, would need to be implemented to mitigate these conflicts? How does the compensation model seek to limit conflicts of interest between the entity paying for the ratings and the NRSRO? Between users of ratings and the NRSRO? Between issuers and the NRSRO?
As previously discussed, conflicts of interest arise between the entity paying for the rating and the NRSRO. The alternative compensation models we have identified continue to rely on issuer fees to fund ratings and to help ensure that ratings remain free to the public. However, several intend to mitigate the potential for the issuer to influence NRSROs in different ways—either by increasing the investor’s role in the rating process or assigning NRSROs using a rotational process or randomly. In assessing these as well as other potential compensation models, it is important to consider whether the models introduce any new conflicts of interest and evaluate the steps the models propose to mitigate them. 2. Accountability. The ability of the compensation model to promote NRSRO responsibility for the accuracy and timeliness of their ratings.
How does the compensation model create economic incentives for NRSROs to produce quality ratings over the life of a bond?
How is NRSRO performance evaluated and by whom? For example, does the compensation model rely on market forces or third parties to evaluate performance? For models that rely on third parties, how are “quality” credit ratings defined and what criteria would be used to assess ratings performance?
When an NRSRO demonstrates poor performance, what are the economic consequences under the compensation model and who determines these consequences? For example, how is an NRSRO’s compensation or opportunity for future ratings business linked to ratings performance?
The quality of an NRSRO’s ratings largely is determined by the ratings methodologies it employs, but the compensation model also can affect the ratings process. An effective compensation model will provide economic incentives for the rating agency to produce not only a quality rating at issuance, but also appropriate surveillance of the security over its life. It also should link NRSRO compensation to the performance of the rated entity. As such, when evaluating various compensation models it is important to consider how NRSRO performance is evaluated and by whom. NRSRO performance could be evaluated by market participants or an independent arbiter, with the consequences of performance dictated by the compensation model. For example, models can rely on market discipline to evaluate NRSRO ratings and determine which ones merit future business. Models also could rely on third parties to evaluate NRSRO performance which might require that the third party develop performance measures. However, as we previously discussed, there are differences in the NRSROs’ measures of creditworthiness, ratings scales, ratings methodologies, and other processes that can make comparison of NRSRO performance difficult when using these measures. 3. Competition. The extent to which the compensation model creates an environment in which NRSROs compete for customers by producing higher-quality ratings at competitive prices.
On which dimensions does the compensation model encourage NRSROs to compete? To what extent does the compensation model encourage competition around the quality of ratings? Ratings fees? Product innovation?
To what extent would the compensation model encourage new entrants and reduce barriers to entry in the industry?
To what extent does the model allow for flexibility in the differing sizes, resources, and specialties of NRSROs?
To what extent do market forces determine ratings fees?
When evaluating an alternative compensation model, considering its potential impact on the competition in the ratings industry is important. Most importantly, the model should not in itself present a barrier to entry or increase existing barriers. It should not promote convergence of one class of products or methodologies by NRSROs, but should foster diversity in ratings methodologies and products. For example, the compensation model should be flexible to allow for relatively smaller NRSROs or NRSROs with specialties to adapt to any new requirements and not inadvertently hinder them from competing with the larger NRSROs or expanding their product lines to meet market demand.
An effective compensation model also will promote competition around the quality of ratings. In that sense, this factor is closely related to the accountability factor, in that the compensation model should not economically reward NRSROs that consistently produce poor-quality ratings. Some compensation models could increase competition by reducing barriers to entry for smaller or newer NRSROs; for example, by offering or guaranteeing them more opportunity to produce ratings and increase their coverage of the market. However, it is unclear whether a model that increases the number of NRSROs would result in more competition among them to produce quality ratings over time. In assessing these models, considering their potential impact on NRSROs’ incentives to compete around ratings quality, product innovation, and overall efficiency is important.
Similarly, an effective compensation model will promote competition around ratings fees. Some NRSROs are highly specialized, serving particular markets or asset classes. As such, the ratings fees charged by each NRSRO reflects its own cost structure. Compensation models should not incorporate a uniform approach to setting ratings fees. Such an approach would promote inefficiencies in the market and dissuade some NRSROs from continuing to offer services if they believed they were economically disadvantaged. Those NRSROs with comparatively lower- cost structures for producing ratings might benefit from such an approach, but overall it would not encourage NRSROs to produce ratings cost effectively. 4. Transparency. The accessibility, usability, and clarity of the compensation model and the dissemination of information on the model to market participants. How clear are the mechanics of the compensation model to market participants? How transparent are the following procedures and processes: how the NRSROs obtain ratings business; how ratings fees are determined; how NRSROs are compensated; and how the compensation model links ratings performance to NRSRO compensation.
An effective compensation model should be transparent to market participants to help them understand it and to increase market acceptance. For example, the model should be transparent about how NRSROs obtain ratings business, such as (1) whether issuers will select the NRSROs; (2) whether ratings business will be assigned, randomly awarded, or mandated; or (3) whether NRSROs will have the option to provide ratings on any new business. If the model relies on third parties or systems for this function, it should be explicit about the criteria or procedures employed. Similarly, if ratings fees are not determined by market forces, the model should clearly explain the process and criteria for determining fees. Issuers, NRSROs, oversight bodies, and users of ratings also should understand the proposed compensation mechanism, and it should clearly link ratings performance to NRSRO compensation. Any criteria for evaluating ratings performance and the process for determining these criteria should be disclosed. Lack of transparency in any of these areas could hinder support and trust in the model. 5. Feasibility. The simplicity and ease with which the compensation model can be implemented in the securities market.
Is the model easily implemented? If not, how difficult will implementing the model be?
Could the compensation model be instituted through existing regulatory or statutory authority or are additional authorities needed?
What are the costs to implement the compensation model and who would fund them?
Which body would administer the compensation model, and is this an established body? If not, how would it be created?
What, if any, infrastructure would be needed to implement the compensation model? What information technology would be required? Which body would be responsible for developing and maintaining it?
What impact would the alternative compensation model have on bringing new issuances to market and trading on the secondary market?
How many NRSROs would be required for the compensation model to function as intended? How would the exit of an NRSRO from the ratings industry affect the model’s feasibility? What impact would the alternative compensation model have on the financial viability of an NRSRO?
When assessing a compensation model, considering the model’s feasibility for successful implementation is essential. We note that the market itself has not undertaken the implementation of any compensation model other than the current issuer- and subscriber-pays models. As such, SEC or Congress likely would have to direct market participants to implement any alternative model. Models that are technically simplistic in nature will be more feasible to implement than complex ones. Further, some alternative models we identified involve potentially significant costs. For example, some models would require the development of information technology systems that would be used across the market by potentially thousands of participants. Assessing not only the costs of implementing these models, but also determining who would be responsible for overseeing and paying for their development upfront is a key question. Costly models could deter market participants from implementing and participating in them.
Assessing the impact of any potential model on the efficiency of the securitization market is an important part of the evaluation process. An alternative compensation model should be flexible and adaptable to real- time demands of the securities markets, and not hinder the timing of initial issuance and trading on the secondary market. The model also should be viable regardless of the number of NRSROs that enter or exit the market.
For compensation models that require a third-party administrator, the process for selecting or creating this administrator could have a significant impact on the success of its implementation. If market participants question the independence or capability of the administrator to run the model effectively and efficiently, they may be less likely to accept the model.
For a compensation model to work as intended, it should not have to rely on a certain number of NRSROs to attain its goal. Such models could be undermined if only one or two NRSROs participated in the rating of specific types of securities or if an NRSRO exited the industry. While some proposed alternative compensation models intend to encourage competition among the NRSROs, the models themselves should not hinder the financial viability of an NRSRO. For example, the potential impact on the smaller NRSROs of any participation costs should be considered. The model also should not introduce undue uncertainty into the industry, so that NRSROs could not conduct appropriate business planning (that is, attract and retain qualified staff). 6. Market Acceptance and Choice. The willingness of the securities market to accept the compensation model, the ratings produced under that model, and any new market players established by the compensation model.
What role do market participants have in selecting NRSROs to produce ratings, assessing the quality of ratings, and determining NRSRO compensation? More specifically, what are the roles of issuers and investors in these processes? Where do these roles differ between models and what are the trade offs?
Are all market participants likely to accept the ratings produced under the compensation model? If not, what are the potential consequences for the securitization market?
What impact, if any, would the model have on each market participant using the ratings?
Would market participation need to be mandated, and if so, for which participants?
The likelihood that market participants will accept an alternative compensation model is another important consideration in its evaluation. In achieving its goals, such as increasing independence in the ratings process or competition among NRSROs, a particular model may limit or promote the participation and choices of some market participants over others and could affect the market’s acceptance of and participation in the model. For example, as we have pointed out, the proposed models we have identified require that the issuer pays for the rating; however, in most of the models the issuer is no longer able to select which NRSRO rates the security. Limiting the issuer’s choice may address conflicts of interest and increase the independence of the ratings process, but also could deter issuers from soliciting NRSROs to rate their debt. Market acceptance by institutional investors is also instrumental to the success of the model. For example, many private investment guidelines require the use of specific NRSROs. If these specified NRSROs are not producing ratings under an adopted model, then these investors may be limited in the securities that they can consider purchasing. Such tradeoffs would need to be carefully evaluated to ensure the model’s viability and minimize its impact on the securities market.
Market participants should accept the ratings produced by the compensation model. If market participants, particularly issuers and end users of ratings, do not have confidence in the ratings produced under the model, its viability could be significantly undermined. This is a particular concern with models that would mandate the use of a particular NRSRO or otherwise limit the market’s influence in the supply and demand for ratings. Market participants, including regulators outside of the United States, also could affect the acceptance of the model. A rating that is not accepted could create inconsistencies between domestic and foreign securities markets for investors that rely on ratings. 7. Oversight. The evaluation of the model to help ensure it works as intended.
Does the model provide for an independent internal control function?
What external oversight (from a regulator or third-party auditor) does the compensation model provide to ensure it is working as intended?
If third-party auditors provide external oversight, how are they selected, what are their reporting responsibilities, and to whom do they report?
Who will compensate the regulator or third-party auditor for auditing the compensation model? How will the compensation for regulator/auditor be determined?
To what extent will a third-party auditor allow flexibility in oversight to accommodate NRSROs of different sizes?
An effective alternative compensation model also will provide for independent internal controls and robust, external oversight to ensure its integrity. This is especially important when a model calls for third- party administration or the use of information technology systems in its implementation. For example, any centralized system that collects fees from issuers and compensates the NRSRO(s) should be audited, as should any procedures used to award ratings business to an NRSRO, evaluate NRSRO performance, or apply economic penalties. Such oversight will help ensure the model functions as intended, thus increasing transparency and market acceptance. Funding for this oversight should be specified.
The Dodd-Frank Act contains a mandate for SEC to conduct a study of the feasibility of establishing a system in which a public or private utility or a self-regulatory organization assigns NRSROs to determine the credit ratings of structured finance products. The study must include an assessment of the potential mechanisms for determining fees for NRSROs, appropriate methods for paying fees to the NRSROs, and the range of metrics that could be used to determine the accuracy of credit ratings. SEC also must evaluate alternative means for compensating NRSROs that would create incentives for accurate credit ratings. Our framework could be used to evaluate current proposals for compensating NRSROs, develop new proposals, and identify tradeoffs among them.
Conclusions
The Credit Rating Agency Reform Act sought to improve ratings quality for the protection of investors, including establishing SEC oversight over credit rating agencies that register as NRSROs. However, SEC faced a number of challenges in implementing the law, and the recent financial crisis resulted in additional changes to SEC’s oversight of NRSROs under the Dodd-Frank Act. As SEC starts to implement its new requirements, there are a number of challenges from its existing responsibilities that must also be addressed.
SEC’s implementation of the Act involved developing an NRSRO registration program and an examination program. As currently implemented and staffed, both programs require further attention.
As intended by the Act, the new registration program for NRSROs reduced the time SEC staff took to act on an application and improved the transparency of SEC’s process for awarding NRSRO designations to interested credit rating agencies. However, due to the time constraints, a lack of criteria, and lack of express preregistration examination authority, Trading and Markets staff said the registration process generally does not allow staff to conduct reviews that would allow staff to confirm that the information provided on Form NRSRO was accurate and the applicant met all of the Act’s requirements. However, SEC has yet to explicitly identify the legislative changes needed to address this limitation and work with Congress to ensure it has the authority needed to effectively carry out its oversight responsibilities. This raises a concern because SEC may approve applicants that do not meet the Act’s requirements.
Although SEC has established an OCIE branch dedicated to the examination of NRSROs and hired individuals with experience in credit rating analysis and structured finance to fill these positions, OCIE has not completed timely examinations of the NRSROs and expressed concerns about its ability to meet its planned NRSRO routine examination schedule of examining the three largest NRSROs every 2 years and the other NRSROs every 3 years. While SEC requested additional resources that it anticipated using to fully staff this oversight function, it will likely need to revisit those requests due to the passage of the Dodd-Frank Act, which requires SEC to establish an Office of Credit Ratings and examine each NRSRO every year. As SEC begins its planning of this new office, it is essential that SEC assess not only the number of staff it needs but also the skills required of this staff. Approaching this effort strategically may facilitate the recruitment and training of new hires. Without a plan that details the amount of staff needed with the requisite qualifications and training, SEC may face challenges in meeting the required examination timetable and providing quality oversight of the NRSROs.
SEC rules requiring NRSROs to publish short-, medium-, and long-term performance statistics have increased the amount of information publicly available about the performance of some NRSROs, particularly those newly registered. Overall, the disclosure of these statistics has not had the intended effect of increasing transparency for users. Specifically, SEC has not provided specific guidance for the NRSROs for calculating and presenting the required performance statistics. Therefore, NRSROs have used different methodologies for calculating the required performance statistics, which renders them ineffective for comparative purposes.
SEC has yet to evaluate the appropriateness of the required performance statistics for SEC’s currently designated asset classes to determine if the requirements need to be modified. Asset classes that are defined too broadly limit the usefulness of the disclosures.
The Dodd-Frank Act directs SEC to adopt additional rules requiring NRSROs to publicly disclose information on the initial credit ratings determined by each NRSRO for each type of obligor, security, and money market instruments, and any subsequent changes to such credit ratings. In developing these new disclosure requirements, it will also be important for SEC to provide clear and specific guidance to NRSROs. Otherwise, the resulting disclosures may lack comparability. Recent SEC rules to make ratings history data publicly available are intended to generate performance measures and studies to evaluate and compare NRSRO performance. However, it is unlikely that the ratings histories NRSROs publish pursuant to the 10 percent and 100 percent requirements can be used for these purposes. Specifically, SEC did not specify the data fields the NRSROs were to disclose as part of their 10 percent sample disclosures, and the data fields provided by the NRSROs did not always provide sufficient information to allow users to identify a complete rating history for each rating in the sample, including the beginning of rating histories, or specific types of ratings for making comparisons. As a result, users cannot develop performance measures that track how an issue or issuer’s credit rating evolves, evaluate comparable entities across NRSROs, or calculate measures that compare a starting point to the state of a rating at the time of default.
Users cannot easily determine what data the variables represent because NRSROs were not required to provide an explanation of the variables used in the samples as part of their disclosures. Without such explanations, users may find it difficult to begin to construct performance statistics.
Because SEC did not require it, not all NRSROs disclosed defaults as part of their ratings histories in the samples. As such, users cannot calculate default statistics for those NRSROs.
Because SEC guidance to NRSROs for generating the 10 percent random samples does not specify that the NRSROs draw the sample from those ratings that are typically analyzed in each asset class and does not require the NRSROs to periodically redraw the samples or include ratings that have been withdrawn in prior time periods, the samples are not representative of the population of credit ratings at each NRSRO. As a result, users cannot generate performance measures that represent the population of credit rating over time and that can be compared across NRSROs.
Because the 100 percent disclosure requirement does not require that the NRSROs disclose the ratings of any issuer rated before June 26, 2007, or include data on withdrawn ratings, performance statistics calculated using the 100 percent data set would not reflect the overall rating performance of NRSROs and may not be representative of the universe of issuer ratings.
As SEC also did not provide guidance to NRSROs on how to format and describe the data disclosed under the 100 percent requirement, users will likely experience challenges when seeking to construct ratings histories and develop comparable performance statistics.
Finally, SEC’s rule requiring NRSROs to disclose total outstanding ratings is intended for users to assess how broad an NRSRO’s coverage is within a particular class of credit ratings. However, because SEC did not specify how NRSROs were to count their outstanding ratings, NRSROs used diverse methodologies to count up their outstanding ratings. As a result, users of data cannot use them for their intended purpose.
The Dodd-Frank Act requires SEC and other federal agencies to remove references to NRSRO ratings from their regulations, and substitute an alternative standard of creditworthiness. SEC has recently removed or proposed to remove references to NRSRO ratings from several rules. In comparison, the Dodd-Frank Act requirement is a broader undertaking that requires a strategic approach. SEC’s previous experience highlights the importance of developing a plan to ensure that (1) any adopted alternative standards of creditworthiness for a particular rule facilitate its purpose and (2) examiners have the requisite skills to determine that the adopted standards have been applied. Without such a plan, SEC may develop alternative standards of creditworthiness that are not effective in supporting the purpose of a particular rule.
Among its stated goals, the Act intended to improve competition among NRSROs by creating a more efficient and transparent NRSRO designation process for SEC to administer. The Act made receiving an NRSRO designation easier and resulted in three new, subscriber-pays NRSROs. However, industry concentration remains high. Given the limited time that has passed since SEC implemented the registration program, the impact of the credit crisis on the securities market, and uncertainty about changes in the regulatory environment, significant changes in industry concentration in the short term are not likely. However, whether any changes in industry concentration will materialize in the long term is still unclear. The credit rating industry continues to manifest its traditional barriers to entry, such as high fixed costs, that make gaining customers and achieving significant coverage of the securities market a challenge for new entrants. In some asset classes, such as structured finance, these barriers are especially high. Recognizing this, SEC amended the Exchange Act rule 17g-5 to increase the number of structured finance ratings by requiring issuers that contract with an NRSRO for a rating to agree to make the underlying data free to other interested NRSROs in order to encourage nonhired NRSROs to produce unsolicited ratings. As this rule became effective in June 2010, not enough time has passed to assess its impact. However, we note that the impact of competition on the quality of credit ratings is not well understood. The limited academic research conducted in this area suggests that the entry of new credit rating agencies will improve overall information available to investors and other market participants, but that the effect of entry on the quality of ratings produced by any one rating agency is not well-established.
To assist Congress and others in evaluating proposed models for compensating NRSROs, we created an evaluative framework of seven factors that any compensation model should address to be effective. The Dodd-Frank Act contains a mandate for SEC to conduct a study of the feasibility of establishing a system in which a public or private utility or a self-regulatory organization assigns NRSROs to determine the credit ratings of structured finance products. SEC also must evaluate alternative means for compensating NRSROs that would create incentives for accurate credit ratings. Our framework could be used to evaluate current proposals for compensating NRSROs, develop new proposals, and identify trade offs among them.
Recommendations for Executive Action
To address the concern that the current process for registering credit rating agencies may result in SEC approving applicants that do not meet the Act’s requirements, the Chairman of the Securities and Exchange Commission should: Identify the additional authorities and time frames necessary to ensure that staff can verify the accuracy of the information provided on Form NRSRO and that the applicant meets all of the Act’s requirements; the Chairman should also work with Congress to ensure that SEC has the authority needed to effectively carry out its oversight responsibilities.
To ensure that SEC has sufficient staff with the skills necessary to address the requirement in the Dodd-Frank Act that SEC establish an Office of Credit Ratings and examine each NRSRO every year, the Chairman of the Securities and Exchange Commission should: Develop and implement a plan for the establishment of this office that includes the identification of the number of staff and the skills required of these staff to meet the required examination timetable and provide quality oversight of the NRSROs, including plans for the recruitment of any new hires and appropriate training.
To address the inconsistencies in the NRSROs’ methodologies for calculating required performance statistics and total outstanding ratings for initial and updated Form NRSRO filings, address limitations in the required 10 percent and 100 percent rating history disclosures, and increase the comparability and usefulness of these disclosures, the Chairman of the Securities and Exchange Commission should take the following eight actions: for the disclosures of required performance statistics, provide specific guidance for NRSROs for calculating and presenting these performance statistics, considering the impact of different methodologies on the information content of the performance statistics and the purpose for which SEC intends the statistics to be used; and evaluate the appropriateness of SEC’s currently designated asset classes for presenting performance statistics, and where SEC determines that the asset classes are not appropriate, modify the requirements accordingly; for the disclosures of required 10 percent and 100 percent ratings histories, ensure that the data elements required as part of the datasets allow users to construct complete ratings histories, identifying the beginning of ratings histories, and distinguish between different types of ratings; consider requiring NRSROs to publish a codebook to explain the variables included in the datasets; clarify that NRSROs should include defaults in the ratings histories review its guidance to NRSROs for generating the 10 percent samples and modify it as needed to ensure that the samples are 10 percent of the type of ratings typically analyzed in each asset class, that withdrawn ratings are not removed from these samples, and that the samples are periodically redrawn; and review its guidance to NRSROs for generating the 100 percent rating history disclosures and modify it as needed to ensure that these histories include those ratings that are typically analyzed in each asset class; and that withdrawn ratings are not removed from these disclosures; for the disclosures of total outstanding ratings required on Form NRSRO, provide specific guidance to NRSROs to calculate their total outstanding ratings.
To address the Dodd-Frank Act’s requirement for SEC to remove any references to or requirements of reliance on credit ratings in its rules and substitute alternative standards of credit worthiness that it deems appropriate, the Chairman of the Securities and Exchange Commission should: develop and implement a plan for approaching the removal of NRSRO references from SEC rules to help ensure that (1) any adopted alternative standards of creditworthiness for a particular rule facilitate its purpose and (2) examiners have the requisite skills to determine that the adopted standards have been applied.
Agency Comments and Our Evaluation
We provided a draft of the report to the SEC Chairman for her review and comment. SEC provided written comments that are summarized below and reprinted in Appendix III. We also received technical comments from SEC that were incorporated, where appropriate.
In its written comments, SEC agreed with our findings. With respect to our recommendation that addresses concerns about the current registration process, SEC stated that SEC staff intend to develop proposals to provide Congress with technical assistance for how the relevant portions of the Securities Exchange Act of 1934 could be amended to address the issues we identified with the registration process for NRSROs. Regarding our recommendation to develop and implement a plan for the establishment of the Office of Credit Ratings, SEC stated that it anticipates drawing upon our findings as it staffs this new office. SEC stated that it is in the process of hiring staff to meet its new responsibilities under the Dodd-Frank Act relating to NRSROs and has allocated between twenty-five and thirty-five positions to this new office.
With respect to the recommendations related to improving the comparability of the NRSROs required disclosures of performance statistics, SEC noted the Dodd-Frank Act mandates that it adopt rules that require NRSRO disclosures of performance-related data to be comparable among NRSROs in order to allow users of credit ratings to compare the performance of credit ratings across NRSROs. SEC stated that our review of the existing disclosure requirements will be helpful to SEC staff in developing recommendations for the Commission in response to the congressional mandate.
With respect to the recommendations related to addressing limitations in the required 10-percent and 100-percent rating history disclosures, SEC noted that on August 27, 2010, it published on its Web site the list of XBRL tags that NRSROs must use for these ratings history disclosure requirements. SEC believes this step may address some of the our concerns regarding its guidance as to the data fields NRSROs must use for these disclosures. We encourage SEC to evaluate the extent to which these tags address the limitations we identified, and, to the extent that they do not, to take further action. As we discussed, these limitations render current ratings history disclosures largely unusable.
With respect to our recommendation regarding SEC’s approach to address the Dodd-Frank mandate that it remove NRSRO references from its rules and substitute alternative standards of credit worthiness that it deems appropriate, SEC agreed that any proposed alternative standards of creditworthiness for a particular rule should facilitate its purpose and that replacing NRSRO ratings with alternative standards will require that SEC ensure that examiners have the requisite skills to determine that the adopted standards have been applied. SEC stated that it has already hired senior examiners with specialized expertise and skills and that it continues to increase its expertise in these areas through its recruiting and training programs.
We are sending copies of this report to interested congressional committees and the Chairman of SEC. The report will also be available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs can be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV.
Appendix I: Objectives, Scope, and Methodology
To discuss the implementation of the Credit Rating Agency Reform Act of 2006 (Act), focusing on Securities and Exchange Commission (SEC) rulemaking and SEC’s implementation of the registration and examination programs for Nationally Recognized Statistical Rating Organizations (NRSRO), we reviewed the rules SEC has adopted to implement the Act, including the NRSRO registration program and its oversight of NRSROs. We reviewed the SEC’s Inspector General’s August 2009 audit report for findings and recommendations pertaining to SEC’s NRSRO registration program as well as SEC’s July 2008 public report discussing its findings on examinations of selected NRSROs. We also reviewed copies of the Division of Trading and Markets’ (Trading and Markets) internal memoranda to SEC documenting its review of NRSRO applications and internal memoranda outlining additional NRSRO monitoring. We obtained and reviewed the Office of Compliance Examinations and Inspections (OCIE) guidance for conducting an NRSRO examination and reviewed completed NRSRO examinations. To understand additional changes to SEC’s oversight of the NRSROs, we reviewed the recently passed Dodd- Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). We conducted interviews with Trading and Markets regarding the NRSRO application review process, and SEC’s Division of Investment Management (Investment Management) and the Financial Industry Regulatory Authority (FINRA) to obtain information on SEC’s process for registering investment advisors and FINRA’s process for registering new broker-dealer members, respectively. We also conducted interviews with OCIE staff regarding the NRSRO examinations that were initiated after the Act’s passage and obtained information from OCIE on its staffing of the NRSRO examination team.
To evaluate the performance-related NRSRO disclosures that the Act and SEC rules require, we analyzed SEC rules requiring NRSRO disclosure of performance statistics and ratings history samples. First, we analyzed and compared the 10 NRSROs’ 2009 disclosures of performance statistics, focusing on the corporate and structured finance asset classes, and we reviewed voluntary disclosures of additional performance statistics by 5 of the NRSROs. We also reviewed the Dodd-Frank Act to understand its directive to SEC to ensure the comparability of NRSRO performance disclosures. Second, we assessed NRSRO ratings history data disclosed by the 7 issuer-pays NRSROs pursuant to SEC’s 10 percent disclosure requirement. From each NRSRO’s Web site, we obtained its 10 percent random samples of outstanding ratings. We downloaded these data in February and March 2010. To assess the reliability and usability of the samples for generating comparative performance measures, we reviewed the samples and obtained information from each of the NRSRO’s on the methods used to draw and maintain the samples. We identified a number of issues that led us to determine that the data were not in a format that allowed us to generate comparative performance statistics. For example, we found that the data fields required by the rule were not always sufficient to identify a complete rating history for ratings in each of the seven samples and did not give us enough information to identify specific types of ratings for making comparisons. We also could not consistently identify the beginning of the ratings histories in all of the samples. Furthermore, we found that the guidance provided by SEC to NRSROs for generating the random samples does not ensure that the method used will result in samples that are representative of the population of credit ratings at each NRSRO. Since it was impossible to compare performance statistics across NRSROs in any reliable manner, we focused on identifying the issues we encountered when reviewing the available data and attempting such comparisons. We also analyzed SEC’s 100 percent disclosure requirement by reviewing the rule and obtaining information from Trading and Markets and two NRSROs on its implementation. As this rule did not become effective until June 2010, we did not review the data disclosed by NRSROs pursuant to the rule, with the exception of one NRSRO. We conducted a limited review of the data disclosed by this NRSRO to determine the extent to which the data included ratings of issuers rated prior to June 26, 2007. As part of this objective, we also assessed the NRSROs’ disclosures of total outstanding ratings required on Form NRSRO. We reviewed these disclosures and SEC’s instructions pertaining to these disclosures and obtained information from the NRSROs on their methods for determining total outstanding ratings.
To evaluate the potential regulatory impact of removing NRSRO references from certain SEC rules, we reviewed SEC’s proposed rules to remove references to NRSRO ratings, focusing on proposed amendments to rule 2a-7 under the Investment Company Act of 1940 (Investment Company Act) and Securities and rule 15c3-1under the Securities Exchange Act of 1934 (Exchange Act) and the comment letters submitted to SEC on these proposals. We reviewed multiple studies pertaining to the use of ratings in regulations. To understand the extent to which NRSRO ratings are used in U.S. federal securities, banking, and insurance laws, rules, and regulations we obtained a copy of a Joint Forum report documenting their use. To understand how the ratings were used in the rules and the regulatory impact the removal of the ratings might have, we reviewed OCIE’s examination guidance for reviewing for compliance with rules 2a-7 and 15c3-1. We also reviewed the 65 examinations of money market funds OCIE completed in FY 2003-2009, which reviewed funds for compliance with rule 2a-7. We did so to understand how examiners ensured that funds complied with the rule’s two-part test for determining if a security was eligible for purchase and how the removal of NRSRO ratings might affect oversight of this determination. We reviewed the Dodd-Frank Act to understand its directive to SEC and other federal agencies to remove NRSRO references from their rules regulations. We also interviewed staff from Investment Management to better understand the purpose of rule 2a-7, and how the removal of references might affect oversight. We conducted interviews with OCIE staff, Trading and Markets staff, and market participants and observers about the pros and cons of utilizing NRSRO references in, and the potential impact of removing them from, regulations.
To evaluate the impact of the Act on competition among NRSROs, we reviewed proposed and final SEC rules intended to promote competition among rating agencies, as well as the comment letters SEC received in response to those rules. We reviewed SEC’s 2008 and 2009 mandated annual reports on NRSROs, including SEC’s studies on competition in the credit rating industry. We used the Herfindahl-Hirschman Index (HHI) to track industry concentration over time. The HHI is a measure of industry concentration that reflects both the number of firms in the industry and each firm’s market share. It is calculated by summing the squares of the market shares of each firm competing in the market. The HHI reflects both the distribution of market shares of the top firms and the composition of the market outside the top firms. The HHI is measured on a scale of 0 to 10,000, with larger values indicating more concentration. According to the Department of Justice and Federal Trade Commission, markets in which the value of the HHI is between 1,500 and 2,500 points are considered to be moderately concentrated, and those in which the value of the HHI is in excess of 2,500 points are considered to be highly concentrated, although other factors also play a role.
Calculating the HHI requires defining what constitutes the industry and specifying our measure of market share. We define the relevant industry as the set of credit rating agencies that have NRSRO status, and we use a variety of market share definitions to ensure that any trends in industry concentration we observe are robust to alternative specifications of NRSROs’ market shares. A firm’s market share typically is measured in terms of dollars, as either its sales or revenue as a fraction of total sales or revenue for all firms in the industry, or in terms of quantities, as its output as a fraction of total output produced by all firms in the industry. We measured an NRSRO’s overall market share as its revenue as a share of total revenue for the industry. We measured an NRSRO’s market share overall in each asset class as the number of debt-security issuing organizations or entities it rates as a percent of the sum of the numbers of organizations that each NRSRO rates, in which the number of organizations rated is our proxy for output. Finally, for the ABS asset class, we measured an NRSRO’s market share as the dollar value of new U.S. issuance it rated as a percentage of the sum of the dollar value of issuance each NRSRO rated. We then calculated the HHI using these definitions of market share.
We obtained the revenue data for 2006–2009 from the NRSROs’ initial and annual Form NRSRO filings. We obtained the number of organizations or entities that issue debt securities and are rated by the NRSROs per asset class for 2006–2009 from 9 of the 10 NRSROs. We obtained data on the dollar amount of new U.S.-issued asset-backed debt rated by NRSROs for 2004—June 2010 from an industry newsletter that tracks asset-backed securitization. Because these data came from private firms, we were able to conduct only limited assessments of the data’s reliability. We were not, for example, able to conduct our own reliability tests on the data. For the revenue data obtained from the NRSROs’ responses to Form NRSRO, we interviewed the staff from Trading and Markets to determine the steps they took to ensure the data represented the firms’ total revenues. As such, we determined that the data were sufficiently reliable for our purpose, which was to show the relative concentration of the NRSROs in the industry. For the data we obtained from the NRSROs on the number of rated organizations or entities that issue debt securities, we specified the methods by which the NRSROs were to count and classify the ratings. We did this to ensure consistency in the data across the NRSROs. We also examined the data, both within and NRSRO and among NRSROs, to determine whether there were any illogical trends that would indicate the date had been prepared incorrectly. As such, we determined that the data were sufficiently reliable for our purpose, which was to show the relative concentration of the NRSROs in the industry. For the data we obtained from the private firm tracking the dollar value of rated new U.S. asset- backed securitization, we obtained information from the firm on the processes and procedures used to collect and manage the data. We determined that the data were sufficiently reliable for our purpose, which was to show the relative concentration of the NRSROs in the industry. We also used these data to generate a series of descriptive graphs showing the NRSROs’ market coverage, that is, the percentage of new U.S. asset- backed issuance that each rated. We also believe that the data are sufficiently reliable for this purpose.
We also reviewed academic studies on competition in the industry. We identified three studies that analyze data to assess the impact of the number of rating agencies on some aspect of the credit rating industry. We identified these studies by searching databases of both unpublished working papers and papers published in refereed academic journals and by searching the bibliographies of studies we found in the databases. The three studies we identified are all unpublished working papers. We reviewed these studies and determined they did not raise any serious methodological concerns. However, the inclusion of these studies is purely for research purposes and does not imply that we deem them to be definitive. Finally, we obtained the views of SEC’s Office of Risk Analysis, the NRSROs, credit rating agencies that are not registered NRSROs, institutional investors, issuers, and industry experts on the impact of the Act on competition.
To provide an overview of proposed alternative models for compensating NRSROs and an evaluative framework for assessing the models, we identified proposals on alternative models for compensating NRSROs by reviewing white papers submitted to the SEC roundtable on credit rating agency oversight, academic and other white papers, and interviewed the authors of the proposed models. We obtained the views of Trading and Markets, SEC’s Office of Risk Assessment, and NRSROs. We also spoke with credit rating agencies that are not registered NRSROs, institutional investors, issuers, and academic and industry experts. To develop the framework for evaluating the models, we reviewed prior GAO reports and obtained the views of market participants and observers to identify appropriate factors for inclusion. We then convened a panel of GAO experts (financial markets specialists, economists, an attorney and a social scientist) to review the framework and incorporated their comments. Finally, we solicited comments from NRSROs, proposal authors, industry experts, and trade associations and incorporated them as appropriate.
We conducted this performance audit from May 2009 to September 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
Appendix II: Other Registration Processes Provide Greater Flexibility to the Regulators
Other registration programs for securities market participants allow regulators to exercise greater oversight over applicants than does the registration program for Nationally Recognized Statistical Rating Organizations (NRSROs) while maintaining an efficient and transparent registration process. More specifically, in the Securities and Exchange Commission’s (SEC) Division of Investment Management’s (Investment Management) registration programs for investment advisors and the Financial Industry Regulatory Authority’s (FINRA) Registrant Application process for broker-dealers, staff can request additional information from the applicant in specific circumstances, extend the review process, and reject an application for a broader set of reasons.
SEC’s registration process for investment advisers is authorized by section 203 of the Investment Advisers Act of 1940 (Investment Advisers Act), which identifies generally the type of information required in an application for registration as an investment adviser and prescribes a time frame, 45 days, by which SEC must act on an application. Investment advisers apply by completing and submitting Form ADV, which requires information such as the type of company that is applying, what businesses it will be involved in, its assets under management, its employees and clients, compensation and ownership arrangements, any financial industry affiliates, and whether the adviser or any person associated with the adviser is subject to certain disciplinary events. SEC must grant registration to applicants if it finds that the requirements of section 203 are satisfied. After instituting a proceeding to determine whether registration should be denied, SEC must deny a registration if it does not make such a finding or if it finds that if the applicant were so registered, its registration would be subject to suspension or revocation.
Although Investment Management oversees the rules and policies regarding the registration of investment advisers, the Office of Compliance Inspections and Examinations (OCIE) is responsible for reviewing the application materials and evaluating whether the application is complete. If additional information is necessary to consider the application or clarify inconsistencies in the information provided, OCIE contacts the applicant with questions and requests additional information. If additional information is required, applicants submit an amended Form ADV, triggering a new 45-day review period. Investment Management officials characterized the process as efficient, and stated that OCIE completes application reviews in an average of 30 days, with variations due to factors such as volume of applications and complexity. Staff stated that incomplete applications can be placed in a postponed status. When postponed, OCIE contacts the applicant through an official letter, which typically states that SEC received the application and describes the parts of the filing that need to be corrected or completed. While staff await a response from the applicant, the running of the 45-day review period is automatically suspended pending receipt by SEC of the additional information necessary to complete the application. Staff said that sometimes an applicant may never provide the requested information or correct the deficiency in the application. In these situations, OCIE considers the application incomplete. Once a complete application is received, a review of disciplinary information is completed to determine if there is a reason to recommend to SEC to deny, condition, or limit the registration. If there is none, the application is approved.
FINRA’s registrant process also imposes a time frame on FINRA staff for reviewing broker-dealer applications for registration. Under FINRA Rule 1014, FINRA staff must make a decision no more than 180 days from the filing date unless requested by the applicant and to which FINRA otherwise agreed. Broker-dealers applying for registration must submit an application providing information demonstrating they meet the 14 standards specified by the FINRA rule. These include that they have adequate financial and managerial resources, supervisory systems, and compliance procedures designed to detect and prevent violations of securities laws and related rules; recordkeeping systems that enable compliance with regulatory recordkeeping requirements; and staff sufficient in qualifications and number to prepare and preserve required records. FINRA’s Department of Member Regulation reviews and either approves, approves with restrictions or denies broker-dealer member applications, and staff have the authority, if there are any questions, to make additional requests for information. The department also conducts a membership interview to further clarify the application material, after which additional information is requested and thereafter, a final decision is made. According to FINRA officials, staff frequently have additional questions. For example, staff may have factual questions about capital, employee registrations, leases, or the location of the broker-dealer facility. While FINRA officials said that at no point should a decision on an application take more than 180 days unless agreed to by the applicant and agreed to by FINRA, they also stated that if staff did not receive, within prescribed timeframes, the information they requested to satisfy any questions they would, absent good cause, reject or lapse the application. They also can reject an application at the time it is initially filed if that application has a material deficiency (i.e. was not substantially complete); for example, if staff were unable to tell what the applicant’s business was going to do, how the business would be supervised, or who was intending to fund the broker-dealer. If applicants disagree with the department’s decision to deny or restrict an application, they can appeal internally to FINRA and then to SEC, and finally in Circuit court. According to FINRA officials, the department reviews more than 200 new member applications in a year and decisions often take less than 180 days. They estimated that about 80 percent are completed within 180 days. FINRA officials stated that the process allows FINRA to restrict certain activities and deny unqualified applicants.
Both FINRA’s registrant application process for broker-dealers and SEC’s registration process for investment advisors require applicants to provide specific information and utilize deadlines to ensure an efficient process. However, unlike the NRSRO registration program, staff of these programs are provided the authorities necessary to clarify any outstanding questions they have regarding an applicant and to delay approving that applicant until the staff are satisfied that the applicant has met all of the necessary requirements.
Appendix III: Comments from the Securities and Exchange Commission
Appendix IV: GAO Contact and Staff Acknowledgments
Staff Acknowledgments
In addition to the individuals named above, Karen Tremba, Assistant Director; Lucas Alvarez; William Chatlos; Rachel DeMarcus; Courtney LaFountain; Elizabeth Jimenez; Stefanie Jonkman; Matthew Keeler; Omyra Ramsingh; and Barbara Roesmann made key contributions to the report. | Why GAO Did This Study
In 2006, Congress passed the Credit Rating Agency Reform Act (Act), which intended to improve credit ratings by fostering accountability, transparency, and competition. The Act established Securities and Exchange Commission (SEC) oversight over Nationally Recognized Statistical Rating Organizations (NRSRO), which are credit rating agencies that are registered with SEC. The Act requires GAO to review the implementation of the Act. This report (1) discusses the Act's implementation; (2) evaluates NRSROs' performance-related disclosures; (3) evaluates removing NRSRO references from certain SEC rules; (4) evaluates the impact of the Act on competition; and (5) provides a framework for evaluating alternative models for compensating NRSROs. To address the mandate, GAO reviewed SEC rules, examination guidance, completed examinations, and staff memoranda; analyzed required NRSRO disclosures and market share data; and interviewed SEC and NRSRO officials and market participants.
What GAO Found
SEC's implementation of the Act involved developing an NRSRO registration program and an examination program. As currently implemented and staffed, both programs require further attention. (1) The process for reviewing NRSRO applications limits SEC staff's ability to fully ensure that applicants meet the Act's requirements. While SEC had registered 10 of 11 credit rating agency applicants as of July 2010, some staff memoranda to the Commission summarizing their review of applications described concerns that were not addressed prior to registration. According to staff, the 90-day time frame for SEC action on an application and the lack of an express authority to examine the applicants prior to registration prevented the concerns from being addressed prior to approval. Unlike other registration application programs that have built in greater authority and flexibility for their staff to clarify outstanding questions regarding applications before approval, the NRSRO registration program requires SEC to act within 90 days of receiving the application. As a result, staff recommended granting registration with ongoing concerns about NRSROs meeting the Act's requirements. (2) With its current level of staffing for NRSRO examinations, SEC's Office of Compliance Inspections and Examinations (OCIE) would likely not have been able to meet its routine examination schedule of examining the three largest NRSROs every 2 years and others every 3 years. OCIE has requested additional resources to fully staff the NRSRO examination program. While the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires SEC to establish an Office of Credit Ratings to conduct annual examinations of each NRSRO and staff the office sufficiently to carry out these examinations, SEC may face challenges in meeting the required examination timetable and providing quality supervision over NRSROs unless it develops a plan that clearly identifies staffing needs, such as requisite skills and training. While SEC has increased the amount of performance-related data NRSROs are required to disclose, the usefulness of the data is limited. First, SEC requires NRSROs to disclose certain performance statistics, increasing the amount of performance information available for some NRSROs. However, because SEC does not specify how NRSROs should calculate these statistics, NRSROs use varied methodologies, limiting their comparability. Second, SEC issued two rules requiring NRSROs to make certain ratings history data publicly available. However, the data sets do not contain enough information to construct comparable performance statistics and are not representative of the population of the credit ratings at each NRSRO. Without better disclosures, the information being provided will not serve its intended purpose of increasing transparency. In July 2008, SEC proposed amendments that would have removed references to NRSRO ratings from several rules. Since the implementation of the Act, the number of NRSROs has increased from 7 to 10; however, industry concentration as measured by NRSRO revenues, the number of entities rated, and the dollar volume of new asset-backed debt rated remains high. As part of an April 2009 roundtable held to examine oversight of credit rating agencies, SEC requested perspectives from users of ratings and others on whether it should consider additional rules to better align the raters' interest with those who rely on those ratings, and specifically, whether one business model represented a better way of managing conflicts of interest than another. SEC should identify the additional time frames and authorities it needs to review NRSRO applications, develop a plan to help ensure the NRSRO examination program is sufficiently staffed, improve NRSROs' performance-related disclosure requirements, and develop a plan to approach the removal of NRSRO references from its rules. SEC generally agreed with these recommendations. |
gao_NSIAD-99-168 | gao_NSIAD-99-168_0 | Background
The International Monetary Fund, established in 1945, is a cooperative, intergovernmental, monetary and financial institution. As of April 1999, it had 182 members. The IMF’s first purpose is the promotion of international monetary cooperation. Its Articles of Agreement (as amended), or charter, also provide that it may make its resources available to members experiencing balance-of-payments problems; this is to be done under “adequate safeguards.” Making resources available to counter balance-of-payments problems is intended to shorten the duration and lessen the degree of these problems and avoid “measures destructive of national or international prosperity.”
Member countries govern the IMF through the Executive Board—the IMF’s primary decision-making body. The IMF Executive Board comprises 24 Executive Directors who are appointed or elected by one or more IMF member countries. The U.S. Executive Director, for instance, represents the United States at the IMF. When a country joins the IMF and later when IMF members agree to increase the IMF’s capital, the country pays a quota or a capital subscription to the organization. The quota serves several purposes: (1) the funds paid to the IMF contribute to the pool of funds that the IMF uses to lend to members facing financial problems and (2) the amount of quota paid determines the voting power of the member. The IMF calculates the quota by assessing each member country’s economic size and characteristics—economically larger countries pay relatively larger quota amounts. The United States pays the largest quota and thus has the largest single share of voting rights. The IMF also has access to lines of credit provided by member countries under the General Arrangements to Borrow and, more recently, under the New Arrangements to Borrow.
As part of the IMF’s mission to promote economic and financial cooperation among its members, the IMF may provide financial assistance to countries facing actual or potential balance-of-payments difficulties that request such assistance. Balance-of-payments difficulties may have short- term, as well as longer-term aspects. The IMF’s approach to alleviating a country’s balance-of-payments difficulties is intended to address both aspects, as needed. As such, the IMF’s approach has two main components—financing and conditionality—that are intended to address both the immediate crisis as well as the underlying factors that contributed to the difficulties. Although financing is designed to help alleviate the short-term balance-of-payments crisis by providing a country with needed reserves, it may also support the longer-term reform efforts by providing needed funding. Similarly, although conditionality, usually in the form of performance criteria and policy benchmarks, is intended to primarily address the underlying causes of the balance-of-payments difficulties over the medium term, it can also assist in alleviating the immediate balance-of- payments problems by, for example, reducing the country’s aggregate demand, including imports.
The access to and disbursement of IMF financial assistance is conditioned upon the adoption and pursuit of economic and structural policy measures the IMF and recipient countries negotiate. This IMF “conditionality” aims to alleviate the underlying economic difficulty that led to the country’s balance-of-payments problem and ensure repayment to the IMF. As the reasons for and magnitude of countries’ balance-of-payments problems have expanded (due, in part, to the growing importance of external financing and changes in the international monetary system since the 1970s), conditionality has also expanded. According to IMF staff, conditionality has moved beyond the traditional focus of reducing aggregate demand, which was appropriate for relieving temporary balance- of-payments difficulties, typically in industrial economies. Structural policies—such as reducing the role of government in the economy and opening the economy to outside competition—that take longer to implement and are aimed at increasing the capacity for economic growth became an important part of conditionality. More recently, the financial crises in Mexico (1994-95) and in Asia and Russia (1997-99) have resulted in an increased focus on strengthening countries’ financial sectors and the gradual opening of the economy to international capital flows.
The main instruments used by the IMF to provide financial assistance are
Stand-by Arrangements (SBA), that provide short-term assistance for problems of a temporary nature; extended arrangements, under the Extended Fund Facility (EFF), that provide longer-term balance-of-payments assistance for problems arising from structural maladjustments; typically, when established, a program lists the general objectives for the first year; objectives for subsequent years are spelled out in program reviews; a Supplemental Reserve Facility (SRF), provided under an SBA or extended arrangement, that provides assistance for exceptional balance- of-payments problems owing to a large and short-term financing need resulting from a sudden and disruptive loss of market confidence reflected in pressure on the capital account and reserves; it is likely to be used when the magnitude of capital outflows may threaten the international monetary system; and an Enhanced Structural Adjustment Facility (ESAF), which is the principal means for providing financial support (highly concessional, or low- interest, loans) to low-income countries facing protracted balance-of- payments problems.
The first three arrangements are funded through the IMF’s general resources account (GRA). The ESAF is funded through separate resources. A country may also draw on its “reserve tranche,” that is, call on funds that initially represented about one-quarter of its quota. Except for the highly concessional ESAF loans, the country pays market-based interest rates on money it receives. The SRF is a new facility that charges a higher amount for its use than other IMF instruments. According to the IMF, for a member country to use this facility, there should be a reasonable expectation that the implementation of strong adjustment policies and adequate financing will result in the early correction of its difficulties.
IMF financial assistance may be a part of a larger package of financial assistance committed to countries in crisis. Brazil, for example, received commitments for a package that included about $18 billion to be provided by the IMF and approximately $4.5 billion each from the World Bank and the Inter-American Development Bank–primarily to provide improved social safety nets and banking reform. Additional bilateral sources agreed to provide $14.5 billion in financing, primarily to guarantee credits extended to Brazil from the Bank for International Settlements. The resulting package for Brazil amounted to more than $41 billion in commitments.
An IMF program can also serve as a catalyst for debt relief from other creditors. For example, to qualify for debt relief from the Paris Club of creditor governments, countries must reach agreement with the IMF on a reform program. The Paris Club conditions its debt relief on countries’ implementation of economic and structural reforms under IMF-supported financing programs. Part of the motivation for Russia’s IMF arrangement in 1996 was to facilitate its debt rescheduling from the Paris Club.
The IMF’s Process for Establishing Programs Incorporates Country- specific Data and Analysis as Well as IMF Judgment
The IMF’s general framework for establishing a financial assistance arrangement is intended to be applied on a case-by-case basis that considers each country’s individual circumstances. This process gives the IMF considerable latitude in establishing the balance-of-payments need, the amount and timing of resource disbursements, and the conditions for disbursements. Under its Articles of Agreement, as amended, the IMF limits financial assistance to those countries with a balance-of-payments need. However, the Articles do not precisely define “need,” and, according to IMF documents, the IMF’s Executive Board has been reluctant to establish guidelines that would add greater specificity to the charter’s general criteria. The specific conditions that the IMF and the country authorities negotiate are intended to address the underlying problems that contributed to the country’s balance-of-payments difficulty, while ensuring repayment to the IMF. These conditions include a variety of changes in a country’s fiscal, monetary, or structural policies. After the country completes any “prior actions” and the IMF Executive Board approves the financial arrangement, the program is to take effect and the country is eligible to receive its first disbursement of funds. We found that the IMF generally followed this process for the six countries we reviewed.
The IMF’s Process for Establishing Financial Arrangements With Member Countries
The formal process the IMF generally uses to establish countries’ financial arrangements is outlined in figure 1. IMF staff, the IMF Executive Board members, and country authorities may also consult informally at any stage throughout this process.
Establishment of an IMF financial arrangement begins with discussions between IMF staff and country officials and continues through the IMF Executive Board’s approval of the arrangement. If a member country determines that it is experiencing or could experience a balance-of- payments problem, it can initiate discussions with IMF staff that may lead it to request IMF financial assistance. These discussions can occur at any time, including during the country’s annual consultation with the IMF or through informal consultations requested by the member. At these consultations, IMF staff and country authorities discuss economic data and policies as well as the nature of the country’s balance-of-payments difficulty, amount of financing expected to be provided by various sources and the amount that may be requested from the IMF, instruments under which the IMF resources could be provided, potential schedule for reviewing countries’ performance and disbursing likely conditions for assessing countries’ performance under the program.
IMF staff noted that key tasks during country missions to conduct the negotiations are (1) the collection of extensive data describing the country’s economic conditions and (2) an analysis of those data to recommend the amount and timing of the IMF financial assistance and conditionality. The IMF’s review of a country’s economy is an iterative process that is often based on country-provided data, projections of key macroeconomic variables, and judgment by the IMF staff and country officials.
The design of an IMF program is complicated, and negotiations between IMF staff and country authorities can be difficult for several reasons. First, the countries are facing an adverse or uncertain economic situation. Second, the negotiators may disagree on the type, pace, or feasibility of the reforms needed to help overcome the difficulty. In some cases, needed reforms reflect long-standing problems and are difficult to undertake due to political constraints. For example, reforms may entail changes to labor practices opposed by unions or removal of tax preferences benefiting certain sectors. Third, conditionality and financing are based, in part, on projections of key variables such as estimated growth rates and access to external financing. Fourth, in some cases, the country may lack reliable data for analyzing the current situation or making projections.
IMF staff and country authorities may or may not reach agreement on a package of financing and conditionality. If they do not reach agreement, then the member may seek other means for addressing its difficulty. If they reach agreement, the arrangement is presented to the IMF Executive Board for approval. IMF staff generally brings to the IMF Board only arrangements it believes the IMF Board will accept. After the country satisfies any required “prior actions” and the IMF Executive Board approves the arrangement, the arrangement will take effect and the country can get funds from the IMF.
The IMF Has a Broad Framework for Assessing Countries’ Balance of Payments
Under the IMF’s Articles of Agreement, as amended, the IMF considers any of the following three elements to be a basis for providing financial assistance from the GRA: the country’s balance of payments, the country’s reserve position, and developments in its reserves.
However, the Articles do not precisely define the elements or provide criteria for assessing need. While the IMF Executive Board has not established guidelines that would add greater specificity to the Articles’ general criteria, over time the IMF has developed a broad framework that serves as a basis for analyzing a country’s economy and forming judgments regarding the existence and magnitude of balance-of-payments deficits and the adequacy of international reserves.
The first element—the country’s balance of payments—represents the economy’s external financing requirement and equals the sum of a member’s current and capital account balances. The current account primarily includes exports and imports in goods and services; transfers; and income payments, such as interest payments. The capital account provides summary data on the changes in the net foreign assets of domestic residents arising from transactions such as external borrowing or repayments, foreign direct investment, portfolio investment (equity and bonds), and short-term capital movements. The second element—the country’s reserve position—refers to the amount of resources (hard currency, reserve position in the IMF, special drawing rights, and monetary gold) that can be used to pay for imports and make payments on external debt. IMF documents indicate that the third element—developments in the reserve position—has a very narrow application. This element is intended to ensure that members of the IMF whose currency is a reserve currency (such as the United States) would be able to use IMF resources when requested, despite the absence of a need as outlined in the first two elements.
The IMF’s framework has enabled it to consider countries’ individual circumstances and changes in the international monetary system. These include increased capital flows between countries and changes in the composition and source of those flows as well as the shift in the primary recipients of IMF financial assistance from industrialized countries to developing countries. Given such considerations, decisions about a country’s need for IMF resources have become more difficult. According to IMF documents, determining need based solely on the overall balance- of-payments position is relatively clear-cut because the balance is either in surplus or deficit. Assessing need based on whether a country’s foreign reserves are sufficient requires a greater degree of judgment because no precise criteria define the appropriate level of reserves. In determining the sufficiency of a country’s reserves, the IMF can adjust the definition of “sufficient” reserves to account for such country-specific factors as the volume and variability of exports and imports, the size and variability of capital flows, the amount of short-term liabilities, and the nature of the country’s exchange rate regime. Significant declines in the foreign reserve position may be of concern if they indicate that a country may have difficulty financing its imports or repaying its external debt in the future.
IMF documents indicate that the Executive Board has been reluctant to establish guidelines that would add greater specificity to the general criteria for balance-of-payments need set forth in the Articles of Agreement, as amended. Members of the IMF Board have been concerned that “codification” of the concept of need would create unnecessary inflexibility. For this reason, they urged that the concept of need should continue to be applied on a case-by-case basis. As a result, application of this concept involves considerable data analysis as well as judgment.
The IMF uses somewhat different criteria for low-income countries requesting resources under the ESAF. In contrast to the criteria for demonstrating a need for GRA resources, when assessing whether a member that meets income and other criteria for ESAF eligibility has a protracted balance-of-payments problem, emphasis is to be placed on the components of its balance of payments rather than solely on its overall balance-of-payments position. According to IMF staff, the underlying balance-of-payments problems of many low-income countries did not necessarily result in conditions similar to those reflecting the GRA criteria; that is, an actual balance-of-payments deficit or low reserves. For this reason, emphasis would have to be placed on those indicators that would normally evidence “poor external performance.” Such indicators include a deterioration in the terms of trade and diminished access to capital markets. Moreover, protracted balance-of-payments problems would often be reflected by exchange rate restrictions, payments arrears, or prolonged use of IMF resources. As with the GRA criteria, the IMF Executive Board agreed to continue to use flexibility in applying the ESAF criteria. Some Board members have expressed the opinion that a low-income country, by definition, has a protracted balance-of-payments problem. and external developments. For example, owing to a rundown in its reserves, a country may allow its currency to float more freely until adjustment policies take effect and reserves are rebuilt. resource needs, IMF quota, outstanding IMF resources, and previous performance in using IMF financing; the strength of its adjustment program; and its capacity to repay the IMF. While the IMF has discretion in deciding the total amount of resources it will provide to a country, disbursements are to be limited to the amount needed by the country. If the IMF later discovers that a country drew IMF funds without a need for those funds (that is, the information on which the financing need was determined was later found to be incorrect), it can undertake remedial action.
The IMF Executive Board encourages countries to request its assistance early and to undertake corrective actions early in order to minimize the potential costs and disruption of correcting the underlying causes of a balance-of-payments problem. However, a number of factors—including the belief that the problem is temporary or can be solved without official assistance, or the concern that political and social problems may arise from needed structural changes—can cause some countries to hesitate in asking for IMF assistance. For example, Korea did not draw on IMF resources until its reserves had fallen substantially.
IMF Conditionality Focuses on Fiscal, Monetary, and Structural Reforms
Once the IMF staff has determined the balance-of-payments needs of a member and its eligibility to draw resources, the IMF must be satisfied that the member can meet its repayment obligations to the IMF and that the policy measures agreed to are sufficient to overcome the member’s balance-of-payments problem. The IMF does this, in part, through conditionality. Fundamental weaknesses in the underlying economy, such as a large budget deficit and/or high inflation, or in the structure of the financial or corporate sectors, may contribute to the balance-of-payments problem of a country. Conditionality may vary with each country’s individual program as it seeks to address these weaknesses. As such, according to the IMF, there is no “rigid and inflexible” set of operational rules in the establishment of a country’s conditionality program. The process is one of negotiation between the country authorities and the IMF to reach agreement on a number of issues, ranging from economic assumptions to the speed and magnitude of structural reforms.
The IMF arrangement often occurs within the context of the country’s larger reform efforts. As a result, not all of a country’s policies or reform efforts may be included as conditions of the IMF arrangement. For example, some structural reforms and trade liberalization measures may be mentioned in the arrangement reached between the IMF and the country authorities, but only the actions the IMF judges to be particularly important for achieving program objectives will become performance criteria and benchmarks within the arrangement. IMF officials noted that achieving performance criteria is not the ultimate goal of conditionality; rather, the performance criteria are selected as clearly observable and measurable indicators that a country is making progress toward the overall program goals, such as strengthening the balance of payments and reducing inflation. The IMF uses two types of performance criteria that generally must be met for members to qualify for disbursements. The first are quantitative performance criteria, or macroeconomic indicators, such as monetary and budgetary targets. The second are structural performance criteria, or quantifiable/observable actions that demonstrate progress toward the borrower country’s structural reform goals. Benchmarks are points of reference against which progress may be monitored but disbursements are generally not dependent on meeting them. Benchmarks are not necessarily quantitative and frequently relate to structural variables and policies, such as tax reform and privatizing state-owned enterprises.
IMF conditionality tends to focus on three areas: fiscal, monetary, and structural. These three areas are designed to support a general framework that aims to strengthen the balance-of-payments position, achieve market- based growth, and decrease the role of the government in a country’s economy. Borrower country IMF arrangements generally consist of a combination of efforts in these three areas, which depend on the country’s particular circumstances.
According to the IMF, poor fiscal management in a member’s economy generally has been a major factor underlying such problems as high inflation, large current account deficits, and sluggish growth. Large and persistent budget deficits may tend to overheat the economy, contributing to high inflation (especially when financed by the printing of money), excess imports, and low domestic savings. IMF staff and the member country negotiate ways to address this fiscal deficit, including instituting reductions in government spending and increases in tax revenues. Numerical targets for the fiscal level consistent with these reforms are often part of a country’s quantitative performance criteria.
Similarly, IMF staff and the member country will negotiate monetary policy changes as part of the conditionality package. The underlying goals of these conditions are typically strengthening the balance-of-payments position, safeguarding or rebuilding international reserves, restoring market confidence, reducing sizeable exchange rate changes, restraining growth in domestic credit, and/or reducing inflation. For example, limits may be imposed on the increase in short-term debt owed or guaranteed by the government; this may be done in an effort to restrict the ability of a government to use short-term external financing to meet reserve targets or finance fiscal deficits. Another performance criterion that is frequently used is a limit on the net domestic assets of the central bank. By limiting the resources made available by the central bank to the economy, the growth of the money supply is slowed and inflation is lessened. Frequently, the country and the IMF reach agreement on the minimum level of foreign reserves that the country may hold; such a requirement reduces the country’s ability to manage its exchange rate through interventions in the foreign currency market. The performance criterion on international reserves is a key indicator of progress toward external viability.
According to IMF staff, the presence of pervasive structural problems in a member’s economy and the need to ensure the sustainability of a country’s reform effort require that structural policy changes be included within the overall conditionality negotiated. These structural problems encompass a broad array of issues, including inefficient state enterprises, trade restrictions, and lack of transparency in the financial and corporate sectors. Reforms in these areas are included as part of a country’s structural benchmarks, which the country is strongly encouraged to satisfy, although the benchmarks do not have the same significance as the performance criteria. However, in certain instances, structural changes may be established in a precise quantitative manner and made part of a country’s structural performance criteria.
Once the financial arrangement has been negotiated, it is presented to the IMF Executive Board for approval. The IMF Board generally accepts the recommendations of the staff, largely because the staff brings to the IMF Board only proposals that the staff believes the Board will accept. The decision to approve an arrangement depends on a judgment by the IMF staff, management, and Executive Board that the program is sufficient to overcome the country’s balance-of-payments difficulty and the country will be able to repay the IMF. After the country completes any prior actions and the IMF Executive Board then approves the arrangement, the arrangement will take effect and the country becomes eligible for its first disbursement of IMF funds. The country is then expected to implement the policy measures agreed to under the arrangement. (See app. I for more information on the IMF’s process for establishing financial arrangements.)
The IMF Generally Followed its Process in Establishing the Six Arrangements
According to the IMF documents we reviewed, the IMF generally followed the process described previously in establishing the financial assistance arrangements with each of the six countries that we reviewed. In each case, the balance-of-payments problem was described and the conditionality program was intended to address the underlying problems of the individual countries as defined by IMF staff and country authorities. Our analysis showed that, to varying degrees, the balance-of-payments problems of the six countries we studied stemmed from concerns regarding the access of the countries’ public and private sectors to external financing. In addition, the reform programs of each country generally addressed the areas of concern identified by country and IMF officials as contributing to the balance-of-payments problems. Moreover, the type of financial arrangement each country received, the time period of the arrangement, and the total amount of financing the IMF agreed to provide were based on the IMF’s analysis of the needs and circumstances of the individual countries. In determining the potential amount of IMF assistance, the IMF also considered the country’s outstanding IMF resources in relation to its quota. Table 1 outlines the current IMF financial arrangements for the six borrower countries. (These arrangements are described in greater detail for each country in apps. II to VII.)
According to our analysis, the balance-of-payments problems of the six countries we studied were due to concerns about the countries’ continued ability to obtain external financing. In the cases of Korea, Indonesia, and Brazil, concerns over severely diminished reserves and continued access to external financing were clearly identified as important factors in the initial set of documents that recommended the establishment of an IMF financial arrangement in these countries. In the cases of Argentina, Russia, and Uganda, concerns over continued access to external financing were not as clearly defined but were embedded within a larger set of reasons for IMF assistance, including continued support for the countries’ economic reform programs. Nonetheless, the information provided by IMF staff and country authorities was sufficient to determine that a potential balance-of- payments problem existed in each of these three countries.
Our analysis also indicated that the individual IMF programs were geared toward the specific IMF assessment of the needs of the six countries, as shown in table 2.
The purpose of the programs was to address the immediate or potential balance-of-payments problem of each country as well as the underlying factors that IMF staff and country officials identified as contributing to that problem. The fiscal, monetary, and structural objectives of all six countries’ arrangements had the goal of helping to improve the medium- term economic growth and/or bolster investor confidence in order to continue to finance or reduce the balance-of-payments deficit or to build reserves. However, within the context of these general goals, the magnitudes and definitions of the performance criteria and the specifics of structural reforms differed across the countries.
The financing of each package addressed the balance-of-payments problem of each country. In the cases of the three countries with significant losses in their reserves (Brazil, Indonesia, and Korea), the amount of the IMF financing was substantial and frontloaded, meaning that the countries were to receive much of the funding early, with the intent of providing a signal to market participants that the commitment to these countries was strong. In the three remaining countries, IMF financing was designed to be more evenly distributed throughout the duration of the program. The financing for Russia and Uganda was to be provided in relatively equal installments over the life of the program to assist in addressing the reforms agreed to under the program. Argentina’s financing was viewed as a precautionary line of credit, available only if necessary.
Korea and Argentina exemplify the differences that can exist between countries’ financial arrangements with the IMF. The IMF’s approach to the financial crisis in Korea was intended to address the country’s immediate need for financing as well as the underlying causes identified by IMF staff and country authorities as contributing to the balance-of-payments difficulties. The IMF arrangement in Korea was heavily frontloaded, with the country receiving much of the agreed-to financing at the beginning of the arrangement, in order to address the country’s immediate need to replenish depleted reserves. The country faced balance-of-payments problems primarily due to significant capital outflows. Korean banks had a large amount of foreign debt, composed substantially of short-term external loans that needed frequent refinancing. As market confidence fell, the willingness of external creditors to roll over (that is, refinance) the debt declined rapidly. The attempt by the government to support the former exchange rate rapidly depleted the foreign reserves by providing creditors with the hard currency that they ultimately withdrew as short- term debt matured. As reserves reached precariously low levels, Korea abandoned its attempt to support the exchange rate, moved to a flexible rate, and sought IMF support.
The conditions outlined in the IMF arrangement were intended to address immediate concerns as well as the underlying causes of the balance-of- payments difficulties as determined by IMF staff and Korean authorities. The immediate causes were a loss of market confidence, depleted foreign reserves, and a rapidly depreciating currency. The arrangement’s immediate goal was to restore calm in the markets and contain the inflationary impact of the currency’s depreciation by providing substantial financing and requiring a tightening of monetary policy. In terms of longer- term changes, IMF staff and Korean authorities identified weaknesses in the corporate and financial sectors as underlying causes for the difficulties. Specifically, increases in corporate bankruptcies (caused by large debt burdens and excess capacity) and nonperforming (unpaid) loans exacerbated weaknesses in the banking system. Weaknesses in the banking systems included a focus on maximizing revenues (not profits) and limited experience in managing risk, combined with lax prudential supervision. As a result, under Korea’s IMF arrangement, compared to other countries’ arrangements, greater emphasis was placed on structural reforms—particularly corporate and financial restructuring.
Unlike Korea’s IMF arrangement, Argentina’s arrangement addresses a potential, rather than existing, balance-of-payments problem. Although Argentina enjoyed good access to capital markets and employed a strategy to lengthen the maturity of its debt and borrow when interest rates were low, it faced an uncertain future due to deteriorating conditions in the international financial environment and the effect this likely would have on its future access to capital markets. To address this potential problem, Argentina and the IMF reached agreement on a precautionary program, with Argentina agreeing to access IMF resources only if external conditions made it necessary.
The government and the IMF identified fiscal discipline and structural reforms (particularly in tax systems and labor markets) as two of the most crucial elements of Argentina’s program. In Argentina, the goal of maintaining fiscal discipline is to reduce the federal government deficit, stimulate domestic saving, and strengthen confidence in the continued viability of the convertibility regime, under which Argentine pesos are exchanged at a 1-to-1 rate with U.S. dollars. Reducing the amount of the government’s deficit lowers the amount of funds the government needs to borrow from domestic and external creditors, therefore freeing up resources for other uses and decreasing the government’s dependence on external borrowing. Argentina’s government is limited in its ability to print money (pesos) to finance its deficit because under its currency board arrangement, the government has agreed to exchange each Argentine peso circulating in the economy with a U.S. dollar if requested. Consistent with this, the quantitative performance criteria agreed to under the IMF arrangement emphasize fiscal issues and are intended to limit the federal government’s budget deficit and government debt levels. Monetary issues are not emphasized as strongly due to the government’s limited power to affect the money supply and interest rates. Structural reforms aimed at, for example, decreasing the costs of labor and lowering taxes on production are aimed at making the economy more competitive, with the goal of reducing the trade deficit and thus the current account deficit.
The IMF’s Process for Monitoring Conditionality Is Intended to Respond to Individual Borrower Country Progress in Implementing Its Program
The IMF’s process for monitoring conditionality is intended to respond to individual country progress in meeting required conditions. After the IMF Executive Board approves the arrangement, the country is expected to implement the conditions. The programs are subject to periodic reviews, at which time decisions are made on future fund disbursements. In cases where the IMF determines the country has made sufficient progress in meeting the program’s conditions, the next disbursement will be made available. The IMF Executive Board may grant waivers for nonobservance of conditions and approve access to funds for countries that do not meet all required conditions if, according to the IMF, it concludes that the deviation was minor and the country had made sufficient progress in implementing the program. However, if the IMF staff concludes that a country has not made sufficient progress in implementing policies and meeting conditions it considered essential, it may recommend that disbursements be delayed or funds withheld. In these cases, the IMF Board is generally not asked to make a negative decision; rather, the review is not completed and it is not formally brought before the Board for a decision at that time. IMF staff and Executive Directors told us that these cases are discussed with the Executive Board informally and in “country matter” sessions.
The IMF’s process for monitoring the conditions included in support programs allows for program modifications, depending on a country’s individual circumstances. Modifications are usually summarized in updated program documents. The programs in each of the countries we reviewed were modified, in some cases frequently, for a variety of reasons. In some instances, modifications were made because of the effect unforeseen internal or external factors had had on the country’s ability to meet the conditions in the program. In other instances, the IMF determined the initial conditions were not feasible or realistic.
The IMF’s Monitoring of a Borrower Country’s Program Is a Process That Involves IMF Staff, Country Officials, and the IMF Executive Board
As illustrated in figure 1, once the IMF Executive Board has approved a program, the country is expected to implement its conditions. IMF staff monitors the program continually, and the program is subject to periodic reviews by the IMF Executive Board in order to evaluate if the country’s progress in meeting the conditions under the program justifies the continuation of disbursements. In some cases, disbursements depend only on a determination by the IMF staff that the country has met prenegotiated criteria. As such, according to IMF staff, for most programs, review by the IMF Executive Board is not required prior to each quarterly disbursement. For these programs, semiannual reviews by the IMF Executive Board are the more typical approach. In these cases, IMF staff reviews whether the country has met its performance criteria quarterly and, if they have been met, a disbursement can follow without a full IMF Board review. Larger programs, such as several we studied, tend to have tighter monitoring, and reviews can be held quarterly, bimonthly, or monthly. Future disbursements are contingent on the outcome of these reviews. In order for a country to be eligible for the next disbursement, the review has to be considered “complete.” IMF staff missions to the country review the country’s progress in meeting the program’s performance criteria and other structural reforms with country officials. Progress is outlined in documents provided to the Executive Board by both country authorities and IMF staff. IMF staff appraises a country’s progress and makes a recommendation to the Executive Board. According to IMF staff, this process involves a considerable amount of judgment and allows for a number of options depending on the country’s performance and the effect of both internal and external events on that performance.
If the IMF Executive Board determines that a country has made sufficient progress in meeting the program’s conditions, the next disbursement, as specified in the arrangement, will be available for release. However, according to IMF staff, it is fairly common for one or more of the program’s conditions to be missed, including performance criteria. When this happens, IMF staff and country officials discuss the causes behind the missed criteria and changes that may be needed in the program. According to an IMF official, if the staff concludes that the deviation is minor and self-correcting or the underlying objectives of the program can be met despite the deviation, they may recommend to the IMF Executive Board that it grant the country’s request for a waiver and be eligible for the next disbursement. However, if the staff concludes that the reform program is not on track and that the criteria were missed because the country was not sufficiently pursuing an agreed-upon policy, the staff will not recommend approval of a waiver at that time and will instead delay or suspend the completion of the country’s review. Negotiations between the two parties can continue if and until the two sides reach agreement on how to restart the existing program or initiate an entirely new program, or the borrower country requests that the program be terminated. When the staff is assured that the country is once again committed to reform (sometimes by undertaking “prior actions”), it can recommend to the Executive Board that waivers be granted for the previously unmet conditions, and the review be completed. Upon IMF Executive Board approval, the country is eligible to receive the next disbursement. The documents we reviewed demonstrated that this process was generally followed for the six countries in our study, as summarized in table 3.
The IMF Executive Board May Approve Access to Funds if Overall Progress Is Sufficient
As previously discussed, during the review process, if the IMF determines that a country has met all of the performance criteria, the country is eligible to receive its next IMF disbursement. If IMF staff believes that the country has satisfactorily implemented the requirements for the period under review but that all criteria were not met, it can recommend that the IMF Executive Board grant the borrower country’s request for a waiver of nonobservance of those unmet criteria. Generally, in these cases, the deviations are determined to be minor, of a technical nature, or temporary. The granting of such waivers generally happens fairly quickly, and access to the next disbursement is not delayed. In addition to reviewing a country’s progress on performance criteria, its progress toward meeting indicative targets and structural benchmarks is also considered in the review process and the decision to approve the next disbursement.
For example, Argentina requested a waiver for the IMF Board review in March 1999 because its federal government deficit slightly exceeded its target. This situation was primarily due to adverse external factors. In this instance, the federal government deficit, estimated at $3.85 billion in 1998 (1.1 percent of gross domestic product ), exceeded its ceiling by about $350 million, or around 0.1 percent of GDP. According to the Argentine government, its efforts to contain expenditures could not compensate fully for the revenue shortfall. The shortfall mainly reflected the slowdown of economic activity in the second half of 1998 and its adverse effect on taxes, particularly the value-added tax. IMF staff viewed the deviation as minor and as not detracting from overall fiscal performance. Hence, they recommended the waiver be granted; in March 1999, the IMF Executive Board approved the waiver.
In another example, Uganda requested a waiver for nonobservance of one quantitative performance criterion during its April 1998 IMF Board review. In this instance, the quantitative performance criterion was a limit on the net claims on the government by the banking system. During the review period that ended in December 1997, the Ugandan government experienced a temporary shortfall in its checking accounts with the banking system, thereby causing it to miss the performance criterion. According to IMF documents, the shortfall was due to government payments being made sooner than expected. IMF staff recommended the waiver be granted because they viewed this nonobservance as minor and of a technical nature rather than a policy violation; the IMF Executive Board approved the waiver in April 1998. The shortfall was corrected within a short period of time.
The IMF May Delay or Withhold Funds if Sufficient Progress Is Not Made
During the review process, instances in which the country did not meet key quantitative or structural performance criteria may be considered significant enough to delay or suspend disbursements. According to IMF staff, a country’s record in implementing performance targets and benchmarks influences this determination. Under these circumstances, IMF staff recommends to IMF management that the review not be completed. If IMF management concurs, the staff will likely informally brief the IMF Board, but the IMF Board will not be asked to make a formal decision on the program’s continuation at that time. Depending on the situation, IMF staff may continue to work with country officials to negotiate new terms of the program so that it can be restarted or so a new program can be initiated. If country officials and IMF staff are unable to agree on terms, it is possible that the program will lapse.
Indonesia’s program is an example of a situation in which disbursements were delayed several times. The Indonesian IMF program began with Executive Board approval in November 1997, with completion of the first review scheduled for mid-March. The IMF, however, delayed Indonesia’s disbursements from mid-March to early May 1998 due to the IMF staff’s determination that Indonesia had not made sufficient progress in carrying out its program. The first review was completed in May 1998, with Indonesia meeting none of the quantitative performance criteria and one of the required structural performance criteria. IMF staff recommended and the Executive Board granted Indonesia’s request for waivers of nonobservance of these criteria based on actions taken by the government, and disbursements resumed. At this time, the IMF moved from quarterly to monthly reviews of Indonesia’s program. Disbursements were also delayed in the process of completing several subsequent reviews.
Brazil’s program is a more recent example of a delay in disbursements. The program began in November 1998, with the first disbursement occurring in early December. In January 1999, the government of Brazil was forced to devalue and then float its currency. Up until that time, Brazil’s currency was pegged to the U.S. dollar, and maintenance of the exchange rate was an objective of Brazil’s IMF program. Because Brazil received funds under two different IMF policies and drew from these sources simultaneously, the first and second reviews were scheduled to occur simultaneously. Completion of this set of reviews and the second disbursement were initially scheduled to occur no later than the end of February 1999. The change in the currency regime required substantial revision to the program, thus delaying until late March completion of the review. Brazil’s program was modified to reflect new economic and exchange rate circumstances. Brazil missed one of its quantitative performance criteria (a ceiling on net domestic assets in the central bank). The Executive Board granted Brazil a waiver for the nonobservance of this performance criterion, agreed to the program modifications, and approved completion of the first and second review on March 30, 1999, thus opening the way for Brazil to receive the next disbursement of funds.
Russia’s program is an example of one in which the IMF delayed disbursements and program approval, reduced the amount of the disbursement, and ultimately suspended the program. The IMF delayed four disbursements: one in June and two in September and October 1996, and then another in November 1997. Russia received no funds between February and May 1997, pending approval of the 1997 program, which was delayed until May 1997, based on Russia’s successful completion of prior actions. The delayed approval of the 1998 program, due to cabinet changes and difficulty in meeting the revenue package, meant that Russia received no funds between January and June 1998. The program was finally approved in June 1998, based on implementation of prior actions. In July 1998, the IMF approved additional funds to Russia but reduced the amount of the initial disbursement from $5.6 billion to $4.8 billion due to delays in getting two measures passed in the Duma (the lower house of the Russian parliament). The IMF was scheduled to release the next disbursement in September 1998, but Russia had deviated so far from the program that the IMF made no further disbursements. Ultimately, according to the IMF, it delayed disbursements because of Russia’s poor tax collections, reflecting a lack of government resolve to collect these revenues. However, throughout Russia’s program, the IMF staff expressed the view that Russia’s key senior authorities were committed to the program and should be supported; therefore, the IMF Executive Board continued to approve disbursements. In March 1999, Russia requested that the program be terminated. In April 1999, IMF staff and Russian authorities announced they had reached agreement on an economic program that management hoped to be able to recommend to the IMF Executive Board in support of a new arrangement. As of June 16, 1999, the IMF Board had not approved the new arrangement.
Conditions May Be Modified for a Variety of Reasons
Modifications to a borrower country’s program are usually based on an agreement between the IMF and country officials summarized in updated program documents. In these cases, such agreements outline modified performance criteria, indicative targets, and benchmarks.
IMF and country officials may modify conditions contained in borrower country programs for a variety of reasons, depending on individual country circumstances. Two reasons for modifications of programs are (1) the effect of unanticipated internal and external factors on the country’s ability to fulfill the required conditions and (2) the determination that the initial conditions were not realistic or feasible. In many instances, there is overlap between these two reasons. Unanticipated internal factors generally reflect events over which the government had less control than it had hoped. Examples include the inability of the government to enact required legislation, or other political turmoil. Unforeseen external factors are generally changes in the global economic environment that affect the ability of a borrower country to fulfill the macroeconomic conditions of its program. Examples include such things as a decline in investor confidence and/or capital flows, a decrease in demand for or price of primary exports, default by a major debtor, a recession or other economic problems in another country to which one’s economy is closely tied, and natural disasters like droughts and floods. Unrealistic or unfeasible conditions can result when a country’s problem is misdiagnosed or when the impact of certain conditions is different from what was expected.
Developments in the early stages of Indonesia’s current program are an example of an instance in which unanticipated internal events made it difficult for Indonesia to fulfill the conditions it had agreed to. These events included (1) circumvention of government decrees to dismantle cartels and open up markets, (2) the government’s consideration of a currency board (which was not part of the program), (3) social unrest, and (4) the resignation of the president. Indonesia experienced a significant loss of investor confidence that resulted in a run on the banks, the reduction of foreign credit lines, and a continuing depreciation of the currency. The IMF and Indonesia revised the economic program a number of times before the situation stabilized.
Brazil is another example in which unanticipated internal events resulted in program revisions. The maintenance of the exchange rate regime was an objective of the country’s IMF program. Brazil turned to the IMF for assistance in September 1998, when its currency came under pressure as a result of the Russian crisis, and it experienced a significant loss of reserves. This reserve loss decelerated after the negotiations began, but, according to Brazilian officials, Brazil’s currency came under additional pressure for a variety of reasons after its IMF program had started. These reasons included three internal setbacks that were out of the government’s control, including the defeat in Brazil’s congress of two tax measures deemed crucial to the fiscal adjustment program and the reluctance of a number of Brazilian state governors to fulfill their financial obligations to the government. To try to stem the additional loss of reserves, the Brazilian government found it necessary to devalue and then float the currency. The IMF program was then revised to reflect the new economic situation and currency regime.
In Korea, a significant external factor that limited its macroeconomic performance, in the view of the IMF, was the continued Japanese recession. According to an IMF assessment, the weakening of the Japanese yen affected Korea’s export competitiveness by making Korea’s exports more expensive in comparison with Japanese exports. In addition, it was a contributing factor in worsening and lengthening Korea’s own recession.
Reassessment of initial conditions can take place because these conditions are later determined to be unfeasible or unrealistic due to economic factors that were not well known at the time. For example, Treasury and IMF officials told us the IMF projections for Korea were overly optimistic at the beginning of the program. These estimates were based on Korea’s past strong growth and did not accurately project the “rolling financial crisis” throughout Asia. Also, the true state of Korea’s financial sector was not clear when Korea’s initial program was designed. Part of Korea’s agreement with the IMF was to improve transparency (openness) in its financial reporting, but as greater information became available, investor confidence dropped when the market learned more about the level of usable international reserves, corporate debt, and banks’ nonperforming loans.
Apart from waivers and reviews, quantitative performance criteria and indicative targets can be changed by means of “adjusters” that are included in some country programs. Adjusters are prenegotiated to account for specific actions and assumptions about economic and financial movements. We found that there were basically two types of adjusters in the agreements we reviewed: adjusters due to unexpected external events that temporarily affect a key variable and adjusters due to in-country policy changes that affect a key variable or the measurement of that variable.
The first type of adjuster automatically changes the level of a quantitative performance criterion when there are unexpected changes—generally outside of the country’s control—to one or more key variables. The rationale is that occasionally countries may fail to reach a particular quantitative performance criterion due to fluctuations in economic conditions outside their control and that temporary changes in key variables should not derail an IMF agreement. Also, some adjusters are designed to take into account the effect of positive as well as negative external developments on the quantitative performance criteria. For example, Uganda’s program had a quantitative performance criterion that set a minimum level for net international reserves. This minimum level was based on an assumed level of inflows of funds from bilateral and multilateral lending agencies. An adjuster was added to the quantitative performance criterion in order to adjust the required minimum level upward (or downward) in the event that creditors provided more (or less) debt relief than was expected.
The second type of adjuster automatically changes the level of a quantitative performance criterion when policymakers choose to make changes in their monetary or fiscal policy instruments in a manner that would either directly or indirectly affect the target variables. For example, an IMF official noted that a common performance criterion in programs is a maximum permissible level of net domestic assets of the central bank, usually included as part of a strategy to target the growth of the money supply. However, other policy decisions can affect the level of the money supply. For instance, decreases in the required reserve ratio (the proportion of the total value of deposits that a commercial bank must keep either in its vault or in an account at the central bank) may increase commercial bank liquidity and the money supply. Thus, frequently the quantitative performance criteria include an adjuster that automatically decreases the performance criterion for the net domestic assets of the central bank when the required reserve ratio is reduced to offset potential increases in the money supply. This adjuster is intended to prevent policy changes from compromising the achievement of overall program objectives, such as price stability or low inflation.
Objectives, Scope, and Methodology
Our objectives were to (1) describe how the IMF establishes financial arrangements with borrower countries and the types of conditions set under these programs and assess how this process was used for six borrower countries; and (2) describe how the IMF monitors countries’ performance and assess how this process was used for six borrower countries, detailing the conditions met and not met, the reasons why conditions were not met, and the actions the IMF took in response. To meet our objectives, we obtained access to IMF officials and documents (public and nonpublic) through the Department of the Treasury and through the staff of the U.S. member of the IMF Board of Executive Directors. These documents describe the IMF’s background, policies, and practices. We reviewed borrower country documents outlining IMF arrangements and conditionality, including letters of intent, and documents presented to the IMF Executive Board, such as staff reports on arrangements. We also reviewed several IMF assessments of its operations, including reviews of ESAF and the IMF’s response to the Asian financial crisis.
We discussed the IMF’s process for establishing and monitoring the conditions of its financial arrangements with officials of the IMF, U.S. government agencies, and borrower governments. To obtain additional information from in-country officials, in February 1999, we requested access to Department of State cables related to the most current IMF arrangement and economic and financial conditions in each of the six countries. According to State, it identified and reviewed over 550 cables that were determined to be responsive to our request. Due to the volume of the cables and the limited time in which to review them, State was unable to provide timely access for us to analyze the content of many of these cables and meet the legislatively required reporting date. We also obtained information from nongovernmental and academic organizations. We did not evaluate the appropriateness or effectiveness of the IMF’s terms and conditions.
We reviewed the most recent IMF financial arrangements for the following six borrower countries: Argentina, Brazil, Indonesia, Republic of Korea (Korea), the Russian Federation (Russia), and Uganda. We selected these countries because they are geographically diverse, represent a mix of borrowers that were having actual or potential balance-of-payments difficulties at the time they requested IMF financial assistance, and have varying histories with the IMF. Several of these countries were in the midst of a financial crisis at the time they requested assistance. Three countries—Argentina, Russia, and Uganda—had successive IMF financial arrangements, whereas two other countries—Indonesia and Korea—had not had IMF financial arrangements for about 10 years before their most current arrangements.
The information contained in this report is based on the implementation of countries’ programs from their inception through April 1999, unless otherwise noted.
We conducted our review in Washington, D.C., between November 1998 and April 1999 in accordance with generally accepted government auditing standards.
We recognize that the IMF’s actions have been subject to debate and criticism. An evaluation of these criticisms is clearly outside the scope of this report. We identify some of these criticisms in appendix VIII.
Agency Comments and Our Evaluation
We requested comments on a draft of this report from the Under Secretary (International) of the Department of the Treasury and the Managing Director of the International Monetary Fund. The Treasury provided written comments on a draft of this report, which are reprinted in appendix IX. These comments characterized the report as balanced and informative. The Treasury did note its concern that our discussion of flexibility in monitoring and implementing IMF programs could be misunderstood. The Treasury commented that while the IMF’s process does incorporate flexibility and latitude, “there is a fundamental link between program implementation and program support.” We agree that IMF’s process is designed to allow adjustment to a country’s program in appropriate cases, taking into account changing circumstances. We provide many examples of such adjustments in our description of the arrangements for six borrower countries. Also, in response to the Treasury’s concern, we added clarifying language to the Results in Brief to note that the resumption of IMF disbursements following a delay depends on IMF judgment that there has been satisfactory progress in meeting key conditions. For a full discussion of the process, see appendix I of this report.
Both the IMF and the Treasury provided technical and clarifying comments, which we incorporated where appropriate. We also asked responsible Department of State officials to review the accuracy of the in- country information in the draft. They provided technical and clarifying comments, which we have incorporated where appropriate.
We are sending copies of this report to Senator Connie Mack, Chairman, Representative Jim Saxton, Vice Chairman, and Senator Charles Robb and Representative Fortney Pete Stark, Ranking Minority Members, Joint Economic Committee; Senator William Roth, Chairman, and Senator Daniel Moynihan, Ranking Minority Member, Senate Committee on Finance; Senator Phil Gramm, Chairman, and Senator Paul Sarbanes, Ranking Minority Member, Senate Committee on Banking, Housing, and Urban Affairs; and Representative Benjamin Gilman, Chairman, and Representative Sam Gejdensen, Ranking Minority Member, House Committee on International Relations. We are also sending copies of this report to the Honorable Robert Rubin, the Secretary of the Treasury; the Honorable Madeleine Albright, the Secretary of State; the Honorable Jacob Lew, Director, Office of Management and Budget; and the Honorable Michel Camdessus, Managing Director, IMF. Copies will be made available to others upon request.
This report was prepared under the direction of Susan S. Westin, Associate Director, Financial Institutions and Markets Issues, and Harold J. Johnson, Jr., Associate Director, International Relations and Trade Issues. Please contact either Ms. Westin at (202) 512-8678 or Mr. Johnson at (202) 512- 4128 if you or your staff have any questions about this report. Other major contributors are acknowledged in appendix X.
The IMF’s Process for Establishing and Monitoring Countries’ Financial Arrangements
The process that the International Monetary Fund (IMF) generally uses to establish and monitor financial assistance arrangements is intended to be flexible and applied on a case-by-case basis to address the specific balance-of-payments problems of member countries. The IMF staff and the member country begin the process by assessing the country’s overall economy, balance-of-payments position, ability to finance any balance-of- payment deficit, and potential need for IMF financial assistance. If the country decides to seek IMF financing, the IMF staff and the country negotiate an arrangement that describes the amount of financing, the type of financing instrument, and the schedule for review. The IMF staff and the country also negotiate conditions—the policy measures that the country intends to fulfill in order to continue to access IMF funds. After the arrangement is negotiated, the IMF Executive Board discusses and approves it.
IMF staff conduct periodic reviews to monitor the country’s progress in meeting the IMF program conditions. The frequency of the reviews depends on the type of financial arrangement that the country is under and the nature of its problem. The IMF uses both data and judgment in assessing the extent of the country’s progress in meeting program conditions. If it determines that the country is on track in implementing its program conditions, additional allotments of funds can be made available. In cases where the IMF determines deviations from the program are significant, it can delay or withhold funding unless and until, in its judgment, the country has made further progress.
Country Officials Consult With the IMF
When a member country faces an actual or potential balance-of-payments problem, it may consult with the IMF to analyze information on the economy and discuss various methods of managing the problem. These discussions may lead the country to request IMF financial assistance in order to alleviate the imbalance. If the IMF and the country do not reach final agreement on a financial assistance arrangement, the country may seek other means to address the difficulty. Discussions can occur at any time, including during the country’s annual “Article IV” consultation with the IMF or during informal consultations as requested by the member.
Country Officials and the IMF Analyze the Country’s Situation
To aid in the IMF’s assessment of a country’s overall economic situation and to determine the magnitude of potential financial assistance required by the country, IMF staff evaluates the balance-of-payments problem and determines the financial support measures that would assist in correcting the imbalance. The IMF staff’s review of the state of a member’s economy is an iterative process and is based on country-provided data, assumptions about key macroeconomic variables, and judgment by the IMF staff and country officials. To do this, the IMF staff examines the following four related sectoral statistical systems over the medium term of 3 to 5 years with the assumption that the government will follow its stated policies: (1) national income and product accounts for gross domestic product (GDP), (2) government financial accounts for the fiscal sector, (3) consolidated banking system accounts for the monetary sector, and (4) external accounts for the balance-of-payments position.
In order to analyze these four sectors, an IMF team (IMF mission) travels to the country to review the situation within the country. The team begins the analysis by reviewing the data previously collected from country officials for the most recent Article IV consultation as well as other requested information provided by the country. The information includes data on the country’s balance of payments; fiscal variables, such as government expenditures and receipts; and monetary variables, such as monetary reserves and bank deposits, stock of currency, and interest rates. In addition, it includes country authorities’ projections for areas such as real GDP growth and inflation; real sector indicators, such as employment levels, manufacturing, production, agriculture, and service sectors; budget plans for government expenditures; and subsidies for public enterprises.
As part of the process of analyzing a country’s economy and determining the balance-of-payments position, the IMF staff verifies the country- provided information, searching for both consistency and contradictions in the information. According to an IMF official, data inconsistencies may be discovered in a variety of ways. For example, if IMF staff believed that the country-provided trade data were inaccurate, it would cross-check that country’s trade data with similar data of a neighboring county with whom it trades in order to verify whether the information was accurate. In other cases, if the data suggested that the manufacturing level in a country had increased and at the same time indicated that electricity usage had decreased, the staff would be alerted to the inconsistency and would seek to verify the data. In such instances, the IMF team would work with government employees in ministries or agencies to calculate and verify the information. According to an IMF official, this type of analysis is, by necessity, undertaken on a case-by-case basis, and it would be difficult to develop a universal set of standards for verifying such information. For this work, the IMF relies on its mission chiefs, who have acquired knowledge and experience in each country to assist in verifying the data.
According to an IMF official, determining the balance-of-payments position is central to both the analysis of the economy and the determination about whether the country would be eligible for IMF financial support. The concept of a balance-of-payments need is broadly defined in the IMF’s Articles of Agreement and includes (1) the country’s overall balance of payments, (2) the country’s foreign reserve position, and (3) developments in its reserve position. IMF documents state that these three elements are regarded as separate, and a member’s representation of a balance-of- payments need can be based on any one of them. The first element—the country’s overall balance of payments—represents the economy’s external financing requirement and equals the sum of a member’s current and capital account balances. The current account primarily includes exports and imports of goods and services. The capital account provides summary data on the changes in net foreign assets of domestic residents arising from such transactions as external borrowing or repayments (borrowing from or repaying foreign sources), foreign direct investment, portfolio investments (both equity shares and bonds), and short-term capital movements.
The second element—the country’s reserve position—refers to the amount of resources (convertible currency, special drawing rights, and gold) a country has to support its imports and external debt payments. The reserves are under the control of the monetary authority. The third element—developments in the reserve position--has a very narrow application and is intended to ensure that members of the IMF whose currency is a reserve currency (such as the United States) would be able to use IMF resources when requested, despite the absence of a need as outlined in the first two elements.
According to an IMF official, determining an actual balance-of-payments need is easier than projecting a potential balance-of-payments need. This is because the process of assessing an economy is subject to many assumptions and uncertainties, including factors within and outside of the country’s control. For example, in the case of Russia, the IMF documents establishing the 1996 extended arrangement do not explicitly describe the underlying balance-of-payments need. However, the IMF documents do present a clear case for the role that IMF funding was to play in catalyzing debt rescheduling and encouraging the inflow of private capital to avoid a potential balance-of-payments problem. In 1996, Russia had a basic weakness in its external accounts due in part to short-term capital outflows and an inadequate level of reserves. Furthermore, many debt service obligations were expected to occur between 1996 and 2000, adding more stress to Russia’s external accounts. An IMF financial arrangement in 1996 was seen as critical for Russia to avoid a potential balance-of- payments problem. The IMF arrangement helped Russia obtain debt rescheduling to reduce the future burden on the federal budget and improve Russia’s access to private capital markets.
Analyzing the nature, source, and severity of any existing or potential balance-of-payments problem involves assessing data about the balance-of- payments deficit and the country’s ability to finance it. To determine the nature of the imbalance, the IMF determines whether the problem is short term or longer term. For example, a short-term problem could be a cyclical or seasonal imbalance caused by the falling price of a primary export. A longer-term imbalance might be caused by underlying or structural weaknesses in the economy, such as an unsustainable government budget deficit. The IMF staff also determines to what extent the reasons for the imbalance are within the government’s control, along with the dimensions and urgency of the problem, including the availability of financing.
After the balance-of-payments gap analysis is complete and if the country decides to seek IMF financial assistance, the country officials and IMF staff begin to discuss IMF financing as well as the conditions for the country program. However, according to the IMF, in order to adapt programs to individual country circumstances, it has no inflexible set of operational rules for establishing a country’s program. Nonetheless, Deputy Managing Director of the IMF, said that staff enter into negotiations with detailed instructions, agreed upon within the IMF staff offices and then by IMF management. This IMF official stated that negotiations are often long and sometimes contentious, involving several rounds of discussions. The disagreements tend to be over difficult issues, for example, whether the budget needs to be tightened, the inflation rate should be reduced less rapidly, or the agreed-upon balance-of-payments deficit can be larger.
To address the balance-of-payments problem, typically the IMF uses economic models to project the potential impact of a variety of adjustment measures to develop several scenarios of possible program elements. Based on these scenarios, the IMF staff and the country negotiate what they view as the appropriate mix of fiscal and monetary adjustment, structural reforms, and financing required to achieve their overall goals; these goals can include an increase in economic growth or in investor confidence.
For example, for the external sector, two independent projections of imports need to be made and reconciled. The first is based on the demand for imports, derived from information including the projected level of output and relative prices, and the second is based on the capacity to import, derived from the target change in international reserves and projections of other components of the balance of payments. For example, if the demand for imports is greater than the country’s capacity to import, the basic options for adjustment may include the following: (1) seek additional foreign exchange, (2) lower the initial target for net international reserves, (3) reduce the initial projection for output to lower the demand for imports, or (4) some combination of the above. Similar iterative analyses are also carried out for the fiscal and monetary sectors.
The IMF staff and the country negotiate an arrangement that describes (1) the amount of financing expected to be provided by various sources and the amount that may be requested from the IMF; (2) the instruments under which the IMF resources could be provided, for example, Stand-by Arrangement (SBA) or Extended Fund Facility (EFF); and (3) the potential schedule for reviewing a country’s performance and disbursing funds. The IMF has many instruments through which it provides financing to member countries. Table I.1 illustrates IMF instruments used by the six IMF member countries discussed in this report.
Longer-term, balance-of-payments assistance for (1) deficits arising from structural maladjustments in production and trade and widespread cost and price distortions and (2) an economy characterized by slow growth and an inherently weak balance-of-payments position that prevents pursuit of an active development policy. Can provide larger total amounts of assistance.
Periodic reviews provided that appropriate monitoring of macroeconomic developments would be ensured, normally through quarterly performance criteria. Staff prepare an analysis and assessment of the performance under programs Periodic reviews, typically quarterly performance criteria. Country provides annual reports on progress made, and policies and measures to be followed, including any modifications.
Reviews done in conjunction with SBA or extended arrangement.
Exceptional balance-of-payments problems owing to a large, short-term financing need resulting from a sudden and disruptive loss of market confidence reflected in pressure on the capital account and reserves. Likely to be used where the magnitude of outflows may threaten the international monetary system. Helps members deal with temporary current account shocks that are largely beyond their control. A “compensatory” element is available in case of shortfalls in export earnings or excesses in cereal import costs. A “contingency” element helps members with existing arrangements keep their programs on track when faced with adverse current account shocks.
1 year/ 2 or more drawings/ within 1- 1-1/2 years from date of disbursement but may be extended another year, including surcharges Significant limits on amounts; defined methodology for determining whether CCFF is needed and, if so, type and amount.
Board review at the time of request and, in the case of the contingency element, on the occasions stipulated in the underlying arrangement.
Disbursements linked to phasing of existing arrangement. For the compensatory element, disbursements normally in one installment. For the contingency element, disbursements linked to phasing of existing arrangements. Repayment is in 3-1/4 to 5 years.
Principal means for providing financial support (highly concessional loans) to low-income members facing protracted balance-of-payments problems.
Quarterly monitoring of financial and structural benchmarks. Semiannual performance criteria are set for key quantitative and structural targets.
3 years/ semiannually/ repaid in 10 equal semi- annual installments, beginning 5-1/2 years and ending 10 years after date of each disbursement.
In addition, the country and the IMF staff negotiate the likely conditions to be used to assess a country’s performance under the arrangement. These conditions are generally intended to advance the country’s larger objectives–such as a reduced balance-of–payments problem, higher economic growth, and lower inflation—as well as the reform efforts undertaken to achieve those objectives. “Performance criteria” (quantitative and structural) and “prior actions” are conditions that a country is required to meet and that the IMF uses to monitor the country’s performance and determine whether it is eligible for disbursements of resources. “Benchmarks” and “indicative targets” are other measures the IMF uses to monitor a country’s progress; however, disbursements are not generally dependent on meeting them. “Quantitative performance criteria” are clearly defined numeric targets (macroeconomic indicators), such as a specified ceiling on the government’s budget deficit or on the net domestic assets of the central bank. According to IMF staff, “structural performance criteria” must be accurately and unambiguously defined so that no subjective judgment is involved in determining whether they have been met. For example, a structural performance criterion could be that a country has to solicit bids to privatize three state-owned enterprises by a prespecified date.
A prior action is a particular policy measure that is considered to be essential to the effectiveness of an adjustment program. Prior actions may be negotiated by IMF staff and country officials as part of the country’s initial arrangement or during subsequent program reviews; they generally have to be implemented before an IMF arrangement or a disbursement of funds is approved. An example of a prior action is the issuance of a regulation or other forms of legal reform.
Other measures used to assess a country’s progress include benchmarks and indicative targets. They may relate to macroeconomic variables or to specific policy commitments, such as changes in key structural areas of the economy. Benchmarks can be difficult to define and are best explained as a set of specific target measures to be accomplished by a certain date, used by the IMF to assess progress toward an overall goal. In general, benchmarks could include targeted structural changes for tax policy and administration reform, financial sector reform, or exchange system reform. For example, to achieve the overall goal of strengthening a country’s banking system, the IMF and the country may agree to a structural benchmark, such as enacting legal reforms for bankruptcy or developing a bank recapitalization plan. Indicative targets are quantitative targets set on many of the standard goals of macroeconomic policy and could include targets set on the balance of payments, the rate of inflation, or the public deficit.
The IMF Executive Board Discusses and Approves Program
After the arrangement is negotiated, it has to be accepted by the IMF Managing Director before it is brought before the IMF Executive Board. According to an IMF official, the Executive Board generally accepts the recommendations of the staff, largely because the staff brings to the Executive Board proposals that the Board will accept. Generally, the Executive Board is briefed formally or informally during the negotiation process, and board decisions are made on a consensual basis. Since negotiations with a country continue throughout the life of a program, the Executive Board will often use a meeting to send signals about what it will and will not accept in the future.
IMF Staff and Country Officials Review Program Status
After the IMF arrangement is approved by the Executive Board, the country is then expected to implement the agreed-upon conditions in the IMF program. To determine whether the program is on track and the country is eligible to receive the next disbursement of funds, the IMF staff conducts periodic reviews of the programs. The review schedule is built into the arrangement between the country and the IMF. For the reviews, a team of IMF staff and country officials assesses the program status, including the country’s overall economic conditions and performance with respect to criteria, prior actions, and benchmarks.
According to the IMF, reviews are typically held on a semiannual basis, although disbursements can be made if countries achieve the quarterly performance criteria and prior actions. Some countries, however, including those suffering a financial crisis or receiving funds from the Supplemental Reserve Facility (SRF), tend to have tighter monitoring because funding tends to be heavily front-loaded and disbursed within a year. In these cases, the program reviews can be held monthly or bimonthly. SRF funding is for countries with exceptional balance-of- payments problems owing to a large, short-term financing need resulting from a sudden and disruptive loss of market confidence.
The IMF staff monitors the program continuously and the program is subject to periodic reviews by the IMF Executive Board in order to evaluate if the country’s progress in meeting the conditions under the program justifies the continuation of disbursements. In some cases, IMF disbursements are conditioned only on the determination by IMF staff that the country has met prenegotiated quantitative criteria. According to the IMF, for most programs, review by the IMF Executive Board is not required prior to each quarterly disbursement. For these programs, semiannual reviews by the IMF Executive Board are the more typical approach. In these cases, IMF staff review whether the country has met its performance criteria quarterly and, if so, a disbursement can follow without a full IMF Board review.
Larger programs tend to have tighter monitoring and all disbursements are subject to reviews by the IMF Executive Board. In these cases, through its monitoring, the IMF staff believes that the country has satisfactorily implemented the program or the staff believes that the country has not satisfactorily implemented the program. In the first case, the review is “completed” and the borrower country is eligible to receive an additional disbursement. In the latter case, review completion is delayed and the country is not eligible to receive a disbursement at that time.
Satisfactory progress can be judged in one of two ways. If the IMF staff believes that the country has met all of the performance criteria and considers the review “complete,” the staff presents the results of the review to the Executive Board. In addition, the IMF and the country may negotiate a new or revised set of criteria and benchmarks. Upon the Executive Board’s approval, the country is eligible to receive the next disbursement of IMF funds.
In other instances, the IMF staff could conclude that the country did not meet all performance criteria but that most deviations were minor and did not affect the country’s overall performance. The staff would then generally recommend to the Executive Board that a waiver be granted and the review would be completed on time. A country’s inability to meet a performance criterion could be due to cyclical or seasonal problems that are self-correcting; the difficulty in making economic projections, that is, if key factors, such as the money supply were underestimated; unanticipated events, for example, a tumultuous political environment; or an incorrect assessment of the cause or solution to the problem.
After the IMF Executive Board grants the waiver, the country is eligible to receive IMF funds.
The IMF staff considers that a country has not made satisfactory progress when key conditions are not met and deviations are significant. In these cases, “completion” of the review and disbursements are generally delayed and are not resumed unless and until, in the IMF’s judgment, satisfactory progress has been achieved. During the delay period, country officials and IMF staff negotiate the steps necessary to complete the review and make funds available. According to IMF staff, if the country did not meet the performance criteria because it is unwilling or unable to do so, the IMF will negotiate with the authorities to determine the nature of the problem and possible corrective measures. In these instances, the IMF may request that the country demonstrate its commitment to the program by undertaking a specific prior action before it recommends the Executive Board grant waivers for nonobservance of the unmet criteria and “complete” the review.
In other cases where the country has not met key performance criteria, the IMF staff may determine that deviations are so significant that it is not possible to negotiate steps to get the program back “on track.” When this happens, the IMF staff generally concludes that it is not in a position to complete the review and notifies IMF management. If management concurs with the recommendation, staff briefs the Executive Board on the situation. The review will not be completed at that time and disbursements would be delayed. In these cases, the IMF staff and the country may negotiate ways to restart the existing program or initiate a new program. In some cases, for example, in Russia, some deviations from the program may be significant enough that the IMF delays or withholds further disbursements for a considerable length of time, and the program lapses.
Apart from waivers and reviews, quantitative performance criteria and indicative targets can be changed by means of “adjusters” that are included in some country programs. Adjusters are prenegotiated to account for specific actions and assumptions about economic and financial movements. There are two types of adjusters: (1) adjusters related to unexpected external events and (2) adjusters due to in-country policy changes. The first type of adjuster automatically changes the level of a quantitative performance criterion when there are unexpected changes— generally outside of the country’s control—to one or more key variables.
For example, in Uganda’s program, an adjuster was added to the quantitative performance criterion that set a minimum level for net international reserves in the event that creditors provided more (or less) debt relief than was expected. The second type of adjuster automatically changes the level of a quantitative performance criteria when policy makers choose to make changes in their monetary or fiscal policy instruments in a manner that would either directly or indirectly affect the target variables. It is intended to prevent policy changes from compromising the achievement of overall program objectives, such as price stability or low inflation.
The IMF's Financial Arrangement with Argentina
Macroeconomic Context When Current IMF Arrangement Negotiated
Argentina has undergone radical changes since 1991 when it enacted the Convertibility Law, which established the currency board arrangement. Under this system, the central bank maintains a sufficient level of U.S. currency to guarantee the convertibility of all outstanding Argentine pesos at the official exchange rate (1 peso equals 1 U.S. dollar). The currency regime is seen as greatly helping to reduce Argentina’s inflation from over 1,000 percent in 1990 to less than 1 percent in 1998, instill fiscal and monetary discipline, build investor confidence, and contribute to economic growth. The government also undertook major structural reforms between 1992-94, including substantial privatization, deregulation, trade liberalization, and pension reform. The Argentine government described the time from 1991-98 as periods of sustained growth interrupted by external shocks, including the Mexican financial crisis in 1995 and the Asian, Russian, and Brazilian crises in 1998. Argentina has had successive IMF programs since 1983. The previous arrangement was an IMF Stand-by Arrangement of over $900 million from April 1996 to January 1998.
According to IMF staff and the Argentine government, Argentina registered a strong macroeconomic performance in 1997. The economy grew very rapidly, the unemployment rate fell, and inflation was virtually zero. The fiscal position improved as programmed, and there were no major difficulties in financing a widening of the current account deficit. The prudent borrowing strategy (preborrowing at lower interest rates, stretching out maturities) followed by the public sector, and the strengthening of the banking system achieved in recent years, allowed Argentina to weather the turbulence that affected international capital markets in 1997 without major immediate consequences for the economy. Nonetheless, Argentina and the IMF decided an IMF financial assistance program was necessary because of risks to the economy posed by events in international financial markets.
Current Arrangement Intended to Be Precautionary
Argentina and the IMF Executive Board reached agreement on the current 3-year EFF arrangement in February 1998. This arrangement is intended to be precautionary, meaning that Argentina will draw IMF resources only if external conditions make it necessary. The government noted that the agreement is of great significance because the IMF’s review of Argentina’s accounts provides information to investors on the country’s economic progress. The arrangement of about $2.8 billion is intended to support the government’s medium-term economic reform program for 1998-2000 and to help maintain investor confidence. When Argentina negotiated this arrangement, the country did not have an actual balance-of-payments problem. The country’s current account deficit had been increasing primarily due to its widening trade imbalance, with rising imports outpacing exports, but was funded with external capital. Foreign direct investment covered over 50 percent of the deficit in 1997 and was estimated to cover about 40 percent of the deficit in 1999. The IMF expressed concern about the sizable current account deficits expected over the next few years—although these deficits reflect to a large extent the growth of productive investment—and the economy’s vulnerability to changes in external market conditions. The policies implemented to meet these targets were intended to promote sustained growth in production and employment, increase public saving, and reduce the vulnerability of the economy to disturbances on international financial markets. As of May 31, 1999, Argentina had not drawn resources under the current EFF arrangement.
IMF Program Focused on Fiscal Conditions and Structural Reforms
The current EFF arrangement includes quantitative conditions and structural benchmarks for the period 1998-2000. Consistent with the IMF’s approach, the government and the IMF negotiated the performance criteria and structural benchmarks for the first year of the EFF; criteria and benchmarks for subsequent years have been negotiated on an annual basis. As agreed to for 1998, Argentina’s program with the IMF contained quantitative performance criteria that limited the federal government budget deficit, central bank assets, and government debt. The structural benchmarks for Argentina included reforms in the labor market, tax system, public sector budgeting and operations, health system, and judicial system as well as the completion of the privatization program. The government and the IMF identified fiscal equilibrium and structural reform (particularly in tax and labor) as two of the most crucial elements of the program.
The Argentine government is on record as strongly supporting the conditions under the IMF program because they reflect the government’s own priorities. According to the Argentine government, disagreements between the IMF staff and Argentina officials have been minor. One area of disagreement has been the significance of the current account deficit. While IMF staff is concerned about Argentina’s increasing current account deficit, some government economic officials are less so. They contend that the current account deficit should not be overemphasized since it is due, in part, to investment-led growth and since external investors have been willing to finance it, thus signaling their confidence in Argentina’s economy.
Quantitative Performance Criteria Focused on Fiscal Levels
As shown in table II.2, three of the four quantitative performance criteria focused on Argentina’s fiscal policy. The fourth—limits on central bank assets—targeted Argentina’s monetary policy.
The goals of the fiscal deficit criteria were to reduce the overall federal government deficit while increasing spending in social areas, stimulate domestic saving, and strengthen confidence in the continued viability of the currency convertibility regime. The $3.5 billion deficit represents about 1 percent of GDP, which was estimated at about $340 billion for 1998. The monetary program was intended to strengthen confidence in the currency board and the banking system by maintaining a sound financial system and providing for an adequate cushion of liquidity that could compensate for the limited role of the central bank as a lender of last resort.
Structural Benchmarks Covered Many Areas
Under the current EFF, the Argentine government agreed to meet the following structural benchmarks by the end of 1998:
Submit to the Argentine congress a tax reform program before mid-1998 for approval before the end of 1998. Tax reforms were intended to improve the efficiency and equity of the tax system and promote the competitiveness of the economy. The reforms were aimed at contributing to a reduction in labor costs by cutting employers’ payroll contributions, diminishing distortions in corporate and individual taxes, broadening the income tax base, applying the value-added tax to products not currently taxed, introducing a single tax to replace the value-added and income taxes due from small businesses, strengthening tax auditing procedures, and modifying customs codes in line with MERCOSUR (the Southern Common Market, or customs union) and World Trade Organization norms. The changes were generally focused on decreasing taxes on production and increasing taxes on consumption.
Implement the first stages of a program to strengthen tax administration by revising penalties and interest on past due tax obligations to help normalize relations between taxpayers and tax authorities, privatizing collection of past due taxes, and introducing pre-shipment inspection of imports for the short term.
Implement labor reforms before mid-1998–a precondition for the conclusion of the first review. Increased flexibility in the labor market was intended to decrease unemployment, strengthen economic competitiveness, and ultimately ensure the viability of the currency convertibility regime. The reforms were to significantly reduce the costs of dismissing employees, eliminate statutes that impede the renegotiation of labor contracts (expired labor contracts remain legally binding if there is no agreement to renegotiate them between employers and unions) and inhibit entry into certain professions, eliminate certain temporary labor contracts, decentralize labor negotiations, and promote increased competition among union-run health care organizations.
Reform budgeting operations. The government was to submit a multiple- year budget for income, expenditure, and results covering a 3-year period, with the goal of providing transparency, efficiency, and control for budgetary administration.
Take measures to promote efficiency in public spending, especially in education, public health services, and the social security and social assistance systems, and improve the quality of public sector administration. The measures were to include governance rules for public employees outlining obligations and increasing penalties for corruption.
Conclude reforms to the public social security system to help increase the efficiency of expenditures.
Continue reforms to the health insurance system for retirees and health care organizations (public and private), as agreed with the World Bank, in order to strengthen health care, contain the demand for high-cost hospital care, and promote efficiency in health services.
Take steps to speed up rulings in court cases involving taxes and financial guarantees and collateral.
Grant leases for airports, telecommunications frequencies, and power stations.
Draft proposals to privatize Banco de la Nación, the country’s largest bank.
Revise legislation to help financial institutions more quickly execute guarantees and collateral, and to develop a legal and supervisory framework for financial derivatives.
Approve new antitrust laws.
First Review: Argentina Met All Performance Criteria; Mixed Progress on Structural Reforms
The IMF Executive Board completed the first review of Argentina’s program in September 1998, as scheduled. It found that all applicable quantitative performance criteria were met in March and June 1998 and that substantial progress had been made in the implementation of structural reforms, with the notable exception of labor market reforms. Argentina’s congress passed some of the intended labor market reforms; it passed legislation lowering dismissal costs but did not pass legislation intended to make the collective bargaining process more flexible. The IMF Board urged the Argentine authorities to take further steps in regard to labor market reform, noting that the reform recently approved by Argentina’s congress fell short of what would be necessary to enhance labor market flexibility and reduce labor costs adequately. The IMF Board also expressed concern over the possible adverse impact of the Russian debt crisis on Argentina’s access to external financing and urged the authorities to maintain firm macroeconomic policy to help promote a rapid improvement in market confidence.
Second Review: Argentina Met Most Performance Criteria; Mixed Progress on Structural Reforms
According to IMF and Argentine documents for the second review, completed as scheduled in March 1999, Argentina met all but one of its quantitative performance criteria (for which a waiver was granted) and made progress on structural reforms. The waiver was requested because the federal government deficit, estimated at $3.85 billion in 1998 (1.1 percent of GDP), exceeded its ceiling by about $350 million, or around 0.1 percent of GDP. However, IMF staff viewed the deviation as minor, primarily due to adverse external factors, and as not detracting from overall fiscal performance. The government noted that, significantly, the structural deficit for 1998 was smaller than that of 1997. The IMF Executive Board granted the waiver. According to the Argentine government, its efforts to contain expenditures could not compensate fully for the revenue shortfall. The shortfall mainly reflected the slowdown of economic activity in the second half of 1998 and its adverse effect on taxes, particularly the value-added tax. The government noted that debt limits were met in the context of tighter conditions in international capital markets. A larger than anticipated share of the deficit was financed using public sector deposits and receipts from asset sales.
Argentina made progress in several areas of structural reform, according to IMF and country documents. The government implemented most of the tax reforms but was only able to pass some of the intended labor reforms. The government implemented tax reforms that, among other things, expanded the bases of the income and value-added taxes and improved tax administration by enhancing tax audit procedures and hastening the resolution of court cases involving tax enforcement. Regarding labor reforms, Argentina’s congress approved a law to reduce dismissal costs and eliminate most forms of temporary labor contracts with decreased social security contributions. Reforms regarding collective bargaining were not passed. While IMF staff stressed the importance of making Argentina’s labor market more flexible—particularly given the uncertainty about continued access to foreign financing and trade levels—they told us that they do not expect the government to complete the remaining labor reforms before the fall 1999 elections. As such, according to IMF staff, the emphasis on labor reforms is likely to be eased. Argentina continued making reforms to budgeting operations, public sector administration, and the public hospital system. Restructuring of the health-care system continued, as agreed with the World Bank. The government completed leasing arrangements for airports and continued working on leasing arrangements for telecommunications frequencies, which were delayed by judicial challenges, and power stations. It concluded reforms to the public social security system.
New Criteria and Benchmarks
In January 1999, the government outlined its proposed objectives, criteria, and benchmarks for the second year of the arrangement. The government intends to continue to focus its economic policies on promoting sustainable growth in output and employment, addressing priority social needs, and maintaining low inflation and a viable external position. The government noted that in light of the presidential election scheduled for October 1999 and the uncertainty of the adverse international environment, it recognized the critical importance of maintaining disciplined and restrained macroeconomic policies, further improving public finances, strengthening the financial system, enhancing competitiveness, and deepening structural reforms. In March 1999, Argentina and the IMF reached agreement on the quantitative performance criteria and structural benchmarks for monitoring the country’s progress during 1999, as shown in table II.3.
The estimated cumulative federal government deficit between January 1999 and December 1999 was increased from $2.65 billion to $2.95 billion (0.8 percent of GDP) to reflect the criterion missed in the previous quarter. The ceiling on the noninterest expenditures of the federal government was changed from an indicative target to a quantitative performance criterion because, according to IMF staff, there was concern about the sufficiency of tax revenues.
Many of the new structural benchmarks continue ongoing reforms. By the third review (August 1999) the Argentine government is to present a proposal to reform the system of tax-revenue sharing with the provinces. In light of the fiscal deficit, IMF staff stressed the importance of achieving this reform. The reform of the tax-sharing arrangement between the government and the provinces is intended to strengthen the provinces’ own revenue-raising capacity and design a more equitable, transparent, and flexible system of intergovernmental transfers. lease telecommunication frequencies. implement new monitoring systems for the external debt and the finances of provincial administrations. implement the enabling regulations for the labor statute for small- and medium-size firms. submit to the Argentine congress a proposal to transform the Banco de la Nación into a state-owned corporation. This benchmark represents a change from the government’s original intention to privatize the bank. When it appeared that congress would not approve the privatization of the bank, the authorities decided to propose the transformation of the bank into a state-owned corporation that could include private capital and management, be listed in the stock exchange, and thus be subject to increased public disclosure requirements. submit to the Argentine congress a proposal to further reform social security. complete the sale of the first package of shares of the National Mortgage Bank.
Also, by August 1999, the Argentine congress is to approve the proposed changes to the central bank charter and the financial entities law, which are intended to improve banking supervision and risk assessment of financial institutions; and the fiscal responsibility law, which sets limits on government indebtedness, constrains the growth of public expenditure, and establishes a fiscal stabilization fund to smooth out the impact of cyclical fluctuations or external shocks on tax revenue. The government intends to improve the efficiency of social spending in education and social protection programs.
By the fourth review (Feb. 2000), the Argentine government is to implement the tax administration program aimed at, among other things, shifting to a new electronic tax filing and collection system; strengthening auditing procedures; and amending the customs code, after congressional approval, to incorporate MERCOSUR (the Southern Common Market, or customs union) norms and new World Trade Organization valuation rules; and eliminate the 3 percent import surcharge to the common external tariff.
Also by this time Argentina’s congress is to approve the social security reform and new law for Banco de la Nación.
The key factors affecting Argentina’s short-term macroeconomic outlook were the need for improvements in trade and the continued availability of private-sector capital. Argentina recorded a satisfactory macroeconomic performance in 1998, in a relatively difficult international macroeconomic environment. However, the economy slowed considerably in the second half of 1998, in response to the tightening of external financing conditions in the wake of Russia’s and Brazil’s financial crises and the slowdown in export earnings. For 1998, GDP growth was estimated at about 4.2 percent, down from 7 ¼ percent in the first half of the year. Since mid-January 1999, the external macroeconomic environment (trade and investment) has deteriorated because of adverse events in Brazil. The program agreed to in March 1999 (including quantitative performance criteria for 1999) was negotiated in December 1998, consistent with the external environment at that time. Argentina and IMF officials noted that the country had weathered the turbulence in external markets well; however, given the uncertain environment, the government and the IMF agreed to reexamine the program and modify it, if needed.
Third Review Accelerated; Performance Criteria Modified
The third review was conducted 3 months ahead of schedule in order to reevaluate the assumptions underlying the 1999 program and modify the performance criterion in light of the deterioration in the external environment since the program was negotiated. Despite the decline in Argentina’s economic activity and current account balance, preliminary information indicated that the country made progress on the structural reforms and met the quantitative performance criteria for end-March 1999. However, GDP in 1999 is expected to decline by 1.5 percent (from the previously projected gain of 2.5 percent), which is expected to significantly reduce federal government revenues from the previous estimate by about $2.5 billion.
Argentine government officials and IMF staff noted that while the government was able to compensate for the revenue shortfall in the first quarter of 1999, fully compensating for the total estimated shortfall through additional spending cuts would seriously impair the quality of public services and aggravate the economic downturn. The government therefore requested an increase in the 1999 federal deficit performance criterion from $2.95 billion (0.8 percent of GDP) to $5.1 billion (1.5 percent of GDP), an increase of $2.15 billion, or about 70 percent, from the amount agreed to in March 1999. The increase reflects about 85 percent of the expected shortfall of $2.5 billion, with the government expected to absorb the remainder. Attaining the new level will require cuts in government expenditure, including spending for social programs.
The deficit level was increased to help ensure that additional government borrowing to finance the deficit does not crowd out private-sector borrowing or raise uncertainty about the government’s commitment to fiscal discipline. To help achieve the new target, the ceiling on the noninterest expenditures of the federal government is to be lowered by $450 million. The debt ceiling was raised in line with the increase in the deficit in order to accommodate additional borrowing. The modified performance criteria are shown in table II.4.
The Argentine government recognized the importance of reinvigorating the structural reforms to improve economic efficiency and strengthen market confidence. Many of the new structural benchmarks continue or accelerate ongoing reforms. By the third review (May 1999) the Argentine government is to present a proposal to reform the system of tax-revenue sharing with the provinces. implement new monitoring systems for the level and composition of the financing to the provincial administrations. submit to the Argentine congress a proposal to transform the Banco de la Nación into a state-owned corporation.
By the fourth review (November 1999) the Argentine government is to submit to the Argentine congress a proposal to reform social security. implement a new monitoring system for conditions of access by commercial banks to external credit lines. submit to the Argentine congress a proposal to reform the tax code. lease telecommunication frequencies.
Also by November 1999, the Argentine congress is to approve the fiscal convertibility law and the changes to the central bank charter and the financial entities law.
The IMF's Financial Arrangement with Brazil
Brazil’s November 1998 IMF Program
In August 1998, Brazil’s capital account came under serious pressure in the wake of the Russian crisis. The Brazilian authorities responded with a sharp increase in interest rates; significant fiscal measures, including substantial spending cuts; and strengthening of institutional mechanisms to monitor developments in public finances and take further timely corrective actions, if needed. The IMF Managing Director said he was encouraged by the determination of Brazil’s president to give high priority to further fiscal reforms. Brazil also began a dialogue with the IMF to ensure that adequate financial support could be arranged quickly, if needed. The government of Brazil saw the nature of the IMF program as preventive—to assist the country in facing a period of deep uncertainty in international financial markets and to enable the government to continue gradual depreciation of the exchange rate without having to move to a floating currency system.
IMF Program Announced
A 3-year IMF program was announced in November and approved by the IMF Executive Board on December 2, 1998. The IMF program represented one portion of a larger support package totaling about $41.5 billion made up of commitments from the World Bank; the Inter-American Development Bank; and bilateral financing from 20 countries, in most cases to guarantee credits extended to Brazil by the Bank for International Settlements.
When the program was announced in November, the IMF stated, in its press release, that the program first and foremost addresses the chief source of Brazil’s external vulnerability—namely its chronic public sector deficit (5-7 percent of GDP). The reduced savings of the public sector necessitated a growing resort to external savings to finance the rise in domestic investment, leading to an increase in the current account deficit of the balance of payments from under 0.5 percent of GDP in 1994 to over 4 percent of GDP in 1997.
The IMF Arrangement and the Objectives of the Conditionality Program
The IMF program is supported by a 3-year SBA, augmented in the first year by the SRF, for a total amount equivalent to about $18 billion. Around 70 percent of the funds were to be under the SRF. Brazil received its first disbursement of $4.6 billion in early December. The second disbursement was scheduled for February 1999 after completion of the first and second reviews; however, due to the events in January, it was delayed until after the revamped program was agreed upon by the IMF Executive Board on March 30, 1999.
The November 1998 IMF program had four program objectives: a frontloaded fiscal adjustment effort (with most of the fiscal adjustment expected to occur in the first half of 1999) aimed at arresting quickly the rapid growth of public sector debt; maintenance of the exchange rate regime that existed at the time; a tightly controlled monetary policy, aimed at supporting the exchange rate regime that existed at the time, while safeguarding net international reserves; and wide-ranging structural reforms.
IMF Program Comprised Fiscal, Structural, and Monetary Reforms
The economic program was centered on fiscal adjustment and structural reform. The macroeconomic scenario underlying the fiscal program assumed that confidence would be rebuilt gradually as measures were implemented and began to improve Brazil’s fiscal accounts and as access to foreign financing improved.
Elements of the Fiscal and Monetary Adjustment Program
The initial program had fiscal, external sector, and monetary targets. These were a mixture of quantitative performance criteria and indicative targets.The fiscal targets were a performance criterion for the “public sector borrowing requirement,” which set ceilings on the “cumulative borrowing requirement” of the consolidated public sector through June 30, 1999; an indicative target that set a minimum on the primary surplus of the primary balance of the federal government; and an indicative target that set a minimum floor on the recognition of nonregistered public sector debt net of privatization proceeds.
The fiscal quantitative performance criteria were intended to stabilize the ratio of the net public debt to GDP by the year 2000 and then reduce it gradually thereafter. Under these assumptions, the public sector borrowing requirement would decline to about 4.7 percent in 1999, to about 3 percent in the year 2000, and to 2 percent in 2001. The bulk of this adjustment was planned at the federal level; however, the states and municipalities were expected to shift their consolidated primary balance from an estimated deficit equivalent to 0.4 percent of GDP in 1998 to a surplus of 0.4 percent of GDP in 1999, rising to 0.5 percent in the years 2000 and 2001. The main elements behind the assumption of the state and local governments’ primary balance improvement were the implementation of the administrative reform laws and the firm enforcement of their debt restructuring agreements with the federal government. The fiscal adjustment program had both revenue-raising and expenditure-reducing measures designed to yield overall budget savings of 3.4 percent of GDP in 1999.
Revenue measures to achieve the indicative target on the primary balance of the federal government included increases in the financial transactions tax rate from 0.2 percent to 0.3 percent with a temporary surcharge of 0.08 percent for 1999; an increase in the rate of the tax on corporate turnovers from 2 to 3 percent, one-third of which is to be creditable against the corporate income tax; an increase of 9 percentage points in the contribution to the public sector pension plan by civil servants earning more than R$1,200/month; the extension of this contribution to public sector pensioners (at the rate of 11 percent for those with pensions of R$1,200/month or less and of 20 percent for the others); and a number of other measures aimed mainly at widening the bases of existing taxes and contributions, and eliminating distortions.
Expenditure measures included substantial cuts in discretionary current and capital spending and savings expected from implementation of already approved constitutional reforms of the civil service and social security.
The external sector targets were a performance criterion on external debt of the nonfinancial public sector, which set a ceiling on the stock of this debt; a performance criterion that set a ceiling on new publicly guaranteed an indicative ceiling on total short-term external debt disbursed and a floor on net international reserves in Brazil’s Central Bank (BCB).
The monetary target was a performance criterion that set a ceiling on net domestic assets in the BCB.
The goal of monetary policy was continued low inflation. The BCB intended to continue to apply a flexible interest rate policy as appropriate while safeguarding foreign exchange reserves, and to rely on indirect policy instruments to guide short-term interest rates. The government, with the support of the IMF, intended to maintain the pegged exchange rate regime with a gradual widening of the exchange rate band and to keep the increase in public sector external debt within prudent limits, around US$10 billion in 1999.
The Program Contained Varied Structural Reforms
While Brazil’s program does not contain structural performance criteria, it did include a variety of structural benchmarks and measures to address long-standing weaknesses in the budget process; the tax system and tax administration; public administration; social security; and the efficiency of public expenditure, especially in the social area. Table III.2 outlines the various structural reforms contained in Brazil’s November 1998 IMF program.
Description Reforms aimed at strengthening budget discipline at all levels of government–Fiscal Responsibility Act to be submitted to the Brazilian Congress by December 1998. A set of new legislative initiatives to be presented to the Brazilian Congress in the first quarter of 1999 based on the principle of actuarial balance. Legislation to be presented to the Brazilian Congress before the end of 1998 to address weaknesses in Brazil’s current indirect tax system, which is viewed as inefficient and unduly complex. Passage of enabling legislation already submitted to the Brazilian Congress to ensure administrative reform already passed begins to produce effects in 1999. The government sent to the Brazilian Congress a proposal for constitutional reform that reduces restrictions on unions and creates incentives for public collective bargaining. Programs focused in public utilities (electrical sector; and some water, gas, and sewage public utilities) and state banks. The government intends to give priority to primary education and basic health care in the allocation of social expenditures, to promote the more efficient use and financing of health and education, and to better target social expenditures to the poor. Reduction in the share of total deposits of the Brazilian financial system held by state banks to about 7 percent by end-1999. All remaining state banks are to be subject to the same regulatory and supervisory scrutiny as private banks. Legislative and supervisory framework– considerable strides have been made in implementing the 25 basic principles of the Basle Committee, and the government believes that Brazil can be fully compliant by the year 2000. Addition of a stand-by facility to the deposit insurance fund to improve its finances. Measures to speed up the resolution of failed banks and to increase asset recovery rates. Subscribe to the Special Data Dissemination Standards as soon as technically feasible.
Trade-related Elements of the Program
The government committed to continue the policy of trade liberalization by doing the following: promoting the integration of the Brazilian economy with those of its MERCOSUL (the Southern Common Market, or customs union) and other regional trading partners; increasing trade with countries outside the region; and not imposing trade restrictions or restrictions including for balance of The government also said it would continue to promote the competitiveness of Brazil’s exports through steps aimed at leveling the playing field for Brazilian exporters, thus facilitating access to financing and to export credit insurance.
Prior Actions Contained in the November Program
The following prior actions were included in the November 1998 IMF agreement:
By end-November 1998, increase the rate of the financial transactions tax to 0.38 percent for 1999 is to be under consideration by the Brazilian Congress.
For completion of the first review (which was scheduled by month-end February 1999, but could have been advanced to December 15, 1998), enact revenue and expenditure measures sufficient to give confidence that the fiscal program targets for 1999 are likely to be met, and enact the constitutional amendment for social security reform, for both the private sector social security system and the federal public sector social security system.
Brazil’s Progress in Implementing the Program’s Components
The government of Brazil was initially successful in implementing many of the elements of the fiscal package that were the core of its program. Prior to the approval of the Stand-by Arrangement by the IMF Executive Board on December 2, 1998, it had successfully guided through the Brazilian Congress, the constitutional amendment on social security reform and an increase in the tax on corporate turnover. However, the proposed measure to increase the social security contribution on active civil servants and extend it to retired ones, was not approved in early December, and the government’s efforts to pass the financial transactions tax were delayed. These were requirements under the November IMF program. In response to delays in getting an increase in the financial transactions tax, the government increased taxes on corporate profits and financial operations by executive decree.
In early January 1999, a few Brazilian state governors demanded better payment terms on their debt payments to the federal government, and one declared a moratorium on these payments (24 of Brazil’s 27 state governors have agreements with the federal government whereby, in exchange for fiscal adjustment, the federal government has assumed their debt, rescheduled it over the long term, and agreed to charge preferential interest rates). This action precipitated the most recent crisis and put pressure once again on Brazil’s exchange rate, with major outflows of international reserves.
In early January 1999, the president of the central bank resigned. On January 13, his successor then widened the real’s trading band. This action effectively devalued the currency by 8 percent. Massive currency outflows followed, and 2 days later Brazil gave up defending its currency and let the real float. This action, in turn, resulted in an immediate devaluation of another 12 percent.
Progress continued on implementation of the fiscal program in January. After the real was allowed to float and new negotiations began with the IMF, Brazil’s Congress passed a law increasing the pension contribution of civil servants, which had been rejected previously. Brazil also approved a bill to increase the financial transactions tax, which had been delayed before. Both of these measures were requirements of the November IMF program. The BCB raised interest rates even further to try to encourage investors to keep their money in Brazil.
Completion of the First Review Was Delayed Slightly
Under Brazil’s arrangement with the IMF, completion of the first and second review was scheduled to take place no later than the end of February 1999; however, due to the change in the exchange rate regime that was pegged to the U.S. dollar and the currency devaluation, Brazil and the IMF delayed the review completion until March. As a result, Brazil did not receive an additional disbursement as scheduled in February.
In addition to negotiating revisions to the economic program with the IMF, Brazilian officials also negotiated voluntary support commitments with their creditor banks. According to the IMF’s Managing Director, this effort was integral to the success of the program and was seen as a key factor in the IMF Executive Board’s consideration of the program in late March. Brazilian officials reached the necessary agreement in mid-March. In the voluntary agreement, banks agreed to keep trade and interbank credit lines at end of February levels until the end of August.
Revised Program Announced in March
On March 8, 1999, the IMF’s Managing Director announced his intention to recommend to the IMF’s Executive Board the approval of the revised economic program for 1999-2001 proposed by the Brazilian government. The amount of support to be provided by the IMF portion and the total package, including that provided by multilateral banks and bilateral financing, remained the same. The key elements of the revised program are strengthened fiscal adjustment and, in light of the floating exchange rate, the adoption of a new nominal anchor for monetary policy. The additional fiscal improvement and a firm monetary policy are expected to limit the impact of the currency depreciation on prices in the first half of 1999 and to facilitate a decline in the annualized monthly inflation rate to single digits by the end of the year. Brazil’s balance of payments is expected to improve as capital inflows recover and Brazil capitalizes on its improved competitiveness.
The IMF’s Executive Board approved the revised program on March 30, 1999, thereby opening the way for Brazil’s next disbursement. Brazil requested and was granted a waiver of nonobservance of one performance criterion—the ceiling on net domestic assets in the BCB. According to IMF officials, the nonobservance of the performance criterion was the result of a premature easing of monetary policy.
Fiscal and Monetary Elements of the Revised Program
Like the initial program, the revised program contains fiscal, external sector, and monetary targets, some of which are the same as previous criteria or indicative targets and others of which are different. According to the IMF, the changes were the result of two factors: (1) understandings that were formulated in an informal way under the original program were made into performance criteria, and (2) the reformulation of the program required different performance criteria on technical grounds.
The two fiscal targets are different from the initial program. They consist of: a performance criterion that set a floor on the cumulative primary balance of the consolidated public sector and an indicative target that set a ceiling on the total net debt outstanding of the consolidated public sector.
The government intends to steadily reduce the ratio of public debt to GDP to below 50 percent by end-1999, and to below the value initially projected in the November 1998 program for the end of 2001 (46.5 percent). The government expects to accomplish this through higher than originally targeted primary surpluses of the consolidated public sector in the next 3 years. The government intends to increase the targeted primary surplus to at least 3.1 percent of GDP in 1999, 3.25 percent of GDP in the year 2000, and 3.35 percent of GDP in 2001. According to the IMF, the need for higher primary surpluses comes from the higher interest bill that resulted from the currency being devalued. Hence, to achieve the same debt-GDP ratio, primary surpluses needed to be higher.
As in the initial program, the additional fiscal adjustment is to be achieved through a range of revenue-raising measures and expenditure cuts. This effort will be concentrated at the federal level, but the state and local governments are expected to contribute through the implementation of their debt restructuring agreements with the federal government and by complying with the requirements of the administrative reform laws.
The first two external sector targets were the same as in the initial program, while four more performance criteria were added: a performance criterion that set a ceiling on the total external debt of the a performance criterion that set a ceiling on new publicly guaranteed a performance criterion that set a ceiling on total short-term external debt of the nonfinancial public sector, a performance criterion that set a limit on net sales of foreign exchange by the BCB, a performance criterion on the BCB’s exposure in foreign exchange a performance criterion on the BCB’s exposure in foreign exchange forward markets.
The monetary target is the same—a performance criterion that sets a ceiling on net domestic assets in the BCB; however, in the view of Brazil’s government, monetary policy became a more important component in the revised program. The overriding objective of monetary policy is securing low inflation. The BCB intends to put in place as quickly as feasible a formal inflation-targeting framework. This is expected to take some time and in the meantime, it intends to rely on a quantity-based framework under which it will target its net domestic assets.
Structural Benchmarks and Reforms in the Revised Program
According to IMF documents, the Brazilian government has reaffirmed its commitment to the wide-ranging program of structural reforms included in the November program in such areas as social security, taxation, fiscal transparency, and the financial sector. In most of these areas the government believes it has already made significant progress. Accelerating and broadening the scope of the privatization program is also a goal of the revised program. In addition, the government remains committed to the policy of trade liberalization (summarized in the November 1998 program) adopted by Brazil’s President. Table III.3 shows the structural benchmarks contained in the revised program.
Structural benchmark Submission to the Brazilian Congress of a law on the complementary private pension system. Submission to the Brazilian Congress of an ordinary law on the pension system for private sector workers. Presentation to the Brazilian Congress of the Fiscal Responsibility Law. Issuance of new regulation on the foreign exchange exposure of banks, in conformity with international standards in this area. Acceptance of the obligations under Article VIII, sections 2, 3, and 4 of the IMF’s Articles of Agreement, with a definite timetable for removing any remaining restrictions (if any). Proposal of an action plan for statistical improvements that will permit Brazil’s subscription to the Special Data Dissemination Standards.Submission to the Brazilian Congress of the multi-year plan that incorporates improvements in the budgetary process along the lines described in the November 1998 program. Implementation of the remaining administrative improvements in the social security system, as described in the November 1998 program. Submission to the Brazilian Congress of an ordinary law on the pension system for public sector workers. Privatization of a number of state-owned banks. Implementation of a regulation for the institution of a capital charge related to market risks, based on the Basle Committee (in line with technical assistance from the World Bank). Implementation of a forward-looking loan classification system that takes into account the capacity of borrowers to repay (and in accordance with technical assistance from the World Bank).
The IMF's Financial Arrangement with Indonesia
Condition of Indonesia Prior to Its Financial Crisis—Years of Growth and Low Inflation
Until its recent financial crisis—starting in mid-1997—Indonesia had 30 years of real economic growth, averaging 7 percent annually, with annual inflation held continuously below 10 percent in the previous 2 decades. Over the past 2 decades, the incidence of poverty was greatly reduced, assisted by improvements in primary education, effective health care, and family planning. Poverty rates declined from 70 million people in 1970 to 22.5 million in 1996. Universal primary school education was achieved in the 1980s.
Indonesia’s economic performance over the past several decades ranked among the best in the developing world. GDP per capita income was rising toward the level of middle-income countries. The economic structure had become diversified, as dependency on the oil sector had declined. An export-oriented manufacturing sector had emerged led by a dynamic private sector and fueled by high domestic savings and large inflows of foreign direct investment. Prior to the regional market turbulence in 1997, Indonesia’s macroeconomic situation appeared by many measures reasonably sound: the budget was in balance, inflation had been contained to single-digit levels, current account deficits were low, and international currency reserves were at a comfortable level. This strong economic performance helped attract large capital inflows.
These achievements masked persistent underlying structural weaknesses in the economy, however, that made Indonesia vulnerable to adverse developments. Extensive domestic trade regulations and import monopolies impeded economic efficiency and competitiveness. Indonesia had many commodities with restrictive marketing arrangements and many state enterprises. A government agency—the State Logistics Agency—had a monopoly over the importation of essential food items, a domestic market monopoly, and the ability to restrict prices on these food items. A lack of transparency in decisions affecting the business environment and data deficiencies increased uncertainty and adversely affected investor confidence.
Indonesia had a banking system that had expanded too rapidly and was not prepared to withstand the financial turmoil that affected Southeast Asia in the latter half of 1997. Too many weak banks had larger than normal levels of nonperforming loans, foreign exchange risk, concentrated bank ownership, large exposures to risks in the property sector, and connected lending—lending to related companies. Furthermore, Indonesia had a large, unhedged, private, short-term foreign currency debt prompted by large differentials between domestic and foreign interest rates. Indonesian corporations were heavily exposed to such debt and thus were vulnerable to the adverse effects of a currency depreciation. Growth in short-term foreign liabilities outpaced growth in available international currency reserves. Also, a severe drought in 1997, the year leading up to the crisis, created a need for large food imports.
Following the widening of the intervention band on July 11, 1997, the rupiah was allowed to float on August 14. By October 1997, the rupiah had depreciated significantly as the regional financial crisis deepened. The sudden rise in the rupiah value of the foreign-currency-denominated loans and increased interest rates that ensued placed the banking and corporate sectors under enormous stress. At the time, Indonesia faced the loss of confidence of financial markets demonstrated by a sharp currency depreciation, a decline in foreign currency reserves, and a substantial fall in its capital account.
Initial SBA—Monetary, Fiscal, and Structural Conditions
On October 31, 1997, Indonesian authorities requested and on November 1, 1997, the IMF granted a 3-year SBA equivalent to $10.1 billion (SDR 7,338 million). The typical SBA is designed to provide short-term, balance-of- payments assistance for deficits of a temporary or cyclical nature. The IMF granted Indonesia the right to draw the funds provided Indonesia met the conditions of the program. Drawings were scheduled in 13 disbursements but were to be substantially front-loaded with $3.0 billion (SDR 2,201 million) disbursement on November 5, 1997, and an equivalent amount to be released on March 15, 1998. Interest charges were levied on a quarterly basis—at a rate slightly above the SDR interest rate. Repayments of principal under this arrangement were to be in eight quarterly installments beginning 39 months after disbursement and ending 60 months after disbursement. The principal justification for such large access was that the availability of sizable external financing would catalyze a speedy return to confidence and the resumption of normal capital market financing. Subsequent releases of $785.4 million (SDR 579 million) were to be available on June 15, September 15, and December 15, 1998. Amounts of $206.8 million (SDR 149.8 million) were to be released at eight times during 1999 and the year 2000, according to the IMF.
Program Revisions and Board Reviews of the SBA—Progress and Problems
A series of letters of intent issued by the government of Indonesia and program reviews by the IMF of the SBA followed. The SBA had 4 distinct letters of intent that documented program changes that took account of changing economic and social factors in Indonesia. The IMF reviewed the SBA twice during the November 1997-August 1998 time period. Fund disbursements were delayed twice over the course of the SBA— Indonesia’s access to funds associated with the completion of the first and second reviews was withheld. At the end of the first review funding was rephased so that amounts available for disbursement were reduced and reviews were changed from quarterly to monthly. The initial Stand-by program was not successful in restoring confidence in the economy. By August 25, 1998, the SBA had been replaced by an EFF.
According to IMF documents, the first IMF Stand-by program with Indonesia met with some initial success, as confidence appeared to be boosted by the tightening of liquidity and exchange market intervention. But financial market sentiment soon began to sour. This deterioration of market sentiment reflected the government’s failure to follow through quickly on the policy measures. The closing of 16 banks while other weak banks continued operation also contributed to a loss of confidence. Indonesia’s promise to carry out a tight monetary policy was derailed by a strong liquidity expansion to deal with runs on banks. There was also political uncertainty triggered by concerns about the health of the President. Foreign creditors refused to roll over maturing credit lines, and pressure on the exchange rate intensified. By early January 1998, the rupiah had undergone a cumulative depreciation of some 75 percent from pre-crisis levels. This created severe tension in both the corporate sector and banking sectors.
Second Stand-by Letter of Intent—Implementation Commitment and Detailed Banking and Corporate Conditions
On January 15, 1998, the Indonesian authorities released a new letter of intent which included major revisions to their economic program and addressed new conditions. The new measures were designed to reverse the decline of the rupiah before it triggered a surge in inflation and a wave of corporate bankruptcies. Key changes from the previous program included a commitment to implement a tight monetary program, and to accelerate deregulation and trade reform. In late January, the program was strengthened with the introduction of a comprehensive bank restructuring program—to be implemented by a new agency called the Indonesian Bank Restructuring Agency (IBRA) and the announcement of a voluntary scheme to restructure private corporate debt.
Market reaction to the January 15 letter of intent was swift and negative. Shortly after the announcement of the new letter of intent, the rupiah was depreciating rapidly and had lost a cumulative 85 percent of its value compared to 7 months earlier. Owing to difficulties in implementing required policy changes following the announcement of the second letter of intent under the SBA, continuing uncertainty about the government’s commitment to elements of the program, and other developments, the rupiah failed to stabilize, inflation picked up sharply, and economic conditions deteriorated. Base money grew rapidly, fueled by Bank Indonesia’s liquidity support for financial institutions. Moreover, program implementation was sidetracked by a February announcement that the government was considering the introduction of a currency board as a means of stabilizing the rupiah. There was widespread international concern that Indonesia’s financial and credibility crisis would make such a measure extremely risky. IMF officials viewed a currency board as inappropriate for Indonesia at this time because they were concerned about the rupiah’s credibility and sustainability—especially at an exchange rate far above the prevailing market rate—in light of ongoing capital outflows. Decisive policy action was also inhibited by preparations for the change in government after a March presidential election. The economic downturn deepened, while inflation accelerated sharply. Against this background, as well as the need to await the appointment of a new cabinet in the wake of the reelection of the President, the first IMF quarterly review was delayed.
First Review of SBA—Access to IMF Funds Temporarily Withheld
The first quarterly review was scheduled to be completed on March 15, 1998, and was to be tied to targets for December 1997 according to the IMF. However, the review was not completed—and hence additional funds were not available to Indonesia—until May 4, 1998. During February and March 1998, only limited progress was made in implementing the revised program. There had been a precipitous depreciation of the exchange rate and a large-scale outflow of capital. The banking sector and the private corporate sector were basically insolvent. Consumer prices increased 39 percent in the first quarter of 1998. In addition, Indonesia’s overall external payments position deteriorated sharply, especially the capital account, because of a decline in new inflows, the reluctance of foreign creditors to roll over bank and corporate external debt, and the repatriation of portfolio investment. IMF officials were concerned that, without a strong adjustment effort, Indonesia would encounter an even more severe crisis and a deepening recession.
Bank Indonesia had lost control over monetary policy in the first quarter of 1998. Monetary policy was dominated by the crisis in the banking system, with liquidity support provided to the banks reflecting the drawdown in foreign currency deposits, the reduction of credit lines by foreign banks, a shift into foreign currency from rupiah deposits, losses on forward contracts, and higher nonperforming loans. Moreover, Bank Indonesia had been hurt by the complete turnover of staff in the most senior positions. To deal with the crisis, foreign experts were appointed to a monetary panel to help strengthen implementation of monetary policy. The budget, too, was adversely affected by the deterioration in the economic environment, experiencing substantial revenue losses and increased outlays. Furthermore, government decrees designed to dismantle cartels and open up markets were delayed and circumvented in several sectors, which raised concern about the government’s commitment to the IMF program.
None of the five quantitative performance criteria required for completion of the first review were met, and only one of four structural performance criteria was implemented. Quantitative performance criteria were not observed on base money and public sector short-term debt outstanding at end-December 1997 and end-March 1998. Quantitative performance criteria were also not observed on the government balance and net international reserves at end-March 1998.
One structural performance criterion was completed on schedule—that Indonesia issue implementation regulations on procurement. Two structural performance criteria were superseded by the creation of IBRA— the closure of banks under intensified supervision and the establishment of performance criteria for state-owned banks. Two performance criteria were pending and were expected to be implemented by end-June 1998— increases in petroleum prices and increases in electricity prices.
The Indonesian government requested waivers for the nonobservance of the performance criteria. IMF staff supported granting these waivers in view of actions undertaken prior to the proposed completion of the review and the proposed actions of Indonesian authorities included in the revised program. Originally $3 billion (SDR 2,201.5 million) was to be available for Indonesia, but this amount was restructured so that equal amounts of $1 billion (SDR 733.8 million) were to be available each month over the next 3 months. On May 4, 1998, the IMF Executive Board granted the waivers and Indonesia received a $995.4 million (SDR 733.8 million) disbursement. At that point the IMF moved from scheduling quarterly to monthly reviews of the arrangement.
Third Stand-by Letter of Intent— 117 Structural Policy Commitments
On April 10, 1998, the IMF and the government of Indonesia issued a third letter of intent to address the far-reaching changes that had occurred in political, social, and external circumstances. The new program complemented and modified the program outlined in the previous letter of intent. According to IMF documents, the economic situation had deteriorated since the beginning of 1998: prices had increased, the government’s budget was under severe pressure as a result of the decline in economic activity, subsidies were needed to protect low-income groups from the rise in prices of staples and essentials due to the depreciation of the rupiah, restructuring the banking system was costly, and international oil prices had declined. In addition, the financial position of the domestic banking system had dramatically deteriorated and Bank Indonesia had granted very large-scale liquidity support. Furthermore, foreign banks had cut trade and other credit lines to Indonesian banks.
The revised program built on the program specified in the previous letter of intent but placed more emphasis on debt strategy, banking system restructuring, privatization, and bankruptcy procedures. The revised program comprised 117 structural policy commitments covering fiscal issues, monetary and banking issues, bank restructuring, foreign trade, investment and deregulation, a social safety net, the environment, and other issues.
The program required sharply raising interest rates to secure a sustained appreciation of the rupiah and strict control over the net domestic assets of Bank Indonesia. Liquidity support to banks was to be brought firmly under control. The program included an accelerated strategy for restructuring the banking system—including the takeover of seven banks that accounted for most of the liquidity support and raising the capital levels of healthier banks. The cost of bank restructuring was estimated to be 15 percent of GDP. The revised program also sought reform of bankruptcy procedures. It required a revised budgetary framework, with higher subsidies for some food and other items to soften the impact of the currency depreciation on the poor, as well as funds to cover the costs of bank restructuring. The revised program outlined a framework for restructuring private corporate debt with limited government support.
This letter of intent shifted one quantitative performance criterion—the monetary policy target—from base money to net domestic assets because the net domestic assets of Bank Indonesia had been the source of monetary instability. The change was made because of the necessity of bringing under control the rapid expansion of central bank credit to banks with liquidity problems, according to Indonesian government documentation. Other quantitative performance criteria remained, with targets changed. New structural performance criteria were to merge Bank Bumi Daya and Bank BAPINDO and transfer problem loans to the asset management unit of IBRA by end-June 1998; initiate sales of additional shares in listed state enterprises including, at a minimum, the domestic and international telecommunications corporations by end-September 1998; and reduce export taxes on logs and sawn timber to 20 percent by end- December 1998.
New or strengthened structural policy commitments since January 15, 1998, included raising profit transfers to the budget from state enterprises including Pertamina—the state oil company, publishing key monetary data on a weekly basis, appointing high-level foreign advisors to Bank Indonesia to assist in the conduct of monetary policy, setting minimum capital requirements for banks of rupiah 250 billion after providing external guarantees to all depositors and creditors of all locally establishing IBRA, transferring 54 weak banks to IBRA, transferring claims resulting from past liquidity support from Bank announcing 7 enterprises to be privatized, submitting to Parliament draft law on competition policy, and establishing a monitoring system for structural reforms.
Second Review of the SBA— Access to IMF Funds Temporarily Withheld
The second review of the SBA was scheduled to be completed on June 15, 1998, but the review and the subsequent disbursement of $995.4 (SDR 733.8 million) was delayed by about a month. The social unrest that boiled over in mid-May and culminated in the resignation of the president. There were runs on Indonesia’s largest private bank, and unemployment and inflation started to rise dramatically. The country was seen as facing an extremely severe and rapidly deepening systemic economic crisis. As a result, the review was completed on July 15, 1998. Indonesia did not have access to additional IMF funds during the delay period.
According to IMF documents, the April 1998 program had gotten off to a good start. Monetary performance was kept within program targets specified in the April letter of intent, even though liquidity support to banks was higher than expected. Banks requiring most of Bank Indonesia’s liquidity support were put under the control of IBRA. New bankruptcy procedures were enacted, and restrictions on foreign investment in wholesale trade were lifted.
However, IMF documentation shows that the social disturbances and political change in May 1998 derailed the April program despite generally good policy implementation. Arson, rioting, and looting in Indonesia undermined business confidence and damaged the distribution system. Business confidence was shaken, capital flight resumed, and the rupiah depreciated sharply pushing many corporations and banks further into insolvency. GDP fell by 8.5 percent in the first quarter of 1998 and by 7 to 8 percent in the second quarter of 1998. The banking system was paralyzed—unable or unwilling to lend to corporations—and the corporate sector was deeply insolvent. According to MF documents, at this time, the Indonesian economy faced the risk of falling into an even deeper systemic crisis, with normal financial market mechanisms breaking down completely, banks unwilling to lend to insolvent corporations, and access to international markets denied.
Despite this situation, Indonesian officials reported that Indonesia had met three of the four IMF quantitative performance criteria. For example, they judged the structural performance criterion to increase petroleum prices and eliminate subsidies to have been met because petroleum prices had been raised on average by 38 percent, although the increase in kerosene prices was subsequently rescinded to assist poor households. Data on two quantitative performance criteria were not available—the end-June performance criteria on the contracting or guaranteeing of new external debt and the stock of public sector short-term debt outstanding.
Indonesia met the end-June 1998, structural performance criteria to raise fuel and electricity prices according to an agreed schedule. One of the structural performance criteria was not met—the end-June 1998, merging of two banks and the transfer of problem assets to the asset management unit of IBRA were delayed. The Indonesian government requested a waiver for its nonobservance. The IMF staff supported this request because the preparatory work took longer than anticipated, and the merger was expected to take place by end-July 1998. The IMF staff also supported Indonesia’s request to waive the applicability of the other quantitative and structural performance criteria that were not met. On July 15, 1998, the IMF Executive Board granted the waivers and Indonesia received a $995.4 million (SDR 733.8 million) disbursement. At this time, the government of Indonesia requested and the IMF’s Board approved a $1.4 billion (SDR 1 billion) augmentation of the SBA.
Fourth Stand-by Letter of Intent—Strengthening the Social Safety Net
On June 24, 1998, the government of Indonesia issued a fourth letter of intent to address the prevailing economic conditions. Although the overall objectives and policy content of the revised program remained the same as in previous letters of intent, the new program was to be substantially revised to reflect the deterioration in the economic situation, and the emphasis placed on some IMF conditions changed to some extent. The economy faced a serious crisis as a result of the social and political upheavals in May. Tight monetary policy was thought necessary to prevent hyperinflation. The new monetary program envisaged no increase in base money or net domestic assets. The budget was the area where major changes were made to the IMF program, including requirements for a substantially increased subsidy bill for basic foodstuffs, petroleum products, and electricity; greater expenditures for health and education; and expansion of employment-creating projects. Deficit spending was expected to amount to more than 8 percent of GDP—with the recognition that this deficit was not sustainable and would need to be reduced as the economy recovered. The bank-restructuring strategy—focused on putting in place as quickly as possible a core functioning banking system— envisioned an increased role for foreign advisors. A revised strategy was added to assist the resolution of the problems of the corporate sector through the establishment of the Indonesian Debt Restructuring Agency (INDRA), which was designed to provide exchange rate protection for restructured debts.
A strengthened social safety net to cushion the escalating effects of the crisis on the poor was now required. As a result of the reduction in real incomes, the number of households below the poverty line was growing rapidly. The food distribution system was to be repaired to ensure adequate supplies of food and other essential items to all parts of the country. Nevertheless, it was thought that the revised program was likely to encounter great risk from unsettled political conditions and growing social strains.
Quantitative performance criteria were the same as in the prior letters of intent, but targets were changed. New structural performance criteria were as follows:
Initiate sales of additional shares in listed state enterprises including, at a minimum, the domestic and international telecommunications corporation by end-September 1998.
Submit to parliament a draft law to institutionalize Bank Indonesia’s autonomy by end-September 1998.
Reduce export taxes on logs and sawn timber to 20 percent by end- December 1998.
Complete audits of the State Oil Company, the State Logistics Agency, the State Electric Company, and the Reforestation Fund by end-December 1998.
New or strengthened structural policy commitments included the following:
Issue presidential decree to provide appropriate legal powers to IBRA, including its asset management unit.
Reduce the minimum capital requirements for existing banks.
Take action to freeze, merge, recapitalize, or liquidate the six banks for which audits have already been completed.
Conduct portfolio, systems, and financial reviews of all other banks by internationally recognized audit firms.
Introduce community-based work programs to sustain purchasing power of poor in both rural and urban areas.
Increase subsidy for food and essential items.
Introduce microcredit scheme to assist small businesses.
Request for an EFF— Indonesia to Get More Time to Repay the IMF
On July 29, 1998, Indonesia requested that the SBA be canceled and the existing policy program be supported instead by an EFF. Several IMF Board members had previously suggested that such an arrangement might be more appropriate than a SBA due to the deep-seated nature of Indonesia’s structural and balance-of-payments problems. The EFF was established to provide assistance to meet balance-of-payments deficits over longer periods of time. By this time, Indonesia had received $4.96 billion (SDR 3.66 billion) in disbursements under the SBA. The EFF was to cover the remaining period of the SBA—26 months—and access under the new arrangement was to be the same as the amount remaining to be drawn under the SBA—$6.33 billion (SDR 4.67 billion). An EFF allows a country more time to repay the IMF, according to an IMF official. Repayment of principal under an EFF was to be made in 12 semiannual installments beginning 4-½ years after disbursement and ending 10 years after the date of each disbursement whereas repayments under an SBA are scheduled 3- ¼ to 5 years after each disbursement.
The deep-seated nature of the structural and balance-of-payments problems facing the economy had become increasingly apparent. A thorough restructuring of the banking and corporate sectors was needed for the economy to recover from the crisis, even if this restructuring would take some time to complete. IMF staff supported the Indonesian government’s request that the SBA be replaced by an EFF. On August 25, 1998, the IMF Board approved the request for an EFF, and Indonesia received a $995.4 million (SDR 733.8 million) disbursement.
Program Revisions and Board Reviews of the EFF—Progress and Problems
A series of five letters of intent and four reviews followed the switch to an EFF. The five letters were an elaboration of the elements of the reform program, according to the IMF. Monetary policy requirements continued to be tight and focused on getting the exchange rate into an acceptable range. Fiscal policy requirements pinpointed deficit spending. Structural policies focused on reforming the financial sector, eliminating anticompetitive structures in the Indonesian economy, and providing social safety measures. Disbursements were on time twice and delayed twice when IMF officials judged that Indonesian officials were not satisfactorily implementing the set conditions.
First EFF Letter of Intent—New Social Safety Net and Banking Measures
On July 29, 1998, at the time the government of Indonesia requested an EFF, Indonesia issued a new letter of intent to address the prevailing conditions. Program modifications were introduced in budgetary management, corporate debt restructuring, and bank restructuring. There was progress in implementing the Frankfurt agreement with foreign commercial banks and the introduction of auctions for central bank instruments. Progress was also being made on elaborating the details of the plan for bank restructuring. IBRA and its asset management unit were fully operational, and foreign investment banks and a leading foreign commercial bank were assisting the bank restructuring process. These developments had a beneficial impact on market confidence.
At the time of the request for the EFF, the economic situation remained precarious. Output had declined 10 percent and was likely to decline as much as 15 percent for 1998/1999, according to the IMF. Inflation was projected to be 80 percent for 1998. Food security was a continuing concern—food prices had risen dramatically since the beginning of May 1998. Severe problems in the banking system and corporate sector were still not adequately addressed. Actions to resolve six private banks that were taken over were needed. Actions were also needed on the recapitalization of sounder banks and the restructuring of state banks. Progress on corporate debt workouts was very slow, and IMF staff judged that the Indonesian government needed to be involved in facilitating such workouts. The outlook for the program was vulnerable to changes in the political and social climate. The June program had slippages in monetary policy—concerns about further bank closures led to renewed withdrawals of deposits from troubled banks, and the move by Bank Indonesia to reabsorb liquidity led to a rise in interest rates. Strenuous efforts were necessary to bring base money in line with program targets.
New measures were added to repair and strengthen the distribution system, to mitigate the humanitarian effects of the crisis by expanding social safety net programs and improving the targeting of subsidies, to remove obstacles to corporate sector restructuring through the adoption of regulatory and administrative reforms, and to restructure insolvent banks. The distribution and subsidy systems were improved to ensure that essential goods were available at affordable prices. In addition, a new program was created to provide rice at highly subsidized prices to the poorest families. Components of this strategy were the following:
The State Logistics Agency was to release large quantities of rice of all qualities into the market.
The rice was to be released into the market at less than the market price.
The State Logistics Agency was to increase direct deliveries of medium- quality rice to retailers and cooperatives.
To put further downward pressure on prices, the value-added tax on rice was to be suspended.
The program for delivering rice at prices well below market prices to poor families was to be expanded as quickly as possible, with the help of provincial governors.
The State Logistics Agency was to actively seek new imports for rice to ensure that stocks remained adequate.
Private traders were to be freely allowed to import rice.
Quantitative performance criteria were the same as those in effect in the final letter of intent of the SBA except for changes in targets. Structural performance criteria were to: initiate sales of additional shares in listed state enterprises including, at a minimum, the domestic and international telecommunications corporations by end-September 1998; submit to parliament a draft law to institutionalize Bank Indonesia’s autonomy by end-September 1998; reduce export taxes on logs and sawn timber to 20 percent by end- complete audits of the State Oil Company, the State Logistics Agency, the State Electric Company, and the Reforestation Fund by end-December 1998.
New or strengthened structural policy commitments included an IMF review of public expenditure management, the transfer of assets of the seven frozen banks to the asset management the transfer of the responsibility for six state banks from the Ministry of State Enterprises to the Ministry of Finance, the launch of the Indonesian Debt Restructuring Agency, the institution of tax neutrality for mergers, the submission to the Indonesian parliament of a new arbitration law consistent with international standards, the completion of a review of accounting and auditing standards to make them consistent with international standards, and the establishment of a voluntary framework to facilitate corporate restructuring.
First Review of the EFF—Good Policy Implementation
On September 17, 1998, IMF staff presented its first review of the EFF to the IMF’s Executive Board. Completion of the review was to be based on indicative fiscal and monetary targets, as well as external targets for end- July and end-August 1998. IMF staff recommended that the review be completed and that Indonesia continue to have access to IMF assistance. The policy discussions with the government of Indonesia were conducted in close collaboration with the World Bank and the Asian Development Bank.
According to IMF documents, Program implementation was generally good and the program was broadly on track. Market sentiment had improved as a result of good implementation and increased financing for the program. Steps were being taken in key areas where problems had occurred, especially in regard to food security, or where progress needed to be accelerated, such as corporate restructuring. A cautious easing of monetary policy was seen as possible once inflation had been brought down from its high levels. The challenge for policy at that time was to proceed with structural reforms-–chiefly banking system and corporate restructuring. Improving the food situation was crucial for ensuring social stability.
Real GDP was estimated to have declined by 12 percent in the first half of 1998, while cumulative inflation for the first 8 months of the year was 69 percent. Although the political situation had stabilized to some degree by September, it remained fragile, as indicated by street protests. The privatization program was behind schedule, and a shortfall from the target for privatization revenues was believed to be likely. The budget was running far within program targets in part because of delays in increasing spending on social programs. Because the government had adopted a strategy for addressing the urgent problems created by the recent rapid increase in rice prices, IMF staff believed it helped limit risks to the program from social unrest.
On the other hand, bank restructuring had been subject to delays. The transfer of assets to the asset management unit was being delayed pending passage of amendments to the banking law. In addition, little progress had been made in corporate restructuring. To address some of these issues, a package of measures to address bank restructuring was announced on August 21, 1998. The package included the recapitalization of core banks, the closure of six large private banks, the merger of four state banks, and other items. An important development with respect to corporate restructuring was the announcement of the Jakarta Initiative—a voluntary framework to guide and streamline out-of-court restructuring of corporate debt. This initiative was announced in early September 1998 and used approaches that were proven successful in other countries. The approach covered all foreign and domestic debt and applied equally to all creditors. To promote financing to distressed companies, the principles encouraged creditors to subordinate their existing claims to lenders that were willing to provide interim financing.
Several benchmarks were implemented during the course of this review. The end-June 1998 measure to allow transferability of forest concessions and to de-link their ownership from processing of new concessions was done by end-August. The end-July measure to issue a presidential decree to provide appropriate legal powers to IBRA, including its asset management unit, was done on schedule. The end-August measure to submit to parliament a draft amendment to the banking law, incorporating procedures for the privatization of state banks, and the removal of the limits on private ownership of banks was done on August 24, 1998. On September 25, 1998, the IMF Board completed the review and Indonesia received a $928.3 million (SDR 684.3 million) disbursement.
Second EFF Letter of Intent— New Strategy for Rice and Banks
On September 11, 1998, at about the time of the first IMF review of the EFF, the government of Indonesia announced a revised program to address the new conditions. The letter of intent established indicative targets for monetary and fiscal variables and for international reserves. The letter of intent indicated that the program intended to continue to implement a firm monetary policy. As inflation declined, the government of Indonesia expected interest rates to decline, easing pressure on the corporate and banking sectors. Development expenditures, particularly those for the social safety net, which were running below the programmed levels, were to be stepped up. Rice was to be provided at highly subsidized levels to poor families. For the first time in 30 years, the government was to allow private traders to import rice. This letter of intent included commitments related to an August 21, 1998, announcement by the government of Indonesia of a major bank-restructuring package that covered banks with almost half the assets of the banking system.
The end-September targets for net domestic assets, overall central government balance and net international reserves, and net international reserves were quantitative performance criteria. The letter of intent contained an updated matrix of structural policy commitments with the following new or strengthened commitments:
Eliminate subsidies on imports of sugar, wheat, wheat flower, corn, soybeans, soybean meal, and fishmeal.
Strengthen public expenditure management.
Prepare a final plan for restructuring three banks.
Complete the legal requirements for the merger of four state banks.
Prepare a plan for the operational merger and restructuring of four state banks.
Second Review of the EFF— Waivers Requested and Granted
On October 23, 1998, IMF staff submitted a second IMF staff review of Indonesia’s program. IMF staff reported that further progress had been made with stabilization since the last review and that policy implementation under the IMF program continued to be generally good. The priority for policy at this juncture was to foster recovery in output, consolidate gains in stabilization, and strengthen programs to protect the poor. IMF staff recommended that waivers for nonobservance be granted for two missed structural performance criteria provided that there was a satisfactory arrangement for the repayment of liquidity support by private banks.
The situation remained fragile and the economy extremely weak. Unemployment and poverty were on the rise. Although the political situation had stabilized, the outlook remained uncertain and, in the IMF staff’s view, further turbulence in coming months was not ruled out. There had been slippages in some areas, notably privatization. Privatization of several mining companies and the domestic telecommunications concern had been postponed until market conditions improved. The inability of most corporations to pay high rates on loans had resulted in a negative spread between commercial bank deposit and lending rates, contributing to continuing decapitalization of the banking system. At this time there was no satisfactory agreement on the repayment of liquidity support by private banks.
By the third week in October 1998, the rupiah had strengthened beyond expectations, inflation had moderated, and prices for many staple food items had declined. Key elements of bank restructuring were moving ahead. Indonesia then announced a government-assisted recapitalization program for viable banks. The merger of four state banks had been initiated, and plans had been announced for resolving the debt situation of six major private banks. Progress was being made in establishing the appropriate legal and regulatory framework for the Jakarta Initiative.
Completion of the second review under the EFF was to be based on indicative and performance targets for end-August and end-September 1998. The government of Indonesia had complied with performance criteria for end-September 1998 on net domestic assets and net international reserves. However, Indonesia requested a waiver for the following end-September performance criteria due to the lack of available data on the central government balance, the contracting or guaranteeing of new external debt, and the short-term external debt outstanding.
One benchmark for the end of September 1998 was done on schedule while the completion of another benchmark was delayed. The benchmark to complete action plans for all 164 state enterprises was done on schedule. The benchmark to complete divestiture of two state enterprises that were unlisted was delayed because of weak market conditions.
The government also requested waivers for structural performance criteria that were not met. These criteria dealt with share sales of domestic and international telecommunications companies and submission to parliament of a draft law to institutionalize Bank Indonesia’s autonomy. Although share sales of one company had been completed, other shares had not been sold due to weak market conditions. The draft law was nearing completion, and submission to parliament was expected by mid- November. On October 30, 1998, the IMF Board granted the requested waivers. On November 6, 1998, Indonesia received a $928.3 million (SDR 684.3 million) disbursement.
Third EFF Letter of Intent— Additional Banking Reform and Corporate Debt Restructuring Commitments
On October 19, 1998, the government of Indonesia announced a new letter of intent incorporating adjustments to prevailing conditions. This was the third letter of intent to be announced under the EFF. This revision contained several measures to further strengthen the IMF program, especially in the areas of banking and corporate debt restructuring. The letter of intent called for lowering interest rates as long as the rupiah remained strong and inflation was falling. Development spending was to be accelerated. Monitoring of development spending was to be strengthened to protect against leakage and corruption. The preparation of the master plan for privatization was completed—all but a few selected enterprises were to be privatized within the next decade. The program included requirements to streamline the food distribution procedures and make adequate food supplies available to the most vulnerable groups.
On September 28, 1998, the government announced the formal merger of four state banks into the newly established Bank Mandiri. The next day, Bank Indonesia announced key elements of a bank recapitalization program for potentially viable private banks—including higher capital adequacy ratios, injections of new capital, lower levels of nonperforming loans in accordance with new prudential requirements, and preparation of business plans demonstrating achievement of medium-term viability and compliance with prudential regulations. Indonesia’s parliament approved amendments to the banking law on October 16, 1998, which facilitated the restructuring process by strengthening the legal powers of IBRA and its asset management unit.
The Jakarta Initiative on corporate debt restructuring was expected to be fully operational by end-October. The decrees necessary to give effect to the Initiative were signed and a chairman appointed. At this time about a dozen companies, with a combined debt exposure in excess of $3 billion, were entering the process. On October 23, 1998, a draft government regulation was to be signed to provide for tax neutrality for mergers and removal of other tax disincentives for restructuring.
Quantitative performance criteria were as specified in the first EFF, with targets changed. New and strengthened structural policy commitments were to complete a review by Bank Indonesia of business plans of relatively strong recapitalize banks whose business plans are accepted by Indonesia, transfer to IBRA banks that are determined to be insolvent and ineligible for the recapitalization plan, resolve 26 banks currently subject to IBRA control for which audits were expected to be completed by mid-November, establish centralized control of lending decisions and treasury management in the four state banks that were being merged into Bank Mandiri, reach final settlement with former owners of two private banks for repayment of Bank Indonesia liquidity support, encourage the initiation of negotiations between debtors and creditors under the Jakarta Initiative, and expand the subsidized rice scheme to 17 million poor families.
Fourth EFF Letter of Intent— Implementing Corporate and Financial Restructuring
On November 13, 1998, the government of Indonesia issued a letter of intent and supplementary memorandum of economic and financial policies that detailed revised conditions under the EFF. The new letter of intent undertook a number of additional steps to implement the key areas of corporate and financial restructuring. The letter of intent reaffirmed the government’s commitment to keep base money under control so as to stabilize prices and accommodate further appreciation of the rupiah. Progress continued to be made on lengthening the maturity structure of monetary instruments. Development expenditure was targeted to rise. The revised program sought collaboration at all levels in stepping up internal government oversight mechanisms to help identify leakages and ensure accountability. The letter of intent had a commitment to sell majority interests in the Jakarta container port and minority interests in the Jakarta airport operations, the largest palm oil plantation in Indonesia, and the international telecommunications enterprise. The letter of intent contained a commitment to taking steps to release detailed financial information about the state logistics agency, the state oil company, and the state electric company. Banking sector reforms included requirements for recapitalization of private sector banks, resolution of debt in certain frozen banks, and other actions.
There was to be a renewed effort to implement the Jakarta Initiative. A foreign exchange monitoring system was to be developed to allow Bank Indonesia to oversee foreign currency flows on a more timely basis. As of April 30, 1999, the system had been approved by the government of Indonesia but had not begun operations.
The letter of intent only had one structural performance criterion—reduce export taxes on logs and sawn timber to 20 percent by end-December 1998. New and strengthened structural policy commitments included the following:
Raise aviation fuel prices to international levels.
Complete terms and conditions of bank recapitalization bond.
Reach agreement with former owners of six banks for repayment of Bank Indonesia liquidity support and connected lending.
Issue three new prudential regulations on connected lending, the capital adequacy ratio, and the semi-annual publication of financial statements.
Establish a mechanism for the appointment of ad hoc judges to the Commercial Court.
Expand the subsidized rice scheme and increase monthly allocations to 20 kilograms per family.
Eliminate exchange rate subsidies for rice imports by the National Logistics Agency and replace them with explicit budgetary subsidies.
Third Review Under the EFF— Completion of Review Delayed
On December 15, 1998, IMF staff presented their third review under the EFF to the IMF Board. In its view, macroeconomic policies were on track, financial sector reform was proceeding, progress was being made on corporate restructuring, and slippages and delays in some areas were being addressed. The rupiah had strengthened, allowing money market rates to begin falling. Inflation had abruptly slowed. Fiscal policy had been less stimulative than envisaged but development spending was accelerating. Moreover, the rice program was being broadened beyond the initial target of 7.5 million families. The privatization agenda was narrowed to 4 or 5 enterprises from the original list of 12 enterprises. Financial sector and corporate restructuring was moving forward on several fronts with the aim of restoring the soundness of the banking system. On November 7, 1998, final agreement was reached with the previous owners of four banks to repay the equivalent of 9 percent of GDP in obligations stemming from loans obtained by their enterprises from these four banks. An increasing number of companies were seeking assistance in initiating negotiations with creditors.
The review noted slippages in some areas of the program, including privatization and some risk that political unrest could again derail the program. Government authorities remained reluctant to finance the restructuring costs because of the political implications. There had only been limited progress in corporate debt restructuring—further steps were needed in expediting regulatory approvals for restructuring, establishing a public registry to facilitate interim financing, and streamlining the Commercial Court.
According to IMF documents, Indonesia met the indicative targets on net domestic assets and net international reserves. Data were not available for the indicative target for the central government balance, but the IMF believed that the target had been met. IMF staff recommended completion of the third review and supported the introduction of three bimonthly reviews during the first half of 1999 before moving to quarterly reviews. On December 15, 1998, the IMF Board approved completion of the review. Indonesia received a $928.3 million (SDR 684.3 million) disbursement.
Fourth Review Under the EFF— Indonesia Requested Additional Funds
On March 25, 1999, the IMF completed its fourth review of the EFF and the request for augmentation of funds. The review was scheduled to have been completed on February 15, 1999. This was the first bi-monthly review. Although progress was reported in implementing the IMF program, delays had occurred in implementing key banking and corporate restructuring measures. Nevertheless, the IMF staff was satisfied that policies and developments were continuing to evolve as well as could be expected under difficult and unsettled domestic conditions. Progress toward achieving macroeconomic stability had been helped by a firmer and more consistent monetary policy. The external current account kept its solid surplus of almost 5 percent of GDP in 1998-1999, offsetting a weaker capital account. A trade surplus of $17 billion accounted for the bulk of the improvement in the current account. In mid-March 1999, net international reserves of $15 billion remained above the program targets. Opposition political parties supported the IMF program.
Indonesia continued to pose exceptional risks for the IMF, particularly until the political transition was further advanced, according to IMF staff. The economy had not yet bottomed out. Export volumes had declined sharply, and domestic banks were reluctant and unable to extend credit to exporters. Although the judiciary had not implemented the bankruptcy law in a manner consistent with international practice, Indonesian authorities were believed to be cooperating fully in carrying out a corrective strategy. This corrective strategy included proposed legislation aimed at improving governance of the judiciary and expectations that state banks and IBRA were aggressively to pursue their largest borrowers. Corporate debt restructuring under the Jakarta Initiative had yet to spread rapidly—only 15 companies, involving about $2 billion in foreign currency debt, had concluded debt restructurings with creditors.
Several benchmarks were completed on schedule. For example, the measure to finalize a decision on the resolution of all banks that fail the criteria for eligibility to the recapitalization program was implemented in that all these banks were closed or intervened on March 13, 1999. The IMF granted a waiver for nonobservance of the structural performance criterion—to reduce the export tax on logs and sawn timber to 20 percent at end-December 1998. The measure was adopted in February 1999. The result of the review was that on March 25, 1999, Indonesia received a $465.3 million (SDR 337 million) disbursement, and the total amount available to Indonesia was increased $985.8 million (SDR 714 million).
Fifth EFF Letter of Intent— Strengthening the Program for the Banking System and Corporate Restructuring
The government of Indonesia issued a fifth letter of intent under the EFF on March 16, 1999. This letter of intent included a number of new steps to strengthen the program—especially the banking system and corporate restructuring. Banking reforms requirements included state bank resolution; private bank recapitalization; resolution of debt in banks under IBRA control; and improvement of the legal, regulatory, and supervisory framework.
Steps to strengthen the corporate restructuring framework included the following:
A regulation became effective that removed company law limitations on debt-to-equity conversions.
The Ministry of Finance passed a decree providing more favorable tax treatment of cancellation of indebtedness income in restructurings.
Legislation was to be submitted for the registration of security interests that would give certainty concerning the priority rights of lenders.
Actions related to the rice situation included elimination of the state trading agency’s exchange rate subsidy for imports of rice, a public procurement floor price policy that was aimed at keeping domestic rice prices broadly in line with world prices, and the unhindered import of rice by the private sector.
To supplement the People’s Economy Initiative for development of small- and medium-sized enterprises and cooperatives, Indonesia was to review commercial lending practices to and the financing needs of small- and medium-sized enterprises and cooperatives, transform the BRI state bank into a specialized bank with a mandate to lend only on commercial terms, and simplify directed credit schemes to cooperatives and small- and medium- sized enterprises and ensure that lending rates are positive in real terms and adjust them periodically to reflect market conditions.
The letter of intent set end-March and end-May quantitative performance criteria and indicative targets for the rest of 1999 and the year 2000 as well as structural performance criteria and benchmarks through September 1999. There were no new structural performance criteria in this letter of intent. Policy actions were to continue to be guided by the matrix from the November 1998 letter of intent.
The IMF’s Financial Arrangement With South Korea
History of the Crisis
Prior to Korea’s 1997 financial crisis, Korea had experienced about 30 years of economic growth and was considered to have had broadly favorable macroeconomic performance. Korea had recorded real GDP growth of about 6 percent in the first 3 quarters of 1997, and inflation was around 4 percent. Korea’s external financing crisis stemmed from fundamental weaknesses in its corporate and financial sectors. Korea had experienced a mild recession in 1993. In response, Korea’s elected officials promised growth and encouraged Korea’s conglomerates (called “chaebols”) to invest heavily in new factories. In turn, Korean firms made substantial investments, leaving Korea with excess production capacity and large debt burdens for Korean firms. This overcapacity led to falling prices for its main exports—computer memory chips, cars, ships, steel, and petrochemicals—and weakened profitability.
The large amount of short-term borrowing compounded these other problems. Most of the corporate debt was either short-term borrowing from domestic financial institutions or from the issuance of promissory notes. At the end of December 1997, the 30 largest conglomerates owed approximately 111.3 trillion won (the Korean currency) in loans and payments to Korean banks, according to Korea’s Office of Bank Supervision. The conglomerates’ current liabilities (less than 1 year) accounted for 60 percent of total liabilities and roughly half of nominal GDP in 1996. These factors resulted in an increase in bankruptcies beginning in 1997, including a large Korean steel company and car manufacturer.
These bankruptcies weakened the financial system, since bank loans were not being paid off, and non-performing loans rose sharply, causing strains in the banking system. Korean government estimates of nonperforming loans at the end of 1997 were 34.9 trillion won. Weaknesses in the banking system were thought to be based on a lack of commercial orientation (that is, a focus on increasing market share over improving profitability) and limited experience in managing risk, combined with lax prudential supervision. These factors, as well as the large-scale, external short-term borrowing of the Korean banks, made Korea vulnerable to the contagion effects of financial problems in Southeast Asia.
The weak state of the banking sector led to successive downgrades by international credit rating agencies and a sharp tightening in the availability of external financing. External creditors began to reduce their debt exposure to Korean banks in the latter part of 1997, causing a sharp decline in usable reserves. A large amount of these reserves were being used to finance the repayment of the short-term debt of Korean commercial banks’ offshore branches. Historically, Korean authorities had a policy of not letting private banks go into default. Consequently, the Bank of Korea was providing foreign exchange support to commercial banks as foreign creditors reduced their exposure on short-term lines of credit. The total amount of foreign currency reserves the Bank of Korea, the central bank of Korea, held at the end of December 1997 was $20.4 billion, the usable portion of which was $8.9 billion. As of December 31, 1997, the total amount of Korea’s private and governmental external liabilities was $154.4 billion, calculated under IMF standards. The Korean government estimated that at the end of December 1997, approximately $27.3 billion was due by the end of the first quarter in 1998. The ability of Korea to repay its short-term foreign debts was dependent on the willingness of foreign lenders to extend the terms of existing loans and/or to offer new financing.
Korea had made earlier attempts to reform the financial sector and had taken steps to liberalize its capital account. Korea permitted short-term foreign borrowing but had not allowed domestic banks access to longer- term foreign borrowing, which added to Korea’s financing problems. Korea was faced with depleted foreign reserves and a rapidly depreciating currency when it asked for IMF assistance in late November 1997. It had been 10 years since Korea had had an IMF program, and Korea did not have any outstanding IMF credit. Korea had made its last repayment of prior borrowings to the IMF in 1988. Table V.1 presents a history of Korea’s recent financial problems.
Hanbo Steel, a large Korean conglomerate, collapses under $6 billion in debts, first bankruptcy of a Korean conglomerate in a decade. President’s Committee on Financial Sector Reform recommends short-term reform measures. Thailand devalues its currency, the baht. Kia, Korea’s third largest carmaker, requests emergency loans. Korean government announces plan for providing special financing for certain commercial and merchant banks. Announced government guarantee for overseas foreign currency borrowings by Korean commercial banks. IMF mission goes to Seoul for an Article IV consultation.Credit rating agencies begin to downgrade the ratings of Korea and Korean companies to below investment grade. Kia Motors Corp. announces bankruptcy. Bank of Korea intervenes to attempt to halt the decreasing value of the won. IMF announces it is ready to provide assistance if needed. Bank of Korea loosens band on currency, won begins to drop sharply.Korean government requests IMF assistance. Korea bank asset workout program announced. Korea Asset Management Corporation reorganized to acquire and dispose of nonperforming loans. $21 billion IMF package announced, which was part of a larger financing package totaling about $58 billion. Korea eliminated its daily currency exchange rate band.
IMF staff conduct first biweekly review of Korea’s program. South Korea elected opposition party Kim Dae-jung to serve a 5-year presidential term. Moody’s rating service announces that it lowered Korea’s foreign currency ratings. Won drops to its low of 1,963 won to the dollar. Standard & Poor’s announces that it lowered Korea’s long-term foreign currency credit ratings. IMF funding accelerated, debt restructuring talks begin. IMF and 12 country lenders agree to advance Korea $10 billion to prevent default. Korea issues second letter of intent with accelerated and strengthened reforms. Korea’s National Assembly passes 13 financial reform bills designed to facilitate financial sector restructuring, accelerate capital market liberalization, and improve prudential regulation. IMF conducts second biweekly review of Korea’s program. $22 billion in Korean foreign debt restructured. Tripartite accord (among labor, management, and the government) reached on Korea’s restructuring program and sharing the burden of reform. IMF conducts first quarterly review of Korea’s program. President Kim and the new administration take office. Korea issues global bond offering of $4 billion to add to its official reserves. Financial Supervisory Commission formed. IMF conducts second quarterly review of Korea’s program and completes its Article IV consultation. Korea signs memorandum of understanding with the World Bank for implementing corporate sector reforms. IMF conducts third quarterly review of Korea’s program. Review completed and disbursement made. IMF conducts fourth quarterly review of Korea’s program. Korea requests waiver for obtaining bids for the sale of Korea First Bank and Seoul Bank. IMF Board approves waiver, review is completed, and disbursement made. Korea First Bank signs Memorandum of Understanding with Newbridge Capital for sale of Korea First Bank. Seoul Bank signs memorandum of understanding with HSBC for sale of Seoul Bank. IMF conducts fifth quarterly review of Korea’s program. IMF recommends waivers for completion of an audit of Korea Asset Management Corporation and delivery of recommendations based on a financial supervisory review of Korea Development Bank. The financial supervisory review was conducted within the timetable under the review, and the remaining actions were subsequently completed. IMF completes review and disbursement was made.
IMF Agreement Announced
On December 4, 1997, the IMF approved a 3-year stand-by arrangementwith Korea for an amount equivalent to special drawing right (SDR) of 15.5 billion (amounting to about $21 billion). This program was formulated under emergency procedures and later drew on the IMF’s newly established Supplemental Reserve Facility. The World Bank and the Asian Development Bank committed $14 billion to the Korean government. In addition, interested countries pledged $22 billion as a second line of defense for a total package of $58.4 billion. At the time of the announcement, the IMF staff team continued to work with Korean officials to develop more fully the policy measures for the program. The full program was to be reviewed by the IMF’s Executive Board in January 1998. It was planned that the review would expand the scope of the performance criteria and set performance measures and benchmarks for 1998. Customary clauses were also included as conditions for Korea’s IMF program. Each subsequent review adjusted and expanded the performance criteria for the next reviews, that is, they were set as “rolling” performance criteria. The IMF’s monitoring of Korea’s program started with two biweekly reviews in 1997 and quarterly reviews for 1998 and the first quarter of 1999. After the fifth quarterly review in March 1999, the IMF plans to conduct reviews every 6 months, and Article IV consultation discussions are planned for June or July 1999.
IMF Program Comprised Macroeconomic Policies and Structural Reforms
The IMF program for Korea included a combination of macroeconomic policies—changes to monetary and fiscal policies—and structural reforms. The IMF-directed response was to tighten monetary policy, including raising interest rates to stabilize the currency and reduce government spending, along with an ambitious reform program for financial sector and corporate restructuring. Macroeconomic policies were an essential part of Korea’s program. The large official financing package was assembled to help break the cycle of capital outflows, exchange rate depreciation, and financial sector weakness. However, compared with other countries’ IMF programs, the structural reforms in Korea, as well as Indonesia and Thailand, were central to dealing with the underlying causes of the financial crisis, restoring market confidence, and setting the stage for resuming and sustaining growth in Korea.
According to Korea’s December 3, 1997, IMF letter of intent, Korea’s IMF program was “built around (1) a strong macroeconomic framework designed to continue the orderly adjustment in the external current account and contain inflationary pressures, involving a tighter monetary stance and substantial fiscal adjustment; (2) a comprehensive strategy to restructure and recapitalize the financial sector, and make it more transparent, market-oriented, better supervised and free from political interference in business decisions; (3) measures to improve corporate governance; (4) accelerated liberalization of capital account transactions; (5) further liberalization of trade; and (6) improvement in the transparency and timely reporting of economic data.”
The broad policy goals of restoring investor confidence and building international reserves have remained throughout the program, although the emphasis has changed and adjustments have been made in specific targets as Korea’s reforms progressed.
Quantitative Performance Criteria Outlined in Initial Agreement
Korea’s macroeconomic program included monetary and fiscal policy measures. The initial letter of intent did not fully specify Korea’s reform program but did provide a framework of reforms that Korea intended to pursue. IMF staff continued to work with Korean officials to develop more detailed policy measures to be taken. To monitor Korea’s progress under the program, the initial agreement detailed the following quarterly quantitative performance criteria: a ceiling on net domestic assets of the Bank of Korea, a floor on net international reserves of the Bank of Korea, and the interest rate charged by the Bank of Korea on foreign exchange injections to Korean commercial banks or their overseas branches was not to be below 400 basis points above LIBOR.
These quantitative macroeconomic performance criteria, in addition to other indicative targets, structural performance criteria, and structural measures, were used to monitor Korea’s progress. The IMF and Korea also agreed to indicative targets to monitor Korea’s economic progress, including a floor on the consolidated central government balance, reserve money,and broad money (M3).
The principal macroeconomic objectives of Korea’s IMF program, as detailed in the initial December 3, 1997, letter of intent, include building the conditions for an early return of confidence so as to limit the deceleration of real GDP to about 3 percent in 1998, followed by a potential recovery in 1999; containing inflation at or below 5 percent; and building international reserves to more than 2 months of imports by end- 1998.
Monetary Policy
The main objective of the monetary policy was to contain inflation to 5 percent in 1998 and limit depreciation of the won. To demonstrate to markets the government’s resolve to confront the crisis, monetary policy was tightened immediately—interest rates were raised—to restore and sustain calm in the markets and contain the inflationary impact of the won depreciation. The government of Korea reversed its policy of providing liquidity to Korean banks and allowed money market rates to rise to a level sufficient to stabilize markets. The day-to-day conduct of monetary policy was guided by movements in the exchange rate and short-term interest rates, which were used as indicators of how tight monetary conditions were. A flexible exchange rate policy was maintained, with monetary and exchange rate policy being implemented in close coordination with IMF staff.
Fiscal Policy
Fiscal policy in Korea had traditionally been formulated prudently, according to the IMF. In recent years, the Korean government’s budget was in broad balance, with government savings of around 8 percent of GDP and a low level of public debt. Unlike economic problems in Latin America (large public debts), the Korean crisis was centered in the private sector. For 1998, Korea was to maintain a tight fiscal policy—by cutting government spending and raising certain taxes—to limit upward pressure on interest rates and to provide for the still uncertain costs of restructuring the financial sector.
The quantitative performance criteria were adjusted at subsequent reviews to reflect changes in economic assumptions, discussed more fully below. The first quarterly review of the full program was completed in February 1998, which expanded the scope of performance criteria and set performance criteria and benchmarks for 1998. Two biweekly reviews were conducted in the interim period after announcement of the Korea program and before the first quarterly review in February 1998.
Structural Performance Criteria
The IMF used numerous structural performance criteria to monitor Korea’s progress in making structural reforms. Korea’s structural reforms focused on financial sector reforms, capital account liberalization, strengthening corporate governance and corporate structure, labor market reforms, trade liberalization, and information provisions and program monitoring. After the first IMF quarterly review, measures to increase spending for Korea’s social safety net, including unemployment insurance, were added to the program. The third quarterly review added a World Bank component on corporate sector reforms.
For monitoring Korea’s reforms, the IMF set benchmarks in the initial letter of intent for the first and second biweekly reviews. As Korea implemented its reforms, the structural performance criteria used to monitor progress changed to reflect the reforms undertaken (see table V.2 and discussion that follows). The IMF set Korea’s benchmark for the first biweekly review “to comply with the understandings between the Korean government and the Fund staff regarding the implementation of interest rate policy.” For the second biweekly review, to be completed on January 8, 1998, Korea was “to call a special session of its National Assembly, shortly following its presidential elections in December 1997 to pass reform bills on financial sector reforms, capital account liberalization, and trade liberalization.” Korea was also “to publicize its foreign reserve data.” Also, “the Bank of Korea was not to increase its deposits with nonresident branches and affiliates of domestic financial institutions after December 1997.”
At the first quarterly review, and at each quarterly review throughout 1998, the IMF and Korea agreed to additional specific structural performance criteria to monitor Korea’s reform efforts. For example, at the third quarterly review, Korea was to obtain bids for the sale of Korea First Bank and Seoul Bank by November 15, 1998. Korea was monitored against this performance criterion at its fourth quarterly review in December 1998. Table V.2 details Korea’s reported progress and changes in its structural performance criteria from the initial IMF program in December 1997 through the fifth IMF quarterly review in March 1999.
Table V.2: Structural Performance Criteria for Korea’s IMF Program Date of review First biweekly review, 12/17/1997 Second biweekly review, 1/8/1998 Structural benchmarks and performance criteria to be met Structural benchmark set: Compliance with understandings between the Korean authorities and the IMF regarding the implementation of interest rate policy. Structural benchmarks set: Call a special session of the National Assembly after elections to pass reform bills that (1) revise Bank of Korea Act to provide central bank independence; (2) consolidate bank supervision; and (3) require corporate financial statements to be prepared on a consolidated basis and certified by external auditors. Submit legislation to harmonize the Korean regime on equity purchases with the Organization for Economic Cooperation and Development’s practices.
Call rate rose to about 30 percent on Dec. 24, 1997. Increase in interest rate cap from 25 percent to 40 percent was approved by cabinet on Dec. 16 and became effective Dec. 22, 1997.
Passed the three financial reform bills by the National Assembly on Dec. 29, 1997. The Financial Supervision Board will be under the Prime Minister’s office.
Submit legislation concerning hostile takeovers to harmonize Korean legislation on abuse of dominant positions in line with industrial countries’ standards. Publication of foreign reserve data.
The Bank of Korea’s deposits with nonresident branches and affiliates of domestic institutions will not be increased after end- Dec. 1997.
Eliminate interest rate ceiling. Korea was to submit legislation to National Assembly to remove interest rate ceiling as soon as necessary procedures are completed, but not later than Feb. 28, 1998.
Raised ceiling on aggregate foreign ownership of listed Korean shares from 26 to 50 percent and the individual ceiling from 7 to 50 percent on Dec. 11, 1997. Raised the aggregate ceiling on foreign investment in Korean equities to 55 percent on Dec. 30, 1997. Under Korea’s foreign direct investment law, Korea already allowed foreign investors to buy equity in the stock market (as well as over the counter) for the purpose of friendly mergers and acquisitions, without limits. Legislation submitted to allow greater foreign ownership of banks. It was announced that foreign participation in merchant banks would be allowed without limit. Publishing data on Korea’s foreign reserves began Dec. 17, 1997. Data on usable reserves of the BOK is published twice monthly (for 15th and the last day of each month) within 5 business days. Data on net forward position of the Bank of Korea is being published monthly. All of these data were placed on the Bank of Korea’s web site, starting May 15, 1998. Began Dec. 24, 1997. The Bank of Korea was to limit its funding of financial institutions to short-term liquidity support, which the BOK offered to commercial banks through its liquidity support program. Increase in interest rate cap from 25 percent to 40 percent was approved by cabinet on Dec. 16, 1997, and became effective on Dec. 22, 1997.
Assume government control of Korea First Bank and Seoul Bank and request the management of these banks to write down the equity of existing shareholders.
These banks came under intensive supervision beginning Dec. 24, 1997. The equity capital was written down, and the government recapitalized these banks and took effective control of the banks by Jan. 31, 1998.
By March 31, 1998 Complete second round evaluation of the remaining 20 merchant banks and suspend operations of those banks that fail to pass the evaluation. Allow foreign banks and brokerage houses to establish subsidiaries.
Completed Feb. 26, 1998.
Completed June 29, 1998 Legislation was enacted to allow the writedown of existing shareholders’ equity in insolvent financial institutions.
By June 30, 1998 Complete an assessment of the recapitalization plans of commercial banks. Introduce legislation to allow a full writedown of existing shareholder equity, eliminating the current minimum bank capital floor for this purpose. Establish a unit for bank restructuring under the Financial Supervisory Board with adequate powers and resources to coordinate and monitor bank restructuring and provision of public funds. In addition to the end-June performance criteria, IMF added the following for end Sept. 1998: Submit legislation to allow for the creation of mutual funds (by Aug. 31, 1998) Require listed companies to publish half-yearly financial statements prepared and reviewed by external auditors in accordance with international standards (by Aug.31, 1998) For end-Dec. 1998: Obtain bids for Korea First Bank and Seoul Bank (by Nov. 15, 1998)
Unit established on Apr. 1, 1998.
Legislation submitted to the National Assembly on Aug. 8, 1998; related legislation put into effect in Sept. 1998. Completed.
At the fourth quarterly review, the IMF staff recommended a waiver to extend the date for obtaining bids for Korea First Bank and Seoul Bank from Nov. 15, 1998, to end- Jan. 1999. Korea First Bank: memorandum of understanding signed with Newbridge Capital, Dec. 31, 1998; Seoul Bank: memorandum of understanding signed with HSBC on Feb. 22, 1999. Completed July 1998.
Introduce consolidated foreign currency exposure limits for banks, including their offshore branches (by Nov. 15, 1988). In addition to end-Dec. 1998 performance criteria, additional criteria were set for end-March 1999: To complete an audit of Korea Asset Management Corporation to international standards by a firm with international experience in auditing this type of agency and to reflect any losses identified in the Korea Asset Management Corporation’s financial statement The Financial Supervisory Commission to complete supervisory examination of the Korea Development Bank and make recommendations to Ministry of Finance and Economy, as needed, as to any remedial actions required.
IMF staff recommended a waiver for this action at the fifth quarterly review but it has since been completed. External audit report completed March 12, 1999. Losses identified in external audit report were reflected in the Korea Asset Management Corporation’s financial statement as of April 30, 1999. IMF staff recommended a waiver for this action at the fifth quarterly review but it has since been completed. Financial Supervisory Commission completed its examination of the Korea Development Bank March 20, 1999. Recommendations coming from the examination were submitted to the Ministry on April 26, 1999.
Structural benchmarks and performance criteria to be met Period of April 1-August 31, 1999 (1) Issue regulation by April 1, 1999, requiring insurance companies that fail to meet the mandatory solvency margin thresholds (specified in the Memorandum of Economic Policies for the fifth review of the stand-by arrangement) to submit recapitalization plans by July 31, 1999. (2) By June 1, 1999, begin publishing data on revenue, expenditure, and financing of the consolidated central government on a monthly basis with no more than a 4-week lag. (3) By June 30, 1999, issue new loan classification guidelines that fully reflect capacity to repay. These guidelines would also cover the treatment of restructured loans and the valuation of equity and convertible debt acquired as part of corporate restructuring. (4) For merchant banks, implement prudential rules for foreign exchange liquidity and exposures based on a maturity ladder approach by July 1, 1999. (5) Issue instructions, effective July 1, 1999, that at least 20 percent of the new guarantees issued by Korea Credit Guarantee Fund and Korea Technology Guarantee Fund will cover only 80-90 percent of the value of guaranteed obligations depending on the credit rating of the firm.
Ongoing. (1) Regulation was issued on March 26, 1999.
Financial Sector Restructuring
The centerpiece of Korea’s structural reform package was financial sector restructuring. Korea’s goals were to have a sound, transparent (improved Korea’s financial reporting, according to international accounting standards), and more efficient financial system. Korea had already begun efforts to reform its financial sector prior to seeking IMF assistance but had not been successful in passing reform legislation. Korea’s initial IMF letter of intent detailed the government’s plans for addressing the financial restructuring of the banks. The Korean government, in consultation with the IMF, prepared a comprehensive action program to strengthen supervision and regulation in accordance with international best practices. The IMF agreement built upon the framework for financial sector reforms that the Korean government had published in November 1997.
In its original letter of intent, Korea specified the need for a credible and clearly defined method for closing troubled banking institutions. The strategy required that troubled institutions present viable rehabilitation plans and close those insolvent financial institutions that failed to carry out their rehabilitation plans within specified periods. Korea also planned to set a timetable for all banks to meet or exceed Basle capital standards.
The disposal of nonperforming loans was to be accelerated. All forms of assistance to banks, including financing from the Korean Asset Management Corporation and the deposit insurance funds, would be provided only as part of viable rehabilitation plans. All support to financial institutions, other than Bank of Korea liquidity credits, were to be recorded transparently in the fiscal accounts. In addition, blanket guarantees were to be phased out and replaced by a limited deposit insurance scheme.
In its first IMF agreement, Korea stated its intentions to restructure and recapitalize troubled financial institutions. Timeframes and rules for doing this were detailed in later agreements that accelerated and strengthened Korea’s plans for addressing these problems. For example, the Koreans were successful in passing financial reform legislation and established a high-level team to negotiate with foreign creditors by the end of December 1997. The Korean government (1) appointed a high-level task force to develop and implement a strategy to address the financial crisis, (2) assumed control of Korea First Bank and Seoul Bank and hired outside experts to develop a privatization plan, and (3) hired experts to conduct due diligence with respect to the balance sheets of merchant banks and to assess the rehabilitation plans.
Other Structural Measures
Other measures included in Korea’s initial IMF agreement were reforms in capital account liberalization, corporate governance and corporate structure, labor market reforms, and information provisions and program monitoring. standards are formula-based and apply risk-weights to reflect different gradations of risk. Since 1992, the rules have been amended. One of the most notable change is the establishment of risk-based capital requirements to cover market risk in bank securities and derivatives trading portfolios. capital account were aimed at increasing competition and efficiency in the financial system. The schedule for allowing foreign entry into the domestic financial sector was to be accelerated. The United States supported these reforms and sought to move them forward quickly. Treasury officials told us that these were conditions they considered necessary to address underlying structural problems. More details were added in later agreements about the other structural reforms. For example, details about support for Korea’s social safety net were added after the first quarterly review in February 1998.
The IMF Made Adjustments in Performance Criteria After Each Review
As part of monitoring Korea’s progress in meeting IMF conditions, the IMF conducted quarterly reviews. After these quarterly reviews, monetary and fiscal targets were revised for the conditions outlined in the original IMF agreement. From the initial review to Korea’s present program, the IMF added details and conditions to structural reforms that address underlying problems in the financial and corporate sector. According to IMF, Treasury, and State Department officials, changes in conditions for Korea’s program reflected the progress made under the IMF’s program.
Korea’s initial program was intended to restore market confidence and limit private capital outflows through the large financing package, which was heavily front loaded, together with sound economic policies. However, according to program documents and our discussions with IMF officials, the program was not initially successful in restoring investor confidence, and private capital outflows far exceeded program projections. According to IMF officials, the changes made to Korea’s macroeconomic targets reflected worsening conditions in the external environment (for example, the weakening of the Japanese yen, affecting Korea’s export competitiveness) and were adjusted to match actual economic data. Nevertheless, the IMF was criticized for the fact that the policies taken in Korea to stabilize the economy caused monetary conditions to become too tight. IMF and Treasury officials told us the IMF projections were overly optimistic at the beginning of the program, based on Korea’s past positive growth, and emphasized that the IMF did not accurately project the “rolling financial crisis” throughout Asia.
Within First 2 Weeks, the IMF Modified Korea’s Program to Accelerate Funding Disbursements
According to IMF officials and program documents, Korea’s response to the program was slow at first because of its national presidential election on December 18, 1997. The positive impact of the announcement of the IMF program on exchange and stock markets was small and short-lived. In the 2 weeks from the announcement until the first biweekly review, the won dropped to its low of 1963 won per dollar on December 23, 1997. Before the crisis, the value of the won was 915 to the dollar on September 30, 1997. Investor confidence was further undermined by doubts about Korea’s commitment to the IMF program, as the leading candidates for the presidential election hesitated to endorse it publicly. Moreover, new information became available about the state of Korea’s financial institutions, the level of its usable reserves, and short-term obligations falling due, raising concerns among investors about Korea’s widening financing gap. Part of Korea’s agreement was to improve transparency in its financial reporting because the levels of usable international reserves, corporate debt, or banks’ nonperforming loans had not been readily apparent from published data.
A temporary agreement was reached with the private, foreign bank creditors on December 24, 1997, to continue lending to Korean borrowers (to roll over short-term loans), and discussions on voluntary rescheduling of short-term debt were initiated. At the same time, Korea issued another letter of intent requesting the IMF to accelerate its funding, which the IMF agreed to do. Specifically, on December 24, 1997, Korea asked the IMF to modify the disbursement date under the stand-by agreement to December 30 from the original date of January 8, 1998, to permit an advancement of its IMF drawings. In negotiating the advancement of funds, Korea agreed to strengthen its structural reform agenda to accelerate financial sector restructuring and facilitate capital inflows into the domestic economy and bond market. Interest rates were raised significantly to about 30 percent at end-December 1997 from rates of about 12 percent in September 1997. Conditions for the Bank of Korea to provide foreign currency liquidity support to banks were tightened. One condition (quantitative performance criterion) of the IMF agreement was to raise the interest rate on Bank of Korea foreign exchange loans to commercial banks. These actions were considered a signal of a clear commitment by the incoming administration to support reforms under the IMF program.
According to IMF documents, signs that Korea’s economy was stabilizing emerged by the time of the second biweekly review on January 8, 1998. Korea met the end-December 1997 quantitative performance criteria for the net domestic assets and net international reserves. The other conditions for the review were met, and efforts to liberalize Korea’s capital account were accelerated substantially. For example, Korea lifted the restriction on foreign borrowing of over 3-year maturity on December 16, 1997.
To address Korea’s vulnerability to its short-term debt and improve its rollover rates, on January 28, 1998, Korea reached an agreement-in- principle with private bank creditors. IMF and Treasury documents note that this agreement was a voluntary rescheduling of Korean banks’ short- term debt into loans with longer-term maturities. The agreement covered interbank deposits and short-term loans maturing during 1998, equivalent to about $22 billion.
First Quarterly Review Showed Korea’s Market Situation Improving
The IMF completed its first full quarterly review of Korea’s program in February 1998. According to IMF documents, Korea’s exchange market situation was improving, but there were growing signs of a decline in economic activity. According to IMF, Treasury, and Korean officials, the agreement with bank creditors had helped to improve Korea’s financing conditions. Korea’s usable reserves had increased, and the won had appreciated by nearly 20 percent from the low in late December 1997.
In terms of fiscal policy, the IMF said it had proved difficult to adjust government spending rapidly. With the large currency depreciation occurring and domestic demand contracting, the IMF made adjustments in Korea’s program. The revised program was based on lower (but still marginally positive) growth projections. The fiscal target for 1998 was lowered from a surplus of 0.2 percent of GDP in the original program (including bank restructuring costs) to a deficit of 0.8 percent of GDP. The IMF and Korea agreed that Korea would maintain a tight monetary policy as long as the exchange market situation continued to be fragile.
While Korea had already taken a number of steps to implement the program’s comprehensive structural reform agenda, the revised program specified additional commitments in financial sector restructuring and capital account and trade liberalization. For example, Korea was to establish a unit for bank restructuring under the Financial Supervisory Board with adequate powers and resources to coordinate and monitor bank restructuring and the provision of public funds. Korea established this unit in April 1998.
After the new government took office in late February 1998, business, labor, and the government reached a tripartite accord. Based on this accord, the reform agenda was broadened to include measures to strengthen the social safety net, increase labor market flexibility, promote corporate restructuring, and enhance corporate governance.
At Second Quarterly Review, the IMF Reported that Korea’s Reforms Were on Track
According to IMF documents and announcements, Korea’s program remained on track, and market confidence in the new government’s commitment strengthened. Growth projections were marked down further during the second quarterly review, which was completed May 29, 1998. Korea had successfully launched a global sovereign bond issue, significant capital inflows into the domestic stock and bond market had been registered, and usable reserves now exceeded $30 billion. According to IMF documents, Korea’s sharp decline in economic activity, however, was weighing heavily on corporations, necessitating an acceleration of structural reforms in the financial and corporate sectors. Korea had lowered interest rates, but monetary policy continued to focus on maintaining exchange market stability. In view of the weaker outlook for growth, the fiscal target was eased further to permit automatic stabilizers (that is, adjustments in tax and government spending) to take effect.
In Korea’s July 1998 letter of intent, Korea reported that it had made substantial progress in overcoming its external crisis. However, market sentiment weakened somewhat in June in view of growing concerns about the domestic recession and the impact of economic conditions in the region. Nevertheless, the won remained broadly stable and appreciated vis- à-vis the U.S. dollar in July, permitting Korea to further lower interest rates to pre-crisis levels. The Korean government prepared a supplementary budget to support economic activity and strengthen the social safety net. Output was now projected to decline by 4 percent in 1998, inflation had decelerated and was expected to average 9 percent during the year, and the current account surplus was expected to reach nearly $35 billion (over 10 percent of GDP).
The IMF’s Third Quarterly Review Focused on Strengthening Structural Reforms
The IMF’s third quarterly review, completed on August 28, 1998, focused on a further easing Korea’s macroeconomic policies to mitigate the severity of the recession and on strengthening Korea’s structural reform agenda. For example, Korea broadened its corporate restructuring efforts significantly, supported by the World Bank. In a July 23, 1998, memorandum of understanding between the government of Korea and the World Bank, Korea agreed to develop a framework and capacity to do voluntary corporate workouts and to provide policy support for corporate restructuring, in addition to taking other actions to reform the corporate sector. By the end of October 1998, Korea had drawn $27.2 billion of the total financing package for Korea, including $18.2 billion from the IMF and $9 billion from the World Bank and the Asian Development Bank.
Output was projected to contract by 5 percent in 1998, inflation had decelerated further and was expected to average 8.5 percent during the year, and the current account surplus was still expected to reach nearly $35 billion. Exchange market conditions permitting, interest rates were to be lowered again. According to Korean officials, they reluctantly agreed with the IMF to raise Korea’s fiscal deficit target to 4 percent of GDP. Korea introduced a supplementary budget to increase government spending, including additional spending for social programs for those most affected by Korea’s recession.
IMF Staff Recommended a Waiver in Fourth Quarterly Review
The IMF completed its fourth review of Korea in December 1998. The IMF staff recommended, and the Executive Board granted, a waiver for the structural performance criterion to obtain bids for the sale of two Korean banks. According to IMF staff, Korea’s implementation of policies had been good, and all their quantitative criteria had been observed. It was apparent that Korea would not obtain bids for selling two Korean banks by the November 15, 1998, deadline, although the bidding process had begun. Since the World Bank was assisting Korea with this process, according to IMF staff, completing this action was a matter of timing, and it was necessary to allow a sufficient period for Korea to complete these negotiations. This action has since been completed.
Fifth Quarterly Review Completed
The IMF Executive Board met on April 7, 1999, for Korea’s fifth quarterly review. According to IMF documents, the Korean authorities met all their quantitative performance criteria for end-December 1998 and fulfilled its policy commitments under the program. However, the IMF staff recommended waivers for (1) completing an audit of Korea’s Asset Management Corporation to reflect any losses identified during the audit in its financial statement and (2) delivery of recommendations based on a financial supervisory review of the Korea Development Bank. According to IMF and Treasury officials, Korea has since completed these actions. Korea completed its audit of Korea’s Asset Management Corporation on March 12, 1999, and the losses identified during the audit were reflected in its financial statement as of April 30, 1999. Also, Korea’s Financial Supervisory Commission finished its supervisory examinations of the Korea Development Bank on March 20, 1999, (within the timetable of the review) and made recommendations to the Ministry of Finance and Economy on April 26, 1999.
Status of Program— Reform Efforts Remain Strong
IMF, Korean, U.S. Treasury, and State Department officials we spoke with were consistent in their views that Korea’s reform efforts remain strong, but difficult reforms still need to be made in Korea’s corporate sector. As noted earlier, Korea’s program began slowly due in part to a presidential election. But to date, Korea has made substantial progress in its financial sector reforms. The U.S. Department of the Treasury reported to Congress that Korea had complied with its IMF program. The Treasury reported that Korea’s external financing crisis has been alleviated—the Bank of Korea’s usable foreign exchange reserves recently surpassed $50 billion, reflecting a current account surplus in 1998 of nearly 12 percent of GDP and strong net inflows of portfolio capital. According to the Treasury’s report, Korea’s short-term external liabilities declined by nearly half, from $63.2 billion at the end of 1997 to an estimated $32.5 billion at the end of 1998. The Treasury also reported that Korea’s continued adherence to the restructuring program set forth by the IMF and World Bank will be crucial to Korea’s sustained recovery. Korea has already begun to repay its IMF borrowings for a total of about $6.1 billion, as of April 30, 1999.
According to Korean government documents, Korea’s domestic economy remains weak, although stable. While Korea’s economy still is vulnerable to external shocks, the government is projecting growth for 1999. IMF officials have changed its growth projections for 1999 from a negative 1 percent to a positive 2 percent GDP growth rate. As of April 1999, other private sector projections for Korea were also more optimistic. Some officials we spoke with noted that Korea still faced difficult reforms in its corporate sector and emphasized that it would take time for Korea to complete the reforms they have begun.
The IMF's Financial Arrangement with Russia
Early Programs and the Context of the 1996 IMF Russia Programs
The early IMF programs in Russia faced unsettled conditions, systemic problems, and large macroeconomic imbalances. During 1992-94, the initial period of market reform, Russia received financial assistance from the IMF in the form of a first credit tranche Stand-By Arrangement (SBA) and two purchases under the Systemic Transformation Facility (STF). From the outset, the Russian economic programs focused on reducing macroeconomic imbalances and moving toward a market-based economy. The IMF, along with the World Bank and other bilateral and multilateral agencies, also began providing a broad range of technical assistance that would develop the supporting macroeconomic management capability. These early programs were implemented under unsettled political and constitutional conditions that severely complicated the already daunting task of stabilizing the economy while transforming its basic features. While significantly reducing the fiscal deficit and curtailing credit expansion aided a decline in consumer price inflation from 2,500 percent at end-1992 to around 200 percent at end-1994, none of the programs was successfully carried through: stabilization remained elusive, reforms fell short of the goals, and inflation remained excessive.
Inflation Was a Primary Focus of 1995 Stand-by Arrangement
The 1995 SBA was negotiated over several months against the backdrop of policy failures and worsening economic performance. For example, in January 1995—midway through program negotiations—the monthly inflation rate accelerated to 18 percent and there was a further $1 billion reserve loss. The SBA was approved in April 1995, despite a large measure of uncertainty regarding the Russian government’s ability and determination to implement the program. The program itself was characterized by what the IMF considered to be a large reliance on expenditure restraint. The SBA program focused on Russia’s achieving a substantial and sustained reduction in inflation, seen as essential for economic recovery. This was to be effected by imposing an even tighter monetary policy and a reduction of the deficit from 5 percent of GDP in 1996 to 2 percent of GDP in 1998. Although inflation in Russia declined significantly in 1995 – the consumer price index was 134 percent at the end of 1995 – it nonetheless remained significantly above the level targeted in the SBA program.
The 1996 Extended Fund Facility Program
The focus of the 1996 arrangement was on reducing fiscal and monetary imbalances while transitioning to a market-based economy. The primary problems were the fiscal deficit, weak tax collection, and excessive government spending.
The recently terminated $10-billion, 3-year EFF arrangement, approved by the IMF in March 1996, was negotiated on the heels of the 1995, 12-month, SBA arrangement, under increasingly adverse political circumstances. The program’s broad objectives were to achieve financial stabilization while transitioning to a market-based economy and to lay the basis for sustained growth. This was to be accomplished by reducing the budget deficit from around 5 percent in 1995 to 4 percent in 1996 and 2 percent in 1998, lowering the inflation rate from around a 7-percent monthly average in 1995 to 1.9 percent per month in 1996, and implementing key structural reforms. In addition to improving tax administration and limiting government expenditures, the fiscal strategy was to reduce the deficit by improving revenue collections – raising the revenue-to-GDP-ratio from around 10 percent in 1995 to 11 percent in 1996 and to 15 percent by 1999. The monetary strategy was to continue to lower inflation and strengthen the banking system by resolving the problem of weak and insolvent banks.
At the time the IMF and Russia were negotiating the 1996 arrangement, the critical problems facing Russia were – and continue to be – fiscal and monetary imbalances, combined with very slow progress toward a functioning, market-based economy. At the heart of the fiscal deficit problem lay weakness in tax revenue collection and government spending in excess of what was affordable. To address the revenue problem, the program focused on improved tax administration, collecting outstanding tax arrears – especially from the energy sector – and eradicating the culture of nonpayment. The Russian government also agreed to resist strong spending pressures and to make cuts in noninterest spending to achieve the deficit reduction target. A restrained credit stance was intended to lower inflation further toward a single-digit annual rate and to serve as the first line of defense against depreciation pressures on the ruble. The 3-year EFF program also continued to press for implementation of the structural reforms key to a market-based economic system, including improving the structure of government spending and treasury functions, strengthening the banking system, reaccelerating the privatization process, and completing the process of trade policy liberalization.
Progress Measured by Quantitative Performance Criteria and Structural Policy Benchmarks
Key to evaluating Russia’s progress in the program, and to the decision to release the next quarter’s loan tranche, were the quarterly performance criteria. These quantitative quarterly performance criteria included the following fiscal, monetary and international reserve targets: federal and enlarged (including regional and extrabudgetary funds) federal government cash revenue floor, limit on the stock of net domestic assets of the monetary authority (that is, currency in circulation and bank deposits at the Central Bank of Russia, ), limit on the monetary authority’s claims on the federal and enlarged floors on both gross and net international reserves.
The 1996 plan was based on an ambitious structural reform program aimed at improving the functioning of markets. The following are some of the 20 structural benchmarks proposed under the 1996 program: By March 31, 1996, Russia was to complete an evaluation of the financial condition of the 10 largest banks.
By June 30, 1996, Russia was to establish procedures for gas prices to reflect variation in transmission costs to launch audit of 5 major fully or majority-owned state owned enterprises and submit legislation for move to an accruals-based system for the profit and value added tax.
By September 30, 1996, Russia was to ensure that all remaining import duties rates above 30 percent are replaced submit specific legislation to improve the fiscal relations between the federal and subnational governments, and conclude an evaluation of the financial situation of the 200 largest banks.
By December 31, 1996, Russia was to complete an annual audit of the Pension and Employment Funds according to international standards, prepare a list and launch an audit of an additional 5 major enterprises in which the state has full of majority ownership, and initiate an implementation procedure to deal with problem banks.
Russia also had to undertake certain prior macroeconomic actions (for example, introduce additional revenue measures) and structural policy actions (for example, revoke import restrictions on alcoholic beverages) before the IMF Executive Board would approve the 1996 EFF program. Both structural performance benchmarks and prior actions for IMF Board reviews of the program were altered frequently throughout the program to reflect changing conditions.
IMF Board Reviews
Overall, the IMF determined that Russia’s efforts during 1996 fell short of the targets. There were seven program reviews during the program’s first year. These seven reviews included four instances of program modification, three occurrences of waivers for nonobservance of performance criteria, and three delays in disbursements. While Russia had success in moderating inflation – the monthly average inflation rate for 1996 was 1.7 percent – there was less success in achieving fiscal goals. For 1996, the federal deficit registered 6.3 percent of GDP instead of the planned 4 percent, and federal revenues fell from 10.5 percent of GDP in 1995 to only 9.5 in 1996, in contrast to the targeted increase of nearly 1 percent in 1996. Moreover, exchange rate stability was bought at the expense of a significant loss of reserves. Additionally, progress in pursuing structural reforms was disappointing, according to the IMF. In the first half of 1996, uncertainties related to the election outcome influenced fiscal performance and revealed the fragility of the 1996 fiscal framework; in the second half of 1996, concerns about the health of the Russian president contributed to heightened uncertainty. More fundamentally, however, fiscal slippages were attributable to a lack of sufficient political commitment to insist on the payment of tax liabilities, especially by large taxpayers, as well as the weak capacity of tax administration and the deficiencies in the tax system. Nonetheless, while they delayed the completion of a number of reviews for failure to meet program conditions, the IMF staff continued to recommend approval of the program, despite uncertainties about the government’s capacity to implement it, because, as the staff said, the new government demonstrated strong leadership, which could lead to a successful program if backed at the highest level.
Program Adjustment and Disbursement Delays Marked the First Four Months of Program Reviews
Russian presidential election concerns dominated the first half of 1996. During this period, the IMF reviewed the program four times (three monthly reviews and one quarterly review), modifying the deficit limits in the first two reviews and making broad performance modifications in the fourth month review. Inflation continued to decline as the monetary authority adhered to a tight credit stance, and the central bank was able to maintain a stable exchange rate corridor despite the political uncertainty and pressure toward ruble depreciation. There were other positive developments: Russia had (1) achieved some structural reforms in banking and tax-related fiscal measures; and, (2) satisfied the quantitative targets in the first two reviews, aided by modification of the deficit limits to accommodate the clearance of accumulated wage arrears and the jump in treasury bill rates. However, the fiscal situation remained quite vulnerable, owing to both internal and external factors. The continuing weakness in revenue collection reflected the lack of will to enforce existing law, deficiencies in the tax system, rising tax arrears, and strong spending pressures with the approaching June presidential elections. The higher treasury bill rates, which raised the interest payments to higher levels than assumed under the program, was in large part due to the highly charged political environment. On this basis, Russia and the IMF agreed to an upward adjustment in the deficit ceiling, while securing the government’s commitment to focus on collecting tax arrears. Two other areas that were also a source of ongoing concern were the sustained depreciation pressures on the ruble, which put the international reserve targets at risk, and the sluggish progress on structural reforms. The staff also attributed the pressure against the ruble, and the consequent loss in reserves, to the market sensitivity generated by this historic, election-dominated situation.
Officials Committed To Program, But Systemic Weakness in Tax Revenue Collection Continue
Throughout this period, the IMF staff commented on the determination of key senior officials to abide by the program, noting their commitment and determined efforts. However, the completion of the fourth review and the disbursement of the July tranche was postponed until late-August because the program had gotten too far off track. Russia had missed its monetary targets and had barely complied with the deficit target. The main concern was the progressive weakening of the federal government’s cash tax revenues, reflecting an environment in which paying taxes appeared to be more a matter of choice than an obligation. The upcoming heavy interest payment schedule and accumulation of wage and pension arrears made the deficit target virtually out of reach. Hence there was a broad reassessment of policy requirements for the remainder of the year to bring the program back on track. The completion of the fourth review was made conditional upon Russia’s meeting end-July targets as modified and significantly increasing tax revenues. Russia also received a waiver for nonobservance of end-June targets. In the end, the IMF staff’s support for the program reflected their assessment that immense pressures had led to Russia’s missing the targets, that the Russian authorities were taking actions to bring the program back on track, and that the Russians’ efforts “deserve the benefit of doubt and warrant continued Fund support.”
Missed Targets, Waivers, Program Modifications, and Delays in Disbursement Characterized the Remainder of the 1996 Program
Three reviews were completed from August through December 1996 (following the completion of the fourth review). The first review focused on progress in structural policies and found the results disappointing, though structural reform efforts had been recently stepped up. Fourty-four modifications were proposed for the structural program, and the Russian authorities agreed to a revised set of 10 new structural benchmarks for the remainder of the year. During this period, the IMF continued to encourage the government to open the treasury bill market to nonresidents so that Russia could have better access to private capital markets. The CBR officials agreed in principle but expressed concerns regarding the volatility of foreign capital inflows that could easily be converted into dollars rather than rolled over into new debt. Meanwhile, by September, the dominant concern was continuing pressure on the ruble and international reserves, despite the favorable inflation trend and the cautious macroeconomic policy. The IMF staff believed that noneconomic, temporary, and reversible factors such as concerns about President Yeltsin’s health, the postponement of the completion of the fourth review, changes in the rules governing nonresident access to the Treasury bill market, and concern about the health of the banking system contributed to the exchange market pressure. While continuing to note the major risks and difficulties in the Russian situation, the IMF maintained a cautious optimism that the authorities would address these problems and continue to achieve program objectives.
At Third Quarter Review, Program Off Track, and Review and Disbursement Delayed–Weakness in Revenue Collection at Source
However, by the third quarterly review, originally scheduled for completion in October 1996, Russia had gotten too far off the program, and the review was delayed until December. Consequently, both October and November disbursements to Russia were delayed. Russia had missed the September international reserve and deficit targets – the deficit of the federal government amounted to 6.7 percent of GDP. There was a marked deterioration in revenue performance because of a tax code change that gave priority to wage payment over meeting tax payments: revenues had declined to 9 percent of GDP at November 1996. The nonobservance of the deficit target was due, in part, to the need to make large interest payments on treasury bills that had been issued at high interest rates in the second quarter. But more fundamentally, the deficit continued to originate from a weakness in revenue collection due to a lack of government resolve to enforce tax laws. As a result of weaker-than-anticipated revenue and higher-than-anticipated interest payments, the IMF and Russia agreed to modifications to the fiscal and monetary performance criteria for end- December 1996. These modifications were to serve as the first step of the 1997 program. Also, understandings were reached on a comprehensive action plan that sought to improve revenue collection by creating a tax- paying culture in Russia rather than just proposing tax measures.
Progress in Structural Reform Lagging, Fiscal Situation Difficult–Waiver Granted Based on Good Faith Efforts
The IMF staff noted that, in hindsight, the structural work plan might have been too ambitious for Russia to manage, given its limited institutional capacity. Even though program revisions had just been introduced in August/September to reflect the slower pace of implementation of structural reforms in the first half of 1996, progress in the structural policy agenda was still lagging at this time. With the important exception of banking reform – where actions were in line with the program – structural reforms fell short of the objectives in all areas in 1996. Only two of the seven structural benchmarks that were the subject of this review had been met, and immediate action was required before the staff could recommend completion of the third quarter review. At the end of 1996, the situation in Russia remained fragile, and the fiscal situation was difficult. However, the staff determined that the authorities continued to demonstrate their firm intention to maintain a restrained credit stance to forestall inflation and to reduce pressure on international reserves. The staff also acknowledged the authorities’ good faith efforts and exemplary cooperation with the IMF. In the end, the IMF granted Russia a waiver for its nonobservance of end- September performance criteria.
Approval of 1997 Program Delayed Pending Completion of Prior Actions
The completion of the May 1997 Article IV staff report also gave the Executive Board’s approval of the 1997 EFF program. The report followed the April negotiations and the setting of program targets. The approval came after Russia implemented a series of prior actions, including submission of the tax code and a new 1997 spending plan to the Duma, a crackdown on large tax debtors, and announcement of transparent privatization procedures. The 1997 program included a revised schedule of disbursements for the 1997 program year (Russia had received no program disbursements since the one following the completed eighth month review in mid-February 1997). As envisaged under the program, performance was to be monitored quarterly on the basis of quarterly performance criteria. However, because of the significant risks that Russia still faced, the IMF continued to closely monitor developments throughout the period of the extended arrangement.
A major focus of the fiscal program in 1997 was the reversal of the declining trend in federal cash revenues in relation to GDP and the elimination of the use of noncash revenue sources. Cash revenues were targeted to increase, on average, to 8.3 percent of GDP in 1997, compared with 7 percent of GDP in 1996. To improve revenue collection, the Russian authorities agreed to major tax reform and the full implementation of the comprehensive November 1996 action plan. The annual limit on the federal deficit in 1997 was set at 5.5 percent of GDP, higher than the original EFF target of 3 percent of GDP for 1997, but lower than the 6.3 percent deficit at yearend 1996. A further reduction in inflation to a monthly rate of 1 percent in 1997 was one of the program’s main economic goals. In addition to implementing the November 1996 action plan in full, the structural program for 1997 was designed to accelerate the process of building the institutional and legal framework to support a market economy. Table VI.2 shows Russia’s performance in some critical areas.
Table VI.2: Russian Federation: Federal Budget Aggregates and Inflation, 1993- 1997 (in Percent of GDP)
13.7 20.2 18.2 2.0 -6.5 874.5 11.4 23.2 21.2 2.0 -11.4 307.4 9.1 15.4 12.5 2.9 -4.8 197.4 7.0 15.8 11.3 4.5 -6.3 47.6 8.3 15.0 10.8 4.2 -5.5 14.2 (actual 1997, 14.6)
Positive Developments in First Half of 1997
Preliminary data at this time were showing that the economy had begun to turn around since the third quarter of 1996. Output appeared to have stabilized in 1997 after years of decline; inflation continued to decelerate – the monthly percent change for the last quarter of 1996 had declined to 1.7 percent; and the exchange rate was stable. Structural reforms had gained momentum in the areas of natural monopolies and public utilities, and the government had eased restrictions on access to capital markets by nonresidents. While the authorities had used a sizable reserve cushion to defend the ruble during 1996, there was a reversal of exchange market pressure in the first half of 1997 attended by large capital inflows. The easier monetary conditions due to the capital inflows and the clearing up of arrears brought with them the associated risk of renewed inflation, and the IMF monetary program was revised for the second half of 1997. Compared to the severe difficulties experienced in 1996, the developments during the first half of 1997 were encouraging. The IMF staff noted, however, that there were still considerable uncertainties in Russia, and that the IMF assumed a potentially large exposure to risk in providing support to the country. Given Russia’s substantial reliance on energy exports, there was also a risk of external shocks, for example, due to a decline in the price of oil or gas. Amid uncertainties about the government’s capacity to implement the program, the IMF approved the 1997 program based on the strong leadership demonstrated by the new government as well as the completion of the prior actions.
Fall 1997: Ripple Effects From the Asian Financial Crisis Spill Over to Russia’s Financial Markets, Compounding Russia’s Fiscal Problems
In mid-1997, the economic crisis that started in Thailand quickly spread to other Asian countries and to Russia, aborting the nascent economic recovery that had just begun in Russia after 8 years of deep output decline. From October 1997 on, Russia continued to experienced recurrent financial crises. The government and the CBR attempted to protect the main economic policy achievements of the recent years—low inflation, a fixed ruble, and the living standards of the people – through foreign exchange market interventions and interest rate hikes, both seen as needed to defend the ruble.
Waivers, Modifications, and Program Delays Ensue
The spillover from the Asian financial turbulence in the fall of 1997 spread to Russia’s financial markets and further undermined investor confidence, already adversely impacted by Russia’s ongoing fiscal problems. Federal cash revenue collections were not improving, and the government was able to achieve the deficit target only by holding down cash expenditures, thus creating new expenditure arrears. Substantial foreign exchange outflows accompanied the financial turbulence. The CBR’s response was to sell foreign exchange and, later, to raise interest rates. Consequently, Russia was unable to meet its international reserve target. Originally intended to be an assessment of end-September performance, the IMF’s sixth quarterly review and the corresponding quarterly disbursement were delayed until January 1998. The delay was due to the serious underlying weakness and slow progress in addressing the fiscal problems, as indicated by the nonobservance of the government revenue performance criterion from January to September 1997. The review also indicated that the September performance criteria, which Russia did not meet, were no longer operationally relevant. The December criteria were being modified, as they were no longer attainable either, and thus could not be applied against Russia’s performance yet. Thus, the review requested a waiver of the applicability of December performance criteria. During this period, structural reforms proceeded generally as envisaged under the 1997 program, particularly in the areas of natural monopolies (gas) and privatization, and there was continued progress in closing and restructuring smaller banks. Overall, however, the IMF staff recognized that the program continued to face serious risks.
New Fiscal Action Plan Addresses Budget Difficulties and Tax Collection
In late 1997, the IMF and Russia created a credible fiscal action plan and developed monetary policy actions and targets to reestablish monetary policy restraint, which had deviated considerably from the program. On the fiscal side, the discussions emphasized the difficulties in controlling budget expenditures, as well as ineffective efforts to collect taxes from large debtors, as the source of fiscal problems. For example, the inability of the government to pay its own bills, combined with extensive use of monetary offsets and noncash mechanisms to settle budgetary arrears against tax debtors’ arrears, undermined incentives for paying taxes in cash. The Russian government agreed to take steps (prior actions) based on the newly developed strategy to bring the fiscal program back on track, including the abolition of all types of noncash tax arrangements on January 1, 1998. The monetary policy discussions were concerned with the CBR’s response to sizable foreign exchange outflows and how to ensure that these outflows would not become a source of inflationary pressure. Informal and flexible understandings were reached on a revised monetary program for end-December 1997 that permitted some room for expansion of base money but also emphasized keeping inflation on a downward trend and protecting international reserves. To complete the review, the government had to undertake fiscal measures, agree upon targets for the 1998 federal budget, revise monetary performance criteria for end- December 1997, and complete actions on the structural side.
Lack of Political Will Behind Lax Revenue Collection
The IMF staff conceded that little had been accomplished on the fiscal side by end-December 1997, particularly in the collection of tax revenues, owing to a lack of “forceful and focused implementation,” along with slow progress in improving tax administration, and that the credibility of the Russian authorities was at stake. However, they recommended the completion of the sixth review based on the newly adopted fiscal action plan that brought a new approach to tackling the fiscal problem and the expectation that the authorities would make a concerted effort to follow through this time.
Cabinet Changes Delayed 1998 Program Approval and Disbursement of First Tranche–Low Oil Prices Led to Further Program Modifications
During February 1998, amid the ongoing pressures on Russia’s financial markets, an IMF mission team visited Moscow to hold discussions for the seventh quarterly review and to complete the talks begun earlier on the 1998 program. The subsequent dismissal of Prime Minister Victor Chernomyrdin in March and the Duma’s approval of Yevgeny Kiriyenko in April, together with weak oil prices, delayed the review and implementation of the program, as well as the disbursement of the $700 million credit tranche. Follow-up staff visits took place in April and May to revise the fiscal targets and policies for 1998.
1998 Program Approved Amid May Financial Crisis
In mid-May, following the formulation of the 1998 program, a severe financial crisis hit Russia, coinciding with renewed financial instability in Asia (Indonesia) and labor unrest in Russia. The CBR’s interventions in the foreign exchange market led to a large decline in reserves, and sharp increases in interest rate and financial volatility underscored Russia’s vulnerability to changes in market sentiment. The IMF staff again recognized that the program might have to be revisited unless confidence returned. The completion of the review and approval of the 1998 program occurred in June 1998, following Russia’s completion or satisfactory progress in 27 fiscal, financial, and structural measures (many were from the November 1997 Fiscal Action Plan) and observance of the March targets. Some measures included (1) collecting taxes from large tax debtors, (2) taking steps to improve tax collection, (3) establishing better monitoring and control over expenditure commitment, and (4) identifying additional expenditure cuts. Although Russia missed the deficit and cash revenue targets for end-March, no waiver was requested, though a waiver was granted for nonobservance of one December 1997 performance criterion. The staff also supported Russia’s request for the extension of the EFF arrangement for a fourth year in light of the delayed purchases during 1996-97 and the need to catch up with the original program objectives.
The 1998 Program Emphasized Expenditure Cuts and Pursuit of Tax Debtors With Large Arrears
The Russian government favored achieving the deficit target through spending cuts, as officials did not think that they could collect the required amount of cash tax revenues or that the Duma would agree to the required tax measures. However, the IMF staff’s opinion was that expenditure cuts often translated into new expenditure arrears, hence they emphasized strengthening collections from large, delinquent tax debtors. In the end, the program relied on both approaches. For example, the Emergency Tax Commission met in May and made a decision to collect arrears from a number of large tax debtors, and the Expenditure Reduction plan was adopted by presidential decree that month as well. Eliminating mutual offsets, which undermined the incentives to pay taxes in cash, was also critical to resolving the fiscal problem. No new offset operations had been approved since January 1, 1998, and federal government abstention from any offset operations was to be a performance criterion under the 1998 program.
Structural Reforms Were Front-Loaded; Transparency and Accountability Were Emphasized
The 1998 structural reform program was front loaded with a wide range of measures taken as prior actions ahead of the IMF Executive Board’s consideration. Structural reforms that would have important macroeconomic impact over the medium term were designated benchmarks for each quarter. Some areas of focus for the structural reform agenda included making improvements in corporate governance through ensuring a more transparent accounting by public utility and transport monopolies, engaging in an open and competitive privatization process, liberalizing the trade regime, and strengthening the prudential and supervisory framework of the banking sector. Some of the fiscal prior actions Russia had to undertake for the completion of the seventy quarterly review were based on elements from the November 1997 Fiscal Action Plan, for example, collecting taxes from large tax debtors, establishing better monitoring and control over expenditure commitments, and identifying additional expenditure cuts needed to observe the program targets. Progress in structural reforms continued to be based on an overall assessment, but with a particular emphasis on the structural benchmarks.
1998 Program Had Substantial Risks
While the IMF’s projections for 1998 and beyond indicated a strengthening of Russia’s balance of payments over the medium term that would permit Russia to service its obligation to the IMF, the IMF staff was cognizant of substantial risks to the program, such as: a variability in capital flows and foreign exchange outflows, magnified by Russia’s dependence on nonresident’s participation in the treasury bill market (as illustrated by May 1998 events); a vulnerability to external shocks, given Russia’s reliance on energy a sluggish pace in transitioning to a market economy; and the upcoming elections that could undermine the government’s will and ability to implement tough measures.
Nevertheless the IMF staff indicated that the program was deserving of continued IMF support because of the government’s strong commitment to the program and the important steps it took to stabilize and reform the economy during the first 2 years of the EFF. Further, the staff noted, the Russian authorities were taking additional prior actions before the IMF Board meeting, were implementing many of the fiscal measures, and were committed to an ambitious structural reform agenda.
Economy Vulnerable to Variable Capital Flows and Foreign Exchange Outflows
The Russian government had financed its high, and ultimately unsustainable, budget deficits by selling ruble-denominated, short-term debt to both foreign and domestic investors. By May 1998, nonresident investors were holding about one-third ($20 billion) of domestic treasury securities. The government borrowed in capital markets and issued treasury bills and bonds at high yields to attract capital. This added a heavy debt service burden to the Russian budget. Further, the short-term maturity of the debt meant that Russia constantly had to roll over the debt. This made the economy highly vulnerable to changing investor sentiments in the capital market. As long as foreign and domestic investors were willing to renew short-term debt, this practice could continue, but Asia’s financial problems intensified the instability in global financial markets. The combination of high yields, deteriorating investor sentiment, and the short-term maturity of the treasury bills raised investor concerns that the Russian government would not be able to meet around $1.5 billion in debt service that fell due each week in the remainder of 1998. By June 1998, domestic borrowing to finance the federal budget came to a virtual halt.
June 1998: Russia Requests Additional Funds to Avert Financial Crisis
The Russian government had been in a race between its need to collect more taxes and to pay the rising interest bill on its growing debt – the government had to roll over more than $1 billion per week of treasury bills. This became impossible, as export revenues declined with falling oil and commodity prices and interest rates sharply increased when capital fled the country. The persistent weaknesses in tax collection and government spending in excess of what was affordable exacerbated the situation. Russia was forced to request international assistance to replenish international reserves, to overcome liquidity problems arising from foreign investors redeeming their short-term ruble-denominated debt, and to provide the government with reserves of dollars and other foreign currencies to keep the ruble at its current value in foreign exchange markets.
The government needed more dollars to attempt to prevent the ruble from losing too much of its value against the dollar. A depreciated ruble could create serious problems for the Russian banks and industries that had to buy dollars with rubles to repay their loans from foreign banks. It could also reignite the ruinous inflation that had plagued Russia in the early 1990s by raising the price of imports.
IMF Approves Request – Exceptional Risk Noted
Recognizing that it was a calculated risk,and to try to help Russia avoid devaluation, the IMF made a decision to provide $11.2 billion in extra funding on an augmented EFF arrangement on July 20, 1998. The financing consisted of an increase in the EFF arrangement of about $8.3 billion, and about $2.9 billion under the Compensatory and Contingency Financing Facility (CCFF) to compensate for a shortfall in export earnings, mainly due to lower oil prices. Of the augmented amount to be provided under the extended arrangement, about $5.3b was to be made available under the Supplemental Reserve Facility (SRF), and the remainder was new EFF funding. The augmentation of the extended arrangement came from borrowing the equivalent of about $8.3 billion under the IMF’s rarely used General Agreement on Borrowing.
As June 1998 data were not available to assess Russia’s performance under the 1998 program, this requirement was waived in the proposed decision, and the IMF approved the first disbursement under the CCFF. The remainder of the disbursements were to be in three additional installments phased through February 1999. Because of Russia’s delays in implementing the personal income tax and pension measures, the amount being made available immediately was reduced from $5.6 billion to $4.8 billion. The difference was to be made available in September, assuming the measures were satisfactorily implemented.
New Package Could Not Halt Crisis
The new package included fiscal measures to aimed at reducing the fiscal deficit. These included: tax reforms, measures to increase tax revenues, and spending cuts; new structural reforms to address the arrears problem and promote private sector development; and steps to reduce the vulnerability of the government debt position (for instance, a voluntary restructuring of short-term treasury bills).
The July 20, 1998 announcement of the IMF’s additional policy package had a positive, but very short-lived, effect on Russia’s financial markets. Ultimately, the Duma’s lack of support for the program in the areas of personal income tax and pension fund financing and the veto by the president of several measures led the IMF to reduce the initial amount of the disbursement from $5.6 billion to $4.8 billion. The program also faced opposition in the key energy sector, and the collection of overdue tax payments from a number of oil companies proved difficult. Finally, the government-owned Sberbank’s decision to not roll over its sizable treasury bill holdings falling due in the last 2 weeks in July culminated in cancelled bond auctions because of prohibitively high borrowing rates. With pressure growing against the ruble and spreading to the banking sector, the CBR was forced to intervene on a large scale. However, these actions were not enough to avert a serious crisis. Russia was facing a full-scale banking and currency crisis by mid-August.
Russia’s persistently large fiscal imbalances, heavy reliance on short-term foreign borrowing financed at high interest rates, the impact of the declining price of oil on Russia’s external balance, and delays in structural reform led to Russia’s replacing Asia in August 1998 as the center of the financial crisis afflicting emerging markets, thus potentially erasing many of the gains of prior years.
Russia Defaults on Debt and IMF Suspends Program
In August 1998, the Russian government abandoned its defense of a stable ruble exchange rate – one of the major accomplishments of the previous years – essentially devaluing the ruble, forced a restructuring of government domestic debt, and placed a 90-day moratorium on commercial external debt payments. The financial crisis intensified following the dissolution of the Kiriyenko government and the approval of Yvegeny Primakov as Prime Minister on September 11, 1998. On that day as well, the German government acknowledged that Russia missed virtually all of a DM800 million interest payment due on August 20 on sovereign debt dating from the Soviet era. Russia’s decision to unilaterally restructure its ruble-denominated sovereign debt and impose a moratorium on private external debt payments had significant repercussion in the financial markets, effectively destroyed Russia’s external creditworthiness, and cut Russia off from international capital markets. Currently, Russia’s debt service exceeds Russia’s ability to pay. The IMF’s second tranche was scheduled to be delivered on September 15, 1998, but the IMF has made no further payments following the initial $4.8 billion disbursement because of the Russian government’s failure to meet its loan conditions.
According to the IMF, the immediate cause of the Russian economic crisis was the growing loss of financial market confidence in the country’s fiscal and international payments situation, leading to a loss of reserves and an inability to roll over treasury bills as they matured. However, fundamental problems having to do with Russian economic policy and economic structure lay behind Russia’s vulnerability.
Russia’s Problems Are Deeper Than the Deficit
According to the IMF and the Congressional Research Service, deeper problems involving the incomplete restructuring of Russia’s economy caused Russia’s vulnerability. Russia’s fiscal problem originated in Russia’s failure to reform its huge and inefficient tax system, resulting in inadequate tax collection. Further, the culture of nonpayment and the widespread use of barter have made it difficult to resolve the fiscal imbalances. According to one estimate by Russia scholars, more than 50 percent of payments are conducted by barter and 40 percent of the tax revenues are paid in a nonmonetary form. Public spending has not been adequately controlled, and the government has not been able to cover its expenditures with revenues. Other structural problems include the lack of clarity in the administrative relationship between the federal government in Moscow and the regional and local governments. This situation produces confusion and conflict over control of assets and tax authority. The vagueness of relationships is further complicated by problems in dealing with the oligarchs, a group of individuals who have amassed a great deal of wealth and who control the major banks and enterprises. There has also been slow progress in making key structural reforms such as introducing accountability and transparency at all levels of government operations, establishing a federal treasury system, and restructuring enterprises and the legal framework, which adversely affects the economy’s performance more broadly.
The IMF’s Financial Arrangement with Uganda
History of the IMF Arrangements With Uganda
Years of war and civil strife in the 1970s-1980s destroyed Uganda’s infrastructure, public services, and agricultural production and impoverished the population. Per capita GDP in 1986 was 60 percent below its level of 1970, annual inflation had risen to 240 percent, and external debt service was more than 50 percent of exports. Exports other than coffee had all but ceased by 1987. The country had annual declines in terms of trade each year from 1986 to 1992. However, the country has been undergoing successful macroeconomic adjustment and structural reform with IMF and other donor support since 1987. Economic growth has averaged over 5 percent per annum since 1987, but a European Union representative in Uganda told us in April 1998 that much of the country’s growth has been “recovery growth” and that the country was only reaching levels in 1998 that it was at in 1972. He also said that, after 25 years of war and chaos, with the society surviving largely at the subsistence level, the country was vulnerable to corruption.
Uganda has had 10 IMF arrangements since 1987. The current 3-year ESAF arrangement approved by the IMF Executive Board in November 1997 totals about $138 million and is to support the Ugandan government’s 1997/98-1999/2000 economic plan. The first semiannual installment of $27.6 million of the first annual arrangement was made in November 1997. In April 1998, Uganda was the first country to complete an international initiative aimed at reducing the debt burden of some heavily indebted poor countries. The IMF has had a resident representative in Uganda since July 1982. U.S. Treasury officials said that, over the past few years, problems have become apparent in (1) government privatization of state-owned enterprises, (2) corruption within government, and (3) government military spending. IMF and U.S. Treasury officials said that, unlike many governments, the Ugandan government is committed to addressing the corruption problem. There appears to be increased emphasis by the IMF and other donors on reducing corruption within the government and holding down military expenditures to ensure that funds are available for needed social spending. The IMF resident representative also told us in April 1998 that the rule of law needs to be strengthened since laws, regulations, and procedures are weak throughout the system.
According to the external (independent) experts’ 1998 evaluation of ESAF, the government’s reform program benefited from intensive public education and consensus-building initiatives. The external evaluation also noted that the Ugandan president defended government policies in the face of public opposition and protests, rather than opting for political expediency as is done by “most presidents.” IMF officials said the Ugandan parliament supports the ESAF program, although there are some questions among legislators about the speed at which it is implemented. While the Ministry of Finance is responsible for specific monitoring of program performance criteria and benchmarks, the parliament’s Economy Committee monitors the program in a general way. IMF missions to Uganda meet with the president, the Ministry of Finance, and the Central Bank, and in recent years have also met with noneconomic ministries, parliamentary committees, nongovernmental organizations, and private- sector organizations.
The IMF is providing technical assistance to the government to implement changes in customs management and administration, establish a large-taxpayer unit for the 100 largest taxpayers, improve budget management through improved expenditure control and promote secondary markets in treasury bills, and improve the statistical base through enhanced collection and reporting of national accounts, revenue, expenditures, balance-of-payments and debt statistics, and implementation of prior technical assistance missions’ recommendations.
Uganda’s Performance Under the 1994/95- 1996/97 Annual Arrangement
The IMF reported that, during the annual arrangement in 1994/95-1996/97, annual real GDP growth averaged 8 percent and inflation was 5 percent. The fiscal deficit, excluding grants, was reduced from 11.2 percent of GDP in 1993/94 to 6.5 percent in 1996/97. The external current account deficit, excluding grants, declined to 6.1 percent in 1996/97, and improved balance of payments increased international reserves to 4.6 months of imports of goods and nonfactor services. Government elimination of marketing boards, price controls, export taxes, and foreign exchange restrictions contributed to expansion and diversification of the export base. Uganda’s debt service ratio as measured by the annual payments on debt outstanding as a ratio of export earnings fell from 53.7 percent in 1993/94 to 18 percent in 1996/97 following Paris Club debt reschedulings.
The external experts’ 1998 evaluation reported that the 1994-97 ESAF arrangement did not need a stabilization component and consequently focused on a development agenda of structural reforms. The scope of IMF- government policy dialogue focused on issues not traditionally within the IMF’s area of expertise. As part of Uganda’s structural adjustment, the following reforms were undertaken.
The civil service was reduced in size by 25 percent, noncash benefits were monetized and salaries increased, and army demobilization was completed.
Within tax policy reforms, the tax identification number system was expanded, a value-added tax (VAT) introduced, most discriminatory tax exemptions were eliminated, and a new income tax bill was submitted to parliament.
The Bank of Uganda was restructured and its recapitalization begun, two commercial banks were restructured, the Uganda Commercial Bank was recapitalized and steps to privatize it begun, and enforcement of adequate capital requirements in the banking sector was undertaken.
Fifty-five public enterprises were privatized, actions were initiated to privatize telecommunications, and a communications act and amendments to remove the Uganda Electricity Board’s monopoly and regulatory powers were submitted to parliament.
Import tariffs and import duty exemptions were reduced, export taxes were eliminated, and an external debt-management and borrowing strategy that eliminates nonconcessional borrowing was implemented.
IMF disbursements for the 3 -year arrangement were $24.5 million in September 1994 and $26.3 million in April 1995; $29.8 million in December 1995 and $29 million in May 1996; and $33.7 million in December 1996 and $32.5 million in May 1997.
Uganda’s New 3-Year Arrangement and the First Annual Arrangement
On October 22, 1997, the government requested a new 3-year ESAF arrangement of about $138 million to support its economic plan for 1997/98-1999/2000. Uganda’s fragile external position left it vulnerable to external shocks; and it faced deteriorating terms of trade, uncertainty over the effectiveness of revenue measures, and substantial expenditure pressures. The IMF approved the arrangement on November 10, 1997. IMF officials said that other donors wanted Uganda to have an IMF program as an anchor for their assistance. They also said that some IMF executive directors felt that Uganda needed assistance on structural issues such as financial sector reform, privatization, trade liberalization, and social spending. IMF and U.S officials emphasized the Ugandan government’s commitment to reform. The IMF made its first disbursement to Uganda under the new arrangement in November 1997 for $27.6 million.
Quantitative Performance Criteria and Benchmarks
The quantitative performance criteria for Uganda focus chiefly on bolstering Uganda’s liquidity and creditworthiness by improving its ability to reduce inflation, by garnering resources readily usable for the purpose of financing deficits in the balance of payments, and by stabilizing the foreign exchange value of the currency (Ugandan shilling).
The quantitative performance criteria for the first annual arrangement covered the following:
Ceilings were set on net domestic assets of the banking system as a monetary policy measure intended to control the rate of inflation by limiting the amount of money in circulation. Increases in the net domestic assets of the banking system are, in effect, increases in outstanding loans to the nonbanking sector that raise the amount of money in circulation and represent a potential source of inflation.
Limits were set on the net claims of the banking system on the government, as a mechanism to restrict the growth rate of government borrowing. Net claims of the banking system on the government are loans to the government by the banking system. Bank loans to the government may either increase the amount of money in circulation and possibly raise the rate of inflation in the country or raise the interest rate by fostering competition with the private sector for loans. Moreover, by discouraging banks from lending to the government, limiting net claims may also serve as a fiscal restraint on the government.
A prohibition was set on the issuance of promissory notes by the government to curb the rate of growth of government spending financed through issuance of negotiable instruments, such as bonds. This fiscal restraint prohibits government borrowing from the public to finance government expenditures.
Arrears on outstanding external debt was forbidden. This prohibition enforces the Ugandan government’s agreement with the IMF and the World Bank to maintain an on-time payment history to remain eligible for past and future debt reduction benefits under the HIPC.
The Bank of Uganda was prohibited from incurring debt with a maturity of less than 1 year. Short-term external debt of the Bank is loans from external sources contracted by the Bank when it is unable to provide sufficient foreign exchange to pay for expenses that are incurred for routine international transactions. This prohibition, therefore, ensures that the Bank maintains sufficient foreign exchange on hand to pay for each year’s imports of good and services. Consequently, short-term credit extended to Uganda to facilitate trade with international trading partners cannot be converted to long-term international debt.
Limits were established on new public- or publicly-guaranteed nonconcessional debt. This was intended to reduce total external debt by restricting government borrowing from international sources, unless the debt contains a grant element of at least 35 percent.
A minimum net international reserve level for the Bank of Uganda was set.
Setting a minimum reserve level enhances the availability of foreign exchange for the purposes of stabilizing the value of the currency and maintaining adequate foreign exchange to pay for several months of imports of goods and services.
Table VII.2 shows the specific criteria and timetable, or benchmarks, for the first annual arrangement.
Adjustments to be made for import support in excess of cumulative projections. Adjustments to be made for debt service paid by the central government in excess of cumulative projections. Excludes notes issued to regularize domestic payment arrears not to exceed 24.1 billion. This criterion must be continuously observed.
Excludes debts contracted in the context of reschedulings. External debt with maturity of less than 1 year excluding normal import related credit. Concurrent adjustments to be made in case of adjustments in ceiling of net domestic assets and net claims on government.
Structural Performance Criterion and Benchmarks
The structural performance criterion for the first annual arrangement was to complete government auditing of at least 200 VAT payers, 50 of which would be from the top 400 VAT-registered taxpayers, and the rest of which would be based on revenue-risk criteria. Achievement of the criterion was to be completed by December 31, 1997. Three prior actions for the removal of import bans by March 31, 1998, were also established. Table VI.3 shows the structural performance benchmarks for the first annual arrangement.
Table VII.3: Structural Performance Benchmarks for the First Annual Arrangement CategoryPerformance benchmark Privatization
Relinquish government control of 80 public enterprises by December 31, 1997.
Relinquish government control of 89 public enterprises by March 31, 1998.
Relinquish government control of 95 public enterprises by June 30, 1998.
Divest 23 enterprises including 7 with asset values of 5 billion Ugandan shillings or more by June 30, 1998; divestiture of at least 3 of these 7 large enterprises by December 31, 1997.
Offer Uganda Telecommunications Ltd. for sale following its separation from the Uganda Posts and Telecommunications Corp. by December 31, 1997.
Set the size of the number-limited civil service on the payroll, excluding primary school teachers, at 57,100 by December 31, 1997, and 55,600 by June 30, 1998.
Gain Cabinet approval of agreed structures and establishments for 9 central ministries/departments by January 31, 1998.
Reduce Uganda Electricity Board employment from 3,060 as of June 1997 to 2,800 by December 31, 1997, and 2,300 by
Ensure minimum nonwage budgetary expenditures for the Priority Program Areas of health and education at $24.6 million by December 31, 1997, and $45.5 million by June 30, 1998.
Audit 600 taxpayers based on revenue/risk criteria by June 30, 1998.
Conduct annual on-site inspections of at least 40 percent of banks by June 30, 1998.
Uganda’s Observance of Criteria and Benchmarks
In its March 24, 1998, Article IV consultation and midterm review, the IMF staff reported that the government had met its quantitative and structural performance criteria for December 31, 1997, with the exception of the government’s net position vis-à-vis the banking system. This criterion was missed, according IMF staff, because of the more rapid liquidation of domestic nonbank liabilities than expected (government checks cleared the banking system sooner than expected). The IMF Executive Board granted a waiver because nonobservance was deemed to be technical in nature, as opposed to a policy violation. Performance was reported as satisfactory with respect to the structural benchmarks. However, some of the benchmarks were categorized by IMF staff as “observed with delay,” meaning that the benchmarks were met but not within the timeline envisioned. In addition, the removal of three import bans, a prior action with a completion date of March 31, 1998, was met according to the IMF. In the October 28, 1998, IMF staff paper to the IMF Executive Board on Uganda’s request for a second annual arrangement, the staff stated that the government had met the removal of bans on three imports on time. The IMF disbursed $27 million in April 1998.
Uganda’s Second Annual ESAF Arrangement
On October 28, 1998, the Ugandan government requested the second annual ESAF arrangement. The IMF staff had reported in its October 28, 1998, ESAF policy framework paper that heavy rains in 1997/98 had adversely affected Ugandan food and coffee production, transportation, and exports; real GDP growth was 5.5 percent and inflation 5.8 percent. The current account deficit excluding grants as a share of GDP was 8.3 percent. Capital and official transfers financed the current account deficit and generated a balance-of-payments surplus so that gross international reserves rose to 4.9 months of imports of goods and services. The IMF Executive Board approved the arrangement on November 11, 1998. The first disbursement of $23.1 million was made November 25, 1998.
Quantitative Performance Criteria and Benchmarks
The quantitative performance terms and conditions for Uganda‘s second annual arrangement added two criteria to those of the first annual arrangement: a minimum amount of total revenue was to be collected in order to reduce a minimum amount of nonwage expenditures to be made in the priority program areas of education and health so that the social sector would not be overlooked relative to other priorities, particularly military expenditures.
Table VII.4 shows the quantitative performance criteria and benchmarks for the second annual arrangement.
Adjustments to be made for import support in excess of cumulative projections. Adjustments to be made for debt service paid by the central government in excess of cumulative projections.
Minimum expenditure would be increased by no less than 50 percent of the first 8.6 billion of import support in excess of cumulative projections. Excludes notes issued to regularize domestic payment arrears not to exceed U sh 24.1 billion. This criterion has to be continuously observed.
Excludes debts contracted in the context of rescheduling agreements. External debt with maturity of less than 1 year excluding normal import related credit. Concurrent adjustments to be made in case of adjustments in ceilings of net domestic assets and net claims on government.
Structural Performance Criteria and Benchmarks
The following structural performance criteria for the second annual arrangement (1998/99) were to be completed by December 31, 1998: verification by the Verification Subcommittee of the Ugandan government line ministries’ report on arrears outstanding at the end-June 1998 and submission of its findings to the Arrears Monitoring and Reporting Unit, and completion of follow-up site examinations of the banks for which the Bank of Uganda sent a timetable of corrective actions.
Prior actions that were to be completed by March 31, 1999, for the midterm review were the removal of the import ban on cigarettes, and approval of divestiture plans in 1998/99 by the Divestiture and Reform Implementation Committee and commencement of investment search (defined as issuance of information memorandum, advertisement of sale, or placement of shares on stock exchange) for 10 enterprises by March 15, 1999, of which 5 were to be high-priority enterprises.
Table VII.5 shows structural performance benchmarks for the second annual arrangement.
Table VII.5: Structural Performance Benchmarks for the Second Annual Arrangement CategoryPerformance benchmark Privatization
Approval of divestiture plans in 1998/99 by the Divestiture and Reform Implementation Committee and commencement of investment search (define as issuance of information memorandum, advertisement of sale, or placement of shares on stock exchange) for 16 enterprises by June 30, 1999.
Decision by the Cabinet on options for increasing private sector involvement in the operations of the Uganda Railways Corporation by December 31, 1998.
Finalization by the Arrears Monitoring and Reporting Unit of a plan to clear verified outstanding arrears within 3 years
Reduction in the size of the number-limited civil service on the payroll, excluding primary school teachers to 53,190 by December 31, 1998, and 512,640 by June 30, 1999, with a margin of error of up to 99 for new pending cases.
Limitation of the waiting period between the date of reporting to work and that of being put on the payroll to no more than 4 weeks to be a continuous benchmark beginning October 1, 1998.
Completion by the Large-Taxpayer Unit of 10 comprehensive on-site audits by December 31, 1998.
Completion by the Large-Taxpayer Unit of an additional 40 comprehensive on-site audits by June 30, 1999.
Completion of on-site audits of all retail and nonretail gasoline outlets by the Uganda Revenue Authority by June 30,
Completion of on-site examination of four commercial banks that have been identified as showing less-than-full compliance with bank regulations or being in need of stronger management practices, and issuance of relevant examination reports by September 30, 1998.
In the IMF staff paper to the Executive Board on Uganda’s request for the second annual arrangement, the staff stated that the government had met its macroeconomic objectives for 1997/98 and that real growth was reviving and inflation was low. The staff also said the end-June 1998 quantitative and structural benchmarks were largely met, with the exceptions of net claims on the government by the domestic banking system (which was exceeded by a very small margin) and the number of public enterprises privatized (which set back significantly the privatization program).
The 1998 external experts’ evaluation of ESAF noted that the IMF’s traditional role is crisis management and that this has generally been the context for the extension of ESAF arrangements. The evaluation stated that Uganda had fully achieved stabilization and the major macroeconomic reforms had been implemented, and consequently, the IMF has reached the point where it had to decide whether to (1) maintain its exclusive focus on crisis-management and so withdraw from Uganda, or (2) extend its mandate and remain in Uganda. It noted that the case for withdrawal from Uganda is that the IMF’s work is done. The case for continued involvement was that (1) investors and donors still regard Uganda as high risk and want the reassurance that an IMF presence brings, (2) the Ugandan government still needs IMF expertise, and (3) ESAF resources are most productive in an already reformed policy environment such as Uganda’s. The evaluation favored continued IMF involvement in Uganda. U.S. Treasury officials felt that continued IMF involvement in Uganda is warranted because the reform program is still in a fragile state due to (1) serious weaknesses in human and institutional capacity that the IMF is uniquely suited to help remedy, and the recently-identified problems with corruption that are in part related to these capacity deficiencies, and (2) the threats to fiscal and economic stability posed the military security problems in the region.
Uganda’s Nonobservance of Criteria Results in the IMF Delaying of Disbursement
IMF staff conducted their midterm review of Uganda’s performance under the arrangement in February/March 1999 in conjunction with their annual Article IV consultations. Staff found that the government had missed the December 1998 quantitative performance criteria on (1) net domestic assets, (2) net credit to the government by the banking sector, (3) issuance of promissory notes for current expenditures, (4) minimum non-wage expenditures in the social sectors of health and education, and (5) minimum net reserves. The structural performance criterion on the verification of arrears was also missed. The midterm review was consequently not completed and the IMF delayed the second disbursement under the arrangement.
An IMF official said the non-observance was marginal and the country’s macroeconomic picture had not changed, with inflation remaining low and the real growth rate possibly exceeding the government’s target of 7 percent. The official said that Ugandan revenues were very good due to (1) improved controls of corruption in customs, (2) improved tax administration, and (3) income tax reforms, such as a broadened tax net and elimination of tax exemptions, which were paying off. However, the official said the government had used the unexpected revenues to increase military spending from 1.9 percent of GDP to 2.5 percent. Although the increased military spending does not violate IMF criteria, the official expressed concern that government officials not continually expect revenues to exceed expectations in order to pay for increasing military expenditures. The official said that IMF staff’s major concern was that Uganda’s privatization effort was completely off track due to political factors and corruption. The official said there is a loss in government credibility and therefore buyers are reluctant to bid for enterprises in the privatization program. The parliament had suspended the program while it conducts an investigation. The IMF staff set prior actions relating to the privatization program and the financial sector, which the government must meet prior to the staff’s completion of the midterm review, which resumed in May 1999 and is expected to be completed in June 1999. Despite these problems, the IMF official said the Ugandan government has been quick to react to IMF findings, is making efforts to meet IMF conditions, has fired corrupt officials, has promised to hold down military spending, and should still be classified as a good performer.
Criticisms of the IMF
The financial support that the IMF has provided to member countries, along with the conditions attached to that support, has long been a topic of debate. This issue recently received considerable prominence when the U.S. Congress considered an increased U.S. quota contribution to the IMF in 1998. While a full discussion of these issues is outside the scope of this report, several themes, including “moral hazard,” the appropriateness of IMF conditionality, and the effect of IMF programs on the poor, have been consistently raised and illustrate the complexity of this debate.
The issue of moral hazard has two components: (1) the willingness and ability of an international financial institution, such as the IMF, to “rescue” a country from problems that may be of its own doing; and (2) the concern that the financing provided by these institutions is shielding private sector participants from the risks inherent in their investments. In the first instance, critics argue that the incentives for a country to avoid financial difficulties are diminished by its reliance on IMF assistance to lessen the impact of its policy mistakes. In response to this criticism, the IMF stresses that crises inevitably bring painful consequences, and that, in exchange for receiving its financial assistance, countries have to agree to adopt a stringent conditionality program that is designed to address each country’s underlying problems. The adjustments required in implementing such a program can be very costly and painful, and thus should provide sufficient disincentive to countries from pursuing questionable policies. Furthermore, countries are obligated to repay the IMF for the financial assistance provided.
Under the second moral hazard issue, critics of the IMF contend that in providing financial support to countries, the IMF also “bails out” large international banks and other private lenders. When a member country receives financial assistance from the IMF, the funds can be used to pay off existing creditors including those in the private sector. This activity has raised concerns about the efficiency of the international financial system by shielding private sector participants from the risks inherent in their investments. If some creditors are not fully assuming investment risk, and are lending under the assumption that the IMF and other official support will be forthcoming if necessary, distortions could be introduced into the international financial system. The IMF and the Group of Seven (G-7), in recent public announcements, have acknowledged the existence of this threat to the international financial system and are exploring strategies for reducing it. However, it has been argued that the danger of moral hazard should be balanced against the danger of the further spread of financial difficulties, or “contagion.” During a crisis, lenders and investors may try to limit their exposure to all developing countries, not just those in crisis. This can result in countries with sound economic policies experiencing a financial crisis, driven largely by external events out of their control. By providing assistance to nations facing such a crisis, the IMF may also slow or stop the exit of private-sector lending to other developing countries and thus help minimize this potential threat to the international financial system.
The appropriateness of IMF conditionality has also been subject to a considerable amount of debate. First, some critics believe that the IMF has overstepped its original mission by including conditions related to economic and social development strategies (“mission-creep”). Second, some critics have stressed that the imposition of an IMF conditionality program, under crisis conditions, that lacks a political consensus is unlikely to be successful and could in fact generate instability within the country. Third, during the Asian financial crises, several critics questioned the IMF’s underlying economic assumptions for these countries, believing the initial IMF programs in Korea, Thailand, and Indonesia represented the IMF’s standard approach to crises (macroeconomic austerity) that was inappropriate for these countries’ situations. According to those critics, the IMF’s “cookie-cutter approach” was doing those countries more harm than good. In response, the IMF has said that the flexibility of its approach to countries has allowed it to adapt to changing situations. In particular, its increasing emphasis on structural issues has reflected a growing understanding that balance-of-payments problems cannot be resolved if an economy suffers from deep-seated structural weaknesses. Moreover, the IMF has emphasized that its arrangements for individual countries constantly evolve, depending on developments, and that conditions are modified as necessary. The Thai, Indonesian, and Korean programs, for instance, were modified to take account of these countries’ unexpectedly severe recessions. The IMF has also striven in recent years to coordinate its efforts with other international financial institutions, including the World Bank.
The IMF has also been criticized because of the belief that its programs impose undue hardships on the poor. These critics point out that IMF programs often require that governments cut expenditures and reduce budget deficits in order to meet the IMF’s macroeconomic goals. They argue that such cuts often result in reductions in spending on health, education, and other social programs vital to the poor. The IMF has acknowledged that, in certain cases in the past, programs for the poor have been excessively reduced. To lessen this potential, the IMF says that it now pays considerable attention to social issues and to social safety nets, to the point of sometimes now requiring that countries maintain minimum spending levels for social programs, despite the need for a general reduction in government spending.
Comments from the Department of the Treasury
GAO Contacts and Staff Acknowledgments
GAO Contacts
Acknowledgments
Glossary
This glossary is provided for reader convenience, not to provide authoritative or complete definitions for IMF funding arrangements, programs, and facilities.
Arrangement
A decision by the IMF that gives a member the assurance that the institution stands ready to provide foreign exchange or special drawing rights (SDRs) in accordance with the terms of the decision during a specified period of time. An IMF arrangement—which is not a legal contract—is approved by the IMF Executive Board in support of an economic program under which the member undertakes a set of policy actions to reduce economic imbalances and achieve sustainable growth. Resources used under an arrangement carry with them the obligation to repay the IMF in accordance with the applicable schedule, and to pay charges on outstanding purchases (drawings). (See “purchases and repurchases.”)
Article IV Consultation
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country’s authorities.
Articles of Agreement
An international treaty that sets out the purposes, principles, and financial structure of the IMF. The Articles, which entered into force in December 1945, were drafted by representatives of 45 nations at a conference held in Bretton Woods, New Hampshire. The Articles have since been amended three times, in 1969, 1978, and 1992, as the IMF responded to changes in theworld economic and financial structure.
Balance-of-Payments Accounts
A country’s balance-of-payments accounts summarize its dealings with the outside world. Balance-of-payments accounts are usually divided into two main parts, the current account and the capital account. A country is said to have a surplus in its balance-of-payments if there is an increase in its net official assets (official reserves minus its liabilities to foreign official institutions). It is said to have a deficit (or external deficit) if there is a decrease in its net official assets.
Basis Points
The smallest unit in quoting yields on bonds, mortgages, and notes, equal to one one-hundredth of one percentage point.
Basle Capital Standards
Bank regulators from industrialized countries adopted standards for credit risk exposure for internationally active banks in 1988 under the auspices of the Bank for International Settlements. Known as the Basle Accord, the standards were fully implemented in 1992 by member countries. The standards are formula-based and apply risk-weights to reflect different gradations of risk to each asset category. Since 1992, the standards have been amended. The most notable amendment is the establishment of risk- based capital requirements to cover market risk in bank securities and derivatives trading portfolios.
Basle Core Principles
A set of standards for effective bank supervision, issued by the Basle Committee on Banking Supervision in September 1997. The core principles were developed in close collaboration with supervisors from around the world, the IMF, and World Bank. The standards are comprised of 25 core principles that form a sound framework on which to build supervisory structures that meet the needs and conditions prevalent in individual countries.
Benchmarks
In the context of IMF programs, a point of reference against which progress may be monitored. Benchmarks are not necessarily quantitative and frequently relate to structural variables and policies. In Enhanced Structural Adjustment Facility Arrangements, some benchmarks are designated as semiannual performance criteria and are required to be observed in order to qualify for phased (semiannual) borrowings. In addition, quantitative benchmarks are set for the quarters for which there are no performance criteria, and structural benchmarks are set for any date agreed upon under the arrangement.
Capital Account
The capital account of the balance-of-payments shows all flows that directly affect the national balance sheet. It includes (1) direct investment by foreign firms in domestic affiliates and by domestic firms in their foreign affiliates; (2) portfolio investment, which include net purchases by foreigners of domestic securities and net purchases by domestic residents of foreign securities; (3) net lending to domestic residents and net lending by domestic residents to foreigners; and (4) changes in cash balances, which include changes in cash balances held by banks and other foreign- exchange dealers, resulting from current and capital transactions.
Compensatory and Contingency Financing Facility
A special IMF financing facility (window) that was established in 1988 to combine the long-standing Compensatory Financing Facility (retaining its essential features) with elements of contingency financing. The compensatory element provides resources to members to cover shortfalls in export earnings and services receipts, as well as excesses in cereal import costs, that are temporary and arise from events beyond the members’ control. The contingency element may help members with IMF arrangements to maintain their economic programs when faced with a broad range of unforeseen adverse external shocks.
Conditionality
As defined by the IMF, economic policies that members intend to follow as a condition for the use of IMF resources. These are often expressed as performance criteria (for example, monetary and budgetary targets) or benchmarks, and are intended to ensure that the use of IMF credit is temporary and consistent with the adjustment program designed to correct a member’s external payments imbalance.
Current Account
This is the broadest measure of a country’s international trade in goods and services. Its primary component is the balance of trade, which is the difference between merchandise exports and imports. The current account shows all the flows that directly affect the national-income accounts. It includes exports and imports of merchandise and services, inflows and outflows of investment income, and grants, remittances, and other transfers.
Emergency Financing Mechanism
A set of exceptional procedures established by the IMF to facilitate rapid Executive Board approval of IMF financial support for a member while ensuring the conditionality necessary to warrant such support. These emergency measures are to be used only in circumstances representing, or threatening to give rise to, a crisis in a member’s external accounts that requires an immediate IMF response.
Enhanced Structural Adjustment Facility
An IMF facility established in December 1987 to provide assistance on concessional terms to low-income member countries facing protracted balance of payments problems. The ESAF’s operations are financed through borrowing by a trust administered by the IMF as a trustee.
Exchange Rate Policy
A government’s policies concerning at what price (or whether) it will seek to stabilize or otherwise influence the rate of exchange between domestic currency and other currencies.
Exchange Stabilization Fund
Currency reserve fund of the U.S. government employed to stabilize the dollar and foreign exchange markets. ESF is managed by the Treasury. The Federal Reserve Bank of New York acts as fiscal agent for the Treasury. ESF holds special drawing rights allocated to the United States by the IMF.
Extended Arrangement
A decision of the IMF under the Extended Fund Facility that gives a member the assurance of being able to purchase (draw) resources from the General Resources Account, in accordance with the terms of the decision, during a specified period, usually three to four years, and up to a particular amount.
Extended Fund Facility
A financing facility (window) under which the IMF supports economic programs that generally run for three years and are aimed at overcoming balance-of-payments difficulties resulting from macroeconomic and structural problems. Typically, an economic program states the general objectives for the 3-year period and the specific policies for the first year. Policies for subsequent years are spelled out in program reviews.
External Deficit
See “Balance of Payments Accounts.”
Fiscal Policy
Taxation and government spending policies designed to achieve government goals, such as achieving full employment, price stability, or growth in the economy.
Foreign Direct Investment
Foreign direct investment occurs when citizens of one nation purchase nonfinancial assets in some other nation. Distinguished from portfolio investment (below), foreign direct investment generally involves ownership of assets used in production (e.g., factories).
Foreign Portfolio Investment
The purchase by one country’s private citizens or their agents of marketable noncontrolling positions in equity and debt securities issued by another country’s private citizens, corporations, banks, and governments. Commonly, these marketable noncontrolling positions can be easily reversed.
Foreign Exchange
Foreign exchange is the money issued by a foreign country.
Foreign Exchange Market
The foreign exchange market is an interbank or over-the-counter market in foreign exchange that is a network of commercial banks, central banks, brokers, and customers.
Foreign Exchange Reserves
The stock of liquid assets denominated in foreign currencies held by the monetary authorities (finance ministry or central bank). Reserves enable the monetary authorities to intervene in foreign exchange markets to affect the exchange value of their domestic currency in the market. Reserves are typically part of the balance sheet of the central bank. Reserves are invested in low-risk and liquid assets—often in foreign government securities.
In an IMF arrangement, placing a more that proportional part of the disbursement of the financial resources available to a member near the beginning of the arrangement.
General Arrangements to Borrow
Long-standing arrangements under which 11 industrial countries stand ready to lend to the IMF to finance purchases (drawings) that aim at forestalling or coping with a situation that could impair the international monetary system. Since the establishment in 1962, these arrangements have been renewed every four to five years and been invoked 10 times, according to IMF documents. Additional funds are also available to the IMF under an “associated agreement” with Saudi Arabia.
General Resources
Assets, whether ordinary (owned) or borrowed, maintained within the IMF’s General Resources Account.
London Interbank Offer Rates (LIBOR)
Key interest rates at which the major banks in the London interbank market are willing to lend funds to each other at various maturities and for different currencies. LIBOR has become the most important floating rate pricing benchmark for loans and debt instruments in the global financial markets. These rates are published daily by the Bank of England and are based on a sampling from a group of reference banks that are active in the Eurocurrency market, but agreements that use LIBOR do not necessarily rely on quotes published by the Bank of England.
Macroeconomic Policy
Macroeconomic policy is governmental and central bank policy concerning a nation’s economy as a whole including, among other things, price levels, unemployment, inflation, and industrial production. The macroeconomic analysis of open economies is concerned with the effects of international and domestic transactions on output, employment, and the price level and the effects of these in turn on the balance of payments and exchange rate. It is also concerned with the implications of openness and of exchange-rate arrangements for the functioning of monetary and fiscal policies.
Monetary Policy
Monetary policy is the central bank’s use of control of the quantity of money and interest rates to influence the level of economic activity. The quantity of money can affect price levels and, for a given real income, the level of nominal income within a given system. The central bank often concentrates its policy actions, such as the interest rates it charges banks to borrow, to achieve a money stock target. In theory, the demand for money changes with changes in income and interest rates, in addition to other factors.
New Arrangements to Borrow
Arrangements under which 25 member countries or their financial institutions would be ready to lend to the IMF under circumstances similar to those covered by the General Arrangements to Borrow (see General Arrangements to Borrow). The New Arrangements to Borrow are not to replace the General Arrangements to Borrow, and the total amount of resources potentially available under the New Arrangements to Borrow and the General Arrangement to Borrow is about $46 billion. The New Arrangements to Borrow can be activated when participants representing 85 percent of the credit lines’ resources determine that there is a threat to the international financial system. The New Arrangements to Borrow became effective on November 17, 1998 and were activated in December 1998 in connection with the financing of an arrangement for Brazil.
Performance Criteria
Measurable and observable indicators, such as monetary and budgetary targets, or structural (policy) adjustments, that must be met, typically on a quarterly basis, for a member to qualify for purchases under a country’s arrangement with the IMF. These indicators measure a country’s implementation of conditions agreed to under the country’s IMF program. Performance criteria are generally categorized as quantitative or structural depending on the conditions being measured. (See also “benchmarks.”)
Phasing
The practice of making the IMF’s resources available to its members in installments over the period of an arrangement.
Purchases and Repurchases
When the IMF makes its general resources available to a member, it does so by allowing the member to purchase SDRs or other members’ currencies in exchange for its own (domestic) currency. The IMF’s general resources are, by nature, revolving; purchases (or drawings) have to be reversed by repurchases (or repayments) in installments within the period specified for a particular policy or facility.
Quantitative Performance Criteria
See “performance criteria” and “benchmarks.”
Quota
The capital subscription, expressed in SDRs, that each member must pay to the IMF on joining, up to 25 percent is payable in SDRs or other acceptable reserve assets and the remainder in the member’s own currency. Quotas, which reflect members’ relative size in the world economy, are normally reviewed every five years.
Sovereign Debt
The debt instruments issued or guaranteed by the central government of a country. Debt instruments are typically bonds evidencing amounts owed and payable on specified dates or on demand.
Special Drawing Right
International reserve asset created by the IMF in 1969 as a supplement to existing reserve assets. Its value as a reserve asset is derived, essentially, from the commitments of participants to hold and accept SDRs and to honor various obligations connected with its proper functioning as a reserve asset. The IMF defines its value in terms of a basket of major international currencies that fluctuates with market conditions.
Stand-by Arrangement
A decision of the IMF by which a member is assured that it will be able to make purchases (drawings) from the General Resources Account up to a specified amount and during a specified period of time, usually one to two years, provided that the member observes the terms set out in the supporting arrangement.
Structural Performance Criteria
See “performance criteria” and benchmarks.”
Supplemental Reserve Facility
A facility (window) established in December 1997 to provide financial assistance to members experiencing exceptional balance of payments difficulties due to short-term financing needs resulting from a sudden and disruptive loss of market confidence reflected in pressure on the capital account and the members’ reserves.
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Pursuant to a legislative requirement, GAO reviewed the International Monetary Fund (IMF), focusing on how the IMF: (1) establishes financial arrangements with borrower countries and the types of conditions set under these arrangements and assess how this process was used for six borrower countries; and (2) monitors countries' performance and assess how this process was used for the same six borrower countries, detailing the conditions met and not met, the reasons why conditions were not met, and the actions IMF took in response.
What GAO Found
GAO noted that: (1) under IMF's Articles of Agreement, as amended, IMF limits financial assistance to those countries with a balance-of-payments need; (2) continued disbursement of assistance to a country is based on IMF's consideration of data on and judgment of the country's progress in meeting the agreed-upon conditions; (3) IMF has developed a broad framework for establishing a financial assistance arrangement that is to be applied on a case-by-case basis considering each country's circumstances; (4) the specific conditions that IMF and the country authorities establish are intended to address the immediate and underlying problems that contributed to the country's balance-of-payments difficulty, while ensuring repayment to IMF; (5) after a country fulfills any early IMF requirements and the IMF Executive Board then approves the financial arrangement, the program is to take effect and the country is eligible to receive its first disbursement of funds; (6) according to information GAO reviewed for the six countries in its study, IMF generally followed this process to establish the financial assistance package and the conditions for the assistance; (7) the underlying causes and magnitude of the balance-of-payments difficulty varied among the countries but generally stemmed from concerns about their continued access to external financing; (8) the IMF's process for monitoring a country's progress toward overall program goals and compliance with program conditions is designed to respond to an individual country's progress and situation; (9) according to IMF staff, many disbursements are conditioned only on the determination by IMF staff that the country has met prenegotiated quantitative criteria; other disbursements are subject to reviews by IMF Executive Board; (10) the process for conducting IMF Board reviews, which involves the borrower country and IMF, is designed to incorporate data on a country's economic performance as well as the judgment of the IMF Executive Board and staff; (11) according to the information GAO reviewed, the monitoring of the IMF's conditionality program in the six countries in GAO's study was generally consistent with this approach; (12) IMF missions to each country reviewed the country's economy and documented the country's progress in satisfying conditions; and (13) in some cases, IMF determined that country progress in meeting the conditions had not been sufficient, and its response varied depending on the specifics of the condition and the judgment of the IMF staff and Executive Board on the country's overall progress. |
gao_GAO-12-874 | gao_GAO-12-874_0 | Background
Oil and gas reservoirs vary in their geological makeup, location, and size. Regardless of the reservoir, unconventional oil and gas development involves a number of activities, many of which are also conducted in conventional oil and gas drilling. This section describes the types and locations of oil and gas reservoirs and the key stages of oil and gas development.
Types and Locations of Oil and Gas Reservoirs
Oil and natural gas are found in a variety of geologic formations. In conventional reservoirs, oil and gas can flow relatively easily through a series of pores in the rock to the well. Shale and tight sandstone formations generally have low permeability and therefore do not allow oil and gas to easily flow to the well. Shale and tight sandstone formations can occur at varying depths, including thousands of feet beneath the surface. For example, the Bakken shale formation in North Dakota and Montana ranges from 4,500 to 11,000 feet beneath the surface. Coalbed methane formations, often located at shallow depths of several hundred to 3,000 feet, are generally formations through which gas can flow more freely; however, capturing the gas requires operators to pump water out of the coal formation to reduce the pressure and allow the gas to flow. Shale, tight sandstone, and coalbed methane formations are located within basins, which are large-scale geological depressions, often hundreds of miles across, which also may contain other oil and gas resources. There is no clear and consistently agreed upon distinction between conventional and unconventional oil and gas, but unconventional sources generally require more complex and expensive technologies for production, such as the combination of horizontal drilling and multiple hydraulic fractures. See figure 1 for a depiction of conventional and unconventional reservoirs.
Unconventional reservoirs are located throughout the continental United States on both private lands and federal lands that are administered by BLM, Forest Service, Park Service, and FWS (see fig. 2).
Developing unconventional reservoirs involves a variety of activities, many of which are also conducted in conventional oil and gas drilling.
Siting and site preparation. The operator identifies a location for the well and prepares the area of land where drilling will take place—referred to as a well pad. In some cases, the operator will build new access roads to transport equipment to the well pad or install new pipelines to transport the oil or gas that is produced. In addition, the operator will clear vegetation from the area and may place storage tanks (also called vessels) or construct pits on the well pad for temporarily storing fluids (see fig. 3). In some cases, multiple wells will be located on a single well pad.
Drilling, casing, and cementing. The operator conducts several phases of drilling to install multiple layers of steel pipe—called casing—and cement the casing in place. The layers of steel casing are intended to isolate the internal portion of the well from the outlying geological formations, which may include underground drinking water supplies. As the well is drilled deeper, progressively narrower casing is inserted further down the well and cemented in place. Throughout the drilling process, a special lubricant called drilling fluid, or drilling mud, is circulated down the well to lubricate the drilling assembly and carry drill cuttings (essentially rock fragments created during drilling) back to the surface. After vertical drilling is complete, horizontal drilling is conducted by slowly angling the drill bit until it is drilling horizontally. Horizontal stretches of the well typically range from 2,000 feet to 6,000 feet long but can be as long as 12,000 feet in some cases.
Hydraulic fracturing. Operators sequentially perforate steel casing and pump a fluid mixture down the well and into the target formation at high enough pressure to cause the rock within the target formation to fracture. The sequential fracturing of a well can use between 2 million and 5.6 million gallons of water. Operators add a proppant, such as sand, to the mixture to keep the fractures open despite the large pressure of the overlying rock. About 98 percent of the fluid mixture used in hydraulic fracturing is water and sand, according to a report about shale gas development by the Ground Water Protection Council. The fluid mixture—or hydraulic fracturing fluid—generally contains a number of chemical additives, each of which is designed to serve a particular purpose. For example, operators may use a friction reducer to minimize friction between the fluid and the pipe, acid to help dissolve minerals and initiate cracks in the rock, and a biocide to eliminate bacteria in the water that cause corrosion. The number of chemicals used and their concentrations depend on the particular conditions of the well. After hydraulic fracturing, a mixture of fluids, gases, and dissolved solids flows to the surface (flowback), after which production can begin, and the well is said to have been completed. Operators use hydraulic fracturing in many shale and tight sandstone formations (see fig. 4). Some coalbed methane wells are hydraulically fractured (see fig. 5), but operators may use different combinations of water, sand, and chemicals than with other unconventional wells. In addition, operators must “dewater” coalbed methane formations in order to get the natural gas to begin flowing—a process that can generate large amounts of water.
Well plugging. Once a well is no longer producing economically, the operator typically plugs the well with cement to prevent fluid migration from outlying formations into the well and to prevent downward drainage from inside the well. In some cases, wells may be temporarily plugged so that the operator has the option of reopening the well in the future. In some states with a long history of oil and gas development, wells drilled decades ago may not have been properly plugged—or the plug may have deteriorated.
Site reclamation. Once the well is plugged, the operator takes steps to restore the site to make it acceptable for specific uses, such as farming. For example, reclamation may involve removing equipment from the well pad, closing pits, backfilling soil, and restoring vegetation. Sometimes, when a well starts production, operators reclaim the portions of a site affected by the initial drilling activity.
Waste management and disposal. Throughout the drilling, hydraulic fracturing, and subsequent production activities, operators must manage and dispose of several types of waste. For example, operators must manage produced water, which, for purposes of this report includes flowback water—the water, proppant, and chemicals used for hydraulic fracturing—as well as water that occurs naturally in the oil- or gas-bearing geological formation. Operators temporarily store produced water in tanks or pits, and some operators may recycle it for reuse in subsequent hydraulic fracturing. Options for permanently disposing of produced water vary and may include, for example, injecting it underground into wells Operators also generate solid wastes designated for such purposes. such as drill cuttings and could potentially generate small quantities of hazardous waste. See table 1 for additional methods for managing and disposing of waste.
We recently issued a report on the quantity, quality, and management of water produced during oil and gas production. See GAO, Energy-Water Nexus: Information on the Quantity, Quality, and Management of Water Produced during Oil and Gas Production, GAO-12-156 (Washington, D.C.: Jan. 9, 2012).
Federal Environmental and Public Health Laws Apply to Unconventional Oil and Gas Development but with Key Exemptions
Requirements from eight federal laws apply to the development of oil and gas from unconventional sources. In large part, the same requirements apply to conventional and unconventional oil and gas development. There are exemptions or limitations in regulatory coverage for preventive programs authorized by six of these laws, though EPA generally retains its authorities under federal environmental and public health laws to respond to environmental contamination. States may have regulatory programs related to some of these exemptions or limitations in federal regulatory coverage; state requirements are discussed later in this report.
Eight Federal Environmental and Public Health Laws Apply to Unconventional Oil and Gas Development
Parts of the following eight federal environmental and public health laws apply to unconventional oil and gas development:
Safe Drinking Water Act (SDWA)
Clean Water Act (CWA)
Clean Air Act (CAA)
Resource Conservation and Recovery Act (RCRA)
Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)
Emergency Planning and Community Right-to-Know Act (EPCRA)
Toxic Substances Control Act (TSCA)
Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA)
There are exemptions or limitations in regulatory coverage related to the first six laws listed above. In large part, the same requirements apply to conventional and unconventional oil and gas development. This section discusses each of these laws in brief; for more details about seven of these laws, please see appendixes II through VIII.
SDWA is the main federal law that ensures the quality of drinking water.Two key aspects of SDWA that are part of the regulatory framework governing unconventional oil and gas development are the Underground Injection Control (UIC) program and the imminent and substantial endangerment provision.
Under SDWA, EPA regulates the injection of fluids underground through its UIC program, including the injection of produced water from oil and gas development. The UIC program protects underground sources of drinking water by setting and enforcing standards for siting, constructing, and operating injection wells. Injection wells in the UIC program fall into six different categories based on the types of fluids being injected. The wells used to manage fluids associated with oil and gas production, including produced water, are Class II wells.
EPA officials estimate there are approximately 151,000 permitted Class II UIC wells in operation in the United States. Two types of wells account for nearly all the Class II UIC wells in the United States (see fig. 7), as follows:
Enhanced recovery wells inject produced water or other fluids or gases into oil- or gas-producing formations to increase the pressure in the formation and force additional oil or gas out of nearby producing wells. EPA documents estimate that about 80 percent of Class II wells are enhanced recovery wells.
Disposal wells inject produced water or other fluids associated with oil and gas production into formations that are intended to hold the fluids permanently. EPA documents estimate that about 20 percent of Class II wells are disposal wells.
UIC regulations include minimum federal requirements for most Class II UIC wells; these requirements are generally applicable only where EPA implements the program. For example, for most new Class II UIC wells, an operator must, among other things (1) obtain a permit from EPA or a state, (2) demonstrate that casing and cementing are adequate, and (3) pass an integrity test prior to beginning operation and at least once every 5 years. In addition, when proposing a new Class II UIC well, an operator must identify any existing water or abandoned production or injection wells generally within one-quarter mile of the proposed well. During the life of the Class II UIC well, the operator has to comply with monitoring requirements, including tracking the injection pressure, rate of injection, and volume of fluid injected.
SDWA authorizes EPA to approve by rule a state to be the primary enforcement responsibility—called primacy—for the UIC program, which means that a state assumes responsibility for implementing its program, including permitting and monitoring UIC wells. Generally, to be approved for primacy, state programs must be at least as stringent as the federal program for each of the well classes for which primacy is sought; however, SDWA also includes alternative provisions for primacy related to Class II wells whereby, in lieu of adopting requirements consistent with EPA’s Class II regulations, a state can demonstrate to EPA that its program is effective in preventing endangerment of underground sources of drinking water. Five of the six states in our review (Colorado, North Dakota, Ohio, Texas, and Wyoming) have been granted primacy for Class II wells under the alternative provisions. Pennsylvania has not applied for primacy, so EPA directly implements the program there. Please see appendix IX for more information about UIC requirements in the six states in our review.
As discussed, the UIC program regulates the injection of fluids underground. Historically, the UIC program was not used to regulate hydraulic fracturing, even though fracturing entails the injection of fluid underground. In 1994, in light of concerns that hydraulic fracturing of coalbed methane wells threatened drinking water, citizens petitioned EPA to withdraw its approval of Alabama’s Class II UIC program because the state failed to regulate hydraulic fracturing. The case ended up before the United States Court of Appeals for the Eleventh Circuit, which held that the definition of underground injection included hydraulic fracturing. The court’s decision was made in the context of hydraulic fracturing of a coalbed methane formation in Alabama but raised questions about whether hydraulic fracturing would be included in UIC programs nationwide.
UIC regulations at the time and now provide that ‘‘ny underground injection, except into a well authorized by rule or except as authorized by permit issued under the UIC program, is prohibited.’’ 40 C.F.R. 144.11 (2005) (2011). The Energy Policy Act provision did not exempt injections of diesel fuel during hydraulic fracturing from the definition of underground injection. EPA’s position is that underground injection of diesel fuel as part of hydraulic fracturing requires a UIC permit or authorization by rule. program. The guidance is directed at EPA permit writers in states where EPA directly implements the program; the guidance does not address state-run UIC programs (including five of the six states in our review). EPA’s draft guidance is applicable to any oil and gas wells using diesel in hydraulic fracturing (not just coalbed methane wells). The draft guidance provides recommendations related to permit applications, area of review (for other nearby wells), well construction, permit duration, and well closure.
SDWA also gives EPA authority to issue orders when the agency receives information about present or likely contamination of a public water system or an underground source of drinking water that may present an imminent and substantial endangerment to human health. In December 2010, EPA used this authority to issue an emergency administrative order to an operator in Texas alleging that the company’s oil and gas production facilities near Fort Worth, Texas, caused or contributed to methane contamination in two nearby private drinking water wells. EPA contended that this methane contamination posed an explosion hazard and therefore was an imminent and substantial threat to human health. EPA’s order required the operator to take six actions, specifically: (1) notify EPA whether it intended to comply with the order, (2) provide replacement water supplies to landowners, (3) install meters to monitor for the risk of explosion at the affected homes, (4) conduct a survey of any additional private water wells within 3,000 feet of the oil and gas production facilities, (5) develop a plan to conduct soil and indoor air monitoring at the affected dwellings, and (6) develop a plan to investigate how methane flowed into the aquifer and private drinking water wells. The operator disputed the validity of EPA’s order and noted that the order does not provide any way for the company to challenge EPA’s findings. Nevertheless, the operator implemented the first three actions EPA listed in the order. In January 2011, EPA sued the operator in federal district court, seeking to enforce the remaining three provisions of the order. In March 2011, the regulatory agency that oversees oil and gas development in Texas held a hearing examining the operator’s possible role in the contamination of the water wells and issued an opinion in which it concluded that the operator had not caused the contamination. In March 2012, EPA withdrew the original emergency administrative order, and the operator agreed to continue monitoring 20 private water wells near its production sites for 1 year. According to EPA officials, resolving the lawsuit allows the agency to shift its focus away from litigation and toward a joint EPA-operator effort in monitoring.
For more details about SDWA, please see appendix II.
To restore and maintain the nation’s waters, CWA authorizes EPA to, among other things, regulate pollutant discharges and respond to spills affecting rivers and streams. Several aspects of CWA are applicable to oil and gas well pad sites, but statutory exemptions limit EPA’s regulatory authority. Several elements of CWA and implementing regulations are relevant to oil and gas development from onshore unconventional sources. First, the National Pollutant Discharge Elimination System (NPDES) program regulates industrial sites’ wastewater and stormwater discharges to waters of the United States (surface waters). Second, spill reporting and spill prevention and response planning requirements pertain to certain threats to U.S. navigable waters and adjoining shorelines. In addition, under certain circumstances, EPA has response authorities; for example, it can generally bring suit or take other actions to protect the public health and welfare from actual or threatened discharges of oil or hazardous substances to U.S. navigable waters and adjoining shorelines.
EPA’s NPDES program limits the types and amounts of pollutants that industrial sites, industrial wastewater treatment facilities, and municipal wastewater treatment facilities (often called publicly-owned treatment works or POTWs) can discharge into the nation’s surface waters by requiring these facilities to have and comply with permits listing pollutants and their discharge limits. As required by CWA, EPA develops effluent limitations for certain industrial categories based on available control technologies and other factors to prevent or treat the discharge. EPA established multiple subcategories for the oil and gas industry; relevant here are: (1) onshore, (2) agricultural and wildlife water use, and (3) stripper wells—that is, wells that produce relatively small amounts of oil.
For the onshore and agricultural and wildlife water use subcategories, EPA established effluent limitations guidelines for direct dischargers that establish minimum requirements to be used by EPA and state NPDES permit writers. Specifically, the onshore subcategory has a zero discharge limit for discharges to surface waters, meaning that no direct discharges to surface waters are allowed. EPA documents explain that this is because there are technologies available—such as underground injection—to dispose of produced water generated at oil and gas well sites without directly discharging them to surface waters. Given that the NPDES permit limit would be “no discharge,” EPA officials said that they were unaware of any instances in which operators had applied for these permits. EPA officials did mention, however, an instance in which an operator discharged produced water to a stream and was fined by EPA under provisions in CWA. For example, in 2011, EPA Region 6 assessed an administrative civil penalty against a company managing an oil production facility in Oklahoma for discharging brine and produced water to a nearby stream. The company ultimately agreed to pay a $1,500 fine and conduct an environmental project, which included extensive soil remediation near the facilities.
Effluent limitations guidelines for the agricultural and wildlife water use subcategory cover a geographical subset of wells in the westthe quality of produced water from the wells is good enough for watering crops and livestock or to support wildlife in streams. The effluent limitations guideline for this subcategory allows such discharges of produced water for these purposes as long as the water meets a minimum quality standard for oil and grease. EPA officials identified 349 facilities with discharge permits in this subcategory. Officials also stated in which that individual permits may contain limits for pollutants other than oil and grease.
EPA has not established effluent limitations guidelines for stripper wells, and EPA and state NPDES permit writers currently use their best professional judgment to determine the effluent limits for permits on a case-by-case basis. EPA explained in a 1976 Federal Register notice that unacceptable economic impacts would occur if the agency developed effluent limitations guidelines for stripper wells and that the agency could revisit this decision at a later date. In July 2012, EPA officials confirmed that the agency currently has no plans to develop an effluent limitations guideline for stripper wells.
EPA also has not established effluent limitations guidelines for coalbed methane wells and EPA and state NPDES permit writers currently use their best professional judgment to determine the effluent limits for permits on a case-by-case basis. EPA officials explained that the process of extracting natural gas from coalbed methane formations is fundamentally different from traditional oil and gas development, partly because of the large volume of water that must be removed from the coalbed methane formation prior to production. Given these differences, coalbed methane wells are not included in any of EPA’s current subcategories. EPA announced in 2011 that, based on a multiyear study of the coalbed methane industry, the agency will develop effluent limitations guidelines for produced water discharges from coalbed methane formations. In the course of developing these guidelines, EPA officials told us that they will analyze the economic feasibility of each of the available technologies for disposing of the large volumes of produced water from coalbed methane wells and that EPA plans to issue proposed guidelines in the summer of 2013.
In addition to setting effluent limitations guidelines for direct discharges of pollutants to surface waters, CWA requires EPA to develop regulations that establish pretreatment standards. These standards apply when wastewater is sent to a POTW before being discharged to surface waters, and the standards must prevent the discharge of any pollutant that would interfere with, or pass through, the POTW. To date, EPA has not set pretreatment standards specifically for produced water, though there are some general requirements; for example, discharges to POTWs cannot cause the POTW to violate its NPDES permit or interfere with the treatment process. In October 2011, EPA announced its intention to develop pretreatment standards specific to the produced water from shale gas development. EPA officials told us that the agency intends to conduct a survey and use other methods to collect additional data and information to support this rulemaking. Officials expect to publish the first Federal Register notice about the survey by the end of 2012 and to publish a proposed rule in 2014.
In addition to CWA’s requirement for NPDES permits for discharges from industrial sites, the 1987 Water Quality Act amended CWA to establish a specific program for regulating stormwater discharges, such as those related to rainstorms, though oil and gas well sites are largely exempt from these requirements. EPA generally requires that facilities get NPDES permits for discharges of stormwater associated with industrial and construction activities, but the Water Quality Act of 1987 specifically exempted oil and gas production sites from permit requirements for stormwater discharges, as long as the stormwater was not contaminated by, for example, raw materials or waste products. exemption and EPA’s implementing regulations, oil and gas well sites are only required to get NPDES permits for stormwater discharges if the facility has had a discharge of contaminated stormwater that includes a reportable quantity of a pollutant or contributes to the violation of a water quality standard. The 2005 Energy Policy Act expanded the language of the exemption to include construction activities at oil and gas well sites, meaning that uncontaminated stormwater discharges from oil and gas construction sites also do not require NPDES permits. So while other industries must generally obtain NPDES permits for construction activities that disturb an acre or more of land, operators of oil and gas well sites are generally not required to do so.
The 1987 Water Quality Act also exempted oil and gas processing, treatment, and transmission facilities from permit requirements for stormwater discharges.
National Response Center, which is managed by the U.S. Coast Guard and serves as the sole federal point of contact for reporting oil and chemical spills in the United States. Oil discharges must be reported if they cause a film or sheen on the surface of the water or shorelines or if they violate water quality standards. The National Response Center shares information about spills with other agencies, including EPA Regional offices, which allows EPA to follow up on reported spills, as appropriate.
CWA also authorized spill prevention and response planning requirements as promulgated in the Spill Prevention, Control, and Countermeasure (SPCC) rule. Facilities that are subject to SPCC rules are required to prepare and implement a plan describing, among other things, how they will control, contain, clean up, and mitigate the effects of any oil discharges that occur. Onshore oil and gas well sites, among others, are subject to this rule if they have total aboveground oil storage capacity greater than 1,320 gallons and could reasonably be expected, based on location, to discharge oil into U.S. navigable waters or on adjoining shorelines. The amount of oil storage capacity at oil and gas well sites tends to vary based on whether the well is being drilled, hydraulically fractured, or has entered production. For example, during drilling at well sites located near these waters, operators generally have to comply with SPCC requirements if fuel tanks for the drilling rig exceed the 1,320 gallon threshold. According to EPA officials, nearly all drill rigs have fuel tanks larger than 1,320 gallons, and so most well sites are subject to the SPCC rule during drilling if they are near these waters. Oil and gas well sites that are subject to the SPCC rule were required to comply by November 2011 or before starting operations.
In accordance with CWA, EPA directly administers the SPCC program rather than delegating authority to states. EPA regulations generally do not require facilities to report SPCC information to EPA, including whether or not they are regulated. As a result, EPA does not know the universe of SPCC-regulated facilities. To ensure that regulated facilities are meeting SPCC requirements, EPA Regional personnel may inspect these facilities to evaluate their compliance. EPA officials said that some of these inspections were conducted as follow-up after spills were reported and that most inspections are conducted during the production phase, since drilling and hydraulic fracturing are of much shorter durations, making it difficult for inspectors to visit these sites during those times. According to EPA officials, Regional personnel inspected 120 oil and gas well sites nationwide in fiscal year 2011 and found noncompliance at 105 of these sites. These violations ranged from paperwork inconsistencies to more serious violations, such as a lack of secondary containment around stored oil or failure to implement an SPCC plan (though EPA officials were unable to specifically quantify the number of more serious violations). EPA officials said that EPA has addressed some of the 105 violations through enforcement actions.
CWA also provides EPA with authorities to address the discharge of pollutants and to address actual or threatened discharges of oil or hazardous substances in certain circumstances. For example, under one provision, EPA has the authority to address actual or threatened discharges of oil or hazardous substances into U.S. navigable waters or on adjoining shorelines upon a determination that there may be an imminent and substantial threat to the public health or welfare of the United States, by bringing suit or taking other action, including issuing administrative orders that may be necessary to protect public health and welfare. Under another provision, EPA has authority to obtain records and access to facilities, among other things, in order to determine if a person is violating certain CWA requirements. For example, EPA conducted initial investigations in Bradford County, Pennsylvania, following a 2011 spill of hydraulic fracturing and other fluids that entered a stream. Citing its authority under CWA and other laws,from the operator about the incident, including information about the chemicals involved and the environmental effects of the spill. Meanwhile, the Pennsylvania Department of Environmental Protection signed a consent order and agreement with the operator in 2012 that required the operator to pay fines and implement a monitoring plan for the affected stream.
For more details about CWA, please see appendix III.
CAA, a federal law that regulates air pollution from mobile and stationary sources, was enacted to improve and protect the quality of the nation’s air. Under CAA, EPA sets national ambient air quality standards for the six criteria pollutants––ground level ozone, carbon monoxide, particulate matter, sulfur dioxide, nitrogen oxides, and lead––at levels it determines are necessary to protect public health and welfare. States then develop state implementation plans (SIP) to establish how the state will attain air quality standards, through regulation, permits, policies, and other means. States must obtain EPA approval for SIPs; if a SIP is not acceptable, EPA may assume responsibility for implementing and enforcing CAA in that state. CAA also authorizes EPA to regulate emissions of hazardous air pollutants, such as benzene. In addition, under CAA, EPA requires reporting of greenhouse gas emissions from a variety of sources, including oil and gas wells.
In accordance with CAA, EPA has progressively implemented more stringent diesel emissions standards to lower the amount of key pollutants from mobile diesel-powered engines since 1984. These standards apply to a variety of on- and off-road diesel-powered engines, including trucks used in the oil and gas industry to move materials to and from well sites and compressors used to drill and hydraulically fracture wells. Diesel exhaust contains nitrogen oxides and particulate matter. Emissions standards may set limits on the amount of pollution a vehicle or engine can emit or establish requirements about how the vehicle or engine must be maintained or operated, and generally apply to new vehicles. For example, the most recent emissions standards for construction equipment began to take effect in 2008 and required a 95 percent reduction in nitrogen oxides and a 90 percent reduction in particulate matter from previous standards. EPA estimates that millions of older mobile sources—including on-road and off-road engines and vehicles—remain in use. It is projected that over time, older sources will be taken out of use and be replaced by the lower-emission vehicles, ultimately reducing emissions from mobile sources.
New Source Performance Standards (NSPS) apply to new stationary facilities or modifications to stationary facilities that result in increases in air emissions and focus on criteria air pollutants or their precursors. For the oil and gas industry, the key pollutant is volatile organic compounds, a precursor to ground level ozone formation. Prior to 2012, EPA’s NSPS were unlikely to affect oil and gas well sites because (1) EPA had not promulgated standards directly targeting well sites and (2) to the extent that EPA promulgated standards for equipment that may be located at well sites, the capacity of equipment located at well sites was generally too low to trigger the requirement. For example, in 1987, EPA issued NSPS for storage vessels containing petroleum liquids; however, the standards apply only to tanks above a certain size, and EPA officials said that most storage tanks at oil and gas sites are below the threshold.
In April 2012, EPA promulgated NSPS for the oil and natural gas production industry which, when fully phased-in by 2015, will require reductions of volatile organic compound emissions at oil and gas well sites, including wells using hydraulic fracturing.
Specifically, these new standards are related to pneumatic controllers, well completions, and certain storage vessels as follows:
Pneumatic controllers. According to EPA, when pneumatic controllers are powered by natural gas, they may release natural gas and volatile organic compounds during normal operations. The new standards set limits for the amount of gas (as a surrogate for volatile organic compound emissions) that new and modified pneumatic controllers can release per hour. EPA’s regulatory impact analysis for the NSPS estimates that about 13,600 new or modified pneumatic controllers will be required to meet the standard annually; EPA also estimates that the oil and gas production sector currently uses about 400,000 pneumatic controllers.
Well completions for hydraulically fractured natural gas wells. EPA’s NSPS for well completions focus on reducing the venting of volatile organic compounds during flowback after hydraulic fracturing. According to EPA’s regulatory impact analysis, natural gas well completions involving hydraulic fracturing vent approximately 230 times more natural gas and volatile organic compounds than natural gas well completions that do not involve hydraulic fracturing. The regulatory impact analysis attributes these emissions to the practice of routing flowback of fracture fluids and reservoir gas to a surface impoundment (pit) where natural gas and volatile organic compounds escape to the atmosphere. To reduce the release of volatile organic compounds from hydraulically fractured natural gas wells, EPA’s new rule will require operators to use “green completion” techniques to capture and treat flowback emissions so that the captured natural gas can be sold or otherwise used. EPA’s regulatory impact analysis for the rule estimates that more than 9,400 wells will be required to meet the new standard annually.
Storage vessels. Storage vessels are used at well sites (and in other parts of the oil and gas industry) to store crude oil, condensate, and produced water. These vessels emit gas and volatile organic compounds when they are being filled or emptied and in association with changes of temperature. EPA’s NSPS rule will require storage vessels that emit more than 6 tons per year of volatile organic compounds to reduce these emissions by at least 95 percent. EPA’s regulatory impact analysis for the rule estimates that approximately 300 new storage vessels used by the oil and gas industry will be required to meet the new standards annually. EPA officials said they anticipate that most of these storage vessels will be located at well sites.
EPA also regulates hazardous air pollutants emitted by stationary sources. In accordance with the 1990 amendments to CAA, EPA does this by identifying categories of industrial sources of hazardous air pollutants and requiring those sources to comply with emissions standards, such as by installing controls or changing production practices. These National Emission Standards for Hazardous Air Pollutants (NESHAP) for each industrial source category include standards for major sources, which are defined as sources with the potential to emit 10 tons or more per year of a hazardous air pollutant or 25 tons or more per year of a combination of pollutants, as well as for area sources, which are sources of hazardous air pollutants that are not defined as major sources. Generally, EPA or state regulators can aggregate emissions from related or nearby equipment to determine whether the unit or facility should be regulated as a major source. However, in determining whether the oil or gas well is a major source of hazardous air pollutants, CAA expressly prohibits aggregating emissions from oil and gas wells (with their associated equipment) and emissions from pipeline compressors or pumping stations.
EPA initially promulgated a NESHAP for oil and natural gas production facilities for major sources in 1999 and promulgated amendments in April 2012. NESHAPs generally identify emissions points that may be present at facilities within each industrial source category. The source category for oil and natural gas production facilities includes oil and gas well sites and other oil and gas facilities, such as pipeline gathering stations and natural gas processing plants. The NESHAP for the oil and natural gas production facilities major source category includes emissions points (or sources) that may or may not normally be found at well sites at sizes that would tend to meet the major source threshold. EPA officials in each of the four Regions we contacted were unaware of any specific examples of oil and natural gas wells being regulated as major sources of hazardous air pollutants before the April 2012 amendments. These amendments, however, changed a key definition used to determine whether a facility (such as a well site) is a major source. Specifically, EPA modified the definition of the term “associated equipment” such that emissions from all storage vessels and glycol dehydrators (used to remove water from gas) at a facility will be counted toward determining whether a facility is a major source. EPA’s regulatory impact analysis and other technical support documents for the April 2012 amendments did not estimate how many oil and natural gas well sites would be considered major sources under the new definition.
EPA also promulgated a NESHAP for oil and natural gas production facilities for area sources in 2007. The 2007 area source rule addresses emissions from one emissions point, triethylene glycol dehydrators, which are used to remove water from gas. Triethylene glycol dehydrators can be located at oil and gas well sites or other oil and gas facilities, such as natural gas processing plants. Area sources are required to notify EPA that they are subject to the rule, but EPA does not track whether the facilities providing notification are well sites or other oil and natural gas facilities, so it is difficult to determine to what extent oil and gas well sites are subject to the area source NESHAP.
In addition to specific programs for regulating hazardous air pollutants, CAA establishes that operators of stationary sources that produce, process, store, or handle listed or extremely hazardous substances have a general duty to identify hazards that may result from accidental releases, take steps needed to prevent such releases, and minimize the consequences of such releases when they occur. Methane is one of many hazardous substances of concern due to their flammable properties. Some EPA Regional officials said that they use infrared video cameras to conduct inspections to identify leaks of methane from storage tanks or other equipment at well sites. For example, EPA Region 6 officials said they have conducted 45 inspections at well sites from July 2010 to July 2012 and issued 10 administrative orders related to violations of the CAA general duty clause. said that all well sites are required to comply with the general duty clause but that EPA prioritizes and selects sites for inspections based on risk.
EPA Region 6 includes the states of Arkansas, Louisiana, New Mexico, Oklahoma, and Texas.
CAA also requires EPA to publish regulations and guidance for chemical accident prevention at facilities using substances that pose the greatest risk of harm from accidental releases; the regulatory program is known as the Risk Management Program. The extent to which a facility is subject to the Risk Management Program depends on the regulated substances present at the facility and their quantities, among other things. EPA’s list of regulated substances and their thresholds for the Risk Management Program was initially established in 1994 and has been revised several times. The regulated chemicals that may be present at oil and gas well sites include components of natural gas (e.g., butane, propane, methane, and ethane). However, a 1998 regulatory determination from EPA provided an exemption for naturally-occurring hydrocarbon mixtures (i.e., crude oil, natural gas, condensate, and produced water) prior to entry into a natural gas processing plant or petroleum refinery; EPA explained at the time that these chemicals do not warrant regulation and that the general duty clause would apply in certain risky situations. Since naturally-occurring hydrocarbons at well sites generally have not entered a processing facility, they are not included in the threshold determination of whether the well site should be subject to the Risk Management Program. EPA officials said that generally, unless other flammable or toxic regulated substances were brought to the site, well sites would not trip the threshold quantities for the risk management regulations. In September 2011, the U.S. Chemical Safety and Hazard Investigation Board (Chemical Safety Board) released a report describing 26 incidents involving fatalities or injuries related to oil and gas storage tanks located at well sites from 1983 through 2010. The report found that these accidents occurred when the victims—all young adults—gathered at rural unmanned oil and gas storage sites lacking fencing and warning signs and concluded that such sites pose a public safety risk. The report also noted that exploration and production storage tanks are exempt from the Risk Management Program requirements of CAA and recommended that EPA publish a safety alert to owners and operators of exploration and production facilities with flammable storage tanks advising them of their CAA general duty clause responsibilities, and encouraging specific measures to reduce these risks. The Chemical Safety Board requested that EPA provide a response stating how EPA will address the recommendation. EPA responded in June 2012, stating its intent to comply with the recommendation.
As of 2012, oil and natural gas production facilities are required to report their greenhouse gas emissions to EPA on an annual basis as described in EPA’s greenhouse gas reporting rule. According to EPA documents, oil and gas well sites may emit greenhouse gases, including methane and carbon dioxide, from sources including: (1) combustion sources, such as engines used on site, which typically burn natural gas or diesel fuel, and (2) indirect sources, such as equipment leaks and venting.greenhouse gas reporting rule requires oil and gas production facilities (defined in regulation as all wells in a single basin that are under common ownership or control) that emit more than 25,000 metric tons of carbon dioxide equivalent at the basin level to report their annual emissions of carbon dioxide, methane, and nitrous oxide from equipment leaks and venting, gas flaring, and stationary and portable combustion. EPA documents estimate that emissions from approximately 467,000 onshore wells are covered under the rule.
For more details about CAA, please see appendix IV.
RCRA, passed in 1976, established EPA’s authority to regulate the generation, transportation, treatment, storage, and disposal of hazardous wastes. Subsequently, the Solid Waste Disposal Act Amendments of 1980 created a separate process by which oil and gas exploration and production wastes, including those originating within a well, would not be regulated as hazardous unless EPA conducted a study of wastes associated with oil and gas development and then determined that such wastes warranted regulation as hazardous waste, followed by congressional approval of the regulations. EPA conducted the study and, in 1988, issued a determination that it was not warranted to regulate oil and gas exploration and production wastes as hazardous. Based on this EPA determination, drilling fluids, produced water, and other wastes associated with the exploration, development, or production of oil or gas are not regulated as hazardous. According to EPA guidance issued in 2002, these exempt wastes include wastes that come from within the well, as well as wastes generated from field operations. Conversely, wastes generated from other activities at well sites may be regulated as hazardous. For example, discarded unused hydraulic fracturing fluids and painting wastes, among others, may be present at well sites and are “non-exempt,” and could be regulated as hazardous, depending on the specific characteristics of the wastes. Facilities that generate more than 100 kilograms (220 pounds) of hazardous waste per month are regulated as generators of hazardous waste and, among other things, are required to have an EPA identification number and to use the RCRA manifest system for tracking hazardous waste. Facilities generating smaller quantities of hazardous waste are not subject to these requirements. EPA headquarters officials said they do not have data on how many well sites may be hazardous waste generators, but that states may have more information about quantities of hazardous wastes at well sites. As such, we asked state officials responsible for waste programs whether they were aware of well sites being classified as small-quantity hazardous waste generators, and officials in all six states we reviewed indicated that they were unaware of well sites having sufficient quantities of hazardous wastes to be subject to those regulations.
In September 2010, the Natural Resources Defense Council submitted a petition to EPA requesting that the agency regulate waste associated with oil and gas exploration and production as hazardous. The petition asserts that EPA should revisit the 1988 determination not to regulate these wastes as hazardous because, among other things, EPA’s underlying assumptions concerning the availability of alternative disposal practices, the adequacy of state regulations, and the potential for economic harm to the oil industry are no longer valid. According to EPA officials, the agency is currently reviewing the information provided in the petition but does not have a time frame for responding.
RCRA also authorizes EPA to issue administrative orders, among other things, in cases where handling, treatment, or storage of hazardous or solid waste may present an imminent and substantial endangerment to health or the environment. EPA has used RCRA’s imminent and substantial endangerment authorities related to oil and gas well sites. For example, EPA Region 8 issued RCRA imminent and substantial endangerment orders to operators in Wyoming after discovering that pits near oil production sites were covered with oil and posed a hazard to birds.
For more details about RCRA, please see appendix V.
Congress passed CERCLA in 1980 to protect public health and the environment by addressing the cleanup of hazardous substance releases. CERCLA establishes a system governing the reporting and cleanup of releases of hazardous substances and provides the federal government the authority to respond to actual and threatened releases of hazardous substances, pollutants, and contaminants that may endanger public health and the environment. CERCLA requires operators of oil and gas sites to report certain releases of hazardous substances and gives EPA authority to respond to certain releases but excludes releases of petroleum (e.g., crude oil and other petroleum products) from these provisions. As previously discussed, releases of petroleum products are covered by CWA if the release threatens U.S. navigable waters or adjoining shorelines. EPA officials identified some instances of petroleum spills in dry areas that did not reach surface waters and explained that EPA had no role related to the investigation or cleanup of these incidents. We identified regulatory provisions in five of six states requiring cleanup of oil spills even if they do not reach surface waters.
For hazardous substances, CERCLA has two key elements relevant for the unconventional oil and gas industry: release reporting and EPA’s investigative and response authority. Similar to the requirements to report oil spills under CWA, CERCLA requires operators to report releases of hazardous substances above reportable quantities to the National Response Center. The National Response Center shares information about spills with other agencies, including EPA Regional offices, which allows EPA the opportunity to follow up on reported spills. EPA also has investigative and response authority under CERCLA, including provisions allowing EPA broad access to information and the authority to enter property to conduct an investigation or a removal of contaminated material. EPA has the following authorities, among others: Investigative. EPA may conduct investigations—including activities such as monitoring, surveying, and testing—in response to actual or threatened releases of hazardous substances or pollutants or contaminants. EPA can also require persons to provide information about alleged releases or threat of release. EPA officials described several instances in which the agency used CERCLA’s investigative and information gathering authorities relating to alleged hazardous substance releases from oil and gas well sites. For example, EPA used CERCLA authority to investigate private water well contamination potentially related to nearby shale gas well sites in Dimock, Pennsylvania. In addition, EPA is currently using the same authority to investigate private water well contamination potentially related to tight sandstone well sites in Pavillion, Wyoming.
Response. EPA has the authority to respond to releases of hazardous substances itself and to issue administrative orders requiring a company potentially responsible for a release of hazardous substances, which may pose an imminent and substantial endangerment, to take response actions, as well as to seek relief in a federal court. EPA officials could not provide a recent example where the agency used this authority to issue an administrative order at a well site, but EPA used the response authority to conduct sampling and to provide temporary drinking water to residents with contaminated wells in Dimock, Pennsylvania.
For more details about CERCLA, please see appendix VI.
Among other things, EPCRA provides individuals and their communities with access to information regarding storage or release of certain chemicals in their communities. Two provisions of EPCRA—release notification and chemical storage reporting—apply to oil and gas well sites. The release notification provisions require companies that produce, use, or store certain chemicals to notify state and local emergency planning authorities of certain releases that would affect the community. Spills that are strictly on-site would not have to be reported under EPCRA but may still have to be reported to the National Response Center under provisions of CWA or CERCLA. In addition, companies would have to comply with EPCRA’s chemical storage reporting provisions, which require facilities storing or using hazardous or extremely hazardous chemicals over certain thresholds to submit an annual inventory report including detailed chemical information to state and local emergency planning authorities and the local fire department. When asked whether oil and gas well sites would commonly trigger EPCRA’s release notification and chemical storage reporting requirements, EPA officials said these requirements could be triggered at every well site.
EPCRA also established the Toxics Release Inventory (TRI)––a publicly available database containing information about chemical releases from more than 20,000 industrial facilities––but EPA regulations for the TRI do not require oil and gas well sites to report to TRI. Specifically, these provisions of EPCRA generally require certain facilities that manufacture, process, or otherwise use any of more than 600 listed chemicals to report annually to EPA and their respective states on chemicals used above threshold quantities; the amounts released to the environment; and whether they were released into the air, water, or soil. EPCRA specified certain industries subject to the reporting requirement—which did not include oil and gas exploration and development—and also provided authority for EPA to add or delete industries going forward. EPA issued regulations to implement the TRI in 1988 and chose not to change the list of industries subject to the provision at that time. In 1997, EPA promulgated a rule adding seven industry groups to the list of industries required to report releases to the TRI, including coal mining and electrical utilities that combust coal and/or oil. In developing the 1997 rule, EPA considered including oil and gas exploration and production but did not do so because, according to EPA’s notice in the Federal Register for the final rule, there were concerns about how “facility” would be defined for this industry. At that time, EPA’s stated rationale was that the oil and gas exploration and production industry is unique in that it may have related activities over a large geographic area and, while together these activities may involved the management of chemicals regulated by the TRI program, taken at the smallest unit—an individual well—the chemical and other thresholds are unlikely to be met. According to EPA officials, EPA is in the preproposal stage of developing a new rule to add additional industrial sectors into the TRI program but is not planning to include the oil and gas exploration and production industry. EPA officials said that adding oil and gas well sites would likely provide an incomplete picture of the chemical uses and releases at these sites and would, therefore, be of limited utility in providing information to communities.
For more details about EPCRA, please see appendix VII.
TSCA authorizes EPA to regulate the manufacture, processing, use, distribution in commerce, and disposal of chemical substances and mixtures. TSCA provides EPA with several authorities by which EPA may assess and manage chemical risks, including the authority to (1) collect information about chemical substances, (2) require companies to conduct testing on chemical substances, and (3) take action to protect adequately against unreasonable risks. TSCA allows chemical companies to assert confidentiality claims on information provided to EPA; if the information provided meets certain criteria, EPA must protect it from disclosure to the public.
EPA maintains a list of chemicals that are or have been manufactured or processed in the United States, called the TSCA inventory. Of the over 84,000 chemicals currently in the TSCA inventory, about 62,000 were already in commerce when EPA began reviewing chemicals in 1979. Since then, EPA has reviewed more than 45,000 new chemicals, of which approximately 20,000 were added to the inventory after chemical companies began manufacturing them. As part of EPA’s Study on the Potential Impacts of Hydraulic Fracturing on Drinking Water Resources, EPA is currently analyzing information provided by nine hydraulic fracturing service companies, including a list of chemicals used in hydraulic fracturing operations. EPA officials said that they expect most of the chemicals disclosed by the service companies to appear on the TSCA inventory list, provided that chemicals are not classified solely as pesticides. EPA officials do not expect to be able to compare the list of chemicals provided by the nine hydraulic fracturing service companies to the TSCA inventory until the release of a draft report of the Study on the Potential Impacts of Hydraulic Fracturing on Drinking Water Resources for peer review, expected in late 2014.
In August 2011, EPA received a petition from the environmental group Earthjustice and 114 others asking the agency to exercise TSCA authorities and issue rules to require manufacturers and processors of chemicals used in oil and gas exploration and production to develop and provide certain information to EPA. According to the petition, EPA and the public currently lack adequate information about the health and environmental effects of chemicals used in oil and gas exploration and production, and EPA should exercise its TSCA authorities to ensure that chemicals used in oil and gas exploration and production do not present an unreasonable risk of harm to health and the environment. In a letter to the petitioners, EPA granted the petition in part, stating there is value in beginning a rulemaking process under TSCA to obtain data on chemical substances used in hydraulic fracturing. EPA’s letter also stated that the TSCA proposal would focus on providing an aggregate picture of the chemical substances used in hydraulic fracturing, which would complement and not duplicate well-by-well disclosure programs that exist in some states. The letter also indicates that the agency is drafting an Advance Notice of Proposed Rulemaking on this issue. As of August 31, 2012, EPA has not released a publication date for this proposed rulemaking. EPA also intends to convene a stakeholder process to gather additional information for use in developing a proposed rule.
For more details about TSCA, please see appendix VIII.
FIFRA, as amended, mandates that EPA administer pesticide registration requirements and authorizes EPA to regulate the use, sale, and distribution of pesticides to protect human health and preserve the environment. FIFRA requires that EPA register new pesticides; pesticide registration is a very specific process that is not valid for all uses of a particular chemical. Instead, each registration describes the chemical and its intended use (i.e., the crops/sites on which it may be applied), and each use must be supported by research data. According to EPA officials, some pesticides registered under FIFRA are used in hydraulic fracturing, and EPA has approved registrations of some pesticides for this purpose. According to a report about shale gas development by the Ground Water Protection Council, operators may use pesticides to kill bacteria or other organisms that may interfere with the hydraulic fracturing process. For example, glutaraldehyde may be used by operators to eliminate bacteria that produce byproducts that cause corrosion inside the well and was reregistered for this purpose by EPA in 2007.
Exemptions Are Related to Preventive Programs
As discussed above, in six of the eight federal environmental and public health laws identified, there are exemptions or limitations in regulatory coverage related to the oil and gas exploration and production industry (there are two exemptions related to CAA). All of these exemptions are related to programs designed to prevent pollution (see table 2). For example, under CWA, EPA generally requires permits for stormwater discharges at construction sites, which prevents sediment from entering nearby streams. However, the Water Quality Act of 1987 and Energy Policy Act of 2005 largely exempted the oil and gas exploration and production sector from these stormwater permitting requirements. Four of the exemptions are statutory (related to SDWA, CWA, CAA, and CERCLA), and three are related to regulatory decisions made by EPA (related to CAA, RCRA, and EPCRA). States may have regulatory programs related to some of these exemptions or limitations in federal regulatory coverage. For example, although oil and gas exploration and production wastes are not regulated under RCRA as hazardous, which reduces the federal role in management of such wastes, they are nonetheless solid wastes. State regulations may govern management of solid waste, and certain EPA regulations address minimum requirements for how solid waste disposal facilities should be designed and operated.
The exemptions do not limit the authorities EPA has under federal environmental and public health laws to respond to environmental contamination. Table 3 lists EPA authorities that may be applicable when conditions or events at a well site present particular risk to the environment or human health. As noted throughout this report, EPA has used several of these authorities at oil and gas wells. For example, as discussed above, EPA Region 8 has used RCRA’s imminent and substantial endangerment authorities to issue RCRA imminent and substantial endangerment orders to operators in Wyoming after discovering that pits near oil production sites were covered with oil and posed a hazard to birds. Similarly, as discussed above, EPA is using CERCLA’s response authority to investigate private water well contamination in Pavillion, Wyoming.
Whether an authority is available depends on requisite conditions being met in a given instance. EPA officials said that, in some instances, response authorities of multiple federal environmental laws could be used to address a threat to public health or the environment. In 2001, EPA and the Department of Justice developed a memo advocating that officials consider the specifics of a situation and use the most appropriate authority. See appendixes II through VI for a more detailed discussion of these authorities.
States in Our Review Implement Additional Requirements and Recently Updated Some Requirements
The six states in our review implement additional requirements governing a number of activities associated with oil and gas development. One of the states—Pennsylvania—is also part of the Delaware River Basin Commission—a regional commission that implements additional requirements. All six states have updated some aspects of their requirements in recent years.
States in Our Review Implement Additional Requirements and Certain Federal Requirements
In addition to implementing and enforcing certain aspects of federal requirements with EPA approval and oversight, the six states in our review implement additional requirements governing a number of activities associated with oil and gas development. State requirements often do not explicitly differentiate between conventional and unconventional development but, in recent years, states have begun to promulgate some requirements that apply specifically to unconventional development. States have regulatory requirements related to a variety of activities involved in developing unconventional reservoirs, including siting and site preparation; drilling, casing, and cementing; hydraulic fracturing; well plugging; site reclamation; waste management and disposal; and managing air emissions. Table 4 compares selected state requirements and related federal environmental and public health requirements; a more comprehensive table is available in appendix X. Several studies noted that development practices and state requirements may vary based on a number of factors, including geology, climate, and the type of resource being developed. We did not assess whether all requirements are appropriate for all states as part of this review.
All six states we reviewed have state requirements regarding site selection and preparation, though the specifics of their requirements vary. Specifically, states have requirements for baseline testing of water wells, required setbacks from water sources, and stormwater management, among others. For example, three of the six states—Colorado, Ohio, and Pennsylvania—have requirements that encourage or require operators to conduct baseline water testing in certain cases. Colorado requires testing of certain nearby wells when a proposed coalbed methane well is located within a quarter-mile of a conventional gas well or a plugged and abandoned well. In Ohio, baseline water well sampling is required within 1,500 feet of any proposed horizontal well or within 300 feet of any kind of well proposed in an urban area. Pennsylvania does not require baseline testing, but state law presumes operators to be liable for any pollution of water wells within 2,500 feet of an unconventional well that occurs within 12 months of drilling activities, including hydraulic fracturing. Operators in Pennsylvania can defend against this presumption if they have predrilling tests conducted by an independent certified laboratory showing that the pollution predated drilling. State regulators in Pennsylvania said that nearly all companies in Pennsylvania conduct baseline testing of nearby water wells, in many cases up to 4,000 feet from the drilling site.
Five of the six states—Colorado, North Dakota, Ohio, Pennsylvania, and Wyoming—we reviewed have requirements related to setbacks for well sites or equipment from certain water sources. For example, in Ohio, oil and gas wells and associated storage tanks generally may not be within 50 feet of a stream, river, or other body of water. In Pennsylvania, unconventional wells may not be drilled within 500 feet of water wells without written owner consent unless the operator cannot otherwise access its mineral rights and demonstrates that additional protective measures will be utilized. In Pennsylvania, there are also setbacks from public water supplies and certain other bodies of water such as springs and wetlands.
Oil and gas operations are generally not subject to certain stormwater permitting requirements under the Clean Water Act, but four of the six states we contacted—Colorado, North Dakota, Pennsylvania, and Wyoming—have their own stormwater permitting requirements. For example, the Wyoming Department of Environmental Quality requires permit coverage for stormwater discharges from all construction activities disturbing 1 or more acres. These permits require the operator to develop a stormwater management program, including best management practices, that can be reviewed by the Wyoming Department of Environmental Quality. In North Dakota, operators must obtain a permit for construction activities that disturb 5 or more acres, and state officials said that nearly all oil and gas drilling projects meet this threshold. This permit also requires the operator to develop a stormwater management program and implement best management practices for managing stormwater, such as using straw bales or dikes to manage water runoff. We did not identify any stormwater permitting requirements for Ohio and Texas, but their state regulations address stormwater in other ways. For example, operators in Ohio are required to comply with the state’s best management practices during construction, such as design guidelines for constructing access roads. Texas regulations prohibit operators from causing or allowing pollution of surface water and encourage operators to implement best management practices to minimize discharges, including discharges of sediment during storm events.
States have additional requirements relating to erosion control, site preparation, and surface disturbance minimization. For more details about state siting and site preparation requirements, see appendix IX.
All of the six states in our review have requirements related to how wells are to be drilled and casing should be installed and cemented in place, though the specifics of their requirements vary. For example, states have different requirements regarding how deep operators must run surface casing to protect groundwater. In Pennsylvania, operators are required to run surface casing approximately 50 feet below the deepest fresh groundwater or at least 50 feet into consolidated rock, whichever is deeper. Generally, the surface casing may not be set more than 200 feet below the deepest fresh groundwater unless necessary to set the casing in consolidated rock. Different casing and cementing requirements apply in Pennsylvania when drilling through coal formations, which state regulators said is common in the southwest part of the state. In Texas, operators are required to run surface casing to protect all usable quality water, as defined by the Texas Commission on Environmental Quality. The depth of the surface casing may be specified in a letter by the commission or in rules specific to a particular oil or gas field, which account for local considerations. In no case may surface casing be set deeper than 200 feet below the specified depth without prior approval from the Texas Railroad Commission, the oil and gas regulator in Texas. Operators in Wyoming are generally required to run surface casing to reach a depth below all known or reasonably estimated usable groundwater as defined in regulations and generally 100 to 120 feet below certain permitted water supply wells within a quarter-mile, but certain coalbed methane wells are exempt from these requirements. Until 2012, Ohio did not specify a depth to which surface casing was required to be set but according to state regulators, the depth of the casing used to protect groundwater was dictated through the permitting process, and regulators and operators were generally following the same casing and cementing requirements for unconventional wells as they would for Class II UIC wells. Ohio adopted new regulations effective August 2012 that generally require operators to run surface casing at least 50 feet below the base of the deepest underground source of drinking water or at least 50 feet into bedrock, whichever is deeper.
Among the six states we contacted, North Dakota and Ohio are the only states with specific casing and cementing provisions for horizontal wells. However, all six states have some requirements—whether through law, regulation, or the permitting process—that generally require operators to provide regulatory officials with information about the vertical and horizontal drilling paths. For example, an application for a permit to drill a horizontal well in Wyoming must include information about the vertical and horizontal paths of the well, and operators must provide notice to owners within a half-mile of any point on the entire length of the well. In addition, operators must (1) provide notification and obtain approval from the Wyoming Oil and Gas Conservation Commission before beginning horizontal drilling and (2) file a description of the exact path of the well, known as a directional survey, within 30 days of well completion. North Dakota requires a different permit to drill a horizontal well than it does for a vertical well, and the horizontal permit contains information about the horizontal path of the well.
For more details about state drilling, casing, and cementing requirements, see appendix IX.
All six states we reviewed have requirements for disclosing the chemicals used in hydraulic fracturing, but the specific requirements vary (see table 5). Four states—Colorado, North Dakota, Pennsylvania, and Texas— require disclosure through the website FracFocus, which is a joint project of the Ground Water Protection Council and the Interstate Oil and Gas Compact Commission. For example, operators that perform hydraulic fracturing in Texas are required to upload certain information to the website FracFocus within 30 days after completion of the well or 90 days after the drilling operation is completed, whichever is earlier. Information required to be uploaded to FracFocus includes, among other things, the operator’s name; the date of completion of hydraulic fracturing; the well location; the total volume of water used to conduct fracturing; and chemicals used, including their trade names, suppliers, intended use, and concentration. In Ohio, companies have options as to how to disclose information, including through FracFocus. Wyoming’s chemical disclosure requirements were developed prior to the development of FracFocus, and the state does not require operators to disclose information through the website. Among the six states we contacted, Wyoming is the only state that requires operators to disclose certain chemical information prior to conducting hydraulic fracturing. Specifically, as part of their application for permit to drill, operators are required to submit information on the chemicals proposed to be used during hydraulic fracturing.
Five of the six states—Colorado, Ohio, Pennsylvania, Texas, and Wyoming—have specific provisions for protecting information on hydraulic fracturing fluids that is claimed as confidential business information or trade secrets. Four of the six states—Colorado, Ohio, Pennsylvania, and Texas—specifically require that the information must be provided to health professionals for diagnosis or treatment and to certain officials responding to a spill or a release. For example, in Texas, if an operator claims that a chemical is subject to trade secret protection, the chemical family or other similar description must generally be provided. Operators in Texas may not withhold information, including trade secrets, about chemicals used during hydraulic fracturing from health professionals or emergency responders who need the information for diagnostic, treatment, or other emergency response purposes, but health professionals and emergency responders must hold the information confidential except as required for sharing with other health professionals, emergency responders, or accredited laboratories for diagnostic or treatment purposes. Texas’ regulations also allow for certain entities—including the owner of the land on which the well is located, an adjacent landowner, and relevant state agencies—to challenge a claim to trade secret protection.
Five of the six states—Colorado, North Dakota, Ohio, Pennsylvania, and Wyoming—have additional requirements specifically related to hydraulic fracturing. For example, Colorado, North Dakota, Ohio, and Wyoming require operators to continuously monitor certain pressure readings during hydraulic fracturing and to notify the state if pressure exceeds a certain threshold. Ohio also requires the suspension of operations when anticipated pressures are exceeded. North Dakota has mechanical integrity requirements specific to hydraulic fracturing, including requirements for specific types of casing, valves, and other equipment, which vary based on different fracturing scenarios. In addition, Colorado, Ohio, Pennsylvania, and Wyoming require operators to notify state regulators prior to conducting hydraulic fracturing, which provides state regulators the opportunity to conduct inspections during the hydraulic fracturing. Colorado requires notice 48 hours prior to conducting hydraulic fracturing, and Ohio and Pennsylvania require notice 24 hours prior. Wyoming does not require a specific period of notice. In Wyoming, benzene, toluene, ethylbenzene, and xylene (BTEX compounds) and petroleum distillates may only be used for hydraulic fracturing with prior authorization from state oil and gas regulators. Pennsylvania law requires blowout preventers to be used when drilling into an unconventional formation.
For more details about state hydraulic fracturing requirements, see appendix IX.
All six states in our review have requirements regarding well plugging, such as notifying the state prior to plugging or using specific materials or methods to do so. For example, operators in Colorado must obtain prior approval from state regulators for the plugging method and provide notice of the estimated time and date of plugging. Colorado regulations specify that the material used for plugging must be placed in the well in a manner that permanently prevents migration of oil, gas, water, or other substances out of the formation in which it originated. Cement plugs must be a minimum of 50 feet in length and must extend a minimum of 50 feet above each zone to be protected. After plugging the well, operators must submit reports of plugging and abandonment to the Colorado Oil and Gas Conservation Commission and include information specifying the fluid used to fill the wellbore, information about the cement used, date of work, and depth of plugs. In Pennsylvania, operators must follow (1) specific provisions for well plugging based on whether the well is located in a coal area or noncoal area or (2) an alternate approved method. Prior to plugging a well in an area underlain by a workable coal seam, the oil and gas operator must notify the state and the coal company to permit representatives to be present at the plugging.
In addition, all six states have programs to plug wells that were improperly plugged and have been abandoned, though their level of activity varies. For example, state regulators in Texas said that the primary objective of their program, which began in 1983, is to plug abandoned oil and gas wells that are causing pollution or threatening to cause pollution for which a responsible operator does not exist; the responsible operator failed to plug the well; or the responsible operator failed to otherwise bring the wells into compliance. As of 2009, Texas state regulators had plugged 30,000 wells, and approximately 8,000 potentially abandoned wells remained throughout the state. Officials stated, however, that many of these abandoned wells may be re-used for development of previously overlooked reservoirs. State regulators in North Dakota said that the number of abandoned wells in the state is very low compared with other states because the state was fairly late to oil and gas development—with major development starting in the 1950s—and that the state had a good tracking system in place during the early days of development. State regulators in North Dakota used funds from its well plugging program to plug two wells in the last year.
For more details about state well plugging requirements, see appendix IX.
All six states in our review have requirements for site reclamation, though the extent of the requirements varies. Five states—Colorado, Ohio, North Dakota, Pennsylvania, and Wyoming—have requirements both for backfilling soil and for revegetating areas. For example, in Colorado, final reclamation must generally be complete within 3 months of plugging a well on crop land and within 12 months on noncrop land. Reclamation in Colorado involves returning segregated soil horizons to their original relative positions; returning crop land to its original contour; as near as practicable, returning noncrop land to its original contour to achieve erosion control and long-term stability; and adequately tilling to establish a proper seedbed. In Wyoming, operators must begin reclamation within 1 year of permanent abandonment of a well or last use of a pit and in accordance with the landowner’s reasonable requests, or to resemble the original vegetation and contour of adjoining lands. In addition, where practical, topsoil must be stockpiled during construction for use in reclamation. Texas has requirements for contouring soil, but we did not identify requirements for revegetating the area.
For more details about state site reclamation requirements, see appendix IX.
All six states in our review have some requirements regarding waste management and disposal, though specific requirements and practices vary across and within states. For example, regulators in Colorado said that the method of waste disposal varies based on the geological formation being exploited and the location of the production well. In some parts of the state, they said that the produced water generated is very salty and is therefore generally disposed of in a Class II UIC well. In contrast, in the Raton Basin—a coalbed methane formation near the border with New Mexico—the produced water is of sufficiently good quality that much of it is discharged to surface waters, according to state regulators.
All six states we reviewed have requirements regarding the use of pits for storage of produced water, drill cuttings, and other substances. For example, in North Dakota, a lined pit may be temporarily used to retain solids or fluids generated during activities including well completion, but the contents of the pits must be removed within 72 hours after operations have ceased and must be disposed of at an authorized facility. Pennsylvania requires that certain pits be lined and requires the liners to meet certain permeability, strength, thickness, and design standards; the pit itself must also be constructed so that it will not tear the liner and can bear the weight of the pit contents. In addition, Colorado and Wyoming require pitless drilling systems (tanks) to be used in certain circumstances. For example, Colorado requires pitless drilling systems for produced water from new oil and gas wells within a specified distance of certain drinking water supply areas, and Wyoming requires pitless drilling systems in areas where groundwater is less than 20 feet below the surface.
Underground injection of produced water in Class II UIC wells is a common method of disposal of produced water in five of the six states we reviewed. For example, state regulators in Ohio said that there are 177 Class II UIC disposal wells currently in operation, and 98 percent of the fluid waste from oil and gas wells in Ohio is disposed of in these Class II UIC wells. As noted previously, five out of the six states we reviewed have primary responsibility for regulating injection wells, whereas EPA implements the program in Pennsylvania. The five states in our review that have been granted primacy for their Class II UIC programs obtained it under the alternative provisions in which they demonstrate to EPA that their program is effective in preventing endangerment of underground sources of drinking water, in lieu of adopting all Class II UIC requirements in EPA regulations. All states have requirements for Class II UIC wells relating to casing and cementing, operating pressure, mechanical integrity testing, well plugging, and the monitoring and reporting of certain information, among other requirements. For example, North Dakota requires the operators of all new Class II UIC wells to demonstrate the mechanical integrity of the well and requires existing Class II UIC wells to demonstrate continued mechanical integrity at least once every 5 years. In North Dakota, mechanical integrity is demonstrated by showing that there is no significant leak in, for example, the casing; and there is no significant fluid movement into an underground source of drinking water through vertical channels adjacent to the injection well. Texas also requires operators to demonstrate the mechanical integrity of Class II UIC wells generally by conducting specified pressure tests before commencing injection, after conducting maintenance, and every 5 years. With regard to monitoring and reporting, Ohio requires operators to monitor injection pressures and volumes for each disposal well on a daily basis and to report annually on maximum and monthly average pressure and volumes.
Aside from underground injection, there are several other options for disposal of produced water, though the specifics vary across and within states. For example, regulatory agencies issue NPDES permits in Colorado, Texas, and Wyoming for direct discharges to surface waters in certain cases; in doing so, the states must apply, where applicable, EPA’s effluent limitations guidelines discussed above. According to state regulators in Wyoming, the state has about 1,000 currently active permits for discharges of produced water from coalbed methane formations and 500 permits for produced water from conventional formations. In contrast, state regulators in North Dakota said that there are no direct surface discharges of produced water in their state because the produced water is too salty.
Some states, such as Colorado and Pennsylvania, also have commercial facilities, which treat produced water before discharging it to surface waters. In addition, disposal to a POTW is an option in Ohio and Pennsylvania, but there have been some recent efforts to restrict such disposal. One concern regarding disposal to POTWs is that these facilities may not have the technology necessary to remove key pollutants, including total dissolved solids, from the waste stream. In 2010, Ohio’s Environmental Protection Agency (OEPA) approved a permit modification that allowed a POTW in Warren, Ohio, to accept 100,000 gallons per day of produced water with concentrations of less than 50,000 milligrams per liter of total dissolved solids, which was then diluted and discharged to surface waters. However, the Director of OEPA subsequently issued a determination in 2011 that the permit had been unlawfully issued because Ohio law does not generally permit the disposal of produced water through a POTW. In response, OEPA did not reauthorize the POTW to accept produced water when its NPDES permit came up for renewal in 2012. In July 2012, however, OEPA’s decision was reversed by an administrative review commission, which held that the matter was outside of OEPA’s jurisdiction. Instead, the power to prohibit disposal to a POTW lies with the Ohio Department of Natural Resources. Accordingly, the commission removed the NPDES permit’s prohibition on accepting produced water. Prior to 2011, POTWs in Pennsylvania also accepted produced water from oil and gas well sites. The Pennsylvania Department of Environmental Protection issued administrative orders to POTWs in Pennsylvania requiring, among other things, that the POTWs restrict the volume of oil and gas wastewater they were accepting, evaluate the impacts of oil and gas wastewaters on their treatment process, and submit certain samples of oil and gas wastewater accepted for treatment. In addition, the state of Pennsylvania requested that operators of Marcellus shale gas wells stop delivering produced water to POTWs and began revising the POTWs’ NPDES permits. State officials later reported that POTWs in Pennsylvania were no longer accepting produced water from the Marcellus shale, and EPA Regional officials said that they believe that POTWs are accepting less produced water.
In addition to permanent disposal of produced water, all six states in our review allow for recycling or other reuses of produced water. For example, according to a 2011 report, over 50 percent of the produced water in Colorado is recycled. In addition, state regulators in Pennsylvania said that the best option for dealing with produced water in the state is recycling, and the Department of Environmental Protection can track what percentage of recycled water was used in hydraulic fracturing based on information required on well completion reports. Approximately 90 percent of produced water in Pennsylvania is recycled, according to state regulators. The Texas Railroad Commission has approved several recycling projects in the Barnett Shale to reduce the amount of fresh water used in development activities there. Four of the six states—Colorado, North Dakota, Ohio, and Wyoming—also allow operators to reuse certain types of fluid waste for road applications. For example, in Ohio, produced water, excluding flowback from hydraulic fracturing, may be used for dust and ice suppression on roads with the approval of local governments; approximately 1 percent of produced water is used in this way. In Wyoming, road and land applications may be permitted as reuses of produced water. North Dakota allows road but not land application of produced water.
Regulatory agencies in all six states implement requirements for the disposal of waste such as drill cuttings. For example, in Colorado, drill cuttings may be buried in pits at the well site, an activity which is regulated by the Colorado Oil and Gas Conservation Commission. Drill cuttings taken off site for disposal at a commercial waste facility must comply with the regulations of the state’s Department of Public Health and Environment that govern those facilities. Texas allows drill cuttings to be landfarmed on the well site where they were generated with the written permission of the surface owner of the site if they were obtained using drilling fluids with a chloride concentration of 3,000 milligrams per liter or less. Texas allows on-site burial of drill cuttings that were obtained using drilling fluids with a chloride concentration in excess of 3,000 milligrams per liter. In North Dakota, operators frequently bury drill cuttings on-site where the North Dakota Industrial Commission’s Oil and Gas Division has authority, but, in some cases, the drill cuttings may be disposed of at a landfill under the jurisdiction of the Department of Health due to shallow groundwater or permeable subsoil.
As discussed earlier in this report, officials in the six states we reviewed were not aware of any oil or gas well sites that would be regulated as small-quantity generators of hazardous waste under RCRA. Pursuant to RCRA, regulation of waste that is not considered hazardous is largely a state responsibility. Some states have special categories of waste and associated additional requirements that apply to industrial wastes generally, or oil and gas wastes specifically. For example, waste from crude oil and natural gas exploration and production in North Dakota is called special waste. Special waste landfills must be permitted and comply with specific design standards. Currently, there are four special waste landfills in North Dakota with another five proposed special waste landfills at the beginning stages of the permitting process. State regulators said that special waste consists mostly of drill cuttings but can also include other things such as contaminated soil. In Pennsylvania, oil and gas waste falls into a category of waste called residual waste that applies to, among other things, certain wastes from industrial, mining, or agricultural operations. Residual waste disposal must be permitted and is subject to processing and storage rules.
All six states in our review have requirements for managing and disposing of wastes, such as oilfield equipment, drilling solids, and produced water that have been exposed to or contaminated with naturally-occurring radioactive material (NORM) or technologically-enhanced NORM.occurs naturally in some geologic formations that also contain oil or gas and when NORM is brought to the surface during drilling and production, it remains in drill cuttings and produced water and, under certain conditions, creates scales or deposits on pipes or other oilfield equipment. Officials at the Colorado Department of Public Health and Environment said that they set tiers for how to manage materials that contain NORM based on their level of radioactivity. In addition, they said that the department is working with the Colorado Oil and Gas Conservation Commission to require operators to perform certain tests on produced water before allowing produced water to be used for road application. Texas officials said that the state requires operators to identify NORM-contaminated equipment with the letters “NORM” by securely attaching a clearly visible waterproof tag or marking with a legible waterproof paint or ink. In addition, Texas requires operators to dispose of oil and gas NORM waste by methods that are specifically authorized by rule or specifically permitted. State regulators in Wyoming said that a lot of NPDES permits for direct discharges to surface waters have limits on radioactivity that would probably lead the operator to dispose of produced water contaminated with NORM in a Class II UIC well.
For more details about states waste management and disposal requirements, see appendix IX.
Five of the six states we reviewed have permitting or registration requirements for managing air emissions from oil and gas production sites. In addition, all six states have requirements related to venting and flaring of gas and limiting or managing emissions of hydrogen sulfide—a hazardous and deadly gas—at drilling sites.
Five of the six states we reviewed —Colorado, North Dakota, Ohio, Texas, and Wyoming—have developed permitting or registration requirements that apply to oil and gas development. For example, according to state regulators, the vast majority of production wells in Colorado require air permits. Operators with certain condensate tanks and tank batteries are required to obtain a permit if the tanks have uncontrolled actual emissions of volatile organic compounds greater than or equal to 2 tons per year in areas which are not attaining certain air quality standards (nonattainment areas) or greater than or equal to 5 tons per year in an attainment area. As part of the permit requirements, operators in nonattainment areas must reduce emissions of volatile organic compounds by 90 percent from uncontrolled actual emissions during certain times of the year, and by 70 percent during other times, and reduce emissions by 90 percent for dehydration systems. In Ohio, an operator meeting certain requirements must obtain an air permit that lists each source of emissions; all applicable rules that apply to the sources, including federal and state requirements; operational restrictions; monitoring; recordkeeping; reporting; and testing requirements. Wyoming officials noted that oil and gas facilities are subject to general state permitting requirements but did not identify any permitting requirements specific to air emissions from oil and gas development. In Wyoming, state regulators have worked with industry to achieve voluntary reductions from mobile sources in certain parts of the state that may soon not meet air quality standards for ozone. Specifically, officials at the Wyoming Department of Environmental Quality said that they have asked operators in certain areas to agree to implement voluntary reductions in volatile organic compounds and nitrogen oxides and to install controls on diesel engines on mobile drilling rigs; regulators then include these requirements in the air permit issued to the operator. North Dakota and Texas also have permitting or registration requirements, and Pennsylvania is in the process of developing an inventory for oil and gas emissions information.
All six states have some requirements for flaring excess gas encountered during drilling and production, which may otherwise pose safety hazards and contribute to emissions. For example, operators in Pennsylvania who encounter excess gas during drilling or hydraulic fracturing must capture the excess gas, flare it, or divert it away from the drilling rig in a manner that does not create a hazard to public health and safety. According to state regulators in Wyoming, the Oil and Gas Conservation Commission has jurisdiction for flaring prior to production when the primary concern with flaring is safety. For flaring that occurs after production has begun, the Department of Environmental Quality requires 98 percent combustion efficiency.
All six states have safety requirements to limit and manage emissions of hydrogen sulfide—a hazardous and deadly gas—at drilling sites. For example, in Texas, operators are subject to detailed requirements in areas where exposure to hydrogen sulfide could exceed a certain threshold if a release occurred, taking into consideration whether the area of potential exposure includes any public areas such as roads. Requirements relate to posting warning signs, using fencing, maintaining protective breathing equipment at the well site, installing a flare line and a suitable method for lighting the flare, and conducting training. In some cases, hydrogen sulfide requirements overlap with flaring requirements. For example, flares used for treating gas containing hydrogen sulfide in North Dakota must be equipped and operated with an automatic ignitor or a continuous burning pilot, which must be maintained in good working order, including flares that are used for emergency purposes only.
For more details about state requirements for managing air emissions, see appendix IX.
Regional Commission Implements Additional Requirements
One of the states in our review—Pennsylvania—is also part of a regional commission that implements additional requirements governing several aspects of natural gas development. Specifically, the Delaware River Basin Commission is a regional body whose members include the governors of Delaware, New Jersey, New York, Pennsylvania, as well as the U.S. Army Corps of Engineers’ Division Engineer for the North Atlantic Division. The commission regulates water quantity and quality within the basin, which spans approximately 13,500 square miles.
In December 2010, the Delaware River Basin Commission published draft Natural Gas Development Regulations, which are currently under consideration for adoption, and the commission will not issue any permits for shale gas wells within the basin until the final regulations have been adopted. The draft regulations propose a number of requirements related to the protection of certain landscapes and waters and how to handle wastewater generated by natural gas development. For example, the proposed regulations require that produced water stored on the well pad be kept in enclosed tanks. In addition, operators of treatment and/or discharge facilities proposing to accept natural gas wastewater would be required to provide the commission with information on the contents of the proposed discharge and submit a study showing that the proposed discharge could be adequately treated. Natural gas well operators would also be required to have natural gas development plans for projects that exceed certain thresholds for acreage or number of wells. According to commission officials, the natural gas development plans would allow the commission to consider the cumulative impacts of development from numerous well pads, associated roads, and pipeline infrastructure, and to minimize and mitigate disturbance on lands most critical to water resources, such as core forests and steep slopes. The plans will also help protect water resources for approximately 15 million people, including residents of New York City and Philadelphia.
States Have Recently Updated Some Requirements
All six states in our review have updated some aspects of their requirements in recent years. Key examples include the following:
Colorado made extensive amendments to its oil and gas regulations in 2008, which included, among other things, restrictions on locating wells near drinking water sources, measures to manage stormwater, and requirements to consult with the Colorado Division of Wildlife in certain cases to minimize adverse impacts on wildlife. According to state officials, these regulatory updates served three primary purposes: (1) address the growing impacts of increased oil and gas development; (2) implement state legislation passed in 2007 directing the Colorado Oil and Gas Conservation Commission to work with the Colorado Department of Public Health and Environment and the Colorado Division of Wildlife to update its regulations; and (3) update existing rules to enhance clarity, respond to new information, and reflect current practices and procedures.
In 2012, North Dakota implemented 26 rule changes, including the requirement for operators to drain pits and properly dispose of their contents within 72 hours after well completion, servicing, or plugging operations have ceased. According to state officials, this change was implemented in response to a number of pit overflows that occurred during the spring melt in 2010 and 2011.
In 2012, Ohio adopted new oil and gas well construction regulations to implement state legislation passed in 2010. The new regulations include casing and cementing requirements and requirements to disclose the chemicals used in hydraulic fracturing.
Pennsylvania passed legislation in 2012 which, among other things, requires unconventional wells to be sited at greater setback distances from existing buildings and water wells than was previously required for all wells and requires chemical disclosure through FracFocus. In addition, the new legislation increases the distance from which an operator of an unconventional well may be presumed liable in the event of pollution of nearby water wells from 1,000 feet to 2,500 feet.
The Texas Commission on Environmental Quality updated its air emissions regulations for oil and gas facilities in 2011, including emissions limitations for nitrogen oxide and volatile organic compounds. Texas officials told us that changes included requirements for operators to install controls on stationary compressor engines and storage tanks. In addition, operators in the Dallas-Fort Worth area have agreed to voluntarily reduce emissions of volatile organic compounds by replacing pneumatic valves with no-bleed or low-bleed valves which helps to address nonattainment issues in the area while also reducing emissions of hazardous air pollutants. Texas also adopted a regulation in December 2011 regarding chemical disclosure requirements in order to implement state legislation passed several months earlier.
In 2010, Wyoming updated its chemical disclosure requirements. According to state regulators, operators were always required to provide notification to the Wyoming Oil and Gas Conservation Commission before conducting hydraulic fracturing, but recent regulatory changes clarified these requirements and also added detailed requirements on what information was required to be disclosed.
In the last 3 years, Colorado, Ohio, and Pennsylvania volunteered to have parts of their regulations reviewed by the State Review of Oil and Natural Gas Environmental Regulations (STRONGER) program, which is administered by the Ground Water Protection Council and brings together state, industry, and environmental stakeholders to review state oil and gas environmental regulations and make recommendations for improvement. Ohio and Pennsylvania have made regulatory changes that reflect STRONGER’s recommendations. For example, STRONGER completed a review of Pennsylvania’s regulations in September 2010. The review team commended the state for encouraging baseline groundwater testing in the vicinity of wells but also recommended that the state consider whether the testing radius should be expanded to take into account the horizontal portions of fractured wells. As discussed above, in 2012, Pennsylvania passed legislation that increases the distance from which an operator of an unconventional well may be presumed liable in the event of pollution of nearby water wells from 1,000 feet to 2,500 feet.
State regulators said that the addition was in response to the state’s September 2010 STRONGER review and the Governor’s Marcellus Shale Advisory Commission. State regulators are also considering additional regulatory changes in response to the remaining recommendations of the Governor’s Marcellus Shale Advisory Board.
Additional Requirements Apply on Federal Lands
Federal land management agencies, including the Bureau of Land Management (BLM), Forest Service, National Park Service, and Fish and Wildlife Service (FWS) manage federal lands for a variety of purposes. Specifically, both the Forest Service and BLM manage their lands for multiple uses, including oil and gas development; recreation; and provision of a sustained yield of renewable resources, such as timber, fish and wildlife, and forage for livestock. By contrast, the Park Service manages its lands to conserve the scenery, natural and historical objects, and wildlife so they remain unimpaired for the enjoyment of present and future generations. Similarly, FWS manages national wildlife refuges for the benefit of current and future generations, seeking to conserve and, where appropriate, restore fish, wildlife, plant resources, and their habitats.
Each of these agencies imposes additional requirements for oil and gas development on its lands to meet its obligations with respect to its mission. These additional federal requirements are the same for conventional and unconventional oil and gas development. In some cases, the surface rights to a piece of land and the right to extract oil and gas—called mineral rights—are owned by different parties. For example, private mineral rights might underlie lands where the surface is managed by a federal agency. Requirements for developing mineral rights vary based on whether the mineral rights are owned by the federal government or by a private entity.
Requirements for Federally Owned Mineral Rights
Requirements for operators developing federally owned mineral rights are imposed by federal agencies during planning and leasing processes carried out by federal agencies. Operators must also meet specific requirements during several of the activities involved in oil and gas development.
BLM has primary authority for issuing leases and permits for federal oil and gas resources even in cases when surface lands are managed by other federal agencies or owned by private landowners. The majority of federal oil and gas leases underlie lands managed by BLM or the Forest Service, but there are some federal oil and gas resources available for leasing under lands managed by other federal agencies or private landowners. Altogether, BLM oversees oil and gas development on approximately 700 million subsurface acres.
Pub. L. No. 91-190 (1970), codified as amended at 42 U.S.C. §§ 4321-4347 (2012). either an environmental assessment or environmental impact statement.After the planning process, BLM takes the lead in preparing the NEPA analysis for leases when the surface lands are managed by BLM or owned by a private landowner (see table 6). For Forest Service lands, the Forest Service takes the lead in preparing the NEPA analysis and coordinates with BLM so that BLM’s subsequent leasing decision can be supported by the same analysis. At both agencies the NEPA review focuses on how the sale of leases may affect the environment and public health and, according to BLM officials, often includes mitigation measures that ultimately become stipulations on leases and permits for that tract of federal land. After the environmental impact statement is completed, BLM sells the lease to an operator through an auction or by other means.
After acquiring a lease for the development of federal oil and gas, an operator is required to submit an application for permit to drill (APD) for individual wells to BLM. According to BLM officials, the APD is a comprehensive plan for drilling and related activities, which is approved by BLM. Prior to permit issuance for the proposed drilling activity, BLM is required to document that needed reviews under NEPA have been conducted. According to officials, at this step BLM conducts site-specific NEPA analysis, often drawing on the previous NEPA analysis conducted prior to the lease sale, but supplemented with more specifics about the proposed well site and related facilities, such as access roads or pipelines. The environmental review may also identify mitigation measures that could be used to reduce the environmental effects of drilling. The APD includes two key components: (1) the drilling plan, which describes the plan for drilling, casing, and cementing the well; and (2) the surface use plan of operations, which describes surface disturbances, such as road construction to the well pad and installation of any needed pipelines or other infrastructure. BLM is responsible for reviewing and approving the APD as a whole but gets input from the surface land management agency regarding the surface use plan of operations. For example, the Forest Service is responsible for review and approval of the surface use plan of operations component of the APD. After reviewing the operator’s APD, BLM approves the APD, often by attaching conditions of approval and requiring the operator to take mitigation measures as described in the environmental review or recommended by the surface land management agency. Once the APD is approved, and any state or local approvals are obtained, the operator can begin work.
BLM has overall responsibility for ensuring compliance with approved APDs but coordinates with other surface land management agencies as appropriate. According to BLM officials, BLM is responsible for inspections and enforcement related to drilling operations, including running tests on casing and cementing. In addition, BLM officials said that they coordinate with surface land management agencies regarding surface conditions. Forest Service officials said that the Forest Service is responsible for conducting inspections relative to surface uses authorized by the surface use plan of operations. These officials said that if Forest Service personnel note possible noncompliance related to drilling or production operations, they notify and coordinate with BLM. Similarly, officials said that, if BLM conducts an inspection and notices potential violations of the surface use plan of operations, they contact the Forest Service.
Operators of wells accessing federal oil and gas also face requirements related to activities involved in oil and gas development. Specifically, these requirements are related to siting and site preparation; drilling, casing, and cementing; well plugging; site reclamation; waste management and disposal; and managing air emissions. Requirements are as follows:
Siting and site preparation. BLM requires an operator to identify all known oil and gas wells within a 1-mile radius of the proposed location. BLM does not require baseline testing of groundwater near the proposed well site. BLM generally prohibits an operator from conducting operations in areas highly susceptible to erosion, such as floodplains or wetlands, and recommends that operators avoid steep slopes and consider temporarily suspending operations when weather-related conditions, such as freezing or thawing ground, would cause excessive impacts.
Drilling, casing, and cementing. As discussed above, operators must submit detailed drilling plans as part of their APD. The drilling plan must be sufficiently detailed for BLM to appraise the technical adequacy of the proposed project and must include, among other things: (1) geologic information about the formations that the operator expects to encounter while drilling; (2) whether these formations contain oil, gas, or useable water and, if so, how the operator plans to protect such resources; (3) a proposed casing plan, including details about the size of the casing and the depths at which each layer of casing will be set; (4) the estimated amount and type of cement to be used in the well; and (5) a description of any horizontal drilling that is planned.
Well plugging. Operators are required to provide notice to and get approval from BLM prior to plugging a well and to comply with specific technical standards in plugging the well.
Site reclamation. Operators describe their plans for reclamation in the surface use plan of operations submitted as part of the APD. BLM requires operators to return the disturbed land to productive use. All well pads, pits, and roads must be reclaimed and revegetated. Interim and final reclamation generally must be completed within 6 months of the well entering production and being plugged, respectively.
Waste management and disposal. In the surface use plan of operations, operators must describe the methods and locations proposed for safe disposal of wastes, such as drill cuttings, salts, or chemicals that result from drilling the proposed well. The description must also include plans for the final disposition of drilling fluids and any produced water recovered from the well.
Managing air emissions. For operations in formations that could contain hydrogen sulfide, BLM requires a hydrogen sulfide operations drilling plan, which describes safety systems that will be used, such as detection and monitoring equipment, flares, and protective equipment for essential personnel.
In some cases, BLM and states may regulate similar activities; in such cases, operators must comply with the more stringent regulation. For example, North Dakota state requirements allow the use of pits only for short-term storage of produced water. BLM generally allows the use of pits for longer-term storage of produced water, but operators cannot do so on federal lands in North Dakota due to state requirements. See appendix X for a comparison of federal environmental requirements, state requirements, and additional requirements that apply on federal lands.
BLM recently proposed new requirements for oil and gas development on federal lands. Specifically, in May 2012, BLM proposed regulations that update and add to its current requirements related to hydraulic fracturing. As proposed, these regulations would require operators of wells under federal leases to (1) publicly disclose the chemicals they use in hydraulic fracturing; (2) take certain steps to ensure the integrity of the well, including complying with certain cementing standards and confirming through mechanical integrity testing that wells to be hydraulically fractured meet appropriate construction standards; and (3) develop plans for managing produced water from hydraulic fracturing and store flowback water from hydraulic fracturing in a lined pit or a tank. According to BLM officials, BLM’s proposed rule is intended to improve stewardship and operational efficiency by establishing a uniform set of standards for hydraulic fracturing on public lands. According to BLM officials, a final rule is expected in the fall of 2012.
Requirements for Privately Owned Mineral Rights under Federal Surface Lands
Subject to some restriction, owners of mineral rights that underlie federal lands have the legal authority to explore for oil and gas and, if such resources are found, to develop them. Federal land management agencies’ authorities to control the surface impacts of drilling for privately owned minerals underlying federal lands vary based on a variety of factors, including which federal agency is responsible for managing the surface lands.
According to BLM officials, private mineral owners seeking to develop oil and gas would need to obtain a right-of-way grant from BLM for any surface disturbance, including the well pad, but otherwise BLM has limited authority over the private owners’ use and occupancy of the BLM- managed surface lands. Officials said that BLM would have the same rights as a private surface owner under state law to hold a mineral rights owner to “reasonable surface use.” BLM officials explained that BLM would perform a NEPA analysis prior to issuing the right-of-way grant. According to officials, the agency applies its general regulations for granting rights of way, but BLM did not have specific guidance regarding oversight of private mineral operations on BLM lands.
According to Forest Service officials, Forest Service authority related to the development of privately owned minerals is limited because private mineral owners have the legal right to develop such resources. The Forest Service manages a large number of wells accessing privately owned minerals. Specifically, Forest Service officials said that, of the 19,000 operating oil and gas wells on Forest Service lands, about three- fourths are producing privately owned minerals. Forest Service officials explained that the Forest Service evaluates the effects of the development and, through negotiations with the operator, tries to reach agreement on certain mitigation measures. Officials explained that these mitigation measures are generally not as stringent or specific as mitigation measures used on federal leases. In addition, Forest Service officials explained that enforcement options are limited for environmental damage from development of privately owned minerals. Generally, the Forest Service can work with state oil and gas agencies to have them enforce any relevant state requirements regarding surface impacts, or the Forest Service can seek an injunction from the court to stop damaging actions and then pursue possible damages or restitution via the court. According to Forest Service officials, development of privately owned minerals has been a particular challenge in the Alleghany National Forest in Pennsylvania where privately owned minerals underlie more than 90 percent of the forest. Forest Service officials stated that there are approximately 1,000 new wells drilled in this forest each year, most of which are shallow conventional oil development. Officials said that the pace of this development has made it difficult for the Forest Service to manage other forest uses, such as recreation and timber extraction.
See GAO, National Wildlife Refuges: Opportunities to Improve the Management and Oversight of Oil and Gas Activities on Federal Lands, GAO-03-517 (Washington, D.C.: Aug. 28, 2003). partly because FWS does not currently have regulations that directly address oil and gas development. FWS officials said that the agency is developing a proposed rule that will set requirements for operators developing privately owned minerals. Officials expect an Advance Notice of Proposed Rulemaking to be issued in calendar year 2012. FWS officials said that, despite having minimal requirements for operators drilling for privately owned minerals, they can use other federal authorities and work with federal and state agencies to minimize or remediate injury to FWS lands. For example, FWS worked with EPA to respond to a spill of produced water into a stream on a National Wildlife Refuge in Louisiana in 2005, in violation of CWA. EPA, the Coast Guard, and the Department of Justice worked together on the case, and the operator ultimately paid $425,000 to FWS for the two affected wildlife refuges. According to agency officials, however, without specific regulations, FWS faces challenges conducting daily management and oversight of oil and gas activities on FWS lands.
The Park Service’s 9B regulations govern potential impacts to all park system resources and values resulting from exercise of private oil and gas rights within Park Service administered lands. These regulations require an operator to submit a proposed plan of operations to the Park Service, which outlines the activities that are proposed for Park Service lands, including drilling, production, transportation, and reclamation. The regulations also outline certain requirements for operators, including that operations be located at least 500 feet from surface waters, that fences be used to protect people and wildlife, and that during reclamation the operator reestablish native vegetation. The Park Service analyzes the operator’s proposed plan of operations to ensure that the proposed plan complies with the 9B regulations. Also, in determining whether it can approve an operation, the Park Service undertakes an environmental analysis under NEPA. Once the Park Service approves the proposed plan of operations, the operator can begin drilling. The Park Service continues to have access to the site for monitoring and enforcement purposes. In November 2009, the Park Service issued an Advance Notice of Proposed Rulemaking to update its 9B regulations; a proposed rule is expected in September 2013, according to agency officials.
Federal and State Agencies Reported Several Challenges Regulating Unconventional Oil and Gas Development
Federal and state agencies reported facing several challenges in regulating oil and gas development from unconventional reservoirs. Specifically, EPA officials reported that their ability to conduct inspection and enforcement activities and limited legal authorities are challenges. In addition, BLM and state officials reported that hiring and retaining staff and educating the public are challenges.
Conducting Inspection and Enforcement Activities
Officials at EPA reported that conducting inspection and enforcement activities for oil and gas development from unconventional reservoirs is challenging due to limited information, as well as the dispersed nature of the industry and the rapid pace of development. More specifically, according to EPA headquarters officials, enforcement efforts can be hindered by a lack of information in a number of areas. For example, in cases of alleged groundwater contamination, EPA would need to link changes in groundwater quality to oil and gas activities before taking enforcement actions. However, EPA officials said that often no baseline data exist on the quality of the groundwater prior to oil and gas development. These officials also said that linking groundwater contamination to a specific activity may be difficult even in cases where baseline data are available because of the variability and complexity of geological formations.
As discussed earlier in this report, in 2005, the Energy Policy Act amended SDWA to specifically exempt hydraulic fracturing from the UIC program, unless diesel fuel is used in the hydraulic fracturing process. the agency does not know which operators are using diesel. Similarly, with respect to CWA, EPA officials said it is difficult to assess operators’ compliance with the SPCC program, which establishes spill prevention and response planning requirements in accordance with CWA, because EPA does not know the universe of operators with tanks subject to the SPCC rule. In addition, related to CAA, EPA headquarters officials said that it would be difficult for EPA to find oil and gas wells that are subject to but noncompliant with NESHAPs because EPA does not have information on the universe of oil and gas well sites with the equipment that are significant to air emissions. Also, according to EPA Region 8 officials, these requirements are “self-implementing,” and EPA would only receive notice from a facility that identifies itself as subject to the rules.
Several EPA officials also mentioned that the dispersed nature of the industry and the rapid pace of development make conducting inspections and enforcement activities difficult. For example, officials in EPA Region 5 said that it is a challenge to locate the large number of new well sites across Ohio and to get inspectors out to these sites because EPA generally does not receive information about new wells or their location. EPA headquarters officials also mentioned that many oil and gas production sites are not continuously staffed, so EPA needs to contact operators and ensure that someone will be present before visiting a site to conduct an inspection. Officials in EPA Region 6 said that the dispersed nature of the industry, the high level of oil and gas development in the Region, and the cost of travel have made it difficult to conduct enforcement activities in their Region.
EPA officials in headquarters said that SDWA is a difficult statute to enforce because of the variation across states. Specifically, SDWA authorizes EPA to approve, for states that elect to assume this responsibility, individual states’ programs as alternatives to the federal UIC Class II regulatory program. As a result, EPA’s enforcement actions have to be specific to each state’s program, which increases the complexity for EPA. In addition, SDWA requires that EPA approve each state’s UIC program by regulation rather than through an administrative process, and many of the federal regulations for state UIC programs are out of date. EPA officials said that this has hindered enforcement efforts, and some cases have been abandoned because EPA can only enforce those aspects of state UIC regulations that have been approved by federal regulation.
Limited Legal Authorities
EPA officials also reported that the scope of their legal authorities for regulating oil and gas development is a challenge. For example, EPA officials in headquarters and Regional offices told us that the exclusion of exploration and production waste from hazardous waste regulations under RCRA significantly limits EPA’s role in regulating these wastes. For example, if a hazardous waste permit was required, then EPA would obtain information on the location of well sites, how much hazardous waste is generated at each site, and how the waste is disposed of; however, operators are not required to obtain hazardous waste permits for oil and gas exploration and production wastes, limiting EPA’s role. As discussed earlier in this report, EPA is currently considering a petition to revisit the 1988 determination not to regulate these wastes as hazardous, but according to officials, has no specific time frame for responding. In addition, as we described earlier in this report, officials in Region 8 noted that EPA cannot use either its CERCLA or CWA emergency response authority to respond to spills of oil if there is no threat to U.S. navigable waters or adjoining shorelines because those statutory authorities do not extend to such situations.
Hiring and Retaining Staff
Officials at BLM, Forest Service, and state agencies reported challenges hiring and retaining staff. For example, BLM officials in North Dakota said recruiting is a challenge because the BLM pay scale is relatively low compared with the current cost of living near the oil fields in the Bakken formation. Similarly, BLM officials in North Dakota and headquarters both said that retaining employees is difficult because qualified staff are frequently offered more money for private sector positions within the oil and gas industry. BLM officials in Wyoming told us that their challenges related to hiring and retaining staff have made it difficult for the agency to keep up with the large number of permit requests and meet certain inspection requirements. We previously reported that BLM has encountered persistent problems in hiring, training, and retaining sufficient staff to meet its oversight and management responsibilities for oil and gas operations on federal lands. For example, in March 2010, we reported that BLM experienced high turnover rates in key oil and gas inspection and engineering positions responsible for production verification activities. We made a number of recommendations to address this and other issues—and the agency agreed—but we reported in 2011 that the human capital issues we identified with BLM’s management of onshore oil and gas continue.
State oil and gas regulators in two of the six states we reviewed—North Dakota and Texas—also reported challenges with employees leaving their agencies for higher paying jobs in the private sector. Officials from the North Dakota Industrial Commission––which regulates oil and gas development––said they have partially mitigated this challenge by removing state geologists and engineers from the traditional state pay scale and offering signing and retention bonuses. In addition, state environmental regulators in three of the six states—North Dakota, Pennsylvania, and Wyoming—also mentioned challenges related to hiring or retaining staff. For example, air regulators in the Wyoming Department of Environmental Quality said that retaining qualified staff is challenging, as staff leave for higher-paying private sector positions. These officials said that 6 of their 22 air permit-writing positions are vacant as of June 2012. State regulators in Colorado and Ohio did not report facing this challenge.
In addition, FWS officials reported that they have inadequate staffing for oil and gas development issues and noted that additional regional and field positions could help FWS implement a more comprehensive oil and gas program.
Public Education
BLM and state officials reported that providing information and education to the public is a challenge. Specifically, BLM headquarters officials mentioned that hydraulic fracturing has attracted the interest of the public and that BLM has been fielding many information requests about its use in oil and gas development. In addition, officials in five of the six states— Colorado, Ohio, Pennsylvania, Texas, and Wyoming—reported challenges related to public education. For example, regulators in Ohio said that their agency has conducted more public outreach in the last year than in the past 20 years and, in response to this public interest in shale drilling and hydraulic fracturing, they will be adding more communications staff. Similarly, oil and gas development is moving into areas of Colorado that are not accustomed to this development, and state officials in both the Department of Public Health and Environment and the Oil and Gas Conservation Commission said that they have spent a lot of time providing the public with information on topics including hydraulic fracturing. State regulators in Wyoming said that educating the public has been a challenge since coalbed methane and tight sandstone development in Wyoming is very different than, for example, shale gas development in Pennsylvania, but the media do not always make this clear. State regulators in North Dakota did not report public education as a challenge.
Agency Comments and Our Evaluation
We provided a draft of this report to EPA and to the Departments of Agriculture and the Interior for review and comment. The Departments of Agriculture and Interior provided written comments on the draft, which are summarized below and appear in their entirety in appendixes XI and XII, respectively. In addition, both Departments and EPA provided technical comments, which we incorporated as appropriate.
In its written comments, the Department of Agriculture agreed with our findings and noted that the Forest Service also faces challenges hiring and retaining qualified staff. In response, we added this information to the report.
In its written comments, the Department of the Interior provided additional clarifying information on its efforts concerning BLM’s proposed rule on hydraulic fracturing and steps BLM is taking to hire and retain skilled technical staff. In response, we included additional information in the report about BLM’s proposed rule on hydraulic fracturing.
As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, the EPA Administrator, the Secretaries of Agriculture and the Interior, the Director of the Bureau of Land Management, and other interested parties. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov.
If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix XIII.
Appendix I: Objectives, Scope, and Methodology
To identify federal and state environmental and public health requirements governing onshore oil and gas development from unconventional reservoirs, we analyzed federal and state laws, regulations, and guidance, as well as reports on federal and state requirements. We defined unconventional reservoirs as including shale gas deposits, shale oil, coalbed methane, and tight sandstone formations. We focused our analysis on requirements that apply to activities on the well pad and wastes or emissions generated at the well pad rather than on downstream infrastructure such as pipelines or refineries. In particular, we identified and reviewed eight key federal environmental and public health laws, specifically the Safe Drinking Water Act; Clean Water Act; Clean Air Act; Resource Conservation and Recovery Act; Comprehensive Environmental Response, Compensation, and Liability Act; Emergency Planning and Community Right-to-Know Act; Toxic Substances Control Act; and Federal Insecticide, Fungicide, and Rodenticide Act. We also reviewed corresponding regulations such as the Environmental Protection Agency’s (EPA) New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants for the Oil and Gas Industry and guidance such as EPA’s Guidance for Implementation of the General Duty Clause of the Clean Air Act.
To identify state requirements, we identified and reviewed laws and regulations in a nonprobability sample of six selected states—Colorado, North Dakota, Ohio, Pennsylvania, Texas and Wyoming. We selected states with current unconventional oil or gas development and large reservoirs of unconventional oil or gas. In addition, we ensured that the selected states included a variety of types of unconventional reservoirs, differing historical experiences with the oil and gas industry, and that some of the selected states have significant oil and gas development on federal lands. Because we used a nonprobability sample, the information that we collected from those states cannot be generalized to all states but can provide illustrative examples.
To complement our analysis of federal and state laws and regulations, we interviewed officials in federal and state agencies to discuss how federal and state requirements apply to the oil and gas industry (see table 7). In particular, we interviewed officials in EPA headquarters and four Regional offices where officials are responsible for implementing and enforcing programs within the six states we selected, including Region 3 for Pennsylvania, Region 5 for Ohio, Region 6 for Texas, and Region 8 for Colorado, North Dakota, and Wyoming. We also interviewed state officials responsible for implementing and enforcing requirements governing the oil and gas industry and environmental or public health requirements in each of the six states we selected. For three of these states—Colorado, North Dakota, and Wyoming—we conducted these interviews in person. We also interviewed officials from the Delaware River Basin Commission—a regional body that manages and regulates certain water resources in four states, including Pennsylvania. We also contacted officials from environmental, public health, and industry organizations to gain their perspectives and to learn about ongoing litigation or petitions that may impact the regulatory framework. We selected environmental organizations that had made public statements about federal or state requirements for oil and gas development and public health organizations representing state and local health officials and communities. The selected organizations are a nonprobability sample, and their responses are not generalizable. In addition, we visited drilling, hydraulic fracturing, and production sites in Pennsylvania and North Dakota and met with company officials to gather information about these processes and how they are regulated at the federal and state levels. We selected these companies based on their operations in the six states we selected.
To identify additional requirements that apply to unconventional oil and gas development on federal lands, we reviewed laws, such as the National Environmental Policy Act (NEPA), as well as regulations and guidance promulgated by the Bureau of Land Management (BLM), Fish and Wildlife Service (FWS), Forest Service, and National Park Service. We also interviewed officials responsible for overseeing oil and gas development on federal lands, including officials in BLM headquarters and in field offices in the states we selected where there is a significant amount of oil and gas development on federal lands, including Colorado, North Dakota, and Wyoming; and in National Park Service, Forest Service, and FWS headquarters. Oil and gas development may also be subject to tribal or local laws, but we did not include an analysis of these laws in the scope of our review.
To determine challenges that federal and state agencies face in regulating oil and gas development from unconventional reservoirs, we reviewed several reports conducted by environmental and public health organizations, industry, academic institutions, and government agencies that provided perspectives on federal and state regulations and associated challenges. We also collected testimonial evidence, as described above, from knowledgeable federal and state officials, as well as industry, environmental, and public health organizations.
We conducted this performance audit from November 2011 to September 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
Appendix II: Key Requirements and Authorities under the Safe Drinking Water Act
The Safe Drinking Water Act (SDWA or the Act) was originally passed by Congress in 1974 to protect public health by ensuring a safe drinking water supply. Under the act, EPA is authorized to set standards for certain naturally-occurring and man-made contaminants in public drinking water systems, among other things. Key aspects of SDWA for unconventional oil and gas development include provisions regarding underground injection and EPA’s imminent and substantial endangerment authority.
Underground Injection Control Program
SDWA also regulates the placement of wastewater and other fluids underground through the Underground Injection Control (UIC) program.This program provides safeguards to ensure that wastewater or any other fluid injected underground does not endanger underground sources of drinking water; these sources are defined by regulation as an aquifer or its portion: 1) (i) Which supplies any public water system; or (ii) Which contains a sufficient quantity of groundwater to supply a public water system; and (A) Currently supplies drinking water for human consumption; or (B) Contains fewer than 10,000 mg/l total dissolved solids; and 2) Which is not an exempted aquifer.
Thus, the program is intended to protect not only those aquifers (or portions thereof) that are currently used for drinking water, but those that possess certain physical characteristics indicating they may be viable future drinking water sources.
EPA regulations establish criteria for exempting aquifers.the regulations establish that the criterion that an aquifer “cannot now and In particular, will not in the future serve as a source of drinking water” may be met by demonstrating that the aquifer is mineral, hydrocarbon or geothermal energy producing, or demonstrated by a permit applicant as having commercially producible minerals or hydrocarbons. States or EPA typically initially identified exempt aquifers when UIC programs were established, and according to EPA, states may have added exempt aquifers since then. While EPA has the information from the initial applications, the agency does not have complete information for the additional exemptions, although under EPA regulations certain of these subsequent exemptions are considered program revisions and must be approved by EPA. EPA is currently collecting information about the location of all exempted aquifers, and an official estimated that there are 1,000-2,000 such designations (including portions of aquifers).
There are six classes or categories of wells regulated through the UIC program. Class II wells are for the management of fluids associated with oil and gas production, and they include wells used to dispose of oil and gas wastewater and those used to enhance oil and gas production.
SDWA § 1422(b)(2), 42 U.S.C. § 300h-1(b)(2) (2012). See also SDWA §§ 1421(b)(1), 1422(b)(1), (3), 42 U.S.C. §§ 300h(b)(1), 300h-1(b)(1), (b)(3) (2012) (establishing requirements and responsibilities for states with primacy). permitting, monitoring, and enforcement for UIC wells within the state. Generally, to be approved as the implementing authority (primacy), state programs must be at least as stringent as the federal program and show that their regulations contain effective minimum requirements for each of the well classes for which primacy is sought. Alternately, SDWA section 1425 provides that to obtain this authority over Class II wells only, a state with an existing oil and gas program may, instead of meeting and adopting the applicable federal regulations, demonstrate that its program is effective in preventing endangerment to underground sources of drinking water. With respect to the six states in this review, Texas, North Dakota, Colorado, Wyoming, and Ohio have each been granted primacy for Class II wells under the alternative provisions (SDWA section 1425). EPA directly implements the entire UIC program in Pennsylvania.
Class II wells include saltwater (brine) disposal wells, enhanced recovery wells, and hydrocarbon storage wells. These wells are common, particularly in states with historical oil and gas activity. EPA officials estimate there are approximately 151,000 Class II UIC wells in operation in the United States; about 80 percent of these wells are for enhanced recovery, about 20 percent are for disposal, and there are approximately 100 wells for hydrocarbon storage. In Pennsylvania, the one state in our review in which EPA directly implements the Class II program, EPA Region 3 officials stated that there are five active Class II disposal wells. Recently, Region 3 issued permits for two Class II disposal wells in Pennsylvania, which were appealed. On appeal, the Environmental Appeals Board remanded the permits back to EPA for further consideration, finding that the Region failed to clearly articulate its regulatory obligations or compile a record sufficient to assure the public that the Region relied on accurate and appropriate data in satisfying its obligations to account for and consider all drinking water wells within the area of review of the injection wells. The Environmental Appeals Board denied all other claims against EPA. Under the remand, EPA may take further action consistent with the decision, which could include such actions as additions or revisions to the record and reconsideration of the permits. With respect to applications, according to Region 3 officials, until recently EPA did not receive many applications for new Class II brine disposal wells in Pennsylvania. EPA officials said that they have received five permit applications for such wells in the last 4 months and expect continued interest in the future.
Class II UIC Requirements
Under SDWA, UIC programs are to prohibit underground injection, other than into a well that is authorized by rule or permitted. Class II UIC wells must meet requirements contained in either EPA regulations, or relevant state regulations. Federal regulations for Class II wells include construction, operating, monitoring and testing, reporting, and closure requirements. For example, one requirement of federal regulations is that all of the preexisting wells located in the area of review, and that were drilled into the same formation as the proposed injection well must be identified. For such wells which are improperly sealed, completed, or abandoned, the operator must also submit a plan of actions necessary to prevent movement of fluid into underground sources of drinking water— known as ‘‘corrective actions,’’ such as plugging, replugging, or operational pressure limits—which are considered in permit review. Permits may be conditioned upon a compliance schedule for such corrective actions. According to EPA, in Pennsylvania many old wells have had to be replugged in order to ensure they cannot present a potential pathway for migration.
Regarding seismicity concerns, the federal regulations for Class II UIC wells require applicants for Class II UIC wells to identify faults if known or suspected in the area of review. requirement that a well must be sited to inject into a formation that is separated from any protected aquifer by a confining zone that is free of known open faults or fractures within the area of review. In a permit process, EPA (in direct implementation states) or the state can require additional information (including geology) to ensure protection of underground sources of drinking water. For example, Region 3 officials said the Region routinely determines whether there is the potential for fluid movement out of the injection zone via faults and fractures, as well as abandoned wells, by calculating a zone of endangering influence around the injection operation. Under the general standard, if a proposed or ongoing injection was, due to seismicity, believed to endanger underground sources of drinking water, EPA or the state could act, as the burden is on the applicant to show the injection well will not endanger such sources.line that was not identified or known at the time of the UIC permit approval, EPA (in direct implementation states) or the state can go back to the well owner or operator and ask for additional information, which the owner or operator would be obligated to provide.
In addition there is a general Officials said that if a seismic event occurs along a fault For additional information on the Class II UIC requirements applicable under EPA’s program in Pennsylvania, see appendix IX.
40 C.F.R. §§ 146.24, 146.24(a)(2) (2012).
Class II UIC Programs and Hydraulic Fracturing
Historically, UIC programs did not include hydraulic fracturing injections as among those subject to their requirements. In 1994, in light of concerns that hydraulic fracturing of coalbed methane wells threatened drinking water, the Legal Environmental Assistance Foundation petitioned EPA to withdraw its approval of Alabama’s Class II UIC program. EPA denied the petition, but on appeal, the United States Court of Appeals for the Eleventh Circuit held that the definition of underground injection included hydraulic fracturing and ordered EPA to reconsider the issue. Subsequently, Alabama revised its program to include injection of hydraulic fracturing fluids, and EPA approved it pursuant to SDWA section 1425 in 2000. The Legal Environmental Assistance Foundation appealed the approval and, in 2001, the Eleventh Circuit partially remanded the approval, directing EPA to regulate hydraulic fracturing as Class II UIC wells rather than a Class II-like activity. Alabama amended its regulations in 2001 and 2003. EPA issued a determination in 2004 addressing the question on remand and found that the hydraulic fracturing portion of Alabama’s UIC program relating to coalbed methane production, which was previously approved under the alternative effectiveness provision, complied with the requirements for Class II UIC wells.
EPA initiated a study in 2000 to further examine the issue of fracturing in coalbed methane in areas of underground sources of drinking water. EPA officials said the study showed diesel fuel was the primary risk. Subsequently, in 2003, EPA entered into a memorandum of agreement with three major fracturing service companies in which the companies voluntarily agreed to eliminate diesel fuel in hydraulic fracturing fluids injected into coalbed methane production wells in underground sources of drinking water. According to EPA officials, the agreement is still in effect insofar as the agency has not received any termination notices.
EPA officials did not know of any permits issued by Alabama, or any other state, for hydraulic fracturing injections during this time frame. EPA also did not modify its direct implementation of Class II UIC programs to expressly include hydraulic fracturing.
On December 7, 2004, EPA’s Assistant Administrator for Water responded to a congressional request for information on EPA’s actions on this issue. The letter summarizes EPA’s study findings—that the potential threat to underground sources of drinking water posed by hydraulic fracturing of coalbed methane wells is low, but there is a potential threat through the use of diesel fuel as a constituent of fracturing fluids where coalbeds are colocated with an underground source of drinking water.
Pub. L. No. 109–58 § 322, 119 Stat. 594 (2005) (modifying SDWA § 1421(d)(1), 42 U.S.C. § 300h(d)(1) (2012)). fluids other than diesel fuel in connection with hydraulic fracturing is not subject to federal UIC regulations, including both EPA direct implementation requirements and federal minimum requirements for state programs. The provision, however, did not exempt injection of diesel fuels in hydraulic fracturing from UIC programs.
EPA has prepared a draft guidance document to assist with permitting of hydraulic fracturing using diesel fuels under SDWA UIC Class II; a public comment period for this draft guidance closed in August 2012. EPA explained that the guidance does not substitute for UIC Class II regulations, rather the guidance focuses on specific topics useful for tailoring Class II requirements to the unique attributes of hydraulic fracturing when diesel fuels are used. EPA’s draft guidance is applicable to any oil and gas wells using diesel in hydraulic fracturing (not just coalbed methane wells). The draft guidance provides recommendations related to permit applications, area of review (for other nearby wells), well construction, permit duration, and well closure. The guidance states that it does not address state UIC programs, although states may find it useful.
EPA officials told us that they recently identified wells for which publicly available data suggest diesel was used in hydraulic fracturing. EPA officials stated the agency also has some information on diesel use in hydraulic fracturing of shale formations from a 2011 congressional investigation. EPA officials said there are no EPA-issued permits authorizing diesel to be used in hydraulic fracturing, and they believe no applications for such permits have been submitted to EPA to date. EPA officials also said that they were not aware of any state UIC programs that had issued such permits.
Enforcement
Generally, EPA is authorized to enforce any applicable requirement of a federal or state UIC program as promulgated in 40 C.F.R. pt. 147, including Class II UIC programs approved under the alternative provision. However, according to officials, EPA has not promulgated all of the states’ modifications to UIC programs, and the federal regulations are out-of-date, hindering EPA’s ability to directly enforce some state program provisions.
EPA may issue administrative orders or, with the Department of Justice, initiate a civil action when a person violates any requirement of an applicable UIC program. Where a state has primacy, EPA must first notify the state, and may act after 30 days if the state has not commenced an appropriate enforcement action. SDWA also provides EPA with authority to access records, inspect facilities, and require provision of information. Specifically, EPA has authority, for the purpose of determining compliance, to enter any facility or property of any person subject to an applicable UIC program, including inspection of records, files, papers, processes, and controls.
Under EPA’s UIC program enforcement authorities, EPA has issued administrative compliance orders and administrative penalty orders relating to SDWA UIC Class II Wells. According to officials, most cases are administrative and handled at the Regional level. Officials said that there were more than 200 administrative orders related to the UIC program from 2004-2008 and that it is likely that a majority of these were related to Class II wells.
For example, EPA Region 3 signed a consent agreement in Venango County, Pennsylvania, where injections of produced water were made into abandoned wells not permitted under the UIC program.
In another case, Region 3 told us it has issued an administrative order against an operator for failure to conduct mechanical integrity tests. According to EPA, the order requires the operator to plug many of these wells, and to bring the wells they plan to continue to operate into compliance with their financial responsibility. Region 3 also took a penalty action against an operator for failure to report a mechanical integrity failure and continued operation after the failure. According to officials, EPA was able to confirm during well rework that there was no fluid movement outside the well’s casing and no endangerment to an aquifer.
Imminent and Substantial Endangerment Authorities
While SDWA generally does not directly regulate land use activities that may pose risk to drinking water supplies, SDWA gives EPA authority to issue imminent and substantial endangerment orders or take other actions deemed necessary “upon receipt of information that a contaminant which is present in or is likely to enter a public water system or an underground source of drinking water…which may present an imminent and substantial endangerment to the health of persons, appropriate State and local authorities have not acted to protect the health of such persons.” As noted above, the term “underground source of drinking water” includes not only active water supplies but also aquifers (or portions thereof) with certain physical characteristics.
EPA has used this imminent and substantial endangerment authority in several incidents where oil or gas wells have been alleged to contaminate drinking water. For example, EPA Region 8 has conducted long-term investigation and monitoring of groundwater contamination from an oilfield in Poplar, Montana, of a water supply serving Poplar, as well as the Fort Peck Indian Reservation. EPA determined that there are several plumes of produced water (brine) in the East Poplar aquifer, which supplies private and public drinking water wells. Several pathways of contamination have been identified, including unlined pits, spills, and a leaking plugged oil well.
EPA issued a SDWA imminent and substantial endangerment order in 2010 to three companies operating wells in the oilfield, each of which challenged the order in federal court. Following mediation, EPA and the parties entered an administrative order on consent in which the parties agreed to monitor the public drinking water supply for specified parameters and, if certain triggers are met or exceeded, to take actions to ensure the public water system meets water quality standards and pay reimbursement costs to the public water system.
In another case, on December 7, 2010, EPA issued an administrative order to a well operator in Texas alleging methane contamination affecting private wells and directly related to its oil and gas production EPA subsequently filed a complaint in U.S. District Court facilities. seeking injunctive relief to enforce the order’s requirements and civil penalties for the operator’s noncompliance with the order. A few days later, the operator filed a petition for review of the order with the Fifth Circuit Court of Appeals. The operator’s position was that the order is not a final agency action and that EPA has the burden of proving its claim in the district court enforcement action, and its enforcement would violate due process. On March 29, 2012, EPA withdrew its administrative order, and the parties moved for voluntary dismissal of both cases. In a letter to EPA, the operator agreed to conduct sampling of 20 private water wells for 1 year.
Appendix III: Key Requirements and Authorities under the Clean Water Act
Under the Clean Water Act (CWA), EPA regulates discharges of pollutants to waters of the United States; for the purpose of this document, we generally refer to such waters, including jurisdictional rivers, streams, wetlands, and other waters, as surface waters. Discharges may include wastewater, including produced water, and stormwater. In addition, together with the U.S. Army Corps of Engineers, EPA regulates discharge of dredged or fill material into these waters.
Under CWA section 311 and the Oil Pollution Act, establish, in relevant part, requirements for the prevention of, preparedness for, and response to oil discharges at certain facilities, including among others oil drilling and production facilities.requirements may include Facility Response Plans and Spill Prevention, Control, and Countermeasure (SPCC) Plans. EPA also has certain response and enforcement authorities relevant to these requirements.
This review focuses on EPA regulatory activities under these programs relevant to unconventional oil and gas development activities.
CWA § 311, 33 U.S.C. § 1321 (2012); Oil Pollution Act of 1990, Pub. L. No. 101-380, 104 Stat. 484 (classified as amended at 40 U.S.C. ch. 40, §§ 2701 – 2761 (2012) and amending sections of CWA). See also Exec. Order 12,777, 56 Fed. Reg. 54,757 (1991).
National Pollutant Discharge Elimination System Program
CWA is the primary federal law designed to restore and maintain the chemical, physical, and biological integrity of the nation’s waters. Among other things, EPA and delegated states administer CWA’s National Pollutant Discharge Elimination System (NPDES) program, which limits the types and amounts of pollutants that facilities such as industrial and municipal wastewater treatment plants may discharge into the nation’s surface waters. Facilities such as municipal wastewater treatment plants and industrial sites, including oil and gas well sites, need a permit if they have a point source discharge to surface waters. Other than stormwater runoff as discussed below, discharges of pollutants from an oil or gas well site to surface water require an NPDES permit. According to EPA, wastewater associated with shale gas extraction can include total dissolved solids, fracturing fluid additives, metals, and naturally occurring radioactive materials, and may be disposed by transport to publicly- owned or other wastewater treatment plants, particularly in some locations where brine disposal wells are unavailable. According to EPA, produced water from coalbed methane gas extraction can include high salinity and pollutants such as chloride, sodium, sulfate, bicarbonate, fluoride, iron, barium, magnesium, ammonia, and arsenic, and some produced water is discharged to surface water in certain geographical areas.
EPA and delegated states issue discharge permits that set conditions in accordance with applicable technology-based effluent limitations guidelines that EPA has established for various industrial categories, and may also include water-quality based effluent limitations. When EPA issues effluent limitations guidelines for an industrial category, it may include both limitations for direct dischargers (point sources that introduce pollutants directly into waters of the United States) and pretreatment standards applicable to indirect dischargers (facilities that discharge into publicly-owned wastewater treatment plants).
Existing Effluent Limitations Guidelines for Oil and Gas Extraction
EPA has developed effluent limitations guidelines for several subcategories of the oil and gas extraction industry. The guidelines generally apply to facilities engaged in the production, field exploration, drilling, well completion, and well treatment in the oil and gas extraction industry. The guidelines applicable to the wells in the scope of this review—essentially, oil and gas wells located on land and drilling unconventional reservoirs—include those for the onshore subcategory, agricultural and wildlife water use subcategory, and stripper wells. The guidelines for these subcategories were finalized in 1979.
For the onshore and agricultural and wildlife water use subcategories, EPA established effluent limitations guidelines for direct dischargers. EPA did not establish guidelines for stripper wells, explaining that unacceptable economic impacts would occur from use of the then- evaluated technologies, and that the agency could revisit this decision at a later date. EPA officials we spoke with said that they are not aware of any reconsideration of this decision, and that this is not an issue on the current regulatory agenda. EPA also did not establish pretreatment requirements for either onshore or stripper well subcategories.
Existing effluent limitations guidelines do not apply to wastewater discharges from coalbed methane extraction. As EPA subsequently explained, because there was no significant coalbed methane production in 1979, the oil and gas extraction rulemakings did not consider coalbed methane extraction in any of the supporting analyses or records. EPA officials also told us that the coalbed methane process is fundamentally different than traditional oil and gas exploration because of the volume of water that must be removed from the coalbed before production can begin, which they see as a significant distinction for potentially applicable technology. As will be discussed later in this appendix, in October 2011, EPA announced its intention to develop effluent limitations guidelines and standards for wastewater discharges from the coalbed methane industry.
When an oil and gas well proposing to discharge pollutants to a surface water is not covered by the existing guidelines, effluent limitations included in the permit are determined on a case-by-case basis by the relevant permitting authority, using best professional judgmentapplicable state rules or guidance. EPA officials were not aware of any other unconventional oil and gas extraction processes, besides coalbed methane extraction, that are not covered by the existing effluent limitations guidelines.
Table 8 summarizes the coverage and key requirements of the existing guidelines. there shall be no discharge of waste water pollutants into navigable waters from any source associated with production, field exploration, drilling, well completion, or well treatment (i.e., produced water, drilling muds, drill cuttings, and produced sand).
Because an NPDES permit is only required where a facility discharges or proposes to discharge a pollutant, and as the technology-based requirement of “no discharge” must be applied in the permit, facilities subject to a “no discharge” limit are not required to apply for such permits.
According to the 1976 Federal Register Notice of the Proposed Rule, technologies for managing produced water to achieve no discharge to surface waters were expected to include evaporation ponds, or underground injection, either for enhanced recovery of oil or gas in the producing formation or for disposal to a deep formation. Further, EPA indicated that drilling muds, drill cuttings, well treatment wastes, and produced sands would be disposed by land disposal so as not to reach navigable waterways.
The effluent limitations guideline for the Oil and Gas Extraction point source category also established a subcategory for Agricultural and Wildlife Water Use to cover a geographical subset of operations in which produced water is of good enough quality to be used for wildlife or livestock watering or other agricultural uses and that the produced water is actually put to such use during periods of discharge. This subcategory guideline is only applicable to facilities located west of the 98th meridian, which extends from approximately the eastern border of North Dakota south through central Texas. EPA explained in the preamble to this rule that “t is intended as a relatively restrictive subcategorization based on the unique factors of prior usage in the Region, arid conditions and the existence of low salinity, potable water.” “no discharge of waste pollutants into navigable waters from any source (other than produced water) associated with production, field exploration, drilling, well completion, or well treatment (i.e., drilling muds, drill cuttings, and produced sands),” and for produced water discharges a daily maximum limitation of 35 milligrams per liter of oil and grease.
At oil and gas well sites meeting the conditions of location, produced water quality, and use of produced water for wildlife or livestock watering or agricultural use, the produced water may be discharged to waters of the United States. In terms of water quality, the produced water must be and must not exceed the daily maximum for “good enough” for this use, oil and grease. States generally issue these permits, and are responsible for determining whether the water is of appropriate water quality for the beneficial use.guidance on this topic.
EPA is responsible for oversight and has not issued EPA has not revised the guildeines, such as to add limitations for additional pollutants, to define “good enough” water quality, or to establish potentially more stringent guidelines. EPA officials stated that it has not done so because in certain locations the produced water from oil and gas development is high quality, and because treatment would cost more than injection, thus discouraging the beneficial use of this water.
With respect to the subcategories of oil and gas wells covered by the effluent limitations guidelines, discharges are authorized only for oil and gas wells under the Agricultural and Wildlife Water Use and Stripper well subcategories. These well sites that discharge wastewater to surface waters must, as noted above, obtain a NPDES permit from the permitting authority (state, tribe, or EPA). The permit is to incorporate the applicable effluent limitations guideline, if one exists, and include effluent monitoring and reporting requirements. Officials also stated that individual permits may contain limits for pollutants other than oil and grease.
According to EPA, 349 discharge permits in the Agricultural and Wildlife Water Use subcategory have been issued. Most of these permitted discharges are located in Wyoming, Montana, and Colorado.
Anticipated Rulemaking to Develop Effluent Limitations Guidelines for Oil and Gas Extraction from Coalbed Methane Formations
On October 26, 2011, EPA announced in its Final 2010 Effluent Limitations Program Plan that the agency will develop effluent limitations guidelines and standards for wastewater discharges from the coalbed methane extraction industry.
With respect to coalbed methane extraction, as noted above, there is no existing effluent limitations guideline applicable to associated wastewaters. Coalbed methane operations discharging wastewaters to surface waters must nonetheless obtain a NPDES permit, but in the absence of a federal effluent limitations guideline, the permitting authority determines the permit limits based on best professional judgment, as well as any applicable state rules or guidelines. EPA had identified the industry for consideration in prior years, and initiated work leading to a detailed study beginning in 2007. found that states are primarily issuing individual permits, but they are also issuing some general permits and watershed permits covering one or more wells through a streamlined process. According to EPA officials, eastern states have generally based effluent limitations in permits on the coal mining effluent limitations guideline, although that guideline does not have limitations for total dissolved solids or chlorides that are key components of produced water. In the six states reviewed, EPA identified 861 coalbed methane discharge permits.most coalbed methane wastewater discharges have NPDES permits. initiate rulemaking. EPA is in the preproposal stage of rulemaking for the coalbed methane effluent guidelines and standards.indicates the projected date for publication of the proposed rule is June 2013.
Generally Applicable Pretreatment Standards and POTW Obligations
Facilities discharging industrial wastewater to publicly-owned treatment works (POTW) treatment plants are subject to general pretreatment requirements. In addition, the POTW receiving such industrial wastewaters also has responsibilities related to its own permit and to receiving these wastewaters.
EPA has issued general pretreatment requirements applicable to all existing and new indirect dischargers of pollutants (other than of purely domestic, or sanitary, sewage) to a POTW, including any dischargers of wastewaters associated with oil and gas wells. Notably, such discharges are subject to a general requirement that the pollutants do not cause pass through or interference with the POTW. For a discharge to cause pass through, it must contribute to violation of the POTW’s NPDES permit; to cause interference, it must contribute to the noncompliance of its sewage sludge use or disposal.
Other standard provisions for indirect discharges involve a prohibition on corrosive discharges. According to EPA officials, in produced water, concerns for corrosivity would be related to high chlorides and sulfides which could adversely affect pipes and gaskets in the POTW.
EPA has stated that NPDES permits for POTWs typically do not contain effluent limits for some of the pollutants of concern from shale gas wastewater, and that some of these pollutants may be harmful to aquatic Specifically, if a POTW did not include information in its NPDES life. permit application indicating that the POTW would receive oil and gas wastewater, or did not otherwise adequately characterize the incoming wastewater as including certain pollutants of concern, the permit may not include limits for these pollutants, as permits generally only contain limits for those pollutants reasonably expected to be present in the wastewater.
Regarding pass through, in which an indirect industrial discharger contributes to violation of the receiving POTW’s NPDES permit, Region 3 officials said that POTW operators had not indicated that NPDES violations were caused by oil and gas wastewaters received at the plant, with the following exception. In 2011, EPA issued an administrative order for compliance and request for information to a POTW in New Castle, Pennsylvania, in relation to permit effluent limit violations. The POTW experienced violations of its suspended solids limits spanning over a year, and attributed the violations to salty wastewater from natural gas production it was receiving. The order required the POTW to take several actions including to cease accepting oil and gas exploration and production wastewater until completing an evaluation and sampling, and to eliminate and prevent recurrence of the violations.
Generally, local governments operating POTWs are responsible for ensuring that indirect dischargers comply with any applicable national pretreatment standards. Certain POTWs are required to develop pretreatment programs, which set out a facility’s approach to developing, issuing, and enforcing pretreatment requirements on any indirect dischargers to the particular plant. EPA or states may be responsible for ensuring these POTWs meet their obligations and for approving the POTW’s pretreatment plans.
According to EPA, regardless of pass through or interference, POTWs should not accept indirect discharges of produced water if the wastewaters have different characteristics than those for which the POTW was originally permitted, without providing adequate notice to the permitting authority. If a POTW accepts oil and gas wastewater with characteristics that were not considered at the time of the permit issuance, then the permit may not adequately protect the receiving water from potential violations of water quality standards. In other words, a POTW may meet its permit limits, yet still contribute to a violation of water quality standards, if the permit does not reflect consideration of all the pollutants actually present, and their concentrations, in the incoming wastewater and in the discharge. According to Region 3 officials, EPA has conducted several investigations of whether discharges from POTWs accepting oil and gas wastewater have prevented receiving waters from meeting water quality standards. Region 3 officials stated that a major impediment to this evaluation was that the NPDES permits reviewed did not have effluent limits or monitoring requirements for the pollutants of concern. EPA also stated that it has data from a 2009 Pennsylvania Department of Environmental Protection violation report documenting a fishkill attributed to a spill of diluted produced water in Hopewell Township, PA.
In March 2011, EPA’s Office of Water issued to the Regions a set of questions and answers that provide state and federal permitting authorities in the Marcellus shale region with guidance on permitting treatment and disposal of wastewater from shale gas extraction. guidance states that POTWs must provide adequate notice to the permitting authority (EPA or the authorized state) of any new introduction of pollutants into the POTW from an indirect discharger, if the discharger would be subject to NPDES permit requirements if it were discharging directly to a surface water, among other things. EPA officials indicated that if a POTW is accepting types of wastewater that were not on its original application, EPA could require a modification of the POTW’s NPDES permit, or object to a NPDES renewal that did not address these wastewaters and the facility’s ability to treat them. POTWs may also initiate inclusion of these wastewaters in their permits or permit renewals. For example, EPA Region 3 officials stated that four POTW operators in Pennsylvania in the NPDES renewal process have indicated the intent to continue accepting oil and gas wastewater. In addition, in cases with pass through or interference, EPA could require a POTW to develop a pretreatment program.
EPA’s website indicates the agency plans to supplement the existing Office of Water questions and answers document with additional guidance directed to permitting authorities, pretreatment control authorities and POTWs, to provide assistance on how to permit POTWs and other centralized wastewater treatment facilities by clarifying existing CWA authorities and obligations. Specifically, EPA plans to issue two guidance documents, one for permit writers and another for POTWs.
Anticipated Rulemaking to Develop Pretreatment Standards for Gas Extraction from Shale Formations
With respect to shale gas extraction, the effluent limitations guideline for the onshore subcategory in effect since 1979 has prohibited direct discharges of associated wastewaters; however, EPA has not established pretreatment standards for indirect discharges of such wastewaters. EPA requested and received comments on whether to initiate a rulemaking for the industry in recent years.
In 2011, EPA announced it will initiate a rulemaking to develop such pretreatment standards. EPA reviewed existing data, but did not conduct a study to develop data as it had for coalbed methane. EPA found that pollutants in wastewaters associated with shale gas extraction are not treated by the technologies typically used at POTWs or many centralized treatment facilities. the potential to affect drinking water supplies and aquatic life. On this basis, EPA concluded that pretreatment standards are appropriate and decided to initiate a rulemaking. EPA intends to conduct a survey, among other things, to collect information on management of produced water to support the rulemaking. Finally, EPA noted that if it obtains information indicating that POTWs are already adequately treating shale gas wastewater, the agency could adjust the rulemaking plans accordingly.operators of Marcellus shale gas wells stop delivering produced water to POTWs, potentially avoiding the issue. EPA officials stated that other states may nonetheless have a need to utilize POTWs to address these wastewaters and hence could benefit from pretreatment standards.
Further, EPA stated that resulting discharges have For example, the state of Pennsylvania requested that EPA is in the preproposal stage of this rulemaking, and EPA’s website indicates the projected date for publication of the proposed rule is 2014.
76 Fed. Reg. at 66,295-96. According to EPA, POTWs typically have permits that do not contain limits for the pollutants of concern in shale gas wastewater; the secondary treatment requirements do not address such pollutants, and is it uncommon for these permits to contain water quality based limitations for such pollutants. Id. at 66,297. Thus, such wastewaters likely pass through the POTWs receiving such wastewaters and the POTWs may not monitor for these pollutants in their effluent.
Id. at 66,297.
NPDES for Stormwater Discharges
In 1987, the Water Quality Act amended CWA to establish a specific program for regulating stormwater discharges of pollutants to waters of the United States. Among other things, the amendments clarified EPA authority to require an NPDES permit for discharges of stormwater from several categories, including in relevant part those associated with industrial activity and construction activity. EPA subsequently issued regulations that address stormwater discharges from several source categories, including certain industrial activities and construction activities.
Generally, industrial sites obtain coverage for stormater through a general permit, such as the multisector general permit or construction general To do so, the facility operator submits a notice of intent, and permit. agrees to meet general permit conditions. For example, conditions for the construction general permit include applicable erosion and sediment control, site stabilization, and pollution prevention requirements. oil and gas exploration, production, processing, or treatment operations or transmission facilities composed entirely of flows which are from conveyances or systems of conveyances (including but not limited to pipes, conduits, ditches, and channels) used for collecting and conveying precipitation runoff and which are not contaminated by contact with, or do not come into contact with, any overburden, raw material, intermediate products, finished product, byproduct, or waste products located on the site of such operations.
Interpreting the provision exempting oil and gas facilities, EPA issued regulations requiring permits for contaminated stormwater from oil and gas facilities. To determine whether a discharge of stormwater from an oil or gas facility is contaminated, EPA regulations establish that if a facility has had a stormwater discharge that resulted in a discharge exceeding an EPA reportable quantity requiring notification under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) or section 311 of CWA, or which contributes to violation of a water quality standard, the permit requirement is triggered for that facility.
Regarding stormwater at oil and gas well sites, officials said it is unlikely there is a permit requirement because it is rare that stormwater would come into contact with raw materials. Nonetheless, if a facility anticipates having a stormwater discharge that includes a reportable quantity of oil or may result in a violation of water quality standards, then the facility would be obligated to apply for a NPDES permit. In applying for the permit, however, the facility has to agree not to discharge pollutants in a reportable quantity and not to discharge pollutants so as to cause a water quality violation. Given this, it is unclear whether facilities would apply for such a permit after they have had a release of a reportable quantity or contributing to a water quality violation. Furthermore, according to officials, EPA relies upon operators self-identifying based on reportable quantities or water quality violations.
Despite these factors, EPA reviewed available data for the five states in which EPA administers the NPDES program, including Texas, and identified some stormwater general permit notifications for facilities that could be well sites.
EPA regulations require permits for stormwater discharges from construction activities including clearing, grading, and excavating that result in land disturbance. Beginning in 1990, EPA began regulating stormwater discharges from construction sites disturbing more than 5 acres of land under its Phase I rule. Under Phase II rules issued in 1999, EPA regulated stormwater discharges from construction sites disturbing between 1 and 5 acres of land, with initial permit applications due in 2003.
With respect to oil and gas well sites, under the statutory provisions and EPA’s Phase 1 stormwater regulations, discharges of stormwater from construction activity would have required a permit only for sites disturbing more than 5 acres and where the stormwater is contaminated by contact with, or comes into contact with, any overburden, raw material, intermediate products, finished product, byproduct, or waste products located on the site of such operations. According to EPA officials, the agency believed few oil and gas sites met these conditions. They further explained that when EPA conducted the Phase II rulemaking for the smaller 1 to 5 acre sites, the agency assumed incorrectly that oil and gas well sites would be smaller than 1 acre and thus did not include oil and gas well sites in their economic analysis of the rule. After the rule’s issuance as it became aware that such sites would fall under the rule, and in light of industry objections over the lack of economic analysis, EPA delayed Phase II implementation at oil and gas well sites until 2006.
Before implementation of Phase II regulations at oil and gas well sites began, the Energy Policy Act of 2005 was enacted. The Energy Policy Act of 2005 amended CWA to specifically define the activities included in the oil and gas stormwater exemption. Where the law already exempted from NPDES permit requirements discharges of stormwater from “oil and gas exploration, production, processing, or treatment operations or transmission facilities,” the Energy Policy Act of 2005 added a definition of this term as “all field activities or operations associated with exploration, production, processing, or treatment operations, or transmission facilities, including activities necessary to prepare a site for drilling and for the movement and placement of drilling equipment, whether or not such field activities or operations may be considered to be construction activities.”
In response to these amendments, in 2006, EPA revised a key provision of the regulations concerning oil and gas stormwater discharges. The revision provided that discharges of sediment from oil or gas facility construction activities and contributing to a water quality standard violation would not trigger a permit requirement. This revision was vacated and remanded by the Ninth Circuit in 2008. EPA has not subsequently revised the regulations applicable to stormwater discharges from oil and gas facilities; the pre-2006 regulations remain in effect as to this industry. EPA officials said the agency intends to revise its regulations to address the court’s vacatur in an upcoming stormwater rulemaking, with the proposal expected in 2013.
According to EPA officials, during construction, oil and gas well sites would have no permit requirement because of the statutory exemption.
NPDES Enforcement
For violations of the law, or applicable regulations or permits, EPA has authority to issue administrative orders requiring compliance, impose administrative penalties, as well as to bring suit and, in conjunction with the Department of Justice, to impose civil penalties. Among other things, EPA can take such actions if a well operator violates the CWA prohibition on unauthorized discharges of pollutants to surface waters. EPA also has information-gathering and access authority relative to point source owners and operators, which could include certain oil and gas well site operations. For example, EPA has authority to inspect facilities where an effluent source is located.
As an example of enforcing the prohibition of unauthorized discharges, in 2011, EPA Region 6 assessed an administrative civil penalty against a company managing an oil production facility in Oklahoma for discharging brine and produced water to a nearby stream. entered a consent agreement with an oil production company in Colorado for unauthorized discharges of produced water from a multiwell site due to a failed gas eliminator valve in a produced water transportation pipeline. The produced water travelled overland for 333 feet, then entered a stream tributary to an interstate river. The company agreed to pay a civil penalty and to conduct a macroinvertebrate study for the affected watershed.
Imminent and Substantial Endangerment Authorities
American Petroleum & Environmental Consultants, Inc., Cease and Desist Administrative Order, EPA Docket No. CWA-06-2012-1760 (Dec. 12, 2011). take such other action as may be necessary, upon receipt of evidence that a pollution source or combination of sources is presenting an imminent and substantial endangerment to the health of persons or to the livelihood of persons. Unlike the analogous provisions of several other major environmental laws, however, CWA section 504 does not expressly mention administrative orders.
Oil and Hazardous Substances Spill Prevention, Reporting, and Response
Spill Prevention and Response Plans
EPA’s Oil Pollution Prevention regulations, promulgated and amended pursuant to CWA and the Oil Pollution Act, impose spill prevention and response planning requirements on oil and gas well sites that meet thresholds. Specifically, the Spill Prevention, Control, and Countermeasure (SPCC) Rule applies to sites with underground and/or aboveground storage tanks above certain thresholds and where oil could be discharged into or upon navigable waters.production facilities, among others, generally are subject to the rule if they (1) have an aggregate oil storage capacity of greater than 1,320 gallons in aboveground oil storage containers or a total oil storage capacity greater than 42,000 gallons in completely buried storage tanks and (2) could reasonably be expected, due to their location, to discharge harmful Onshore oil and gas quantities of oil into or upon U.S. navigable waters or adjoining shorelines.
The SPCC rule, as amended, requires each owner or operator of a regulated facility to prepare and implement a plan that describes how the facility is designed, operated, and maintained to prevent oil discharges into or upon U.S. navigable waters and adjoining shorelines. The plan must also include measures to control, contain, clean up, and mitigate the effects of these discharges.
EPA regulations specify requirements for SPCC plans for onshore oil drilling and oil production facilities. Onshore drilling facilities must meet the general requirements for such plans, as well as meet specific discharge prevention and containment procedures: (1) position or locate mobile drilling or workover equipment so as to prevent a discharge; (2) provide catchment basins or diversion structures to intercept and contain discharges of fuel, crude oil, or oily drilling fluids; and (3) install a blowout prevention (BOP) assembly and well control system before drilling below any casing string or during workover operations. Oil production facilities are exempt from the SPCC security provisions.
73 Fed. Reg. 74,236 (Dec. 5, 2008). reviewed the spill data for the oil production sector contained in its study of the exploration and production sector…While these data do not characterize the extent of environmental damage caused by oil discharges from small oil production facilities, they demonstrate that the volume of oil discharged from onshore oil production facilities increasing, and the number of oil discharges on a yearly basis has remained the same, despite a decline in crude oil production. In addition, oil production facilities are often unattended, and typically located in remote areas, which potentially increases the risk of environmental damage from an oil discharge of oil.
Various development activities at oil and gas well sites involve storage of oil that may trigger the SPCC regulations to impose these requirements. During initial exploration and drilling, the capacity of the fuel tank of the drill rig is the primary way the SPCC rule could be triggered, and EPA officials said that almost all drill rigs exceed the threshold capacity. During well completion and workover, where hydraulic fracturing is conducted, EPA officials said the capacity of the fuel tank in the turbines and pumps being used for fracturing typically exceed the threshold. As to wells in the production phase, they said there would generally be no SPCC requirement at dry gas wells, because they would not be storing condensate on-site. For wet gas and oil production, the size of the condensate or oil tanks on the site would be the key to whether SPCC is triggered.
Id. at 58,802. See also Considerations for the Regulation of Onshore Oil Exploration and Production Facilities Under the Spill Prevention, Control, and Countermeasure Regulation (40 C.F.R. part 112)) (available at www.regulations.gov document EPA–HQ– OPA–2007–0584–0015).
EPA has developed guidance related to SPCC applicability and compliance for oil production, drilling, and workovers. According to officials, EPA is currently developing a “frequently asked questions” document about the SPCC program and hydraulic fracturing. This document is being developed in response to an influx of questions about how the SPCC rule applies to gas well sites, particularly from companies active in the Marcellus shale. According to EPA officials, while the SPCC is focused on oil, wet gas wells involve condensates, some of which have traditionally been deemed liquid hydrocarbons and included in the program. In particular, questions have arisen over the lightest condensates (C2 and C4 hydrocarbons), which are usually in gaseous form at standard temperatures and pressures and hence are not included in the SPCC program, whereas storage of heavier condensates, such as C6+ hydrocarbons, has been included (as liquids) in the SPCC program.
EPA directly administers the SPCC program. require facilities to report to the agency that they are subject to the SPCC rule and, as of 2008, EPA did not know the universe of SPCC-regulated facilities, but the agency was considering developing some data. EPA officials stated that they have significant data but not complete data because of the lack of a registration or submittal requirement. To ensure that facility owners and operators are meeting SPCC requirements, EPA personnel inspect selected regulated facilities to determine their compliance with the regulations. For some facilities, the SPCC compliance date was in November 2011. EPA is working to develop a national database of sites inspected under the SPCC rule. Officials said that the SPCC program’s database includes 120 inspections at oil and gas production facilities for fiscal year 2011, of which 105 had some form of noncompliance, which varies in significance from paperwork inconsistencies to more serious violations (though EPA officials were unable to specifically quantify the number of more serious violations).
The Clean Water Act does not provide EPA with the authority to authorize states to implement the program in its place.
According to EPA headquarters officials, EPA generally selects facilities for inspection based on spill reports EPA receives through the National Response Center.
The Oil Pollution Prevention Regulation also requires an owner or operator of nontransportation onshore facilities that could, because of location, reasonably be expected to cause substantial harm to the environment by discharging oil into or on the navigable waters or shorelines, to submit to the appropriate EPA Regional office a facility response plan. The regulation specifies criteria to be used in determining whether a facility could reasonably be expected to cause substantial harm and hence triggers such requirement, and it also provides that the EPA Administrator may at any time, on determination considering additional factors, require a facility to submit a facility response plan. A facility owner or operator also may maintain certification that it could not, because of location, reasonably be expected to cause substantial harm by discharging oil into or onto navigable waters or shorelines. Relevant to oil well sites, the initial criteria for requiring a facility response plan is that the facility has total oil storage of 1 million gallons or more. Where such facilities meet at least one of four other criteria—such as lacking secondary containment, or located at distances that could injure fish and wildlife—then a facility response plan is required. The plan is to provide, in essence, an emergency response action plan for the worst-case discharge and other relevant information. According to EPA officials, onshore oil well sites would typically not go over the threshold criteria triggering the requirement for a facility response plan. Officials said there may be a small number of sites where very large or centralized operations with a number of wells connected to central piping and/or storage might trigger a facility response plan.
Spill Prohibition and Reporting
CWA established the policy of the United States that there should be no discharges of oil or hazardous substances into or upon U.S. navigable waters or onto adjoining shorelines, among other resources, and generally prohibited such discharges. Relevant provisions require reporting of certain discharges of oil or a hazardous substance to these waters.
EPA has issued regulations designating those hazardous substances that present an imminent and substantial danger to the public health or welfare when discharged to U.S. navigable waters or onto adjoining shorelines in any quantity.
EPA also has determined, in regulations, the quantities of oil and other hazardous substances of which the discharge to U.S. navigable waters or onto adjoining shorelines may be harmful to the public health or welfare or the environment. CWA in conjunction with these regulations require facilities to report to the National Response Center certain unpermitted releases of oil or hazardous substances to surface waters. The National Response Center subsequently sends reports to EPA Regions and headquarters. With respect to oil, discharges of oil must be reported if they “(c)ause a film or sheen upon or discoloration of the surface of the water or adjoining shorelines or cause a sludge or emulsion to be deposited beneath the surface of the water or upon adjoining shorelines,” or if they violate applicable water quality standards. With respect to hazardous substances, EPA has determined threshold quantities—those which may be harmful to the public health or welfare or the environment— known as reportable quantities.
Spill Response Authority
EPA, as well as other relevant federal agencies, has various response authorities to ensure effective and immediate removal of a discharge, and mitigation or prevention of a substantial threat of a discharge, of oil or a hazardous substance to U.S. navigable waters or onto adjoining shorelines. The National Oil and Hazardous Substances Pollution Contingency Plan, issued by EPA by regulation, provides a system to respond to discharges and to contain, disperse, and remove oil and hazardous substances, among other things.EPA Region 5, in conjunction with the state of Ohio, the Region has responded to several incidents in which orphan wells were found to be leaking or discharging crude oil into waterways.
For example, according to Under CWA section 311, as required to carry out its purposes including spill prevention and response, EPA also has authority to require the owner or operator of a facility subject to the Oil Pollution Prevention Regulation, among other provisions, to establish and maintain such records; make such reports; install, use, and maintain such monitoring equipment and methods; provide such other information deemed necessary; and for entry and inspection of such facilities.
Enforcement of SPCC and Spill Prohibition and Reporting Requirements
For violations of the law, or applicable regulations or permits, EPA has authority to issue administrative orders requiring compliance, impose administrative penalties, as well as to bring suit, in conjunction with the Department of Justice, to impose civil penalties.EPA the authority to access records and inspect facilities, and the ability Section 311 also gives to require provision of information, with respect to persons and facilities subject to section 311, including SPCC program requirements.
For example, in Region 8, EPA participated in an effort with the U.S. Fish and Wildlife Service (FWS), states, and tribes, after FWS expressed concerns about migratory birds landing on open pits that contained oil and water, which killed or harmed the birds. surveys to observe pits. Where apparent problems were identified, relevant federal or state agencies were notified and were to give oil and gas operators an opportunity to correct problems. Ground inspections were then conducted where deemed warranted and, if problematic conditions were found, further follow-up action was taken by EPA or the relevant state or other federal agency. As a result of this effort, 99 sites with violations of SPCC requirements were identified. EPA’s report stated that “on-compliance with SPCC requirements was more pervasive than anticipated. Although the SPCC program has been the focus of outreach and compliance assistance nationally for more than 25 years, there remains a strong need to communicate its requirements, inspect regulated facilities, and conduct appropriate technical assistance or enforcement to ensure improved compliance.” The report states that, for most SPCC violations, EPA issued a notice of violation and that many notice of violation recipients came into compliance without escalation to formal enforcement, but that some enforcement actions were taken. Region 8 reported identifying 22 sites with documented SPCC violations as a result of subsequent efforts in 2004-2005. Information on the nature or resolution of these violations was not readily available.
EPA Region 8, Oil and Gas Environmental Assessment Effort 1996 – 2002, v (2003).
Imminent and Substantial Endangerment Authority for Spills
CWA section 311 provides EPA authority to address certain releases of oil or hazardous substances to U.S. navigable waters and adjoining shorelines. Specifically, on determination that “there may be an imminent and substantial threat to the public health or welfare of the United States, including fish, shellfish, and wildlife, public and private property, shorelines, beaches, habitat, and other living and nonliving natural resources under the jurisdiction or control of the United States, because of an actual or threatened discharge of oil or a hazardous substance from a vessel or facility” in violation of the prohibition against discharges of oil or hazardous substances to U.S. navigable waters and adjoining shorelines, EPA may bring suit, or may, after notice to the affected state, take any other action under this section, including issuing administrative orders, that may be necessary to protect the public health and welfare.
Appendix IV: Key Requirements and Authorities under the Clean Air Act
Production components may include, but are not limited to, wells and related casing head, tubing head and ‘‘Christmas tree’’ piping, as well as pumps, compressors, heater treaters, separators, storage vessels, pneumatic devices and dehydrators. Production operations also include the well drilling, completion and workover processes and includes all the portable non-self-propelled apparatus associated with those operations.
In addition, EPA officials have noted that tanks, ponds, and pits are sources of emissions that may be present at well sites. Others have also identified condensate storage tanks and flaring as significant emission sources often associated with gas wells. The key criteria pollutant of concern for oil and gas production is VOCs, as an ozone precursor, and the primary HAP released by the oil and gas production industry are BTEX (benzene, toluene, ethylbenzene, and xylenes) and n-hexane.
To address stationary sources under CAA, EPA is required to promulgate industry-specific emissions standards such as National Emission Standards for Hazardous Air Pollutants (NESHAP) and New Source Performance Standards (NSPS) for source categories that EPA has listed under the Act. CAA also provides for review of new and modified major sources of emissions under the Prevention of Significant Deterioration and Nonattainment New Source Review programs, typically implemented by states. CAA and EPA regulations require operating permits, known as Title V permits, for certain stationary sources, and establish minimum requirements for state operating permitting programs.programs is described below as it may apply to oil and gas well sites.
Mobile sources associated with oil and gas production may include trucks bringing fuel, water, and supplies to the well site; construction vehicles; and truck-mounted pumps and engines. That is, oil and gas wells may be served by a variety of road and nonroad vehicles and engines. EPA regulates emissions from an array of mobile sources by imposing emission limits on such vehicles and engines; these generally applicable regulations are not specific to the oil and gas industry and are not discussed here.
Finally, the Act includes provisions addressing accidental releases of dangerous pollutants to the air. Oil and gas wells are unlikely to trigger the planning aspects of these provisions, according to EPA; however, the well sites are subject to the general duty clause, a self-implementing provision of CAA under which operators are responsible for identifying hazards associated with accidental releases and designing and maintaining a safe facility, taking such steps as are necessary to prevent releases.
Table 9 summarizes the applicability of key Clean Air Act programs to emission points at oil and gas well sites. These provisions will be discussed in greater detail in this appendix.
National Emission Standards for Hazardous Air Pollutants
Hazardous Air Pollutants
The 1990 CAA amendments significantly expanded the hazardous air pollutants program; they identified 189 specific HAPs to be regulated, required EPA to list categories of sources to be regulated, and established implementation timelines. The list of HAPs includes several potentially found in oil and gas well emissions. In addition to these listed HAPs, EPA and others have identified hydrogen sulfide, which is found in oil and gas well emissions but is not a listed HAP, as hazardous and toxic to humans. EPA has the authority to add to the HAPs list pollutants which may present, through inhalation or other routes of exposure, a threat of adverse human health effects or adverse environmental effects, but not including releases subject to EPA’s regulation under section 112(r)—namely, the accidental release and risk management regulations. The prevention of accidental releases regulation includes accidental releases of hydrogen sulfide. In a 1993 report to Congress, EPA found that the limited data available did not evidence a significant threat to human health or the environment from “routine” emissions of hydrogen sulfide from oil and gas wells.
CAA provides a process to petition EPA to modify the HAPs list. On March 30, 2009, the Sierra Club and 21 other environmental and public health organizations and individuals petitioned EPA to list hydrogen The petitioners asserted that sulfide as a HAP under section 112(b). low-level hydrogen sulfide emissions not addressed by the accidental release provisions in section 112(r) are harmful to human health.officials told us they are considering the petition but have no specific timeline for acting upon it.
NESHAPs Overview and Statutory Provisions Restricting Aggregation of Oil and Gas Production Sources
EPA is required to promulgate and periodically revise NESHAPs for source categories the agency has identified. NESHAPs may include standards for major sources and for area sources, which are any sources not major. Major source NESHAPs are based on the maximum achievable control technology (MACT), while EPA may use a different standard of generally available control technology for area sources.
S under CAA section 112(b), especially since H2S’s routine exposure effects – on a daily basis – are not addressed whatsoever under the accidental release provisions in section 112(r) of CAA.” Id. at 1. combination of HAPs. Normally, the determination of a facility’s potential to emit HAPs is based on the total of all activities at a facility, known as aggregation. Under a unique provision of CAA, however, “emissions from any oil or gas exploration or production well (with its associated equipment) and emissions from any pipeline compressor or pump station shall not be aggregated with emissions from other similar units,” to determine whether such units or stations are major sources of air pollution, or for other purposes under section 112 (e.g., the HAPs section). Finally, facilities that do not contain a regulated unit (e.g., glycol dehydrator or covered storage vessel) are not subject to any requirement in the rule, even if they emit HAPs.
Regarding the aggregation provisions, EPA officials explained that the agency has historically interpreted the statutory language to prohibit aggregation of HAP emissions from wells and associated equipment, meaning that each well and piece of associated equipment must be evaluated separately for purposes of determining major source status. EPA has defined “associated equipment” in the regulations. Officials said that EPA has not evaluated the significance of the aggregation prohibition and EPA’s interpretation of it, such as its effect on the numbers of facilities that are or are not regulated as major sources and hence subject to MACT controls. Officials also said that it is likely that the effect of the aggregation provisions on well sites is smaller than its impact on downstream oil and gas production facilities where equipment tends to be larger and would be more likely to trigger MACT requirements if aggregated.
64 Fed. Reg. at 32,619.
NESHAPs for Oil and Natural Gas Production Facilities
EPA originally promulgated the NESHAPs for Oil and Natural Gas Production source subcategory in two parts: the standard for major sources was issued in 1999, and the NESHAP for area sources in 2007. In April 2012, EPA promulgated amendments to the NESHAPs for major sources.
The NESHAPs for major sources apply to emission points of HAPs located at oil and natural gas production facilities (including wells, gathering stations, and processing plants) that are major sources. Under this rule, in determining whether a well site’s potential to emit HAPs equals or exceeds 10 tons per year (the major source threshold), only emissions from equipment other than wells or “associated equipment,” may be aggregated; associated equipment is a defined term, and excludes glycol dehydrators and storage vessels. In other words, emissions from wells are not aggregated; only emissions from glycol dehydrators and storage vessels at a site may be aggregated. Further, the rule exempts facilities exclusively handling and processing “black oil” and small oil and gas production facilities, including well sites, prior to the point of custody transfer.which these exemptions have the effect of cancelling MACT requirements that would otherwise apply to oil and gas wells from unconventional deposits.
EPA documents do not indicate the extent to EPA headquarters officials did not know if any oil or gas wells were NESHAP major sources prior to the April 2012 amendments, and EPA officials in each of the four Regions we contacted were unaware of any examples of oil and natural gas wells being regulated as major sources. EPA officials noted that glycol dehydrators are more likely where there are high pressure gas wells, such as in the Jonah-Pinedale area of Wyoming. EPA officials said that a multiple pad well site in this area would very likely be major for HAPs, except that any federally enforceable standards are first applied to determine the potential emissions, and Wyoming’s presumptive best available control technology standards would likely limit the emissions such that the potential to emit would be reduced to area source levels. Analyses developed for the recent amendments also do not identify if any well sites triggered the major source NESHAPs prior to the amendments, but available data suggest few well sites do so.
Large glycol dehydrators are those with an actual annual average natural gas flowrate equal to or greater than 85 thousand standard cubic meters per day and actual annual average benzene emissions equal to or greater than 0.90 Mg/yr. 77 Fed. Reg. 49,490 , 49,568-69 (Aug. 16, 2012) (revising 40 C.F.R. §§ 63.761, 63.760(b)). cover vented through a closed vent system to a control device that recovers or destroys HAPs emissions with an efficiency of 95 percent or greater, or for combustion devices, reduces HAPs emissions to a specified outlet concentration. However, these standards only apply at sites that are deemed major sources, and as outlined above, it appears likely that few well sites reach the key threshold emissions level.
The April 2012 amendments added one more emission source to the These sources NESHAP major source rule: small glycol dehydrators. must meet a unit-specific limit for emissions of BTEX that is calculated using a formula in the rule based on the unit’s natural gas throughput and gas composition. Existing dehydrators have 3 years to comply, while new dehydrators must comply upon start-up.
Id. at 49,503; see also EPA, Summary of Requirements for Processes and Equipment at Natural Gas Well Sites. these sources in order to analyze and establish MACT emission standards for this subcategory of storage vessels.”
In addition, the April 2012 amendments changed a key definition in the NESHAPs for determining major source status. change (i.e., revision to the definition of “associated equipment”) is that emissions from all storage vessels and all glycol dehydrators now will be counted toward determining whether a facility is a major source under the NESHAP for Oil and Natural Gas Production. EPA documents do not indicate the extent to which the change in definition will result in additional oil and gas wells being subject to the MACT requirement.
CAA prohibits EPA from listing oil and gas production wells (with its associated equipment) as a specific “area source” category, unless the area source category is for oil and gas production wells located in any metropolitan statistical area or consolidated metropolitan statistical area with a population in excess of 1 million, and the EPA Administrator determines that emissions of HAPs from such wells present more than a negligible risk of adverse effects to public health.
Id. at 49,501, 49,569 (revising 40 C.F.R. § 63.761).
EPA defines these control areas with reference to parameters used by the U.S. Census Bureau to identify densely settled areas. See 72 Fed. Reg. 26, 28 (2007). limit for benzene. For area sources outside of these control areas, an operational standard is required instead of an add-on control.
Area sources are required to notify EPA that they are subject to the rule; additional information, including periodic reports, are required for area sources within a control area. The area source notifications are sent to a specific EPA e-mail box. EPA does not track whether the facilities providing notification are well sites or other components of the oil and natural gas production sector, so it is difficult to determine to what extent oil and gas well sites are subject to the area source NESHAP.
Regarding EPA’s authority to establish an area source category for oil and gas wells in metropolitan statistical areas, if certain conditions are met, officials said that EPA has not considered doing so. They said that they have not analyzed well emissions in relation to location in or outside a metropolitan statistical area, and that if the agency were to consider developing an area source within metropolitan statistical areas, they would need to conduct a new data collection effort.
Other NESHAPs
In addition, EPA has promulgated other NESHAPs, the applicability of which to oil and gas well sites depends upon the particular equipment— and factors such as capacity or emission rate—used at a well site. Although some published materials suggest several NESHAPs may apply, based on discussions with EPA, the primary NESHAP that officials believe could apply at oil and gas well sites is the Boilers and Process Heaters NESHAP for major sources.
The major source rule for boilers and process heaters has an unusual feature in that, to determine applicability of the rule, it references whether or not an oil and gas production facility falls within the major source definition under the NESHAPs for Oil and Gas Production Facilities (subpart HH). If an oil and gas well were a major source under the Oil and Gas NESHAP, then any boilers or process heaters with heat input of 10 million British thermal units (BTU) per hour are subject to emission limitations requirements, and any smaller heaters are subject to work standards, under the Boiler NESHAP. These requirements differ from those in the NESHAP for Oil and Gas Production Facilities by, among other things, imposing limits for other pollutants, such as particulate matter, hydrogen chloride, mercury, carbon monoxide, and dioxins/furans, depending on the type of unit. Officials stated that some glycol dehydrators at well sites could be over the trigger heat input and would be subject to the Boiler NESHAP requirements if the oil and gas site were a major source subject to the rule. As noted above, it is not known how many, if any, well sites are major sources.
Where a gas well has a compressor, the compressor engine may be EPA did not have available subject to standards for stationary engines. information on the extent to which these engines are present at well sites and, if so, whether they fall under these rules, which are based on equipment and are not specific to the oil and gas industry.
New Source Performance Standards
EPA promulgates NSPS, which are generally applicable to (1) new or reconstructed facilities and (2) facilities that have undergone modification—that is, any physical change in, or change in the method of operation of, a facility which increases the amount of any air pollutant emitted by such source or which results in the emission of any air pollutant not previously emitted. These rules are implemented by EPA or by states through delegation.the NSPS primarily regulates VOCs (as an ozone precursor).
For the oil and gas production industry, In 1985, EPA promulgated NSPS for the oil and gas industry focused on natural gas processing plants, but did not include any standards for emissions from preprocessing production activities. promulgated such standards for some production emissions, notably completion and recompletion of certain hydraulically fractured gas wells.In addition, some other generally applicable standards for certain equipment may apply at oil and gas well sites.
April 2012 Amendments to NSPS
In April 2012, EPA promulgated amendments to the NSPS for the Oil and Gas sector, including new standards applicable to the production source category. The new standards were issued pursuant to a 2010 consent decree that settled a challenge brought by environmental groups over EPA’s failure to conduct required reviews of the existing standards. Following publication of the new rules in August 2012, an industry group petitioned EPA to reconsider certain aspects of the new rules.
40 C.F.R. pt. 60, subparts KKK, LLL. completions and recompletions of natural gas wells, with variable implementation dates as described in table 10. These practices are designed to capture emissions from flowback from hydraulically fractured wells, and reduce VOC emissions. EPA’s regulatory impact analysis estimated that the rules will apply to about 9,700 new wells per year, and to about 1,200 existing wells being recompleted per year. Of these, EPA’s analysis estimates that nearly 9,400 wells will be required to use “green completion” techniques to capture and treat flowback emissions so that the captured natural gas can be sold or otherwise used, while the remainder will use completion combustion.
Additionally, to reduce VOC emissions, the April 2012 rule establishes standards including those for, as relevant to gas well sites, gas-driven pneumatic controller devices and storage vessels, subject to thresholds. According to EPA documents, over 13,600 pneumatic controllers will be affected, but it is not clear the extent to which these are located at well sites. Similarly, EPA documents estimate that 304 storage vessels annually will trip the threshold of 6 tons per year of VOC and thus be subject to the rule, and EPA officials expect most of these storage vessels will be located at wells.
When asked about the potential increased burden of the amended NSPS rules, officials said that it was not clear whether the rule would result in more or fewer CAA-related permits. For example, the applicability of NSPS may trigger a state requirement to get a construction permit or other type of permit. These permits may be triggered by, among other things, a facility’s “potential to emit” that is calculated assuming all federally enforceable controls are in place. Officials said that the NSPS, which are federally enforceable requirements, will reduce actual emissions and thus could reduce the number of facilities that trigger the requirement for these state permits. In the new rule, EPA generally exempted covered facilities from the obligation to obtain a Title V operating permit.
Other NSPS
EPA has issued equipment-focused NSPS for certain equipment that may be used at oil and gas well sites. These include NSPS for Volatile Organic Liquid Storage Vessels (Including Petroleum Liquid Storage Vessels). These standards apply to such tanks with a capacity greater than or equal to 75 cubic meters that is used to store volatile organic liquids and that were built, reconstructed, or modified after July 23, 1984. Tanks attached to trucks and other mobile vehicles are excluded.while there are tanks at well sites, they are often smaller than the threshold in this rule. Specifically, while the standards apply to tanks greater than 75 cubic meters (about 475 barrels, according to EPA), an individual tank typically found at oil and gas sites is often between 250 – 400 barrels, hence avoiding coverage under this rule.
Other NSPS that have been identified as potentially relevant include those for gas turbines and steam generators. EPA officials said, however, that typical activity at well sites is not enough to trigger thresholds for coverage under this rule, either.
New Source Review
CAA New Source Review (NSR) provisions require a source to obtain a permit and undertake other obligations to control its emissions of air pollution prior to construction of a new source or modification of an existing stationary source. However, NSR only applies if the construction project results in actual emissions or the potential to emit regulated air contaminants at or above certain threshold levels established in the NSR regulations. For a new source, NSR is triggered only if the emissions would cause the source to qualify as major. For an existing major source making a modification, NSR is triggered only if the modification will result in a significant increase in emissions and a significant net emissions increase of that pollutant. Relevant to NSR, the emission profile for oil and gas wells would include hydrogen sulfide and VOCs, among others. In most areas, states implement the NSR permitting programs.
The major NSR program is actually composed of the following two separate programs:
Nonattainment NSR applies to emission of specific pollutants from sources located in areas designated as nonattainment for those pollutants because they do not meet the pollutant-specific national ambient air quality standards.
Prevention of Significant Deterioration (PSD) applies to emissions of all other regulated pollutants from sources located in attainment areas where such standards are met or in areas unclassifiable for such standards.
For PSD, the major source threshold is generally 250 tons per year of any regulated air pollutant. Determining whether a facility is a major source, together with identifying which emissions should be included in doing so is guided by the process as for Title V permits, discussed below. While a 1993 EPA report appeared to suggest that most oil and gas extraction wells would not likely be subject to PSD regulations based on the applicability criteria, the specific determination of which emission units, including wells, must be included in determining whether a source is major (source aggregation) involves a case-by-case, fact-specific analysis. For nonattainment NSR, the major source threshold ranges from 100 tons per year down to 10 tons per year depending on the severity of the air quality problem where the source is located and the specific pollutant at issue. To be a major source under nonattainment NSR, the source must emit or have a potential to emit above the major source level set for the specific regulated air pollutant (or its precursor) for which the area is designated nonattainment. With respect to nonattainment NSR, EPA officials stated that some large wells in nonattainment zones could be major sources standing alone because of low emission thresholds in certain areas; as noted above, such thresholds could be as low as 10 tons per year in the most severe nonattainment areas, versus 250 tons per year in attainment areas.
Title V Operating Permits
Relevant to oil and gas production, CAA generally requires Title V permits for the operation of determined based on the facility’s actual emissions or “potential to emit;” any source, including a nonmajor source, subject to a NSPS; any source, including an area source, subject to a NESHAP, among any source required to obtain a PSD or NSR permit.
Thus, whether a Title V permit is required depends on whether the source (1) is subject to one of these other requirements, unless EPA has exempted the particular area sources or nonmajor sources from the Title V permit requirement, or (2) meets the emissions thresholds for a major source. Title V permits for a major source must include all applicable requirements for all relevant emission units in the major source. Title V permits for nonmajor sources must include all applicable requirements applicable to emissions units that caused the source to be subject to the Title V permitting requirements. Title V permits may need to add monitoring, reporting, or other requirements but generally do not add new emissions control requirements (rather they consolidate requirements from throughout CAA programs and contain conditions to assure compliance with such requirements). According to EPA officials, the permits help operators and the public to understand what the requirements are for compliance with CAA and help assure compliance with such requirements.
Title V permits are generally issued by states and, in some instances, EPA Regional offices. As of August 2012, EPA officials were unaware of any Title V permits issued solely on the basis of oil and gas well site emissions alone. EPA officials stated that some oil and gas well sites have adopted federally enforceable emissions limits such that the sites do not need a Title V permit, which they would otherwise have triggered. In addition, EPA identified a March 2012 case in which a state environmental agency alleged, among other things, that an oil and gas production site had VOC emissions of over 600 tpy, which would require a Title V permit. The operator disputed the violations but agreed to submit an application for a Title V permit.
Source Determinations and Aggregation Issues for Title V and NSR
Applicable to both NSR and related determinations for Title V, EPA regulations specify three factors that must be met in source determinations—whether the emissions points are under common control, belong to the same major industrial grouping, and are located on contiguous or adjacent properties. Thus, in contrast to the NESHAPs, in determining whether significance thresholds for emissions are met for purposes of NSR or Title V, EPA and states must aggregate VOC emissions from oil and gas well sites that are both (1) contiguous or adjacent and (2) under common control. To determine whether a source meets the emissions thresholds for a Title V or NSR major source designation, EPA applies these regulatory criteria to evaluate whether to aggregate oil and gas production wells with other emission sources. Specifically, permitting authorities (EPA or authorized states or local authorities) have in particular matters, on a case-by-case basis, aggregated emissions from facilities to determine major sources, for purposes of Title V operating permits or NSR. Determining when emissions must be aggregated is a fact-based inquiry that is made by permitting authorities on a case-by-case basis. While authorized states are typically responsible for making source determinations, EPA headquarters has stated that Regional offices should continue to review and comment on source determinations to assure consistency with regulations and historical practice. In addition, EPA Regions may be responsible for source determinations in areas where they are responsible for permitting.
Aggregation of emissions from the oil and gas industry generally, including production facilities, has received recent attention. For example, in 2007, EPA provided guidance on how to evaluate aggregation in source determinations for the oil and gas industry. EPA later withdrew this industry-specific guidance and emphasized that source determinations in this industry were governed by the existing regulations, the existing interpretations of them, and need for case-specific application of the regulations in each permitting action.
See Summit Petroleum Corp. v. EPA, Nos. 09-4348, 10-4572, slip op. (6th Cir. August 7, 2012). oil and gas activities with the compressor station in determining the source. A citizen group appealed this decision to the Environmental Appeals Board. Both citizen group challenges were ultimately dismissed after the parties engaged in a dispute resolution process. EPA entered settlements with the citizen group and agreed to undertake a pilot program for the purpose of studying, improving, and streamlining source determinations in the oil and gas industry in new or renewal Title V permits for which EPA Region 8 is the initial Title V permitting authority.
In sum, several recent disputes over aggregation of oil and gas facilities involve whether or not well emissions should be aggregated; however, whether or not well emissions are aggregated for Title V or PSD purposes generally would not affect other federal requirements for emission controls at well sites.
Greenhouse Gas Reporting Rule
In 2009, EPA promulgated the Greenhouse Gas Reporting Rule, providing a framework for the greenhouse gas reporting program and establishing requirements for some source categories. According to EPA, the goals of the program are to obtain data that are of sufficient quality that they can be used to support a range of future climate change policies and regulations; to balance the rule coverage to maximize the amount of emissions reported while minimizing reporting from small emitters; and to create reporting requirements that are consistent with existing programs by using existing estimation and reporting methodologies to reduce reporting burden, where feasible.
EPA subsequently issued and amended a rule to implement the program for the category of Petroleum and Natural Gas Systems, including oil and gas wells. According to EPA, oil and gas well sites may contain sources of greenhouse gas emissions including: (1) combustion sources, such as engines used on-site and which typically burn natural gas or diesel fuel, and (2) process sources, such as equipment leaks and vented emissions. The process sources include pneumatic devices, dehydrators, and compressors. EPA has identified the onshore production subcategory as the largest segment for equipment leaks and vented and flared emissions in the petroleum and natural gas system source category.
The rule requires petroleum and natural gas facilities—including oil and gas well sites—that emit 25,000 metric tons or more of carbon dioxide equivalent per year to report certain data to EPA. Specifically, oil and gas production facilities are to report annual emissions of carbon dioxide, methane, and nitrous oxide from equipment leaks and venting, gas flaring, and stationary and portable combustion.
Reporting is to begin in September 2012, for calendar year 2011.
76 Fed. Reg. 73,886, 73,889, 73,899 (Nov. 29, 2011) (amending 40 C.F.R. § 98.3).
For purposes of this rule, onshore petroleum and natural gas production is defined to include all equipment on a single well pad or associated with a single well pad (including but not limited to compressors, generators, dehydrators, storage vessels, and portable non-self-propelled equipment which includes well drilling and completion equipment, workover equipment, gravity separation equipment, auxiliary non-transportation- related equipment, and leased, rented or contracted equipment or storage facilities), used in the production, extraction, recovery, lifting, stabilization, separation, or treating of petroleum and/or natural gas (including condensate). Moreover, the rule defines an onshore oil and gas production facility as including all oil or gas equipment on or associated with a well pad and carbon dioxide enhanced oil recovery operations that are under common ownership or control and that are located in a single hydrocarbon basin; thus, for example, where multiple wells are owned or operated by the same person or entity in a single basin, the owner or operator is to report well data collectively for each hydrocarbon basin. EPA estimated that this facility definition for onshore petroleum and natural gas production will result in 85 percent GHG emissions coverage of this industry segment, and EPA documents estimate that emissions from approximately 467,000 onshore wells are covered under the rule.
Accidental Releases
Section 112(r) of CAA establishes the chemical accidental release prevention program applicable to specifically listed “regulated substances,” as well as other extremely hazardous substances. This provision, among other things, required EPA to publish regulations and guidance for chemical accident prevention at facilities using substances that pose the greatest risk of harm from accidental releases; the resulting regulatory program is known as the Risk Management Program. In conjunction with the program, EPA was required to promulgate a list of at least 100 substances which, in the case of an accidental release, are known to cause or may reasonably be anticipated to cause death, injury, or serious adverse effects to human health or the environment, and to periodically review the list. Among others, hydrogen sulfide is included on the list of regulated substances. Section 112(r) also established the Chemical Safety Board; and the general duty for owners and operators of facilities to take steps to prevent accidental releases of the listed and other extremely hazardous substances, among other things.
Accidental Release Prevention (Risk Management Program)
Whether and the extent to which a facility is subject to the Risk Management Program requirements depends on the regulated substances present and their quantities, the processes, and the presence of receptors. Generally, the regulation requires, for covered processes, a three-part program including (1) a hazard assessment; (2) a prevention program that includes safety procedures and maintenance, monitoring, and employee training measures; and (3) an emergency response program.
63 Fed. Reg. 640 (Jan. 6, 1998); 65 Fed. Reg. 13,243, 13,244 (Mar. 13, 2000). naturally occurring hydrocarbon mixtures, which include any combination of the following: condensate, crude oil, field gas, and produced water (defined as water extracted from the earth from an oil or natural gas production well, or that is separated from oil or natural gas after extraction), regulated substances in gasoline, when in distribution or related storage for use as fuel for internal combustion engines, and a flammable substance when the substance is used as a fuel.
Regarding the exemption of naturally occurring hydrocarbon mixtures prior to entry into a processing plant or refinery, EPA explained at the time that the agency believed they do not warrant regulation, noting that the general duty clause would apply when site-specific factors make an In addition, EPA stated that, unlisted chemical extremely hazardous. for naturally occurring hydrocarbons and for regulated substances in gasoline, a key consideration was EPA’s original intent to exempt flammable mixtures that do not meet a preexisting standard—the National Fire Protection Association flammability hazard rating of 4. EPA has also explained that this rating reflects the potential to result in vapor cloud explosions and boiling liquid expanding vapor explosions, which it found pose the greatest potential hazard from flammable substances to the public and environment.
40 C.F.R § 68.126 (2012).
Program rule. In this context, the Chemical Safety Information, Site Security and Fuels Regulatory Relief Act prohibited EPA from listing flammable substances used as fuel, solely because of their explosive potential. EPA then revised the regulation, adding the exemption to comply with the act.
The regulated chemicals present at oil and gas well sites include components of natural gas (such as butane, propane, methane, and ethane), but these are exempt from the threshold determination of a facility subject to the Risk Management Program when present in “naturally occurring hydrocarbon mixtures.” If an oil or gas well site nonetheless uses or stores some of the regulated chemicals not encompassed by the exemptions, it could trigger the risk management requirements.
General Duty to Prevent Accidental Releases
The owners and operators of stationary sources producing, processing, handling or storing such substances have a general duty …to identify hazards which may result from such releases using appropriate hazard assessment techniques, to design and maintain a safe facility taking such steps as are necessary to prevent releases, and to minimize the consequences of accidental releases which do occur.
Known as the “general duty clause,” the provision is analogous to a negligence standard, according to EPA officials. In other words, if there is a known risk and a way to mitigate it, then the operator should conduct risk mitigation. As explained in an EPA report, “responsibilities include the conduct of appropriate hazard assessments and the design, operations, and maintenance of a safe facility,” as well as release mitigation and community protection. EPA officials noted that industry standards (such as from the American National Standards Institute or the American Petroleum Institute) and fire codes are used in determining the duty of care. EPA has published Chemical Safety Alerts to advise the regulated community of its general duty clause obligations.
The general duty clause applies to sources handling or storing substances listed by EPA in the Risk Management Program regulations or any other extremely hazardous substance, without a threshold. EPA headquarters officials said that, conceivably, the general duty clause would apply to every single well but stated that it would be in EPA Regions’ discretion where and when to use the general duty clause to conduct inspections. In some Regions, EPA has conducted inspections of gas well sites to enforce the general duty clause, including identifying noncompliance with certain safety standards. EPA Regional officials said that they use infrared video cameras to conduct inspections to identify leaks of methane from storage tanks or other equipment at well sites. For example, EPA Region 6 officials said they have conducted 45 inspections at well sites since July 2010 and issued 10 administrative orders related to violations of CAA general duty clause. EPA officials said that all well sites are required to comply with the general duty clause but that EPA prioritizes and selects sites for inspections based on risk.
Imminent and Substantial Endangerment Authority Respecting Accidental Releases
Section 112(r) also provides EPA with the authority to issue orders as may be necessary to protect the public health when the EPA Administrator determines that there may be an imminent and substantial endangerment to human health or welfare or the environment because of an actual or threatened accidental release of a regulated substance.
Chemical Safety Board
The Chemical Safety Board, established by section 112(r), is charged with investigating and publicly reporting on accidental releases resulting in a fatality, serious injury, or substantial property damages. The board is authorized, among other things, to make recommendations to EPA. In September 2011, the Chemical Safety Board released a report investigating three incidents involving fatality and injuries at oil and gas storage tanks located at well sites and surveyed an additional 23 such incidents that occurred between 1983 and 2010. The report found that these accidents occurred when the victims—all young adults—gathered at rural unmanned oil and gas storage sites lacking fencing and warning signs. This report concluded such sites pose a public safety risk. The report also reviewed federal, state, and local regulations, inherently safer designs of tanks, and industry standards. Noting that exploration and production storage tanks are exempt from the security requirements of CWA and from the risk management requirements of CAA, the Chemical Safety Board recommended that EPA encourage owners and operators to reduce these risks. Specifically, the Chemical Safety Board recommended EPA “publish a safety alert directed to owners and operators of exploration and production facilities with flammable storage tanks, advising them of their general duty clause responsibilities for accident prevention under CAA.” The letter requests that EPA provide within 180 days a response stating how EPA will address the recommendation. On June 27, 2012, EPA responded to the Chemical Safety Board and stated that EPA agrees to develop and publish a safety alert and anticipates the agency will be able to publish a final safety alert by June 2013. The Chemical Safety Board also made related recommendations to several states and industry associations.
EPA Enforcement Authorities
Even where a state implements key CAA provisions, EPA retains oversight and enforcement authority. For example, EPA may initiate an enforcement action via an administrative order or a civil action for a violation of any requirement or prohibition of an applicable SIP, permit, or certain other requirement or prohibition after notification to the state and the party. CAA also gives EPA authorities regarding access to records and the ability to require provision of information, as to any person who owns or operates any emission source, among others.
Imminent and Substantial Endangerment Authority
Where EPA receives evidence that a source or a combination of sources present an imminent and substantial endangerment to public health or welfare, or the environment, EPA may bring suit or, where prompt action is needed, issue orders to stop the emission of air pollutant or take other necessary action.and attempt to confirm the accuracy of information before taking such actions.
Appendix V: Key Requirements and Authorities under the Resource Conservation and Recovery Act
In 1976, Congress passed the Resource Conservation and Recovery Act (RCRA), generally establishing EPA authority to regulate the generation, transportation, treatment, storage, and disposal of hazardous waste, and also including some provisions respecting solid waste. As to solid waste, RCRA provided a more limited federal role and included incentives for states to implement programs to manage nonhazardous solid waste disposal, a prohibition on open dumping of wastes, and a requirement for EPA to promulgate technical criteria for classifying solid waste disposal facilities, among other things.
Subtitle C – Hazardous Waste
a solid waste, or combination of solid wastes, which because of its quantity, concentration, or physical, chemical, or infectious characteristics may (A) cause, or significantly contribute to an increase in mortality or an increase in serious irreversible, or incapacitating reversible, illness; or (B) pose a substantial present or potential hazard to human health or the environment when improperly treated, stored, transported, or disposed of, or otherwise managed.
RCRA Subtitle D, 42 U.S.C. ch. 82, subch. IV (§§ 6941-6949a) (2012). ignitability, corrosivity, or reactivity. The generation, transport, and disposal of wastes meeting the RCRA regulatory hazardous definition are generally subject to RCRA Subtitle C requirements, such as reporting, using a manifest, and disposing of the waste in approved ways, such as through hazardous waste landfill.
Exemption of Certain Oil and Gas Production Wastes from Regulation as Hazardous Waste under RCRA Subtitle C
Notwithstanding the provisions for identifying hazardous wastes, the Solid Waste Disposal Act Amendments of 1980 created a separate process for certain oil and gas exploration and production wastes. Under the statute, these wastes would not be subject to regulation as hazardous waste under RCRA Subtitle C unless specific actions were taken. The amendments required EPA to conduct and publish “a detailed and comprehensive study…on the adverse effects, if any, of drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil or natural gas or geothermal energy on human health and the environment.” The study report was to “include appropriate findings and recommendations for Federal and non-Federal actions concerning such effects.” he Administrator shall, after public hearings and opportunity for comment, determine either to promulgate regulations under this subchapter for drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil or natural gas or geothermal energy or that such regulations are unwarranted. The Administrator shall transmit his decision, along with any regulations, if necessary, to both Houses of Congress. Such regulations shall take effect only when authorized by Act of Congress.
In considering the first factor, EPA found that a wide variety of management practices are utilized for these wastes, and that many alternatives to these current practices are not feasible or applicable at individual sites…As to the second factor, EPA found that existing State and Federal regulations are generally adequate to control the management of oil and gas wastes. Certain regulatory gaps do exist, however, and enforcement of existing regulations in some States is inadequate. EPA’s review of the third factor found that imposition of Subtitle C regulations for all oil and gas wastes could subject billions of barrels of waste to regulation under Subtitle C as hazardous wastes and would cause a severe economic impact on the industry and on oil and gas production in the U.S…and could cause severe short-term strains on the capacity of Subtitle C Treatment, Storage, and Disposal Facilities..and a significant increase in the Subtitle C permitting burden for State and Federal hazardous waste programs.
Id. at 25,446.
EPA stated that regulation of these wastes as hazardous waste under Subtitle C posed significant problems, including the lack of flexibility in the statute to take into account the varying geological, climatological, geographic, and other differences characteristic of oil and gas production sites, and to consider cost in applying the requirements—such that EPA would be unable to craft a program to avoid severe economic impacts and to fill only the gaps in existing programs.
In lieu of regulating these wastes as hazardous waste under Subtitle C, EPA announced “a three-pronged approach toward filling the gaps in existing State and Federal regulatory programs,” comprised of (1) improving existing programs under RCRA, the Safe Drinking Water Act, and the Clean Water Act; (2) working with states to improve their programs; and (3) working with Congress on any additional legislation EPA further stated that it planned to revise its that might be needed. existing standards under Subtitle D of RCRA, “tailoring these standards to address the special problems posed by oil, gas, and geothermal wastes and filling the regulatory gaps,” and “in developing these tailored Subtitle D standards for crude oil and natural gas wastes, EPA will focus on gaps in existing State and Federal regulations and develop appropriate standards that are protective of human health and the environment. Gaps in existing programs include adequate controls specific to associated wastes and certain management practices and facilities for large-volume wastes, including roadspreading, landspreading, and impoundments.”
EPA, Exploration & Production Waste and RCRA, presented at ASTSWMO Annual Meeting (Oct. 26, 2011).
Environmental Regulations (STRONGER) program. EPA also worked with industry representatives to develop best management practices for exploration and production wastes, but these efforts did not culminate in any document or guidance.
On September 8, 2010, the Natural Resources Defense Council submitted a petition requesting regulation of waste associated with the exploration, development, or production of oil, natural gas, and geothermal energy. the determination not to regulate these wastes because, among other things, the underlying assumptions—concerning the availability of alternative disposal practices, the adequacy of state regulations, and economic harm to the oil and gas industry—are no longer valid. The petition requests that EPA promulgate regulations applying to wastes from the exploration, development and production of oil and natural gas under Subtitle C of RCRA.
Letter, NRDC to EPA, Petition for Rulemaking Pursuant to Section 6974(a) of the Resource Conservation and Recovery Act Concerning the Regulation of Wastes Associated with the Exploration, Development, or Production of Crude Oil or Natural Gas or Geothermal Energy (Sept. 8, 2010); see also RCRA § 7004(a), 42 U.S.C. § 6974(a) (2012). issue, the agency intends to issue a proposed response to the petition. The proposed response will be printed in the Federal Register, and EPA will establish an electronic docket and provide an opportunity for public comment. Although EPA has not yet sought public comment on the petition, the agency has received several unsolicited comment letters, including from two industry associations, the STRONGER program, and two states.
If EPA revises the regulatory determination for some or all exploration and production wastes, the agency would conduct a full regulatory process to propose the regulations. Under the key RCRA provision, the regulations would not become effective until authorized by congressional action. Should the exemption be lifted, not all exploration and production wastes would necessarily be hazardous. Rather, whether particular exploration and production wastes would be hazardous and subject to regulation would depend on whether those particular wastes meet the regulatory definition of hazardous (i.e., are a listed waste or exhibit a characteristic of hazardous waste).
Oil and Gas Exploration and Production Wastes That Are Not Exempt from Regulation
While well sites wastes originating within the well or generated by field operations such as water separation, demulsifying, degassing, and storage are exempt, RCRA Subtitle C regulations generally apply to other wastes that may be generated at oil and gas wells, such as discarded unused products, solvents used to clean surface machinery, and others, if they are actually hazardous. In 2002, EPA published a guide titled “Exemption of Oil and Gas Exploration and Production Wastes from Federal Hazardous Waste Regulations” that identifies, among other things, a list of nonexempt wastes. The guide identified nonexempt wastes including the following wastes that may be generated by activities at oil and gas well sites: unused fracturing fluids or acids; oil and gas service company wastes such as empty drums, drum rinsate, sandblast media, painting wastes, spent solvents, spilled chemicals, and waste acids; vacuum truck and drum rinsate from trucks and drums transporting or containing nonexempt waste; used equipment lubricating oils; waste compressor oil, filters, and blowdown; used hydraulic fluids; caustic or acid cleaners; radioactive tracer wastes; and drums, insulation, and miscellaneous solids.
According to EPA’s guidance document, this list represents some types of wastes that, if hazardous, are not exempt from Subtitle C regulation; however, these wastes may or may not be hazardous in a particular situation. These wastes are hazardous if they are a listed hazardous waste or exhibit a hazardous characteristic, such as ignitability or toxicity. If hazardous, then the facility is subject to waste management requirements that vary depending upon the amount of hazardous waste generated per calendar month.
RCRA regulations establish several categories for facilities generating hazardous waste, with differing reporting obligations. Among these, the lowest level category is conditionally exempt small quantity generators, composed of facilities generating no more than 100 kilograms (220 pounds) per month of hazardous waste. These facilities are subject to limits on the amount of hazardous waste they accumulate, as well as general requirements to determine which wastes are hazardous and to ensure that any hazardous wastes sent for off-site disposal are sent to state-approved facilities, RCRA-permitted or interim status, or for certain wastes, universal waste facilities, facilities beneficially using, recycling, or reclaiming the waste. Generally, conditionally exempt small quantity generators would not be required to have an EPA ID number. Small quantity generators are those facilities generating more than 100 kilograms (220 pounds) but less than 1,000 kilograms (2,220 pounds) per month of hazardous waste. These facilities are subject to limits on the amount of hazardous waste they accumulate, as well as storage requirements, and general requirements to determine which wastes are hazardous and to ensure that any hazardous wastes sent for off-site disposal are sent to RCRA-permitted or interim status facilities. In addition, the small quantity generators are required to have an EPA ID number and use manifests, by which hazardous waste may be tracked.
Id. at § 262.12(a) (a generator, other than a conditionally exempt small quantity generator, is essentially required to obtain an identification number before storing the waste or offering it to a transporter.). and inspection purposes. Generally, EPA (or the authorized state’s) involvement at generator-only sites includes receiving notifications and issuing identification numbers, receiving biennial reports, conducting compliance assurance activities such as inspections, and investigating alleged problems.
EPA has not undertaken a specific assessment of the extent to which oil and gas well sites are generating small amounts of regulated hazardous wastes and consequently are regulated as small quantity generators or conditionally exempt small quantity generators. EPA officials were unaware of the extent to which oil and gas well sites generate nonexempt hazardous waste (e.g., hazardous wastes other than exempt exploration and production wastes) in quantities significant enough to require an EPA ID number. EPA Region 8 officials were unaware of any instances in which a well site requested an EPA ID number. A challenge in understanding the extent to which oil and gas well sites are regulated stems in part from the use of North American Industry Classification System (NAICS) codes. While there is a code at the six-digit level that generally corresponds with oil and gas production, it appears that, for some facilities with this code, the facility entry includes associated downstream facilities such as a compressor station or gas processing plant, making it impossible to use RCRAInfo – a publicly available EPA database that contains information on RCRA generators -- alone to identify well sites triggering the particular requirement of interest. For example, this database shows that some facilities with the oil and gas production NAICS code are listed as conditionally exempt small quantity generators. GAO’s review of a small sample of these listings suggests some may include downstream facilities, while others appear to be well sites.
Subtitle D – Solid Waste
Oil and gas exploration and production wastes may be RCRA statutory solid wastes even if they are exempt from hazardous waste requirements or are nonhazardous wastes. As compared with hazardous waste, RCRA provided EPA a different and largely nonregulatory role for solid waste. EPA’s role in solid waste management is focused on assisting states in developing solid waste management programs. For example, EPA developed guidelines for certain aspects of solid waste management. A key part of EPA’s limited regulatory role for solid waste was to establish criteria defining which solid waste disposal facilities and practices are “sanitary landfills” and those which constitute “open dumps,” where RCRA prohibited open dumping of solid waste.
Consistent with the scheme established by RCRA Subtitle D, states have primary responsibility for managing disposal of solid waste, including that resulting from oil and gas exploration and production. State solid waste programs regulate treatment (which may include incineration) and land disposal of these wastes, among other things. In addition, states may have specific programs to address oil and gas production wastes, and some states put such wastes in a special category of solid waste, such as industrial wastes, with more stringent requirements than the federal minimum requirements. (See report and app. IX for discussion of selected aspects of state waste management.)
Enforcement
EPA has certain enforcement authorities to address hazardous wastes. RCRA sections 3007, 3008, and 3013 collectively provide EPA with authorities to monitor compliance, conduct investigations, and enforce Subtitle C (the hazardous waste subtitle) and its implementing regulations. Each of these key authorities depends, among other things, on the existence or presence of a hazardous waste in a given situation. EPA’s authority under sections 3007 and 3013 extends beyond waste that is regulated as hazardous under Subtitle C (e.g., wastes meeting the regulatory definition of hazardous waste), and includes waste that meets the statutory definition of hazardous waste in RCRA section 1004(5).
For example, section 3008(a) authorizes EPA to issue administrative compliance orders “whenever on the basis of any information” the EPA Administrator determines that any person has violated or is in violation of any requirement of Subtitle C. These orders may require the person ,to come into compliance immediately or by a specific time frame and/or pay a civil penalty for any past or current violation and may include suspension or revocation of a facility’s RCRA permit. Alternatively, EPA, through the Department of Justice, may file a civil action in federal court for violations of RCRA and its implementing regulations and permits. EPA must give notice to the state, if it has an EPA-authorized hazardous waste program, prior to issuing an order or filing a civil judicial action.
Section 3007(a) gives EPA authority to inspect and copy records and to obtain samples from any person who generates, stores, treats, transports, disposes of, or otherwise handles or has handled hazardous wastes, and to enter sites where hazardous wastes are or have been generated, stored, treated, disposed of, or transported from. Section 3007 also establishes mandatory compliance inspections. EPA has interpreted its section 3007 authority, discussed above, to include the authority to access records and sites related to solid waste “that the Agency reasonably believes may pose a hazard when improperly managed.” EPA officials did not provide any examples of EPA using its section 3007 authority at oil or gas well sites.
Section 3013 authorizes EPA to issue an order requiring monitoring, testing, analysis, and reporting if the EPA Administrator determines, upon receipt of any information, that the presence or release of any hazardous waste at a facility or site at which hazardous waste is, or has been, stored, treated, or disposed of may present a substantial hazard to human health or the environment. Furthermore, in certain circumstances, EPA may use its authority under section 3013 to conduct its own investigation into the nature and extent of a potential hazard.
EPA officials did not provide any examples of EPA using these hazardous waste enforcement provisions for incidents arising at oil or gas well sites.
EPA has fewer enforcement responsibilities and authorities for nonhazardous waste facilities under RCRA Subtitle D, than it does for hazardous waste activities regulated under RCRA Subtitle C. In particular, state solid waste programs are based in state law and generally are not subject to enforcement or overfiling by EPA. RCRA’s prohibition on open dumping of solid and hazardous waste is enforceable by citizen suit.
Imminent and Substantial Endangerment Authority
EPA has imminent and substantial endangerment authority to address both hazardous and solid wastes. Section 7003 authorizes EPA to issue administrative orders and to file suit in federal district court. In addition, “upon receipt of evidence that the past or present handling, storage, treatment, transportation or disposal of any solid waste or hazardous waste may present an imminent and substantial endangerment to health or the environment,” EPA has authority to restrain any person who has contributed or who is contributing to such handling, storage, treatment, transportation or disposal, from such activity, to order them to take such other action as may be necessary, or both. Such orders can be issued to a person who contributed in the past or is currently contributing to the imminent and substantial endangerment to health or the environment. Section 7003 orders are enforceable; if a nonfederal recipient fails to comply, EPA can enforce the order, including fines, by requesting that Department of Justice file suit in federal court.
EPA’s imminent and substantial endangerment authority is not limited to Subtitle C regulated hazardous wastes but also includes statutory solid wastes and hazardous wastes. EPA has interpreted the authority broadly, to allow a range of actions to be taken, including addressing the threat of endangerment. Nonetheless, EPA officials noted that a section 7003 action is distinct from, for example, the agency’s Subtitle C enforcement authorities because the objective of such an action is to abate the imminent and substantial endangerment, rather than to enforce specific RCRA requirements. Whether RCRA section 7003 authority is applicable to a given situation requires a fact-based determination that the facts establish the statutory elements, including the existence of conditions that may present an imminent and substantial endangerment.
EPA has issued section 7003 orders at several facilities handling wastes from oil and gas well sites. For example, as previously discussed, EPA Region 8 participated in an effort with the FWS, states, and tribes, after the FWS expressed concerns about migratory birds landing on open pits that contained oil and water, which killed or harmed the birds. The effort involved aerial surveys to observe pits. Where apparent problems were identified, relevant federal or state agencies were notified and were to give oil and gas operators an opportunity to correct problems. Ground inspections were then conducted where deemed warranted and, if problematic conditions were found, further follow up action was taken by EPA or the relevant state or other federal agency. As a result of this effort, EPA issued nine orders pursuant to RCRA section 7003 authority. According to the report, the orders required operators “to remove oil from pits, install effective exclusionary devices, and/or clean up sites.” EPA Region 8 has issued section 7003 orders to several commercial oilfield waste disposal facility operators in Wyoming, finding each site endangered the environment including having caused bird mortalities due to inadequate pit management.
As another example, in 2005, EPA Region 6 entered into an agreement with an exploration company and property owners at a site in Oklahoma where the contents of a well drilling waste pit had been relocated onto residential property; the agreement required the waste to be removed, among other things.
Appendix VI: Key Requirements and Authorities under the Comprehensive Environmental Response, Compensation, and Liability Act
In 1980, Congress passed the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), often referred to as “Superfund,” to address the cleanup of releases of hazardous substances, pollutants, and contaminants nationwide and, in so doing, protect human health and the environment from their effects. The enactment of CERCLA gave the federal government the authority to respond to actual and threatened releases of hazardous substances, pollutants, and contaminants that may endanger public health or welfare or the environment, as well as requiring reporting of hazardous substances releases above threshold quantities. CERCLA also established a liability scheme, whereby potentially responsible parties such as owners and operators may be liable for cleanup and other costs stemming from the release (or threatened release) of hazardous substances into the environment from a facility. CERCLA is primarily a remedial statute; it is preventive in that it authorizes responses to threatened releases of hazardous substances, pollutants, and contaminants, and to the extent that the liability scheme provides incentives for owners and operators to take care to avoid releases to the environment.
Relevant Exclusions and Definitions
Under a provision known as the petroleum exclusion, CERCLA’s provisions do not apply to releases to the environment that are purely petroleum, including crude oil and natural gas, and fractions of crude oil including the hazardous substances, such as benzene, that are indigenous in those petroleum substances. EPA can respond to releases of hazardous substances, however, even if there are colocated petroleum releases. any injection of fluids or other materials authorized under applicable State law (i) for the purpose of stimulating or treating wells for the production of crude oil, natural gas, or water, (ii) for the purpose of secondary, tertiary, or other enhanced recovery of crude oil or natural gas, or (iii) which are brought to the surface in conjunction with the production of crude oil or natural gas and which are reinjected.
However, EPA has explained, “he National Response Center must be notified in any situation involving the use of injection fluids or materials that are not authorized specifically by State law for purposes of the development of crude oil or natural gas supplies and resulting in a release of a hazardous substance” at or above the threshold reporting quantity.
CERCLA Hazardous Substance Release Reporting
Where there has been a release of a hazardous substance, CERCLA section 103 requires a person in charge of a facility to report such releases above reportable quantities as soon as he/she has knowledge of such release to the National Response Center. EPA regulations establish CERCLA hazardous substances and their reportable quantities. While releases of pure petroleum (e.g., petroleum in which hazardous substances have not increased such as by addition or processing) are excluded, releases of CERCLA hazardous substances that are commingled with petroleum are subject to the reporting requirement. Oil and gas well operators would be required to report any releases to the environment of other hazardous substances, for example, if a stored hazardous substance was accidentally spilled onto the ground, or if hazardous substances above the reportable quantity were injected but not authorized by state law.
The National Response Center—managed by the U.S. Coast Guard— receives release reports and forwards them to EPA Regions. When receiving a report, according to EPA Regional staff will screen the report for such factors as what was spilled and in what quantity and whether the spill threatens surface waters, to determine if EPA needs to respond and, if appropriate, will obtain additional information on the event, and/or send an on-scene coordinator to the site. EPA officials also noted they use the release reports to refer sites to program enforcement offices, such as the Clean Water Act’s SPCC program, for follow-up. Although release reports are publicly available, the available search terms do not readily differentiate oil and gas well sites from other types of oil and gas facilities. EPA officials noted that there had been approximately 200 reports of oil spills from oil facilities in the last 5 years. EPA Region 5 officials stated that oil spills are more often related to pipelines, tank sites, or trucking accidents, with few occurring at well sites.
Relevant EPA Authorities
EPA established the Superfund program to carry out its responsibilities and authorities under CERCLA. Under the Superfund program, EPA implements its authorities to compel parties responsible for contaminating sites—via releases of hazardous substances—to clean them up, as well as to enter into agreements with such parties for them to conduct the cleanup. In addition, EPA can itself conduct response actions, which may include investigations and cleanup activities, and then seek reimbursement from the responsible parties.
The Superfund cleanup process involves a series of steps during which specific activities—such as investigations and cleanups—take place or decisions are made. The CERCLA program has two basic types of cleanup: (1) cleanups under the removal process, which generally address short-term threats, and (2) cleanups under the remedial action process, which are generally longer-term cleanup actions. In determining whether to use removal or remedial authority to take a response action, EPA considers the time-sensitivity, complexity, comprehensiveness, and cost of the response action.
Several EPA Superfund authorities are particularly relevant to oil and gas well operations, including the following: Investigations, monitoring, coordination. Under section 104(b), EPA generally may conduct investigation activities with appropriated program funds whenever a hazardous substance is released or there is a substantial threat of such a release, or there is reason to believe a release has occurred or is about to occur. These activities may include monitoring, surveys, testing, and other information gathering, as well as planning, legal, fiscal, economic, engineering, architectural, and other studies or investigations, as deemed appropriate.
Information gathering and access. Under section 104(e), EPA has authority to obtain information as well as authorities to enter property Specifically, EPA may and to conduct inspections and take samples. require a person to furnish information about the identification, nature, and quantity of materials that have been or are generated, treated, stored, or disposed of at a facility or transported thereto, or the nature or extent of a release or threatened release of a hazardous substance or pollutant or contaminant, or the ability of a person to pay for or to perform a cleanup, including related documents and records, among other things. Where there is a reasonable basis to believe there may be a release or threat of release of a hazardous substance or pollutant or contaminant, EPA is authorized to enter a facility or property where such release is or may be threatened, among other things, and may inspect and obtain samples. EPA may obtain access by agreement, warrant, or administrative order. If consent is not granted, EPA may issue administrative orders or, through the Department of Justice, file civil actions, to compel compliance with requests made under these provisions.
Removals. Under section 104(a), EPA generally has authority to act whenever there has been a release or substantial threat of release into the environment of any hazardous substance. EPA generally may conduct removal actions, among other things. Removal actions are broadly defined and include actions to monitor, assess, and evaluate the release; the disposal of removed material; and other actions to prevent, minimize, or mitigate damage to the public health or welfare or to the environment such as provision of alternative drinking water supplies.
Imminent and substantial endangerment authority related to releases of a pollutant or contaminant. Under section 104(a), EPA has authority to act whenever a release or substantial threat of release into the environment of any pollutant or contaminant may present an imminent and substantial danger to the public health or welfare. This provides EPA with authority over releases of substances that are not CERCLA however, as hazardous but that may harm public health or welfare; noted above, releases that are purely petroleum are excluded. Under this authority, EPA may conduct removals, provide for remedial action, or take any other response measure consistent with the National Contingency Plan.
Authorities to pursue potentially responsible parties. In addition, under section 106(a), EPA, through the Department of Justice, can pursue injunctive relief in court, where an actual or threatened release of a hazardous substance from a facility may pose an imminent and substantial endangerment to the public health or welfare or the environment. EPA also can issue an administrative order requiring a potentially responsible party to take response actions as may be necessary to protect public health and welfare and the environment. CERCLA also provides authorities for EPA to pursue cleanup and related costs from potentially responsible parties, and to enter settlements, as well as providing for liability of potentially responsible parties for damages to federal, state, and tribal natural resources.
EPA has utilized its CERCLA authorities at several locations where it has been alleged that hazardous substance releases from oil and gas well sites have contaminated land or groundwater. In an example at a conventional oil well, in the 1990s, EPA, as represented by the Department of Justice, reached an agreement in which an oil exploration and production company pled guilty to a criminal felony count related to CERCLA violations when operators disposed of waste oil and hazardous substances by injecting them down the annuli (the space between the well casing and the surrounding rock) of the oil wells, over a 2-year period. According to the Department of Justice, the company agreed to spend $22 million to resolve the criminal case and related civil claims, which included claims brought under RCRA, SDWA, and EPCRA, as well as CERCLA.
See Richard M. Fetzer, On-Scene Coordinator EPA, Action Memorandum to Dennis Carney, Associate Division Director, Hazardous Site Cleanup Division, EPA, re: Request for Funding for a Removal Action at the Dimock Residential Groundwater Site, Jan. 19, 2012. contamination investigations at Pavillion, Wyoming.referenced CERCLA section 104(e) authority in requesting information from operators of wells proximate to the Pavillion site.
EPA has used CERCLA section 104(e) in conjunction with other authorities in several “multimedia” information requests, where EPA seeks information under multiple statutes and for multiple media—air, land, water—that may be affected. In 2011, for example, EPA used CERCLA and other authorities to request information concerning a blowout at a Marcellus shale natural gas well in Bradford, Pennsylvania. In this instance, a well blowout during hydraulic fracturing resulted in the release of flowback fluids to a tributary of the Susquehanna River, as well as combustible gases to the atmosphere.
Appendix VII: Key Requirements and Authorities under the Emergency Planning and Community Right-to-Know Act
The Emergency Planning and Community Right-to-Know Act of 1986 (EPCRA) provides a mechanism to help communities plan for emergencies involving extremely hazardous substances, and to provide individuals and communities with access to information regarding the storage and releases of certain toxic chemicals, extremely hazardous substances, and hazardous chemicals in their communities.
Generally Applicable Chemical Information, Inventory, and Release Reporting
EPCRA imposes a set of generally applicable requirements to report information on the uses, inventories, and releases into the environment of hazardous and toxic chemicals above threshold quantities. Regarding releases, EPCRA section 304 requires owners or operators of facilities where a chemical is produced, used, or stored to notify state and local emergency planning authorities of certain releases. The releases for which EPCRA requires reporting partially overlap with those for which the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) requires reporting. Where there is overlap, EPCRA’s procedures ensure state and local authorities receive this information, and CERCLA’s procedures ensure federal authorities receive notification.
Regarding reporting of chemical information and inventories, EPCRA sections 311 and 312 requirements apply only to those facilities storing or using (1) more than 500 pounds or the threshold planning quantity, whichever is lower, of extremely hazardous substances, or (2) more than 10,000 pounds of other hazardous chemicals. These facilities are required to provide chemical information (e.g., Material Safety Data Sheet or other detailed list) and submit an annual inventory report to state and local emergency planning authorities and to the local fire department with jurisdiction over the facilities.
Requirements under EPCRA That May Be Triggered at Well Sites
Well sites are subject to EPCRA sections 304, 311, and 312, among others, and may be subject to reporting requirements to the extent that the chemicals used, stored, or produced at well sites meet the respective reporting thresholds. Under EPCRA section 304, any facility, such as a well site, that produces, uses, or stores any hazardous chemical and has a release above the reportable quantity of a CERCLA hazardous substance or an extremely hazardous substance, must provide notification to state and local emergency planning authorities, as well as the National Response Center. Under EPCRA sections 311 and 312, any facility, such as a well site, at which an extremely hazardous chemical or any other hazardous chemical is present at the relevant threshold quantity, must meet inventory reporting requirements. For extremely hazardous chemicals, the threshold is 500 pounds or its threshold planning quantity, whichever is less. For all other hazardous chemicals, the reporting threshold is 10,000 pounds. For example, if the aggregate amount of hydrofluoric acid, an extremely hazardous chemical with a threshold planning quantity of 100 pounds, at a well site exceeds that threshold then the facility must report under sections 311 and 312. As another example, if a well stores or uses more than 10,000 pounds of drip gas or natural gas condensate at any one time, then the facility must report under sections 311 and 312.
The extent to which these requirements are triggered at oil and gas well sites depends on the presence and quantities of listed chemicals at such sites, among other things. We did not locate any publicly available data on the quantity of chemicals stored at actual or typical well sites, but FracFocus provides self-reported data on the types of chemicals used in hydraulic fracturing, meaning that these chemicals are present and used at well sites. According to data in FracFocus, some hydraulic fracturing operations may use various hazardous chemicals, including some that are also CERCLA hazardous substances, such as hydrochloric acid, formaldehyde, formic acid, acetaldehyde, ethylene glycol, methanol, acetic acid, sodium hydroxide, potassium hydroxide, acrylamide, and naphthalene; of these, one is also considered “extremely hazardous.”
According to EPA, its Regional offices have several cases in development where the facility triggered the reporting requirements under 311 and 312 during all phases of operation, including drilling, hydraulic fracturing, and production. EPA stated that, based on the Regions’ experience, section 311 and 312 requirements could be triggered at every well site. EPA provided an example of section 312 information for a well site, which according to EPA officials, indicates that some hazardous chemicals may be present at the particular well site in quantities that would trigger section 311 and 312 requirements.
The information provided by EPA suggests that the types of chemicals with maximum on-site quantities of 10,000 to 99,999 pounds are the following: cement and associated additives; drilling mud and associated additives; lubricants, drilling mud additives; and alkalinity and pH control material.
The information provided by EPA also suggests that the types of chemicals with maximum on-site quantities of 100,000 to 999,999 pounds are the following: weight materials, and fuels.
Toxic Release Inventory
EPCRA also requires some facilities in listed industries to report to EPA their releases of listed toxic chemicals to the environment; at present, these requirements do not apply to oil and gas well operations.
Section 313 of EPCRA generally requires certain facilities that manufacture, process, or otherwise use any of more than 600 listed individual chemicals and chemical categories, to report annually to EPA and their respective state, for those chemicals used above threshold quantities. Facilities need to report the amounts that they released to the environment and whether they were released into the air, water, or soil.
Id. at (i).
Full-time employee is defined as 2,000 hours per year of full-time equivalent employment. A facility would calculate the number of full-time employees by totaling the hours worked during the calendar year by all employees, including contract employees, and dividing that total by 2,000 hours. 40 C.F.R.§ 372.3 (2012).
American Industry Classification System (NAICS) codes, and subsequently to update as needed to reflect changes to the NAICS codes.
EPCRA section 313(b)(1)(B) provides EPA with authority to add or delete industrial codes. 1988. In the initial regulations, EPA discussed its approach to evaluating additional industrial codes under its discretionary authority but did not add any at that time. Oil and gas extraction industries were not included on the statutory list of Standard Industrial Classification codes and hence were not subject to the rule.
EPCRA § 313(b)(1)(B), 42 U.S.C. § 11023(b)(1)(B) (2012). EPA can also add individual facilities. EPCRA § 313(b)(2), 42 U.S.C. § 11023(b)(2) (2012).
One industry group, oil and gas extraction classified in [Standard Industrial Classification] code 13, is believed to conduct significant management activities that involve EPCRA section 313 chemicals. EPA is deferring action to add this industry group at this time because of questions regarding how particular facilities should be identified. This industry group is unique in that it may have related activities located over significantly large geographic areas.
While together these activities may involve the management of significant quantities of EPCRA section 313 chemicals in addition to requiring significant employee involvement, taken at the smallest unit (individual well), neither the employee nor the chemical thresholds are likely to be met. EPA will be addressing these issues in the future.
The preamble of the final rule stated in part, “ number of commenters support EPA’s decision not to include oil and gas exploration and production in its proposal, and urge EPA not to propose adding this industry in the future. EPA considered the inclusion of this industry group prior to its proposal, and indicated in the proposal that one consideration for not including it was concern over how a ‘facility’ would be defined for purposes of reporting in EPCRA section 313 …This issue, in addition to other questions, led EPA to not include this industry group. EPA will continue its dialogue with the oil and gas exploration and production industry and other interested parties, and may consider action on this industry group in the future.”
In fall 2011, EPA conducted a discussion forum on regulations.gov. The background information provided in the forum stated that EPA was considering a rule to add or expand coverage to the following industry sectors: Iron Ore Mining, Phosphate Mining, Solid Waste Combustors and Incinerators, Large Dry Cleaners, Petroleum Bulk Storage, and Steam Generation from Coal and/or Oil. EPA officials told us that, for the current possible rulemaking, the initial screening process for sectors to consider adding to the TRI included review of those sectors, such as oil and gas production, that were considered but ultimately not added in the 1997 rule. In addition, EPA officials said the initial screening process also included sectors covered by analogous registries of other countries. According to EPA, the oil and gas sector falls into both categories and was considered in the initial screening. As of July 2012, EPA officials stated that EPA does not anticipate adding oil and gas exploration and production sites as part of the possible rule currently under consideration to add industry sectors to the scope of TRI. EPA officials explained that the agency has not changed its assessment of the oil and gas sector as it pertains to TRI reporting since the 1996 proposed rule and stated that adding oil and gas well sites would likely provide a substantially incomplete picture of the chemical uses and releases at these sites, and would therefore be of limited utility in providing information to communities.
EPA officials noted that Canada’s National Pollutant Release Inventory (NPRI) has data on Canadian oil and gas wells for some TRI chemicals. Specifically, EPA identified several TRI chemicals that were also reported to the Canadian NPRI by oil and gas facilities as being released, disposed of, and/or transferred in large quantities in reporting year 2010 in Canada including ammonia, arsenic, cadmium, copper, hexavalent chromium, hydrogen sulfide, lead, manganese, mercury, phenanthrene, phosphorus, sulfuric acid aerosols, and zinc compounds.
If oil and gas exploration and production were added to the industries required to report to the TRI, such facilities meeting relevant thresholds would have to report releases of hydrogen sulfide, which is among the chemicals of particular concern some have cited. In October 2011, EPA lifted its administrative stay of the EPCRA section 313 reporting requirements for hydrogen sulfide, which had been in effect since 1994, shortly after the chemical was added to the list of toxic chemicals. EPA conducted a technical evaluation of hydrogen sulfide and found no basis for continuing the administrative stay of the reporting requirements. The first reports under EPCRA section 313 for hydrogen sulfide will be due on July 1, 2013, for reporting year 2012.
Enforcement
EPCRA provides EPA with various authorities to enforce the act’s requirements. For example, for violations of EPCRA section 311 or section 312 requirements, such as provision of annual inventory reports to state and local authorities, EPA may assess administrative penalties, or initiate court actions to assess civil penalties. In cases of violations of section 304 release reporting requirements, EPA may assess administrative penalties, among other things.
Appendix VIII: Key Requirements and Authorities under the Toxic Substances Control Act
To help protect human health and the environment, the Toxic Substances Control Act (TSCA) authorizes EPA to regulate the manufacture, processing, use, distribution in commerce, and disposal of chemical substances and mixtures. EPA has authorities by which it may assess and manage chemical risks, including (1) to collect information about chemical substances and mixtures; (2) upon making certain findings, to require companies to conduct testing on chemical substances and mixtures; and (3) upon making certain findings, to take action to protect adequately against unreasonable risks such as by either prohibiting or limiting manufacture, processing, or distribution in commerce of chemical substances or by placing restrictions on chemical uses. EPA maintains the TSCA Chemical Substance Inventory that currently lists over 84,000 chemicals that are or have been manufactured or processed in the United States; about 62,000 were already in commerce when EPA began reviewing chemicals in 1979. Generally, TSCA’s reporting requirements fall on the manufacturers (including importers), processors, and distributors of chemicals, rather than users of the chemicals.
According to EPA, some of the chemicals on the TSCA Chemical Substance Inventory are used in oil and gas exploration and production. For example, in response to our request, EPA identified several chemicals on the FracFocus list of “chemicals used most often” which are on the TSCA inventory.representative of different product function categories, are as follows: These examples, which EPA chose as
Hydrochloric acid – Acid;
Peroxydisulfuric acid, ammonium salt – Breaker;
Ethanaminium, 2-hydroxy-N,N,N-trimethyl-, chloride (1:1) – Clay
Methanol – Corrosion Inhibitor; and
2-Propenamide, homopolymer – Friction Reducer.
As part of EPA’s Study on the Potential Impacts of Hydraulic Fracturing on Drinking Water Resources, EPA is currently analyzing information provided by nine hydraulic fracturing service companies, including a list of chemicals the companies identify as used in hydraulic fracturing operations. EPA officials said that they expect most of these chemicals disclosed by the service companies to appear on the TSCA inventory list, provided that chemicals are not classified solely as pesticides. EPA does not expect to be able to compare the list of chemicals provided by the nine hydraulic fracturing service companies to the TSCA inventory until the release of a draft report of the Study on the Potential Impacts of Hydraulic Fracturing on Drinking Water Resources for peer review, expected in late 2014. For those chemicals that are listed, some hydraulic fracturing service companies may be manufacturers, processors, or distributors, and could be subject to certain TSCA reporting provisions.
On August 4, 2011, Earthjustice and 114 others filed a petition with EPA asking the agency to exercise TSCA authorities and issue rules to require manufacturers, processors, and distributors of chemicals used in oil and gas exploration or production to develop and/or provide certain information. The petition asserts that more than 10,000 gallons of such chemicals may be used to fracture a single well. EPA denied the portion of the petition requesting that EPA issue a TSCA section 4 rule to require identification and toxicity testing of chemicals used in oil and gas exploration or production, stating that the petition did not set forth facts sufficient to support the findings required for such test rules.
The petition also requested that EPA issue new rule(s) under TSCA section 8 to require, for these chemicals, maintenance and submission of various records, call-in of records of allegations of significant adverse reactions, and submission of all existing not previously reported health EPA granted the section 8(a) and 8(d) portions of and safety studies. the petition in part, stating that the agency believes “there is value in initiating a proposed rulemaking process under TSCA authorities to obtain data on chemical substances and mixtures used in hydraulic fracturing,” but denying them so far as they concern other chemical substances used in oil and gas exploration and production but not in hydraulic fracturing.
EPA is drafting an Advance Notice of Proposed Rulemaking for the section 8(a) and (d) rules. As of August 31, 2012, EPA has not released a publication date for this proposed rulemaking. EPA also intends to convene a stakeholder process to gather additional information for use in developing a proposed rule, and “to develop an overall approach that would minimize reporting burdens and costs, take advantage of existing information, and avoid duplication of efforts.” EPA officials said that the agency will consider, among other things, how to address confidential business information as it develops the proposal. A TSCA section 8(a) rule, once issued, may require reporting, insofar as known or reasonably ascertainable, of such chemical information as chemical names, molecular structure, category of use, volume, byproducts, existing environmental and health effects data, disposal practices, and worker exposure. Regulations promulgated under TSCA section 8(d) are to require submission to EPA of reasonably ascertainable health and safety studies.
TSCA provides EPA with certain enforcement authorities. For example, EPA may impose a civil penalty for certain violations of TSCA, such as failing to comply with requirements to notify and provide certain information to EPA before manufacturing a new chemical, or by using for commercial purposes a chemical substance that the user had reason to know was manufactured, processed, or distributed in violation of such requirements, among other things.
Appendix IX: Selected State Requirements
All six states we reviewed have state agencies responsible for implementing and enforcing environmental and public health requirements, which include overseeing oil and gas development (see table 11). In five of the six states we reviewed, this responsibility is split primarily between two different agencies. In general, one of these agencies has primary responsibility for regulating oil and gas development activities such as drilling that occur on the well pad and for managing and disposing of certain wastes generated on-site, while the other agency has a broader mandate for implementing and enforcing environmental or public health requirements, some aspects of which may affect oil and gas development. For example, the Colorado Oil and Gas Conservation Commission regulates activities such as drilling, hydraulic fracturing, and disposal of produced water in Class II UIC wells, while the Colorado Department of Public Health and Environment regulates discharges to surface waters, commercial solid waste facilities, and certain air emissions. In contrast, oil and gas development in Pennsylvania is primarily governed by one agency—the Pennsylvania Department of Environmental Protection.
This appendix presents information about state statutory and regulatory requirements in the areas of siting and site preparation (see table 12); drilling, casing, and cementing (see table 13); hydraulic fracturing (see table 14); well plugging (see table 15); site reclamation (see table 16); waste management in pits (see table 17); waste management through underground injection (see table 18); and managing air emissions (see table 19). Requirements presented in the following tables have been summarized mainly from state regulations, though references to state statutes are included in certain circumstances.
Appendix X: Crosswalk between Selected Requirements from EPA, States, and Federal Lands
Table 20 is intended to show representative areas of regulation, focused on substantive requirements specific to oil and gas wells. The table includes EPA’s environmental and public health requirements, requirements from the six states included in our review, and additional requirements that apply for the development of federally-owned mineral resources. Other activities at oil and gas well sites may also be subject to federal or state regulation.
Appendix XI: Comments from the Department of Agriculture
Appendix XII: Comments from the Department of the Interior
Appendix XIII: GAO Contact and Staff Acknowledgments
GAO Contact
Staff Acknowledgments
In addition to the individual named above, Barbara Patterson, Assistant Director; Elizabeth Beardsley; David Bieler; Antoinette Capaccio; Cindy Gilbert; Armetha Liles; Alison O’Neill; and Janice Poling made key contributions to this report. | Why GAO Did This Study
Technological improvements have allowed the extraction of oil and natural gas from onshore unconventional reservoirs such as shale, tight sandstone, and coalbed methane formations. Specifically, advances in horizontal drilling techniques combined with hydraulic fracturing (pumping water, sand, and chemicals into wells to fracture underground rock formations and allow oil or gas to flow) have increased domestic development of oil and natural gas from these unconventional reservoirs. The increase in such development has raised concerns about potential environmental and public health effects and whether existing federal and state environmental and public health requirements are adequate.
GAO was asked to review environmental and public health requirements for unconventional oil and gas development and (1) describe federal requirements; (2) describe state requirements; (3) describe additional requirements that apply on federal lands; and (4) identify challenges, if any, that federal and state agencies reported facing in regulating oil and gas development from unconventional reservoirs. GAO identified and analyzed federal laws, state laws in six selected states (Colorado, North Dakota, Ohio, Pennsylvania, Texas, and Wyoming), and interviewed federal and state officials and representatives from industry, environmental, and public health organizations.
GAO is not making recommendations. In commenting on the report, agencies provided information on recent regulatory activities and technical comments.
What GAO Found
As with conventional oil and gas development, requirements from eight federal environmental and public health laws apply to unconventional oil and gas development. For example, the Clean Water Act (CWA) regulates discharges of pollutants into surface waters. Among other things, CWA requires oil and gas well site operators to obtain permits for discharges of produced waterwhich includes fluids used for hydraulic fracturing, as well as water that occurs naturally in oil- or gas-bearing formationsto surface waters. In addition, the Resource Conservation and Recovery Act (RCRA) governs the management and disposal of hazardous wastes, among other things. However, key exemptions or limitations in regulatory coverage affect the applicability of six of these environmental and public health laws. For example, CWA also generally regulates stormwater discharges by requiring that facilities associated with industrial and construction activities get permits, but the law and its regulations largely exempt oil and gas well sites. In addition, oil and gas exploration and production wastes are exempt from RCRA hazardous waste requirements based on a regulatory determination made by the Environmental Protection Agency (EPA) in 1988. EPA generally retains its authorities under federal environmental and public health laws to respond to environmental contamination.
All six states in GAOs review implement additional requirements governing activities associated with oil and gas development and have updated some aspects of their requirements in recent years. For example, all six states have requirements related to how wells are to be drilled and how casingsteel pipe within the wellis to be installed and cemented in place, though the specifics of their requirements vary. The states also have requirements related to well site selection and preparation, which may include baseline testing of water wells before drilling or stormwater management.
Oil and gas development on federal lands must comply with applicable federal environmental and state laws, as well as additional requirements. These requirements are the same for conventional and unconventional oil and gas development. The Bureau of Land Management (BLM) oversees oil and gas development on approximately 700 million subsurface acres. BLM regulations for leases and permits govern similar types of activities as state requirements, such as requirements for how operators drill the well and install casing. BLM recently proposed new regulations for hydraulic fracturing of wells on public lands.
Federal and state agencies reported several challenges in regulating oil and gas development from unconventional reservoirs. EPA officials reported that conducting inspection and enforcement activities and having limited legal authorities are challenges. For example, conducting inspection and enforcement activities is challenging due to limited information, such as data on groundwater quality prior to drilling. EPA officials also said that the exclusion of exploration and production waste from hazardous waste regulations under RCRA significantly limits EPAs role in regulating these wastes. In addition, BLM and state officials reported that hiring and retaining staff and educating the public are challenges. For example, officials from several states and BLM said that retaining employees is difficult because qualified staff are frequently offered more money for private sector positions within the oil and gas industry. |
gao_RCED-96-165W | gao_RCED-96-165W_0 | Federal Land Ownership and Management, Parks and Recreation
NPS Projected Returns from Concessioners. GAO/RCED-96-48R. November 28, 1995.
BACKGROUND: Pursuant to a congressional request, GAO examined the assumptions that the National Park Service (NPS) used to project future financial returns to the government from concessioners through year 2002. GAO noted that NPS: (1) overstated its projections of future returns under the Concessions Policy Act by assuming it could increase franchise fees as contracts expired and that monies and franchise fees would remain in the same proportions; (2) overstated its projections of future returns under H.R. 773 and S. 309 by assuming that the bills would increase competition and that it would gradually extinguish the concessioners’ processory interest; and (3) understated its projections of future returns under H.R. 2491 by assuming that the bill’s performance incentive would impede competition.
Land Management Systems: Progress and Risks in Developing BLM’s Land and Mineral Record System. GAO/AIMD-95-180. August 31, 1995.
ABSTRACT: The Bureau of Land Management’s (BLM) Automated Land and Mineral Record System/Modernization, which is estimated to cost $428 million, is intended to improve BLM’s ability to record, maintain, and retrieve land description, ownership, and use information. To date, the Bureau has been completing most of the project’s tasks according to the schedule milestones set in 1993. In coming months, the work will become more difficult as BLM and the primary contractor try to complete, integrate, and test the new software system and meet the current schedule. The Bureau is trying to maintain the project schedule, but slippages may yet occur because little time was allocated to deal with unanticipated problems. BLM recently sought to obtain independent verification and validation to ensure that the new system software meets the Bureau’s requirements. A key risk remains, however. BLM’s plans include stress testing only a portion of the Automated Land and Mineral Record System/ Modernization, rather than the entire project, to ensure that all systems and technology can successfully process workloads expected during peak operating periods. By limiting the stress test, BLM cannot be certain that the system’s information technology will perform as intended during peak workloads.
National Parks: Difficult Choices Need to Be Made About the Future of the Parks. GAO/RCED-95-238. August 30, 1995.
ABSTRACT: GAO concludes that there is cause for concern about the health of national parks. Visitor services were deteriorating at most of the park units that GAO reviewed. Services were being cut back, and the condition of many trails, campgrounds, and other facilities was declining. Trends in resource management were less clear because most park managers lacked enough data to determine the overall condition of their parks’ natural and cultural resources. In some cases, parks lacked an inventory of the resources under their protection. Two factors strongly affected the levels of visitor services and the management of park resources—(1) additional operating requirements placed on parks by laws and administrative requirements and (2) increased visitation, which drives up the parks’ operating costs. These two factors seriously eroded funding increases since the mid-1980s. The national park system is at a crossroads. Although the system continues to grow, conditions at the parks have been deteriorating and the dollar amount of the maintenance backlog has soared from $1.9 billion in 1988 to more than $4 billion today. Congress is faced with the following difficult policy choices: (1) increasing the amount of financial resources going to the parks, (2) limiting or reducing the number of units in the park system, and (3) reducing the level of visitor services. The Park Service should be able to stretch available resources by operating more efficiently and by improving its financial management and performance measuring systems.
Federal Lands: Information on the Use and Impact of Off-Highway Vehicles. GAO/RCED-95-209. August 18, 1995. would be further hampered. Some BLM and Forest Service locations have targeted their monitoring and enforcement to the most heavily used or the most environmentally sensitive lands. Also, some have formed coalitions with state governments, local communities, and private groups to supplement their resources for off-highway vehicle programs. As the agencies continue to inventory, map, and post signs to identify their off-highway vehicle areas, roads, and trails, they should be able to implement the executive orders more fully.
Natural Resources Management Issue Area Plan: Fiscal Years 1996-97. GAO/IAP-95-16. August 1, 1995.
BACKGROUND: GAO presented its Natural Resources Management issue area plan for fiscal years 1996 through 1997. FINDINGS: GAO plans to assess: (1) ways to obtain a better return on the sale or use of natural resources on federal lands or eliminate or reduce federal subsidies; (2) efficiency improvements within and coordination among the four primary federal land management agencies; (3) improvements in collaboration and consensus-building among federal and nonfederal stakeholders to address problems or issues related to natural resources; and (4) whether agencies are meeting existing production and conservation requirements.
Federal Lands: Views on Reform of Recreation Concessioners. GAO/T-RCED-95-250. July 25, 1995.
ABSTRACT: This testimony summarizes GAO’s work on federal policy governing the recreation concessioners and provides GAO’s views on four bills pending before Congress. Federal agencies’ concessions policies and practices are based on at least 11 different laws and, as a result, vary considerably. GAO concludes that more competition is needed in awarding concessions contracts and that the federal government needs to obtain a better return from concessioners for the use of its lands, including obtaining fair market value for the fees it charges ski operators. GAO supports the changes proposed by the four bills to current concessions policies and practices.
National Parks: Views on the Denver Service Center and Information on Related Construction Activities. GAO/RCED-95-79. June 23, 1995.
ABSTRACT: One of the major organizational units of the National Park Service is the Denver Service Center, which supports construction activities throughout the park system. The Center works with individual parks in planning, designing, and building projects, which range from rehabilitating historic structures to building new visitor centers to repairing and replacing utility systems. Parks are expected to use the Center’s services for projects costing more than $250,000, although exceptions are granted if the parks have the expertise needed for the projects and they receive approval from Park Service headquarters. In response to congressional concerns about the quality of services provided by the Center, GAO surveyed park managers on the quality and the timeliness of those services. This report also (1) describes how the Park Service sets priorities for funding construction projects and how the priorities may be modified during congressional consideration of the Park Service’s annual appropriations requests, (2) describes the process the Park Service uses to develop cost estimates for projects, and (3) provides information on the makeup of projects’ contingency and supervision funds.
National Park Service: Difficult Choices Need to Be Made on the Future of the Parks. GAO/T-RCED-95-124. March 7, 1995.
ABSTRACT: The overall level of visitor services offered by the National Park Service is deteriorating. Visitor services are being cut back and the condition of many trails, campgrounds, exhibits, and other facilities is declining. The Park Service estimates that since 1988 the backlog of deferred maintenance has more than doubled to $4 billion. The following two factors have had a major impact on the level of visitor services and resource management activities: (1) additional operating requirements resulting from more than 20 federal laws affecting the parks and (2) an increase in the number of visitors. Since substantial increases in appropriations seem unlikely in today’s tight budget climate, difficult choices must be made on the future of the national parks. These choices involve generating more revenue within the parks, limiting the number of parks in the system, and reducing the level of visitor services and expectations.
Federal Lands: Information on Land Owned and on Acreage with Conservation Restrictions. GAO/T-RCED-95-117. March 2, 1995.
ABSTRACT: During fiscal years 1964-93, the amount of federal land managed by the Forest Service, the Bureau of Land Management, the Fish and Wildlife Service, and the National Park Service decreased by 77 million acres, from about 700 million acres to about 623 million acres. However, the decrease is skewed because of two unique land transfers in Alaska—the transfer of about 76 million acres of federal land to the state of Alaska in accordance with the Alaska Statehood Act of 1958 and the transfer of about 36 million acres to native Alaskans in accordance with the Alaska Native Claims Settlement Act of 1971. Excluding these two large land transfers, the amount of land managed by the four agencies actually increased by 34 million acres. During the same 29-year period, the number of acres managed by the four agencies that were set aside for conservation purposes increased from about 51 million acres at the end of fiscal year 1964 to about 271 million acres at the end of fiscal year 1993.
National Park Service: Better Management and Broader Restructuring Efforts Are Needed. GAO/T-RCED-95-101. February 9, 1995.
ABSTRACT: The National Park Service lacks necessary financial data, internal controls, and performance measures that would allow the agency to shift resources among competing goals, rank priorities so that the most pressing issues receive attention, and link the agency’s planning process directly to budget decisions to better allocate resources. Although the Park Service’s restructuring plan addresses some of the challenges facing the agency, such as the need to meet the demands of an expanding system, growing numbers of visitors, and increasingly complex resource protection problems, the plan does not address the potential to improve operations through land management collaboration among Interior’s three land management agencies and Agriculture’s Forest Service. It also does not consider which functions or programs could be eliminated or turned over to state or local governments or to the private sector.
National Parks: Information on the Condition of Civil War Monuments at Selected Sites. GAO/RCED-95-80FS. February 1, 1995. and pedestals suffering from the following problems: broken or missing parts, chips and cracks, and wear and erosion. The most common causes of these problems are weathering and vandalism. Other causes include erosion, structural deficiencies, and neglect. Park officials estimate the cost to repair 34 of the monuments at $2,403,000. Cost estimates were not provided for the other 20 monuments because officials were unsure what work was needed or how much it would run.
Federal Lands: Information on Land Owned and on Acreage with Conservation Restrictions. GAO/RCED-95-73FS. January 30, 1995.
ABSTRACT: During fiscal years 1964-93, the amount of federal land managed by the Forest Service, the Bureau of Land Management, the Fish and Wildlife Service, and the National Park Service decreased by 77 million acres, from about 700 million acres to about 623 million acres. However, the decrease is skewed because of two unique land transfers in Alaska—the transfer of about 76 million acres of federal land to the state of Alaska in accordance with the Alaska Statehood Act of 1958 and the transfer of about 36 million acres to native Alaskans in accordance with the Alaska Native Claims Settlement Act of 1971. Excluding these two large land transfers, the amount of land managed by the four agencies actually increased by 34 million acres. During the same 29-year period, the number of acres managed by the four agencies that were set aside for conservation purposes increased from about 51 million acres at the end of fiscal year 1964 to about 271 million acres at the end of fiscal year 1993. GAO summarized this report in testimony before Congress; see: Federal Lands: Information on Land Owned and on Acreage With Conservation Restrictions, by John H. Anderson, Jr., Associate Director for Natural Resources Management Issues, before the House Committee on Resources. GAO/T-RCED-95-117, Mar. 2, 1995 (11 pages).
Monuments at Vicksburg National Military Park. GAO/RCED-95-55R. November 15, 1994. officials estimate that it could cost more than $1 million to repair one of the monuments and $3,200 to $4,000 to repair the other monument.
Forest Service: Land Acquisitions Within the Lake Tahoe Basin. GAO/RCED-95-22. October 31, 1994.
ABSTRACT: The Santini-Burton Act, enacted in 1980, authorized the sale of about 7,000 acres of federal lands within Clark County, Nevada, to allow more orderly development of the communities there. The federal lands were owned by the Bureau of Land Management. The act also required the bulk of the proceeds from the land sales to be used for a buyout program in which the government would purchase environmentally sensitive private lands around Lake Tahoe in an effort to stem further degradation of the lake. Concerns have been raised about whether property owners in the Lake Tahoe Basin have been treated fairly when the lands were acquired under the act. This report determines the extent to which (1) the Forest Service acquired lands within the basin under the act’s buyout program, (2) the classification of lands within the basin as environmentally sensitive may have harmed their value, and (3) the Forest Service’s acquisition of environmentally sensitive land in the basin may have involved the federal government taking private property under the Fifth Amendment to the U.S. Constitution.
National Park Service: Reexamination of Employee Housing Program Is Needed. GAO/RCED-94-284. August 30, 1994.
ABSTRACT: Since 1916, the National Park Service has provided rental housing in parks to many of its employees. The Park Service has an inventory today of about 4,700 housing units. Nearly half of the housing inventory is more than 30 years old. Park Service estimates of what it would cost to repair, rehabilitate, repair, and replace this housing inventory have increased significantly during the past several years; the total estimate is now more than half a billion dollars. This report (1) describes the Park Service’s housing program and compares it with the housing programs run by two other large land management agencies—the Forest Service and the Bureau of Land Management—and (2) identifies options that are available to the Park Service to deal with its housing problems.
Federal Lands: Fees for Communications Sites Are Below Fair Market Value. GAO/RCED-94-248. July 12, 1994.
ABSTRACT: The Forest Service and the Bureau of Land Management (BLM) are the two major federal agencies whose lands are used as sites to broadcast radio, television, and other electronic signals. These sites, mainly located in the western United States, are for the most part leased to private entities that build and operate communications facilities. The annual fees being charged for such communications sites are, in many cases, significantly below fair market value. Forest Service and BLM officials estimate that charging fees on the basis of fair market value would boost total federal revenues by more than 500 percent—from about $4 million to about $23 million annually. Although the Forest Service and BLM have been trying to set fees reflecting fair market value, annual appropriations legislation has limited the amount by which these fees can be increased. As long as these limits are in effect, the fees charged will not reflect fair market value. Both the Forest Service and BLM lack reliable and complete information needed to manage their communications site programs. In addition, many unauthorized communications users are operating on Forest Service lands, and annual inspections to ensure that the sites are properly maintained are rarely done. GAO summarized this report in testimony before Congress; see: Federal Lands: Fees for Communications Sites Are Below Fair Market Value, by John H. Anderson, Jr., Associate Director for Natural Resources Management Issues, before the Subcommittee on the Environment, Energy, and Natural Resources, House Committee on Government Operations, and the Subcommittee on Natural Parks, Forests, and Public Lands, House Committee on Natural Resources. GAO/T-RCED-94-262, July 12 (13 pages).
Federal Lands: Fees for Communications Sites Are Below Fair Market Value. GAO/T-RCED-94-262. July 12, 1994.
BLM have been trying to set fees reflecting fair market value, annual appropriations legislation has limited the amount by which these fees can be increased. As long as these limits are in effect, the fees charged will not reflect fair market value. Both the Forest Service and BLM lack reliable and complete information needed to manage their communications site programs. In addition, many unauthorized communications users are operating on Forest Service lands, and annual inspections to ensure that the sites are properly maintained are rarely done.
Natural Resources: Lessons Learned Regarding Public Land Withdrawn for Military Use. GAO/T-NSIAD-94-227. June 29, 1994.
ABSTRACT: Military operations had not been hampered at the six withdrawn sites GAO visited in Alaska, Arizona, Nevada, and New Mexico, but these operations had constrained resource management activities. Military commanders at five of the sites said that they changed some training exercises to accommodate concerns for wildlife; at one site, officials expressed concern about meeting training needs because of environmental constraints. However, the Defense Department restricted access to three sites, making it difficult for the Bureau of Land Management (BLM) to carry out resource management activities. Such restrictions and the overall military presence have led BLM to assign a low priority to resource management on military lands. A lack of information on resource conditions prevents an overall assessment of the impacts. The six sites could improve resource management by enhancing interagency cooperation and by strengthening systems to monitor resource management actions. Resource management at the Goldwater Range in Arizona was an example of effective cooperation between BLM and the military.
Federal Lands: Land Acquisitions Involving Nonprofit Conservation Organizations. GAO/RCED-94-149. June 15, 1994.
Department buy land from or with the help of nonprofits, (2) adequacy of controls for protecting the government’s interest in such acquisitions, and (3) extent to which nonprofits realize large financial gains in such transactions.
Hawaiian Homelands: Hawaii’s Efforts to Address Land Use Issues. GAO/RCED-94-24. May 26, 1994.
ABSTRACT: Although the Interior and Justice Departments maintain that the federal government has never had a trust responsibility to native Hawaiians, the state of Hawaii disagrees. Hawaiian state courts and the state’s Attorney General have concluded that the federal government had a trust responsibility during the territorial period, and the state’s Attorney General believes that such a responsibility continues today. In GAO’s opinion, territorial governors lacked authority to withdraw Hawaiian homelands for nonfederal public purposes through executive orders and proclamations. However, many of these unauthorized withdrawals appear to have (1) benefitted native Hawaiians or (2) involved lands that were unsuitable for authorized homeland uses, such as homesteading or leasing, during the territorial period. Territorial governors also lacked authority under the Hawaiian Homes Commission Act to withdraw homelands for federal purposes through executive orders or other means. Because such withdrawals took place more than 50 years ago, there is no guarantee that all information relevant to these withdrawals is still available. Therefore, GAO is unable to express an opinion on the propriety of homeland withdrawals for federal purposes. GAO believes that the methodology used by a consultant to the state to estimate the lost income from and the current market value for parcels of lands was generally reasonable.
Natural Resources: Defense and Interior Can Better Manage Land Withdrawn for Military Use. GAO/NSIAD-94-87. April 26, 1994. that made it hard for the Bureau of Land Management (BLM) to carry out resource management activities. These restrictions and the military presence led BLM to assign a low priority to resource management on military land. At three sites, BLM allocated considerably less money to manage lands used for military training than for other property under its care. All six sites had opportunities to improve resource management by strengthening cooperation between BLM and the military and by beefing up monitoring of progress on planned resource management actions. This report includes photographs of the terrain at the six sites.
Hurricane Iniki Expenditures. GAO/RCED-94-132R. April 18, 1994.
BACKGROUND: GAO reviewed whether the U.S. Fish and Wildlife Service (FWS) used emergency appropriated funds for the repair and replacement of national wildlife refuge facilities damaged by Hurricane Iniki. GAO noted that: (1) FWS did not have authorization to use emergency funds for reconstruction work at two refuges; (2) FWS planned to use emergency funds for enlarging selected buildings at one refuge and remodeling the visitors’ center at another refuge; (3) approximately $12.8 million in emergency disaster assistance was appropriated to FWS for construction projects; and (4) of the amount appropriated, FWS allocated $6.2 million for the rehabilitation of the refuges.
Forest Service Management: Issues To Be Considered in Developing a New Stewardship Strategy. GAO/T-RCED-94-116. February 1, 1994.
ABSTRACT: Budgetary constraints and scientific findings on ecosystem management will challenge the Forest Service as never before to find new ways to achieve program goals with fewer resources. GAO testified that the Forest Service needs to work closely with Congress to get a better return on the sale or use of natural resources on public lands. It also needs to work with Congress and other federal land management agencies to find ways to work more efficiently and to manage federal lands so as to preserve the nation’s natural resources and sustain their long-term economic productivity. GAO believes that a coordinated interagency strategy may be needed to link Forest Service reforms to changes being considered by other federal land management agencies. The goal would be to coordinate and integrate these programs, activities, and functions so that these agencies can function as a unit on the local level.
The Gettysburg Address: Issues Related to Display and Preservation. GAO/RCED-94-12. January 26, 1994.
ABSTRACT: Of the five known original manuscripts of the Gettysburg Address, two are in the collection of the Library of Congress. Since 1979, the Library’s two drafts have been displayed during the spring and the summer at the Gettysburg National Military Park, which is run by the Park Service. The Library plans to substitute a high-quality facsimile for display at the park after 1994, a move the Park Service opposes. This report discusses (1) the risks inherent in exhibiting a draft at the park or elsewhere, (2) whether the Park Service has met the Library’s exhibition and preservation requirements and can meet future requirements, and (3) the estimated cost of exhibiting the document at the park in the current or an upgraded facility versus the cost of building a comparable facility at the Library. GAO notes that exhibiting the drafts at the park has allowed millions of Americans to see the original documents in a historic setting and that the Park Service seems capable of meeting evolving exhibition and preservation requirements. The conference report accompanying the fiscal year 1994 legislative branch appropriations act supports exhibiting an original draft in Gettysburg and encourages the Library and the Park Service to reopen discussions on extending the loan of the address. Ultimately, it is Congress’ call as to where the drafts should be displayed.
National Park Service: Activities Outside Park Borders Have Caused Damage to Resources and Will Likely Cause More. GAO/RCED-94-59. January 3, 1994. wildlife and habitat. Furthermore, they expect that virtually all of the threats will inflict additional damage during the next five years. Although park managers say that action has been taken to counter more than half of the threats, this typically involved community outreach, which requires the cooperation of multiple parties and often is the first step toward minimizing damage to park resources.
Federal Lands: Public Land Access. GAO/T-RCED-94-72. November 9, 1993.
ABSTRACT: According to managers at the Forest Service and the Bureau of Land Management (BLM), access to more than 50 million acres of public land in the United States is inadequate, a situation that can potentially reduce the public’s recreational opportunities and interfere with the government’s land management. Private landowners are increasingly unwilling to grant public access across their land because of concerns about vandalism and potential liability or because of desires for privacy or exclusive personal use. To overcome access problems, the Forest Service and BLM may acquire all rights and interests associated with the land or obtain perpetual easements. In fiscal years 1989-91, the Forest Service and BLM acquired permanent legal public access to about 4.5 million acres of federal land. The two agencies had plans as of October 1991 to open another 9.3 million acres of federal land to the public.
Fisheries Management: Administration of the Sport Fish Restoration Program. GAO/RCED-94-4. November 8, 1993.
ABSTRACT: The long-term decline in the quality of sport fishing in the United States prompted the creation in 1950 of the Sport Fish Restoration Program, which seeks to restore, conserve, and enhance the nation’s sport fishery resources. During fiscal years 1998-92, the program received nearly $1 billion in federal funding. In response to congressional concerns about the program’s rapid expansion and about whether program money was being used for its intended purposes, this report determines (1) the extent to which the Fish and Wildlife Service (FWS) used these funds to run the program, (2) whether FWS’ use of program funds for special investigations helped the agency to achieve the program’s goals, (3) whether the states allocated the required amount of funds to freshwater and marine projects, and (4) the extent to which the states programmed funds to enhance fish habitat. GAO limited its review to five coastal states—California, Florida, North Carolina, Texas, and Washington—that historically have either received the largest apportionments of program funds or have underwritten a diverse range of sport fish projects.
Department of the Interior: Transfer of the Presidio From the Army to the National Park Service. GAO/RCED-94-61. October 26, 1993.
ABSTRACT: The proposed uses of the Presidio Army Post under the Park Service’s preferred alternative are generally consistent with the goal of creating a Golden Gate National Recreation Area. The extent to which the costs to rehabilitate the Presidio’s buildings and run the Presidio will be offset by tenant payments and philanthropic donations, however, is unknown. Thus, the level of future annual appropriations needed to manage the Presidio cannot be estimated with any certainty at this time. Given the costs and the potential impact of the Presidio’s rehabilitation on the Park Service’s deferred maintenance and reconstruction backlog, close oversight by the Department of the Interior and Congress is warranted. In addition, once an alternative for managing the Presidio is decided upon, the Park Service needs to establish a plan that will (1) prioritize the objectives, (2) identify their associated costs and funding sources, and (3) estimate their completion dates. GAO summarized this report in testimony before Congress; see: Department of the Interior: Transfer of the Presidio From the Army to the National Park Service, by James Duffus III, Director of Natural Resources Management Issues, before the Subcommittee on National Parks, Forests and Public Lands, House Committee on Natural Resources. GAO/T-RCED-94-64, Oct. 26, 1993 (11 pages).
Department of the Interior: Transfer of the Presidio From the Army to the National Park Service. GAO/T-RCED-94-64. October 26, 1993.
ABSTRACT: The proposed uses of the Presidio Army Post under the Park Service’s preferred alternative are generally consistent with the goal of creating a Golden Gate National Recreation Area. The extent to which the costs to rehabilitate the Presidio’s buildings and run the Presidio will be offset by tenant payments and philanthropic donations, however, is unknown. Thus, the level of future annual appropriations needed to manage the Presidio cannot be estimated with any certainty at this time. Given the costs and the potential impact of the Presidio’s rehabilitation on the Park Service’s deferred maintenance and reconstruction backlog, close oversight by the Department of the Interior and Congress is warranted. In addition, once an alternative for managing the Presidio is decided upon, the Park Service needs to establish a plan that will (1) prioritize the objectives, (2) identify their associated costs and funding sources, and (3) estimate their completion dates.
National Park Service: Condition of and Need for Employee Housing. GAO/RCED-93-192. September 30, 1993.
ABSTRACT: The National Park Service, which has been housing park employees since 1916, now has an inventory of about 5,200 housing units. Park Service records suggest that about 40 percent of this inventory is in “good” or “excellent” condition, needing no more than routine maintenance; about 15 percent was rated “poor” to “obsolete,” requiring extensive repairs. Most of the Park Service housing is used to shelter (1) seasonal employees, (2) permanent employees at isolated parks, and (3) permanent employees at more-accessible parks who provide visitor services or protect government property. GAO questioned the justification for about 12 percent of the units. For example, at 11 nonisolated parks GAO visited, park managers subjectively determined the need for housing instead of relying on an analysis of local housing availability, as required by Park Service guidance. GAO could not verify the accuracy of the Park Service’s $546 million estimate for employee housing repair and replacement. Park Service officials claim that a sizable backlog of repairs exists because rental income has covered only about half of all maintenance costs and operating funds have not been enough to make up the difference. Rental income has been limited because (1) the Park Service reduces its rates because of factors such as isolation and lack of amenities and (2) Congress has set a cap on rental rate increases.
Bureau of Reclamation: Unauthorized Recreation Facilities at Two Reclamation Projects. GAO/RCED-93-115. September 16, 1993. forced to comply with the law or obtain specific congressional authorization to continue running the facilities at taxpayers’ expense.
Federal Lands: Improvements Needed in Managing Short-Term Concessioners. GAO/RCED-93-177. September 14, 1993.
ABSTRACT: Nationwide, about 6,000 short-term agreements (of 5 years or less) exist under which concessioners provide goods and services to the public on federal land. The services they provide include sightseeing tours and guided fishing, hunting, and rafting trips. This is one in a series of reports on concessioners’ operations on federal recreation land. GAO reviews the federal government’s policy and practices for (1) evaluating short-term concessioners’ overall performance; (2) ensuring that short-term concessioners comply with federal, state, and local health and safety laws and regulations; (3) ensuring the reasonableness of the prices charged to the public by short-term concessioners; and (4) setting fees for the use of federal land by short-term concessioners.
Federal Land: Little Progress Made in Improving Oversight of Concessioners. GAO/T-RCED-93-42. May 27, 1993.
ABSTRACT: Concessioners are often the primary operators in recreation areas containing some of the nation’s greatest national treasures. Despite GAO’s warnings during the past three years, however, federal agencies are still doing a poor job of managing concessioners on federal land. The agencies lack enough data to adequately manage concession operations, they cannot demonstrate that they are receiving a fair return, and they have to revise or develop some policies to improve their management of concessioners. Deterioration in federal areas is widespread, and the existing infrastructure—approaching $200 billion in value—is increasingly run down; the cost of deferred maintenance in the national parks and forests alone is nearly $3 billion. The federal government has a huge investment in its recreation resources, and GAO believes that the government needs to ensure that it is fairly compensated for the use of its land, the visiting public is provided with healthy and safe services, and the nation’s recreation resources are adequately protected for future generations.
National Park Service: Scope and Cost of America’s Industrial Heritage Project Need to Be Defined. GAO/RCED-93-134. May 14, 1993.
ABSTRACT: America’s Industrial Heritage Project consists of several sites scattered throughout southwestern Pennsylvania that will explain how the region’s iron and steel, coal, and transportation industries contributed to the nation’s industrial growth. The project is expected to revitalize the region’s economic base through tourism. Much uncertainty exists, however, about the development and the completion of the project. Although one estimate pegs the cost of completing the project at about $355 million, including $155 million in federal funds, this estimate lacks documentation and the final scope of the project has yet to be defined. Uncertainty also exists about the operation and maintenance of project sites on nonfederal land. Although some of the sites will be run by the National Park Service, other projects built on nonfederal land are to be run by nonfederal entities. Yet GAO was told that federal funds will be used for up to 5 years to run several projects on nonfederal land. Finally, it is unclear who will be responsible for managing, operating, and maintaining the projects. The Southwestern Pennsylvania Heritage Commission, part of the Interior Department, has been overseeing the project’s implementation, but the Commission’s term expires in November 1998. Although the Commission favors the establishment of a not-for-profit corporation that would run all the projects, it has yet to make a final choice among the options being considered.
Forest Service: Little Assurance That Fair Market Value Fees Are Collected From Ski Areas. GAO/RCED-93-107. April 16, 1993.
ABSTRACT: Ski operators on Forest Service land are required to pay the government fees that are based on fair market values. Although these ski operators had $737 million in gross sales in 1991, they paid the government only about $13.5 million in fees. GAO concludes that the current fee system does not ensure that the Forest Service receives fair market values for using its land. When the graduated rate fee system was put into place more than 20 years ago, it was expected that rates would be adjusted periodically to reflect economic changes. Yet the rates by which fees are calculated have not been updated in more than two decades. The fee system developed by the ski industry also does not deliver fees that reflect fair market value. GAO agrees with the Forest Service that a simplified system is desirable. The goal of developing a simpler system, however, must be secondary to ensuring that fees are based on fair market value.
Natural Resources Management: Issues to Be Considered by the Congress and Administration. GAO/T-RCED-93-5. February 2, 1993.
ABSTRACT: This testimony discusses GAO’s December 1992 transition series report entitled Natural Resources Management Issues (GAO/OCG-93-17TR). During this era of budgetary constraints, Congress and the new administration face hard choices in how to protect the nation’s natural resources. Current funding is inadequate to handle the declining condition of the nation’s natural resources and related infrastructure on federal lands. A number of proposals to obtain a better return for the sale or use of natural resources have not succeeded, GAO believes, because (1) the full extent of the staffing and funding shortfalls facing federal natural resources management agencies has not been clearly articulated and (2) the proposals and the dialogue surrounding them have not focused on the need to encourage uses that are compatible with sustaining the nation’s natural resources for future generations.
Natural Resources Management Issues. GAO/OCG-93-17TR. December 1992. see: Major Issues Facing a New Congress and a New Administration, by Charles A. Bowsher, Comptroller General of the United States, before the Senate Committee on Governmental Affairs. GAO/T-OCG-93-1, Jan. 8, 1993 (30 pages).
National Parks: Issues Involved in the Sale of the Yosemite National Park Concessioner. GAO/RCED-92-232. September 10, 1992.
ABSTRACT: In response to the Department of the Interior’s concerns about foreign ownership of the major concessioner service in Yosemite National Park, the Yosemite Park and Curry Company, owned by a Japanese company, was sold to an American purchaser for $61.5 million. The new concessioner should have enough revenue to pay the promissory note for the purchase price, cover operating expenses, and make a reasonable profit. GAO has not, however, reviewed the assumptions that the Park Service used to calculate its cash flow projections. Although the new concessioner will be required to implement some portion of the 1980 Yosemite General Management Plan, which seeks to reduce congestion in the park, the Park Service has not yet finalized what those requirements or the associated cost will be. Finally, the transfer of interests in the agreement between the Curry Company’s parent firm—MCA, Inc.—and the middleman in the sale—the National Park Foundation—does not constitute a gift to the Foundation. Accordingly, the Foundation’s participation in the agreement is unauthorized. Additionally, the Foundation’s involvement appears to have been unnecessary to completing the transaction, since Interior is authorized to enter into such transactions directly. The Foundation appears to have been acting on Interior’s behalf.
Arlington National Cemetery: Improvements to the Superintendent’s Lodge. GAO/RCED-92-208. August 13, 1992. authority of the superintendent to approve expenditures. The Army is also reassessing the amount that the superintendent will be required to pay for rent, utilities, and other services.
National Park Service: Policies and Practices for Determining Concessioners’ Building Use Fees. GAO/T-RCED-92-66. May 21, 1992.
ABSTRACT: While national park concessioners using federally owned facilities—including lodges, restaurants, and horse corrals—report gross revenues of up to tens of millions of dollars, many only pay a pittance for use of these properties. Poor management by the National Park Service and lack of data, however, make it impossible to determine whether the government is getting a fair return on the use of its facilities. A lack of policy guidance has led to inconsistent determinations of building use fees. Furthermore, a lack of complete and centralized data has left the Park Service in a quandary as to how many concession agreements contain the assignment of federally owned facilities; how many federally owned facilities are used by concessioners; and what other agreements have been reached on the repair, maintenance, and improvement of these facilities. As a result of this lack of data, the total compensation for the use of federally owned facilities is unknown.
Federal Lands: Reasons for and Effects of Inadequate Public Access. GAO/RCED-92-116BR. April 14, 1992.
ABSTRACT: The public’s access to more than 50 million acres, or 14 percent, of the land managed by the Forest Service and the Bureau of Land Management (BLM) is considered inadequate by agency managers. Private landowners’ unwillingness to grant public access to their land has increased during the past decade as the public’s use of public land has increased. Factors contributing to inadequate access are private landowners’ concerns about vandalism and potential liability or their desire for privacy and exclusive personal use. To resolve the public access problem, the Forest Service and BLM can acquire either all rights and interests associated with the land (fee simple acquisition) or perpetual easements (limited controls over the land that are binding on succeeding owners). In fiscal years 1989-91, the Forest Service and BLM acquired permanent, legal public access to about 4.5 million acres of federal land. As of October 1991, the two agencies had about 3,300 actions pending to open another 9.3 million acres of federal land to the public.
Federal Lands: Oversight of Long-Term Concessioners. GAO/RCED-92-128BR. March 20, 1992.
ABSTRACT: Nationwide, the federal government has about 1,500 long-term agreements (five years or more) with private concessioners for recreation services ranging from ski resort operations to raft trips. These concessioners operate on land managed by six federal agencies. This report examines the (1) concessioners’ overall performance; (2) concessioners’ compliance with federal, state, and local health and safety standards; and (3) reasonableness of prices concessioners charge the public for services.
Federal Lands: Status of Land Transactions Under Four Federal Acts. GAO/RCED-92-70BR. December 3, 1991.
ABSTRACT: This briefing report reviews the status of federal land transactions authorized under four acts—the El Malpais National Monument and National Conservation Area; the Nevada-Florida Land Exchange Authorization Act of 1988; the Apex Project, Nevada Land Transfer and Authorization Act of 1989; and the Targhee National Forest Land Exchange Act. GAO discusses (1) actions taken to complete the land transactions and (2) the use and development of the lands transferred out of federal ownership.
National Park Service: Status of Development at the Steamtown National Historic Site. GAO/T-RCED-92-6. October 22, 1991.
ABSTRACT: The Steamtown National Historic Site, established in 1986, encompasses about 63 acres of land that formerly comprised a rail yard in Scranton, Pennsylvania. The site is intended to provide year-round facilities and programs to educate visitors about the role of steam railroads in the expansion of the United States. This testimony discusses the status of the site and notes that various uncertainties raise questions about (1) the reliability of the $63 million estimated cost to complete site development, (2) identifying and disposing of hazardous and toxic wastes at the site, and (3) the feasibility of the planned rail excursion lines to surrounding locations.
National Park Service: Selected Visitor and Cost Data. GAO/RCED-91-247FS. September 30, 1991.
ABSTRACT: This fact sheet provides information on aspects of National Park Service operations. GAO (1) presents data on visitor accidents and fatalities and criminal offenses reported at the parks; (2) discusses the Park Service’s hazardous waste program; and (3) provides a list of parks created since 1970 that have, or are projected to have, land acquisition and construction appropriations exceeding $40 million.
National Park Service: Cost Estimates for Two Proposed Park Facilities in Texas. GAO/RCED-91-218BR. September 3, 1991.
ABSTRACT: This briefing report analyzes the cost estimates for the proposed visitor center at San Antonio Missions National Historical Park in San Antonio, Texas, and a headquarters/visitor center and separate maintenance facility at Big Thicket National Preserve, which is north of Beaumont, Texas. The Park Service’s initial cost estimate for the San Antonio facility is $8.63 million. To date, about $200,000 has been spent on planning and design work. The Park Service’s initial cost estimate for the Big Thicket facilities is $8.41 million. So far, about $564,000 has been spent on planning, and about $3.1 million has been spent on the maintenance facility.
Bureau of Reclamation: Federal Interests Not Adequately Protected in Land-Use Agreements. GAO/RCED-91-174. July 11, 1991. used to set such fees; (3) Bureau instructions governing land-use agreements do not address the issue of public access or public-use fees; (4) Scottsdale did not compensate the Bureau for the use of its lands because local Bureau officials decided that no fee compensation was warranted under the agreements, since leasing the lands supported the Bureau’s goal of providing its land for recreation; and (5) the Bureau had authority to enter into agreements to promote the development of land in the public interest for recreation, but typically negotiated such agreements at the regional or local level and did not maintain centralized information, making it difficult to determine whether similar agreements were pending.
Bureau of Reclamation: Land-Use Agreements With the City of Scottsdale, Arizona. GAO/T-RCED-91-74. July 11, 1991.
BACKGROUND: GAO discussed two recreation land-use agreements between the Bureau of Reclamation and Scottsdale, Arizona, to determine whether the: (1) agreement terms and conditions are consistent with federal law; (2) approved activities are consistent with applicable agency policies and guidance; and (3) potential exists for the Bureau to enter into similar agreements elsewhere. GAO found that: (1) while the agreements themselves were not contrary to federal law, the absence of comprehensive oversight policies and guidance led local officials to base many key agreement decisions on personal judgment; (2) the law does not require nor preclude federal government compensation for the use of its lands; (3) Scottsdale did not compensate the government for the use of its lands because local Bureau officials determined that leasing the lands supported the Bureau’s goal of providing its lands for recreation; (4) since Bureau guidance governing land-use agreements does not address the issue of public access, local Bureau officials approved a reservation policy at a golf complex that limits public use; (5) the Bureau has not developed guidance on establishing public-use fees for recreational activities on its lands; and (6) although similar agreements are being negotiated at the regional or local level, the Bureau does not maintain centralized information, making it difficult to determine whether similar agreements were pending.
Federal Lands: Improvements Needed in Managing Concessioners. GAO/RCED-91-163. June 11, 1991. (3) total return to the government from concession operations; and (4) federal recreation resources management practices of the National Park Service, Bureau of Land Management, U.S. Fish and Wildlife Service, Bureau of Reclamation, Forest Service, and Army Corps of Engineers. FINDINGS: GAO found that: (1) no single law authorizing concession operations existed; (2) none of the agencies maintained a complete database identifying the number and types of concession agreements; (3) the agencies could not determine total compensation to the federal government for the use of federal recreational resources, due to incomplete financial data and unreported nonfee considerations; (4) the agencies identified 11 different laws governing concession agreements and operations, many of which were agency-specific and allowed for broad discretion in establishing policies; (5) complete financial data were available for only 60 percent of over 9,000 concession agreements reported by the agencies; (6) some agencies permitted field offices to accept such nonfee compensation as capital improvements from concessioners, but the offices generally did not report such agreements to headquarters; (7) from those concessioners who reported complete financial data in 1989, the federal government received about $35 million in concession fees, with gross concession revenues of about $1.4 million, representing an average return to the government of about 2 percent; and (8) various fee approaches by the six agencies resulted in concessioners paying different fees to operate similar activities.
Forest Service: Difficult Choices Face the Future of the Recreation Program. GAO/RCED-91-115. April 15, 1991. conditions and resource needs; (5) funding could be increased through appropriations, although that could be difficult in an era of fiscal constraint and competing demands; (6) the Service would require legislative changes to impose higher fees; (7) increasing the use of volunteers and cost-share programs could increase funds, but not to the level of the resources needed; (8) in lieu of funding increases, the Service could still meet its current maintenance standards if it reduced the number of sites and areas to be developed and maintained, but that action could further strain existing sites and areas due to increased use; and (9) the Service could lower its development and maintenance standards to more closely match the resources available, but that could result in providing the public with a lower-quality recreational experience.
Budget Issues: Funding Alternatives for Fire-Fighting Activities at USDA and Interior. GAO/AFMD-91-45. April 4, 1991.
BACKGROUND: Pursuant to a congressional request, GAO reviewed the Departments of Agriculture’s (USDA) and the Interior’s budgetary treatment of fire-fighting activities during fiscal years (FY) 1988 through 1990, focusing on alternative: (1) methods of funding fire-fighting activities; and (2) budget approaches for funding both emergency and nonemergency fire-fighting activities. FINDINGS: GAO found that: (1) the agencies’ budgetary treatment of fire activities improved from between FY 1988 and FY 1990; (2) in 1990, Congress established a separate account to fund fire-fighting activities in both USDA and Interior; (3) in 1990, both agencies requested greater appropriations than in previous years, and received amounts from Congress that came closer to meeting actual fire-fighting needs; (4) USDA and Interior began to use consistent terms to categorize and track various fire costs to better determine whether certain costs applied to emergency or nonemergency activities; (5) despite such improvements, the agencies’ continued use of transfer authority to fund emergency activities created difficulties, since the agencies could not anticipate such transfers in making budget estimates; (6) such transfers allowed the agencies to use funds originally intended for emergency fire activities to support nonemergency activities; and (7) alternative methods for funding emergency fire activities within the budget, included the provision of annual or periodic appropriations for emergency and nonemergency activities.
Recreation Concessioners Operating on Federal Lands. GAO/T-RCED-91-16. March 21, 1991.
BACKGROUND: GAO discussed the issue of concession-operated recreation services on federal lands, concerning the National Park Service (NPS), Bureau of Land Management, Fish and Wildlife Service, Bureau of Reclamation, Forest Service, and the Army Corps of Engineers. GAO noted that: (1) since there was no single law authorizing concession operations for all six agencies, the agencies’ policies regarding the types, terms, and fees of such agreements were significantly different and inconsistent; (2) the total number of concession agreements was not known or documented by any of the six agencies; (3) due to either incomplete data and non-fee compensations, the total amount of federal compensation for the use of its recreational resources was not known; (4) the six agencies received about $32 million in fees from gross concession revenues of $1.5 billion, and NPS and Forest Service concession operations accounted for about 90 percent of the revenue; (5) because the laws did not specify the calculation of fees to the government, the agencies developed their own varying approaches; and (6) those various calculation approaches resulted in concessioners paying different fees for similar activities. GAO believes that, to more effectively manage their concession programs, the six agencies need to develop and analyze complete data on their concession agreements, including data and the financial worth and non-fee compensations.
Changes Needed in the Forest Service’s Recreation Program. GAO/T-RCED-91-10. February 26, 1991. consider funding levels, the number of sites for development and maintenance, and the revision of maintenance standards to develop its strategy.
Forest Service Wilderness Management Funding. GAO/T-RCED-91-11. February 26, 1991.
BACKGROUND: GAO discussed the Forest Service’s funding for managing wilderness areas. GAO noted that: (1) the Service reprogrammed funds Congress designated for wilderness management to other programs without the appropriate congressional approval; (2) of the $44.9 million Congress designated for wilderness management in fiscal years (FY) 1988 through 1990, the Service only spent $28.3 million on wilderness activities; (3) from FY 1989 through 1990, Service wilderness management expenditures decreased by 4 percent despite a 20-percent increase in funds designated for such purposes; (4) the Service could not specifically identify the activities for which it used most of the reprogrammed funds; (5) as of January 31, 1991, the Service planned to expend only $9.7 million of the $22.6 million designated for wilderness management; (6) in FY 1988 through 1990, the Service spent $17.8 million on such activities as measuring and controlling recreational use, constructing and maintaining signs and facilities, overseeing livestock grazing, and administering outfitter and permit programs; (7) in FY 1988 through 1990, the Service spent $10.5 million for headquarters oversight, regional office planning, and forest supervision; and (8) Service district offices spent substantially less on wilderness management in 1990 than in 1989.
Financial Management: National Park Service Implements New Accounting System. GAO/AFMD-91-10. February 13, 1991. that its system’s costs do not increase beyond its needs for effective operation, NPS uses sufficient staff to operate the system, and system documentation is adequate.
Parks and Recreation: Resource Limitations Affect Condition of Forest Service Recreation Sites. GAO/RCED-91-48. January 15, 1991.
BACKGROUND: Pursuant to a congressional request, GAO assessed the Forest Service’s maintenance of developed recreation sites, focusing on the: (1) extent and causes of the maintenance and reconstruction backlogs; (2) Service’s site inventory system; and (3) effects of resource limitations on site maintenance. FINDINGS: GAO found that: (1) aging facilities, increased public use, and public demand for new or modernized facilities contributed to the maintenance and reconstruction backlogs at developed recreation sites; (2) funding and staffing levels failed to adequately meet daily operation and maintenance needs; (3) the deferral of needed maintenance resulted in such health and safety hazards as contaminated drinking water, disintegrating boat ramps, and unstable stairs and bridges; (4) without routine maintenance, the environmental damage caused by natural forces and human use and vandalism could accelerate site deterioration; (5) the Forest Service lacked a reliable system to monitor or report site maintenance and reconstruction needs; (6) the extent to which districts documented site conditions and backlog data varied widely, with 12 of the 20 districts unable to provide current and accurate backlog data; (7) the Service planned to implement a new recreation information management system to collect backlog data in 1991, but the new system’s usefulness was questionable because of the sources and types of data intended for the system; (8) between 1986 and 1989, the Service closed 4 percent of the 12,915 sites that existed in 1986, but total recreation site capacity increased between 1972 and 1987; (9) resource limitations contributed to reduced or eliminated services and reduced quality of the recreational experience; and (10) to compensate for limited funds and staff, the districts used such other means as volunteer and cost-share programs to help operate and maintain developed recreation sites.
Natural Resources Protection
Estimated Costs To Recover Protected Species. GAO/RCED-96-34R. December 21, 1995.
BACKGROUND: Pursuant to a congressional request, GAO provided information on species protected under the Endangered Species Act, focusing on the: (1) costs and time needed to recover selected species; and (2) Fish and Wildlife Service’s (FWS) and the National Marine Fisheries Service’s (NMFS) species recovery plans. GAO noted that: (1) the 58 species recovery plans reviewed contained cost estimates that were not based on rigorous scientific analyses; (2) total costs estimates ranged from $145,000 to $153.8 million and initial-years costs estimates ranged from $57,000 to $49.1 million; (3) cost estimates for high-priority recovery actions varied widely; (4) while FWS and NMFS expect to achieve their species recovery goals after the year 2000, one recovery plan is expected to take more than 100 years; (5) other federal agencies, state and local governments, and certain private parties are expected to participate in many FWS and NMFS recovery actions; (6) FWS and NMFS officials believe that recovery cost estimates alert various governmental and private entities to the possible range of costs and tasks needed for species recovery; (7) recovery cost estimates include actions that may not be taken because of a lack of funding or are no longer needed; and (8) FWS and NMFS believe that high-priority species will require more expenditures and the estimated recovery costs contained in the 58 plans reviewed are not representative of the cost estimates contained in all approved recovery plans.
Wildlife Protection: Fish and Wildlife Service’s Inspection Program Needs Strengthening. GAO/RCED-95-8. December 29, 1994.
ABSTRACT: Growing demand throughout the world for wildlife and wildlife parts, ranging from rhino horns to bear gall bladders, now threatens some wildlife populations. Although the full extent of illegal trade is unknown, the value of such trade into and out of the United States is estimated at up to $250 million annually. Despite recent increases in the Fish and Wildlife Service’s (FWS) wildlife inspection program, the program has had difficulty in accomplishing its mission of monitoring wildlife and intercepting wildlife trade. Given current budget constraints and downsizing within the federal government, increases in program funding are unlikely. GAO raises questions about the program’s efficiency and effectiveness. The passage of the North American Free Trade Agreement is likely to increase wildlife trade among the countries that are party to the agreement—the United States, Canada, and Mexico. The expected rise in trade will increase the workload of FWS inspectors, who are already stretched thin along the U.S. borders. Wildlife inspectors, federal agency officials, and conservation and trade groups cited advantages and disadvantages to transferring FWS’ wildlife inspection program to the Customs Service.
Endangered Species Act: Information on Species Protection on Nonfederal Lands. GAO/RCED-95-16. December 20, 1994.
ABSTRACT: Congress is considering reauthorization of the Endangered Species Act. GAO was asked to obtain information on the efforts of the Fish and Wildlife Service to protect species on nonfederal lands. A predominant number of the species protected under the Act have the major share of their habitat on nonfederal lands. Specifically, of the 781 listed species for which the Fish and Wildlife Service was responsible as of May 1993, 712 (or over 90 percent) have habitat on nonfederal lands and of these, 516 have over 60 percent of their total habitat on nonfederal lands. Two processes authorized under the Act have addressed potential conflicts between the effort to protect species and land use activities on nonfederal lands. The implementation of these processes has resulted in nonfederal landowners altering their planned or ongoing activities in various ways to minimize and/or mitigate their potential impact on endangered species. In addition, the Fish and Wildlife Service and others have initiated legal action to protect species.
National Wildlife Refuge System: Contributions Being Made to Endangered Species Recovery. GAO/RCED-95-7. November 14, 1994.
ABSTRACT: Of the nearly 900 species listed under the Endangered Species Act, one quarter can be found on national wildlife refuges. These listed species include plants, birds, and mammals. Although a significant portion of the current habitat for 94 listed species is on 66 wildlife refuges, many other listed species use refuge lands on a temporary basis for breeding or migratory rest stops. Refuges and refuge staff contribute to the protection and the recovery of listed species in several ways. First, the refuges themselves represent about 91 million acres of secure habitat, including more than 310,000 acres that have been acquired by the Service specifically for the protection of listed species. Second, refuge staff are taking steps to protect and recover listed species. Third, refuge staff, by identifying specific actions that can help a species recover, help to develop recovery plans that the Fish and Wildlife Service requires for listed species. Funding limitations constrain efforts to manage wildlife refuges. Two 1993 Interior Department reports found that available funding was not enough to meet established objectives for refuges because the level of funding has not kept pace with the rising costs of managing existing refuges.
California Fire Response. GAO/RCED-94-289R. August 31, 1994.
BACKGROUND: Pursuant to a congressional request, GAO provided information on the late 1993 California fires, focusing on: (1) federal airtankers’ response to the fires; (2) the adequacy of funding for the Soil Conservation Service’s Emergency Watershed Protection Program to mitigate the damage from the fires; and (3) the use of California’s FIRESCOPE Program as a national model for disaster response. GAO noted that: (1) firefighters used 39 federal airtankers to suppress the fires; (2) the California National Guard responded within the 24-hour readiness requirement; (3) the Economy Act provided sufficient flexibility for the use of federal funds to activate modular airborne firefighting systems, since commercial resources could not be provided in a timely manner; (4) the Emergency Watershed Protection Program appeared to provide sufficient funding for erosion prevention projects; (5) nonpriority projects are planned for completion by December 1994; (6) California has continually worked with other government entities to develop and implement well-defined emergency response procedures for recurring wildfires and has expanded the FIRESCOPE program to respond to other natural and manmade disasters; and (7) the Federal Emergency Management Agency and other state and local agencies already use FIRESCOPE as a model for disaster response.
Endangered Species: Federal Actions to Protect Sacramento River Salmon. GAO/RCED-94-243. August 15, 1994.
ABSTRACT: During the past 15 years, the population of winter-run chinook salmon returning to spawn in the Sacramento River has declined by 99 percent. The salmon was classified as an endangered species in January 1994. As a result of this listing, the National Marine Fisheries Services must advise federal agencies on how to modify actions that could harm the salmon and must enforce the Endangered Species Act’s provisions prohibiting the “taking” of salmon. This report identifies major actions that the Service has taken to protect the salmon. These actions affected the Central Valley Project and nonfederal irrigation districts that divert water from the Sacramento River.
Research Fleet Modernization: NOAA Needs to Consider Alternatives to the Acquisition of New Vessels. GAO/RCED-94-170. August 3, 1994.
ABSTRACT: The National Oceanic and Atmospheric Administration (NOAA) in the Commerce Department operates a fleet of 18 ships that supports its programs in fisheries and oceanographic research, and hydrographic charting and mapping. Because the fleet is old and technologically obsolete, NOAA has concluded that fleet replacement and modernization are critical to supporting its mission requirements. In this report on the cost-efficiency, accounting, and operating practices of NOAA vessels compared with other federal and private research vessels, GAO found that NOAA has generally agreed with previous studies that it experiment with contracting and chartering the services of private vessels as an alternative to acquiring new ships. NOAA’s current fleet modernization plan, however, focuses on the acquisition of new vessels and does not fully consider the role that contracted and chartered vessels could play. Because NOAA does not have the data it needs to adequately assess whether use of private ships could meet its needs, the agency has no assurance that its fleet modernization plans are the most cost-effective means of meeting future program requirements.
Endangered Species Act: Impact of Species Protection Efforts on the 1993 California Fire. GAO/RCED-94-224. July 8, 1994.
ABSTRACT: In October 1993, a wildfire near Riverside, California, raged over about 25,000 acres—an area more than one-half the size of the District of Columbia. The wildfire destroyed 29 homes. Some homeowners later alleged that the loss of some homes was caused by the Interior Department’s regulations protecting the Stephens’ kangaroo rat, an endangered species. Specifically, the homeowners claimed that prohibitions against “disking” for weed abatement—an annual process of reducing the amount of vegetation around homes to protect homes from wildfires—prevented them from saving their property. This report reviews (1) the development and application of the disking prohibition; (2) the nature of the fire and the resulting damage to homes; (3) the relationship, if any, between the disking prohibition and the loss of homes; and (4) any developments on the disking prohibition that have occurred since the fire.
Pacific Whiting Harvest: Controversy Surrounding 1993 Allocation Between Processing Sectors. GAO/RCED-94-122. May 10, 1994.
ABSTRACT: The 1993 Pacific whiting harvest was controversial. The Department of Commerce rejected the Pacific Fishery Management Council’s proposed allocation of the whiting harvest between the shoreside and at-sea processing sectors. The Council had proposed that up to 74 percent of the 1993 harvest be allocated to those fishing vessels delivering their catch to shoreside processors and that the rest be made available to vessels delivering their catch to at-sea processors. After much deliberation, Commerce—one day before the opening of the 1993 fishing season—approved an allocation of 30 percent to the shoreside sector and 70 percent to the at-sea sector. GAO concludes that the allocation decision for the 1993 Pacific whiting harvest was made in accordance with federal agency decision-making procedures and regulations. Commerce rejected the Council’s recommendation because of inadequate support. The timing of the decision, which differed little from the timing of the 1992 decision, was the result of the considerable time that federal officials spent deliberating the Council’s proposed shift in the 1993 allocation between the two processing centers.
Ocean Research Vessels: NOAA Fleet Modernization Plan. GAO/T-RCED-94-52. October 21, 1993.
ABSTRACT: The National Oceanographic and Atmospheric Administration’s (NOAA) $1.9 billion fleet modernization plan calls for acquiring 24 new or refurbished vessels during a 15-year period. Several reports, including those from GAO and the Department of Commerce, have encouraged NOAA to use more private sector ship services to cut costs. So far, however, NOAA has used contracting on a very limited basis, and its fleet modernization plan makes few provisions for vessel contracting. NOAA needs to experiment with contracting and leasing options to determine whether the private sector can effectively meet NOAA’s mission requirements. In experimenting with contracting, NOAA will need to grant contractors flexibility in how they do the work so that NOAA obtains the cost and operational data it needs to determine the extent that contracting can meet mission needs.
Endangered Species: Public Comments Received on Proposed Listings. GAO/RCED-93-220BR. September 30, 1993.
ABSTRACT: One issue likely to be debated during the reauthorization of the Endangered Species Act is whether a scientific peer review is needed of decisions to list species as endangered and threatened under the act. The act requires that these decisions be based on the best available scientific and commercial data, and peer review has been suggested as a way to ensure this. This briefing report provides information on the public comments that were provided in response to species’ being proposed for listing, the extent and nature of questions raised about the biological basis for the proposed listings, and the frequency of public hearings on proposed listings. GAO also discusses the number of petitions to list, delist, or reclassify species that the Fish and Wildlife Service found not merited.
Protected Species: Marine Mammals’ Predation of Varieties of Fish. GAO/RCED-93-204. September 10, 1993.
ABSTRACT: According to government officials, the hunting of steelhead salmon by California sea lions at Ballard Locks in Seattle, Washington, is the only documented case in which predation by one species is threatening the existence of another, although federal officials suspect that the adverse predation of fish by protected seals may also be occurring at the Columbia River and in the state of Maine. Efforts to counteract the predation at Ballard Lock, including relocating the sea lions and driving them away from the locks, have been unsuccessful. Other possible options include capturing and holding the sea lions during the steelhead’s migration and making structural changes to the locks and the accompanying spillway. The National Marine Fisheries Service has considered but rejected the possibility of controlling the sea lion population through lethal means.
Natural Resources Restoration: Use of Exxon Valdez Oil Spill Settlement Funds. GAO/RCED-93-206BR. August 20, 1993.
ABSTRACT: Under the civil settlement stemming from the 1989 grounding of the supertanker Exxon Valdez—the largest oil spill in U.S. history—Exxon agreed to pay a total of $900 million in 11 annual payments. Under the criminal settlement, Exxon was fined $150 million and required to pay $50 million each to the federal government and the state of Alaska to help restore areas damaged by the spill. This briefing report provides information on the amount and distribution of money that Exxon has paid through December 1992 under the settlements. GAO also discusses issues surrounding the functioning of the Trustee Council, which was created to coordinate damage assessments and to seek funds from responsible parties to clean up natural resources. GAO concludes that Alaska and federal trustees managing the oil spill settlement funds will have to address several issues before there can be confidence that the money is being spent for natural resources restoration and other intended purposes.
Endangered Species: Factors Associated With Delayed Listing Decisions. GAO/RCED-93-152. August 5, 1993.
ABSTRACT: Delays by the Fish and Wildlife Service (FWS) in listing six species as either threatened or endangered were due to several factors, the most common of which were FWS concerns about the sufficiency of biological data and concerns about potential economic and other impacts. GAO found that the conservation agreements for the Bruneau Hot Springsnail and the Jemez Mountains salamander were inconsistent with FWS policy and guidance. Whether a conservation agreement is an appropriate means of protecting species that would otherwise warrant listing is a decision for FWS to make. On the basis of its findings, however, GAO concludes that a conservation agreement, if it is to be an effective alternative to listing, should (1) address known threats to a species that would otherwise warrant listing, (2) provide for monitoring to ensure that the agreement’s mechanisms for protecting the species are properly and fully implemented, and (3) be implemented in a timely manner.
Species Protection: National Marine Fisheries Service Enforcement Efforts. GAO/RCED-93-127BR. June 21, 1993.
ABSTRACT: During 1991 congressional hearings, shrimp fishermen from the Gulf of Mexico complained that federal agencies were overly aggressive in enforcing regulations requiring turtle eluder devices, which create a hole in shrimp nets allowing trapped turtles to escape. This briefing report examines how enforcement practices under the Endangered Species Act compare with the enforcement of other fisheries and marine protection laws. GAO presents statistical data on the level of federal agencies’ enforcement efforts and penalties assessed to enforce four major fisheries and marine species protection laws in the southeastern United States.
Wetlands Protection: The Scope of the Section 404 Program Remains Uncertain. GAO/RCED-93-26. April 6, 1993.
ABSTRACT: The environmental benefits of swamps, marshes, and bogs—long considered fit only for draining and filling—are increasingly recognized today. Wetlands provide vital habitat for wildlife as well as improve water quality and control soil erosion. How to protect these areas has become a major regulatory issue in the 1990s. Under the Section 404 program, the U.S. Army Corps of Engineers is in charge of granting permits to anyone wanting to dredge and fill in navigable waters, including wetlands. GAO made several suggestions in a July 1988 report (GAO/RCED-88-110) on how the Corps could improve program management. This report discusses (1) the extent to which the Corps has acted on GAO’s recommendations, (2) legislative and other developments that have occurred since the 1988 report that affect the program, and (3) the extent to which budgetary constraints have affected program administration.
Endangered Species: Potential Economic Costs of Further Protection for Columbia River Salmon. GAO/RCED-93-41. February 23, 1993.
ABSTRACT: Despite federal and regional outlays of more than $1.3 billion to improve salmon runs in the Columbia River Basin, certain salmon stocks—especially those that spawn far upstream in the Snake River and its tributaries—have reached critically low levels. As a result, the Snake River sockeye salmon was designated an endangered species in 1991, while the Snake River fall chinook and spring/summer chinook were listed as threatened species the following year. In looking into the potential economic costs and effectiveness of efforts to protect these salmon stocks, GAO found that a preliminary estimate of lost jobs due to salmon protection will be unavailable until mid-1993 at the earliest. However, preliminary estimates of the value of goods and services foregone—a measure of net economic costs—suggest that the economic costs of salmon protection may range from $2 million to as high as $211 million annually. According to the more than 300 agencies and organizations GAO contacted, no studies address how effective any of the proposed protection measures may be in increasing the number of adult salmon returning to spawn. Past evaluation of measures to maintain and improve salmon runs either did not address the issue or were inconclusive.
Wildlife Management: Many Issues Unresolved in Yellowstone Bison-Cattle Brucellosis Conflict. GAO/RCED-93-2. October 21, 1992.
ABSTRACT: Montana succeeded in eradicating brucellosis from its cattle herds in 1985, allowing Montana ranchers to ship their cattle to other states without first testing them for the disease. Cattlemen are concerned about the possibility that brucellosis, a contagious disease that can cause abortions and infertility in domestic cattle, may be spread from Yellowstone Park’s free-roaming bison and elk herds to livestock grazing along the park borders, thereby jeopardizing Montana’s ability to freely transport cattle across state lines. Although its policy is not to restrict the movement of the park’s bison and elk, the National Park Service has, in an attempt to reduce the risk of brucellosis transmission, killed more than 10,000 bison that have wandered out of the park in recent years. This report provides information on the (1) scientific evidence that brucellosis can be transmitted from bison and elk to domestic cattle, (2) economic damage that might arise from such transmission, and (3) management alternatives for preventing or reducing the likelihood of such transmission.
Natural Resources Protection: Reelfoot Lake Lease Terms Met, but Lake Continues to Deteriorate. GAO/RCED-92-99. August 17, 1992.
ABSTRACT: Under an agreement signed in 1941, the Fish and Wildlife Service assumed responsibility for maintaining Reelfoot Lake, the largest natural lake in Tennessee, including controlling siltation and the growth of undesirable vegetation. Because the lake, which is used extensively by fishermen, boaters, and wildlife enthusiasts, captures drainage from adjacent eroding cropland, it has been silting up over the years and is increasingly swampy in areas; today, more than 40 percent of the lake is three feet deep or less. This report (1) discusses the extent to which the Fish and Wildlife Service has complied with terms of the lease agreement and (2) identifies the main causes of the lake’s deterioration, options for improving the lake’s condition, and barriers to implementing these options.
Coastal Barriers: Development Occurring Despite Prohibition Against Federal Assistance. GAO/RCED-92-115. July 17, 1992.
ABSTRACT: Coastal islands buffer the U.S. mainland from hurricanes and are an important source of habitat for fish and wildlife, including some endangered species. More and more islands, despite being highly unstable, are being developed because of their natural beauty and the dwindling supply of beachfront property. This development has also been spurred by the availability of national flood insurance and other federal assistance. Congress, in an effort to cut down on environmental damage and the government’s exposure to losses from storm damage, passed legislation a decade ago that prohibits new federal financial assistance on most coastal islands. Although this legislation has discouraged development on some coastal islands and other islands are unlikely to be developed any time soon because they are either inaccessible or unsuitable for building, significant development has occurred since 1982 in some attractive and accessible islands. Extensive new development can be expected in these and similar areas in the future. Most federal agencies have not provided new financial assistance for the coastal islands. Two exceptions involve the Federal Emergency Management Agency, which underwrote flood insurance obtained by ineligible property owners, and the Air Force, which granted an easement on land within Florida’s Eglin Air Force Base at no cost to a quasi-state agency that wanted to build a bridge to one of the coastal islands. GAO also discovered that permits issued by agencies such as the U.S. Army Corps of Engineers have allowed development on certain coastal islands.
Endangered Species: Contract Funding For Selected Species. GAO/RCED-92-218. July 17, 1992.
ABSTRACT: GAO looked at whether individuals or groups that petition the Fish and Wildlife Service to put plants and animals on the endangered species list later receive agency funds to study those same plants and animals. According to Fish and Wildlife Service officials, agency contracting policies do not prohibit petitioners from receiving Endangered Species Act funding to study the same species for which they have submitted petitions. Of the 228 contracts for studying endangered species that GAO examined, 38 had been awarded to study the same species covered by the petitions. But in only one case was a petitioner associated with a Fish and Wildlife Service award. In this instance, the principal investigator for the organization receiving funding was the same person who had petitioned for the species to be placed on the endangered species list.
Endangered Species: Past Actions Taken to Assist Columbia River Salmon. GAO/RCED-92-173BR. July 13, 1992.
ABSTRACT: Concerns about declining populations of wild salmon prompted the National Marine Fisheries Service to list several kinds of Snake River salmon as either endangered or threatened species. This briefing report examines past efforts to reverse declines in salmon runs. GAO discusses the actions, and their costs, that federal agencies and organizations in the Pacific Northwest have taken to maintain and restore runs of salmon—both wild and hatchery-bred. GAO also discusses the results of studies and research on the effectiveness of the salmon recovery measures undertaken.
Hydroelectric Dams: Proposed Legislation to Restore Elwha River Ecosystem and Fisheries. GAO/T-RCED-92-80. July 9, 1992.
BACKGROUND: GAO discussed the Elwha River Ecosystem and Fisheries Restoration Act, focusing on: (1) the Federal Energy Regulatory Commission’s (FERC) authority to license dams on the Elwha River; (2) the Department of the Interior’s position on removal of the dams to restore fisheries; and (3) who should pay the costs if the dams are removed. GAO noted that: (1) the Glines Canyon Dam is within the boundaries of a national park, where FERC does not have the authority to license dams; (2) Interior, FERC, and the National Marine Fisheries Service believe that removing both dams offers the best prospects for restoring the Elwha River fisheries and their surrounding ecosystem; and (3) the cost of removing the dams should be allocated among parties in proportion to the benefits they have received from the dams or will receive from the restoration of the river.
Hydroelectric Dams: Interior Favors Removing Elwha River Dams, but Who Should Pay Is Undecided. GAO/RCED-92-168. June 5, 1992.
ABSTRACT: The Department of the Interior’s position is that in order to restore fisheries in the Elwha River, two dams will have to be removed. As of May 1992, Interior has not worked out with the Federal Energy Regulatory Commission whether the dams should be removed and who should pay for the cost of removing them. Proposed legislation before Congress would involve federal acquisition of the two dams and subsequent comprehensive analysis of the most effective and reliable alternative for fully restoring, enhancing, and protecting the ecosystem, fisheries, and wildlife of the Elwha River basin. GAO believes that a better understanding of the estimated costs and potential liabilities would provide for more informed public policy decisions on whether and how best to restore the ecosystem and fisheries of the Elwha River and who should be responsible for paying the costs of restoration. GAO summarized this report in testimony before Congress; see: Hydroelectric Dams: Proposed Legislation to Restore Elwha River Ecosystem and Fisheries, by Keith O. Fultz, Director of Planning and Reporting in the Resources, Community, and Economic Development Division, before subcommittees of the House Committee on Merchant Marines and Fisheries. GAO/T-RCED-92-80, July 9, 1992 (10 pages).
Endangered Species Act: Types and Number of Implementing Actions. GAO/RCED-92-131BR. May 8, 1992.
ABSTRACT: This briefing report examines how two federal agencies—the Fish and Wildlife Service (FWS) and the National Marine Fisheries Service (NMFS)—have implemented the Endangered Species Act of 1973, which sets forth processes for protecting plants and animals. Habitat designation has taken place for less than 20 percent of the species listed as endangered. Agency officials doubt whether designating critical habitats provides much additional benefit for a species, and critical habitat designation is considered a low priority. During fiscal years 1987 through 1991, when other federal agencies asked FWS or NMFS to consider the effect of proposed actions such as construction on a listed species, the two agencies allowed such projects to proceed as planned more than 90 percent of the time. While more than 650 domestic species are on the endangered species list, 600 others are recognized by the agencies as potentially imperiled. At the present pace of listing, it will take FWS until 2006 to list these species as endangered or threatened. Compounding this problem are the estimated 3,000 additional species that may be threatened or endangered in the future. The agencies attribute their slowness to resource constraints.
Great Lakes Fishery Commission: Actions Needed to Support an Expanded Program. GAO/NSIAD-92-108. March 9, 1992.
ABSTRACT: Sea lampreys, eel-like parasites that prey on fish, are native to the Atlantic Ocean but gained entry to the Great Lakes through the Erie Canal in the late 19th century. In response to concerns about decimated fish stocks, the Great Lakes Fishery Commission was created in 1955 to check the sea lamprey population. This report discusses (1) whether the Commission, a joint U.S.-Canadian venture, uses an ecosystem management approach that considers the potential harmful effects of sea lamprey control efforts; (2) what progress the Commission has made in adopting nonchemical methods to control the sea lamprey; and (3) if the Commission could effectively spend more funding on research for alternative control methods.
Wildlife Protection: Enforcement of Federal Laws Could Be Strengthened. GAO/T-RCED-92-26. February 3, 1992.
ABSTRACT: Federal statutes and international treaties give the Department of the Interior’s Fish and Wildlife Service adequate authority to protect wildlife. The Migratory Bird Treaty Act does not, however, give the Service the authority to conduct a search and seizure without a warrant, as do other laws protecting wildlife. GAO continues to believe that it would enhance the Service’s enforcement authority if the act were amended to provide such search and seizure authority. The Service investigates more than 10,000 suspected violations each year and maintains a conviction rate averaging more than 90 percent for cases prepared for prosecution. The agency cannot, however, investigate many more suspected violations or respond to state requests to participate in certain investigations because (1) it has a limited number of agents and (2) many of these agents are deskbound for months at a time due to insufficient operating funds. Further, the Service lacks readily available information on suspected violations and other enforcement activities that could help to justify needed resources. Although Interior is developing an information system capable of recording suspected crimes against wildlife, it also needs to (1) ensure that its agents report all known or suspected violations, whether they are investigated or not, and (2) document all state requests for assistance. This information should then be used to substantiate the resources the Service needs to carry out its law enforcement activities effectively.
Natural Resources Damage Assessment: Information on Study of Seabirds Killed by Exxon Valdez Oil Spill. GAO/RCED-92-22. November 27, 1991.
ABSTRACT: In the wake of the March 1989 Exxon Valdez oil spill in Alaska’s Prince William Sound, a federally funded study sought to estimate the number of seabirds killed as a result of the accident. This was one of more than 50 damage assessment studies that sought to determine the impact of the spill on natural resources and develop a restoration strategy. The most controversial aspect of the seabird study involved killing 219 seabirds, immersing them in oil, placing them in Prince William Sound, and tracking their drift patterns to discover the number of birds recovered versus the number lost at sea. This report provides information on (1) the request and approval of the seabird damage study and (2) the study’s methodology, which required killing more than 200 seabirds.
Wetlands Overview: Federal and State Policies, Legislation, and Programs. GAO/RCED-92-79FS. November 22, 1991.
ABSTRACT: In recent years, the value of wetlands—such as providing fish and wildlife habitat and abating erosion—have become better known. Unfortunately, an estimated 50 percent of all wetlands in the lower 48 states have already been filled or drained, and another 290,000 acres are being lost annually to agriculture and development. This fact sheet provides an overview of federal and state wetlands-related policies, legislation, and programs.
Wetlands Preservation: Easements Are Protecting Prairie Potholes but Some Improvements Are Possible. GAO/RCED-92-27. November 7, 1991.
ABSTRACT: Wetlands protected under the Small Wetlands Acquisition Program are located mainly in the Prairie Pothole Region in the upper Middle West, including parts of Montana, the Dakotas, Iowa, and Minnesota. Prairie potholes are shallow, freshwater depressions and marshes that were created by glaciers thousands of years ago. Loss of such habitat is a major reason why populations of some duck species, such as mallards and pintails, have declined about 60 percent over the past 50 years. The Small Wetlands Acquisition Program has successfully helped preserve wetlands in the Prairie Pothole Region, primarily because the Fish and Wildlife Service has effectively enforced easements on wetlands. GAO believes that the program could be made even better if the Fish and Wildlife Service were to correct weaknesses in the (1) documentation of waterfowl’s use of wetlands under easement and (2) guidance involving the timeliness with which damaged wetlands are restored and the circumstances under which violators should be issued notices and assessed fines.
Wilderness Management: Accountability for Forest Service Funds Needs Improvement. GAO/RCED-92-33. November 4, 1991.
ABSTRACT: To help ensure that Forest Service wilderness areas are protected and maintained in their natural state, Congress increased funding for wilderness management by almost 80 percent during fiscal years 1989 through 1991. The Forest Service, however, diverted more than one-third of the $44.7 million designated for wilderness management to other activities. Of the $28.3 million spent on wilderness management, $10.5 million was used for management expenses—mainly salaries and administrative costs—at organizational levels above the district offices, with the remainder spent on wilderness management at the district level. The Forest Service reported that 112 of the 500 district offices managing wilderness areas saw cuts in funding for fiscal year 1990, including some offices that had earlier reported funding and staffing shortfalls. Contrary to congressional directives, the Forest Service reprogrammed these funds without seeking prior approval by the House Committee on Appropriations. The head of the Forest Service recently outlined several steps to ensure that (1) designated funds are spent as Congress intended, (2) the Committee’s reprogramming procedures are followed, and (3) there is greater accountability over funds designated for wilderness management. In addition, GAO suggests that the Forest Service refine its accounting for expenditures and establish output targets to improve accountability over expenditures of wilderness management funds and the performance of wilderness managers.
Oil Reserve: Impact of NPR-1 Operations on Wildlife and Water Is Uncertain. GAO/RCED-91-129. August 1, 1991.
BACKGROUND: Pursuant to a congressional request, GAO reviewed the basis for the disagreements between the Department of Energy (DOE) and its Argonne National Laboratory relating to Argonne’s development of a supplemental environmental impact statement (SEIS) for Naval Petroleum Reserve No. 1 (NPR-1), focusing on: (1) the DOE Naval Petroleum Reserves-California (NPRC) and Argonne positions on NPR-1 impacts on endangered species and groundwater quality and how SEIS would discuss those uncertainties; and (2) NPR-1 compliance with environmental laws and regulations governing endangered species, wastewater disposal, and historic preservation activities.
FINDINGS: GAO found that: (1) between 1981 and 1989, the number of foxes living free within the NPR-1 study area decreased from 164 to between 44 and 58; (2) Argonne concluded in a SEIS draft that NPR-1 operations could have contributed to the decline of foxes in that area; (3) NPRC and Argonne staffs disagreed about how SEIS should describe the effects of NPR-1 operations on endangered foxes and nearby groundwater, primarily due to a lack of definitive data; (4) in September 1990, NPRC notified Argonne that DOE would prepare final SEIS, but it was unclear to what extent DOE would use Argonne’s data and views; (5) DOE and others were conducting research that could provide additional data on factors affecting the fox population and wastewater migration; (6) DOE has not ensured that NPR-1 operations comply with the Endangered Species Act and the National Historic Preservation Act’s regulations; (7) Argonne concluded in a June 1990 SEIS draft that NPR-1 operations violated California wastewater disposal requirements for sumping, but DOE believed that NPR-1 had not violated the requirements, and the state had not made a determination on that issue; (8) factors contributing to the noncompliance included NPRC officials’ lack of knowledge regarding environmental requirements, noncoordination with federal and state agencies having environmental responsibilities, and mismanagement, which could result in legal action, fines, or a temporary shutdown; and (9) NPRC is taking action to address the problems, but unless DOE improves its management controls, similar problems may continue to exist.
National Forests: Funding Fish and Wildlife Projects. GAO/RCED-91-113. June 12, 1991.
BACKGROUND: Pursuant to a congressional request, GAO provided information on funds spent by various sources for fish and wildlife activities on national forest lands. FINDINGS: GAO found that: (1) between October 1987 and June 1990, fish and wildlife activities involving Forest Service staff participation totalled over $202 million; (2) such activities included revegetation of streamside areas, fencing installation, and erosion control projects to maintain or improve fish and wildlife habitat or provide for the recovery of endangered species; (3) of the $202 million, $154.6 million came from congressional appropriations to the national forest system and the remaining $47.8 million came from such outside sources as state and local governments; (4) from fiscal year (FY) 1988 through FY 1989, outside funding for fish and wildlife activities directly involving Service staff increased from about $14.7 million to about $16.7 million and totalled about $16.4 million for the first 9 months of FY 1990; and (5) financial support from outside sources included $32.1 million in cost-sharing arrangements between the Service and outside sources, $15.7 million in work performed by the Service but paid for by outside sources, and $14.7 million for activities in which the Service was not involved.
Wildlife Protection: Enforcement of Federal Laws Could Be Strengthened. GAO/RCED-91-44. April 26, 1991.
BACKGROUND: Pursuant to a congressional request, GAO reviewed whether: (1) federal statutes and international treaties provided sufficient authority to protect wildlife, particularly migratory waterfowl; and (2) the Department of the Interior’s Fish and Wildlife Service (FWS) adequately enforced those statutes and treaties. FINDINGS: GAO found that: (1) with the exception of the Migratory Bird Treaty Act and the Endangered Species Act, the 11 federal statutes and 5 international treaties provided sufficient enforcement authority for FWS; (2) the lack of warrantless search and seizure authority in the Migratory Bird Treaty Act hampered agents’ efforts to investigate suspected violations; (3) the issue of whether hybrid species were protected under the Endangered Species Act of 1973 presented enforcement problems, since the only alternative to conclusively prove an animal’s species was to destroy and examine it; (4) although new and amended legislation substantially increased FWS responsibilities for protecting species, the number of FWS special agents decreased by 9 percent; (5) due to insufficient funds, some special agents were deskbound and unable to perform their basic responsibilities for months at a time; (6) staffing and funding shortfalls resulted in the selective enforcement of wildlife protection legislation; (7) FWS lacked adequate information regarding the extent of suspected crimes it was unable to investigate and the effectiveness of its law enforcement methods; and (8) joint FWS-state investigations of large-scale illegal commercial operations and massive illegal harvesting of waterfowl worked well, but reductions in FWS staffing and operating funds, coupled with its focus on large-scale operations, rendered FWS unable to respond to many state requests for assistance.
Fisheries: Commerce Needs to Improve Fisheries Management in the North Pacific. GAO/RCED-91-96. March 28, 1991.
BACKGROUND: Pursuant to a congressional request, GAO reviewed: (1) federal management of the groundfish fishery in the Bering Sea and the Gulf of Alaska; (2) systems for calculating domestic processing capability; and (3) systems for releasing surplus allocations to joint-venture fishermen. FINDINGS: GAO found that: (1) the North Pacific Fishery Management Council’s recommended 2-million metric ton cap for groundfish in the Bering Sea was conservative, based on the National Marine Fisheries Service’s (NMFS) 1984 estimate; (2) the Council maintained the conservative cap to Americanize the fishery, protect markets for groundfish, and sustain the ecological balance; (3) domestic processors provided NMFS with preseason estimates which were 43 percent higher than actual use, and NMFS believed that estimates were inflated primarily to limit or eliminate allocations to joint-venture and foreign fishermen; (4) the system for allocating groundfish often gave domestic processors larger initial allocations than they needed and reduced the allocations to joint-venture and foreign fishermen; and (5) joint-venture and foreign fishing in the North Pacific fishery was eliminated when all allocations of groundfish in the Gulf of Alaska and Bering Sea went to domestic processors in 1990 and 1991.
Coast Guard: Millions in Federal Costs May Not Be Recovered From Exxon Valdez Oil Spill. GAO/RCED-91-68. March 5, 1991.
BACKGROUND: Pursuant to a congressional request, GAO provided information on the Exxon Valdez oil spill, focusing on: (1) the total spill-related costs reported as of June 30, 1990; (2) the extent of the oil carrier company’s reimbursement to the government for spill-related costs through September 30, 1990; and (3) improvements needed in the reimbursement process in the event of future spills. FINDINGS: GAO found that: (1) the federal government, as of June 30, 1990, spent almost $154 million on the spill, for which the carrier reimbursed it or was processing reimbursement of $123 million; (2) through June 30, 1990, 10 federal agencies reported spending $116.9 million for removal, $22.6 million for damage assessment, and $14.2 million for other spill-related costs; (3) 4 of those agencies accounted for 87 percent of total costs incurred, and the Department of Defense accounted for $62.2 million, the largest portion; (4) as of September 30, 1990, the oil carrier company reimbursed the federal government for $116.1 million of the $153.7 million agencies reported they spent on the spill; (5) the Coast Guard’s spill coordinator did not authorize for reimbursement a number of the agencies’ activities, since it did not believe that they were related to oil removal; (6) several agencies lost opportunities to obtain reimbursement from the Oil Spill Liability Trust Fund because of problems in tracking and billing their spill-related costs completely and accurately; (7) agencies estimated that future cleanup activities would require at least another $26 million; and (8) the Department of Justice was considering civil litigation against the oil carrier company to recover damage assessment and restoration costs.
Public Lands Management, Mining Control and Reclamation
Animal Damage Control Program: Efforts to Protect Livestock from Predators. GAO/RCED-96-3. October 30, 1995.
ABSTRACT: Efforts to protect livestock from predators, mainly coyotes, constitute the major activity of the Agriculture Department’s Animal Damage Control Program. In 1994, more than 100,000 predators were killed by the program’s field personnel. GAO found that Agriculture field personnel in California, Nevada, Texas, and Wyoming used lethal methods in essentially all instances to control livestock predators. Agriculture’s written policies and procedures call for field personnel to give preference to the use of nonlethal methods when practical and effective. However, according to program officials, this aspect of written guidance does not apply to the control of livestock predators. These officials said that in controlling livestock predators, nonlethal methods, such as fencing and the use of herders and guard dogs, are more appropriately used by ranchers, have limited effectiveness, and are impractical for field personnel to use.
Restoring the Everglades: Public Participation in Federal Efforts. GAO/RCED-96-5. October 24, 1995. learned about federal and nonfederal collaboration and consensus-building in South Florida that may be applicable elsewhere.
Ecosystem Management: Additional Actions Needed to Adequately Test a Promising Approach. GAO/T-RCED-94-308. September 20, 1994.
ABSTRACT: The “ecosystem” approach to managing the nation’s lands and natural resources stresses that plant and animal communities are interdependent and interact with their physical environment to form ecosystems that span federal and nonfederal lands. GAO found that the four primary federal land management agencies—the National Park Service, the Bureau of Land Management, the Fish and Wildlife Service, and the Forest Service—have started to implement ecosystem management. In addition, the administration’s fiscal year 1995 budget request includes $700 million for ecosystem management initiatives. GAO recognizes that, compared with the existing federal approach to land management, ecosystem management may require greater flexibility in planning; in budgeting, authorizing, and appropriating funds; and in adapting management on the basis of new information. However, GAO believes that if ecosystem management implementation is to move forward, it must advance beyond unclear priorities and broad principles. Clear goals and practical steps for implementing ecosystem management need to be established and progress in implementing this approach needs to be regularly assessed and reported.
Ecosystem Management: Additional Actions Needed to Adequately Test a Promising Approach. GAO/RCED-94-111. August 16, 1994. advance beyond unclear priorities and broad principles. Clear goals and practical steps for implementing ecosystem management need to be established and progress in implementing this approach needs to be regularly assessed and reported. GAO summarized this report in testimony before Congress; see: Ecosystem Management: Additional Actions Needed to Adequately Test a Promising Approach, by James Duffus III, Director of Natural Resources Management Issues, before the Subcommittee on Oversight and Investigations, House Committee on Natural Resources, the Subcommittee on Environment and Natural Resources, House Committee on Merchant Marine and Fisheries, and the Subcommittee on Specialty Crops and Natural Resources, House Committee on Agriculture. GAO/T-RCED-94-308, Sept. 20, 1994 (nine pages).
Federal Land Management: Status and Uses of Wilderness Study Areas. GAO/RCED-93-151. September 23, 1993.
ABSTRACT: In response to congressional concerns about the alleged degradation of areas being considered for possible inclusion in the National Wilderness Preservation System, this report provides information on the types and effects of activities in these areas, which are managed by the Bureau of Land Management and the Forest Service. GAO discusses (1) the legislative guidance and the agency policies governing wilderness study area management, (2) various activities and uses occurring in the agencies’ study areas, (3) ways these activities affect the areas, and (4) agency actions to monitor and restrict these uses and to repair resulting damage. Congress has allowed many different uses, such as primitive recreation and grazing, to occur in these areas. In the locations GAO visited, the effects and damage seemed to be concentrated in relatively small and accessible areas. Because people have various views on “wilderness,” they will also have different opinions about the severity of “man’s imprint” on potential and designated wilderness. The final decision about an area’s suitability for wilderness ultimately rests with Congress.
Ranching Operations on Public Lands. GAO/RCED-93-212R. August 17, 1993. these ranching operations make to wildlife and improving the condition of the federal lands. GAO noted that: (1) one-third of the cattle in 11 western states graze at least part of the year on federal lands; (2) the extent that ranching operations are dependent on federal lands varies by state and region; (3) federal lands are generally of lower quality and not as productive as private and state lands; and (4) the operating size of many livestock operations is affected by the amount of federal range land available during seasons of feed shortage on privately-owned lands.
Large Grazing Permits. GAO/RCED-93-190RS. July 16, 1993.
BACKGROUND: Pursuant to a congressional request, GAO provided permit holders’ addresses and phone numbers missing from its listing of the top 500 Bureau of Land Management and Forest Service grazing permits. GAO noted that it could not provide the unlisted phone number of one permit holder and the other permit had been cancelled, sold, or transferred.
Large Grazing Permits. GAO/RCED-93-190R. June 25, 1993.
BACKGROUND: Pursuant to a congressional request, GAO provided information on the top 500 grazing permits issued by the Bureau of Land Management and the Forest Service. GAO noted that: (1) it could not provide some of the permittees’ addresses and phone numbers due to time constraints and unavailable information; (2) the information on the permits may not correspond to the actual livestock operators; (3) some operators hold more that one permit and some permits are issued to associations that represent many operators; and (4) some operators who do not hold one of the top permits may hold several smaller permits which raise their aggregate grazing level higher than that of an operator who holds one of the top 500 permits.
Rangeland Management: Profile of the Forest Service’s Grazing Allotments and Permittees. GAO/RCED-93-141FS. April 28, 1993. grouped the allotment and permittee information into several categories, emphasizing the 500 largest and smallest allotments and permittees. In general, grazing allotments in the western United States were concentrated among the largest ranchers. The 500 largest allotments GAO studied encompassed more than 29 million acres, or about 32 percent of the total allotment acreage. In contrast, the 500 smallest allotments accounted for about 49,000 acres, or 0.05 percent of the total allotment acreage. Similarly, the 500 permittees with the highest livestock grazing levels accounted for nearly 4.5 million animal months, or nearly half of the total number of animal months. The 500 permittees with the lowest livestock grazing levels accounted for about 8,500 animal months, or 0.09 percent of the total number of animal months allowed.
Rangeland Management: BLM’s Range Improvement Project Data Base Is Incomplete and Inaccurate. GAO/RCED-93-92. April 5, 1993.
ABSTRACT: The Bureau of Land Management (BLM) spent about $18 million in fiscal years 1990 and 1991 to improve the public rangeland. These funds came from fees paid by ranchers to graze their livestock on BLM land. The law requires that the funds be used for projects such as fencing, weed control, and water development that benefit rangeland resources, including wildlife, watersheds, and livestock. This report discusses how range improvements are accounted for, including (1) the types of range improvement projects funded, (2) the cost of each project, and (3) the rangeland resources benefiting from these projects. GAO also provides information on the role that grazing advisory boards play in determining which range improvement projects are funded each year.
Wilderness: Effects of Designation on Economy and Grazing in Utah. GAO/RCED-93-11. December 29, 1992. study’s methodology is flawed because, among other things, it inflates the total effects of wilderness designation by not discounting future cash flows and by double-counting projected lost revenues. The limitations of this study led GAO to conclude that the effect on Utah’s economy of designating more acreage as wilderness has not been adequately quantified. Likewise, the effect of wilderness designation on livestock grazing in Utah has not been quantified.
Rangeland Management: Profile of the Bureau of Land Management’s Grazing Allotments and Permits. GAO/RCED-92-213FS. June 10, 1992.
ABSTRACT: This fact sheet provides information on livestock grazing on public rangeland managed by the Department of the Interior’s Bureau of Land Management (BLM). GAO discusses (1) the number, the average acreage, and the average stocking rate of BLM allotments and (2) the total and the average number of animal unit months—the amount of forage needed to feed one 1,000-pound cow, a horse, or five sheep for a month—covered by grazing permits. GAO groups the information into several categories, emphasizing the 500 largest and 500 smallest allotments and permits.
BLM Resource Allocation. GAO/RCED-92-181R. May 20, 1992.
BACKGROUND: Pursuant to a congressional request, GAO provided information on the Bureau of Land Management’s (BLM) fiscal year (FY) 1991 and FY 1992 budget and staff allocations for nine western states in management programs addressing oil and gas, coal, rangeland, cultural resources, wilderness, recreation resources, and resource planning. GAO noted that: (1) the BLM resource allocation process, including its budget development phase, takes place over 3 fiscal years; (2) BLM state offices adjust current budgets for such factors as inflation, administrative priorities, and initiatives, to develop new budgets; (3) numerous BLM, Department of the Interior, and Office of Management and Budget officials review and revise the proposed budgets over the 3-year development period, as well as the President and Congress; (4) total BLM FY 1992 budget allocations for the nine states ranged from $29.8 million to $53.2 million; and (5) total BLM FY 1992 staff allocations ranged from 510 full-time equivalents (FTE) to 975 FTE.
Rangeland Management: Results of Recent Work Addressing the Performance of Land Management Agencies. GAO/T-RCED-92-60. May 12, 1992.
BACKGROUND: GAO discussed its work on public rangeland management, focusing on: (1) its response to a consultant’s critique of three GAO reports issued between 1988 and 1990 on rangeland management; and (2) other reports it has issued regarding rangeland monitoring and livestock grazing activity. GAO noted that: (1) the consultant made numerous criticisms about GAO reports regarding grazing allotments, riparian area restoration, and the federal wild horse program, but GAO believes that the critique includes little factual data to substantiate its assertions and misrepresents report findings to support its positions; (2) other federal and state agencies conducting similar studies reached conclusions that were similar to GAO conclusions; (3) both the Bureau of Land Management (BLM) and the Forest Service have taken actions to address the issues raised in the GAO reports; and (4) its reports on BLM and Service rangeland monitoring continue to indicate that neither agency has sufficient staffing and funding to effectively administer or evaluate grazing activities.
Rangeland Management: Assessment of Nevada Consulting Firm’s Critique of Three GAO Reports. GAO/RCED-92-178R. May 4, 1992.
Agencies, by J. Dexter Peach, Assistant Comptroller General for Resources, Community, and Economic Development Programs, before the Subcommittee on National Parks and Public Lands, House Committee on Interior and Insular Affairs. GAO/T-RCED-92-60, May 12 (10 pages).
Contacts and Documents Reviewed. GAO/RCED-92-193R. May 4, 1992.
ABSTRACT: GAO reviewed a January 1992 report by a Nevada consulting firm that critiqued three GAO reports on management of the western public rangeland by the Bureau of Land Management and the Forest Service. Subjects addressed included declining and overstocked grazing allotments, riparian area restoration, and the federal wild horse program. GAO carefully examined both the consulting firm’s analysis of GAO’s reports as well as GAO’s adherence to its own standards, policies, and procedures. GAO is confident that its work was done with due professional care consistent with generally accepted government auditing standards and that its findings are well supported, its conclusions flow logically from the facts, and its recommendations offer reasonable suggestions for addressing the problems identified. The first report provides GAO’s point-by-point responses to the charges made in the consulting firm’s report, while the second provides the titles of the documents GAO reviewed and the names of individuals GAO contacted in preparing its reports. GAO summarized these reports, along with two other recent reports on rangeland management (GAO/RCED-92-52, Feb. 24, 1992, and GAO/RCED-92-12, Nov. 26, 1991) in testimony before Congress; see: Rangeland Management: Results of Recent Work Addressing the Performance of Land Management Agencies, by J. Dexter Peach, Assistant Comptroller General for Resources, Community, and Economic Development Programs, before the Subcommittee on National Parks and Public Lands, House Committee on Interior and Insular Affairs. GAO/T-RCED-92-60, May 12 (10 pages).
Grazing Fees: BLM’s Allocation of Revenues to Montana Appears Accurate. GAO/RCED-92-95. March 11, 1992. data are entered incorrectly and mistakes are not caught and corrected. Although GAO found several instances of inaccurate data entry, BLM had corrected them by the time of GAO’s review. With the formation of a committee to identify and implement edit-checks needed to refine its system, BLM has started to ensure greater accuracy of the information in the system. GAO believes that these efforts are worthwhile and should be continued.
Management of Artwork: Steps Taken to Preserve and Protect Bureau of Reclamation’s Collection. GAO/RCED-92-92. February 28, 1992.
ABSTRACT: In the late 1960s, the Department of the Interior’s Bureau of Reclamation commissioned artwork depicting its water projects in the West. Because of inadequate record-keeping and controls, the Bureau has been unable to locate about 40 percent of the paintings, watercolors, and sketches in its collection. Some of the missing artwork may have been lost or stolen, and other pieces may have been returned to the original artists. The Bureau has done what it can to identify and locate the missing pieces, and since 1987 it has strengthened its accountability and controls over the remaining 201 pieces of art. Few of these pieces have been seriously damaged, and the Bureau has begun restoring the most valuable among them. The Bureau has not yet decided, however, how best to display its collection in offices and public facilities or loan out pieces for exhibit after their restoration.
Rangeland Management: Interior’s Monitoring Has Fallen Short of Agency Requirements. GAO/RCED-92-51. February 24, 1992. its ability to protect rangelands from grazing damage and to restore damaged lands because of insufficient funding and staff.
Rangeland Management: BLM’s Hot Desert Grazing Program Merits Reconsideration. GAO/RCED-92-12. November 26, 1991.
ABSTRACT: The debate over the effects of domestic livestock grazing are particularly important in the nations’ so-called hot deserts—the Mojave, the Sonoran, and the Chihuahuan—because of the fragile ecosystems there and the length of time it takes for damaged areas to recover. GAO concludes that current livestock grazing activity on Bureau of Land Management (BLM) allotments in hot desert areas risks long-term environmental damage while not generating enough revenues to provide for adequate management. According to recent data, the economic benefits derived from livestock grazing on BLM lands in the hot desert areas are minimal. The primary economic benefits accrue to about 1,000 livestock operators who hold livestock grazing permit in these areas. Yet many of these operators derive little income from ranching the public lands, who instead place a premium on the traditional lifestyle they are able to maintain via the permits. Conversely, other public land users value the use of desert lands for environmental preservation and recreation. GAO found that BLM lacks the staff needed to collect and evaluate data measuring the impact of livestock grazing on many desert allotments. Without these data, BLM is in no position to assess livestock usage of desert allotments and change usage as needed.
Surface Mining: Management of the Abandoned Mine Land Fund. GAO/RCED-91-192. July 25, 1991.
BACKGROUND: Pursuant to a congressional request, GAO examined: (1) the amount of Abandoned Mine Land (AML) funds the Office of Surface Mining Reclamation and Enforcement (OSMRE) and the Soil Conservation Service (SCS) expended for administrative costs for fiscal years (FY) 1985 through 1990; and (2) whether OSMRE and SCS funded reclamation projects in accordance with the priorities set forth in the Surface Mining Control and Reclamation Act of 1977 (SMCRA). construction grants, a precise figure on the amount of AML funds actually spent on administrative expenses is not readily discernible; (3) SCS estimated that it spent $6.6 million to administer the Rural Abandoned Mine Land Program (RAMP) between FY 1985 and 1990 and RAMP projects funded in this time generally fell under the two highest priority categories of the six set forth in SMCRA; (4) OSMRE spent about $137.3 million administering the overall AML program between FY 1985 and 1990; (5) states generally funded reclamation projects in accordance with SMCRA priorities and each participating state has its own OSMRE-approved ranking system to help guide project selection; and (6) OSMRE annual oversight reports found few major project selection problems during FY 1985 through 1990.
Wildlife Management: Problems Being Experienced With Current Monitoring Approach. GAO/RCED-91-123. July 22, 1991.
BACKGROUND: Pursuant to a congressional request, GAO reviewed the Forest Service’s management indicator species approach to monitoring wildlife and their habitat in national forests, focusing on the cost-effectiveness and ultimate usefulness of this approach. FINDINGS: GAO found that: (1) although the management indicator approach is based on sound theory, several practical drawbacks exist which raise questions about whether data collected on selected species can provide the basis for drawing conclusions on overall habitat conditions; (2) the costs of monitoring indicator species populations were prohibitive, since the cost of monitoring increased as the population of the species being monitored decreased or as the size of the habitat increased; (3) even when planned data collection efforts were completed using the management indicator species approach to monitoring, the data had limited usefulness because they revealed population changes without conclusively relating observed changes to overall habitat conditions or Service management actions; (4) although Service headquarters officials acknowledge that problems exist in field implementation of the management indicator species approach, they believe that these difficulties stem more from the application of the management indicator species principle than from fundamental weaknesses with the concept itself; and (5) Service headquarters is revising its national direction on wildlife and wildlife habitat monitoring.
Rangeland Management: Comparison of Rangeland Condition Reports. GAO/RCED-91-191. July 18, 1991.
BACKGROUND: Pursuant to a congressional request, GAO followed up on its 1988 report on the Bureau of Land Management’s (BLM) and Forest Service’s rangeland management programs, comparing the conclusions and analyzing the findings of two studies conducted by BLM and the Natural Resources Defense Council (NRDC) on the condition of the public rangeland under BLM jurisdiction. FINDINGS: GAO found that: (1) although NRDC and BLM reports reached different conclusions on the overall condition of the public rangeland, they were not necessarily inconsistent with each other; (2) the different conclusions were attributable more to data interpretation and presentation than to differences in the data; (3) BLM based its conclusion that current range conditions are better than they have been in the past century on studies that lacked supporting documentation and used different methodologies; (4) had BLM calculated its percentages solely on the basis of the land for which it had condition information, as NRDC did, its percentage of rangeland in fair or poor condition would have increased to 61 percent, much closer to the NRDC percentage; and (5) NRDC concluded that the data presented in its report did not show any significant improvement in rangeland condition over the data in its 1985 rangeland status report, and BLM noted that no substantial change should be expected to occur within only a 4-year period.
Public Land Management: Observations on Management of Federal Wild Horse Program. GAO/T-RCED-91-71. June 20, 1991. and anticipated full statewide implementation in about 4 to 5 years; (2) published a rule in September 1990 making it difficult for one person to gain control over a large number of horses; and (3) took such actions to improve the prison halter training effort as establishing quality standards for the training being provided, implementing tighter controls over the age of horses receiving training, and limiting the amount of time horses could spend in training facilities.
Rangeland Management: Current Formula Keeps Grazing Fees Low. GAO/RCED-91-185BR. June 11, 1991.
BACKGROUND: Pursuant to a congressional request, GAO: (1) assessed the soundness of the formula for computing grazing fees on most federal lands; and (2) compared the formula results to those of alternative formulas using updated cost and price data. FINDINGS: GAO found that: (1) although the current formula kept grazing fees low, it failed to recover reasonable program costs, since it did not produce a fee that covered the government’s cost to manage the grazing program; (2) the current formula also failed to follow the rise in grazing land lease rates paid for private land and to provide a revenue base that could be used to better manage and improve federal land so that it would remain a productive public resource in the future; (3) alternative formulas produced higher fees than the current formula and tended to increase the fees faster over time; and (4) economists preferred a formula that would adjust a base value by a single index and make no additional adjustments for the rancher’s ability to pay.
Abandoned Mine Reclamation: Interior May Have Approved State Shifts to Noncoal Projects Prematurely. GAO/RCED-91-162. June 7, 1991.
BACKGROUND: Pursuant to a congressional request, GAO reported on the Department of the Interior’s Office of Surface Mining Reclamation and Enforcement’s (OSMRE) process for allowing states to spend federal surface coal mine reclamation funds to address noncoal reclamation problems, focusing on whether OSMRE ensured that states met the certification requirements. (SMCRA) priorities related to public health, safety, and general welfare, restoration of land and water resources and the environment, research and development, and public facilities and land; (3) to receive discretionary funds, states needed to show that they had reclamation needs as reflected in a national inventory of abandoned coal mine land problem areas; (4) coal-related reclamation projects competed with noncoal reclamation sites for funds that were limited to state share monies; (5) when approving a certification request, OSMRE did not independently verify whether a state had addressed all priority-3 through –6 coal projects, relying on the governor’s certification statement that all coal problems had been addressed; (6) the lack of OSMRE policy and guidance to address SMCRA certification requirements contributed to the confusion over certification; and (7) OSMRE did not effectively communicate that states would lose further access to discretionary funds once the certification had been approved.
Coal Mine Subsidence: Several States May Not Meet Federal Insurance Program Objectives. GAO/RCED-91-140. May 28, 1991.
BACKGROUND: Pursuant to a congressional request, GAO examined: (1) the Department of the Interior’s Office of Surface Mining Reclamation and Enforcement’s (OSMRE) efforts to implement the federally assisted coal mine subsidence insurance program; and (2) six states’ efforts to develop self-sustaining insurance programs.
FINDINGS: GAO found that: (1) after 5 years experience with the program, two of the six states that received grants may not be progressing toward self-sustainability; (2) state officials noted that their participation rates were too low to generate sufficient premium income to meet the insurance reserve requirement for anticipated claims; (3) state officials also noted that low participation rates greatly increased the risk that a major subsidence event would threaten solvency; (4) OSMRE lacked effective management of federal grants and did not provide the oversight necessary to ensure that program objectives were met; and (5) OSMRE cited the limited funds involved and the resources needed to actively participate in state-administered programs as the reason for its passive grants management.
Rangeland Management: Forest Service Not Performing Needed Monitoring of Grazing Allotments. GAO/RCED-91-148. May 16, 1991.
BACKGROUND: Pursuant to a congressional request, GAO reviewed the Forest Service efforts to implement recommendations to: (1) ensure that range managers identify all grazing allotments thought to be overstocked or in declining condition; and (2) concentrate monitoring and other range management activities on those lands. FINDINGS: GAO found that: (1) of the 9,217 grazing allotments in the Service’s 6 western regions, range managers identified 2,183 allotments as in declining condition or overstocked; (2) the Service made little progress in conducting the follow-up monitoring necessary to identify improper grazing practices and devise corrective action; (3) the Service attributed its limited monitoring to staff constraints and limited resources; (4) although the Service gave priority attention to monitoring allotments classified as declining or overstocked, five regional offices monitored only 13 percent of such allotments; and (5) the number of Service range managers decreased from over 1,000 to under 700 between fiscal years 1979 and 1990.
Public Land Management: Issues Related to the Reauthorization of the Bureau of Land Management. GAO/T-RCED-91-20. March 12, 1991.
BACKGROUND: GAO discussed the Bureau of Land Management’s (BLM) management the public lands and issues related to BLM reauthorization. GAO noted that although BLM continues to make only limited progress in accomplishing its land management responsibilities, it has taken such specific actions as: (1) establishing management plans for all BLM riparian and wetland acreage and estimating the additional funds and staff needed for implementation; (2) establishing national agreements with 12 private wildlife and conservation organizations to foster projects to improve wildlife and fish habitats; and (3) issuing a hardrock mining policy that required all miners disturbing more than 5 acres to post financial guarantees to ensure reclamation. GAO believes that provisions of the proposed reauthorization legislation would improve BLM management of public lands, but staffing and funding constraints could significantly impede its progress.
Public Land Management: Attention to Wildlife Is Limited. GAO/RCED-91-64. March 7, 1991. considered wildlife interests during federal land use planning processes; and (2) the impact of federal management practices on wildlife conditions.
FINDINGS: GAO found that: (1) no legislation existed that specified an appropriate level of consideration of wildlife interests in federal land management; (2) wildlife protection and enhancement activities received between 3 percent and 7 percent of available BLM and Service staffing and funding; (3) while BLM and the Service uniformly considered wildlife needs during land use planning, when conflicts occurred, the agencies frequently favored consumptive interests over wildlife needs; (4) BLM and the Service did not always implement actions to benefit wildlife that were included in land use plans; (5) data were not available to judge the overall effect of BLM and Service policies and practices on wildlife conditions; (6) the agencies’ land use priorities, budgets, and staffing met grazing, logging, and mining objectives first and provided for wildlife interests as circumstances permitted; and (7) BLM and the Service initiated efforts to provide more balanced consideration of wildlife needs in their management activities.
Oil and Gas, Minerals Resources
Sale of NPRs & Oil Shale Reserves. GAO/RCED-96-28R. October 17, 1995.
BACKGROUND: Pursuant to a congressional request, GAO reviewed proposed legislation regarding the sale of six Naval Petroleum and Oil Shale Reserves, focusing on whether the proposed sales method will provide an equal opportunity to all prospective buyers and yield maximum funds to the federal government. GAO noted that the proposed sales method: (1) should provide an equal opportunity to all prospective buyers; (2) stipulates the acceptance of the highest responsible bid that meets the minimum acceptable price; and (3) should yield a fair market value to the federal government.
Terminating Federal Helium Refining. GAO/RCED-95-252R. August 28, 1995.
BACKGROUND: Pursuant to a congressional request, GAO provided information on the possible consequences of proposed legislation to end the Bureau of Mines’ production and sale of refined helium. GAO noted that: (1) the Bureau estimates that production and sale of refined helium could cease within 6 months after legislation is passed and that other related actions could be completed within 2 years if no contingencies are encountered; (2) if the helium program is terminated, program costs would decrease to $20.6 million in the first year and to $3.5 million in the second year; (3) the Bureau estimates that all environmental requirements could be met within 2 years after passage of legislation; (4) the Bureau plans to use standard federal property disposal procedures to dispose of all property associated with helium refining, but private helium refiners have shown no interest in purchasing these assets; (5) about two-thirds of the helium program’s employees would be subject to a reduction in force if the program is discontinued, while the remaining one-third would be retained or retired; (6) the National Aeronautics and Space Administration (NASA) is the only federal user concerned about the availability and cost of refined helium to meet its unique and sporadic needs if the program is terminated; and (7) the Administration’s proposal to terminate the helium program differs from the House’s proposal and calls for allowing more time for termination, mainly to accommodate NASA needs, abolishing the Helium Fund and depositing sale proceeds into the U.S. Treasury, and capping remaining program spending at $5 million annually.
Trans-Alaska Pipeline: Actions to Improve Safety Are Under Way. GAO/RCED-95-162. August 1, 1995.
ABSTRACT: The Trans-Alaska Pipeline System, run by the Alyeska People Service Company, transports nearly 20 percent of the nation’s domestically produced oil and has operated for nearly 20 years without a major oil spill. However, throughout the pipeline’s years of construction and operation, problems with the condition of the pipeline, the quality assurance program of its operator, and the effectiveness of government monitoring have been reported. These problems have resulted in continued congressional oversight. A study commissioned by the Interior Department in August 1993 identified 22 categories of substantial—and potential threatening—deficiencies in Alyeska’s management and operation of the pipeline. Other audits have identified additional deficiencies. This report (1) assesses Alyeska’s progress in correcting these deficiencies; (2) determines whether the corrective measures planned for three areas—electrical systems, quality, and preventive maintenance—will address the deficiencies; (3) discusses whether regulators are improving regulatory oversight of the pipeline; and (4) identifies the root causes of the deficiencies.
Sale of NPR-1. GAO/RCED-95-255R. August 1, 1995.
BACKGROUND: Pursuant to a congressional request, GAO reviewed draft legislation proposing the sale of Naval Petroleum Reserve Number 1 (NPR-1), focusing on: (1) the proposed sales method; and (2) improvements to ensure that the government receives the best value from the sale. GAO noted that: (1) the proposed sales method appears to provide equal opportunity to all prospective buyers and yield fair market value for NPR-1; (2) the sales method stipulates that the government will accept the highest responsible offer that meets or exceeds the minimum acceptable price, which will be based on the net present value of NPR-1, and requires that NPR-1 ownership shares be finalized before the sale; and (3) under the proposed legislation, the Secretary of Energy may use independent experts to value NPR-1 and finalize ownership shares and an investment banker to administer the sale. GAO also noted that the draft legislation needs to: (1) provide for adequate notification and information dissemination to improve potential buyers’ participation; (2) resolve conflicting time requirements; and (3) provide for congressional notification of potential obstacles to the sale.
Naval Petroleum Reserve: Opportunities Exist to Enhance Its Value to the Taxpayer. GAO/T-RCED-95-136. March 22, 1995.
ABSTRACT: This testimony focuses on ways to enhance the profitability of the Naval Petroleum and Oil Shale Reserves. Regardless of what alternative is finally adopted for the Naval Petroleum and Oil Shale Reserves, GAO believes that the goal should be to protect the interests of taxpayers by getting a reasonable return on these assets. If a decision is made to form a government corporation, care should be taken to establish a financially sound corporate entity with as few government restrictions on earning profits as is possible. If a decision is made to sell the reserves, the government must ensure that it receives fair market value for them. Steps can be taken now, such as giving the Energy Department more flexibility to set the rate of production so as to maximize profits and marketing Elk Hills oil more aggressively, that would be compatible with any more fundamental management changes.
Naval Petroleum Reserves. GAO/RCED-95-141R. March 17, 1995.
BACKGROUND: GAO provided information on the Naval Petroleum and Oil Shale Reserves. GAO noted that: (1) although the mission of the reserves has changed from emphasizing energy security to providing revenue to the Treasury, few measures have been taken to maximize profits; (2) profits could be increased at the Elk Hills, California oil field by allowing the Department of Energy to set the rate of production, finalizing equity shares, sharing the risks of drilling wells to encourage new drilling ventures, establishing a more reliable price index, marketing Elk Hills oil more aggressively, lifting the ban on exporting Alaskan oil, and eliminating certain requirements and preferences; (3) establishing the Elk Hills field as a government corporation could increase profits greatly; (4) selling the reserves could result in a great return to the Treasury if the government set a sufficiently high minimum price and established a competitive bidding process; and (5) it is unclear what benefits could be realized by operating a government corporation to manage Elk Hills in fiscal year (FY) 1996 and sell it in FY 1997, as the Administration has proposed.
Naval Petroleum Reserve: Opportunities Exist to Enhance Its Profitability. GAO/RCED-95-65. January 12, 1995. that expires in July 1995. Chevron believes that it can run the reserve more profitably than the government can, and in May 1995 it proposed taking over reserve operations. Later, the Energy Department (DOE) suspended negotiations with Chevron on this proposal and recently began to solicit interest from other parties to operate the reserve. Like Chevron, DOE wants to lower the costs of operating the reserve. This report explores actions that DOE and Congress can now take to improve the reserve’s profitability.
Mineral Resources: BLM Needs to Improve Controls Over Oil and Gas Lease Acreage Limitation. GAO/RCED-95-56. December 29, 1994.
ABSTRACT: The Bureau of Land Management’s (BLM) internal controls cannot guarantee that federal oil and gas leases are not issued to parties who have exceeded the Mineral Leasing Act’s acreage limitation. BLM allows oil and gas lessees to self-certify that they have not exceeded the acreage limitation, and although the agency has procedures for auditing compliance with the requirement, BLM has not done a compliance audit since 1993 because it considers it a low priority. Even when audits were done, BLM’s strategy for selecting lessees was ineffective because it did not target parties for approaching or appearing to exceed the acreage limitation. Finally, BLM has allowed companies that share the same officers, directors, or major stockholders to be considered separate leaseholders under the acreage limitation. GAO discovered one lessee who had exceeded the limitation by more than 190,000 acres in Wyoming and by nearly 27,000 acres in Nevada. Similarly, by presuming that companies are affiliated when they share the same officers, directors, or major stockholders, GAO identified five firms whose aggregate acreage exceeded the limit by more than 800,000 acres in Wyoming, 435,000 acres in New Mexico, and 86,000 acres in Nevada.
Mineral Resources: Federal Coal-Leasing Program Needs Strengthening. GAO/RCED-94-10. September 16, 1994. environmental impacts of additional coal leasing, and (3) consider projected demand in coal-leasing decisions.
Naval Petroleum Reserve: Limited Opportunities Exist to Increase Revenues From Oil Sales in California. GAO/RCED-94-126. May 24, 1994.
ABSTRACT: The government-owned and operated Naval Petroleum Reserve (NPR) in Elk Hills, California—the seventh largest oil field in the lower 48 states—generated oil sales revenues of $327 million in 1992. The Energy Department (DOE) sells most of this oil to California refiners through competitive bids. The prices received by the government for this oil have been lower than prices for crude oil in other parts of the country. GAO concludes that it will be difficult for DOE to boost revenues from NPR oil sales by selling oil to Gulf Coast or midcontinent oil refineries because this oil is of lower quality than other available crudes and shipping costs are high. This report explores other ways that DOE may be able to increase revenues. For example, DOE bills its customers more often than private oil producers do, resulting in buyers making lower bids to compensate for the higher administrative costs. DOE also does not market its oil as aggressively as private producers do. In testimony before Congress, GAO summarized this report and also discussed (1) the relative priority that should be given to several options for improving the readiness and expansion of the Strategic Petroleum Reserve and (2) the evolving mission of the International Energy Agency; see: Energy Policy: Energy Policy and Conservation Act Reauthorization, by Victor S. Rezendes, Director of Energy and Science Issues, before the Subcommittee on Energy and Power, House Committee on Energy and Commerce. GAO/T-RCED-94-214, May 25, 1994 (15 pages).
Offshore Oil and Gas Resources: Interior Can Improve Its Management of Lease Abandonment. GAO/RCED-94-82. May 11, 1994. costs. GAO focuses on MMS’ actions in the Gulf of Mexico because almost all Outer Continental Shelf oil and gas structures are located there.
Mineral Resources: H.R. 3967—A Bill to Change How Federal Needs for Refined Helium Are Met. GAO/T-RCED-94-183. April 19, 1994.
ABSTRACT: H.R. 3967 would change how the federal government’s helium needs are met by shifting helium refinement from the Interior Department’s Bureau of Mines to the private industry. In addition, the bill would repay the helium program debt. Whether the federal budget will be helped or harmed by this legislation will depend on whether private industry can sell refined helium to the government at a lower price. Revenues from the disposal of the existing helium inventory could also affect the federal budget. The choice between Interior and the private industry to meet federal helium needs is ultimately a public policy decision. GAO believes that H.R. 3967 provides a viable alternative for meeting current and foreseeable federal needs for helium with the potential for budgetary savings and repayment of the helium program debt.
Mineral Resources: Hardrock Mining Reclamation. GAO/T-RCED-93-67. August 5, 1993.
ABSTRACT: More than five years ago, GAO reported that it would cost nearly $300 million to reclaim abandoned, suspended, or unauthorized hardrock mining operations on federal land in 11 western states; cleanup estimates since then have ranged as high as $71.5 billion. No federal program or funding sources now exists to ensure that past hardrock reclamation problems on government and private land are remedied. Accordingly, any public policy decision on how best to address these reclamation needs will have to carefully consider the workability of such a program and the source of funding.
Arctic National Wildlife Refuge: An Assessment of Interior’s Estimate of an Economically Viable Oil Field. GAO/RCED-93-130. July 9, 1993. quantities of oil. This conclusion, however, does not take into account uncertainties in a field’s development potential that could arise from variations in future oil prices or costs. Given the uncertainties of future economic variables, such as oil prices and discount rates, GAO believes that Interior should have developed ranges of minimum economic field size estimates for each prospect and then run its model using the derived field sizes. This would have yielded a greater range of values to account for the uncertainty associated with estimating what constitutes an economically viable oil field in the refuge.
Mineral Resources: Meeting Federal Needs for Helium. GAO/T-RCED-93-44. May 20, 1993.
ABSTRACT: The federal government uses helium in the space program, weapons systems, and superconductivity research. The Helium Act of 1960 authorizes the Interior Department to conserve, buy, store, produce, and sell helium to meet federal needs. The act also requires federal agencies to buy most of their helium from the Bureau of Mines. GAO testified that the Bureau of Mines has acted to meet the act’s objectives. In addition, the helium program debt, which overshadows meaningful debate on the merits of the program, could be canceled without adversely affecting the federal budget. Finally, a reassessment of the objectives of the helium act is in order.
Trans-Alaska Pipeline: Projections of Long-Term Viability Are Uncertain. GAO/RCED-93-69. April 8, 1993. at the North Slope. GAO also looked at the reasonableness of DOE’s belief that it will take 10 to 12 years to develop new oil fields in the refuge.
Mineral Royalties: Royalties in the Western States and in Major Mineral-Producing Countries. GAO/RCED-93-109. March 29, 1993.
ABSTRACT: The Mining Law of 1872 governs mining for most minerals on federal lands, the vast majority of which are found in the western states and Alaska. This legislation allows individuals to stake claims on federal lands and mine ore, including copper, gold, and silver, without compensating the government. In contrast, the government has been receiving royalties for coal and natural gas on federal lands since the 1920s. Congress has considered but has yet to amend the law to ensure that the public receives a fair return for minerals extracted. This report looks at how 12 western states—Alaska, Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming—share in the proceeds from minerals mined on state lands and on federal and private lands within each state. GAO also discusses how Australia, Canada, and South Africa—three of the largest mineral-producing countries—share in the proceeds from minerals mined in those countries.
Mineral Resources: Meeting Federal Needs for Helium. GAO/RCED-93-1. October 30, 1992.
ABSTRACT: Federal agencies use helium in everything from space programs to superconductivity research. The Helium Act of 1960, which seeks to conserve and provide a steady supply of this inert gas for essential government activities, requires federal agencies to buy most of their helium from the Department of the Interior’s Bureau of Mines. The act further provides that Interior price federal helium so that revenues from sales cover all program costs. This report discusses (1) actions that the Bureau has taken to meet the objectives of the 1960 act; (2) issues that should be considered when Congress decides how to meet current and foreseeable federal needs for helium, including whether the program debt in the Helium Fund should be cancelled or repaid; and (3) three alternatives for meeting federal needs for helium—continue the Bureau’s existing program, require that all federal needs be met by the private sector, or allow federal agencies to choose to buy helium from either the Bureau or private industry.
Royalty Compliance: Improvements Made in Interior’s Audit Strategy, But More Are Needed. GAO/RCED-93-3. October 29, 1992.
ABSTRACT: During the past several years, the Department of the Interior has been collecting about $4 billion in royalties each year from oil and gas companies that hold mineral leases on federal or Indian lands. Although the Minerals Management Service (MMS) has substantially improved its strategy for auditing royalty payers, these audits still do not provide reasonable assurances that such royalty payments comply with applicable laws, rules, and regulations. The amount of royalties actually audited or verified is very small, increasing the likelihood that noncompliance will go undetected. In addition, the judgmental samples are not representative of all payers and leases; consequently, MMS cannot determine with any degree of confidence such things as the level of compliance by payers or the magnitude of underpayment—that is, the royalties at risk. MMS can, however, require payers to do the additional work needed to correct the system problems found by audits and to compute any additional royalties due. An MMS task force issued a report in June 1991 recommending major changes to improve MMS’ strategy for auditing royalty payers, including the use of statistical sampling, a measure GAO supports.
Mineral Resources: Value of Hardrock Minerals Extracted From and Remaining on Federal Lands. GAO/RCED-92-192. August 24, 1992.
ABSTRACT: GAO surveyed mineral operators on the value of eight hardrock minerals—barite, copper, gold, lead, limestone, molybdenum, silver, and zinc—extracted from public lands in 12 western states. According to the questionnaire responses, the total value of these eight minerals extracted during 1990 was at least $1.2 billion. Almost $1 billion of this came from one state—Nevada. The total value of the remaining mineral reserves on federal lands at the end of 1990 was estimated at almost $65 billion.
Mineral Resources: Proposed Revision to Coal Regulations. GAO/RCED-92-189. August 4, 1992. would redefine commercial quantities, cutting the required level of coal production from one percent of recoverable reserves to 0.3 percent. This change would significantly reduce the minimum production level now required to retain a federal coal lease. This report examines BLM’s justification for the proposed change.
Location Dates for Mining Claims. GAO/RCED-92-199R. June 16, 1992.
BACKGROUND: Pursuant to a congressional request, GAO commented on whether claims for lands discussed in its report on the mining law’s patent provision, were located before the land escalated in value and the dates the claims were located. GAO noted that: (1) the claims for the 20 patent and 12 patent application sites were located from 1893 to 1986; (2) it identified the dates, but did not independently verify the dates; and (3) the value of the land at the time it was claimed was not an issue raised in its report.
Trans-Alaska Pipeline: Ensuring the Pipeline’s Security. GAO/RCED-92-58BR. November 27, 1991.
ABSTRACT: The Trans-Alaska Pipeline System is responsible for transporting nearly a quarter of the nation’s domestically produced crude oil. This report reviews the security of the pipeline. It discusses (1) what federal and state agencies have done to assess the vulnerability of the pipeline to terrorists and (2) what these agencies and the Alyeska Pipeline Service Company have done to protect the pipeline.
Mineral Resources: Federal Helium Purity Should Be Maintained. GAO/RCED-92-44. November 8, 1991. otherwise be degraded. Because larger volumes of the mixture of natural gas and helium must then be processed to extract and refine the less pure helium, the government could incur additional losses as high as $23.3 million in 1991 dollars through 2050.
Mineral Resources: Interior’s Use of Oil and Gas Development Contracts. GAO/RCED-91-1. September 17, 1991.
ABSTRACT: To prevent the concentration of control over federal oil and gas resources in a few companies or individuals, Congress has limited number of acres of oil and gas leases that one party may control in a single state. An exception to this limitation involves lease acreage within the boundaries of development contracts. These contracts permit oil and gas lease operators and pipeline companies to contract with enough lessees to economically justify large-scale drilling operations for the production and transportation of oil and gas, subject to approval by the Secretary of the Interior, who must find that such contracts are in the public interest. Since 1986 Interior has entered into or approved 10 contracts with 12 lease operators for exploration of largely unleased federal lands—ranging from about 180,000 to 3.5 million acres in four western states—and has designated them as developmental contracts. GAO believes that the 10 contracts do not satisfy the legal requirements for development contracts because they are for oil and gas exploration on largely unleased federal lands, rather than for developing existing leases. By designating the 10 contracts as development contracts, Interior has enabled 9 of the 12 contract parties to accumulate lease acreage that vastly exceeds the statutory acreage limitation. All nine of the contract parties were major or large independent oil companies. As a result, other parties who wish to participate in developing federal oil and gas resources within the four states may be adversely affected because the parties to Interior’s contracts have been able to compete for and obtain lease acreage beyond the statutory acreage limitation. Although Interior believes that the Secretary has the discretion under law to use development contracts in the current manner, in April 1989 it ceased issuing these contracts pending completion of GAO’s review. Congress needs to resolve the matter by amending mineral leasing laws to expressly permit or prohibit Interior to enter into or approve development contracts for oil and gas on largely unleased federal lands or to increase or remove the acreage limitation.
Trans-Alaska Pipeline: Regulators Have Not Ensured That Government Requirements Are Being Met. GAO/RCED-91-89. July 19, 1991.
BACKGROUND: Pursuant to a congressional request, GAO examined the adequacy of regulatory oversight of the Trans-Alaska Pipeline System (TAPS), focusing on TAPS: (1) operational safety; (2) oil spill response capabilities; and (3) ability to protect the environment.
FINDINGS: GAO found that: (1) several federal and state agencies had TAPS monitoring, oversight, and enforcement responsibilities; (2) regulators essentially accepted the pipeline operation contractor’s reports regarding TAPS conditions and did not independently evaluate corrosion prevention and detection systems; (3) although aware of deficiencies in the corrosion prevention and detection systems, regulators did not direct the contractor to take action until after the contractor detected significant pipeline corrosion in 1989; (4) regulators conducted little oversight of terminal operations; (5) regulatory review of the oil-spill response plan was cursory until after the Exxon Valdez oil spill, after which federal and state regulators reevaluated oil-spill risks and response capabilities; (6) regulators do not plan to require the contractor to conduct a drill to fully test its response capabilities; (7) there was no long-term monitoring program to assess TAPS overall environmental impact, making it difficult to assess oil-spill impacts or to identify the most appropriate containment, cleanup, and disposal technologies; (8) regulators did not have adequate systems to carry out their oversight responsibilities, did not dedicate sufficient staff for monitoring pipeline activities, and did not coordinate oversight activities to ensure comprehensive monitoring of all pipeline activities; and (9) several regulators assigned staff to a joint oversight office composed of federal and state agencies with statutory authority over TAPS.
Mineral Resources: Increased Attention Being Given to Cyanide Operations. GAO/RCED-91-145. June 20, 1991. operations on federal land in Nevada, California, and Arizona, with 113 on lands managed by the Bureau of Land Management (BLM) and 6 on lands managed by the Forest Service; (2) cyanide operators reported over 9,000 cyanide-related wildlife deaths, mostly involving migratory waterfowl, between 1984 and 1990; (3) cyanide operators typically used hazing techniques to scare wildlife away from operations, but they were not as effective over the long term as covering or fencing cyanide ponds; (4) examination of 31 inadvertent cyanide discharges from operations indicated minimal environmental damage; (5) BLM, the Forest Service, state agencies, and other federal agencies had adequate authority to regulate cyanide operations and enforce laws to protect wildlife and the environment from their potential hazards, but there was little coordination among the agencies, and the agencies had varying reporting requirements regarding cyanide operations, discharges, and wildlife deaths; (6) in August 1990, BLM issued a cyanide management policy, and Nevada recently enacted legislation requiring operators to obtain permits for cyanide ponds and report wildlife deaths, but Arizona, California, and the Forest Service lacked overall cyanide management policy; and (7) BLM required quarterly inspection of cyanide operations, but the states and the Forest Service did not have minimum inspection requirements.
Mineral Revenues: Interior Used Reasonable Approach to Assess Effect of 1988 Regulations. GAO/RCED-91-153. May 30, 1991. tribes expressed concern that the reports did not analyze data by individual state and tribe.
Tax Incentives and Enhanced Oil Recovery Techniques. GAO/T-GGD-91-36. May 21, 1991.
BACKGROUND: GAO discussed the use of tax incentives for increasing domestic oil production and exploration, focusing on enhanced oil recovery (EOR) techniques. GAO noted that: (1) Congress only sporadically reviewed tax expenditures, rarely compared their effectiveness to alternative mechanisms for achieving similar goals, and did not subject them to overall limits to control their total budgetary impact; (2) tax incentives for domestic oil production, in the form of building up the strategic petroleum reserve or such trade restrictions as tariffs or quotas, would increase production; (3) government subsidies for the use of EOR techniques would encourage firms to undertake risky petroleum exploration activities that could result in financial loss; (4) the tax expenditure approach favored projects that were close to being viable without the tax break and generated fewer inefficient projects than direct subsidies; (5) tax expenditures aimed at certain activities, such as EOR methods, offered the potential for giving a better return on the tax dollar; (6) it would be more cost-effective to target tax incentives at activities that did not already receive substantial tax breaks than at types of investments that already were eligible for favorable treatment; and (7) environmental effects must be considered in evaluating costs and benefits of the increased use of EOR.
Mineral Revenues: Potential Cost to Repurchase Offshore Oil and Gas Leases. GAO/RCED-91-93. February 22, 1991.
BACKGROUND: Pursuant to a congressional request, GAO reviewed the range of potential costs to the federal government for the cancellation of 123 oil and gas leases offshore Alaska, Florida, and North Carolina. FINDINGS: GAO found that the: (1) bonuses, rents, and associated interest ranged from $889.4 million to $970.7 million for the 123 leases, as of December 31, 1990; (2) federal government was only obligated to pay the lessee the fair value of the lease or sunk costs plus interest which accrues from lease suspension to lease cancellation; (3) lessees spent $1.5 million for the Alaska leases, up to $21 million for the Florida leases, and $20 million for the North Carolina leases; and (4) federal government, as of December 31, 1990, would be required to reimburse the lessees for about $1 billion under the sunk cost approach if it cancelled the 123 leases.
Water Resources
Animas-La Plata Project: Status and Legislative Framework. GAO/RCED-96-1. November 17, 1995.
ABSTRACT: The Interior Department’s Animas-La Plata Project was designed to store water and divert it to arid regions in southwestern Colorado and northwestern New Mexico, mainly by channelling water from the Animas River to the La Plata River basin. Before beginning construction of the project, the Interior Department is required to determine whether the project would jeopardize the continued existence of any endangered species. This report provides information on the history and status of the Animas-La Plata project, the legislative framework provided for the project by the 1988 Colorado Ute Indian Water Rights Settlement Act and the Endangered Species Act, the consultation between the Bureau of Reclamation and the Fish and Wildlife Service under the Endangered Species Act, and the project’s relationship to another congressionally authorized project—the Navajo Indian Irrigation Project.
Midwest Flood: Information on the Performance, Effects, and Control of Levees. GAO/RCED-95-125. August 7, 1995.
ABSTRACT: The intense rainfall that deluged the upper Mississippi River basin in the spring and summer of 1993 caused the largest flood ever measured at St. Lewis. This unprecedented event in nine midwestern states saw the highest flood crests ever recorded at 95 measuring stations on the region’s rivers. The catastrophic flooding caused 95 deaths and extensive property damage and forced the evacuation of tens of thousands of people. The President declared 505 counties to be federal disaster areas, and estimates of the damage have ranged as high as $16 billion. This report examines the operation of the levees, which are earthen or masonry structures, including floodwalls, that are typically built along rivers to keep floodwaters from overflowing adjacent floodplains. GAO reviews the extent to which (1) the U.S. Army Corps of Engineers’ flood control levees prevented flooding and reduced damage during the event; (2) the federal levees increased the height of the flooding and contributed to the damage; and (3) federal, state, and local governments exercise control over the design, construction, placement, and maintenance of nonfederal levees.
Central Arizona Project: Costs and Benefits of Acquiring the Harquahala Water Entitlement. GAO/RCED-95-102. June 5, 1995.
ABSTRACT: The Fort McDowell Indian Community Water Rights Settlement Act of 1990 requires the Interior Department to acquire nearly 14,000 acre-feet of water to complete the settlement of the Fort McDowell Indian Community’s water rights claim against Arizona parties and the federal government. The Interior Department acquired the water from the Harquahala Valley Irrigation District, one of 10 irrigation districts that contracted for non-Indian agricultural water from Interior’s Central Arizona Project. This report provides information on how Harquahala became a source of water for the settlement, the federal government’s costs to acquire the water, and the benefits accrued to the parties involved in the acquisition. The report also discusses the status of Agriculture Department loans made to Harquahala landowners.
Water Quality: Information on Salinity Control Projects in the Colorado River Basin. GAO/T-RCED-95-185. May 11, 1995.
ABSTRACT: Through fiscal year 1994, the Interior and Agriculture Departments (USDA) spent $362 million on salinity control projects in six states. Interior’s Bureau of Reclamation and USDA estimate that they will spend about $428 million more for additional projects, while Interior’s Bureau of Land Management expects to spend $800,000 in fiscal year 1995. In selecting salinity control methods, the agencies consider several factors, key among them the methods’ effectiveness and cost. According to Interior’s measurements of the salinity control program’s effectiveness, salinity levels in the Colorado River since 1974 have been below limits set by the Clean Water Act. With completion of the projects under construction or planned, salinity levels should stay within the established limits beyond 2010. GAO summarized this report in testimony before Congress; see: Water Quality: Information on Salinity Control Projects in the Colorado River Basin, by James Duffus III, Director of Natural Resources Management Issues, before the Subcommittee on Water and Power Resources, House Committee on Resources. GAO/T-RCED-95-185, May 11, 1995 (8 pages).
Water Quality: Information on Salinity Control Projects in the Colorado River Basin. GAO/RCED-95-58. March 29, 1995.
ABSTRACT: Through fiscal year 1994, the Interior and Agriculture Departments (USDA) spent $362 million on salinity control projects in six states. Interior’s Bureau of Reclamation and USDA estimate that they will spend about $428 million more for additional projects, while Interior’s Bureau of Land Management expects to spend $800,000 in fiscal year 1995. In selecting salinity control methods, the agencies consider several factors, key among them the methods’ effectiveness and cost. According to Interior’s measurements of the salinity control program’s effectiveness, salinity levels in the Colorado River since 1974 have been below limits set by the Clean Water Act. With completion of the projects under construction or planned, salinity levels should stay within the established limits beyond 2010. GAO summarized this report in testimony before Congress; see: Water Quality: Information on Salinity Control Projects in the Colorado River Basin, by James Duffus III, Director of Natural Resources Management Issues, before the Subcommittee on Water and Power Resources, House Committee on Resources. GAO/T-RCED-95-185, May 11, 1995 (8 pages).
Water Resources: Flooding on Easement Lands Within the Red Rock, Iowa, Reservoir. GAO/RCED-95-4. December 23, 1994.
ABSTRACT: Before the Red Rock Dam and Lake Project near Des Moines, Iowa, began operating in 1969, the U.S. Army Corps of Engineers purchased easements from landowners on 29,000 acres within the reservoir’s boundary. The easements give the Corps the right to occasionally flood the easement lands when the dam is forced to hold back water upstream in the reservoir to prevent flooding downstream. Because of heavier-than-expected rainfall during the 1970s and 1980s, the easement lands were flooded more often than the Corps had estimated. In 1985, Congress authorized a buyout program for easement landowners who were willing to sell their land to the Corps; however, few owners have been interested in selling, and their complaints about flooding have persisted. This report (1) determines whether the property within the Red Rock reservoir’s boundary has been inundated beyond the levels permitted by the easements; (2) recommends whether compensation for the easements should be renegotiated with landowners; and (3) reports on actions that the Corps has taken to implement the buyout program.
Water Markets: Increasing Federal Revenues Through Water Transfers. GAO/RCED-94-164. September 21, 1994.
ABSTRACT: Most water in the arid western United States delivered through federal projects is used for agriculture, but the demand for water for urban, recreational, and environmental uses is growing. The federal government plays a role in water management in the arid West mainly through water resource projects. Water transfer, in which rights to use water are bought and sold, is seen by many resource economists as a way to reallocate scarce water to new users by allowing those who place the highest economic value on it to purchase it. Those who want more water—such as municipalities—often are willing to pay considerably higher prices for it than the current users, and irrigators who receive subsidized water from federal projects may want to transfer this water to a municipality at a profit. At the same time, these transactions may allow the Bureau of Reclamation to share in the profits. This report examines (1) whether water transfers will boost revenues, (2) how the Bureau could increase its revenues from transferred water, and (3) what issues the Bureau should consider in setting prices for transferred water.
Water and Waste Disposal. GAO/RCED-94-229R. June 6, 1994.
BACKGROUND: Pursuant to a congressional request, GAO reviewed the Department of Agriculture’s (USDA) Water and Waste Disposal Grant Program, focusing on: (1) how different areas of the country benefit from the program; (2) the program’s matching funding requirements; and (3) how the program has been implemented for Mexican border states and rural Alaskan villages. GAO noted that: (1) most states benefit from the program, but some states use the program more actively than others; (2) Rural Development Administration (RDA) grants generally may not exceed 75 percent of a project’s costs, and rural communities must fund the remaining costs; (3) RDA may fund up to 100 percent of project costs in communities whose residents face significant health risks; (4) RDA has obligated about $25 million of the $50 million in grant funds that Congress specifically targeted for the border states for fiscal years (FY) 1993 and 1994; and (5) RDA anticipates that it will soon begin obligating portions of the FY 1994 grant funds targeted for rural Alaskan villages.
Water Transfers: More Efficient Water Use Possible, If Problems Are Addressed. GAO/RCED-94-35. May 23, 1994.
ABSTRACT: Debates over how water from western federal water projects should be used have become more heated in recent years. Farmers use more than 80 percent of the western water withdrawn for use. Environmental problems, such as selenium contamination and salinity, have been linked to agricultural irrigation. Moreover, as urban populations, tourism, and environmental awareness continue to grow, the demand for water increases for cities, recreation, and fish and wildlife habitats. Building dams to meet new demand is often not an option because of their high price tags and harmful environmental effects. Advocated by resource economists and others, water markets, in which rights to use water are bought and sold, would allocate water to its highest economic use by allowing those who place the highest economic value on it to buy it. This report examines (1) the costs and benefits of water transfers; (2) how water markets might be structured to address the impacts on parties outside of transfers; (3) the legal, institutional, and other issues that would need to be addressed to implement a federal water market; and (4) how transfers of water from federal projects could be coordinated with state law.
Water Subsidies: Impact of Higher Irrigation Rates on Central Valley Project Farmers. GAO/RCED-94-8. April 19, 1994.
ABSTRACT: Farmers have received federally subsidized water from the Interior Department’s Central Valley Project for up to 40 years under fixed-rate water service contracts. The fixed rates, however, no longer function as intended; they do not cover Interior’s operating costs and have not been enough to repay virtually any of the $1 billion in construction costs owed. Moreover, environmental and water use problems have been linked to the irrigation carried out under these contracts. Studies by agricultural economists suggest that higher water prices would increase irrigation efficiency and conservation, thereby reducing environmental degradation caused by irrigation and freeing up water now used for irrigation for other uses. This report (1) estimates the impact on farm profits of the higher irrigation rates mandated under 1992 legislation and of further rate increases under various scenarios, (2) estimates the financial benefits to the federal government of increasing the irrigation rates, and (3) determines how farmers can mitigate the impact of higher rates.
Central Utah Project Cost Allocations. GAO/RCED-94-65R. January 25, 1994.
BACKGROUND: Pursuant to a legislative requirement, GAO reviewed the development of cost accounting standards for the Department of the Interior to follow in allocating costs for the Central Utah Project (CUP). GAO found that: (1) the cost accounting standards developed by the Cost Accounting Standards Board provide a sound basis for allocating CUP costs and additional standards are not needed; (2) its audit of the CUP cost allocation will determine whether Interior’s cost allocation methodology is based on the Board’s standards and whether Interior properly applies the cost allocation methodology; and (3) the Bureau of Reclamation’s experience with the Central Valley Project’s cost allocation should be helpful to Interior in allocating CUP costs.
Bureau of Reclamation: Information on the Federal Financial Commitment and Repayment Status of the Central Arizona Project. GAO/T-RCED-94-92. December 10, 1993.
ABSTRACT: It is estimated that construction of the Central Arizona Project—a massive water project designed to pump water from the Colorado River as far south as Tucson—will be completed in 1999 at a cost of $4.7 billion, and the federal share could climb from $1.7 billion to upwards of $2.8 billion. The project is expected to provide Arizona residents with flood control, fish and wildlife enhancement, recreation, commercial power, groundwater conservation, and drinking water. This testimony discusses (1) the total financial commitment of the federal government to build the system and (2) the Central Arizona Water Conservation District’s ability to fulfill its obligation to repay allocated project costs.
Water Resources: Corps’ Management of Reservoirs in the Missouri River Basin. GAO/T-RCED-94-43. October 11, 1993.
ABSTRACT: This testimony focuses on the U.S. Army Corps of Engineers’ management of the Missouri River reservoir system under drought conditions during 1989-90. GAO concludes that the Corps acted consistently with its drought contingency plan in releasing water from the reservoir system during the three-year period and that all of the purposes served by the reservoirs, except flood control, were harmed. The plan does not reflect current economic conditions in the Missouri River Basin. Contrary to the Corps’ beliefs, federal statutes do not require the Corps to give recreation a lower priority than other project purposes—flood control, navigation, irrigation, and hydroelectric power—in deciding on water releases. Congress should consider legislation that would require the Corps to set priorities for operating its reservoir projects on the basis of the economic, environmental, social, and other benefits of all authorized purposes.
Water Resources: Factors That Lead to Successful Cost Sharing in Corps Projects. GAO/RCED-93-114. August 12, 1993.
ABSTRACT: The U.S. Army Corps of Engineers is required to develop a cost-sharing partnership with local sponsors of water projects that provide flood control, water supply, hydroelectric power, and recreation. The sponsors are generally local and state governments or other government groups, such as flood control districts or port authorities. GAO surveyed sponsors and found that the following three factors contributed most significantly to a successful relationship: (1) good communications between the Corps and the sponsor, (2) the sponsor’s significant involvement in decisions and activities, and (3) the Corps’ responses to the sponsor’s concerns about cost-sharing agreements. Sponsors were concerned about their inability to pay their share of study or project costs. The inability to pay generally related to flood control/damage projects in the Dallas and Chicago regions. The sponsors’ other main concern involved changes in the cost-sharing agreements at different Corps review levels.
Clean Water Act: Private Property Takings Claims as a Result of the Section 404 Program. GAO/RCED-93-176FS. August 11, 1993.
ABSTRACT: This fact sheet identifies private property takings claims that have been filed with the U.S. Court of Federal Claims as a result of regulatory actions taken under the Clean Water Act. GAO also provides information on the actual and potential liability of the U.S. government—including the amounts of the claims, interest, and attorneys’ fees and other litigation costs—and on federal agencies’ costs in litigating these claims.
Water Resources: Federal Efforts to Monitor and Coordinate Responses to Drought. GAO/RCED-93-117. June 8, 1993.
ABSTRACT: Collecting and reporting data on drought conditions in the United States is a collaborative, multilevel effort led by the federal government. State and local governments make important contributions of work and funding to this effort. Federal, state, and other users are generally satisfied with the data on drought that are collected and distributed by federal agencies. No permanent federal organization is responsible for monitoring drought conditions and planning the government’s response. Instead, individual agencies carry out these activities and arrange to cooperate with one another. When drought has been severe or has had widespread geographic impact, temporary interagency committees have been set up to coordinate the response. Because of the increasingly severe effects that periodic droughts have had on the economy, however, temporary committees may no longer be able to handle the long-term planning needed for such droughts, promptly resolve policy differences among federal agencies, or coordinate the federal response to drought.
Water Resources: Highfield Water Company Should Not Receive Compensation From the U.S. Army. GAO/RCED-93-49. May 10, 1993.
ABSTRACT: The Highfield Water Company has claimed that it should receive between $17.7 million and $52 million from the U.S. Army as compensation for lost property and damages. Highfield argues that Fort Ritchie, located in Maryland, excessively pumped the aquifer during periods of drought between 1974 and 1978, thereby depriving the company of water it needed to meet its customers’ needs. As a result, the Maryland Public Service Commission revoked the company’s right to exercise its franchise to sell water to its customers. Highfield is appealing for legislative relief, asserting that it has never received a fair hearing on the merits of its case since court actions were dismissed on technical grounds. After reviewing the case, GAO concludes that Highfield was not damaged by the Fort’s reasonable use of the groundwater and that Highfield neither owned nor had superior rights to the water. As a result, GAO does not believe that Highfield is entitled to any compensation from the Army.
Water Resources: The Corps of Engineers’ Dredging Program for Small Business Firms. GAO/RCED-92-239BR. August 3, 1992.
ABSTRACT: This briefing report looks at whether the U.S. Army Corps of Engineers program to set aside or restrict part of its dredging contracts for small businesses significantly boosts federal costs because there is less competition for restricted-bid contracts. GAO evaluated existing studies on program costs and competition (measured by the number of bids per contract) done on behalf of large and small dredging firms. GAO also did a separate analysis of dredging contracts the Corps awarded during a recent 31-month period.
Water Resources: Future Needs for Confining Contaminated Sediment in the Great Lakes Region. GAO/RCED-92-89. July 17, 1992.
ABSTRACT: The U.S. Army Corps of Engineers has built 26 confined disposal facilities since 1974 to hold bottom sediment dredged from harbors, channels, and other waterways in the Great Lakes area. This mud often contains contaminants, such as chemicals from industry or agricultural runoff, that require special handling. Six of the facilities are already filled to capacity, and 18 others are expected to be filled by 2006. Twelve more facilities are planned, and more sites will be needed in the foreseeable future. The Corps is now deciding whether it or state and local governments should pay the construction costs. Construction of more facilities is at a virtual standstill. Because of concerns from communities and environmental groups, finding suitable disposal sites for contaminated dredged material has been difficult and time-consuming. As a result, the Corps has deferred some dredging and commercial and recreational navigation in some areas has been harmed.
Bureau of Reclamation: Central Valley Project Cost Allocation Overdue and New Method Needed. GAO/RCED-92-74. March 31, 1992.
ABSTRACT: This report examines how the Bureau of Reclamation allocates construction costs for the Central Valley Project. Located in California’s Central Valley Basin, the project is the Bureau’s largest water resource project, with authorized construction costs totaling more than $6.5 billion as of September 1990. While primarily devoted to irrigation, the project also provides flood control, hydroelectric power, and recreation uses. GAO (1) discusses the status of the Bureau’s effort to reallocate project costs in accordance with a 1986 congressional mandate, (2) describes the Bureau’s current cost allocation method, and (3) discusses alternative cost allocation methods.
Water Resources: Corps’ Management of Ongoing Drought in the Missouri River Basin. GAO/RCED-92-4. January 27, 1992.
ABSTRACT: The Missouri River basin, encompassing all of Nebraska and part of nine other North Central states, is experiencing its most severe drought since the 1930s. GAO reviewed the U.S. Army Corps of Engineers’ management of the Missouri River reservoir system under drought conditions in 1988, 1989, and 1990. Acting consistently with its drought contingency plan, the Corps reduced winter release rates, shortened navigation seasons on the Missouri River, and reduced water levels in the navigation channel. As a result, 17 percent less water was released during the three-year period than would have been released under normal operating conditions. The drought and the Corps’ response to it harmed all reservoir efforts save one—flood control. The Corps’ contingency plan, however, relies on assumptions about the amount of water needed for navigation and irrigation made in 1944 that are no longer valid, and the plan does not reflect the current economic conditions in the Missouri River basin. The Corps’ ongoing study of its operation of the reservoir system is expected to address these issues. The Corps insists that, unless Congress approves changes to existing operating priorities, it must continue to give recreation a lower operating priority than other authorized purposes even if this lower priority results in decreased system benefits. GAO sees no appropriate basis for the Corps’ view. A lawsuit filed in federal court by three upper basin states questions the legality of the Corps’ position on recreation.
Water Resources: Local Sponsors’ Views on Corps’ Implementation of Project Cost Sharing. GAO/RCED-92-11FS. November 15, 1991.
ABSTRACT: The Water Resources Development Act of 1986 requires the U.S. Army Corps of Engineers to develop a cost-sharing partnership with local sponsors whose active participation and financial commitment are essential to accomplish water resource development projects. The sponsors generally are local or state governments or other public entities, like flood control districts or port authorities, that ask the Corps’ for help. This fact sheet presents the views of local sponsors on the Corps’ implementation of cost sharing under the act, including the sponsors’ views on their relationship with the Corps and the impact of cost sharing on accomplishing proposed projects, such as flood control or navigation projects.
Reclamation Law: Changes Needed Before Water Service Contracts Are Renewed. GAO/T-RCED-92-13. October 29, 1991.
ABSTRACT: This testimony, which is based on an earlier report (GAO/RCED-91-175, Aug. 22, 1991), addresses changes needed before renewal of long-term water service contracts in the Bureau of Reclamation’s Central Valley Project in California. Significant environmental and water use problems are associated with irrigation practices carried out under existing water service contracts. These irrigation practices have contributed to selenium poisoning and increasing salinity in the San Joaquin Valley; some farmers use Central Valley Project water to produce crops that are also eligible for subsidies under Agriculture Department commodity programs; and with 85 percent of the Central Valley Project water dedicated to irrigation under the contracts, the water supply available for wildlife habitat is inadequate. GAO is concerned that renewing the Central Valley Project’s 238 contracts for the same quantities of water for up to 40 years could severely hamper efforts to address existing and future problems. GAO recommends that Congress place a moratorium on all Central Valley Project contract renewals, while temporarily extending existing contracts, and amend legislation to explicitly allow contract renewals for lesser quantities of water and shorter periods of time. GAO also recommends that the Department of the Interior fully analyze the impact of contract renewal and alternative contract provisions.
Water Subsidies: Views on Proposed Reclamation Reform Legislation. GAO/T-RCED-91-90. September 12, 1991.
BACKGROUND: GAO discussed four legislative proposals to amend the Reclamation Reform Act of 1982, which permits multiple landholdings to continue to be operated collectively as one large farm while individually qualifying for federally subsidized water. GAO noted that: (1) if the farm operations in the five case studies remain constant, each of the proposals could limit federally subsidized water to some or all of the operations; (2) three of the five large farm operations in the case studies could continue to receive subsidized water on land in excess of the 960-acre limit, under the House bill; (3) under the Senate bill, four of the five large farm operations would be able to continue to receive subsidized water on more than 960 acres; (4) three of the large farm operations could continue to receive subsidized water on land in excess of the 960-acre limit under the Bureau of Reclamation’s draft bill; and (5) the Subcommittee on Water, Power, and Off-Shore Energy Resources’s draft bill could stop the flow of federally subsidized water to more than 960 acres in all five of the case studies. GAO believes that since farmers have ample financial incentive to reorganize their operations in response to any new reclamation legislation enacted, some farmers are likely to reorganize again to be eligible to receive additional federally subsidized water.
Reclamation Law: Changes Needed Before Water Service Contracts Are Renewed. GAO/RCED-91-175. August 22, 1991.
BACKGROUND: Pursuant to a congressional request, GAO: (1) identified environmental and water use problems associated with the irrigation practices carried out under the Bureau of Reclamation’s water service contracts in the Central Valley Project (CVP); and (2) determined whether contract renewals would allow such problems to continue. FINDINGS: GAO found that: (1) agricultural drainage has degraded the quality of the San Joaquin Valley’s water supply and soil, poisoning wildlife and threatening agricultural productivity with selenium accumulation and increasing salinity; (2) since most CVP water is dedicated to irrigation through water service contracts, the supply of water available for wildlife habitat is not adequate; (3) some farmers use CVP water to produce crops that are also eligible for subsidies under the U.S. Department of Agriculture’s (USDA) commodity programs, causing Congress to express concern over the apparent inconsistency between the Bureau’s programs for increasing agricultural production through inexpensive subsidized water and USDA programs for raising prices while limiting production; (4) increased irrigation efficiency and conservation could reduce environmental degradation caused by agricultural runoff and drainage, while freeing water currently diverted for irrigation and other uses, but the low cost of federal irrigation water is a disincentive to increased irrigation efficiency; (5) the Department of the Interior believes that, since long-term renewal of contracts for the same quantities of water is nondiscretionary, it is not required to change its provisions as a result of environmental impact statements; and (6) continuing irrigation practices carried out under existing contract provisions compromise other national interests such as environmental protection and wildlife conservation.
Water Resources: Corps Lacks Authority for Water Supply Contracts. GAO/RCED-91-151. August 20, 1991.
BACKGROUND: Pursuant to a legislative requirement, GAO examined whether the Army Corps of Engineers has the legislative authority to operate nine water reservoirs for the purposes for which they are being managed. FINDINGS: GAO found that: (1) with one exception, the Corps has the authority to operate the nine reservoirs for the purposes for which they are being managed; (2) in that exception, the Corps improperly cited the Water Supply Act of 1958 in reallocating storage capacity to municipal and industrial (M&I) water supply and entering into six long-term contracts to supply water to M&I users without expanding those reservoirs; (3) the authority under the Water Supply Act to supply water for M&I needs is limited to what may be accomplished through the construction or expansion of reservoirs, and the act does not provide authority to reallocate existing water storage capacity for M&I purposes at reservoirs previously constructed or modified; and (4) the Corps used the act to enter into 38 water supply contracts and was planning to enter into similar contracts in the future.
Water Resources: Corps’ Management of 1990 Flooding in the Arkansas, Red, and White River Basins. GAO/RCED-91-172BR. August 1, 1991.
BACKGROUND: Pursuant to a congressional request, GAO examined the Army Corps of Engineers’ operation of its reservoirs in the Arkansas, Red, and White River basins during the May 1990 flooding that caused severe damage in Arkansas, Texas, and Oklahoma to determine whether the Corps followed operating procedures in capturing and releasing the water from nine reservoirs in the three basins before, during, and after the flood. FINDINGS: GAO found that: (1) the Corps generally operated the nine reservoirs in accordance with its operating procedures before, during, and after the May 1990 flooding; (2) there was no evidence that the Corps released water from six of the reservoirs contrary to its procedures; and (3) in two cases, the Corps released water contrary to its operating procedures and prolonged the flooding of rural lands predominantly in Texas and Oklahoma.
Water Resources: Bonneville’s Irrigation and Drainage System Is Not Economically Justified. GAO/RCED-91-73. January 31, 1991.
BACKGROUND: Pursuant to a congressional request, GAO prepared a: (1) benefit-cost analysis of the Irrigation and Drainage (I&D) system of the Central Utah Project Bonneville Unit; and (2) financial impacts analysis measuring the federal cost of not completing the I&D system. FINDINGS: GAO found that: (1) the federal government spent or was contractually obligated for a total of about $320 million for the I&D system; (2) proposed legislation providing for the completion of the system, with some changes, would cost an additional $178 million in federal funds; (3) completion of the I&D system was not economically justified, since the U.S. economy would realize a benefit of only 28 cents for every dollar of project costs; and (4) the financial impacts on the federal government of not completing the I&D system ranged from savings of $133 million, if Congress decided to reallocate sunk costs, to an additional cost of $54 million if Congress decided to forgive the repayment of sunk costs.
Timber Management
Forest Service: Observations on the Emergency Salvage Sale Program. GAO/T-RCED-96-38. November 29, 1995.
ABSTRACT: Salvage timber involves dead or dying trees, much of which would be marketable if harvested before it rots. In the past, many sales of salvage timber were delayed, altered, or withdrawn, and some of the timber deteriorated and became unsalable. In response to the millions of acres of salvage timber caused by the devastating fires of 1994, Congress established an emergency salvage timber sale program, which was designed to increase the harvesting of salvage timber by easing environment procedures and eliminating the administrative appeals process. GAO testified that it is too early to say to what extent the changes introduced by the program will boost sales because few sales have been made since the program became effective. Some salvage sale offerings have failed to receive bids mainly because of the terms and conditions of the sales, such as the minimum bid or specific logging requirements or the volume of timber being offered, were unacceptable to potential buyers. In addition, because of the short-term nature of the emergency salvage sale program, more comprehensive information on the universe of marketable salvage timber may help Congress as it assesses the program’s impact and whether additional resources are needed to support it.
Forest Service: Distribution of Timber Sales Receipts Fiscal Years 1992-94. GAO/RCED-95-237FS. September 8, 1995.
ABSTRACT: Over the years, the Forest Service’s annual reports to Congress have indicated that receipts from the timber sales program exceeded the expense of preparing and administering the sales. However, these reports did not show the extent to which timber sales receipts were distributed to various Forest Service funds or accounts established for specific purposes, such as reforesting the land and making payments to the states in which the forests are located. GAO found that during fiscal years 1992-94, the Forest Service collected nearly $3 billion in timber sales receipts and distributed about $2.7 billion, or 90 percent, to various Forest Service funds or accounts for specific purposes. The Forest Service deposited the remaining receipts—about $300 million—in the General Fund of the Treasury. Outlays for preparing and administering timbers sales totaled about $1.3 billion for the same period.
Private Timberlands: Private Timber Harvests Not Likely to Replace Declining Federal Harvests. GAO/RCED-95-51. February 16, 1995.
ABSTRACT: Timberlands in Washington state, Oregon, and California are owned by the federal government, state and local governments, and the forest products industry or other private parties. Timber harvest volumes from all these sources have decreased during the past five years. Most notable, however, is the drop on federal lands, mainly as a result of efforts to protect the habitats of threatened or endangered species. This report discusses (1) trend data on private timberland acreage and on volumes of timber harvested; (2) requirements for reforestation and the use of active timber management practices, such as fertilization or thinning, on private timberlands; (3) incentive programs to encourage private landowners to actively manage their timberlands and other factors that influence their land management decisions; and (4) federal tax provision that affect timber management decisions, including the changes that occurred in the 1986 Tax Reform Act.
Tongass Timber Reform Act: Implementation of the Act’s Contract Modification Requirements. GAO/RCED-95-2. January 31, 1995.
ABSTRACT: In Alaska’s Tongass National Forest, two companies—the Ketchikan Pulp Company and the Alaska Pulp Corporation—have held 50-year contracts to cut timber. The Forest Service maintains that its existing policy provides consistent treatment of credits in contracts that timber harvesters are awarded for building harvest-related roads. GAO disagrees, believing that the policy gives Ketchikan Pulp a competitive advantage by allowing it to apply “ineffective” road credits for a much longer period than timber harvesters that must use short-term contracts. Through the end of fiscal year 1993, Ketchikan Pulp used road credits to pay for 73 percent of the timber harvested. Also, some streamside buffers did not meet the 100-foot minimum. The Forest Service has since taken steps to ensure that this requirement is met. GAO also found that the Forest Service was not following its policy of documenting the environmental effects of changes made to planned timber-harvest boundaries.
Forest Service: Factors Affecting Timber Sales in Five National Forests. GAO/RCED-95-12. October 28, 1994.
ABSTRACT: In recent years, debate about the future of the national forest system has focused on ensuring that timber harvests do not exceed the forests’ ability to replenish the available supply of timber. An important component of managing forests on a sustained-yield basis is each forest’s “allowable sale quantity”—an estimate of the maximum volume of timber that can be sold from each forest over a 10-year period without impairing other uses of the forest, such as recreation or wildlife habitat. GAO reviewed the allowable sale quantities and the timber sales at five national forests—Deschutes and Mt. Hood in Oregon, Gifford Pinchot in Washington, Ouachita in Arkansas, and Chattahoochee-Oconee in Georgia. The Forest Service did not meet allowable sale quantities in the five forests for a variety of reasons, including (1) limitations in the data and estimating techniques on which the allowable sale quantities were originally based, (2) new forest management issues and changing priorities, and (3) rising or unanticipated costs associated with preparing timber sales and administering harvests. Although forest officials believed that the Service has used the best information available to develop the allowable sale quantities, they later failed to meet these levels. As a result, timber sales for each of the five forests between fiscal years 1991 and 1993 were significantly below the average annual allowable sale quantity.
Forest Service: Management of Reforestation Program Has Improved, but Problems Continue. GAO/RCED-94-257. September 15, 1994.
ABSTRACT: In the 1930 Knutson-Vandenberg Act, Congress attempted to sustain the nation’s forests by establishing a fund—today totaling more than $800 million—to reforest, improve timber stands, and improve other renewable resources in timber sale areas that have been harvested. The Forest Service annually collects about $230 million from timber purchasers for reforestation and other activities and deposits it in the fund. In response to congressional concerns over the adequacy of Forest Service control of these funds and their use for appropriate projects, GAO reviewed the Forest Service’s management of the fund. This report describes (1) how the Forest Service plans, implements, and manages Knutson-Vandenberg projects and (2) what changes the Forest Service has made since 1990 in response to previous internal and Office of Inspector General reviews of the program and what additional changes may be necessary.
Forestry Functions: Unresolved Issues Affect Forest Service and BLM Organizations in Western Oregon. GAO/RCED-94-124. May 17, 1994.
ABSTRACT: The Bureau of Land Management (BLM), part of the Interior Department, and the Forest Service, part of the Agriculture Department, together manage 7.2 million acres of land in western Oregon. Both agencies manage portions of these lands for timber production and have parallel forestry organizations in several locations. This report examines the possibility of the two agencies consolidating their forestry duties. GAO summarizes these agencies’ past and ongoing reorganization efforts and the potential legal and other constraints affecting any consolidation.
Forest Service: Status of Efforts to Achieve Cost Efficiency. GAO/RCED-94-185FS. April 26, 1994.
ABSTRACT: Congress requested that the Forest Service prepare a cost study for its timber program that would analyze how to achieve an annual cost reduction of at least five percent. The Forest Service’s April 1993 report on timber cost efficiency discussed such areas as the overall timber program, the program’s organization, the Timber Sale Program Information Reporting System, financial management, and attempts to monitor cost efficiency. In the year since the study was issued, the Forest Service has made progress toward completing 21 of 23 action items targeted for completion by October 1993 or October 1994. The results of the regional offices’ cost efficiency efforts have been mixed. In addition, the Forest Service has undertaken other, nontimber initiatives, such as reorganizing and downsizing, that could improve the agency’s overall efficiency. Overall, from fiscal year 1992 to fiscal year 1993, the Forest Service reduced its timber program expenses nationally by about 7.2 percent. Total annual timber program expenses declined in six of the nine regions during this period. However, six of the nine regions’ timber sales programs showed a net loss when annual expenses were deducted from revenues for fiscal year 1993.
Timber Sale Contract Defaults: Forest Service Needs to Strengthen Its Performance Bond and Contract Provisions. GAO/RCED-94-5. October 28, 1993.
ABSTRACT: The Forest Service has assessed damages totaling about $302 million against purchasers who defaulted in timber sale contracts between January 1982 and March 1993. The Forest Service has collected about $42 million, or 14 percent, of this amount and has determined that about $136 million is uncollectible for a variety of reasons, such as the bankruptcy or the death of the purchaser. Continuing litigation has been the main reason for the delays in the final disposition of the remaining $124 million, most of which is owed by 14 timber purchasers. When many of these defaulted contracts were awarded, the Forest Service had few safeguards in place to protect the government against losses from defaults.
Since then, the Forest Service has begun requiring purchasers to make down payments and has raised the dollar limit on the performance bond that purchasers must provide. In addition, the Forest Service is considering retaining the down payments until the contracts are substantially complete and clarifying the liability provisions in a new performance bond—measures that GAO strongly supports.
Cancer Treatment: Actions Taken to More Fully Utilize the Bark of Pacific Yews on Federal Land. GAO/RCED-92-231. August 31, 1992.
ABSTRACT: The Pacific yew, source of the anticancer drug Taxol, grows primarily in Pacific Northwest forests managed by the U.S. government. In fiscal year 1991, neither the Forest Service nor the Bureau of Land Management had effective timber sale administrative procedures or utilization standards. As a result, some usable yew bark went uncollected that year. In fiscal year 1992, both agencies in conjunction with Bristol-Myers Squibb Co. and its yew bark collectors have worked to ensure more complete utilization of yew bark. If properly implemented, the agencies’ fiscal year 1992 program plans and associated operational procedures should help ensure that more of this limited and valuable resource is recovered.
Forest Service Timber Sales Program: Questionable Need for Contract Term Extensions and Status of Efforts to Reduce Costs. GAO/T-RCED-92-58. April 28, 1992.
ABSTRACT: This testimony centers on two issues concerning the timber sales program run by the Forest Service. GAO discusses (1) a 1-year extension in the length of timber sales contracts in response to dramatic reductions in the prices for wood products and (2) the Forest Service’s response to a fiscal year 1991 directive to reduce costs in its timber sales program.
Comments on Below-Cost Timber Bills. GAO/RCED-92-160R. April 1, 1992.
BACKGROUND: Pursuant to a congressional request, GAO commented on whether two bills regarding below-cost timber sales on national forests addressed three previous GAO recommendations regarding such sales. GAO noted that both of the bills addressed GAO recommendations that the Forest Service: (1) expand the proposed below-cost sales policy beyond forests as a whole to individual sales; and (2) define the minimum rate for timber sales bids as the cost of timber sale preparation and administration and ensure that the sale process recovers those costs. GAO also noted that neither of the bills addressed the recommendation to amend the timber sale process to include an initial below-cost determination during the sale preparation process in order to avoid unnecessary costs.
Cancer Treatment: Efforts to More Fully Utilize the Pacific Yew’s Bark. GAO/T-RCED-92-36. March 4, 1992.
ABSTRACT: The bark of the Pacific yew is the only approved source of taxol, an anticancer drug that has been shown effective in treating ovarian cancer. The limited supply of Pacific yew bark coupled with existing and potential demand mean that the bark needs to be as fully utilized as possible. For a variety of reasons, however, not all the bark that could have been collected on federal lands in 1991 was collected. Both responsible federal land-managing agencies and private industry are taking or planning actions to more fully use the bark, and increased utilization should be seen in 1992. These actions appear to be consistent with provisions of the Pacific Yew Act of 1991 intended to achieve full utilization of the bark.
Forest Service: The Flathead National Forest Cannot Meet Its Timber Goal. GAO/RCED-91-124. May 10, 1991.
BACKGROUND: Pursuant to a congressional request, GAO collected information on planned and actual amounts of timber offered for sale from the Flathead National Forest in northwestern Montana.
FINDINGS: GAO found that: (1) the Forest Service fell short of its Flathead timber-offering goal for the last 5 years by about 37 percent; (2) the goal for timber sales in a forest plan may not exceed the allowable sale quantity (ASQ), the maximum amount that the forest can produce in perpetuity after giving balanced consideration to other multiple issues in accordance with environmental standards; (3) the Flathead forest plan specified an ASQ of 500 million board feet (MMBF) for the first 5 years; (4) the Forest Service experienced difficulty in offering many proposed sales due to environmental organizations’ concern over their effects on wildlife and water quality; (5) even if planned sales had met all environmental standards, the forest only had sufficient funding to prepare 443 MMBF; (6) the Flathead’s continued inability to meet its original, unattainable ASQ-based goal will contribute to production cutbacks and mill closures as early as fiscal year 1990; and (7) Flathead officials have no immediate plans to revise the present 10-year forest plan ASQ.
First Audit of the Forest Service’s Financial Statements. GAO/T-AFMD-91-4. April 25, 1991.
BACKGROUND: GAO discussed its audit of the Forest Service’s financial statements for fiscal year (FY) 1988, focusing on whether: (1) there were weaknesses in internal controls; (2) accounting systems adequately accounted for resources received and spent; (3) internal management adequately reported problems; and (4) financial reporting provided accurate and reliable information regarding the efficiency and effectiveness of operations and future resource needs. GAO noted that the: (1) Service’s inaccurate financial information made it difficult to determine the true value of its property; (2) Service reported two violations of the Antideficiency Act, involving its overobligations of National Forest System budgetary resources by $4,348,805, and its overobligation of its FY 1987 Job Corps allotment by $582,550; (3) Service’s timber program accounting system included inaccurate values for timber and related facilities, but the Service subsequently initiated actions to ensure that the system accurately recognizes costs in accordance with generally accepted accounting principles; and (4) Service’s external reports did not include information that accurately reflected the results of its operations or its financial position.
Forest Service Needs to Improve Efforts to Reduce Below-Cost Timber Sales. GAO/T-RCED-91-43. April 25, 1991.
BACKGROUND: GAO discussed the Forest Service’s below-cost timber sales, focusing on: (1) timber sales that did not recover their associated costs; and (2) Service efforts to reduce below-cost timber sales. GAO noted that: (1) fiscal year 1990 below-cost timber sales resulted in unrecovered timber-sale preparation and administration expenses of at least $35.6 million; (2) unrecovered costs ranged from $14.9 million for large sales and $20.7 million for small sales when only preparation and administration costs were considered, to $68.4 million for large sales and $43.8 million for small sales when all operating costs plus payments to states were calculated; (3) sale preparation and administration costs at the 122 national forests ranged from $15 per thousand board feet of harvested timber to $348 per thousand board feet; and (4) the Service issued a draft policy to reduce losses from below-cost timber sales. In addition, GAO noted that the Service needed to take such additional actions to reduce below-cost timber sales as: (1) extending consideration of below-cost sales to the individual sales level; (2) considering its costs when setting minimum rates for a timber sale; and (3) evaluating whether the benefits of a below-cost sale justify the unrecovered costs prior to incurring most preparation costs.
Forest Service Needs to Improve Efforts to Protect the Government’s Financial Interests and Reduce Below-Cost Timber Sales. GAO/T-RCED-91-42. April 24, 1991.
BACKGROUND: GAO discussed the Forest Service’s efforts to: (1) collect on defaulted timber sales contracts and reduce further defaults; and (2) reduce the number of below-cost timber sales. GAO noted that: (1) the Service collected about $35 million of the $302 million in damages that it assessed from defaulted contracts and was taking steps to improve its collection processes; (2) the Service’s key contracting measures were similar to other timber sellers’ measures, although the Service and one federal timber seller returned or credited down payments or deposits before contractors substantially completed the contracts; (3) such practices lessened the Service’s security in terms of access to funds in the event of a default; (4) in fiscal year 1990, the Service incurred timber sale preparation and administration expenses of $35.6 million that it could not recover as a result of below-cost timber sales; and (5) preparation and administrative costs varied greatly by forest. GAO also noted that the Service issued a draft policy aimed at reducing losses caused by below-cost timber sales, but the policy left gaps in a comprehensive approach, since the Service: (1) would not subject many below-cost sales to review; (2) did not consider costs when setting minimum prices for advertised timber sales; and (3) did not evaluate on a timely basis whether the benefits of a below-cost sale justified the unrecoverable cost.
Better Reporting Needed on Reforestation and Timber Stand Improvement. GAO/T-RCED-91-31. April 16, 1991.
BACKGROUND: GAO discussed the Forest Service’s reporting of its reforestation and timber stand improvement activities. GAO noted that: (1) the Service did not provide specific guidance to regional offices on identifying and reporting reforestation and timber service improvement needs; (2) Service reports understated reforestation needs because it failed to report accurate information about areas requiring reforestation following forest fires or other natural disasters; (3) for fiscal year 1990, the Service reported that 1.2 million acres required reforestation or timber stand improvement; (4) nine Service regions used several methods to identify and report reforestation needs resulting from forest fires or other natural disasters; (5) each service region followed its own criteria for defining timber stand improvement needs; and (6) none of the regions certified and reported all reforestation and timber stand improvement achievements, making it difficult for Congress to accurately assess reforestation and timber stand improvement achievements.
Tongass National Forest: Contractual Modification Requirements of the Tongass Timber Reform Act. GAO/RCED-91-133. March 28, 1991.
BACKGROUND: Pursuant to a legislative requirement, GAO reviewed the Department of Agriculture’s compliance with the Tongass Timber Reform Act, focusing on the implementation of modifications to two long-term timber sale contracts to eliminate the contractors’ competitive advantage over independent short-term contractors. FINDINGS: GAO found that: (1) the Forest Service made extensive revisions to the two long-term timber sale contracts, generally by adopting and modifying provisions from independent short-term timber sale contracts to meet the act’s requirements; (2) all modifications to the long-term contracts, except purchaser road credits, complied with the act’s requirements; and (3) the modifications did not specify how the Service would perform environmental assessments or how large an area they would cover. GAO believes that: (1) although the contract modifications did not specify exactly how the Service would implement them, the modifications will require extensive additional effort on the part of the Service; and (2) the manner in which the Service implements the modifications will determine its compliance with the act’s requirements.
Financial Audit: Forest Service’s Financial Statements for Fiscal Year 1988. GAO/AFMD-91-18. March 18, 1991.
BACKGROUND: GAO examined the Forest Service’s financial statements for the fiscal year ended September 30, 1988. FINDINGS: GAO found that: (1) the central accounting system did not integrate all separate accounting and reporting systems; (2) internal control policies and procedures within individual accounting and reporting systems failed to ensure that financial information was reliable and in compliance with prescribed accounting principles; (3) the general ledger was unable to produce accurate and timely financial reports, since the Service failed to integrate it with its accounting and reporting systems; (4) the Timber Sale Program Information Reporting System (TSPIRS) was not in accordance with generally accepted accounting principles; (5) the Service violated the Anti-Deficiency Act by overobligating the National Forest System’s funds and the Job Corps account’s allotment; and (6) except as noted, the financial statements presented fairly the Service’s financial position, and the results of its operations, in conformity with generally accepted accounting principals applied on a consistent basis.
Forest Service: Better Reporting Needed on Reforestation and Timber Stand Improvement. GAO/RCED-91-71. March 15, 1991.
BACKGROUND: Pursuant to a congressional request, GAO analyzed the reliability of the Forest Service reporting on national forest land: (1) needing reforestation or timber stand improvement; and (2) where reforestation or timber stand improvement activities have been successful. FINDINGS: GAO found that: (1) Service reports understated reforestation needs and did not always identify all needs resulting from forest fires and other natural disasters; (2) from fiscal years 1985 to 1990, reported reforestation needs rose from about 822,000 acres to over 1.2 million acres, while reported timber stand improvement needs decreased from 1.5 million to 1.2 million acres; (3) the nine Service regions used several different methods to identify and report reforestation needs resulting from forest fires or other natural disasters; (4) each Service region followed its own criteria for defining timber stand improvement needs; and (5) none of the regions certified and reported all reforestation and timber stand improvement achievements, making it difficult for Congress to accurately assess the reforestation and timber stand improvement achievements.
Native Americans, Bureau of Indian Affairs
Vacant Positions in the Bureau of Indian Affairs. GAO/RCED-96-14R. October 6, 1995.
BACKGROUND: Pursuant to a congressional request, GAO provided information on end of fiscal year (FY) staffing at the Bureau of Indian Affairs (BIA), focusing on the: (1) occupations that have the highest number of vacant positions; and (2) number of vacant positions in law enforcement and social services. GAO noted that BIA: (1) had about 14,600 employees on board at the end of FY 1993 and 13,700 at the end of FY 1994; (2) had over 4,300 vacant positions as of June 1995; (3) occupations with the most vacant positions included laborer, secretary, teacher, forestry aid, and equipment operator; and (4) had 193 vacant positions in law enforcement and 76 vacant positions in social services.
Indian Trust Fund Settlement Legislation. GAO/AIMD/OGC-95-237R. September 29, 1995.
BACKGROUND: Pursuant to a congressional request, GAO provided draft legislation that is intended to help the Bureau of Indian Affairs reconcile indian trust fund accounts. GAO noted that the draft legislation would require mediated negotiation and binding arbitration to resolve disputed account balances.
Navajo-Hopi Relocation Program. GAO/RCED-95-155R. April 27, 1995.
BACKGROUND: Pursuant to a congressional request, GAO provided information on the relocation of the Navajo and Hopi Indian Tribes, focusing on: (1) whether the Navajo and Hopi Relocation Office certified more families for benefits than it relocated in 1994; and (2) the number of families that still have to be relocated or certified as of December 31, 1994. GAO noted that: (1) as of December 31, 1994, 4,507 families had applied for relocation assistance, 3,302 families were certified for relocation benefits, and 2,560 families had been relocated; (2) although the Relocation Office certified 160 families for benefits and in 1994, it only relocated 102 of these families; (3) certifications outnumbered relocations mainly because previous ineligibility determinations were reversed; (4) 742 families certified for relocation had not been relocated as of December 31, 1994; (5) the 660 families originally found to be ineligible for assistance could have their original ineligibility determinations overturned during review; and (6) there may be as many as 100 additional Navajo families eligible for relocation assistance, but these families have never applied for such assistance.
Indian Health Service: Improvements Needed in Credentialing Temporary Physicians. GAO/HEHS-95-46. April 21, 1995.
ABSTRACT: Indian Health Service (IHS) facilities, which provide medical care to more than one million American Indians and Alaskan Natives, supplement their staffs with temporary physicians. But weak policies have led IHS to unknowingly hire doctors who have been disciplined for such offenses as gross and repeated malpractice and unprofessional conduct. IHS does not explicitly require verifying all active and inactive state medical licenses that a temporary physician may have. Further, most IHS facilities that have contracts with companies that supply temporary physicians do not require the companies to inform IHS of the status of all medical licenses a physician may hold. In addition, IHS facilities do not have a formal system for sharing information on temporary physicians who have worked within the IHS medical system. This report also discusses what happens when requested medical services are delayed.
Financial Management: Indian Trust Fund Accounts Cannot Be Fully Reconciled. GAO/T-AIMD-95-94. March 8, 1995.
ABSTRACT: The Bureau of Indian Affairs (BIA) has spent four years and $16 million to reconcile Indian trust fund accounts. BIA is requesting $6.8 million for fiscal year 1996 to continue with the detailed reconciliation work. However, it is clear that even if more reconciliation work is done, BIA will not be able to guarantee that trust fund account balances are accurate. This is due to missing lease and accounting records; the inability to verify that all earned revenues were collected, posted to the correct account, and disbursed to the proper party; and the lack of accurate, up-to-date ownership information. Because the Indian trust fund accounts cannot be fully reconciled, Congress may want to consider legislating a settlement process in lieu of continuing to fund BIA’s reconciliation effort.
Indian Trust Fund Testimony Q&As. GAO/AIMD-95-33R. December 2, 1994. establish a G-Fund through the Department of the Treasury for Indian trust fund investments; (4) even if a G-Fund is established, Interior would still need to provide for both investment advisor and custodian services; (5) the American Indian Trust Fund Reform Act of 1994 establishes a mechanism for tribes to assume management and control of their trust funds; (6) the fractionated ownership group, Individual Indian Money (IIM) Reconciliation working group, and the Land Records working group have been formed to resolve issues concerning IIM accounts; (7) the 6-Point Plan does not address a number of fundamental actions needed to resolve trust fund management problems; (8) the BIA streamlining plan lacks a mission statement and information on how BIA will transfer trust fund management to tribes; and (9) a spokesperson for Indian interests would ensure that Indian interests are fully articulated and considered before program and organizational changes.
Indian Food Stamp Proposal. GAO/RCED-95-57R. November 30, 1994.
BACKGROUND: Pursuant to a legislative requirement, GAO reviewed the feasibility of eliminating the conditions for tribal organizations to administer the Food Stamp Program on Indian reservations, focusing on: (1) whether Indian tribal organizations have expressed interest in administering the program; and (2) the barriers to and effects of tribal administration of the program. GAO noted that: (1) tribal officials are unaware of federal regulations governing the Food Stamp Program and have expressed little interest in assuming program administration; (2) the barriers that would prevent tribal administration include the statutory cost-sharing requirements and the potential penalties that could be imposed for administrative errors; (3) tribal officials believe that for them to assume program administration, they will need to revise the program’s infrastructure, obtain and train staff to administer the program, and modify certain program regulations to better meet the needs of Indian clients; (4) tribal administration of the Food Stamp program will likely increase administrative costs, Indian enrollment, and benefit distribution; (5) the tribes and the states would incur additional costs for coordinating and sharing information on program participation in both tribally-administered Food Stamp Programs and state-administered assistance programs; and (6) state officials believe that tribal administration of the Food Stamp Program would increase the burden on food stamp recipients participating in both tribally-administered Food Stamp Programs and state-administered assistance programs.
Financial Management: Focused Leadership and Comprehensive Planning Can Improve Interior’s Management of Indian Trust Funds. GAO/T-AIMD-94-195. September 26, 1994.
ABSTRACT: The Interior Department has initiatives planned or under way to address some of the long-standing problems plaguing management of the Indian Trust Funds, and additional options exist that could help it make other needed improvements. However, Interior’s track record on past attempts at corrective action has not been good. Interior needs a comprehensive plan, focused leadership, and management commitment if it is to carry through on needed improvements.
Financial Management: Focused Leadership and Comprehensive Planning Can Improve Interior’s Management of Indian Trust Funds. GAO/AIMD-94-185. September 22, 1994.
ABSTRACT: For years, the Interior Department has been unable to correct many serious financial management problems affecting the Indian trust funds, including (1) backlogs in land title and beneficial ownership determinations and recordkeeping, (2) inadequate management of natural resource assets to ensure that all earned revenues derived from natural resources are collected, (3) improper accounting practices, and (4) limited trust fund investment options. In addition to recent management initiatives to implement needed improvements, additional options would more fully address trust fund management problems. Further, more focused leadership, management commitment, and a comprehensive strategic plan would help Interior to effectively address all of its trust fund management responsibilities.
Financial Management: Native American Trust Fund Management Reform Legislation. GAO/T-AIMD-94-174. August 11, 1994. programs and operations. Pending trust fund management reform legislation would enhance trust financial management reform initiatives underway at the Department of the Interior.
Indian Health Service: Efforts to Recruit Health Care Professionals. GAO/HEHS-94-180FS. July 7, 1994.
ABSTRACT: Indian Health Service (IHS) salary schedules for health care professionals are set on a national basis. Thus, the base pay these persons receive does not differ among IHS regions or areas. However, bonuses and allowances may be paid to doctors who agree to work in hard-to-fill locations, such as the Aberdeen Area. In many IHS areas, health care delivery has been hampered by problems in recruiting and retaining health care professionals, particularly doctors. The recruitment and retention of physicians in the Aberdeen Area has been affected by the relatively low pay; inadequate housing for medical personnel on the reservations; remoteness of the reservations; cultural differences between the doctors and their patients; and a general lack of amenities, such as shopping and dining. IHS’ Aberdeen Area has a higher vacancy rate for physicians than all but one other IHS area. The vacancy rate has been particularly high, more than 31 percent, at the Pine Ridge hospital. IHS is now looking at the benefits of using a physician pay structure similar to that used by the Department of Veterans Affairs.
Indian Issues: Eastern Indian Land Claims and Their Resolution. GAO/RCED-94-157. June 22, 1994.
ABSTRACT: In late 1992, the Golden Hill Paugussett Indian Tribe filed a lawsuit claiming damages and the right to have large tracts of land in Connecticut restored to the tribe. The lawsuit asserted that land historically belonging to the tribe had been transferred without the congressional approval required by the Indian Nonintercourse Act of 1790. In response to concern about Congress’ responsibilities under the act, the unpredictability of such claims, and the hardships they place on current landowners, this report (1) provides information on land claims made by eastern Indians during the past 20 years, (2) determines how these claims were resolved, and (3) identifies steps that Congress could take to mitigate the unpredictability and impact of these claims.
BIA Reconciliation Recommendations. GAO/AIMD-94-138R. June 10, 1994.
BACKGROUND: Pursuant to a Department of the Interior request, GAO answered questions on two recommendations concerning the reconciliation of Indian trust fund accounts. GAO noted that: (1) its recommendation for an additional reconciliation procedure would ensure that earned revenues are billed and collected and would not delay the Bureau of Indian Affairs’ (BIA) current reconciliation process; (2) reconciliations can only be done in cases where BIA can locate the relevant lease documents; (3) the lack of a complete documentation would impact projections of transaction error rates and reconciliation results; and (4) an accounts receivable system that indicates when payments are due would enhance BIA reconciliation efforts.
BIA Trust Fund Reconciliations. GAO/AIMD-94-110R. April 25, 1994.
BACKGROUND: Pursuant to a congressional request, GAO provided information on the status of the Bureau of Indian Affairs’ (BIA) efforts to correct long-standing trust fund management weaknesses. GAO noted that: (1) although BIA has made progress toward improving its Indian trust fund reconciliation and certification process, long-standing management problems have impeded BIA ability to maintain proper control and accountability over individual Indian trust accounts; (2) the Indian community has expressed concern over BIA trust fund accounting and the effectiveness of BIA investment practices; (3) BIA trust fund account balances lack credibility because BIA trust funds are not properly reconciled; (4) BIA continues to lack adequate strategic planning, staff and training, trust fund management policies and procedures, and accounting and reporting systems; and (5) BIA needs to develop a strategic Indian trust fund financial management plan, and reconciliation procedures to ensure reliable accounting and reporting and to prevent and detect fund losses.
Financial Management: Status of BIA’s Efforts to Reconcile Indian Trust Fund Accounts and Implement Management Improvements. GAO/T-AIMD-94-99. April 12, 1994. control and accountability over trust fund accounts. BIA has been criticized for erroneous allocations of receipts, erroneous payments to account holders, failure to consistently invest trust fund balances, and failure to pay interest. Tribes and individual Indians continue to express concern about the accuracy of BIA’s accounting for trust fund receipts and disbursements and the effectiveness of BIA’s investment practices. Past audits and GAO’s current work on BIA trust funds management continue to show (1) the lack of a strategic plan to guide trust fund management in the future, (2) inadequate staffing and training, (3) a lack of consistent, written trust fund management policies and procedures, and (4) inadequate systems for ensuring reliable accounting and reporting. GAO makes several recommendations aimed at ensuring better control and accountability over Indian trust funds. GAO continues to urge BIA to develop a strategic management plan for improving Indian trust fund operations.
Juvenile Justice: Native American Pass-Through Grant Program. GAO/GGD-94-86FS. March 28, 1994.
ABSTRACT: This fact sheet provides information on the Native American Pass-Through Grant Program, which provides federal grants to states and localities to help improve their juvenile justice systems. GAO (1) describes how the pass-through grant program works; (2) determines the funding amounts that the states and Indian tribes received under this program for fiscal years 1991 through 1993, and (3) provides examples of how some tribes used the funds.
Job Training Partnership Act: Labor Title IV Initiatives Could Improve Relations With Native Americans. GAO/HEHS-94-67. March 4, 1994.
ABSTRACT: This report provides information on the Indian and Native American job training program authorized under title IV of the Job Training Partnership Act. The act targets a variety of economically disadvantaged groups, including Native Americans, to receive employment-seeking skills and job training services. GAO discusses (1) the history of the relationship between the Labor Department and the Native American community with respect to the program and (2) the extent to which the act’s funds are used to provide training services, one of four allowable cost categories under that program. GAO also examines disagreements between the Labor Department and Native Americans over proposed changes to program regulations and the reasonableness of such changes.
BIA’s Trust Fund Loss Policy. GAO/AIMD-94-59R. January 14, 1994.
BACKGROUND: Pursuant to a congressional request, GAO reviewed the Bureau of Indian Affairs’ (BIA) draft policy and procedures to reconcile its Indian Trust Fund account losses. GAO found that: (1) the BIA draft policy does not address some of the weaknesses of the earlier draft; (2) the draft policy’s definition of losses does not include interest that is earned but not credited to the appropriate account; (3) the draft policy does not establish the steps necessary to detect, prevent, document, and resolve trust fund losses, since BIA trust fund systems do not have a mechanism to identify losses; (4) BIA needs to explain the appropriate notification and loss calculation documentation necessary for reporting losses and make its time frames for notification consistent and clear; (5) the draft policy incorrectly states that loss of interest on a certain type of account is not an obligation of the United States; (6) the draft policy lacks procedures for account holders to respond to and comment on BIA decisions; (7) BIA should clarify the draft policy’s language regarding the availability of appropriated funds for reimbursing losses and the reasons for transferring funds between accounts; and (8) BIA should change its quarterly and annual reporting of estimated losses to coincide with other significant accounting-cycle benchmarks and reports.
Financial Management: BIA’s Management of the Indian Trust Funds. GAO/T-AIMD-93-4. September 27, 1993.
ABSTRACT: Since April 1991, GAO has testified six times before Congress on the Bureau of Indian Affairs’ (BIA) management of the Indian trust funds and its efforts to reconcile and audit the trust fund accounts. BIA manages about $2 billion in tribal money that has accumulated from payments of claims, oil and gas royalties, land use agreements, and investment income. Over the years, countless audit reports and internal studies have cited a litany of serious problems in BIA’s oversight of these accounts. BIA’s record has been so poor, in fact, that the Office of Management and Budget has placed trust fund accounting on its high-risk list of government programs most vulnerable to waste, fraud, and abuse. This testimony discusses (1) the status of BIA’s efforts to overcome its past problems; (2) problems that still need to be addressed; and (3) provisions in H.R. 1846, the Native American Trust Fund Accounting and Management Reform Act of 1993, that can help BIA resolve some of these matters.
Financial Management: Creation of Bureau of Indian Affairs’ Trust Fund Special Projects Team. GAO/AIMD-93-74. September 21, 1993.
ABSTRACT: In November 1992, the Bureau of Indian Affairs (BIA) created a Special Projects Team to oversee trust fund management initiatives, including management of the ongoing trust fund account reconciliation project. The team was intended to be temporary, lasting only until the reconciliation project and other trust fund improvements were completed—possibly as long as eight years. This report examines whether BIA, in creating the team, (1) followed Interior Department guidelines, (2) notified Congress and received its approval before transferring money and staff to the team, and (3) submitted reorganization proposals to the relevant Advisory Task Force on BIA Reorganization for consideration. GAO also identifies the officials responsible for creating the team and their present jobs, as well as Interior Department and BIA efforts to investigate the circumstances surrounding the team’s creation.
Financial Management: Status of BIA’s Efforts to Resolve Long-Standing Trust Fund Management Problems. GAO/T-AFMD-93-8. June 22, 1993.
ABSTRACT: GAO has testified repeatedly on problems with the Bureau of Indian Affairs’ (BIA) management of the Indian trust fund, which includes billions of dollars earned from claims, oil and gas royalties, land use agreements, and investment income. Overall, the Bureau has failed to ensure that proper control and accountability are maintained over each trust fund account. The Bureau’s record has been so poor, in fact, that the Office of Management and Budget has placed trust fund accounting on its high-risk list. This testimony discusses Bureau actions to correct past problems; problems that still need to be addressed; and GAO’s views on S. 925, the Native American Trust Fund Accounting and Management Reform Act of 1993, which mandates many of the improvements spelled out in the Bureau’s own audits and contractor studies.
BIA Appropriation Language. GAO/AFMD-93-84R. June 4, 1993. parties to examine and evaluate all pertinent account information and reconcile all claims arising from BIA management of accounts, few audits and reconciliations have been completed; (2) the government needs to fulfill its fiduciary responsibilities and provide account holders with a full accounting regardless of the alternative used to reconcile account balances; and (3) until Interior finds a mutually acceptable basis for determining account balances and associated losses, its proposal for deleting the provision should be rejected as premature.
Indian Health Service: Basic Services Mostly Available; Substance Abuse Problems Need Attention. GAO/HRD-93-48. April 9, 1993.
ABSTRACT: The five Indian Health Service area offices GAO visited—Aberdeen, Alaska, California, Navajo, and Portland—differed greatly in the way that they delivered health care services. Nonetheless, the areas reported generally similar levels in the availability of basic clinical services. The services most available were treatment services, such as routine prenatal care, and diagnostic services, such as biopsies for cancer diagnoses. Almost all patients seeking such services were able to receive them. Preventive care, such as diabetes education and dental care, was comparatively less available. Service unit officials generally named alcohol and substance abuse services as their greatest unmet health need. Despite recent increases in Indian Health Service funding for alcohol and substance abuse treatment services, the gap between the demand for and availability of services persists. In addition, the Indian Health Service lacks data on alcoholism rates among native Americans and the effectiveness of current prevention and treatment programs.
Tribal Management of Mission Valley Power. GAO/RCED-92-282R. September 18, 1992.
BACKGROUND: Pursuant to a congressional request, GAO commented on two contracts between residents of the Flathead Reservation in Montana and the Bureau of Indian Affairs for the operation and management of the Mission Valley Power utility. GAO noted that: (1) to meet the contract requirements, the utility provided special personnel, made improvements in the system, gathered quantitative data on electrical power consumption, and developed a long-range plan for electrical consumption; (2) the utility took many steps to comply with federal environmental and safety standards; and (3) nine modifications were made to the 1988 contract and one modification was made to the 1991 contract.
Financial Management: Status of BIA’s Efforts to Resolve Long-Standing Trust Fund Management Problems. GAO/T-AFMD-92-16. August 12, 1992.
ABSTRACT: This testimony focuses on management of the Indian Trust Funds by the Bureau of Indian Affairs (BIA). GAO discusses (1) some of the long-standing weaknesses that have plagued BIA’s management of the trust funds; (2) the status of BIA efforts to reconcile the trust fund accounts, including the problems that have been identified and alternatives; and (3) the status of BIA efforts to develop a comprehensive strategic plan for trust fund financial management improvement, which include implementing the Chief Financial Officers Act of 1990.
Financial Management: Problems Affecting BIA Trust Fund Financial Management. GAO/T-AFMD-92-12. July 2, 1992.
BACKGROUND: GAO discussed the Bureau of Indian Affairs’ (BIA) management of the Indian Trust Funds. GAO noted that: (1) BIA has experienced inadequate controls and accountability over many of its trust fund accounts, and the Office of Management and Budget has placed trust fund accounting on its high risk list; (2) although BIA is dependent on accurate and complete land ownership records to properly distribute revenues, audits have shown continued problems with those land records; (3) fractionated interests have impacted BIA maintenance of land ownership records and trust fund accounting, primarily because BIA must account for numerous small transactions; (4) BIA ability to properly account for trust fund monies is impacted by the processes and procedures used by the Minerals Management Service (MMS) to collect, report on, and distribute Indian oil and gas royalties; (5) BIA has difficulty using oil and gas revenue collection and distribution data it receives from MMS to ensure that revenue is credited to the proper accounts, and has developed a computer program to enable it to better analyze this information. GAO believes that, if BIA is to effectively manage the Indian trust funds, it will need to address the problems that impede accurate accounting, including factors outside of BIA control that affect account maintenance, but BIA cannot resolve those problems itself.
Indian Issues: GAO’s Analysis of Land Ownership at 12 Reservations. GAO/T-RCED-92-75. July 2, 1992. reservations. GAO discusses (1) the ownership of Indian land; (2) the Bureau of Indian Affairs’ (BIA) work load in maintaining ownership records; and (3) the effect of the Indian Land Consolidation Act on multiple ownership of land tracts by small ownership interests, known as fractionation. GAO also discusses how it used BIA’s computerized land records database to develop the information found in GAO’s report.
Tribal Operation of Mission Valley Power. GAO/RCED-92-229R. June 30, 1992.
BACKGROUND: Pursuant to a congressional request, GAO commented on two contracts between residents of the Flathead Reservation in Montana and the Bureau of Indian Affairs for the operation and management of the Mission Valley Power utility. GAO noted that: (1) to meet the contract requirements, the utility provided special personnel, made improvements in the system, gathered quantitative data on electrical power consumption, and developed a long-range plan for electrical consumption; (2) the utility took many steps to comply with federal environmental and safety standards; and (3) nine modifications were made to the 1988 contract and one modification was made to the 1991 contract.
Financial Management: BIA Has Made Limited Progress in Reconciling Trust Accounts and Developing a Strategic Plan. GAO/AFMD-92-38. June 18, 1992. royalty income has been called into question. Although BIA recognizes the seriousness of the situation, little progress has been made in resolving the problems. GAO recommends that BIA develop a comprehensive strategic plan that will address interfaces between other systems and operations affecting trust fund accounting, such as the land records and reporting by the Minerals Management Service. GAO summarized this report in testimony before Congress; see: Financial Management: Problems Affecting BIA Trust Fund Financial Management, by Jeffrey C. Steinhoff, Director of Civil Audits, before the Senate Select Committee on Indian Affairs. GAO/T-AFMD-92-12, July 2, 1992 (11 pages).
Bureau of Indian Affairs: Long-Standing Internal Control Weaknesses Warrant Congressional Attention. GAO/RCED-92-118. May 8, 1992.
ABSTRACT: Through its social services program, the Bureau of Indian Affairs (BIA) offers assistance to individual Indians and tribes. GAO found that two of these services, involving payments for welfare and the burial of indigents, are plagued by unjustified, improper, and inconsistent payments and are ripe for fraud and waste. These problems stem from weak internal controls—some as basic as inadequate supervision, failure to separate employee duties, and poor computer security. Similar problems have been repeatedly identified in BIA’s social services program for more than a decade. The long-standing nature of internal control weaknesses and ineffective BIA efforts in the past to correct them indicate that an overall management commitment at all levels will be needed if an effective system of controls is to be established. Recent congressional initiatives to address persistent accounting and internal control weaknesses in BIA’s management of Indian trust funds and the Office of Audit and Evaluation will need management support at all levels if these initiatives are to succeed. To ensure full management support, increased congressional oversight may be warranted.
Financial Management: BIA Has Made Limited Progress in Reconciling Indian Trust Fund Accounts and Developing a Strategic Plan. GAO/T-AFMD-92-6. April 2, 1992. reconciliation project, which began last summer, seeks to identify correct account balances for Indian accounts using source documents to reconstruct trust account transactions so that account holders are provided as accurate an accounting as possible. Because many accounts are between 50 and 100 years old, however, the lack of supporting documentation presents a major obstacle. This testimony examines BIA’s progress in reconciling the Indian trust fund accounts and developing a strategic plan for trust fund financial management improvement.
Welfare To Work: Effectiveness of Tribal JOBS Programs Unknown. GAO/HRD-92-67BR. March 19, 1992.
ABSTRACT: GAO could not assess the effectiveness of Job Opportunities and Basic Skills Training (JOBS) programs run by Indian Tribes and Alaska Native groups or determine outcomes resulting from these programs because evaluation criteria, including well-defined program objectives, were lacking and insufficient, and reliable program data were unavailable. The economic environment in which many Indian tribes and Alaska Native organizations must operate may hinder the success of their Tribal JOBS programs. These programs are assisting participants prepare for and obtain employment at a time when few jobs are available, and unemployment on many reservations is high. In addition to poor economic conditions, tribal organizations mentioned several implementation problems, including a lack of transportation and child care for program participants.
Indian Programs: BIA and Indian Tribes Are Taking Action to Address Dam Safety Concerns. GAO/RCED-92-50. February 11, 1992. assessment is made. An effective record-keeping and reporting system to help monitor the situation at priority dams would help BIA assess progress.
Land Exchange: Phoenix and Collier Reach Agreement on Indian School Property. GAO/GGD-92-42. February 10, 1992.
ABSTRACT: Legislation passed in 1988 authorized the Interior Department to swap its former Indian School property in downtown Phoenix for more than 100,000 acres of land near the Florida Everglades owned by the Collier family along with $34.9 million in cash to set up two Indian trust funds. While most of the exchange conditions set by the law have been met, the City of Phoenix placed limitations on the uses of the Indian School land and the Barron Collier Co. had the right to match the highest bid. As a result, no competing bids for the property were received, and Congress’ intent to test the value of the land by exposing the school site to meaningful competitive bidding was not met. For several reasons, GAO cannot conclude that the Florida land, along with the $34.9 million, equals the value of the Colliers’ portion of the Indian School property. For instance, the Florida land, which was possibly overvalued in 1988, has not been reevaluated since then, and its value could have fallen during the recession. GAO does not question the right of the City of Phoenix to decide how privately-owned property should be used. Yet the city’s action in this case raises questions about whether a locality should have the authority to use zoning as a way of acquiring land in federal disposition programs without compensation to the federal government. Conflict arose during the Phoenix exchange because of efforts by the various entities to meet the intent of the exchange. Such natural conflict raises the issue of how future exchanges can be designed to accommodate the demands of several parties and still meet a market demand test.
Indian Programs: Profile of Land Ownership at 12 Reservations. GAO/RCED-92-96BR. February 10, 1992. land administered by the Department of the Interior, (2) Bureau of Indian Affairs’ workload in maintaining ownership records, and (3) act’s impact on the degree of fractionated ownership.
BIA Reconciliation Monitoring. GAO/AFMD-92-36R. January 13, 1992.
BACKGROUND: Pursuant to a congressional request, GAO reviewed the Bureau of Indian Affairs’ (BIA) efforts to improve its detection and handling of Indian trust fund losses. GAO found that: (1) BIA is liable for investing trust funds above the insured limits of $100,000; (2) the National Credit Union Administration will not cover losses in excess of the $100,000 insurance ceiling; (3) BIA has incurred losses on investments at non-accredited, uninsured credit unions as a result of fraud and criminal activity; (4) the Federal Deposit Insurance Corporation (FDIC) will not cover $121,500 in losses at FDIC-insured institutions; (5) BIA will request approximately $4 million in appropriations to cover credit union and bank losses in its next budget submission; and (6) BIA policies regarding notification and reimbursement to Indian account holders for losses due to BIA errors need to be strengthened because the policies do not address the need for loss prevention and detection systems, adequately instruct staff on how to resolve losses, address documentation requirements, and define whether losses should include interest that was earned but not credited to the appropriate account.
Land Exchange: Phoenix Indian School Development Plan Adversely Affects Property Value. GAO/GGD-91-111. July 25, 1991.
BACKGROUND: Pursuant to a legislative requirement, GAO analyzed the development proposals and rezoning process for the Department of the Interior’s Phoenix Indian School site in Arizona, focusing on: (1) alternative development plans considered; (2) the plan’s effect on the potential value of the property; and (3) how the plan affects the government’s interests. maximize the amount of city parkland; (4) the City Council’s plan adversely affected the Indian School property’s potential value, since it allows relatively less commercial space than had been granted in past zoning decisions; (5) the government could have realized more than the $80-million minimum price had Phoenix allowed as much commercial development as deemed reasonable by Interior’s contract appraiser and the GAO consultant; and (6) GAO did not estimate the property’s value due to the specific plan’s potentially costly requirements for reducing traffic impacts and improving open space.
Indian Issues: Compensation Claims Analyses Overstate Economic Losses. GAO/RCED-91-77. May 21, 1991.
BACKGROUND: Pursuant to a congressional request, GAO reviewed the economic analyses supporting the Garrison Unit Joint Tribal Advisory Committee’s (JTAC) recommendation that Indian tribes at the Fort Berthold Reservation and Standing Rock Reservation receive additional financial compensation for land the federal government acquired in 1949 and 1958 for a water resources project, focusing on: (1) the adequacy of the analyses conducted by tribal consultants; and (2) alternative methods of establishing a basis for financial compensation.
FINDINGS: GAO found that: (1) the consultants overestimated the tribes’ economic losses, since they made overly optimistic assumptions about the tribes’ economic condition prior to the loss of their land; (2) neither consultant reduced the estimate of additional compensation by the total amount that Congress previously appropriated for the acquired lands; and (3) an alternative approach for considering additional compensation would be to consider the difference between the amount of compensation the tribes believed was warranted at the time the land was taken and the compensation appropriated by Congress.
Bureau of Indian Affairs’ Efforts to Reconcile, Audit, and Manage the Indian Trust Funds. GAO/T-AFMD-91-6. May 20, 1991. tribal and approximately 283,000 individual Indian money accounts; (5) BIA made progress in starting the project, but it needed to ensure effective management, accounting, and reporting; (6) BIA still had not finalized its phase I reconciliation management plan; (7) BIA will have to reconstruct old accounts before it can determine an accurate balance; (8) despite the significant potential for incomplete records and the resulting problems due to the outdated accounts, BIA believed that reconciliation work will adequately disclose overpayments and inconsistent investments that resulted in lost interest; and (9) BIA lacked an adequate long-term strategy for keeping the accounts balanced.
Indian Programs: Lack of Internal Control at Two Special Law Enforcement Units. GAO/RCED-91-111. May 15, 1991.
BACKGROUND: Pursuant to a congressional request, GAO reviewed two Bureau of Indian Affairs (BIA) law enforcement operations, focusing on their management of: (1) a confidential fund BIA used to pay informants; (2) overtime pay; (3) travel advances; and (4) sensitive equipment.
FINDINGS: GAO found that BIA: (1) did not comply with federal requirements regarding controls over appropriated funds and did not follow numerous management procedures; (2) improperly transferred funds to private bank accounts and did not return unobligated funds to the Department of the Treasury at the end of each fiscal year, as required; (3) did not adequately account for and control fund disbursements; (4) did not comply with federal regulations requiring periodic reviews of administratively uncontrollable overtime (AUO) it paid to units and employees; (5) issued excessive travel advances to unit investigators and did not adjust or liquidate the advances, as regulations required; and (6) did not properly control sensitive equipment, such as weapons and surveillance equipment.
Indian Issues: GAO’s Assessment of Economic Analyses of Fort Berthold and Standing Rock Reservations’ Compensation Claims. GAO/T-RCED-91-30. April 12, 1991. $411.8 million and $181.2 million to $342.9 million for Standing Rock; (2) the tribes’ economic losses were overstated, because economic consultants made optimistic assumptions regarding the tribes’ economic situation prior to when their land was taken; and (3) the consultants did not reduce their estimates for additional compensation by the total amount that Congress previously appropriated for the land taken. GAO also noted that: (1) three Fort Berthold tribes estimated that their land was worth $9.4 million more than the amount Congress appropriated and the Standing Rock tribe estimated that its land was worth $14.2 million more than the amount Congress appropriated; and (2) the GAO calculated dollar range for the three Fort Berthold tribes was $51.8 million to $149.2 million and $64.5 million to $170 million for the Standing Rock tribe.
Bureau of Indian Affairs’ Efforts to Reconcile and Audit the Indian Trust Funds. GAO/T-AFMD-91-2. April 11, 1991.
BACKGROUND: GAO discussed the Bureau of Indian Affairs’ (BIA) efforts to reconcile and audit the Indian trust funds. GAO noted that: (1) numerous audit reports have pointed out serious accounting and financial management problems and weak internal controls throughout BIA; (2) the lack of general ledger control over accounts, inaccurate data, the lack of accounting systems documentation, and inadequate management of the Indian trust funds caused numerous accounting errors; (3) the first phase of the BIA trust fund reconciliation and audit project would identify the correct account balances for over 500 tribal accounts and 17,000 individual Indian money trust accounts; and (4) BIA planned to use the first-phase results to develop plans for moving into a second phase that would cover the remaining 1,500 tribal and 283,000 individual Indian money accounts. GAO believes that: (1) legislation may be needed to provide appropriations for monies owed to account holders or relief for unrecoverable overpayments that go back many years; (2) BIA planned to implement the Department of the Interior’s six-part plan to help it control fund accounting transactions, reconcile all account balances, and implement a new Interior-wide accounting system; and (3) BIA must ensure that it carries out its financial responsibilities efficiently and effectively by developing a comprehensive financial management plan for both its appropriated funds and trust fund operations.
Indian Programs: Use of Forest Development Funds Should Be Based on Current Priorities. GAO/RCED-91-53. March 7, 1991.
BACKGROUND: Pursuant to a congressional request, GAO reviewed the Bureau of Indian Affairs’ (BIA) forestry program, focusing on BIA: (1) achievement of its timber harvest goals on commercial Indian timberland; (2) accomplishment of needed forest development; (3) controls over funds disbursement; (4) forestry program staffing since 1977; and (5) efforts to attract Indian foresters.
FINDINGS: GAO found that: (1) tribes actively participated in developing multi-year forest management plans, and in planning and approving individual timber sales; (2) BIA experienced problems in keeping forest management plans current due to funding and staffing shortfalls and inability to obtain timely tribal involvement in developing plan components; (3) such factors as market conditions and compliance with relevant federal laws affected the achievement of timber harvest goals; (4) the 1977 backlog of forest development needs was incomplete and imprecise, and failed to include over 300,000 additional acres of needed timber stand improvement; (5) while BIA data indicated that needed forest development had been completed for about one-half of the backlog acreage, data on individual reservation accomplishments were uncertain; (6) dedicated funding failed to address changing development needs because it was still targeted at reducing the 1977 backlog; (7) BIA improved its controls over forest management deduction funds; (8) BIA forestry staff increased significantly since 1978; and (9) BIA had several headquarters and field-level programs to encourage Indians to study and train for the forestry profession.
Indian Programs: Navajo-Hopi Resettlement Program. GAO/RCED-91-105BR. March 6, 1991.
BACKGROUND: Pursuant to a congressional request, GAO reviewed the Navajo-Hopi Resettlement Program, focusing on: (1) program status; (2) problems faced by relocatees; and (3) Navajos resisting relocation. maintenance or repair problems; (5) less than half of the relocated families moved to off-reservation sites; (6) some of the families who moved to off-reservation sites experienced financial and adjustment problems; (7) 28 percent of the relocated families sold their off-reservation replacement homes primarily because they preferred life on the reservation; (8) to address problems encountered by families who had moved off the reservation, the Office of Navajo and Hopi Indian Relocation issued two program requirements to help families relocate successfully; and (9) the Office continued to work with the Navajo and Hopi tribes to avoid having to forcibly relocate Navajos resisting relocation.
Indian Health Service: Funding Based on Historical Patterns, Not Need. GAO/HRD-91-5. February 21, 1991.
BACKGROUND: Pursuant to a congressional request, GAO obtained information on: (1) Indian Health Service (IHS) funding distribution methods and the funds allocated for fiscal year (FY) 1980 through FY 1990; (2) per-capita funding for the Oklahoma IHS area; and (3) the effect of IHS funding constraints on health services delivery in Oklahoma, with special attention to the Contract Health Services (CHS) program.
FINDINGS: GAO found that: (1) IHS distributed its funding among its 12 service delivery areas based primarily on previous-year funding and rarely used needs-based methods; (2) total IHS funding increased from approximately $517 million in FY 1980 to about $1 billion in FY 1990, and Oklahoma’s funding increased from $59.9 million to $131 million during that period; (3) increased needs-based funding for Oklahoma failed to increase its overall funding share; (4) per-capita funding for Oklahoma Indians was relatively low due to limited needs-based funding and the growing number of eligible Indians in the area; and (5) IHS service delivery was strained in Oklahoma due to substantial increases in demand for outpatient services and rationing of the CHS program.
Indian Programs: Tribal Influence in Formulating Budget Priorities Is Limited. GAO/RCED-91-20. February 7, 1991. contracted with BIA to carry out programs; and (4) concerns tribes had regarding the IPS process.
FINDINGS: GAO found that: (1) the BIA budget has averaged about $1 billion annually over the past 10 years, with the operation of Indian programs budget component averaging about $850 million a year and the IPS process averaging about $275 million annually; (2) BIA changed various IPS programs based on administrative decisions or legislative directives without notifying area offices or tribes; (3) BIA could not explain why its current guidance provided tribes with a lesser role than earlier guidance in setting IPS budget priorities and funding levels; (4) tribal involvement in the IPS process varied depending on the tribes’ relationship with BIA, changes in tribal leadership, and political situations at the tribes’ reservations; (5) although tribes exercised some control over budget formulation for contracted programs, they characterized their overall IPS involvement as inconsequential; (6) tribes were particularly concerned about the lack of adequate federal funding for their needs; and (7) BIA and tribal officials often cited federal trust responsibilities as a factor limiting tribal involvement in the IPS process.
Subject Index
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gao_GGD-98-5 | gao_GGD-98-5_0 | Introduction
In 1994, we reported on a number of risks associated with the use of over-the-counter (OTC) derivatives, but we did not specifically address sales practice issues. However, since the beginning of 1994, major legal and regulatory actions have been associated with sales practices for OTC derivatives, mortgage-backed securities (MBS), and structured notes, suggesting that the topic deserved closer scrutiny. In addition, we found that an estimated $11.4 billion in reported losses resulted from transactions in such products from April 1987 through March 1997—about $3.2 billion of which involved end-user concerns about dealer sales practices. Federal financial market regulators have an interest in these markets as a part of their responsibilities for ensuring the soundness of regulated financial institutions and maintaining the efficiency and stability of U.S. financial markets. In response to a request by the former Chairman of the Subcommittee on Telecommunications and Finance, House Committee on Energy and Commerce, we reviewed sales practices for OTC derivatives. Because users of MBS and structured notes had also experienced losses that sometimes involved sales practice disputes, we expanded our review to include these products.
OTC Derivatives
OTC derivatives contracts are privately negotiated outside of an organized exchange and have a market value determined by the value of an underlying asset, reference rate, or index (called the underlying). Underlyings include stocks, bonds, agricultural and other physical commodities, interest rates, currency exchange rates, and stock indexes. OTC derivatives are customized to satisfy specific end-user requirements that cannot always be met by the typically more standardized exchange-traded derivatives, which include futures and optionscontracts. Although the economic terms of OTC derivatives are privately negotiated, counterparties commonly elect to use standardized contract language contained in master agreements, such as those developed by the International Swaps and Derivatives Association (ISDA).
Both OTC and exchange-traded derivatives are used by firms around the world to manage market risk by transferring it from entities less willing or able to manage it to those more willing and able to do so. In transferring this risk, OTC derivatives counterparties, unlike their U.S. exchange-traded counterparts, typically remain subject to credit risk—the risk of counterparty default. Derivatives can be more cost-effective for market participants than transactions in the underlying cash markets because of the reduced transaction costs and the leverage that derivatives provide. These benefits do not come without risk because using OTC derivatives, similar to using other financial products, can result in losses from adverse market movements, credit defaults, or operations errors.
As discussed in the following sections, the basic types of OTC derivatives are forwards, options, and swaps. These basic products can be combined with each other in a multitude of ways or with other financial products to create more complex OTC derivatives.
Forwards
Forwards are OTC contracts that obligate the holder to buy or sell a specific underlying at an agreed-upon price, quantity, and date in the future. The price of each forward contract may be agreed upon in advance or determined at the time of delivery. Forward contracts exist for many underlyings, including traditional agricultural or physical commodities, as well as for currencies (referred to as foreign exchange forwards) and interest rates (referred to as forward rate agreements). Market participants can use forwards to protect their assets and liabilities against the risks associated with rate and price movements, called hedging, or to profit from correctly anticipating rate and price movements. Generally, counterparties to forwards intend either to make or take delivery of the underlying.
OTC Options
OTC options are privately negotiated contracts that can be used for hedging or to profit from correctly anticipating rate and price movements. OTC option contracts also exist for many underlyings, including commodities, currencies, interest rates, and equities. Like other OTC derivatives, OTC options are designed to satisfy specific end-user requirements because specific terms, such as the exercise price, maturity date, and type of underlying, are negotiated.
Swaps
Swaps are OTC agreements that typically require counterparties to make periodic payments to each other for a specified period. The calculation of these payments is based on an agreed-upon amount, called the notional amount, that generally is exchanged only in currency swaps. The periodic payments may be a fixed or floating (variable) amount. Floating payments may change with fluctuations in interest or currency rates or equity or commodity prices, depending on the contract terms. Swaps are used to hedge a risk or obtain more desirable financing terms, and they can be used to profit from correctly anticipating rate and price movements.
Plain Vanilla OTC Derivatives
The simplest derivatives, such as the basic forwards, options, and swaps previously described, are generally called plain vanilla. These OTC derivatives are typically offered by many dealers due to their relative simplicity. As a result, dealer price quotes tend to be very competitive—falling within a narrow range. Also, the price at which dealers are willing to enter into plain vanilla derivatives—the bid-ask spread—tends to be narrow. Furthermore, large transactions can be executed through one dealer at a single price. Therefore, through the availability of dealers, liquidity is provided for plain vanilla OTC derivatives. Although no official data are available, according to some dealers, plain vanilla OTC derivatives account for 80 to 90 percent of all OTC derivatives activity.
More Complex OTC Derivatives
In contrast to plain vanilla OTC derivatives, the more complex OTC derivatives have features that may make them more difficult to value. Their values may be based on, or derived from, more than one underlying asset, reference rate, or index. An example of a more complex OTC derivative is a “rainbow call option,” whose value is based on the highest 1-year yield available from among four underlyings—cash, the 10-year U.S. Treasury note, the 30-year U.S. Treasury bond, and the Standard & Poor’s 500 Index. Unlike plain vanilla interest rate swaps in which the notional amount remains constant to maturity, this amount may change during the life of more complex swaps. Some OTC derivatives may be complex because they contain, or have embedded in them, other derivatives—for example, a swap with an embedded option that grants the holder the right, but not the obligation, to terminate the swap contract at some future time. Complex OTC derivatives may have other features, such as a multiplier that magnifies the effect of a price movement in the underlying.
In contrast to plain vanilla OTC derivatives, more complex OTC derivatives are offered by fewer dealers, or they may even be the creation, or proprietary product, of one dealer. Fewer dealers means less liquidity and wider bid-ask spreads, making it more difficult to offset or unwind an earlier transaction at a favorable price. Also, an end-user may find it difficult to independently determine the price or value of a complex OTC derivative that has very complicated terms or that is the proprietary product of one dealer. End-users may attempt to determine the market price of OTC derivatives on the basis of a model. However, the resulting price may not correspond closely to what would actually occur in the marketplace, assuming a buyer or seller could be found. The large fees that some more complex OTC derivatives transactions generate are an economic incentive for dealers to develop new products and refine existing products developed by other dealers.
Mortgage-Backed Securities
MBS are debt securities that are created from residential mortgages. They are backed (collateralized) by pools (groups) of mortgages, most of which are 30-year obligations. The process of pooling mortgages and using them to back a new issue of securities is called securitization. Investors in MBS are entitled to receive a portion of the interest and principal payments generated by the mortgage pool. MBS provide funds to the mortgage market by enabling mortgage lenders to sell the mortgages that they originate, thereby replenishing their funds for additional mortgage lending. MBS effectively expand funds available for housing by attracting investors in mortgage loans.
MBS consist of mortgage pass-through securities (also called mortgage-backed certificates) and collateralized mortgage obligations (CMO). Mortgage pass-through securities entitle investors to share on a pro rata basis in all principal and interest payments received from the mortgage pool. CMOs, which are a form of multiple-class securities, entitle investors to share in principal and interest payments in accordance with a payment schedule. The payment schedule may divide the mortgage pool into classes, called tranches, and specify the order in which the tranches are to receive principal and interest payments. CMO tranches receiving the earliest payments, by design, contain less risk than is found in simple mortgage pass-through securities. However, the creation of these relatively safe and stable tranches requires the creation of more risky tranches that can be highly volatile in price.
Structured Notes
Structured notes are debt securities that combine elements of traditional debt instruments and OTC derivatives. Interest payments for traditional debt instruments are generally either a stated fixed amount or a variable amount that is based on fluctuations in a specified interest rate. In contrast, the interest and/or principal payments for structured notes may be linked to two or more specified interest or currency rates, or to equity or commodity prices. Structured notes may contain precise formulas describing how these payments are tied to such rates and prices and how they are to be computed. For example, a more complex type of structured note, the inverse floater (also called an inverse floating rate note) pays investors a rate of interest that moves in the opposite direction of a specific market interest rate. Because its value tends to move in the opposite direction of other debt instruments, the inverse floating rate is often used for hedging. Inverse floating rate notes typically contain options that effectively set maximum and minimum rates that will be paid to holders.
Structured notes may also have OTC derivatives embedded in them, such as forwards, options, and swaps. By combining debt and OTC derivatives into a single product, structured notes can provide a more efficient and economic means of managing certain risks than debt and OTC derivatives as separate products. For example, a company can, by purchasing a structured note, limit its credit risk to one party (the issuer) and limit its risk management costs to one product.
Structured notes can be attractive both to investors and issuers. They can be customized to meet investors’ preferences for risk and return. Such customization, which is hard to replicate with traditional debt securities, can be attractive to investors seeking to hedge their unique risks or possibly earn greater returns than those offered by traditional debt securities. The customization is not needed by issuers but is offered to attract investors. Structured notes can be attractive to issuers seeking to lower their cost of capital through access to cheaper financing sources. However, the customized features, though attractive to investors, can contain rate and price risks that are unwanted by the issuer. To offset such unwanted risks, issuers can enter into swaps or options with dealers at the time of issuance. Structured notes are generally of high credit quality because most are issued by highly rated (AAA/Aaa or AA/Aa)corporations or government-sponsored enterprises (GSE) and, therefore, are considered by market participants to have minimal credit risk.
OTC Derivatives, MBS, and Structured Note Markets’ Growth and Participants’ Activities
Growth in the OTC derivatives market has continued since 1993 because of the popularity of plain vanilla products, which continue to dominate the market relative to more complex products. In contrast, the MBS market and the largest segment of the structured note market experienced significant declines between 1993 and 1995, but they are now showing signs of recovery. OTC derivatives market participants include dealers and end-users. In addition to these participants, the MBS and structured note markets include issuers and underwriters. Various types of financial institutions market OTC derivatives, MBS, and structured notes.
Market Growth
According to the most recent global survey by the Bank for International Settlements, the notional/contract amount outstanding of OTC derivatives was estimated at $47.5 trillion worldwide and $11 trillion in the United States, as of March 31, 1995. MBS issuances grew from $371 billion in 1990 to a peak of $991 billion in 1993. MBS issuances then declined 45 percent between 1993 and 1994 to $541 billion and declined another 40 percent between 1994 and 1995 to $326 billion. However, total issuances for 1996 grew to $474 billion.
Structured note issuances grew each year between 1990 and 1994, which is the last year for which we were able to obtain estimates for corporations.Structured note issuances for both GSEs and corporations were estimated to be $18 billion in 1990 and $92 billion in 1994. Structured note issuances by GSEs alone were estimated to be $44 billion in 1993. In 1994, they were estimated to be $40 billion and accounted for 43 percent of the estimated structured note issuances for that year. However, in 1995, GSE-issued structured notes declined by 75 percent to $10 billion. This decline was consistent with the significant drop in overall structured note activity that market participants told us they experienced or witnessed that year. In 1996, GSE-issued structured notes, though still below the peak reached in 1993, increased to $12 billion.
The Nature and Extent of Issuer, Underwriter, and Dealer Activities
MBS and structured notes are similar to other securities, such as stocks and bonds, in that they are issued—created and sold to investors—to raise capital. Securities underwriting is a capital-raising activity that involves distributing newly issued stocks and bonds as well as MBS and structured notes, and it is a major function of securities firms and some banks. Often, individual underwriters join with other underwriters and form underwriting groups, or syndicates, to handle a new issue. As underwriters, these firms agree to offer the securities of the issuer to other investors in two different ways. One way that underwriters agree to issue securities is on a “firm commitment” basis, whereby the underwriting firm agrees to accept all of the issued securities from the issuing entity. If all of the securities are not sold to other dealers or investors, the firms underwriting the issue will own the unsold portion of the issuance. Underwriters can also agree to offer securities on a “best efforts” basis, whereby any portion of the issuance that is not purchased by other dealers or investors is returned to the issuing entity.
Various Types of Institutions Actively Market OTC Derivatives, MBS, and Structured Notes
Dealers from various industries market OTC derivatives, MBS, and structured notes. Data on the total number of banks, securities firms, and other dealers of OTC derivative products were not available. In the United States, banks account for the majority of OTC derivatives volume. In 1996, the top 10 bank holding companies in terms of assets, all of which market these products, accounted for about 94 percent of the total volume of OTC derivatives held by all banks. Regulated broker-dealers market OTC derivatives. In addition, the affiliates of some securities firms actively market nonsecurities OTC derivatives, with the affiliates of six of the largest firms being the most active. Insurance company affiliates are also somewhat active, with three affiliates actively marketing nonsecurities OTC derivatives in volumes comparable to that of some of the securities firm affiliates. Together, these dealers conduct thousands of OTC derivatives transactions annually. Complete statistics are not available on the total number of dealers marketing MBS and structured notes, but regulators estimated that hundreds of financial institutions market these products. Securities firms account for the largest volumes, but banks and bank affiliates also market MBS and structured notes.
Sales Practices for OTC Derivatives, MBS, and Structured Notes
The sales practices that dealers use to market OTC derivatives, MBS, and structured notes can involve various activities. For example, in discussing potential transactions, dealers may attempt to determine whether a particular product is appropriate or suitable for the end-user by considering several factors, such as the product’s complexity relative to the end-user’s sophistication as well as the end-user’s risk management needs or investment objectives. Dealers may also make disclosures about the product’s benefits and risks, such as how the product’s value may be favorably or adversely affected by changes in interest rates or foreign exchange rates. This information is sometimes provided to an end-user as part of a “term sheet” that outlines the relevant terms of the transaction, including price, quantity, and maturity dates, and that may also be included as a part of the confirmation materials that document the transaction.
Another aspect of marketing these products is the establishment of the transaction price. The transaction price is usually negotiated between the dealer and the end-user and can be influenced by market conditions and other factors, including whether the end-user has other business transactions with the dealer, such as loans or securities underwriting. After a transaction is entered into, the dealer may be asked to periodically assist the end-user in determining the current value of the product. End-users are less likely to need such assistance for plain vanilla OTC derivatives that have readily available dealer price quotes or for certain MBS products that have an active secondary market. Dealers may also be asked to unwind an OTC derivatives contract, and this may require one party to pay the other an amount representing any change in the contract’s market value.
The nature of the relationship and expectations between dealers and end-users can vary, depending on the product involved. OTC derivatives transactions create obligations between counterparties that continue over the life of the contracts, and thus involve counterparty credit risk. Because of counterparty credit risk, dealers and end-users of OTC derivatives usually seek to enter into transactions with credit-worthy counterparties. Such creditworthiness concerns are important because the counterparties to a swap, for example, are obligated to exchange periodic payments over the life of the contract. Therefore, until the contract matures, each party is at risk that the other may not fully meet its obligations. In contrast, some securities transactions, including those in MBS and structured notes, involve a change in ownership, and thus no additional obligations would exist between the dealer and end-user.
Various Regulators Oversee the Dealers Marketing OTC Derivatives, MBS, and Structured Notes
The dealers of OTC derivatives, MBS, and structured notes may be subject to oversight by various federal or other regulatory bodies. Bank dealers are generally overseen by either the Federal Reserve System, which oversees the bank holding companies and state-chartered banks that are its members, or the Office of the Comptroller of the Currency (OCC), which oversees nationally chartered banks. Of the 10 largest bank OTC derivatives dealers as of 1996, 3 are overseen by the Federal Reserve and 7 are overseen by OCC. In addition, many banks have established separate legal entities to conduct securities activities, including marketing MBS and structured notes, and these entities are also subject to oversight by the Securities and Exchange Commission (SEC). Banks can also conduct limited securities activities—primarily in securities issued by the U.S. government, GSEs, or certain state or local governments—from the banking entity itself.
As previously noted, the activities of dealers marketing OTC derivatives that are securities as well as those marketing MBS and structured notes are overseen by SEC. The activities of dealers marketing OTC derivatives that are determined to be futures are subject to the Commodity Futures Trading Commission’s (CFTC) oversight. Firms that market securities must do so from an entity registered with SEC and subject to various regulations, such as regulations requiring minimum levels of capital. In addition, firms offering futures and commodity options to the public must register with CFTC and comply with the Commodity Exchange Act (CEA) and regulations promulgated under the act, unless otherwise exempted.
Registered securities and futures firms are also required to join and subject themselves to the rules and requirements of a self-regulatory organization (SRO). Such SROs also impose sales practice-related requirements on their members. Most OTC derivatives are not considered to be securities or futures by the dealers offering them. Nonsecurities and nonfutures activities may be conducted in a subsidiary separate from the regulated entity. Consequently, securities and futures firms typically conduct their nonsecurities and nonfutures OTC derivatives activities outside of their registered entities in affiliates that are not subject to SEC or CFTC regulation. CFTC has also exempted swaps and certain other OTC derivatives from the requirement that such activities be conducted in an affiliate subject to its regulation, but CFTC has retained the authority to take action against fraudulent conduct involving exempted products that are futures. (Ch. 2 discusses the regulatory framework for OTC derivatives, MBS, and structured notes in greater detail.)
In addition to working individually, the federal financial market regulators also work collectively to address issues relating to the financial markets. The heads of the Department of the Treasury, CFTC, the Federal Reserve, and SEC comprise the President’s Working Group on Financial Markets. Staffs from OCC and other regulatory agencies also participate in this group’s activities. The Working Group was established after the 1987 market crash to address issues concerning the competitiveness, integrity, and efficiency of the financial markets, and it is chaired by the Secretary of the Treasury. The Working Group meets periodically to share information and to coordinate regulatory policies and activities, and it also meets on those matters relating to OTC derivatives.
Objectives, Scope, and Methodology
To address congressional concerns associated with sales practices for OTC derivatives, MBS, and structured notes, our objectives were to analyze (1) the federal sales practice requirements applicable to these products and the dealers marketing them; (2) the extent of end-user satisfaction with sales practices, product use, and related disputes and the costs of these disputes; (3) the views of end-users and dealers on the nature of their relationship and responsibilities; (4) the actions dealers and end-users have taken to reduce the potential for sales practice disputes; and (5) the actions regulators have taken to address sales practice issues.
To analyze federal sales practice requirements applicable to these products and the dealers marketing them, we reviewed federal laws and regulations related to sales practices and discussed them with federal financial market regulators. We also reviewed the proposed and final rule issued jointly by the three federal bank regulators regarding bank sales of government securities, which include MBS and structured notes issued by GSEs. In addition, we reviewed the sales practice guidance provided by federal bank regulators for their examiners and the dealers they oversee.
To analyze the extent of end-user satisfaction with sales practices involving OTC derivatives, MBS, and structured notes, we sent questionnaires to the financial officers of nearly 2,400 randomly selected U.S. organizations in 1995. Using the best information we could identify, we constructed a universe of over 49,000 public-sector and private-sector U.S. organizations that might be using these products, including not only the largest organizations, which were determined on the basis of financial or other measures of size, but also the smaller organizations in each industry. Our sample was drawn from 19 populations of such organizations. Some of these 19 populations were divided into 2 or more strata on the basis of an appropriate measure of organization size—such as assets, revenues, student enrollment, or census counts. Our questionnaire requested data on the use of these products within the 12 months preceding the survey.
Our questionnaire asked organizations to rate the sales practices of dealers with whom they entered into contracts across the following six dimensions: (1) disclosure of downside risks, (2) quality of transaction documentation provided, (3) suitability of products proposed, (4) competitiveness of pricing and fees, (5) provision of accurate mark-to-market pricing information, and (6) assistance in unwinding transactions. Our questionnaire also asked the organizations to separately rate the sales practices of dealers that proposed contracts but who they did not use for the three applicable dimensions listed above—(1), (3), and (4). We developed these sales practice dimensions on the basis of reviews of regulatory and dealer documents and discussions with regulators, dealers, and end-users. We also asked the organizations to provide overall ratings of sales practices both for dealers with whom the organizations entered into contracts as well as dealers that proposed contracts but who they did not use.
To analyze the extent of product use, we evaluated the approximately 1,800 responses received to our questionnaire. We developed statistically valid estimates of the extent of each product’s use across all 19 populations, subject to a 95-percent confidence level, unless otherwise indicated. We compared our results to regulatory data and 27 other recent studies that reported rates of OTC derivatives usage. We also compared our survey results regarding the reasons derivatives were used to studies by other organizations.
To analyze the extent of sales practice disputes between end-users and dealers and the costs of these disputes, we collected data on investigations by securities regulators and on complaints these organizations received in the 4-year period from January 1993 through December 1996. We also reviewed reports and findings of federal regulators and state audit departments for cases where an end-user incurred a loss and subsequently alleged deficient dealer sales practices. Additionally, we used public and nonpublic information to compile a list of entities that were known to have incurred losses on OTC derivatives, MBS, or structured notes, and we attempted to identify those cases where sales practice allegations had been raised.
To analyze the views of end-users and dealers on the nature of their relationship and responsibilities, we evaluated the responses of survey respondents who reported being satisfied as well as those who expressed being dissatisfied with dealer sales practices. We also interviewed by telephone 50 survey respondents, including about one-half of whom expressed satisfaction and about one-half of whom expressed general dissatisfaction with dealer sales practices. The respondents were judgmentally selected from the industries we surveyed to include large and small organizations and users of OTC derivatives, MBS, and structured notes as well as nonusers that had heard sales presentations. The interviews were performed, among other reasons, to learn more about (1) why end-users were satisfied or dissatisfied with dealer sales practices and (2) what opinions end-users had on fiduciary relationships.
In addition, we analyzed two sets of voluntary guidance prepared by two dealer groups that address sales practice issues. We also reviewed comments on this voluntary guidance made by end-user associations, legal experts, the U.S. Department of Labor, and others. Finally, we attended industry conferences; reviewed conference documents, court cases, and congressional testimony; and interviewed dealer, end-user, and federal and state regulatory officials regarding the relationship and responsibilities of dealers and end-users in OTC derivatives transactions.
To analyze the actions that dealers and end-users have taken to reduce the potential for sales practice disputes, we interviewed 14 dealers active in marketing OTC derivatives, MBS, and structured notes, including securities firms, banks, and insurance companies; 15 small, medium, and large end-users; 11 dealer and end-user associations; and 5 U.S. federal regulators. We interviewed the end-users and dealers regarding their internal controls and the practices they used to reduce the likelihood of sales practice disputes. In addition, we reviewed studies by other organizations that surveyed end-user management practices and internal controls for OTC derivatives, MBS, and structured notes. We also interviewed regulators and reviewed regulatory examination results regarding weaknesses they identified in policies, procedures, and practices that could lead to sales practice disputes. Furthermore, we reviewed end-user association guidance to members regarding the policies and practices that should be in place before using these products. Finally, we reviewed state legislation whose goal was to minimize the risks that OTC derivatives, MBS, and structured notes pose to governments at the state level or lower and that was enacted by 14 states between January 1994 and September 1996.
To analyze the actions that regulators have taken to address sales practice issues, we interviewed federal financial market regulators. We also reviewed the examination reports and supporting workpapers for the special examinations of the seven largest banks marketing OTC derivatives, MBS, and structured notes. These special examinations were conducted by OCC and the Federal Reserve from mid-1994 through mid-1995. We reviewed the guidance provided by federal bank regulators for their examiners and the dealers they oversee that addresses sales practices and overall risk management responsibilities. We also reviewed congressional testimony, examination policies, guidance, procedures, workpapers, and reports pertaining to the marketing of these products.
We did our work in Chicago, Cincinnati, Dallas, Los Angeles, Minneapolis, and Washington, D.C., between June 1994 and August 1997 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the heads, or their designees, of CFTC, the Department of the Treasury, the Federal Reserve Board, OCC, SEC, the National Association of Securities Dealers (NASD), and the New York Stock Exchange (NYSE). We also requested comments from the End-Users of Derivatives Association (EUDA), the Government Finance Officers Association (GFOA), ISDA, and the National Association of State Auditors, Controllers and Treasurers (NASACT). The nontechnical comments from these organizations are presented and evaluated at the end of chapter 7 and are reprinted along with additional responses in appendixes III through IX.
Federal Sales Practice Requirements Vary by Product and Dealer
The federal sales practice requirements designed to protect end-users of OTC derivatives vary, depending, in part, on whether the specific product in question is a security, a futures contract, or neither product. If an OTC derivative falls within the definition of a security or futures contract, the transaction is subject to the applicable sections of the federal laws governing the sale of those products. Although it is not always clear which OTC derivatives fall within these definitions, SEC and CFTC agreed that one dealer’s sales practices related to certain OTC derivatives warranted action, and they cooperated in taking enforcement action against the dealer. If an OTC derivative is not covered by the federal securities or commodities laws, an end-user with a sales practice complaint would need to seek redress against a dealer by asserting primarily state statutory or common law claims. In contrast to OTC derivatives, MBS and structured notes are typically securities; therefore, their sale is subject to the federal securities laws, except when exempted from specific provisions.
The sales practice requirements that a dealer must follow when marketing OTC derivatives in the United States also vary, depending on which regulator, if any, oversees its activities. If the dealer is a bank, all of its activities are subject to oversight by one of the federal regulatory agencies responsible for ensuring that banks are appropriately managing their risks. Unlike the requirements applicable to securities, which are intended to protect investors, the requirements placed on banks marketing OTC derivatives are intended primarily to limit the risk that such activities pose to a bank. Securities and futures firms, as well as insurance companies, that offer nonsecurities and nonfutures OTC derivatives typically do so from affiliates that are not subject to direct regulatory oversight.However, should SEC or CFTC determine that a specific OTC derivatives transaction is a security or a futures contract, the transaction would be subject to the respective regulator’s jurisdiction, absent an agency exemption or a successful court challenge. Members of the President’s Working Group on Financial Markets have stated that the scope of SEC and CFTC authority and existing sales practice requirements are adequate to protect the markets and OTC derivatives end-users.
Sales Practice Requirements Vary, Depending on the Product
The sales practice requirements designed to protect end-users of OTC derivatives vary. Some OTC derivatives are subject to the requirements found in the securities laws, including their antifraud provisions and SRO rules. Some OTC derivatives may be subject to similar requirements found in the laws applicable to futures trading in the United States. When federal laws do not apply, disputes involving OTC derivatives would need to be addressed by asserting primarily state statutory or common law claims, such as fraud or breach of fiduciary duty. In comparison, dealers marketing MBS and structured notes that are securities must comply with the federal securities laws.
Some OTC Derivatives Are Subject to the Federal Securities Laws
OTC derivatives that are securities are subject to the sales practice requirements in the federal securities laws that SEC administers. OTC derivatives that are considered to be securities include OTC options on securities, including options on stock indexes. However, such OTC derivatives represent a small portion of the overall volume of these products. According to the most recent global survey by the Bank for International Settlements, the notional amount of equity OTC derivatives—which would include products either previously determined or likely considered to be securities—was $579 billion, or 1.4 percent of the total OTC derivatives contracts outstanding (net of local and cross-border double-counting), at the end of March 1995. The gross market value for equity derivatives was $50 billion, or 2.8 percent of the total OTC derivatives contracts outstanding, at the end of March 1995. Although SEC could not provide comparable data on the extent to which U.S. broker-dealers market OTC derivatives that are securities, an SEC official confirmed that the percentage of such U.S. firms’ activities were likely to be similar to those identified in the Bank for International Settlements survey.
The sale of any OTC derivative contract that is considered to be a security is subject to the antifraud provisions of the securities laws that are intended to protect customers and to foster market integrity by prohibiting fraudulent conduct in securities transactions. A dealer can violate these antifraud provisions by making material misstatements about the security being recommended or misleading a customer by omitting information material to the transaction. Under the authority granted by these laws, SEC can act against dealers or their personnel for violating these provisions, including imposing fines on them, restricting their activities, or revoking their registration. An end-user may also bring a civil action for a violation of these laws and seek rescission (or undoing of the transaction) or damages.
In addition to complying with the securities laws, dealers marketing OTC derivative securities must comply with the requirements of the securities industry SROs of which they are members. For example, NASD’s members offering securities to the public must comply with its Conduct Rules.These rules, among other things, require that a dealer, before recommending a product to an end-user, obtain and evaluate information about the end-user’s financial condition and investment objectives to ensure that the product is suitable. (A recently issued NASD rule interpretation that discusses dealers’ responsibilities relating to institutional end-users is discussed below.)
The extent to which some OTC derivatives are securities and, therefore, subject to the securities laws is not always clear. SEC officials told us that, as a matter of policy, the agency does not limit its authority by delineating categories of OTC derivatives that are not securities. Relative certainty exists for options on securities, which are considered to be securities under the securities laws. For other OTC derivative products, case-by-case determinations are made. SEC officials said that the agency responds, when requested, to dealer inquiries about whether SEC would consider a specific proprietary OTC derivative contract to be a security. In other cases, dealers independently evaluate the characteristics of individual OTC derivative products to determine whether the products meet the definition of a security as defined in the securities laws. However, when dealers conduct activities in products on the basis of their own determination that the product involved is not a security, SEC or a court may later disagree with their determination. Even if a product meets the definition of a security, SEC officials told us that they can exempt products from various provisions of the securities laws, although, according to agency officials, the agency has never exempted any product from the antifraud provisions of these laws.
In cooperation with CFTC, SEC took action under the securities laws against Bankers Trust, in 1994, for its conduct in transactions with Gibson Greetings, Inc., involving two OTC derivatives contracts. In acting against Bankers Trust, SEC found that the two transactions involved were securities because they were options on U.S. Treasury securities.Accordingly, SEC found that Bankers Trust violated various sections of the securities laws, including making false statements or omissions in the sale of securities, supplying materially inaccurate valuations of derivatives transactions, and failing to supervise marketing personnel.
Some OTC Derivatives Are Subject to the Federal Commodities Laws
Some OTC derivatives are subject to the CEA, which governs futures trading in the United States and which is administered by CFTC. U.S. firms offering futures and certain options contracts to the public must register with CFTC and comply with the CEA and regulations promulgated under the act as well as with applicable SRO rules. The CEA provides various sales practice-related requirements that must be adhered to by these and other firms offering such products, unless otherwise exempted from such requirements. When establishing accounts, firms are required by SRO rules to obtain certain information pertaining to their customers’ financial condition and trading experience. CFTC generally requires that firms make certain disclosures about the risks of products and provide customers with a standardized risk disclosure document before engaging in transactions. The CEA also prohibits fraudulent conduct, including material misstatements and omissions. CFTC can bring actions against firms for violating the CEA. In addition, the CEA allows futures and options customers to pursue private claims against a firm for fraud, but questions have been raised about the application of the CEA’s fraud provisions to OTC derivatives transactions.
The extent to which some OTC derivatives are subject to the CEA is uncertain. CFTC’s regulatory framework is focused primarily on the oversight of exchange-traded futures and certain options and of intermediaries engaging in such transactions on behalf of customers. CFTC has issued regulations that allow trade options on commodities, except on certain enumerated domestic agricultural commodities, to be traded off-exchange. Forwards and certain OTC foreign-currency transactions are excluded from regulation under the CEA, including its antifraud provisions. In 1992, Congress granted CFTC the authority to exempt certain OTC derivatives, including swaps, from almost all of the CEA’s provisions.Without determining that swaps were futures, CFTC issued a rule that exempted eligible swaps from all but the CEA’s antifraud and antimanipulation provisions. Although CFTC’s swaps exemption preserves the CEA’s antifraud provisions, the provisions only apply to the extent that swaps are found to be subject to the act.
As previously discussed, CFTC took a sales practice-related action, in cooperation with SEC, against Bankers Trust for activities involving swaps and other products that are subject to the CEA exemption. In taking this action, CFTC enumerated the transactions that were involved in the violations but did not indicate whether it considered the transactions to be futures or options contracts subject to the CEA. Instead, it asserted that Bankers Trust, by its conduct, had assumed the role of a commodity trading advisor and had violated the antifraud provisions of the CEA governing such parties’ activities.
State Statutory and Common Law Claims Would Be Asserted in Disputes Involving OTC Derivatives That Are Not Subject to Federal Laws
To the extent that OTC derivatives are not covered by either the federal securities or commodities laws, an end-user alleging sales practice misconduct by a dealer would need to seek relief by asserting primarily state statutory or common law claims, such as fraud or breach of fiduciary duty. These claims, which are typically advanced in suits against dealers, are either tort or contract based. Although similar in certain respects, tort claims are based upon the existence of a special relationship that creates a duty owed by the dealer to the end-user, while contract claims are based upon the contractual relationship between the dealer and end-user. Tort-based claims that are typically asserted by end-users include claims of fraud and fraudulent concealment against dealers. End-users may also assert a claim of breach of fiduciary duty. For such claims, a derivatives dealer may have a duty to disclose material information to an end-user if the court finds that an explicit or de facto fiduciary relationship exists. End-users may also assert a claim that the dealer’s alleged misstatements or omissions constitute a negligent misrepresentation. In addition, other state law claims may be asserted. For example, under New York law, the judge in the Procter & Gamble case found that an implied contractual duty to disclose in business negotiations exists when one party has superior knowledge not known to the other and the party with superior knowledge knows that the other party is acting on the basis of mistaken knowledge. In resolving these cases, the nature of the relationship between the parties to the transaction is critical to determining the duties that the dealer owes the end-user.
Contract-based claims do not require the existence of a special duty between the dealer and end-user. For example, an end-user may advance a contract-based claim for rescission due to misrepresentation. This claim would restore the parties to the positions they held before they entered into the contract. If the end-user is a governmental entity, it may assert an ultra vires claim. To support this claim, the end-user may argue that the transaction at issue is unenforceable because it violates a provision in its charter. An end-user may also claim that the contract is voidable because the end-user was a victim of economic duress and, therefore, did not enter into the contract of its own free will. Finally, an end-user may assert that the contract is unenforceable under the applicable statute of frauds. Although the specifics may vary from jurisdiction to jurisdiction, the statute of frauds generally states that contracts in excess of a certain dollar amount that cannot be performed within 1 year are unenforceable unless in writing and signed by the party against whom the contract is being enforced. To reduce the likelihood of the success of this claim, New York amended this statute in 1994 to improve the enforceability of oral OTC derivatives transactions.
MBS and Structured Notes Are Typically Subject to the Securities Laws
MBS and structured notes are typically considered to be securities and subject to the federal securities laws, except when exempted from specific provisions. In the United States, these products are marketed by broker-dealers who are required to register with SEC and become subject to various regulations, such as those requiring minimum levels of capital. When corporations issue these securities, they are subject to the full range of requirements applicable to other corporate securities issued to the public. These requirements include the need to file a prospectus that describes the financial condition of the issuer and explains the risks of investing in the securities. In addition, the marketing of MBS and structured notes is subject to the antifraud provisions of the securities laws previously discussed, as well as the sales practices provisions of SRO rules.
Many MBS and structured notes are issued by GSEs and are considered to be government securities under the federal securities laws. Although dealers marketing these products must comply with the antifraud provisions of the securities laws, just as they would for other securities activities, issuers of government securities are generally exempted from the registration and issuance disclosure provisions of the laws that apply to corporate-issued securities. As a result, GSEs are not generally required to obtain SEC approval before offering securities publicly, and such issuances need not be accompanied by prospectuses that identify the issuer and describe its business operations and financial condition. Nevertheless, GSEs have chosen to voluntarily follow the same practices that corporate securities issuers are required to follow. For example, GSE securities issuances are accompanied by prospectuses that contain the same type of disclosures as would be required for other company securities that are registered with SEC. GSE security issuances also typically include a discussion of the structure and risks of the securities being offered.
As previously discussed, dealers marketing securities, including MBS and structured notes, must comply with the requirements of the securities industry SROs of which they are members. NYSE and NASD supervise the majority of dealers offering MBS and structured notes, and both place similar requirements on their members, including requiring firms to determine the suitability of products before recommending them to their customers. Although NASD’s suitability rule had long applied to stocks and other securities, the provisions of this rule were not extended to its members’ marketing of government securities, including GSE-issued MBS and structured notes, until August 1996.
In recognition of the significant institutional participation in the markets for these securities, NASD also implemented an interpretation of its suitability rule to clarify the responsibilities that dealers have to institutional end-users. Such users are defined by the rule to include any entity other than a natural person. This interpretation provides that a dealer must, on the basis of information either supplied by the end-user or otherwise known to the dealer, determine whether the end-user is capable of evaluating the risk of the specific transaction and whether the end-user is making an independent investment decision. The interpretation includes a number of factors that are relevant to making this determination, including the end-user’s employment of outside consultants or advisors, the end-user’s general level of sophistication and level of sophistication with respect to the particular product, the complexity of the product, and the end-user’s ability to understand and independently assess the product. Other relevant information might include whether the end-user had established a pattern of accepting the dealer’s recommendations, had access to investment suggestions from other sources, and had supplied information about its investment portfolio to the dealer. If a dealer determines that the end-user is capable of independently evaluating investment risk and making its own decision about the transaction, the dealer’s obligation regarding the end-user’s suitability is to be considered fulfilled. The interpretation stresses that the determination can only be made on the basis of the particular facts and circumstances of the transaction, including the particular relationship between the dealer and end-user.
Sales Practice Requirements Vary, Depending on the Regulator of the Dealers’ Activities
Sales practice requirements also vary, depending on which regulator, if any, oversees the dealers’ activities. Bank OTC derivatives activities are subject to requirements of the federal banking regulators as a part of their oversight of all bank activities. Banks marketing MBS and structured notes are now expected to comply with suitability rules similar to those that apply to securities firms offering such products. Banks marketing OTC derivatives, MBS, and structured notes may also be subject to oversight by different regulators, depending on which legal entity within their corporate structure conducts these activities. Securities, futures, and insurance firms typically conduct their nonsecurities and nonfutures OTC derivatives marketing in affiliates not subject to direct federal oversight, although some individual transactions may be subject to oversight. Members of the President’s Working Group on Financial Markets have stated that the scope of SEC and CFTC authority and existing sales practice requirements are currently adequate to protect the end-users of derivatives and the markets.
Bank Activities Are Regulated to Protect Their Financial Condition
All of the activities of banks are subject to oversight by at least one federal regulatory agency—either the Federal Deposit Insurance Corporation, the Federal Reserve, or OCC. These regulators are responsible for ensuring the safety and soundness of banks to protect depositors and the federally administered Bank Insurance Fund. The regulators address this responsibility by placing various requirements on banks, including periodic reports of financial condition, maintenance of minimum capital levels, and periodic bank examinations. Almost all of the banks actively marketing OTC derivatives, MBS, and structured notes are overseen by either the Federal Reserve or OCC.
In response to the large increase in the volume of bank activity in OTC derivatives and other financial products over the last decade, bank regulators revised and expanded the guidance provided to examiners and banks to more specifically address the risks that these activities pose, including those risks related to sales practices. Previously, according to bank regulatory officials, the only bank sales practice-related guidance was “know your customer” rules under which regulators expected banks to obtain sufficient information about customers’ financial condition and business activities to prudently extend credit or engage in other financial transactions with them.
In 1993 and 1994, OCC and the Federal Reserve each issued new guidance that more specifically addresses sales practice issues as a part of a bank’s overall responsibilities for managing the risks of its financial activities, including OTC derivatives. Both sets of guidance place generally the same requirements on examiners and banks. OCC’s October 1993 guidancedirects the banks it oversees to assess and document the appropriateness of transactions, as a part of managing the credit risk arising from these transactions. In a follow-up 1994 OCC interpretation, OCC states that consistent with safe and sound practices, banks should not recommend transactions that they know, or have reason to know, would be inappropriate for counterparties on the basis of available information. According to the interpretation, banks should also determine whether proposed transactions are consistent with counterparties’ policies and procedures, as these are known to them. Specifically, banks should understand the risks that counterparties are trying to manage or assume through the use of derivative products. The interpretation also requires that banks ensure counterparties understand the general market risk of transactions and explain, particularly for those counterparties that they determine lack sophistication, how transactions will achieve the counterparties’ objectives.
The Federal Reserve’s December 1993 guidance to the banks it oversees states that sound business practices require member banks to take steps to ascertain the sophistication of derivatives counterparties, including whether counterparties understand the nature and risks of transactions. If a bank determines that its counterparty is unsophisticated, either generally or with respect to a specific transaction, the guidance directs it to educate the counterparty about the risks associated with the proposed transaction. Furthermore, the guidance provides that when a bank recommends a derivatives transaction to an unsophisticated counterparty, it should ensure that it has adequate information about the counterparty on which to base its recommendation. In the guidance issued to examiners, the Federal Reserve indicates that banks should have established standards for complex products to ensure that counterparties are not entering into transactions where they fail to understand the risks. The guidance also notes that bank management should be cognizant of the potential for activities in these products to result in financial losses and harm the bank’s reputation.
The goal of the guidance applicable to OTC derivatives issued by the Federal Reserve and OCC is primarily to protect the safety and soundness of banks rather than their counterparties or the end-users of the products banks offer. The requirements banks are to follow when marketing such products are designed to reduce their exposure to risk of loss from end-user default or transaction disputes. Although the Federal Reserve’s guidance places additional sales practice requirements on banks, its guidance also states that end-users are ultimately responsible for their own transactions. Regarding OCC’s guidance, a senior OCC official explained that it does not task banks with determining the suitability of OTC derivatives transactions for their customers, but the guidance is meant to ensure that the activities are being conducted in a safe and sound manner. According to the official, a suitability rule would represent a fundamental change in the relationship between a bank and its customers because certain transactions, such as loans, deposits, and letters of credit, are entered into on a principal-to-principal basis. Although intended primarily to protect banks, bank regulator officials told us that the interests of end-users would indirectly be protected by banks complying with the prudent practices recommended in bank guidance.
Bank Regulators Adopted Additional Requirements for Dealers Marketing Securities
Bank regulators have placed additional requirements on banks that market securities. Banks marketing securities must now comply with substantially the same suitability rule as securities firms that market such products. In 1994, the Federal Deposit Insurance Corporation, the Federal Reserve, OCC, and the Office of Thrift Supervision issued a joint statement applicable to banks and thrifts marketing nondeposit investment products, including mutual funds and annuities, to retail customers. This joint statement also applied to banks marketing government securities, including GSE-issued MBS and structured notes to retail customers. Although securities products have always been subject to the antifraud provisions of the securities laws, the interagency statement tasks banks offering nondeposit investment products—some of which are not securities—with determining the suitability of such products before recommending them to retail customers.
Bank regulators have also recently approved additional sales practice rules for banks that deal in government securities. As authorized by the Government Securities Act Amendments of 1993, the three federal bank regulatory agencies—the Federal Reserve, the Federal Deposit Insurance Corporation, and OCC—issued a March 1997 joint rule on bank sales of government securities, including GSE-issued MBS and structured notes. In addressing dealers’ obligations to determine suitability before making a recommendation to institutional end-users, the rule uses language similar to the recently approved NASD rule, as previously discussed. As of July 1, 1997, which was the effective date of the banking regulators’ rule, banks and securities firms marketing these securities became subject to essentially the same rules regarding determining suitability before recommending purchase of GSE-issued MBS and structured notes.
Banks Market Products From Various Legal Entities That May Be Subject to Oversight by Different Regulators
Banks market OTC derivatives, MBS, and structured notes from various legal entities within their organizational structures, and this affects which regulators, if any, oversee these activities. Regulators indicated that most banks use bank employees to market OTC derivatives. However, some also use their securities affiliates’ staffs to market them, depending on corporate preferences or the extent to which securities are also being offered to their customers. Nevertheless, any OTC derivative marketing activities by such securities affiliate staff would not be subject to the securities laws unless the product being marketed is a security. A bank examiner explained that banks’ use of the same staff to market both securities and nonsecurities OTC derivatives may reflect an effort to have marketing staff be able to select the most appropriate product for the specific risk management needs or investment objectives of an end-user, regardless of the regulatory status of the individual products.
The corporate entities used by banks to market MBS and structured notes also vary. The Banking Act of 1933, commonly known as the Glass-Steagall Act, allows banks and their affiliates to underwrite and deal in certain types of securities known as bank-eligible securities. These include GSE-issued MBS and structured notes. The act generally prohibits banks from underwriting and dealing in bank-ineligible securities, such as those issued by corporations, including MBS and structured notes. Federal regulators have provided banks with limited authority to underwrite and deal in ineligible securities through affiliates of their holding company. These affiliates—called Section 20 affiliates after the relevant section of the act—are permitted to engage in securities underwriting and dealing as long as the affiliate generates no more than 25 percent of its gross revenues from ineligible securities. Regulators told us that most banks with such affiliates market MBS and structured notes exclusively from these entities to provide as large a revenue base as possible for conducting activities in ineligible securities. Because these Section 20 affiliates are also registered as broker-dealers with SEC, they are also subject to examinations by SEC and securities industry SROs to ensure that they comply with the sales practice requirements of the federal securities laws when selling securities.
Unregulated Affiliates Are Not Subject to Direct Federal Oversight, but Regulators May Assert Jurisdiction Over Specific Products
Affiliates of securities, futures, and insurance firms that market nonsecurities or nonfutures OTC derivatives are not directly regulated by SEC or CFTC. Securities and futures firms are allowed to conduct activities in nonsecurities and nonfutures products outside of the entities that are subject to direct SEC or CFTC oversight, respectively. Some securities firms have established one or more separate affiliates that conduct OTC derivatives activities. For example, because counterparties are sensitive to the credit risk inherent in most OTC derivatives contracts, several securities firms have created separately capitalized subsidiaries to conduct activities in these products. These affiliates were specifically structured to receive the highest credit ratings by rating agencies to increase their attractiveness as counterparties to end-users of these products. SEC officials told us that firms generally cite the stringent treatment that OTC derivatives receive under SEC and CFTC capital requirements as the reason firms do not conduct such activities in regulated entities, rather than a desire to avoid sales practice requirements.
Some insurance firms also market OTC derivatives to end-users. However, unless the products involved are subject to SEC or CFTC jurisdiction, the OTC derivatives marketing activities of these firms are not subject to federal regulatory oversight. The regulation of the insurance industry is primarily a state responsibility. However, officials from the state insurance regulatory commissions of the states with major insurance company dealers of OTC derivatives, including New York, New Jersey, and Delaware, told us that they did not directly oversee insurance firms’ marketing of these products because such activities were conducted in noninsurance affiliates.
As previously discussed, to the extent that nonsecurities OTC derivatives activities are legally conducted outside of a regulated firm, they are not subject to direct SEC or CFTC oversight. By offering these products from affiliates, dealers have, in effect, determined that these products are not subject to the securities laws or most provisions of the CEA. However, SEC, CFTC, or a court could determine that a product offered by an unregulated affiliate is subject to the provisions of the federal securities or commodities laws, respectively, and take action against the dealer when they find violations of these laws.
The Working Group Concluded That the Scope of Regulators’ Authority and Sales Practice Requirements Are Adequate
According to SEC and CFTC officials, the President’s Working Group on Financial Markets has discussed the need to expand SEC and CFTC authority over and sales practice requirements for OTC derivatives. On the basis of these discussions and information collected on an ad hoc basis by various members, the officials comprising the Working Group concluded that no changes requiring legislation are currently needed to protect the financial markets or end-users of derivatives. SEC and CFTC officials also told us that their agencies have been able to take appropriate actions under their existing authorities when problems have arisen. For example, as previously discussed in this chapter, SEC and CFTC took a cooperative action against Bankers Trust for its conduct in OTC derivatives transactions with Gibson Greetings. The legal entity cited was BT Securities, which is a subsidiary of Bankers Trust. SEC and CFTC officials told us that if they believed their authority was insufficient, they would ask Congress to address the issue.
One member of the Working Group, the Chairman of the Federal Reserve, indicated in a February 1997 speech that institutional end-users of OTC derivatives have demonstrated their ability to protect themselves from fraud. He noted that when dealers have engaged in deceptive practices, end-users have been able to obtain restitution either by taking legal action or threatening to do so. He indicated that, while the threat of legal action by end-users may deter misconduct, dealers are motivated by the need to stay competitive, which requires that they maintain a good reputation.
Officials familiar with the operations of the Working Group indicated that the various members have shared information relating to OTC derivatives sales practice issues. The members obtained this information through special study efforts or otherwise collected it during their routine oversight activities. However, Federal Reserve and SEC officials indicated that data on market characteristics relevant to sales practice issues, such as increased market participation by new dealers, more widespread use of complex products, or increased marketing to or product use by less sophisticated end-users, was not routinely collected by their agencies. Furthermore, they said that no formal mechanism or expectation existed for the members to continue collecting and sharing such information on a periodic basis.
Satisfaction With Sales Practices Was High and Disputes Were Limited, but When Disputes Occurred Losses Were Often Large
According to our 1995 survey, end-users were generally satisfied with the sales practices of dealers offering OTC derivatives, MBS, and structured notes. Product use varied with end-users reporting less use of OTC derivatives than of MBS and structured notes, and larger organizations generally reporting more use of all of the products than smaller organizations. Review of regulatory and other data indicated that cases involving sales practice disputes were not widespread. However, when disputes did arise, the losses were often large, with dealers and end-users generally experiencing other financial impacts. These included direct costs from litigation or regulatory fines and indirect costs, such as reduced revenues and income.
Most End-Users Were Generally Satisfied With Dealer Sales Practices
According to our 1995 survey of a wide range of U.S. organizations, most end-users were generally satisfied with the sales practices of the dealers that marketed OTC derivatives, MBS, and structured notes to them. The rates of reported overall dissatisfaction with the sales practices of dealers used ranged from as low as 2 percent to as high as 13 percent across the products. End-users reported lower rates of dissatisfaction with the sales practices of dealers they had used than for dealers that made presentations to them but were not used. Finally, the respondents to our survey provided generally consistent reasons for any dissatisfaction with specific elements of dealer practices.
Few End-Users Reported Dissatisfaction With Dealers Used
When asked to rate the sales practices of the dealers with whom they had entered into transactions, few end-users of OTC derivatives, MBS, or structured notes reported dissatisfaction. To obtain information on how satisfied organizations who had heard proposals were with these dealers’ sales practices, we asked the organizations we surveyed to indicate whether they were “very satisfied,” “somewhat satisfied,” “neither satisfied nor dissatisfied,” “somewhat dissatisfied,” or “very dissatisfied” for each of the products included in this review. They were asked to provide these ratings for the following six individual elements of sales practices: (1) disclosure of downside risks, (2) quality of transaction documentation provided, (3) suitability of products proposed, (4) competitiveness of pricing and fees, (5) provision of accurate mark-to-market pricing information, and (6) assistance in unwinding transactions. Respondents were also asked to provide a rating of their overall level of satisfaction or dissatisfaction with dealer sales practices. In addition, survey respondents were asked to provide ratings in these categories for (1) dealers they used for transactions involving OTC derivatives, MBS, or structured notes and (2) dealers that made product proposals to them but whom they did not use for a particular product.
As shown in figure 3.1, 2 percent of the organizations across the industries we surveyed reported being “somewhat” or “very dissatisfied” with the overall sales practices of the dealers they used for plain vanilla OTC derivatives contracts. For MBS dealers used, 7 percent of users reported being similarly dissatisfied; for structured note dealers used, 13 percent reported being similarly dissatisfied.
Our survey indicated that 79 percent of the end-users of more complex OTC derivatives were somewhat or very satisfied with the dealers with whom they did business, which was comparable to the levels of satisfaction reported for dealers of the three product types shown in figure 3.1. Because of the small number of end-users of more complex OTC derivatives and the even smaller number who reported being dissatisfied with the dealers they used, we could not make a reliable estimate of the extent of dissatisfaction with overall dealer sales practices for more complex products. Similarly, the small number of end-users reporting dissatisfaction with other products among our survey respondents precluded a statistically valid analysis of dissatisfaction by the size of organization or by industry subgroups.
As shown in figure 3.1, an analysis of our survey results indicated that organizations reported less satisfaction with the overall sales practices of dealers they heard presentations from but with whom they did not do business. The percentages of organizations that were either somewhat or very dissatisfied with the overall sales practices of dealers that they did not use could be at least twice as high as the comparable percentages for dealers that were used. The overall level of dissatisfaction with dealers not used was 17 percent for plain vanilla OTC derivatives, 26 percent for more complex derivatives, 27 percent for MBS and/or asset-backed securities, and 29 percent for structured notes.
Between 4 and 8 percent of the organizations not using a particular product were contacted by at least one dealer offering that product during the survey period. Furthermore, some evidence exists that the extent to which dealers contacted nonusers is somewhat higher than these percentages suggest because some nonusers contacted chose not to rate the dealers’ presentations. These respondents reported that they generally did not listen to the dealers’ complete presentations or thoroughly evaluate them because they did not find the products appropriate for their organization or for their investment objectives.
For those end-users and nonusers who rated dealers they did not do business with, the higher level of dissatisfaction reported with the dealers not used suggests that potential end-users may have chosen not to do business with dealers whose sales practices were objectionable or appeared questionable for particular transactions. Comments by some end-users were consistent with this interpretation, as some respondents indicated that they refused to do business with some dealers. Also, some respondents noted that their satisfaction with dealer sales practices varied by product at some dealers or depended on which member of a dealer’s sales staff presented a transaction.
Respondents Provided Consistent Reasons for Their Dissatisfaction With Specific Elements of Dealer Sales Practices
Respondents who were dissatisfied with dealer sales practices provided similar reasons for their dissatisfaction with two individual elements of sales practices—disclosure of downside risk and suitability of products proposed. In addition to providing ratings on their overall satisfaction with dealers’ sales practices (as shown in fig. 3.1), survey respondents also provided ratings of individual sales practice elements. For disclosure of downside risk, none of the estimates for the rate of dissatisfaction with dealers used exceeded 20 percent for any of the products. End-users of structured notes reported the highest rate of dissatisfaction—17 percent—with thks element. However, for dealers not used, these rates of dissatisfaction were higher. Twenty percent of the organizations in our population reported dissatisfaciton with the risk disclosure practices of dealers not used that offered plain vanilla OTC derivatives, while 38 percent reported dissatisfaction with the risk disclosure practices of dealers not used that offered more complex OTC derivatives. In addition, 27 percent of the organizations reported dissatisfaction with the risk disclosure practices of dealers they had not used for MBS, and 31 percent reported dissatisfaction with the risk disclosure practices of dealers they had not used for structured notes.
In follow-up conversations or in their written comments, some respondents explained why they were dissatisfied with dealer risk disclosures. Officials at 19 of the 50 judgmentally selected organizations with which we followed up told us that they were dissatisfied in some way with the amount of information dealers had provided. For example, an official of a money management firm said that risk disclosure was the primary problem with dealer sales practices. For MBS and structured notes, he said that dealers had not provided sufficient information about the reduced market liquidity of some products and that end-users could not rely on commercially available pricing information to determine the market liquidity or prices that could be received for products.
Some officials at these 19 organizations commented that even dealer personnel did not appear to understand the potential downside risks of the products. For example, an official at a mutual fund told us that dealer staff often provided written materials on how product use could be beneficial, but the dealer staff could not always answer questions about how the value of the products would change as interest rates changed. An insurance company official wrote on the survey form that his firm’s dissatisfaction rating reflected experiences with some of the smaller dealers that contacted the firm. The official believed that the larger dealers generally did a good job of explaining the merits and risks of products.
According to our survey results for another individual sales practice element that we asked questionnaire recipients to rate, organizations were not always satisfied with the suitability of the products dealers proposed, and this dissatisfaction was again more significant for dealers they did not use. For this particular element, all of our estimates of dissatisfaction with dealers used fell below 10 percent. However, for dealers not used, the estimates of dissatisfaction were higher—18 percent of end-users reported being somewhat or very dissatisfied with the suitability of plain vanilla OTC derivatives proposed by dealers that were not used, while 42 percentreported dissatisfaction with the suitability of more complex OTC derivatives transactions proposed by dealers that were not used. Thirty-six percent reported dissatisfaction with the suitability of MBS that were offered but not purchased, and 39 percent reported dissatisfaction with the suitability of structured notes that were offered but not purchased.
Officials at 16 of the 50 organizations with which we followed up indicated that dealers were not sufficiently considering end-user circumstances when proposing transactions. For example, an official at a money market mutual fund said that, although such funds should maintain fixed net asset values, many of the transactions dealers proposed to his organization were for products that could cause large declines in the value of the fund. A credit union official described mixed experiences. He said some dealers seemed interested in selling a product regardless of the credit union’s needs and requirements, but others were more willing to describe products and attempt to understand the organization’s needs. Officials of at least three organizations were concerned that dealers were marketing GSE-issued structured notes by portraying them as safe, government-backed investments, even though the values of such products could be quite volatile.
Although some organizations were concerned about the suitability of products that dealers offered, other organizations generally welcomed receiving proposals even if the product was not currently appropriate or suitable for them. For example, officials at a hardware products manufacturer that exported worldwide explained that their firm used OTC derivatives for managing its foreign currency exposures and for altering the mix of fixed and floating interest rate obligations used to finance its operations. Although the firm had specific guidelines related to its use of these products, it was still interested in hearing ideas that could lead to alternative ways of meeting its needs. Similarly, officials at three large multinational firms told us that, even though their firms receive numerous proposals from dealers, they explore only those they considered appropriate for them. However, they appreciated receiving the other proposals so that they could better evaluate their own risk management activities.
Reported Product Usage Varied Across Products and by Organization Size and Type
Our survey revealed that the extent of OTC derivatives, MBS, and structured notes usage varied, with fewer organizations reporting use of OTC derivatives than of MBS and structured notes. In general, larger organizations were more likely than smaller ones to report using any of these products, although smaller organizations were active users in some industries, such as banking. The extent of reported product usage also varied across industries and organizations, with more financial organizations reporting use of the products than nonfinancial organizations, such as state and local governments. Surveys conducted by other organizations covering periods after that of our survey indicated that rates of usage showed little change, with some showing slight declines.
Few Organizations Reported Using OTC Derivatives, More Reported Using MBS and Structured Notes
Our end-user survey measured the usage of OTC derivatives, MBS, and structured notes over a broad population of U.S. organizations. The survey results indicated that relatively few public and private organizations used an OTC derivative product, with an estimated 11 percent of such organizations reporting using such a product in the 12 months before our survey was received, beginning for most organizations in the spring of 1995. Some of these organizations had reported using either plain vanilla or more complex OTC derivatives, and others had reported using both. We estimated that in the period defined by our survey, approximately 5,200 end-users of OTC derivatives (plain vanilla, more complex, or both) existed in the population of approximately 49,000 potential end-users from which we drew our sample.
As shown in figure 3.2, 10 percent of these organizations reported using plain vanilla OTC derivatives, and 2 percent reported using more complex OTC derivatives. Reported usage of other products was somewhat more widespread—approximately 24 percent of such organizations reported holding at least one MBS, and 16 percent reported holding at least one structured note during the study period. We estimated the number of end-users for these products to be approximately 11,500 for MBS and 7,700 for structured notes. Although we did not survey individual investors, regulators and exchange officials told us that few individuals used OTC derivatives and their usage of MBS and structured notes was small. For example, NYSE officials estimated that individual investors accounted for about 5 percent of the volume in the MBS market.
Larger Organizations Were More Likely to Be End-Users
As shown in figure 3.3, the larger organizations were more likely to indicate that they were users of OTC derivatives, MBS, and structured notes.
Even though large organizations were more likely to be end-users of these products, some types of small organizations, which were aggregated in the survey analysis because of the small sample sizes involved, reported using MBS at higher rates. For example, small banks, credit unions, and insurance companies—aggregated in the survey analysis because of the small sample sizes involved—reported using MBS at a combined rate of 40 percent,which was about twice the estimated 21-percent usage rate across all other organizations. In addition, 35 percent of the small bank, credit union, and insurance company subgroup reported using structured notes, while overall 12 percent of all other organizations reported use of such products. Similarly, OCC reported that, as of March 31, 1996, 41 percent of the approximately 8,600 banks with less than $250 million in assets had invested in structured notes that had a total market value of about $6.2 billion. According to OCC, the percentage of small banks using structured notes was equal to that of the other 1,274 banks with assets exceeding $250 million.
Product Usage Varied by Industry
Our survey results indicated that usage of OTC derivatives, MBS, and structured notes was generally higher among the more specialized and perhaps more sophisticated financial services and investment management industries. As shown in figure 3.4, among the various industries we surveyed, reported use by GSEs indicated that they were the most active users of all three of these product types. On the basis of information provided by the 31 GSEs that responded to our survey, 71 percent of these large and generally financially sophisticated institutions reported using OTC derivatives. About the same percentage also reported using MBS, while 57 percent of GSEs reported using structured notes. A group we classified as “other financial corporations”—which included large credit-financing organizations, mortgage brokers and lenders, and leasing agencies—also reported being active users of OTC derivatives. In contrast, banks, credit unions, and insurance companies reported active use of MBS and structured notes but comparatively less use of OTC derivatives.
In addition, the survey results from the pension fund industry indicated differing levels of usage within certain subgroups. Although the average usage rates reported across the overall universe of large and small public and private pension funds were not above average, the large public pension fund subgroup reported relatively higher usage rates. Forty-one percent of the large public pension funds reported using plain vanilla OTC derivatives, 33 percent reported using structured notes, and 74 percent reported using MBS.
Our survey also showed that nonfinancial corporations (service and manufacturing firms), endowments and colleges, and state and local governmental entities did not make extensive use of any of the products. Among nonfinancial corporations, overall reported usage rates were average or below average for all of the products. However, the “larger organization” subgroup of nonfinancial corporations did report using plain vanilla OTC derivatives to a great extent. We estimated that 66 percent of the population of large U.S. nonfinancial firms used plain vanilla OTC derivatives during the survey period. This estimate is comparable to those of other surveys of similar organizations, many of which reported usage rates of over 50 percent.
Although higher proportions of firms in the specialized, sophisticated financial industries may be using OTC derivatives, MBS, and structured notes, they often represented a smaller total number compared to the actual number of reported end-users among some of the more populous nonfinancial industries. For example, even though 71 percent of GSEs reported using OTC derivatives, they made up less than 1 percent of the entire number of estimated end-users. However, nonfinancial corporations made up an estimated 22 percent of the total population of end-users of OTC derivatives, even though only 10 percent of the firms in this industry grouping reported using these products. Similarly, while 27 percent of the aggregated industry group of mutual funds, money market funds, and commodity pools reported using OTC derivatives, the number of such organizations represented 39 percent of the total number of end-users for this product type.
More Recent Studies Generally Showed Little Change in Product Usage
A number of publicly reported studies conducted after our survey generally showed either no change or slight declines in the proportion of organizations in various industries that use OTC and other derivatives. To assess the magnitude and direction of any change in usage that may have taken place after our survey closed in October of 1995, we reviewed studies conducted by three external organizations that measured usage among specific industries over a period extending to October 1995 or beyond. Two of the three studies concluded that a slight decrease in derivative product usage had occurred among certain organizations after 1995. A series of surveys conducted by Greenwich Associates estimated that 68 percent of a selected sample of public and private nonfinancial corporations used derivatives in 1995, while 59 percent of such corporations used derivatives in 1996. The Greenwich Associates’ surveys suggest that for nonfinancial corporations, usage reached a high point in 1995, after having increased somewhat in the preceding years. Surveys of public and private pension plans conducted for the September 1995 and March 1997 issues of Institutional Investor Magazine concluded that derivatives usage had declined from 52 percent to 48 percent.However, another set of surveys of publicly held U.S. nonfinancial corporations in 1994 and 1995 found an increase in the proportion of derivative product users. The Wharton School of Business estimated that 41 percent of these organizations used derivatives in October 1995, an increase from November 1994.
Sales Practice Concerns Did Not Appear to Be Widespread but Involved Many Large Losses
Concerns about dealer sales practices have been raised in many of the publicized losses incurred by end-users of OTC derivatives, MBS, and structured notes. Although many of the losses were large, sales practice concerns related to OTC derivatives involved primarily one dealer. More sales practice concerns were raised for transactions involving MBS and structured notes. However, such losses involved a relatively limited number of dealers.
Concerns About Dealer Sales Practices Were Raised in Many Publicized Losses
Combining publicly available information and regulatory data, we compiled a list of U.S. and foreign end-users that experienced losses from OTC derivatives, MBS, or structured note transactions with U.S. dealers.From this list and with the information used to compile it, we identified losses in which sales practice concerns were raised by end-users or regulators. Through this effort, we identified 360 end-user losses involving OTC derivatives, MBS, and structured notes, with the earliest loss occurring in April 1987 and the latest loss occurring in March 1997. These end-user losses totaled an estimated $11.4 billion. Sales practice concerns were raised in 209, or 58 percent, of these losses and were associated with an estimated $3.2 billion in losses. However, since many disputes were associated with a relatively limited number of dealers, and given the many thousands of transactions in OTC derivatives, MBS, and structured notes and the hundreds of billions of dollars at risk in these transactions over the period we reviewed, we found that sales practice concerns were not widespread.
As indicated above, not all OTC derivatives, MBS, and structured note losses involved sales practice disputes. For example, 42 percent of the publicly reported losses were not accompanied by sales practice disputes, and for OTC derivatives, 59 percent of the reported losses were not associated with such disputes. End-users that incurred losses may not have raised sales practice concerns if the products were used to hedge other positions that had offsetting gains. EUDA confirmed that some end-users suffering large derivatives losses had been using the products as hedges. In such instances, the losses were not unexpected because the derivatives operated as anticipated and were offset by gains in the underlying hedged items. Alternatively, when derivatives performed differently than the way the dealer had represented they would perform, EUDA said disputes have arisen.
OTC Derivatives Losses With Sales Practice Concerns Involved Primarily One Dealer
Our review identified 44 end-user losses that involved OTC derivatives transactions with U.S. dealers. These losses totaled an estimated $5.4 billion. Sales practice concerns were raised in 18 of these losses, accounting for about 41 percent of the total OTC derivatives losses and covering an estimated $1.7 billion in losses. The losses with sales practice concerns involved 9 dealers; however 1 dealer, Bankers Trust, was involved in 9 of the 18 end-user losses.
Sales practice allegations against Bankers Trust have been among the most widely publicized and have resulted in lawsuits and regulatory action. As noted in our 1994 report on OTC derivatives, Bankers Trust is a major U.S. OTC derivatives dealer, and it had a reputation for offering some of the most sophisticated derivatives products. In April 1994, two of its customers, Procter & Gamble and Gibson Greetings, Inc., announced that they faced losses on certain complex OTC derivatives transactions with Bankers Trust. Procter & Gamble announced after-tax losses of about $102 million on two complex swaps transactions, and Gibson Greetings reported after-tax losses of almost $20 million in a series of complex swaps and options transactions. Both corporations, as well as several other Bankers Trust customers that suffered losses, filed suit against Bankers Trust alleging, among other things, fraudulent sales practices. As discussed on page 78, Bankers Trust has settled with Procter & Gamble and Gibson Greetings as well as with other customers.
SEC, CFTC, and the Federal Reserve investigated Bankers Trust’s conduct, and each regulator reached a settlement or similar agreement with Bankers Trust (the SEC and CFTC actions were discussed in ch. 2, and the Federal Reserve’s action is discussed in ch. 6). In December 1994, SEC and CFTC concluded their investigations with a joint settlement addressing Bankers Trust’s dealings with Gibson Greetings. Without admitting or denying SEC’s and CFTC’s findings, Bankers Trust agreed to the issuance of SEC and CFTC orders finding that the bank violated antifraud provisions of the federal securities and commodities laws and agreed to pay a $10 million fine. During the same period, the Federal Reserve entered into an agreement with Bankers Trust that required it to establish, among other things, new marketing and sales practice policies that were consistent with safe and sound banking practices.
The eight dealers involved in the remaining nine end-user losses with sales practice concerns were largely major U.S. securities firms; however, unlike the losses associated with Bankers Trust, these losses generally involved instances where only one end-user had raised concerns about a dealer’s conduct. The end-users incurring the losses were foreign firms, individuals, and a state, and their losses ranged from an estimated $8 million to $371 million. In these losses, many of which involved lawsuits, the end-users alleged, among other things, that the dealers had misrepresented the risks of the products or induced the end-user to enter into unsuitable or unauthorized derivatives transactions.
Regulatory staff at SEC, NASD, and NYSE told us that they have received few, if any, other complaints against securities firms involving OTC derivatives. Notwithstanding the limited number of complaints and publicized OTC derivatives losses involving sales practice concerns, the extent to which such concerns exist may not be fully apparent. Speaking at an industry conference, an OCC official said that the agency’s examiners identified instances in which banks agreed to settle certain OTC derivatives transactions for less than the amounts due after their customers expressed concerns about the practices that the banks used to market the products. The OCC official was not able to estimate the total number of such occurrences or the dollar amounts involved. Furthermore, an official from a financial markets consulting firm also indicated that some of its clients have settled transactions for amounts less than due under circumstances similar to those described by the OCC official. In addition, EUDA expressed the view that more sales practice disputes between end-users and dealers have arisen than were aired publicly, many of which it said probably involved modest losses.
More Sales Practice Concerns Were Raised in MBS and Structured Note Transactions, but Such Concerns Generally Involved Few Dealers
MBS and structured notes were used more often than OTC derivatives, and a greater number of sales practice concerns were raised with these products than with OTC derivatives. Our review identified 285 end-user losses connected with MBS and/or structured note transactions. These losses totaled an estimated $5.6 billion. Sales practice concerns were raised in 190 of these losses, accounting for 67 percent of the total losses and covering an estimated $1.6 billion. The losses associated with sales practice concerns involved 56 dealers, ranging from major national securities firms to smaller regional firms. However, 8 dealers were involved in 148 of these losses. According to press accounts and similar articles, common sales practice allegations included the dealers misrepresenting the risks of the products and/or omitting material information about them.
Our review of regulatory efforts to enforce securities laws applicable to MBS and structured notes also indicated that cases in which sales practice concerns were raised involved a limited number of firms, with an even smaller number of firms accounting for large numbers of disputes with individual end-users. To assess the extent to which sales practice concerns were associated with MBS or structured note transactions, we collected data on investigations by securities regulators and on complaints these organizations received in the 4-year period from January 1993 through December 1996. The regulatory organizations included were SEC, NASD, and NYSE. In total, we found that these organizations had conducted 55 dealer investigations during this 4-year period. However, some of these investigations involved several personnel at individual firms, and some dealers had been investigated by more than one regulator. Table 3.1 summarizes the status of these investigations.
Overall, SEC, NASD, and NYSE investigated a total of 44 different dealers. However, just a few firms accounted for a large number of the losses in which individual end-users had raised sales practice concerns. For example, 6 Houston firms were being investigated or considered for investigation across more than 78 end-users. SEC and NASD staff were investigating 1 of these dealers for its dealings with as many as 30 customers in several states. This firm consented to a regulatory settlement, stating that it had committed various sales practice-related violations, including making material misrepresentations of MBS risks, failing to adequately supervise its sales representatives, and lacking procedures to ensure that product risks were disclosed to end-users. SEC was also investigating at least 3 other dealers for activities involving numerous end-users, ranging from 10 to 23 end-users at each firm.
Typically, these cases involved dealers marketing GSE-issued MBS, including some of the more volatile variations, to municipal and county governments and colleges. For example, an end-user in one of these cases—City Colleges of Chicago—had estimated losses of around $38 million, as of March 1996, after purchasing about $110 million in volatile MBS from one dealer. In at least two of the cases that SEC or the SRO staff were investigating, the end-users had accused dealer personnel of marketing high-risk securities by characterizing them as safe, federally insured investments.
Although the bulk of these cases involved a few smaller securities firms, some of the largest securities firms were involved in the MBS case that had the largest loss. In this case, Askin Capital Management, a New York-based investment management firm, reportedly lost over $660 million after the declines it experienced from adverse market movements led to the April 1994 liquidation of several funds it managed. These funds had been invested in some of the most volatile CMO tranches. Some of the fund investors sued Askin Capital Management and at least three large securities firms that sold Askin the volatile products. The investors alleged that Askin promised them high returns without large risks, but instead purchased high risk securities. The suit claims that the three large securities dealers abetted Askin in these fraudulent sales because they needed Askin and others to buy the higher risk CMO tranches before the lower risk tranches could also be sold, thereby ensuring the profitability of the entire issuance of securities.
Other than these cases, regulators reported that a limited number of allegations of deficient dealer sales practices involving MBS and structured notes were identified. Table 3.2 shows the number of complaints received by securities industry regulatory bodies from 1993 through 1996 for MBS. These data indicate that the total complaints involving MBS was about 1 percent of the total number of complaints received. These regulatory bodies did not separately track complaints, if any, they had received involving structured notes.
The bulk of the sales practice cases being reviewed by regulators involved MBS; however, one case involving structured notes has been widely reported by the press. In 1994, Orange County, CA, filed for bankruptcy after incurring over $1.7 billion in losses in its investment portfolio that included GSE-issued structured notes. While about $970 million of the losses were attributed to structured notes, the county had also used other nonderivative products and had borrowed heavily to make additional investments. Alleging deficient sales practices, the county filed suit against two dealers—Merrill Lynch and Morgan Stanley—that sold it structured notes. Other cases involving losses on structured notes have been made public, but they did not involve allegations of deficient sales practices.
When They Occurred, Sales Practice-Related Disputes Were Often Costly to Dealers and End-Users
Transactions in OTC derivatives, MBS, and structured notes can present significant risks to dealers and end-users. In addition to the familiar risks arising from adverse market movements or counterparty default, dealers with inadequate sales practices expose themselves to significant compliance and reputation risks. We found that, in the recent losses involving sales practice disputes, the associated dealers and end-users frequently experienced significant costs related to these risks.
Compliance and Reputation Risk Losses Can Arise From Sales Activities
Although the potential for OTC derivatives and related financial products to produce losses from adverse market movements or counterparty default has been widely discussed, parties to transactions in these products are also subject to losses arising from compliance and reputation risks. These risks are defined by OCC in December 1995 guidance and appear to aptly describe the various potential losses and costs that can arise from sales practice disputes. OCC describes compliance risk as the potential for losses that result when an entity violates or does not comply with existing laws, rules, regulations, prescribed practices, or ethical standards. The OCC guidance also indicates that this risk is present when the laws or rules governing certain products or customer activities are ambiguous or untested—the situation that seems to have applied to the rapidly growing markets for OTC derivatives. The actual types of losses that result from the failure to adequately manage activities posing compliance risk include regulatory fines, civil lawsuit penalties and damages, legal fees, and voided contracts.
Entities entering transactions in OTC derivatives, MBS, and structured notes without sound sales practices or adequate controls also subject themselves to a second major risk—reputation risk. OCC defines this risk as the potential for reduced earnings and firm value when negative public opinion affects an institution’s ability to establish new customer relationships or maintain existing ones. Such losses can also arise if the shareholders of a public corporation or the investors in an investment company or mutual fund file suit or reduce their investments in the affected institution.
Some Dealers Experienced Significant Costs Associated With Sales Practice Disputes
The Bankers Trust case exemplifies the serious compliance and reputation risks that deficient marketing of OTC derivatives, MBS, and structured notes can pose. Bankers Trust’s OTC derivatives sales practice disputes have already resulted in significant costs, and additional compliance and reputation risk losses are possible. Regarding compliance risk, press accounts reported that Bankers Trust forgave as much as $150 million of the amount owed to it by Procter & Gamble and forgave $14 million of the amount owed to it by Gibson Greetings to settle these customers’ suits. Bankers Trust also settled with several other firms. In addition, it was required to pay a $10 million fine to settle a joint SEC and CFTC investigation of its dealings with Gibson Greetings and retain an independent consultant to review and make recommendations concerning its OTC derivatives activities. Overall, Bankers Trust reserved $423 million to absorb losses and other payments relating to these derivative-related disputes. Press accounts also indicated that Bankers Trust faced litigation with at least one other derivatives customer—an Italian publishing firm that reported losses on derivatives transactions with the bank in 1994. Furthermore, Bankers Trust has likely incurred significant legal expenses in defending itself against these and other lawsuits, including one by a shareholder.
In addition to these costs, Bankers Trust experienced effects on its reputation or operations that are more difficult to directly measure. It reported sharply lower revenues and profits for 1994—the year the disputes came to light, and its stock price declined around the time its customers were announcing losses. Analysts attributed much of this reduced performance to Bankers Trust’s ongoing derivatives problems. Also, according to press reports, Bankers Trust’s credit rating was downgraded by the major credit rating services, which was expected to increase its future borrowing costs. Finally, Bankers Trust’s chairman resigned and was replaced by an executive from outside of the company.
Another major dealer—Merrill Lynch—was sued by Orange County. The county alleged that Merrill Lynch employed deficient sales practices in marketing structured notes and other financial products and has sought over $2 billion in civil damages. In June 1997, without admitting wrongdoing, Merrill Lynch agreed to pay Orange County $27 million and to reimburse the county and California $3 million to end a criminal probe into the firm’s role in the county’s bankruptcy. Under the agreement, Merrill Lynch will also implement changes in its procedures and training. The agreement will not affect the county’s $2 billion civil damage lawsuit against Merrill Lynch. The county also filed suit against a second major securities dealer—Morgan Stanley—from whom it purchased structured notes. Since initiating an investigation of this case, SEC has taken action against the county’s treasurer and assistant treasurer.
As of June 6, 1997, SEC had not taken action against any of the dealers involved for their conduct in marketing structured notes to Orange County, and SEC officials advised us they do not discuss ongoing investigations. However, a press account indicated that some Merrill Lynch staff had earlier raised concerns with its management about the potential risks involved with both marketing securities to and underwriting the debt of Orange County, but that management had not adequately addressed these concerns. If so, Merrill Lynch may have failed to adequately consider the potentially serious compliance and reputation risks of its sales practices and other dealings with Orange County.
A number of other dealers also face potential regulatory action or are involved in litigation as a result of their sales of MBS and structured notes. For example, Askin Capital’s loss of as much as $660 million on MBS in 1994 resulted in an SEC investigation of its fund’s activities and of the dealers that sold it these investments. As previously discussed, investors in its funds have also filed suit against these dealers in a New York state court. These investors are seeking almost $700 million in restitution and an additional $1 billion for damages from each of the three dealers named in the suit.
Some smaller securities firms have also incurred and continue to face additional costs from their dealings in MBS and structured notes. As previously indicated, as many as 44 dealers are being investigated by regulators for their sales of MBS and some have already been assessed monetary sanctions by federal and state securities regulators or their designated SRO. For example, Westcap Securities of Houston, TX, entered into a consent settlement with SEC in February 1996 in which SEC found that sales representatives had made false or misleading statements to customers in marketing CMOs and had excessively traded customer accounts to maximize sales commissions. SEC found that supervision of sales personnel had been deficient. SEC revoked the firm’s registration as a broker-dealer and ordered it to pay over $800,000 in regulatory penalties and customer restitution. The firm declared bankruptcy in April 1996.
Other smaller securities firms under regulatory investigation also incurred additional losses and costs as a result of their sales practice-related problems. For example, another Houston securities firm—Government Securities Corporation—was fined $400,000 by NASD and has paid more than $11 million in restitution and other costs as part of its activities with over 30 local government and other public fund customers. The firm was also suspended from selling certain securities to such customers for 2 years. Other end-user suits against dealers included one involving Escambia County, FL, which sued in U.S. district court four of the dealers that sold it volatile MBS that had declined in value by $21 million. In another action, Odessa College of Texas settled legal proceedings under terms that were not publicly disclosed against four dealers that had sold it similar securities.
Some End-Users Also Experienced Significant Costs From Sales Practice Disputes
In addition to the losses that end-users suffered when adverse market movements reduced the value of their OTC derivatives, MBS, and structured note holdings, some end-users have experienced additional costs and losses similar to the compliance and reputation risk losses incurred by dealers. The widely publicized case of Orange County is a primary illustration of the additional adverse financial impacts that an end-user can experience beyond the original investment loss.
In December 1994, the county filed for bankruptcy—the largest reported occurrence of a governmental insolvency in the United States, according to a 1995 statement to Congress by the SEC Chairman—as a result of losses on the portfolio of investments it managed for itself and 187 other local government participants. As indicated in the Chairman’s statement, the subsequent liquidation of this portfolio produced at least a $1.7 billion loss. His statement also elaborates that, as a result of the bankruptcy filing, two major rating services downgraded Orange County’s debt to speculative grade status.
According to information reported by one of the rating services, when the county issued $275 million in 30-year bonds in June 1995, it paid $10 million to buy insurance guaranteeing repayment—4 times the normal rate for such issues—and an additional .25 percent in interest to investors. Later that same month, the county issued an additional $155 million in bonds; this issuance carried interest payments that were more than 1 percent above comparably rated municipal bonds, according to this rating service account. We calculated that the higher rates of interest paid on these bond issues mean that the county will pay as much as $2.2 million more in interest each year that these bonds are outstanding.
According to testimony by an Orange County official, the county also laid off employees, reduced its operating budget, and is using revenue from other sources to pay off its debt. This official stated that various other California municipalities and public entities also made service cutbacks and reduced planned expenditures as a result of the losses incurred on the funds they invested with the county.
The experiences of other end-users that incurred investment losses and had subsequent sales practice disputes also illustrate the potential for additional compliance and reputation risk losses. For example, both City Colleges of Chicago and Odessa College of Texas have faced additional financial impacts beyond their initial losses on MBS investments. According to a City Colleges’ official, the college reduced services and borrowed additional money to cover its liquidity problem. Similarly, Odessa College officials indicated that their MBS losses were a contributing factor in raising student tuition, borrowing from reserves, and restructuring the college’s debt.
The case of Gibson Greetings illustrates other compliance and reputation risk impacts. After announcing losses on various derivatives transactions with Bankers Trust, Gibson Greetings was investigated by and subsequently settled the proceeding with SEC for filing financial statements that materially misstated its derivatives positions. Although SEC did not assess a monetary penalty, the regulator ordered the company to cease and desist any additional violation of reporting and recordkeeping, which will likely require that it improve its internal controls and accounting practices for such products. Gibson Greetings also faced at least four shareholder lawsuits that claimed that the company’s disclosures about its derivatives activities and other operations were misleading.
Disagreement Over Counterparty Responsibilities Increases the Potential for Disputes
Some end-user losses involving OTC derivatives, MBS, and structured notes have been accompanied by disputes over counterparty responsibilities that reflect differences in dealer and end-user views on the nature of their relationship. These differences in views could contribute to costly sales practice disputes when end-users incur losses. However, reconciling these differences could be difficult given the reaction of end-users to aspects of dealer-issued guidance that address the nature of counterparty relationships. Also, decisions about the specific responsibilities of end-users and dealers can affect the costs of the transaction to each party. In addition to the dealer-issued guidance, steps taken by other dealer groups as well as judicial decisions related to sales practice issues have not completely resolved the differences in end-user and dealer views. As a result, some market participants have indicated that the involvement of federal financial market regulators may be useful.
Disputes Have Centered on Counterparty Responsibilities
Some of the widely publicized losses on OTC derivatives, MBS, and structured notes have resulted in disputes between the end-users and dealers involved over the specific roles and responsibilities that each envisioned for the other, including whether a fiduciary relationship existed. An institution acting as a fiduciary to an end-user, whether established by law or fact, must act in good faith and with loyalty and honesty towards the end-user and disclose to the end-user all material facts relevant to actions it takes within the context of the fiduciary relationship. In one lawsuit, Procter & Gamble accused Bankers Trust of misusing the trust and confidence it had placed in the bank by inducing the firm to enter into swaps that were represented as being safe investments, when instead the transactions entailed considerable undisclosed risk. Bankers Trust countered that it acted solely as a principal by dealing with and not on behalf of Procter & Gamble—that is, by dealing with the firm on an arm’s-length basis. The bank also indicated that Procter & Gamble, as with other counterparties, was responsible for making its own assessment of the likely rewards and risks of the transactions, although the bank contended that it had responded to any questions posed and had provided reasonable and accurate information. The resolution of this case is discussed on pages 102 and 103.
In another publicized case, the treasurer of Orange County asserted that he relied on the advice of various large securities firms when purchasing structured notes that later incurred losses and contributed to the county’s bankruptcy. The dealers denied having any advisory responsibilities and stated that county officials had responsibility for the investments they made. The lawsuit brought against various large securities firms over their dealings in MBS with Askin Capital (see discussion in ch. 3) also alleged that the dealers had breached their fiduciary responsibilities and failed to act in the interests of Askin’s investors. In January 1997, the judge in this case reduced the counts against these firms to those pertaining to fraud, according to press accounts.
As these cases indicate, determining whether a formal fiduciary relationship exists can be difficult. In some instances, fiduciary duties are clearly placed on a financial institution by law when the institution agrees to act as an agent in performing certain services. Such fiduciary duties arise, for example, when a bank’s trust department manages the assets of an estate or when an investment advisor manages the investments of a pension fund. In other instances, courts have found fiduciary duties applied to a financial institution that had not formally agreed to provide fiduciary services, but whose past relationship with a customer showed a pattern of reliance by the customer on the institution’s advice. The factors that courts have considered to establish such a pattern of reliance include the extent to which a customer followed the institution’s recommendations, statements by the customer indicating reliance or dependence on the institution, and the customer’s general level of sophistication. Generally, courts have ruled that the larger and more sophisticated the customer, the greater its responsibility to independently assess the value and risks of a transaction and the lesser the dealer’s responsibility to determine the suitability of a security and to fully disclose product risks and valuations. No specific standards distinguish between sophisticated and unsophisticated customers or degrees of sophistication.
Even when no special relationship exists between a financial institution and an end-user, the institution may have an obligation to disclose to the end-user information regarding a transaction about which it has superior knowledge. Under principles defining common law fraud, superior knowledge or access to the means of knowledge can give rise to an affirmative duty to disclose material information, particularly when the information is not within reasonable reach of the other party. Applying this principle to the securities markets, federal courts have held that securities firms have a special duty not to take advantage of customers’ lack of knowledge and, therefore, firms must disclose certain material information—such as the amount of the markup they are charging—even when executing a transaction on a principal-to-principal basis.
The Potential for Additional Disputes Arises From the Differing Views of End-Users and Dealers
Differences between end-users and dealers in the way they view their responsibilities in transactions involving OTC derivatives, MBS, and structured notes indicate that costly disputes may continue to accompany end-user losses. Our survey indicated that a large percentage of end-users believed that a fiduciary relationship exists when they engage in transactions involving these products. However, additional follow-up contacts with respondents revealed that, when end-users indicated a fiduciary relationship existed, they were expecting dealers to accurately describe product features, performance, and material risks. Our survey also indicated that a significant percentage of end-users relied on dealers for investment advice.
However, end-users’ views on counterparty relationships differed from those reflected in voluntary guidance issued by two groups of dealer representatives. In the guidance, transactions in OTC derivatives are presumed to be on an arm’s-length basis—with no special responsibilities or reliance expected of either party—unless otherwise agreed to or provided by law. While the dealer-issued guidance is voluntary and intended only to supplement any existing responsibilities that parties to these transactions may have, the approaches to the nature of the relationship, degree of reliance, and expectations for risk disclosure between parties differed in some, but not all, respects from the way that such issues are addressed in existing U.S. and U.K. regulatory requirements applicable to securities, futures, and other financial products.
End-Users Attributed Some Fiduciary Responsibilities to Dealers
In our survey, we asked end-users to indicate the extent to which they believed a fiduciary relationship existed between them and dealers offering OTC derivatives, MBS, and structured notes. However, we did not define the term fiduciary. The responses revealed that a significant number of end-users attributed fiduciary-like responsibilities to dealers in at least some transactions involving these financial products. On the basis of responses to our survey, we estimated that 53 percent of end-users believed dealers had a fiduciary relationship in some or all transactions involving plain vanilla OTC derivatives, and that 48 percent attributed such responsibilities to dealers in some or all transactions involving more complex OTC derivatives, as shown in figure 4.1.
To better understand survey responses indicating that a fiduciary relationship existed, we reviewed comments on returned questionnaires and conducted follow-up telephone interviews with 50 judgmentally selected respondents, including those that were both satisfied and dissatisfied with dealer sales practices. In explaining their response that a fiduciary relationship existed, most end-users told us that this meant dealers had a duty to disclose adequate information about the products and their risks. Many end-users also commented that dealers should be truthful and provide accurate information. In addition, some end-users indicated that dealers should generally have the end-users’ best interests in mind. For example, an official at a GSE that used OTC derivatives, MBS, and structured notes told us that, although a legal fiduciary relationship did not exist, his organization expected dealers to be open and forthcoming with information, and that this expectation creates responsibilities for dealers similar to those of a fiduciary.
The percentage of end-users that believed fiduciary relationships existed as part of transactions in these products was generally similar across OTC derivatives, MBS, and structured notes. As discussed in chapter 1, no specific federal sales practice requirements apply to OTC derivatives that are not securities or subject to the CEA antifraud provisions. However, MBS and structured notes are subject to the antifraud provisions of federal securities laws, which require dealers to disclose risks and assess the suitability of transactions involving such products for end-users. Because the percentages of end-users indicating that a fiduciary relationship existed for transactions involving OTC derivatives were not significantly different from the percentages for securities products, it does not appear that the different requirements afforded these products greatly influenced the degree of responsibility that end-users placed on dealers.
However, our analysis of survey responses revealed some differences by type of industry. Officials of state and local governments were more likely than those from most other organizations to report believing that a fiduciary relationship existed in some or all transactions involving OTC derivatives, MBS, and structured notes. In contrast, GSEs were significantly less likely than organizations in some other industries to report that such a relationship existed between them and their dealers. Because of the small number of respondents within some industry groups, statistically valid comparisons between most industries could not be made. However, overall, the responses across industries generally indicated that entities whose primary function included operating or managing portfolios of financial assets—such as GSEs, mutual funds, commodity pools, and money managers—were least likely to believe that a fiduciary relationship existed. Entities whose use of these products was generally more limited, such as state and local governments and nonfinancial corporations, were correspondingly more likely to believe a fiduciary relationship existed.
End-Users Also Indicated Reliance on Dealers for Investment Advice
In addition to views regarding fiduciary responsibilities, end-users indicated that they relied to some extent on dealers to provide investment advice as part of these transactions. As shown in figure 4.2, the percentage of end-users that indicated they relied on dealers to provide investment advice from some to a very great extent ranged from 59 percent for plain vanilla OTC derivatives to 84 percent for structured notes.
Dealer-Issued Guidance Asserts an Arm’s-Length Relationship
In 1995, two dealer groups each issued guidance that addresses sales practices, including the nature of the relationship and the specific responsibilities of parties to transactions involving OTC derivatives. The first set of guidance, the Framework for Voluntary Oversight (the Framework), was issued by the Derivatives Policy Group in March 1995. This group consists of six securities firms whose affiliates did approximately 90 percent of all U.S. securities firm-related business in nonsecurities OTC derivatives. The Framework was issued in response to concerns by Congress and others that the nonsecurities OTC derivatives activities of these firms were conducted in affiliates not subject to any direct U.S. regulation. The Framework contains procedures the participating firms have agreed to voluntarily follow in four major areas related to OTC derivatives, including counterparty relationships, which address dealer sales practices. Specifically, the counterparty relationships section consists of guidelines for professional intermediaries to follow in dealing with nonprofessional counterparties. Currently, the Framework applies only to the six firms and only to their nonsecurities OTC derivatives activities.
In August 1995, six financial industry groups, in coordination with the Federal Reserve Bank of New York, released the Principles and Practices for Wholesale Financial Market Transactions (the Principles). The purpose of the Principles is to define the relationship between institutional participants and to set out sound practices to be followed as part of transactions in OTC financial products, including OTC derivatives, MBS, and structured notes. This guidance does not purport to apply to transactions involving retail customers. The Principles resulted from an invitation by a senior official at the New York Federal Reserve Bank to representatives of the six groups to develop a code of conduct for U.S. financial markets. In contrast to the Framework, the Principles was promoted for use by all institutional market participants and does not make distinctions in its recommended practices on the basis of any differences in the professional or nonprofessional nature of the parties to a transaction.
Although differences between the two sets of dealer-issued guidance exist, we did not find these differences to be material. One of the members of the Principles drafting committee, whose firm also served on the committee that developed the Framework, reached the same general conclusion. At an April 5, 1995, public meeting at which the Principles drafting committee discussed the provisions of Principles, he stated that the spirit of the two documents is the same and that it would be unfair to contrast them simply because they use different language in some sections.
Overall, we found that the two sets of dealer-issued guidance advocate a similar approach to counterparty relationships. Both assert that the relationship between counterparties—unless otherwise agreed to by the parties or provided by law—is arm’s length with neither party relying on the other, even if information is exchanged. Also, neither set of guidance requires risk disclosure on specific transactions by either party, although each states that the parties should consider exchanging such information when the transaction is more complex or involves leverage. The summary introducing the Framework also indicates that the six participating firms have agreed to provide a generic risk disclosure document to new counterparties. In addition, both sets of guidance recommend similar procedures for exchanging pricing information and controlling and supervising personnel. Furthermore, both state that they are not intended to create legally enforceable obligations; however, courts could find the guidance useful in evaluating counterparty relationships and defining counterparties’ respective common law responsibilities. Table 4.1 compares the major sales practice provisions of the two sets of guidance.
As a part of stating that neither counterparty should rely on the other, both the Framework and the Principles advocate that each party should be capable of independently analyzing prospective transactions. This expectation is generally consistent with existing risk management guidance, such as that issued by the Group of Thirty and others, for entities engaging in transactions in OTC derivatives, MBS, and structured notes. This other risk management guidance typically recommends that such entities have adequate risk management systems in place, including the ability to measure and control the risks associated with using these products. The Framework and the Principles echo this advice by maintaining that each party is responsible for assessing the risks of a transaction and its own risk tolerance or capability for managing such risks. While stating that the relationship between parties is arm’s length, both sets of guidance advocate that parties clarify their relationship or obligations in writing. For example, the Principles states that any changes in the assumed relationship from one of arm’s length should be agreed to in writing.
Although the two sets of dealer guidance indicate that entities wishing to adhere to them should implement certain practices or controls, neither establishes any minimum responsibility for disclosing the risks of specific transactions—although this is an area where problems and disputes have arisen. Nonetheless, when such information is shared, both sets of guidance offer advice on the types of disclosure that could be made and provide suggestions for making certain kinds of disclosures. For example, both discuss providing scenario analyses that are not misleading and that adequately explain any assumptions made.
Both sets of guidance also indicate that all dealings should be conducted fairly and accurately. For example, the Framework states that dealers should conduct their OTC derivatives activities honestly, in good faith, and in a manner consistent with the promotion of public confidence in the integrity of the markets. It also indicates that all materials should be accurate and reasonable and that professional intermediaries “should consider including legends with those materials that identify various assumptions underlying the analyses presented, describe market factors that may affect the analysis, and/or inform the party receiving the materials that a variety of assumptions and market factors may affect the analysis.” Similarly, the Principles indicates that “a Participant should act honestly and in good faith when marketing, entering into, executing and administering Transactions.” It subsequently indicates that any communications between the parties, either oral or written, should be accurate and not intentionally misleading. The Framework and the Principles also urge that any assumptions used in scenario analyses be reasonable and that the unique market terminology and conventions of particular transactions not be used in a misleading way.
The Framework and the Principles also note that participants must be mindful of the potential for transactions to result in disputes as well as to expose them to compliance risk—the risk of loss from counterparty or shareholder lawsuits, regulatory fines, and voided contracts—and reputation risk—the risk of loss from reduced revenues and firm value. Both sets of dealer guidance acknowledge that certain transactions pose greater levels of these risks, such as when the transaction is more complex or involves leverage, or when the counterparty lacks sophistication or the capability to independently analyze the transaction. In such cases, both indicate that participants may wish to increase the amount of information they exchange, involve additional internal personnel or external advisors in negotiating the transactions, or take other steps, including avoiding the transaction. Both sets of guidance also advocate that counterparties establish policies and procedures to assess and mitigate the extent to which these transactions create compliance and reputation risks for each party, such as when counterparties appear to believe that the dealer has assumed an advisory role.
The Dealer-Issued Guidance Differs in Some, but Not All, Respects From Regulatory Standards Applicable to Other Activities
To identify any significant differences between the dealer-issued voluntary guidance and other existing sales practice standards, we compared the major tenets of the dealer guidance to the approaches embodied in bank supervisory guidance, a foreign code of conduct, and U.S. commodities and securities laws. Differences between the dealer-issued guidance and these other standards could generally be attributed to differences in their purpose and intent, products covered, or entities subject to them.
The sales practice requirements placed on banks that market OTC derivatives are largely consistent with the dealer-issued guidance, although certain differences exist. Similar to the dealer-issued guidance, OCC and Federal Reserve guidance each indicates that bank counterparties are ultimately responsible for ensuring the appropriateness of transactions with bank dealers. Similar to the dealer-issued guidance, OCC guidance does not specifically require risk disclosure on individual transactions. The Federal Reserve guidance appears to require risk disclosure as it expects banks, if they determine that a counterparty is unsophisticated, to take steps to ensure that the counterparty is made aware of transaction risks. The goal of bank supervisory guidance as it relates to OTC derivatives is to promote the safety and soundness of regulated institutions; it is not specifically intended to protect those who engage in financial transactions with these institutions.
The expectations for dealers set out in the dealer-issued guidance are also similar in some, but not all, respects to the requirements applicable to futures trading in the United States. Similar to the dealer guidance, U.S. commodities laws do not require entities marketing futures and exchange-traded options to determine whether such products are suitable for their customers. However, in contrast to the Principles, U.S. commodities laws require that the customer be apprised of the significant risks of buying and selling these products, including disclosing that the prices of futures and options can be volatile and that the customer may incur losses that are larger than the amount originally invested.
The dealer-issued guidance is most similar to regulatory requirements issued in one of the major foreign markets for OTC derivatives and foreign exchange. In July 1995, the Bank of England issued an update to The London Code of Conduct, which was developed in conjunction with U.K. market participants. Similar to the U.S. dealer-issued guidance, the U.K. code establishes that the nature of the relationship for products in institutional markets involves transactions between principals, with end-users assumed to be capable of independently evaluating the transaction. In addition, the U.K. code states that if the end-user wishes to retain the other party as an adviser, it should do so in writing. Just as with the U.S. dealer-issued guidance, the U.K. code also states that participants share an interest in maintaining high standards of business conduct and fair dealing. However, whereas compliance with the U.S. dealer-issued guidance is voluntary, compliance with the U.K. code is mandatory. The code indicates that the U.K. central bank—the Bank of England—will view breaches of its provisions seriously, will investigate complaints, and may employ a range of sanctions against violators.
The responsibilities envisioned by the dealer-issued guidance contrast most with the SEC requirements imposed on dealers marketing securities in the United States. Although the Framework and the Principles do not supersede existing regulatory requirements, they vary in several major respects from U.S. securities law requirements. Whereas the dealer-issued guidance asserts that an arm’s-length relationship exists between counterparties, dealers marketing securities are expected to ensure that transactions they recommend are suitable, given the investment objectives, financial condition, and sophistication of the end-user. Disclosure of transaction risk, which the dealer-issued guidance makes optional for specific transactions, is generally expected as part of securities transactions.
The differences between the dealer-issued guidance and U.S. securities laws may stem, in part, from differences in the types of entities to which each applies. The dealer-issued guidance addresses transactions between participants who tend to be large financial and commercial entities and tend to be financially sophisticated. In addition, the dealer-issued guidance does not apply to individual investors. In contrast, the antifraud provisions of the U.S. securities laws apply equally to all investors and do not distinguish between institutional and individual end-users. Furthermore, the required disclosures that must be made as part of corporate securities issuances are designed to ensure that any superior knowledge about the financial condition and risks associated with the entity issuing the securities are made known to prospective investors.
Reconciling the Views of End-Users and Dealers Could Be Difficult
End-user and dealer reactions to the specific tenets of the Framework and the Principles have been mixed. Such reactions may reflect the parties’ differing interests when it comes to defining the nature of their relationship in transactions involving OTC derivatives. Part of the difficulty arises because altering the nature of the relationship between end-users and dealers affects the costs of the transaction to each party. In addition to the dealer-issued guidance, actions by a dealer group to standardize contract language as well as judicial decisions related to sales practice issues have not completely resolved the differences in end-user and dealer views. Therefore, various market participants have recognized the need to resolve these differences, and some have acknowledged that the involvement of federal financial market regulators might be necessary.
Reactions to the Tenets of the Dealer-Issued Guidance Have Been Mixed
End-user representatives, including EUDA, GFOA, the National Association of State Treasurers (NAST), the North American Securities Administrators Association (NASAA), and the Department of Labor have criticized the tenets of the dealer guidance. Others, including legal experts, have also voiced concerns about specific provisions of the guidance. In contrast, representatives of dealers and certain other organizations have supported the guidance.
Although public comments were not sought on the Framework, the drafting committee of the Principles solicited comments before finalizing the guidance. We analyzed the comment letters to identify the views of end-users and others on the specific tenets of the dealer-issued guidance, many of which were common to both the Principals and the Framework. Of the 21 organizations that commented, we spoke with 9 that provided substantive criticisms of the Principles. These nine organizations told us that their primary criticisms had not been addressed in the final version of this guidance.
One of the primary objections raised by commenting organizations was that the dealer-issued guidance inappropriately assumes that an arm’s-length relationship should prevail for all transactions. Those citing this issue argued that the dealer guidance thus imposes a “one-size-fits-all” model on end-users despite their varying levels of financial sophistication. For example, in their joint comments on the final draft of the Principles, three associations representing governmental entities stated that because the guidance uses the term “participant” to refer to both dealers and end-users, no distinction is made between their respective roles and responsibilities. As a result, they believe that the value of most of the document is negated. Additionally, the associations stated that end-users are a diverse group and that assuming they all have equivalent levels of expertise, responsibility, and access to information is erroneous.
Another criticism has been that the Principles may reduce end-users’ legal protections. In a May 3, 1996, letter to the Federal Reserve Bank of New York, EUDA noted that Bankers Trust offered the Principles as documentation of common practices for OTC derivatives transactions in support of its litigation with Procter & Gamble. EUDA indicated that Bankers Trust’s action affirmed the association’s original concerns that the Principles would be used by dealers to reduce the legal protections afforded end-users. EUDA characterized the Principles as “essentially a unilateral effort on the part of the dealer community to shift responsibilities from the dealers to end-users and to buttress the position of the dealers in pending and possible future litigation.” Some have argued that adherence to the dealer guidance may negatively affect the ability of end-users to claim reliance on dealer representations. GFOA, NASACT, and NAST stated in a joint issuance to their members that they might inadvertently waive existing legal rights if they agreed to be bound by the Principles without careful prior review. In their letter commenting on the draft of the Principles, these organizations also indicated that the attempt by the guidance to preclude reliance on a dealer was not realistic because potential investors should be able to, and often do, rely on representations made by dealers about products. However, the organizations stated that the guidance would require written acknowledgement by the dealer before any such reliance could occur.
Some of the commenting organizations also objected to the guidance because it does not place any responsibilities on dealers to disclose transaction risks or valuations. For example, in its November 1995 newsletter, EUDA stated that the Principles drafting committee had “philosophically rejected the idea that dealers should have any affirmative obligation to disclose material risks of OTC derivative transactions to end-users, irrespective of the complexity or novelty of the transactions.” Later in that newsletter, EUDA stated that “the final Principles make it clear that a dealer is not obligated to provide periodic valuations to its end-user counterparty, regardless of whether the instrument sold is a proprietary product of the dealer for which market valuations are neither publicly available nor readily ascertainable.” The associations representing governments stated that the guidance should recognize a dealer’s affirmative obligation to provide information material to a transaction instead of requiring an end-user to request it. They believe that failing to do so inappropriately assumes that both sides have equal information. They also objected to the Principles’ assumption that any additional transaction information, if not specifically requested, is considered unnecessary.
In commenting on the Principles, various associations representing governmental entities stated that the Federal Reserve’s agreement with Bankers Trust would be a better model for disclosing risk and ensuring that end-users understand transactions. Such a model would require dealers to (1) provide every counterparty with information about the material terms and risks of any applicable proposed transactions, (2) ensure that every counterparty could understand such terms and risks, and (3) ensure that the means by which product prices and values are determined are reasonably clear to counterparties. Dealers would also be required to meet specific disclosure obligations for proposed transactions.
Another criticism of the guidance was that end-users were insufficiently involved in their development. For example, the Department of Labor stated in its comment letter on the draft Principles that “entities which had no involvement in the creation of the Principles, had not agreed to adhere to the Principles, or may not even have known of its existence could be viewed as subject to the Principles.” The agency also stated that the Principles should only apply to entities that subscribe to them in writing. According to EUDA, “the process followed in developing the Principles and Practices was fundamentally flawed” because representatives of the end-user community were excluded from the Principles Drafting Committee. The treasurer of a major utility, who is an EUDA board member, was quoted in an industry publication as stating that “this is probably the only area in the finance world where a group of dealers have shaped both the products and all of the surrounding rules and regulations, with no input from those who are not dealers.”
Finally, in a May 1995, letter to the Principles drafting committee, GFOA contrasted the Framework with the Principles by stating that the Framework “takes limited steps in advising professional intermediaries to OTC transactions to disclose information regarding risks, clarify valuation questions, and provide training regarding counterparty relationships.” A GFOA official told us that, although these documents call for largely the same practices, GFOA believed that the Framework was more balanced in tone.
Representatives of dealers and other organizations have viewed the Principles more positively. A member of the ISDA board told us that the greater use of OTC derivatives has increased the need for dealers to formally explain their products and activities, including the risks associated with product use and the nature of their responsibilities in these transactions. A managing director at a large U.S. securities firm said that he disapproved of end-users who, when faced with losses, decide that they were not fully informed about the transactions. Therefore, he saw the guidance as valuable for describing the customary way the institutional markets work and for clarifying that dealers, unless otherwise agreed to, do not have fiduciary obligations as part of these transactions. An official from the New York Federal Reserve Bank indicated that the Principles provides a sound basis for relationships between parties conducting activities in financial products. He said that it assumes an arm’s-length relationship unless otherwise agreed to and acknowledged that parties can agree to alter this assumption in writing if it does not fit their circumstances. He also stated that the United Kingdom makes the same assumption about the nature of counterparty relationships, and it would be problematic for U.S. practices to be inconsistent with those of other major markets.
The Interests of End-Users and Dealers Conflict When It Comes to Defining Their Relationship
Difficult issues remain to be resolved before the differing interests of end-users and dealers over the nature of their relationship can be reconciled. To date, attempts to address these differences have not been successful. The primary areas of disagreement and uncertainty between end-users and dealers, and among the most difficult to resolve, are the nature of their relationships in transactions involving OTC derivatives that are not securities or futures and whether or not each party can rely on the statements made by the other. Under the securities laws, an implied standard of fair dealing allows end-users to rely on dealer statements and advice about a security. Although both sets of dealer-issued guidance indicate that neither party is presumed to be relying on the other, these documents contain language stating that transactions and communications between parties are expected to be accurate and made in good faith. According to the New York Federal Reserve Bank official who sponsored the development of the Principles, this language means that misstatements are not permissible. An official of a U.S. securities firm that participated in drafting the Principles said that, although neither party has the duty to advise the other about the risks of the transaction, a “buyer beware” philosophy is not assumed because the Principles calls for honest dealings between the parties.
Some dealer officials explained that allowing counterparties to view their firms’ statements as investment advice as a part of these transactions can be problematic. They said that to provide investment advice, dealers need to understand the complete financial position of their counterparties; however, end-users are not always willing to provide this information. A managing director at one of the major dealer banks, who also sits on ISDA’s board, told us that OTC derivatives contracts require performance by both parties. As a result, it is not reasonable to hold dealers totally responsible for the actions of the end-user.
Dealers also explained that the information they provide is not advice, rather it describes and explains the products. Dealers told us that they offer useful products that can meet the needs of end-users seeking to hedge risks or to obtain an investment return. In explaining how they marketed these products, dealers said they take time to learn end-users needs, assess end-users’ current financial condition, and provide end-users education or explanations about products. For example, officials at one U.S. securities firm provided us with a sample of a presentation given to an end-user. The 26-page document included a detailed analysis of the end-user’s exposure to changes in interest and currency exchange rates.
However, officials representing end-users and other organizations indicated that when the complexity or other features of some products render their risk characteristics less obvious, then reliance on dealer statements is sometimes necessary. An official working in the treasury of a large end-user commented at an April 1996 conference that, although his firm was financially sophisticated, the effort required to fully analyze the performance of certain complex products was beyond his firm’s capabilities. Therefore, the firm needed to be able to rely on dealer statements about how the products would perform as market rates changed. He said that, although the dealers’ marketing staff who explain complex transactions are willing to allow his firm to rely on their representations, the dealers’ legal staff advised his firm that no such reliance can be made because such firms are seeking to avoid the resulting legal liability. An attorney representing EUDA at a July 1996 forum on these issues said that dealers have superior knowledge about the proprietary products they develop and end-users find replicating the valuations of some products very difficult. During an address to an industry conference, an SEC commissioner said that dealers sometimes are tempted to describe products in sophisticated terms to increase their proprietary value.
Although comments on a draft of the Principles were solicited in a public session, few meetings between end-user and dealer groups have been held. A representative of GFOA said that members of the Principles drafting committee met with their organization and other governmental end-user associations just before issuing the final draft of that document. A representative from another end-user organization told us that his organization had been approached in early 1996 about working on a committee to revise the Principles, but they had declined to participate at that time because, according to this official, participation was made contingent on endorsing the Principles. As of August 1997, no additional meetings for the purpose of reconciling dealer and end-user views on the nature of their relationship as part of OTC derivatives transactions had been held.
The Financial Impact of Altering the Nature of Relationships May Make Resolving Disagreements More Difficult
Resolving disagreements about the nature of the relationship between end-users and dealers may be more difficult because the resolution can affect who bears what costs in transactions involving OTC derivatives, MBS, and structured notes. As our survey and other information indicated, end-users believe they should be able to rely on the information that dealers provide. However, dealers and others told us that, if end-users want to rely on the information provided, then it would be considered investment advice and the dealers would have to increase transaction prices or arrange separate compensation to reflect the increased legal risk in providing such advice. A former securities regulatory official said that reconciling the opposing views of the parties will be difficult because neither wants to assume the likely increased costs of the transactions. He noted that dealers, despite providing sometimes voluminous information about a product and its function, do not wish this information to be considered a recommendation or investment advice that can be relied upon because they do not want to assume any related legal liability. Conversely, he said that end-users want to obtain information from a dealer at no cost, secure competitive price quotes from a number of dealers, and then retain the right to sue the dealer used if the transaction loses money.
In January 1995 testimony before Congress, the Chairman of the Board of Governors of the Federal Reserve System also discussed how altering dealer responsibilities could create additional costs that are detrimental to the markets. The Chairman testified that dealers in financial transactions sometimes assume a role beyond that of a mere counterparty, such as when they provide advisory services. However, if dealers are required to ensure that an end-user’s use of a product is appropriate, such requirements may serve as a means for end-users to shift a transaction’s risk back to the dealer through legal actions. If such legal risks are exacerbated, dealers may begin charging a premium to cover uncertain future legal claims, and some dealers could move their activities overseas or withdraw from the market altogether. He said that such an outcome would present considerable costs to the economy because of the resulting interference in liquid and efficient markets.
A Dealer Group Proposed Contract Language to Address the Nature of Counterparty Relationships
ISDA proposed standardized language that describes the nature of the relationship between counterparties to OTC derivatives transactions and that could be incorporated into OTC derivative contracts. ISDA suggests that this language be added to the ISDA master agreement—the standardized contract used to document the obligations of parties to OTC derivatives transactions. If included as part of such contracts, each party would be representing that it was not relying on the other party and was making its own decisions about the transaction, it was capable on its own (or with independent professional advice) of understanding the terms of the transaction and its risks, and it was not acting as a fiduciary or an advisor in the transaction.
An official from a large U.S. corporation indicated that his firm refused to sign contracts with this provision. He said that, although his firm did not expect dealers to act as fiduciaries, it wanted to be able to rely on statements of fact made by the dealers about product performance under different market conditions. He noted that, although his firm was large enough to refuse to sign contracts that included language such as that suggested by ISDA, smaller end-users might not have the same clout and thus might sign as a condition of completing a transaction.
An attorney speaking on behalf of EUDA at a July 1996 industry forum said that the organization was cautioning end-users about signing contracts with this language in the event that doing so waived rights they might otherwise have, such as the ability to claim fraud on the basis of misrepresentations or omissions of fact. Although ISDA had amended the representation in an attempt to address this concern, the attorney told us that she was aware of the amendment when she spoke at the conference and that EUDA’s reservations about the representation’s language persist.
Recent Court Decisions Have Found That OTC Derivatives Dealers Have Some Responsibilities, but They Have Not Resolved Key Issues
In two cases resolved since 1995, courts have indicated that, although OTC derivatives dealers were not acting as fiduciaries, they were held responsible for being accurate when disclosing transaction risks. The first case, decided in the English Commercial Court in December 1995, was decided in the dealer’s favor. Although a U.K. case, the decision is relevant to U.S. OTC derivatives counterparties because many of their swaps personnel are located in London, and the ISDA master agreement used to document OTC derivatives contracts offers the choice of either New York or U.K. law as the governing jurisdiction for disputes. The case concerned two swaps transactions executed between Bankers Trust and an Indonesian business conglomerate. The Indonesian firm claimed, among other things, that the bank had made fraudulent misrepresentations and had a “duty of care” to fully explain the transactions and their risks. The judge found that Bankers Trust had not made a complete disclosure of the risks as part of these transactions. However, he stated that “the parties’ respective skill and knowledge in the field is a very relevant, though not by itself, decisive factor.” He also noted that officials at the Indonesian firm had held themselves out as being financially sophisticated and had demonstrated their ability to determine the transaction risks, even though the bank had not fully disclosed them. Therefore, the judge determined that Bankers Trust did not have a duty greater than the duty to present fairly and accurately any facts and matters in the representations it made.
Another suit—filed in U.S. District Court by Procter & Gamble against Bankers Trust—may have aided in clarifying the responsibilities of dealers in OTC derivatives transactions, but its early settlement has left opinions divided on its implications. Procter & Gamble filed this suit in October 1994, but the two parties settled in May 1996 before the case was presented to a jury. Under the settlement, Bankers Trust agreed to forgive as much as $150 million that Procter & Gamble owed. On the day of the settlement, the presiding judge responded to an earlier motion for summary judgment by dismissing or ruling in Bankers Trust’s favor on all the counts against it except one count alleging fraud and two counts requesting that the contracts be voided. The judge would have allowed these three counts to proceed to trial. Bankers Trust had argued that the transactions in question had been conducted at an arm’s length. In the ruling, the judge concluded that Bankers Trust had not been acting for or on behalf of Procter & Gamble as in a typical customer-broker context, but instead the two were principals to a contract and, therefore, no fiduciary duties were imposed. However, he did find that, under New York law, Bankers Trust had a duty to disclose material information about the transaction, both before and during the transactions, and also had a duty to deal fairly and in good faith during the performance of the transactions.
The judge’s ruling in the Procter & Gamble case did not definitively settle the extent to which dealers, in general, have responsibilities to disclose material information about transaction risks or the other requirements that may apply to dealers’ marketing activities. Since the ruling was made, several journal articles have provided conflicting views on the implications of the judge’s ruling on dealers’ obligations. At a July 1996 conference in Washington, D.C., representatives of dealers and end-users as well as legal experts also offered conflicting views on the conclusions that could be drawn from the ruling. Furthermore, in its announced settlement with an individual Bankers Trust employee who had marketed these products to Gibson Greetings, SEC stated that it disagreed with the Ohio judge’s ruling in the Procter & Gamble case regarding the inapplicability of federal securities laws to certain OTC derivative products.
The Need to Address Conflicting Views on the Nature of Counterparty Relationships Has Been Recognized
Representatives of regulators, end-users, and dealers have recognized the need to reach agreement on the specific responsibilities of dealers as a part of transactions in OTC derivatives, MBS, and structured notes. While speaking at a forum for end-users about the relationship that should prevail between end-users and dealers in institutional market transactions, a New York Federal Reserve Bank official said that activities in these products are important to the economy. Therefore, he said that too much uncertainty is created by leaving these matters to be decided by the courts on the basis of individual case facts and circumstances. Another speaker, an SEC commissioner, called on dealers and end-users to come to common agreement on each party’s responsibilities and duties. He cited the inefficiency of having dealers face potentially large legal liabilities over disputes decided by individual courts on the basis of what is usually a brief interaction between the end-user and dealer. He said that such uncertainty would not be tolerated in other areas of business and should not be tolerated in the markets for these products. Thus, he concluded that clarifying the relationship between end-users and dealers could enhance market efficiency and reduce dealers’ legal liability. Furthermore, he said that having dealers agree on the rules regarding their responsibilities was better than having thousands of end-users attempting to individually negotiate the nature of their relationship with dealers. However, he also acknowledged that when the nuances of relationships do not fit within the generally agreed-upon framework, then changes could still be individually negotiated.
Others have also recognized a need for end-users and dealers to agree on the nature of their relationship. A former securities regulator said that end-users and dealers need to agree on a set of common terms so that each side understands what type of information the other is providing and which statements can be relied on and which cannot. End-users and dealers should also discuss when and how scenario analyses should be provided. Coming to such agreement could reduce the number of instances where legal disputes occur. In response to an end-user’s concerns over the need to rely on the information dealers provide about product features and performance, ISDA’s legal counsel agreed that the parties need to discuss these issues with the goal of reaching a consensus. In a May 1996 article, an EUDA board member remarked that the organization hoped to continue to work with dealers to develop mutually acceptable practices for these products. “. . . could be endorsed and implemented by both dealers and end-users. This would require, however, that all sides and views be invited to the drafting table without preconditions. If the Federal Reserve Bank of New York does not want to facilitate such a dialogue under its auspices, we feel certain that other interested persons or government agencies would do so.”
Although not calling for federal involvement, the Chairman of the Federal Reserve Board provided some criteria for appropriate regulatory intervention in the markets. In the previously cited January 1995 congressional testimony, the Chairman stated that markets function most efficiently when both parties are free to enter transactions at their own discretion and are unhampered by the need to serve the interests of their counterparties. He emphasized that any consideration of regulation in this area should adhere to the principle that parties to financial transactions are responsible for their own decisions. However, he noted that misrepresentation and fraud could not be tolerated. He also said that, in some cases, end-users may not reasonably be expected to understand the risks involved in certain complex products, and that dealers in financial transactions sometimes act as more than just a counterparty by providing advisory services. According to the Chairman, addressing the situation may require limiting the use of some products to only certain organizations, providing guidance to end-users for investment and risk management, encouraging them to obtain independent advice, or encouraging them to diversify their portfolios. However, he cautioned against approaches that would allow end-users to shift a transaction’s risk back to the dealer through legal actions, because such approaches would likely increase transaction costs, discourage dealers from offering these products, and interfere with currently liquid and efficient markets.
Dealers and End-Users Acted to Reduce the Potential for Sales Practice Disputes, but Weaknesses Remain
Regardless of whether end-users and dealers collectively reach agreement on the nature of their relationship, they can individually protect themselves against sales practice disputes by having in place strong corporate governance systems, including internal controls and related practices. In discussions with us, dealers described implementing internal controls and sales practices that were consistent with those advocated by the two sets of dealer-issued voluntary guidance analyzed in chapter 4. Nonetheless, regulators identified weaknesses in sales practices that exposed dealers to the risk of loss. Similarly, end-users described a range of procedures for controlling investment risk; however, some lacked basic controls. Also, reviewing organizations identified specific weaknesses in end-user controls that contributed to losses. To help end-users better manage their activities, professional associations have issued guidance for their members to use in strengthening their corporate governance systems, including their internal controls and related practices. Actions have also been taken by various state governments to reduce the risk of loss associated with the use of OTC derivatives, MBS, and structured notes.
Corporate Governance Systems Can Address Sales Practice Issues
In our previous reports on derivatives, we stressed the importance of organizations having strong corporate governance systems to ensure that risk management and internal control systems are in place and functioning as anticipated. Under an effective corporate governance system, the board of directors approves policies and oversees the organization’s activities in financial products, including OTC derivatives, MBS, and structured notes. In addition to losses arising from adverse market movements or counterparty defaults, the marketing and use of these products can expose dealers and end-users to risks that can be similarly costly. Various entities, such as the Federal Reserve, OCC, and the Group of Thirty, have issued guidance that emphasizes the need for sound corporate governance systems to address the risks posed by dealing in and using these products. These sets of guidance are applicable to dealer marketing and end-user investment activities. As discussed at the end of this chapter, various end-user groups have also issued guidance that is specifically targeted to their members’ investment activities and that addresses the importance of a strong corporate governance system.
Dealers Described Sales Practice Policies and Procedures That Were Consistent With the Dealer-Issued Guidance
The dealers we contacted described sales practice policies and procedures for marketing OTC derivatives, MBS, and structured notes that we found to be consistent with the Framework and the Principles that were discussed in chapter 4. Dealers indicated that the extent to which they disclosed transaction risks depended on the product and the needs of the end-user. In general, they explained that the amount and type of information they disclosed about the risks of transactions in OTC derivatives, MBS, and structured notes varied depending on the complexity of the product. For more complex products, dealers generally indicated that they would provide more detailed descriptions, explanations, and materials about the product’s performance and risks. The firms also indicated that scenario analyses were sometimes provided, particularly for more complex transactions. The dealers explained that the amount of information they provided also varied depending on the sophistication of the end-user. For example, officials at one of the large securities firms told us that end-user sophistication was key to determining how much information was included in proposals—that is, the less sophisticated the end-user, the more information they would include.
Although dealers of OTC derivatives, MBS, and structured notes told us that they considered the circumstances of end-users when marketing these products, they did not view this as necessary for all transactions. At least four of the dealers we contacted explicitly stated that they were not responsible for assessing the suitability of OTC derivatives transactions for end-users. However, all of the dealers said that their firms’ policy is to tailor transactions to end-user objectives and sophistication. For example, officials at a major bank and a major securities firm indicated that, although suitability determinations are not legally required for OTC derivatives, their staff are generally protective of their relationships with end-users and would not knowingly enter into transactions that were inappropriate for end-users. However, officials at another major securities firm told us that they would enter into a transaction they believed was inappropriate for an end-user if the end-user insisted on proceeding even after hearing the dealer’s advice against such action. Dealers also generally did not view themselves as acting as fiduciaries in these transactions—most dealers emphasized that the end-users with whom they transacted were generally sophisticated. Officials at one of the large securities firms explained that, as a way of reducing their firm’s exposure to compliance and reputation risks, sales staff are required to be alert to indications that an end-user might be viewing the relationship as one involving fiduciary responsibilities for the firm. Such indications could result from observing that the end-user generally entered into all or most of the transactions the firm proposed, or appeared to be doing so, without independent analysis. In such cases, firm policy was for sales staff to ensure that transactions conformed to the end-user’s objectives and to discuss the situation with other levels of management within the firm.
Dealers of OTC derivatives, MBS, and structured notes described having similar controls and supervision processes to oversee their marketing of these products and to reduce the likelihood of sales practice disputes. They told us that their primary means of overseeing the firm’s marketing activities was by establishing multiple points of review for the transactions. The dealers described requiring staff other than the marketing personnel—such as trading supervisors—to review transactions daily as well as at weekly or monthly intervals. At least four firms had relationship managers who acted as central points of contact for the dealers’ activities with individual end-users. In this capacity, such staff were to review the appropriateness of all activity between the dealer and end-users, regardless of which business line within the firm originated the transaction. Furthermore, most of the dealers indicated that their internal audit staff performed reviews of their marketing activities in these products. However, one firm indicated that its internal audit staff had never reviewed these activities.
Most of the dealers of OTC derivatives, MBS, and structured notes told us that they had also made at least some changes to their sales practices or oversight activities within the last few years, primarily in response to publicized sales practice disputes. Five of the dealers indicated that they had revised policies applicable to their marketing of these products. For example, two firms said that they were creating more formal written policies to better document the specific practices they expected their staff to follow. Two other dealers said that they had made improvements to the information they provided to end-users including, in one case, expanding the range of possible market moves used in scenario analyses. Two of the dealers also indicated that they had formed new groups within their firms to review transactions and marketing of these products. One of the firms explained that a new committee within the firm would focus on assessing the compliance and reputation risks of the firm’s activities, including how products would be marketed and what type of end-user would be approached.
Dealer compensation practices was another area relevant to the quality of sales practices. The findings of regulators and others indicate that the structure of such compensation can be influential in determining how marketing personnel conduct their activities. For example, to the extent that staff receive higher compensation for more risky transactions that bring the firm greater profits, they have greater incentives to market these types of transactions, even if they are not in the end-user’s best interests. One dealer told us that more complex derivatives tend to offer the potential for greater bonuses than plain vanilla OTC derivatives because of their higher profit margin.
In general, dealers told us that their marketing staffs were not compensated solely by commissions on individual transactions. However, we could not determine the extent to which such commissions determined compensation. One dealer told us that its compensation is not a commission system tied to sales volume but a salary and bonus system that is based on the value of business brought into the firm. The dealer explained that, in calculating individual bonuses, overall firm profitability and the relative performance of other departments within the firm might be weighed more heavily than individual performance. The dealer said that the system was designed to reduce incentives for individuals to market high margin, risky products that are not in the end-user’s best interests. Some firms told us that deferring portions of the compensation of their personnel was one way they were attempting to align their marketing staffs’ interests with those of end-users. Other firms told us that maintaining quality end-user relationships was important to determining compensation.
Regulatory Examinations Surfaced Dealer Weaknesses
Although dealers described following sales practices that were consistent with the dealer-issued voluntary guidance, regulatory examinations indicated that most dealers had some areas where improvements were warranted. As noted in chapter 3, we did not find that a large number of dealers had deficient sales practices. In addition, in examinations conducted from mid-1994 to mid-1995, the Federal Reserve and OCC generally found that large bank derivatives dealers had made efforts to implement appropriate policies, procedures, and internal controls related to sales practices. OCC concluded that the banks it examined were in substantial compliance with its guidance and, in many cases, had developed policies and procedures that went beyond its minimum requirements.
However, both regulators identified weaknesses in sales practice-related areas at these banks that could expose them to compliance and reputation risks. Among the weaknesses identified in internal controls were inadequacies in the risk disclosure materials provided to potential counterparties. For example, some banks’ risk disclosure materials did not show how a product would perform across a sufficiently wide range of market conditions.
Regulators also identified weaknesses in the supervision of marketing personnel, including failure to provide for supervisory approvals of the prices quoted by marketing personnel to end-users. Some banks also lacked comprehensive, written policies and failed to adequately document transactions. Finally, OCC found that, in some cases, bank communications to end-users could be construed as advisory, which could expose banks to litigation if the transactions resulted in losses.
Banks may continue to have such weaknesses in their sales practice policies and controls. According to a bank regulatory official who oversees some of the major dealer banks, the examinations they have conducted since 1995 have continued to find weaknesses like those identified above. This official noted that banks have made improvements to their policies and controls relating to sales practices since 1994 and 1995, but that additional improvements are needed.
End-Users Described a Range of Controls, but Some Lacked Basic Controls
Our review found that the policies and controls varied widely at the organizations we contacted that used OTC derivatives, MBS, and structured notes. From a judgmentally selected sample of respondents to our survey, we obtained information through telephone interviews about the practices and controls in place at 50 organizations that had used OTC derivatives, MBS, or structured notes or that had only heard dealer presentations on these products. The organizations we contacted described a range of policies and practices governing the use of these products. Some described very sophisticated and involved processes, whereas others acknowledged that very few formal policies or practices existed. For example, one end-user reported having an extensive set of policies that it updated every quarter. Twenty-eight respondents said that they had their own investment guidelines. Officials of four organizations said they followed guidelines provided by their regulator or local governmental authority. Officials at three organizations said they did not have formal investment policies because of their small size or lack of investment activity.
Restrictions on using particular products also varied across the organizations we interviewed. Although we did not obtain complete information for all organizations, at least 30 respondents said that they limited purchases to specific products or had formal prohibitions against investing in certain products. However, five entities had no restrictions on which products they could use. In addition, 22 of the organizations described limiting their use of these products to certain situations or for specific purposes. For example, some of these organizations said they limited their use of OTC derivatives to adjusting exposure to changes in interest rates.
The ability to independently price or stress test the values of products held and the existence of a robust process for reviewing and approving transactions are important controls over investment activities. Of the 26 organizations that provided information on their ability to price or stress-test their holdings, 12 indicated they could independently do so. Six others indicated that they relied on assistance from dealers or other parties to conduct such activity. Four indicated that they did not attempt to stress test their portfolios.
The processes respondents used to approve or review transactions also varied. Although 31 respondents said that they required some sort of approval before purchasing a product, the levels of review and authorizing parties varied greatly. In some cases, portfolio managers or treasurers approved transactions; whereas in other cases, approval was required by an investment committee or by the company president. Twenty-two respondents reported controlling their use of these products by entering into transactions only with dealers that had been previously approved. To become an approved dealer, these organizations evaluated dealers’ credit ratings and other factors, such as their reputation. Two respondents reported that they only approved dealers that sign an agreement acknowledging that they understood and would follow the end-users’ investment guidelines. Five other end-users, which said they did not conduct such evaluations, indicated that they would only use dealers with high credit ratings.
Consistent with the descriptions of the practices followed by respondents we contacted, surveys by other organizations also found that end-user practices and controls varied across firms. For example, a 1995 survey by the Wharton School of Business found that while 76 percent of respondents had policies addressing their use of these products, only 3 percent reported results monthly to their boards, 25 percent reported results quarterly, 20 percent reported results annually, and 51 percent reported results on an as-needed basis. This survey and one other also found that just under one-half of the respondents conducted stress-testing or scenario analyses on their portfolios to determine how they could be affected by severe market changes. A 1995 survey of 75 large, multinational corporations found that their ability to internally determine the value of their holdings varied widely across these organizations, depending on the products involved. Seventy-six percent reported being capable of pricing forwards and futures contracts, but only 38 percent of the corporations reported that they could independently price swaps and swaptions, and 14 percent reported such capabilities for complex options.
Other surveys also found that the controls employed by end-users varied. Separate surveys by two financial journals of between 150 and 200 large U.S. firms reported that the authority for entering into transactions in OTC derivatives and similar products resided mainly with senior managers who were responsible for the organizations’ finances, but that some firms had recently begun requiring additional levels of approval. Similarly, an accounting firm’s survey of U.S. and international investment fund companies reported that one-third of those surveyed who had used derivatives had a supervisory board or risk management committee that established limits on the use of derivatives and similar products.
A more recent survey that addressed the practices of end-users also showed that practices varied across organizations. In November 1996, one of the large public accounting firms issued a survey of almost 700 financial and nonfinancial organizations that used exchange-traded and OTC derivatives. According to this survey, although these organizations followed generally consistent practices in accounting for these transactions, a range of practices existed for how they defined and evaluated the risks of these activities.
Reviewing Organizations Found That Weaknesses at End-Users Contributed to Losses
Although concerns over dealer sales practices have arisen in a number of recent losses, in some of these cases, weaknesses in the end-user’s internal controls and practices contributed to the end-user’s losses. Various groups have called for end-users to improve their management of and controls over the use of products like OTC derivatives, MBS, and structured notes to reduce the potential for losses and resulting sales practice disputes. The types of controls advocated by these groups are intended to reduce end-user dependence on the information provided by dealers and the resulting vulnerability to deficient dealer sales practices. Federal and state regulators, state audit departments, and other reviewing organizations that examined end-user losses where sales practice disputes existed found that the end-users involved had multiple weaknesses in their internal controls and practices that contributed to their losses. We reviewed the reports and findings of these organizations for nine cases where an end-user incurred a loss and subsequently alleged deficient dealer sales practices. Among the weaknesses identified at these end-users were inadequacies related to investment policies, oversight of investment activities, separation of duties, staff training and qualifications, and internal audits.
Regarding investment policies, regulators and others have frequently recommended that, at a minimum, entities using OTC derivatives or investing in financial instruments, such as MBS and structured notes, identify their objectives for using such products, the type of products approved for use, and the extent to which the products will be used. However, in five of the nine cases we reviewed, the reviewing organization found that end-users had material weaknesses in their policies addressing product use and, in some cases, lacked formal written policies. For example, a State of California report on Orange County’s losses noted that the county did not have a written investment plan against which its activities could have been compared before the losses occurred. Also, its investment policies did not establish limits on the level of risk allowed for the county’s investments. In 1994, a Texas community college incurred a $3-million loss when it sold part of its portfolio of highly volatile CMO tranches. The college had also experienced an $11-million decline in the market value of its remaining portfolio, which originally had a book value of over $31 million. The state auditor found that the college had no policies related to controlling the risk of its investments, their desired level of liquidity, or the extent to which they should be diversified.
Regarding oversight of investments, a key control identified by most reports and other guidance on the use of OTC derivatives and products with similar characteristics is the need to supervise the activities of staff engaging in such transactions to ensure that guidelines are followed and activities are prudent. Seven of the nine audit reports of end-users incurring losses identified lack of controls for monitoring investment activity and personnel as contributing to these losses. For example, the treasurer at one Texas county was allowed to enter into transactions without prior approval. He invested over 65 percent of the county’s investment funds in long-term, high-risk CMOs. The value of the $12.7-million portfolio later declined by as much as $4.5 million.
A related control is to adequately separate officials’ duties and responsibilities. Internal control standards generally require that internal auditors report to officials other than those that directly oversee the activities they are auditing. This control was absent in one county that experienced losses because the comptroller was responsible for making the county’s investments and for approving any internal audit of his activities—approval which he had never granted. An official of another county was responsible for both executing investment transactions and preparing the accounting records that reported their value. Because these two duties were not assigned to separate staff, the official was able to falsify the accounting records to hide the full extent of the losses that resulted from transactions he executed.
Federal and state regulators and state auditors also criticized some end-users for lacking staff that were adequately trained or that possessed sufficient understanding of the risks involved in using complex financial products. Six of the nine audits we reviewed indicated that investment personnel or supervisory staff did not sufficiently understand the risks involved with the products purchased or lacked the expertise to properly monitor complex investments. This lack of understanding is not surprising because the treasurers of some local entities are elected officials who may have no experience investing in sophisticated financial instruments. In these situations, external oversight assumes even greater importance because, as some of the reviewing authorities noted, the lack of expertise on the part of end-user personnel led them to rely heavily on dealers for advice.
Finally, some end-users lacked adequate internal audits. Thorough internal audits can lead to corrective action when investment policies and procedures are deficient or not being followed. At three end-users, the reviewing organizations noted that audits of investment activities either were not being done frequently enough or were not sufficiently addressing whether investment activities were in compliance with policies or other guidance. State auditors noted that the investment activities at one community college had not been reviewed by county audit staff in at least 5 years.
Various Organizations Issued Guidance for End-Users
In response to recent reported losses, various organizations issued guidance on recommended practices for reducing the risks of engaging in OTC derivatives, MBS, and structured note transactions. Although most of the recommended practices we reviewed addressed issues faced primarily by dealers, we identified four sets of guidance issued by professional associations or groups that address issues faced by end-users. In June 1994, GFOA issued guidance to its members on the policies and practices that governmental entities should have in place before using derivatives. About 1 year later, NAST issued revised guidance that focuses on preferred practices for government-administered investment pools in which smaller state and local government funds are pooled and invested centrally. That same year, the Treasury Management Association (TMA) issued guidelines on internal controls and appropriate disclosures for end-users of derivatives. Finally, in November 1996, the Risk Standards Working Group (RSWG) issued 20 standards for managing and measuring risks. The GFOA and TMA guidance is written specifically for derivatives use, while NAST and RSWG guidance is intended for all investment products. All four sets of guidance favor explicitly written policies and objectives that have been approved by executive management or the board of directors.
As shown in table 5.1, the four sets of guidance also call for similar practices, which, if not followed, can leave an end-user more vulnerable to sales practice disputes. However, each set of guidance has a different emphasis. The GFOA guidance emphasizes the importance of internal controls in reducing risks, such as establishing written investment guidelines, reporting requirements, and oversight systems. The NAST guidance focuses on the importance of communicating with pool participants, establishing the authorization to invest in certain types of products, and ensuring that investment policies exist—including borrowing and diversification policies. The RSWG guidance stresses the importance of risk management—including setting overall risk management objectives, valuing investments, and measuring risk-adjusted rates of return.
The TMA guidance pays particular attention to end-user management controls, calls for end-users to obtain any necessary independent expertise, and provides an extensive list of disclosure standards and practices. Overall, RSWG and TMA provide the most detail on implementing their guidance.
Some State Governments Acted to Reduce the Risk of Loss
Between 1994 and 1996, at least 14 states made changes that address the use of OTC derivatives, MBS, and structured notes by governmental entities within their states. These actions—which included 11 states enacting legislation and 3 states making executive branch policy changes—were taken after governmental entities in some of these states incurred unanticipated losses from derivatives use. These actions were taken to minimize the risk of loss that product use poses to governments in at least one of three ways—by improving end-users’ policies, procedures, and controls; limiting the use of certain types of products; or placing additional requirements on dealers.
One way that state governments have sought to decrease the likelihood of losses arising from the use of OTC derivatives, MBS, and structured notes was by requiring governmental entities to revise their own investment policies, procedures, and controls. Thirteen states took actions that place additional requirements on the investing entities within their states. For example, legislative bodies in Florida and Texas placed a similar new requirement on governmental units within their respective states to adopt investment plans that make the safety of investment funds a primary objective of government investment strategies. California and Florida now require their treasurer or unit carrying out the state’s investment activities to follow the prudent investor/person standard. Eleven states imposed requirements for strengthening internal controls on local governments. For example, Ohio now requires treasurers in local governments to establish and file written investment policies with the state, prepare quarterly investment reports, and provide monthly portfolio updates.
Several states also placed restrictions on the types of products that governmental entities could use. Ten of the 14 states now prohibit or restrict the use of OTC derivatives, MBS, and/or structured notes. For example, New Mexico now prohibits governmental entities in that state from using complex financial products, including structured notes. Wisconsin’s legislation allows its state investment board to use derivatives only for reducing risk. In Florida, local entities can invest in derivatives if the entity’s investment policy authorizes derivatives and if the entity’s financial officers have sufficient expertise in managing derivatives investments.
Finally, four states also sought to place additional responsibilities on dealers marketing OTC derivatives, MBS, or structured notes to governmental entities in their jurisdictions as well as to impose punitive measures when violations are found. The four states—Colorado, Minnesota, Ohio, and Texas—require dealers to ensure that the products they offer are acceptable under the governmental entities’ statutes or investment policies. For example, Texas requires broker-dealers to sign a statement acknowledging that they reviewed the entity’s investment policy and implemented reasonable procedures and controls in an effort to preclude imprudent investment activities arising out of the subject transaction. Taking a different approach, Colorado law requires that dealers repurchase investments, for at least the original face value plus any accrued interest, if the investments are found to be impermissible for the governmental entity.
Regulators Have Improved Sales Practice Oversight of Regulated Firms, but Some Weaknesses Remain
Federal financial market regulators have improved their oversight of dealer sales practices, but have not taken certain steps that would better ensure dealers follow sound practices when marketing OTC derivatives, MBS, and structured notes. To limit the risks that these activities pose to regulated institutions, bank regulators have promulgated specific requirements for the marketing of financial products and conducted examinations to monitor the extent to which banks comply with them. As a result, bank supervisory guidance addresses sales practices more extensively than in the past. We also found that these regulators’ examinations were generally thorough in addressing issues related to banks’ sales practices for OTC derivatives, MBS, and structured notes. However, the Federal Reserve’s guidance does not yet adequately address areas where weaknesses in a bank’s practices could lead to sales practice-related losses, although agency officials told us the Federal Reserve plans to address these areas in updated guidance that the agency expects to issue by the end of 1997.
In contrast to banking regulators, the regulatory authority of SEC and CFTC does not extend to the unregulated affiliates of the firms they otherwise regulate. To address concerns about the risks these activities pose to the regulated entity, SEC and CFTC worked with the six U.S. securities firms whose affiliates did approximately 90 percent of all U.S. securities firm-related business in these products on the Framework for Voluntary Oversight. Under the Framework, the participating firms are to provide SEC and CFTC with more information about their unregulated activities; however, the two regulators are not to receive information that could be used to determine the extent to which the firms are following the sales practice provisions of the Framework. Finally, SEC relies primarily on the securities SROs to oversee the sales practices of MBS and structured note dealers. Although certain jurisdictional and other factors affected SROs’ ability to fully assess dealers’ sales practices, recent changes in the law and corresponding rules removed the most serious limitation affecting one SRO.
Bank Regulators’ Efforts to Oversee Sales Practices Have Increased, but Updated Federal Reserve Guidance Has Not Yet Been Issued
Both the Federal Reserve and OCC have taken various actions to address sales practice issues. Both regulators issued guidance to their examiners and the banks they oversee that address the risks of marketing OTC derivatives, MBS, and structured notes. They subsequently conducted targeted examinations of bank sales practices for these products, including reviewing areas not adequately addressed in each agency’s guidance. To ensure that subsequent examinations would also adequately review these areas, OCC issued additional guidance to address these weaknesses, but the Federal Reserve has not yet issued updated guidance. Federal Reserve officials told us they expect to issue revised guidance that will address the sales practice areas not specifically covered in their existing guidance by the end of 1997. In addition, the Federal Reserve placed specific sales practice-related requirements on one bank’s transactions in certain types of complex OTC derivatives transactions as part of a 1994 enforcement action.
Bank Regulators Expanded Sales Practice Requirements for Banks
In 1993 and 1994, OCC and the Federal Reserve issued guidance to the banks they regulate. This guidance was also used by their examiners to review banks’ activities. The two sets of supervisory guidance were designed to address the risks associated with the increasing volume of banks’ activities in OTC derivatives and other financial products. According to OCC and Federal Reserve officials, before these issuances, sales practice-related guidance generally consisted of requirements that banks obtain sufficient information about a customer’s financial condition and business activities before extending credit to or engaging in other financial transactions with the customer—referred to as the “know your customer” rule.
In expanding the treatment of sales practice issues, OCC and Federal Reserve guidance generally contained the same requirements to be followed by banks and used by bank examiners. Specifically, OCC guidance required that banks not recommend transactions that they know, or have reason to know, would be inappropriate for their customers on the basis of available information about the end-user. The Federal Reserve required banks to determine the sophistication of derivatives counterparties, including whether counterparties understood the nature and risks of transactions. In separate guidance to its examiners, the Federal Reserve indicated that banks should establish standards to ensure that counterparties are not entering into transactions in complex products where they do not understand the risks. The guidance also noted that bank management should be cognizant of the risks to the bank’s reputation arising from its activities in these products. In December 1995, OCC issued additional guidance that more extensively discussed the risks—including compliance and reputation risks—that are associated with marketing financial products. This guidance also provided extensive criteria to help examiners evaluate the degree to which a bank was exposed to these risks and how well they were being managed.
Bank Regulators Generally Conducted Thorough Examinations After Sales Practice Problems Surfaced
In response to publicized sales practice disputes, OCC and the Federal Reserve conducted focused examinations of the largest bank dealers that addressed sales practices associated with OTC derivatives, MBS, and structured notes. In 1995, OCC conducted targeted examinations of several large bank dealers to assess their practices. OCC also published a summary of the results of these reviews, including identifying a list of best practices followed by the banks they reviewed. Similarly, the Federal Reserve targeted sales practices in examinations of major bank dealers conducted from mid-1994, when Bankers Trust’s sales practice-related problems became public, to mid-1995. The scope of both regulators’ examinations was broader than required by their existing supervisory guidance.
We reviewed the examination reports and supporting workpapers for seven of the targeted examinations that the two bank regulators conducted and found that these examinations were generally thorough in addressing key areas related to sales practices. As part of our review, we searched various sources for information applicable to sales practices—including securities regulators’ examination materials, private risk management guidance, and case studies of end-user losses—and identified six elements that could comprise a thorough examination of an institution’s sales practices. These elements include the existence of sales practice policies and procedures, management oversight and controls over marketing personnel, management oversight and controls over price quotes and valuation information, management supervision of restructured transactions, policies and procedures for assessing counterparty sophistication and appropriateness, and adequacy of disclosures to counterparties. We found that OCC and Federal Reserve examiners had reviewed at least five of these six elements at each of the banks they examined. The element examiners most commonly omitted from review involved management supervision of restructured transactions. Also, the Federal Reserve’s efforts focused primarily on more complex OTC derivatives transactions because agency officials believed that such transactions were harder for end-users to understand and value and thus were more prone to sales practice disputes.
OCC Addressed Weaknesses in Its Guidance, but Updated Federal Reserve Guidance Has Not Yet Been Issued
Although the guidance OCC and the Federal Reserve issued through 1996 expanded sales practice-related requirements, our analysis revealed that they did not address several sales practice areas related to compliance and reputation risks. These areas had been noted by regulators and dealers as among those in which sales practice disputes were likely to arise. For example, the guidance did not task examiners with assessing whether a bank’s marketing practices might inadvertently create an advisory relationship with an end-user where none was intended. In addition, neither regulator directed its examiners to ensure that the banks had adequate internal controls in place related to supervisory review of the price quotations and position valuation information provided to end-users. The importance of assessing this aspect of a dealer’s sales practices was illustrated by the Bankers Trust case, where providing incorrect price quotations and valuation information was the primary misconduct SEC and CFTC cited in their settlements with the bank. Finally, neither regulator’s guidance required examiners to assess the accuracy of banks’ marketing materials and product risk disclosures to end-users. Yet, both regulators reviewed such materials during the targeted examinations and found weaknesses.
In January 1997, OCC issued guidance to its examiners and the banks it oversees that expanded its coverage of sales practice issues into the areas where past problems were identified, thereby addressing these weaknesses. For example, the guidance directs OCC examiners to review any risk disclosure materials banks provide to customers and ensure that bank policies define the types of disclosures, if any, that should be made. Examiners are also to determine whether banks’ internal audit staff ensure that sales presentations are clear, balanced, and reasonable. The guidance also raises expectations for banks’ internal controls and supervision of marketing personnel, including requiring independent reviews of counterparty positions by other departments within the bank. Banks’ policies must also provide guidance on avoiding the implication that an advisory relationship exists. Finally, the new guidance more specifically addresses the way transactions are to be documented, including directing that bank policies require the maintenance of financial statements, investment policies, and profiles of counterparties.
As of June 20, 1997, the Federal Reserve had not yet issued updated guidance, but agency officials told us that the agency expected to do so by the end of 1997. Federal Reserve staff provided us with a draft of the updated guidance to review. The planned revisions to the guidance would address the elements we identified as missing in the existing guidance.
The Federal Reserve Placed Higher Sales Practice Requirements on One Bank
Separately from the guidance issued to all of the banks that it oversees, the Federal Reserve tasked at least one bank with more stringent requirements as a part of a 1994 supervisory agreement. As discussed in chapter 3, some Banker’s Trust counterparties raised concerns about the bank’s marketing of OTC derivatives, which prompted regulatory investigations. As a result of its investigation, the Federal Reserve entered into a supervisory agreement with Bankers Trust that imposed extensive new requirements on some of the bank’s activities in more complex OTC derivatives to increase the amount of information the bank provided on product risks as well as price and valuation calculations.
Specifically, the agreement included required practices for the bank’s marketing of leveraged derivative transactions (LDT), whose payment flows and values are highly sensitive to changes in relevant market rates, prices, or indexes to which they are linked. The agreement required Bankers Trust to (1) provide every counterparty with sufficient information about the terms and risks of any LDT it entered, (2) reasonably ensure that every counterparty has the ability to understand this information, and (3) conduct its LDT business in a manner that ensured reasonable price and valuation transparency to its counterparties.
The supervisory agreement also imposed specific disclosure obligations on the bank for proposed LDT transactions, including providing a written term sheet setting out material terms, explaining the risks, and preparing sensitivity analyses that show a broad range of potential outcomes. Both the term sheet and sensitivity analyses were to describe the various assumptions Bankers Trust used to evaluate transaction risks. To achieve reasonable price transparency, Bankers Trust was also to provide LDT counterparties with indicative (approximate) price quotes, which were to be updated daily for highly market sensitive LDTs and monthly for other LDTs. Bankers Trust’s procedures for achieving minimum risk disclosure and price transparency were to be subject to Federal Reserve review.
In addition to implementing these sales practice-related changes, Bankers Trust was subjected to a review of the conduct of its employees’ LDT activities by a special counsel and was restricted from initiating any new LDT business until the Federal Reserve determined that it had complied with the provisions of the written agreement. On December 9, 1996, the Federal Reserve announced that it had terminated the written agreement, thus ending the heightened requirements and oversight placed on the bank. According to a press account, a Bankers Trust official responded by noting that the bank had implemented numerous policies and procedures over the prior 2 years that increased the transparency and controls related to activities with its derivatives customers.
Although the sales practice requirements outlined in this agreement were binding only on Bankers Trust, some industry participants, including legal experts and professional association officials, indicated that the agreement may have effectively set the standard for all derivatives dealers. However, a senior Federal Reserve official cautioned that requirements such as those placed on Bankers Trust for its LDT activities may not be appropriate for other OTC derivative products. This official told us that the detailed disclosures required of Bankers Trust for its LDT customers would be unnecessary for more experienced end-users of plain vanilla derivatives. However, she said that as the complexity of products increase, similar disclosures may become necessary.
Jurisdictional and Other Limitations Have Affected Oversight of Securities Firms’ Sales Practices
SEC, CFTC, and the various industry SROs have increased their sales practice oversight of firms that deal in OTC derivatives, MBS, and structured notes. However, the approaches used to conduct this oversight were sometimes affected by these organizations’ lack of authority over the full range of firms’ marketing activities. Under legislation passed in the early 1990s, the firms under SEC and CFTC jurisdiction must provide SEC and CFTC, respectively, with information to be used in assessing the risks that such firms’ unregulated activities, including those in nonsecurities and nonfutures OTC derivatives, pose to the regulated entity. To supplement this information, SEC and CFTC worked with the securities firms whose affiliates are most active in the OTC derivatives markets to develop guidance that includes actions these firms will voluntarily implement to manage their OTC derivatives risks, including those related to sales practices. By adopting the guidance, participating firms also agreed to provide additional information about their OTC derivatives activities. However, SEC and CFTC are not to receive information about the extent to which these firms are following the sales practice provisions of the guidance.
In contrast to nonsecurities OTC derivatives, SEC has jurisdiction over the marketing of MBS and structured notes and has conducted examinations of dealers and taken enforcement actions against them for violations of the securities laws. SROs, such as NASD and NYSE, provide most of the routine oversight of dealers marketing these products and also have conducted examinations of and taken enforcement actions against dealers of these products. However, SRO efforts have sometimes been made more difficult by limits to their authority over particular firms or products. NASD faced the most serious restrictions, but recent changes to the law and applicable rules have removed these restrictions.
SEC and CFTC Jurisdiction Is Limited, but the Regulators Receive Information on Affiliates’ Activities
As discussed in chapter 2, SEC and CFTC direct regulatory authority is limited to products defined as securities or futures (including certain options), respectively, and to the firms registered with these regulators to conduct such activities. Because nonsecurities and nonfutures OTC derivatives activities are usually conducted in affiliates outside of the direct oversight of these two regulators, neither regulator conducts examinations of these firms’ sales of OTC derivatives.
To better assess the risk posed by the activities of these affiliates on the financial condition of a regulated broker-dealer, SEC was granted authority under the Market Reform Act of 1990 to collect certain types of information from the entities it regulates about their unregulated activities. CFTC was provided similar authority by the Futures Trading Practices Act of 1992. Both regulators subsequently issued risk assessment rules that require the firms subject to their regulation to submit additional information about their unregulated activities. For example, firms overseen by both SEC and CFTC provide these regulators with information on the total notional/contract amounts, aggregated credit risk exposure, and credit exposures concentrated by industry or counterparty arising from their OTC derivatives activities. The two regulators were to receive information from the regulated entities subject to these rules on a quarterly basis beginning in 1995. Firms regulated by both SEC and CFTC were to provide these regulators with descriptions of the systems they use to manage the risks associated with transactions in nonsecurities OTC derivatives. SEC and CFTC officials confirmed that, in general, they have been receiving the information required under their rules.
SEC and CFTC Lack Information to Assess the Sales Practices of Unregulated Affiliates
The rapid growth of the OTC derivatives market and some highly publicized losses by end-users raised concerns by Congress and others about the potential risks that OTC derivatives use by unregulated affiliates might pose to the regulated entity and the financial system. SEC and CFTC responded by working with the six securities firms whose affiliates are most active in the OTC derivatives markets to develop the Framework, which includes a sales practice-related section (the provisions of which are discussed ch. 3). According to an SEC official, the affiliates of these six firms accounted for about 90 percent of the OTC derivatives activity done by securities firm affiliates.
To supplement the responsibilities that securities firms have under the risk assessment rules, the Framework expands the participating firms’ commitment to taking additional voluntary steps related to their unregulated activities. These steps include reporting additional information to SEC and CFTC on their market and credit risk management systems and controls, risk in relation to the capital reserved against these activities, and credit concentrations and revenues from these activities. The Framework also outlines management controls that the firms are to follow. In addition, the firms have agreed to annual external audits whose purpose is to verify their adherence to the management control provisions of the Framework.
Unlike the other aspects of the Framework, the provisions relating to sales practices are less prescriptive and do not call for SEC and CFTC to receive additional information on the firms’ activities. These provisions suggest that participating firms (1) provide generic risk disclosure forms to new counterparties, (2) prepare accurate marketing materials that fairly present a transaction’s benefits and risks, and (3) adopt internal controls sufficient to ensure that strong counterparty relationships are maintained. SEC officials told us that the agency had worked with the participating firms to ensure that the counterparty relationships section was included in the Framework because they believed that fair treatment of end-users is a prerequisite to the growth and evolution of the OTC derivatives market. In a speech to end-users, an SEC commissioner said that the financial integrity of the OTC derivatives markets would be harmed if participants perceived them as unfair or rampant with abuse, thus, regulators have an interest in the sales practices used to market these products.
Although the firms agreed to external audits addressing their adherence to certain provisions of the Framework, as planned, these audits will not address the sales practices provisions. The Framework also does not stipulate that the participating firms report on the extent to which they are implementing the sales practice provisions of the Framework. For example, the participating firms have not provided copies of their sales practice policies—as they did as part of SEC’s risk assessment process for their risk management systems—and descriptions of the internal controls they have established to ensure that such policies are being followed. In addition, the firms are not expected to periodically provide the regulators with internal audit reports that document adherence to these policies and controls. Without a mechanism to collect such information, SEC and CFTC will lack sufficient data to indicate whether these firms are conducting their OTC derivatives marketing activities in ways that foster the fairness and integrity of these markets as was envisioned by the agencies when the sales practice provisions were included in the Framework.
SEC Relies Primarily on SROs to Oversee MBS and Structured Note Dealers, but Also Conducts Examinations and Takes Enforcement Actions
Although SEC relies primarily on SROs to oversee the activities of MBS and structured note dealers, including their sales practices, it has an active regulatory program under which it receives reports on dealers’ financial condition, examines broker-dealers and evaluates their compliance with laws and regulations, and conducts investigations of possible violations of the securities laws. The goals of its oversight are to (1) ensure the quality of SRO activities and (2) provide additional oversight of securities firms’ marketing activities. For example, SEC conducted 645 examinations of securities firms in 1996, about 50 percent of which were to assess the quality of examinations performed by the relevant SRO. The remaining 50 percent of SEC examinations were initiated on the basis of a specific cause, such as a complaint by an end-user. SEC officials advised us that almost all of these examinations include some sales practice component. In conducting the 1996 examinations, the officials said that six examinations identified material sales practice deficiencies involving MBS or structured notes that were subsequently referred to SEC’s Enforcement Division for investigation.
SEC is also expanding its examination procedures to address sales practice issues. According to officials in SEC’s Office of Compliance Inspections and Examinations, new examination modules have been created to facilitate their examiners’ review of products such as MBS and structured notes. Routine sales practice modules include updated steps to address current rules and case law regarding markups and confirmation disclosures, and specialized modules are being created for government securities. SEC is to use these specialized modules to review NASD’s implementation of its new government securities rule (as discussed on p. 133).
Although SROs also conduct enforcement activities, SEC considers enforcing the securities laws to be one of its most important missions. As discussed in chapter 3, SEC officials had initiated investigations against 24 dealers from 1993 through 1996 for deficiencies related to the sale of MBS and structured notes. In some of these cases, SEC has taken action against the dealer involved, including assessing monetary penalties, imposing operating restrictions, or revoking a dealer’s license to conduct business. In several cases, both SEC and an SRO were investigating the conduct of the same dealer. A senior SEC Enforcement Division official explained that, when an SRO either has an investigation under way or has sanctioned a firm, SEC usually avoids initiating a parallel effort but sometimes will seek additional penalties for egregious cases. Decisions to pursue such actions also depend on the size and frequency of the violations and the dollar value involved. (See ch. 3 for a discussion of the results of SEC enforcement actions.)
Various Factors Also Affected SROs’ Ability to Fully Assess Dealer Sales Practices
Securities industry SROs, particularly NASD and NYSE, are an integral part of the oversight of firms marketing MBS and structured notes. However, these organizations were not always able to review all of a dealer’s sales activities. SROs can only review the sales activities of their members and not the sales activities of those firms’ unregulated affiliates that are not also members. The way that certain customers use dealers of MBS and structured notes also reduced the SRO staffs’ ability to fully assess sales practices for some transactions.
As part of their activities, NASD and NYSE have conducted examinations of securities firms. In 1996, NASD conducted 2,359 examinations and NYSE conducted 326 examinations that addressed sales practices, according to each SRO’s statistics. SRO officials told us that the examinations generally reviewed firms’ sales practice policies, procedures, and controls over marketing personnel. These organizations also had conducted enforcement investigations of possible sales practice violations, with NASD having performed investigations of 16 dealers and NYSE having performed investigations of 15 dealers from January 1993 through December 1996. (See ch. 3 for additional discussion of SRO enforcement action results.)
The way in which securities industry SROs conducted their sales practice oversight differed from the way they met their other responsibilities. According to a NYSE official, these SROs obtain reports and conduct examinations to ensure that their members are financially sound and in compliance with SRO rules and relevant federal securities law requirements. To facilitate these examinations and reduce the overlap of SRO jurisdiction over securities firms that conduct activities on multiple exchanges, usually just one SRO is designated to review the financial condition of such firms. However, the NYSE official said that the individual SROs remain responsible for conducting their own examinations for sales practice purposes, unless they contract with another SRO to have such examinations conducted on their behalf.
Dealers’ sales practice activities relating to OTC derivatives, MBS, and structured notes were not always subject to review by securities industry SROs. As previously discussed, the largest securities firms generally conduct their nonsecurities OTC derivatives activities in affiliates that are not registered with SEC. Although a dealer conducting activities in securities is required to join and submit to oversight by at least one securities industry SRO, its other nonsecurities affiliates, such as those conducting nonsecurities OTC derivatives activities, are not subject to SRO oversight.
The way that certain end-users conduct their activities in MBS and structured notes also affected SROs’ ability to fully assess sales practices. NYSE officials told us that assessing the adequacy of their members’ sales practices for MBS and structured notes could generally only be done when the customers involved are retail end-users. However, they estimated that such end-users account for only about 5 percent of the purchases of MBS. The remainder of such securities are purchased by institutional end-users that do not always maintain their holdings in accounts at NYSE-member securities firms. Instead, some transfer their purchases to custodial accounts at banks or other money managers. According to NYSE officials, reviewing an end-user’s portfolio is an important way for them to determine the appropriateness and suitability of transactions for the particular end-user. However, the transfer of purchases by some institutional end-users to other accounts generally precluded NYSE staff from determining the appropriateness and suitability of transactions for such end-users.
Removal of Restrictions on NASD Oversight Should Improve Sales Practice Oversight
The most serious limitation on an SRO’s ability to assess sales practices was faced by NASD. Before August 1996, NASD could not fully assess and take appropriate actions against certain deficiencies in the sales practices of dealers marketing GSE-issued MBS and structured notes, which accounted for the bulk of those securities issued. As noted in chapter 2, NASD had been prohibited from applying its full complement of sales practice rules to the marketing of government securities by a long-standing provision in the Securities Exchange Act of 1934. This restriction was removed by the Government Securities Act Amendments of 1993, and, after several rounds of public comment and revision, NASD obtained SEC approval to implement the rules and an associated interpretation on August 22, 1996.
While in effect, this restriction on NASD’s authority affected its enforcement activities. In cases where NASD determined that dealers’ sales practices warranted disciplinary action, the SRO was unable to pursue such cases as violations of its Rules of Fair Practice because GSE-issued securities were exempt from these rules. Instead, it had to pursue the enforcement cases under the antifraud provisions of the securities laws. However, the burden of proof for fraud violations was harder to meet than that for noncompliance with SRO rules. The removal of restrictions on NASD authority will allow the SRO to pursue cases as violations of its own rules and should improve its ability to oversee sales practices for MBS and structured notes.
Conclusions and Recommendations
Conclusions
Although OTC derivatives are subject to sales practice requirements that vary, depending on the dealer or specific product involved, our survey found that most end-users of these products were generally satisfied with the sales practices of dealers with whom they did business. In addition, federal financial market regulators found that few dealers in these contracts were involved in sales practice disputes.
Certain characteristics of the OTC derivatives markets may explain the high level of end-user satisfaction and the relatively limited number of disputes. Specifically, our 1995 survey found that about 10 percent of a broad range of U.S. organizations had entered into plain vanilla OTC derivatives contracts and only 2 percent had entered into more complex OTC derivatives contracts. In addition, product use was concentrated among generally large, financially oriented organizations, with GSEs, finance companies, mutual funds, and money managers reporting the highest rates of usage.
Nonetheless, some regulators and market participants have responded to concerns about the losses and costly disputes that can arise when OTC derivatives sales practices are inadequate or when roles and responsibilities are unclear. Their responses have included issuing guidance on recommended practices and controls; strengthening sales practice or investment policies, procedures, and practices; and increasing internal reviews of these activities.
Although the President’s Working Group on Financial Markets has concluded that legislation containing additional sales practice requirements is not currently needed for OTC derivatives, the market characteristics that contributed to the high level of end-user satisfaction and the limited number of sales practice disputes experienced to date could change as the markets evolve. These changes could include increased market participation by new dealers, more widespread use of complex products, or increased marketing to or product use by less sophisticated end-users. Such changes in market characteristics could cause the Working Group to reconsider whether current requirements are adequate to protect end-users of OTC derivatives or the financial markets.
However, the federal financial market regulators that participate in the Working Group do not routinely collect information related to changes in market characteristics. These regulators monitor the OTC derivatives activities of the firms subject to their respective oversight, and they discuss any developments of which they become aware through their joint participation in the Working Group. However, the regulators do not routinely collect the information necessary to ensure that they are able to systematically detect changes in market characteristics. Thus, the Working Group lacks a formal mechanism for obtaining the necessary information for monitoring market developments related to sales practices. Such a mechanism is important because it could alert the Working Group to the need for reassessing the adequacy of existing sales practice laws and regulations applicable to OTC derivatives.
Regarding MBS and structured notes, our survey found that end-user satisfaction with dealer sales practices was somewhat lower than for OTC derivatives. In addition, regulators identified more cases of potential sales practice abuse for these products than for OTC derivatives. However, SEC and the securities industry SROs have been investigating and, when deemed necessary, taking enforcement actions against the dealers involved in these cases. In addition, recently enacted rules subject dealers marketing GSE-issued MBS and structured notes—which account for the bulk of such securities—to all of NASD’s sales practice requirements. The implementation of these rules should close what has been a major gap in regulatory oversight of these products and improve NASD’s ability to ensure that dealer practices in these markets are appropriate.
Although the number of cases in which sales practice concerns were raised was relatively limited, the disputes that accompanied some of these cases resulted in both the end-user and dealer incurring significant costs. These costs included legal expenses, regulatory fines, reduced income, and even bankruptcy as well as other costs related to the failure to manage the compliance and reputation risks associated with these transactions. Although expanded sales practice requirements to protect end-users may not be necessary at this time due to the market characteristics previously discussed, the seriousness of these risks justify additional action by federal financial market regulators to better ensure the sound financial condition of regulated institutions and the fairness and integrity of the markets. Even actions that focus primarily on the risks posed to dealers can help improve dealer sales practices, benefit end-users, and enhance the overall integrity of the markets.
The Working Group could provide regulators a forum for assisting end-users and dealers in reconciling their differing views on the nature of their responsibilities in transactions involving OTC derivatives. According to our survey, over 50 percent of the end-users of plain vanilla OTC derivatives believed that dealers had certain fiduciary responsibilities to them in some or all cases. As reflected in the two sets of dealer-issued voluntary guidance—the Framework and the Principles—dealers have generally considered such transactions to be conducted at arm’s length, with minimal responsibilities existing for either party beyond those of honest and fair dealing. To the extent that the differing views of end-users and dealers increase the likelihood of sales practice disputes that expose regulated institutions to material losses or that otherwise could prove disruptive to the markets, federal regulators have an interest in the reconciliation of these differences. The reconciliation of such differences does not entail federal regulators imposing a resolution on the markets. Rather, the type of relationship and accompanying responsibilities that should prevail in OTC derivatives transactions should be agreed upon by market participants.
A clearer understanding of the nature of end-user and dealer responsibilities may also be necessary for the voluntary standards to receive more widespread acceptance among end-users. In addition, these standards may be the only ones applicable to some unregulated market participants, such as insurance company affiliates. Therefore, by assisting market participants in reaching a clearer understanding of their responsibilities, federal financial market regulators may enhance the overall integrity of the markets. Reaching a clearer understanding may also encourage product use, where appropriate, by organizations that have limited their use because of concerns about transaction risks and uncertainty about the roles and responsibilities of dealers and end-users. Finally, reaching such an understanding could result in greater diligence by both end-users and dealers in ensuring that they comprehend product risks before entering into transactions.
Notwithstanding the potential benefits of an improved understanding between dealers and end-users, the issues surrounding their relationships are complex and federal involvement may not necessarily result in an agreement that is widely accepted. Even if an increased level of understanding between these groups could be reached, the likelihood of legal disputes when large losses occur might not decrease. However, federal financial market regulators would be justified in considering whether they can help end-users and dealers reach a mutually acceptable agreement because of the importance of these products to the financial markets and the U.S. economy. Consultation with market participants on this subject might assist regulators in assessing whether they should assume such a role.
Regardless of whether they decide to assist end-users and dealers in resolving their differences, federal financial regulators can take other specific actions to address the risks to dealers that market OTC derivatives, MBS, and structured notes. Although the Federal Reserve has conducted examinations of banks’ activities and issued guidance on the responsibilities of banks that market these products, its guidance remains incomplete. Specifically, it does not direct bank examiners to assess the adequacy of bank policies and controls related to disclosing risk, acting in a fiduciary or advisory capacity, or supervising marketing personnel. Weaknesses in these areas existed in some cases where sales practice disputes have arisen. Although we found both bank regulators’ examinations to be generally thorough, specifically addressing these areas in the Federal Reserve’s guidance would better ensure that such areas receive similar attention in future examinations. Federal Reserve officials have efforts under way to update this guidance, and our review of a draft of this updated guidance indicates that it would address the elements we identified as missing in the existing guidance.
SEC and CFTC participation in the development of the Framework reflects their concern with the risks posed by the sales practices and other activities of the largely unregulated dealers in these markets. In lieu of additional regulation of this market, the Framework is to result in SEC and CFTC periodically receiving additional information, including the results of external audits, on some aspects of participating dealers’ OTC derivatives activities. This information should improve the ability of SEC and CFTC to conduct the legislatively mandated risk assessments of the entities they regulate. However, information on these dealers’ adherence to the sales practice provisions of the Framework is not included in the information these regulators are to receive. Adherence to these provisions is important for ensuring market fairness and integrity. In the absence of a mechanism for ensuring such adherence, SEC and CFTC cannot be sure that these firms’ commitment to voluntarily follow the sales practice provisions of the Framework is being fulfilled, casting doubt on whether a voluntary arrangement is an adequate substitute for direct federal oversight.
Recommendations to the President’s Working Group on Financial Markets
We recommend that the Secretary of the Treasury, as Chairman of the President’s Working Group on Financial Markets, take the following actions:
Ensure that the members of the Working Group establish a mechanism for systematically monitoring developments in the OTC derivatives markets to assess whether developments warrant introducing specific federal sales practice requirements.
Lead the members of the Working Group in considering the extent to which it should assist end-users and dealers in reaching agreement on the nature of their relationship in transactions involving OTC derivatives.
Recommendation to the Federal Reserve
We recommend that the Chairman of the Federal Reserve Board implement planned revisions to the Federal Reserve examination guidance, which are to more specifically address the need to assess the adequacy of banks’ policies and controls related to disclosing risks, creating advisory relationships, and supervising marketing personnel.
Recommendation to SEC and CFTC
We recommend that the Chairpersons of SEC and CFTC establish a mechanism for determining that participating firms are following the sales practice provisions of the Framework for Voluntary Oversight.
Agency and Industry Comments and Our Evaluation
We requested comments on a draft of this report from the heads, or their designees, of CFTC, the Federal Reserve Board, OCC, SEC, and Treasury. We also requested comments from two securities industry SROs (NASD and NYSE) and four industry associations (EUDA, GFOA, ISDA, and NASACT). Each of these agencies/associations provided us with written comments except CFTC, Treasury, and NASD. The Director of Treasury’s Office of Federal Finance Policy Analysis provided oral comments on our recommendations. Officials from CFTC provided oral, technical comments. Our additional responses to written, nontechnical comments are contained in appendixes III through IX. Technical comments provided by CFTC, the Federal Reserve Board, OCC, SEC, Treasury, NASD, NYSE, EUDA, GFOA, and ISDA were incorporated into this report as appropriate.
Overall, no consensus emerged on the benefits of implementing our recommendations. The banking regulators and the associations that represent primarily end-users generally concurred with our findings and/or recommendations. The Federal Reserve also stated that this report makes a useful contribution to assessing the current state of financial market sales practices. OCC commented that the report is comprehensive in evaluating sales practices from the perspectives of dealers, end-users, and regulators. GFOA said this report will be an extremely helpful reference on derivatives, and NASACT stated that it provides an excellent study of sales practice issues facing the OTC derivatives market. In contrast, Treasury and ISDA generally objected to our recommendations, with both opposing additional federal involvement in the OTC derivatives markets to address sales practice issues. SEC’s views were mixed.
SEC, Treasury, and ISDA objected to our recommendation that the Working Group establish a mechanism for systematically monitoring developments in the OTC derivatives markets. Specifically, SEC and Treasury officials commented that the Working Group’s current efforts, which generally include the principals meeting every 6 weeks and the staff meeting every 2 weeks, are adequate to address market developments. Similarly, ISDA commented that it is not readily apparent that a formal monitoring mechanism would be any more effective than the existing structure. In contrast, EUDA, GFOA, and NASACT supported this recommendation. EUDA indicated that taking the recommended steps—as they relate to this and our other recommendation to the Working Group—will lead to greater market safety and soundness, particularly concerning new dealers or end-users entering the markets. We continue to believe that the Working Group needs a formal mechanism for monitoring the OTC derivatives markets. As discussed in this report, the market characteristics that contributed to the relatively high level of end-user satisfaction and the relatively limited number of sales practice disputes could change as the markets evolve. This report recognizes that the federal financial market regulators monitor the OTC derivatives activities of the firms subject to their respective oversight, and they discuss market developments of which they become aware through their joint participation in the Working Group. However, this report also observes that the agencies that participate in the Working Group do not routinely collect the information necessary to ensure that they are able to systematically detect changes in market characteristics. Thus, the Working Group lacks a formal mechanism for obtaining the necessary information for monitoring developments related to sales practices. Such a mechanism is important because it could alert the Working Group to the need for reassessing the adequacy of existing sales practice requirements applicable to OTC derivatives. The information to be assessed could include the number and types of new dealers and end-users entering the markets, the types of complex new products being introduced, and changes in the types or sophistication of end-users to whom products are being marketed.
Treasury and ISDA also objected to our recommendation that the Working Group consider the extent to which it should assist end-users and dealers in reaching agreement on the nature of their relationship in transactions involving OTC derivatives. Treasury was concerned that, because such relationships are contractual, no single model may be appropriate. ISDA commented that no need exists for the Working Group to involve itself in mediating between dealers and end-users, that the involvement of market participants and regulators to date has been sufficient, and that the issues involved are complex and federal involvement may not result in an agreement that is widely accepted. In addition, ISDA stated that the draft report offered no evidence suggesting that disputes among privately negotiated derivatives contracts (that is, OTC derivatives contracts) are more frequent than in other commercial dealings, that these markets have been largely free of sales practice abuses, and that courts and regulators have not had difficulty in finding remedies when necessary. For these reasons, ISDA indicated that it did not support expanded regulatory activity. ISDA also commented that the report does not substantiate that the OTC derivatives market is “in any way broken and needs fixing,” that our recommendations do not follow logically from the facts or conclusions in the report, and that our recommendations contradict the views of market participants and regulators.
SEC commented that in its efforts to address financial market issues, the Working Group has had discussions with end-users and professional counterparties (dealers) and that it believes the Working Group would be willing to continue this dialogue. However, SEC stated that it is not necessary for the government to intervene and define contractual obligations for professional and sophisticated counterparties. The Federal Reserve noted that it has recognized the importance of and encouraged voluntary industry efforts in this area, and the three end-user associations supported our recommendation.
We continue to support our recommendation that the Working Group consider assisting market participants in reaching agreement on the nature of their relationship in OTC derivatives transactions. This report acknowledges that the issues involved in reaching agreement between dealers and end-users are complex and may not lend themselves to a single, widely accepted solution. For this reason, we do not intend that the Working Group impose a model that defines counterparty relationships in OTC derivatives transactions. In addition, we do not base our recommendation to the Working Group on a finding that a high frequency of sales practice abuses exists or that courts and regulators have had difficulty in finding remedies when abuses occur. Instead, we present evidence that end-users and dealers do not always agree on the nature of their relationship, including their responsibilities, in OTC derivatives transactions. Although the dealer-issued voluntary guidance asserts that the nature of the relationship is arm’s length, our survey found that a majority of end-users believed that dealers had fiduciary responsibilities in some or all OTC derivatives transactions, and that a majority indicated they relied on dealers from some to a very great extent as part of these transactions. To the extent that the differing views of end-users and dealers increase the likelihood of sales practice disputes that expose regulated institutions to material losses or that otherwise effect the sound financial condition of regulated institutions and the fairness and integrity of the markets, we concluded that the federal financial market regulators have an interest in the reconciliation of these differences.
Regarding ISDA’s objection to additional regulatory activity, our report concludes that no legislation or regulation is currently needed. Nonetheless, our views on the benefits of federal regulatory involvement in the OTC derivatives markets differ from those of ISDA. In this regard, our recommendations address the need for the federal financial markets to fulfill their responsibilities related to ensuring the sound financial condition of regulated institutions and the fairness and integrity of the markets, without creating unnecessary or costly burdens for them. We do not recommend that the federal financial market regulators resolve the differences between dealers and end-users by defining the nature of their relationship for them. Rather, we recommend that they consider, as participants in the Working Group, whether the benefits of assisting market participants are sufficient to warrant their involvement and whether their involvement is likely to achieve the desired result. The Working Group’s assistance could involve facilitating discussions between dealers and end-users that lead to agreement in key areas where they now disagree. Regarding ISDA’s comment that our recommendations contradict the views of market participants and regulators, this report recognizes the varying support of these parties for our recommendations.
Treasury officials commented that the draft report appeared to be critical of establishing an arm’s-length relationship as the default model for OTC derivatives transactions. ISDA officials supported the arm’s-length relationship as the default model, noting that it is the appropriate starting place for institutional market participants. This report does not reach a conclusion on the appropriate default model for counterparty relationships. It presents the views of both those who support and oppose an arm’s-length relationship as the default model. As clarified in chapter 7, we conclude that the type of relationship and accompanying responsibilities that should prevail in OTC derivatives transactions should be agreed upon by market participants, and we recommend that the Working Group consider assisting market participants in reaching agreement on these issues.
The Federal Reserve commented favorably on our recommendation to its chairman. That is, the agency indicated that it has efforts under way that would fully respond to our recommendation that the agency revise its examination guidance to more specifically address the need to assess the adequacy of banks’ policies and controls related to disclosing risk, creating advisory relationships, and supervising marketing personnel.
In addressing our recommendation that SEC and CFTC establish a mechanism for determining that participating firms are following the sales practice provisions of the Framework, SEC indicated that it is willing to discuss with the affected parties the feasibility of extending the external auditor’s role to incorporate a review of sales practice procedures. This appears to be an appropriate first step towards implementing our recommendation. As indicated in chapter 6, SEC and CFTC could also request that the participating firms provide copies of their sales practice policies—as was done for these firms’ risk management systems as part of SEC’s risk assessment process—and descriptions of the internal controls these firms have established to ensure that such policies are being followed. CFTC did not comment on this recommendation.
However, NASACT opposed this recommendation to SEC and CFTC, contending that these agencies’ participation in a compliance program would be recognized as an endorsement of the Framework and would present new legal obligations without first being subject to the due process associated with a new regulation. In place of our recommendation, NASACT proposed that the drafters of the Framework and end-users work with SEC and CFTC to further clarify counterparty relationships. GFOA also expressed concern that the dealer-issued voluntary guidance could establish legal obligations, noting that Bankers Trust cited the Principles as support in legal actions involving Procter & Gamble.
Our recommendation is not intended to create new legal obligations for dealers or end-users. Regarding NASACT’s concern that SEC and CFTC participation in a compliance program related to the Framework would present new legal obligations (presumably for end-users), this report notes that the Framework is not intended to apply to end-users. Instead, the Framework specifically states that it applies only to the participating firms and only to their nonsecurities OTC derivatives activities. Although the Framework indicates that it is not intended to create legally enforceable obligations, this report acknowledges that the courts could find the guidance useful in evaluating counterparty relationships and defining common law responsibilities. To the extent that market participants find this potential outcome objectionable, they can individually take steps to clarify their relationship with counterparties in each transaction they enter.
We believe that a more effective approach would be for end-users and dealers to participate in a joint effort to reach agreement on the nature of their relationship in OTC derivatives transactions, and we have recommended that the Working Group consider assisting the parties in this process. We make our recommendation to the Working Group in the belief that a coordinated effort by the federal market regulators would be a more effective means of reaching agreement on the nature of counterparty relationships, including the responsibilities of counterparties to OTC derivatives transactions. An additional advantage to this approach is that the resulting agreement would not make distinctions between types of dealers and end-users. That is, it would not distinguish between dealers that are banks and dealers that are securities firm affiliates or their end-user counterparties. As a result, should the Working Group assist dealers and end-users in reaching an agreement on the nature of their relationship, the resulting agreement would be applicable to all dealers and end-users of OTC derivatives.
This report also notes that, in lieu of additional regulation, SEC and CFTC are already participating with the drafters of the Framework in a voluntary program that includes monitoring the nonsales practice provisions of the Framework by external auditors. We are merely recommending that such monitoring be extended to the sales practice provisions of the Framework. As we conclude in this chapter, adherence to these provisions is important for ensuring market fairness and integrity. In the absence of a mechanism for ensuring such adherence, SEC and CFTC cannot be sure that a participating firm’s commitment to voluntarily follow the sales practice provisions of the Framework is being fulfilled, thereby casting doubt on whether a voluntary arrangement is an adequate substitute for direct federal oversight. | Why GAO Did This Study
Pursuant to a congressional request, GAO reviewed the sales practices for over-the-counter (OTC) derivatives, mortgage-backed securities (MBS), and structured notes, focusing on the: (1) federal sales practice requirements applicable to these products and the dealers marketing them; (2) extent of end-user satisfaction with sales practice, product use, and related disputes and the costs of these disputes; (3) views of end-users and dealers on the nature of their relationship and responsibilities; (4) actions dealers and end-users have taken to reduce the potential for sales practice disputes; and (5) actions regulators have taken to address sales practice issues.
What GAO Found
GAO noted that: (1) the extent to which OTC derivatives are subject to federal sales practice requirements intended to protect end-users varies, depending, in part, on whether they are considered to be securities, futures, or neither; (2) when they are considered to be securities or futures, their sale is covered by the federal securities or commodities laws, and they are regulated by the Securities Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), respectively; (3) to the extent that these products are not securities or futures, end-users with sales practice disputes would need to seek redress against a dealer by asserting primarily state statutory or common law claims; (4) in contrast to most OTC derivatives, MBS and structured notes are typically securities and, thereby, subject to the federal securities laws, except when exempted from specific provisions; (5) the extent to which sales practice requirements apply to the dealers marketing OTC derivatives in the United States also varies, depending on whether the dealer offering them is regulated; (6) when OTC derivatives are marketed by banks, they are subject to supervisory guidance issued by federal bank regulators; (7) securities, futures, and insurance firms, unlike banks, typically market OTC derivatives that they consider to be neither securities nor futures from affiliates that are not subject to any direct federal financial regulatory oversight, although some individual transactions may be subject to such oversight; (8) although sales practice requirements vary by product and dealer, according to GAO's survey, most end-users were generally satisfied with the sales practices of the dealers with whom they entered transactions; (9) GAO's survey also found that relatively few organizations reported using OTC derivatives; (10) GAO's review of regulatory and public records, covering 1993 through 1996, indicated that cases involving actual or alleged deficiencies in dealer sales practices were limited in number; (11) however, the dealers and end-users involved in these cases often experienced significant costs; (12) although generally satisfied with dealer sales practices, end-users' views on the nature of counterparty relationships sometimes differed from those of dealers; (13) in addition, bank regulators have taken certain actions to address sales practice issues; and (14) although SEC and CFTC do not directly regulate the affiliates that securities and futures firms use to conduct their OTC derivatives activities, SEC and CFTC worked with the most active of these firms to produce one of two sets of voluntary guidance. |
gao_GAO-06-450 | gao_GAO-06-450_0 | Introduction
The basic goal of the elections system in the United States is straightforward: All eligible persons, but only eligible persons, should be able to cast their votes and, if such votes have been properly cast by the voters, have those votes counted accurately. Faith in the fairness and accuracy of the U.S. election system is at the foundation of our democracy. Reports of problems encountered in the close 2000 presidential election with respect to voter registration lists, absentee ballots, ballot counting, and antiquated voting equipment raised concerns about the fairness and accuracy of certain aspects of the U.S. election system. After the events surrounding the November 2000 general election, the Help America Vote Act of 2002 (HAVA) was enacted and major election reforms are now being implemented. The November 2004 general election highlighted some of the same challenges as 2000 as well as some new challenges in areas such as electronic voting technology and implementation of some HAVA requirements. The issues that arose in both elections highlighted the importance of the effective interaction of people, processes, and technology in ensuring effective election operations and maintaining public confidence that our election system works.
Since 2001, GAO has issued a series of reports covering aspects of the election process primarily with respect to federal elections. This report focuses on the changing of such election processes in the United States and the November 2004 general election. Specifically, primarily with respect to federal elections, our objectives were to examine each major stage of the election process to (1) identify changes to election systems since the 2000 election, including steps taken to implement HAVA, and (2) describe the issues and challenges encountered by election officials in the November 2004 election.
Election Authority
Election authority is shared by federal, state, and local officials in the United States. Congressional authority to affect the administration of elections derives from various constitutional sources, depending upon the type of election. Congress has passed legislation in several major areas of the voting process. For example, the National Voter Registration Act of 1993 (NVRA), expanded the opportunities for citizens to register to vote for federal elections by, among other things, requiring most states to accept registration applications for federal elections by mail and at state motor vehicle agencies (MVA) and at certain other state agencies. The act also requires that in the administration of elections for federal office, states are to take certain steps to accurately maintain voter registration lists, and it limits the circumstances for removing names from voter lists. The Uniformed and Overseas Citizens Absentee Voting Act of 1986 (UOCAVA) requires states to, among other things, permit uniformed services voters absent from the place of residence where they are otherwise qualified to vote, their dependents, and U.S. citizens residing outside the country to register and vote absentee in elections for federal office.
The Help America Vote Act was enacted into law on October 29, 2002. As discussed below, the act includes a number of provisions related to voter registration, provisional voting, absentee voting, voting equipment, and other election administration provisions, and authorizes the appropriation of funds to be used toward implementing the law’s requirements. HAVA also provides that the choices on the methods of implementation of such requirements, for example, a computerized statewide voter registration list, provisional voting, voter information requirements at the polling place, identification requirements, and voting system standards (for ballot verification, manual audit capacity, accessibility, and error rates), are left to the discretion of the states. HAVA further specifies that such requirements are minimum requirements and should not be construed to prevent states from establishing election technology and administration requirements that are stricter than HAVA requirements as long as they are not inconsistent with certain other specified provisions.
HAVA, in general, applies to all 50 states and the District of Columbia. Areas covered by the law include Computerized statewide voter registration list: HAVA requires most states to implement a single, uniform, centralized, computerized statewide voter registration list to serve as the official voter registration list for the conduct of all elections for federal office in each such state. Under HAVA, the computerized statewide voter registration list was to have been implemented by 2004. However, 40 states and the District of Columbia received waivers to extend the deadline until January 1, 2006. States are required to perform regular maintenance of the voter list by comparing it to state records on felons and deaths, and to match voter registration applicant information on the voter list with information in the state motor vehicle agency’s records and Social Security Administration records, as appropriate.
Absentee ballots: HAVA contains various amendments to UOCAVA regarding absentee voting for absent uniformed service voters and certain other civilian voters residing outside of the United States. The amendments, among other things, (1) required that the secretaries of each military department, to the maximum extent practicable, provide notice to military personnel of absentee ballot deadlines, (2) extended the time that can be covered by a single absentee ballot application from UOCAVA voters, and (3) prohibited states from refusing to accept or process, with respect to federal elections, a voter registration application or an absentee ballot application by an absent uniformed services voter on the ground that the application was submitted before the first date that the state otherwise accepts or processes applications for that year from nonuniformed service absentee voters.
Provisional ballots: HAVA requires most states to implement provisional voting for elections for federal office. Under HAVA, in an election for federal office, states are to provide a provisional ballot to an individual asserting (1) to be registered in the jurisdiction for which he or she desires to vote and (2) eligible to vote in a federal election but (3) whose name does not appear on the official list of eligible voters for the polling place. Provisional ballots are also to be provided in elections for federal office to individuals who an election official asserts to be ineligible to vote, and for court-ordered voting in a federal election after the polls have closed. These various types of individuals, under HAVA, are to be permitted to cast the provisional ballot upon the execution of written affirmation at the polling place that they are registered voters in the jurisdiction and that they are eligible to vote in that election. If election officials determine that the individual is eligible under state law to vote, the individual’s provisional ballot is to be counted as a vote in accordance with state law. HAVA also requires that a free access system be established to inform voters if their votes were counted, and if not, the reason why.
Polling places: HAVA provisions targeted, among other things, improving information at polling places and Election Day procedures. To improve the knowledge of voters regarding voting rights and procedures, HAVA requires election officials to post voting information at each polling place on the days of elections for federal office, including, for example, a sample ballot, polling place hours, how to vote, instructions for first-time voters who registered by mail, and general information on federal and state voting rights laws and laws prohibiting fraud and misrepresentation. The act also authorized the appropriation of funds for payments to states for educating voters concerning voting procedures, voting rights, and voting technology. Under HAVA, voting systems used in elections for federal office are required to meet specified accessibility requirements for individuals with disabilities. With respect to improving accessibility, HAVA also authorized the appropriation of funds for payments to states to be used for improved accessibility of polling places for, among others, individuals with disabilities and those with limited English proficiency. HAVA also requires that such voting systems provide individuals with disabilities with the same opportunity for access and participation (including privacy and independence) as for other voters. In connection with this requirement, HAVA provides for the use of at least one direct recording electronic (DRE) device or other voting system equipped for individuals with disabilities at each polling place.
Identification requirements: Under HAVA, states are to require that certain voters who register by mail to provide specified types of identification when voting at the polls or send a copy of the identification with their mailed applications. Acceptable identification includes a current and valid photo identification or current utility bill, bank statement, government check, paycheck, or other government document that shows the name and address of the voter. Under HAVA, voters at the polls who have not met the identification requirement may cast a vote under HAVA’s provisional voting section. Similarly, mail-in ballots from persons who have not provided the required identification also are to be counted as HAVA provisional ballots.
Election administration: HAVA also established an agency with wide-ranging duties to help improve state and local administration of federal elections. The Election Assistance Commission is to be involved with, among other things, providing voluntary guidance to states implementing certain HAVA provisions, serving as a national clearinghouse and resource for information with respect to the administration of federal elections, conducting studies, administering programs that provide federal funds for states to make improvements to some aspects of election administration, and helping to develop testing for voting systems, and standards for election equipment. EAC is led by four Commissioners, who are to be appointed by the President and confirmed by the Senate. The Commissioners, who, under HAVA, were to be appointed by February 26, 2003, were appointed by the President in October 2003 and confirmed by the Senate in December 2003. Since beginning operations in January 2004, EAC has achieved many of its objectives. Among other things, EAC has held hearings on the security of voting technologies and the national poll worker shortage; established a clearinghouse for information on election administration by issuing two best practices reports; distributed payments to states for election improvements, including payments for voter education and voting equipment replacement; drafted changes to existing federal voluntary standards for voting systems; and established a program to accredit the national independent certified laboratories that test electronic voting systems against the federal voluntary standards. However, EAC has reported that its delayed start-up affected its ability to conduct some HAVA-mandated activities within the time frames specified in the act. In turn, according to its fiscal year 2004 annual report, the delayed EAC start-up affected states’ procurement of new voting equipment and the ability of some states and local jurisdictions to meet related HAVA requirements by statutory deadlines.
Voting systems: One of the primary HAVA provisions relates to encouraging states to replace punch card voting systems and lever voting systems and authorizing appropriations for payments to support states in making federally mandated improvements to their voting systems. A voting system includes the people, processes, and technology associated with any voting method. It encompasses the hardware and software used to define the ballot, conduct the vote, and transmit and tally results, and system maintenance and testing functions. With respect to standards for voting systems used in elections for federal office, HAVA requirements for such systems include providing voters with the ability to verify their votes before casting their ballots, producing permanent paper records for manual auditing of voting systems, and compliance of voting system ballot counting error rates with those set out in specified federal voting system standards. HAVA also directs that updates to the federal voluntary voting system standards for these requirements be in place by January 1, 2004, and provides for additional updates to the voluntary standards as approved by the Election Assistance Commission. Mechanisms are also specified that can be used by states and localities in acquiring and operating voting systems, including accreditation of laboratories to independently test and evaluate voting systems and federal certification for voting systems that undergo independent testing.
The time frames for implementing various HAVA requirements ranged from as early as 45 days after enactment (a deadline for establishing a grant program for payment to the states for improved election administration) to as late as January 1, 2006, for various voting system standards. Several key deadlines were set for January 1, 2004, including implementation of HAVA’s provisional voting requirements and the establishment of a statewide voter registration list (or to request a waiver from the deadline until January 1, 2006). States receiving funds to replace punch card voting systems or lever voting systems could also request a waiver until January 1, 2006; otherwise such systems were to be replaced in time for the November 2004 general elections. The deadline for states and jurisdictions to comply with specific requirements for voting systems, such as producing a paper record for audit purposes, was January 1, 2006.
HAVA vests enforcement authority with the Attorney General to bring a civil action against any state or jurisdiction as may be necessary to carry out specified uniform and nondiscriminatory election technology and administration requirements under HAVA. These requirements pertain to HAVA voting system standards, provisional voting and voting information requirements, the computerized statewide voter registration list requirements, and requirements for persons who register to vote by mail. The enforcement of federal statutes pertaining to elections and voting has, with certain exceptions, been delegated by the Attorney General to the Civil Rights Division.
Election System Elements
The U.S. election system is highly decentralized and based upon a complex interaction of people (election officials and voters), processes, and technology. Each of the 50 states and the District of Columbia has its own election system with a somewhat distinct approach. Within each of these 51 systems, the guidelines and procedures established for local election jurisdictions can be very general or specific. Each election system generally incorporates elements that are designed to allow eligible citizens to vote and ensures that votes are accurately counted. While election systems vary from one local jurisdiction to another, most election systems have the elements identified in figure 7.
Delegation of Election Responsibility
Typically, states have decentralized elections so that the details of administering elections are determined at the local jurisdiction. States can be divided into two groups according to how they delegate election responsibilities to local jurisdictions. The first group include 41 states where election responsibilities are delegated to counties, with a few of these states delegating election responsibilities to some cities, and 1 state that delegates these responsibilities to election regions. We included the District of Columbia along with this group. The second group is composed of 9 states that delegate election responsibilities to subcounty governmental units, known by the U.S. Census Bureau as minor civil divisions (MCD). However, in 1 of these states, Minnesota, election functions are split between county-level governments and MCDs. For example, registration is handled exclusively by county officials, and functions, such as polling place matters, are handled by MCDs. Overall, about 10,500 local government jurisdictions are responsible for conducting elections nationwide, with the first group of states containing about one- fourth of the local election jurisdictions and about three-fourths of the local election jurisdictions located in the states delegating responsibilities to MCDs. Although more election jurisdictions are in the 9 states, most of the population (88 percent of the U.S. population based on the Census of 2000) lives in the states delegating responsibilities primarily to counties.
Voter Registration
While voter registration is not a federal requirement, the District of Columbia and all states, except North Dakota, generally require citizens to register before voting. The deadline for registering, and what is required to register, varies; at a minimum, state eligibility provisions typically require a person to be a U.S. citizen, at least 18 years of age, and a resident of the state, with some states requiring a minimum residency period. Citizens apply to register to vote in various ways, such as at motor vehicle agencies, during voter registration drives, by mail, or at local voter registrar offices. Election officials process registration applications and compile and maintain the list of registered voters to be used throughout the administration of an election. Prior to HAVA, voter registration lists were not necessarily centralized at the state level, and separate lists were often managed by local election officials. HAVA requires voter registration information for federal elections to be maintained as a statewide computerized list and matched with certain state data, and that voter registration application information be matched with certain state data and, in some cases, with federal data, to help ensure that the voter list is accurate.
Absentee and Early Voting
All states and the District of Columbia have provisions allowing voters to cast their ballot before Election Day by voting absentee with variations on who may vote absentee, whether the voter needs an excuse, and the time frames for applying and submitting absentee ballots. In addition, some states also allow early voting, in which the voter goes to a specific location to vote in person prior to Election Day. As with absentee voting, the specific circumstances for early voting—such as the dates, times, and locations—are based on the state and local requirements. In general, early voting allows voters from any precinct in the jurisdiction to cast their vote before Election Day either at one specific location or at one of several locations. The early voting locations are staffed by poll workers who have a registration list for the jurisdiction and ballots specific to each precinct. The voter is provided with and casts a ballot for his or her assigned precinct.
Conducting Elections
Election officials perform a broad range of activities in preparation for and on Election Day itself. Prior to an election, officials recruit and train poll workers to have the skills needed to perform their Election Day duties, such as opening and closing the polls, operating polling place equipment, and explaining and implementing provisional voting procedures for certain voters such as those who are not on the registration list. Where needed and required, election officials must also recruit poll workers who speak languages other than English. Polling places have to be identified as meeting basic standards for accessibility and having an infrastructure to support voting machines as well as voter and poll worker needs. Ballots are designed and produced to meet state requirements, voter language needs, and identify all races, candidates, and issues on which voters in each precinct in their jurisdiction will vote. Election officials seek to educate voters on topics such as what the ballot looks like, how to use a voting machine, and where their particular polling place is located. Finally, election officials seek to ensure that voting equipment, ballots, and supplies are delivered to polling places.
On Election Day, poll workers set up and open the polling places. This can include tasks such as setting up the voting machines or voting booths, readying supplies, testing equipment, posting required signs and voter education information, and completing paperwork such as confirming that the ballot is correct for the precinct. Before a voter receives a ballot or is directed to a voting machine, poll workers typically are to verify his or her eligibility. The assistance provided to voters who are in the wrong precinct depends on the practices for that particular location.
Provisional Voting
One of the most significant post-2000 election reforms found in HAVA, according to the Election Assistance Commission, is that states are required to permit individuals, under certain circumstances, to cast a provisional ballot in federal elections. More specifically, states are to provide a provisional ballot to an individual asserting to be (1) registered in the jurisdiction for which he or she desires to vote and (2) eligible to vote in a federal election, but (3) whose name does not appear on the official list of eligible voters for the polling place. In addition, provisional ballots are to be provided in elections for federal office to individuals who an election official asserts to be ineligible to vote, and for court-ordered voting in a federal election after the polls have closed. Although many states had some form of provisional balloting prior to the passage of HAVA, 44 of the 50 states and the District of Columbia were required to provide provisional ballots for the 2004 general election. Under HAVA, 6 states were exempt from HAVA’s provisional voting requirements because they either permitted voters to register on Election Day or did not require voter registration. If individuals are determined to be eligible voters, their provisional ballots are to be counted as votes in accordance with state law, along with other types of ballots, and included in the total election results.
Vote Counting and Recounting
Following the close of the polls, election officials and poll workers complete a number of basic steps to get the votes counted and determine the outcome of the election. Equipment and ballots are to be secured, and votes are to be tallied or transferred to a central location for counting. The processes used to count or to recount election votes vary with the type of voting equipment used in a jurisdiction, state statutes, and local jurisdiction policies. Votes from Election Day, absentee ballots, early votes (where applicable), and provisional ballots are to be counted and consolidated for each race to determine the outcome. While preliminary results are available usually by the evening of Election Day, the certified results are generally not available until days later. Some states establish a deadline for certification of results, while other states do not.
Voting Methods and Technologies
Voting methods are tools for accommodating the millions of voters in our nation’s approximately 10,000 local election jurisdictions. Since the 1980s, ballots in the United States have been cast and counted using five methods: paper ballots, lever machines, punch cards, optical scan, and DREs. Four of the five methods by which votes are cast and counted involve technology; only the paper ballot system does not use technology. The three newer methods—punch card, optical scan, and DRE—depend on computers to tally votes. Punch card and optical scan methods rely on paper ballots that are marked by the voter, while many DREs use computers to present the ballot to the voter. Voting systems utilize technology in different ways to implement these basic voting methods. For instance, some punch card systems include the names of candidates and issues on the printed punch card, while others use a booklet of candidates and issues that must be physically aligned with the punch card. The way systems are designed, developed, tested, installed, and operated can lead to a variety of situations where misunderstanding, confusion, error, or deliberate actions by voters or election workers can, in turn, affect the equipment’s performance in terms of accuracy, ease of use, security, reliability, and efficiency. In fact, some recent election controversies have been specifically associated with particular voting methods and systems. Nevertheless, all voting methods and systems can benefit from established information technology management practices that effectively integrate the people, processes, technologies.
Scope and Methodology
For this report, we conducted a Web-based survey of election officials in all 50 states and the District of Columbia, surveyed by mail a nationally representative stratified random probability sample of 788 local election jurisdictions, and conducted on-site interviews with election officials in 28 local jurisdictions in 14 states. Copies of the survey instruments are in appendixes II and III. In addition, the results of our state and local surveys are presented in two supplemental GAO products that can be found on our Web site at www.gao.gov. Appendix IV provides a summary of jurisdictions we visited. In reporting the state survey data, actual numbers of states are provided. When reporting local jurisdiction survey data, we provide estimates for jurisdictions nationwide. Unless otherwise noted, the maximum sampling error, with 95 percent confidence, for estimates of all jurisdictions from our local jurisdiction survey is plus or minus 5 percentage points (rounded). We also provide some national estimates by jurisdiction population size, and the sampling errors for these estimates are slightly higher. For these estimates, large jurisdictions are defined as those with a population over 100,000, medium jurisdictions have a population of over 10,000 to 100,000, and small jurisdictions have a population of 10,000 or less. Unless otherwise noted, all estimates from our local jurisdiction survey are within our planned confidence intervals.
Jurisdictions in which we conducted on-site interviews were chosen based on a wide variety of characteristics, including voting methods used, geographic characteristics, and aspects of election administration, such as whether early voting was offered. We did not select jurisdictions we visited on the basis of size, but as appropriate, we identify the size of a jurisdiction we visited using the same groupings we used for our nationwide mail survey.
We also reviewed extensive prior GAO work and other national studies and reports, and attended an annual election official conference. A comprehensive description of our methodology for this report is contained in appendix V.
We conducted our work between March 2005 and February 2006 in Washington, D.C.; Dallas; Los Angeles; and 28 local election jurisdictions in 14 states, in accordance with generally accepted government auditing standards.
Voter Registration
In general, the goal of a voter registration system is to ensure that eligible citizens who complete all the steps required of them to register to vote in their jurisdictions are able to have their registrations processed accurately and in a timely fashion, so they may be included on the rolls in time for Election Day. The November 2000 general election resulted in widespread concerns about voter registration in the United States. Headlines and reports questioned the mechanics and effectiveness of voter registration by highlighting accounts of individuals who thought they were registered being turned away from polling places on Election Day, the fraudulent use of the names of dead people to cast additional votes, and jurisdictions incorrectly removing the names of eligible voters from voter registration lists. With the passage of HAVA, with respect to federal elections, most states were required to establish statewide computerized voter registration lists and perform certain list maintenance activities as a means to improve upon the accuracy of voter registration lists. List maintenance is performed by election officials and consists of updating registrants’ information and deleting duplicate registrations and the names of registrants who are no longer eligible to vote.
The voter registration process includes the integration of people, processes, and technology involved in registering eligible voters and in compiling and maintaining accurate and complete voter registration lists. In managing the voter registration process and maintaining voter registration lists, state and local election officials must balance two goals— minimizing the burden on eligible persons registering to vote, and ensuring that voter lists are accurate, that is, limited to those eligible to vote and that eligible registered voters are not inadvertently removed from the voter registration lists. This has been a challenging task, and remains so, as we and others have noted. While registering to vote appears to be a simple step in the election system generally, applying to register and being registered are not synonymous, and election officials face challenges in processing the voter registration applications they receive. This chapter describes various HAVA and state changes related to the voter registration processes that have occurred since the 2000 general election. It also examines continuing and new registration challenges encountered by local jurisdictions for the 2004 general election.
Overview
With respect to voter registration, a significant change since the 2000 general election is the HAVA requirement for states to each establish a single, uniform, statewide, computerized voter registration list for conducting elections for federal office. The HAVA requirements for states to develop statewide lists and verify voter information against state and federal agency records presented a significant shift in voter list management in many states. While the initial deadline to implement HAVA’s statewide list requirement was January 1, 2004, more than 40 states took advantage of a waiver allowing an extra 2 years to complete the task, or until January 1, 2006. The statewide registration lists for federal elections are intended to implement a system capable of maintaining voter registration lists that are more accurate by requiring states to (1) match voter registration application information against other state and federal agency databases or records to help ensure that only eligible voters are added to such lists, (2) identify certain types of ineligible voters whose names should be removed from the lists, and (3) identify individual voter names that appear more than once on the list to be removed from the lists. While HAVA defined some parameters for the required statewide voter registration lists and required matching voter information with certain state and federal records, the act leaves the choices on the methods of implementing such statewide list requirement to the discretion of the states. On the basis of our survey of state election officials, states varied in the progress made in implementing their statewide voter registrations lists, how they have implemented these systems, and the capabilities of their systems to match information with other state and federal agency records as well as many other features of the state systems.
In addition to requiring states to develop statewide voter registration lists, HAVA provides that states must require that mail registrants who have not previously voted in a federal election in the state are to provide certain specified types of identification with their mail application, and if they do not provide such identification with their application, these first-time mail registrants are to provide the identification at the polls. Furthermore, if such a voter does not have the requisite identification at the polls, HAVA requires that the voter be provided a provisional ballot with the status of his or her ballot to be determined by the appropriate state or local official. As with the statewide voter registration list requirement, HAVA leaves the choices on the methods of implementing the provisional voting requirement to the discretion of the states. On the basis of interviews of officials in 28 local election jurisdictions, implementation of the requirement for first-time voters who registered by mail varied. One noteworthy variation is in the definition of mail registration, where some local jurisdictions we visited told us that applications received through voter registration drives would be treated as mail registrations subject to HAVA identification requirements and other local jurisdictions we visited told us applications from registration drives were not treated as mail registrations and therefore were not treated as subject to HAVA identification requirements.
As noted above, during 2004 and 2005 many states were in the process of implementing their HAVA-required statewide voter registration lists and associated requirements for maintaining the lists. Thus, the potential benefits to be gained from HAVA’s requirement for the statewide voter registration lists were not evident in many states at the time of the November 2004 general election. Maintenance requirements in HAVA intended to help states and local election jurisdictions to have access to more accurate voter registration list information, such as identifying duplicate registrations and matching the voter information against other state agency databases or records, were not yet fully implemented by many states. Many local jurisdictions were not yet seeing the benefits of being able to verify voter registration application information with state motor vehicle agency databases to identify eligible voters, or to match voter registration lists with state vital statistics agency records to identify deceased persons, and to appropriate state agency’s records to identify felons who may be ineligible to vote. Thus, on the basis of our nationwide survey and local election jurisdictions we visited, many local jurisdictions continued to encounter challenges with the voter registration lists that they had experienced in the 2000 general election, such as difficulties related to receiving inaccurate and incomplete voter registration information, multiple registrations, or ineligible voters appearing on the list. In addition, election officials in some jurisdictions we visited told us they continued to face challenges obtaining voter registration applications from motor vehicle agencies and other NVRA entities.
In addition, for some local election jurisdictions we visited, election officials told us that efforts on the part of various groups to get out the vote by registering new voters through voter registration drives created new challenges not identified to us as a problem in the 2000 general election. Specifically, at some local jurisdictions we visited, election officials told us they faced a challenge processing large volumes of voter registration applications just prior to the deadlines for registration, which included challenges in some large jurisdictions to resolve issues of incomplete or inaccurate (and potentially fraudulent) applications submitted by entities conducting voter registration drives.
Changes Required by HAVA Subsequent to the 2000 General Election
HAVA requires states to, among other things, (a) implement a single, uniform, computerized statewide voter registration list for conducting elections for federal office; (b) perform regular maintenance by comparing the voter list against state records on felons and deaths; (c) verify information on voter registration applications with information in state motor vehicle agency databases or with a Social Security Administration database, as appropriate. In addition, HAVA imposes new identification requirements for certain mail registrants—such as, individuals who register by mail and have not previously voted in a federal election within the state.
HAVA Requirements for Statewide Voter Registration List
Historically, to ensure that only qualified persons vote, states and local jurisdictions have used various means to establish and compile voter registration lists. Prior to HAVA, we noted in our October 2001 comprehensive report on election processes nationwide that in compiling these lists, election officials used different methods to verify the information on registration forms, check for duplicate registrations, and update registration records, and we noted that states’ capabilities for compiling these lists varied. At the time, some states had statewide voter lists, but others did not and were not required to do so. Moreover, most jurisdictions we visited at the time maintained their own local, computerized voter lists. Under HAVA, this has changed. HAVA requires the chief election official in the state to implement a “single, uniform, official, centralized, interactive, computerized statewide voter registration list” that must contain the name and registration information of every legally registered voter in the state. Under HAVA, states were required to be in compliance with the statewide voter registration list requirement by January 2004 unless they obtained a waiver until January 2006. Forty-one states and the District of Columbia obtained a waiver and thus, for the 2004 general election, were not required to have their statewide voter registration lists in place.
With respect to the HAVA required statewide voter registration list, states are to, among other things: Make the information in such lists electronically accessible to any election officials in the state.
Ensure that such voter lists contain registration information on every legally registered voter in the state, with a unique identifier assigned to each legally registered voter.
Verify voter identity; most states are required to match voter information obtained on the voter registration application for the applicant’s drivers’ license number or the last four digits of the voter’s Social Security number, when available, to state MVAs or the Social Security Administration databases. In connection with this requirement to verify voter registration application information, states must require that individuals applying to register to vote provide a current and valid driver’s license number, or the last four digits of their Social Security number; if neither has been issued to the individual, then the state is to assign a unique identifier to the applicant. The state MVA must enter into an agreement with the Social Security Administration (SSA), as applicable, to verify the applicant information when the last four digits of the Social Security number are provided, rather than a driver’s license number or state ID number.
Perform list maintenance on the statewide voter registration lists by coordinating them on a regular basis with state records on felony status and deaths, in order to identify and remove names of ineligible voters. List maintenance is also to be conducted to eliminate duplicate names.
Implement safeguards ensuring that eligible voters are not inadvertently removed from statewide lists.
Include technological security measures as part of the statewide list to prevent unauthorized access to such lists.
Except for the 9 states that did not obtain a waiver from HAVA’s requirements for establishing a statewide voter registration list, all other states subject to the statewide list requirement were not required to perform list maintenance activities as defined in HAVA until the extended waiver deadline of January 2006. By the November 2004 general election, states were in various stages of implementing provisions of HAVA related to their statewide voter registration lists and performing voter list verification and maintenance, and had different capabilities and procedures at the state and local levels for performing required list maintenance functions. Many states reported that their statewide voter registration systems implementing the statewide list requirement include or will include additional election management features not required under HAVA.
Progress Establishing Statewide Voter Registration Lists Varied
Voter registration system development was an ongoing process in 2004 and 2005. For the November 2004 general election, the use of technology to compile voter registration information remained an issue. Developing and implementing statewide computerized voter lists has been an ongoing process for many states, and state and local election officials reported encountering difficulties along the way. Our state survey and site visits suggest that states and jurisdictions were still coming to terms, as of the last half of calendar year 2005, with how their systems should be updated and whether states or jurisdictions should control the flow of information into statewide registration systems.
As mentioned in chapter 1, HAVA vests the Attorney General with the responsibility of enforcing certain HAVA requirements with respect to the states. In January 2006, the Justice Department asked all states, the District of Columbia, and other covered territories to provide a detailed statement of their compliance with voting systems standards and implementation of a single, uniform, official, centralized, interactive computerized statewide voter registration list. If the states, the District of Columbia, or covered territories were not implementing HAVA’s requirements for the computerized statewide voter registration lists as of January 2006, the Justice Department reported that it then asked them to identify steps they planned to take to achieve full implementation of the HAVA-compliant statewide voter registration list and the date on which each step would be accomplished. According to Justice Department officials, they are reviewing the information provided by the states, the District of Columbia, and such territories to make determinations of what, if any, enforcement action might be needed. The Department of Justice reports that it entered into a memorandum of agreement with California in November 2005 after that state realized it would not be able to fully meet HAVA’s requirements by the January 1, 2006, deadline. On March 1, 2006, the Department of Justice also filed suit in a federal district court against the state of New York alleging the state not to be in compliance with, among other things, HAVA’s requirement for a computerized statewide voter registration list and seeking a judicial determination of noncompliance and a court order requiring the state to develop a plan for how it will come into compliance.
During our site visits in 2005, we asked local election officials about the status of their statewide registration systems. Election officials in some local jurisdictions we visited cited difficulties related to implementing their statewide voter registration systems involving, among other things, internal politics and technology-related challenges. For example, election officials in a large jurisdiction reported that a disagreement between the State Board of Elections and local election officials over the type of system to implement delayed the project for a year. State election officials wanted a system requiring all voter registrations to be entered at the state level but maintained locally. The local election officials expressed the view that such a system would result in a lack of control over data entry at the local level at the front end, while imposing accountability on them on the back end (data maintenance). During our interview in August 2005, these election officials told us that a statewide registration system had not been implemented yet. In some jurisdictions, the difficulties cited by election officials may have reflected the fact that they were establishing statewide voter registration systems for the first time. For example, in 1 large jurisdiction that was establishing a HAVA voter registration list from scratch, local election officials noted that at the time of our interview in August, the system was behind schedule, lacked the ability to identify duplicates, had no quality control, and was not planned to function as a real-time system.
State Capabilities for Matching Voter Registration Lists with State and Federal Records, as Required by HAVA, Were Under Way or Not Yet Achieved
In our survey of states and the District of Columbia, and our survey of local election jurisdictions nationwide, among other things, we inquired about the status of their capabilities for meeting HAVA provisions for (1) verifying voter registration application information against MVA and SSA databases and (2) maintaining the statewide voter lists by comparing information on the statewide voter registration list against state death records and felon information, and discussed the issues during our local site visits. Our work focused on how states had matched or planned to match voter registration lists against other state records, as required by HAVA. However, it is important to note that the success of such matching in ensuring accurate voter registration lists is dependent upon the accuracy and reliability of the data in the databases used for matching. If that state’s MVA databases, felon records, death records, or other records used for matching are inaccurate, they can result in voter registration list errors.
When a driver’s license or driver’s license number is presented as identification when registering to vote in an election for federal office, HAVA requires that states match the voter registration application information presented with that in the MVA records. In our survey of state election officials, we asked states whether their voter registration systems would have the capability to perform electronic matching of such voter registration information with state motor vehicle agency records for the purposes of verifying the accuracy of information on the registration application. Twenty-seven states reported they will have or currently had the capability to match on a real-time basis, 15 states and the District of Columbia reported they will have or currently had capability to match in batches, and 4 states reported they would not have the capability to perform electronic matching. The remaining 4 states included 2 states that reported that they are not subject to HAVA’s registration information verification requirement because they collect the full Social Security numbers on voter registration applications; 1 state, North Dakota, which does not require voter registration, did not respond, and 1 state reported that it was uncertain of its capability to perform electronic matching.
With respect to matching voter information with SSA data when a Social Security number is presented instead of a driver’s license, in our state survey, 7 states had and 26 states and the District of Columbia reported that they would have the capability, by January 1, 2006, to electronically match voter registration information with SSA (through the MVA); 10 states reported they planned to have this capability in place but not by January 2006; and 6 states had not yet determined whether they could do so. Many states reported concerns with whether SSA would be able to return responses to verify requests in a timely manner. Specifically, 30 states and the District of Columbia reported some level of concern about the issue. When asked whether they thought local jurisdictions would be able to resolve nonmatches resulting from SSA verification checks, opinions were divided, with a number of states (21) expressing some degree of concern about this, while a nearly equal number (22 states and the District of Columbia) did not.
In our June 2005 report on maintaining accurate voter registration lists, we found that in one state (Iowa) that had verified its voter registration list with SSA before the 2004 general election, there was no unique match for 2,586 names, according to the SSA records. As we stated in our report, Iowa officials said that the biggest problem they faced was that SSA did not specify what specific voter information did not match (i.e., was the mismatch in name, date of birth, or final four-digit Social Security number). Without that information, they were not able to efficiently resolve the non- matching problems. In that same report, we also noted that an SSA official said that the system established to perform the HAVA matching on the four- digit Social Security number is not able to provide that detail. In addition, we found that use of SSA’s database to identify deceased registrants, which is linked with the system established to perform the HAVA verification of voter registration application information, had matching and timeliness issues.
As shown in figure 8, many states reported that they faced significant challenges when trying to match voter registration information with state records. For example, in our survey, 29 states and the District of Columbia reported that records with incomplete data posed a challenge; 19 states and the District of Columbia reported that obtaining records not maintained electronically was a challenge; and 23 states reported that verifying information against incompatible electronic record systems was also a challenge.
During our site visits to local jurisdictions, we obtained additional views on how well, in general, states were believed to perform various data- matching functions. We asked local election officials to describe their state system’s ability to match voter registration information with MVA and SSA records and the system’s ability to verify information on eligibility status for felons, noncitizens, and others with other state databases or records. One jurisdiction in Illinois reported it was not sure how or if its voter registration system would be able to match data with MVA and SSA databases or to verify eligibility status for felons and by age. An official in a jurisdiction in Florida said that Florida’s system could not verify information on the eligibility status of felons, noncitizens, the mentally incompetent, or the underaged—though plans were under way to obtain information from the Clerk of Courts Information System to perform some of these tasks.
Removing Voters Names from the Registration List
HAVA’s list maintenance provisions require states to match the statewide voter registration list information against certain state records to identify ineligible voters and duplicate names. If a voter is ineligible under state requirements and is to be removed from the statewide voter registration list, states are generally required to remove such names in accordance with NVRA provisions relating to the removal of voter names from registration lists for federal elections. Under NVRA, in the administration of voter registration for federal elections, states may not remove the names of people who are registered to vote for nonvoting and names may be removed only for certain specified reasons: at the request of the registrant; by reason of criminal conviction, as provided by state law; by reason of mental incapacity, as provided by state law; or pursuant to a general program that makes a reasonable effort to remove the names of ineligible voters from the official lists by reason of the death of the voter or on the ground that the voter has changed address to a location outside the election jurisdiction on the basis of change of address information from the U.S. Postal Service (but only if either (1) the voter confirms in writing a change of address to a place outside the election jurisdiction or (2) the voter has failed to respond to a confirmation mailing and the voter has not voted or appeared to vote in any election between the time of such notice and the passage of two federal general elections).
Reasons Names Removed from Registration Lists In our survey of local election jurisdictions nationwide, we asked about the reasons names were removed from voter registration lists. On the basis of our survey of local election jurisdictions, the following table shows various reasons that jurisdictions removed names from voter registration lists for the 2004 general election and our estimates of how frequently names were removed for that reason. For example, the most frequent reason was the death of the voter (76 percent). Names were removed with about equal frequency because the voter requested that his or her name be removed (54 percent) or the registrant’s name appeared to be a duplicate (52 percent). The least frequent reason was for mental incompetency (10 percent). In many jurisdictions, names were not removed but rather placed on an inactive list for a period of time. In our survey of local jurisdictions, nearly half, or an estimated 46 percent, took this step.
In our June 2005 report on maintaining accurate voter registration lists, on the basis of interviews of election officials in 14 jurisdictions and 7 state election offices, we reported that in larger jurisdictions, the task of identifying and removing registrants who died can be substantial. For example, in the city of Los Angeles, in 1 week in 2005 alone, almost 300 persons died.
The issue of felons voting unlawfully—that is, voting when their felony status renders them ineligible to voter under state law—was a high-profile issue in some jurisdictions. According to an election official in a Washington jurisdiction we visited, this issue was identified during the November 2004 general election. This official also told us that the Secretary of State is working to establish a database that will indicate felony status and cancel the registration of felons. This election official noted that the jurisdiction rarely receives information from federal courts on felony convictions. Under federal law, U.S. Attorneys are to give written notice of felony convictions in federal district courts to the chief state election official of the offender’s state of residence. In our June 2005 report on maintaining accurate voter registration lists, we found that U.S. Attorneys had not consistently provided this information, and while the law did not establish a standardized time frame or format for forwarding the federal felony conviction information, election officials in 7 states we visited reported that the felony information received from U.S. Attorneys was not always timely and was sometimes difficult to interpret. We recommended that the U.S. Attorneys provide information in a more standardized manner.
Under HAVA, duplicate names on the statewide voter registration list are also to be identified and removed. In our state survey, 49 states and the District of Columbia reported that their voter registration systems will include a function for checking duplicate voter registration records. On the basis of our nationwide survey of local jurisdictions, we estimate that 72 percent of local jurisdictions employed a system of edit checks (automated controls to identify registration problems) to identify duplicates. Our prior work has also found that states were, for the most part, able to handle duplicate registrations—though obtaining timely, accurate data to facilitate the identification of duplicate registrations has been viewed as a challenge among some state election officials. Specifically, in our February 2006 report on certain states’ (9 states that did not seek a waiver until January 1, 2006 and were to implement a computerized statewide voter registration list by January 1, 2004) experiences with implementing HAVA’s statewide voter registration lists, we found that 8 of the 9 states we reviewed screened voter applications to identify duplicate registrations, and most did so in real time. We also reported that 8 of these 9 states checked voter registration lists for duplicate registrations on an annual, monthly, or other periodic basis. And 4 of the 9 states reported that implementing the HAVA requirements led to some or great improvement in the accuracy of their voter lists by reducing duplicate registrations or improving the quality of voter information before it was entered into the statewide voter list.
Checking for duplicates remained a challenge for some in 2004 and 2005, however. In our June 2005 report on maintaining accurate voter registration lists, we noted that officials in 7 of the 21 local election jurisdictions we spoke with during 2004 and 2005 had some concern about the accuracy and timeliness of data they received to identify duplicate registrants and verify that registrants resided within the jurisdiction. They noted that the matching and validation of names are complex and made more so when considering aliases and name changes, as are matches such as “Margie L. Smith” with “Margaret Smith.” Officials from several states who reported, at the time of our review, that their state had not implemented a statewide voter registration system noted that there was no way to identify duplicates outside their jurisdiction.
Most States Reported Having Established Centralized Voter Registration Systems, and Half Reported They Can Enter Voter Information on a Real-Time Basis
While HAVA requires that both state and local election officials have immediate electronic access to information in the statewide voter registration list, HAVA grants states discretion as to the method used to ensure that this capability is established. According to EAC, state and local election officials may determine whether to establish (a) a top-down system, whereby the statewide voter registration list resides on a state database hosted on a single, central platform (e.g., a mainframe or client servers), which state and local election officials may query directly; (b) a bottom-up system, whereby the statewide voter list is stored on a state-level database that can be downloaded to jurisdictions and updated by the state only when the jurisdictions send new registration information back to the state; or (c) take another approach. According to the EAC voluntary guidance on HAVA’s statewide voter registration system, the top-down approach most closely matches HAVA requirements—but other configurations may be used as long as they meet the HAVA requirement for a single, uniform list that allows election officials to have immediate access.
Our 2005 survey of state election officials sought information on how states were implementing statewide computerized voter registration systems. We asked, among other things, whether states were using a top-down or a bottom-up approach. In response, 40 states and the District of Columbia reported that they have a database maintained by the state, with information supplied by local jurisdictions (top-down system); 4 states reported that local jurisdictions retain their own lists and transmit information to a statewide list (a bottom-up system); and 5 states reported they use a hybrid of these two options. We also asked whether state election officials would have immediate, real-time access to their state lists for the purposes of entering new voter registration information, updating existing information, and querying voter registration records. About half the states and the District of Columbia reported they had or would have all these capabilities. Specifically, 24 states and the District of Columbia reported they had or would have as of January 2006, real-time access for entering new voter registration information, while 23 states reported they did not plan to do so and 2 states did not respond. In addition, 26 states and the District of Columbia reported that they had or would have as of January 2006, real-time access for updating existing voter registration information, while 21 states reported they did not plan to do so and 2 states did not respond. And 47 states and the District of Columbia reported they had or would have as of January 2006 real-time access for querying all state voter registration records, while 1 state reported it would not do so and 1 state did not respond. For each of these questions, one state reported it too would have these capabilities, but not by the January 1, 2006, HAVA deadline.
We also sought state election officials’ views on whether election officials in local jurisdictions would have immediate, real-time access to voter list information for the same three purposes stated above: entering new information, updating existing information, and querying records. In our state survey, most states and the District of Columbia reported that local jurisdictions had these capabilities. Specifically, 46 states and the District of Columbia reported that local jurisdictions had or would have as of January 2006, real-time access for entering new voter registration information, and 3 other states reported that they planned to do so as well, but not by January 1, 2006. Also, 46 states and the District of Columbia reported that local jurisdictions had or would have as of January 2006, real-time access for updating existing voter registration information, and 3 other states planned to do so as well, but not by the deadline. Finally, 47 states and the District of Columbia reported local jurisdictions had or would have as of January 2006 the capability to query records for their jurisdictions in real time, and 2 states planned to do so, but not by January 2006. Figure 9 compares the capability of state and local jurisdiction election officials to access the voter registration lists to perform certain tasks.
While HAVA’s list maintenance provisions require states to coordinate statewide voter registration list information with certain other state records within their state in order to identify and remove ineligible names, the act does not specifically provide that such coordination must be done electronically. However, to determine whether state systems had or would have the capability to perform electronic data matching, our survey asked states about existing or planned electronic capability. As shown in figure 10, more than half the states reported that they had, or planned to have, the ability to match voter registration information electronically with state records on felony convictions and deceased registrants. Specifically, 25 states reported they had and 15 states reported that they would have the capability to electronically match against state death records as of January 2006, and 6 states and the District of Columbia planned to have the capability, but not by January 2006. Three states reported that they did not plan to have this capability. With respect to identifying ineligible felons, 16 states reported they had, and 15 reported they would have the capability to electronically match against felony conviction records as of January 2006, while 9 states planned to do so but would not have done so by January 2006. In addition, 7 states and the District of Columbia did not plan to have this capability, and 2 states had not determined whether to have the capability.
On the topic of states’ efforts to meet HAVA’s data-matching requirements electronically—as opposed to transmitting paper records—EAC recommends that voter registration information be transmitted electronically, particularly between states and their MVAs. EAC further recommends that to the extent allowed by state law and available technologies, the electronic transfer between statewide voter registration lists and coordinating verification databases should be accomplished through direct, secure, interactive, and integrated connections. While EAC provided guidance to states for their statewide systems, under HAVA, the states are to define the parameters for implementing interactive and integrated systems.
Security of Voter Information in the Statewide Voter Registration Lists
HAVA requires election officials to provide adequate technological database security for statewide voter registration lists that is designed to prevent unauthorized access. EAC provided states with voluntary guidance, issued in July 2005, to help clarify HAVA’s provisions for computerized statewide voter registration lists. Among other things, the EAC guidance noted that such computer security must be designed to prevent unauthorized users from altering the list or accessing private or otherwise protected information contained on the list. Access may be controlled through a variety of tools, including network- or system-level utilities and database applications (such as passwords and “masked” data elements). Special care must be taken to ensure that voter registration databases are protected when linked to outside systems for the purposes of coordination. Any major compromise of the voter registration system could lead to considerable election fraud.
We sought information on what documented standards or guidance for computer and procedural controls would be in place to prevent unauthorized access to the lists. In our state survey, 45 states and the District of Columbia reported having such standards or guidance, 3 plan to do so, and 1 reported that it did not know. We also asked states what actions they had taken or planned to take to deal with privacy and intrusion issues. We asked, for instance, what, if anything, had been done to install or activate mechanisms to detect or track unauthorized actions affecting the state’s computerized voter registration system. A majority of states reported actions had been taken or were to be taken at some point. Specifically, 26 states reported taking action as of August 1, 2005, while 12 states and the District of Columbia reported they would do so by January 1, 2006. An additional 4 states reported that actions were planned, but at no particular point in time. In a related question, we asked what actions had been taken or were planned to install or activate mechanisms to protect voter privacy. Again, a majority of states reported actions had been taken or were to be taken at some point. Specifically, 32 states reported taking action as of August 1, 2005, while 13 states and the District of Columbia reported they would do so by January 1, 2006. Two other states reported actions would be taken at a later point in time.
During our site visits, we asked local election officials what standards or procedures were used for the November 2004 general election to help ensure that the registration list was secure and that the privacy of individuals was protected. Election officials in most jurisdictions reported that voter information (such as name and address) is public information if it is to be used for political purposes—though some do not release Social Security numbers, and others limit access to this information by requiring a fee. Some local election officials noted that security standards for this information were not set by the state but rather at the county or local level, though many look to the state for future guidance on standards. The type of security in place to restrict access to voter registration records varied by jurisdiction; among the procedures commonly used were password protection (so that only certain election officials could log onto the voter registration system to access the information); storage of voter registration records in locked facilities; use of “best practice” protocols such as system firewalls; and in some cases, registration information is maintained on a computer system that is separate from the jurisdiction’s central system. Along these lines, 1 jurisdiction noted that it planned to implement a public key infrastructure (PKI). A PKI is a system of computers, software, policies, and people that can be used to facilitate the protection of sensitive information and communications. The official noted it is a felony in that jurisdiction to use a PKI authorization without authorization from the State Board of Elections. Election officials in another jurisdiction we visited told us that all voter registration system users must log on using unique user IDs and passwords, which are maintained by the county registrar. The system tracks all data entries and changes, which user made them, and when they were made. In a few jurisdictions, election officials said they grant additional privacy to the records of voters involved in domestic disputes or other law enforcement matters.
When asked whether they had any plan to develop or change existing security standards or procedures, local election officials in 16 of the 28 jurisdictions we visited told us there were no plans to alter current practices, though some noted they were not sure. Among those indicating that security procedures were being enhanced, election officials in 1 large jurisdiction said they planned to enclose their computer systems server in a secure case with restricted access. Another official in a large jurisdiction in another state said that because of a change in state law in 2004, a hard copy of voter records was no longer available for public inspection.
Sharing Registration and Eligibility Information among States Is Limited
As mentioned earlier, the HAVA computerized statewide voter registration list provisions require states to perform list maintenance to identify duplicate registrations, deceased registrants, and registrants who may be ineligible to vote under state law based upon a felony conviction. However, we note that requirements for matching voter registration lists with certain state records leaves some potential gaps for incomplete and inaccurate voter registration lists because election officials may not have information regarding registered voters who die out of state or who are in prison in another state and ineligible because of a criminal conviction. To determine whether states went beyond HAVA requirements to share voter registration data with other states to identify registrants who died in another state, were incarcerated in another state, or registered in another state, we asked on our survey of state election officials whether they had taken action to electronically exchange voter registration information with at least 1 other state and whether they were sharing registration information routinely with other states. In our state survey, 31 states and the District of Columbia reported that they did not plan to electronically exchange voter registration information with another state. However, 35 states and the District of Columbia reported they share information with states when a new registrant indicates he or she previously resided in another state. Other types of information sharing across state lines were less common. For instance, 6 states reported sharing voter registration information with neighboring states, and 1 state reported that it shared information with states where an individual is known to reside part of the year. In our state survey, 14 states reported they do not currently share voter registration information with other states.
We analyzed state and federal voter registration applications to determine whether these applications provided space for applicants to indicate they were registered in other states or in other jurisdictions within the same state to identify duplicate registrations. We obtained state application forms during site visits with local election jurisdictions, from state Web sites or, if not available from there, we obtained the application from the state. Registration forms were those on the Web site or obtained from the states as of January 2006. Applications for the 46 states and the District of Columbia and both federal applications had a place on their registration application where registration applicants could indicate prior registration in another state on their forms. Three states (Kentucky, Texas, and Wyoming) did not include a place on their registration forms to identify prior registration information in another state. Forty-five states and the District of Columbia included a space for registration applicants to indicate prior registration in another jurisdiction within their state on their forms, or in the case of the District of Columbia applicants were to indicate the address of their last registration. Four states (Alaska, Hawaii, Kentucky, and Wyoming) did not provide space to indicate prior registration within their state. Figure 11 is an example of a state registration form that provided a space for the voter registration applicant to indicate that he or she had registered in another state.
On the basis of our survey of local election jurisdictions, we estimated that 12 percent of local jurisdictions administered their own registration application form in addition to the state registration application. Of the 12 percent who had their own form, we estimate that 70 percent had space on their voter registration applications so that an applicant can indicate whether he or she was previously registered in another state. However, we estimate that about a third did not capture this information on their forms.
Many States Have or Plan to Have Additional Election Management Features in Voter Registration Systems
Although HAVA’s voter registration-related provisions focus primarily on state election management activities for developing, verifying, and maintaining voter lists, we sought information on what other types of registration system upgrades, if any, states planned, and we asked at the sites we visited what additional system capabilities, if any, had been implemented or planned. In our state survey, 15 states reported taking action to upgrade the processing speed or records capacity of their systems as of August 2005; 6 states reported that such actions would be taken by January 2006; and 12 states and the District of Columbia reported they would take such action at a later time.
In other recent work, we have also looked at selected states’ efforts to enhance their statewide voter list systems. In our February 2006 report on certain states’ experiences with implementing HAVA’s statewide voter registration lists, we found that 7 of 9 states that reported implementing HAVA provisions for a computerized, statewide voter registration system by January 1, 2004, also reported that they have upgraded or enhanced their systems, or planned to so do, to include additional election management capabilities. For example, Arizona reported plans to upgrade its current system to reflect reciprocity agreements with other states, so that election officials can be alerted when a voter moves from state to state, and will allow election officials to retrieve data on such issues as voter petitions, provisional ballots, poll worker training, and polling locations. Other states reported adding or planning similar enhancements. Kentucky reported another type of enhancement: It has used its statewide computerized voter registration system to establish voter information centers on the state’s Web site, to assist applicants and staff in the voter registration process.
During our site visits, we asked local election officials to comment on the election management functions their voter registration systems might perform. While some local election officials noted they were not certain whether their new statewide voter registration systems would include the same array of features as the local county versions, other local election officials in some jurisdictions responded that they expect their statewide systems to be able to perform some or all of the following functions: maintain records confirming mailings to new registrants, generate letters informing rejected applicants of reasons for generate forms or mailing labels, note status or date of absentee applications and ballots sent and identify polling places for use on Election Day, and identify poll workers.
In some jurisdictions, other capabilities were mentioned; 2 large jurisdictions noted, for instance, that bar coding would be used to identify registrants, and 2 other large jurisdictions indicated that their systems would track and maintain candidate petition information.
Not all jurisdictions expressed equal confidence in the extra (non-HAVA- related) capabilities of their systems. Election officials in a couple of large jurisdictions, for instance, told us they were not certain their statewide voter system would have features comparable to those already in place, and that their vendor or state was taking a one-size-fits-all approach for all jurisdictions regardless of size, rather than taking specific local needs into account. In some jurisdictions, election officials stated that their statewide systems were still too new to know whether these additional functions would be operational, and some said they were not yet familiar with all the system’s capabilities.
Implementation of Identification Requirements for First-Time Mail Registrants Varied
HAVA imposed new identification requirements for certain mail registrants—such as, individuals who register by mail and have not previously voted in a federal election within the state. These individuals (first-time mail registrants) must provide certain specified types of identification either by submitting copies of such identification during the mail registration process or by presenting such identification when voting in person for the first time following their mail registration. Moreover, first-time mail registrants are to be informed on the application that appropriate identifying information must be submitted with the mailed form in order to avoid additional identification requirements upon voting for the first time. An individual who asserts that he or she has registered by mail and desires to vote in person but who does not meet the identification requirements may cast a provisional ballot under HAVA’s provisional language. However, according to election officials in some jurisdictions we visited, casting a provisional ballot requires that these voters are to provide identification to election officials by a specified time (e.g., by close of polls on Election Day or within a certain number of days following Election Day) to have their ballot count. On the basis of our local survey, we estimate that 32 percent of local jurisdictions encountered a problem in counting provisional ballots because voters did not provide identification as specified by HAVA for mail-in registrants and were voting for the first time in the precinct or jurisdiction. Our discussion of provisional voting processes appears in chapter 5.
HAVA, in general, provides states with discretion as to the methods of implementing HAVA’s identification requirements for first-time mail registrants, such as ensuring that voters comply with the requirements and, subject to certain limitations, allows states to establish requirements that are stricter than those required under HAVA. According to our state survey, 7 states reported that such HAVA requirements were already covered by existing state legislation or some type of state executive action (such as orders, directives, regulations, or policies); 44 states and the District of Columbia reported that they enacted new legislation or took some type of state executive action (such as orders, directives, regulations, or polices) to address the identification requirements in HAVA for first-time mail registrants.
We analyzed state and federal (NVRA) voter registration application forms to determine whether the applications provided instructions on identification requirements for individuals registering in a jurisdiction for the first time. We obtained some state application forms during site visits with local election jurisdictions, and others from state Web sites or, if not available from there, we obtained the application from the state. Registration forms were those on the Web site or obtained from the states as of January 2006. Our analysis showed that 39 states and the District of Columbia had information on their application forms and 10 states did not provide this information on their forms. The NVRA voter registration form included this information. Figure 12 is an example of a voter registration form that included instructions for first-time mail registrants.
During our site visits, we asked local election officials whether they considered registering by mail to only include when someone mails in a single application or to also include mailed-in applications from voter registration drives. Five local jurisdictions told us that applications received by mail as a result of voter registration drives are not treated as mail-in applications and therefore are not treated as subject to mail registration identification requirements under HAVA; 3 jurisdictions told us that applications submitted by voter registration drives were treated as mail-in applications subject to HAVA’s mail registration identification requirements. Election officials in 1 of these jurisdictions told us that under their state law (Pennsylvania) all voters who are voting for the first time in a district must show a valid form of identification, regardless of how they registered to vote.
Also, during our site visits we asked local election officials how they processed voter registration applications from first-time mail registrants for the 2004 general election. Election officials reported taking different approaches, many involving mailed communications from election officials sent back to the applicant, particularly if required information was missing. For example, at least 2 large jurisdictions reported that first-time voters who did not mail in identification with their applications were sent letters instructing them to do so. Similarly, officials in 2 jurisdictions in another state said letters were sent to applicants whose applications were incomplete, advising them of the need to provide photo ID—and informed applicants that if they failed to do so, they may have to use a provisional ballot on Election Day, which would be subject to the voter subsequently providing identification. In other jurisdictions, though local election officials reported taking steps to process incomplete applications from first-time voters, they did not necessarily give the applicant a chance to correct the application prior to Election Day. For example, in a medium jurisdiction we visited, first-time voter applicants who did not submit proper identification were to have been given provisional ballots. However, the election official told us her office did not inform them about this in advance for the 2004 general election.
In addition to contacting applicants to inform them of the need to provide identification discussed above, 1 jurisdiction we visited told us that it periodically provided a list of applicants who provided driver’s license numbers but did not provide identification at the time of registration to the state MVA as another means to verify the registrant’s identity. In this case, the MVA compared the county clerk office’s registration list against its list of licensed drivers to see if the name, date of birth, and driver’s license number matched, and returned the results to election officials. If all these data elements matched, the election official certified the records and these prospective voters were not required to show identification at the polling place.
If a registrant did not provide identification prior to Election Day, local election officials at all 28 sites we visited reported having a system for recording first-time voters who failed to provide identification and transferring that information to a polling site by annotating the poll book. One large jurisdiction, for example shaded the voter line in the poll book, while another printed the words “ID required” next to the voter’s name. With respect to voters who presented themselves at a polling place and did not have identification, election officials at some local jurisdictions we visited described different ways that the voter’s provisional ballot could become verified. For example, a jurisdiction in Georgia said that if a voter did not provide identification at the polls, it allowed the voter to vote a provisional ballot and the voter had until 2 days after the election to provide identification. Another jurisdiction in Kansas told us that the voter had until the day that votes were canvassed to provide identification. Other jurisdictions told us that voters would have until the close of the polls on Election Day to provide identification to election officials. A local jurisdiction in Washington told us that if the voter did not have identification on Election Day, the voter would vote a provisional ballot and election officials would subsequently have the voter’s signature matched against the registration application to verify the voters identity.
Processing Registration Applications Received from MVAs and Other NVRA Entities Remained a Challenge
Citizens generally have numerous opportunities to apply to register to vote. Figure 13 shows several of these opportunities—such as applying at a local election office, at a motor vehicle agency, or through a voter registration drive—and the processes used to submit an application.
Problems with applications submitted to MVAs have been identified as a challenge since 1999. Our October 2001 report on election processes found that 46 percent of local jurisdictions nationwide had problems processing applications submitted at MVAs and other public registration sites designated pursuant to NVRA requirements. In its reports to Congress on the impact of NVRA on federal elections in 1999 through 2002, the Federal Election Commission (FEC) found that several states reported problems with election officials receiving applications from MVA offices in a timely manner, resulting in, the FEC stated, “the effective disenfranchisement” of citizens who had applied to vote but were not processed by Election Day. FEC recommended in both reports that states develop ongoing training programs for personnel in NVRA agencies, such as MVAs.
HAVA includes requirements providing that voters who contend that they registered (at MVAs or through other means) in the jurisdiction in which they desire to vote, but whose names are not on the voter registration list for that polling place, be allowed to cast a provisional ballot. HAVA also requires that voters who an election official asserts is not eligible to vote also be permitted to cast a provisional ballot. Election officials would determine the voter’s eligibility under state law and whether the vote should count as part of the vote counting process. From our local jurisdiction survey, we estimate that for the 2004 general election, 61 percent of local jurisdictions had a problem in counting provisional ballots because of insufficient evidence that individuals had submitted voter registration applications at MVAs. In addition, we estimate that 29 percent of local jurisdictions had a problem in counting provisional ballots because of insufficient evidence that individuals had submitted voter registration applications at NVRA agencies other than MVAs. Also, our September 2005 report on managing voter registration reported that 4 of 12 jurisdictions we surveyed reported that election office staff experienced challenges, either to a great extent or some extent, receiving voter registration applications from motor vehicle agencies. They reported taking steps to address the problem by hiring additional staff to handle the volume of applications received and by contacting applicants to obtain correct information.
There is evidence that, at least in 1 jurisdiction, election officials took steps since the 2000 general election to address the MVA voter registration issue, though problems persisted for the November 2004 general election. When we revisited the same small jurisdiction in 2005 that we had visited in 2001, election officials reported they were still experiencing problems receiving registration forms from the MVA, for all those who registered to vote there—but noted that the process had improved. For example, they said elections staff now have access to the MVA database directly, so they can verify whether someone who claimed to have registered at the MVA actually did so.
In our local jurisdictions survey, we estimate that few jurisdictions provided training to MVA or other NVRA agencies. Specifically, for the 2004 general election, we estimate that 12 percent of local jurisdictions provided training or guidance to MVA offices and an estimated 3 percent provided training to other NVRA entities regarding procedures for distributing and collecting voter registration applications. Large jurisdictions are statistically different from small or medium jurisdictions, and medium jurisdictions are statistically different from small jurisdictions. Specifically, we estimate that 34 percent of large jurisdictions provided training to MVA offices, an estimated 18 percent of medium jurisdictions did so, and an estimated 9 percent of small jurisdictions did this. In addition, large jurisdictions are statistically different from both medium and small jurisdictions in providing training to other NVRA entities.
In our October 2001 comprehensive report on election processes nationwide, we identified measures such as improving the training of MVA staff as a means of addressing challenges related to applications received from MVAs. After the November 2004 general election, the National Task Force on Election Reform—composed almost exclusively of officials who served in voter registration and administration of elections capacities— reported that while the NVRA expanded the number of locations and opportunities where citizens can apply to register to vote, supporting the voter registration application process is a secondary duty for entities that do so under this law. The task force report noted that it is a challenge for these entities to provide this service in a consistent manner and to transfer the registrations collected accurately and efficiently to voter registration offices.
Jurisdictions Encountered New Challenges Processing the Large Volume of Voter Registration Applications for the November 2004 General Election
In our October 2001 report on election processes, some election officials noted that while extending voter registration deadlines gave voters additional chances to register, it shortened the time for processing applications. And a few election officials raised concerns about short time frames for processing applications in relation to the possibility of voter fraud if there was insufficient time to verify an applicant’s eligibility. For the 2004 general election, the time frame for processing applications had the potential to pose an even greater challenge given the increase in the number of voter registration applications that elections officials reported receiving for the November 2004 general election. The conditions that election officials experienced in processing the volume of voter registration applications, such as long hours and lack of time to fully train temporary workers, could have resulted in data entry errors that would have had the impact of not properly registering eligible voters and not identifying ineligible voters.
During our site visits to local jurisdictions, election officials told us that for the 2004 general election, entering applications in a timely manner was possible—but challenges did arise, and election officials described actions taken to help ensure that voters were properly registered. Furthermore, on the basis of our survey of local election jurisdictions, we estimate that 81 percent of local jurisdictions were able to process applications received just prior to the registration deadline—though we estimate 19 percent of the jurisdictions received applications just prior to the registration deadline that posed problems in entering them prior to Election Day. As shown in figure 14, we estimate that large jurisdictions experienced problems in entering the number of voter registration applications more than small and medium jurisdictions. Large jurisdictions are statistically different from both medium and small jurisdictions. This may be attributable to larger jurisdictions having larger populations with more registration activity, among other things.
All jurisdictions we visited reported that they were able to enter all eligible applications into the voter registration lists. Nevertheless, most reported it was a challenge to process the large volume of applications received. For example, 1 large jurisdiction we visited reported that on a daily basis it was 30,000 to 40,000 applications behind in data entry. As a result, election officials reported that they hired 80 full-time temporary workers who worked two full-time shifts to enter all eligible applications into the voter registration list used at the polls on Election Day. Election officials in another large jurisdiction told us that they unexpectedly received about 10,000 last-minute registrants. Another large jurisdiction reported it was “swamped” with registration applications right before the registration deadline and was not prepared for the volume of applications submitted. Several jurisdictions required permanent employees to work extended hours or on weekends. To manage registration workloads, other jurisdictions reported hiring temporary workers and recruiting county employees to handle processing workloads. Figure 15 shows the reported spike in voter registration applications received prior to Election Day in 1 large jurisdiction. Some applications were received after the final week allowed for voter registration and could not be registered for the 2004 general election but were registered for future elections.
In our state survey, a few states reported that since the 2000 general election they increased the time that voters in their states have to register. Although setting registration deadlines close to Election Day itself provides citizens increased time to apply to register, reducing the number of days from the registration deadline to Election Day can make it difficult for election officials to ensure that all eligible voters are included on the voter registration list. Specifically, in our state survey, 3 states (Maryland, Nevada, and Vermont) reported changing their registration deadlines for the November 2004 general election. For the 2000 general election, Maryland’s registration deadline had been 25 days before the election, but for the 2004 general election, the deadline for registration was 21 days before the election, extending the time that voters could register by 4 days. Nevada’s 2000 registration deadline (9 p.m. on the fifth Saturday preceding any primary or general election) remained the same for mail-in registrations. However, for the 2004 general election, the state extended in- person registration by 10 days. Vermont’s voter registration deadline changed from the second Saturday before the election to the second Monday before the election, allowing voters 2 more days to register. Appendix VI provides information on state laws pertaining to registration deadlines.
On the basis of our local jurisdiction survey, entering all voter registration applications for the time between the registration deadline and the November 2004 general election posed problems for large jurisdictions more than it did for small and medium jurisdictions. Specifically, we estimate that 41 percent of large jurisdictions experienced problems, 18 percent of medium jurisdictions, and 13 percent of small jurisdictions. Large jurisdictions are significantly different from both medium and small jurisdictions. Inasmuch as large jurisdictions have more potential registrants, it is reasonable to expect that they would experience more difficulty entering all voter registration applications by Election Day than smaller ones would.
For the 2004 general election, while many states reported having registration deadlines that were 20 to 30 days prior to Election Day, a few states reported having registration deadlines that were 10 days or less prior to Election Day, and some states reported having same-day registration. Four states (Alabama, Maine, New Hampshire, and Vermont) reported having registration deadlines that were 10 days or less prior to Election Day. Idaho, Maine, Minnesota, New Hampshire, Wisconsin, and Wyoming reported having Election Day registration at the polling place.
According to Our Nationwide Survey and Jurisdictions Visited, Some Jurisdictions Lacked Sufficient Staff to Process Applications
Having sufficient staff to process the increased number of voter registration applications was an issue for large local election jurisdictions. On the basis of our nationwide survey, most local jurisdictions (an estimated 89 percent) had a sufficient number of election workers (whether full-time, part-time, or temporary) who were able to enter registration applications in a timely manner. However, we estimate that 11 percent had an insufficient workforce for this task. Large jurisdictions experienced problems with insufficient election workers to enter voter registrations applications more than small and medium jurisdictions did, as shown in figure 16. The difference between large jurisdictions and both medium and small jurisdictions is statistically significant. This difference could be attributable to larger jurisdictions having a greater need for additional staff.
Several jurisdictions we visited reported that there was a price to pay for the large volume of registration applications received, such as the need to hire temporary workers or extend the hours of permanent employees in order to process voter registration applications for the November 2004 general election. Election officials in several jurisdictions we visited commented on the financial impact of the temporary workers hired, overtime hours, and the purchase of needed equipment, such as computers.
In our September 2005 report on managing voter registration, we noted that all but 1 of the 14 jurisdictions we surveyed faced challenges receiving and processing voter registration applications during the 2004 general election and took various steps to address them. For example, election officials in 7 of the 14 jurisdictions reported challenges checking voter registration applications for completeness, or for accuracy, or for duplicates. At that time, as in our more recent site visits, jurisdictions reported hiring extra staff, among other things, to address these challenges.
Larger Jurisdictions More Likely than Small or Medium Ones to Provide Training to Staff and Track Receipt of Voter Applications
Providing training to data entry staff and tracking applications provide ways for election officials to manage the flow of applications for processing that can help ensure that voter registration applications are appropriately entered into the voter registration list. As part of our inquiry into the methods jurisdictions used to enter completed registration application data into voter lists, our questionnaire to local election jurisdictions asked how they went about accomplishing this task. On the basis of our survey, we estimate that 76 percent of all local jurisdictions provided training to data entry staff about the processing and inputting of registration applications. Seventy-five percent of small jurisdictions provided this training, 73 percent of medium jurisdictions did so, and 94 percent of larger jurisdictions did so, too. Large jurisdictions are statistically different from both medium and small jurisdictions. Another activity that election officials undertook when entering completed registration applications included tracking incoming registrations. The results of our survey show that over half of local jurisdictions tracked incoming registration applications to ascertain the total number received, the number entered into registration lists, and the number not processed because of omission or application error, and to identify ineligible voters based on age or residence. Again, large jurisdictions are statistically different from both medium and small jurisdictions. Table 2 provides information on the different activities that local election jurisdictions undertake when entering completed registration applications into the official voter registration list.
Processing Applications Obtained through Voter Registration Drives Posed Additional Challenges for Some Jurisdictions
Nongovernmental organizations in many states sponsored voter registration drives for the November 2004 general election in an effort to increase the number of citizens eligible to vote. Voter registration drives pose a dilemma for some election officials. On one hand, voter registration drives provide another means by which persons can apply to register to vote. On the other hand, they pose challenges in assessing the validity of submitted registrations and in processing large numbers of registrations submitted close to the registration deadline. For the November 2004 general election, election officials in some jurisdictions we visited told us they encountered challenges validating and processing the large number of voter registration applications obtained through voter registration drives that employed either paid staff (where workers are paid for each voter registration application completed and submitted to election authorities prior to Election Day) or used volunteers. For example, Wisconsin’s state legislative audit bureau conducted an evaluation of the 2004 general election in its state. It found, among other things, that many registration deputies appointed for the November 2004 general election worked for special interest groups or political parties interested in increasing voter turnout. The evaluation states that investigators found that registration deputies had submitted 65 falsified names for the 2004 general elections and that district attorneys in two counties charged four individuals with submitting fraudulent registration forms. According to the evaluation report, these registration deputies were reportedly paid by their employer on a per registrant basis, which may have encouraged them to submit fraudulent registration forms to increase their compensation.
Such questions about the integrity of the voter registration process were of particular concern in battleground states such as Florida, Ohio, and Pennsylvania, where margins of victory were slim and accurate tallies of eligible votes were therefore of consequence. In our state survey several states reported that their state election provisions do not address the issue of voter registration drives that involve payment per application, while relatively fewer states reported prohibiting them outright. Specifically, 19 states and the District of Columbia reported that state laws or executive actions are silent about these drives (that is, it is left up to each local jurisdiction to decide). However, 1 of these 19 states further reported that while its state law does not address voter registration drives that involve payment per application, the conduct of such drives is not left up to each local jurisdiction—the local jurisdictions have no authority in regulating such matters. Sixteen states reported that voter registration drives are allowed either by state law or by executive action, 13 states reported that they are prohibited by state law, and 2 states did not respond.
In addition, our nationwide survey of local election jurisdictions inquired about their awareness and handling of registration drives, and any actions taken to deter fraudulent applications from being submitted by persons or groups participating in paid registration drives, and we discussed this matter during our site visits to selected jurisdictions as well. In our nationwide survey, we estimate that 91 percent of all local jurisdictions were not aware of such drives, while 9 percent were aware. About a third (an estimated 32 percent) of the large jurisdictions—those with populations greater than 100,000—were aware of such drives. We also queried local election jurisdictions whether any names on voter registration applications appeared to be fraudulent. On the basis of our local survey, nearly all jurisdictions—an estimated 95 percent—did not have any names that appeared to be fraudulent. Although only 5 percent of local election jurisdictions had voter registration applications that appeared to have fraudulent names, an estimated 70 percent identified receiving 10 fraudulent applications or fewer, an estimated 14 percent identified receiving 10 or more fraudulent applications, and an estimated 16 percent did not know the volume of fraudulent applications received. The distribution of the volume of fraudulent applications received is of a smaller subset of our total sample and therefore has larger confidence intervals than other estimates. Figure 17 shows the extent to which local jurisdictions identified experiencing fraudulent voter registration applications.
In addition, our prior work raised concerns about the quality of voter registration applications obtained through voter registration drives. In our September 2005 report on managing voter registration, we reported that among 12 of 14 local jurisdictions we surveyed, processing applications received from voter registration drives sponsored by nongovernmental organizations posed a challenge to election officials because applications were incomplete or inaccurate.
Election Officials’ Views on Irregular Voter Registration Applications from Registration Drives
During our site visits, we sought local officials’ views on a host of issues related to the integrity of the voter registration process, including how or whether voter registration drive applications were tracked, how many registration applications were submitted by volunteer or paid registration drives in calendar year 2004 leading up to the November election, and how their jurisdictions dealt with irregular applications. (We defined irregular applications as those using fictitious names, unusual dates of birth, nonexistent addresses, or fake signatures or party affiliations.) We also asked election officials whether they had the ability to determine if individuals were using false or fictitious names. Many local jurisdictions that we visited told us that they did not have specific procedures to ensure that voter applications obtained through voter registration drives were collected or tracked. This was because, in some cases, the application forms could simply be downloaded from the Internet. One large jurisdiction that did not track applications coming from various sources told us it planned to begin doing so, using a drop-down menu in its statewide voter registration system that will allow staff to record the information.
Overall, at local jurisdictions that we visited where applications from voter registration drives were tracked or at least estimated, the number and proportion of applications submitted through voter registration drives relative to total registrations—and the number and proportion considered irregular—varied widely. For example, in 1 large jurisdiction, election officials reported that approximately 30,000 registrations received in 2004—about 90 percent—were submitted by registration drives. Of these, the election officials estimated that only about 50 applications were irregular—that is, they were unreadable, had questionable signatures, were incomplete, or had invalid addresses. The election official from this jurisdiction noted that it appeared some of the applications had been filled out by individuals who took addresses from the phone book and changed them slightly. In another large jurisdiction in a battleground state, local election officials estimated that 70,000 registration applications were submitted by volunteer or paid registration drives, and here too irregularities were noted—such as fictitious names and fake signatures— but election officials stated that these irregular applications represented a “low” percentage of the total. In other large jurisdictions, fewer voter registration applications were received; 1 jurisdiction, for example, in another battleground state, reported receiving 2,500 such applications and estimated that about 20 percent of them were irregular. Two medium jurisdictions we visited reported receiving a few hundred voter registration applications or fewer, and both reported that there were no irregularities. One small jurisdiction did not report any voter registration drives taking place.
When we asked local election officials during our site visits whether they had the ability to determine whether a person actually tried to vote using a false or fictitious name, responses were mixed: Election officials in 3 large jurisdictions we visited told us they did not have the ability to make this determination. An election official in another large jurisdiction stated that “there is no way to know if someone falsely registered has voted.” Others, however, reported that they were able to determine whether false identities had been used. For example, in 1 large jurisdiction, election judges check voter IDs and signatures at the polls to prevent the use of fictitious identities. One large jurisdiction verifies voter registration information against Social Security and driver’s license information and checked voter history internally; election officials in this jurisdiction reported that they believe anyone who attempted to use a false or fictitious name in the November 2004 general election would have been caught. And in another jurisdiction, election officials told us that if an individual attempted to vote using a fictitious name that was not in the poll book, that individual would be issued a provisional ballot—which would not be verified if it was determined that the name was indeed fictitious. Election officials in some jurisdictions we visited said there was no way to know whether the poll book already contained fictitious names.
When asked what steps, if any, local jurisdictions we visited took to notify law enforcement or other legal authorities on irregular registration applications received, most reported taking some actions. For example, 1 large jurisdiction we visited reported providing irregular registration applications to the Federal Bureau of Investigation (FBI) and the district attorney’s office and to the Secretary of State’s office for investigation. Both the FBI and the district attorney declined to pursue the matter on the ground that they were understaffed, the jurisdiction reported. The Secretary of State’s office concluded that while the registration applications were fraudulent or fictitious, a purposeful fraud was not committed and that the people completing the fake applications were not trying to alter an election, but to obtain money by working for the registration drives. Four other jurisdictions that we visited said they contacted appropriate state or federal authorities, such as state law enforcement, a State’s Attorney, a state election enforcement agency, or the FBI, but election officials did not know whether any action had been taken.
In addition, in our June 2005 report on maintaining voter registration lists, we reported that election officials in seven locations we visited referred reported instances of voter registration fraud allegations to appropriate agencies, such as the district attorney and the U.S. Attorney for investigation. Also, EAC issued voluntary guidance in July 2005 to help states implement HAVA. EAC’s guidance suggested that when the voter registration verification process indicates the possible commission of an election crime, such as the submission of false registration information, such matters should be forwarded to local, state, and federal law enforcement authorities for investigation.
Some Jurisdictions Have Controls to Manage Registration Drives
When we asked local jurisdictions that we visited whether they had procedures in place for registration groups to follow when submitting applications, election officials in most jurisdictions reported that some type of system was in place to control registration drives. For example, 1 large jurisdiction reported that it had a program to train volunteer field registrars to register citizens on behalf of the county registrar; these field registrars were to comply with all registration rules and laws and must themselves be registered voters, and noncandidates, have proof of identify, complete a 2-hour training course, and pass a brief examination before taking an oath. In addition, this same jurisdiction required that any group requesting more than 50 voter registration forms was required to provide a plan to the state elections department for when, where, and how it would distribute the forms—all of which were numbered so that election offices could track them. Some jurisdictions reported, however, that no procedures were in place that registration groups had to follow. One large jurisdiction, for instance, reported that anyone can run a voter registration drive simply by downloading the voter registration form from the election office Web site.
On the topic of what actions, if any, local jurisdictions had taken to deter paid registration drives from submitting fraudulent registration applications, from our nationwide survey, we estimate that roughly half of the estimated 9 percent of local jurisdictions that were aware that paid registration drives were occurring provided training or guidance on how to accurately complete an application, and an estimated 41 percent of these jurisdictions notified the persons or groups engaged in paid registration drives that they had submitted incomplete, inaccurate, or fraudulent applications. In addition, on the basis of our survey, 41 percent of local jurisdictions that were aware of the drives helped prevent submission of incomplete, inaccurate, or fraudulent applications by working with persons and groups engaged in paid registration drives.
Actions Taken to Help Prevent Fraudulent Registrations and Ensure Submission of Registrations to Election Offices
In a couple of jurisdictions, election officials told us they took other steps, such as meeting with registration drive organizers and contacting the registrant identified on the application, to help prevent fraudulent registrations. A jurisdiction in Colorado reported that numerous complaints had been received from voters who claimed to have completed registrations through a drive but for whom the county had no record of application. The jurisdiction reported that Colorado’s legislature passed a bill pertaining to voter registration drives. Subsequently, Colorado enacted legislation effective in June 2005 that, among other things, requires voter registration organizers to file a statement of intent with the Secretary of State, fulfill training requirements pursuant to rules promulgated by the Secretary of State, and, in general, submit or mail registration applications within 5 business days. In addition, the 2005 state legislation provides that voter registration organizers may not compensate persons circulating voter registration application forms based on the number of applications distributed or collected. The Secretary of State issued rules in November 2005 implementing such requirements, including rules that require registration drive organizers to file a statement of intent with the Secretary of State and require persons circulating such application forms to ensure that the tear-off receipt on the application is completed and given to the applicant. Election officials in 17 jurisdictions we visited told us that they had procedures in place for managing voter registration drives to some extent. For example, in 1 medium jurisdiction, election officials stated that groups or persons seeking to run registration drives must be trained and deputized by the registrar’s office.
Concluding Observations
In 43 of the 50 states and the District of Columbia, successfully registering to vote prior to Election Day is a prerequisite for casting a ballot and having that ballot counted. States are still working to fully implement HAVA’s voter registration requirements. As states gain more experience with their statewide voter registration and data matching systems and processes, it is likely their systems and processes will evolve. Given the continuing challenge of maintaining accurate voter registration lists in a highly mobile society, this is to be expected.
For election officials, the voter registration process presents a continuing challenge in balancing ease of registration for eligible voters with sufficient internal controls to help ensure that only eligible voters are added to and remain on the voter registration rolls. To maintain accurate voter registration lists, election officials must use and rely upon data from a number of sources, such as state death and criminal records and applications from MVAs.
HAVA’s requirements for creating and maintaining statewide voter registration lists and its identification requirements for first-time voters who register by mail were designed to help improve the accuracy of voter registration lists and reduce the potential for voter fraud. Specifically, HAVA’s requirements for creating and maintaining a statewide voter registration list was designed to improve voter registration list accuracy by identifying duplicate registrations within the state and identifying those ineligible to vote because of death, criminal status, or other reasons. HAVA requires states to match the names and other identifying information on their statewide voter registration lists against death and felony records in the state. States may voluntarily match their voter registration lists with the voter registration lists, death, felony, or other records in other states. In the absence of voluntary cross-state matching, it is possible to fully implement HAVA’s statewide voter registration provisions and still have ineligible persons on the state’s voter registration rolls on Election Day, such as those who died out of state or were convicted in federal courts or other states. Nor would implementing HAVA’s statewide matching requirements identify persons who are registered to vote in more than one state. Although some states report sharing registration and eligibility information among states, the practice was generally limited to neighboring states or dependent upon a registrant indicating that he or she previously resided in another state.
HAVA includes a provision that requires certain first-time voters who register by mail to provide identification as proof of their identity and eligibility to vote in the jurisdiction. Which voters must present identification either with their mail application or when they vote for the first time depends upon how states and local jurisdictions define “mail registrations” subject to HAVA’s identification requirement. In our site visits, we found that some local jurisdictions considered registration applications submitted by registration drives to be mail registrations subject to HAVA’s identification requirement for first-time voters, while other jurisdictions did not consider such registrations to be mail registrations subject to the identification requirement. This distinction has importance on Election Day for first-time voters who registered through registration drives. In those jurisdictions that considered mail registrations to include registration drive applications, first-time voters who registered through registration drives would be required to show an acceptable form of identification at the polls on election day. If they did not do so, they are to be permitted to cast a provisional ballot, but the ballot would only be counted upon a state determination that the voter is eligible to vote under state law. In contrast, in those jurisdictions that did not consider mail applications to include those submitted through registration drives, first- time voters would not be treated as subject to the HAVA identification requirement and could generally cast a regular ballot that would be counted with all other regular ballots.
Election jurisdictions continue to face challenges in obtaining voter registration applications from NVRA entities, including MVAs. Some local jurisdictions have established processes to manage receipt of voter registration applications from these entities, such as training for staffs of these agencies. To the extent that NVRA entities do not track and forward to the appropriate election jurisdiction the voter applications that they have received, voters may be required to cast provisional ballots instead of regular ones because their names do not appear on the voter registration lists. In addition, the provisional ballot will not be counted if the voter’s valid registration cannot be verified. Our survey of local election jurisdictions found that many local jurisdictions encountered problems counting provisional ballots in cases where voters claimed to have registered at an MVA or some other NVRA entity but there was insufficient evidence that the voter had submitted a registration application at the MVA or NVRA entity.
A surge of last-minute registrations in many jurisdictions prior to the November 2004 election illustrated the challenge of balancing ease of registration with assurance that only eligible voters are on the registration rolls. Some election jurisdictions reported registration drive groups submitted hundreds or thousands of applications just before the registration deadline. When the registration deadline is close to Election Day, processing these applications presents a tremendous challenge in checking applications for completeness, having time to contact applicants to obtain missing information, verifying applicants’ eligibility to vote, and adding the name of eligible voters to the registration list. Some jurisdictions reported hiring and training temporary employees to process the applications. The enormous workload and time constraints associated with processing large numbers of last-minute applications can increase the chances that errors will be made in determining voter eligibility, and the names of some eligible voters may not be added to the list in time for Election Day.
Absentee and Early Voting
A growing number of citizens seem to be casting their ballots before Election Day using absentee and early voting options that are offered by states and local jurisdictions.
However, circumstances under which these voters vote and the manner in which they cast their ballots before Election Day differ because there are 51 unique election codes. Because of the wide diversity in absentee and early voting requirements, administration, and procedures, citizens face different opportunities for obtaining and successfully casting ballots before Election Day.
To collect information about absentee and early voting options, in our state and local surveys we asked questions about each of these voting options separately. We defined absentee voting as casting a ballot, generally by mail, in advance of Election Day (although ballots could be returned through Election Day and dropped off in person). We defined early voting as generally in-person voting in advance of Election Day at specific polling locations, separate from absentee voting. However, there is some measure of overlap between absentee voting and early voting reported by the states, especially where states have reported in-person absentee voting to be, in effect, early voting. This may be due, in part, to the fact that the relational statutory framework for early voting and absentee voting varies among the states—with some states, for example, providing early voting within the context of the state’s absentee voting provisions, while others, for example, provide for absentee voting within the context of the state’s early voting provisions. Similarly, local jurisdictions that completed our survey may also have had some measure of overlap in relation to their practices for absentee and early voting. During our interviews with local election officials in jurisdictions that offered early voting, we were able to obtain more detailed information about absentee and early voting procedures and practices for those jurisdictions.
On the basis of our site visits to jurisdictions that had early voting, absentee and early voting were similar in some ways and distinct in others. Election officials described to us that when voters cast absentee ballots, they typically followed a specific process including applying for and receiving the ballot and returning their marked ballots before Election Day or, in some cases, returning the ballot up until the close of polls on Election Day. According to the description that election officials gave us, early voting was distinct from in-person absentee voting in that in-person absentee voters usually applied for and received a ballot, and cast it at the registrar’s office, while early voters reported to a voting location where early voting staff verified their eligibility to vote, usually by accessing the jurisdiction’s voter registration list. Also, early voting usually did not require citizens to provide an excuse, as some states required for absentee voting, and it was usually allowed for a shorter period of time than absentee voting. For example, in the 14 jurisdictions we visited in 7 states that reported having early voting, the time frame allowed for absentee voting was almost always at least twice as long as that for early voting (e.g., Colorado allowed 30 days for absentee voting and 15 days for early voting). Early voting was similar to Election Day voting in that the voting methods were usually the same. However, according to election officials in jurisdictions we visited that had early voting, voters were not limited to voting in their precinct because all early voting locations had access to a complete list of registered voters for the jurisdiction (not just precinct specific) and had appropriate ballots that included federal, state, and precinct-specific races. Appendix VII provides a description of selected characteristics of the early voting jurisdictions we visited.
In this chapter, we will discuss changes since 2000 and challenges related to (1) absentee voting in general, (2) overseas military and civilian absentee voting, and (3) early voting.
Overview
Some states have increased the opportunities for citizens to vote absentee or early. For the November 2004 general election, 21 states reported that they no longer required voters to provide excuses such as being ill, having a disability, or being away from the precinct on Election Day to vote absentee—an increase of 3 states from the November 2000 general election. Three states reported expanding their provision for permanent absentee status (usually reserved for the elderly or those with disabilities), allowing voters to receive absentee ballots for a state-specified time period, such as 4 years. One state reported eliminating its requirement that mail-in absentee voters provide an attestation from a notary or witness for their signature along with the completed absentee ballot. Eliminating the need for a notary or witness removes a potential barrier to an absentee ballot being counted. According to election officials in 2 jurisdictions in 1 state we visited that required a notary or witness signature, an absentee ballot may not be counted if voters neglect to have their ballots witnessed or notarized. Furthermore, HAVA amended the Uniformed and Overseas Citizens Absentee Voting Act (UOCAVA) to, among other things, extend the period of time that can be covered by a single absentee ballot application by absent uniformed service voters and certain other civilian voters residing outside of the United States from the year during which the application was received to a time period covering up to the two next regularly scheduled general elections for federal office.
Election officials reported facing some of the same challenges in the November 2004 general election that they had identified to us for the November 2000 general election, and they also reported some new challenges. Continuing absentee voting challenges included (1) receiving late absentee voter applications and ballots; (2) managing general workload, resources, and other administrative constraints; (3) addressing voter error issues such as unsigned or otherwise incomplete absentee applications and ballot materials; and (4) preventing potential fraud.
Election officials also told us that they encountered new challenges in the November 2004 general election. Some election officials said that the increased early voter turnout during this election resulted in long lines. In some local jurisdictions we visited, election officials said that factors such as inadequate planning on their part, limitations on types of facilities that could be used for early voting locations, and funding constraints on hiring more staff or acquiring more voting locations affected their management of large early voter turnout. In addition, some election officials reported that they encountered a challenge handling disruptive third parties as they attempted to approach early voters who were in line to vote. Another challenge could develop as a result of a 2002 HAVA amendment to UOCAVA. In an effort to help make registration and voting easier for absent uniformed service voters and certain other civilian voters residing outside of the United States, this 2002 amendment, as noted above, extended the period of time that can be covered by a single application from the year during which the application was received to a time period covering up to the next two subsequent general elections for federal office. Election officials in 4 jurisdictions we visited told us that a possible unintended consequence of this amendment could be that when uniformed services personnel are reassigned to other duty posts, absentee ballots may not be sent to the correct address for subsequent general elections. Even with a 2005 revision to the ballot request form whereby voters can indicate that they want ballots for one federal election only, election officials in 3 of these jurisdictions were concerned many absentee ballots would be returned as undeliverable.
Absentee Voting
Absentee voting allows citizens the opportunity to vote when they are unable to vote at their precinct on Election Day. Although availability, eligibility requirements, administration, and procedures vary across the 50 states and the District of Columbia, absentee voting generally follows a basic process. As figure 18 shows, this process included four basic steps for the November 2004 general election.
Jurisdictions we visited typically provided absentee ballot applications that registered voters used to request absentee ballots in a standard state or jurisdiction form, as shown in figure 19.
According to our state survey, state election officials reported that registered voters could visit or write their local election office, or in some cases visit a state or local election Web site, to obtain an application or learn what information was required to request an absentee ballot. State election officials reported registered voters could return a completed absentee ballot application via the U.S. mail or in many other different ways as allowed by state absentee ballot provisions. Also, some election officials in jurisdictions we visited told us that voters could complete any part of the absentee voting process in person at their local elections office. Table 3 shows the various options allowed by states for requesting and returning absentee ballot applications. However, it is important to note that particular local jurisdictions might not have offered all of the options described below.
According to our state survey results, states reported that applicants could find out the status of their absentee ballot application after it was submitted and offered at least one of several ways, including telephoning a state or local jurisdiction office, telephoning a hotline or toll-free number, or e-mailing a state or local jurisdiction office. For example, in 49 states and in the District of Columbia, applicants could telephone a state or local jurisdiction office, and in 47 states and in the District of Columbia, applicants could e-mail a state or local jurisdiction office to find out their absentee ballot applications’ status. Thirty-nine states and the District of Columbia notified the applicant if the application was rejected.
While absentee ballots are generally provided to the voter through the mail, unless voting in person, on the basis of our survey of a representative sample of local jurisdictions nationwide, some jurisdictions provided absentee ballots using fax and e-mail. Specifically, for the November 2004 general election, we estimate that 17 percent of local jurisdictions provided absentee ballots by fax, and 4 percent of local jurisdictions provided absentee ballots by e-mail. On the basis of our discussions with election officials in jurisdictions we visited, absentee ballots are generally returned through the mail.
Election officials in most jurisdictions we visited said that voters used a combination of envelopes for returning completed absentee ballots so that voters’ indentities would be distinct from the ballots they were casting. For example, a voter would place the completed ballot in a secrecy (inner) envelope, which would then be placed in an outer envelope. The secrecy envelope would be to ensure that the voted ballot was not linked to the voter, while the voter’s affidavit information, such as a name, address, and signature, needed to certify that the voter was eligible to vote, would be marked on the outer envelope. Election officials in some jurisdictions provided examples of the envelopes used to return absentee ballots. One of these examples had a separate affidavit envelope, which was to be placed in a pre-addressed return envelope and mailed to the local elections jurisdiction. Other examples allowed the voter to include the affidavit information on the back of the pre-addressed return envelope. Once the local elections jurisdiction certified that the absentee ballots could be counted using the affidavit information, election officials in jurisdictions we visited told us that they removed the secrecy envelope (with the voted ballot sealed inside) and set it aside for counting. Figure 20 shows examples of absentee ballot return envelopes and the inclusion of affidavit information.
In our survey of state election officials, we asked whether absentee voters were able to find out the status of their submitted absentee ballots in various ways. According to our state survey, 44 states and the District of Columbia reported that absentee voters were able to telephone a state or local jurisdiction office, 32 states and the District of Columbia reported that absentee voters were able to e-mail a state or local jurisdiction office, 16 states reported that absentee voters could telephone a hotline or toll- free number, and 5 states reported that absentee voters’ ballot status was available via a Web site. Furthermore, 16 states reported that either state or local jurisdictions would notify the voter if the absentee ballot was not counted. However, 6 states reported that they do not allow voters to check the status of their absentee ballots at all. For example, Vermont reported that state law does not allow voters to find out whether or not the absentee ballot was counted. Kentucky reported that it does not track whether or not an individual voter’s ballot was counted because linking a voted ballot back to a specific voter violates that voter’s right to a secret ballot.
A Few States Reported Changes to Absentee Voting Requirements since 2000
A few states reported changes to their requirements with respect to absentee voting by (1) no longer requiring a reason or excuse for voting absentee; (2) eliminating the need for a mail-in absentee voter to have a notary or witness for the voter’s signature to accompany the ballot; and (3) not limiting permanent absentee voting status to individuals with disabilities or the elderly.
Excuse Requirement
According to our state survey regarding the November 2004 general election, all 50 states and the District of Columbia had some provisions allowing registered voters to vote before Election Day, but not every registered voter was eligible to do so. Twenty-one states reported allowing voters to vote absentee for the November 2004 general election without first having to provide a reason or excuse. The other 29 states and the District of Columbia reported requiring voters to meet one of several criteria, or “excuses,” to be eligible to vote before Election Day, such as having a disability, being elderly, or being absent from the jurisdiction on Election Day. The following are examples of excuses that some states required: absent from the state or county on Election Day; a member of the uniformed services or a dependent; a permanent or total disability; ill or having a temporary disability; over a certain age, such as 65; at a school, college, or university; employed on Election Day in a job for which the nature or hours prevent the individual from voting at his or her precinct, such as an election worker; and involved in emergency circumstances, such as the death of a family member.
In our survey of local jurisdictions, we asked about problems encountered when processing absentee ballot applications. As shown in figure 21, we estimate that 9 percent of local jurisdictions received absentee applications that did not meet the excuse required by law, in states where excuses were required. The issue of applicants not meeting the required excuse is more of a problem for large jurisdictions than small or medium jurisdictions.
According to our state survey, the number of states that allowed absentee voting without an excuse increased from 18 in 2000 to 21 in 2004. Since November 2004, 2 more states reported that they have eliminated their excuse requirement. Specifically, during visits to local jurisdictions in New Jersey, election officials told us that state law had changed since the November 2004 general election. According to these officials, no-excuse absentee voting was adopted by the New Jersey legislature and became effective in July 2005. Ohio also amended its absentee voter provisions, effective January 2006, to provide for no-excuse absentee voting.
Notary or Witness Signature Requirement
Election officials in 2 jurisdictions in 1 state we visited told us that if voters returned a completed (voted) ballot without having the signature notarized or affirmed by a witness, the vote would be disqualified and not counted. For the November 2004 general election, according to our state survey, 12 states reported requiring that mail-in absentee ballots contain attestation by a notary or witness for a voter’s signature to accompany the absentee ballot. From the November 2000 election to the November 2004 election, Florida was the only state that reported in our state survey that it had dropped the requirement that mail-in absentee ballots contain attestation by a notary or witness for a voter’s signature.
Permanent Absentee Voting
Permanent absentee voting, which typically was available to individuals with disabilities or the elderly, was another way some states sought to help enfranchise certain categories of voters. Permanent absentee status, where offered, generally allowed the voter to apply for mail-in absentee ballots once (rather than for each separate election) over a specified time period. State requirements dictated when and how often a voter must apply for permanent absentee status. For example, for the November 2004 general election, in a New Jersey jurisdiction that we visited, election officials told us that state law required those eligible for permanent absentee status to apply at the beginning of the calendar year to receive absentee ballots for that year. According to the absentee ballot application provided by this jurisdiction, a voter’s permanent absentee status remains in effect throughout that year unless the voter notifies the election office otherwise. An election official in a Pennsylvania jurisdiction we visited said that his state allowed permanent absentee voters to apply once every 4 years. In this state, permanent absentee voters were to receive absentee ballots for all elections during the 4-year period, according to the election official. In 2 Washington jurisdictions we visited, election officials told us that any voter could qualify for permanent absentee status for all future elections (e.g., no time period specified). In one of these Washington jurisdictions, election officials provided a copy of the permanent absentee application instructing voters that their permanent absentee status would be terminated upon the (1) voter’s written request, (2) cancelation of the voter’s registration record, (3) death or disqualification, or (4) return of an ongoing absentee ballot as undeliverable.
Our state survey results showed that since the November 2000 general election, 3 states (California, Rhode Island, and Utah) reported state changes that expanded, in some manner, the use of permanent absentee voting. For example, California, reported changes for the November 2004 election that allowed any voter to apply for and receive permanent absentee status. For the November 2000 general election, California previously reported that only certain categories of voters with disabilities (e.g., blind voters) were eligible for permanent absentee status. Overall, the results of our state survey showed that at the time of the November 2004 general election, 17 states reported having some provision for permanent absentee status, 32 states and the District of Columbia reported that they did not provide for permanent absentee status, and Oregon reported conducting its election entirely by mail—making permanent absentee status unnecessary in this state.
Appendix VIII provides information on states’ requirements for no-excuse absentee voting and witness or notary signature provisions for the November 2000 and 2004 general elections and shows where changes occurred. States did not report any changes to their permanent absentee requirements since the November 2000 general election.
Receiving Late Absentee Ballot Applications and Ballots for the November 2004 General Election Continued to Be a Challenge
The results from our state survey show that deadlines for voters to both apply for absentee ballots and return them to local jurisdictions to be counted differed among states. According to our state survey for the November 2004 general election, 47 states and the District of Columbia reported that they had absentee ballot application deadlines that ranged from Election Day (5 states: Connecticut, Maine, New Jersey, Ohio, and South Dakota) to 21 days before Election Day (Rhode Island). Three states (Florida, New Hampshire, and Oregon) reported having no absentee ballot application deadline, although ballots in these states had to be returned by the close of polls on Election Day.
With respect to state deadlines for returning absentee ballots, many states reported having more than one deadline to correspond with differing methods of returning such ballots to election officials. In our state survey, 44 states reported having provisions requiring that absentee ballots be returned by or on Election Day; 7 states reported having provisions requiring that absentee ballots be returned a certain number of days before Election Day; and 8 states and the District of Columbia reported having provisions allowing mailed absentee ballots to be returned a certain number of days after Election Day, if such ballots were postmarked by a specified date. For example, for the 2004 November general election, Alaska reported two deadlines: (1) mail-in absentee ballots were to be received by close of business on the 10th day after the election when postmarked on or before Election Day, and (2) in-person absentee ballots were to be delivered by 8:00 p.m. on Election Day.
Also, according to our state survey, Nebraska reported that for absentee ballots returned by mail, the deadline changed from no later than 2 days after Election Day for the November 2000 general election to the close of polls on Election Day for the November 2004 general election. According to our state survey, these deadlines may be different for absent uniformed service voters and certain other civilian voters residing outside the United States, a subject that will be discussed later in this chapter.
In our October 2001 comprehensive report on election processes, we reported that election officials for the 2000 general election identified receiving applications and ballots after state statutory deadlines as a challenge. According to our nationwide survey, local jurisdictions encountered similar problems with processing absentee ballot applications and absentee ballots for the November 2004 general election. More specifically, on the basis of our survey, we estimate that 55 percent of local jurisdictions received absentee ballot applications too late to process. We also estimate 77 percent of local jurisdictions encountered problems in processing absentee ballots because ballots were received too late. Furthermore, we asked jurisdictions about which problems were encountered most frequently. An estimated 25 percent of local jurisdictions encountered the ballot lateness problem most frequently. Figure 22 shows that medium and large jurisdictions encountered lateness with absentee ballots more than small jurisdictions did.
Appendix VIII summarizes states’ deadlines for receiving domestic mail-in absentee ballot applications and absentee ballots.
Election officials in the local jurisdictions we visited told us that they tried to approve applications and mail absentee ballots to voters as quickly as possible, assuming that the ballots had been finalized and printed. In 8 jurisdictions we visited in 5 states (Colorado, Kansas, New Mexico, Pennsylvania, and Washington), election officials said that their states mandated that local election jurisdictions process absentee ballot applications within a specified time period, such as within 24, 48, or 72 hours of receipt of the application. In 2 Pennsylvania jurisdictions we visited, election officials stated that they established a local policy encouraging election staff to process absentee ballot applications faster (such as on the day of receipt) than the time period specified in state law (which was 48 hours). In 1 Illinois and 1 Nevada jurisdiction we visited, election officials said that while a 24- or 48-hour turnaround time for absentee ballot applications was not mandated in state law, local office policy was to process them as quickly as possible—such as within 24 hours of receipt of the application.
During our site visits, election officials in 9 jurisdictions stated that they received large numbers of mail-in absentee ballot applications just prior to the deadlines prescribed by state law. Most of these election officials said they were able to meet their state-mandated or office policy application- processing time, although they had to work long hours and hire additional staff to process the absentee ballot applications by the deadline. In 1 Florida jurisdiction we visited, local election officials said that even though they had no absentee ballot application deadline, they processed applications using “long hours and extra people” and tried to send out absentee ballots within 24 hours of receiving a complete application.
In jurisdictions we visited in Pennsylvania and Colorado, election officials said that sometimes the 24- or 48-hour turnaround was impossible to meet because the state did not finalize the ballots for printing until the days immediately preceding Election Day for the November 2004 election. For example, an election official in the Pennsylvania jurisdiction we visited told us that determining whether or not an independent presidential candidate’s name was to be included on the November 2004 general election ballot proved to be a challenge. In this jurisdiction, the validity of petition signatures supporting the independent candidate’s request to be included on the ballot was challenged in state court about 10 weeks before the election. As a result, according to the election official, election officials were required to participate in a court-mandated process of verifying the signatures. According to the election official, it took about 10 days in court to resolve the situation, which delayed the printing of the ballots.
In 6 jurisdictions we visited, election officials told us that slowness in the delivery of the mail added to the processing time crunch during the week before Election Day—a problem that is out of election officials’ control and may contribute to the local election officials’ receipt of absentee voting materials after state-mandated deadlines. Although envelopes can use an “official election mail” designation, election officials in these 6 jurisdictions we visited said that the U.S. Postal Service did not always process absentee voting materials in a timely manner. For example, in one New Mexico jurisdiction we visited, election officials stated that they experienced serious problems with the U.S. Postal Service delivering absentee ballot applications. These officials felt that the post office ignored the envelopes’ official election mail designation and did not process and deliver them quickly. Election officials in this jurisdiction said that their telephone system crashed numerous times leading up to Election Day in November 2004, given the heavy volume of incoming calls from voters checking on the status of their absentee ballot applications. In one Pennsylvania jurisdiction that we visited, election officials said that postal concerns were raised when some college students’ absentee ballot applications were received after Election Day. These officials could not definitely say at what point these applications might have been delayed and explained that the mail delivery delay could have been attributable to either the U.S. Postal Service or the university’s mailing center. Figure 23 illustrates the use of special postal markings for absentee ballot materials.
While election officials in 6 jurisdictions we visited told us about challenges with mail delivery, election officials in 7 jurisdictions we visited told us that they did not have problems with mail delivery or coordinating with the U.S.
Postal Service. In an Illinois jurisdiction we visited, election officials told us that prior to the election, staff from his office met with the postmaster to establish a good working relationship. Election officials in a New Hampshire and Ohio jurisdiction we visited stated that the post office was very helpful. In a Nevada jurisdiction we visited election officials said that they received excellent service from the postal service.
When an absentee application was received after the state-mandated deadline, election officials in 13 jurisdictions we visited told us that they often sent these applicants a letter explaining that their application was received too late. In 5 of these same jurisdictions, election officials said they also provided an alternative to absentee voting such as early voting, voting on Election Day, or in-person absentee voting, where the voter could visit the election office and complete the absentee voting process in person.
Voter Errors in the November 2004 Election Continued to Be a Challenge with Processing Absentee Ballot Applications and Ballots
In our October 2001 report on election processes, we reported that election officials for the 2000 general election identified voters’ failure to provide critical information, with respect to signatures and addresses, as challenges to successfully processing mail-in absentee applications and verifying ballots for counting. According to our nationwide survey for the November 2004 election, local jurisdictions encountered similar voter errors that could affect the jurisdictions’ ability to establish voter eligibility or approve the ballot for counting when processing absentee ballot applications and absentee ballots.
Absentee Ballot Applications
In our nationwide survey, we asked local jurisdictions what problems they encountered in processing absentee ballot applications. We estimate that 48 percent of them identified problems receiving absentee ballot applications that contained a missing or illegible voter signature. Furthermore, we asked about which problems were encountered most frequently. An estimated 20 percent of local jurisdictions encountered the problem of receiving absentee ballot applications that contained a missing or illegible voter signature most frequently. Table 4 shows our estimates of the types of voter errors local jurisdictions encountered with absentee ballot applications submitted for the November 2004 general election.
On the basis of our nationwide survey, large jurisdictions had more of a problem than small or medium jurisdictions concerning missing or illegible signatures. Specifically, we estimate that 73 percent of large jurisdictions encountered this problem, while we estimate 44 percent and 55 percent of small and medium jurisdictions respectively encountered it. Large jurisdictions are statistically different from medium and small jurisdictions.
When elections officials were unable to process absentee ballot applications, our nationwide survey showed that some local jurisdictions contacted applicants to inform them of the status of their application using the methods listed in table 5. Specifically, on the basis of our survey of local jurisdictions, we estimate that 72 percent of all jurisdictions telephoned applicants when their absentee applications could not be processed. We found no significant difference based on the size of the jurisdiction with regard to this contact method. However, we estimate that 84 percent of medium jurisdictions and 90 percent of large jurisdictions contacted absentee applicants by U.S. mail. In contrast, 63 percent of small jurisdictions contacted absentee applicants with problem applications via U.S. mail. Small jurisdictions are statistically different from medium and large jurisdictions. We also estimate that 10 percent of local jurisdictions did not inform any applicants about the status of their application.
In an Illinois jurisdiction that we visited, elections officials told us that they would do everything possible in an attempt to obtain complete absentee applications from voters. If the absentee ballot application was incomplete, election office staff said they contacted the voter and attempted to resolve the problem in the best way practical, according to the election officials. For example, if the application was missing the voter’s signature and there was enough time, the staff mailed the application back to the voter for signature. If time was limited, the staff called the voter and asked him or her to visit the election office to sign the application. An election official in a Pennsylvania jurisdiction we visited told us that if applicants forgot to include one part of an address, such as a ZIP code, but election staff could match the rest of the address and voters’ identifying information with their registration information, the application was approved. Election officials in another Pennsylvania jurisdiction and a Nevada jurisdiction told us that the voter registration system automatically generated letters to voters when the application could not be processed for any reason.
Absentee Ballots
In our nationwide survey, we asked local jurisdictions what problems they encountered in processing submitted absentee ballots. We estimate that 61 percent of all jurisdictions reported that absentee ballots were received without the voter’s signature on the envelope. We estimate 54 percent of small jurisdictions, 76 percent of medium jurisdictions, and 90 percent of large jurisdictions encountered this problem. Jurisdictions of all sizes are statistically different from one another. Table 6 shows our estimates of the types of problems election officials encountered on absentee ballots. We estimate that 81 percent of local jurisdictions encountered at least one of the problems listed.
If the ballot was not able to be verified, election officials in some jurisdictions we visited told us that they attempted to contact the voter, time permitting, so that the affidavit envelope could be corrected and approved for counting. In 10 jurisdictions we visited, election officials said that they reviewed the affidavit envelope information to approve the ballots as they received them rather than waiting until Election Day. On the basis of our nationwide survey, we estimate that 40 percent of local jurisdictions contacted the voter by mail in an attempt to address a problem with the affidavit envelope, and 39 percent contacted the voter via telephone. Table 7 shows our estimates of the contact methods used by local jurisdictions when absentee ballots had problems that could prevent them from being approved for counting if not corrected.
Differences in whether voters were contacted by mail when there were problems with their absentee ballots were based on the size of the local elections jurisdiction. Specifically, we estimate that 31 percent of small, 61 percent of medium, and 66 percent of large jurisdictions contacted voters by mail. Small jurisdictions are statistically different from medium and large jurisdictions.
While election officials in 10 jurisdictions we visited told us that they qualified absentee ballots prior to Election Day—allowing them time to follow up with voters, in 6 local jurisdictions we visited, election officials told us that they qualified or approved absentee ballots for counting on Election Day. According to election officials in these jurisdictions, contacting the voter for corrected or complete ballot information was not a viable option because there was not enough time. These election officials stated that absentee ballots with incomplete or inaccurate information on the affidavit envelope would not be qualified or counted.
Some election officials in jurisdictions we visited told us that voters can visit local election offices and complete all or part of the absentee process in person. Some election officials told us that when voters vote in-person absentee, officials are well situated to help ensure that the application and ballot are complete and accurate before accepting them. For example, in one Connecticut jurisdiction we visited, election officials told us that they did not have incomplete absentee ballot applications from voters who visited the office in person because they reviewed the application and required the person to correct any errors before leaving.
Some Election Jurisdictions Continued to Have Concerns about Fraud and Had Procedures to Address the Potential for Fraud
In our October 2001 report on election processes, we reported that election officials for the 2000 general election had concerns with mail-in absentee voting fraud, particularly regarding absentee voters being unduly influenced or intimidated while voting. However, we also reported that election officials identified that they had established procedures to address certain potential for fraud, such as someone other than the registered voter completing the ballot or voters casting more than one ballot in the same election.
Once the voters received and voted absentee ballots in accordance with any state or local requirements (such as providing a signature or other information on the affidavit envelope), such ballots were to be returned to specified election officials. In general, local election officials or poll workers were to review the information on the affidavit envelope and subsequently verified or disqualified the ballot for counting based on compliance with these administrative requirements, according to election officials in some local jurisdictions we visited.
In our state survey, we asked states whether they specified how local jurisdictions were to determine eligibility of absentee ballots. According to our survey, 44 states and the District of Columbia reported that at the time of our survey, they specified how to determine absentee ballot eligibility, while 6 states reported that they did not. Colorado, for example, specified that the poll worker is to compare the signature of the voter on a self- affirmation envelope with a signature on file with the county clerk and recorder. Wisconsin specified, among other things, that inspectors ascertain whether a certification has been properly executed, if the applicant is a qualified elector of the ward or election district, and that the voter has not already voted in the election.
Our survey of local elections jurisdictions asked election officials if they used any of the procedures described in table 8 to ensure that the absentee voter did not vote more than once for the November 2004 general election.
These procedures could have been conducted either manually by elections officials or through system edit checks. On the basis of our survey of local jurisdictions, we estimate that 69 percent of jurisdictions checked the Election Day poll book to determine whether the voter had been sent an absentee ballot, and 68 percent of jurisdictions checked the Election Day poll book to determine whether the voter had completed an absentee ballot.
On our survey of local jurisdictions, we also asked if any of the procedures listed in table 9 were in place to ensure that the absentee ballots were actually completed by the person requesting the ballot. On the basis of our survey of local jurisdictions, we estimate that 70 percent of jurisdictions compared the absentee ballot signature with the absentee application signature.
With respect to comparing the absentee ballot application signature with the absentee ballot signature, there were differences based on the size of the jurisdiction. On the basis of our survey of local jurisdictions, we estimate that 72 percent of small, 69 percent of medium, and 40 percent of large jurisdictions compared these signatures. Large jurisdictions are significantly different from small and medium jurisdictions. One reason that large jurisdictions may differ is that they have a large volume of absentee ballots to process and it may be too resource intensive to compare signatures, among other things.
During our site visits, elections officials provided examples of the procedures they used to ensure against fraud. For example in 20 local jurisdictions that we visited, election officials said that when the ballot signature was compared with the absentee application signature, voter registration signature, or some other signature on file, the signatures had to match for the ballot to be approved and counted. In addition to matching signatures, election officials in 2 Illinois jurisdictions and 1 New Jersey jurisdiction we visited told us that during the Election Day absentee ballot qualification process, poll workers were instructed to check the poll book to determine if the voter had cast an Election Day ballot. In 1 of these Illinois jurisdictions, if poll workers found both an Election Day and absentee ballot were cast, they were instructed to void the absentee ballot so that it would not be counted. In addition to matching signatures, election officials in a Nevada jurisdiction we visited said that they used an electronic poll book to manage absentee, early, and Election Day voting to ensure that voters cast only one ballot. Once a ballot was cast in this jurisdiction, the electronic poll book was annotated and the voter was not allowed to cast another ballot.
Although election officials in the 20 jurisdictions mentioned above told us that they had procedures in place designed to help prevent fraud during the absentee voting process, election officials told us that they still suspected instances of fraud. For example, in a Colorado jurisdiction we visited, election officials told us that they referred 44 individuals who allegedly voted absentee ballots with invalid signatures to the district attorney for investigation. In a New Mexico jurisdiction that we visited, election officials told us that organized third parties went door to door and encouraged voters to apply for absentee ballots. Once these voters received their ballots, according to election officials, the third parties obtained the voters’ names (in New Mexico this is public information, according to such officials), and went to the voters’ homes and offered to assist them in voting the ballots. These election officials said that they were concerned that the latter part of this activity might be intimidating to voters and could result in voter fraud.
Uniformed and Overseas Citizens Absentee Voting
In general, the Uniformed and Overseas Citizens Absentee Voting Act requires, among other things, that states permit absent uniformed services members and U.S. citizen voters residing outside the country to register and vote absentee in elections for federal office. In addition, states also generally offer some measure of absentee voting for registered voters in their states not covered under UOCAVA. The basic process for absentee voting under UOCAVA is generally similar to that described in figure 18 for absentee voters not covered under UOCAVA in that UOCAVA voters also must establish their eligibility to vote on their absentee ballot application, and the ballot must be received by the voter’s local jurisdiction to verify it for counting. Election officials in some jurisdictions we visited told us that they allow UOCAVA voters to submit a voted ballot via facsimile—a method that might not be allowed for absentee voters not covered under UOCAVA because of concerns about maintaining ballot secrecy. In 6 jurisdictions we visited, election officials told us that they require voters under UOCAVA to submit a form acknowledging that ballot secrecy could be compromised when ballots are faxed.
One mechanism used to simplify the process for persons covered by UOCAVA to apply for an absentee ballot is the Federal Post Card Application (FPCA), which states are to use to allow such absentee voters to simultaneously register to vote and request an absentee ballot. On our survey of local jurisdictions, we asked if any problems were encountered in processing absentee applications when the applicant used the FPCA. We estimate that 39 percent of local jurisdictions received the FPCA too late to process—a problem also encountered with other state-provided absentee ballot applications. Table 10 shows our estimates of problems local jurisdictions encountered when processing Federal Post Card Applications. In addition, we asked about which problems were encountered most frequently when the FPCA was used, and an estimated 19 percent of local jurisdictions encountered the problem of receiving the FPCA too late to process more frequently than other problems.
Also, uniformed services voters and U.S. citizen voters residing outside of the country are allowed to use the Federal Write-In Absentee Ballot to vote for federal offices in general elections. This ballot may be used when such voters submit a timely application for an absentee ballot (i.e., the application must have been received by the state before the state deadline or at least 30 days prior to the general election, whichever is later) but do not receive a state absentee ballot. Some states’ absentee ballot application forms included serving in a uniformed service or residing outside the country as excuses for voting absentee. According to our state survey, 4 states (Minnesota, Missouri, Oklahoma, and Rhode Island) reported that they require attestation by a notary or witness for a voter’s signature on voted mail-in absentee ballots but do not require uniformed service voters and U.S. citizen voters outside the country to provide this on their voted ballots.
For the 2004 November general election, according to our state survey, 9 states reported having absentee ballot deadlines for voters outside the United States that were more lenient than the ballot deadlines for voters inside the United States. Table 11 lists these 9 states and the difference between the mail-in ballot deadline from inside the United States and the mail-in absentee ballot deadline from outside the United States.
HAVA amended the UOCAVA to, among other things, extend the period of time that can be covered by a single absentee ballot application—the Federal Post Card Application—by absent uniformed service voters and citizen voters residing outside the United States from the year during which the application was received to a time period covering up to the two next regularly scheduled general elections for federal office. To illustrate, if uniformed service voters or civilian voters residing outside the United States submitted a completed FPCA in July 2004, they would have been allowed to automatically receive ballots for the next two federal general elections, including those held in 2004 and 2006. (See fig. 24 for an example of the FPCA used in 2004.)
In 4 local jurisdictions we visited, election officials told us that the amendment described above may present a challenge for successfully delivering absentee ballots to the uniformed services members because they tend to move frequently. For example, in a North Carolina jurisdiction that we visited, election officials stated that addresses on file for such voters at the time of the November 2004 general election may be no longer correct and that mail sent to these voters could be returned as undeliverable. Also, in 1 jurisdiction in Georgia that we visited, election officials told us that they were concerned that many of the absentee ballots sent in subsequent general elections would be returned as undeliverable. In an Illinois jurisdiction we visited, elections officials expressed concerns about paying the postage for mail that may be undeliverable will be a challenge in future years. Also, we noted in our March 2006 report on election assistance provided to uniformed service personnel, that one of the top two reasons for disqualifying absentee ballots for UOCAVA voters was that the ballots were undeliverable.
The Federal Post Card Application was revised in October 2005, after the November 2004 general election, and now allows overseas military and civilians to designate the time period for which they want to receive absentee ballots. (See figure 24 for the revised FPCA.) Those who do not wish to receive ballots for two regularly scheduled general elections can designate that they want an absentee ballot for the next federal election only and then complete the form and request a ballot for each subsequent federal election separately. The FPCA used at the time of the November 2004 election did not allow overseas military and civilian voters to make this designation.
Even with the revised FPCA, some applications might not have this box checked, and jurisdictions could continue to have absentee ballots returned as undeliverable. In an attempt to mitigate these problems, election officials in 3 local jurisdictions we visited told us that they planned several activities in an attempt to maintain and update the addresses of uniformed services voters and civilian voters residing outside the country. In a Washington jurisdiction we visited, election officials told us that they began requesting e-mail addresses from such voters so that any problems with these applications or ballots could be corrected more efficiently. In previous elections, when e-mail addresses were not available, elections officials in this jurisdiction told us that many absentee applications and ballots sent to uniformed services members and civilian voters residing outside the United States were often returned as undeliverable. In a Georgia jurisdiction that we visited, election officials said that they planned to create a subsystem within their voter registration system. This subsystem will, according to the election officials, allow staff in the election office to produce a form letter for each uniformed services voter that will verify the voter’s current address. The election officials also told us letters will be mailed in January asking the voter to contact the jurisdiction to confirm that he or she continues to reside at the address on the letter. If the jurisdiction does not receive confirmation from the uniformed services voter, the election officials told us that they will contact the Federal Voting Assistance Program (FVAP) for assistance in locating the voter. In an Illinois jurisdiction we visited, election officials stated that they plan to canvass all uniformed services members and civilians residing outside the United States who are registered in the state in 2006. Election officials in this jurisdiction told us that they had approximately 7,400 such registered voters who completed the FPCA and that the jurisdiction planned to canvass these voters to confirm that they continued to reside at the address on the FPCA. This jurisdiction expects that as many as half of these canvass cards will be returned as undeliverable. Once the cards are returned, state law allows those voters whose canvass cards are returned to be deleted from the voter registration list, according to the election officials.
Early Voting
Early voting is another way to provide registered voters with the opportunity to cast ballots prior to Election Day. However, conducting early voting is generally more complicated for election officials than conducting Election Day voting. In the jurisdictions we visited in 7 states with early voting, election officials described early voting as generally in- person voting at one or more designated polling locations usually different from polling locations used at the precinct level on Election Day. The voting may or may not be at the election registrar’s office. Early voting is distinct from in-person absentee voting in that in-person absentee voters usually apply for an absentee ballot at the registrar’s office and vote at the registrar’s office at that time. Also, early voting usually does not require an excuse to vote, which some states require for absentee voting, and in the jurisdictions we visited in 7 states with early voting, it was usually offered for a shorter period of time than absentee voting. The time frame allowed for absentee voting was almost always at least twice as long as for early voting. For example, election officials in the Colorado jurisdictions we visited said that they allow 30 days for absentee voting and 15 days for early voting. In the jurisdictions we visited in 7 states with early voting, election officials said early voting is similar to Election Day voting in that the voter generally votes using the same voting method as on Election Day. However they added that it differs from Election Day voting in that voters can vote at any early voting polling location because all early voting locations have access to a list of all registered voters for the jurisdiction (not just precinct specific) and can provide voters with appropriate ballots that include federal, state, and precinct-specific races.
Proponents argue that early voting is convenient for voters and saves jurisdictions money by reducing the number of polling places and poll workers needed on Election Day, and also provides the voter with more opportunity to vote. Opponents counter that those who vote early do so with less information than Election Day voters, and there is no proof that early voting increases voter turnout. Statistics on voter turnout for early voting can be difficult to come by, partly because some states and localities combine early and absentee voting numbers. Nevertheless, early voting in certain jurisdictions appears to be popular with voters and on the rise. In a New Mexico jurisdiction, election officials told us that early voting accounted for about 34 percent of the ballots cast in that jurisdiction. In North Carolina and Colorado elections jurisdictions we visited, election officials said that early voters cast about 35 and 38 percent of the jurisdictions’ total votes in the November 2004 election, respectively. In a Nevada jurisdiction we visited, election officials told us that the percentage of voters who voted early steadily increased over time. The officials said that in 1996, about 17 percent of voters voted early; in 2000, 43 percent voted early; and in the November 2004 general election, about 50 percent (271,500) of their voters voted early.
Our prior work on the 2000 general election did not identify states that offered early voting as we have defined it. Rather, we reported on absentee and early voting together. Thus, we are unable to identify the change in the number of states that offered early voting for the November 2000 general election and the November 2004 general election. We describe the availability of early voting throughout the nation and the challenges and issues that election officials encountered in the November 2004 general election as they conducted early voting in selected jurisdictions. Many early polling locations in Florida and elsewhere received media publicity about voters standing in long lines and waiting for long periods of time to vote early. In half of the local election jurisdictions we visited, election officials described encountering challenges that included long lines, and some identified challenges dealing with disruptive third-party activities at the polls.
Early Voting Appears to Be Gaining in Popularity
For the November 2004 general election, in our state survey, 24 states and the District of Columbia reported offering early voting. In addition, 2 states—Illinois and Maine—reported, in our state survey, that they had enacted legislation or taken executive action since November 2004 to provide for early voting in their states. Another 7 states reported that with respect to early voting, they (1) had legislation pending, (2) considered legislation in legislative session that was not enacted, or (3) had an executive action that was pending or was considered. Figure 25 shows where early voting was provided for the November 2004 general election.
On the basis of our survey of local jurisdictions, we estimate 23 percent of jurisdictions were in states that offered early voting. Furthermore, we estimate that 16 percent of small jurisdictions, 40 percent of medium jurisdictions, and 52 percent of large jurisdictions were in states that offered early voting. Small jurisdictions are statistically different from both medium and large jurisdictions.
The Number of Days and Hours to Conduct Early Voting
The number of days that early voting was available in these 24 states and the District of Columbia varied. In some cases, early voting was allowed no sooner than a day or a few days prior to Election Day, while in other cases voters had nearly a month or longer to cast an early ballot. Table 12 shows the range of days for early voting among the states and the District of Columbia that reported providing early voting for the November 2004 election.
On the basis of our survey of local jurisdictions, we estimate that 75 percent of the jurisdictions that offered early voting offered it for 2 or more weeks prior to Election Day. Figure 26 shows the estimated percentage of local jurisdictions that offered early voting for various time periods.
Among the local jurisdictions that we visited in the 7 states that provided early voting, we found that the shortest time frame allowed for early voting was in Georgia, which had 5 days, and the longest time frame allowed for early voting was in New Mexico, with 28 days. Furthermore, in the local jurisdictions we visited in the 7 states that provided early voting, election officials supplied information on early voting hours that ranged from weekday business hours to those that included weekends and evenings. For more details on the characteristics of early voting sites we visited, see appendix VII.
During the course of our work, a limited review of state statutes showed, for example, that Nevada statute requires early voting polling places be open Monday through Friday, 8 a.m. to 6 p.m., during the first week of early voting and possibly to 8 p.m. during the second week, dependent upon the county clerk’s discretion. In addition, under the Nevada provision, polling places must be open on any Saturdays within the early voting period from 10 a.m. to 6 p.m., and may be open on Sundays within the early voting period dependent upon the county clerk’s discretion. Under these provisions, the early voting period is to begin the third Saturday prior to an election and end the Friday before Election Day. Similarly, Oklahoma statute provides that voters be able to cast early ballots from 8 a.m. to 6 p.m. on the Friday and Monday immediately before Election Day, and from 8 a.m. to 1 p.m. on the Saturday immediately before Election Day. Some states’ statutes are less prescriptive, such as those of Florida, where the statute specifies that early voting should be provided for at least 8 hours per weekday during the early voting period, and at least 8 hours in the aggregate for each weekend during the early voting period, without specifying the specific hours such voting is to be offered. Other states, such as Kansas, however, do not specify in statute the hours for voting early. Kansas statute, in general, leaves it to county election officials to establish the times for voting early. Officials at some local jurisdictions we visited said that their hours of operations were set based on the hours of the election office or by the hours of the facility that was hosting early voting such as a shopping mall or a library.
According to our survey of local jurisdictions, an estimated 34 percent of local jurisdictions that provided early voting for the November 2004 general election offered early voting during regular business hours (e.g., from 8 a.m. until 4 p.m.) on weekdays, and 16 percent offered early voting during regular business hours on weekdays and during other hours. Other hours included weekday evenings (after 4 p.m. or 5 p.m. until 7 p.m. or 9 p.m.) and Saturdays (all day) and Sundays (any hours) for about 2 percent of the jurisdictions, respectively.
Determining Number and Types of Early Voting Locations
As with early voting time frames, some states reported having requirements for local election jurisdictions regarding the number of early voting locations. In our state survey, 17 of the 25 entities (including 24 states and the District of Columbia) that reported offering early voting for the November 2004 general election also reported having requirements for local jurisdictions regarding the number or distribution of early voting locations. Kansas election standards, for example, provide for one such voting location per county unless a county’s population exceeds 250,000, in which case the election officer may designate additional sites as needed to accommodate voters.
Election officials in 1 jurisdiction we visited said that state statute determined the number of locations, while election officials in 13 other jurisdictions told us they decided the number of locations. For example, New Mexico’s early voting statutory provisions specifically require that certain counties with more than 200,000 registered voters establish not fewer than 12 voting locations each. During our site visits, we asked jurisdictions how they determined the number of early voting locations. In a Nevada jurisdiction that we visited, election officials said that the number of locations was determined by the availability of resources such as fiscal and manpower needs. In a Colorado jurisdiction we visited, an election official said he would like to have had more early voting locations but could not because the jurisdiction did not have the funds to pay for additional costs associated with additional sites, such as the cost for computer connections needed for electronic voter registration list capability. In a North Carolina jurisdiction we visited, election officials said that they had only one early voting location because they did not have election staff that would be needed to manage another site.
Conducting Early Voting
In many ways, early voting is conducted in a manner substantially similar to Election Day voting in that polling locations are obtained, workers are recruited to staff the sites for each day polling locations are to be open, and voting machines and supplies are delivered to the polling locations. However, as described by election officials in jurisdictions we visited that had early voting, early voting differs from Election Day voting in that staff are generally required to perform their voting day-related duties for more than 1 day, and staff generally do not use poll books to identify eligible voters and check them in. Instead, as described by some of these jurisdictions, early voting staff usually access the jurisdiction’s voter registration list to identify eligible voters and to indicate the voter voted early to preclude voting on Election Day or by absentee ballot. Also, election officials told us that, generally, staff must possess some computer skills and need to be trained in using the jurisdiction’s voter registration system. Furthermore, staff must be aware that ballots are specific to the voter’s precinct.
In our nationwide survey of local election jurisdictions, we asked about the type of staff who worked at early voting polling places. According to our survey for the November 2004 general election, local election jurisdictions relied on permanent election jurisdiction staff most often to work at early voting polling locations. As table 13 shows, we estimate 30 percent of local jurisdictions offered early voting using only permanent election jurisdiction staff to work at the early voting polling places; we estimate that 14 percent of local jurisdictions used poll workers exclusively; and we estimate 14 percent used other staff (e.g., county or city employees).
Election officials at 11 jurisdictions we visited emphasized the importance of staffing early voting locations with experienced staff such as election office staff or experienced and seasoned poll workers. Even with experienced staff working early voting locations, election officials at local jurisdictions we visited mentioned that staff were required to take training and were provided tools to help them perform their duties.
In our nationwide survey, we asked local jurisdictions that provided early voting about the ways that staff were trained for early voting. As shown in table 14, the majority of jurisdictions used methods, such as providing a checklist of procedures, written guidance for self-study or reference, and quick reference materials for troubleshooting, to train early voting staff.
Local jurisdictions could do more than one of the above ways to train early voting staff. On the basis of our local survey, we estimate that 14 percent of local jurisdictions used classroom training, written guidance for self-study or reference, a checklist of procedures, and quick reference materials for troubleshooting to train early voting staff.
When asked about what worked particularly well during early voting, election officials in 1 jurisdiction we visited in Colorado said that that they provided 8 hours of training and had on-site supervision that they thought contributed to a successful early voting experience. The election officials also said they used a feature in their electronic poll book system to track the number of ballots used at each site to determine whether sites had adequate inventories of ballots. The program for the poll book system had an alarm that went off if any site was running low on ballots, according to these election officials. Two other jurisdictions we visited in Kansas and Florida noted the importance of having experienced staff for early voting, with the election officials in 1 Kansas jurisdiction saying that designating a group of workers to work on early voting helped the process run effectively and the election officials in 1 Florida jurisdiction saying that having the supervisor of elections office staff on site to support early voting helped make the process work well.
Some Local Jurisdictions We Visited Encountered Long lines Resulting from Larger than Expected Early Voter Turnout
When asked about challenges with early voting faced during the November 2004 general election, in half of the local jurisdictions we visited that offered early voting election officials identified long lines as a major challenge. Election officials at 5 local jurisdictions we visited said that they had not anticipated the large number of voters who had turned out to vote early. Officials attributed challenges handling the large number of voters and resulting long lines to problems with technology, people, and processes. Election officials at local jurisdictions we visited made the following comments: Election officials in one Florida jurisdiction we visited said that their jurisdiction faced more early voters than anticipated and this fact, coupled with slowness in determining voter eligibility, resulted in long lines. They said that on the first day of early voting, staff was unable to access the voter registration list because laptops were not functioning properly. To address the problem, a worker at the early voting location paired with another worker, who called the supervisor of elections office to obtain voter registration information and provide information on the voter seeking to vote early.
An election official in another Florida jurisdiction said that while state law provides for early voting in the main office of the supervisor of elections, other locations may be used only under certain conditions. For example, in order for a branch office to be used, it must be a full-service facility of the supervisor and must have been designated as such at least 1 year prior to the election. In addition, a city hall or public library may be designated as an additional early voting location, but only if the sites are located so as to provide all voters in the county an equal opportunity to cast a ballot, insofar as is practicable. The official thought more flexibility was needed to allow him to either have more early voting locations or use other types of facilities, such as a local community center, that could accommodate more voters.
An election official in a Nevada jurisdiction we visited said that the jurisdiction’s process flow was inadequate to handle the large turnout for early voting. The election official said that the jurisdiction had not planned sufficiently to manage the large turnout for early voting and did not have enough staff to process voters. The election official said that in the future, he will hire temporary workers and will assign one person to be in charge of each process (e.g., checking in voters, activating the DRE machine, etc.) In addition, the election official said that, in hindsight, he made a questionable decision to close all but two early voting locations for the last day of early voting. The closing of all but two locations on the last day of early voting coincided with a state holiday so children were out of school. The decision to close all but two locations caused 3 to 3½ hours of wait time, with parents waiting in line with children. The election official said he has set a goal for the future that no wait time should be longer than half an hour.
To address challenges related to heavy early voter turnout, election officials in 1 Nevada jurisdiction said they have gradually added new early voting locations each year to keep up with the increasing number of people who vote early. In a New Mexico jurisdiction we visited, election officials said that they used a smaller ratio of voters to machines than required by state statute. According to these election officials, the state required at least one machine for every 600 voters, and during early voting, the election officials said they used one machine for every 400 voters registered in the jurisdiction.
In 1 Colorado jurisdiction we visited, election officials said that they addressed the challenge of long lines by having greeters inform voters about the line and make sure the voters had required identification with them. They said they provided equipment demonstrations and passed out sample ballots so people in line could consider their choices, if they had not already done so. They also said they offered people in line the option of absentee ballot applications.
Some Jurisdictions We Visited Encountered Challenges Dealing with Disruptive Third-Party Activities
In 3 jurisdictions we visited, election officials stated that they encountered challenges dealing with disruptive third-party activities at early voting sites. In particular, concerns were raised about various groups attempting to campaign or influence voters while the early voters waited in line. State restrictions on various activities in or around polling places on Election Day include prohibitions relating to, for example, the circulation of petitions within a certain distance of a polling place, the distribution of campaign literature within a certain distance of the polls, the conduction of an exit or public opinion poll within a certain distance of the polls, and disorderly conduct or violence or threats of violence that impede or interfere with an election. Election officials in 1 jurisdiction we visited stated that campaign activities too close to people waiting in line were a concern to the extent that police were called in to monitor the situation at one early voting location. Election officials in a Florida jurisdiction we visited said that they were concerned about solicitors, both candidates and poll watchers, approaching people waiting in line to vote early and offering them water or assistance in voting. While Florida’s statutory provisions in place for the November 2004 general election contained restrictions of various activities in or around polling places on Election Day, such provisions did not explicitly address early voting sites. Amendments to these provisions, effective January 2006, among other things, explicitly applied certain restrictions of activities in or around polling places to early voting areas. With respect to poll watchers, these amendments also prohibit their interaction with voters to go along with the pre-existing prohibition on obstructing the orderly conduct of any election by poll watchers.
Concluding Observations
Making voting easier prior to Election Day has advantages for voters and election officials, but also presents challenges for elections officials. Many states and local jurisdictions appear to be moving in the direction of enabling voters to vote before Election Day by eliminating restrictions on who can vote absentee and providing for early voting. Many states allowed voters to use e-mail and facsimiles to request an absentee ballot application and, in some cases, to return applications. To the extent that large numbers of voters do vote absentee or early, it can reduce lines at the polling place on Election Day and, where permitted by state law, ease the time pressures of vote counting by allowing election officials to count absentee and early votes prior to Election Day.
However, there are also challenges for election officials. An estimated 55 percent of jurisdictions received absentee ballot applications too late to process, and an estimated 77 percent received ballots too late. Although we do not know the extent of these problems in terms of the number of applications and ballots that could not be processed, the estimated number of jurisdictions encountering these problems may be of some concern to state and local election officials. Absentee application deadlines close to Election Day provide citizens increased time to apply to vote absentee. However, the short time period between when applications are received and Election Day may make it difficult for election officials to ensure that eligible voters receive absentee ballots in time to vote and return them before the deadline for receipt at election offices.
Voter errors on their absentee applications and ballots also create processing problems for election officials. These include missing or illegible signatures, missing or inadequate voting residence addresses, and missing or incomplete witness information for a voter’s signature or other information. In addition, mail-in absentee ballots are considered by some to be particularly susceptible to fraud. This could include such activities as casting more than one ballot in the same election or someone other than the registered voter completing the ballot. Despite efforts to guard against such activities, election officials in some of the jurisdictions we visited expressed some concerns, particularly regarding absentee voters being unduly influenced or intimated by third parties who went to voters’ homes and offered to assist them in voting their ballots. Some election officials expressed similar concerns about the influence of third parties on early voters waiting in line who were approached by candidates and poll watchers. After this happened in Florida in November 2004, the state amended its election provisions to prohibit such activity with respect to early voters.
Getting absentee ballots to uniformed service personnel and overseas citizens is a continuing challenge. UOCAVA permitted such voters to request an absentee ballot for the upcoming election, and HAVA extended the covered period to include up to two subsequent general elections for federal office. Because the duty station of uniformed service personnel may change during the period covered by the absentee ballot requests, election officials in jurisdictions we visited were concerned that they have some means of knowing the current mailing address. Some jurisdictions are taking action to ensure that they have the correct address for sending absentee ballots for the November 2006 election, such as requesting e-mail addresses that can be used to obtain the most current address information prior to mailing the absentee ballot. To the extent there are problems identifying the correct address, uniformed service personnel and overseas civilians may either not receive an absentee ballot or receive it too late to return it by the deadline required for it to be counted.
Conducting Elections
Whether voters are able to successfully vote on Election Day depends a great deal on the planning and preparation that occur prior to the election. Election officials carry out numerous activities—including recruiting and training poll workers; selecting and setting up polling places; designing and producing ballots; educating voters; and allocating voting equipment, ballots, and other supplies to polling places—to help ensure that all eligible voters are able to cast a ballot on Election Day with minimal problems. In our October 2001 comprehensive report on election processes nationwide we described these activities as well as problems encountered in administering the November 2000 general election. Since then, federal and state actions have been taken to help address many of the challenges encountered in conducting the November 2000 general election. However, reports after the November 2004 general election highlighted instances of unprepared poll workers, confusion about identification requirements, long lines at the polls, and shortages of voting equipment and ballots that voters reportedly encountered on Election Day. This chapter describes changes and challenges—both continuing and new—that election officials encountered in preparing for and conducting the November 2004 general election.
Overview
States and local jurisdictions have reported making changes since the November 2000 general election as a result of HAVA provisions and other state actions to improve the administration of elections in the United States. In addition to establishing a commission—the U.S. Election Assistance Commission—with wide-ranging duties that include providing information and assistance to states and local jurisdictions—HAVA also established requirements with respect to elections for federal office for, among other things, certain voters who register by mail to provide identification prior to voting; mandated that voting systems accessible to individuals with disabilities be located at each polling place; and required voter information to be posted at polling places on Election Day. HAVA also authorized the appropriation of federal funds for payments to states to implement these provisions and make other improvements to election administration. Since the November 2000 general election, some states have also reported making changes to their identification requirements for all voters.
Election officials reported encountering many of the same challenges preparing for and conducting the November 2004 general election as they did in 2000, including recruiting and training an adequate supply of skilled poll workers, locating a sufficient number of polling places that met requirements, designing ballots that were clear to voters when there were many candidates or issues (e.g., propositions, questions, or referenda), having long lines at polling places, and handling the large volume of telephone calls received from voters and poll workers on Election Day. Election officials in some of the jurisdictions we visited also reported encountering new challenges not identified to us in the 2000 general election with third-party (e.g., poll watchers, observers, or electioneers) activities at polling places on Election Day. On the basis of our survey of a representative sample of local election jurisdictions nationwide and our visits to 28 local jurisdictions, the extent to which jurisdictions encountered many of these continuing challenges varied by the size of election jurisdiction. Large and medium jurisdictions—those jurisdictions with over 10,000 people—generally encountered more challenges than small jurisdictions. In most results from our nationwide survey where there are statistical differences between the size categories of jurisdictions, large jurisdictions are statistically different from small jurisdictions.
HAVA Made Changes Intended to Improve Election Administration
HAVA established EAC to provide voluntary guidance and assistance with election administration, for example, by providing information on election practices to states and local jurisdictions and administering programs that provide federal funds for states to make improvements to some aspects of election administration. HAVA also added a new requirement for states to in turn require certain first-time voters who register by mail who have not previously voted in a federal election in the state to provide identification prior to voting, and jurisdictions reported taking steps to implement this requirement and inform voters about it. In addition, HAVA includes provisions to facilitate voting for individuals with disabilities, such as requirements for accessible voting systems in elections for federal office. HAVA established voter information requirements at polling places on the day of election for federal office and authorized the appropriation of funding for payments to states to expand voter education efforts.
HAVA Established EAC to Provide Guidance and Assistance with Election Administration
HAVA established EAC, in part, to assist in the administration of federal elections by serving as a national clearinghouse for information and providing guidance and outreach to states and local officials. In our October 2001 report on election processes, we estimated that on the basis of our survey of local election jurisdictions in 2001, 40 percent of local election jurisdictions nationwide were supportive of federal development of voluntary or mandatory standards for election administration similar to the voluntary standards available for election equipment. We also reported in 2001 that some election officials believed that greater sharing of information on best practices and systematic collection of information could help improve election administration across and within states. To assist election officials, since its establishment, EAC has produced two clearinghouse reports, one of which covers election administration. EAC released a Best Practices Toolkit on Election Administration on August 9, 2004, to offer guidance to election officials before the November 2004 general election. The document is a compilation of practices used by election officials that covers topics such as voter outreach, poll workers, polling places, and election operations. Of note, this compilation provided election officials with a checklist for HAVA implementation that covers identification for new voters, provisional voting, complaint procedures, and access for individuals with disabilities. EAC has made this guidance available to states and local jurisdictions via its Web site and engaged in public hearings and outreach efforts to inform the election community about the resource tool.
EAC also administers programs that provide federal funds for states under HAVA to make improvements to aspects of election administration, such as implementing certain programs to encourage youth to become involved in elections; training election officials and poll workers; and establishing toll- free telephone hotlines that voters may use to, among other things, obtain general election information. The results of our state survey of election officials show that as of August 1, 2005, most states reported spending or obligating HAVA funding for a variety of activities related to improving election administration. For example, 45 states and the District of Columbia reported spending or obligating HAVA funding for training election officials, and 32 states and the District of Columbia reported spending or obligating funding to establish toll-free telephone hotlines.
HAVA Added a New Requirement for Certain Voters, and Jurisdictions Reported Taking Steps to Inform Voters
As discussed in chapter 2, under HAVA, states are to require certain first- time voters who registered to vote by mail to provide identification prior to voting. Voters who are subject to this provision are those individuals who registered to vote in a jurisdiction by mail and have not previously voted in a federal election in the state, or those who have not voted in a federal election in a jurisdiction which is located in a state that has not yet established a computerized voter registration list, as required by HAVA. When voting in person, these individuals must (if not already provided with their mailed application) present a current and valid photo identification, or a copy of a current utility bill, bank statement, government check, paycheck, or other government document that shows the name and address of the voter. Under HAVA, voters at the polls who have not met this identification requirement may cast a vote under HAVA’s provisional voting provisions. Additional information on provisional voting processes and challenges is presented in chapter 5.
Election officials in 21 of the 28 jurisdictions we visited reported encountering no problems implementing the HAVA first-time voter ID requirement, and officials in some of these jurisdictions provided reasons why there were no problems. For example, election officials in 2 jurisdictions in Colorado told us that they did not encounter implementation problems because all voters, under state requirements, were required to show identification. Election officials in some other jurisdictions we visited reported that they took steps to inform voters of the new HAVA ID requirement for such voters registering by mail. For example, election officials in a jurisdiction in Ohio reported that they contacted about 300 prospective voters twice, either by phone or by letter, prior to the election to inform them that that they needed to show identification. Figure 27 illustrates a poster used in a jurisdiction we visited to inform prospective voters about the new identification requirements.
HAVA Includes Provisions to Facilitate Voting for Individuals with Disabilities
HAVA contains provisions to help facilitate voting for individuals with disabilities, including requirements for the accessibility of voting systems used in elections for federal office, effective January 1, 2006. HAVA also authorized the appropriation of funding for payments to states to improve the accessibility of polling places. In October 2001, we issued a report that examined state and local provisions and practices for voting accessibility, both at polling places and with respect to alternative voting methods and accommodations. We reported in 2001 that all states and the District of Columbia had laws or other provisions concerning voting access for individuals with disabilities, but the extent and manner in which these provisions addressed accessibility varied from state to state. In addition, in our 2001 report we noted that various features of the polling places we visited had the potential to prove challenging for voters with certain types of disabilities. On the basis of our observations on Election Day 2000, we also estimated that most polling places in the contiguous United States had one or more physical features, such as a lack of accessible parking or barriers en route to the voting room, that had the potential to pose challenges for voters with disabilities. Results from our 2005 surveys show that at the time of the November 2004 general election, many states and local jurisdictions had taken steps to meet HAVA’s requirement for accessible voting systems, as well as making other changes to help improve the accessibility of voting for individuals with disabilities.
HAVA Requirements for Accessible Voting Systems
HAVA requires that, effective January 1, 2006, each voting system used in a federal election must meet certain accessibility requirements. These voting systems are required to provide individuals with disabilities with the same opportunity for access and participation (including independence and privacy) as for other voters. These HAVA requirements specify that such accessibility include nonvisual accessibility for voters who are blind or visually impaired. HAVA provides for the use of at least one DRE or other voting system equipped for voters with disabilities at each polling place. The results of our state survey show that as of August 1, 2005, 41 states and the District of Columbia reported having laws (or executive action) in place to provide each polling location with at least one DRE voting system or other voting system equipped for individuals with disabilities by January 1, 2006. Of the remaining 9 states, 5 reported having plans to promulgate laws or executive action to provide each polling location with at least one DRE voting system or other voting system equipped for individuals with disabilities, and 4 reported that they did not plan to provide such equipment or were uncertain about their plans.
Some local election jurisdictions provided accessible voting machines at polling places for the November 2004 general election. On the basis of our survey of a representative sample of local election jurisdictions nationwide, we estimate that 29 percent of all jurisdictions provided accessible voting machines at each polling place in the November 2004 general election. Further, more large and medium jurisdictions provided accessible voting machines than small jurisdictions. We estimate that 39 percent of large jurisdictions, 38 percent of medium jurisdictions, and 25 percent of small jurisdictions provided accessible voting machines at each polling place. The differences between both large and medium jurisdictions and small jurisdictions are statistically significant. Election officials from some small jurisdictions who provided written comments on our survey questionnaire expressed concerns about how this requirement would be implemented in their jurisdictions and whether electronic voting machines were the best alternative. For example, one respondent wrote: “We in a small town … and use paper ballots and that has worked very well in the past and I believe will work very well in the future. Voting machines should be decided on for much larger areas with a lot more than our 367 population with 150 voters.” Another wrote: “We are a small rural township with about 160 voters. Our 2004 election went well; as usual, we had no problems. We use paper ballots. We have some concerns with the implementation of HAVA. We are being forced to use expensive voting machines that will require expensive programming for every election. We are concerned about these costs.… If our limited budget can’t afford those expensive machines and programming, we may need to combine our township polling place with another township—maybe several townships. The additional driving to a different polling place miles away will discourage voters from voting—particularly our elderly residents. So these efforts (HAVA) to help voters will actually hinder voters.”
In an effort to address these issues, Vermont, which has about 250 small and medium election jurisdictions that use paper and optical scan ballots, took an alternative approach to meeting the HAVA requirement, according to an election official. Instead of providing one DRE machine for each of its 280 polling places, Vermont plans to implement a secure vote-by-phone system that allows voters to mark a paper ballot, in private, using a regular telephone at the polling place. According to the Vermont’s Secretary of State’s Office, a poll worker uses a designated phone at the polling place to call a computer system located at a secure location and access the appropriate ballot for the voter. The computer will only permit access to the system from phone numbers that have been entered into the system prior to the election, and only after the proper poll worker and ballot access numbers have been entered. The phone system reads the ballot to the voter, and after the voter makes selections using the telephone key pad, the system prints out a paper ballot that is automatically scanned by the system and played back to the voter for verification. The voter may then decide to cast the ballot or discard it and revote. The system does not use the Internet or other data network, and it produces a voter-verified paper ballot for every vote cast. In addition, according to an election official, voters are able to dial into a toll-free telephone number for at least 15 days prior to an election to listen to, preview, and practice with the actual ballot they will vote on Election Day. This is a way of providing a sample ballot to voters, as well as providing an opportunity for voters to become familiar with using the telephone system.
Provisions for Polling Place Accessibility and Other Accommodations
For our October 2001 report on voters with disabilities, our analysis included a review of state statutes, regulations, and written policies pertaining to voting accessibility for all 50 states and the District of Columbia, as well as policies and guidelines for a statistical sample of 100 counties. As part of our 2005 surveys, we asked states to report on provisions concerning accessibility and local jurisdictions whether they provided accommodations or alternative voting methods for individuals with disabilities in the November 2004 general election. While the methodologies in the 2001 report and this report differ, results of our 2005 surveys show that states and local jurisdictions have taken actions to help improve voting for individuals with disabilities by, for example, using HAVA funds, taking steps to help ensure accessibility of polling places, and providing alternative voting methods or accommodations.
Most states reported that they had spent or obligated HAVA funding to improve the accessibility of polling places, including providing physical or nonvisual access. The results of our state survey of election officials show that as of August 1, 2005, 46 states and the District of Columbia reported spending or obligating HAVA funding for this purpose. For instance, election officials in a local jurisdiction we visited in Colorado told us they had used HAVA funds to improve the accessibility of polling places by obtaining input from the disability community, surveying the accessibility of their polling places, and reviewing the DRE audio ballot with representatives of the blind community.
States and local jurisdictions reported taking a variety of actions designed to help ensure that polling places are accessible for voters with disabilities, including specifying guidelines or requirements, inspecting polling places to assess accessibility, and reporting by local jurisdictions on polling place accessibility to the state. In our October 2001 report on voters with disabilities, we noted that state involvement in ensuring polling places are accessible and the amount of assistance provided to local jurisdictions could vary widely. For example, in 2001 we reported that 29 states had provisions requiring inspections of polling places, and 20 states had provisions requiring reporting by local jurisdictions. According to our 2005 state survey, 43 states and the District of Columbia reported requiring or allowing inspections of polling places, and 39 states and the District of Columbia reported that they required or allowed reporting by local jurisdictions. From our local jurisdiction survey, we estimate that 83 percent of jurisdictions nationwide used state provisions to determine the accessibility requirements for polling places. During our site visits to local jurisdictions, we asked election officials to describe the steps they took to ensure that polling places were accessible. Election officials in many of the jurisdictions we visited told us that either local or state officials inspected each polling location in their jurisdiction using a checklist based on state or federal guidelines. For example, election officials in the 4 jurisdictions we visited in Georgia and New Hampshire told us that state inspectors conducted a survey of all polling locations. Election officials in the 2 jurisdictions we visited in Florida told us that they inspected all polling places using a survey developed by the state. Appendix IX presents additional information about state provisions for alternative voting methods and accommodations for the November 2000 and 2004 general elections.
In addition to making efforts to ensure that polling places are accessible, some local jurisdictions provided alternative voting methods pursuant to state provisions (such as absentee voting) or accommodations at polling places (such as audio or visual aids) that could facilitate voting for individuals with disabilities. Table 15 presents results from our survey of local election jurisdictions about the estimated percentages of jurisdictions that provided alternative voting methods or accommodations to voters for the November 2004 general election.
HAVA Helped to Expand State and Local Jurisdictions’ Voter Education Efforts
Election officials’ efforts to educate citizens can help minimize problems that could affect citizens’ ability to successfully vote on Election Day. Informing the public about key aspects of elections includes communicating how to register, what opportunities exist to vote prior to Election Day, where to vote on Election Day, and how to cast a ballot. This information can be distributed through a number of different media, including signs or posters, television, radio, publications, in-person demonstrations, and the Internet. In our October 2001 report on election processes, we stated that lack of funds was the primary challenge cited by election officials in expanding voter education efforts. From our 2001 survey of local election jurisdictions, we estimated that over a third of jurisdictions nationwide believed that the federal government should provide monetary assistance for voter education programs. Since the November 2000 election, changes in voter education efforts include HAVA requiring certain information to be posted at polling places and authorizing the payment of federal funds to states to use for educating voters, and states and local jurisdictions reported expansion of voter education efforts.
HAVA Required Voter Information at Polling Places and Provided for Funding to States
To help improve voters’ knowledge about voting rights and procedures, HAVA required election officials to post voting information at each polling place on the day of each election for federal office and authorized the payment of funding to states for such purposes. This required voting information includes a sample ballot, polling place hours, instructions on how to vote, first-time mail-in instructions, and general information on federal and state voting rights laws and laws prohibiting fraud and misrepresentation. Results of our state survey of election officials show that as of August 1, 2005, 40 states and the District of Columbia reported spending or obligating HAVA funding for voting information, such as sample ballots and voter instructions, to be posted at polling places. Election officials in all 28 jurisdictions we visited told us they posted a variety of voter information signs at polling places on Election Day 2004. Figure 28 illustrates examples of some of these signs.
HAVA also authorized the payment of funding for voter education programs in general, and according to our state survey, as of August 1, 2005, 44 states and the District of Columbia reported spending or obligating HAVA funding for these programs. For example, according to its HAVA plan, Florida required local election officials to provide descriptions of proposed voter education efforts, such as using print, radio, or television to advertise to voters, in order to receive state HAVA funds in fiscal years 2003 and 2004. Election officials in 2 jurisdictions we visited in Florida provided us information about voter education campaigns that they implemented. Election officials in 1 of these jurisdictions reported designing election advertisements to be shown on movie theater screens in the beginning of the summer season; election officials in the other jurisdiction told us they implemented a “Get Out the Vote” television advertising campaign with a cable company intended to reach hundreds of thousands of households during the weeks prior to the November 2004 general election.
Variety of Local Election Jurisdictions’ Actions to Educate Prospective Voters
More local election jurisdictions appear to have taken steps to educate prospective voters prior to Election Day in 2004 than in 2000, and on the basis of our 2005 survey of local jurisdictions, more large and medium jurisdictions took these steps than small jurisdictions. In our October 2001 report on election processes, we noted that local election jurisdictions provided a range of information to prospective voters through multiple media. For example, on the basis of our 2001 survey of local jurisdictions, we reported that between 18 and 20 percent of local jurisdictions nationwide indicated they placed public service ads on local media, performed community outreach programs, or put some voter information on the Internet. On the basis of our 2005 survey, we estimate that more jurisdictions provided these measures. For instance, we estimate that 49 percent of all jurisdictions placed public service ads on local media, and 43 percent of all jurisdictions listed polling places on the Internet. However, increases in the overall estimates from the 2001 and 2005 surveys are, in part, likely due to differences in the sample designs of the two surveys and how local election jurisdictions that were minor civil divisions (i.e., subcounty units of government) were selected. Because of these sample design differences, comparing only election jurisdictions that are counties provides a stronger basis for making direct comparisons between the two surveys’ results. These county comparisons show increases as well. For instance, for the November 2000 election, we estimate that 21 percent of county election jurisdictions placed public service ads on local media, while for the November 2004 election, we estimate that 61 percent of county election jurisdictions placed such ads.
In our 2005 survey, we also looked at whether there were differences between the size categories of jurisdictions, and generally, more large jurisdictions provided voter education prior to Election Day than medium and small jurisdictions. For instance, we estimate that 88 percent of large jurisdictions, 46 percent of medium jurisdictions, and 38 percent of small jurisdictions listed polling place locations on Internet Web sites. Table 16 presents estimated percentages of jurisdictions that provided various voter education steps prior to the November 2004 general election.
Large jurisdictions may have provided voter education through multiple media in order to reach a broader audience of prospective voters. For instance, Web sites were used to provide information to voters by nearly all large jurisdictions. On the basis of our 2005 survey of local jurisdictions, we estimate that 93 percent of large jurisdictions, 60 percent of medium jurisdictions, and 39 percent of small jurisdictions had a Web site. The differences between all size categories are statistically significant. During our site visits, election officials in large jurisdictions described a variety of voter education mechanisms used to reach a number of prospective voters. For example, election officials in a large Nevada jurisdiction we visited told us that their office partnered with power, water, and cable companies to provide voter registration information in subscribers’ billing statements. Election officials in other jurisdictions we visited reported using a variety of other media to encourage participation or provide information to a broad audience of prospective voters. For example, figure 29 illustrates a billboard, cab-top sign, and milk carton used in local jurisdictions we visited.
Some States Reported Changing Identification Requirements for All Prospective Voters
Whether or not all voters should be required to show identification prior to voting is an issue that has received attention in the media and reports since the November 2000 general election. Recent state initiatives, such as those in Georgia, that in general require voters to provide photo identification, exemplify the challenge that exists throughout the election process in maintaining balance between ensuring access to all prospective voters and ensuring that only eligible citizens are permitted to cast a ballot on Election Day. Results of our state and local jurisdiction surveys show that while providing identification could be one of several methods used to verify identity, it was not required by the majority of states, nor was it the only way used to verify voters’ identities in the majority of local jurisdictions for the November 2004 election. Voter identification requirements vary in flexibility, in the number and type of acceptable identification allowed, and in the alternatives available for verifying identity if a voter does not have an acceptable form of identification.
Results of our state survey of election officials show that for the November 2004 general election 28 states reported that they did not require all prospective voters to provide identification prior to voting in person. Twenty-one states reported that they required all voters to provide identification prior to voting on Election Day 2004. However, 14 of these states reported allowing prospective voters without the required identification an alternative. In 9 of these 14 states the alternative involved voting a regular ballot in conjunction with, for example, the voter providing some type of affirmation as to his or her identity. For example, Connecticut, in general, allowed voters who were unable to provide required identification to swear on a form provided by the Secretary of State’s Office that they are the elector whose name appears on the official registration list. Kentucky allowed an election officer to confirm the identity of a prospective voter by personal acquaintance or by certain types of documents if the prospective voter did not have the required identification. The other 5 states reporting that they offered an alternative did so through the use of a provisional ballot if a prospective voter did not have the required identification. For the November 2004 election, 5 of the 21 states that reported having identification requirements also had statutory provisions requiring, in general, that such identification include a photograph of the prospective voter. For the other 16 states that reported requiring identification, there was a range of acceptable forms of identification, including photo identification, such as a driver’s license, and other documentation, such as a copy of a government check or current utility bill with a voter’s name and address. Figure 30 presents information on the identification requirements for prospective voters for the November 2004 general election for all 50 states and the District of Columbia.
In our nationwide survey, we asked local jurisdictions about how they checked voters’ identities, such as by asking voters to state their name and address, verifying voters’ signatures, or asking voters to provide a form of identification or documentation. On the basis of this survey, we estimate that 65 percent of all local jurisdictions checked voters’ identification as one way to verify their identities on Election Day. However, in an estimated 9 percent of all jurisdictions, providing identification was the only way voters could verify their identities.
Since the November 2004 general election, several states have reported that they have considered establishing identification requirements for all prospective voters, and some reported that they have implemented requirements. Results of our state survey show that at the time of our survey, 9 states reported having either considered legislation (or executive action) or legislation (or executive action) was pending to require voters to show identification prior to voting on Election Day. Four states, at the time of our survey, reported having taken action since November 2004 to require that voters show identification for in-person Election Day voting. For example, changes in Arizona law and procedure emanating from a November 2004 ballot initiative were finalized in 2005 after receiving approval from the Department of Justice. These Arizona changes require voters to present, prior to voting, one form of identification with the voter’s name, address, and photo, or two different forms of identification that have the name and address of the voter. Indiana enacted legislation in 2005 requiring, in general, that voters provide a federal- or state-of-Indiana- issued identification document with the voter’s name and photo prior to voting, whereas 2005 legislation in New Mexico and Washington imposed identification requirements but allowed prospective voters to provide one of several forms of photo or nonphoto forms of identification. In all four states, if voters are not able to provide a required form of identification, they are allowed to cast a provisional, rather than a regular, ballot. Finally, a state that had identification requirements in place for the November 2004 general election may have taken additional actions to amend such requirements. Georgia, for instance, required voters in the November 2004 general election to provide 1 of 17 types of photo or nonphoto identification. In 2005 Georgia enacted legislation that, in general, amended and reduced the various forms of acceptable identification and made the presentation of a form of photo identification, such as a driver’s license, a requirement to vote.
Recruiting a Sufficient Number of Skilled, Reliable Poll Workers Continued to Be a Challenge for Large and Medium Jurisdictions
Having enough qualified poll workers to set up, open, and work at the polls on Election Day is a crucial step in ensuring that voters are able to successfully vote on Election Day. The number of poll workers needed varies across jurisdictions, and election officials recruit poll workers in a variety of ways using different sources and strategies. Some poll workers are elected, some are appointed by political parties, and some are volunteers. Election officials in jurisdictions we visited reported considering several different factors—such as state requirements, registered voters per precinct, historical turnout, or poll worker functions at polling places—to determine the total number of poll workers needed. On the basis of our survey of local jurisdictions, we estimate that recruiting enough poll workers for the November 2004 general election was not difficult for the majority of jurisdictions. However, large and medium jurisdictions encountered difficulties to a greater extent than small jurisdictions. To meet their need, election officials recruited poll workers from numerous sources, including in some cases, high schools and local government agencies, to help ensure that they were able to obtain enough poll workers for Election Day. Poll workers with specialized characteristics or skills were also difficult for some large and medium jurisdictions to find. Election officials in some jurisdictions we visited reported that finding qualified poll workers could be complicated by having a limited pool of volunteers willing to work long hours for low pay. Poll worker reliability continued to be a challenge for some jurisdictions—especially large jurisdictions—that depend on poll workers to arrive at polling places on time on Election Day.
Recruiting Enough Poll Workers Was Not Difficult for the Majority of Jurisdictions, but Many Large and Medium Jurisdictions Encountered Difficulties
We estimate that recruiting enough poll workers for the November 2004 general election was not difficult for the majority of jurisdictions, and may have been less of a challenge for the November 2004 election than it was for the November 2000 election. For example, on the basis of our 2001 survey of local jurisdictions, we estimate 51 percent of county election jurisdictions found it somewhat or very difficult to find a sufficient number of poll workers for the November 2000 election. In contrast, from our 2005 survey, we estimate that 36 percent of county election jurisdictions had difficulties obtaining enough poll workers for the November 2004 election. In our 2005 survey, there are differences between size categories of election jurisdictions in the difficulties encountered obtaining a sufficient number of poll workers, with more large and medium jurisdictions encountering difficulties than small jurisdictions. As shown in figure 31, we estimate that 47 percent of large jurisdictions, 32 percent of medium jurisdictions, and 14 percent of small jurisdictions found it difficult or very difficult to obtain a sufficient number of poll workers.
Election officials in large and medium jurisdictions, with typically more polling places to staff, are generally responsible for obtaining more poll workers than officials in small jurisdictions. For example, election officials in a large jurisdiction we visited in Illinois told us that recruiting enough poll workers for Election Day was always a challenge and November 2004 was no different. They said that state law specifies a minimum of 5 poll workers per precinct, and there were 2,709 precincts in their jurisdiction for the November 2004 general election, requiring at least 13,545 poll workers. In contrast, election officials in a small jurisdiction we visited in New Hampshire told us that they never had difficulties finding poll workers because they were able to use a pool of volunteers to staff the 9 poll worker positions at their one polling place.
While election officials in 10 of the 27 large and medium jurisdictions we visited told us they had difficulties recruiting the needed number of poll workers, election officials in the other 17 jurisdictions did not report difficulties. These officials provided a variety of reasons why they did not encounter difficulties, including having a set number of appointed or elected poll workers for each precinct, having a general public interest in being involved in a presidential election, and using a variety of strategies and sources to recruit poll workers. For example, election officials in a large jurisdiction in New Mexico told us that their lack of problems with recruitment was due to the fact that they had a full-time poll worker coordinator who began the search for poll workers very early and, as a result, was able to fill all of the positions needed (about 2,400) for the November 2004 election. Election officials in other large jurisdictions reported that they were able to obtain enough poll workers by relying on multiple sources. For example, election officials in a large jurisdiction in Kansas told us that they made an exhaustive effort to recruit about 1,800 poll workers for the November 2004 general election that included soliciting from an existing list of poll workers, working with organizations, using a high school student program to obtain about 300 student poll workers, recruiting from a community college, using county employees, and coordinating with the political parties. On our nationwide survey we asked local jurisdictions about the sources they used to recruit poll workers for the November 2004 general election, and table 17 presents estimates from this survey on a variety of sources that jurisdictions used.
In our October 2001 report on election processes, we identified several recruiting strategies that election officials reported helped in their efforts to obtain enough poll workers. On the basis of our local jurisdictions survey, student poll workers and county or city employees were used as sources for poll workers by many medium and large jurisdictions in the November 2004 general election, as shown in table 17. These two sources were also cited as having worked well by election officials in several of the jurisdictions we visited. For example, election officials in a jurisdiction in Colorado told us that their high school student poll worker programs helped them to obtain a sufficient number of skilled poll workers and reported that 200 of their about 600 poll workers were high school students. Election officials in other jurisdictions we visited reported that high school students often helped them in obtaining enough poll workers with specialized skills or characteristics, such as needed language skills. According to our state survey, 38 states and the District of Columbia reported allowing poll workers to be under the age of 18.
Local government offices were another source of poll workers for the November 2004 general election. As shown in table 17, we estimate that 65 percent of large jurisdictions, 25 percent of medium jurisdictions, and 12 percent of small jurisdictions recruited poll workers from city or county government offices. For example, election officials in a large jurisdiction in Nevada told us that the chief poll worker at most of the jurisdiction’s 329 polling places is a county employee, and described benefits of recruiting local government employees as poll workers, including their experience in dealing with the public.
According to Our Nationwide Survey, Poll Workers with Specialized Skills Were Difficult to Find for Some Jurisdictions
The specific skills and requirements needed for poll workers varies by jurisdiction, and in some cases by precinct, but can include political party affiliation, specific technical or computer skills, or proficiency in languages other than English. On the basis of our survey of local jurisdictions, we estimate that most jurisdictions nationwide did not encounter difficulties recruiting poll workers with these specific skills and requirements. However, the results show that the ease of obtaining poll workers with these skills varied by the size of the election jurisdiction, with large and medium jurisdictions generally experiencing more difficulties than small jurisdictions.
Some states require political balance between poll workers at polling places. For example, New York election law, which requires that each election district must be staffed with four election inspectors (i.e., chief poll workers) and a variable number of poll workers (depending upon specified conditions), requires that appointments to such positions for each election district be equally divided between the major political parties. Election officials in some jurisdictions we visited told us that even though not required, they tried to maintain a balance in poll workers’ political party affiliation. Recruiting enough poll workers with specific political party affiliations continued to be a challenge for some, in particular large and medium jurisdictions. From our local jurisdiction survey, we estimate that 49 percent of large jurisdictions, 41 percent of medium jurisdictions, and 22 percent of small jurisdictions had difficulties recruiting enough Democratic or Republican poll workers, as shown in figure 32.
Election officials in 11 of the 28 jurisdictions we visited reported experiencing some difficulties finding enough poll workers with needed party affiliations. For example, election officials in a jurisdiction in Connecticut told us that because their jurisdiction was predominantly one political party it was difficult to find minority party poll workers. Election officials in these 11 jurisdictions told us that they recruited independents, unaffiliated persons, or student poll workers to fill minority party poll worker positions.
Recruiting poll workers with necessary information technology skills or computer literacy was also a challenge for some large and medium jurisdictions, according to our survey of local jurisdictions. We estimate that 34 percent of large jurisdictions and 28 percent of medium jurisdictions found it difficult or very difficult to obtain poll workers with these skills, whereas, we estimate that 5 percent of small jurisdictions had difficulties, as shown in figure 33.
Election officials in 23 of the 28 jurisdictions we visited told us that computer or technically skilled poll workers were not needed in their jurisdictions for the November 2004 general election. However, election officials in some of these jurisdictions reported that they foresaw a need for poll workers with these skills with the implementation of electronic poll books or new voting technology. Among the reasons cited for not needing technically skilled poll workers were the use of paper ballots or lever machines, the ease of use of DRE voting equipment, and that any needed skills were taught. In addition, election officials in many jurisdictions we visited told us that they recruited and trained technicians or troubleshooters to maintain, repair, and in some cases set up voting equipment prior to Election Day.
Some jurisdictions may be required under the language minority provisions of the Voting Rights Act to, in general, provide voting assistance and materials in specified minority languages in addition to English. We asked on our survey of local jurisdictions whether jurisdictions encountered difficulties recruiting poll workers who were fluent in the languages covered under the Voting Rights Act for their jurisdiction and estimate that for the majority (61 percent) of all jurisdictions, this requirement was not applicable. We estimate that 15 percent of all jurisdictions indicated that recruiting poll workers fluent in languages other than English was difficult or very difficult. Jurisdictions of all size categories may encounter difficulties recruiting poll workers with needed language skills for different reasons. For instance, small jurisdictions may find it difficult to recruit enough poll workers fluent in other languages because of a limited pool of potential recruits, whereas large jurisdictions may be required to provide voters with assistance in multiple languages other than English. Los Angeles County, for example, was required to provide voters assistance in six languages other than English for the November 2004 election. Election officials in some of the large jurisdictions we visited reported encountering difficulties obtaining poll workers with needed language skills, but these officials also told us about their efforts to recruit poll workers with language skills. For example, election officials in a large jurisdiction in Illinois reported that they recently established an outreach department to assist in the recruitment of poll workers with specialized language skills. The jurisdiction has hired outreach coordinators for the Hispanic, Polish, and Chinese communities to assist with recruiting. Figure 34 illustrates materials used by election officials in some jurisdictions we visited to recruit poll workers with a variety of skills for the November 2004 general election.
Election Officials in Some Jurisdictions We Visited Described Factors That Affected Recruiting Poll Workers
In our October 2001 report on election processes, we identified long hours, low pay, and an aging volunteer workforce as factors that complicated election officials’ efforts to recruit enough poll workers. Election officials in some, but not all, of the jurisdictions we visited in 2005 told us that one or more of these factors complicated their efforts to find enough quality poll workers for the November 2004 general election. For example, election officials in a large jurisdiction in Nevada told us that it was difficult to find people who wanted to work, considering that most families are two-income households and Election Day is a long—14 hours—grueling day. Election officials in a large jurisdiction in Washington told us that they never have enough poll workers, noting that the pay is minimal, the hours are long, and the majority of the poll worker population is elderly. Election officials in several of these jurisdictions we visited reported concerns about finding poll workers in light of a limited pool of volunteers. For example, election officials in a large jurisdiction in Colorado told us the average age of poll workers was over 70 years old and expressed concerns about obtaining poll workers who could physically work a 12-hour day. Alternatively, election officials in a large jurisdiction in Florida told us that the younger generation does not have the same commitment to civic duty that the older poll worker generation had and recruiting enough qualified poll workers may be a challenge in the future. These officials noted that about three- quarters of their poll workers are return participants. An election official in a large jurisdiction in Pennsylvania, where the median age of poll workers is about 75 years old, suggested that serving as a poll worker should be treated similarly as serving on jury duty—it should be everyone’s civic duty to serve as a poll worker.
Poll Worker Reliability Continued to Be a Challenge, Especially in Large Jurisdictions
In our October 2001 report on election processes, we noted that poll worker reliability was a challenge for election officials, who depended on poll workers to arrive on time, open, and set up polling places. Poll worker absenteeism was a challenge for large and, to some extent, medium jurisdictions in the November 2004 general election. On the basis of our nationwide survey of local jurisdictions, we estimate that 61 percent of large jurisdictions, 20 percent of medium jurisdictions, and 2 percent of small jurisdictions encountered problems with poll workers failing to show up on Election Day. The differences between all size categories are statistically significant. One way that election officials in several large jurisdictions we visited minimized the impact of poll worker absenteeism was to recruit backup poll workers to ensure that polling places were set up and adequately staffed, even if some poll workers failed to show up. For example, election officials in a large jurisdiction we visited in Illinois reported that approximately 1 to 2 percent of about 13,000 poll workers did not show up on Election Day. However, these officials reported that they had recruited stand-by judges who were to report to the elections office on Election Day in case an already scheduled judge did not show up. Election officials in a few other jurisdictions we visited told us that they called poll workers before Election Day to help ensure they showed up. For instance, election officials in a large jurisdiction in Pennsylvania told us that they called all of the chief poll workers—about 1,300 people—during the week prior to the election. Election officials in a large jurisdiction we visited in Connecticut went a step further, reporting that in addition to placing wake- up calls to all of the chief poll workers, they offered rides to poll workers to help ensure they showed up on time.
Election Officials in Some Jurisdictions We Visited Reported on Challenges Training Poll Workers
Voters’ experiences on Election Day are largely informed by their interactions with poll workers, who are responsible for conducting many Election Day activities, such as setting up polling places, checking in voters and verifying their eligibility to vote, providing assistance to voters, and closing the polling places. Although these workers are usually employed only for 1 day, the success of election administration partly depends on their ability to perform their jobs well. Depending on the applicable state requirements and the size of the jurisdiction, the steps that election officials take to adequately prepare all of their poll workers can vary, but may include training, testing, or certification. Ensuring that poll workers were adequately trained for Election Day was a challenge reported by some election officials in large and medium jurisdictions we visited, but these officials also reported a variety of steps they took to help prepare poll workers for Election Day.
State Requirements for Training Poll Workers Varied
Most states and the District of Columbia reported having training requirements for poll workers for the November 2004 general election, but the frequency and content of training varied. Some states also reported providing guidance related to the training of poll workers. According to our state survey, for the November 2004 general election, 18 states reported having had poll worker training requirements and providing guidance; 20 states and the District of Columbia reported having had training requirements; 9 states reported providing guidance; 1 state reported that it did not require training nor provide guidance; and Oregon, which conducted all-mail voting on Election Day 2004, indicated this requirement was not applicable. Figure 35 shows reported state requirements for training for the chief poll worker at a precinct or polling place and for poll workers.
About half of the states with training requirements reported requiring that poll workers be trained prior to every election or every general election. According to our survey, of the 38 states and the District of Columbia that reported having training requirements for poll workers, 22 states and the District of Columbia reported requiring poll workers to be trained prior to every election or every general election. For example, Florida provisions in place for the November 2004 general election required that poll workers have a minimum of 3 hours of training prior to each election and demonstrate a working knowledge of the laws and procedures relating to voter registration, voting system operation, balloting, and polling place procedures, and problem-solving and conflict resolution skills. These Florida provisions also require, among other things, that local election officials are to contract with a “recognized disability-related organization” to develop and assist with training for disability sensitivity programs, which must include actual demonstrations of obstacles confronted by persons with disabilities during the voting process, including obtaining access to the polling place and using the voting system. Ten states reported requiring that poll workers be trained on a scheduled basis (e.g., yearly or every 2 years). For example, under provisions in place for the November 2004 general election, New Jersey required that all district board members attend training sessions for each election at least once every 2 years. The other 6 states reported that training was required at least once, but not prior to every general election; that the frequency of training was not specified; or that they did not know.
For the November 2004 general election, fewer states reported requiring testing or certification than training for poll workers. According to our state survey, 12 states reported having requirements for testing or certification for poll workers, and 16 states reported having these requirements for the chief poll worker at a precinct or polling place. Election officials in 6 of the 28 jurisdictions we visited reported that poll workers were certified or tested after training. Election officials in 6 other jurisdictions told us that they used informal tests or quizzes or informally monitored poll workers performance in training. For instance, election officials in a jurisdiction in Kansas told us that they gave poll workers a nongraded quiz at the end of training. In Nevada, where state election officials indicated in our state survey that there are no requirements for poll worker training or testing, election officials in the 2 jurisdictions we visited told us that they required poll workers to attend training. Election officials in 1 of these jurisdictions required all poll workers to attend a training class each year and to pass a hands-on performance test in which they demonstrate their ability to perform their assigned function, such as checking in voters or programming the DRE voting equipment.
Election Officials Reported on Training Conducted and Challenges Encountered
Training provided to poll workers varies greatly among local election jurisdictions. Therefore, we asked questions about training challenges as part of our site visits only where we were able to gain an understanding of the types of training and specific conditions faced by local jurisdictions. Election officials in a small jurisdiction we visited in New Hampshire reported that they did not conduct training for the November 2004 general election because poll workers only receive training if they have not previously worked in the polling place, and all nine poll workers had worked in the polling place before. Election officials in the 27 other jurisdictions we visited described the training that they provided poll workers for the November 2004 general election. According to these officials, poll worker training generally occurred in the weeks or month before the election and ranged from 1 hour to 2 days, depending on the type of poll worker being trained. Election officials in most of these jurisdictions reported that training was mandatory. However, the frequency varied, with election officials in the majority of jurisdictions reporting that they required training prior to every election. Election officials in a few jurisdictions reported that poll workers received training at least once or on a scheduled basis, such as once every 2 years. Election officials in many jurisdictions told us that poll workers were paid to attend training, and payments could range from $5 to $50.
While election officials in nearly all of these jurisdictions reported that training was conducted by these officials and their staffs, the manner in which the training was conducted varied. For example, election officials in a large jurisdiction in Nevada told us that poll workers were trained in a workshop fashion in which 15 to 20 poll workers were provided hands-on training for their specific function, such as operating voting machines or processing voters. In a large jurisdiction in Kansas, election officials told us that they conduct the training for between 70 and 100 poll workers using a formal presentation as well as the documents poll workers use on Election Day and the voting equipment. Election officials in a large jurisdiction in Washington told us that poll worker training consisted of a PowerPoint presentation conducted in a train-the-trainer style where election officials trained the chief poll workers, who then trained the poll workers.
Election officials in 9 of the 27 large and medium jurisdictions we visited reported encountering some challenges with training poll workers, but generally reported that they overcame them. Some of the challenges reported by these officials included keeping poll workers informed about new or changing requirements, conveying a vast amount of information about election processes to a large number of people in a limited time, and ensuring that poll workers understand their tasks and responsibilities. For instance, election officials in a large jurisdiction in Ohio told us that it was challenging keeping up with state changes and incorporating such changes into poll worker training. Election officials in a large jurisdiction in Connecticut told us that effectively training poll workers on a variety of new changes (such as those required by HAVA) could be challenging because the procedures can be difficult to understand, especially for tenured poll workers who have been working at the polls for many years. Election officials in a large jurisdiction in Kansas noted that addressing the need to have a systematic way to evaluate poll worker performance at polling places was a challenge. These officials said that they currently rely on the fact that the poll worker showed up, general observations of the poll workers’ performance, and feedback cards completed by voters exiting the polls. Election officials in the jurisdictions we visited reported taking steps to address these challenges, such as providing poll workers training manuals or booklets for reference on Election Day, training poll workers to perform one function, and conducting training in a workshop fashion with smaller class sizes.
Poll Worker Performance Problems in Some Large and Medium Jurisdictions
Election officials and poll workers perform many tasks throughout the day to ensure that elections run smoothly and that voters move efficiently through the polling place. These activities can include checking in voters, providing instructions for voting machine operation, or assisting voters at the polls. We asked on our survey of local jurisdictions whether for the November 2004 general election jurisdictions encountered poll workers failing to follow procedures for a variety of activities, including, among others, procedures for voter identification requirements, providing correct instructions to voters, and voting machine operation. Overall, according to this survey, most local election jurisdictions nationwide did not encounter problems with poll worker performance. For example, we estimate that 90 percent of all jurisdictions did not encounter poll workers failing to follow procedures related to voter identification requirements, 92 percent of all jurisdictions did not encounter poll workers failing to provide correct instructions to voters, and 94 percent of all jurisdictions did not encounter poll workers failing to follow procedures for voting machine operation.
However, we estimate that poll worker performance problems encountered varied by size category of jurisdiction, with more large jurisdictions encountering problems than medium and small jurisdictions. For example, we estimate that 37 percent of large jurisdictions, 19 percent of medium jurisdictions, and 3 percent of small jurisdictions encountered problems with poll workers failing to follow procedures related to voter identification requirements. In terms of providing correct instructions to voters, we estimate that 31 percent of large jurisdictions, 12 percent of medium jurisdictions, and 1 percent of small jurisdictions encountered problems with poll worker performance in this area. For both results, the differences between all size categories are statistically significant.
Large jurisdictions could have encountered problems for a variety of reasons, including having more poll workers to train and oversee or having fewer options for recruiting skilled poll workers. While jurisdictions may have reported on our survey that they encountered problems with a particular aspect of poll workers’ performance, written comments provided on the questionnaire indicated that these problems may not have been widespread or may have been easily remedied after they occurred. For example, one survey respondent wrote: “Errors were few and far between, but with 4,500 poll workers, it is very difficult to answer that [our jurisdiction did not encounter any problems with poll workers’ performance.]” Election officials in 12 of the 28 jurisdictions we visited reported that they encountered some problems with poll workers’ performance, but that generally the majority of poll workers performed well. For example, an election official in a large jurisdiction in Pennsylvania we visited told us that while the jurisdiction did not encounter serious problems with performance, in the official’s opinion, it would be disingenuous to report that there were no problems with the 6,500 poll workers working the polls on Election Day.
Most Jurisdictions Provided Guidance at Polling Places to Help Poll Workers
In an effort to minimize poll worker confusion or performance problems, many jurisdictions provided written guidelines or instructions for poll workers to use at the polling place. On our nationwide survey we asked local jurisdictions whether or not for the November 2004 general election they had written guidelines or instructions at the polling place for poll workers covering a variety of topics, such as voting equipment operation; procedures related to verifying voters’ eligibility to vote; and assisting voters with special needs, such as voters with disabilities or who spoke a language other than English. We estimate that 94 percent of all jurisdictions had at least one set of written guidelines at polling places for poll workers.
Further, more large and medium jurisdictions provided instructions to poll workers than small jurisdictions. For example, we estimate that 99 percent of large jurisdictions, 96 percent of medium jurisdictions, and 80 percent of small jurisdictions provided written instructions for poll workers to use at polling places if a voter’s name was not on the poll list. In addition, we estimate that 96 percent of large jurisdictions, 92 percent of medium jurisdictions, and 71 percent of small jurisdictions provided written guidelines to use at the polls for identification requirements for first-time voters who registered by mail and did not provide identification with their registration. For both of these results, small jurisdictions are statistically different from both medium and large jurisdictions.
During our site visits, election officials in 26 of the 28 jurisdictions we visited reported that they provided written instructions or checklists for poll workers to have at polling places. Election officials in the 2 smallest population size jurisdictions we visited reported that they did not provide written instructions for poll workers. As the officials in a small jurisdiction in New Hampshire said, they are at the polling place to resolve issues personally as they arise. Figure 36 illustrates examples of some checklists that election officials in jurisdictions we visited provided to us.
Written instructions and checklists may help poll workers, but problems on Election Day can still be encountered with some issues, in particular issues related to voter registration. We asked on our survey of local jurisdictions whether for the November 2004 general election jurisdictions maintained a written record to keep track of issues or problems that occurred on Election Day. We estimate that 55 percent of all jurisdictions nationwide maintained a written record to keep track of issues. Of those that did maintain a record and provided written comments on our survey, the issues most frequently cited by election officials were problems with voter registration (e.g., not being registered, being registered at another polling location, or being in the wrong polling location).
Obtaining Enough Polling Places That Met Standards Continued to Be a Challenge for Some Jurisdictions
Election officials are responsible for selecting and securing a sufficient number of polling places that meet basic requirements and standards. Polling place locations vary across jurisdictions but can include public and private facilities, such as schools, government buildings, fire departments, community centers, libraries, churches, and residential facilities. To meet the needs of the voting population, polling places should be easily accessible to all voters, including voters with disabilities. Polling places also need to have a basic infrastructure, including electricity, heating and cooling units, and communication lines, to support some voting machines and be comfortable for voters and poll workers. In our October 2001 report on election processes, we stated that obtaining polling places for the November 2000 election was not a major challenge for most jurisdictions. On the basis of our 2005 survey of local jurisdictions, obtaining a sufficient number of polling places was not difficult for the majority of jurisdictions. However, finding polling places that met these standards was generally more difficult for large and medium jurisdictions than for small jurisdictions. Election officials in many jurisdictions reported combining precincts in one polling place, with minimal challenges, for the November 2004 general election.
Finding a Sufficient Number of Polling Places Was Difficult for Some, but Not Most, Jurisdictions
For the November 2004 election, obtaining a sufficient number of polling places was not difficult for the majority of jurisdictions. On the basis of our survey of local jurisdictions, we estimate that 3 percent of all jurisdictions found it difficult or very difficult to obtain a sufficient number of polling places for the November 2004 general election. However, the difficulty encountered in finding enough polling places varied by the size category of jurisdiction. We estimate that 14 percent of large jurisdictions, 8 percent of medium jurisdictions, and 1 percent of small jurisdictions had difficulties obtaining enough polling places, as presented in figure 37.
Small jurisdictions may not experience difficulties obtaining polling places for a variety of reasons, among them because they do not have to find as many locations to support an election as large jurisdictions do. For example, election officials in a small jurisdiction we visited in New Hampshire told us that because of the small voting population (about 1,200), they only needed to use one polling place—the town hall—for the November 2004 general election, as shown in figure 38.
In contrast, large jurisdictions could be responsible for selecting hundreds of polling places for Election Day. Election officials from a large jurisdiction we visited in Illinois reported that they used over 1,800 polling places for the November 2004 election and hired staff to find polling places that met standards for their jurisdiction. Although election officials in some large and medium jurisdictions told us that they needed to find numerous polling places, officials in only 1 large jurisdiction we visited in Kansas told us that they encountered difficulties finding suitable polling places, in part because of low payments provided to use polling place facilities. Election officials in this jurisdiction reported that in 2003 they implemented a campaign to “recruit” polling places and sent letters to schools and other possible locations in addition to conducting site visits and inspections. These election officials reported that after their efforts, they added about 70 polling places for use on Election Day 2004.
Finding Accessible Polling Places and Polling Places with Parking and Phone Lines Was Difficult for Some Jurisdictions
Selecting accessible polling places includes assessing parking areas, routes of travel, exterior walkways, and entrances, as well as interior voting areas. In our October 2001 report on voters with disabilities, we identified a variety of challenges faced by election officials in improving the accessibility of voting—including the limited availability of accessible buildings and the lack of authority to modify buildings to make them more accessible. Finding accessible polling places continued to be a challenge for some jurisdictions for the November 2004 general election. On the basis of our local jurisdiction survey, we estimate that 36 percent of large jurisdictions, 25 percent of medium jurisdictions, and 5 percent of small jurisdictions found it difficult or very difficult to find enough accessible polling places, as shown in figure 39.
Election officials in some jurisdictions we visited told us that they encountered challenges finding accessible polling places. For example, election officials in 2 large jurisdictions we visited reported that it was challenging to find polling places that were accessible because many of the public buildings in their jurisdiction were older facilities and were not compliant with the Americans with Disabilities Act (ADA). However, election officials reported taking steps to help ensure that polling places were accessible. For example, election officials in a large jurisdiction in Georgia reported that they hired a private company to conduct surveys of the polling locations and determine whether they were accessible and what, if any, changes needed to be made to make the facilities compliant. Some election officials described making minor or temporary modifications to polling places to ensure that they were accessible, for example, by adding ramps, using doorstops for heavier doors, or clearly identifying accessible entrances.
In addition to being accessible for all voters, polling places should have sufficient parking for voters and phone lines to provide for communication on Election Day. From our local jurisdiction survey, more large and medium jurisdictions encountered difficulties in finding polling places with these characteristics than small jurisdictions. On the basis of this survey, we estimate that 38 percent of large jurisdictions, 18 percent of medium jurisdictions, and 4 percent of small jurisdictions had difficulties obtaining polling places with adequate parking. The differences between all size categories are statistically significant. In terms of finding polling places with adequate phone lines, we estimate that 35 percent of large jurisdictions, 33 percent of medium jurisdictions, and 9 percent of small jurisdictions had difficulties obtaining polling places with adequate phone lines. Providing cell phones to poll workers was one way for some jurisdictions to help ensure communication between polling places and the election office on Election Day. Also on the basis of our survey, we estimate that cell phones provided by the jurisdiction were the primary means of communication for 29 percent (plus or minus 9 percent) of large jurisdictions, 15 percent (+9 percent, -6 percent) of medium jurisdictions, and 3 percent of small jurisdictions. For both of these results, the differences between both large and medium jurisdictions and small jurisdictions are statistically significant. Election officials in some large jurisdictions we visited included cell phones as part of the supplies provided to each polling place. For example, officials in a large jurisdiction we visited in Nevada told us they paid poll workers $5 to use their own cell phones.
Combining Precincts at a Polling Location Continues to Be a Strategy to Address Challenges with Obtaining Polling Places
We identified several strategies in our October 2001 report on election processes that election officials said helped in their efforts to obtain enough polling places, including locating more than one precinct at a single polling place. Results of our 2005 state and local surveys and site visits show that combining precincts at a polling location continued to be a strategy used by local jurisdictions, predominantly large and medium jurisdictions, to find adequate polling locations for voters in all precincts. According to our state survey, nearly all states (47) reported that they allowed precincts to be colocated in a polling place for the November 2004 general election. Ten states reported allowing colocation only under specified conditions, for instance, if no suitable polling place existed for a precinct, and 37 states reported allowing colocation but did not specify conditions. On the basis of our survey of local jurisdictions, we estimate 33 percent of all jurisdictions had multiple precincts located in the same polling place. However, more large and medium jurisdictions combined precincts than small jurisdictions. We estimate that 78 percent of large jurisdictions, 63 percent of medium jurisdictions, and 19 percent of small jurisdictions had multiple precincts located in the same polling location. The differences between all size categories are statistically significant. During our site visits, election officials in 22 of the 28 jurisdictions we visited told us that they combined precincts in the same polling location for the November 2004 general election. Included in the 6 jurisdictions that did not report combining precincts in a single polling place were the 1 small and 2 medium jurisdictions we visited. Further, in many of the large jurisdictions we visited, election officials told us that most of their polling places had more than one precinct. For example, election officials in a large jurisdiction in Ohio told us that there was an average of three precincts per polling location, but that there could be up to nine precincts in one polling place.
Although combining precincts may help solve the issue of obtaining a sufficient number of voting places that meet requirements, other challenges may surface, including voter confusion in not finding the correct precinct at a location, poll worker confusion about eligibility if a voter is not in the correct precinct poll book at a polling place, and the possibility of voters voting on the wrong voting machine for their precinct. However, on the basis of our local survey, few challenges were encountered in polling places where precincts were combined for the November 2004 general election. We estimate that of the 33 percent of jurisdictions with multiple precincts at a polling location, 85 percent (+6 percent, -5 percent) did not experience challenges in terms of voters locating their correct precinct. Election officials in jurisdictions we visited described steps they took to help ensure that voters were able to easily find their correct precinct, including posting signage to direct voters to the correct precinct, using specially designated poll workers as greeters to direct voters as they entered the polling location, setting up separate tables or voting areas for each precinct, and locating the precincts in distinct areas of the building, for example, in the gym and cafeteria of a school building.
Election officials in a few jurisdictions we visited told us that they consolidated functions, such as the check-in table or voting equipment, for precincts located in the same polling location in order to avoid voter confusion or problems with voting. For example, election officials in a jurisdiction in Kansas reported that they used one registration table with a consolidated poll book for all precincts at a polling location. As a result, voters only needed to locate one table. Election officials in a jurisdiction in Nevada reported that once voters checked in, they were able to vote on any voting machine in the polling location because the machines were programmed with ballots from each of the precincts located at the polling place, and poll workers activated the particular ballot style for a particular voter.
Beyond consolidating some functions at a polling place, in 2004 Colorado authorized the use of “vote centers,” which are polling places at which any registered voter in the local election jurisdiction may vote, regardless of the precinct in which the voter resides. Each vote center is to use a secure electronic connection to a computerized registration list maintained by the local election office to allow all voting information processed at any vote center to be immediately accessible to computers at all other vote centers in the jurisdiction. Larimer County, with 143 precincts and about 200,000 registered voters, reported using 31 vote centers for the November 2004 general election. Election officials in Larimer County described several benefits of vote centers, including voter convenience; cost- effectiveness; minimal voter wait time on Election Day; and overall easier management, including requiring fewer poll workers. Election officials told us that voters liked the convenience of being able to vote anywhere in the jurisdiction, regardless of the precinct they live in. Vote centers can also be cost-effective, according to election officials, for jurisdictions faced with replacing voting equipment to comply with HAVA accessibility requirements for voting systems used in federal elections. Using vote centers also reduces the number of polling places a jurisdiction needs, which can be cost-effective with respect to finding enough accessible polling places. Election officials also told us that on Election Day they were able to avoid having long lines at most vote centers by issuing media announcements to voters throughout the day specifying which vote centers were busy and which were not, and by using their electronic poll book technology to process voters quickly and to monitor ballots and supplies. Officials told us that on average there was a 15-minute wait time for voters. Finally, officials told us that from the perspective of election officials, vote centers facilitated aspects of election administration because there were fewer locations (about 30 instead of about 140) and fewer poll workers overall to recruit and train.
While other jurisdictions in Colorado have used vote centers since the November 2004 election or are planning to pilot vote centers in elections in 2006, election officials in a second jurisdiction we visited in Colorado explained why their jurisdiction opted to not use vote centers. Officials told us that their jurisdiction assessed the feasibility of implementing vote centers and concluded that despite several advantages offered by vote centers, the cost of implementation was prohibitive. For example, election officials identified costs including the connectivity for the electronic poll books, so that voters can be credited with voting in real time; potential rental costs for facilities, such as hotels, to house vote centers; and the expense of purchasing additional voting equipment. Because a voter in a jurisdiction using vote centers can vote at any vote center, each vote center needs to be stocked with all applicable ballot styles for an election or have DRE voting machines capable of being programmed with all applicable ballot styles, according to election officials. For the November 2004 general election, these officials told us that they used optical scan for absentee and Election Day voting and DREs for early voting. To avoid the cost and confusion of having to print and keep track of ballot styles for their 378 precincts—compared to Larimer County’s 143 precincts—election officials said that they would need to purchase additional DRE voting machines if they were to implement vote centers.
Election Officials in Some Jurisdictions We Visited Reported That Designing Clear Ballots Continued to Be a Challenge
Election officials are responsible for designing ballots that meet various state requirements, possibly federal requirements under the minority language provisions of the Voting Rights Act relating to offering voting materials in specified minority languages in addition to English, and the requirements of the particular voting equipment, and these ballots must be easy for voters to understand. Ballot design generally involves both state and local participation. Most states (46 states and the District of Columbia) were involved in ballot design for the November 2004 general election. For instance, according to our state survey, 17 states and the District of Columbia reported designing ballots for local jurisdictions, 3 states reported requiring approval of the ballot design, and 26 states reported having requirements for local jurisdictions regarding ballot design (e.g., layout, candidate order, or paper stock). Specifically, election officials must determine all races, candidates, and issues that voters in each precinct in a jurisdiction will vote on and construct layouts for these races and issues for the particular types of ballots used with their election equipment. Figure 40 illustrates an optical scan ballot used in El Paso County, Colorado, for the November 2004 general election.
In our October 2001 report on election processes, we noted that despite the controversy over the “butterfly ballot” and other ballot problems in the aftermath of Florida’s 2000 general election, very few jurisdictions nationwide thought that confusing ballot design was a major problem. Ballot design problems were not highlighted by voters as a problem in the November 2004 election; therefore, we did not inquire about the extent of ballot design problems in our local survey of jurisdictions. However, we asked about ballot design processes and problems during our visits to local election jurisdictions. Election officials in all of the jurisdictions we visited reported that they did not encounter voter problems with confusing ballot designs for the November 2004 general election. However, election officials in 7 jurisdictions we visited told us that designing easily understood ballots that meet the particular constraints of the voting equipment can be challenging when there are a large number of races or issues to include on the ballot. For example, election officials in a jurisdiction we visited in Colorado that used optical scan ballots told us that fitting all of the races and questions on the ballot is always challenging, but they managed to do so by limiting the number of words on ballot questions and using small fonts. These officials noted that they provided magnifying glasses at polling places to assist voters. Election officials in a jurisdiction we visited in Florida reported that they had to use oversized optical scan ballots to accommodate the number of constitutional amendments that had to be included on the ballot.
Some ballot design options taken to help ensure clarity for voters could lead to problems later. For example, election officials in a jurisdiction in Kansas reported that they used a two-sided ballot design requiring that the optical scan counting equipment read the ballot front and back, which presented a problem. Chapter 6 discusses challenges with counting ballots. The requirements of the voting equipment may also limit options election officials can take related to ballot design. For example, election officials in a jurisdiction in Illinois that used punch cards reported that lengthy ballots could have been a problem in the November 2004 election, but they decided to change the type of punch card ballot used. These officials told us that increasing the number of punch positions allowed for more space on the ballot and prevented challenges related to length of ballot. However, with punch card ballots, the greater the number of choices on a punch card, the greater the potential for voter error in punching the preferred choice, as voters must align the ballot carefully.
Election officials in jurisdictions we visited that designed their ballots described steps they took to ensure that ballots were clear to voters, including using templates from the state or election management systems, proofreading both before and after printing, and public viewing or testing of ballots. For example, election officials in a jurisdiction in Colorado told us that prior to printing they send proofs of the ballot designs to candidates for their review. After printing, election officials said that staff members and representatives of the political parties test the ballot designs to ensure that there are no problems with how the ballots are processed through the counting equipment. Election officials in another jurisdiction in Colorado reported conducting a mock election with county employees to review the ballot and test a ballot from each package of printed ballots. Election officials in a jurisdiction in Ohio told us that they displayed the ballots for the general public to view and test.
Preparing Ballots or Voting Equipment Not a Problem Reported by Most Jurisdictions, but These Activities Can Be a Challenge for Some Jurisdictions
The activities and plans that election officials undertake related to preparing ballots or voting equipment can have a direct impact on a voter’s Election Day experience. For example, reports about the November 2004 election highlighted shortages of ballots and voting machines at some polling places. While election officials may not be able to prepare for every contingency that could affect a voter’s wait time or experience at the polls, ensuring that there is a sufficient number of ballots or voting machines can minimize potential problems. On the basis of our survey of local jurisdictions, we estimate that few jurisdictions had problems with ballot or voting equipment shortages for the November 2004 general election. We estimate that 4 percent of all jurisdictions experienced problems with Election Day ballot shortages, and an estimated 4 percent of all jurisdictions did not have enough voting equipment on Election Day. However, there were statistical differences between large and small jurisdictions in having enough voting equipment. We estimate that 12 percent of large jurisdictions, 4 percent of medium jurisdictions, and 3 percent of small jurisdictions did not have enough voting equipment. Election officials in 23 of the 28 jurisdictions we visited reported that they encountered no challenges with preparing and delivering ballots, voting equipment, and supplies for the November 2004 general election. However, these activities could present logistical challenges for jurisdictions if there are unexpected delays, or for jurisdictions that are required to prepare ballots in multiple languages or prepare and deliver numerous voting machines to a large number of polling places.
To ensure that there is an adequate supply of machine-readable paper ballots on Election Day, election officials may conduct numerous activities, such as designing, reviewing, proofreading, printing, and testing ballots. Uncertainties about ballot content, such as whether or not certain candidates or issues will be included on the ballot, could affect these activities by delaying printing or leading to a last-minute rush to ensure that ballots are printed in time for the election. While election officials in most of the jurisdictions we visited did not report encountering these uncertainties, election officials did in 4 jurisdictions. For example, election officials in a jurisdiction in Colorado reported that ballot printing was delayed by three statewide lawsuits regarding the content of the ballot. These officials reported that they prepared two ballot designs—one with a particular candidate’s name and one without—so that they would be prepared to send the ballots to an external printer regardless of the lawsuits’ outcome.
Some jurisdictions are required to provide ballots in languages other than English. Producing ballots in multiple languages can add to the complexity of preparing ballots because election officials must take steps to ensure proper translation and printing for each required language. On the basis of our local jurisdictions survey, we estimate that 6 percent of jurisdictions nationwide provided ballots in other languages. We estimate that significantly more large jurisdictions provided ballots in languages other than English than medium and small jurisdictions. We estimate that 26 percent of large jurisdictions (compared to 10 percent of medium jurisdictions and 3 percent of small jurisdictions) provided ballots in languages other than English.
Once voting equipment, ballots, and supplies have been prepared, ensuring that they are transported to polling places can be a logistical challenge for jurisdictions with thousands of voting machines and hundreds of polling places. Election officials in 18 of the 28 jurisdictions we visited told us that they contracted with moving companies to deliver voting equipment to polling places prior to Election Day. For example, election officials in a jurisdiction in Pennsylvania told us that they contract with a moving company that transports about 1,000 DREs to about 400 polling places in the week prior to Election Day. Election officials in a jurisdiction in Nevada told us that to ensure that voting machines were delivered to the correct polling places, they bar-coded each DRE and also assigned a bar code to each polling place. Upon delivery, contract movers used scanners to read the bar codes on each DRE and the bar code for the specific polling place. Prior to Election Day, these officials said that teams of election staff technicians then went to each polling place to set up the DREs and verify the scanned bar codes. After setting up the DREs, the rooms in which they were located were secured until Election Day. In contrast, in a jurisdiction we visited in New Hampshire, two election workers delivered 12 optical scan counters to the 12 polling places at 4:00 a.m. on Election Day. Figure 41 shows stored voting equipment—with accompanying delivery instructions for each DRE for 1 location—in 3 large jurisdictions we visited that needed to be prepared and delivered to polling places prior to Election Day.
Election Officials in Some Jurisdictions We Visited Reported Experiencing Long Lines on Election Day, while Officials in Other Jurisdictions Did Not
Long voter wait times are a problem that election officials try to avoid. However, voters waiting in line at the polls was an issue identified in reports reviewing the November 2004 general election. These reports identified a variety of factors, including confusion about a voter’s registration status, ballot or voting equipment shortages, or malfunctioning voting equipment that led to long voter wait times. We asked election officials during our site visits whether or not any polling places in their jurisdictions had long lines during the November 2004 general election and to describe factors they thought contributed to or helped to reduce long lines.
Election officials in 17 of the 28 jurisdictions we visited reported having long lines at one or more polling places in their jurisdiction at some point on Election Day. However, there was variation in the reported voter wait times, times of day, and numbers of polling places with lines. For instance, election officials described voter wait times that ranged from 15 minutes to 1 ½ hours. Some election officials reported that the longer lines occurred in the morning; others told us that they kept polling places open past the official closing time to accommodate voters who were in line when the polls closed. Election officials in over half these 17 jurisdictions attributed long lines to higher than expected voter turnout, both in general and at peak voting times. Some of these jurisdictions were located in states where the presidential race was considered close (often referred to as “battleground states”). For example, the election official in a jurisdiction in Nevada attributed long lines to using a new voting system in addition to being a battleground state and encountering high voter turnout. This official estimated that there were between 30,000 and 35,000 more voters for the November 2004 general election than in previous elections. Election officials in 2 jurisdictions we visited in Ohio told us that higher than expected voter turnout in some precincts led to long lines. For example, election officials in 1 of these jurisdictions reported that at a polling place where two precincts were located there was higher than expected turnout because of a school board race. According to these officials, at this polling place there was a single line for voters from both precincts to check in at the registration table, and this line backed up. Election officials in another jurisdiction in Ohio told us that some precincts had long lines, and one precinct in particular had a waiting time of up to 1 hour. These officials said that one precinct closed 30 to 45 minutes after closing time for the voters that were in line at 7:30 p.m.
Election officials in 11 of 28 jurisdictions we visited told us that none of the polling places in their jurisdictions had long lines, and some described factors that helped to reduce or prevent lines. High voter turnout prior to Election Day—either during early voting or through absentee voting—was one factor they identified. For example, election officials in 2 jurisdictions we visited—a second jurisdiction in Nevada and 1 in New Mexico—told us that about 60 percent of those who cast ballots voted early or absentee. Election officials in a jurisdiction we visited in Washington (which reported that it did not require or allow early voting) told us that they attributed their lack of long lines on Election Day to the fact that two-thirds of voters in their jurisdiction vote by absentee ballot. Election officials in a jurisdiction in Florida reported that in planning for the November 2004 general election, they decided to encourage early and absentee voting as alternatives to Election Day voting in anticipation that there would be heavy turnout for the general election. Their voter education campaign, which included buying airtime on radios and in movie theaters, stressed early voting options. In the end, about 40 percent of voters cast early ballots, which, according to election officials, made crowds easier to manage on Election Day.
Overloaded Phones on Election Day Posed Problems for Some Large and Medium Jurisdictions
On Election Day, poll workers may need to communicate with election officials at the central office for a variety of reasons—to inquire about a person’s eligibility to vote if his or her name does not appear in the poll book, to report voting equipment problems, or to report other issues that could occur at a polling place on Election Day. On the basis of our nationwide survey of local jurisdictions, for the November 2004 general election, we estimate that for 48 percent of all jurisdictions, the primary means of communication between polling places and the central office was telephones installed at polling places. Cell phones were also used as a primary means of communication in some jurisdictions. For example, on the basis of our local survey results, we estimate that for 25 percent of all jurisdictions, personal cell phones were the primary means of communication.
Having inadequate communication lines on Election Day was a problem for election officials in the November 2000 election, as we noted in our October 2001 report on election processes. On the basis of our 2005 survey of local jurisdictions, communication problems between polling places and the election office on Election Day were a challenge for some jurisdictions in the November 2004 election, and these problems varied by the size category of jurisdiction, with more large jurisdictions encountering major problems than medium and small jurisdictions. We estimate that 36 percent of large jurisdictions, 63 percent of medium jurisdictions, and 89 percent of small jurisdictions encountered no major problems with the communication system used at polling places. Small jurisdictions may not have experienced communication problems on Election Day for a variety of reasons, among them because a single polling place is located in the same building as the central election office, allowing the election officials to be physically present to resolve any questions or issues. Election officials in small jurisdictions provided comments on our nationwide survey of local jurisdictions about the primary communication system used in their jurisdictions on Election Day, including “personal contact—the clerk’s office is across the hall from the polling place,” “ yelled across the room,” or “we are the central office and the polling place.” In addition, the election official in the small jurisdiction we visited in New Hampshire told us that the town clerk was on site at the one polling place.
Election Day communication problems encountered by some large and medium jurisdictions included overloaded phones because of the volume of calls. On the basis of our local jurisdictions survey, we estimate that 49 percent (plus or minus 8 percent) of large jurisdictions, 14 percent of medium jurisdictions, and 1 percent of small jurisdictions experienced overloaded phone systems. The differences between all size categories are statistically significant. Election officials in many large jurisdictions we visited reported receiving numerous phone calls on Election Day, both from polling places and from the public. In addition to poll workers calling from polling places, election officials at the central office may receive phone calls from citizens asking about the location of their polling place or whether or not they are registered to vote. For example, a large jurisdiction we visited in Nevada reported receiving over 35,000 calls on Election Day 2004, about three times the number reportedly received in 2000. Election officials reported that most calls received were from people wanting to know whether or not they were registered or where their polling place was, despite providing polling place locations on their Web site, printing the locations in the newspaper, and mailing a sample ballot listing polling place locations to every registered voter in the jurisdiction. Election officials in 2 other large jurisdictions in Florida and Kansas reported that the volume of calls received was extremely high and that most inquiries concerned voter eligibility. In 1 of these 2 jurisdictions, election officials told us that many poll workers could not get through to the elections office to verify voter registration information, which may have increased the number of provisional ballots issued during the election.
Election officials in many of the large jurisdictions we visited reported taking steps to manage, or even reduce, the volume of calls from both polling places and the public. These actions included setting up call centers or phone banks, installing additional phone lines in their offices, or hiring temporary workers. For example, election officials in a large jurisdiction in Pennsylvania reported that after experiencing problems being able to handle the volume of calls on Election Day 2000, they implemented a call center at their office with 30 phone lines for the November 2004 election. While these election officials reported receiving “a lot” of calls for the 2004 general election, they said they were able to successfully handle the volume because of the new phone lines. Election officials in a large jurisdiction in Illinois reported that a feature, new for the November 2004 election, on the jurisdiction’s Web site that allowed voters to determine their polling place online helped to reduce the number of phone calls received from people asking about polling location.
Election Officials in Some Jurisdictions We Visited Reported That Third-Party Observers Were a Challenge on Election Day 2004
After the November 2004 general election, some reports highlighted allegations of voter intimidation by third parties (e.g., poll watchers, observers, or electioneers) at polling places. To gain a better understanding of the extent to which this alleged behavior occurred and because the range of behaviors and circumstances in which they could have occurred was difficult to capture on a structured survey, we asked election officials during our site visits about challenges they faced conducting voting on Election Day—specifically, we asked them about any problems they encountered with voter intimidation. Election officials in 19 of the 28 jurisdictions we visited did not report experiencing problems with third parties on Election Day. However, election officials in 9 jurisdictions we visited in battleground states reported challenges with disruptive third- party activities. In some instances these third parties simply increased the number of people that poll workers were to manage at a polling location; in others, election officials told us third-party observers provided misinformation to voters or even used intimidation tactics.
Election officials in a jurisdiction in Nevada told us that poll watchers were the biggest challenge on Election Day. Poll watchers, according to election officials, had been bused in from another state to observe the election because Nevada was a battleground state, which led to having 14 poll watchers at some locations. These officials noted that while most poll watchers simply observed, the poll watchers did increase the number of people at polling places, creating more for poll workers to manage. Election officials in other jurisdictions reported that third-party behavior negatively affected poll workers and voters. For example, election officials in a jurisdiction in Pennsylvania reported that one of the biggest challenges on Election Day was managing poll workers’ stress levels in an especially contentious election where poll watchers and observers yelled at them throughout the day. Election officials in another jurisdiction in Nevada told us that outside observers’ behavior was disruptive and noted that the observers were contentious, violated electioneering limits at the polling place, and questioned every action that poll workers made. Election officials in a jurisdiction in Colorado reported that at one polling location on a college campus, poll watchers and representatives of a national organization were encouraging students to go to the polling place at one time to create a disruption. Students were also being encouraged to get back in line after they had voted, which caused long lines for other voters. Election officials said that they ended up calling security officers to help manage the situation.
In other instances, election officials reported that observers provided misinformation to voters or even used intimidation tactics. Election officials in a jurisdiction in Florida reported that third-party organizations caused confusion at polling places by misinforming voters and staging demonstrations. In a jurisdiction we visited in Colorado, election officials told us that poll watchers caused problems at some polling places by providing misinformation to voters, such as informing them that their provisional ballots would not be counted. In a jurisdiction in New Mexico, election officials said that one polling place had to remain open until 10:30 p.m. because voters were encouraged by local political advocates to go to that polling place to vote even though the polling location for their precinct had been changed. As a result, according to these officials, hundreds of provisional ballots were cast at the polling place, which made for long waiting times. Election officials in another jurisdiction in New Mexico reported that outside candidate advocates and observers from political parties tried intimidation tactics and treated people at the polls “terribly.” For example, these election officials told us that some advocates were observed taking photographs of the license plates of Hispanic voters as they arrived at polling places.
We did not ask a specific question about third-party activities at polling places on our survey of local jurisdictions because of the complexities in capturing the range of alleged behaviors on a structured survey. However, we asked whether local election jurisdictions maintained a written record of issues that occurred on Election Day and, if so, what issue or problem occurred most frequently on Election Day. Several election officials from jurisdictions in battleground states that provided comments on our nationwide survey wrote that electioneering or poll watchers did. For example, election officials from Florida, Colorado, and Iowa wrote “voters complained about being harassed by demonstrators while waiting in line to vote,” “poll watchers acting aggressively,” and “poll watchers (who were attorneys, mostly) were interfering with the process, intimidating precinct officials, and giving erroneous advice to voters who showed up at the wrong polling place.”
Concluding Observations
Administering an election in any jurisdiction is a complicated endeavor that involves effectively coordinating the people, processes, and technologies associated with numerous activities. Many of the challenges that election officials reported encountering in preparing for and conducting the November 2004 election were not new. Recruiting and training an adequate supply of poll workers, finding accessible polling places, and managing communications on Election Day were challenges we identified in our October 2001 report on the November 2000 election.
Data from our local elections jurisdiction survey and site visits to 28 locations, indicate that more large, and to some extent medium, jurisdictions encountered challenges in preparing for and conducting the November 2004 general election than did small jurisdictions. This is not surprising. Larger, diverse jurisdictions may face challenges smaller jurisdictions do not, such as recruiting poll workers with non-English language skills. Larger jurisdictions are also likely to need to rely to a greater degree on technology to manage their elections administration process, and this brings its own set of challenges. The complexity of administering an election and the potential for challenges increase with the number of people and places involved, the ethnic diversity and language skills of the voting population, and the scope of activities and processes that must be conducted. Many of the election officials in large jurisdictions we visited told us that being well prepared, having established policies and procedures in place, and having qualified election staff were factors that contributed to a smooth Election Day. One problem that occurred on Election Day in some jurisdictions that election officials reported encountering was the actions of poll watchers and other third parties that election officials considered disruptive. This presents another issue that election officials may need to include in their Election Day preparations and training.
Provisional Voting
A goal of the election process is to ensure that every eligible voter is able to cast a vote and have that vote counted. In the November 2000 general election, reports of some voters showing up at the polls and not being able to vote raised concerns about eligible voters’ names not appearing on the voter registration list at the polling place or poll workers not otherwise being able to determine voters’ eligibility. While many jurisdictions reported in 2001 having at least one procedure in place to help resolve eligibility questions for voters whose names did not appear on a polling place registration list, only 20 states plus the District of Columbia reported using some form of provisional ballot for the 2000 general election.
One of the major changes since the 2000 general election has been the implementation of a HAVA provision requiring, in general, that states permit individuals, under certain circumstances, to cast provisional ballots in elections for federal office. In general, under HAVA, voters who claim to be eligible to vote and registered in the jurisdiction they desire to vote in but whose names do not appear on the polling place registration list are to be allowed to cast provisional ballots in a federal election. These ballots are called provisional because they are counted only if an election official determines that the voter is eligible under state law to vote. In terms of ballot access, provisional ballots benefit voters by allowing an individual to cast a vote, in general, when there is some question as to the individual’s eligibility such as when the individual’s name is not on the registration list or the individual’s eligibility has been questioned by an election official. In terms of ballot integrity, provisional ballots benefit election officials by allowing them to determine voter eligibility prior to counting such ballots (i.e., verifying provisional ballots).
In this chapter, we describe (1) events that preceded HAVA’s provisional voting requirements, (2) how states and local jurisdictions implemented the requirement to provide provisional ballots, (3) how states and local election jurisdictions qualified provisional ballots for counting, and (4) the difficulties of estimating and comparing the number of provisional ballots that were cast and counted.
Overview
Concerns were raised with respect to the November 2000 election that some eligible voters were not allowed to vote because of questions regarding the voters’ eligibility. HAVA required that by January 1, 2004, most states permit the casting of provisional ballots in elections for federal office by voters who affirm in writing that they believe they are eligible to vote and registered in that jurisdiction, but are not found on the voter registration list. Such states are also required under HAVA to provide provisional ballots in federal elections under other circumstances such as for certain voters who registered by mail and do not have required identification, and where an election official asserts that an individual is ineligible to vote. Provisional votes cast under HAVA’s provisional voting requirements are to be counted in accordance with state law if election officials determine that the voter is eligible to vote under state law. Under HAVA, 6 states are exempt from the act’s provisional voting requirements because they either permitted the voter to register on Election Day or did not require voter registration.
On the basis of reports from state election officials and in local election jurisdictions we surveyed and visited, states and local jurisdictions varied in a number of ways regarding how they implemented HAVA’s provisional voting requirements in the November 2004 election. Among other things, we found variation in the additional circumstances, apart from those circumstances specified in HAVA, where a provisional ballot would be offered, such as when voters claimed they did not receive an absentee ballot; design of ballots themselves and how they were tracked; and voting method used for casting provisional ballots, such as optical scan ballots or DRE.
With respect to the counting of provisional votes, states reported various differences in their counting processes such as the prescribed location from which a voter must cast a provisional ballot in order for it to be counted. Also, with respect to the counting of provisional ballots, according to our estimates from our survey of local election jurisdictions nationwide, a voter not meeting residency requirements was the most frequently cited problem, followed by insufficient evidence that the voter was registered. In jurisdictions we visited, election officials also varied in how they handled a lack of information from the voter that was needed to verify a provisional ballot.
National figures on provisional ballots for the November 2004 election are difficult to estimate because of a lack of data on provisional ballots cast and counted, and variation in how states implemented provisional voting. Nevertheless, we estimate that between 1.1 million and 1.7 million provisional ballots were cast in the November 2004 election. The variation in how provisional voting was implemented makes it difficult to compare the use and counting of provisional ballots among jurisdictions. A number of factors can affect the number of provisional ballots cast and counted. For example, one such factor could be an instance in which the polling location hours were extended and votes cast during the extended hours were cast provisionally.
Events in the November 2000 Election Preceded the HAVA Requirement for Provisional Ballots
Following the November 2000 election, in our October 2001 comprehensive report on election processes nationwide, we noted that the biggest problems on Election Day involved resolving questions about voter eligibility. Typically, a voter’s eligibility is established before a voter receives a ballot, most often by a poll worker examining a poll book or registration list for the person’s name. If the name appears on the list and other identification requirements are met, the voter is given a regular ballot and is allowed to vote. We also noted in our report that in the November 2000 election, a large number of voters with eligibility issues created frustration for voters, long lines, and problems communicating between the polls and election headquarters as workers tried to resolve eligibility issues.
For the 2000 general election, when the voter’s name did not appear on the registration list, we reported in October 2001 that jurisdictions had different procedures for dealing with the question of the voter’s eligibility. More specifically, we reported that 20 states plus the District of Columbia used some form of provisional ballot when a voter’s name was not on the voter list, with verification of registration conducted after the election. As we reported, provisional balloting measures went by different names among the states, including provisional ballot, challenged ballot, special ballot, emergency paper ballot, and escrow ballot. Further, in 5 states in the 2000 general election, we reported that voters could complete an affidavit when voting with no further verification of their registration information being required by state law prior to the ballot being counted.
The U.S. Census Bureau estimated that of the 19 million registered voters who did not vote in 2000, 6.9 percent did not vote because of uncertainty regarding their registration. In our October 2001 report, we noted that headlines and reports questioned the effectiveness of voter registration by highlighting accounts of individuals who thought they were registered being turned away from polling places on Election Day and jurisdictions incorrectly removing the names of eligible voters from voter registration lists. Our report also found that almost half of the jurisdictions nationwide in 2000 reported having problems with registration applications submitted at motor vehicle agency offices that election officials believed could result in individuals showing up at the polls to vote and discovering that they were not registered.
Numerous recommendations were made for federal regulations to require that all states provide provisional voting. For example, the Federal Election Commission in June 2001 recommended that all states devise procedures for voters to cast provisional ballots at the polls under certain conditions, as did the National Commission of Federal Election Reform in August 2001 and the National Task Force on Election Reform in July 2001, among others.
Under HAVA, in an election for federal office, most states are to permit individuals to cast a provisional ballot under certain circumstances. The statutory deadline for implementing HAVA’s provisional voting requirement was January 1, 2004. For federal elections, states are, in general, required to allow the casting of a provisional ballot by an individual asserting to be registered in the jurisdiction in which the individual desires to vote and eligible to vote but whose name does not appear on the official list of eligible voters for the polling place, or whom an election official asserts to be ineligible to vote, or who registered to vote by mail but does not have (and has not previously provided) the required registration identification when trying to vote in person or by mail, or casting a vote pursuant to a court order or other type of order extending poll closing times.
HAVA requires that an individual be permitted to cast a provisional ballot upon the execution of a written affirmation before an election official at the polling place. The written affirmation must state that the individual is registered to vote in that jurisdiction and eligible to vote in that election. HAVA specifies that either the provisional ballot or the written affirmation information be transmitted to an appropriate election official for a determination as to whether the individual is eligible to vote under state law. Under HAVA, if an individual is determined to be eligible, the provisional ballot is to be counted as a vote in accordance with state law. Election officials, under HAVA, are to give the individual written information on how to ascertain whether the vote was counted and, if the vote was not counted, the reason the vote was not counted. HAVA directs that state or local election officials establish a free access system, such as a toll-free number, for provisional voters to ascertain such information.
While HAVA established conditions under which an individual must be allowed to cast a provisional ballot, states are not prohibited from offering provisional ballots for other reasons, or from using ballots with other names (e.g., a challenged ballot) to serve provisional vote purposes. HAVA explicitly provides that the specific choices on the methods of complying with certain act requirements, including the provisional voting requirements, are left to the discretion of the state. In addition, HAVA provides that a state may establish election technology and administration requirements that are stricter than HAVA requirements, so long as they are not inconsistent with other specified federal requirements.
State and Local Jurisdictions Varied in Their Implementation for Providing Provisional Ballots for the November 2004 Election
On the basis of reports from state election officials and in local election jurisdictions we surveyed and visited, states and local jurisdictions provided for provisional voting in a variety of ways for the November 2004 election. These differences contributed to the variation in the number of provisional votes cast among jurisdictions.
The results of our state survey of election officials show that states reported using new or existing legislative or executive actions (which included executive orders, directives, regulations, or policies) to implement HAVA’s provisional voting requirements. Specifically, our state survey showed 27 states reported enacting new legislation or taking executive action to meet HAVA’s provisional voting requirements; 11 states and the District of Columbia reported using the state’s existing legislative or executive action to meet the requirements; 7 states said HAVA provisional requirements were met by a combination of new legislation or executive action and existing actions; 5 states (Idaho, Minnesota, New Hampshire, North Dakota, and Wisconsin), in response to the question of how their state established the provisional voting requirements set forth in HAVA, answered that they were exempt from such requirements; these 5 states are exempt from HAVA provisional requirements, in general, because they have same-day voter registration or no voter registration.
Connecticut officials responded, for example, that the state enacted legislation after HAVA to establish HAVA provisional voting requirements. Connecticut state laws were enacted in June 2003 related to the application for a provisional ballot, casting of the ballot, and determination of eligibility for counting of provisional ballots, among other things. In contrast, Alaska election officials reported that existing legislation met HAVA’s provisional voting requirements. According to Alaska’s 2005 updated HAVA plan, the state had an existing provisional voting process known as Questioned Voting. This process, established in the early 1980s, required only minimal changes to meet HAVA provisional voting requirements. Alaska requires use of a questioned ballot for any voter who votes at a polling location where his or her name does not appear on the precinct register, or if the voter does not have identification and is not personally known by the election official. In our state survey, New Jersey reported meeting HAVA provisional voting requirements with a combination of existing and new legislation. In one New Jersey jurisdiction we visited, election officials stated that state provisional voting procedures were first established in 1999. According to these officials, the state amended its provisional ballot election law after HAVA to allow use for voting by court (or other) order after the polls have closed, and by first-time mail registrants who do not provide identification.
Paper Ballots and DRE Were Voting Methods Used to Cast Provisional Ballots
Election officials in 25 of the 26 jurisdictions we visited that provide for provisional voting told us that they used some form of paper ballot for Election Day provisional voting for the November 2004 election. For example, election officials in the Illinois jurisdictions we visited said that the regular punch card ballot was used by provisional voters, and then placed in provisional ballot envelopes. In the New Jersey jurisdictions we visited officials said that provisional votes were cast on paper ballots that could be counted with optical scan machines (if voters were determined to be eligible). Election officials in Connecticut jurisdictions said that they used hand-counted paper ballots for provisional voters.
According to election officials in 1 Ohio jurisdiction and 1 Nevada jurisdiction, DRE was used for Election Day provisional voters. According to election officials or documents they provided in the 2 jurisdictions we visited that used DRE for provisional voting on Election Day, the processes used for casting provisional votes were as follows: In the Ohio jurisdiction, election officials said voters first completed an affidavit statement with a preprinted code number, and signed a special section of the poll book. The poll worker then inserted a unit into the DRE that contained the ballot for the precinct. The poll worker then pressed the provisional ballot selection on the DRE and entered the code number for the individual voter associated with the voter’s affidavit statement. The individual then voted.
In one Nevada jurisdiction, DREs were used for Election Day provisional voting, but optical scan ballots were used for provisional voters participating in early voting. According to the poll worker’s manual provided by election officials, Election Day provisional voters completed an affirmation with identifying information and the reason they were casting a provisional ballot. As described to us by election officials at this jurisdiction, the poll worker then added precinct information, and both signed the affirmation. The poll worker then activated the DRE with a card. To indicate that the ballot was provisional, the poll worker pressed “0” and the machine provided a provisional voter identification number that the poll worker copied onto the voter affirmation and provisional voter receipt. The voter then voted.
The Provisional Ballot Design and Tracking Procedures Varied among States
According to election officials in the jurisdictions we visited, the design of provisional ballots varied for the November 2004 election. The provisional ballot differences included variation in terms of the races included, ballot and envelope color, the envelopes they were placed in, and the information included on the provisional ballot envelopes. For example, in the Nevada jurisdictions, the provisional ballot only included races for federal offices, while in the Kansas jurisdictions, officials said that the provisional ballot was the same as a regular ballot. In 1 Georgia jurisdiction, election officials stated that they were using an absentee ballot for provisional voters but were inserting it into a salmon-colored envelope, whereas in an Illinois jurisdiction we visited, “Provisional” was printed in pink letters across the punch card ballot used in that jurisdiction so that these ballots were distinguishable from other ballots.
The provisional ballot envelopes also varied in terms of what information was provided in the jurisdictions we visited, according to example envelopes provided to us (or described) by election officials. The outside of the provisional ballot envelopes in most of the jurisdictions we visited served as the voter’s written affirmation that is required by HAVA. For example, in a jurisdiction in Illinois, the ballot envelope included instruction to voters on how to cast a provisional ballot; in a Florida jurisdiction (as well as in Illinois) the provisional envelope includes information on the reason why the provisional ballot was cast. In New Mexico and Colorado jurisdictions we visited, the envelope included a tear- off tab with information on how voters could find out whether their vote counted, and if not, why it was not counted. In addition, election officials in some jurisdictions we visited described provisional ballots being placed in envelopes, sometimes with a second security envelope covering the ballot inside. Figure 42 shows an example of a provisional ballot envelope.
Officials in jurisdictions we visited described a variety of methods used for tracking provisional ballots in the November 2004 election. Methods included having individual ballots numbered, maintaining an inventory or log, accounting for provisional ballots at the beginning and end of Election Day, and using specially colored ballots or envelopes for holding provisional ballots. The following are examples of how election officials in four jurisdictions we visited said they tracked provisional ballots for the November 2004 election: In a Pennsylvania jurisdiction, election officials tracked provisional ballots cast at the polling place on a form provided by the election officials. Provisional ballots were marked with a sticker indicating that they were provisional. The sticker also had an identification number for tracking the ballot, and the voter was provided a receipt with the identification number to use when calling for information on the status of their ballot. All provisional ballots were placed inside of green envelopes.
In a New Mexico jurisdiction, an election official said that ballots were numbered sequentially, so that the poll workers could track the numbers. The precinct judges certified the numbers of the ballots they received, used, delivered, and destroyed.
In a New Jersey jurisdiction, the municipal clerk issued a specific number of provisional ballots (25) to each precinct, with a “Custody Receipt” form that identified who was in possession of the orange bag with the provisional ballots and an accounting of all ballots originally issued. A ballot that had been voted was enclosed in a gray envelope and then put back in the orange bag.
In a Kansas jurisdiction, separate poll books, separate envelopes for provisional ballots, and separate pouches for envelopes containing provisional ballots (all blue in color) facilitated tracking the ballots as separate items from regular Election Day ballots. No tracking of the actual ballot occurred (before it was voted) because the same optical scan paper ballot was used for regular Election Day voters.
Additional Circumstances for Using Provisional Ballots Varied for the November 2004 Election
Apart from permitting voters to cast provisional ballots under the circumstances specified in HAVA, some jurisdictions we surveyed or spoke with had additional reasons for providing provisional ballots to voters in the November 2004 election and other types of ballots that could be used for different circumstances. In addition, election officials in jurisdictions we visited told us about different approaches for offering provisional ballots.
Provisional Ballots Were Provided for a Variety of Reasons in Jurisdictions We Visited
In the local election jurisdictions we visited, election officials described various circumstances, in addition to those required by HAVA, in which a provisional ballot was provided to a prospective voter in the November 2004 election. The additional circumstances under which provisional ballots were provided are established by state officials. For example, In one Colorado jurisdiction we visited, election officials stated that provisional ballots were available to voters who did not have the identification required of all voters in the state and also available if a person was listed as a felon in the poll book. Further, election officials told us that the Colorado Secretary of State issued guidance just prior to the 2004 general election that allowed individuals— claiming to have registered at a voter registration drive but for whom the jurisdiction had no record—to vote provisionally.
Election officials in jurisdictions we visited in Colorado, Florida, Kansas, Ohio, and Washington said that voters claiming they had not received their absentee ballots were provided with provisional ballots. In other jurisdictions, such as the 2 we visited in Connecticut, voters were allowed to vote regularly if their absentee ballot did not arrive.
Kansas election officials reported that they allowed voters to cast provisional ballots if the voter did not trust the voting machines and wanted a paper ballot, or if the voter had a different last name than the listed one because of marriage or divorce.
The extent to which voters are provided with provisional ballots varied depending on whether states required identification of all voters or only certain voters, according to our state survey. Some states reported that they require all voters to provide identification; some reported that they require only provisional voters to produce identification, while others reported that they do not require identification from voters other than first- time voters who registered by mail, as required by HAVA. Chapter 4 on conducting elections discusses state requirements for voter identification for all voters. According to our state survey, 6 states—Arizona, Massachusetts, Michigan, New Mexico, Utah, and Wisconsin—reported requiring identification from only provisional voters in the November 2004 election, but Michigan and Utah reported allowing an alternative to identification for provisional voters who did not have required identification. In Michigan, for example, a voter receiving a provisional ballot who was unable to meet the identification requirement was permitted, according to election officials responding to our state survey, to fax, mail, or hand-deliver an acceptable form of photo identification to the clerk anytime during the 6 days following the election.
Alternatives to Provisional Voting Available in Some Jurisdictions We Visited
Some jurisdictions we visited reported that Election Day voting options other than provisional ballots were available. For example, election officials in jurisdictions we visited in Ohio said that provisional ballots were the only special ballots available for that election. In contrast, in a New Mexico jurisdiction we visited, election officials said the state offered an in-lieu-of ballot for voters who requested an absentee ballot, and claimed it did not arrive. These election officials said the in-lieu-of ballot was the same as a provisional ballot, but it was placed in a different sleeve for later determination of whether an absentee ballot had been cast or not. At a Connecticut jurisdiction we visited, election officials described the state’s presidential ballot, available at the clerk’s office on Election Day for the November 2004 election. A presidential ballot, according to election officials and documents they provided, allowed voting for president and vice-president by former Connecticut residents who had moved to another state within 30 days of the election and for that reason could not vote in their new state of residence.
Election officials in some jurisdictions we visited, such as 1 jurisdiction in Florida and 2 jurisdictions in New Jersey, said their procedures allowed challenged voters to sign a statement, such as an affidavit declaring their eligibility, and to vote on a regular ballot that would be counted with other ballots on Election Day. According to poll worker guidance provided by election officials in the Florida jurisdiction, a written challenge must be submitted under oath and given to the voter; then the voter has the right to submit an oath affirming his or her eligibility. The polling place clerk and inspectors must resolve the challenge by majority vote, providing a regular ballot if the decision is in the prospective voter’s favor. The guidance states that a challenged voter who refuses to sign the oath must be offered a provisional ballot. In both jurisdictions we visited in New Jersey, voters who were challenged were not issued a provisional ballot, according to documents provided by election officials. As stated in the poll worker manual for one of the jurisdictions for the 2004 general election, a voter who was challenged completed a challenged voter affidavit, as shown in figure 43. The manual stated that the location’s four poll workers take a vote to decide whether the voter would be allowed to vote. On the basis of the decision, the challenged voter cast a regular ballot or was not allowed to vote, according to the manual (in case of a tie, the voter was allowed to vote).
In our survey of local election jurisdictions nationwide, we asked for information on the use of provisional ballots, challenged ballots, or other types of ballots under various scenarios for the November 2004 election. Table 18 shows the extent to which we estimate that local jurisdictions provided provisional ballots as compared to providing other types of ballots.
Apart from permitting voters to cast provisional ballots under the circumstances specified in HAVA, election officials in jurisdictions we visited described differing approaches under which provisional ballots were utilized for the November 2004 election.
Election officials in most of the 28 jurisdictions we visited said that in the November 2004 election they would not refuse an individual a provisional ballot. In a Colorado jurisdiction, election officials said that election judges were instructed to direct all voters meeting the criteria for voting provisionally (e.g., claiming to be registered and eligible, but with some eligibility question) to the provisional voting table. In 1 Nevada jurisdiction, the election official said that anyone could receive a provisional ballot. He said that they had Las Vegas tourists who wanted to vote a provisional ballot, even though they were informed that it would not be counted. Election officials in 1 Washington jurisdiction said voters knew that they could cast a ballot regardless of circumstances, and election officials in the other Washington jurisdiction said that provisional ballots served as a conflict avoidance tool at the polls. Election officials in both New Mexico jurisdictions said that if a voter was not on the registration list, he or she was immediately given a provisional ballot. According to the New Mexico election officials, precinct officials were not to direct a voter to the correct precinct; instead, under the provisional voting rule, they were to offer a provisional ballot to the voter.
Election officials in some other jurisdictions we visited told us that poll workers may have taken certain steps before providing a voter with a provisional ballot. In 1 Illinois jurisdiction, an election official said that if a potential voter was not listed, the poll workers first tried to determine if the voter was registered in another jurisdiction. If that was the case, the poll workers then directed the voter to that jurisdiction, but they did not refuse to provide a provisional ballot if a voter requested one. In 1 Ohio jurisdiction, election officials told us that if a voter was registered in Ohio, everything was done to get the voter to the correct precinct. In a New Jersey jurisdiction we visited, election officials explained that poll workers take several steps when the voter’s name was not listed in the poll book. Poll workers were instructed, according to the poll worker’s manual, to check the poll book for misspellings or for the name being out of alphabetical sequence, and to check the county street guide to see if the voter was in the wrong location. Election officials in this jurisdiction also told us that voters who were in the wrong location were directed to the correct location. They added that voters who did not wish to vote provisionally were told to go before a superior court judge to plead their cases.
In 5 jurisdictions we visited, election officials said there were instances where election officials would refuse to provide a provisional ballot on Election Day. In 1 Ohio jurisdiction, election officials said that a provisional ballot was provided if the potential voter appeared at the polling place. However, if the person came to the election office on Election Day and no record of voter registration was found by the Registrar, then the voter was not allowed to vote provisionally. A potential voter stating that he or she was not registered or not a resident was a reason not to offer the individual a provisional ballot, according to election officials in 1 jurisdiction in Nevada, and 1 in New Jersey, and both jurisdictions in North Carolina. Officials in 1 Georgia jurisdiction we visited said that an individual might not be offered a provisional ballot if he or she was on the voter registration list and therefore eligible to vote a regular ballot.
Whether a provisional ballot was provided or not might have been based, in part, on the size of the jurisdiction and the familiarity of the poll workers with the voters. Several election officials in small local jurisdictions included in our nationwide survey made this point in written comments. For example, comments included the following: “This is a small township. We don’t have the problems big cities have. People know who lives in the township. They know their neighbors.” “Most voters are personally known, including their addresses.” “We were told that the state voter list was the bible for the day. But we had one lady who should have been provisional but we all knew where she lived so we let her vote. It was the choir lady’s niece. Her signature was on file.”
In larger jurisdictions, poll workers might be less likely to know the voters in the precinct and may have made greater use of provisional ballots than in smaller jurisdictions.
Newness of Providing Provisional Ballots Presented Some Challenges in November 2004
Some jurisdictions we visited reported that knowing how many provisional ballots to have available for the November 2004 election was a challenge. However, on the basis of our survey of local jurisdictions, we estimate that for the November 2004 election, only 1 percent of jurisdictions had a shortage of provisional ballots. The difficulty with anticipating the need for provisional ballots, according to an Illinois jurisdiction election official, was that officials had no historical experience to rely upon in deciding how many to make available at each site. In this jurisdiction, provisional ballots were used for the first time in the November 2004 election, according to the election official. Similarly, in a Pennsylvania jurisdiction we visited, election officials stated that they had no basis to plan for the number needed, and that they had to rush to produce (e.g., placing a provisional ballot sticker over an absentee ballot) additional provisional ballots at the last minute because some precincts needed more than were initially allocated. Election officials in one Nevada jurisdiction we visited said some polling places were overstocked while others were understocked, requiring them to shuttle the ballots between polling places. In a Colorado jurisdiction we visited, election officials said that last-minute changes by state officials created a need for more provisional ballots because this change allowed individuals who registered during a voter registration drive but who were not on the voter list to vote provisionally.
On the basis of our local survey, poll workers failing to follow procedures for conducting provisional voting surfaced as an issue in some jurisdictions in the November 2004 election. We estimate that 12 percent of jurisdictions nationwide encountered poll worker performance problems related to their failure to follow procedures with provisional voting. The newness of the provisional procedures or last-minute changes in the guidance were challenges that confused poll workers, according to election officials in jurisdictions we visited. Specifically, In a Georgia jurisdiction, election officials told us there was a question regarding whether several college students were eligible to vote provisionally, and state election officials were called for clarification (the students were allowed to vote provisionally).
In a Connecticut jurisdiction, election officials said poll workers were confused about the process, issuing provisional ballots in some cases before checking with the Registrar to try to locate the prospective voters in the statewide database.
In both Nevada jurisdictions, election officials we visited identified poll worker training needs; for example, in 1 of the Nevada jurisdictions election officials said provisional ballot materials were not adequately tracked and returned.
In an Ohio jurisdiction, election officials identified poll worker handling of provisional ballots as an area for improvement based on finding valid provisional ballots returned in envelopes for soiled and defaced ballots. In addition, they said about half of the provisional voters did not sign the poll book, as they were supposed to have done under this jurisdiction’s requirements. Furthermore, voters were to place their provisional ballots in a colored provisional sleeve for determination of eligibility before the vote was submitted, but the election official estimated that about 10 percent of the provisional ballots were placed directly in the ballot box instead.
Some election officials in jurisdictions we visited described actions they took to implement provisional voting that worked well for the November 2004 election. Several identified training given to poll workers that prepared them for provisional voting, or had staff dedicated to handling provisional votes, or poll workers with prior provisional voting experience. For example, election officials in 1 Colorado jurisdiction said that they had election judges whose sole responsibility was conducting provisional voting. According to these election officials, the election judges (i.e., poll workers) were well trained and sat at a separate table to handle provisional voting. One jurisdiction we visited in Illinois had specific instructions on the voter affidavit for election workers to follow. Figure 44 provides an example of the affidavit.
State and Local Jurisdictions Reported Variation in Several Areas Affecting whether Provisional Ballots Are Counted
HAVA specifies that voters casting ballots under HAVA’s provisional balloting requirements must, in general, execute a written affirmation stating that they are registered in the jurisdiction in which they desire to vote and that they are eligible to vote in that election. Polling place officials, under HAVA, are to transmit either the ballot or the written affirmation information to an appropriate election official for verification to ascertain if the individual is eligible to vote under state law. In the November 2004 election, state requirements regarding the location from which voters had to cast their provisional ballot in order for it to be counted (e.g., in the specific precinct in which the voter is registered or anywhere within the county—city, parish, township—in which the voter was registered) was one key difference among states. States also varied in how missing voter information was handled and how voters were informed whether their vote was counted or not. On the basis of our national survey of local jurisdictions, the most frequent problem encountered by local jurisdictions in counting provisional ballots was that voters did not meet residency eligibility requirements for the precinct or jurisdiction.
Location Where Voters Must Cast Their Ballots in Order to Be Counted Varied among States
HAVA requires states to provide provisional balloting where, among other things, individuals assert that they are registered in the jurisdiction in which they desire to vote. The term “jurisdiction” in HAVA’s provisional voting requirements is not specifically defined. As a result, states establish, under their own election codes, the applicable jurisdiction where voters must cast their provisional ballot from in order for such ballot to be eligible to be counted. For example, in some states this location is the specific precinct in which the voter is registered, and in other states, the voter may be anywhere within the county (city, parish, township) in which the voter resides and is registered. Our survey of state election officials asked where a provisional voter needed to cast a vote in order for it to be counted for the November 2004 election. Figure 45 shows where states reported that provisional voters needed to cast their votes in order for such votes to be eligible to be counted.
Variation in state requirements as to the location where a provisional ballot must have been cast in order to be counted was also evident in the jurisdictions we visited. For example, voters in Kansas could, according to election officials, vote provisionally in precincts other than where they were registered (but within the same county) and if otherwise eligible to vote have their vote partially counted (e.g., for county, state, or federal offices or issues). Nevada election officials said they count provisional votes cast anywhere in the county where the voter was registered and otherwise eligible, but all provisional ballots only included federal races. Election officials in both Washington jurisdictions we visited reported that a voter in the November 2004 election was allowed to cast a provisional ballot anywhere in the state of Washington, and the ballot would be forwarded to the correct county (if the ballot was cast in a county other than the one in which the voter was registered) and counted if the voter was eligible. Election officials in 1 Washington jurisdiction we visited said that county election workers mailed the provisional ballots for non- Washington residents to the Secretary of State of the state where the voter claimed to be registered, but these officials were not knowledgeable of what became of the ballots.
Election officials in several states have faced court challenges to their state requirements regarding the location where a provisional ballot must have been cast in order to be counted. The litigation has primarily arisen in states requiring that a provisional voter had to cast a vote in the specific precinct in which he or she was registered, in order for that vote to be counted. In this context, the courts have generally held that HAVA does not require a state to count provisional votes cast in the wrong precinct as legal votes when they would otherwise be considered invalid under state law.
In our state survey, we also asked state election officials if they anticipated that their state would change, by November 2006, where a provisional voter must cast a vote for it to be counted. Forty states reported that they did not anticipate such rules would change. Election officials in 4 states reported they anticipated a change by November 2006. Three out of the 4 states (Arkansas, Nevada, and New Jersey) reporting that they anticipated a change for 2006 had reported for the November 2004 general election that a provisional voter could have cast a vote anywhere within the county (city, parish, township) in which the voter resides and have such vote counted. The fourth state, Colorado, had reported for the November 2004 general election that provisional voters had to cast their votes in the specific precincts in which they were registered in order for their votes to be counted. Georgia, Maryland, and the District of Columbia said they did not know whether rules specifying where a provisional voter must cast a ballot in order to be counted could be anticipated to change, and the remaining 4 states responded that they will not have provisional voting. These 4 states are not subject to provisional voting requirements.
Residency Requirements and Evidence of Registration Were the Most Frequent Problems Nationwide Affecting whether Provisional Ballots Were Counted
In our survey of local election jurisdictions nationwide, we asked about problems that local jurisdictions encountered during the November 2004 election in counting provisional ballots. On the basis of our survey, in jurisdictions where provisional ballots were cast we estimate that the most frequent problems concerned voters not meeting residency requirements or lacking evidence that the voter was registered. Specifically, we estimate 66 percent (plus or minus 7 percent) of jurisdictions had a problem with voters not meeting residency eligibility requirements for the precinct or jurisdiction, 61 percent (plus or minus 7 percent) received insufficient evidence that individuals had submitted voter registration applications at motor vehicle agency offices, 61 percent (plus or minus 7 percent) had instances of insufficient evidence that individuals had registered or tried to register directly with the election office, 34 percent (plus or minus 7 percent) had registration applications received by the registrar very close to or after the registration deadline, 32 percent (plus or minus 7 percent) had voters not providing identification as specified by HAVA for registrants who registered by mail and were voting for the first time in the precinct or jurisdiction, 29 percent (plus or minus 6 percent) received insufficient evidence that individuals had submitted voter registration applications at National Voter Registration Act agencies other than motor vehicle agency offices, 28 percent (plus or minus 6 percent) had provisional ballot envelopes or ballots that were incomplete or illegible, and 20 percent of jurisdictions had problems with voters who did not sign a sworn statement that they met the qualifications to be eligible to vote in the precinct or jurisdiction.
Written comments made by local election officials in our nationwide survey identified some additional problems encountered with counting provisional ballots. Examples included uncertainty whether a convicted felon’s voting rights, lost as a result of such conviction, had been restored; a voter’s registration records that had been sealed by a court; and the state changing the rules several times right up to Election Day, creating confusion, according to election officials.
Jurisdictions Visited Identified Variations in How Missing Information Was Handled when Provisional Ballots Were Counted
In addition to variation in where states required provisional ballots to be cast in order to be counted for the November 2004 election, local jurisdictions we visited reported a variation in how to handle a lack of identification or a missing signature. For example, election officials in one New Mexico jurisdiction we visited said that first-time voters that did not provide the required identification had until the close of the polls on Election Day to bring their identification to the county clerk’s office. In contrast, according to election officials in a New Jersey and a Georgia jurisdiction, provisional voters were allowed up to 2 days to produce identification for their vote to be counted, and in a Nevada jurisdiction, voters had until 5:00 p.m. the Friday after the election.
With respect to mail registrants who were permitted to cast provisional ballots because they did not provide required identification when voting for the first time, election officials in 1 Illinois jurisdiction we visited reported a lack of clarity as to what subsequent identification-related verification was needed prior to counting provisional ballots. According to the Illinois election officials, the state’s guidance resulted in a situation where one Illinois jurisdiction required the voter to provide to the county clerk’s office identification with an address that matched the address in the voter registration list within 48 hours after the election in order to be counted, while another jurisdiction did not require the two such addresses match. The Illinois officials stated that this issue has been clarified.
Jurisdictions we visited also varied in how they handled a missing voter signature. For example, in 1 Colorado jurisdiction, election officials said that they mailed letters to voters who failed to sign their provisional ballot envelopes and allowed the voters up to 10 days after the election to come in and sign so that their votes would be counted. This was not a procedure described in all jurisdictions we visited. In 1 jurisdiction in New Mexico, ballots would not be counted for voters who did not sign the provisional ballot affidavit or roster. In 1 Georgia jurisdiction we visited, voters had to complete a new voter registration form or their provisional ballots were not counted.
Telephone Was Used Most Often to Provide Voters with the Outcome of Their Provisional Vote
HAVA requires that provisional voters be provided with written information about how to find out whether their vote was counted (and if not, why) using a free access system established by state or local election officials. On the basis of our local jurisdiction survey, we estimate that the majority of local jurisdictions that had provisional ballots cast used the telephone (often toll-free) as the free access system for voters in the November 2004 election to obtain information on whether their provisional ballot was counted, and if not counted, why not. Table 19 shows the estimated percentage of jurisdictions that used various methods. Some jurisdictions used more than one method.
Election officials from jurisdictions we visited described a number of ways that provisional voters were provided information about how to learn the outcome of their votes for the November 2004 election, such as ballot receipts, a copy of the voter’s affidavit, a form letter, or a tear-off portion of the provisional ballot envelope. In a New Jersey jurisdiction we visited, provisional voters were given a toll-free number at which to leave their name and address, and then the results were mailed to them, according to election officials. The jurisdiction election officials noted that this process worked well. Figure 46 provides examples of the information voters were provided to inquire whether their vote was counted.
In our local jurisdiction survey, we asked how soon after Election Day information on the outcome of a provisional ballot was made available to voters. According to written comments, feedback was reported by some election officials to be available to voters after the November 2004 election as early as the next day, or within 7 days after the election, although some allowed 1 month, or until the election was certified.
Election officials in some of the jurisdictions we visited reported that few voters called to find out if their provisional votes were counted. For example, in a Colorado jurisdiction, officials reported approximately 100 calls out of over 6,100 ballots cast; a Kansas jurisdiction election official estimated receiving calls from 6 provisional voters out of over 3,600 that voted; a New Jersey jurisdiction reported receiving 69 inquiries from voters out of over 6,300 cast; and in 3 other jurisdictions we visited, election officials reported no one called to find out if his or her vote was counted.
A Number of Factors Contribute to Difficulties in Estimating and Comparing Provisional Ballots Cast and Counted
Estimating the number of provisional ballots initially cast and those that were counted in the November 2004 election is difficult because complete information is not available, and because of differences in how state and local jurisdictions have implemented HAVA provisional voting requirements affecting how and whether such ballots are provided and counted. Those same factors limit the value of comparing provisional ballots cast and counted among jurisdictions. Although estimation is difficult, our survey allowed us to estimate provisional ballots cast, but with strong caveats.
While HAVA required that most states permit individuals to cast provisional ballots under certain circumstances, not all jurisdictions reported having provisional ballots cast in their jurisdiction in the November 2004 election. On the basis of our survey of local jurisdictions, we estimate that provisional votes were cast in 33 percent of jurisdictions and none were cast in 67 percent of jurisdictions. Our estimates varied by size of jurisdiction regarding whether provisional votes were cast or not. We estimate that in 99 percent of large jurisdictions, 84 percent of medium jurisdictions, and 12 percent of small jurisdictions provisional votes were cast in the November 2004 election. The differences between all sizes of jurisdictions were statistically significant.
The difference between different sizes of jurisdictions’ use of provisional ballots may be explained in part by comments from election officials in local jurisdictions surveyed and from officials in jurisdictions we visited. For example, officials in several smaller jurisdictions included in our nationwide survey who reported that provisional ballots were not cast in their jurisdiction had indicated in written comments that election workers are likely to have personal knowledge of a voter’s eligibility. As one election official from a Wisconsin jurisdiction wrote, provisional ballots were available, but use of the ballots was not necessary. Similarly, in a small jurisdiction we visited in New Hampshire, election officials told us that given the town’s small population of roughly 1,600 residents, 99 percent of the time someone in the room knew the individual and could vouch for his or her identity. In this circumstance, according to election officials, no verification was necessary at the poll to ensure the voter's identification.
Data Were Lacking for National Estimate of Provisional Votes Cast and Counted
The number of provisional ballots cast and counted nationally is difficult to estimate with precision because of the limited data available and data quality concerns. Estimates that are available, however, do serve as an indication that the HAVA provisional voting requirements have allowed potentially eligible voters who otherwise might have been turned away to participate. We requested November 2004 data on provisional ballots cast and counted in our survey of local election jurisdictions nationwide, but because of missing information and other methodological concerns, our estimate is provided only with strong caveats. We estimate that a total of between 1.1 million and 1.7 million provisional ballots were cast. Our range reflects the fact that an estimated 20 percent of the jurisdictions in our survey did not provide data on how many provisional ballots were cast. We could not estimate the number of provisional ballots that were counted with any level of certainty, because of a very high level of missing data—an estimated 40 percent of the jurisdictions did not provide data on the number of provisional ballots counted.
In addition, some jurisdictions in our survey providing the number of provisional ballots cast may have actually provided the number of provisional votes counted. It is possible this may have occurred because jurisdictions would more likely have a record of the number of provisional votes determined to be qualified and counted than they would have the number of provisional votes originally submitted at polling places (cast). For example, in 1 jurisdiction we visited, provisional ballot numbers were provided only on the number of provisional votes that were counted. If some responses to our survey of local jurisdictions actually provided the number of votes counted rather than the number of votes cast, then our estimate of provisional votes cast may be an underestimate.
HAVA specifies that information be made available to individuals through a free access system (such as a toll-free telephone number or an Internet Web site) regarding whether their provisional votes were counted and, if a vote was not counted, the reason it was not counted. The specifics of implementing such a system, such as the methods by which such information is to be identified, collected, and maintained, however, under HAVA, are left to the discretion of state and local election officials. The National Task Force on Election Reform recommended that states develop a uniform method for reporting provisional ballots at the state and national levels, and also that states collect data on the number of provisional ballots cast on Election Day. Some states might require the information on ballots cast and counted be sent for statewide figures. Election officials in a Connecticut jurisdiction we visited, for example, said that the Registrar completed a provisional ballot report for the Secretary of State in accordance with state guidance.
Other national estimates of the number of provisional votes cast and counted in the November 2004 election have been affected by data quality issues. The Election Assistance Commission, using data from its survey of election administrators, estimated that 1.9 million voters cast provisional ballots at the polls in November 2004, and that 1.2 million of those votes cast were counted. As with our estimates, EAC cautioned that the coverage, or response rate, for its estimates was limited. The response rate for provisional ballots cast and counted was 46 percent and 38 percent, respectively. The report authors stated that data quality issues, such as missing data or data error entries (such as in 15 jurisdictions in the EAC report where the number of provisional ballots counted was greater than the jurisdiction reported as cast) were identified and corrected where possible.
On the basis of data collected at different times from different sources in different states, electionline.org estimated that over 1.6 million provisional ballots were cast, and nearly 1.1 million of them were counted. However, readers are cautioned here as well about the limitations of the available data. For example, figures are not definitive because of the variation in requirements and procedures among (or even within) states, and estimates are based on incomplete information. The authors stated that they provided provisional voting estimates with the intent of moving the discussion of provisional voting forward.
Number of November 2004 Provisional Votes Cast and Counted in Local Jurisdictions We Visited
Information provided by some of the jurisdictions we visited illustrates the variation in the reported number of provisional ballots cast and counted during the November 2004 election, as shown in table 20.
When looking at provisional ballots cast and counted for a particular jurisdiction, the variability in the implementation of provisional voting by states and jurisdictions makes interpretation and comparison among jurisdictions difficult. As mentioned earlier, the number of provisional votes cast and counted may vary based on a number of factors. In general, states and jurisdictions vary in why and how provisional ballots are provided to potential voters, as well as the state and local procedures for how provisional ballots are counted. A partial list of these factors includes the following: State provisions varied regarding the additional circumstances (apart from the minimum requirements specified in HAVA) under which a provisional ballot may be offered.
Some states offered other voting options in addition to provisional ballots to voters with eligibility issues (such as signing an affidavit, then voting normally or casting a challenged ballot).
The manner and extent to which the provisional ballot options available to voters are actually utilized varied in connection with the size and approach of the jurisdictions. For example, smaller jurisdictions were, according to election officials, less likely to use the provisional ballot option than larger jurisdictions because they were more knowledgeable of voters in their jurisdictions and therefore better positioned to address eligibility issues than larger jurisdictions, and some jurisdictions reported taking additional steps to send the voter to the correct precinct before offering a provisional ballot, whereas other jurisdictions might not do so.
States established the location where voters must cast their provisional ballots from in order for such ballots to be eligible to be counted. For example, in some states this location is the specific precinct in which the voter is registered, and in other states, the voter may be anywhere within the county (city, parish, township) in which the voter resides and is registered.
States or local jurisdictions established other conditions (e.g., the time limit for providing required identification) that varied in determining whether a provisional vote was to be counted.
There were other factors, such as instances in which the polling location was kept open late because of a federal court, state court, or other order extending the polling hours.
Notwithstanding the variations we have identified in provisional voting processes and challenges identified by some election officials in jurisdictions we visited, several election officials reported that they thought the provisional voting process worked well for the November 2004 election, in that people who would normally not have been able to cast a ballot were allowed to do so, and some of those ballots were counted.
Concluding Observations
While many jurisdictions reported that for the November 2000 election having at least one procedure in place to help resolve eligibility questions for voters whose name did not appear on a polling place registration list, only 20 states plus the District of Columbia reported using some form of provisional voting in the November 2000 election. In those states in which it was not available, voters whose names did not appear on polling place registration lists, but stated they had properly registered to vote, were often not permitted to cast a regular ballot. Provisional voting is an important means of enhancing voter access to the polls.
HAVA required all states that required registration prior to Election Day to provide for provisional balloting by the November 2004 election, but left to states the specific choices on how they would implement that requirement. In exercising this discretion, states have created varied provisional voting rules and practices. Under HAVA, provisional ballots are to be counted as a vote under state law if the person casting the ballot is determined to be eligible to vote under state law. These statutory provisions and determinations of eligibility and what constitutes a properly voted ballot vary by state and thus affect the state rules and procedures used to determine whether provisional ballots are counted. At least 1 state, for example, allows voters to cast a provisional ballot for statewide offices anywhere in the state, with the ballot returned for eligibility verification and counting to the jurisdiction in which the voter said he or she was registered. Other states required that voters cast provisional ballots in their assigned precinct for the ballots to be counted. The actual impact of these varying practices on provisional balloting and vote counting is unknown. Comparable data across states are not available to determine whether or how these variations affect the number of voters who are permitted to cast provisional ballots or the percentage of provisional ballots that are actually counted. Thus, it is difficult to assess the potential impact of a state changing its existing rules and practices. However, based on the data that are available, it is clear that provisional voting has helped to facilitate voter participation of those encountering eligibility-related issues when attempting to vote.
Counting the Votes
Once the polls close on Election Day, the process of determining and certifying the final results begins. Vote counting is a complex, multistep process with many variations across the nation. The exact process depends upon a number of variables. Among them are state requirements that define standards for determining voter intent for ballots that are not clearly marked, deadlines for certifying the final count, and specifications for conducting recounts when required. The types of ballots to be counted affect vote tabulations because absentee and provisional ballots typically undergo some type of verification before counting, while early and regular Election Day ballots typically do not require this processing. The types of technology used for vote casting and counting—hand-counted paper ballots and machine-counted ballots (punch card, optical scan, and those cast electronically)—also add variance to how votes are handled. The counting process requires attention to detail, and problems in any one election stage can affect the final vote count. Moreover, its orchestration requires the effective interaction of people, processes, and technology. This chapter discusses the continuity and key changes since the 2000 general election and challenges—new and ongoing—encountered by election officials in the 2004 general election with respect to counting votes.
Overview
In the 2004 general election, vote counting remained an intricate, multistep process characterized by a great variety of local procedures depending on a local jurisdiction’s technology, size, and preferences. As with the 2000 general election, the proportion of jurisdictions nationwide reporting recounts or contested elections remained small in the 2004 general election. There were some notable developments related to vote counting. A significant change was the fact that by the 2004 general election more states had developed guidance for determining voter intent on unclear ballots. Eighteen states that reported not having guidance in the 2000 general election reported in our survey they had such guidance in place for the 2004 general election. In addition, 9 states reported changes relating to the process of conducting recounts. Some added requirements for mandatory recounts. Others changed their conditions and guidance for conducting recounts. The results of our state survey showed that while 29 states and the District of Columbia did not require audits of vote counts, 9 states reported having taken some legislative or executive steps toward doing so.
Many of the problems in managing people, processes, and technology that had confronted election officials across the country in the November 2000 general election continued to challenge them in the 2004 general election.
Equipment problems, poll worker errors, and voter errors made it difficult to tabulate the votes quickly and accurately, according to some election officials. A new phenomenon emerged as a challenge to election officials, as well: Some jurisdictions reported difficulty completing the extra steps required to verify and count provisional votes within the time allowed for tallying the final vote count. Finally, while recounts and contested elections remained rare in the 2004 general election, those that did occur, particularly in Washington state, revealed the intricacies and vulnerabilities of the election process.
In the 2004 General Election the Vote- Counting Process Remained Complex and Marked by Local Diversity
The basic elements of the vote-counting process we described in our October 2001 comprehensive report on election processes nationwide remained in practice for the general election of 2004. Of necessity, it was a complex, multistep process, with many variations, depending on a jurisdiction’s technology, size, and preferences. As with other elections, vote counting in the 2004 general election involved certain common steps: closing and securing the polls and voting equipment; securing the ballots; reconciling the number of ballots at the polls (e.g., the number available at the polls compared to the number cast, spoiled, and remaining); transporting ballots and equipment from the polling places to a central location where they were secured; in some cases electronically transmitting results from polling place voting equipment to a central tally location; verifying provisional and absentee ballots for counting; determining whether and how to count ballots that may be improperly or unclearly marked; conducting any necessary recounts; and certifying the final count.
Local Jurisdictions We Surveyed and Visited Secured Machines and Ballots in a Variety of Ways
Preliminary to counting, a key step was to secure the voting machines and ballots so that no additional votes could be cast. Procedures for securing equipment varied with the equipment that was in use. However, on the basis of our survey of a representative sample of local election jurisdictions nationwide, we estimate that 91 percent of all jurisdictions used hardware locks and seals as one of their predominant security measures. In our site visits, local election officials also described securing DRE tapes and cartridges under lock and key before and after they were delivered to boards of elections or other authorities. For example, election officials from 1 jurisdiction we visited described securing memory cards in optical scan counting machines by attaching a plastic band with a serial number. The band would have to be severed in order for the memory card to be removed, according to election officials. One such band is shown in Figure 47 securing a voting equipment bag.
Election officials in 2 jurisdictions we visited also described a variety of measures they took to ensure that ballots were not lost or miscounted. In 1 Washington jurisdiction, officials said they secured punch card ballots at polling places for counting elsewhere by transporting ballots twice: once earlier on Election Day and the other time after the polls had closed. These officials also said that ballots were bundled into groups of 50, separated by type (Election Day, provisional, and absentee ballots), and put into transport carrier safe boxes. Two poll workers, one from each political party, accompanied the ballots when they were transported to the elections office for counting. Similarly, in a Colorado jurisdiction we visited, election officials said that at the close of Election Day they sealed optical scan ballots from the polling place and the optical scan counter to prevent tampering. Then, two election judges transferred the ballots and optical scan counter to the counting center.
While ballot-securing methods varied, the results of our local jurisdiction survey showed that most jurisdictions had written policies and procedures in place in the November 2004 general election to secure ballots (including paper and electronically stored ballots). As shown in table 21, on the basis of our survey we estimate that two-thirds of local jurisdictions had written procedures for transporting ballots, and about three-quarters had written procedures in place for secure ballot storage rooms.
In addition, reconciling ballots with the number of voters was a common step in securing ballots before they were counted. According to our state survey, 47 states and the District of Columbia reported that they required jurisdictions to count or keep track of ballots that were unused, spoiled, rejected, or issued but not returned. Two states, Montana and Maine, reported not requiring jurisdictions to count or keep track of such ballots. New York reported in our survey that because it does not have paper ballots, such tracking was not necessary. New York reported that it did not use paper, optical scan, or punch card ballots. During our visits to election jurisdictions, we asked officials how they reconcile ballot and voter numbers. The election officials reported conducting cross-checks in a number of ways, but generally followed a process of reconciling any discrepancies between the total numbers of ballots on hand at the beginning of the day, the number of voters who signed in at the polling place, and the number of ballots cast.
Counting, Canvassing, and Certifying the Vote Was an Intricate and Varied Operation
Once the ballots were reconciled in the November 2004 election, local jurisdictions tabulated and canvassed (or reviewed) the vote. Both counting and canvassing the count were an ongoing process in the effort to ensure an accurate tally. After initial tabulations of votes on election night, which were typically released to the public, canvassing was typically the process of reviewing all votes by precinct, resolving problem votes, and counting all types of votes (including absentee and provisional votes) for each candidate and issue on the ballot and producing an official total for each. The official total was usually certified by an election official. This process varied among jurisdictions in terms of how and where it was done and who was responsible.
The counting process involved several different types of ballots, cast under different circumstances: General election votes are cast at polling places on Election Day by voters who appeared in the registration lists for that precinct and voted a regular ballot.
Provisional votes are cast by those, for example, whose registration (and qualification to vote) could not be established at the time of voting at the polls on Election Day.
Absentee votes are generally votes received and cast by mail before Election Day.
Early votes are generally cast in person before Election Day.
According to our local survey, for the November 2004 general election, local jurisdictions nationwide used different voting methods for different ballot types. As shown in table 22, we estimate the largest percentages of jurisdictions used optical scan and paper hand-counted ballots for Election Day. Also, optical scan and punch card vote-counting methods were used at precincts or at central locations. Jurisdictions could check more than one voting method.
In our local jurisdiction survey, we also asked what predominant voting method was used to process the largest number of ballots in the 2004 general election. We estimate that hand-counted paper ballots were the predominant tabulation method for 30 percent of all jurisdictions, although these were almost all small jurisdictions. Specifically, we estimate that 41 percent of small jurisdictions, 3 percent of medium jurisdictions, and no large jurisdictions hand-counted paper ballots. Small jurisdictions were statistically different from large jurisdictions.
As in the November 2000 general election, the counting process for the November 2004 election took place at precincts or at centralized locations, such as election headquarters at town halls and even warehouses. In jurisdictions we visited, we learned about some of the substantial variations in the sequence, procedures, and precautions taken to conduct the count. We found in our site visits that vote counting ranged from a very simple process in a small jurisdiction to more complex processes in larger jurisdictions. For example, a small New Hampshire jurisdiction, with just over 1,000 registered voters, had one polling place and one precinct open on Election Day, according to election officials. They told us the paper ballots were not transferred to any location for counting and were hand- counted by 25 election workers. These officials also said that five teams of five individuals each reviewed votes cast on each paper ballot and used paper and pencil to record and tally vote totals. The final election outcomes were written on a standard form and submitted to the New Hampshire Secretary of State’s office, according to election officials.
In contrast, election officials in a large Washington jurisdiction described a more complex process for their centralized vote count of punch card ballots. As described by these officials, their process enabled them to begin reporting results on Election Day evening by precinct and to provide updates of the count every 30 minutes. Once Election Day ballots were transferred to the election office by poll workers, the ballots were counted to determine total numbers, according to election officials. They also told us that after the ballots were separated by precinct, up to 20 inspection boards, composed of two Republicans and two Democrats each, inspected the ballots one precinct at a time. In the inspection process, the officials said that the ballots were further separated into categories—those that were machine-readable and those that required further examination, such as ballots with write-in candidates or with a chad hanging by two or more corners. Once all questions were resolved (including any that would require review by a canvassing board), they told us ballots in batches of 500 each were placed in trays by precinct and brought to the ballot tabulation area. According to these officials, the jurisdiction used a punch card tabulator, which was connected to a computer and had a processing speed of 600 ballots per minute (see fig. 48). Once all ballots were counted, jurisdiction election officials told us they generated an unofficial report with results for all races and voting propositions. This initial tally was posted on the county Web site and released to the press, candidates, and public, according to election officials.
Six of the jurisdictions we visited told us that they counted Election Day votes at the local precinct, where poll workers would tabulate results and resolve any ballot issues that could be handled locally. For example, in a large Kansas jurisdiction, election officials said that voters were able to place their ballots in an optical scanner at the polling place that read the ballot and rejected it if there were any problems. According to officials there, the machines could return to the voter any ballot that, for example, had too few or too many votes for a specific office and provide a screen message for what to correct before resubmitting the ballot. After the polls closed, the optical scan machines with their memory cards—which had been programmed for the specific precinct—were transferred to election headquarters, according to election officials. The officials also said the optical scan machines were linked electronically to one computer and data from the memory cards were uploaded so that votes from all precincts could be tallied.
Additional Steps Were Required to Manage Absentee, Provisional, and Early Votes
Absentee, provisional, and early votes each required some additional steps to manage in order to include them in the vote count.
Absentee votes: According to our state survey, all states reported having some provision for absentee voting in the 2004 general election. As we discussed in chapter 3, on absentee voting, absentee ballots must typically undergo some type of verification prior to counting. At 1 Colorado jurisdiction we visited, officials said that they began verifying and counting absentee ballots 10 days before Election Day. At 1 jurisdiction in Washington election officials said that they qualified the absentee ballots as they were received at the election office, but did not count the votes until 3:00 p.m. on Election Day. Additionally, at a jurisdiction in Illinois, election officials said that they distributed most absentee ballots to their respective precincts to be counted along with the Election Day ballots. In each of these jurisdictions, however, according to election officials, the absentee ballot results were not released until after the Election Day polls were closed. Also, on the basis of our local jurisdiction survey, we estimate that 99 percent of election jurisdictions included the counts of qualified absentee ballots in the final certified count, regardless of their effect on the outcome.
Provisional votes: Provisional voting, which was required by HAVA in all but 6 states during the 2004 general election, generally required several steps. At all of the local jurisdictions we visited that used provisional ballots, election officials said that the ballots were transferred to an election office or central count location, where the eligibility of the voter was verified before they were counted. We estimate, on the basis of our local jurisdiction survey, that 83 percent of jurisdictions that provided provisional ballots during the 2004 general election transferred the provisional ballots to a central location for counting. Those jurisdictions that did not engage in transfers may have been jurisdictions with only one precinct, in which case, the votes were tallied on-site. At all of the jurisdictions we visited that used provisional ballots election officials said they included provisional ballots determined to be verified in certified vote counts regardless of their effect on the outcome of the election.
Early votes: According to our state survey, for the November 2004 election, 24 states and the District of Columbia reported they allowed early voting, and from our local jurisdiction survey, we estimate that about 23 percent of local jurisdictions allowed early voting in the election. In early voting jurisdictions we visited, a variety of reconciliation and counting processes were used, according to election officials. At one jurisdiction we visited, election officials told us that early voting DRE votes were reconciled daily. According to these officials, at the end of the early voting period, election department staff shut down the DRE machines and removed the memory cards (which stored cast votes). The officials said that the memory cards were sealed and returned to the election department office for counting, in a manner similar to Election Day DRE votes. In another jurisdiction we visited that used optical scan machines for early voting, officials told us that ballots were inserted by voters into the machines at the polls—the same procedure used on Election Day. At the end of each early voting day, according to the officials, the ballots from that day were physically transferred to the clerk’s office and the optical scan results were submitted by modem to the jurisdiction’s headquarters.
Election Certification Periods Varied by State
Election returns posted on election night are unofficial and are not considered final until canvassing—the process described earlier of reviewing all votes by precinct, resolving problem votes, and counting all types of votes—is complete and the count is certified. Certification is when the vote count is finalized, generally by state and local officials. Our state survey showed that for the 2004 general election, states reported varied practices for when counts were certified and by whom, similar to the general election of 2000.
Our state survey showed that most states reported setting certification deadlines, but the certification periods varied from state to state. Four states (Alaska, Nebraska, New Hampshire, and Rhode Island) and the District of Columbia reported not specifying a deadline following Election Day for certification of election results, while all other states reported specifying such a deadline. For example, certification on the second day after Election Day was reported by Delaware, while not later than 40 days was reported by Michigan. Some states reported caveats and varying levels of specificity in the certification deadlines. Maine reported allowing 3 days for local election official certification and 20 days for state-level certification. Missouri’s reported deadline was by the fourth Tuesday following the election. North Dakota reported a deadline of not less than 3 days, but not more than 6. Similarly, the requirement reported for Texas was 15 to 30 days after the election.
For the 2004 General Election, More States Had Requirements or Guidance for Determining Voter Intent
An important facet of the canvassing process is the consideration that may or may not be given to ballots that have not been marked properly. An improper mark, for example, could be a circle around a candidate’s name instead of a checked box on a ballot that is to be scanned optically. For those states providing for the determination of voter intent, the importance of having explicit and consistent criteria for treating unclear ballots became evident in the 2000 general election when different interpretations for punch card ballots in Florida made the close presidential race extremely contentious. While subsequent federal reforms have not specified standards for treating unclear ballots, HAVA requires that each state adopt uniform standards, by January 2006, that define what constitutes a vote and what will be counted as a vote for each category of voting system used in the state.
In our state survey, 39 states and the District of Columbia reported that for the November 2004 general election they had requirements or guidance for determining voter intent that focused primarily on improper ballot marks. Forty-five states and the District of Columbia reported they had requirements or guidance for determining how or whether to count a machine-unreadable ballot—one that cannot be processed by machine because it is damaged.
Eighteen states that had reported not having provisions in place for the 2000 general election reported to us in our 2005 state survey that they had voter intent guidance for the November 2004 general election. Georgia, for example, had developed requirements for four methods: DRE machines, lever-type machines, optical scan, and hand-counted paper ballots. Some of Georgia’s requirements were for certain ballots rejected by optical scan machines. These requirements provide for some measure of subjective determination of a voter’s intent by election officials in certain specified instances. In such an instance, a vote shall be counted, under these Georgia provisions, if in the opinion of the vote review panel, the voter has clearly and without question indicated a choice for which the voter desired to vote. In addition, under specified circumstances, these Georgia provisions also provide for a similar type of voter intent determination with respect to hand-counted paper ballots.
As described below, we found in our site visits that under state or local guidance, local jurisdictions we visited had gone to varied lengths in the 2004 general election to salvage ballots that were improperly marked or that were machine unreadable. These efforts varied by the type of voting equipment used in the jurisdiction.
Optical scan ballots: In some jurisdictions, election officials told us that optical scan machines located at polling places could notify the voter of an unreadable or incorrectly marked ballot at the moment it was submitted. However, where the ballots were transferred to a central location for counting this would not be the case. In one jurisdiction in Colorado where optical scanning was done centrally for absentee ballots, election officials told us they were required to interpret voter intent or replace an unreadable ballot. According to election officials, the jurisdiction had instructions, which they stated were based on state statutes, specifying that bipartisan election judges would be the responsible parties for determining voter intent. Their deliberations, however, would be observed by others, according to the instructions. If a decision was reached on voter intent, a replacement ballot could be created and run through the optical scanner, according to the officials.
Officials in a Kansas jurisdiction we visited said that state election standards were very specific for interpreting an incorrectly marked optical scan ballot. They would count a vote if an oval shape is marked, near but not inside the oval, and not closer to another candidate’s name. A completed oval would also be counted if another oval for the same race was scribbled or crossed out. If the ballot could be interpreted locally, officials said election workers duplicated the vote on a new ballot for the optical scanner to read. According to election officials, if the intent was not clear, the ballot would be sent to the Board of Canvassers for further examination. State guidance also included standards for hand-counted paper ballots.
In Florida, guidance in place for the November 2004 general election was even more specific than that provided in Colorado or Kansas. The guidance specified, for example, that, with respect to manual recounts, a vote may be counted if “there is an ‘X’, a check mark, a plus sign, an asterisk or a star, any portion of which is contained in a single oval or within the blank space between the head and tail of a single arrow and which does not enter into another oval or the space between the head and tail of another arrow.” It also allowed for a vote to be counted under additional specified circumstances including if “there is a diagonal, horizontal, or vertical line, any portion of which intersects two points on the oval and which does not intersect another oval at any two points,” provided that the horizontal line does not strike through the name of the candidate.
Punch cards: While federal election reforms included provisions promoting replacement of punch card ballots, on the basis of our local jurisdiction survey, some jurisdictions continued to use them in the 2004 election. As was the case for other types of ballots, levels of guidance for interpreting voter intent varied by state. Illinois reported that it had no requirements or guidance for determining voter intent, according to our state survey. Election officials in 2 Illinois jurisdictions using punch card ballots told us in our site visit that election workers did not attempt to ascertain the intent of voters on punch card ballots that were improperly punched. If the ballot could not be counted by a punch card-counting machine because of an improper punch or mark, the votes were not to be counted.
In contrast to Illinois, Washington reported that it had guidelines or requirements regarding voter intent and allowed for remaking an unreadable or damaged punch card. In a Washington jurisdiction we visited that used punch card ballots in the 2004 general election, election officials said that state law guided their jurisdiction’s written instructions for determining voter intent. Election officials said voters were given very specific instructions for how to change their vote before casting their vote, if necessary, on a punch card ballot while at the polls. These officials also said ballots could be either enhanced or duplicated if it was clear that a voter had followed these instructions. Also, according to the officials, a problem ballot could be enhanced or duplicated by officials if voter intent could easily be determined. If voter intent was at all unclear, the ballot was to be sent to the canvassing board for review. According to officials, canvassing board meetings were open to the public and state guidelines were to be used to interpret voter intent. Figure 49 shows a punch card voting booth.
Hand-counted paper ballots: While we estimate, on the basis of our local jurisdiction survey, that no large jurisdictions and only 3 percent of medium jurisdictions used paper ballots in the November 2004 general election for their predominant voting method, 41 percent of small jurisdictions did. This voting method presented yet another variation in the process of determining voter intent. For example, in one small jurisdiction we visited in New Hampshire, election officials we spoke with said a senior election official was on hand during ballot counting. They said if a ballot was unclear, the senior official would be involved to discuss it. If it was still unresolved, state guidance called for an unclear ballot to “be counted in accordance with a majority vote of the election officials present.” The guidance, which we examined, also provided examples of what marks on a paper ballot to accept, as shown in figure 50.
Recounts and Contested Elections Remained Uncommon for the November 2004 General Election
As with the 2000 general election, recounts and contested elections were an uncommon event in the 2004 general election. On the basis of our local survey, we estimate that 92 percent of election jurisdictions nationwide did not conduct a recount for federal or statewide office. Also on the basis of our survey, recounts were more prevalent in large than in small election jurisdictions. Specifically, we estimate that 4 percent of small jurisdictions, 16 percent of medium, and 24 percent of large jurisdictions conducted recounts for federal or statewide offices. Both large and medium jurisdictions were statistically different from small jurisdictions. Similarly, in our state survey, 37 states and the District of Columbia reported they had no recounts for federal or statewide offices during the primary or general elections of 2004, as shown in figure 51.
Recounts are, in general, conducted because a candidate, voter, or group of voters has requested it or because the margin of victory was within a certain specified margin such that state provisions required or allowed for a recount. Election officials in local jurisdictions we visited in several states where recounts were conducted described to us the procedures they used for their 2004 general election recounts. In a New Hampshire jurisdiction, where a recount was conducted of the presidential race of 2004, officials said the recount was requested by a presidential candidate to test the accuracy of the optical scan vote-counting equipment. The officials provided the following description of the recount: Five wards in the jurisdiction had been selected for a sample recount. It was conducted by the New Hampshire Secretary of State’s office, not by the local election jurisdiction. The jurisdiction’s only role in the recount was to provide the Secretary of State with the optical scan ballots from the applicable wards. After the Secretary of State recounted a portion of the optical scan ballots and found no significant discrepancies between the initial vote tally and the partial recount, a full recount was not conducted statewide, according to these officials.
In North Carolina, races for two statewide offices (the Agricultural Commissioner and the Superintendent of Public Instruction) were subject to recounts because, under state law, the close margin of victory allowed the losing candidates to request a recount, according to election officials. In 1 North Carolina jurisdiction we visited, which used DRE machines, local election officials described the recount process as follows: The recount was conducted in a different manner from the initial count. For the initial count, votes were electronically transferred from each DRE machine to vote storage devices at the polls that stored the vote totals by precinct. The precinct totals were then downloaded from the vote storage devices onto a computer located at the jurisdiction’s election headquarters, and vote tabulation software summed vote totals from each precinct for each election contest in the jurisdiction. During the recount, rather than relying on aggregated votes totaled by precinct for a vote count, officials tabulated individual DRE ballots. To complete this process, the jurisdiction’s tabulation software recognized individual ballot images from the DRE machines rather than aggregated votes per precinct. The individual ballot images were downloaded onto the computer in election headquarters, and votes for the races in question were retabulated (by voter, rather than by precinct as in the initial count). The outcomes of both the Agricultural Commissioner and the Superintendent of Public Instruction races were unaffected by the recount results.
Generally, contested elections are court actions initiated by a candidate or voter alleging, for example, that some type of misconduct or fraud on the part of another candidate, election officials, or voters, occurred in a particular election. The results of our local survey indicate that contested elections were rare during the period from 2001 to the 2004 general election. In our local survey, we asked local jurisdictions whether they held any primary or general elections for federal or statewide offices during this period that were contested, and if so, whether the outcomes for these elections changed. On the basis of our nationwide survey, we estimate that 5 percent of local election jurisdictions held a federal or statewide election that was contested during this period. The contested elections in which the winner did change involved races for offices such as state judge or governor, or for the U.S. House of Representatives.
Perhaps the most heavily contested election in November 2004, which received a great deal of press coverage, was the Washington state governor’s race. A close margin of victory and a candidate request prompted two recounts, and after the state certification of a winner in the election, the second place candidate’s campaign and seven voters filed a petition in a state Superior Court contesting such certification, alleging that errors, omissions, mistakes, neglect, and other wrongful acts had occurred in conducting the election. The Chelan County Superior Court dismissed the election contest petition, finding that the petitioners failed to prove that grounds for nullification of the election existed. The Superior Court held, in general, that while there was some evidence of irregularities, the petitioners failed to adequately prove that the outcome of the election was changed as a result. The recount itself, however, revealed the substantial complexities involved in accomplishing an error-free count. We discuss this case more closely later in this chapter.
Several States Had Further Developed Their Specifications for an Election Recount since the 2000 General Election
State provisions for recount processes vary, and not all states have provided for or required them in the past. For the November 2004 general election, however, several states reported that they had introduced or further developed their specifications for election recounts since the 2000 general election.
In our October 2001 report on election processes, we reported that 47 states and the District of Columbia had provisions for recounts, though most did not have mandatory recount provisions. To better understand recount reform efforts to help ensure vote count accuracy since the 2000 election, we asked states in our 2005 survey about changes to their mandatory recount provisions in place for the November 2004 general election. Nineteen states reported requiring a mandatory recount predominantly in cases of a tie or close margin of victory, whereas in 2001, 17 states indicated they required mandatory recounts. Thus, 2 more states reported requiring mandatory recounts for the 2004 general election than for the 2000 general election. In addition, 3 other states reported amending their existing provisions for mandatory recounts, while 3 said they had changed their requirements or guidance for who may request a recount as shown in table 23. Three states—Hawaii, Mississippi, and Tennessee— reported not having any formal provision for conducting recounts—both for the 2000 or 2004 general elections.
Alabama, Pennsylvania, and Texas were the states that reported adding mandatory recount provisions for the 2004 election. Alabama law, in place for the 2004 general election, requires a recount when the election returns for any public office indicate that a candidate or ballot measure is defeated by not more than one-half of 1 percent of the votes cast for the office or the ballot measure—unless the defeated candidate submits a written waiver. In Pennsylvania, a recount is mandatory if an election is decided by one-half of 1 percent or less—unless the defeated candidate requests in writing that a recount and recanvass not be made. Texas reported that a recount was required only if two or more candidates tie in an election.
For the 2004 general election, Arizona, Minnesota, and Washington reported adding more specifications to the vote margins that trigger recounts in their states than were in effect during the 2000 general election. Arizona added triggers for different types of races. For the 2000 general election, Arizona reported requiring a mandatory recount when the margin of votes between the two candidates receiving the most votes was not more than 0.1 percent of votes cast for both candidates, or 200 votes for statewide offices and 50 votes for the state legislature. For the 2004 general election, Arizona reported in our state survey that it had amended its mandatory recount requirements so that the thresholds triggered by the number of votes only applied when the total number of votes cast was 25,000 or fewer.
Washington’s mandatory recount provisions in place for the November 2004 general election had changed since the November 2000 general election. The requirement in 2000 for a mandatory recount by machine was a margin of 0.5 percent or less of total votes cast for the top two candidates. If the margin was less than 150 votes and less than 0.25 percent of total votes cast for the top two candidates, a manual recount was required. The amended requirement, in place for the November 2004 general election, specified that a recount by machine was required when the margin is both fewer than 2,000 votes and less than 0.5 percent of total votes cast for the top two candidates. If the margin was fewer than 150 votes and less than 0.25 percent of total votes cast for the top two candidates, there was to be a manual recount.
Since the November 2000 election, Minnesota amended its mandatory recount triggers to include a specific percentage margin of victory in certain circumstances, rather than only a specified difference in the absolute number of votes between the top two candidates. While a margin of 100 votes or fewer in an election had previously triggered a recount for the 2000 general election, Minnesota election officials reported in our state survey that for the 2004 general election their state required a recount if the margin was determined to be either less than one-half of 1 percent of the total number of votes counted or, was 10 votes or less when no more than 400 votes are cast.
According to our state survey, state requirements or guidance for who may request a recount, in place for the November 2004 general election, changed in Florida, Maine, and Rhode Island since 2000. While any Florida candidate or candidate’s political party in 2000 could request a recount, this was no longer true for the November 2004 general election. For the 2004 general election, Florida election officials reported that no candidate or political party could request a recount, and that the only authorized recounts were mandatory recounts to be conducted when the margin of victory was 0.5 percent or less of the total votes cast. Rhode Island, which reported that for the November 2000 general election it had allowed recount requests by any candidate who trailed the winning candidate by less than 5 percent, reported that for the November 2004 general election, it required a smaller margin before a losing candidate could request a recount. For example, for races with between 20,001 and 100,000 votes, Rhode Island reported that it required a margin of 1 percent or less (or 500 votes) before a trailing candidate could request a recount, and for races with more than 100,000 votes the required margin was one-half of 1 percent (or 1,500 votes) before a trailing candidate could request a recount. Maine, on the other hand, reported that its recount provisions in place for the November 2004 general election were clarified to provide that an apparent losing candidate, rather than only the second-place candidate, could request a recount.
Vote Count Audits Were Not Prevalent in the 2004 General Election, but Some States Reported Taking Action to Require Them
Twenty-nine states and the District of Columbia reported that for the 2004 general election, they did not have provisions requiring or allowing local jurisdictions to conduct a vote count audit of election results. However, in our state survey, 9 states reported taking action since November 2004 (e.g., enacted legislation or took executive action) to require audits of vote counts. As used in this report, a vote count audit is an automatic recount, in full or in part, of the vote tabulation, irrespective of the margin of victory, in order to ensure accuracy before certification.
On the basis of our state survey, as shown in figure 52, 8 states reported that for the 2004 general election they had a vote count audit requirement for all local jurisdictions, and 2 states reported requiring vote count audits for some local jurisdictions. Election officials from 29 states and the District of Columbia reported that for the 2004 general election they did not require or allow local jurisdictions to conduct vote count audits. Eleven states reported that they allowed them. We estimate, on the basis of our local survey, that 15 percent of all local jurisdictions were required by their states to conduct such audits as part of the certification process for the 2004 general election. Larger and medium jurisdictions were more likely to have been required to do so than smaller jurisdictions. Nine percent of small jurisdictions, 27 percent of medium, and 38 percent of large jurisdictions conducted a required vote count audit of the 2004 general election. Both large and medium jurisdictions were statistically different from small jurisdictions.
Nine states reported in our state survey that they had enacted legislation or taken some executive action to require audits since November 2004. For example, in Washington, beginning January 1, 2006, prior to election certifications, county officials must audit the results of votes cast on DRE machines. The audit must be conducted by randomly selecting up to 4 percent of the DRE voting machines or one machine, whichever is greater, and for each device, comparing the results recorded electronically with the results recorded on paper.
During our visits to local election jurisdictions, election officials in 5 jurisdictions described conducting vote count audits as a part of the election certification process for the November 2004 general election. For instance, 2 large jurisdictions in Nevada reported that the state requires each jurisdiction to randomly audit election results when DRE machines were used. According to officials in 1 of these Nevada jurisdictions, they were required to select 1 percent of DRE machines, or 20 machines, whichever amount is greater, and to perform a manual audit of the machine-tabulated vote totals. The officials said that they used a computer program to randomly select which of the jurisdiction’s 740 DRE machines to audit. To conduct a paper-based audit, they told us that for each randomly selected machine, election workers printed the DRE result tapes from the voter-verified paper trail printer, manually counted the vote data on the tapes, and compared the manual count results to the original electronic results.
In one large Illinois jurisdiction we visited, election officials told us they were required by the state to automatically audit (by retabulating votes) results of punch card ballots in 5 percent of their precincts, which were randomly selected. According to the officials, the State Board of Elections sent the jurisdiction officials a letter specifying which randomly selected precincts had to retabulate their votes.
Election officials in a Pennsylvania jurisdiction we visited said that state law required random audits when electronic voting machines were used. According to these officials, they were required to audit 2 percent of DRE vote totals following an election. They told us, however, that in practice they actually audit all DRE machine vote totals to ensure an accurate vote count. They stated that vote data stored on DRE backup memory cards is printed and compared to vote data stored on DRE cartridges used in original vote counts. They said they operated on the assumption that because the internal memory cards serve as a backup system, there should be no difference in the totals.
Local Jurisdictions Reported Some Mistakes and Technical Challenges in Counting Votes for the 2004 General Election
As in the general election of 2000, the 2004 general election saw failures to properly employ voting equipment. At several of the jurisdictions we visited, officials recounted mistakes in using the DRE systems, for example, that echoed other recent findings (in our September 2005 report on the security and reliability of electronic voting), noting inadequate understanding of the equipment on the part of those using it.
In our September 2005 report on electronic voting, we noted that instances of fewer votes counted than cast in one Pennsylvania county in the 2004 general election had resulted from incorrectly programmed DRE machines. Similarly, in our 2005 site visits to election jurisdictions for this report, officials with whom we spoke recounted difficulties that had resulted from mistakes in programming the electronic equipment. In 1 Florida jurisdiction, for example, officials reported that the storage capacity of an optical scan accumulator (used to combine vote data from DREs and optical scanners) had been inadequately programmed to capture all of the votes cast. Officials there were able to discover and rectify the problem so that all votes were counted. In a Nevada jurisdiction, officials said that on Election Day, there were 198 provisional ballots (out of 4,532 cast) that were incorrectly programmed on the DRE machines at several polling locations, resulting in the provisional votes being counted without the voter first being qualified. According to these officials, poll workers forgot to add the “0” to the beginning of the precinct number. The officials noted that 2004 was the first time that the jurisdiction had used provisional voting and that in the future they planned to use paper provisional ballots to avoid any confusion.
In a North Carolina jurisdiction we visited, election officials told us about how a misunderstanding of the voting equipment resulted in the loss of votes. Specifically, election officials were unclear about the vote storage capacity of a DRE machine used in early voting and failed to notice the machine’s warning that its file was full. The software installed on this machine was an older version of the program and only recognized up to 3,500 votes, according to election officials. Election administrators believed that it could recognize up to 10,500 votes. They discovered the error at the close of Election Day when reconciling the number of votes cast on the DRE machine used in early voting with the number of voters credited with early voting at the polls. Furthermore they said it was not until they subsequently conducted a simulation of votes cast that they discovered the cause of the problem. They also discovered that while the machine’s software flashed warnings on its screen when the voter file became full, election workers had not seen it because of the screen’s positioning. Also, according to the officials, they had been operating under the assumption that the machine would have automatically stopped accepting votes once the limit had been reached. Instead, the machine had continued to accept votes cast, overwriting earlier votes in order to accommodate the new ones. The officials said they determined that 4,235 votes were lost.
Not all equipment failures resulted in lost votes, but some did create technical challenges. Officials in a Colorado jurisdiction stated that memory cards for optical scan machines at early voting sites sometimes failed, which meant that all affected optical scan ballots were rescanned using a new card once poll workers realized that the original card was malfunctioning. Also, in our September 2005 report on the security and reliability of electronic voting mentioned earlier, we noted that a Florida county experienced several problems with its DRE system, including instances where each touch screen took up to 1 hour to activate and had to be activated separately and sequentially, causing delays at the polling place. In addition, we reported that election monitors discovered that the system contained a flaw that allowed one DRE machine’s ballots to be added to the canvass totals multiple times without being detected. In another instance, our report notes that a malfunction in a DRE system in Ohio caused the system to record approximately 3,900 votes too many for one presidential candidate in the 2004 general election. We also reported that a state- designated voting system examiner in a Pennsylvania jurisdiction noted that the county DRE system had technical problems, such as failure to accurately capture write-in votes, frozen computer screens, and difficulties sensing voters’ touches.
During our 2005 site visits, officials from 3 jurisdictions also described several cases of jamming problems with optical scan and punch card ballot tabulators. For example, election officials in a Kansas jurisdiction we visited told us that an extensive two-sided optical scan ballot frequently jammed voting machines because of its length. These officials told us that they used a two-sided ballot design which required that the optical scan counting equipment read the ballot front and back, which presented a problem. According to the officials, the ballot was not scored properly to feed easily through the equipment and paper jams occurred frequently. Election officials said the ballots had to be hand-sorted into 13 groups before scanning, which took time. Similarly, officials in a New Jersey jurisdiction told us that their optical scan machines had frequently jammed when reading provisional and absentee ballots. According to the officials, the ballots had two or three folds, which in combination with the high volume of ballots being read, jammed the machine regularly. To repair the jams, officials told us they would straighten ballots and run them through again, or, if needed, would remake the ballot. Also, officials in an Illinois jurisdiction we visited said punch cards had also jammed in their tabulator. Officials there said that this had been likely due to the punch cards swelling in humid weather, and this problem had caused the scanner to misread ballots on several occasions. In all of these instances, the problems were corrected.
While we heard in our site visits about some human error at the polls, in our survey of local jurisdictions we found that human error was a problem for a small portion of election jurisdictions in terms of at least one key function. Specifically, we estimate that 6 percent of local jurisdictions nationwide experienced poll worker errors in tracking and accounting for ballots. To the extent that these errors occurred, they were more common in large jurisdictions. We estimate 1 percent of small jurisdictions, 14 percent of medium jurisdictions, and 34 percent of large jurisdictions had these errors. The differences between all size categories are statistically significant. In 10 of the jurisdictions we visited, election officials cited poll worker or voter errors as the cause of discrepancies in the number of ballots and voters. In 1 Ohio jurisdiction, for example, election officials said the discrepancy in the number of ballots and votes was caused by the fact that poll workers did not track some voters who left the polling place without voting. In a Florida jurisdiction, according to election officials, some voters left the polling place without signing a poll book (which was used to reconcile voter numbers). Another cause for discrepancies in the number of ballots and voters cited by election officials in a Washington jurisdiction was that poll workers erroneously counted some provisional ballots as regular Election Day ballots, which led to the appearance of more regular Election Day ballots cast than voters credited with voting in that manner.
Finally, from election officials in 2 jurisdictions we visited, we learned of voter errors in using voting technology. In one Kansas jurisdiction, officials reported that some voters did not know how to scroll down the electronic screen to see all of the information. Also, we were told by election officials in a New Jersey jurisdiction that poll workers had noticed that some voters had failed to press a button to finalize their votes. According to these officials, the poll workers watched for such a mistake, and in at least one instance, reached under the curtain to register a vote while both a Democrat and a Republican poll worker observed the maneuver.
In the 2004 General Election, Some Election Jurisdictions Reported Difficulty Meeting Deadlines for Certifying the Final Vote Count
According to state survey responses, 7 states (Arkansas, California, Georgia, Oklahoma, Pennsylvania, South Carolina, and Virginia) encountered a challenge during the 2004 general election related to timely completion of the certification process. For example, Georgia election officials reported difficulty in certifying election results in a timely manner that would allow a runoff election to commence within 3 weeks of Election Day. California officials responded that achieving an appropriate balance between vote count accuracy and the speed of vote tabulation was a challenge statewide. Arkansas officials said that the Secretary of State’s office had to contact local election jurisdictions numerous times to receive certified election results in a timely manner.
In some local jurisdictions we visited, we also heard about difficulty meeting certification deadlines, particularly with regard to provisional ballots. In 7 local election jurisdictions we visited, election officials cited concerns with the timing requirements of election certifications. Specifically, the task of verifying voter information with respect to provisional ballots and counting provisional ballots made achieving certification deadlines difficult. For example, officials in 1 Colorado jurisdiction said that verifying and counting provisional ballots within the state-mandated 12-day period required that the county hire additional workers. A Florida jurisdiction reported a similar challenge, but in this instance, these officials stated that the county canvassing board was required to consider each provisional ballot individually, which added to the challenge to meet the short state certification deadline. One large jurisdiction in Illinois also reported that its 14-day certification deadline was difficult to achieve because of the large number of provisional ballots that had to be verified and counted. In a Washington jurisdiction, officials stated that verifying and counting all ballots (including provisional ballots) within state-mandated periods had been a challenge in 2004. In 2005, the Washington state legislature extended the mandated certification deadline from 15 to 21 days following any general election.
The Recount in Washington State Revealed the Intricacies of the Election Process, but Also Yielded Many State Reforms
While the 2004 recount in Washington was one of few statewide recounts conducted across the country, the types of issues that surfaced during the recount about Washington’s election system identified problems in all three key elements of elections—people, process, and technology. The close gubernatorial race and the recount subjected these elements to close scrutiny, revealing the vulnerability and interdependence of the various stages of the elections process and the unerring attention to detail that is required to run an error-free election. It was, in fact, the closest gubernatorial race in United States history. In the initial statewide count, a mere 261 votes separated the top two candidates—about 0.001 percent of the total votes cast. An initial recount reduced that margin of victory to just 42 votes out of more than 2.7 million cast, and the final recount resulted in a 129-vote margin of victory for the candidate who came in second in the first two vote counts.
In part because it is the largest election jurisdiction (in number of voters) in Washington state, King County was the subject of some of the greatest scrutiny. However, problems were identified by courts in other jurisdictions in the state as well. As a result of this scrutiny, as discussed below, Washington state, and King County itself, has subsequently instituted many reforms.
Breakdowns in Interaction of People, Process, and Technology Can Impair the Vote Count
We reviewed a variety of reports and studies on this extraordinary election, including state task force studies, an internal county review, a management audit sponsored by the Election Center, and the findings of a state Superior Court that resulted from a lawsuit challenging the results of the final recount. The principal problems we identified in these materials ranged from poll worker errors to challenges in using equipment. Described here, they illustrate how breakdowns in the interface of people, process, and technology may, at any stage of an election, impair an accurate vote count.
Provisional Ballots Counted before Being Validated
In at least 11 counties provisional ballots were found by a Washington state Superior Court to have been counted without verifying voter signatures or before verification of voter registration status was completed. For example, in Pierce County, Washington, 77 provisional ballots were found by the Superior Court to have been improperly cast. Provisional ballots were to have included on the ballot envelope the voter’s name and residence. Because the provisional voter’s identity or residence was not marked on the provisional ballot envelope for these 77 ballots, voter registration status could not be verified. In King County, the court found that 348 provisional ballots were improperly cast without verifying voter eligibility. The Election Center management audit found this had occurred because the provisional voters had been allowed to put their ballots, which had not been verified, directly into the optical scan machines at the voting precincts. The Superior Court found that of these 348 provisional ballots, 252 were ultimately determined to have been cast by registered voters. According to the audit, this error resulted from poll worker confusion about who was accountable for the provisional voting process at the polls. No one poll worker was assigned responsibility for tracking provisional ballots.
Illegal Votes Cast by Felons
The Superior Court also found that more than 1,400 votes had been cast illegally by felons during the November 2004 general election in counties across Washington. Under Washington state law, in general, persons convicted of a federal or state felony are not eligible to vote unless their right to vote has been restored. According to the King County audit, some felons were registered to vote in King County. The audit stated that election registration officials had very limited information available to them regarding such felons that would have allowed them to periodically purge the rolls. Moreover, according to the audit report, when a former felon who wished to register signed an affidavit to attest to the fact that his or her voting rights had been restored, election officials had no expedient way to verify the claim, particularly for former felons convicted in a different county. In addition, the audit report noted that election officials did not necessarily have the authority to refuse to accept a registration form. In our June 2005 report on maintaining accurate voter registration lists, we found that similar challenges in identifying and removing felons from voter rolls were reported in other states as well.
More Votes Counted than Cast
The Superior Court found that more votes were counted than the number of voters credited with voting. Specifically, a judge cited evidence of 190 excess votes counted in Clark County, 77 excess votes counted in Spokane County, 20 excess votes counted in Island County, and 14 excess votes counted in Kittitas County. In a King County internal report, election officials reported that the discrepancy between voters credited with voting and ballots cast was about 0.2 percent, or over 1,000 votes. The Election Center management audit concluded that the discrepancy may have been due, in part, to the use of an electronic wand held by temporary employees to scan the entry codes in the poll book when registrants came to vote. The audit noted space limitations and difficulty hearing the wand’s beep when it processed a bar code may have prevented an accurate count of voters. During our site visit with King County officials, they told us that separate from the wanding issue, poll worker training deficiencies may have contributed to discrepancies in the number of votes credited and cast when voter information was not entered properly into poll books.
Uncounted Ballots Discovered after Results Had Been Certified
According to the Superior Court’s findings, in several counties uncounted ballots were discovered after the certification of the initial election results. The Superior Court found that there were 64 uncounted absentee ballots found in Pierce County and 8 in Spokane County. According to the Election Center audit, in King County, the uncounted ballots were both absentee and provisional ballots, and 22 absentee and provisional ballots were discovered in the base units of optical scan machines after the election was certified. The audit concluded that poll workers had failed to adhere to their procedures for checking these units when reconciling ballots after the polls closed, and recommended strengthening both procedures and training.
Absentee Ballots Erroneously Disqualified
In King County, during the second recount, the King County Canvassing Board discovered that election workers had disqualified 573 absentee ballots during initial canvassing when they could not find the voters’ signatures in the county’s new computerized voter registration list for verification. In addition, the election workers had not checked elsewhere for these signatures, such as on the voters’ paper registration forms. In the recount, the King County Canvassing Board decided to recanvass these ballots to determine whether their disqualification had been appropriate or whether these ballots should have been counted. According to the King County audit, the voter registration list had been very recently updated, and for this reason, not all voter signatures had been scanned and electronically stored in time for the general election so that election workers would have been able to find them.
Verifying absentee ballots was another issue highlighted during the recount. According to press accounts, differences existed in how local jurisdictions in the state verified the signatures of absentee and provisional voters. The Seattle Times reported conducting a survey in which it found that signatures went through as many as four levels of review in one county and only one level in another. Also, the newspaper reported that some counties would look for as many as six different identifying traits of a signature, while others “eyeballed the handwriting.” Recommendations by the Governor’s Election Reform Task Force identified the verification of voter signatures as one of several areas needing more procedural consistency among the counties.
The Washington Recount Fueled Several Reforms at the State and Local Levels
Washington enacted into law a series of election reform measures in 2005 designed to clarify, standardize, and strengthen election requirements and procedures. Several of the statewide reforms specifically address problems described above, but others are broader measures designed to improve election administration. Examples of these measures are listed below.
Unique provisional and absentee ballots: All provisional and absentee ballots are required to be visually distinguishable from one another and must be either printed on colored paper or imprinted with a bar code for the purpose of identifying the ballot as a provisional or absentee ballot. The bar code must not identify the voter. Provisional and absentee ballots must be incapable of being tabulated by polling place counting devices.
Standardized guidelines for signature verification processes: The Secretary of State is to establish guidelines for signature verification relating to, for example, signatures on absentee and provisional ballot envelopes. All election personnel assigned to verify signatures are required to receive training on the established guidelines. State law also provides that while signatures on certain mail-in ballot envelopes (such as absentee ballots) must be compared with the voter’s signature in the county registration files, variation between the signature on a return envelope and the signature of that voter in the registration files due to the substitution of initials or the use of common nicknames (e.g., Joseph Smith versus Joe Smith) is permitted so long as the surname and handwriting are clearly the same.
Triennial review of county election processes and reports listing corrective actions: Instead of being performed periodically, state-conducted reviews of county election-related policies, procedures, and practices are to be performed at least once every 3 years. If staffing or budget levels do not permit a 3-year review cycle, such reviews must be done as often as possible. The county auditor or the county canvassing board must respond to the review report in writing, listing steps to be taken to correct any problems. Before the next primary or general election, the Secretary of State’s office must visit the county and verify that the corrective action has been taken.
Election law manuals for use in all vote-counting centers: The Secretary of State must prepare a manual explaining all election laws and rules in easy-to-understand, plain language for use during the vote counting, canvassing, and recounting process. The manuals must be available for use in all vote-counting centers throughout the state.
Option to conduct voting entirely by mail: Another change introduced by the state, which may avoid errors at the polls, has been to give county officials the option to conduct elections entirely by mail. The new measure authorizes the use of all-mail voting in counties upon the express approval by a county’s legislative authority and provides that such approval must apply to all primary, special, and general elections conducted by the county. For example, King County has announced plans to conduct elections entirely by mail in 2007. The King County Independent Task Force on Elections found in 2005 that the King County election process basically involved simultaneously conducting two dissimilar elections. The task force stated that increasingly, a majority of King County voters (565,011, or slightly more than 62 percent in 2004) used the permanent absentee or vote-by-mail process. Despite this fact, the task force reported that the county also conducted a traditional election involving about 330,000 voters assigned to over 2,500 precincts and 540 individual polling places, and the use of hundreds of temporary election workers who must be trained and who work at the polling places for more than 13 hours on election days. Furthermore, the task force stated that both election processes contain independent, complex, and often conflicting requirements that have clearly caused significant problems for King County election officials. Having one means of voting for all citizens is perceived to be both more efficient and cost-effective than the previous process, according to the task force.
Paper records for electronic voting devices and precertification audits of electronic voting results: All electronic voting devices must, beginning January 1, 2006, produce an individual paper record of each vote, at the time of voting, that may be accepted or rejected by the voter before finalizing his or her vote. This audit is to be conducted by randomly selecting a specified percentage of electronic voting devices and, for each device, comparing the results recorded electronically with the paper records. The audit process must be open to observation by political party representatives if such representatives have been appointed and are present at the time of the audit.
Separate from changes made at the Washington state level, King County, as reported in the Election Center audit, also implemented or was in the process of implementing changes to improve election administration that specifically address issues that arose during the 2004 general election. Examples of such reported changes are below: Controls to manage provisional ballots: Provisional ballots will be color- coded for easy recognition and will have timing marks that prevent the counter at the polling place from accepting them. Therefore, the voter has no option but to return his or her provisional ballot to a poll worker, who will place it in a provisional envelope. One additional poll worker is to be assigned to each polling place to exclusively manage provisional ballots for all voters at that polling place.
Controls to prevent misplaced ballots: Poll workers are required to record the serial number located at the bottom of the optical scan bins on the ballot reconciliation transmittal form. The serial number is not visible if any ballots remain in the bin. Increased poll worker training, attaching a flashlight to the inside of each bin, and continued adherence to existing procedures for troubleshooters to examine each bin before certification are also intended to help ensure that all ballots are properly handled and counted in future elections.
Additional procedures for tracking absentee ballots and registration signatures: King County performed a database search of the entire voter file prior to the fall 2005 elections, in order to identify missing or unreadable signatures. On the basis of the search results, elections personnel contacted voters and made significant progress in updating the files. In addition, procedures at the absentee ballot operation center have been enhanced. New logs were created for tracking absentee ballots that required additional research because they were not easily verified. Also, in any instance where a voter registration signature is not on file, or is illegible, a search for the original record, as well as a call and a letter to the voter, is required.
Improvements to procedures for reconciling ballots and voters: For the 2005 primary and general elections, the use of electronic hand wands to scan poll books, when reconciling ballot and voter numbers, was to be done at a county center where more space would be available. New checklists were developed that required staff to balance the number of signatures recorded with the wand against the number of ballots counted by the computer. Also, the hand-wand process was to occur at the beginning rather than at the end of the canvass to allow more time for any necessary research into potential discrepancies.
Concluding Observations
Although the methods used to secure and count ballots vary across the 50 states and the District of Columbia, the goal of vote counting is the same across the nation: to accurately count all ballots cast by eligible voters. As with the elections process overall, conducting an accurate vote count is not a simple process. It requires many steps, an unerring attention to detail, and the seamless integration of people, processes, and technology.
Providing eligible voters multiple means and times within a jurisdiction for casting their ballots—early, absentee, provisional, and Election Day voting—enhances eligible voters’ opportunity to vote. At the same time, multiple voting methods and types of ballots can make the vote-counting process more complicated. In addition, short deadlines for certifying the final vote—as little as 2 days in 1 state—provide little time for election officials to review, verify, and count provisional and absentee ballots. Larger jurisdictions generally face more challenges than smaller jurisdictions because of the sheer volume of votes cast by all ballot types— absentee, provisional, and regular ballots. Provisional ballots were new for many jurisdictions in November 2004 and created some challenges in tracking, verifying, and counting. On the basis of their experience in November 2004, some jurisdictions are implementing new procedures for provisional voting, such as printing provisional ballots in a color different from other types of ballots or using paper ballots rather than DRE machines for provisional voters.
Two jurisdictions we visited in Washington have announced plans to move to all-mail elections, which was authorized on a county-wide basis by recent state law. Although replacing in-person voting with all-mail voting eliminates some challenges—e.g., poll worker training on voting equipment operations and provisional voting or the chance of malfunctioning voting equipment at the polls—in some circumstances it could magnify the importance of other aspects of state election processes, such as verifying votes, accurately matching voter signatures and having guidance for determining voter intent from improperly or unclearly marked ballots. For those jurisdictions allowing or requiring the determination of a voter’s intent from an improperly or unclearly marked ballot, the importance of having explicit and consistent criteria for treating such ballots became evident in the 2000 general election when different interpretations for such ballots in Florida made the close presidential race extremely contentious. Eighteen states that reported they did not have voter intent guidance in place for the November 2000 general election reported to us in our state survey that they did have voter intent requirements or guidance in place for the November 2004 general election. While federal election provisions do not address the state counting issue of ascertaining voter intent, HAVA did require states to adopt, by January 2006, uniform and nondiscriminatory standards defining what constitutes a vote and what will be counted as a vote for each type of voting system used by the state.
The recount in the close gubernatorial election in Washington revealed the interdependence of every stage of the elections process in ensuring an accurate vote count. That experience also illustrated how small errors in election operations can affect the vote counting process. Were any state’s election processes subjected to the very close scrutiny that characterized the recount in Washington state, it is likely that imperfections would be revealed. Votes are cast and elections are conducted by people who are not and cannot be 100 percent error free in all their tasks all the time. Thus, the consistently error-free vote count may be elusive, particularly in very large jurisdictions with hundreds of thousands of ballots cast in person, absentee, or provisionally. However, diligent efforts to achieve consistent error-free vote counts can help to ensure that any errors are reduced to the minimum humanly possible.
Voting Methods and Technologies
Voting methods can be thought of as tools for accommodating the millions of voters in our nation’s more than 10,000 local elections jurisdictions. These tools are as simple as a pencil, paper, and a box, or as sophisticated as programmable computer-based touch screens. Regardless of method, however, the proper operation and functioning of each depends on its effective interplay with the people who participate in elections (both voters and election workers) and the processes (governed by policies, procedures, and so forth) that govern the interaction of people with one another and with the voting method.
This chapter focuses on voting methods—the technology variable in the people, process, and technology election equation. It describes the use of voting methods in the 2004 general election, compares this technology environment with that of the 2000 general election, and examines plans for voting technologies in the 2006 election, particularly in light of the roles being played by states and HAVA. It also examines efforts to measure and understand how well voting equipment performed in the 2004 election (see fig. 53 for equipment examples), including the state of performance standards and local jurisdictions’ overall satisfaction with their respective voting methods. Additionally, this chapter discusses the state of practice relative to voting system security, testing, and integration, and presents key challenges facing all levels of governments as voting systems, related election systems, and supporting technologies continue to evolve.
Overview
The technology of the voting environment can be characterized as varied and evolving, according to our 2005 state survey results and local jurisdiction survey estimates. We estimate on the basis of our local jurisdiction survey that the predominant voting methods most often used for the 2004 general election by large jurisdictions were DRE and precinct count optical scan, while medium jurisdictions most often used precinct count optical scan and small jurisdictions most often used paper ballot. In addition, the predominant voting method most often used for large jurisdictions changed from precinct count optical scan in 2000 to both DRE and precinct count optical scan in 2004, while the predominant voting methods remained the same for the other jurisdiction sizes. Also in the 2004 general election, an estimated one-fifth of jurisdictions used multiple voting methods to support voting activities. Most states generally exercised influence over the voting methods used by their respective elections jurisdictions through a range of approaches such as requiring the use of one specific voting method, helping with local acquisition efforts, or eliminating voting methods, according to our 2005 state survey. Ten states and the District of Columbia reported that they required the use of one specific method for the 2004 general election, and 4 additional states planned to require a specific method for the 2006 general election. Sixteen states and the District of Columbia reported that they were involved to some extent in local jurisdiction efforts to acquire voting systems, components, and services. States also reported that they were eliminating lever and punch card equipment between the 2000 and 2006 general elections. Specifically, for the November 2000 general election, 37 states reported that they used lever or punch card voting equipment; by the November 2006 general election, only 4 states had plans to use lever and punch card equipment. HAVA has influenced state and local decisions regarding particular voting methods by providing funds to states to replace punch card and lever voting equipment with other voting methods. This greater state involvement in jurisdictions’ choice of voting methods, combined with federal funding to replace lever and punch card voting equipment and certain HAVA requirements—among other factors—is likely to influence the adoption of DRE and optical scan voting methods.
Federal and state standards provide an important baseline for the performance of voting systems and were widely adopted for the 2004 general election. However, according to our local jurisdiction survey, voting equipment performance was not consistently measured during the 2004 general election and varied by jurisdiction size and voting method, in part because some types of measures were not well suited to particular voting methods. For example, small jurisdictions were generally less likely to collect accuracy measures such as accuracy of voting equipment (estimated at 31 percent for small jurisdictions) than large and medium jurisdictions (66 percent and 54 percent, respectively), and this may be because the predominant voting method most used by small jurisdictions was paper ballot. On the other hand, on the basis of our local jurisdiction survey, we estimate that the vast majority of all jurisdictions were very satisfied or satisfied with their systems’ performance during the 2004 general election. For instance, we estimate that 78 percent of jurisdictions were very satisfied or satisfied with the accuracy of their voting system performance. The estimated high satisfaction levels demonstrated across different voting system performance areas and jurisdiction sizes contrast with our lower estimates of the performance measures that were collected for the 2004 general election. Although the reasons for moderate collection levels for performance measures are unclear, jurisdictions that may not have collected performance data or may have considered such information not applicable to their situation may lack sufficient insight into their system operations to adequately support their satisfaction in the variety of performance areas we surveyed. The moderate collection levels of data on operational voting system performance may present a challenge to state and local election officials in their efforts to make informed decisions on both near-term and long-term voting system changes and investments.
A wide range of recently published concerns for the security of voting systems and the development of nationwide mechanisms under HAVA to improve security standards and processes have not yet produced a consistent approach across all jurisdictions for managing the security of voting systems. Our 2005 local jurisdiction survey and our visits to local jurisdictions found that voting system security has been primarily shouldered by local jurisdictions. However, states, vendors, law enforcement officials, and others shared in these efforts to varying degrees for the 2004 general election. Our state survey for the 2004 general election and visits to local jurisdictions indicated that security mechanisms employed by some states—but not others—included promulgation of policies and guidance, compliance of voting equipment with security standards, and monitoring and evaluation of implemented security controls. According to our local jurisdiction survey estimates and visits to local jurisdictions, jurisdictions and their support organizations were largely responsible for implementation of security controls, such as access restrictions to voting equipment, system backup capabilities, and security- related testing. Estimates from our local jurisdiction survey also showed, however, that many jurisdictions nationwide had not documented their security measures, and we found that several of the jurisdictions we visited reported that they had not implemented recommended measures, such as security plans, training, and documentation of policies and procedures. Furthermore, decisions by states to continue using outdated voting system standards may allow the vulnerabilities of newer technologies to go unevaluated and impair effective management of the corresponding security risks. States and local jurisdictions face the challenge of regularly updating and consistently applying appropriate standards and other directives to meet the vulnerabilities and risks of their specific election environments.
Testing and evaluation of voting systems also varied across states and jurisdictions for the 2004 general election. Our state survey found that most states required certification testing of their voting systems using a range of criteria. However, responsibility for purchasing a certified system typically rested with local jurisdictions. Other results from our 2005 state survey and responses from jurisdictions we visited indicated that acceptance testing continued to be commonly performed, but there was wide variation in the responsibilities and practices for this type of testing, including whether such testing was applied to new systems or upgrades, the extent of vendor participation, and the coverage of hardware and software functions. Also on the basis of our local jurisdiction survey, we estimate that most jurisdictions conducted readiness (logic and accuracy) testing for the 2004 general election as they did for the 2000 election, but in some jurisdictions we visited, we found they used different procedures that may have included one or more processes such as diagnostic tests, mock elections, or suites of test votes. In contrast, our local survey estimates indicate that parallel testing was employed by fewer than an estimated 2 percent of jurisdictions. This may be due to, in part, the lack of directives for conducting such tests. Finally, postelection voting system audit tests were conducted by fewer than half of jurisdictions for the 2004 general election, according to our local survey estimates, although many more large and medium jurisdictions performed these tests than small jurisdictions. As with other types of testing, the requirements and practices for audit tests were diverse. Factors associated with the testing of voting systems may further challenge states and local jurisdictions as they adapt to changes in voting system capabilities, standards, and national certification for the 2006 general election. Those factors are likely to include increased certification testing workloads to recertify systems with new capabilities, ongoing limits to the number of available testing laboratories until a new laboratory accreditation process becomes fully operational, and more complex testing because a new version of the federal voluntary voting system guidelines has been added in 2005 to older federal standards from 1990 and 2002 that states are already using.
The number of jurisdictions that had integrated particular aspects of voting system components and technologies was limited for the 2004 general election, according to estimates from our local jurisdiction survey and visits to local jurisdictions for the selected areas of integration we examined, such as electronic programming or setup and electronic management. Two-thirds of the jurisdictions we visited told us that they used electronic programming or setup of voting equipment, and an estimated 7 percent of jurisdictions that used voting methods other than paper ballots, according to our local survey, connected their voting equipment via a local network at polling locations. Relatively few local jurisdictions we visited also reported having plans for integrating or further integrating their election-related systems and components for the 2006 general election, and in the instances where jurisdictions reported plans, the scope and nature of the plans varied. For instance, officials at 5 jurisdictions we visited reported plans to introduce a voter-verifiable paper trail (VVPT) capability for future elections, and officials from 1 jurisdiction reported plans to purchase an optical scanner with the ability to tabulate both DRE and optical scan election results. Nevertheless, the potential for greater integration in the future does exist as states and jurisdictions act on plans to acquire the kind of voting equipment (e.g., optical scan and DRE products) that lends itself to integration. For example, on the basis of our local jurisdiction survey, we estimate that at least one-fifth of jurisdictions plan to acquire DRE or optical scan equipment before the 2006 general election, and officials from 2 jurisdictions we visited who used DRE equipment told us that their state planned to purchase electronic poll books for its precincts to use during the 2006 elections to electronically link its voter registration system with its voting systems. It is unclear if and when this migration to more technology-based voting methods will produce more integrated election system environments. However, suitable standards and guidance for these interconnected components and systems—some of which remain to be developed—could facilitate the development, testing, operational management, and maintenance of components and systems, thereby maximizing the benefits of current and emerging election technologies and achieving states’ and local jurisdictions’ goals for performance and security. The challenge inherent in such a dynamic environment is to update system standards so that emerging technical, security, and reliability interactions are systematically addressed.
Voting Methods Vary among Jurisdictions and Are Being Influenced by States’ Choices and HAVA
The technology of the voting environment can be characterized as varied and evolving, according to our 2005 state survey results and local jurisdiction survey estimates. We estimate on the basis of our local jurisdiction survey that the predominant voting methods most often used for the 2004 general election by large jurisdictions were DRE and precinct count optical scan, while medium jurisdictions most often used precinct count optical scan and small jurisdictions most often used paper ballot.
Two key patterns emerged in the use of voting methods between the 2000 and 2004 general elections. First, we estimate that the percentage of large jurisdictions using DREs doubled from 15 percent in the 2000 general election to 30 percent in 2004. The predominant voting method for large jurisdictions changed from precinct count optical scan in 2000 to both DRE and precinct count optical scan in 2004. In contrast, we estimate that the predominant voting methods remained the same for small and medium jurisdictions (paper ballots and precinct count optical scan, respectively) from 2000 to 2004. Furthermore, on the basis of our local jurisdiction survey, we estimate that at least one-fifth of jurisdictions plan to acquire DRE or optical scan equipment before the 2006 general election. Second, in response to our state survey, 9 states reported that they eliminated the lever machine and punch card voting methods for the 2004 general election. In addition, 18 other states plan to eliminate lever or punch card voting methods for the 2006 general election. This greater state involvement in jurisdictions’ choice of voting methods, the availablilty of federal funding to replace lever and punch card voting equipment, and certain HAVA requirements—among other factors—are likely influences on the adoption of DRE and optical scan voting methods.
Voting Methods Differ by the Size of Local Jurisdictions and States’ Choices
Since the November 2000 general election, the DRE voting method has become more widely used in large jurisdictions, according to our local jurisdiction 2005 survey. During the same period, states’ reported use of lever machine and punch card voting methods has decreased, according to responses to our 2005 state survey. Our state and local jurisdiction surveys also indicate plans for changes to voting technologies for the 2006 general election.
Overall, the estimated percentages of predominant voting methods used by local jurisdictions in the 2000 and 2004 general elections did not change appreciably. In particular, from our local jurisdiction survey, we estimate that the mix of predominant voting methods used in the November 2000 general election was 5 percent DRE, 21 percent central count optical scan, 26 percent precinct count optical scan, 5 percent central count punch card, 2 percent precinct count punch card, 8 percent lever, and 31 percent paper. In comparison, we estimate that the mix for the November 2004 general election (in the same order) was 7 percent DRE, 21 percent central count optical scan, 30 percent precinct count optical scan, 2 percent central count punch card, 2 percent precinct count punch card, 7 percent lever, and 30 percent paper. Figure 54 compares these percentage changes.
According to our local jurisdiction survey, there may have been a small shift away from punch card and lever machine voting methods (estimated at 3 percent or 1 percent loss of jurisdictions, respectively) and may have been an increase in optical scan and DRE voting equipment (estimated at 5 percent and 2 percent gain of jurisdictions, respectively) for the 2004 general election. However, these differences are not statistically significant. During the same time frame, we estimate that 16 percent of jurisdictions acquired new voting equipment through their own purchases or leases and 15 percent of jurisdictions through purchases or leases by their state. Thus, the new voting equipment acquired by many jurisdictions since 2000 did not substantively affect the predominant voting methods that were already in use.
One notable change did occur, however, in the use of predominant voting methods in the 2000 and 2004 general elections. The percentage of large jurisdictions using DREs doubled (estimated at 15 percent in 2000 and 30 percent in 2004, respectively)—an increase that is statistically significant. This increase in the use of DREs changed the predominant voting method most often used for large jurisdictions, which was precinct count optical scan in 2000, to both DRE and precinct count optical scan in 2004. A smaller increase in the use of DREs among medium jurisdictions (from an estimated 13 percent in 2000 to 20 percent in 2004) is not statistically significant, and there was virtually no change in DRE use among small jurisdictions (an estimated 1 percent for both elections). In contrast, the use of paper ballots as a predominant voting method did not appreciably change between the 2000 and 2004 general elections (with overall use at 30 percent in 2000 and 31 percent in 2004, respectively). Small jurisdictions were the major contributors to this steady use of paper ballots (estimated at 43 percent in 2000 and 41 percent in 2004, respectively); medium jurisdictions were minor contributors (3 percent for each election). (No large jurisdictions used paper ballots as their predominant voting method for either of these elections.) We also estimate that use of precinct count optical scan as the predominant voting method for medium jurisdictions did not change appreciably between the 2000 and 2004 elections (estimated at 35 percent in 2000 and 39 percent in 2004, respectively). Figure 55 shows the estimated use of predominant voting methods for small, medium, and large jurisdictions in the 2004 general election.
The more widespread adoption of DREs by large jurisdictions was consistent with their greater proportion among jurisdictions that acquired voting equipment since 2000. According to our local jurisdiction survey, we estimate that 37 percent of large jurisdictions bought or leased new voting equipment since 2000, compared with 21 percent of medium jurisdictions and 12 percent of small jurisdictions, where the differences between large jurisdictions and both medium and small jurisdictions are statistically significant.
Furthermore, on the basis of our local jurisdiction survey, we estimate that at least one-fifth of jurisdictions plan to acquire DRE or optical scan equipment before the 2006 general election. Both large and medium jurisdictions are more likely to have plans to acquire DREs before the November 2006 general election (estimated at 34 percent each) than small jurisdictions (estimated at 13 percent), while small jurisdictions are more likely to have plans to acquire precinct count optical scan voting equipment (estimated at 28 percent) than medium or large jurisdictions (estimated at 17 percent and 15 percent, respectively). In general, fewer jurisdictions expected to acquire central count optical scan voting equipment than the other two voting methods, although the differences were not statistically significant. The percentages of jurisdictions planning to acquire the newer voting systems before the next general election are shown in figure 56 by the size of jurisdiction.
Another interesting pattern emerged in voting methods between November 2000 and November 2004 at the statewide level. Thirty-seven states reported that at least 1 jurisdiction used lever machine or punch card voting equipment for the November 2000 general election. By the time of the November 2004 general election, the number of states that continued to employ these voting methods decreased to 28. Specifically, our state survey results show that 9 states reported that they completed replacement of all their punch card or lever voting equipment before the November 2004 general election, and 4 other states reported that they completed their replacements since the 2004 election. Of the remaining 24 states that reported using the punch card and lever methods in 2000 but had not yet replaced them at the time of our survey, 18 reported that they planned to replace all punch card and lever voting equipment by the November 2006 general election, while 3 planned to replace a portion of their equipment by then. One state reported no replacement plans prior to the November 2006 general election. Figure 57 summarizes the states’ progress and plans for replacing punch card and lever voting equipment.
Our local jurisdiction survey provided insight into jurisdictions’ plans for acquiring technology-based voting methods and the time frames for executing these plans, which may increase the predominance of these methods in future elections. Specifically, we estimate that 25 percent of local jurisdictions are planning to acquire precinct count optical scan machines by the November 2006 general election, 19 percent expect to acquire DREs by then, and about 7 percent plan to acquire central count optical scan equipment before that election. In addition, we estimate that between 4 and 10 percent of local jurisdictions had plans to acquire additional equipment in each of these voting methods but had not set a target date for doing so at the time of our survey.
During visits to election jurisdictions across the country, local election officials explained some of their motivations behind plans to acquire DRE or optical scan voting equipment. For example, election officials in 6 jurisdictions cited HAVA as the reason for purchasing new DRE equipment, particularly HAVA’s requirement that each voting place have at least one voting method that is accessible to persons with disabilities, as we discussed earlier in chapter 4. More specifically, officials in 1 large jurisdiction in Connecticut said that they would evaluate the use of DREs to meet HAVA accessibility requirements before deciding whether to purchase more DREs in time for the November 2006 general election. Election officials from 5 other jurisdictions stated that they planned to purchase new voting equipment to provide a VVPT, a requirement levied by 3 of the 14 states we visited (Colorado, Nevada, and New Mexico). Officials from 5 other jurisdictions said that they expected to acquire new voting equipment but did not give a reason and, in some cases, did not yet know what type of equipment they would obtain. Officials in jurisdictions that did not plan to purchase new voting equipment told us that their existing equipment was sufficient or that budget constraints prevented the acquisition of new equipment, among other reasons.
More Jurisdictions Used Several Voting Methods
As for the 2000 general election, some jurisdictions used multiple voting methods to support the 2004 general election, and some of these methods were more widely used than others for particular types of voting. In our October 2001 comprehensive report on election processes nationwide, we reported that 5 percent of jurisdictions used more than one voting method. On the basis of our 2005 local jurisdiction survey, we estimate that 21 percent of jurisdictions used more than one voting method in the November 2004 general election, with the most common combination of methods being central count optical scan with paper ballot (estimated to be 5 percent of jurisdictions). Other common combinations in 2004 were lever machine with paper ballot (4 percent) and DRE with paper ballot (3 percent). DRE with central count optical scan was one of numerous other combinations used by 2 percent or less of local jurisdictions. Figure 58 shows the estimated proportion of jurisdictions with the most prevalent single and combination voting methods.
The specific mix of voting methods used can also be viewed with respect to particular types of voting (e.g., absentee, early, provisional) that were supported in the 2004 election. In this regard, some voting methods were applied to a particular type of voting more frequently than others. We estimate that paper ballot was the most widely used voting method for absentee voting (36 percent of jurisdictions), provisional voting (18 percent), and early voting (8 percent). Precinct count optical scan (shown in fig. 59) was generally the second most widely used voting method for these types of voting (24 percent of jurisdictions for absentee, 10 percent for provisional, and 5 percent for early voting, respectively), while central count optical scan was the third most widely used method (20 percent of jurisdictions for absentee, 9 percent for provisional, and 5 percent for early voting, respectively).
Jurisdictions’ Voting Methods Were Influenced by the States and HAVA
Most states have generally exercised influence over the voting methods used by their respective elections jurisdictions through a range of approaches. In particular, for our state survey, a majority of states (32) and the District of Columbia said that they restricted the voting methods employed by local jurisdictions in the 2004 election either by requiring the use of one specific method (10 states and the District of Columbia) or providing a list of approved voting methods for the jurisdiction to select from (22 states). An alternate approach reported by 10 states was to require local jurisdictions to obtain state approval when selecting a voting method. The remaining 8 states said that local jurisdictions chose the voting method they used without any state involvement.
In addition to affecting the choice of voting methods, 16 states and the District of Columbia reported that they were involved to some extent in local jurisdiction efforts to acquire voting systems, components, and services. For example, 1 state reported that it evaluated voting equipment options and vendors, and then contracted with a single vendor to supply voting equipment for all jurisdictions in the state. Jurisdictions within this state then had the option of purchasing additional voting equipment from this vendor, as needed. The top map of figure 60 shows the role of each state in the selection of specific voting methods for jurisdictions in the 2004 general election.
Washington, D.C.
Washington, D.C.
Responses to our state survey indicate that state influence over the voting methods to be used in the November 2006 general election will continue to increase. Four additional states planned to require the use of a single voting method statewide, which will bring the total number of states doing so to 14, and the District of Columbia will do so as well. Also, 5 additional states reported that they will require local jurisdictions to select a voting method or methods from a state-approved list, bringing this total to 27; 8 states intended to continue to allow local jurisdictions to select their voting methods with state approval. Only 1 state was not expecting to be involved in decisions on voting methods for its jurisdictions for 2006. The bottom map of figure 60 shows the role of each state in the selection of specific voting methods for jurisdictions in the 2006 general election.
Consistent with state survey responses indicating their contributions to local jurisdictions’ selection of voting methods and on the basis of our local jurisdiction survey, one of the most frequent factors that influenced the 16 percent of local jurisdictions that bought or leased new voting equipment since the November 2000 general election was state requirements or certification of the equipment (an estimated 83 percent of the 16 percent of jurisdictions that bought or leased the new voting equipment). Other widely influential factors included ease of equipment use (91 percent), vendor demonstrations (72 percent), and affordability (68 percent). In contrast, local requirements and HAVA funding were less influential factors for local jurisdictions’ acquisition of voting equipment (44 percent and 45 percent of jurisdictions, respectively). (See fig. 61.)
HAVA has also influenced state and local decisions regarding particular voting methods through mechanisms to encourage the adoption of technology. Among other things, HAVA provided funds to states to replace punch card and lever voting equipment with other voting methods (Section 102 funds). During fiscal year 2003, the General Services Administration (GSA) reported distributing about $300 million to 30 states that applied for these funds. Figure 62 depicts an overview of the funds distributed to states specifically to replace lever machines and punch card voting equipment. (Fig. 57 presented an overview of states’ progress in replacing lever and punch card voting equipment.) In responding to our state survey, 24 of the 30 states reported that they had invested at least a portion of these funds to replace lever or punch card voting equipment as of August 1, 2005.
In addition to the funding that HAVA earmarked for voting equipment replacement, states could also apply for other HAVA funds that could be used for multiple purposes, including replacement or upgrade of voting systems (Section 101 funds). In its 2004 annual report, EAC reported that almost $344 million had been distributed to each of the 50 states and the District of Columbia under this multiple purpose funding category. In all, 44 states and the District of Columbia reported in our state survey that they had spent or obligated funds from one or both of these HAVA funding sources in order to improve, acquire, lease, modify, or replace voting systems and related technology. EAC requires states to submit detailed annual reports on the use of those funds but has not yet compiled data from the state reports about spending for voting equipment covered in HAVA Section 101.
Besides authorizing funding for changes to voting methods, HAVA also has the potential to influence voting methods through new requirements for the usability and accountability of voting systems. Among other things, HAVA requires that voting systems used in federal elections provide voters with ballot verification and correction capabilities by January 1, 2006, including the opportunity to verify their ballots in a private and independent manner before they are cast; the ability to change their ballots or correct any error in a private and independent manner before the ballots are cast and counted; and the capability to both notify the voter whenever more than one candidate has been selected for a single office and correct the ballots.
HAVA also requires voting equipment to generate a permanent paper record with manual audit capacity as an official record of the election.
Our October 2001 report on election processes described how voting methods varied in their ability to support features such as error identification and correction for voters. With regard to minimizing voter error at the polls, our local jurisdiction survey for the 2004 general election found that, for instance, voters were provided the opportunity to correct a ballot or exchange a spoiled ballot for a new one in most jurisdictions, and such capabilities were largely available for all voting methods. Our estimates of the availability of ballot correction capabilities range from 100 percent (for jurisdictions whose predominant voting method was central count punch cards) to 70 percent (for jurisdictions predominantly using DREs). However, the differences among these voting methods were not statistically significant. Figure 63 shows one approach that allows voters to verify and correct their ballots using a particular voting method (DRE).
With regard to voting equipment that generated a permanent paper record with a manual audit capability for election audits in the 2004 general election (including solutions such as VVPT), we estimate that few jurisdictions that used DREs had this capability. Specifically, from our local jurisdiction survey, a small proportion of jurisdictions that used DREs for the 2004 election had manual audit capabilities such as VVPT (estimated at 8 percent of DRE jurisdictions) or printing of ballot images (11 percent of DRE jurisdictions). An estimated 52 percent of jurisdictions using DREs had equipment that produced an internal paper record that was not voter-verifiable. With this limited implementation of HAVA-related capabilities in the 2004 general election, it appears that most of the voting system and election process changes to comply with these specific HAVA usability and accountability requirements will need to be satisfied by jurisdictions for the 2006 general election.
Voting Equipment Performance Was Not Consistently Measured during the 2004 General Election, but Estimated Levels of Performance Satisfaction Were High
Voting system performance can be viewed in terms of accuracy, reliability, and efficiency. Accuracy refers to how frequently the equipment completely and correctly records and counts votes; reliability refers to a system’s ability to perform as intended, regardless of circumstances; and efficiency refers to how quickly a given vote can be cast and counted. Performance in each of these areas depends not only on how well a given voting system was designed and developed, but also on the procedures governing its operation and maintenance and the people who use and operate it. Thus, it is important that system performance be measured during an election when the system is being used and operated according to defined procedures by voters and election workers. As we have previously reported in our October 2001 report on election processes, measuring how well voting systems perform during a given election allows local election officials to better position themselves for ensuring that elections are conducted effectively and efficiently. Such measurement also provides the basis for knowing where performance needs, requirements, and expectations are not being met so that timely corrective action can be taken.
HAVA recognized the importance of voting system performance by specifying requirements for error rates in voting systems and providing for updates to the federal voting system standards, including the performance components of those standards. Moreover, according to our local jurisdiction survey, most local jurisdictions adopted performance standards for the 2004 general election—usually standards selected by their respective states. As was the case for the 2000 general election, jurisdictions collected various types of voting system performance measures for the 2004 general election, although some types of measures were collected by fewer jurisdictions than others—in part because they were not well suited to particular voting methods. Furthermore, from our local jurisdiction survey, we estimate that the vast majority of all jurisdictions were very satisfied or satisfied with their systems’ performance during the 2004 general election, even though performance data may not have been collected to an extent that would provide firm support for these views.
HAVA Has Increased the Focus on Voting System Performance
In our October 2001 report on voting equipment standards, we reported that the national voluntary voting system standards being used by some states and local jurisdictions at that time were originally approved in 1990 and were thus out of date. Among other things, these standards identified minimum functional and performance thresholds for voting systems in terms of accuracy, reliability, and efficiency. In 2002, the Federal Election Commission updated these standards and, in doing so, provided new or enhanced coverage of certain performance requirements for, among other things, voting system components that define, develop, and maintain election databases; perform election definition and setup functions; format ballots; count votes; consolidate and report results; and maintain records to support vote recounts; direct feedback to the voter that indicates when an undervote or overvote is detected in DRE and paper-based voting systems that encompass punch cards and optical scan; system standards to meet the needs of voters with disabilities, including specific standards for DREs; and strengthened election record requirements to address a range of election management functions, including such functions such as ballot definition and election programming.
HAVA further focused attention on voting system performance by establishing a performance requirement for systems used in elections for federal offices and by providing for updates to federal voting system standards. Specifically, HAVA required that voting systems used in federal elections comply with error rate standards specified in the 2002 federal voting system standards. Under these standards, the maximum acceptable error rate during testing is 1 in 500,000 ballot positions. In addition, HAVA directed EAC to revise the voluntary national voting system standards, and to test, certify, decertify, and recertify voting system hardware and software with respect to national voting system standards using accredited testing laboratories.
Most Jurisdictions Adopted Voting System Performance Standards, but Collection of Performance Measures Varied by Jurisdiction Size and Voting Method
On the basis of our local jurisdiction survey, we estimate that the vast majority of jurisdictions that used some type of automated voting equipment on Election Day generally established written standards for the performance of their voting equipment for the November 2004 general election. Of these, most jurisdictions (an estimated 77 percent) had adopted their state’s standards or requirements pertaining to voting system performance, although a few had adopted performance standards from a source other than their state (10 percent) or developed their own (8 percent). The apparently high adoption rate for standards among states and local jurisdictions is important because it indicates broad acceptance of a basic management tool needed for systematic performance measurement and evaluation.
Consistent with our results on voting system performance measurement from our October 2001 report on election processes, estimates from our local jurisdiction survey indicated that jurisdictions used several specific measures that could be generally grouped into the areas of accuracy, reliability, and efficiency to assess the performance of their voting systems for the 2004 general election. However, jurisdictions measured how well their systems actually performed in the 2004 election to varying degrees. In the discussion below, we compare jurisdictions’ collection of selected information on voting system performance for the 2000 and 2004 general elections, and then examine jurisdictions’ performance monitoring in each of the three performance areas.
On the basis of on our local jurisdiction surveys for the 2000 and 2004 elections, we estimate that about 50 percent of jurisdictions collected performance information in both elections using three measures— accuracy, undervotes, and overvotes. The percentage of jurisdictions that collected information on a fourth performance measure—average time to vote—was much smaller (estimated at 10 percent or less). The differences between estimates for the two elections are not statistically significant. Figure 64 shows the percentages of jurisdictions that collected these performance measures for the 2000 and 2004 general elections.
In the area of accuracy, we estimate that 42 percent of jurisdictions overall monitored the accuracy of voting equipment in the 2004 general election. Other widely used measures of accuracy in the 2004 general election were spoiled ballots (estimated at 50 percent of jurisdictions), undervotes (50 percent of jurisdictions), and overvotes (49 percent of jurisdictions).
During our visits to local jurisdictions, election officials in several jurisdictions told us that measuring overvotes was not a relevant performance indicator for jurisdictions using lever machines and DREs because neither permits overvoting. Election officials in several local jurisdictions we visited also told us that undervotes were not a meaningful metric because most voters focused on a limited range of issues or candidates and thus frequently chose not to vote on all contests.
Jurisdictions’ collection of the accuracy measures we studied for the 2004 general election varied according to jurisdiction size, with small jurisdictions generally less likely to collect these measures than other jurisdiction sizes. Both large jurisdictions (an estimated 66 percent) and medium jurisdictions (54 percent) were significantly more likely than small jurisdictions (31 percent) to collect data on vote count accuracy. In addition, large jurisdictions (65 percent) were significantly more likely than small jurisdictions (47 percent) to collect data on undervotes. (See fig. 65.) This disparity may be due to the proportion of smaller jurisdictions that use paper ballots and for whom collection of these data would be a manual, time-consuming process.
In the area of reliability, we estimate that 15 percent of jurisdictions measured the reliability of their voting equipment in terms of pieces of equipment that failed, and 11 percent measured equipment downtime.
As with accuracy, a higher percentage of large and medium jurisdictions collected such reliability data than small jurisdictions, and in the case of equipment failures, there were statistically significant differences in the collection of this information among different sizes of jurisdictions. (See fig. 66.) Importantly, an estimated 55 percent of all jurisdictions kept a written record of issues and problems that occurred on Election Day, which could be a potential source of reliability data.
Collection of reliability data for automated voting equipment was also related to the predominant voting method used by a jurisdiction, with jurisdictions that predominantly used DREs more likely to collect reliability data than those that used optical scan voting methods.
An estimated 45 percent of jurisdictions whose predominant method was DREs collected information on the number of pieces of voting equipment that failed. The next most frequently collected information on machine failures was for precinct count optical scan systems (an estimated 23 percent of jurisdictions) and central count optical scan systems (an estimated 10 percent). The differences in data collection on equipment failures among jurisdictions that predominantly used DREs and those that used precinct count optical scan or central count optical scan voting methods are statistically significant. (See fig. 67.)
In the area of efficiency, we estimate that 13 percent of jurisdictions measured their voting system’s speed of counting votes, 17 percent measured the time it took for election workers to set up equipment, and 4 percent measured the average length of time it took for voters to cast ballots on Election Day. Large jurisdictions (34 percent) were significantly more likely than were both medium jurisdictions (19 percent) and small jurisdictions (9 percent) to collect information on counting speed. There were no significant differences for other efficiency measures by jurisdiction size. (See fig. 68.)
It is worth noting that for several types of performance measures in our local jurisdiction survey, jurisdiction size was a factor in whether system performance information was collected. Generally, large jurisdictions were most likely to record voting system performance and small jurisdictions were least likely, with medium jurisdictions in between. Moreover, large jurisdictions were more likely to keep a written record of issues or problems that occurred on Election Day. Specifically, on the basis of our local jurisdiction survey, we estimate that 79 percent of large jurisdictions kept such records, compared with 59 percent of medium jurisdictions and 52 percent of small jurisdictions. The differences between large jurisdictions and both medium and small jurisdictions are statistically significant. The responsibilities for monitoring or reporting voting system performance most often rested with local jurisdictions. On the basis of our local jurisdiction survey, we estimate that 83 percent of local jurisdictions had local officials responsible for performance monitoring or reporting, while states or other organizations (such as independent consultants or vendors) held such responsibilities in 11 percent and 13 percent of jurisdictions, respectively.
Information obtained during our visits to local election jurisdictions was generally consistent with the above estimates from our local jurisdiction survey. For example, election officials in the 28 jurisdictions we visited most frequently cited number of undervotes (14 jurisdictions), overvotes (10 jurisdictions), and equipment failures (10 jurisdictions) as types of performance metrics collected. Another collected metric (cited by election officials in 6 jurisdictions we visited) was equipment speed, measured in terms of how fast the voting equipment downloaded vote totals or transmitted totals to its central count location, and the time required to cast a vote (reported by election officials in 4 jurisdictions, although officials in 2 of these 4 jurisdictions limited their measurements to early voting). Another measurement that election officials in some jurisdictions told us they collected was comments from poll workers and voters on the efficiency of the equipment. For instance, an election official in a large jurisdiction in Georgia told us that poll workers commented that it took 20 minutes to vote using the voting equipment’s audio feature. In addition, election officials in several jurisdictions that we visited told us that they had established performance management programs for their voting systems. For example, election officials in 1 jurisdiction reported that they collected data on the time it took to vote to better allocate its voting equipment to various locations. Officials in a large jurisdiction in Kansas said they had conducted a survey of voters concerning their satisfaction with the ease of use of voting equipment during the 2004 general election and determined that they were very satisfied.
Local Jurisdictions Were Generally Satisfied with Their Voting Systems in 2004, although Some Problems Were Reported
In our October 2001 report on election processes, we reported that 96 percent of local jurisdictions nationwide were satisfied with the performance of the voting equipment during the November 2000 general election. On the basis of our local jurisdiction survey for the 2004 general election, we estimate that election officials were generally satisfied with their voting system performance. Estimated satisfaction varied for specific areas of voting system performance, ranging from relatively high levels for accuracy (78 percent), speed of vote counting (73 percent), time to set up equipment (63 percent), and number of spoiled or ruined ballots (61 percent), to relatively low levels for equipment failures (37 percent), and downtime (36 percent). Some of these measures may not be applicable to all jurisdictions, such as those using only hand-counted paper ballots. When jurisdictions that used only hand-counted paper ballots were excluded from our results, satisfaction levels were higher in all performance areas—accuracy (86 percent), speed of vote counting (83 percent), time to set up equipment (76 percent), number of spoiled ballots (68 percent), equipment failures (54 percent), and downtime (52 percent). However, even with the exclusion of paper ballot jurisdictions, “not applicable” responses were often selected by jurisdictions in the areas of equipment failures (41 percent not applicable) and downtime (43 percent not applicable).
Also on the basis of our local jurisdiction survey, for five of six satisfaction measures, we estimate that medium and large jurisdictions were satisfied or very satisfied with their voting systems more frequently than small jurisdictions and that most of these differences are statistically significant. These ratings may be related to the widespread use of paper ballots by small jurisdictions, where this voting method was predominant in an estimated 41 percent of jurisdictions. Figure 69 shows the frequency of satisfaction in each of six performance areas for large, medium, and small jurisdictions.
The estimated high satisfaction levels demonstrated across different voting system performance areas and jurisdiction sizes contrast with our lower estimates of the performance measures that were collected for the 2004 general election. Although the reasons for moderate collection levels for performance measures are unclear, jurisdictions that may not have collected performance data or may have considered such information not applicable to their situation may lack sufficient insight into their system operations to adequately support their satisfaction in the variety of performance areas we surveyed.
Local election officials at most of the 28 jurisdictions we visited also expressed satisfaction with the performance of their voting systems or method. For example, Election officials in several jurisdictions using optical scan systems stated that they were pleased with their equipment because it produced a paper trail and permitted fast processing. Officials in 1 large jurisdiction in Florida added that their use of the same equipment over several elections made it easy for voters to use the equipment in both 2000 and 2004.
Election officials in several other jurisdictions using DREs told us that their equipment was easy to use and provided results that were accurate and timely. Officials in 1 large jurisdiction in New Jersey reported that, in contrast to paper ballots, DREs do not require poll workers to interpret a voter’s ballot.
Election officials in a large Connecticut jurisdiction using lever machines said that voters were happy with the equipment and that it had worked well for over 60 years. They emphasized that the simplicity and transparency of the equipment’s counting mechanisms gave voters confidence that their votes would be counted correctly.
Election officials in a small New Hampshire jurisdiction using paper ballots reported that they had used the same hand-counted paper ballot system for decades and it has been very cost-effective for the small population of voters in the jurisdiction.
Overall, election officials in few of the 28 jurisdictions that we visited reported substantive performance issues, such as overvoting, undervoting, or equipment failure.
Although the estimated level of satisfaction with voting equipment performance in the 2004 general election was high overall, some dissatisfaction existed. On the basis of our local jurisdiction survey, we estimate that between 1 and 4 percent of jurisdictions were dissatisfied or very dissatisfied with their voting systems in the 2004 general election for the six performance areas of our survey.
Our local jurisdiction survey provided additional insight into the role of voting equipment in jurisdictions’ dissatisfaction ratings. Of almost 300 responses to our open-ended question about the issue or problem that occurred most frequently on Election Day, November 2004, fewer than 20 responses were specifically related to voting equipment. The most frequent reason for voting system dissatisfaction was voting equipment malfunction. Ballot errors related to voting equipment were much less frequently mentioned.
Although such problems were rarely mentioned by election officials during our visits to local jurisdictions, some did describe a few reasons for dissatisfaction with voting equipment, including the additional time required to count ballots using DREs versus the optical scan equipment previously used, the perceived lower reliability and greater failure rates of DREs over the voting equipment used in the past, accuracy problems with DRE computer programs, and difficulty in first-time poll worker operation and voter use of DREs.
Election officials in a few jurisdictions we visited noted situations that required considerable effort to resolve. For example, as mentioned in our discussion of vote counting in chapter 6, election officials in a North Carolina jurisdiction told us that 4,235 ballots were lost by one of the DREs used for early voting because the software manufacturer had not installed an upgrade that would have allowed the machine to record up to 10,000 ballots rather than its original limit of 3,500 ballots. The machine continued to show the number of people who voted on the machine after 3,500 ballots had been cast, but did not store the results of their ballots. As a result, the jurisdiction switched to hand-counted paper ballots for elections after the 2004 general election until its state can approve a new automated system for use. Given the real and potential impacts of situations where dissatisfaction was reported, systematic collection and analysis of performance information may help provide election officials with objective support for decisions to improve the operation and upgrade of these systems.
Attention to Voting System Security Management Continues to Vary amid Published Concerns and Federal Improvement Efforts
Having secure voting systems is essential to maintaining public confidence in the election process, and accomplishing this is a shared responsibility among federal, state, and local jurisdiction authorities. Among other things, voting system security involves ensuring that technical security controls embedded in voting equipment operate as intended, as well as ensuring that security policies and procedures governing the testing, operation, and use of the systems are properly defined and implemented by state and local election officials.
Our October 2001 report on election processes identified voting system security challenges facing local jurisdictions, such as consistent application of controls and adequacy of resources. HAVA recognized some of these challenges by requiring specific system security controls and providing improved security management guidance. Nevertheless, while we estimate from our local survey that most jurisdictions have assigned responsibility for voting system security to individuals and implemented certain security controls, the nature and extent of their respective security efforts and activities varied widely. In particular, according to our state survey, estimates from our local jurisdiction survey, and visits to jurisdictions, there are differences across jurisdictions in the (1) adoption of system security standards, with some states requiring jurisdictions to use outdated standards for voting systems; (2) reported implementation of system security controls; and (3) testing performed to ensure that security controls are functioning properly. For instance, we estimate on the basis of our local jurisdiction survey that at least 19 percent of local jurisdictions nationwide (excluding jurisdictions that reported using paper ballots) did not conduct security testing for the systems they used in the November 2004 general election. In addition, 27 states reported in our state survey that they are requiring jurisdictions to apply federal standards to voting systems used for the first time in the November 2006 general election that are outdated, unspecified, or entail multiple versions. This variability in implementation and testing of controls is generally consistent with what we reported for the 2000 general election. Moreover, our September 2005 report on the security and reliability of electronic voting highlighted substantial security issues and concerns for more modern electronic voting systems and reinforced the importance of effective security management.
HAVA Has Increased Focus on Voting System Security
HAVA recognized the importance of effective voting system security through two primary mechanisms. First, it required voting systems to produce a permanent paper record that provides a manual review capability and constitutes the official record for recounts by January 1, 2006. The paper record can be compared with polling place records and voting system documentation to ensure that authorized ballots have been completely and accurately counted. Second, HAVA provided various means to assist states and localities in acquiring and operating secure voting systems. These include provisions for EAC to (1) update voting system standards for voting systems, including standards for security; (2) establish processes for accrediting voting system testing laboratories and conducting tests of voting systems against the standards; and (3) create a process for federal certification of voting systems that undergo the testing process. In doing so, HAVA created tools and resources that states and local jurisdictions can leverage when, for example, acquiring systems from vendors, conducting system testing, and operating and auditing voting systems.
However, delays in establishing EAC and commission funding challenges resulted in the first update to the 2002 voluntary voting system standards, and its provisions for system security, not being approved until December 2005. Further, commission efforts to establish processes for accrediting testing laboratories, conducting testing, and certifying systems are still under way.
Efforts to Address System Security Continued to Vary Widely, and Jurisdictions Were Inconsistent in Following Common Security Practices
As was the case for the November 2000 general election, the nature and extent of voting system security efforts and activities during the 2004 election varied among jurisdictions. Moreover, these efforts and activities do not in all cases reflect the use of recommended system security management practices and current voting system security standards.
In our October 2001 report on election processes, we reported that jurisdictions had taken a number of steps to manage the security of their respective voting systems for the 2000 general election. In particular, we estimated that 89 percent of the local jurisdictions assigned responsibility for performing security-related functions to one or more individuals, and implemented some type of controls to protect their equipment during the election. Examples of implemented security controls included such physical controls as locks and surveillance, and such embedded controls as access restrictions and firewalls. However, we also reported in 2001 that an estimated 40 percent of the jurisdictions had not assessed the security threats and risks on which their controls were based, and 19 percent had not reviewed the sufficiency of their security controls. Moreover, the nature of established controls varied by type of system, and these controls were not uniformly followed across jurisdictions.
For the November 2004 general election, jurisdictions addressed system security to varying degrees and through various means. At the foundation of these approaches, responsibilities for voting system and network security were distributed among local officials, the state, and third parties (e.g., independent consultants and vendors) in varying proportions. On the basis of our 2005 local jurisdiction survey, we estimate that 90 percent of all jurisdictions (excluding those that used only hand-counted paper ballots on Election Day) specifically assigned responsibility for voting system security in the 2004 general election. We estimate that 67 percent of these local jurisdictions assigned responsibilities for voting system and network security to local election officials, 14 percent relied on state officials to perform these responsibilities, and 24 percent assigned them to third parties. Moreover, this distribution varied somewhat according to jurisdiction size, with large jurisdictions depending on local officials the most and medium jurisdictions depending on local officials the least. Figure 70 shows how voting system and network security responsibilities were distributed among various parties for each size of jurisdiction.
On the basis of our visits to local jurisdictions, the types of system security responsibilities and the groups that performed them further demonstrate the variation among security approaches and controls applied to voting systems. Specifically, election officials in these jurisdictions were typically responsible for implementing security controls, state officials were usually involved with developing security policy and guidance and monitoring local jurisdictions’ implementation of security, and third parties performed tasks such as ensuring adequate security of voting equipment during transport or storage. Table 24 shows examples of security tasks and the parties that performed them as reported to us by election officials in the jurisdictions that we visited.
Responses to our state survey showed that both states and third parties participated in security responsibilities related to monitoring and evaluating security and privacy controls. Although the most frequently cited party responsible for this area was local officials (identified by 38 states), just less than one-half of the states (22 states and the District of Columbia) reported that they had some level of responsibility for security monitoring and evaluation as well. In addition, 22 states responded that third parties (e.g., independent consultants or vendors) were involved in monitoring and evaluating controls. Overall, security monitoring and evaluation was performed by two or more entities in 26 of the states.
The use of certain security controls was similarly varied. On the basis of our local jurisdiction survey, we estimate that 59 percent of jurisdictions used power or battery backup, 67 percent used system access controls, 91 percent used hardware locks and seals, and 52 percent used backup electronic storage for votes. We further estimate that 95 percent of jurisdictions used at least one of these controls, with hardware locks and seals being most consistently used across the automated voting methods associated with this survey question. Furthermore, we estimate that a lower percentage of small jurisdictions used power or battery backup and electronic backup storage of votes for their voting equipment than large or medium jurisdictions, and these differences are statistically significant in most cases. Figure 71 presents the use of various security controls by jurisdiction size.
We estimate that a small percentage of local jurisdictions (10 percent) provided remote access to their voting systems for one or more categories of personnel—local election officials, state election officials, vendors, or other parties. Small jurisdictions, in particular, were less likely to provide remote access to their voting systems (estimated at 7 percent) than either medium jurisdictions (13 percent) or large jurisdictions (19 percent). The difference between small jurisdictions and large jurisdictions is statistically significant. For each category of personnel—local officials, state election officials, vendors, or other parties—7 to 8 percent of jurisdictions did not know if remote access was available to their systems, a situation that could increase the risk of unauthorized access to these systems. Some of the jurisdictions responding to this survey question described a variety of protections to mitigate the risk of unauthorized remote access, including locally controlled passwords, passwords that change for each access, and local control of communications connections.
Among the jurisdictions that we visited, election officials reported that various security measures were in use during the 2004 general election to safeguard voting equipment, ballots, and votes before, during, and after the election. However, the measures were not uniformly reported by officials in these jurisdictions, and officials in most jurisdictions reported that they did not have a security plan to document these measures or other aspects of their security program. The security controls most frequently cited by officials for the jurisdictions that we visited were locked storage of voting equipment and ballots, and monitoring of voting equipment. Other security measures mentioned during our visits included testing voting equipment before, during, or after the election to ensure that the equipment was accurately tallying votes; planning and conducting training on security issues and procedures for elections personnel; and video surveillance of stored ballots and voting equipment. Table 25 summarizes the types and frequency of security measures reported by election officials in the jurisdictions we visited.
Notwithstanding this range of reported security controls that were used in the 2004 general election by jurisdictions we visited, jurisdictions’ activities and efforts for managing voting system security were not always in line with recommended system security practices. Our research of recommended practices shows that effective system security management involves having, among other things, (1) defined policies governing such system controls as authorized functions and access, and documented procedures for secure normal operations and incident management; (2) documented plans for implementing policies and procedures; (3) verified implementation of technical and procedural controls designed to reduce the risk of disruption, destruction, or unauthorized modification of systems and their information; and (4) clearly assigned roles and responsibilities for system security.
On the basis of our local jurisdiction survey, we estimate that 46 percent of election jurisdictions nationwide that used some type of automated voting method had written policies for voting system security and access in place for the November 2004 general election, while 45 percent had formal security procedures. Written security policies were more prevalent among large jurisdictions, an estimated 65 percent, compared to an estimated 52 percent of medium jurisdictions and an estimated 41 percent of small jurisdictions. The difference between large and small jurisdictions is statistically significant. More large and small jurisdictions had formal security procedures (an estimated 51 percent and 47 percent, respectively) than medium jurisdictions (an estimated 39 percent), although these differences are not statistically significant. Figure 72 shows the estimated percentages of jurisdictions with written security policies and procedures by jurisdiction size.
In our earlier discussion of local survey responses related to counting votes in chapter 6, we estimated that many jurisdictions had written policies and procedures for ballot security in the 2004 general election. However, we estimate that up to one-fifth of jurisdictions did not have written policies and procedures uniformly in place, including policies and procedures for transporting unvoted and voted ballots or electronic memory, storing unvoted and voted ballots, and electronic transmission of voted ballots. The disparity in written policies and procedures was observed for electronic transmission of voted ballots for counting, where an estimated 18 percent of jurisdictions had such security management tools, compared with between 66 and 76 percent of jurisdictions for each of the other four types of ballot controls—a difference that is statistically significant but which may be linked to the percentage of jurisdictions that used paper ballot and older technologies in the 2004 general election. Yet we also found that an estimated 17 percent of jurisdictions whose predominant method was DRE had no policies or procedures for electronic transmission of voted ballots for counting. In addition, the differences in estimates of policies and procedures for electronic ballot transmission among jurisdictions whose predominant voting method was punch cards and those whose methods were DRE or optical scan are statistically significant. Figure 73 shows the variation in estimates of documented policies and procedures for electronically transmitting ballots among jurisdictions that used specific voting methods.
Moreover, our visits to local jurisdictions found diverse approaches to documenting security policies and procedures. Election officials in 8 of the jurisdictions that we visited told us that they had written instructions for managing security aspects of their voting equipment and processes. However, some guidance we reviewed did not cover these topics. Election officials in some jurisdictions stated that their security measures were contained in the voting process documentation for the voting system or were covered in election worker training. For example, the hardware guide for the voting system used by some jurisdictions described the verification and authentication functions that were built into the system to secure vote counts during transmission of the precinct results to the jurisdiction, including processes for ballot creation and vote tabulation that also included security procedures. In contrast, several other jurisdictions that we visited had published detailed security policies and procedures for their voting systems that included, for example, network security policies for election tabulation, procedures for securing and protecting election equipment and software, testing voting equipment to ensure accurate recording of votes, and disaster recovery plans, and they provided them to GAO. Officials in several jurisdictions also described their steps to ensure that election workers had access to, and were trained in, the contents of the policies and procedures for securing ballots and voting equipment.
Information system security plans typically identify the responsibilities, management approach, and key controls to be implemented for an information system, based on an assessment of identified risks to the information. Election officials in a few of the jurisdictions that we visited told us that they had security plans in place for the November 2004 general election (8 of 28). Officials at 4 of the jurisdictions that we visited stated that they had security plans or plan components that were approved at the state level, and officials in 1 large jurisdiction in Nevada reported having a state statutory requirement for a voting system security plan. However, jurisdictions that employed advanced security technologies, such as encryption, in their systems did not always have a plan that would document how the elections people, process, and technologies would work together to provide comprehensive protections. Moreover, the contents of plans we obtained from our visits to local jurisdictions varied widely. One of the jurisdiction security plans we examined covered most aspects of the voting process, from ballot preparation through recount, while another plan focused on the security of its vote-tallying system in a stand-alone environment. Two security plans covered several security topics including risk assessment, physical and personnel controls, and incident response. Table 26 shows the variation in topics covered in the security plans we reviewed.
Security testing is an important way to verify that system security controls have been implemented and are functioning properly. From our survey of state election officials, 17 states and the District of Columbia reported that they had conducted security testing of the voting systems used in the 2004 general election, and 7 other states reported that they required local jurisdictions to conduct such testing. The remaining 22 states said that they did not conduct or require system security testing. (Three states reported that security testing was not applicable for their voting systems.) Moreover, from our local jurisdiction survey, we estimate that at least 19 percent of local jurisdictions nationwide (excluding jurisdictions that reported that they used paper ballots) did not conduct security testing for the systems they used in the November 2004 general election. Although jurisdiction size was not a factor in whether security testing was performed, the percentage of jurisdictions performing security testing was notably higher when the predominant voting method was DRE (63 percent) and lower for jurisdictions where the predominant method was central count optical scan (38 percent) or precinct count optical scan (45 percent). However, the difference in the percentages of jurisdictions performing security testing on DRE or central count optical scan is not statistically significant.
Beyond jurisdictions’ efforts to verify implementation of voting system security controls, some states required that their voting systems be nationally qualified against the federal voluntary voting system standards, which include a security component. In particular, from our state survey, most states that used a new voting system for the first time in the November 2004 general election said that they required the system to go through qualification testing. For example, all 26 states that used DREs for the first time in the 2004 general election, as well as the District of Columbia, required qualification testing and approval by the National Association of State Election Directors (NASED). Similarly, of the 35 states and the District of Columbia that used optical scan systems for the first time in the 2004 general election, 31 reported that they required voting systems to be qualified. Nine of the 10 states that used new punch card systems for the first time in the 2004 general election also reported that they required voting systems to be qualified.
Security Standards Being Used Vary by State and Jurisdiction
States and jurisdictions are applying a variety of security standards to their voting systems, some of which are no longer current. Specifically, 44 states and the District of Columbia reported on our state survey that they were requiring local jurisdictions’ voting systems being used for the first time in the November 2006 general election to comply with voluntary federal voting system standards, which include security standards. However, they are not all using the same version of the voluntary standards. This is troublesome because the 2002 standards are more stringent than the 1990 standards in various areas, including security. For instance, the 2002 standards establish security requirements and acceptable levels of performance for the telecommunications components of voting systems, while the 1990 standards do not include detailed requirements for this control measure.
According to our analysis of responses states reported in our state survey, 17 of the 44 states and the District of Columbia reported that their voting systems must comply solely with the 2002 standards that were developed and approved by the Federal Election Commission and later adopted by EAC. However, 27 other states are requiring their jurisdictions to apply federal standards to their new voting systems that are outdated, unspecified, or entail multiple versions. In the case of 5 of these 27 states where multiple versions of voluntary federal standards will be applied, one of the versions is the Voluntary Voting System Guidelines, which was approved by the EAC in December 2005. These guidelines promote security measures that address gaps in prior standards and are applicable to more modern technologies, such as controls for distributing software and wireless operations. Nevertheless, these same 5 states reported that they will also apply older federal standards to systems that are new to the 2006 election. Furthermore, 2 other states responded that they do not plan to require their voting systems to comply with any version of the voluntary federal standards, while 3 additional states reported that they had not yet made a decision on compliance with voluntary federal standards for 2006. (One state did not respond.) Figure 74 depicts the number of states that reported applying voluntary federal voting system standards to their new voting systems. Appendix X summarizes responses for all states and the District of Columbia regarding reported requirements for local jurisdictions’ use of federal standards for their voting systems.
Simultaneous use of multiple versions of voting system standards is not new for the 2006 election. Not all NASED-qualified voting systems that may have operated during the 2004 election were tested against a single version of security standards. For example, many systems that were qualified before the 2004 general election had been tested against the 1990 Federal Election Commission standards, rather than the more stringent 2002 standards.
The use of outdated system security standards increases the risk of system integrity, availability, and confidentiality problems for all voting methods, but it is of special concern for jurisdictions that use their systems in a networked environment or transmit election data using telecommunications capabilities. This is because the use of such connectivity introduces vulnerabilities and risks that the older versions of the standards do not adequately address, as we have previously described in our September 2005 report on the security and reliability of electronic voting.
Recent Studies and Analyses Have Raised Concerns about the Security Vulnerabilities and Weaknesses of Modern Voting Systems
After the 2000 general election, Congress, the media, and others cited numerous instances of problems with the election process. As the use of electronic voting systems expanded and the 2004 general election approached, the media and others continued to report problems with these systems that caused some to question whether they were secure and reliable. To clarify the wide range of concerns and issues raised and identify recommended practices for addressing them, our September 2005 report on the security and reliability of electronic voting analyzed over 80 recent and relevant studies related to the security and reliability of electronic voting systems. We focused on systems and components associated with vote casting and counting, including those that define electronic ballots, transmit voting results among election locations, and manage groups of voting machines.
In summary, our September 2005 report stated that while electronic voting systems hold promise for a more accurate and efficient election process, numerous organizations and individuals have raised concerns about their security, citing instances of weak security controls, system design flaws, inadequate system version control, inadequate security testing, incorrect system configuration, poor security management, and vague or incomplete voting system standards, among other issues. For example, we reported that studies found (1) some electronic voting systems did not encrypt cast ballots or system records of ballots, and it was possible to alter both without being detected; (2) it was possible to alter the files that define how a ballot looks and works so that the votes for one candidate could be recorded for a different candidate; and (3) vendors installed uncertified versions of voting system software at the local level. We also reported that some of these concerns were said to have caused local problems during national elections—resulting in the loss or miscount of votes. We added, however, that many of the reported concerns were drawn from specific system makes and models or from a specific jurisdiction’s election, and that there has been a lack of consensus among election officials and other experts on the pervasiveness of the concerns.
We also reported in September 2005 that federal organizations and nongovernmental groups have issued recommended practices and guidance for improving the election process, including electronic voting systems, as well as general practices for the security of information systems. For example, in mid-2004, EAC issued a collection of practices recommended by election experts, including state and local election officials. This guidance includes approaches for making voting processes more secure and reliable through, for example, risk analysis of the voting process, poll worker security training, and chain of custody controls for Election Day operations, along with practices that are specific to ensuring the security and reliability of different types of electronic voting systems. As another example, in July 2004, the California Institute of Technology and the Massachusetts Institute of Technology issued a report containing recommendations pertaining to testing equipment, retaining records of ballots, and physically securing voting systems. In addition to such election-specific practices, numerous recommended practices are available that are relevant to any information system. For instance, we, the National Institute for Standards and Technology (NIST), and others have issued guidance that emphasizes the importance of incorporating security and reliability into the life cycle of information systems through practices related to security planning and management, risk management, and procurement. We noted that the recommended practices in these election- specific and information technology-focused documents provide valuable guidance that, if implemented effectively, should help improve the security of voting systems.
Further, our September 2005 report stated that since the passage of HAVA, the federal government has begun a range of actions that are expected to improve the security and reliability of electronic voting systems. Specifically, after beginning operations in January 2004, EAC was leading efforts to (1) draft changes to the existing federal voluntary standards for voting systems, including provisions related to security; (2) develop a process for certifying, decertifying, and recertifying voting systems; (3) establish a program to accredit the national independent testing laboratories that test electronic voting systems against the federal standards; and (4) develop a software library and clearinghouse for information on state and local elections and systems. However, we observed that these actions were unlikely to have a major effect in the 2006 federal election cycle because at the time of our report publication the changes to the standards had not yet been completed, the system certification and laboratory accreditation programs were still in development, and the software library had not been updated or improved since the 2004 elections. Further, we stated that EAC had not defined tasks, processes, and time frames for completing these activities, and we recognized that other organizations had actions under way that were intended to improve the security of electronic voting systems. These actions include developing and obtaining international acceptance for voting system standards, developing voting system software in an open source environment (i.e., not proprietary to any particular company), and cataloging and analyzing reported problems with electronic voting systems.
To improve the security and reliability of electronic voting systems, we made recommendations to EAC for establishing tasks, processes, and time frames for improving the federal voluntary voting system guidelines, testing capabilities, and management support available to state and local election officials. The EAC commissioners agreed with our recommendations and stated that actions to address each were either under way or intended, and the NIST director agreed with our conclusions.
Certain Types of Tests and Evaluations Were Widely Performed on Voting Systems, while Others Were Less Common
To ensure that voting systems perform as intended during use, the systems must be effectively tested, both before they are accepted from the manufacturer and before each occasion that they are used. Further confidence in election results can be gained by conducting Election Day and postelection audits of voting systems. For the November 2004 general election, voting system testing was conducted for almost all voting systems, but the types and content of the testing performed varied considerably. Most states and local jurisdictions employed national and state certification testing and readiness testing to some extent, but the criteria used in this testing were highly dependent on the state or jurisdiction. Also, many, but not all, states and jurisdictions conducted acceptance testing of both newly acquired systems and those undergoing changes or upgrades. In contrast, relatively few states and jurisdictions conducted parallel testing during elections or audits of voting systems following elections.
To assist election officials in testing voting systems for the 2004 general election, most local jurisdictions documented policies and procedures related to some types of testing, according to estimates based on our survey of local jurisdictions. However, the testing approaches embodied in policies and procedures that the local jurisdictions we visited shared with us varied considerably. Furthermore, in jurisdictions we visited, few voting system problems were reported as a result of local testing, and correspondingly few changes were made to the systems or election processes. The variability in testing approaches among states and jurisdictions underscores our previously reported concerns from our September 2005 report about whether actual testing of voting systems is sufficient to ensure satisfaction of system requirements, including those associated with accuracy, reliability, and security.
Voting system test and evaluation can be grouped into various types or stages: certification testing (national level), certification testing (state level), acceptance testing, readiness testing, parallel testing, and postelection voting system audits. Each of these tests has a specific purpose, and is conducted at the national, state, or local level at a particular time in the election cycle. Table 27 summarizes these types of tests.
Many states have laws or regulations that mandate specific types of testing for voting equipment and time frames for conducting those tests. Documented policies and procedures for testing and evaluation provide an important means for ensuring that testing is effectively planned and executed. Effective test and evaluation can greatly reduce the chances of unexpected or unknown equipment problems and errors. From our local jurisdiction survey for the 2004 election, we estimate that 85 percent of local jurisdictions had documented policies and procedures for some type of voting system testing, 6 percent of jurisdictions did not have policies and procedures for testing, and 9 percent did not know whether their jurisdictions had them. Larger jurisdictions were more likely to have these management tools than smaller ones. An estimated 96 percent of large jurisdictions had documented testing policies and procedures, compared with 89 percent of medium and 82 percent of small jurisdictions. The difference between large and small jurisdictions is statistically significant.
The testing policies and procedures of the local jurisdictions we visited presented a wide variety of approaches and details for the 2004 general election. For instance, election officials in 1 large jurisdiction in Connecticut told us that they did not conduct acceptance testing on their lever equipment, which had been in use for many years, and did not conduct either parallel testing or audit testing, stating that these tests were not applicable to its systems for 2004. However, officials said they did conduct readiness testing at the polling place prior to the election. Election officials in a large Ohio jurisdiction that used punch card voting equipment told us that readiness testing had been conducted by local officials. However, election officials stated that certification and acceptance testing were not performed for 2004 because this system had been used in prior elections. They also said that neither parallel testing nor audit testing of voting systems was performed. Officials in a large Colorado jurisdiction we visited that used central count optical scan equipment told us that they obtained state certification of the newly purchased equipment, conducted acceptance and readiness testing prior to the election, and executed another readiness test following the election. Election officials in a large Georgia jurisdiction that used DRE voting equipment reported that the state performed both certification and acceptance testing when the equipment was purchased and conducted a parallel test of the tabulation system during the election. Further, local officials reported that they conducted readiness testing prior to the election, but did not perform postelection audit testing. For the 5 local jurisdictions that provided us with copies of procedures for readiness testing, three sets of procedures were developed by the jurisdictions themselves and two sets were developed by the voting equipment vendors.
National Certification Testing Was Widely Performed, but Its Standards and Usage Varied
The enactment of HAVA in 2002 established federal responsibilities for the certification of voting systems to meet federal standards and provided the framework for a national testing program. The act charged EAC, supported by NIST, with instituting a federal program for the development and adoption of voluntary voting system guidelines against which voting systems can be evaluated, establishing processes and responsibilities for accrediting laboratories to test systems, and using the results of testing by the accredited labs to certify the voting systems. In 2005, EAC developed guidelines for the certification process and defined the steps needed for the process to transition from NASED to EAC. States and local jurisdictions are to decide whether and how to use the testing and certification results from the federal program in their elections processes.
Most states continued to require that voting systems be nationally tested and certified. In our October 2001 report on election processes, we reported that 38 states required that their voting systems meet federal standards for the November 2000 general election, which meant that the systems were tested by NASED. For voting systems being used for the first time in the 2004 general election, national certification testing was almost uniformly required. From our prior discussion of state survey responses in the context of voting system security, 26 of 27 states using DRE for the first time in this election, as well as the District of Columbia, required them to be nationally certified, while 9 of the 10 states using punch card equipment for the first time, and 30 of 35 states and the District of Columbia using optical scan equipment for the first time, said they had such requirements.
It is unclear whether the proportion of nationally certified systems changed between the 2000 and 2004 general elections. In our October 2001 report on election processes nationwide, we reported that an estimated 39 percent of jurisdictions used NASED-qualified voting equipment for the 2000 general election. However, for the 2004 general election, we estimate that 68 percent of jurisdictions did not know whether the respective systems that they used were NASED-qualified. This uncertainty surrounding the national qualification status of a specific version of voting system at the local level underscores a concern we recently reported with respect to electronic voting security and reliability in our September 2005 report on this topic—that is, even though voting system software may have been qualified and certified at the national or state levels, software changes and upgrades performed at the local level may not be qualified and certified.
The upcoming 2006 general election can be viewed as a challenging transition period in the voting system capabilities, standards, and national certification, with several testing-related factors potentially increasing the difficulty of this transition. First, HAVA’s requirements for voting system capabilities, such as voter error correction and manual audit, along with the attendant new guidelines, are likely to require additional testing at the national level to recertify previously fielded and certified systems that have been upgraded. Second, this increased workload is not likely to be met with added national testing capacity, since the process for accrediting new voting system testing laboratories is not expected to produce newly accredited labs in time for the 2006 election. Third, the complexity of the testing being performed is likely to increase because states report that they will collectively apply the full range of available standards—1990, 2002, and 2005 standards, as well as various combinations of these—to voting systems first used for the November 2006 election. As a result, a range of test protocols must be developed or maintained, and a variety of corresponding tests must be planned, executed, and analyzed to meet the variety of standards.
States Generally Required Certification of Voting Systems Using a Range of Criteria
Most states continue to certify voting systems to ensure that they meet minimum state election requirements. In our October 2001 report on election processes, we reported that 45 states and the District of Columbia had certification programs for their voting systems, 38 of which required that the systems be tested before they were certified for the 2000 general election. In addition, we reported that an estimated 90 percent of local jurisdictions used state-certified voting equipment for the November 2000 general election. However, we also reported that state officials had expressed concerns with voting system changes that did not undergo recertification. Since then, we have reported that security experts and election officials have expressed similar concerns.
For the November 2004 general election, 42 states and the District of Columbia reported on our state survey that they required state certification of voting systems. (See fig. 75.) Seven states required certification of the voting equipment purchased at the state level for local jurisdictions in the 2004 election. However, in 35 states and the District of Columbia, officials reported that responsibility for purchasing a state-certified system rested with the local jurisdiction. While state certification requirements often included NASED testing, as well as approval or confirmation of functionality for particular ballot conditions, some states also included additional requirements for features such as quality of construction, transportation safety, and documentation. Although the remaining 8 states did not require state certification, the officials we contacted described other mechanisms to address the compliance of voting equipment with state-specific requirements, such as a state approval process or acceptance of voting equipment based on federal certification. Figure 75 shows states’ reported certification requirements for voting systems used in the 2004 general election.
For the 2006 general election, 44 states reported that they will have requirements for certification of voting systems, 2 more states than for the 2004 general election. The District of Columbia reported that it will not require voting system certification for the 2006 general election. Of the 44, all but 1 expected to conduct the certification themselves; the 1 state reported that it would rely solely on a national independent testing authority to make its certification decision. Furthermore, of the 43 other states conducting certification themselves, 41 reported that they would include testing of system functions to obtain certification. In addition, 18 of the 43 states planned to involve a national testing laboratory in their certification process.
Acceptance Testing Continued to Be Commonly Performed, but Implemented Practices Varied Widely
As we reported previously in our October 2001 report on election processes, either states or local jurisdictions conducted acceptance tests prior to the 2000 general election. However, the testing processes, test steps, and involvement of vendors in the testing performed varied by jurisdiction and by type of equipment. Also, we reported in our 2001 report that states and local jurisdictions sometimes relied heavily on vendors to design and conduct acceptance tests. With respect to vendor involvement in particular, we reported that vendors were sometimes heavily relied upon to design and conduct acceptance tests.
For the 2004 election, the extent and variety of acceptance testing was similar to those for the 2000 election. With regard to state roles and involvement in acceptance testing of new voting systems, 26 states and the District of Columbia reported responsibilities at some level of government. Specifically, 8 states and the District of Columbia reported on our survey that they had responsibility for performing acceptance testing, 15 states required local jurisdictions to perform such testing, and 3 states reported that requirements for acceptance testing existed at both the state and local levels. Twenty-two states either did not require such testing or did not believe that such testing was applicable to them. (Two states did not know their acceptance testing requirements for the 2004 election.) More states required that acceptance testing be performed for changes and upgrades to existing systems than they did for new systems—30 states in all and the District of Columbia. Specifically, 15 states and the District of Columbia were responsible for performing acceptance tests for changes and upgrades, 10 states required local jurisdictions to perform these tests, and 5 states required acceptance testing at both the state and local levels.
Election officials at a majority of the local jurisdictions that we visited told us that they conducted some type of acceptance testing for newly acquired voting equipment. As with the 2000 general election, these officials described a variety of approaches to acceptance testing for the 2004 general election. For example, the data used for testing could be vendor- supplied, developed by election officials, or both, and could include system initialization, logic and accuracy, and tamper resistance. Other steps, such as diagnostic tests, physical inspection of hardware, and software configuration checks, were also mentioned as testing activities by local election officials. Further, election officials from 3 jurisdictions that we visited said that vendors were heavily involved in designing and executing the acceptance tests, while officials from another jurisdiction that we visited said that vendors contributed to a portion of their testing. In 2 jurisdictions in Georgia, officials said that acceptance tests were conducted at a university center for elections systems.
Readiness Testing Continued to Be Widely Performed Using Various Approaches
Most jurisdictions conducted readiness testing, also known as logic and accuracy testing, for both the 2000 and 2004 general elections. In addition, some states reported that they conducted readiness testing for the 2004 general election. The content and nature of these tests varied among jurisdictions.
According to our state survey, 49 states and the District of Columbia reported that they performed readiness testing of voting systems at the state level, the local level, or both (1 state did not require readiness testing). Most states required local jurisdictions to perform readiness testing (37 states in all). However, 7 states reported that they performed their own readiness testing of voting equipment for the 2004 general election in addition to local testing. Five states and the District of Columbia reported that they had no requirements for local jurisdictions to perform readiness testing but conducted this testing themselves. State laws or regulations in effect for the 2004 election typically had specific requirements for when readiness testing should be conducted and who was responsible for testing, sometimes including public demonstrations of voting system operations. For example, one state mandated that local jurisdictions conduct three readiness tests using all types of election ballots including audio ballots. One test took place before Election Day and two occurred on Election Day—before the official counting of ballots began and after the official counting had been completed. Another state required the Secretary of State to conduct testing using pre-audited ballots before Election Day, as well as on Election Day before ballots were counted.
On the basis of a subgroup of local election jurisdictions from our 2000 election survey, we estimate that 96 percent of jurisdictions nationwide conducted readiness testing before the 2000 general election. For a comparable subgroup of jurisdictions in the 2004 general election, we estimate that 95 percent of local jurisdictions conducted readiness testing. The frequency with which readiness testing was conducted in 2004 was largely stable across all jurisdictions of various sizes that did not solely use hand-counted paper ballots, ranging between an estimated 90 percent (for small jurisdictions) to an estimated 96 percent (for large jurisdictions). Whenever the sample of jurisdictions permitted statistical comparison, there were also no significant differences between the percentages of jurisdictions that said they conducted readiness testing for various predominant voting methods.
The variety of readiness testing activities performed by jurisdictions for the 2000 general election was also evident for the 2004 general election. Election officials in all of the local jurisdictions we visited following the 2004 election reported that they conducted readiness testing on their voting equipment using one or more of the approaches we identified for the 2000 election, such as diagnostic tests, integration tests, mock elections, and sets of test votes. Election officials in many of these jurisdictions told us that they combined test approaches. For example, officials in 1 large jurisdiction in Florida told us that they conducted pre-election testing using complete ballots (not test decks) to determine the accuracy of the marks and to see if there were any errors in voting machine programming. They told us that logic and accuracy testing was performed for each machine using undervoted ballots and overvoted ballots, and that zero tapes were run for each voting machine before the election. In addition, a diagnostic test was run before the election on each voting machine. According to the local officials, this was the test approach described in the manufacturer’s preparation checklist. Election officials in another Florida jurisdiction stated that readiness testing included integration testing to demonstrate that the voting system is properly programmed; the election is correctly defined on the system; and all system inputs, outputs, and communication devices are in working order. In the case of these jurisdictions, the state requires logic and accuracy testing and submission of the test parameters to the state.
Parallel Testing Was Not Frequently Performed
Parallel testing was not widely performed by local jurisdictions in the 2004 general election, although 7 states reported on our state survey that they performed parallel testing of voting systems on Election Day, and another 6 states reported that this testing was required by local jurisdictions. From our survey of local jurisdictions, we estimate that 2 percent of jurisdictions that did not solely use hand-counted paper ballots conducted parallel testing for the 2004 general election. Large and medium jurisdictions primarily performed this type of testing (7 percent and 4 percent of jurisdictions, respectively). The percentage of small jurisdictions performing this type of testing was negligible (0 percent). The differences between both large and medium jurisdictions and small jurisdictions are statistically significant.
Our visits to local jurisdictions affirmed the limited use of parallel testing. Specifically, election officials in 2 of the 28 jurisdictions that we visited told us that they performed parallel testing. Officials in 1 large jurisdiction in Georgia told us that parallel testing was conducted by the state in conjunction with a university center for voting systems. In another case, officials in a large jurisdiction in Kansas told us that parallel testing was required by the local jurisdiction and was publicly conducted. In both cases, the tests were conducted on voting equipment for which security concerns had been raised in a voting equipment test report issued by the state of Maryland prior to the 2004 general election. Local officials who told us that parallel testing was not performed on their voting systems attributed this to the absence of parallel testing requirements, a lack of sufficient voting equipment to perform these tests, or the unnecessary nature of parallel testing because of the stand-alone operation of their systems.
Postelection Voting System Audit Requirements and Practices Were Diverse
According to our state survey, 22 states and the District of Columbia reported that they performed postelection voting system audits for the 2004 general election. Specifically, 4 states and the District of Columbia reported that they conducted postelection audits of voting systems themselves, 16 states required that audits of voting systems be conducted by local jurisdictions, and 2 states reported that audits of voting systems were performed at both the state and local levels. State laws or regulations in effect for the 2004 general election varied in when and how these audits were to be conducted. In addition, a variety of statutes cited by states for testing requirements did not mention postelection voting system audits, and the one that did lacked details on the scope or components of such audits.
According to our local jurisdiction survey, postelection voting system audits were conducted by an estimated 43 percent of local jurisdictions that did not solely use hand-counted paper ballots on Election Day. This practice was much more prevalent at large and medium jurisdictions (62 percent and 55 percent, respectively) than small jurisdictions (34 percent). The differences between small jurisdictions and both medium and large jurisdictions are statistically significant. We further estimate that these voting system audits were conducted more frequently in jurisdictions with central count optical scan voting methods (54 percent) than they were in jurisdictions with precinct count optical scan voting methods (35 percent). Figure 76 shows the estimated use of postelection audits for jurisdictions with different voting methods in the 2004 general election.
Election officials in 14 of 28 local jurisdictions that we visited told us that they conducted postelection voting system audits. However, the conditions and scope of voting system audits varied. Some were routine, while others were conducted only in the event of close races or challenges to results. Among the 14 jurisdictions, most of the officials we spoke with said that they focused on reconciling voting machine counts with known votes, and officials in 2 of these jurisdictions characterized the voting system audits largely as voting system logic and accuracy tests. However, officials with a few jurisdictions told us that they also reviewed voting machine logs, sampled results from random precincts, or employed independent auditors to repeat and verify vote counting. In 1 large jurisdiction in Nevada, an election official told us that paper results were compared to the tabulated results of votes counted on 24 machines. In addition, every voting machine was activated and the same scripts used for pre-election testing were rerun through the machines. According to the election official, this level of testing was required by law.
Information on Jurisdictions’ Election Technology Integration Is Limited, but Current and Emerging Technologies Offer Greater Opportunities
The number of jurisdictions that have integrated particular aspects of voting system components and technologies was limited for the 2004 general election for the areas of integration we examined, based on estimates from our local jurisdiction survey and visits to local jurisdictions. For the areas of integration we did examine, the scope and nature of this integration was diverse and included remote programming of electronic ballots, statewide tabulation of voting results, and end-to-end management of the election process. Nevertheless, the potential for greater integration in the future does exist as states and jurisdictions act on their earlier discussed plans to acquire the kind of voting equipment (e.g., optical scan and DRE products) that lends itself to integration. It is unclear if and when this migration to more technology-based voting methods will produce more integrated election system environments. However, suitable standards and guidance for these interconnected components and systems—some of which remain to be developed—could facilitate the development, testing, operational management, and maintenance of components and systems, thereby maximizing the benefits of current and emerging election technologies and achieving states’ and local jurisdictions’ goals for performance and security.
Reported Instances of Certain Election Systems Integration Approaches Have Been Inconsistent
Various voting systems, components, and technologies—some of which have been available since the 2000 general election—encompass a wide range of functional capabilities and system interactions. According to our local jurisdiction survey estimates and visits to election jurisdictions for the 2004 general election, officials reported various types of integration, but there were few instances. The areas in which integration was reported can be grouped into four categories: (1) electronic programming or setup of voting equipment from a centralized facility, (2) electronic aggregation and tabulation of voting results from multiple voting systems or locations, (3) add-on voting features and technologies, and (4) electronic management of voting equipment and operations.
Electronic Programming or Setup
Electronic programming or setup of voting equipment involves integration between an administrative system and voting equipment to initialize vote count totals, load ballot definitions, and authorize voter access. As we previously reported in our September 2005 report on the security and reliability of electronic voting, this type of integration has raised security concerns. Election officials in 19 of the 28 jurisdictions that we visited used portable memory cartridges or cards for electronic programming or setup of their voting equipment. To accomplish programming or setup, officials at some of the local jurisdictions that we visited said that they used a computer to preload voting equipment with ballots or tabulation logic prior to transporting the equipment to polling locations. At 1 large New Jersey jurisdiction, officials stated that the administrative computer used a dedicated connection to the election server to electronically transmit the data and logic necessary to program and enable the units for the election. Election officials in some jurisdictions told us that an administrative system loaded ballot definitions onto portable electronic devices, such as memory cartridges or smart cards, which were then physically transported to the locations where the voting equipment was being prepared for the election—either at a storage facility or polling location (see fig. 77). The cartridges or cards were then inserted into individual voting units to prepare or activate them for the election. Some electronic ballot cards were provided directly to the voter to activate the voting equipment, then returned to election workers when the ballot has been cast.
Electronic aggregation or tabulation of cast ballots also requires integration between voting equipment and another computer system that is responsible for collecting and aggregating the votes. Figure 78 shows examples of computer systems used for vote tabulation.
Transfer of votes or election results between the voting equipment and the central tabulator may employ portable electronic media or telecommunication lines. Portable electronic media were the means that officials at 7 of the 28 jurisdictions that we visited said they used to electronically aggregate election results from multiple voting locations. For DRE equipment, memory cartridges that stored cast ballots from individual voting units were transferred to the election office, and the data they contained were uploaded and tallied by an electronic tabulation system.
Some jurisdictions also used telecommunications services to transfer election data from polling locations or election coordination centers to tabulation facilities, although how these services were used varied. Officials at 4 jurisdictions that we visited told us that they employed dial-up connections to transmit local vote tallies for further tabulation. For instance, election officials in a large jurisdiction in Washington told us that after the polls were closed and all ballots were scanned and recorded by the optical scan machines at each polling place, the machines were taken to storage areas, where the results were transmitted to the central computer for tabulation using the jurisdiction’s phone line. Officials at a large jurisdiction that we visited in Ohio said that they had election judges take voting machine memory cartridges from their polling locations to facilities where laptop computers would read the cartridges and transmit vote tallies over phone lines to a remote access server at the elections office. In a large jurisdiction that we visited in Illinois, election officials told us that they took their portable precinct ballot counters to 1 of 10 stations throughout the city, where vote totals from the counters were encrypted and transmitted to a remote access server via a cellular network.
Add-on Features and Technologies
Add-on features and technologies to ensure the accuracy of votes, provide easier access to persons with disabilities or special needs, and enhance security or privacy were also integrated into voting systems by a few states and jurisdictions for the 2004 general election. Officials at both large jurisdictions in Nevada that we visited told us that they had integrated a VVPT capability into their DREs to meet a state requirement for VVPT. Figure 79 shows one example of a VVPT voting system component. Overall, we estimate that about 8 percent of jurisdictions operating DRE voting equipment in the November 2004 general election produced VVPT.
Audio features were also added to voting systems for the 2004 election. Officials at 6 of the jurisdictions that we visited reported that they had incorporated an audio ballot component into their DRE machines for voters with sight impairments. Election officials in 3 jurisdictions reported that they offered audio ballots in languages other than English.
Security and privacy capabilities, such as data encryption and virtual private networks, were also reportedly integrated into several jurisdictions’ voting system environments for the 2004 general election to protect electronically transferred election data or to secure remote system access. Election officials at 6 of the 28 jurisdictions that we visited said they used encryption to protect ballots during electronic storage. Officials at both jurisdictions in Georgia explained that their state-selected DRE equipment used individual access cards for each voter, uniquely encrypted data on the card (including the voter’s cast ballot) for each polling location, and a separately encrypted electronic key needed to access the voter’s ballot. Officials at 7 jurisdictions said they applied encryption to the transmission of election results during the 2004 general election. Election officials in 1 large Colorado jurisdiction stated that they used a virtual private network to ensure the secrecy of data and authenticity of parties when transmitting election results from jurisdictions to the state.
Electronic Management
Electronic management of voting equipment and operations was another form of integration employed for the 2004 general election. Electronic management covers such functions as equipment testing, initializing, operational monitoring, diagnosis, troubleshooting, shutdown, and auditing. It also includes election operations that affect voting equipment, such as voter processing at the polling place and handling of absentee ballots. We previously reported that some of these capabilities were available during the 2000 general election in our October 2001 report on election processes. For the 2004 general election, on the basis of our local jurisdiction survey, we estimate that 7 percent of jurisdictions that used voting methods other than paper ballots connected their voting equipment via a local network at their polling locations. The frequency with which remote access to voting systems was provided for the 2004 general election was similarly low (estimated at 10 percent of jurisdictions that used voting methods other than paper ballots) but was again affected by the size of jurisdictions. We estimate that a higher percentage of large jurisdictions used remote access to voting equipment (estimated at 19 percent) than medium jurisdictions (13 percent) or small jurisdictions (7 percent). The difference between large and small jurisdictions is statistically significant. Furthermore, we estimate that remote access was primarily provided to local election officials (in 6 percent of jurisdictions) and to a lesser extent, state election officials, voting equipment vendors, and third parties. Figure 80 shows the estimated percentages of jurisdictions of various sizes that used networking or various types of remote access. These capabilities pose voting system security and reliability concerns as reported in our September 2005 report on the security and reliability of electronic voting. From approximately 20 open-ended text responses to our survey of local jurisdictions that described steps taken to prevent unauthorized remote access to voting systems, four safeguards were identified: employing passwords for remote users, limiting operations to specific election activities, use of virtual private networks, and system monitoring.
As we previously reported in our September 2001 report on voting assistance to military and overseas citizens, state and local election officials used technologies like electronic mail and faxing to better integrate activities during the 2000 general election and to improve communications with absentee voters. According to our estimates from the local jurisdiction survey for the 2004 election, jurisdictions continued to use electronic mail to interact with voters and also relied on Web sites for a variety of election needs including voter registration status, the application and processing of absentee ballots, and the status of provisional ballots. For seven items in our survey where we asked about jurisdictions’ use of e-mail and Web sites for voter services, we estimate that large jurisdictions generally used these technologies more frequently than both medium and small jurisdictions, and that differences in six of these items were statistically significant. Figure 81 shows the extent to which jurisdictions of different sizes employed e-mail and Web sites for selected voter services. In addition to using technology to support individual voters, election officials in 1 large jurisdiction we visited in New Mexico described their use of telecommunications technology to support early voting at multiple locations. This jurisdiction connected its registration database to its early voting locations with dedicated phone lines, thus making voter registration information electronically available at each location.
Prospects for Expanded Use of Integrated Election Systems Are Unclear
Relatively few local jurisdictions we visited reported having plans for integrating or further integrating their election-related systems and components for the 2006 general election, and in cases where they had plans, the scope and nature of the plans varied. At the same time, we estimate on the basis of our local jurisdiction survey that a relatively large proportion of jurisdictions expect to acquire DREs and optical scan systems, which will introduce greater integration opportunities. However, given the uncertainty surrounding the specific types of systems and features to be acquired, the extent and timing of greater integration of voting systems and components, as well as election-related systems, remains to be seen.
More specifically, officials in several jurisdictions that we visited told us about plans to integrate relatively modular add-on components to their systems, while officials with several other jurisdictions described plans for more complex end-to-end interactions among election systems and technologies. For example, officials at 5 jurisdictions that we visited reported plans to introduce a VVPT capability for future elections, and officials at 2 jurisdictions reported plans to integrate an audio component to comply with HAVA requirements. In another case, officials in 2 jurisdictions told us that their state is planning to purchase electronic poll books for its precincts to use during the 2006 elections to electronically link its voter registration system with its voting systems. Officials at another jurisdiction told us that they plan to obtain a new optical scanner that will be used to tabulate both DRE and optical scan election results.
The scope and magnitude of election system integration may be influenced, in part, by the jurisdictions’ adoption of the optical scan and DRE voting methods and the corresponding products that support add-on automated features, such as languages and accessibility tools, and interactions among automated components of the election process, such as ballot generation and tabulation. As we discussed earlier in this chapter, one-fifth of local jurisdictions are planning to acquire new optical scan and DRE voting equipment in time for the 2006 general election. For instance, on the basis of our survey of local jurisdictions, we estimate that 25 percent of jurisdictions plan to acquire precinct count optical scan voting equipment by the November 2006 general election. However, some jurisdictions had not yet finalized their time frame for acquiring voting equipment at the time of our survey. In addition, their acquisition plans also include technologies for their election Web sites. Figure 82 estimates the percentages of jurisdictions with acquisition plans for various technologies and their implementation time frames. While the advent of more technology-based voting methods provides greater opportunities for integration, the uncertainty around the timing and nature of their introduction makes the future extent of this integration unclear at this point.
It is important for voting system standards developers to recognize the opportunity and potential for greater integration of election systems. EAC recently adopted a new version of the voluntary voting system guidelines in December 2005 that will become effective in December 2007. However, this version does not address some of the capabilities discussed above. For instance, the guidelines do not address the integration of registration systems with voting systems. Neither do they address commercial-off-the- shelf devices (such as card readers, printers, or personal computers) or software products (such as operating systems or database management systems) that are used in voting systems without modification. EAC has acknowledged that more work is needed to further develop the technical guidelines in areas such as voting accessibility, usability, and security features. Such efforts have the potential to assist states and local jurisdictions in maximizing the benefits of emerging election technologies.
Concluding Observations
The challenges confronting local jurisdictions in acquiring and operating voting technologies are not unlike those faced by any technology user— adoption and consistent application of standards for system capabilities and performance, reliable measures and objective data to determine whether the systems are performing as intended, rigorous and disciplined performance of security and testing activities, and successful management and integration of the people, process, and technology components of elections during system acquisition and operation. These challenges are heightened by other conditions common to both the national elections community and other information technology environments: the distribution of responsibilities among various organizations, technology changes, funding opportunities and constraints, emerging requirements and guidance, and public attention.
The extent to which states and local jurisdictions adopt and consistently apply up-to-date voting systems standards will directly affect the security and performance of voting systems. A substantial proportion of jurisdictions have yet to adopt the most current federal voting system standards or related performance measures. Even if this happens, however, other challenges loom because systems will need to be tested and recertified by many states (and by federal processes whenever states have adopted national standards) to meet any newly adopted voting standards and HAVA requirements for accuracy. Organizations involved with recertification—including federal, state, and local governments; testing authorities; and vendors—may need the capacity to assume the workloads associated with expected increases in the adoption of current standards and the use of new voting systems so that potential risks to near-term election processes are minimized.
Reliable measures and objective data are also considered essential management practices for determining whether the technology being used is meeting the needs of the jurisdiction’s user communities (both the voters and the officials who administer the elections). Looking back to the November 2000 and 2004 general elections, we estimate that the vast majority of jurisdictions were satisfied with the performance of their respective technologies. However, considering that our local jurisdiction surveys for the 2000 and 2004 elections indicated limited collection of voting system performance data, we conclude that estimated levels of satisfaction with voting equipment found in our local surveys have been mostly based on a patchwork of operational indicators and, based on site visits to local jurisdictions, have involved anecdotal experiences of election officials. Although these impressions should not be discounted, informed decision making on voting system changes and investment would benefit from more objective data about how well existing equipment is meeting specific requirements, such as those governing system accuracy, reliability, efficiency, and security. No one voting method, or particular voting system make and model, will meet the needs of every jurisdiction. The challenge is thus to ensure that decisions about staying with an existing voting method or investing in new or upgraded voting equipment are made on the basis of reliable and relevant data about the operational performance of the existing method against requirements and standards, as well as the benefits to be derived versus the costs to be incurred with each choice.
Effective execution of well-planned security and testing activities provides opportunities to anticipate and address potential problems before they affect election results. This is important because even a few instances of election errors or disruptions can have a sizable impact if election results are close. We estimate that the vast majority of jurisdictions performed security and testing activities in one form or another for the 2004 general election. However, the nature and extent of these activities varied among jurisdictions—to some degree by jurisdiction size, voting method, or perceived applicability of the activities. These activities were also largely responsive to—and limited by—formal state and local directives. When appropriately defined and implemented, such directives can promote the effective execution of security and testing practices across all phases of the elections process. As voting technologies and requirements evolve, states and local jurisdictions face the challenge of regularly updating and consistently implementing the directives to meet the needs of their specific election environments.
As we noted for the 2000 general election, managing the three election components of people, process, and technology as interrelated and interdependent variables presents an important challenge in the acquisition or operation of a given voting method. Whether a state or jurisdiction is acquiring, testing, operating, or maintaining a new voting system or an existing one, how successfully the system actually performs throughout the election cycle will depend not only on how well the technology itself has been designed, but also on how well the people and processes associated with the system fulfill their roles for each stage. The technical potential of more extensive integration of voting equipment, components, and election systems also holds the prospect for even more interrelationships and interdependencies among the people, processes, and technologies, with all their attendant risks. In addition to establishing minimum functional and performance requirements and processes for voting system aspects of the election process, system standards can also be used to govern the integration of election systems; address the accuracy, reliability, privacy, and security of components and interfaces; and deliver needed support for the people and processes that will use the integrated election systems. Timely development of integration standards presents a challenge to the election community to keep pace with the advancement of election systems and technology. | Why GAO Did This Study
The 2004 general election was the first presidential election that tested substantial changes states made to their election systems since the 2000 election, including some changes required by the Help America Vote Act of 2002 (HAVA). HAVA required some major changes in the nation's elections processes, not all which had to be implemented by the November 2004 election. HAVA addressed issues of people, processes, and technology, all of which must be effectively integrated to ensure effective election operations. GAO initiated a review under the authority of the Comptroller General to examine an array of election issues of broad interest to Congress. For each major stage of the election process, this report discusses (1) changes to election systems since the 2000 election, including steps taken to implement HAVA, and (2) challenges encountered in the 2004 election. For this report, GAO sent a survey to the 50 states and the District of Columbia (all responded) and mailed a questionnaire to a nationwide sample of 788 local election jurisdictions about election administration activities (80 percent responded). To obtain more detailed information about experiences for the 2004 election, GAO also visited 28 local jurisdictions in 14 states, chosen to represent a range of election system characteristics.
What GAO Found
In passing HAVA, Congress provided a means for states and local jurisdictions to improve upon several aspects of the election system, but it is too soon to determine the full effect of those changes. For example, 41 states obtained waivers permitted under HAVA until January 1, 2006, to implement a requirement for statewide voter registration lists. States also had discretion in how they implemented HAVA requirements, such as the identification requirements for first-time mail registrants. Some local election jurisdictions described different identification procedures for first-time mail registrants who registered through voter registration drives. Although states differed regarding where voters who cast provisional ballots for federal office must cast those ballots in order for their votes to be counted, provisional voting has helped to facilitate voter participation. HAVA also created the Election Assistance Commission, which has issued best practice guides and voluntary voting systems standards and distributed federal funds to states for improving election administration, including purchasing new voting equipment. The results of our survey of local election jurisdictions indicate that larger jurisdictions may be replacing older equipment with technology-based voting methods to a greater extent than small jurisdictions, which continue to use paper ballots extensively and are the majority of jurisdictions. As the elections technology environment evolves, voting system performance management, security, and testing will continue to be important to ensuring the integrity of the overall elections process. GAO found that states made changes--either as a result of HAVA or on their own--to address some of the challenges identified in the November 2000 election. GAO also found that some challenges continued--such as problems receiving voter registration applications from motor vehicle agencies, addressing voter error issues with absentee voting, recruiting and training a sufficient number of poll workers, and continuing to ensure accurate vote counting. At the same time, new challenges arose in the November 2004 election, such as fraudulent, incomplete, or inaccurate applications received through voter registration drives; larger than expected early voter turnout, resulting in long lines; and counting large numbers of absentee ballots and determining the eligibility of provisional voters in time to meet final vote certification deadlines. |
gao_GAO-07-15 | gao_GAO-07-15_0 | Background
The Rail Passenger Service Act of 1970 created Amtrak to provide U.S. intercity passenger rail service because existing railroads found such service unprofitable. Today, Amtrak continues to be the main provider of intercity passenger rail service in the United States, operating a 22,000-mile network that provides service to 46 states and Washington, D.C., primarily over tracks owned by freight railroads. Federal law requires that freight railroads typically give Amtrak trains priority access and, in general, charge Amtrak the incremental cost—rather than the full cost—associated with the use of their tracks. Amtrak also owns about 650 miles of track, primarily on the Northeast Corridor (NEC), which runs between Boston, Massachusetts, and Washington, D.C. Access to this corridor is also critical for the operations of nine commuter railroads run by state and local governments serving 1.2 million passengers each work day. According to Amtrak, four freight railroads also use the corridor each day. Amtrak employs about 19,000 people.
The Amtrak Reform and Accountability Act of 1997 gave Amtrak significant flexibility with respect to its route system, but directed it to continue to operate “a national passenger rail transportation system which ties together existing and emergent regional rail passenger service and other intermodal passenger service.” To meet this mandate, Amtrak currently operates 41 intercity passenger rail routes that fall into two distinct types, long-distance routes and short-distance corridors (see fig. 1). There are 14 long-distance routes, which generally travel over 750 miles and include an overnight component. Twenty-seven routes are short distance, or “corridor” services, and are further classified into two distinct categories. The first is the NEC. According to Amtrak, about two-thirds of its ridership is either wholly or partially on this corridor. The second category of corridor service is primarily comprised of routes partly funded by states, but also includes several other routes that Amtrak continues to operate as part of the original or “legacy” system. These corridor services have several similarities, such as a relatively high frequency of service and route distances generally under 500 miles.
The 1997 act also established a Reform Board (to assume the responsibilities of Amtrak’s Board of Directors) and a Reform Council (to review and recommend changes in Amtrak's route structure). The act provided for the Reform Board to serve for 5 years and then be replaced by a new Amtrak Board of Directors; meanwhile, the Reform Council’s mandate was to look at “Amtrak’s operation as a national passenger rail system which provides access to all regions of the country and ties together existing and emerging rail passenger corridors.” In November 2001, the Reform Council reported that Amtrak would not achieve operational self- sufficiency by December 2, 2002, as envisioned by the act and, in 2002, the Reform Council recommended restructuring and rationalizing the national intercity passenger rail system—a move that envisioned, among other things, breaking up Amtrak and introducing competition to provide rail service. As of October 2006, Congress was still considering Amtrak issues, such as its funding level, the size of its network, the introduction of competition for routes, and Amtrak restructuring.
Since Amtrak’s inception, it has struggled to become financially solvent. Amtrak has run a deficit each year and required federal assistance to cover operating losses and capital investment. Amtrak has received approximately $1.2 billion in annual appropriations since fiscal year 2003 for operational support, capital improvements, and debt obligations. Amtrak, like other intercity transportation systems, is capital-intensive. From fiscal years 1971 through 2006, Amtrak has received just over $30 billion in federal support, of which about $11 billion has been for infrastructure improvements and equipment overhauls. Additional capital funding has also been obtained from state and local governments, generally for specific capital investments required to support corridor routes operating within their jurisdiction.
The Amtrak Reform and Accountability Act of 1997 removed Amtrak from the list of government corporations under 31 U.S.C. § 9101. While listed, Amtrak was required to submit annual management reports to Congress under the Government Corporation Control Act of 1945. Relieved from this requirement, Amtrak remains a government-established private corporation which is neither an agency nor instrumentality of the U.S. government, nor an issuer of securities to the public. Therefore, since 1997, Amtrak has not been subject to the basic accountability requirements of either federal entities or public companies. Such requirements cover financial reporting, internal control, and governance. Through its loan agreement and grant agreements for operating and capital expenses, Amtrak is subject to a variety of reporting requirements—including providing a monthly performance report to its board, the Department of Transportation (DOT), and Congress; providing FRA with a daily cash balance report; and providing FRA with a monthly progress report on actions addressing our previous recommendations. Due to Amtrak’s long- term challenges, several reform proposals and legislation have recently been introduced to address Amtrak’s financial problems. The suggested reforms vary in the level of federal subsidies proposed and the extent to which the current U.S. intercity passenger rail system would be restructured. Among these proposals is the administration’s 2005 proposal, which would phase out federal operating subsides for long-distance trains and split Amtrak into three entities: an oversight company to manage the restructuring process, a private infrastructure management company, and a train operating company. This proposal would ultimately give states greater decision-making authority with respect to rail service and capital improvements. Conversely, the Senate Committee on Commerce, Science, and Transportation proposed a reauthorization bill in 2005 that would authorize just under $2 billion per year over a 6-year period to fund Amtrak’s capital and operating expenses to maintain current operations, upgrade equipment, and return the NEC to a state of good repair. Although operating subsidies over the life of this bill would be reduced 40 percent through cost cutting and other actions, capital funding to Amtrak and states would increase. See table 1 for key aspects of recent intercity passenger rail reform proposals and legislation.
The U.S. system is not the only intercity passenger rail system that has experienced financial deficits and economic inefficiencies. Many countries have undertaken efforts to reform their systems in order to alleviate financial and structural problems. While the intercity passenger rail experiences of other countries are often cited in the debate over the U.S. system, there are some key differences between the U.S. system and other foreign systems, including: Infrastructure ownership. In the United States, nearly all of the infrastructure that intercity passenger rail operates on is owned by private freight rail companies and is located on private land. Although Amtrak, by law, has a statutory right of access to infrastructure at incremental cost, it enters into operating agreements with freight and other railroads to use their lines. In contrast, in most of the countries in Europe, infrastructure is publicly owned.
Freight and passenger railroad industry. In addition to owning the infrastructure, freight rail dominates the rail industry in the United States. This is a stark contrast to most other countries, where passenger rail is the primary component of the rail industry and freight plays a more secondary role.
Geography and demographics. Geographic and demographic factors also make the United States significantly different from other countries, in particular those in Europe and Japan. The United States is relatively larger geographically than most of these other countries. Europe and Japan are more compact than the United States, making more intercity travel by rail between major cities as fast as by air. Additionally, experts and prior research highlight the greater population density of European cities—making rail a more attractive option for transportation.
Existing U.S. Intercity Passenger Rail System Is in Poor Financial Condition and Appears to Provide Limited Benefits for Federal Expenditures
The existing U.S. intercity passenger rail system remains in poor financial condition, characterized by continued high operating losses and substantial levels of deferred capital and maintenance projects. Moreover, the current structure does not appear to effectively target federal funds where they may achieve the greatest level of public benefits. That is, many services are not focused on the markets where rail may have a comparative advantage over other modes and is most likely to be a viable and cost- effective option to meet public transportation demands.
Amtrak operates two types of intercity routes—long distance and corridors—that provide service to a wide range of passengers across the country; however, each of these route types exhibit markedly different financial and operating characteristics. Long-distance routes account for about 80 percent of Amtrak’s financial losses although they serve about 15 percent of Amtrak’s total ridership, and are characterized by poor on-time performance. These routes are often associated with a number of public benefits, including offering service to a number of rural residents and providing national connectivity; however, these benefits may be limited by infrequent or inconvenient service and are provided at high cost to the federal government. In contrast, corridor routes account for most of Amtrak’s ridership and appear to offer greater potential to provide passenger transportation benefits and public benefits. For example, these services tend to be more time- and cost-competitive with other modes of transportation—potentially mitigating highway and air congestion—and they offer greater flexibility over long-distance rail services to adapt schedules and services to the demands of the traveling public. While several challenges related to funding and capacity constraints exist, corridors appear to be where the comparative strength for intercity passenger rail services lies and where the greatest potential exists for rail to provide increased public benefits for federal expenditures. Corridors could also facilitate integrating intercity passenger rail into the national transportation system.
Existing U.S. Intercity Passenger Rail System Appears Unsustainable at Current Levels of Federal Funding
Although the Amtrak Reform and Accountability Act of 1997 proposed that Amtrak reach operational self-sufficiency by December 2002, Amtrak did not achieve this goal and its financial condition since this legislation was enacted remains precarious. In addition, to stabilize and sustain the existing system, Amtrak is likely to need increased levels of funding. Amtrak continues to incur substantial operating deficits and is faced with billions of dollars in deferred capital maintenance and debt obligations. No combination of service cuts or productivity improvements can fully eliminate the need for public operating and capital subsidies, particularly if Congress continues to mandate that Amtrak operate a national system. However, at a time when the federal government faces a long-term structural fiscal imbalance, these poor financial characteristics lead to questions about how the system should be structured and funded in the future.
Operating Losses
The U.S. intercity passenger rail system ends each fiscal year with substantial operating losses. Although Amtrak has made some progress in containing operating expenses in recent years, it continues to run an annual operating deficit (total operating revenues minus operating expenses) of over $1 billion dollars and relies heavily on federal subsidies to cover this deficit. In fiscal year 2005, Amtrak reported a net operating loss of $1.2 billion, including an annual cash loss of $450 million (see fig. 2). Although exhibiting a slight decrease from the record deficit in fiscal year 2004, operating losses have shown few signs of substantial long-term improvement. In fact, Amtrak projected in its 2005–2009 Strategic Plan that, under the existing structure, annual operating losses will increase to over $1.5 billion by 2009.
While Amtrak has experienced a steady increase in ridership over the last decade, there has not been a corresponding increase in total annual revenues. Between fiscal years 2002 and 2005, passenger revenues remained relatively stable—declining from $1.34 billion to $1.29 billion (3.3 percent)—despite growth in annual ridership of nearly 2 million passengers during this period, an increase of 8.2 percent (see fig. 3). These results suggest that it is unlikely that Amtrak can grow its way out of financial difficulty through additional increases in ridership. Further, these trends of continued high operating losses and stagnating passenger revenues, despite a number of cost-cutting efforts, have led the DOT Inspector General and others to conclude that Amtrak also cannot “save its way to financial health” and—in the absence of increased federal funding—may require long-term structural operating reforms.
In addition to the burden of its annual operating deficit, the intercity passenger rail system is faced with substantial financial obligations related to capital repairs and infrastructure maintenance, as well as accumulated debt. Both of these obligations have received substantial federal subsidies each year and are likely to continue affecting the financial outlook of Amtrak into the foreseeable future.
Capital needs and deferred maintenance. Lacking the funds to complete all of its identified capital repair and maintenance projects, Amtrak has deferred an estimated $6 billion in capital and infrastructure maintenance spending. In addition to increasing the risk of a major failure on the system, the deteriorated condition of Amtrak’s rolling stock and infrastructure may contribute to higher operating costs and reduced reliability of service. Further, over 60 percent of this deferred maintenance is attributable to Amtrak’s mainstay NEC service. Disruptions of service on this corridor, due to needed repairs or safety concerns, would have significant financial impacts. While Amtrak has identified the restoration of rail infrastructure to a state of good repair as one of its primary goals, the cost and extent of the needed improvements remain a significant burden to the financial viability of the existing intercity passenger rail system. Although the level of federal capital funding has increased in recent years, there remains a fundamental mismatch between the level of investment Amtrak and the DOT Office of Inspector General (DOT OIG) have estimated is needed to maintain the existing network and the amount of funding provided. For example, in fiscal years 2005 and 2006, Amtrak identified capital funding needs of nearly $800 million dollars annually; however, actual funds appropriated for capital projects in those years totaled $369 million and $495 million, respectively.
Debt obligations. Significant federal funds are also spent each year to service Amtrak’s substantial debt burden. At the end of fiscal year 2005, Amtrak carried a total of $3.6 billion in debt and capital lease obligations. Principal and interest payments on these accumulated debts is estimated at $295 million for fiscal year 2007 and will likely remain at about this level for the foreseeable future. These payments accounted for over 20 percent of Amtrak’s total federal appropriation for fiscal year 2006 and, in light of Amtrak’s other financial obligations, are likely to continue to require funding from other sources.
Federal Funding
Given high annual deficits, deferred capital spending, and debt obligations, the current levels of federal subsidies are likely insufficient to maintain the existing level of passenger rail service being provided by Amtrak. Since Amtrak’s authorizing legislation expired in 2002, federal funding for intercity passenger rail has been far below what Amtrak and others have estimated is needed to sustain and stabilize the current system. For example, Amtrak submitted budget requests of approximately $1.8 billion for fiscal years 2004 through 2006. However, the average amount of federal funding received over this period totaled about $1.24 billion per year— enough to keep the system operating but not enough to meet the level Amtrak estimated is needed to prevent the continued deferral of significant maintenance projects (see fig. 4). The President’s budget in fiscal year 2006 proposed no funding for Amtrak in the absence of significant operating and structural reforms; however, Amtrak eventually received federal funding in the amount of $1.29 billion.
For fiscal year 2007, Amtrak’s budget request totaled $1.6 billion. This figure included $498 million to support cash operating losses, $730 million for capital spending, $295 million for debt service, and $75 million for working capital. The DOT OIG issued estimates similar to those proposed by Amtrak, reporting that $1.4 billion would be required in fiscal year 2007 just to maintain the currently configured system in a steady state, without addressing the backlog of infrastructure projects or investing in new corridor development. This report also identified that up to $125 million in additional working capital may be needed to protect Amtrak from insolvency risks posed by any significant unforeseeable events, such as the Acela brake problem experienced in 2005.
Current Intercity Passenger Rail Network Appears to Provide Limited Public Benefits at a High Cost to the Federal Government
The nation’s intercity passenger rail system serves a variety of purposes, but many routes appear to provide limited public benefits for the level of federal expenditures required to operate them. While none of the 41 routes comprising the current U.S. intercity passenger rail network earn sufficient revenue to fully cover the operating and capital costs of providing the service, the two types of routes that Amtrak operates—long distance and corridors—have markedly different operating and financial characteristics. Some of these differences include annual ridership and passenger demographics, financial performance, and the scope of potential transportation benefits and public benefits that the service is likely to provide.
Long-Distance Routes are Characterized by Relatively High Costs and Potentially Limited Benefits
While Amtrak’s 14 long-distance routes serve a number of different geographical and traveler markets, they often do so inefficiently and at a high cost to the federal government. That is, long-distance routes account for nearly 80 percent of Amtrak’s financial losses although they serve 15 percent of Amtrak’s annual ridership. In addition, long-distance rail services also tend to be infrequent and exhibit poor dependability—as measured by on-time performance—due to increased trip distances and potential issues associated with operating on freight-owned infrastructure. As a result, actual transportation and public benefits potentially deriving from these routes, such as rural transportation and national connectivity, may be limited.
Ridership and Financial Characteristics
Long-distance routes comprise a relatively small percentage of total Amtrak ridership, yet they consume a disproportionate amount of federal subsidies. Ridership on Amtrak’s long-distance routes has remained relatively stable, averaging approximately 3.8 million passengers per year between fiscal years 2002 and 2005. This figure represents approximately 15 percent of Amtrak’s total reported ridership of 25.4 million passengers in fiscal year 2005. Since many of these passengers travel longer distances than passengers on corridor routes, long-distance routes accounted for 47 percent (2.5 billion) of Amtrak’s total of 5.4 billion passenger miles in fiscal year 2005. However, many of the trips taken on these routes are for relatively shorter distances as opposed to end-to-end trips, with riders often traveling between city pairs on existing Amtrak corridors or planned corridor routes. For example, the DOT OIG issued a statement in 2003 which estimated that the share of trips taken on long-distance routes that were corridor in nature was 34 percent. In fiscal year 2005, nearly 30 percent of all trips on long-distance routes were for fewer than 300 miles and 46 percent were for fewer than 500 miles (see fig. 5). In this regard, many passenger trips on long-distance routes may be similar to those on Amtrak’s corridor services, where rail service is more likely to be time- and cost-competitive with other modes of intercity transportation. For example, on the Empire Builder—one of Amtrak’s best-performing long- distance routes—over 24 percent of all passenger trips on the 2,200-mile route take place on the 417-mile stretch between Chicago, Illinois, and Minneapolis/St.Paul, Minnesota; this stretch represents 1 of 10 potential high-speed rail corridors designated by FRA.
Ridership demographic data also indicate that Amtrak’s long-distance routes serve a large percentage of vacation and leisure travelers. According to Amtrak passenger profile surveys, most passengers (over 80 percent) report utilizing long-distance routes for recreational and “leisure” trips, including visits with family and friends and for personal business, compared with other types of travel, such as business or commuting. In addition, Amtrak passenger data indicate that, overall, many long-distance customers tend to be retirees—33 percent versus 16 percent for the total travel market.
Long-distance routes operate with substantial financial losses and consume a disproportionate amount of federal operating subsidies. Financial losses allocated to long-distance routes amounted to $539 million in fiscal year 2005, accounting for approximately 80 percent of Amtrak’s total reported loss of $659 million. This figure also accounts for nearly 95 percent of the total federal appropriated operating grant of $570 million provided to Amtrak for that year. Based on data provided by Amtrak, operating losses on long-distance routes averaged $154 per passenger with considerable variation illustrated between the individual routes. Financial performance over the past several years also indicates that Amtrak is unlikely to substantially reduce these losses through increased revenue or cost reductions. Between fiscal years 2002 and 2005, Amtrak reported a nearly 30 percent decline in annual long distance revenue. However, during this time period, operating costs decreased only about 9 percent. As a result, the budget gap between revenues and costs shows no sign of improvement (see fig. 6).
Contributing to the high operating losses on many of Amtrak’s long- distance trains are the costs of extra services and amenities, such as sleeper services and dining cars. While these auxiliary services generate additional revenue over coach-class seats, the additional revenues do not cover incremental costs. In fact, passengers traveling in first-class sleeper cabins on Amtrak long-distance trains are actually more heavily subsidized than coach passengers. The DOT OIG estimated that sleeper services increase the operational loss over coach class seats by an average of $109 per passenger. When capital costs for providing such services are also included, these additional losses average $206, with losses on some routes as high as $358 per passenger (see app. II). Amtrak is currently evaluating several alternatives to their existing sleeper services in an aim to eliminate incremental financial losses. Some of these alternatives include making equipment and service enhancements on the Empire Builder to reposition it as a luxury service and potentially outsourcing premium sleeper services on select routes for passengers seeking a luxury “land cruise” experience.
Transportation Benefits and Public Benefits
Amtrak’s long-distance routes are generally associated with a number of transportation benefits and public benefits; however, these benefits are obtained at high cost to the federal government and may be limited by infrequent or undependable service. In addition to offering a relatively safe mode of transportation, long-distance routes are commonly associated with their role in providing (1) an intercity transportation option for a number of rural passengers, and (2) national connectivity to link regional corridors and other long-distance routes. While there are public benefits associated with filling these roles, it appears that other transport modes may be better positioned to provide these benefits at reduced cost to the federal government. Moreover, the infrequent service and poor on-time performance of many of Amtrak’s long-distance trains may further limit the benefits provided by intercity passenger rail along these routes.
Intercity passenger rail provides access to many of the nation’s rural residents but air and bus services continue to be the principal modes of public or common carrier transportation for these residents. In 2005, the Bureau of Transportation Statistics estimated that scheduled intercity public transportation (e.g., by air, bus, rail, or ferry) provides coverage to 93 percent of the 82.4 million residents classified as rural. Intercity bus and air services have the deepest penetration within rural America—at 89 and 71 percent of the population, respectively—and rail services were reported to cover approximately 42 percent of the rural population. While many of these residents have access to more than one transportation option, the Bureau of Transportation Statistics estimated that intercity passenger rail (i.e., Amtrak) is the sole public transportation option for approximately 350,000 people nationwide. Georgia and South Carolina were reported as the two states with the largest number of rural residents (with a combined total of 94,000) that were solely dependent on scheduled intercity passenger rail. In contrast, scheduled intercity air and bus services provide the sole transportation option for 2.4 million and 14.4 million rural residents nationwide, respectively. In addition, it appears that if rural transportation were a targeted public policy objective, other modes of transport could be better positioned to provide this benefit to a greater number of residents at lower cost. For example, in fiscal year 2004, federal grants available to the intercity bus industry to support rural service amounted to just $22 million, with rural coverage for that mode exceeding twice the level provided by rail. However, as the DOT reported in 2005, the goal of rural mobility should be to offer flexible and sustainable travel options to those with the greatest mobility needs—and not necessarily to preserve or promote use of any specific transportation mode. Achieving this goal may require the establishment of objective criteria by which to evaluate the needs of these communities. It may also require the awarding of competitive franchise agreements to whatever mode that could provide service with the least amount of subsidy.
Intercity passenger rail also provides connectivity between different regions of the country and other rail routes; however, alternatives may exist to meet passenger demands at reduced cost. Federal law currently directs Amtrak to tie together existing and emerging regional rail passenger service. On a system wide basis, relatively few passenger trips (8 percent) include a train-to-train connection—that is, a passenger changing from one train to another. However, on long-distance routes the percentage of train- to-train connections is somewhat higher (an estimated 22.6 percent in fiscal year 2004). Consequently, national interconnectivity provided by long-distance routes appears to be a potential benefit to approximately 3.5 percent of Amtrak’s total annual passengers. While this population is a very small proportion of the overall intercity passenger market, some rail proponents believe national connectivity may also provide public benefits by providing transportation redundancy to the country. Such redundancy may be important, particularly if air services were grounded as they were in the immediate aftermath of the September 11, 2001, terrorist attacks. However, to the extent that transportation redundancy is a meaningful policy option, intercity passenger rail may not be positioned to provide cost-effective service to the greatest number of people. As previously cited, intercity buses currently provide much greater coverage across the United States without federal operating assistance. Therefore, determining whether these public benefits warrant federal subsidies involves consideration of the substantial costs required to achieve them, as well as evaluation of alternative options, such as intercity buses, that may be better positioned to provide these benefits.
Amtrak’s long-distance services are often infrequent and hindered by poor on-time performance, which may further diminish the benefits provided by these services and offer reduced potential to meet the public’s transportation demands. For example, nearly all of the long-distance trains have limited frequencies—typically one daily departure in each direction— and, due to increased travel times, they are often scheduled to arrive outside of convenient traveling hours. For example, many of Amtrak’s long-distance trains operating within Georgia and South Carolina—the states with the most rural residents dependent solely on rail—are scheduled to arrive at the station between 3:20 a.m. and 6:50 a.m. The infrequent and inconvenient nature of many long-distance schedules is likely to severely limit rail as a viable transportation option for many passengers. While increased frequency of service may potentially address these limitations, this option could be costly due to the increased level of federal subsidies that more frequent service would entail if the population and other characteristics of long-distance corridors did not warrant increased frequency of service.
On-time performance also continues to be a major limitation affecting the potential benefits provided by Amtrak’s long-distance services. In fiscal year 2005, Amtrak reported an average on-time performance of 41.4 percent for long-distance routes, ranging from a low of 7.1 percent on the Sunset Limited to a high of 83 percent on the City of New Orleans (see app. II). While several factors contribute to the wide variation in performance, Amtrak attributes operating delays on the six host railroads—on which Amtrak trains operate—as the largest single factor affecting Amtrak on-time performance, contributing as much as 75 to 80 percent of the delay minutes. Since fiscal year 2000, average on-time performance for all long-distance trains has been in decline (see fig. 7).
On average, in fiscal year 2005, trains on long-distance routes arrived at their final destinations approximately 98 minutes late. Trains on the poorest performing route, the Sunset Limited, averaged nearly 5 hours late. Such poor on-time performance is likely to significantly affect the extent that passengers choose rail services to meet their transportation needs.
Corridor Services Appear to Provide More Public Benefits at Reduced Cost, but Opportunities for Improvement Remain
Corridor rail services—which include NEC operations, as well as state supported and legacy corridor routes—appear to offer increased potential to provide transportation benefits and public benefits to a greater number of people at reduced cost to the federal government. Corridor routes comprise most of Amtrak’s annual ridership—providing service to a wide variety of business and leisure travelers—and they account for much of the growth in passenger rail in recent years, particularly on the state-supported routes (see app. II for a list of states and associated corridor services). Relative to the long-distance routes, corridor services also operate with lower costs and better on-time performance. They also appear to be better aligned to provide more cost-effective transportation benefits and public benefits. For example, they are generally more time- and cost-competitive with other transport modes and offer increased flexibility over long- distance rail services, adapting schedules and services to changing demographics and passenger travel demands. However, despite their relative financial and operating performance, many of the corridor routes face challenges such as capacity constraints and funding issues, which may limit opportunities for rail to increase market share and play a more significant role in the nation’s transportation system.
Ridership and Financial Characteristics
Corridor routes account for most of the intercity passenger rail travel in the United States and they illustrate substantially reduced financial losses relative to the long-distance routes. Most intercity passenger rail travel in the United States is comprised of relatively short trips on a small number of corridor routes. In fiscal year 2005, the average trip length for all routes— both long distance and corridor—was 213 miles, with corridor routes servicing approximately 85 percent of the total Amtrak ridership. Among these corridor routes, over half of the ridership in fiscal year 2005—nearly 11 million passengers—occurred on the NEC alone. The Washington–New York City–Boston main line of the NEC remains the most heavily utilized rail route in the country, forming an essential link for intercity passenger and freight transportation, as well as nine different commuter rail operations in the Northeast. On an average weekday, over 1,800 commuter and Amtrak trains operate over the NEC.
On the 26 non-NEC corridors, ridership in fiscal year 2005 was 10.6 million, with 52 percent of this total generated on the four most heavily traveled routes. These corridor services, namely the state supported routes, also represent the market that is exhibiting the strongest ridership growth. Since fiscal year 2002, there has been an 18-percent increase in ridership on state-supported routes as states continue to increase spending for operations and capital improvements of corridor rail services (see fig. 8).
Given the high number of passengers and the relative importance of the NEC, passenger profiles for Amtrak-operated trains on this corridor illustrate some clear distinctions from those on long-distance routes. For example, a much higher percentage of ridership is comprised of commuters and business travelers in comparison to the long-distance routes, particularly on the higher-end NEC trains, the Acela Express and Metroliner. Amtrak survey data indicates that in fiscal year 2004, 82 percent of travel on these services was business-related. Passengers on Amtrak’s Regional Service—the other primary NEC trains—reported that 49 percent were traveling or commuting for business or school; 50 percent reported traveling for personal or family business, or traveling primarily for leisure purposes.
For non-NEC corridors, the designated trip purpose varied widely between the routes because they operate in a number of different states and passenger markets. For example, the Empire service in New York caters to a number of business travelers and commuters, while the California corridor routes are characterized by a larger share of leisure and personal travel.
As for financial performance, the Acela Express and Metroliner trains operating on the NEC are Amtrak’s only services in which passenger revenues cover the cost of operation (excluding depreciation and interest). In fiscal year 2005, Amtrak reported a positive total annual contribution of $65.3 million for this service. However, Amtrak’s other scheduled trains on the NEC ended the year with operating losses, resulting in a net contribution of approximately $45 million for intercity passenger rail service on this corridor. While these results indicate relative financial success, they do not take into account the substantial amount of capital spending invested to fund infrastructure improvements and maintain operations on the NEC. For example, in fiscal year 2005, Amtrak reported a capital allocation to the NEC of $190.4 million—over four times the reported operating contribution. In addition, Amtrak has an estimated system backlog of up to $6 billion in deferred maintenance and infrastructure improvements, with the NEC comprising more than 60 percent of this total.
All of the non-NEC corridor routes also incur financial losses to Amtrak; however, considerable variation exists among them. In fiscal year 2005, Amtrak reported a total annual loss from all non-NEC corridor services of approximately $164 million, with losses on individual services ranging from a low of $200,000 (Illinois Zephyr) to a high of $23.3 million (Empire Service). In the aggregate, these losses represent an average operating subsidy of about $20 per passenger for non-NEC operations. One reason for the wide variance in Amtrak’s financial performance among these corridor routes is the level of state support provided. Overall, state payments to Amtrak for operating and capital costs have increased considerably in recent years—rising from $148 million to $272 million between fiscal years 2000 and 2005 (see fig. 9). However, states have generally not been required to pay the full subsidies for these routes. Moreover, many states that have corridor services have not paid anything at all, thus producing issues of equity among states. For example, Amtrak operates a number of weekly departures of the Hoosier State service—between Indianapolis and Chicago—although it has the lowest cost recovery of any short-distance route and neither state contributes any level of operating support.
Both types of Amtrak’s corridor routes illustrate significant potential to provide transportation benefits and public benefits, but they each illustrate a number of unique attributes and opportunities for improvement. Transportation experts generally agree that intercity passenger rail services that serve large, relatively close population centers—and that are time- and cost-competitive with other transportation modes—represent the greatest potential markets for rail worldwide. Moreover, these markets are the ones most likely to offer the greatest opportunity to mitigate pollution and reduce the growth of highway congestion through increased rail use. However, the ability of intercity passenger rail to generate these benefits depends on the likelihood that travelers will choose rail service over other modes of transportation. As we have reported previously, congestion is most likely to be alleviated when rail routes run parallel to congested roadways and where travelers view rail as a more attractive “door-to-door” travel option (in terms of price, time, comfort, and safety) than driving. Similarly, rail becomes less competitive with other modes of transportation, particularly air services, as travel time and prices increase over longer distances (see app. II). For these reasons, corridor services appear to be most competitive with automobile and air travel in markets between 100 and 300 miles. In this regard, many existing and developing corridor rail services appear to be well positioned to provide a viable alternative to other modes of transport and potentially offer a number of public benefits: NEC. With over 30 million metropolitan residents, the NEC has a population density of over 65,000 residents per route mile. According to the American Association of State Highway and Transportation Officials, such a large population density helps to explain why the NEC accounts for such a large proportion of Amtrak’s total corridor ridership. Many of the rail services on the NEC are very competitive with air and auto travel in several markets. For example, Amtrak serves 50 percent of the combined air/rail market between Washington, D.C., and New York, and 40 percent between New York and Boston. Moreover, in fiscal year 2005, Amtrak reported air/rail market shares greater than 90 percent for other shorter distance city pairs such as Philadelphia–New York and Philadelphia–Washington, D.C. The Northeast region also illustrates characteristics of the type of urban congestion and capacity constraints that may benefit the most from travelers being diverted away from the highways and onto rail.
State-Supported Corridors. State-supported routes are the fastest growing routes and illustrate significant potential to provide a viable transportation option; however, further development of new and existing rail corridors may require funding beyond what has been previously provided. A growing number of individual states and groups of states have made the public policy decision to utilize state funds to subsidize additional corridor rail service and invest in related capital projects. Some of the potential benefits cited for such expenditures include the potential for rail to accommodate regional growth and enhance economic competitiveness. Over 80 percent of the nation’s population now lives in a metropolitan area. Officials in many states are interested in identifying and developing regional rail corridors that link these economies and provide a viable transportation option to large numbers of residents. Officials in several states with whom we spoke also indicated that corridor rail services are an important component of state and local transportation plans. For example, in Washington State, corridor rail service between Seattle, Washington, and Portland, Oregon, comprised over 60 percent of the air/rail market share in fiscal year 2005 and was identified for its potential role in reducing the growth rate of highway congestion within the region. The nine member states of the Midwest Regional Rail Initiative also identified where potential public benefits may be provided through additional funding for increased train frequencies and extensions of existing corridor routes. In addition, this group has set out a “grand vision” to link all of the major industrial centers in the region with high-speed rail service (operating at speeds up to 110 miles per hour). If completed, this network would reach over 35 million residents—a number that exceeds the entire metropolitan population of the NEC. An additional benefit attributed to increased development of corridor services is that the state (or other public authority) has the ability to contract for the specific services that it chooses to subsidize, including scheduling, frequency, and the stations served. In this manner, services can be adjusted over time according to regional growth patterns and changing population demographics.
Potential Opportunities for Improvement
While Amtrak’s corridor routes serve millions of passengers each year and appear to provide a number of public benefits, there may be additional opportunities to further develop rail corridors to improve existing services and reach new markets. For example, a number of issues associated with infrastructure improvements and capacity constraints may need to be addressed to ensure that rail services continue to provide an effective alternative to other transport modes. To be successful, corridor trains must operate with adequate on-time performance to provide competitive travel times and reasonably predictable schedules. In addition, overcoming funding issues will likely be required in order to realize the opportunities identified by states for the further development of regional rail corridors.
Infrastructure improvements and capacity constraints are critical issues on the NEC. Although it is Amtrak’s most viable route, the NEC faces a high level of unmet infrastructure spending, maintenance spending, and growing capacity constraints, which may affect its ability to effectively compete with other transportation modes in the future. Amtrak’s most recent legislative grant request asks for $730 million in fiscal year 2007 to complete major projects such as replacing bridges, ties, power supply systems, and overhauling the existing fleet of rolling stock, with the NEC being targeted as a critical priority for such investments. In addition, the many users operating on the NEC present a constraint on capacity that may impact the ability of Amtrak trains to reach their destinations on time. Backups are becoming more common among freight, commuter, and Amtrak trains, causing delays that result in dissatisfaction among riders. Delays affecting on-time performance may be particularly important on the NEC, where a high number of business and commuter travelers rely on these services.
In fiscal year 2005, Amtrak reported that train services on the NEC reached their destinations on time an average of 78 percent of the time. While this represents a slight improvement over fiscal year 2004 levels, this indicator has decreased from fiscal year 2000 levels (see fig. 10). Recognizing that the deteriorated condition of the infrastructure contributes to increased operating costs and reduced reliability of services, Amtrak has committed to developing a NEC master plan in conjunction with the states and commuter agencies that utilize it. This effort aims to identify long-term needs and service improvements, and work together to fund such projects. An example of such a project designed to address capacity constraints and improve service is illustrated by Amtrak’s current efforts working with the state of Virginia to develop an additional track dedicated to passenger trains between Washington, D.C., and Richmond, Virginia. The benefits identified by Amtrak for projects such as this one include increased capacity, potentially higher speeds, reduced trip times, and overall improvement in reliability and on-time performance.
Non-NEC corridor routes also face a number of the same infrastructure and capacity challenges affecting train speeds and the predictability of travel times as the NEC services. In fiscal year 2005, on-time performance for these services was reported at 70.4 percent, reflecting a 6-percent decline since fiscal year 2000. A state official in New York cited the Empire Service as an example of one such corridor facing significant congestion and capacity constraints associated with heavy use by freight trains, commuter services, and Amtrak trains. A recent study estimated that $700 million would be needed just to complete infrastructure improvement projects on one segment of this corridor, the 141-mile line between Albany and New York City. Similar projects to reduce congestion and increase speeds have been identified on a number of other state supported and “legacy” corridors in Pennsylvania, California, and the Midwest.
Overcoming funding challenges is another issue that needs to be addressed if Amtrak and state partners are going to work together to continue developing and expanding intercity passenger rail services. Although some states have identified where additional corridor services may provide significant transportation benefits and public benefits, these projects often require substantial levels of public funding. For example, the total cost required to develop the 3,000-mile high-speed rail network as envisioned by the Midwest Regional Rail Initiative is estimated at $4.8 billion. All the state officials with whom we spoke indicated that any additional state funding for rail will require some type of federal match program similar to other transportation modes. Moreover, Amtrak’s plans to recover additional overhead and other shared costs expended on state-supported corridor routes beginning in 2008 will place further demands on limited state funding for rail. Undertaking the significant infrastructure improvement projects needed to expand capacity and improve operational performance on existing corridors would also be expensive. For example, a report issued by a coalition of rail stakeholders in the Mid-Atlantic region estimated that funding to address major congestion bottlenecks in that region would cost approximately $6.2 billion over 20 years. In addition, a report issued by state transportation officials in 2002 estimated that capital investment projects outlined for 21 corridors across the country could cost as much as $60 billion over a 20-year period. Regardless of which projects are ultimately funded, it appears that, if rail is to play a more significant role in the nation’s transportation system, overcoming issues of funding and capacity will be an important component.
Current Intercity Passenger Rail System Is Not Adequately Focused Where It Can Be the Most Financially Viable and Provide the Most Public Benefits
The current intercity passenger rail system is not adequately focused on its comparative strengths; it exists much as it did when Amtrak began over 35 years ago. While Amtrak has made notable upgrades along the NEC and implemented a number of contractions and expansions of its route structure over the years, the system remains similar in its size and endpoints as the original “basic system” that the DOT designated in 1971 (see app. II for a map of Amtrak’s routes in 1971). As the DOT General Counsel recently testified, this system has not effectively adapted to shifting demographics and market demands over time, as other transportation modes have done. While the current model may provide limited service offerings across the country’s broad geography, it does so at a very high cost to the federal government. Amidst a number of fiscal constraints and increased pressure to reduce or better target federal rail subsidies in the future, this model may no longer be viable. However, intercity passenger rail continues to illustrate the potential to become an important element with greater integration into the nation’s overall transportation system if it is focused on the markets where rail exhibits comparative strength. As reported by the Congressional Budget Office (CBO) in September 2003, these opportunities are most likely to be found on routes of about 100 to 300 miles that connect cities with large populations. In these markets, rail is most likely to be both time- and cost- competitive with highway and air travel, and may be best positioned to meet both the demands of the traveling public and the demands of sponsoring public authorities.
As our work illustrates, the current intercity passenger rail system targets substantial resources toward the operation of long-distance services, which the CBO and others have reported is an area of comparative weakness for rail services. In addition to accounting for about 80 percent of Amtrak’s operating losses, these services do not appear to be meeting Amtrak’s goal of providing “basic transportation” very effectively. Services are often unreliable—averaging 41 percent on-time performance—and serve communities infrequently or at inconvenient times (often one train daily in each direction).
While these characteristics do not serve Amtrak’s long-distance passengers well, the several distinct “client” markets on these routes are also not efficiently targeted. For example, many passengers on long-distance trains travel relatively short distances—400 miles or less—suggesting that a substantial share of long-distance service may actually be corridor service. However, these services are not managed like corridors, which are characterized by higher speeds and more frequent train service. Passengers in rural communities along these routes also do not appear to be effectively targeted by rail services. These services are inherently limited to those communities fortunate enough to be located next to historical rail lines. Further, there is reason to believe that alternative modes of transportation may be better positioned to provide much greater rural coverage at potentially lower cost to the government. Finally, for those passengers traveling longer distances, Amtrak often operates costly amenities (e.g., sleeper and dining cars) which account for even higher levels of federal subsidies than coach-class seats. Amtrak survey data also suggests that, on average, the 16 percent of riders on long distance trains who utilize sleeper services are typically the most affluent passengers. For example, passengers in Sleeper/First Class reported an average household income over one-third higher than coach-class passengers. Consequently, substantial federal dollars are currently being spent to subsidize costly services to individuals with higher-than-average incomes. All of these characteristics raise questions about the appropriate federal role in long- distance service, such as whether federal expenditures should be used to subsidize leisure services to affluent travelers, and whether there may be more cost-effective alternatives to provide corridor services and efficient rural transportation.
In contrast, the current intercity passenger rail system also includes corridor services, which have been identified as the comparative strength of passenger rail and where passenger rail services hold the most promise to be financially viable and provide a number of potential public benefits. There has been a relative growth of passenger rail ridership on corridor routes, especially state-supported corridors, and 85 percent of Amtrak’s riders live and work along corridors. Aside from the heavily populated NEC where Amtrak has achieved its best results, a number of other corridors— such as those in California, New York, the Midwest, and the Pacific Northwest—exhibit many of the key characteristics that indicate there may be potential public benefits that could justify public subsidies for passenger rail services, namely clusters of densely populated areas within 300 miles of each other. Moreover, many officials with whom we spoke agreed that the promise of intercity passenger rail is likely along corridors, not over long distances. States have further supported this view by providing substantial funds to support corridor operations and/or capital investments on these routes.
Foreign Experiences Illustrate Various Approaches to Restructuring and Key Reform Elements
Over the past 20 years, several countries have employed a variety of approaches in reforming their intercity passenger rail systems in order to meet national intercity passenger rail objectives. These approaches—alone or in combination with each other—have been used to support national objectives such as increasing the cost effectiveness of public subsidies, increasing transparency in the use of public funds, and providing transportation benefits and public benefits. Despite the variation or combination of approaches used, during the restructuring process these countries addressed several key elements of reform, such as establishing clear goals for intercity passenger rail, clearly defining stakeholder roles that are necessary in implementing any approach, and establishing stable sustainable funding.
Prior to implementing these new approaches, many countries’ passenger rail systems consisted of “monolithic” state-owned and state run organizations in which customer service and financial performance were not the main concerns of the railroad. Rather, other concerns, such as socioeconomic issues (e.g., providing employment) were more important. Similar to the current situation in the United States, passenger rail in many countries was losing market share to other modes of transportation and this loss of market share, along with mounting dependence on public subsidies and decreasing transparency with respect to where public funds were being spent, prompted change in the passenger rail industry. Table 2 discusses the different passenger rail structures that existed in the five countries in which we conducted site visits for this report. These countries were chosen because they have transitioned from state-owned fully integrated organizations to more consumer driven market-dependent entities. While it is important to be aware of the key differences between these countries and the United States (e.g., infrastructure ownership, geography, and political culture) the general catalyst for reform—the need to deliver a better value for the expense of public funds—is the same as the current passenger rail environment in the United States.
Various Approaches Have Been Used Abroad to Support a Broad Range of National Intercity Passenger Rail Objectives Aimed at Improving Value for Funds Spent
The foreign countries we visited have met a broad range of national objectives by implementing various approaches to improve the cost effectiveness of their intercity passenger rail systems. All the countries we visited reformed their systems in large part to improve the value of service they were receiving for the amount of public money being spent on the service. For example, the desire for increased transparency in the use of public funds, mounting public subsidies and rail-related debt, and a desire for economic efficiency were all key factors in the European Union’s 2001 directive requiring all member states to improve the efficiency of their rail systems. Three of the five countries we visited—France, Germany, and the U.K.—are members of the European Union and have all begun implementing changes to meet these goals. Similarly, Canada and Japan both reformed their systems to increase the value in service they were receiving for the funds being spent. While the countries we studied reformed their systems in order to meet financial objectives, the national governments of these countries still provided heavy financial support to the system after the reforms. Table 3 shows the current levels of financial support provided by these governments.
Passenger rail reform in the countries we visited was also undertaken to achieve a number of other objectives. For example, reform was used as an opportunity to provide viable transportation benefits and public benefits that might not otherwise be achieved. The Canadian, Japanese, and French governments all financially support passenger rail service to areas of the country that have small or isolated populations and that may not be well served by other means of transport. For the most part, this service is unprofitable and would not otherwise be provided. Another objective was to address growing urban congestion through enhanced passenger rail service. In the European Union member countries we visited passenger rail reform was used to address environment and urban congestion issues. Finally, the countries we visited used reform to improve the operational performance of existing intercity passenger rail systems. For example, in Germany, a large part of its reform was to consolidate the two highly inefficient rail systems that existed after the country was reunified into one cost-efficient rail system. Similarly, in Canada a major reexamination of long-distance intercity passenger rail service took place in order to better market these routes and, therefore improving the routes’ financial performance. Additionally, Germany and France have established performance metrics such as on-time performance and train cleanliness, which result in bonuses or penalties for the rail operators based on their ability to meet the standards established in the metrics.
These reform objectives have been addressed through various approaches. Each approach reorganized a different aspect of the existing intercity passenger rail system. See figure 11 for a summary of the approaches each country took. These approaches are not mutually exclusive of each other, and have included, but are not limited to: 1) changing the roles and responsibilities of the various stakeholders involved in the intercity passenger rail system, 2) changing the funding structures of the existing system, 3) changing the organizational structure of the existing passenger rail entity, and 4) the introduction of competition or privatization in rail operations.
Shifts in the Roles and Responsibilities of Intercity Passenger Rail Stakeholders
One approach taken by the five countries we visited was a shift in the roles and responsibilities of the stakeholders involved in intercity passenger rail—primarily the national and regional governments. This was generally undertaken to remove political and state interests from the operation of the rail system in order to increase efficiency.
Shift from service operator to service regulator/oversight. In both the U.K. and Germany, the national government shifted from being the operator of intercity passenger rail service to taking on more of a regulatory role, overseeing the competitive bidding process used by private operators. By taking on an oversight role, these governments are facilitating competition and, in turn, supporting their objective of creating a more cost effective and transparent use of public funds. A more cost effective and transparent use of public funds helps facilitate improved operational performance of intercity passenger rail operators.
Shift away from infrastructure manager, yet remaining owner. In the countries we visited, some of the national governments no longer provide day-to-day management of the infrastructure; however, they remain the owner of the infrastructure companies in order to ensure that the state’s best interests with respect to decision making can be maintained. For example, in France and Germany, government-owned private companies were established to manage and maintain the entire rail infrastructure, including granting access to operators and collecting access fees. In the U.K., a member-owned private company handles infrastructure matters. By moving away from the day-to-day management of the infrastructure, governments are able to put those tasks in the hands of individuals best suited to manage the infrastructure, while still being able to set the strategic direction. Shifting away from day-to-day management allows the government to be more of a customer of the infrastructure manager, thereby enhancing transparency in costs as well as accountability in the financial performance of the infrastructure companies.
Devolving decision-making authority to local and regional governments. One of the most prevalent changes made in two of the three European Union countries we visited was the devolution of specific roles and responsibilities from the national government to local or regional governments. These roles included decision making (e.g., selecting the operator through a bidding process), as well as determining the quantity and frequency of intercity passenger rail service. By letting governments that were geographically closest to the service make decisions about it, the national governments have been able to be more cost effective by targeting public and transportation benefits to the specific preferences of the localities. In cases where the localities are able to select their operator through competitive bidding, service can be purchased for the lowest bid—as opposed to having no choice if there were only one operator to choose from. For example, in Germany, all of the national operation subsidies are given directly to the Länder (analogous to U.S. states); the Länder are then able to issue a request for proposal outlining specific service needs, and receive competing bids for the level of service they request.
Shift from service operator to customer. The U.K. and Germany, as well as France and Canada, have transitioned their relationships with rail operators from that of operator to that of customer—the governments determine what type of service they want to make available to their citizens, and then purchase that service from the rail operators. Frequently, the governments establish performance metrics to hold the operators accountable. In the U.K. and Germany there are multiple operators that can bid to provide this service, but in France and Canada the service is provided by a single national operator. By taking on a customer role—even if the national provider is still fully owned by the government—these nations have been better able to define the type of service they want, and then pay for those services. This can lead to more cost-effective service, and better provision of public benefits and transportation benefits. For example, officials in the Ile de-France region (greater Paris area) told us that they have received better service from the national operator since they were able to deal with them directly, and in 2004 the operator received 1.8€ million in bonus payments from the region for meeting metrics such as the handling of passenger claims and station cleanliness.
Changing the Public Funding Structure Used to Support Intercity Passenger Rail
Another approach taken by some of the countries we visited involved changing the public funding structure used to support intercity passenger rail.
Changes to government commitment to funding. In all the countries we visited, the national governments made commitments to fund intercity passenger rail. Four of these countries dedicated annual funding towards investing in the intercity passenger rail system in order to provide the resources needed to achieve a desired level of rail service. Japan established a one-time fund for its railroads that needed financial assistance, allowing the railroads to invest these funds in order to operate off the interest earned on these investments. Changing the commitment to funding allows these countries to get the best value for their money by requiring rail operators to provide specified levels of service for the amount of funds required to conduct these services. Also, as shown by Canada, cuts to the level of annual funding can push an operator to improve its operations, reduce costs, and grow revenues in order to operate within its funding limits.
Changes to funding mechanisms for infrastructure. Another major funding change made in the three European Union countries we visited was the establishment of new funding mechanisms (i.e., grants and loans) for intercity passenger rail operations and infrastructure. By splitting the funding sources for these two distinct functions, the governments are better able to determine what the subsidy is being used for and increase the transparency in the use of public funds; in addition, constant and expensive infrastructure projects now have a specific source of funding, allowing infrastructure managers to better plan for future projects.
Changes to funding dissemination. Another funding change made by both France and Germany occurred in conjunction with the devolution of decision making to local and regional governments. These two countries now provide national funds directly to local and regional governments in order to support the purchase of intercity passenger rail service. By doing this, these countries have enabled local and regional governments to be more flexible and purchase service that best fits the preferences of the users; funds can therefore be targeted at the transportation benefits and public benefits preferred by local areas.
In addition to these changes in the structure of the public funds, another factor played an important role in changing the funding structure—a national commitment to provide stable sustainable funding. For example, in Germany, part of the motor fuel excise tax was dedicated to rail; meanwhile, Japan created Business Stabilization Funds in order to support operations and capital improvements of the three island railway companies with smaller passenger rail markets. In Canada, officials told us the national government has informally made an ongoing commitment to support intercity passenger rail operations by consistently providing the same level of funding each year. By committing to provide the funds each year, all the national governments above allowed rail operators to better manage their resources and planning capabilities.
As part of this commitment, four of the five countries we visited transferred or reduced the debt that the railways were carrying. In Germany, reform took place in 1994 and the debt was transferred to the government; a new public agency was then created to take over and pay off the 35€ billion in debt (about $39 billion) incurred by the preexisting railways, as well as by the employees of the former railways. In Japan, during the 1987 reform, the national government relieved the railway of its ¥37.1 trillion debt (about $257 billion) by transferring most of it—along with part of the railway’s employee pensions—to the national government, and splitting the remainder of the debt among the operators. In France, the 1997 reform resulted in 20€ billion in debt (about $24 billion) being transferred to the new infrastructure manager. In exchange, the new manager received the country’s entire rail infrastructure at no cost; the remaining 10€ billion in debt (about $12 billion) was transferred to the national operator. While the British government wrote off the initial debt of the railway in 1994, the U.K. is currently carrying an infrastructure debt of about £18 billion (currently about $34 billion). According to U.K. officials we interviewed, this amount is expected to increase to £21 billion (currently about $39 billion) by 2009. Officials with U.K.’s infrastructure manager noted, though, that borrowing is limited to 85 percent of the value of its regulatory asset base. Canada did not have debt at the time of their restructurings. Relieving the debt of the rail operators created a viable capital structure for the new railways to operate in, and has been an important factor in their ability to move forward more cost effectively.
Changing the Organization of Existing Passenger Rail Systems
Restructuring the organization of existing passenger rail systems is another approach often taken by governments when reforming their rail systems. Historically, most national rail systems have been comprised of monolithic government-owned and government-managed entities, where the two major functions—managing infrastructure (e.g., tracks and stations) and managing daily operations—were integrated. The three European countries we visited began their reform by separating the operational and infrastructure functions of their passenger rail systems. Separating these two functions from each other can result in more transparency and a better estimate of what the costs for each function are.
This separation can take place in a variety of ways. For example, the U.K. went from a government monopoly with full control over both functions to a private company owned by “members” that own and manage all of the rail infrastructure; operations were turned over to private operators in 1993. In France, the government monopoly was separated into two separate government-owned companies. One company is responsible for managing all rail operations and the other is responsible for managing the infrastructure. In Germany the government rail monopoly was turned over to a private state-owned holding company, with separate independent subsidiary business units in charge of infrastructure and operations. Additionally, in Germany, although the same holding company that owns the infrastructure also includes the primary passenger rail operator, other private operators are permitted to provide intercity passenger rail service on their tracks. Conversely, in Japan, the infrastructure and operational function of the passenger rail system have remained integrated—instead, the country divided its rail system into six distinct geographic regions allowing each area of the country to address issues specific to its passenger markets. Restructuring the rail system is generally implemented to create more transparency in the costs incurred by the rail companies; once accurate costs are known, companies can better gauge how much to charge for their services, as well as identify opportunities for cost savings.
Introducing Competition and Privatization in Intercity Passenger Rail Operations
The introduction of competition and/or privatization in rail operations is another approach to reform intercity passenger rail. This approach was used by some of the countries we visited. Over the past two decades, countries have been reforming their railway systems through various forms of privatization in order to improve the quality of service and efficiency offered to customers, and to reduce costs. Competition and privatization are two market mechanisms that are often used to improve service efficiency while meeting financial objectives. The use of competition and privatization can lead to a market that is more responsive to customers as well as investors. However, regardless of the degree of success, deep and continuing government involvement will likely continue to be necessary in order to balance the financial needs of the railways with the transportation coverage desired by the state.
Competition and privatization have been particularly prevalent in Europe, where a European Union directive requires the existence of competition in the freight rail industry; an additional directive has been proposed requiring the allowance of competition in the international passenger rail industry as well, although some countries have already opened their markets to multiple operators. Germany makes extensive use of private operators, with over 300 operators providing rail service on many regional routes. In the U.K., all passenger rail services are franchised and open to competitive bidding by operators. The introduction of competition and privatization is largely dependent on the government changing its role to that of a customer, with the primary focus on purchasing the best service for the best price. In Germany, the dissemination of national funding to regional governments has facilitated the extensive presence of multiple operators. Japan, meanwhile, aims to have its passenger rail system completely privatized; currently three of Japan’s six passenger rail systems are managed by individual private companies. By turning its passenger rails over to the private sector, Japan has improved its quality of service and substantially reduced the number of its employees; the demand for railway service continues to increase.
Foreign Countries Addressed Key Reform Elements in Implementing New Approaches to Intercity Passenger Rail
Several key reform elements were addressed by the five countries we visited as part of their planning and implementation of new approaches to intercity passenger rail. Based on our review, implementing these approaches appears to improve the cost effectiveness of intercity passenger rail service. For example, officials with the primary operator in Germany told us that their company has seen a 187-percent increase in staff productivity between 1993 and 2004; at the same time, the company was able to reduce its workforce by 40 percent. These officials stated that the German rail reform resulted in taxpayers paying 44€ billion less during this time period than what they would have been expected to pay if there had been no reform. The key reform elements addressed throughout implementation of these approaches include: Establishing clearly defined national policy goals. In making major changes to an intercity passenger rail system, it is essential that the national government establish a clear vision for what the goals of the system should include while making decisions to implement new approaches to meet these goals. During our review of the five countries we visited, we observed that each country established goals that their reforms were intended to achieve. As we reported in February 2005, a key component in reforming a national program includes determining if there is a clear federal role and mission. All of the approaches taken by the five countries we visited were tailored to meet the specific national policy goals established by those countries. For example, in the U.K., there was a national goal to reduce the role government played in managing the passenger rail system. To meet this national goal, the U.K. used approaches such as introducing competition in its system, and changing the role of the national government from service operator to that of a customer of private rail operating companies.
Clearly defining government and stakeholder roles. The second key reform element we learned about during our site visits is that government and stakeholder roles should be clearly defined prior to (or during) implementation of any reform approach. Deciding what these roles should be was the first step in several of the approaches. For example, in order to shift the national government’s role, the responsibilities of the government first needed to be defined; it then had to be decided which of these responsibilities would continue to be government functions, and which would be those of other stakeholders.
Establishing consistent, committed funding. Consistent, committed funding is the final reform element key to successful implementation of a new approach to intercity passenger rail. In the five countries we visited, the national governments made a commitment to provide intercity passenger rail service. The governments also committed to provide the system, on an annual basis, with the funds necessary to maintain this service. Whether the approach taken was to increase the annual subsidy, provide subsidies to regional levels of government, or establish a consistent subsidy for each year, all of these governments made financial commitments to provide intercity passenger rail service.
See app. III for more detailed information about each of the countries we reviewed.
The United States is Not Well Positioned for Reform
The United States is not well positioned to reform or restructure intercity passenger rail service. Based on our review of foreign intercity passenger rail reforms, a more fundamental reexamination of the system by policymakers than has taken place to date will be needed if the United States wants to better position itself to improve the performance and benefits of the intercity passenger rail system in this country. The national governments of the countries we visited addressed three main elements through the process of reforming or restructuring their intercity passenger rail systems: (1) clearly defining national policy goals, (2) clearly defining the various roles and responsibilities of public and private sector entities involved, and (3) establishing consistent committed funding for intercity passenger rail. Currently, the goals and expected outcomes of U.S. passenger rail policy are ambiguous, stakeholder roles are unclear, and funding is limited because of other priorities and a lack of consensus on the level of funding to devote to goals. As the primary provider of U.S. intercity passenger rail, Amtrak has the authority to take a number of actions, but has a history of poor financial and operating performance. Amtrak has recently proposed a reform strategy and is undertaking efforts to reduce costs and increase corporate efficiency. However, constraints, such as expensive labor protection payments that may be triggered by possible route and service changes, limit the benefits Amtrak can achieve on its own. Even if Amtrak were to fully exercise its authority, Amtrak is not in a position to address the key elements of reform we observed in other countries. Federal leadership will be needed to fundamentally improve the performance of intercity passenger rail.
United States Will Need to Address Three Key Elements to Improve the Benefits of Intercity Passenger Rail
We found that other countries we visited addressed key reform elements in the process of reforming or restructuring their intercity passenger rail systems. U.S. policymakers will need to reexamine national policy goals and objectives, stakeholder roles and responsibilities, and funding mechanisms for intercity passenger rail if the United States wants to better position itself to improve the performance and benefits of federal expenditures on intercity passenger rail.
Policy Goals
Based on our review of intercity passenger rail systems in five countries, we found that, in the process of reforming or restructuring their systems all five national governments clearly defined national policy goals and objectives for the system. For example, a specific goal of the reform process in France, Germany and the U.K. was to increase transparency in the use of public funds and restructuring included separating the management of their rail infrastructure and passenger operations. In Germany, the government’s objectives in consolidating two state railways into one private holding company, Deutsche Bahn AG (DB), was to improve efficiency, and to allow DB to function independently of the government and manage its railway like a private business. During the restructuring process in Japan, by defining specific goals and outcomes for the system, the national government was able to determine an overall structure for the system. Some of the goals Japan defined for the railway before restructuring it were reducing the accumulated debt, minimizing the national government’s role in maintaining the railway, increasing efficiency, and strengthening competitiveness. Additionally, a desired outcome of restructuring the state-owned provider into six private regional passenger rail operating companies was to better position rail service to compete for passengers.
Goals provided by Congress focus narrowly on Amtrak management, rather than providing guidance and direction for the entire U.S intercity passenger rail system. The current legislation governing Amtrak directs it to operate a national passenger rail transportation system that ties together existing and emerging regional corridors and other intermodal service. However, it does not provide specific objectives for the system Amtrak is required to operate, such as defining transportation benefits and public benefits or increasing the transparency of public funds, nor does it specify how the system should be structured to achieve certain outcomes. This broad mandate, as previously discussed, has resulted in the current intercity passenger rail system—a system that does not target markets where rail may have a comparative advantage over other transportation modes nor makes the most cost-effective choices to meet public transportation needs. In April 2005, Amtrak released a set of proposed strategic reform initiatives, which included a vision for the future of intercity passenger rail service and Amtrak’s role. Recently, Amtrak developed a mission statement, which aims to improve financial and operational performance by tying specific goals to the mission statement. Although the vision and mission statement provide a direction for the company, senior Amtrak officials told us that this mission for the company should not be a substitute for Congress setting a national intercity passenger rail policy. Furthermore, they said that a national rail policy should be explicit and clearly indicate the transportation services that the federal government wants operators to offer; Congress should then provide funding for the desired level of service.
Determining the system’s structure, as well as determining how to position passenger rail within the entire U.S. transportation system, will remain uncertain without specific goals and outcomes for intercity passenger rail. To change the current structure of intercity passenger rail, policy decisions need to be made. As the Congressional Research Service (CRS) reported in December 2004, maintaining the status quo of passenger rail policy allows policymakers to avoid making decisions, such as shutting down Amtrak and eliminating its long distance routes or alternatively, committing to a major financial program. Without a more explicit national policy, the future role of intercity passenger rail in the national transportation system is uncertain.
Stakeholder Roles and Responsibilities
Similarly, establishing clear stakeholder roles and responsibilities was important to helping improve the efficiency of intercity passenger rail systems in several of the countries we reviewed. For example, the U.K. reorganized its structure by creating separate organizations (e.g., organizations to provide train service, manage the rail infrastructure, and regulate infrastructure access fees and costs). Each of these organizations has defined responsibilities and is transparent with respect to the responsibility of achieving specific goals. According to a U.K. official, in privatizing some of these organizations, the U.K. sought greater efficiency, tighter cost control, a reduction in government interference in the railway industry, and more consistent and reliable funding. Our study also showed that clarifying stakeholder roles and responsibilities may require the creation of new entities. For instance, when Japan National Railways restructured its railways in 1987, the government created the Japan National Railways Settlement Corporation to settle the accumulated debt of Japan National Railways. In addition, an official from Japan’s Ministry of Land, Infrastructure, and Transport told us that the railway split into six passenger railroads in order to have more efficient regional service.
In the United States, stakeholder roles and responsibilities for managing, operating, and funding intercity passenger rail services are unclear. For example: It is unclear what Amtrak’s main responsibility should be as the primary intercity passenger rail operator in the United States, given that the purposes of Amtrak are in conflict. Although Amtrak is incorporated as a for-profit corporation, any expectation of being a profitable company has not been realized—partly because it is responsible for maintaining an intercity passenger rail system with many unprofitable routes.
The federal role in intercity passenger rail service has primarily been to subsidize Amtrak’s operations and, in the past, manage capital improvements to the infrastructure along the NEC. Only recently has the Secretary of Transportation been tasked with overseeing these funds, but such funding has been tied to Amtrak’s business plan and not a national policy or vision that articulates goals, objectives, and outcomes for intercity passenger rail services.
Current law offers states a narrow role in decision making, but permits states to subsidize additional intercity passenger rail service. Some states see benefits to subsidizing intercity passenger rail and choose to spend their own funds for additional service not provided as part of Amtrak’s national route system—a system that has not had substantial changes since 1971. Those states have had a role in making decisions, such as what stations will be served and whether food service will be provided on the subsidized route, unlike states that do not provide funding. Forty-two states receive basic long distance service with no state support, while 13 of these states have decided to subsidize additional corridor services based, partly, on demand. For example, Amtrak’s legacy route system has provided service on some corridors without state support, (e.g., from Pittsburgh, Pennsylvania, to New York City), but on other corridors, states have subsidized additional service, such as Washington state paying for additional frequencies for the Cascades Service between Seattle, Washington, and Portland, Oregon. Additionally, in December 2004, CRS reported that there are those who view that state governments may be better positioned to make regional service decisions. The administration’s proposal also favors giving states a greater role in decision making with respect to rail service and capital improvements.
The role that freight railroads should play in shaping the future of intercity passenger rail service is not defined. Management of and access to infrastructure is dominated by the freight railroads. Since passenger railroads and freight railroads must often share access to privately owned tracks, the freight railroads’ control over infrastructure has an influence on both national passenger rail policy and day-to-day passenger rail operations. Specifically, freight railroads may be concerned with intercity passenger rail policy decisions that affect access to their rights-of-way and capacity on existing tracks; these decisions could potentially affect the freight business. While their decisions may influence passenger rail service, freight railroads do not have a defined role in decision making or the funding of intercity passenger rail.
Funding
Finally, as part of their overall restructuring process, all of the countries we reviewed committed to funding intercity passenger rail service. For example, in the U.K., the Secretary of State for Transport is tasked with determining what services the railway should deliver. This determination is made through a document called the High Level Output Specification: available funds for these services over a 5-year planning period are set down in a statement of funds available. An official in the U.K. Department for Transport told us that this funding cannot be reallocated for other purposes without great political and financial risk. In addition, a 2002 CRS report observed that reorganization of the railways in several countries required substantial political and financial commitment over an extended period. Besides establishing funding tied to goals, countries we visited also devoted funds to capital improvements separate from operating subsidies. In France, about 2€ billion per year (currently this is approximately $2.5 billion) is provided for new rail lines: additionally, the government also offers interest-free loans to support new infrastructure projects. In addition to providing funding specifically for capital improvements, three of the five countries disseminate the national subsidy to regional governments, allowing passenger rail subsidy options to be decided by regional governments instead of the national governments. For instance, about 7€ billion per year (about $8.9 billion) in operating subsidies is divided among the 15 German Länder to be used at their discretion, and in France a 2€ billion per year (currently this is about $2.5 billion) subsidy is divided among the 21 regions to support operations.
The U.S. federal government has annually subsidized Amtrak since its inception. The funding for intercity passenger rail has been constrained due to competing priorities; possibly, funding has also been constrained due to the inability to reach consensus over the federal role in intercity passenger rail, which is demonstrated in the status of Amtrak’s reauthorization. Grants to Amtrak have not been expressly reauthorized since its previous 5-year authorization expired in 2002, despite the number of proposals presented to the Congress. Nonetheless, Amtrak developed a 5-year strategic plan (covering the period of fiscal years 2005 to 2009) that was designed to address its immediate needs. (The plan identified inadequate and uncertain levels of funding as a risk.) In recent years, Amtrak has received over $1 billion in annual operating grants and capital grants through the annual appropriations process. Some other transportation programs have established funding mechanisms that share costs between the federal government and other parties. For example, the Federal-aid Highway Program—a portion of which is subject to the annual appropriations process for budget authority—has a dedicated trust fund, the Highway Account, which is mainly funded by highway user fees, such as taxes on motor fuels, tires, and trucks. Transit projects have access to the Federal Transit Administration’s full-funding grant agreement—a mechanism that requires identifying and committing federal and nonfederal funds to support the multiyear capital needs of construction projects. According to the Federal Transit Administration, dependable levels of funding for the full-funding grant agreements have improved the ability of transit agencies to finance, plan, and execute projects. Without consensus over the federal role in funding intercity passenger rail and competing priorities for federal funds, Amtrak will continue to operate in an uncertain environment—impairing its ability to make strategic and operational decisions, and often deferring capital and infrastructure maintenance.
Amtrak Can Take Actions to Reduce Costs and Increase Efficiency but It Is Not Positioned to Address Key Reform Elements
In general, Amtrak’s Board of Directors and management have the flexibility to make numerous changes in its corporate direction and organizational structure to improve financial performance. However, Amtrak has a history of poor financial and operating performance. As we have previously reported, many of its efforts at internal restructuring over the last decade have largely failed and the company lacks many basic management and reporting practices. More recently, in April 2005, Amtrak proposed a more strategic approach for the company with a broad set of reform initiatives. Amtrak is taking actions within its existing authority to implement these initiatives, although most of the actions currently being taken are operating in nature. While the Amtrak Reform and Accountability Act of 1997 provided Amtrak with greater flexibility to make more significant improvements, constraints limit the benefits that can be achieved from this increased freedom. For example, although Amtrak no longer requires approval by the Secretary of Transportation to make changes to its route structure, route changes that result in elimination of service could trigger expensive labor protection requirements. Regardless of the internal changes Amtrak could make to manage its operations more efficiently, Amtrak, as an operator, is not in a position to address the key elements of reform. Federal leadership is needed to establish national policy goals and stakeholder roles related to these goals, and to identify funding levels needed to support these goals.
Amtrak Has the Authority to Take a Number of Actions to Reduce Costs and Increase Corporate Efficiency
Amtrak’s Board of Directors and management have the authority to make numerous changes and have made changes in its corporate direction and organizational structure. Amtrak is incorporated as a for-profit corporation, but has been the recipient of substantial federal financial assistance since its inception and has historically struggled to earn sufficient revenues and operate efficiently. Without annual federal subsidies for Amtrak’s operating costs, the corporation would not survive as presently configured and operated. Amtrak’s financial condition has never been strong and it has been on the edge of bankruptcy several times. In 2001, Amtrak lost about $1.2 billion and mortgaged a portion of Pennsylvania Station in New York City to generate enough cash to meet its expenses. In July 2002, Amtrak also received a federal loan of $100 million to meet expenses.
Management of Amtrak has also generally been ineffective and the company lacks basic tools for comprehensive planning. For example, some of Amtrak’s internal changes over the last decade, such as establishing strategic business units and modifying Amtrak’s routes, have not met expectations. Instead, Amtrak’s financial condition deteriorated. Additionally, as we reported in February 2004, Amtrak’s ineffective management of a large-scale infrastructure project resulted in the incompletion of many critical elements of the project, increased project costs, and the project goal—a 3 hour trip time between Boston and New York City—was not achieved. Finally, in October 2005, we reported that the corporation lacked many basic management and financial reporting practices. Among other things, we found that much of the financial information Amtrak used for day-to-day management purposes lacked certain relevant information or was of questionable reliability.
Amtrak’s Board of Directors and management have recently taken actions to address these concerns. These actions include appointing a new president and creating a planning and analysis department to develop and manage a company-wide strategic plan. However, impacts on the corporation’s performance remain to be seen. Additionally, in April 2005, Amtrak’s Board of Directors and management proposed a set of broad strategic reform initiatives designed to improve the operational efficiency of the company, transition Amtrak into one of a number of competitors to provide intercity passenger rail service, and change how federal subsidies are distributed for intercity passenger rail. Specifically, changes outlined include reinforcing management controls, organizing planning and reporting by lines of business, and cultivating competition and private commercial activity in passenger rail functions and services.
Amtrak’s proposed initiatives are a step toward a more strategic approach for the corporation and include both reforms Amtrak could pursue internally, such as changes to its maintenance services and facilities, and those that require legislative action, such as the enactment of a federal- state capital matching program for corridor development in partnership with states. However, according to senior Amtrak officials, Amtrak is initially focused on internal reforms that Amtrak believes it has greater control over. Currently, Amtrak is implementing operational changes in 15 areas based on the broader proposed set of strategic reform initiatives. (See app. IV for a list of Amtrak’s operational initiatives and their status.) These efforts are primarily associated with improving business efficiency and reducing costs. For example, Amtrak’s management proposed to redesign some aspects of the sleeper car service offered on long-distance trains, such as reducing the number of sleeper cars and offering new sleeper service products targeted at different markets. This effort is projected to reduce Amtrak’s losses from offering sleeper service by about 46 percent.
Although Amtrak’s recent efforts are expected to result in some savings, these changes alone will not be sufficient to address broader structural issues. According to a July 2006 DOT OIG report, Amtrak’s 15 operational changes have resulted in a $46 million reduction in annual operating losses through May 2006. But the projected incremental operating savings from full implementation of Amtrak’s operational changes over the next 5 or 6 years will not be sufficient to fund needed improvements to the intercity passenger rail system such as addressing capital and maintenance needs, returning the system to a state-of-good repair, and promoting corridor development. In April 2005, Amtrak estimated that the strategic reform initiatives could achieve total operating savings of nearly $550 million by fiscal year 2011. Amtrak said achieving these savings would require a number of legislative actions, such as the enactment of an 80 percent federal capital match for state intercity passenger rail funds, as well as realizing increased revenues from passengers, obtaining additional state operating contributions for corridor trains, and having the federal government cover Amtrak’s legacy debt obligations. Some or all of these could increase federal costs.
Benefits of the Legislative Freedoms Are Limited by Constraints
The Amtrak Reform and Accountability Act of 1997 provided Amtrak with greater flexibility to alter its route network and undertake other cost saving changes to meet the goal of operating self-sufficiency by the end of December 2002, which Amtrak did not achieve. However, the benefits that Amtrak can achieve from these provisions are limited by practical constraints. For example, while the act eliminated the statutory ban on Amtrak contracting out or outsourcing work, except for food and beverage service that could already be contracted out, it made outsourcing a part of the collective bargaining process. Amtrak officials also told us that this provides less flexibility rather than more since it is more difficult to change collective bargaining agreements with unions than for Congress to change a statutory requirement. This could limit the extent to which Amtrak could contract out services, depending on the outcome of negotiations with unions. Amtrak officials told us that little progress has been made on labor negotiations since only three contracts (of the 24 collective bargaining agreements Amtrak maintains with its agreement employees) have been signed and these all technically expired on December 31, 2004. As a result, Amtrak is currently in negotiations with all of its unions and employee councils over collective bargaining agreements.
The benefits of making route changes to better meet the demands of the public may also be limited as a result of labor protection requirements, which are also part of the collective bargaining process. The Amtrak Reform and Accountability Act of 1997 relieved Amtrak from getting approval from the Secretary of Transportation to make changes to its route structure and allowed Amtrak to discontinue routes without having to preserve the “basic system” formerly mandated by Congress, as long as the remaining route structure tied existing and emergent regional rail passenger service and other intermodal passenger service. One Amtrak official told us that while Amtrak is legally allowed to change the route network, decisions are often met with a variety of reactions including resistance by Congress. In addition, if route changes result in the elimination of jobs, Amtrak employees may be entitled to labor protection benefits. As we reported in September 2002, if Amtrak had been liquidated on December 31, 2001, potential Amtrak employee claims for immediate labor protection payments could have been as much as $3.2 billion.
Further, if an employee loses his or her job as a result of a reduction in service on a route or closing of a maintenance shop, then he or she could receive labor protection benefits for up to 5 years.
Finally, several potential constraints exist in gaining benefits from Amtrak adopting a “user pays” principle for the provision of its services. Under the user pay concept, costs to build and maintain rail infrastructure, including along the NEC, would be paid for by the full range of users of the system, including states, commuter rail agencies, freight railroads, and the public. If adopted, a better matching of fees paid to costs incurred by the diverse users of the NEC could provide incentives for both public and private users to make modal choices and transportation options based on true costs. One issue in implementing this approach is Amtrak’s ability to accurately define the true costs of intercity passenger rail services. We discussed examples of this issue in two recent reports. In October 2005, we reported concerns with how Amtrak captured and reported financial information, such as Amtrak’s overreliance on indirect cost allocation methods. In April 2006, we reported that it is difficult to determine Amtrak’s revenues and costs associated with providing services and access to infrastructure to commuter rail agencies, in part due to the limitations of Amtrak’s accounting practices. Since then, Amtrak has made some changes to its reporting and financial systems, but according to Amtrak officials and progress reports, more work is needed. A senior Amtrak official told us that identifying direct route costs may be difficult since Amtrak uses many different systems to capture costs.
Another constraint may be the ability and willingness of users to pay additional fees. For example, we recently reported that the ability and willingness of private rail companies to invest in infrastructure capacity to meet projected future demand for freight rail transportation is uncertain. While some states see a benefit to intercity passenger rail and pay for additional service, two state officials we spoke with opined that a proposal which required states to further subsidize existing intercity passenger rail service would face political opposition at the state level unless a federal capital matching program comparable to other transportation modes is enacted. In addition, commuter rail agencies that use the NEC raised several concerns about FRA’s efforts to establish a fee on them as mandated in Amtrak’s fiscal year 2006 appropriations. Among other concerns, these agencies stated that their usage of the NEC is different from Amtrak’s, which should dictate different levels of payment for use of the same infrastructure.
Amtrak Is Not Positioned to Address the Three Key Reform Elements
Amtrak, as an operator, is not in a position to adopt and ultimately implement key elements to begin reforming intercity passenger rail in the United States. Amtrak’s efforts will not likely change the structure of intercity passenger rail without legislative action. Most of all, Amtrak cannot address the three key elements of reform we observed in other countries: 1) clearly defining national policy goals, 2) clearly defining the various roles and responsibilities of public and private sector entities involved, and 3) establishing a level of funding to devote to these goals.
Amtrak’s role is to provide intercity passenger rail service to the public. Congress sets the national policy and goals for intercity passenger rail, especially in the context of the entire national transportation system. Since 2002, federal policymakers have been struggling with what to do about U.S. intercity passenger rail in general. Policymakers have not adopted the legislative actions in Amtrak’s strategic reform proposal. Additionally, in June 2006, CRS reported that policymakers have not endorsed Amtrak’s strategy of maintaining its current route network while restoring its infrastructure to a state of good repair, nor did they provide Amtrak with the requested funds to meet these goals. CBO also said there has been a lack of consensus about the role intercity passenger rail service should play in the national transportation system and Amtrak’s role in providing such services. While Amtrak’s efforts are a step to improving the corporation’s financial and operating performance, these changes do not address the reform elements necessary to maximize transportation and public benefits of, and the effectiveness of federal expenditures for, intercity passenger rail service. Any fundamental change of intercity passenger rail will involve a number of difficult operational challenges and policy decisions and all of them will require federal leadership.
Addressing Reform Elements for Intercity Passenger Rail Will Require Overcoming Stakeholder and Funding Challenges
There are a number of challenges associated with addressing the key elements of reform for intercity passenger rail. The variety of stakeholders, all with different interests and issues, makes it difficult to reach consensus on any change. Central among federal challenges is determining what the vision and role for intercity passenger rail in the United States should be, the federal role, if any, within this vision, and the reconciliation of the wide diversity of views on how the intercity passenger rail service fits into the national transportation system. Challenges in promoting a more equitable federal–state partnership include the varying ability and willingness of states to participate in funding intercity passenger rail and identifying appropriate policy changes to overcome the disadvantages intercity passenger rail faces relative to the leveraging of federal funds. Currently, states are challenged to leverage their expenditures on such service. However, federal-state cost sharing is common in highway and transit programs where investment is encouraged through matching grants. Other challenges include freight railroad concerns about infrastructure access and capacity, workforce issues, and the role of the private sector. Addressing funding issues will also present challenges. This includes identifying funding sources to achieve national policy goals and developing incentives for state participation. Each of these challenges presents opportunities to increase the benefits of federal and nonfederal expenditures on intercity passenger rail; not addressing them will likely continue the stalemate in moving toward a well-defined role for federal subsidies for intercity passenger rail in the United States.
Variety of Stakeholder Interests and Challenges Makes Reaching Consensus on Change Difficult
One of the most difficult aspects of addressing reform elements for intercity passenger rail will be reaching consensus among stakeholders on the topic of change. Stakeholders include federal and state governments, freight and commuter railroads, the passenger rail workforce, and potential private sector operators. There are a variety of stakeholder interests in intercity passenger rail and, at virtually every level, there are challenges that will need to be overcome before consensus can be reached to change any policies, goals, or stakeholder roles involved with intercity passenger rail.
Federal Issues and Challenges
The federal government’s interest, as laid out in statute, is in seeing that intercity passenger rail service is provided on a national basis. However, the Amtrak Reform and Accountability Act of 1997 removed direct federal involvement in making route decisions, and DOT and FRA have, until recently, largely taken a “hands-off” approach to Amtrak and intercity passenger rail. As we reported in October 2005, FRA officials have told us that, even though FRA has a seat on Amtrak’s Board of Directors, the agency has historically refrained from advocating a particular approach to running Amtrak; neither has it specifically held Amtrak management accountable for meeting particular goals. In addition, an FRA official told us that the agency must be careful about its involvement with management decisions since, legally, Amtrak is a private for-profit corporation. Since fiscal year 2003, Congress has imposed measures to increase the Secretary of Transportation’s responsibility for providing oversight of, and accountability for, the federal funds used for intercity passenger rail service. Among other things, these measures require Amtrak to transmit a business plan to the Secretary of Transportation and Congress and provide monthly reports about this plan. In response to these measures, FRA has entered into grant agreements with Amtrak. Although measures are in place to increase FRA’s oversight of Amtrak’s operations through grant agreements, FRA attributed the lack of resources for its limited and focused approach to Amtrak oversight. These measures address oversight and accountability but do not necessarily address establishing a vision for intercity passenger rail service, and the role of such service, in the national transportation system. DOT commented that FRA’s role has never been to “establish a vision for intercity passenger rail” regardless of resources available.
The challenges of establishing a national policy vision for intercity passenger rail and the federal role, if any, within this vision are illustrated by the wide diversity of intercity passenger rail service proposals introduced in recent years. For example, one recent congressional proposal would largely keep Amtrak intact and instead focus on various reforms related to improving financial management, corporate governance, and the development of metrics and standards for measuring performance and the quality of service. This proposal would, among other things, require Amtrak to develop a capital spending plan for restoring the NEC to a state of good repair, and would allow freight railroads to bid for operating long- distance trains. In contrast, a proposal by the administration would significantly restructure Amtrak. This proposal includes splitting Amtrak into three functionally independent entities: a corporate entity to oversee the restructuring and manage residual responsibilities; a passenger operating company; and an infrastructure management company. It would also, among other things, encourage the creation of an interstate compact made up of northeastern states and the District of Columbia, to operate the NEC. Amtrak itself has recognized the need for change. In April 2005, Amtrak’s management released a proposed set of strategic reform initiatives that, if fully implemented, could substantially change how it is operated. Under this proposal, states would play a larger role in deciding what services to offer, and there would be increased opportunities for competition in providing intercity passenger rail service.
Federal–State Partnership Issues and Challenges
There are also a variety of interests and challenges in promoting a more equitable federal–state partnership that make reaching consensus difficult. One is the number of states that have the interest or willingness to participate in intercity passenger rail. On the one hand, there are a number of states that are willing to participate in subsidizing intercity passenger rail and have made commitments to do so. In fiscal year 2005, 13 states paid about $140 million to subsidize additional service from Amtrak. Amtrak also received about $130 million from 8 states and 3 state agencies for capital improvements on passenger rail corridors and at stations. In addition, a coalition of 27 states—called the States for Passenger Rail— have come together to promote the development, implementation, and expansion of intercity passenger rail services with the involvement and support from state governments. This organization’s policy statement indicates that states have taken, and will continue to take, a lead role in the planning and development of new, expanded and enhanced regional passenger rail corridor services. The states in the organization maintain that these systems cannot be fully programmed and implemented without a federal–state funding partnership similar to existing highway, transit, and aviation programs. On the other hand, there are a number of states that receive the benefits of intercity passenger rail service but do not subsidize such service, and may or may not be willing to do so. This situation reflects the legacy service that existed when Amtrak was created in the early 1970s. For example, as of April 2006, there were 12 Amtrak trains scheduled to operate daily Monday through Friday between New York City and Albany, New York. The state subsidizes only 1 of these trains—the Adirondack. Even on this train the state only subsidizes service north of Albany to Montreal, Canada. New York City to Albany is part of the legacy service that dates to when Amtrak began service in 1971. The extent to which states would be willing to pay for the intercity passenger rail service currently received for free is an open question.
Another federal–state challenge is the leveraging of financial assistance to intercity passenger rail. Recent surface transportation acts have authorized some federal financial assistance for the development of high-speed rail and other passenger rail corridors. In addition, states can finance passenger rail projects through the Federal Highway Administration’s Congestion Mitigation and Air Quality Improvement program when the project will result in demonstrable air quality improvements. However, states are challenged to leverage their expenditures on intercity passenger rail. In general, states work directly with Amtrak to obtain service above the basic service provided. Some states also work directly with Amtrak to finance intercity passenger rail capital improvement projects that benefit their state. An FRA official told us that states could start their own intercity passenger rail service, but doing so would be difficult given the potential cost and lack of statutory access to infrastructure at the incremental cost that Amtrak currently enjoys. Some other transportation programs—such as the interstate highway program and the Federal Transit Administration’s New Starts program for transit systems—share responsibility for planning, design, and funding between the federal government and state and local governments. Federal agencies generally set the design and quality standards for projects and encourage investment through matching grants. State and local governments prepare transportation plans which identify the need for investment, develop a business case for the investment, and contribute a portion of the funding.
Finally, reform initiatives designed to increase state roles in intercity passenger rail will likely face the challenge of finding mechanisms for states to work cooperatively together in the development of routes and corridors that cross state lines. One mechanism is an interstate compact. Interstate compacts for intercity passenger rail were proposed in the Amtrak Reform and Accountability Act of 1997. Interstate compacts are agreements between states that are constitutionally permitted when approved by Congress. Several interstate compacts are currently being used to study the feasibility of, or advocate for, intercity passenger rail service. These include the Midwest Interstate Rail Passenger Compact and the Interstate High Speed Intercity Passenger Rail Compact. Currently, however, there are few passenger rail systems being operated under an interstate compact. State officials have told us that interstate compacts are a very difficult mechanism to use when more than two states are involved. They said that not only do compacts take a substantial amount of time and burden to create, but, in the context of passenger rail, there are practical issues involved—such as deciding what service is provided, how the costs of such service are allocated to participants, and what happens when one or more states do not fulfill their financial obligations to the compact.
There may be other mechanisms available for states to work cooperatively with each other. For example, the Appalachian Regional Commission (ARC) is a federal–state partnership that, in general, was created to promote economic development in Appalachia. Although the current definition of Appalachia includes 13 states, the governance structure is made up of only two co-chairs—one representing the federal government and one representing the collective interests of 13 member states. Each co- chair has one vote on ARC matters. ARC officials told us that because of the governance structure of ARC, virtually all decisions are reached by consensus. In fact, they said that one of the advantages of ARC is that more can be accomplished together than separately. They also cited as a disadvantage the difficulties in reaching decisions.
Freight Railroad Issues and Challenges
Freight railroads play an integral role in intercity passenger rail. Over 95 percent of Amtrak’s route system operates over lines owned by freight railroads. As such, the freight railroads have a keen interest in the volume of passenger rail service provided and the potential impacts of such service on their business. One of the main challenges associated with passenger and freight railroads is infrastructure access and the cost of such access. Since Amtrak’s creation, federal law has generally required freight railroads to give Amtrak trains priority access and charge Amtrak an incremental cost—rather than the full cost—associated with the use of their tracks. These legal rights currently apply only to Amtrak. However, efforts to reform intercity passenger rail service raise questions about the status of Amtrak’s priority access and incremental charge rights—that is, can, or should, these rights be transferred to non-Amtrak operators or will some other arrangement need to be made? Other arrangements could significantly increase both the difficulty and cost of introducing non- Amtrak operators, possibly through competitive bidding for subsidies, to provide intercity passenger rail service.
Commuter rail service offers an example of access negotiations on commercial, rather than incremental, cost terms. As we reported in January 2004, unlike Amtrak, commuter rail agencies do not possess statutory rights of access to freight railroad track. As a result, commuter rail agencies must negotiate with freight railroads to purchase, lease, or pay to access the railroads’ right-of-way. Negotiations for these agreements can last from a few months to several years. Our report noted that when negotiating a lease or access agreement, freight railroads typically want to be compensated for all operating, capital, and other costs associated with hosting commuter and other trains. These costs would include direct costs, such as dispatching trains and maintaining the rights-of-way, and indirect costs, such as the cost of foregone opportunities (e.g., the incremental value of “lost” train slots). Infrastructure access is also difficult from the perspective of a freight railroad company. Since freight service is the companies’ core business, the ability to move freight through the system must be protected. Freight railroad officials with whom we spoke for our earlier report insisted that they must protect their systems’ capacity to handle both today’s freight traffic as well as future traffic projections. Protecting capacity becomes difficult when passenger trains, either intercity or commuter, consume available capacity without some sort of infrastructure enhancement, expansion, or market-based compensation for line capacity used.
In addition to infrastructure access, capacity and capacity-availability issues—that is, the ability of rail lines and infrastructure to handle current and future traffic volumes—are also of concern to freight railroad companies. After years of reducing infrastructure and rationalizing their property, plant, and equipment, freight railroads have recently experienced a substantial growth in traffic—a growth that some project will continue into the future. In January 2006, the CBO reported that total freight carried by all modes of transportation in the United States has been growing. CBO indicated that railroads, in particular, experienced a sharp increase in traffic in the 1990s, with traffic increasing more than 50 percent between 1990 and 2003 (from about 1 trillion ton-miles to about 1.6 trillion ton- miles). This growth is expected to continue. For example, the Department of Energy’s Energy Information Administration has projected that railroad ton-miles will increase 1.7 percent annually between 2004 and 2030, reaching about 2.4 trillion ton-miles in 2030. Other organizations have similarly predicted increases. This growth has acted to limit available capacity on the rail network, at least in some locations. In April 2006 testimony before the U.S. House Committee on Transportation and Infrastructure, Subcommittee on Railroads, the president and chief executive officer of the Association of American Railroads said that the traffic density (i.e., ton-miles per route-mile owned) for Class I railroads had more than doubled from 1990 to 2005 (see fig. 12). He went on to say that the traffic increases had resulted in capacity constraints and service issues at certain junctions and corridors within the rail network. These constraints and service issues will all affect the ability of both passenger and freight rail carriers to provide the quality and frequency of service the carriers may be asked to provide.
Any reform that changes the type and frequency of intercity passenger rail service will need to address system infrastructure access and capacity issues. In doing so, any federal policy responses regarding freight infrastructure should consider several things in this regard: (1) subsidies can distort the performance of markets; (2) the federal fiscal environment is constrained; (3) policy responses should occur within the context of a National Freight Policy that reflects system-performance-based goals and a framework for intergovernmental and public-private cooperation; and (4) federal involvement should occur where demonstrable wide-ranging public benefits—and mechanisms to appropriately allocate the cost of financing these benefits—exist between the public and private sectors. In addition, federal involvement should focus on benefits that are more national than local in scope.
Freight railroads have other concerns as well. These include concerns about liability issues—that is, adequate protection against the risks of accidents involving passenger trains using their lines. In general, freight railroads seek full indemnification against any risks that might exist because of passenger rail service. See appendix V for a more complete discussion of infrastructure access, capacity, and liability issues.
Workforce Issues and Challenges Finally, efforts to reform intercity passenger rail require consideration of workforce issues. That is, having enough people with the requisite knowledge and skills to provide the amount and type of service called for in a reformed system. There are several issues that need to be considered in this regard, including the following: Availability of a qualified labor pool. The reform of intercity passenger rail resulting in new services or operators will require that there be sufficient staff to provide service, conduct maintenance, and perform other duties related to running passenger railroads. In the short term, obtaining sufficient staff could be a challenge. As we reported in April 2006 (in the context of commuter railroad services), if Amtrak were to abruptly cease to provide service, some commuter railroad agencies would be able to replace Amtrak employees dedicated to their particular commuter rail service with employees from another railroad. However, there were a number of agencies that said they would not be able to quickly replace current Amtrak employees because of workforce limitations, such as the availability of a qualified labor pool.
Workforce flexibility and productivity. Reform of intercity passenger rail resulting in new services or operators will also require consideration of workforce flexibility and the extent that labor productivity can be increased. One key to providing cost effective intercity passenger rail service is to have high levels of labor productivity. Collective bargaining agreements and their related work rules specify the work that employees are expected to do and the amount of compensation they will receive for performing this work. Although such agreements can and do include changes designed to increase employee productivity by increasing or broadening the types of tasks that employees can perform, such agreements can also affect productivity by limiting the amount or type of work that employees can perform.
Potential labor protection payments. If, as the result of a reform of intercity passenger rail, Amtrak employees lose their jobs, there could be liability for labor protection payments. In general, labor protection payments are made to employees who lose their jobs as a result of a discontinuation of service. The Amtrak Reform and Accountability Act of 1997 made a number of changes to labor protection, including eliminating the statutory right to such protection; this made labor protection subject to collective bargaining, and required Amtrak to negotiate new labor protection arrangements with its employees. Amtrak labor-relations officials observed that bringing labor protection under collective bargaining (and therefore subject to the constraints of the Railway Labor Act), as opposed to being statutorily mandated, has actually limited Amtrak’s flexibility to respond to marketplace changes. They observed that their flexibility was reduced because it is generally easier to change a statutory requirement than it is to change a collective bargaining agreement. With regard to the potential magnitude of labor protection payments, in September 2002 we reported that Amtrak would have had potential unsecured labor protection claims of about $3.2 billion had it been liquidated on December 31, 2001. Although any restructuring might not involve a bankruptcy, potential labor protection payments could still be substantial if employees lose their jobs.
Workforce challenges also include determining how a potentially reformed intercity passenger rail system fits into the current scheme of railroad- specific labor–management relations, retirement, and injury-compensation systems. Amtrak is currently subject to, among other laws, the Railway Labor Act, the Railroad Retirement Act of 1974, and the Federal Employers’ Liability Act, which govern labor–management relations, retirement, and injury compensation, respectively, in the railroad industry. Amtrak’s collective bargaining agreements generally do not expire and are subject to requirements designed to reduce labor strikes; Amtrak participates in, and provides financial contributions to, the railroad retirement-system (approximately $400 million annually); and Amtrak and its employees are subject to a tort-based injury compensation system under the Federal Employers’ Liability Act. We have reported that these legal requirements raise railroad costs compared to nonrailroad industries. Amtrak’s April 2005 Strategic Reform Initiatives also suggested that meaningful reform of intercity passenger rail will require changing how some of these requirements apply to passenger rail. On the other hand, rail labor has argued for the importance of these laws in protecting employee rights, providing critical retirement benefits, and adequately compensating employees injured on the job.
State officials with whom we spoke expressed general concerns about the potential impact of Amtrak’s labor agreements and obligations on the future of passenger rail. Some state officials viewed Amtrak’s labor agreements as a significant barrier to restructuring. One official stated that serious labor reform is needed for intercity passenger rail reform to succeed. State officials also questioned whether alternative operators would be bound by Amtrak’s labor agreements and thought that it was unlikely another operator could provide significant improvements in cost savings if they were. Another official stated that Amtrak’s labor agreements would put Amtrak at a considerable disadvantage over alternative operators in a competitive market if the alternative operators were not bound by the same agreements.
Rail labor union officials with whom we spoke expressed several concerns about the effects any potential reform of intercity passenger rail might have on their members. First and foremost, union officials told us of their concern about the history of Amtrak’s successive reforms and said these reforms had a detrimental effect on union employees. In their view, past Amtrak reforms have brought fewer union jobs and the loss of health and safety programs with no real improvement in Amtrak’s financial performance or service to the public. Union officials also told us that any reform should attempt to make Amtrak, among other things, find new leadership dedicated to working with employees and growing the business, fix basic business practices, and improve customer service. Finally, union officials emphasized that rail labor is the monopoly workforce for passenger rail. Any reforms of intercity passenger rail would still require any operator—Amtrak, alternative operators, or a successor to Amtrak—to work through the unions to maintain a labor force. Rail union officials noted the success of the Massachusetts Bay Commuter Railroad, which provides commuter rail service in and around Boston, Massachusetts. In this instance, a private operator took over operations from Amtrak and was able to maintain existing work rules (collective bargaining agreement provisions that specify tasks employees can perform) while offering a 24- percent increase in wages.
See appendix VI for more information about workforce issues.
Private Sector Issues and Challenges
Private sector issues and challenges primarily focus on what role, if any, the private sector will play in any reformed intercity passenger rail system. Currently, there is little private sector involvement beyond the infrastructure provided by freight railroads to operate intercity passenger rail service. Amtrak is the sole operator of intercity passenger rail service, and, although organized as a private, for-profit corporation, is heavily dependent on federal subsidies to remain solvent. In general, there are no other private sector operators outside of leisure travel providers such as GrandLuxe Rail Journeys (previously American Orient Express). This contrasts with the pre-1971 situation when, before Amtrak began service, freight railroads provided all intercity passenger rail service.
There are suggestions that the private sector could play a larger role, including being contract operators under a system in which competition and bidding is used to select service providers. For example, Amtrak’s April 2005 Strategic Reform Initiatives suggests that there are opportunities for increased competition, and part of Amtrak’s vision for itself under these initiatives is to evolve into one of a number of competitors for contracts to provide passenger rail service. However, there are a number of issues associated with increasing the private sector role in intercity passenger rail. These issues include the following: Availability of potential private sector operators. Since Amtrak is the sole provider of intercity passenger rail service, there has been little opportunity to test the market for potential new operators. However, there are indications that potential operators may exist and may be willing to participate in any opportunities that might arise, especially corridor service. For example, an official of one firm with worldwide rail and transportation operations said he believes there is a U.S. market for rail service in corridors—especially corridors with city-pairs 100 to 300 miles apart. An official from another firm with extensive passenger rail operations in the U.K. said his firm is very much interested in entering the U.S. passenger rail market, especially in operating the NEC. In his opinion, the NEC is a very viable corridor and could be wholly or partially privatized.
Costs of private sector operators and the need for public subsidies. One of the key questions associated with competition and the use of private sector operators is how costs will change, and whether public subsidies can be reduced or eliminated. Again, since the U.S. market has not been tested, it is difficult to know what the specific cost or subsidy impacts from competition might be. On the one hand, European experience has shown that franchising and competitive bidding has not necessarily reduced the need for government subsidies. In fact, in 2 of the European countries we visited (Germany and the U.K.) there is substantial government financial involvement in competitively bid systems. On the other hand, in the U.K., some franchise operators have recently been financially successful enough to allow them to pay the government a premium for excess profits they have made. Aside from government financial assistance, foreign officials also pointed to other things—such as increases in ridership and quality of service—as the benefits of a more competitive system. For example, data from the Association of Train Operating Companies indicate that passenger rail ridership in the U.K. increased about 38 percent over roughly the last decade (from about 745 million trips to just over 1 billion trips annually). The largest growth was in the long-distance market. Similarly, government data show that the number of complaints per 100,000 passenger trips in the U.K. generally decreased from about 120 in April 1999 to 70 in April 2005.
Potential requirements to encourage private sector participation.
There may be certain requirements for encouraging private sector participation in providing intercity passenger rail service. These requirements may include maintaining Amtrak’s current statutory rights of infrastructure access. An official from one firm with worldwide transportation operations with whom we spoke emphasized that access to tracks, stations, rights-of-way, and maintenance facilities would be key for his firm and other operators to be successful participants in the intercity passenger rail market. This firm would look to states or Amtrak to provide these access arrangements prior to their taking over operations. Officials from all 5 states we talked to agreed there would be a number of barriers to competition and that access issues would be a critical issue. Flexibility in allowing firms to branch into nonrail operations may also be important. In Japan, passenger rail officials told us that their firms not only provide passenger rail service but are also involved in other activities such as real estate development, retail stores, and light manufacturing.
Funding Issues also Present Challenges
There are also a number of challenges associated with funding for intercity passenger rail service. One is identifying funding sources to meet long-term funding needs. Being in a capital intensive business, intercity passenger rail has substantial ongoing and long-term funding needs. For example, Amtrak is currently receiving over $1 billion annually in federal subsidies and it has an estimated $6 billion in deferred capital backlog of infrastructure improvements, including about $4 billion on the NEC. In March 2006, the DOT OIG reported that, for fiscal year 2007, Amtrak would need about $1.4 billion just to maintain Amtrak and keep its system from falling into further disrepair. This would not include amounts to address the backlog of capital maintenance, invest in short-distance corridors, or renew equipment. This official went on to say that none of the corridors around the country, including the NEC, can provide the type of mobility needed without significant capital investment. This limitation applies to the development of new corridors as well, including high-speed rail corridors. As we testified in April 2003, the total cost to develop high-speed rail corridors is unknown because these types of corridors are in various stages of planning. However, the costs could be substantial. The American Association of State Highway and Transportation Officials—a trade association of state and local transportation officials—has reported that about $60 billion would be required to develop these corridors, including Amtrak’s NEC, over a 20-year period.
Funding challenges also include finding funding sources to meet whatever national intercity passenger rail policy goals are established. Currently, virtually all federal funding for intercity passenger rail comes from general appropriations; therefore, intercity passenger rail must compete with a myriad of other needs to obtain funding. This practice allows Congress to set spending priorities. As discussed earlier, the existence of funding sources to meet national policy goals was a component in many foreign passenger rail reform efforts. Even in Canada, where there was no major restructuring, the government was willing to commit, albeit not on a formal basis, to identifying funding amounts so as to provide a stable level of annual operating funding for its intercity passenger rail provider, VIA Rail. This commitment has continued for about 8 years and through several changes in government. According to Transport Canada officials, this commitment allowed VIA Rail management some stability in planning. They also said that, while there was no explicit rationale for the amounts provided, the objective was clearly to “set VIA’s feet to the fire” by not increasing the subsidy. However, reducing the level of support would make it difficult to preserve services. Finding funding sources to meet national policy goals for intercity passenger rail will not be easy, especially as the nation faces increasing fiscal constraints at the federal level. As discussed earlier in this report, the federal government faces significant fiscal challenges in future years and will need to reexamine its role and financial support for virtually all federal programs, including intercity passenger rail. The challenge will be in finding a funding source(s) that can meet long-term needs while retaining the accountability of an annual appropriations process.
Funding challenges include aligning the decision making for, and the benefits of, intercity passenger rail service with the responsibility for paying for such service. Currently, there is a basic misalignment in these elements. Historically, states have not been required to subsidize basic intercity passenger rail service. States may subsidize additional service that would benefit residents. As discussed earlier, in fiscal year 2005, 13 states paid about $140 million to subsidize additional service from Amtrak. However, there were over 30 states that did not subsidize intercity passenger rail service even though such service was provided in their state. In general, Amtrak is the focal point for decision making about what intercity passenger rail service is provided and where. Under this structure, some states benefit from having intercity passenger rail service but play little role in deciding what service is provided or in subsidizing the services received. Some states are aware of the benefits of this structure— for example, an official from one state we contacted told us that Amtrak is “a great deal” for the state because the state pays nothing for service, even though there are numerous Amtrak trains that operate daily within the state. This official said his state would like to see additional service, but the state has little voice in the matter because the state does not pay. On the other hand, an official with another state said his state believes it is paying an inequitable amount for service compared to other states. As we reported in April 2003, the willingness and ability of states to provide and maintain financial support for intercity passenger rail is unknown. This willingness and ability is a challenge that will need to be considered in aligning the decision making and benefits of intercity passenger rail with payment for such benefits.
Finally, funding challenges will involve developing incentives to ensure participation and cost sharing by states and other stakeholders. Currently, there are few means for cost sharing of federal and nonfederal expenditures on intercity passenger rail. The current funding structure provides appropriations for both federal operating and capital improvement funds directly to Amtrak by way of grant agreements. These grant agreements specify what federal funds are to be used for but do not require Amtrak or others to contribute matching funds, either for operating or capital purposes. Some other federal surface transportation programs require matching contributions to create incentives and leverage federal funds. For example, the Federal-aid Highway program generally limits the federal financial share of the cost of highway projects (generally 80 percent of costs) and requires states or others to contribute matching funds for the remaining cost of such projects. Similarly, federal statute limits the maximum federal share for some mass transit projects and requires project sponsors to contribute matching funds. In fact, one of the criteria the Federal Transit Administration considers in selecting new transit projects to finance under its New Starts program is the amount of local financial commitment. The absence of similar cost sharing mechanisms makes it difficult for intercity passenger rail projects to compete for federal or state dollars.
The equitable and sustainable response to funding challenges is more complex than providing some “comparable” funding for intercity passenger rail to that provided for other transport modes. First, while advocates for increased federal support for passenger rail often cite the billions of dollars provided to highways and airports, in fact these funds are derived from explicit taxes or user fees. Second, in spite of the historical user-based funding of these modes, we have recently reported that commitments made are no longer sustainable; there is an urgent need for identifying new, more sustainable, and adequate funding to support the defined federal role. Finally, the modal comparisons of the magnitude of federal funding are most appropriately grounded in the magnitude of current and potential public benefits. As such, the order of magnitude of public funds to support intercity passenger rail would appropriately be grounded in the role intercity passenger rail does (or could) play in national mobility, relative to the dominance of highway and air travel for medium- and long-distance travel and the public benefits that would result. Any consideration of dedicated funding for intercity passenger rail also needs to account for the potential downsides of such funding. In May 2006, we reported that, despite the advantages of dedicated funding, there are risks of revenue volatility and loss of budgetary flexibility. That is, there is a risk that revenues may fluctuate and not meet funding expectations; and, that setting government funds aside for a specific use may affect the funding available for other spending priorities.
Not Addressing Challenges Will Hinder Opportunities to Increase the Benefits of Federal and Nonfederal Intercity Passenger Rail Expenditures
Not addressing the challenges discussed earlier may very well hinder opportunities to increase the benefits of both federal and nonfederal expenditures on intercity passenger rail. Amtrak has efforts under way to analyze and implement various changes to its operations to reduce costs, increase efficiency, and move states closer to paying for the services they receive. Although these efforts are a step in the right direction, they are expected to have only marginal impacts on the financial performance of intercity passenger rail service. These efforts will not, and should not be expected to, address some of the more fundamental reform elements (e.g., clearly defining both a national policy and stakeholder roles for intercity passenger rail service, and finding funding to support national policy goals) associated with increasing public benefits provided by intercity passenger rail service. Amtrak itself has said that its existence is not a substitute for a national policy. The incremental changes being taken by Amtrak do not necessarily go to the root of the challenges that policymakers need to address to bring about increased public benefits of any federal expenditure on intercity passenger rail service.
Not addressing the challenges makes it likely that a well-defined role for federal subsidies for intercity passenger rail in the United States will also remain elusive. As CRS reported in June 2006, Congress has essentially reached a stalemate with respect to Amtrak and intercity passenger rail. This stalemate was illustrated by the fact that both the 107th and 108th Congresses were unable to reauthorize funding for Amtrak or reach consensus on what kind of passenger rail system it would be willing to fund. This stalemate has largely continued in the 109th Congress. As discussed earlier, part of this stalemate has resulted from the wide diversity of views and opinions on how the intercity passenger rail system should be structured, what role the federal government, states, and others should play in the system, and required funding levels. All of these speak to the fundamental challenges described above.
Finally, addressing challenges has been integral to reform efforts elsewhere in the world. Although passenger rail reform efforts worldwide are still largely evolving and continue to face challenges, addressing such challenges has been part of moving forward. For example, in the early 2000s, the U.K. realized it faced problems with insufficient infrastructure investment and rising costs of train operators. In response, a new structure was developed that changed the infrastructure manager and the governance structure of this manager, and significantly increased government involvement in specifying the services to be provided by train operating franchises. The U.K. has also established a process that will develop expected national outputs for its passenger rail system in 2007, develop a cost estimate for these outputs, and ensure that adequate funds are available to support these outputs. Accompanying this output document will be a broader and longer-term strategy document looking ahead to about 2035. Similarly, to address the costs of intercity passenger rail service and growing federal budget pressures, Canada initially considerably reduced VIA Rail’s annual subsidy from 1992 to 1998 from $344 million (Canadian) to $171 million (Canadian), then imposed informal caps on VIA Rail’s operating subsidy. Along with the caps came informal funding commitments designed to facilitate management stability in planning. The funding also came with incentives by allowing VIA Rail to finance capital improvements or meet operating shortfalls by retaining any annual operating subsidy amounts not used. Further, Japan addressed funding challenges associated with financially weak passenger rail systems by establishing a business stabilization fund that is expected to provide sufficient income to continue operations without using an annual federal subsidy. Japanese rail officials told us that the business stabilization fund has allowed smaller railroads to operate more independently of government interference.
Options for the Future of Intercity Passenger Rail Will Determine the Level of Federal Involvement
As the federal government is the primary provider of funds, oversight, and direction for intercity passenger rail service, federal policy makers should take the lead in deciding what the federal government’s role in intercity passenger rail service should be and what changes, if any, need to be made to its goals, structure, and funding. Using our previous work, the work of other government agencies, and our review of other selected countries, we defined four basic options that represent the potential range of options for reforming intercity passenger rail service in the United States. They are maintaining the status quo, introducing incremental changes within the existing structure, discontinuing federal support, and restructuring the entire intercity passenger rail system. This section discusses each option separately, although some combination of these options could also be implemented. All four options for the future of intercity passenger rail present challenges that could impede both their selection and their effectiveness once chosen. Of the four options, however, restructuring presents the opportunity to substantially improve the intercity passenger rail system. This option would allow Congress and policymakers to establish intercity passenger rail’s goals, define the roles of stakeholders, and develop funding mechanisms that provide performance and accountability for intercity passenger rail expenditures. Any substantial reorganization of intercity passenger rail will be difficult and can be expected to occur over a long period of time.
In the sections that follow, we (1) lay out the framework for examining the options, (2) describe each option in more detail, and (3) offer observations on the advantages, disadvantages, and challenges associated with each option.
Fundamental Reexamination Criteria and Key Components of Decision-Making Framework Could Help Guide Consideration of Options for Future Federal Role in Intercity Passenger Rail
It is important for federal policy makers to determine whether or not the federal government should be involved in intercity passenger rail and, if so, how federal participation can be both cost-effective and sustainable, particularly in light of the federal government’s long-term structural fiscal imbalance. In our report on 21st century challenges facing the federal government, we defined a set of fundamental reexamination criteria that are useful for evaluating the federal role in any government program, policy, function or activity. The criteria are designed to address the legislative basis for the program, its purpose and continued relevance, its effectiveness in achieving goals and outcomes, its efficiency and targeting, its affordability, its sustainability, and its management. These fundamental criteria can be used to inform and evaluate the continued federal involvement in intercity passenger rail service (see table 4 below for an example of how these criteria may be applied).
If policy makers determine that there is a clear federal role in subsidization of intercity passenger rail service, the implementation of that role should have several essential elements. From our past work on federal investments in transportation, and our analysis of foreign efforts on intercity passenger rail reform, we have defined a framework that can guide the implementation of any of the basic options for the future of intercity passenger rail. This framework includes three components: creation of solid goals, establishment of clear stakeholders’ roles, and the provision of sustainable funding. This framework has three components (see table 5).
All four basic options we identified would also benefit from a process for evaluating performance periodically to determine if the anticipated benefits are being realized. Evaluations also provide a means to periodically reexamine established goals, stakeholder roles and funding approaches, and provide a basis to modify them, as necessary. Leading private and public organizations we have studied in the past, such as General Electric and the state of Washington, have stressed the importance of developing performance measures and then linking investment decisions and their expected outcomes to overall strategic goals and objectives.While federal funding is currently a major source of financial support for intercity passenger rail service in the United States, currently there are no requirements for a periodic, regular evaluation of the use of federal funds (outside of annual appropriations legislation and yearly FRA grant reviews).
Each of the four options we identified has different implications for the three elements of our framework—goals, roles, and funding. (See fig. 13 for an overview.) For example, the federal role changes from managing the different aspects of a federal exit from intercity passenger rail service in the discontinuance option to one where it provides strategic direction and targeted funding to increase the benefits of intercity passenger rail service in the restructuring option.
First Option: Keep Existing Structure and Funding of Intercity Passenger Rail
This option would continue the existing structure and about the same level of federal funding for intercity passenger rail service. Under this option, the federal government would continue to ensure that a national intercity passenger rail system exists. However, the existing inefficiencies, uneven service levels, and limited capital investment would also continue.
Establish Goals to Maintain Current Structure
The goal of this option would be to preserve and maintain the current intercity passenger rail structure and federal funding levels. This option would also maintain the current route structure and levels of capital investment. The federal mandate to have a national route structure connecting intercity corridors would continue to influence the route structure of the intercity passenger rail system. With no increased federal direction to change Amtrak, intercity passenger rail operations would continue without any major structural changes or increased federal expenditure.
Define the Federal Role within the Current Structure
The federal role under this option would be to continue to support the current structure of intercity passenger rail. The federal requirement to run a national system would remain and Amtrak’s route structure and management of the NEC would continue. The current stakeholder roles of the federal government, state and local governments, freight railroads, and commuter rail agencies would also remain the same. This option would also retain the current relationships between Amtrak and the states and commuter rail agencies, which in some cases are uneven. For example, extensive service provided by Amtrak for some city pairs allows some states to benefit from basic or “free” intercity corridor services from Amtrak, while other states pay Amtrak to run corridor services that were not part of Amtrak’s original service structure. Likewise, some commuter rail agencies would continue to pay lower access fees than other commuter rail agencies for using Amtrak-owned infrastructure. These access fee differences, the result of a 1982 Interstate Commerce Commission ruling, are depicted in figure 14.
Federal funding to support Amtrak’s operations and capital expenditures would continue at current levels (between $1.25 billion and $1.5 billion per year) under this option. Although a small portion of the overall federal transportation budget, this level of expenditure could maintain Amtrak’s current operations and level of capital investment in the short term. However, the longer this level of expenditure continues without any other changes in Amtrak’s route structure or expenditures, the less likely that Amtrak will be able to cover any losses from extended operational difficulties (such as the Acela brake issue in April 2005 or the loss of electrical power on the NEC in June 2006), or be able to start improving the condition of its core asset, the NEC.
Second Option: Incremental Change within Existing Intercity Passenger Rail Structure
Federal policy makers could determine that the current level of federal involvement in, and funding of, intercity passenger rail is generally adequate and appropriate, as in the first option. Under this second option, however, federal policy makers could introduce incentives for incremental improved operational and financial performance and accountability within the current intercity passenger rail structure, such as financial, accounting, or operational improvements. These incremental improvements could come from federal policymakers or Amtrak’s management. The aim of this option would be to make some positive financial and operational improvements without substantially changing Amtrak’s financial situation or the current structure of intercity passenger rail in the national transportation system.
Establish Goals to Improve Performance within Existing Structure
Under this option, the goal of federal involvement could be defined as continuing to support the current intercity passenger rail structure while incrementally improving its performance. This goal would be achievable within the current system and funding structure and would focus on incremental operational and financial improvements. For example, provisions in Amtrak’s fiscal year 2006 appropriations legislation specify that Amtrak must show savings from operational reforms or federal funds could not be used to cover losses from sleeper or food and beverage services.
Another improvement federal policy makers could consider is making Amtrak subject to basic requirements that are consistent with either federal-entity or public-company financial reporting and accountability requirements. Many of the basic accountability practices and requirements of federal entities or public companies would improve Amtrak’s accountability and transparency to Congress, the public, and key stakeholders; and could be implemented while streamlining current practices. An integral step in this process would be to first evaluate Amtrak’s current practices and requirements in comparison with those of federal entities and public companies and use the evaluation as the basis for a plan to move forward.
Currently, Amtrak is not subject to many of the basic accountability requirements of either federal entities or public companies due to its status as a government-established private corporation. However, the current financial reporting and accountability requirements specific to Amtrak require it to submit annual audited financial statements and an operations report to Congress. Amtrak is also subject to additional reporting requirements as a result of its current funding structure, where annual grant agreements for operating and capital expenses are established and a prior loan agreement remains in effect. The monthly performance report— an extensive report containing financial results, route performance, workforce statistics, and performance indicators—is one of the various daily, monthly, and annual reports that Amtrak is required to provide under these agreements. In our October 2005 report on Amtrak’s management and performance, we noted that certain relevant information was not included in monthly performance reports and the information in the monthly performance reports was of questionable reliability. We also noted in our October 2005 report that Amtrak had made improvements in its financial information, and we recommended including relevant information and increasing the reliability of the information in the monthly performance report, as well as preparing an action plan to put certain financial management and reporting mechanisms in place.
Although financial reporting requirements of federal entities vary somewhat, most federal entities are required to issue annual performance and accountability reports (PAR). These PARs contain audited financial statements; management’s discussion and analysis of the current year in comparison to the prior year; an analysis of the agency’s overall financial position, the results of its operations, and a discussion of key financial related measures; and management's assurance statement on the effectiveness of internal control, including a report on identified material weaknesses and corrective actions. OMB, which oversees the financial reporting of federal entities, reviews the PARs submitted by agencies. In addition, agency Inspectors General report semi-annually on their assessments of the agencies’ most serious management and performance challenges.
Public companies, in addition to annual reports, are required to (1) provide, with their annual financial statements (management’s discussion and analysis), information relevant to an assessment of financial condition and the results of operations; (2) issue quarterly financial statements that are reviewed by external auditors; (3) have the chief executive officer and chief financial officer certify that the financial statements do not contain any untrue statements; and (4) have management assess and report on the effectiveness of internal controls over financial reporting. Independent audit committees provide oversight of public companies' financial reporting, internal control, and the audit process. The Securities and Exchange Commission oversees accountability at public companies through reviewing the financial reports and other filings of public companies. (See app. VII for a more detailed discussion of financial accountability standards and oversight that could be applied to Amtrak.)
Define the Federal Role within the Current Structure
As this option would not represent a dramatic shift in the current intercity passenger rail structure, a clear definition of roles may not occur. The current roles for states, local governments, Amtrak, freight railroads, and commuter railroads, would stay the same. As in the first option, this option would perpetuate Amtrak’s current service structure that provides more basic intercity service between some city pairs than others. It would also perpetuate its current relationship with commuter rail agencies on the NEC.
Determine the Appropriate Federal Funding Mechanisms to Improve Performance
One approach would be to reach an agreement among key legislative and executive branch decision makers on a multiyear funding level for federal operating of subsidies for intercity passenger rail service. Such a multiyear agreement was successful in Canada when VIA Rail used the imposition of a cap on its operating subsidies from the Canadian government to reduce its operating costs. Although the spending cap was originally intended to save the Canadian government money during a time of high fiscal deficits, VIA Rail used its imposition to increase its emphasis on internal cost control by reducing its labor costs for managers by 50 percent and its equipment maintenance costs by 65 percent. The operating funds are planned for over 10 years, giving VIA Rail the stability to plan its operational expenditures over that time. While the funds are not adjusted for inflation, VIA Rail is allowed to retain any amount of its operating subsidy it does not use from year to year to save for capital improvement projects or other needs.
While the funding approach could take several forms, federal support under this option would likely not rise substantially, as the goal of the option is to make incremental improvements without substantially changing the federal commitment. While some savings could result from incremental reforms, it is likely that, as with the first option, Amtrak would remain unable to cover any losses from extended operational difficulties or to start improving the condition of the NEC.
Third Option: Discontinue Federal Role in Intercity Passenger Rail
Under this option, the federal government would end its financial support of the intercity passenger rail system. This would shift responsibility for all intercity passenger rail service and federally owned rail infrastructure in the Northeast to state and local governments and other stakeholders. While this option could ultimately reduce federal expenditures by eliminating operating and capital funds for Amtrak, according to CBO, discontinuing federal support for intercity passenger rail could also force a liquidation of Amtrak. Consequently, federal funds could be needed in the immediate and long terms to cover implementation costs of Amtrak liquidation, including labor protection payments and the disposition of Amtrak’s assets. Also, although this option could create opportunities for states to contract for intercity passenger rail service from other operators, many states may not be able or willing to fund existing intercity passenger rail service with state transportation funds without access to federal capital matching funds. Any federal exit strategy and transition plan would also need to be comprehensive and detailed.
Establish Goals that Discontinue the Federal Role
Under this option, federal policy makers would determine that there is no federal role in the support of intercity passenger rail service. A goal of successfully implementing this option could be an orderly withdrawal of federal support and involvement from long distance and corridor intercity passenger rail service. The federal government would create an exit strategy that would enact this goal, in part by creating a detailed and comprehensive transition plan that would address several important issues resulting from federal withdrawal of support. One of these issues is the disposal of the federal interest in Amtrak and in Amtrak owned portions of the NEC. The NEC is the busiest rail corridor in the United States, with over 1,800 intercity passenger, commuter, and freight trains using its tracks per day. Amtrak owns a substantial portion of the NEC, including portions over which several commuter rail agencies and freight railroads operate. Amtrak operates trains, controls the movement of train traffic over the NEC, and maintains most of the NEC.
One example of how to handle the NEC under this option could be similar to how the Mexican government sold franchise agreements for different segments of its freight rail network. Following privatization efforts in Argentina and Brazil, the Mexican government, between 1996 and 2000, sold nine different 50-year franchises (each with a 50-year renewal option) to private bidders to operate freight rail service. According to the World Bank, considerable care was taken by the Mexican government when creating the franchises to preserve competition and avoid cross-holding and cross-subsidization between the bidders and eventual franchise operators. Since privatization, freight traffic has grown and substantial investments in the rail infrastructure have been made by the private operators.
As we pointed out in our April 2006 report on Amtrak and commuter rail issues, access to Amtrak’s skilled labor and its infrastructure are two critical issues to commuter railroads—especially to those railroads that operate over the NEC. Some commuter rail agencies could not continue to fully operate service—or would cease service altogether—without access to Amtrak’s skilled labor and infrastructure. Any transition plan would also need to include, among other things, strategies for addressing the challenges identified earlier in this report (e.g., federal–state partnerships, and infrastructure access and capacity), the financial viability of Amtrak, and concerns of freight railroads and others about the viability of the railroad retirement system.
Define the Appropriate Stakeholder Roles
The heart of any federal exit strategy and transition plan would be to define the appropriate role for freight and commuter railroads, Amtrak, and any new owner or manager of the NEC in relation to any continued intercity passenger rail service. Since following this option would involve a major shift in national transportation policy, the federal exit strategy and transition plan would need to clearly define the roles of stakeholders in the new intercity passenger rail structure in the United States. The federal role would be discontinued and responsibility for any continued intercity passenger rail service could be transferred to states (either to individual states or to groups), local governments, or the private sector. Amtrak, as a private corporation, could potentially continue as a provider of service; other private transportation companies could also compete for subsidies to provide service on current or new routes sponsored by the states. However, many states may choose not to invest their scarce transportation funds in a transportation mode for which there are no federal capital matching funds—especially considering passenger rail’s capital costs. For example, two state transportation officials said their states would be willing to consider taking over operational responsibility for corridor Amtrak service in their states, but only if the federal government would match state capital funds at an 80-percent to 20-percent rate, similar to highway and airport expenditures.
The financial incentive for private transportation companies to continue or start any intercity passenger rail service would be reduced, or may not exist at all, without federal subsidies for either operations or capital projects. For example, officials from one private transportation company with whom we spoke stated that virtually every intercity passenger route would require public subsidies. However, according to the official, if competition for intercity passenger rail service were introduced, it could motivate private transportation companies to reduce their costs. While probably not enough to eliminate the public subsidy, competition could lead to lower overall costs.
If states did want to continue intercity passenger rail service (especially across state borders) without direct federal involvement, different intergovernmental structures could be adopted. One structure could be interstate compacts, under which a group of states can work together to achieve a common regional goal or provide a regional service without direct federal involvement. An example is the Washington, D.C., Metropolitan Area Transit Authority (WMATA). WMATA is an agency created by an interstate compact (although the federal government is also a signatory to the compact) that provides bus and rail transit service in Virginia, Maryland, and Washington, D.C. WMATA operations are funded by fare and non-fare revenue and contributions from local governments, the two states and Washington, D.C. Capital projects are funded by these states and Washington, D.C., and are matched by the federal government.
Determine Funding Level for Federal Exit Strategy
While the federal government could eventually save the amount of Amtrak’s annual capital and operating subsidy if it decided not to support intercity passenger rail service, this option could have substantial immediate and long-term costs to the federal government, especially if Amtrak were liquidated as a result of withdrawal of federal support. In our 2002 report on potential issues associated with an Amtrak liquidation, we identified $44 billion in total claims against Amtrak’s estate—including $3.2 billion for potential payments Amtrak would owe its terminated employees (if Amtrak had been liquidated on December 31, 2001). Payments to the railroad retirement system could be as high as $400 million annually if former Amtrak employees were not reemployed in the railroad industry. In addition, currently, Amtrak has about $3.5 billion in long-term debt and capital lease obligations that could be unfunded in an Amtrak liquidation. The federal government may also decide to fund Amtrak’s other liabilities as a last resort if the sale of Amtrak assets does not cover them. In addition, as we found in 2002, the market value of Amtrak’s most valuable asset, its portion of the NEC, has not been tested. The corridor clearly has substantial value and some consideration could be given to a long-term lease to a private operator. However, the railroad is subject to numerous easements and has, as of our October 2005 report, over $3.8 billion of deferred capital maintenance that any future owner or operator would need to address for continued safe, reliable operations.
Fourth Option: Restructure Intercity Passenger Rail Service
Substantial restructuring of intercity passenger rail service could take many different forms. However, the core challenge of this approach is that critical decisions would have to be made with all stakeholders about what goals the restructured intercity passenger rail system should try to meet, what roles the various stakeholders should play, and what federal funding sources and mechanisms would be available to operate and maintain the restructured system while maximizing cost sharing by all who benefit from intercity passenger rail. Some examples of ways that substantial restructuring could be implemented could include the following: continuing corridor intercity routes where the benefits of intercity passenger rail are higher while discontinuing long distance routes where the benefits are lower; restructuring Amtrak into separate companies; transferring Amtrak-owned infrastructure to a compact or commission of states to oversee its operations and improvements; creating competition for federal- and state-subsidized routes between private operators and Amtrak; providing a one-time endowment to Amtrak as an incentive for it to run as a more market-oriented business without continued federal involvement and support; or providing states flexible capital matching grants to create their own solutions to transportation needs, including intercity passenger rail service.
Establish Goals for Restructured Intercity Passenger Rail Service
Under this option, policy makers would determine that there are sufficient public benefits at a national level to justify subsidies for an intercity passenger rail service that is different from the current structure. The primary goal for the federal government, under this option, would focus on increasing the national transportation benefits and public benefits of intercity passenger rail service relative to the federal expenditure. For example, furthering this goal could include using federal subsidies for intercity passenger rail to: reduce highway congestion, increase intermodal connectivity, provide environmental benefits, or increase redundancy in regional or urban transportation. Specifically, one of the goals under this option could be to increase the use of intercity passenger rail service between major cities with trip times under 3 hours. Two examples of how this goal could be achieved include the U.K. model of intercity passenger rail service or the German model for regional rail service. In both models, passenger rail operating companies openly bid for the lowest amount of government subsidy to operate a specific route. These franchise agreements are multiyear contracts backed by either national or regional government subsidies. The operator would collect ticket revenues and the agreed-upon government subsidy to operate a specific level of service over the route. This approach makes the government an explicit buyer of intercity passenger rail services from a private operator and increases the transparency of costs for a given level of service. Contracts for service could include operational and capital expenditures and specify such things as service frequency, trip length, stops, a payment schedule, and performance metrics.
Importantly, spending federal funds for intercity passenger rail service to increase public benefits will not necessarily lower the cost of providing intercity passenger rail service. As discussed earlier in this report, in many of the countries we visited the level of federal expenditures on passenger rail after reform remained high or increased.
Define the Federal and Other Stakeholder Roles in a New Intercity Passenger Rail Structure
There are many different ways that the federal government and other stakeholders could define their respective roles within a new intercity passenger rail structure. The federal government could narrow or expand its role in the new structure. However, the key opportunity of a restructuring effort is in defining the roles of all stakeholders to create incentives and promote equity across all beneficiaries, both public and private, in the new structure. For example, the federal government could determine—in partnership with states, local governments, Amtrak, and various transportation providers (including freight and commuter railroads)—the route structure, service frequency, and infrastructure access arrangements for all intercity passenger rail routes. In order to ensure that intercity passenger rail service does not significantly interfere with freight rail service, any restructuring approach should also take into consideration the national freight transportation policy currently being developed by DOT.
One of the more challenging areas to define roles is the NEC, where Amtrak is the owner of most of the infrastructure while many other railroads are the main users. As discussed above, participation is uneven and the vital infrastructure is not being maintained effectively. One structure that could facilitate a federal–state partnership to manage the NEC could resemble the Delta Regional Commission or the Appalachian Regional Commission. These commissions consist of a group of states and a federal representative to foster partnerships between state and federal government entities and distribute economic development funds throughout a specified economically distressed region. For example, the federal government and thirteen states make up the Appalachian Regional Commission to distribute economic development and highway construction funds throughout the 410-county Appalachian region. Federal economic development grant funds are distributed to member states according to criteria based on such factors as population, land area, and economic need.
Recognizing its fiscal constraints, the federal government could provide matching funds (either for operating or capital expenditures, or both) for routes that meet certain goal-related criteria (such as reducing highway congestion or increasing intermodal connectivity) and that are partially funded and proposed by states or groups of states under a process similar to the New Starts program for federal transit funding. However, regardless of the eventual structure or tools used to implement the structure, federal leadership would be needed to reach a consensus on goals, structure, and funding with all stakeholders.
Determine the Appropriate Federal Funding Sources
Given the long term federal fiscal imbalance, finding federal funds necessary to fund a substantial restructuring of intercity passenger rail could be a significant challenge. In four out of the five countries we visited, the national government currently provides a substantial amount of funding for intercity passenger rail service. Finding sufficient funding could be crucial in order to restructure current service, attract increased capital investment from nonfederal sources and give other transportation providers the incentive to provide intercity passenger rail service by significantly increasing the incentives for non-federal partners. However, the scarcity of federal funds puts a premium on sharing costs of equipment, infrastructure, and service. State and local governments may be willing to invest to support continued, expanded or new intercity passenger rail service. Moreover, increased state participation would more effectively integrate decision making on intercity passenger rail priorities with investments in competing and complementary modes including highways, airports and mass transit.
An example of how costs could be shared across stakeholders could be seen in the Federal Highway Administration’s Innovative Financing Program. This program includes several different forms of highway financing, which are designed to stimulate additional investment and private participation. Different financing approaches in the program include the use of state infrastructure banks and credit assistance under the Transportation Infrastructure Finance and Innovation Act. These financing approaches could be adapted to allow states to leverage federal funds for investment in intercity passenger rail projects.
Funding for intercity passenger rail could come from a number of sources. For example, some funding to subsidize federal and state intercity passenger rail service could be provided through taxes paid by, or franchise payments received from, private operators on those routes that may be profitable and not require a subsidy (as is the case for some railroads in Japan). Capital funds used to increase capacity, reduce bottlenecks, and increase train speeds (especially on freight railroad owned track) could come from existing federal taxes, including taxes on railroads or fuel taxes. For example, regional governments in Germany are allocated funds from a federal automobile fuel tax to support regional (i.e., short-distance, intraregion) passenger rail service. This is not necessarily a new tax— rather, it is a change in how these funds are allocated by the German federal government. Another funding option would be for the federal government to create an endowment or “business stabilization fund,” such as was used in Japan, to stabilize its smaller privatized railroads. This endowment would help Amtrak transition from being dependent on federal support to being a more market-based company. Any funding for a stabilization fund would need to recognize the fiscal constraints on the federal government and competing priorities. During the privatization of its national railroad system, the Japanese national government identified the railroads that were least likely to be profitable and provided them with a one-time set-aside of government funds to provide continuous interest income for those railroads. While the companies were prohibited from using the invested capital to cover expenses, the earned interest could be used to stabilize the business and provide long-term funds not subject to annual government appropriations.
Each Option Carries Advantages, Disadvantages, and Challenges, However Restructuring Presents Substantial Opportunity for Improving the Intercity Passenger Rail System
All four options for the future of intercity passenger rail present challenges that could impede both their selection and their effectiveness once chosen. Of the four options, however, restructuring presents the opportunity to substantially improve the intercity passenger rail system. This option allows all stakeholders to establish intercity passenger rail’s goals, the roles of stakeholders and the funding mechanisms that provide performance and accountability for intercity passenger rail expenditures. Consensus on any change to the current intercity passenger rail structure has been difficult to achieve in the past. As a result, if a decision is made to proceed with restructuring, a commission may be a useful mechanism for reaching consensus on a method of restructuring among stakeholders and for recommending a restructuring approach.
Keeping the Status Quo Forgoes Benefits that May Accrue from Improving the System
While keeping intercity passenger rail’s current structure and federal funding levels would preserve a federal role in intercity passenger rail, it would also preserve all of the current problems and limitations. States and commuter rail agencies would continue to have unequal relationships with Amtrak. The current route structure would continue to dilute the public benefits of federal intercity passenger rail expenditures. Investment in and the quality of commuter and intercity service on the NEC would likely continue to decline and in states where intercity passenger rail could provide the most public benefits states’ transportation funds would continue to be spent on other modes without considering public benefits from spending on intercity passenger rail. Any extended operational difficulties may leave Amtrak without significant cash reserves to cover lost revenues and may result in more financial difficulty.
With the current general level of federal funding, Amtrak will continue to be faced with a deteriorating infrastructure and aging equipment that will increase its operating costs and limit its ability to provide its current levels of service. Without a significant capital infusion, the capital maintenance backlog on the Amtrak-owned portion of the NEC will continue to increase, negatively affecting Amtrak’s performance on its key route and diminishing the benefits of intercity passenger rail in the most densely populated area of the country. In addition, any new equipment (or a refurbishment of old equipment) would have to be financed either with Amtrak’s limited capital funds or with commercial debt, which would increase Amtrak’s operating expenses. With current levels of funding and the lack of a clear definition of roles for intercity passenger rail service, significant opportunities—for instance, cost sharing for service in corridors where the public benefits of such service may be high—could go unrealized. Amtrak will also face the continued annual uncertainty about its financial situation, which will damage its relationship with its creditors, suppliers, freight railroads and its riders. Freight railroads will receive the same compensation from Amtrak for the use of increasingly scarce capacity on their major rail lines in addition to not benefiting from increased public investment to increase capacity for passenger and freight traffic where they co-exist on their rail lines.
Intercity passenger rail riders could also face disadvantages under this option. A deterioration in service and equipment could force Amtrak to raise ticket prices for a lower quality service (which may also be affected by increased freight rail traffic). In addition to the uncertainty surrounding federal and state investment in intercity passenger rail service, this deterioration of service may drive away current and future riders and increase highway and airway congestion in areas where intercity passenger rail has made progress in increasing ridership, such as on the NEC and in California. Finally, the federal government would receive no increased benefits, and may receive less benefit due to declining capital investment, for its expenditures and would have no accountability or performance measures in place to gauge the effectiveness of those expenditures. In addition, no performance or outcome based goals would be established for intercity passenger rail service, clear stakeholder roles would not be defined, and there would be no opportunity to restructure funding mechanisms to include share costs across all stakeholders.
Incremental Change Does Not Address Fundamental Flaws in the Current System
Though there may be some increase in public benefits, incremental change within the existing intercity passenger rail structure retains many of the same problems that would be retained under the first option. States and commuter rail agencies may still have unequal roles and face declining investment in Amtrak’s infrastructure. While some savings could result from incremental reforms, the need for federal subsidies would remain, continuing the uncertainty of Amtrak’s financial future. Freight railroads would continue to receive the same level of compensation for increasingly constrained rail capacity and may not see more investment where public demand for intercity passenger rail service on their railroads increases. Riders could also face reductions in amenities due to cost cutting measures in addition to the same or decreased service levels due to, among other things, increased freight traffic and deteriorating equipment that could reduce ridership on some routes.
With current levels of funding and the lack of a clear definition of roles for intercity passenger rail service, significant opportunities—for instance, to share the costs of intercity passenger rail service in corridors where the public benefits of such service may be high—could go unrealized. While the federal government or Amtrak may impose new accountability and performance measures, the route structure may stay generally the same, still diluting the impact of federal expenditures. Also, no overall goals will be established for federal expenditures, roles will not be clarified and costs of intercity passenger rail service will not be equally shared across all beneficiaries.
Discontinuing Federal Involvement May Reduce Services and Would Require Detailed Planning and Substantial Federal Expenditures
Discontinuing the federal role presents strong challenges to all intercity passenger rail stakeholders. The federal government will need to create a comprehensive transition plan and exit strategy, especially in disposing of the NEC. The federal government could also face pressure from states, commuter rail agencies, and Amtrak’s creditors and workforce to continue infrastructure investment in the NEC, and to cover Amtrak’s outstanding debts and labor protection payments, respectively. Amtrak would face bankruptcy and a possible shutdown of all services without federal financial support. States will likely need to take on the responsibility to continue intercity passenger rail service, which may result in some routes being discontinued if they are not financially viable and states or others are not willing or able to subsidize service. In addition, an Amtrak bankruptcy may take away its equipment and its right of access to freight rail infrastructure. Without a comprehensive federal transition plan, commuter rail agencies that rely on Amtrak for services or infrastructure would face service disruptions and financial difficulties. This would be especially acute in the NEC, where most commuter railroads rely on Amtrak infrastructure or services. Freight railroads may gain increased capacity on some of their network, but would have to separately negotiate with individual or groups of states that wished to continue intercity passenger rail service on their railroads and deal with any new intercity passenger rail operators as well. Finally, riders could be forced to other modes of intercity and commuter transportation as a result of the federal exit from intercity passenger rail, either temporarily or permanently, increasing congestion on those modes. Under the discontinuation option there could be gaps in the national transportation system to the extent there are areas where the public relies solely on intercity passenger rail for mobility or travel between regions if states or groups of states choose not to retain the service.
Restructuring Provides Path to Increased Transportation and Public Benefits from National Intercity Passenger Rail Network
The restructuring option provides the opportunity to address the key reform elements necessary for a sustainable, equitable, intercity passenger rail system that delivers increased public benefits for federal and nonfederal expenditure where the other options do not. The status quo and incremental change options do not allow for a reexamination by all stakeholders of the goals, roles and funding mechanisms of the system and would not significantly increase the potential benefits of the system relative to the expenditures required. Discontinuing federal support would transfer responsibility for the system to other stakeholders, possibly creating disruption and loss of benefits for a possible decrease in federal expenditures. Although specific approaches may vary as to the goals, roles, funding and challenges faced by different stakeholders, restructuring the intercity passenger rail system potentially allows each stakeholder to more fully participate and build consensus toward addressing these key reform elements and to move toward a more equitable sharing of costs between the federal government and other beneficiaries of intercity passenger rail service.
Several challenges would need to be addressed before a restructured intercity passenger rail system could provide increased public benefits and accountability for federal expenditures. Federal policymakers will need to determine the goals of the restructured system, the roles of all the stakeholders, how federal expenditures will support the new system and mechanisms for its implementation. Increased funding for private operators may be needed to create a competitive marketplace for intercity passenger rail, as well as increased funding or financial backing for capital improvements in the NEC to ensure higher quality service. Federal policymakers could also face pressure to compensate those who might lose intercity passenger rail service or jobs due to the restructuring. States and commuter rail agencies may have to shoulder more of the financial, maintenance, and management burden in a restructured intercity passenger rail system, especially in the NEC, but may receive other benefits (such as improved service) in return. Amtrak would need to adjust to the new intercity passenger rail structure or face bankruptcy. Freight railroads may face increased public pressure for the use of their infrastructure for intercity passenger rail service and may need to accommodate non-Amtrak intercity passenger rail operators on their railroads. Riders may experience some disruption as routes are re-routed or discontinued.
Due to the complex nature of intercity passenger rail issues and the wide diversity of views about the future of intercity passenger rail service, an independent and properly designed commission may be an effective mechanism for building a consensus that helps determine a restructuring approach. For example, a commission might be able to facilitate public dialogue around a variety of options. While it may be difficult for citizens to discuss the federal role in the abstract, preferences about that role can be inferred from their reactions to and comments on the various restructuring approaches. By facilitating public dialogue focused on feasible alternatives, the commission could help the President and the Congress as they define the role for the federal government in providing or subsidizing such service and specifying how the service could fit into our national transportation system. As discussed above, reaching consensus about federal policy toward intercity passenger rail has been difficult. While the stalemate in part reflects widely divergent views of the appropriate federal role, the debate has been stymied by the lack of objective, rigorous exploration of the operating challenges, costs, and distributional impacts of alternative strategies.
Prior commissions and initiatives have recommended options for restructuring intercity passenger rail service; however, their recommendations have not been implemented. This inaction is due, in part, to the challenges facing Amtrak as stated earlier in this report and, in part, to a failure to reach public consensus on the recommended restructuring approaches, which more fundamentally, requires a consensus on the future role of intercity rail in the nation’s transportation system. Although motivated to define the federal role in intercity passenger rail, these prior commissions and current strategic initiatives have assumed a federal role in intercity passenger rail service without explicitly stating what that role is, what other stakeholders’ roles are, and how that federal role will be funded.
Conclusions
If the role of intercity passenger rail is to be effectively integrated into the national transportation system and federal support is to be targeted to assure its performance, results and accountability, we believe that there is a clear need to change the current structure of and the federal role in intercity passenger rail in the United States. This change would be consistent with GAO’s position that all federal activities should be reexamined with an eye to whether they fit in the changing world of the 21st century. The current and future fiscal imbalance underscores the importance of assuring that all federal programs and policies, including those for intercity passenger rail service, are subject to reexamination, review and possible change. The extended stalemate in developing a clear vision for how intercity passenger rail can be a part of the national transportation system has reflected the significant challenge in achieving consensus. As recently reported by the CBO, in the absence of any consensus on intercity passenger rail issues, Amtrak is likely to continue “limping along” as it has since its inception. We agree that without any changes to its current structure, roles, and funding, the current intercity passenger rail structure will continue to underserve, underinvest, and underachieve.
Consensus will be needed, in addition to legislative action—both in the short and long term—to improve the focus, performance, and sustainability of federal support for intercity passenger rail. Development of a national passenger rail policy to guide investments of federal funds should have: a clearly defined federal role, outcome-based policy goals, an approach to financing that stimulates investment by others commensurate with their benefits, and appropriate accountability mechanisms. The current U.S. intercity passenger rail structure meets none of these criteria—it does not have clear transportation related goals, the roles of stakeholders have grown haphazardly over time, federal funding is not based on cost sharing and not focused on maximizing public benefits, and its results are not outcome-based. With regard to its accountability and financial reporting, Amtrak is not subject to the same basic requirements for financial reporting, internal control and governance that are typically required of federal entities or public companies.
Recommendations for Executive Action
To improve Amtrak’s financial and internal control reporting and overall accountability, we recommend that the president of Amtrak: Immediately take steps to evaluate Amtrak's accountability—particularly its financial reporting, internal control, and governance practices—and formulate a plan to bring the financial reporting, internal control, and governance practices in-line with the basic requirements that federal entities or public companies practice, while also identifying opportunities to improve and streamline current reporting practices. The evaluation should include a comparison of Amtrak’s current accountability requirements and practices to those of federal entities as well as public companies. This evaluation should serve as the basis for the formulation of Amtrak’s plan to bring Amtrak’s financial reporting, internal control, and governance practices in-line with the basic requirements that federal entities and public companies practice, based on a determination of which practices are most appropriate given Amtrak’s overall mission, funding sources, and current situation. The plan should include developing management discussion and analysis as part of its annual financial reporting and developing management's assessment of internal control over financial reporting, while identifying opportunities to streamline other reporting practices. The plan should be submitted to Amtrak’s Congressional oversight committees.
Matter for Congressional Consideration
In order to address longer term needs to maximize the transportation benefits and public benefits of intercity passenger rail service and any federal funds expended on this service, we recommend that Congress consider restructuring the approach for the provision of intercity passenger rail service in the United States. Only Congress can provide the national vision and has the authority to put in place a wide-ranging restructuring effort. This restructuring should include establishing clear goals for the system, defining the roles for states and the federal government, if any, commuter rail agencies, freight railroads and other stakeholders, focusing expenditures where they will achieve the most public benefits, and developing funding mechanisms that include cost sharing between the government and beneficiaries.
In undertaking this restructuring, it will be important to solicit input from all stakeholders, particularly DOT and FRA given their responsibility for transportation and rail matters. Evaluation of restructuring approaches should also consider the relationship between passenger and freight railroads and give due consideration to the national freight transportation policy being developed by DOT. Due to the complex nature of intercity passenger rail issues and the wide diversity of views about the future of intercity passenger rail service, an independent and properly designed commission may be an effective mechanism for developing a consensus over the future of intercity passenger rail service and helping determine a restructuring approach.
By addressing the key reform elements, Congress can create a structure that not only efficiently and effectively serves travelers but also promotes performance and accountability and the chance for increased transportation and public benefits from federal expenditures for intercity passenger rail.
Agency Comments and Our Evaluation
We provided copies of the draft report to Amtrak and DOT for comment prior to finalizing the report. Amtrak provided its comments in a letter from its president and chief executive officer (see app. VIII). In general, Amtrak did not take an overall position on the report or the Matter for Congressional Consideration. However, Amtrak agreed that intercity passenger rail in the United States has come to a critical juncture and that a national dialogue about the future direction of rail service is needed. Amtrak also said that the three key elements to comprehensive reform of intercity passenger rail are establishing clearly defined national policy goals, clearly defining government and stakeholder roles, and establishing committed funding. Finally, Amtrak commented that a more efficient, improved, and expanded intercity passenger rail service can play an important role in relieving congestion, both in the air and on the highways, and that rail has unique advantages compared to other transport modes. We agree and our report discusses the importance of the three key elements of reform and the role they have played in reform efforts in foreign countries. We also agree that intercity passenger rail can play an important role in the nation’s transportation system. For this reason, as well as the fact that intercity passenger rail service does not currently provide the most transportation benefits and public benefits that it can and the growing federal fiscal challenges, it is more important than ever for serious efforts to begin on identifying how intercity passenger rail service can be restructured to focus on its comparative advantages. We believe that success of this restructuring effort can best be achieved in the context of national policies and goals for intercity passenger rail—goals that are performance and outcome based. In addition, all relevant stakeholders need to participate and realistic assessments need to be made of potentially available funds for sustaining the restructured system. It will be very difficult to maximize the transportation benefits and public benefits of intercity passenger rail service without these foundations.
In response to our recommendation that Amtrak evaluate its accountability—particularly its financial reporting, internal control, and governance practices—Amtrak offered comments about specific steps that could be taken in that regard. For instance, Amtrak agreed that creating a Management Discussion & Analysis with its annual audited financials is reasonable and could help the uninformed readers understand the results and trends. Amtrak took exception with other examples of oversight such as the CEO and CFO certifying Amtrak’s financial statements similar to those done under Section 302 of Sarbanes-Oxley Act. However, our recommendation notes some general steps that Amtrak needs to take in order to evaluate Amtrak’s current accountability practices in order to formulate a plan to bring Amtrak’s practices in-line with the basic practices of federal entities or public companies, while identifying opportunities to streamline Amtrak’s current reporting practices. In its response, Amtrak did not specifically address our recommendation to conduct such an evaluation for purposes of formulating a plan. Therefore, we have included additional information to our recommendation further elaborating on the objectives of the evaluation and the formulation of a plan to bring Amtrak’s practices in-line with the basic practices of federal entities and public companies.
In its comments, Amtrak also pointed out that among the Federal Railroad Administration, the Department of Transportation Inspector General’s office and the independent Amtrak Inspector General’s office they have three existing oversight agencies that oversee Amtrak on a monthly, quarterly and annual basis and increasing oversight by adding the Securities and Exchange Commission seems an unnecessary use of federal funds with little real benefit for stakeholders. While we recognize that Amtrak is subject to oversight already, we believe there are opportunities to improve reporting practices, while identifying opportunities for potential streamlining of Amtrak’s current reporting and related oversight. These opportunities should be considered as part of the evaluation of Amtrak’s current accountability requirements and practices.
Amtrak also commented on a number of other issues. These included (1) the Amtrak deficit, (2) passenger revenues, (3) public benefits of Amtrak services, (4) state corridors, and (5) freight railroad impacts. These comments and our evaluation can be found in appendix VIII. Finally, Amtrak offered technical comments that we incorporated where appropriate.
DOT provided its comments in an e-mail message on October 12, 2006. The department did not indicate agreement or disagreement with the report or its recommendations but primarily provided technical comments that we incorporated where appropriate. However, the department did observe that effectively targeting federal funds where they may achieve the greatest level of public benefits is not one of the existing goals for Amtrak. The department also commented that it has never been FRA’s role to “establish a vision for intercity passenger rail” regardless of resources that might be available to the agency. While we recognize that FRA’s involvement with and oversight of Amtrak has increased in recent years, our report makes it clear that, as currently structured, intercity passenger rail does not maximize either transportation benefits or public benefits for federal funds expended. Although Congress will play the key role in establishing a national vision for intercity passenger rail service and putting in place a structure for maximizing the benefits from this service, we believe executive branch leadership, particularly from DOT as being responsible for transportation issues and FRA for rail matters, would be helpful in establishing this vision. DOT and FRA leadership will also be essential for identifying the optimum structure for meeting this vision and the role stakeholders will be expected to play within this structure, as well as in identifying potential funding sources to ensure sustainability of the system. Such leadership and participation by these agencies will be even more important in light of the growing fiscal challenges faced by the federal government and the resulting constraints these challenges will place on resources provided to all modes of transportation.
As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 14 days from the report date. We will then send copies to other appropriate congressional committees, the President of Amtrak, the Secretary of Transportation, the Administrator of the Federal Railroad Administration, and the Director, Office of Management and Budget. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at www.gao.gov.
If you or your staff have any questions concerning this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs Office may be found on the last page of this report. GAO staff that made major contributions to this report are listed in appendix IX.
Scope and Methodology
Our work was focused on identifying the critical issues and options that Congress could consider in providing more cost-effective intercity passenger rail. In particular, we focused on: (1) the characteristics of the U.S. intercity passenger rail system and the value and benefits provided by this system, (2) foreign experiences with passenger rail reform and lessons learned for the United States, (3) how well the United States is positioned to reform intercity passenger rail, (4) challenges that must be addressed in any reform efforts, and (5) potential options for the federal role in intercity passenger rail. Our scope was primarily limited to identifying the financial characteristics and other characteristics of the U.S. intercity passenger rail system from fiscal years 2001 to 2005. In reviewing route-related information, it was not the intent of our work to suggest that any particular routes or services be retained or eliminated. Similarly, in reviewing potential options for the federal role in intercity passenger rail it was not our intent to suggest that any particular option should be selected over any other option. Rather, the scope of our work was intended to identify a series of options that might exist for addressing the future federal role in intercity passenger rail service.
To determine the characteristics of the current U.S. intercity passenger rail system we collected information on all of the National Railroad Passenger Corporation’s (Amtrak) routes, including ridership, revenues and costs, federal grants and state payments to Amtrak, and on-time performance for fiscal years 2000 through 2005. We also gathered and analyzed data provided by Amtrak to determine passenger demographics, connectivity between routes, and the potential transportation benefits and public benefits provided by Amtrak’s different route types. We utilized route ridership data provided by Amtrak from their “data warehouse” database. To assess the reliability of this data and address discrepancies from figures reported in Amtrak’s Route Profitability System (RPS), we conducted interviews with Amtrak officials and assessed the methodology used to develop this database. Based on this assessment, we determined that the data were sufficiently reliable for our purposes. To evaluate the financial performance of Amtrak’s routes, we utilized information from the RPS database. Due to previously identified concerns regarding the reliability of this database, we conducted an interview with Amtrak’s Chief Financial Officer, reviewed documentation of RPS’s sources and methodology, and compared route-related financial information to Amtrak’s “data warehouse” database to determine any major discrepancies. While these databases exhibit some variation due to the reporting format and source information, we determined that the financial information provided by the RPS database was sufficiently reliable to illustrate aggregate route-related costs, and general trends between Amtrak’s different route types, for the purposes of this report. For the purposes of reporting on-time performance we utilized data provided by Amtrak. We compared these figures to other reports issued by Amtrak and the Department of Transportation (DOT) and determined that the data were sufficiently reliable for our purposes. To determine passenger demographic information, we utilized survey data for all long-distance routes and select corridor routes in the Northeast and California in 2004 and 2005; these data were provided by Amtrak and collected by a third party contractor to Amtrak. We did not independently determine the accuracy or precision of Amtrak's survey estimates, however, based on our understanding of the overall survey methodology, we determined that the estimates were sufficiently reliable for our purposes in illustrating general demographic differences in riders across route types. Finally, to identify potential transportation benefits and public benefits provided by intercity passenger rail, we spoke with officials in five states; private transportation companies; and transportation officials in several foreign countries. We also reviewed our previous work and reports issued by the Congressional Budget Office (CBO), Congressional Research Service, the Bureau of Transportation Statistics, the American Association of State Highway and Transportation Officials, and statements by officials at DOT.
To learn about foreign experiences with passenger rail restructuring and lessons learned for the United States, we collected data on several foreign countries that have reformed their intercity passenger rail system. This data included reports from the World Bank, the European Commission, the Congressional Research Service, as well as reports drafted by several private consulting firms at the request of the European Union. We conducted interviews with World Bank and European Commission officials, and using these reports and interviews, we developed criteria for selecting countries for site visits. These criteria included: the extent of rail privatization or competition introduced, geographic characteristics, market characteristics, national funding levels and sources, and the legislative regulatory environment. We reviewed data for Australia, Canada, France, Germany, Japan, Sweden, and the United Kingdom (U.K.). Five countries— Canada, France, Germany, Japan, and the U.K.—were all selected because they represented a wide range of reform experiences, and implemented a variety of approaches in reforming their systems. We conducted site visits to these countries, which included interviews with the Ministries of Transport for each of these countries. We also interviewed the primary rail operators in Canada, France, Germany, and Japan. In the U.K. we conducted interviews with one train operator, as well as the Association of Train Operating Companies. In France, Germany, the U.K., and Japan we also met with the infrastructure managers. Additionally, we met with other rail industry groups, such as Angel Trains and HSBC (rolling stock leasing companies) in the U.K., and the Paris Ile de France Public Transport Authority.
To determine the extent to which the United States is positioned to reform intercity passenger rail we analyzed the information we learned from the experiences of the five countries described above, and reviewed statutes related to intercity passenger rail, historical information on federal grants requested by and provided to Amtrak, government and association reports on Amtrak, and our past reports on various issues (including reports on Amtrak’s management, commuter rail issues, and funding for other modes of transportation). We used the three key lessons learned from the five countries as our criteria for assessing how well the United States is positioned to reform intercity passenger rail; these criteria were (1) clearly defining national policy goals; (2) clearly defining the various roles and responsibilities of all government entities involved; and (3) establishing consistent committed funding for intercity passenger rail. For example, we compared the current U.S. intercity passenger rail policy to policies formed in other countries during the process of reform. A limitation of our assessment is that we only focused on comparing the United States to five countries with relatively different compositions in railroad infrastructure ownership, freight and passenger railroad markets, geography, and demographics. To determine the extent to which Amtrak’s efforts address the three criteria, we obtained and analyzed a list of planned and under-way initiatives from Amtrak. We also reviewed Amtrak’s April 2005 Strategic Reform Initiatives, congressional hearings on intercity passenger rail, and DOT’s financial study on Amtrak’s initiatives. In addition, we interviewed Amtrak officials about the status of reform initiatives and intercity passenger rail reform in general.
To address the challenges associated with addressing reform elements we reviewed pertinent legislation related to federal involvement with Amtrak and intercity passenger rail issues. We also reviewed various legislative proposals that have been introduced in recent years addressing intercity passenger rail issues and reviewed Amtrak’s April 2005 Strategic Reform Initiatives to identify the wide diversity of views on what intercity passenger rail service can and should be. We also obtained data from Amtrak showing state payments in fiscal year 2005 for additional passenger rail service and state contributions for capital improvement projects. We reviewed our previous reports addressing, among other things, infrastructure access and workforce issues, as well as Amtrak management and performance issues. We also reviewed reports from the CBO and the Department of Energy, and testimony from the Association of American Railroads on infrastructure capacity issues. As part of our work we solicited information from both Amtrak and selected commuter railroads about infrastructure access and liability costs. We used the types and amounts of costs incurred by Amtrak and the commuter railroads to develop a comparison that highlights the differences between Amtrak’s access agreements and access agreements negotiated under commercial arrangements. We did not perform a quantitative analysis of the differences in access charges between Amtrak and commuter railroads. Rather, our focus was limited to a qualitative description of the types and ranges of costs. Finally, we interviewed officials from Amtrak, the Federal Railroad Administration (FRA), state departments of transportation, rail labor unions, and freight railroads about issues they see in addressing the potential reform of intercity passenger rail. We also interviewed officials from the Appalachian Regional Commission about the structure of the organization, how it is governed, and the potential application of this federal–state governance structure to intercity passenger rail service.
To address future intercity passenger rail options, we reviewed pertinent legislation and our past reports, along with reports from the World Bank, the DOT Inspector General, the CBO, and the Congressional Research Service. We also interviewed railroad and government officials in the United States and the countries we visited. We reviewed the reports of various commissions including: the House Committee on Transportation and Infrastructure's Working Group on Intercity Passenger Rail, the Amtrak Reform Council, the President's Commission on the United States Postal Service, and the National Commission of Social Security Reform. The criteria for a fundamental reexamination of the federal role were developed in our report on 21st Century Challenges, and the framework to guide the implementation of the options was reported in several of our previous reports and testimonies.
Our work was conducted from January 2006 to October 2006 in accordance with generally accepted government auditing standards.
Selected Performance Characteristics of Amtrak Long-Distance and Corridor Routes
The following are selected performance characteristics of Amtrak’s long distance and corridor routes.
Reform Overviews in Five Site Visit Countries
The following is an overview of the five countries we visited as part of this review.
Canada
Background
Reformation of Canada’s intercity passenger rail system initially took place in 1978 with the creation of VIA Rail, a state-owned corporation. Prior to this, both the passenger and freight rail systems were integrated and service was provided by two companies, Canadian National Railway and Canadian Pacific Railway. While there has been no major organizational changes since its creation, VIA Rail was subject to several national policy actions throughout the 1990s leading to significant changes in how the rail operator conducted its business, in addition to the changes in the amount of funding it receives.
Snapshot of the Canadian Rail System Monopoly state owned operator, VIA Rail.
Almost all infrastructure is owned by two freight rail companies.
Operating subsidies are consistent from year to year in order to force efficiencies and enable better planning for VIA Rail’s management.
VIA’s corporate plan is approved annually by the federal cabinet.
Operations
The primary provider of intercity passenger rail operations in Canada is VIA Rail, a government-owned corporation with shares held solely by the Canadian government. However, the government agency, Transport Canada, is responsible for overseeing VIA Rail. VIA Rail operates almost all of the intercity corridor and long-distance routes throughout Canada, and has some flexibility in setting its routes and services: however, all route and service changes must be approved by Transport Canada, the Canadian Minister of Transport, and the Canadian government. The majority of VIA Rail’s usage occurs on a corridor that runs between Québec City, Québec, and Windsor, Ontario. (This corridor is in the southeast part of the country, and shares similarities with the Amtrak’s Northeast Corridor, but with a lower population density.) Similar to the United States, Canada’s long- distance routes operated with higher losses than the corridor service, and because of this in 1992 a reevaluation of the Canadian (a long-distance train which runs across the country from Toronto, Ontario, to Vancouver, British Columbia) was conducted. Analysis of this route revealed that it was primarily serving a leisure/tourist market, and a decision was made to transition service on the Canadian to a luxury train offering “premium service at a premium price” along with its coach service. In addition, cutbacks in all cost categories and labor renegotiations, combined with substantial revenue growth, allowed VIA Rail to operate more efficiently within its budget.
Infrastructure
VIA Rail does not own most of the tracks on which it operates, and similar to Amtrak, operates on private tracks owned by freight rail. VIA Rail does not have any statutory guarantee of access to tracks, and must negotiate access agreements with the freight operators. Current access agreements with freight railroads are 10-year agreements and are set to expire in 2008. VIA Rail owns and maintain most of its stations.
Funding and Debt
VIA Rail receives an annual subsidy from the Canadian Parliament. Currently VIA Rail receives about $170 million (CAD) annually to support its rail operations. In 1991, the Canadian government began informally capping the subsidy received by VIA Rail. The subsidy at the time was $350 million (CAD) and, due to governmentwide cost cutting, was gradually reduced to its current level. Despite the decrease in its subsidy, VIA Rail did not make any reductions in its service offerings—it concentrated on improving customer service while reducing costs through more efficient management, instead. This operating subsidy does not include funds for capital improvements. VIA Rail does not receive a capital subsidy each year, but instead must request special capital subsidies from Parliament.
The last funding it received for capital improvements was in 2000 for $400 million (CAD) to replace locomotives and rolling stock, and to perform work on its Montreal, Québec–Ottawa, Ontario, line. VIA Rail has no authority to issue debt instruments, or to go into the debt market to fund rail operations. Any attempt to do this would require permission from Transport Canada, the Minister of Transport, and the Minister of Finance. At the time of its creation, VIA Rail did not have any debt, and currently has no authority to issue debt instruments or to go into the debt market to raise funds.
France
Background
The French intercity passenger rail system was reformed in 1997 in order to create an infrastructure manager distinct from the national operator and address the financial crisis that had been created by the fully integrated intercity passenger rail system. The monopoly intercity passenger rail operator in France is Société Nationale des Chemins de Fer Français (SNCF), a public company with 100 percent of its assets owned by the state. Until the 1997 reform, SNCF was responsible for both intercity passenger rail operations, as well as for managing the country’s rail infrastructure. During the reform, Réseau Ferré de France (RFF) was created to take over management of the infrastructure. RFF is also a public company with 100 percent of its assets owned by the state.
Snapshot of the French Rail System Monopoly operator and infrastructure manager; both are state-owned public companies.
National subsidies for intercity passenger rail operations are provided to the regions, and not directly to the operator.
System comprises the largest use of high-speed trains in the world (6,000 miles operated by Train a Grande Vitesse trains).
Will be required by the European Union to begin to open its passenger rail market to competition by 2010-2012 (freight market already open to competion).
Operations
SNCF is the monopoly intercity passenger rail operator in France. SNCF primarily provides intercity rail service through contracts with 20 geographical regions of France. At the time of the 1997 reform, the French government began experimenting with regionalization of its intercity passenger rail system. Through this experiment six geographic regions were provided with subsidies so that intercity passenger rail needs could be purchased from SNCF. This was successful, and, as of 2002, 20 regions in France are given direct subsidies to purchase intercity passenger rail service. This allows the regions to enter into contracts with SNCF for the appropriate quantity and frequency of service needed to meet the unique characteristics of the region’s passengers. In addition to operating passenger rail services, SNCF provides infrastructure management services under contract with RFF. SNCF performs traffic management on the national network, and operates and maintains the national safety system.
Infrastructure
RFF was created through the reform in order to establish an infrastructure manager separate from the national operator. This was intended to clarify the responsibilities and costs for rail infrastructure in France. All rail infrastructure is owned by RFF, and it was given the mission of ensuring coherence of the French rail network through improving existing lines, developing the network through building new lines, and enhancing the network by selling land property and lines not in use. RFF’s main sources of income are access charges for use of the rail network, income relative to land properties included in the network, and a state subsidy. As part of the creation of RFF, two-thirds of the former SNCF’s debt was transferred to RFF in exchange for SNCF’s infrastructure assets (31,000 km of track).
Funding and Debt
Funding for both RFF and SNCF is provided by the French Ministry for Transport. The state provides about 7.5€ billion to subsidize the rail system each year including 2€ billion to France’s 21 geographic regions so that intercity passenger rail service can be purchased from SNCF. The state provides RFF about 800€ million annually to pay off the debt it inherited during the reform, and about 900€ million each year to perform infrastructure renewal. The cost of track maintenance is supported through infrastructure access fees. RFF contracts with SNCF to perform some infrastructure management, and in 2004 RFF paid SNCF 2.6€ billion (approximately $3.2 billion (USD)) for its services. SNCF pays RFF access fees in order to operate its trains on RFF tracks, and in 2004 it paid 2.16€ billion (approximately $2.6 billion (USD)) in access fees. Since the reform, these access fees have continued to increase, and the public subsidy for infrastructure is decreasing proportionally. At the time of the reform, SNCF was carrying about 30€ billion in debt (approximately $25 billion (USD)), and was operating with a 2€ billion (approximately $2.4 billion (USD)) deficit. 20€ billion (approximately $18 billion) of this debt was transferred to RFF in exchange for infrastructure, and the remainder stayed with SNCF. RFF’s debt has stabilized since the 1997 reform, and a public financial agency for funding transportation infrastructure was recently formed to provide infrastructure subsidies and zero-percent interest loans for new projects. RFF receives on average 2€ billion annually for capital investments for new lines and anticipates 7.5€ billion from this agency for 2005 through 2012 (currently this is approximately $9.6 billion).
Germany
Background
In 1994, Germany implemented its first rail reform initiative. Germany began by separating its governmental and commercial rail-related tasks and by opening its markets to competition. This was done by merging the two preexisting national railway properties, Deutsche Bundesbahn (West Germany) and Deutsche Reichsbahn (East Germany) into the Federal Railway Property Agency (BEV). The commercial section of BEV was then separated and transformed into DB, a state-owned joint-stock company that acts independently in the transport market, and includes separate business units for both long and short distance passenger rail operations and infrastructure management. Although DB owns the entire rail infrastructure network in Germany, all shares of the DB infrastructure company are held by the state. The German intercity passenger rail system is also open to competition. Any rail operator who wants to enter the market is free to bid on contracts to provide service, and while this has yielded a large number of intercity passenger rail operators in Germany, DB remains the primary operator in most markets.
Snapshot of the German Rail System Multiple operators, market open to competition (over 300 competing operators).
Single infrastructure manager; private company that is part of a state owned holding company.
National subsidies for regional passenger rail operations are provided to the Länder (the German federal states), and not directly to the operators.
Operations
The German passenger rail market is open to competition, and currently there are over 300 different operators providing rail service in Germany. Despite this, most rail service in Germany is operated by DB. National funding for short-distance passenger rail service is provided directly to the Länder by the national government and the Länder then receive bids for service from operators based on the specific needs they outline in a request for proposal. Länder are not required to tender the service to multiple operators, and can provide payment directly to DB for it to continue operating preexisting service. The contracts established with operators are generally for about 10–15 years. If the Länder want to purchase service that exceeds the amount of the subsidy available to them, they are welcome to do so, and can spend their own funds to do this. In some cases, the Länder have further delegated the authority to decide rail services to the local level. In addition to winning contracts to provide regional service, passenger operators can provide long-distance service at their own risk.
However, long-distance rail operators are required to pay infrastructure access fees. After reform, several of the money-losing long-distance routes that were in existence were shut down by DB, in compliance with public law.
Infrastructure
Most of the infrastructure in Germany is owned by DB Netz, one of DB’s corporate business units. Currently DB Netz is part of a state owned holding company. All operators that use infrastructure in Germany pay access fees to DB Netz, including other DB business units (freight, commuter rail and intercity passenger rail). Currently there is ongoing debate about transforming DB’s status as a state-owned private-stock company to a publicly traded company. The largest issue at hand is whether or not to include DB Netz as part of the initial public offering. According to DB officials, the company sees an advantage to including the infrastructure in an initial public offering. Based on several reports, government representatives also expect significant public financial benefits from an integrated initial public offering, but some fear this model will lessen their ability to influence infrastructure decisions.
Funding and Debt
The national government provides about 7€ billion annually to the Länder to operate regional passenger rail. The source of this federal subsidy is a transportation fund, which is supported by an automobile fuel tax. DB Netz receives about 4€ billion each year in federal subsidies in order to renew and develop new infrastructure (including stations). About 2.5€ billion of this goes towards maintaining the current infrastructure, and about 1.5€ billion goes towards renewal and new infrastructure. By establishing DB, the German government relieved it of approximately 35€ billion debt (approximately $38 billion at the time of reform in 1994) and transferred the responsibility for paying and managing this debt to BEV. About 10€ billion per year is paid to BEV for debt relief and other administrative responsibilities (e.g., pensions).
Japan
Background
Reform of the Japanese rail system through privatization was initiated in 1987. Before reform, the Japanese railway was a fully integrated state- owned monolithic railway entity, Japan National Railways, which operated at considerable cost to the government and carried extensive debt. After reform, Japan kept its intercity passenger rail system vertically integrated, that is, it did not separate out operations from infrastructure, but instead it divided the system geographically, and created separate private intercity passenger railways for the country based on six distinct geographic regions (and a separate company for freight rail). The government also assumed the majority of the debt for the preexisting state-owned system, which at about $300 billion was a substantial sum.
Snapshot of Japanese Rail System Vertically integrated operations and infrastructure; market split into six geographic regions.
Each region has its own rail company.
Debt of pre-existing state owned railway divided among three largest passenger rail companies, JR Freight, Shinkansen Holding Corporation, and JNR Settlement Corporation.
Three largest intercity passenger rail companies are fully private, while government supports the other three.
Operations
After the reform, the fully integrated state owned operator, Japan National Rail, was broken up into six passenger rail entities based on six geographic regions. Three of these regions are on the mainland (JR East, JR Central, and JR West) and the other three are each on an island (JR Hokkaido, JR Shikoku, and JR Kyushu). A freight company was also created to serve the entire country. Each of these six passenger rail operations are vertically integrated, that is within each rail company infrastructure and operations are both managed by the same company. The three companies on the mainland are fully privatized, and do not receive any financial assistance from the government. The other three passenger companies have not yet reached a point where they are financially independent from the state.
Infrastructure
The six passenger railway companies own their own tracks and JR Freight has legal access to the JR’s tracks at marginal or incremental cost. In 1991, JR West, East and Central purchased their tracks from the Shinkansen Holding Company and the proceeds went toward paying down the company’s portion of Japan National Railway’s long term debt. The Japan National Railway developed an implementation plan for its division that included how much land was needed for each railroad, which was approved by the Ministry of Land, Infrastructure and Transport. The companies were then given existing stations and offices from the old Japan National Railway. Some of the non-railroad-oriented land was retained by the Japan National Railway Settlement Corporation because it was not needed by the new railroads for operations. JR Freight pays a relatively low state-determined access fee for using the tracks of the other passenger railroads. Japan also has Shinkansen (high-speed) lines that connect most of the highly populated cities. The Japan Railway Construction, Transportation, and Technology Agency builds new Shinkansen lines; it also holds title to some existing Shinkansen lines and leases them to the passenger railroads for high-speed train operations.
Funding and Debt
When reform occurred in 1987, the Japanese government provided a one- time Business Stabilization Fund, which provided funding for three passenger railroads that were not yet privatized and needed subsidies to survive. JR Hokkaido was given ¥682 billion, JR Shikoku was given ¥208 billion, and JR Kyushu was given about ¥388 billion. These three railroads were allowed to invest these funds and use any money made from them for operations and capital improvements. However, they were not allowed to draw down any principal—only the profits or interest from investments. Therefore, currently the three companies have maintained the original amounts given to them by the state in 1987. However, the performance of the fund has been declining as Japanese interest rates have declined since the establishment of the fund. It is not clear what will happen to these amounts if any of these three companies are fully privatized at a later date. However, Japanese Board of Audit officials feel that it will be a long time, if ever, before the three companies are financially able to achieve privatization. Of these three passenger railroads, only JR Kyushu is given a reasonable chance of achieving the financial stability necessary to privatize.
There are two other forms of assistance to JR Hokkaido, JR Shikoku, and JR Kyushu. A guaranteed interest rate was offered for the stabilization fund that was higher than the market rate available to the three mainland JR’s. The government reduced the tax rate on fixed railroad assets as well. In addition, at the time of reform, the Japan National Railways had accumulated about ¥37 trillion of long-term debt. About ¥25.5 trillion was placed with a newly created entity, called the Japan National Railways Settlement Corporation, and the remaining debt was distributed among the three mainland railroads, JR Freight, and the Shinkansen Holding Company. The state government determined the debt allocation, apparently on the basis of expected future profits of each entity. The Hokkaido, Shikoku, and Kyushu railroads were not allocated any of this debt because of their more precarious financial positions.
The United Kingdom
Background
The U.K. began its major reform in 1993 in an effort to privatize its rail system, and then undertook another significant restructuring effort in its 2004. The 1993 reform took place over 5 years and involved radical restructuring. The preexisting monolith, British Railways, was broken up into many pieces, including a private infrastructure company, Railtrack, which was replaced in 2002 with Network Rail, over 20 train operating companies, three rolling stock ownership and leasing companies, and three government regulators (currently there is only one entity, the Office of Rail Regulations). In 2004, the U.K. restructured again to restore the long-term efficiency and keep the affordability of rail within the level of public expenditures defined by the British government, as well as to recover performance levels, maintain high standards of safety, and enable the industry to meet its customers’ needs.
Snapshot of the U.K. Rail System Multiple operators; market split into franchises which are open to competition.
Single infrastructure manager; owned “members” consisting of representatives from a range of industry interests.
British Rail’s rolling stock was divided between the three rolling stock ownership and leasing companies and is available for lease to interested operators.
The national government was unable to completely exit the industry, and mainly plays a role in setting the strategic direction for the railways.
Operations
After the initial reform effort, intercity passenger rail operations were no longer conducted by British Railways but were instead turned over to the private sector. The rail network was broken up into different franchises, and private operators were permitted to bid on franchises for the provision of services. These operators are essentially private companies that enter into franchise agreements with the government, where the government will subsidize unprofitable service or receive a premium for services that see excess profits. In addition, these operators pay access fees to the infrastructure manager in order to access the tracks, and the U.K. government adjusts subsides paid to, or premium received from, operators to compensate for any change to the fixed access charge made by the independent regulator.
Infrastructure
Rail infrastructure in the U.K. is currently all managed by Network Rail. Network Rail is a private corporation, run by a board of directors, and overseen by more than 100 members of the railroad industry and some members of the general public. The members do not have day-to-day responsibilities for making management decisions, but they do elect and dismiss the board of directors, approve the long-term remuneration of board members, approve Networks Rail’s annual report, and approve specific resolutions put forth before the membership. Network Rail was not the first infrastructure company formed after the U.K.’s reform. At the time of reform, a private for-profit corporation, Railtrack, was established to own and manage all of the U.K.’s infrastructure. In 2001, Railtrack went bankrupt, and Network Rail’s bid to take over Railtrack was accepted; it then assumed control over the infrastructure in 2002. Currently, Network Rail earns income from three sources—network access fees paid by the operators (and which are set by the Office of Rail Regulation), direct government grants, and other income such as commercial property.
Funding and Debt
Although privatized, the intercity passenger rail system in the U.K. receives operating subsidies from the government. Generally about 50 percent of all costs are covered through public subsidies, but U.K. government officials expect this percentage to fall in the future. Total debt for Network Rail is currently at £18 billion and is projected to peak at £21 billion between 2008–2009. This debt did not exist at the time of reform, and was incurred through paying for enhancements to its regulatory asset base. Network Rail also assumed £8 billion of this debt from Railtrack.
Current Amtrak Reform Efforts
In April 2005, Amtrak’s board of directors and management proposed a set of broad strategic reform initiatives. Since the release of these initiatives, Amtrak formed a new planning and analysis department to manage the strategic reform initiative plan and implementation, among other duties (such as developing a capital and asset plan). Thus far, 15 operational initiatives have been developed, which are described as either corporate or business-line initiatives (see table 9). Recently, to further develop these initiatives, Amtrak has begun to refine the structure of these initiatives into five issue areas: (1) business efficiencies, (2) service levels, (3) cost recovery, (4) labor, and (5) legislative. According to Amtrak, most of the 15 initiatives will fall into the business efficiency category, which the company views as having greater control over. The labor, long-distance, corridor, and infrastructure initiatives will fall within more than one of the categories, and full implementation of these initiatives would require legislative action. In addition, initiatives associated with each of the train operations business lines (long distance, NEC, and state corridor) will fall under all five categories.
Amtrak’s 15 initiatives are largely designed to reduce costs, increase revenue, and improve its financial reporting. Among the initiatives Amtrak has planned or undertaken to reduce costs is the overhead function initiative, which it estimates will save $5.1 million in fiscal year 2006 through reductions in outside legal fees, software, and communications costs. The NEC operations initiative is designed to increase revenue, partly through the implementation of revenue management on NEC’s Regional Service, by charging variable rates. The management information initiative calls for reforming how Amtrak currently reports financial and operating information. Amtrak’s Chief Financial Officer told us that reports to management will focus more on performance outcomes, such as performance per passenger mile. In addition, Amtrak is in the process of developing a new cost-accounting system as directed through fiscal year 2006 appropriations to improve accountability. As of May 2006, the operational initiatives have resulted in annual savings of $46 million for fiscal year 2006, but are expected to save $190 million a year when fully implemented.
Operational Challenges Associated with Access, Capacity, and Liability Issues
Any effort to reform the United States’ intercity passenger rail system must recognize that there are access, capacity, liability, and workforce issues. For instance, Amtrak benefits from a number of statutory access rights that mask the potential capacity impacts of passenger rail service on freight traffic. In addition, the potential liability associated with operating passenger rail must be accounted for, as must statutory and contractual workforce requirements. Currently, the liability framework surrounding intercity passenger rail is complex, with statutory exceptions and negotiated indemnification agreements altering default negligence rules.
Infrastructure Access and Capacity Issues
Amtrak’s statutory access and priority rights for intercity passenger service—and the subsequent impact on freight capacity—is a source of contention in the rail industry. Amtrak owns very little of the infrastructure that it uses, and, in fact, most of the 22,000 miles of rail lines that Amtrak uses are owned by four private, U.S.-based Class I freight companies—CSX, Union Pacific, BNSF, and Norfolk Southern. Amtrak has three statutory rights to privately owned rail infrastructure that no other operator has: (1) access to tracks and facilities of railroads and regional transportation authorities; (2) access charges at incremental cost; and (3) priority over freight trains.
No other passenger rail service receives the benefit of statutory rights. For instance, commuter rail agencies must negotiate with host railroads for infrastructure access. Similarly, any private operator of intercity passenger rail in the United States would have to negotiate for access to host-railroad infrastructure without the benefit of these statutory rights. Because other operators do not have these statutory rights, one state official said that his state feels “stuck” with Amtrak. This state official said his state is frustrated because there is no real alternative to Amtrak as long as these rights belong solely to Amtrak. The freight railroad industry is adamantly opposed to permitting a transfer of Amtrak access and incremental charge rights to non-Amtrak operators, which was confirmed by officials from freight railroads with whom we spoke.
One state official told us that, without Amtrak’s access rights, passenger rail access fees are a “seller’s market”—that is, freight railroads can charge whatever they want. State officials with whom we spoke generally estimate that Amtrak’s per train-mile costs are approximately one quarter to one half of what the freight railroads would charge another operator. Similarly, an official from one freight railroad estimated that infrastructure access costs for an intercity passenger rail operator negotiating “at arm’s length” would be three to four times Amtrak’s current costs, and possibly as high as ten times as much as current rates. According to this official, even these rates would not capture the full impact of passenger trains on freight line capacity.
While Amtrak’s access costs cannot be directly compared with a competing intercity passenger rail operator, a comparison with commuter rail access costs is informative. According to information provided by Amtrak, on average, Amtrak paid $1.16 per train-mile for access to freight-owned infrastructure in fiscal year 2005. In contrast, commuter rail agencies with whom we spoke that operate primarily on freight railroad infrastructure identified three types of access charges: per train-mile fees, fixed-access fees, and capital contributions. All of these commuter agencies reported paying per train-mile access fees for each line, with a range from $3.38 to $40 per train-mile. These agencies reported paying either a one-time up front access fee or an annual access fee for most lines as well (see table 10). In addition, all four commuter rail agencies with whom we spoke made capital contributions to freight infrastructure for each line, either to gain initial access to the freight infrastructure or to expand established commuter rail operations. According to Amtrak, commuter rail trains— which are concentrated in the morning and evening weekday peak periods and have long track occupancy due to frequent stops—require greater rail line capacity, and therefore, impose much higher costs on the track owner than a comparable number of intercity passenger rail trains that are spread throughout the day or week.
According to several state officials, increases in intercity passenger rail service, particularly corridor services, could conflict with freight rail traffic for line capacity. For example, one state official stated that the rail lines between New York City and Albany, New York, are heavily used by freight railroads, commuter rail service, and Amtrak. Even today this line has congestion problems, leading to delays for both passenger and freight traffic. Desired improvements to address capacity restrictions will cost about $700 million in capital improvements. An official with another state, talking about the line between Washington, D.C., and Richmond, Virginia, said that—between freight, Amtrak, and commuter service—the amount of traffic on the corridor is increasing and delays are becoming more common. Further, capacity constraints are causing delays that cause dissatisfaction among riders.
Freight railroad officials have emphasized the growing challenge associated with infrastructure capacity issues. An official at one railroad said that, while freight traffic on his railroad had grown and decreased capacity, nothing in the Amtrak model had changed, which he described as increasing his railroad’s subsidy to Amtrak. An official of another railroad stated that under the current Amtrak model—with guaranteed access to track at incremental cost—freight railroads do not recover the lost value created when freight trains are delayed because of passenger train priority. He also stated that the current Amtrak model skews the incremental value of freight and passenger train slots on a line in such a way that freight railroads cannot capture the difference in value between low value passenger train slots and higher value freight train slots. This official went on to say that, without new capacity, there would be ripple effects throughout the entire freight railroad industry as both freight and passenger railroads try to accommodate ever-increasing traffic on a fixed- infrastructure network. He also stated that for intercity passenger rail to be successful it must be attractive, efficient, and reliable.
In addressing capacity issues associated with passenger rail reform it will be important to recognize balancing public and private investment with public and private benefits. An official with the Washington State Department of Transportation said his state is willing to pay for capital projects that benefit passenger rail, and that freight railroads should pay for projects, or parts of projects, that benefit their operations. This official said most states use the “but for” argument in determining public rail infrastructure investments—that is, would there be a need for investment but for the passenger rail service? Similarly, the state of Virginia works with host railroads to fund rail projects that increase both the freight and passenger rail capacity of privately owned rail infrastructure in the state to achieve public benefits. As we testified in June 2006, federal involvement with rail infrastructure should depend on identifying wide-ranging public benefits from potential projects and appropriately allocate the cost of financing these benefits between public and private sectors, and, to the extent possible, focus investments that yield national rather than just local benefits.
Liability against Accident Risks
In addition to the access-to-infrastructure issues, there are also challenges associated with liability against accident and other train-related risks. If a passenger rail accident should occur, injured passengers may sue the transportation provider for their damages. As our January 2004 report on commuter rail noted, freight railroads have been traditionally sheltered from this exposure when they haul freight. However, when a freight railroad allows a commuter rail service (or intercity passenger rail service) to operate over its rights-of-way, the freight railroad becomes exposed to these risks—as passengers may sue the commuter rail’s (or intercity passenger rail’s) provider and owner of the tracks. Consequently, freight railroads do not want to allow such service on their rights-of-way unless they are protected from liability. Freight railroads often use the “but for” argument for requiring passenger rail operators to assume all risks associated with their presence—that is, but for the presence of the service, the freight railroad would not be exposed to certain risks and therefore should be held harmless. Freight railroad officials have stated that they must take this position to protect their businesses and shareholders from lawsuits. As a result, passenger rail operators must contractually indemnify freight railroads against all liability and obtain insurance as a guarantee that payments will be made for any damages.
Amtrak currently has no fault liability agreements with most freight railroads to cover risks associated with its operations. Under these agreements, Amtrak indemnifies the host railroads against liability resulting from any damages that occur to Amtrak passengers, equipment, or employees regardless of fault if an Amtrak train is involved. Similarly, the host railroads indemnify Amtrak against any liability resulting from damages to host railroad employees and property regardless of fault. At one time, Amtrak compensated the host railroads for the risk that they bear by paying a negotiated risk charge of 7.34 cents per train-mile to the host railroad. Amtrak has subsequently negotiated away this charge for all but one line. In contrast, commuter rail operators with whom we spoke manage liability with the freight railroads their own way. In the view of one commuter rail official, the host railroads charge his company more per train-mile for infrastructure access that Amtrak to compensate for the liability costs associated with commuter rail operations. Another commuter rail official stated that in addition to the per train-mile fees, his agency purchases an insurance policy that indemnifies the host railroads against all liability, including gross negligence and willful misconduct.
Both railroad and state officials with whom we spoke believe liability will be a major issue should competition for intercity passenger rail service be introduced. Officials from all 5 states cited concerns about liability issues, particularly the potential cost of liability coverage. An official from one state, Washington, told us that his state would not be able to pay for the liability coverage freight railroads would require if Amtrak ceased operating intercity passenger rail service and this service was taken over by the state—the cost would be too prohibitive. An official from California also said that liability would be a significant issue associated with competition. Besides cost, this official said California is prohibited by law from providing full indemnification to third parties. Consequently, any non- Amtrak passenger rail operators would have to provide their own liability coverage that would indemnify not only the state, but also any freight railroads they operated over. Freight railroad operators also expressed concern about liability issues. An official from one freight railroad said his company would not “bet the company” on the liability risk that could exist with multiple passenger rail operators, and that his company would expect full indemnity against liability risks created by passenger rail operators. It would also be expected that this indemnity be backed up with sufficient insurance coverage similar to the arrangement this company currently has with Amtrak. Similar sentiments were expressed by another freight railroad official.
Recognizing the freight railroads’ exposure to liability when hosting passenger rail trains, Congress established liability provisions in the Amtrak Reform and Accountability Act of 1997. Specifically, the act limits the aggregate overall damages that may be awarded to all passengers for all claims (including punitive damages) from a particular rail accident to $200 million. The act also permits Amtrak and other providers of rail transportation to enter into indemnification agreements allocating financial responsibility for passenger claims arising from accidents involving passenger rail. As we reported in January 2004, our review of this legislation concluded that the liability cap applies to commuter rail operations on the basis of the plain language of the statute and our review of pertinent legislative history. Our review of the statute and legislative history also indicates this cap would apply to non-Amtrak providers of intercity passenger rail service. However, our report goes on to note that there are limitations to the protections provided by the legislation, such as the fact that the legislation does not limit damages for claims brought by nonpassengers; in addition, the application of the liability cap has not been tested in federal court. As a result of these limitations many carriers are being “super cautious” in requiring high levels of insurance.
Workforce Issues Associated with Intercity Passenger Rail Reform
Efforts to reform or restructure intercity passenger rail require consideration of workforce issues that is, having enough people with the requisite knowledge and skills to provide the amount and type of service called for in a restructured system. This may not be as easy as it seems.
Amtrak employees currently provide a number of services that are integral to operation of intercity passenger rail. This includes train and engine crews that operate trains, on-board staff such as conductors and attendants that take tickets and arrange for sleeping accommodations, and maintenance staff that repair equipment and maintain the rights-of-way over which trains operate. In addition, Amtrak employees dispatch trains and maintain communication and signal systems, among other things. Over the last several years Amtrak has reduced its employment levels as it has tried to control costs (see fig. 17). In fiscal year 2005, 87 percent of Amtrak’s workforce was unionized (14 unions and two councils covering a variety of crafts and skills) and covered by collective bargaining agreements. These employees are referred to as agreement employees. The collective bargaining agreements specify not only wage and benefit rates but also specific duties (defined in work rules) that employees can perform. Between fiscal years 2001 and 2005 the number of unionized employees decreased from 22,163 to 16,687 (a 25 percent decrease). There has also been an overall 7 percent decrease in non-union employees over this time period, with a slight increase in the number of non-union employees between fiscal years 2003 and 2005. While these decreases might have benefits in terms of cost reduction, they might also limit the pool of qualified people available to operate intercity passenger rail under a restructuring scenario.
There are several workforce issues that will likely present challenges in efforts to reform or restructure intercity passenger rail. These include: Availability of a qualified labor pool. Reform of intercity passenger rail that results in new services or operators will require that there be sufficient staff to provide service, conduct maintenance, and perform other duties related to running passenger railroads. In the short term, obtaining sufficient staff could be a challenge. As we reported in April 2006, in the context of commuter railroad service, if Amtrak were to abruptly cease to provide service, some commuter railroad agencies might be able to replace Amtrak employees dedicated to their particular commuter rail service with employees from another railroad. However, according to agency officials, a number of agencies would not be able to quickly replace current Amtrak employees because of workforce limitations, such as the availability of a qualified labor pool. In part, this is because of strains on the current workforce due to growth in the demand for freight rail transportation. In addition, it was estimated that it could take months to train replacements if Amtrak train crews were unavailable. Over the short term it is feasible that a restructuring that resulted in new intercity passenger rail services could face a shortage of qualified employees if (1) Amtrak employees did not transfer to the new services or operators, (2) they retire or leave the railroad industry, or (3) there are insufficient applicants with necessarily skills to provide the employees needed.
Workforce flexibility and productivity. Reform of intercity passenger rail resulting in new services or operators will also require consideration of workforce flexibility and the extent labor productivity can be increased. One key to providing cost-effective service is to have high levels of labor productivity. Collective bargaining agreements and their related work rules specify the work that employees are expected to do and the amount of compensation they will receive for performing this work. Although such agreements can and do include changes designed to increase employee productivity by increasing or broadening the types of tasks that employees can perform, such agreements can also affect productivity by limiting the amount or type of work that employees can perform. Foreign passenger rail reform efforts have included actions to increase workforce flexibility and productivity. For example, from 1993 to 1998, as a result of revenue growth and an increased focus on cost control, VIA Rail entered into negotiations with rail labor in order to obtain more flexibility in its workforce. Among other things, these negotiations resulted in a significant consolidation of jobs. According to VIA Rail, union members got enhanced pension benefits in return for reduced employment levels and increased job responsibility. The latter included consolidating a number of on-board service and conductor positions into one customer-service manager who has the flexibility to interchange positions for on-board service staff and is responsible for everything that goes on inside a train.
Potential labor protection payments. If, as the result of reforming intercity passenger rail, Amtrak employees lose their jobs, there could be liability for labor protection payments. In general, labor protection payments are made to employees who lose their jobs as a result of a discontinuation of service. The Amtrak Reform and Accountability Act of 1997 made a number of changes to labor protection, including eliminating existing rights to such protection—again subjecting labor protection to collective bargaining, and requiring Amtrak to negotiate new labor protection arrangements with its employees. As we have previously reported, after Amtrak and its employees could not reach agreement, an October 1999 arbitration decision (1) capped labor protection payments at a 5-year maximum (rather than 6 years under the statutory arrangement), (2) made employees with less than 2 years of service ineligible for payments, and (3) based payments on a sliding scale that provided less payout for each year worked than did the previous system. Even with these changes, in September 2002, we reported that Amtrak would have had unsecured labor protection claims of about $3.2 billion had Amtrak been liquidated on December 31, 2001. Although a reform of intercity passenger rail may or may not involve a liquidation of Amtrak, it is clear that should Amtrak employees lose their jobs as the result of a discontinuation of service there could be substantial financial obligations as a result. To the extent that Amtrak employees can and do accept jobs elsewhere (whether in the railroad industry or not) this obligation could be reduced. In general, should this be the case, then labor protection payments would be limited to the differences, if any, between what the employees were previously making at Amtrak and their wages at the new jobs.
Amtrak labor-relations officials state that a significant barrier to any attempts to reform—or to negotiating their collective bargaining agreements even in the absence of broader corporate restructuring—is the lack of flexibility in the current labor agreements. First, the provision of the Amtrak Reform and Accountability Act of 1997 that altered rail labor protection—eliminating the statutory labor protection provision and allowing Amtrak and the affected labor unions to negotiate contractual labor protection arrangements in their place—did not give Amtrak as much flexibility as it had hoped. Although significant changes resulted from negotiations about new labor protection arrangements (such as limiting the maximum number of years’ wages that could be received in the event of job loss to 5 years instead of 6), Amtrak is still bound by expensive labor protection obligations if jobs are lost because of route cancellations or service reductions. Amtrak officials referred to rail labor protection as the “last of the last” of the old type of unemployment benefits. As such, labor protection continues to be a stumbling block in Amtrak’s internal restructuring efforts, as well as collective bargaining. In addition, Amtrak officials stated that Amtrak would like additional flexibility in the work rules that define the tasks that employees can perform to improve productivity. The current work rules allow most employees to perform tasks outside their enumerated work duties only 2 hours per day. According to Amtrak labor relations officials, current work rules allow Acela employees 4 hours of flexibility per day. Amtrak would like to extend this to all labor contracts. Amtrak officials stated that Amtrak wants the increase to 4 hours of flexibility to gain desired improvements in efficiency of operations. Without the work rule change, these improvements will be difficult to achieve.
Workforce challenges also include determining how a potentially reformed intercity passenger rail system fits into the current scheme of railroad- specific labor-management, retirement, and injury compensation systems. Amtrak is currently subject to, among other things, the Railway Labor Act, the Railroad Retirement Tax Act, and the Federal Employers’ Liability Act, which govern labor-management relations, retirement, and injury compensation, respectively, in the railroad industry. Amtrak’s collective bargaining agreements generally do not expire and are subject to requirements designed to reduce labor strikes; Amtrak participates in, and provides financial contributions to, the railroad retirement-system (approximately $400 million annually); and Amtrak and its employees are subject to a tort-based injury compensation system under the Federal Employers’ Liability Act. We have reported that these legal requirements raise railroad costs compared to nonrailroad industries. Amtrak’s April 2005 Strategic Reform Initiatives also suggested that meaningful reform of intercity passenger rail will require changing how these apply to passenger rail. On the other hand, rail labor has argued for the importance of these laws in protecting employee rights, ensuring a sustainable retirement system, and adequately compensating employees injured on the job.
State officials we interviewed expressed more general concern about the potential impact of Amtrak’s labor agreements and obligations on the future of passenger rail. Some state officials viewed Amtrak’s labor agreements as a significant barrier to reform. One official stated that serious labor reform is needed for intercity passenger rail reform to succeed. Some state officials with whom we spoke also questioned whether alternative operators would be bound by Amtrak’s labor agreements and thought that it was unlikely another operator could provide significant improvements in cost savings or quality of service if they were. Another official stated that Amtrak’s labor agreements would put Amtrak at a considerable disadvantage over alternative operators in a competitive market if the alternative operators were not bound by the same agreements.
Rail labor union officials with whom we spoke expressed several concerns about the effects any potential reform of intercity passenger rail might have on their members. Foremost, union officials expressed concern about the history of Amtrak’s successive “reforms” and the detrimental effects on labor–management relations and employee morale. In their view, past Amtrak reforms have brought fewer union jobs and the loss of health and safety programs with no improvement in Amtrak’s service to the public, while it continues to flounder with funding uncertainty. A union official stated that the first step should be getting Amtrak to operate like other for- profit businesses, including the freight railroads. The emphasis should be on applying basic business principles, including transparent accounting, and repairing its relationship with the unions and improving national railroad passenger service—rather than on reducing the federal subsidy.
This should be addressed before moving on to something other than the current system and route structure. In addition, union officials emphasized that some union members are highly skilled and highly specialized and cannot be easily replaced. Any restructuring of intercity passenger rail would still require any operator—Amtrak, alternative operators, or a successor to Amtrak—to work through the unions to maintain a labor force or to train additional workers. Total compensation for employees moving forward is another concern; however, union officials told us, where alternative operators have succeeded Amtrak in operating commuter railroads, unionized employees have been offered more compensation than they received from Amtrak with no accompanying change in work rules.
Financial Reporting, Internal Control, and Governance Requirements and Practices for Federal Entities and Public Companies
Current Accountability Requirements and Practices
The Amtrak Reform and Accountability Act of 1997 removed Amtrak from the list of government corporations subject to the Government Corporation Control Act of 1945. The 1997 act, however, did not change Amtrak’s status as a private, for-profit corporation established to provide intercity and commuter rail passenger transportation in the United States and is neither an agency nor an instrumentality of the U.S. government, nor an issuer of securities to the public. Consequently, Amtrak is not subject to the basic accountability requirements of either federal entities or public companies, but has been subject to specific reporting requirements contained in its grant and loan agreements and Amtrak-specific statutory provisions in Title 49 of the U.S. Code. Following are the basic accountability requirements that encompass financial reporting, internal controls, and governance at these organizations.
Federal Entities
Financial Reporting
The Chief Financial Officers Act of 1990 (CFO Act), as amended by the Government Management Reform Act of 1994 (GMRA), requires the major 24 agencies of the federal government to submit annual audited financial statements to the Office of Management and Budget (OMB). The Accountability of Tax Dollars Act of 2002 (ATDA) expanded this requirement to include most other executive agencies. Federal government corporations had been subject to financial reporting requirements for many years under the Government Corporation Control Act. Quarterly, the executive agencies required to submit annual financial statements under the CFO Act, GMRA, and ATDA (31 U.S.C. § 3515) are required by OMB to submit unaudited financial information to OMB. These interim unaudited financial statements, required on a quarterly basis, may be submitted without footnotes and limited to a balance sheet, statement of net cost, and statement of budgetary resources. Management discussion and analysis and supplementary information are not required for quarterly reporting. Chapter 91 of Title 31 of the U.S. Code, commonly known as the Government Corporations Control Act, requires government corporations to submit annual management reports to Congress (with copies to the President, OMB, and us) no later than 180 days after the end of the government corporation’s fiscal year. OMB has accelerated the submission deadline to no later than 45 days after the end of the government corporation’s fiscal year. Annual management reports are therefore required to include the following: a statement of financial position; a statement of operations; a statement of cash flows; reconciliation to the budget report of the corporation, if applicable; a statement of internal accounting and administrative control systems by the head of corporation management, consistent with the requirements under amendments to the act made by 31 U.S.C. § 3512 (c), (d), commonly referred to as the Federal Managers’ Financial Integrity Act of 1982 (FMFIA); a financial statement audit report; and any other information necessary to inform Congress about the operations and financial condition of the corporation.
Government corporations are not required by OMB to submit quarterly information. The federal government does not have a certification for government corporations or federal agencies comparable to section 302 of the Sarbanes–Oxley Act of 2002, which requires the chief executive officers (CEO) and chief financial officers (CFO) of public companies to certify their company’s financial statements.
Under OMB Circular No. A-136, Financial Reporting Requirements (rev. July 24, 2006), annual performance and accountability reports (PAR) issued by federal government agencies consist of the Annual Performance Report required by the Government Performance and Results Act of 1993 (GPRA) with audited financial statements and other disclosures, such as agencies’ (1) assurances on internal control, (2) accountability reports by agency heads, and (3) Inspectors General’s assessments of the agencies’ most serious management and performance challenges. OMB Circular No. A- 136 states that PARs are intended to provide financial and performance information to enable the President, Congress, and the public to assess the performance of an agency relative to its mission and to demonstrate the agency’s accountability. The PAR’s management’s discussion and analysis (MD&A) section, which serves as a brief overview of the entire PAR, should include the most important matters that could lead to significant actions or proposals by top management of the reporting unit; are significant to the managing, budgeting, and oversight functions of Congress and the administration; or could significantly affect the judgment of citizens about the efficiency and effectiveness of their federal government.
OMB Circular No. A-136 also requires federal entities in their MD&A to include information to help users understand the entity’s financial results, position, and condition as conveyed in the principal financial statements. The MD&A also includes comparisons of the current year to the prior year and should provide an analysis of the agency’s overall financial position and results of operations to assist users in assessing whether that financial position has improved or deteriorated as a result of the year’s activities. The MD&A should also include a discussion of key financial measures that emphasize financial trends and assess financial operations.
Internal Control
According to OMB, the passage of the Sarbanes–Oxley Act of 2002 served as an impetus for the federal government to reevaluate its current policies related to internal control over financial reporting and management’s related responsibilities. While section 404 of the Sarbanes–Oxley Act created a new requirement for managers of publicly traded companies to report on the internal controls over financial reporting, federal managers have been subject to similar internal-control reporting requirements for many years.
Federal agencies are subject to many legislative and regulatory requirements that promote and support effective internal control: 31 U.S.C. § 3512(c), (d), commonly referred to as FMFIA, provides the statutory basis for management’s responsibility for, and assessment of, internal control. OMB Circular No. A-123, Management’s Responsibility for Internal Control (rev. Dec. 21, 2004), sets out the guidance for implementing the statute’s provisions.
The CFO Act of 1990 requires agency CFOs to maintain an integrated accounting and financial management system that includes financial reporting and internal controls. 31 U.S.C. § 902(a)(3).
The Federal Financial Management Improvement Act (FFMIA) of 1996, as implemented by OMB Circular No. A-127, Financial Management Systems (rev. Dec. 1, 2004), requires the 24 CFO Act agencies to implement and maintain integrated financial management systems that comply substantially with federal financial management system requirements, applicable federal accounting standards, and the U.S. Standard Government Ledger at the transaction level.
The Inspector General Act of 1978, as amended, requires Inspectors General to submit semiannual reports to Congress on significant abuses and deficiencies identified during agency reviews, and recommended actions to correct those deficiencies. 5 U.S.C. Appx. § 5.
Government Auditing Standards, GAO-03-673G (rev. June 2003) (commonly referred to as the “Yellow Book”), and OMB Bulletin No. 06- 03, Audit Requirements for Federal Financial Statements, (Aug. 23, 2006), require auditors to report on internal control as part of a federal agency financial-statement audit, including a description of reportable conditions and material weaknesses in internal control over financial reporting.
Recent federal governmentwide initiatives have contributed to improvements in financial management and placed greater emphasis on implementing and maintaining effective internal control over financial reporting. In December 2004, OMB issued a significant update to its Circular No. A-123, the implementing guidance for FMFIA. The update requires the 24 CFO Act agencies to include the FMFIA annual report in their PAR, under the heading “Management Assurances.” The FMFIA annual report must include a separate assurance on internal control over financial reporting, along with a report on identified material weaknesses and actions taken by management to correct those weaknesses.
FMFIA and OMB Circular No. A-123 apply to each of the three objectives of internal control outlined in our Standards For Internal Control in the Federal Government: effective and efficient operations, reliable financial reporting, and compliance with applicable laws and regulations. OMB Circular No. A-123 calls for internal control standards to be applied consistently toward each of the objectives. The circular’s new Appendix A, which applies only to the 24 CFO Act agencies, requires management to document the process and methodology for applying A-123 standards when assessing internal control over financial reporting. Appendix A also requires management to use a separate materiality level when assessing internal control over financial reporting. The agency head’s annual assurance statement on the effectiveness of internal control over financial reporting required by Appendix A is a subset of the assurance statement required under FMFIA on the overall internal control of the agency.
Governance (Audit Committee)
Audit committees are becoming increasingly important in federal entities and public companies as a mechanism to improve accountability and enhance oversight. Overall, in the federal government, audit committees are intended to protect the public interest by promoting and facilitating effective accountability and financial management, which is accomplished by providing management with independent, objective, and experienced advice and counsel.
In 2002, the Government Finance Officers Association (GFOA)—a professional association of state and local finance officers—recommended that every government entity establish an audit committee or its equivalent. An audit committee can facilitate communication between management, the auditor, and the governing board, according to GFOA, and is also useful in focusing on and documenting the process for managing the organization’s financial statement audit. GFOA’s guidelines for establishing an audit committee include recommendations that (1) the audit committee should be formally established by charter, enabling resolution, or other appropriate legal means; (2) the members of the audit committee collectively should possess the expertise and experience in accounting, auditing, financial reporting, and finance needed to understand and resolve issues raised by the independent audit of the financial statements; and (3) a majority of the members of the audit committee should be selected from outside of management. GFOA also states that the audit committee’s primary responsibility should be to oversee the independent audit of the government’s financial statements, from the selection of the independent auditor to the resolution of audit findings. GFOA further recommends that the audit committee should present annually to the governing board and management a written report of how it has discharged its duties and met its responsibilities, and that the report be made public.
Public Companies
The corporate failures and fraud that resulted in substantial financial losses to institutional and individual investors at the turn of the 21st century led to renewed focus on accountability and governance in public companies and culminated in the enactment of the Sarbanes-Oxley Act of 2002, which enhanced the disclosure and internal control requirements imposed by the Securities Exchange Act of 1934 as amended (Exchange Act); the Sarbanes-Oxley Act also implemented new accounting reforms for public companies. The Sarbanes-Oxley Act contains provisions for the governance, auditing, and financial reporting of public companies, including provisions intended to deter corporate accounting fraud and corruption and to punish violators. The 2002 act generally applies to companies required to file reports with the Securities and Exchange Commission (SEC) under the Securities and Exchange Act of 1934.
Financial Reporting
The Exchange Act, including SEC implementing regulations, requires publicly traded companies to make periodic filings with the SEC that disclose their financial status and changes in financial condition, including annual and quarterly financial reports. Annually, public companies file reports containing audited financial statements prepared in conformity with generally accepted accounting principles (GAAP) and audited by registered accounting firms. Quarterly reports, which may be unaudited, contain financial statements and the MD&A. In addition to the company’s financial statements, annual filings contain information including (1) selected financial data, (2) supplementary financial information, and (3) the MD&A of the company’s financial condition and results of operations. The objective of the MD&A is to enable the reader to assess material changes in financial condition and the results of operations of the company. The MD&A is not audited; however, the auditor is required to consider whether the information is materially consistent with information appearing in the financial statements. The SEC reviews a selection of annual and quarterly filings for compliance with accounting and disclosure requirements. Generally, the MD&A is required to contain a discussion of material changes in liquidity, capital resources, off-balance sheet arrangements, aggregate contractual obligations, and results of operations; known material trends, events, and uncertainties that could render historical financial information non-indicative of future operations or financial condition; the cause of material changes in line items of the interim financial statements from prior-period amounts; and any other information necessary for an understanding of the company’s financial condition, changes in financial condition, and results of operations.
Since the enactment in 2002 of the Sarbanes-Oxley Act, public companies have been required by section 404 to file annual reports with the SEC that include (1) management’s assessment of the effectiveness of internal controls over financial reporting, and (2) the auditor’s attestation and report on management’s assessment. Public companies are also required to disclose in both quarterly and annual reports filed with the SEC any changes in their internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to affect, the company’s internal control over financial reporting. In addition, most companies are required to evaluate the effectiveness, as of the end of each fiscal quarter, of its disclosure controls and procedures and disclose in its quarterly report filed with the SEC the conclusions of the company's CEO and CFO regarding the effectiveness of such procedures.
Under SEC rules adopted pursuant to section 302 of the Sarbanes–Oxley Act, each annual and quarterly report a public company files with the SEC must include, as an exhibit, the certification signed by the company’s CEO and CFO stating in pertinent part that they each have reviewed the report being filed and that, based on their knowledge, it does not contain untrue statements or omissions of a material fact resulting in a misleading report and that, based on their knowledge, the financial information in the report is fairly presented. The act includes criminal penalties for certifying the financial statements while knowing that the financial statements do not fairly present the financial condition and results of the public company. The certification requirement motivated corporate executives and managers to increase their scrutiny of the company financial statements and, in many cases, put specific accountability mechanisms in place in their companies to help assure reliable financial statements.
The SEC’s Division of Corporate Finance reviews public company filings periodically to determine whether publicly held companies are meeting their disclosure requirements and whether improvements are needed in the quality of the disclosures. To meet the SEC's requirements for disclosure, a company issuing securities must make available all information, whether it is positive or negative, that might be relevant to an investor's decision to buy, sell, or hold securities in the company.
Internal Controls
Internal control serves as a first line of defense in safeguarding assets, preventing and detecting errors and fraud, and in providing assurance over the reliability of financial reporting. Internal control is defined as a process that is effected by an entity’s board of directors, management, and other personnel, and is designed to provide reasonable assurance regarding the achievement of the following objectives: (1) effectiveness and efficiency of operations; (2) reliability of financial reporting; and (3) compliance with laws and regulations.
Section 404 of the Sarbanes–Oxley Act establishes requirements on internal control for companies and auditors. It requires companies to publicly report on (1) management’s responsibility for establishing and maintaining an adequate internal control structure, including controls over financial reporting and (2) the results of management’s assessment of the effectiveness of internal control over financial reporting. Section 404 requires accounting firms that serve as external auditors for public companies to (1) attest to the assessment made by the companies’ management and (2) report on the results of their attestation and whether they agree with management’s assessment of the company’s internal control over financial reporting.
Internal control over financial reporting is further defined in SEC regulations implementing Section 404. These regulations define internal control over financial reporting as a process providing reasonable assurance regarding the preparation of financial statements and the reliability of financial reporting, including policies and procedures that do the following: pertain to the maintenance of records that accurately and fairly reflect the transactions and dispositions of company assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of company assets.
Governance (Audit Committees)
Independent audit committees have become, within public companies, an integral part of governance and oversight over financial reporting, internal control, and the audit process. The 1987 Treadway Commission’s Report on Fraudulent Financial Reporting recognized as a key practice in reducing fraudulent financial reporting the establishment by the company’s board of directors of “an informed, vigilant, and effective” audit committee to oversee the financial reporting process. In 1998, the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) formed the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees. The committee released a 10-point plan in 1999 toward improving audit committee effectiveness. NYSE-, Amex-, and NASD-listing standards—which were the primary guidance for audit committees of public companies—were changed to reflect the recommendations of the Blue Ribbon Committee. Although this guidance, as well as recommendations of the Treadway Commission, existed prior to enactment of the Sarbanes–Oxley Act of 2002, the act provided a statutory basis—primarily in sections 202, 204, 301, and 407— for the composition and responsibilities of public-company audit committees in provisions similar to the Treadway Commission and the Blue Ribbon Committee recommendations.
Section 301 of the Sarbanes–Oxley Act of 2002 requires that audit committee members be selected from the company’s board of directors and that they be independent (i.e., unaffiliated with the company and receiving no consulting fee, advisory fee, or other compensatory fee from the company). The audit committee is responsible for the appointment, compensation, and oversight of the auditor, oversight of company management regarding financial reporting, and the resolution of disagreements between management and the auditor. Finally, Section 301 provides that the audit committee should have the authority and funding to engage advisors when necessary; ensure that processes are in place for the receipt, retention, and treatment of any complaints from “whistle-blowers” about accounting, internal controls, or auditing issues; and maintain open channels for employees to use in communicating knowledge of malfeasance or errors to the audit committee without fear of management retaliation.
Section 202 of the act requires the audit committee to preapprove all audit and nonaudit services by an auditor to guard against potential conflicts that could occur if services such as bookkeeping and information-system design and implementation are provided by the company’s auditor.
Section 204 of the act requires that the auditor report to the audit committee all critical accounting policies followed in the course of an audit, all alternative accounting treatments within GAAP related to material items discussed with company management, and other material written communications between the auditor and company management.
Finally, Section 407 of the act and implementing SEC regulations requires public companies to disclose whether the audit committee has at least one financial expert, the expert’s name, and the expert’s independence from management. If the company does not have a financial expert on the audit committee, it is required to explain why.
Amtrak
Financial Reporting
Until 1997, Amtrak was classified as a mixed-ownership government corporation under the Government Corporation Control Act. Government Corporation Control Act was intended to make government corporations accountable to Congress for their operations while allowing them the flexibility and autonomy needed for their commercial activities. Generally, a mixed-ownership corporation can be defined as a corporation with both government and private equity. In the case of Amtrak, the federal government held its preferred stock, and there were private entities that held common stock (three railroads and a holding company). The Amtrak Reform and Accountability Act of 1997 changed Amtrak’s status as a mixed- ownership government corporation by removing Amtrak from the list of mixed-ownership government corporations in the context of making Amtrak operationally self-sufficient by 2002. As we noted in our October 2005 report, today Amtrak is most similar to a “government-established private corporation.”
Consistent with Amtrak-specific statutory provisions in Title 49 of the U.S. Code, Amtrak’s management and Board of Directors annually shall submit the financial statements to Congress with its operations reports. The annual financial report prepared and issued by Amtrak includes the audited financial statements and accompanying notes. However, the report does not include an MD&A section. Amtrak’s annual financial statements are required to be submitted to Congress, but are not submitted to, or formally reviewed by, OMB or any regulatory agency. However, Amtrak is required in its grant and loan agreement to produce a variety of daily, monthly, and annual reports that are submitted to its board, Congress, and FRA. The monthly performance report is an extensive report averaging 80 to 90 pages that contains financial results, route performance, workforce statistics, and performance indicators; it is also posted to Amtrak’s Web site.
Internal Control
As a government-established private corporation, Amtrak is not subject to the internal control requirements that govern either federal entities or publicly traded companies, and thus its annual report does not include a management report on internal control. An annual audit is performed using Government Auditing Standards; therefore, Amtrak’s management and Board of Directors receive a report on internal controls and compliance with laws, regulations, contracts, and grant agreements. However, the internal control report is not included in Amtrak’s annual report. In our October 2005 report, we noted that DOT officials told us that they receive the internal control and compliance report. We also stated in our October 2005 report that Amtrak officials were not able to provide us with a distribution list and they had no recollection of the report being requested by, or sent to, any external party.
Governance (Audit Committee)
In its original authorizing legislation in 1970, Amtrak’s Board of Directors was authorized for 15 members, but there have never been more than 13 members serving. The current limit of 7 members was a reduction from 9 made by the Amtrak Reform and Accountability Act of 1997. The members are appointed by the President with the advice and consent of the Senate. The board has operated with less than a full complement of 7 voting members since July 2003. Between October 2003 and June 2004, the board had only 2 voting members (excluding the Secretary of Transportation or his designee). As of September 2006, the board had 5 members (excluding the Secretary of Transportation or his designee and the President of Amtrak); however, the term of 2 members is expiring in January 2007, so the board will be back to 3 members. Amtrak’s bylaws also authorize the establishment of committees to assist the board in carrying out its management responsibilities. In March 2002, the board eliminated ad hoc committees, along with the Corporate Strategy Committee and the Safety, Service, and Quality Committee. At that time, committees were established for audits, corporate affairs, finance, compensation and personnel, and legal affairs. Amtrak’s bylaws permit it to conduct periodic meetings between the Board of Directors and the shareholders, as necessary. Following enactment of the Amtrak Improvement Act of 1981, which abolished the election of any members of the Board of Directors by the common or preferred shareholders, Amtrak has not held a shareholders’ meeting.
Currently the board is using the former audit committee charter in carrying out its responsibilities for the oversight of its accounting and financial reporting processes and the audits of Amtrak’s financial statements by an independent auditor. Since the Board of Directors includes the President and CEO, the audit committee would not be considered “independent” under the requirements and practices for public companies, as provided in section 301 of the Sarbanes–Oxley Act of 2002.
In commenting on a draft of our October 2005 report, both DOT and Amtrak officials told us that, given the limited number of board members, Amtrak’s full board of directors had assumed the functions of the audit committee. DOT officials said these functions included meeting with Amtrak’s auditor to discuss audit and internal control issues, and that some of these meetings were held without the presence of Amtrak management. Our analysis showed that the board performed some audit committee oversight functions. Currently, the board is using the audit committee charter in carrying out its responsibilities for the oversight of the corporation’s accounting and financial reporting processes and the audits of Amtrak’s financial statements by an independent auditor.
Opportunities for Improvement at Amtrak
Financial Reporting
MD&A
Currently, Amtrak’s financial statements do not include an MD&A, an important part of financial statements that is required for federal entities and public companies. The MD&A provides users with information relevant to an assessment of the organization’s financial condition and the results of its operations as determined by an evaluation of the amounts and certainty of cash flows from operations and from outside sources. For a hybrid organization such as Amtrak—a for-profit corporation that receives substantial federal subsidies—an MD&A would seem especially important to understand the numbers presented in its financial statements, and for users of the financial statements to interpret material changes in financial condition and the results of operations.
Quarterly Financial Statements
Currently, Amtrak does issue a variety of reports, but does not issue quarterly financial statements that include footnotes. Public companies are required to file quarterly financial statements with footnotes and MD&A with the SEC. Under OMB Circular No. A-136, the executive agencies required to submit annual financial statements under the CFO Act, GMRA, and ATDA (whose requirements are now all codified at 31 U.S.C. § 3515) are also required to submit quarterly financial statements without footnotes to OMB. To issue quarterly financial statements, an organization must adopt a rigorous financial reporting process that, by its frequency, becomes more practiced and routine. Companies that are more successful at closing their accounting systems and issuing financial statements on a regular basis tend to have more automated systems and routine processes, which can minimize fraud and errors. We previously recommended that Amtrak should engage an independent public accountant to provide review-level attestation work on Amtrak’s quarterly financial statements in order to strengthen financial reporting procedures. Preparation of quarterly financial statements with footnotes is a basic financial reporting function that contributes to the overall effectiveness of financial reporting and the organization’s control environment.
Certification by CEO and CFO
An important provision of the Sarbanes–Oxley Act, section 302, requires the CEO and CFO of public companies to certify that they have reviewed the company’s financial statements and that, based on their knowledge, the financial statements do not contain any untrue statements or omissions of material fact; also, they must certify that the financial statements are fairly presented. Amtrak’s executives are not required to so certify the organization’s financial statements. Amtrak’s CEO and CFO would need to implement additional internal processes and controls to allow them to make such a certification. Because Amtrak relies heavily on federal subsidies, such a certification process would be useful for those charged with making decisions about the level of financial subsidies that are being used.
Review of Financial Statements
Currently, Amtrak is required to provide various financial and performance reports to FRA and/or DOT; however, Amtrak’s financial statements are not reviewed by OMB or any other regulatory agency. Requiring Amtrak’s financial statements to be filed with, and subject to review by, SEC or OMB (or both) could further strengthen accountability and assurance that Amtrak’s financial statements represent its true financial condition. If Congress were to require Amtrak to file annual reports and other periodic reports with the SEC, Amtrak would need to adhere to the SEC’s regulations and guidance, which require consistent disclosure of financial and operations information. If Congress were to require Amtrak to submit its financial report to OMB, Amtrak would need to comply with appropriate OMB and federal financial reporting regulations and guidance, and respond to OMB’s inquiries about Amtrak’s reported financial information.
Internal Control
Management’s Assessment and Report on Internal Controls
Currently, Amtrak does not have requirements for management to evaluate and report on internal control effectiveness. A management evaluation of the effectiveness of internal control and a management report on the results of the assessment holds management accountable for understanding the organization’s internal control, recognizing and correcting deficiencies, and maintaining effective internal controls. FMFIA and OMB Circular No. A-123 and section 404(a) of the Sarbanes–Oxley Act have requirements for management’s assessment of internal controls for federal agencies and public companies, respectively.
Auditor’s Attestation
An auditor’s opinion on the effectiveness of internal control provides an independent assessment of management’s assessment of its internal controls. Although not required for federal entities, we support internal control opinions as an important accountability mechanism. In addition, an independent auditor’s opinion on internal control was a key provision of the Sarbanes–Oxley Act. Under section 404(b), public companies are required to have an independent auditor attest to, and report on, management’s assessment of the effectiveness of internal control over financial reporting.
Governance (Audit Committee)
Amtrak currently does not have an audit committee separate from its Board of Directors due to its current board size. A minimum of three audit committee members is required for NYSE-listed companies, and a minimum of three members was recommended by the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees. Because Amtrak relies heavily on federal subsidies, an audit committee with duties and responsibilities that mirror those of publicly traded companies and meets regularly is important to oversight of Amtrak’s accountability for federal funds.
Comments from National Railroad Passenger Corporation
The following are GAO’s comments on National Railroad Passenger Corporation’s letter dated October 23, 2006.
GAO Comments
1. Our report is not intended to imply that Amtrak’s mission is to generate profits rather than provide services that produce public benefits on a break-even basis. In fact, the first section of the report discusses the characteristics (both financial and non-financial) of the types of service provided by intercity passenger rail in the United States and the types of service that could increase the transportation benefits and public benefits of intercity passenger rail. Regarding operating losses, we recognize that Amtrak’s operating loss is projected to decrease in fiscal year 2006 and have changed the report to reflect that, instead of increasing, operating losses continue to remain high. Finally, we do not believe our report is inconsistent in how operating loss is portrayed. Non-cash items such as depreciation and interest expenses are legitimate expenses to the business and were reported based on Amtrak’s audited financial statements. The report also includes a figure excluding these items to illustrate their relative contribution over Amtrak’s reported cash losses. In our discussion of the financial performance of routes, we used the route financial data provided to us by Amtrak, which does not include non-cash items such as depreciation charges. 2. The trend in passenger rail revenue between fiscal years 2002 and 2005 was stable. Based on data provided by Amtrak we included a footnote to recognize the projected increase in passenger rail revenue in fiscal year 2006. We have eliminated any reference to “promotional pricing” being the reason for revenue decreases. 3. We recognize that a significant percentage of long distance passengers that are not traveling for work purposes may be traveling for family or personal/family business reasons. This is still a form of leisure travel and we have modified our definition of “leisure” to include travel for family or personal business reasons. Regarding long distance passengers traveling less than 500 miles, our report notes that many— but certainly not all—of these passenger trips may have characteristics similar to those on corridor routes. The example cited in the report, on the Empire Builder route, is intended to illustrate the type of circumstances where this may apply. Regarding the financial performance of long distance routes, we agree that on a per passenger mile basis the difference between long distance service and other non- NEC trains may be attributable to state subsidies. Our report notes that one reason for the wide variance in financial performance among corridor routes is the level of state support. 4. Our report also recognizes the growth in state-supported services and that these services are the fastest growing in terms of ridership and illustrate the significant potential for further growth. Finally, we agree that on state-supported routes, states play a much greater decision making role. We have changed our report to recognize this role. 5. We agree that rail network capacity is an important national policy issue and that freight and passenger railroads, as well as governments at all levels need to work together to address this issue. This will be particularly important in the future as rail infrastructure capacity continues to become constrained. Our report discusses the challenges associated with addressing this issue. We also address the issue of cost sharing between the federal and state governments and how this is common in some transportation modes other than intercity passenger rail. Moreover, we identify factors that need to be considered in making federal investments in private infrastructure. Finally, the report identifies some of the factors as to why commuter railroads pay amounts different from incremental cost to access freight and other privately owned infrastructure. It was for this reason that we made a qualitative, rather than a quantitative, comparison between Amtrak and commuter rail infrastructure access costs.
GAO Contact and Staff Acknowledgments
GAO Contact
Acknowledgments
In addition to the above individual, Randy Williamson (Assistant Director), Tida Barakat, Jay Cherlow, Jeanette Franzel, Greg Hanna, Bert Japikse, Richard Jorgenson, Ryan Lambert, Kimberly McGatlin, John Saylor, Stan Stenersen, Lacy Vong, and Diana Zinkl made key contributions to this report. | Why GAO Did This Study
Intercity passenger rail service is at a critical juncture in the United States. Amtrak, the current service provider, requires $1 billion a year in federal subsidies to stay financially viable but cannot keep pace with its deteriorating infrastructure. At the same time, the federal government faces growing fiscal challenges. To assist the Congress, GAO reviewed (1) the existing U.S. system and its potential benefits, (2) how foreign countries have handled passenger rail reform and how well the United States is positioned to consider reform, (3) challenges inherent in attempting reform efforts, and (4) potential options for the federal role in intercity passenger rail. GAO analyzed data on intercity passenger rail performance and studied reform efforts in Canada, France, Germany, Japan, and the United Kingdom.
What GAO Found
The existing intercity passenger rail system is in poor financial condition and the current structure does not effectively target federal funds to where they provide the greatest public benefits, such as transportation congestion relief. Routes of 750 miles or more, while providing service for some rural areas and connections between regions, show limited public benefits for dollars expended. These routes account for 15 percent of riders but 80 percent of financial losses. "Corridor" routes (generally less than 500 miles in length) have higher ridership, perform better financially, and appear to offer greater potential for public benefits. The countries GAO studied varied in their reform approach, but their experience shows the United States needs to consider three key elements in attempting any reform: (1) define national policy goals, (2) define the roles of government and other participants, and (3) establish stable funding. Countries found these elements important in setting the role of passenger rail in the national transportation system and increasing the benefit from investing in passenger rail. Currently, however, the United States is not well positioned to address these key elements. The goals or expected outcomes of intercity passenger rail policies are ambiguous, participants' roles are unclear, and there is widespread disagreement about the level of funding to devote to this effort. Amtrak is taking actions within its authority to reduce costs and increase efficiency, but Amtrak is not in a position to address all key elements. To undertake reform, federal leadership is needed. Addressing key elements of reform poses many challenges, because those who have a stake in the process have divergent goals or points of view. Amtrak workers, freight railroads that own much of the rail system over which passenger trains operate, and federal and state governments would be among those affected. The diversity of viewpoints poses challenges for determining both the overall goal for passenger rail in the United States and the federal role in achieving this goal. Funding-related challenges include identifying how to pay for achieving these goals and how to overcome disadvantages intercity passenger rail faces relative to leveraging of federal funds. Although federal-state cost sharing is common in highway and transit programs, states face difficulty leveraging their expenditures on rail service. There are four main options for the federal role in intercity passenger rail service: (1) keep the existing structure and funding, (2) make incremental changes to improve financial or operational performance, (3) discontinue federal involvement, or (4) fundamentally restructure the system. Each option has advantages and disadvantages, and each faces its own challenges. Each requires some level of federal funding, a clear articulation of expected goals, and, except for the status quo option, substantial time to implement. Of these options, the fourth--fundamental restructuring--would allow for effectively integrating rail into the national transportation system and substantially improving overall performance and accountability. |
gao_GAO-05-785 | gao_GAO-05-785_0 | Background
As described at the beginning of this report, DOD recognized the need for additional base closures and realignments following the 1995 closure round and made repeated efforts to gain congressional authorization for an additional closure round. Congress authorized an additional round for 2005 with the passage of the National Defense Authorization Act for Fiscal Year 2002. The 2002 Act essentially extended the authority of the Defense Base Closure and Realignment Act of 1990, which had authorized the 1991, 1993, and 1995 rounds, with some modifications for the 2005 base closure round.
In a memorandum dated November 15, 2002, the Secretary of Defense issued initial guidance outlining goals and a leadership framework for the 2005 BRAC round. In doing so, he noted that “At a minimum, BRAC 2005 must eliminate excess physical capacity; the operation, sustainment and recapitalization of which diverts scarce resources from defense capability.” However, specific reduction goals were not established. At the same time, the Secretary’s guidance for the 2005 round depicted the round as focusing on more than the reduction of excess capacity. He said that “BRAC 2005 can make an even more profound contribution to transforming the Department by rationalizing our infrastructure with defense strategy.” He further noted that “A primary objective of BRAC 2005, in addition to realigning our base structure to meet our post-Cold War force structure, is to examine and implement opportunities for greater joint activity.” Toward that end, the Secretary indicated that organizationally the 2005 BRAC analysis would be two pronged. Joint cross-service teams would analyze common business-oriented functions, and the military departments would analyze service-unique functions.
The Secretary of Defense established two senior groups to oversee and guide the BRAC 2005 process from a departmental perspective. The first was the Infrastructure Executive Council (IEC), which was designated the policy-making and oversight body for the entire process, and the second, a subordinate group, was the Infrastructure Steering Group (ISG), created to oversee the joint cross-service analyses and integrate that process with the military departments’ own service-unique analyses. Each of the military departments also established BRAC organizations, which had oversight from senior leaders. Likewise, each of the joint cross-service teams, under the purview of the ISG, was led by senior military or civilian officials, with representation from each of the services and relevant defense agencies. DOD’s BRAC leadership structure is shown in figure 1.
DOD developed a draft set of 77 transformational options that once approved, were expected to constitute a minimum analytical framework upon which the military departments and joint cross-service groups would conduct their respective BRAC analyses. Because of a lack of agreement among the services and OSD, the draft options were never formally approved, but they remained available for consideration by analytical teams and were referenced by some groups in support of various BRAC actions being considered. (See app. XV for a list of the draft transformational options.) To some extent, the analyses and recommendations of each of the services and joint cross-service groups were also influenced by various guiding principles or policy imperatives developed by the respective service or joint cross-service groups, such as the need to preserve a particular capability in a particular location.
The legislation authorizing the 2005 BRAC round, enacted as part of the fiscal year 2002 Defense Authorization Act, required DOD to give priority to selection criteria dealing with military value and added elements of specificity to criteria previously used by DOD in prior BRAC rounds. Subsequently, The Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 codified the entire selection criteria and added the word “surge” to one previously used criterion related to potential future contingencies and mobilization efforts. In large measure, the final criteria closely followed the criteria DOD employed in prior rounds, with greater specificity added in some areas, as required by Congress. Figure 2 shows DOD’s selection criteria for 2005, with changes from BRAC 1995 denoted in bold.
To ensure that the selection criteria were consistently applied, OSD established a common analytical framework to be used by each military service and joint cross-service group. Each service and group adapted this framework, in varying degrees, to its individual activities and functions in evaluating facilities and functions and identifying closure and realignment options. Despite the diversity of bases and cross-service functions analyzed, each of the groups was expected to first analyze capacity and military value of its respective facilities or functions, and then to identify and evaluate various closure and realignment scenarios and provide specific recommendations. Scenarios were derived from data analysis and transformational options, as well as from goals and objectives each group established for itself as it began its work. Figure 3 depicts the expected progression of that process.
An initial part of the process involved an overall capacity analysis of specific locations or functions and subfunctions at specific locations. The analysis relied on data calls to obtain certified data to assess such factors as maximum potential capacity, current capacity, current usage, excess capacity, and capacity needed to meet surge requirements.
The military value analysis consisted of assessments of operational and physical characteristics of each installation, or specific functions on an installation related to a specific joint cross-service group’s area of responsibility. These would include an installation’s or function’s current and future mission capabilities, physical condition, ability to accommodate future needs, and cost of operations. This analysis also relied on data calls to obtain certified data on the various attributes and metrics used to assess each of the four military value criteria and permit meaningful comparisons between like installations/facilities with reference to the collective military value selection criteria. DOD officials used these data to develop comparative military value scores for each installation/facility or for categories of facilities serving like functions.
The scenario development and analysis phase focused on identifying various realignment and closure scenarios for further analysis. These scenarios were to be derived from consideration of the department’s 20- year force structure plan, capacity analysis, military value analysis, and transformational options; applicable guiding principles, objectives, or policy imperatives identified by individual military services or joint cross- service groups; and military judgment. Each component had available for its use an optimization or linear programming model that could combine the results of capacity and military value analyses and other information to derive scenarios and sets of alternatives. The model could be used to address varying policy imperatives or objectives, such as minimizing the number of sites, minimizing the amount of excess capacity, or maximizing the average military value. A BRAC review group could also direct variations that would, for example, eliminate as much excess capacity as possible while maintaining an average military value at least as high as the original set of sites.
OSD policy guidance has historically specified that priority consideration be given to military value in making closure and realignment decisions, but that priority was specifically mandated by the legislation authorizing the 2005 BRAC round. At the same time, historic practice and the 2005 authorizing legislation both required consideration of additional issues included in selection criteria 5 through 8, detailed below: Criterion 5—costs and savings: This criterion consists of measures of costs and savings and the payback periods associated with them. Each component assessed costs using the Cost of Base Realignment Actions (COBRA) model that was used in each of the BRAC rounds since 1988. Appendix XIII summarizes improvements that have been made to the model over time and more recently for the 2005 round.
Criterion 6—economic impact: This criterion measures the direct and indirect impacts of a BRAC action on employment in the communities affected by a closure or realignment. Appendix XIV provides a more complete description of how economic impact was assessed and the changes made to improve the assessment for this round.
Criterion 7—community infrastructure: Selection criterion 7 examines “the ability of the infrastructure of both the existing and potential receiving communities to support forces, missions, and personnel.” The services and joint cross-service groups considered information on demographics, childcare, cost of living, employment, education, housing, medical care, safety and crime, transportation, and public utilities of the communities impacted by a BRAC action.
Criterion 8—environmental impact: Selection criterion 8 assesses “the environmental impact, including the impact of costs related to potential environmental restoration, waste management, and environmental compliance activities” of closure and realignment recommendations. In considering this criterion, the services and joint cross-service groups focused mainly on potential environmental impacts while acknowledging, when appropriate, known environmental restoration costs associated with an installation recommended for closure or realignment. Waste management and environmental compliance costs were factored into criterion 5. However, under OSD policy guidance, environmental restoration costs were not considered in the cost and savings analyses for evaluating individual scenarios under criterion 5. DOD is obligated to restore contaminated sites on military bases regardless of whether they are closed, and such costs could be affected by reuse plans that cannot be known at this time but would be budgeted for at a later time when those plans and costs are better identified.
Each of the military departments produced reports with closure and realignment recommendations, as did each of the joint cross-service groups, the results of which are summarized in appendixes III through XII. Figures 4 and 5 show, respectively, the 33 major closures and 30 major realignments that have been recommended by DOD where plant replacement values exceed $100 million for major base closures and net losses of 400 or more military and civilian personnel for major base realignments.
While the 2005 BRAC round, like earlier BRAC rounds, was chartered to focus on United States domestic bases, DOD separately had under way a review of overseas basing requirements that had implications for the domestic BRAC process. In a September 2004 report to Congress, the Under Secretary of Defense for Policy provided an update on DOD’s “global defense posture review.” It noted that once completed, the changes stemming from the review would result in the most profound reordering of United States military forces overseas as the current posture has been largely unchanged since the Korean War. The report noted that over the next 10 years, it is planned that up to 70,000 military personnel would return to the United States, along with approximately 100,000 family members and civilian employees. It further noted that a net reduction of approximately 35 percent of overseas sites—bases, installations, and facilities—is planned. DOD had indicated that the domestic BRAC process would be used in making decisions on where to relocate forces returning to the United States from overseas bases.
Separately, Congress in 2003 mandated the creation of a special commission to evaluate, among other things, the current and proposed overseas basing structure of the United States military forces. The Commission’s observations are included in its May 2005 report. Among other things, the Commission cited the need for appropriate planning to ensure the availability of community infrastructure to support returning troops and to mitigate the impact on communities.
DOD’s Recommendations Would Have Varying Degrees of Success in Achieving Goals for the 2005 BRAC Round
The recommendations proposed by the Secretary of Defense would have varying degrees of success in achieving DOD’s BRAC 2005 goals of reducing infrastructure and achieving savings, furthering transformation objectives, and fostering joint activity among the military services. While DOD proposed a record number of closure and realignment actions, exceeding those in all prior BRAC rounds combined, many proposals focus on the reserve component bases and relatively few on closing active bases. Projected savings are almost equally as large, as all prior BRAC rounds combined, but about 80 percent of the projected 20-year net present value savings (savings minus up-front investment costs) are derived from only 10 percent of the recommendations. While we believe the recommendations overall would achieve savings, up-front investment costs of about $24 billion are required to implement all recommendations to achieve DOD’s overall expected savings of nearly $50 billion over 20 years. Much of these saving are related to eliminations of jobs currently held by military personnel but are not likely to result in end-strength reductions, limiting savings available for other purposes. Some proposed actions represent some progress in emphasizing transformation and jointness, but progress in these efforts varied without clear agreement on transformational options to be considered, and many recommendations tended to foster jointness by consolidating functions within rather than across military services.
BRAC 2005 Round Differs from Past Rounds
The BRAC 2005 round is different from previous base closure rounds in terms of number of actions, projected implementation costs, and estimated annual recurring savings. While the number of major closures and realignments is just a little greater than individual previous rounds, the number of minor closure and realignments, as shown in table 1, is significantly greater than those in all previous rounds combined.
The large increase in minor closures and realignments is attributable partly to actions involving the Army National Guard, Army Reserve, Air National Guard, and vacating leased space.
The costs to implement the proposed actions are $24.4 billion compared to a $22 billion total from the four previous rounds through 2001, the end of the 6-year implementation period for the 1995 BRAC round. The increase in costs is due partly to significant military construction and moving costs associated with Army recommendations to realign its force structure, and to recommendations to move activities from leased space onto military installations. For example, the Army projects that it will need about $2.3 billion in military construction funds to build facilities for the troops returning from overseas. Likewise, DOD projects that it will need an additional $1.3 billion to build facilities for recommendations that include activities being moved from leased space. Time will be required for these costs to be offset by savings from BRAC actions and this in turn affects the point at which net annual recurring savings can begin to accrue.
Finally, the projected net annual recurring savings are $5.5 billion compared to net annual recurring savings of $2.6 billion and $1.7 billion for the 1993 and 1995 rounds respectively. The increased savings are partly attributable to significant reductions in the number of military positions and business process reengineering efforts.
Infrastructure Would Likely Be Reduced with Some Limitations Noted
DOD projects that the proposed recommendations would reduce excess infrastructure capacity, indicating that the plant replacement value of domestic installations would be reduced by about $27 billion, or 5 percent. However, the projected reductions in plant replacement value did not account for the $2.2 billion in domestic military construction projects associated with relocating forces from overseas. On the other hand, reductions in leased space are not considered in the plant replacement value analysis, since leased space is not government owned. DOD estimates that its recommendations will reduce about 12 million square feet of leased space.
DOD Projects Recommendations Would Produce Savings, but there are Limitations Associated with the Savings Estimates
DOD projects that its proposed recommendations will produce nearly $50 billion in 20-year net present value savings, with net annual recurring savings of about $5.5 billion. There are limitations associated with the savings claimed from military personnel reductions and we believe there is uncertainty regarding the magnitude of savings likely to be realized in other areas given unvalidated assumptions regarding expected efficiency gains from business process reengineering efforts and projected savings from sustainment, recapitalization, and base operating support.
Table 2 summarizes the projected one-time cost, the cost or savings anticipated during the 6-year implementation period for the closure or realignment, the estimated net annual recurring savings, and the projected 20-year net present value costs or savings of DOD’s recommendations.
Table 2 also shows the Navy, Air Force, and joint cross-service groups all projecting net savings within the 6-year implementation period, as well as significant 20-year net savings. In contrast, because of the nature of the Army’s proposed actions and costs, such as providing infrastructure for troops returning from overseas and the consolidation and recapitalization of reserve facilities, the Army does not achieve net savings either during the implementation period or within 20 years, based on recommendations included in its BRAC report.
Notwithstanding these projected savings, we identified limitations or uncertainties about the magnitude of savings likely to be realized. As figure 6 shows, 47 percent of the net annual recurring savings can be attributed to projected military personnel reductions. About 40 percent ($2.1 billion) of the projected net annual recurring savings can be attributed to savings from operation and maintenance activities, which include terminating or reducing property sustainment and recapitalization, base operating support, and civilian payroll. Furthermore, about $500 million of the “other” savings is based on business process reengineering efforts, but some of the assumptions supporting the expected efficiency gains have not been validated.
Military Personnel Savings
Much of the projected net annual recurring savings (47 percent) are associated with eliminating positions currently held by military personnel; but rather than reducing end-strength levels, DOD indicates the positions are expected to be reassigned to other areas, limiting dollar savings available for other uses. For example, although the Air Force projects net annual recurring savings of about $732 million from eliminating about 10,200 military positions, Air Force officials stated the active duty positions will be reinvested to relieve stress on high demand career fields and the reserve positions to new missions yet to be identified. Likewise, the Army is projecting savings from eliminating about 5,800 military positions, but it has no plans to reduce its end-strength. Finally, the Navy is projecting it will eliminate about 4,000 active duty military positions, which a Navy official noted will help it achieve the end-strength reductions already planned. As we noted during our review of DOD’s process during the 1995 BRAC round, since these personnel will be assigned elsewhere rather than taken out of the force structure, they do not represent dollar savings that can be readily reallocated outside the personnel accounts. Without recognition that these are not dollar savings that can be readily applied elsewhere, this could create a false sense of savings available for use in other areas traditionally cited as a beneficiary of BRAC savings, such as making more funds available for modernization and better maintenance of remaining facilities.
Sustainment, Recapitalization, and Base Operating Support Savings
DOD is also projecting savings from the sustainment and recapitalization of facilities that are scheduled to be demolished, as well as from facilities that might remain in DOD’s real property inventory when activities are realigned from one base to another. For example, the Industrial Joint Cross-Service Group is claiming about $20 million in annual recurring savings from the recapitalization of facilities at installations responsible for destroying chemical weapons at three locations recommended for closure. However, the Army had already expected to demolish these chemical destruction facilities upon completing the destruction of the chemical weapons at each site and the Army has not identified future missions for these installations. As a result, we do not believe it is appropriate for the Industrial Joint Cross-Service Group to claim any recapitalization savings related to these installations.
Likewise, DOD is projecting savings from the recapitalization and sustainment of facilities in cases where functions or activities would be realigned from one base to another. However, it is not clear to what extent the proposed realignments would result in an entire building or portion of a building being vacated, or if entire buildings are vacated, whether they would be declared excess and removed from the military services’ real property inventory. Our analysis shows that the supply and storage group’s recommendations project about $100 million in sustainment and recapitalization savings from realigning defense distribution depots. The group estimates its recommendations will vacate about 27 million square feet of storage space. Supply and storage officials told us their goal is to vacate as much space as possible by re-warehousing inventory and by reducing personnel spaces, but they do not have a specific plan for what will happen to the space once it is vacated. In addition, until these recommendations are ultimately approved and implemented, DOD will not be in a good position to know exactly how much space is available or how this space will be disposed of or utilized. As a result, it is unclear as to how much of the estimated $100 million in annual recurring savings will actually occur.
Collectively, the issues we identified suggest the potential for reduced savings that are likely to be realized in the short term during the implementation period, which could further reduce net annual recurring savings realized in the long term. The short-term impact is that these reduced savings could adversely affect DOD’s plans for using these BRAC savings to help offset the up-front investment costs required to implement the recommendations and could further limit the amount of savings available for transformation and modernization purposes.
Savings Based on Business Process Reengineering
DOD projected net annual recurring savings in the “other” category as shown in figure 6 include about $500 million that is based on business process reengineering efforts. Our analysis indicates that four recommendations—one from the Industrial Joint Cross-Service Group and three from the Supply and Storage Joint Cross-Service Group—involve primarily business process reengineering efforts. However, the expected efficiency gains from these recommendations are based on assumptions that are subject to some uncertainty and have not been validated. For example, our analysis indicates that $215 million, or 63 percent, of the estimated annual recurring savings from the Industrial Joint Cross-Service Group recommendation to create fleet readiness centers within the Navy is based on business reengineering efforts that would result in overhead efficiencies. Although the data suggest there is the potential for savings, we believe the magnitude of the savings is somewhat uncertain because the estimates are based on assumptions that have undergone only limited testing. Realizing the full extent of the savings would depend on actual implementation of the recommended actions and modifications to the Navy’s supply system. The industrial group and the Navy assumed that combining depot and intermediate maintenance levels would reduce the time needed for an item to be repaired at the intermediate level, which in turn would reduce the number of items needing to be kept in inventory, as well as the number of items being sent to a depot for repair. These assumptions, which were the major determinant of the realignment savings, were reportedly based on historical data and pilot projects and have not been independently reviewed or verified by the Naval Audit Service, the DOD Inspector General, or us.
Furthermore, our analysis indicates that $291 million, or about 72 percent, of the net annual recurring savings expected from the Supply and Storage Joint Cross-Service Group’s three recommendations are also based on business process reengineering. In the COBRA model, the savings are categorized as procurement savings and are based on the expanded use of performance-based logistics and reductions to duplicate inventory. Supply and storage group staff said that these savings accrue from reduced contract prices because the Defense Logistics Agency (DLA) will have increased buying power since it is responsible for purchasing many more items that before were purchased by each of the services. In addition, savings accrue from increased use of performance-based agreements, a key component of performance-based logistics. The group estimates DLA can save 2.8 cents on each contract dollar placed on performance-based agreements. In addition, savings result from reductions in the amount of stock that must be held in inventory. Supply and storage staff said that these savings are attributable to reductions in the cost of money, cost of stock losses due to obsolescence, and cost of storage. Together the group estimates these factors save about 17 percent of the estimated value of the acquisition cost of the stock that is no longer required to be held in inventory. These savings estimates, for the most part, are based on historical documentation provided by DLA, which time did not allow us to validate. The extent to which these same savings will be achieved in the future is uncertain. As noted above, how these actions are implemented could also affect savings. We are concerned that this is another area that could lead to a false sense of savings and lead to premature reductions in affected budgets in advance of actual savings being fully realized, as has sometimes occurred in past efforts to achieve savings through business process reengineering efforts. We are also concerned that it could exacerbate a problem we have previously identified regarding past BRAC rounds involving the lack of adequate systems in place to track and update savings resulting from BRAC actions—the focus of our recommendation for the Secretary of Defense. These concerns are reinforced by limitations in DOD’s financial management systems that historically have made it difficult to fully identify the costs of operations and provide a complete baseline from which to assess savings.
Transformation Cited as Justification for Many Recommendations Despite Lack of Clear Agreement on Transformational Options
While furthering transformation was one of the BRAC goals, there was no agreement between DOD and its components on what should be considered a transformational effort. As part of the BRAC process, the department developed over 200 transformational options for stationing and supporting forces as well as for increasing operational efficiency and effectiveness. The OSD BRAC office narrowed this list to 77 options, but agreement was not reached within the department on these options, so none of them were formally approved. Nonetheless, each service and joint cross-service group was permitted to use the transformational options as appropriate to support its candidate recommendations. Appendix XV has a list of these 77 draft options.
Collectively, these draft options did not provide a clear definition of transformation across the department. The options ranged from those that seemed to be service specific to those that suggested new ways of doing business. For example, some transformational options included reducing the number of Army Reserve regional headquarters; optimizing Air Force squadrons; and co-locating various functions such as recruiting, military and civilian personnel training, and research, development and acquisition and test and evaluation, across the military departments. In contrast, some options suggested consideration of new ways of doing business, such as privatizing some functions and establishing a DOD agency to oversee depot-level reparables.
While the transformational options were never formally approved, our analysis indicates that many of DOD’s recommendations reference one or more of the 77 transformational options. For example, 15 of the headquarters and support activities group recommendations reference the option to minimize leased space and move organizations in leased space to DOD-owned space. Likewise, 37 of the Army reserve component recommendations reference the option to co-locate guard and reserve units at active bases or consolidate guard and reserve units that are located in proximity to one another at one location.
Conversely, a number of the scenarios that were initially considered but not adopted reference transformational options that could have changed existing business practices. For example, the education and training group developed a number of scenarios—privatizing graduate education programs and consolidating undergraduate fixed and rotary wing pilot training—based on the draft transformational options, but none were ultimately approved by the department.
Some Progress Made in Fostering Joint Basing
DOD’s recommendations make some progress toward the goal of fostering joint activity among the military services, based on a broad definition of joint activity. We found that for DOD’s recommendations, joint activity included consolidating some training functions within the same service, co- locating like organizations and functions on the same installation, and moving some organizations or functions closer to installations in order to further opportunities for joint training. Although the recommendations achieve some progress in fostering jointness, we found other instances where DOD ultimately adopted a service-centric solution even though the joint cross-service groups proposed a joint scenario. Table 3 shows the major recommendations that foster joint activity.
While the proposal to create joint bases by consolidating common installation management functions is projected to create greater efficiencies, our prior work suggests that implementation of these actions may prove challenging. The joint-basing recommendation involves one service being responsible for various installation management support functions at bases that share a common boundary or are in proximity to one another. For example, the Army would be the executive agent for Fort Lewis, Washington, and McChord Air Force Base, Washington, combined as Joint Base Lewis-McChord. However, as evident from our recent visit to both installations and discussions with base officials, concerns over obstacles such as seeking efficiencies at the expense of the mission, could jeopardize a smooth and successful implementation of the recommendation.
In some cases, the joint cross-service groups proposed scenarios that would have merged various support functions among the services, but a service solution was adopted by DOD. For example, the Headquarters and Support Activities Joint Cross-Service Group proposed to (1) consolidate civilian personnel offices under a new defense agency as DOD implements the national security personnel system, and (2) co-locate all military personnel centers in San Antonio, Texas, in anticipation of a standard military personnel system being implemented across the department. However, in both cases, DOD decided to consolidate military and civilian personnel centers within each service. Likewise, the Education and Training Joint Cross-Service Group proposed scenarios to consolidate undergraduate fixed wing training activities between the Air Force and the Navy and rotary wing training activities between the Navy and the Army to eliminate excess capacity. However, the proposals were not adopted because the Navy and the Air Force expressed concerns that this recommendation would result in significant permanent change of station costs for the services, specifically the cost of students traveling to designated training locations.
DOD Developed a Generally Logical and Reasoned Process for Making BRAC Decisions
Based on our analytical work, we believe DOD established and generally followed a logical and reasoned process for formulating its list of BRAC recommendations. The process was organized in a largely sequential manner with a strong emphasis on ensuring that accurate data were obtained and used. OSD established an oversight structure that allowed the seven individual joint cross-service groups to play a larger, more visible role in the 2005 BRAC process compared to BRAC 1995. Despite some overlap in data collection and other phases of the process, these groups and the military services generally followed the sequential BRAC process designed to evaluate and subsequently identify recommendations within their respective areas, with only the Army using a separate but parallel process to evaluate its reserve components. DOD also incorporated into its analytical process several key considerations required by the BRAC legislation, including the use of certified data, basing its analysis on its 20- year force structure plan and emphasizing its military value selection criteria, which included homeland defense and surge capabilities. In addition, DOD’s Inspector General and the military service audit agencies helped to ensure the data used during the BRAC process were accurate and reliable.
BRAC Process Was Logical and Largely Sequentially Structured
DOD provided overall policy guidance for the BRAC process, including a requirement that its components develop and implement internal control plans to ensure the accuracy and consistency of their data collection and analyses. These plans also helped to ensure the overall integrity of the process and the information upon which OSD considered each group’s recommendations. The BRAC recommendations, for the most part, resulted from a data-intensive process that was supplemented by the use of military judgment as needed. The process began with a set of sequential steps by assessing capacity and military value, developing and analyzing scenarios, then identifying candidate recommendations, which led to OSD’s final list of BRAC recommendations. Figure 7 illustrates the overall sequential analytical process DOD generally employed to reach BRAC recommendations.
It must be noted, however, that while the process largely followed the sequential process established by the department, initial difficulties associated with obtaining complete and accurate data in a timely manner added to overlap and varying degrees of concurrency between data collection efforts and other steps in the process.
During the 2005 BRAC process, the seven individual joint cross-service groups played a larger, more visible role compared to their role during the 1995 BRAC round. Our analysis indicates that many, although not all, actions proposed by these groups were accepted by OSD and the military services. Based on lessons learned, OSD empowered these groups in 2005 to suggest BRAC recommendations directly to a senior-level group that oversaw the BRAC 2005 analysis. Moreover, we noted a closer coordination between these groups, the military services, and OSD than existed during the 1995 round. OSD’s efforts to integrate the process among these seven joint cross-service groups with the military services’ own efforts led to increased discussions, greater visibility, and more influence for the cross- service recommendations than in prior BRAC rounds.
To assist in the process for analyzing and developing recommendations, the military services and joint cross-service groups used various analytical tools. These tools helped to ensure a more consistent approach to BRAC analysis and decision making. For example, all of the groups used the DOD- approved COBRA model to calculate costs, savings, and return on investment for BRAC scenarios and, ultimately for the final 222 BRAC recommendations. As noted in appendix XIII, the COBRA model was designed to provide consistency across the military services and the joint cross-service groups in estimating BRAC costs and savings. DOD has used the COBRA model in each of the previous BRAC rounds and, over time, has improved upon its design to provide better estimating capability. In our past and current reviews of the COBRA model, we found it to be a generally reasonable estimator for comparing potential costs and savings among various BRAC options.
Furthermore, the military services and joint cross-service groups generally used a consistent process to assess and formulate BRAC recommendations, with one minor exception involving the Army reserve components. The Army created a separate yet parallel approach in reviewing its reserve components for several reasons, although it generally followed the BRAC process. With respect to its reserve components, the Army did not perform a military value rank-ordering of these various installations across the country, but instead assessed the relative military value that could be obtained by consolidating various facilities into a joint facility in specific geographical locales to support, among other things, reserve component training, recruiting, and retention efforts. This approach provided an opportunity for the Army reserve components to actively participate in the BRAC process along with the voluntary participation of the states. The Army reported that consulting with the states was crucial to ensure the support of the state governors and staff Adjutants General for issues related to recommendations that affected the National Guard. The Army’s recommendations affected almost 10 percent of the Army’s 4,000 reserve components’ facilities. More specifically, the Army recommended 176 Army Reserve closures with the understanding that the state governors will close 211 Army National Guard facilities with the intent of relocating their units into 125 new Armed Forces Reserve Centers. The Army reports that 38 states and Puerto Rico voluntarily participated in the BRAC process.
The Air Force and the Navy also reviewed their reserve components’ installations but did so within the common analytical structure established by OSD, yet with some differences in approach in involving affected stakeholders in the process. For example, the Air Force did not involve state officials or its State Adjutants General as it analyzed and developed its BRAC recommendations. However, senior Air National Guard and Reserve leadership were in attendance as voting members of the Air Force’s Base Closure Executive Group, a senior deliberative body for the BRAC process. The Navy also reviewed its reserve components, including the Marine Corps Reserves, within the BRAC process, and worked closely with representatives from the Navy and Marine Corps reserve components to consolidate units within active duty installations or armed forces reserve centers without affecting recruiting demographics.
BRAC Process Incorporated Key Legislative Requirements
DOD also incorporated into its analytical process the legal considerations for formulating its realignment and closure recommendations. As required by BRAC legislation, DOD based its recommendations on (1) the use of certified data, (2) its 20-year force structure plan, and (3) military value criteria as the primary consideration in assessing and formulating its recommendations.
Use of Certified Data
DOD collected capacity and military value data that were certified as to their accuracy by hundreds of persons in senior leadership positions across the country. These certified data were obtained from corporate databases and from hundreds of defense installations. DOD continued to collect certified data, as needed, to support follow-up questions, cost calculations, and to develop recommendations. In total, DOD projects that it collected over 25 million pieces of data as part of the BRAC process. Given the extensive volume of requested data from the 10 separate groups (3 military departments and 7 joint cross-service groups), we noted that the data collection process was quite lengthy and required significant efforts to help ensure data accuracy, particularly from joint cross-service groups that were attempting to obtain common data across multiple military components, which, because of the diverse nature of the functions and activities, do not always use the same data metrics. In some cases, coordinating data requests, clarifying questions and answers, controlling database entries, and other issues led to delays in the data-driven analysis DOD originally envisioned. As such, some groups had to develop strategy-based proposals. As time progressed, however, these groups reported that they obtained the needed data, for the most part, to inform and support their scenarios. The DOD Inspector General and the service’s audit agencies played an important role in ensuring that the data used in the BRAC analyses were accurate and certified by cognizant senior officials.
Consideration of DOD’s 20-year Force Structure Plan
As congressionally mandated, each of the military services and the seven joint cross-service groups considered DOD’s 20-year force structure plan in its analyses. DOD based its force structure plan for BRAC purposes on an assessment of probable threats to national security during a 20-year period beginning with fiscal year 2005. DOD provided this plan to Congress in March 2004, and as authorized by the statute, it subsequently updated it 1 year later in March 2005. Based on our analysis, updates to the force structure affected some ongoing BRAC analyses. For example, the Industrial Joint Cross-Service Group reassessed its data pertaining to overhauling and repairing ships based on the updated force structure outlook and decided that one of its two smaller shipyards—Naval Shipyard Pearl Harbor or Naval Shipyard Portsmouth—could close. Ultimately, the Navy decided to close the Portsmouth shipyard in Maine. In addition, the Navy told us it recalculated its capacity based on updates to the force structure plan and determined that there was no significant change to its orginial analysis. The other groups, such as those examining headquarters and support activities, education and training, or technical functions, considered updates to the defense 20-year force structure and determined the changes would have no impact on their ongoing analyses or the development of recommendations.
Primary Consideration of Military Value Criteria, Which Included Homeland Defense and Surge
DOD gave primary consideration to its military value selection criteria in its process. Specifically, military value refers to the first four selection criteria in figure 2 and includes an installation’s current and future mission capabilities, condition, ability to accommodate future needs, and cost of operations. The manner in which each military service or joint cross- service group approached its analysis of military value varied according to the unique aspects of the individual service or cross-service function. These groups typically assessed military value by identifying multiple attributes or characteristics related to each military value criterion, then identifying qualitative metrics and measures and associated questions to collect data to support the overall military value analysis. For example, figure 8 illustrates how the Technical Joint Cross-Service Group linked several of its military value attributes, metrics, and data questions to the mandated military value criteria.
Quantitative scoring plans were developed by each military service or joint cross-service group assigning relative weights to each of the military value criteria for use in evaluating and ranking facilities or functions in their respective areas. Appendixes III through XII highlight the use and linkages of military value criteria by each service and joint cross-service group.
As noted earlier, based on congressional direction, there was enhanced emphasis on two aspects of military value—an installation’s ability to serve as a staging area for homeland defense missions and its ability to meet unanticipated surge.
Homeland defense: Each of the three military services considered homeland defense roles in its BRAC analysis and coordinated with the U.S. Northern Command—a unified command responsible for homeland defense and civil support. In October 2004, the U.S. Northern Command contacted the Chairman of the Joint Chiefs of Staff, requesting to play a role in ensuring that homeland defense received appropriate attention in the analytical process. Our analysis shows that all three military departments factored in homeland defense needs, with the Air Force recommendations having the most impact. According to Air Force officials, the U.S. Northern Command identified specific homeland defense missions assigned to the Air Force, which they incorporated into its decision-making process. Navy officials likewise discussed the impact of potential BRAC scenarios on its maritime homeland defense mission with U.S. Northern Command, U.S. Strategic Command, and the U.S. Coast Guard. In this regard, the Navy decided to retain Naval Air Station Point Mugu, California, was influenced, in part, because the U.S. Coast Guard wanted to consolidate its West Coast aviation assets at this installation for homeland defense purposes. According to Army officials, most of the their role in supporting homeland defense is carried out by the Army National Guard. The U.S. Northern Command reviewed the recommendations and found no unacceptable risk to the homeland defense mission and support to civil authorities.
Surge: DOD left it to each military service and joint cross-service group to determine how surge would be considered in the their analysis. Generally, all the groups considered surge by retaining a certain percentage of infrastructure, making more frequent use of existing infrastructure, or retaining difficult-to-reconstitute assets. For example, the Technical Joint Cross-Service Group set aside 10 percent of its facility infrastructure for surge, while the Industrial Joint Cross-Service Group factored in additional work shifts in its analysis. The military services retained difficult-to-reconstitute assets as the primary driver to satisfying the statutory requirement to consider surge capability. Both the Army and Navy gave strong consideration to infrastructure that would be difficult to reconstitute, such as large tracts of land for maneuver training purposes or berthing space for docking ships. For example, the Navy has a finite number of ships and aircraft and would likely have to increase operating tempo to meet surge needs. The Air Force addressed surge by retaining sufficient capacity to absorb temporary increases in operations, such as responding to emergencies or natural catastrophic events like hurricane damage, and the capacity to permanently relocate all of its aircraft stationed overseas in the United States if needed.
Congress also mandated four other criteria to be considered in the analytical process: cost and savings of the BRAC recommendations, economic impact on affected communities, impact on communities’ infrastructure, and environmental impact. The extent these other mandated considerations influenced recommendations varied. For example, high cost was the primary reason the Army decided not to develop a recommendation to restation troops returning from overseas to installations with large tracts of undeveloped land that could potentially accommodate these moves, such as Yuma Proving Ground, Arizona, or Dugway Proving Ground, Utah. Despite these installations having the capacity to provide large training ranges, they do not have existing infrastructure to immediately house 3,000 to 5,000 troops required for the Army’s new modular combat brigades. Initially, the Army assessed the possibility of building new infrastructure at these locations, but Army BRAC officials told us it would be too costly given that the Army’s COBRA analysis showed that at Yuma, for example, it would cost about $2 billion to build the required infrastructure. As a result, the Army decided to place units returning from overseas at installations currently used to base other operational units, notwithstanding limitations in existing training capacities.
Although there was heavy reliance on data for completing analyses, military judgment was also a factor throughout the entire process, starting with an analytical framework to base analysis of the 20-year force structure plan and ending with the finalized list of 222 recommendations submitted to the BRAC Commission. Military judgment also played a role in decisions on how military value selection criteria would be captured as attributes, with associated values or weights. Military judgment was also applied in deciding which proposed scenarios or actions should move forward for additional analysis. Generally, military judgment was exercised at this stage to delete or modify a potential recommendation for reasons such as strategic importance, as shown in the following examples: Naval Shipyard Pearl Harbor, Hawaii, which has a lower military value than other shipyards, was eliminated from closure consideration because the shipyard was considered to have more strategic significance in the Pacific Ocean area compared to other alternatives.
Tripler Army Medical Center, Hawaii, which has a lower military value than some other bases, was eliminated from closure consideration because it is the only defense medical center of significant size in the Pacific Ocean area.
Naval Station Everett, Washington, which has a lower military value than some other bases, was eliminated from closure consideration because of strategic reasons regarding the number and the locations of the Navy’s aircraft carriers on the West Coast and in the Pacific.
Grand Forks Air Force Base, North Dakota, which has a lower military value than some other bases, was eliminated from closure consideration because of the belief that a strategic presence was needed in the north central United States. Even though Grand Forks Air Force Base was retained for strategic reasons, Minot Air Force Base is also located in North Dakota and is not affected by any BRAC recommendations.
DOD Audit Agencies Helped to Improve the Accuracy of Data Used during the BRAC Process
The oversight roles of the DOD Inspector General and the military services’ audit agency staff, given their access to relevant information and officials as the process evolved, helped to improve the accuracy of the data used in the BRAC process. The DOD Inspector General and most of the individual service audit agencies’ reports generally concluded that the extensive amount of data used as the basis for BRAC decisions was sufficiently valid and accurate for the purposes intended. In addition, with limited exceptions, these reports did not identify any material issues that would impede a BRAC recommendation.
The DOD Inspector General and the services’ audit agencies played an important role in ensuring that the data used in the BRAC analyses were accurate and certified by cognizant senior officials. Their frontline roles and the thousands of staff days devoted to reviewing the massive data collection efforts associated with the BRAC process added an important aspect to the quality and integrity of the data used by military services and joint cross-service groups. Through extensive audits of the capacity, military value, and scenario data collected from field activities, these audit agencies notified various BRAC teams of data discrepancies for corrective action. The audit activities included validation of data, compliance with data certification requirements employed throughout the chain of command, and examination of the accuracy of the analytical data. While the auditors initially encountered problems with regard to data accuracy and the lack of supporting documentation for certain questions and data elements, most of these concerns were resolved. In addition, the auditors worked to ensure certified information was used for BRAC analysis. These audit agencies also reviewed other facets of the process, including the various internal control plans, the COBRA model, and other modeling and analytical tools that were used in the development of recommendations. Appendix XVI lists these organizations’ audit reports related to BRAC 2005 to the extent they were available at the time this report was completed. Overall, these organizational audit agencies reported the following: The Naval Audit Service reported that it visited 214 sites, covering 45 data calls, and audited over 8,300 questions. It concluded that the data appeared reasonably accurate and complete and the Navy complied with statutory guidance and DOD policies and procedures.
The Air Force Audit Agency officials told us they visited 104 installations, reviewed over 11,110 data call responses at 126 Air Force locations, 8 major commands, the Air National Guard, and Headquarters Air Force, and concluded that data used for Air Force BRAC analysis were generally reliable.
The Army Audit Agency reported that it visited 32 installations and 3 leased facilities and reviewed for accuracy over 2,342 responses. It concluded that the data was reasonably accurate and that the Army BRAC office had a sound process in place to collect certified data.
DOD Inspector General officials told us they visited about 1,550 sites covering 29 defense agencies and organizations and reviewed over 15,770 responses. We were told that these responses were generally supported, complete, and reasonable. The DOD Inspector General also evaluated the validity, integrity, and documentation of data used by the seven joint cross-service groups and found they generally used certified data for the BRAC analysis.
We closely coordinated with the DOD Inspector General and the three service audit agencies to maximize our individual and collective efforts and avoid duplication. As part of this coordination, we observed their audit efforts at selected military installations to verify the scope and quality of coverage they provided throughout the process and to give us insights into potential issues having broader applicability across the entire process. We also observed the work of these audit agencies to better familiarize ourselves with the types of issues being identified and resolved, with a view toward determining their materiality to the overall process.
Several Aspects of DOD’s BRAC Recommendations and Rejected Proposals May Warrant Further Attention
We identified issues regarding DOD’s recommendations, and other actions considered during the selection process that may warrant further attention by the BRAC Commission. Many of the issues relate to how costs and savings were estimated while others relate to potential impacts on communities surrounding bases that stand to gain or lose missions and personnel as a result of BRAC actions. Further, we are highlighting candidate recommendations that were presented during the selection process by either the military services or the joint cross-service groups to senior DOD leadership within the IEC that were projected as having the potential to generate significant savings, and which were substantially revised or deleted from further consideration during the last few weeks or days of the selection process. Additional discussion of issues targeted more specifically to the work and recommendations of the military services and joint cross-service groups is included in appendixes III through XII.
Issues with DOD’s BRAC Recommendations
We identified a number of issues, most of which apply to a broad range of DOD’s recommendations, that may warrant further attention by the BRAC Commission. In addition to the issue previously discussed regarding military personnel eliminations being claimed as savings to the department, other issues include (1) instances of lengthy payback periods (time required to recoup up-front investment costs), (2) inconsistencies in how DOD estimated costs for BRAC actions involving military construction projects, (3) uncertainties in estimating the total costs to the government to implement DOD’s recommended actions, and (4) potential impacts on communities surrounding bases that are expected to gain large numbers of personnel if DOD’s recommendations are implemented.
Some Lengthy Payback Periods
Many of the 222 recommendations DOD made in the 2005 round are associated with lengthy payback periods, which, in some cases, call into question whether the department would be gaining sufficient monetary value for the up-front investment cost required to implement its recommendations and the time required to recover this investment. Our analysis indicates that 143, or 64 percent, of DOD’s recommendations are associated with payback periods that are 6 years or less while 79, or 36 percent, of the recommendations are associated with lengthier paybacks that exceed the 6-year mark or never produce savings. DOD officials acknowledge that the additional objectives of fostering jointness and transformation have had some effect on generating recommendations with longer payback periods. Furthermore, our analysis shows that the number of recommendations with lengthy payback periods varied across the military services and the joint cross-service groups, as shown in table 4.
As shown in table 4, the Army has five recommendations and the education and training group has one recommendation that never payback, as described below: Army realignment of a special forces unit from Fort Bragg, North Carolina, to Eglin Air Force Base, Florida; Army realignment of a heavy brigade from Fort Hood, Texas, to Fort Army realignment of a heavy brigade to Fort Bliss, Texas, and infantry and aviation units to Fort Riley, Kansas; Army reserve component consolidations in Minnesota; Army reserve component consolidations in North Dakota; and Education and Training Joint Cross-Service Group’s establishment of Joint Strike Fighter aircraft training at Eglin Air Force Base, Florida.
According to Army officials, their five recommendations have no payback because, in part, they must build additional facilities to accommodate the return of about 47,000 forces currently stationed overseas to the United States as part of DOD’s Integrated Global Presence and Basing Strategy initiative (see app. III for further discussion of the restationing initiative). According to the education and training group, its one recommendation with no payback period is due to the high military construction costs associated with the new mission to consolidate initial training for the Joint Strike Fighter aircraft for the Navy, the Marine Corps and the Air Force.
Similarly, the Army has nearly 50 percent of the total number of DOD recommendations with payback periods of 10 years or longer. Our analysis of Army data shows that these lengthy paybacks are attributable to many of the recommendations regarding the reserve components. These recommendations typically have a combination of relatively high military construction costs and relatively low annual recurring savings, which tend to lengthen the payback period.
We also identified some portions of DOD’s individual recommendations that are associated with lengthy payback periods for certain BRAC actions but are imbedded within larger bundled recommendations. The following are a few examples: A proposal initially developed by the Headquarters and Support Activities Joint Cross-Service Group to move the Army Materiel Command from Fort Belvoir, Virginia, to Redstone Arsenal, Alabama, had more than a 100-year payback period with a net cost over a 20-year period. However, the proposal did not include some expected savings that, if included, would have reduced the payback period to 32 years. Concurrently, the group developed a separate proposal to relocate various Army offices from leased and government-owned office space onto Fort Sam Houston, Texas, which would have resulted in a 3-year payback period. The headquarters group decided to combine these two stand-alone proposals into one recommendation, resulting in an expected 20-year net present value savings of about $123 million with a 10-year payback.
Many of the individual Air Force proposals involving the Air National Guard and Air Force Reserve had payback periods ranging from 10 to more than 100 years. These individual proposals were subsequently revised by combining them with other related proposals to produce recommendations that had significant savings, minimized the longer payback periods, and linked operational realignment actions. We found that this change occurred in the realignment of Lambert-St. Louis International Airport Air Guard Station, Missouri, which originally had a 63-year payback period and resulted in a 20-year net present value cost of about $22 million. However, this realignment is now a part of the closure of Otis Air National Guard Base, Massachusetts, and the realignment of Atlantic City Air Guard Station, New Jersey. The combined recommendation results in a 20-year net present value savings of $336 million and a 3-year payback period.
Inconsistencies in DOD’s Estimated Costs for Military Construction Projects
While the military services used the COBRA model to estimate the costs for military construction projects needed to implement BRAC recommendations, we found some inconsistencies in how they estimated some costs associated with these projects. While the impact of these inconsistencies on savings is likely not as great as others noted in this report, it nevertheless contributes to the overall imprecision of the cost estimates of DOD’s recommended actions.
One area of inconsistent accounting involves the relative amounts of estimated support costs—such as the cost of connecting a new facility to existing water, sewage, and electrical systems—associated with military construction projects across the services. In its estimates, the Army considered these additional support costs as one-time costs whereas the Navy and the Air Force included them in the cost of the military construction projects for each project. By including these support costs in the cost of each project, the Navy and Air Force generally generated higher relative recurring costs than the Army for the recapitalization of facilities over time. Specifically, the Army increased its military construction cost estimates by 18.5 percent to account for the connection of the projected new facilities’ utilities. The Air Force, on the other hand, increased its construction costs for support services from 8 to 40 percent, depending on the type of facility, while the Navy included support costs at only two locations. According to the Special Assistant to the Secretary of the Navy for BRAC, the Navy assigned teams to review all proposed military construction projects by location to determine any support costs necessary for connection of utilities. Our analysis shows that had the Army used the same methodology as the Navy and the Air Force, the Army would incur about $66 million in additional recapitalization costs for all of its proposed military construction projects.
The services were also inconsistent in considering the costs associated with meeting DOD’s antiterrorism force protection standards in their estimated costs for military construction projects. The Air Force increased the expected costs of its military construction projects by 2.3 percent, or about $18 million, to meet DOD’s standards. Air Force officials noted that these funds would provide enhancements such as security barriers and blast proof windows. The Army and the Navy, on the other hand, did not include additional costs to meet the department’s standards in their proposed military construction projects. If the Army and the Navy estimated costs similarly to the Air Force, the cost of their proposed military construction projects would have increased by about $146 million and $25 million, respectively.
Uncertainties in Accounting for All Expected Costs or Savings to the Federal Government
DOD’s cost and savings estimates for implementing its recommendations do not fully reflect all expected costs or savings that may accrue to the federal government. The BRAC legislation requires that DOD take into account the effect of proposed closure or realignment on the costs of any other activity of the department or any other federal agency that may be required to assume responsibility for activities at military installations. While the services and joint cross-service groups were aware of the potential for these costs, estimated costs were not included in the cost and savings analysis because it was unclear what actions an agency might take in response to the BRAC action. One such agency was the U.S. Coast Guard, which currently maintains some of its ships or various units at several installations that are slated to close. Navy BRAC officials briefed the U.S. Coast Guard about its recommendations prior to the list being published, but the Air Force did not meet with the Coast Guard. The U.S. Coast Guard was still in the process of evaluating various responses to take as a result of the proposed BRAC actions and did not complete its analysis in time for it to be included in this report.
Further, as noted earlier, estimated costs for the environmental restoration of bases undergoing closure or realignment are not included in DOD’s cost and savings analyses. Such costs would be difficult to fully project at this point without planned reuse of the unneeded property being known. Consistent with the prior BRAC rounds, DOD excluded estimates for base environment restoration actions from its costs and savings analysis and in determining payback periods, on the premise that restoration is a liability that the department must address regardless of whether a base is kept open or closed and therefore should not be included in the COBRA analysis. Nevertheless, DOD did give consideration to such costs in addressing selection criterion 8, and included available information on estimated restoration costs as part of the data supporting its BRAC recommendations. DOD estimates that the restoration costs to implement its major closures would be about $949 million, as shown in table 5. (See fig. 4 in the Background section for a map of DOD’s major base closures.)
Based on the data provided, the Army would incur the largest share of estimated restoration costs due to the closure of several ammunition plants and chemical depots. The largest expected costs for any one location across DOD, about $383 million, would be for restoration at Hawthorne Army Depot, Nevada. While the DOD report does not specifically identify the potential for some additional restoration costs at its installations, available supporting documentation does identify some additional costs. For example, the Army estimated the range restoration at Hawthorne Army Depot could cost from about $27 million to $147 million, which is not included in the estimates in table 5. Further, the Army recognizes that additional restoration costs could be incurred at six additional locations that have ranges and chemical munitions, but these costs have not yet been determined.
Our prior work has shown that environmental costs can be significant, as evidenced by the nearly $12 billion in total cost DOD expected to incur when all restoration actions associated with the prior BRAC rounds are completed. Service officials told us that the projected cost estimates for environmental restoration are lower, in general, because the environmental condition of today’s bases is much better than the condition of bases closed during the prior BRAC rounds, primarily because of DOD’s ongoing active base environmental restoration program. Nonetheless, our prior work has indicated that as closures are implemented, more intensive environmental investigations occur and additional hazardous conditions may be uncovered that could result in additional, unanticipated restoration and higher costs. Finally, the services’ preliminary estimates are based on restoration standards that are applicable for the current use of the base property. Because reuse plans developed by communities receiving former base property sometimes reflect different uses for the property this could lead to more stringent and thus more expensive restoration in many cases.
Based on experiences from prior BRAC rounds, we believe other costs are also likely to be incurred, although not required to be included in DOD’s cost and savings analysis but which could add to the total costs to the government of implementing the BRAC round. These costs include transition assistance, planning grants, and other assistance made available to affected communities by DOD and other agencies. DOD officials told us that such estimates were not included in the prior rounds’ analyses and that it was too difficult to project these costs, given the unknown factors associated with the number of communities affected and the costs that would be required to assist them. Additionally, as we reported in January 2005, in the prior four BRAC rounds, DOD’s Office of Economic Adjustment, the Department of Labor, the Economic Development Administration within the Department of Commerce, and the Federal Aviation Administration provided nearly $2 billion in assistance through fiscal year 2004 to communities and individuals, and according to DOD officials, these agencies are slated to perform similar roles for the 2005 round. However, while the magnitude of this assistance is unknown at this time, it is important to note that assistance will likely be needed in this round, as contrasted with prior rounds, for not only those communities that surround bases losing missions and personnel but also for communities that face considerable challenges dealing with large influxes of personnel and military missions. For example, DOD stated in its 2005 BRAC report that over 100 actions significantly affect local communities, triggering federal assistance from DOD and other federal agencies. Also, as discussed more fully later, the number of bases in the 2005 BRAC round that will gain several thousand personnel from the recommended actions could increase pressure for federal assistance to mitigate the impact on community infrastructure, such as schools and roads, with the potential for more costs than in the prior rounds.
Finally, the BRAC costs and savings estimates do not include any anticipated revenue from such actions as the sale of unneeded former base property or the transfer of property to communities through economic development conveyances. The potential for significant revenue may exist at certain locations. For example, the Navy sold some unneeded property from prior round actions in California at the former El Toro Marine Corps Air Station for about $650 million and the former Tustin Marine Corps Air Station for $208.5 million. The extent to which sales will play a role in the disposal of unneeded property arising from the 2005 BRAC round remains to be seen.
Impact of BRAC Recommended Actions on Communities
The recommended actions for the 2005 BRAC round will have varying degrees of impact on communities surrounding bases undergoing a closure or realignment. While some will face economic recovery challenges as a result of a closure and associated losses of base personnel, others, which expect large influxes of personnel due to increased base activity, face a different set of challenges involving community infrastructure necessary to accommodate growth.
In examining the economic impact of the 222 BRAC recommendations as measured by the percentage of employment, DOD data indicate that most economic areas across the country are expected to be affected very little but a few could face substantial impact. Almost 83 percent of the 244 economic areas affected by BRAC recommendations fall between a 1 percent loss in employment and a 1 percent gain in employment. Slightly more than 9 percent of the economic areas had a negative economic impact of greater than 1 percent, but for some of these areas, the projected impact is fairly significant, ranging up to a potential direct and indirect loss of up to nearly 21 percent. Almost 8 percent of the economic areas had a positive economic impact greater than 1 percent. Appendix XIV provides additional detail on our economic analyses.
Of those communities facing potential negative economic impact, six communities face the potential for a fairly significant impact. They include communities surrounding Cannon Air Force Base, New Mexico; Hawthorne Army Depot, Nevada; Naval Support Activity Crane, Indiana; Submarine Base New London, Connecticut; Eielson Air Force Base, Alaska; and Ellsworth Air Force Base, South Dakota, where the negative impact on employment as a percent of area employment ranges from 8.5 percent to 20.5 percent. Our prior work has shown that a variety of factors will affect how quickly communities are able to rebound from the negative economic consequences of closures and realignments. They include such factors as the trends associated with the national, regional, and local economies; natural and labor resources; effective planning for reuse of base property; and federal, state, and local government assistance to facilitate transition planning and execution. In a series of reports that have assessed the progress in implementing closures and realignments in prior BRAC rounds, we reported that most communities surrounding closed bases have been faring well in relation to key national economic indicators—unemployment rate and the average annual real per capita income growth rates. In our January 2005 report for example, we further reported that while some communities surrounding closed bases were faring better than others, most have recovered or are continuing to recover from the impact of BRAC, with more mixed results recently, allowing for some negative impact from the economic downturn nationwide in recent years.
The 2005 round, however, also has the potential to significantly affect a number of communities surrounding installations, which are expected to experience considerable growth in the numbers of military, civilian, and civilian support personnel. These personnel increases are likely to place additional demands on community services, such as providing adequate housing and schools, for which the communities may not have adequate resources to address in the short term. The total gains can be much more than just those personnel with the consideration of accompanying families. Table 6 shows that 20 installations are expected to realize gains of over 2,000 military, civilian, and mission support contractor personnel for an aggregate increase of more than 106,000 personnel.
As shown in table 6, most of the gaining installations are Army installations with the gains attributable to a number of actions, including the return of large numbers of personnel from overseas locations under DOD’s integrated global presence and basing strategy and the consolidation of various activities, such as combat-support related activities at Fort Lee, Virgina. Fort Belvoir, Virginia, has the largest expected growth, due in large measure to some consolidation of various activities from lease space in the Washington, D.C. area.
The challenges facing communities surrounding gaining bases can be many, including increased housing demand, increased demands for roads and utilities, and adequate schools. These challenges can be formidable as communities may be faced with inadequate resources to address concerns in these areas as follows: Housing: If history is any indication, while some of the personnel transferring into a base may live on-base, the majority may not, as the military services are turning more to housing privatization. Installation officials at Fort Riley, Kansas, told us about concerns about the nearby availability of housing (within a 20-mile radius) to support the expected influx of military and civilian personnel and their families transferring to the base. For those installations where adequate housing is not available in the surrounding communities existing housing privatization projects would need to be revised and expedited to provide for additional units. Fort Bliss, Texas, officials told us that they expect the need to accelerate their existing housing privatization efforts, but would require additional funds to do so. Currently, housing privatization has taken place or is in the process of taking place at several of these installations and similar efforts may be needed there as well.
Schools: Effects on bases with the greatest gain in personnel resulting from BRAC vary between whether dependents attend schools operated on base by DOD (Fort Benning, Fort Bragg, and Marine Corps Base Quantico as shown in table 6) or schools operated by local educational agencies. We recently reported on challenges likely to be faced by both DOD operated schools and those operated by local educational agencies in the post BRAC environment at these and other locations. Recently, in visiting selected bases affected by the BRAC recommendations, installation officials told us that while local educational authorities should be able to absorb additional students into their school systems, they are more concerned about the potential shortage of teachers. Another concern is that make-shift trailers or temporary modular facilities might be used. For example, while Kings Bay, Georgia, officials told us that the local school system should be able to accomodate the increase of students, it may need to resort to the use of portable classrooms. All installations that are expected to gain more than 2,000 personnel have local community-administrated school systems with the exceptions of Fort Benning, Fort Bragg, and Marine Corps Base Quantico which have DOD-administrated school systems. If additional capacity is required at these three locations, additional military constructions funds would likely be needed.
Other infrastructure: Installation officials we spoke to also expressed some concern for the increased demand for various community services, such as health care, transportation, and utilities to accommodate personnel increases. Fort Carson, Colorado, officials told us that with its expected personnel increases, the local community will need more TRICARE providers to meet the expected demand. In other cases, such as at Fort Belvoir, Virgina, discussion has ensued regarding the need for increased mass transit capability, which may involve requests for millions of dollars in federal grant assistance.
As previously noted, it is likely that these concerns may increase federal governmental expenditures that are not included in the BRAC cost and savings analyses.
Candidate Recommendations That Were Deleted or Revised during the Final Weeks of the Selection Process
We also identified several candidate recommendations that were presented by the military services or joint cross-service groups to the IEC—DOD’s senior BRAC leadership group—that were substantially revised or deleted from further consideration during the last few weeks of the BRAC section process. In aggregate, based on projected savings, these actions reduced the overall potential for estimated net annual recurring savings by nearly $500 million and estimated 20-year net present value savings by over $4.8 billion, as shown in table 7.
Each of the cases highlighted in the table is described in additional detail below.
The educational and training group proposed to privatize graduate education, which enabled the Navy to recommend the closure of the Naval Postgraduate School, Monterey, California. The proposed closure supported DOD’s draft transformational option to privatize graduate- level education. Navy officials, however, stated that they believed professional military education was more important than ever given the world climate. During the IEC deliberations, Navy officials expressed concern about the loss of such a unique graduate military education facility and the effect on international students who participate in the school’s programs. Further, in the IEC meeting the Navy stated its belief that all education recommendations should be withdrawn because education is a core competency of the department and relying on the private sector to fulfill that requirement is too risky. The IEC agreed and disapproved the recommendation.
The Medical Joint Cross-Service Group recommended that the Uniformed Services University of the Health Sciences associated with the National Naval Medical Center in Bethesda, Maryland, be closed, citing that educating physicians at the site was more costly than alternative scholarship programs (about triple the cost) and that the department could rely on civilian universities to educate military physicians. We also reported previously that the university is a more costly way to educate military physicians. The IEC, subsequently disapproved the recommendation, citing that education is a core competency for the department, and therefore it was considered too risky to rely on the private sector to provide this function. Also, a DOD official indicated that, with the recommended action to realign Walter Reed Army Medical Center to Bethesda, Maryland, it would be highly desirable to have a military medical college associated with this medical facility in order for it to be a world-class medical center.
The Technical Joint Cross-Service Group, through the Army, proposed that the Natick Soldier Systems Center, Massachusetts, be closed and technical functions relocated to Aberdeen Proving Ground, Maryland, to create an integrated command, control, communications, and computers, intelligence, surveillance, and reconnaissance center. In its presentation to the IEC, the Army noted that the cost for this recommendation was high, but it would generate greater efficiencies and faster transition from research and development through the acquisition and fielding phases of the technology. Although the ISG initially raised no concerns and approved the recommendation, the IEC disapproved it in the last week of the BRAC selection process, citing the high cost of the recommendation.
The closure of the Adelphi Laboratory Center, Maryland, was originally part of the recommendation to close Fort Monmouth, New Jersey, and, along with Natick Soldier Systems Center, was part of the Army’s plan for an integrated command, control, communications, and computers, intelligence, surveillance, and reconnaissance center. An Army official told us that, as with the closure of Natick, no concerns were originally raised and the recommendation was approved by the ISG, but the IEC later removed it from the recommendation that includes the closure of Fort Monmouth because of high cost.
The proposed closure of Carlisle Barracks, Pennsylvania—home of the Army War College—was initiated by the Education and Training Joint Cross-Service Group and was aimed at creating synergy between the college and Army’s Command and General Staff College at Fort Leavenworth, Kansas. The IEC approved the proposed recommendation when it was initially briefed, but later rejected it, based on the Army’s argument that among other things, the Army War College’s proximity to Washington, D.C., provides access to key national and international policymakers and senior military and civilian leaders within DOD.
The Education and Training Joint Cross-Service Group recommended the closure of the Air Force Institute of Technology at Wright-Patterson Air Force Base, Ohio. The group recommended that graduate-level education be provided by the private sector and that all other functions of the institute be relocated to Maxwell Air Force Base, Alabama. However, the IEC disapproved the recommendation based on the risk involved in relying on the private sector for education requirements, given that education is a core competency of the department.
The Industrial Joint Cross-Service Group recommended transferring the workload of the Marine Corps’ depot maintenance facility in Barstow, California, which enabled the Department of the Navy to recommend closure of the Marine Corps Logistics Base. The Marine Corps raised concerns over the impact that the closure would have on Marine Corps deployments from the West Coast. The IEC decided to downsize the base and retain the depot, citing the Marine Corps’ concerns.
While the Navy recommended closure of the Naval Air Station Brunswick, Maine, the IEC revised this to a realignment. Navy officials stated that the senior Navy leadership had been reluctant to give up the Navy’s remaining air station in the Northeast region, but found the potential savings significant enough to recommend closure. Navy officials stated that the IEC relied on military judgment to retain access to an airfield in the Northeast. Nonetheless, all aircraft and associated personnel, equipment, and support as well as the aviation intermediate maintenance capability will be relocated to another Navy base. The Navy is maintaining its cold weather-oriented Survival, Evasion, Resistance and Escape School, a Navy Reserve Center, and other small units at the air station.
While the Air Force had proposed to close Grand Forks Air Force Base, North Dakota, the IEC revised this to a realignment a week before OSD released its recommendations. The Air Force reported in its submission to the BRAC Commission that over 80 percent of the base’s personnel are expected to be eliminated or realigned under the revised proposal. The revision to keep the base open was made based on military judgment to keep a strategic presence in the north central United States, with a possible unmanned aerial vehicle mission for the base. Even though Grand Forks Air Force Base was retained for strategic reasons, Minot Air Force Base is also located in North Dakota and is not affected by any BRAC rcommendation.
The closure of Rome Laboratory, New York, was originally part of a Technical Joint Cross-Service Group recommendation to consolidate the Defense Research Laboratories. No concerns were originally raised about the closure, and it was approved by the IEC. However, the IEC subsequently decided to realign rather than close the laboratory to address strategic presence and cost concerns. The realignment of Rome has a higher 20-year net present value savings than the closure proposal because the closure would have required more military construction and transfers of military and civilian personnel and equipment.
Conclusions
While we believe DOD’s overall recommendations, if approved and implemented would produce savings, there are clear limitations associated with the projected savings, such as the lack of military end-strength reductions and uncertainties associated with other savings estimates. DOD’s recommendations would provide net reductions in space and plant replacement value, which would reduce infrastructure costs once up-front investment costs have been recovered but the extent some projected space reductions will be realized is unclear. Other DOD savings estimates are based on what might be broadly termed business process reengineering efforts and other actions, where savings appear likely, but the magnitude of savings has not been validated and much will depend on how the recommended actions are implemented. Nevertheless, the savings could prove difficult to track over time. As a result, DOD’s projections may create a false sense of the magnitude of the savings, with fewer resources available for force modernization and other needs than might be anticipated, and there may be the potential for premature budget reductions. Given problems in tracking savings from previous BRAC rounds, and the large volume of BRAC actions this round that are more oriented to realignments and business process reengineering than closures, we believe it is of paramount importance that DOD put in place a process to track and periodically update its savings estimates.
Despite a fundamentally sound overall process, we identified numerous issues regarding DOD’s list of recommendations that may warrant further attention by the BRAC Commission, as noted in this report and appendixes III through XII. These include those recommendations having lengthy payback periods, some with limited savings relative to investment costs, and potential implementation difficulties. Given the large number of such items for the Commission’s consideration, we are not addressing them as individual recommendations but simply referring our report in its entirety for the Commission’s consideration.
Recommendation for Executive Action
We recommend that the Secretary of Defense take appropriate steps to establish mechanisms for tracking and periodically updating savings estimates in implementing individual recommendations, with emphasis both on savings related to the more traditional relignment and closure actions as well as those related more to business process reengineering.
Agency Comments
Cognizant officials of the military services and joint cross-service groups reviewed drafts of the report providing us with informal comments, permitting us to make technical changes, as appropriate, to enhance the accuracy and completeness of the report. Subsequently, we similarly provided complete drafts of the report to cognizant OSD officials, obtaining and incorporating their comments as appropriate. In providing oral comments on a draft of this report, the Deputy Under Secretary of Defense for Installations and Environment concurred with our recommendation.
We are sending copies of this report to Members of Congress; the Secretaries of Defense, the Army, the Navy, and the Air Force; the Commandant of the Marine Corps; the Director, Office of Management and Budget; and the Chairman, Defense Base Closure and Realignment Commission. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me on (202) 512-5581 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix XVII.
Scope and Methodology
Prior to the release of the Department of Defense’s (DOD) base realignment and closure (BRAC) recommendations on May 13, 2005, we monitored the BRAC process in a real-time environment beginning in October 2003. We sought to assure ourselves that DOD followed an objective and consistently applied process in which we could observe logical decision making leading to defensible and well-documented proposed closure and realignment recommendations. During this period, we abided by an agreement with DOD to not disclose details of the process due to the sensitivity of the information. Following the release of the recommendations, we continued our analyses of the process and recommendations. With the unprecedented large number of recommendations and the finalization of many of these occurring in the final weeks of the process, along with the limited time available for us to report our results following DOD’s May 13, 2005, release of the recommendations, we were not able to review all recommendations in detail. We focused more of our attention on cross-cutting issues than on implementation issues of individual recommendations, but did review individual recommendations as time permitted. Further, because of time constraints, we had only limited opportunities to gain further insight into some of the recommendations from officials at bases affected by the recommendations.
We performed our work primarily at the Office of the Secretary of Defense (OSD), the military services’ base closure offices, and the offices of seven joint cross-service groups that were established by OSD to develop cross- service recommendations. While we did not attend deliberative meetings, we had access to minutes of meetings and relevant documentation and met periodically with key staff and senior leadership to gain an understanding of each phase of the process and to provide them with the opportunity to address our concerns as the process was unfolding. We also visited selected bases following the public disclosure of the Secretary’s recommendations to gain further insights into potential issues regarding specific recommendations. Those bases included the Anniston Army Depot, Alabama; Fort Bliss, Texas; Fort Carson, Colorado; Fort Sam Houston, Texas; Fort Lewis, Washington; Fort Riley, Kansas; Lackland Air Force Base, Texas; McChord Air Force Base, Washington; Marine Corps Air Station Cherry Point, North Carolina; Naval Shipyard Portsmouth, Maine; Naval Submarine Base Kings Bay, Georgia; Naval Submarine Base New London, Connecticut; and Red River Army Depot, Texas. We also met with officials of the U.S. Coast Guard to discuss the impact of BRAC actions on their operations since they are tenants on several bases recommended for closure or realignment. We relied on DOD’s Office of the Inspector General, Army Audit Agency, Naval Audit Service, and Air Force Audit Agency to validate the data used by the military services and joint cross-service groups in their decision-making processes. We met with staff of these audit agencies periodically to discuss the results of their work as well as to observe their data validation efforts at selected locations across the country. The DOD Inspector General and service audit agencies issued reports that generally concluded that the extensive amount of data used as the basis for BRAC decisions was sufficiently valid and accurate for the purposes intended. In addition, with limited exceptions, these reports did not identify any material issues that would impede a BRAC recommendation. Where questions existed, we made further assessments and were able to satisfy ourselves that issues raised would have limited, if any, impact on the department’s recommendations. Based on the audit agencies’ extensive validation efforts and our observation of their work, we believe the data are sufficiently reliable for the purposes of this report.
To determine the extent to which DOD achieved its BRAC goals, we interviewed key officials and collected and analyzed relevant documentation generated by OSD, the military departments, and the joint cross-service groups. We reviewed the Secretary of Defense’s November 2002 memorandum that initiated the 2005 BRAC process and highlighted DOD’s goals and obtained DOD officials’ views on the degree to which the goals were accomplished. With respect to DOD’s goal of reducing excess capacity, we initially reviewed the capacity analysis reports of the services and joint cross-service groups to gain insight into the relative amounts of excess capacity within the department. We subsequently reviewed major recommendations to determine the extent to which these recommended actions would reduce infrastructure and excess capacity. In this regard, we also assessed the changes in the overall defense infrastructure’s plant replacement value—a measure used by the department to determine the cost to replace an existing facility with a facility of the same size at the same location, using today’s standards—by reviewing supporting documentation for the recommendations. We also analyzed the aggregated estimated costs and savings associated with reducing DOD’s unnecessary infrastructure, as depicted in the Cost of Base Realignment Actions (COBRA) analyses for the 222 recommendations proposed by the department, and compared these estimates with similar data from the prior BRAC rounds to determine similarities and differences in sources of costs and savings and thereby identify potential areas for further review. With respect to DOD’s costs and savings estimates, we examined selected supporting documentation to determine the basis for the estimates and identified key elements, such as base operating support, personnel compensation, or recapitalization of facilities, those estimates comprised.
We also performed a qualitative analysis of DOD’s performance in addressing its other BRAC goals—transforming the infrastructure and fostering jointness—by examining DOD’s proposed recommendations and seeking views from key officials on the relative success of achieving these initiatives. We also compared the justification narratives supporting individual recommendations for closures and realignments against draft transformation options developed by the department, although not formally adopted, that were nonetheless used by the individual military services and joint cross-service groups. Our efforts in addressing this and other objectives were facilitated by remote access to selected automated databases and tracking systems, which gave us near real-time access to relevant briefings and other documents, permitting us to broadly track the evolution of the BRAC process and identify issues for further consideration.
To address whether DOD’s selection process for developing recommendations was logical and reasoned, we focused on key aspects of the BRAC process, including capacity and military value analyses. In doing so, we sought to determine whether DOD’s selection process was objective and in compliance with key considerations of BRAC legislation. Our monitoring of the process from the start permitted us to assess the extent to which the process followed was logical, sequential, reasoned, and well documented. Our monitoring permitted us to determine to what extent a logical and sequential flow existed among all phases of DOD’s selection process from the point at which data were collected and analyzed through the compilation of the final recommendations. We reviewed the services’ determinations of which installations to consider in the BRAC process and analyzed the services’ and joint cross-service groups’ excess capacity analyses and military value evaluation plans and analyses to determine if they were developed in a reasoned fashion and supported by appropriate documentation. In reviewing military value analyses, we reviewed specific attributes established by the services and joint cross-service groups and examined the linkage between the groups’ methodologies and the military value selection criteria (i.e., criteria 1 through 4) to determine if these mandated selection criteria were addressed. Regarding the development of recommendations, our focus was to determine whether the recommendations were developed in a logical and reasoned manner. We reviewed, among other things, the extent to which the services and joint cross-service groups (1) considered various alternative proposals for closure or realignment, (2) assessed proposed recommendations using military value as the predominant decision-making factor, and (3) considered the remaining four selection criteria as mandated by law.
To address issues regarding DOD’s recommendations, we focused more of our attention on cross-cutting issues than on implementation issues of individual recommendations, but did review individual recommendations as time permitted. We reviewed recommendation justification packages that included particulars on the benefits of implementing the recommendations from an operational perspective, the estimated costs and savings associated with implementing the recommendations, and their degree of conformity to the mandated selection criteria. We discussed perceived benefits with key officials and reviewed appropriate supporting documentation. We also examined financial aspects of the recommended actions, including expected up-front investment costs to implement the actions, length of payback periods, net present value savings or costs over a 20-year period, and annual recurring savings or costs. In examining the expected costs and savings as generated by DOD’s COBRA model, we further examined assumptions and specific calculations regarding specific recommendations to determine the relative reasonableness of the estimates, given the data available to the services and the joint cross- service groups using the COBRA model. Further, we examined and discussed with DOD officials the economic and community impact for selected closure and realignment actions, including both adverse impacts associated with closing bases as well as challenges facing bases and surrounding communities that stand to receive large influxes of military personnel, civilian personnel, or both. Additionally, we reviewed potential recommendations that were approved by either the services or joint cross- service groups but ultimately rejected by senior leadership, the Infrastructure Executive Council, during the last few weeks of the BRAC process. We examined the merits of these proposals as presented by the services or joint cross-service groups in terms of addressing DOD’s BRAC goals. We further reviewed the rationale offered by senior leadership in its decisions to reject or substantially revise the offered proposals. Because of time limitations and complexities introduced by DOD in weaving together the unprecedented 837 closures and realignment actions across the country into 222 recommendations, we focused more on evaluating major issues affecting more than one recommendation than on implementation issues of individual recommendations. However, as time permitted, we did visit several selected installations, as noted above, to better gauge the operational and economic impact of the proposed recommendations. Installations visited were selected on a judgment basis because of our desire to have additional information on issues of concern, such as those related to costs and savings, potential operational implications, and potential economic impact. They included a number of bases with industrial-type activities because of concerns in prior rounds about how well the BRAC process and the COBRA model deal with such issues and other aspects of those facilities that permitted us to address other issues of concern.
We conducted our work from October 2003, as DOD’s process was beginning, through June 2005, shortly after the Secretary of Defense announced his proposed base closures and realignments, in accordance with generally accepted government auditing standards.
Glossary of BRAC-Related Terms
The following terms were used by DOD during the 2005 BRAC process.
Annual recurring savings: Savings that are expected to occur annually after the costs of implementing a BRAC action have been offset by savings.
Candidate recommendation: A scenario that a joint cross-service group or military department has formally analyzed against all eight selection criteria and which it recommends to the Infrastructure Steering Group and Infrastructure Executive Council respectively for approval by the Secretary of Defense. A joint cross-service group candidate recommendation must be approved by the Infrastructure Steering Group, the Infrastructure Executive Council, and the Secretary of Defense before it becomes a DOD recommendation. A military department candidate recommendation must be approved by the Infrastructure Executive Council and the Secretary of Defense before it becomes a DOD recommendation.
Certified data: P.L. 101-510, section 2903 (c)(5) requires specified DOD personnel to certify to the best of their knowledge and belief that information provided to the Secretary of Defense or the 2005 Defense Base Closure and Realignment Commission concerning the realignment or closure of a military installation is accurate and complete.
Closure: All missions of the installation have ceased or have been relocated. All personnel positions (military, civilian, and contractor) have either been eliminated or relocated, except for personnel required for caretaking, conducting any ongoing environmental restoration, and disposing of base property.
COBRA: An analytical tool used to calculate the costs, savings, and return on investment of proposed realignment and closure actions.
Force structure plan: Numbers, size, and composition of the units that comprise U.S. defense forces, for example, divisions, air wings, aircraft, tanks, and so forth.
Infrastructure Executive Council (IEC): One of two senior groups established by the Secretary of Defense to oversee and operate the BRAC 2005 process. The IEC, chaired by the Deputy Secretary of Defense, composed of the Secretaries of the military departments and their chiefs of services, the Chairman of the Joint Chiefs of Staff, and Under Secretary of Defense (Acquisition, Technology, and Logistics), was the policy-making and oversight body of the entire BRAC 2005 process.
Infrastructure Steering Group (ISG): The subordinate of two senior groups established by the Secretary of Defense to oversee the BRAC 2005 process. The ISG, chaired by the Under Secretary of Defense (Acquisition, Technology, and Logistics), and composed of the Vice Chairman of the Joint Chiefs of Staff, the Service Vice Chiefs, Deputy Under Secretary of Defense (Installations and Environment), and the Military Department Assistant Secretaries of Defense (Installations and Environment), provided oversight to joint cross-service group analyses of common business and support functions and ensured the integration of that process with the military departments’ and defense agencies’ specific analyses of all other functions.
Losing installation: An installation from which missions, units, or activities would cease or be relocated pursuant to a closure or realignment recommendation. An installation can be a losing installation for one recommendation and a receiving installation for a different recommendation.
Military installation: A base, camp, post, station, yard, center, homeport facility for any ship, or other activity under the jurisdiction of the Department of Defense, including any leased facility. The term does not include any facility used primarily for civil works, river and harbor projects, flood control, or other projects not under the primary jurisdiction or control of the Department of Defense.
Military value: Referring to one or more of the first four BRAC selection criteria, which are collectively referred to as the military value criteria and are expected to receive priority consideration in the analytical process that results in recommendations for the closure or realignment of military installations within the United States.
Net present value: In the context of BRAC, net present value is taking into account the time value of money in calculating the value of future cost and savings.
Payback period: The time required for cumulative estimated savings to exceed the cumulative estimated costs incurred in net present value terms as a result of implementing BRAC actions.
Realignment: Includes any action that both reduces and relocates functions and civilian personnel positions, but does not include a reduction in force resulting from workload adjustments, reduced personnel or funding levels, or skill imbalances.
Receiving installation: An installation to which missions, units, or activities would be relocated pursuant to a closure or realignment recommendation. An installation can be a receiving installation for one recommendation and a losing installation for a different recommendation.
Scenario: A proposal that has been declared for formal analysis by a military department or joint cross-service group deliberative body. The content of a scenario is the same as the content of a proposal. The only difference is that it has been declared for analysis by a deliberative body. Once declared, a scenario was registered at the ISG by inputting it into the ISG BRAC Scenario Tracking Tool.
Surge: A term incorporated in one of the military value selection criteria for the 2005 BRAC round: “the ability to accommodate contingency, mobilization, surge, and future total force requirements.” The term is not otherwise defined and application of the term can vary by specific operational or support categories.
Transformation: According to the department’s April 2003 Transformation Planning Guidance document, transformation is “a process that shapes the changing nature of military competition and cooperation through new combinations of concepts, capabilities, people, and organizations that exploit our nation’s advantages and protect against our asymmetric vulnerabilities to sustain our strategic position, which helps underpin peace and stability in the world.”
The Department of the Army Selection Process and Recommendations
The Army generally followed the common analytical framework established by the Office of the Secretary of Defense (OSD) for reviewing its active component installations and followed a separate parallel process for its reserve components installations. Compared to prior rounds, the Army’s process produced a record number of 56 recommendations, with 44 of them directed to its reserve components and 12 directed to the active component, recognizing that many of the individual recommendations contain multiple closure and realignment actions. The 44 reserve components recommendations involved realignment or closure actions that could have been approved outside of the BRAC process, but the Army and DOD decided to include them as part of DOD’s efforts to aid transformation through the base realignment and closure process. Unlike the other military services and joint cross-service groups, the Army’s recommendations, while producing estimated net annual recurring savings of nearly $500 million after 2011, are not expected to achieve overall net savings over the 20-year period typically used to measure net savings from BRAC actions. Over this 20-year period, the Army expects to incur a net present value cost over $3 billion, which is due primarily to the very large up-front costs in a few recommendations that are necessary to return forces to the United States under DOD’s Integrated Global Presence and Basing Strategy. However, the financial outlook for the Army improves if joint cross-service recommendations involving Army bases are considered—these separately reported actions are expected to produce $10.7 billion in net present value savings over a 20-year period. Payback periods—the time required for savings to offset closure costs—for the active component recommendations are projected to average 2.5 years with a range of immediate to no payback, and average 12.3 years with a range of immediate to more than 100 years for the reserve components. We believe some of the Army’s recommendations may warrant additional attention from the BRAC Commission due to the likelihood of overstated savings projections associated with military personnel eliminations, uncertainties regarding overseas restationing of forces to the United States and other ongoing force structure changes, challenges facing communities surrounding bases that are gaining large numbers of personnel, the bundling of various recommendations, various unknowns associated with implementing the reserve components’ recommendations, and issues regarding the proposed closure of the Red River Army Depot in Texas. The Army Audit Agency, which performed audits of the data used in the process, concluded that the data were sufficiently reliable for use in BRAC.
Organization and Focus
The Army established a Senior Review Group, headed by the Vice Chief of Staff of the Army and the Under Secretary of the Army and comprising senior Army military and civilian personnel, responsible for assessing potential recommendations for consideration by the Secretary of the Army, who in turn was to forward recommended actions to the Infrastructure Executive Council (IEC) for approval. This group was supported by The Army Basing Study Group, headed by the Deputy Assistant Secretary of the Army for Infrastructure Analysis, which was responsible for collecting and analyzing data and developing recommendations. In addition, subject matter experts and representatives from the Army’s major commands provided expertise and input throughout the BRAC process.
The Army’s broadly stated goals for BRAC 2005 were to enhance the capabilities of a transforming Army while aligning its infrastructure to meet its post-Cold War force structure and eliminating excess physical capacity to provide ready combat power to Combatant Commanders. Some key planning and strategy documents provided guidance in the pursuit of Army goals. The Army Stationing Strategy, for example, provided an overall vision, principles, and goals relative to future basing decisions while DOD’s Strategic Planning Guidance helped to define objectives regarding soldiers’ well-being. In further defining its goals, the Army identified the capabilities and missions that its installations require to support its forces in the future. With these needs in mind, the Army set out numerous objectives, such as: locate Army forces and materiel (at critical installations) to enhance relocate forces in accordance with the Integrated Global Presence and reshape installations to support home station mobilization and reshape reserve components infrastructure to improve efficiency of mobilization and demobilization; and provide sufficient area and facilities (with varied terrain, climate, and airspace) to support institutional training, combat development, and doctrine development.
Framework for Analysis
The Army’s BRAC analysis included a review of 87 active component installations and 10 leased facilities. A separate effort was undertaken to review over 4,000 Army National Guard and Army Reserve facilities to explore infrastructure consolidation opportunities that would afford the reserve components better facilities and enhance, among other things, training and operations. Army officials indicated that differences in the objectives and the nature of facilities associated with the active and reserve components infrastructure made it impractical to use identical review and decision-making processes. As with previous BRAC rounds, capacity and military value analyses provided the starting point for the Army’s decision- making process. A key focus in the Army’s efforts was to preserve large maneuver areas to ensure that future training requirements could be met and to relocate missions and personnel from small, single-function installations to larger, multi-function installations. The Army Audit Agency played an important role in helping to ensure data accuracy through extensive audits of data gathered at various locations.
The Army’s BRAC process was made more challenging by two ongoing force structure and basing initiatives—the rebasing of thousands of Army forces and their families to the United States as a result of the Integrated Global Presence and Basing Strategy and the restructuring of the Army’s forces under its modularity program—that were to be integrated into the BRAC process.
Capacity Analysis
The Army initiated its capacity analysis by collecting capacity-related data for its active duty installations (e.g., buildings, land) based on 28 capacity metrics, such as buildable acres, maneuver areas, and instructional facilities. In calculating capacity excesses or shortages through a comparison of the physical capacity data with requirements, the Army considered a surge capability to ensure that sufficient capacity existed to meet unforeseen military contingencies, future threats, and future needs as outlined in DOD’s 20-year force structure plan. The Army’s surge analysis also reinforced the importance of preserving assets such as maneuver land that would be difficult to reconstitute if eliminated. Table 8 shows selected Army’s capacity results for 7 of 12 mission areas, as presented in the Army’s BRAC 2005 report.
As shown in table 8, some areas, such as armaments production and ammunition storage, had excess capacity ranging from about 5 percent to about 220 percent while other areas had shortages. Further, the Army reported that it had a service-wide excess of over 1.5 million square feet of general administrative space even though 35 installations reported shortages. While the Army’s BRAC report did not indicate the overall impact the Army’s proposed closure and realignment recommendations would have on reducing excess capacity, Army officials projected that its proposed actions would reduce excess general administrative space by over 1 million square feet while realigning Army units to better match the remaining capacity.
While the overall capacity excesses and shortages, identified by installation, provided insights for potential closures or realignments, the Army subsequently conducted more detailed capacity analyses that identified the types of facilities and training lands that were required to support various units (e.g., light and heavy maneuver brigades, small and large training schools). In this manner, the Army had the ability to determine which installations could handle additional missions and units and what infrastructure improvements and additional military construction might be required to support those units.
The Army did not perform a similar capacity assessment of the reserve components’ facilities because of the nature of their facilities and differing objectives, but did collect and assess data related to, for example, the condition and location of facilities, as well as expected costs such as construction and force protection upgrades that may be necessary to provide for viable reserve consolidation opportunities. Prior to the collection of this data, the Army sought interest from the state Adjutant Generals of the National Guards for units in each state participating in such efforts on a voluntary basis.
Military Value Analysis
The Army’s military value analysis focused on a set of 40 attributes, such as maneuver land, and housing availability for its soldiers and dependents, that are characteristics the Army considered desirable for its installations to meet Army needs. Attributes with less flexibility for change, such as the availability of maneuver land or direct fire ranges, were among those most highly valued in developing a scoring plan for evaluating the military value for each of the Army’s installations. According to Army officials, this reflected their view of the criticality of possessing adequate acreage to conduct unit training, particularly in view of the expectation for an increase in the number of brigades and return of various forces from overseas locations. The Army’s military value attributes also reflected consideration of its role in supporting the global war on terrorism, homeland defense, and transformation. Through a process of weighting each of the Army’s attributes, the Army derived relative weights for the four legislatively-mandated military value selection criteria. As shown in table 9, three of the four criteria had relatively higher weights than the remaining criterion dealing with cost and manpower implications. Imbedded within these criteria was a key focus on the need for availability of existing land and facilities for expansion purposes to address the needs as cited in those specific criteria. In this regard, the Army placed high value on these criteria as a hedge against uncertain future requirements and to ensure that they did not dispose of assets such as large tracts of land, which would be difficult to reacquire.
In performing its military value assessment, the Army assessed each active duty installation and ranked each of them across the four military value selection criteria to more fully evaluate the potential for realignment and closure actions. This contrasted with the approach the Army used in the 1995 BRAC round when it developed a military value ranking for individual installations under one of 13 mission categories, which made it more difficult to assess an installation for use in a different mission area. For this round, the Army assessed the military value of each of its installations based on a common framework that linked attributes, metrics, and data call questions to military value as shown in figure 9.
During its assessment, the Army stressed multi-function capabilities for installations. To account for the unique capabilities that some Army single- function installations provided, the Army applied military judgment to modify the initial ranking of its installations to better identify installations that the Army believed were best suited to meet its current and future capabilities. For example, the Tripler Army Medical Center in Hawaii, which initially ranked low in military value, is DOD’s only medical center of significant size in the Pacific and therefore was retained for strategic reasons. Ultimately, the Army moved nine installations higher in the list based on their unique capabilities. Subsequently, those installations with a lower military value ranking became more vulnerable to closure or realignment actions.
With respect to its reserve components, the Army did not perform a military value rank-ordering of these various installations across the country, but instead assessed the relative military value that could be obtained by consolidating various facilities into a joint facility in specific geographical locales to support, among other things, the reserve components’ training, recruiting, and retention efforts.
Army Audit Agency’s Role in the Process
Throughout the BRAC process, the Army Audit Agency advised the Army on the development and implementation of its internal control procedures; performed audits of the Army’s conduct of the process, including the validation of data and various models used to assist in decision making. During the capacity and military value data calls, the Army Audit Agency performed on-site audits of data collection efforts at various installations on a sample basis to validate the data being gathered. Instances of inaccurate data or inadequate source documentation identified during these audits were generally corrected by the Army. As a result, the auditors generally found the data to be sufficiently reliable for use in the BRAC process.
Identification and Assessment of Alternate Scenarios and Selection of Recommendations
The Army used the results of its capacity and military value analyses, along with the 20-year force structure plan, as the foundation for the development of hundreds of potential closure and realignment scenarios. Scenarios under consideration were refined using various models— primarily an optimization model and the Cost of Base Realignment Actions (COBRA) model—along with military judgment. The optimization model, using capacity data, military value scores, and other data, provided the Army with various competing, plausible alternatives associated with the restationing of various missions and forces within the infrastructure. The model provided for alternative scenarios and their impact on overall military value as functions were moved to higher ranked installations. The COBRA model, which was used by all military services and joint cross- service groups to address the fifth selection criterion regarding costs and savings, provided the Army with the relative cost and savings estimates of these various alternatives.
The Army further assessed the various scenarios in terms of the remaining selection criteria 6 through 8, regarding the economic impact on communities affected by BRAC, the ability of the infrastructure within communities to support military missions, and the environmental impact of the BRAC actions, respectively. The Army used input from various DOD- generated models in assessing its scenarios against these criteria, which, while important and mandated by the BRAC legislation, played less of a role than that of military value. However, the Army considered these criteria in order to ensure that there were no insurmountable challenges that would derail the implementation of any particular scenario. In addition, they were used to differentiate between competing scenarios. For example, the Army determined its final stationing of modular brigades based in part on its assessment of the environmental impact these brigades would have on the receiving installations.
The Army also integrated into the overall process those scenarios that had been generated for the reserve components in the parallel process referred to previously. Those scenarios were developed through a series of meetings with state officials across the country. As with the active component, the reserve component scenarios were assessed using the COBRA model and other models.
The Army also worked closely with the joint cross-service groups as they developed recommendations that affected Army installations. In some cases, the Army developed scenarios that were provided to the joint cross- service groups for further consideration. For example, the Army developed initial scenarios proposing to close three chemical demilitarization facilities, which were subsequently provided to the Industrial Joint Cross- Service Group, which ultimately developed and processed recommendations for these closures. Alternatively, some scenarios which ultimately became Army recommendations were developed in conjunction with the joint cross-service groups. For example, the Industrial Joint Cross- Service Group’s scenario regarding the realignment of the depot maintenance workload out of the Red River Army Depot in Texas, was instrumental in leading to an ultimate Army recommendation to close the depot. Similarly, the Education and Training Joint Cross-Service Group developed a scenario to realign the Army’s Armor Center and School from Fort Knox, Kentucky to Fort Benning, Georgia, an action that was later folded into the Army’s broader realignment of Fort Knox. As the Army and cross-service group recommendations were being finalized, the Army held a series of meetings with the joint cross-service groups to ensure that all recommended actions involving Army installations were properly integrated and corresponding impacts were considered in their entirety.
Recommendations Approved by DOD
The Army produced 56 recommendations that were approved by DOD—6 closures of active component installations, 6 realignments of active component installations, and 44 recommendations consisting of multiple reserve components closure and realignment actions grouped by state or region. These recommendations, along with other Army-related recommendations produced by the joint cross-service groups, align, for the most part, with the Army’s objectives of reducing the number of primarily single-function, smaller installations and transforming the infrastructure to better meet current and expected future Army needs. Table 10 provides the financial implications of the Army’s recommendations.
As shown in table 10, the Army’s recommendations are expected to produce nearly $500 million in estimated net annual recurring savings beginning in 2012, but have a large 20-year net present value cost of about $3 billion, rather than savings which are typically expected in that timeframe; this is due primarily to very large up-front costs, nearly $10 billion in expected one-time costs, that are required to implement the recommendations. A few of the recommendations, particularly the one involving the redeployment of Army forces to the United States under DOD’s Integrated Global Presence and Basing Strategy, are responsible for the high costs and negative returns.
The recommended closures of 6 active duty installations, which are largely installations of lower military value within the Army, have the greatest potential for savings with a combined estimated net present value savings over the next 20 years of about $3.8 billion and payback periods of 6 years or less. Most of the expected savings from these recommendations are due to reductions in personnel costs and overhead (e.g., base operations support). Expected personnel savings from these 6 recommendations are driven by the elimination of nearly 3,500 personnel of which nearly 25 percent, or over 800, are military.
While 3 of the remaining 6 active duty base realignment recommendations as shown in table 10 also produce savings, 3 recommendations account for more than $9.4 billion in 20-year net present value costs and will never payback. The largest of these three latter recommendations involves the rebasing of Army forces to the United States from overseas locations. The Army projected that this realignment alone has a one-time cost of about $4 billion and annual recurring costs of almost $300 million and will never produce savings. Army officials note that a contributory factor to these high costs is the fact that the Army could not claim the estimated savings that would accrue from the expected closure of the overseas installations and the departure of Army forces from those locations. The Army estimates that had these estimated savings been accounted for in BRAC, the recommended actions would have produced substantial net savings rather than the costs as indicated. We did not validate the Army’s savings estimates for the overseas closures, and it is not clear to us that sufficient information is available at this time to fully assess the total changes in overseas basing costs since much of the detail regarding these plans has not been finalized. Further, we agree with DOD that it would not be appropriate for the Army to include these particular savings in BRAC as BRAC provisions in existing legislation do not contemplate consideration of savings from the closure or realignments that take place outside of the United States.
With regard to the reserve components, the Army adopted 44 recommendations, which taken as a whole, would provide a net present value savings of over $1.5 billion over the next 20 years but have an average payback period of over 12 years. Five of the recommendations involve the realignment of the Army Reserve’s command and control structure within five regional areas. The remaining recommendations realign reserve components facilities in 38 states and Puerto Rico by constructing 125 new armed forces reserve centers while closing 176 Army Reserve centers and with the understanding that various states would close 211 National Guard armories and centers. These closures represent about 10 percent of the over 4,000 existing Army reserve components’ facilities across the country.
While most of the Army’s projected savings associated with the reserve components’ recommendations result from reductions in personnel costs by eliminating over 4,000 personnel, about 80 percent of these eliminations are military personnel.
Issues Identified with Approved Recommendations
Time did not permit us to assess the operational impact of each recommendation, particularly recommendations that included multiple closure and realignment actions across multiple locations. However, we offer a number of broad-based observations about the proposed recommendations. Some recommendations may warrant additional attention from the BRAC Commission based primarily on issues associated with the projected savings from military personnel reductions, uncertainties regarding the rebasing of overseas forces and modularity, potential impact of expected increase in the use of training ranges, the impact on gaining communities, uncertainties regarding the reserve component recommendations, the bundling of various recommendations, and concerns over the transfer of workload from Red River Army Depot, Texas.
Military Personnel Reductions
Our analysis showed that about $450 million of the Army’s projected annual recurring savings from its recommended closure and realignment actions are based on claimed savings from eliminating military personnel. Army officials acknowledged that a large portion of their annual recurring savings were derived from military personnel eliminations but noted that the Army’s financial outlook improved if joint cross-service group recommendations involving Army bases are considered. Nevertheless, the Army does not plan to reduce its active or reserve component end-strength in implementing these recommendations. According to Army officials, these personnel are being redistributed within the Army. While we believe that the potential exists for these personnel to provide a benefit to the Army in their new positions, it represents a savings to the Army in the sense of potentially avoiding costs that otherwise might be incurred in increasing authorized end strength levels. They do not represent dollar savings that might be shifted to other appropriations to meet other priority needs such as equipment modernization or improving remaining facilities, areas typically cited as likely beneficiaries of BRAC savings. Further, because DOD envisions BRAC savings in general to be used to partially fund up-front investment costs associated with implementing BRAC actions, the Army may be forced to find other sources of funding as military personnel savings will not likely be available for this purpose. The Commission may wish to consider this issue in evaluating the BRAC recommendations.
Uncertainties regarding the Rebasing of Army Overseas Forces to the United States and Force Structure Changes due to Modularity
Uncertainties over plans to realign thousands of soldiers and their families to the United States as a result of the Integrated Global Presence and Basing Strategy as well as the Army’s modularity efforts to create new modular brigades have the potential to change the expected costs and savings associated with the Army’s BRAC recommendations. The Army’s BRAC recommendations incorporate about 15,000 of the 47,000 Army personnel currently expected to return as a result of the global basing study. The Army also incorporated the stationing of five of ten brigades being created under the Army’s modular restructuring effort. Estimated BRAC costs and savings are typically calculated based on assumptions for specific units or missions that are expected to realign to specific installations in specific years. Changes to these assumptions can alter the costs and savings associated with the actions being undertaken. Existing Army plans for the return of overseas forces and modularity were the basis for the assumptions used to calculate estimated costs and savings and to determine potential impacts to the environment and communities surrounding the affected installations. However, our analysis identified several areas of uncertainty that could affect the assumptions contained in those recommendations: Army officials told us that DOD has been and is continuing to modify its overseas restationing plans, even as the Army BRAC recommendations were being finalized. Because of BRAC reporting requirements, the Army had to finalize its recommendations before the overseas rebasing plans were finalized. Army officials indicated that the major overseas restationing actions included in the BRAC recommendations are expected to occur as currently envisioned. However, as plans continue to evolve, the specific details regarding the rebasing could be adjusted, with corresponding adjustments in costs and savings being required.
In a May 2005 report produced by the Commission on Review of the Overseas Military Facility Structure of the United States, the Commission recommended slowing down the Army’s entire overseas restationing process. If DOD heeds this recommendation, the timing of some planned restationing actions could be affected with the potential risk of not completing BRAC closure or realignment actions within the 6-year implementation period with a 2011 completion date as established by the BRAC legislation. Further, over half of the Army’s forces returning from overseas are expected to be folded into the new modular brigades being formed in the United States. Uncertainties over the timing of their return could also impact the costs and savings associated with those brigades.
In a March 2005 congressional testimony, we reported that the design configuration of the Army’s modular brigades had not been finalized at that time. In this regard, the Army is considering adding an additional combat battalion to each of its modular brigades and has not finalized the design of higher echelon and support units. Any such changes to the design that was used in deriving the cost and savings estimates and potential impacts to the environment and communities of the recommended actions are likely to impact the estimates and may alter the potential impacts as well.
The Commission may wish to ensure that it has the Army’s latest plans regarding the overseas rebasing and modularity efforts in reviewing the Army’s recommendations.
Potential Impact on Training Ranges
The Army’s BRAC recommendations provide for the stationing of returning overseas forces and new modular brigades on existing Army installations. Our review of Army documentation shows these installations are already facing environmental and encroachment issues that constrain their ability to meet unit training requirements. These issues raise concerns that currently constrained installations may face additional challenges and unexpected costs in meeting the training requirements of the additional forces the Army plans to station at these installations. As we reported in June 2005, several of the Army’s training ranges already face challenges resulting from inadequate maintenance and modernization and may also require substantial investment for modernization to support the training requirements of the new brigades. Army officials stated they reviewed their BRAC recommendations to ensure that there were no insurmountable environmental or encroachment obstacles. They also noted that their recommendations included costs for training range upgrades. However, we have not validated whether these costs will adequately address training range limitations. Further, we have concerns as to whether the Army will need to acquire additional training range land at existing bases that are already experiencing range limitations—a potential cost not identified in the current BRAC recommendations.
Concerns over the ability of existing training ranges to meet training requirements are exacerbated by uncertainties over the final number and composition of the modular brigades as well as the potential for additional forces returning from overseas. Because of existing constraints on training ranges, the Army developed scenarios to examine the possibility of stationing operational Army units on other installations, including installations belonging to other military services and Army installations with considerable acreage such as the Yuma Proving Ground in Arizona. The Army deemed none of these scenarios feasible for various reasons, such as the configuration of other service installations and their associated training ranges did not meet Army training requirements. For other scenarios, such as use of the Yuma Proving Ground, the lack of adequate infrastructure and the associated high military construction costs that would be required essentially made them infeasible. However, Army officials told us that should the Army decide to create an additional five modular brigades or bring additional forces back from overseas, it may become necessary to station these units at installations such as the Yuma Proving Ground, which has large tracts of land, because existing Army installations might not be able to support these additional units. The Commission may wish to review the Army’s plan for addressing training range issues and the potential need to acquire additional land to mitigate likely challenges the Army faces in the probable increased use of its training ranges.
Impact on Gaining Communities
Several of the Army’s recommendations involve relocating significant numbers of forces and their families to various installations, which raises concerns about the ability of local communities to adapt to these changes and absorb these personnel increases. For example, Fort Bliss, Texas is expected to receive a net gain of over 11,000 military and civilian personnel. The full impact of such increases on surrounding communities, particularly on schools, housing, and other community infrastructure, is unclear at this time. According to Army officials, its analysis for the selection criterion regarding community impact (criterion seven) provided an overall assessment of the ability of local communities impacted by a potential BRAC action to handle additional personnel and their families, including the identification of potential obstacles that could prevent a recommendation from being implemented. For example, in assessing the impact of the return of forces from overseas, the Army’s review of community infrastructure for Fort Bliss and Fort Riley indicated the importance of working with these communities to assess and implement housing and schooling requirements. However, the Army concluded that these issues did not represent impediments to implementing recommendations involving these bases.
Addressing the challenges that these communities face may require significant investments, particularly with regard to available housing and schools, which would increase pressures for federal assistance from various agencies to help mitigate these needs. While such costs might be borne outside the defense budget to some extent, they would nevertheless represent additional costs to the federal government. These potential costs, although not required to be captured in DOD’s cost and savings analyses for the various recommended actions, could be substantial, given the number of Army installations with expected personnel gains. Army officials stated that they expect to resolve these issues during implementation and that by staggering the movement of units being moved to these installations, they believe they will be able to reduce adverse impacts and enable communities to better prepare for their arrival. Nevertheless, some communities may lack the infrastructure to easily absorb these forces. This could impact the timing of the movement of forces to these communities, which in turn could alter current BRAC cost and savings estimates from a governmentwide perspective. The Commission may want to review the Army’s plans for addressing these issues.
Uncertainties regarding State Involvement in the Reserve Components’ Recommendations
We identified a number of uncertainties associated with the Army’s reserve components’ recommendations. Most of these recommendations, as detailed in the Army’s 2005 BRAC report, are contingent upon certain actions that have either yet to take place or be decided. For example, the Army expects to build 125 Armed Forces Reserve Centers, which are currently expected to be able to accommodate National Guard units as well as Army Reserve units and some reserve units from the other military services. However, the decision to relocate these National Guard units lies with state authorities. While the states with Guard units that are affected by BRAC recommendations have agreed, on a voluntary basis, to be included in the process, they can opt out at any time, thereby creating uncertainties over future state actions and their impact on the precision of current cost and savings estimates for these recommendations. Should state authorities decline to relocate some or all of these units, the costs and savings associated with these armed forces reserve centers could change. Some of the reserve components’ recommendations have other contingencies as well. For example, the recommendation for the Texas reserve components calls, in part, for an Armed Forces Reserve Center to be located in Amarillo, Texas, if the Army is able to acquire land suitable for the construction of facilities there. Many others are like this as well. Should the land not be available, these recommendations will need to be adjusted as well as the related costs and savings estimates. While the Army’s reserve components’ recommendations as a whole are projected to generate more than $1.5 billion in net savings over a 20-year period if implemented, the uncertainties regarding some of the actions these recommendations are relying on could result in increases or decreases to this estimate. The Commission may wish to seek clarifications as to the status of these state- based actions and the potential consequences if some of those actions are not executed as currently planned.
Bundling of Various Recommendations Lessens Visibility of Costs
Most of the Army’s recommendations involve the bundling of multiple closure and realignment actions under one recommendation, which reduces the visibility of the estimated costs and savings as well as the payback periods of the individual actions that are embedded within the recommendation. While the the Army only produced six recommendations for the realignment of its active component installations, most of these recommendations have several components to them. For example, one Army recommendation involves the realignment of the Armor Center and School from Fort Knox, Kentucky, to Fort Benning, Georgia; the activation of a new modular brigade at Fort Knox; the relocation of various combat service support and other units from Europe and Korea to the United States; and the relocation of a reserve training center from Fort McCoy, Wisconsin, to Fort Knox. Similarly, the Army packaged all of its proposed reserve components’ realignments and closures within a state into a single recommendation for that state. As a result, there may be components within a recommendation that have relatively high costs or long pay-back periods (or never produce savings) even though the recommendation taken as a whole appears to have relatively higher savings or a shorter payback period. The Commission may therefore wish to request and examine information on the costs and savings associated with these individual actions. The following examples highlight these potential issues: The Army’s maneuver training recommendation would realign Fort Knox by incorporating several elements of scenarios the Army and the Education and Training Joint Cross-Service Group developed over time. The DOD-approved recommendation includes the stationing of a new modular brigade at Fort Knox. However, the Army’s original scenario for realigning Fort Knox, which did not include stationing the modular brigade or realigning the Armor Center and School, would have generated a 20-year net savings of almost $225 million. The Education and Training Joint Cross-Service Group’s related scenario involving the relocation of the Armor Center and School from Fort Knox to Fort Benning would have generated a 20-year net savings of over $1.3 billion. The Army’s approved recommendation combined most of the elements of these two scenarios but generated 20-year savings of about $950 million, or about $500 million less than one might have expected. The difference may be largely attributed to the inclusion of the new modular brigade in the Army’s final recommendation.
The Army’s reserve components’ transformation recommendation in Arizona is expected to have a payback period of 5 years and generate a net savings of almost $52 million over a 20-year period. However, one action contained within this recommendation involves the creation of an Armed Forces Reserve Center at the Buckeye Training Site, Arizona. A previous scenario, which focused solely on this action, indicated that the Army would incur a net cost of almost $9 million over the 20-year period and that it would take more than 100 years to produce savings. By bundling this action with others, the net costs of this action are obscured by the net savings of the recommendation’s other actions.
Red River Army Depot, Texas
We are raising several issues with the recommended closure of the Red River depot and the transfer of its functions to other locations that may warrant further review by the Commission. The issues relate to the transfer of the Red River combat vehicle workload to the Anniston Army Depot, Alabama; the transfer of certain munitions to the McAlester Army Ammunition Plant, Oklahoma; and the replication of Red River’s capability to remove and replace rubber pads for vehicle track and road wheels.
Potential Transformation Opportunity for Depot Maintenance
As discussed in appendix VIII, the Industrial Joint Cross-Service Group, when developing its maintenance proposals, completed its depot workloading analysis on the basis of one and a half shifts per workday (60 hour workweek) rather than the one shift per day (40 hour workweek) under the current system, thus increasing available capacity and allowing it to consider depot closures. Industrial group officials told us that use of more than one shift, which is a common private industrial better business practice, would enhance transformational opportunities in that it would provide for more efficient use of facilities and equipment. Industrial group officials stated that the expanded shift concept, although transformational, was only a “sizing or planning tool” to examine ways to increase depot capacity and that it would be left up to each depot to decide whether or not to employ the expanded shift concept. In other words, it was a way to see if a depot could accommodate the incoming transfer of additional workload. We were also told that no policy changes were envisioned to actually implement the expanded shift concept. Available information indicates that the closure recommendation may not be implemented based on the concept of a one and a half shift operation at the Anniston Army Depot, which is to receive the combat vehicle workload from Red River. In our visit to Anniston Army Depot, officials told us that, with additional construction to increase capacity as provided for in the supporting documentation for the recommendation, they would be able to accommodate this additional workload without much difficulty and without working under the expanded shift concept. Industrial group officials acknowledged that, while some one and a half shift operations may be implemented at other activities, only a one shift operation was envisioned at Anniston, given the uncertainty associated with future requirements and the need to minimize risk by providing for additional capacity if a contingency arises. As such, it appears that there is essentially no substantive transformational changes occurring with the closure of the Red River Army Depot.
Uncertainties on Munitions Storage
The BRAC recommendation to close the Red River Depot also dictates the transfer of its munitions storage mission to another Army depot--McAlester Army Ammunition Plant, Oklahoma. However, officials at Red River told us they were concerned about whether storage capacity at McAlester was sufficient to handle all of Red River’s munitions. Specifically, Red River officials told us during a recent visit that available excess storage capacity at McAlester has decreased since BRAC data were gathered, thus raising concerns whether all of Red River’s munitions can be stored there. Further, Red River officials asserted that McAlester did not have sufficient storage capacity for special types of munitions without constructing new storage facilities. According to Red River officials, certain munitions (category I and II) require different storage capacity and that McAlester currently does not have enough storage capacity for Red River’s entire category I munitions. However our analysis of the closure recommendation supporting documentation does not include any provision for military construction funds. Industrial group officials told us, however, that it expects that the McAlester plant will demilitarize much of its ammunition and thus free up space for the munitions stored at Red River. However, given that some diversion of demilitarization funds for other purposes has occurred in recent years, it raises questions as to the extent of the demilitarization that will occur. Nonetheless, in their opinion, this potential issue is not of concern to them. Time did not permit us to fully resolve the conflicting information regarding the extent to which the munitions may be transferred and McAlester’s ability to sufficiently accommodate the storage of any transferred munitions.
Transfer of Rubber Production Capabilities
Red River officials also raised concerns about the complexities associated with replicating its rubber production capability, which consists of removing and replacing rubber pads for vehicle track and road wheels, at Anniston Army Depot, Alabama, and that it is currently the only source for road wheels for the Abrams M1 tank. Specifically, Red River officials told us this capability is not an easy process to reproduce, including obtaining the required certification associated with the rubber production capability and that the processes must be qualified through rigorous testing. The complexities with replicating the rubber production capability was also echoed by officials at Anniston Army Depot, Alabama—the installation which is expected to absorb most of Red River’s combat vehicle workload. Officials at Anniston told us they expect a long certification process in order to perform the required rubber repair process and that this represents the most serious challenge in the workload transfer of Red River’s work. As to the Abrams Ml tanks road wheels, Red River officials told us that if the capability to produce road wheels is interrupted, the ability to sustain the warfighter is diminished and overall readiness could be degraded. To mitigate this risk, officials at Red River told us that it is imperative that the Army construct a new rubber production facility at Anniston, establish its processes and qualify its product before ceasing rubber production at Red River. Industrial group officials told us that, should a problem arise in this area, that commercial sources are available to purchase rather than repair these parts. We did not independently verify their assertion.
The Commission may want to review the extent to which these concerns associated with Red River are valid and whether they were adequately considered by DOD.
The Department of the Navy Selection Process and Recommendations
The Navy followed the common analytical framework established by the Office of the Secretary of Defense (OSD) for reviewing its functions and facilities. The Navy’s process produced 21 base closure and realignment recommendations, which cover 63 active and reserve installations. The Navy projects that its recommendations would realize about $7.7 billion in net present value savings over a 20-year period. Payback periods—the time required for savings to offset closure costs—range from immediate to 15 years and average 3.5 years. At the same time, there are limitations associated with the projected savings related to the lack of planned reductions in military personnel end-strength associated with the savings. Some of the Navy’s recommendations may warrant additional attention from the BRAC Commission based on projected force structure changes, decisions to realign versus close some bases, and extended payback periods. The Naval Audit Service, which performed audits of the data, concluded that the data were sufficiently reliable for use during the BRAC process.
Organization and Focus
The Navy established an organization to conduct the closure and realignment analysis similar to the one it used in the 1995 round. The Secretary of the Navy established a group of senior military officers and civilian executives, the Infrastructure Evaluation Group (IEG), chaired by the Assistant Secretary of the Navy (Installations and Environment) to conduct the process, and a related team, the Infrastructure Analysis Team, to support the IEG. The Secretary subsequently established a second senior-level group, the Department of the Navy Analysis Group, chaired by the Special Assistant to the Secretary of the Navy for BRAC, that was subordinate to the IEG, and he directed it to conduct the Navy’s analysis for Navy-unique functions. Another associated group, the Functional Advisory Board, consisted of the Navy and Marine Corps principal members of the seven joint cross-service groups and was responsible for ensuring that the Navy leadership was informed of matters relevant to those groups and for articulating the Navy’s position on common business-oriented support functions for Navy leaders.
The Navy established numerous goals for BRAC, organized around such considerations as (1) facilitating recruitment and training, (2) providing quality of life, (3) matching force structure to national defense strategy, (4) adequately equipping the force, (5) ensuring access to an optimally integrated logistical and industrial infrastructure, and (6) maintaining secure and optimally located installations for mission accomplishment (including homeland defense). With these and other considerations in mind, the Navy established numerous objectives corresponding to DOD’s BRAC principles, examples include: Optimize access to critical maritime training facilities.
Accommodate the 20-year force structure plan.
Facilitate active/reserve integration and synchronization.
Leverage opportunities for joint basing and training.
Enable further installation management regional alignment.
Optimize regional management structure for recruiting districts and reserve readiness command.
Minimize use of long-term leased administrative space.
Provide flexible research, development, test, and evaluation infrastructure to adapt to Navy transformational mission changes and joint operations.
Consolidate aircraft basing to minimize sites while maintaining ability to meet operational requirements.
Rely on private-sector support services where cost-effective and feasible.
Retain sufficient organic capability to effectively support maritime- unique operation concepts.
Align Navy infrastructure to efficiently and effectively support Fleet Response Plan and Sea-basing concepts.
Realign assets to maximize use of capacity in fleet concentration areas while maintaining fleet dispersal and viable antiterrorism/force protection capability.
Framework for Analysis
In executing its BRAC process, the Navy sought to eliminate excess capacity and reconfigure its current infrastructure so that operational capacity maximized warfighting capability and efficiency. The IEG approved four major areas for analyses: operations, education and training, headquarters and support activities, and other activities. These major areas were then further divided into functions to ensure that installations performing comparable functions were compared with one another and to allow identification of total capacity and military value for an entire category of installations.
The Navy’s BRAC process included a review of 889 reporting activities— 765 Navy and 124 Marine Corps—of which 673 were active component and 216 reserve component activities (reserve centers, reserve forces headquarters, reserve recruiting areas, and reserve personnel centers). As with previous BRAC rounds, capacity and military value analysis provided the starting point for the Navy’s BRAC process. The Naval Audit Service served an important role in ensuring the accuracy of data used in these analyses through extensive audits of data gathered at various locations.
Capacity Analysis
For its capacity analysis, the Navy universe was defined at the activity or function level, and a capacity data call was distributed to the 889 reporting activities. Capacity analysis for each activity consisted of comparing the current Department of the Navy base structure to the future force structure requirements to determine whether excess base structure capacity existed within the Department of the Navy. Current force requirements were based on the existing force structure, and future force requirements were derived from the 20-year force structure plan.
All Navy and Marine Corps bases were placed into one of four categories for capacity analysis: operations, headquarters and support activities, education and training, and other activities. Each category used a different metric to analyze capacity. Almost all of the Navy’s bases were contained in the operations function category. In evaluating air operations activities the Navy used hangar modules, while in evaluating surface/subsurface operations activities it used a cruiser-equivalent concept, the same measures that were used in BRAC 1995. In evaluating ground operations activities, the Navy used a battalion-equivalent concept that considered the amount of administrative space, covered storage space, and maintenance space required to support a generic Marine Corps battalion. In evaluating munitions storage and distribution, the Navy used throughput (loading and unloading) and short-term storage functions to conduct its analysis. The Navy identified excess capacity in all four categories, as shown in table 11.
In completing its capacity analysis, the Navy assumed that it would be necessary to home base all aircraft and ships at the same time. The Navy did not include additional infrastructure requirements to accommodate surge capability. According to Navy BRAC officials, the force structure— number of ships and aircraft—is finite in number, and additional ships or aircraft could not be quickly produced in the event of a contingency. The officials stated that their analysis also ensured that sufficient flexibility was retained to handle surge represented by operational tempo changes or unanticipated operational requirements. For example, for surface/subsurface operations, the Navy concluded that there was sufficient berthing space available in nonoperational bases (shipyards and weapon stations) to meet surge or other unanticipated operational requirements.
Navy officials projected that their closure recommendations, if approved, would reduce excess capacity in aviation operations from 19 percent to 16 percent, in surface/subsurface operations from 25 percent to 17 percent, and in munitions storage and distribution operations from 24 percent to 16 percent, but they would not reduce excess ground operations capacity. The Navy did not recommend closing any ground operations facilities, citing cost considerations and noting that planned force structure changes would further increase its requirements.
Military Value Analysis
In completing its military value analysis, the Navy targeted military value questions to specific activities in order to rank installations in the four operational subgroups from highest to lowest in military value. Each of the four operational subgroups had overarching concepts by which military value scoring plans were then developed to measure and rank each installation. Military values were assigned to 35 Navy and Marine Corps installations under air operations, 29 surface/subsurface installations, and 11 ground operations installations. Table 12 shows how the Navy weighted military value criteria in its analyses of operational functions.
Key factors considered in evaluating the military value of aviation operations activities included size and versatility of the facilities, proximity to training opportunities, and the strategic location of airfields. In considering surface/subsurface activities, key factors were the size and versatility of ship berthing, maintenance and support capabilities, and proximity to naval shipyards. Additional value was given for strategic nuclear submarine homeport capability and Nimitz-class nuclear powered berthing capability. Also considered was the proximity to training facilities, ranges, and operations areas as well as strategic location. Likewise, in considering ground operations activities, key factors were facilities and services, operational staff buildings, ordnance storage depots, and organic maintenance shops. Additional value was given for capability to receive and stage onward movement and integration of forces. Also considered was proximity to ranges, maneuver areas and training areas as well as proximity to aerial and seaports of debarkation. Key factors in the munitions storage and distribution operations activities were storage capability, throughput capability, strategic factors, environment and encroachment, and personnel support. Figure 10 illustrates how the Navy linked its analysis to the military value criteria for the naval aviation function.
The same process was used to analyze military value with the other operational and functional areas.
Naval Audit Service’s Role in the Process
The Naval Audit Service played an important role in ensuring that the data used in the Navy’s analyses were certified. Through extensive audits of the capacity, military value, and scenario data collected from field activities, the audit service notified the Navy of any data discrepancies for the purpose of follow-on corrective action. While the process of validating data was quite lengthy and challenging, the Naval Audit Service deemed the Navy data was sufficiently reliable for use in the BRAC process.
Identification and Assessment of Alternative Scenarios and Selection of Recommendations
The Navy used results from the capacity and military value analyses as the inputs to its optimization model to help identify initial scenarios for realignment and closure. In some circumstances, such as closure of naval reserve centers, military judgment and transformation provided the basis for scenarios and later decisions. For example, Navy officials said it was necessary to retain naval reserve centers for naval air reservists near major airline hubs and activities in order to retain the demographic profile necessary to recruit and retain personnel for these units. The Navy identified 187 scenarios for consideration; 82 involved Navy and Marine Corps reserve centers. The scenarios were then further assessed through more detailed scenario analyses, cost and savings considerations, risk assessments, and the Navy’s IEG deliberations, which resulted in 53 candidate recommendations being forwarded to DOD’s IEC. After some consolidation and bundling, DOD approved 21 Department of the Navy recommendations and forwarded them to the BRAC Commission.
The Navy eliminated scenarios for strategic reasons, to maintain operational flexibility, and for cost considerations. For example, various scenarios proposing to close Submarine Base San Diego, California, were dropped because a closure would have eliminated the sole capability for berthing attack submarines on the West Coast. Likewise, scenarios proposing to close Naval Station Everett, Washington, were dropped because of the strategic importance of this seaport. Various proposals to close active naval air stations were dropped because of operational concerns. For example, the Navy analyzed the potential to close Marine Corps Air Station Beaufort, South Carolina, and relocate its squadrons to Marine Corps Air Station Cherry Point, North Carolina. However, the Navy leadership concluded that Marine Corps Air Station Beaufort should be retained for future tactical aviation basing flexibility, especially in light of concerns about the continued viability of basing aviation units at Naval Air Station Oceana, Virginia. Due to increasing environmental and encroachment issues surrounding Naval Air Station Oceana, the Navy also analyzed various scenarios to close it. However, the analyses indicated a long payback period for achieving return on investment, high one-time costs, and operational issues at receiving sites. Therefore, the Navy determined that the closure of Naval Air Station Oceana was not feasible. Another complicating factor for basing of East Coast tactical aircraft is the Navy’s attempt to purchase approximately 33,000 acres in eastern North Carolina to build a new outlying landing field to provide simulated aircraft carrier landings for aircraft stationed at Naval Air Station Oceana and Marine Corps Air Station Cherry Point. The purchase is currently being challenged in federal court over environmental concerns.
The Navy also did not pursue some scenarios because of cost considerations and extended payback periods. For example, Navy data showed a one-time cost of $838 million to close Construction Battalion Center Gulfport, Mississippi, and relocate it to Camp Lejeune, North Carolina, and a one-time cost of $643 million to close Marine Corps Recruit Depot San Diego, California, and relocate all recruit training to Parris Island, South Carolina. The Navy leadership determined that these costs did not justify closing either the Construction Battalion Center Gulfport or the Marine Corps Recruit Depot San Diego.
The Navy also considered alternatives to homeport an additional carrier strike group forward in the Pacific theater through the BRAC process to accommodate Integrated Global Presence and Basing Strategy decisions. The Navy analyzed moving a carrier to Pearl Harbor, Hawaii, and Guam, and found that other than cost, there was no clear BRAC preference for either the losing or the gaining base. The Navy leadership postponed any decision until the ongoing Quadrennial Defense Review is completed.
The Navy worked closely with the joint cross-service groups as they developed recommendations that affected Navy installations. In some cases, a joint cross-service group recommendation or series of recommendations relocated a majority of the functions, workload, equipment, or personnel from a Department of the Navy installation, thereby enabling closure of the entire installation. Where the DAG determined that the aggregate of joint cross-service group actions were of such magnitude that it affected the “critical mass” of the installation, e.g., impact on the major mission, a substantial number of personnel, and/or a substantial amount of acreage, a Navy closure scenario was developed. The closure of Portsmouth Naval Shipyard, Maine is an example of such a closure. The ISG and IEC approved an industrial joint cross-service group recommendation to relocate the ship overhaul and repair function at Portsmouth Naval Shipyard to Norfolk Naval Shipyard, Puget Sound Naval Shipyard, and Pearl Harbor Naval Shipyard, and to relocate the Submarine Maintenance Engineering, Planning and Procurement Activity at Portsmouth Naval Shipyard to the Norfolk Naval Shipyard. This recommendation eliminated Portsmouth Naval Shipyard’s primary mission and moved or eliminated approximately 90 percent of its workforce. After conducting criteria 5-8 analyses, the Navy recommended closing Portsmouth Naval Shipyard in its entirety.
Recommendations Approved by DOD
The Navy projects that its 21 recommendations will produce about $754 million in net annual recurring savings and, after savings have offset implementation costs, a 20-year net present value savings of $7.7 billion. Table 13 provides a summary of the financial aspects of the Navy’s recommendations.
The Navy’s recommendations include 16 closures and 5 realignment actions, affecting 63 installations. Much of the projected annual recurring savings are based on military and civilian personnel reductions. The Navy has two recommendations with payback periods greater than 10 years—the realignment of Naval Station Newport, Rhode Island, and the closure of the Naval Support Activity Corona, California.
Issues Identified with Approved Recommendations
Time did not permit us to assess the operational impact of each recommendation, particularly individual recommendations that include multiple closure and realignment actions at multiple locations outside of a single geographic area. Nonetheless, we offer a number of broad-based observations about the proposed recommendations. These recommendations may warrant additional attention from the BRAC Commission based on issues associated with projected savings from military personnel reductions, force structure changes, decisions to realign versus close some bases, extended payback periods, and potential impact on the U.S. Coast Guard.
There remains uncertainty as to what the Navy’s future force structure will actually look like, particularly with battle force ships. While the Navy’s force structure plan that accompanies its BRAC report gives a range of 341 to 370 ships in the fleet in 2024, the Navy’s 30-year shipbuilding plan identifies a possible lower limit of 314 ships in 2024 (including all type surface ships and submarines). Additionally, the shipbuilding plan provides a fleet profile in the decade afterward (to the year 2035) with as few as 260 to 325 ships. This includes a decrease in aircraft carriers from the current 12 to 10 in 2035, as projected in the Navy’s shipbuilding plan.
Military Personnel Reductions
Our analysis showed that about $386 million, or about 51 percent, of the projected $753.5 million in net annual recurring savings are based on savings from eliminating almost 4,000 active duty military personnel positions. A Navy official indicated that these reductions will help the Navy achieve the projected 21,000 active military personnel reductions already programmed between fiscal year 2006 and 2011. However, the Navy has already reduced the military personnel account to reflect the savings associated with the projected 21,000 end-strength reduction. While the projected almost 4,000 reductions associated with BRAC actions might help the Navy achieve their overall programmed end strength reductions, it will not generate any additional dollar savings that could be reallocated for other higher priority needs.
Projected Changes in Navy Force Structure
While the recommendations to close Submarine Base New London, Connecticut, and Portsmouth Naval Shipyard, Maine, project significant savings, both are based on projected decreases in the number of submarines in the future force structure. However, as mentioned earlier, there is uncertainty over the number of submarines and surface ships required for the future force.
Submarine Base New London
The proposed closure of Submarine Base New London is based on reducing existing excess capacity in the surface/subsurface category and planned reductions in the submarine force. Both the 25 percent excess capacity identified in the surface/subsurface infrastructure and the projected 21 percent reduction in the submarine force led the Navy to analyze various proposals to close submarine bases. As previously noted, the Navy’s BRAC scenario analysis focused on East Coast submarine bases because attack submarines are single-sited on the West Coast. The Navy considered three alternatives: (1) moving all submarines at Naval Station Norfolk, Virginia, to New London, Connecticut; (2) moving all submarines at Submarine Base New London and the Submarine School New London to Naval Station Norfolk; and (3) moving submarines at Submarine Base New London to both Naval Station Norfolk and Submarine Base Kings Bay, Georgia, and moving the submarine school to Kings Bay or Naval Station Newport, Rhode Island. The Navy analysis showed that only the option to relocate submarines from New London to Norfolk and Kings Bay achieved a reduction in capacity and savings resulting from a base closure. Navy officials noted that Submarine Base New London had a lower military value than both Norfolk and Kings Bay. As we also discuss in appendix XIV, this recommendation has the largest economic impact on any community in terms of the number of job losses (8,457 direct jobs and 7,351 indirect jobs). These direct and indirect job losses would result in a negative change of 9.4 percent in unemployment for the economic area around Submarine Base New London.
The majority of the projected savings would result from the elimination of about 80 percent of the civilian personnel positions at New London. Officials at New London we met with concurred with the projected number of civilian positions that could be eliminated based on coordination with both receiving locations—Kings Bay, Georgia, and Norfolk, Virginia, and on the number of personnel that would be needed to support the missions being relocated. However, a separate issue of concern relates to the proposed move of the Navy’s submarine school from New London to Kings Bay. In our discussions with officials at New London, we found while the Navy’s BRAC cost and savings analysis includes one-time costs to move the specialized equipment associated with the submarine school, the Navy analysis does not appear to have included an assessment of the time it would take to pack, move, and unpack the equipment, and the potential impact on the training pipeline and the certification of crews for submarines. In subsequent discussions with Navy headquarters officials, we were told that the submarine school would be the last activity to move from New London to ensure that facilities at Kings Bay are ready to start training. Furthermore, they noted that the implementation plan will ensure that the Navy will be able to perform crew certification and maintain the training pipeline. The BRAC Commission may want to assure itself that the Navy has developed a transition plan to satisfy the training and certification requirements until the receiving sites are able to perform this training, without unduly interrupting the training pipeline.
Portsmouth Naval Shipyard
The proposed closure of the Portsmouth Naval Shipyard assumes that the remaining three shipyards could perform all of the projected depot level maintenance workload based on planned reductions in the number of attack submarines and the Navy’s proposal to decommission an aircraft carrier. The Navy, with agreement from the Industrial Joint Cross-Service group, which initially had assessed depot functions, selected the Portsmouth Naval Shipyard for closure, despite Pearl Harbor Shipyard’s having a slightly lower military value score, because it determined that Portsmouth was the only closure that would both eliminate excess capacity and satisfy the Combatant Commander’s and Navy’s strategic objective to place ship maintenance capabilities close to the fleet.
The Navy BRAC and Industrial Joint Cross-Service Groups analyzed scenarios closing each of the four shipyards, and determined that only the potential closure of Portsmouth or Pearl Harbor was feasible due to cost and capacity considerations. Initially, based on capacity data and the 20- year force structure plan submitted in March 2004, the Industrial Joint Cross-Service Group determined that there was sufficient excess capacity in the aggregate across the four shipyards to close either Pearl Harbor or Portsmouth. However, the group determined that there was insufficient excess capacity in certain commodities in the remaining three shipyards to accept all the workload from the closing shipyard. As such, the group initially determined that no shipyard should be closed. However, based on changes in the DOD’s 20-year force structure plan it submitted to Congress in March 2005—reductions in the number of submarines and the decommissioning of an aircraft carrier—the industrial group’s analysis indicated that workload for all commodities at Portsmouth or Pearl Harbor could be accommodated by the remaining three shipyards. A Naval Sea Systems Command analysis of dry dock availability indicates that the three remaining Navy shipyards could handle the projected ship repair and overhauls in the future. However, the analysis indicates that within the next three years there would not be much, if any, room for unanticipated ship repairs. According to Navy officials, any unanticipated requirements would be addressed by a combination of delaying and re-prioritizing scheduled overhaul work, and authorizing additional overtime, which they noted is no different than how they manage these requirements in the current operating environment.
In selecting Portsmouth over Pearl Harbor for closure, the Navy noted that Pearl Harbor is in a fleet concentration area in the Pacific theater and is the homeport for many ships, while Portsmouth is not in a fleet concentration area or a homeport for any ships. In addition, closing Pearl Harbor would require the ships that are homeported there to transit back to the east coast, in some cases, for maintenance, which the Navy would essentially view as a deployment and, for quality of life reasons, would want to avoid if possible. Another strategic objective was to maintain dry docks for aircraft carriers on both coasts and in the central Pacific. Pearl Harbor has aircraft carrier dry-docking capability, but Portsmouth does not.
In our meeting with employees at the Portsmouth Naval Shipyard in June 2005, they raised questions about several issues regarding the cost and savings analysis developed to support the proposed action. First, they objected to the industrial group and the Navy disallowing about $281 million in costs ($205 million one-time and $76 million recurring) that they believed would be incurred if the shipyard were to close. About $52 million of the recurring costs are associated with sustainment of facilities and power plant from fiscal year 2008, when the base is projected to close, until 2011. While some of these costs are likely valid, overall they appear high in relation to the Navy’s projected savings of about $120 million over the same period from reduced base operating support and sustainment of facilities. The majority of the one-time costs are associated with closure of the buildings, historical preservation of buildings, and write-off of undepreciated assets of the working capital fund. While it is questionable whether all of these costs should be included, our analysis shows that if they are all included, the projected 20-year savings would decrease by $192 million, or 15 percent.
Portsmouth employees were also concerned that the cost and savings analysis did not adequately capture the widely recognized efficiencies of their shipyard, which, if adopted, could translate into additional costs that the Navy would incur by shifting its workload to the remaining three Navy shipyards. The employees estimated that they perform submarine overhaul and depot maintenance work at about $54 million per year less than the average of the other three shipyards, an efficiency which was not included in the Navy’s analysis. Department of Navy officials recognized that the Portsmouth Naval shipyard is presently more efficient than the Puget Sound and Pearl Harbor shipyards, but noted that it is very difficult to quantify the impact of this efficiency. Navy officials noted that the scope of work performed is not always the same, depending on the condition of each submarine, and wages, especially in Pearl Harbor, are higher than in Portsmouth. Navy officials told us they were reviewing the efficiency analysis developed by the Portsmouth Naval Shipyard; however, their analysis was not completed in time to be included in this report. The Commission may wish to consider the views of the shipyard employees and the results of the Navy’s review in their analysis of this recommendation.
Decisions to Realign Rather Than Close Some Bases
The Navy initially recommended the closure of Naval Air Station Brunswick, Maine, and Marine Corps Logistics Base Barstow, California. However, based on direction from the IEC, these closure recommendations were changed to realignments. As a result, the 20-year savings decreased by almost $2 billion, as shown in table 14.
According to Navy BRAC officials, the senior Navy leadership was reluctant to give up the Navy’s remaining air station in the Northeast but found the potential savings significant enough to recommend closure of Brunswick. However, the judgment of the IEC changed the closure to a realignment to retain access to the strategic airfield in the Northeast. As a result, the base will become a naval air facility with an operational runway, but all aircraft and associated personnel, equipment, and support will be relocated to Naval Air Station Jacksonville, Florida, and the Aviation Intermediate Maintenance will be consolidated with Fleet Readiness Center Southeast Jacksonville, Florida. The Navy is maintaining its cold weather–oriented Survival, Evasion, Resistance, and Escape School, a Navy Reserve Center, and other small units at Brunswick. Navy officials also stated that Brunswick would provide a base from which to carry out potential homeland defense missions should those missions not be able to be carried out from other military or civilian airfields in the Northeast.
The Industrial Joint Cross-Service Group had proposed to close the depot maintenance functions at Barstow because of its low military value and to increase opportunities for joint maintenance at Army depots doing similar work. However, the Marine Corps objected to the closure because that would eliminate its only West Coast ground vehicle depot maintenance presence and would increase repair cycle times for the Marine’s West Coast equipment by increasing rail transit and customer turnaround time by 10 to 30 days. In response to the Marine Corps’ concerns, the IEC directed the Industrial Joint Cross-Service Group to develop several alternative recommendations that would have closed Barstow but still realigned its workload to other West Coast activities. The Industrial Joint Cross -Service Group estimated that all of these options would result in higher net annual recurring and 20-year net present savings than would the realignment option. The Commission may want to assess DOD’s rationale for changing the recommendation from a closure to realignment in light of the projected reductions in savings.
Extended Payback Periods
The Navy has two recommendations for which the payback period is greater than 10 years, much longer than typically associated with recommendations in the 1995 BRAC round, and the one-time costs are significantly greater than the projected 20-year savings by which BRAC rounds are typically measured. The Navy’s proposal to realign Naval Station Newport by relocating the Navy Warfare Development Command to Naval Station Norfolk has a 13-year payback period and a projected one- time cost of about $12 million, primarily to rehabilitate existing structures and move 111 personnel. According to Navy officials, this recommendation places the Navy Warfare Development Command closer to Fleet Forces Command and the Second Fleet Battle Lab it supports. Likewise, the Navy recommendation to close Naval Support Activity Corona has a payback period of 15 years, one-time cost of about $80 million, and 20-year savings of about $400,000. Navy data shows that the one-time cost is primarily to rehabilitate existing facilities and relocate personnel from Corona to Naval Air Station Point Mugu, California. Navy officials stated the closure had merit because the Corona facility was a single-function facility whose mission could be performed at other multifunction bases.
Potential Impact on the U.S. Coast Guard
Several Navy recommendations to close bases could affect the U.S. Coast Guard. However, the Navy’s cost and savings analysis did not consider any costs that could be incurred by the Coast Guard if the bases are closed. Navy officials recognized that the Coast Guard would be affected by several of its recommendations and considered the impact in its deliberations. However, they determined that it was unreasonable to include any cost estimates for the Coast Guard because the Navy could not assume the final disposition of the facility and how much, if any, of the facility the Coast Guard would opt to retain. Coast Guard officials stated that the Navy briefed them on their potential recommendations several months prior to the public announcement of the recommendations. The Coast Guard is in the process of developing potential basing alternatives, to include cost impacts, for each affected location. However, the Coast Guard had not completed these estimates in time for us to include them in our report.
The Department of the Air Force Selection Process and Recommendations
The Air Force followed the common analytical framework established by the Office of the Secretary of Defense (OSD) for reviewing its functions and facilities. The Air Force’s process produced 42 recommendations. Most of the recommendations are devoted to reserve component bases, including several realignment actions reallocating aviation assets to multiple locations. In comparison with the other services, its recommendations contain the smallest number of closures (three) of active component bases. It had two major realignments, however, that left the bases in a reduced active duty status, and another where the base was transferred to the Army, with the Air Force retaining a limited presence as a tenant. The Air Force recommendations project the greatest savings of any of the services— $14.6 billion in 20-year net present value savings. Payback periods—the time required for savings to offset closure and realignment costs—for active component bases range from immediate to 14 years, and average 3 years, and for reserve component bases they range from immediate to 18 years, and average 6 years. However, our analysis indicates that these projected savings in each of their categories could have some limitations, primarily due to the lack of personnel end-strength reductions associated with claimed savings. In addition, some Air Force recommendations may warrant additional attention by the BRAC Commission because of uncertainty regarding future mission requirements for adversely affected reserve component personnel, and because of lengthy payback periods associated with some recommendations having been merged with other recommendations that have shorter payback periods, thus making the former appear more acceptable. The Air Force Audit Agency, which performed audits of the data, concluded that the data were sufficiently reliable for use during the BRAC process.
Organization and Focus
The Secretary of the Air Force established a group of senior Air Force military and civilian personnel to form an executive deliberative body responsible for conducting the Air Force base closure and realignment analyses. The Base Closure Executive Group was led by a Deputy Assistant Secretary and a General Officer from Plans and Programs, who served as co-chairs. This group’s working-level staff made up the Base Closure Working Group, which provided direct support for data collection, validation, and analysis in the development of base closure and realignment recommendations.
The Air Force 2005 BRAC goals were to transform by maximizing warfighting capability of each squadron and realigning infrastructure with future defense strategy, maximizing operational capability by eliminating excess physical capacity, and to capitalize on opportunities for joint activity. To guide the BRAC process, the Air Force developed the following principles, to be applied to both active and reserve components: Maintain squadrons within operationally efficient proximity to DOD- controlled airspace, ranges, military operations areas, and low-level routes.
Optimize the size of Air Force squadrons in terms of aircraft models, aircraft assigned, and crew ratios applied.
Retain enough domestic capacity to base the Air Force entirely within the United States and its territories.
Retain aerial refueling bases in optimal proximity to their missions.
Better meet the needs of the Air Force by maintaining or placing Air Reserve Component (Air National Guard or Air Force Reserve Command) units in locations that best meet the demographic and mission requirements unique to the Air Reserve Component.
Ensure joint basing realignment actions (in comparison with the status quo) either increased the military value of a function or decreased the cost for the same military value of that function.
Ensure that long-range strike bases provide flexible strategic response and strategic force protection.
Support the Air Expeditionary Forces framework by keeping two geographically separate munitions sites.
Retain enough surge capacity to support deployments, evacuations, and base repairs.
Consolidate or co-locate legacy fleets (such as A-10, B-1, B-52, F-15, and F-16 aircraft).
Ensure global mobility by retaining two air mobility bases and one additional wide-body-capable base on each coast.
Several of the above principles were included in an Expeditionary Air Force Principles White Paper, which outlined principles to shape future force development and basing. This document, discussed the increased effectiveness and efficiency of consolidating smaller squadrons into larger units. The significant reduction in aircraft based on the future force structure plan of 2025 will reduce the Air Force infrastructure, including that of the Air Reserve and the Air National Guard to select the best combination of bases, while accomadating use of reserve components for emerging missions, such as homeland defense and unmanned aerial systems.
Framework for Analysis
The Air Force BRAC process included a review of 154 installations—70 active and 84 reserve. As with previous BRAC rounds, capacity and military value analyses provided the starting point for analysis. However, in this BRAC round the Air Force concentrated its analysis on operational aircraft and space missions, since joint cross-service groups developed capacity and military value analyses and recommendations for various commonly held business-oriented categories, such as education and training, headquarters, and technical functions. The Air Force Audit Agency performed an important role in ensuring the accuracy of data used in these analyses through extensive audits of data gathered at various locations.
Capacity Analysis
The Air Force collected information on key capacity areas, such as physical capacity (buildings and utilities), environmental issues (air emissions and water resources), encroachment (constraints and noise safety), airfields, airspace and ranges (operational capacity of runways, ramp space, and fuel storage), communications (telecommunications), and personnel. The capacity data call was designed to provide information to assess bases for current and future missions in the following mission areas: (1) airlift; (2) space operations; (3) bombers; (4) tankers; (5) command and control and intelligence, surveillance and reconnaissance; (6) unmanned aerial vehicles; (7) fighter aircraft; and (8) Special Operation Forces and Combat, Search, and Rescue. The Air Force also considered surge requirements in its capacity analysis. According to Air Force officials, surge was defined as the ability to domestically “bed down” all aircraft, including those currently stationed overseas, as well as the ability to respond to natural disasters, emergencies, and runway repairs.
Following the collection of the capacity data call, the Air Force requested that its eight major commands and the Air National Guard estimate each installation’s capacity to acquire additional squadrons, taking into consideration existing conditions, facilities, additional construction requirements, and operational and environmental infrastructure.
The capacity analysis incorporated information from the 20-year force structure plan to serve as a baseline and to further define requirements in the future. Although this analysis indicated the ability of bases to bed down additional aircraft, according to Air Force officials, it did not provide a specific excess capacity percentage by installation or major command. Accordingly, an overall capacity analysis report was not made available to us, comparable to that provided by the other military departments. However Air Force officials said they considered capacity information in their assessment of installations. Air Force officials did provide limited capacity information in their final BRAC report. Table 15 provides excess capacity percentages that were calculated for two areas.
According to Air Force officials, their recommendations if implemented are projected to reduce excess capacity by 37 percent for flight line and ramp space and 75 percent in buildings and facilities.
Military Value Analysis
In completing its military value data calls, the Air Force evaluated each of its bases in each of the eight mission categories, regardless of the base’s current use. Military value data analysis was directly linked to the four DOD military value selection criteria required by the BRAC process and legislation. As shown in table 16, the Air Force developed a weighting system for the military value criteria with the first two criteria having larger weights, or importance, than the remaining two criteria.
The Air Force used various military value attributes (characteristics, factors, etc), metrics (measures), and questions related to each of the four military value criteria. Key military value attributes included operating environment, geographic-location factors, key mission infrastructure, operating areas, mobility/surge, growth potential, and cost. Other installation-specific attributes included such factors as electromagnetic spectrum and bandwidth, munitions storage and handling, runway dimensions, ramp area, space launch, proximity to (and quality of) airspace and ranges, and geographical factors.
Figure 11 shows how the attributes, metrics, and military value data questions were linked to the military criteria for the fighter aircraft mission category.
The Air Force followed a similar process for all eight mission categories. Likewise, each base was evaluated against metrics associated with each of the eight mission categories, which resulted in multiple military values for each base. Air Force officials stated that the resulting military value scores enabled them to determine which bases were best to retain and which were less desirable. This enabled them to produce mission compatibility indexes for their bases related to each of the four military value criteria. However, the Air Force did not develop one composite score for each base across all eight mission areas, which might have allowed for a clearer distinction between lower and higher military value rankings. Instead of developing one composite score, the Air Force established an overall mission compatibility index score within each of the eight mission areas, which provided each installation with eight entirely different scores for the various mission areas. According to Air Force officials, this approach was used to apply military judgment to select the best combination of bases to retain.
Air Force Audit Agency’s Role in the Process
During both the capacity and the military value data collection and analysis processes, the Air Force Audit Agency provided the Air Force with real- time evaluations of BRAC 2005 policies, procedural controls, systems, and data to ensure accurate data and analyses support for BRAC recommendations. One of its primary efforts involved three audits to verify the Air Force data call responses submitted during the BRAC process. Although the auditors found errors or inadequate source documentation, they reported that most discrepancies were subsequently corrected. In addition to these nationwide audits, the Air Force Audit Agency produced audit reports on other facets of the BRAC process, including the Air Force Internal Control Plan, COBRA data, and various modeling and analysis tools that were used in development of recommendations. The final Air Force Audit Agency reports on BRAC data concluded that overall the Air Force data were reliable for the purpose of developing recommendations.
Identification and Assessment of Alternate Scenarios and Selection of Recommendations
The Air Force identified over 100 scenarios, which were later reduced to 42 recommendations. The Air Force scenario teams identified potential scenario groups of like weapons systems, and then the Base Closure Executive Group selected scenarios for analysis. While the Air Force relied on certified data to identify proposed closure and realignment recommendations, other factors were instrumental in guiding decisions for closures and realignments, including changes in unit sizing, a decreased force structure, the active and reserve mix and future total force initiatives such as those discussed in the Expeditionary Air Force White Paper. Toward the end of the BRAC process, the Air Force eliminated and scaled back several recommendations because they did not actually result in net savings. In addition, the Air Force combined several interrelated recommendations (some that provide savings and some that do not) to present a consolidated recommendation with savings and a shorter payback period than would otherwise appear had some recommendations.
The military value data were analyzed by a computer-generated optimization model called the Air Force cueing tool. This model used the military value data and the 20-year force structure plan to create a starting point for Base Closure Executive Group deliberations by allocating aircraft to the fewest bases while conserving the greatest military value. This model also included Air Force imperatives. For example, to ensure unimpeded access to polar and equatorial earth orbits for U.S. satellites, the Air Force decided that Vandenberg Air Force Base, California, and Patrick Air Force Base, Florida, must be retained. Likewise, the Air Force retained Andrews Air Force Base, Maryland, to provide support to the President of the United States. According to Air Force officials, the cueing tool results were the starting point for analysis in allocating its inventory of aircraft. The model had various limitations, such as its inability to factor the active/reserve force mix for specific types of aircraft or the different types of aircraft at an installation. Furthermore, it assumes that all aircraft are bedded down at bases ranked highest in military value, which generally were active bases. To address these limitations, the Base Closure Executive Group relied on military judgment in some cases to overrule the results of the model to preserve the existing active/reserve force mix, a ratio expectation to be maintained through 2011.
In reviewing alternatives for BRAC recommendations, the Air Force went through various iterations of the BRAC recommendations (called second look, third look, and so forth) in order to provide force structure alignments that conformed to the Air Force principles and improved military capability and efficiency, consistent with sound military judgment. Air Force scenario teams analyzed the results of the analytical tools, including information to be considered with each recommendation—for example, force structure reductions from the future year force structure plan, new missions, military construction requirements, homeland defense missions, and other areas. Furthermore, the scenario teams were responsible for identifying any “showstoppers,” in terms of capacity or environmental characteristics that would make a recommendation difficult to implement. These consisted of running a potential recommendation through the COBRA model and developing the information for selection criteria 6 (economic impact), 7 (community infrastructure), and 8 (environmental impact) to help identify or evaluate possible closure and realignment actions.
The majority of the candidate recommendations had various components derived from using the optimization model; however, a few of the recommendations did not. For example, a few of the candidate recommendations involved realigning aircraft from an active base to an Air National Guard station with a lower military value score in order to achieve the appropriate mix between active and reserve forces and to increase the standard squadron size. Further, in some recommendations Air National Guard aircraft were realigned to other Air National Guard stations with a lower military value to align common versions of weapon system types, and for strategic interests.
Four other recommendations were not derived from an optimization model because the model primarily focused on the bedding down of aircraft rather than specific functional areas, such as repair facilities. These recommendations involved logistics support centers, standard air munitions packages (munitions storage), and avionics intermediate repair and maintenance facilities. Air Force officials told us they had requested that the Industrial Joint Cross-Service Group consider the above candidate recommendations in its process, but the group declined and deferred to the Air Force because it was considering scenarios at a joint operational level rather than at the installation level. As a result, Air Force officials told us that they applied either a Mission Compatibility Index approach to these scenarios in deliberative session to assess installations for future missions or they recommended certain functions to follow the placement of aircraft in other Air Force recommendations.
Recommendations Approved by DOD
The Air Force recommended closing 10 installations (3 active, 3 Air Reserve, and 4 Air National Guard bases) and realigning 62 other installations. In total, the Air Force projected its BRAC recommendations to result in 20-year net present value savings of over $14 billion—the largest projected savings of any service or Joint Cross-Service Group—and net annual recurring savings of $1.2 billion. Table 17 shows the financial aspect of the Air Force recommendations.
Over 80 percent of the projected 20-year savings are based on the first 5 recommendations shown in table 17, which involve closing two and realigning three active bases and have payback periods of 1 year or less. Conversely, the one-time costs of over $1.8 billion to implement all recommendations are primarily comprised of new military construction to implement the recommendations. Most of the Air Force’s recommendations involve realignment of Air Guard facilities with limited savings. For example, the Air Force is proposing to realign five Air National Guard stations, with payback periods greater than 10 years and $12 million in 20-year savings, with onetime costs of about $71 million. According to Air Force officials, these proposals were necessary because the Air Force recommendations are interwoven, depending on realignment actions from other recommendations. For example, 72 realignment and closure recommendations involving active and reserve installations were combined to create 42 candidate recommendations. At least one segment of all but 3 of the 42 Air Force recommendations that were combined affects the Air Force Reserve Command or Air National Guard.
Based on our analysis we noted that the majority of the net annual recurring savings (60 percent) are cost avoidances from military personnel eliminations. However, eliminations are not expected to result in reductions to active duty, Air Reserve and Air National Guard end strengths, limiting savings available for other purposes.
None of the recommendations included in the Air Force’s report involve consolidation or integration of activities or functions with those of another military service. However, the Air Force believes that its recommendations to realign Pope Air Force Base, North Carolina, and Eielson Air Force Base, Alaska, and to move A-10 aircraft to Moody Air Force Base, Georgia, will provide an opportunity for joint close air support training with Army units stationed at Forts Benning and Stewart, Georgia. Furthermore, the Air Force’s recommendations support transformation efforts by optimizing (increasing) squadron size for most fighter and mobility aircraft. According to the Air Force BRAC report, the recommendations maximize warfighting capability by fundamentally reshaping the service, effectively consolidating older weapons systems into fewer but larger squadrons, thus reducing excess infrastructure and improving the operational effectiveness of major weapons systems. We have previously reported that the Air Force’s could not only reduce infrastructure by increasing the number of aircraft per fighter squadron but could also save millions of dollars annually.
Issues Identified with Approved Recommendations
Time did not permit us to assess the operational impact of each recommendation, particularly where recommendations involve multiple locations. Nonetheless, we offer a number of broad-based observations about the proposed recommendations and selected observations on some individual recommendations. Our analysis of the Air Force recommendations identified some issues that the BRAC Commission may wish to consider, such as the projected savings from military personnel reductions; impact on the Air National Guard, impact on other federal agencies; and other issues related to the realignments of Pope Air Force Base, North Carolina; Eielson Air Force Base, Alaska; and Grand Forks Air Force Base, North Dakota and the closure of Ellsworth Air Force Base, South Dakota.
Military Personnel Savings
Our analysis showed that about $732 million, or about 60 percent, of the projected $1.2 billion net annual recurring savings are based on savings from eliminating military personnel positions. Initially, the Air Force counted only military personnel savings that resulted in a decrease in end strength. However, at the direction of OSD, the Air Force included savings for all military personnel positions that were made available through realignment or closure recommendations. The Air Force was unable to provide us documentation showing at the present time to what extent each of these positions will be required to support future missions. According to Air Force officials, they envision that most active slots will be needed for formal training, and all the Air Reserve and Air National Guard personnel will be assigned to stressed career fields and emerging missions. Furthermore, Air Force officials said that positions will also be reviewed during the Quadrennial Defense Review, which could decrease end strength. Either way, claiming such personnel as BRAC savings without reducing end strength does not provide dollar savings that can be reapplied outside personnel accounts and could result in the Air Force having to find other sources of funding for up-front investment costs needed to implement its BRAC recommendations.
Impact on the Air National Guard and Reserve Components
At least one segment of all but 3 of the 42 Air Force recommendations that were combined affects the Air Force Reserve Command or Air National Guard. The Air Force BRAC report lists 7 closures and 35 Air Reserve and Air National Guard realignments. Overall, 68 Reserve Command (12) and Air National Guard (56) installations were affected by a closure or realignment, or they received aircraft or missions from these actions. According to Air Force officials, its BRAC recommendations have resulted in a reduction of 29 installations with flying missions. Of these reduced installations with flying missions, over 75 percent, or 22, are from the Air National Guard. If implemented the BRAC recommendations will affect over 30 percent of the 70 Air National Guard and 13 Air Reserve installations with air flying units, respectively. Table 18 shows the reduction of flying units in the BRAC process by active force, Air Force Reserve Command, and the Air National Guard.
Based on our analysis of COBRA data, we estimate that more than 1,419 positions in the Air Reserve and 5,700 positions in the Air National Guard will be affected by the proposed recommendations, in terms of military personnel and civilians eliminated and realigned. In recommendations affecting active installations, over 26,000 positions are affected (eliminated and realigned); however, since the Air Force has combined active and reserve component actions in some recommendations those positions also include additional Air National Guard and Air Reserve personnel. Also the Air Force recognizes that in moving Air National Guard and Air Reserve units, part-time military (commonly referred to as drill) personnel will also be affected since they will not be moved. A significant portion of the personnel associated with these units must be replaced at the gaining installation and will require training. At Air National Guard installations with flying units, over 30 percent have been recommended for realignment or retirement; many of the personnel positions associated with the units do not have missions. Air Force officials said they plan to use these positions for emerging missions in such areas as homeland security, unmanned aerial vehicles, and intelligence, which they expect to further refine as part of the ongoing Quadrennial Defense Review.
Initially, many of the Air Force proposals involving the Air National Guard and Air Force Reserve with payback periods ranging from 10 to more than 100 years were stand-alone recommendations. Those recommendations linked by related operational realignment actions were grouped together to produce recommendations that had significant savings and minimized the longer payback periods. We found that this occurred in the realignment of Lambert-St. Louis International Airport Air Guard Station, Missouri, which originally had a 63-year payback period and resulted in a 20-year net present value cost of $22 million. However, this realignment is now a part of the closure of Otis Air National Guard Base, Massachusetts, and the realignment of Atlantic City Air Guard Station, New Jersey because of related operational realignment actions. The current combined recommendation results in a 20-year net present value savings of $336 million and a 3-year payback period. Figure 12 shows the various BRAC actions in this recommendation. For example, 18 F-15 fighter aircraft are realigned from Otis Air National Guard Base and Lambert-St. Louis Air Guard Station to Atlantic City Air Guard Station. Furthermore, all three Air Guard Stations also realign other aircraft to three separate installations, Nellis Air Force Base, Nevada; Burlington Air Guard Station, Vermont; and Jacksonville Air Guard Station, Florida.
Finally, questions have been raised by various state officials whether the Secretary of Defense is authorized to close or realign Air National Guard bases without the consent of the state governor. DOD’s Office of General Counsel has not issued a legal opinion on this issue. According to an Air Force official, as of the date of this report, there have been no legal challenges brought against DOD regarding this issue.
Impact on the Coast Guard
The Air Force recommendation to close Otis Air National Guard Base could impact the U.S. Coast Guard. While the Air Force officials recognized the Coast Guard could be affected if the base was closed, their cost and savings analysis did not consider any costs that could be incurred by the Coast Guard. Air Force officials stated they didn’t have access to credible cost data during the BRAC process since cost estimates would have been speculative; the Air Force could not assume the final disposition of the facility and how much, if any, of the facility the Coast Guard would opt to retain. The Coast Guard is in the process of developing potential basing alternatives, to include costs impacts, for each affected location. Subsequent to the recommendations being made public, the Coast Guard estimated that they would incur about $17 million in additional annual operating costs to remain at Otis Air National Guard Base.
Realignment of Selected Active Bases
The realignment of Pope Air Force Base involves the transfer of 100 percent of the acres and facilities to the Army to become part of Fort Bragg, with a C-130 active/reserve associate unit remaining to support the Army. Our analysis indicates that there is a significant difference between the savings claimed by the Air Force and the costs projected by the Army regarding base operations support, recapitalization, and sustainment for facilities on Pope Air Force Base. For example, the Air Force claimed total net annual recurring savings of about $36 million for not providing base operations support and recapitalization and sustainment of facilities on Pope Air Force Base. However, the Army estimated total annual recurring costs for these areas to be about $19.5 million. This estimated cost comprises over $13 million from the Army as well as over $5.5 million from the Air Force to remain as tenant at Fort Bragg. According to Army officials, their estimated costs included taking ownership for all facilities on Pope Air Force Base.
The Air Force is also proposing to realign Eielson Air Force Base by moving all active duty units, leaving the Air National Guard units, and hiring contractors to provide base operating support and maintenance and repair of the facilities. The Air Force projects this action would produce a 20-year net present value savings of $2.8 billion, the most of any Air Force recommendation. Air Force officials said the decision to realign Eielson was made because of the high cost of operating the base and its value as major training site. The officials noted that the realignment will enable the Air Force to expand an annual training exercise as well as provide opportunities for increase use of the training area by other Air Force units. However, we have some question about the facilities that need to be retained to support the training mission and Air National Guard units. While the Air Force plans to give up the base family housing, it appears that all other base facilities would be retained. For example, Air Force COBRA data indicates that there will be no reduction in the square feet of facilities. The data also indicates that 64 percent of the facilities will be sustained at current funding.
The Air Force proposed to close Grand Forks Air Force Base but this was changed to a realignment by the Infrastructure Executive Council a week before the recommendations were finalized within the department. As a result, the projected savings were significantly reduced, as shown in table 19.
The decision to realign rather than close the base did not affect the need to move current aircraft and associated personnel to other bases to achieve the active and reserve mix. According to the Air Force BRAC report, this change to a realignment was based on military judgment to keep a strategic presence in the north central United States and on the fact that Grand Forks Air Force Base ranked high for acquiring a possible unmanned aerial vehicle mission. Even though Grand Forks Air Force Base was retained for strategic reasons, Minot Air Force Base is also located in North Dakota and is not affected by any BRAC recommendation. Furthermore, Minot Air Force Base scored only 3.4 points less than Grand Forks Air Force Base in the unmanned aerial vehicle mission area.
Closure of Ellsworth Air Force Base
The Air Force is proposing to close Ellsworth Air Force Base, South Dakota, and move its 24 B-1 bomber aircraft to Dyess Air Force Base, Texas to achieve operational efficiencies at one location. Ellsworth Air Force Base ranked lower in the military value than Dyess Air Force Base. In the 1995 BRAC round, the Air Force considered but chose not to close Ellsworth Air Force Base out of concern over placing all B-1 aircraft at a single location. In contrast, one of the Air Force principles which guided the BRAC 2005 process emphasized consolidating or co-locating legacy fleets such as the B-1 aircraft. Air Force officials stated that they no longer had concerns about consolidating the B-1 fleet in one location because it does not have the same operational mission requirements it had 10 years ago.
Education and Training Joint Cross-Service Group Selection Process and Recommendations
The Education and Training Joint Cross-Service Group followed the common analytical framework established by the Office of the Secretary of Defense (OSD) for reviewing its functions and facilities. The group produced a relatively small number of recommendations (nine) compared with the amount of excess capacity it identified. The group reported that the Infrastructure Steering Group (ISG) or the Infrastructure Executive Council (IEC) had each disapproved two recommendations for various reasons, and four recommendations were rolled into military department recommendations and are discussed in appendixes related to these groups. The group’s recommendations are projected to produce $1.3 billion in net present value savings over a 20-year period. For these recommendations, the length of time required for the savings to offset closure costs varied widely, with two recommendations expected to take just 1 year, two other recommendations requiring 13 and 16 years, respectively, and one never having any payback. We identified issues regarding the projected savings and extended payback periods with some recommendations that may warrant further attention by the BRAC Commission. The DOD Inspector General and service audit agencies, which performed audits of the data used in the process, concluded that the data were sufficiently reliable for use during the BRAC process.
Organization and Focus
The overarching goal of the Education and Training Joint Cross-Service Group was to pursue those educational and training economies and efficiencies that enhance readiness and promote academic synergies for more joint or interservice education. The group was chaired by the Principal Deputy Under Secretary of Defense (Personnel and Readiness), with senior-level members from Air Force Manpower and Reserve Affairs, Marine Corp Training and Education Command, Army and Naval Personnel, and the Joint Staff. This cross-service group was organized into four subgroups, focusing on (1) flight training, (2) specialized skill training, (3) professional development education, and (4) ranges.
The group identified five principles that were used to provide focus to its work: Advance jointness: Declare jointness paramount for specific functions.
Establish Joint National Training Capability.
Achieve synergy: Jointly construct, co-locate or put in close proximity multiple functions that are mutually supportive. Increase cross- functional use of training and testing ranges.
Capitalize on technology: Leverage distance learning capability to significantly reduce residential requirements.
Exploit best practices: Establish centers of excellence. Outsource to alternative providers.
Minimize redundancy: Identify common functional areas and eliminate duplication, reduce or avoid costs, standardize instruction, and increase efficiency.
The organizational structure and the above guiding principles provided a framework to evaluate the potential of a broad series of transformational options to improve DOD education and training.
Framework for Analysis
Capacity and military value analysis became the starting point for the group’s analyses. The DOD Inspector General and service audit agencies performed an important role in ensuring the accuracy of data used in these analyses through selective audits of data gathered at various locations.
Capacity Analysis
To form the basis for its analyses, the group developed metrics in each of the functional areas to measure capacity and subsequently collected certified data linked to these metrics from various defense activities whose missions resided within these categories. Each subgroup developed metrics to analyze capacity and to compare the various functions. The major standards used by each subgroup are described below: For undergraduate fixed and rotary flight training, runway and airspace capacity were the primary metrics used to analyze capacity. Runway capacity for fixed wing aircraft was calculated using Federal Aviation Administration standards to define the number of runway operations that could be conducted during daylight hours for 244 training days, at 12 hours per day. This approach accounted for weather conditions, the number and configuration of runways, the mix of aircraft, and the percentage of touchdown/takeoff operations. Other metrics included the amount of ramp (apron) space and ground-training facilities, such as classrooms and simulators.
For professional development education, capacity was based on classroom equivalent hours available on a 6-hour training day basis for 244 days a year. Classroom equivalent hours represent the number of 1- hour classes (15 students per class) that can be held in designated facilities, and they are based on available classroom space and instructor office space.
For specialized skill training, capacity was measured by the student population that can be sustained by the number of available dormitory rooms, dining facilities, and classrooms. This figure was based on an 8- hour training day for 244 days per year.
For ranges, capacity was based on the volume and time for training and open air testing at ground, air, and sea levels.
Each subgroup focused its capacity analysis on the existing capability to perform specific functions. Surge requirements, where applicable, were determined by military judgment. Excess capacity was defined as current capacity less current usage plus surge capacity. As seen in table 20, significant excess capacity was identified across all education and training functions except for the ranges subgroup.
The percentage of excess capacity includes consideration of surge requirements for all functions except professional development education.
According to service officials, in the event of a mobilization, postgraduate educational institutions and facilities would cease to operate and the students would revert back to their warfighting duties. The surge requirements for the remaining functions were based on military judgment. For example, the flight and specialized skill training subgroups used a 20 percent surge factor based on a review of current planning documents and military judgment. Likewise, a 25 percent surge factor was used for training ranges and a 10 percent factor for test and evaluation ranges, based on military judgment. According to service officials, a higher surge factor was used for training ranges to meet anticipated training needs for contingencies and mobilization, while test and evaluation are more measured and predictable and less likely to generate large surge loads on test and evaluation missions.
The group did not analyze the extent to which its proposed recommendations would reduce excess capacity across all education and training functions. Nonetheless, the Air Force estimated that the recommendation to consolidate undergraduate pilot training would reduce excess capacity by 2 percent. At the same time, the excess capacity identified will remain in undergraduate rotary wing training because the Navy could not agree on a scenario to consolidate training. Since there were no recommendations involving training ranges, there was no reduction in excess capacity in the sea and open air testing areas.
Military Value Analysis
Each subgroup developed military value scoring plans to analyze and rank each training facility using DOD’s four military value selection criteria. The subgroups assigned weighted values to each of the four criteria based on relative importance in assessing the military value of a site under each subgroup and related functions. Table 21 shows the weights for each subgroup.
Some key assumptions used by the subgroups in developing scoring plans for military value include the following: Installations with larger capacities are of comparatively greater military value for flight training and specialized skill training.
Managed training areas (particularly airspace) would be extremely hard to reconstitute if lost due to the BRAC process.
Existing service qualitative training requirements must be maintained.
Retain unique, one-of-a-kind assets or capabilities.
Attributes varied by subgroup. For example, the flight training subgroup identified six attributes that included airfield capacity, weather, environmental constraints (air quality, noise abatement, and encroachment), quality of life, managed training areas, and ground training facilities. The professional development subgroup applied location (access to senior political and military decision makers), educational output, facilities, educational staff, and quality of life. The specialized skill training subgroup attributes included location, quality of life issues, training facilities/resources (number of classrooms and available housing), support for other missions, training mission/throughput, and environmental constraints/expansion potential. Finally, the attributes for the ranges subgroup included personnel (experience and education), workload, physical plant (available space and range features), synergy with other ranges, and encroachment. Figure 13 gives an example of how the flight training subgroup was linked to the military value criteria.
The specialized skill training, professional development education, and ranges subgroups used similar approaches of attributes, metrics, and data call questions to link analysis back to the military value criteria.
DOD Inspector General’s and Service Audit Agencies’ Roles in the Process
The DOD Inspector General and service audit agencies reviewed the data and processes used by each subgroup to develop their recommendations. The overall objective was to evaluate the validity, integrity, and documentation of the data used by the subgroups. The DOD Inspector General and service audit agencies used real-time audit coverage of data collection and analyses processes to ensure that the data used in the Education and Training Joint Cross-Service Group capacity analysis and military value analysis were reliable and certified. Through extensive audits of the data collected by each subgroup from field activities during the process, the Inspector General and service audit agencies notified the group about identified data discrepancies for the purpose of follow-on corrective action. While the process for validating data was quite lengthy and challenging, the Inspector General and the service audit agencies ultimately determined the education and training–related data to be sufficiently reliable for use in the BRAC process once the subgroups made corrections to all the discrepancies.
Identification and Assessment of Alternate Scenarios and Selection of Recommendations
Although corrections were later made, the group did not have accurate and complete capacity and military value data when it started developing potential closure and realignment scenarios, and therefore, it had to rely on incomplete data, military judgment, and transformation options in developing initial scenarios for consideration. However, certified capacity and military value data and results of COBRA analyses were subsequently used to support the group’s final candidate recommendations. The group initially identified 64 scenarios and selected 17 candidate recommendations that were forwarded to the ISG. Four of the recommendations were rejected by the ISG and IEC and 4 of the group’s recommendations were integrated into military service recommendations. Ultimately, 9 recommendations were approved by the IEC.
Generally, scenarios were eliminated because they were alternatives to a recommendation that was selected or because the services objected to the scenario and the group leadership decided to delete it. For example, the professional development education subgroup developed three scenarios to streamline graduate education courses—two to consolidate these functions at existing military facilities and another to obtain graduate-level education at civilian colleges and universities. The group selected the privatization option because of the significant savings; however, it was rejected by the IEC, as discussed later. The professional development education subgroup also developed nine scenarios to realign the senior- level education courses provided by the service war colleges. The group elected to relocate the service war colleges under the National Defense University as the “best choice” option because it establishes a joint strategic center of excellence in the National Capitol Region. However, the IEC rejected this option, as discussed later. Finally, the flight subgroup developed eight alternatives to consolidate undergraduate pilot training. However, the Navy and the Air Force objected to these scenarios because they believed they would result in too much disruption to the pilot production pipeline.
The flight training subgroup was the only subgroup that used an optimization model in its scenario analysis. The subgroup used it to identify potential locations to consolidate undergraduate fixed wing pilot training functions among 11 installations. According to flight subgroup officials, the model was not used for rotary wing pilot training because there are only two locations where this training is conducted. Likewise, they noted that it was not used to select sites for the Joint Strike Fighter and Unmanned Aerial Vehicle training because there were limited sites selected for this training. Officials from the other three subgroups stated they did not use the model because of the limited number of facilities or functions reviewed. For example, the professional development education subgroup compared from two to six locations within each scenario, so the team manually developed scenarios by maximizing military value and capitalizing on excess capacity.
Recommendations Approved by DOD
The group estimated that its recommendations will produce $1.3 billion in 20-year savings and $236 million in net annual recurring savings. Table 22 provides a summary of the financial aspects of the group’s recommendations, all of which are realignment actions.
Our analysis indicates that $1.3 billion, or over 95 percent, of the group’s projected 20-year savings results from two recommendations that involve only the Army—the combat service support center and the air defense artillery center. The greater part of the projected savings from these two recommendations is based on military personnel reductions.
While five of the nine recommendations would foster jointness, they have limited projected savings. For example, the three recommendations that would establish joint centers of excellence for training (culinary, transportation management, and religious studies) are projected to produce only $45.6 million, or less than 1 percent, of the projected 20-year savings. Furthermore, the recommendation to consolidate the Joint Strike Fighter training has a payback period of never and a 20-year net present value cost of $226 million.
Issues Identified with Approved Recommendations
Time did not permit us to assess the operational impact of each of the Education and Training Joint Cross-Service group’s recommendations, particularly where operations proposed for consolidation extend across multiple locations outside of a single geographic area. While available data supporting the recommendations suggest that their implementation should provide for more efficient operations within DOD, the BRAC Commission may wish to consider the basis for the group’s assumptions about military personnel reductions, because these have a significant impact on the recommendations’ annual recurring savings and the potential benefits in relation to the investment costs for recommendations with longer payback periods.
Military Personnel Reductions
Significant portions of the savings in three recommendations—combat service support, air defense, and aviation logistics—are related to military personnel reductions. These recommendations represent $217 million, or 92 percent of the Education and Training Joint Cross-Service Group’s projected net annual recurring savings. Our analysis indicates that about $174 million of the net annual recurring savings is based on eliminating over 2,000 military positions within the Army. However, the Army does not plan to reduce its end strength by 2,000 in implementing these actions. These projected revenues do not represent dollar savings that can be readily reallocated to other accounts and applied to other priorities such as modernization, an area typically cited as a potential beneficiary of BRAC savings. Our analysis shows that without the savings from the military personnel reductions, the payback for the combat service support recommendation increases to 35 years, and for both the air defense and aviation logistics recommendations there would be no payback.
Extended Payback Periods
The group has proposed one recommendation that has no expected payback period and two others that have payback periods that exceed 10 years, far longer than the average payback typically associated with recommendations in the 1995 BRAC round. The recommendation to establish an integrated training center for the Joint Strike Fighter at Eglin Air Force Base, Florida, has no expected payback period, one-time cost of $199 million ($168 million is for military construction), and annual recurring cost of $3.3 million. This recommendation calls for the realignment of nearly 800 military positions—675 maintenance and 115 pilot—from five military installations to Eglin Air Force Base to train entry- level aviators and maintenance technicians from the Navy, Marine Corps, and Air Force in how to operate and maintain the new Joint Strike Fighter aircraft when produced and deployed. According to the chairman of the flight training subgroup, the recommendation does not provide the opportunity to generate savings through the consolidation and alignment of similar personnel because it is a new mission. However, this recommendation would establish a baseline program in a consolidated/joint school with a curriculum that brings a joint perspective to the learning process.
The two recommendations with payback periods greater than 10 years affect the Army. For example, the recommendation to relocate the Army Prime Power School from Fort Belvoir, Virginia to Fort Leonard Wood, Missouri, has a 16-year payback period, onetime cost of $6 million, and a 20-year net present value savings of less than $1 million. According to the DOD BRAC report, implementation of this recommendation consolidates engineer courses at Fort Leonard Wood, since the common-core phase of engineer courses are already taught at Fort Leonard Wood. Likewise, the recommendation to realign Fort Eustis, Virginia by relocating the Aviation Logistics School and consolidating it with the Aviation Center and School at Fort Rucker, Alabama has a 13-year payback period, one-time cost of $492.3 million, and a 20-year net present value savings of only $77.4 million. According to the DOD BRAC report, consolidating aviation logistics training with the Aviation Center and School fosters consistency, standardization, and training proficiency.
Proposals Eliminated from Consideration
The proposed recommendations do little to reduce the significant excess capacity (see table 20) that was identified in undergraduate pilot training for both fixed and rotary wing aircraft. The Education and Training Joint Cross-Service group identified several scenarios to consolidate undergraduate pilot training that could have enabled some base closures, but the group was unable to get the military services to agree to a joint solution. As a result, the Air Force made a proposal to realign its undergraduate pilot training and consolidate its navigator training with the Navy, which DOD adopted. However, the approved recommendation did not include rotary wing flight training. According to the chairman of the flight training subgroup, the capacity and military value analysis clearly showed that sufficient space is available at Fort Rucker for the Navy undergraduate rotary wing program to relocate from Naval Air Station Whiting Field, Florida, to Fort Rucker with limited renovation or military construction. However, the chairman noted that his group could not get the Navy to agree to the consolidation because of the Navy’s concerns over how such actions would affect other training schedules, so it was not pursued.
The Education and Training Joint Cross-Service group also developed a proposal to privatize graduate education that was conducted at the Naval Postgraduate School at Monterey, California, and the Air Force Institute of Technology at Wright-Patterson Air Force Base, Ohio. The group estimated that the proposal would produce $14 million in 20-year savings, with payback in 13 years, and enable the closure of the Monterey location. However, the IEC removed this recommendation late in the process because they believed that relying on the private sector to fulfill this requirement is too risky. According to the Navy’s Special Assistant for BRAC, the Chief of Naval Operations did not want to lose the synergy and interaction between U.S. and foreign students who attended the postgraduate school, and there were questions over whether all graduate- level courses would be available at civilian institutions.
The group also developed a recommendation to consolidate all the military services’ senior war colleges at Fort McNair, Washington, D.C., making them one college of the National Defense University. The group estimated that the proposal would produce $213 million in 20-year savings, with payback in 2 years. All of the military services voiced concerns about this recommendation. The Air Force believed that this recommendation would significantly degrade its Center of Excellence for Professional Military Education that includes extensive curriculum for air centric studies located at Maxwell Air Force Base, Alabama. The Navy believed that the existing system already has joint educational forums to address executive-level interchange, and it is unclear what would be gained by creating a single senior war college. Finally, the Army opposed the recommendation because it would move senior leaders and their families to the National Capital Region for 10 months. Based on the services’ concerns, the IEC rejected the proposal. However, the group, with the Army’s concurrence, developed a recommendation to move the Army War College, Pennsylvania, to Fort Leavenworth, Kansas, and consolidate it with the Army Command and General Staff College at a single location. This proposal would have enabled the closure of Carlisle Barracks in Pennsylvania, with projected 20-year savings of $555 million and a 2-year payback period. However, the IEC rejected this proposal because it wanted to maintain the proximity to Washington, D.C. that provides access to key national and international policy makers as well as senior military and civilian leaders.
Finally, the group developed eight scenarios to promote joint management of the military services’ training ranges. These options included utilizing a joint national urban operations training center and establishing three joint regional range coordination centers. The group ultimately proposed one recommendation to establish three regional joint range coordination centers, which it projected would have a 20-year cost of $138 million and no payback. The ISG rejected this recommendation because it deals with a program action as opposed to a BRAC-related issue.
Headquarters and Support Activities Joint Cross-Service Group Selection Process and Recommendations
The Headquarters and Support Activities Joint Cross-Service Group followed the common analytical framework established by the Office of the Secretary of Defense (OSD) for reviewing its functions and facilities. The group produced 21 recommendations, each of which resulted in multiple closures or realignments of activities, mostly from leased space onto military bases intended to consolidate commands, reduce costs, and enhance force protection. Nine other recommendations were referred to other joint cross-service groups or military services for inclusion in their reports. The group’s 21 recommendations are projected to realize $9.5 billion in net present value savings over 20 years. The payback period, or length of time required for the savings to offset closure costs for the recommendations discussed here, varied widely, from immediate to up to 16 years. We have identified some issues that suggest uncertainty about the level of savings likely to be realized, which the BRAC Commission may want to consider in its analysis of the proposed recommendations. The DOD Inspector General and service audit agencies, which performed audits of the data, concluded that the data were sufficiently reliable for use during the BRAC process, but did raise issues of concern impacting some recommendations.
Organization and Focus
The Headquarters and Support Activities Joint Cross-Service Group comprised six senior-level principal members, representing each service, the Office of the Secretary of Defense, and the Joint Chiefs of Staff. The group was chaired by the Army Assistant Deputy Chief of Staff for Programs, and principal members included the Commandant, Naval District Washington; the Marine Corps Assistant Deputy Commandant for Manpower and Reserve Affairs; the Administrative Assistant to the Secretary of the Air Force; the Office of the Secretary of Defense Deputy Director for Administration and Management; and the Chief of the Forces Division, Joint Staff. The group analyzed common headquarters-, administration-, and business-related functions across DOD, covering the military services, and defense agencies and activities. The group’s objectives were to eliminate redundancy, duplication, and excess capacity; utilize best business practices; increase effectiveness, efficiency, and interoperability; and reduce costs.
Framework for Analysis
The group organized itself into three subgroups: (1) major administrative and headquarters activities, (2) geographic clusters and functional, and (3) mobilization. The major administrative and headquarters activities subgroup focus included headquarters activities in leased and DOD-owned space within and outside a 100-mile radius of the Pentagon, combatant, service component, and supporting commands, and reserve and recruiting headquarters. The geographic clusters and functional subgroup examined installation management within geographic clusters, Defense Finance and Accounting Services headquarters and field offices, correctional facilities, and civilian and military personnel centers. The mobilization subgroup looked at the potential for joint mobilization sites. Capacity analysis identified the current inventory of administrative space, while the military value analysis became the starting point for developing recommendations as they applied to the four military value selection criteria. The DOD Inspector General and service audit agencies performed an important role in ensuring the accuracy of data used in these analyses through extensive audits of data gathered at various locations.
Capacity Analysis
To form the basis for its analyses, the group developed metrics in each of the functional areas to measure capacity and subsequently collected certified data from the military services and defense agencies and activities. In most cases, the group used a single metric, a standard factor of 200 gross square feet per person in analyzing existing administrative space requirements. The group also used fiscal year 2003 inmate population and current and maximum operational capacities for correctional facilities, and it used fiscal year 2004 personnel processing numbers and peak processing capacities at military installations serving as reserve component mobilization sites to estimate mobilization excess capacity figures.
The capacity analysis identified excess capacity across all functions analyzed—even when surge requirements were considered. As shown in table 23, excess capacity ranged from 14 percent to 87 percent across various capacity metrics in functional categories after applying a surge factor to figures for major administrative and headquarters installations and facilities and correctional facilities. The table provides the amount of the aggregate excess capacity for each of the functional categories; however, the amount of excess capacity varies by individual installation and activity.
In calculating excess capacity estimates for each of the eight categories, the group analyzed the data call responses pertaining to current capacity, maximum potential capacity, current usage, and space required for surge, using a standard factor of 200 gross square feet per employee. Subtracting current usage and surge space requirements from maximum potential capacity resulted in the excess capacity estimates. The group used a variety of approaches to consider surge requirements. For example, the major administrative and headquarters activities subgroup determined surge requirements through specific data call questions and then used these requirements in the capacity analysis in terms of requirement and space evaluations. The correctional facilities function within the geographic clusters and functional subgroup considered surge as a function of demand against maximum potential capacity. At the same time, the geographic clusters and functional subgroup determined that military personnel centers had been operating in a surge mode for the past several years and did not require additional surge capacity to be retained. The group did not determine the aggregate impact its recommendations had on reducing excess capacity.
Military Value Analysis
The group’s military value analysis was directly linked to the four military value selection criteria, as required by the BRAC legislation. The group assigned military values to 25 civilian personnel offices, 10 military personnel centers, 17 correctional facilities, 26 Defense Finance and Accounting Service sites, 65 installation management sites, 334 major administrative and headquarters installations and activities, and 66 mobilization sites. Each functional group developed weighted values for each selected criteria by first asking each group member to assess weights across the military value selection criterion, ranking them from highest to lowest in importance to military value. Once the rankings were determined, the weights generated for each group member were compared and, if they were close, the weights were adopted. If not, the group discussed the differences and reached agreement. Table 24 shows the various weights assigned to each of the four military value selection criteria.
The group’s assessment of military value included development of attributes (characteristics, facts, etc.), metrics or measures, and data call questions for each of the three subgroups. Figure 14 demonstrates an example of how attributes, metrics, and data call questions were linked back to the BRAC military value selection criteria for the major administrative and headquarters activities subgroup.
The geographic clusters and functional subgroup and the mobilization subgroup used similar approaches of attributes, metrics, and data call questions to link the analysis back to the military value selection criteria. For example, the geographic clusters and functional, and major administive and headquarters subgroups developed metrics and data call questions addressing force protection issues.
Using mostly certified data, the headquarters group examined the capabilities of each function from questions developed to rank activities from most valued to least valued. Exceptions occurred where military value responses were slow in arriving, contained obvious errors, or were incomplete, and in these cases judgment-based data were used. For example, in about 30 cases, activities in leased space did not respond to particular data call questions addressed to the leased space building manager nor did they identify what entity managed the building. After numerous follow-ups with the activities and meetings with representatives of the Washington Headquarters Service and Army Corps of Engineers— property agents for DOD—the group decided to use judgment-based data derived from functional subject matter experts, in consultation with the military departments and defense agencies. In an October 2004 memorandum to the Infrastructure Steering Group describing military value scoring plan changes, the Headquarters and Support Activities Joint Cross-Service Group concluded that based on an analysis of the effect of the missing, wrong, and incomplete data on proposals, there were some data issues that could affect the generation and comparison of proposals by the group members. However, improvements to the data occurred over time, and as of May 2005, when the military value analysis was completed, the group reported that a vast majority of its data were certified. We were told by a group operations research analyst that 99 percent of the analysis was determined by certified data and less than 1 percent by judgment- based data.
DOD Inspector General’s and Service Audit Agencies’ Role in the Process
The DOD Inspector General and service audit agencies reviewed the data and processes used by each subgroup to develop their recommendations; the military service audit agencies reviewed data inputs from the services, and the Inspector General reviewed data inputs from defense agencies and activities. Their objectives were to validate the data and the adequacy of the supporting documentation. The process for detecting and correcting data errors was quite lengthy and challenging. Through their audits of the data collected from field activities during the process, audit agencies notified the group as data discrepancies were discovered so that follow-on corrective actions could be initiated. The military service audit agencies concluded that the information was sufficiently reliable for its intended purpose. Assessments by the DOD Inspector General’s office of the data it reviewed were more mixed. In its June 10, 2005 draft report on the Headquarters and Support Activities Joint Cross-Service Group’s data integrity and internal control process for BRAC, the DOD Inspector General’s office concluded that after corrections were made, the group generally used certified data and created an adequate audit trail for its capacity, military value, and cost of base realignment actions. However, the Inspector General’s office raised issues involving estimated one-time savings associated with vacating leased space and consistency in rounding to estimate personnel savings. According to group officials, the Inspector General’s issues were discussed with group leadership, and they decided in deliberative session that the approaches taken by the group were the most fair and accurate approaches available and should be retained.
Our analysis indicates that the two issues identified by the Inspector General would reduce projected savings. Our analysis shows that if the one-time cost savings associated with antiterrorism and force protection are excluded, the 20-year net present value savings would be reduced by $268.4 million, the payback periods for 7 of the 15 affected recommendations would be extended by 1 year, and 3 years for one recommendation. Also, for the two recommendations identified by the Inspector General as using abnormal rounding techniques to estimate personnel reductions, the projected 20-year net present value savings in one case would be reduced from $13.5 million to a $749,000 cost, and for the other recommendation, the 20-year net present value savings drops from approximately $4.9 million to $ 2.6 million.
Identification and Assessment of Alternate Proposals and Selection of Recommendations
The Headquarters and Support Activities Joint Cross-Service Group developed proposals without receiving all the data they had requested from numerous activities. As such, the group relied on transformational goals and military judgment to develop its initial proposals. The group also used certified data to support or reject its proposals, data which the DOD Inspector General audited for accuracy. The group used the optimization model on a limited basis for a few functional areas because potential for those functional realignment possibilities was generally slight.
The following transformation options helped guide the group in developing initial proposals: Consolidate management at installations with shared boundaries and in geographic clusters.
Consolidate or co-locate civilian and military personnel offices.
Consolidate Defense Finance and Accounting Service central and field offices.
Establish and consolidate mobilization sites and establish joint deployment processing sites.
Justify locations for headquarters, commands, and activities within 100 miles of the Pentagon.
Eliminate leased space.
Consolidate multi-location headquarters at single locations, and eliminate stand-alone headquarters.
Consolidate corrections facilities.
Co-locate reserve and active component recruiting headquarters, and eliminate reserve force management organizations.
Regionalize common headquarters, administrative, and business-related common support activities.
The group initially developed 117 proposals, based on these transformational options and military judgment, to include alternative proposals being requested by the Infrastructure Steering Group (ISG). The group settled on 50 recommendations that were initially forwarded to the ISG. Seventeen of them were subsequently consolidated with other recommendations; 2 were rejected by the ISG and one by the Infrastructure Executive Council. Also, 9 recommendations were transferred to other cross-service groups or military departments for inclusion in their reports. That left 21 recommendations that the group addressed in its report and accordingly are addressed in this appendix.
Recommendations Approved by DOD
The Headquarters and Support Activities Joint Cross-Service Group projects that its 21 recommendations will produce a 20-year net present value savings of $9.5 billion, net annual recurring savings of about $914 million, and payback, or length of time required for the savings to offset closure costs for the recommendations, that varies widely from immediate to up to 16 years. Table 25 provides a summary of the financial aspects of the group’s recommendations.
In total, the group estimates that its recommendations will require a total investment of $2.5 billion, primarily for new military construction and moving personnel from leased space onto military bases, and will ultimately result in net annual recurring savings of $914.2 million. Our analysis indicates that about 92 percent of the annual recurring savings results from reductions in military and civilian employment levels (about $270 million, and about $267 million respectively) and the elimination of future lease payments for administrative office space ($300 million). Eighteen of the group’s recommendations are expected to realize savings within 10 years of completing the BRAC realignment and closure actions, while 3 have a payback period greater than 10 years.
Issues Identified with Approved Recommendations
Time did not permit us to assess the operational impact of each recommendation, particularly where operations are proposed for consolidation across multiple locations outside a single geographic area. However, we offer a number of broad-based observations about the proposed recommendations. While available data supporting the recommendations suggest that their implementation should provide for more efficient operations within DOD, the BRAC Commission may wish to consider the basis of the group’s assumptions for personnel reductions because they have a significant impact on the recommendations’ savings; the assumptions regarding vacating leased facilities because including antiterrorism and force protection savings also has an impact on the recommendations’ savings; challenges to implementing joint basing; cases where realignment actions with long payback periods were combined with actions with shorter durations; stand-alone actions where the payback period exceeded 10 years; and proposals eliminated prior to release of the final recommendations.
Personnel Reductions
Approximately $537 million, or about 59 percent, of the group’s projected net annual recurring savings are based on reductions in the number of military and civilian personnel eliminated as a result of the BRAC actions. The process used raises questions about the projected savings. The group initially used generic savings factors to estimate the number of personnel positions that could be eliminated when organizations were co-located or consolidated. These factors were developed on the basis of comments from subject matter experts and research of various databases available through the Pentagon library or the Internet. The group found that personnel reductions from 14 percent to 30 percent resulted from consolidation of organizations and 7 percent to 15 percent when they were co-located. The group adopted these personnel savings factors because the information it did collect on the number of personnel performing common support functions within the affected organizations could not be used and believed it did not have sufficient time to perform more precise manpower studies. The group used these savings factors consistently as starting points in negotiating the number of personnel reductions with the military departments and defense agencies and activities. In most cases the negotiated estimates were accepted, but in some cases the group imposed a personnel reduction percentage when negotiations failed. For example, in analyzing the costs and savings associated with relocating the Army Materiel Command from temporary lease space on Fort Belvoir, Virginia, to Redstone Arsenal, Alabama, the group leadership decided to impose a 7 percent personnel elimination based on expected economies of scale from co-locating the command with one of its major subordinate activities. Our analysis showed that the percentage factor used to estimate personnel reductions for all recommendations ranged from zero percent to about 42 percent.
A separate area of concern involves savings reported for military personnel. Our analysis indicates that the group’s recommendations propose to eliminate 2,479 military positions, which would result in about $270 million in net annual recurring savings. However, service officials indicate that they do not plan to reduce their end-strength based on these proposed eliminations but rather reallocate these positions elsewhere within the force structure. Since these military personnel will be assigned elsewhere rather than removed from the force structure, the projected savings do not represent dollars that can be readily allocated outside the personnel accounts to other purposes.
Leased Space
Fifteen of the group’s recommendations include a one-time savings of over $300 million from moving activities from leased space onto military installations. For example, these recommendations, if approved, would reduce total DOD leased space within the National Capital Region from 8.3 million square feet to about 1.7 million square feet, or by 80 percent. While our prior work generally supports the premise that leased property is more expensive than government owned property, the recommendations related to vacating leased space also raises questions about a limitation in projected savings and impact on local communities.
The one-time cost savings represents costs expected to be avoided in the future by moving from leased facilities onto government owned and protected facilities rather than upgrading existing leased space to meet DOD’s antiterrorism and force protection standards. According to a DOD official, the department put together a task force after the June 1996 Khobar Tower bombing incident in Dhahran, Saudi Arabia, of mostly engineers to develop minimum force protection standards for all DOD- occupied locations. The official also stated that application of the standards in BRAC was not the result of a threat or vulnerability assessment of the affected facilities. The Pentagon Force Protection Agency will shortly begin a 10-month antiterrorism and force protection vulnerability assessment of about 60 DOD-occupied leased buildings in the National Capital Region. This assessment will provide DOD with information to estimate the costs and feasibility of upgrading leased facilities to the antiterrorism and force protection standards. The force protection standards for leased buildings apply only where DOD personnel occupy at least 25 percent of the net interior usable area; only to the portion of the building occupied by DOD personnel; and to all new leases executed on or after October 1, 2005, and to leases renewed or extended on or after October 1, 2009. Initially, the group prepared military value data call questions that could determine whether a leased location met the force protection requirements. However, group officals stated that most of these questions were discarded because of inconsistencies in how the questions were answered except for the percentage of DOD personnel occupying buildings.
The group applied the cost avoidance factor consistently to all leased locations but did not collect data that would indicate whether existing leases met the standards, which could possibly result in application of the factor at locations meeting the force protection requirements. For example, the group applied over $2 million in one-time force protection cost avoidance to relocate a Navy human resources service center from the Stennis Space Center, Mississippi, to the Naval Support Activity, Pennsylvania, even though the Stennis Space Center may be as secure as any military installation. If these one-time savings, as shown in the final recommendations forwarded to the BRAC Commission, are not considered in the cost and savings analysis, our analysis shows that the projected 20- year net present value savings decrease by 3 percent ($268.4 million), the payback period increases by 1 year for 7 of 15 recommendations, and by 3 years for one recommendation as shown in table 26. After the final recommendations were released to the BRAC Commission, the group found errors in some recommendations, affecting one-time estimated savings and other costs and savings, which were still in the process of being corrected at the time of this report.
Furthermore, four of the Headquarters and Support Activities Joint Cross- Service Group’s recommendations involve moving personnel from leased space to Fort Belvoir, Virginia, mostly at the engineering proving ground, increasing Fort Belvoir’s population by about 10,700. The recommendations include military construction projects to build facilities for these personnel on Fort Belvoir. In addition, the recommendations include a $55 million Army estimate to improve roads and other infrastructure in the area surrounding the fort. However, it is uncertain at this time whether this will be sufficient to fully support the impact on the surrounding community’s infrastructure, or the likelihood that federal assistance is likely to be sought by local governments to help communities reduce the impact—costs that will have the effect of increasing one-time costs and offsetting short-term savings from the recommendations.
Implementation Challenges While the proposal to create joint bases by consolidating common installation management functions is projected to create greater efficiencies, our prior work suggests that implementation of these actions may prove challenging. The joint-basing recommendation involves one service being responsible for various installation management support functions at bases that share a common boundary or are in proximity to one another. For example, the Army would be the executive agent for Fort Lewis, Washington, and McChord Air Force Base, Washington, combined as Joint Base Lewis-McChord. However, as evident from our recent visit to both installations and discussions with base officials, concerns over obstacles such as seeking efficiencies at the expense of the mission, could jeopardize a smooth and successful implementation of the recommendation. Further, Air Force officials stated that most military personnel at McChord are mission critical and deployable, increasing the difficulty to identify possible Air Force military personnel reductions. The group projects 20-year net present value savings of about $2.3 billion, with net annual recurring savings of about $184 million. More than 90 percent of the recurring savings reported represent military (54 percent) and civilian (37 percent) personnel reductions. The group applied personnel reductions ranging from 1 to 10 percent for each of the 12 locations included in the joint basing recommendation. The actual percentage used for each location was negotiated between the group and the military departments based on the size of base populations and the kind of services provided.
In our June 2005 report we noted that DOD and the military services’ ability to forecast base operations support requirements and funding needs has been hindered by the lack of a common terminology for defining base support functions, as well as by the lack of a mature analytic process for developing base support requirements. We also reported challenges in maintaining adequate funding to meet base operating support requirements and facility upkeep. We concluded that until such problems are resolved, DOD will not have in place the management and oversight framework needed for identifying total base support requirements and ensuring adequate delivery of services, particularly in a joint environment. In its comments to a draft of our June report, DOD indicated that it expects to release a new facilities operation model by December 1, 2005, and use it to develop the fiscal year 2008 program and budget. DOD stated that it is also conducting a cross-department initiative to develop definitions for the common delivery of installation services and expects to complete this effort by December 2005. However, regarding modeling efforts, a Senior Joint Basing Group official expressed doubt during our review whether there would be a single funding model because base operating support, as it currently exists, has too many diverse activities to model. He indicated that it is more likely that a suite of tools will evolve over time.
Bundling Lessens Visibility of Costs
The headquarters group consolidated some recommendations with more than 10-year payback periods, far longer than typical payback periods in the 1995 BRAC round, with other proposals having shorter returns on investment. In total, 8 of the 21 final recommendations were actually packages that consolidated two or more recommendations approved by the joint cross-service group as stand-alone candidate recommendations. We found that in 7 instances, the more than 10-year payback periods of initially stand-alone proposals tended to be masked after they were combined in such packages. For example, the group developed a proposal to move the Army Materiel Command from Fort Belvoir, Virginia, to Redstone Arsenal, Alabama, which showed a 20-year net present cost and a 100-year payback period by not having to spend about $71 million to construct a permanent facility for the headquarters at Fort Belvoir. Had the construction savings been included in the recommendation, the payback period would have been 32 years. Concurrently, the group developed a separate proposal to relocate various Army offices from leased and government-owned office space mostly onto Fort Sam Houston, Texas, which would result in a 20- year net present value savings of about $277.4 million and a 3-year payback period. The group decided to combine these two stand-alone proposals so that all Army headquarters related activities were addressed in one recommendation with an estimated 20-year net present value savings of about $123 million with a 10-year payback.
Extended Payback Periods
The group proposed three recommendations that have an estimated payback period exceeding 10 years and one-time costs for implementation that greatly exceeds the expected 20-year net present value savings. The cost, savings, and expected benefits for these recommendations are described below: The recommendation to co-locate military department and DOD security clearance adjudication and appeals activities to Fort Meade, Maryland, has an estimated payback of 13 years, one-time cost exceeding $67 million, and 20-year net present value savings of only $11.3 million. According to the DOD final BRAC report, implementation of this recommendation would co-locate adjudication activities, reduce lease costs, and enhance security.
The recommendation to consolidate the Defense Commissary Agency Eastern and Midwestern regions and a leased site in Hopewell, Virginia, to Fort Lee, Virginia, has an estimated 14-year payback period, one-time cost exceeding $47 million, and 20-year net present value savings of only $4.9 million. According to the DOD BRAC report, implementation of this recommendation would consolidate headquarters operations at single locations, enhance security, and reduce lease costs.
The recommendation to establish joint regional correctional facilities has an estimated 16-year payback period, one-time cost of almost $179 million, and 20-year net present value savings of only $2.3 million. For example, the recommendation would establish the Midwest Joint Regional Correctional Facility by relocating correctional functions currently located at Lackland Air Force Base, Texas; Fort Knox, Kentucky; and Fort Sill, Oklahoma, to Fort Leavenworth, Kansas. According to the DOD BRAC report, implementation of this recommendation would improve jointness, centralize corrections training, and eliminate or significantly reduce old inefficient facilities.
Proposals Eliminated from Consideration
Three recommendations were initially approved by the group; two were later rejected by the ISG and another by the IEC. The ISG rejected the recommendation to relocate U.S. Southern Command, Miami, Florida, from its leased space to a state-owned leased space also in Miami with no explanation. Group officials stated the ISG rejected the U.S. Southern Command recommendation because costs associated with the relocation were too high. The ISG also rejected the relocation of U.S. Army Pacific Headquarters from Fort Shafter, Hawaii, to Pearl Harbor, Hawaii, because of Pacific Command Combatant Commander and the Army concerns regarding future requirements of U.S. Army Pacific Headquarters. The recommendation rejected by the IEC to co-locate military department and DOD medical activities to the National Medical Center, Bethesda, Maryland was discarded because of cost and long payback issues.
In other cases, Headquarters and Support Activities Joint Cross-Service Group members considered proposals that could have fostered jointly operated support activities, but they were later dropped on the basis of cost considerations and perceived operational risks. For example, the group considered co-locating all military personnel offices at one location. However, in analyzing this proposal, the group determined that implementing the joint proposal would be very costly, while also citing concerns about the uncertain availability of skilled employees at a single location to operate the joint facility. Therefore, the group concluded that it was better to co-locate or consolidate personnel centers within the individual military departments. Similarly, for civilian personnel centers the group developed a proposal to consolidate 25 offices that are currently operated by the military departments and defense agencies into 10 DOD “joint” offices. However, the proposal was dropped after concerns were raised by one military department that the risks associated with implementing joint personnel offices concurrently with processing paperwork supporting other BRAC-related personnel moves and implementing a new standardized personnel data system were too high. Consequently, the IEC directed the group to revise its proposal. The group revised its proposal to provide for consolidating the 25 current offices into 12 offices—4 to be operated by the Army, 4 by the Navy, 1 by the Air Force, and 3 by a single agency providing support to the defense agencies. While DOD did not recommend the creation of joint military personnel offices or joint civilian personnel offices, it is important to note that each of the initial proposals included justifications citing ongoing efforts within the department to establish standardized personnel processes and systems.
The recommendation to co-locate components of the U.S. Transportation Command does not include the Navy Military Sealift Command, one of the service component organizations. The group developed a proposal to move the Army and Navy component of the Transportation Command to Scott Air Force Base, Illinois. While the Army agreed to the proposal, the Navy did not believe that the group should be proposing to move the Military Sealift Command because it was considered an operational headquarters and not an administrative function under the purview of the Headquarters and Support Activities Joint Cross-Service Group. The ISG agreed with the Navy and deleted the Military Sealift Command from the recommendation, which reduced projected 20-year net present value savings from $1.30 billion to $1.28 billion.
Industrial Joint Cross-Service Group Selection Process and Recommendations
The Industrial Joint Cross-Service Group followed the common analytical framework established by the Office of the Secretary of Defense (OSD) for completing its review. The group initially produced 34 candidate recommendations; 3 were disapproved by the Infrastructure Executive Council (IEC); and several were subsequently integrated into larger military service recommendations. As a result, the group had 17 remaining recommendations that are addressed in this appendix. These 17 recommendations represent a mixture of closures and realignments with the realignments often encompassing the consolidation of various types of industrial workloads at fewer locations. Although some of the recommendations may be considered transformational, limited progress was made in recommending major actions to foster greater interservicing among the services. Industrial group officials said this was due to economic and military value considerations as well as the downsizing of maintenance facilities in prior BRAC rounds. Altogether, DOD projects these recommendations to produce about $7.6 billion in net present value savings over a 20-year period; nearly all are projected to have short payback periods (time required to recoup up-front investment costs) with expected savings offsetting expected implementation costs either immediately or within a few years. One recommendation has a payback period exceeding 10 years. However, uncertainty exists about the precision of the savings estimates because many estimates are based on efficiency gains that are yet to be validated and other factors. Further scrutiny by the BRAC Commission of this and other recommendations may be warranted to assess the impact of reductions against future force structure needs or capacity constraints. The DOD Inspector General and the military service audit agencies, which performed audits of the data, concluded that the data were sufficiently reliable for use during the BRAC process.
Organization and Focus
The industrial group was composed of senior-level principal members from the installations directorates for each service, the Defense Logistics Agency (DLA), and the Joint Chiefs of Staff and was supported by staff from these organizations. The Under Secretary of Defense (Acquisition, Technology and Logistics) chaired the group, which in turn forwarded its proposed recommendations to the Infrastructure Steering Group (ISG) for its review and approval. The group organized its BRAC analyses around three subgroups: (1) maintenance, (2) ship overhaul and repair, and (3) munitions and armaments. All of the subgroups focused their work similarly on identifying opportunities for reducing excess capacity.
Framework for Analysis
The industrial group’s analytical process included a review of nine distinct industrial areas across each of the military services. They included: (1) ground vehicles, aircraft, and other depot maintenance; (2) ground vehicles, aircraft, and other intermediate maintenance; (3) ship depot maintenance; (4) ship intermediate maintenance; (5) munitions production; (6) munitions storage; (7) munitions demilitarization; (8) munitions maintenance; and (9) armaments production. As per the BRAC process outlined by OSD, capacity analysis and military value analysis provided the starting point for the cross-service group’s work. The DOD Inspector General and service audit agencies performed an important role in ensuring the accuracy of data used in these analyses through extensive audits of data gathered at various locations.
Capacity Analysis
To form the basis for its analysis, the group developed metrics in each of the nine industrial areas to measure current capacity and subsequently collected certified data linked to these metrics from various defense activities across the country whose missions resided within these categories. While the most predominate metric was direct labor hours— used by both the maintenance and ship overhaul and repair subgroups exclusively and by the munitions and armaments subgroup in some instances—the munitions and armaments subgroup also used other metrics for measuring capacity. For example, for measuring munitions production, the subgroup used pounds and units, and for measuring munitions storage, the subgroup used square feet and short tons. The disparate nature of the functions analyzed by the group did not lend itself to a “one size fits all” analytical approach and each of the three subgroups conducted its own capacity analysis.
The munitions and armaments and ship overhaul and repair subgroups defined excess capacity as the difference between current capacity and current usage. For depot maintenance, the maintenance subgroup defined excess capacity as the difference between current capacity and the larger of current usage or core requirements. Core requirements are those workload needs that must be performed in organic rather than contractor facilities. For intermediate maintenance, the maintenance subgroup defined excess capacity as the difference between current capacity and current usage. The cross-service group’s capacity analysis showed that excess capacity existed within many of functional areas it examined, especially in those of munitions and armaments functions. As shown in table 27, the estimates of excess capacity ranged from 7 percent to 91 percent among individual functional categories.
The three subgroups addressed surge requirements in their capacity analyses to varying degrees. For the maintenance subgroup, the excess percentages represent excess capacity above surge requirements, because the collected core requirements data included surge requirements and the excess capacity calculations were based on the larger of current usage or core requirements. For the munitions and armaments subgroup, the excess capacity percentages represent the capacity available to meet surge requirements. According to munitions and armaments subgroup officials, there are no over-arching, quantified, DOD-wide surge requirements for munitions and armaments. Instead, surge becomes a factor of how much excess capacity is available and can be addressed through multiple work shifts. Conversely, the percentages for ship repair and overhaul do not address surge requirements. According to ship overhaul and repair subgroup officials, because the Navy’s surge requirements are dictated by emergent deployments or ship repair requirements and because shipyards are normally workloaded to their workforce capacity, surge capability is limited to the use of overtime and delaying previously planned work.
As table 27 shows, the data indicate that there was not much excess capacity in the ground vehicles, aircraft, and other depot maintenance area. Therefore, in that area the group focused much of its attention on minimizing sites by redistributing and consolidating workload. On the other hand, while many of the group’s ship overhaul and repair and munitions and armaments recommendations were directed toward reducing excess capacity, group officials did not calculate a percentage for the reduction in excess capacity made possible by implementing the recommendations.
Military Value Analysis
The military value of activities within the group played a predominant role in formulating recommendations. In completing its military value assessment, the industrial group assessed each activity across the four established military value criteria to more fully evaluate the potential for realignment and closure actions. As was the case with capacity analysis, the disparate nature of the industrial areas analyzed by the group precluded a uniform analytical approach among the three subgroups. As a result, the subgroups differed in the methodology they used to develop relative weights for the military value criteria for each of their functions. Table 28 shows the various weights assigned to each of the four military value criteria by the subgroups for their functions.
The group’s military value analysis also included the development of attributes, metrics, and data call questions for each of the nine functional areas represented in the categories in the chart above which were linked back to the four military criteria. Figure 15 provides examples of these attributes, metrics, and data questions and shows how each of these was linked back to the criteria.
Because of the disparate nature of the industrial areas analyzed by the industrial group, the subgroups also differed in the way they assigned military value scores to their respective activities. For instance, the maintenance subgroup determined military value by commodity only and did not develop an overall military value score for activities in the depot and intermediate maintenance functions. Because military value scores were only determined for activities by commodity, activities were only ranked within their respective commodities. For example, Rock Island Arsenal, Illinois, received a military value score for its combat vehicle maintenance workload and was ranked accordingly against all the other depot level activities that perform combat vehicle maintenance. In addition, because most activities involve multiple commodities, such as major maintenance functions like aircraft engines, electronics, etc., many of the activities received multiple military value scores. In the case of Rock Island Arsenal, it not only received a military value score for its combat vehicle maintenance work but also for its tactical vehicle maintenance work and its other equipment maintenance work. These military value scores were then used in an optimization model to determine the best locations to consolidate various like commodities among the three services. In all cases, the subgroup examined redistributing the workload to activities with a higher military value score for that commodity. According to the maintenance subgroup, determining military value by commodity allowed for more opportunities to create interservicing and consolidations of workload among the services. The maintenance subgroup’s process was focused on military value and available capacity without regard to service. The final recommendations were tempered by financial and operational considerations. However, as we discuss later, our analysis shows that while some interservicing may be achieved, most of the group’s recommendations remained relatively service-centric. The ship overhaul and repair and munitions and armaments subgroups, on the other hand, developed overall military value scores for activities within their respective functions and ranked their activities within those functions accordingly. For example, all shipyards were ranked together under the depot maintenance function, and all industrial activities that perform munitions production were ranked together under the munitions production function.
DOD Inspector General’s and Service Audit Agencies’ Role in the Process
The DOD Inspector General and the service audit agencies played important roles in ensuring that the data used in the industrial group’s data analyses were certified and properly supported. Through extensive audits of the data collected from field activities during the process, these audit agencies notified the group regarding any identified data discrepancies for the purpose of follow-on corrective action. While the process for detecting and correcting data errors was quite lengthy, the audit agencies ultimately deemed the industrial data to be sufficiently accurate for use in the BRAC process.
Identification and Assessment of Alternate Scenarios and Selection of Recommendations
The industrial group did not have complete capacity or military value data when it initiated the development of potential closure and realignment scenarios. Therefore, it had to rely on incomplete data as well as military judgment to determine which industrial areas had excess capacity and which could receive new workloads. As time progressed, however, the group obtained the needed data to inform and support its scenarios. The DOD Inspector General validated the data.
The maintenance and munitions and armaments subgroups used an optimization model to help facilitate scenario development, while the ship overhaul and repair subgroup, which had similar data problems, also relied on incomplete data as well as military judgment to help formulate scenarios for consideration. This subgroup did not rely on the optimization model as extensively as the other subgroups due to the relatively small number of activities analyzed. Collectively, the subgroups initially developed 120 proposals and scenarios and with the maturation of the data, completion of Cost of Base Realignment Actions (COBRA) analyses, and elimination of alternative scenarios, the industrial group settled on 34 recommendations that were forwarded to the ISG with all but 3 being ultimately approved by the IEC.
Despite having incomplete data, the maintenance subgroup began its scenario development by generating several ideas as potential scenarios. In testing the feasibility of these ideas, the maintenance subgroup found it useful to use an optimization model, because the subgroup was dealing with a universe of 57 commodities across 28 depot level activities and 11 commodities across over 200 intermediate level activities which made it extremely difficult to determine where workload could be consolidated or redistributed. For realignment considerations, officials told us the preferred method was to consolidate workload at the highest military value sites that remained open in the optimization results, but military judgment also played a role in finalizing the sites. In some instances, military judgment was used to override the results of the optimization model. For example, the subgroup chose not to realign the rotary aircraft workload from the Naval Air Depot at Cherry Point, North Carolina, to the Corpus Christi Army Depot, Texas, even though it was proposed for realignment under the optimization model because of concerns about establishing a single point of failure or vulnerability for DOD’s rotary aircraft workload.
One issue that the maintenance subgroup dealt with during its scenario development was that the current DOD capacity baseline for its maintenance work was based on a single shift 40 hours per week workload. According to the subgroup, when using the optimization model, it found that existing capacity as measured on this basis would constrain its ability to identify options for achieving more economical operations. Further, recognizing that such a baseline was inconsistent with industry practice, the subgroup modified the capacity baseline to one and a half shifts with a 60 hours weekly workload, thus increasing available capacity at its industrial activities and the potential for consolidating work at fewer locations. As we reported after the 1995 BRAC round, a capacity baseline of a single shift 40 hours per week workload is a conservative projection of capacity because the private sector frequently uses a capacity baseline of two or two and a half shifts. In addition, based on more current information of private sector capacity utilization, we still believe that a single shift is a conservative projection of capacity, since many firms today work multiple shifts.
Like the maintenance subgroup, the munitions and armaments subgroup also used the optimization model to test the feasibility of its ideas and to facilitate its scenario development and analysis. Its emphasis was on increasing multi-functional activities, (i.e., those activities that have the capability to do more than one munitions and armaments function). During scenario development, the subgroup’s preference was to eliminate excess capacity through closure versus realignment.
The ship overhaul and repair subgroup, on the other hand, used mostly capacity and military value data in combination with military judgment in developing and analyzing its scenarios. Due to the small number of activities analyzed—22 depot and intermediate level ship overhaul and repair activities—the subgroup did not have to rely on the optimization model to determine where workload could be potentially consolidated or redistributed. While it did use the model primarily to check the feasibility and rationalization of scenarios, military judgment was required because most of the subgroup’s scenarios were influenced by Navy force structure changes and planned changes in the homeports of ships. According to industrial group officials, expected out-year changes in Navy force structure—specifically expected reductions in the number of ships— allowed them to recommend the closure of a shipyard. Expected changes in the homeports of ships also influenced the subgroup’s intermediate level scenarios because the Navy’s intermediate level maintenance is generally performed where ships are homeported.
Recommendations Approved by DOD
The industrial group’s 17 recommendations are estimated to produce an estimated $7.6 billion in 20-year net present value savings. Table 29 provides a summary of the financial aspects of the group’s recommendations.
Most of the projected savings from the group’s recommendations are concentrated in relatively few recommendations and nearly all have an immediate or moderately short payback period where projected savings are anticipated to offset the implementation costs either immediately or within a few years. The recommendation regarding the establishment of Navy fleet readiness centers is by far the largest in terms of overall savings, accounting for about $341 million, or about 56 percent, of the total estimated net annual recurring savings. As discussed later, only one recommendation—the realignment of the Watervliet Arsenal, New York, has a lengthy payback period exceeding 10 years.
Of the industrial joint cross-service group’s 17 recommendations, 8 are closures and 9 are realignments. However, contained within these recommendations are 40 smaller, individual realignment actions and several recommendations involve installations with less than 300 personnel that could be but were not required to be proposed under BRAC. The following summarizes some of our overall observations about the group’s recommendations.
Interservicing: Despite setting up its military value scoring for maintenance by commodity to foster opportunities for interservicing, the industrial group actually developed few recommendations that proposed greater interservicing. Of the 9 realignment recommendations, we consider only three to involve interservicing—(1) realigning the Air Force’s depot maintenance workload at Lackland Air Force Base, Texas, to Tobyhanna Army Depot, Pennsylvania, (2) realigning the Navy’s depot maintenance at Naval Weapons Station Seal Beach, California to several other service depots, and (3) realigning Lima Army Tank Plant, Ohio, to support, in part, the future manufacturing of the Marine Corps expeditionary force vehicle. DOD has stated recently that there is some interservicing of ground maintenance work already being performed at the major depots. However, while there is significant interservicing of electronics work at Tobyhanna Army Depot, Pennsylvania and of rotary work at Corpus Christi Army Depot, Texas, our analysis shows that interservicing at the major ground vehicle maintenance depots is very limited. For example, in fiscal year 2003, only 3 percent of Anniston Army Depot’s total workload was for the Marine Corps and only 3 percent of Marine Corps Logistics Base Barstow’s and Marine Corps Logistics Base Albany’s workloads was for the Army. Moreover, out of 17 major maintenance depots across the services, the group only proposed the closure of three—Portsmouth Naval Shipyard, Maine, Red River Army Depot, Texas and Marine Corps Logistics Base Barstow, California—with Barstow ultimately becoming a realignment. No recommendations were developed regarding the Air Force’s three relatively large air logistics centers and only Navy-centric recommendations were developed regarding the Navy’s three naval air depots, despite that the industrial group had registered scenarios consolidating similar types of work from a naval air depot into air logistics centers. According to group officials, they decided not to propose these as recommendations because of the Navy’s desire to combine its aircraft depot and intermediate work into fleet readiness centers and because this recommendation offered greater financial benefits. As a result, this essentially removed the naval air depots from the BRAC analysis in considering opportunities for more interservicing. While not considered an industrial group recommendation or otherwise addressed in this appendix, the industrial group’s work also helped the Navy develop a recommendation realigning some of the workload at Marine Corps Logistics Base Barstow to Army depots. This recommendation is discussed in appendix IV.
Closures: Regarding eight closures, four involve underutilized Army ammunition facilities, and three are chemical demilitarization facilities where the primary mission is slated to disappear in the coming years.
Savings: Essentially all of the projected savings from the group’s recommendations are based on reducing overhead and eliminating civilian and military personnel as installations are closed and functions are realigned between installations. For example, 63 percent of the group’s total projected net annual recurring savings is from reductions in overhead and 37 percent is from personnel eliminations with civilians making up 21 percent of total net annual recurring savings and military personnel 16 percent.
Taken individually, the recommendation that the industrial group expects will generate the greatest amount of savings is the establishment of the Navy’s fleet readiness centers, which is estimated to produce net annual recurring savings of $341 million or 56 percent of the group’s total net annual recurring savings and an estimated 20-year net present value savings of $4.7 billion or 62 percent of the group’s estimated total net present value savings. This realignment recommendation differs from the other realignments in that it proposes a significant business process reengineering effort to integrate the Navy’s non-deployable, intermediate and depot level aircraft maintenance rather than a consolidation or realignment of workload. While the changes proposed would appear to have the potential for significant savings, as explained below, some uncertainty exists about the full magnitude of the savings estimate for this recommendation because most of the group’s projected savings are based on efficiency gains that have yet to be validated. For example, based on our analysis, over 63 percent of the estimated net annual recurring savings for this recommendation are miscellaneous recurring savings projected to accrue from overhead efficiencies, such as reduced repair time and charges, while 12 percent of the annual recurring savings is produced from reductions in military personnel and 24 percent of the savings is derived from reductions in civilian personnel. These efficiencies are expected to be gained from integrating intermediate and depot levels of maintenance and not having to ship as many items to faraway depots for repair. In addition, 34 percent of the group’s net implementation savings for this recommendation is derived from other one-time unique savings accrued from one-time reductions in spare parts inventories.
Issues Identified with Approved Recommendations
Time did not permit us to assess the operational impact of each of the industrial group’s recommendations that was approved by DOD, particularly those with minimal financial impact and where minimal realignment and consolidation of workload was proposed. At the same time, however, we offer a number of broad-based observations about selected proposed recommendations regarding high payback periods and uncertain savings that the BRAC Commission may want to consider in its review.
Navy’s Fleet Readiness Centers
The recommendation on fleet readiness centers is essentially a Navy business process reengineering effort to transform the way the Navy conducts aircraft maintenance by integrating existing, non-deployable, intermediate and depot maintenance levels into a single, seamless maintenance level. The fleet readiness center construct focuses on the philosophy that some depot level maintenance actions are best accomplished at or near the operational fleet. Although the data suggests the potential for savings, we believe there is some uncertainty regarding the magnitude of the industrial group’s expected savings for these readiness centers because its estimates are based on assumptions that have undergone limited testing, and full savings realization depends upon the transformation of the Navy’s supply system. In determining the amount of savings resulting from the establishment of the fleet readiness centers, the industrial group and the Navy made a series of assumptions that focused on combining depot and intermediate maintenance in a way that would reduce the time an item is being repaired at the intermediate level, which in turn, would simultaneously reduce the number of items needed to be kept in inventory and the number of items sent to a depot for repair. These assumptions, which were the major determinant of realignment savings, were based on historical data and pilot projects and have not been independently reviewed or verified by the Naval Audit Service, DOD Inspector General, or us. Moreover, how well these actions, if approved, are implemented will be key to determining the amount of savings realized.
According to the group, two types of savings account for the majority of the projected savings from the fleet readiness center recommendation. First, one-time savings are projected to accrue from reductions in inventory maintained at several Navy shore locations because item repair cycle time for components is reduced with more depot level maintenance being performed at or near the fleet, generally at an intermediate facility. According to group officials, this reduction is accomplished by stationing several depot level repair personnel at an intermediate facility to assist in repairing an item on site rather that spending time re-packing and shipping the item to a depot for repair. By reducing the turnaround time for an item—that is, time spent in transit to and from a depot level repair facility, group officials estimate that the average time an item is in the repair pipeline will decrease from 28 hours to 9 hours, with nearly all that time spent on the actual repair. The industrial group maintains this reduction in turnaround time will allow for savings since fewer items will need to be kept in the shore based aviation consolidated inventory because items will be getting repaired quicker and returned to the inventory faster. The second type of savings is recurring overhead savings that are projected to accrue from fewer items being sent to depots for repair. According to group officials, establishing fleet readiness centers will result in fewer items being sent to a depot to be repaired, thus reducing per item maintenance costs. These savings are captured in the COBRA model under overhead as miscellaneous recurring savings. As explained by group officials, when an item is sent to a depot, two charges are applied to the cost to repair the item—a component unit price and a cost recovery rate. So, if fewer items are sent to a depot, then fewer repair charges are incurred and less overhead costs are incurred.
However, according to an industrial group official, since the depots will have fewer items to repair, they will have fewer opportunities to generate revenue to support their working capital fund operations. This situation, in turn, could create an incentive for the depot to increase its cost recovery rate for items it does repair to make up for reduced revenues. If this were to occur, then the projected savings would not materialize because most of the fleet readiness center savings are based on a reduction in the number of items sent to depots and are contingent on the supply system not drastically raising the cost recovery rate. According to industrial group officials, it will be important to overall transformation efforts that DOD follow through on eliminating management structures and duplicate layers of inventory in the supply system. Also, according to these officials, some of this supply-side transformation is already underway at the retail level in the form of a partnership between fleet industrial supply centers and the naval air depots where material management for the depots was handed over to the supply centers to standardize supply chain processes, improve material availability, and reduce the material excesses that have been a difficult problem for the naval air depots. In addition, group officials stated that the supply and storage joint cross-service group’s recommendation to realign supply, storage, and distribution management should also further this transformation by eliminating unnecessary redundancies and duplication and by streamlining supply and storage processes, which will reduce costs and help prevent a large increase in the cost recovery rate.
In addition, we believe there is some potential risk in properly accounting for depot level work to meet legislatively mandated reporting requirements on the percentage of depot workload performed in government and contractor facilities, absent efforts to ensure adequate differentiation of work completed for intermediate and depot level maintenance. We previously reported on similar difficulties in 2001 involving a consolidation of intermediate and depot level work at Pearl Harbor Naval Shipyard, Hawaii. We noted that, prior to consolidation, the Navy’s determination of depot and intermediate maintenance work was based on which facility performed it—the former Pearl Harbor shipyard performed depot work, and the former intermediate maintenance facility performed intermediate work. However, because Pacific Fleet and Pearl Harbor officials asserted that all work was considered and classified the same at the consolidated facility, the management and financial systems did not differentiate between depot and intermediate categories of work. As a result, the lines between what was considered intermediate and depot maintenance became blurred, making it harder to report what was intermediate and depot maintenance. The industrial group maintains that during the first few years of implementing the fleet readiness center recommendation, the Navy will continue to operate depot maintenance within the working capital fund (setting up a separate holding account) and perform intermediate maintenance with mission funding. During this period, depot maintenance will be reported as depot maintenance and intermediate maintenance will be reported as intermediate maintenance. While this should mitigate the accounting issue in the short-term, it is unclear to what extent longer term measures will be needed to ensure proper reporting of depot work to meet statutory requirements.
Savings for Chemical Depots after Implementation
The net annual recurring savings may be overstated for the three chemical depots recommended for closure—Newport, Umatilla, and Deseret—and it is unclear whether such facilities are appropriately included in the BRAC process. The industrial group estimated net annual recurring savings of $127 million for the three chemical demilitarization facilities, $20 million of which is from anticipated savings by not recapitalizing these closed BRAC installations. However, the current missions of each of these installations are focused on the destruction of existing chemical weapons stockpiles, and after the stockpiles are destroyed, the destruction facilities themselves are scheduled to be dismantled and disposed of in accordance with applicable laws and agreements with the governors of the states in which they are located. With the exception of the recommended transfer of storage igloos and magazines from Deseret to Tooele Army Depot, Utah, Army officials have not identified any existing plans for future missions at these depots once the chemical destruction mission is complete. Consequently, it is unclear how the closure of the depots will result in recapitalization savings. Additionally, given the general delays in the Army’s chemical weapons destruction program it is uncertain that it will be able to complete the chemical weapons destruction mission and close these depots within the 6-year BRAC statutory implementation period.
Hawthorne Army Depot
There is uncertainty surrounding the Army’s ability to close the Hawthorne Army Depot, Nevada, by 2011, the final year as prescribed by the BRAC legislation for implementing BRAC actions. The Army may be unable to demilitarize all the unserviceable munitions stored at the depot by 2011, thereby placing the Army at risk for closing the depot by that date. Army officials told us that demilitarization funds have not been fully used for demilitarization purposes in recent years, but for other purposes. As a result, the stockpile of unserviceable munitions is growing. The funding situation is of such concern that an Army official told us they intend to request the DOD Comptroller issue a memorandum that would administratively “fence” funding in the demilitarization account to better ensure that the funds will be used for reducing the stockpiles of unserviceable munitions. This official also told us that this funding situation could be further exacerbated with the potential for the return to the United States of additional unserviceable munition stockpiles that are currently stored in Korea, even though the group considered these stocks in its analysis. This official stated that if these unserviceable munitions are returned for demilitarization to Hawthorne, there will be added pressure to finish the demilitarization process in time to close the facility by 2011.
Closure of Ammunition Plants
Currently, the Army leases some property at its ammunition plants through the Army’s program called the Armament Retooling and Manufacturing Support Initiative. DOD has recommended for closure four ammunition plants that are part of this initiative—Mississippi, Kansas, Lone Star, and Riverbank. We previously reported that, while this initiative has offset some of the Army’s maintenance costs, maintaining ammunition plants in an inactive status still represents a significant cost to the federal government. Through this initiative, the Army contracts with an operating contractor that conducts maintenance, repair, restoration, and remediation in return for use of the inactive part of the facility. The operating contractor, in turn, locates and negotiates with tenants regarding lease rates, facility improvements, and contract terms. However, the effect on these tenants of closing the four ammunition plants involved with the initiative is currently unknown. Army officials responsible for the initiative told us that past transfers of such property outside of the BRAC process have been handled poorly in that the General Services Administration or Army Corps of Engineers, the agencies responsible for transferring excess property, evicted the tenants and then sold the property separately, as was the case in past closures such as the Indiana Army Ammunition Plant. Army officials said that property transfers conducted in this manner could be costly because the government must incur some costs that were paid by the tenants, such as for security and maintenance. For example, an Army analysis showed that retaining the ARMS tenants on Indiana Army Ammunition plant rather than evicting them would have saved about $41 million. Additionally, DOD may incur some costs if leases are terminated early. An industrial group official told us that the group included termination costs for leases that extended past the proposed closure date but only for tenants performing DOD work, not for other tenants. We believe that lease termination costs should have been included for any tenant’s lease that extends past the proposed closure date, since there may be a cost incurred for breaking the lease early. However Army officials said that it would be difficult to estimate such potential costs at this time.
Watervliet Arsenal, New York
Despite having a payback period of 18 years, the industrial group proposed the realignment of Watervliet Arsenal, New York, because it has considerable excess capacity and DOD will no longer require some of its capabilities. The group had originally considered either moving the entire workload of the arsenal to Rock Island Arsenal, Illinois, or moving the entire workload of Rock Island Arsenal to Watervliet Arsenal. However, according to industrial group officials environmental issues regarding potential chromium discharges into the Mississippi River and costs associated with moving heavy industrial equipment precluded a cost- effective realignment of moving the work at Watervliet Arsenal to Rock Island Arsenal. Similarly, air quality issues regarding sulfur dioxide emissions along with the costs to move equipment precluded a cost- effective realignment of moving the work at Rock Island Arsenal work to Watervliet Arsenal, since the Northeast region already exceeds allowable limits for sulfur dioxide emissions. As shown in the table 29, the Watervliet recommendation has a payback period of 18 years, with about $63.7 million in one time unique costs and only $5.2 million in net annual recurring savings. According to industrial group officials, these one-time costs reflect the costs of “shrinking the footprint,” (i.e., moving out of buildings and eliminating and moving excess equipment at both the arsenal and the accompanying research laboratories also located at the arsenal).
Intelligence Joint Cross-Service Group Selection Process and Recommendations
The Intelligence Joint Cross-Service Group followed the common analytical framework established by the Office of the Secretary of Defense (OSD) in reviewing its functions and facilities. The Intelligence Joint Cross- Service Group produced two recommendations that it projects will yield about $588 million in 20-year net present value savings, with a payback period of 8 years for each recommendation. The majority of savings in the two recommendations result from lease terminations. Unlike the services or other groups, there is little savings projected from personnel reductions because, according to officials, almost all of the personnel will relocate and end strength is projected to increase as a result of program growth. The DOD Inspector General and service audit agencies, which performed audits of the data, concluded that the data were sufficiently reliable for use during the BRAC process.
Organization and Focus
The intelligence group was responsible for reviewing intelligence functions throughout DOD. Previous BRAC rounds did not involve the participation of any joint cross-service group dedicated to analyzing intelligence functions. The intelligence group was chaired by the Deputy Under Secretary of Defense (Counterintelligence & Security). The Group’s principals included senior members from the Defense Intelligence Agency, National Geospatial-Intelligence Agency, National Reconnaissance Office, National Security Agency, each military department, and the Joint Staff Directorate for Intelligence, along with representation from the offices of the Director, Central Intelligence Community Management Staff, and the Department of Defense Inspector General.
The intelligence group formed four functional subgroups: Sources and Methods; Correlation, Collaboration, Analysis, and Access; Management Activities; and National Decisionmaking and Warfighting Capabilities. The first three subgroups each created an analytical construct for measuring defense intelligence capacity that resulted in a capacity data call. These subgroups were eventually replaced by a single Core Team that included membership from each organization represented in the Intelligence Joint Cross-Service Group. This team created a single, consolidated analytical construct for measuring the military value of defense intelligence facilities. The team also performed detailed capacity and military value analysis, evaluated scenario ideas, executed scenario data calls, and prepared Intelligence Joint Cross-Service Group candidate recommendations for deliberation.
The overarching intelligence principle the group worked to support was that DOD needs intelligence capabilities to support the National Military Strategy by delivering predictive analyses, warning of impending crises, providing persistent surveillance of our most critical targets, and achieving “horizontal” (that is, interagency) integration of networks and databases. To do so, the group focused on four key objectives: Locating and upgrading facilities on protected installations as appropriate.
Reducing vulnerable commercial leased space.
Realigning selected intelligence functions/activities and establishing facilities to support continuity of operations and mission assurance requirements.
Providing infrastructure to facilitate robust information flow between analysts, collectors, and operators at all echelons and achieve mission synergy.
The group conducted an assessment of defense intelligence for buildings, facilities, and personnel performing the intelligence function. The objective was to project an alignment of present capabilities, with current organizational compositions and business processes, to desired future operational capabilities, using DOD’s transformational concepts and preferred organizational construct.
Framework for Analysis
The intelligence group initially identified five broad functions to analyze in defense intelligence: Sources and Methods (Acquisition and Collection); Analysis; Dissemination; Management Activities; and Sustainability. Based on subsequent Infrastructure Steering Group guidance, these five broad functions were consolidated into a single function—defense intelligence— in the final military value scoring plan. Capacity analysis and then military value analysis were the starting points for the BRAC analytical process. The DOD Inspector General and service audit agencies performed an important role in ensuring the accuracy of data used in these analyses through extensive audits of data gathered at various locations.
Capacity Analysis
To assess capacity, the intelligence group identified buildings and facilities performing the intelligence function and developed related attributes, metrics, and questions for analysis. Data calls were issued to the defense intelligence community to gather certified data on intelligence buildings and facilities. The capacity analysis identified limited excess capacity in some organizations, but no overall excess capacity, as shown in table 30.
The negative excess capacity shown in table 30 differs from the group’s initial capacity data results, which showed an overall excess capacity of 18 percent. However, after reviewing the initial data, the intelligence group made two adjustments. First, the group removed buildings with no direct intelligence mission, such as barracks, pump houses, tunnels, or warehouses. Then the group increased its estimate of the area of square feet required for personnel temporarily working at another intelligence entity and for contractor personnel by 50 percent. The group did not identify any known documented requirements for the defense intelligence community to set aside space or facilities for surge. The intelligence community has historically handled surge operations by reassigning and reallocating existing resources within the current square footage.
Military Value Analysis
All BRAC 2005 selection criteria were applied by the intelligence group across the defense intelligence functional support area and used with the force structure plan and infrastructure inventory to perform analyses. Priority consideration was given to military value by evaluating and scoring activities based on the first four selection criteria. Table 31 below shows the weighted value the intelligence group gave to the criteria, based on a 100-point scale.
The intelligence group assessed the military value of its facilities based on those facilities’ capabilities to support the intelligence function. A single scoring plan measured the value of both the infrastructure and the personnel performing the defense intelligence function at a given facility. Attributes and weighted metrics were used to compute the military value of a building by assessing the facility’s physical infrastructure and locations as they related to selection criteria 1 through 4. After computing military value scores, a rank-ordered listing of the 267 intelligence facilities was developed for the defense intelligence function. Subsequently, strategy- driven scenarios were validated by analyses of military value data and military judgment. Figure 16 illustrates how the military value attributes, metrics, and data questions were linked to the military value criteria using selected attributes, metrics, and questions.
A similar process was followed for all of the 267 intelligence facilities.
DOD Inspector General’s and Service Audit Agencies’ Role in the Process
The DOD Inspector General and service audit agencies reviewed the data and processes used by the Intelligence Joint Cross-Service Group to develop its recommendations. The overall objective was to evaluate the validity, integrity, and documentation of data used by the subgroups. The DOD Inspector General and service audit agencies used real-time audit coverage of data collection and analysis processes to ensure that the data used in the groups’ capacity analysis, military value analysis, and use of optimization models was certified and was used as intended. Through extensive audits of the data collected from field activities during the process, the DOD Inspector General notified the group of data discrepancies for the purpose of follow-on corrective action. The DOD Inspector General ultimately determined, once the corrections to all the discrepancies were noted, the intelligence data to be sufficiently reliable for use in the BRAC process.
Identification and Assessment of Alternate Scenarios and Selection of Recommendations
The Intelligence Joint Cross-Service Group developed 13 scenarios, which after further analysis led to 6 candidate recommendations being presented to the Infrastructure Steering Group and the Infrastructure Executive Council, the latter of which approved 3 candidate recommendations. One of these 3 approved candidate recommendations was subsequently incorporated into a recommendation proposed by the headquarters group.
Some scenarios were eliminated because they were alternatives to a proposed recommendation. Other scenarios were eliminated because of concerns over high implementation costs and long payback periods—that is, the length of time required for the savings to offset closure costs. For example, the group developed a scenario to establish selected continuity of operations and mission assurance functions at White Sands Missile Range, New Mexico, but it was disapproved by the Infrastructure Executive Council because it had a one-time cost of $1.8 billion and a projected payback period of never.
Recommendations Approved by DOD
The Intelligence Joint Cross-Service Group projects that its two recommendations will produce almost $588 million in 20-year net present value savings, and almost $138 million in net annual recurring savings. Table 32 below provides a summary of the financial aspects of the group’s recommendations.
The majority of the net annual recurring savings in the two recommendations is from the avoidance of future leased cost when activities move from leased space to military installations. Intelligence Joint Cross-Service Group officials noted that about one-half of the estimated $1.1 billion one-time costs for the National Geospatial- Intelligence Agency move will be paid from National Intelligence Program funds.
Issue Identified with Approved Recommendations
The recommendation to move the National Geospatial-Intelligence Agency from various leased sites to Fort Belvoir, Virginia, will have a significant impact on the local community when added to other proposals to move activities to Fort Belvoir. This one proposal would move about 8,500 personnel to Fort Belvoir from Bethesda, Maryland, Washington, DC and the northern Virginia area. The BRAC Commission may wish to consider the impact on the local community infrastructure, such as roads and public transportation, when evaluating this and other proposals affecting Fort Belvoir.
Medical Joint Cross-Service Group Selection Process and Recommendations
The Medical Joint Cross-Service Group followed the common analytical framework established by the Office of the Secretary of Defense (OSD) for reviewing the military health care system. It produced 22 candidate recommendations; one was disapproved late in the process by the Infrastructure Executive Council (IEC), and one was integrated with a service recommendation. The remaining 20 recommendations were combined into 6 recommendations that were ultimately approved by DOD. These 6 recommendations are projected to produce about $2.7 billion in estimated net present value savings over a 20-year period. The expected payback period, or length of time for the savings to offset costs associated with the recommendations, varies from immediately to 10 years. We have identified various issues regarding the recommendations that may warrant further attention by the BRAC Commission. These include the likelihood that some estimated savings could be less than projected, lengthy or no payback periods for certain proposed actions imbedded within the more complex recommendations, and uncertainties about future requirements and their impact on the viability of the recommendations. While the group encountered some challenges in obtaining accurate and consistent certified data on a cross-service basis, the DOD Inspector General and the military service audit agencies ultimately concluded that the data used by the medical group were sufficiently reliable for use in the BRAC process.
Organization and Focus
maintain and improve access to care for all beneficiaries, including identify and maximize synergies from co-location or consolidation, and examine outsourcing opportunities, such as increasing the use of civilian care providers, to allow DOD to leverage its efforts across the overall United States health care system.
Framework for Analysis
The medical group organized and conducted its BRAC analyses of DOD’s military health care system focusing on three broad functions: (1) health care services; (2) health care education and training; and (3) medical and dental research, development, and acquisition. As with other military services and joint cross-service groups, capacity and military value analyses were the starting points for the group’s analyses. The DOD Inspector General and service audit agencies performed an important role in ensuring the accuracy of data used in these analyses through extensive audits of data gathered at various locations.
Capacity Analysis
In establishing the analytical framework for developing its recommendations, the medical group analyzed the military health system’s capacity in terms of services, workloads, and facilities. The group developed specific functional area metrics for measuring capacity and collected certified data associated with these metrics from military installations across the country. It used a range of metrics, depending on the functional area being assessed, such as military health care population and workloads, number of hospital beds, available and currently used building space, length and frequency of education and training programs, personnel requirements, and equipment usage, to measure capacity. group’s capacity analysis report acknowledged that even though adjustments have been made to the health care system since the BRAC 1995 round, the medical system infrastructure is still generally based on a Cold War strategy with minimal reliance on civilian health care providers.
TRICARE network, civilian medical education and training programs, and extended operations.
According to DOD medical officials, the Department of Health and Human Services, rather than DOD, is responsible for domestic homeland medical support, but defense medical personnel and infrastructure could be used to assist in handling domestic medical emergency situations. According to DOD officials, since this support is not part of DOD’s defined mission, it was not included in the medical group’s analysis. However, DOD officials also told us that the Joint Chiefs of Staff and the OSD had coordinated the BRAC analysis with major commands that would be impacted by BRAC proposals, including the U.S. Northern Command, which is responsible for the homeland defense mission.
DOD is in the process of reviewing the military health care system’s ability to meet future medical readiness requirements, including an evaluation of medical infrastructure at various levels of operations from contingencies to full operational surges. DOD intends to include Department of Homeland Security policies in this review. According to DOD officials, the results of this ongoing assessment were not included in the medical group’s capacity analysis because the assessment is not expected to be completed until after the BRAC recommendations are finalized, following reviews by the BRAC Commission, the President, and Congress. Nevertheless, the medical group made a determination that the current medical force size was adequate to meet the requirements of various war plans, and after reviewing the fiscal year 2006 program objective memorandum and the 20-year force structure plan, it decided to use the current force structure for its analysis. Further, the group concluded that deployment force sizing, a readiness issue, did not have direct influence on determining excess facility capacity.
The medical group estimates that its recommendations, if adopted, would result in a 12 percent reduction in excess inpatient medical capacity and an approximately 7.4 million square feet net reduction in overall facility space.
Military Value Analysis
The medical group’s assessment of military value, like its excess capacity assessment, focused on the same three functional areas: (1) health care services; (2) health care education and training; and (3) medical and dental research, development, and acquisition.
The military value analysis helped to establish the basis for realigning medical functions across the various installations or closing specific activities within the medical infrastructure. It also helped to gauge the impact of the group’s proposed scenarios on the overall DOD health care system. The military value methodology for this BRAC round was similar, in many respects, to the one used in the 1995 round, especially for medical functions. For example, both rounds identified affected populations and local civilian providers within catchment areas. In both rounds, military value played a predominant role in formulating recommendations. Moreover, during the 2005 round, the medical group considered the impact on local beneficiaries, such as military retirees, from downsizing or eliminating medical facilities, which included input from a DOD-chartered military health benefit working group. This working group included independent members who represented TRICARE regions throughout the United States.
The medical group’s functional military value analysis assessed the relative capabilities of various activities and facilities supporting the military health care system’s mission and operational needs. Its military value analysis was directly linked to the four military value criteria required by the BRAC legislation. For example, the military value analysis gave greater weight to services supporting active duty members in order to emphasize force readiness. Table 34 shows the relative weights that the group developed for each of the four selection criteria that relate to military value.
Medical and dental research, development, and acquisition weight 1. The current and future mission capabilities and the impact on operational readiness of the total force of the Department of Defense, including the impact on joint warfighting, training, and readiness. 2. The availability and condition of land, facilities, and associated airspace (including training areas suitable for maneuver by ground, naval, or air forces throughout a diversity of climate and terrain areas and staging areas for the use of the Armed Forces in homeland defense missions) at both existing and potential receiving locations. 3. The ability to accommodate contingency, mobilization, surge, and future total force requirements at both existing and potential receiving locations to support operations and training. 4. The cost of operations and the manpower implications.
In developing its analysis in accordance with the criteria above, the group developed specific functional area attributes, metrics, and data call questions to assist in assessing military value. Figure 17 provides an example of such analysis for the health care services functional area and its linkage to the BRAC legislation.
Population—active duty, dependents, and other beneficiaries—eligible to receive medical care from the military health system.
Age and condition of medical treatment facilities.
Hospital potential capabilities for providing inpatient care to casualties.
Total costs for inpatient and outpatient services.
The BRAC military value criteria are the first four BRAC selection criteria.
DOD Inspector General’s and Service Audit Agencies’ Roles in the Process
The DOD Inspector General and the service audit agencies played important roles in ensuring that the data used in the medical group’s analyses were certified and properly supported. The involvement of these audit groups included validation of data submitted by the military services, compliance with data certification requirements, the integrity of the group’s databases, accuracy of the analytical process in terms of calculations, and the adequacy of supporting documentation. These audit groups conducted extensive audits of the data collected from the military installations, and in some instances data discrepancies were identified for follow-on corrective actions. While the process for detecting and correcting data errors was quite lengthy, the DOD Inspector General and audit agencies determined that the medical-related data were sufficiently reliable for use in the BRAC process.
Identification and Assessment of Alternate Scenarios and Selection of Recommendations
The medical group’s study objectives, military judgment, and capacity and military value analyses helped to identify closure and realignment scenarios for consideration. Identification and evaluation of scenarios was also facilitated by use of an optimization model to identify recommendations that could aid in optimizing medical health care workloads and infrastructure. The group also developed scenarios that included establishing a minimum level of average daily patient workload for inpatient facilities and by reducing excess capacity in multiservice markets to achieve efficiencies. It also used the Cost of Base Realignment Actions (COBRA) model to estimate the potential net costs or savings for its scenario proposals. The group also considered the scenarios’ impact on the local economy, the DOD medical beneficiary population and graduate medical education requirements, and the environment.
The medical group submitted 22 recommendations to the IEC, which disapproved one of the recommendations—the proposal to close the Uniformed Services University of the Health Sciences at Bethesda, Maryland. This matter is discussed further in the next section of this appendix. Further, another recommendation was integrated with a service realignment and closure action. The remaining 20 recommendations were combined into 6 recommendations that were ultimately approved by DOD.
Recommendations Approved by DOD
The group produced 6 recommendations which they reported will yield an estimated $2.7 billion in 20-year net present value savings and $412 million in net annual recurring savings. Table 35 below provides a summary of the financial aspects of the group’s recommendations. However, the group acknowledges that it incorrectly reported certain financial data for its recommendation involving the Walter Reed Army Medical Center. Based on our analysis, the revised estimates are shown as a note to table 35.
Appendix X Medical Joint Cross-Service Group Selection Process and Recommendations One-time (costs)
Payback period (years)
Close Brooks City-Base, San Antonio, TX, by relocating functions to Randolph Air Force Base, Wright-Patterson Air Force Base, Lackland Air Force Base, Fort Sam Houston, and Aberdeen Proving Ground ($325.3) ($45.9)
Realign various activities by converting inpatient services to clinics at Marine Corps Air Station Cherry Point, Fort Eustis, U.S. Air Force Academy, Andrews Air Force Base, MacDill Air Force Base, Keesler Air Force Base, Scott Air Force Base, Naval Station Great Lakes, and Fort Knox (12.9)
Establish San Antonio Regional Medical Center at Fort Sam Houston, Brooke Army Medical Center; and realign basic and specialty enlisted medical training to Fort Sam Houston (1,040.9) (826.7)
Realign Walter Reed Army Medical Center (all tertiary care to Bethesda National Naval Medical Center and primary and specialty care to Fort Belvoir) (988.8) (724.2)
Realign McChord Air Force Base by relocating all medical functions to Fort Lewis (1.1)
Realign various activities to create joint centers of excellence for chemical, biological, and medical research, development, and acquisition (at Fort Sam Houston, Walter Reed Army Medical Center— Forrest Glen Annex, Wright-Patterson Air Force Base, Fort Detrick, and Aberdeen Proving Ground) (73.9) (45.9) ($2,442.9) ($1,336.7) result in nearly all of the expected savings—over 90 percent of the total estimated 20-year net present value savings of about $2.7 billion, and of the net annual recurring savings of about $411.7 million. Two of the six recommendations have high one-time upfront costs—about $2 billion, or over 80 percent of the total one-time costs for the six recommendations.
Two multiservice market area recommendations—the establishment of the San Antonio Regional Medical Center in Texas and realignment of the Walter Reed Army Medical Center in Washington, D.C.—are ultimately expected to (1) produce over 50 percent of the net annual recurring savings and (2) incur most of the up-front costs for the recommendations as a whole. The group’s primary motivation for these recommendations was to transform the existing medical infrastructure into premier modernized joint operational medical centers. In the case of the Walter Reed Medical Center recommendation, the group also justified the recommendation based on a shift in the beneficiary population from the northern tier of the Washington, D.C., area to the southern tier near Fort Belvoir, Virginia.
Another recommendation with substantial estimated net annual recurring savings is the closure of the Brooks City-Base in Texas, which is projected to achieve efficiencies in research, development, and acquisition by relocating similar functions to a single location. However, as discussed below, a significant portion of the savings from this as well as other recommendations involve claimed military personnel savings, which are somewhat uncertain. The recommendation that involves the downsizing of inpatient facilities at nine locations is expected to achieve efficiencies and reduce personnel as well as provide enhanced training opportunities for medical personnel transferring to other locations. base will help foster jointness in the long term. Based on our analysis, it is not obvious whether some of these proposed realignments will truly result in joint military operations.
Issues Identified with Recommendations
Time did not permit us to assess the operational impact of each of the medical group’s recommendations, particularly where operations proposed for consolidations or realignments extend across functional areas, geographical areas, or both. At the same time, we offer a number of broad- based observations about some of the proposed recommendations as they relate to military medical personnel savings, payback periods, jointness, and medical wartime requirements that may warrant further review by the BRAC Commission.
Military Medical Personnel Savings
Our analysis shows that military personnel savings account for about $201 million or nearly 50 percent of the group’s estimated net annual recurring savings. However, the amount of projected dollar savings is uncertain because the medical group indicated that reductions in end strength are not planned. Indirectly, some savings could occur based on the group’s expectation that medical personnel would be reassigned on an individual basis to specific and varied locations, depending on where the need exists for military medical specialists. In some cases, the group noted that these military personnel reassignments could displace civilian and/or contractor medical providers. When or to what extent these reallocations would occur has not yet been determined. At the time of the group’s analysis, these specific moves had not been identified and thus the group did not estimate costs related to such potential moves in its cost and savings analysis.
Bundling of Recommendations
period was determined to be 10 years. The common linkage of the two recommendations is location, with the expectation that the enlisted medics will benefit from the location of the Brooke Army Medical Center in Texas, which has a trauma center suited for combat casualty training. Another example is the initial realignment of medical research, development, and acquisition functions at Brooks City-Base, which had no payback before DOD combined this recommendation with other related recommendations to close the base.
Future Wartime Medical Requirements
DOD’s ongoing assessment of its future wartime medical requirements, as mentioned earlier, will not be completed until after BRAC decisions are finalized, following reviews by the BRAC Commission, the President, and Congress; therefore, this assessment was not included in the medical group’s analysis. Without having such requirements available during the BRAC process, it is difficult for DOD to identify the appropriate medical infrastructure changes that are needed or to determine the appropriate size of the military health care system. Also, the group recognized that medical operations are changing with casualties rapidly moved to medical facilities outside the theater of operations and that these changes may affect the future sizing of medical forces.
Nevertheless, the group expressed belief that the current medical force size was adequate to meet the requirements of the various war plans despite the group’s recommendations that will reduce system-wide excess inpatient capacity by 622 beds.
Use of Veterans’ Hospitals
existing medical facilities. While the official told us that VA involvement had the potential for providing services and benefiting the department, another official added that the group’s analysis indicated that sufficient capacity exists, without VA support, within the private sector to accommodate military beneficiaries in those locations where inpatient care at the military facilities is being eliminated. However, we were unable to verify the results of this analysis because the group did not fully document its analysis.
Closure of the Uniformed Services University of the Health Sciences Rejected by IEC
The medical group had initially developed a candidate recommendation to close DOD’s medical school, known as the Uniformed Services University of the Health Sciences, which is located on the grounds of the National Naval Medical Center in Bethesda, Maryland. The group had concluded that it was more costly than alternative scholarship programs, and that the department could rely on civilian universities to educate military physicians. The group projected the closure will yield net annual recurring savings of about $58 million, and 20-year net present value savings of approximately $575 million. In a series of reports from 1995 through 2000, we also concluded at the time that the university was a more costly way to educate military physicians. associated with this medical facility in order for it to be a world-class medical center. According to another official, DOD will need to make investments in the university in order to elevate its status and attract leading medical scholars who could make the university more competitive.
Supply and Storage Joint Cross-Service Group Selection Process and Recommendations
The Supply and Storage Joint Cross-Service Group followed the common analytical framework established by the Office of the Secretary of Defense (OSD) for reviewing the supply, storage, and distribution system within DOD. The group initially produced five recommendations that were presented to the Infrastructure Steering Group (ISG) and the Infrastructure Executive Council (IEC). Three of the five recommendations were merged into one recommendation by the IEC. If adopted, the three approved recommendations are projected to generate about $5.6 billion in estimated 20-year net present value savings and $406 million in net annual recurring savings for the department with an immediate payback (i.e., time required to recoup up-front investment costs) on the cost of implementing these recommendations. While the number of recommendations is small, each encompasses multiple realignment actions of workloads affecting many locations. Our analysis shows that the anticipated savings would result primarily from business process reengineering—expanded use of performance-based logistics—, infrastructure and inventory reductions, and reduced civilian personnel costs. We identified a number of issues associated with several recommendations that may warrant additional attention by the BRAC Commission. The group encountered some challenges in obtaining accurate and consistent certified data, but the DOD Inspector General and the military service audit agencies, which performed audits of the data, ultimately concluded that the data were sufficiently reliable for use during the BRAC process.
Organization and Focus
The supply and storage group consisted of six senior-level principal members from the logistics directorates for each service, the Defense Logistics Agency (DLA), and the Joint Chiefs of Staff, and was supported by staff from these organizations. The Director, DLA, chaired the group, following the retirement of the original chairman from the Joint Staff. The group’s overarching goal was to identify potential closures, realignments, or both that would enhance economies and efficiencies in operations as traditional military forces and logistics processes become more joint and increasingly take on expeditionary characteristics.
Framework for Analysis
The group organized its BRAC efforts around the three core logistics functions of supply, storage, and distribution. These functions are inherent in the military services’ operations as well as for DLA, whose mission is to provide wholesale-level support in these functions for the services in common supply classes. In collecting and analyzing data to formulate its recommendations, the group sought to assess the supply and storage infrastructure in the following four distinct activity areas: (1) military service and DLA inventory control points (2) defense distribution depots, (3) defense reutilization and marketing offices and (4) other activities such as installation-level supply operations. As with other military services and joint cross-service groups, capacity and military value analyses served as starting points for the group’s analyses. While the group initially tried to analyze both the wholesale and retail supply and storage activities, it later terminated most retail-level efforts because of difficulties in collecting reliable data and a desire by the group’s principals to not impact the retail support to operational and other deploying units. The DOD Inspector General and service audit agencies performed an important role in ensuring the accuracy of data used in these analyses through extensive audits of data gathered at various locations.
Capacity Analysis
exception, from further consideration in the succeeding analyses leading to recommended actions.
The group’s capacity analysis showed that excess capacity exists, even when surge factors were considered, within three of the four supply and storage activity areas it examined. As shown in table 36, the excesses ranged from 20 percent to 75 percent under normal demand conditions across various capacity metrics in the functional areas, with the excesses somewhat less under surge conditions.
According to the group’s staff, its recommendation regarding restructuring of defense distribution depots, if approved and implemented, is expected to reduce current covered storage of about 51 million square feet (both regular and special) by over 50 percent, or about 27 million square feet. In addition, the recommendation regarding inventory control points is expected to increase infrastructure by about 4,700 square feet because the inventory control points would be absorbing more space than they would be vacating. The group has no recommendations that would affect the capacity of DLA’s defense marketing and reutilization offices.
Military Value Analysis
The supply and storage group’s assessment of military value, like its excess capacity assessment, focused on the same three core logistics functions of supply, storage, and distribution. By linking its military analysis directly to OSD’s four military selection criteria required by the BRAC legislation, the group established a sound basis for developing its recommendations. As shown in table 37, the group developed a weighting system for the military value criteria with the first and third criteria having relatively larger weights, or importance, than the remaining two criteria.
As with the capacity analysis, the group’s assessment of military value included development of attributes and metrics in each of the core functional areas to measure military value, and it subsequently sought to collect certified data linked to these metrics from various defense activities whose missions resided within these categories. The group developed 55 individual metrics within the three functional areas, addressing information such as the percentage of demand for stocked items and cost of operations per person. The attributes and metrics were linked back to the military value selection criteria, as illustrated in figure 18. retail level to complete a military value analysis at that level. In many respects, the military value methodology for this round was comparable to that used in the 1995 BRAC round, particularly for DLA activities. In both BRAC rounds, the military value ranking of an activity played a predominant role in formulating recommendations.
DOD Inspector General’s and Service Audit Agencies’ Roles in the Process
The DOD Inspector General and the service audit agencies played important roles in helping to ensure that the data used in the group’s data analyses were certified and properly supported and that decision-making models (e.g., military value and optimization) were logically designed and operating as intended. Through extensive audits of the data collected from field activities during the process, these audit agencies notified the group when they identified data discrepancies for follow-on corrective action. While the process for detecting and correcting data errors was quite lengthy and challenging, the audit agencies ultimately deemed the supply and storage-related data to be sufficiently reliable for use in the BRAC process.
Identification and Assessment of Alternate Scenarios and Selection of Recommendations
The Supply and Storage Joint Cross-Service Group did not have accurate and complete capacity and military value data when it initially started developing potential closure and realignment scenarios and, therefore, had to rely on incomplete data, as well as military judgment based on the group’s collective knowledge of the supply and storage area, to formulate its initial closure and realignment scenarios for evaluation. Although the data improved as additional information was requested and received from field locations, the lack of useable data initially limited the use of an optimization model to help identify and analyze scenarios. As time progressed, however, the group obtained the needed data, for the most part, to inform and support its scenarios. The DOD Inspector General validated the data. The group also focused on a number of OSD supplied transformational options, as outlined below, to guide its efforts in the recommendation development process: Establishing a consolidated multi-service supply, storage, and distribution system focused on creating joint activities in areas with heavy DOD concentration.
Privatizing the wholesale storage and distribution processes.
Migrating oversight and management of all service depot-level reparables to a single DOD agency/activity.
Establishing a single inventory control point within each service or consolidate into a joint activity.
Examining the effect of reducing functions by 20, 30, and 40 percent from the existing baseline, or reducing excess capacity by an additional 5 percent beyond the analyzed excess capacity.
The group developed a total of 51 scenarios based on these transformational options. With the maturation of the data and the application of the COBRA model to estimate costs and savings, along with military judgment, the group was able to narrow its proposals to five candidate recommendations that were forwarded to the ISG and ultimately approved by the IEC. Further integration of three of these recommendations into a single recommendation left the group with three approved recommendations.
Recommendations Approved by DOD
The group’s recommendations are projected to produce substantial savings—about $406 million in estimated net annual recurring savings and about $5.6 billion in estimated net present value savings for DOD over the next 20 years. All are realignment actions, even though one of the recommended actions will close two defense distribution depots at Columbus, Ohio, and Texarkana, Texas and another one will close four inventory control points at Fort Huachuca, Arizona; Fort Monmouth, New Jersey; Rock Island, Illinois; and Lackland Air Force Base, Texas, while, at the same time, opening a new one at Aberdeen Proving Ground, Maryland. The group’s recommendations also helped facilitate the closures of Fort Monmouth, New Jersey, and Red River Army Depot, Texas, both of which are reported in the Army’s BRAC report. Table 38 provides a summary of the financial aspects of the group’s three DOD-approved recommendations. industrial customers, such as maintenance depots, shipyards, and air logistics centers. The strategic distribution sites are located at Susquehanna, Pennsylvania; Warner Robins, Georgia; Oklahoma City, Oklahoma; and San Joaquin, California. It is also designed to realign service retail supply and storage functions along with personnel and infrastructure for these industrial customers in an “in-place, no-cost transfer” to DLA. This recommendation supports the closures of the defense distribution depots at Columbus, Ohio, and Texarkana, Texas, and realigns each of the remaining 17 defense distribution depots.
The recommendation regarding the realignment of the inventory control points transfers certain inventory control point functions, such as contracting, budgeting and inventory management, to DLA and allows further consolidation of service and DLA inventory control points by the supply chains they manage. In addition, it supports the movement of the management of essentially all service consumable items and the procurement management and related support functions for the procurement of essentially all depot level reparables from the military services to DLA. This recommendation realigns all 16 of the current DLA and service inventory control points and closes 4 through consolidation— Fort Huachuca, Arizona; Fort Monmouth, New Jersey; Rock Island, Illinois; and Lackland Air Force Base, Texas—while opening a new inventory control point at Aberdeen Proving Ground, Maryland. The recommendation also supports the Army’s closure of Fort Monmouth by moving supply and storage functions to other locations.
The recommendation regarding the realignment of commodity management disestablishes the wholesale supply, storage, and distribution functions within the department for all tires; packaged petroleum, oils, and lubricants; and compressed gases used by DOD. As a result, these commodities will be supplied directly by private industry, which will free up space and personnel used to manage these items. It realigns all of the remaining defense distribution depots by disestablishing all storage and distribution for the commodities.
Issues Identified with Approved Recommendations
Although time did not permit us to fully assess the operational impact of each recommendation, particularly where operations proposed consolidation across multiple and varied locations, available information suggests these recommendations have the potential for more efficient operations within DOD. At the same time, there are some issues we identified that we believe the BRAC Commission may wish to consider during its review process because of potentially overstated savings estimates. In this regard, the supply and storage group claimed savings for future cost avoidances for sustainment and facilities’ recapitalization related to the facilities’ space that is expected to be vacated under the recommended actions. However, as discussed below, it is uncertain whether these savings will actually materialize if these facilities are not closed and remain open—even with reduced usage of the space. Additionally, the group did not develop recommendations for several areas within the scope of its responsibility that may have further contributed to the accomplishment of DOD’s BRAC objectives, such as additional consolidations in DLA and service inventory control points.
Estimated Savings Related to Business Process Improvements Are Uncertain
required to be held in inventory. Although the group had some supporting documentation for its assumptions, time did not allow us to fully evaluate the documentation. Nevertheless, the full magnitude of savings likely to be realized will depend on how well the actions, if approved, are implemented in line with the assumptions made.
Estimated Savings Related to Vacated Facility Space May Be Overstated
All of the supply and storage group’s recommendations taken together show significant projected savings from expected reductions to excess or unnecessary infrastructure. According to the group’s estimates, it is claiming BRAC savings on about 27 million square feet of vacated space— an estimated savings of about $100 million annually or about 25 percent of the group’s total net annual recurring savings. In developing its costs and savings estimates, the group assumed that all of the excess infrastructure that was made possible by the recommendations would generate BRAC savings because it was further assumed that the infrastructure would no longer be used and therefore would not require sustainment and recapitalization funding. However, we believe these assumptions are not necessarily valid because it is not clear that the freed-up infrastructure will be eliminated and could potentially be occupied by other users following the BRAC process. At present the group does not have plans for this space. Under the BRAC process, if these vacated facilities or portions thereof are reoccupied by other defense organizations, there is a corresponding cost for this reoccupation. Likewise, additional BRAC costs are required for facilities that remain empty to minimally maintain them, and costs are incurred if buildings are demolished. Supply and storage officials told us they were aware of this issue and said that their goal is to vacate as much space as possible by re-warehousing inventory and by reducing personnel spaces, but they do not have a specific plan for what will happen to the space once it is vacated. In addition, until these recommendations are ultimately approved and implemented, it will not be known exactly how much space is available or how this space will be disposed of or utilized. As a result, it is unclear as to how much of the estimated $100 million net annual recurring savings will actually occur.
Potential for Additional Savings Exists
6,500 service staff to DLA and was estimated by the group to save $2.9 billion over the same 20-year period. The latter scenario would leave nearly 3,900 service technical and engineering support personnel of the more than 10,300 service staff at existing service inventory control points. Senior-level principal members of the supply and storage group consider the technical and engineering support personnel positions to be more closely related to weapon system readiness and support to the warfighter than other inventory control point functions, such as contracting, budgeting, and inventory management, which are being transferred to DLA. These officials were not willing to suggest transferring the technical positions to DLA because of the perceived additional risk involved of not being able to supply the critical parts to the warfighter when needed. Therefore, they approved the recommendation that generated less savings, but also less risk to weapon system readiness and moved fewer inventory control point functions and fewer service staff to DLA. The Commission may wish to further examine the potential for greater savings regarding the transfer of more inventory control point functions versus the potential risk of not being able to supply critical parts when needed.
The group also did not pursue the development of recommendations regarding the defense reutilization and marketing office activities, even though considerable excess capacity exists, as shown in table 36, in that area. Group officials told us that these activities, which are managed by DLA, are considered follower organizations that are currently undergoing an extensive A-76 initiative outside the BRAC process that is expected to either close or consolidate several activities and reduce staff levels at others. DLA data indicate that 61 of the 67 reutilization and marketing office activities analyzed by the supply and storage group are involved in the effort and that the agency expects to save about $36 million through 2011 with the A-76 effort.
Technical Joint Cross-Service Group Selection Process and Recommendations
The Technical Joint Cross-Service Group followed the common analytical framework established by the Office of the Secretary of Defense (OSD) in reviewing its functions and facilities. The group included in its report 13 recommendations that it projects would generate about $2.2 billion in 20- year net present value savings for DOD. These 13 recommendations incorporate a total of 6 closures, 62 realignments, and 1 disestablishment action. Additionally, the technical group transferred parts of nine recommendations to other joint cross-service groups or military services, which combined with other actions resulting in three additional closures. The majority of the projected annual recurring savings result from eliminating civilian and contractor personnel and vacating leased space. The recommendations have payback periods—the time required for savings to offset closure and realignment costs—ranging from 1 to 26 years. Limited progress was made to foster greater jointness and transformation. The DOD Inspector General and the military service audit agencies, which performed audits of the data used in the process, concluded that the data were sufficiently reliable for use during the BRAC process. While available data supporting the recommendations suggest their implementation should provide for more efficient operations within the department, we believe there are some issues that the BRAC Commission may wish to examine more closely during its review process.
Organization and Focus
The technical group was chaired by the Director, Defense Research and Engineering; it consisted of senior members from each military department and the Joint Chiefs of Staff. The group created five subgroups to evaluate the technical facilities: (1) Command, Control, Communications, and Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR); (2) Air, Land, Sea, and Space Systems; (3) Weapons and Armaments; (4) Innovative Systems; and (5) Enabling Technologies. In addition, the group also created a Capabilities Integration Team and an Analytical Team to support the efforts of the subgroups.
Framework for Analysis
The technical group established two principles to guide its analysis and recommendation development: (1) provide efficiency of operations by consolidating technical facilities to enhance synergy and reduce excess capacity and (2) maintain competition of ideas by retaining at least two geographically separated sites. The group analyzed three functional areas within DOD: research, development and acquisition, and test and evaluation. It focused its analysis of the 3 functions across 13 technical capability areas—air platforms; battlespace environments; biomedical; chemical and biological defense; ground vehicles; human systems; information systems; materials and processes; nuclear technology; sea vehicles; sensors, electronics, and electronic warfare; space platforms; and weapons and armaments. Each of the military services and some defense agencies perform work in the functions and technical capability areas. The group developed a strategic framework based on its two principles that focused on establishing multifunctional and multidisciplinary centers of excellence, which served as the starting point for developing scenarios. These strategy-driven scenarios were later confirmed by capacity and military value data and military judgment. The DOD Inspector General and service audit agencies performed an important role in ensuring the accuracy of data used in these analyses through extensive audits of data gathered at various locations.
Capacity Analysis
and subsequently collected certified data on these measures from the technical facilities performing work in each of the technical facility categories. Excess capacity was defined as the difference between current usage plus a surge factor and peak capacity. Current usage was defined as the average usage for fiscal years 2001 through 2003, and peak capacity was defined as the maximum capacity for the measure. The group set the surge factor at 10 percent of current capacity, based on military judgment of how the technical community has approached surge in the past.
The group calculated excess capacity for each of the 39 technical facility categories; however, the aggregated data provide more insight into the amount of excess capacity. Table 39 shows the excess capacity that the technical group found through its analysis.
The group reported that the current required capacity, including surge, across all technical capability areas and functions is 169,596 work years. The group found the equivalent of 13,368 work years, or 7.9 percent, excess capacity across the three functions. The group reports that its recommendations eliminate approximately 3,000 work years. Based on these calculations, approximately 6 percent excess capacity would remain if all of the group’s recommended actions are implemented. The work year reductions include the reductions made through the technical group’s 13 recommendations. The work year reductions do not include reductions in technical excess capacity through the closure of Fort Monmouth, New Jersey, and Brooks City-Base, Texas, for example, which are included in the Army and Medical Joint Cross-Service Group recommendations, respectively.
Military Value Analysis
As with capacity analysis, the technical group’s assessment of military value included an assessment of the technical infrastructure across the 39 technical facility categories. The group weighted each of the four military value criteria based on the importance of the criterion to the technical function. The group used the same weights for the research and development and acquisition functions, but different weights for the test and evaluation function due to differences in the type of work conducted at these facilities. Table 40 shows the weights for the three functions. people, which measures intellectual capital; physical environment, which measures special features of technical physical structures and equipment, which measure the presence of physical structures unique within DOD and the value, condition, and use of these structures; operational impact, which measures the output of the three functional areas (research, development and acquisition, and test and evaluation); and synergy, which measures working on multiple technical capability areas and functions and jointness.
The technical group developed weights for the 5 attributes that were applied to each of the criteria and 30 metrics divided among the 5 attributes. While the group allowed the evaluative weights for the metrics to vary across its subgroups, it used the same weights for the five attributes. The evaluative weight assigned to attributes varied among the three functions because a particular attribute could have greater importance for one function than another. For example, the technical group weighted the people attribute for criterion 1 at 17 percent of the total military value score for research, 13 percent for development and acquisition, and 16 percent for test and evaluation. While the attribute weights were the same for activities across subgroups, the metric weights varied by subgroup. For example, the Air, Land, Sea, and Space Systems subgroup weighted the patents, publications, and awards metric of criterion 1 for the research function at 30 percent of the total for the people attribute, while the Weapons and Armaments subgroup weighted the same metric at 18 percent.
Figure 19 provides an example of the technical group’s military value attributes, metrics, data sources, and their link to the four BRAC military value criteria.
Highest education level for professional/technical workforce.
Number and funding for other services’ programs executed at the facility.
The BRAC military value criteria are the first four BRAC selection criteria.
All technical facilities were analyzed using the technical group’s military value approach, regardless of whether the recommendation ended up with the technical group’s 13 recommendations or in another services’ or joint cross-service groups’ recommendations. For example, part of the Army’s recommendation to close Fort Monmouth relocates the information systems research and development and acquisition to Aberdeen Proving Ground, Maryland. The technical group followed the same process in gathering data and calculating a military value score for these functions as they did all other technical functions.
DOD Inspector General’s and Service Audit Agencies’ Role in the Process
Inspector General found that certified data were used for the group’s capacity and military value analyses, and there was an adequate audit trail for the capacity and military value analyses, and COBRA input data. Through extensive audits of the data collected from technical facilities during the process, the service audit agencies notified the technical facility of identified data discrepancies and the technical facility was to take corrective action. While the process for detecting and correcting data errors was quite lengthy and challenging, the DOD Inspector General and service audit agencies deemed the technical data to be sufficiently reliable for use in the BRAC process.
Identification and Assessment of Alternate Scenarios and Selection of Recommendations
their implementation should provide for more efficient operations within the department, we believe there are some issues that the BRAC Commission may wish to examine more closely during its review process.
Recommendations Approved by DOD
The technical group’s proposed recommendations result in a total projected net savings of $2.2 billion over 20 years, with net annual recurring savings of $265.5 million per year. Table 41 provides a summary of the financial aspects of the group’s recommendations, most of which are realignment actions.
The majority of the projected net annual recurring savings are based on eliminating civilian and contractor personnel ($167.7 million) as functions are realigned between installations and vacating leased space ($51.8 million). On the other hand, the majority of the projected costs are for constructing new facilities ($644.6 million) and moving personnel and equipment ($326.7 million) to the gaining installations. The group’s 13 recommendations include 6 closures, 62 realignments, and 1 disestablishment for a total of 69 actions. For example, the group’s recommendation to consolidate maritime C4ISR research, development and acquisition, and test and evaluation includes 16 realignment actions and 1 disestablishment action.
The technical group’s recommendations support, to a limited extent, the goals of maximizing jointness and furthering transformation efforts within the department. Eight of the group’s 13 recommendations move functions from one service or defense agency’s installation to another service’s installation. For example, the recommendation to create an integrated weapons and armaments specialty site for guns and ammunition moves seven Navy functions to an Army installation. While the chairman of the group’s Capabilities Integration Team told us that all of the group’s recommendations were transformational, the supporting information often suggested the recommendations were more focused on combining like work at a single location without a clear indication of how it provided for transformation. Two of the group’s recommendations specifically mention transformation in their justification statements, but the transformational effects are not clear in the documentation. For example, the recommendation to create an air integrated weapons and armaments research, development and acquisition, and test and evaluation center states that it supports transformation because it moves and consolidates smaller weapons and armaments efforts into high military value integrated centers and leverages synergy among the three functions; however, the documentation does not discuss how these actions are transformational.
Issues Identified with Approved Recommendations
Time did not permit us to assess the operational impact of each of the technical group’s recommendations, particularly where operations proposed for consolidation extend across multiple locations outside of a single geographic area. At the same time, we offer a number of broad-based observations about the proposed recommendations. there are some issues that the BRAC Commission may wish to consider during its review process. Specifically, the Commission may want to consider whether the level of personnel reductions is attainable, issues related to projected savings from vacating leased space, the long payback period and relatively small savings for some recommendations, and the economic impact of one recommendation.
Personnel Reductions
The technical group developed a standard assumption to eliminate 15 percent of military and civilian personnel affected by the recommendation for consolidation and joint actions based on personnel eliminations at technical facilities in previous BRAC rounds. The group used a different assumption (5.5 percent reduction in affected military and civilian personnel) for co-location actions because it is believed that there are likely to be fewer efficiency gains for co-locations than consolidations or joint actions. A technical group official told us that in some cases the group used higher personnel reduction estimates than the standard because the military department provided for higher estimated personnel reductions in the certified data, and the military services agreed with all personnel eliminations in the group’s recommendations. We believe there is some uncertainty regarding the magnitude of the group’s expected savings for these personnel reductions because its estimates are based on assumptions that have undergone limited testing and full savings realization depends upon the attainment of these personnel reductions. Eight of the group’s 13 recommendations eliminate at least 15 percent of military and civilian personnel positions affected by the recommendation. Personnel savings account for at least 40 percent, and as much as 100 percent, of the group’s projected annual recurring savings for each of these 8 recommendations. Almost three-quarters of all personnel savings come from civilian personnel eliminations.
Similar to military and civilian personnel, the technical group developed a standard assumption that the subgroups could eliminate 15 percent of contractor personnel and could take $200,000 in recurring savings for each contractor position eliminated. It is unclear from the data what percentage of contractor positions were eliminated because the total number of contractor personnel is not included in the COBRA data. Seven of the group’s recommendations include savings from eliminating contractor personnel, for a total of $53.9 million in net annual recurring savings. In contrast, the data on economic impact (criterion 6 of the BRAC selection criteria) show a net loss of 508 contractor personnel in 10 recommendations, which would have totaled $101.6 million in net annual recurring savings. Technical group officials told us that both sets of numbers are based on certified data from the services; however, they added that the contractor data were difficult to collect because they were provided by the services through the scenario data calls, rather than as standard data in the COBRA model.
It is unclear to what extent the personnel reductions assumed in the group’s recommendations will be attained, largely because of uncertainties associated with the group’s assumptions. For example, the group’s recommendation to create a naval integrated weapons and armaments research, development and acquisition, and test and evaluation center includes the reduction of 15 percent of military and civilian personnel. As mentioned above, the technical group assumed a standard 15 percent reduction in military and civilian personnel for consolidation and joint actions and a 5.5 percent reduction in military and civilian personnel for co- location actions. Because we are uncertain whether the 15 percent reduction in military and civilian personnel for consolidations and joint actions is attainable, we determined the costs and savings of the recommendation with the 5.5 percent personnel reduction for co-locations. Table 42 shows the financial aspects of DOD’s original recommendation with a 15 percent reduction in military and civilian personnel, our analysis of the recommendation with a 5.5 percent reduction in military and civilian personnel, and the difference between the two recommendations.
Payback period (years)
20-year net present value savings (cost)
GAO’s analysis (5.5 percent military and civilian personnel reduction) (3)
Leased Space
Our analysis identified some inconsistencies in projecting annual recurring savings and one-time savings in three recommendations to move activities from leased space. The technical group used two different methodologies to project annual recurring savings from vacating leased space. In one recommendation, the group projected annual recurring savings based on future leased costs while in the other two, the group used actual lease costs data provided by the military services and defense agencies. Furthermore, the recommendation to co-locate the extramural research program managers also includes $2.7 million in annual recurring savings for the Defense Threat Reduction Agency vacating leased space; however, the agency is already scheduled to move to Fort Belvoir, Virginia, in January 2006.
The technical group also included $14.5 million in one-time savings for seven of the eight activities vacating leased space for the cost of upgrading existing leased space to meet DOD’s antiterrorism and force protection standards. The group did not collect data that would indicate whether existing leases met the antiterrorism and force protection standards. Our analysis indicates that excluding these one-time savings would have minimal impact on the overall projected savings of the technical group’s recommendations.
Limited Savings during Implementation Period
Only 3 of the 13 recommendations achieve savings during the 6-year implementation period, and 3 of the group’s recommendations take longer than 10 years to achieve savings, far longer than typically occurred in the 1995 BRAC round. According to a technical group official, the recommendation to establish a center for rotary wing air platform research, development and acquisition, and test and evaluation, which has a 26-year payback, was retained because it realigns the technical-related work away from a test range at Fort Rucker, Alabama, which will provide for expanded training space. An Army official agreed that a potential benefit of realigning the test range at Fort Rucker is that it would make available hangars, facilities, and airspace for trainers. For example, the Army said that the vacated hangar space could potentially be used to accommodate the Aviation Logistic School’s proposed move to Fort Rucker and the reduced demand for airspace will make additional airspace available to meet the current and future needs for manned and unmanned aviation training.
The group’s recommendation to create an integrated weapons and armaments specialty site for guns and ammunition, which has one-time costs of $116.3 million and a 20-year net present value savings of $32.6 million, has a payback of 13 years. Technical group officials told us that this recommendation was determined to be worth the costs and longer payback period because it provides synergy and jointness, as well as eliminating some duplication, in research and development and acquisition of guns and ammunition for the Army and Navy.
According to a group official, the group’s recommendation regarding Navy sensors, electronic warfare, and electronics research, development and acquisition, and test and evaluation, which has a 12-year payback period, is beneficial because it consolidates similar work currently performed at locations that are in proximity to each other and clears out laboratory space at Naval Air Station Point Mugu, California, that is needed for personnel moving in from Naval Support Activity Corona, California, through a Navy recommendation. The official added that while the payback for this recommendation is long, it should be put into perspective with the savings from closing Naval Support Activity Corona because the savings from closing that facility (net annual recurring savings of $6.0 million and a 20-year net present value of $0.4 million) would be smaller had the laboratory space not been available at Point Mugu.
Economic Impact
One of DOD’s BRAC selection criteria, criterion 6, required the department to consider the economic impact on existing communities in the vicinity of military installations when determining realignments and closures. In most cases, the group’s recommendations had a cumulative impact on communities of less than 1 percent as measured by direct and indirect job loss as a percentage of employment for the economic area of the military installation. However, the exception is the recommendations that realign activities from Naval Surface Warfare Center Crane, Indiana, which would result in an economic impact of 9.3 percent. A technical group official stated that realigning the technical infrastructure to respond to defense needs over the next 20 years took priority over the economic impact of the proposed recommendation. Two of the group’s recommendations realign or eliminate approximately 460 military and civilian personnel and 80 contractor personnel from Naval Surface Warfare Center Crane, for a cumulative reduction of 9.3 percent of employment in Martin County, Indiana, when direct and indirect jobs are considered.
Personnel Realignments from Point Mugu
There is some uncertainty on the number of civilian personnel that would be realigned in the technical group’s recommendation to create a naval integrated weapons and armaments research, development and acquisition, and test and evaluation center. The recommendation proposes to realign about 1,400 civilian employees from Naval Air Station Point Mugu, California, to Naval Air Weapons Station China Lake, California. However, in its data call submission, Naval Air Station Point Mugu identified 505 civilian employees that operate or support an outdoor range that it believes should remain at Point Mugu; however the technical group’s recommendation proposes to move these personnel to China Lake. A Navy official said that if the recommendation is approved the Navy will decide the best way to manage the range, including the appropriate number of employees to retain at Point Mugu, during implementation. Our analysis indicates that if the 505 civilian employees remain at Point Mugu, the 20- year net present value savings decreases by about $87.4 million but the payback period remains at 7 years.
Scenario Eliminated from Consideration
The technical group developed a scenario that would have allowed the Air Force to close Los Angeles Air Force Base, California, which may have further contributed to the accomplishment of BRAC objectives; however, the Air Force Base Closure Executive Group did not approve this scenario due to the base’s relatively high military value and perceived operational risk due to a potential for schedule and performance disruption. Table 43 provides a summary of the financial aspects of this scenario.
Payback period (years)
20-year net present value (costs) or savings($305.1) ($161.1) development and acquisition—its military value in space development and acquisition is four times higher than that of Peterson—and (2) the closure has a near-term operational risk due to a potential for schedule and performance disruption to development and acquisition programs and activities, intellectual capital, and synergy with industry based in Los Angeles and surrounding areas.
Technical group officials told us that there are several reasons to close Los Angeles Air Force Base in addition to the net recurring savings ($52.9 million) and relatively high 20-year net present value savings ($358.5 million). Los Angeles Air Force Base is a single-service installation that primarily performs one function in one technical capability area— development and acquisition of space platforms. The technical group sought to identify opportunities to consolidate smaller single-function locations to larger multifunction facilities, so closing Los Angeles Air Force Base would meet this goal. The group proposed to move the functions at Los Angeles Air Force Base to Peterson Air Force Base to co-locate the development and acquisition function with the operational user. Other alternatives could achieve other goals. For example, moving the space development and acquisition function from Los Angeles Air Force Base to Kirtland Air Force Base, New Mexico, which performs research on space platforms, could expedite the transition of technology from the research phase to development and acquisition. Alternatively, there could be increased jointness among the services if the functions at Los Angeles Air Force Base were moved to Redstone Arsenal, Alabama, where much of the Army’s space platform development and acquisition work is done.
Cost of Base Realignment Actions Model
DOD used a quantitative model, known as the Cost of Base Realignment Actions (COBRA) model, to provide consistency across the military services and the joint cross-service groups in estimating the costs and savings associated with BRAC recommendations. DOD has used the COBRA model in all previous BRAC rounds and over time has made improvements designed to provide better estimating capability. Similarly, DOD has continued to improve the model for its use in the 2005 BRAC round. We have examined COBRA in the past and during this review and have found it to be a generally reasonable estimator for comparing potential costs and savings among candidate alternatives. As with any model, the quality of the output is a direct function of the input data. Also, as in previous rounds, the COBRA model, which relies to a large extent on standard factors and averages, does not represent budget quality estimates that will be developed once BRAC decisions are made and detailed implementation plans are developed. The COBRA model also does not include estimated costs of environmental restoration as DOD considers these costs a liability that must be addressed whether or not an installation is closed.
COBRA Used as Tool to Estimate Costs and Savings Associated with BRAC Recommendations
costs for the actions; (4) annual recurring savings; and (5) the net present value of BRAC actions, calculated over a 20-year time frame. Collectively, this financial information provides important input into the selection process as decision makers weigh the financial implications for various BRAC actions along with military value and other factors (for example, military judgment) in arriving at final decisions regarding the suitability of BRAC recommendations.
The COBRA model uses a set of formulas, or algorithms, that rely on standardized data as well as base- and scenario-dependent data to perform its calculations. Standard factors are common to a class of bases and are applicable for all recommendations that involve those bases. Some standard factors apply only to one DOD component or a subset of a component’s bases, while others are applicable to all bases DOD-wide. Typical standard factors include, for example, average personnel salaries and costs per mile and per ton for moving personnel and equipment. Base- and recommendation-specific data, which were to be certified in accordance with the BRAC statute, include, for example, the number of authorized personnel on a base, the size of the base, and annual sustainment costs. As with any model, the quality of the output is a direct function of the quality of the input data. For this reason, the data used in COBRA were to be certified, in a manner similar to that employed for the capacity and military value data, as to their accuracy.
COBRA Improvements over Time
The COBRA model has been used in the base closure process since 1988, and in the intervening years it has been consistently revised to address the problems we and others have identified after each round. DOD has once again made improvements to the model, as shown in table 44, that are designed to further refine its estimating capability. enclaves created during the prior BRAC rounds, thereby having the effect of overstating the savings for those particular BRAC actions. Consequently, the Joint Process Action Team provided for the inclusion of these costs in the COBRA model. In another case, the Joint Process Action Team developed an approach to incorporate longer term estimated facility recapitalization costs in COBRA, thus overcoming a COBRA shortcoming that we identified in our 1997 report on lessons learned from the prior BRAC rounds.
As was done in the 1995 BRAC round, the Army Audit Agency examined the improved COBRA model to determine whether the model accurately calculated cost and savings estimates as described in the user’s manual. The Army Audit Agency assumed this responsibility at the request of The Army Basing Study Group since the Army serves as the executive agent for the COBRA model. The Army Audit Agency tested all 340 algorithms in the model as presented in the user’s manual and reported in September 2004 that COBRA accurately calculated costs and savings as prescribed in the manual. Following the audit, however, multiple revisions were made to the model to include changes to the TRICARE and privatization algorithms because of programming errors in the model. The Army Audit Agency subsequently reexamined the revisions where these algorithms were modified and concluded in a similar fashion that the model accurately calculated the estimates. In addition, the Army Audit Agency validated the certified data and documentation supporting the standard factors used in the model.
Application of COBRA in the 2005 BRAC Round
accuracy of the input data, and the flexibility provided to users of the model to consider additional input data that can affect cost and savings estimates. The following are examples of cases where the specific application of the model can have an effect on the estimates: The COBRA model generates a dollar amount attributable to the reduction or elimination of military personnel at realigning or closing bases. While it has been DOD’s practice to classify these reductions or eliminations as recurring savings, we have consistently taken the view that these actions should not be counted as savings that can be used outside the military services’ personnel accounts unless commensurate reductions are made in the affected military services’ end strengths. We acknowledge that these actions may afford DOD the opportunity to redirect these personnel to serve in other roles that would benefit DOD. Our analysis of DOD data indicate that about 47 percent—about $2.6 billion—of the expected net annual recurring savings of nearly $5.5 billion for the 2005 round are attributable to these military personnel actions, for which reductions in the military personnel end- strength levels are not planned.
The COBRA model provides users with considerable flexibility in estimating one-time and miscellaneous recurring costs or savings of various recommendations by allowing them to consider what actions might constitute a cost or savings and what the expected dollar amounts should be. Validating the level of projected savings is less clear-cut for recommendations that, instead of closing facilities, realign workloads from one location to another, or that estimate savings in overhead or other consolidation efficiencies. The dollar amounts could be based on specific assumptions as well as certified data but nonetheless be subject to greater degrees of uncertainty pending implementation than would be actions resulting in facility closures where expected reductions are more clear-cut. Our analysis of the BRAC recommendations showed inconsistencies across some of the services and joint cross-service groups in applying COBRA in this area. would be either understated or overstated. Time did not permit us to determine the extent to which this might be the case in the proposed recommendations.
Comparability of COBRA Estimates and Actual Costs and Savings
Although COBRA has provided DOD with a standard quantitative approach enabling it to compare the estimated costs and savings associated with various proposed BRAC recommendations, it should be noted that it does not necessarily reflect with a high degree of precision the actual costs or savings that are ultimately associated with the implementation of a particular BRAC action. COBRA is not intended to produce budget-quality data and is not used to develop the budgets for implementing BRAC actions, which are formulated following the BRAC decision-making process. COBRA estimates may vary from the actual costs and savings of BRAC actions for a variety of reasons, including the following: COBRA estimates, particularly those based on standard cost factors, are imprecise and are later refined during implementation planning for budget purposes. The use of averages has an effect on precision. For example, as noted previously, COBRA uses authorized, rather than actual, base civilian personnel figures in its calculations. Our work has shown that the actual number of personnel may be lower or higher than that which is authorized. The authorized personnel levels are documented estimates, which can be readily audited. COBRA also uses a median national civilian personnel salary figure (adjusted by locality pay), rather than average pay at a particular base, in its calculations. Further, COBRA estimates are expressed in constant-year dollars, whereas budgets are expressed in then-year dollars.
36 percent, or $8.3 million, of the $23.3 million in costs incurred through fiscal year 2003 for implementing BRAC actions for the previous four BRAC rounds. Further, COBRA does not include estimates for some other costs to the federal government, particularly those related to other federal agencies or DOD providing assistance to BRAC-affected communities. That is because assistance costs depend on specific implementation plans that are unknown at the time COBRA estimates are developed. In our January 2005 report on the previous BRAC rounds, we noted that about $1.9 billion in such costs had been incurred through fiscal year 2004.
Some savings are not fully captured in COBRA as well. COBRA does not include estimates, for example, for anticipated sales of BRAC surplus property or other revenue that may be collected in the future through property leasing arrangements with BRAC-affected entities. These revenues can help offset some of the costs incurred in implementing BRAC actions. While such estimates had been included in COBRA in the previous rounds, the Joint Process Action Team decided not to include any such estimates for the 2005 round because of the difficulty in estimating the amount of these revenues.
Nonetheless, while COBRA estimates do not necessarily reflect the actual costs and savings ultimately attributable to BRAC, we have recognized in the past and continue to believe that COBRA is a reasonably effective tool for the purpose for which it was designed: to aid in BRAC decision making. It provides a means for comparing cost and savings estimates across alternative closure and realignment recommendations.
Economic Impact Assessments
One of the eight selection criteria used to make BRAC decisions was the economic impact on existing communities in the vicinity of military installations coming from BRAC recommendations. DOD measured the economic impact of BRAC recommendations on the affected community’s economy in terms of total potential job change—measured both in absolute terms (estimated total job changes) and relative terms (total job changes as a percentage of the economic area’s total employment). This approach to measuring economic impact is essentially the same approach DOD used in the 1995 BRAC round. In a series of reports, that examine the progress in implementing closures and realignments in prior BRAC rounds, we examined how the communities surrounding closed bases were faring in relation to key national indicators. In our last status report, we observed that most communities surrounding closed bases were faring well economically in relation to key national economic indicators. While some communities surrounding closed bases were faring better than others, most have recovered or are continuing to recover from the impact of BRAC, with more mixed results recently, allowing for some negative impact from the 2001 recession.
While there will be other economic impacts from 2005 BRAC actions that DOD did not consider, such as changes in the value of real estate or changes in the value of businesses in the economic area, we believe that the magnitude of job changes would be correlated with the changes in these other dimensions of economic impact. Although not a precise predictor of the economic impact, we and an independent panel of experts assembled by DOD agree that the methodology used by DOD makes a reasonable attempt to measure economic impact of BRAC actions, both in terms of communities losing and gaining jobs as a result of BRAC actions.
Economic Impact Methodology
DOD assessed the economic impact of realignments and closures using a methodology that sought to estimate the total direct and indirect job changes. To perform its assessment, DOD established the Economic Impact Joint Process Action Team with members of the services and the Office of the Secretary of Defense (OSD) to develop an economic impact model for the services and joint cross-service groups to use as they considered potential recommendations. The team met many times to develop the economic methodology. We attended and observed those meetings as the methodology was developed. DOD also retained a private firm, Booz Allen Hamilton, to provide technical assistance in developing the methodology and computer database used by the military services and joint cross-service groups in calculating economic impacts in communities for which they were considering closure or realignment actions. which the base’s primary county or counties lie. For bases in counties not in a MSA, Micropolitan Statistical Area, or a Metropolitan Division the economic area was defined as the county itself.
The economic impact of a potential action on an area was measured in terms of direct and indirect job changes estimated from 2006 through 2011 as shown below.
Estimated Total Job Changes = Direct Job Changes x (1 + indirect multiplier + induced multiplier).
Direct job changes are the estimated net addition or loss of jobs for military personnel, military students, civilian employees, and contractor mission support employees. The indirect job changes are the estimated net addition or loss of jobs in each economic area that could potentially occur as a result of the direct job changes. DOD considered two types of indirect job changes: (1) indirect job changes that are associated with the production of goods or the provision of services that are direct inputs to a product, such as a subcontractor producing components for a weapon system and (2) induced job changes that are affected as a result of local spending by direct and indirect workers, such as retail sales. base was located. Indirect multipliers were estimated by mapping Military Occupational Specialties (MOSes) to economically similar civilian sectors. Each of these similar economic sectors multipliers were weighted by the number of military personnel mapped to each sector divided by the total number of employees in the sector. Examples of these economically similar sectors are educational services, administration and support services, scientific research and development services, aerospace product and parts manufacturing, and electronic repair and maintenance. Judgment was used to place all MOSes into one of the industrial sectors. A weighted average of the indirect multipliers, based on the weights discussed above, for each base was used to estimate the indirect job changes from military personnel. This weighted average of indirect multipliers used to estimate the military indirect multiplier for each base was used to estimate the indirect job changes from civilian personnel job changes, as well as the indirect job changes for mission-support contractors for each base.
Estimating the induced job changes from military and civilian job changes was more straightforward. For each economic area, MIG used one induced multiplier for military personnel job changes and one for nonmilitary government jobs changes. These multipliers were used to estimate the induced job changes for each base in that economic area. Summing the products of the weights for each of the civilian industries calculated for the military indirect multipliers, and the induced multipliers for each of the industries from MIG, produced the induced multiplier used for mission support contractor job changes.
Because of a concern about the lower spending of military trainees at recruit training facilities, an adjustment was made to reduce the values of the induced multipliers used for job changes of military trainees at recruit training bases. The Economic Impact Joint Process Action Team was also concerned about overestimating induced job changes for military trainees at recruit training bases and thought that military trainees at such bases have a smaller economic impact than civilian employees and regular military personnel, including those military personnel who receive more advanced training. The team thought this because such students receive a relatively smaller income and are generally transient. Student multipliers for bases with recruit training programs were estimated by multiplying the military induced multiplier for an economic area by the ratio of basic training wages to average military wages (slightly more than a third). Student induced multipliers for bases without basic training programs were set equal to the military induced multiplier for the base’s economic area. The team thought that these more advanced students were likely to have incomes and spending habits similar to the average military in the economic area.
Some of the joint cross-service groups subsequently considered a small number of bases (leased spaces or Reserve/Guard centers) that were not included in the initial set of defined economic areas. For these economic areas, a generic set of multipliers was developed by averaging each of the multipliers of the five categories (military, civilian, contractor, student, and recruit training student) over the existing economic areas. by economic area (net result of all actions for the economic area).
The total potential job change and the total potential job changes as a percentage of total in an economic area were to be considered in the context of historical economic data. For historical context, the services and the joint cross-service groups considered the following for each economic area: total employment: 1988 to 2002, annual unemployment rates: 1990 to 2003, and real per capita income: 1988 to 2002.
In addition, the latest available numbers on population would be provided. These dates were chosen to reflect the latest available data from federal sources.
In the 1995 BRAC round, DOD developed a separate method of assessing cumulative economic impact because some of the closures and realignments from the prior rounds had not been fully implemented, so special consideration was given to the economic impacts that were yet to occur. However in 2005, given the passage of time since all four of the previous BRAC rounds, which extended from 1988 to 1995, and other factors contributing to changing economic conditions in the interim period, DOD decided not to consider the cumulative economic impact of the prior BRAC rounds in assessing the impact of the current round. We believe DOD’s decision not to assess a cumulative economic impact for the 2005 round has merit.
DOD had extensive documentation controls to protect how documents for economic impact were prepared, handled, and processed. Procedures were used to ensure that the inputs, such as the values of the multipliers, used to make calculations on job changes were correct. A review by qualified analysts who did not participate in the initial calculations was also conducted.
Methodology Has Limitations but Is Reasonable for BRAC Purposes
DOD’s approach to measuring economic impact did not measure all the dimensions of the economic impact coming from a BRAC action. There will be other economic impacts on the economic area, such as changes in the value of real estate or the value of businesses in the area. The DOD approach did not estimate these effects, but it is reasonable to assume that the magnitude of job losses would be correlated with the changes in these values.
DOD’s methodology does have some limitations. Specifically, it tended to overstate the employment impact for economic areas. One of DOD’s goals for the methodology was to produce credible estimates but to err on the side of overstating the actual impacts in order to prevent others from arguing that DOD was underestimating economic impact. The Joint Process Action Team was aware that the methodology had factors that might offset the estimated job losses. For example, the methodology assumed that that jobs are lost all at once and does not recognize that employees may be released over the 6-year implementation period and be reemployed in other local businesses or outside the economic area, which would reduce the estimated job loss. The methodology does not recognize the possible civilian reuse of the affected base and the resulting reemployment of workers, which would reduce the estimated job losses.
In examining the construction of the indirect multipliers, it is possible to question how they were created. The indirect multiplier being used to estimate job changes from military job changes for a base is constructed as a weighted average multiplier where the weights are the fraction of total base personnel being judged to be similar to a particular civilian industry. Questions could be raised about judgments made to map particular Military Occupation Specialties to activities in civilian industries. In some cases, the mapping from military jobs to industries was easier, such as military jobs in the medical area being mapped to the medical industry. However, in other areas where the jobs are uniquely military, such as infantry, the mapping would be more problematic. If a mistake was made in mapping a job that is uniquely military to a civilian sector, the result would depend on the relative size of the multiplier of the correct civilian sector versus the civilian sector used. It could lead to overestimation or underestimation of the indirect job change. Time did not permit us to examine this mapping. Nonetheless, we believe the overall approach seemed to be a sound attempt to produce a credible multiplier.
Finally, in using the ratio of estimated job losses from 2006 through 2011 to total employment as of 2002 (the latest figure for total employment) as a measure of economic impact, the economic impact was likely overstated. This occurs because total employment is likely to grow for many economic areas over the 2006-2011 implementation period as local economies grow, which would reduce the overall percentage of job losses.
DOD’s methodology for assessing economic impact was reviewed by an independent panel of four economists and policy analysts from the private and academic sectors in August 2004. DOD formed the panel of four members to review the methodology and to determine if it conformed to accepted economic practices. Three of the panel members were Ph.D. economists and the other was a policy analyst. All four were experienced in conducting local economic impact studies and were not otherwise associated with the BRAC process. The panel found the methodology to be reasonable. The experts agreed that the use of direct and indirect job changes was a logical method to characterize the impact of proposed closures and realignments. The reviewers also concluded that DOD’s methodology represents a “worst-case” estimate of economic impact. We contacted each member of the panel to discuss their review of the methodology to ensure that DOD had adequately summarized the results of the panel meeting and that they agreed that the methodology was sound. We and the experts agreed that DOD had adequately summarized the review meeting and agreed that the methodology was reasonable to use.
Economic Areas Most Impacted and Least Impacted by BRAC Recommendations
greatest negative employment change and the greatest positive employment change.
As noted in prior reports, we examined how the communities surrounding closed bases were faring in relation to two key national economic indicators—the national unemployment rate and the average annual real per capita income growth rate. In our last status report, we observed that most communities surrounding closed bases were faring well economically in relation to these key national economic indicators. While some communities surrounding closed bases were faring better than others, most have recovered or are continuing to recover from the impact of BRAC, with more mixed results recently, allowing for some negative impact from the 2001 recession.
Draft DOD Transformational Options Recommended for Approval
Appendix XV Draft DOD Transformational Options Recommended for Approval 1.
Consolidate Management at Installations with Shared Boundaries. Create a single manager for installations that share boundaries. Source & Application: H&SA 2.
Regionalize Installation Support. Regionalize management of the provision of installation support activities across Military Departments within areas of significant Department of Defense (DoD) concentration, identified as Geographic Clusters. Option will evaluate designating organizations to provide a range of services, regionally, as well as aligning regional efforts to specific functions. For example, a possible outcome might be designation of a single organization with the responsibility to provide installation management services to DoD installations within the statutory National Capital Region (NCR). Source and Application: H&SA 3.
Consolidate or collocate Regional Civilian Personnel Offices to create joint civilian personnel centers. Source and Application: H&SA 4.
Consolidate active and Reserve Military Personnel Centers of the same service. Source and Application: H&SA 5.
Collocate active and/or Reserve Military Personnel Centers across Military Departments. Source and Application: H&SA 6.
Consolidate same service active and Reserve local Military Personnel Offices within Geographic Clusters. Source and Application: H&SA 7.
Collocate active and/or Reserve local Military Personnel Offices across Military Departments located within Geographic Clusters. Source and Application: H&SA 8.
Consolidate Defense Finance and Accounting Service (DFAS) Central and Field Sites. Consolidate DFAS business line workload and administrative/staff functions and locations. Source and Application: H&SA 9.
Consolidate Local DFAS Finance & Accounting (F&A). Merge/consolidate local DFAS F&A within Geographic Clusters. Source and Application: H&SA 10. Consolidate remaining mainframe processing and high capacity data storage operations to existing Defense Mega Centers (Defense Enterprise Computing Centers). Source and Application: H&SA Appendix XV Draft DOD Transformational Options Recommended for Approval 11. Establish and consolidate mobilization sites at installations able to adequately prepare, train and deploy service members. Source and Application: H&SA 12. Establish joint pre-deployment/re-deployment processing sites. Source and Application: H&SA 13. Rationalize Presence in the DC Area. Assess the need for headquarters, commands and activities to be located within 100 miles of the Pentagon. Evaluation will include analysis of realignment of those organizations found to be eligible to move to DoD-owned space outside of a 100-miles radius. Source and Application: H&SA 14. Minimize leased space across the US and movement of organizations residing in leased space to DoD-owned space. Source and Application: H&SA 15. Consolidate HQs at Single Locations. Consolidate multi-location headquarters at single locations. Source and Application: H&SA 16. Eliminate locations of stand-alone headquarters. Source and Application: H&SA 17. Consolidate correctional facilities into fewer locations across Military Departments.
Source and Application: H&SA 18. Collocate Reserve Component (RC) Headquarters. Determine alternative facility 19. Collocate Recruiting Headquarters. Analyze alternative Recruiting Headquarters alignments. Consider co-location of RC and Active Component (AC) Recruiting headquarters. Source and Application: H&SA 20. Establish a consolidated multi-service supply, storage and distribution system that 21. Privatize the wholesale storage and distribution processes from DoD activities that perform these functions. Source and Application: Supply & Storage Appendix XV Draft DOD Transformational Options Recommended for Approval 22. Migrate oversight and management of all service depot level reparables to a single DoD agency/activity. Source and Application: Supply & Storage 23. Decentralize Depot level maintenance by reclassifying work from depot-level to I- level. Source and Application: Industrial 24. Centralize I-level maintenance and decentralize depot-level maintenance to the existing (or remaining) depots.
Eliminate over-redundancy in functions.
Consolidate Intermediate and Depot-level regional activities Source and Application: Industrial 25. Regionalize severable and similar work at the intermediate level. Source and 26. Partnerships Expansions. Under a partnership, have government personnel work in contractor owned/leased facilities and realign or close facilities where personnel are currently working. Source and Application: Industrial 27. Collocate depots: Two Services use the same facility(s). Separate command structures but shared common operations. Source and Application: Industrial 28. Consolidate similar commodities under Centers of Technical Excellence. Source 29.
Implement concept of Vertical Integration by putting entire life cycle at same site to increase synergies, e.g. production of raw materials to the manufacture of finished parts, co-locating storage, maintenance and demil. Source and Application: Industrial 30.
Implement concept of Horizontal Integration by taking some of the most costly elements of the M&A processes and put them at the same site to increase efficiencies, e.g. put Load, Assemble and Pack (LAP) of all related munitions at same site. Source and Application: Industrial 31. Maintain a multi-service distribution and deployment network consolidating on regional joint service nodes. Source and Application: Industrial 32. Evaluate Joint Centers for classes and types of weapons systems and/or technologies used by more than one Military Department:
Within a Defense Technology Area Plan (DTAP) Capability Area
Across multiple functions (Research; Development & Acquisition; Test & Evaluation)
Appendix XV Draft DOD Transformational Options Recommended for Approval
Across multiple DTAP capability areas. Source and Application: Technical 33. Evaluate Service-Centric concentration, i.e. consolidate within each Service:
Within a Defense Technology Area Plan (DTAP) capability area
Across multiple functions (Research; Development & Acquisition; Test & Evaluation)
Across multiple DTAP capability areas. Source and Application: Technical 34. Privatize graduate-level education. Source and Application: Education & Training 35.
Integrate military and DoD civilian full-time professional development education programs. Source and Application: Education & Training 36. 36. Establish Centers of Excellence for Joint or Inter-service education and training by combining or co-locating like schools (e.g., form a “DoD University” with satellite training sites provided by Service-lead or civilian institutions). Source and Application: Education & Training 37. Establish “joint” officer and enlisted specialized skill training (initial skill, skill progression & functional training). Source and Application: Education & Training 38. Establish a single "Center of Excellence" to provide Unmanned Aerial Vehicle initial (a.k.a. undergraduate) training. Source and Application: Education & Training 39. Establish regional Cross-Service and Cross-Functional ranges that will support Service collective, interoperability and joint training as well as test and evaluation of weapon systems. Source and Application: Education & Training 40.
Integrate selected range capabilities across Services to enhance Service collective, interoperability and joint training, such as Urban Operations, Littoral, training in unique settings (arctic, mountain, desert, and tropical). Source and Application: Education & Training 41. Combine Services' T&E Open Air Range (OAR) management into one joint management office. Although organizational/managerial, this option could engender further transformation. Joint management of OAR resources could encourage a healthy competition among OARs to increase efficiency and maximum utility DoD-wide. Source and Application: Education & Training 42. Consolidate or collocate at a single installation all services' primary phase of pilot training that uses the same aircraft (T-6). Source and Application: Education & Training Appendix XV Draft DOD Transformational Options Recommended for Approval 43. Locate (division/corps) UEx and (corps/Army) UEy on Joint bases where practical to leverage capabilities of other services (e.g., strategic lift to enhance strategic responsiveness). Source and Application: Army 44. Locate (brigades) Units of Action at installations DoD-wide, capable of training modular formations, both mounted and dismounted, at home station with sufficient land and facilities to test, simulate, or fire all organic weapons. Source and Application: Army 45. Collocate Army War College and Command and General Staff College at a single 46. Locate Special Operations Forces (SOF) in locations that best support specialized training needs, training with conventional forces and other service SOF units and wartime alignment deployment requirements. Source and Application: Army 47. Collocate or consolidate multiple branch schools and centers on single locations (preferably with MTOE units and RDTE facilities) based on warfighting requirements, training strategy, and doctrine, to gain efficiencies from reducing overhead and sharing of program-of-instruction resources. Source and Application: Army 48. Reshape installations, RC facilities and RC major training centers to support home station mobilization and demobilization and implement the Train/Alert/Deploy model. Source and Application: Army 49.
Increase the number of multi-functional training areas able to simultaneously serve multiple purposes and minimize the number of single focus training areas for the Reserve Components where possible. Source and Application: Army 50. Collocate institutional training, MTOE units, RDTE organizations and other TDA units in large numbers on single installations to support force stabilization and enhance training. Army 51. Locate units/activities to enhance home station operations and force protection.
Source and Application: Army 52. Consolidate aviation training with sister services for like-type aircraft to gain Appendix XV Draft DOD Transformational Options Recommended for Approval 54. Consolidate Army RDT&E organizations to capitalize on technical synergy across 55. Reduce the number of USAR regional headquarters to reflect Federal Reserve Restructuring Initiative (FRRI). Source and Application: Army 56. Consolidate RDT&E functions on fewer installations through inter-service support 57. Establish a single inventory control point (ICP) within each Service or consolidating into joint ICPs. Application: Supply and Storage 58. Expand Guard and Reserve force integration with the Active force. Examples: (1) Blended organizations. (2) Reserve Associate, Guard Associate, and Active Associate (3) Sponsored Reserve. (4) Blending of Guard units across state lines to unify mission areas, reduce infrastructure, and improve readiness. Application: MilDeps 59. Consolidate National Capital Region (NCR) intelligence community activities now occupying small government facilities and privately owned leased space to fewer, secure DoD-owned locations in the region. Application: Intel 60. Collocate Guard and Reserve units at active bases or consolidate the Guard and Reserve units that are located in close proximity to one another at one location if practical, i.e., joint use facilities. Application: MilDeps 61. Consolidate the Army’s five separate Active Component recruit training sites and BENS; Application: Supply and Storage, MilDeps 63. Privatize long-haul communications in the Defense Information Systems Agency 64. Collocate Joint Strike Fighter graduate flight training and maintenance training. 65. Collocate Joint Strike Fighter graduate flight training.
Key GAO and Other Defense Audit Agency Products Related to DOD’s 2005 Base Realignments and Closures
Government Accountability Office
Military Base Closures: Observations on Prior and Current BRAC Rounds. GAO-05-614. Washington, D.C.: May 3, 2005.
Military Base Closures: Updated Status of Prior Base Realignments and Closures. GAO-05-138. Washington, D.C.: January 13, 2005.
Military Base Closures: Assessment of DOD’s 2004 Report on the Need for a Base Realignment and Closure Round. GAO-04-760. Washington, D.C.: May 17, 2004.
Military Base Closures: Observations on Preparations for the Upcoming Base Realignment and Closure Round. GAO-04-558T. Washington, D.C.: March 25, 2004.
Military Base Closures: DOD’s Updated Net Savings Estimate Remains Substantial. GAO-01-971. Washington, D.C.: July 31, 2001.
Military Bases: Lessons Learned from Prior Base Closure Rounds. GAO/NSIAD-97-151. Washington, D.C.: July 25, 1997.
Military Bases: Analysis of DOD’s 1995 Process and Recommendations for Closure and Realignment. GAO/NSIAD-95-133. Washington, D.C.: April 14, 1995.
Department of Defense Office of Inspector General
Infrastructure and Environment: Technical Joint Cross-Service Group Data Integrity and Internal Control Processes for Base Realignment and Closure 2005. D-2005-086. Washington, D.C.: June 17, 2005.
Defense Infrastructure: Education and Training Joint Cross-Service Group Data Integrity and Internal Control Processes for Base Realignment and Closure 2005. D-2005-084. Arlington, Va.: June 10, 2005.
Defense Infrastructure: Industrial Joint Cross-Service Group Data Integrity and Internal Control Processes for Base Realignment and Closure 2005. D-2005-082. Arlington, Va.: June 9, 2005.
Infrastructure and Environment: Washington Headquarters Services Data Call Submissions and Internal Control Processes for Base Realignment and Closure 2005. D-2005-079. Arlington, Va.: June 8, 2005.
Defense Infrastructure: Supply and Storage Joint Cross-Service Group Data Integrity and Internal Control Processes for Base Realignment and Closure 2005. D-2005-081. Arlington, Va.: June 6, 2005.
Infrastructure and Environment: Defense Finance and Accounting Service Data Call Submissions and Internal Control Processes for Base Realignment and Closure 2005. D-2005-075. Arlington, Va.: May 27, 2005.
DOD Inspector General plans to issue reports on the Defense Logistics Agency, the Headquarters and Support Activities Joint Cross-Service Group, and the Medical Joint Cross-Service Group.
Department of the Army U.S. Army Audit Agency
Reserve Component Process Action Team, The Army Basing Study 2005. A-2005-0165-ALT. Alexandria, Va.: April 29, 2005.
The Army Basing Study 2005 Process. A-2005-0164-ALT. Alexandria, Va.: April 22, 2005.
Validation of Army Responses for Joint Cross-Service Group Questions. A-2005-0169-ALT. Alexandria, Va.: April 22, 2005.
Army Military Value Data, The Army Basing Study 2005. A-2005-0083- ALT. Alexandria, Va.: December 21, 2004.
Army Capacity Data, The Army Basing Study 2005. A-2005-0056-ALT. Alexandria, Va.: November 30, 2004.
Cost of Base Realignment Actions (COBRA) Model. A-2004-0544-IMT. Alexandria, Va.: September 30, 2004.
Department of the Navy Naval Audit Service
The Department of the Navy’s Implementation of the FY 2005 Base Realignment and Closure Process. N2005-0046. Washington, D.C.: June 10, 2005.
Risk Assessment of the Department of the Navy Base Realignment and Closure 2005 Information Transfer System. N2005-0042. Washington, D.C.: April 25, 2005.
Base Realignment and Closure Optimization Methodology. N2004-0058. Washington, D.C.: June 16, 2004.
Department of the Air Force Air Force Audit Agency
BRAC Cueing and Analysis Tools. F2005-0007-FB2000. Washington, D.C.: June 22, 2005. 2005 Base Realignment and Closure-Installation Visualization Tool Data Reliability. F2005-0004-FB4000. Washington, D.C.: June 16, 2005.
Base Realignment and Closure Data Collection System. F2004-0008- FB40000. Washington, D.C.: September 27, 2004. 2005 Base Realignment and Closure: Installation Capacity Analysis Questionnaire. F2004-0007-FB4000. Washington, D.C.: August 24, 2004. 2005 Base Realignment and Closure: Installations Inventory. F2004-0005- FB4000. Washington, D.C.: April 12, 2004. 2005 Base Realignment and Closure: Air Force Internal Control Plan. F2004-0001-FB4000. Washington, D.C.: December 29, 2003.
The Air Force Audit Agency plans to release 7 additional reports on the Air Force and joint cross-service group data collection, the Air Force analysis, and the use of various BRAC tools.
GAO Contact and Staff Acknowledgments
GAO Contact
Acknowledgments
In addition to the individual named above, Mike Kennedy, Jim Reifsnyder, Nelsie Alcoser, Shawn Arbogast, Raymond Bickert, Alissa Czyz, Andrew Edelson, Glenn Knoepfle, Nancy Lively, Warren Lowman, Tom Mahalek, David Mayfield, Richard Meeks, Hilary Murrish, Charles Perdue, Robert Poetta, James Reynolds, Laura Talbott, and Cheryl Weissman made key contributions to this report.
Other individuals also contributing to this report included, Tommy Baril, Carl Barden, Angela Bourciquot, Steve Boyles, Delaney Branch, Joel Christenson, Kenneth Cooper, Paul Gvoth, Larry Junek, Mark Little, Philip Longee, Ricardo Marquez, Gary Phillips, Greg Pugnetti, Sharon Reid, John Strong, Roger Tomlinson, and Kimberly Young. | Why GAO Did This Study
On May 13, 2005, the Secretary of Defense submitted proposed base realignment and closure (BRAC) actions to an independent commission for its review. The Commission must submit its recommendations to the President by September 8, 2005, for his acceptance or rejection in their entirety. Congress has final action to accept or reject these recommendations in their entirety later this year. The law requires that GAO issue a report on the Department of Defense's (DOD) recommendations and selection process by July 1, 2005. GAO's objectives were to (1) determine the extent to which DOD's proposals achieved its stated BRAC goals, (2) analyze whether the process for developing recommendations was logical and reasoned, and (3) identify issues with the recommendations that may warrant further attention. Time constraints limited GAO's ability to examine implementation details of most of the individual recommended actions.
What GAO Found
DOD had varying success in achieving its 2005 BRAC goals of (1) reducing excess infrastructure and producing savings, (2) furthering transformation, and (3) fostering jointness. While DOD proposed a record number of closures and realignments, exceeding all prior BRAC rounds combined, many proposals focused on reserve bases and relatively few on closing active bases. Projected savings are almost equally large, but most savings are derived from 10 percent of the recommendations. While GAO believes savings would be achieved, overall up-front investment costs of an estimated $24 billion are required, and there are clear limitations associated with DOD's projection of nearly $50 billion in savings over a 20-year period. Much of the projected net annual recurring savings (47 percent) is associated with eliminating jobs currently held by military personnel. However, rather than reducing end-strength levels, DOD indicates the positions are expected to be reassigned to other areas, which may enhance capabilities but also limit dollar savings available for other uses. Sizeable savings were projected from efficiency measures and other actions, but underlying assumptions have not been validated and could be difficult to track over time. Some proposals represent efforts to foster jointness and transformation, such as initial joint training for the Joint Strike Fighter, but progress in each area varied, with many decisions reflecting consolidations within, and not across, the military services. In addition, transformation was often cited as support for proposals, but it was not well defined, and there was a lack of agreement on various transformation options. DOD's process for conducting its analysis was generally logical, reasoned, and well documented. DOD's process placed strong emphasis on data, tempered by military judgment, as appropriate. The military services and seven joint cross-service groups, which focused on common business-oriented functions, adapted their analytical approaches to the unique aspects of their respective areas. Yet, they were consistent in adhering to the use of military value criteria, including new considerations introduced for this round, such as surge and homeland defense needs. Data accuracy was enhanced by the required use of certified data and by efforts of the DOD Inspector General and service audit agencies in checking the data. Time limitations and complexities introduced by DOD in weaving together an unprecedented 837 closure and realignment actions across the country into 222 individual recommendations caused GAO to focus more on evaluating major cross-cutting issues than on implementation issues of individual recommendations. GAO identified various issues that may warrant further attention by the Commission. Some apply to a broad range of recommendations, such as assumptions and inconsistencies in developing certain cost and savings estimates, lengthy payback periods, or potential impacts on affected communities. GAO also identified certain candidate recommendations, including some that were changed by senior DOD leadership late in the process that may warrant attention. |
gao_GAO-08-262 | gao_GAO-08-262_0 | Background
Federal efforts to use collaboration, broadly, and collaborative resource management more specifically have their roots in natural resource and environmental law, litigation, and alternative efforts to resolve environmental conflicts. Beginning in the 1960s and 1970s as environmental concerns over species, wilderness preservation, and air and water pollution heightened and legislation to protect different resources followed, litigation over land and resource use became more common. In the 1980s and 1990s, a number of factors, including court decisions and regulatory and economic changes, resulted in decreased timber harvests and increased scrutiny of grazing on public lands. In the 1990s, concerns over pollution and resource problems that cross property lines—such as water quality or endangered species—increased, and sometimes resulted in litigation. Also during this time, development of private lands posed increased threats to habitat, water quality, rural lifestyles, and wildlife, including threatened and endangered species.
Over the same time frame beginning in the 1970s, environmental conflict resolution began to evolve as an alternative way of dealing with environmental disputes outside of the courts. This approach uses facilitation, mediation, and other methods to negotiate solutions among disputing parties. It also involves collaborative efforts to solve problems and conflicts before they have a chance to fully develop. In the 1990s, as these alternatives to litigation became more established, two laws were enacted authorizing their use by federal agencies and the U.S. District Courts—the Administrative Dispute Resolution Act of 1996 and the Alternative Dispute Resolution Act of 1998. Also in 1998, legislation created the U.S. Institute for Environmental Conflict Resolution, a federal institute to assess, and assist in resolving, conflicts related to federal land, natural resource, or environmental management.
Throughout the 1990s, some communities facing natural resource problems decided to use alternative approaches to solving associated conflicts, forming grassroots groups of diverse stakeholders to discuss the problems and develop solutions. The collaborative groups that formed often included federal land and resource management agency representatives as participants. Recognizing the value of these groups, the federal land and resource management agencies began developing programs in support of such efforts. The agencies have been working collaboratively with communities for a long while, but placed increased emphasis on collaboration in the 1990s. Specifically, in 1997, the Forest Service began a partnership program to gather guidance and information on how best to work with local communities. In 2003, Interior began an effort to focus on working cooperatively with local communities on conservation activities, both on public and private lands. In addition, the U.S. Fish and Wildlife Service has a program, called Partners for Fish and Wildlife, to work with private landowners to provide technical and financial assistance in protecting threatened and endangered species on their lands.
More recently, the federal land and natural resource agencies have been authorized by specific legislation to collaborate with nonfederal parties on specific resource problems. For example, both BLM and the Forest Service received authority to use stewardship contracts—which allow them, for example, to use the value of products sold, such as timber, to offset the cost of contracted services such as removing small trees and brush from the forest—to achieve national forest land management goals that meet local and rural community needs.
In 2004, the President signed Executive Order 13352 introducing the Cooperative Conservation initiative to increase the use of collaboration and other processes for managing land, natural resource, and environmental issues. The order directed the Secretaries of Agriculture, Commerce, Defense, and the Interior, and the Administrator of the Environmental Protection Agency to carry out natural resource and environmental laws in a manner that facilitates “cooperative conservation.” The order defined this as “actions that relate to the use, enhancement, and enjoyment of natural resources, protection of the environment, or both, and involve collaborative activity among Federal, State, local, and tribal governments, private for-profit and nonprofit institutions, other nongovernmental entities and individuals.” The Executive Order is being carried out by CEQ, in its role coordinating federal environmental efforts and working with agencies in the development of environmental policies and initiatives. Also involved is OMB, in its role overseeing the preparation of the federal budget and supervising executive branch agencies. OMB evaluates the effectiveness of agency programs, policies, and procedures, as well as ensuring that agency reports, rules, testimony, and proposed legislation are consistent with the President’s budget and with administration policies. In addition, OMB oversees and coordinates the administration’s procurement, financial management, information, and regulatory policies.
While collaboration refers broadly to the way different groups work together to achieve a common goal, collaborative resource management efforts involve multiple parties joining together voluntarily to identify environmental and natural resource problems and goals and to design activities and projects to resolve the problems and achieve their goals. The federal agencies work with collaborative resource management groups using partnership tools, which are cooperative or voluntary agreements among the federal and nonfederal groups to share resources and achieve the objectives of all parties. Each of the four major federal land and resource management agencies—BLM, U.S. Fish and Wildlife Service, National Park Service within Interior and USDA’s Forest Service—has a complex mix of legislative authorities that allow it to create and fund partnerships. In the simplest form, a partnership can exist without any exchange of funds or items of value from the federal agency to a nonfederal group and a memorandum of agreement or understanding is used to describe the details of the arrangements. In cases when federal funds or property are provided to nonfederal entities as part of a partnership, the agencies use different instruments such as grants or cooperative agreements to document the agreement and work to be done.
Collaborative resource management efforts can involve any mix of the nation’s 2.3 billion acres of federal, state, local, private, or tribal land. Historical settlement and development of the nation resulted in the intermingling of lands among these different entities. As shown in figure 2, about 60 percent of the nation’s land, or almost 1.4 billion acres, is privately owned and managed, while more than 27 percent, or about 628 million acres, is managed by the four federal land and resource management agencies. More than 43 million acres, representing almost 2 percent of the nation’s land, are owned and managed by the federal government for purposes such as military installations and water infrastructure. About 8 percent of the nation’s land, or 195 million acres, is owned and managed by state and local governments and more than 2 percent, or about 56 million acres, is held in trust by the federal government for Native American tribes.
Collaborative efforts are governed by a framework of federal, state, and local laws, as well as federal Indian law and tribal law, that determine how management activities, including collaborative management activities, are carried out. These efforts often involve coordinated decision making for management activities that the collaborative groups undertake. Each land and resource manager or landowner, including federal agencies, retains decision-making authority for the activities that occur on their respective lands and follow applicable requirements to implement them, although the federal agencies may work with other group members to develop and consider plans and gather information and community input. When collaborative activities occur on private lands, individual landowners make decisions about the activities that occur subject to applicable federal, state, and local laws, and decide whether and how to share information related to their lands with members of the group.
Laws Governing Collaborative Efforts on Federal Lands
Collaborative management activities on federal lands are governed by federal resource and environmental laws. Overall, the four federal land management agencies manage their lands for a variety of purposes, although each agency has unique authorities that give it particular responsibilities. Specifically, both BLM and the Forest Service manage lands under their control for multiple uses and to provide a sustained yield of renewable resources such as timber, fish and wildlife, forage for livestock, and recreation. On the other hand, the National Park Service’s mission is to conserve the scenery, natural and historic objects, and wildlife of the national park system so that they will remain unimpaired for the enjoyment of current and future generations. The U.S. Fish and Wildlife Service, under its authorities, manages refuges for the conservation, management—and where appropriate—restoration of fish, wildlife, and plant resources and their habitats within the United States, for the benefit of present and future generations.
Other federal agencies—including the military services in the Department of Defense and the power marketing administrations in the Department of Energy—have land and resource management responsibilities that may cause them to become involved in collaborative efforts. The military services—the Army, Navy, Marine Corps, and Air Force—use their lands primarily to train military forces and test weapon systems, but are required under the Sikes Act of 1960 to provide for the conservation and rehabilitation of natural resources on military lands. The power marketing administrations—which include the Western Area Power Administration, Bonneville Power Administration, Southwestern Power Administration, and Southeastern Power Administration—sell and deliver power within the United States on hundreds of miles of transmission lines across public and private land using rights-of-way. Under the Energy Policy Act of 2005, transmission owners, including the power administrations, must maintain the reliability of their transmission systems, which includes establishing and maintaining the vegetation on these rights-of-way so that power lines are not compromised. Lines may be at risk from trees falling on them, electrical arcing from a power line to a tree or other objects in the right-of- way, or forest fires. Other agencies, such as the Department of Transportation and state transportation agencies, conduct activities that affect land and resources, and collaborate with agencies such as the U.S. Fish and Wildlife Service to manage the effects on wildlife and habitat.
Management activities that occur on federal lands, including those developed by a collaborative group are subject to the National Environmental Policy Act (NEPA) of 1969, and the Endangered Species Act of 1973. NEPA requires that federal agencies evaluate the likely environmental effects of proposed projects and plans using an environmental assessment or, if the action would be likely to significantly affect the environment, a more detailed environmental impact statement. The scope of actions being analyzed under NEPA may encompass a broad area, such as an entire national forest, or a specific project such as treatment of invasive species on several acres of land. The federal agencies are mandated to include the public in the NEPA process through efforts such as providing public notice of meetings, making related environmental documents available to the public, and considering public comments. Under the Endangered Species Act, federal agencies are required to consult with the U.S. Fish and Wildlife Service to ensure that any activities they carry out do not jeopardize the continued existence of a threatened or endangered species or destroy or harm any habitat that is critical for the conservation of the species.
Laws Governing Collaborative Efforts on State, Local, Private, and Tribal Lands
Collaborative activities that occur on state, local, and private lands are subject to state and local laws that provide authority for numerous agencies to manage state and local lands and programs to protect and conserve natural resources, as well as generate revenue from these resources. Many states have trust lands that were granted to them at statehood by the federal government. These lands, which constitute 46 million acres of the continental United States, are typically managed to produce revenue for beneficiaries such as schools and other public institutions. As a result, the primary uses of these state lands are activities that may generate revenue such as livestock grazing, oil and gas leasing, hard rock mining, and timber. In addition, states regulate land and natural resource use through a variety of programs, such as wildlife management or forestry programs. Each state manages fish and wildlife through various programs, and these state wildlife programs typically manage certain species of wildlife as game for recreation purposes. These programs may also own and manage land with habitat particularly suited for game species, and sometimes provide protection for particular species of concern. State forestry agencies, which are also in every state, can manage their state forests for uses such as timber or recreation.
Private landowners determine how, or whether, to implement collaborative activities on their lands, consistent with applicable federal, state, and local laws and zoning restrictions that regulate the types of activities that can occur on particular areas of land including open space, agricultural, residential, commercial, and industrial lands. For example, a nonprofit organization, such as The Nature Conservancy, can own land solely for conservation purposes, while a timber company uses its lands to harvest timber for profit. Private activities must also be consistent with applicable federal environmental laws such as the Endangered Species Act. Under the act, private landowners are not required to consult with the U.S. Fish and Wildlife Service on activities they conduct on their land, but the act prohibits them from “taking” a threatened or endangered species. In certain cases, private landowners may obtain permits for taking species if the taking is incidental to a lawful activity. To obtain such a permit, a landowner must submit a habitat conservation plan to the U.S. Fish and Wildlife Service that specifies the likely effect of the landowner’s activities on a listed species and mitigation measures that the landowner will implement. Landowners may also enter into voluntary safe harbor agreements with the U.S. Fish and Wildlife Service in which landowners manage habitat for endangered species in return for assurances that no additional restrictions will be imposed as a result of their conservation actions.
Land use activities, such as harvesting trees for timber, applying fertilizer and pesticides for agriculture, and diverting water for irrigation or other use, can degrade air and water quality and habitat for wildlife. However, undeveloped lands used for forestry, livestock grazing, and agriculture—in addition to producing the nation’s food and fiber—are vital to the protection of the nation’s environment and natural resources. To encourage conservation on private lands used for agricultural and natural resource production, USDA operates approximately 20 voluntary conservation programs that are designed to address a range of environmental concerns—soil erosion, surface and ground water quantity and quality, air quality, loss of wildlife habitat and native species, and others—by compensating landowners for taking certain lands out of production or using certain conservation practices on lands in production. Among these programs, USDA’s Natural Resources Conservation Service manages the Environmental Quality Incentives Program, which promotes agricultural production and environmental quality as compatible national goals and provides technical and financial assistance to farmers and ranchers to address soil, water, air, and related natural resource concerns and to comply with environmental laws, and the Wetlands Reserve Program, which authorizes technical and financial assistance to eligible landowners to restore, enhance, and protect wetlands. Since its beginning as the Soil Conservation Service more than 70 years ago, the service has delivered its assistance to farmers and ranchers through partnerships with locally led conservation districts.
Resource and land use decisions on Indian lands are governed by federal Indian law and tribal law. Federal Indian law includes relevant provisions of the Constitution, treaties with Indian tribes, federal statutes and regulations, executive orders, and judicial opinions that collectively regulate the relationships among Indian nations, the United States, and individual state governments. Tribal law includes the constitutions, statutes, regulations, judicial opinions, and tradition and customs of individual tribes.
Experts Generally View Collaborative Resource Management as an Effective Approach for Improving the Management of Natural Resources, but a Few Question Collaboration Involving Federally Managed Lands
Experts whose literature we reviewed consider collaborative resource management to be effective in managing natural resources because it can reduce or avert conflict and litigation, while at the same time improving natural resource conditions and strengthening community relationships. The experts note that successful groups that are able to achieve these benefits use various collaborative practices. In addition, many experts cite limitations to collaboration and others question collaborative resource management efforts involving federally managed land, arguing that collaborative efforts can favor local interests over national interests, be dominated by particular interests over others, result in a “least common denominator” decision that inadequately protects natural resources, or inappropriately transfer federal authority to local groups.
Experts View Collaboration as an Effective Approach for Improving Natural Resource Management
Experts view collaborative resource management as an effective approach for addressing natural resource problems compared with more traditional approaches, such as independent and uncoordinated decision making or litigation. They note, based on their research of many collaborative efforts, that collaborative resource management offers several benefits, including (1) reduced conflict and litigation; (2) better natural resource results; (3) shared ownership and authority; (4) increased trust, communication, and understanding among members of a group; and (5) increased community capacity, such as fostering the ability for community members to engage in respectful dialogue. In addition, experts say that effective collaboration can have different structures and processes, but use similar practices.
According to the experts, collaboration can reduce conflict and litigation because it provides a way for people to become directly involved in resolving issues through face-to-face discussions and move beyond the impasse associated with more adversarial approaches. Experts say that the lawsuits, administrative appeals, and lobbying campaigns that have been associated with natural resource management in the past can be expensive and divisive and lead to delays in getting land management activities and projects accomplished. Such was the case in the Applegate watershed in northern California and southwestern Oregon in the early 1990s when years of adversarial conflict between environmentalists, the timber industry, and government agencies over forest management issues and litigation related to these issues had resulted in policy gridlock, with neither side able to effectively achieve its goals. In this case and in many others cited by the experts, stakeholders were driven to try collaboration because they were frustrated with a lack of progress through other means. Through face-to- face discussions, parties may be able to define solutions that meet their mutual interests and avert potentially costly litigation that requires winners and losers and, in some cases, results in delays. For example, according to one of the participants of the Blackfoot Challenge, one of the collaborative efforts we studied, the group was able to prevent litigation by an environmental group over water flows in the Blackfoot River in Montana by implementing conservation programs during drought that increased water levels in the river for fish.
The experts noted that, in addition to reducing conflict, collaboration can lead to better natural resource results than traditional approaches. A collaborative process, with a range of stakeholders—from local citizens to agency technical specialists, and from environmentalists to industry representatives—incorporates a broad array of knowledge, which may include specialized local knowledge or technical expertise that would not be available to particular stakeholders or agencies if they were working alone. With input from a wide variety of stakeholders, collaborative efforts are often able to identify creative solutions to natural resource problems and make better, more-informed decisions about natural resource management. Because these decisions are made collaboratively and have concurrence from multiple affected stakeholders, solutions are frequently easier to implement with less opposition. A second collaborative effort we studied, the Cooperative Sagebrush Initiative, started in 2006 to involve multiple stakeholders in developing and implementing solutions to conserve sagebrush habitat.
Another benefit noted by experts is that collaborative resource management creates shared ownership of natural resource problems among the stakeholders. The experts recognize that many of the nation’s natural resource problems that cross ownership boundaries are not amenable to traditional centralized government solutions through regulation and cannot be solved by single organizations. For example, problems such as the spread of invasive species, the decline of threatened and endangered species, the loss of open space from development and urban sprawl across agricultural landscapes, and non-point-source water pollution—pollution from diffuse sources—are just a few of the numerous challenges resulting from the independent actions of countless individuals. Collaborative efforts bring many of these individuals together, making progress toward resolving the problems possible. In addition, through collaboration, federal and state programs can be made locally relevant and decision making and progress are able to transcend political boundaries. Consequently, local stakeholders feel consulted and may view federal agencies as partners, and programs encourage joint stewardship of public lands.
Experts also noted that collaborative resource management can increase communication, trust, and understanding among different stakeholders. The collaborative process can bring together stakeholders with divergent interests who may have no prior direct experience working together or have an adversarial relationship. As they work together to address a particular common natural resource problem, these stakeholders often begin to develop trust and increase communication. Furthermore, through such communication, stakeholders can become more informed about each other and the natural resource problem and develop an enhanced understanding of its complexities. For example, environmental and industry groups with divergent opinions about natural resource use may be represented in a particular collaborative effort. Through working together in collaborative groups and opening lines of communication, these stakeholders may learn to appreciate each other’s perspective by focusing on interests that they have in common. Experts have noted examples in which environmentalists learned to appreciate ranchers’ needs to earn a living through grazing livestock, timber companies acknowledge the value of healthy ecosystems, and federal agency technical experts recognized the importance of using traditional knowledge in land management practices. One of the collaborative efforts we studied, the Eastern Upper Peninsula Partners in Ecosystem Management, has shared information to improve forested habitat, including on private timber lands.
In addition to improving relationships within a collaborative group, experts identify collaboration more broadly as a means to increase the social capacity of a community. Increased community capacity can include developing networks between the public and private sectors and enhancing the public’s engagement in issues affecting the community. The experts note that through increasing community capacity, collaborative groups may enable the community to deal better with future problems that arise.
Collaborative groups that are able to achieve these benefits can be organized differently and have different decision making and organizational processes, but use similar practices that distinguish them from more traditional groups and make their efforts more effective and potentially more successful. A collaborative group can be organized formally—such as a legislatively mandated advisory group or an incorporated nonprofit organization—or less formally, with loosely organized members and simple written agreements. Collaborative groups may also employ a variety of processes to manage their meetings and organizations and may strive to achieve different desired outcomes, such as sharing information on what each member is doing, partnering on particular management activities, or seeking agreement on how to manage natural resource problems.
The eastern Upper Peninsu inclde fore tht hve hitoriclly een mged for timer. The grop focus on abt 4 million cre thn the Hith Ntionl Foret, the Seney Ntionl Wildlife Refge, Pictred Rock Ntionl Lkehore, te lnd, nd privtely-owned lnd. The prtner inclde the ForeService, U.S. Find Wildlife Service, Ntionl Prk Service, Michign Deprtment of Nl Rerce, The Nre Conervncy, nd compnie owning privte foret lnd. collaborative practices noted that all stakeholders—individuals and organizations whose interests are affected by the process or its outcome—should be included in the process by participating or being represented. One expert suggested that such stakeholders may include those affected by any sort of agreement that could be reached, those needed to successfully implement an agreement, and those who could undermine an agreement if not included in the process. Some experts added that participation should be voluntary.
Develop a collaborative process. Many experts noted that a collaborative process should be designed by the participants to fit the needs and circumstances of their situation. Some experts recommended that groups employ the assistance of a neutral facilitator with experience in building collaborative processes. According to some experts, the process should include decision and process rules to govern how the group operates. For example, collaborative groups may use consensus to make decisions, described by several experts as a process in which discussion proceeds until all viewpoints are heard and the stakeholders, or most of the stakeholders, are willing to agree to a conclusion or course of action. When using consensus, some experts note that a group should agree on what consensus means and what the responsibilities are for parties who disagree, such as providing an alternative. In addition to establishing decision rules, one expert noted that participants need to identify the roles and responsibilities for implementing an agreement and obtain commitment from the participants that an agreement will be implemented.
Pursue flexibility, openness, and respect. According to many experts, flexibility, transparency, and respect should be built into the collaborative process. Flexibility is important in the process in order to accommodate changing timetables, issues, data needs, interests, and knowledge. Transparency and open communication are essential for maintaining trust and can be achieved through maintaining a written record of proceedings and decisions and ensuring that all parties have equal access to relevant information. Having a respectful process is also necessary to attain civil discourse in which participants listen to one another, take each participant’s perspectives seriously, and attempt to address the concerns of each participant. Building respect and openness involves accepting the diverse values, interests, and knowledge— including local knowledge—of the parties involved.
Find leadership. Several experts identified the need for collaborative groups to find a credible leader who is capable of articulating a strong vision. According to the experts, a leader should have good communication skills, be able to work on all sides of an issue, and ensure that the collaborative process established by the group is followed. Experts noted that neutral facilitators can also function as leaders for a group. In addition, experts said that it is important to build leadership skills within the organizations participating in a group so that these leaders can effectively represent the interests of their organizations.
Identify or develop a common goal. Most of the experts who wrote about collaborative practices noted the importance of groups having clear goals. In a collaborative process, the participants may not have the same overall interests—in fact they may have conflicting interests. However, by establishing a goal based on what the group shares in common—a sense of place or community, mutual goals, or mutual fears—rather than on where there is disagreement among missions or philosophies, a collaborative group can shape its own vision and define its own purpose. When articulated and understood by the members of a group, this shared purpose provides people with a reason to participate in the process.
Develop a process for obtaining information. Some experts noted that effective collaborative processes incorporate high-quality information, including both scientific information and local knowledge, accessible to and understandable by all participants. As one expert noted, conflict over issues of fact is capable of incapacitating a collaborative process. Therefore, it is important to develop a common factual base, which can be accomplished by all participants jointly gathering and developing a common understanding of relevant data. This process allows the stakeholders to accept the facts themselves, rather than having the facts disseminated to them through experts.
Leverage available resources. Many of the experts emphasized that collaboration can take time and resources in order to accomplish such activities as building trust among the participants, setting up the ground rules for the process, attending meetings, conducting project work, and monitoring and evaluating the results of work performed. Consequently, it is important for groups to ensure that they identify and leverage sufficient funding to get the group started and to accomplish the objectives. One expert noted that many collaborative groups are successful in attracting sufficient funding for restoration projects but have difficulty in securing funding for administration of the group.
Provide incentives. Some experts note that economic incentives can help collaborative efforts achieve their goals. For example, by purchasing conservation easements, a group can give landowners incentives to help achieve the goal of preserving open space. A conservation easement is a restriction placed on a parcel of land that limits certain types of uses or prevents development from taking place in order to protect the resources associated with the land. By purchasing easements and thus creating an incentive for a landowner to keep the land in its current land use, the groups are able to keep the land from being developed, preserving open space and providing other ecological benefits.
Monitor results for accountability. According to many experts, to be effective, the participants in groups need to be accountable to their constituencies and to the process that they have established. In addition, organizations supporting the process expect accountability for the time, effort, money, or patience they invested in the group. As a result, experts note the importance of designing protocols to monitor and evaluate progress toward a collaborative group’s goals, from both an environmental and a social perspective. Some experts recommend that collaborative groups use monitoring as a part of an adaptive management approach that involves modifying management strategies or project implementation based on the results of initial activities.
While experts noted that these practices are commonly shared by successful collaborative groups, one expert said that the use of the collaborative practices does not guarantee a group’s success. To measure whether groups are successful, experts noted that two criteria can be used: (1) whether the groups were able to increase participation and cooperation and (2) whether they improved natural resource conditions. The first criterion measures success based on organizational factors and social outcomes, such as improved relations and trust among stakeholders. In many instances, the groups studied by one expert identified factors such as improved communication and understanding as their greatest success. Factors used by some experts to evaluate success in this respect include the perceived effects of the collaborative effort in building relationships, the extent of agreement reached, and educating and outreaching to members of the community. The second criterion for success is based on whether groups have been able to improve natural resource conditions as measured by specific indicators, such as water quality, ecosystem health, or species recovery. Some experts note that to evaluate progress toward improving resource conditions, monitoring needs to be performed over a period long enough for change to occur and focus on indicators that are associated with a group’s natural resource goals.
Many Experts Identified Limitations of Collaboration and a Few Raise Questions about Using It on Federally Managed Lands
Although collaborative resource management is generally viewed by the experts as an effective approach for addressing natural resource problems, many experts discussed two limitations to its use. First, the process of collaboration, which involves bringing people together to work on a problem and moving the group forward to reach a decision, can be difficult and time-consuming, particularly in the initial stages when the group is getting started, and thus require large amounts of resources, including staff and money. Even after a group has been working together for a period of time, there may be inefficiencies with the process as new group members need to be brought up to speed.
Second, collaboration does not always work in providing the solution to all natural resource problems. In some instances, for example when there are irreconcilable differences among group members, agreement may not be possible. In other instances, one particular stakeholder may derail the process by refusing to cooperate. As a result, collaborative resource management is not applicable everywhere, and collaborative efforts may not be replicable. For example, collaboration may not work in a community deeply divided over a particular natural resource issue that has generated a long history of controversy and litigation even though a collaborative effort dealing with the same issue was successful in another community.
Furthermore, some experts question whether collaborative resource management groups are equitable; have balanced power; produce solutions that are protective of the environment; and are accountable to the public, particularly in circumstances where federally managed lands are involved. A number of experts raised concern over the equity of collaboration, noting that it can remove discussions from the public arena and empower those who are involved in the group at the expense of those who cannot, or choose not to, participate even though they have a legitimate interest. By their nature, collaborative groups tend to be primarily made up of local stakeholders. Yet, others who may not live in the community but have an interest in the lands because they recreate there, use water originating there, or value endangered species living there are sometimes left out of the process because they are unaware it is occurring or do not have the means or the resources to participate. For example, national environmental organizations cannot always participate in local efforts because they may not have people at these locations or be able to bear the expense of traveling there.
Some experts also question collaboration on the grounds that public processes may be co-opted by parties with particular interests who manage to control the agenda of the group. Many experts raising this question were concerned about local economic interests taking over a process and, because of their influence, overriding other interests. Yet, one expert noted concerns that the process could also be co-opted by environmental interests. Furthermore, some experts critical of collaborative resource management raised concerns about the efforts focusing on reaching a consensus decision. By trying to reach consensus, they argued, compromises are made that can result in a “least common denominator” solution, which some may view as less protective of the natural resources.
Finally, a few experts criticize collaborative efforts designed to make decisions about management activities on federal lands because they believe collaboration reduces federal agencies’ accountability to the broader public. Specifically, some of these experts say that collaboration effectively transfers the authority to make land management decisions from the federal land management agencies to local citizens. Consequently, these experts argue that when collaborative groups make decisions related to federal land, the land and resource management agencies do not carry out their legal responsibilities to manage the public land and are not accountable to the public.
In response to such questions raised about collaboration, other experts note that a well-designed and implemented collaborative process can avoid some of the outcomes with which the critics of collaboration are concerned. For example, a process that is inclusive will incorporate both local and national interests, and a process that uses the leadership of a neutral facilitator can help to ensure that all viewpoints are considered and prevent any one group from taking over the process. Furthermore, one expert notes that a well-designed collaborative process that includes debate over the facts of an issue can avoid a “least common denominator” solution. Finally, according to an expert, when participating in collaborative groups that are transparent, federal agencies can show that they are not improperly transferring authority to local communities.
Most Collaborative Efforts We Studied Reduced or Averted Resource Conflicts, Completed Projects, and Improved Natural Resource Conditions to an Extent That Could Not Be Determined
Overall, the collaborative resource management efforts that we studied were successful in achieving participation and cooperation among their members and sustaining or improving natural resource conditions, the two criteria the experts identified to gauge the success of collaborative groups. Six of the seven collaborative efforts we studied have reduced or averted the kinds of conflicts that often arise when dealing with contentious natural resource problems, particularly those that cross property boundaries, such as threatened and endangered species, lack of wildland fire, invasive species, degraded wildlife habitat, or similar problems. However, the extent of resource improvement across broader landscapes that the efforts were working in was difficult to determine because the landscape-level data needed to make such determinations were not always gathered.
Most Collaborative Resource Management Efforts Reduced or Averted Conflicts through Cooperation among Participants
The seven efforts we studied managed natural resource problems that can often cause conflict and controversy, and sometimes litigation. As shown in table 1, the natural resource problems undertaken by the seven efforts we studied ranged widely from fragmented riparian habitat for fish and lack of wildland fire in rangeland ecosystems to predator interactions with livestock, travel access in wilderness areas, and nature-related outdoor activities.
Each of the natural resource problems the efforts managed, or are managing, involves many different interests that can potentially lead to conflict among the different members of the group. For example, in the Blackfoot Challenge case, federal agencies are required to protect threatened and endangered species such as the grizzly bear and the gray wolf, yet ranchers fear these large predators because of the harm they can cause to livestock. Or, in the Uncompahgre Plateau example, as a result of the Energy Policy Act of 2005, transmission line operators must ensure that their power lines remain reliable, which traditionally involved clear cutting the rights-of-ways involved, even on public lands. Meanwhile, natural resource managers seek to provide habitat for lynx and deer and to prevent large openings in the forest that may come with utility corridors. The natural resource problems and potential or actual conflicts managed by each of the groups are described in more detail in appendix II.
As table 1 shows, six of the seven efforts were able to identify solutions to their natural resource problems that met their common interests. For example, by developing the concept of a credit system, the Cooperative Sagebrush Initiative has identified a way to encourage—and pay for— preservation and restoration of sagebrush habitat while also allowing for the development of sagebrush in areas that are economically or otherwise important. In another example, the Onslow Bight Forum identified lands that were important to preserve and restore as habitat for different species and purchased these from willing landowners. Because the groups can pool their funds, they are able to purchase more properties and more expensive properties, and by purchasing the land on the free market from willing owners, the group provides the landowners with the value of their property, thereby not harming their economic interests. While the seventh group— the Steens Mountain Advisory Council—was able to provide advice on a cooperative management plan and vegetation treatment plans, it did not provide input on a travel management plan for the area, a key management issue.
All seven efforts we studied used several of the collaborative practices identified by the experts—such as seeking inclusive participation; using collaborative processes; pursuing flexibility, openness, and respect; and finding leadership—and six of the efforts were successful in reducing or averting conflicts. These six groups were able to cooperate and focus on their common interests and goals, despite different perspectives and interests among the members. In addition to identifying common goals, several of the successful efforts were able to use other practices, such as obtaining scientific and other information to inform their decisions, leveraging funds, and providing incentives. The one effort that has been less successful in dealing with conflict used several of the collaborative practices, but does not have a common goal and does not have funding to gather information, leverage resources, or provide incentives.
The Steen Montin collabortive effort i locted in theastern Oregon. The effort i focused on abt 496,000 cre of high deert montin re tht has gret ecologicl diverity nd vried wildlife. The primry rerce concern Steen Montin inclde issu relted to livetock grzing, wilderness, trvel ccess, nd mgement of jniper tht hve encroched into sageusnd grassnd reas.
In 2000, the Steen Montin Coopertive Mgement nd Protection Act eablihed the re nd tasked the Steen Montin Adviory Concil with providing innovtive nd cretive suggetion to the BLM on how to mge the nl rerce on Steen Montin in nner tht wold llevite conflict. The Steen Montin Adviory Concil inclde locl rncher, recretioni, nd environmentl repreenttive.
Seek Inclusive Participation. The seven groups each have members that have multiple different perspectives such as private landowners, conservation groups, natural resource land management agencies, and wildlife agencies. Most of the groups include representatives from federal agencies such as BLM, the Forest Service, and the U.S. Fish and Wildlife Service, and several include USDA’s Natural Resources Conservation Service. All but one of the groups we studied were primarily organized around landowners and managers who can make decisions about their respective lands, including members of conservation-oriented groups such as The Nature Conservancy and local conservation groups such as the North Carolina Coastal Land Trust and North Carolina Coastal Federation. Two groups, the Blackfoot Challenge and the Malpai Borderlands Group, focus primarily on private lands and the surrounding public lands. On the other hand, the Uncompahgre Plateau, Onslow Bight Forum, and the Eastern Upper Peninsula Partners in Ecosystem Management include large areas of public lands, with the exception of lands owned by the land conservancy groups in North Carolina and several forest companies in Michigan. While the groups are open to other participants such as environmental groups, according to several participants, they may not seek them out or the environmental groups may not participate. All but one of the groups have self-selected membership, which means that they attract members who are interested in working on the problems identified by the group and are willing to find solutions to these problems, which may not be the case with certain organizations. Only one group, the Steens Mountain Advisory Council, is required by law to include certain members, including representatives of the ranching and environmental communities, including one local and one national representative from each.
Develop a Collaborative Process. The seven groups we studied are organized differently but are each organized to collaborate. Three of the groups—the Blackfoot Challenge, the Cooperative Sagebrush Initiative, and the Malpai Borderlands Group—have incorporated as nonprofit organizations, each with a board of directors, and one—the Uncompahgre Plateau Project—has a separate nonprofit financial management group. According to members of one group, being incorporated allows the group the autonomy to raise funds and complete management projects on its own, without relying on the federal or state agencies. Also, incorporating puts the groups on equal footing with the agencies as they identify projects with mutual benefits. Of the remaining three groups, two are less formally organized and one is more formally organized. The Onslow Bight Forum and the Eastern Upper Peninsula group function as information-sharing groups that allow the individual members to determine what actions they will take independently. The Onslow Bight Forum uses a memorandum of understanding to identify the role of each member and the group, while the Eastern Upper Peninsula group does not have any organization documents and operates informally. Finally, the last group—the Steens Mountain Advisory Committee—is a legislatively organized advisory group for BLM and has written protocols to describe its organization and processes.
All but one of these groups uses a consensus process to make decisions. This process involves all participants, focuses on solutions, and proceeds until agreement is reached. For example, participants of one group, the Blackfoot Challenge, said that its members followed the 80-20 rule—they worked on 80 percent of the items they could agree on and left the 20 percent they could not agree on at the door. The participants said that as they worked together longer, the 20 percent of items that cause disagreement have been reduced as well. Two groups—the Onslow Bight Forum and the Eastern Upper Peninsula group—do not make formal decisions, but use a consensus process in discussing and agreeing on a plan of action that members can decide to take or not. One group, the Steens Mountain Advisory Council, uses a voting process to make certain decisions rather than a consensus process. To make a recommendation to BLM, the advisory council is required to have 9 of its 12 members vote in favor of it. According to the members, unfilled positions and poor attendance at council meetings have made it difficult to achieve the number of votes needed to make recommendations to BLM.
Pursue Flexibility, Openness, and Respect. All but one of the groups have flexible and open processes that allow the members to discuss their positions. Two of the groups—the Onslow Bight Forum and the Eastern Upper Peninsula group—would not likely exist without the openness that allowed the members to retain their own missions and land management goals rather than the group subsuming them. Several of the groups, such as the Uncompahgre Plateau Project, use Web sites and plans to communicate with each other and the community. On the other hand, the Steens Mountain Advisory Council is different from the other groups in that it was legislatively created, and the act that created both the Steens Mountain Cooperative Management and Protection Area (CMPA) and the council resulted from lengthy negotiations among several parties, some of whom are, or have been, represented on the council. The group has used facilitators to overcome some of the conflict that developed through the negotiations, but some acknowledge that the council established by the act has not yet resolved key conflicts over management of the area. Yet, some of the members we interviewed were hopeful that a change in members that occurred recently might help to invigorate the group.
The Onlow Bight Conervtion Form i collabortive grop focused on the long-lef pine fore, euarie, wetlnd, nd pocoin (wetlnd on hill tht form ecause of ccted pet) in coasl North Crolin. The grop formed in 2001 rond issu such as increasing development nd it effect on wildlife habitt, prticrly tht of the endngered red-cockded woodpecker, nd wter quality.
The Onlow Bight Conervtion Form i n informtion-ring prtnerhip of federnd te gencie nd nonprofit gro who hve igned Memorndm of Undernding to identify opportnitie to work together to conerve the nl rerce of the Onlow Bight lndpe. The memer inclde the Mrine Corp, ForeService, U.S. Find Wildlife Service, North Crolin Deprtment of Environment nd Nl Rerce, North Crolin Wildlife Rerce Commission, The Nre Conervncy, the North Crolin Coasl Federtion, nd the North Crolin Coasl Lnd Trust.
Find Leadership. All of the groups have benefited from the availability of community leaders or agency employees who could lead the group. Several of the groups were started by local community leaders who energized and engaged others to work with them, although the federal agency staff were working alongside the community leaders to support the efforts. In particular, the Blackfoot Challenge, Malpai Borderlands Group, and Uncompahgre Plateau projects were started and sustained by community leaders, but they recognize the important contribution of the federal agency employees who were involved as well. On the other hand, federal and state agency employees took the lead in starting the Eastern Upper Peninsula group and were also important in the Cooperative Sagebrush Initiative, and federal agency staff worked with staff from The Nature Conservancy to start the Onslow Bight Forum. One community leader on the Steens advisory council has attempted to focus the group on its role and keep it on track for making recommendations to BLM.
Identify a Common Goal. Of the seven groups we studied, six identified and shared a common goal. For example, the Onslow Bight Forum brought together diverse members with similar interests in preserving open space and habitat—the U.S. Marine Corps has an interest in preserving open space around its installations for safety reasons and to help save endangered species, and land conservation groups seek to preserve habitat corridors and prevent development of the rural landscape. Similarly, the Eastern Upper Peninsula group focused on the need to facilitate complementary management of public and private lands, for all appropriate land uses, and to sustain and enhance representative ecosystems in the Eastern Upper Peninsula. On the other hand, the Steens Mountain Advisory Council does not share a common goal for management of the Steens Mountain area, with some members advocating motor vehicle access through wilderness areas for historical uses such as livestock grazing and others advocating for more wilderness areas to be set aside in the planning area and greater conservation requirements instituted in those wilderness areas already existing. The Steens Mountain act established a cooperative management area, the purpose of which is to conserve, protect, and manage the long-term ecological integrity of Steens Mountain for present and future generations. To further this purpose, the act directed BLM to manage the area to achieve five objectives. Several participants indicated that the issue will need to be litigated to clarify the act’s requirements.
The Uncomphgre Plteau Project collabortive grop i locted in thwetern Colordo. The grop focus it effort on the Uncomphgre Plteau, which 1.5 million cre, 75 percent of which iublic lnd. The plteau home to abundnt wildlife pecie, inclding poption of mle deer. The grop formed in 2001 to protect nd retore the ecotem helth of the plteau. In ddition, key electricl trmission line tht connect the eastern nd wetern United Ste cross the plteau, creting the need for vegettion mgement ner thee line.
The prtner in the Uncomphgre Plteau Project inclde the ForeService, BLM, Public Lnd Prtnerhip, Colordo Diviion of Widlife, Wetern Are Power Adminitrtion, nd Tri-Ste Genertion nd Trmission Assocition, Inc. The prtner igned Memorndm of Undernding nd eablihed n Exective Committee to gide it overll direction; Technicl Committee nd contrct employee, to crry ot it ctivitie; nd nonprofit orgniztion to hndle it finnce.
Develop a Process for Obtaining Common Information. Each of the seven collaborative groups has established a group or process to jointly develop and use scientific information as part of their decision making, although some groups have done so more than others. For example, the Malpai Borderlands Group has a scientific advisory board to develop research projects on fire to support the group’s efforts to restore fire, which had been suppressed for decades, to the ecosystem to help restore healthy grasslands. It also holds annual science conferences to bring together the relevant scientific findings on rangelands, fire, threatened and endangered species, and other issues. The group also works with USDA, Forest Service, and university researchers on vegetation and fire studies. On the other hand, rather than develop its own scientific information, the Cooperative Sagebrush Initiative relied on data produced by the U.S. Geological Survey on sagebrush habitat and studies completed by the Western Association of Fish and Wildlife Agencies to assess the status of sage grouse and the sagebrush ecosystem in the 11 western states involved. Several groups developed landscape maps to show different information. For example, the Onslow Bight Forum used habitat and biological information, and other information, to develop a landscape map of the key areas for habitat and preservation purposes. Finally, some groups, such as the Uncompahgre Plateau Project, reported that using scientific information, including field trips to demonstrate effects of their management activities, helped them to communicate their efforts to outside parties who may have otherwise been critical.
The Mlpi Borderlnd Grop collabortive effort i locted on the order with Mexico in thern New Mexico nd Arizon. The grop formed nonprofit orgniztion in 1994 to work on retoring the nl fire regime, preerve lrge open ce, nd mintin l lifetyle in the pproximtely 800,000 cre of deert grassnd region tht inclde mix of federl, te, nd privte lnd. foundation grants, and to use these funds in conjunction with federal partners’ funding to leverage the amount of work that could be done by the group. For example, the Blackfoot Challenge recently received an Ash Institute for Democratic Governance and Innovation award of $100,000, the Uncompahgre Plateau Project received $500,000 from the state of Colorado and $620,000 from the Ford Foundation, and the Malpai Borderlands Group received $8.5 million from its different fundraising efforts. According to the Onslow Bight Forum, its members have raised as much as $75 million since 2001 from state and federal funds to acquire land, a process helped by the existence of the forum. On the other hand, the Eastern Upper Peninsula project and the Steens Mountain Advisory Council do not generate funding. The Eastern Upper Peninsula project members said they did not intend to raise funds because they did not intend to conduct joint projects, and the Steens group is not organized to raise funds. The federal legislation that created the Steens Mountain Advisory Council authorized $25 million to be appropriated to BLM to work with local ranchers, landowners, and others to conduct work in the cooperative management area; however, these funds have not been provided. Some members said that, if provided, these funds could be used to pursue activities such as purchasing private inholdings, which are privately owned lands within the boundary of a national park, forest, or other land management unit.
The Mlpi Borderlnd Grop was initited grop of rncher nd environmentli. Federgencie, inclding the ForeService, U.S. Find Wildlife Service, nd Nl Rerce Conervtion Service; Arizon nd New Mexico te gencie; nd conervtion gro, such as The Nre Conervncy, hve plyed role in the grop’ effort.
Provide Incentives. Several of the groups we studied that have dealt successfully with conflict used different types of incentives to gain cooperation and participation. Such incentives include conservation easements, payments for projects or damages caused by wildlife, and different agreements related to threatened and endangered species. The Blackfoot Challenge, Malpai Borderlands Group, and Eastern Upper Peninsula project have arranged, or helped arrange, conservation easements to protect either rangeland or forested land that could have been developed for housing, otherwise. The Malpai group also used another type of payment to help reduce conflict over livestock losses caused by predators, supporting a predation fund to pay ranchers when it can be proved a predator—the jaguar in New Mexico and Arizona—has killed livestock.
A third type of incentive, safe harbor agreements and habitat conservation plans, has been used by the Malpai Borderlands Group. Safe harbor agreements seek to assure landowners that if they restore or enhance habitat, they will not incur new restrictions if their actions result in a threatened or endangered species taking up residence. In order to obtain a permit to take a species incidental to lawful land management activities, a landowner must complete a habitat conservation plan, which specifies measures the landowner will undertake to minimize and mitigate the effect on the species. These agreements encourage private landowners to conduct projects that will protect species on their property, while also protecting their use of the land should they “take” one of the species— either by killing it or degrading its habitat. According to one group these agreements can be complex and time-consuming to arrange, and thus, it may be more efficient for the group to work with the U.S. Fish and Wildlife Service through the process than for each individual landowner. In addition to these types of arrangements, the Cooperative Sagebrush Initiative wants to develop a related incentive, a conservation credit bank in which one party would pay to protect sagebrush habitat, or conduct restoration of habitat, and another party would purchase credits to develop land that would degrade sagebrush habitat or kill a species. The group is still considering how to measure the conservation value of different sagebrush species and habitat they provide and how to monitor those values.
Collaborative Efforts Have Improved Natural Resource Conditions, but Determining the Extent of Improvement Was Difficult Because of Limited Landscape Data
Through cooperating, five of the seven efforts we studied have accomplished multiple management activities and projects that have helped sustain or improve natural resource conditions in their areas. Officials of the five efforts that have completed resource management projects to date said that this work had improved resource conditions and helped to accomplish the goals the groups hoped to achieve. The Cooperative Sagebrush Initiative has not yet accomplished its work, as it started in September 2006 and is just developing demonstration projects. And, although the Steens Mountain Advisory Council has helped BLM to develop a management plan for the Steens Mountain CMPA, it did not deal with the most contentious issues that relate to travel access, wilderness areas, and wilderness study areas in the plan issued in November 2007. Table 2 shows the work accomplished by the different efforts that we studied.
As shown in table 2, the efforts’ accomplishments ranged widely, from developing joint plans and scientific information, to changing vegetation conditions and managing species habitat. For example, some of the groups developed landscape maps of vegetation and potential habitat that integrated information for each of the members in the group. The groups also accomplished numerous activities to keep landscapes open and usable for natural resource purposes, such as grazing or timber harvesting. At the same time, the groups worked on several projects to help conserve threatened and endangered species habitat. The two efforts that have not completed projects—the Cooperative Sagebrush Initiative and the Steens Mountain Advisory Council—have not moved beyond planning work.
As shown in table 2, three of the groups—the Blackfoot Challenge, Malpai Borderlands Group, and Uncompahgre Plateau Project—have employed monitoring programs that demonstrate the effect of their activities on site- level natural resource conditions. Monitoring environmental or natural resource characteristics is typically conducted at the site level—the area involved in a management activity, such as a vegetation treatment—to determine what effect the management activity has, or at the landscape level—a broad area—to determine the overall conditions across that area. Monitoring can also be conducted over time to indicate the trend in conditions at a site or landscape. Montana’s Department of Fish, Wildlife and Parks, one of the partners involved in the Blackfoot Challenge, conducts fish surveys in the Blackfoot River to determine how populations are faring. This work measures the benefits provided by the group’s riparian projects for fish populations, including endangered bull trout. The Malpai Borderlands Group conducts range monitoring on 290 sites in its area and conducts monitoring of some species to determine how they have been affected by group projects. The Uncompahgre Plateau Project maps its vegetation treatments and fires, and thus shows areas of different vegetation ages, types, and the habitat it provides across the broad area managed by several agencies. Because the agencies’ mapping data are not compatible, however, staff said that they had to develop ways to merge the data, which was is time-consuming and expensive. Through January 2008, the agencies, with the help of the group, had pulled together data for two large watersheds and had begun working on two more. The other groups do not conduct monitoring as a group, although the resource management agencies do track resources in some cases.
Two of the seven groups—Blackfoot Challenge and the Uncompahgre Plateau Project—monitor the results of some of their projects across the larger landscape to determine the effect of their work across the broad landscapes that they are trying to affect; however, the other groups do not conduct landscape monitoring. According to two groups, they are not able to monitor across a larger area for two primary reasons. First, according to participants, it is time-consuming and expensive to monitor multiple sites regularly across a large area, and this is what is necessary to understand the effects of multiple projects in that large landscape. For example, even though the Malpai Borderlands Group monitors 290 sites for the effects of grazing, climate, and other factors on the condition of the grasslands that are useful for assessing the condition of that pasture or smaller area, according to the group’s scientists, the group does not collect comparable data across different pastures or smaller areas that allow comparison across the broader landscape. Data must be collected at a different, broader scale and need to be collected consistently at specified locations to determine the condition of the hundreds of thousands of acres of rangeland that the group is helping to manage. Currently, the group and its scientific advisory board are considering what data to collect.
The second reason that the groups do not collect data is that they either have not agreed to collect such data or they have not agreed on the work that they will conduct and monitor. Two groups—the Onslow Bight Forum and the Eastern Upper Peninsula group—do not monitor because both of these groups organized to share information, not to develop joint projects and monitoring. According to some Onslow Bight members, it would be useful to track the results that individual members have accomplished with the group’s information, but the group has not decided to do this jointly or to dedicate the resources to it. According to the members of the Eastern Upper Peninsula group, their purpose has never been to jointly manage projects and therefore there is no need to monitor results. The group’s purpose is to share information about natural resource problems, such as invasive species, and effective ways to treat them, without requiring the participants to work together. The group gives members a place to find common problems with other agencies and then each agency or participant can conduct its work and monitor results accordingly.
Finally, the Cooperative Sagebrush Initiative and the Steens Mountain Advisory Council do not conduct any monitoring because the groups are just beginning projects that warrant monitoring. The Cooperative Sagebrush Initiative recognizes the need for monitoring and has considered including the cost of monitoring in each project to ensure that it is conducted, but the group has not yet conducted any projects, nor have they conducted pilot projects to ensure that they can correctly measure the benefits achieved by restoration projects. At Steens Mountain, BLM has drafted an overall monitoring plan for the Steens Mountain area that may serve to monitor work accomplished. However, BLM has not yet conducted some of the key work identified as needed by the Advisory Council because the agency is still conducting studies to determine how to best clear juniper in wilderness areas and wilderness study areas because mechanical tools— the method that has been proven effective for removing large juniper trees—cannot be used to cut down trees prior to burning.
Cooperative Conservation Policies and Actions Address Some of the Challenges Faced by Federal Agencies Participating in Collaborative Efforts, but Opportunities Exist for Further Action
Federal land and resource management agencies face several challenges to participating in collaborative resource management efforts, according to the experts, federal officials, and participants in collaborative efforts we interviewed. Key challenges that the agencies face include improving federal employees’ collaborative skills and working within the framework of existing laws and policies. The 2004 Executive Order and 2005 White House Conference on Cooperative Conservation set in motion an interagency initiative, including a senior policy group, an executive task force, and working groups, to develop policies and take actions that support collaborative efforts and partnerships. The policies and actions taken as part of the initiative have made progress in addressing the challenges agencies face. However, additional opportunities exist to develop tools, examples, and guidance that would strengthen federal participation in collaborative efforts and better structure and direct the Cooperative Conservation initiative to achieve its vision.
Federal Land and Resource Management Agencies Face Several Challenges to Their Participation in Collaborative Resource Management Efforts
As the federal land and resource management agencies work to collaborate with state, local, private, and tribal entities, they face several challenges. The key challenges identified by experts, federal officials, and participants in collaborative efforts we interviewed include (1) improving federal employees’ collaborative skills; (2) determining whether to participate in a particular collaborative effort; (3) sustaining federal employees’ participation over time; (4) measuring participation and monitoring results to ensure accountability; (5) sharing agency and group experiences with collaboration; and (6) working within the framework of federal statutes and agency policies to support collaboration.
Improving Federal Employees’ Collaborative Skills
The first challenge agencies face involves improving their employees’ skills in collaboration, as well as increasing their use. Such skills include improving communication, identifying and involving relevant stakeholders, conducting meetings, resolving disputes, and sharing technical information and making it accessible. Federal participants and others we interviewed indicated that federal employees are often technical experts and improving their collaborative skills may enable them to work more effectively with a collaborative group. They indicated that such skills are important to work effectively with neighboring landowners and community members who are interested in the projects and lands. Many participants emphasized that hiring new people with collaborative skills is one way to improve the level of collaboration by federal agencies and also said that training in collaboration for employees is important to improve skills. Some federal agency officials said that hands-on training in collaborative efforts, involving participants from other groups, is most helpful.
Furthermore, to encourage the use of collaboration by federal employees, several participants we interviewed said that management should support field staff in their collaborative efforts. For example, one participant stated that management needs to identify those employees with collaborative skills and assign them according to these skills. Some participants said that senior employees may be better at collaboration because they have developed a relationship with the group or are more comfortable in interpreting laws and policy to apply in specific situations that might arise. Others said that new employees have enthusiasm and only need to be shown how they can best work with groups. Several participants said that federal agencies need to allow their staff to become acquainted with a community to work better with local groups, and others said that providing flexibility for the employees to work with the groups is needed. Finally, one participant we interviewed said that collaborative efforts will fail if federal management officials reverse the decisions made by the federal representatives working with a collaborative group because the group will no longer trust the federal agencies to do what they have agreed on.
Determining Whether to Participate in a Particular Collaborative Effort
A second challenge agencies face in working with collaborative groups is determining whether or not to participate in a particular group. Collaborative efforts are commonly started by concerned citizens interested in the management of their public lands and, as a result, the federal agencies can choose whether to be involved and what role to play. If they make an uninformed choice, they risk becoming involved in a group that might take great effort and expend considerable staff resources with few results. Various external factors affect a collaborative group’s ability to cooperate and succeed, including a community’s collaborative capacity and the amount of controversy involved. If federal agencies do not understand these contributing factors, as well as the nature of the controversy related to a problem, federal staff may become involved in a collaborative effort that has little chance of working, potentially leading to increased conflict and costs.
Part of determining whether to be involved is what role the agencies can play. Participants we interviewed indicated that it is important for federal agencies to be involved in collaborative efforts because they are such large landowners, and, in many areas, natural resource problems cross their boundaries onto other lands. However, several participants—including federal agency officials—indicated that the agencies should “lead from behind,” letting the group take a lead in determining what work can be done. One participant said that by doing this, the community works out their issues and comes to a common understanding among themselves— without the agency staff brokering the discussion. In such cases, the agencies can help the groups by providing planning assistance, technical information, funding, and even administrative support. In other cases, the federal agencies may want to use a collaborative group to provide input on a management plan or project, and in these cases, the agencies need to determine which groups to involve and what their particular natural resource management concerns are. Regardless of the federal role in collaboration, experts and participants emphasized the need for federal agencies to clarify how a group’s agreed-upon ideas could affect decisions about federal land.
Sustaining Federal Participation over Time
Once federal staff have become involved in a collaborative effort, a third challenge becomes sustaining employees’ participation over time. This is particularly important because of limited resources available in the field offices and the staff’s limited ability to participate while also conducting their work for the agency. Experts and participants we interviewed said that, to be effective, federal participation should be consistent and ongoing throughout the collaboration, which can be for many years. For example, participants of the Blackfoot Challenge and the Malpai Borderlands Group indicated that their groups had benefited from agency staff acting as liaisons to the groups for several years. These groups were highly organized in their efforts and worked with agency officials to create these relationships. However, at many of the field offices we visited, federal agencies were experiencing staffing limitations that made their work with existing collaborative efforts more difficult and limited. In particular, the federal agencies’ field offices had experienced recent downsizing in the last several years and were one or two people below their normal staffing levels. As a result, the remaining staff members were spread thinly across existing programs to accomplish their work and achieve targets set by the agencies. According to the officials, these federal employees sometimes continued to participate in collaborative efforts but devoted less time and attention to them. For example, in North Carolina, federal officials for the National Park Service, U.S. Fish and Wildlife Service refuge, and Forest Service had been involved in the Onslow Bight Forum efforts to map key habitat, but as their biologists left the agencies, the agencies became less involved and attended fewer meetings.
Another issue related to staffing and federal agency support of collaborative efforts is the agencies’ practice of transferring people frequently from one field location to another. Participants said that longevity and a “sense of place”—or commitment to an area—is important for collaborating with groups whose participants may have been in an area for generations. A few participants thought that changing staff helped to bring in new people with energy and new ideas, but, according to several other participants, moving staff frequently creates a gap in the support for a group, which may hinder progress if a federal participant for a project moves at the wrong time. Some participants thought that the transition between outgoing and new federal staff could be eased by the outgoing staff member writing a memo to describe all the relevant details of the group, its members, its issues, and its projects, among other things, but others thought that it would be better to rely on the other staff in the office or group members for knowledge about the group, community, and other factors that would affect the agency’s participation.
Measuring Participation and Monitoring Results to Ensure Accountability
Once a collaborative effort has begun, an important challenge faced by federal agencies and the members of the group is measuring participation and monitoring the results of the efforts. Measurement and monitoring allow members, both federal and nonfederal, to be accountable to each other and to the public. In the case of the federal agencies, measuring participation and monitoring results help show how an agency’s participation in a group has helped to achieve some important resource management goal for the agency. According to federal officials we interviewed, agencies will be involved in collaborative efforts to the extent that the group can help them achieve federal land management goals and targets for work they are required to do. However, according to experts, federal officials, and participants, it is difficult to measure the results of collaboration because there is no direct measure or “widget” produced from participating or collaboration. For example, according to one participant, counting the number of meetings held does not measure collaboration, and, in fact, the number of meetings needed for a well-run group may decrease over time. Participants also said that it may take a few years to build a group and relationships before any work is accomplished, which may not fit with agency performance targets that are set annually.
Moreover, experts said that monitoring the natural resources results of collaborative management is also difficult because of the long-term nature of ecological change. For example, it can take several years before the results of a management project can be seen or measured; at the same time, natural fluctuation in drought, vegetation, and species can mask the effects of management actions. To counter these difficulties, according to some participants we interviewed, groups need to have an overall plan for the improvements in natural resources they are working to achieve and monitor according to those goals. Even then, as the examples we studied show, collaborative groups have a difficult time monitoring because of the time and cost involved.
Sharing Agency and Group Experiences with Collaboration
A fifth challenge that the federal agencies face in participating in collaborative efforts involves sharing agency and group experiences with collaboration. By their nature, collaborative groups are decentralized and localized, with their members focused on the group’s management plans and activities. According to experts and participants, these groups are each unique in their makeup, organization, circumstances, and abilities, yet can experience similar problems working together and with federal agencies. Some participants who had been involved in the White House Conference on Cooperative Conservation and other conferences stated that such forums are useful for giving groups the opportunity to share practical experiences of working together and with federal agencies. The types of lessons include the fact that groups can benefit from paid staff, even part- time, or a director to keep the group organized between meetings.
Working within the Framework of Federal Statutes and Agency Policies to Support Collaboration
Finally, agencies face the challenge of collaborating within the existing framework of federal statutes and agency policies that establish a management culture within each agency. In addition to the framework of natural resources and environmental laws and policies described above, agencies have a set of laws and policies for working with nonfederal entities or groups, including the Federal Advisory Committee Act, policies on ethics related to working with groups, and financial assistance requirements. Some experts and participants in collaborative groups identified aspects of federal laws and agency policies as being inconsistent with collaboration. However, aspects of the policies reflect processes established to support good government practices such as transparency and accountability. The federal agencies have not, in all cases, evaluated the laws and policies involved to determine how best to balance collaboration with the need to maintain good government practices. A short description of these laws and policies follows.
Federal Advisory Committee Act: Some experts and collaborative groups assert that the Federal Advisory Committee Act inhibits collaborative management by imposing several requirements on interaction between federal and nonfederal participants. For example, the act requires that all committees have a charter, and that each charter contain specific information, including the committee’s scope and objectives, a description of duties, the period of time necessary to carry out its purposes, the estimated operating costs, and the number and frequency of meetings. The act generally requires that agencies announce committee meetings ahead of time and give notice to interested parties about such meetings. With some exceptions, the meetings are to be open to the public, and agencies are to prepare meeting minutes and make them available to interested parties. By making the process bureaucratic, some experts and others say that the act limits groups’ abilities to work together spontaneously to solve problems or get work done. USDA officials indicated that they have a budget limit on what they can spend on groups working under the act. Some participants of collaborative groups we interviewed said that the fact that the act’s requirements do not apply to privately led efforts is one reason for communities to lead collaborative efforts with assistance from federal agencies. Other participants said that the act’s requirements caused their groups to focus their goals solely on information sharing, because the group’s purpose would not be to offer advice regarding agency decisions, and therefore the group would not be subject to the act.
Ethics rule: USDA and Interior implement federal ethics’ rules on federal employees’ participation on the board of directors of an outside organization differently, resulting in their staff members participating in different capacities on a group’s nonprofit board. The ethics rules generally prevent a federal employee from serving as a board member while serving in an official capacity for the federal agency because of concerns over conflicts of interest. Waivers may be granted under limited circumstances; however, according to USDA and Interior officials, USDA rarely grants waivers, while Interior has granted some waivers. As a result of different implementation of the rule, in the Blackfoot Challenge case, a Forest Service member serves as a nonvoting board member, while BLM and the U.S. Fish and Wildlife Service members serve as voting members. Several of the participants of the group expressed confusion and some distrust over the different federal agency interpretations, saying that they raised some questions about the Forest Service’s commitment to participate. Other groups that form nonprofit boards may face this same inconsistency.
Financial requirements: Some groups receive federal grants or cooperative agreements that enable them to conduct activities that provide for a public purpose. Nonfederal participants in collaborative efforts identified federal agency financial procedures for these grants and cooperative agreements that make it difficult for them to work collaboratively with the agencies. For example, some grants require that any interest earned be returned to the federal government, others require the group to raise funds to meet a share of costs, or others do not allow the group to be paid up front, which is difficult for small organizations without much funding. In addition, several participants indicated that it is difficult to pull together funding over the long term from the numerous sources available—foundations, agencies, and fundraising activities—and that this is an ongoing struggle for groups. However, because federal agencies need to seek competing offers or applications for many types of grants and agreements, the agencies may not be able to provide stable funding to groups for very long. For example, the participants of one group we interviewed recently learned that they would have to compete with others to renew their agreement, even though the group has ongoing management plans and projects with BLM and other agencies to provide long-term vegetation management across the agencies’ lands. The result of this action is that the group was uncertain if they would be able to carry out these long-term plans and projects because they rely on this stream of funding to pay for part-time staff to organize the group and provide support for planning projects and reporting the results.
One specific type of funding agreement that can help make collaboration work, identified by some federal officials we interviewed, is the watershed restoration and enhancement agreement. Under this authority the Forest Service can use appropriated funds to enter into agreements with other federal agencies; states, tribal, and local governments; or private entities to protect, restore, and enhance fish and wildlife habitat and other resources on public or private land. However, the authority that allows this for the Forest Service—the Wyden Amendment—is set to expire in 2011. In addition, Interior officials stated that they do not have general authority to use their funds to restore or enhance resources on nonfederal land; however, they indicated that BLM, the U.S. Fish and Wildlife Service, and the National Park Service can fund projects on nonfederal land related to reducing the risk of damage from wildland fire. The agency officials that discussed these funding sources said that the ability to spend some of their funds on nonfederal lands enhances—or would enhance—their ability to work with partners in the community.
Endangered Species Act requirements for listing species: Participants in the Cooperative Sagebrush Initiative identified several aspects of the Endangered Species Act that make collaboration difficult for them. They have identified and proposed areas where they believe Endangered Species Act policies could be made more consistent with their collaborative effort. In particular, the group is planning to conduct restoration projects for sagebrush habitat, but, according to one participant, these restoration projects are scrutinized as much as a destructive project is in terms of the effect the project may have on a potentially endangered species such as the sage grouse. The group has proposed to Interior that the policy for listing species as endangered—the Policy for Evaluating Conservation Efforts—would apply to their restoration actions because such actions might make listing unnecessary, or listing requirements might be less restrictive. This policy identifies criteria the U.S. Fish and Wildlife Service will use in determining whether formalized conservation efforts that have yet to be implemented or to show effectiveness contribute to making listing a species as threatened or endangered unnecessary. The group has also proposed other changes to the Endangered Species Act regulations and policies that they say would support collaboration and their particular effort. For example, under current policies, the U.S. Fish and Wildlife Service treats the two types of species (threatened and endangered) in the same manner with regard to prohibitions on the taking of a species. The group has proposed that Interior relax the prohibition on the taking of threatened species, arguing that the Endangered Species Act allows for threatened species to be treated in a different manner from endangered species.
National Environmental Policy Act: Experts and participants have stated that NEPA hinders collaboration by essentially duplicating the public participation that occurs through collaborative efforts. Collaborative groups may develop a plan or project that they would prefer. For federal projects having a significant environmental effect, NEPA requires the development and analysis of a reasonable range of alternative actions, including the agency’s preferred alternative action, in an environmental impact statement. It also requires public participation in the development of the environmental impact statement. Because collaborative groups often include many of those interested in the natural resources or management being conducted, several participants said that the collaborative group provides the agencies with its preferred alternative and a good sense of the public’s opinion of the project. They believe, for this reason, that NEPA requirements are redundant in these cases.
Cooperative Conservation Policies and Actions Have Made Progress in Addressing the Challenges Agencies Face, but Additional Opportunities Exist to Strengthen Federal Participation in Collaborative Efforts
Building on the agencies’ earlier efforts to develop their partnership programs and abilities to work collaboratively, the 2004 Executive Order and 2005 White House Conference heightened attention to partnerships and collaboration across the federal government. After the White House Conference, a report entitled Supplemental Analysis of Day Two Facilitated Discussion Sessions (Day 2 report) was written summarizing the comments of numerous participants in collaborative groups and highlighting actions that the federal agencies could take to improve cooperation and partnerships. In response to the Day 2 report, a senior policy team—composed of the Chairman of CEQ, Director of OMB, and selected Deputy Secretaries of the departments—identified issues to be further addressed by an executive task force and working groups. The task force formed—or incorporated—working groups to address several overall themes identified in the Day 2 report: personnel competencies, training and development, legal authorities for cooperative conservation, conflict resolution, the Federal Advisory Committee Act, education, federal financial assistance, measuring and monitoring, volunteers, engaging the public, and Web site development. Table 3 shows the challenges we identified with input from experts, federal officials, and participants in our review; proposed actions from the Day 2 report that are responsive to the challenges; and the policies or actions taken by the task force working groups that address the challenge.
As shown in table 3, several actions have been taken, including development of policies, that have resulted in progress toward addressing several of the challenges agencies face participating in collaborative efforts, but other opportunities exist to take actions that further address the challenges.
The challenge of improving federal employees’ collaborative skills is being addressed by the personnel competencies working group. Through 2007, with the input of the Office of Personnel Management, this working group developed a set of collaborative behaviors for federal employees that some of the agencies have made part of their strategies to hire and train employees to improve their collaborative skills. According to Interior and Forest Service officials, senior executive service managers in the agencies are already rated on their ability to collaborate and collaborative behaviors. Interior agencies are now considering how to incorporate these into personnel rating systems for other federal officials and staff, and the Forest Service has revised its employee rating system and incorporated the collaborative competencies into the new system for both managers and employees. In addition, the training and development working group identified and published appropriate training courses offered by each of the land and resource management agencies. For example, BLM and the Forest Service offer a series of courses that include collaborative behavior, and BLM offers one course that visits a community and trains community and agency members on how to work as a group. According to a member of the working group, the idea of an experience-based training, in which staff would visit and work with an experienced group, has been developed but none of the agencies have adopted this at the time of our review. Furthermore, in 2005, CEQ and OMB issued joint guidance, developed by a broad interagency task force convened by the U.S. Institute for Environmental Conflict Resolution, to encourage agencies to use collaborative problem-solving and elaborate on the principles of collaboration. According to officials, the institute also offers a series of courses on collaboration that federal agencies can take.
The twin challenges of determining (1) whether to participate in a particular collaborative effort and (2) how to sustain federal employees’ participation over time have not been addressed by policies or actions of the task force or its working groups. However, BLM published a collaborative guidebook in 2007 that includes a discussion of factors to consider in determining whether to collaborate. Similarly, the Forest Service’s Web site links to various partnership assessment tools created by the Natural Resources Conservation Service and private companies. In addition, the Forest Service developed an assessment document that guides an office through an analysis of its workload and how much time it can devote to a collaborative effort. The results of this analysis can help determine whether an office will be able to sustain their participation in a group. Finally, the Forest Service has adopted a tool developed with the Collaborative Action Team, called a transition memo, which allows an employee transferring locations to leave detailed documentation about the community, groups, leaders, and other information for the person coming into the position. While these separate tools are available to the individual agency that developed them, they have not been shared or adopted more broadly among the federal agencies to help them in making decisions whether and how much to participate in particular collaborative efforts. Without tools to assess these aspects of collaboration, particularly as the agencies increase their ability and efforts to participate in collaborative efforts, agencies may be more likely to get involved in unsuccessful efforts.
The challenge of measuring participation and monitoring results of collaborative efforts, as shown in table 3, has been partly addressed by the measuring and monitoring working group. Through September 2007, the working group gathered, reviewed, and analyzed tools that measure and monitor how cooperative conservation activities help achieve environmental protection and natural resource management goals. For example, the working group discussed different means to demonstrate the leveraging power of partnerships and collaboration. Some of these tools can also help people engaged in partnerships and collaborative efforts monitor how they are doing and improve their efforts during the process. In addition, the working group identified a few resources that discuss, in general, monitoring of natural resource conditions. In October 2007, the group posted a variety of tools on the Cooperative Conservation Web site, which is an initial step to address this challenge. However, actions that would more fully address natural resource monitoring—the Day 2 report indicated that project monitoring protocols would be useful—have not been taken by the task force or working groups. CEQ officials indicated that an ongoing effort on key national indicators might help to address this aspect of the challenge. However, until guidance or protocols on natural resource monitoring for collaborative groups is provided, federal agencies and groups will be unable to track and relate their progress to Congress, the communities, or other interested parties.
The challenge of sharing experiences among agencies and groups has been partly addressed through the actions of the outreach working group, which has developed an official Web site and examples of collaborative experiences. In addition, in 2007, the Collaborative Action Team started WestCAN, facilitating the development of a network of people familiar with cooperative conservation. Other actions identified in the Day 2 report that could be taken and would address this challenge include organizing and supporting annual conservation conferences. As of October 2007, the agencies had held nationwide listening sessions, but had not held or proposed any further conferences on cooperative conservation either nationally or regionally. Federal officials indicated that such meetings can be expensive and time-consuming to organize and that they would like others to take the lead in organizing them. They also indicated that it is important to have clear goals and objectives for such meetings and that the meetings should lead progressively to achieving these goals and objectives. Individual agencies have held conferences in the past; they also meet regularly with nonprofits interested in the collaborative approach through the Collaborative Action Team. However, these meetings and tools may not provide the opportunity for the different agencies and groups to meet and share information and possible solutions, or the face-to-face experiences that participants in the conference found valuable. Without such meetings, it would be difficult for the groups to be able to meet periodically to generate ideas and share information or develop a cooperative conservation network.
The challenge of working within the agencies’ legal framework is being addressed, as shown in table 3, by several actions. At a broad level, the legal authorities working group worked with the agencies to publish a compendium, for each department, of the authorities that allow and support collaboration, which will help agency staff who are working with collaborative groups to understand the requirements that they face. More specifically, the status of actions to resolve perceived inconsistencies between the authorities and collaboration include the following: The Federal Advisory Committee Act working group is streamlining requirements for federal advisory groups, which is one of the primary pieces of legislation that agencies and participants in collaborative efforts have identified as inconsistent with collaboration. According to CEQ officials, the Federal Advisory Committee Act team has determined that flexibility exists within the current law and policy for groups and is developing the best way to share this information with agency staff and group participants, such as training.
A legal analysis of the incentives and disincentives affecting collaborative groups—particularly those associated with the Endangered Species Act and NEPA—was an action proposed by the Day 2 report that has not been addressed by the task force or working groups. In addition, USDA’s and Interior’s different implementation of ethics rules resulted in inconsistent decisions regarding federal employees serving on nonprofit boards. While no specific actions have been taken by the task force, Interior is evaluating regulatory and policy changes to the Endangered Species Act in response to the concerns raised during listening sessions held in 2006, and by the Cooperative Sagebrush Initiative. As of October 2007, Interior had not proposed any regulatory or policy changes to the Endangered Species Act. Also, in October 2007, CEQ issued guidance on collaboration within the NEPA process that discusses using a collaborative group’s option as the preferred alternative in a NEPA analysis. The guidance resulted from the recommendation of a federal task force in 2003 and followed the issuance in 2005 of a report by the National Environmental Conflict Resolution Advisory Committee concluding that one way to achieve NEPA goals is for the federal agencies to use environmental conflict resolution practices, including collaboration. However, no evaluation or action has occurred as of October 2007 to resolve the inconsistent application by USDA and Interior of federal ethics rules.
While these actions are addressing the Federal Advisory Committee Act, Endangered Species Act, and NEPA, the federal financial assistance working group did not complete its task of evaluating the extent to which cooperative funding authorities could be enhanced to better assist collaboration. Because of the number and complexity of funding authorities, the working group determined that each department should undertake an analysis of its own financial assistance to collaborative groups. Through December 2007, Interior was considering its use of cooperative agreements and whether they can be used to support partners to conduct work that is mutually beneficial to the group and Interior agencies. In such situations, both the partners and the federal agencies bring resources to the table and both sides benefit from the work jointly conducted. However, an Interior official noted that laws related to federal contracting may limit the agencies’ ability to use these agreements in the absence of specific statutory authority to do so. In September 2007, an Interior official stated that the type of authority needed is reflected in authorities provided to the Natural Resources Conservation Service and other agencies that allow them to work with partners on mutually beneficial activities. Through September 2007, the Forest Service had authority to use cooperative agreements with private and public organizations, including nonprofit groups, to perform forestry protection activities and other types of cooperative projects that provide mutual benefits other than monetary considerations to both parties. In addition, the agency has authority to work on mutually beneficial restoration projects under the Watershed Enhancement and Restoration Act or Wyden authority, but this authority is not permanent, extending only to 2011.
In late December 2007, Congress passed, and the President signed, the Consolidated Appropriations Act for fiscal year 2008, which included two provisions related to the agencies and cooperative agreements. The first provision authorizes Interior to enter into cooperative agreements with state or local governments, or not-for-profit organizations, if the agreement will (1) serve a mutual interest of the parties to the agreement in carrying out Interior’s programs and (2) all parties will contribute resources. The second provision extended through 2010 the Forest Service’s authority to enter into cooperative agreements with state, local, and nonprofit groups if the agreement serves the mutual benefit (other than monetary consideration) of the parties carrying out programs administered by the Forest Services and all parties contribute resources. However, the overall problem of facilitating collaborative partnership projects for collaborative groups and partners—in terms of interest, cost share, and other administrative matters—remains. For this reason, an overall evaluation of federal funding assistance and tools available for collaborative groups could help to identify the situations across agencies that hinder collaboration and the potential legal and policy changes that could be made.
Overall, the working groups and agencies have made some progress in developing policies and taking actions that address the challenges they face in working with collaborative groups. However, these challenges will not be fully addressed or solved in the short term. As indicated in the Day 2 report, the actions to be taken by federal agencies would require a sustained effort and a senior policy team with an overall strategy to sequence the many actions that need to be taken by multiple different federal agencies. While the Cooperative Conservation initiative is being coordinated by a task force and working groups, both are temporary, formed by federal agency personnel interested in the cooperative approach but who, for the most part, have other full-time responsibilities. Because of this, the structure and direction—which includes goals, actions, time frames, and responsibilities—of the initiative as it moves forward are uncertain. According to CEQ and agency officials, the task force working groups were organized to propose actions that could be taken in the short term; CEQ officials said that the senior policy team would meet to assess the status of actions and progress toward the vision laid out for the Cooperative Conservation initiative. As of December 2007, the policy team had not met, but CEQ officials expected they would meet after the issuance of the second annual report on the implementation of the Cooperative Conservation initiative. Currently, the task force is developing the report, which was expected to be issued in January 2008.
Conclusions
Collaborative resource management offers federal land and resource management agencies a promising tool with which to approach the ongoing and potential conflicts that arise in managing the nation’s land and resources. Compared with the alternatives—such as litigation or individual landowners making independent, potentially conflicting decisions about their separate parcels of land—collaboration provides groups a way to integrate multiple interests and achieve common goals. To date, federal land and resource management agencies have had some success in working with collaborative efforts. Moreover, the policies put in place through the Cooperative Conservation initiative move the federal government and agencies forward in supporting collaborative resource management efforts. However, based on the challenges that the agencies face in working with collaborative efforts, additional opportunities exist to enhance and effectively manage federal agencies’ participation in and support of ongoing and future collaborative efforts. Specifically, because federal agencies have limited resources and time, yet at the same time have multiple opportunities to collaborate, they need to be judicious in their decisions about collaborating with particular efforts and could benefit from guidance on how this can be done. This would involve dissemination of tools that already exist for field offices to assess a community’s capacity for collaborating, and the federal ability to participate. In addition, because the agencies are accountable to Congress and the public for achieving their land and resource management goals, it is important for them to be able to demonstrate the results that have been accomplished through collaborative efforts. This means that agencies and groups should be able to measure participation and monitor their progress, including monitoring the broader landscape-level effects that result from their collaborative efforts and projects.
Furthermore, collaborative resource management is just beginning to emerge as one approach for federal land and resource agencies to work with local groups in ways that can reduce conflict and improve resources.
In addition to developing capability among agency personnel, federal agency support for this approach entails helping to create networks, identifying best practices, and generating new ideas. These outcomes can be achieved though facilitating the exchange of information and lessons learned among collaborative groups, as was done at the White House Conference. Federal support also involves an ongoing commitment to identify practicable legal and policy changes that could enhance collaboration. In particular, CEQ, OMB, and other federal agencies can evaluate and identify possible changes to federal financial assistance authorities and policies that make it difficult to work with partners. Also, USDA and Interior can identify a way to achieve more consistent results in determining participation by USDA and Interior employees on nonprofit boards. In the future, as the agencies participate in different collaborative efforts, additional situations may arise in which agencies need to seek ways to implement laws or policies in a manner that enhances collaboration.
Finally, because collaborative resource management involves multiple departments and agencies facing common challenges and will take a sustained effort to implement, it is important that the effort has structure and long-term direction to ensure that it is ongoing and completed. Structure could be provided by continuing such an interagency effort as the Cooperative Conservation task force and its working groups. One way this could be accomplished would be by developing a memorandum of understanding between participating agencies. Long-term direction to address common challenges could be provided by the memorandum of understanding, or through another organizational document or plan that will steer the task force, working groups, and agencies toward realizing the vision of the initiative.
Recommendations for Executive Action
To enhance the federal government’s support of and participation in collaborative resource management efforts, we recommend that the Chairman of CEQ, working with the Secretaries of Agriculture and the Interior, direct the interagency task force to take the following actions: 1. Disseminate, more widely, tools for the agencies to use in assessing and determining if, when, and how to participate in a particular collaborative effort and how to sustain their participation over time.
2.
Identify examples of groups that have conducted natural resource monitoring, including at the landscape level, and develop and disseminate guidance or protocols for others to use in setting up such monitoring efforts. 3. Hold periodic national or regional meetings and conferences to bring groups together to share collaborative experiences, identify further challenges, and learn from the lessons of other collaborative groups.
4.
Identify and evaluate, with input from OMB, legal and policy changes concerning federal financial assistance that would enhance collaborative efforts.
5.
Identify goals, actions, responsible work groups and agencies, and time frames for carrying out the actions needed to implement the Cooperative Conservation initiative, including collaborative resource management, and document these through a written plan, memorandum of understanding, or other appropriate means.
Furthermore, to ensure that federal agencies can work well with collaborative groups, we recommend that the Secretaries of the Interior and Agriculture take action to develop a joint policy to ensure consistent implementation of ethics rules governing federal employee participation on nonprofit boards that represent collaborative groups.
Agency Comments and Our Evaluation
We provided CEQ, Interior, and USDA with a draft of this report for review and comment. Interior concurred with the conclusions and five of the six recommendations in the report, providing written comments that included additional information describing actions the department and its agencies are taking that they believe are responsive to our recommendations, some of which have been finalized since they received the draft report. We made changes to the report as appropriate to include this information, but underscore the fact that the recommendations apply more broadly to the federal agencies implementing the Cooperative Conservation initiative (see app. III). USDA provided oral comments also concurring with the conclusions and five of the six recommendations in the report. CEQ did not provide comments on the report.
The departments neither agreed nor disagreed with our sixth recommendation that the Secretaries take action to develop a joint policy to ensure consistent implementation of ethics rules governing federal employee participation on nonprofit boards that represent collaborative groups. USDA’s Office of General Counsel, however, expressed concerns that such a policy might be desirable, but not feasible. The office said that the two departments may provide waivers based on each agency’s interests and distinct relationship with the collaborative group, and therefore it is not practicable to have a joint policy in advance of a particular request and consultation may not make the waivers more uniform. While we understand these concerns, we believe that such a consultation would have either resulted in a consistent recommendation in the case of the Blackfoot Challenge, or if it did not, would have at least provided a transparent response to the group and field offices seeking the waivers. We continue to believe that the departments should make a good faith effort to develop and implement a process that would be more transparent to the groups with which they work. Therefore, we did not change our recommendation.
As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretaries of the Interior, Agriculture, and Defense, Chairman of CEQ, and Director of OMB, as well as other interested parties. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff has any questions regarding this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors are listed in appendix IV.
Objectives, Scope, and Methodology
The objectives for this study were to determine (1) experts’ views of collaborative resource management as an approach for addressing complex natural resource management problems; (2) the extent to which selected collaborative resource management efforts have addressed land use conflicts and improved natural resource conditions; and (3) what challenges, if any, federal land and resource management agencies face in participating in collaborative resource management efforts and how the Cooperative Conservation initiative has addressed the challenges.
For the first objective, to determine experts’ views of collaborative resource management as an approach for addressing natural resource problems, we examined the academic literature related to the topic. To identify relevant articles in the literature, we first interviewed experts who have studied collaborative resource management. Following GAO’s methodology for identifying experts, we started with knowledgeable individuals and agency personnel and asked them for referrals to experts. In an iterative process, we contacted these experts and asked them for nominations of other knowledgeable individuals. We interviewed over 20 individuals who could be considered experts, based on the nominations of others in the field. We asked these experts for references to articles on the collaborative resource management approach. We also identified articles through a search of four academic databases including Agricola, a database of articles relating to aspects of agriculture, forestry, and animal science; ProQuest Science Journals, a database of science and technology journals that includes literature on biology and earth science; ECO, a database of scholarly journals; and BasicBIOSIS, a database of biology and other life science-related journals. We searched these databases using the terms “ecosystem management policy” and “collaborative resource management policy,” which produced over 950 articles in the four databases. Abstracts of these articles were reviewed and only those articles appropriate for our work were retained for a literature review. This process yielded over 130 articles (the full article was used, not just the abstract).
To perform the literature review, one of two analysts (A, B) read and reviewed each of the articles and indicated whether or not the contents included themes related to our objectives, that is, the common practices, benefits, limitations, and critiques of collaboration. The analysts summarized information from the articles that was relevant to these themes and recorded it as statements in a database. To verify that the two analysts were extracting similar information from the articles, the analysts randomly selected 10 percent (13) of the total articles. For each of these 13 articles, if Analyst A had originally summarized and categorized relevant information in the article, then Analyst B independently performed the same tasks. Similarly, Analyst A reviewed the articles originally reviewed by Analyst B. For each article, the verification work was compared with the original and it was determined whether both analysts agreed or disagreed on the presence of information in the article related to each theme. This analysis indicated that the two analysts were extracting comparable information from the articles.
A content analysis was then performed on the statements. Each analyst classified the statements from the articles read as a benefit, limitation, or critique associated with collaborative resource management. The analysts then exchanged data and examined the other analyst’s categorizations to determine whether there was agreement on classifying each statement from the literature review into the benefits, limitations, and critiques categories. The two analysts reviewed the statements they had placed into these categories and either concurred with the classification or noted the basis of disagreement. For items where there was disagreement, the disagreement was resolved so that agreement was 100 percent.
Once the analysts had established a unified set of statements under each category—benefits, limitations, and critiques—each analyst independently grouped the statements under each category into similar components. The analysts’ lists of components for each category were compared, discussed, and merged into one set. The components we agreed upon for each category and a description of them are noted in table 4.
After developing the categories and components, we independently assigned each of the statements to one of the components. After the statements were independently assigned a component, the analysts discussed every statement for which they had assigned different components and reached agreement on the category for each of the statements. As a result, the analysts attained 100 percent agreement on the assignment of statements to components. Table 5 reports the number of statements that were assigned to each component.
The literature review was also used to identify what the experts viewed as common practices of successful collaborative groups. Such practices were described in 15 of the articles from the literature review and one GAO report that described practices to sustain collaborative efforts among federal agencies. To develop a comprehensive list to summarize the practices described in all of these sources, two analysts independently generated lists based on commonalities of those described in the literature. A third analyst reconciled the two lists and all three analysts discussed the results and agreed on the following final list of practices: Seek inclusive representation.
Develop collaborative processes.
Pursue flexibility, openness, and respect.
Establish leadership.
Identify or develop a common goal.
Develop a process for obtaining information.
Leverage available resources.
Provide incentives.
Monitor results for accountability.
For the second objective, to determine the extent to which selected efforts have addressed land use conflicts and improved natural resource conditions, we identified seven examples involving collaborative resource management efforts. The examples were identified using referrals made by experts and citations in the literature. The seven examples we chose to study were judgmentally selected based on several criteria, as shown in table 6, designed to capture groups with (1) a significant amount of federal land involved, (2) participation of multiple stakeholders, (3) locations across the United States, and (4) different types of groups, from nonprofit groups, to an advisory council, to loosely organized information-sharing groups. Although there are many collaborative efforts dealing with water issues, we confined our examples to land management efforts to limit the scope of our work. The examples we selected included both new and experienced groups, made up of multiple participants including federal agencies, from rural areas. The groups chosen and the states in which they are located are shown in table 6.
To gather information on each group’s organization, efforts, and results, we conducted field visits and detailed, semistructured interviews with several key participants of the group, and in some cases, interested parties who were not participating in the group. We obtained related documentation of each group’s activities and results and in some instances observed the groups’ projects in the field. We did not independently verify data related to the groups’ results. In analyzing the groups, we considered conflicts to exist if two or more participants had different interests to achieve and considered conflicts to be reduced or averted if a common solution or interest was identified.
For the third objective, we identified challenges associated with the collaborative resource management approach described by the experts in the literature and by members of the collaborative resource management groups we studied. The components of the challenges described by the experts in the literature were identified using the literature review and content analysis that is explained above. Table 7 describes the challenges.
As with the benefits, limitations, and critiques, each statement identified as a challenge in the literature review was assigned to a component. The number of statements that were assigned to each challenge component is listed in table 8.
An additional challenge related to sharing experiences with collaboration was identified through semistructured interviews with collaborative group participants. Many participants we interviewed mentioned that aspects of their collaborative group were unique, yet the groups share similar problems and could benefit from sharing experiences with other groups. This challenge reflects the personal experiences of participants working within a specific collaborative group.
To identify how efforts under the Cooperative Conservation initiative address challenges associated with federal land and resource management agencies’ participation in collaborative resource management, we interviewed federal officials from organizations responsible for implementing the Cooperative Conservation initiative, including the Council on Environmental Quality, Office of Management and Budget, Department of the Interior, and Department of Agriculture. In addition, we reviewed Cooperative Conservation documents and agency guidance related to partnerships and Cooperative Conservation.
We conducted this performance audit from October 2006 through February 2008, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
Collaborative Resource Management Groups and Successful Collaboration Practices
To understand the purpose and nature of collaborative resource management groups, we selected seven such groups for detailed study. We met with participants of these groups individually or, at times, together to discuss the natural resource problems and conflicts the group was managing and the practices used by the group that enabled them to successfully alleviate conflict and improve resource conditions. To various degrees, the seven groups we studied used the collaborative practices identified by experts that successful groups commonly use. Experts emphasized that while these practices are commonly used by successful groups, the use of these practices does not guarantee success for all groups. Collaborative groups are unique and can succeed or fail depending on the nature of the problem or conflict involved. The following describes each of the collaborative groups, the natural resource problems or conflicts they managed, and the extent to which they used collaborative practices.
Blackfoot Challenge
The Blackfoot Challenge (Challenge) is a landowner-based nonprofit group working in the 1.5-million-acre Blackfoot River watershed in Montana. Although it began much earlier, the group was officially established as a nonprofit group in the early 1990s, with a board including private landowners and federal and state agency personnel. The participants of the group sought to create an organization that could resolve natural resource issues, such as the reintroduction of threatened and endangered species and their effect on private landowner livelihoods, before they became conflicts.
Of the total acres in the watershed, about 57 percent is publicly managed by the Forest Service, Bureau of Land Management (BLM), and the state of Montana. The remaining lands in the watershed are owned by timber companies and private citizens. The area has had a long history of mining, logging, and ranching. More recently, the area has increasing numbers of people, which has increased development and recreation. The ecosystem is also home to threatened and endangered species including the bull trout, grizzly bear, and gray wolf.
Natural Resource Problems
Participants of the Challenge identified several natural resource problems and conflicts that the group has managed, and is continuing to manage, including the following: In 2000, the Challenge responded to a conflict that arose over low water flows in the Blackfoot River that threatened the survival of fish and other river species and organisms. The Challenge formed a Drought Response Committee, which has since expanded to address long-term water conservation and recreation issues. The committee met with the Big Blackfoot Chapter of Trout Unlimited, which had concerns about fish populations and habitat; Montana Department of Fish, Wildlife and Parks; and water users to develop an emergency drought plan for the river. The plan, based on the idea of “shared sacrifice,” provided more in-stream flow as water users voluntarily reduced the amount of water they withdrew, allowing more water to be left in the stream. In 2005, this plan helped save 60 cubic feet per second of water.
Riparian habitat for fish in the Blackfoot River is fragmented by culverts, roads, and other infrastructure on both public and private land that block tributaries and creeks flowing into the river. Wildlife agencies have noticed the reduction in fish populations, including the threatened bull trout. Many groups, including federal agencies, fishermen and women, and ranchers, are interested in reconnecting streams that have been blocked to provide better fishing and wildlife habitat opportunities. However, some ranchers are hesitant about making improvements or working with federal agencies. The group has worked with willing ranchers and the local chapter of Trout Unlimited to develop a plan for restoring riparian areas and tributaries across the watershed. Over time, the groups have protected and restored 38 miles on 39 tributaries and 62 miles of riparian habitat.
In 2002, the Challenge responded to concerns throughout the valley about increased grizzly bear activity by creating a Wildlife Committee to exchange information and coordinate efforts. The Blackfoot watershed is nearby three wilderness areas and is considered a prime wildlife corridor for wolves and grizzly bears, whose populations are increasing. Local landowners are concerned about increased human and livestock interaction with such species. The Challenge began a Carcass Pick-Up Program in conjunction with the Montana Department of Fish, Wildlife and Parks; the U.S. Fish and Wildlife Partners Program; local ranchers; and a waste service to remove dead livestock from ranches to deter bears from searching for such remains. Human-grizzly bear conflicts have been reduced by 91 percent from 2003 through 2006.
In 2005 and 2006, the Challenge dealt with two unique resource conflicts. In the first case, conflict arose over a housing development around one particular community in the watershed that would dramatically affect an important elk migration corridor and increase the community’s population, water use, and school enrollment. As a result, there were many different stakeholders interested in the issue. Rather than taking a position on the conflict, the Challenge has instead brought the community together with the stakeholders to find an acceptable alternative. In a second similar case, members of the Challenge did not take sides on a controversial proposed gold mine near Lincoln, Montana, in the northern part of the watershed. Instead of advocating for a particular solution, the Challenge offered to bring people together to discuss their options. In the end, according to the participants, the state passed a law against methods of mining that use cyanide to leach the gold from the rocks and the proposed mine was ultimately blocked.
Collaborative Practices
The collaborative practices used by the Challenge are described in the following sections.
Seek Inclusive Representation
The Challenge board and its working committees include a wide variety of representation. Members of the board are landowners, land managers, agencies, and others who are represented through working committees and membership. The group has tried to involve every type of stakeholder in the process to provide help or share resources. They realize, however, that some perspectives that should be included may be missing from the board, including absentee landowners who own second homes in the valley. In an effort to provide greater inclusiveness, the board has created at-large members.
As members of the Challenge, federal agency officials are members of the Executive Board and committees. Because the Challenge provides a forum for information sharing, agency officials have an opportunity to hear community concerns. It allows them to know, in an informal capacity, if local people are supportive of particular actions before making decisions.
Of equal importance, the agencies have an opportunity to communicate correct facts about their respective agencies. This helps to correct rumors and reduce doubt, uncertainty, and distrust between the community and the agencies and provides a forum for agency officials to make participants aware of their limitations early in the process. Although federal employees serve as members of the Executive Board, a nonprofit board, the Forest Service member serves as a nonvoting member, while the BLM and U.S. Fish and Wildlife Service employees serve as voting members.
Develop a Collaborative Process
The group uses an “80-20” rule, whereby the group concentrates its efforts on 80 percent of the issues it can agree upon and does not force consensus on the 20 percent that it is unable to agree upon. This strategic approach allows the group to first work on solutions to problems that are less controversial and more likely to succeed, thereby building common ground and trust among participants. The Challenge does not advocate any one position because it believes if it did, it would be unable to act as a bridge between two sides of an issue. Instead the group chooses to facilitate dialogue and information sharing. This process helps to promote community dialogue between private landowners and public agencies in an attempt to resolve issues before they become major conflicts.
Pursue Flexibility, Openness, and Respect
Members of the Challenge attributed much of their success as a group to the time they have taken to develop trust among members. Participants of the Challenge include individuals that are respectful of diverse views, committed to the effort, and are willing to negotiate and build consensus. One member described the group’s common approach as polite, thoughtful, kind, and respectful.
Find Leadership
According to participants, a collaborative group needs the right leader and the Challenge has had several committed, talented community leaders over the years. They view the right leader as someone who is a local opinion leader and who has the respect of a majority of the community. A participant described one of the reasons for the Challenge’s success as inspired leadership, which involves being able to focus the group on its common interests. The group also hired an Executive Director, which was a crucial step for the Challenge in terms of raising funds and organizing the group because it could only accomplish a limited amount on a volunteer basis.
Identify a Common Goal
Concern for maintaining a certain quality of life in the area prompted landowners, public agencies, and other community leaders to begin working together on ways to manage the watershed. The group’s mission is to “coordinate efforts that will enhance, conserve and protect the natural resources and rural lifestyles of Montana’s Blackfoot River Valley for present and future generations.” As early as the 1970s, private landowners and public agency officials worked together to resolve conflicts, or potential conflicts, among various users within the watershed. For example, in an effort to protect and restore fish and wildlife habitat along the river corridor, several public agencies, including BLM, the Forest Service, U.S. Fish and Wildlife Service, and state wildlife and parks agencies, attempted to purchase conservation easements from private landowners. The landowners made the agencies aware that they were each asking to acquire land, and the agencies and landowners started talking about their common goals. In the 1980s, a conflict over access to the river between recreationists and private riparian landowners developed. To access the river, recreationists had to trespass on private lands. In response, a local timber company joined with BLM and the Montana Department of Fish, Wildlife and Parks to allow limited access across private land to use the river if the agencies would manage the activities and effects on resources.
Develop a Process for Obtaining Information
The Challenge relies on the scientific expertise and information provided by the resource managers from the federal and state agencies. To make decisions about specific resource management problems, the group has a standard set of committees that include knowledgeable agency and community members. One committee in particular, the Drought, Water Conservation, and Recreation committee, monitors snowpack, stream flow, and drought conditions, as well as recreation use of the river. The Challenge has recently become involved in monitoring and developing water quality standards for streams in the watershed because the water quality data needed to analyze and improve conditions in the watershed were inadequate. It also works with university researchers to conduct studies.
Leverage Available Resources
In the past, the Challenge has operated on about $50,000 per year, receiving funding from private donors and foundations. The group recently received a $100,000 award for innovations in governance from the Ash Institute for Democratic Governance and Innovation at Harvard University. The group’s resources are used to leverage federal funds by coordinating private projects with federal projects. For example, as the Forest Service and BLM work to restore parts of a stream on their respective lands, the Challenge coordinates the projects and adds its own resources to conduct work on private stretches of the same stream, thereby providing greater stream restoration than if the agencies had conducted individual projects.
Provide Incentives
The Blackfoot Valley uses conservation easements as an incentive for conservation activities. Through many partners, more than 100 conservation easements on more than 90,000 acres of private lands have been purchased to keep agricultural and grasslands open and available for ranching and wildlife use. Conservation easements are being purchased and donated to the following organizations: Forest Service; U.S. Fish and Wildlife Service; Montana Fish, Wildlife and Parks; The Nature Conservancy; Montana Land Reliance; and Five Valleys Land Trust.
Monitor Results for Accountability
For the most part, the Challenge uses monitoring data that the agencies collect, although in specific cases, the group and its partners are monitoring the results of their projects. In particular, the local chapter of Trout Unlimited led the development of a process to prioritize tributaries and stretches of the river to restore and monitor results. In addition, the Montana Department of Fish, Wildlife and Parks monitors fish populations in the river, which indicates habitat improvement and water quality conditions. The Challenge recently began monitoring water quality.
Cooperative Sagebrush Initiative
The Cooperative Sagebrush Initiative (Initiative) is a partnership of landowners, communities, local working groups, conservation groups, industries, and tribal, state, and federal agencies that started in 2006 to focus on conservation of the western sagebrush landscape. The effort encompasses the sagebrush range, which spans 11 western states, and involves creating incentives for conservation through mechanisms such as a system to trade credits for conservation activities. The group incorporated into a nonprofit organization in 2007 and is still organizing and planning the effort, so it has not yet conducted conservation activities. In 2007, the group solicited proposals for projects designed to demonstrate how the work could be done and incentives could be developed and has endorsed three proposed projects that encompass over 1 million acres of sagebrush habitat in four states.
In the mid-1990s, the declining status of two sage grouse species— Gunnison sage grouse and greater sage grouse—triggered regional concern for the health of the sagebrush ecosystem. In 2000, the Gunnison sage grouse was added to the U.S. Fish and Wildlife Service’s list of candidate species to be considered for a threatened or endangered listing under the Endangered Species Act and the greater sage grouse was the subject of three petitions in 2002–2003 seeking listing throughout its range. The U.S. Fish and Wildlife Service found that a listing was not warranted for the greater sage grouse in 2005, or for the Gunnison sage grouse in 2006. The sagebrush range is also home to wildlife, such as mule deer, valued for hunting; scenic attractions; energy resources; and ranching; which could be affected by declining greater sage grouse populations or a listing of one, or more, of the species that are dependent on the sagebrush ecosystem.
Natural Resource Problems
The primary natural resource problem that the Initiative is focused on is the decline of the sagebrush range and associated decline in greater sage grouse populations. These declines have been attributed to factors such as increased oil and gas exploration and development in the West, some ranching practices, and climate. Although the sage grouse species were not listed when originally petitioned, there are three lawsuits that could affect the legal status of the sage grouse. The states, energy companies, ranchers, and developers are concerned that a listing decision would limit their activities in sagebrush habitat.
Collaborative Practices
The collaborative practices used by the Initiative are described in the following sections.
Seek Inclusive Representation
The Initiative was started when representatives of a nonprofit organization called the Sand County Foundation saw an opportunity for oil and gas companies to become involved in stewardship of the sagebrush ecosystem and help with key issues hindering sage grouse conservation in the West that were identified in a report sponsored by the Western Association of Fish and Wildlife Agencies. These key issues included creating an organizational structure for conservation efforts, establishing leadership to coordinate the efforts, and finding resources to fund the efforts. Representatives from the Sand County Foundation and the U.S. Fish and Wildlife Service initiated discussions with representatives from BLM, the U.S. Geological Survey, and Encana Oil and Gas to develop ideas for a collaborative conservation effort that spanned the range of the sage grouse.
The partners believe that the effort should be broad, inclusive, and representative and, therefore, include key state agencies; counties; tribes; a wide spectrum of landowners, ranchers, and citizens; a diverse mix of companies across multiple industries; a good representation of local, regional, and national conservation groups; and other federal agencies such as the Department of Defense. Potential partners in the Initiative were identified through conversations among the core group who initiated the effort. Subsequently, invitations to participate were sent out broadly to individuals and the list of potential partners grew through further recommendations. At the second major general meeting of the group in December 2006, over 80 people attended, including representatives from federal and state agencies, energy companies, and nongovernmental organizations, as well as private landowners.
After its initial efforts to gain participation, the Initiative formed a partnership and outreach working group responsible for identifying and communicating with critical partners for the Initiative, as well as developing an outreach strategy to inform key audiences of the Initiative’s purpose and achievements. Partners we spoke with noted that they believe they have good representation from all of the necessary interests, although some noted that the tribes have not been involved thus far even though they have been encouraged to participate.
Develop a Collaborative Process Decisions within the Initiative are made by consensus and meetings are facilitated by a staff member from the U.S. Institute for Environmental Conflict Resolution. To accomplish work, the Initiative has developed a strategic plan that includes four working groups: (1) a partnership and outreach group to ensure that the Initiative includes all stakeholders and reaches out to underrepresented interests; (2) an incentives group to work on incentive mechanisms for the participants; (3) a projects group that identifies and prioritizes conservation projects; and (4) a funding group that is developing a banking structure for the group.
The Initiative is governed by a 12-member Partnership Council that includes representatives from the Cooperative Sagebrush Steppe Restoration Initiative, Encana Oil and Gas, EnerCrest Corporation, Environmental Defense, Idaho Cattle Association, Idaho Department of Fish and Game, National Cattleman’s Beef Association, Peabody Energy/Powder River Coal, Shell Oil, Western Governor’s Association, Sand County Foundation, Utah Department of Natural Resources, Vermillion Ranch, and Western Association of Fish and Wildlife Agencies. In addition, there are nonvoting federal advisory members on the Partnership Council from the U.S. Geological Survey, U.S. Fish and Wildlife Service, and Natural Resources Conservation Service.
Pursue Flexibility, Openness, and Respect
According to some of the partners, the group views transparency as the best way to deal with critics and skeptics and, therefore, has invited everyone to participate. By having an open process for discussion, the group has been able to respectfully discuss different perspectives even though the members do not always agree. As one participant described it, there is more to the process than sitting around singing “kumbaya.” In addition, the group posts most of its information and documents on its Web site and opens its meetings and conference calls to any stakeholders who want to participate.
Find Leadership
Several participants attribute the initial success of the group to the visionary leadership of some of the group’s founders who saw an opportunity for conservation in the concurrent trends of increased oil and gas development in the West and decreasing sagebrush habitat. One of the participants noted that the group has benefited from several different leaders who have the ability to share a vision with others and motivate them to work toward it by focusing on problem solving and solutions.
Identify a Common Goal
The Initiative partners came together around the goal of conserving sagebrush habitat, with the focus on preventing the need for a listing of the greater sage grouse under the Endangered Species Act. The partners have identified a common goal which is to “result in the long-term, verifiable recovery of the greater sage grouse and improvement of other species of concern in the sagebrush range.” Some participants noted that the Initiative would not exist without the threat of a listing because each of the partners has different concerns over the need for or result of a listing. For example, conservation organizations want to maintain the health of the species, industry is concerned over increased limitations on energy exploration and development in sagebrush habitat that would be brought about by a listing, and ranchers are concerned that a listing would restrict their activities on their private land as well as on the public land associated with grazing leases.
Develop a Process for Obtaining Information
The Initiative has utilized the expertise of scientists from the state wildlife agencies and the federal agencies to guide various aspects of the effort and has used existing sagebrush habitat data from the U.S. Geological Survey and sage grouse conservation studies completed by the Western Association of Fish and Wildlife Agencies across the 11-state sage grouse range. In 2006, a panel of sage grouse scientists, representing 10 state wildlife agencies, the U.S. Fish and Wildlife Service, BLM, Natural Resources Conservation Service, and the Forest Service convened to identify priority areas of conservation and types of conservation efforts that would benefit the sagebrush range. In addition, to mentor applicants who have applied for conservation projects under the Initiative and help them develop the details of their project, one of the working groups has been charged with recruiting a Science Advisory Council that will consist of scientists with expertise in sage grouse biology, range management, landscape ecology, and conservation biology. Furthermore, in February of 2007, the Initiative sponsored a workshop to explore how a conservation credit trading system for the sagebrush ecosystem may be defined. This workshop brought together sage grouse and sagebrush scientists as well as experts familiar with other credit trading systems such as wetland banking programs, endangered species conservation banks, and carbon offset programs.
Leverage Available Resources
The Initiative’s early efforts have been funded by some of the member organizations such as the Sand County Foundation, National Fish and Wildlife Foundation, and Encana Oil and Gas. The funds generated thus far have paid for meetings and planning activities, but participants anticipate that the Initiative will be able to raise sufficient money for demonstrating conservation efforts. As the effort begins to implement conservation projects, participants noted that funding may come from industry, federal programs, or the conservation credit trading system. Funding for the demonstration projects will potentially be provided by a mix of the partners, including the federal agencies and oil and gas companies.
Provide Incentives
According to the group, the Initiative’s partnership is built upon using incentives for landowners, local communities, and private industry to invest in habitat restoration and other conservation actions. The incentives working group has focused its efforts primarily on two incentives. First, the Initiative views the creation of a conservation credit trading system as a potentially significant economic incentive for landowners to engage in voluntary conservation efforts. This system would allow landowners or others to earn credits by implementing sagebrush conservation activities. These credits could then be sold to energy companies or others who may desire them for a variety of purposes, including mitigating the effect of development projects elsewhere in sagebrush habitat. The concepts behind the conservation credit trading system are currently in development and many of the participants acknowledge that there are significant inherent difficulties in designing such a system, particularly one that will stand up to scientific scrutiny. For example, the sagebrush ecosystem is highly heterogeneous, with varying levels of habitat quality across the range. This creates challenges in determining the value of a credit and how this may change from location to location. However, several of the participants we spoke with believed this credit trading system was crucial to the overall Initiative and remained optimistic that it could succeed.
The second type of incentive that the Initiative is working on includes obtaining various assurances from the Department of the Interior that by implementing voluntary sagebrush ecosystem conservation efforts, participants would not bear greater costs or requirements if the greater sage grouse or other species dependent on the sagebrush ecosystem became listed under the Endangered Species Act. For example, if a rancher improved or created habitat for sage grouse on his or her land and then the species was listed under the Endangered Species Act, the rancher could be subject to restrictions on grazing practices that might harm the sage grouse by damaging its habitat. The Initiative developed and submitted five specific recommendations that they believe Interior could take to secure particular assurances. According to one partner, Interior has indicated that the group will receive a response soon.
Monitor Results for Accountability
The group has not yet initiated any conservation projects; however, the group issued a request for proposal in May 2007 for demonstration projects designed to measurably improve sagebrush habitat and test the concept of a conservation credit trading system. The request for proposal included provisions for monitoring of projects. Some participants noted that monitoring would be a critical component of any conservation projects and conservation credit system.
Eastern Upper Peninsula Partners in Ecosystem Management
The Eastern Upper Peninsula Partners in Ecosystem Management group was started in 1992 originally to collaborate across boundaries on lands in the eastern Upper Peninsula of Michigan for ecosystem management. Over time, the group evolved into an information-sharing group to coordinate land management, but has been relatively inactive in recent years. Members of the group include state and federal government agencies, a conservation organization, and industrial (timber) landowners who together manage two-thirds of the four million acres of the eastern Upper Peninsula. This area includes the 895,000-acre Hiawatha National Forest, 95,000-acre Seney National Wildlife Refuge, 73,000-acre Pictured Rocks National Lakeshore, state land, and privately owned land.
Historically, much of the eastern Upper Peninsula was managed for timber harvest and most of the region was cut by the early 1900s. In the 1800s, loggers harvested pine and shifted to hardwoods in the 1900s as pine trees were cut over. The eastern Upper Peninsula is once again largely forested with second-growth forests including aspen, white birch, and jack pine. In recent years, many of the timber companies have been selling their lands.
Natural Resource Problems According to group members, there are few contentious issues causing conflict among land managers and owners in the eastern Upper Peninsula, but the group saw an opportunity among the large landowners to cooperate in a manner that could enhance ecosystems across the landscape. Many members note that the primary outcomes of the group have been educating partners with information that they can use in their management, sharing information among the partners, and building relationships. Some of the particular examples of the Eastern Upper Peninsula group’s coordinated efforts include the following: Most of the eastern Upper Peninsula is second-growth forest, with trees of similar age. Some members of the group sought to establish a mix of trees of different age classes across the landscape to provide healthy habitat for species, in particular, neotropical bird species such as the golden-winged warbler, that use the forests. However, the forest companies that owned land in the eastern Upper Peninsula were focused on commodity production rather than habitat health. The Eastern Upper Peninsula group provided opportunities to educate the industrial landowners that accommodating neotropical birds on their land could be done without affecting their financial bottom line. By coordinating with neighboring landowners to obtain a mix of vegetation over a larger area, the need for any one landowner to achieve all habitat objectives on his or her land alone was reduced.
To support efforts to manage their land in a complementary manner, members of the group recognized the need for broad-scale mapping that could be used in looking at the overall landscape. As a result, the group coordinated to map and categorize land units in the region into areas with similar physical and biological characteristics, called land type associations. The land type associations have been used to varying extent by the partners as a planning tool and for some decision making. The group was able to reach consensus on the descriptions of the land classifications, but was unable to agree on the management implications of the ecological descriptions such as the need to use fire to attain a particular age variation in the trees. The partners were concerned that documenting management implications would constrain the activities they could conduct on their land.
Many of the Eastern Upper Peninsula group partners have worked together on individual efforts to enhance their positive effects on the landscape, discuss compatible management, or preserve land. Examples of such efforts include the following: Through the relationship built with the Eastern Upper Peninsula group, The Nature Conservancy and a timber company were able to reach agreement on access and save a wetland area from being built over by a road. The timber company wanted to gain access across a nature preserve owned by The Nature Conservancy. The Nature Conservancy originally denied access and the timber company threatened to build a road across a wetland on its land. Through the relationship developed through the Eastern Upper Peninsula group, these organizations were able to discuss the issue and The Nature Conservancy agreed to allow access across its land.
A National Park Service official noted that the Eastern Upper Peninsula group helped the National Park Service open a dialogue with the state and timber companies to discuss forest management issues. Pictured Rocks National Lakeshore has a 39,300-acre buffer zone of land within its boundary that is predominately owned by the state and timber companies. According to a former National Park Service official, the National Park Service has an interest in maintaining healthy ecosystems in this buffer zone, while the state and timber company’s interest is focused primarily on the use of the land to generate revenue from harvesting timber.
As a result of the relationship that The Nature Conservancy developed with state and federal agencies and timber companies, The Nature Conservancy negotiated a conservation easement on 250,000 acres of private timberland. The easement will allow some forestry on the land, but in a manner that is compatible with a nearby Nature Conservancy preserve.
Collaborative Practices
The collaborative practices used by the Eastern Upper Peninsula group are described in the following sections.
Seek Inclusive Representation
The Eastern Upper Peninsula group effort began when staff from the Michigan Department of Natural Resources recognized the need to talk with the landowners who shared their boundaries and subsequently convened a meeting with the Forest Service, National Park Service, U.S. Fish and Wildlife Service, and The Nature Conservancy. According to these partners, after they had been meeting for a period of time, they recognized the influence of private forest land in the eastern Upper Peninsula landscape. The group members debated about whether or not to bring private timber companies who owned or managed land into the partnership because they were commodity-based and would have different goals and objectives for the land than the agencies. Ultimately, according to the members, they decided to invite timber representatives into the group. One timber industry official noted that his company was initially interested in the Eastern Upper Peninsula group because participating in a collaborative group could help them attain certification for sustainable forestry practices. More recently, the timber companies have had less interest in the group, in part because many of them have been selling their land in the eastern Upper Peninsula.
Develop a Collaborative Process
The participants stressed that the Eastern Upper Peninsula group is not a decision-making group and therefore does not have an established decision-making process. However, the group has used consensus to identify issues that it would like to work on. The group has no protocols, bylaws, or memorandums of understanding. The members share information and, as partners see the need, form subgroups to work on particular projects, with people joining in as they have the interest and time. Under this arrangement, each entity retains its own individual objectives and decision-making process that it will go through to determine what work it will undertake as a part of the group’s efforts. Some members noted that the informality of the group has allowed them to avoid issues with the Federal Advisory Committee Act, which establishes rules for federal advisory committees.
Pursue Flexibility, Openness, and Respect
According to the Eastern Upper Peninsula group partners, the participants generated trust because early in the process they agreed to respect the missions of each of the individual organizations and to not change any agency’s or organization’s mission or objectives. Participants describe trust as the most significant outcome of their efforts. When the group first began meeting, each of the partners discussed their organization’s missions, which helped the group to gain an understanding of one another. As a result of the trust generated by the group, they have been able to openly share information that they probably would have not shared otherwise, such as the location of timber harvests. Some participants noted that through the open atmosphere generated by the group, potential conflicts are often eliminated before they become conflicts.
Find Leadership
According to some of the members, the group was pulled together by a few key people who were all managers and able to make decisions. Everyone in the initial group was a manager and had good decision-making skills, an ability to voice his or her opinion, and knowledge of the relevant governing laws, authorities, and policies. Some members noted that different people emerged at various times to bring the group together on different issues and move the group forward.
One of the original members coordinated the group and kept it going between 1992 and 2006. When this person assumed a different position within his agency and was no longer able to coordinate the group, it became less active and does not currently have a coordinator. Some members noted that there were still natural resource issues, such as invasive species, that the group could continue to work on and that the Eastern Upper Peninsula group effort could be improved by having a leader dedicated to the group who had coordination and facilitation skills.
The Natural Resources Conservation Service has not previously been actively involved in the Eastern Upper Peninsula group, according to an official from the agency, but coordinates the Upper Peninsula Resource Conservation and Development Council—a congressionally designated, nonprofit group that identifies and undertakes resource management and community development projects. Some of the council’s goals overlap with those of the Eastern Upper Peninsula group. Consequently, the council coordinator, who is a Natural Resources Conservation Service employee, has offered to facilitate and coordinate the group’s meetings in the future, starting in early 2008. A Natural Resources Conservation Service official noted that this may supply the impetus needed to get the Eastern Upper Peninsula group active again and working on issues important to the group members.
Identify a Common Goal
The Eastern Upper Peninsula group members agreed that their goal is “to facilitate complementary management of public and private lands, for all appropriate land uses, using a landscape-ecological approach to sustain and enhance representative ecosystems in the Eastern Upper Peninsula of Michigan.” According to one of the group’s founders, the Eastern Upper Peninsula effort was originally envisioned as a means to coordinate land management strategies and activities among neighboring landowners to achieve overall ecosystem goals. However, after the group began meeting, it became apparent that it would not be able to concur on a common management approach given the different missions of each of the partners. Efforts by some of the members to try to get the partners to coordinate and agree on common management practices and strategies were met with resistance. Consequently, the group determined that it would function as an information-sharing group and not a decision-making body.
Develop a Process for Obtaining Information
The Eastern Upper Peninsula group has placed a high priority on developing and sharing information. The group has worked together to map and describe land type associations in the eastern Upper Peninsula, which some members noted have been useful in making landscape-scale decisions. Members of the group stated that any information developed by the group is made available to other members without restrictions or protocols. For example, land type associations were developed for private lands adjacent to the national forest and were used by small foresters to help with their planning.
Leverage Available Resources
The Eastern Upper Peninsula group has not officially sought funding because, according to group members, it made a decision that it did not want to receive and mange funds. Resources for the group came from the individual partners as they were needed and available. For example, some of the timber company partners published a guide on threatened and endangered species using private funds.
Provide Incentives
The Eastern Upper Peninsula group does not use any particular incentives to achieve its goals.
Monitor Results for Accountability
The Eastern Upper Peninsula group has not established any formal mechanisms to monitor natural resources, but has periodically assessed the need for the group to continue. According to one member, monitoring natural resource improvements made by a group is possible only if the group has joint projects, which is not the case of this group. Furthermore, the group has no resources to dedicate to monitoring. However, group members noted that they assessed the value of the group every 2 or 3 years by evaluating their progress toward their goals and discussing among the members whether the effort was still needed. In addition, every 2 to 3 years the group would discuss and set new goals.
Malpai Borderlands Group
The Malpai Borderlands Group is a nonprofit group in southeastern Arizona and southwestern New Mexico working to restore fire as an ecological process to the rangelands and keep a working landscape based on natural resources—primarily, livestock grazing. The Sonoran and Chihauhaun deserts in this area have historically supported ranching, but also support numerous species, including threatened and endangered species such as the New Mexico ridge-nosed rattlesnake, jaguar, and Chiricauhua leopard frog.
The group’s planning and activities encompass approximately 800,000 acres including public lands managed by the Forest Service, BLM, and the states of New Mexico and Arizona, as well as private lands held by ranchers and the nonprofit Animas Foundation. The group started informally, meeting to discuss problems the neighbors faced in ranching and eventually bringing in interested environmentalists who were concerned about subdivision and development of the land, including The Nature Conservancy. The group incorporated in 1994 to more actively pursue its goals.
Natural Resource Problems
In working to restore fire to the landscape, the Malpai group has worked to resolve related problems.
Wildland fires can provide some beneficial effects to ecosystems that are adapted to fire, such as restoring vegetation and improving habitat. Some landowners view fire as beneficial but others do not want to use fire to manage land and vegetation. For example, Arizona state trust lands are managed primarily for ranching and to generate income for public schools in the state. As a result, the state puts out all fires on these lands and generally does not use fire as a management tool to promote growth of grasses and fuel reduction of shrubs and bushes, although it works with the Malpai Borderland Group to set prescribed fires. On the other hand, the Forest Service, BLM, and some private ranchers want to burn their grasslands to reduce shrubs, such as creosote and mesquite and to promote grasses. The group has worked to educate landowners about the benefits of fire and has worked with the different landowners to set and burn several large fires. The group has succeeded in reintroducing fire to a total of about 69,000 acres.
The effects of fire on threatened and endangered species are mixed and create difficulties for using fire to restore vegetation. While restoring fire to an ecosystem that is fire-adapted helps support habitats and species in the long term, using fire on the landscape in the short term can harm threatened and endangered species, such as the ridge-nosed rattlesnake, or food sources for other threatened and endangered species, such as the agave plant used by lesser long-nosed bats. The group worked to get the most recent scientific evidence from researchers working on the species to use in their plans to restore fire, both on public and private lands. More recently, the group has begun working on a habitat conservation plan with the U.S. Fish and Wildlife Service, which would identify the activities that could be undertaken by the group without triggering concerns about “taking”—killing or harming—a threatened or endangered species.
Resource overuse can occur during drought. During an extended drought over the last decade, ranchers in the Malpai area faced a decision to sell off their herds or keep them on the land and potentially overgraze it. To avoid this outcome, the group and the Animas Foundation—a nonprofit working ranch operating within the group’s boundaries—established a grassbank on Animas Foundation lands in New Mexico. Ranchers with distressed lands have used the grassbank for 3 to 5 years. Continued drought has made this program less viable in the last few years as the drought has extended over a broader area.
Development of open land and loss of the resource and open space occurs when ranchers sell their lands. Private landowners can sell their land at any time, but are more likely to sell during economic hardship. Yet ranchers, and others, have an interest in maintaining open lands for different purposes—livestock grazing, habitat for species, and amenities such as recreation or scenic views. The group worked with ranchers in the area who did not want to sell, purchasing conservation easements for their lands that allowed them to stay in ranching despite economic need to sell the land. The group has succeeded in protecting 77,000 acres of land using conservation easements.
The group worked with an individual rancher who provided habitat for a threatened species—the Chiricahua leopard frog. As a result, the U.S. Fish and Wildlife Service provided the Malpai Borderlands Group with a safe harbor agreement that protects the owner, and any other landowners who wish to participate, should the species be damaged by typical ranching actions.
Collaborative Practices
The collaborative practices used by the Malpai Borderlands Group are described in the following sections.
Seek Inclusive Representation
The Malpai Borderlands Group began informally as a discussion group that later incorporated as a nonprofit. The original members of the group were self-selected members of the ranching community and interested environmentalists who were associated with members of the group. When the Malpai Borderlands Group incorporated in 1994, this discussion group formed the original board. Many of the members of the Malpai group are landowners in the area, but some are not. The board includes a member of The Nature Conservancy and retired federal employees who were key in helping the group get started and work with the agencies. Board meetings are open and the group invites a wide range of people to attend. It also works with its critics on various issues; however, it has determined not to change the membership of the board to include outside parties because of concerns over control of members’ private lands. The members of the group are particularly concerned about the need to recruit young people to the group and board—some are leaving ranching altogether and those who remain often do not attend meetings.
Develop a Collaborative Process
The group is managed by a nonprofit board, which has bylaws and organizational structure. According to some members, the group has succeeded because it is run by the board, and while the agencies have joined the effort, they do not direct it. This is important because the private landowners make decisions about what actions to take on their own lands.
The group coordinates closely with federal and state agencies that manage lands within the Malpai planning area. Until the last few years, two of these agencies—the Natural Resources Conservation Service and the Forest Service—dedicated an employee to be a liaison with the group. When the Natural Resources Conservation Service liaison retired, a new person was selected with the help of the group; however, when the Forest Service liaison retired, the agency and the group decided not to fill that position and the agency is instead trying to have more employees work with the group.
Pursue Flexibility, Openness, and Respect
The group holds open meetings and invites a wide range of participants to talk about management issues. It works by consensus, trying to work problems out informally first. For example, in the mid-1990s, a member of the group photographed a live jaguar in the United States. Members participated in the discussions over protection of the species and designation of critical habitat—specific areas that may be critical for the conservation of the species—for it in the United States. The group invited a key scientist to visit and assess the habitat, and as a result, members believe that what they are doing to restore the habitat and keep it open is the best protection for the habitat. The Malpai group also established a fund to reimburse ranchers for any jaguar kills of livestock. While members of the group disagree with the need for the federal government to designate critical habitat for the species in the United States, which may have an effect on the activities that they can conduct on their land, they invited environmental groups to their board meetings to discuss protection of the species under the Endangered Species Act. According to the Center for Biological Diversity, a member attended a meeting but the groups disagreed on how to handle the situation. The U.S. Fish and Wildlife Service listed the jaguar as endangered outside of the United States in 1972, prohibiting the import of jaguar pelts into the country, and listed it as endangered within the United States under the Endangered Species Act in 1997. Recently, the Center has sued the U.S. Fish and Wildlife Service to compel the agency to develop a recovery plan and designate critical habitat for the jaguar.
Find Leadership
Members of the Malpai group attribute their success to the leadership of several individuals who brought vision, commitment, and organizational skills to the group. They also recognized the role played by federal agency officials both in Washington and in the field offices, who recognized the group’s potential and gave it the opportunity—and resources, including people—to work. According to members, leadership and organizational skills from The Nature Conservancy were also key to getting foundations interested in the group’s efforts and getting the group incorporated as a nonprofit. Most importantly, key members of the ranching community had the vision to join together—when most ranchers prefer to work as individuals—and other farsighted ranchers joined them. Members attribute this attitude to a particular individual whose philosophy was to protect the land and those who work it.
Identify a Common Goal
The Malpai group’s goal is to “restore and maintain the natural processes that create and protect healthy, unfragmented landscape to support a diverse, flourishing community of human, plant, and animal life in our borderlands region. Together, we will accomplish this by working to encourage profitable ranching and other traditional livelihoods which will sustain the open space nature of our land for generations to come.” When lands in the area started selling, these ranchers became concerned about future subdivision and development of ranchland and the potential loss of their ranching livelihoods and joined together to protect both. Another concern was the lack of fire.
Develop a Process for Obtaining Information
As part of its decision-making process, the Malpai Borderland Group seeks to gather and use scientific information relevant to the problem its members are managing. The group has a science coordinator whose position is to manage several ongoing research efforts on lands in the Malpai planning area and a Science Advisory Board made up of more than 40 experts in rangeland science; this group provides advice about research efforts, monitoring, and management activities. These include a program of research to study the effects of wildland fire on threatened and endangered species such as the lesser long-nosed bat and ridge-nosed rattlesnake. The science program also includes 9,000 acres of research plots established by the Forest Service’s Rocky Mountain Research Station to study different revegetation treatments in areas excluded from grazing and 12 watersheds to examine the sediment runoff resulting from burning differently-sized areas and different amounts of vegetation. The group funds research, as well as partners with outside researchers from federal agencies, such as USDA’s research stations, and universities. In addition, the group sponsors an annual scientific conference on topics related to its interests and management activities.
Leverage Available Resources
Because the group fosters a cooperative relationship among landowners and agency staff to manage a broad landscape, it has been able to raise more money for its conservation efforts. Private fundraising groups and individuals provide funding to groups that can achieve on-the-ground resource improvements and results. The group received start-up funds, which was important because it let the group buy basic office equipment such as computers, printers, and supplies. Over the years, the group has met at one of the ranch houses, in an addition built for the meetings. The group continues to get grants from nonprofit groups such as the National Fish and Wildlife Foundation and receives grants for research and personnel support.
Most of the members have been involved since the inception of the discussion group and acknowledge the heavy time commitment that comes with being part of the group. The members see the benefit of participating because as a group they are able to accomplish activities that they would not do as individuals. For example, prior to the establishment of the group, one rancher could not coordinate with the agencies to burn vegetation on both his land and on the agency’s adjacent land. The group used to meet monthly, but now meets less often. Because the distances between ranches are great and require considerable travel time, the group conducts business by telephone conference and e-mail and holds quarterly board meetings in person.
Provide Incentives
Incentives used by the group include a grassbank, which allows ranchers to temporarily move their cattle from their own drought-damaged land to healthier grasslands on the Gray Ranch owned by the Animas Foundation. In exchange, the Malpai Borderlands Group receives a conservation easement for the development rights to the private property on the ranch. These conservation easements are different from others used by The Nature Conservancy and federal agencies in that they contain a clause that states if the rancher loses access to his or her federal grazing allotment through no fault of his or her own, then the easement is void and the land could then be sold for development.
The group has worked with U.S. Fish and Wildlife Service to manage the threatened and endangered species on privately-owned ranchlands in the group’s planning area. In one case, the group received a safe harbor agreement to protect one of the last remaining populations of Chiricahua leopard frogs that were residing in a rancher’s stock pond. The agreement allows the rancher, who had trucked water in to the pond during drought years to keep the frogs alive, to manage the stock pond for livestock purposes without the threat of enforcement action should any of the frogs die because of those actions. Other ranchers can participate in the safe harbor agreement by signing a certificate of inclusion with the Malpai Borderlands Group and thereby receive the protections of the agreement. The group is also developing a habitat conservation plan for the area in order to implement grassland and ranch management activities in areas where there are threatened or endangered species. For example, this habitat conservation plan will allow the use of fire in certain conditions and identify certain restrictions to protect the threatened ridge-nosed rattlesnake and several other species that might be harmed or killed by the fires. This will permit ranchers to conduct activities provided the restrictions are followed.
Monitor Results for Accountability
As part of its management efforts, the group conducts range monitoring across the lands in its planning area and maintains more than 290 monitoring plots for this purpose. It pays a contractor to visit the plots to determine the condition of the pastures and the availability and use of grass by livestock or wildlife. According to members, these monitoring efforts are useful for judging the condition of grasslands in the vicinity of the plots, but do not gauge overall rangeland conditions. The group is working on a method for monitoring range conditions more broadly across the whole planning area. The group has also sponsored species counts for some of the threatened and endangered species on lands in its planning area. This work enabled them to better know and understand the location of species and to limit activities there.
Onslow Bight Conservation Forum
The Onslow Bight Conservation Forum (Forum)—named for the shallow crescent-shaped bay that makes up much of the coastline in southeastern North Carolina where the group is organized—is an information-sharing group organized to help protect and restore the unique coastal environment of the area and associated species. The Onslow Bight region, as with other parts of coastal North Carolina, is developing quickly and the rural nature of the area is rapidly changing. Because of its unique makeup, the area is a hotspot for endemic species—those that can only be found in that area— such as the Venus flytrap. This area of North Carolina contains both longleaf pine habitat favored by the endangered red-cockaded woodpecker and unique wetland habitat such as pocosins, or wetlands that form on a hill because of large amounts of peat that accumulate.
The group, formed officially in 2001, originally began as a way to help the Marine Corps manage encroachment issues around its installations and to manage habitat for threatened and endangered species, in particular the red-cockaded woodpecker. The group has since expanded its vision to include aquatic habitat and conservation of land along the coast. The members of the group represent the large blocks of publicly-owned lands such as the North Carolina Wildlife Resources Commission game lands, the Croatan National Forest, Marine Corps Base Camp Lejune, Marine Corps Air Station Cherry Point, and several land conservation trust groups. In addition to overall biodiversity conservation, one focus of the group has been to study potential corridors for wildlife to migrate between these public lands.
Natural Resource Problems
The natural resource management problems and conflicts that the Forum has managed revolve around land development and conservation: Development of lands eliminates habitat for different species and causes the public lands to become islands of biodiversity, which can affect management of these lands. In particular, development can harm endangered species such as the red-cockaded woodpecker. Agencies with populations that need to be protected are interested in expanding habitat to help protect the species and ease the pressure on their lands. Yet, private landowners are free to sell and develop their land. The Forum developed a habitat protection plan to identify the location of important habitat for threatened and endangered species and has discussed and agreed upon areas that are a priority for preservation and protection. This information has helped the agencies and land trusts coordinate and prioritize land acquisition and has prevented them from competing for the same lands. Since 2001, the Forum partners have together acquired about 57,000 acres of land from willing sellers.
Encroachment near military installations creates safety hazards as well as complaints from neighboring communities about noise, dust, and other side-effects of training exercises. The military has the incentive to use its lands for training purposes and to have large buffers between its installations and communities. Yet, communities and others have incentives to develop lands for other purposes. Through the Forum, the Marine Corps representatives can work with other members to identify lands that have compatible uses with the military’s needs and also meet habitat purposes. Military funds can then be used to help acquire conservation easements to the land.
Habitat fragmentation occurs with increased development, particularly with greater numbers and size of roads, which affects large species and increases vehicle collisions with wildlife that are possibly fatal. Private landowners have the right to sell and develop their land and zoning allows for building. However, hunting, environmental, and other groups have an interest in protecting species such as the black bear, which need land to roam. The Onslow Bight area supports a large population of bears and the number of collisions with wildlife in the area is increasing. The group has identified areas that road construction should avoid and the need for more wildlife crossings in new road construction.
Historically, the longleaf pine and pocosins of the Coastal Plain depended on fire as an ecological process. Fire has been suppressed for years, although the health of the vegetation depends on fire. The agencies and land managers have an interest in burning their lands to restore their health, however, new community members do not like smoke and complain about burning programs. The group is working with The Nature Conservancy on a project started in 2005 called the Onslow Bight Fire Learning Network/LANDFIRE application project to develop and support a burn program to help restore habitat. The Nature Conservancy is also developing a memorandum of understanding (MOU) with the Forum to share equipment and personnel. Including burning on agency lands as part of the fire programs, the members of the Forum burn about 60,000 acres of land a year.
Collaborative Practices
The collaborative practices used by the Forum are described in the following sections.
Seek Inclusive Representation
The Forum includes a range of participants who manage land or are advocates for land conservation. The Forum began with a network of land managers and federal and state agency officials, and members have discussed how broadly to advertise for potential members; for now, they have determined to keep the membership more narrow. Two land conservation organizations—North Carolina Coastal Federation and North Carolina Coastal Land Trust—have representatives in the Forum. Members also include representatives from the North Carolina Natural Heritage Program, which conducts inventories for rare species and high-quality habitat in the state, and the Wildlife Resources Commission, which manages state lands for wildlife. Another state agency, the Department of Transportation, has signed on as a member because it acquires lands to mitigate the destruction of wetlands or other lands for road building activities. It is also interested in identifying where to put underpasses for wildlife to safely cross roads; however, members indicated that agency representation has been infrequent.
In addition to the Marine Corps, other federal agencies that are involved in the Forum include the Forest Service, U.S. Fish and Wildlife Service, and the National Park Service. The federal partners were initially more involved in planning efforts, but because the key staff involved left the area and were not replaced, the agencies have had less involvement. Members of the U.S. Fish and Wildlife Service Ecological Services group participate because of threatened and endangered species issues. Other federal employees from the Forest Service have attended as they are able to do so, but according to Forum and Forest Service members, other Forest Service activities compete for their attention. The Natural Resources Conservation Service also joined the Forum and attends meetings. However, while Forum members see a role for the agency because of the large amounts of conservation funding that it provides, the agency has been less involved in acquisition activities because that is not a main goal of the Natural Resources Conservation Service.
Develop a Collaborative Process
The Forum exists through an MOU signed by all members. The MOU is nonbinding and states that each agency will retain its mission. It also states that the group will discuss and share information that is compatible with the land use and management objectives of each entity involved. The MOU allows the groups to discuss, share information, and agree on conservation or preservation opportunities, but in order to avoid triggering Federal Advisory Committee Act requirements, the group does not make official decisions or take official actions. For committees subject to the Federal Advisory Committee Act, the act generally requires that agencies announce committee meetings ahead of time and give notice to interested parties about such meetings. With some exceptions, the meetings are to be open to the public, and agencies are to prepare meeting minutes and make them available to interested parties. Nevertheless, the Forum can come to consensus on activities, which individual agencies can decide to undertake or not.
Pursue Flexibility, Openness, and Respect
According to members, because of the MOU, which allows each member to retain its overall mission and undertake the activities that best suit that mission, the group is highly flexible and open. In addition, participants said that the Forum has been managed in a transparent manner, in that the participants are clear in sharing their individual interests with other members. Participants said that this transparency has helped to foster respect among the members. For example, the Marine Corps members have been upfront about their purpose in working for land conservation, which involves relieving the pressure of development around their installations and potentially removing restrictions on training exercises that result from threatened and endangered species habitat.
Find Leadership
The Forum started with the efforts of two key people with The Nature Conservancy and the U.S. Marine Corps, modeled after a similar effort at the Army’s Fort Bragg in North Carolina. It has continued with the sustained interest of several more individuals. Members participate as they are able and as they can offer particular skills. Because these individuals and their agencies have sustained the Forum by such efforts as organizing meetings and completing work between meetings, the group is currently discussing whether it should hire staff to ensure that work gets accomplished. The participants are uncertain which of the agencies or groups could justify funding such a position and to whom that position would answer.
Identify a Common Goal
The goal of the Forum is to provide for open discussion about the long-term conservation and enhancement of biological diversity and ecosystem sustainability in the Onslow Bight area. The members have different goals for managing their land and resources, but do share the goal of identifying opportunities to preserve, protect, and restore native biological elements in the coastal landscape, including marine and estuarine areas. To achieve their goal, the group has focused on acquiring lands that bridge the gaps between large publicly-owned lands, as well as some private conservation lands, and can meet their common needs. For example, one species on which the group focuses is the red-cockaded woodpecker; two of the federal partners have primary habitat for this species and support two of the main recovery populations of the bird as defined by the U.S. Fish and Wildlife Service in its recovery plan for the species. The group has identified, and has acquired, land between the public lands that can serve as a stepping-stone for members of the populations. The group recognizes that acquisition is only the first step of protecting land and resources. The next step is to restore habitat and manage those acquired lands and resources in the long term. Most of the land is being managed by the state’s Department of Environment and Natural Resources, primarily the Wildlife Resources Commission and the Division of Parks and Recreation.
Develop a Process for Obtaining Information
In developing its habitat protection plan, the Forum made use of available information about lands and resources in the area. In particular, the state’s Natural Heritage Program conducts assessments of habitat and identifies good habitat for purposes of preserving and protecting it, and the Forum used this data to develop the plan. It also used information on existing populations of species such as bears and red-cockaded woodpeckers and locations of undeveloped woodlands. The Forum also used the scientific expertise available from the federal and state agencies in its planning process. Biologists from the federal and state agencies helped to identify how species such as bears and woodpeckers move across the landscape and, accordingly, good places to protect.
Leverage Available Resources
Members of the Forum have been successful in getting grants and using these funds to match agency funding to acquire lands. According to participants, one of the benefits of the Forum is that foundations and other funding groups use collaboration as a way to judge the potential success and effectiveness of the group. Sources of funding include the military, North Carolina trust funds established for purposes of land conservation, U.S. Fish and Wildlife Service grants under the North American Wetland Conservation Act, and funds raised by the land conservation group partners. The Forest Service also attempted to get funding from the Land and Water Conservation Fund, but did not succeed.
The Forum does not have staff and its work is done by the participants, which means that sometimes it does not get done. The group meets every few months and keeps in touch by e-mail, but participants may not be able to prioritize or complete tasks for the group in between meetings. The Forum discussed hiring staff but has not made a decision to do so. According to members, having staff would allow the group to get more work done in between meetings and would ensure that the work would be done. The decision to have staff is difficult, however, because the action might force the group members to increase their commitment to the group through funding the position or even cause the Forum to take on a different organizational structure to enable the hiring of staff.
Provide Incentives
Apart from the incentives provided by land acquisition, the group has not had the opportunity to provide or use any incentives to achieve its goals. However, in the future, the group may need to work more with private landowners and provide them incentives. Some members cited Natural Resources Conservation Service programs to protect and conserve agricultural lands and wetlands as potential sources of funding to work with landowners. For example, one program that could potentially be compatible with the Forum’s goals is the Wetlands Reserve Program, a program that seeks to restore marginal agricultural land to its previous wetland condition through cost-share assistance and easement purchases. According to the agency’s Forum representative, the agency’s staff currently works with landowners on more traditional agricultural issues such as preventing erosion and conserving soils.
Monitor Results for Accountability
As membership in the Forum is voluntary, any activities the participants undertake are also voluntary and the Forum does not track its achievements. These activities, primarily land acquisition and some restoration work, help the Forum achieve its overall vision of protecting habitat. This conclusion is based on the assumption that protecting and restoring habitat will improve species conditions. As part of its planning effort, the Forum has developed a geographic information system (GIS) map of the public lands and locations of important species and habitat. Because the lands are acquired by each agency or participant and not by the Forum, this map is not updated to show acquisitions or to keep track of the lands protected. Rather, the information that the group develops about habitat and species can be used by each participant as it makes decisions about land acquisition.
Steens Mountain Advisory Council
The Steens Mountain Cooperative Management and Protection Area (CMPA), located in southeastern Oregon, was created in 2000 when Congress passed the Steens Mountain Cooperative Management and Protection Act (Steens Act). The high desert mountain area occupies about 496,000 acres and supports diverse vegetation and wildlife, including habitat for the sage grouse. The same area has a long history of human use as a Native American site for spiritual experience and herbal gathering and for cattle grazing by local ranching families. The purpose of the CMPA is for BLM “to conserve, protect, and manage the long-term ecological integrity of Steens Mountain for future and present generations.” Of the 496,000 acres in the CMPA, about 428,000 acres are federal lands and the remaining lands are private and state lands. The Steens Act protected about 170,000 acres of the federally managed land as wilderness, of which about 95,000 acres are specifically designated as a cattle-free wilderness, the first of its kind. The federal land is managed for various uses by BLM, and BLM is authorized to work cooperatively with private land owners in managing the entire area.
Natural Resource Problems
The Steens Act established a multistakeholder group called the Steens Mountain Advisory Council (Council). The Council is charged with providing BLM recommendations regarding “new and unique approaches to the management of lands within the boundaries of the CMPA and cooperative programs and incentives for seamless landscape management that meets human needs and maintains and improves the ecological and economic integrity of the CMPA.” The major land and resource management issues that the Council has considered are described below: The act required that BLM develop a comprehensive management plan for the Steens Mountain CMPA. In addition to the wilderness area created by the act, the CMPA contains several wilderness study areas that BLM must manage to retain wilderness conditions and wild and scenic river corridors that BLM must manage to maintain natural conditions. These designations may limit certain activities, such as motorized vehicles and equipment, in the areas, and as a result, Council members disagree over how to manage these areas—ranchers and others would like the wilderness study areas to be removed from consideration as wilderness, but an environmental group would like even more area to be considered as wilderness study area. In August 2005, BLM, with the Council’s input, issued a land management plan; however, it did not completely address management of roads and travel in the CMPA, deferring decisions on route designations until 2007.
Travel management and designation of roads, tire tracks, and ways for traditional access was an issue discussed in 2007. BLM has been charged with managing travel in the CMPA and can potentially restrict travel in some places, in particular the new wilderness area and other wilderness study areas. Although motorized access to wilderness areas and wilderness study areas is limited, participants of the Council have not been able to agree on the definitions for different types of roads that should remain open for access. Given the historic uses of Steens Mountain, the area has many roads, tracks, or ways that are used at various times and for multiple reasons—such as to access property each day, check on fencing periodically, and gather herbs during different seasons. However, some of these have been proposed for closure by environmental groups in order to maintain wilderness characteristics of the wilderness areas and study areas, as required by law. An initial travel management plan was made public in May 2007, but was rescinded due to a court order and was reissued in November 2007.
Private land management within the CMPA is another management issue in which the Council has been involved. BLM is authorized to work with private landowners within the CMPA to cooperatively manage the private and public lands, such as to control vegetation. However, BLM has been able to agree in only a few cases on what management activities and payments will be involved. At least one owner is considering selling his land for development rather than working with BLM. The act authorizes $25 million from the land and water conservation fund for, among other purposes, the acquisition of private land and conservation easements within the CMPA. According to the agency and Council members, none of these funds have been provided, limiting the actions local BLM officials can take. Council members and others explained that by adding new layers of management restrictions, such as wilderness management restrictions, the act limited their ability to manage the area in a new and innovative way, thereby precluding some cooperation and creative management that could have taken place.
One area in which the group has agreed is related to vegetation management. The Council has endorsed a juniper management program to thin stands of juniper that have expanded and overcome sagebrush habitats and grasslands in the area. BLM, with Council input, is studying different options for reducing the expansion of juniper woodlands, but to date only limited activity has been funded. According to the agency, the Council has had greater success at working together to solve ecological restoration issues.
Collaborative Practices
The collaborative practices used by the Council are described in the following sections.
Seek Inclusive Representation
The Council consists of 12 representatives that, according to the Steens Act, must be appointed by the Secretary of the Interior from nominees submitted by various federal, state, and local officials. Members include, among others: a private landowner in the CMPA; two members who are grazing permittees on federal lands in the CMPA; a member interested in fish and recreational fishing in the CMPA; a member of the Burns Paiute Tribe; two persons who are recognized environmental representatives, one of whom represents the state as a whole and one of whom is from the local area; a person who participates in dispersed recreation such as hiking, camping, nature viewing or photography, bird watching, horse back riding, or trail walking; and a person who is a recreational permit holder or is a representative of a commercial recreation operation in the CMPA. Several members noted that the group stalemates as a result of their makeup and difficulty in getting a quorum. According to several members and observers, the group is polarized on fundamental issues of use versus nonuse and some suggested the need for more neutral or balanced representation.
Another community group, similar to the Blackfoot Challenge in Montana and the Malpai Borderlands Group in Arizona and New Mexico, has formed with the help of the staff at the local U.S. Fish and Wildlife Service refuge. This group, called the High Desert Partnership, has succeeded in working together on a few projects and has helped rebuild trust with the U.S. Fish and Wildlife Service among some community members. One difference is that the group is focused on the common interests of the members.
Develop a Collaborative Process
The Council’s organization and processes have evolved, although members of the Council and others explained that it has been less successful making recommendations because of organizational problems. Although the Council votes using a majority rule, it was not until March 2006 that members adopted operating protocols that describe, among other things, the Council’s objectives, roles and responsibilities, and communication protocols. The Council needs 9 votes in order to provide BLM with a formal recommendation; however, during the several years the group has been in existence, attendance has been poor and filling vacancies has been a problem, making it difficult for it to establish a quorum for votes to take place. According to several members of the Council, they believe they have failed to make recommendations on large issues but they have made decisions about less important issues. More recently, all vacancies have been filled and some participants were more optimistic about the Council’s ability to collaborate in the future. In 2007, the Council provided approximately 20 recommendations.
BLM has brought in an outside facilitator to help the Council work through conflicts. The facilitator worked with the members during a 2-day retreat and made progress on a wilderness access issue. However, a later vote by the Council failed to approve the final plan.
Pursue Flexibility, Openness, and Respect
At times, the group has lacked a respectful atmosphere. One observer explained that at one of the Council’s meetings some members fostered disrespect toward BLM representatives and tried to direct BLM decisions rather than simply provide advice. In response to such issues, the March 2006 protocols include a section on rules for members and members of the public to follow in order to facilitate an open and collaborative discussion. These rules say that members will listen with respect, avoid grandstanding in order to allow everyone a fair chance to speak and to contribute, and jointly advocate for support for consensus recommendations.
Find Leadership
According to the agency and participants, the group needs a strong leader or facilitator with sufficient training to guide the group. The Council has a regular facilitator from the local area; however, at least one member believes the group requires stronger facilitation to move forward. While the U.S. Institute for Environmental Conflict Resolution provided the Council with third-party facilitation in 2003 that achieved consensus on some travel access issues, the facilitation was short term and the consensus did not last.
Identify a Common Goal
While one objective of the Steens Act was to promote and foster cooperation, communication, and understanding and to reduce conflict between Steens Mountain users and interests, members and other parties said that conflicting interpretations of the act are a fundamental source of conflict among parties. According to several BLM officials, cooperation among stakeholders was much better before the act. The Steens Mountain area has been considered an area worthy of conservation since at least 1999, when the area was considered for designation as a national monument but local stakeholders opposed special designation. For this reason, Council members have fundamentally different interpretations of the act, and continue to debate the conservation versus use clauses in it. Council members interpret the act differently—some refer to one of the statutory objectives of the CMPA that promotes grazing and a provision that allows reasonable access to lands within the CMPA, while others assert that a section requiring BLM to ensure the conservation, protection, and improved ecological integrity of the CMPA represents the act’s primary purpose. After the establishment of the CMPA and the wilderness area within it, a local environmental group identified several new possible wilderness areas—called wilderness study areas. The group has since sued BLM to designate these areas as wilderness study areas. In June 2007, the District Court held that BLM had properly declined to adopt most of the group’s proposed designations.
Develop a Process for Obtaining Information
The Steens Act authorizes BLM to establish a committee of scientists to provide advice on questions relating to the management of the CMPA, but BLM has not done so. A BLM official said that the reason a scientific group has not been formed is lack of funding requested by the scientists who were invited to participate. The local USDA Agriculture Research Service office has partnered with BLM and several private landowners over the last 30 years on scientific research including juniper management. On other issues, such as travel management, the county pulled together a common database for BLM and the Council to use in its discussions about access.
The Steens Act established a Wildlands Juniper Management Area for experimentation, education, interpretation, and demonstration of management that is intended to restore the historic fire regime and native vegetation communities on Steens Mountain. The area is being used to demonstrate different ways BLM and partners are working to reduce the amount or size of juniper woodlands to effectively manage the expansion of juniper vegetation. Some additional experimentation may occur in the area and in other areas of the CMPA. The results of research can help the agency, with Council input, determine the best way to reduce vegetation using all available tools in many areas, and for certain areas including wilderness and wild rivers, through minimum use of mechanized transport or motorized equipment.
Leverage Available Resources
BLM pays between $70,000 and $80,000 annually for the Council’s travel, staff support, and facilitation. Because it is an advisory committee, it is not organized to collect donations or spend funds. However, the Steens Act authorized $25 million to be appropriated to BLM to help purchase private properties within the boundaries of the CMPA, and additional funds would be available for incentive payments for cooperative agreements with private landowners. Several members of the Council and others told us that many conflicts might have been resolved had BLM received these funds. For example, funding could have been used to develop cooperative agreements or purchase private inholdings, thereby reducing controversial issues over access and permissible use.
Provide Incentives
According to the Steens Act, BLM may provide conservation incentive payments to private landowners in the CMPA who enter into a contract with BLM to protect or enhance ecological resources on the private land covered by the contract, if those protections or enhancements benefit public lands. However, according to BLM officials and Council members, because funding has not been forthcoming, such agreements had not been finalized at the time of our review. In 2007, BLM initiated several cooperative management agreements concerning joint juniper management projects where each party pays its own costs and one agreement that provides public recreation on private lands where BLM funds were used (not land and water conservation funds).
Monitor Results for Accountability
The Steens Act requires that a monitoring program be implemented for federal lands in the CMPA so that progress toward ecological integrity objectives can be determined. BLM developed a plan to monitor changes to current resource conditions within the CMPA, which would provide information on 31 resources and uses identified in the CMPA management plan.
The Council has not been formally evaluated to determine its contributions or shortcomings. According to the agency and an observer, the group’s effectiveness should be evaluated, particularly because some federal dollars contribute to its functioning.
Uncompahgre Plateau Project
The Uncompahgre Plateau Project is a collaborative group working to restore and sustain the condition of the 1.5-million-acre Uncompahgre Plateau, located in southwestern Colorado. The group began in the late 1990s in response to a decline in the mule deer population on the plateau that was observed by wildlife officials and hunters. After recognizing that the mule deer decline was an indicator of a larger ecosystem problem, the group broadened its focus to restoring and sustaining the ecological, social, cultural, and economic values of the plateau. The group, which includes federal agencies, a community group, a state wildlife agency, and utility companies, has developed a plan, the Uncompahgre Plateau Project Plan, to guide its efforts.
Historically, the Uncompahgre Plateau, 75 percent of which is managed by the BLM, the Forest Service, and the Colorado Division of Wildlife (CDOW), has had multiple uses including logging, ranching, and recreation and provides habitat for many wildlife species, including game species. Commercial logging has occurred on Forest Service land for over a century, but in recent decades the Forest Service has decreased timber harvest on the plateau and current logging operations are limited to small sales of logs and firewood. Both the Forest Service and BLM manage grazing allotments on the plateau that are tied to privately owned ranches. Recreational use of the plateau has steadily increased and includes fishing, off-highway vehicle use, snowmobiling, mountain biking, camping, and cross-country skiing. In addition, CDOW manages two areas on the plateau for deer and elk hunting. Furthermore, the plateau contains lynx analysis units designated by CDOW and the U.S. Fish and Wildlife Service for lynx populations that were reintroduced into Colorado beginning in 1999.
Natural Resource Problems
The Uncompahgre Plateau Project has concentrated on several natural resource problems on the plateau, including the following: According to the group’s participants, their focus broadened to larger ecosystem health issues when state biologists found that the observed decline in mule deer was related to poor habitat, specifically, vegetation that was too homogeneous in its age class distribution. According to natural resource managers, this condition resulted from certain activities on the plateau such as fire suppression and grazing practices. The Uncompahgre Plateau Project has initiated landscape-level planning and restoration efforts across jurisdictional boundaries to achieve more heterogeneous vegetation across the plateau and bring vegetation structure, age, condition, and spatial patterns in line with the habitat needs of wildlife species. The group’s initial planning and restoration efforts have focused on two watersheds covering over 220,000 acres of BLM, Forest Service, state, and private land and has included a variety of vegetation treatments such as roller chopping— using a large round drum to crush the shrubs—and prescribed burning. As of May 2007, the Uncompahgre Plateau Project completed over 100 restoration projects, covering over 50,000 acres.
The Uncompahgre Plateau has had problems with invasive species on both public and private lands. Invasive species alter the ecology in an area by crowding out native species, changing fire regimes, or altering hydrologic conditions. To facilitate cooperation among land managers and private landowners in efforts to manage invasive species, the Uncompahgre Plateau Project has initiated a program to map, monitor, control, and prevent invasive species within designated weed management areas on over 350,000 acres.
The Uncompahgre Plateau is a key location for east to west transmission lines connecting Rocky Mountain power sources with western markets such as Los Angeles. As a result of the Energy Policy Act of 2005, transmission line operators must ensure that their power lines remain reliable. Forested rights-of-way pose threats to reliability because of the potential for tall trees to fall on the lines, arcing from the power line to trees, and forest fires. Traditionally, power line rights-of- way have been clear-cut to remove tall trees underneath and adjacent to the power lines, which has historically generated conflict between utilities and land managers, according to a utility official. While this practice removes the threat to power lines directly posed by these trees, it can damage habitat and ecosystem health and the risk from forest fires still remains. Through the Uncompahgre Plateau Project, the utility companies and land management agencies have worked together to treat vegetation outside of the utility rights-of-way in order to reduce the risk of forest fires and threats to the power lines in a manner that creates more natural openings that are friendly to wildlife. This is accomplished through means such as creating undulating boundaries between treated and untreated vegetation, instead of straight lines. According to a group member, these treatment techniques are being used as a model for other utilities across the country.
When conducting restoration projects, land managers working on the Uncompahgre Plateau want to replant with vegetation that is native to the plateau because it is better adapted to the local conditions and can improve the success of restoration projects. However, there is not a sufficient supply of native seeds available on the commercial market for large-scale restoration projects on the Uncompahgre Plateau. In response, the Uncompahgre Plateau Project initiated a native plant program to collect, study, and produce native seeds that can be used to facilitate restoration projects. According to a group member, it has gathered native seeds for over 50 plants and developed methods for propagating these. The ultimate goal of this program is to have private, local growers and larger commercial growers cultivate the seeds and sell them to the agencies and energy companies who are doing restoration projects.
Collaborative Practices
The collaborative practices used by the Uncompahgre Plateau Project are described in the following sections.
Seek Inclusive Representation
The Uncompahgre Plateau Project partners include BLM; Forest Service; CDOW; utility companies including the Western Area Power Administration and Tri-State Generation and Transmission Association, Inc.; and an informal nonprofit community organization called the Public Lands Partnership. The Uncompahgre Plateau Project was initiated by the Public Lands Partnership and major land managers on the Uncompahgre Plateau—BLM, Forest Service, and CDOW. Later, the Western Area Power Administration and Tri-State Generation and Transmission Association, Inc., approached the Uncompahgre Plateau Project after seeing a presentation on the group and realizing that working collaboratively to treat vegetation beyond the utility rights-of-way and decrease the threat of forest fires could mutually benefit themselves and the original partners. The Western Area Power Administration and Tri-State Generation and Transmission Association, Inc., became formal partners in the Uncompahgre Plateau Project in 2004.
Many participants cited the involvement of the Public Lands Partnership as a significant and unique asset to the Uncompahgre Plateau Project. The membership of the Public Lands Partnership is made up of county commissioners, city administrators, user groups from the timber industry, agricultural producers, environmentalists, recreationists, and local citizens. The organization started in 1992 because members of the community wanted to get involved in discussions about the public lands that surrounded them. The group brings together members of the public to discuss issues related to public lands including oil and gas drilling, forest plans, campground closures, travel access, and roads. BLM officials noted that, by having the Public Lands Partnership involved in the Uncompahgre Plateau Project, they have been able to complete their National Environmental Policy Act analyses more efficiently because, through the Public Lands Partnership, the public was brought in to help set the vision for the proposed action and there were no subsequent appeals.
Develop a Collaborative Process
The Uncompahgre Plateau Project operates by consensus and, through its efforts, seeks to develop strong communication, collaborative learning, and partnerships among the agencies and community. Individual projects to be undertaken by the group are prioritized by a Technical Committee according to criteria established in the Uncompahgre Plateau Project Plan that was developed by the group. One participant noted that having a collaborative group allows the partners to take a project of theirs and see how it fits into the overall landscape.
The Uncompahgre Plateau Project was formalized with a Cooperative Agreement and MOU, signed in 2001. When that MOU expired at the end of 2006, it was replaced by a second MOU. The structure of the group includes an Executive Committee, Technical Committee, coordinators, and a fiscal agent. The Executive Committee is responsible for annually reviewing project progress and addressing future resource commitments. The Technical Committee forms the working body and backbone of the group and meets monthly to coordinate activities, meet with outside members, review project requests, and recommend budgeting and project approvals. Members from each of the partner organizations hold positions on both the Executive and Technical Committees. In addition to these committees, the Uncompahgre Plateau Project contracted four part-time coordinators who are responsible for public relations and outreach, overall project coordination, financial record keeping and contracting, and grant writing. Some participants noted that the coordinators play a critical role in moving the group forward between meetings and making sure that projects get done. The Uncompahgre Plateau Project uses Uncompahgre/Com, Inc., a nonprofit organization, as its fiscal agent.
Pursue Flexibility, Openness, and Respect
One participant noted that the group was able to generate credibility and trust among the members through the group’s initial effort to develop a landscape plan for a watershed around a common vision. According to the participants, the group maintains transparency by having open meetings, distributing minutes of meetings, and using its Web site.
Find Leadership
Several participants attributed the initial success of the group to the leadership of the individual who was originally responsible for coordinating the group. He was described by several participants as a “charismatic leader” who had great vision for the group and was able to get projects going by working with the different agencies to generate support for the collaborative effort.
Identify a Common Goal
While each of the Uncompahgre Plateau Project participants has different interests, they have identified that their common interest is to protect and restore the ecosystem on the Uncompahgre Plateau. The participants were able to agree on a common goal to: “improve the ecosystem health and natural functions of the landscape across the Uncompahgre Plateau through active restoration projects using the best science available and public input,” which represents the area where each of the partners’ individual interests overlap. The federal land management agencies—BLM and Forest Service—are responsible for managing multiple uses on the plateau, including timber, grazing, and recreation, and have an interest in conducting these management activities in a manner that preserves ecosystem health. CDOW is responsible for managing game species, so it is interested in ensuring that habitat for the mule deer and other game species is healthy and adequate to support them. The Public Lands Partnership represents the community’s values and is consequently interested in maintaining a healthy ecosystem for economic, environmental, cultural, social, recreation, and aesthetic reasons. The utility companies desire a healthy ecosystem, less prone to catastrophic wildfires, in order to protect the reliability of their power lines.
Develop a Process for Obtaining Information
According to participants, the Uncompahgre Plateau Project is always seeking new science to inform its decisions and looks for opportunities to bring new ideas to the table. For example, the group works with researchers from universities such as Colorado State University, Brigham Young University, Snow College, and the University of Wyoming to gather new scientific data on the vegetation and ecology of the plateau and study the effects of different vegetation treatments. Scientific publications related to research on the plateau are available on the Uncompahgre Plateau Project Web site. The Uncompahgre Plateau Project frequently sponsors field trips, which one participant noted is important to get community members involved, understand the resource problems that exist on the plateau, and become comfortable with the projects being carried out by the group.
As part of the Uncompahgre Plateau Project planning efforts, BLM and the Forest Service have integrated their GIS map data for two priority watersheds and are working to integrate data for two other priority watersheds. Because the agencies’ mapping data are not compatible, however, staff said that the landscape assessment process was difficult. The agencies had to develop ways to merge the data, which was time- consuming and expensive. For areas outside of these watersheds, data generated by agency research are held within the sponsoring agency, so other partners sometimes do not have access to this information. For example, BLM fuel treatments are mapped in its GIS database, which the Forest Service does not have access to, and vice versa. The group noted that it would like to make all of the GIS maps available on its Web site, but according to group members, this effort is extremely resource intensive and therefore not feasible for the group to accomplish at this time with its current resources. According to the participants, BLM and the Forest Service have hired an outside consultant to serve as a repository for the GIS data.
Leverage Available Resources
The group has been successful in leveraging funds and has received over $3 million from a variety of grants. Two grants that were instrumental in getting the Uncompahgre Plateau Project started included $500,000 from CDOW for mule deer conservation efforts and $620,000 given to the Public Lands Partnership from the Ford Foundation for community forestry. The finances of the group are handled by Uncompahgre/Com, Inc., which administers contracts, solicits bids, and pays invoices for the Uncompahgre Plateau Project and provides the partners a mechanism to pool their funds.
The Forest Service, BLM, CDOW, and the utilities support the Uncompahgre Plateau Project through various means. BLM has an assistance agreement with the group under which it can provide money to the group for activities outlined in statements of work. BLM has also given the group program funding. BLM officials noted that by having nonfederal partners, the group has a relatively easy time coming up with the nonfederal matching funds that are required with particular federal grants. In addition, BLM and the Forest Service have provided money for the native plant program. The Forest Service has used various agreements including appropriated funds spent with Wyden Amendment authority— which allows federal money to be spent on nonfederal lands—to support the efforts of the Uncompahgre Plateau Project, such as completing invasive species work across jurisdictional boundaries. The Western Area Power Administration; Tri-State Generation and Transmission Association, Inc.; and CDOW have provided money to support vegetation management projects.
The group noted that while it has had success leveraging funds in the past, it has run into difficulty acquiring funding now that the project is more mature. In addition, most grant money is for projects on the ground, so the group faces a challenge in funding its overhead costs. The Uncompahgre Plateau Project applied for a National Forest Foundation mid-capacity grant, which provides operating funding for organizations that have been working together for some time, but was unsuccessful in receiving this grant.
Provide Incentives
The Uncompahgre Plateau Project assisted a local county in establishing a cost-share program to provide incentives for private landowners to treat invasive species. Furthermore, with assistance from Colorado State University, the group has established a program to assist local growers in cultivating native plants and purchase seed from them.
Monitor Results for Accountability
According to group members, the Uncompahgre Plateau Project monitors its work on both a landscape level and a site level in the watershed where their efforts have been focused and produces an annual report for the Executive Committee and agency offices that describes their accomplishments. Some participants noted that monitoring efforts could be improved if there were more resources available. To monitor individual treatments on a site level, the group has set up a series of specific locations across a site that are monitored before, and 2 and 5 years after, a site is treated to assess whether the treatments are having anticipated results. For landscape-level monitoring the Uncompahgre Plateau Project uses GIS data to assess vegetation age classes across the watershed. The monitoring results are used in an adaptive management approach to revise management strategies in order to improve future treatments. One participant noted that the most difficult thing about conducting monitoring for collaborative groups, particularly landscape-level monitoring as the Uncompahgre Plateau Project has done, is integrating the data from different agencies.
Comments from the Department of the Interior
GAO Contacts and Staff Acknowledgments
GAO Contact
Staff Acknowledgments
In addition to the contact named above, David P. Bixler, Assistant Director; Ulana Bihun; Nancy Crothers; Elizabeth Curda; Anne Hobson; Susan Iott; Rich Johnson; Ches Joy; and Lynn Musser made key contributions to this report. Marcus Corbin, John Mingus, Kim Raheb, Jena Sinkfield, and Cynthia Taylor also made important contributions to the report.
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Conflict over the use of our nation's natural resources, along with increased ecological problems, has led land managers to seek cooperative means to resolve natural resource conflicts and problems. Collaborative resource management is one such approach that communities began using in the 1980s and 1990s. A 2004 Executive Order on Cooperative Conservation encourages such efforts. GAO was asked to determine (1) experts' views on collaborative resource management, (2) how selected collaborative efforts have addressed conflicts and improved resources, and (3) challenges that agencies face as they participate in such efforts and how the Cooperative Conservation initiative has addressed them. GAO reviewed experts' journal articles, studied seven collaborative groups, and interviewed group members and federal and other public officials.
What GAO Found
Experts generally view collaborative resource management that involves public and private stakeholders in natural resource decisions as an effective approach for managing natural resources. Several benefits can result from using collaborative resource management, including reduced conflict and litigation and improved natural resource conditions, according to the experts. A number of collaborative practices, such as seeking inclusive representation, establishing leadership, and identifying a common goal among the participants have been central to successful collaborative management efforts. The success of these groups is often judged by whether they increase participation and cooperation or improve natural resource conditions. Many experts also note that there are limitations to the approach, such as the time and resources it takes to bring people together to work on a problem and reach a decision. Most of the seven collaborative resource management efforts GAO studied in several states across the country were successful in achieving participation and cooperation among their members and improving natural resource conditions. In six of the cases, those involved were able to reduce or avoid the kinds of conflicts that can arise when dealing with contentious natural resource problems. All the efforts, particularly those that effectively reduced or avoided conflict, used at least several of the collaborative practices described by the experts. For example, one effort obtained broad community representation and successfully identified a common goal of using fire, after decades of suppression, to restore the health of a large grasslands area surrounding the community. Also, members of almost all the efforts studied said they have been able to achieve many of their goals for sustaining or improving the condition of specific natural resources. However, for most of these efforts no data were collected on a broad scale to show the effect of their work on overall resource conditions across a large area or landscape. Federal land and resource management agencies--the Department of the Interior's Bureau of Land Management, U.S. Fish and Wildlife Service, and National Park Service, and the Department of Agriculture's Forest Service--face key challenges to participating in collaborative resource management efforts, according to the experts, federal officials, and participants in the efforts GAO studied. For example, the agencies face challenges in determining whether to participate in a collaborative effort, measuring participation and monitoring results, and sharing agency and group experiences. As a part of the interagency Cooperative Conservation initiative led by the Council on Environmental Quality (CEQ), the federal government has made progress in addressing these challenges. Yet, additional opportunities exist to develop and disseminate tools, examples, and guidance that further address the challenges, as well as to better structure and direct the initiative to achieve the vision of Cooperative Conservation, which involves a number of actions by multiple agencies over the long term. Failure to pursue such opportunities and to create a long-term plan to achieve the vision may limit the effectiveness of the federal government's initiative and collaborative efforts. |
gao_GAO-10-581 | gao_GAO-10-581_0 | Background
Congress built into the Recovery Act numerous provisions to increase transparency and accountability, including requiring recipients of funds to report quarterly on a number of measures. To implement these requirements, OMB worked with the Recovery Board to deploy a nationwide system at FederalReporting.gov for collecting data submitted by the recipients of funds. OMB set the specific timeline for recipients to submit reports and for agencies to review the data. Recipients are required to submit the reports in the month after the close of a quarter, and, by the end of the month, the reports are to be reviewed by federal agencies for significant errors and missing information before being posted to Recovery.gov. For the programs discussed in this report, information was submitted by recipients for the quarter ending December 31, 2009 (second round reporting) and posted on Recovery.gov on January 30, 2010.
While OMB’s role was to provide governmentwide guidance, one of the functions of the Recovery Board was to establish the Web site and to publish a variety of data, including recipient data once it was reviewed by the federal agencies. These data, collected through www.FederalReporting.gov, are made available to the public for viewing and downloading on www.Recovery.gov. The Recovery Act set a demanding schedule for implementing Recovery.gov, requiring the Recovery Board to establish the Web site within 30 days. The Recovery Board’s goals for this Web site were to promote accountability by providing a platform to analyze Recovery Act data and serving as a means of tracking fraud, waste, and abuse allegations by providing the public with accurate, user-friendly information.
This was an extensive undertaking across the federal government. OMB, the Recovery Board, and federal agencies, among others, worked to design a Web site, develop the capability to handle tens of thousands of submissions, develop guidance on reporting, and assist recipients in meeting reporting requirements. More specifically, within a short period of time, OMB and the Recovery Board implemented a recipient reporting system that covered a wide-range of programs and provided detailed and up-to-date information on the use of Recovery Act funds. Our fieldwork and initial review and analysis of recipient data from www.Recovery.gov indicated that there was a range of significant reporting and quality issues that needed to be addressed, including issues with interpretations of reporting guidance. OMB told us that achieving the promised degree of transparency will be an iterative process, during which the reporting process and submitted information will improve.
The Recovery Act required recipients to report specific information, including descriptive information on each award, which we discuss further in the following section. In the accountability and transparency section of the act, transparency is not specifically defined. However, the act requires that the award information on Recovery.gov be made available to enhance public awareness of the use of funds. Furthermore, both Members of Congress and the President have asserted the need for accountability, efficiency, and transparency in Recovery Act spending, with the administration pledging that the Recovery Act would “break from conventional Washington approaches to spending by ensuring that public dollars are invested effectively and that the economic recovery package is fully transparent and accountable to the American people.” Thus, the transparency of award information on Recovery.gov, particularly in narrative fields (the focus of this review) is particularly important.
For this report, we reviewed the 11 energy and infrastructure programs introduced previously. (See table 1.) No awards were made for two of the programs—the Broadband Initiatives Program and the Supplemental Discretionary Grant Program—by December 31, 2009. Awards were made for the other 9 programs by this date, requiring recipients to submit reports for the second round of reporting.
OMB Created Baseline Guidance on Describing Awards Expecting but Not Requiring Agencies to Provide Supplemental Guidance
Both the Recovery Act and OMB require recipients to report on a wide range of items to track the uses of funds. These items include—but are not limited to—overall descriptions of the awards, projects and activities funded, funding amounts, numbers of jobs created or retained, compensation for certain executives, and awards to subrecipients. As discussed earlier, our focus is on the extent to which descriptions of awards reported by recipients and published on Recovery.gov provide a basic understanding of what funds are being spent on and what outcomes are expected. As a result, we focused on certain reporting requirements and guidance that provide that basic understanding, such as the location of the project and the nature of the award activities.
Recovery Act Created Broad Requirements for Reporting on Awards
The act created broad requirements for recipient reporting. Specifically, the act requires, among other types of information, that recipients report the total amount of Recovery Act funds received, associated obligations and expenditures, and a detailed list of those projects or activities. For each project or activity, the detailed list must include its name and a description, an evaluation of its completion status, and an estimate of the number of jobs created and the number of jobs retained through that project or activity. The act did not include any more specific interpretation or explanation of these requirements.
OMB Created Generic Guidance That Applies Across a Wide Range of Agency Programs
To operationalize the act’s requirements, OMB provided recipients with a range of guidance through memorandums, supplemental materials, and reporting instructions. Specifically, starting for the period ending September 30, 2009 (and repeated for the quarter ending December 31), OMB’s reporting instructions for the Recipient Reporting Data Model specified that recipients would provide, among other things, the project name, which should be brief and descriptive; a project description that captures the overall purpose of the award and expected outputs and outcomes or results; an award description that describes the overall purpose, expected outputs, and outcomes or results of the award, including significant deliverables and, if appropriate, units of measure; the project status, which was specified as not started, less than 50 percent complete, completed 50 percent or more, or complete; an activity description, which categorizes projects and activities; the amount of the award; and the primary place of performance, which is the physical location of award activities.
Three of these fields—project name, project description, and award description—are narrative fields. OMB’s Recipient Reporting Data Model does not specifically address the clarity of such descriptions, although OMB, in its December 2009 guidance to heads of executive departments and agencies, has stated that the narrative information must be sufficiently clear to facilitate understanding by the general public.
Several of these fields are defined in ways that are inconsistent with reporting award project and activity information as required by the Recovery Act. Where, for example, funds are awarded using a single award to cover multiple projects, requiring a project description that captures the overall purpose of the award is not consistent with the requirement in the act to report a detailed list of all projects and activities each having its own name, description, completion status, and potential outcomes. Requiring that status, outcomes, or other information covered be reported in single fields on an award-by-award rather than a project-by-project or activity-by- activity basis may convey an incomplete impression if multiple projects or activities are being included. Officials from OMB agreed with this assessment but said that the agency, in creating its guidance and reporting data model, weighed the level of reporting detail required against the potential reporting burden.
OMB created the guidance to require general information that could be applied broadly across a wide range of recipients. OMB defined the three narrative fields to solicit high-level information that is not overly specific to a single program. In this regard, the guidance had to be applicable to awards that are for discrete activities at a single location and for a single purpose.
For example, under the Federal Highway Administration’s (FHWA) Highway Infrastructure Investment program, an award might be for a single project to widen a section of a road or to replace a substandard bridge. bundle several discrete activities at different locations. For example, under the Federal Transit Administration’s (FTA) Transit Capital Assistance Program, a transit agency could receive an award that has different purposes at different locations. are like block grants in which recipients (i.e., states, territories, and tribes) receive funds for a broad purpose and make subawards to local entities, which then decide the specific uses for which funds are to be spent. For example, under the Department of Energy’s Weatherization Assistance Program, recipients receive funding to enable low-income families to reduce their energy bills by making energy-efficiency improvements to their homes. In turn, the recipients provide grant funds to a number of local agencies to actually carry out the purposes of the program, which might involve modernizing heating equipment in one home and installing insulation in another. are components of a larger project, but are not linked to the larger project for reporting purposes. For example, under the Civil Works Program, the U.S. Army Corps of Engineers (Corps) may enter into a contract (the award) with one company to dredge a river channel and with another company to build a seawall, all for the purpose of improving navigable waters at a specific location. Each recipient reports on the activities conducted under the individual award but not the overall project being funded as each recipient works on only a piece of the larger project.
OMB officials also told us the agency created generic reporting guidance because they expected the guidance to be a baseline, with agencies providing supplemental guidance that was more specific to unique program characteristics and situations that OMB’s one-size-fits-all guidance could not effectively address. According to OMB, the agencies would be better sources of program-specific individualized guidance, tailored to the awards made under their programs. As discussed in the next section of this report, most agencies included in our review did provide some type of technical assistance or supplemental materials to aid recipients in reporting. However, most did not develop formal, program-specific supplemental guidance that was approved by OMB, and OMB did not require agencies to do so. For agencies that do develop program-specific supplemental guidance, OMB officials told us that they primarily review this guidance for consistency with their agency’s general guidance, and review the supplemental guidance to ensure its overall sufficiency. OMB officials did not indicate if their review includes whether agencies developed guidance on their narrative fields. Also, while OMB reviews formal guidance, it does not monitor other forms of agency supplemental material or technical assistance provided to recipients. (See apps. I-XI for additional information on the agencies’ reporting assistance and its possible effects on the transparency of descriptions).
OMB continues to update its guidance based on lessons learned from early reporting experiences, recognizing that the reporting process is a work in progress. For example, OMB clarified its guidance on calculating jobs created or retained to address issues with the jobs data reported by recipients during the first reporting round. During the course of our review, OMB officials signaled that they are willing to revise their guidance should our assessment or other input suggest that changes are needed, but would need to balance any changes in guidance against additional reporting burdens.
OMB’s Guidance on Narrative Fields Was Not Clear
We found two instances in which OMB’s guidance on narrative fields was unclear. First, for the award description field, the guidance provided that recipients of grants should describe the overall purpose of the award; recipients of contracts should provide a description of the overall purpose and expected outcomes including significant deliverables. OMB provided three examples of how to fill in the field, at least two of which do not conform to OMB’s expectations: “community development” and “special education – part B/preschool.” These examples provide only high-level titles but do not identify the purpose or outcomes. Furthermore, OMB allowed recipients to enter descriptions of up to 4,000 characters, providing space for more robust descriptions. As a result, based on our assessment of award descriptions, recipients are reporting widely varying types of information in this field—some of it very detailed, while other reporting is quite limited and uninformative. This issue is discussed more fully in the following section and can be seen in award information from Recovery.gov that we reproduced in appendixes I through XI.
Second, for the quarterly activities/project description field, OMB instructed grantees to provide a description of the overall purpose and expected outputs and outcomes or results of the award. As mentioned, project description, as that term is used in the act, refers to listed projects or activities, not awards. Instead, OMB's guidance anticipated that, for contracts, recipients were supposed to provide a description of all significant services or supplies delivered in the current calendar quarter. The example OMB provided in its Recipient Reporting Data Model, “Powers and Gold Beach Ranger Districts Curry County OR Has Fuels Item 1 Chetco Area and Item 3 – Powers Area” is, in our opinion, unclear, and it does not meet the general requirements that OMB laid out.
As discussed in the next section, the inconsistency and lack of clarity in OMB’s guidance may have contributed to the level of transparency in some of the award description information that we reviewed.
A Quarter of the Descriptions of Awards Provide Sufficient Information for Transparency; Some Additional Information Is Publicly Available for Those That Did Not
We estimate that about a quarter of the awards on Recovery.gov for the nine programs we reviewed were transparent—that is, had sufficiently clear and understandable information on the award’s purpose, scope, location, cost, nature of activities, outcomes, and status of work. Many others (an estimated 68 percent) had at least some or most of this information, and a small percentage (an estimated 7 percent) had little of this information. A few factors may have contributed to the lack of transparency in the descriptions we assessed, including the type of guidance and technical assistance provided by OMB and federal agencies. In addition to the information published on Recovery.gov, federal, state, and other public sources provide some additional information on the uses of Recovery Act funds.
About a Quarter of the Descriptions of Awards Met the Transparency Criteria; Others Lacked at Least Some Important Information
Because the Recovery Act did not define transparency, we developed our own set of criteria by which to measure the transparency of the awards’ descriptive fields. In order to assess the descriptions, we selected key fields required for recipient reporting from Recovery.gov that describe the uses of Recovery Act funds, including the three narrative fields. Using the Recovery Act, OMB’s guidance, and our professional judgment, we determined that these fields should collectively contain information on the award’s purpose, scope, location, cost, nature of activities, outcomes, and status of work—information necessary to make the use of funds transparent to the public. We also considered the extent to which information in the fields was clear and understandable. We drew a probability (simple random) sample of prime recipient awards to review for each of the nine energy and infrastructure programs that had awards in Recovery.gov for the second round of recipient reporting and compared the descriptions of these awards to our transparency criteria. (See app. XIII for more information about our transparency criteria and overall methodology.)
We estimate that 25 percent of the awards for the nine programs we reviewed (out of a total of over 14,000 awards) were transparent—had sufficiently clear and understandable information on the award’s purpose, scope, location, cost, nature of activities, outcomes, and status of work. (See table 2.) We estimate that another 68 percent had some or most of this information, but not all. Importantly, the descriptions of awards that partially met our transparency criteria varied widely. Some of these award descriptions had much of the information needed to make them transparent, but might be missing one important aspect, such as the expected outcomes. Other descriptions contained much less information and provided sufficient detail to meet only a few attributes of our criteria, such as purpose and location. Finally, an estimated 7 percent of the descriptions provided little or no information on nature, scope, purpose, location, or outcomes of the award.
Recipient-reported information varied widely in its transparency. For example, a Napa, California, transit recipient provided clear information in sufficient detail for the general public to understand the award’s purpose, scope, location, cost, nature of activities, outcomes, and status of work. Specifically, the description of the award states that it will be used to purchase four hybrid buses and construct a multimodal park-and-ride facility and, as a result, the transit fleet will be modernized, and the park- and-ride facility will allow hundreds of commuters to make more efficient, safe, and timely transit connections. (See table 3.) Thus, we determined that this description met our transparency criteria.
Other recipient-reported information was less transparent and partially met our transparency criteria. For example, a weatherization program description for the Commonwealth of Virginia partially met our transparency criteria because it contained some, but not all of the attributes needed to make the use of funds transparent to the public. (See table 4.) For example, the description did not provide information on the scope of the award because it did not indicate how many homes would be weatherized in the state. From publicly available information on other federal and state Web sites, we found information that would have made this description more complete. Specifically, we found that approximately 9,193 homes throughout the state of Virginia will undergo weatherization activities such as tests for carbon monoxide, heating/cooling equipment inspection and repair, domestic water heater insulation, and refrigerator and stove replacement. (The extent to which federal agency and state agency Recovery Act Web sites have material that supplement Recovery.gov recipient-reported information is discussed later in this section.)
Finally, some recipient-reported information contained little or no information on what funds are being spent on and what outcomes are expected. These did not meet our transparency criteria. For example information reported by the State of Michigan for a highway project did not describe the location of the roadway or the extent of the project, and used technical terminology to describe the nature of the project—chip sealing—that is not likely to be familiar to the general public. (See table 5.) As a result, this description did not meet our transparency criteria. From publicly available information on other federal and state Web sites, we found information that would have made this description more understandable and clearer. Specifically, we found that the award supports pavement improvement activities to resurface 7.8 miles of Featherstone Road from M-66 to Engle Road north of Sturgis. The award will result in improved driving quality by making the road smoother.
For more information on the transparency results for each program, as well as our assessment of each of the 467 awards that we reviewed, see appendixes I-XI.
Two Key Factors May Have Affected Transparency Results
Two key factors may have contributed—positively or negatively—to the transparency of the award descriptions we assessed from Recovery.gov, although we cannot directly correlate our specific transparency results to these factors.
Guidance
Most notably, the guidance provided may have played a role in the degree to which recipients transparently described their awards. As noted in the previous section, OMB’s guidance for reporting information on the uses of an award is unclear, which could have prevented some recipients from meeting some or all of our criteria in the transparency assessment. In addition, the type of assistance—program-specific guidance or technical assistance—as well as the level of detail, which varied across agencies, may have played a role in the extent to which awards met our transparency criteria.
Some agencies supplemented OMB’s high-level guidance with program- specific technical assistance on how to meet OMB’s reporting requirements, including specific instructions on what to write in the narrative fields. For example, FTA annotated OMB’s guidance with program-specific instructions and examples for all the reporting fields in FederalReporting.gov. In the project description field, FTA suggested that recipients “describe the specific outputs and outcomes that will result from the grant. This entry should include quantitative information about the activities conducted and items purchased under the grant.” For the most part, the programs in our review for which agencies provided program-specific guidance or technical assistance—Highway Infrastructure Investment, Transit Capital Assistance, and Geothermal Technologies Program—tended to have more transparent descriptions. However, other program-specific factors, such as grant applications that involved creating project descriptions for public dissemination in advance of award selection, may have also played a role in the degree to which such descriptions met our transparency criteria. For example, when some applications required recipients to create project descriptions for public dissemination in advance of award selection, such as in the Broadband Technology Opportunities Program, the recipients may have been more prepared to describe their awards in the narrative fields. For additional information by program, see appendixes I-XI.
Other agencies we reviewed only provided general reporting assistance to recipients, primarily by disseminating OMB’s guidance to help recipients navigate OMB’s reporting requirements. However, this assistance did not necessarily include specific clarification or instructions for completing narrative fields. For example, the Department of Energy provides technical assistance to Weatherization Assistance Program recipients that, for the most part, summarizes OMB’s guidance. The Federal Aviation Administration (FAA) distributes OMB’s guidance and provides recipient reporting assistance through each of its field offices, which in turn, determines how to disseminate guidance to recipients. In one FAA field office, a contractor hired to oversee Recovery Act efforts distributed information and guidance to every airport in the region by e-mail. For the most part, the programs in our review that only provided general reporting assistance to recipients, mostly through disseminating OMB’s guidance—Weatherization Assistance Program, Grants-in-Aid for Airports, and the Federal Buildings Fund—tended to have less transparent descriptions. However, other factors, such as the level of experience of the recipients in reporting on government awards, may have also played a role in the degree to which such descriptions met our transparency criteria. For additional information by program, see appendixes I-XI.
Data Quality Reviews
Federal agencies’ data quality reviews may also have played a role in the extent to which some recipients met our transparency criteria. OMB’s guidance requires that federal agencies conduct data quality reviews to address two key data problems—material omissions and significant reporting errors—but does not specify methodologies for such reviews. However, OMB does require federal agencies to develop data quality plans to articulate how they intend to detect and correct material omissions and significant reporting errors. OMB officials told us that given the limited amount of time federal agencies have to conduct these reviews, identifying misleading or erroneous information must take priority. Officials from almost all of the programs included in this review that had awarded funds for the second reporting round told us that they conduct automated checks of data, specifically of the numerical fields. For example, Department of Energy officials told us that they ensure the quality of recipient reported data for the Weatherization Assistance Program primarily through an automated analysis of key data fields, including the award number, recipient name, award amount, and jobs calculated. In a few cases, they also manually review the data for other anomalies. However, officials from some of the programs included in our review told us they did not typically review the information provided in narrative fields, and, of the three programs that do, none had a systematic process in place to evaluate the accuracy or transparency of the information. For example, FHWA officials told us that they “spot check” the information for significant errors because of the volume of awards—over 10,000—in their program.
In light of the importance of the quality of the Recovery Act data, the Recovery Board has worked with federal Inspectors General to establish a multiphased review process to look at the quality of the data submitted by Recovery Act recipients. To date, this process has focused on (1) whether agencies developed data quality reviews in anticipation of the data to be submitted and (2) identified data errors and omissions in recipients’ first cycle reports and factors that may have contributed to them and the actions taken by agencies, OMB, and the Recovery Board to improve the quality of the data that recipients will submit in future reporting cycles. The resulting report did not comment on the quality of the data in the narrative fields. According to the Recovery Board, future reports will focus on the effectiveness of the agency data quality review processes. For information on each agency’s data quality reviews, see appendix XII.
Federal and State Web Sites and Other Public Sources Provide Some Information to Supplement Recovery.gov, but the Level of Detail Varies
Recovery.gov includes award information on Recovery Act spending from both recipients and agencies, as well as various other required agency reports, including agency-specific Recovery Act plans and weekly financial and activity reports. Aside from the information on Recovery.gov, descriptive information on the uses of awards is available through other resources.
At the federal level, agency Web sites provide information on Recovery Act activities as required by OMB’s guidance. The level and type of award information provided on agency Web sites varies across the programs we reviewed. For example, FHWA has a link to a spreadsheet on its Web site that provides information such as the location and obligation amount for each award, as well as a short description. The Geothermal Technologies Program Web site has detailed information on each project, including the technology type, recipient name, location, objectives, description, and targets/milestones.
The Recovery Act did not require states to establish Web sites to provide Recovery Act information. However, all 50 states and the District of Columbia do post some information on their state-specific Recovery Act Web sites. As with the federal agency Web sites, however, the state Web sites provide varying levels of detail. For example, the New York State Recovery Act Web site, NYWorks (www.recovery.ny.gov), details how the state of New York is spending its Recovery Act funds through a map that provides specific information on each project that has been announced. In addition, the Web site provides links to over 40 other federal, state, and local entities that have additional information on Recovery Act spending. Mississippi’s Recovery Act Web site (www.stimulus.ms.gov) provides links to federal guidance and the recipient reports for projects in the state, but it does not provide additional information on a project-by-project basis beyond what is published on Recovery.gov. In some cases, state auditors have also developed Web pages or sites to provide information to the public on the oversight and monitoring of Recovery Act spending.
In addition to federal and state Web sites, information on the uses of Recovery Act funds can be found on some recipients’ Web sites and in other publicly available documents. For example, the Ohio Department of Transportation has a one-page description and photo for most recovery projects that provides detail on the activities and outcomes of that project, as well the expected completion date. Likewise, 36 of the 58 states, territories, and tribes receiving Recovery Act funds through the Weatherization Assistance Program have their weatherization plans on their Web sites. The Department of Energy requires all states, territories, and tribes to create these plans to outline how they will use weatherization funds, including Recovery Act funds.
Program Officials and Recipients Reported Differing Degrees of Citizen Feedback on Publicly Available Information
For the most part, the officials we spoke with said they are not systematically tracking the citizen feedback that they have received on publicly available award information. The Recovery Board tracks the total number of comments received on Recovery.gov—it receives about 125 to 200 e-mails per week—but does not categorize the e-mails by type of comment. However, Recovery Board officials told us that they plan to begin linking e-mails to specific projects in the future. OMB officials told us that the information published from the first round of reporting received public scrutiny and commentary, which they viewed as evidence that the transparency and reporting processes for the Recovery Act are working effectively. In fact, based on the comments OMB received, the agency added an automated check to FederalReporting.gov to ensure that certain numerical fields, such as zip codes or congressional districts, were correctly entered.
In general, federal agency officials told us that they have received some feedback on Recovery Act awards and the award information made available to the public. Officials from the Weatherization Assistance Program and Grants-in-Aid for Airports Program told us that the public has provided little feedback on awards and the award information made available to the public, while Geothermal Technologies Program officials told us that the public and media have provided positive feedback on the program’s Web site, which provides detailed information on each project. According to officials at a few agencies, many public inquiries on the Recovery Act addressed the availability of funding and jobs, not individual awards. According to FHWA officials, the agency has no baseline information for comparing the feedback on Recovery Act awards with comments on awards made before the Recovery Act, because they did not previously track feedback on project information they provided to the public.
Conclusions
The administration faced a daunting task in simultaneously putting in place ways to spend large sums of Recovery Act funds that required, in some instances, developing new programs and, in others, significantly expanding the size of existing ones, while also seeking to make these efforts more transparent to the public than previous efforts had been. Although OMB initially focused on quickly designing a reporting system that covered a vast array of Recovery Act programs delivered in different ways, now that such requirements are largely in place, OMB can begin focusing on other important aspects of its transparency efforts. Specifically, ensuring that the narrative portions of Recovery.gov award descriptions prepared by recipients are understandable is an important aspect of OMB’s transparency effort. These descriptions provide a key mechanism through which the public can understand clearly how their tax dollars are being spent and what is likely to be achieved from these expenditures.
Looking forward, OMB has an opportunity to improve the transparency of the recipient-reported narrative information on Recovery.gov by revising its guidance to remedy the problems we found. Assuredly, the more difficult task is having tens of thousands of recipients follow this guidance and report on their awards in a way intended by the act and the administration. In our view, one promising approach is for OMB to work with the executive departments and agencies that seek to provide supplemental guidance on narrative description information. In doing so, OMB can use its central position to further mission agencies' efforts to tailor resulting guidance to their individual situations in a way that furthers the transparency goals discussed in this report. A second approach is for OMB, in partnership with federal agencies, to periodically review the descriptions of awards submitted by recipients and to work with the Recovery Board on the board’s assessments of agencies’ data quality reviews to gain a sense of whether the information reported is meeting the administration’s expectations.
We are not making recommendations to individual agencies at this time because we believe that there are actions that OMB can take which may lead to substantial improvements in recipient reporting of narrative information. However, as we continue to monitor OMB’s efforts to achieve transparent Recovery Act spending, we will reassess, as needed, whether actions in these areas are needed.
Recommendations for Executive Action
To further the goals of public understanding of what Recovery Act funds are being spent on and what results are expected, we recommend that the Director, Office of Management and Budget, take the following three actions: Revise OMB’s recipient reporting guidance, including the Recipient Reporting Data Model, to provide recipients with clearer general instructions and examples for narrative fields aimed at fostering more complete information on the uses of funds and expected outcomes.
Work with executive departments and agencies to determine (1) whether supplemental guidance is needed to meet, in a reasonable and cost-effective way, the intent of the Recovery Act for reporting on projects and activities and (2) whether that supplemental guidance or other agency-proposed technical assistance dealing with narrative descriptions of awards provides for transparent descriptions of funded activities.
Periodically (1) review, in partnership with executive departments and agencies, the descriptions of awards—in particular, the narrative fields—submitted by recipients to determine whether the information provides a basic understanding of the uses of the funds and the expected outcomes, and, if not, determine what actions to take, including encouraging agencies to develop or improve program-specific guidance and (2) work with the Recovery Board on the board’s assessments of departments’ and agencies’ data quality reviews to ensure the adequacy of these reviews and further reinforce actions to meet transparency goals.
Agency Comments and Our Evaluation
We provided a draft of this report to the Office of Management and Budget; the Departments of Agriculture, Commerce, Energy, and Transportation; the Corps of Engineers; and the General Services Administration for their review and comment. OMB officials agreed with our recommendations. The officials stated that our report would be enhanced if it better communicated information in three areas. First, regarding our findings on transparency, the large “partially met” category contains awards that have a substantial amount of the information needed to understand what funds are being spent on and what outcomes are expected as well awards that contained sufficient information on only a few attributes. Second, OMB asked that we recognize the need to balance more extensive reporting with the effort needed to comply with that reporting. Third, OMB officials suggested that we state more clearly that we assessed the transparency of award information collectively—that is, from reviewing the 12 data fields as a whole rather than from looking at the information contained in each field individually—since some information that might not appear in one data field could show up in another field. We revised our report to better communicate these aspects. The officials also provided technical and clarifying comments, many of which we incorporated.
For the most part, the other agencies’ comments were limited to technical and clarifying comments, which we incorporated where appropriate. In its technical comments, the Department of Transportation provided a general comment from FTA that the transit administration believed that many of the award descriptions for transit projects that we assessed as partially meeting our transparency criteria could have been assessed as meeting the criteria. Given the procedures that we used to make our assessment, we remain confident that these assessments were fair and accurate. We do note that providing narrative information is a learning experience, with recipients having opportunities in subsequent reporting rounds to improve their narrative material to be more transparent. Finally, the Department of Commerce provided a letter in which it detailed a number of ways that it undertook to achieve transparency for its Broadband Technology Opportunities Program. (See app. XV.)
As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to congressional committees and subcommittees with responsibilities for the programs discussed in this report; the Director, Office of Management and Budget; and the Secretaries of the agencies discussed in this report. In addition, this report will be available at no charge on GAO’s Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact Katherine Siggerud at (202) 512-2834 or [email protected] for buildings, telecommunications and transportation issues, Patricia Dalton at (202) 512- 3841 or [email protected] for energy and Army Corps of Engineers issues. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Contributors to this report are listed in appendix XVI.
Broadband Initiatives Program
Within the Department of Agriculture, the Rural Utilities Service’s Broadband Initiatives Program makes funding available for broadband infrastructure projects in rural areas that lack sufficient access to high- speed broadband service. The Recovery Act provides $2.5 billion of budget authority for the Rural Utilities Service to extend grants, loans, and loan/grant combinations to projects for the purpose of facilitating broadband deployment in rural communities. Through the use of loans, the Rural Utilities Service can support a principal amount exceeding the appropriation.
On July 9, 2009, the Rural Utilities Service and the Department of Commerce’s National Telecommunications and Information Administration (NTIA) released a joint Notice of Funds Availability detailing the requirements, rules, and procedures for applying for broadband funding. Under this funding notice, the Rural Utilities Service received 401 applications requesting nearly $5 billion, and another 833 applications were joint applications to the Broadband Initiative Program and NTIA’s Broadband Technology Opportunities Program totaling nearly $13 billion.
Broadband grants and loans fall into several first round project categories: Last Mile projects. Up to $1.2 billion was available for last mile infrastructure projects in remote and non-remote areas. A “last-mile” project is defined as any broadband infrastructure project that provides service to end users or end user devices. A remote area is an unserved, rural area 50 miles from the limits of a nonrural area, and an unserved area is defined as a proposed service area composed of one or more contiguous census blocks, where at least 90 percent of households in the proposed funded service area lack access to facilities-based, terrestrial broadband service.
Middle Mile projects. Up to $800 million was available for Middle Mile projects. A Middle Mile project is defined as a broadband infrastructure project that does not predominantly provide broadband service to end users or to end user devices, and may include interoffice transport, backhaul, Internet connectivity, or special access.
The Rural Utilities Service released a separate second funding round notice on January 22, 2010. Under this second funding notice, the Rural Utilities Service received a total of 776 applications requesting nearly $11.2 billion. The second funding notice retained funding for Last Mile and Middle Mile projects, but eliminated the funding category for Last Mile Remote projects. Several new categories have been established for satellite, rural library broadband, and technical assistance, as described below: Last Mile projects. Up to $1.7 billion is available for loans or loan/grant combinations.
Middle Mile. Up to $300 million is available for loans or loan/grant combinations.
Satellite, rural library broadband, and technical assistance projects.
Up to $100 million is available in grants for satellite projects, as well as any and all funds not obligated for Last Mile and Middle Mile projects, and up to $5 million is available in grants for connecting rural libraries and developing regional broadband development strategies in rural areas.
Second round awards are expected to be announced starting in June 2010.
Nature and Type of Rural Utilities Service Broadband Projects
In the first round, the Rural Utilities Service announced over $1 billion in grants and loans for 68 broadband projects in 31 states, one territory, and 17 tribal lands and Alaska Native regions. According to the Department of Agriculture, these projects will make high-speed Internet available to an estimated 529,000 households and 96,000 rural businesses and public facilities. Of the 68 awarded projects, 49 are for Last Mile non-Remote areas, 13 are for Last Mile Remote areas, and 6 are for Middle Mile projects. As of May 3, 2010, the agency had obligated nearly $250 million for 26 of the 68 awards. There have been no program expenditures to date.
The projects selected include a range of efforts to bring high-speed Internet to remote and rural communities that currently have little or no access to broadband technology. Funding has been awarded to a range of providers—small telecommunications companies, wireless providers, and rural electric and telephone providers—to build networks in rural areas. These projects feature a variety of Internet technologies, including wireline and wireless, and are expected to provide Internet connectivity to homes, business, and anchor institutions in rural communities.
No Basis to Judge Broadband Awards for Transparency
Since no grant or loan money had been obligated to recipients as of December 31, 2009, there were no awards reported on Recovery.gov for the second reporting round.
Prospective Agency Guidance and Other Factors That May Affect Transparency of Reported Information
The Rural Utilities Service did not issue supplemental technical assistance to recipients to augment the Office of Management and Budget’s (OMB) guidance on recipient reporting. Because Broadband Initiatives Program funds have not yet been expended, recipient reporting for the program will not occur until July 2010. Therefore, the agency does not have experience with how well OMB’s guidance ensures that the public has accurate information. Based on information that the Rural Utilities Service received in the first funding round, the agency developed enhanced application guide procedures and developed more comprehensive forms for the applicant’s use that should enable an applicant to submit better data.
The agency held a series of workshops together with NTIA in July 2009 and January 2010 coinciding with the first and second funding round notices and agency officials said that they will be hosting upcoming workshops to discuss compliance and reporting requirements.
Other Ways Award Information Is Made Available to the Public
The Rural Utilities Service makes broadband stimulus project information available to the public in several forms, including the following: Department of Agriculture Web site (www.usda.gov/recovery). This Web site includes an overview of all Recovery Act funds provided to the Department of Agriculture and a Recovery Act project map that provides the award recipient, type, and amount, among other things, for all departmental awards. The agency also publishes a blog for each state (linked to the project map), with an entry that briefly describes each award and provides a venue for public feedback.
Broadband USA (www.broadbandusa.gov). This joint Rural Utilities Service/NTIA broadband portal includes an information library on Recovery Act broadband programs and an application database. The database, which includes funded applications, provides information such as the project type, proposed project area, description, and in many cases, a project executive summary.
Press releases (www.usda.gov/rus). On its site, the Rural Utilities Service posts press releases announcing awards for the Broadband Initiatives Program.
According to agency officials, there has been considerable interest from various groups about projects funded by the Broadband Initiatives Program. These comments range from full support for a project to questions about why the agency made an award to a community. Officials stated that, in most cases, the public is satisfied with the information that has been made to the general public, but some groups want more information than the Rural Utilities Service can make available, such as proprietary information about the award recipient. The agency plans to make all information available to the public in conformance with the requirements of the Freedom of Information Act.
Broadband Technology Opportunities Program
Within the Department of Commerce, the National Telecommunications and Information Administration’s (NTIA) Broadband Technology Opportunities Program makes grant funding available to a variety of entities for broadband infrastructure, public computer centers, and innovative projects to stimulate demand for, and adoption of, broadband. Of the $4.7 billion appropriated for the program, up to $350 million was also available for the State Broadband Data and Development Program pursuant to the Broadband Data Improvement Act for the purpose of developing and maintaining a nationwide map featuring the availability of broadband data.
On July 9, 2009, NTIA and the Department of Agriculture’s Rural Utilities Service released a joint Notice of Funds Availability detailing the requirements, rules, and procedures for applying for broadband funding. Under this funding notice, NTIA received 260 applications requesting over $5.4 billion to fund broadband infrastructure projects in unserved and underserved areas. In addition, parties filed more than 320 applications with NTIA requesting nearly $2.5 billion in grants for projects that promote sustainable demand for broadband services and more than 360 applications with NTIA requesting more than $1.9 billion in grants for public computer centers. Parties submitted another 833 joint applications to the Broadband Technology Opportunities Program and the Rural Utilities Service’s Broadband Initiatives Program requesting nearly $13 billion for broadband infrastructure projects.
Broadband Technology Opportunities Program funds were available through the following three categories of eligible projects during the first round: Broadband Infrastructure. Up to $1.2 billion was available for Broadband Infrastructure projects. This category consists of two components—Last Mile and Middle Mile—and funds projects to deliver access to unserved and underserved areas. An “unserved” area is defined as one or more contiguous census blocks, where at least 90 percent of households in the proposed funded service area lack access to facilities-based, terrestrial broadband service. An “underserved” area is defined as one or more contiguous census blocks where (1) no more than 50 percent of the households have access to facilities-based, terrestrial broadband service; (2) the rate of broadband adoption is 40 percent of households or less; and (3) no service provider advertises broadband speeds of at least 3 megabits per second (“mbps”).
Public Computer Centers. Up to $50 million was available for projects that expand public access to broadband service and enhance broadband capacity at entities such as community colleges and public libraries that permit the public to use these computing centers.
Sustainable Broadband Adoption. Up to $150 million was available for innovative projects that promote broadband demand, including projects focused on providing broadband education, awareness, training, access, equipment, or support, particularly among vulnerable population groups that traditionally have underutilized broadband technology.
NTIA released a subsequent funding round notice on January 22, 2010. Under this second funding notice, the agency received a total of 886 applications requesting a total of $11 billion in funding. For the second funding notice, NTIA is adopting a “comprehensive communities” approach as its top priority in awarding infrastructure grants, focusing on Middle Mile projects that connect community anchor institutions, such as libraries, hospitals, community colleges, universities, and public safety institutions. The following project categories are funded in the second funding round: Comprehensive Community Infrastructure projects. Up to $2.35 billion is available for broadband infrastructure projects that emphasize Middle Mile broadband capabilities and new or substantially upgraded connections to community anchor institutions, especially community colleges. Under the second funding notice, a Middle Mile project is defined as any component of a comprehensive community infrastructure project that provides broadband service from one or more centralized facilities (i.e., the central office, the cable headend, the wireless switching station, or other equivalent centralized facility) to an Internet point of presence.
Public Computer Centers. At least $150 million is available to provide broadband access to the general public or a specific vulnerable population and must either create or expand a public computer center or improve broadband service or connections at a public computer center, including those at community colleges, that meets a specific public need for broadband service.
Sustainable Broadband Adoption. At least $100 million is available to fund innovative projects that promote broadband demand, including projects focused on providing broadband education, awareness, training, access, equipment, or support, particularly among vulnerable groups that traditionally have underutilized broadband technology.
Second round awards are expected to be announced starting in July 2010.
Nature and Type of Broadband Awards
In the first funding round, NTIA awarded and obligated 82 Broadband Technology Opportunities Program grants worth more than $1.2 billion. As of May 10, 2010, more than $8.6 million had been expended; however, NTIA officials said that more funds have been spent, but not yet drawn down. NTIA has funded 49 infrastructure projects, 20 public computing centers, and 13 sustainable broadband adoption projects in 45 states and territories. In addition, NTIA has initially funded 54 broadband mapping and planning grants in 50 states, three territories, and the District of Columbia, totaling more than $100 million.
Over Half of Broadband Descriptions Met Our Transparency Criteria
We assessed the transparency of descriptive information for broadband awards available on Recovery.gov. We found that an estimated 57 percent met our transparency criteria, 43 percent partially met our criteria, and zero percent did not meet our criteria.
For broadband descriptions that partially met or did not meet our criteria, we collected information necessary to make the descriptions meet the transparency criteria. The descriptions of awards in our sample, whether they met our transparency criteria, and additional information that we found to complete the narrative descriptions are provided at the end of this appendix.
Prospective Agency Guidance and Other Factors That May Affect Transparency of Reported Information
Since the Broadband Technology Opportunities Program is an entirely new program, NTIA focused on developing application processes to ensure the timely distribution of project funding. NTIA did not issue supplemental technical assistance to recipients to augment OMB’s guidance on recipient reporting.
The agency held a series of workshops in July 2009 and January 2010 that coincided with the first and second funding round notices, and agency officials said that they will be hosting upcoming workshops to discuss compliance and oversight requirements. According to several grant recipients that we spoke with, agency officials have been very helpful in providing assistance throughout the application and reporting process.
Other Ways Award Information Is Made Available to the Public
NTIA makes broadband stimulus project information available to the public in several forms. For example: NTIA Web site (www.ntia.doc.gov/broadbandgrants/). On April 7, 2010, NTIA launched a new Web site for current information on the Broadband Technology Opportunities Program. The Web site includes sections on Recovery Act grants awarded and grants management, as well as an application database, and will make publicly available copies of reports on award recipients’ progress that contain detailed descriptions of recipient activities. For each award, the agency posts an award summary that includes the name, location, and amount of the award, as well as a detailed description of the award activities and outcomes.
Broadband USA (www.broadbandusa.gov). This joint Rural Utilities Service/NTIA broadband portal includes an information library on Recovery Act broadband programs and an application database. The database, which includes funded applications, provides information such as the project type, proposed project area, description, and, in many cases, a project executive summary.
Press releases (www.ntia.doc.gov/press). NTIA also posts press releases announcing awards for the Broadband Technology Opportunities Program, including the mapping grants. These press releases typically include short, narrative information on the awards.
In addition, award recipients are using a variety of methods to inform the public about their projects, including company/institution Web sites, press releases, and local news media reports. Award recipients told us that they have received hundreds of phone calls or Web inquiries from individuals who were looking for employment or vendors who were attempting to sell goods or services to the award recipients. According to agency officials, there has been considerable interest from various groups about projects funded by the Broadband Technology Opportunities Program. These comments range from full support for a project to questions about why a project was funded in an area where there may already be an incumbent broadband service provider.
Broadband Descriptions That Met Our Transparency Criteria
The following award descriptions contained sufficient information on general purpose, scope and nature of activities, location, and expected outcomes to meet our transparency criteria. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors. .
STATE LIBRARY, ARCHIVES & PUBLIC RECORDS, ARIZONA American Recovery and Reinvestment Act - PCC - Arizona Public Computer Centers The Arizona Public Computer Centers project plans to enhance existing facilities in more than 80 public libraries throughout Arizona. The project expects to deploy more than 1,000 computers across the state to meet the growing demand for public computers and broadband access. The project intends for users to access valuable e-resources and enable libraries to provide training in 21st century skills. The Arizona State Library plans to partner with a variety of government, not-for-profit, and tribal organizations. The Arizona State Library expects 84 public computer centers to serve more than 75,000 users per week or more than 450,000 residents throughout the term of the grant.
The Arizona Public Computer Centers project plans to enhance existing facilities in more than 80 public libraries throughout Arizona. The project expects to deploy more than 1,000 computers across the state to meet the growing demand for public computers and broadband access. The project intends for users to access valuable e-resources and enable libraries to provide training in 21st century skills. The Arizona State Library plans to partner with a variety of government, not-for-profit, and tribal organizations. The Arizona State Library expects 84 public computer centers to serve more than 75,000 users per week or more than 450,000 residents throughout the term of the grant.
Public, Society Benefit, General/Other (Information not reported)
CONNECT ARKANSAS INC.
Little Rock, AR 72201-1766 Less Than 50% Completed PUBLIC UTILITIES COMMISSION, CALIFORNIA For Broadband Mapping, CPUC is gathering and verifying broadband data and creating a publicly available, interactive web-based map that will display information about the broadband services and providers available at each address throughout California. For Broadband Planning, CPUC is partnering with the California State University, Chico Research Foundation (CSU), to carry out activities intended to increase broadband subscribership.
Broadband Mapping: collection of certain broadband data from all broadband providers in California, specified data verification tasks, GEO-coding, and creation and on-going maintenance of a state-level broadband availability map. Data must be collected, verified, geo-coded, and submitted to the NTIA twice yearly for the entire duration of the broadband mapping portion of this Grant Program. Broadband Planning: identify subscribership levels in order to develop a plan to identify barriers to broadband adoption, develop marketing and promotional material aimed at promoting broadband adoption and usage, and work with broadband providers to encourage high speed Internet services.
San Francisco, CA 94102-3214 Less Than 50% Completed 06-50-M09001 GOVERNOR'S OFFICE OF INFORMATION TECHNOLOGY, THE State Broadband Data and Development Grant Program The State of Colorado Governor's Office of Information Technology (OIT) is overseeing Colorado's State Broadband Data and Development Program which will map broadband availability across the state and provide the information regarding broadband service required by the NTIA. OIT will verify this broadband service data through a number of methods. The Broadband Data and Development Program grant also includes a planning effort, funded through five years. This planning program will start by working closely with local stakeholders in several regions of the state to develop local technology planning teams during the first two years of the grant period. The teams will assess broadband demand and barriers to adoption and will disseminate the broadband service information being mapped. Successful methods in developing these teams' work will then be generalized across the state over the last three years of the funded planning period. 12/30/09: Finalizing award documents, selection and contract development of data contractor and defining positions to be hired. 601 East 18th Avenue, Suite 250 08-50-M09032 TECHNOLOGY & INFORMATION, DELAWARE DEPT OF State Broadband Data and Development Grant The Delaware Department of Technology and Information (DTI) was designated by Govenor Markell as the Delaware entity eligible to receive a federal grant under the National Telecommunications and Information Administration's (NITA) State Broadband Data and Development Grant Program. DTI applied for $1,069,922 to cover broadband mapping activities for the first 2 years, as well as $472,811 for broadband planning purposes. DTI will oversee the broadband mapping data collection and verification, including public anchor institution information, and the development of an interactive state broadband inventory mapping system. The resulting data will be presented to NITA per their specifications and also made available to the public from a user friendly website. DTI will leverage exsisting IT infrastructure, and will partner with the University of Delaware's Information for Public Administration (UD-IPA) to achieve the overall NTIA goals. The longer term broadband planning activities will be carried out by DTI in partnership with UD-IPA. Relationships will be built with Technology Planning Teams comprised of representativies from local governments, small businesses, and agricultural communities. These teams will be formed in parallel with mapping activities and will continue for the full 5 years of the program. They will idnentify (1) broadband best practicies for their community; (2) issues affecting the deployment and full use of broadband; and (3) potential projects to expand the use and deployment of broadband in these communities.
DTI signed the approved grant on December 16,2009. Internal resources for the the project have been assigned. Initial meetings have been conducted within DTI and the Delaware Office of Management and Budget to review reporting requirements. DTI is currently working on finalizing the Statement of Work with vendor to begin data collection. 10-50-M09029 PARTNERSHIP FOR A CONNECTED ILLINOIS, THE Connect Illinois Mapping and Planning American Recovery and Reinvestment Act - SBDD - The Partnership for a Connected Illinois, Inc. This project, conducted on behalf of the State of Illinois, seeks to employ GIS toolsets and experienced personnel to deliver comprehensive broadband mapping data, develop state-level broadband maps, aid in the development and maintenance of a national broadband map, and fund statewide initiatives directed at broadband planning, in a manner compliant with the National Telecommunications and Information Administration?s (NTIA) Notice of Funding Availability (NOFA) for the State Broadband Data and Development Grant Program. The ensuing deliverables will include datasets as required by the NTIA as well as web-based, interactive broadband maps to inform state and local government officials, consumers, broadband providers, community development organizations, researchers, and other stakeholders. This interactive web site (www.ConnectIllinois.org) will be critical to ensure accessibility of the broadband data, but it will also be key to increasing awareness of the mapping program and the benefit of broadband. It will also play an important role in ensuring local verification of the mapping data. Data will be compiled directly from network providers with protection to the proprietary aspects of that data provided by non-disclosure agreements. Connect Illinois partner Connected Nation will utilize the value of long-standing relationships with providers to negotiate the non-disclosure agreements, receive datasets from individual providers, develop comprehensive datasets of Illinois providers of all platforms excluding satellite, then incorporating those datasets into informative GIS mapping that will be the first of its kind in Illinois. The end product of the mapping activities will be that of a highly interactive and accessible mapping suite called BroadbandSTAT. This product will allow easily functional search activity at street levels and will be combined with U.S. Census and research data to provide users with the ability to drill down to neighborhoods, see which companies provide service in their areas, determine the density of households and populations, and county-level adoption rates. Also of great value will be the collection of datasets reflecting the presence of community anchor institutions throughout the state. Teams are already at work identifying the locations of various health care providers, K-12 schools, public and private colleges and universities, public safety answering points (PSAP?s), fire departments, police departments, and ambulance services, and, to the extent permissible, other local emergency services agencies. Community anchor institution data, including connectivity information, will be submitted as datasets to NTIA, but it will also be overlaid within a mapping context to create a remarkable graphic depiction of the locations of these critical connection points from a statewide to a local level. Community anchor institutions tend to be key junctures in the development of telecommunications systems nodes that provide greater access to households and businesses in unserved and underserved areas. Lastly, SBDD funding under this award will provide for five years of planning activities that relate to the consistent and steady communication of the ?messages? of the mapping products throughout the state, including instruction on the use of the mapping tools. Through strategic relationships with various organizations including the Illinois Resource Network, the Governor?s Broadband Deployment Council, the Illinois Library Association, the Illinois Department of Commerce and Economic Opportunity, and the Connect Illinois Broadband Resource Development Council, this project envisions a steady flow of communication and information that will ensure full statewide penetration of awareness of the mapping artifacts and how to employ them at their best and highest uses.
Teams are already at work identifying the locations of various health care providers, K-12 schools, public and private colleges and universities, public safety answering points (PSAP?s), fire departments, police departments, and ambulance services, and, to the extent permissible, other local emergency services agencies. Community anchor institution data, including connectivity information, will be submitted as datasets to NTIA, but it will also be overlaid within a mapping context to create a remarkable graphic depiction of the locations of these critical connection points from a statewide to a local level. Community anchor institutions tend to be key junctures in the development of telecommunications systems nodes that provide greater access to households and businesses in unserved and underserved areas. Lastly, SBDD funding under this award will provide for five years of planning activities that relate to the consistent and steady communication of the ?messages? of the mapping products throughout the state, including instruction on the use of the mapping tools. Through strategic relationships with various organizations including the Illinois Resource Network, the Governor?s Broadband Deployment Council, the Illinois Library Association, the Illinois Department of Commerce and Economic Opportunity, and the Connect Illinois Broadband Resource Development Council, this project envisions a steady flow of communication and information that will ensure full statewide penetration of awareness of the mapping artifacts and how to employ them at their best and highest uses.
The performing partners of The Partnership for a Connected Illinois, Inc. have been working diligently and proactively during the fourth quarter of 2009 to produce the requisite datasets of broadband availability in the state of Illinois. The federal award notification sent to The Partnership was dated December 29, 2009. As such, ASAP registration at this writing is incomplete. No funds have been received or invoiced as yet. Not withstanding, work continues. A total of 344 potential broadband providers in Illinois were identified. Through further research and direct contact, that number was pared to approximately 250. Non- disclosure agreements were developed, submitted, negotiated, and signed. Data from providers of various size and platform are now submitting data. Negotiations, contacts, and research continues to increase the flow of data. Foundational work has been accomplished in terms of identification and location of community anchor institutions. Recruitment has begun by one subcontractor to hire a researcher specifically assigned to community anchor institution data development. A hire in this regard is anticipated in the first two weeks of 2010. Demonstrations of the BroadbandSTAT product described in the proposal have been made to several state agencies. The combination of highly granular mapping and research will be crucial to the information and development of a statewide comprehensive broadband strategic plan. As described in the Planning Outcomes section, the Illinois Resource Network has agreed to prepare an online tutorial about the Illinois BroadbandSTAT product, increasing access and user-friendliness. Hard work lies ahead, and the performing partners of The Partnership for a Connected Illinois, Inc. remain focused on meeting federal deadlines and providing the citizens of Illinois with quality data, maps, research, education, and broadband advocacy.
Partnership for a Connected Illinois, Inc., 150 E. Pleasant Hill Rd, MC 6879 Less Than 50% Completed 17-50-M09033 CONNECTED NATION, INC.
STATE BROADBAND DATA AND DEVELOPMENT PROGRAM Recipient DBA Name: Kansas. The State Broadband Data Program is a competitive, merit- based matching grant program that effects the joint purposes of the Recovery Act and the Broadband Data Improvement Act (BDIA) by funding projects that collect comprehensive and accurate state-level broadband mapping data, develop state-level broadband maps, aid in the development and maintenance of a national broadband map, and fund statewide initiatives directed at broadband planning.
Connect Kansas Progress to Date * Commenced with broadband planning efforts in late February 2009 and included working groups among the public sector and provider communities * Provided a number of staff hours in-kind to the planning effort * State of Kansas contracted with professional facilitators to help with the initial organizing of the planning effort * Developed budget/finance cost model for Connect Kansas * Developed, distributed, reviewed and finalized project work plan and Work Breakdown Structure (WBS) * Assigned project team and distributed project organization chart * Developed and launched a Connect Kansas website to explain the program and gather information from the consumer community * Prepared Project Kick-off Plan, Roles & Responsibilities, and Outreach Plan * Created and implemented a outreach strategy * Scheduled periodic bi-weekly Connect Kansas project team meetings * Produced bi-weekly status reports, data collection activity log and website statistics; and, distributed to the Connect Kansas project team * Compiled and refined broadband provider list * Developed a broadband data collection activity log * Developed SBDD compliant Non Disclosure Agreement (NDA) * Distributed NDAs to provider community * Executed NDAs with the provider community * Securely stored executed NDAs * Conducted webinars with provider community * Conducted demonstrations of the BroadbandSTAT product * Requested broadband coverage coordinate data sets from provider community * Distributed broadband coverage data sets to GIS Mapping team for processing 1020 College Street, P. O. Box 3448 Bowling Green, KY 42102-3448 Less Than 50% Completed 20-50-M09021 American Recovery and Reinvestment Act ? SBDD ? Massachusetts Technology Park Corporation dba MTC (?Mass Broadband Institute?)?.
The goal of the Massachusetts Broadband Mapping Project is to develop detailed and accurate statewide broadband availability and infrastructure datasets to support the development and updating of a national broadband map that will be made available to the public. This goal will be accomplished by: developing collaborative relationships and data sharing agreements with broadband providers to develop a broadband availability database; validating and enhancing the provider database through the analysis of cable strand maps, DSL-equipped central office and remote terminal locations and wireless tower locations and various modeling methods based on the transport technology; verifying broadband availability in the field through a grassroots, civic engagement component using industry experts, partner organizations, and public participation and; making the data easily accessible and useable through an innovative web-based map library, data repository, and searchable broadband map. The MBI will collect, integrate, verify and submit five substantially complete datasets to NTIA in the first quarter of 2010 with subsequent semi-annual updates. A wireline broadband availability dataset will include availability, technology and speed of wireline broadband services by census block or street segment. A wireless broadband availability dataset will include availability, technology, speed and spectrum of wireless broadband services by census block or street segment. A residential broadband speed dataset will include average nominal speed for residential broadband users for each broadband service by metropolitan and rural statistical areas. A middle-mile infrastructure dataset will include location, ownership, technology, capacity and typical speeds of interconnect points between broadband provider services and the Internet. A community anchor institution dataset will include address, current broadband subscribership, technology and typical speed for each community anchor institution in the state (e.g., public safety entities, medical and healthcare facilities, libraries, state and local government entities, schools, community colleges and other higher education buildings). The Massachusetts Broadband Planning Project will identify barriers and assets to the deployment of broadband infrastructure and broadband adoption and then develop and implement innovative solutions to overcome barriers and best utilize assets. These solutions include: developing and supporting Local Technology Planning Teams and organizing outreach efforts to engage, inform, and energize residents, businesses, and public officials; supporting municipalities in making educated decisions on broadband issues impacting their communities, including technology, siting locations, zoning, and permitting; improving access to broadband and increasing adoption rates by providing technical assistance, support and coordination to the public, community anchor institutions, municipalities, and providers and; facilitating the development of public computing centers, training programs, and other efforts to improve broadband access and adoption Quarterly activities for the Massachusetts Broadband Mapping Project included: hiring staff and selecting consultants; purchasing hardware and software; establishing information security policies and procedures; requesting data from and negotiating non-disclosure agreements with broadband service providers; acquiring publicly available cable and DSL data; performing cable and DSL availability modeling by census block; submitting initial statewide availability datasets to the NTIA; and establishing data verification and web site development plans. Quarterly activities for the Massachusetts Broadband Planning Project included: approving a sub-award to WesternMA Connect; developing a community contact database; planning sub-regional public forums; and coordinating with other broadband initiatives in western Massachusetts.
Less Than 50% Completed CONNECTED NATION, INC.
STATE BROADBAND DATA AND DEVELOPMENT PROGRAM Recipient DBA Name: Michigan. The State Broadband Data Program is a competitive, merit- based matching grant program that effects the joint purposes of the Recovery Act and the Broadband Data Improvement Act (BDIA) by funding projects that collect comprehensive and accurate state-level broadband mapping data, develop state-level broadband maps, aid in the development and maintenance of a national broadband map, and fund statewide initiatives directed at broadband planning.
Connect Michigan Progress to Date * Developed budget/finance cost model for Connect Michigan * Developed draft project work plan and Work Breakdown Structure (WBS) * Assigned project team and distributed project organization chart * Developed and launched a Connect Michigan website to explain the program and gather information from the consumer community * Prepared Project Kick-off Plan, Roles & Responsibilities, and Outreach Plan * Conducted project kick-off meeting with public stakeholders * Scheduled periodic bi-weekly Connect Michigan project team meetings * Compiled and refined broadband provider list * Conducted introductory meeting with broadband provider community * Developed a broadband data collection activity log * Developed SBDD compliant Non Disclosure Agreement (NDA) * Distributed NDAs to provider community * Started execution of NDAs with the provider community ? Securely stored executed NDAs * Conducted webinars with provider community * Conducted demonstrations of the BroadbandSTAT product * Requested broadband coverage coordinate data sets from provider community * Distributed broadband coverage data sets to GIS Mapping team for processing 1020 College Street, P. O. Box 3448 Bowling Green, KY 42102-3448 Less Than 50% Completed 26-50-M09035 CONNECTED NATION, INC.
STATE BROADBAND DATA AND DEVELOPMENT PROGRAM Recipient DBA Name: Minnesota. The State Broadband Data Program is a competitive, merit-based matching grant program that effects the joint purposes of the Recovery Act and the Broadband Data Improvement Act (BDIA) by funding projects that collect comprehensive and accurate state-level broadband mapping data, develop state-level broadband maps, aid in the development and maintenance of a national broadband map, and fund statewide initiatives directed at broadband planning.
Bowling Green, KY 42102-3448 Less Than 50% Completed CONNECTED NATION, INC.
STATE BROADBAND DATA AND DEVELOPMENT PROGRAM Recipient DBA Name: Nevada. The State Broadband Data Program is a competitive, merit- based matching grant program that effects the joint purposes of the Recovery Act and the Broadband Data Improvement Act (BDIA) by funding projects that collect comprehensive and accurate state-level broadband mapping data, develop state-level broadband maps, aid in the development and maintenance of a national broadband map, and fund statewide initiatives directed at broadband planning.
Connect Nevada Progress to Date * Developed budget/finance cost model for Connect Nevada * Developed draft of project work plan and Work Breakdown Structure (WBS) * Assigned project team * Developed and launched a Connect Nevada website to explain the program and gather information from the consumer community * Prepared Project Kick-off Plan, Roles & Responsibilities, & Outreach Plan * Scheduled and participated in monthly Connect Nevada project team meetings with the Nevada Broadband Task Force * Presented to the broadband providers association meetings * Compiled and refined broadband provider list * Developed a broadband data collection activity log * Developed SBDD compliant Non Disclosure Agreement (NDA) * Started distribution of NDAs to provider community * Executed NDAs with the provider community * Securely stored executed NDAs * Conducted webinars with provider community * Conducted demonstrations of the BroadbandSTAT product * Requested broadband coverage coordinate data sets from provider community (National Providers in Nevada) * Distributed broadband coverage data sets to GIS Mapping team for processing. 1020 College Street, P. O. Box 3448 Bowling Green, KY 42102-3448 Less Than 50% Completed CULTURAL AFFAIRS, NEW MEXICO DEPARTMENT OF American Recovery and Reinvestment Act - SBA - Fast Forward New Mexico NM State Library, University of NM-Los Alamos, Global Center for Cultural Entrepreneurship, and 1st Mile Institute partner to sponsor 'Fast-Forward New Mexico, a broadband stimulus initiative that integrates a statewide broadband awareness campaign, a NM Broadband Conference, and a series of broadband training initiatives in public and tribal libraries across the state. Trainings are in computer literacy and e-commerce. A centralized website and on- line catalog will support current and future trainings.
No activities during this quarter.
Public, Society Benefit, General/Other SANTA FE, NM 87507-5166 CYBER SECURITY & CRITICAL INFRASTRUCTURE COORDINATION, NYS OFFICE OF American Recovery and Reinvestment Act - State Broadband Data and Development Grant Program - NY State Office of Cyber Security and Critical Infrastucture Coordination In keeping with the Recovery Act's direction that NTIA develop and maintain a comprehensive and interactive national broadband map, NTIA established a grant program where awardees will collect broadband-related data and conduct planning programs at the state level. In addition to supporting state level planning activities, these data will be used to construct the following deliverables: (1) Datasets detailing broadband availability, technology, speed, infrastructure and in the case of wireless broadband, the spectrum used, across New York State. (2) A dataset identifying community anchor institutions and associated broadband information. (3) Development of a statewide interactive broadband map identifying available broadband service levels, providers, unserved and underserved areas. Much of this data will be collected from broadband service providers. Other data sources, existing and to be created, will be used to validate the accuracy and completeness of these deliverables.
The overall purpose and expected results of the award are stated above in the Award Description Section. The following is a summary of quarterly activities: (1) Reviewed grant documentation and identified reporting requirements and deadlines; (2) Worked with other NYS agencies to assemble a comprehensive list of companies that potentially provide end user broadband services or provide backbone/infrastructure related services. Contacted approximately 120 of these companies thus far in order to execute non-disclosure agreements and begin the data collection process; (3) Began assembling community anchor institutions dataset from existing and available information; (4) Began procurement process to purchase required hardware and software to complete the project; (5) Began development of workflows to be used to standardize, cleanse, improve, geo-process and validate data received from providers; (6) Began hiring process to staff seven open project team positions. Three were hired in late December but will not be calculated as jobs created until next quarter; (7) Began mapping related planning activities in support of the NYS Broadband Development and Deployment Council.
Less Than 50% Completed 36-50-M09010 RHODE ISLAND ECONOMIC DEVELOPMENT CORPORATION State Broadband Data and Development Grant Program The purpose of the project is to develop geographic information system maps displaying levels of broadband service by connection speed and type of technology used to integrate the maps with demographic information to produce a comprehensive statewide inventory and mapping of existing broadband service and capability. Project will be compliant and consistent with requirements specified by the U.S. Department of Commerce, National Telecommunications and Information Administration (NTIA) Notice of July 1, 2009 related to the ARRA and Broadband Mapping, specifically the State Broadband Data and Development Grant Program.
No activities to report for Qtr 4 - 2009 as grant was awarded on 12/28/09 315 Iron Horse Way, Suite 101 CONNECTED NATION, INC.
STATE BROADBAND DATA AND DEVELOPMENT PROGRAM Recipient DBA Name: South Carolina. The State Broadband Data Program is a competitive, merit-based matching grant program that effects the joint purposes of the Recovery Act and the Broadband Data Improvement Act (BDIA) by funding projects that collect comprehensive and accurate state-level broadband mapping data, develop state-level broadband maps, aid in the development and maintenance of a national broadband map, and fund statewide initiatives directed at broadband planning.
Connect South Carolina Progress to Date * Developed budget/finance cost model for Connect South Carolina * Developed draft project work plan and Work Breakdown Structure (WBS) * Assigned project team * Developed and launched a Connect South Carolina website to explain the program and gather information from the consumer community * Prepared Project Kick-off Plan, Roles & Responsibilities, and Outreach Plan * Created a outreach strategy * Compiled and refined broadband provider list * Developed a broadband data collection activity log * Developed SBDD compliant Non Disclosure Agreement (NDA) * Distributed NDAs to provider community (National) * Executed NDAs with the provider community (National) * Securely stored executed NDAs * Conducted webinars with provider community * Conducted demonstrations of the BroadbandSTAT product * Requested broadband coverage coordinate data sets from provider community * Distributed broadband coverage data sets to GIS Mapping team for processing. 1020 College Street, P.O. Box 3448 Bowling Green, KY 42102-3448 Less Than 50% Completed STATE BROADBAND DATA AND DEVELOPMENT GRANT PROGRAM Recipient DBA Name: Tennessee. The State Broadband Data Program is a competitive, merit-based matching grant program that effects the joint purposes of the Recovery Act and the Broadband Data Improvement Act (BDIA) by funding projects that collect comprehensive and accurate state-level broadband mapping data, develop state-level broadband maps, aid in the development and maintenance of a national broadband map, and fund statewide initiatives directed at broadband planning.
Connected Tennessee Progress to Date * Developed budget/finance cost model for Connected Tennessee * Developed draft project work plan and Work Breakdown Structure (WBS) * Assigned project team and distributed project organization chart * Refined Connected Tennessee website to include Broadband Provider page to explain the program and gather information from the provider community * Prepared Project Kick-off Plan, Roles & Responsibilities, and Communications Plan * Conducted project kick-off meeting with stakeholders * Scheduled periodic bi-weekly Connected Tennessee project team meetings * Compiled and refined broadband provider list * Conducted introductory meeting with broadband provider community * Developed a broadband data collection activity log * Developed SBDD compliant Non Disclosure Agreement (NDA) * Distributed NDAs to provider community * Started execution of NDAs with the provider community * Securely stored executed NDAs * Conducted webinars with provider community * Conducted demonstrations of the BroadbandSTAT product * Requested broadband coverage coordinate data sets from provider community * Distributed broadband coverage data sets to GIS Mapping team for processing 618 Church Street Suite 305 Less Than 50% Completed VERMONT CENTER FOR GEOGRAPHIC INFORMATION, INCORPORATED The VT Broadband Mapping Initiative will initiate the development of a comprehensive and verified geographic inventory of broadband service availability in the State of VT. Landline and wireless services (fixed and mobile) will be mapped, including wireless voice and data with information from providers and other sources. The broadband mapping information collected and verified through this proposed effort will then support the broadband development objectives identified in the RUS Broadband Initiatives Program (BIP) and NTIA's Broadband Technology Opportunities Program (BTOP) in VT. Most importantly, the geographic inventory will further refine our understanding of the location of 'unserved' and 'underserved' areas, supporting targeted investments in these areas.
Broadband Descriptions That Partially Met Our Transparency Criteria
The following award descriptions did not contain sufficient details on one or more of the following pieces of information necessary to facilitate general understanding of the award, based on our criteria: general purpose, scope and nature of activities, location, or expected outcomes. In some cases, only a small amount of additional information was needed, while in other cases, many pieces of information were needed to make the description more transparent. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
ARRA SBDD Georgia Technology Authority (GTA)
ARRA SBDD Georgia Technology Authority(GTA) The purpose of this project is to provide NTIA (Dept Commerce)and Georgia Public/Private sector stakeholders with broadband mapping and data collection, analysis, and broadband mapping display services for the State of Georgia residents, businesses, and community anchor institutions. The GTA Broadband office operations will utilize planning funds to promote sustainable adoption throughout the state as a part of this project's deliverable.
The Georgia Technology Authority is in the process of selecting a vendor through a statement of need process with qualified vendors. We expected to select a mapping vendor by the end of January, 2010.
Information GAO gathered to improve the description This award supports broadband data collection, mapping, and planning activities across Georgia over a 2-year period. Data on the availability, speed, and location of broadband across the state will be collected and verified on a semi-annual basis between 2009 and 2011. These data will be used to develop publicly available state-wide broadband maps and to inform the comprehensive, interactive, and searchable national broadband map that the National Telecommunications and Information Administration (NTIA) is required by the Recovery Act to create and make publicly available by February 17, 2011.
Mapping Indiana Broadband is a project that will collect, map, verify, and distribute data that will contribute to a publicly available national broadband map to inform policymaker’s efforts and provide better information to consumers about the availability of broadband Internet services.
State Broadbamd Data and Development Grant. Award letter received.
Grants 100 N Senate Avenue IGCN551 Information GAO gathered to improve the description The award supports collection of information from broadband providers across the state.
ADMINISTRATION, LOUISIANA DIVISION OF American Recovery & Reinvestment Act - SBDD - State of Louisiana Division of Administration Louisiana State Broadband Data & Development Program - Data Collection & Mapping; Louisiana State Broadband Data & Development Program - Planning The intent of the award is to allow the State of Louisiana to collect/verify statewide broadband availability and submit the findings to the NTIA, according to the requirements contained in the SBDD NOFA and its subsequent clarification. In this reporting period, we completed our project kickoff meeting and finalized our strategy for Service Provider Outreach. 1201 North 3rd Street, Suite 2-130 Baton Rouge, LA 70802-5243 Information GAO gathered to improve the description The award funds mapping activities including broadband availability data collection, verification, mapping and analysis. These efforts are expected to raise awareness of the availability of broadband, identify barriers to adoption, and develop a plan for sustainable broadband adoption for currently “underserved” and “unserved” businesses and households. Further, these activities will increase coordination and collaboration between the state and regional economic development efforts.
Overall Approach/How grant will increase Broadband Adoption: The city's 3 partners who operate the 66 centers are established communiy anchor organizations which provide multipe services to constituents incuding public computing. PCCs are embedded in multi- muliple services organizations providing ideal institutional setting for reaching a large audience of potential broadband adopters. These partners are: The Boston Pubic Library (BPL) and its 25 neighborhood branches; Boston Centers for Youth and Families (BCYF), Boston's largest youth and human services agency serving over 90,000 resident annually in 46 facilities including 29 PCCs; and the Boston Housing Authority (BHA) operating 62 pubic housing sites, serving 11,500 household with 11 computers labs.
No fund spent on infrastructure City of Boston/Auditing Dept., One City Hall Sq. R-M-4 Information GAO gathered to improve the description The city is using the award funds to wire 66 community centers and some public housing within the City of Boston for Internet use and purchase a few hundred computers for those centers. These activities will provide internet access to low-income individuals who may not otherwise have access to the Internet.
NORTH DAKOTA, STATE OF ARRA-SBDD-North Dakota Information Technology Department $1,305,354 is for efforts related to mapping broadband availability across the state and year two maintenance of that data. $308,400 is for efforts related to broadband planning activities to identify how the state could leverage current organizational structure and relationships, either directly or indirectly, to provide the broadband requirements for additional anchor institutions No project activities occurred during this period (Information not reported)
Information GAO gathered to improve the description The award supports broadband planning activities, including drafting non-disclosure agreements, a project plan, and a project schedule. The award covers personnel salaries, travel expenses, and equipment associated with this planning.
EXECUTIVE OFFICE STATE OF OHIO State Broadband Data and Development Grant Program State Broadband Data and Development program grant - supports state broadband mapping and related planning activities.
Award annouced 12/28/09 - no activities to report for quarter ending 12/31/09. 30 E. Broad Street, 39th Floor Information GAO gathered to improve the description The award supports the development of a statewide map that will pinpoint areas in Ohio that do not currently have access to broadband technology. The activities under this award include collecting broadband data, to be displayed in a national broadband map, and planning delivery of broadband services.
PUBLIC UTILITY COMMISSION, STATE OF OREGON State Broadband Data and Development Grant Program Governor Theodore Kulongoski designated the Public Utility Commission of Oregon (PUC) as the single eligible entity to receive a grant under the National Telecommunications and Information Administration (NTIA) State Broadband Data and Development Grant Program. The PUC was granted a $1,609,692 million Broadband Data Collection and Mapping Grant and a $498,610 Broadband Planning Grant. The OPUC selected One Economy through the state's 'Request for Proposal' process to assist Oregon with fulfilling the requirements of these Grant Programs.
None to date. 550 Capitol St NE, Suite 215 Less Than 50% Completed Information GAO gathered to improve the description The award supports the collection and mapping of specific data on broadband infrastructure and the availability of broadband services throughout Oregon, including on tribal lands. These data will identify unserved and underserved areas at the most granular level possible; identify community anchor points; be displayed on a publicly accessible and interactive state Web site in the form of a broadband map; be updated semi-annually through 2011; and be provided to the National Telecommunications and Information Administration (NTIA). These data will inform Oregon about the affordability, availability, and adoption of broadband technology in all areas of the state. These data will also provide information for analyzing and reporting on Oregon's use of broadband technology in the telehealth industry and for energy management, education and government. In year 2, additional data collection efforts will provide fresh data that may show the effects of any actions taken by the State of Oregon to address broadband adoption or availability and allow for further development of state broadband strategies.
Spokane Broadband Technology Alliane: Public Computer Centers This Public Computer Centers project will provide establish 17 public computer centers throughout the Spokane Washington Area.
This is a newly awarded grant. During the 8 days of the quarter the grant was active, we held a press conference, notified stakeholders and partners, had front page coverage in the local newspaper, and established a preliminary calendar.
Public, Society Benefit, General/Other Grants 827 West First Avenue, Suite 121 Information GAO gathered to improve the description The award provides 3 new and expands 14 existing public computer centers in Spokane's poorest neighborhoods, and equips a vehicle to bring computers and training to other organizations and hard-to-reach populations. The training will cover basic Internet search training and links to needed services, video production, and using the Internet for small businesses. The award is anticipated to serve 298,906 unduplicated users.
Spokane Broadband Technology Alliane: Sustainable Adoption This Sustainable Broadband Adoption project will provide training to individuals and organizations throughout the Spokane Washington Area. We estimate that we will train 12150 people over the three years of the project, and that about 1550 will become new broadband subscribers.
This is a newly awarded grant. During the 8 days of the quarter the grant was active, we held a press conference, notified stakeholders and partners, had front page coverage in the local newspaper, and established a preliminary calendar.
Place of performance - city, state, and postal code Information GAO gathered to improve the description The award supports sustainable adoption of broadband services, which includes acquiring broadband-related equipment, developing and providing education and training programs, and conducting broadband-related public outreach. The Sustainable Broadband Adoption project in Spokane will provide training at 11 not-for-profit organizations and community centers on the benefits of broadband access to enhance work/life skills. Small businesses are being trained to create an online presence, sell on the Internet, and use social media and low-cost, targeted Web advertising. Additional training will be available at 6 public libraries.
GEOLOGICAL & ECONOMIC SURVEY, WEST VIRGINIA ARRA-SBDD-WV Geological and Economic Survey The purpose of this program is to develop a statewide broadband coverage map to provide a comprehensive picture of current infrastructure deployment and availability of broadband service in the State of West Virginia. Working with providers to encourage the provision of service in unserved and underserved areas, and engaging local entities to analyze current use of the technology and educate on service expansion opportunities. this quarter's activity was gathering data from broadband service providers By the way, this is the message I get when changing the number of jobs to 4, since we have not used federal funds yet. ?If Number of Jobs is greater than 0, it cannot equal or exceed Total Federal Amount ARRA Funds Received/Invoiced. ?If Number of Jobs is greater than 0, it cannot equal or exceed Total Federal Amount of ARRA Expenditure. ?If Number of Jobs is greater than 0, it cannot equal or exceed Total Federal ARRA Infrastructure Expenditure. 1124 Smith St, LM-10 Less Than 50% Completed Information GAO gathered to improve the description The award supports the collection and verification of the availability, speed, and location of broadband access across West Virginia. This information will be mapped on a semi-annual basis from 2009-2011, and the map will be used to increase broadband access and adoption through better data collection and broadband planning.
PUGET SOUND CENTER FOUNDATION FOR TEACHING, LEARNING ANDTECHNOLOGY, THE Wyoming State Broadband Data and Development Grant Provide targeted, timely and useful information that will enable local solutions to address local broadband priorities for the State of Wyoming: Data Project Feasibility; Expedient Data Delivery; Process for Repeated Data; Updating, Planning and Collaboration In November and December 2009 the project was initiated and the team assembled. Mapping project activities included the execution of NDAs with all relevant providers and the development and release of a broadband provider survey. This online survey was designed to collect coverage and speed information in the format requested by NTIA. Outbound e-mail and telephone calling efforts helped encourage provider responses to the survey. Initial data submissions were reviewed, normalized and stored in a master database. In addition, consumer website templates were developed for the ultimate delivery of statewide maps for Wyoming. Planning activities included the establishment of planning objectives and state oversight procedures. Initial interviews with stakeholders across the State of Wyoming will begin in Q1 2010. 19020 33rd Avenue West Suite 210 Less Than 50% Completed Information GAO gathered to improve the description The award supports the development of a statewide interactive map showing (1) areas that do and do not have broadband access (or have limited access), (2) transmission speeds, and (3) the type of access (e.g., wireless, cable, etc.) available. This information will be used to help broadband providers apply for future infrastructure funding to build capacity across the state of Wyoming.
SOUTH DAKOTA NETWORK, LLC South Dakota Network,LLC, $20.6 million grant with an additional $5.1 million matching funds to add 140 miles of backbone network and 219 miles of middle mile spurs to existing network, enabling the delivery of at least 10Mbps service to more than 220 existing anchor institution customers in rural and underserved areas of the state.
Delivering 10 Megabit Connectivity for Community Anchor Institutions in areas currently not served.
Power and Communication Line and Related Structures Construction (Information not reported)
Sioux Falls, SD 57104-2543 $20,572,242.00 Information GAO gathered to improve the description The award is being used throughout the state to add 140 miles of fiber optic cable to an existing 1,850-mile network and an additional 219 miles of fiber optic cable to connect anchor institutions (such as schools, hospitals, and libraries) to the expanded network. Funds will be used for fiber construction, equipment, and end-point electronics, plus permitting and engineering fees.
ION Upstate New York Rural Broadband Initiative ION will build 10 new segments for a total of 1308 plant miles of 'Middle Mile' infrastructure, which will incorporate more than 70 additional rural communities into its current statewide fiber backbone. ION will enhance its reach throughout rural New York with its Open Network design; this will enable a host of last mile service providers to bring their products and services to numerous underserved and unserved areas of rural NY.
No activities this quarter we are in the planning phase of the project.
Power and Communication Line and Related Structures Construction 80 State Stret, 7th floor Information GAO gathered to improve the description The award encompasses 10 projects to build Middle Mile infrastructure that will bring broadband service to 125 anchor institutions. The project will occur throughout the State of New York in a majority of the rural areas of New York and parts of Pennsylvania and Vermont.
The Weatherization Assistance Program assists low-income families while improving their health and safety, by making such long-term energy- efficiency improvements to their homes as installing insulation, sealing leaks, and modernizing heating equipment, air circulation fans, and air- conditioning equipment. These improvements enable families to reduce energy bills, allowing these households to spend their money on more pressing needs, according to the Department of Energy. In 2009, the Recovery Act provided $5 billion for the program—increasing the department’s portion for local weatherization efforts by more than 20 times over a 2-year period based on fiscal year 2008 funding levels—about $227.2 million per year. The department distributes 58 awards to each of the 50 states, the District of Columbia, and seven territories and American Indian tribes (recipients) and relies on the recipients to administer the programs.
Nature and Type of Weatherization Assistance Program Awards
The department had obligated approximately $4.73 billion of the Recovery Act’s weatherization funding to recipients for weatherization activities as of March 31, 2010, retaining about 5 percent of the funds to cover its expenses, such as those for training and technical assistance, management, and oversight for the expanded Weatherization Assistance Program. Funds are available for obligation until September 30, 2010, and the department has indicated that the recipients are to spend the funds by March 31, 2012. As of March 31, 2010, recipients had spent about $659 million, or about 14 percent of the $4.73 billion obligated, to weatherize about 82,200 homes nationwide. Many recipients are just beginning to use Recovery Act funding, in part because certain federal requirements, such as Davis-Bacon wage requirements, affected the ability of some agencies to start work in programs, including the Weatherization Assistance Program, and because they have needed time to develop the infrastructures required for managing the significant increase in weatherization assistance funding.
About 12 percent of the Weatherization Assistance Program Descriptions Met Our Transparency Criteria
We assessed the transparency of descriptive information for Weatherization Assistance Program awards on Recovery.gov, as described in the report. We found that an estimated: about 12 percent met our transparency criteria, 71 percent partially met our criteria, and 18 percent did not meet our criteria.
For weatherization descriptions that partially met or did not meet our transparency criteria, we collected information necessary to make the descriptions meet our criteria. The descriptions of awards in our Weatherization Assistance Program sample, whether they met our criteria, and information that would complete the descriptions of award activities are provided at the end of this appendix.
Agency Guidance and Other Factors That May Affect Transparency of Reported Information
The department provided additional documentation to assist recipients in fulfilling Recovery Act reporting requirements but did not assess the quality of the information reported by recipients in narrative reporting fields. The department issued supporting documentation on the grant application process for the Weatherization Assistance Program in March and December 2009. This documentation includes information about requirements for a public hearing, budget, and program oversight. The department also issued supporting documentation twice in March 2010, providing additional information about requirements for quarterly reporting and calculation of jobs created. The supporting documentation is available on the department’s Web sites, as is a capability to search responses to frequently asked questions.
The department also provided technical assistance restating the Office of Management and Budget (OMB) requirements in the form of reporting instructions and training for completing specific fields, including narrative description fields, to fulfill Recovery Act reporting requirements in December 2009. The department has made its technical assistance available on the Weatherization Assistance Program’s technical assistance Web site, http://www.waptac.org, and has established a call center—the Recovery Act Clearinghouse—to answer specific reporting questions from recipients. This technical assistance includes some information specific to the weatherization program, such as the definition of a completed unit, but for the most part, restates OMB’s guidance, as shown in table 6 for the project description field.
However, the department did not evaluate the quality of the information in narrative fields. OMB’s guidance, issued December 2009, states that where a narrative description is required, as in the award description field, the “description must be sufficiently clear to facilitate understanding by the general public.” Department of Energy officials told us that the agency ensures the quality of data primarily through an automated analysis of key data fields, including award number, recipient name, award amount, and jobs calculated, but not including narrative fields, such as award description or project description. Instead, department officials said every weatherization award has an assigned agency reviewer who may, at his or her discretion, review the accuracy of any and all data submitted by recipients. Department of Energy officials said that they do not have a robust process for evaluating the quality of information in descriptive fields because they do not consider the narrative description fields key to reporting and could not automate a review of narrative fields. Also, they noted that the limited scope of the Weatherization Assistance Program ensures that narrative descriptions—such as the award description—are sufficiently clear to be understood by the general public.
Award Information Is Made Available to the Public in Other Ways
Weatherization Assistance Program award information is made available to the public by the department, recipients, and some local agencies: The Department of Energy maintains weatherization information and data on its Web site at http://apps1.eere.energy.gov/weatherization/recovery_act.cfm and http://www.energy.gov/recovery/. It also maintains a Web site housing technical assistance for recipients at http://www.waptac.org.
Many of the 58 recipients have some weatherization information available on their Web sites that, for example, describes the assistance program, summarizing activities performed, eligibility requirements, the application process, and contact information. In some cases, the Web sites also provide greater detail on the program, including the amount obligated to the recipient, the number of homes weatherized, and the number of jobs created. In addition, approximately 36 of 58 recipients post their weatherization plans on their Web sites. These plans are required for each recipient receiving weatherization assistance funds and outline how funds will be used. Information available in the weatherization plans includes a description of the types of weatherization activities that could be performed, the counties or regions in which weatherization activities will occur, the number of units to be weatherized, the budget for weatherization activities, the community action agencies performing weatherization activities, the energy savings expected, and monitoring activities to ensure the quality of the weatherization activities performed. In accordance with privacy guidance, the specific location for individual homes weatherized is not reported. Several state Offices of Inspector General have issued reports on the Weatherization Assistance Program in their states. Furthermore, recipients also provide weatherization award information through press releases, hearings, public forums, and community meetings.
Finally, many of the local agencies that provide weatherization services directly to residents also make information available to the public, through press releases, public service announcements, community events, or Web sites.
Most of the feedback that the Department of Energy, recipients, or local community action agencies have received about the Weatherization Assistance Program has been about proposed regulations or weatherization activities performed, and few comments have been about the weatherization information available to the public. At the department, many of the comments received relate to proposed regulations on reporting frequency (and not to project description information). Recipients have received comments and inquiries from individuals wanting to apply for weatherization services or learn how to get a job and from vendors wishing to market products. Inquiries have also addressed how much money the recipient received, how many homes will be weatherized and the total amount of funding to be spent on each household—-but not the accessibility of project description information.
Weatherization Descriptions That Met Our Transparency Criteria
The following award descriptions contained sufficient information on general purpose, scope and nature of activities, location, and expected outcomes to meet our transparency criteria. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
HUMAN SERVICES, MICHIGAN DEPARTMENT OF Recovery Act Weatherization Award for the state of Michigan Michigan Department of Human Services has been awarded stimulus funding from the U.S. Department of Energy Weatherization Assistance Program for Low-Income Persons in the amount of $243 million dollars over the next three years. The State plan includes changes in the Weatherization Program for year 2009: average cost per unit maximum of $6,500, increase in income eligibility limits to 200% of poverty or 60% of state median income, whichever is higher, and program training plan. Changes in the plan also include the new positions; 10 weatherization inspectors, report analyst, Davis Bacon specialist, grant manager/monitor, fiscal monitor, division manager and the secretary. Funding has been allocated to the 32 Community Action Agencies and Limited Purpose Agencies that serve as Local Weatherization Operators (LWOs) in Michigan under the existing weatherization program. The funding is exclusively for weatherization, which involves the installation of energy efficiency measures on low-income homes. Applications are taken at Local Weatherization Operator offices. Approximately 33,000 homes will be weatherized in Michigan through March 2012 with the ARRA funding. Households generally realize a 25% reduction in their energy usage as a result of weatherization.
We have hired 10 technical monitors and they have attended and passed the Level I & II Michigan Inspector training. They were all required to do field activities including 8 inspector shadowing events and 8 inspections where they took the lead. They had to prepare all required paperwork/audit materials for each of these 16 inspections and have submitted to supervision for review and comment. They must next go through the final step in the inspector certification process- the over-the-shoulder Inspector Observation test. This will be scheduled in January. We have acquired two training houses- one in the Upper Peninsula and one in Lansing. These houses are being used to schedule over the shoulder inspection tests, as well as hands on contractor trainings and lead safe weatherization training. As of December 2009, we have trained 180 new program inspectors to ensure an adequate number of inspectors statewide. We have also conducted lead safe weatherization training for over 200 contractor/crew members. We continue to work with local community colleges to adopt the DOE recommended curriculum for contractors/crews that will enable ongoing classroom and hands on weatherization worker training. In support of the program (and of the Jobs Created/Saved/Retained) a total of 703 persons/jobs were supported, in whole or in part, utilizing DOE ARRA funds generating 101,503 hours of work. During this reporting period we have seen an increase in the amount of ARRA funded work grow as new workers ramp up to start projects. There will continue to be a lag between actual Funds Received and actual Funds Disbursed due to the use of 'General Funds' dollars to support the sub-recipient activities until Federal Funds are drawn down to cover the actual expenditures reported. 235 S. Grand Ave., Suite 1314 Less Than 50% Completed Weatherization Assistance for Low-Income Persons ARRA Supplemental Funding for the Weatherization Assistance Program (WAP): To reduce energy costs for low-income families, particularly for the elderly, people with disabilities and children, by improving the energy efficiency of their homes while ensuring their health and safety.
In October VI WAP was still in the program implementation stage. A 3 day electric base load audit training for staff was conducted on Oct. 7th, 8th, and 9th by Pure Energy Inc. Four members of VI WAP staff were trained and 3 Energy Office engineers who will serve as back up to the VI WAP auditors. VI WAP identified a home that would qualify to be weatherized and used it for a demonstration energy audit. The information obtained in this energy audit was very useful and provided very good information for DOE's technical assistance visit. Oct 19th thru Oct 23rd DOE officials conducted a Technical Assistance Visit and reviewed various VI WAP procedures on Client Intake. VI WAP has started purchasing tools, equipment, and supplies and has obligated funds for two vehicles for the program and funds to pay for the disposal of old refrigerator replaced in the program. November 2009 VI WAP Client Intake was finalized forms for the in-take application, and procedures for determining eligibility, proof of ownership, and ranking system. A web meeting was hosted with DOE on Nov. 17, 2009, regarding the Virgin Islands Priority List, for VI specific energy measures for the program. The major issue being the cost limitation on the refrigerators at $1000.00, which may cause a problem for the Virgin Islands because of the high price of refrigerators due to shipping cost. In December, Susan White a DOE consultant on Procurement and Financial Management trained staff and provided three days of technical assistance. Ms. White assisted VI WAP on finalizing VI WAP's procurement manual and developing RFP’s for the certifying agency, final inspections, and two Requests for Bids. The approved Priority list for the program has still not been approved by DOE. VI WAP also completed the Production schedule average is 15 homes a month being weatherized in the Territory. The goal is 430 home by March 2012.
Less Than 50% Completed HOUSING AND COMMUNITY RENEWAL, NEW YORK STATE DIVISION OF Weatherization formula grants allocated to the New York State Division of Housing and Community Renewal (DHCR) under the American Recovery and Reinvestment Act (ARRA). Funds are provided to reduce the energy expenditures of low-income households by conducted instrumented energy audits and installing energy conservation materials such as insulation, weatherstripping and caulk, high-efficiency heating and hot water systems, high- efficiency electrical fixtures and efficient building materials such as windows and doors. Award amount includes administrative funding (up to 5%) that will be retained by DHCR for administration. Funds are allocated to eligible subrecipients throughout the state who are responsible for proper installation, compliance with program rules and quality assurance. ARRA funds are expected to provide energy conservation assistance for more than 45,000 dwelling units.
Preliminary activities such as training, conducting energy audits and health and safety tests, and installation weatherization materials in eligible units.
Less Than 50% Completed EXECUTIVE OFFICE OF THE STATE OF NEW HAMPSHIRE To audit and weatherize low-income residential single and multi-family units for the purpose of lowering residents' energy costs and increasing their health, safety, and comfort. The program is also designed to decrease greenhouse gas emissions, decrease our country's dependence on fossil fuels, and create jobs, especially in the hard-hit construction related trades. At least 2600 units are slated to be weatherized, coordinated by six Community Action Agencies within New Hampshire.
ARRA funding is expected to greatly increase the number of residential units to be weatherized, from a few hundred over two years to 2600 over three years. As of December 31st, all six Community Action Agencies in the state are weatherizing with ARRA funds. Completed units now stand at approximately 275, with at least 100 in the process of being weatherized. Two energy auditing classroom trainings have been held, with over 27 new auditors receiving state energy auditing certification, seven new since the last quarterly report. Two combustion appliance training sessions are being planned for January '10.
Weatherization Descriptions That Partially Met Our Transparency Criteria
The following award descriptions did not contain sufficient details on one or more of the following pieces of information necessary to facilitate general understanding of the award, based on our criteria: general purpose, scope and nature of activities, location, and/or expected outcomes. In some cases only a small amount of additional information was needed, while in other cases, many pieces of information were needed to make the description more transparent. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
STATE, LOUISIANA DEPARTMENT OF Weatherization Assistance for Low-Income Persons ARRA Supplemental Funding for Weatherization Assistance to Low-Income Persons: To reduce energy costs for low-income families, particularly for the elderly, people with disabilities, and children, by improving the energy efficiency of their homes while ensuring their health and safety.
Most activities have continued to support the ramp up of workforce and infrastructure.
Baton Rouge, LA 70808-0120 Less Than 50% Completed Information GAO gathered to improve the description Through this award, approximately 5,646 homes throughout the state will undergo weatherization activities such as performing client education, weatherizing site-built and mobile homes, and making weatherization repairs, such as installing attic insulation and performing basic air sealing.
NATURAL RESOURCES, MISSOURI DEPARTMENT OF WEATHERIZATION ASSISTANCE FOR LOW-INCOME PERSONS FUNDING TO BE USED TO INCREASE THE ENERGY EFFICIENCY OF DWELLINGS OWNED OR OCCUPIED BY LOW-INCOME PERSONS, REDUCE THEIR TOTAL RESIDENTIAL EXPENDITURES AND IMPROVE THEIR HEALTH AND SAFETY.
A grand total of 1,093 homes have been weatherized by the subgrant agencies through December 31, 2009. A total of 839 homes have been weatherized by the subgrant agencies from October 1, 2009 through December 31, 2009. On October 13, 2009 the Missouri Department of Natural Resources Energy Center (MDNR/EC) staff conducted a one-day administrative and technical training for the subgrant agencies in Branson, Missouri. The training consisted of an update of the revised Weatherization Program Operational Manual and sessions concerning Davis-Bacon requirements, procurement, ARRA reporting, and technical monitoring. During December 2009 seven regional ARRA Energize Missouri Housing Initiative meetings were held throughout the state to provide information and networking opportunities to those interested in participating in the program. Also in December the Department of Labor issued a revised Weatherization wage rate determination for Missouri. The MDNR/EC has hired four weatherization employees to help with ARRA implementation. MDNR/EC has five technical staff that are BPI certified.
Jefferson City, MO 65101-4272 Less Than 50% Completed Information GAO gathered to improve the description Over a period of 3 years, 21,506 homes throughout the state will undergo weatherization activities and 221 of these will be reweatherized. Weatherization activities may include air leakage reduction, attic insulation, wall insulation, foundation and floor insulation, duct insulation, heating system clean and tunes, repairs, and replacements, lighting retrofits, and replacement of hot water heaters, refrigerators, and air conditioning units.
HEALTH & HUMAN SERVICES, NORTH CAROLINA DEPARTMENT OF Weatherization Assistance for Low Income Persons. American Recovery and Reinvestment Act (ARRA)
The Weatherization Assistance Program’s mission is to enhance the well-being of low- income residents, particularly those persons who are most vulnerable such as the elderly, the handicapped, and children, through the installation of energy efficient and energy-related health and safety measures, thus benefiting clients through reduced energy bills, enhanced comfort, and the mitigation of energy related health risks. Sub Recipients will be responsible for weatherizing over 20,000 homes.
The Weatherization Assistance Program’s mission is to enhance the well-being of low- income residents, particularly those persons who are most vulnerable such as the elderly, the handicapped, and children, through the installation of energy efficient and energy-related health and safety measures, thus benefiting clients through reduced energy bills, enhanced comfort, and the mitigation of energy related health risks. Sub Recipients will be responsible for weatherizing over 20,000 homes.
Office of Economic Opportunity, 222 North Person Street Less Than 50% Completed Information GAO gathered to improve the description Through this award, approximately 22,000 homes throughout the state of North Carolina will undergo weatherization measures, including air sealing, attic insulation, dense-pack sidewalls, floor insulation, sealing and insulation of ducts, and general heat waste (weatherstripping, caulking, glass patching, water heater tank wrap, pipe insulation, faucet aerators, low-flow showerheads, furnace filters).
HOUSING & COMMUNITY DEVELOPMENT, MD DEPT OF Weatherization Assistance Program for low-income persons.
The American Recovery and Reinvestment Act of 2009, Public Law 111-5, appropriates funding for the Department of Energy to issue/award formula-based grants under the Weatherization Assistance Program. The purpose of the program is to increase the energy efficiency of dwellings owned or occupied by low-income persons, reduce their total residential expenditures, and improve their health and safety. The priority population for the Weatherization Assistance Program is persons who are particularly vulnerable such as the elderly, persons with disabilities, families with children, high residential energy users, and households with high-energy burden.
Maryland began in earnest ARRA production during the Quarter after working with the LWA's to implement the Davis-Bacon Act requirements for the prevailing wages and required reporting. Production has steadily increased during each month of the Quarter. Maryland completed training for the Hancock Energy Solutions software system for managing all program information and the system is now live. All 18 LWA's are entering client case information into the system and invoices are now being paid out. Maryland DHCD has purchased 4 vehicles (Ford Escape Hybrids) to be used by our quality control inspectors for their field work. Note that costs were two @ $29,300 and two @ $30,860., expenditures that do not show up elsewhere in this report.
Less Than 50% Completed Information GAO gathered to improve the description Through this award, approximately 6,850 homes throughout the state of Maryland will undergo weatherization activities such as energy audits, incidental repairs, lighting retrofits, water system treatment, attic and floor insulation, furnace testing and service, blower door air sealing, and health and safety abatement.
Weatherization Assistance for Low-Income Persons/ARRA ARRA Supplemental Funding for Weatherization Assitance to Low-Income Persons: To reduce energy costs for low-income families, particularly for the elderly, people with disabilities, and children, by improving the energy efficiency of their homes while ensuring their health and safety.
The State of South Carolina plans to weatherize 5000 homes over the three year life of the grant. We anticipate completing 40% of our goal within the first year, and the remainder within the next two and half years. This will be accomplished through a collaborative partnership with both public and private entities. $58,892,771.00 Less Than 50% Completed Information GAO gathered to improve the description Weatherization activities include air sealing, attic insulation, dense-pack sidewall insulation, sealing and insulating ducts, floor insulation, and installation of a smart thermostat, compact fluorescent lamps, and refrigerator. Activities will be performed statewide.
HOUSING AND COMMUNITY DEVELOPMENT, VIRGINIA DEPT OF Weatherization Assistance Program for Low-Income Persons To improve home energy efficiency for low-income families through the most cost-effective measures possible.
Sub-awardees were expected to complete ramp-up activities. This includes the purchase of additional or upgraded vehicles and equipment, hiring of additional personnel, identifying additional new beneficiaries and limited production increases. 600 East Main Street, The Main Street Centre Less Than 50% Completed Information GAO gathered to improve the description Through this award, approximately 9,193 homes throughout the state of Virginia will undergo weatherization activities such as tests for carbon monoxide, pre- and post-blower door tests, pressure diagnostic tests, pre- and post-health and safety tests, heating/cooling equipment inspection and repair, floor insulation, domestic water heater insulation, and refrigerator and stove replacement.
DISTRICT OF COLUMBIA, GOVERNMENT OF The Weatherization Assistance Program (WAP) grant will provide assistance to reduce energy costs for low-income families, particularly for the elderly, people with disabilities, and children, by improving the energy efficiency of their homes while ensuring their health and safety.
The stimulus Weatherization Assistance Program (WAP) will expand efforts to audit income-qualified homes and install energy efficiency measures to reduce energy use. DDOE has completed selection of community-based organizations and is preparing final grant agreements and awards to initiate partnerships with 7 organizations. DDOE has posted 6 position descriptions to hire additional program staff; candidates have been identified and are being screened and interviewed by DDOE human resources. 51 N St. NE 6th FL Less Than 50% Completed Information GAO gathered to improve the description Through this award, approximately 785 units throughout the District will undergo weatherization activities, including conducting energy audits of single-family and multifamily homes/residences and performing weatherization improvements to these residences, such as installing energy-efficient lighting, insulation, and weather stripping, and replacing windows/doors; heat pump repair; hot water heater repair/replacement; faucet, showerhead replacement, and programmable thermometer installation. Under this award, inefficient air- conditioners and refrigerators will be replaced in order to reduce electric bills in low-income households.
LABOR AND INDUSTRIAL RELATIONS, HAWAII DEPARTMENT OF Weatherization Assistance Program for Low -Income Persons Weatherization Formula Grants - American Recovery and Reinvestment Act of 2009 The quarter ending 12/31/09 we processed a total of 14 units have been installed. Of these 9 units are hot water solar systems and 5 are compact fluorescent lights (CFL’S). Projected units installed for the coming quarter is 137. As of this date 107 families have been assessed, 17 are currently being considered for solar installations, and 22 are approved for solar and cfl installations. Applicants to HCAP's WAP-ARRA program are currently in receipt of energy conservation education. Applicants watch a video about general energy conservation practices and receive free copies of the publications 'Power to Save: An Energy Conservation Guide to Your Home' and '101 Ways to Save.' In addition to collateral materials, income eligible applicants received dwelling-specific tips and advice from the WAP-ARRA Technical Specialist during an initial home survey and assessment. During the post-installation phase, vendors will provide information on how to use and care for energy saving devices. HCAP continues to develop and refine its process for related weatherization programming with help from the State of Hawaii, Office of Community Services. In the later part of this quarter the WAP-ARRA Program Specialist and WAP-ARRA Technical Specialist traveled to the island of Kauai to discuss procedures with neighbor island CAPs and to receive technical training from Hawaii Energy.
Less Than 50% Completed Information GAO gathered to improve the description This award supports weatherization activities for 672 households in all four Hawaii counties. These activities include an energy audit service, installation of energy saving devices, and follow-up and energy monitoring of low-income homes, as well as technical assistance and training to subawardees.
HOUSING & COMMUNITY SERVICES, OREGON DEPARTMENT OF DOE ARRA Weatherization Assistance Program Statewide The purpose of the Weatherization Assistance Program is to increase the energy efficiency of dwellings owned or occupied by low-income persons, reduce their total residential expenditures, and improve their health and safety. The program promotes job creation, provides energy savings, and reduces carbon emissions. The priority population for the program is persons who are particularly vulnerable such as the elderly, persons with disabilities, families with children, high residential energy users, and households with high-energy burden. Income requirements for ARRA Weatherization funds are 200 percent of the national poverty level. A DOE-approved energy audit is performed on each home to determine the greatest cost saving measures for the client's dwelling. Weatherization contractors then install the most cost-effective, energy efficient measures, address health and safety concerns, and improve comfort. The use of ARRA funds on dwelling units may include, but are not limited to auditing, testing, and installation of energy saving materials. Energy-efficiency education is also provided for each household receiving weatherization. ARRA Weatherization funds may also be used for training and technical assistance.
During the quarter OHCS continued formalizing program and legal agreements with subrecipients and conducted training necessary for proceeding with Weatherization operations throughout the state. Work activities during the period covered a wide range of activities. Through various webinars, tele-conferences, and prepared group training meetings, OHCS has worked with subrecipients developing monitoring and reporting procedures. OHCS continues to analyze subrecipient needs for equipment, vehicles, training and hiring, monitoring and reporting, and feasibility analysis for special projects. OHCS has evaluated at-risk and vulnerable agencies and continues to work with those subrecipients to develop action plans. OHCS continues its coordination with the Oregon Employment Department, Workforce Development, Oregon Energy Coordinators Association and Community Action Partnership of Oregon to develop training plans and the possibilities of leveraged ARRA funding sources. Davis Bacon certified wages were determined and provided to the agencies. Follow-up training for the subrecipients regarding certified payroll issues has been provided. A payroll specialist joined the staff of OHCS during the quarter to facilitate the collection and retention of payroll the certified payroll and to provide guidance to the subrecipients. The monitoring staff has begun scheduled site visits to the subrecipient agencies across the state, evaluating completed jobs and providing weatherization technique training and guidance.
Less Than 50% Completed Information GAO gathered to improve the description Through this award, approximately 4,635 homes throughout the state will undergo weatherization activities; the estimated energy savings is 141,368 MBtu.
COMMERCE, NORTH DAKOTA DEPT OF Weatherization of Low income homes Weatherization of low income clients in the state of North Dakota. It is planned to weatherized approximately 3267 homes. Weatherization will receive general heat waste measures, insulation measures, diagnostics, windows and doors, Health and Safety measures including furnace replacement and repair. Residiential, multi-family and mobile homes will be weatherized with all measures with a SIR of Greater than 1.5. 310 homes completed as weatherized. 330 homes in-progress.
Place of performance - street address (optional field)
Less Than 50% Completed Information GAO gathered to improve the description Each weatherization measure to be installed must have savings-to-investment ratio (SIR) equal to or greater than 1 in order to be included as a priority. The award will result in an estimated energy savings of 85,917 MBtu.
DEVELOPMENT, OHIO DEPARTMENT OF COMMUNICATIONS Recovery ACT Weatherization Award for State of Ohio Weatherization program provides services to low-income households in Ohio to reduce energy costs. The Home Weatherization Assistance Program (HWAP) weatherized over 5,500 homes with ARRA funds in the state of Ohio since July 1st, 2009. Additional training courses have been added to the Corporation for Ohio Appalachian Development (COAD) training center to meet demand due to the considerable increase of crew and contractor based personnel hiring.
Less Than 50% Completed Information GAO gathered to improve the description Through this award, approximately 32,180 homes throughout the state will undergo weatherization activities, including water heater insulation, air leakage repair, furnace tune-up, duct insulation in nonconditioned areas, duct sealing, and the installation of low-flow showerheads.
SOCIAL SERVICES, CONNECTICUT DEPARTMENT OF ARRA Supplemental Funding for the Weatherization Assistance Program (WAP): To reduce energy costs for low-income families, particularly for the elderly, people with disabilities, and children, by improving the energy efficiency of their homes while ensuring their health and safety.
DSS has provided 2 Combustion Safety, 2 Lead Safe, and one OSHA 10 training for weatherization crews and subcontractors. DSS also sponsored 2 Davis Bacon trainings and hosted one statewide ARRA WAP meeting in early December. Through the CCTCs, 1 Building Analyst course was provided to 14 students. Through two workforce investment boards, 2 Weatherization Installer courses were provided to 36 students. To date, more than 125 people have received training for the ARRA WAP program. All DSS ARRA WAP durational project positions have been filled. DSS holds monthly weatherization directors meetings. Through an agreement with the OWC and CT's workforce investment boards, regional workplans have been developed for weatherization training and job creation/retention programs. In addition, the CCTC system is in the process of developing a statewide weatherization training curriculum and building training labs at the vocational and technical high schools. DECD began its pilot project in which 500 state financed elderly housing units will be weatherized in Northwest CT. The sub recipients have finalized their procurement processes and 98 contracts for services and materials have been executed. Total FTEs for the reporting period are 34.33; however, approximately 79 persons have worked for ARRA WAP during this quarter.
Less Than 50% Completed Information GAO gathered to improve the description Through this award, approximately 7,500 homes throughout Connecticut will undergo weatherization activities, such as attic insulation, sidewall insulation, air-sealing/infiltration measures, basement/crawlspace ceiling insulation, pipe and duct insulation, and install storm windows/doors and primary windows/doors.
HEALTH AND WELFARE, IDAHO DEPARTMENT OF Department of Energy - Weatherization The Department of Energy ARRA Weatherization Award will be used to weatherize an additional 3,198 low and moderate income (at or under 200% federal poverty income guidelines) homes by March 31, 2011. This will result in job creation, projected to at least double current staffing as well as increase the use of contractors, promoting retiention. Projections indicate that the material purchased to weatherize homes will at least triple during the project period.
Less Than 50% Completed Information GAO gathered to improve the description The award includes weatherization activities such as attic, floor, and wall insulation, door/window replacement, furnace repair/replacement, refrigerator replacement, duct sealing and insulation, water pipe insulation, and water heater replacement.
Weatherization Assistance Program for Low Income Persons Under the Recovery Act ARRA Supplemental Funding for Weatherization Assistance to Low-Income Persons: To reduce energy costs for low-income families, particularly for the elderly, people with disabilities, and children, by improving the energy efficiency of their homes while ensuring their health and safety.
ARRA Supplemental Funding for Weatherization Assistance to Low-Income Persons: To reduce energy costs for low-income families, particularly for the elderly, people with disabilities, and children, by improving the energy efficiency of their homes while ensuring their health and safety.
Legislative Building 416 Sid Snyder Avenue S.W.
Less Than 50% Completed Information GAO gathered to improve the description Through this award, approximately 7,170 homes throughout the state will undergo weatherization services such as an energy audit, a complete visual assessment, assessment of electric base load measures, diagnostic tests, energy-related health and safety assessments, client education, appropriate low-cost measures, applicable weatherization-related repairs, and a thorough consideration of the client and residence. There is an estimated energy savings of 701,927 MBtu.
BUSINESS AND INDUSTRY, NEVADA DEPARTMENT OF Weatherization Assistance for Low-Income Persons ARRA Supplemental Funding for Weatherization Assistance to Low-Income Persons; To reduce energy costs for low-income families, particularly for the elderly, people with disabilities, and children, by improving the energy efficiency of their homes while ensuring their health and safety.
With $11,572,667.00 of grants awarded in the first cycle, NHD anticipates providing weatherization assistance to approximately 2,000 homes. Production began the first week of November due to state stipulations that had to be met, and work is now moving forward. Department of Employment, Training and Rehabilitation (DETR) is contracting with nonprofit collaboratives to provide weatherization worker training to approximately 300 individuals who we anticipate will be absorbed into the workforce by our current contractors. NHD has hired a compliance auditor/inspector, project specialist, and a Davis Bacon compliance specialist with additional staff to be added as needed. 1535 Old Hot Springs Road, Suite 50 Carson City, NV 89706-0679 Less Than 50% Completed Information GAO gathered to improve the description The award supports weatherization activities by five service providers throughout Nevada. The activities include minor home repairs, floor and duct insulation, refrigerator replacement, and shell infiltration sealing.
LEGISLATIVE OFFICE OF THE STATE OF WEST VIRGINIA To increase the energy efficiency of dwellings owned or occupied by low-income persons, reduce their total residential expenditures, and improve their health and safety, especially low- income persons who are particularly vulnerable such as the elderly, persons with disabilities, familes with children, high residential energy users, and households with a high energy burden.
To weatherize low-income persons homes throughout the State of West Virginia according to the Department of Energy and West Virginia Weatherization Field Standards. 950 Kanawha Blvd. E., 3rd Floor Less Than 50% Completed Information GAO gathered to improve the description The award will support weatherization activities for 3,574 homes throughout West Virginia. These activities include cleaning and tuning heating systems; air sealing; duct, attic and floor insulation; and replacement of heating systems, doors, and windows. The award is expected to result in an energy savings of 57,269 MBtu.
Recovery Act - Weatherization Formula Grants - Low-Income Households Second qtr activities included ramping up by increasing the number of state monitors, issuing grants to subrecipients, and providing training on American Recovery and Reinvestment Act of 2009 (ARRA) rules, the Davis Bacon Act, and other related regulations. Weatherization-related training opportunities have been provided to new State and Service Provider Weatherization Assistance Program staff. The MN Department of Commerce (DOC) hired additional weatherization field and fiscal monitoring staff. 1,392 homes have been weatherized using ARRA funds. 101 of these homes were monitored by ARRA DOC weatherization staff. These monitoring visits were also used to train new DOC weatherization staff. 85 Seventh Place East, Suite 500 Saint Paul, MN 55101-2198 Less Than 50% Completed Information GAO gathered to improve the description The award supports weatherization activities for about 16,850 homes in all Minnesota counties and 6 of the state's 11 Native American reservations. Weatherization activities include air leakage and infiltration reduction, attic insulation, wall insulation, health and safety repairs/replacement, duct sealing and room-by-room pressure balancing, cleaning and tuning heating systems, efficiency-based heating system replacements, and belly and duct repairs/sealing.
ARRA Weatherization Assistance for Low Income Persons ARRA Weatherization Assistance Program for Low Income Persons provides funding for improving the energy efficiency of low-income dwellings to decrease energy consumption and thereby decrease the cost of energy for low-income families.
ARRA Weatherization Assistance Program for Low Income Persons provides funding for the improvement of energy efficiency of dwellings to decrease energy consumption and thereby decrease the cost of energy for low-income families. This is accomplished through the state's network of Community Action Agencies and is headed by Community Action of Kentucky, the subrecipient of grant funds.
Grants Less Than 50% Completed Information GAO gathered to improve the description This award supports weatherization activities for 9,907 homes throughout Kentucky. These activities include attic, wall, and floor insulation; incidental repairs; infiltration reduction; and health and safety measures. The award is expected to result in an energy savings of 268,644 MBtu.
COMMUNITY AFFAIRS, FLORIDA DEPARTMENT OF The U.S. Department of Energy (DOE) awarded $175,984,474 to Florida for the Weatherization Assistance Program (WAP) through the American Recovery and Reinvestment Act (ARRA). These funds are to help reduce the monthly energy burden of Florida's low-income population households by making those dwellings more energy efficient. To date, DOE has released 50% of the total award amount to the state. The funding, administered by the Florida Department of Community Affairs, will be passed through to the existing 27 provider agencies (community action agencies, non-profit entities and county governments) covering the 67 counties statewide. Each of these providers, along with the contractors and vendors participating in the program, have an integral role in job creation and retention by providing energy efficiency improvements on low-income dwellings. Weatherization activities may include: addressing air infiltration with weather stripping, caulking, thresholds, minor repairs to walls, ceiling and floors and window or door replacement; applying solar reflective coating to manufactured homes; adding ceiling and floor insulation; evaluating efficiency of heating and cooling systems, refrigerators, water heaters; and installing solar screens, low flow shower heads, compact fluorescent light bulbs, water heater and water line insulation. One hundred percent of the beneficiaries of the WAP are below the 200% federal income guidelines.
During the first quarter, primary activities were focused on capacity-building and training at the local provider level. Local providers were required to complete specific benchmarks, prior to receipt of ARRA working weatherization grants. Benchmarks included: completion of one- week weatherization inspector training for existing and new employees with follow-up field testing, purchasing of additional equipment, and validation and eligibility verification of client waiting lists. During the second quarter, all but one of the 27 local providers completed the required benchmarks. Weatherization grant awards were executed with 26 agencies and those agencies began weatherizing dwellings. A new oversight measure of field monitoring was also implemented within the second quarter. Field monitors were trained by state Weatherization staff and in November the monitors began their ongoing responsibility of reviewing 100% of client files and inspecting 50% of the weatherized homes. Training on Davis Bacon requirements was also provided statewide by a representative of the U.S. Department of Labor. Statewide contractor training curriculum was developed and implementation begins in the third quarter. (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award supports weatherization activities for approximately 19,090 homes.
HOUSING & COMMUNITY AFFAIRS, TEXAS DEPARTMENT OF Recovery Act-Weatherization Assistance Program for the State of Texas The Weatherization Assistance Program assists low-income households control energy costs to ensure an healthy and safe living environment. Qualified households may receive weatherization materials installed in their residences and/or energy conservation education.
Continued administrative activities at the prime recipient level and weatherization work at the subrecipient level. $326,975,732.00 Less Than 50% Completed Information GAO gathered to improve the description The award supports weatherization activities for 33,908 homes across the state. Weatherization activities include measures to reduce air infiltration, such as replacement of doors and windows, repairing of holes and caulking; installation of ceiling, wall and floor insulation; replacement of energy inefficient appliances and heating and cooling units; and energy education to help families reduce their energy consumption. Subawardees will receive training that will include basic and advanced weatherization, weatherization program management, NEAT software, and Davis-Bacon administration.
THE EXECUTIVE OFFIC OF THE COMMONWEALTH OF PUERTO RICO The Weatherization Assistance Program helps low-income families to attain a reduction of household energy expenditures, while securing and enhancing the health and safety of the home. Of particular concern to the program is to provide assistance to the elderly, families with children, persons with disabilities, and those with a high energy burden in their household. Due to the warm climate of the island, weatherization efforts will be directed at improving the efficiency of cooling systems, reduction in electrical energy demand of light fixtures and selected household appliances, and mitigate energy-related health and safety concerns. To maximize the benefits of the program, work will be performed by trained personnel, and the process will be monitored from initial client application to certification of completed weatherization work. The period of performance is estimated from 4-1-2009 to 3- 31-2012.
The Evaluation Committee for the Call Center studied the proposals received and made their recommendations to subgrantee's, PRIFA, Board of Awards. The pre-bid meeting for the Refrigerator Replacement Services Bid was held. Refrigerator Replacement Services Bid Documents were prepared, and the newspaper bid announcement was published. The Evaluation Committee for the compact fluorescent lamps (CFLs) bid began evaluating the proposals received. Water Heater Replacement Services Bid Documents were prepared, and the newspaper bid announcement was published. Trainers (ECA) contract was signed and their first visit ocurred on December 29 and 30. The Evaluation Committee for the qualification of auditors and inspectors met and selected the inspectors to be invited for the training. Evaluation of auditors started this period. Probable intake locations were visited to evaluate the physical conditions and necessities to adjust the locations to the intake process. Evaluation of probable training facilities was finished and sent to PRIFA for their comments and final decision on which facility to use. Draft report on the Energy Audit Tool to be used by auditors in Puerto Rico WAP was prepared. After grantee's, EAA, revision, the agency will submit the document to the DOE. The document includes a brief description of the Puerto Rico housing stock, photos, climate description, explanation of audit tool for all the weatherization measures for which the Savings to Investment Ratio (SIR) needs to be calculated, samples of SIR calculations for each of the measures, and a priority list which describes SIR tendencies for the different weatherization measures.
Weatherization Environmental Agencies Building Floor 8 Street 8868, PO BOX 41314 San Juan, PR 00940-0285 Less Than 50% Completed Information GAO gathered to improve the description Through this award, approximately 5,500 homes throughout Puerto Rico will undergo weatherization activities such as installing reflective films; addressing air leakage in air-conditioned areas; installing solar water heaters; replacing refrigerators, water heaters, and air conditioners with Energy Star rated units; replacing incandescent lamps with compact fluorescent lamps (CFL); replacing shower heads; installing smart power strips to avoid phantom loads; and other work to mitigate energy-related health and safety concerns.
GOVERNOR'S OFFICE OF ECONOMICS DEVELOPMENT Provide home weatherization services to eligible low-income households, includin furnace replacement, insulation, etc., with the goal of reducing energy usage, energy production and greenhouse gas output, as well as reducing utility bills.
Weatherization staff has been hired at 9 local area agencies responsible for implementing the Weatherization Assistance Program. 558 homes have been completed and another 842 are in progress. 324 South State Street, Ste. 500, N/A Salt Lake City, UT 84111-2388 Less Than 50% Completed Information GAO gathered to improve the description Through the award, approximately 4,466 homes will undergo weatherization throughout the state.
Weatherization of homes ultimately completes the plan to upgrade State Energy Infrastructure. As the primary focus being on lowering energy liabilities electricity providers are charging onto the costumers. Through education, trainning and audits/assessments the consumers can learn the benefits of using Energy Efficiency and Conservation measures in their homes. However, the State Plan wishes to initiate this program for the first time by focusing on replacing electricity appliances and other electricity devices with certified Energy Star units. Several deliverables applicable in the State plan include Solar Water Heater, Electric Stove, Refrigerator, Air Con, Microwave, Cloth Washers, and etc..
Home assessments are continued and an environmental regulatory issue needs be resolved prior to initiating any production to measures guided under the State Plan. This issue perhaps should be finalized before this quarter expires.
American Samoa Government, Territorial Energy Office Pago Pago, AS 96799-0000 Less Than 50% Completed Information GAO gathered to improve the description The award supports weatherization activities for approximately 225 homes throughout American Samoa.
PUBLIC HEALTH AND HUMAN SERVICES, MONTANA DEPARTMENT OF Recovery Act - Weatherization Assistance Program for Low Icome Persons ARRA - Supplemental Funding for Weatherization Assistance to Low-Income Persons: To reduce energy costs for low-income families, particularly for the elderlly, people with disabilities and children, by improving the energy efficiency of their homes while ensuring their health and safety.
These funds will provide grants for local Human Resource Development Councils that apply to pay to weatherize homes with the oriiginal created and retained remaining active. . As with all weatherization projects, the applicants will be asked to provide planning and accountability documentation. The Weatherization Program’s mission is to increase the energy efficiency of homes occupied by low-income individuals, thereby reducing their energy costs. The program has reduced the annual heating costs of recipient households by an average of approximately 32 percent. It serves approximately 2,000 high energy burden households each year. ARRA funding will allow the Weatherization Program to serve at least 2,500 more families and to double the average labor and materials expenditure per dwelling for cost-effective energy conservation measures. As of November, 2009, 253 homes have been weatherized and audited in Montana with an additional 411 that are in the process of being weatherized. (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award supports weatherization activities for approximately 2,477 homes throughout Montana. These activities include stoppage of air infiltration; heating systems tune-ups; water heater, attic, floor, perimeter, and wall insulation; installation of storm windows, replacement doors, moisture controls, ventilation materials, pipes, and duct wrap.
The following award descriptions did not contain sufficient details on one or more of the following pieces of information necessary to facilitate general understanding of the award, based on our criteria: general purpose, scope and nature of activities, location, and/or expected outcomes. In some cases only a small amount of additional information was needed, while in other cases, many pieces of information were needed to make the description more transparent. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
COMMUNITY SERVICES & DEVELOPMENT, CALIFORNIA DEPARTMENT OF Recovery Act - Weatherization Assistance Program Recovery Act - Weatherization Assistance Program Formual Block Grant - DOE WAP. The initial allocation is dedicated for CSD & Agency ramp up, this included training, new hires & vehicle purchases. The training also included creating a web based WX training ciriculum web site. 700 N 10th St Rm 258 Less Than 50% Completed Information GAO gathered to improve the description The award allows 42 subawardees to weatherize 43,400 eligible low-income dwellings in all California counties. In addition to start-up activities such as training, hiring, and vehicle purchases, this award supports weatherization activities, including the installation of ceiling insulation and carbon monoxide alarms. The award will result in an estimated energy savings of 1,742,370 MBtu.
Weatherization Assistance for Low-Income Persons ARRA supplemental funding for Weatherization Assistance to Low-Income Persons: To reduce energy costs for low-income families, particularly for the elderly, people with disabilities, and children, by improving the envergy efficiency of their homes while ensuring their health and safety.
As this is the first report for WAP ARRA funds, most activity has supported ramp up of workforce and infrastructure.
Oklahoma City, OK 73104-3234 Less Than 50% Completed Information GAO gathered to improve the description The award supports weatherization activities for about 7,000 homes in all Oklahoma counties. These activities include cost-effective energy efficiency measures, including attic insulation, caulking, weather stripping, and air sealing. The award is expected to result in an estimated energy savings of 310,640 MBtu.
HUMAN SERVICES, VERMONT DEPARTMNT OF The ARRA Weatherization Assistance Program mission in to reduce the energy burden of low income persons while ensuring their health & safety.
Grants have been written to the 5 sub-awardees and training has begun.
Less Than 50% Completed Information GAO gathered to improve the description This award supports weatherization activities for approximately 1,612 homes in 15 counties in Vermont. Weatherization activities include heating system modifications; installation of cost-effective levels of attic, wall, floor, duct, and foundation insulation; and water heater and water pipe insulation and modifications. The award is expected to result in an energy savings of 60,588 MBtu.
FAMILY SERVICES, WYOMING DEPARTMENT OF Recovery Act Weatherization Award for State of Wyoming (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description Through this award, approximately 900 units throughout the state will undergo weatherization activities such as installing insulation, sealing and balancing ducts, and mitigating heating loss through windows and door.
HUMAN SERVICES, TENNESSEE DEPARTMENT OF Weatherization Assistance for Low-Income Persons Weatherization Assistance Program, Recovery Act Reduce energy costs for low-income families through increased energy efficiency. (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description This award supports weatherization activities for 10,524 homes throughout Tennessee. These activities include attic, wall, floor, and duct insulation; air sealing; heat waste reduction measures; refrigerator replacement; and window and door repairs. The award is expected to result in an energy savings of 320,952 MBtu.
GOVERNMENT OF GUAM - DEPARTMENT OF ADMINISTRATION MOU being established with Guam Energy Office and Guam Housing and Urban Renewal Authority, an agency which works closely with HUD and has the qualifications and the knowledge to assist in determing which dwelling qualifies and falls under the WAP guidlines as stipulated in the grant activity. 548 N Marine Corps Dr $1,119,297.00 Less Than 50% Completed Information GAO gathered to improve the description The award supports weatherization activities for 204 homes throughout the territory of Guam. Weatherization activities include the replacement or repair of refrigerators, air conditioners, low-flow shower heads, and faucets, compact fluorescent lamp (CFL) fixtures, and water heaters. The award will result in an estimated energy savings of 3,060 MBtu.
Within the Department of Energy, the Geothermal Technologies Program (geothermal program) provides grants, cooperative agreements, and contracts to support scientific research to find, access, and use geothermal energy in the United States. In fiscal year 2009, the geothermal program received $43.3 million in annual appropriations; the Department of Energy provided an additional $400 million in Recovery Act funds for geothermal activities and projects that should be completed within 3 years.
According to program officials, the geothermal program received a tremendous and unprecedented response to its solicitations announcing Recovery Act funding opportunities. Specifically, the program office received 529 applications in response to the grant solicitations and over 50 applications in response to a solicitation for the department’s national laboratories. Out of these applications, the program office selected 151 projects—124 projects were submitted by private industry, academic institutions, tribal entities, and local governments, and 26 projects were submitted by 10 national labs. The program office also established an interagency agreement with the U.S. Geological Survey to work on 1 project.
In terms of awarding grants and contracts for projects, program officials told us that a grant is equivalent to a project because the grant is awarded to one recipient and funds are provided directly to the recipient. However, this concept does not hold true for all contracts awarded to the national labs for a project. This is because a national lab can be involved in a collaborative project that includes one or more partner labs. In this case, individual “activities” from each national lab would be completed and contribute to the completion of the overall project. Unlike grants, funding from the program office is provided directly to the lab performing the work. Consequently, a national lab project can be equivalent to one contract or multiple contracts.
Nature and Type of Geothermal Projects
The department selected the projects to receive grants under the Recovery Act in October 2009, but according to program officials, it had not finished awarding the grants until February 2010. The program officials told us that some lag time (e.g., 5 to 6 months) between project selection and award is typical. As of April 23, 2010, the program office had obligated almost $343 million of the $393 million in appropriations (about 87 percent); however, only 28 recipients had spent any funds, and they had only spent 2.6 percent (almost $9 million). Program officials told us that the expenditure rate was low because many projects were recently awarded and had not started.
Almost 60 percent of the geothermal program obligations under the Recovery Act were split evenly between enhanced geothermal systems research and development projects and innovative exploration technologies projects. Specifically, over $101 million (30 percent) was obligated to 50 enhanced geothermal systems research and development projects, while about $98 million (29 percent) was obligated to 22 validation of innovative exploration technologies projects. (See fig. 1.) The rest of the obligations funded the following three project areas: almost $62 million (about 18 percent) was obligated to 37 ground source about $50 million (about 15 percent) was obligated to 14 geothermal about $31 million (about 9 percent) was obligated to 5 national geothermal data system projects.
About One-Third of the Geothermal Descriptions Met Our Transparency Criteria
We assessed the transparency of the descriptive information for geothermal awards available on Recovery.gov. We found that an estimated 33 percent met our transparency criteria, 62 percent partially met our criteria, and 5 percent did not meet our criteria.
For geothermal descriptions that partially met or did not meet our criteria, we collected information necessary to make the descriptions meet our criteria. The geothermal descriptions of awards in our sample, whether they met our criteria, and information that we found to provide a fuller understanding of the award are provided at the end of this appendix.
Agency Guidance and Other Factors That May Affect Transparency of Reported Information
Although supplemental materials were available to assist with recipient reporting, recipients did not always follow the directions in these materials. Additionally, geothermal program officials did not review narrative description fields in Recovery.gov, which may have led to some reporting errors. Both the Department of Energy and the Office of Science provided supplemental materials that directed recipients to a source document (e.g., the award letter) where information can be found to complete a required field. In addition, the department provided training on the reporting requirements through webinars, while the geothermal program office held a video conference with recipients (i.e., the national labs). Furthermore, the department has a Recovery Act Clearinghouse available to answer questions from recipients, and it posts responses to frequently asked questions on its Recovery Act Web site. Moreover, geothermal program officials told us that they do not review these narrative description fields because information in these fields is available on the geothermal Web site. Likewise, department officials told us that they do not review these fields because the information is fully described in the award documents. However, we identified two issues with the fields that may have affected the transparency of some information reported by the national labs.
First, information on the overall status of four national lab projects that involve multiple labs may not come across clearly in the narrative description fields. This is because Recovery.gov was set up to track Recovery Act spending at the recipient level and not at the project level. According to geothermal program officials, Recovery Act funds are provided directly to a lab to complete its activities on a project. Consequently, multiple labs working on the same project would report their individual activities in multiple records in Recovery.gov. For example, Lawrence Berkeley National Laboratory was the prime recipient for a project on enhanced geothermal systems using carbon dioxide as a heat transmission fluid, and the Idaho National Laboratory was identified as a partner lab. As required, both national labs reported their activities on this project in two separate records in Recovery.gov. Unless narrative information disclosed that this project involved more than one lab, the expectation might be that these were two different projects.
Second, six national labs did not submit a separate report for each activity as specified in the supplemental materials provided by the department. The six labs combined two to four different activities into a single report. As a result, 18 separate activities were reported in just six records. When we spoke with program officials, they were unaware of the requirement that recipients report on projects separately. They told us that their preference for national labs reporting on multiple activities is explained in the annual program guidance letter. However, based on our review of a few program guidance letters, we believe that the preference of the program office is for the labs to report each activity separately because this is how the activities are presented in the letters.
Other Ways Award Information Is Made Available to the Public
According to geothermal program officials, information on the geothermal projects funded by the Recovery Act is made available to the public using other means besides Recovery.gov. For example: The Geothermal Technologies Program Web site (http://apps1.eere.energy.gov/geothermal/projects/). This Web site provides detailed information on each project, including the technology type, recipient name, location, objectives, description, and targets/milestones. It provides a database that allows the public to search for a project by, among other things, funding source, location, and technology type.
The Department of Energy Recovery Act Web site (http://www.energy.gov/recovery/). It provides weekly updates on departmental projects and programs funded by the Recovery Act, including data on appropriations, obligations, and outlays.
Press releases. These provide information on major announcements, such as announcements on the availability of Recovery Act funding. (http://www.eereblogs.energy.gov/geothermaltechnologies/). This provides the public with the opportunity to learn about and discuss geothermal activities.
Weekly Recovery Act success stories. These highlight the results of Recovery Act funding on recipients. If the department selects a geothermal story, then it appears on the department’s Recovery Act Web site.
Program officials told us that the geothermal program has become more visible to the public during the past two years. Although the program office has not conducted any surveys to determine how consumers are becoming aware of the program, they believe that new articles and the Recovery.gov Web site could be contributing to the increased awareness. Program officials also told us that the public, the community, and reporters have provided positive feedback on the geothermal Web site, noting that the Web site is easy to navigate.
Geothermal Descriptions That Met Our Transparency Criteria
The following award descriptions contained sufficient information on general purpose, scope and nature of activities, location, and expected outcomes to meet our transparency criteria. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
Geothermal Technologies Program Enhanced Geo Science R&D Task 1) Design, develop, and field test highly integrated, high temperature data loggers using silicon on insulator and silicon carbide technologies. Task 2) Develop a drilling system based upon pneumatic down the hole hammer bits and polycrystalline diamond compact bits. Task 3) Test supercritical fluids in a pilot-scale Brayton Cycle and evaluate the performance of the working fluids. Requirements: Task 1 Milestones: Field Dewarless 240C PTC Tool-9/30/10; Evaluate existing Dewar Technology-9/30/10; Design analog MCM-01/31//11; Status report-03/31/11. Deliverables: 1) Dewarless 240C PTC Tool; 2) Report evaluating existing Dewar technology; 3) Design of analog MCM; 4) Status report. Task 2 Milestones: Year 1: Complete Initial Field Trials-9/30/10; Year 2: Implement Design Changes from Initial Field Trials-9/30/11. Deliverables: Report evaluating existing Dewar technology. Task 3 Milestones: 1) Prediction of thermodynamic properties for a single component fluid through the critical point-10/1/10. 2) Obtain full vapor-liquid equilibrium envelopes & critical points for one set of mixtures-4/1/11. 2) Milestones 1: Verification complete mixing & thermodynamic equilibrium between components can be obtained so appearance of new phase can be reliably detected (Go/no- Go).; Deliverables 1) thermodynamic properties for several candidate working fluids; 2) computational toolbox for analysis of mixtures of fluids, turbine design & cooling needs; 3) experimental results from Brayton cycle rests; & 4) recommendations for new working fluids. (For Performance outcomes & measures see Work Authorization Plan)
Thie original project has been separated into three separate projects; 1) ARRA Drilling Technology (145316) with $588,600, 2) ARRA Geo Thermal Turbines (146694) with $150,000; and 3) Base Technologies ARRA (144299) with $885,600. The budget total has remained the same. The scope, deliverables and milestones are being developed.
AL85000 Develop a new type of biphasic working fluid for subcritical geothermal systems that utilizes microporous nanostructured metal-organic solids as the primary heat carrier and heat transfer medium to support an organic Rankine cycle. Provide information on temperature distribution, fracture spacing, and fracture surface area in EGS (Enhanced Geothermal Systems). Develop suites of tracers with different properties that can be injected into geothermal systems, extracting the desired information by interpreting the differences in transport behavior of these compounds in the reservoir.
SA 56595 - Project team members from PNNL, LANL, and BNL participated in a meeting at the Energy and Geoscience Institute (EGI) at the University of Utah on December 8, 2009. The purpose of the meeting was to share information on the geothermal tracer programs at EGI and the four national labs the project team plus INL) and to explore ways that the programs can interact. Following this meeting, the project team discussed the next steps for 2004190- EGS R&D and agreed to begin laboratory testing of PFT compounds early next calendar year. A tentative schedule was developed that included a meeting in late winter at Los Alamos to further plan laboratory testing. In parallel with the laboratory effort, PNNL and LANL will develop a modeling approach, conduct predictive simulations to identify optimal thermal and surface adsorption properties for geothermal tracers, and examine the sensitivity of the model to a range of tracer properties. Results from this sensitivity analysis will be used to guide subsequent laboratory-scale testing of candidate tracers.
Research and Development in the Physical, Engineering, and Life Sciences (except Biotechnology)
Less Than 50% Completed DE-AC05-76RL01830 BATTELLE ENERGY ALLIANCE, LLC Enhanced Geothermal Systems (EGS) Technology R&D ($1.953M). This scope of work includes four scopes of work. 1) Air-Cooled Condensers in Next-Generation Conversion Systems. The Idaho National Laboratory (INL) will identify and resolve issues that are associated with using air-cooled condensers in next-generation energy conversion systems, achieve the full benefits of using mixed working fluids in air cooled binary cycles, evaluate the benefits of using air-cooled condensers with flash steam cycles, and establish criteria for designing air-cooled binary plant turbines. 2) Enhanced Geothermal Systems with CO2 as Heat Transmission Fluid. The INL will conduct experiments for evaluating the effect of supercritical carbon dioxide, at elevated temperatures, on precipitation and dissolution of mineral phases that are typical of geomedia found in geothermal reservoirs. 3) Physics-Based Fracture Stimulation, Reservoir Flow and Heat Transport Simulator. The INL will develop a physics-based rock deformation and fracture propagation simulator by coupling a discrete element model for fracture generation with a continuum-based multiphase fluid flow and heat transport model. 4) Advancing Reactive Tracer Methods for Measuring Thermal Evolution in CO2 and Water-based Geothermal Reservoirs. The INL will develop a set of tracer test planning and analysis tools to define the parameters necessary for successful testing, identify new tracers suitable to a wide range of potential reservoir volumes and permeabilities, and demonstrate the utility of newly developed tracers in a system representative of Enhanced Geothermal Systems.
Quarterly activities are listed below for the four scopes of work as mentioned above. 1) Personnel have been developing power plant (conversion system) models that will be used to assess the benefits of applying different equipment concepts having the potential to increase performance from air-cooled binary plants. Emphasis has been on plants to be used with EGS resources. Model development has been largely been completed. The reasonability of model performance estimates are being assessed by comparing estimates to operating data from existing plants. 2) Experimental design for batch experiments involving supercritical CO¨2/water/mineral reactions was planned. Reactor components were ordered and/or under construction. Initiated laboratory safety review and approval process. 3) Over the past quarter, significant progress was made in the development of advanced computer models for predicting the behavior of enhanced geothermal systems. 4) A high-performance liquid chromatograph was purchased and has been installed in the laboratory to perform tracer analyses. A computer program was developed to model the migration of thermally reactive tracers through a fractured geothermal system. This code was used to evaluate testing strategies for tracer experiments. Experiments were conducted to encapsulate reactive tracers. The experiments showed that encapsulsted tracers could be made and are stable at room temperature.
All Other Professional, Scientific, and Technical Services Idaho Falls, ID 83415-0001 Less Than 50% Completed DE-AC07-05-ID14517 LOS ALAMOS NATIONAL SECURITY, LLC LANL?s project will develop a multipurpose (simultaneous multiple physical parameter determination) acoustic sensor for downhole fluid monitoring in EGS reservoirs over typical ranges of pressures and temperatures and then demonstrate the capabilities and performance of this sensor for conditions in different EGS systems (with a wide range of temp/pressure and geophysical/geological conditions). Specific technical challenges are finding the right material for the sensor that can withstand working temperatures of up to 374×C and pressures up to 22 MPa; developing the most efficient design/geometry for the sensor to sustain the high temperature ? high pressure conditions specific for a typical EGS system; and the fluid flow determination requires either high flow rates or turbulent flow (vortices or disturbances) and/or impurities/gas bubbles present in the fluid. The multipurpose sensor that LANL proposes is capable of accurately measuring temperature, pressure, and fluid composition at in situ conditions expected in geothermal environments and is needed in nearly every phase of an EGS project, including testing of injection and production wells, reservoir validation, inter-well connectivity, reservoir scale-up, and reservoir sustainability. The Swept Frequency Acoustic Interferometry (SFAI) technique was originally developed at LANL for noninvasive identification of chemical warfare compounds in a multitude of weapons and a wide range of containers for international treaty verification and counterterrorism purposes. Since then, the technique has been significantly refined and expanded, and LANL will adapt SFAI and combine new approaches to extract multiple fluid parameters from a single sensor. Although the underlying basis of the SFAI technique is proven, it has never been applied to geothermal exploration primarily because the requirements of high temperature and pressure were not needed in earlier applications; this application will require some novel adaptation and sensor development and associated physics.
A thorough literature search was performed in order to identify the best choice of piezoelectric materials to be used. Curie temperature (TC) is an important factor in high-temperature applications, as the transducers lose their piezoelectric property completely at temperatures close to TC. Typically, it is best not to exceed half of Tc. Piezoelectric materials and their TC, in ½C: PZT (195-300), AlN (600), LiNbO3 (1150), Langasite (1000), Langatate (>1500). The langasites and langatates are piezoelectric materials discovered recently and are still under investigation by the scientific community. We are planning to investigate the material properties at high-temperatures and determine if there are advantages in using these new piezoelectric materials in the development of the multipurpose acoustic sensor. Several PZT and Lithium Niobate transducers with different center frequencies, ranging from 1 MHz to 6 MHz, were investigated above room temperature. Langasite and/or langatate piezoelectric material has to be acquired and machined into transducers. Milestone Status As planned. Significant Procurements Investigated and identified the equipment necessary: Parr Instrument Pressure Vessel, Model 4681; Air Pressure Amplifier, Haskel AAD-30; Thermocoax cables (high temperature coaxial cables); Bode 100 Vector Network Analyzer; Tektronix Arbitrary Function Generator; Tektronix Oscilloscope; Materials for transducers (Lithium Niobate, Langatate and or/Langasite). Hiring A postdoctoral job was posted on several web-sites targeting recently graduated PhD?s. From a pool of 30+ applicants, we narrowed the list to 2 potential postdocs, which we interviewed on site. Dr. Blake Sturtevant graduated in Dec 2009 form University of Maine, and is very experienced in the field of Acoustics, with extensive experience related to high-temperature piezoelectric materials. Dr. Sturtevant has accepted the job offer, and he is planning to start in middle of January 2010.
Research and Development in the Physical, Engineering, and Life Sciences (except Biotechnology)
Los Alamos, NM 87544-1663 Less Than 50% Completed UNIVERSITY OF UTAH, THE ECONOMIC IMPACT ANALYSIS FOR EGS The proposed project is aimed at studying the economic development and impacts associated with electric power production resulting from Enhanced Geothermal Systems (EGS), conventional hydrothermal, low temperature geothermal, and coproduced fluid technologies. The project also involves analysis of these results to develop an impact assessment model that could be used across the Nation for impact assessments with an ability to quantify the potential employment, energy and other environmental impacts associated. Further to developing such a tool, we will also be carrying out a Utah region study to validate the GEC tool developed and will publish a detailed report on the economic impacts associated with Geothermal technologies considered for this study in the Utah State. The 24- month project is divided into three discrete phases: Phase 1: Data gathering ? collect the associated cost data for each of the different technologies Phase 2: Economic Impact Analysis ? design studies to understand all the impacts associated, and Phase 3: Outreach activities ? Communicate the findings to the industry and the research community to validate the studies used to roll out an impact assessment tool, the GEC tool.
Research & Public Policy Analysis 75 S 2000 E RM 211 SALT LAKE CITY, UT 84112-8930 DE-EE0002744 LOS ALAMOS NATIONAL SECURITY, LLC Field tests (Fenton Hill, USA; Hijiori, Japan) strongly suggest that our ability to image fluid flow and temperature distribution in enhanced (engineered) geothermal reservoirs (EGS) needs to be dramatically improved to optimize the operation of injection and production wells and the placement of new wells. The objectives of this project are to (1) improve image resolution for fracture detection, (2) image the flow in the fractures with super-resolution imaging, and (3) quantify fluid flow and temperature changes during and after stimulation. This research will provide vastly improved, high-resolution images of pre-existing and created fractures and fluid flow in EGS reservoirs. Focusing on the data available from short term-stimulation treatments, while developing imaging and modeling technology of importance to the long-term operation of an EGS system, we will integrate LANL?s and NETL?s unique capabilities in seismic imaging, fluid flow modeling, and laboratory measurements. ? Develop a super-resolution, seismic imaging method for imaging fractures and fluid flow using time-lapse microearthquake (MEQ) and vertical seismic profiling data. ? Improve fracture and flow imaging using MEQ and double-difference tomography. ? Utilize imaging results, time-lapse seismic data and modified Gassmann equations to quantify fluid flow and temperature changes in EGS. ? Develop a reservoir-scale fully coupled thermal-hydrologic-mechanical (THM) model. ? Use NETL?s discrete fracture network modeling to scale up constitutive relationships for porosity and permeability needed for THM. This project is innovative in that the development of super-resolution seismic imaging for mapping features and imaging fluid flow is a novel extension of a ground-breaking technique recently developed in medical imaging, and offers great potential to break through seismic imaging resolution. Typically, the use of microseismic data has been restricted to mapping gross flow paths affected by stimulation. Our proposed high-resolution mapping will provide additional information about fracture network geometry and induced deformation. Combining this information with the active seismic images will enable a more complete conceptual model of the fracture networks and fluid flow/temperature distribution in the EGS, which is vitally needed for successful EGS operations.
The ability to include stress-dependent fracture permeability in reservoir simulation models allows for (more) accurately predicting future reservoir performance and offers the possibility of help in managing thermal short-circuiting. Reservoir simulation software has evolved in the past decades to a point where complete reservoirs can be efficiently simulated with a single model. Thermal hydrologic mechanical (THM) software has also progressed to the point where large scale simulations including fluid flow, heat transfer, and stress changes can be made. This capability allows ground displacement measurements and micro earthquake (MEQ) analysis to be used to calibrate and constrain reservoir models and thereby help predict future field behavior. In the THM modeling of geothermal reservoirs, relating the fracture permeability to fracture aperture and fracture aperture to changes in stress or displacement is the key to realistic and efficient computations. We surveyed the literature and found several conceptualizations of permeability-aperture-stress relationships. We like a paper by Bai et. al. (Rock. Mech. Rock Engng., 32, 195-219, 1999) because it can represent compressive, tensile, and shear stresses. We converted this to a displacement formulation and added a thermal stress term. We are testing the model on grids we developed for this purpose. In addition, we met and discussed with our collaborators at Berkeley Lab, GeothermEx, and Ormat: one meeting at LBNL and another at San Francisco during the AGU meeting. We have obtained some geophysical well log data from GeothermEx/Ormat for building a reservoir model. Milestone Status: Programmed Initial Permeability-Aperture- Stress (PAS) models in FEHM Created 2D and 3D numerical grids to test the PAS models.
Research and Development in the Physical, Engineering, and Life Sciences (except Biotechnology)
Los Alamos, NM 87544-1663 Less Than 50% Completed The United Technologies Research Center (UTRC) proposes to improve the utilization of available energy in geothermal resources and increase the energy conversion efficiency of systems employed by: a) tailoring the subcritical and/or supercritical glide of enhanced working fluids to best match thermal resources, and b) identifying appropriate thermal system and component designs for the down-selected working fluids. By implementing these technologies, the overall energy conversion of binary geothermal power plants is projected to increase by at least 40%. The technical approach is: 1. Screen, evaluate, and down-select working fluids and mixtures that efficiently match source and sink conditions, meet environmental and safety requirements (flammability, global warming potential, ozone depletion potential, toxicity, etc), and increase thermodynamic cycle performance. 2. Develop necessary models to identify and evaluate opportunities for energy conversion technology advancements in subcritical, supercritical and trilateral cycles. UTRC shall identify optimal cycle configurations and component designs to take full advantage of the attributes of down- selected working fluids. UTRC shall also define a two-phase expander to best match chosen fluids and cycles and conduct a proof-of-concept demonstration. 3. Conduct property measurements and develop validated thermophysical models for down-selected working fluids. 4. Characterize the heat transfer and pressure drop performance of down-selected working fluids and perform experiments to quantify and mitigate the impact of heat transfer degradation characteristic of supercritical fluids and non-azeotropic mixtures. The deliverables of the program are: 1. A comprehensive analytical study detailing the screening, evaluation, and down-selection of working fluids and identifying the appropriate technology advancements in subcritical, supercritical, and trilateral cycles 2. Improved heat exchanger and turbine designs for down-selected working fluids 3. Validated thermophysical models and experimental data for down-selected working fluids 4. Heat transfer and pressure drop data and validated correlations for down-selected working fluids over a representative operational envelope, plus an analytical study of and recommendations for the mitigation of heat transfer degradation 5. Definition and proof-of-concept demonstration of a two-phase expander Research and Development in the Physical, Engineering, and Life Sciences (except Biotechnology)
Geothermal Descriptions That Partially Met Our Transparency Criteria
The following award descriptions did not contain sufficient details on one or more of the following pieces of information necessary to facilitate general understanding of the award, based on our criteria: general purpose, scope and nature of activities, location, and/or expected outcomes. In some cases, only a small amount of additional information was needed, while in other cases, many pieces of information were needed to make the description more transparent. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
REGENTS OF THE UNIVERSITY OF CALIFORNIA, THE We propose mathematical modeling work, using both analytical and numerical methods, to design and analyze laboratory and field experiments that would (a) identify tracers with sorption properties favorable for enhanced geothermal systems (EGS) applications, (b) apply reversibly sorbing tracers to determine the fracture-matrix interface area available for heat transfer, and (c) explore the feasibility of obtaining fracture-matrix interface area from non- isothermal, single-well injection-backflow tests. 1. We performed a first series of design calculations for the laboratory heat extraction experiments with CO2 as heat transmission fluid. 2. An improved model for the specific enthalpy of the CO2-rich phase was implemented in the evolving ECO2H fluid property module for TOUGH2. 3. We started a literature survey of rock-fluid interactions in geologic systems that may serve as (partial) analogues of EGS with CO2. Reactive transport modeling studies have also been initiated.
Research and Development in the Physical, Engineering, and Life Sciences (except Biotechnology)
Contracts Less Than 50% Completed Information GAO gathered to improve the description The award funds experiments on fluid flow, heat transfer, and rock-fluid chemical interactions conducted by the Lawrence Berkeley National Laboratory, in partnership with Idaho National Laboratory. The award supports an Enhanced Geothermal System (EGS) development project that seeks to achieve a rational, science-based design that tests and interrogates critical process elements of EGS with carbon dioxide.
REGENTS OF THE UNIVERSITY OF CALIFORNIA, THE 1) develop a novel model and high performance code for analysis of coupled THMC processes in EGS, 2) determine quantitatively the permeability of sheared fractures and its long term changes through THMC processes, 3) refine and validate the models and codes to laboratory experiments. and 4) model couple THMC processes in near wellbore hydrofracture systems.
Thermal-Hydrological-Mechanical-Chemical Code Development: An initial coupling of TOUGHREACT V2.0 to FLAC, based on the TOUGH-FLAC code has been done. This code will be used to benchmark problems handled by the fully coupled THMC code under development. Improvements in TOUGHREACT V2.0 have been made to increase efficiency and speed for strongly coupled problems encountered in EGS. Combinations of improved code and compiler capabilities have resulted in over 30% speed increases on test problems. Initial evaluation of thermal-hydrological-mechanical processes in ROCMAS was begun, that will form the basis of the fully coupled THMC code. Background investigation into chemical- mechanical processes in fractures under EGS conditions is continuing. Experimental Design and Setup: The experimental design for the rock shearing test inside a triaxial cell was updated. The new design is based upon double shearing of two axis-parallel fractures. These fractures will be induced by sequential Brasilian loading in two perpendicular directions along the core diameter A procurement request was placed for the test vessel, with the requisite operating requirements, to be used in the THMC experiments. Evaluation of potential EGS rock samples and their suitability for experimental studies was begun.
Research and Development in the Physical, Engineering, and Life Sciences (except Biotechnology) $511,200.00 Less Than 50% Completed Information GAO gathered to improve the description The award supports experiments at the Lawrence Berkeley National Laboratory related to Thermal-Hydrological-Mechanical-Chemical (THMC) processes with the outcome of model and code development for THMC processes, as well as optimization of enhanced geothermal system development and production. The experiments will cover four different purposes: (1) develop a novel model and high performance code for analysis of coupled THMC processes in Enhanced Geothermal Systems (EGS), (2) determine quantitatively the permeability of sheared fractures and its long-term changes through THMC processes, (3) refine and validate the models and codes to lab experiments, and (4) model couple THMC processes in near wellbore hydrofracture systems.
REGENTS OF THE UNIVERSITY OF CALIFORNIA, THE Lawrence Berkeley National Laboratory will determine the feasibility of jointly using data from microseismic and electrical surveys to image the fluid distribution with Enhanced Geothermal Systems. (1) We conducted feasibility studies on using electromagnetic methods to monitor enhanced geothermal processes. The preferred approach is to use time lapse measurements to image fluids associated with the geophysical attribute of electrical conductivity. The modeling experiments were based upon the Desert Peak Geothermal field. Findings show that it is critical to isolate the fluid imaging volume for successful outcome. This volume can be provided by micro earthquake hypocenter locations, obtained through standard and double difference earthquake location algorithms. (2) We initiated evaluation of standard and double difference earthquake location and corresponding tomographic algorithms to reconstruct P and S wave seismic velocities. The double difference seismic tomography looks favorable in reconstructing velocity images of greatest resolution in the earthquake stimulated region. Our future plans will include coupling of these velocities to electrical conductivity to better image fluid stimulation. This is to be done using a common structural constraint between velocities and conductivity. (3)We have successfully implemented and tested a cross-gradient constraint in our electromagnetic imaging codes. We can now image subsurface electrical conductivity, which is associated with fluids, that is constrained by seismic velocity structural information obtained from seismic tomography. We have now just started this implementation in our seismic tomographic codes, where velocity will be constrained by electrical conductivity structural information. (4)The desert peak EGS experiment will not go forward as planned. We are now investigating two new field test sites to make measurements. Bardys Nevada or Raft River Idaho. Plans call for an earthquake monitoring networks to be installed at both sites, and we are evaluating logistics for making time lapses electromagnetic measurements. A contractor has been found that will make these measurements, pending final selection.
Research and Development in the Physical, Engineering, and Life Sciences (except Biotechnology)
BERKELEY, CA 94720-0000 Less Than 50% Completed Information GAO gathered to improve the description The award funds collection of data at an Enhanced Geothermal System (EGS) site to provide a baseline study and a large EGS injection to map fluid attributes. The project will determine the feasibility of jointly using data from micro earthquake and electrical surveys to image the fluid distribution within EGSs.
REGENTS OF THE UNIVERSITY OF CALIFORNIA, THE Laboratory will conduct a series of laboratory experiments to quantify the reactivity of a suite of natural chemical and isotopic tracers as a function of fluid chemistry, temperature, surface area, and time; and incorporate the measured solute reactivities into a tracer analysis model. 1. Quantification of Bulk Reactivity and Surface Area: In collaboration with, EGI, University of Utah and PI on the Raft River EGS demonstration project, core samples from the Raft River site were examined and arrangements have been made for shipping core samples to LBNL. Preliminary assessment of potential core samples from the Desert Peak EGS demonstration site has been completed. Sample selection is underway. The core samples will be used in the surface area reactivity experiments. Arrangements have been made with rock prep lab at UC Berkeley's Department of Earth and Planetary Science for preparing the core samples for the surface reactivity tests. 2. Tracer Transport Simulation In this quarter, we have focused on Task 2.1 Tracer Transport Simulation for the modeling part of the project. Specifically, we have incorporated the analytical solution of Neretnieks (2002) into the framework of the channelized flow that is expected to occur in an EGS system. The work of Neretnieks (2002) deals with both conservative and reactive (simple kd-approach) tracers for one-dimensional flow conditions. We are also extending the analytical solution for steady-state isotopic compositions of fluids flowing through fractured rock (DePaolo, 2006) to transient conditions that are important for new fractures created in an EGS system. In addition, we are evaluating whether or not the TOUHREACT code (Xu et al., 2006) needs to be modified when bulk- reactivities for species, determined as part of the experimental phase of the project, are used in place of assumed reaction rates for specific species.
Research and Development in the Physical, Engineering, and Life Sciences (except Biotechnology) $564,600.00 Less Than 50% Completed Information GAO gathered to improve the description The award supports activities that will quantify the mineralogy of reservoir rocks and the chemical composition of fluids needed for an Enhanced Geothermal System (EGS) to incorporate into numerical models and evaluate the reactivity of different solutes as a function of surface area, temperature, fluid chemistry and time to develop the tracer-interpretation technique. The activities will develop an innovative approach for estimating the change in fracture surface area induced by well stimulation.
EGS Technology R&D (Project code 2004190) consists of the following 3 subprojects: Enhanced Geothermal -- EGS R&D for Synchrotron X-Ray Studies In accordance with the approved EERE Geothermal Technologies Program, these funds are for synchrotron X-ray studies of supercritical carbon dioxide/reservoir rock interfaces. Argonne will use synchrotron x-ray measurements to monitor all aspects of atomic to nanoscale structural changes resulting from chemical interactions of scCO2-H2O binary fluids with rocks under enhanced geothermal systems conditions. EGS R&D for Utilization of Geothermal Energy In accordance with the approved EERE Geothermal Technologies Program, these funds are for the Utilization of Geothermal Energy. Argonne will develop chemical energy carrier processes to recover heat from enhanced geothermal systems as chemical energy. EGS R&D for Waveguide-based Ultrasonic and Far-Field Electromagnetic Sensors In accordance with the approved EERE Geothermal Technologies Program, these funds are for Waveguide based ultrasonic and far- field electromagnetic sensors for downhold reservoir characterization. Argonne National Laboratory will develop waveguide-based ultrasonic and far-field electromagnetic sensors to measure Enhanced Geothermal Systems reservoir parameters. Two sensor technologies to be examined are (1) microwave (MW) radiometer and (2) ultrasonic waveguide (UW) sensor. Major activities in FY2010 include: (1) Establish a laboratory hot-rock test facility, (2) Evaluate MW antenna performance under high temperature and humidity, and (3) Evaluate UW sensor performance under high temperature and humidity.
Synchrotron X-Ray Studies: Silica surfaces were prepared for synchrotron x-ray reflectivity. The roughness of the surface was found less than 1 nm. X-ray reflectivity measurements of the silica surfaces under static scCO2-scH2O fluids showed no measurable dissolution and roughening as expected. The X-ray/pressure cell was modified to accommodate thinner windows (0.5~1 mm) of synthetic diamond, boron carbides, or silicon carbides. The boron carbide windows were ordered and tested. The synthetic diamond windows were ordered and yet to be delivered. Utilization of Geothermal Energy: Potential reversible reactions have been identified. Preliminary thermodynamic analyses were performed to match the temperature conditions of some of these reactions to temperatures potentially available from EGS. Aspen Plus analysis of the methane reforming /methanantion reaction cycle was conducted. Because the reforming reaction generally occurs at higher temperatures than what may be available from EGS reservoirs, a search was conducted to identify new catalysts that may enhance the performance of this reaction system at lower temperature. Waveguide-based Ultrasonic and Far-Field Electromagnetic Sensors: Completed the literature and commercial sensor/instrumentation search and a brief knowledge capture report was documented. Both literature search and commercial instrument survey show lack of high-temperature instruments and sensing techniques and development in this area is needed.
Research and Development in the Physical, Engineering, and Life Sciences (except Biotechnology)
Less Than 50% Completed Information GAO gathered to improve the description The first project on synchrotron X-Ray measurements will consist of two phases: one studies rock and superconcentrated CO2 interface and the other performs measurements under variable component binary fluids with a new flow cell. The second project on chemical energy carriers (CEC) consists of six tasks for conducting tests, analysis, and development for the CEC systems. The third project on waveguide based ultrasonic includes three phases for developing and building the ultrawave sensor and microwave radiometer.
BROOKHAVEN SCIENCE ASSOCIATES, LLC The Recovery Act funds received by Brookhaven National Laboratory for the Geothermal Technologies program will be used to fund (3) separate projects: $200.4k will be used for FWP#EST436NEDA and will enable BNL to elucidate the carbonation reaction mechanisms between the supercritical carbon dioxide and reservoir rocks in aqueous and non-aqueous environments, and to develop chemical modeling of CO2-reservoir rock interactions. $347.4k will be used to fund FWP#BCH139 and will allow BNL to develop and characterize field- applicable geopolymer sealing materials. $225k will fund FWP#EE632EEDA and will be used to fund the development and implementation of suites of tracers consisting of compounds with different chemicals and physical properties.
Geothermal Technologies - On FWP#EST436NEDA, we are working with Alta Rock Energy for assistance in developing core samples and analysis for EGS sites. The key technical leader on this project will start at BNL the first week of January 2010. ON FWP#BCH139, work is continuing on lab setup and equipment requirements. On FWP#EE632EEDA, a specification has been written for a subcontract to develop methods of encapsulating PFTs in temperature sensitive microbeads. We expect the process to be completed in January.
All Other Professional, Scientific, and Technical Services $772,800.00 Less Than 50% Completed Information GAO gathered to improve the description The award supports three geothermal technologies projects at Brookhaven National Laboratory. Brookhaven will collaborate with four other labs on the projects. (1) The project on elucidating a carbonation reaction mechanism of reservoir rock will result in, among other things, a report on chemical analysis. (2) The project on developing and characterizing geopolymer sealing materials will, among other things, result in field demonstrations and validations. (3) The project on determining the temperature distribution and fracture/heat transfer surface area in geothermal reservoirs will result in tracer and model development, including field test design and execution.
EGS Technology R&D: Geothermal Technologies Program Enhanced Geo: This award provides funding to four subprojects in support of Enhanced Geothermal Systems technology: 1) Feasibility and Design Studies for a High Temperature Downhole Tool--ORNL will perform feasibility and design studies for a high temperature downhole tool that can measure the porosity, lithology, and density profile of geothermal wells; 2) Wear-Resistant NanoComposite Stainless Steel Coatings and Bits for Geothermal Drilling--ORNL will develop ultra hard, wear resistant nanocomposite stainless steel coatings and bulk components to increase the lifetime of drill tooling in harsh geothermal environments; 3) Working Fluids and their Effects on Geothermal Turbines--ORNL will evaluate working fluids for a geothermal turbine cycle based on property measurements, molecular dynamics modeling, and thermodynamic modeling to increase the turbine cycle efficiency in binary power plants; and 4) Properties of CO2 Rich Pore Fluids and their Effect on Porosity Evolution in EGS Rocks--ORNL will characterize CO2 and water bulk and pore fluids by vibrating tube densimetry, determine changing pore and fluid structures using neutron scattering, and conduct real time imaging of the dissolution front and evolution of porosity using x-ray and neutron computed tomography. 1) High Temperature Downhole Tool--A furnace for detector testing has been ordered but not received. Several scintillator materials for testing purposes have been ordered. Design for test apparatus for temperature and vibrations tests is in progress. Preliminary modeling studies have been performed to determine the change in tool response with the change in temperature and surrounding formation environment. 2) NanoComposite Stainless Steel Coatings and Bits-- ORNL is working with Carpenter Powder Products to gas atomize a 500 pound melt of an alloy specifically designed to devitrify from an amorphous state into a corrosion resistant alloy with increased hardness for use as coating materials in geothermal applications. Carpenter has scheduled this run for late January 2010 and ORNL should receive powder in early February. ORNL is currently processing the same alloy using conventional casting techniques. A parametric study was developed to analyze the effect of various processing parameters on the laser/metal interaction. A preliminary conceptual design for an impact-abrasion testing apparatus has been developed. 3) Working Fluids--A review has been conducted on the properties of supercritical fluids to identify where there are needs for additional or corroborative data and where models need to be developed for physical properties. Work carried out during this quarter will allow us to focus both experimental and computation efforts to address gaps and deficiencies in the thermodynamic database for the heat transfer fluids selected for binary geothermal power plant operation. 4) Properties of CO2 Rich Pore Fluids--The high temperature vibrating tube flow densimeter (VTD) was tested and disassembled to make repairs and improvements needed to restore reliable operation. Proof of principle experiment was successfully conducted to synthesize low density silica mesoporous solid inside the vibrating tubes of different geometries.
Oak Ridge, TN 37830-8050 Less Than 50% Completed Information GAO gathered to improve the description The award to the Oak Ridge National Laboratory consists of four projects. (1) The high temperature down-hole tool project will investigate the feasibility of developing components for enabling operation at higher temperatures, up to 400 degrees Celsius for use in geothermal wells. (2) The project on carbon dioxide fluids will use four complementary approaches to improve geochemical modeling. (3) The project on stainless steel coatings and bits will have two stages for analyzing a specific type of metal and then showing the possibility of using complex metal-boron carbides into stainless steel matrix for a type of alloy. (4) The project for working fluids will take advantage of expertise in prediction and measurement of thermodynamic properties, and accurate modeling of complex turbine cycles based on those properties.
LOS ALAMOS NATIONAL SECURITY, LLC This ARRA-funded project addresses the research topic area: Tracers and Tracer Interpretation ? to adapt or develop reservoir tracers and/or tracer interpretation techniques that provide information beyond well-to-well connectivity such as fracture surface area or fracture spacing. Commercial development of geothermal energy requires quantitative characterization of temperature distributions and surface area available for heat transfer in engineered (enhanced) geothermal systems (EGS). This project will provide integrated tracer and tracer interpretation tools to facilitate this characterization by developing and implementing 1. Suites of tracers consisting of compounds with different chemical and physical properties that can be injected into wells and will interact in different and measurable ways with the fractured rock matrix. 2. Single- and inter-well test designs and corresponding interpretation methods to extract the temperature distribution and surface area information from differences in the tracer concentration-versus-time histories (breakthrough curves). We anticipate significantly advancing tracer-based methods available to geothermal operators by developing (1) tracers that can be reliably applied to provide quantitative information on temperature distribution and fracture surface area, (2) tracer test designs (both single well and interwell) to exploit the use of these tracers, and (3) interpretive methods to allow this information to be used to provide practical guidance to operators to improve heat extraction.
The members of the research team participated in a meeting at the Energy and Geoscience Institute (EGI) at the University of Utah on December 8, 2009. The purpose of the meeting was to share information on the geothermal tracer programs at EGI and the four national labs and to explore ways that the programs can interact and share information. Pete Rose opened the meeting with introductions and an overview of the geothermal tracer programs at EGI. He described laboratory programs investigating the properties of different tracer candidates under geothermal conditions and field programs where fluorescent dies have been used in actual wells. Kevin Leecaster, also of EGI, described laboratory equipment and experiments used to characterize potential tracer compounds, discussed results, and presented plans for flow through reactor experiments. Paul Reimus of Los Alamos National Laboratory (LANL) discussed methods for modeling tracer behavior in geothermal applications and described the laboratory capabilities at LANL. Contact Paul Reimus or the LANL SPO office for additional details related to the meeting. The meeting finished with a discussion of how the three programs, EGI, INL, and the combined program of BNL, LANL, and PNNL, could establish working collaborations. We agreed to share information on field programs and to work towards incorporating tracers from all three programs in future field tests as well as share in design, operation, and results of laboratory experiments. On Dec. 9th, The LANL, PNNL, BNL team discussed the next steps for 2004190- EGS R&D and agreed to begin laboratory testing of PFT compounds early next year. We developed a tentative schedule and will have a meeting in late winter at Los Alamos to plan laboratory testing.
Research and Development in the Physical, Engineering, and Life Sciences (except Biotechnology)
Los Alamos, NM 87544-1663 Less Than 50% Completed Information GAO gathered to improve the description The award has seven milestones, including identifying materials operable at high temperatures, developing a sensor model, and determining the optimum approach for flow measurements.
Recovery Act: Decision Analysis for Enhanced Geothermal Systems, Project 2004190 Recovery Act: DECISION ANALYSIS FOR ENHANCED GEOTHERMAL SYSTEMS Project 2004190.
Not started yet. Start date is Feb 1 2010 Research & Public Policy Analysis 77 Massachusetts Ave., E19-750 Information GAO gathered to improve the description The award supports the development of a decision analysis procedure to assess development of an Enhanced Geothermal System (EGS). Activities will include the development of several models: a cost/time estimation model, a simple circulation/heat transfer model, and a subsurface cost/time model. The models will be integrated to assess EGS development and made accessible to EGS stakeholders to provide feedback for improvements.
Pressure Sensor and Telemetry Methods for Measurement While Drilling in Geothermal Wells The scope of the proposed project is to develop a pressure sensor system consisting of silicon on sapphire based sensor transducer and SiC-based electronics to operate at 300C in Measurement While Drilling (MWD) conditions that are expected to be found in a geothermal well.
Performance and deliverables in accordance with the Grant Statement of Project Objectives.
Research and Development in the Physical, Engineering, and Life Sciences (except Biotechnology)
Information GAO gathered to improve the description The award will develop a pressure sensor system operating at 300 degrees Celsius and capable of surviving shock and vibration conditions similar to measurement while drilling (MWD) environments. Activities include integrating and testing a pressure sensor system and developing and testing a telemetry module and pressure system at 300 degrees Celsius. Both systems will be tested for shock and vibration conditions typically found in measurement while drilling environments. The technology can aid in the economic completion of (Enhanced Geothermal Systems) EGS wells.
ALTAROCK ENERGY, INC.
This project will demonstrate the development and operation of an Engineered Geothermal System, including site and resource investigation, well drilling and completion, stimulation of wells to create a geothermal reservoir, testing of well productivity and assessment of reservoir characteristics, construction of a well field and power plant, and extended operation and monitoring of the constructed facility with continuous power generation.
AltaRock Energy has not commenced the project activities as described in Section 2.0 (Task Schedule) of the Project Management Plan submitted as part of its application. AltaRock is currently negotiating the award agreement with DOE and revising budget and project activities in relation to these negotiations.
Power and Communication Line and Related Structures Construction Newberry Volcano, McKay Butte Road/NF-600 La Pine, OR 97739-0000 Information GAO gathered to improve the description The award funds the building of a power plant and production facility that will be capable of generating no less than 15 MWe and operating for 30 years. This will provide long-term power generation through Engineered Geothermal System (EGS) and the first source of indigenous geothermal power in Oregon. The award will allow geothermal experts to enhance geoscience and engineering techniques that are essential to the expansion of EGS throughout the country.
BAKER HUGHES OILFIELD OPERATIONS, INC.
RECOVERY ACT: high Temperature 300C Directional Drilling System The scope of work will be to develop a reliable drilling and steering system for the creation of Enhanced Geothermal Systems. The drilling and steering system will provide optimum performance in temperatures of up to 300×C (572×F) in hard rock formations, and under the high pressures encountered in boreholes at depths of up to 10,000 meters (33,000 feet). The drilling and steering system will be comprised of the following components: a drill bit to break up the rock formation, a downhole drive to rotate the bit, some steering means associated with the drive unit to steer the well in a pre-determined way, and a dedicated drilling fluid (mud) to serve several purposes including carrying the rock cuttings out of the wellbore.
Project not started since award made very late in quarter: 12/29/2009 Information GAO gathered to improve the description The award has four phases and 26 tasks with activities including a concept review, designing equipment like drill bits and waste management equipment, conducting design reviews, manufacturing and assembling prototype equipment, and conducting integrated testing of the prototype drilling system under geothermal conditions.
COLORADO MUSEUM OF NATURAL HISTORY, THE Recovery Act: Education and Collection Facilty Ground Source Heat Pumps Demonstration Project Recovery Act: Education and Collection Facility Ground Source Heat Pumps Demonstration Project No activity; start date was 12/29/09 Denver, CO 80205-5798 Information GAO gathered to improve the description The award funds installation of a commercial scale (100 ton) ground source heat pump (GSHP) heating/cooling system that will be operated and maintained for 2 to 3 years. The project is expected to significantly reduce traditional GSHP installation costs while boosting the efficiency of the GSHP system. Activities will include, among other things, developing a detailed engineering design, procuring and installing the proposed GSHP system, operating and maintaining the system for 2 to 3 years, and developing a national awareness campaign for GSHP systems. The successful design and installation of the system can drastically reduce building energy consumption, require less area and capital to install, and be economically implemented wherever access to recycled water is available.
The following award description contained little or no information that allowed readers to understand the general purpose, scope and nature of activities, location, and expected outcomes. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
ALLIANCE FOR SUSTAINABLE ENERGY, LLC Geothermal Demonstrations; Geothermal Analysis Literature search was conducted on the status of dry/wet cooling options for power plants. Interviews with candidates are scheduled.
Research and Development in the Physical, Engineering, and Life Sciences (except Biotechnology) $1,200,000.00 Less Than 50% Completed Information GAO gathered to improve the description The award supports Enhanced Geothermal Systems (EGS) research and development in air cooling. The award will identify and analyze advanced cooling strategies that allow air-cooled geothermal power plants to maintain a high electric power output during periods of high air dry bulb temperatures while minimizing any water consumption. The research will include activities such as an hour-by-hour cost/performance simulation of a cost-optimized 50 MW binary-cycle geothermal power plant at resource temperatures of 125 and 175 degrees Celsius for three different heat rejection systems.
Within the Department of Transportation, the Federal Railroad Administration’s (FRA) High-Speed Intercity Passenger Rail Program is working to build an efficient, high-speed passenger rail network of between 100- and 600-mile intercity corridors, as one element of a modernized transportation system. This relatively new program is based on two pieces of legislation: the Passenger Rail Investment and Improvement Act of 2008 and the Recovery Act. The 2008 investment act established new competitive grant programs for high-speed and intercity passenger rail capital improvements, and the Recovery Act provided $8 billion for these grant programs. In order to meet the goals of the Recovery Act, FRA proposed to advance the following funding tracks: Projects. Provide grants to complete individual projects that are “ready to go” with preliminary engineering and environmental work completed.
Corridor Program. Enter into cooperative agreements to develop entire phases or geographic sections of corridor programs that not only have completed corridor plans and environmental documentation but also have a prioritized list of projects to meet the corridor objectives; this approach would involve additional federal oversight and support.
Nature and Type of High- Speed Rail Projects
On January 28, 2010, the administration announced the first recipients of grant funding for the high-speed rail program. In total, 70 projects were selected for funding, but no awards have been made. (See fig. 2.) FRA is working with the selected recipients to refine the projects’ scope and descriptions. The selected projects are focused on the following three key areas that may provide transportation, economic recovery, and other public benefits: Build new high-speed rail corridors that will fundamentally expand and improve passenger transportation in the geographic regions they serve.
Upgrade existing intercity passenger rail services.
Lay the groundwork for future high-speed passenger rail services through smaller projects and planning efforts.
Results of Transparency Assessment for High-Speed Rail Descriptions
Although FRA has not made any awards for rail projects, it has entered into five contracts to assist the agency with program administration and architectural and engineering issues related to the evaluation of proposals and feasibility studies. For example, FRA can use the architectural and engineering contractors for site visits to specific locations to confirm engineering assessments in proposals and check calculations of various loads and capacities. We assessed the transparency of descriptive information for these five contracts: One met our transparency criteria.
One partially met our criteria.
Three did not meet our criteria.
For the four descriptions that partially or did not meet our criteria, we collected information necessary to make the description meet our criteria. The descriptions of awards in our sample, whether they met our transparency criteria, and additional information that we found to complete the narrative descriptions are provided at the end of this appendix.
Since the program is relatively new, FRA focused on selecting projects and getting awards out and did not issue any supplemental reporting guidance to eligible applicants. FRA officials considered the Office of Management and Budget’s (OMB) guidance sufficient to outline reporting requirements. While FRA has not yet issued supplemental guidance, it may in the future.
Other Ways Award Information Is Made Available to the Public
The Department of Transportation and FRA make high-speed rail project information available to the public in several forms: The department’s recovery Web site (www.dot.gov/recovery). This agencywide map provides the location, cost, and a brief description for each award.
FRA Web site and high-speed rail interactive project map (www.fra.dot.gov/Pages/2243.shtml). This provides information by region.
Press releases. Also on its Web site, FRA provides press releases detailing the goals and plan for the high-speed rail program.
FRA is also developing a more interactive recovery Web site for the general public.
FRA officials told us they have not received much public feedback about the high-speed rail awards to date. However, FRA has received questions on its Web site from the public about job opportunities, and when it was soliciting grant applications, it received questions from industry officials about the application process.
High-Speed Rail Descriptions That Met Our Transparency Criteria
The following award description contained sufficient information on general purpose, scope and nature of activities, location, and expected outcomes to meet our transparency criteria. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
Provide assistance consisting of mission-oriented business consulting services in support of FRA's Office of Passenger and Freight Programs, with a specific focus on advising FRA in the establishment of a grants management program that is commensurate with the significant increase in discretionary grant activity resulting from ARRA.
Program Support - Coordinate information and develop processes to administer ARRA grant program. Activities include: development of tools and databases to drive workflow and assist FRA in meeting statutory objectives and deadlines; support FRA in the capture, sorting and organization of all relevant grant and stakeholder information and utilize tools and processes to provide information to program leadership for analysis and presentation to relevant stakeholder audiences. Policy / Process - Assist with tasks such as project planning, grant administration process design and execution across the grants management lifecycle (Application and Approval, Award and Disbursement, Management and Monitoring, Closeout), stakeholder policy issues tracking, risk identification and mitigation. Communications and Resourcing - Assist program and FRA leadership in managing communications planning by monitoring, cataloging and coordinating responses to stakeholder inquiries submitted via program email account and docket; work with program and FRA leadership to conduct workforce analysis to identify core capabilities, organizational structure and resourcing requirements necessary to successfully administer agency programs at current stage and into the future.
High-Speed Rail Descriptions That Partially Met Our Transparency Criteria
The following award description did not contain sufficient details on one or more of the following pieces of information necessary to facilitate general understanding of the award, based on our criteria: general purpose, scope and nature of activities, location, and/or expected outcomes. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
BOOZ ALLEN HAMILTON INC.
Booz Allen Hamilton will provide general technical support in environmental engineering, historic documentation, and financial analysis and organizational planning to assist RDV in reviewing ARRA high speed rail grant applications.
There were no invoices submitted for this reporting period.
Administrative Management and General Management Consulting Services Information GAO gathered to improve the description The award supports a contract for activities such as conducting site visits to specific locations to confirm engineering assessments in applications and conducting calculations of various loads and capacities. The activities that will occur under this contract will allow senior engineers from the Federal Railroad Administration (FRA) to do higher level assessment work on the various applications and interface with the prospective grantees.
The following award descriptions contained little or no information that allowed readers to understand the general purpose, scope and nature of activities, location, and expected outcomes. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
Archiect and Engineering Support Services for Passenger Rail Programs Architect and Engeering Support Services for Passanger Rail Programs 3101 Wilson Boulevard, 4th Floor Information GAO gathered to improve the description The award supports a contract for assistance to the Federal Railroad Administration (FRA) as it evaluates and considers the feasibility of high-speed rail proposals. Activities under the contract include conducting site visits to specific locations to confirm engineering assessments in proposals and conducting calculations of various loads and capacities. These activities will allow senior engineers from the FRA to do higher level assessment work on the various proposals and interface with the prospective grantees.
PB AMERICAS, INC.
A/E contract for support services in areas of intercity passenger rail programs and high speed rail programs. 465 Spring Park Technology Center $99,000.00 Information GAO gathered to improve the description The award supports a contract for assistance to the Federal Railroad Administration (FRA) as it evaluates proposals and considers feasibility of high-speed rail proposals. Activities that can occur under the contract include conducting site visits to specific locations to confirm engineering assessments in proposals and conducting calculations of various loads and capacities. These activities will allow senior engineers from the FRA to do higher level assessment work on the various proposals and interface with the prospective grantees.
Provide environmental engineering and historic documentation support and financial/organizational planning support for analysis of high speed rail systems. (Information not reported)
Information GAO gathered to improve the description The award supports a contract for assistance to the Federal Railroad Administration (FRA) as it evaluates and considers the feasibility of high-speed rail proposals. Activities under the contract include conducting site visits to specific locations to confirm engineering assessments in proposals and calculations of various loads and capacities. These activities will allow senior engineers from the FRA to do higher level assessment work on the various proposals and interface with the prospective grantees.
Within the Department of Transportation, the Federal Aviation Administration’s (FAA) Grants-in-Aid for Airports Program (airport improvement program) provides grants for the planning and development of public-use airports. The Recovery Act provides $1.1 billion for discretionary airport improvement program grants, with priority given to projects that can be completed within two years.
Nature and Type of Awards
FAA had obligated nearly $1.1 billion in recovery funds by April 22, 2010. As of April 22, 2010, about $650 million had been disbursed by FAA to airports. About two-thirds of obligations have been for runway and taxiway projects. Approximately $481 million (44 percent) is being used on runway construction and rehabilitation projects, while nearly $220 million (20 percent) is being used for taxiway construction and rehabilitation projects. (See fig. 3.) For example, the Denver International Airport’s taxiway project rehabilitated portions of Taxiway P by removing and replacing identified distressed concrete pavement panels.
About 18 Percent of Descriptions Met Our Transparency Criteria
We assessed the transparency of descriptive information for aviation awards available on Recovery.gov, as described earlier in this report. An estimated 18 percent met our transparency criteria, 82 percent partially met our criteria, and zero percent did not meet our criteria.
For descriptions that partially met or did not meet our criteria, we collected information necessary to make the descriptions meet our criteria. The descriptions of awards in our sample, whether they met our criteria, and additional information that we found to complete the narrative descriptions are provided at the end of this appendix.
Agency Guidance and Other Factors That May Affect Transparency of Reported Information
For recipient reporting, FAA provided technical assistance and other support to recipients but did not issue supplemental guidance. FAA officials told us they considered the Office of Management and Budget’s (OMB) guidance sufficient to outline reporting requirements, so the agency did not issue its own supplemental guidance. However, FAA distributed guidance and provided technical assistance to recipients through each airport’s division office. FAA officials said field offices have discretion in how to distribute OMB’s guidance. One field official, for example, said the division office hired a contractor to oversee Recovery Act efforts who distributed information and guidance to every airport in the division by e- mail. In addition, FAA annotated, for a few fields, the template that recipients used to enter information into FederalReporting.gov. These annotations direct recipients to use information on their grant agreement as entered into FAA’s internal grants database. Many of the recipients we spoke with indicated that they populated the award description field with the description that was on the original grant. For example, officials we spoke with for the Quad City International Airport located in Moline, Illinois, stated that they used the amount of the award, execution date, and award description from the grant award to populate fields on FederalReporting.gov.
In addition, a number of recipients we spoke with stated that they received help from FAA division office officials to complete their reporting. According to FAA officials, only a small portion of airport improvement program grantees—10 percent, or about 300—received Recovery Act funds. Specifically, according to officials at the Midland-Bay City-Saginaw International Airport in Michigan, they received a tremendous amount of support from FAA’s division office with regard to identifying and explaining reporting requirements. However, several recipients we spoke with reported problems with FederalReporting.gov or OMB’s guidance. For example, officials at the John Murtha Johnstown-Cambria County Airport had difficulty determining the correct zip code to use to accurately identify the location of the project receiving Recovery Act funds. The FAA district official was able to identify the correct zip code to enter into FederalReporting.gov.
Other Ways Award Information Is Made Available to the Public
Beyond Recovery.gov, the Department of Transportation and FAA make award information available to the public through various means, including the following: Department of Transportation interactive map of awards (www.dot.gov/recovery). This agencywide map, which includes aviation awards, provides the location, cost, and a brief description for each award.
FAA web site (www.faa.gov/recovery). The Web site contains a spreadsheet that outlines each award’s location, cost, and name, among other things. In addition, the Web site provides a pie chart to display awards by category (i.e., runway, taxiway).
In addition, airport improvement program recipients use Web sites and other tools to provide award information to the public. Several airport improvement program recipients we interviewed disseminate award information to the public on their Web sites. For example, the Web site for the Washington Metropolitan Airport Authority, recipient of the Dulles International Airport award includes, among other things, a narrative description of the project and the estimated cost of the investment. Another Web site, for the Midland-Bay City-Saginaw International Airport Authority, describes the ongoing construction project but does not mention that Recovery Act funds are being used. Dulles International Airport also erected a sign to alert the public that its runway project was funded by the Recovery Act.
According to FAA headquarters officials, the public has provided little feedback on airport improvement program Recovery Act awards, but they were unsure if the regions had received any feedback. The airport improvement program recipients we interviewed generally reported the same experience. Officials from Los Angeles World Airports told us that they had not received many calls, but those calls were typically from construction companies or individuals looking for work. The Williamson- Sodus Airport in New York and the John Murtha Johnstown-Cambria County Airport in Pennsylvania received negative media attention because the media considered them smaller airports and maintained their funds could have been better spent at larger airports. However, recipients at both airports told us they received support from FAA and the local communities that they service.
Airport Improvement Program Descriptions That Met Our Transparency Criteria
The following award descriptions contained sufficient information on general purpose, scope and nature of activities, location, and expected outcomes to meet our transparency criteria. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
Rehabilitate Taxiway D (+/- 3,000 feet by 50 feet) and Overlay This project consisted of the design, bid and award, and construction phases for the rehabilitation of Taxiway 'D' at the Bartow Municipal Airport. Taxiway 'D' and associated ttaxiway connectors are approximately 3000' in length and 50' wide and had severe cracking and spalling. The cracks were sealed and covered with a self-adhesive engineering fabric prior to the P-401 overlay. The project improved the quality of the pavement of our primary taxiway at the Bartow Airport. This project now provides a safer environment for aircraft by placement of the asphalt overlay on a poor pavement surface which was oxidized and raveling, creating a FOD situation.
The overall purpose and expected results of this project is the project improved the quality of pavement of a primary taxiway at the Bartow Municipal Airport. The project provided a safer environment for aircraft by the placement of the asphalt overlay on a poor pavement surface which had oxidized and raveled, creating a FOD situation Highway, Street, and Bridge Construction Airport Improvement project to replace and rehabilitate runway and taxiway lighting and associated NAVAIDs. This project will bring the current airfield lighting system into compliance standards, prevent further failures and increase safety, and reduce associated maintenance and operational costs. Current system tests show that the megohm readings are out of acceptable range to by an excessive amount. The new system is designed to prevent pre-mature deterioration and reduce maintenance and operational costs while providing a more reliable and visable lighting system. An overall cost savings will be realized over the life of the new system.
Contractor has run 1,137 ft of homerun conduits from the regulator station. Contractor has installed one pull box at the end of the 512 ft run. Contractor has completed 7 runs of homerun conduits to the junction box where the conduits split to the various runways and taxiways. Contractor trenched and ran conduits to Taxiways Alpha and Fox Trot. Contractor has completed the conduit runs to Taxiways Alpha and Fox Trot. Contractor started installation of the threshold lights on the north end of 12/30 and installed conduit for Taxiways Alpha and Fox Trot through the threshold. Contractor completed installation of the threshold cans on the north end of 12/30, ran 1800 feet of conduit along the north side of 12/30, and set runway light cans. Contractor completed installation of the conduit and cans on the northwest side of 12/30. Contractor installed ground rods in homerun junction boxes back to the regulator station. Contractor installed pull strings from the regulator station through the homerun conduits in prepartion for pulling wire. Contractor completed the work at the intersection of 12/30 and 18/36 and has cleared the runway safety area of 18/36. Contractor completed the installation of the cans and conduit on the west side of Runway 12/30 and is currently working on the REILs. Contractor pulled conductors on the west side of Runway 12/30 and completed the installation of the REILs on the north end. Contractor pulled the home run wiring on five active circuits. Contractor began installing lights on the northwest end of Runway 12/30. Contractor began installation of the lights and transformers on the northwest end of Runway 12/30. Contractor backfilled and grated around the newly installed cans. Contractor completed installation of the cans and lights on the west end of the runway. Contractor tied in the existing lights on the east end of the runway and tested the runway lighting. The runway was opened for air traffic.
Less Than 50% Completed SIERRA VISTA, CITY OF Runway 12-30 Reconstruction and Taxiway J Realignment Design and reconstruct Runway 12-30 and construct Taxiway J realignment at the Sierra Vista Municipal Airport-Libby Army Airfield.
The existing Taxiway J pavement was removed. All excavation and subgrade compaction was completed on Taxiway J. The pavement at the intersection of Runway 12-30 and Taxiway J was milled off and the existing base course was removed to finish grade. Approximately 17,042 square yards of subgrade at the intersection was repaired to eliminate unstable spots. Base Course materials have been placed and compacted on Taxiway J and Runway 12-30. Approximately 23,576 sy of concrete pavement was placed on Taxiway J and 14,445 sy concrete on Runway 12-30 that intersects with Taxiway J and D. Asphalt pavement was placed on the Taxiway J shoulders and a test strip has been placed for the P- 401 asphalt on Runway 12-30. Electrical conduit crossings and extensions have been installed, guidance signs were installed and the shoulder pavement has been cored for the new taxiway edge lights. The existing concrete storm drain pipe was extended 80 feet.
Highway, Street, and Bridge Construction Sierra Vista, AZ 85635-6334 More than 50% Completed 373715-Rehabilitate Taxiway AND 377259-Runway Incursion Markings Airport Development - This project included the rehabilitation of T/W B and its adjacent apron, as well as constructing holding position markings for Runway 12-30. This project included rotomilling approximately 20,000SY of pavement, excavating and backfilling 13,000 CY of material, installing 2,300 LF of edge drain, 5000 Tons of bituminous surface course, 45,000SF of airfiled markings (including enhanced and surface painted holding position markings), and other miscellaneous airfield improvements to Taxiway Bravo.
Construct new taxiway, apron, and safety markings on airport to maintain safe taxiway and airfield for commercial, jet, and general aviation fleet.
Highway, Street, and Bridge Construction East Wenatchee, WA 98802-9233 More than 50% Completed 3-53-0084-030-2009 REDWOOD FALLS, CITY OF Rehabilitate Runway 12/30 and Taxiway Airport Development to include Runway 12/30 and adjacent taxiway pavement rehabilitation project at the Redwood Falls Municipal Airport (RWF). Project scope includes bituminous mill & overlay of the pavement, incidental grading, and pavement markings per FAA pavement management program requirements. Project will extend the useful life of the runway and taxiway pavement complying with the overall airport pavement management program at the Redwood Falls Municipal Airport. Project includes construction and engineering costs.
Activities on this project include engineering and construction activities. Total project engineering includes preparation of engineering plans and specifications on the project, construction observation and administration, and grant assistance activities. Project construction tasks include completing a bituminous mill & pavement overlay, incidental grading, and pavement markings on Runway 12/30 and adjacent taxiway at the Redwood Falls Municipal Airport. Project plans and specifications were completed in April 2009. Construction and construction observation was completed September 25th, 2009 in the first reporting period. On-going grant administration was also completed. For this reporting period (October 1 ? December 31), construction administration, documentation, as-built plans were completed. Grant administration, reporting, and closeout procedures were also completed.
Highway, Street, and Bridge Construction Redwood Falls, MN 56283-2827 WOOD COUNTY AIRPORT AUTHORITY (INC)
Acquire Aircraft Rescue and Fire Fighting Vehicle Replace old worn out ARFF vehicle with new more capable and lower maintenance vehicle for this quarter all payments have been made to the engineering firm for developing bid specs and awarding the bid for construction of the new ARFF vehicle. This vehicle will be paid for in a lump sum upon delivery. The truck has been delivered, we are awaiting maintenance/operations training.
Highway, Street, and Bridge Construction Grants More than 50% Completed Economic Recovery Program Construction to Remove Obstructions-Relocate Powerlines in the Runaway 30 Approach Zone at the North Las Vegas Airport.
This grant is for removal and relocation of a high tension power line located beneath the final approach to runways 30L and 30R of the North Las Vegas Airport. The power line is located approximately 1,200 feet from the threshold of Runway 30L and 1,500 feet from the threshold of Runway30R. The lines are 45 feet tall (AGL) and are listed as an obstruction in the Airport Facilities Directory.
The transmission and distribution ductbanks are now approximately 95% complete. Four of the six transmission vaults are in place. The next phase of construction involves the construction of the foundations for the six new towers, which will allow the transmission and distribution ductbanks to be completed. Cable installation is not expected to take place until the local power company can arrange for an outage on the existing lines.
Electric Bulk Power Transmission and Control 2730 Airport Drive, Suite #101 North Las Vegas, NV 89032-0000 More than 50% Completed Airport Development: Rehabilitate runway 3/21 Survey, excavation, compacting, grinding existing asphalt, re-laying new asphalt, replace electrical lighting to insure safety of National Air Transportation System.
Highway, Street, and Bridge Construction 9000 W Airport Dr, #204 More than 50% Completed Rehabilitate Taxiway E 4 from Sta.9-46.86 to Sta. 16-20.65, rehabilitate Taxiway E5 from Sta 9+46.29 to Sta 15+97.53 The objective of this grant is the rehabilitation of a portion Taxiway E-4 from the edge of the Runway 17L-35R pavement to just west of the runway hold-lines including the shoulders and electrical replacement, and rehabilitation of a portion of Taxiway E-5 from the edge of the Runway 17L-35R pavement to just west of the runway hold-line including shoulder and electrical replacement at the Colorado Springs Airport. This taxiway system supports the primary runway for passenger carriers and Peterson Air Force Base. The project includes the reconstruction of existing concrete, replacement of airfield lighting, and an upgrade of all associated drainage systems. The existing airfield pavements are deteriorating due to the existeance of Alkali-Silca Reactivity (ASR) and will experience failure if the pavement is not replaced.
Project physically completed; final inspection completed in November Highway, Street, and Bridge Construction 7770 Milton E Proby Parkway Colorado Springs, CO 80916-4961 More than 50% Completed 3-08-0010-046-2009 METROPOLITAN KNOXVILLE AIRPORT AUTHORITY (THE) ( )
McGhee Tyson Airport (TYS) is the sole commercial service airport for the greater Knoxville and East Tennessee Areas. The airport has two parallel 9000 ft. runways with RWY 5L/23R being the primary instrument approach runway equipped with an Instrument Landing System (ILS). Funds provided by the ARRA are being executed on TWY Bravo to reconstruct sections B1 to B6; TWY Bravo is the taxiway network that services our primary instrument approach runway (RWY 5L/23R) that is used by both commercial and military aircraft. In essence, TWY Bravo is our second highest priority paved aircraft movement area with RWY 5L/23R being the first priority. TWY Bravo from B1 to B2 was constructed in 1976 and received a Portland Cement Concrete (PCC) maintenance overlay in 1986. This section of taxiway had received numerous spall repairs, crack repairs and full-depth slab repairs over the past 20 years and was becoming a revolving maintenance and FOD issue. As part of this project, an aggregate surfaced access roadway to the airfields Automated Weather Observation Station (AWOS) will be improved with a durable solid surface course (asphalt). The Runway Safety Action Team (RSAT) recommended paving this section of roadway thus greatly reducing the potential for FOD on the aircraft movement areas. The ARRA funds being spent on this TWY Bravo project have a direct impact on the safety and level of service to the traveling public at McGhee Tyson Airport. Significant deliverables will be concrete measured in square yards and asphalt measured in tons.
Funds provided by the ARRA are being executed on TWY Bravo to reconstruct sections B1 to B6. As part of this project, an aggregate surfaced access roadway to the airfields Automated Weather Observation Station (AWOS) will be improved with a durable solid surface course (asphalt).
Highway, Street, and Bridge Construction More than 50% Completed 3-47-0037-057-2009 MOSES LAKE, PORT OF Rehabilitate T-Hangar Taxilanes; Install Enhanced Taxiway Centerline Markings Taxiway Rehabilitation and Runway Incursion Markings. This project will replace the failed pavements of that T-Hangar areas, including the Taxiway leading into the area, and the taxilanes within. The project will also complete the enhanced Runway Markings.
This project is designed to replace the failing asphalt and concrete in the T-Hangar area of the airport, and also includes the installation of enhanced markings for protection of Runway Incursions. The completion of this project will do two things: 1) opens up an area of T-Hangars that have not been previously usable and 2) create a safer environment for pilots. The use of the T-Hangars will increase the need for other airport employees to handle aircraft maintenance, fueling, tower operations, etc.
Highway, Street, and Bridge Construction Grant County International Airport, 7810 Andrews Street, NE, Suite 200 Moses Lake, WA 98837-3204 More than 50% Completed Construct Aircraft Rescue and Fire Fighting (ARFF) Building - Phase IV Fitiuta Airport does not have an ARFF facility to comply with FAA Regulations Part 139 for this airport. Therefore to comply and satisfy this requirement, a certified complying ARFF facility is required to be built.
This project is 18% complete. Preliminary items to start the project moving as in mobilization of equipment and personnel to Fitiuta Island is completed. Excavation of project site is currently in progress.
Airport Improvement Program Descriptions That Partially Met Our Transparency Criteria
The following award descriptions did not contain sufficient details on one or more of the following pieces of information necessary to facilitate general understanding of the award, based on our criteria: general purpose, scope and nature of activities, location, and/or expected outcomes. In some cases, only a small amount of additional information was needed, while in other cases, many pieces of information were needed to make the description more transparent. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
Final project checkout and reporting, Developing grant cloesout papers.
Information GAO gathered to improve the description The award funds rehabilitation of the existing general aviation apron, which is the extensive paved part of an airport immediately adjacent to the terminal area or hangers, at the Upshur County Regional Airport. The rehabilitation activities will consist of removing the existing pavement section, lowering the profile grade of the existing subgrade, installing a new pavement section, apron markings, tie-downs, and lowering of the existing taxiway lights to accommodate the change in grade. Also the taxiway hold-short markings and the replacement of the runway light globes inside the “caution zone” will be enhanced to bring the airport into compliance with current Federal Aviation Administration (FAA) standards.
Rehabilitation of Apron, South Field, OIA Quarterly activities include: project surveying and marking of project limit; installation of temporary pavement striping and marking; demolition of taxiway centerline line light and edge light fixtures. Procurement and installation of new centerline and edge light fixtures, demoliton of existing jet blast fence, utilities, and storm drains; installation of water line and fire hydrant; installation of miscellaneous asphalt pavement patches. Vendors: Manufacture and furnish electrical and general co Highway, Street, and Bridge Construction 530 Water Street, PO Box 2064 Less Than 50% Completed Information GAO gathered to improve the description The award supports the rehabilitation of the apron--a surface where aircraft park and are serviced--adjacent to the port maintenance shop, Terminal 1 luggage area, and Terminal 2 tug ramp area at Oakland International Airport. The award will provide long-term pavement reliability to maintain airport air cargo, flight, and baggage operations.
Rehabilitate Runway 14-32 Phase 3 Airport Development - Rehabilitate Runway 14-32 - Pittsburgh International Airport - Allegheny County Airport Authority Winter weather activities only.
Highway, Street, and Bridge Construction Pittsburgh International Airport, Findlay and Moon Township P.O. Box 12370 $9,770,201.00 Less Than 50% Completed Information GAO gathered to improve the description The award supports the rehabilitation of Runway 14-32 at Pittsburgh International Airport, including activities such as improving pavement and grading, and updating pavement markings, airfield signage and lighting systems. The rehabilitation is expected to maintain the airport's primary runway for night time arrivals and noise abatement procedures, thus enabling continued environmentally friendly and efficient operations for military and civilian aircraft.
Rehabilitate Taxiways D,E,F & G Airport Development - Rehabilitate Taxiways D,E,F & G - Allegheny County Airport - Allegheny County Airport Authority Project 35% complete. Winter weather activities.
Highway, Street, and Bridge Construction Allegheny County Airport, Lebanon Church Road West Mifflin, PA 15122-2605 Less Than 50% Completed Information GAO gathered to improve the description The award rehabilitates 75,000 square feet of new airfield asphalt pavement. Rehabilitation activities include the removal of deteriorated pavement and base materials, the rebuilding of the base and repaving of the taxiways, the rebuilding of any necessary storm water drainage infrastructure, and the remarking and relighting of the taxiways in accordance with Federal Aviation Administration (FAA) specifications. The rehabilitation will help maintain airfield safety and usefulness, preventing extensive maintenance costs, correcting an antiquated physical layout, and allowing for airport economic development.
Airport Development rehabilitate Runway 17R/35L Highway, Street, and Bridge Construction Grants Less Than 50% Completed Information GAO gathered to improve the description This award completes a total rehabilitation project of Runway 17R/35L at Laredo International Airport that began roughly 7 to 10 years earlier. The rehabilitation work encompasses an area of approximately 5,900 feet long by 150 feet wide. Specific activities include engineering, surveying, and demolition of existing pavement; replacing underground drainage; compaction of the sub base, adding a 6- inch asphalt base and a 16-inch concrete pavement; and testing, grooving, cleaning, and repainting the new surface. The rehabilitation will provide a safer runway that is less costly to maintain by using a rigid Portland concrete that does not create foreign object debris (FOD) and does not require frequent sweeping.
Rehabilitate Runway, Rehabilitate Taxiway The project is for Airport Development, specifically, the reconstruction/realignment of the taxiway and rehabilitation of the runway. The project will enhance safety, protect the federal investment and increase the life of the pavements.
Mix designs and test strips are complete. Paving is underway. Project is 60% complete.
Highway, Street, and Bridge Construction More than 50% Completed Information GAO gathered to improve the description The award supports airport development activities at Salinas Municipal Airport. These activities include rehabilitating runway 08/26, taxiway B, taxiway D, and converting runway 14/32 to a taxiway.
DELAWARE RIVER & BAY AUTHORITY Construct Runway (design, Phase VI)-09/27 (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award supports the design of a new runway and taxiway system at Delaware Airpark. The project will include a new Runway 9-27 (4,200 feet by 75 feet) and a parallel taxiway. The taxiway will incorporate the old runway pavement (3,582 feet by 60 feet) plus new pavement (1,300 feet by 35 feet). It also will include connector taxiways, a wetland mitigation site, lighting, signage and drainage. The award will result in a design for a new runway in accordance with the 2003 Airport Master Plan, which recommended a new runway to accommodate projected regional general aviation growth.
PALM BEACH, COUNTY OF Airport development - The award purpose is to rehabilitate Runway 05/23.
The overall purpose of this award is to rehabilitate runway 05/23.
Highway, Street, and Bridge Construction Boca Raton, FL 33431-6409 More than 50% Completed Information GAO gathered to improve the description The award rehabilitates a runway in Boca Raton Airport in order to improve its quality. Rehabilitation activities include removing the asphalt, relaying it, and marking up the two ends of the runway.
Rehabilitate Taxiways 'C'& 'L'; Rehabilitate Taxiways 'D' & 'M' This project can be described as the rehabilitation of pavements on Taxiways 'C' and 'L' and Taxilane 'K', including the replacement of existing taxiway edge lights with LED lights, the replacement of failed drainage pipes beneath affected airfield pavement areas, and re- shaping of taxiway shoulders. The project also includes the rehabilitation of pavements on Taxiways 'D' and 'M' (approximately 1,200 ft. x 50 ft.) and the adjacent Customs Apron (approximately 5,800 sf.) to include full depth pavement reconstruction, replacement of failed drainage pipes beneath affected airfield pavement areas, re-shaping of taxiway shoulders, and adjustment of existing edge lights.
This project can be described as the rehabilitation of pavements on Taxiways 'C' and 'L' and Taxilane 'K', including the replacement of existing taxiway edge lights with LED lights, the replacement of failed drainage pipes beneath affected airfield pavement areas, and re- shaping of taxiway shoulders. The project also includes the rehabilitation of pavements on Taxiways 'D' and 'M' (approximately 1,200 ft. x 50 ft.) and the adjacent Customs Apron (approximately 5,800 sf.) to include full depth pavement reconstruction, replacement of failed drainage pipes beneath affected airfield pavement areas, re-shaping of taxiway shoulders, and adjustment of existing edge lights.
Highway, Street, and Bridge Construction 8 Airport Rd.
Information GAO gathered to improve the description The award is for rehabilitation at Morristown Municipal Airport.
Upgrade Edge Lights, Taxiways A, B, C, D, and H; Upgrade Edge Light Base Housings Runway 17L/35R and Taxiway H.
Upgrade airfield lighting and lighting equipment on select runway and taxiways.
Electrical Contractors and Other Wiring Installation Contractors Will Rogers World Airport, 7100 Terminal Drive Oklahoma City, OK 73159-0937 Less Than 50% Completed Information GAO gathered to improve the description The award upgrades the 20-year-old lighting and lighting fixtures at Will Rogers Airport in Oklahoma City, Oklahoma, which will increase energy efficiency, improve safety, and make it easier to obtain replacement parts in the future.
Saw cut groove (7400' X100'). Mark (7400'X100') & transition the connecting TWYS to overlay on RW 17-35 Stillwater Reginal Airport Rehabilitate runway to increase safety and decrease delays.
Highway, Street, and Bridge Construction More than 50% Completed Information GAO gathered to improve the description The award rehabilitates the south 4,800 feet of existing Runway 17-35 to bring it to a level or quality equivalent to that of the north 2,600 feet of runway. Rehabilitation activities include a geotechnical investigation of soils analyses to determine optimum stabilization methods and parameters, as well as a field survey to determine appropriate grades and profiles for new pavement.
Airport Development. Columbia Owens Downtown Airport Airfield Pavement Rehabilitation Project - Phase III (Taxiways, taxilanes, & partial apron)
During the quarter ending December 31, 2009, the paving operation and pavement markings were completed. Crews began seal coating, but stopped due to weather issues. There were no hours completed during the month of December due to weather. The purpose of this project is to rehabilitate and resurface major portions of the aircraft parking ramp and active taxiway at the Jim Hamilton - L.B. Owens Airport.
Highway, Street, and Bridge Construction More than 50% Completed Information GAO gathered to improve the description The award includes specific activities such as milling of old asphalt; application of asphalt overlay, pavement rejuvenator and temporary markings; quality control material testing; and application of permanent markings. The construction will improve safety, reliability, and general aviation service to the airport and surrounding area by improving the condition of the taxiway, taxi lanes, and apron pavements. (An apron is a surface where aircraft park and are serviced.) The airport provides facilities for general aviation traffic and flight training activities and serves as the reliever airport to Columbia Metropolitan Airport. The existing pavements were constructed in 1985 and were exhibiting signs of deterioration, including lane separation, block cracking, and loss of asphalt content due to aging and oxidation from sunlight exposure. This condition has the potential to contribute to Foreign Object Damage (FOD) to aircraft.
COLUMBUS, CIVIL CITY OF RW RE LI Rehabilitate Runway LIghting Completed design & bid phases for project required to receive grant, substantially complete with site work.
Highway, Street, and Bridge Construction 4770 Ray Boll Blvd.
Columbus, IN 47203-4764 Less Than 50% Completed Information GAO gathered to improve the description The award supports the design, construction, inspection and testing of a new electrical vault at Columbus Municipal Airport. The award will ensure the safety of aircraft in the event of a power failure affecting airport lighting and communication systems.
BOULDER CITY, CITY OF The project is for Airport Development, specifically, the rehabilitation of the primary runway. The project will enhance safety, protect the federal investment and increase the life of the pavements.
Completed pavement mix designs , test strips and pavement preparation taking the runway project over 50% complete.
Highway, Street, and Bridge Construction Boulder City, NV 89006-1350 More than 50% Completed Information GAO gathered to improve the description The award supports rehabilitation activities for Runway 9R-27L at Boulder City Municipal Airport. Rehabilitation activities include leveling and covering the safety area around the runway in aggregate to provide a stable surface, sealing cracks, constructing a 2-inch overlay, grooving and repainting.
AIRPORT AUTHORITY FOR THE CITY OF GREENVILLE & COUNTY OF PITT Terminal Building Addition (Lobby/Circulation-3500 sq ft and New Departure Lounge- 10,400 sf)
Terminal building improvement; footings poured, commencement of steel erection Commercial and Institutional Building Construction Grants Less Than 50% Completed Information GAO gathered to improve the description The award supports the expansion of a terminal and improvement of the facade by incorporating green technologies such as solar panels and ground source (geothermal heat pumps). The expansion will allow the Pitt-Greenville Airport's capacity to better meet the community's air service needs due to increased air traffic.
Acquire Mobile Aircraft Rescue and Fire Fighting Training Facility Acquire Mobile Aircraft Rescue & Fire Fighting Training Facility Approval of Configuration Drawings and Start of Fabrication for the acqisition of a Mobile Aircraft Rescue and Fire Fighting Training Facility Regulation and Administration of Transportation Programs Less Than 50% Completed Information GAO gathered to improve the description This award will support preparations for the facility, including installing electrical components, running propane lines to and from the facility, as well as fabrication (bending steel to specification) and engineering. The award will result in improved aviation safety, as this facility will provide training to firefighting departments throughout the entire state of Virginia for the next 15 years.
Asphalt overlay and pavement markings Highway, Street, and Bridge Construction (Information not reported)
Dauphin Island, AL 36528-0000 Information GAO gathered to improve the description The award supports activities to fix damaged pavement on Dauphin Island Airport's runway 12/30, the only runway at this airport. The activities included reconstruction of the pavement on the entire runway, which measures 3,000 feet long and 80 feet wide. The result of the award was to improve the quality of the runway.
TRANSPORTATION AND PUBLIC FACILITIES, ALASKA DEPARTMENT OF Akiachak Airport Relocation-Stage 1.
This project will construct a new airport facility approximately 1.5 miles northwest of the community, consisting of a new 60 ft by 3300 ft runway, 120ft by 3900ft runway safety area, a 35ft by 400ft taxiway with a 79ft wide safety area and a 200ft by 400ft apron. The project is approximately 6% complete.
Highway, Street, and Bridge Construction (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award replaces the current airport with a new airport that meets current design standards. The result of this award will be an airport that improves safety and operational efficiency by reducing injuries, fatalities, and property damage, and by improving the mobility of people and goods.
Rehabilitation of the center portion of Runway 6/24 - 960 feet long by 150 feet wide - bring the entire runway up to the same length, at Decatur Airport. Decatur, Illinois Engineering & Construction Services for Decatur Airport Highway, Street, and Bridge Construction More than 50% Completed Information GAO gathered to improve the description The award supports reconstruction activities for 960 feet of Runway 6-24. These activities include pavement milling, paving, grooving, and marking. The award will result in a preserved runway with strengthened pavement that meets Federal Aviation Administration (FAA) requirements.
Airport Development. The rehabilitation of the primary air carrier runway and the construction of runway shoulders and blast pads.
Project has been beset with weather delays. No invoices received for reporting quarter Other Support Activities for Air Transportation $5,400,000.00 Less Than 50% Completed Information GAO gathered to improve the description The award rehabilitates the entire length of runway 13/31 in order to increase safety features and create a better landing surface. Additionally, two shoulders and blast pads will be added to the runway. Activities include milling, or stripping, the top layer of runway, putting down a new overlay, and repainting/restriping the runway.
Reconstruct EFD Taxiways A, D, & F Airport Development -- Reconstruction of Taxiways A, D and F Taxiways A and D are complete The existing concrete on Taxiway F has been removed. The base is being laid. Anticipated completion is before March 31, 2010 More than 50% Completed Information GAO gathered to improve the description The award supports the reconstruction of around 42,000 square yards of pavement for taxiways A, F, and two portions of D at Ellington Airport. Reconstruction includes removing pavement that had been in place for over 20 years and replacing it with concrete pavement. Activities included construction phasing, sodding and seeding, pavement markings, and preservation of the existing electrical facilities along the taxiways, in order to meet new industry standards.
A B WON PAT INTERNATIONAL AIRPORT AUTHORITY Rehabilitate 1000 feet of Runway 06L/24R to maintain and improve safety for aircraft operations Highway, Street, and Bridge Construction Grants Less Than 50% Completed Information GAO gathered to improve the description The award supports rehabilitation activities for Runway 06L-24R at A B Won Pat International Airport. These activities include removal of the existing blast pad, localizer concrete pads and steel posts, electrical conduits, wiring and signs; and construction of the runway extension subgrade and subbase, and base course. The activities also will include milling the existing asphalt pavement and construction of pavement surface pending resolution of Voids in Mineral Aggregate (VMA), a hot mix asphalt mixture property; restoration of Taxiway Julia; installation of runway lighting; runway grooving; and painting the runway and taxiway.
Modify Aircraft Rescue and Fire Fighting (ARFF) Building Site work, drainage, foundation, structural steel, decking, finish exterior brick, electrical & plumbing rough-in Highway, Street, and Bridge Construction 9430 Jackie Cochran Blvd., Suite 300 Baton Rouge, LA 70807-8020 More than 50% Completed Information GAO gathered to improve the description The award supports the renovation and expansion of the existing Aircraft Rescue and Fire Fighting building. The award will result in a building that will accommodate airportwide training activities and facilitate the use of an emergency command center.
ST MARY, PARISH OF Project completed/runway asphalt patched, rejuvenated, and restriped.
Highway, Street, and Bridge Construction Harry P. Williams Memorial Airport Information GAO gathered to improve the description The award funds rehabilitation of a deteriorating runway, runway 06/24, which is approximately 5,400 feet long. The rehabilitation covers the entire surface of the runway, patching places where the concrete joints have come through the asphalt, and where lightning has taken out chunks. Additionally, the runway will be coated and restriped and the new runway will meet general aviation standards.
WINDOM, CITY OF (INC)
Windom Municipal Airport Runway Project Rehabilitate Runway 17/35 (approximately 75'x3,599')
Rehabilitated runway - Concrete overlay of existing runway by placing 3 inches of gravel and 5 inches of concrete to replace runway asphalt surface. The shoulders were re-graded due to the raised concrete surface. Shoulders were filled with black dirt and seeded.
Highway, Street, and Bridge Construction 48572 County Road 28, PO Box 38 $1,149,062.00 Information GAO gathered to improve the description This award replaces Runway 17-35, which was originally constructed in the late 1960s and is the only hard-surfaced runway available in Cottonwood County. The runway's condition was recently classified as "fair poor" in the Minnesota Department of Transportation annual survey of airport pavement. This award ensures continued access to aviation for business, medical, agricultural, and private use by re- constructing this runway and its taxiways.
Rehabilitate Runway (Phase III)-09R/27L Survey and layout were performed, permits were obtained and contractor mobilization costs were incurred.
Highway, Street, and Bridge Construction (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award supports rehabilitation activities for runway 9R-27L, Philadelphia International Airport's longest runway. These activities include replacing the runway's pavement and lighting system. The award will result in extended life for this runway.
Install Guidance Signs (Phase II)
Install airfield signs. Demobilization.
Highway, Street, and Bridge Construction 100 Terminal Drive More than 50% Completed Information GAO gathered to improve the description The award encompasses the signage for all of the airfield runways and taxiways. The award will update wiring for runway and taxiway edge lights installed prior to 1970 and signage last updated in 1991.
PALM BEACH, COUNTY OF Airport development - The award purpose is to rehabilitate Runway 05/23.
The overall purpose of this award is to rehabilitate runway 05/23.
Highway, Street, and Bridge Construction Boca Raton, FL 33431-6409 More than 50% Completed Information GAO gathered to improve the description The award supports rehabilitation activities for runway 5/23, Boca Raton Airport's only asphalt runway. These activities included removing the existing asphalt, overlaying the runway with new asphalt, and marking it up. The award improved the quality of the runway.
The milling and asphalt pavement are 100% complete. The striping is 95% complete. The project is 98% complete.
Grants More than 50% Completed Information GAO gathered to improve the description The award supports a rehabilitation project for Runway 18-36 (75 feet by 5,002 feet) at Orlando Sanford International Airport. A Pavement Management Program evaluation conducted by the Florida Department of Transportation in 2008 determined that Runway 18-36 was past due for routine maintenance, and therefore in poor condition, requiring total rehabilitation.
Reconsturct Parallel Taxiway A, Station 9+20 to 22+50, including two connecting taxiways Airport Development - Reconstruct Parallel Taxiway A, Station 9+20 to 22+50, including two connecting taxiways. The existing taxiways have numerous large cracks and failures throughout the surface. A site investigation has shown that organic debris (tree stumps) was used as a fill material under the existing taxiways and apron. This organic debris is causing failures in the asphalt in several locations. Full depth reconstruction is required.
Reconstruct Parallel Taxiway A, Station 9+20 to 22+50, including two connecting taxiways Highway, Street, and Bridge Construction Information GAO gathered to improve the description The award reconstructs approximately 1,330 lineal feet of parallel taxiway, including two connecting taxiways at Shoshone County Airport. Activities include removing existing pavement; constructing the parallel taxiway, including transitional pavement, shoulders, grading and reflectors; constructing connector taxiways; and relocating aircraft tie-downs. Reconstruction of the taxiway will help maintain a safe aircraft operational surface.
Peoria International Airport - PIA-3912-ARRA Construction of a New Terminal Building (Phase 5 - Electrical, Doors & Windows & Site Preparation Divisions) at the Peoria International Airport, Peoria, Illinois.
Architectural and Building Construction Services for an airport terminal expansion.
Commercial and Institutional Building Construction 6100 W. Everett McKinley Dirksen Parkway Less Than 50% Completed Information GAO gathered to improve the description. The award supports work which will facilitate completion of the new terminal building at the Peoria International Airport, which replaces the original terminal building built in 1959.
Acquire Aircraft Rescue and Fire Fighting (ARFF) Vehicle Construction of the vehicle began in December 2009, currently 19% complete. 99 Sinclair Drive, c/o Muskegon County Airport Less Than 50% Completed Information GAO gathered to improve the description This vehicle will provide necessary fire fighting capabilities as required by the Federal Aviation Regulation Part 139.
Crack route and seal, 2' asphalt overlay on Runway 4/22 Highway, Street, and Bridge Construction (Information not reported)
More than 50% Completed Information GAO gathered to improve the description The award supports the rehabilitation of all of runway 4/22, which is 75 feet wide by 4,000 feet long, at Mankato Regional Airport. Rehabilitation activities include obtaining materials and services to prepare the area, removing old runway pavement, laying new pavement, and repainting the runway. The rehabilitation will improve the pavement condition and extend the useful life of the runway by sealing the surface to prevent water damage.
Dixon Municipal Airport C73-3914-ARRA; Waukegan Regional Airport UGN-3908-ARRA Airport Development under the State Block Grant Program, including: Dixon Municipal Airport (C73) - Rehabilitate Apron; Waukegan Regional Airport (UGN) - Rehabilitate Runway 14/32.
Engineering Services for Waukegan Regional Airport and Dixon Municipal Airport.
Power and Communication Line and Related Structures Construction 3580 N. McAcree Rd. $2,155,560.00 Less Than 50% Completed Information GAO gathered to improve the description The award rehabilitates the apron--a surface where aircraft park and are serviced--at Dixon Municipal Airport; specific activities include 11,000 linear feet of cleaning and sealing cracks and 3,450 square feet of pavement marking. The award also rehabilitates a runway at Waukegan Regional Airport; specific activities include approximately 14,000 square feet of pavement marking, 8,200 square yards of pavement milling, and 4,100 feet of cleaning and sealing cracks. The rehabilitation at both airports will strengthen the pavement to Federal Aviation Administration (FAA) requirements and preserve the existing investments.
ALBERT LEA, CITY OF Airport Development: Construct new Runway 16/34 Work this quarter involved site grading, draintile, and subbase.
Highway, Street, and Bridge Construction Albert Lea, MN 56007-2081 Less Than 50% Completed Information GAO gathered to improve the description The award funds construction of a new, asphalt runway that is 5,000 feet long, reconstruction of the existing runway (as a 35-foot wide parallel taxiway), and rehabilitation of the crosswind runway that is 2,899 feet long at Albert Lea Municipal Airport. The activities will include grading, drainage and paving work for the relocated runway; new edge lighting for the runway and taxiway; new navigational aides for the runway; new airfield signage; and rehabilitation of a runway involving milling, asphalt overlay, and painting. These activities will assist in accommodation of the airport’s current and projected aircraft fleet.
Rehabilitate Apron to extend life Highway, Street, and Bridge Construction Grants More than 50% Completed Information GAO gathered to improve the description The award supports rehabilitation activities for the existing south paved asphalt apron--a surface where aircraft park and are serviced-- and taxiways leading to this apron at the Somerset Airport in Bedminster, New Jersey. These activities include an excavation to remove deteriorated asphalt surface and sub-base soils for placement of a geotextile stabilization fabric, new sub-base course, and asphalt pavement and pavement markings. The award is expected to result in improved surface drainage.
TW ST CO Construct Taxiway Relocate Taxiway A (Construction Phase 3 - 5000' x 100')
Construction substantially completed in 4th quarter.
Highway, Street, and Bridge Construction More than 50% Completed Information GAO gathered to improve the description The award will improve the safety of the airfield geometry and correct the pavement condition of Runway 18-36 at Findlay Airport to be within the recommended Federal Aviation Administration (FAA) standards. The runway will be relocated to 400 feet from the runway centerline north of Runway 7-25. Along with relocating the runway, activities include construction of connector taxiways as appropriate, and the completion of construction of a second taxiway to access the apron (a surface where aircraft park and are serviced) from the south.
TRANSPORTATION, WISCONSIN DEPARTMENT OF Construct Runway Safety Area- 01L/19R The grant to General Mitchell International Airport improves the airport's infrastructure by constructing Phase II of Runway Safety Area Improvements to runway 01L/19R. The outcome of this project will be to enhance the safety and efficiency of the airport.
Power and Communication Line and Related Structures Construction (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award supports the second phase of a project that will construct a tunnel to provide a clear runway safety area.
Airport Development. Rehabilitate Runway - 09/27.
Paving, Pavement Marking Applications and Grading Highway, Street, and Bridge Construction 41771 Highway 77, P.O. Box 187 More than 50% Completed Information GAO gathered to improve the description The award supports the rehabilitation of a runway at Ashland/Lineville Airport. Rehabilitation activities will preserve airport infrastructure by removing old runway pavement, preparing the area, laying new pavement, and repainting the runway.
SAN DIEGO COUNTY REGIONAL AIRPORT AUTHORITY Install airfield guidance signs and elevated runway guard lights Airport Development.
Project mobilization including construction trailer; review of product submittals; beginning of construction of electrical dutc bank, laying conduit and surveying for location of trenches, pull boxes, and new lights and signs.
Highway, Street, and Bridge Construction San Diego, CA 92101-1045 Less Than 50% Completed Information GAO gathered to improve the description The award will replace aging lights and signs throughout the San Diego International Airport with new LED lights and directional signs that meet Federal Aviation Administration (FAA) standards and improve safety. The new LED lights also will be more energy efficient, thereby reducing the cost of their operation.
SAN FRANCISCO, CITY & COUNTY OF Reconstruction of a Runway (28R-10L)
Airport Development. This project will overlay and reconstruct Runway 28R-10L to repair deteriorating pavement, improve the surrounding drainage system, upgrade the electrical runway and taxiway lighting system, and repaint runway markings to increase visibility and improve safety for aircraft on the airfield. Additionally, this project consists of pavement grinding, excavating, paving, runway marking, and installing of runway and taxiway lights.
Activities included pavement grinding, asphalt paving, shoulders grading and watering; demolition of existing steel conduits; and installation of runway centerline light extensions, edge lights installation, wiring, transformers, and steel conduits on runway 28R-10L.
Highway, Street, and Bridge Construction (Information not reported)
Information GAO gathered to improve the description The award supports work at San Francisco International Airport.
This overall program consists of increasing the height of the existing perimeter fence to 10' in height and the installation of underground wildlife deterrent.
Highway, Street, and Bridge Construction $845,698.00 Less Than 50% Completed Information GAO gathered to improve the description The award supports increasing the height of the perimeter fence to 10 feet and installing wildlife deterrent measures. The award will result in securing the airport property from wildlife.
IOWA CITY, CITY OF Rehabilitate Runway 12/30 (Phase 2)
Construction, Engineering Design and Construction Observation.
Highway, Street, and Bridge Construction Iowa City Municipal Airport, 1801 South Riverside Drive Iowa City, IA 52246-5704 More than 50% Completed Information GAO gathered to improve the description The award supports rehabilitation activities for approximately 2,500 feet of runway 12/30 at Iowa Municipal Airport. This runway is 60 years old and the award will result in improved safety.
MADISONVILLE, CITY OF (INC)
Other Heavy and Civil Engineering Construction Madisonville, KY 42431-0000 More than 50% Completed Information GAO gathered to improve the description The award supports the rehabilitation of the ramp and apron--a surface where aircraft park and are serviced--at Madisonville Municipal Airport. The apron is 272 feet wide and 385 feet long. This award will allow the airport to continue its mission of catering to military, corporate, private, and recreational flyers. In addition, the award will provide more space to aircraft when they are parked and tied down overnight.
TRANSPORTATION, WISCONSIN DEPARTMENT OF The grant to Rhinelander-Oneida County Airport improves the airport's infrastructure by rehabilitating taxiways A, B, and D. The outcome of this project will be to enhance the safety and efficiency of the airport.
Highway, Street, and Bridge Construction More than 50% Completed Information GAO gathered to improve the description The award supports taxiway rehabilitation activities, including removing old taxiway pavement, laying new pavement, and preparing the new taxiways for use.
TRANSPORTATION AND PUBLIC FACILITIES, ALASKA DEPARTMENT OF Allakaket Airport Improvements.
Repair and stabilize the runway embankment, taxiway and apron to correct areas that have experienced serious differential settlement, side slope failures and erosion.
Highway, Street, and Bridge Construction Grants (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award supports activities to improve taxiways A-E and aprons--surfaces where aircraft park and are serviced--including resurfacing and installing new lighting.
BURBANK GLENDALE PASADENA AIRPORT AUTHORITY Rehabilitation of Taxiways C, D & G Rehabilitation of Taxiways C, D & G to improve pavement Highway, Street, and Bridge Construction More than 50% Completed Information GAO gathered to improve the description Taxiways C, D, and G at Bob Hope Airport are deteriorating and reaching the end of their life spans. This award funds the rehabilitation of these runways to bring them up to Federal Aviation Administration requirements and give them life spans of approximately 10 years. Activities include removing the existing pavement by milling and replacing with new asphalt pavement, installing new striping, and applying creak seal and seal coat.
DENVER, CITY & COUNTY OF Rehabilitate a portion of Runway 17L/35R from Station 494+57 to Station 583+62 Rehabilitate a portion of Runway 17L/35R from Station 494 + 57 to Station 583 + 62. Pavement rehabilitation of portions runway 17L/35R complex including runway 17L/35R by removing and replacing identified distressed PCCP pavement panels and portions of asphalt shoulders. Benefits include replacement of distressed aircraft pavement to improve safety, increase overall runway and taxiway pavement life, and reduce FOD and possible aircraft damage FOD can cause.
All work was completed September 3, 2009. Pavement Rehabilitation of portions Runway 17L/35R by removing and replacing identified distressed PCCP pavement panels and portions of asphalt shoulders. Benefits include replacement of distressed aircraft pavement to improve safety, increase overall runway and taxiway pavement life, and reduce FOD and possible aircraft damage FOD can cause.
Highway, Street, and Bridge Construction More than 50% Completed Information GAO gathered to improve the description The award funds the removal and replacement of deteriorated concrete panels on portions of the east runway at Denver International Airport to, among other things, reduce foreign object debris (FOD).
GULFPORT BILOXI REGIONALL AIRPORT AUTHORITY( INC)
Mill and Overlay Runway 18/36 Overlay and groove Runway 18/36 (4,93'5 +- x 150')
Completed and closed out related contract on time and under budget.
Highway, Street, and Bridge Construction $1,828,988.00 Information GAO gathered to improve the description The overlay covers holes that develop in the runway concrete. The grooving reduces the slick nature of the runway to meet Federal Aviation Administration (FAA) friction requirements. The result of the award enhances the safety of landing aircraft and will help attract more general aviation aircrafts to use the airport.
Airport Development - Runway 15-33 is in need of improvement to reconstruct pavement to reconstruct pavement, upgrade the lighting system, and provide better airfield drainage.
Purchase construction materials & project administration.
Highway, Street, and Bridge Construction Less Than 50% Completed Information GAO gathered to improve the description The award supports the reconstruction of Runway 15-33 at Harry Stern Airport. Reconstruction of this runway is a state priority because the North Dakota Aeronautics Commission determined that the runway was in poor condition.
TRANSPORTATION, TEXAS DEPARTMENT OF Rehabilitate and mark Runway 17/35 and reconstruct 17/35 end in PCC Runway improvements to increase and sustain economic activity for the airport and its local community Primary runway reconstruction at the Curtis Field/Brady Municipal Airport Highway, Street, and Bridge Construction 3821 N US Hwy 377 More than 50% Completed Information GAO gathered to improve the description The reconstruction of 500 feet of runway 17/35 involves pouring Portland Cement Concrete (PCC) to fix the failures in the pavement. The rehabilitation of 4,104 feet of the runway includes resurfacing with asphalt and remarking of the runway.
Demo of existing asphalt apron, add de-icing catchment and pave the area with concrete.
PO Box 1677, 1801 Roeder Avenue More than 50% Completed Information GAO gathered to improve the description The award reconstructs the portion of Taxiway D at the intersection of Taxiway E and A at Bellingham International Airport. Since the runway is currently experiencing rapid pavement failures, the reconstruction will improve the pavement and add drainage to ensure the runway has a longer life.
Rehabilitate Emergency Generator and Acquire Index B Air Rescue and Fire Fighting Vehicle The project involves the cosntruction of a new backup generator that will serve the airport terminal, airfield lights,FBO and ARFF building. The project also involves the purchase of a new ARFF vehicle.
The generator is installed. The punchlist will be completed next week. The ARFF vehicle has been delivered. Waiting on the training which should be later this month.
Highway, Street, and Bridge Construction More than 50% Completed Information GAO gathered to improve the description The award funds a backup generator at North Central West Virginia Airport, including construction of two different facilities to house the generator and installation of the generator. The award also funds the acquisition of the new Air Rescue and Fire Fighting (ARFF) vehicle including designing the specification of the ARFF and the purchase itself.
TRANSPORTATION, GEORGIA DEPARTMENT OF Federal Aviation Administration-Grants-in-aid for Airports, Recovery Act FAA Airport Improvement Program Grant for Non-primary development projects in the State Block Grant Program. This grant provides 100% federal funding for five general aviation airport construction projects in Georgia.
This grant provides 100% federal funding for five general aviation airport construction projects in Georgia. All five of Georgia's aviation projects received notice to proceed with construction in June 2009. All projects to be funded with this grant are under construction.: Adel-Cook County Airport: Construct Parallel Taxiway for $656,000 Alma-Bacon County Airport: Construct Parallel Taxiway for $734,000 Brunswick-McKinnon-St. Simons Airport: Rehabilitation of Terminal Area Apron for $5,864,000 McRae-Telfair-Wheeler County Airport: Rehabilitate Runway 3/21 for $890,000 Peachtree City-Falcon Field Airport: Construct Area 'C' Aircraft Parking Apron-Phase II for $2,000,000 Other Heavy and Civil Engineering Construction 600 West Peachtree Street, NW Less Than 50% Completed Information GAO gathered to improve the description This award funds projects at five Airports that not only were (1) previously delayed due to lack of funds and (2) part of the state's respective Airport Layout Plan and Airport Improvement Programs, but which (3) could begin construction within 45 days.
Airport Development - design and construction of a building to house fire fighting equipment site work, framing, roofing, siding, plumbing, electrical installation Highway, Street, and Bridge Construction 143 Caruso Drive, Suite 1 More than 50% Completed Information GAO gathered to improve the description The award provides adequate space at the Hancock County-Bar Harbor Airport for fire fighting personnel, vehicle, equipment and their related functions.
The Recovery Act provides funding to states for restoration, repair, and construction of highways and other eligible surface transportation activities under the Federal Highway Administration’s (FHWA) Federal-Aid Highway Surface Transportation Program and for other eligible surface transportation projects. FHWA apportioned $26.7 billion in highway funds to states and the District of Columbia through existing federal-aid highway program mechanisms, and states must follow existing program requirements and Recovery Act requirements in the use of funds.
Nature and Type of Highway Projects
FHWA has obligated $26 billion in Recovery Act Highway Infrastructure Investment funding. (See fig. 4.) As of May 3, 2010, FHWA had reimbursed states for about $7.6 billion (29 percent).
Almost two-thirds of Recovery Act highway obligations nationally have been for pavement projects, including reconstruction, resurfacing, and widening projects. In addition, $1.6 billion (6 percent) is being used on new roadway construction projects. Transportation enhancements account for about $1 billion (4 percent) of highway obligations. Of this $1 billion for transportation enhancements, the largest portion—71 percent—went to facilities for pedestrians and bicycles, while an additional 18 percent went for landscaping and other scenic beautification projects. (See table 7.)
About One-Quarter of Highway Descriptions Met Our Transparency Criteria
We assessed the transparency of descriptive information for highway awards available on Recovery.gov, as described earlier in this report. We found that an estimated 25 percent met our transparency criteria, 69 percent partially met our criteria, and 6 percent did not meet our criteria.
For highway descriptions that partially met or did not meet our criteria, we collected information necessary to make the descriptions meet our transparency criteria. The descriptions of awards in our sample, whether they met our transparency criteria, and additional information that we found to complete the narrative descriptions are provided at the end of this appendix.
Agency Guidance and Other Factors That May Affect Transparency of Reported Information
FHWA established a new data system and guidance to support recipient reporting, which may have affected the transparency of reported information. For the Recovery Act, FHWA created a new database called the Recovery Act Data System (RADS) to help fulfill Recovery Act reporting requirements. In addition to oversight and agency reporting requirements, highway recipients—state highway departments—can use RADS to complete their recipient reports. RADS information, including descriptive information, can be uploaded by recipients into FederalReporting.gov. FHWA officials told us that highway recipients can also use RADS information to check the accuracy of their own state highway award data before submitting the data as part of their recipient reports. Several highway recipients we interviewed said they relied heavily on FWHA guidance, specifically RADS guidance, to fulfill their recipient reporting requirements.
RADS includes several data fields to describe highway awards, including one specifically designed to provide descriptions more understandable to the public. After a state certifies a highway project, the highway recipient submits descriptive information to the database. FHWA’s guidance for RADS provides specific instructions on this information; for example, the project name data field in RADS should be consistent with the name used in state planning documents. In fall 2009, FHWA added a narrative field to RADS to describe awards in plain terms to facilitate public understanding. FHWA division offices in each state were tasked with submitting this information to RADS. In several cases, state highway department officials we spoke to helped division offices generate this information. Colorado and Ohio state highway officials, for example, told us they generated the information from various sources, such as state databases and project managers.
In some cases, the addition of this plain-language description field in RADS may have improved the narrative information in recipient reports to make it more understandable for the second reporting round. For state highway recipients that used RADS data to complete recipient reports, the new RADS description field was reported on Recovery.gov. The Ohio highway department submits RADS data to fulfill its reporting requirement, and for one pavement improvement project in Ohio, the narrative information changed between reporting rounds as follows: First round project description: “It is proposed to widen SR104 from US35 to the new relocated SR207 by adding additional thru traffic lanes and a center turn lane. PE Only-100% LPA Funds.”
Second round project description: “State Route 104 is currently a two- lane highway between U.S. Route 35 and the new state Route 207 extension to U.S. Route 23, and it serves as the northwest bypass of Chillicothe. The project consists of widening approximately three miles of roadway from two to four lanes. It also provides for adding traffic signals at two intersections, the rerouting of Pleasant Valley Road and the upgrading of entrances to the two state prisons located on the route. One of the signals will serve Moundsville Road, a main artery for Union Scioto Schools and one of the largest districts in the county; the other signal will serve Gateway Industrial Park.”
As state highway recipients can choose whether to use RADS data for recipient reporting, the addition of this plain-language description field will not affect all highway recipient reports. Moreover, FHWA is still working to gather plain-language descriptions in all states. FHWA officials told us they regularly check that the new field in RADS contains information for each award and subsequently work with FHWA division officials in each state to get the necessary information when it is missing.
Because of the fluid nature of the Office of Management and Budget’s (OMB) guidance, FHWA officials told us that aligning their agency’s supplemental guidance with OMB’s has been a challenging process. However, FHWA officials said communication with OMB has improved over time. During the first two reporting rounds, FHWA worked with OMB to revise its guidance in response to concerns over the agency’s definitions for the award amount fields, including amounts received and expended. However, OMB did not provide formal approval of this guidance. For the third reporting round, FHWA officials told us they did receive written approval for FHWA’s supplemental guidance, after again working with OMB to address problems with the award amount fields, though it took 2 to 3 months to finalize and gain approval of this guidance.
In addition to the RADS database and guidance, FHWA provided other reporting assistance to recipients. First, FHWA held webconferences for recipients prior to the second reporting round. FHWA also provided targeted assistance to state highway recipients to discuss specific problems or concerns with recipient reporting.
Some state-specific factors may also have affected the transparency of recipient-reported information. For the state’s transparency Web site, the Massachusetts Recovery and Reinvestment Office required the state highway department to write detailed descriptions understandable to the public. Massachusetts highway officials told us that creating these descriptions was time-consuming for the first round of reporting but that descriptions did not change for second round of reporting. In Georgia, the state highway department typically develops both a short and an extended description for a highway project. According to Georgia highway officials, the extended descriptions are written in nontechnical terms and include details beyond the project’s name and location. Georgia officials told us they used these extended descriptions in FHWA’s RADS database and used them to fulfill recipient reporting requirements.
Regarding award location, several recipients we interviewed said they experienced problems entering information into FederalReporting.gov. Recipients faced difficulty entering zip code and congressional district information for awards. While highway projects can occur in more than one locality or congressional district, FederalReporting.gov allows only one zip code and congressional district per award. In these cases, highway officials in Colorado and Pennsylvania told us that multiple entries for location would be useful. In Pennsylvania, for example, a project to construct curb ramps compliant with the Americans with Disabilities Act in Chester County spanned two congressional districts, forcing the state department of transportation to select a single zip code—the geocenter of the county—and one congressional district—the lowest number—to report for the award.
Other Ways Award Information Is Made Available to the Public
The Department of Transportation and FHWA make highway award information available to the public in several forms. For example: Department of Transportation interactive map of awards (www.dot.gov/recovery). This agencywide map, which includes highway awards, provides the location, cost, and a brief description for each award.
FHWA online map (fhwaapps.fhwa.dot.gov/rap/). The map provides, among other things, the cost, type (e.g., bridge improvement), and a brief description of each award.
FHWA weekly summary of projects (http://www.fhwa.dot.gov/economicrecovery/index.htm). On its Recovery Act Web site, FHWA publishes location, cost, and descriptive information on awards in three stages—awarded, in construction, and completed. FHWA also provides a weekly summary of obligation and status information by state.
At the state and local level, recipients provide various types and amounts of award information to the public. The six state highway departments we interviewed posted descriptive information on Recovery Act awards on their Web sites. Several state Web sites provided a list of awards, while some state highway departments provided award information in alternative formats. In Massachusetts, for example, the state highway Web site made award information available through an interactive map. Other state highway departments provided more extensive award information. For most Recovery Act awards to the state, the Ohio highway department provides cost, location, and status information, as well as a description and photos. For highway awards administered at the local level, some localities also used Web sites and other tools to promote award information. The City of Olmsted Falls in Ohio used the city Web site and newsletter to share information on the construction of a new bridge on State Road 252 to improve safety by eliminating a railroad crossing.
FHWA officials and recipients we interviewed said they had not received much feedback from citizens on Recovery Act highway awards. As they have no data for comparison, FHWA officials told us that they could not determine whether Recovery Act awards received more public feedback than regular awards. Based on their experience, public feedback on the Recovery Act often involves requests for a definition of a transportation enhancement and an explanation for why it is included in a highway program. At the recipient level, state highway departments experienced varying levels of feedback from the public and the media. Massachusetts highway officials told us they were surprised at the level of inquiry received on the Recovery Act. By contrast, New Jersey and Colorado highway officials said they had received little public feedback on Recovery Act awards. According to Colorado officials, the state highway department has not had to respond to many inquiries, since award information is available on the department’s Web site. At the local level, officials from the City of Olmsted Falls in Ohio told us that they had received both positive and negative comments on the bridge project. In addition, officials told us that the availability of award information has kept public interest alive and created an outlet to publicize volunteer opportunities to landscape the project area after the new bridge is completed.
Highway Descriptions That Met Our Transparency Criteria
The following award descriptions contained sufficient information on general purpose, scope and nature of activities, location, and expected outcomes to meet our transparency criteria. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
US 6 CHANNAHON RD RAILROAD ST Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
This project will extend the pavement life by resurfacing 3.0 miles on US Route 6 in Channahon and Rockdale (Northeast Illinois).
Highway, Street, and Bridge Construction (Information not reported)
TRANSPORTATION, MARYLAND DEPARTMENT OF Resurfacing Pegg Road from Forest Run Drive to Westbury Boulevard Highway Infrastructure Investment Grant: Available for Use in Any Area (Flexible)
To have projects underway that will preserve our existing highway infrastructure and thereby prevent further decay, improve conditions, extend the overall life of roadways and bridges, and further other associated highway improvements. In some cases, the projects will improve safety and environmental conditions for the motoring public and/or pedestrians.
Highway, Street, and Bridge Construction (Information not reported) 0003129 RESURFACING AND RELATED WORK ON ROUTE 2 HARVARD LITTLETON - RESURFACING & RELATED WORK ON ROUTE 2 Resurface Route 2 from the vicinity of the Littleton Road Bridge to the Boxborough town line, a distance of approximately 4.4 miles. Work includes minor box widening to extend existing sub- standard acceleration and deceleration lanes.
Contract has been awarded and project advanced to 91% of scheduled construction before winter weather forced paving work to shut down. The project will resume in the Spring.
Highway, Street, and Bridge Construction 10 Main St.
More than 50% Completed TRANSPORTATION, NORTH CAROLINA DEPARTMENT OF Highway Infrastructure Investment Grant: Areas with Population equal to or less than 200K Replace deficient bridge carrying NC 73 over Long Creek in Stanly County.
Highway, Street, and Bridge Construction (Information not reported)
Less Than 50% Completed 0073019 Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
This project will extend the bridge life by replacing the bridge deck and making other roadway improvements on 112th Place over I-57 in Chicago in Cook County. (Northeastern Illinois).
Highway, Street, and Bridge Construction (Information not reported)
More than 50% Completed TRANSPORTATION, NORTH CAROLINA DEPARTMENT OF Highway Infrastructure Investment Grant: Transportation Enhancements This project provides for the acquisition of right-of-way to construct trailhead parking area to access the Lake Brandt Greenway on US 220 North of Strawberry Road in Guildofrd County. This is a locally administered project bu the Town of Summerfield.
Highway, Street, and Bridge Construction (Information not reported) 0729002 TRANSPORTATION, NORTH CAROLINA DEPARTMENT OF Highway Infrastructure Investment Grant: Transportation Enhancements This project adds sidewalks along SR 1149 (Lee Street/Old NC 11) in Ayden from West Barwick Street to Allen Drive in Pitt County to improve pedestrian safety.
Highway, Street, and Bridge Construction (Information not reported)
TRANSPORTATION, NEW YORK DEPARTMENT OF Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible), Rural Areas with Population under 5K Replace two culverts on NY Route 242 in the towns of Ellicottville and Little Valley, Cattaraugus County. This project will eliminate culvert deficiencies and ensure good structural condition.
Highway, Street, and Bridge Construction (Information not reported)
Less Than 50% Completed 5017283 HIGHWAY AND TRANSPORTATION, ARKANSAS DEPARTMENT OF I-40 OFF RAMP-ON RAMP (CONWAY) (REHAB)
Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
THE PURPOSE OF THIS PROJECT IS TO REHABILITATE 0.37 MILE OF HIGHWAY 65 BETWEEN THE INTERSTATE 40 OFF AND ON RAMPS IN THE CITY OF CONWAY, FAULKNER COUNTY. WORK INCLUDES PAVEMENT REHABILITATION, COLD MILLING, MAINTENANCE OF TRAFFIC, PAVEMENT MARKING AND MISCELLANEOUS ITEMS.
Highway, Street, and Bridge Construction (Information not reported)
More than 50% Completed TRANSPORTATION, GEORGIA DEPARTMENT OF SR 9 FROM CHATTAHOOCHEE RIVER TO MARIETTA HWY Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
This is a maintenance construction project in Fulton County. This project is the milling and resurfacing of SR 9 from the Chattahoochee River to Marietta Highway. This section of SR 9 needs resurfacing because the existing pavement is deteriorating. SR 9 was last resurfaced in 2000.
Highway, Street, and Bridge Construction (Information not reported)
Less Than 50% Completed M003942 Highway Infrastructure Investment Grant: Urbanized Areas over 200K Population This project will extend the pavement life by resurfacing on Wondermere Rd from Greenwood Rd to Thompson Rd in the Village of Greenwood (Northeastern Illinois)
Highway, Street, and Bridge Construction (Information not reported)
More than 50% Completed TRANSPORTATION, GEORGIA DEPARTMENT OF CR 41/GREEN TOP RD @ CSX RAILROAD 2 MI NE OF NEWNAN Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
This project is the replacement of a structurally deficient bridge in Coweta County. This project will replace the bridge on County Road 41 over the CSX Railroad, 2.0 miles northeast of Newnan, Georgia. The existing bridge, constructed in 1950, is a 92-f x 21.33-f steel truss structure with a sufficiency rating of 21. County Road 41 at this location is a rural two lane roadway with 10-f lanes with variable 3-f to 8-f grass shoulders with a posted speed of 45 MPH. County Road 41 is an east-west roadway classified as an urban local road. The project will construct a new 170-f x 40-f concrete bridge over CSX Railroad at the existing bridge site. The approaches will consist of two 12-f lanes with 8-f rural shoulders. The existing bridge will be closed to traffic during construction. Traffic will be detoured using an offsite detour.
Highway, Street, and Bridge Construction (Information not reported) 0006956 WEST VIRGINIA DIVISION OF HIGHWAYS Highway Infrastructure Investment Grant: Areas with Population equal to or less than 200K This project will improve safety for motorists by replacing the McBee Bridge due to condition. The bridge is located on County Route 17 at approximately milepoint 3.68 in Wetzel County.
Highway, Street, and Bridge Construction (Information not reported)
TRANSPORTATION , MISSISSIPPI DEPARTMENT OF Highway Infrastructure Investment Grant: Areas with Population equal to or less than 200K The city of Pontotoc will resurface Industrial Drive/South Industrial Circle east of First National Bank on Hwy 15 to intersection of Bolton Street. This project will make the road smoother and extend the life of the pavement.
Highway, Street, and Bridge Construction (Information not reported) 0102008 TRANSPORTATION, IOWA DEPT OF US 52 From Just S. Of NCL Garnavillo N. to Just S. of IA 13 This project includes performing cracking and seating of the existing portland cement concrete pavement and then applying a hot-mix asphalt overlay on approximately 9.0 miles of US Highway 52 from just north of the northern coprporate limits of Garnavillo north to just south of Iowa Highway 13 in Clayton County. Improvements will also include the addition of 4- ft paved shoulders. The project will result in an improved driving surface and enhance safety.
US 52 From Just S. Of NCL Garnavillo N. to Just S. of IA 13 Highway, Street, and Bridge Construction (Information not reported)
Less Than 50% Completed TRANSPORTATION, INDIANA DEPARTMENT OF Highway Infrastructure Investment Grant: Urbanized Areas over 200K Population This project will improve the surface and rebuild sections of the bridge on SR 912 over I-80 in Lake County.
Highway, Street, and Bridge Construction (Information not reported) 0900336 TRANSPORTATION, INDIANA DEPARTMENT OF HMA Overlay, Preventive Maintenance Highway Infrastructure Investment Grant: Areas with Population equal to or less than 200K This project will improve sections and extend the life of Walnut Street from Center Street to Wayne Street in Dekalb County with a pavement surface overlay.
Highway, Street, and Bridge Construction (Information not reported)
TRANSPORTATION, FLORIDA DEPARTMENT OF CR 491 (LECANTO HWY) FROM N OF PINE RIDGE BLVD TO SR 200 RESURFACING - This award was reported 3rd Quarter 2009 as 4261501ARRA091 In Citrus County, due to the poor condition of the road, this project resurfaces 6.8 miles of County Road 491 from Pine Ridge Boulevard to State Road 200.
Highway, Street, and Bridge Construction (Information not reported)
CITRUS (COUNTY), FL 34434-8125 Less Than 50% Completed ARRA091 TRANSPORTATION, FLORIDA DEPARTMENT OF CITRUS WAY FM CR484 (FT DADE AVE) TO KENSINGTON RD WIDEN/RESURFACE EXIST LANES - This award was reported 3rd Quarter 2009 as 4261271ARRA107 In Hernando County, due to the poor condition of the road, this project resurfaces 3.8 miles of Citrus Way and widens the 11-foot lanes to 12-foot lanes from Ft. Dade Avenue to south of Centralia Road.
Highway, Street, and Bridge Construction (Information not reported)
HERNANDO (COUNTY), FL 34601-8659 Less Than 50% Completed TRANSPORTATION, FLORIDA DEPARTMENT OF SW 72 ST/SUNSET DR. FROM S.W. 65 AVENUE TO S.W. 63 AVENUE RESURFACING - This award was reported 3rd Quarter 2009 as 4264161ARRA409 The City of South Miami will enhance sections of Sunset Drive by resurfacing, reconstructing sidewalks, upgrading drainage, and installing median landscaping and irrigation. This project will create a pedestrian-friendly corridor.
Highway, Street, and Bridge Construction (Information not reported)
MIAMI-FT LAUDERDALE-WPALM BCH, FL 33143-3242 Less Than 50% Completed ARRA409 TRANSPORTATION, IOWA DEPT OF S23 Highway: G24 Highway to IA Hwy 5 Warren County will resurface 3.2 miles of County Road S-23 with new asphalt between County Road G-24 and Iowa Highway 5 west of the City of Hartford. This project will improve driving quality by providing a more smooth riding surface.
S23 Highway: G24 Highway to IA Hwy 5 Pave Highway, Street, and Bridge Construction (Information not reported)
Highway Descriptions That Partially Met Our Transparency Criteria
The following award descriptions did not contain sufficient details on one or more of the following pieces of information necessary to facilitate general understanding of the award, based on our criteria: general purpose, scope and nature of activities, location, and/or expected outcomes. In some cases, only a small amount of additional information was needed, while in other cases, many pieces of information were needed to make the description more transparent. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
TRANSPORTATION, MARYLAND DEPARTMENT OF Updating Existing Traffic Barrier and Design New Median Barrier - District 4 Highway Infrastructure Investment Grant: Available for Use in Any Area (Flexible)
To have projects underway that will preserve our existing highway infrastructure and thereby prevent further decay, improve conditions, extend the overall life of roadways and bridges, and further other associated highway improvements. In some cases, the projects will improve safety and environmental conditions for the motoring public and/or pedestrians.
Highway, Street, and Bridge Construction (Information not reported)
Bel Air, MD 21014-9999 More than 50% Completed Information GAO gathered to improve the description The award supports the as-needed replacement of guardrails along US 40, MD 41, I-83, and MD 151, located in Baltimore and Harford counties in Maryland. The award will result in increased safety for the traveling public.
TRANSPORTATION, ALABAMA DEPT OF STMAA-0010(520)
Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
This project involves the repaving of 2 miles of State Highway 10 (Camden Bypass) from State Highway 28 to State Highway 28 in Camden. Wilcox County Highway, Street, and Bridge Construction (Information not reported)
Information GAO gathered to improve the description The award supports resurfacing of the road, which is needed for safety reasons and to prolong the life of the road. Based on current traffic patterns, the repaved road may last up to 12 years.
Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
This project will extend the pavement life by milling, patching and resurfacing various locations throughout Kane County (Northeastern Illinois).
Highway, Street, and Bridge Construction (Information not reported)
Information GAO gathered to improve the description The award supports the repair of roads which had significant pavement damage from winter weather conditions. The project repaired the following locations: IL 19 (Shales Pkwy. to Barrington Rd.); IL 25 (I-88 to Banbury Rd.); IL 31 (Huntley Rd. to Miller Rd.); IL 31 (IL 64 to Indian Mound Rd.); IL 38 (IL 47 to east side of Anderson Rd.); IL 38 (Peck Rd. to West Ave.); IL 58 (IL 47 to I-88); IL 64 (IL 47 to Peck Rd.); and IL 72 (west of I-90 bridge to IL 31).
TRANSPORTATION, COLORADO DEPARTMENT OF I 25 - COMMERCIAL TO MAIN ? SB (STIMULUS Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
Constructs the Purgatoire River Pedestrian Trail, adds street lights, parking lot paving, curb and gutter, drainage inlets, landscaping and sidewalk along I-25 in Trinidad.
Highway, Street, and Bridge Construction (Information not reported) $7,044,806.00 Less Than 50% Completed Information GAO gathered to improve the description The award funds reconstruction of I-25 for both northbound and southbound lanes from Goddard Ave. to Van Buren St., which will replace aging infrastructure and provide a safe transportation system to and from the city of Trinidad, Colorado. This award includes construction of a multi-use/pedestrian trail along the Purgatoire River, under and adjacent to the Main St. exit and entrance ramps. These activities will extend the city of Trinidad’s planned trail to Van Buren St., a distance of 2500 feet. Construction includes earthwork, pre- cast panel retaining walls, riprap, trail/path paving, and pedestrian guardrail.
TRANSPORTATION , MISSISSIPPI DEPARTMENT OF UPGRADE ROADS IN SHARKEY COUNTY-STREETS IN THE TOWN OF ANGUILLA - VARIOUS STREETS Highway Infrastructure Investment Grant: Rural Areas with Population under 5K This project will resurface various roads in the town of Anguilla, Sharkey county.
Highway, Street, and Bridge Construction (Information not reported)
More than 50% Completed Information GAO gathered to improve the description The award resurfaces 3.85 miles of 20 roads to improve rideability of the roads. Hot asphalt will be laid over the old road, and new grass will be planted along the shoulders. Once construction is completed, roads will be restriped and new signs will be placed along the roads.
Highway Infrastructure Investment Grant: Rural Areas with Population under 5K This project will extend the pavement life by resurfacing a section of Shady Rest Road approximately 15 miles west of Champaign (East-Central Illinois)
Highway, Street, and Bridge Construction Grants (Information not reported)
Information GAO gathered to improve the description The award supports road resurfacing from FAS (Federal Aid Secondary) Highway 1532 to IL10.
TRANSPORTATION, MISSOURI DEPARTMENT OF Jackson County, Route 150 Widen from two lanes to four lanes from Horridge Road to Route 291 Highway, Street, and Bridge Construction (Information not reported)
Kansas City, MO 64106-2706 Less Than 50% Completed Information GAO gathered to improve the description The award funds the change of the original rural section of Route 150 to a narrower urban/suburban section to reflect the community's future development and changing land uses.
ROADS, NEBRASKA DEPARTMENT OF Highway N-116, Concord Southwest Highway Infrastructure Investment - Bridge replacement - From funding for use in any Area (flexible)
This bridge replacement project brings this roadway to a state of good repair. It replaced a 52-year old structure with a new quintuple 10' x 8' box culvert. As of December 31, 2009, project is substantially complete.
Highway, Street, and Bridge Construction (Information not reported)
Information GAO gathered to improve the description The bridge is on Highway N-116 southwest of the town of Concord in Dixon County.
TRANSPORTATION, ARIZONA DEPT OF US-95 (16th St) @ I-8 ( MP 24.2 to MP 24.8) in YUMA Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
The Arizona Department of Transportation proposes to construct a widening project in Yuma County along US 95 (16th Street), I-8 to Palms Ave.
Highway, Street, and Bridge Construction (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award supports widening of the road in order to reduce traffic congestion.
TRANSPORTATION, CALIFORNIA DEPARTMENT OF Highway Infrastructure Investment Grant: Areas with Population equal to or less than 200K This is a Pavement Restoration and Rehabilitation project by a local agency in the City of Live Oak. The project is described as: Rehabilitate Apricot St: N St-Broadway Highway, Street, and Bridge Construction 703 'B' Street More than 50% Completed Information GAO gathered to improve the description The award repaves 0.2 miles of Apricot St. from North St. to Broadway. The resurfaced road will result in a smoother driving surface.
TRANSPORTATION, WISCONSIN DEPARTMENT OF This is a reconstruction project in Dodge County on County Highway G, Beaver Dam - Randolph.
Highway, Street, and Bridge Construction (Information not reported)
More than 50% Completed Information GAO gathered to improve the description The award supports pavement improvement activities on 2.1 miles of County Highway G in Dodge County to provide two 12-foot travel lanes and two 6-foot shoulders (including 3 feet paved). The activities will include pulverizing, injecting and relaying existing asphalt pavement, spot grading, culvert replacements, base aggregate dense, concrete curb and gutter, pavement, pavement marking and all incidental items necessary to complete work. The award will improve rideability of the road and increase safety of the road's intersections due to grading to meet current standards.
TRANSPORTATION, MISSOURI DEPARTMENT OF City of Washington Resurfacing of Various Streets Resurfacing of various streets within the city of Washington.
Highway, Street, and Bridge Construction (Information not reported)
More than 50% Completed Information GAO gathered to improve the description The award funds asphalt resurfacing on approximately 3.1 miles. The activities include sealing of cracks, providing an asphalt level course and a 2-inch surface course, and Americans with Disabilities Act (ADA) compliant curb access ramps. The streets include W. Eighth St., W. Main St., Grand Ave., Pottery Rd., Old Route 100, and Route 47 to Stafford St. These activities are a cost-effective method to extend the life of the pavement, provide a smoother riding surface, increase the structural capabilities of the pavement, and postpone a costly reconstruction project.
TRANSPORTATION, OKLAHOMA DEPARTMENT OF USDOT - FHWA Transportation Infrastructure Project in partnership with the Oklahoma Department of Transportation Transportation Infrastructure Project for the Oklahoma Department of Transportation identified as RESURFACE OKC ARRA: MULTIPLE LOCATIONS ON MACARTHUR, MERIDIAN, MAY &NW 10TH Highway, Street, and Bridge Construction (Information not reported)
Oklahoma City, OK 73102-3457 $2,202,725.00 More than 50% Completed Information GAO gathered to improve the description The award supports resurfacing 6 miles of road in Oklahoma City and installing new curb ramps in order to improve ride quality and extend the life of the pavement.
TRANSPORTATION, CALIFORNIA DEPARTMENT OF Highway Infrastructure Investment Grant: Urbanized Areas over 200K Population This is a Pavement Restoration and Rehabilitation project by a local agency in the City of Gilroy. The project is described as: Rehabilitate local street Highway, Street, and Bridge Construction Information GAO gathered to improve the description This award repairs 11 street sections that are roadway corridors for arterial and collector streets and repairs sidewalks that lead to schools. The sidewalk construction project will improve the sidewalks for safety on the following streets: Welburn Ave. from Santa Teresa Blvd. to Wayland Ln.; Murray Ave. from Lincoln Ct. to Lewis St.; Sixth St. from Wren Ave. to Eigleberry St.; Princevalle St. from Sixth St. to Luchessa Ave.; Westwood Dr. from First St. to Third St.; Eighth St. from Uvas Park Dr. to Monterey St.; Forest St. from I.O.O.F Ave. to Sixth St.; Wren Ave. from First St. to Mantelli Dr.; Miller Ave./Wayland Ln. from Arnold Dr. to Eighth St.; Mantelli Dr. from Santa Teresa to Lions Creek Dr.; Church St. from First St. to Las Animas Ave.
TRANSPORTATION, CALIFORNIA DEPARTMENT OF Pedestrian and Class 1 Bike Path Highway Infrastructure Investment Grant: Transportation Enhancements This is a Facilities for Pedestrians and Bicycles project by a local agency in the City of Orange. The project is described as: Construction of a Class I bike trail along the Santiago Creek from Tustin Street to Collins Avenue and other amenities Highway, Street, and Bridge Construction Grants 3347 Michelson Dr Ste 100 Information GAO gathered to improve the description The award will result in a grade separated and safe Class I bikeway from central Orange to Main Place Mall and the Discovery Science Center.
TRANSPORTATION, MONTANA DEPARTMENT OF Highway Infrastructure Investment Grant: Transportation Enhancements Installation of accessible curb ramps on existing sidewalks at multiple locations within the City of Missoula.
Highway, Street, and Bridge Construction (Information not reported)
Information GAO gathered to improve the description The award will install between 100 to 200 sidewalk curb ramps in Missoula, Montana to make sidewalks Americans with Disabilities Act (ADA) accessible, install and repair sidewalks where the need is greatest, and upgrade existing sidewalks. The award will improve walkability in Missoula by providing a continuous sidewalk system throughout the community, provide safe and efficient pedestrian movement and meet the standards of the ADA, as well as identify pedestrian corridors for creating preferred routing for schools, children, disabled residents, elderly, community and neighborhood trips.
TRANSPORTATION, RHODE ISLAND DEPARTMENT OF State CCVE/RVD Installation for Incident Detection and Data Collection Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
This project involves the installation of radar-based vehicle detectors, at the same location as existing traffic cameras, to collect data on traffic volume and speeds. The new detectors provide alerts to Traffic Management Center operators to announce increasing traffic congestion. Technology will allow RIDOT to post travel time on electronic message signs (40 locations).
Highway, Street, and Bridge Construction (Information not reported)
More than 50% Completed Information GAO gathered to improve the description The award supports the installation of radar detectors at 43 stations, including Narragansett, Warwick, North Smithfield, Lincoln, Richmond and Middletown.
TRANSPORTATION, PENNSYLVANIA DEPARTMENT OF Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
Bridge deck replacements for various structures in Bedford County Highway, Street, and Bridge Construction (Information not reported)
More than 50% Completed Information GAO gathered to improve the description The award supports bridge rehabilitation activities on two structurally deficient bridges in Bloomfield and Monroe Townships on State Route 2029. Rehabilitation activities include removing the existing overlay, placing a new concrete deck, and paving the new deck with asphalt. The award will extend the life of these bridges and improve safety by replacing the existing deteriorated bridge decks.
TRANSPORTATION, CALIFORNIA DEPARTMENT OF Highway Infrastructure Investment Grant: Urbanized Areas over 200K Population This is a Pavement Restoration and Rehabilitation project by a local agency in the County of Marin. The project is described as: Rehabilitate local street Highway, Street, and Bridge Construction More than 50% Completed Information GAO gathered to improve the description The award supports the construction of a High-Occupancy Vehicle (HOV) lane and bike path along US 101 in San Rafael from 0.8 km south of Coleman Pedestrian Overcrossing to North San Pedro. The current HOV lane stops and starts at various locations in Marin County. This project, called the Gap Closure Project, will provide an uninterrupted HOV lane through the most densely populated section of Marin County. The award will result in an alternative to single-occupancy commuting.
Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
This project will substantially improve the roadway by reconstructing a section of Armour Road in the city of Bourbonnais (East-Central Illinois).
Highway, Street, and Bridge Construction (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award improves pavement and safety by resurfacing 1.23 miles of Armour Rd. between US 45/52 and IL 50.
TRANSPORTATION, IDAHO DEPARTMENT OF STC-6762, MAIN ST; BRIDGE ST TO 6TH E, ST ANTHONY Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
This project will repair and overlay 0.5 mile of pavement on Main Street in City of St.Anthony, Fremont County and will include minor drainage improvements, replacement of traffic signal detection loops, and adjustments to manholes and valves.
Highway, Street, and Bridge Construction (Information not reported)
Information GAO gathered to improve the description This award will repair the road, as it was in a state of disrepair.
HIGHWAY AND TRANSPORTATION, ARKANSAS DEPARTMENT OF Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
THE PURPOSE OF THIS PROJECT IS TO WIDEN 4.91 MILES OF HIGHWAY 167 BETWEEN THE SALINE RIVER AND NORTH MILLERVILLE IN GRANT COUNTY. WORK WILL INCLUDE WIDENING THE EXISTING ROADWAY TO 4-LANES WITH AN 11' PAINTED MEDIAN AND 8' SHOULDERS, TWO BRIDGES, DRAINAGE IMPROVEMENTS, EROSION CONTROL AND MISCELLANEOUS ITEMS.
Highway, Street, and Bridge Construction (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award supports the widening of the road which goes to the growing town of El Dorado. This widened road, which will be 4 lanes, will connect El Dorado to the highway system. The award will result in reduced congestion and help spur economic development.
TRANSPORTATION, CALIFORNIA DEPARTMENT OF RESURFACE, REPAIR, RESTRIPE AND CONCRETE REPAIRS Highway Infrastructure Investment Grant: Areas with Population equal to or less than 200K and Available for Use in Any Area (flexible)
This is a Pavement Restoration and Rehabilitation project by a local agency in the City of San Buena Ventura. The project is described as: Steet Rehab. Olive Street Phase I Highway, Street, and Bridge Construction Los Angeles, CA 90012-3712 Information GAO gathered to improve the description The award provides a new roadway surface on Olive St., from Stanley to Main St., because the road was in a state of disrepair.
TRANSPORTATION, CALIFORNIA DEPARTMENT OF PAVEMENT REHABILITATION- 2009 ON SYSTEM ROADS.
Highway Infrastructure Investment Grant: Urbanized Areas over 200K Population This is a Pavement Restoration and Rehabilitation project by a local agency in the County of Ventura. The project is described as: On system roads - Phase A various locations Highway, Street, and Bridge Construction Los Angeles, CA 90012-3712 More than 50% Completed Information GAO gathered to improve the description The award rehabilitates roads which were in a state of disrepair; the rehabilitation will result in new roadway surface pavement. The locations of the rehabilitation are Mission Dr., Beardsley Rd., Corsicana Dr., Simon Way, West Petrero Rd., Center School Rd., Tico Rd. and Spring Rd.
TRANSPORTATION, MISSOURI DEPARTMENT OF North Sarah Street Belle To Page Preliminary engineering associated with resurfacing and sidewalk improvements from north Sarah Street to Belle.
Highway, Street, and Bridge Construction (Information not reported)
Saint Louis, MO 63101-1371 Information GAO gathered to improve the description The award supports widening sidewalks, improving pavement, and replacing street lights and traffic signals to improve safety.
TRANSPORTATION, WYOMING DEPARTMENT OF Federal project I801176, involving microsurfacing and miscellaneous work on 23.20 miles of I-80 at various locations between Carter and LaBarge, in Sweetwater and Uinta counties. 100% of funds are under contract.
Highway, Street, and Bridge Construction (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award will support preventive maintenance, including microsurfacing, to improve the pavement and safety of the road.
TRANSPORTATION, OKLAHOMA DEPARTMENT OF USDOT - FHWA Transportation Infrastructure Project in partnership with the Oklahoma Department of Transportation Transportation Infrastructure Project for the Oklahoma Department of Transportation identified as BRIDGE & APPROACHES CO BR: OVER SPRING CREEK, 1.0 MI WEST & 0.7 MI SOUTH OFUS-177/SH-66 JCT.
Highway, Street, and Bridge Construction (Information not reported)
More than 50% Completed Information GAO gathered to improve the description The award replaces a structurally deficient bridge that was scheduled for replacement in the next couple of years. The award provided the county with the necessary funding to accelerate the construction process. The new bridge will be approximately 1/4 mile in length and will provide improved safety and enhanced capacity for the Lincoln County road system.
TRANSPORTATION, OHIO DEPARTMENT OF Highway Infrastructure Investment Grant: Urbanized Areas over 200K Population Resurface a portion of the Reed Hartman Hwy. Also, perform pavement repair, curb & gutter repair, replace signal loops with video detection, replacing pavement striping, place new RPMs, and where ap Highway, Street, and Bridge Construction (Information not reported) $799,432.86 Information GAO gathered to improve the description The award supports rehabilitation activities for the Reed Hartman roadway from Cooper to Glendale-Milford Roads. These activities include removing the existing deteriorated asphalt surface and replacing it with a stress membrane and a new surface course of asphalt. In addition, ramps will be constructed at all intersections within the project area to comply with the Americans with Disabilities Act (ADA). Video vehicle detection cameras will also be installed at intersections instead of wire "loops" in the pavement to improve intersection performance.
TRANSPORTATION, TEXAS DEPARTMENT OF ADD SHOULDERS : FM 372 ; Highway, Street, and Bridge Construction (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description This award widens 8.58 miles of highway FM 2071, from FM 372 to FM 922, by adding shoulders to the north and southbound lanes to improve road safety.
EXECUTIVE OFFICE OF THE COMMONWEALTH OF KENTUCKY Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
GRIND PAVEMENT AND REHABILITATION OF PAVEMENT ON I-264 IN LOUISVILLE, KENTUCKY FROM NEWBURG ROAD AT MILEPOINT 13.710 TO BRECKINRIDGE LANE AT MILEPOINT 18.410 IN JEFFERSON COUNTY.
Highway, Street, and Bridge Construction Grants (Information not reported)
Louisville Urban Service Area, KY 40207-1112 Less Than 50% Completed Information GAO gathered to improve the description The award is for a section of road that is in poor condition and will help to improve pavement of the road.
TRANSPORTATION, CALIFORNIA DEPARTMENT OF Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
This is a Pavement Restoration and Rehabilitation project by a local agency in the City of Baldwin Park. The project is described as: RAMONA BOULEVARD ROADWAY PRESERVATION AND REHABILITATION (A)- INTERSTATE 605 TO FRANCISQUITO. THIS PROJECT CONSISTS Highway, Street, and Bridge Construction Los Angeles, CA 90012-3712 Less Than 50% Completed Information GAO gathered to improve the description The award supports repaving the roadway to make a smoother driving surface.
TRANSPORTATION, OHIO DEPARTMENT OF Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
Replace existing box beam bridge on SR 154, located approximately one mile east of SR 7 at Rogers, with a steel beam superstructure.
Highway, Street, and Bridge Construction (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description This award supports the replacement and modernization of a bridge in Columbiana County, near Rogers, Ohio. The award will increase the bridge's life expectancy to up to 75 years.
TRANSPORTATION, UTAH DEPARTMENT OF ADA PED ACCESS REGION ONE - PACKAGE 1 Highway Infrastructure Investment Grant: Transportation Enhancements This project constructed safe sidewalks and installed pedestrian ramps in various locations in Region 1(Northern Utah).
Highway, Street, and Bridge Construction (Information not reported)
Salt Lake City, UT 84119-5977 Information GAO gathered to improve the description The award funds construction of 43 pedestrian access ramps, 38 of which are at primary need locations--those locations that had existing curb, gutter, and sidewalk, but no curb cuts. The ramps will improve safety and compliance with Americans with Disabilities Act (ADA) standards and are located in the counties of Davis, Weber, Morgan, Box Elder, Cache and Rich.
TRANSPORTATION, PENNSYLVANIA DEPARTMENT OF Hawthorn Bridge No. 4 Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
Replacement of PA 28 Hawthorn Bridge over Pine Creek in Redbank Township Highway, Street, and Bridge Construction (Information not reported)
Information GAO gathered to improve the description The award will replace a bridge that was built in 1931.
TRANSPORTATION, MARYLAND DEPARTMENT OF Safety and Resurfacing from Garrett County Line to East of Tisdale Street Highway Infrastructure Investment Grant: Areas with Population equal to or less than 200K To have projects underway that will preserve our existing highway infrastructure and thereby prevent further decay, improve conditions, extend the overall life of roadways and bridges, and further other associated highway improvements. In some cases, the projects will improve safety and environmental conditions for the motoring public and/or pedestrians.
Highway, Street, and Bridge Construction (Information not reported)
More than 50% Completed Information GAO gathered to improve the description The award improves pavement along 0.79 miles of US 40 Alt. The resurfacing will fix a deteriorating roadway and improve ride conditions.
TRANSPORTATION, WASHINGTON DEPT OF Highway Infrastructure Investment Grant: Areas with Population equal to or less than 200K Reconstruct approximately 0.7 miles of Speyers Road, from the west City limits to Fremont Avenue, including curb and gutter, sidewalk, stormwater drainage system, and street lighting.
Highway, Street, and Bridge Construction (Information not reported)
Information GAO gathered to improve the description The activities under this award will improve pedestrian safety.
TRANSPORTATION, CALIFORNIA DEPARTMENT OF Highway Infrastructure Investment Grant: Transportation Enhancements This is a Facilities for Pedestrians and Bicycles project by a local agency in the City of San Francisco. The project is described as: Pedestrian Enhancements Highway, Street, and Bridge Construction Less Than 50% Completed Information GAO gathered to improve the description The award covers an area in San Francisco bounded by 4th Ave., Moraga St., 9th Ave. and Lincoln Way. The sidewalk bulb-outs will encourage people to use alternative forms of transportation by improving pedestrian safety and comfort while also improving the connections between new cultural attractions in Golden Gate Park, the commercial corridor, the University of California Medical School, schools, a dense residential area, and several transit lines.
TRANSPORTATION, NEW YORK DEPARTMENT OF SFY 09/10 PMI PAVING; ORANGE AND ULSTER COUNTIES Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
Repave approximately 22 miles of state roadway in Orange and Ulster counties. The top layer of worn, deteriorated pavement will be removed and replaced with new asphalt and fresh pavement markings to extend the service life of pavement.
Highway, Street, and Bridge Construction (Information not reported)
PINE BUSH, NY 12566-0000 More than 50% Completed Information GAO gathered to improve the description The award supports repaving of short sections and intersections along state routes 10, 104, 104a, 109, 115, 116, 117, 118, 119, 120, 120a, and 121.
TRANSPORTATION, TENNESSEE DEPARTMENT OF Highway Infrastructure Investment: Urbanized Areas over 200K Population This project is for improvements to the intersection of SR-8 (Ringgold Road) at Camp Jordan Parkway and including traffic signals Highway, Street, and Bridge Construction (Information not reported)
More than 50% Completed Information GAO gathered to improve the description The award funds the installation of 10 traffic signals and 4 pedestrian signals at the intersection of Ringgold Rd. and Camp Jordan Pkwy. in order to help reduce congestion and improve pedestrian safety.
TRANSPORTATION, GEORGIA DEPARTMENT OF CR 415/PHILLIP CAUSEY ROAD FROM SR 33 TO CR 412/SUMNER ROAD Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
This project is a roadway maintenance repaving project in Worth County. This project is the milling and resurfacing of County Road 415/PHILLIP CAUSEY ROAD from SR 33 to County Road 412/SUMNER ROAD for a total project length of 5.48 miles.
Highway, Street, and Bridge Construction (Information not reported)
Information GAO gathered to improve the description The pavement had deteriorated, and the resurfacing will bring the roadway into a state of good repair.
TRANSPORTATION, CONNECTICUT DEPARTMENT OF Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
Installation of epoxy pavement marking lines and intersections Highway, Street, and Bridge Construction (Information not reported)
Information GAO gathered to improve the description The award enhances safety for both the motoring public and pedestrians in District 2 by replacing crosswalks, stop bars, and lane arrows at 396 intersections.
TRANSPORTATION, INDIANA DEPARTMENT OF Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
This project will improve drainage by replacing the structure on US 41 over Jane Feddeler Ditch in Lake County.
Highway, Street, and Bridge Construction (Information not reported)
Saint John, IN 46373-0000 More than 50% Completed Information GAO gathered to improve the description The drainage structure, called a "culvert," is located on US 41 over Jane Feddeler Ditch, 0.08 KM North of US 231. The new structure is a four-sided box culvert with a 10-foot span and 9-foot rise, and is 88 feet in length. The new structure is a sound structure satisfying contemporary design standards and has an estimated functional life of 60 to 80 years. Due to its age, overall structural condition, and, more specifically, deterioration at the widening joints, the structure is being replaced.
SOUTH DAKOTA, STATE OF US18 - From the east junction with SD50 to the east junction with US281; US281 - From the east junction with US18 to the south city limits of Armour.; US18 - From the east junction with US281 to the junction with SD37; SD50 - from the East US18 Junction Highway Infrastructure Investment Grant: Areas with Population equal to or less than 200K Highway, Street, and Bridge Construction (Information not reported) $6,323,010.95 Information GAO gathered to improve the description The award supports the milling and paving of sections of US Highways 18 and 281 and South Dakota Highway 50 in Charles Mix, Douglas, and Hutchinson Counties. These sections of highway were rated by the South Dakota Department of Transportation as being in "fair" condition, the project would take little time to begin, and the area that these roads are located in was economically distressed at the time of project proposal. The total length of roadway to be milled and paved is 30.2 miles and has a life span of about 15 to 18 years.
TRANSPORTATION, INDIANA DEPARTMENT OF Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
SR 39 - 1.25 miles N of E jct of SR 10 Highway, Street, and Bridge Construction (Information not reported)
Information GAO gathered to improve the description The purpose of the award was to correct existing structural deficiencies and safety hazards by lining the existing pipe. The award supports lining for a corrugated metal pipe 5 feet in diameter and 58 feet in length. An High Density Polyethylene (HDPE) liner is placed in a pipe when an existing pipe is structurally deficient. A pipe liner is more cost effective in many cases than a full pipe replacement. The award will result in a newly lined pipe with an estimated functional life of 80 years.
TRANSPORTATION, INDIANA DEPARTMENT OF Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
This project will restore the pavement on Madison County Road 600 W with a new surface course.
Highway, Street, and Bridge Construction Grants (Information not reported)
Information GAO gathered to improve the description The award supports the resurfacing of County Road 600 West from County Road 400 North to State Route 128 in Madison County.
TRANSPORTATION, INDIANA DEPARTMENT OF Highway Infrastructure Investment Grant: Urbanized Areas over 200K Population, Available for Use in Any Area (flexible)
This project will improve the traffic signals on Market Street from State St to Vincennes Street.
Highway, Street, and Bridge Construction (Information not reported)
Information GAO gathered to improve the description The award supports a traffic signal modernization project. This project includes the replacement of existing mast arms (with span mounted signals), controllers, signal indications (vehicular and pedestrian), and the installation of new vehicle detection at the following six intersections: three signals on East Market St. at Pearl St., Bank St., and East 7th St., and three signals on East Spring St. at Pearl St., Bank St. and East 7th St. The vehicle detection system being installed is wireless, which eliminates issues typical to wired loop detection systems such as broken loop wire. The pedestrian signal indications will visibly countdown the remaining crossing time. New controllers and antennae will be installed where State St. intersects East Market St. and East Spring St. to create a coordinated traffic signal system. Signal heads will be LED lights which are brighter, last longer, and much more energy-efficient.
TRANSPORTATION, MICHIGAN DEPARTMENT OF Hot mix asphalt base crushing and shaping, resurfacing, trenching and aggregate shoulders.
To improve the transportation infrastructure and the economic development capacity of the state of Michigan.
Power and Communication Line and Related Structures Construction Less Than 50% Completed Information GAO gathered to improve the description The award provides resurfacing for 1.37 miles of West Holt Rd. from Heatherton Dr. to Thornburn St. in Ingham County to improve rideability and make the roadway smoother.
TRANSPORTATION, MICHIGAN DEPARTMENT OF Cold mill, HMA resurfacing Hot mix asphalt base crushing, shaping, cold milling, resurfacing, ramp realignment, misc safety and drainage To improve the transportation infrastructure and the economic development capacity of the State Power and Communication Line and Related Structures Construction Less Than 50% Completed Information GAO gathered to improve the description In order to make the road smoother and improve driving quality, the award resurfaces 2 miles of US-10 from the west county line of Osceola to the US-131 interchange in the vicinity of Reed City.
TRANSPORTATION, MICHIGAN DEPARTMENT OF Pavement remremoval, hot mix asphalt pavement, concrete curb and gutter and earth work To improve the transportation infrastructure and the economic development capacity of the State Power and Communication Line and Related Structures Construction More than 50% Completed Information GAO gathered to improve the description The award provides resurfacing for 0.5 mile to maintain the pavement condition and improve the ride quality of Riverside Dr. in Port Huron.
TRANSPORTATION, CALIFORNIA DEPARTMENT OF Resurfacing from Austin Rd to Airport Way Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
This is a Pavement Restoration and Rehabilitation project by a local agency in the City of Ripon. The project is described as: Rehabilitate roadway between Airport Way and Austin Road Highway, Street, and Bridge Construction Information GAO gathered to improve the description The award funds the resurfacing of West Ripon Rd., which is in a state of disrepair. The resurfacing will result in a smoother driving surface.
TRANSPORTATION , MISSISSIPPI DEPARTMENT OF North St/Court St. (8035/8032)
Highway Infrastructure Investment Grant: Areas with Population equal to or less than 200K The city of Cleveland will construct sidewalks along Court Street and North Street. This project will improve pedestrian access along these roads.
Highway, Street, and Bridge Construction (Information not reported)
Information GAO gathered to improve the description The award will cover 0.55 miles.
TRANSPORTATION, NEW YORK DEPARTMENT OF HUDSON VALLEY RAIL TRAIL: HAVILAND ROAD TO COMERCIAL AVENUE Highway Infrastructure Investment Grant: Available for Use in Any Area (flexible)
A project for a new/improved bicycle facility on the Hudson Valley Rail Trail from Haviland Road to Commercial Avenue in the town of Lloyd.
All Other Specialty Trade Contractors (Information not reported)
Information GAO gathered to improve the description This award converts 1.36 miles of abandoned rail corridor into a continuous multi-use trail facility for bicycles by constructing the missing links in a publicly owned bicycle/pedestrian facility. The trail will increase accessibility and mobility options, enhance the integration and connectivity of the transportation system, and preserve and improve existing transportation systems.
TRANSPORTATION, IDAHO DEPARTMENT OF STP-7181, GOULD ST BR, POCATELLO Highway Infrastructure Investment Grant: Areas with Population equal to or less than 200K This project will remove and replace existing bridge joints on Gould Street Bridge in the City of Pocatello and improve pavement markings along the roadway.
Highway, Street, and Bridge Construction (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award funds the repair of the bridge deck joint seals and associated concrete work in order to seal the bridge expansion joint system and protect the structural components below the joint. Recent bridge inspections indicated deteriorated elements of the Gould Street Bridge, including the deck expansion joint seals, deck wearing surface, and girder bearings. Failed deck joints can cause extensive damage to bearings, abutment back walls, and diaphragms, resulting in improper movement of the bridge, diminished structural integrity of the structure, and further deterioration of the deck.
TRANSPORTATION, NEW JERSEY DEPT OF Chester Branch RR Rehabilitation - Morris County Highway Infrastructure Investment Grant: Urbanized Areas over 200K Population Rehab of existing Rail Road Highway, Street, and Bridge Construction (Information not reported) $5,800,000.00 Information GAO gathered to improve the description The award supports the rehabilitation of 4 miles of rail track alignment including five rail spurs, bridge and steel structures, and grade crossings, as well as rehabilitation of the rail right of way to include the following: change out the rails; remove and replace tie; lay new ballasts; new switches and switch timbers; surface the entire right of way; new runarounds and turnouts; and brush cutting and wood chipping.
TRANSPORTATION, NEW MEXICO DEPARTMENT OF Highway Infrastructure Investment Grant: Areas with Population equal to or less than 200K This project will include grinding down existing old pavement and replacing with new pavement on 12th Street from Gold Street to Mississippi Street. In addition, it will include inspection and oversight. On Silver Street from US 180 to 32nd Street, new pavement will be placed.
Highway, Street, and Bridge Construction (Information not reported)
Silver City, NM 88062-0000 Information GAO gathered to improve the description The award supports pavement improvements to ensure that the road complies with the Americans with Disabilities Act (ADA).
TRANSPORTATION, KANSAS DEPARTMENT OF GREENWOOD HOTEL BUS DEPOT @ 300 N MAIN IN EUREKA Highway Infrastructure Investment Grant: Transportation Enhancements Restore part of the interior and exterior and establish a transportation museum/welcome center in the former bus depot of the Greenwood Hotel at 300 N Main Highway, Street, and Bridge Construction Grants (Information not reported)
Information GAO gathered to improve the description The award supports the renovation of the first floor and exterior restoration of the Greenwood Hotel.
TRANSPORTATION, ALABAMA DEPT OF STMTE-TE09(927)
Highway Infrastructure Investment Grant: Transportation Enhancements 'This project involves a Historic Downtown Sidewalk and Canopy Restoration for Hartselle Highway, Street, and Bridge Construction (Information not reported)
Information GAO gathered to improve the description This award supports the reconstruction of .24 miles of sidewalks and the canopy above the sidewalks in the historic downtown area of Hartsell, Alabama. This reconstruction is being done so that the sidewalks meet Americans with Disabilities Act (ADA) standards and the canopy meets historical preservation standards.
The following award descriptions contained little or no information that allowed readers to understand the general purpose, scope and nature of activities, location, and expected outcomes. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
TRANSPORTATION, NORTH CAROLINA DEPARTMENT OF Highway Infrastructure Investment Grant: Transportation Enhancements Highway, Street, and Bridge Construction (Information not reported)
Information GAO gathered to improve the description The award funds one shelter, four trash containers, two tables, and one bike rack at the Bayview Beach ferry terminal in Beaufort County, which will increase pedestrian access and safety.
TRANSPORTATION, MICHIGAN DEPARTMENT OF To improve the transportation infrastructure and the economic development capacity of the State Power and Communication Line and Related Structures Construction More than 50% Completed Information GAO gathered to improve the description The award supports pavement improvement activities by the Clinton County Road Commission. The Commission will improve 4 miles of pavement on West Colony Rd. from the West Clinton County Line to Tallman Rd. The award will result in improved safety and extend the service life of the roadway.
TRANSPORTATION, MICHIGAN DEPARTMENT OF To improve the transportation infrastructure and the economic development capacity of the State Power and Communication Line and Related Structures Construction More than 50% Completed Information GAO gathered to improve the description In order to improve road safety, the award resurfaces 2.282 miles of shoulder on County Road 498 in Schoolcraft County from Newborn Rd. to the County line. The resurfacing defines the inside edge of the shoulder, adds additional gravel material and grade shoulder to proposed slope, removes excess material, and compacts the shoulder with a roller.
TRANSPORTATION, MICHIGAN DEPARTMENT OF To improve the transportation infrastructure and the economic development capacity of the State Power and Communication Line and Related Structures Construction Information GAO gathered to improve the description The award supports pavement improvement activities to resurface 7.8 miles of Featherstone Rd. from M-66 to Engle Rd. north of Sturgis. The award will result in improved driving quality by making the road smoother.
TRANSPORTATION, MICHIGAN DEPARTMENT OF To improve the transportation infrastructure and the economic development capacity of the State Power and Communication Line and Related Structures Construction Information GAO gathered to improve the description The award supports the resurfacing of .1 miles of Shook Rd. in Romulus, Michigan. The award will result in improved driving quality and increase the service life of the road.
The Recovery Act appropriated $1.5 billion to the Supplemental Discretionary Grants for a National Surface Transportation System—which the Department of Transportation termed “TIGER grants.” The purpose of the program is to make capital investments in surface transportation that will have a significant impact on the nation, a metropolitan area, or a region. The act required the selection of awards on a competitive basis.
Nature and Type of Awards
Although grant agreements have yet to be signed, the department announced the selection of 51 awards on February 17, 2010. Department officials said they received over 1,400 applications from all 50 states, territories, and the District of Columbia for projects totaling nearly $60 billion. With $1.5 billion available, about 3 percent of the projects will be awarded grant funds. The projects selected include a range of efforts to improve highways, bridges, rail, port, transit, and intermodal facilities. As shown in figure 5, transit projects totaled about $383 million (26 percent), and rail projects totaled about $374 million (25 percent). These were the largest transportation categories for projects to improve the movement of people and freight. These projects are geographically dispersed throughout the United States. Highways were the next largest category at $338 million (23 percent). Most of these projects are located in the West and South.
According to the department, these projects were selected because they demonstrated the potential to meet all of the selection criteria, which included such key components as the ability to have a significant impact on desirable near- and long-term transportation outcomes of the nation, a metropolitan area, or a region and the creation of jobs, and the ability to apply innovation and partnership to achieve long-term transportation outcomes or new approaches to financing, contracting, or project delivery.
No Basis to Judge TIGER Descriptions for Transparency
As no TIGER grants have been awarded, the department has not issued any reporting guidance or other assistance to date. Therefore, for this program, we could not perform our transparency assessment. According to an official, the administrative oversight and reporting requirements for these awards will be similar to those for other Department of Transportation Recovery Act awards. Each TIGER grant will be administered by the modal administration responsible for the majority of the activities within the award. For example, an award for public transportation activities will be administered by the Federal Transit Administration. The modal administration will also oversee recipient reporting for these grants.
Other Ways Award Information Is Made Available to the Public
Department officials have implemented steps to inform the public about the TIGER grants and selected projects: Department of Transportation Web site (www.dot.gov/recovery/ost/.) A Web site was established to provide information about the TIGER grants and to address general questions. In announcing the grant awards, the department issued a press release along with a report listing the grant amounts. The report also included for each project a brief summary that describes the project and its benefits. (See table 8.) The press release and report are also available on the Web site.
Department of Transportation interactive map of awards (www.dot.gov/recovery). This interactive map will include the TIGER awards and provide the location, cost, and a brief description for each award.
According to an agency official, there has been little public feedback regarding the announced grants or the information that is available on the agency’s Web site. To date, most of the public comments on TIGER grants are not from the general public but from unsuccessful applicants—that is, the 97 percent of applicants that were not selected.
Transit Capital Assistance
Under the $6.9 billion Transit Capital Assistance program, the Federal Transit Administration (FTA) apportioned Recovery Act funds to recipients through existing program formulas. Recipients of funds include both large and medium urbanized areas, as well as states, which administer transit awards for small urbanized and nonurbanized areas. These funds can be used for activities such as vehicle replacements, facilities renovation or construction, preventive maintenance, and paratransit services. The Transit Capital Assistance program also includes a new discretionary grant program to support transit projects that reduce greenhouse gas emissions or energy use.
Nature and Type of Transit Awards
FTA had obligated nearly all the Recovery Act Transit Capital Assistance program funding as of April 5, 2010. Of the amount obligated, $1.6 billion had been reimbursed by FTA. Almost half of Recovery Act transit obligations have been for transit construction and non-vehicle infrastructure activities. This includes about $1.2 billion for station stops and terminals and about $1.1 billion for support facilities and equipment. In addition, 30 percent is being used for purchasing or rehabilitating buses; a majority of these funds are being used to replace or rehabilitate buses. (See fig. 6.)
Half of Transit Descriptions Met Our Transparency Criteria
We assessed the transparency of descriptive information for transit awards available on Recovery.gov, as described in the report. We found that an estimated 50 percent met our transparency criteria, 50 percent partially met our criteria, and zero percent did not meet our criteria.
For transit descriptions that partially met our transparency criteria, we collected information necessary to make the descriptions meet our criteria. The descriptions of awards in our sample, whether they met our transparency criteria, and additional information that we found to complete the narrative descriptions are provided at the end of this appendix.
Agency Guidance and Other Factors That May Affect Transparency of Reported Information
For the first two reporting rounds, FTA created detailed assistance documents for recipients that may have affected transparency results. FTA annotated the Office of Management and Budget’s (OMB) guidance— specifically, the data reporting model—by adding a transit-specific comment and example for each reporting field. For some data fields, such as project name, FTA directed recipients to use information from FTA’s grants database, Transportation Electronic Award Management. In the award description field, FTA outlined items that recipients should include in their narrative. (See table 9.) According to FTA officials, OMB’s guidance is open to different interpretations and does not provide enough information to guide recipients to provide descriptions understandable to the public. In its reporting model, therefore, FTA provided clarification to help recipients do so.
Several recipients we interviewed told us this annotated reporting model was very useful in crafting their recipient reports. Chicago Transit Authority officials, for example, told us that FTA’s annotated reporting model helped them interpret the ambiguous parts of OMB’s guidance. For many of the transit awards we reviewed in detail, the Recovery.gov reports directly reflected FTA’s annotated reporting model. Specifically, recipients included the introductory language and other conventions suggested by FTA in the award description field.
For the third reporting round (for the quarter ending March 31, 2010), FTA updated its annotated reporting model. However, officials told us they called this updated reporting model and all other reporting resources “technical and training assistance” for this round. They did so because OMB’s March guidance directs agencies to not call any of their materials “guidance” unless they have been formally approved by OMB. In general, FTA officials said that the agency has had to adjust its plans and processes for recipient reporting because of the fluid nature and late release of OMB’s guidance.
In addition, FTA conducted webinars for each reporting round to support transit recipients. For the second reporting round, FTA’s webinar provided tips on completing narrative fields that advised recipients to use plain language and avoid acronyms and jargon, imagine that you are writing for your mother, who will have to explain what is written to someone else, and think about the public, reporters, and auditors reading published reports.
According to several recipients we interviewed, FTA’s webinars were helpful in completing reports. Officials from the Port Authority of Allegheny County told us that the FTA webinars were the main source of assistance used to complete their recipient reporting. FTA also held a webinar with recipients after the first reporting period to identify concerns and collect lessons learned for use in future reporting rounds.
Other FTA efforts may have affected the transit transparency results. First, FTA produced a tip sheet to help recipients avoid and resolve problems when reporting. A few recipients we interviewed also said that FTA regional office staff helped clarify reporting guidance and solve problems. Officials from the Greater Attleboro-Taunton Regional Transit Authority in Massachusetts told us they worked closely with FTA regional staff to initially develop a description for the Recovery Act award, as it required more detail than normal. In addition, Massachusetts Bay Transportation Authority officials told us that FTA regional staff were helpful in answering questions that arose during the reporting process. Finally, FTA regional officials reviewed narrative descriptions to ensure that they were understandable and accurate, though the volume of descriptions prevented them from doing a thorough review.
While FTA’s transparency results were generally positive, a few recipients we interviewed told us that space limitations in the narrative reporting fields affected their ability to fully convey award information on Recovery.gov. For example, officials from the Greater Attleboro-Taunton Regional Transit Authority said that they wanted additional space to explain activity details and status information. Massachusetts Bay Transportation Authority did not face space limitations; however, officials told us that the multiple activities under their grant, from purchasing paratransit vans to repairing fencing systemwide, did not lend themselves to a single description, as is the convention in FederalReporting.gov.
Other Ways Transit Award Information Is Made Available to the Public
Beyond Recovery.gov, the Department of Transportation and FTA make award information available to the public through various means, including the following: Department of Transportation interactive map of awards (www.dot.gov/recovery). This agencywide map, which includes transit awards, provides the location, cost, and a brief description for each award.
FTA grants digest (www.fta.dot.gov/index_9440.html). Published on FTA’s Recovery Act Web site, this searchable digest provides a short summary of each grant including location, cost, and an overview of activities.
FTA spreadsheet of awards. Also on FTA’s Web site, the spreadsheet outlines information on each award like the grant number and a short, descriptive title. This spreadsheet does not include detailed descriptions of the activities within each award. The source of the data—FTA’s Transportation Electronic Award Management database—limits the length of the descriptive field.
FTA fact sheets. For a limited number of awards, FTA posted on its Web site detailed fact sheets that describe the purpose and nature of the award.
In addition, transit recipients use Web sites, newsletters, and other tools to provide award information to the public. Several transit recipients we interviewed disseminate Recovery Act award information to the public on their Web sites. In California, the Orange County Transportation Authority created a dedicated Web site for the county’s Recovery Act transportation awards (www.octa.net/rtw_response.aspx). This Web site includes, among other things, information on the transit activities in the authority’s transit award, including bus preventative maintenance and facility repairs in Irvine, California. On its Web site, the Chicago Transit Authority posted press releases to announce plans and progress on activities. Press releases covered the delivery of the first hybrid bus purchased under the award and a status update on the replacement of 7 miles of subway track. Similarly, the Northeast Illinois Regional Commuter Railroad Corporation—Metra— used its monthly newsletter to announce Recovery Act activities, including the construction of a new station on the Rock Island Line. A few recipients also used social media like Facebook and Twitter to make award information available to the public. The Metropolitan Transportation Authority in New York, for example, maintains a Facebook page that contains a video explaining the Long Island Rail Road Atlantic Avenue viaduct span replacement project.
According to FTA officials, most of the feedback on transit Recovery Act awards has been positive. The press also reported on the use of funds for specific projects at the local level, but press coverage has decreased over time as the Recovery Act has become more routine. Many of the transit recipients we interviewed said that, in general, they had not received much public feedback. Pennsylvania state transit officials told us they had not received any public comments on the state’s rural transit award, which involved transit activities like building an intermodal transit center and replacing buses in various locations in the state. The Port Authority of Allegheny County used its transit award to pay for a portion of the ongoing construction of its light rail system from downtown Pittsburgh into the developing North Shore area of the city, which involves tunneling under the Allegheny River. While the project received some negative feedback early on, Port Authority officials told us that those remarks have faded as the benefits of using public transportation to support development of the North Shore have become evident.
Transit Descriptions That Met Our Transparency Criteria
The following award descriptions contained sufficient information on general purpose, scope and nature of activities, location, and expected outcomes to meet our transparency criteria. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
Purchase of 17 replacement buses. Rehabilitaion of maintenance garage. Purchase of bus washer and vacuum cleaning system. Purchase of diagnostic equipment and tools.
Invest in public transportation by purchasing 17 new compressed natural gas buses and related tools for repair, rehabilitating a bus maintenance garage, and replacing a bus wash and vacuum cleaning system.
This grant has allowed the Birmingham-Jefferson County Transit Authority to begin the administrative and soliciatation process to acquire 17 compressed natural gas buses and related diagnostic equipment and tools. This grant sill also provide for the rehabilitation of a maintenance garage and replacement of a buswash and vacuum cleaning system at the same location within the next year.
Bus and Other Motor Vehicle Transit Systems Preventive Maintenance and ADA Complementary Paratransit Service Sustain mass transit service by funding Alameda Contra Costa Transit's (AC Transit) Preventive Maintenance ($23,165,013), and AC Transit/Bay Area Rapid Transit jointly funded Complementary Paratransit Service (East Bay Paratransit): ($2,573,890), financed by American Recovery and Reinvestment Act Funds appropriated through the Federal Transit Administration Urbanized Area Program (Section 5307; 49 CFR). The purpose of this program is to sustain mass transit and paratransit operations in the AC Transit service area and to preserve critical jobs to ensure service can be maintained at existing levels.
Purpose of grant activities is to provide regular and ongoing bus maintenance and rehabilitation, including associated administrative costs, to sustain fixed-route transit service and paratransit service. As one of the largest bus transit systems in the country, AC Transit currently provides bus service to approximately 67 Million passengers per year, in addition to nearly 500,000 paratransit riders annually . This service covers a 364-square mile service area in Alameda and Contra Costa Counties, with over 100 bus lines providing bus transportation to 13 cities and 9 unicorporated areas, as well as to the City of San Francisco via the San Francisco-Oakland Bay Bridge, and San Mateo and Santa Clara Counties via the Hayward-San Mateo and Dumbarton Bridges. American Recovery and Reinvestment Act funds allowed transit service to be sustained for nine (9) months. These funds were committed to fund jobs critical to maintain fixed-route mass transit and paratransit services. Without the American Recovery and Reinvestment Act funds, AC Transit woul dhave been forced to make mandatory layoffs in all areas and draconian service cuts would have gone into affect last year.
Bus and Other Motor Vehicle Transit Systems AC Transit, 1600 Franklin Street SIMI VALLEY, CITY OF Shelters, Buses, Garage Modernization, Wheelchair Scale, Operating Assistance and Non Fixed-Route ADA Paratransit Service Fiscal Year 2009 Transportation Enhancement projects eligible for funding under the Federal American Recovery and Reinvestment Act (ARRA) for the City of Simi Valley/Simi Valley Transit include funding for the following: 1) TRANSIT SHELTER PROGRAM ($484,000) - Like-kind replacement and upgrade of 26 deteriorated bus shelters, 72 concrete benches, and other amenities at bus stops throughout the City. 2) PURCHASE OF THREE REPLACEMENT 40-FT BUSES ($1,380,000) - Like-kind replacements for Compressed Natural Gas (CNG) buses that have met their useful service life by accumulating in excess of 568,000 miles each. The replacement vehicles will be low-floor, 40-ft New Flyer buses that will have an expected service life of 12 years or an accumulation of at least 500,000 miles. These buses will meet the Clean Air Act Standards (CAA) and the Americans with Disabilities Act (ADA) requirements. 3) TRANSIT GARAGE MODERNIZATION ($563,949) - Project to include work on electrical, ventilation and mechanical systems; retrofitting the mechanic work bays; upgrading the hydraulic lifts; increased storage area and like-kind replacement of the bus washer. 4) WHEELCHAIR SCALE ($5,000) - Purchase of one scale to be used during the ADA application process to weigh wheelchairs. 5) OPERATING ASSISTANCE ($303,400) - 10% of total allocation to provide for operating assistance for the City's fixed-route and non- ADA paratransit service. 6) NON FIXED-ROUTE ADA PARATRANSIT SERVICE ($303,400) - 10% of total allocation to assist with ADA/DAR paratransit operating costs.
Have entered into a cooperative purchasing agreement with Orange County Transportation Authority (OCTA) for the replacement of three (3) New Flyer of America buses. The design and locations for transit shelters is complete. Staff will be seeking authorization from City Council to solicit bids by March 2010. Architectural services on the garage modernization project have been approved. Staff will be seeking authorization from the City Council by February 2010 to solicit bids. Purchase of the wheelchair scale has not been completed.
Bus and Other Motor Vehicle Transit Systems 490 West Los Angeles Ave Simi Valley, CA 93065-1646 Less Than 50% Completed LOS ANGELES, CITY OF This grant applies the 2009 ARRA Formula allocation of $8,022,665 to bus replacement. The City of Los Angeles Department of Transportation will purchase approximately sixteen 40-foot over-the-road type coaches that will have an expected useful life of 12 years or 500,000 miles. The vehicles that will be replaced have either met or exceeded their useful life of 12 years. A Federal ratio of 100/0 will apply. The buses purchased through this grant will comply with both the Clean Air Act (CAA) standards as well as with the requirements of the Americans with Disabilities Act (ADA).
The goal of this project is replace approximately 16 existing buses. The new buses will have a useful life of 12 years or 500,000 miles. The new buses will also comply with current environmental standards as well as with the ADA. The City of Los Angeles initially anticipated that this project would be completed no later than June 30, 2010. During the 4th quarter of calendar year 2009, the project experienced slippage. The City currently anticipates that the project will be completed by the second quarter of 2011. Completion means that the buses will be assembled, delivered, placed into the service, and the grant closed out. During the most recent quarter (October 1, 2009 to December 31, 2009) arrangements were made with the proposed vendor to provide a sample bus for testing. The sample bus is currently being shipped to Altoona, Pennsylvania. If the sample bus performs as expected, production of the 16 buses are scheduled to begin in the summer of 2010. The City anticipates to begin taking delivery of these buses in the summer of 2010. To date, no funds have been expended nor obligated. 100 S. Main Street-10th Floor Los Angeles, CA 90012-3712 Less Than 50% Completed Transit Capital - Bus Replacement Transit Capital - Bus Replacement of 6 Hybrid Gasoline-Electric buses.
Contract awarded on 8/11/09 to purchase 6 hybrid gasoline-electric buses from New Flyer.
Bus and Other Motor Vehicle Transit Systems CA-96-X051 NAPA COUNTY TRANSPORTATION & PLANNING AGENCY Purchase 4 hybrid buses and construct multi-modal Park and Ride Facility Invest in Public Transportation- Replace four 15+ yeal old diesel buses with new, clean air, gasoline/electirc hybrid buses. In addition, funds will be used to construct a multi-modal Park and Ride facility featuring: commuter parking, transit hub, bicycle accomodations, and a potential future rail platform. Green building elements (such as solar power) will be incorporated into the design.
This grant will allow for the modernization of the transit fleet with the purchase of 4 gasoline/electric hybrid vehicles. In addition, once the multi-modal Park and Ride lot is constructed, hundreds of residents/commuters a day will be able to make more efficient, safe and timely transit connections.
Bus and Other Motor Vehicle Transit Systems (Information not reported)
Preventative Maintenance, Capital Cost of Contracting, and Paratransit Offset This project invests the American Recovery and Reinvestment funds to preserve public transportation service by funding vehicle maintenance, providing fixed-route service, and help fund local transit services for the disabled community for 2010. The funds applied in this application will help reduce the potential reduction of these services as a direct result of declining local sales tax revenues.
Due to declining sales tax revenues, Mountain Metropolitan Transit is facing up to a 50% reduction in local fixed route services and up to a 10% reduction in paratransit services for 2010. This ARRA grant will allow Mountain Metropolitan Transit to fund 3rd Party Captial Cost of Contracting for its fixed route service for 2010; fund a portion of the ADA Paratransit services for 2010; and fund building and vehicle Preventative Maintenance for 2010. As a result of these investments, the local match , annually budgeted for these grant funded capital expenditures, has been freed up to help preserve portions of the local fixed-route and paratransit services in 2010.
Bus and Other Motor Vehicle Transit Systems Grants (Information not reported)
Colorado Springs, CO 80901-1575 SANTA ROSA, CITY OF Invest in public transportation. These funds will partially finance the purchase of one replacement bus. The bus to be replaced is a 1998 40’ diesel fixed route urban public transit bus. This bus will have met the end of its 12 year useful life by 2010. The 1998 bus will be replaced with a 40-foot, low floor Gasoline Hybrid Electric Bus (GHEB) fixed route, urban public transit bus. This bus will be procured in accordance with FTA’s Procurement Requirements. The bus will meet the Clean Air Act (CAA) standards and the Americans with Disabilities Act (ADA) requirements.
These funds will partially finance the purchase of one replacement bus. The bus to be replaced is a 1998 40’ diesel fixed route urban public transit bus. This bus will have met the end of its 12 year useful life by 2010. The 1998 bus will be replaced with a 40-foot, low floor Gasoline Hybrid Electric Bus (GHEB) fixed route, urban public transit bus through the exercising of options on an existing contract. This bus will be procured in accordance with FTA’s Procurement Requirements. The bus will meet the Clean Air Act (CAA) standards and the Americans with Disabilities Act (ADA) requirements. Expected contract award by March 2009.
Bus and Other Motor Vehicle Transit Systems 1101 College Avenue, Suite 200 Santa Rosa, CA 95404-3940 Less Than 50% Completed CA-66-X010 TRACY, CITY OF (INC)
Invest in public transportation by imrpovement of bus stop including, but not limited to, installation of bus shelters, benches, and trash recepticles at over 50 locations. The City of Tracy currently operates 5 fixed bus routes serving over 90,000 passengers annually. Additionally, the City operates a Paratransit system which services over 24,000 passengers annually. The addition of bus shelters and benches will provide a safer environment for passengers to wait for the bus.
The City of Tracy has not yet started its ARRA project this quarter.
Bus and Other Motor Vehicle Transit Systems (Information not reported)
SAN FRANCISCO, CITY & COUNTY OF Infrastructure Enhancement and Maintenance Projects Invest in public transportation by restoring the door and step components on light rail vehicles; engaging in preventive maintenance activities to preserve/extend the functionality of the SFMTA's assets; rehabilitating articulated motor coaches; upgrading the SFMTA’s mileage and fuel tracking system for diesel and trolley coaches; equipping an interim Operations Control Center to support dispatching and rerouting of vehicles, incident detection and response, and voice communications with transit operators; replacing the inductive loop cable in the subway; procuring a customized software application for capital planning and grant management; procuring new personal computers for the bus yards; replacing sales kiosks for cable car fares; replacing change machines in the subway system; replacing track switches for light rail vehicles; replacing the SFMTA's existing subway fare collection system with a new fare collection system; and engaging in rehabilitation and upgrade activities at various sites, facilities, and right-of-way locations.
This grant will allow the SFMTA to restore the worn out door and step components of approximately 143 light rail vehicles; engage in preventive maintenance activities to preserve/extend the functionality of the SFMTA's assets; rehabilitate about 35 standard and 27 articulated motor coaches; upgrade the SFMTA’s obsolete mileage and fuel tracking system for diesel and trolley coaches; equip an interim Operations Control Center to support dispatching and rerouting of vehicles, incident detection and response, and voice communications with transit operators; replace the worn out inductive loop cable in the subway; procure a customized software application for capital planning and grant management; procure about 70 new PCs for the bus yards; replace up to 2 outdated sales kiosks for cable car fares; replace obsolete change machines in the subway system; replace approximately 19 worn out track switches for light rail vehicles; obtain a new automatic fare collection system for the subway; and engage in rehabilitation and upgrade activities at various sites, facilities, and right-of-way locations, including the SFMTA's Presido and Burke facilities and right-of-way locations including 19th Avenue, Carl and Cole Streets, and Duboce Portal. All applicable projects are under contract, with the SFMTA actively working on performing preventive maintenance on its vehicles, implementing automatic fare collection equipment in the subway, rehabilitating the doors and steps of light rail vehicles, installing new workstations at bus yards, implementing various infrastructure and facility enhancements, and establishing the Central Control Interim Line Management Center. The SFMTA has completed the installation of change machines in the subway station. (Information not reported)
San Francisco, CA 94103-5417 Less Than 50% Completed Lease (46) 40-Ft Buses Monterey-Salinas Transit Capitalized Preventive Maintenance;Lease (46) 40-Ft Buses, Acquire Mobile Fare Coll Equip.
The project consists of the purchase up to forty (40)buses from Gillig Corp. and six (6) trolleys from Optima Bus Corp. to replace 38 buses in current fleet and expand by 8 buses. This will fund the remaining payments on bus financing payments 17, 18, 19, and 20. Buses have been paid off.
Bus and Other Motor Vehicle Transit Systems 1 Ryan Ranch Road Purchase of 2 replacement paratransit vehicles.
Invest in public transportation by purchasing new replacement paratransit vehicles.
This grant will allow the purchase of two paratransit vehicles to replace old vehicles that are currently in the fleet. As a result of these investments, the agency will be able to continue to offer public transportation service that is safer, more reliable, and accessible for people with disabilities. (Information not reported)
REDONDO BEACH, CITY OF (INC) 30' and 35' Bus Replacement and Bus Stop Improvements Invest in public transportation by purchasing replacement transit vehicles and implementing bus stop improvements. The fund will be utilized to 1) purchase up to three 18 passenger, 30', CNG-powered cut-away buses that have an expected useful life of five years or 150,000 miles; 2) purchase one 29-passenger, 32', CNG-powered bus that has an expected useful life of 10 years or 350,000 miles; and 3) to implement bus stop improvements throughout the City of Redondo Beach, which will include replacing the old concrete and terracotta bus benches with new, more durable and aesthetically pleasing corrosion resistant steel construction benches, replacing pre-existing bus stop sign poles with new standard rail poles, replacing bus stop signs with new high-visibility reflective signs, and replacing old and deteriorated or missing trash receptacles with new metal vandal resistant receptacles.
This grant allows the City of Redondo Beach to move forward with the purchasing of three, up to 27', CNG powered cutaway buses and procuring of bus stop improvements.
Bus and Other Motor Vehicle Transit Systems Redondo Beach, CA 90277-2836 More than 50% Completed TRANSPORTATION, FLORIDA DEPARTMENT OF FY 09 (4) ARRA Locomotives Invest the 2009 ARRA Formula allocation of $13,431,438 to purchase up to four (4) locomotives # 802,803,804 and 805. The original locomotives were manufactured in the mid 1960's and were last remanufactured in 1988. They lack any fuel efficient technology and are not required to meet any EPA emission standards. Due to the design of the HEP unit, these locomotives consume excessive fuel. The locomotives have an approximate expected useful life of 25 years. A Federal ratio of 100/100 will apply. The new locomotives wll meet the Clean Air Act (CAA) standards and the American with Disabilites Act (ADA) requirements. This grant also includes transit enhancements ($135,670) that will fund various station beautification improvements such as landscaping, painting, etc.
SFRTA issued the Notice to Proceed to the Consultants on September 22, 2009. At this time the solicitation package is being prepared and is due to be advertised by the end of Januar, 2010. It is estimated that the procurement period will be sixty (60) days. The estimated Notice of Award to the manufacturer will be in late April early May. All activities are in complaince with ARRA regulations.
Pompano Beach, FL 33064-2046 Less Than 50% Completed FL-96-X015-00 Purchase of 4 replacement buses; 3 replacement Trolley buses; Enhancements replacement and security equipment installation.
Invest in public transportation by purchasing new 35 Ft Low Floor Clean Diesel Transit Buses, installing security cameras and annunciation systems on buses and replacing worn out transit enhancements to include, bus stops signs, bus shelters, benches and trash cans.
This grant allowed the transit agency to purchase 4 low-floor clean diesel and 3 trolley clean diesel buses, replace worn out bus shelters, trash cans, benches, install security cameras on 8 existing buses and install automatic stop announcements systems on 5 buses. As a result of these investments, the transit agency will be able to offer public transportation service that is safer, more reliable, and more enviromentally friendly.
Bus and Other Motor Vehicle Transit Systems Less Than 50% Completed SIOUX CITY, CITY OF 1 Medium Duty Bus - Flex Funds Purchase one (1) 31 Ft low-floor Medium Duty (MD) expansion bus. The vehicle will help to expand the spare ratio for the fleet and provide much needed reliable service backup for the aging fleet. These are flex funds through Nebraska. The vehicle will be procured via State of Minnesota consortium.
One (1) 31 ft. medium duty (MD) low-floor bus. The MD bus is an expansion vehicle for enhancement of the transit service primarily for disabled passengers and to provide backup for fixed route service. This unit will increase the spare ratio to 4 units. With 21 units in peak service, the 4 spares will increase the ratio to 16% once the vehicle is acquired. 2505 East 4th Street, PO Box 447 Sioux City, IA 51102-0447 Purchase 15 biodiesel replacement buses.
Invest in public transportation by purchasing new biodiesel buses.
The purchase of 15 low-floor, biodiesel, replacement buses allows Madison County Transit District to continue providing safe and reliable public transportation services in a more environmentally friendly manner.
Bus and Other Motor Vehicle Transit Systems Granite City, IL 62040-2868 Less Than 50% Completed PACE, THE SUBURBAN BUS DIVISION OF THE REGIONAL TRANSPORTATION AUTHORITY Purchase 58 replacement fixed route 30' buses, Puchase 190 replacement paratransit vehicles, and purchase 76 replacement support vehicles for maintenance and supervisory personnel as well as staff at Headquarters.
Invest in public transportation by purchasing 58 30' transit buses, 190 paratransit vehicles and a minimum of 76 support vehicles for maintenance and supervisory personnel as well as staff at Headquarters.
This grant allows Pace to purchase 58 30' replacement fixed route buses, 190 replacement paratransit vehicles, and 76 replacement support vehicles for maintenance and supervisory personnel as well as staff at Headquarters. As a result of these investments, Pace will be able to provide public transportation service that is safer and more reliable. In this quarter, we have awarded a contract for inspection services. We received delivery of 10 trucks with plows for maintenance/supervisory personnel and 6 paratransit buses. Production will continue for the paratransit buses next quarter. Production will begin in February for the fixed route buses.
Bus and Other Motor Vehicle Transit Systems Arlington Heights, IL 60005-4412 Less Than 50% Completed Capital Projects: Buses, vans and facility improvements.
Investing in public transportation by purchasing four new 35' buses to replace four 1993 35' buses, by purchasing two new wheelchair lift vans to replace two 1999 wheelchair vans, by repairing and remodeling the bus storage building built in 1980, by installing a water recycling system in the existing bus washer to reduce the amount of water used, and by repairing and seal coating the existing asphalt parking lot and driving lanes around the Transit Administration Building.
Although no jobs were created and no funds were paid out this quarter, the City of Decatur has already awarded purchase orders for 4 buses ($1,500,000) and for 2 wheelchair lift vans ($104,202). The buses are tentatively scheduled to be built by Gillig Corp. about July 15, 2010, and the 2 vans were tentatively scheduled for delivery around January 1, 2010. Staff advertised nationally for bids for the installation of a water recycling system. Since only one bid was submitted by the Dec. 3 deadline and that bid was significantly higher than the pre- bid estimate, this project will be re-bid. Staff has been preparing to advertise for bids for the other facility improvement projects. Those projects are expected to be under contract this quarter, or as soon as the weather permits.
Bus and Other Motor Vehicle Transit Systems Less Than 50% Completed IL-96-X014 ARRA Funds for Buses, Lift, Generator OTS is investing in public transportation by purchasing three new transit busses, installing a commercial generator at the Transit Office, and rehabilitating the bus garage by installing a new hydraulic bus lift to assist with maintenance operations.
This grant will allow the transit agency to purchase three low-floor transit busses to replace busses which have exceeded their useful life. The transit agency is also purchasing a hydraulic bus lift for the maintenance garage to assist with repairs and maintenance of the new busses. The transit agency is also installing a commercial generator at the main Transit Office, so that transit operations can continue through times when the city is without power. January 2010 Update: Three transit busses are on order from Gillig. The hydraulic lift will be installed in January 2010. The commercial generator has been ordered.
Bus and Other Motor Vehicle Transit Systems Owensboro Transit Sytem, 430 Allen Street Less Than 50% Completed SHREVEPORT TRANSIT MANAGEMENT, INC Purchase buses, renovate facility, preventive maintenance, purchase miscellaneous equipment.
Invest in public transportation by purchase of new compressed natural gas (CNG) buses; constructiopn of a CNG fuel station; conversion of existing maintenance facility to CNG fueling; rehabilitate/upgrade 22 year old bus terminal; acquire maintenance support ewuipment, mobile surgeillance/security equipment, and upgrade of maintenance record system; and perform preventive maintenance on existing buses.
This Grnt allowd the transit agency to purchase a new computer and map software for the teminal information booth, purchase the first bus bike racks, select a bus vendor from which to purchase the first 5 CNG buses, and issue reqest for bids for an architect to design and manage consturction of a CNG fuel station and upgrade of maintenance facility. As a result of these activities the agency's customers will be able to optain accurate information on best bus route to a sepcific destination, have a means to combine bus/bike transportation and prepare to purchase the first environmentally friendly buses and their support system.
Bus and Other Motor Vehicle Transit Systems Grants Less Than 50% Completed Purchase of two new vehicles and provide preventative maintenance on existing buses.
Invest inpublic transportation by purchasing new wheelchair lift buses and performing preventative maintenance on existing buses.
This grant will allow the transit agency to purchase two new wheelchair lift equipped vehicles to expand its fleet and to conduct preventative maintenance on 4 existing vehicles. As a result of these investments the the transit agency will be able to continue offering the public a safe, reliable and accessible service.
Bus and Other Motor Vehicle Transit Systems LA-96-X013-00 This grant will allow MART to invest in public transportation by allowing us to purchase new vehicles and equipment and to construct a vehicle storage facility to protect our investment. A budget of $750,000 is allocated to the purchase of 3 new hybrid buses to replace existing diesel buses for use on our fixed route service within the Fitchburg/ Leominster/Gardner service area. This investment will allow us to bring down the maintenance costs by reducing fuel quantities and the disposal of olders buses which have higher maintenance costs than a new vehicle under warranty. A budget allocation of $2.1 million is for construction of a vehicle storage facility at 840 N. Main Street in Leominster, MA. The A&E is complete and was funded through grant MA-04-0004 for $1,485,000. The ARRA funds will pay for the actual construction. MART, at this time, has a large number of vehicles which are stored outside. The construction of this vehicle storage facility will allow us to get these vehicles out of the elements - which include a harsh New England winter. This again will drive down overall maintenance and repair costs. The remainder of the allocated funds will purchase bus maintenance equipment including a new bus washer for the Fitchburg Maintenance facility and related peripheral equipment. The existing bus maintenance equipment is old and in need of replacement. .
This grant allowed MART to order the three Hybrid buses, but delivery is not expected until February 2010. One bus has been completed and sent for Altoona testing (1 of 3 tests are complete). The other 2 buses are complete but will not be delivered until the 1st bus is finished testing. The funds for these buses has been obligated but remains unliquidated at this time (no expenditures have been made). Construction of the Storage Facility started on October 1st and is progressing. The remaining items have not been ordered yet and are unobligated as of this reporting period.
Bus and Other Motor Vehicle Transit Systems Less Than 50% Completed MA-96-X003-00 GREATER ATTLEBORO-TAUNTON REGIONAL TRANSIT AUTHORITY Purchase bus, minibus, vans; construct improvements at train station, bus terminal, walkway, prev. maint., scheduling software, ADA service; SmartCard & software Invest in public transportation by purchasing low-floor buses, minibuses and vans; purchase scheduling software; construction of renovations to commuter rail station; construction of improvements to bus facility; construction of accessible walkway at commuter rail station; preventative maintenance; provision of ADA paratransit service; purchase smartcard equipment and software.
This grant allowed GATRA to purchase 4 transit buses, 12 minibuses, and 10 vans (all on order with delivery shortly), improvements to Attleboro Commuter Rail Station (one project completed and ongoing), improvements to Taunton Terminal and Maintenance facility (2 projects completed and ongoing), construction of ADA accessible walkway (design at 80%), preventative maintenance, provision of ADA service, purchase of dispatch/scheduling equipment and purchase of SmartCard Equipment and software. All of the above will enable GATRA to offer public transportation service that's safer, more reliable and more accessible for people with disabilities. All activities are less than 50% complete.
Bus and Other Motor Vehicle Transit Systems Less Than 50% Completed ARRA Bus replacement & Bus Wash Rehab Invest in public transportation by rehabilitating a Bus Wash Facility and replacing two high maintenance low-floor buses that have exceeded their useful life of twelve years.
This grant allowed recipient (City of Billings MET Transit) to rehabilitate the Bus Wash Facility, which was built in 1983, and to replace two low-floor buses that have incurred more frequent and higher than normal maintenance costs. As a result of these investments, recipient will be able to continue to offer economical public transportation service that is safer, more reliable and more environmentally friendly.
Bus and Other Motor Vehicle Transit Systems 1705 Monad Road, P.O. Box 1178 Less Than 50% Completed Invest in public transportation by supporting a portion of the construction activities (30.2%) for a new Transit Maintenance and Operations Facility and Administrative Offices for the Greensboro Transit Authority. This 'LEED Gold Designed' facility is being built to address current and future service delivery needs for maintenance and operations of GTA transit vehicles and administrative functions. Phase 1 consists of the programming and schematic design of the facility, site design, permitting and the site work construction phase. Phase 2 will include a 64,000 SF facility building design and construction. Over the past five years, GTA's ridership has doubled (2M to 4M passenger trips) with the implementation of improved services and vehicles. Therefore, a new transit facility is desperately needed to replace an aging facilty that no longer meets GTA's needs. This project is one of the city's priority facility projects that will significantly enhance the GTA's service delivery, efficiency and the quality of transit services to current and future transit riders (over 200,000 population) in the Greensboro community.
Completed Phase 1 project activities. Efforts to comlete the final punch list. Specifically, checking the soil bearing pressure to make ready work for the building pad for Phase 2. In addition, initiated Phase 2 of the project, which includes the 69,254 SF facility building design and construction. A ground breaking ceremony was conducted on 11/19/09. This project was initially advertised for bids on 1018/09 and bids were opened from all eight prequalified bidders on 11/19/09. All bidders had minimal DBE participation. Following discussions with FTA, NCDOT and GDOT-Public Transportation Division, it was determined that the project would need to be rebid due to the fact that the need to apply GS 143-28 and rebidding will provide an opportunity to improve DBE participation and Buy America compliance. Efforts have been continued to ensure full compliance with the applicable federal requirements. A conference call was held (December 2009) with FTA Region IV officials to discuss the DBE and Buy America compliance requirements. FTA concurrence was provided regarding the city's decision to rebid the project. On 12/15/09 City Council authorized the rebidding of the GTA Maintenance/Operations Transit Facility and Administrative Offices Phase 2 project. The Pre-Bid meeting will be held on January 7, 2010, with the Bid Opening scheduled for January 26, 2010.
Bus and Other Motor Vehicle Transit Systems Greensboro, NC 27406-3607 More than 50% Completed AVL/GPS, Fareboxes, Vans, Furnishings 2009 Transit Capital Assistance Grants - This grant applies the 2009 ARRA Formula allocation of $700,000 an AVL/GPS system for complete tracking of 12 buses. This includes hardware, software, and training for a total of $700,000. This grant applies the 2009 ARRA Formula allocation of $320,000 for Automated electronic fareboxes for 10 Gillig buses, 2 LTV and 1 spare. This includes additional vaults and docking/communication systems. This project will have an estimated useful life of 12 years. This grant applies the 2009 ARRA Formula allocation of $145,000 for 2 non-revenue LTV service vans. These will be used to augment late buses and missed stops as well as serving as driver relief vehicles. These support vehicles will meet the Clean Air Act standards (CAA) and the American with Disabilities Act (ADA) requirements. They will have a useful life of 4 years. This grant applies the 2009 ARRA Formula allocation of $100,000 for furnishings and equipment for the new transit center to include cubicles, desks, chairs, passenger seating, computers, printers, copier, base station radio, antenna, phones. (1) AVL System project is 40% complete. Installation for 10 buses complete with modems, base station, software, database, AVM. Also mapping services for area. (2) Automated Farebox System is on order. (3) Light Transit Vehicles on order. (4) Transit Center Furnishings RFP to go out in January.
Bus and Other Motor Vehicle Transit Systems 850 Warren C. Coleman Blvd.
Less Than 50% Completed NC-96-X011-00 ARRA TOR ands TZx Buses Invest in Public Transportation by procuring two (2) 35 FT hybrid-electric buses, two (2) 40 FT hybrid-electric buses for Transport of Rockland (TOR), the County's inter-county bus system. We will also procure three (3) 45 FT hybrid-electric over-the road coach buses for the Tappan ZEExpress (TZx) service, the County's commuter coach service over the Tappan Zee Bridge to Westchester County to meet connecting Metro-North trains into New York City.
This grant will allow Rockland County Public Transportation to purchase seven (7) environmentally friendly hybrid-electic replacement buses. These buses will replace older buses that have reached their useful life and have become too costly to maintain and are no longer environmentally friendly. As a result of these investments, Rockland County Public Transportation will be able to offer the riding public service that is safer, more reliable, more environmentally friendly and more accessible for people with disabilities. There were no building activities this quarter. We have reviewed our commuter coach bid and expect our County Legislature to make an award in 1st quarter 2010.
Bus and Other Motor Vehicle Transit Systems New City, NY 10956-3664 NEW YORK, CITY OF Staten Island Ferry System Asset Maintenance NYCDOT operates the Staten Island Ferry (SIF) system that operates from St. George Ferry terminal in Staten Island and Whitehall ferry terminal in Manhattan, New York. It is the largest ferry system nationwide carrying 70,000 on weekdays or approximately 21 million passengers annually. It is the principal means of transportation for Staten Island residents traveling to Manhattan?s central business district and other activity centers. The major assets of Staten Island Ferry system consist of a fleet of eight passenger ferries, the St. George Ferry Terminal in Staten Island and the Whitehall Ferry Terminal in Manhattan, New York, several support floating stock, bridges, slips, ramps, a ferry maintenance facility with auxiliary buildings. This project will invest in public transportation by carrying out preventive maintenance activities of the Staten Island Ferry system assets, for two different projects: 1) Dry-docking services for ferry vessels through a third-party contract ($37,747,237) 2) Personnel costs for in-house maintenance on ferry vessels ($9,000,000)
In the past quarter, the shipyard dry-docking third party contractor completed all maintenance activities for the Marchi ferry vessel including underwater hull repair, propulsion system repairs, and sea valve repairs. The in-house maintenance personnel has maintained Staten Island ferry assets in a state of good repair by executing daily maintenance work.
Staten Island, NY 10301-2510 Less Than 50% Completed BUTLER, COUNTY OF OHIO Purchase of Vehicles, Equipment, Facility Improvments and Preventitive Maintenance To invest in public transportation by purchasing five replacement small buses (14 passenger), purchasing eight small vans, and purchasing four service vehicles (one service truck and three four-wheel drive vehicles to provide essential services during bad weather and to back up daily operations). All vehicles being replaced are several years past their normal useful life cycle and the new vehicles will be more fuel efficient and help reduce routine operating costs. In additon we will be replacing shop and office equipment which is past it normal useful life. This grant will also allow for some facility improvements including a covered parking area to better protect the buses and extend their useful lives. Finally this grant will allow us to do necessary maintenace on our vehicle fleet and facilty to ensure all assets are maintained to the highest standards, thus helping to reduce operating cost in the future.
This grant allowed BCRTA to order and receive eight replacement transit vehicles which are being used to expand service. This investment will allow BCRTA to offer public transportation service that is safer, more reliable, environmentally friendly, and more accessible for customers with disabilities. Funds from this grant are also allowing us to replace outdated equipment, make much need facility improvements, and do preventitive maintenance on the existing fleet of vehicels and facility. All of which will result in reduced operating costs and ensure that all assets are in prime condition.
Bus and Other Motor Vehicle Transit Systems Hamilton, OH 45011-5373 More than 50% Completed GREATER DAYTON REGIONAL TRANSIT AUTHORITY Preventive Maintenance, purchase of twenty five replacement 40ft diesel buses and purchase of twenty two replacement <30ft medium duty buses.
To invest in Public Transit by purchasing twenty five replacement 40' low floor public transit buses. These buses meet or exceed current Clean Air Act (CAA) standards and the American with Disabilities Act (ADA) requirements and will have a service life of at least 12 years or 500,000 miles. GDRTA will also purchase twenty two replacement smaller transit buses (less than 30' long) for use with our Project Mobility service to the disabled community. In additon GDRTA is also using funds to perform preventive maintenance on existing buses, facilities and equipment to ensure that all assets are properly maintained. Both of these projects will improve customer comfort and operating efficiencies. It is anticipated that both projects will also help retain jobs in the public transit / vehicle production industries.
Since the award of funds GDRTA has completed the preventitive maintenance project which has resulted in both the retention on jobs and the proper upkeep of federally funded assets. This will lead to greater operational efficiencies and passenger comfort. We have received the order of smaller buses being used for our Project Mobilty service and these buses are being placed in service. In addtion we exercised an existing option from our vehicle manufacturer and the 40' replacement buses being funded with this grant are on order.
Bus and Other Motor Vehicle Transit Systems Less Than 50% Completed OH-96-X005 Renovate two separate facilities in addition to the purchase of three replacement buses and vehicle GPS/AVL systems Invest in public transportation by restoring and preserving a historic New York Central Train Station to become the Lorain County Transportation Center. The Transportation Center will be a transportation hub for Lorain County Transit, Greyhound and Amtrak as well as housing Lorain County Transit administrative offices. Renovations of an existing building to be a maintenance facility, performing preventative maintenance on buses. The maintenance facility will include office space, restrooms, parts storage and a mechanics shop. Purchase of 3- 30 Ft. buses replacing vehicles that have met their useful life of seven years. Purchase/install intelligent transportation systems technology on vehicles.
This grant allowed the transit agency to renovate a historic train station and make it a transportation hub for Lorain County Transit, Greyhound and Amtrak as well as a community space available to the public for rent. The transit agency was able to renovate a building as a maintenance facility to maintain Lorain County Transit's vehicles and will include office space, restrooms, parts storage and a mechanics shop, this project is about 95% complete. The grant also gave the ability to purchase 3- 30-Ft. buses, replacing an aging fleet, the purchase of the vehicles has been completed. The vehicles were delivered the week of December 14. This grant will also give the ability to purchase/install intelligent transportation systems technology on vehicles. As a result of these investments, the transit agency will be able to offer public transportation service that is safer, more reliable, more environmentally friendly, and more accessible for people with disabilities.
Bus and Other Motor Vehicle Transit Systems (Information not reported)
More than 50% Completed OH-96-X023 SALEM AREA MASS TRANSIT DISTRICT 09 ARRA 5307 Buses (8);Rehab Tran Ctr Salem Area Mass Transit District is making an investment in public transportation through the following projects: purchase of three (3) 35-foot fixed route buses (the Transit District initially applied to purchase four (4) buses, but the number was decreased to three to allow funding for operational assistance), the purchase of four replacement buses and one bus for the expansion of the fleet to serve Americans with Disabilities (ADA), replacement fareboxes for fixed route buses, Performance Management Software will be purchased to maximize the gathering of information about services provided, the surface of the Transit Center Mall in downtown Salem will be re-done to provide for greater pedestrian safety, work will take place for the installation of a Transit Center in Keizer at the north-end of transit services provided in the community, and funds are designated in support of operational assistance to support tasks required to complete the above stated projects.
During the October-December 2009 Quarter, Salem Area Mass Transit District paid for the shipping of Fareboxes that were purchased in the preceding quarter. The Transit District received the delivery of four replacement buses and one bus to expand the fleet of buses that serve Americans with Disabilities (ADA). The environmental study was completed on the site selected for the Keizer Transit Center.
Bus and Other Motor Vehicle Transit Systems 555 Court Street NE, Suite 5230 Less Than 50% Completed This project uses a portion of the federal funds to finalize a bus driver break area and public rest room building at the new SMART Central at Wilsonville Station multi-modal facility located adjacent to the WES Commuter Rail Station in Wilsonville, Oregon. In addition the federal funds will allow SMART to construct an artistic clock tower, passenger shelters and pedestrian safety enhancements located at SMART Central station. Finally, the funds will conduct preliminary engineering/design and site plan preparation for the construction of a new SMART administrative building located adjacent to the SMART Central at Wilsonville Station multi-modal facility. All projects have been designed to ensure increased access for all users of the multi-modal facility and the design has taken into consideration eco-friendly storm water management elements and building materials. Further each element is designed to deter crime and ensure public safety at the station through the placement of security cameras, lighting and the increase of SMART personnel at the Station.
This grant is funding the design and construction of an artistic clock tower, passenger shelters and pedestrian crosswalks as well as the site planning for an administrative and maintenance facility. In addition, this grant will supplement grant X003 funds for the construction of the operator breakroom. All of these projects are being completed at SMART Central at Wilsonville Station. This quarter, activities included engineering and design of the clock tower and passenger amenities.
Bus and Other Motor Vehicle Transit Systems Less Than 50% Completed BERKS AREA READING TRANSPORTATION AUTHORITY Purchase 11 buses, security equipment and facility improvements.
Invest in public transportation by purchasing four new hybrid-electric buses, four new hybrid- electric paratransit vans, three new diesel paratransit vans, installation of surveillance and security equipment on 25 transit vehicles, and renovation of BARTA's Intermodal Transportation Complex.
This grant has allowed BARTA to purchase four hybrid-electric 40ft transit buses, which will be delivered in June 2010, in order to expand service on its fixed routes. With this grant, BARTA is also purchasing seven paratransit vans (four hybrid-electric and three diesel) to replace paratransit vans that have met the minimum 5 year useful life requirement for this size vehicle as set forth in FTA Circular 9030.1C. The three diesel paratransit vans will be delivered in November, 2009. Also, these funds will allow BARTA to purchase and install security and surveillance cameras on 25 transit vehicles that are not equipped with safety and security cameras. Furthermore, this grant will also allow BARTA to upgrade and repair its Intermodal Transportation Complex. The maintaining of this facility is critical to the overall efficiency of the operations of BARTA. Bids for the upgrade of the transportation complex will be accepted on October 30, 2009. Moreover, as a result of these investments, BARTA will be able to offer public transportation service that is safer, more reliable, more environmentally friendly, and more accessible for people with disabilities.
Bus and Other Motor Vehicle Transit Systems (Information not reported)
Less Than 50% Completed ARRA - Acquisition of 40 hybrid replacement units Investment in public transportation by purchasing 40 replacement hybrid units, 40-foot length, heavy duty low floor buses for fixed route service in the San Juan Metropolitan Area.
As a result of this investment, the Metropolitan Bus Authority will be able to offer public transportation service that is safer, more reliable, more environmentally friendly and more accesible to people with disabilities. Contract was awarded to Daimler Buses North America on October 2009. Advance payment was isssued by December 2009 for 41 (40 plus one spare) Cummins engines delivered to Daimler Buses North America as part of the purchase order to deliver 40 buses by Summer 2010. This transaction was authorized as per FTA letter of October 20, 2009. Jobs to be created will contribute to preserve and maintain jobs in the manufacturing industry and will be reported as units are delivered and invoices paid.
Bus and Other Motor Vehicle Transit Systems #37, Ave De Diego, San Fransisco, Monacillo Ward San Juan, PR 00919-0000 Less Than 50% Completed PR-96-X011-00 Acquisition of Two Minibuses and Maintenece Improvements to Public Transportation Terminals Use of ARRA funds to purchase two minibuses, make deferred maintenance improvements to Public Transportation Terminal and administration of grant program. The project includes: 1. Purchase of two cut-away small buses with a five year duty cycle, ADA access complaint to provide demand response service to areas not currently served by the Public system under ALI 11.13.04 in the amount of $138,000 of ARRA funds. 2. Renovation of the Public transportation Terminal to improve illumination, provide surveillance, repair roof and bathrooms, and install wheelstops under ALI 11.34.01 in the amount of $56,000 of ARRA funds. 3. Administration costs to comply with FTA regulations such as publication of bids and submittal of quaterly reports, under ALI 11.79.00 with $2,850 of ARRA funds.
Bus and Other Motor Vehicle Transit Systems (Information not reported)
Transit Descriptions That Partially Met Our Transparency Criteria
The following award descriptions did not contain sufficient details on one or more of the following pieces of information necessary to facilitate general understanding of the award, based on our criteria: general purpose, scope and nature of activities, location, and/or expected outcomes. In some cases only a small amount of additional information was needed, while in other cases, many pieces of information were needed to make the description more transparent. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
TRANSPORTATION, ALABAMA DEPT OF This is a FY 2009 American Recovery and Reinvestment Act (ARRA) Section 5307 application in the amount of $4,033,530.00 for the State of Alabama. This application incorporates ARRA Governor Apportioned Section 5307 funds in the amount of $3,834,718.00 and Columbus, GA MPO ARRA Apportioned Section 5307 funding in the amount of $198,812.00. This application includes the purchase of 33 replacement vehicles and 6 expansion vehicles ($2,439,834), bus facilities ($25,000), equipment ($988,634), signal and communications ($4,900), and additional capital program items ($575,162). The funds will be used to fund small urban transportation programs for the following six (6) subrecipients: Auburn-Opelika, Phenix City, Anniston, Florence, Decatur, and Dothan.
None for quarter ending 12/31/2009.
Bus and Other Motor Vehicle Transit Systems Information GAO gathered to improve the description The award supports transit improvements at six small urban public transit systems selected by the State of Alabama. These improvements include replacing old vehicles, expanding fleets, and installing bicycle racks and signal systems. These activities assisted in keeping transit systems running at current levels and enhancing public transit.
Capital Assistance for Transit Projects Pre-audit completed on bus order for eight replacement buses, four replacement paratransit vans received, bus parts, shop equipment ordered and received. Replaced surveillance system, purchased 75 bus and streetcar fare boxes, waiting delivery, A&E completed for Trolley Barn expansion, construction has begun, A&E contract in place for platform stop addition, work to begin shortly.
Bus and Other Motor Vehicle Transit Systems 901 Maple Street North Little Rock, AR 72114-4647 More than 50% Completed Information GAO gathered to improve the description The award will result in residents and visitors to Central Arkansas traveling more safely and easily through Little Rock and the surrounding areas.
HIGHWAY AND TRANSPORTATION, ARKANSAS DEPARTMENT OF ARRA funds will be used to purchase 126 replacement buses for transit providers throughout the State of Arkansas. In addition, transit providers will receive funding for ADP hardware and software; support vehicles and equipment; construction or rehabilitation of maintenance facilities, administrative facilities, and park and ride lots; and for the performance of preventive maintenance. Our expectations are that the above mentioned expenditures will enhance public transportation, retain existing jobs for Arkansas providers, enable contractors to retain and maybe create new jobs within their companies, in the state of Arkansas.
To invest in transportation, environmental protection, and other infrastructure that will provide long-term economic benefits.
Bus and Other Motor Vehicle Transit Systems Little Rock, AR 72209-4206 Less Than 50% Completed Information GAO gathered to improve the description The award supports activities in several Arkansas counties, including Pulaski, Randolph, Carroll, Benton, Saline, Boone, Jefferson, and Phillips counties.
FORT SMITH, CITY OF Investment in public transportation by completing the transfer station facility at 200 Wheeler Avenue in Fort Smith, AR, purchase four demand response buses, purchase and install approximately 30 bus shelters, purchase and install security cameras/surveillance equpment for transit buildings and buses, purchase mobile data terminals and renovate the administrative and maintenance buildings.
Completed projects within this ARRA grant include the purchase of 4 demand response buses, purchase of 4 automatic electronic defibrillators, replacement of 5 garage doors in the maintenance building, heaters for the maintenance shop and the purchase and installation of a bus hoist. Ongoing projects include the renovations of the administrative and maintenance facilities. An architect has been selected for the renovations and coordination will begin soon. Specifications are being completed by our Information Technology Service (ITS) Department for the purchase and installation of security cameras for the facilities and buses. Bus shelter sites are currently being selected for the placement of passenger shelters. The onboard computers to be used as mobile data terminals are being reviewed by the ITS Department at this time. The mobile data terminal software will be a one vendor source that will work in conjunction with the already existing scheduling software. Projects currently not underway at this time include the addition of the underground fuel tank and associated software as well as the fare counting equipment. These two projects will begin once the renovations to the administrative and maintenance facilities are nearing completion.
Bus and Other Motor Vehicle Transit Systems 6821 Jenny Lind, PO Box 1908 Fort Smith, AR 72902-1908 Less Than 50% Completed Information GAO gathered to improve the description The activities funded by the award will improve safety and security for both passengers and staff, improve transit performance and communication, and provide cost savings.
ARRA - (10) Replacement; (2) Expansion; equipment REPLACEMENT/EXPANSION OF ROLLING STOCK, ACQUISITION OF BUS SHELTER AND ACQUISITION OF RADIOS.
Replacement of 12 fixed route buses; construction of bus shelter located in Bienville Square and purchase of a digital and analog 800 Mhz radio system Bus and Other Motor Vehicle Transit Systems 1224 W. I-65 Service Road S.
Less Than 50% Completed Information GAO gathered to improve the description The award supported the replacement of old buses with 10 buses and 2 transit vans. The award also constructed a bus shelter in downtown Mobile to connect various bus routes. The award also replaced the obsolete radio system for the buses with a new analog and digital radio system, which aids in Mobile's emergency preparedness plans. 1.) COP Debt Service, 2.) Capital Cost of Contracting, 3.) Preventive Maintenance, 4.) Non Fixed Route ADA Paratransit Service, 5.) Transit Enhancements Invest in public transportation by providing assistance to the following projects: COP debt service payment, capital cost of contracting, capitalized preventive maintenance, non-fixed ADA paratransit service operations and transit enhancements. 1.) Semi-annual COP debt service payment processed in September 2009 for purchase of (55) 40-foot CNG buses. 2.) Contracted transit operations and maintenance to support ongoing fixed route and demand response (ADA) paratransit service. 3.) Preventive Maintenance of the agency's vehicle fleet and facilities to support the ongoing operation. 4.) Contracted transit operations and maintenance to support ongoing demand response (ADA) paratransit service. ARRA 5307 funded portion of this service completed as of September 2009. 5.) Transit Enhancement project not started.
Bus and Other Motor Vehicle Transit Systems 1825 Third Street Less Than 50% Completed Information GAO gathered to improve the description The award supports transit operations in Riverside County through the purchase of items including benches, shelters, light poles and extensions, signs, and trash receptacles. The award will result in enhanced safety and security of the bus stops and transit facilities.
TRANSPORTATION, COLORADO DEPARTMENT OF ARRA Summit County - Statewide Rolling stock Invest in public transportation by building a fleet maintenance facility, purchasing new buses, and providing some operating assistance This grant allowed the county to build a new 42,000 sq. foot bus maintenance facility. As a result of this project, the county will be more efficient in maintaining and servicing its fleet buses in a high altitude environment.
Commercial and Institutional Building Construction 0222 County Road 1003, PO Box 2179 Less Than 50% Completed Information GAO gathered to improve the description The award supports the construction of a fleet transit and vehicle maintenance garage facility as well as a 3,147 square foot stand-alone wash bay, a diesel/unleaded multi-use fuel island, and a bulk fuel storage area in the city of Frisco, Colorado. Services at the facility will be available for Summit Stage transit buses and other vehicles providing public transit services.
TRANSPORTATION, CALIFORNIA DEPARTMENT OF 5311 Transit Improvements in non-urban areas.
The grant will fund a variety of transit capital projects in all 58 California counties. Projects include vehicles, bus and intermodal terminals, fare collection systems, security equipment, information signage, construction and renovation of maintenance and storage facilities, park- and-ride lots, bus shelters and signal and communications equipment, including radios. The grant will also support preventive maintenance programs and provide a source of operating assistance for ADA-required paratransit.
A grant to modernize transit fleets through vehicle replacement and expansion, to modernize and upgrade physical facillities, such as bus terminals, stops, maintenance and storage facilities and park-and-ride lot, to improve fare collection, security, information and communications systems and to support preventive maintenance programs and ADA-required paratransit operation.
Bus and Other Motor Vehicle Transit Systems Less Than 50% Completed Information GAO gathered to improve the description This award supports transit upgrades in rural communities. The award will be used to purchase 105 buses, 2 vans, 11 automobiles, 7 trolleys and 1 commuter vehicle. The award also will be used to build and renovate facilities and bus station terminals, as well as to purchase and install bus fare collection systems, computer hardware and software, signal and communications equipment, bus route signs and bus shelters; to upgrade safety and surveillance security equipment; and to perform preventive maintenance. The award will result in promoting and enhancing public transportation in rural areas through capital infrastructure investments and stimulate local economies.
SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT Replacement of Train Auxiliary Power Equipment, Cables on Transbay Tube, and Coverboards, Improve walkway safey at a station, Car Interior Modifications, and Wheel Truing Machine Study.
The overall purpose of the grant is to invest in public transportation to improve the safety and reliablity of the transit system and to improve the passenger comfort in the modified revenue vehicles. Therefore, the BART passengers should have a safer and better riding experience.
Activities include soliciting bids and awarding contracts to initiate work on the projects.
Less Than 50% Completed Information GAO gathered to improve the description The award supports capital improvements, including construction of a new walkway at the Balboa park station; installation of new auxiliary power supply equipment on 30 railcars; new coverboards over the electric third rail; replacement of cables in the Transbay Tube; replacement of worn-out vehicle interiors and reconfiguration of interiors for improved passenger circulation; installation of between-car safety barriers; and preliminary work on a wheel truing machine.
Information GAO gathered to improve the description This award funds the purchase of nine buses.
SANTA ROSA, CITY OF Transit Operations, Americans with Disabilities Act Paratransit Operations, Preventative Maintenance, Transit Enhancements Invest in public transportation by providing funds for assistance to transit operating, preventative maintenance of buses, Americans with Disabilities Act paratransit service operations, and transit enhancements, including solar bus shelters, benches and map display cases.
These funds will support transit operations for Santa Rosa CityBus, which is housed in the City of Santa Rosa's Transit Department and is the municipal transit provider for the City of Santa Rosa. In addition to providing fixed route bus service, the agency is responsible for the provision of complimentary Paratransit services (required by the Federal Americans with Disabilities Act), the management of the City’s Transportation Demand Management (TDM) Program, as well as bicycle and pedestrian planning efforts. CityBus operates seventeen fixed routes within the City of Santa Rosa and Roseland and carries approximately 2.8 million passengers annually. For the provision of paratransit service, the agency contracts with MV Transportation to provide approximately 50,000 trips annually for disabled patrons that are not able to take fixed route transit. Additionally, through the TDM Program, CityBus reduces approximately 100,000 car trips and an average of 200,000 car miles annually. This grant funds fixed route transit operations (with the completion of the first amendment to this grant, due in the second quarter of Federal Fiscal Year 2010) , ADA paratransit operations (contract awarded November 17, 2009), preventative maintenance expenses ($2,182,095.78 expended and drawn down through the end of Federal Fiscal Year 2009), and Transit Enhancements (in the form of a bus stop amenity purchase order executed November 18,2009).
Bus and Other Motor Vehicle Transit Systems 1101 College Avenue, Suite 200 Santa Rosa, CA 95404-3940 More than 50% Completed Information GAO gathered to improve the description The award supports the maintenance of all 500 bus stops and shelters, trash receptacles at all stops, and display cases. Maintenance includes power-washing. The award also supports preventive maintenance and upkeep of the entire fleet of 35 buses and 11 paratransit buses to Federal Transit Administration (FTA) standards, paying driver salaries, and maintaining transit facilities. The award does not support capital improvements or gains, only day-to-day operations.
SAN JOAQUIN REGIONAL TRANSIT DISTRICT RTD This grant, CA-96-X045, will provide funds for preventive maintenance for upkeep of San Joaquin Regional Transit District’s buses and paratransit vehicles. Funds will also be used for the following projects: Construction of the Mall Transfer Station; Design/engineering of the Regional Operations Center; Associated capital maintenance items; Computer/communications equipment and software; Capital tire lease; Passenger amenities and transit enhancements; Development of the BRT Phase II- Airport Way Corridor that include environmental and preliminary eng/design; and, Safety and security equipment related to bus and bus facilities.
This grant has allowed the San Joaquin Regional Transit District to conduct preventative maintenance on its 134 existing buses; construction of the Mall Transfer Station; design/engineering of the Regional Operations Center; purchase associated capital maintenance items; purchase computer/communications equipment and software; contract for a capital tire lease; purchase and install passenger amenities and transit enhancements; development of the BRT Phase II- Airport Way Corridor that include environmental and preliminary eng/design; and, purchase of safety and security equipment related to bus and bus facilities.
Bus and Other Motor Vehicle Transit Systems More than 50% Completed Information GAO gathered to improve the description The Channel St. amenities improvement project in the downtown area provides passenger amenities and transit enhancements such as adding benches for additional seating in the boarding area, new landscaping to provide shade, and trash receptacles. Construction of the Mall Transfer Station will improve customer comfort and boarding area aesthetics at the station on Pacific Ave. near Sherwood Mall, which gives passengers easy access to the downtown area. The improvements include: construction of bus shelters; installation of passenger information kiosks, benches, and trash receptacles; reinforcing the pavement; and installation of crosswalks for increased safety of passengers. Development of the Bus Rapid Transit system design will allow the transit agency to increase capacity by extending the current system to a new corridor. The Regional Operations Center will allow the transit agency to expand and house all the buses and maintenance activities in one facility. Currently, the transit agency has three facilities that are at maximum capacity and are no longer suitable for their operations. The Center will include a service station, bus wash, and fueling center for public transit buses as well as private buses. The award also funds an extension of a transit hopper service in the Stockton Metropolitan area. Specifically, this includes activities such as branding the buses, installing bus stop signs, and rehabilitation of some buses. The hopper service is designed for elderly and disabled passengers.
SOUTHERN CALIFORNIA REGIONAL RAIL AUTHORITY Track Rehab, Positive Train Control Invest in public transportation for 1) Track Rehabilitation/renovation on San Bernardino Line; 2) System Communication Improvements on SCRRA's Metrolink commuter train system in Riverside County; 3) partial funding for Positive Train Control system (PTC) on the Southern California Regional Rail Authority's (SCRRA) Metrolink commuter train system, in Los Angeles, Orange, Riverside, San Bernardino, and San Diego Counties. 1/14/10 update: 1) Project #510046 Track Rehabilitation on San Bernardino Line contracts awarded is $1,864,144. Rail Frogs, plates, ties, and turnouts ordered 10/26/09 and delivery expected 2/2010. Project completion expected 6/2010. ARRA Funds received on this project $4,909. 2) Project #510095 System Communication Improvements contracts awarded is $0. A System-Communication feasibility study to determine how to best link and integrate Riverside County Service will be completed first. Project completion expected 9/2015. ARRA Funds received on this project $49. 3)Positive Train Control (PTC) contracts awarded is $1,187,000; ARRA grant #CA-05-0007-00 also funds PTC. PTC is 10% completed. Work is progressing on Map & Validate Existing Assets/Rules; Validate Existing Locomotive Cab Systems; Validate New Locomotive/ Cab Systems; Validate Passive Braking algorithm; Initial Evaluation for General Electric Transportation Signals Systems (GETS) Module Upgrade; Map & Validate Signal Assets on San Gabriel Sub, Valley Sub, Ventura Sub, Olive Sub, and Orange Sub; Relocate & Reconfigure Signals; Operational Study; Validate System Safety Plans; Map & Validate Communications System; Validate Network Systems; finalizing Scope and Requisition Documents to our Procurement Dept; Disadvantaged Business Enterprise (DBE) Consultant Review; Agency Project Manager Review of Draft Evaluation Criteria; Prepare Development Plans; Prepare Draft Implementation Plan; Prepare Draft Development Plan; Prepare Safety Plan; Procure Spectrum in 220 MHZ Band; Prepare Interoperability Agreement with the following Railroads UP, BNSF, and NC; Re-Design Main Operation Center (MOC) backroom to accommodate for PTC. Tasks finished: Validate Train Dispatch System; NEPA-Compliant Categorical Exclusion. Substantial completion expected 12/31/12. We are using up funds first from grants that expire before the ARRA grants. 700 S Flower St, Suite 2600 Los Angeles, CA 90017-4104 Less Than 50% Completed Information GAO gathered to improve the description The award supports safety and capacity upgrades and improvements such as the replacement of approximately 5,000 feet of rail on the San Bernardino Line as well as the rehabilitation of two grade crossings on the Metrolink system in the Los Angeles area.
Invest in public transportation by expansion of the commuter fleet with the purchase of three 57 passenger clean diesel buses.
Awarded contract for the purchase of three 57 passenger commuter buses on November 3, 2009.
Bus and Other Motor Vehicle Transit Systems Yuba-Sutter Transit Authority, 2100 B Street Information GAO gathered to improve the description The award supports fleet expansion for the Yuba Sutter Transit Authority, which provides transit services in and around Yuba City, Marysville, Linda, and Olivehurst. The commuter bus fleet will be expanded from 14 to 16 and one bus from 1997 will be replaced. The award will result in new buses which will help control air pollution.
Capital equipment and security improvements Purchase 1 replacement coach for Clean Air Express, 2 ADA vans, 4 replacement buses for local service, 6 particulate safety traps for existing buses, 6 replacement bike racks and bus security cameras for all rolling stock.
Bus and Other Motor Vehicle Transit Systems (Information not reported) $1,342,268.00 Information GAO gathered to improve the description The multiple activities under this award will improve security and safety equipment. The purchase of vehicles allows the agency to replace the rolling stock of buses that have reached their lifespan. The new Americans with Disabilities Act (ADA) compliant vans will have a higher ceiling and provide more head room. Security cameras for all buses will help with problems on buses, prevent problems, and respond to complaints. Bike racks are being replaced because the current racks are deteriorated due to increased use by residents. Safety traps will secure buses at night, and prevent vandalism or theft.
INDIAN RIVER, COUNTY OF Invest in public transportation by constructing a new transporatation administration/bus parking facility.
An RFP for architectural & engineering services for the design of the new transit administration facility has been issued. Upon completion of project design, a general contractor will be selected by a bidding process.
Bus and Other Motor Vehicle Transit Systems Vero Beach, FL 32960-0000 Less Than 50% Completed Information GAO gathered to improve the description The new facility is approximately 5,000 square feet and approximately 2 acres of secured parking for the door-to-door and fixed-route transit vehicle fleet. The new building and parking area will reduce non-revenue mileage by shortening the travel distance of the transit fleet from the old depot to refueling and maintenance areas, improve safety and security, improve office efficiency--including dispatching, communications, and response times--and improve disaster planning, since the new facilities will be built to exceed current hurricane standards.
Transit Vehicles, Preventive Maintenance, Surveillance equipment to enhance the operations and functionality of Transit Property in Ocala, FL, SunTran.
No activities completed to date. Getting project underway.
Bus and Other Motor Vehicle Transit Systems Information GAO gathered to improve the description The award supports maintenance activities for the passenger bus fleet of the city of Ocala. Activities include replacing transmissions and overhauling engines to keep all nine buses running properly. The award also supports the purchase of surveillance equipment for the buses. This equipment, which includes cameras and monitoring devices, will improve safety.
TRANSPORTATION, GEORGIA DEPARTMENT OF Georgia Statewide Rural Transit Grant: 182 vehicles, ITS, facilities, software Invest in public transportation in rural areas of Georgia by purchasing new vehicles, upgrading rural bus facilities, procuring scheduling software and installing intelligent transportations systems technology on vehicles.
This quarter contracts have been executed with sub-recipients; however most sub-recipients will begin work in the next quarter. This grant will allow Georgia to assist rural transit agencies to purchase 182 vehicles, upgrade ITS equipment, upgrade transit facilities and purchase scheduling software.
Regulation and Administration of Transportation Programs 600 West Peachtree Street, NW Less Than 50% Completed Information GAO gathered to improve the description The award funds various transit activities in 30 counties throughout Georgia. Activities include the following: installing intelligent transportations systems technology on vehicles in order to dispatch and schedule information from many transportation providers and allow the public to visit the transportation provider's Web site to schedule necessary trips on line; replacement of aged equipment in order to maintain Georgia's rural paratransit fleet in a state of good repair; purchasing scheduling and dispatching software that will allow for computer-based dispatch, integration with GPS and GIS mapping, and automated route planning, among other things; and upgrading rural bus facilities or purchasing buildings that will serve as rural transit agencies that will also house equipment for the dispatching and scheduling of trips.
CAT ARRA 7 replace bus/Trans Enhancement This grant is for FY 2009 ARRA Economic Stimulus Funds. The funds will be used to purchase seven(7) 30-foot replacement vehicles. The buses will be hybrid electric/diesel buses. These vehicles have a useful life of seven(7) years/350,000 miles. CAT will acquire a security system for the facility, monitoring, security guard, and razor wire for fencing. Included in the Project Administration will be the RFP, Advertising and Procurement Cost. Chatham Area Transit Authority will follow all third party procurement policies as defined in C4220.1F. Chatham Area Transit Authority will check the Federal Excluded Parties List System (EPLS), and DOT regulations, 'Non-procurement Suspension and Debarment' 2 CFR Parts 180 and 1200 as one step in the process of determining only 'responsible' contractors that possesses the ability, willingness, and integrity to perform successfully under the terms and conditions (See 49 U.S.C. Section 5325) are awarded contracts. We understand and will follow the proper procurements procedures. 7 new buses have been ordered from the manufacturer. Manufacturing is expected to begin mid year 2010. New radios have been ordered and delivery is expected in January 2010.
Bus and Other Motor Vehicle Transit Systems Less Than 50% Completed Information GAO gathered to improve the description The new buses replace those past their expected life and will increase energy efficiency for the agency. The security system and cameras will cover the entire facility and increase safety measures.
HONOLULU, CITY & COUNTY OF Bus and Handi-Van Acquisition Program, Pearl City Bus Transit Facility Parking Expansion Program, Wahiawa Transit Center, Middle-Street Inter-Modal Center,Bus Stop Pad Improvements Rehabilitation/Renovation, Preliminary Engineering for New Starts Honolulu- High Capacity Transit Cooridor Project.
STIP #OC16, Amount budgeted this grant: $19,345,207, Bus and Handi-Van Acquisition Program - Contract for purchase of 19 buses under review by City. Funds to be used with $254,793 from ARRA HI-56-0001-00. STIP #OC17, Amount budgeted this grant: $4,000,000, Honolulu-High Capacity Transit Corridor Project - Consultant contract documents for planning and engineering work under review by City. STIP #OC19, Amount budgeted this grant: $3,104,793, (includes security and transit enhancement activities)Middle Street Inter-modal Center - Construction contract documents under review by City. STIP #OC31, Amount budgeted this grant: $2,000,000, Bus Stop Pad Improvements Rehabilitation/Renovation -Construction contract documents under review by City. STIP #OC32, Amount budgeted this grant: $7,899,148, Pearl City Bus Facility - Bus Parking Expansion - Construction contract documents under review by City. STIP #OC33, Amount budgeted this grant: $4,300,000, Wahiawa Transit Center - Letter from Mayor Mufi Hannemann to Hawaii Governor Linda Lingle was sent during the 3rd quarter of 2009 requesting release of State of Hawaii funds budgeted for this joint development project. No response from Governor's office. The City will continue its efforts to resolve the matter. New radio communication units will be installed in the replacement buses. 1% transit enhancement requirement totaling $377,398 will be met through artwork at the Wahiawa Transit Center ($200,000) and at the Middle Street Inter-modal Center ($200,000). The 1% transit security requirement of $406,491 will be met through security fencing elements at the Middle Street Inter-modal Center ($400,000) and the Wahiawa Transit Center ($16,938). 650 South King Street; 3rd Floor Information GAO gathered to improve the description The award funds multiple transit activities including construction of an interim parking facility with 100 stalls at the Middle Street Intermodal Center and completing construction of the Transit Center and the Park and Ride Facility at the Wahiawa Transit Center. Activities funded by this award will result in reducing fuel usage by replacing old buses and purchasing hybrid buses, increasing capacity at the Pearl City Bus Transit Facility by increasing the number of parking spaces for buses, and allowing the city and county of Honolulu to move forward with its bus stop pad improvements at a more rapid pace by installing 32 bus pads this year.
ARRA grant to purchase three medium duty buses Purchase three medium duty buses and security cameras.
Let RFP to purchase buses by 12-30-2009. We have negotiated bus purchase price with the sucessful bidder for RFP#BET2009 (Intermountain Coach Leasing Inc.)to build 3 M.D. low flooor buses. Intermountain has offered their best and final price of $179,832 for each bus for a total of $539,467.00 for three buses. The City is currently considering the bid and will make a decision to accept the offer, of to re-negotiate. (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award supports the replacement of old buses that have exceeded their lifespan according to Federal Transit Administration (FTA) standards. Buses will also be equipped with security cameras to monitor passengers, drivers, and any incidents inside or accidents outside the bus. 09 ARRA 5307 Buses (8) and Oper Vendor has delivered 6 of the 8 buses that were award, and final 2 buses are in production.
Bus and Other Motor Vehicle Transit Systems More than 50% Completed Information GAO gathered to improve the description The award will support the purchase of new buses for the transit service area that includes the cities of Pocatello and Chubbuck.
TERRE HAUTE, CITY OF Replacement buses and remodeling of maintenance facility Have started working on this project to improve and remodel the bus maintenance garage. Engineering cost and replacement estimate design work has been received and invoiced to the Terre Haute Transit Utility.
Vendor has started estimating the replacement cost for several pieces of equipment that will be replace in bus maintenance garage.
Bus and Other Motor Vehicle Transit Systems Terre Haute, IN 47807-4923 Less Than 50% Completed Information GAO gathered to improve the description This award funds the purchase of 5 30-foot replacement buses, 5 passenger shelters, 14 fare boxes, and 14 radios. Funds will also be used to renovate the transit maintenance and storage facility. These activities will renew the fleet and modernize its system.
Replace 6 35' buses, rehabilitate maintenance facility, provide transit enhancements Invest in public transportation by purchasing replacement transit buses, rehabilitating a maintenance facility, installing a disaster recovery system, and providing various transit enhancements to system riders.
The main objective of GPTC's service provision is to enhance the ability of Lake County, Indiana citizens to access shopping, education, recreation, public services, and employment by adequately developing, improving, and maintaining a regional passenger bus system. This award will allow GPTC the capacity to realize these objectives, which also include creating and maintaining jobs associated with funded projects.
Bus and Other Motor Vehicle Transit Systems Information GAO gathered to improve the description The award funds the replacement of buses because the vehicles were beyond their useful life. The new buses will allow the transit agency to provide better service to transit riders. Transit enhancements at the University Park Transit Center, a transfer center for bus routes, near Indiana University, include beautification of the center with trees and landscaping. This transfer center will improve connectivity between bus routes and improve safety for transit users. Rehabilitation of the maintenance facility includes installing new garage doors and repaving the staging area due to deteriorating pavement. This rehabilitation will extend the life of the maintenance facility.
These funds will be used to purchase replacement public transit vehicles which will invest in transportation, environmental protection, and other infrastructure that will provide long-term economic benefits.
We are currently in the process of securing contract opportunities for the purchase of vehicles.
Bus and Other Motor Vehicle Transit Systems PO Box 708, 6 East 6th Street Information GAO gathered to improve the description The award supports the replacement of up to four 40-foot buses that comply with the Americans with Disabilities Act (ADA).
LAFAYETTE CITY PARISH CONSOLIDATED GOVERNMENT Pur. 1 Bus,Shelters,Security,PM,Signage Invest in public transportation by completeing funding of the final phase of the multimodal center, complete funding for one additional bus, fund bus shelters, fund safety and security equipment, fund new bus stop signs, fund bus stop ADA improvements and fund preventative maintence on the bus fleet. 1. Lafayette Multi-Modal Facility Final Phase: Went to bid and bid awarded. 2. Bus purchase: Went to bid and bid awarded. 3. Bus stop shelters: preliminary site selection. 4. Safety and security equipment: Developing specifications. 5. Bus stop signs: Selecting design and deciding on options. 6. ADA bus stops: preliminary site selection. 7. Preventive maintenance on buses: preparing for bid or option selection.
Bus and Other Motor Vehicle Transit Systems (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description This award supports public transportation improvements in the City of Lafayette, Louisiana. These improvements include the purchase of one 35-foot bus, approximately 20 bus shelters, and bus stop signs. The award also supports preventive maintenance, including oil changes and bus engine inspections, as well as renovations of a small number of bus stops to make them accessible, per the Americans with Disabilities Act (ADA). The improvements also include purchasing and installing video cameras on the new bus and replacing damaged cameras on the other buses so that all buses are connected to the security system. The award also provides partial financing for the Rosa Parks Transportation Center. The center is a two-story, 41,000 square foot building which will house a U.S. Post Office and Traffic and Transportation Department offices, as well as Lafayette’s Intelligent Transportation System (ITS) center.
Purchase of four replacement buses.
Invest in public transportation by purchasing four new thirty-foot buses for replacement This grant allowed the transit agency to purchase four thirty foot replacement buses.
Bus and Other Motor Vehicle Transit Systems More than 50% Completed Information GAO gathered to improve the description The award replaces older buses with new buses that meet the standards of the Clean Air Act and the Americans with Disabilities Act.
Notification was received from FTA on July 10, 2009 that the City of Charlotte's ARRA Grant had been approved by FTA's Regional Office, the Department of Labor, and Washington's Special Committee. The City of Charlotte was, therefore, given official approval to execute the grant application in FTA's TEAM System.
Relocation activities are in progress. Construction contract was awarded to Clancy & Theys Construction Company and a Notice-To-Proceed was issued November 25, 2009. Procurement activities include the selection process for Inspection Services and Safety & Security Certification. Expenditures include project administration, plans review fee, construction management services toward 3rd Party Contracts, advertisements, and relocation expenses along with pre-award expenditures eligible within the grant. (Information not reported) $20,766,306.00 Less Than 50% Completed Information GAO gathered to improve the description The award funds improvements for the North Davidson Bus Facility. Activities include updating facility conditions; upgrading mechanical, electrical, and plumbing systems; replacing original bus maintenance equipment; and constructing a new parking garage. These improvements will delay the need for a third bus facility, allow Special Transportation Services to relocate to the North Davidson Bus Facility, and provide sufficient space and support for up to 200 buses.
ROCKY MOUNT, (INC) CITY OF ARRA 2 BUS, PM, EQUIP, RE, SHELTERS Purchase of new buses to expand existing urban transit routes; purchase of equipment to upgrade vehicles and maintenance operations; and facility improvements to operational facilities utilized by riders, including transfer stations and shelters.
Activity in the 4th Quarter of 2009 comprised of purchasing an existing building for relocation of TRT driver opearations, along with the preparation of bids for the purchase of vehicles, equipment, and services to be funded with additional grant funds. Tar River Transit (TRT), the urban public transportation provider for the City of Rocky Mount, will utilize ARRA Transit Urban Capital Assistance funds to expand and improve transit operations through the purchase of vehicles and equipment, along with improvements to distribution and maintenance facilities. 100 Coastline St.
Rocky Mount, NC 27804-5849 Less Than 50% Completed Information GAO gathered to improve the description The award funds the purchase of two 25-foot light transit vehicles; seven replacement engines; and equipment, real estate, and shelters for Tar River Transit. Work on the transfer and administrative facility includes purchasing the facility and landscaping the transit center. The transit garage improvements include work on the paint, lights, heaters, and transmission stand. Other activities include painting the bus station and renovating the taxi shelter.
RUTGERS, THE STATE UNIVERSITY FTA project and construction management training To provide training for transit systems through the delivery of 34 Project Management for Transit Professionals and 6 Management of Transit Construction Projects sessions.
Planning course deliveries began in September and courses will commence in the next quarter.
All Other Support Activities for Transportation (Information not reported)
New Brunswick, NJ 08901-8559 Less Than 50% Completed Information GAO gathered to improve the description Federal transit laws require a grant applicant for a major capital investment project to prepare and carry out a Project Management Plan (PMP) approved by the Federal Transit Administration (FTA). The award supports project and construction management training for transit management professionals so that they can prepare and carry out a PMP. The training teaches good project management skills to transit management professional and builds capacity at transit organizations. The training also includes specific emphasis on the requirements that are presented in the report Project and Construction Management Guidelines 2003 Update.
PORTAGE AREA REGIONAL TRANSPORTATION AUTHORITY ARRA Maint. Facility Rehab./ Preventative Maintenance Invest in public transportation by replacing the roof of a bus storage/maintenance facility, performing preventative maintenance on existing buses, and completing preliminary engineering and design for facility projects on PARTA's property located at 2000 Summit Road, Kent, OH 44240.
During the CY 4th quarter, PARTA continued to perform preventative maintenance on its 73 vehicles. The labor for the roof renovation is substantially complete and we are now in the contract close out period. PARTA has continued to complete preliminary engineering and design for facility projects on PARTA's property located at 2000 Summit Road, Kent, OH 44240.
Bus and Other Motor Vehicle Transit Systems 2000 Summit Road More than 50% Completed Information GAO gathered to improve the description The award supports preventive maintenance activities to extend the life of the buses, including safety inspection, oil change, fluid change, brakes, labor for mechanics, and replacement parts if needed. The award also supports replacement of the facility’s roof. The roof was deteriorating and leaking water, which caused damage to equipment inside the building. The new roof is expected to last for 15 years.
TRANSPORTATION, OKLAHOMA DEPARTMENT OF Purchase of 241 replacement buses and five over-the-road intercity buses.
Invest in public transportation by replacing the nonurbanized and rural transit provider's aging fleet with efficient and reliable vehicles. A total of 246 vehicles will be purchased. The purchase will include 241 replacement buses of which 17 will be configured with Compressed Natural Gas. Also, five over-the-road buses are programmed for purchase.
Awarded 19 contracts to subrecipients. Request for Bids for nine vehicle types were solicited. Awards were made for eight types of vehicles. One vehicle type was canceled due to ambiguous bid specifications. A total of 37 purchase orders were awarded during this report period.
Interurban and Rural Bus Transportation (Information not reported)
Information GAO gathered to improve the description The award serves 18 counties throughout the state.
TRI-COUNTY METROPOLITAN TRANSPORTATION DISTRICT OR Street Maint Improve; Milwaukie Park&Ride; Foster Road Layover Concrete Bus Pads; Lighting along Multi-Use Path adjacent to I-205 Light Rail Tracks; Morrison/Yamhill Intersect Repairs; Portland Streetcar Signals; Rail Preventive Maintenance.
Invest in public transportation by initiating Bus Priority Street Maintenance Improvements; Milwaukie Park & Ride; Foster Road Layover Concrete Bus Pads; Lighting along Multi-Use Path adjacent to the I-205 Light Rail Tracks; Morrison/Yamhill Intersection Repairs; Portland Streetcar Signals, Ramps, ITS; and performing rail Preventive Maintenance on existing light rail vehicles.
Bus Priority Street Maintenance Improvements; Milwaukie Park & Ride; Foster Road Layover Concrete Bus Pads; Lighting along Multi-Use Path adjacent to the I-205 Light Rail Tracks; Morrison/Yamhill Intersection Repairs; Preventive Maintenance.
More than 50% Completed Information GAO gathered to improve the description The award supports various improvement activities including (1) repaving two deteriorating major bus transit streets and adding concrete bus pads at stops in order to reduce ongoing preventive maintenance at these locations and improve the rider experience; (2) replacing the shoulder on Foster Rd. with a concrete pad and base to accommodate buses, minimize future maintenance costs, and address the degradation of the standard roadway surface and base; (3) replacing infrastructure beneath the light rail tracks at 10 corridor intersections in the Morrison and Yamhill corridors to maintain safe and reliable service; (4) extending lighting along the I-205 multi-use path from the Lents Town Center Station to Gladstone to enhance safety along the corridor and encourage more people to ride bikes and walk to transit; (5) constructing a new 315-space Milwaukie Park & Ride facility at the intersection of SE Milport Rd. and SE Main St. for the heavily traveled McLoughlin corridor, enabling more commuters to use bus lines.
WEST FLORIDA REGIONAL PLANNING COUNCIL Invest in public transportation by constructing new transit facility and security fencing, performing preventive maintenance on existing revenue fleet, installing automatic passenger counters on existing revenue vehicles, installing automated fareboxes on existing revenue vehicles, installing stop annunciators on existing revenue vehicles, purchasing and installing passenger shelters, purchasing a service vehicle, for a total of $2,377,250.
Received and installed automatic stop announcement (annunciator) systems in all (17) buses, received and installed automatic passenger counting system (APC) in 8 buses, received (have not installed) automated fare boxes for all (17) buses. Performed preventive maintenance for fleet vehciles. Annunciators and APCs will be configured in January. Automated fareboxes will be installed in February.
Bus and Other Motor Vehicle Transit Systems Panama City, FL 32401-3485 Less Than 50% Completed Information GAO gathered to improve the description The new transit facility being constructed will house the administrative functions of the transit agency, maintenance facilities, and response system, as well as store buses. The new facility will be located in unincorporated Bay County, outside of Panama City limits on Sherman Ln. and Douglas Rd. The current transit facility in Panama City is no longer big enough to house buses, and has inadequate office and maintenance space.
Invest in public transportation. Cherokee County will use the 2009 ARRA funds to purchase a 5307 fixed route expansion vehicle. The 30' passenger vehicle will provide the opportunity to increase ridership and expand fixed route service to Cherokee County residents. Preventive Maintenance vehicle surveillance, and other communications and fleet maintenance miscellaneous support equipment, and bus shelters, will be purchased. Transit enhancements, including transit technology, MDCs and AVLs, will also be purchased. We plan to add one (1) expansion vehicle with a useful life of 6-8 years. The bus will meet CAA and ADA requirements. The fleet status section of TEAM has been updated to reflect this fleet addition. We are able to operate and maintain the vehicle expansion. The County is aware of FTA C 4220.1F regarding third-party procurement and will follow federal, state and local procurement policies. County will ensure that contractors are not on the debarment and suspension list. Will adhere to any/all special conditions of this award. (4th Quarter) The Project Description has not changed, however, the activities this quarter have. Expenditures for the 4th Quarter include $188,705.06 for Miscellaneous Support Equipment (11.42.20); $12,123.80 for Landscaping under Scenic Beautification (119.00 Transit Enhancements; $11,533.00 for Preventive Maintenance (117-00 Other Capital Items). ___________________________________________ (3rd Quarter) The Cherokee County Board of Commissioners has received 15 bids relevant to the ARRA Capital expenditure to date. $20,037 for Communications Equipment (11.62.02); $20,642 for Control/Signal Equipment (11.62.01) and $151,975.59 obligated to Misc. Support Equipment (11.42.20), as well as $12,000 obligated to Scenic Beautification adn property security (11.92.03 - 11.42.09)
Bus and Other Motor Vehicle Transit Systems Less Than 50% Completed Information GAO gathered to improve the description The award funds the purchase of 14 technology units (Automatic Vehicle Locators and Mobile Data Computers), 3 bus shelters in the city of Canton, and 1 set of 4 portable lifts to help perform bus maintenance. The intelligence technology system software and hardware will help map and coordinate routes and ultimately save money by providing for more efficient pick-up/delivery. The new equipment is expected to save on tire wear and outsourcing costs.
ARRA Aug 3 repl bus/1 van/1 truck/misc expense Invest in public transportation by purchasing additional buses including a hybrid and replacing a totally depreciated bus. Also fund maintenance costs including mechanics salaries and additional training. Also fund ADA expenses,salaries,training, fuel maintenance costs.
Invest in public transportation by purchasing additional buses including a hybrid and replacing a totally depreciated bus. Also fund maintenance costs including mechanics salaries and additional training. Also fund ADA expenses,salaries,training, fuel maintenance costs.
Bus and Other Motor Vehicle Transit Systems 530 Greene Street, Room 207 Less Than 50% Completed Information GAO gathered to improve the description The award supports the transit department of the County of Augusta-Richmond in replacing buses that were scheduled to be replaced and upgrading their fleet, funding salaries and maintenance work on vehicles, and replacing an old supervisor van and maintenance truck. The award allows the transit department to maintain service levels.
Renewable Energy/Retrofit-Solar Lgt&Sec Invest in public transportation by replacing conventional petroleum dependent energy/security lighting system with a photovoltaic solar system in FTA funded vehicle maintenance and storage facilities.
Bus and Other Motor Vehicle Transit Systems PR-172, 2nd Floor Public Transportation Terminal $1,000,000.00 Information GAO gathered to improve the description The award supports the conversion of the Cidro Public Transportation Center from a gas-powered to a solar-powered facility. The solar system will rely on inverters for power rather than batteries. The energy backup will be the electric company. The award will lower pollution by producing clean energy.
The Recovery Act appropriated $5.55 billion for the Federal Buildings Fund, which provides money for measures necessary to convert federal buildings into high-performance green buildings, renovate and construct federal buildings and courthouses, and renovate and construct land ports of entry. This fund is administered by the General Services Administration (GSA), which selects projects for funding (such as the construction of a new building), and contracts with construction and engineering professionals to complete the project. Generally, GSA issues a number of contracts for each project.
Nature and Type of Projects GSA had obligated just over $4 billion as of April 23, 2010. Of this amount, GSA has spent about $315 million. This spending represents the total value of payments made to contractors for work they have already completed. Of the $5.55 billion in Recovery Act funds, about $4.3 billion was made available for measures necessary to convert GSA facilities to high- performance green buildings, $750 million was made available for federal buildings and U.S. courthouses, and $300 million was made available for border stations and land ports of entry. Overall, GSA selected 263 projects in all 50 states, the District of Columbia, and two U.S. territories. As shown in table 10, GSA’s Recovery Act projects fall into four main categories: (1) new federal construction, (2) full and partial building modernizations, (3) limited scope projects, and (4) small projects.
About 30 Percent of Federal Buildings Fund Descriptions Met Our Transparency Criteria
We assessed the transparency of descriptive information for Federal Building Fund awards available on Recovery.gov, as described in the report. We found that an estimated 29 percent met our transparency criteria, 64 percent partially met our criteria, and 7 percent did not meet our criteria.
For the descriptions that did not fully meet our transparency criteria, we collected additional information necessary to make the descriptions meet our criteria. The descriptions of awards, whether they met our criteria, and additional information that we found to complete the narrative descriptions are provided at the end of this appendix.
GSA Guidance and Other Factors That May Affect Transparency of Reported Information
GSA has provided additional guidance to Federal Buildings Fund contract recipients, established an Outreach Call Center to help recipients fulfill reporting requirements, and reviewed the recipient reports before the reports were made public on Recovery.gov. According to GSA officials, these efforts were designed to ensure that recipients followed reporting requirements and provided information on awards that the public can understand.
GSA provided technical assistance to recipients that was designed to augment the Office of Management and Budget’s (OMB) guidance on recipient reporting. GSA made this guidance available on its Web site and also mailed a copy of the guidance to each recipient. This guidance, first issued in September 2009 and updated in October 2009, December 2009, and March 2010, describes the time frames for reporting and specific data element instructions, among other things. GSA’s guidance did not supply any information that supplemented OMB’s guidance on describing projects, including how funds are being used and expected outcomes. According to GSA officials, this guidance was meant to be a synopsis of OMB’s guidance; they did not think supplemental guidance was needed to describe how funds are being used and what outcomes are expected because they considered OMB’s guidance sufficient.
GSA’s Outreach Call Center has provided both outreach and support to contract recipients. Specifically, prior to each reporting quarter, staff at the center have contacted recipients to update contact information and remind recipients of the reporting deadlines. In addition, staff at the center are available to answer questions from recipients and provide technical support to recipients as they complete their reporting requirements.
For the second round of recipient reporting, GSA staff also developed data quality reviews that compared the financial data in recipient reports with financial data in GSA’s financial management systems. GSA staff contacted the recipients and clarified any information that was not consistent with GSA data. In addition, GSA staff reviewed the narrative information in the “award description” and “project description” fields to ensure that the information was accurate and to clarify any technical jargon or acronyms. According to GSA officials, GSA staff did not attempt to provide additional information; instead, GSA officials clarified the information that was already in the description.
Other Ways That Federal Buildings Fund Information Is Made Available to the Public
GSA officials have worked with members of the media to inform the public about GSA’s work under the Recovery Act. In addition, GSA issues press releases on major project milestones and informs national and local media when GSA awards a project. However, according to GSA officials, GSA cannot communicate all of its available information to the public because of the large volume of information available on GSA projects. In addition, some information is procurement-sensitive and cannot be released to the public.
In addition to information on Recovery.gov, GSA has published information on its Recovery Act program on its own Recovery Act Web site. This information includes the following: A Federal Buildings Fund Program Plan. This plan contains a summary of the objectives and activities that GSA’s Public Buildings Service plans to implement with the $5.55 billion in Recovery Act funds. The plan also includes information on the projects’ selection, delivery schedule, and performance measures. Additionally, the plan contains information on how GSA will address issues such as monitoring and evaluation, transparency, and accountability for its Recovery Act program.
A Public Building Service Project Plan. This plan details how GSA will spend its $5.55 billion in Recovery Act funds; lists all the GSA building projects that will receive Recovery Act funds; and, for each project, includes the name, location (city and state), and estimated cost of the project.
A Federal Buildings Fund Investments Map. This interactive map shows where GSA is spending its Recovery Act funds and provides information on spending to date, measured in obligations and outlays, for individual projects or states.
According to GSA officials, they have received positive comments about GSA’s role in helping to revive the construction sector in numerous communities. GSA has also received negative comments about the pace of its spending. According to GSA officials, the pace of spending lags behind the amount of work and number of jobs that GSA projects are generating because GSA pays for work on a reimbursable basis after the work has been completed. As a result, work can be ongoing at a GSA project, even though GSA has not spent any money on the project.
Federal Buildings Fund Descriptions That Met Our Transparency Criteria
The following award descriptions contained sufficient information on general purpose, scope and nature of activities, location, and expected outcomes to meet our transparency criteria. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
GRUZEN SAMTON ARCHITECTS PLANNERS & INTERIOR DESIGNERS LLP This contract is a for A/E services for the design of a federal employee parking garage and a master plan for the San Juan, PR FBI Field Office Consolidation project. The project as a whole will result in the design and construction of a new approx. 240,000 GSF Federal Building, on existing government property (a 27 acre site) for the Hato Rey area, San Juan FBI field offices. Design and construction of the FBI facility wil be procured under a separate contract.
Delivered Final Master Plan and Final Concept Design for the Garage. (Information not reported)
SAN JUAN, PR 00918-1700 More than 50% Completed GS-02P-06-DTD-0054 WESTLAKE, REED, LESKOSKY, LTD.
The objective of this work order is to achieve the re-commissioning and retro-commissioning goals set forth in the ARRA for the Howard M. Metzenbaum USCH by creating bid and construction documents that describe all construction phase project work required by the NRPC identified projects and support the NRPC with project identification and definition. The design shall consist of but is not limited to the following: Mechanical Systems Upgrade/Replacement: Chillers, cooling towers, air conditioning units, boilers, hot water converters, steam pressure reducing stations, condensate return systems, primary and secondary pumping systems, domestic hot water heaters, heat exchangers, air handling units, terminal or variable air volume (VAV) boxes, heat recovery units, motors, steam traps, dampers, pumps and air ducts. Energy conservation and renewable energy projects ? Water Quarterly Activities/Project Description: During the final Quarter of 2009, WRL held an on-site kick off meeting with the GSA Project Manager, at the Metzenbaum Federal Courthouse. Field investigation was performed, and base drawings of the building were developed. WRL participated in reviews of the Commissioning agent?s reports prior to producing documents based on their Recommisioning recommendations. WRL produced 30% and 75% Documents which were used to solicit proposals from a Construction Manager. WRL participated in pre-proposal conferences with GSA and the potential Offerors for the role of Construction Manager. (Information not reported)
Less Than 50% Completed PDG, INC.
Wind Tunnel Testing Structural Study for the Micky Leland FOB (TX0298ZZ located at 1919 Smith Street, Houston, TX 77002). Provide engineering testing and analysis services for the site, as well as, to determine building cladding design loads.
Attended meeting with Leland FOB building manager and COTR to verify existing conditions & establish working schedule. Reviewed existing architectural and engineering plans & technical reports. Verify Bldg. site climatology & develop wind speeds. Perform wind tunnel testing for the FOB that simulates the natural wind environment for the building site. Document all findings, conclusions & recommendations into a report.
MESSER CONSTRUCTION CO.
The Project Award includes $35,500,000 for Construction Phase Services for the GS-05P-08- GBC-0005 Fire/Life Safety and HVAC Modernization for the Minton Capehart Federal Building in Indianapolis, IN. It also includes Estimated Additional Scope Items of $4,304,513; and GSA Contingency of $2,805,739.21; M&I Services of $500,000. The base project scope (Fire/Life Safety and HVAC Modernization) includes replacement of: air handlers, fiberglass branch distribution ductwork, stair pressurization fans, temperature controls, fire alarm system, fire pump and jockey pump, fire protection system, ceilings and lighting. Electrical systems and emergency generator system are to also be upgraded as necessary to support the project scope of work. The project scope should also include LEED Silver certification.
We are working to complete preconstruction services funded prior to the ARRA funding. Preconstruction services are proceeding as scheduled. We anticipate major subcontract awards to take place in first quarter of Calendar Year 2010. We are also working on M&I services, including forensic testing to verify condition of building piping systems prior to completion of design.
Commercial and Institutional Building Construction Less Than 50% Completed GS-05P-08-GBC-0005 HEERY INTERNATIONAL, INC.
Provide engineering and commissioning expertise to conduct recommissioning / retro- commissioning planning, identify energy conservation measures, scoping, testing, investigation, evaluation, analysis, calculations, recommendations, and report writing services for the following GSA federal buildings: (1) TX, Houston, Bob Casey US Courthouse, (2) TX, Houston, Alliance Tower, (3) TX, Houston, LaBranch Federal Building, (4) TX, Corpus Christi, US Courthouse and (5) TX, Victoria, ML King, Jr. Federal Building.
Responsed to government's comments on the Draft Report (submitted last quarter) and completed Final report for submission by end of the year. (Information not reported)
FORT WORTH, TX 76102-6105 More than 50% Completed GOSHOW ARCHITECTS, L.L.P.
A/E Services for Bridging Documents for the high-performance, green, building modernization and other alteration work Clement Ruiz Nazario Courthouse and Federico Degetau Federal Office Building in Hato Rey, Puerto Rico.
Review and evaluate site conditions, existing studies, surveys, analyses and reports, and identify additional services and tests that are required to fully document the project. Included in this phase were Courthouse/FOB Tours; Systems Upgrade Analysis; Fire Protection/Life Safety Analysis; Enviromental Hazards report; Conveyance System Study, Structural Analysis Study; Accessibility Study; Thermographic Imaging Study; Energy Model and Existing Building Analysis.
Hato Rey, PR 00918-0000 More than 50% Completed Purpose is to investigate and provide recommendations for optimizing building performance through identifying energy improvements and demand reduction strategies. A feasibility study is being generated to include the following information: 1) The integration of geothermal heat pumps in the facility to offset the cost of cooling and heating the building. 2) Determine the feasibility of installing PV panels on the roof. 3) Provide suggestions for the most methods of retrofitting the roof to accept PV panels where existing roof can not supoort PV panel installation. 4) Provide conceptual renderings and drawings depicting vehicle canopies and covered walkways that use PV panels as protection from weather. 5) Provide any other suggestions for reducing the electrical load of the building. 6) Provide a fully developed Lifecycle costing, pay back period, and energy savings. The Architect/Engineer are to develop a Design-Build scope of work to implement the findings of the Retro-Commissioning Study that can be executed within the available funding.
The Architects and Engineers took the findings from the Retro-Commissioning Study and began preparing a Design-Build scope of work specification report. A draft copy of the report was submitted to the agency for review and comments.
More than 50% Completed GS-03P-03-CDD-0028 HEERY INTERNATIONAL, INC.
Initial scope is for pre-design services for the design and construction of new office space for the Army Corp of Engineers on the Federal Center South campus in Seattle, WA. Design and construction will be procured under a design-build procurement methodology using a two- step best value competitive award. The deliverables include an update Program of Requirements, a design-build performance specification, a comprehensive bidding procurement document. The design-build contractor is expected to be under contract in early March 2010.
Developed and refined concept estimate for the DB scope of work.Completed Owner Project Requirements (OPR) document. Completed development of the DB competition bid document. Participated in DB Q&A meetings with GSA and USACE. (Information not reported)
More than 50% Completed JACOBS FACILITIES INC.
Construction Management Services for Judges' Swing Space at Samuel M. Gibbons Federal Courthouse The purpose of this scope of work is to provide GSA guidance and direction as the Construction Manager as Advisor (CMa) Contractor who will be the government's on-site manager responsible for the successful renovation of Space Alterations at the Samuel M. Gibbons Federal CourthouseThe goal of the project is to construct the project on schedule and within budget while addressing minimum criteria for integrated design, energy and water usage, indoor environmental quality and materials usage.Major deliverables include Cost Estimating, Communications Plan, Detailed Project Schedule Development and Maintenance, Project Progress Meetings and Presentations, Meeting Minutes and Correspondence, General Progress Reports, Record Keeping, Construction Submittal and RFI Processing, Project Photography, Inspections and Testing Reports, Punch-List and Final Inspection, and Closeout Documentation.
Interior buildout wall framing completed, wall rough-in of electrical completed, walls insulated and drywall has been installed and finished complete. Overhead electrical rough-in nearly complete and HVAC rough is nearly complete. All walls are painted and ceiling grid installation started.Project is ahead of schedule and going well.
Commercial and Institutional Building Construction (Information not reported)
More than 50% Completed The restoration project will replace the waterproofing membrane and increase the insulation of the plaza, replace the lighting systems in the below grade Post Office workroom levels with more energy efficient lighting, repair damages caused by water leaks and upgrade sidewalk access ramps to meet current ADA requirements. Further, the granite pavers will be cleaned, restored and reset at the Federal Plaza. The mnain goals are as follows: ?? Replace the waterproofing system. ?? Increase insulation of the Plaza. ?? Replace the lighting and/or lighting controls in the below grade Post Office workroom levels with more energy efficient lighting. ?? Repair structural damage. ?? Repair damages to interior structural elements and finishes caused by water leaks. ?? Ensure ease and efficiency of long term operation and cost effective maintenance. ?? Complete the design and construction per GSA P-100. ?? Develop 3D Building Information Model (BIM) for the Post Office space and Plaza. ?? Complete a project that satisfies the requirements of the existing building tenants and GSA. ?? Maintain the visual integrity and historic nature of the Plaza and all its elements after the project is complete. ?? Complete the design and construction within established schedules. ?? Complete the project within the budget by maintaining fiscal responsibility, communicating that responsibility to all parties involved, and by constantly updating and tracking project cost estimates. ?? Develop a high performance green complex. ?? Adhere to all elements and guiding principles of the LEED program where practical. ?? Per the Energy Policy Act of 2005, GSA’s targeted maximum annual energy consumption level for this project is 87,571 BTU's per gross square foot. ?? Promote and demand excellence in design and construction to produce a final project/building that reflects the dignity and significance of the United States Government.
Pre-Construction Phase Services: 1) Review of the Architects design 2) Review of the Architects schedule. 3) Conduct a design review charette 4) Conduct bi-weekly meetings for the project team and maintain meeting minutes/ project directory and the distribution list. 5) Track Progress via monthly report. 230 South Dearborn Less Than 50% Completed Owner's Construction Representative services for the Modernization of the 10W. Jackson, 18 W. Jackson, and 230 S. State Street Project, located in Chicago, IL. The contract award is for the Base Services-Design/Pre-Construction Phase, Construction Year One of Option 1, and Options 2 and 3: Cost Estimating and Project Scheduling. The purpose of this project is to modernize and renovate the three buildings to create a safe and functional environement for the federal government and the public that will use the building.
Owner's Construction Representative, project Kick-Off, run and organize weekly meetings, meeting minute documentation, review of existing and new documents, review drawings, site visits, project organization, tenant meetings attendnace, notes, review of plans, peer reviews, HVAC report review, schedule review, design review, final concept design review, scheduling, GMP cost estimating reconciliation, conduct value engineering work shops. (Information not reported)
Less Than 50% Completed GS-05P-08-GBD-0023 The award is for Architectural/Engineering Briding Design services including, but not limited to, Pre-Design Services, Design Concepts, Briding Design-Build Services, and Contract Close our Services for th eBan Buren Land Port of Entry. The project is a new Land Port of Entry (LPOE) for the town of Van Buren, Maine, located on the St. John River approximately 320 miles north of Portland, 40 miles north of Presque Isle, and 25 miles southeast of Madawaska. The existing Border Station was damaged when the St. John River flooded in late April and early May of 2008. Rather than merely repair the undersized and outdated 40- year old facility, the GSA and the Department of Homeland Security’s Customs and Border Protection (CBP) felt that this would be an excellent opportunity to build a new port that would meet CBP’s needs for the future. This new port will be a gateway to our country and will replace a flood-damaged and obsolete border facility with a state-of-the-art commercial port of entry. It should make a distinct architectural statement that is responsive to the local community, the efficient movement of trade and commerce, the security requirements of law enforcement agencies, and the welcoming of visitors and citizens to the United States of America.
Design Concepts services, including: space planning, space efficiency reporting, model building, systems life cycle assessments, design, review, and presentation of three conceptual project alternatives, cost estimating. 2400 Rand Tower, 527 Marquette Avenue Less Than 50% Completed CH2M HILL, INC.
The Denver Federal center has antiquated utilities in need of repair or rehabilitation. CH2M HILL has been working with the GSA over the past three years to design a new water distribution system to replace the antiquated one, design rehabilitation and replacement of the sewer system that has been in place since the 1940's, and upgrades to the existing stormwater and electrical systems. The ARRA funding allowed this much needed project to be constructed and also allows for further design and construction to improve the Gulch that runs through the DFC to provide channel stabilization, replace the main electrical conductors, repair parking lots and provide a sewer upgrade.
Provided engineering construction services for the construction of Phases I through III of the Utilities Infrastructure Project at the Denver Federal Center. Completed 30% design of Phase IV and began 60% design of Phase IV. (Information not reported)
Less Than 50% Completed JACOBS FACILITIES INC.
The New Custom House in Denver, CO, is an 8-story office building containing 172,502 usable square feet with 47 outdoor parking spaces on a 2.4 acre site. This 8-story stone building was constructed in 1931 and has 5 floors above grade plus a basement, sub- basement, and a partial floor below the sub-basement. In 1979, the building as listed on the National Register of Historic Places and is now designated as a level 2 historic asset. The building is primarily used as office space, the building also contains a child care center, as food service area, and provides space for US Bankruptcy court proceedings. Tenants include: the Small Business Administration, the US Bankruptcy Courts, the Military Entrance Processing Station, Department of the Army, Department of Justice, Department of Labor, Department of the Treasury, the Railroad Retirement Board, and the Department of Homeland Security.The proposed capital project will protect this 78-year old historic asset and improve the energy efficiency by upgrading air handling units, updating/replacing . Induction units and condensate piping, updating lighting and controls, updating mechanical controls, air intakes, installing isolation valves, updating/replacing domestic and mechanical plumbing, replacing ceilings and flooring, site work and new dock, updating restrooms, upgrading life safety system, and updating interior and exterior finishes. The project will also include replacement of all the windows with blast resistant construction. The amount of swing space is estimated at approximately 10,000 square feet. Construction is anticipated to begin in the summer of 2010 and the project duration is estimated at 24 - 30 months. The project is required to meet all American Recovery and Reinvestment Act (ARRA) regulations and applicable environmental and energy requirements.The contract scope of services includes Pre Design Phase Services to assist, review and provide technical support during the procurement process. Specifically, the Construction Manager will compile and/or develop the Design/Build criteria package and review offeror proposals for adequacy and completeness. After award, during the Design/Build design phase, services include review of the Design/Builders design submittals to confirm that the design meets the Solicitation for Offers, budget, and special requirements. The Construction Management team will also perform code compliance reviews; constructability reviews;conduct/participate in Value Engineering workshops; analyze Value Engineering proposals; prepare independent cost estimates, scheduling and design problem resolution. Project Construction Phase Services include monitoring/observation services and attending onsite construction coordination meetings that occur among the Government, General Contractor, and Architect. Pre-Design services have initiated with review and analysis of existing documentation. The first deliverable for the CM team is in progress. The deliverable is augmentation of the DB study, the DB specifications, the bid form, consultation on the technical proposal and DB SOW. Products from this analysis will be included in the DB RFP which will be issued to the shortlisted offerors in mid-December. Subcontracting and scheduling of geotech subconsultant is in progress. Commercial and Institutional Building Construction (Information not reported)
Less Than 50% Completed This project is to study options and make recommendations for a photovoltaic system to be located at the terry Sanford Federal Building in Raleigh, NC. The complex consists of a courtroom tower and a large postal annex. The proposed PV system will be mounted on the roof of the annex, which is estimated to have 116,140 square feet of useable roof area. The project is initiated to use solar energy to generate power and reduce dependency on grid power. The overall goal of the project is to provide an alternative energy source that will provide supplemental power to the Terry Sanford Federal Building. The goal for this award is to provide a pre-project study and to develop a requirements package for construction.
Project Management, Structural Engineering, Architecural Services, & Electrical Engineering Raleigh, NC 27601-1483 More than 50% Completed ENVIROSERVICES & TRAINING CENTERS LLC Ensure safe work conditions and prevent release of asbestos and lead during renovation activities at the Federal Building and US Post Office, 154 Waianuenue Ave, Hilo, Hawaii. Mobilized to the island of Hawaii. Provided oversight of asbestos related work for the 3rd Floor, rooms 302 to 305, including air monitoring and asbestos clearance testing. Asbestos clearance testing failed criteria and additional follow-up cleaning and testing is expected. Performed sampling and analysis of soil and thermal system insulation debris on bare soil to determine asbestos content. Debris contained regulated levels of asbestos. Soil in 2 of 4 sections contained detectable levels of asbestos less than 1 percent which is considered contaminated by Hawaii Dept of Health. Will provide design specifications for asbestos abatement if required. Further oversight activites are expected for lead related work and in different areas of the site.
Mobilized to the island of Hawaii. Provided oversight of asbestos and lead related work for the 3rd Floor, rooms 302 to 305, including air monitoring and asbestos clearance testing. Asbestos clearance testing failed criteria and additional follow-up cleaning and testing is expected. Performed sampling and analysis of soil and thermal system insulation debris on bare soil to determine asbestos content. Debris contained regulated levels of asbestos. Soil in 2 of 4 sections contained detectable levels of asbestos less than 1 percent which is considered contaminated by Hawaii Dept of Health. (Information not reported)
Less Than 50% Completed GS10F0173U KEY ENGINEERING GROUP, LTD.
Overall purpose of this study was to comply with the National Environmental Policy Act (NEPA). NEPA study for the Chicago Federal Plaza restoration project. Project deliverables included preparation of an agenda (complete), meeting minutes and action items (complete), roster of team members (complete), Class I Cultural Resource Review - Section 106 Compliance (complete), preparation of a draft documented Categorical Exclusion (CATEX) checklist (complete), final checklist (complete).
Significant services performed included agenda (complete), meeting minutes and action items (complete), roster of team members (complete), Class I Cultural Resource Review - Section 106 Compliance (complete), preparation of a draft documented Categorical Exclusion (CATEX) checklist (complete), final checklist (complete). In accordance with the scope of work, this project has been invoiced to 90% of completion. The remaining 10% will be invoiced after GSA public notice is completed.
CHICAGO HEIGHTS, IL 60411-1001 More than 50% Completed CORNERSTONE ARCHITECTURAL GROUP, PS Provide a study to determine the condition of the Federal Center South Building's roof structural system and address potential roofing material alternatives while meeting the ARRA requirements, initial capital, sustainability, life cycle costs, good stewardship, historic preservation and performance. A cool roof, a vegetative roof, a building integrated photovoltaic or photovoltaic ballasted roof were to be considered and a recommendation provided. The study will be used to provide guidance for a future roofing construction project.
The entire work under this award was completed in this quarter. Site visits, inspections, meetings, draft reports, reviews and the final report was submitted and approved. 6161 NE 175th Street JACOBS TECHNOLOGY INC.
Data collection services to determine the feasibility of Project Labor Agreements in two areas and the risk associated with each (San Francisco, CA and Honolulu, HI). The report will look at the utilization of Project Labor Agreements in high union density states (such as California and Hawaii) and will determine if large-scale construction projects to be built in predominantly unionized areas would benefit from the use of a Project Labor Agreement. The report will look at the utilization of Project Labor Agreements in high union density states (such as California and Hawaii) and will determine if large-scale construction projects to be built in predominantly unionized areas would benefit from the use of a Project Labor Agreement.
Research and study continued for Honolulu and San Francisco. Contract modification forthcoming to perform similar Project Labor Agreement studies on additional cities. (Information not reported)
Less Than 50% Completed GS03P09DXA0025 HEERY INTERNATIONAL, INC.
Heery International is providing Construction Manager as Agent (CMa) services for the San Juan FBI Consolidation Project for the Master Plan & Garage Design. The services include; attending design meetings and preparing agendas and minutes. Heery is also providing design reviews and estimates at each phase of the design. All of these services are being performed to provide quality assurance and project management oversight. Also, include in the scope of services are the design phase commissioning services required to obtain LEED Silver Certification. The expected outcome of these services is to provide a project that is completed on time, within budget, and in accordance with the contract requirements.
October - Attended the kick-off meeting and prepared the 35% DD Estimate and performed the 35% DD Design Review. November - Attended periodic design meetings and prepared the 50% CD Estimate and performed the 50% CD Design Review. December - Attended periodic design meetings and prepared the 95% CD Estimate and performed the 95% CD Design Review. (Information not reported)
San Juan, PR 00918-1700 Less Than 50% Completed JACOBS TECHNOLOGY INC.
CM services for Clemente Ruiz Nazario Courthouse and Federico Degetau Federal Office Building The project is a High Performance Green Building Modernization. The scope of the work for the building includes the following: Redesign and replacement of HVAC system; upgrade of electrical panels and distribution system; implementation of energy conservation program; installation of photovoltaic panels; improve interior finishes; renovation of restrooms; compliance to ADA requirements; upgrade of fire protection and life safety system and partial site improvement.
This quarter 100% Bridging documents were submitted by the Architect and have been reviewed and construction cost estimates prepared by Jacobs for reconciliation prior to bid. The initial phase of a two phase solicitation for a design build contractor has been completed. Jacobs was issued a modification on Dec 28, 2009 to provide design phase services in connection with the buildout of a new courtroom and ancillary space in the Jose Toledo Courthouse, Old San Juan,PR to be used as swing space during the modernization project in Hato Rey. (Information not reported)
Federal Buildings Fund Descriptions That Partially Met Our Transparency Criteria
The following award descriptions did not contain sufficient details on one or more of the following pieces of information necessary to facilitate general understanding of the award, based on our assessment: general purpose, scope and nature of activities, location, and/or expected outcomes. In some cases, only a small amount of additional information was needed, while in other cases, many pieces of information were needed to make the description more transparent. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
STL ARCHITECTS, INC.
Study to investigate three existing 300 ton chillers with one that will be more fuel efficient.
Preparation and presentation of a Pre-Design Report determining methods of altering existing chiller systems in order to increase energy efficiency. (Information not reported) $17,821.76 Information GAO gathered to improve the description The study of energy-efficient chiller options is part of a planning and designing effort for the recommissioning and retro-commissioning of the existing Metcalfe Federal Building in order to improve the energy efficiency and minimize the environmental impact of the existing building. The study will lead to preparation and presentation of a pre-design report highlighting areas of the subject property that may be altered or added to in order to increase energy efficiency. This particular report will focus on the chiller system.
A/E Desgin Services for Land Port of Entry at Columbus, New Mexico Corpus Christi, TX 78401-3025 Less Than 50% Completed Information GAO gathered to improve the description The award was originally for expansion of the facility in its current location, but recent flooding along the border requires relocation of the facility away from the flood zone. This award will allow completion of design to incorporate flood protection and compliance with new statutory energy requirements. The facility will replace the existing, functionally obsolete facility with a new, energy-efficient facility that will meet the Customs and Border Protection (CBP) mission requirements.
PARSONS INFRASTRUCTURE & TECHNOLOGY GROUP INC.
Construction Management (CM) Services for the Mondernization & Expansion of the Otay Mesa Land Port of Enty (LPOE) in San Diego California. This Delivery Order covers services A-B as indicated in the contractor's proposal date 7/17/2009.
Parsons has not yet received a Notice to Proceed from the Government concerning this Task Order.
Commercial and Institutional Building Construction Contracts Otay Mesa Land Port of Entry San Diego, CA 92101-2058 Information GAO gathered to improve the description The award provides the funding required to complete the design, provide construction management and inspection services, and acquire the site necessary to expand the port. The port is a multi-modal (commercial, non-commercial, and pedestrian) port of entry and is one of the 10 busiest land ports in the country. The current facility is obsolete, inefficient, and causes severe traffic congestion. The proposed project will reconfigure and expand the existing port through the purchase of adjacent properties to meet Customs and Border Protection's (CBP) mission needs while meeting General Services Administration's (GSA) energy reduction and green building requirements.
Cotter Federal Building Located at 135 High Street Hartford CT, Roofing And PV Project: Will consist of a Intergraded PV & TPO Roofing system: TPO will be a fully adhered Cool Roof with the Photo Voltaic panels intergraded in the field sheet. The TPO roof will be heat welded using robotic field sheet welders and Lyister- Triack hand-held welders for detail and penetration welds. All electrical components will also be intergraded into the TPO roofing system and insulation. The project includes ongoing monitoring and support..
Asphalt Shingle and Coating Materials Manufacturing Information GAO gathered to improve the description The award modernizes the Cotter Federal Building and makes it more energy efficient by improving roofing and adding photovoltaic (PV) panels.
The scope of work is focused on building systems affecting energy use and indoor environment, including shell infiltration and heat loss for the Moakley Federal Courthouse loacted in Boston, MA.
Site Survey; System Review; Design Review; Energy Modeling; Functional Performance Tests, energy conservation measures, life cycle cost calculations, construction estimates. 153 Milk Street, Suite 200 Information GAO gathered to improve the description The award will result in a study that includes information on energy conservation measures.
The Thurgood Marshall Courthouse infrastructure upgrade.
During the period of October 1, 2009 thru December 31, 2009 Cauldwell Wingate has continued to work on the shop drawing and coordination of the MEPS Systems through out the project. In addition to this we have fabricated and installed the ductwork, sprinkler piping and electrical distribution on 7 tower floors and 2 base floors. The Main Electrical Distribution Switchboards have been fabricated and set in place with the installation of the conduit and wire throughout the electrical closets. The Basement underground plumbing was installed in the parking garage was completed.
Commercial and Institutional Building Construction NEW YORK, NY 10007-1502 $64,000,000.00 Less Than 50% Completed Information GAO gathered to improve the description The award upgrades the infrastructure and addresses life safety and accessibility issues of the building and will extend the useful life of the building. The award includes coordination of mechanical, electrical, and plumbing (MEP) systems throughout the project.
JACOBS ENGINEERING GROUP INC.
Provide Pre-Design and Design Review Servicesfor the building system modifications to meet NARA 2009 requirements for the VA file storage space located in Building 104 of Goodfellow Federal Complex. ARRA VA AT BLDG. 104, 4300 GOODFELLOW, ST. LOUIS, MO No project activities from Jacobs, waiting on design. (Information not reported)
St. Louis, MO 63120-1703 Less Than 50% Completed Information GAO gathered to improve the description The award provides pre-design and design services for the building system modifications to meet National Archives and Records Administration (NARA) 2009 requirements for the VA file storage space. The VA file storage space does not currently have any HVAC or humidification, which is a requirement from the NARA 2009 standards for file storage. These activities will include new high efficiency chillers, new high efficiency chilled water, condenser water and hot water pumps, new high efficiency cooling tower(s), new high efficiency air-handling units and distribution ductwork, chilled and heating hot water pipe, and a humidification system for approximately 130,000 square feet of file storage. Construction management services for the design phase include, but are not limited to the following: (1) Attend the 35 percent, 65 percent, and 95 percent design review meetings; (2) Review drawings and specifications at 35 percent, 65 percent, and 95 percent; (3) Attend design kick-off meeting; (4) Attend three additional design development meetings; and (5) Evaluate construction cost estimate and attend three reconciliation meetings.
PARSONS INFRASTRUCTURE & TECHNOLOGY GROUP INC.
Prepare an Environmental Impact Statment to determine whether the proposed action warrant a finding of no significant impact or the preparation of the record of decision to improve, through modernization and new construction, the functionality, operational capacity and security of the Otay Mesa (OTM) Land Port of Entry (LPOE).
Conducted project kick-off meetings and site inspections, provided Environmental Impact Statement (EIS) notice of intent (NOI),provided draft and final versions of public scoping EIS fact sheet,provided draft and final versions of public scoping meeting display and project information posters, conducted public scoping meeting, provided draft and final versions of scoping report, completed a Phase I environmental site assessment (ESA) of the LPOE and submitted both draft and final versions of the Phase I, completed internal draft threatened and dangered species biological assessment(BA) for the LPOE site and surrounding area, completed cultural resources evaluation for the LPOE site and surrounding area and submitted draft and final versions of the cultural resources report, with the final version submitted, provided draft endangered and threatened species consultation letters to GSA for submittal to US Fish and Wildlife Service and California Department of Fish and Game.
Otay Mesa Land Port of Entry San Diego, CA 92101-4433 Less Than 50% Completed Information GAO gathered to improve the description The Environmental Impact Statement prepared from this award will allow the agency to determine if the proposed action would significantly affect the environment.
GARLAND COMPANY INC, THE Remove and replace approximately 4,950 square feet of bituminous built-up roofing, add new insulation to create an R-50 insulation value when complete, and install architectural metal at all parapet and coping locations. The project shall include all low slope or flat levels of the roof Since the project has not started, Since the last report, manufacturing had manufactured and shipped roofing materials to the site.
Contracts (Information not reported)
FERGUS FALLS, MN 56537-2576 Less Than 50% Completed Information GAO gathered to improve the description The award replaces the roof of the United States Postal Service Building and Courthouse located at 118 S. Mill Street in Fergus Falls, Minnesota. Replacing the roof will reduce the repair and alteration liability of the building and help reduce energy consumption.
SMITHGROUP, INC.
Window replacement - FaÁade Thermal Performance Improvement for the John F kenedy Federal Building in Boston, Massachusetts. The work to be performed under the Contract includes updating the existing window and curtain wall replacement documents for code compliance and energy efficiency.
Typical window design was revised as an additional bidding option. The revised design is to be installed from the exterior as opposed to the interior. Additional bidding options were added for sealant joint replacement and concrete repair. 500 Griswold Street, Suite 1700 More than 50% Completed Information GAO gathered to improve the description The award supports design services for window and curtain wall replacement for the entire John F. Kennedy Federal Building in Boston, Massachusetts.
HOF CONSTRUCTION, INC.
The Robert A. Young Building is a high rise historic brick strucutre approximately 1 million square foot in size, housing 3000 tenants. The existing cafeteria kitchen, dish room, servery, and dining area have become outdated, and much of the equipment is aging with high energy consumption. This work is being performed under the 'Building Tune-up, Lighting Replacement, Building HVAC Systems and Energy Saving' categories as defined in the ARRA descriptions of High Performance Building Improvements.
This field is not applicable yet since we haven't started work yet and no funds have been received.
Commercial and Institutional Building Construction 1222 Spruce St. St. Louis, MO 63102 SAINT LOUIS, MO 63103-2818 Less Than 50% Completed Information GAO gathered to improve the description The award supports construction to upgrade the cafeteria at the Robert A. Young Federal Building. The nature of the activities is renovations to the cafeteria, including coordination and phasing to minimize disruptions to cafeteria service, building operations, and tenants. The activities under this award include construction of a new dish room with an accumulating conveyor; reconfiguring the servery with new food service equipment and all associated rough-ins; renovating the servery with new finishes on the walls, floors, and ceilings with down lighting and accent lighting; replacing the existing equipment and hoods in the kitchen with higher efficiency equipment; constructing two conference rooms at the north end in the dining room; and installing new pendant lighting, diffusers, and finishes throughout the dining room, including ceiling, wall and floor finishes.
Billings, MT Federal Courthouse: ALTA/ACSM survey with boundary amendments; Amended Subdivision Plats; topographic survey; exhibit preparation 4th Quarter: topographic survey Other Activities Related to Real Estate 26th Street West More than 50% Completed Information GAO gathered to improve the description The award funds an American Land Title Association (ALTA) survey of property to be acquired in Billings, Montana for the construction of a new Federal courthouse. In addition to the ALTA survey, additional site survey work includes adjacent parking lots, land, and streets, and a topographic and power pole survey. This work is intended to survey the property and provide data for the next steps in the construction of the courthouse.
STANGER INDUSTRIES INC.
This award was for the ARRA-Wichita Air Handler Replacement - U.S. Courthouse - replacement of air handling units in the Wichita Courthouse.Install new high-efficiency hot water boilers, new off-hours chiller, VAV's and direct digital control upgrades. * Air handling unit replacement; * Variable frequency drive installation; * New hot water piping and mechancial insulation; * New Sheet Metal,distribution ductwork and grilles; * Accoustical ceilling removal/replacement; * Building Automation Upgrades. * Removal and replacement of three (3) air handling units; * Misc. Electrical power for the air handling units; * Minor lighting modifications; * General project clean-up; * Building Automation Engineering; * Pre- Construction Services and drawing coordination; * Value Engineering; * Quality Control; & Solicit Sub-Contracting pricing.
Commercial and Institutional Building Construction Less Than 50% Completed Information GAO gathered to improve the description The award will result in decreased energy consumption and operational costs.
CONSTRUCTORS HAWAII INC.
Repair, alteration, and seismic upgrade to the Federal Building and U.S. Post Office at 154 Waianuenue Avenue, Hilo, Hawaii. The work includes asbestos removal work, installation of new concrete shear walls in the two wings, reconstruction of architectural concrete elements, renovations of existing toilet rooms, custom doors, windows and millwork, installation of fire sprinkler and other fire protection systems, plumbing, new electrical systems, natural stone, quarry tile, ceramic tile, and other finishes.
First Quarter: Furnished payment and performance bond, mobilized on site, started erecting temporary barriers, started demolition work. Second Quarter: Constructed new concrete shear wall at West Wing from basement thru the third floor, new stairs at loading dock, new stairs and curbs at courtyard, new ramp at basement. Work is ongoing at the West Wing first floor restroom and the finishes in the West Wing first, second, and third floors.
Commercial and Institutional Building Construction Less Than 50% Completed Information GAO gathered to improve the description The activities funded by the award will modernize the buildings and are part of General Services Administration's (GSA) overall effort to improve federal buildings.
Install VFD on Chiller # 3 at the Federal Bldg Install new VFD or the chiller for energy efficiency Commercial and Institutional Building Construction (Information not reported)
LOS ANGELES, CA 90024-3602 $72,807.65 Information GAO gathered to improve the description The award funds the installation of a variable frequency driver for a chiller at the Federal Building in Los Angeles, California.
JACOBS TECHNOLOGY INC.
Requirements and Estimating Sevices for facilities in GSA Region 10 Prepare performance based requirements packages for solicitation of Design/Build contracts for various projects. This is to include high performance Green buildings. The intent is to gather project data and performancerequirmentstoprepareperformance based Statement of Objectives. Deliverables include budget estimating, initial schedule development and solicitation phase services. Prepare performance based requirements packages for solicitation of Design/Build contracts for various projects. This is to include high performance Green buildings. The intent is to gather project data and performancerequirmentstoprepareperformance based Statement of Objectives. Deliverables include budget estimating, initial schedule development and solicitation phase services.
Prepare performance based requirements packages for solicitation of Design/Build contracts for various projects - completed 3 of 4 locations. (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award provides plans for energy-efficient buildings at several sites in General Services Adminstration (GSA) Region 10, including the GSA Region 10 headquarters in Auburn, Washington; the federal Building in Baker City, Oregon; a historical building project in Spokane, Washington; and the federal building in Anchorage, Alaska. This contractor’s place of performance will be at the Jacobs office in Bellevue, Washington.
URS GROUP, INC.
TAS::47 4543::TAS - RECOVERY - CONSTRUCTION MANAGEMENT SERVICES IN SUPPORT OF JACKSON FEDERAL BUILDING MODERNIZATION PROJECT. SERVICES INCLUDE PRE-DESIGN AND DESIGN PHASE.
Construction Management Assist services for the Jackson Federal Building Modernization Project from inception through June 20, 2011 (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The construction management services provided by this award are in support of an effort that will improve the building shell and repair or replace the building’s HVAC/electrical systems. The modernization of the building will result in the facility being an economically and operationally efficient high-performance green building. The services also include additional energy conservation measures in support of LEED Existing Building designation.
BOVIS LEND LEASE LMB, INC.
Moderization and facade reclad of Peter W. Rodino Federal Building in Newark, NJ 100% Bridging design and Final Report Commercial and Institutional Building Construction $542,023.00 More than 50% Completed Information GAO gathered to improve the description The award is part of a larger modernization project of the building consisting of exterior cladding for the entire building, upgrading fire egress for entire building, asbestos abatement and build out of 6 floors, upgrading HVAC for 9 floors, replacing 32 AHU’s, and a new cafeteria. This award includes repair/replacement of the HVAC system, domestic water distribution system, fire protection system, lighting and electrical systems, interior restoration, infrastructure work, exterior façade repairs, and hazardous materials remediation. Telephone, data networks, and security systems will also be upgraded and the restrooms will be modernized in compliance with Americans with Disabilities Act (ADA) and Uniform Federal Accessibility Standards (UFAS) regulations. The modernization will improve the building’s façade, which, due to the age of the building, is showing signs of significant deterioration, and replace or modernize various aging original systems.
NICHOLSON & GALLOWAY, INC Façade Repair and Slate Roof Replacement at the U.S. Post Office and Courthouse located at 271 Cadman Plaza East, Brooklyn, NY 11201 Continuation of Security Clearance with the Department of Homeland Security / Mobilization of Job Site / Installation of Pipe Scaffold / Installation of Sidewalk Bridge / Temporary Electric Installed Commercial and Institutional Building Construction 271 Cadman Plaza, East Less Than 50% Completed Information GAO gathered to improve the description The award updates the original structure built in 1892 and the expansion built in 1933, including replacement of nearly all of the existing deteriorated terra cotta cladding; retention, repair, restoration, re-pointing, and cleaning of existing terra cotta and granite cladding on the facades of both structures; replacement of the entire slate roofing system on both structures, to match the appearance and character of the existing slate roof; installation of an access and fall protection/prevention system in compliance with all applicable Occupational Safety and Health Administration (OSHA) regulations at the slate mansard roof on both structures to facilitate periodic maintenance of perimeter gutters and drains; and hazardous materials investigation and abatement associated with the above work items. These activities will correct the deficiencies in the exterior envelope of the building and preclude further façade deterioration and damage to the structure and the recently renovated historic interior.
NORTHERN MANAGEMENT SERVICES, INC.
Northern Management Services Inc shall supply and install four cartons of polardam form in the Data Center. Based on the revised scope of work, Northern Management has received a credit for not using the special order brushed grommets. Thus adjusting the original project from $20,383.00 to $16,228.00.
Sub contractor has completed approximately 100% of the work. The Airflow panels have been relocated, the installation of the 126lf of Plenum Divider is finished and the floor work has been completed. None of the completed work has been invoiced in this quarter. GSA requirement of payment after 100% completion with inspection of work and release for payment documented.
Commercial and Institutional Building Construction (Information not reported)
Information GAO gathered to improve the description The award provides repair work at the data center of the Bureau of Alcohol, Tobacco and Firearms (ATF) facility in Martinsburg, West Virginia. The air flow handlers in the data center--which houses many computers--were not distributing air properly. The handlers were moved to the racks at the front of the room and now work properly. The contract was reduced from $20,383 to $16,000 because they did not need to use special order grommets that were originally thought needed for installation. The award will result in air flow handlers that cool the data center to appropriate temperatures needed for computer functionality.
NORTHERN MANAGEMENT SERVICES, INC.
Perform testing of the EMS systems at the Giaimo building in New Haven, CT and the McMahon CH/FB in Bridgeport, CT, in support of the energy audits at these locations.
The Subcontractor had been contracted and the EMS systems testings have been completed at both buildings as per the notice to proceed by General Services Administration. Northern Management Services' Project Manager and Chief Engineer oversaw the work by the Subcontractor was completed in a timely manner. This project is 100% completed.The General Services Administration has been billed in the amount of $6,437.52.
Contracts Information GAO gathered to improve the description The award supports testing of the energy management systems (EMS) to improve energy efficiency.
Wissahickon Building in Philadelphia, PA - PV Roof, CM Services Task#1-Design & Shop Drawings/Submittal Reviews/Meetings Commercial and Institutional Building Construction 1120 Connecticut Ave NW, Suite 310 More than 50% Completed Information GAO gathered to improve the description The award supports electrical inspection services for the roof replacement and photovoltaic (PV) array installation project at the Veteran's Affairs Center at 5000 Wissahickon Ave. in Philadelphia, Pennsylvania. The design and construction of a new modified built-up roofing system is intended to replace the existing roof, which is 10 years old and currently in poor condition, with some portions of the roof leaking. Additionally, the PV array will reduce the environmental impact of the building.
SQUARE D COMPANY (INC)
Energy retrofit of the ATF Facility in Martinsburg, WV. Provide and install two utility meters and all associated hardware. Provide associated monitoring services.
No activity- project not started yet Commercial and Institutional Building Construction (Information not reported)
Information GAO gathered to improve the description The award supports the installation of two utility meters in support of a larger effort to retrofit the Alcohol, Tobacco and Firearms (ATF) facility with a ground source heat pump system, a photovoltaic (PV) solar array and replacement of the building’s chillers and adjustments to the HVAC system in the building. The retrofit effort will provide heating and cooling and reduce the amount of energy consumed by the building.
W. G. YATES & SONS CONSTRUCTION COMPANY The purpose of this award was to incorporate field changes and add VE option back into the scope work. The major options added back were the Blue fins, Pavers at the Rotunda and Granite steps at the entrance The work performed during this calendar quarter included reworking the sprinkler heads at holding cells, update walls and doors with the revised life safety drawings, revising the dimming board locations, adding blue fins on the performance mockup, changing the floor framing plan @ elevator 5, 6 & 11; adjustments to the steel framing in the field, relocating masonry walls for the Judges mantrap and elevator, relocation of the floodgate and pneumatic tube system, adding additional security conduit, revising the courtroom millwork and revising the locations of the Sally port sprinklers Commercial and Institutional Building Construction More than 50% Completed Information GAO gathered to improve the description The award allowed the contractor to incorporate value engineering (VE) into the construction of a new Federal Courthouse at 555 South President Street in Jackson, Mississippi. VE is an organized effort to analyze the functions of systems, equipment, facilities, services, and supplies to achieve essential functions at the lowest lifecycle cost, consistent with the required performance, reliability, quality, and safety.
COMMUNITY SERVICES AGENCY OF THE METROPOLITAN WASHINGTON COUNCIL, AFL-CIO Pre-apprenticeship training job and placement services all staff hired, 6-week training completed for 20 individuals, job placement activities underway, recruitment for next adult and youth classes underway 888 16th Street NW, Suite 520 Less Than 50% Completed Information GAO gathered to improve the description This award provides pre-apprenticeship training and placement services to low-income area residents through September 2010. Graduates of the program will be placed at registered apprenticeship programs at construction sites to gain on-the-job experience and industry-recognized credentials. The award is expected to result in 150 individuals trained and placed in jobs by September 2010.
PLATINUM ONE CONTRACTING, INC.
Design and install roof replacements and improvements of the Wilke D Ferguson Federal Building. Design and install roof replacements and improvements of the Brickell Plaza Federal Office Building Mobilization : Design in process, submittals, bonding, insurance Wilkie D Ferguson Federal CH, Brickell Plaza Federal Office Building $1,377,500.00 Information GAO gathered to improve the description This award supports the evaluation and installation of new rooftops at both federal buildings. The evaluation phase of this project will test whether the current roof structures can sustain the weight associated with green roofs. After testing, the construction phase of the project will be subcontracted to local builders. The expected outcome is greater energy efficiency at both buildings.
NATIONAL BUILDING CONTRACTORS, INC.
ARRA-funded replacement of penthouse and stair enclosure roofs with vegetated roofs.
The field survey of the roof replacement project has been completed, the asbestos testing has been performed, the 35% design submittal has been prepared and submitted, the project staging has been completed, and the demolition phase has begun. 401 West Peachtree St.
Less Than 50% Completed Information GAO gathered to improve the description This award funds the design and installation of roof replacement and improvements at the Peachtree Summit Federal Office Building at 401 West Peachtree St. in Atlanta, Georgia.
Architect-Engineer Services, Milwaukee, Wisconsin High Performance Green Building at the Federal Building & U.S. Courthouse 517 E. Wisconsin Avenue Less Than 50% Completed Information GAO gathered to improve the description The award provides architect-engineering design services in support of high performance green building work at the Milwaukee United States Courthouse and Federal Building in Milwaukee, Wisconsin. These services will create scopes of work for building system improvements based on the findings of a Recovery Act-funded retro-commissioning study and support the implementation of building features to increase energy efficiency.
ALLIED BUILDING SERVICE COMPANY OF DETROIT, INC.
Installing light sensors through out the building. Installing an A/C unit on the roof for Computer room Haven't started. NO Detais Yet Commercial and Institutional Building Construction 333 Mt. Elliot Avenue, Rosa Parks Federal Building Information GAO gathered to improve the description The award supports energy conservation activities at the Rosa Parks Federal Building in Detroit, Michigan. These activities include replacing water-cooled air conditioning unit with air-cooled air conditioning unit, replacing weather stripping at the front entrance, and installing occupancy lighting sensors throughout the facility. The award will result in reduced energy consumption.
FREDERICK CONSTRUCTION, INC.
Modernization Project at the Federal Building & US Courthouse. This project is in a Design Phase as a Construction Manager project. No subcontracts have been awarded as of 12-31- 09. Bids for subcontracted work will be reviewed and contracts awarded at a future date.
No services have been performed in this quarter.
Commercial and Institutional Building Construction ANN ARBOR, MI 48104-2129 Information GAO gathered to improve the description The award provides upgrades to the lighting and building automation systems at the Federal Building and U.S. Courthouse in Ann Arbor, Michigan. The upgrades to the HVAC and lighting controls will increase cost efficiency and energy conservation.
FREDERICK CONSTRUCTION, INC.
This project was awarded to conduct building automation system upgrades at the Theodore Levin US Courthouse. This project is in a Design Phase as a Construction Manager project. No subcontracts have been awarded as of 12-31-09. Bids for subcontracted work will be reviewed and contracts awarded at a future date.
This project is in the final design phase and the pre-bid phase no work has been performed on site in this quarter.
Commercial and Institutional Building Construction $801,980.18 Information GAO gathered to improve the description The award funds activities to modernize the building automation systems at the Theodore Levin Courthouse in Detroit, Michigan in order to make the building more energy efficient.
SAINT LOUIS, MO 63103-2818 More than 50% Completed Information GAO gathered to improve the description The award funds design services for the renovation and upgrade of the cafeteria at the Robert A. Young Federal Building in St. Louis, Missouri. The work being done under this award includes: design services for the cafeteria project, completing necessary technical updates, revising the project numbers and titles on all drawings, revising the specifications to require Energy Star equipment (where available), and updating projected construction schedules. The larger renovation and upgrade project includes an upgrade to air handlers, exhaust hoods, replacement of existing water-cooled appliances, and replacing existing kitchen equipment with Energy Star or LEED certified equipment.
GARLAND COMPANY INC, THE 1. Test for asbestos in or under roof (current roof may have been laid over an older roofing system). DUE: Two weeks after award of contract. 2. Specifications and schematic design for roof replacement. Documents must be sufficient to fully describe requirements for a design- build contractor, to include the design-build contractor’s requirements for design completion, but need not be stamped by a PE (although work must be by competent professional engineers as applicable). DUE: 30 calendar days after award of contract. 3. Recommendations for a PV system to be coordinated with roof replacement. DUE: two weeks after award of contract. 4. Upon GSA approval of recommended PV system, provide specifications and schematic design for the PV system. The schematic design should be flexible enough to permit competition among PV equipment manufacturers. The design must carefully avoid compromising historic aspects of the building, and must consider any other tenant impacts (e.g., glare reflected into windows). Documents must be sufficient to fully describe requirements for a design-build contractor, to include the design-build contractors requirements for design completion, but with the exception of the structural calculations need not be stamped by a PE (although work must be by competent professional engineers as applicable). DUE: Two weeks after GSA approval of PV system recommendations. 5. Provide structural calculations with the specifications and schematic design for the PV system. Structural calculations must be stamped by a PE.
Since the project has not started, their have not been any significant service performed or supplies delivered. To date, project set-up service and security badging administration has been delivered. (Information not reported)
Information GAO gathered to improve the description The award supports an engineering assessment and plans for roof replacement and photovoltaic (PV) system installation to be performed at the United States Courthouse in Pasadena, California.
SAMUEL ENGINEERING, INC.
Compile exisitng as-built drawings and site plans to display the ground areas being proposed for ground mounted PV panels. Also display the parking areas being proposed for ground mounted PV panels. Also display the parking areas of Buildings 25, 53, and 810 for the installation of carport PV s. Indicate existing electrical system on-lines at both the building 480V and/or 13.8 kV for PV tie-in. This information will be utilized to effectively portray the level of effort and existing conditions for a design-build contractor.
Greenwood Village, CO 80111-2816 More than 50% Completed Information GAO gathered to improve the description The award supports the development of preliminary design build documents, including one-line diagrams, plan drawings, tie-in locations, and general design notes for potential new construction projects of photovoltaic (PV) panel systems at the Denver Federal Center in Lakewood, Colorado. The award recipient also developed cost estimates for electrical tie in at each proposed PV panel system location. The award will result in increased solar power capacity through new ground-mounted and carport PV panel systems.
Parking lot lighting.
Completed site survey and 90 percent of design $48,284.00 More than 50% Completed Information GAO gathered to improve the description The award provides a design draft for LED parking lot lighting installation at the Laguna Niguel Federal Building. The new lighting will provide energy-efficient lighting and reduce energy costs at the federal building.
This is a Design Build Project which requires General Contractor to furnish and install two (2) new centrifugal chiller variable frequency drives at the Phillip Barton Federal Buiding and Court House located in San Francisco, California.
No services have been performed as of yet, as the project has not started. We attended a pre-construction meeting on Thursday, January 14, 2009. We are now awaiting a Notice To Proceed Letter from GSA, as to when we will physically be able to start the Project.
Electrical Contractors and Other Wiring Installation Contractors SAN FRANCISCO, CA 94102-3434 Information GAO gathered to improve the description The award supports activities to improve the energy efficiency of the Phillip Burton Federal Building and United States Courthouse. These activities include installing variable frequency drives, which control electronic motor speeds to modulate the power being delivered to a motor to reduce energy costs and equipment maintenance.
Design and construction services as required for design build construction of a New US Federal Courthouse Selection of Winning was made and under contract Commercial and Institutional Building Construction Contracts (Information not reported)
SAN JOSE, CA 95110-1347 Information GAO gathered to improve the description The award is part of a larger effort to construct a new U.S. federal courthouse in Bakersfield, California, which will meet the 10-year requirements of the courts and will satisfy federal energy standards.
BPA Call is for Project Management services associated with GSA's Public Building Services.
Building enevelope, including curtain wall, windows and roofing, Lighting-day lighting and energy efficient electric with sophisticated controls, HVAC energy retrofit and replacement, including boilers, chillers, cooling towers, piping, pumps and air distribution, building systems controls, including HVAC and lighting and acoustics, renewable energy generation, including photovoltaic.
Administrative Management and General Management Consulting Services (Information not reported)
Fort Worth, TX 76102-0181 Less Than 50% Completed Information GAO gathered to improve the description The award supports 2 people in the operations branch to provide project management support services for General Services Administration (GSA) Recovery Act construction projects. The individuals will provide project management support for all phases of ongoing construction projects from conception to commission. The location is the GSA office at 819 Taylor St., Fort Worth, Texas. The award will enable GSA to complete its Recovery Act-related construction workload.
CORNERSTONE ARCHITECTURAL GROUP, PS PROVIDE LIGHTING REQUIREMENTS AS PART OF A FUTURE RELIGHTING PROJECT AT TWO FEDERAL FACILITIES.
Information GAO gathered to improve the description The award will result in professional engineering and lighting services for the federal building in Fairbanks, Alaska and the General Services Administration (GSA) Region 10 headquarters in Auburn, Washington. The award will result in increased energy efficiency and cost savings.
Design and construction services to include all labor, installation, tools, equipment and design-build services for new boiler system for Eugene Federal Building, Eugene, Oregon and replacement boiler system for James A. Redden Courthouse in Medford, Oregon.
Administrative Co-ordination activities.
Commercial and Institutional Building Construction (Information not reported)
Information GAO gathered to improve the description The new boiler system for the Eugene Federal Building is an energy-efficient system. The boiler system for the James A. Redden Courthouse is being replaced because it is old and the replacement system is energy-efficient.
TISHMAN/AECOM, A JOINT VENTURE Construction Management Services for the Daycare Facility, Central Utility Plant, Phase 1 B Adaptive Reuse. Construction Management Services for Security and IT upgrades Design review, Meetings, Construction Review/Coordination 2700 Martin Luther King Jr, SE Washington, DC, DC 20032-0000 Less Than 50% Completed Information GAO gathered to improve the description The award will support construction management services for the renovation of multiple buildings on St. Elizabeth's West Campus. These services include design and cost estimate review, schedule control, construction progress reporting, safety and inspecting reporting, claims prevention, and close-out services. In addition, the award will ensure that the renovation project complies with the Recovery Act and historical and environmental considerations. The award will result in renovations to the St. Elizabeth's West Campus buildings for use by the U.S. Department of Homeland Security (DHS).
Provide Procurement Analyst Support Services in support of DHS Consolidation Program at St Elizabeths, SE, Washington, DC Performed procurement analyst in support of the DHS consolidation at St. Elizabeths. Services included monitoring, managing, planning, organizing, and documenting all procurement of services/construction/AE contracts, including administrative duties.
Commercial and Institutional Building Construction (Information not reported) $175,400.00 Less Than 50% Completed Information GAO gathered to improve the description The award is part of a larger three-phase Department of Homeland Security (DHS) project to consolidate and develop St. Elizabeths Campus in Washington, DC. The phase of this project that is funded with Recovery Act funds incorporates the design and construction costs of: 1) U.S. Coast Guard Command; 2) U.S. Coast Guard Parking Structure; and 3) Amenity spaces for U.S. Coast Guard. The award will also fund the remaining design work (which was not completed in a previous project phase): 1) The new DHS and Federal Emergency Management Agency (FEMA) Headquarters; 2) Historical preservation of St Elizabeths buildings; 3) Design of DHS National Operations Center (NOC), and 4) DHS parking structures. ProCon Consulting, LLC will be involved in design and construction management support services. The project will help move DHS closer to completing its effort to consolidate and develop its headquarters in the National Capital Region, though it will not complete the project. The remaining work will cost an estimated $1 billion.
JACOBS TECHNOLOGY INC.
Provide Intergrated Planning Sessions with GSA staff managing the 17 High-Efficiency Limited Scope Projects in the New England Region (1). Identify key objectives, critical scheduling requirements, opportunities and constraints posed by the Region's 17 Limited Scope Projects. Lead interactive planning sessions that will yield defined schedules and management plans for each Limited Scope Project.
Interactive planning sessions held with GSA Regional staff managing the 17 Limited Scope Projects. All significant project details and activities reviewed and scheduled through completion. Management plans for each project prepared and distributed to Regional leadership.
Administrative Management and General Management Consulting Services (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award supports integrated planning sessions with representatives from each of the General Services Administration's (GSA) 11 regions as well as representatives from the Office of Chief Architect and other related program offices. These limited-scope projects are system upgrades--such as upgrades to lighting or cooling systems--that are discrete and do not require major space re-design or architectural changes.
JACOBS TECHNOLOGY INC.
Construction Management (Agency) Services for Modernization ofU.S. Department of Interior Headquarters ARRA - DOI MODERIZATION CM SVS ARRA - DOI MODERIZATION CM SVS Project has not started. Plan to start the first quarter of 2010. (Information not reported)
Information GAO gathered to improve the description This award supports the renovation of the Department of Interior building in Washington, DC to make the building more energy efficient.
PROJECT SUPPORT SERVICES, INC.
Project management support to the office of Portfolio Management Division facilities management & services program division; providing operational, technical, and management support to the region in areas such as safety and health, concessions, childcare facilities, maintenance, energy efficiency, and accessibility.
Provided project management to the GSA Budget Program, ARRA Budget Team for support of GSA Manager P. Johnson, Portfolio Management Division. (Information not reported) $216,617.84 Less Than 50% Completed Information GAO gathered to improve the description This award provides one subject matter expert to support the Office of Portfolio Management Division, Facilities Management & Services Program Division for the General Services Administration's (GSA) National Capital Region in Washington DC. Specifically, the individual provides consultation for resolving Americans with Disabilities Act (ADA) and Architectural Barriers Act (ABA) cases at GSA facilities and review of ADA/ABA construction drawings submitted by third-party architects. The award will result in assistance for GSA in approving ADA/ABA-related facility changes and reviewing specification drawings.
The Project Information Portal (PIP) tracks/reports on prospectus level projects for project managers, customers and PBS executives. In an effort to support the ARRA, a host of enhancement will need to be made to the PIP. These ehancements will provide transparency and accountability over the recovery dollars applied to GSA capital projects. These enhancements will also provide PBS managers access to real time reporting tools to provide validity and consistency to the data reported to bother internal and external stakeholders.
Develop field level and form anhancements for recovery tracking to expand what has already been produced in PIP. Update integrations and connections with BI to support OMB reporting requirments. 1800 West Street, NW Less Than 50% Completed Information GAO gathered to improve the description The Project Information Portal (PIP) is a Web-based tool created for project teams to share information on prospectus and non- prospectus level projects with stakeholders. General Services Administration (GSA) uses the centralized system for tracking the more than 5,000 projects throughout its 11 regions for over 14,000 users. The award will develop field level and form enhancements to allow GSA to track Recovery Act spending.
The following award descriptions contained little or no information that allowed readers to understand the general purpose, scope and nature of activities, location, and expected outcomes. The award description information is taken. directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
GASTINGER AND WALKER ARCHITECTS INC Construction Management, Site Visits Commercial and Institutional Building Construction More than 50% Completed Information GAO gathered to improve the description The award provides construction management services for roof replacement at the Roman L. Hruska, United States Federal Building/Courthouse in Omaha, Nebraska. Despite being a relatively new building, the condition of the roof was poor. This roof replacement is part of a larger project to replace the roof, upgrade energy controls so that energy use can be reported back to General Services Administration (GSA), and then install photovoltaic cells (PV). A contractor will perform all construction management services from construction to commissioning. The award will result in a more energy-efficient facility and facility sustainability.
Assist with Functional Perforance Testing at the Rosa Parks Federal Bulding.
Other Services to Buildings and Dwellings Ann Arbor, MI 48104-2129 Information GAO gathered to improve the description The award supports the testing of a cooling system at the Rosa Parks Federal Building in Detroit, Michigan, in order to ensure that the system is working efficiently.
KPH CONSTRUCTION, CORP.
RECOVERY - Light Court Roof Replacement RECOVERY - Light Court Roof Replacement (Information not reported)
Information GAO gathered to improve the description The award supports installation of a high performance green building light court roof located in the south building of the United States Courthouse and Federal Building in Milwaukee, Wisconsin. The activities under this award include all management, supervision, labor, materials, supplies, and equipment necessary to replace the Light Court Roof. The work will consist of removing and replacing approximately 10,000 square feet of roofing covering a first floor space at the base of the light court. The award is in the amount of $997,358.00.
SAINT LOUIS, MO 63108-2208 More than 50% Completed Information GAO gathered to improve the description The award funds design services for the mechanical upgrade to the building automation system, HVAC upgrades, energy-efficient lighting, and new occupancy sensors at the Robert A. Young Federal Building in St. Louis, Missouri.
NORTHSTAR PROJECT MANAGEMENT, LLC Administrative Management and General Management Consulting Services Information GAO gathered to improve the description The award supports design-build consulting services for renovation of the Byron Rogers Federal Office Building in Denver, Colorado. The proposed renovation capital project will address all major building components including the following: structural, mechanical, electrical, plumbing, fire protection, and elevators. In addition, hazardous materials such as asbestos and PCBs will be abated.
The Recovery Act provides $4.6 billion to the U.S. Army Corps of Engineers’ (Corps) Civil Works program to accomplish the goals of the act through the development and restoration of the nation’s water and related resources. Funding is also provided to support the Corps’ permitting activities for protection of the nation’s regulated waters and wetlands and cleanup of sites contaminated as a result of the nation’s early efforts to develop atomic weapons. The Corps is an executive branch agency within the Department of Defense (Defense) and a direct reporting unit within the U.S. Army. Headquartered in Washington, D.C., the Corps has eight regional divisions and 38 districts that carry out its domestic civil works responsibilities. Corps headquarters primarily develops policies, based on administration guidance, and plans the direction of the organization; divisions coordinate the districts’ projects; and the districts plan and implement the projects. The Corps is the world’s largest public engineering, design, and construction management agency and leverages its expertise primarily through contracts with civilian companies for all construction work and much of its design work. Civil Works projects are generally authorized by various Water Resources Development Acts and funded by annual appropriations for energy and water development. The Civil Works program includes efforts to provide safe and reliable waterways; reduce risk to people, homes and communities from flooding and coastal storms; restore and protect the environment; provide hydroelectric power to homes and communities; provide educational and recreational opportunities; prepare for natural disasters and act when disaster strikes; and address water resource challenges.
Nature and Type of Civil Works Recovery Act Projects
The Operations and Maintenance account focuses on preserving, operating, and maintaining river and harbor projects that have already been constructed.
The Construction account funds construction and major rehabilitation projects related to navigation, flood control, water supply, hydroelectric power, and environmental restoration.
The Mississippi River and Tributaries account funds planning, construction, and operation and maintenance activities associated with projects on the Mississippi River and its tributaries that reduce flood damage.
The Formerly Utilized Sites Remedial Action Program account is for cleanup of contaminated sites throughout the United States where work was performed as part of the nation’s early atomic energy program.
The Investigations account funds studies to determine the necessity, feasibility, and returns to the nation for potential solutions to water resource problems, as well as design, engineering, and other work.
The Regulatory account funds efforts to protect the aquatic environment by regulating dredge and fill materials and other construction-related activities in jurisdictional waters of the United States.
Through April 23, 2010, $3.5 billion (about 76 percent) of the $4.6 billion in Recovery Act Civil Works program funds had been obligated by the Corps. (See table 11.) Of the $3.5 billion in obligated funds, the Corps had outlayed about $1.3 billion. Of the obligated funds, the Corps obligated about 49 percent ($1.7 billion) for Operations and Maintenance and 37 percent ($1.3 billion) for Construction.
As of April 23, 2010, the Corps had identified 830 Civil Works projects to receive Recovery Act funding. These included 533 Operations and Maintenance projects, 175 Construction projects, 45 Mississippi River and Tributaries projects, 10 Remedial Action Program projects, 66 Investigations projects, and funding for the Regulatory program. contracts and not for projects. According to Corps headquarters officials, and as discussed later in this appendix, it is not easy to associate individual contracts with Recovery Act projects.
About 14 Percent of the Descriptive Information for Corps Civil Works Awards Met Our Transparency Criteria
We assessed the transparency of descriptive information for Civil Works awards available on Recovery.gov, as described in this report. We found that an estimated 14 percent met our transparency criteria, 70 percent partially met our criteria, and 16 percent did not meet our criteria.
For descriptions that partially met or did not meet our transparency criteria, we collected additional information to complete the award descriptions for the elements of transparency that we believed were missing. The descriptions of awards in our sample, whether they met our criteria, and additional information that we found to complete the narrative descriptions, are provided at the end of this appendix.
The Corps Issued Supplemental Material to Facilitate Public Understanding of Its Awards
In order to assist the public in better understanding how a particular contract fits into a larger project context, the Corps issued supplementary material to its district offices, directing them to instruct recipients to include the project name—information that districts would need to provide to recipients—in the award description. According to Corps headquarters officials, the Corps districts were to provide this information to recipients in a quick reference sheet that contained key award information, including the project name, which recipients were to use to report contract information. The Corps headquarters instructed the districts to provide this information to the recipients.
Factors That May Have Affected the Transparency of Reported Information
We identified three factors that may have affected the transparency of reported information. First, because the Corps awarded multiple contracts to support its projects, depending on the nature of a contract, a recipient may not know which Corps project the contract supports. For example, a Corps district awarded a contract to purchase a boat that will be used to perform maintenance at a dam and reservoir project; however, the recipient was not aware of the intended use of the boat sold under the contract. Moreover, according to Corps headquarters officials, without receiving information from the Corps, a recipient may not know which Corps project the recipient’s contract supports and would not be able to report this information. In addition, even if the project name associated with each contract was provided to the recipient, the nature of Corps contracts may make it difficult for the recipient to report information, particularly with regard to location. For example, engineering services provided for a construction project in Texas may be provided by a recipient located in another state.
Second, according to Corps headquarters officials, the Corps awarded about three-fourths of its Recovery Act contracts to small businesses that may not have experience with this type of reporting and may have limited administrative capacity. Finally, Corps headquarters officials told us that the Recovery.gov system was designed for reporting on grants and loans and was adapted for contracts; therefore, it may have been difficult for recipients to report certain information. For example, certain contract actions such as modifications to existing contracts or task orders—which can include multiple activities across multiple locations—are reported in the system as a single award, and recipients may have been unsure how to indicate this information when reporting. As a result, a single award description may appear in Recovery.gov for work involving multiple activities and locations and this information may not be explained in the award description.
Other Ways Award Information Is Made Available to the Public
projects and identify some descriptive information about the projects. The information available on the Web site is specifically related to Recovery Act projects; however, detailed information about individual contracts that support these projects is not available through the Web site. Prior to awarding Recovery Act contracts, the Corps also provides information about contracts through solicitations it posts on the Federal Business Opportunities Web site. According to Corps headquarters officials, the comments they have received on the Corps’ Recovery Act awards were mainly from recipients requesting technical assistance and from reporters requesting information about a specific contract they were researching.
Civil Works Descriptions That Met Our Transparency Criteria
The following award descriptions contained sufficient information on general purpose, scope and nature of activities, location, and expected outcomes to meet our transparency criteria. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
Appendix XI Civil Works Program TETRA TECH, INC.
Contractor must review as-built information and collect supplemental data to meet the certification requirements outlines in 44 CFR 65.10 and detailed in National Flood Insurance Program for the massillon Levee, located in Massillon, Stark County, Ohio. The contractor will be responsible for determining that interaction among the companents will not result in possible failure. Responsible for producing these supporting engineering analyses and reporting the component condition and certification recommendation. Contractor will be responsible for performing the certification determination. Certification engineering analysis shall consist of Hydrology and Hydraulics, Geotechnical, Structural, Electrical, and Mechanical evaluation. Major factors to be considered in the technical evaluation include: O&M plans, levee certification field inspection, characterizing the flood hazard, capacity exceedence/failure criteria, freeboard, closure devices, embankment protection, seepage analysis, embankment and foundation stability, settlement, construction records and control testing, performance records, major maintenance and rehabilitation, interior drainage, and residual risk and public safety. A Levee Certification Report shall be prepared to document and describe the basis for the certification recommendation of the Massillon levee system. The LCR shall be sufficient to support the execution of the Independent Technical Review process described in paragraph 10.c of NFIP ETL (draft)_1110-2-570. Five copies of the draft submittals shall be submitted . Upon completion five (5) copies of the final report shall be submitted and properly bound. The report shall include all text tables, figures, and exhibits to support the findings, results, and recommendations. In addition to hardcopies, all computer files generated shall be submitted on CD rom formatted in Microsoft Word. To insure all work submitted is technically accurate the Contractor shall develop and execute an Independent Technical Review Plan. This plan shall be submitted for review and approval by the government. The Contractor is responsible for Quality Control. The Contractor is responsible for the formulation and preparation of all work required in this Statement of Work. All final reports, figures, drawings, calculation, and report cover letters will be sealed or stamped by the responsible engineer. The intermediate reports and final report will be submitted for Quality Assurance review and shall be complete and free of spelling, typographic, and grammatical errors. The 50% and 90% drafts reports will be submitted for QA review and comments by Corps of Engineers personnel. The 50% draft report shall be submitted within 5 month of the notice to proceed and the 90% draft report shall be submitted within 7 month of the notice to proceed.
Task 1 - Data Collection and Review. Completed data collection and review. Reviewed readily available materials and Identified additional resources referenced Task 2 - Topographic Mapping. Obtained topographic Mapping in GIS format. Task 3 - Site reconnaissance Visit. Performed post-processing of GPS data. Prepared draft inspection log/report. Task 4 - Geotechnical Assessment. Performed review of past design data and geotechnical information. Prepared drilling plan. Performed field exploration. Task 5 - Engineering Assessment. Performed Hydrologic Evaluation. Performed Hydraulic Evaluation. Performed Initial Scour/Aggradation Analysis (Pending Internal Review) Task 7 - Levee Certification Report. Prepared Hydrologic section of the Levee System Report. Performed hydraulic section of the Levee System Report. Task 8 - Independent Technical Review. Performed review of Hydrologic section of the Levee System Report. Performed review of Hydraulic section of the Levee System Report. Task 9 - Meetings and Coordination. Coordination with City of Massillon and USACE. Task 10 - Project Management. Invoicing and reporting.
Engineering Services Appendix XI Civil Works Program (Information not reported)
Less Than 50% Completed DAVID FORD CONSULTING ENGINEERS INC The accelerated CWMS deployment campaign (hereinafter referred to as the project) is a component of the American Recovery and Reinvestment Act (ARRA) of 2009. The objectives of the project are as follows: 1. To enhance the capability of the Corps of Engineers offices nationwide to make well informed decisions for managing reservoirs and water control systems. This will be achieved by expanding, at an accelerated pace, the availability of advanced information technology resources for hydrometeorological data management, display, and dissemination; watershed runoff forecasting; flood stage prediction; reservoir operation analysis; and flood impact analysis. 2. To create and maintain jobs for US citizens, in keeping with the goal of the ARRA. This will be achieved by using HEC?s BPA contractors to undertake the work and manage its successful completion. Those contractors, in turn, may use local consulting resources if appropriate and useful to the project. The intended deliverable of the overall project is, for critical Corps of Engineers watersheds, a fully functional CWMS decision support system that will enhance water management. The CWMS decision support system includes HEC-HMS, HEC-RAS, HECResSim, and HEC-FIA. For each watershed, software will be installed as needed and configured by a contractor, with cooperation of HEC and Division or District staff. Contractors will configure and calibrate the models, using data and information collected from District and Division staff. Contractors will test the software under simulated real time high flow conditions, demonstrating the deployment under a stress test. Contractors will document actions taken to deploy the decision support system. Finally, contractors will transfer the technology to Corps staff in the appropriate District or Division offices. This task order is for a ?lead contractor? (LC) to assist HEC in managing rapid deployment of CWMS at Corps districts and coordinate the day-to- day activities of the blanket purchase agreement (BPA) contractors contributing to this effort. This role includes working with HEC on selecting watersheds to be implemented, identifying what models and tasks are necessary for each implementation, developing management plans, and performance work statements. The LC will recommend assignments of tasks to other BPA contractors through the Corps PM. The LC will facilitate the work of the BPA contractors, clarifying statements of work, deliverables, and schedules with the PM. The LC will monitor the progress of the BPA contractors, reporting to the PM and supply the weekly reporting information to meet ARRA requirements. The LC will take all necessary actions to ensure the project objective is met.
Appendix XI Civil Works Program Task 1: Worked with HEC project manager (PM) to identify priority basins and locations for accelerated CWMS deployment, and prepare list of candidate sites for deployment. Contacted technical representative (TR) at each candidate site to confirm selection and to gather relevant information about sites. Coordinated with PM to develop a detailed project management plan (PMP). Obtained buy-in and signatures from relevant BPA contractors, Corps District staff, and HEC. Task 2: Coordinated with PM to develop detailed work plan and work statement for each deployment site (8) for initial effort by BPA contractors. Task 3: Reviewed initial Site Assessment reports submitted to HEC from BPA contractors. Advised PM on any technical or administrative issues. Wrote a summary report of the site assessments with LC recommendations. Coordinated with PM on selecting additional candidate watersheds for the second round or on deleting candidate watersheds from first round if funding is not available for all sites. Task 4: Prepared performance work statements (PWS) for each of the 8 candidate watersheds. Task 5: Reviewed work plans and schedules submitted by BPA contractors. Wrote a summary report of the work plans with LC recommendations. (Information not reported)
Less Than 50% Completed FURNISH ALL DRAWINGS, LABOR, MATERIALS AND EQUIPMENT NECESSARY TO FABRICATE, DELIVER AND INSTALL ONE (1) COMPLETE NEW BOAT DOCK SYSTEM WITH THREE (3) 8-FOOT WIDE X 20-FOOT LONG ALUMINUM DOCK SECTOPMS AND ONE (1) 4-FOOT WIDE X 20-FOOT LONG ALUMINUM TAPERED GANGWAY. DOCK SYSTEM MUST BE ABLE TO USE EXISTING ANCHORING SYSTEM.
FABRICATION, DELIVERY AND INSTALLATION HAS BEEN COMPLETED. ACCOUNTING COMPLETED BILLING AND OFFICE ASSISTANT IS COMPLETING FEDERAL REPORTING.
SMARTSVILLE, CA 95977-0006 Appendix XI Civil Works Program Furnish all equipment, labor, layouts of work features, and supervision necessary to obtain sufficient subsurface information, perform analysis, and provide the government recommendations to help alleviate seepage at left abutment of Winfield Locks and Dam, Red House, WV.
Drilling, Lab Evaluations, and Initiated Study More than 50% Completed Original Contract was awarded August 30, 2007: Contract was for the completion of foundation drilling and grouting at the Clearwater Dam in Piedmont, Missouri. This work is a continuation of Phase I which was completed Oct 15, 2007. The scope of this contract was to complete the foundation rock treatment down to elevation 325, 250 ft below the working platform, prior to the installation of the proposed cutoff wall. The lower 50 ft of the grout curtain is to be grouted to a value of 3 lugeons or less and the upper rock mass to a value of 10 lugeons or less. This type of work is highly technical in nature and will provide enormous amounts of valuable data to be used in the design and construction of the proposed cutoff wall (Phase II). Beginning with Modification P00012 executed May 6, 2009, ARRA funds were incorporated into the contract in order to provide for adjustments in quantity and scope of work required in order to meet the project objectives. The project was successfully completed, final reports have been submitted and the contractor is demobilized.
In excess of 25,000 LF of drilling; over 500,000 CF of grout materials placed; over 1117 LF of borehole stage imaging; relocation of water lines in preparation of Phase II work.
Appendix XI Civil Works Program Poured Concrete Foundation and Structure Contractors JACOBS/SEH, A JOINT VENTURE Main Lock Culvert Valve Machinery Study Phase I, Melvin Price Locks and Dam, Mississippi River, Preliminary Engineering report, per attached Scope of Work and proposal dated 18- Jun-09. DJ04 - MEL PRICE MAIN LOCK CULVERT This task involves static and kinematic measurement, disassembly, material inspection and testing, evaluation and reporting as part of an investigation of failures that have occurred in the culvert valve machinery components of the main lock, Illinois-side emptying valve at Mel Price Locks and Dam on the Mississippi River. All field activities are complete. The draft report was submitted this quarter. We are awaiting comments before submission of the final report. (Information not reported)
St. Louis, MO 63102-2131 More than 50% Completed W912EK-09-D-0006 Appendix XI Civil Works Program In support of fish studies, perform adult Coho salmon and steelhead radio telemetry monitoring, green river Seattle, Washington. The contractor must: analyze and report on radio telemetry monitoring of adult Coho salmon released above Howard Hanson Dam, WA, (HHD) into the upper Green River in fall 2008; monitor the movement and distribution of adult Coho released above HHD into the upper green river in fall 2009; analyze and report on 2009 results incorporating information from 2008 study.
Work for this project has not begun. (Information not reported)
Regulatory document imaging and digital conversion to search able format. Approximately 800,000 documents.
Grace Hill (Prime) has converted approximately 50% of the microfiche to digital format. We are now in the process of converting the documents to a searchable (OCR) format. We expect to be 50% complete by end of January 2010.
Data Processing, Hosting, and Related Services Less Than 50% Completed W912ES-10-P-0015 Appendix XI Civil Works Program Provide all transportation, parts, materials, equipment and laborer to provide and install a complete security camera monitoring system (SCMS) designed for marine environment on board the US Army Dredge Ship Wheeler.
Removed antiqated security system and installed three PTX (Pan, Tilt, Zoom) Cameras and 11 fixed cameras at various locations throughout the ship. All work was completed; however, two of the fixed cameras are working intermittantly during the first cruise and will be replaced as soon as the ship returns to port.
Electrical Contractors and Other Wiring Installation Contractors New Orleans, LA 70118-3651 More than 50% Completed DIAZ CONSULTANTS, INC.
PROJECT SYNOPSES: Conduct field and laboratory investigations to characterize the nature and level of contamination of sediments deposited behind three dams (Carbon Canyon Dam, Lopez Dam, and Prado Dam) and prepare a report and logs summarizing those investigations. Carbon Canyon has been awarded as the base contract; Lopez and Prado may be awarded as options to be executed at a later date.
Completed Field Invetigation and Laboratory Testing. Completed and submitted draft report for review. (Information not reported)
Santa Ana, CA 92701-0810 More than 50% Completed W912PL06D0004 Appendix XI Civil Works Program SECURITY CONSTRUCTION SERVICES, INC.
Replace roofs at Knightville Gatehouse, Littleville Gatehouse and Intake Tower and Birch Hill Dam Gatehouse.
Civil Works Descriptions That Partially Met Our Transparency Criteria
The following award descriptions did not contain sufficient details on one or more of the following pieces of information necessary to facilitate general understanding of the award, based on our criteria: general purpose, scope and nature of activities, location, and/or expected outcomes. In some cases only a small amount of additional information was needed, while in other cases, many pieces of information were needed to make the description more transparent. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
Appendix XI Civil Works Program MANSON CONSTRUCTION CO.
Capital (deepening) dredging at the Port of Anchorage Other Heavy and Civil Engineering Construction Less Than 50% Completed Information GAO gathered to improve the description The award funds dredging, which will support the port's ongoing intermodal expansion project, planned to allow larger ships to call and offer more room for commercial cargo handling, a cruise ship terminal, and to support rapid deployment from Alaska's military bases.
ROMERO GENERAL CONSTRUCTION CORP.
REPAIR BADLY DETERIORATED ROADS, SUCCESS LAKE CA Highway, Street, and Bridge Construction (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award funds road repair to multiple areas including the entryway to Success Lake, the South Tule Recreation Area, and the South Tule parking lot. The repairs included replacement and repaving of roads, which involved digging up the asphalt, cement treating, and paving. Success Lake is located just east of Porterville in Tulare County, California.
Appendix XI Civil Works Program ROSS LABORATORIES, INC.
MFG AND DELIVERED SIDESCAN SONAR SYSTEM (MODEL 4900) INCL SUB BOTTOM, PROFILING SYSTEM MFG AND DELIVERED SIDESCAN SONAR SYSTEM (MODEL 4900) INCLUDING A SUB BOTTOM, PROFILING SYSTEM. ALSO DELIVERED A VESSEL MOTION SENSING SYS AND HYDROGRAPHIC SURVEY SOFTWARE.
Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing Information GAO gathered to improve the description The award supports the manufacture and delivery of a sidescan sonar system (model 4900) including a sub bottom profiling system. This award also includes the delivery of a vessel motion sensing system and hydrographic survey software. This equipment and software is for maintaining shipping/navigation channels in the New York Harbor area.
Information GAO gathered to improve the description The award supports the manufacture and delivery of replacement filling and emptying valves, four for Kentucky Lock, Kentucky and two for Wilson Lock, Alabama. These valves allow for the discharge and filling of water from/to the locks in order to perform routine maintenance.
BIOHABITATS, INC.
Schukylkill River, Wissahickon Creek Feasibility Study Field assessment, analysis, and report preparation for restoration actions.
Other Scientific and Technical Consulting Services More than 50% Completed Information GAO gathered to improve the description The award supports the completion of Feasibility Study Scoping documentation for ecosystem restoration within the Wissahickon watershed. Based on a previous study, it was determined that the primary problems within the Wissahickon watershed include stream flow variability, poor quality aquatic habitat, aquatic habitat degradation, flooding, and overall ecosystem imbalances. Various solutions exist to address these problems and will be considered in depth during feasibility investigations. This documentation will include definition of the existing conditions, the "without project" conditions, and the site selection screening process to continue the feasibility study of this critical urban watershed for ecosystem quality improvements.
COMPLETE THE REHABILITATION OF THE ADA CAMPSITES AT SOUTH ABUTMENT, DUB PATTON, AND HERNANDO POINT RECREATION AREAS AT ARKABUTLA LAKE IN ACCORDANCE WITH THE ATTACHED SCOPE OF WORK - (PROJECT #1) completed installation of concrete pads, grading of disturbed areas and installing of latern hangers, picnic tables and service tables.
Facilities Support Services Appendix XI Civil Works Program More than 50% Completed Information GAO gathered to improve the description The award supports the rehabilitation of campground sites to make them Americans with Disabilities Act (ADA) accessible, allowing persons with disabilities to safely utilize the campground areas. Rehabilitation included procurement and installation of ADA-compliant items including tables, lantern holders, and grill services tables. Work also included installation of concrete pads and grading of areas to make them ADA compliant. The award provided rehabilitation of 56 campground sites at 3 recreation areas, including 18 sites at South Abutment, 14 sites at Dub Patton, and 24 sites at Hernando Point.
T & C MOBILE HOME & CONSTRUCTION SERVICES, LLC Remove and replace furnaces and fuel tanks in the gate house at Whitney Point Lake, NY.
The sub-contractor provided all labor, equipment, tools, and materials necessary for removing and replacing two furnaces and two 275 gallon fuel oil tanks in the gate house at Whitney Point Lake, NY.
Plumbing, Heating, and Air-Conditioning Contractors Whitney Point, NY 13862-0706 Information GAO gathered to improve the description Replacing the furnaces will permit a much more efficient use of energy and replacing the fuel tanks will permit operation of flood control gates during a power outage.
WILSON & COMPANY, INC., ENGINEERS & ARCHITECTS CEPD Compliance Surveys.
Appendix XI Civil Works Program Land surveying, geodetic.
Surveying and Mapping (except Geophysical) Services Less Than 50% Completed Information GAO gathered to improve the description The award supports surveys for Comprehensive Evaluation of Vertical Datums that will establish new vertical control, based on the North American Vertical Datum of 1988 (NAVD 88), for each of 70 projects located in New Mexico, Colorado, and Texas, within the U.S. Army Corps of Engineers Albuquerque District. This work will ensure that all of the flood control projects within the Albuquerque District are referenced to at least three vertical control benchmarks. This will take the district one step further in ensuring that all of its flood control projects are referenced to NAVD 88. This effort is needed to meet requirements of an executive order that calls for the standardization of the use of the most current vertical datum, which is NAVD 88. Vertical datums are used to reference protection elevations on flood control structures or excavated depths in navigation projects.
TAS::96 3134::TAS DESIGN AND CONSTRUCT LAND PORT OF ENTRY AT SHERWOOD NORTH DAKOTA FOR CUSTOMS AND BORDER PROTECTION Commercial and Institutional Building Construction (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award supports construction of a new land port of entry (LPOE) building in Renville County, North Dakota for use by Customs and Border Patrol (CBP) personnel. The award also supports interim repair and alterations activities to address immediate and emerging needs of the existing LPOE until new construction is completed.
Appendix XI Civil Works Program Lower Willamette River Ecosystem Restoration General Investigation Feasibilty Study/Draft PEIS We completed the field surveys for HTRW, topography, cultural resources, and utilities. We also completed the hydraulic modeling, cross sections, and refined the preliminary drawings. at the beginning of October. We submitted the draft Notice of Intent. We got about haflway through the geotechnical section, and completed the writeup for soils and geology.
Less Than 50% Completed Information GAO gathered to improve the description The award funds a study that will assess the feasibility of ecosystem restoration, including remediation of contaminated sediments over a portion of a 25-mile reach of the Willamette River in Portland, Oregon. The feasibility study will be used to examine and prioritize ecosystem restoration opportunities in the study area. The purpose of the study is (1) to identify and evaluate substantial ecosystem degradation problems in the Lower Willamette River Basin; (2) to formulate, evaluate, and screen potential solutions to these problems; and (3) to recommend solutions that are in the federal interest and are supported by a local entity willing to provide the items of local cooperation (i.e., a cost-sharing sponsor). The recommended plan will contribute to the identified restoration objectives of restoring fish and wildlife habitat and natural processes of the basin. The Lower Willamette River Ecosystem Restoration project is from Willamette Falls to its confluence with the Columbia River.
ATLANTIC MARINE CONSTRUCTION COMPANY, INC.
Furinsh all labor, material, equipment, incidentals, supervision and transportation for work necessary to provide security, road, and parking improvements. Job duration is 90 days from NTP.
Project is in design at this time?..billed for Bond cost of $18,770.00 Commercial and Institutional Building Construction Elberton, GA 30635-5420 Appendix XI Civil Works Program Less Than 50% Completed Information GAO gathered to improve the description The award provides security, road and parking improvements to the access road at the Richard B. Russell Dam and Lake Project in Elberton, Georgia.
Tidal Datum Determinations for Small Boat Harbors in southeast Alaska. The scope of work is to do a tidal determination to establish a new vertical datum and tie existing control of each harbor to its new vertical datum at Hoonah Small Boat Harbor, Hoonah, Alaska, the Kake Small Boat Harbor, Kake, Alaska, the Metlakatla New Harbor & Metlakatla Old Harbor (one station), Metlakatla, Alaska, and the Pelican Small Boat Harbor, Pelican, Alaska and re- establish the horizontal control at Hoonah Small Boat Harbor for the US Army corps of Engineers, Alaska District.
Field work is complete. Installed tide gauges at the villages of Hoonah, Kake, Pelican, and Metlakatla in Southeast Alaska. Gauges collected water level information for a period of 35 days, then removed from the water. Installed new tidal bench marks at each location. Determined bench mark positions with GPS and updated positions for other historical bench marks and survey monuments at each harbor. Determined bench mark elevations by differential leveling and updated elevations for other historical bench marks and survey monuments at each harbor. Iniated data processing.
Surveying and Mapping (except Geophysical) Services More than 50% Completed Information GAO gathered to improve the description The award supports the collection of tidal data published by the National Oceanic and Atmospheric Administration (NOAA) at specific locations known as tide stations. Commercial and private boats use these data to safely navigate waters and in the long run, these tidal data will help establish four tide stations at these harbors as well as inform harbor improvements.
Appendix XI Civil Works Program DAVID FORD CONSULTING ENGINEERS INC This project is for HEC-RAS steady and unsteady model development for the Red River of the North (RRN) from the Canadian border to Halstad, MN. Scope tasks include review of the existing HEC-RAS steady models, consolidation to one model, cross section expansion and refinement, and calibration to the flood of record. Both steady flow HEC-RAS and unsteady flow HEC-RAS models will be completed. The completed unsteady flow model is intended to be used by the National Weather Service (NWS) North Central River Forecast Center. A brief report should also be prepared to discuss model construction and simulation results.
Quarterly activities: Task 1. Completed kickoff phone conference call and began meeting coordination. Task 2. Began to review existing HEC-RAS models and data and began to complete a Memorandum for the Record (MFR). Task 9. Provided required monthly status reports. (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award supports the development of a Hydrologic Engineering Centers River Analysis System (HEC-RAS) hydraulic model for the entire Red River. The model will be used for project planning and flood forecasting.
Provide labor, equipment and materials required to perform the work at the Lake Washington Ship Canal Spalling Concrete Repairs, including placement of concrete/epoxy repair system.
Erection of scaffolding, cleaning of application area, application of epoxy based concrete patch material, final cleanup and gridning of finished areas, disassembly of scaffolding.
Appendix XI Civil Works Program More than 50% Completed Information GAO gathered to improve the description The award supports the repair of spalling concrete on the sides of lock chambers. Spalling is the minor failure of the concrete lock sidewalls that occurs due to age. The spalling concrete is a safety issue because it could fall on boats and/or presents a hazard for boaters and employees.
GUSTIN, COTHERN, & TUCKER, INC.
Survey #09-079, Perform all A_E services for topographic, geodetic, property/boundary, and construction surveys for EDEN(WCS) Benchmark Monumentation ; counties of Broward, Miami-Dade, Monroe and Palm Beach GPS Sessions for completion of required benchmark monumentation Surveying and Mapping (except Geophysical) Services (Information not reported)
West Palm Beach, FL 33401-0001 More than 50% Completed Information GAO gathered to improve the description The award supports benchmark documentation activities in Florida's Water Conservation Areas as part of the Comprehensive Everglades Restoration Plan, Adaptive Assessment, and Management program. These activities will provide necessary data for scientists and engineers to restore America's Everglades.
BLACK & VEATCH SPECIAL PROJECTS CORP Black & Veatch is performing structural engineer anlaysis and design of mass concrete structures for the new upstream monoliths for Kentucky Lock. We are producing construction plans and specifications. The work has required structural, civil and electrical engineering, as well as, construction cost estimating and scheduling. CADD Technicians put together the construction plans.
Completed final plans and specifications for New Upstream Lock Monoliths. Included foundation design and other miscellaneous features.
Appendix XI Civil Works Program (Information not reported)
Grand Rivers, KY 42045-0001 More than 50% Completed Information GAO gathered to improve the description This design work supported by the award is part of the Kentucky Lock Addition project to construct nine partial height monoliths--the 60- foot wide by 60-foot deep by 100-foot tall concrete blocks that hold back the water--for the upstream one-third of the new lock; this will create a more stable configuration for the existing lock.
MIKE HOOKS, INC.
CIN-007: Disposal Area Maintenance & CIN-008: New Spill Boxes - Calcasieu Parish, Louisiana CIN-007: Disposal Area Maintenance Work consists of ditching in the Disposal Areas. The depth and width of the ditching will be site specific. The linear footages for each disposal area are: D/A 2 = 2,300 ft., D/A = 25,450 ft., D/A 9 = 22,900 ft., D/A 10 = 16,050 ft., & D/A 11 = 16,800 ft. CIN-008: Install new spill box weirs in Disposal Areas #2, #8, #9, #10, & #11. The existing spill boxes in each disposal area shall be removed from the site. Surveys of the disposal areas to determine the location of the new spill boxes.
Other Heavy and Civil Engineering Construction (Information not reported)
Information GAO gathered to improve the description The work performed under this award will extend the life of the levees in Calcasieu Parish.
Appendix XI Civil Works Program URS GROUP, INC.
TAS::96 3135::TAS - MASTER PLANNING SERVICES FOR ALUM CREEK LAKE, LEWIS CENTER, OH.
Prepared URS Project Execution Plan (PXP), performed project administrative start-up activities.
Master Plan (MP) Task 1- Project Start-up: Prepared and submitted draft Plan of Study (POS).
MP Task 1- Project Start-up: Participated in Kick-off Meeting. MP Task 2 - Develop Geographic Database: Began GIS setup and data acquisition.
All Other Professional, Scientific, and Technical Services (Information not reported)
Information GAO gathered to improve the description The project will align eight exciters--designed to supply the correct amount of field current to the generator--to ensure an operational system at the Big Bend Powerplant in South Dakota. The award will result in improving and upgrading the 20-year-old exciters and extend their life by an additional 10 years.
GREAT LAKES DREDGE & DOCK COMPANY, LLC This project entails dredging of 1.2 million cubic yards of maintenance material in the Oregon Inlet Spit Channel and the Ocean Bar. Dredging is to be to -15 feet. Dredged material is to be placed on the beach at Pea Island. The only non-ARRA funding is a portion of the mobilization and demobilization ($2.5 million out of $3.6 million).
Approximately 268,000 cubic yards of material were placed at the disposal site during the fourth quarter of 2009 by the Hydraulic Cutter Suction Dredge Alaska. Equipment was demobilized in the fourth quarter.
Other Heavy and Civil Engineering Construction (Information not reported)
Information GAO gathered to improve the description The award funds maintenance dredging operations to provide a safe, reliable navigable channel. The dredging material was then used to re-nourish the beach.
W. M. SMITH & ASSOCIATES, INC.
Information GAO gathered to improve the description The award provides 250 life vests for park personnel at Barren Lake in order to conform to water safety regulations and also provide a safe environment for the personnel to perform their duties on or near the water. The vests will allow personnel to perform rescue operations, if necessary. The vests replace equipment that no longer meets the standards for such items.
Cleaning and Janitorial Services for Alum Creek Lake, Ohio Cleaning and Janitorial Services for Alum Creek Lake, Ohio (Information not reported)
Information GAO gathered to improve the description The award supports additional janitorial services for Alum Creek. These services include cleaning the Recreation Office at Alum Creek as well as grounds pick-up for half the facility, including the picnic area. The award will result in a clean recreation office and clean grounds.
JENTREE FOREST PRODUCTS, INC.
Landscaping Services Appendix XI Civil Works Program (Information not reported)
Information GAO gathered to improve the description The award supports maintenance work being done at Sutton Lake recreational facilities. The award is a task order for mowing services for Hillside Areas 1 and 2. Hillside Area 1 covers 25 acres and includes the Downstream, Bee Run, and Bug Ridge Recreation Areas. Hillside Area 2 covers 4 acres and includes office access and dam abutments.
JENTREE FOREST PRODUCTS, INC. (Information not reported)
Information GAO gathered to improve the description The award supports maintenance work at Sutton Lake recreational facilities. The award is a task order for mowing services at several areas at Sutton Lake; specifically, mowing services were provided at Lower Gerald R. Freeman Campground covering 18 acres; Upper Gerald R. Freeman Campground covering 12 acres; Middle Gerald R. Freeman Campground covering 9 acres; the Downstream Day Use Area covering 10 acres; and the South Abutment Day Use Area covering 5 acres.
MAINTENANCE SERVICES AT DEER CREEK LAKE, MT STERLING, OH Appendix XI Civil Works Program RESTROOM AND RECREATION AREA CLEANING (Information not reported)
MT STERLING, OH 43143-9505 Information GAO gathered to improve the description The award supports trash pick-up along the river, cleaning of public restrooms below the dam, and cleaning the picnic shelters in the recreational area. The award also provides cleaning and janitorial supplies. The award will result in clean areas along the river, a clean recreational area, and a clean picnic area.
W-P CONSTRUCTION SERVICES, INC.
Maintenance Services for J.W. Flanagan Dam Recreation Area, Haysi, Virginia Maintenance Services for J.W. Flanagan Dam Recreation Area, Haysi, Virginia 105 Centennial Heights Road, PO Box 105 Information GAO gathered to improve the description The award supports the removal of pea gravel and timber over 10 acres at the Crane's Nest Playground in the J.W. Flannagan Dam Recreation Area. The award also includes installation of pipe in the mulch to improve drainage in the area. These activities will help maintain the recreational facilities.
Appendix XI Civil Works Program W-P CONSTRUCTION SERVICES, INC.
Maintenance Services for J.W. Flanagan Dam Recreation Area, Haysi, Virginia Maintenance Services for J.W. Flanagan Dam Recreation Area, Haysi, Virginia 105 Centennial Heights Road, PO Box 105 Information GAO gathered to improve the description The award supports work at North Fork Pound Lake, which is a U.S. Army Corps of Engineers-operated Big Sandy flood protection system project. Award activities include mowing at the Dam Access Road, overlook area, and office, which covered 2.5 acres.
Construction 96-3135 TAS Demolish and Rebuild Summersville Lake Battle Run restrooms located at the campground, beach and boat launch areas.
Other Heavy and Civil Engineering Construction (Information not reported)
Information GAO gathered to improve the description The new restroom facility provides a healthier and safer environment for the visiting public.
Appendix XI Civil Works Program ALLEN, J. F. COMPANY (INC) as part of U.S. Army Corps of Engineers - civil program financing only-Operation and Maintenance, Recovery Act on Bulltown Campground project Delivered stone to Bulltown Campground project Brick, Stone, and Related Construction Material Merchant Wholesalers (Information not reported)
More than 50% Completed Information GAO gathered to improve the description This award funds 1717.72 tons of 3/4-inch crush-and-run limestone to Burnsville Lake to resurface a gravel parking area.
UNITED PROCUREMENT, L.P.
CAN STYLE BUOYS DELIVERED TO EAST LYNN LAKE PART DESCRIPTION: 45101 BUOY RB 962 W/ LETTERING & SYMBOL 6-MODEL B961RC H.D. RED NUN BUOY 6- MODEL B961GC H.D. GREEN CHANNEL MARKER 5-MODEL B961R H.D. BUOY 'SLOW NO WAKE' W/ CONTROL SYMBOL 3-MODEL B961R H.D. BUOY 'ROCKS' W/HAZARD SYSMBOL 2-MODEL 96R1R H.D. BUOY 'BOATS KEEP OUT' W/RESTRICTED SYMBOL DELIVERED TO EAST LYNN LAKE, EAST LYNN WV.
THE JOB HAS BEEN COMPLETED AND ALL PAYMENTS HAVE BEEN RECIEVED.
All Other Plastics Product Manufacturing EAST LYNN, WV 25512-9746 Information GAO gathered to improve the description The award funds the procurement of 22 buoys to the U.S. Army Corps of Engineers in order to enhance water safety for boaters and swimmers at East Lynn Lake in West Virginia.
Appendix XI Civil Works Program READY TO HAUL - COLUMBUS, LLC Supply of bulk engineered wood fiber for use at Sutton Lake playground.
Delivery of engineered wood fiber for playground at Sutton Lake.
Engineered Wood Member (except Truss) Manufacturing Information GAO gathered to improve the description The wood supplied through this award supports the overall maintenance, including the purchase and installation of playground equipment to meet playground safety standards and provide Americans with Disabilities Act (ADA) accessibility at Gerald R. Freeman Campground.
KINGSBOROUGH ATLAS TREE SURGERY, INC (Information not reported)
Information GAO gathered to improve the description The award supports trimming hazardous trees and tree limbs in recreation areas near New Melones Lake, California (downstream channel) and New Hogan Lake, California.
Appendix XI Civil Works Program PARAGON INDUSTRIAL APPLICATIONS, INC.
Design Build Boat Storage building Information GAO gathered to improve the description This award supports the design and construction of a boat storage building that will replace the inadequate boat storage building at the Piney Woods Regional Office. This is part of a larger project to improve the health and safety of the public at Ferrells Bridge Dam, Lake O’ the Pines, Texas.
WISS, JANNEY, ELSTNER ASSOCIATES, INC.
RIP RAP - embankment repair recovery Aggregate testing including Loas Angeles abrasion, Magnesium soundness,unit weight, specific gravity, absorption and petrographic analysis of rip rap materials 13581 Pond Springs Road, Suite 107 Less Than 50% Completed Information GAO gathered to improve the description This award supports the testing of rip rap materials from Miller Springs Quarry in Belton, Texas to be used for embankment repair at Navarro Mills, Belton and Granger Lakes.
Appendix XI Civil Works Program ENGINEERING DESIGN TECHNOLOGIES, INC.
As part of construction on the Atlanta environmental infrastructure projects-Mark Ave stormwater structure in Cobb County, GA (Information not reported)
Information GAO gathered to improve the description The award supports engineering design services. This structure is part of a priority storm water sewer capacity relief project in this region.
MITCHELL INDUSTRIAL CONTRACTORS, INC.
Millers Ferry Renovation HVAC System Air-Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing (Information not reported)
Information GAO gathered to improve the description The award supports replacement and renovation of the HVAC system at Millers Ferry powerhouse, which houses hydroelectric generators for the production of electricity. The powerhouse is located in Wilcox County, Alabama near Camden Lake. Award activities will include renovating the HVAC system by replacing air handlers, chillers, and ductwork, and performing electrical upgrades. The award will result in a more efficient and maintenance-friendly HVAC system.
Appendix XI Civil Works Program ADVANCED CRANE TECHNOLOGIES, LLC Rehabilitation of the Overhead Powerhouse Bridge Cranes at the USACE Powerhouses, located in West Point, GA, Cartersville, GA & Basset, VA Rehab Powerhouse cranes, various locations Overhead Traveling Crane, Hoist, and Monorail System Manufacturing (Information not reported)
Information GAO gathered to improve the description Rehabilitation activities under the award include modernizing crane controls; replacing wiring; and replacing the operators’ cabs. The rehabilitation will restore full capacity to the cranes, including critical lift capabilities; allow for safer operations; and reduce future maintenance costs. The state-of-the-art-controls will improve how the cranes operate. An overhead powerhouse bridge crane runs along the ceiling of the powerhouse and is used to set and maintain equipment in the powerhouse.
Manufacture of four gearboxes.
Manufacture of the gearboxes.
Speed Changer, Industrial High-Speed Drive, and Gear Manufacturing (Information not reported)
More than 50% Completed Information GAO gathered to improve the description The award funds the purchase of secondary gearboxes at Dardanelle Lock & Dam in Russellville, Arkansas, to replace the existing gearboxes that power gates in the powerhouse. A failed gearbox renders the gate inoperable and replacement of the gearboxes reduces the risk of failure.
Appendix XI Civil Works Program ADH TECHNICAL SERVICES, INC.
As a part of the maintenance for the installation of a strong motion seismic instrument on the Cottonwood Springs Dam Project.
None yet. Project will begin in 2010.
Geophysical Surveying and Mapping Services (Information not reported)
Cottonwood Springs, SD 57747-0664 Information GAO gathered to improve the description This award supports the installation of a new seismic instrument to monitor the area for the magnitude of earthquake activity, which will allow for the assessment of potential impacts to the dam and foundation. This work will ensure that dam safety instruments are installed and operating satisfactorily, thus increasing the safety of the dam and downstream residents.
BRUNSWICK COMMERCIAL & GOVERNMENT PRODUCTS, INC.
Small Craft (17' Guardian Boat)
CB9039- Shipment date Oct 28, 2009 Information GAO gathered to improve the description The award supports the purchase of a boat for Beltzville Lake to maintain project grounds and facilities at this 4,200-foot long dam and reservoir project. The boat replaced a 30-year-old vessel, and can be used for, among other things, conducting sampling for water quality, video surveillance of the dam, bridge inspections, debris removal, and reservoir inspection to determine erosion of the rim of the reservoir.
Appendix XI Civil Works Program INSTALLED MOTION GATE AT MILFORD PROJECT OFFICE All Other Specialty Trade Contractors JUNCTION CITY, KS 66441-8342 Information GAO gathered to improve the description The award supports installation of one motion gate at the Milford Lake Project Office in Junction City, Kansas. The installation activities will include removing the existing gate and fence, installing a 24-foot motion gate with accompanying accessories such as a photo eye, gate edge for safety, and additional fencing. The award will result in enhanced security at the office's equipment lot.
PRUDENT TECHNOLOGIES, INC.
Removal of Underground Staorage Tanks and installation of above ground storage tanks at Hillsdale Lake and Clinton Lake Sites in Kansas The underground tanks were removed and disposed. The above ground tanks were installed.
Other Heavy and Civil Engineering Construction Information GAO gathered to improve the description The award supports the removal of four underground tanks (two from Clinton Lake and two from Hillsdale) and the addition of six above ground tanks (four in Clinton Lake and two in Hillsdale). The award will result in tanks which are easier to access and obtain gas for government vehicles, and easier to maintain.
Appendix XI Civil Works Program UTILITIES FORESTRY SERVICES, INC.
Provide all labor,material, supplies and equipment to remove all trees and stumps from Penn St to College Ave along top of Embankment At Indian Rock Dam, York County, York, PA .
Operations and Maintenance-Army, the removal of all trees and stumps from the area between College Ave to Penn St. Along the top of an embankment at Indian Rock Dam, York County, York, PA was awarded utilizing ARRA funds.
Information GAO gathered to improve the description The award supports the removal of trees from the York levee. The trees' rooting system was beginning to degrade the structural integrity of the Cordours River Levee. The award will ensure compliance with new U.S. Army Corps of Engineers levee safety criteria.
GEO-TECHNOLOGY ASSOCIATES, INC.
Preventative Maintenance of 34 relief wells No work performed - releif well inspection and rehabilitation services.
Support Activities for Oil and Gas Operations (Information not reported)
Information GAO gathered to improve the description The award provides funds for preventive maintenance and well inspections at Curwensville Dam in Curwensville, Pennsylvania. There are 34 relief wells located along the downstream toe of Curwensville Dam for the purpose of relieving hydrostatic pressures within the dam. Preventive maintenance of the wells will assure the project continues to operate in a safe manner.
Appendix XI Civil Works Program ANDERSON PERRY & ASSOCIATES, INC.
No activity this period. Job completed.
Walla Walla, WA 99362-1876 Information GAO gathered to improve the description The award supports the attendance of two Anderson-Perry employees to attend levee inspection training in Portland, Oregon, for 3-4 days. The U.S. Army Corps of Engineers requires completion of this course, which includes software training, for all levee inspectors. Upon completion of the workshop, attendees acquired certification to inspect levees managed by the Corps.
SEALS UNLIMITED, INC.
MOOREHAVEN LOCK & DAM LOWER SECTOR GATE SEAL SETS Gasket, Packing, and Sealing Device Manufacturing 525 Ridgelawn RD.
Information GAO gathered to improve the description The award supports the purchase of rubber fabricated lock and dam gate seals for use at Moore Haven Lock and Dam. Moore Haven Lock is located in Clewiston, Florida and is part of the Okeechobee Waterway Project. Purchase of these seals is part of a larger project to complete major maintenance of all four sector gates at Moore Haven Lock. The larger project provides for the continuation of operations significantly reducing the likelihood of failure for this highly utilized recreation site.
Appendix XI Civil Works Program Periodic Inspection of Levees per list in the Statement of Work Conducted levee inspections and submitted activity reports 1210 Pemier Drive, Suite 200- Less Than 50% Completed Information GAO gathered to improve the description This award is for the inspection of two levee systems in the Memphis District to determine their condition and assess if repairs or additional maintenance is required. One levee system encompasses 67 miles, 6 segments, and 3 drainage structures and the other one encompasses 34 miles, 5 segments, and 5 drainage structures. Both the East Bank St. Francis Floodway System and the Big Lake Floodway West Levee System are located in Arkansas and Missouri near Rivervale, Arkansas.
SCIPAR, INC.
Deliver Powerplant Protective Relays per specifications. inspected, packaged, and delivered all relays per the contract requirements. A pending modification is needed for shipment of last required relay.
Electrical Apparatus and Equipment, Wiring Supplies, and Related Equipment Merchant Wholesalers $185,265.00 Appendix XI Civil Works Program More than 50% Completed Information GAO gathered to improve the description The award supports the purchase of new protective relays, which are digital electronic equipment used to support transmission of electrical power. The U.S. Army Corps of Engineers Fort Randall Project Office, in Pickstown, South Dakota, purchased 65 protective relays of various types as well as related components and two communication processors and software. New relays are needed to support the operational system for transmitting electrical power to the customer, which enables the hydroelectric plant to continue to produce electrical power.
BOWEN ENGINEERING & SURVEY INC Hydrographic Surveys, Mile 28.0 to 35.5, Kaskaskia River, Illinois Project is 100% Complete Surveying and Mapping (except Geophysical) Services 1078 Wolverine Lane, Suite J Cape Girardeau, MO 63701-9002 Information GAO gathered to improve the description The award supports the verification of older surveys and existing depths. These efforts were a precursor to the St. Louis Army Corps of Engineers performing dredging and other related work on the Kaskaskia River.
ELITE ROOFING CO. - GENERAL CONTRACTOR To install Shoreline power at six lock sites along the Tennessee River including Guntersvills, AL, Chickamauga, TN, Nickajack, TN, Watts Bar, TN, Fort Loudon, TN and Grand Rivers Kentucky Lock, KY.
We have completed the Guntersville project and the Chickamauga project. As of 12/29/09 we were 82% complete with the Nickajack project.
Appendix XI Civil Works Program (Information not reported)
Less Than 50% Completed Information GAO gathered to improve the description The award funds the electrical wiring for the installation of shoreline power at six locks, which comprise a heavily used lock system along the Tennessee River. Power was not accessible along the shoreline of the lock system prior to this shoreline installation. Installation of electrical wiring is needed along the lock system for a variety of reasons, including powering tools needed to perform routine maintenance along the lock system.
Recover-To provide labor, supplies and materials to furnish 76 pieces Hollaender 2' HD base flange mill finish fittings, 48 pieces 2' Hollaender #5-9 tees, 36 pieces 2' Hollaender #7-9 cross, 24 pieces #11-9 Hollaender side outlet tees, 20 pieces Hollaender #9-9 side outlet 90 ells, 40 pieces #3-9 Hollaender 90 ells, 408 pieces 4' toeplate bevels, 100 pieces TB brackets 3x2 angle hardware, 8 pieces Hollaender gate 2' hinge assm & pin latch hardware, and 1152 pieces 2' S40 pipe.
Recover-To provide labor, supplies and materials to furnish 76 pieces Hollaender 2' HD base flange mill finish fittings, 48 pieces 2' Hollaender #5-9 tees, 36 pieces 2' Hollaender #7-9 cross, 24 pieces #11-9 Hollaender side outlet tees, 20 pieces Hollaender #9-9 side outlet 90 ells, 40 pieces #3-9 Hollaender 90 ells, 408 pieces 4' toeplate bevels, 100 pieces TB brackets 3x2 angle hardware, 8 pieces Hollaender gate 2' hinge assm & pin latch hardware, and 1152 pieces 2' S40 pipe.
Plumbing and Heating Equipment and Supplies (Hydronics) Merchant Wholesalers 1850 Gravers Road, #100 Plymouth Meeting, PA 19462-2837 Information GAO gathered to improve the description The award funds the purchase of handrail components (2-inch aluminum handrails and various 2-inch aluminum handrail fittings to be placed around valve and gate pits) for Guntersville Lock, Alabama, located at Tennessee River mile 349 in Grant, Alabama. These purchases will allow the Nashville District’s Tennessee River project to address a backlog of infrastructure maintenance.
Appendix XI Civil Works Program NEWLAND ENTITIES, INC.
Construct and install new waste water lift station Awarded but NTP was not issued until January 2010 Other Heavy and Civil Engineering Construction Information GAO gathered to improve the description The award supports wastewater facility upgrades at Lake Mendocino's Coyote Valley Dam in Ukiah, California. The upgrades include positioning a new wastewater lift station, repairing wastewater plant tanks, and replacing leach fields. The award upgrades Lake Mendocino's 50-year-old recreational facilities for visitor health and safety.
Rental of equipment to be used at the Carlyle Lake/Kaskaskia Nav Project IAW the contract specs, clauses,and provisions.
Information GAO gathered to improve the description The award funds the rental of construction equipment to support several projects at Carlyle Lake including the replacement of 40-plus- year-old deteriorated lift stations and sewer lines; the repair of damages caused by 2005/2008 floods--including erosion repairs at Coles Creek Beach; and raising/extending the breakwater at Boulder boat ramp. The multiple projects at Carlyle Lake are intended to improve public health and safety, including the following: (1) replacement of sewer lines and lift stations will protect public health and safety by eliminating possible leakage and contamination, as well as comply with public health and EPA regulations; (2) repairs at Coles Creek Beach will reduce risk to the public and improve water quality; and (3) raising/extending the Boulder breakwater will shelter boats using ramps and improve public safety.
CTI AND ASSOCIATES, INC.
St. Louis flood protection Reach 3 pilot holes for new relief wells Geotechnical investigations, soil/laboratory soil sampling, monitoring well design, installation and documentation (Information not reported)
St. Louis, MO 63108-2833 Less Than 50% Completed Information GAO gathered to improve the description This award is for drill machine borings at 13 locations landside of the St. Louis flood protection district in Reach 3 and 20 locations landside of the St. Louis flood protection district in Reach 4. These activities are part of a larger flood protection project that protects approximately 3,160 acres of industrial and commercial development from Mississippi River flooding. The flood protection system was constructed with inadequate closure structures and underseepage protection. These design deficiencies are being corrected to ensure that the system provides its authorized level of service.
Appendix XI Civil Works Program HOWARD W. PENCE, INC.
Provide all labor, materials and equipment for Port Oliver Phase II Project, including; 0017, Weigh in Shelter; 0018, Weigh In Area; 0019, Amphitheater; 0020, Amphitheater Restroom; 0021, ADA Sidewalk; 0022, Boat Ramp Extension; 0023, Western Boardwalk; 0024, Picnic Areas; 0025, ADA Sidewalk; 0026, Eastern Boardwalk.
Project was started in November as of 12/31/09 the following progress is reported: Primary electric is 67% complete, Boat ramp restrooms are 66% complete, Western Boardwalk is 51% complete, Boat Ramp extension is 37% complete, Eastern Boardwalk is 31% complete, Picnic Area restroom is 25% complete, Amphitheater ADA Sidewalk is 22% complete, Picnic Area is 20% complete, Amphitheater restroom is 18% complete, Gravel overflow parking lot is 17% complete, Weigh-in shelter is 15% complete, Overlook is 15% complete, Picnic Loop road is 14% complete, Weigh in Area is 12% complete, Boat ramp ADA loading ramp is 10% complete, Picnic Loop Road Parking Lot is 10% complete, Amphitheater is 8% complete, Sewage treatment plant is 7% complete, Water Line (Main) is 7% complete, Picnic Area Playground is 6% complete, ADA Sidewalk is 5% complete,Picnic Area Shelter is 5% complete, Port Oliver Road Paving is 3% complete, Boat Ramp Parking Lot Paving is 1% complete, Courtesy Dock 1 & 2 are unstarted.
Appendix XI Civil Works Program north springfield, VT 05150-0001 Information GAO gathered to improve the description The stairs being repaired include 3 flights and 2 landings. The work was needed to replace a 30-year-old set of stairs that were rotting and unsafe to use. The stairs allow safe access to the swimming beach and picnic area from the recreation parking lot. The Stoughton Pond Recreation Area is part of the North Springfield Lake project. North Springfield Lake is part of the system of reservoirs and local protection works for the control of floodwaters in the Connecticut River Basin.
Sewer Connection from Cape Cod Canal Field Office to Town, Buzzards Bay, MA Commercial and Institutional Building Construction 42 Academy Dr.
More than 50% Completed Information GAO gathered to improve the description The award connects the project office to the town sewer system in order to improve office environmental conditions and reduce future maintenance costs.
The following award descriptions contained little or no information that allowed readers to understand the general purpose, scope and nature of activities, location, and expected outcomes. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
Appendix XI Civil Works Program This modification is issued to add CLIN 7001 in the funded amount of $5,000. Subsequently, the total amount of this Order is increased from $40,441.18 to $45,441.18.
Senior Project Schedule services.
St. Louis, MO 63103-2833 More than 50% Completed Information GAO gathered to improve the description The award supports an existing contract for one employee to provide database maintenance and project status reporting services for several Corps projects. The employee will provide these services for a base period with the option of a 12-month extension. The employee will work at the U.S. Army Corps of Engineers Office at 1222 Spruce Drive, St. Louis, Missouri.
Information GAO gathered to improve the description The award supports construction of a new U.S. Army Corps of Engineers Arkabutla Lake Field Office in Hernando, Mississippi to replace the current deteriorated building and provide a safe workplace for employees and visitors. The work includes furnishing all labor, materials and equipment for the construction of a new field office, including earthwork, excavation, signs, asphalt pavement parking areas and entrance, and concrete curbs and sidewalks. The new field office will be located on the northern end of the Arkabutla Dam.
URS GROUP, INC.
TAS::96 3134::TAS NON-TIME CRITICAL REMOVAL ACTION - ELIZABETH MINES SUPERFUND SITE, DESCOPE TASK 3.1 - TP-1 TOPOGRAPHIC SURVEY, EXERCISE OPTIONAL TASKS 1.1 - PROJECT MGMT. 3.1 - SURVEY JOSSLER PROPERTIES, 9.6 - LYSIMETER SAMPLING AS WELL AS AMEND SOW.
Property Boundary/Survey Delineation Environmental Site Monitoring Engineering Evaluations (Hydraulics and Hydrology) Material Testing (Information not reported)
More than 50% Completed Information GAO gathered to improve the description The award is part of a larger contract for Hazardous Toxic Radioactive Waste (HTRW) cleanup at the Elizabeth Mines Superfund site. The award is for the collection of analytical data that will support the environmental engineering design for cleanup of the site. The Superfund site includes 35 acres of waste and the property boundary survey will determine how much private property is involved on a portion of the site. The work includes conducting a property boundary survey which will provide data to supplement the design report. The design will support the larger project goal of cleaning up the Superfund site and restoring the West Branch of the Ompompanoosuc River which discharges into the Connecticut River north of White River Junction, Vermont.
REHIBILITATION FENCE BURNSVILLE LAKE Appendix XI Civil Works Program (Information not reported)
Information GAO gathered to improve the description The award provides fencing related materials to the Corps at Burnsville Lake. Materials included 52,800 rolls of wire fence, 400 ACQ treated posts, 5,000 T fence posts, 10 lbs. of 1.25 inch galvanized fence staples, 15 steel tubular farm gates, and 56 bags of 60 lbs ready-mix concrete.
HDB CONSTRUCTION, INC.
Big Hill, Marion, Fall River, Elk City and John Redmond Lakes, Kansas Other Heavy and Civil Engineering Construction (Information not reported)
Information GAO gathered to improve the description The award supports maintenance and upgrades of recreation areas at Fall River, Marion, Big Hill, Elk City, and John Redmond Lakes in Kansas. The activities under this award include paving road and recreation vehicle sites, improvement or repairs of electric pedestals, and sewer and water service to a number of storm-damaged recreation sites. The award also provides for modification of a boat launching ramp at John Redmond Lake. Much of the activities are related to repairing of damage suffered during severe storms over the past 2 years.
Appendix XI Civil Works Program kansas city, KS 66105-1200 Information GAO gathered to improve the description The award provides a 40-horsepower boat motor to be used for water safety purposes at Smithville Lake, Missouri.
SHANNON & WILSON, INC.
Time histories for Dworshak Dam Information GAO gathered to improve the description The award provides electronic time histories for the Dworshak Dam site in Idaho. Time histories, or seismological records, provide pictures of the ground and its movements. These time histories will assist the U.S. Army Corps of Engineers in modeling and evaluating the dam's ability to withstand earthquakes.
Appendix XI Civil Works Program More than 50 % Complete All Other Professional, Scientific, and Technical Services More than 50% Completed Information GAO gathered to improve the description The award supports oversight and inspection of a contractor installing a riser pipe in the Yalobusha River Watershed. The project office is in Sardis, Mississippi, but the installation project covers three counties in the state. The installation of a riser pipe will help control the discharge of water so flooding does not occur in the area surrounding the river.
Appendix XI Civil Works Program Less Than 50% Completed Information GAO gathered to improve the description The award provides funds to hire an Engineering Technician VI for the Levee Inspection Program. This technician will conduct inspections in various locations across the U.S. Army Corps of Engineers St. Louis District. As part of the Levee Safety/Inspection Program, inspections will examine and confirm the operations of elements of a levee system, such as pumps, relief wells and closures. Inspections include the creation of condition reports using a tool called the Levee Inspection System (LIS). The award will result in improved public safety by providing a better understanding of levee systems performance, including how to better evaluate levee systems and their predicted performance before they are tested by a flood. The award will also help ensure a nationwide standard for evaluating levees, which ultimately should provide information that will help prioritize fixes and rehabilitation, where necessary.
GEOKON, INC.
Geotechnical Instrumentation - Load Cells Other Measuring and Controlling Device Manufacturing (Information not reported)
East Alton, IL 62024-2406 Information GAO gathered to improve the description The award funds pressure temperature humidity instruments for work being done to the upstream lift gate at Melvin Price Lock and Dam, specifically five strain gauge load cells. These were provided in support of the overall project at Melvin Price Lock and Dam and are typically used during repairs or refurbishments, when a dam may have shown leaks or needs upgrading for seismic evaluations, for example. The strain gauge load cells provided will ultimately allow the project to continue in a safe manner by measuring loads and holding the dam in place during repairs.
Appendix XI Civil Works Program LAKE CONTRACTING, INC.
Rip Rap Placement complet 50% or more Other Heavy and Civil Engineering Construction REND LAKE, 12220 REND CITY ROAD More than 50% Completed Information GAO gathered to improve the description The award supports the provision of vegetative management services at Rend Lake. The contractor is to furnish all labor, equipment, and material necessary to prepare sites and place rip rap. The work includes the repair of east and west side flood-damaged shoreline revetment and breakwaters. Repair of flood damaged shoreline revetment and breakwaters will stabilize the shoreline and breakwaters, increasing public safety and reliability of the features to protect valuable resources.
Water and Sewer Line and Related Structures Construction Information GAO gathered to improve the description The award supports installation of individual sewer hookups for camp sites at the Littcarr Campground at Carr Creek Lake, 843 Sassafras Road, Sassafras, Kentucky. Some of these hookups will be connected to a main sewage line that in turn is connected to the sewage lift station. The hookups provide campers a means of disposing of waste material from recreational vehicles and trailers without having a negative impact on the local environment. The waste is carried to the lift station and from there to the treatment plant. This work improves the environment and also provides better services for visitors.
Appendix XI Civil Works Program Install entrance gate and barriers Install entrance gate and barriers All Other Specialty Trade Contractors (Information not reported)
Information GAO gathered to improve the description This award supports the installation of force protection measures at Northfield Brook Lake in Thomaston, Connecticut. Specifically, a single-arm heavy duty gate was installed to replace an older style chain-link access gate at the entrance to the lake providing access to the U.S. Army Corps of Engineers' flood control protection project. Work also included the placement of concrete jersey barriers on the dam at Brook Lake.
This appendix describes federal agencies’ actions to review Recovery.gov information for accuracy. In addition, to supplement our findings on the information that describes awards (as discussed in the body of this report), we performed certain computer edit checks to test certain Recovery.gov information for apparent errors.
Governmental Actions to Review Recovery.gov Data
Prime recipients, as owners of the recipient reporting data, have the principal responsibility for the quality of the data submitted, and subrecipients delegated to report on behalf of prime recipients share in this responsibility. OMB’s guidance does not explicitly mandate a methodology for conducting data quality reviews at the prime and delegated subrecipient level. In its June 22, 2009, guidance, OMB says that, at a minimum, recipients and subrecipients should establish internal controls to ensure data quality, completeness, accuracy, and timely reporting of all amounts funded by the Recovery Act. review told us they did not typically review the information provided in narrative fields, and of the three programs that do, none had a systematic process in place to evaluate the accuracy or transparency of the information.
In light of the importance of the quality of the Recovery Act data, the Recovery Accountability and Transparency Board (Recovery Board) has worked with federal Inspectors General to establish a multiphased review process to look at the quality of the data submitted by Recovery Act recipients. All but one of the agencies covered in our review were included in the first phase of the Inspectors General review process—to determine if agencies had developed data quality reviews in anticipation of the data to be submitted. The first phase report revealed that all of the federal agencies in our review had designed processes to perform limited data- quality reviews intended to identify material omissions and significant reporting errors in information reported by recipients of Recovery Act funds. The second phase review included only seven agencies, three of which have programs covered in our review—Departments of Defense and Transportation and GSA. The second phase report identified data errors and omissions in recipients’ first cycle reports and factors that may have contributed to them and the actions taken by agencies, OMB, and the Recovery Board to improve the quality of the data that recipients will submit in future reporting cycles. However, the report did not comment on the quality of the data in the narrative fields. According to the Recovery Board, future reports will focus on the effectiveness of the agency data quality review processes. error message if the entry exceeds this limit. In addition to these completeness checks, FederalReporting.gov includes over 30 data quality checks that primarily focus on the numerical fields, such as the award amount and congressional district. One such edit returns an error message if the submitted place of performance congressional district does not correspond with the place of performance zip code. A senior OMB official told us that such edits were added after the first reporting round to help ensure that congressional districts are correctly entered.
Edit Checks Revealed Very Few Anomalies
We conducted a number of electronic edit checks on all of the 467 prime recipient awards, and any associated subrecipients, in our probability sample, to determine whether there were anomalies that may have affected the transparency of the award information. There were 950 subrecipients associated with the 467 awards in our sample, but not all awards had subrecipients. We found that 109 awards had subrecipients, and the number of subrecipients among these 109 awards ranged from 1 to 79. At the low end of the range, 53 awards had just 1 subrecipient each, and 12 awards had 2 subrecipients. At the high end, 14 awards had 20 or more subrecipients. The 4 awards with the highest number of subrecipients per award had from 60 to 79 subrecipients. Most of the awards with 20 or more subrecipients were within the weatherization program. In total, we performed edit checks on all 1,417 prime recipient and subrecipient reports.
For both prime recipient and subrecipient reports, the electronic edit checks resulted in no missing information for the following fields: award number, award date, award amount, fiscal year, fiscal quarter, status, recipient name, recipient congressional district, and recipient Data Universal Numbering System (or DUNS) number. For prime recipients only, we also checked the funding agency code, funding agency name, awarding agency code, awarding agency name, project status, and final report. There was no information missing in these fields either.
950 missing the second. However, neither prime recipients nor subrecipients were missing information on the country, state, city, or zip code.
For prime recipient and subrecipient reports, we checked to see if any award dates were on or before February 17, 2009 (before the Recovery Act was enacted) and after December 31, 2009 (the end of the quarter for round two reporting). We found three cases in which the award date was on or before February 17, 2009 (one prime recipient, and two subrecipients). Six cases had award dates after December 31, 2009 (one prime recipient and five subrecipients). These nine cases amount to only about one-half of 1 percent of all prime recipient and subrecipient reports in our sample and are not material to our findings or conclusions.
We also performed additional electronic checks to determine if total Recovery Act funds received exceeded the award amount, as well as whether total funds expended exceeded the award amount. There were no cases in our probability sample of prime recipients or any identified subrecipients for whom the total funds received exceeded the award amount.
Additional Information on Methodology
To identify the information that is required to be included as part of the descriptions of awards funded by the Recovery Act, we reviewed the reporting requirements contained in the act, OMB’s guidance, Recovery.gov reporting instructions, and supplemental agency reporting guidance that were applicable for the quarter ending December 31, 2009. We discussed the reporting requirements, guidance, and reporting instructions with officials from OMB, the Recovery Board, and the federal program agencies for the programs included in our review. We also discussed with federal, state, and local officials and recipients their experiences in providing descriptions of awards funded by the act, including any positive reactions to or concerns they had about the requirements and guidance. The state and local officials that we contacted were those that were part of a judgmental sample of 52 awards we selected from those that we had previously contacted as part of our work to report bimonthly on how the Recovery Act is being implemented and from our search of media stories about Recovery Act awards. We contacted officials in 15 states and the District of Columbia regarding the following programs—Grants-in-Aid for Airports, Highway Infrastructure Investment, Transit Capital Assistance, Broadband Technology Opportunities Program, and Weatherization Assistance Program—because these were the programs that we were already reviewing as part of our bimonthly Recovery Act efforts. Because we selected these awards judgmentally, we do not assert that the experiences related by state and local officials about these awards are necessarily representative of all awards in a particular program. required for recipient reporting that describe the uses of Recovery Act funds, including the 3 narrative fields previously discussed. In table 12, we reproduced OMB’s Recipient Reporting Model instructions, specifically the definitions and examples, for these fields. cost (amount awarded), status (percentage complete), and outcome (what is expected to be achieved; e.g., increased safety or reduced congestion as a result of a redesigned highway intersection or increased energy efficiency from installation of a new heating, ventilation, and air-conditioning system).
To these six specific attributes we used our professional judgment to add a seventh that seemed to be a reasonable adjunct to OMB’s attributes: scope (i.e., information on the magnitude or extent of an award). For example, scope could be the number of homes to be weatherized statewide or the number of miles (or lane miles) to be repaved. Finally, using these seven attributes and our professional judgment, we assessed the clarity and understandability of the narrative text, together with the completeness of the descriptions in their entirety. Those that were clear, understandable, and complete we considered to be “transparent.”
In conducting the transparency assessment, we reviewed information reported by prime recipients on Recovery.gov for the quarter ending December 31, 2009, and available to the public on February 10, 2010. While more recent information became available in April 2010 (for the quarter ending March 31), we could not have analyzed this information in the time that we had for our study. We chose to use recipient-reported data from Recovery.gov because the administration considers it to be the official information on Recovery Act spending. to try and identify recipient reports with incorrect program codes. Our population size for each of the nine programs represents the number of correctly recorded recipient reports in Recovery.gov, as of the date on which we downloaded the records. We treated the samples within each of the programs as a stratified design when producing the estimate for overall award transparency. Because we followed a probability sampling procedure, based on random selection, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 90 percent confidence interval. This is the interval that would contain the actual population value for 90 percent of the samples we could have drawn. As a result we are 90 percent confident that each of the confidence intervals in this report will include the true values in the study population. reviewed the award information without regard to the original determinations, compared his or her determination with the results of the two analysts, and made a deciding assessment.
The practical difficulties of making sometimes subjective decisions about whether awards meet our transparency criteria may introduce errors, commonly called nonsampling errors. We took steps to minimize these errors, such as by developing instructions for analysts to guide assessing the transparency of award information; conducting a calibration exercise on an initial selection of 70 awards (before drawing the probability sample) to assess the transparency criteria and to ensure that all analysts were interpreting the criteria consistently; having two analysts independently review each award and reach agreement; and, after all results had been entered, reviewing all results within a program for consistency of interpretation.
For descriptions that partially met or did not meet our transparency criteria, we visited publicly available federal, state, and recipient Web sites, and reviewed publicly available documents (e.g., state weatherization plans) to attempt to obtain insight into the aspects of the award information that we considered missing, nonspecific, or unclear. While we were often able to “complete” the descriptions using this approach, for some of the awards we had to call award officials to get the needed information. In all these cases, we were able to get this information. We did not attempt to quantify the proportion of awards for which we called award officials. information was missing in any address fields, particularly for the city, state, zip code, and country, but also for the award number, award date, award amount, fiscal year, fiscal quarter, status, recipient name, recipient Data Universal Numbering System (or DUNS) number, funding agency code, funding agency name, awarding agency code, awarding agency name, project status, or final report.
Our second sample was a certainty sample of larger dollar awards. We drew this sample because our probability sample did not consider the size of awards. As a result, it is possible that the sample we drew contained a disproportionate number of smaller awards compared with the entire population of awards; therefore, we could not accurately determine the amount of total award dollars for each of our three levels of transparency (i.e. met, partially met, did not meet), and any association of dollars would be misleading. In drawing our large dollar sample, we selected between 2 and 28 of the largest awards in each program, for a total of 70 awards. Overall, the transparency results of this sample are consistent with those of the probability sample (31 percent met, 63 percent partially met, and 6 percent did not meet). This gives us a reasonable level of confidence that that the dollar amount of awards is not necessarily related to the level of transparency of the description.
Our third sample was a judgmental sample of 52 awards described at the beginning of this appendix. Much as we did for our probability sample, we reviewed award information reported on Recovery.gov and used publicly available information from state and federal agency Recovery Act Web sites to complete the information, where needed. In addition, we gathered source documentation, such as grant documents, to gain a sense of the accuracy of the information being reported on Recovery.gov. We also discussed with award officials the feedback that they have received from the public and press. Finally, we contacted state and local auditors about issues raised about these awards, if any. activities (such as a transit agency’s purchasing buses and building transit maintenance facilities) that are part of a self-contained Recovery Act award. Other awards may be part of a larger project. For example, one award may be to install a higher-efficiency heating, ventilation, and air- conditioning system and another award may be to install a new roof, both for the same federal building under the Federal Buildings Fund Program. The Corps’ Civil Works program awards have the similar attribute of being part of a larger whole. We assessed descriptions for these two programs against the activities in the award. Because individual awards under these two programs are not tied together to an overall project in any way on Recovery.gov, we did not rate an award lower if it did not make reference to the larger goal of which the award was a part. For example, we did not mark down an award to install a seawall for the outcome of controlling erosion if the description did not state that the award was part of an overall effort by the Corps to make a waterway more navigable.
As another aspect of our work to review transparency of award information, for the 11 programs we covered, we discussed with federal agency officials and reviewed efforts by federal Inspectors General to assess the reliability and usefulness of the data reported by recipients.
Finally, as discussed in appendixes I through XI, we determined the nature and scope of Recovery Act funding, obligations, and expenditures for the 11 programs covered by our review. Regarding the nature and scope of funding, for each program, we reviewed the act to determine the overall level of funding. We obtained data from the program agencies on the obligations, expenditures, and general purposes of funded awards (e.g., pavement improvements for highways). We chose to analyze information from the federal agencies’ databases because it offers greater ability to parse program activities than do recipient-reported data on Recovery.gov. Relatedly, because the federal agencies keep information on these awards in different levels of detail, our ability to categorize it extends only as far as the detail in the agencies’ databases. The federal agencies update their data at different frequencies. As a result, data for the 11 programs covered by our review are as of different dates, although they all are recent. The earliest data that we report are as of March 31, 2010, for the Weatherization Assistance Program, the latest data are as of May 12, 2010, for the Broadband Technology Opportunities Program.
Error Rates Associated with Estimates of the Extent to Which Awards Met Our Transparency Criteria
This appendix presents the estimated error rates associated with the results of our transparency assessment, on the extent to which awards from our representative sample were transparent, presented in table 2 of this report. For example, if we had taken 100 samples of Weatherization Assistance Program awards, we would expect that in 90 of the samples, between 6.4 percent and 19.3 percent of the awards would have met our transparency criteria, established elsewhere in this report.
Comments from the Department of Commerce
GAO Contacts and Staff Acknowledgments
GAO Contacts
Katherine Siggerud (202) 512-2834 or [email protected] for buildings, telecommunications, and transportation issues.
Patricia Dalton (202) 512-3841 or [email protected] for energy and Army Corps of Engineers issues.
Staff Acknowledgments
James Ashley, Carl Barden, Jonathan Carver, A. Nicole Clowers, Daniel Cain, Janice Ceperich, Michael Clements, Maria Edelstein, Elizabeth Eisenstadt, Susan Fleming, Mark Gaffigan, Joy Gambino, Kimberly Gianopoulos, Diana Goody, H. Brandon Haller, Daniel Hoy, Vondalee Hunt, Bert Japikse, Anar Ladhani, Hannah Laufe, Joanie Lofgren, Grant Mallie, Kristen Massey, David Maurer, Anu Mittal, Sara Ann Moessbauer, Joshua Ormond, James Ratzenberger, Amy Rosewarne, Beverly Ross, John Shumann, Larry Thomas, and Susan Zimmerman made significant contributions to this report.
In addition, Laura Acosta, Silvia Arbelaez-Ellis, Paul Begnaud, Sarah Jane Brady, Laurel Breedon, Myra Watts Butler, Waylon Catrett, Sunny Chang, Richard Cheston, Chase Cook, James Cooksey, John H. Davis, Bonnie Derby, Kathleen Drennan, Daniel Egan, James Elgas, Nagla’a El-Hodiri, K. Eric Essig, Mattias Fenton, Christine Frye, Kathy Hale, John Hansen, Kay Harnish-Ladd, Barbara Haynes, Adam Hoffman, Sabur Ibrahim, Richard Jorgenson, Emily Larson, Alexander Lawrence, Jennifer Leone, Nancy Lueke, Richard Mayfield, Gail Marnik, Cory Marzullo, Ronald Maxon, Marietta Mayfield, Daniel Newman, Loren Obler, Keith O’Brien, Kathryn O’Dea, Carol Patey, Leslie Pollock, Gloria Proa, Frank Putallaz, Nadine Garrick Raidbard, Nitin Rao, Sanford Reigle, Matthew Rosenberg, Mark Ryan, Connie Sawyer Jr., Paul Schmidt, Ryan Scott, David Shoemaker, A. Paige Smith, Ray Smith, Ronald Stouffer, Rosemary Torres-Lerma, Robyn Trotter, and Stephen Ulrich contributed by conducting audit work at state and local governments.
Moreover, Jennifer Andreone, Shea Bader, Steven Banovac, Deyanna Beeler, Amanda Cherrin, MacKenzie Cooper, Abbie David, George Erhart, Janida Grima, Michael Hanson, Paul Hobart, Dana Hopings, William King, Claire Li, Angela Miles, Justin Monroe, Meredith Moore, Michael Pahr, Chhandasi Pandya, Jonathan Stehle, April Van Cleef, Richard Winsor, and Katherine Wunderink contributed by conducting research that allowed us to complete descriptions for hundreds of Recovery Act awards.
Finally, Joyce Evans, Jena Sinkfield, and Cynthia Taylor provided technical assistance. | Why GAO Did This Study
A hallmark of efforts to implement the $862 billion American Recovery and Reinvestment Act of 2009 (Recovery Act) is to be transparent and accountable about what the money is being spent on and what is being achieved. To help achieve these goals, recipients are to report every 3 months on their award activities and expected outcomes, among other things. This information is available on Recovery.gov, the government's official Recovery Act Web site. As requested, this report covers 11 federal programs focused on broadband, energy, transportation, federal buildings, and civil works activities, representing $67 billion in Recovery Act funding. Primarily, the report (1) describes how the Office of Management and Budget (OMB) and federal agencies implemented the act to report funds' uses and (2) assesses the extent to which descriptions of awards meet GAO's transparency criteria. It also describes reported uses of funds for the 11 programs. GAO reviewed requirements for reporting in the act and OMB's guidance. Based on these requirements, GAO developed a transparency assessment and applied it to a probability sample of descriptions from 14,089 recipient reports. In addition, GAO reviewed 52 projects in detail in states that it had contacted as part of its bimonthly reviews and interviewed federal, state, and local officials about their experiences with reporting descriptions of awards.
What GAO Found
This report focuses on one aspect of transparency and accountability: the extent to which descriptions of awards found on Recovery.gov foster a basic understanding of award activities and expected outcomes. Section 1512 of the act created broad requirements for recipient reporting. The act does not further explain these requirements. To implement the act, OMB provided generic guidance instructing recipients to report narrative information, among other things, that captures the overall purpose of the award and expected results. GAO estimates that, for the nine programs with funds awarded by December 31, 2009, 25 percent of the descriptions met its transparency criteria; that is, they had sufficiently clear and complete information on the award's purpose, scope and nature of activities, location, cost, outcomes, and status of work. Two factors may have influenced what GAO found. First, GAO's results were somewhat more positive for programs in which the federal agencies provided program-specific materials that supplemented OMB's guidance with detailed information on what recipients should include in the narrative fields. The highway, transit, and geothermal programs that GAO reviewed tended to have more transparent descriptions compared with programs that only supplied general guidance. Second, officials in many programs told GAO that they did not typically include the narrative fields in their data quality reviews. While an estimated three-quarters of the recipient-reported information did not fully meet GAO's transparency criteria--thus potentially hampering understanding of what is being achieved with Recovery Act funding--GAO found that federal and state Recovery Act Web sites, in some cases, provided additional information that could aid the public in understanding what its tax dollars are being spent on and what outcomes are expected. GAO collected information on the reported uses of funds from federal agencies for the 11 programs it reviewed. These uses ranged from improving infrastructure to improving Internet access. Agencies have obligated program funds at different rates, which may be due, in part, to whether the programs were new, existing, or received sizable funding increases. GAO also asked the federal agencies and selected state agencies in its review about how they make Recovery Act project information available to the public and what feedback they have received. Each agency has established a Recovery Act Web site, as have states, some state auditors and Inspectors General, and some recipients. These sites contain varying amounts of information, such as program objectives, lists of projects, and interactive maps.
What GAO Recommends
To further public understanding of what Recovery Act funds are being spent on and the expected results, GAO recommends that the Director, OMB, (1) revise the agency's recipient reporting guidance to remedy the unclear examples and enhance instructions for completing narrative fields; (2) work with agencies to determine whether supplemental guidance is needed to meet the intent of the act and whether that supplemental guidance or other technical assistance proposed by agencies dealing with narrative descriptions of awards provides for transparent descriptions of funded activities; and (3) periodically review, in partnership with federal agencies, the recipients' descriptions of awards to determine whether the information provides a basic understanding of the uses of the funds and expected outcomes, and, if not, encourage agencies to develop or improve program-specific guidance, as well as work with the Recovery Board as the board reviews the results of agencies' data quality reviews to further reinforce actions to meet transparency goals. In commenting on a draft of this report, OMB agreed with GAO's recommendations. OMB and the federal agencies provided a number of specific comments, many of which GAO incorporated. |
gao_GGD-95-60 | gao_GGD-95-60_0 | Introduction
Two Department of Agriculture (USDA) programs—the Office of the General Sales Manager (GSM)-102 and GSM-103 export credit guarantee programs—are intended to promote the export of U.S. agricultural commodities. The programs’ goals—under the 1990 Food, Agriculture, Conservation, and Trade Act, also known as the 1990 Farm Bill—are to develop, expand, or maintain U.S. agricultural markets overseas by facilitating commercial export sales of U.S. agricultural commodities.However, the statute also provides that the Secretary of Agriculture may not issue credit guarantees in connection with sales of agricultural commodities to any country that the Secretary determines cannot adequately service the debt associated with such sale. The law also prohibits issuing the credit guarantees for foreign aid, foreign policy, or debt-rescheduling purposes.
More than $16 billion in export credit guarantees were provided by the GSM-102/103 programs during fiscal years (FY) 1990 through 1992. The former Soviet Union (FSU) and two of its successor states, Russia and Ukraine, received 43 percent of the guarantees that were made available in fiscal year 1992. During fiscal year 1991 and fiscal year 1992, the FSU obtained more GSM credit guarantees than any other country in the world.
In deciding whether to extend GSM export credit guarantees to any country, USDA considers the prospects for developing and maintaining U.S. markets in that country, on the basis of our review of USDA documents and interviews with agency officials. Before providing guarantees, USDA also assesses the country’s overall creditworthiness. Creditworthiness, in the context of this report, concerns a country’s ability and willingness to service or make timely payments on its current and future foreign debt obligations.
Assessing the creditworthiness of nations generally involves a technical analysis of economic and financial indicators of the risk of nonpayment due to insufficient foreign currency and the likelihood that political or other nonfinancial events may disrupt payments. Some of the factors that affect creditworthiness are a country’s level of indebtedness relative to its economic and financial resources, the ability of the country’s government to effectively manage the domestic economy, and the general economic and political situation in the country. Creditworthiness also involves temporal considerations. For example, some debtors may be judged not creditworthy over the short run due to a lack of readily available foreign exchange but may be considered capable of servicing their debts if additional time is allowed for them to organize and marshal their resources.
GSM Export Credit Guarantee Programs
The Department of Agriculture’s GSM-102 and GSM-103 programs are aimed at facilitating the export of U.S. agricultural commodities to developing countries and middle-income countries with hard currency shortages. They are intended to help importing nations make a transition from concessional financing to cash purchases, as well as to maintain import levels during periods of financial difficulties.
Under the two programs, the U.S. government agrees to pay U.S. exporters or their assignees—U.S. banks or U.S. subsidiaries of foreign banks—in the event that a foreign buyer defaults on its loan obligation. By reducing the risk involved in selling U.S. agricultural products, USDA encourages exporters to explore new foreign market opportunities.
The USDA’s Commodity Credit Corporation (CCC), which administers the GSM programs, attempts to share some of the credit risk with the exporter or the exporter’s assignee (a bank or other financial institution). It does so usually by guaranteeing 98 percent of the value of the sale plus a portion of the interest payable. The exporter or the exporter’s assignee is at risk for 2 percent of the principal and a portion of the interest payable. However, CCC has flexibility to adjust the amount of guarantee coverage it provides. USDA considers the GSM programs to be fully “commercial” in that they assist sales that are made by the private sector, and the interest rates are at “prevailing market levels.” However, there is an important element of concessionality in the programs because recipient countries could not make the purchases without credit and loan guarantees. Furthermore, if the countries were able to obtain financing on commercial markets, they would have to pay a premium above the rates that they obtain from the GSM programs, since a U.S. government guarantee reduces the risk to the lender.
Debt-Servicing Requirements and Possible Budgetary Impacts
Section 202(f) of the 1990 Food, Agriculture, Conservation, and Trade Act prohibits the Secretary of Agriculture from issuing export credit guarantees in connection with sales of agricultural commodities to any country that the Secretary determines cannot adequately service the debt associated with such a sale. The provision was established in response to a situation that developed in the late 1980s and early 1990 when creditworthiness considerations were minimized for foreign policy objectives in order to provide Iraq with GSM export credit guarantees. Following the allied response to Iraq’s invasion of Kuwait in 1990, Iraq defaulted on outstanding guaranteed GSM loans. As of August 17, 1994, CCC had received claims from 10 banks regarding Iraq’s defaults. These claims totaled about $2.2 billion, and CCC had paid claims to nine of these banks, totaling $1.7 billion.
Section 202 (f) requires USDA to determine whether a country is capable of servicing the debt that would result from providing export credit guarantees for agricultural commodities. If a determination is negative, the provision prohibits USDA from making credit guarantees available to that country. USDA advised us that before making any loan guarantee commitments, it assesses the creditworthiness of intended recipients of guaranteed sales and uses the information in deciding whether to provide guarantees to specific countries.
In contrast to a direct loan, a credit guarantee does not involve dollar outlays to either the lender or the borrower when the loan is made. Nonetheless, budgetary outlays are required for loan guarantees when defaults occur and claims are made. To better account for the costs of federal credit programs, the Federal Credit Reform Act of 1990 required, beginning with fiscal year 1992, that the President’s budget reflect the costs of the loan guarantee programs. To this end, new loan guarantee commitments can be undertaken only if appropriations of budget authority are made to cover their costs, including estimated payments by the government to cover defaults and delinquencies.
The act exempted all then-existing CCC credit guarantee programs from the appropriations requirement. However, CCC advised us that it is establishing what it calls an “allowance reserve” to cover its estimate of possible defaults on GSM loans. As of June 30, 1992, CCC had approximately $9.04 billion outstanding in GSM-102 and 103 guarantees on loan principal and $4.51 billion in accounts receivable from loan guarantee payouts on delinquent GSM-102 and 103 guaranteed loans. In a December 1992 report, we estimated the cumulative costs of the programs at about $6.5 billion, or 48 percent of the total $13.55 billion, if the programs had been terminated on June 30, 1992.
Foreign Policy Considerations
In the past, decisions to provide GSM loan guarantees to countries were influenced by foreign policy considerations. Principal recipients of guarantees were often countries that had significant foreign policy relationships with the United States. However, the 1990 Farm Bill stipulated that GSM export credit guarantees could not be used for foreign aid, foreign policy, or debt-rescheduling purposes. So, for example, if the Secretary of Agriculture determines under the debt-servicing requirement that a country cannot adequately service the debt that would arise from receiving agricultural export credit guarantees, no credits are to be extended—even if the president believes that such an extension would be in the national interest.
Despite the problems that arose from the Iraqi loan guarantees, as cited earlier, many Members of Congress have expressed the view that GSM credit guarantee decisions should take account of foreign policy and national interest considerations. For example, in May 1991 the Senate approved a nonbinding resolution (S. Res. 117) recommending that the administration extend another $1.5 billion in agricultural credit guarantees to the Soviet Union—assuming the administration found the country could service the debt—if certain foreign policy objectives would also be realized.
In 1991, attempts were made to provide more flexibility in granting export credit guarantees; amendments to the 1990 Farm Bill were proposed that would have allowed the president to provide guarantees when he believes they are in the national interest, regardless of the debt-servicing requirement and foreign aid/policy restrictions. However, these amendments were subsequently withdrawn. Similarly, the administration’s 1992 bill for authorizing assistance to the former Soviet republicsincluded a provision allowing the Secretary of Agriculture to take into account major economic reforms underway in those states in making a determination about the ability of the states to repay debt associated with GSM sales. However, this provision was struck from the bill that Congress passed in October 1992.
USDA officials told us that although the 1990 Farm Bill prohibits the Secretary of Agriculture from issuing export credit guarantees for foreign aid or foreign policy purposes, the law does not mean that such assistance cannot simultaneously serve foreign policy objectives. They noted that during congressional hearings held in late 1991 and in related briefings provided by USDA to congressional staff, the principal congressional focus with regard to agricultural credit guarantees was on keeping U.S. food moving to the FSU rather than on the risks associated with providing the guarantees.
GSM-102 and GSM-103 Sales by Country and Commodity, 1990 Through 1992
Table 1.1 provides information on GSM program sales by country for fiscal years 1990, 1991, and 1992. As shown, total GSM-102 credit guarantees were $4.6 billion in fiscal year 1990, $5 billion in fiscal year 1991, and $6.1 billion in fiscal year 1992. The GSM-103 program accounted for about $1 billion in guarantees during fiscal years 1990 through 1992. The table also shows that whereas the FSU received no GSM credit guarantees in fiscal year 1990, it was the major recipient in fiscal year 1991. In fiscal year 1992, the FSU and Russia, collectively, received more guarantees than any other nation.
Table 1.2 depicts the distribution of GSM-102 and 103 sales by type of commodity for fiscal years 1990, 1991, and 1992. As the table shows, wheat, yellow corn, and soybeans and soybean meal accounted for the majority of sales.
USDA Criteria for Assessing Creditworthiness
Within USDA, the Trade and Economic Information Division (TEID) of the Foreign Agricultural Service (FAS) is responsible for analyzing the ability and willingness of countries that have requested GSM-102 export credit guarantees to meet their current and future external debts, including potential GSM debt.
TEID evaluates creditworthiness in terms of whether a country is able and willing to service its current and future foreign debt obligations. Access to sufficient hard currency is seen as the key to whether a country is capable of servicing debt (principal and interest payments). TEID notes that external debt can be serviced through revenues derived from a country’s current account, from foreign exchange received from debt and investment inflows, or from a drawdown of a country’s existing stock of foreign exchange reserves. Important factors that affect a country’s ability to service its debts, TEID says, include the status of the current account balance; the volume of trade; the variability in current receipts; the size of international reserves; the country’s access to capital account inflows, either from net direct investment, foreign borrowing, or foreign aid; and the country’s ability to reduce its imports of goods and services.
TEID’s approach also includes a review of the general economic and political situation of countries. If a country’s economy is in a steep decline, its ability to earn foreign exchange from exports may be severely impaired. If the political system is unstable or if a country is subject to external threats to its sovereignty, concerns may arise about the country’s willingness or ability to meet its future debt obligations.
The 1990 Farm Bill provision restricting when GSM-102 credit guarantees can be extended does not include a general creditworthiness standard. Rather, it requires that the Secretary of Agriculture determine whether a prospective borrowing country is capable of adequately servicing the debt associated with a specific, proposed GSM-102 sale to that country before issuing a credit guarantee. However, if a country is experiencing problems in servicing its debts or is likely to in the near future, any particular debt obligation (including a GSM loan), in our view, could result in default.
A country with low creditworthiness may be able to adequately service the debt associated with a particular GSM-102 sale if the country is willing to assign a priority to repayment of that debt (i.e., to not treat other creditors equally). In fact, USDA officials told us that the U.S. decision to extend substantial export credit guarantees to the FSU during 1991 was partly based on the assumption that the Soviet government would give preferential treatment to GSM-102 debt. U.S. officials reasoned that food was a high-priority item. Without adequate supplies of food, political stability could be threatened. Moreover, Soviet and, subsequently, Russian leaders knew that if they fell into arrears on payments for GSM-102 guaranteed sales, the GSM-102 program would be suspended. Thus, they had an incentive to keep current on GSM-102 debt repayments if they wanted to secure future GSM credit guarantees.
However, even if a borrowing country is willing to give preferential treatment to particular debts, creditor nations must pay close attention to its creditworthiness more generally. For example, if a prospective borrower country has low creditworthiness and its problems worsen, it may find it necessary to reschedule its debts. Under the normal rules of international debt restructuring, all official creditors (i.e., creditor country governments) are to be treated equally. Therefore, particular debts should not receive preferential treatment.
Exposure Guidelines
In addition to evaluating the creditworthiness of potential GSM credit guarantees, TEID establishes annual and total risk exposure guidelines to provide USDA with a yardstick for limiting its risk exposure in specific countries. The total exposure guideline for a country is TEID’s recommended maximum dollar amount of GSM-guaranteed principal, rescheduled principal, interest arrears, and claims that the country should owe CCC at a given time.
Decisionmaking Process
TEID’s country risk grades and exposure guidelines are used in USDA’s decisionmaking process for allocating credits to requesting countries. However, TEID’s recommendations about whether to extend credit and, if so, how much, are not binding on the agency. USDA considers not only the risk of providing loan guarantees but also the potential for expanding or maintaining U.S. markets overseas. A Reconciliation Committee, consisting of representatives from TEID and several other USDA offices, meets and discusses both the risk of lending to a foreign country and the prospects for developing and maintaining U.S. markets in that country. A recommendation is developed in committee. According to USDA officials, decisions about which countries should receive credit guarantees and in what amounts may be made by the Assistant General Sales Manager or the General Sales Manager, but sometimes the decisions are elevated to the level of the Under Secretary for International Affairs and Commodity Programs.
The National Advisory Council (NAC) on International Monetary and Financial Policies also provides advice to USDA on GSM credit guarantee actions. USDA sends all GSM-102/103 proposals to NAC for review. Proposals are submitted after USDA has conducted its own risk analysis on a country in question. NAC’s recommendations are only advisory in nature and do not necessarily reflect fiscal risk. However, we were told that USDA does not typically challenge NAC recommendations unless the Treasury or the State Department are not in the majority when a vote on a recommendation is taken.
Objectives, Scope, and Methodology
The Ranking Minority Member of the Senate Committee on Agriculture, Nutrition, and Forestry asked us to assess the creditworthiness of the FSU and its 15 successor states. The FSU’s 15 republics became independent states between August and December 1991, as part of the historic change that swept across the Soviet Union in the late 1980s and early 1990s. This change culminated in the collapse of the Soviet empire and the demise of the Communist Party. The successor states are Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.(See fig. 1.1 for a map showing the location of the states).
We analyzed the creditworthiness of the FSU and its 15 successor states from a variety of perspectives, including debt burden, gross financial requirements, liquidity, secondary market valuations of FSU debt, and country risk analyses. In addition, we (1) considered the general economic and political environment in the FSU and its successor states; (2) reviewed how the Soviet debt crisis developed and the relationship between debt problems, on the one hand, and economic reform and creditworthiness on the other; (3) examined how USDA assessments of creditworthiness and market considerations affected USDA’s decisions on providing the FSU/successor states with credit guarantees; and (4) estimated the exposure of the GSM-102 portfolio to default by the FSU and its successor states.
To assess the creditworthiness of the FSU and its successor states, we (1) analyzed their debt burden and liquidity situations, using historical and forecast data; (2) considered the importance of arrears, debt relief, and International Monetary Fund (IMF) arrangements as measures of creditworthiness; (3) applied USDA/TEID criteria for measuring the relative creditworthiness of countries to the successor states; (4) reviewed secondary market prices of FSU loans and bonds; and (5) analyzed several country risk ratings of the creditworthiness of the FSU and its successor states, including preparing a composite rating for each of the states.
To examine the role of U.S. agricultural exports to the FSU and its successor states and the use of GSM-102 credit guarantees to promote such trade, we analyzed USDA data and related information on U.S. agricultural exports generally and GSM export credit guarantees more specifically. To assess the development of the Soviet debt crisis, we reviewed information on debt-servicing problems and efforts by the Group of Seven (G-7) industrialized nations and international institutions to provide financial assistance to help alleviate those problems. In reviewing the economic and political situation in the FSU and its successor states, we examined data and information on economic conditions and political events during recent years and considered the views of a number of experts and U.S. government agencies. To assess the exposure of the GSM-102 portfolio to default by the FSU and its successor states, we analyzed GSM-102 data on outstanding principal owed by all GSM-102 recipients, including weighting the data according to country risk evaluations of the creditworthiness of the recipients. In addition, we used data on secondary market prices of FSU loans and country risk ratings to estimate the risk of default on external debt of the successor states. The secondary market expresses the value of a country’s loan as a percentage of its face value. The extent to which a loan’s value is discounted in the secondary market indicates how the financial market assesses the risk of default. We estimated the default risk by subtracting a country’s secondary market price from $1 and dividing the result by 100. A similar technique was used for country risk ratings.
In conducting our review, we interviewed representatives of the U.S. Departments of Agriculture, State, and the Treasury. We also conducted field work in five of the FSU’s successor states (Belarus, Kazakhstan, Russia, Ukraine, and Uzbekistan) and in Paris, Bonn, and Brussels. In the latter three cities, we met with representatives of the French and German governments and the European Union.
We also reviewed U.S. legislation relating to GSM-102/103 programs, as well as other government documents and documents of the World Bank and IMF, and private sector ratings of country risk and creditworthiness. In addition, we reviewed information on violent conflicts that have affected Russia and other successor states (see app. I) and compared the debt burden of countries to debt payment problems, IMF arrangements, and debt relief agreements (see app. II).
We obtained comments from the Department of Agriculture on a draft of this report (see app. III). We summarize and evaluate most of USDA’s comments in chapter 6, and some comments are addressed directly in other chapters of this report.
We did our work between April 1992 and December 1994 in accordance with generally accepted government auditing standards.
U.S. Agricultural Trade With the Former Soviet Union and Role of the GSM-102 Program
The FSU has been a major purchaser of U.S. bulk agricultural exports since 1972; until 1991, it usually made such purchases with cash. However, owing to its increasing financial difficulties (see ch. 3), in the latter part of 1990 the Soviets sought export credits to finance their imports of commodities and food products. The United States responded positively. Between December 1990 and September 30, 1993, the United States offered to provide up to $5.97 billion in GSM-102 export credit guarantees to the FSU and those successor states that qualified for the program. As of September 30, 1993, $5.02 billion had been provided, $0.949 billion was no longer available to the FSU, and $3.85 billion was still owed to the United States on FSU credit-guaranteed purchases.
As a result of these sizable guarantees, the GSM-102 program has become heavily exposed to default by Russia, which has undertaken the responsibility as guarantor of the debt of the FSU. Guaranteed sales to the FSU and/or its successor states accounted for 38 percent of all GSM sales in fiscal year 1991 and 43 percent in fiscal year 1992 (including Russia and Ukraine). The FSU and its successor states now hold the largest portion of all outstanding GSM-102/103 loan guarantees. In late November 1992, Russia began missing payments due on GSM-102 debt for the FSU. By the end of September 1993, Russian defaults on FSU and Russian debt totaled nearly $1.1 billion. At that time, the United States agreed to reschedule $1.1 billion of GSM-102 debt. In January 1994, Russia again fell into default on GSM-102 loans. By early June 1994, the United States had agreed to reschedule another $882 million.
Background
As discussed in our 1993 report, the FSU was the world’s largest producer of wheat and one of the world’s largest producers of grains overall. It was also a major producer of potatoes, sugar beets, cotton, and sunflowers. Despite its vast production of crops, however, the FSU was a net importer of food. Its imports averaged just under $20 billion per year, about half of which was for grains and sugar. The need for extensive imports continued following the dissolution of the Soviet Union in December 1991.
We found that extensive food imports were necessary because the states had been unable to efficiently harvest, store, process, and distribute much of what was grown. Difficulties associated with each of these steps of the food production system combined to create huge losses due to spoilage after crops were initially produced. For example, approximately 25 to 30 percent of grain and 30 to 50 percent of potatoes and vegetables produced in the FSU and its successor states were lost annually because of these problems. Moreover, in absolute terms, aggregate annual grain loss of the successor states (excluding the Baltic states) was, on average, about 30 million to 40 million metric tons (mmt), which was roughly equal to the size of their aggregate annual grain imports.
After 1985, the Soviet Union announced a series of initiatives to reform agriculture, ranging from making changes in land ownership laws to paying farmers hard currency for high-quality crops sold to the state in excess of original state-contracted amounts. However, for a variety of reasons, these initiatives did not produce substantive results. By 1991, the availability of basic food staples, such as potatoes, meat, and bread, was far worse than before agricultural reforms were initiated. As discussed in our 1993 report, following the dissolution of the Soviet Union, agricultural reforms in the successor states proceeded slowly, with varied progress among the states. Reforms considered or undertaken in these states included the liberalizing of food prices; restructuring of state and collective farms; and privatizing of food production, wholesale and retail trade, processing, storage, and transport. However, agricultural reform has been slow, in part because successor state governments fear that rapid reform might lead to significant production shortfalls and unemployment. In turn, such disruptions could cause food shortages and discontent that would threaten the political and social stability needed by these governments to proceed with reforms. Our report also found that agricultural reforms have been impeded by (1) bureaucratic resistance from some persons with vested interests in the old central command system and (2) fear of change by workers on state and collective farms.
U.S. Trade With the FSU
Since the early 1970s, the FSU was a major customer for U.S. bulk agricultural commodities, although U.S. exports fluctuated greatly from year to year. The trade relationship was fostered by a series of U.S.-Soviet long-term bilateral grain agreements. Annual sales varied in response to a variety of factors, including fluctuations in Soviet agricultural production, changes in the nature of the U.S.-Soviet political relationship, and competition from other exporters of agricultural commodities.
Table 2.1 shows U.S. agricultural exports to the FSU and its successor states as a percent of U.S. agricultural exports to the world, between 1976 and 1993 (percents were calculated on the basis of the dollar value of the exports). For the entire period, exports to the FSU and its successor states accounted for 5.5 percent (on an average annual basis) of the total value of U.S. agricultural exports to the world. For the 1991-93 period, the average annual share was 5.3 percent. Grain and soybeans/soybean products accounted for the large majority of U.S. agricultural exports to the FSU and its successor states.
Table 2.2 shows U.S. corn, wheat, and soybean/soybean product exports to the FSU and its successor states as a percent of the total value of such commodity exports to the world between 1976 and 1993. The table shows that corn and wheat exports generally accounted for 10 percent or more of total U.S. exports of the same commodities.
GSM-102 Sales to the FSU and Its Successor States
Beginning in the early 1970s, the FSU became more or less a permanent grain importer. Generally, through 1990, it was a cash customer when it purchased U.S. agricultural commodities. However, during the last months of 1990, the Soviets sought to line up export credits to purchase needed food from countries that traditionally exported agricultural commodities to the Soviet Union. The Soviets needed such credits because they had a limited amount of hard currency reserves available to purchase food and other items and to finance their continuing trade deficit with nonsocialist countries.
On December 12, 1990, the Secretary of Agriculture announced that $1 billion in GSM-102 export credit guarantees would be made available for agricultural sales to the Soviet Union. (January 1991 was the first month in which guarantees were allocated for actual commodity purchases.) The decision was made during a time of a food shortage in the Soviet Union.The U.S. response to the Soviet Union’s request for assistance took place in the context of growing western efforts to help the Soviet Union. As of December 1990, Canada, France, Germany, Italy, and Spain had announced about $3 billion in agricultural credits to the Soviet Union for purchases in the following months. The United States had also stated its support for the Soviet President’s “perestroika” (restructuring) measures and fundamental economic reform objectives. When the GSM credits were announced in December 1990, the White House Press Secretary said they reflected the administration’s desire to promote a continued positive evolution in the U.S.-Soviet relationship.
In April 1991, the Soviet Union requested another $1.5 billion in GSM-102 export credit guarantees for 1991. However, the request occurred at a time of growing concern about Soviet creditworthiness. In hearings held in May 1991, the Deputy Under Secretary for International Affairs and Commodity Programs indicated to a congressional committee that under the 1985 Farm Bill it was quite possible to consider the creditworthiness of a country suspect but still proceed with a full GSM program for the country because market development considerations outweighed the financial risk. However, he said, USDA believed that such an approach was no longer possible and that as a result, USDA’s flexibility in operating the credit guarantee programs had been considerably limited. As discussed in chapter 1, the 1990 Farm Bill added the requirement that the Secretary of Agriculture may not issue credit guarantees in connection with sales of agricultural commodities to any country that he determines cannot adequately service the debt associated with such a sale.
During May 1991, there was extensive debate in the Senate about whether to provide additional credit guarantees to the Soviet Union. The debate focused on (1) whether the Soviet Union was creditworthy, (2) what factors should be considered in assessing a country’s ability to repay GSM debt, (3) whether credit guarantees should be provided or denied to the Soviet Union because of foreign policy considerations, and (4) what the impact on the United States and U.S. farmers would be if guarantees were not provided and sales not made. On May 15, 1991, the Senate approved (by a vote of 70 to 28) a nonbinding resolution (S. Res. 117) that said that as the administration evaluates the Soviet request, it should consider in its evaluation such factors as whether the Soviets were able to service current debt and whether the absence of U.S. guarantees would jeopardize U.S. market development. Similarly, on May 31, 1991, 37 members of the House Committee on Agriculture sent the Secretary of Agriculture a letter that said the Secretary should consider, among other factors, the U.S. ability to access, maintain, and develop markets for U.S. agricultural products, including an assessment of whether the absence of U.S. credit guarantees would jeopardize the ability to access and develop such markets.
In June 1991, the President approved the Soviet request for $1.5 billion in additional credit guarantees. Subsequently, in July 1991, USDA’s Assistant General Sales Manager told us that the Senate resolution and letters that USDA had received from Members of Congress had provided helpful guidance on how to interpret the requirements of the 1990 Farm Bill. He said that without that guidance, it is not clear whether USDA would have made a determination that the Soviet Union was creditworthy. The official noted that the entire GSM program was predicated on making credit available beyond what the private sector would provide.
During the summer of 1991, increasing apprehension about the Soviet Union’s creditworthiness affected its ability to obtain financing for U.S. agricultural commodities—even for purchases backed by U.S. credit guarantees. According to an official of Vnesheconombank (VEB), the Soviet Bank for Foreign Economic Affairs, U.S. commercial banks no longer felt comfortable with the 98-percent guarantee coverage that USDA typically offers. The banks, he said, wanted CCC to provide 100-percent coverage of the principal or have the exporters absorb some of the risk.
On September 24, 1991, CCC agreed to guarantee 100 percent of principal. Between then and the end of fiscal year 1993, all of the credit guarantees to the FSU, Russia, and Ukraine included 100-percent coverage of the principal. In comparison, none of the other countries that received GSM-102 credit guarantees in fiscal year 1991 through March 4 of fiscal year 1994 were provided more than 98-percent coverage.
In November 1991, the White House announced that another $1.25 billion in credit guarantees was being made available, along with $250 million in food aid and technical assistance. The White House said that the President’s decision would help the Soviet Union, its republics, and their peoples cope with immediate food shortages and aid in the longer term restructuring of the country’s food distribution system. However, owing to concern about whether the Soviet Union would continue to exist, this commitment was not made until after Russia and the other republics agreed to “joint and several liability” for the debts of the Soviet Union. In December 1991, the Soviet Union did dissolve. At that time, a considerable portion of the November GSM credit guarantees had not been allocated. CCC announced that the unused guarantees (about $650 million) would be available for sale to any of the 12 republics. However, all sales for the unused guarantees went to the 12 states of the FSU as a group.
In April 1992, the President announced that another $1.1 billion in credit guarantees would be made available. However, because several of the successor states (particularly Russia and Ukraine) wanted separate programs, USDA indicated that the guarantees would henceforth be made on a bilateral basis. Of the $1.1 billion announced at that time, USDA said that $600 million was being designated for Russia. The remaining $500 million would be available for Ukraine and the other states provided they met GSM-102 program qualifications. Only Ukraine received any of this commitment—$109 million. According to a USDA official, the remaining $390 million is no longer available. In September 1992, USDA announced that $900 million in new guarantees was being made available to Russia for fiscal year 1993. One month later, USDA announced a commitment of $200 million for Ukraine for fiscal year 1993. Between January and September 1993, USDA announced small amounts of credit guarantees for Estonia ($5 million) and Uzbekistan ($15 million).
Table 2.3 summarizes information on all GSM-102 commitments made to the FSU and its successor states through September 30, 1993. As the table shows, U.S.-announced guarantees totaled $5.97 billion. As of September 30, 1993, $5.021 billion had been registered for export. Of this, the FSU received $3.74 billion, Russia $1.06 billion, Ukraine $199 million, and two other states a total of $20 million. The remaining $949 million in announced guarantees is no longer available because the period of time during which the guarantees could have been registered for export has expired.
Fiscal Year 1994 GSM-102 Credit Guarantees
During fiscal year 1994, USDA announced the availability of GSM-102 credit guarantees for successor states as follows: Kazakhstan, $15 million; Ukraine, $40 million; Turkmenistan, $10 million; and Uzbekistan, $15 million. In each of these cases, CCC agreed to cover only 98 percent of the principal. For Kazakhstan, Turkmenistan, and Uzbekistan, USDA required that principal repayments be made every 6 months. For Ukraine, however, USDA indicated principal repayments could be made annually.
Although USDA said it would make up to $40 million available for Ukraine, only $20 million was authorized during the fiscal year.
In addition to the above states, in September 1994, USDA announced it was authorizing $20 million in GSM-102 credit guarantees for sales to private sector buyers in Russia for fiscal year 1994. The guarantees offered to Russia were significantly different from guarantees previously made available to the FSU and its successor states, including Russia. Under the terms of the announcement, the guarantees could be effective for up to 90 days only rather than up to 3 years. The offer followed a long period during which Russia did not receive any guarantees as a result of substantial defaults on its GSM-102 credit-guaranteed loan payments (see later discussion in this chapter).
Total GSM-102 guarantees offered to the successor states in fiscal year 1994 equalled $100 million, a small fraction of the amounts offered in fiscal years 1991, 1992, and 1993. (See table 2.3 and the accompanying discussion.)
Was There a Food Shortage?
In commenting on a draft of this report, USDA said it is important to clarify that there were no food shortages in the sense that the USSR did not produce enough food. Before the breakup of the USSR, USDA said, shortages and long lines existed in state stores where prices were controlled, resulting in “surplus demand” at those locations. No shortages existed in the farmer markets where prices were relatively freely set and substantially higher than state-set prices. After the breakup of the Soviet Union, USDA said, price liberalization led to higher prices, increasing the availability of food by decreasing surplus demand.
The primary problems facing the FSU in terms of food supply, USDA said, are disruptions due to military conflict and the reduced purchasing power of consumers, which has put some groups (such as the elderly and unemployed) at risk. Humanitarian assistance could address, and in many cases has addressed, these problems. USDA also said that it would not characterize 1990 as a time of food shortages. It noted that the 1990 grain crop was one of the largest in history and reiterated that the food problems in the Soviet Union were a function of controlled prices and surplus demand, not a “shortage of supply.”
We do not disagree with USDA’s description of what caused the food problems in the FSU but believe that our use of the term “food shortages” to characterize the situation in the FSU is consistent with what both USDA and others were saying at the time. For example, on December 12, 1990, the White House issued a fact sheet that said that the GSM-102 export credit guarantees being made available at that time were a form of food assistance that “will help the Soviet authorities address current food shortages.” A Congressional Research Service report of December 3, 1990, concluded that even with bumper grain crops in the Soviet Union in the fall, food losses due to harvesting and spoilage problems and a breakdown in food processing and distribution systems had resulted in shortages of food products, particularly in the larger Soviet cities and in remote areas far from the major food producing regions. Similarly, a May 1991 USDA report on Soviet agriculture used the term food shortages several times in describing food problems in the Soviet Union.
GSM Sales Relative to Total U.S. Exports to the Region
Since the beginning of 1991, most U.S. agricultural exports to the FSU and its successor states have been financed through GSM-102 credit guarantees. For example, the United States exported $6.6 billion in agricultural commodities to the FSU during 1991 through 1993. Between January 1991 and September 30, 1993, CCC registered for export $5 billion in GSM-102 credit-guaranteed food.
Table 2.4 shows that the principal GSM-102 commodity exports to the FSU, Russia, and Ukraine have been grains (i.e., yellow corn and wheat) and soybeans and soybean products (i.e., soybean meal and soybean oil). The table also shows that the GSM commodity exports to the three countries accounted for a considerable portion of total GSM-102 and 103 commodity exports to the world during fiscal years 1991 and 1992.
USDA Assessments of FSU And successor States’ Creditworthiness and Impact on Decisions About Whether to Provide Credit Guarantees
We examined USDA documents recording the results of meetings of USDA’s Reconciliation Committee on whether to provide credit guarantees to the FSU and its successor states. We found that FSU and, subsequently, Russian and Ukrainian creditworthiness were assessed as very risky by the committee during the 2-year period when USDA’s CCC made available more than $5 billion in credit guarantees to these countries. We also found that there was considerable disagreement between those participants whose primary concern was to assess financial risk and those responsible for assessing market opportunities. The committee sought to develop recommendations that would reconcile or balance the financial risks and market development opportunities.
The Assistant General Sales Manager or the Acting General Sales Manager chaired the committee. Other participants included representatives from several offices under USDA’s Under Secretary for International Affairs and Commodity Programs. These included (1) the Financial Management Division of the Agricultural Stabilization and Conservation Service (ASCS); (2) the CCC Operations Division (CCCD); (3) the Commodity and Marketing Programs (C&MP), including its Grain and Feeds Division (G&FD); (4) the Program Development Division (PDD); and (5) the Trade and Economic Information Division.
August-December 1990
The Reconciliation Committee met on August 21, 1990, to consider a recommendation to provide GSM-102 export credit guarantees to the FSU. Members presented very strong arguments for both a $2-billion program based on market development opportunities and a limited $500-million (or less) program based on financial and political risks. The Reconciliation Committee Chairman suggested a $1-billion program as a good balance between market development and risk. However, given strongly opposing views, the committee decided to further assess the situation.
The committee met again on September 19, 1990. TEID, responsible for assessing country risk, reported that there was continued deterioration in the Soviet economic situation and a further unraveling of the political situation. It recommended a maximum exposure of no more than $500 million in credit guarantees for the Soviet Union. ASCS, responsible for establishing limits on the amount of credit guarantees that could be handled by Soviet banks, said that on the basis of bank financial risks, macroeconomic issues, and political problems, it was strongly against a GSM program higher than $280 million. It noted a rapid and major decline in Soviet creditworthiness, reports of military movements outside of Moscow, and open discussion of a coup in the Soviet Union. Both TEID and ASCS cited a plan being circulated in the Soviet Union for changing the balance of power between central authorities and the republics, and they expressed concern about who would be responsible for repayment if republics split from the Soviet Union. ASCS said that if the Soviet plan were implemented, the Soviet banking system would be decentralized and that VEB, the only Soviet bank authorized to issue letters of credit to obtain credit guarantees, might not have sufficient hard currency to repay its obligations.
CCCD asked whether the committee could even consider anything over $500 million, given the negative financial information presented by TEID and ASCS. The Reconciliation Committee Chairman agreed that based on financial information only a smaller program was warranted. However, he reminded the participants that the purpose of the committee was not only to consider financial risks but also to reconcile these risks with market development opportunities. He said the committee had the responsibility of sending forward a recommendation that was balanced between risks and market development.
C&MP, which had urged at least a $2-billion program for the Soviet Union in August 1990, again urged a large program to meet many potential market development opportunities. It said (1) the Soviet Union represented the largest market development opportunity in the world and also had the greatest future potential, (2) there were many competitors lined up to extend credit to the Soviets, (3) any loss in U.S. market share would be severely detrimental to U.S. agricultural business and producers, and (4) loss of the Soviet market would result in higher domestic program costs for CCC now and in future years. In addition, C&MP said the Soviet Union’s ability to pay should not be based solely on current market information. It noted that the country had the largest untapped resource base in the world and that even though its financial condition was bad, it was still paying its agricultural debts to the United States.
In spite of the wide differences of view, the committee recommended a $1.25-billion program for the Soviet Union—subject to certain conditions, such as releasing the guarantees in segments and securing a credit guarantee assurance letter from the Soviet federal government. In addition, the committee said it wanted reviewers of its recommendation to know that there was extreme risk in its proposal and a substantial chance that CCC would have to make outlays. The committee said it felt that CCC should accept a degree of country risk that it would refuse for another country because (1) the Soviet Union was our largest export market for grains, and the health of the American farm community was directly dependent on maintaining market share in that market; and (2) in the event of a loss of the Soviet market, CCC would also make substantial outlays under domestic programs.
According to documents provided to us by USDA, the Reconciliation Committee did not meet again to discuss the Soviet situation between the time of its September recommendation and December 12, 1990. On the latter date, the Secretary of Agriculture announced that the President had waived the Jackson-Vanik amendment to the 1974 Trade Act emigration requirements in order for the Soviet Union to purchase U.S. agriculture commodities using USDA credit guarantees. The Secretary said $1 billion in guarantees would be made available to fulfill a request made by the Soviet government.
May-June 1991
In May 1991 the Reconciliation Committee met twice to consider a Soviet request for an additional $1.5 billion in credit guarantees. In a May 2 meeting, TEID advised the members that the Soviet economic and political situation was rapidly deteriorating and questioned who would repay Soviet loans if the Soviet Union did not survive. TEID said that on the basis of a “best-case” scenario, it could propose no more than $300 million in added credit guarantees. PDD said it favored postponing any further credits. Among some of the reasons it offered were that (1) section 202 (f) of the 1990 Farm Bill stipulated that credit should not be extended to countries that cannot adequately service the debt, (2) CCC exposure was already over CCC’s guideline, (3) Soviet instability seemed likely to continue, (4) foreign exchange reserves would likely decline, and (5) there was uncertainty about implementation of the Jackson-Vanik amendment. ASCS recommended no new credits.
In contrast, C&MP told the committee that the Soviets could use all of the $1.5 billion in credit guarantees and that if the United States did not extend credit, it would be out of the market. C&MP warned that the U.S. reputation as a reliable supplier would suffer, and long-term trade repercussions would follow. G&FD questioned whether there was not room to work out a solution. It noted that the Soviet Union had huge resources and there had been no occasion of its delaying payment. G&FD warned that the President and the Secretary of Agriculture might be embarrassed if guarantees were not extended, since the Soviet state had an obligation to feed its people and the credit guarantees would be used to purchase grain, a fundamental staple. The meeting ended with the committee recommending that no further credit be extended to the Soviet Union for the time being. However, it said a reexamination should be initiated if, for example, Congress acted to clarify the interpretation of section 202(f) of the 1990 Farm Bill. As previously discussed, during May 1991 the Senate approved a nonbinding resolution, and 37 members of the House sent the Secretary of Agriculture a letter indicating that USDA should assess the impact on U.S. commodity exports if additional credit guarantees were not extended to the Soviet Union.
On May 28, 1991, the Reconciliation Committee met to review its previous position and to be briefed by the Chairman and the General Sales Manager on the results of a presidential mission that had visited the Soviet Union between May 17 and 26, 1991, and of which the Chairman and the manager were members. The Chairman reported there were no real signs of hunger or food shortages in the Soviet Union. The General Sales Manager told the committee that Soviet officials had advised USDA that they could not provide firm financial figures relative to Soviet creditworthiness. As a result, he said, Soviet figures had lost their credibility, and a Soviet request for additional credits would have to be viewed as a political rather than commercial request. TEID agreed. Although the committee noted that the Soviet Union had passed a new immigration law that would make the Jackson-Vanik requirement less of a problem in the future, the committee concluded that there was no basis for changing its previous recommendation not to extend further credit guarantees to the Soviet Union.
The committee’s recommendation notwithstanding, on June 11, 1991, the President announced his decision to extend another $1.5 billion in loan guarantees to the Soviet Union. According to the White House Press Secretary, the President’s assessment of the Soviet Union’s creditworthiness was based on the following: (1) its record of never defaulting on an official loan involving the United States; (2) its positive repayment history on several hundred million dollars in loans through the 1970s, primarily from the U.S. Export-Import Bank; (3) the judgment of the USDA team that had visited the Soviet Union in May; (4) the subsequent review by the Secretary of Agriculture; (5) the administration’s discussions with Soviet officials; and (6) the commitment of President Gorbachev to move toward a market economy.
In July 1991, the Assistant General Sales Manager told us that food was a priority item for the Soviet government, since without adequate food supplies political stability could be threatened. The government had an incentive to stay current on GSM debt payments, he said, because Soviet officials knew that if the government did not remain current, the GSM-102 program would be suspended.
August-October 1992
The Reconciliation Committee met on August 12, 1992, to discuss a possible fiscal year 1993 GSM-102 program for Russia. PDD recommended a $1.2-billion program. It noted that Russia had not missed a payment on any of the FSU’s GSM-102 debt and that VEB and Russian officials had continually said Russia would honor all of its GSM-102 obligations. C&MP said Russia’s commodity import needs greatly exceeded the $1.2-billion recommendation and that GSM-102 was essential to maintain the U.S. share of the Russian market. It warned that U.S. exports to Russia would be needed to help offset U.S. farm program costs.
TEID objected to the proposed $1.2-billion program. It advised the committee that CCC was vastly overexposed and at substantial risk of realizing large losses on the FSU and Russian programs. TEID said that Russia’s ability and commitment to resume full debt servicing in fiscal year 1993 were very doubtful and that FSU debt was likely to be rescheduled following Russian negotiation of a standby agreement with the IMF. TEID said it was impossible to establish a meaningful debt exposure guideline for additional credits, since Russia was not creditworthy for the size of its existing program. TEID recommended that Russia be extended other assistance of a more concessional nature. ASCS also objected to the proposed program level due to the substantial credit risk. It noted that the debt exposure level for VEB was well over the established bank limit now set by ASCS at $130 million, that VEB continued to fall behind on its interest payments to other creditors, and that VEB had been late on a number of GSM debt payments to banks. In addition, responsibility for the FSU debt on the part of each former republic had yet to be settled.
In the absence of a committee consensus, on August 28, 1992, the Committee Chairman recommended a $1.2-billion Russian program to the Acting Under Secretary for International Affairs and Commodity Programs. The Chairman detailed the differing views of the committee members. He noted that the proposed program might slightly reduce CCC’s total exposure and indicated that if there were no fiscal year 1993 program for Russia, there would be a highly damaging impact on farm prices and resulting outlays under U.S. domestic commodity support programs.
On August 26, 1992, the Reconciliation Committee met to discuss a fiscal year 1993 GSM-102 program for Ukraine. PDD recognized continued deterioration of the Ukrainian economy but recommended a $200-million program. It said GSM-102 financing would be needed to maintain U.S. market share and that Ukraine officials had stated they would honor all of their GSM-102 obligations. C&MP estimated Ukraine’s credit needs as closer to $300 million and said that the market would provide significant U.S. sales opportunities well into the latter half of the 1990s. In contrast, TEID recommended against a fiscal year 1993 program. It found Ukraine overexposed based on its fiscal year 1992 program and its share of repayments of the FSU program. It warned that unless Ukraine’s record significantly improved, TEID believed Ukraine would not obtain sufficient international financing and foreign exchange earnings to pay for its imports and service its foreign debts. ASCS, which had established a bank limit of $0 for the State Export-Import Bank of Ukraine, also recommended against any further CCC credits.
In the absence of a committee consensus, in September 1992 the Chairman recommended a $150-million Ukrainian program to the Acting Under Secretary. The Chairman said he was again trying to balance financial risk against market development opportunities. He said providing credits would mark the first time that USDA had made credit guarantees available to a country whose current risk rating was below grade (i.e., not creditworthy), but he also said the proposed program would represent a minimal presence in a major market where the United States had a strong interest.
On September 14, 1992, USDA announced that during fiscal year 1993 it would provide Russia with $900 million in GSM-102 credit guarantees and $250 million in food aid. On October 19, 1992, USDA announced an allocation of $200 million in export credit guarantees to Ukraine for fiscal year 1993.
Relationship Between Credit-Guaranteed Food Imports and Agricultural Reform
As we have previously reported, the progress of agricultural reform in the successor states might be hindered by the provision of export credit guarantees by the United States and other countries. Credit guarantees allow the successor states to continue to import billions of dollars of foreign grain and other food commodities. Because these commodities are generally purchased, processed, and distributed by state-owned enterprises, these structures are likely to survive longer as state monopolies than might otherwise be the case, although we were unable to quantify this effect. It is these inefficient state enterprises that successor state reformers seek to privatize or replace with alternative, nonstate structures, such as commodity exchanges and private food processors, distributors, and wholesalers. In addition, credit guarantee-assisted food imports might hinder domestic food production and the efficient processing and marketing of this food by keeping down prices offered to successor state farmers and food processors and distributors.
At the same time, however, a number of successor state officials we contacted felt that credit guarantee-assisted food imports had benefited the overall economic reform process in the states more generally. According to these officials, the food imports helped to preclude food shortages and thereby contributed to the political and social stability needed to advance the overall economic reform process.
In commenting on a draft of this report, USDA indicated that credit-guaranteed assistance has adversely affected reform in the FSU. According to USDA, although widespread dislocation in the food supply never occurred, the West continued to provide assistance (credits and food aid) to the FSU, which accepted it to the likely detriment of economic reforms (increased debt and continued state control of agricultural marketing that lowers productivity, increases waste, and possibly undercuts domestic production). According to USDA, FSU leaders figured it was in their best interest to accept western assistance since repayment, if any, would be delayed. USDA also noted that before its breakup, the Soviet Union also imported large amounts of grain rather than pay farmers more to increase domestic grain procurement and to reduce waste.
Exposure of the GSM Programs to Default on Former Soviet Union/Successor States’ Debt
In the space of 2 years, the GSM-102 program quickly became heavily exposed to debt of the FSU and its successor states. As table 1.1 showed, in fiscal year 1990 there were no GSM sales to the FSU. In fiscal year 1991, GSM guaranteed sales to the FSU were $1.9 billion, which equalled 38 percent of all GSM-102 sales that year. In fiscal year 1992, the FSU, Russia, and Ukraine together accounted for $2.6 billion, or 43 percent of all GSM-102 guaranteed sales. Not surprisingly, the FSU and its successor states accounted for the single largest portion of all outstanding loan guarantees from the GSM-102/103 programs combined. As of the end of January 1993, CCC had $8.8 billion in outstanding loan guarantees (principal only) from these programs. Of this amount, $3.6 billion, or 40.9 percent, was accounted for by guarantees provided to the FSU, Russia, and Ukraine. When the outstanding principal owed by GSM recipient countries is weighted by the risk of countries defaulting on their debt payments, we estimate that the exposure to default by the FSU, Russia, and Ukraine is even greater. See table 5.12 and accompanying discussion in chapter 5.
Table 2.5 provides the repayment schedule for the FSU’s GSM-102 loans as of the end of February 1993.
As the table shows, combined principal and interest payments due from the FSU, Russia, and Ukraine for 1993 equaled nearly $1.65 billion; in 1994, $1.62 billion; and in 1995, about $0.72 billion. The figures do not reflect, as discussed below, USDA’s April 1993 and June 1994 agreements to reschedule a considerable amount of FSU GSM-102 debt.
Since Russia is the only successor state making payments on GSM-102 debt for the FSU and since Russia accounts for nearly all credit guarantees committed since the program was converted to a bilateral mode, the GSM program is particularly vulnerable if Russia is not able or willing to make payments on GSM debt. As table 2.5 shows, Russia began defaulting on scheduled payments for both the FSU and Russia itself beginning in the fourth quarter of 1992. As a result of these defaults, USDA suspended Russia’s participation in the GSM-102 program. By March 31, 1993, FSU and Russian defaults totaled nearly $648 million (see table 2.6).
On April 2, 1993, the United States reached a provisional agreement with Russia to reschedule approximately $1.1 billion of GSM-102 debt. The agreement covered FSU principal and interest arrears, as well as payments coming due in calendar year 1993, on export contracts made in 1991. The rescheduled debt would be repaid over 7 years, with a 2-year grace period on principal repayments. Not covered by the rescheduling were $287 million in FSU arrears accumulated through March 31, 1993. Under the proposed agreement, Russia was to eliminate the arrears by June 30, 1993, and stay current on GSM-102 payments as they came due. However, rather than eliminating the arrears, Russian defaults increased. By the end of September 1993, net defaults totaled nearly $1.13 billion, and the Commodity Credit Corporation had paid out $1.1 billion in net claims to U.S. banks that had made the loans (see table 2.6.).
Nonetheless, on September 30, 1993, the United States and Russia concluded a debt rescheduling agreement along the lines of the April proposal. Under the agreement, Russia accepted responsibility for all of the GSM-102 debt of the FSU. The agreement provided for rescheduling an estimated $1.07 billion of GSM-102 debt, including a considerable amount of the arrears. In addition, Russia agreed to repay approximately $444 million in unrescheduled arrears in three installments by the end of 1993. Table 2.7 shows the schedule for Russia’s repayment of FSU and Russian GSM-102 debt following the September 1993 debt rescheduling. As the table shows, the debt was to be fully repaid by the year 2000. In addition, Russia was required to continue to make payments, as they come due, for FSU and Russian GSM-102 export contracts made after 1991. According to USDA, a determination on resumption of the GSM-102 program for Russia could not be made until the debt issues were fully resolved and all arrears were eliminated.
Russia did pay the arrears by the end of 1993. However, during early 1994, Russia again fell into default on GSM-102 debt. For example, during the first 70 days of 1994, Russia was in default about 51 days. In February, USDA agreed to reschedule $344 million in 1991 payments coming due during the January 1 through April 30, 1994, time period. On June 4, 1994, USDA agreed to reschedule another $517 million in payments due during the May 1 through December 31, 1994, period, as well as $22 million in deferred interest. Repayment terms for the principal included a 2.75-year grace period followed by an 8-year repayment period. The deferred interest on the rescheduling agreement is to be repaid over a 5-year period. Russia was still required to pay approximately $360 million owed to CCC and U.S. banks for the January through December 1994 period.
The amount of GSM-102 principal outstanding for Russia subsequent to the June 4 rescheduling agreement was $2.85 billion. This figure included principal amounts, interest, and capitalized interest due under the FSU program and the Russian program. At the time of the June rescheduling Russia was in arrears, and the rescheduling enabled Russia to become current on those arrears. The rescheduling occurred as part of a broader agreement concluded in Paris between Russia and its official creditors. The creditor countries also agreed to meet with Russia later in 1994 to discuss a longer term and more comprehensive rescheduling to address Russia’s severe financial problems.
Meanwhile, on June 2, 1994, Ukraine began defaulting on its GSM loan payments. As of August 17, 1994, its defaults totaled about $31.1 million and CCC had paid $21.6 million for claims made by lenders.
Impact of U.S. GSM-102 Exports to the FSU on U.S. Commodity Support Programs and U.S. Farmers
According to USDA, providing export credit guarantees to banks willing to extend loans to foreign purchasers of U.S. agricultural commodities increases the demand for U.S. exports. This increase, in turn, results in higher commodity prices for U.S. farmers and lower costs for U.S. government commodity support programs. Proponents of the GSM-102 credit guarantees point out that these reduced program costs offset the risk of default on the guaranteed debt. We reviewed USDA estimates of the cost savings associated with the extension of export credit guarantees to the FSU and its successor states in fiscal years 1991 and 1992. The FSU and its successor states received GSM-102 export credit guarantees for the purchase of U.S commodities and freight, and they also secured lower prices for certain commodities as a result of USDA Export Enhancement Program (EEP) bonus payments to U.S. exporters.
USDA initially provided us with two estimates of savings in commodity support programs associated with extending GSM-102 export credit guarantees to the FSU. The first estimate, which was made in conjunction with a proposed GSM-102 package in the spring of 1991, indicated that if CCC did not provide $1.5 billion in additional export credit guarantees to the FSU between January and July 1, 1991 ($1 billion in guarantees had already been extended between January and March 1991), CCC domestic support payments for wheat, corn, and soybeans could increase between $360 million and $755 million. The higher estimate was arrived at by assuming 100-percent program additionality—that is, that alternative export markets would not exist for GSM-102 guaranteed exports to the FSU.
Thus, commodities not sold to the FSU would have to be sold in the U.S. market or added to unsold carryover stocks. For the lower estimate, USDA made two different key assumptions. The first assumption was that 25 percent of the commodities could be exported to other countries. The second assumption was that $100 million of the guarantees for the FSU would be used for high-value products for which USDA does not provide deficiency payments or nonrecourse loans. Therefore, this $100 million in GSM-102 guarantees would have no impact on the costs of USDA’s domestic commodity support programs. Both of USDA’s estimates deducted the expected cost of EEP bonus payments provided for wheat exports under the proposed GSM sales.
USDA’s second estimate, made in February 1993, assessed changes in support costs for commodity programs if the United States did not export a projected 6 million tons of corn and 6 million tons of wheat to the FSU during 1993 and 1994. According to this estimate, support payments for corn would increase by $499 million and wheat payments by $685 million. Soybean costs were not included in the estimate. The estimate assumed that none of the corn and wheat would be sold into alternative export markets (i.e., 100-percent program additionality). Expected EEP bonus payments, however, were not netted out.
The USDA estimates of increased commodity support costs depend importantly on the assumption that alternative markets would not be generally available if the commodities were not exported to the FSU. USDA did not give us the basis for this assumption. If the commodities in question were exported to other nations, USDA’s estimates of farm price changes and program savings would be less than it estimated.
Questions About an Assumption of 100-Percent Program Additionality
For a variety of reasons, USDA’s assumption about 100-percent additionality is debatable: (1) special features of the GSM-102 program that were made available to the FSU and its successor states could have been attractive if offered to other importing nations; (2) competitor exporting nations may have displaced U.S. exports in other markets; and (3) CCC program costs depend on commodity farm prices that, in turn, are the result of many factors that influence global supply and demand conditions.
As previously noted, countries that participate in the GSM-102 program are able to obtain better interest rates on their credit than would be the case in commercial markets, as they are in effect using the repayment guarantee of the U.S. government to obtain the credit. In addition, most of the guarantees to the FSU and its successor states in fiscal year 1991 and fiscal year 1992 included coverage for 100 percent of the value of the commodities (rather than 98 percent, which is typical for the GSM-102 program). The 100-percent guarantee should also lower borrowing costs to prospective buyers. Also, the GSM-102 program for the FSU and its successor states included guarantees for freight costs. In fiscal years 1991 and 1992, freight coverage equaled nearly $443 million, or about 10 percent of the value of all GSM-102 credit guarantees offered the FSU and its successor states. The coverage of freight costs meant that each dollar of GSM-102 commitment to the FSU and its successor states supported only 90 cents’ worth of commodity exports. Also, EEP bonus payments to the importing countries for selected commodities lowered the cost of importing these commodities, which in turn should have resulted in additional exports. Total EEP bonus payments for GSM-102 exports to the FSU and the successor states in 1991 and 1992 were about $579 million.
We estimated that the combination of freight cost financing and EEP bonus payments alone made the additionality attributable to the GSM program for the FSU and its successor states in fiscal years 1991 and 1992 equal at most to about 77 percent. We believe that if USDA had offered GSM-102 credit guarantees to other potential buyers with similar generous terms, it is possible that the United States could have found alternative export markets for at least some of the GSM sales that were made to the FSU and its successor states.
The behavior of competitor exporters is also relevant to the question of program additionality. For example, if exporters from other nations responded to the GSM-102 guarantees that were made available to the FSU and its successor states by offering similar incentives to non-FSU importers, the exporters may have displaced potential U.S. exports to these other markets. Displaced U.S. exports would have reduced additionality resulting from increased exports to the FSU and its successor states. Alternatively, if the United States did not provide the guarantees to the FSU and its successor states but other exporter nations did, global commodity prices would presumably be about the same. As a result, there would be little or no reduction in USDA commodity support payments to farmers.
Actual support cost is also affected by commodity prices. Commodity prices are the result of many factors that influence global supply of and demand for commodities. These include, among others, the overall economic performance of the United States, as well as the global economy; the weather and growing conditions for crops in the United States and competitor nations; purchasing decisions in importing countries; the prices of competing commodities; and the production and consumption subsidies of the United States and its competitors. These factors could cause commodity prices to reach levels that would reduce or eliminate the need for additional commodity support payments to U.S. farmers—even if the United States did not export to the FSU and its successor states. However, the complexity and variety of factors that could influence commodity prices make the isolation of the effect of a single factor difficult.
Without explicit and detailed investigation of the behavior of exporters and importers and specification of other macroeconomic and microeconomic variables, discerning the additionality of the GSM-102 program is difficult. In the absence of reliable data on the additionality of GSM-102 exports, we believe that estimated savings in commodity support programs associated with extending GSM-102 export credit guarantees to the FSU and its successor states should consider a range of additionality levels.
Conclusions
USDA provided more than $5 billion in export credit guarantees to the FSU and its successor states in 1991-92. It did so when its own assessments indicated that these were high-risk countries from a creditworthiness perspective. According to documents of USDA’s Reconciliation Committee, which makes recommendations concerning whether to provide credit guarantees to specific countries and, if so, in what amounts, the committee saw a need to balance debt-servicing considerations against the need to maintain and expand overseas markets. On two occasions when the committee was unable to reach a consensus, the Chairman made recommendations that he believed balanced financial risk and market development considerations. Since the 1990 Farm Bill does not specify criteria to be used in assessing debt-servicing ability, USDA has considerable discretion and, thus, can provide large amounts of credit guarantees to high-risk countries, increasing the risk of defaults on GSM-102 loans.
Between November 1992 and the end of September 1993, Russia defaulted on more than $1.1 billion in GSM-102 loans made to the FSU and Russia. Under a September 30, 1993, agreement, the United States agreed to reschedule about $1.1 billion in GSM-102 debt, provided that Russia repaid $444 million of arrears (as of the end of 1993). Russia did repay the arrears on schedule. However, in January 1994, Russia again fell into default on GSM-102 loans. Between February and early June 1994, the United States agreed to reschedule approximately $882 million in additional payments due to CCC and U.S. banks under the GSM-102 program. Following the June 1994 rescheduling, there was approximately $2.9 billion in outstanding GSM-102 principal still owed by Russia on GSM-102 credit-guaranteed loans.
According to USDA estimates, export credit guarantees provided to the FSU and its successor states resulted in higher commodity prices and, in turn, lower costs for U.S. commodity support programs. Proponents of the credit guarantees assert that the reduced program costs help offset the risk of default on guaranteed debt. However, the estimated savings in commodity support costs depended importantly on an assumption that alternative markets would not be generally available if the commodities were not exported to the FSU. We disagree with analyses that assume only 100-percent additionality, and we believe that any estimated savings in commodity support programs should consider a range of additionality levels.
Debt Situation of the FSU and Its Successor States
During the latter part of the 1980s, a serious debt situation arose in the Soviet Union. As the situation evolved, western commercial lenders scaled back and then virtually halted lending to the Soviet Union. Western governments provided loans and credit guarantees to help fill the gap. By late 1991, the Soviet Union’s debt problem had reached crisis proportions. At the same time, the country was in the final stages of political disintegration. The debt crisis was temporarily eased in November 1991, when official western creditors agreed to a 1-year deferral of principal payments on pre-1991 debt. Eight of the Soviet republics agreed to joint and several liability for the outstanding debt of the Soviet Union and to carry out economic reforms recommended by the IMF.
Following the dissolution of the Soviet Union in December 1991, the former republics sought membership in the IMF and the World Bank. The Group of Seven (G-7) nations concluded that the international financial institutions could be used to promote economic reform in the FSU and to coordinate western financial assistance. They encouraged the new states to undertake substantial economic reforms designed to stabilize their economies. Doing so could lead to substantial new financial assistance from abroad and help the new states to improve their creditworthiness. Specifically, the G-7 nations said they would support a $24-billion financial assistance package for Russia, contingent on Russian progress in stabilizing and reforming its economy. However, Russia did not stabilize its economy, and the FSU debt arrears situation worsened. In April 1993, Russia’s official creditors (i.e., creditor country governments) found it necessary to reschedule a significant amount of Russian and FSU debts due in 1993. At the same time, the G-7 promised a new package of economic support for Russia. However, debt relief and other financial assistance have remained largely contingent on economic stabilization and reform. During the first half of 1994, Russia’s official creditors rescheduled additional FSU debt and agreed to meet later in the year to consider longer and more comprehensive rescheduling.
How Debt Became a Problem
For decades the Soviet Union was a conservative user of western credits and was regarded by western government and commercial lenders as an excellent credit risk, given its huge gold reserves and other exportable raw materials. During the first 9 years of the 1980s, the Soviets usually ran hard currency current account surpluses.
In the mid- and late 1980s, political detente and increasingly lax fiscal policies of the Soviet government led to a rapid increase in commercial lending to the Soviet Union, according to the World Bank. It estimates that the Soviet Union’s gross hard currency debt more than doubled, from $38.3 billion at the end of 1987 to $81.5 billion at mid-1993 (see table 3.1).
In 1989, the Soviet Union experienced a negative hard currency trade balance of $2.4 billion due to surging imports. The imbalance was financed by hard currency borrowing. During 1989 and 1990, a growing debt burden, debt-servicing problems, and increasing world concern about a collapsing Soviet economy and political disintegration began to affect the country’s access to the commercial financial market. According to the World Bank, the surge of imports caused a severe liquidity crisis, leading to a buildup of arrears to western banks and suppliers. The liquidity crunch was exacerbated, in part, because the government had extended authority to Soviet enterprises to negotiate overseas business.
According to a World Bank analysis, the Soviet Union was $4.5 billion in arrears at the end of 1990 (see table 3.1). In an earlier analysis, the bank estimated that about 10 percent of year-end 1990 arrears was guaranteed debt to official creditors, 30 percent unguaranteed debt to commercial banks, and 60 percent debt to others (mainly suppliers). As arrears accumulated, commercial banks reduced and then stopped new lending. The Soviet Union was faced with large net repayment obligations, which it financed to a great extent out of its deposits in western banks. As a result, these liquid reserves fell sharply, from $14.6 billion in December 1989, to $8.6 billion in December 1990, and to $6.4 billion by March 1991. At the end of 1991, estimated reserves were only about $5.1 billion, which represented less than 2.5 months’ coverage of import costs. According to one source, a 3- to 6-month coverage is generally considered adequate.
Gold reserves, the other major component of the FSU’s international reserves, were apparently either drawn down to very low levels or already at low levels. Thus, they were not available for financing the liquidity problem. According to 1991 Central Intelligence Agency (CIA) estimates, Soviet gold reserves had ranged between 1,679 metric tons in 1980 to 2,105 metric tons in 1990, with a peak level of 2,366 metric tons in 1985.However, during the latter part of 1991 an economic adviser to the Soviet President asserted that the Soviet government had been selling off large amounts of gold reserves for several years. He added that only 240 tons of reserves were left (valued at less than $3 billion). In May 1992, the U.S. Minister Counsellor for Economic Affairs at the U.S. embassy in Moscow told us that Russia had only 220 metric tons of gold. He said these amounts were minimal reserves. In early February 1993, a former Soviet prime minister said that the Soviet Union had squandered its gold reserves before President Gorbachev took over in 1985 but had managed to keep the matter secret until 1991.
Structure, Composition, and Maturity of the Debt
Due to its problems with debt servicing, by 1990 the Soviet Union had become a high-risk country for lenders. The worsening political, economic, and liquidity conditions virtually halted the flow of commercial financing. This halt in commercial financing became an impetus for western governments to undertake considerable official financing. Consequently, the structure of Soviet debt was substantially altered, as evidenced by changes in the source and maturity of the Soviet debt.
Whereas commercial banks and other private creditors had accounted for 78 percent ($44.1 billion) of the Soviet Union’s convertible currency debt at the end of 1989, they held only 41 percent ($25 billion) at the end of 1991. Conversely, Soviet official bilateral debt increased from $12.4 billion, or 22 percent of convertible currency debt, to $36.5 billion, or 59 percent, during the same period.
A substantial change in the maturity of FSU debt accompanied the change in the sources of FSU debt. As commercial lenders increased their efforts to collect on their short-term loans, western governments extended medium- and long-term credit or credit guarantees. Whereas in 1988 about 27 percent of the debt was short term, at mid-1992 short-term debt was estimated at only 17 percent.
As table 3.2 shows, in mid-1991 Germany was by far the largest creditor of the FSU, accounting for more than two-fifths of FSU external debt. However, much of the debt to Germany (about 40 to 43 percent at the end of March 1991) was owed to the former German Democratic Republic (East Germany). The United States was not among the six biggest creditors.
Table 3.3 provides information on both loans and grant assistance pledged to the FSU by the G-7 nations and the European Community during 1990 through 1992. It shows that Germany pledged the largest amounts of both loans and grants during this period—$54 billion out of $81 billion. The United States was second, with combined pledges totaling about $9.2 billion.
Soviet Debt Situation Reaches a Crisis Point in Late 1991
The year 1991 marked a turning point for Soviet debt as well as for Soviet territorial, economic, and political integrity. The hard currency situation worsened significantly as a result of capital flight and declining exports, particularly oil. According to a World Bank report, capital flight for 1991 was estimated at about $15 billion. That figure represents a staggering 88 percent of Soviet contractual debt service for the year and 61 percent of estimated merchandise exports.
According to the Wharton Econometrics Forecasting Associates (WEFA) Group, in 1991 Soviet oil exports fell by about 50 percent from the previous year’s level; iron ore, by 64 percent; steel mill products, 70 percent; timber, 50 percent; and diesel fuel, about 25 percent. Declining exports adversely affected hard currency earnings. Whereas 1990 hard currency earnings from merchandise exports were $36 billion, according to WEFA, in 1991 the earnings equaled only about $24.8 billion. According to WEFA’s figures, most of the decrease can be accounted for by reduced fuel exports. In terms of dollar earnings, the value of Soviet fuel exports to nonsocialist countries fell from an estimated $21.8 billion in 1990 to $9.2 billion in 1991. Soviet merchandise imports also declined markedly—from $39.5 billion in 1990 to $25.4 billion in 1991—due to the lack of hard currency and the unwillingness of foreign commercial banks to grant short-term credits.
Following the failed coup in August 1991, Soviet economic deterioration and political disintegration accelerated. A crisis point was reached in autumn, when the Soviet Union found itself unable to repay all of its debts and to secure new credits badly needed to purchase food imports. Owing to concern about whether the Soviet Union would continue to exist, officials of the G-7 nations indicated that additional western loans would not be forthcoming unless the various Soviet republics pledged to honor the Soviet Union’s debt, according to various Soviet media reports. On November 21, 1991, six Soviet republics signed an agreement with the G-7 nations affirming joint and several liability for the outstanding debt of the Soviet Union, based on an October 28, 1991, memorandum of understanding. Subsequently, two other republics also signed the document. (See table 3.4.) The eight also agreed to carry out economic reforms recommended by the IMF, including reducing fiscal deficits, public expenditures, and monetary growth and liberalizing prices and the foreign exchange rate.
Debt Deferral Agreement of November 1991
The hard currency crisis was temporarily alleviated on November 21, 1991. On that day representatives of the G-7 nations reached agreement with the Soviet government and governments of 8 of the 12 republics on a financial package designed to ease Soviet liquidity problems. According to the U.S. Department of the Treasury, the package included the deferral of about $3.6 billion in principal payments on medium- and long-term debt contracted before January 1, 1991, and falling due to official creditors in G-7 nations before the end of 1992; the maintenance of short-term credit lines by G-7 nations’ export credit agencies; and the possible emergency financing of up to $1 billion in the form of a loan secured by gold.
In December 1991, the Soviet Union was formally dissolved. During that month, eight republics of the Soviet Union reached preliminary agreement among themselves on how to share the external debt and assets of the FSU. (See table 3.4.) The signatory republics agreed to accept responsibility for a portion of the Soviet Union’s overall foreign debt and to set up an interrepublic debt management committee to oversee handling the Soviet Union’s debts and assets. The committee calculated preliminary debt shares for the 15 republics on the basis of each republic’s economic stature within the union. Table 3.4 shows which republics signed the agreement and the debt shares of the republics.
Also during December 1991, the Soviet Union suspended all principal payments to commercial creditor banks for loans made before January 1, 1991. An agreement between the commercial bankers and officials of a majority of the successor states stipulated that talks on the issue resume in March 1992.
On January 4, 1992, 17 principal creditor nations, including the G-7 countries, met in Paris with VEB, the designated debt manager for the 8 former republics that signed the October 28, 1991, memorandum of understanding previously discussed. The creditors agreed to defer principal payments on medium- and long-term official debts contracted before January 1, 1991, and falling due from December 5, 1991, to the end of 1992. They said the deferral would continue beyond March 31, 1992, provided satisfactory progress were made by the debtor countries in mobilizing foreign exchange and adopting comprehensive macroeconomic and structural adjustment programs, in full consultation with the IMF.
Role of International Institutions and Linkage to Economic Reform
Shortly before and following the dissolution of the Soviet Union, Ukraine, Russia, and other republics requested membership in the IMF and the World Bank. Membership in the international financial institutions could lead to substantial new financial assistance from abroad and help the new states to improve their creditworthiness. The United States and other members of the G-7 nations concluded that the international financial institutions could be used to promote economic reform in the FSU and to coordinate western financial assistance. They encouraged the new states to develop economic adjustment programs that could be supported by the institutions.
On March 31, 1992, the IMF endorsed a draft economic reform program that had been prepared by the Russian government. A suitable reform program was a condition for extension of the moratorium on debt service payments for the FSU. Among the program’s main points were that the Russian government would (1) reduce its budget deficit to 1 percent of gross national product (GNP) by the end of 1992 through cuts in military spending and subsidies to enterprises; (2) tighten central bank monetary and credit policies; (3) adopt new taxes, including restoring a 28-percent value-added tax; and (4) target social subsidies more precisely, so aid could be provided to the most needy and the unemployed. Russian officials claimed the program would slow the rate of inflation to 1 to 3 percent by the end of 1992. They also said the reform program would have to be cut back if Russia did not receive substantial foreign financial aid, including debt relief, a stabilization fund for the ruble, and balance-of-payments support.
On April 1, 1992, the United States and other G-7 nations announced support for a $24 billion international aid program for Russia. The package was to include rescheduling of $2.5 billion of official debts of the Russian government. It also was to include about $11 billion in bilateral aid (export credits and humanitarian and other foreign aid) from the G-7 nations; $4.5 billion in loans from the IMF, World Bank, and the European Bank for Reconstruction and Development; and a $6-billion fund to stabilize the ruble for Russia and other former Soviet republics that continued to use the ruble. The stabilization fund was to be funded by IMF member loans to the IMF. However, implementation of much of the aid package was seen as contingent on Russian progress in stabilizing and reforming its economy, and including IMF approval of an IMF standby program.
In mid-April 1992, the IMF Managing Director reported that the challenge involved in trying to engineer a transformation from command to market economies in the former Soviet republics would cost billions of dollars in outside aid from the IMF, the World Bank, the governments of industrial nations, and private investors over the next 4 years. After taking into account the expected level of exports, the obligation to service the debt, the need to replenish international reserves, and the allowance for a stabilization fund for the ruble (about $6 billion), the financing requirement for 1992 in Russia alone, the Director said, could be $20 billion to $25 billion. IMF projections for the other republics, he said, indicated an external financing requirement of about $20 billion in 1992. He estimated that the IMF could provide $25 billion to $30 billion over the next 4 to 5 years. Other sources indicated the World Bank might provide as much as $12 billion to $15 billion for development projects over the same period. The IMF Director noted that if the transformation is to succeed, private capital will eventually have to play the leading role.
On April 27, 1992, the IMF and the World Bank approved membership for Russia and most other republics. Russia became a member on June 1, 1992. However, most aid was held up pending further agreement between Russia and the IMF concerning the nature of the Russian reform program and the terms for an IMF standby loan to Russia. Concerns were raised about whether Russia remained committed to and would implement an adequate reform program. In fact, in the spring of 1992, the Russian reform program was relaxed in response to attacks by domestic critics, particularly in the Russian parliament. For example, the government gave miners large pay increases; promised new bank loans to help state enterprises teetering on the edge of bankruptcy; and agreed to delay until June 1992 an 80-percent increase in oil, gas, and electrical prices scheduled for April.
With final agreement on a reform package still not achieved between Russia and the IMF by June 1992, the IMF proposed a compromise approach: it would advance Russia $1 billion of a planned $4-billion standby loan before agreement was reached on the reform program. In July, the G-7 nations expressed support for the proposal. On July 5, the IMF agreed to release $1 billion to Russia; however, the $1 billion was to be retained in Russia’s international reserves.
Debt Servicing Problems Worsen
In spite of the 1991 deferrals, the successor states have not kept current on servicing the FSU debt. As table 3.1 shows, during 1992 arrears on the Soviet debt more than doubled (from $4.8 billion at the end of 1991 to $11.8 billion at the end of 1992). Capital flight continued to contribute significantly to the FSU’s liquidity problems. The World Bank estimated capital flight during the first 8 months of 1992 at $5 billion to $8 billion ($7.5 billion to $12 billion on an annualized basis).
In June 1992, Russian officials requested that the G-7 agree to a 5-year moratorium on repayments of principal and interest on all FSU debt. In July, G-7 leaders discussed a 10-year restructuring of both principal and interest payments, with a 3- to 5-year grace period. At the July 1992 G-7 meetings, they expressed support for the Russian President’s proposal to defer Russia’s share of the FSU debt. However, they also made it known that the deferral issue had to be addressed by the Paris Club. Following the G-7 meeting, the Russian President indicated that his country would also consider proposals for swapping debt relief for Russian land, buildings, raw materials, and oil and gas exploration rights.
Meanwhile, the December 1992 agreement that had deferred principal payments on commercial FSU debt through March 1992 was reextended in June and again in September 1992.
Negotiations with Russia on debt restructuring got underway with the Paris Club in late 1992. According to the World Bank, as a result of capital flight, lower gold sales, and already depleted reserves, FSU external debt servicing reached only $1.3 billion during the first 3 quarters of 1992—far short of scheduled obligations.
Differences Between Russia and Other Republics Complicate Situation and Affect Credit Standing of All
Under the G-7 Debt Allocation Treaty of December 4, 1991, Soviet successor states were to transfer foreign exchange to VEB for FSU debt payments. However, in December 1992, the World Bank reported that Russia had been the only contributor since late 1991. One reason why other republics had not contributed was a lack of agreement on the disposition of the FSU assets.
An official of the Kazakhstan bank responsible for guaranteeing foreign loans told us that none of the former republics, except Russia, were making payments on the FSU debt. He said payments were not being made because (1) Russia had not divided up the FSU assets and (2) VEB had frozen the hard currency accounts of enterprises located in the other states. Ukrainian officials also told us that the assets had not been divided and hard currency accounts had been frozen. Ukrainian officials also said it was not true to claim that the other states were not paying their debt shares because Russia might be using or might already have used hard currency from the other states’ frozen enterprise accounts to make payments on the debt.
Ukrainian officials said that Ukraine (1) had accepted responsibility for 16.4 percent of the FSU’s debt, (2) was ready and wanted to begin paying off its debt, and (3) was willing to pay 20 percent of the total debt if states other than Russia could not pay their share. However, the officials indicated Ukraine was not willing to make payments on Ukraine’s share through VEB, because there was no assurance that the latter would use the monies to pay off Ukraine’s debt: VEB might instead use the funds to pay off Russia’s debt or the debt of some other republic. Consequently, the officials said, Ukraine wanted to deal directly with its creditors.
Kazakh officials said Kazakhstan had tried to arrange to pay debt owed to Germany’s Deutsche Bank directly to the bank rather than through VEB Moscow, but Deutsche Bank had not agreed to such an arrangement.
Uzbek officials said the debt share apportioned to their country was not fair. They said Uzbekistan did not even know how much of the FSU’s debt had been expended on Uzbekistan and that Uzbekistan’s appropriate share of the old debt was still under discussion. They also said the Uzbekistan government was prepared to pay its share of debt once it was provided accurate data on how Uzbekistan’s share was calculated.
Russian officials denied that the enterprise accounts of other former republics were frozen. Rather, they said, all of the funds in the enterprise accounts (estimated at $10 billion for all republics, including Russia) had been spent by the Soviet government before the dissolution of the Soviet Union. The money was used to pay foreign debts and to purchase grain and food imports. A VEB official said that although all of the states considered themselves responsible for the FSU’s hard currency external debt, only Russia had accepted responsibility for the FSU’s hard currency internal debt. He estimated the latter at approximately $11 billion to $12 billion and said that Russia’s debt claims on the various other states would be far greater than the other states’ asset claims on VEB.
In June 1992, the Russian government launched negotiations with most of the other states aimed at assuming responsibility for their external debts if, in turn, the states agreed to forgo claims on the external assets of the FSU. As long as the issue is not fully resolved, the credit standing of all the republics could be adversely affected, we believe, owing to the previous agreement on joint and several responsibility. For example, according to the news organization Itar-Tass, on November 2, 1992, the Russian Deputy Prime Minister said that the Paris Club had indicated that the former Soviet republics would need to settle their debts fully with each other before the debt of the FSU could be rescheduled.
Toward the end of November 1992, a tentative agreement was reached between Ukraine and Russia, giving Russia the sole right to negotiate with Ukraine’s western creditors. In return, Moscow promised to negotiate a pact with Ukraine sharing remaining assets and liabilities. Each country reserved the right to renounce the agreement if either failed to agree to a bilateral pact by the end of 1992. However, an agreement was not reached by the end of 1992.
According to a State Department official, the Paris Club creditors were not willing to reschedule FSU debt unless satisfactory arrangements were reached between Russia and Ukraine concerning responsibility for the debt. During the early part of 1993, Russia and Ukraine made some progress toward reaching an agreement. On the basis of this progress, the Paris Club creditors felt sufficiently comfortable to consider Russia as primarily responsible for FSU debt, subject to conclusion of an agreement between Russia and Ukraine. The Paris Club decision means that the creditors will pursue Russia first in their efforts to secure payment of FSU debt. As of December 1993, Russia and Ukraine had still not finalized an agreement on the handling of FSU assets and debts.
According to the World Bank, by the end of 1993, nine republics had signed agreements with Russia to exchange FSU assets for debt, and Ukraine and Georgia were negotiating with Russia. Russia had also offered to sign agreements with the Baltic countries. However, according to the bank, the Baltic countries had taken the position that they were not the legal successors of the FSU and therefore could not take responsibility for servicing and paying off its debt.
Western Nations Reschedule Debt and Offer New Financial Assistance in 1993
In early 1993, western governments became increasingly concerned about a deteriorating political situation in Russia and the possibility that Russia’s commitment to democracy and economic reform might be reversed (see ch. 4). As a result, in April the G-7 nations agreed on a $28.4-billion package for providing economic support to Russia. In addition, as part of the effort to assist Russia, the United States and other western creditor governments agreed to reschedule some $15 billion in Russian and FSU debt.
Financial Assistance Package
On April 15, 1993, representatives of the G-7 nations and the European Community announced agreement on a new package for providing financial assistance to Russia. A considerable portion of the G-7’s April 1992 aid package had never been forthcoming, in part because Russia had failed to stabilize its economy and reach agreement with the IMF on a standby agreement. As table 3.5 shows, the 1993 package included renewed commitments of support from 1992, totaling $7 billion, and it included $21.4 billion in new commitments for 1993.
As was the case with the financial assistance offered by the G-7 nations in 1992, there was no assurance that Russia would receive all of the aid. While some of the assistance was expected to start flowing quickly, fulfillment of the package remained contingent on Russian progress in stabilizing its monetary situation and continuing the process of structural economic reform. In addition, much of the assistance depended on the cooperation of multilateral institutions, including the IMF, the World Bank, and the European Bank for Reconstruction and Development. Russian cooperation was also needed.
During early 1993, the G-7 encouraged the multilateral institutions to ease up on their normal standards for conditionality and to provide financial assistance earlier as a way of encouraging later reform. On April 23, 1993, the IMF approved creation of a new loan facility for this purpose—the Systemic Transformation Facility (STF) that was included in the April 15 proposal of the G-7 and the European Community. The program is designed to provide several billion dollars in low-interest loans to Russia, and possibly other former socialist countries as well, under less stringent financial conditions than is typical for IMF loans. For example, countries are not required to have a standby loan in place to receive STF loans. The loans would be approved in two segments, with the first half disbursed immediately. Although a standby loan program is not required, a commitment to achieving macroeconomic stabilization is still important for receiving STF loans. STF is a temporary facility that expires at the end of 1994; however, withdrawals can be completed as late as the end of 1995.
In early June 1993, the IMF held up approval of an STF loan that it was considering for Russia, in spite of pressure from the United States and others. However, on June 30, 1993, it approved a first drawdown of $1.5 billion on a $3-billion loan. In return, Russia committed itself to reducing its budget deficit to 5 percent of gross domestic product (GDP) and its monthly inflation level to a low, single-digit level.
In July 1993, the G-7 established a $3-billion privatization and restructuring program for Russia that was expected to distribute funds over an 18-month period. It was to be made up of $500 million in bilateral grants to be used largely for technical assistance to newly privatized companies; $1 billion in bilateral export credits and $1 billion in World Bank and European Bank for Reconstruction and Development loans to be used by Russian companies to import western goods; and $500 million in World Bank loans to be used by local Russian governments to help them make up for health, education, and other services previously supplied to employees by state-owned companies.
In late September 1993, President Clinton signed a foreign aid bill that authorized $2.5 billion of assistance for Russia.
Debt Rescheduling Agreements
On April 2, 1993, representatives of the United States and 18 other western creditor governments reached a political agreement with Russia to recommend rescheduling $15 billion in Russian and FSU debt. The agreement concerned all arrears (at the end of 1992) on medium- and long-term official and officially guaranteed debt incurred before January 1, 1991, and maturities relevant to that debt falling due in 1993. This rescheduling referred to a 10-year span, with a 5-year grace period. Other obligations were also rescheduled, including those related to medium- and long-term obligations incurred during 1991, some short-term debt obligations, and some moratorium interest falling due during 1993. These latter obligations were rescheduled over 7 years, with a 2-year grace period.
Arrears not covered by the rescheduling were to be fully paid by June 30, 1993, and Russia was required to stay current on all other scheduled payments. Under the agreement, interest would continue to accrue on deferred or rescheduled debt and would have to be repaid as it came due. However, 60 percent of the interest due in 1993 was rescheduled. Governments of the creditor countries were to work out the details in bilateral agreements with Russia. Russia committed itself to seek comparable terms from other external official creditors, banks, and suppliers.
In effect, the April agreement was a practical recognition by official western creditors that Russia could not service most of its debt in 1993. By rescheduling overdue debt and debt likely to fall into arrears in 1993, the April agreement would enable Russia to apply for new loans from western governments and other creditors.
According to a Treasury Department official, under the April agreement Russia also agreed to accept responsibility for repaying all of the official FSU debt.
According to CCC, the April agreement was concluded outside of the Paris Club. Ordinarily the Paris Club does not reschedule government-to-government debt unless an IMF economic reform program is in place. Nonetheless, the agreement required that the Russian government adopt and implement an ambitious and comprehensive macroeconomic and structural adjustment program. The Russian delegation stressed the strong determination of its government to reduce Russia’s economic monetary and financial imbalances and to conclude an IMF upper credit tranche arrangement approved by the IMF Executive Board. Signatory creditor governments could declare the agreement null and void if Russia had not concluded an upper tranche arrangement by October 1, 1993. Russia did not conclude such an agreement by that time. However, the creditor nations waived their right to terminate the agreement. According to a State Department official, the creditors considered the IMF arrangement a significant issue, but they felt it was more important to normalize relations on the debt issue.
Commercial Debt Rescheduling
As discussed earlier, in December 1991 the former Soviet Union suspended all principal payments to commercial creditor banks made before January 1, 1991. In January 1992, commercial creditors, negotiating through a bank advisory committee chaired by Deutsche Bank, granted a 3-month rollover of debt payments. It was extended for each consecutive quarter through the end of 1993. All agreements deferred payment on current principal due during the individual deferment periods. Interest was mostly unpaid, however, and as of June 30, 1993, cumulative interest arrears on commercial bank debt were $2.4 billion, excluding late interest charges.
On July 30, 1993, Russia signed an agreement in principle with the commercial banks. According to Chemical Bank, the debt at that time included $24 billion in principal and $4.5 billion in interest arrears. Russia announced that it would make a $500 million partial payment on its interest arrears by the end of 1993, and the parties agreed to seek to restructure the overall debt in early 1994.
Developments in 1994
According to PlanEcon, at the end of 1993, Russia’s total debt was about $87 billion, and it estimated that Russia’s debt had increased nearly $9 billion during 1993.
At the time of the April 2, 1993, debt rescheduling agreement between Russia and its official creditors, the latter agreed to meet again with Russia in 1994 to discuss further debt relief. According to the World Bank, the creditors’ willingness to do so depended on Russia’s having an IMF upper credit tranche arrangement in place and arranging debt relief on other obligations due in 1993 (mainly commercial bank credit). However, according to USDA, on January 20, 1994, Russia’s major official creditors agreed, in response to a Russian request, to extend the terms of the April 2, 1993, agreement through April 30, 1994. They did so even though neither of the two above conditions was in place.
In March 1994, a State Department official told us that Russia and the IMF had begun serious talks on additional debt relief arrangements. The official indicated that debt relief was no longer being made contingent on Russia’s having an upper credit tranche arrangement or concluding a debt rescheduling agreement with commercial creditors. In March 1994, the IMF Director indicated a standby agreement would not be possible until the second half of 1994, and he said that such an agreement would depend on Russia’s planned budget for 1995 and implementation of its STF program as intended. In addition, he said that the IMF must have a clear idea of how the process of disinflation was developing in 1994.
As of March 1994, the IMF still had not approved the second half of the $3 billion STF loan to Russia. According to the WEFA Group, the IMF was unhappy with Russia’s lack of progress in stabilizing its economy.Subsequently, on April 20, 1994, the IMF announced approval of the second drawdown, equivalent to about $1.5 billion. The IMF said it was approving the loan to support Russia’s 1994 economic reform and stabilization program.
The agreement was reached only after direct negotiations between the IMF Managing Director and Russia’s Prime Minister. According to the IMF Managing Director, the loan will provide foreign exchange and be part of the general financing. He noted that Russia has a lot of debt payments to make to the international community.
According to the IMF, the Russian program’s main objectives are to further reduce the rate of inflation through tighter fiscal and monetary policies and to consolidate and strengthen structural reforms and the transition to a market economy. The IMF said the monthly rate of inflation is projected to decline to 7 percent by the end of 1994, and the federal budget deficit is expected to represent about 7 percent of GDP during the year.
The IMF warned that success of the Russian program hinges critically on the strict implementation of the government’s fiscal plan. The IMF noted that various sectors would probably be reluctant to accept a reduced level of budgetary support. In addition, the IMF reported that Russia would clearly need a further comprehensive debt relief package to normalize relations with external creditors. The IMF said that external financing would also be needed by Russia and other FSU countries to help them consolidate large budget deficits in a noninflationary manner and to finance social safety nets. According to the IMF, official and private external financing would be available only in the context of strong and sustained stabilization and a reform program. Regarding the latter, as of November 1994, Russia had not concluded a standby loan agreement with the IMF.
As table 3.6 shows, the IMF, the World Bank, and the European Bank for Reconstruction and Development delivered only $3 billion of $19 billion in aid that was announced for Russia during 1992 and 1993. Total official aid delivered from all sources was only $23 billion or about 58 percent of the $40 billion announced. According to the IMF, much of the $17 billion that was promised but not received was due to Russia’s failure to implement appropriate macroeconomic stabilization policies.
Table 3.6 also shows that export credits accounted for most of the official assistance that was delivered in 1992-93. Some observers have been highly critical of the counting of export credits as financial assistance. For example, according to Jeffrey Sachs, a former financial adviser to the Russian government, most of the credits were short-term trade credits that had to be repaid in 1 to 3 years. Thus, the credits became government debt that rather quickly added to the government’s debt-financing problems.
On June 4, 1994, Russia’s official creditors agreed to reschedule about $7 billion in FSU debt payments due in 1994, including debt contracted before 1991 and during 1991. According to a Treasury Department official, the $7-billion figure includes payments that had been deferred under the January through April extension previously discussed. The rescheduling included some short-term debt and previously rescheduled interest. The agreement provided for a grace period of 2 to 3 years, with payback periods ranging between 5 and 13 years. Russia and its official creditors also agreed to meet later in 1994 to discuss longer term and more comprehensive rescheduling.
Regarding commercial debt rescheduling, on April 1, 1994, an official of Chemical Bank advised us that talks were being held between the Russian government and the bank advisory committee. According to the official, Russia had not paid any of the promised $500 million in interest during the last quarter of 1993 and had paid no interest during 1994.
In October 1994, the Russian government issued a statement saying it was prepared to assume legal responsibility for the former Soviet Union’s commercial debts. Also, in early October 1994 there were press reports that Russia had reached agreement with its foreign bank creditors on a framework for a long-term rescheduling of the commercial debt. However, a representative of Chemical Bank advised us that the terms of an agreement had still not been defined (e.g., grace period, number of years over which principal would be repaid, contractual interest rate). He said it was possible that an agreement could provide for a grace period of up to 5 years and for repayment of rescheduled debt over 10 to 15 years. He said commercial creditors hoped that the Russian government would make some kind of cash payment on the debt. There were, he said, hopes that an agreement would be reached in the near term, but an agreement was far from being wrapped up.
Conclusions
Between 1989 and 1991, the FSU experienced increasing debt problems. The situation reached crisis proportions in late 1991. Russia and many successor states eventually reached agreements whereby Russia would accept responsibility for external FSU debt in return for the other states not making claims on the FSU’s external assets. Russia has agreed with its official creditors to accept responsibility for the FSU debts. However, as of early October 1994, Russia had still not reached agreement with its foreign bank creditors on a framework for rescheduling and resuming payments on the FSU commercial debts.
Since late 1991, the United States and other official creditor nations have provided considerable debt relief to the FSU and its successor states. The United States, other official creditor nations, and the IMF have also provided important financial assistance to Russia. However, much of the promised financial assistance has not been forthcoming because of insufficient progress by Russia in stablizing and restructuring its economy. Although official creditor nations have provided considerable debt relief, additional debt relief is needed.
General Economic and Political Situation in the FSU/Successor States
During the past few years, the FSU and its successor states have experienced historic economic and political change. The process is not yet complete. The Soviet empire is gone, replaced by 15 successor states, and the central role of the Communist Party has been abolished. The region has begun to move away from the old command economy of the FSU toward market-like economies, and some progress has been made in establishing democratic institutions. However, progress varies widely across the successor states.
The successor states’ economies are in serious decline, and further deterioration is projected for most of them. Political legitimacy is an issue in a number of the new states. During 1993, Russia itself experienced a constitutional crisis concerning the respective roles of the parliament and the presidency in directing the affairs of the country, the direction and pace of economic reform, and the question of whether its leaders represented the views of the electorate. Five of the former Soviet republics have experienced significant armed conflict within their borders.
Whether efforts to create effective market-based economies and democratic polities will succeed is not clear. Also uncertain is whether the political boundaries that resulted from the breakup of the Soviet empire will survive. Such uncertainties can affect the willingness of westerners to invest in the new states. Without substantial foreign investment, the new states’ creditworthiness can be adversely affected.
Background
It is 3 years since the Soviet Union disintegrated. Shortly before the breakup, the central administrative organs of the Communist Party were dissolved, its assets confiscated, and its archives seized. The party that dominated life in the Soviet Union for decades was banned or suspended in Russia and many other successor states. Also gone are the central governmental ministries and planning system in Moscow that played major roles in directing affairs across the various republics.
Having discarded the Marxist-Leninist ideology, the successor states are trying to make a transition from command economies to free and open markets. In addition, many have made progress toward establishing democratic institutions. Nonetheless, former Communist elites continue to govern under the names of newly created parties in many of the new states, and Communist elites cling to power at regional and local levels as well. Although the old Communist Party was banned as a national organization after the 1991 coup attempt, several neocommunist parties have been formed in Russia since then. They have a strong national organization and, as discussed in the following section, experienced some success in December 1993 elections for a new parliament. Former Communists were recently returned to power in Lithuania.
All of the states are experiencing acute economic crises that stem from the general economic collapse that preceded the dissolution of the Soviet Union and that has been further exacerbated by the breakup of the empire. Common elements of the crisis have included very high levels of inflation, hard currency shortages, and failing public health systems. Many of the new states are politically unstable, not only as a result of the economic crisis but also, in many cases, because of a lack of political legitimacy. Several states have been adversely affected by intraregional and internal ethnic and civil conflicts that have turned violent, particularly in the Caucasus region (see app. I).
The Economic Situation
The economies of the former Soviet republics are in disarray. Economic deterioration was a major factor associated with the development of the debt crisis and the disintegration of the Soviet Union itself. According to WEFA estimates, Soviet GDP fell by 2 percent in 1990 and 16.9 percent in 1991. WEFA estimated that aggregate GDP for the former Soviet republics declined another 20 percent during 1992. It estimated the cumulative drop for 1990-92 at 34.9 percent.
PlanEcon, a Washington, D.C., economic forecasting group specializing in East European countries, has estimated GNP losses for each of the former Soviet republics. According to its calculations, during 1989 through 1993, three of the republics/successor states sustained GNP declines ranging from about 12 to 26 percent (Belarus, Turkmenistan, and Uzbekistan); six states experienced declines of about 31 to 37 percent (Estonia, Kazakhstan, Kyrgyzstan, Moldova, Russia, and Ukraine); five states declines of 44 to 57 percent (Armenia, Azerbaijan, Latvia, Lithuania, and Tajikistan); and one state a decline of about 66 percent (Georgia). (See table 4.1.) The GNP estimates indicate that economic decline in most republics is already comparable to or greater than that experienced by the United States during the Great Depression.
According to a Congressional Research Service analysis, the breakdown of the economies of the former Soviet republics can be attributed to the legacy of the Stalinist economic planning system combined with incomplete economic reforms that were introduced during the Gorbachev era. Under the command economy, the state owned all the means of production and controlled production and investment decisions. The result was an inefficient system that produced, with only a few exceptions, poor quality goods and services. Gorbachev’s reforms included laws to decentralize economic decisionmaking but did not go far enough. The reforms reduced the discipline of the state-run economy but left intact most of its fundamental elements—price controls, nonconvertibility of the ruble, public ownership, and the government monopoly over most of the means of production.
The economic breakdown was manifested in monetary imbalances that led to high inflation and a shortage of goods as the former Soviet government ran up large budget deficits. The central government financed these deficits primarily by printing money, thereby generating inflation as increasing amounts of rubles chased decreasing amounts of goods. In addition, the distribution system collapsed. Direct relationships between suppliers and manufacturers and between manufacturers and distributors that were to substitute for the centrally controlled system did not fully develop.
Further Economic Decline Is Projected for Most FSU States
In February 1994, PlanEcon forecast another 2 years of economic decline in Russia and 3 years of additional decline in Belarus and Ukraine. It concluded that prospects for economic recovery in Armenia, Azerbaijan, Georgia, Moldova, and Tajikistan would remain bleak until their various political, interethnic, and territorial conflicts are resolved (see app. I). It forecast another 2 years of economic decline or stagnation in Kyrgyzstan, Turkmenistan, and Uzbekistan. And it forecast another year of economic decline in Kazakhstan.
There were four bright spots in PlanEcon’s forecast. Although forecasting another year of decline in Kazakhstan, PlanEcon said it anticipated a strong recovery in 1995 and 1996. The recovery would be led, directly and indirectly, by several large projects to develop Kazakhstan’s natural resource wealth that involve a commitment of substantial resources by a significant number of major multinational corporations. However, PlanEcon said its forecast would be endangered if developments materialize that discourage the continued participation of western firms in the joint ventures. Without the imminent takeoff of these joint venture products, Kazakhstan’s recovery would be more closely tied to and possibly even lag behind Russia’s recovery.
The other bright spots were the Baltic states. PlanEcon forecast recovery would get underway in these states in 1994 and 1995—provided that macroeconomic stabilization policies were continually pursued and that industrial restructuring got fully underway. According to PlanEcon, the Baltic states have made the most progress in transition toward market economies of all the former republics. PlanEcon said that tough monetary and fiscal measures had paid off—inflation had been sharply reduced, and all three states boasted strong new currencies. According to PlanEcon, (1) all three states closed 1993 with current account surpluses; (2) their trade balances were positive (except for Estonia); and (3) sizable aid and loan transfers, combined with surpluses in services, have made the near-term external payments picture quite solid. With generally stable monetary policies in place, PlanEcon said, they have been able to increase the level of confidence in their currencies, raise their foreign exchange reserves, and maintain the convertibility of their currencies for current account transactions. However, PlanEcon said, the Baltic states are highly dependent on foreign trade, including trade with the CIS. Consequently, prospects for recovery in foreign trade over the medium term, and thus their external payments environment, will depend on developments in the CIS and particularly Russia.
Economic Reform Has a Long Way to Go
As discussed in chapter 3, during 1991 the IMF and the G-7 encouraged Russia to set certain economic goals. Of all the CIS republics, Russia had the most reform-minded leadership, and its reform program set the pace for the others, according to the CIA. It has passed many of the laws and regulations required to establish market institutions and provide the necessary guidelines for private business activity. It took the lead on price deregulation. In terms of foreign exchange, it set exchange rates at more realistic levels, reduced the number of goods requiring export quotas and licenses, and abolished import quotas. It also made some serious efforts to stabilize its economy by reducing its budget deficit, and it made substantial cuts in defense expenditures.
However, Russia still has far to go to create a market economy. Russian fiscal and monetary restraint has weakened considerably in the face of pressures from the old establishment for increased spending and easier credit. Elements of that establishment—industrial managers, farm bureaucrats, and local government officials—are resisting reforms that reduce their influence and diminish their financial support.
In addition, Russia has also fallen far short of the goals that it outlined to the IMF in March and July 1992. As discussed in chapter 3, the March 1992 program called for Russia to reduce its budget deficit to 1 percent of GNP by the end of 1992 and indicated the rate of inflation would be slowed to 1 to 3 percent by the end of the year. In July 1992, Russian officials indicated to the IMF that these goals were not obtainable. At that time, they committed to reduce Russia’s budget deficit to below 10 percent in the second half of 1992 and to lower the monthly rate of inflation to 9 percent by December 1992. According to the IMF, Russia’s budget deficit in 1992 was nearly 19 percent of its GDP (see table 4.2). Regarding inflation, PlanEcon estimated that Russia’s average annual inflation in 1992 was 1,414 percent (see table 4.3) and that it averaged about 25 percent per month during the last quarter of 1992.
According to the IMF, Russia reduced its budget deficit considerably in 1993; however, the deficit was still more than 9 percent of GDP for the year. Russia also reduced inflation significantly during 1993. Nonetheless, its average annual inflation for the year was 905 percent, and PlanEcon estimated that monthly inflation during the last quarter of 1993 averaged 16 percent.
During the first half of 1994, Russia made unexpected progress in reducing inflation as the government maintained tighter fiscal and monetary discipline than had been expected. The average monthly inflation rate fell below 10 percent. PlanEcon estimated that the federal budget deficit during the first half of the year amounted to about 10.4 percent of GDP. However, during the summer, monetary policy was relaxed, raising concerns that inflation would significantly increase before the end of the year. In early October, the ruble began to depreciate significantly. A crisis erupted when the Russian ruble lost more than 25 percent against the dollar in 1 day, October 11—raising new concerns about the effectiveness of the government’s efforts to stabilize the economy. President Yeltsin fired the Finance Minister, sought the resignation of the head of the Russian Central Bank, and appointed a state commission to investigate the situation. The day following the collapse of the ruble, Russia’s Economic Minister was reported to have attributed the ruble collapse, in part, to the government’s easing of monetary and credit policy.
Progress in stabilizing economies and implementing economic reform varies widely across the other successor states. As table 4.2 shows, 12 other states had budget deficits in 1993. For 10 of the 12 states, the deficits ranged between 6.1 percent to 52 percent of GDP. Regarding inflation, PlanEcon estimated that 12 other states had average annual inflation rates in 1993 ranging between 410 percent and 10,000 percent. Estonia and Latvia, the countries with the lowest inflation, had annual rates of 55 and 108 percent, respectively. (See table 4.3.)
According to PlanEcon, little progress on economic reform has been made in many of the successor states. For example, Armenia, Azerbaijan, Georgia, Moldova, and Tajikistan have been sidetracked by war, civil conflicts, and/or trade embargoes. Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan continue to adhere to many features of the old centrally planned systems, including state orders, price controls, and trade regulation through permits and quotas. Belarus has failed to undertake any significant economic reform, partly because of a parliament dominated by old-style Communists. Kazakhstan hesitated in introducing market reforms during 1992 and 1993. Since then, it has begun to accelerate the transition, yet is still struggling to set up the institutions needed to manage the economy of an independent state. Ukraine made some progress on economic stabilization and reform during later 1992 and early 1993, but meaningful reform was then largely abandoned in favor of a return to greater central control. According to PlanEcon, the members of the old Communist Party continue to dominate that country.
Recent IMF Assessment
According to an IMF May 1994 assessment, most FSU successor states had not yet achieved a reasonable measure of macroeconomic stability.
Exceptions cited were the Baltic states. High inflation and budget deficits, the IMF said, are contributing to economic uncertainty and inefficiency, the impoverishment of vulnerable groups of people, capital flight, and a protracted adjustment period. The high inflation and budget deficits are also discouraging needed foreign investment. According to the assessment, states that have pursued very expansionary monetary and fiscal policies (Belarus, Russia, and Ukraine are cited as examples) have not significantly mitigated the large declines in output associated with the transition to market economies.
In those countries where macroeconomic stability has not been achieved, the IMF said, the first priority should be to eliminate the underlying sources of inflation—by sharply reducing budget deficits and reining in credit growth. Tax reform is required to enhance revenues and reduce distortions. Expenditure reform is required to reduce subsidies and to target social assistance more effectively. Eliminating excessive credit growth requires allowing financial markets rather than central banks to allocate credit at market-determined rates.
The IMF found that most countries in transition have made substantial progress in structural reform. In particular, it said, prices are now largely market determined, and international trade has been liberalized in many countries. Privatization has also proceeded rapidly in some—but not all—countries. However, the IMF also found that the reform process has been significantly delayed in most FSU countries because the large declines in economic output, high inflation, and erosion of the financial position of vulnerable groups have resulted in severe economic and social strains. In some cases, the IMF said, the strains threaten to derail the reform process. As a result, it said, all countries in transition still face a daunting agenda of structural reform, which is crucial to the medium-term prospects for economic growth. A priority for the FSU countries (except the Baltics) is the elimination of the system of state orders, bilateral trading arrangements, barter agreements, and export controls and tariffs. These distortionary measures should be replaced, the IMF said, with more uniform tariff structures at low rates, a workable interstate payments system, and a trading system based on the most-favored nation principle.
According to the IMF, privatization and enterprise reform are central to the establishment of market economies but are proceeding more slowly in most FSU countries than had been anticipated. As a result, it said, the pace and scope of privatization need to be strengthened, particularly to include the large enterprises. Land reform, including liberalized real estate markets and the privatization of agricultural land, should be speeded up in most countries. In addition, there is an urgent need in most of the countries to strengthen the financial sector and put in place a legal framework of property rights and effective bankruptcy procedures.
According to the IMF, the decline in FSU and its successor states’ output has put great strain on social, economic, and public institutions. It said the old, the unemployed, and the unskilled have been exposed to severe hardship as inflation has eroded the real value of pensions, unemployment benefits, and minimum wages. In general, the patchwork of enterprise-provided social services that prevailed under central planning has not been replaced by adequate alternatives, and the absence of a social safety net has deterred firms from shedding labor. IMF said that there is an urgent need to maintain the purchasing power of many benefits in the face of inflation and to better target benefits by overhauling eligibility criteria and benefit structures, while keeping expenditures at levels consistent with sustainable budgetary positions.
The Political Situation
The FSU’s political situation is characterized by great uncertainty, with the economic depression that has swept across each state a major destabilizing force. Between the latter part of 1992 and the end of 1993, Russia experienced a political and constitutional crisis that pitted the powers of the Russian presidency against the parliament. The conflict also included a struggle between those who supported the government’s western-oriented market reforms, democratization, and foreign policies against those who wanted to moderate or reverse one or more of these policies.
Conflicts have arisen among the republics over the disposition of the FSU’s armed forces, nuclear weapons and other assets, and foreign debts. Finally, historic ethnic rivalries that were largely suppressed during decades of Soviet rule have broken out into the open. They have already led to serious armed conflicts in five of the former republics—Armenia, Azerbaijan, Georgia, Moldova, and Tajikistan. Each conflict has affected Russian minorities living there, and Russia has employed military forces in some of the conflicts to protect its minorities and other interests. Russia has also deployed troops within its own borders in an effort to separate ethnic combatants and prevent a further spread of violence. (See app. I.)
Developments in Russia19
Russia is the most important of the republics, because it accounts for the large majority of the area, population, and resources of the FSU, and because it has been in the forefront of CIS republics attempting to institute economic and political reforms. Russia includes several highly disparate regions, each of which has an economy larger than nearly all of the other former Soviet republics.
Russia’s population of more than 148 million includes over 150 ethnic groups. Several ethnically based groups have declared themselves sovereign entities and are practically self-governing. These include the Chechen and Tuva Republics and Tatarstan. One concern is whether some of the larger ethnically based groups will be content to remain a part of the Russian Federation or will prefer to seek full independence. Russia’s integrity and viability could be threatened if certain groups seek to leave the country. A related concern is that conflict between minorities could become violent and challenge the Russian government’s ability to maintain order. As discussed in appendix I, Chechens declared independence in 1991, but Russia did not recognize Chechnya’s claim to independence. In late 1994, the Russian government sent large military and police forces into Chechnya to disarm the Chechens and restore Russia’s authority. Chechens fought back fiercely. The conflict could seriously affect Russia’s transition to democracy and a market economy.
For additional information about several of the other republics, see appendix I.
successor states as a pretext for intervention and possible territorial aggrandizement.
As discussed previously, in early 1992 Russia embarked upon a serious economic reform program. During that year, the Russian President governed largely by use of special emergency powers that allowed him to enact changes by executive decree. However, his government found it increasingly difficult to implement its program because of the rise of a powerful industrial lobby that established considerable influence with the Russian parliament. The lobby included large enterprise managers, trade union leaders, and other conservatives who wanted to roll back the government’s economic reform program. The program threatened to restrict the lobby’s powerful role in the Russian economy by decentralizing economic decision-making and holding firms accountable for their actions. During 1992 the lobby demanded and received hundreds of billions of rubles worth of easy credits. It was aided by the Russian central bank, which controlled the printing of money and was responsible to the parliament rather than to the President. The bank’s policy of printing rubles and making large credits available to state-owned industry and farms undermined the government’s monetary and credit policy, threatening hyperinflation. As a result, the budget deficit became much larger than planned, and high inflation rates continued unabated.
Toward the end of 1992, a full-blown constitutional crisis developed. In November 1992, the President told the British Parliament that a cabal of militant nationalists and former Communist officials were plotting to overthrow him and sweep aside the economic and political reforms that his government had pursued. The President vowed to do whatever was necessary to prevent their success. In December, Russia’s supreme legislative body, the Congress of People’s Deputies, convened. As the Congress got underway, estimates indicated that only a minority of its members was committed to the government’s reform program; a larger minority was opposed. A crisis occurred when the Congress voted to not approve making the Acting Prime Minister, Yegor Gaidar, Prime Minister. He had spearheaded the government’s radical economic reform program. Following his rejection, the President declared that it had become impossible to work with the Congress. He called for a national referendum, to be held in January 1993, in which the public would be asked to choose between the Congress’ or the President’s ideas for leading Russia out of its economic and political crisis. The President said he would resign if he did not win the vote. The proposal was threatening to members of the Congress, since their terms were not due to expire until 1995 and a vote against the Congress could lead to early elections.
The crisis was temporarily defused in mid-December 1992 when the President and the parliament agreed instead to hold a referendum in April 1993 to approve the basic principles for a new constitution, such as whether Russia should have a presidential or parliamentary system of government. However, in January the parliament began to try to back away from holding a referendum. In February the President and the parliament explored possible compromise power-sharing formulas that would allow them to postpone or call off the planned April referendum. At issue, in part, were concerns that a referendum would contribute to separatist tendencies in Russia’s regions and to political and economic instability more generally. In March the Congress met in emergency session to decide whether to pursue a referendum or approve a power-sharing arrangement between the parliament and the presidency. Instead, the Congress chose to cancel the referendum and reduce the President’s powers. It gave itself authority to suspend the President’s decrees, made it easier to remove him from office for unconstitutional conduct, and indicated it would act to further reduce the President’s powers and dismantle many of his reforms.
In a televised address to the nation on March 20, 1993, President Yeltsin announced he was assuming temporary special powers to rule by decree and indicated he intended to hold a referendum on a new constitution and to secure a vote of public confidence in his leadership. Such measures were necessary, he said, to prevent restoration of Communist power. President Yeltsin also said that he had ordered the Prime Minister to speed up the economic reform process, including introduction of private land ownership, and to assume control over Russia’s central bank. A few days later, Russia’s constitutional court ruled that the President had violated the constitution by assuming special powers (even though the court had not yet received a copy of a presidential decree ordering an assumption of special powers). On March 23, the speaker of the parliament called for President Yeltsin’s impeachment.
This crisis eased somewhat when the President’s decrees were published, since they backed away from the assumption of special powers. Even so, on March 28, 1993, nearly 60 percent of the members of the Russian Congress voted to impeach the President. However, the vote fell short of a required two-thirds majority. (Only a quarter of the legislators opposed the proposal to oust the President.) The Congress also rejected a proposal that called for elections for both the President and the parliament in November 1993. The Congress then passed a resolution calling for a referendum on April 25, with four questions to be put to the voters. They were whether the voters (1) had confidence in the President, (2) approved of the social and economic policies conducted by the President and the government since 1992, (3) considered it necessary to hold early elections for the presidency, and (4) considered it necessary to hold early elections for the Congress. The Congress did not approve questioning, as had been agreed upon in December 1992, the electorate on the basic principles for a new constitution.
The Congress stipulated that a majority of the electorate would have to approve any question put to the voters before a decision would be accepted. The standard exceeded the normal condition for referendums that 50 percent of the electorate simply vote. The higher standard was considered difficult to achieve, given an apathetic electorate. However, on April 21, 1993, Russia’s Constitutional Court ruled that the President need secure only a majority of votes by those actually voting on the issues of (1) confidence in the President and (2) approval of the President’s socio-economic policy.
In the April 25 referendum, a majority of those voting expressed confidence in the President, his handling of the economy, and early elections for the legislature. Nearly a majority (49.5 percent) voted for early presidential elections. However, the referendum did not bring an end to political gridlock or the constitutional crisis that had gripped Russia for many months. Less than a majority of the total electorate voted for early elections to the legislature and the presidency; consequently, early elections were not mandatory. Although there was a large voter turnout, key opponents of the President sought to discredit the election results before the vote counting had been completed and warned that the President might resort to unconstitutional measures to further his objectives.
Between then and September 1993, relations between President Yeltsin and the parliament deteriorated further. As a result, on September 21 the President announced that he was disbanding the parliament and decreed that elections for a new legislature would be held in December. The lower tier of the parliament responded by voting in favor of impeaching the President and declaring Vice President Alexander Rutskoi as Acting President. The latter said he was nullifying Yeltsin’s decree and named new ministers of defense, interior, and security. However, Yeltsin won support from the existing defense, interior, and security ministries.
On September 28 and 29, the Interior Ministry sealed off the White House (the building that housed the Russian parliament) with armored personnel carriers and barbed wire and ordered remaining armed parliamentary deputies to surrender their arms and leave the building. On October 3, thousands of anti-Yeltsin demonstrators overran police forces surrounding the parliament and seized control of several key facilities. There were many casualties, and the government launched a counteroffensive. The rebellion collapsed on October 4 when army troops subdued the opposition, including using armed force to retake the White House. Rutskoi and other hardliners were arrested.
Following the collapse, President Yeltsin, in a televised address to the nation, warned that conditions in the nation remained dangerously unstable and said that quick action was needed to eliminate the remnants of the old system and put a new democratic structure in place. To this end, he called for (1) a new constitution, (2) elections for a new parliament in December and possibly for new local legislatures as well, and (3) unswerving commitment to continuing economic reform.
Elections were held in mid-December 1993 but yielded mixed results. Voters did approve a new constitution for Russia, but progovernment parties fared poorly in the parliamentary elections. Hardline opposition parties won more than 40 percent of the popular vote and elected more deputies than those elected by the reformist parties. Ultranationalists, Communists, and their allies won the upper hand in the Duma, the more powerful legislative chamber. The significant representation that they achieved reflected widespread economic distress and increased opposition to President Yeltsin’s policies. Nonetheless, during the first half of 1994, Russian political developments were surprisingly favorable, according to PlanEcon, as the new parliament demonstrated greater professionalism and the President, Prime Minister, and parliament achieved more stability in their interactions with one another. However, as previously discussed, in late 1994 Russian military and police forces became involved in a major conflict in Chechnya, and the conflict could adversely affect Russia’s transition to democracy.
Political Reform in the Other States
As with economic reform, progress on political reform varies widely across the other successor states. According to PlanEcon, the Baltic states have established viable democratic institutions capable of managing the economic transition and relations with their neighbors, especially Russia. However, all of the other states remain considerably or even far behind. For example, owing to armed conflict and civil strife, Armenia, Azerbaijan, Georgia, Moldova, and Tajikistan have not even been able to achieve political stability. As a result, according to PlanEcon, none of the countries seems close to establishing the political stability necessary to promote economic recovery and attract foreign investment.
In Belarus, there was little political change until recently. According to PlanEcon, since January 1994, the chief of state resigned under allegations of corruption, the parliament adopted a new constitution, and the country elected a new president. However, the new president’s positions on major issues remained unclear. In addition, parliamentary elections have not been held since 1990, and the legislature is dominated by a faction that consists largely of holdovers from the old Communist regime.
In Central Asia, the political leaders of Tajikistan, Turkmenistan, and Uzbekistan have not strayed far from their Communist roots, according to PlanEcon. The President of Kyrgyzstan is characterized as somewhat of an exception. According to PlanEcon, he seems genuinely committed to change. However, he has been discouraged by corruption and resistance to reform and recently indicated that the people are not yet prepared for democracy. In Kazakhstan, the other successor state in Central Asia, policies have largely been decreed by its executive branch, headed by President Nursultan Nazarbayev. A new constitution was adopted in January 1993 that provided for a strong president (elected for 5 years), a legislature, and a quasi-independent judiciary. The country held its first parliamentary elections in March 1994, with the President’s political supporters securing a large majority. However, according to PlanEcon, both the candidate selection process and voting were not fair.
In Ukraine, the first post-independence parliamentary elections were held in March and April 1994. Ukraine also elected its second post-independence president in July. However, according to PlanEcon, the country is still governed by a Soviet-era constitution and a small cadre of bureaucrats, driven by greed and heavily influenced by industrial bosses, controls the levers of both legislative and executive authority.
Uncertain Future
As the prior discussion indicates, the economic and political situation in the FSU has changed dramatically, and there is much uncertainty about its future. As the CIA has noted, “an empire has collapsed, the dust has barely begun to settle, and the forces that will both buffet and propel reform are epic in proportion. The elements of uncertainty and unpredictability in this part of the world are greater than at any time since the Bolshevik Revolution of 1917.”
At issue is whether attempts to establish democratic and market-based systems will succeed. Also at issue is whether the political boundaries that resulted from the breakup of the Soviet empire will survive. According to one observer, possible outcomes for the area during the next decade include (1) splintering the empire into different groupings, with widely divergent foreign policies and cultures; (2) instability and possibly even civil war; (3) restoration of the Russian empire under an authoritarian, xenophobic, anti-Western regime; or (4) the emergence of truly independent democratic nations united by some form of a common market and collective security framework.
Regarding the latter two possibilities, PlanEcon recently concluded that a few of the new states have already begun to trade some of the normal attributes of sovereignty for closer ties with Russia. In support of this conclusion, it noted the following developments. During 1993, Russia muscled three recalcitrant countries into joining or promising to become full members of the CIS. Georgia had resisted membership since the collapse of the Soviet Union, but in 1993 the Georgian President asked for military assistance to prevent the overthrow of his government; simultaneously, he brought Georgia into the CIS. Azerbaijan, faced with a series of military defeats by the Armenians, turned to Russia for military support and, in exchange, began to participate more actively in the CIS. Moldova’s parliament had not ratified an agreement to participate in the CIS until Russia pressured it to do so in the fall of 1993. In addition, PlanEcon said, Tajikistan and Belarus have abandoned some of the normal attributes of sovereignty for closer integration with Russia. Tajikistan’s ruling group lost the initial rounds of a civil war and needed Russian assistance to reestablish control. The current government relies on Russian economic and security assistance to stay in power and has agreed to follow Russian security and economic policies. Belarus has said it will subordinate its economic, foreign, and security policies to Russia. According to PlanEcon, Kazakhstan and Ukraine are major question marks; if they relinquish the same powers as Belarus, Russia will have reestablished the heart of the former Soviet Union.
Some observers believe the successor states lack the necessary political and economic preconditions for undertaking large and instant reforms. For example, Peter Reddaway, a professor of political science and international affairs at George Washington University in Washington, D.C., has concluded that Russia’s deeply Sovietized political culture is highly unsuited to free markets, entrepreneurism, privatization, and the rule of law and will remain so for a decade or two, even with sustained western assistance. According to Reddaway, Russians have reached the limits of their stoicism after the demoralizing traumas of loss of empire, ideology, and familiar institutions, and with severely diminished real incomes.
Zbigniew Brzezinski, a former national security adviser to President Carter, has also indicated that the former Soviet republics enjoy little prospect of a successful transition to market-based democracies in the foreseeable future. According to him, the more realistic scenarios for the future of the FSU include (1) continued fragmentation of Russia itself—splitting perhaps into two or three states, with Moslem Central Asia going its own way; (2) emergence of an inward-oriented and rather authoritarian but modernizing Russian national state; or (3) establishment of an authoritarian and nationalist Russian state that seeks to recreate its imperial status. Brzezinski also said that the reforms demanded by the IMF and the West as part of the privatization process would force the post-Communist countries to accept prolonged, massive, and painful unemployment. This situation, he said, is politically and morally unacceptable; rather, the West should, at a minimum, help create some temporary safety nets for the victims of the transition process.
In June 1992, the CIA said that it expected the reform process to continue in Russia and elsewhere but believed the process would be contentious and marked by recurring crisis. The CIA said the process would probably last a decade—during which the downside risks would be enormous and the range of possible outcomes wide, including extended political deadlock and instability so serious that it could derail reform in both the economic and political spheres. In early 1993, the CIA reported that there were reasonable prospects that Russia would continue its positive internal transformation and integration into the western system of values, but inevitably with continued great travail. Moreover, it said, there remains the possibility that Russia could revert to dictatorship or disintegrate into chaos, with immediate disastrous consequences for the world.
In January 1994, the U.S. Ambassador responsible for coordinating U.S. assistance to the NIS advised Congress that a titanic struggle was underway in Russia over the future of the country. He said the struggle involved a long-term process that could take a generation or more to resolve. In March 1994, the Secretary of Defense said the struggle could lead to a fully democratic and market-oriented Russia, which he characterized as the best possible outcome imaginable or, in the worst case, an authoritarian, militaristic, imperialistic nation hostile to the West. The latter case, he said, could see a renewal of some new version of the old Cold War.
Economic and Political Situation Can Adversely Affect Foreign Investment
As discussed in chapter 1, one of the factors that affects the creditworthiness of countries is their ability to attract foreign exchange to finance new investment within their borders as well as their external debt. As discussed in chapters 3 and 5, estimates are that Russia and the other new states will require billions of dollars in outside financing over the next several years to engineer a transformation from command to market economies. However, as WEFA recently noted, the amount of direct foreign investment already in Russia is meager. It noted that estimates by Russian officials vary widely, citing figures ranging between $2 billion and $7 billion. Even the latter figure, WEFA said, is small relative to the size of the Russian economy and Russia’s professed desire for foreign investment. In April 1994, a Commerce Department official told us that most observers agree that total foreign investment in Russia is not more than $4 billion. According to a recent report to Congress, total U.S. companies’ investment in Russia is estimated at about $1 billion.
The willingness of foreigners to invest in the various new states depends importantly on their assessments of each state’s (1) political stability; and (2) willingness to pursue the economic reforms needed to establish viable market economies, according to PlanEcon and WEFA. Consequently, to the extent that there is considerable uncertainty about the future of economic reform and political stability in the new states, foreign direct investment is likely to be adversely affected.
Conclusion
Severe economic problems and political and ethnic tensions make the future political and economic situation of the FSU highly uncertain. As long as such uncertainty persists, the FSU successor states will be less likely to attract needed foreign investment, thus adversely affecting their creditworthiness.
Financial, Country Risk, and Other Assessments of the FSU/Successor States’ Creditworthiness
Before 1992, all of the successor states had a relatively small debt compared to their economic output. Since then, all would be classified as severely indebted if held responsible for their respective shares of the FSU debt. Many of the FSU states have agreed to give up their claim on FSU assets in return for Russia’s accepting their share of the FSU debt. This situation would reduce their debt burden but increase Russia’s. Most of the new states have experienced severe liquidity problems. Russia’s serious and growing arrears in debt payments, its inability to meet current and future debt payments, and its need to reschedule its debts demonstrate weighty creditworthiness problems. The secondary market for trading country debt has deeply discounted FSU securities. Since Russia has been commonly perceived as having major responsibility for the FSU’s debt, the discounting shows that commercial investors do not perceive Russia as creditworthy. In addition, several major, private-sector assessments of country risk have rated Russia and all other successor states as high-risk or low on creditworthiness. The lack of creditworthiness of the successor states exposes the GSM-102 program to a high level of risk. For example, GSM-102 credit guarantees on the outstanding principal for the FSU and to Russia and Ukraine equaled about 44 percent of the GSM-102 portfolio. Moreover, these guarantees represented nearly 60 percent of the program’s portfolio risk exposure, according to our calculations.
Debt Burden and Creditworthiness
The amount of a country’s debt burden can be an important indicator of its solvency—the ability to fulfill its obligations in the long run. All other things being equal, a country with a high debt level poses a greater risk of default than one with a low debt level. The burden that debt poses depends, in part, on its relationship to a country’s economic output and its capacity to earn foreign exchange. One method used for analyzing country debt burden was developed by the World Bank. The bank used four indicator ratios to assess whether developing countries are less, moderately, or severely indebted. The ratios are (1) debt to GNP, (2) debt to exports of goods and services, (3) debt service to exports of goods and services, and (4) interest payments to exports of goods and services. The World Bank established thresholds for each of the ratios to use in classifying whether a country has a low level of indebtedness or, alternatively, is moderately or severely indebted. For each indicator, the bank’s moderate threshold represents 60 percent of the value of the severe threshold. A country is classified as “moderately” or “severely” indebted if three of its four ratios exceed the corresponding thresholds shown in table 5.1.
The Debt Ratios
Debt-to-GNP Ratio. This is the broadest measure of the solvency of a country and its ability to fulfill its debt obligations. A low debt-to-GNP ratio suggests good creditworthiness, since it shows that a nation’s output is large relative to its debt obligations.
Debt-to-Exports Ratio. For countries that lack or are limited in their ability to draw upon foreign exchange reserves, exports are the principal means for obtaining foreign exchange needed to pay off loans. Countries with large export revenues relative to their debt are likely to be less vulnerable to foreign exchange crises and thus are less likely to default on their foreign loans.
Debt Service-to-Exports Ratio. Debt service ratios relate principal and interest payments to revenues received from the exports of goods and services. They indicate a country’s ability to service its debt from hard currency export earnings.
Interest-to-Exports Ratio. The interest-to-exports ratio indicates a country’s debt burden from the perspective of interest payments alone. Creditors generally do not reschedule interest payments on outstanding loans. If a country needs to reschedule its debt, creditors will want the country to at least stay current on its interest payments. The increasing frequency with which countries with debt service problems are rescheduling their principal payments has increased the relative importance of this indicator.
Debt Burden of the Successor States
Prior to 1992, the FSU and its successor states were not included in the World Bank’s debtor reporting system. Therefore, we used historical and forecast data for the FSU and the successor states to calculate their debt burden ratios and thus classify their overall debt burden.
For a variety of reasons, economic forecasts for the former Soviet Union and its successor states are difficult to make because of major uncertainties associated with their transition from command to market economies. These uncertainties include the form and pace of economic restructuring that will be attempted, the amount of external assistance they might receive, and the extent to which they will cooperate with each other. In addition, official statistics of the FSU and the new states are difficult to obtain and do not adequately capture the growing nonstate sector. Consequently, although we have attempted to minimize these data problems by using relative indicators such as ratios instead of absolute values, the forecast, as well as our analysis, should be used with caution.
Data were obtained from the WEFA Group. WEFA did not provide disaggregated data for the external debt of the successor states. We estimated the states’ individual debts by allocating total FSU debt according to a fall 1991 agreement among the successor states that assigned preliminary debt shares for each of the states. Other economic variables necessary for calculating the ratios were obtained from state level data as reported by WEFA. Although WEFA stopped making detailed forecasts for the FSU as an entity in October 1992, it continued publishing forecasts for each former republic. Its forecasts for the former republics were denominated in rubles. When there was a need to convert them to dollar values, we used PlanEcon data on historical or forecast market exchange rates to convert the republic data to their dollar equivalents (see below). The extraordinarily severe depreciation of the ruble relative to the dollar, however, may cause an undervaluation of the data for the former republics.
We made our analysis using historical and forecast data made by WEFA in January 1993. We were not able to obtain compatible, more recent data to update the forecast data. Nonetheless, we believe the underlying economic conditions for the forecasts have not been significantly altered for most of the successor states. Important problems being faced then are still being confronted by the states. Examples include large government budget deficits, decreasing economic output, and high levels of inflation.
Table 5.2 summarizes the results of our analysis, using the World Bank’s old methodology, in terms of whether and when each country is considered to have low, moderate, or severe indebtedness during 1988 through 1997.
As table 5.2 shows, before its dissolution in late 1991, the Soviet Union was a less-indebted country. If the outstanding 1988 through 1991 FSU debt were to be distributed among the republics according to the formula agreed upon in 1991, Belarus and Russia would be classified as less-indebted republics. In contrast, Armenia, Azerbaijan, Estonia, Georgia, Kyrgyzstan, Latvia, and Moldova would fall into the severely indebted category. For 1992, and for the 1993 through 1997 period, all of the states are classified as severely indebted.
As earlier indicated, we arrived at the debt classifications in table 5.2 by allocating the total FSU debt among the various republics. As discussed in chapter 3, many of the former republics have now reached agreement with Russia to give up their claims on FSU assets in exchange for Russia’s assuming their shares of FSU debt. Successor states that do this will have reduced their debt burden and thus may no longer be classified in the same category for the forecast years. At the same time, Russia will have increased its debt burden.
While a number of successor states have benefited from Russia’s assuming responsibility for all of the FSU’s debt, they have been hurt by a reduction in transfers received from Russia. According to the IMF, most FSU countries have experienced a steep decline in large explicit and implicit transfers, including fiscal transfers from the former Soviet Union budget, which disappeared in 1992, and the subsidy implicit in the underpricing of energy and raw material exports (relative to world prices). This subsidy was reduced significantly as interstate prices for these goods were raised. The IMF estimated that between 1992 and 1994, the loss of official transfers from Russia and the rise in the import bill—on the assumption that energy and materials prices rise to world levels—may cost the other FSU countries $15 billion, or about 15 percent of their estimated 1994 GDP (at market exchange rates).
In addition, a number of successor states have fallen into serious arrears as a result of trade deficits with other FSU countries. For example, PlanEcon estimated that Ukraine had a 1993 trade deficit with CIS countries of about $2.5 billion and that it owed Russia more than $1 billion for energy resources while having substantial arrears with Turkmenistan for gas deliveries. As a result, creditor states were refusing to deliver new supplies until old arrears were paid for. Turkmenistan has cut back on gas deliveries to Georgia because of the latter’s inability to pay for supplies. Armenia and Moldova have had large trade deficits with other CIS countries, especially Russia and Turkmenistan. Uzbekistan reduced gas deliveries to Kyrgyzstan and threatened to cut off all supplies if the latter did not pay its debts. Tajikistan has accumulated large deficits with Russia.
Liquidity and Creditworthiness
“Liquidity,” as used in this report, refers to a country’s ability to secure foreign exchange over the short- and medium-term future sufficient to meet its debt service payments. We used two different methods to measure the liquidity of the successor states: (1) We examined the gross financial requirements of a country, defined as the amount of financial resources needed to meet its debt service obligations and international payments, including imports of goods and services. (2) We constructed liquidity ratios that parallel the World Bank’s old method for measuring debt burden to assess the liquidity of the successor states.
Gross Financial Requirements of the Successor States
Table 5.3 provides recent historical and forecast data for the hard currency financial requirements for the former Soviet Union. Figures for 1992 and the forecast years of 1993 through 1997 treat the 15 independent states as a single aggregate. The data are from the WEFA Group.
WEFA’s forecast indicates that as an aggregate, the FSU will require major assistance to meet its gross financial needs during the next several years. As the table shows, WEFA forecast a negative current account balance—a nation’s trade in goods and services and net transfers—for each year during the 1993 through 1997 period. Net capital flows—direct and portfolio investments and changes in gold and foreign exchange reserves (not shown in table 5.3)—were estimated to be positive in each of the years but were not large enough to offset the current account deficit. Consequently, net debt, i.e., debt in excess of reserves (also not shown in table 5.3) is expected to grow throughout the forecast period. The net new credit (debt) required to finance the current account deficit and net capital flows is expected to decrease from a high of $11.3 billion in 1992 to $1.5 billion in 1996. However, when combined with the financing required to meet scheduled repayments on short-term and long-term debt, the financial requirements of the FSU and its successor states are considerable—ranging between $22 billion and $30 billion per year. Unless the successor states of the FSU receive substantial debt relief, they would require, on average, an estimated $24 billion annually of external financing between 1993 and 1997.
In contrast, according to the IMF, the annual average gross external financing for developing countries as a whole and for the former centrally planned economies as a separate grouping for 1990 to 1993 was estimated at $213 billion and $45.6 billion, respectively. Thus, the FSU annual gross financial requirement represents approximately 11 percent of the requirement for all developing countries and 53 percent of the gross financial requirement for all of the formerly centrally planned economies. It is doubtful that such a large financial inflow can be attained from financial markets if they are not confident that the successor states represent a growing economy and a stable investment climate.
We also provide in table 5.4 the distribution of the gross financial requirements among the successor states as well as the average ratio of the gross financial requirements to the gross domestic product for each republic from 1993 to 1997. The financial requirement of Russia and Ukraine combined accounts for about 85 percent of the total requirements for all successor states. However, when the gross financial requirements are viewed relative to the economic resources of the FSU and its successor states as measured by their GDP, the requirements of Russia and Ukraine represent only 27 percent of their respective gross domestic products. In contrast, the gross financial requirement for Estonia, Kyrgyzstan, Tajikistan, and Turkmenistan is less than $200 million each but represents several hundred percent of their respective gross domestic products.
Liquidity Ratios of the Successor States
We used four indicator ratios to measure liquidity: (1) foreign exchange reserves to imports, (2) current account balance to GNP, (3) government budget balance to GNP, and (4) short-term debt (credit) to imports. These variables were selected because they are used by the banking industry to determine a country’s general ability to service its debt in the shortterm.
Reserves-to-Imports Ratio. This ratio describes a country’s stock of foreign exchange relative to its annual import levels. As such, it measures the extent to which a country could pay for its imports out of reserves alone if that were necessary. Moreover, a country with large reserves relative to imports is likely to have increased flexibility for using reserves to help service its debt, at least over the short run.
Current Account Balance-to-GNP Ratio. The current account balance measures a country’s trade in goods and services and financial flows related to interest and dividends and transfer payments. If a country has a current account deficit, it is not taking in sufficient foreign exchange from its exports of goods and services and financial earnings inflows to offset the costs of its imports and financial payments outflows. A current account deficit is roughly equal to the amount of new financing required to meet international purchases and transfers. The lower a country’s current account deficit relative to its GNP, the greater its potential for servicing its debt and the lower the probability of default.
Government Budget Balance-to-GNP Ratio. Countries with a surplus of central government revenues relative to expenditures are less likely to face short-term liquidity problems. Countries in surplus may be able to dedicate some of the surplus to paying off foreign debt if it is in the form of hard currency. However, countries that have a budget deficit will need additional domestic or foreign financing if they want to use government monies to help pay off debt.
Short-Term Debt (Credit)-to-Imports Ratio. As short-term debt increases relative to medium- and long-term debt, a country will require more foreign exchange over the short term to meet its near-term payments. When not paid for in cash, imports represent the amount of revolving trade credits that have to be maintained in good order. The ratio of short-term debt to imports is a measure of the short-term cash flow or immediate demands on a country’s foreign exchange. We hypothesize that as short-term debt to imports increases, a country’s creditworthiness is more likely to decrease.
We constructed our own thresholds for these indicators by using IMF and World Bank data on net debtor developing countries for 1986-90. In October 1992, the IMF reported that 72 out of 122 net debtor countries had experienced recent debt service difficulties because they had incurred external payments arrears or entered into official or commercial bank debt-rescheduling agreements during 1986 through 1990. For each of our liquidity measures, we calculated the liquidity ratio for each of 114 countries for each year between 1986-90. We then calculated the average ratio for each country over the 5-year period. Since roughly 60 percent of the IMF’s list of net debtor countries (72 of 122) were designated as having a debt service problem, we used the observation that marks the 60th percentile on each liquidity measure as a threshold for characterizing a severe liquidity problem. We believe this is a reasonable characterization, since arrears and rescheduling are indicative of serious liquidity problems.
We followed the World Bank’s old method of designating “moderate” thresholds equal to 60 percent of the value of “severe” thresholds. Also similar to the bank’s approach, we designated a country as having an overall moderate or severe liquidity problem only if three or more of its liquidity ratios equaled or exceeded the moderate or severe threshold values, respectively. (See prior discussion on debt burden.) Table 5.5 presents our country liquidity thresholds for the ratios of reserves to imports, current account deficit to GNP, government deficit to GNP, and short-term debt to imports.
We used data from the WEFA Group to calculate the liquidity ratios for the successor states. However, data were not available for republic-level foreign currency reserves. To estimate the foreign currency reserves for each republic, we defined a relationship between the FSU’s foreign currency reserves and its imports and exports. We then estimated each republic’s reserve using its export and import data so that the level of reserves is proportional to its external trade balance. In addition, we used data on GDP in place of GNP for the two ratios previously discussed that include the GNP variable. As with the debt burden analysis, we used historical and forecast data provided by WEFA in January 1993. Table 5.6 summarizes the results of our analysis in terms of whether and when each country is considered to have low, moderate, or severe liquidity problems.
As table 5.6 shows, for 1988 through 1991, the liquidity problem of the FSU would have been classified in the severe category. However, if the outstanding debt at that time were distributed among the various republics, three—Kazakhstan, Tajikistan, and Uzbekistan—would have been classified as having moderate liquidity problems. The rest would have remained in the severe category.
For 1992, 11 of the 15 successor states were estimated to have severe liquidity problems. The other four states were estimated to have moderate problems. For the forecast period, 1993 through 1997, 8 of the 15 states are expected to experience severe liquidity problems. The other seven are estimated to have moderate problems. During both periods, Russia and the 15 successor states treated as a single entity are estimated to have severe liquidity problems.
Liquidity is a more appropriate measure of creditworthiness than debt burden, since liquidity more directly measures the ability to generate foreign currency for servicing short- and medium-term debt. The liquidity results indicate that most of the successor states, including Russia, are high-risk countries because of their severe liquidity problems.
Arrears, Debt Relief, and IMF Arrangements
The amount of arrears, the need for debt relief, and the specific types of IMF loan arrangements a country has accepted are major indicators of a lack of creditworthiness.
When countries with liquidity problems cannot meet all of their immediate debt obligations, they fall into arrears. In some cases, arrears reflect an unwillingness to service debt. In either case, if arrears continue and the situation is not remedied, the country is likely to be considered a poor credit risk. If arrears persist and/or become prolonged, a country may reach a point where it concludes it cannot meet its current and future debt payments unless it obtains debt relief.
Debt relief is obtained by rescheduling outstanding debt or by debt forgiveness. Debt rescheduling alters the terms and maturity of outstanding debt. Debt relief is typically undertaken only after payments have been missed or when default is imminent or has already occurred.
To initiate a debt renegotiation, official creditors must be convinced that (1) the debtor country will be unable to meet its external payments obligations unless it receives the relief and (2) the debtor will take necessary steps to eliminate the causes of its payment difficulties and to achieve a lasting improvement in its external payments position. For countries that are members of the IMF, creditors rely on the IMF to help the debtor country design appropriate adjustment measures. Creditors have also required that an “upper credit tranche” arrangement with the IMF be in place before the start of debt renegotiations. Many countries that have accepted IMF arrangements are also countries that have rescheduled their debts.
As previously discussed, the Soviet Union was in substantial arrears by the end of 1990 (see ch. 3). In the fall of 1991, international creditors agreed to defer a substantial amount of the country’s principal payments that were due in 1992. Since the dissolution of the Soviet Union in December 1991, only Russia has been making payments on Soviet debt. During 1992, Russia’s arrears worsened, and Russian officials requested debt relief. In April 1993, official creditors agreed to reschedule $15 billion in debt that was already in arrears or scheduled for payment in 1993. By the end of 1993 a number of the successor states had reached agreement with Russia to exchange their responsibility for repaying a portion of the FSU debt in return for dropping their claims on a share of the FSU’s assets held by Russia. In June 1994, Russia’s official creditors agreed to reschedule another $7 billion (approximately) of FSU debt already due and/or yet to come due during 1994—indicating that Russia was unable to fully service the debt in spite of the 1993 rescheduling.
Meanwhile, Russia had still not reached agreement with bank creditors on rescheduling remaining FSU commercial debt. This issue had been outstanding since the dissolution of the Soviet Union in December 1991. As discussed in chapter 3, the commercial debt at the end of July 1993 was estimated by one source at $28.5 billion.
According to an April 1994 IMF assessment, it is clear that Russia will require a further comprehensive debt-relief package to normalize relations with external creditors. And, the IMF said, Russia and the other FSU countries will require external financing to help them consolidate large budget deficits in a noninflationary manner and to finance social safety nets. But, the IMF warned, official and private external financing will be forthcoming and helpful to Russia and the other states only in the context of strong and sustained stabilization and reform programs. (See also ch. 4.) Otherwise, foreign lending will tend to increase capital flight and external debt and further delay the development of an environment in which a strong private sector can emerge.
As discussed in chapter 2, Ukraine began defaulting on its GSM-102 loan repayments to the United States in the spring of 1994. As of August 17, 1994, defaults totaled about $31.1 million, and CCC had paid $21.6 million on claims made by lenders.
The successor states’ prolonged arrears, the repeated need to reschedule debt, and the failure to reach agreement on re-scheduling FSU commercial debt all indicate a lack of creditworthiness. Successor states that have agreed with Russia to exchange their responsibility for the FSU debt for forgoing claims on FSU assets cannot be faulted for subsequent arrears that arise on FSU debt or a need to further reschedule FSU debt. However, as the recent IMF assessment indicates, other successor countries will still require external financing to help them consolidate large budget deficits in a noninflationary manner and to finance social safety nets.
USDA Criteria Focus on Debt Relief in Assessing Creditworthiness
As discussed in chapter 1, USDA’s Trade and Economic Information Division is responsible for analyzing the ability and willingness of countries that have requested GSM-102 export credit guarantees to meet their current and future external debts, including potential GSM debt. As reported in chapter 2, TEID judged FSU and Russian debt as high risk between December 1990 and September 1992 when USDA committed to making available more than $5 billion in export credit guarantees to these states.
Table 5.7 shows that TEID grades countries on a scale that ranges between A and F, and risk is evaluated primarily in terms of whether a country is currently involved in and likely to be involved in future debt rescheduling. For example, a country is classified as “high risk” or a “D” if there is a greater than 50-percent chance that it will reschedule its old debt during the next 3 years. (See table 5.7.)
TEID considers a country’s risk to be “unacceptable” or an “F” if the state is both currently involved in rescheduling old debt and likely to reschedule new debt within the next 3 years.
On the basis of the analyses presented in this report and the terms of the April 1993 and June 1994 debt-rescheduling agreements and related developments, we believe that additional debt rescheduling for Russia during the next 3 years is a real possibility. As discussed in chapter 4, Russia experienced a constitutional crisis during 1993 that was based importantly on disagreement between the parliament and the President over the pace and extent of economic reform. Although voters approved a new constitution and elected a new parliament in December 1993, it remains to be seen whether the executive and legislative branches will work well together. As presented in this chapter, Russia is shown to have both a severe debt burden and severe liquidity problems. Although the April 1993 debt rescheduling alleviated Russia’s liquidity problems in 1993, it has continued to have serious problems in 1994. In June, it entered into another substantial rescheduling agreement with its official creditors. As table 5.3 showed, the FSU gross financial requirements could exceed $20 billion per year between 1994 and 1997.
Given these considerations, we believe that Russia would continue to be classified as at least high risk under the TEID criteria displayed in table 5.7.
In fact, in May 1994, USDA officials advised us that TEID has assessed Russia as not creditworthy for more than a year. Other countries rated as not creditworthy by TEID included Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, and Ukraine. According to the officials, TEID has rated the Baltic states, Kazakhstan, Turkmenistan, and Uzbekistan as creditworthy.
The Secondary Market
The secondary market for trading developing countries’ loans and bonds is another measure that can be used to assess creditworthiness. Countries whose debt trades close to the face value of the loan or bond are considered quite creditworthy, whereas those whose debt is traded at a deep discount are not.
Some observers have criticized the use of secondary market prices as a measure of creditworthiness. They assert that the market exhibits abrupt price movements regardless of changes in the underlying economic conditions of the debtor countries. There have also been allegations that publicly reported secondary prices and actual transaction prices are different. Additionally, not all secondary market price movements can be linked to economic performance, as some price movements reflect only a country’s willingness to pay back its debt. Moreover, the ability to service debt is dependent, in part, on the economic conditions of developed countries. Therefore, one might expect that the secondary market would be correlated with global economic conditions. However, there is little correlation between secondary price movements and variations in measures of global economic aggregates, such as industrial countries’ growth.
On the other hand, we believe the secondary market is the most reliable source of risk-adjusted valuation of debt that can be used to convert judgmental perceptions of risk into a measurable amount in dollars and cents. Prices in the secondary market for countries with strong growth and lower levels of external debt have been found to be generally higher than prices in the secondary market for countries with severe economic and debt problems in part because investors associate strong growth and low debt with improved creditworthiness. (See ch. 6 for further discussion of why we believe the secondary market is a useful measure.)
Secondary Market’s Assessment of the FSU and Russia
A secondary market has developed for FSU loans and bonds. According to a March 1993 trade publication, the FSU/Russian debt market had been very illiquid. The study reported that transactions on FSU/Russian debt in the secondary market were very structured and often took a few months. Very often transactions were in the form of debt-for-debt swaps, and each transaction was dependent on its own specifications. As a result, the study said, FSU/Russian debt has been one of the most illiquid papers on the secondary market, and total market turnover for the sovereign debt amounted to at most $200 million in 1992. However, according to more recent information, trading of FSU/Russian debt was considerably higher in 1992 (i.e., $678 million) and increased dramatically in 1993, to $24.7 billion.
According to another trade publication, Soviet debt started trading in the secondary market in about 1990 and during 1991 traded at 55 to 60 cents on the dollar. By spring 1992, it said, prices had fallen to 30 to 35 cents on the dollar. According to Chemical Bank data, secondary market prices for FSU loans traded for about 17 to 21 cents on the dollar between July 1992 and February 1993 and then fell to a low of 10 to 11 cents on the dollar in March 1993. Loan prices gradually increased to reach a high of 55 cents on the dollar during part of December 1993. Between then and March 1994, prices again declined, reaching a low of 28 cents on the dollar on March 21, 1994.
Vnesheconombank began issuing Eurobonds in the late 1980s. By March 1993, there were seven issues, amounting to a total value of $1.7 billion. VEB made servicing of these bonds a priority, continuing to make payments despite defaults on its debt service payments for loans. Consequently, the bonds have carried a higher price than the loans since they started being quoted at a discount at the beginning of 1991. In mid-1991 the bonds approached 55 to 60 cents on the dollar. By spring 1992, they had fallen as low as 44 cents. In June 1993, they were trading at 60 to 65 cents on the dollar.
We believe the secondary market’s valuation of FSU debt can be considered to represent market participants’ judgment about Russian creditworthiness. (As previously discussed, Russia has assumed responsibility for making payments on FSU loans and bonds.) Figure 5.1 provides secondary market prices of FSU loans for July 1992 to March 1994. The low prices indicate that the market finds Russia quite uncreditworthy.
Country Risk Assessments
Following the rapid growth of developing countries’ debt in the early 1970s and an increasing number of debt reschedulings in the 1980s, an assessment of the risk posed by cross-border lending and investments grew in importance. Therefore, the international financial community developed country risk assessments to evaluate the risk of loss from the future actions of debtors.
Country risk analysis is based on a holistic approach. It encompasses social and economic risk, as well as “sovereign” (i.e., political) risk. The latter refers to exposure arising from events that are substantially under the control of a foreign government rather than a country’s private sector.
A number of private organizations rate countries on the degree of risk associated with cross-border financial transactions. Lenders and investors can use the ratings in deciding whether to lend to or invest in particular countries. We analyzed the ratings of three publication services: Euromoney, Institutional Investor, and International Country Risk Guide (ICRG). Each assigns a country risk rating ranging between 0 for least creditworthy to 100 for most creditworthy. Each rating service uses a unique methodology for assessing country risk. Not surprisingly, there is considerable overlap in terms of the factors each considers.
Euromoney
Euromoney, a leading international publication, assigns credit ratings as a weighted average of market indicators covering access to bond markets and trade finance, credit indicators covering payment records and rescheduling difficulties, and analytical indicators incorporating economic performance forecasts and political environments.
In April 1992, a Euromoney analysis concluded that the republics of the FSU were not in a position to repay the full amount of their debts at that time and that a debt restructuring package seemed inevitable. At the same time, the analysis said it was generally accepted that the former Soviet republics as a whole were potentially wealthy enough to meet their obligations over time and that debts should be fully serviced and paid.
As shown in table 5.8, in September 1992, Euromoney rated Russia and several other successor states in the range of 14.6 (Moldova) to 24.2 (Estonia) out of a possible 100. Relative to 169 countries rated, they fell into the bottom quartile. Euromoney concluded that access to bank lending by any of the successor states is “impossible” and that their access to international bond and syndicated loan markets is “nearly impossible.”
Institutional Investor
Institutional Investor surveys leading international banks to rate the creditworthiness of sovereign states. Each bank provides its own rating, and Institutional Investor weights the responses using a formula that gives more importance to responses from banks with greater worldwide exposure and more sophisticated country analysis systems.
In March 1992, following the demise of the Soviet Union, Institutional Investor made its last rating for that entity. The score, 29.7, represented a staggering decline of 34.6 points over the previous 2-1/2 year period. The Soviet Union’s score of 29.7 placed it 58 out of the 113 countries rated by Institutional Investor.
In September 1992, Institutional Investor rated Russia 23.6, Belarus 21.1, Ukraine 21.1, Kazakhstan 18.7, and Uzbekistan 16.6. These ratings placed them 73, 78, 79, 90, and 98, respectively, among 126 countries. With the exception of the Baltic states, individual scores for the other republics were not reported. The ratings for the Baltics were lower than their March 1992 ratings. Estonia was rated 22.1, Latvia 21.4, and Lithuania 20.7.
International Country Risk Guide
International Country Risk Guide (ICRG) provides a detailed country-by-country assessment of the risk of operating, investing in, or lending to particular countries using a three-part system that evaluates political, financial, and economic risk. It assigns an overall score to each country by using a weighting system that allocates 50 percent of the score to political risk, 25 percent to financial risk, and 25 percent to economic risk. According to ICRG, its country scores can be interpreted as in table 5.9.
In August 1992, ICRG rated Russia 52.5, putting it slightly above countries it considers as very high risk. ICRG did not provide ratings for any other former republic. (See table 5.8.)
Comparison of Country Risk Ratings and Our Composite Rating and Ranking
As table 5.8 shows, the scores of the three rating services appear to be generally consistent with one another in the way they rank the creditworthiness of countries. Not surprisingly, though, there are some differences. The scores of Euromoney and Institutional Investor most closely approximate one another. ICRG scores are generally considerably higher than those of the other two services except for countries that are rated as high in creditworthiness.
Using a statistical method for effectively summarizing data from several sources, known as “principal components analysis,” we analyzed whether the three rating services are measuring the same phenomenon. The analysis indicated that overall the ratings do measure a common factor. The principal components method was then used to generate a combined, overall rating for each of the countries. To the extent that the rating services are measuring different yet important aspects of creditworthiness and to the extent that bias or poor information may affect their ratings of some countries, we believe our combined ratings provide a better measure of the relative creditworthiness of countries.
As table 5.8 shows, the combined creditworthiness ratings for the successor states range from a low of 13.6 points for Moldova to a high of 31.8 points for Russia. In terms of rankings, Moldova ranked 158 and Russia 100 out of the 172 countries rated.
More Recent Country Risk Ratings
The previous analysis was prepared using country risk ratings from the August and September 1992 period. Table 5.10 provides more recent information on the FSU successor states for two of the rating services, Euromoney and Institutional Investor. The table shows that both services ranked nearly all of the countries as worse on creditworthiness in September 1993 as compared to September 1992.
In March 1994, all of the countries rated by Institutional Investor, including the Baltic states, were ranked lower than they had been in September 1993. In March 1994, 8 of the 15 countries rated by Euromoney, including the Baltic states, improved on their rankings relative to September 1992 and September 1993. Even so, four of those countries were still ranked among the bottom quartile of all countries rated (i.e., Kyrgyzstan, Moldova, Tajikistan, and Uzbekistan); the other four were ranked close to or among the bottom one-third of all countries rated (i.e., the Baltic states and Turkmenistan, respectively). For both services, the 1994 rankings of Russia and Ukraine declined further compared to September 1993.
The Cost of GSM-102 Exports to the FSU/Russia When the Risk of Default Is Taken Into Account
As of August 17, 1994, the extension of GSM-102 credit guarantees for exports to the FSU and to Russia had created a contingent liability to the U.S. government of about $2.9 billion for outstanding principal payments. That amount includes the large reschedulings that occurred in September 1993 and early June 1994. We used country risk ratings and secondary market prices to estimate the risk of default and, in turn, the expected cost of the GSM-102 loans to the FSU and Russia as of June 1994.
Risk of Default Estimated From Country Risk Ratings
Table 5.11 provides Euromoney country risk ratings for the FSU successor states for three time periods between September 1992 and March 1994 and the average of the three ratings. As previously discussed, countries were rated by Euromoney on a scale ranging between 0 and 100. The higher the score, the better the creditworthiness and the lower the score, the worse the creditworthiness.
We used the country risk ratings to estimate an implied risk of the country’s defaulting on its external debt. The results are presented in table 5.11. As with the country risk ratings, we also calculated the average risk of default for the three time periods. As table 5.11 shows, the average country risk ratings for the FSU successor states varied between a low of 17.2 for Armenia and Azerbaijan to a high of 28.9 for Estonia. The average implied risk of default for the countries ranged between a low of 71 percent for Estonia to a high of 83 percent for Armenia and Azerbaijan.
Russia’s country risk ratings ranged from 21.8 in September 1992, to 24.7 in September 1993, to 26.0 in March 1994. Its average rating was 24.2. The March 1994 implied risk of Russia’s defaulting was 74 percent, and its average risk of default for the September 1992 to March 1994 period was 76 percent. As previously stated, Russia’s contingent liability for GSM-102 debt in August 1994 was about $2.9 billion. Using the March 1994 implied risk of default score for Russia, we calculated that $2.1 billion in outstanding GSM-102 guaranteed principal repayments was at risk of default. If one uses the average risk of default score, nearly $2.2 billion was at risk of default.
Risk of Default Estimated From Secondary Market Prices
The average price of FSU loans in the secondary market in March 1994 was 32 cents on the dollar. This price implies a 68-percent risk of default at that time. According to data provided to us by Chemical Bank, between July 1992 and March 1994, the price of FSU loans in the secondary market averaged 26.8 cents on the dollar—implying that financial markets expected about a 73-percent discount on repayment of outstanding FSU loans over that time period. These default risk rates are quite similar to those indicated by the Euromoney country risk ratings previously discussed.
The March 1994 implied risk of default through the secondary market price suggests that $2 billion of the $2.9 billion GSM-102 principal is at risk of default. The average risk of default score for the secondary market price suggests that about $2.1 billion is at risk of default.
These estimates do not take account of possible savings in the cost of commodity support programs that may result when the GSM-102 program is used to promote increased exports of U.S. commodities. However, as discussed in chapter 2, whether and to what extent lower costs will result from the GSM-102 program depends importantly on the availability of alternative markets for the exports in question and how world market prices are affected by actions taken by other exporter nations in the absence of U.S. GSM program benefits for the FSU and its successor states.
According to an ERS official, while the potential CCC liability on GSM loans is great, one should consider Russia’s self-interest in meeting its GSM-102 repayments responsibilities. If Russia does not meet its obligations, the official said, its ability to obtain future credit from the United States and other potential creditors would be complicated. In addition, the official noted that if Russia repays the credit and at an appropriate higher interest rate for rescheduled debt, U.S. taxpayers would endure no long-term cost under the program. Hence, the official said, rather than suffering a loss, U.S. taxpayers may earn revenue from rescheduled loans. In commenting on a draft of this report, USDA said GAO should examine the terms of rescheduled debt with the FSU. USDA said that taxpayers do not lose money as long as the interest charge exceeds the opportunity cost of funds to U.S. taxpayers and as long as principal is repaid.
We agree that Russia will have greater difficulty in obtaining future credit if it does not meet its GSM-102 repayment obligations. However, whether and to what extent it will do so is the question. We have provided estimates of the likelihood of its repaying based on country risk ratings and the secondary market’s valuation of FSU loans. It is conceivable that at some point in the future Russia may seek and obtain forgiveness for a substantial part of its GSM loan obligations. In the meantime, as of mid-August 1994, the United States had already paid out $1.4 billion to cover claims on GSM-102 defaults for FSU loans and was expecting to pay out another $429 million in claims by the end of 1994 as part of the June 4, 1994, rescheduling agreement.
In its comments on our draft report, USDA disagreed with our use of the secondary market to estimate the risk of default on GSM-102 loans. (See ch. 6.) However, in its comments, USDA itself questioned whether Russia had sufficient self-interest to repay GSM-102 debt. USDA said that Russia’s self-interest had been overtaken by recent events, including lower import demand, large infusions of food aid, and the fact that the Russians had not requested new credit and did not seem very interested in staying current on GSM-102 debt payments.
Impact of Default Risk on the GSM-102 Portfolio
As discussed in chapter 1, the GSM statute prohibits USDA from extending credit guarantees to any country the Secretary determines cannot service the debt. However, the statute does not require that a country be considered generally creditworthy to receive GSM credit guarantees. In addition, the law does not provide any guidance as to what is an acceptable level of risk in evaluating whether countries can adequately service proposed GSM debt. Consequently, countries that USDA program officials assess as high risk in terms of creditworthiness can still be approved to receive GSM credit guarantees. Also, the statute does not place a limit on the amount of GSM guarantees that can be provided each year to high-risk countries in aggregate or to individual high-risk countries. As a result, USDA can allocate large amounts of guarantees to high-risk countries, making the GSM-102 portfolio subject to a potentially high rate of default.
In chapter 1 we showed that the FSU and two of its successor states (Russia and Ukraine) received the largest portion of GSM-102 credit guarantees provided during the fiscal years 1990-92. As a result of the large guarantees provided to the FSU and its successor states, the GSM-102 program became considerably exposed to default by these states. Table 5.12 shows that on January 29, 1993, the FSU and its successor states were responsible for $3.6 billion, or about 44 percent, of all outstanding principal on GSM-102 guaranteed loans. Except for Mexico and Algeria, which were responsible for 26 percent and 11.5 percent, respectively, of the outstanding principal, most of the other GSM-102 recipients each accounted for less than 1 percent of the outstanding principal.
We used the combined country risk ratings presented in table 5.8 to estimate the principal at risk for each country participant in the GSM-102 export credit guarantee program. The results are presented in table 5.12. As the table shows, the exposure of the GSM-102 program to default by the FSU and its successor states is considerably larger when the potential for default is considered. Whereas the FSU and its successor states together accounted for about 44 percent of the outstanding principal at the end of January 1993, they represented approximately 59 percent of the portfolio’s risk, because their country risk ratings were lower than most of the other GSM-102 credit guarantee recipients. In contrast, Mexico, which accounted for 26.1 percent of the principal exposure, represented only 12.5 percent of the risk because its country risk ratings were significantly higher than most of the GSM-102 recipients.
GSM-102 Program Does Not Use Risk-Based Fees
Although GSM-102 recipient countries vary significantly from one another in terms of their risk of defaulting on GSM-102 loans, CCC does not adjust the fee that it charges for credit guarantees to take account of country risk. CCC fees are based upon the length of the credit period and the number of principal payments to be made. For example, for a 3-year GSM-102 loan with semiannual principal payments, CCC charges a fee of 55.6 cents per $100, or 0.56 percent of the covered amount. For 3-year loans with annual principal payments, the fee is 66.3 cents per $100. CCC fees that included a risk-based component might not cover all of the country risk, but they could help to offset the cost of loan defaults.
USDA officials told us that including a fee for country risk could reduce the competitiveness of GSM-102 exports. However, they said they did not have recent or current data to support their claim.
The U.S. Export-Import Bank, which provides credit guarantees to promote a variety of U.S. exports, uses risk-based fees to defray the cost of defaults on its portfolio. Under its system, each borrower/guarantor is rated in one of eight country risk categories. Exposure fees vary based on both the level of assessed risk and the length of time provided for repayment. For example, in the case of repayment over 3 years, a country rated in the lowest risk category is charged a fee of 75 cents per $100, whereas a country in the highest risk category is charged a fee of $5.70 per $100 of coverage. Thus, the bank’s fee structure includes a substantial added charge for high country risk. According to the bank, its system is designed to remain as competitive as possible with fees charged by official export credit agencies of other countries.
Under section 211(b)(1)(b) of the 1990 Farm Bill, CCC is currently restricted from charging an origination fee for any GSM-102 credit guarantee in excess of an amount equal to 1 percent of the amount of credit extended under the transaction. This restriction was initially enacted in 1985 following proposed administration legislation to charge a 5-percent user fee for exports backed with credit guarantees. Some Members of Congress were concerned that such a fee would adversely affect the competitiveness of GSM-102 exports. Under the 1-percent restriction, CCC would be considerably limited in the size of the fee that it could charge to take account of country risk should it decide to do so. For example, as previously noted, CCC charges 0.56 percent for a loan payable in 3 years and with principal payments due annually. The most it could increase the fee would be 0.44 percent. In contrast, the Export-Import Bank currently charges fees as high as 5.7 percent for 3-year loans.
Implications of a Lack of Creditworthiness and the High Exposure to Default of the GSM Portfolio
The various analyses previously presented above indicate that Russia and the other successor states are high-risk countries in terms of creditworthiness. Russia is severely indebted, and its agreement to accept responsibility for the other states’ shares of the FSU debt increases its burden. Most of the successor states, including Russia, have severe liquidity problems, and these problems are likely to persist for the next several years. Russia’s arrearage problems and its need to reschedule its debts also demonstrate a lack of creditworthiness. In addition, secondary market valuations of FSU debt and country risk ratings point to poor creditworthiness.
The large amount of GSM-102 export credit guarantees already provided to the FSU and its successor states, along with their low creditworthiness, means that the GSM-102 portfolio is exposed to a high level of risk that could result in additional, substantial costs to U.S. taxpayers. As earlier discussed, in September 1993 and June 1994 the United States rescheduled large amounts of GSM-102 debt. Providing the successor states with more guarantees at this time would add to the already high exposure of the GSM-102 portfolio to further defaults. Since the GSM-102 program provides financing with terms up to only 3 years, additional guarantees for the successor states would add to the difficult liquidity problems that they are expected to experience over the next several years. Consequently, the GSM-102 program may not be an appropriate vehicle for continued financing of U.S. agricultural exports to the FSU successor states at this time.
Nonetheless, there may be important economic and national security reasons for the United States to further assist the financing of food exports to Russia and one or more successor states. For example, if circumstances arise where the Russian government cannot obtain the hard currency to pay for food imports needed to balance its food needs, political stability could be threatened. In a major policy statement on April 1, 1993, President Clinton said that nothing could contribute more to global freedom, security, and prosperity than the peaceful progression of Russia’s transformation from a totalitarian state into a democracy, a command economy into a market, and an empire into an a modern nation-state.However, he noted, the outcome is not assured. The President warned of the danger of Russia, with its vast arsenal of nuclear weapons, being torn apart by the ethnic strife that has engulfed former Yugoslavia. If Russia were to revert to imperialism or plunge into chaos, he said, the United States would need to reassess its plans for defense savings. This could mean billions of less dollars for other uses, including creating new businesses and new jobs in the United States. America’s interests, he said, lie with Russian reform and Russian reformers, and America’s position is to support democracy and free markets in Russia and the other new independent states.
In support of the policy statement, on April 4, 1993, President Clinton announced a $1.6 billion assistance package for Russia for 1993. As discussed in chapter 3, on April 15, the United States, in concert with the G-7 nations, announced a financial assistance program of $28.4 billion for Russia. Also on April 15, the Secretary of State announced that the administration would propose to Congress another U.S. aid package for Russia of $1.3 billion in direct aid and $500 million in assistance to be channeled through international assistance agencies. Subsequently on September 30, 1993, the President signed the fiscal year 1994 foreign aid bill that included $2.5 billion for the NIS.
Alternatives to GSM-102 Export Credit Guarantees
There are alternatives to the GSM-102 program for helping to finance continued U.S. agricultural exports to successor states to the FSU. Examples include the GSM-103 program and various food aid programs. Since the latter include substantial concessionality and at times total grant aid, they would entail higher budgetary outlays.
As discussed in chapter 1, the GSM-103 export credit guarantee program is similar to the GSM-102 program but provides terms of credit whereby the repayment period can range up to 10 years. An advantage of this program is that it would help recipient successor states to finance food imports without adding to their difficult liquidity problems during the next few years, since repayments can be stretched out over a decade. However, GSM-103 is not an appropriate program to use if the successor states are uncreditworthy and is questionable if they are high risk, since longer repayment terms may also increase risk. A limitation of the program is that far fewer dollars have been authorized for GSM-103 guarantees than for GSM-102 guarantees (see table 1.1). Under the 1990 Farm Bill, CCC is required to make available at least $5 billion for each of fiscal years 1991 through 1995, whereas the minimum level stipulated for GSM-103 assistance is only $500 million.
USDA has used several food aid programs to provide food assistance to the successor states during the past few years. These include Public Law 480, title I, the section 416(b) program of the Agricultural Act of 1949 (P.L. 81-439), and the Food for Progress program of the Food Security Act of 1985 (P.L. 99-198).
Title I of the Food for Peace program (P.L. 480) is a concessional sales program to promote exports of agricultural commodities from the United States and to foster economic development in recipient countries. The program requires annual appropriations and thus has a direct impact on federal spending. Food for Peace provides export financing over payment periods of 10 to 30 years, grace periods on payments of principal of up to 7 years, and low interest rates. Eligible countries are developing countries experiencing a shortage of foreign exchange earnings and having difficulty meeting all of their food needs through commercial channels. According to USDA, program allocations take into account changing economic and foreign policy situations, market development opportunities, existence of adequate storage facilities, and possible disincentives to local production.
Section 416(b) of the Agricultural Act of 1949 authorizes donations of uncommitted CCC stocks to assist needy people overseas. Food for Progress is a food aid program that is carried out using funds or commodities made available through Public Law 480, title I, or the section 416(b) program. Food for Progress is generally administered on grant terms. It provides commodities to developing countries and emerging democracies to encourage democracy and private enterprise, including agricultural reform.
Table 5.13 provides figures on the value of GSM-102 credit guarantee and food aid assistance to the FSU/successor states during fiscal year 1991 through April of fiscal year 1994. As the table shows, GSM-102 credit guarantees accounted for all of the assistance provided during fiscal year 1991 and most of the assistance made available during fiscal year 1992. As a result of the suspension of the GSM-102 program in the fourth quarter of 1992, food aid became the dominant form of agricultural assistance in fiscal year 1993. The combined total of GSM-102 and food aid assistance in fiscal year 1993 was slightly more than all GSM-102 assistance provided during fiscal year 1991 but represented only about two-thirds of the combined value of the GSM-102 and food aid assistance made available during fiscal year 1992. As the table shows, from fiscal year 1991 through April of fiscal year 1994, GSM-102 credit-guaranteed assistance was about $5.1 billion, while food aid assistance equaled about $2 billion. Total agricultural assistance made available in fiscal year 1994 (through April) was a small fraction of that provided during each of the 3 previous fiscal years.
Questions About the Need for More Credit Guarantees And/or Food Aid
Questions exist about the need for and value of additional credit guarantees and food aid for the FSU successor states. For example, FSU agricultural imports were down considerably in 1993 and, according to USDA, there generally is not a food shortage problem in the area.According to USDA, economic reforms have begun to have some positive effects, and as they take further hold, the successor states are not likely to continue importing at their former high levels. At the same time, credits and credit guarantees have unintentionally impeded the reform process by increasing the successor states’ external debt burden and perpetuating state control of agricultural distribution.
According to USDA, the successor states’ demand for agricultural imports diminished by 27 percent in 1993 compared to 1992 levels. In commenting on a draft of this report, USDA said that Russian agricultural imports are down sharply largely due to a reduction in demand, particularly of grain, which makes up the bulk of imports. The drop in FSU agricultural imports is expected to continue and, according to USDA, is a sign that economic reforms are working, at least to some degree. USDA noted that high levels of Soviet agricultural imports in the 1980s were used to prop up an overexpanded and inefficient livestock sector. Declines in that sector have freed up domestic grain supplies (production of which has remained steady with the exception of 1991’s drought-affected crop) and lowered the FSU demand for imports. In addition, USDA said, price liberalization in several republics has led to lower waste, increased incentives, and more rational use of inputs.
In commenting on a draft of our report, USDA indicated that food assistance has adversely affected reform in the FSU. USDA said that although widespread dislocation in the FSU food supply never occurred, the West continued to provide assistance (credits and food aid) to the FSU, which accepted it to the likely detriment of economic reforms (increased debt and continued state control of agricultural marketing).
According to a USDA analysis, the high level of FSU grain imports in recent years—sustained by credits, credit guarantees, and food donations—allowed FSU authorities to delay increases in farm prices and to maintain the centralized grain distribution and marketing system to a large degree. For example, the average price of wheat imported by the FSU in 1992-93 was $125 a ton (excluding freight), while Russian farmers received less than $40 a ton. The state provided massive subsidies that lowered the price of the imported grain relative to domestic farm prices. Thus, instead of paying Russian farmers higher prices, which would have improved farm incomes, increased farm sales, and reduced waste, the state chose instead to purchase large amounts of foreign grain. When commercial financing was no longer available, the state requested concessional loans and donations to help maintain these imports. Obtaining imports on concessional terms, which meant deferring immediate repayment, was easier for state planners than allowing market forces to set domestic grain prices. The commercial credits and credit guarantees also adversely affected the reform process, because scarce hard currency needed to support domestic reform was instead required to service the increased external debt.
According to the USDA analysis, fewer credits and credit guarantees are likely to be provided in the future because of increased western concerns about FSU creditworthiness, particularly Russia’s, and expectations of decreased FSU demand for imports. USDA also believes that concessional financing and humanitarian assistance may still be necessary for some of the successor states in the short- to medium-term future.
Conclusions
The GSM statute prohibits USDA from extending credit guarantees to any country the Secretary determines cannot service the debt. However, the statute does not provide any guidance as to what is an acceptable level of risk in evaluating whether countries can adequately service proposed GSM debt. In addition, the statute does not limit the amount of GSM guarantees that can be provided each year to very risky countries—either individually or in aggregate. Consequently, USDA can allocate large amounts of guarantees to high-risk countries and even to countries that are judged not creditworthy, making the GSM-102 portfolio subject to a potentially high rate of default. CCC fees that included a risk-based component could help to offset the cost of loan defaults. However, under the 1990 Farm Bill, CCC is currently restricted from charging an origination fee for any GSM-102 credit guarantee in excess of an amount equal to 1 percent of the amount of credit extended under the transaction. Given this restriction, CCC would be considerably limited in the size of the fee that it could charge to take account of country risk should it decide to do so.
Most, if not all, of the FSU successor states are not creditworthy and all should be considered at least high risk from a creditworthiness perspective. The GSM-102 portfolio is exposed to a high level of risk of default because a large portion of the portfolio includes FSU debt and because of Russia’s lack of creditworthiness. Since the GSM-102 program provides financing with terms to only 3 years, providing additional GSM-102 guarantees to the successor states could further add to their liquidity problems during the financing period. The GSM-103 program could help successor states to finance food imports without adding to their difficult liquidity problems during the next few years, since repayments can be stretched out over 10 years. However, GSM-103 is not a good program to use if the successor states are uncreditworthy and is questionable if they are high risk, since longer repayment terms may also increase risk. Consequently, both GSM programs may not be an appropriate vehicle at this time for financing additional U.S. agricultural exports to Russia or other successor states. Alternatives to the GSM programs include various food aid programs. Of course, the latter include substantial concessionality and at times total grant aid, and thus would result in higher budgetary outlays.
There may be important economic and national security reasons for the United States to further assist the financing of food exports to Russia and one or more successor states. For example, if circumstances develop where the Russian government cannot obtain the hard currency to pay for food imports needed to balance Russia’s food needs, the country’s political stability could be threatened. The latter could disrupt Russia’s progress toward establishing democratic institutions and a free market economy and, in turn, significantly affect U.S. defense expenditures.
Matters for Congressional Consideration
If Congress concludes that Russia or other successor states are too risky to receive additional GSM-102 credit guarantees, and if Congress concludes that continued agricultural exports to the states serve important U.S. economic and national security interests, Congress may wish to consider authorizing additional foreign aid to finance the sale of the food. Such additional authorization of foreign aid to finance food exports to the states could then be weighed against other priorities for U.S. foreign economic assistance.
To reduce future exposure of the GSM-102 portfolio to default, Congress may wish to consider limiting the total amount of credit guarantees that can be issued each year to high-risk countries and the amount that can be provided to any single high-risk country. In addition, Congress may wish to consider (1) amending the statutory provision that precludes the Commodity Credit Corporation from charging a fee in excess of 1 percent of the amount of the credit guarantee and (2) requiring CCC to include a risk-based charge as part of its overall fee for GSM credit guarantees.
Agency Comments and Our Evaluation
We requested comments on a draft of this report from USDA. It provided general comments that are reproduced in appendix III. Most of these comments are discussed in this chapter; some are addressed directly in other chapters of this report, as indicated in marginal references. USDA also provided a separate set of technical and editorial comments that were incorporated into the previous chapters where appropriate.
Overall Comments
Our draft report was reviewed by a number of offices in USDA that concluded the draft was well researched and presented. According to USDA, the report accurately presented USDA source materials, the GSM-102/103 decisionmaking process, and the interviews we conducted pursuant to the investigation.
USDA expressed principal disagreements with our methodology for assessing the costs and benefits of the GSM-102 credit guarantees provided to the FSU and its successor states, particularly our use of the secondary market as a means of estimating losses. USDA also disagreed with our draft conclusion that all of the 15 successor states were not creditworthy.
Use of the Secondary Market to Estimate Default Costs
As discussed in chapter 5, we considered secondary market valuations of FSU loans in evaluating the creditworthiness of the FSU and its successor states, and we used the secondary market’s valuation of FSU loans to estimate expected losses on the value of outstanding GSM-102 loans to the FSU. According to USDA, there are too few participants in the secondary market and they can easily manipulate the market. Thus, USDA said, none of its reviewing offices believe the secondary market is a reliable indicator of the value of FSU debt paper. In addition, USDA said that the attributes of debt traded in the secondary market might be materially different from the GSM debt. We disagree with USDA on these points.
As discussed in a previous GAO report, we concluded that the secondary market provides the best available risk-based valuations of sovereign debt of countries that do not have well developed financial systems. More specifically, we found that the secondary market provides the same characteristics of many functioning securities markets. Generally speaking, the market is (1) self-correcting; (2) appears to have minimal outside forces operating on it other than the risk-reward evaluation by a large number of participants—banks, insurance companies, pension funds, and private investors; (3) has substantial volume and appears to be efficient; (4) and has a wide variety of instruments with varying lengths of maturity and other characteristics.
USDA seems to ignore the emergence of the secondary market as a major financial market. According to a World Bank 1992 study, the total volume of secondary market trading rose from an estimated $4 billion in 1985 to $100 billion in 1990. The bank noted that as a result of improved market efficiencies, secondary market prices were increasingly used as indicators of a country’s creditworthiness and as benchmarks in debt reductions/restructuring packages. According to more recent studies, secondary market trading increased enormously in 1992 and 1993, reaching volumes of $773.7 billion and $1.9 trillion, respectively. As concerns FSU or Russian paper, it has become one of the more popularly traded assets in the secondary market. According to the Emerging Markets Traders Association, Russian debt ranked eighth on trading volume out of 42 countries for which the group reported data for 1993. Trading volume in Russian debt increased more than 35-fold—from $678 million in 1992 to $24.7 billion in 1993.
Although we feel confident about our use of secondary market data to estimate expected losses on the value of outstanding GSM-102 loans to the FSU, we developed a second method for estimating such losses after receiving USDA’s comments on our draft report. As discussed in chapter 5, we used Euromoney country risk ratings to estimate the risk of default and, in turn, the expected cost of GSM-102 loans to the FSU and Russia as of June 1994. The results were very similar to the results obtained from our use of the secondary market prices and, thus, increase our confidence in the secondary market method.
As noted previously, USDA also commented that the attributes of secondary market debt may be materially different from the GSM debt. USDA did not cite any examples of how the debt might be materially different or explain how such differences might affect the use of secondary market prices to reflect the risk of default on GSM-102 loans. GSM debt is different in the sense that the U.S. government guarantees most, if not all, of the principal in the event that the borrower defaults on its loans. Since lending banks are guaranteed that USDA will repay at least 98 percent of defaulted GSM-102 loans, lenders to Russia would presumably have little reason to trade the debt on the secondary market when Russia defaults on such debt. However, this characteristic of GSM-102 loans does not reflect on the likelihood of whether Russia will default on its payoff of GSM-102 debt.
Creditworthiness
In its comments on our draft report, USDA said that it disagreed with our conclusion that all of the FSU successor states are not creditworthy. USDA indicated that between August 1993 and February 1994 it had found Ukraine, Uzbekistan, and Turkmenistan to be creditworthy; it noted that each of these states had been found qualified to receive modest amounts of GSM-102 credits during that period. (USDA also said that each program was driven by market development objectives.) However, in May 1994 USDA officials advised us that the office responsible for preparing creditworthy assessments had rated Ukraine as not creditworthy during the previous year and still considered Ukraine as uncreditworthy. Thus, USDA had made credit guarantees available to Ukraine in fiscal year 1994 even though its own analysis indicated the country was uncreditworthy.
In addition to Ukraine, other successor states identified by USDA as still not creditworthy in May 1994 were Russia, Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, and Tajikistan. Thus, USDA classified 9 of the 15 successor states as not creditworthy. Creditworthy successor states at that time, according to USDA, included the three Baltic states (Estonia, Latvia, and Lithuania) as well as Kazakhstan, Turkmenistan, and Uzbekistan.
Creditworthiness evaluations involve a multidimensional analysis of a variety of factors and some subjective judgment. As a result, evaluations by different parties may not always fully agree. This is best evidenced in chapter 5, where we compare the country risk evaluations of three different private rating services (see table 5.8). Consequently, it is not necessarily surprising that USDA did not agree with the conclusion in our draft report that all of the successor states were not creditworthy. After considering USDA’s comment, we decided to restate our conclusion as follows: Most, if not all, FSU successor states are not creditworthy and all should be considered at least high risk from a creditworthiness perspective.
We believe our restated conclusion is well supported by the information and analyses presented in the report, especially by the material presented in chapters 4 and 5. The most recent summary information in support of our restated conclusion is found in tables 5.10 and table 5.11. As table 5.10 shows, in March 1994 both Euromoney and Institutional Investor rated nearly all of the FSU successor states among the bottom one-third of all the countries they rated on creditworthiness, and most of the rated successor states were in the bottom quartile. As table 5.11 shows, Euromoney’s actual risk ratings for the 15 successor states for March 1994 imply risks of default ranging between about 66 percent (Latvia) to about 82 percent (Armenia). We believe it is reasonable to characterize countries that rank among the bottom one-third of all countries on country risk and that have an implied risk of default equal to or greater than 66 percent as being either uncreditworthy or at least highly risky from a creditworthiness perspective.
Additionality Issue
As discussed in chapter 2, whether and to what extent GSM-102 exports lower domestic commodity support program costs depends importantly on the availability of alternative markets for the exports. This is referred to as the “additionality” issue. For example, if one assumes that in the absence of the GSM-102 credit guaranteed exports to the FSU and its successor states alternative export markets would not exist, this is characterized as 100-percent program additionality. If one assumes that 75 percent of the commodities could be exported to other countries, the program additionality would be only 25 percent.
In chapter 2, we raised questions about USDA’s approach, which largely relied on an assumption of 100-percent additionality. We expressed the view that analyses should consider a range of additionality levels. In commenting on our draft report, USDA provided mixed views on this issue. On the one hand, USDA agreed that one should consider a range of additionalities. In fact, USDA cited a third estimate, provided to the Secretary of Agriculture in February 1993, in which two levels of additionality were assumed for $2 billion in credits to the FSU—50-percent additionality and 100-percent additionality. According to USDA, the estimate indicated deficiency payment savings of $0.7 billion to $1.4 billion. However, USDA further assumed a loan concessionality of 60 percent, or $1.2 billion, to cover loan defaults, freight costs, EEP bonus payments, and other unspecified factors. USDA estimated that the net budget costs of $2 billion in credits (after subtracting estimated deficiency payment savings from the loan concessionality cost) would vary between a cost of $500 million to a savings of $200 million. Although USDA’s comments cited a third estimate that included a 50-percent additionality case, USDA went on to say that an assumption of 100-percent additionality with regard to the FSU and its successor states seemed reasonable. In support of the latter view, USDA said it is likely that without the GSM-102 coverage the FSU would not have been able to purchase substantial quantities of U.S. commodities. This is illustrated, USDA said, by the sharp decline in U.S. exports to the FSU after it was suspended from the program. In addition, USDA said there were few alternative opportunities for the use of the credit guarantees in other countries.
In chapter 2, we questioned USDA’s assumption that alternative export markets would not be available on the grounds that special features of the GSM-102 program made available to the FSU and its successor states should be attractive if offered to other importing nations. One special feature we noted was USDA coverage of 100 percent of the value of the commodities. However, in commenting on our draft report, USDA indicated that it does not like and would be unlikely to provide 100-percent coverage. In addition, USDA said, our analysis presumes there are creditworthy countries in the world marketplace that are interested in participating in a large-scale GSM-102 program. According to USDA, during fiscal years 1991 and 1992 principal markets not targeted for the GSM-102 program included China, Cuba, Iran, Libya, and Japan. With the exception of China and Japan, USDA said, there were few alternative markets that could exert the same amount of influence on U.S. domestic prices as that exerted by the FSU market; and both China and Japan purchased heavily from the United States during the time period without credit guarantees.
We do not believe that 100-percent additionality is the most reasonable assumption. As discussed in chapter 2, we estimated that the combination of freight cost financing and EEP bonus payments, alone, made the additionality attributable to the GSM program for the FSU and its successor states in fiscal years 1991 and 1992 equal at most to about 77 percent. In addition, the issue of what assumed additionality level is most appropriate does not depend simply on whether the FSU could have purchased the U.S. commodities without the GSM-102 guarantees. If the United States had not provided the guarantees, other exporting countries might have provided credits or credit guarantees to assist the FSU. Doing so could have reduced those countries’ exports to third countries, enabling the United States to increase its exports to the latter. Even if the United States had not provided the guarantees and other countries had not provided additional guarantees, it is not obvious that the 100-percent additionality case should be applied. A decline in sales to the FSU would tend to lead to reduced prices on world markets, which, in turn, could result in increased demand.
We have not advocated providing 100-percent loan guarantee coverage. However, we believe that if one wants to consider to what extent credit guarantees to the FSU and its successor states increased U.S. exports, a fair comparison should consider what would have happened if comparable terms had been offered to other countries. We are not aware of any single country with a market comparable to that of the FSU that would have been interested in GSM-102 credit guarantees. However, it is possible that a number of countries with smaller markets might have been interested in credit guarantees or additional guarantees if the terms were comparable to those extended to the FSU. Any guarantees or increase in guarantees provided to other countries would, of course, further detract from the realism of a 100-percent additionality assumption.
Views on Matters for Congressional Consideration
USDA did not express any view regarding our suggestions in chapter 5 on how Congress could reduce future exposure of the GSM-102 portfolio to default. A USDA official told us that it had been examining the issue but had not yet reached any conclusions.
USDA approved of our suggestion that if Congress concludes the United States needs to ensure continued U.S. agricultural exports to Russia and/or other successor states but decides additional GSM-102 guarantees are not appropriate at this time, it may want to consider authorizing additional foreign aid money to finance export sales. USDA said that ongoing agricultural exports to the FSU are essential to the American farm community and to U.S. geopolitical interests and provide needed foodstuffs to a market of enormous potential.
We agree that the American farm community may benefit from ongoing exports to the FSU. We also agree that broader U.S. interests may be served by U.S. agricultural exports to the successor states but do not believe that such exports automatically advance such interests. For example, the United States has favored economic reforms in the FSU that promote development of a free market economy. Yet, as USDA itself noted in commenting on our draft report, western assistance (credits and food aid) to the FSU has probably had a detrimental impact on FSU economic reforms—including increased debt and continued state control of agricultural marketing. | Why GAO Did This Study
Pursuant to a congressional request, GAO reviewed the creditworthiness of the former Soviet Union (FSU) and its successor states in the context of the Department of Agriculture's (USDA) Office of the General Sales Manager (GSM)-102 Export Credit Guarantee Program, focusing on: (1) the countries' general economic and political environment; (2) the relationship between the Soviet debt crisis and Soviet economic reform and creditworthiness; (3) how assessments of creditworthiness and market considerations affect USDA decisions on providing credit guarantees; and (4) the GSM-102 portfolio's exposure to default by FSU and its successor states.
What GAO Found
GAO found that: (1) most of the FSU successor states are not creditworthy because of their heavy debt burdens and severe liquidity problems; (2) as a block, FSU and its successor states hold the largest portion of program credits; (3) USDA extended $5 billion in credit guarantees to FSU, Russia, and Ukraine despite their high risk because it believed the states could service the debt; (4) the poor creditworthiness of FSU countries heavily exposes the GSM-102 loan portfolio to default; (5) FSU and Russian loan defaults have already occurred and the U.S. government has expended over $1 billion to settle loan guarantee claims; (6) the countries' continued ability to import food due to credit extensions may have hampered their agricultural reforms and food production and prolonged the existence of state-owned processors; (7) FSU debt arrearages continue to increase despite efforts to defer and reschedule debt and foreign economic assistance; (8) the countries' debt burden has grown out of their increased reliance on imports and credit programs, particularly for food; (9) Russia's debt burden increased significantly when it accepted responsibility for all FSU debt; (10) much of the foreign assistance provided to Russia in 1992 was contingent on Russia's implementation of additional economic reforms; and (11) the successor states are expected to experience further economic decline despite some progress in market reforms. |
gao_GGD-98-153 | gao_GGD-98-153_0 | Introduction
Through rules known as capital requirements, financial regulators set minimum levels for capital that banks and bank holding companies,securities broker-dealers, futures commission merchants (FCM), and life insurance companies hold as a cushion against unexpected losses that can result from risks faced by these firms in their business activities. Regulatory capital requirements are one tool financial regulators use to help protect customers from losses and ensure the stability of financial markets. In addition to serving these general regulatory purposes, capital requirements can affect the way the financial system functions by influencing how market participants allocate capital resources and conduct business.
Capital requirements can also have competitive effects within the financial services industry, to the extent that capital requirements differ among competing financial institutions and firms. Today, regulators in all sectors have either adopted or are considering changes in capital requirements that compared to earlier approaches, more quickly and precisely respond to changes that occur in a firm’s actual risk profile. In addition, some regulators are considering more fundamental changes that would simplify capital regulation. Changes in capital regulation are being undertaken or considered in a highly dynamic financial services industry that is itself undergoing change in response to competitive pressures as well as advances in telecommunications, computer technology, and financial analysis—all of which have led to new and innovative financial products and services. This report is provided to help Members of Congress and others understand current regulatory capital requirements, developments in those requirements, issues these developments raise, and financial firms’ approaches to risk measurement.
Background
Banks, securities broker-dealers, FCMs, and life insurance companies increase the efficiency of the economy by facilitating the flow of savings to investment and providing other financial services. As discussed in chapter 3 of this report, these financial firms use capital to manage the trade-off between risks and returns in order to increase the firms’ efficiency and maximize the returns for stockholders. The capital that a financial firm holds serves a number of firm-specific purposes—chiefly to provide long-term funding of operations and to protect the firm by serving as a cushion to absorb unexpected losses.
For public purposes, regulators of banks, securities broker-dealers, FCMs, and life insurance companies promulgate capital regulations that set mandatory minimum levels for capital that the firms are to hold as a cushion against unexpected losses. The specific public purposes differ somewhat among the regulators. Generally speaking, however, the financial regulators seek to protect customers of the financial firms from losses and help ensure the stability of financial markets and systems that they regulate. Chapter 2 of this report discusses the capital standards set for banks, securities broker-dealers, FCMs, and life insurance companies and the more specific purposes of each of the financial regulators in setting regulatory capital requirements.
Traditionally, banks, securities broker-dealers and FCMs, and life insurance companies were engaged in mostly different businesses and faced different risks. After the stock market crash of 1929, Congress created a regulatory and industry structure that separated banking, investment banking, and other financial institutions. Banks were restricted to taking deposits, making loans, and other activities closely related to banking.
Broker-dealers (the SEC-regulated portion of investment banks) were restricted to brokering securities, underwriting new security issues, and trading securities. Insurance companies continued to be regulated by the states, and their activities were limited to insurance sales and underwriting. As discussed later in this chapter, significant changes have occurred in the financial services industry within the past two decades. As a result, firms that were in traditionally separate sectors are more directly competing with one another; providing similar products; and, hence, facing similar risks in their activities.
Capital Is the Source of Funding That Cushions a Firm Against Losses That Arise From Risks
Capital is most generally defined as the long-term source of funding for a firm that earns a return for investors (debt and equity) and cushions the firm against losses. Such funding is contributed largely by (1) equity stockholders in anticipation of profits and (2) the firm’s own returns in the form of retained earnings. In some instances, long-term debt is also considered capital.
Losses cushioned by capital arise from risks that firms face in their business activities. In our work, we found no definitive list of risk categories applicable to all firms covered in our review. For example, the Federal Reserve uses a list of six risk categories, and OCC delineates nine. A group of leading individuals from firms and regulators developed what they termed Generally Accepted Risk Principles (GARP), which lists six risk categories. Most of the financial firms we spoke with told us they use four categories of risk; some said they use as few as three. The listings of risks we reviewed covered much the same causes of possible loss, but they varied in how risks were grouped and in the nomenclature used. This report generally focuses on the following six categories, because regulators and the representatives of financial firms we interviewed identified them as the risks of greatest concern.
Credit risk is the potential for financial loss resulting from the failure of a borrower or counterparty to perform on an obligation. Credit risk may arise from either an inability or unwillingness to perform as required by a loan, a bond, an interest rate swap, or any other financial contract. All financial firms face credit risk. For example, banks face credit risks in loans and bonds, insurance companies face credit risks in corporate and municipal bonds, and securities broker-dealers and FCMs face credit risks if other firms that they deal with do not meet their contractual obligations.
Market risk is the potential for financial losses due to the increase or decrease in the value or price of an asset resulting from broad movements in prices, such as interest rates, commodity prices, stock prices, or the relative value of currencies (foreign exchange). Because all financial firms hold assets, all financial firms face market risks. However, they may not all face all types of market risks.
Liquidity Risk is the potential for financial losses due to the inability of a firm to meet its obligations on time because of an inability to liquidate assets or obtain adequate funding, such as might occur if most depositors or other creditors were to withdraw their funds from a firm. This is referred to as “funding liquidity risk.” Liquidity risk also refers to the potential that a firm cannot easily reverse negative financial positions or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions (“market liquidity risk”). Financial firms face liquidity risk inasmuch as the loss of revenues due to interruptions of cash inflows affects a firm’s ability to cover its liabilities as they come due.
Operational Risk is the potential for unexpected financial losses due to inadequate information systems, operational problems, breaches in internal controls, or fraud. Operational risk is associated with problems of accurately processing or settling transactions and taking or making deliveries on trades in exchange for cash, and with breakdowns in controls and risk limits. Individual operating problems are considered small-probability but potentially high-cost events for well-run firms. Operational risk includes many risks that are not easily quantified but control of which is crucial to the firm’s successful operation. Operational risk can be addressed through prudent management oversight of firm operations, including the establishment of internal controls. All firms face some type of operational risk.
Business/event risk is the potential for financial losses due to events not covered above, such as credit rating downgrades (which affect a firm’s access to funding); breaches of law or regulation (which may result in heavy penalties or other costs); or factors beyond the control of the firm, such as major shocks in the firm’s markets. Included in business/event risk is a shift in legal status or changes in regulations. All types of financial firms face business/event risk. Insurance/actuarial risk is the risk of financial losses that an insurance underwriter takes on in exchange for premiums, such as the risk of premature death. Although this risk is most commonly associated with insurance companies, it can exist in other firms. For example, banks are authorized to underwrite credit life insurance, which is subject to actuarial risk.
These risks can be discussed on a risk-by-risk basis, but the potential effect on a firm’s overall financial condition or risk profile cannot be obtained by summing the risks in each category, because risks interact in various ways. That is, the net potential loss from a combination of risks could be greater or less than the sum of potential losses from each individual risk, depending upon the economic relationship among the risks involved. The economic relationship among a firm’s risks depends on the correlation among prices of assets—that is, how the prices move in relation to one another—and the business strategies and holdings of the firm.
Because the traditional activities of banks, securities broker-dealers, FCMs, and life insurers differed, each of these types of financial firms once tended to have a correspondingly distinct type of risk profile. The predominant risk for banks was credit risk, for securities broker-dealers and FCMs it was market risk, and for life insurance companies it was insurance/actuarial risk. However, for a variety of reasons discussed later in this chapter, the activities and risks of large, diversified financial firms in the highly competitive financial services industry are becoming increasingly similar.
Various Agencies Are Responsible for Regulating the Capital of Banks, Securities Broker-Dealers, FCMs, and Life Insurers
The scope of authority and oversight practices of financial regulatory agencies vary in a number of ways. The activities of banks, bank holding companies, securities broker-dealers, FCMs, and life insurance companies are regulated and overseen by a number of different types of agencies and organizations. Bank holding companies are regulated by the Board of Governors of the Federal Reserve System (Federal Reserve Board), and banks are regulated on an individual institution basis by various federal and state agencies. Securities broker-dealers and FCMs are regulated by SEC and CFTC, respectively. State agencies and self-regulatory organizations (SRO) are also involved in supervising broker-dealers and FCMs. Life insurance companies are regulated and overseen by state regulatory agencies. No formal/statutory holding company regulatory oversight currently exists for securities firms, futures firms, or insurance companies in the United States at the federal level.
Authority of the Financial Regulatory Agencies Varies in Scope
Many of the largest financial legal entities are part of a holding company structure that generally has affiliates conducting business activities in the formerly more separate sectors of banking, life insurance, securities trading, and futures trading sectors. In this report, we often refer to these holding company structures as large, diversified firms.
The dominant form of banking structure in the United States is the holding company. A number of the larger bank holding companies have established nonbank subsidiaries that engage in securities underwriting and brokerage services, insurance sales, and futures trading, as well as other nonbanking activities permitted because they are deemed to be closely related to the business of banking and to produce a public benefit. Figure 1.1 is a simplified illustration of a hypothetical holding company with wholly owned banking and nonbanking subsidiaries and the regulators that oversee the various entities.
Many large U.S. securities broker-dealers, life insurers, and FCMs have also expanded their range of activities by establishing holding companies at the top of their corporate structures. When creating or acquiring affiliates, these other types of financial firms are not limited to creating or acquiring those that engage in activities related to their own. Banks are allowed to affiliate only with companies engaging in activities closely related to banking and must demonstrate some public benefit in creating or acquiring an affiliate, but other types of financial firms have no such limitations. Figure 1.2 shows a simplified structure of a hypothetical nonbank financial holding company with affiliates engaged in banking activities (through a thrift institution), securities and futures trading, and life insurance sales, among many other types of activities.
Bank Holding Companies Are Regulated on a Consolidated Basis; and Other Types of Regulated Entities on an Individual Basis
As summarized in table 1.1, the regulatory and oversight authorities of financial regulatory agencies differ. The Bank Holding Company Act of 1956 authorized the Federal Reserve Board to regulate bank holding companies on a consolidated basis. This gives the Federal Reserve Board regulatory and examination authority over all activities of the bank holding company. Affiliates that are banks are supervised by one or more of the federal banking agencies listed in table 1.1. Among other things, this means that capital standards apply at the holding company level and bank level. In addition, FDIC insures bank depositors and has authority to terminate deposit insurance for any FDIC-insured institution.
In contrast to the regulatory authority of the Federal Reserve Board, SEC and CFTC are authorized to regulate only those entities that themselves engage in activities involving securities and futures, respectively, and not the affiliates of those entities. Unlike banks, Congress has not passed legislation authorizing SEC or CFTC to supervise holding companies of securities broker-dealers or FCMs, respectively. However, SEC and CFTC risk assessment rules promulgated pursuant to the Market Reform Act of 1990 and The Futures Trading Practices Act of 1992, respectively, enable those agencies to collect from the regulated entity information about the activities and financial condition of its affiliates and parent firms to assess the risks they pose to the regulated entity’s financial and operational condition, including net capital, liquidity, and the ability to finance operations. These rules do not provide either agency with the legal regulatory authority to examine or set regulatory capital requirements over the parent or affiliates of the SEC-registered broker-dealer or the CFTC-registered FCM, although they do give both agencies a supervisory role with respect to those affiliates.
State insurance departments are authorized to regulate insurance activities and those firms that sell insurance products. They are not authorized to regulate or examine parents or affiliates of the regulated entities.
Capital Regulation Is One of Many Tools Financial Regulators Use to Ensure Stability of the Financial System and Markets
Through capital standards and other regulations, regulators of banks, securities broker-dealers, FCMs, and life insurers seek to help ensure public confidence in financial institutions and markets by protecting customers’ funds and limiting losses to various deposit and guarantee funds that further protect customers’ funds. As for securities broker-dealers and FCMs, regulators seek to ensure that registered entities will have a pool of liquid assets available on a daily basis to meet their obligations to customers and other market participants. Capital regulation—requirements that firms hold minimum amounts of capital—is one tool in a kit of many that financial regulators use to help ensure stability and public confidence in the financial system and markets. It is supported by supervision—the monitoring, inspecting, and examining of regulated entities—and enforcement. In some cases, it is also supported by segregation of customer funds or by insurance protection of those funds.
The oversight activities of financial regulators are similar in some respects and different in others. Each regulator is to promulgate rules (including regulatory capital requirements), monitor firms’ financial condition, perform examinations, and take appropriate actions to enforce relevant regulations and statutes. The oversight activities of SEC and CFTC differ most significantly from those of bank regulators and state insurance regulators because of differing purposes of the regulation. SEC and CFTC, with the assistance of SROs, protect investors and ensure the integrity of the securities and futures markets; bank regulators and state insurance regulators ensure the safety and soundness of entities they regulate.
Supervision of regulated entities in the banking, securities, futures, and life insurance sectors includes off-site monitoring of financial reports and on-site examination visits. In banking, supervisors are to track the financial condition of their banks on a continuing basis and between on-site examinations. A principal off-site technique banking supervisors use for monitoring the activities and financial condition of their banks is the review of detailed financial statements (Call Reports) that the banks submit quarterly. In addition, the banking regulators use computerized monitoring systems that use Call Report data to compute, for example, financial ratios, growth trends, and peer group comparisons. Banking supervisors also meet with bank senior management from time to time to discuss the current condition of the bank and plans the bank has for the future. Monitoring is a complement to on-site examinations, which lie at the heart of the supervisory process. The purpose of bank on-site examinations is for examiners to evaluate the bank’s overall risk exposure with particular emphasis on what is known as its CAMELS—the adequacy of its capital, and asset quality, the quality of its management and internal control procedures, the strength of its earnings, the adequacy of its liquidity, and its sensitivity to market risk. Banks are usually examined at least once during each 12-month period and more frequently if they have serious problems. In addition, well-capitalized banks with total assets of less than $250 million can be examined on an 18-month cycle.
In contrast to regulation of banks, regulation of the securities and futures markets is a combination of direct regulation and oversight by federal agencies and indirect regulation and oversight by SROs (e.g., the New York Stock Exchange, the National Association of Securities Dealers). Securities broker-dealers and FCMs are required to become members of an SRO and, as SRO members, must comply with SRO rules and regulations. SRO rules and regulations are promulgated under the SEC or CFTC standards and requirements. Securities SRO rules and regulations are often more stringent than SEC rules and require SEC’s approval. SROs must register with SEC or CFTC and are subject to SEC or CFTC oversight. SROs establish rules to govern member conduct and trading, set qualifications for certain market participants, monitor daily trading activity, examine their members’ financial health and compliance with rules, and investigate alleged violations of those rules and securities and futures laws. SEC oversees the regulatory and supervisory activities of the securities industry’s SROs. CFTC oversees the compliance activities of the futures industry’s SROs, which include the U.S. commodity exchanges and the National Futures Association. Both SEC and CFTC also develop, implement, interpret, and enforce statutes and regulations to protect customer funds, prevent trading and sales practice abuses, and ensure the financial integrity of firms holding customer funds. Additionally, SEC and CFTC conduct direct audits of clearing organizations and firms handling customer money to ensure compliance with the capital and segregation rules.
In contrast to banking, securities, and futures regulation, regulation of the insurance industry is primarily a state, not federal, responsibility. In general, state legislatures set the rules under which insurance companies are to operate, including capital standards; and state insurance regulators are to monitor the health and solvency of the regulated insurance companies. To help coordinate their activities, state insurance regulators have established a central structure—the National Association of Insurance Commissioners (NAIC), an organization whose members are the heads of the insurance departments of 50 states, the District of Columbia, and 4 U.S. territories and possessions. NAIC’s basic purpose is to encourage consistency and cooperation among the various states and territories as they individually regulate the insurance industry. To that end, NAIC promulgates model insurance laws and regulations for state consideration and provides a framework for multistate examinations of insurance companies.
State regulators use a number of basic methods to assess the financial strength of insurance companies, including reviewing and analyzing annual financial statements, doing periodic on-site financial examinations, and monitoring key financial ratios. Supervision of life insurers is the responsibility of insurance departments in each state, with the primary responsibility residing with the “domiciliary” regulator, that is, the regulator in the state where the company is domiciled. The domiciliary regulator is responsible for conducting periodic on-site examinations and for reviewing the required annual and quarterly financial reports. Examiners monitor the financial health of the insurer, along with compliance with rules and regulations, and look for evidence of any unsafe business practices. Regulators in states where the company is licensed and operating, other than the domiciliary state, may participate in on-site examinations with the domiciliary state if they choose. These examinations are called zone examinations. In most states, the typical interval between on-site examinations is 3 to 5 years unless regulators have reason to believe problems exist that could affect the company’s viability.
Financial regulators may take both informal supervisory and/or formal enforcement actions to ensure that regulated entities undertake corrective steps for identified problems. In banking, such informal actions may include a request that a bank adopt a board resolution or agree to the provisions of a memorandum of understanding to address the problems. If necessary, financial regulators may take formal enforcement actions to compel the management and directors of troubled entities to address problems. Formal enforcement actions in banking include written agreements, cease and desist orders, prompt corrective action directives, termination of deposit insurance, revocation of a bank charter, and closing of the bank. Other actions include assessing fines, such as civil money penalties; and removing an officer or director from office and permanently barring him or her from the banking industry.
SEC and CFTC have the authority to take supervisory and enforcement actions against the entities they regulate. Their enforcement tools include court injunctions; temporary restraining orders; and various administrative proceedings and sanctions, such as assessment of civil monetary penalties, disgorgement orders, censure, suspension and revocation of registration, and cease and desist orders.
Additionally, SEC staff provide informal regulation of broker-dealers through no-action letters. In the no-action process, a broker-dealer requests interpretive relief from SEC staff regarding certain transactions or activities. In a typical no-action letter, the staff states that it will not recommend that SEC take enforcement action if the requesting party executes transactions or engages in activities in the limited context stated by the staff. In SEC’s view, limitations in no-action letters related to risk-management issues balance regulatory flexibility with the need to avoid undue risk. The letters are made available to the public and informally address regulatory concerns that by necessity are not detailed in securities statutes.
As with other financial regulators, insurance regulators have an array of informal and formal actions that can be employed to correct problems identified through the supervisory process. These actions often begin with informal discussions of regulatory concerns with company officials. If problems are not resolved promptly, regulators have a number of more formal tools available, including administrative actions; court orders and injunctions; and culminating with the power to take regulatory control of a company, remove the officers, and either sell or liquidate it. Many of the authorities held by state insurance regulators are enhanced when the Risk-Based Capital Insurers Model Act has been adopted in a particular state. When adopted, this act gives the state’s chief insurance regulator the explicit authority to take regulatory action based on an insurer’s risk-based capital level.
The Financial Services Industry Is Changing in Response to a Variety of Developments
Since the late 1970s, significant changes have been occurring in the financial services industry due to a number of market shocks, combined with advances in financial theory and information technology. The interaction of these factors has led to significant expansion of such financial products as derivatives and asset-backed securities, improved methods to measure and manage risks, increased competition in financial services, and mergers of financial firms within and across financial sectors. In addition, these factors have encouraged some firms to offer risk management services to other financial and nonfinancial firms. This risk management has often been based on the use of derivatives and asset-backed securities to repackage risks and returns.
The creation and growth in derivatives, huge increases in trading activities, and the development of new secondary markets, along with the creation of asset-backed securities, have fundamentally changed the financial landscape. Derivatives and asset-backed securities have permitted financial market participants to better manage market risk by transferring the risk from entities less willing to bear it to those more willing to do so. Derivatives have stimulated trading generally because they gave financial market participants a lower cost way to hedge investments or to take speculative positions. In addition, derivatives products markets have grown rapidly. For example, the International Swaps and Derivatives Association estimates that as of December 31, 1996, the combined notional amount of globally outstanding interest rate swaps and other over-the-counter (OTC) derivatives had grown to $25.45 trillion from $3.45 trillion on December 31, 1990.
Advances in information technology and financial theory have helped reduce various barriers to competition. The increased speed and lower costs in communicating and transmitting data over large geographical distances eliminated such distance as an obstacle to competition. Moreover, new financial theories and faster computers helped financial firms handle large amounts of data at low cost and analyze the risks and returns created by new financial products. Swaps and other derivatives, which have been growing rapidly, are an example of such technology- and theory-dependent products. Since the tools and skills underlying them were not unique to any one sector of the financial services industry, no one sector has a monopoly on their use; thus, the list of major derivatives dealers includes banks, securities firms, and insurance companies.
Regulators also have acted in ways to promote greater competition in the financial services industry. For example, the Federal Reserve Board has approved a number of additional activities for banks to offer, including providing investment advice, underwriting insurance related to the extension of credit, tax planning and preparation, data processing, and operating a credit bureau or collection agency. The Federal Reserve Board also approved bond and stock underwriting powers for Section 20 subsidiaries of bank holding companies. Effective in March 1997, the Federal Reserve Board enhanced these powers when it increased from 10 to 25 percent the share of total revenues a bank holding company’s Section 20 subsidiary may derive from corporate equity and debt underwriting. On the basis of these decisions, banks have increasingly acquired or created securities broker-dealer affiliates or subsidiaries. OCC has amended its regulations to permit subsidiaries of national banks to engage in activities that OCC determines—on a case-by-case application basis—to be “part of or incidental to the business of banking.”
In addition to banks entering underwriting, an area associated with securities firms, a number of large securities firms have entered a traditional province of banks: commercial loans to corporate borrowers. Recently, securities firms have made and traded such loans, which are commonly linked with securities underwriting. Such services enable the firm to provide a customer with a full range of its financing needs. In a number of instances, banks and securities firms have joined together to provide such loan and security facilities for customers.
Increasing competition also affects insurance companies and insurance products. During the past several years, life insurance companies increasingly have moved away from traditional whole life and term insurance products and have focused instead on asset growth or investment products such as variable annuities. These products compete with stocks and bonds, retirement vehicles offered by banks, and stock mutual funds and are often sold by financial planners and securities brokers.
As part of this competition, large, diversified financial firms are increasingly operating in what once were separate banking, insurance, and securities sectors, as discussed earlier. Banks have acquired investment banks; and many types of firms have acquired thrifts, which are similar to banks but can be owned by anyone. For example, a number of insurance companies have applied for thrift licenses. Securities firms have acquired firms that have enabled them to engage in banking activities. For example, in 1997, Merrill Lynch & Company, Inc., and the Travelers Group, Inc., which includes insurance companies and securities firms, both received federal thrift charters. In addition, insurance companies have acquired securities firms. For example, the Travelers Group acquired Salomon Brothers, Inc. (primarily a securities trading firm) in November 1997, and it already owned Smith Barney and Company (primarily a retail brokerage firm). In addition, in April 1998, the Travelers Group and Citicorp announced their intention to merge and create a new entity that is to be called Citigroup. This would be the biggest corporate merger in history; however, there are questions about the implications of current banking laws for the merger. If the laws are not changed, it is possible the new entity would have to divest itself of certain operations, either in insurance or banking.
Objectives, Scope, and Methodology
To help Congress and others better understand current regulatory capital requirements, developments in those requirements, and regulatory issues these developments raise, the objectives of this report are to describe, for the banking, securities, futures, and life insurance sectors of the financial services industry, (1) regulatory views of the purpose of capital and current regulatory requirements; (2) the approaches of some large, diversified financial firms to risk measurement and capital allocation; and (3) issues in capital regulation and initiatives being considered for changes to regulatory capital requirements.
To achieve these objectives, we interviewed officials from financial regulators, including OCC, the Federal Reserve Board, the Federal Reserve Bank of New York, FDIC, SEC, CFTC, and the Office of Thrift Supervision; and the Departments of Insurance for New York and Illinois; academics and consultants who are considered experts in the financial rating agencies’ analysts, including A.M. Best, Standard and Poor’s, and Moody’s Investors Service; officials of SROs, including the Chicago Board of Trade, the Chicago Board of Trade Clearing Corporation, the Chicago Mercantile Exchange, the National Futures Association, the New York Stock Exchange, and the National Association of Securities Dealers; officials of trade and industry associations, including the American Academy of Actuaries, the American Bankers Association, the American Council on Life Insurance, the Independent Bankers Association of America, the Institute of International Finance, NAIC, the New York Clearing House Association, and the Securities Industry Association; and officials of 16 large, diversified firms in the commercial banking, securities, futures, and insurance industries (see app. V for a listing of these firms).
In addition, we reviewed U.S. government, international organization, trade association, academic, industry, and private firm documents, including regulations, annual and other published reports, papers and articles, industry journals, and information available at various sites on the world wide web.
To determine the development of risk measurement and capital allocation systems in firms, we interviewed and obtained information from a number of large, diversified firms in the commercial banking, securities, futures, and insurance sectors (see app. V for a listing of these firms). We did not test the adequacy of any of the risk measurement and capital allocation systems discussed in this report. In selecting firms for this review, on recommendations from SEC, we chose securities firms that were part of the Derivatives Policy Group (DPG). We chose commercial banks that appeared likely to be required to meet the market risk capital requirements that took effect on January 1, 1998, and life insurance companies that have been involved in the development of risk-based capital standards for that industry. The securities firms we visited are large holding companies and include both SEC-registered broker-dealers and CFTC-registered FCMs. We interviewed officials who could speak about risk management and capital allocation systems for the consolidated financial firm.
We developed and used a set of common questions in our discussions with these firms. In these interviews, we obtained information about the following: the most important risks faced by these firms, their risk measurement and capital allocation systems and methodologies, their internal risk management structures and uses of internal risk measurement information, the impact of current capital requirements on their operations, and possible future directions in capital regulation.
We did our work in Washington, D.C.; New York; and Chicago between November 1996 and April 1998 in accordance with generally accepted government auditing standards.
We obtained written comments on a draft of this report from OCC, the Federal Reserve Board, FDIC, SEC, and CFTC. These comments are reprinted in appendixes VI, VII, VIII, IX, and X. The agencies generally believed the report was comprehensive and balanced. In their comments, OCC, FDIC, and SEC expand on a number of points made in the report pertaining to their industries. On June 2, 1998, the Washington Counsel of NAIC provided us with oral comments in which he characterized the report as reasonable. These organizations also provided technical comments, which have been incorporated where appropriate.
Regulatory Capital Requirements Differ by Type of Regulated Entity
Just as the financial regulators serve differing statutory purposes, they differ in their views on the purpose of regulatory capital. Bank capital standards are focused on maintaining the safety and soundness of banks, and capital is calculated on a going-concern basis. Capital standards for securities broker-dealers and FCMs are focused on protecting customers in the event of a broker-dealer or FCM failure and are calculated on a liquidation basis. Capital standards for life insurers are to help limit failures and protect claimants, and capital is calculated on a going-concern basis.
In addition to reflecting differences in the regulators’ views on the purpose of capital, regulatory capital requirements also reflect differences in what have been historically the dominant risks associated with the regulated entities. The bank capital requirements that apply to all banks have emphasized credit risk, because credit risk has long been the most important and predominant risk for banks, which traditionally invested the largest part of their funds in bank loans. Recently, regulators added a market risk capital requirement for banks engaged in trading activities that create market risks. Capital requirements for securities broker-dealers and FCMs traditionally focused on liquidity and market risks and the effect of changing market prices on the value of their assets, in keeping with the dominant risk in their activities. Capital requirements for life insurers focus on traditional risks, such as actuarial risk which is unique to the insurance industry, as well as other risks related to their assets and liabilities.
Current capital requirements reflect a variety of efforts to relate capital requirements to risks inherent in firms’ activities. These include efforts to modify current rules to better reflect actual risks in firm activities as well as efforts to take advantage of new risk measurement techniques that are more sensitive to correlation among prices of assets and can more precisely measure risks. Industry representatives with whom we spoke, who generally favor changing regulatory capital requirements to more precisely account for risks in their activities, see progress in recent changes made to regulatory capital requirements. However, they also have concerns and see needs for additional improvement.
The Purpose of Regulatory Capital Differs by Type of Regulated Entity
Although the agencies that oversee banks, securities broker-dealers, FCMs, and life insurance companies all seek to protect customers and ensure the smooth functioning of the markets they regulate, their statutory purposes differ in various ways. The differences in regulatory purpose are reflected in the regulators’ views of the purpose of regulatory capital.
Bank Capital Standards Focus on Safety and Soundness of Banks, and Capital Is Calculated on a Going-Concern Basis
As shown in table 2.1, the regulatory purpose of agencies that oversee banks is to help ensure the safety and soundness of the banking and payments systems and minimize losses to the deposit insurance fund; and the Federal Reserve Board also has responsibility to help ensure the stability of the U.S. financial system. In this regard, regulators view capital as performing several important functions. It is there to absorb losses, thereby allowing banks to continue to operate as going concerns during periods when operating losses or other adverse financial results are being experienced. Capital also helps to promote public confidence, restrict excessive asset growth, and provide protection to depositors and the Bank Insurance Fund administered by FDIC. Depositors who are protected by deposit insurance may be less careful in their choice of banks. This behavior may, in turn, permit insured banks to operate less conservatively than they would without deposit insurance to shield them from depositors’ concerns about the banks’ safety and soundness. The consequences of both the banks’ and depositors’ behavior is called “moral hazard.” Regulators use capital requirements to mitigate the moral hazard that arises from deposit insurance protection.
In addition, bank regulatory capital requirements are a measure regulators can use as a starting point in regularly assessing the financial condition of banks. A reduction in capital that causes the institution to approach the minimum required ratio is seen as a symptom warning regulators that an institution’s financial health is threatened and that regulatory intervention may be needed to protect depositors and other parties. Under the Prompt Corrective Action guidelines enacted as part of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991, banking supervisors are required to increase intervention as a bank’s capital ratio falls through various predetermined ratios before the bank runs out of capital. This intervention is meant to reduce the likelihood of bank failures, reduce the cost of failures that occur, and thus deter or minimize systemic risk.
Minimum capital requirements also help protect the Bank Insurance Fund, which guarantees depositors will receive par value up to $100,000 per depositor per insured institution if regulators close a bank and FDIC must liquidate it. For deposits exceeding the $100,000 limit, FDIC is to provide reimbursements based on the value of the assets sold when the bank is closed and liquidated. Bank compliance with capital requirements protects the Bank Insurance Fund because higher capital requirements reduce the likelihood of bank failure and thus reduce the losses that FDIC is likely to incur in covering guaranteed deposits from failed banks. FDICIA imposed a requirement that a bank whose tangible equity falls to 2 percent (or less) of assets is deemed to be “critically undercapitalized” and generally is to be placed in conservatorship or receivership within 90 days of becoming critically undercapitalized. Although bank regulation, including capital standards, attempts to reduce the likelihood of failures, it is not meant to forestall all failures.
Bank capital standards are focused on safety and soundness, and regulatory capital is calculated on a going-concern basis—that is, with the assumption that the bank will continue operating. In this way, bank capital regulation is focused on the continued operation of the banking system and is meant to ensure that payment services and the provision of loans to all customers, both large and small, will not be disrupted.
Capital Standards for Broker-Dealers and FCMs Focus on Protecting Customers and Their Markets and Are Calculated on a Liquidation Basis
As shown in table 2.1, the primary regulatory purposes of the SEC and CFTC capital standards are to ensure that broker-dealers and FCMs will have a pool of liquid assets available on a daily basis to meet their obligations to customers and other market participants. This protection of customers does not shield customers from investment losses if the market value of the investment is less than the purchase price, and the protection is consistent with SEC’s and CFTC’s overall concern with ensuring the integrity of the securities and futures markets, respectively. These agencies’ regulatory capital requirements are designed to provide assurance that broker-dealers and FCMs can fulfill their obligations to customers and other market participants in the event a broker-dealer or FCM is closed. The amounts owed to customers are based on credit balances (or cash) in customer accounts and the market value of customers’ securities and futures positions at the broker-dealer or FCM.
Minimum capital requirements also help protect the Securities Investor Protection Corporation (SIPC), a nonprofit membership corporation created by Congress under the Securities Investor Protection Act of 1970. Within certain limits, SIPC will return to customers cash and securities held at liquidated SIPC member broker-dealers. SIPC protects each customer up to $500,000 for claims for cash and securities, although claims for cash are limited to $100,000 per customer. The cash limit historically has tracked the bank-insured deposits amount. SIPC does not protect investors from declines in the market value of their securities. Successful functioning of the net capital rule results in the orderly liquidation of a failing firm; prevents the need for federal court intervention; and reduces strains on SIPC’s resources, including the SIPC membership assessment fund from which customers are paid.
Capital Standards for Life Insurers Are to Help Limit Failures and Protect Claimants
Generally speaking, state insurance regulators are to monitor the health and solvency of regulated life insurers in order to protect claimants. For state insurance regulators, the purposes of capital are similar to the purposes of capital for bank regulators. State insurance regulators impose capital requirements to try to limit life insurance company failures and thus help ensure the long-run viability of these insurance companies so that they can meet policyholders’ claims in the future. However, state regulators regulate only insurance companies and not the insurance groups or the often large, diversified financial firms that own insurance companies. Generally, however, insurance regulators do have the responsibility of approving mergers or acquisitions of insurance companies.
Regulatory Capital Requirements Differ by Industry Sector, Reflecting Differences in Regulatory Purposes and Dominant Activities Within Sectors
Current regulatory capital requirements for the banking, securities, futures, and life insurance sectors vary in how they take into account the risks of regulated entities in determining minimum capital standards. The capital requirements differ, although the rules for securities broker-dealers and FCMs are similar. These differences reflect differing regulatory purposes, as discussed earlier, or differences in the types of activities and risks that are, or have been, dominant for the various types of regulated entities. To one degree or another, all of the regulators have adopted some form of “risk-based” capital regulation. However, due to differences in their purposes or in the historic risks faced by the regulated entities, the actual methods for assessing risks and determining capital levels continue to differ across regulators.
Bank Regulatory Capital Requirements Emphasize Credit Risk and Certain Market Risks
Initial bank risk-based capital requirements primarily emphasized credit risk, reflecting the predominance of lending activities by banks. In 1988, regulators in the United States and other countries who were part of the Basle Committee on Banking Supervision agreed to the Basle Accord, an internationally developed capital standards framework for internationally active banks. The accord’s requirements were initiated in the United States in March 1990, with a 2-year phase-in period ending in full implementation in 1992. These requirements pertained primarily to credit risk; however, they were amended in 1996 to incorporate market risk requirements for specific types of assets that are often traded in internationally active banks. In addition to the risk-based requirements, U.S. banking regulators also have minimum leverage capital requirements. These leverage capital standards were established prior to—and have been retained even after the implementation of—the risk-based capital standards. Also, in 1991, FDICIA created a capital-based framework for bank oversight and enforcement based on the use of increasingly stringent forms of prompt corrective action as an institution’s leverage and risk-based capital ratios decline. (See app. I for a more detailed discussion of bank risk-based capital requirements.)
Credit Risk Standards Under the Basle Accord
The 1988 accord’s standards, which bank regulators and others describe as “risk-based,” require banks to hold capital to cushion against potential losses arising primarily from credit risk. Although the accord pertains to internationally active banks, U.S. banking regulators have required all U.S. banks and bank holding companies, since 1992, to hold capital equal to at least 8 percent of the total value of their on-balance sheet assets and off-balance sheet items, after adjusting this value by a measure of the relative risk (known as risk-weighting).
According to regulatory guidelines on capital adequacy, the final supervisory judgment of a bank’s capital adequacy may differ from the conclusions that might be drawn solely from the risk-based capital ratio. This is because the ratio does not incorporate other factors that can affect a bank’s financial condition, such as interest rate exposure, liquidity risks, the quality of loans and investments, and management’s overall ability to monitor and control financial and operating risks. The guidelines establish minimum ratios of capital to risk-weighted assets; banks are generally expected to operate well above these minimum ratios.
Banks are required to meet a total risk-based capital requirement equal to 8 percent of risk-weighted assets. At a minimum, a bank’s capital must consist of core capital, also called tier 1 capital, of at least 4 percent of risk-weighted assets. Core capital includes common stockholders’ equity, noncumulative perpetual preferred stock, and minority equity investments in consolidated subsidiaries. The remainder of a bank’s total capital can also consist of supplementary capital, known as tier 2 capital. This can include items such as general loan and lease loss allowances, cumulative preferred stock, certain hybrid (debt/equity) instruments, and subordinated debt with a maturity of 5 years or more. The regulation limits the amount of various items included in tier 1 and tier 2 capital. For example, the amount of supplementary (tier 2) capital that is recognized for purposes of the risk-based capital calculation cannot exceed 100 percent of tier 1 capital.
These capital standards were developed because regulators in the United States and in other countries wanted to address more adequately the credit risks posed by certain bank activities. By working with various countries to develop an international standard, regulators also attempted to encourage banks to strengthen their capital positions while minimizing any competitive inequality that might arise if requirements differed across countries. According to the original 1987 consultative paper issued by the Basle Committee, the target ratio of 8 percent capital to risk-adjusted assets represented a higher level of capital than banks in various countries were generally holding at the time. Recognizing this, the 1988 Basle Accord allowed 4 years for banks to come into full compliance with the required amount.
The risk-weights for credit risk attempt to account for the relative riskiness of a transaction on the basis of its broad characteristics, such as a type of obligor (e.g., government vs. bank vs. a private sector borrower) and whether the transaction is on- or off-balance sheet. Assets with a relatively low likelihood of default are assigned lower risk-weights than assets thought to have a higher likelihood of default. Although the amount at risk is often associated with changing asset prices, the credit risk calculation does not use market price information to evaluate risks, except in the case of derivatives contracts. Because bank loans, which dominate credit risks, generally are not traded, market price information cannot be regularly observed and thus used to evaluate risk. Instead, the risk-weights for credit risk are broad categories arrived at through consensus among members of the Basle Committee.
Under the credit risk rules, the adjustments of asset values to account for the relative riskiness of a counterparty involve multiplying the asset values by certain risk weights, which are percentages ranging from 0 to 100 percent. A zero risk-weight reflects little or no credit risk. For example, if a bank holds a claim on the U.S. Treasury, a Federal Reserve Bank, or the central government or central bank of another qualifyingOrganization for Economic Cooperation and Development (OECD) country, this asset is multiplied by a factor of 0 percent, which results in no capital being required against the credit risk from this transaction.
For an obligation owed by another commercial bank in an OECD country, a bank must multiply the amount of this obligation by 20 percent, which has the effect of requiring the bank to hold capital equal to 1.6 percent of the value of the claim on the other bank. Loans fully secured by a mortgage on a 1-4 family residential property carry a risk weight of 50 percent, thus requiring the bank to hold capital equal to 4 percent of the value of the mortgage. For an unsecured obligation owed by a private corporation or individual, such as a loan without collateral, a bank must multiply the amount of the unsecured obligation by 100 percent, which requires the bank to hold capital equal to a full 8 percent of the value of the unsecured obligation.
The U.S. regulations place all credit risks into one of four broad categories and treat each product in a given category as if it carries equal levels of credit risk—that is, the capital requirement for each asset in the category is based on the same percentage risk-weight. Although these risk-weightings are based primarily on the type of obligor, qualifying collateral (such as cash and government securities) and qualifying guarantees (including bank and government guarantees) are also recognized.
To adjust for credit risks created by financial positions not reported on the balance sheet, the regulations provide conversion factors to express off-balance sheet items as an equivalent on-balance sheet item, as well as rules for incorporating the credit risk of interest-rate, exchange-rate, and other off-balance sheet derivatives. These positions are converted into a credit equivalent amount, and then the standard loan risk-weight for the type of customer is applied. The risk-weight is applied according to the type of obligor, except that in the case of derivatives the maximum risk-weight is 50 percent.
Final Rule to Address Market Risk Adopted for Dealer Banks
In September 1996, U.S. bank regulators issued a final rule based on the Basle Committee’s January 1996 amendment to the Basle Accord designed to incorporate market risks into the risk-based capital standards. As applied by U.S. bank regulators, the purpose of the amendment was to ensure that banks with significant exposure to market risk maintain adequate capital to support that exposure. Because the market risk rule applies to assets that are commonly traded in public markets and marked to market, the risk calculations are based, in part, on measuring expected movements in prices and the risks in the current financial position of the institution.
U.S. rules apply to any bank or bank holding company whose trading activity equals 10 percent or more of its total assets or whose trading activity equals $1 billion or more. In addition, a bank regulator can include an institution that does not meet the criteria if deemed necessary for safety and soundness purposes or can exclude institutions that meet the applicability criteria. At the end of 1996, 17 banks and 17 bank holding companies met these criteria. The new rules became mandatory January 1, 1998, but banks could have begun implementing them as of January 1, 1997.
The final market risk rule requires that institutions adjust their risk-based capital ratio to take into account both the general market and specific risk of all “covered positions” both on- and off-balance sheet. The rule does not cover all market risks faced by banks. For example, interest rate risk on nontrading assets such as commercial loans and mortgages is not included.
The rule requires that banks use their own internal models to measure their daily “value-at-risk” (VAR) for covered positions. VAR reflects changes in prices; price volatility or variability; and correlation among the prices of financial assets (that is, the extent to which asset prices move together). A bank’s internal model may use any generally accepted VAR measurement technique, but the regulation requires the level of sophistication and accuracy of the model to be commensurate with the nature and size of the bank’s covered positions.
To adapt banks’ internal models for regulatory purposes, bank regulators developed minimum qualitative and quantitative requirements that all banks subject to the market risk standard are to use in calculating their VAR estimate for determining their risk-based capital ratio. The qualitative requirements reiterate the basic elements of sound risk management. For example, banks subject to the market risk capital requirements are required to have a risk control unit that reports directly to senior management and is independent of business trading units.
According to the final rule, the quantitative requirements are designed to ensure that an institution has adequate levels of capital and that capital charges are sufficiently consistent across institutions with similar exposures. These requirements call for each bank to use common parameters when using its internal model for generating its estimate of VAR. These common parameters include, among others: daily calculation; an assumed holding period of 10 days; a 99 percent confidence level; the use of empirically verified correlation between risk types; and the use of at least 1 year of historical data, with the data updated at least once every 3 months.
The total market risk charge is the sum of the general market and specific risk charges. The market risk charge starts from the estimate of VAR. Because the VAR models may not capture unusual market events, the general market risk charge is then the higher of the previous day’s VAR, or the average daily VAR over the last 60 business days multiplied by at least 3. The specific risk charge can be determined by a bank’s internal model if the model is approved by the regulator, or by calculations specified in the regulation if the model is not approved. The charge for specific risk is added to the general market risk amount to obtain the total market risk capital charge.
For banks subject to the market risk charge, the market risk regulation includes an additional tier of qualifying capital—tier 3. Tier 3 capital is unsecured subordinated debt that is fully paid up, has an original maturity of at least 2 years, and is redeemable before maturity only with approval by the regulator.
The final rule also requires banks to conduct periodic backtesting beginning in January 1999. More specifically, banks will be required to compare daily VAR estimates generated by internal models against actual daily trading results to determine how effectively the VAR measure identified the boundaries of losses, consistent with the predetermined statistical confidence level. The regulation will require bank regulators to use the backtesting results to adjust the multiplication factor (multiplier) used to determine the bank capital requirement.
Capital Leverage Ratio Supplements Credit and Market Risk Measures
In addition to the risk-based capital requirements, U.S. banks are subject to a minimum leverage ratio, which is a requirement that tier 1 capital be equal to a certain percentage of total assets, regardless of the type or riskiness of the assets. Leverage ratios have been part of bank regulatory requirements since the 1980s. They were continued after the introduction of risk-based capital requirements, as a cushion against risks not explicitly covered in the risk-based capital requirements, such as operational weaknesses in internal policies, systems, and controls. According to FDIC, leverage standards also help to restrict excessive asset growth and minimize potential moral hazards by ensuring that any asset growth is funded by a commensurate amount of owners’ equity.
Since the early 1990s, banks have been specifically required to hold tier 1 capital equalling between 3 and 5 percent of their total assets, depending on a regulatory assessment of the strength of their management and controls. The amount of capital held by a bank is not to be less than this leverage ratio. However, if the risk-based capital calculation yields a higher capital requirement, the higher amount is the minimum level required.
Capital Levels of Regulated Banks Currently Tend to Exceed Required Minimum Requirements
In 1997, the risk-based capital ratios for the six large banks we spoke with all exceeded the minimum 8 percent total requirement, as shown in table 2.2. In addition, the ratios for tier 1 capital, which is considered the strongest form of capital, exceeded the 4 percent minimum requirement at all of the banks. According to regulatory officials, the risk-based capital ratios of almost all U.S. banks exceed the minimum required levels. According to FDIC, fewer than 10 percent of U.S. banks actually report risk-based capital figures by completing the Call Report Risk-Based Capital forms. When calculating their capital ratios, banks are permitted to perform a simple test that, once passed, negates the need to do the more complicated calculations. Over 90 percent of banks pass this de minimis test, and an algorithm approximates their risk-based capital level.
Bank regulators told us they believe prompt corrective action has been influential in keeping bank capital levels up. In addition, several years of record-breaking earnings have facilitated financial firms’ capital accumulation.
Securities and Futures Regulatory Capital Requirements Emphasize Liquid Capital to Meet Customer Obligations in the Event of Firm Failure
As discussed earlier, regulators of securities broker-dealers and FCMs seek to protect customers of the firms they oversee as well as to protect the integrity of their markets. The regulatory foundation of customer protection efforts includes capital requirements in the form of net capital rules and customer protection and funds segregation rules, which are designed to protect the regulated entity’s customers and thereby other market participants from monetary losses and delays that can occur when the regulated entity fails. The objective of protecting investors does not extend to the protection of the going concern of broker-dealers or FCMs, nor does it extend to the protection of investors’ holdings against market losses. These rules, respectively, require SEC-registered broker-dealers and CFTC-registered FCMs—the regulated entities—to continually maintain sufficient liquid assets to protect the interest of customers and other market participants if the firm ceases doing business, and as applicable, to keep customer assets segregated from the regulated entity’s assets. The rules focus specifically on the regulated entity’s financial condition and activities. As noted above, SEC and CFTC do not have statutory authority to regulate holding companies of broker-dealers or FCMs. The financial condition of holding companies or other affiliates of the regulated entity are generally not included in computation of net capital or compliance with the customer segregation rule.
SEC and CFTC Use Similar Methods to Calculate Capital
SEC and CFTC calculate broker-dealer and FCM liquid capital, respectively, in a similar manner. However, their capital requirements, which are based on either ratios of capital to assets or capital to liabilities of the firm, are calculated differently.
SEC’s Net Capital Rule
Capital standards for brokers and dealers based upon liquidity have been in effect since 1934 when the Securities Exchange Act was adopted. According to SEC, it adopted the SEC Uniform Net Capital Rule in 1975 in response to congressional concerns arising from the unprecedented financial and operational crisis in the securities industry from 1967 to 1970. It is a conservative liquidity-based capital standard that requires broker-dealers to maintain a minimum level of liquid capital sufficient to promptly satisfy all of its obligations to customers and other market participants, and to provide a cushion of liquid assets to cover potential market, credit, and other risks. The rule focuses generally on the registered broker-dealer; therefore, the assets and liabilities of a related entity (e.g., an affiliate or parent) of the broker-dealer are generally not taken into account in calculation of net capital.
Net Capital Requirements: With certain exceptions, the net capital rule requires a registered broker-dealer to maintain the greater of an absolute minimum dollar amount of net capital depending on the nature of the broker-dealer’s business, or a specified minimum ratio of net capital to either its liabilities or its customer-related receivables.
Under the SEC regulations, a broker-dealer must satisfy a minimum net capital ratio based either on a calculated ratio of capital to indebtedness (liabilities) or capital to customer-related receivables. Under the basic (or aggregate indebtedness) method, the capital a broker-dealer is required to maintain must be the greater of $250,000 or 6-2/3 percent of aggregate indebtedness (generally all the liabilities and/or obligations of the broker-dealer). The basic method is generally used by smaller broker-dealers. Under the alternative method, a broker-dealer is required to maintain capital equal to the greater of $250,000 or 2 percent of the total amount of customer-related receivables (money owed by customers and certain other market participants to the broker-dealer). If the broker-dealer is also registered as an FCM with CFTC under the Commodity Exchange Act (CEA) (i.e., dually-registered), it must maintain capital equal to the greater of SEC’s minimum requirements, as described above; or 4 percent of the customer funds (money owed to the customers by the FCM) that the broker-dealer is required to segregate pursuant to the act and regulations thereunder. The alternative method tends to be used by larger broker-dealers.
The basic and alternative methods are intended to allow a firm to increase its customer business only to the extent that the firm’s net capital can support such an increase.
Computing Net Capital: The process of computing a broker-dealer’s regulatory net capital involves separating its liquid and illiquid assets. Liquid assets are assets that can be converted easily into cash with relatively little loss of value. Assets that are considered illiquid are given no value when net capital is computed (a 100 percent capital charge). Only liquid assets count in the calculation of net capital, because a broker-dealer must have sufficient capital to close its business within a short time frame and have sufficient liquid assets to meet its liabilities, including those of customers.
To begin computing net capital, U.S. Generally Accepted Accounting Principles (GAAP) equity must be determined by subtracting the broker-dealer’s GAAP liabilities from its GAAP assets. Certain subordinated liabilities are added back to GAAP equity because the net capital rule allows them to count toward capital, subject to certain conditions. Deductions are taken from GAAP equity for illiquid assets, such as the value of exchange seats and fixed assets. Unsecured receivables are also deducted from GAAP equity. The net capital rule further requires prescribed percentage deductions from GAAP equity, called “haircuts.” Haircuts provide a capital cushion to reflect an expectation about possible losses on proprietary securities and financial instruments held by a broker-dealer resulting from adverse events. The amount of the haircut on a position is a function of, among other things, the position’s market risk liquidity. A haircut is taken on a broker-dealer’s proprietary position because the proceeds received from selling assets during a liquidation depend on the liquidity and market risk of the assets. Less liquid assets and assets with greater price volatility are more likely to take longer to sell and to be sold at a loss. Thus, the less liquid the position, the greater the haircut on the position. Haircuts generally recognize limited correlation among prices that can affect the actual values received when assets are liquidated. The final figure, after all adjustments are made, is referred to as net (or liquid) capital. This figure is then compared to the minimum requirement to determine capital compliance. See appendix II for greater discussion of the SEC net capital rule.
CFTC’s Net Capital Rule
Liquid capital for FCMs is generally calculated in the same way that SEC calculates a broker-dealer’s liquid capital. That is, CFTC generally makes similar liquidity (illiquid assets deductions) and risk (haircuts for trading and investment positions) adjustments to GAAP net worth as does SEC in determining the amount of liquid capital. (See app. II for more detail on the calculation.)
CFTC’s capital requirements, like SEC’s, are based on the firms’ business activities and apply only to the registered FCMs. However, unlike SEC’s, CFTC’s requirement is based on the amount of required segregated customer funds, (subject to certain adjustments), rather than aggregate indebtedness or customer-related receivables. The amount of required segregated funds is based primarily on margin requirements for the commodity contracts held by the FCM’s customers. Margin requirements are set by each exchange for each commodity contract traded on the exchange and represent the customers’ guarantee of performance. The amount of margin per commodity varies depending on the market value of the contract and volatility of the price of the underlying commodity. The amount of segregated funds on deposit is determined primarily by the Standard Portfolio Analysis of Risk (SPAN) margining system, a VAR based statistical model designed to evaluate the total risk in a portfolio of related futures and options positions. Therefore, the CFTC’s capital requirements are, in large measure, risk-based. In addition, the deductions or haircuts for proprietary positions in futures or commodity option positions are applied to the margin requirement calculated under SPAN. All funds held by FCMs but owed to customers are required to be segregated from the firm’s funds and treated as belonging to customers.
Under CFTC’s net capital rule (Rule 1.17), FCMs must maintain adjusted net capital in an amount that is no less than the greater of (a) a prescribed minimum fixed-dollar amount of $250,000; (b) a variable minimum amount of 4 percent of customer funds required to be segregated, subject to certain adjustments; (c) the amount of adjusted net capital required by a registered futures association of which it is a member; or (d) if the FCM is also a registered broker-dealer, which is known as being “dually-registered,” the amount required under SEC’s net capital rule.
Under CFTC’s capital rule, an FCM calculates adjusted net capital as the amount by which current assets (cash and other assets that are reasonably expected to be realized as cash in a year) exceed its adjusted liabilities (the FCM’s total liabilities minus certain subordinated liabilities) and various regulatory charges or adjustments—such as percentage reductions in the market value of certain proprietary positions and undermargined customer accounts.
Adjusted net capital is intended to provide a cushion for market and credit risks and to give a firm with customer accounts time to transfer accounts and liquidate the accounts of the defaulting customers in an orderly manner.
Capital Levels of Regulated Firms Currently Tend to Exceed the Regulatory Minimum Requirement
Some regulators and firm representatives told us that because a broker-dealer must cease conducting a securities business if its net capital falls below the minimum requirement, broker-dealers generally maintain capital greater than the minimum requirement (a.k.a. excess capital). As shown in table 2.3, the amount of excess net capital held by the five large securities firms in our study, which are all dually-registered as FCMs, ranged from $974 million to $1.845 billion. Some of the firm representatives we interviewed stated that one reason they held such large amounts of excess capital is that their counterparties required them to do so in order to be willing to conduct business with them.
Early Warning Capital Triggers
In addition to the minimum base requirements, the regulatory net capital rules and the rules of the various SROs establish early warning capital levels that exceed the minimum requirement. These capital triggers allow regulators and SROs to identify at early stages broker-dealers and FCMs that are experiencing financial difficulties and to take corrective actions to protect customers and the marketplace. Broker-dealers and FCMs are required to promptly notify their regulators when early warning violations occur. SROs are required to notify SEC and CFTC and place restrictions on the activities of regulated entities whose net capital falls to the early warning levels. For example, under the SEC net capital rule, a broker-dealer that uses the alternative method of calculating net capital may not withdraw equity capital in any form to pay shareholders if its net capital is less than 5 percent of its customer-related receivables.
When an FCM’s adjusted net capital falls below its early warning level, which is generally 150 percent of the minimum net capital amount, it must promptly notify CFTC. In addition, CFTC requires FCMs to report to CFTC when a series of events, on a net basis, causes a 20 percent or greater reduction in their net capital.
As soon as a broker-dealer’s or FCM’s net capital amount falls below the minimum net capital level, the firm must immediately cease conducting business and it must either demonstrate that it has come back into compliance with net capital requirements or liquidate its operations. Closing a broker-dealer or FCM before insolvency makes the firm a viable merger candidate because of its residual value and generally allows the regulated entity’s customers and other market participants to be fully compensated when the firm is liquidated.
The SEC Net Capital Rule Amendment Relates Capital Charges More Closely to Risks in Listed Options
After a 2-year test period using the Options Clearing Corporation’s Theoretical Intermarket Margining System (TIMS), SEC amended its net capital rule in early 1997 to allow broker-dealers to use theoretical option pricing models (i.e., statistical models) to calculate required capital charges for exchange-traded (i.e., listed) equity, index, and currency options and their related hedged positions. At this time, the only approved vendor and options pricing model is the Options Clearing Corporation and its TIMS. According to SEC, this methodology will relate capital charges (haircuts) on these instruments more closely to the market risk inherent in these broker-dealer options positions. This methodology permits the risk calculations for listed options to reflect market prices, price volatility, and correlation among asset prices.
According to the regulations, this methodology is a two-step process. In the first step, third-party source models and vendors approved by a designated examining authority (i.e., an SRO) are to be used to estimate the potential gain and loss on the individual portfolios of the broker-dealers. In the second step, such approved vendors are to provide, for a fee, a service by which the broker-dealer may download the results generated by the option pricing models to allow the broker-dealers to then compute the required haircut for their individual portfolios. (See app. II for greater discussion of the salient features of the methodology.) Adoption of this methodology is the first time SEC has formally permitted the use of statistical models, which reflect price volatility and correlation, for setting regulatory capital requirements. The effective date of the amendment was September 1, 1997.
SEC, CFTC, and some SROs are exploring other possible approaches to more closely relate regulatory capital charges to the actual risks inherent in a firm’s operations. These initiatives are discussed in chapter 4.
SEC and CFTC Both Have Customer Segregation Rules to Protect Customer Assets
Both SEC and CFTC have rules that require the segregation of customer funds from firm funds. The SEC rule complements its net capital rule and is designed to prevent the misallocation or misuse of customer funds and securities. The CFTC rule also complements its net capital rule and provides for the safeguard of customer funds by requiring that they are segregated from the FCM’s own funds.
SEC’s Rule Is Designed to Safeguard Customer Assets
The SEC customer protection rule attempts to prevent the misallocation or misuse of customer funds and customer securities by broker-dealers. The rule applies to carrying firms because they hold customer assets. The rule, working in conjunction with SEC’s net capital rule, is designed to protect the regulated entity’s customers from monetary losses and delays that can occur when the regulated entity fails.
The customer protection rule has two parts: (1) possession or control of all customers’ fully paid and excess margin securities, and (2) special reserve bank account. The first part is to prevent broker-dealers from using customer securities to finance the firm’s proprietary activities, because all customers’ fully paid and excess margin securities must be in possession or control of the broker-dealer. The rule also requires the broker-dealer to maintain a system capable of tracking fully paid and excess margin securities daily. The broker-dealer is required to keep all customer fully-paid and excess margin securities segregated from the broker-dealer’s assets and maintained free of all claims or liens.
The second part of the customer protection rule involves customer cash kept at broker-dealers. When customer cash—the amount the firm owes customers (credits)—exceeds the amount customers owe the firm (debits), the broker-dealer must keep the difference in a special reserve bank account. The broker-dealer is to calculate the amount of the difference weekly using the reserve formula specified in the rule. If debits exceed credits, then no deposit is required. Broker-dealers may not use customer margin securities and cash to finance their operations or proprietary trading activities, except to finance other customers’ transactions. Also, creditors of a failed securities broker-dealer cannot claim assets from the broker-dealer’s customer property account.
CFTC’s Rule Is Designed to Safeguard Customer Funds
Section 4d(2) of the CEA and CFTC rules 1.20-1.30 provide for the safeguarding of customer funds by requiring such funds to be segregated from funds belonging to the FCM. Similar to the SEC rule, the CFTC segregation rule complements its net capital rule and exists to ensure that FCMs do not mix customer funds with theirs. In the event of a firm’s insolvency, under the rule, customer funds would be clearly identified as belonging to customers and would not be available to creditors of the firm.
The rule requires that funds belonging to an FCM’s customers be separately accounted for; segregated as belonging to commodity futures or option customers; and, when deposited with any bank, trust company, clearing organization, or another FCM, deposited under an account name that clearly identifies them as such and shows that they are segregated as required by the act and regulations. Also, each FCM is required to obtain and retain an acknowledgment from such bank, trust company, clearing organization, or FCM that it was informed that the customer funds deposited therein are those of commodity or option customers and are being held in accordance with the provisions of the act and regulations.
On a daily basis, FCMs are to compute the customer funds they are required to segregate on the basis of funds received from customers and the daily mark to market of customer positions. CFTC’s segregation rule requires that 100 percent of each customer’s funds be segregated from FCM’s funds. Unlike securities broker-dealers, FCMs generally cannot use one customer’s funds to finance another customer’s transactions. Thus, CFTC’s segregation requirements serve to provide protection through the deposit of all customer funds in segregated accounts.
Under SEC requirements, generally the net amount owed to customers is deposited in a bank account with the assumption that money receivable from the broker-dealer’s customers will be collected and paid to the customers having credit balances in their accounts, and any shortfall will be covered by the amount deposited in the bank account set up for customers. In addition, SIPC provides insurance protection for securities customers of broker-dealers in the event there are not enough funds on deposit in the bank account. The commodities industry does not have a customer account government-sponsored insurance program that protects against losses due to FCM insolvency.
Together, these customer protection rules are designed to protect (1) customers and other market participants of broker-dealers and FCMs from monetary losses and delays that can occur when the regulated broker-dealer or FCM fails by facilitating the orderly unwinding of a failed firm through liquidation; and (2) the integrity of the securities and futures markets.
Insurance Regulatory Requirements Are to Ensure the Long-Run Viability of Insurers So Policyholders’ Claims Can Be Honored
According to NAIC, capital requirements have been used as an important tool in limiting insolvency costs throughout the history of insurance regulation. Initially, states enacted statutes that required a specified minimum amount of capital and surplus for an insurance company to enter the business or to remain in the business. In some states, a single dollar amount of minimum capital and surplus was applicable to all insurers, regardless of the lines of insurance they wrote. This requirement was, in effect, an entrance requirement and generally did not vary with the size of the insurer or the risks that a company accepted. Thus, the minimum amount of required regulatory capital was unlikely to bear any relationship to the amount of risk on the books of any particular insurer.
In the latter half of the 20th century, according to NAIC, changes within the insurance industry itself and the economic environment in which it operated raised questions about the long-term viability of traditional insurance products and led insurers to offer new products. These products included variable annuities, variable life insurance, universal life insurance, single-premium deferred annuities, and guaranteed investment contracts. In NAIC’s view, competition among sellers of these products led life insurers to seek higher returns on their investment portfolios, and some of them sought such returns without sufficient consideration of the accompanying higher investment risks.
According to NAIC, an increase in the number and size of life insurer insolvencies from the 1960s through the 1980s led insurance regulators to believe they needed new tools to deal with changes in the industry resulting from new products and investment strategies. Because most states required a fixed minimum amount of capital regardless of the risks undertaken in a company’s insurance and investment operations, regulators believed that the traditional statutory insurance capital requirements that were in place were not sufficiently flexible.
By 1990, according to NAIC, a number of states were experimenting with risk-based capital formulas for regulatory purposes. NAIC became interested in risk-based capital in 1989. Its working group and advisory committee developed and tested the life risk-based capital formula, which was approved by NAIC in December 1992, to be used for the first time with the 1993 annual statement filed in March 1994.
Application of the Risk-Based Capital Requirement to Life Insurance Companies
According to NAIC, the risk-based capital formula is intended to determine the minimum amount of capital an insurer needs to avoid triggering regulatory action. The amount of capital required varies with the risk an insurer is assuming in its insurance and investment operations, as well as the normal risks to which all businesses are subject. The formula requires companies to hold minimum percentages of various assets and liabilities as capital, with these percentages based on the historical variability of the value of those assets and liabilities. Companies are free to make their own capitalization decisions commensurate with their own level of risk tolerance as long as the level is above the regulatory minimum risk-based capital thresholds. In NAIC’s view, its formula, in effect, imposes a minimum and uniform degree of risk aversion on all companies, but the formula also allows companies to operate freely at any given level above the minimum threshold.
The NAIC life insurance risk-based formula classifies all of the risks into four major categories: asset risk, insurance risk, interest rate risk, and all other business risk. The formula consists of a series of risk factors that are to be applied, usually as multipliers, to selected assets, liabilities, or other specific company financial data to establish the minimum capital needed to bear the risk arising from that item (similar to risk-weights in banking).
The asset risks are the risks of asset defaults and decreases in market value. For example, the risk factor for cash in the formula is 0.003, which indicates that an insurer must maintain capital equal to three-tenths of 1 percent of its cash holdings to absorb the risk of loss in cash in a bank failure. At the other end of the range, the multiplier for publicly traded common stocks is 0.300, which indicates a requirement for capital equal to 30 percent of the value of the stocks to protect against downturns in the market. The formula also includes charges for risks arising from the ownership of subsidiaries and affiliates, which vary with the nature of these entities. According to NAIC data, asset risks represent by far the largest proportion of risk among the four categories faced by the life insurance industry as a whole.
The insurance risks, which are unique to the insurance industry, are the risk of underpricing or unfavorable developments in mortality or morbidity. NAIC developed a series of risk factors to determine the capital necessary to absorb those risks that are to be applied to the net amount at risk (face amount less reserves) for life insurance. According to NAIC data, insurance risks are second in magnitude among the four categories of risks for the life insurance industry as a whole. However, for a large number of relatively small companies, this component is the dominant risk-based capital risk.
NAIC defines interest rate risk as the chance that a change in interest rates will result in an insurer not earning enough return on its investments to meet its interest obligations under its various insurance and annuity contracts. There is also a risk that changes in interest rates will spur disintermediation. The interest rate risk depends on how closely the assets and liabilities are matched in time. The formula is concerned with the risks related to annuity and pension business. Interest rate risk is third in magnitude among the four categories of risk for the life insurance industry as a whole.
The all-other-business-risk category encompasses risks not included elsewhere in the formula. In developing the risk-based capital formula, the working group recognized that all companies are subject to some risks, such as litigation, that are not contemplated in the parts of the formula used for other categories. However, the group concluded that the derivation of appropriate risk factors for most of these risks was not possible. Also, these risks vary from one company to another. Initially, NAIC decided that the only risk factor to be included in the risk-based capital formula would be a charge for the risk of guaranty fund assessments.
In addition, the risk-based capital formula also requires the performance of sensitivity tests to indicate how sensitive the formula is to changes in certain risk factors. These tests require the company to recalculate its risk-based capital using revised risk factors for certain specified risks and to report the difference between the basic calculations and the sensitivity tests. The purpose of the tests is to provide additional information for company management and regulators.
In NAIC’s view, the true impact of the risk-based capital system is in the Risk-Based Capital for Insurers Model Act (the Model Act), which NAIC developed and recommended that the states adopt. When adopted by a state, this act gives the state’s chief insurance regulator the authority to act on the results generated by the risk-based capital formula.
The act requires each insurer to file a report with NAIC; the commissioner of the insurer’s domiciliary state; and the commissioner of any state in which the insurer is licensed, if that state’s insurance commissioner requests it in writing. In their annual reports, insurers are also required to report their Authorized Control Level Risk-Based Capital, which is the total risk-based capital an insurer needs to hold to avoid being taken into conservatorship. (See app. III for additional information on life risk-based capital regulations.)
Industry Representatives See Progress in Recent Revisions to Capital Standards but Cite Problems With These and Other Capital Rules
The interviews we conducted with representatives of large, diversified firms; industry and rating agency officials; and regulators indicated generally positive views regarding revisions made to capital rules in banking and life insurance in the past several years to more precisely account for their actual risks (“risk-based” capital requirements). Representatives of banks and life insurers said that the changes were a step in the right direction. However, some of these representatives also said that further improvements were needed. Representatives of many of the large financial firms we interviewed generally said that the current requirements of the net capital rule did not correlate well with actual risks. Several of these representatives said that the net capital rule affected their decisions about where to conduct certain activities, such as derivatives.
Bank “Risk-Based” Capital Requirements Are Seen as a Regulatory Improvement but Also Raise Concerns About Accuracy of Risk Measurement
Bankers, regulators, and industry and rating agency officials we spoke with generally believe the current risk-based capital standards for banks are an improvement over the former requirements, but they still have limitations. For example, one regulator and one rating agency commented that although the current credit risk standards are crude, they are much better than the previous leverage ratio requirement, which did not vary with any differences in risk levels. In the view of the Chairman of the Federal Reserve Board, the risk-based capital accord of 1988 had shortcomings, but it was a genuine step forward at the time it was developed. In the view of the Comptroller of the Currency, the accord highlighted and ultimately helped reverse the slippage in bank capital levels worldwide. It focused attention on the whole concept of risk as a tool for both bank managers and bank supervisors and advanced the effectiveness of bank supervision worldwide. It gave official recognition to the growing importance of off-balance sheet activities in bank operations.
Some bank officials we spoke with commented that the current credit risk standards are nonetheless crude and imprecise. The primary reason for this is because the risk-weights are not adjusted for asset quality within each broad class of assets. Institute of International Finance officials said that the credit risk rules offered perverse incentives to banks to take on riskier loans in that they encourage banks to go up the yield curve in pursuit of a return on capital. This means that the bank is making more long-term loans, which tend to have higher interest rates than do short-term loans, thus simultaneously increasing interest rate risk and potential returns. The Federal Reserve Board Chairman noted a number of weaknesses in the risk-based capital structure for credit risk, including its inability to adjust weights for hedging, portfolio diversification, and management controls. Such adjustments are based on changing price volatility and correlation among prices. Another weakness noted by regulators is that the current risk-based structure does not consider all types of risk. Also, it is not flexible enough to respond to new market developments and products.
Officials of one bank told us that they do not manage to regulatory capital levels, because the credit risk-based capital requirements provide the wrong incentives by not distinguishing among the quality of products in the same asset class. Officials of two banks commented that they are not constrained by regulatory capital requirements, because assets can always be securitized so capital will not have to be held against them, or they can move to riskier assets in each credit risk category to obtain higher returns.
An official of another bank felt that the credit risk standards needed to be realigned to match current credit management practices in the industry.
Many bankers we spoke with generally felt the new market risk requirements, which are based on price volatility and correlation, were a step in the right direction and represented a recognition of standard risk management practices and principles. However, one bank told us that even this new requirement will require it to hold unrealistic levels of capital due to the multipliers imposed on the bank’s internal model.
One regulator commented that a limitation of the new market risk requirement is that it covers market risk in a bank’s trading book, but not in its banking book, which is where a lot of banks have exposure to market risk. Others commented that in practice, managers adjust their books daily, but the regulatory use of VAR is calculated with a 10-day holding period; thus, they believe it ignores this day-by-day adjustment process. Two rating agencies commented that even after the inclusion of market risk, other important risks to banks, such as operational and liquidity risks, are not quantified.
Regulatory Capital Requirements for Securities Firms Raise Concerns About Inefficiencies in These Entities
SEC believes the current haircut approach of the net capital rule has several advantages. First, it requires an amount of capital that will be sufficient as a provision against losses, even for unusual events. Second, it is an objective, although conservative, measurement of risk in positions that allows the regulator to compare firms to one another. Third, the current methodology enables examiners to readily determine whether a firm is properly calculating haircuts.
SEC believes there are also weaknesses associated with determining capital charges on the basis of fixed percentage haircuts. For example, the current method of calculating net capital by deducting fixed percentages from the market value of securities can allow only limited types of hedges without becoming unreasonably complicated. In this way, the rule does not account for historical price correlation between foreign securities and U.S. securities or between equity securities and debt securities. By failing to recognize offsets from these correlations between and within asset classes, the fixed percentage haircut method may cause firms with large, diverse portfolios to reserve capital that actually overcompensates for market risk.
Representatives of the securities firms, rating agencies, and industry association officials we spoke with generally felt that the current net capital rule’s requirements do not correlate well with the actual risks in the activities of firms. Industry officials told us that the current net capital rule does not deal well with hedging or other risk-reducing strategies, which are based on price volatility and correlation. Representatives of two firms commented that regulatory capital rules constrain their business decisions, because they require the firms to hold what they view as excessive capital for certain activities. Three firms told us that the net capital rule has an impact on where they do certain business activities, such as derivatives transactions, foreign exchange, and bridge financing. Some industry officials said they are forced to conduct these business activities in unregulated entities due to the high haircuts imposed by the net capital rule if a broker-dealer were to conduct these activities.Representatives of another firm said the regulatory structure drives the holding company structure, which they consider to be an inefficient and expensive business structure. Firm representatives told us they have businesses in many countries, and they are required to provide information to each country regulator. No authority regulates all of the activities of these firms; therefore, even though firms provide a lot of information to regulators, no regulator knows the condition of the entire firm. One rating agency commented that broker-dealers have shifted risks to other parts of the firm in response to net capital requirements.
Representatives of three futures SROs commented that the strengths of CFTC’s net capital rule are that it is easily understood, easily calculated, and easily verified by regulatory auditors. Weaknesses they saw in the rule were that (1) it applies only to funds of domestic customers on deposit with FCMs, so it misses noncustomers and foreign customers; (2) it misses coverage of some risks found in affiliates and internationally; (3) it creates incentives for FCMs to return excess margin funds to customers because such funds can increase an FCM’s segregation requirement and therefore its capital requirement; and (4) it does not deal well with the complexities of exotic instruments.
Life Insurance Risk-Based Capital Requirements Are Seen as a Step Forward, but Concerns Remain
Life insurance companies, rating agencies, insurance regulators, and insurance association officials we spoke with generally felt risk-based capital requirements were a step forward, but improvements were needed. Insurance regulators commented that the main strength of the requirements is that they permit regulators to close a failing company. Similarly, representatives of two firms said that an advantage of these requirements is that they provided regulators a tool they could use before a firm had to be closed by allowing for graduated regulatory action. Representatives of one firm said that the effect of the requirements was to get weaker companies to increase their capital levels. Representatives of another firm commented that the most important aspects of risk-based capital requirements are their objectivity (auditability) and completeness. Representatives of one rating agency commented that the insurance risk-based capital requirements have raised awareness of risk in the industry. Representatives of two rating agencies said they saw a favorable trend in capitalization after the insurance risk-based capital requirements were adopted. One regulator commented that the risk-based capital requirements act as a floor, and firms tend to hold more capital.
Life insurance industry officials whom we spoke with generally said that the current requirements do not cover all risks equally well and that some changes are needed. (See ch. 4 for initiatives under consideration.) These officials saw other limitations in the risk-based capital standards, including that the model is static, it is a lagging indicator, it does not address parent/affiliated company relationships, it has difficulty quantifying risks in new products, it does not deal well with diversification or with derivatives-based risks, it is not strong on interest rate risk, and it concentrates too much on credit risk. One regulator commented that because the risk-based capital formula does not address risks evenly, firms have an incentive to alter their business.
Capital Rules for Large, Diversified Firms Underscore Importance of These Firms’ Risk Measurement Practices
As discussed earlier in this chapter, regulators are increasingly using the results of risk measurement systems of large, diversified firms in calculations that determine regulatory capital requirements, thus attempting to better link capital with firms’ actual risk. Specifically, bank regulators use the market risk measures of large banks in setting the market risk component of risk-based capital. Also, SEC has recently allowed firms to use option pricing models to calculate some capital charges. Along with other options, SEC and CFTC are exploring possible further reliance upon the results of firms’ risk measurement systems in capital regulation. These explorations are described in chapter 4.
Current and possible future use of firms’ estimates of risk in regulatory determination of capital requirements makes the firms’ risk measurement practices an important element of capital regulation for legislative and regulatory policymakers to understand. Chapter 3 describes the approaches being used by some large, diversified firms to measure and manage risk.
Some Large, Diversified Financial Firms Are Measuring Risks With Mathematical Models
Unlike regulators, whose focus on the capital levels of firms is driven by regulatory public purposes, firms analyze their use of capital to help ensure that they can achieve their business objective—maximizing the value of the capital provided by stockholders. To do this they must measure and manage risks, returns, and capital.
A number of large, diversified financial firms are measuring some risks and returns on a firmwide basis. Among other things, these measurements are designed to enable them to determine the trade-offs among risks and returns that would best enable them to maximize the value of equity capital. Individual risks are often measured by means of a variety of complex quantitative and statistical models that use computer programs to analyze financial data and determine risks. Although different firms use similar overall financial approaches when considering the risks they face, the actual statistical models that the firms use are firm-specific—that is, each firm bases its model on its own data and financial activities. The extent to which large, diversified firms measure and model each risk varies according to the risks inherent in their business activities and their ability to quantify those risks. Market and insurance/actuarial risks tend to be most amenable to the use of statistical models. Credit and liquidity risks also have quantifiable elements. Operational and business/event risks are very difficult to quantify and are not as readily measured; however, some firms are developing measurements of these risks.
Regulators and firms alike recognize that models have limitations; however, they believe that using such models can improve a firm’s ability to understand, measure, and manage risks, thereby decreasing the likelihood of some unanticipated risks and losses. Under widely circulated general risk management principles, which were developed in conjunction with financial regulators, firmwide measurement of risk is an integral part of a unified, firmwide risk management system. Such principles include setting limits on trading or other activities and determining capital requirements for business lines on the basis of the measured risks, whenever possible.
Financial Firms Use Capital to Help Manage the Trade-Off Between Return and Risk
Modern finance theory suggests that capital provided by investors enables financial firms to fund operations, earn profits, and grow. It also provides firms with a cushion to absorb unexpected losses. Firms need to attract capital from investors by offering a mix of returns and risks that is competitive with the mix available in other investments.
Both equity investors (stockholders) and bondholders consider return and risk in their decisions to invest in firms. To attract and keep equity capital investors, a firm tries to manage the trade-off between increasing returns and decreasing risks. The trade-off exists because increasing returns, at a given level of risk, generally increases stock values; increasing risks at a given level of return generally is viewed as lowering stock value.
Equity stockholders’ returns are based on the firm’s dividends and capital gains on the stock. A firm using a risky but successful strategy can increase stockholder returns as long as the costs of borrowed funds are less than the return to equity. In contrast, bondholders’ returns are based on interest paid by the firm and capital gains on its bonds. The returns to bondholders are limited, and a successful risky strategy does not increase bondholders’ returns.
Equity stockholders’ risks are the volatility of returns and, in the extreme case, losses in bankruptcy or liquidation when assets are sold to satisfy the claims of the firm’s bond and other debt holders. Generally, bondholders’ risk is the chance that a firm’s risky strategies will fail and it will not be able to repay interest and principal. In the event of a bankruptcy or liquidation, the value of the assets may not cover the outstanding principal. Because stockholders can obtain larger returns from risky and successful strategies and bondholders cannot obtain added returns from such strategies, bondholders are less likely to encourage or accept increased risk-taking by a firm. Furthermore, if the firm undertakes risky strategies, bondholders may require a higher interest rate as compensation for the increased risk. The higher interest rate decreases the funding advantage of debt financing and lowers profits for stockholders.
Bondholders depend on, among other things, credit rating agencies for evaluations of the creditworthiness of bonds based, in part, on a firm’s leverage. When a firm receives high ratings, such as an investment grade rating from credit rating agencies, the market then allows the firm to pay a lower interest rate on its debt, which lowers costs. Consequently, firms often manage their operations to receive investment grade credit ratings. Several firms that we spoke with told us that they manage their firms to a AA investment rating, which is the second highest investment grade rating.
While maximizing stock values, firm management also needs to address the concerns of regulators and others. Regulators’ concerns are important, because regulators can limit firms’ operating freedom by forcing them to allocate capital according to the regulators’ concerns over risk and can require firms to cease doing business, if capital levels fall below the minimum capital requirement. Managers also need to take into consideration the interests of many other parties concerned with the performance of the firm. Employee interests are important, because changing compensation packages can create incentives for excessive risk taking. In addition, financial firms undertake many transactions with each other. It is in each party’s interest to consider the capital levels (relative to risks) in its trading partner or counterparty, because a poorly capitalized entity might fail to complete its financial obligations under a financial contract.
Firms Are Using Models to Measure and Limit Risk-Taking and Determine Their Capital Allocations
Advances in financial theory and information technology have enabled large financial firms to track and evaluate some risks on a more quantitative basis than they could before. Some firms are measuring certain risks on a firmwide basis. According to the financial literature we reviewed and several of the firm representatives we spoke with, large, diversified firms are increasingly doing this because of heightened competition among firms and increased scrutiny of risk management practices by regulators.
Firms can use such tracking and measuring to set limits on risk-taking, evaluate the return and risks of specific activities, and allocate capital accordingly—that is, to ensure that the estimated returns are large enough given the estimated risks. As discussed later in this chapter, these activities are embedded in general risk management principles that lay out a management approach and in tools that are designed to ensure that a firm is appropriately addressing its risks. These principles form the basis of a firm’s risk management system that can, among other things, provide timely information on trading positions, risks, and risk-adjusted performance measures. Such principles also encourage firms to develop risk-adjusted performance measures to track the risk-return trade-off. For example, these general principles are embedded in SEC oversight under the DPG and in bank regulators’ capital regulations.
A general framework for risk-adjusted performance measures that is used by a number of the larger firms is called the risk-adjusted return on capital (RAROC) system. RAROC is the risk-adjusted profitability of a particular business activity per dollar of equity capital allocated to an activity. This means that at any given level of profit and risk, if managers increase capital allocated to an activity, the RAROC for that activity will tend to decrease. Consequently, RAROC directly measures and takes into account the risk, return, and capital trade-off.
Some Firms Measure Market Risk With Statistical and Other Financial Models
As markets become more competitive, as new financial instruments create new mixes of risks and return, and as markets remain volatile and uncertain, managers need improved tools to consider risks and manage them. Therefore, the ability to set limits on trading activity or manage risks is especially important to large financial firms. Generally, models can help managers limit risks and are used to set limits on traders and trading activities. In addition, models can be used to determine needed capital levels on the basis of the measured risks.
In the banking, securities, futures, and life insurance sectors, some large firms measure market risk with statistical financial models supplemented by, or in combination with, other types of models. Statistical models apply past data on price changes to determine losses that might occur in the future; they are often used to measure market risks, such as trading in securities, derivatives, and foreign currencies. Such risks are not equally important for all types of financial firms. For example, market risks are important for large securities firms and banks undertaking trading of financial assets. Life insurance companies must often consider interest rate risk (a type of market risk) when underwriting annuities and other investment products that they sell. In contrast, many banks and insurance companies consider credit risks to be more important. Basically, the relative importance of different risks for a firm depends on the products it offers, the business strategies it uses, and the markets it serves.
Models have important limitations; nonetheless, in the views of the firm representatives and industry experts we spoke with, they improve a manager’s ability to measure and manage risks, thus decreasing the likelihood of losses due to measured risks that could deplete the capital cushion provided by management to cover losses.
Value-At-Risk (VAR) Models Are Used to Measure and Manage Market Risks
A firm’s “value-at-risk” (VAR) is an estimate of the maximum amount that a firm can lose on a particular portfolio a certain percent of the time over a particular period of time. Empirically, this loss can be measured by statistical models as a confidence interval, that is, the percent of the time a certain loss is not likely to be exceeded. This confidence interval implies a corresponding probability that the certain loss is likely to be exceeded a certain percentage of the time. The amount of capital needed to cover this confidence interval is often called economic capital-at-risk.
Using the confidence interval approach, a firm might specify a 1-day time horizon with a 99 percent confidence interval—the percent of the time that a specified loss is not likely to be exceeded. This calculation might yield a $1 million loss that on average would not be exceeded more than 1 out of every 100 trading days. To ensure that this 1-in-100 chance of a $1 million loss would not create a financial problem, the firm could assign a $1 million capital buffer. If the firm wants to lessen the chance that the allocated level of capital will be exhausted, it could increase the confidence interval, increase the capital set aside, or change its trading strategy to create less risk. In contrast, if the firm wanted to increase the expected profits, it could decrease the confidence interval, lower the capital set aside to cover possible losses, or change its trading strategy to create greater expected profits while accepting the added risks.
According to the modeling literature, the four main approaches to VAR modeling are the correlation or parametric method, the historical method, the historic simulation method, and Monte Carlo simulation. VAR models can be based predominantly on the correlations among asset prices and the effects of such correlations on the risk in the firm. In addition, VAR estimates can be based on historic simulation or Monte Carlo simulations that show how changes in several fundamental economic variables or factors would affect the financial condition of the firm.
VAR Estimates Can Be Based on Correlation Among Asset Prices and Returns
Most VAR models depend on statistical analyses of past price movements that determine returns on the assets. The VAR approach evaluates how prices and price volatility behaved in the past to determine the range of price movements or risks that might occur in the future. This VAR approach is based on price variances and, in some cases, covariances among the prices that create market risks. This approach uses statistical estimates of the variances of asset prices and the covariances among asset prices to summarize the overall market risk faced by the firm.
The correlation method assumes that the statistical distribution of asset returns is normally distributed and that the variance-covariance matrix completely describes the distribution. Assuming a normal statistical distribution simplifies the analysis and the computation of the VAR estimates, because it assumes that returns are symmetrically distributed around the mean and the dispersion of returns above and below the mean are similar.
VAR Estimates Based on the Historical Method Use Actual Historic Returns to Determine Losses
The historical method rejects the use of the normal distribution, because much empirical research on the statistical properties of asset returns suggests that returns are not normally distributed. The evidence suggests that high and low returns are more likely to occur than would be predicted if a normal curve assumption were used. Evidence also suggests that in many cases, the actual returns are more likely to be negative than would be predicted if a normal curve assumption were used. In the historic method, the VAR is calculated by finding the lowest returns in the historic data. Using historic data tends to produce higher VAR estimates. This occurs because, empirically, the normal curve assumption underestimates the likelihood of larger losses. Implementing the historical approach requires added historic data that can be expensive to obtain or even nonexistent.
VAR Estimates Based on the Historic Simulation Approach Use Information on Returns and Risk Factors to Calculate the VAR
The returns on particular instruments often cannot be used to determine the VAR estimate. If an institution is large and complex, it may be impractical to maintain historic data on all of its instruments. Furthermore, historic data may not be available on new or innovative instruments that the institution is introducing. In such cases, VAR models must include information about the historic distribution of economic risk factors that will determine the risk created by new instruments. Such risk factors are the fundamental economic creators of risk. For example, for a bond denominated in a foreign currency, the risk factors are foreign exchange rates and interest rates. For a Standard & Poor’s 500 option, the relevant risk factors are its volatility, the dividend yield on the index, and the risk-free interest rates. In the case of banks, when new instruments are present, the bank can develop a VAR model based on the statistical distribution of risk factors and the current composition of the bank’s portfolio of activities both on and off the balance sheet. However, the use of historic simulation is limited by the bank’s inability to change assumptions about fundamental risk factors.
VAR Estimates Based on Monte Carlo Simulations Can Evaluate the Effects of Changing Numerous Fundamental Risk Factors
Firms often are subject to several risks at one time. To address the simultaneous effects of several risks, firms tend to develop Monte Carlo simulations. VAR models based on Monte Carlo simulations start with management identifying a series of changes in several fundamental risk factors that can simultaneously affect the firm. The analysis of the effects of these factors is determined in a mathematical model in which equations show how changes in the fundamental risk factors affect the firm’s cash flows, financial condition, and remaining capital.
On the basis of statistical analyses of how market prices have varied in the past, the Monte Carlo approach to VAR estimation is designed to show how the firm will perform in the future by letting managers evaluate how the firm would perform under thousands of different economic conditions. Monte Carlo approaches to VAR estimation also display the effects of nonlinear risks—risks that grow more than proportionately with movements in the underlying risk factor. Such risks are found in derivatives contracts and in the options embedded in financial products.
Identifying such risks can help the firm to identify the mix of conditions and strategies that would cause the greatest harm. On the basis of the Monte Carlo estimates of VAR, the firm can adjust trading limits to avoid excessive risks or create a better risk-return trade-off.
Backtesting Is Used to Determine the Accuracy of VAR Models
VAR models are commonly backtested to evaluate the accuracy of assumptions by comparing predictions with actual trading results. Backtests determine whether and how well the models’ results compare to a firm’s historic daily trading results. Backtests provide information retrospectively about the past accuracy of an internal model by comparing a firm’s daily VAR measures with its corresponding daily trading profits and losses. Any VAR-set limit that is exceeded by trading losses at a greater frequency than indicated by the chosen confidence level indicates that the model is not measuring expected losses well enough.
VAR-Based Models Have Limitations
According to the financial literature and our interviews, the limitations of the VAR model include a dependence on past data to estimate possible future losses and possible errors caused by simplifying statistical assumptions.
The VAR calculation and estimated losses from VAR models are based on the past behavior of prices and price volatility. If price patterns are changing now or will change in the future, estimates of potential losses based on past price changes will be incorrect. As a result, the risk managers at the firms told us they must continually update their statistical estimates and monitor for changing price patterns that affect losses predicted by VAR models.
Some VAR calculations are simplified by assuming returns are distributed normally. Such simplifications ease data needs, lower computational costs, and are easier for those less familiar with advanced statistical modeling techniques to understand. However, such assumptions can result in the model underestimating the probability and extent of large losses. To avoid this problem, several of the firm representatives we interviewed said that they use Monte Carlo simulations when necessary because such simulations take returns that are not normally distributed into consideration.
Simplifying assumptions also limits the ability of some VAR models to measure risks that do not vary directly or linearly with price changes. For example, gains or losses on stocks held in portfolios vary directly or linearly with market prices. As the market prices of stocks increase, the value of the stock or foreign currencies held by a firm increases in direct proportion. Such direct, linear relationships also exist in foreign currency trading, a common activity of many large, diversified financial firms.
In contrast, losses on options and financial contracts with embedded options can be nonlinear and need not move proportionately or linearly with interest rates or other prices. Options have risks that are nonlinear; for small price movements there may be no losses for the firm, but for larger price movements the firm can suffer large losses. Similarly, interest rate risks in certain financial products can be nonlinear. For example, for small declines in interest rates, mortgage prepayments will not accelerate. However, for large declines in interest rates, prepayments can accelerate quickly and create large and nonlinear losses for a firm holding mortgages. Representatives of several firms told us that nonlinear effects in certain other types of financial options affect the accuracy of VAR modeling.
Stress Tests and Scenario Analysis Are Used to Determine How Large Changes in Economic Conditions Could Lead to a Firm Failure
Firms use stress tests and scenario analyses to help validate or cross-check the reliability of VAR models. Stress tests measure the potential impact of various large market movements on the value of a firm’s portfolio. Such tests are a useful tool for identifying exposures that appear to be relatively small in the current environment but that grow more than proportionally with changes in risk factors. Scenario analysis generates forward-looking “what-if” simulations for specified changes in market factors that quantify revenue implications of such scenarios for the firm.
Stress tests are based on a series of mathematical equations that show how changes in fundamental economic factors would affect the financial statements of the firm over time. Stress tests determine whether large changes in underlying key factors would lead to losses that could put the financial firm at risk of failing. The level of key economic factors used in the stress test can be based on (1) past economic situations in which key economic variables have affected a firm’s financial condition or (2) management’s judgment. When using past economic situations to determine the level of key economic variables, risk managers may use the results of statistical analyses to help decide what factors to use in the test and how large the stress should be. The values or the risk factors used in the stress tests can be based on management’s judgments and statistical analyses of the variability of the risk factors in the past. Some stress tests apply Monte Carlo simulations to determine how often and how quickly a firm will fail when subject to stressful economic environments.
All Market Risk Models Have Limits and Benefits
The financial literature and our interviews with risk managers told us that all models are limited to the extent that they rely on historic data and pricing patterns that may not reflect future economic conditions and risks. In addition, all models are limited by the quality of the data available, the computation power available, and the ability of analysts to develop mathematical models to accurately reflect financial risks and returns as economic conditions change. Several of the risk managers we met with stressed the importance of the risk factors used in a firm’s internal modeling. Because a firm’s internal system cannot effectively track all of the risks the firm is exposed to, risk managers choose those they believe are the most significant, such as equity and foreign exchange positions and the yield curve slope.
Models also offer benefits. Managers using models are able to take a more disciplined approach to the overall operations of the firm. Models encourage and permit risk managers to simultaneously consider the risks and returns in individual assets or portfolios and their interactions, which, in combination determine the overall risks and returns of the firm from market risks.
Our interviews with industry association officials who tend to represent smaller financial firms suggest that small companies may be more likely to hold assets until maturity and less likely to realize the market losses in their portfolios when the market value of assets decreases. According to these officials, these companies may not find it necessary to undertake such market risk modeling, because their risks and long-run profits are not driven by changes in market prices and returns. Instead, their risks may be concentrated in credit risk, insurance risk, and operational risks, which have not been quantified or modeled as extensively as market risks.
Firms Measure Credit Risk in a Variety of Ways
Traditional credit risk management at banks, securities firms, and insurance companies has most often been based on analysis of standardized information reports and judgments by experienced credit officers of the creditworthiness of borrowers and any collateral against the loan or bond. On the basis of such judgments, firm managers have set limits on financial positions and developed plans to manage credit risks. Increasingly at large, diversified firms, traditional credit risk management approaches have been augmented by credit-scoring models for certain classes of homogeneous loans, such as credit card, automobile, and residential mortgages. In even fewer firms, models have also been applied to evaluating the credit of companies with publicly traded stock.
Traditional Credit Analysis
Traditional credit analysis is based on standardized reports and credit officer judgments. In most firms, the credit quality of a particular loan is to be judged by a reviewing officer and placed into one of several credit categories. Categories range from risk-free or low risk to potential or full loss. In rating creditworthiness, credit risk is exclusively the risk of a loss on a loan due to a default and is not the risk due to price volatility.
A particular loan can be reassessed on the basis of either the changing condition of the borrower or changes in the economy that may affect the likelihood that the loan will be repaid on a timely basis. When considering the risks from a particular loan or financial position with a firm, lenders generally consider all the positions with that firm, because a credit problem in one position with a firm will usually be associated with credit risks for all positions of the entire firm. For example, in a situation where a firm has several financial interactions with a bank, such as a commercial loan, a mortgage, and a foreign exchange transaction, if one of these interactions appears uncreditworthy, it can affect the others.
Commercial banks, securities firms, and life insurance companies that we interviewed told us they used the traditional approach to credit analysis. Each firm said it applied a consistent evaluation and rating scheme to all credit decisions. The firm produced aggregated results on the overall credit portfolio. A typical bank might use a rating system with up to 10 rating categories that are defined from low to high risk. Consistent application and updating of the ratings are part of the process. In some firms, both the borrower and the instrument are rated separately. Part of the rating addresses covenants or limitations in the contract and collateral used to secure the contract.
Given consistent application of the ratings by its credit officers, a bank can produce a report of the credit risk in its loan portfolio at any time. The report changes as loans enter and exit the system and as ratings of particular loans change over time. According to one source, this credit quality report is most meaningful when credits are monitored and periodically reviewed by a risk management group or function.
Insurance companies tend to be very focused on credit risk. Because insurance companies’ credit risk often appears in bonds and other traded instruments, rating the instruments is one way to address credit risk. Credit ratings needed by the insurance companies are often performed by the Securities Valuation Office of NAIC.
In many financial firms, credit analysis traditionally was done on a loan-by-loan basis. Such an approach ignored the fact that all loans in the same region or industry tended to become less creditworthy at the same time. However, given sectoral losses of the 1980s in real estate and the petroleum industry, firms are increasingly concerned that many loans concentrated in the same region or industry may create losses at nearly the same time. To address these concerns, some firms are undertaking concentration reports by industry, and work is under way to improve the industry classification codes needed to produce concentration reports.
Some Firms Are Using Credit Scoring Models to Determine Credit Risk
Credit scoring applies formal statistical procedures to the credit decision process. Credit scoring models, based on statistical analyses, use data on the borrower found in credit reports and loan application information to determine whether or not a loan is likely to be repaid. In addition, credit scoring can be used to adjust terms on the loan such as downpayments and interest rates. Such models are often used in underwriting credit cards and mortgages. Credit scoring is most applicable to classes of loans in which there are numerous loans that are frequently underwritten with similar terms. Within each class, the loans are relatively small compared to the total holdings in the class, made frequently, and easily statistically analyzed because the loans have relatively homogeneous characteristics. This homogeneity occurs because the loans are not custom-tailored to the borrower or to the collateral asset.
Some Firms Are Using Stock Prices and Portfolio Credit Models to Measure Credit Risk
Some banks and consulting firms that we spoke to have developed a portfolio approach that rates the creditworthiness of loans to larger corporations whose bonds and stocks are traded regularly in the financial markets. This approach addresses the correlations among the creditworthiness ratings of individual assets in the portfolio.
In the first step, the portfolio approach uses the traditional approach of rating each loan or financial instrument on a case-by-case basis to generate its inputs by determining the credit risk from each obligor (borrower from the bank). In the next step, the portfolio approach accounts for the credit risk across the portfolio based on the correlation of credit quality across obligors. In this way, this approach takes into account and quantifies the benefits of portfolio diversification. It is similar to the portfolio approach already used in market risk modeling such as VAR.
The portfolio approach to credit risk may depend on stock and bond price information and ratings by credit rating agencies, such as Standard and Poor’s. Using statistical methods, the portfolio approach estimates the probability of default on an instrument and the probable loss from that instrument if a default occurs. The approach uses the credit rating from a credit rating agency or the internal credit rating by a bank evaluating its own loans. Credit rating agency ratings and bank loan evaluations are based on reviews of the financial books and other pertinent information gathered during the rating or loan application process when a firm is issuing bonds or applying for a loan. Such ratings are not driven by market prices or by the volatility of market prices.
The portfolio approach also uses market information on stock prices to estimate the total probability of default on the basis of the correlations of defaults among the component loans in the portfolio. By taking these market prices into account, the portfolio credit rating can directly take into account the correlation among credit risks because it can address the correlation among stock prices. Such correlation information permits risk managers to develop more economically efficient portfolios by improving expected profits or lowering the risk of losses from the total loan portfolio. As with market risk modeling, assumptions about the probability distributions and the correlation among the risks affect the estimated potential losses due to credit risk embedded in any particular portfolio.
The portfolio approach to credit risk enables a risk manager to quantify and control credit concentration risk; consider concentrations on the basis of industry rating category, type of instrument, or other factors; interpret credit risk in terms of needed capital as is done in market risk calculations; and evaluate investment decisions more precisely in terms of risks, returns, and capital.
Many Firms Use Worst-Case Cash Flow Simulations to Measure Liquidity Risk
Liquidity risk analyses are most concerned with the effect of a sudden crisis that arises when lines of credit may be closed, assets can be sold only at a loss, and other new funding sources cannot be found. In a liquidity crisis, a firm must be able to sustain itself and obtain cash as needed when the markets, in general, appear much less willing to buy assets from the institution or make loans to the firm experiencing the crisis.
Many firms develop worst-case simulations (i.e., stress tests) or models to investigate the implications of a severe loss, which affects credit ratings, or a systemwide crisis that would affect all sources of liquidity due to a flight to quality throughout the economy. The worst-case “scenarios” are based on simulations of firm cash flows.
In each worst-case cash flow analysis, a firm would attempt to estimate the immediate funding shortfall associated with a severe loss and a crisis that is systemwide. In a worst-case analysis, a firm attempts to measure the speed with which it can acquire needed liquidity during a crisis. Such liquidity might be based on liquidating assets—that is, shrinking its balance sheet—or estimating sources of funds that would still be available during a crisis. The results of such worst-case analyses or simulated crises are often reported in estimated days of exposure or days of a funding crisis. On the basis of the liquidity problems that arise in worst-case simulations, managers can alter current operations to forestall liquidity problems in a crisis, adjust the liquidity of current asset holdings, or create more secure lines of credit.
Such simulations are not used to forecast future problems but rather as a planning tool to understand what a liquidity crisis might entail. In the view of a number of firm representatives we spoke with, such simulations or worst-case studies are imprecise but essential to a firm in the event of a substantial change or deterioration of its financial condition. Some firms we spoke with used such simulations to determine what backup lines of credit, which cannot be cancelled, are needed to ensure liquidity or funding during a crisis.
One large securities firm suggested that financial firms can fail in a crisis when liquidity is lost even though other fundamental risks might not be present. Another large firm emphasized that broker-dealers depend on liquidity when managing market or trading risk because, without liquidity—the ability to buy and sell financial assets without large losses—hedging and other risk-reducing strategies do not work. Firms’ representatives told us their firms often maintain an equity cushion above regulatory capital levels to ensure the constant availability of sufficient cash to deal with liquidity problems or to undertake a large and potentially profitable deal. Another large, diversified firm emphasized that during crises, investor flights to quality occur and firms without strong credit ratings may not be able to refinance short-term debt or fund operations. Firms that maintain high levels of capital are generally considered to be more creditworthy.
Other firms told us that liquidity is an amorphous term and cannot be addressed by VAR or other mathematical models. A representative of a large industry group said that liquidity risk is somewhat quantifiable but not to the same extent as credit and market risk.
According to several insurance industry analysts, liquidity is not as big a concern with many life insurance companies as it is with other financial institutions because life insurance policy liabilities are less liquid than life insurers’ assets. Life insurance companies issue policies that have high surrender charges that tend to limit redemptions. A decade ago, when interest rate movements created options that encouraged early redemptions, illiquidity was more of a problem for life insurance companies. New policies are now written that are designed to bring returns on products into accord with market rates. In addition, policy loans are often charged variable rates that track the market instead of fixed rates in order to prevent losses.
Life Insurers Use Statistical Models to Measure Insurance/Actuarial Risk
In the past, life insurance companies generally used conservative static assumptions regarding loss distributions and interest rates. This approach was ill equipped to deal with the interest rate volatility of the late 1970s, according to several insurance company representatives we spoke with. Life insurance policies are full of options—settlement options, policy loan options, over-deposit privileges and surrender or renewal on the part of the insured, and discretionary dividend options on the part of the insurer.
When interest rates are volatile, these options increase in value and thus are more likely to be exercised.
Traditional actuarial valuation methods that assume interest rate stability incorrectly value these options when interest rates are volatile because the companies do not consider or calculate the economic value of the options. By assuming stable interest rates, insurance companies tended to underprice their policies. Today, the standard valuation techniques deal explicitly with the interest rate risk options embedded in policies. These standard valuation techniques use statistical modeling approaches such as VAR based on correlations and Monte Carlo simulations discussed earlier in connection with market risks.
Most Firms Said They Did Not or Could Not Measure Business/Event and Operational Risk
Although the firms we interviewed emphasized that business risk and operational risk were crucial concerns, most acknowledged that they did not or could not effectively measure these risks. Several firms described how they were measuring market, credit, and liquidity risks and explained that their firms did not measure other risks, such as operational or business risks. Several suggested that they were not convinced that operational and business risks could ever be measured to the same degree that market, credit, and liquidity risks were measured. In almost all the interviews we conducted, including all those with regulators, we were told that because measurement of business/event and operational risk is difficult, managers’ judgments are crucial to managing these risks.
A securities-based firm said that most failures in this industry were not created by market risks; rather, operational problems led to the failures. One bank’s risk manager suggested that business risk was an amorphous term and thus could not be measured or placed in a mathematical or statistical model. This bank does, however, include business risk in its Risk-Adjusted-Return on Capital (RAROC) system. A manager of a large and complex insurance-based financial firm said he was not yet comfortable with how his firm measured such risks. Another bank, which said it is vigorously trying to model its risks, told us that it has not yet quantified operational risk. A major consultant to the financial services industry concluded that operational risks are hard to quantify because the risks are embedded in (1) the operating and accounting systems, (2) the models, (3) staff behavior, (4) the compensation systems that create incentives to undertake various activities that affect both firm and employee risks and returns, and (5) the managers’ abilities to foresee the consequences of the interactions among these factors. Officials of one bank we interviewed told us they were quantifying business/operational risk by using revenue volatility as a proxy for impact of risk on business results.
Measuring and Managing All Risks on a Firmwide Basis
In practice, risk measurement approaches differ across the risks faced by firms, and not all risks are quantified to the same extent. For example, under widely circulated general risk management principles, firms are to monitor and manage all risks but are expected to explicitly measure and manage only market, credit, and liquidity risks, as discussed above. Firms monitor and measure other risks using a more qualitative approach because, to date, quantification of these other risks has not progressed enough to be commonly used even at large, diversified firms.
Because financial firms are as yet unable to quantify and model all risks, a fully quantified approach to determine needed capital has not yet been developed. Nonetheless, the general framework called RAROC has been developed for such firmwide risk assessments across all risks and products (see app. IV for a discussion of this framework). However, as long as no common basis exists for measuring all risks, firms cannot fully integrate their risk measurement and management systems in a firmwide, cross-risk, and cross-product analysis. Thus, given the different approaches and levels of sophistication currently available for measuring and managing risks, managers’ judgment and effective risk management approaches remain a crucial determinant of risks, returns, and needed capital levels in each financial firm.
General Principles of Firmwide Risk Management
As mentioned earlier, firmwide risk measurement is an integral part of a unified, firmwide risk management system under widely circulated general risk management principles. Our discussions with regulators and representatives of large, diversified financial firms indicated that these firms accept the approach of the general risk management principles and are applying these principles in the design of their internal risk control function. However, to date, not all firms we spoke with have fully implemented the risk and capital measurement systems laid out by the principles.
General Risk Management Principles Are Designed to Ensure That a Firm Is Appropriately Addressing Its Risks
General risk management principles lay out a management approach and tools that are designed to ensure that a firm is appropriately addressing its risks. There is a common set of five broad risk management principles:1. A structured framework is to be established to link a firm’s business strategy and operations to its risk management objectives. 2. Centralization of the risk management function in one dedicated staff office is needed. 3. Risk measurement, risk reporting, and risk controls are needed to permit managers and others to evaluate the implications of the risks, returns, and capital levels in the firm. 4. Operations systems are needed to support the risk management function. 5. Risk management systems are needed to provide needed data on a timely basis.
Under these principles, the firm’s risk management strategy is to be based on a framework of responsibilities and functions driven by the board down to operating levels, which covers all aspects of risk. The basis for this principle is the view that unless the board is fully integrated in the risk management approach, the firm’s managers and employees will not be fully committed to risk management. To emphasize the importance of risk management, the principles state that a risk management group composed of senior managers is to be created.
In accordance with the principles, the risk management function is to be fully integrated into a firm’s operations. The day-to-day responsibility for risk monitoring and risk evaluation is to rest with the risk management function, which is to report to a risk management group—a special committee of senior managers. The role of the risk management function is to implement policies associated with specific risks, such as market risk, credit risk, liquidity risk, operational risk, and business/event risk. Its purpose is also to ensure that trading is within approved limits and that risk limits and policies are properly understood and evaluated before transactions are undertaken.
The principles lay out a framework for risk measurement, reporting, and control of risks; quantification of market, credit, and liquidity risks; and development of the capability to aggregate and monitor exposures on a firmwide basis. The principles require a firm to set a comprehensive set of limits to ensure that risk exposures remain within agreed-upon boundaries set by the board or risk management group. In addition, the firm needs a mechanism for evaluating firm performance on a risk-adjusted basis to address the trade-off between return and risk. That is, the firm must develop a method to simultaneously measure and manage the trade-offs that can exist between return and risk on a firmwide, business-unit, and product-specific basis.
The principles call for a risk management system to generate, on a timely basis, information on the firm’s trading positions, risks, and risk-adjusted performance measures. Such information is to be available to the risk management group; risk management function; and other end users of the information, such as traders, credit risk departments, or managers of trading units.
Under the principles, firms are to develop a comprehensive set of operational controls, because firms engaged in trading activities often encounter difficulties as a result of operational control problems rather than measurement problems. Such operational controls are meant to ensure that risk limits are set by the board and, once set, are not violated. To guard against operational problems, it is important for firms to rigorously establish controls that limit risk-taking and unauthorized activities throughout the firm, according to the principles.
Firm officials we met with consistently mentioned these principles and provided firm-specific examples to illustrate their importance. For example, many firms and analysts emphasized that although their approach to risk management is constantly evolving, it is of paramount importance that senior management determines the level of risk that the firm will accept and communicates this information firmwide. Representatives of several firms commented that a central committee, which reports to the chief executive officer, monitors their risks. Firm representatives stressed that numbers are important, but good communication, internal controls, and management judgment are what really matter.
Issues and Initiatives in Capital Regulation
Through our interviews with industry representatives, regulators, and others as well as our review of pertinent literature and other documents, we sought to identify significant issues in capital regulation. We group the issues we identified into the following three categories: differences among financial regulators in terms of the risks each focuses on and the purposes of its capital rules; differences between regulators’ and firms’ estimates of risks and needed capital, and in their views of risk and how it should be managed, and concern about how regulatory capital rules are administered.
The principal issue in the first category is that as firms that have traditionally been in different sectors of the financial services industry increasingly offer similar products and take on similar risks, differences in capital regulation among their regulators may have unintended competitive implications for these firms.
Issues in the second category include a concern that current regulatory capital requirements that are not adequately sensitive to the risks inherent in a firm’s particular products or activities may create inappropriate risk management incentives for firms and, in extreme cases, could even lead to increased risk-taking. A related issue concerns the possible increased use by regulators of a firm’s internal estimates of risk in setting regulatory capital requirements, because financial firms and regulators have somewhat different purposes for capital and tolerances for risk.
The third category, administrative issues, includes questions about whether it makes sense to apply the same approach to capital regulation for firms of all sizes and degrees of complexity. It also includes questions, such as how can the regulators properly oversee the validity of the internal statistical models that firms use to meet regulatory capital requirements.
As competition within and among different financial sectors has increased and as large, diversified firms have improved their ability to measure and manage risks and capital, financial regulators are responding by exploring possible changes to capital requirements. Many initiatives aim to make capital requirements more sensitive to the risks firms face in their activities; other initiatives represent fundamentally different approaches to capital regulation.
Differences in Regulatory Objectives and Approaches May Have Unintended Competitive Implications
In an environment of increasing competition across financial sectors and national borders, large, diversified financial firms increasingly offer similar products that pose similar risks. At the same time, individual firms and their affiliates are regulated by a variety of domestic and foreign regulators, and some are unregulated. Differences in corporate legal systems and markets also contribute to international differences. Concern about differing capital requirements for firms with similar products posing similar risks is one part of an ongoing “level playing field” debate in financial modernization. On a level playing field, firms and markets compete without advantages that result from government backing (such as government-backed deposit insurance) or disadvantages that result from burdensome regulation.
At the same time, regulators acknowledge that differences in regulatory purposes have implications for capital requirements that could limit achievement of a level playing field. As discussed in chapter 2, the specific objectives of the various financial regulators and their approaches to regulation differ. For example, bank regulators are concerned with maintaining the safety and soundness of the banking and payments system and protecting the deposit insurance funds; and securities and futures regulators are concerned with investor protection and ensuring the integrity of the securities and futures markets, respectively.
Financial regulators and other experts we interviewed discussed the appropriateness of having similar capital requirements for banks, which are covered by government-backed insurance funds, and other firms that are not; or whether it is appropriate for capital requirements of banks, which are part of the payments system, to be similar to capital requirements for firms that are not. Traditionally, bank regulation has been more concerned with systemic risk than has regulation of other financial entities. Some experts have argued that capital regulation must be stricter on entities that pose greater systemic risk than on those that do not.
Also, financial regulators were concerned that different domestic and foreign capital standards for the various types of financial firms create incentives for firms to change operations in ways that change their regulator, such as moving business overseas, to avoid or offset capital requirements they believe are costly and excessive. Different regulators may have different capital standards for the same product. In some situations, a firm facing the higher capital standard has an incentive to move its activities in that product line into an affiliate that has a different regulator or one that is unregulated. However, in banking, all affiliates within the holding company fall under the holding company capital standards. If a bank believes the standards are too high for a certain product, it may choose to abandon that product line; or it may restructure its transactions to provide a similar service that carries a lower capital requirement.
Differences Exist Between Regulators’ and Firms’ Estimates of Risk and Needed Capital
An important issue for regulators is how to establish capital requirements that meet their purposes without requiring either excessive or insufficient capital for the risks involved. To a large degree, to increase the value of the shareholders’ equity in competitive markets, large, diversified financial firms have increasingly used statistical and mathematical models to measure and manage economic risks and to determine their optimum capital levels. As firms have been able to apply more sophisticated risk measurement tools, some said they have become increasingly aware of a discrepancy between their internal estimates of risk and the capital needed to support certain activities and the regulatory capital requirements for those activities. Even though firms may hold more total capital than regulatory minimums call for, regulatory capital requirements may impose higher capital levels for some activities than the firms believe to be appropriate.
The difference between amounts of capital allocated by some financial firms and regulatory capital requirements reflect, in part, differences between the firms’ primary objectives and the purpose of regulators. As discussed in chapters 2 and 3, financial firms and regulators agree that capital serves as a buffer against unexpected losses. However, the primary use of capital for firms is to maximize the value of their shares for stockholders by choosing the best mix of risk and returns. Regulators, on the other hand, impose minimum capital requirements to serve the public interest.
Currently, financial regulators use a “building block” approach in setting capital requirements—that is, capital requirements are determined largely on the basis of broad classes of risk, and the total capital requirement is the sum of requirements for each risk. Many firms and regulators have argued that this building block approach is inappropriate, because the total risk in the firm is based on the interactions of all risks in the firm’s portfolio, and risks need not be additive. We did not identify any firms that were yet able to hedge across different risks—for example, hedging credit exposures and market exposures against each other. However, some firms said they have developed hedging strategies that allow them to decrease risks by hedging the same risk within and across portfolios—for example, hedging interest rate or foreign exchange risk in different portfolios within the firm. These risk-reducing strategies are often not recognized in existing building block regulatory approaches to setting minimum capital requirements. Thus, because these approaches do not recognize the possibility that total risk may be less than the sum of individual risks if risks offset each other, they could lead to excessive capital requirements.
In both the banking and securities/futures sectors, capital regulations contain formulas that apply single risk-weightings to a broad range of riskiness within a single category. For example, in banking, the same 8 percent capital requirement is imposed on all unsecured loans to private commercial borrowers regardless of individual creditworthiness, with the result that a high-risk/high-return loan carries no more regulatory capital than a low-risk/low-return loan. As a result, the regulation might give firms an incentive to seek the highest returns within a broad class regardless of underlying risk; or to adjust activities (e.g, develop new products and/or change operations or corporate structures) in a way that reduces or escapes capital requirements. In other words, firms may adjust business to achieve the lowest regulatory capital cost rather than an optimal balance of risk and capital. Also, the securities net capital rule requires registered broker-dealers to apply a 100-percent haircut to any portion of the trading profits, to the extent the profits are unsecured, reflecting SEC’s emphasis on liquidity in its net capital rule.
Moreover, if capital requirements are not adequately sensitive to risk, they may require either too much or too little regulatory capital for the activities being covered. For example, capital requirements that require firms to hold more capital than they believe to be warranted by the risk can cause them to reorganize their structures, resulting in less regulated financial markets as firms move operations outside of regulated entities. Because securities firms consider the 100-percent haircut for OTC derivatives transactions excessive, for example, they book much of their OTC derivatives business in unregulated affiliates to escape capital requirements and other regulatory oversight for these derivatives activities. Some regulators and we have expressed concern about the lack of regulatory oversight in OTC derivatives activities.
On the other hand, capital requirements that are too low to protect against risk may result in firms holding only the required amount of capital. As a result, they may not be sufficiently cushioned against potential losses. At the same time, a relatively low capital requirement may induce some institutions to hold excessive amounts of the asset, thus increasing their exposure to the risk. For example, the calculation of bank capital ratios does not explicitly include the interest rate risk inherent in mortgages and other interest-sensitive assets; this may cause banks to hold more of these assets and fewer assets for which the capital requirement more fully captures all the risks.
Increased Regulatory Use of Firm Estimates of Risk Raises Issues Regarding the Appropriateness of These Estimates for Regulatory Capital Purposes
Although financial regulators are already using firms’ estimates of risk in limited ways, concerns about regulatory insensitivity to risk are leading some regulators to consider increased use of firms’ own estimates of risk for setting regulatory capital requirements. Through our interviews and our review of the literature on risk measurement, we identified a number of concerns with regard to increased regulatory capital requirements that are based on each firm’s own risk estimates. First, the current risk measures used by firms are limited in that they do not measure all risks the firms face. Second, some risk measurement systems may measure some risks incompletely. Third, models used by specific firms are tailored to what each firm sees as its risk measurement needs, so they are not necessarily comparable. Fourth, increasing regulatory use of firm risk estimates could cause firms to modify their models to reduce their regulatory capital requirements.
Firm Risk Measurements Are Limited in Various Ways
Both the literature and representatives of all of the firms we interviewed agreed that a firm’s risk measurement systems are limited in that they do not accurately measure all of the firm’s risks. Many of the representatives said that because their firms’ risk measures and models address some categories of risks (for example, market and credit risks) and not others (for example, operational and business/event risks), their firms continue to use judgments to determine the overall capital levels they need.
In addition to limitations resulting from firms not measuring the same types of risk, some models may not correlate the same type of risk (such as credit or market risk) across the entire firm. In this way, such models may not fully measure all risks within a risk type included in the model. However, as discussed earlier, some firms said they do measure some risks on a consolidated basis—taking into account correlations of the same type of risk wherever it exists in the consolidated firm.
Moreover, models may fail to capture major unique market events of low probability that could pose considerable risk, such as currency devaluations in emerging markets. According to some of the firms’ representatives we interviewed, the firms’ risk estimates address expected losses, but they cannot accurately account for the unexpected losses the firm may face. VAR modeling is often based on day-to-day risks and historical experience and assumes that managers regularly readjust their portfolios as risks change. However, the representatives noted that such models can easily miss low-probability events that could result in large losses, which could pose considerable risk. For this reason, the capital levels indicated by the models may not cover losses during a major market event, such as a financial crisis in an emerging market. Moreover, even if the models were capable of totally accurate risk measurement, regulators, who, for example, are likely to be concerned with the systemic risk posed by a low-probability, high-loss event, may require more capital for certain risks than the firms would set aside for that risk.
Use of Firms’ Internal Models Raises Questions of Consistency and Dependability
The financial regulators we spoke with are concerned with the consistency of capital requirements across the firms they regulate. When regulators depend on firm-specific models or measures to set capital levels, however, capital requirements may not be consistent across firms with similar risk levels. Each firm that uses internal models may well reflect in its own model the firm’s unique characteristics, such as the particular risk factors it faces. Thus, even when regulators specify the use of common procedures for developing internal models, such as those in the market risk capital requirement for banks, the internal models firms produce differ because each firm designs its model to measure what it sees as its own risk profile. Because a firm’s model was designed for use with a specific risk profile, another firm’s model applied to the same profile might produce a different risk estimate. In addition, both the consistency and the accuracy of these models depend on the quality of the raw data used.
The financial regulators are concerned about the dependability of the results of firms’ risk measurement systems, in terms of the accuracy of the results and the transparency in the firms’ use of internal models. To help ensure that the capital set aside for various risks accurately reflects the firm’s risks of possible losses, it is important for risk measures and models to truly reflect management’s own best judgment about the design and use of the models and for the model inputs to be complete and accurate.
With regard to transparency in the use of firm-specific internal models, regulators and other experts are concerned that their use of firm-specific risk measures to set minimum capital requirements could give firms an incentive to adjust the internal models they use to determine their minimum regulatory capital in such a way as to reduce their regulatory capital requirements. Such behavior by firms would raise questions about the dependability of the risk and capital measures used by the firms. Firms might undertake such model alterations if the regulatory minimums for certain risks exceeded the capital level managers wished to put aside for such risks, either because their estimates of risk were lower or their risk tolerances were greater than those set by the regulators. The regulators said that if they could ensure that only one model existed within a firm for a particular risk, they could be more confident that the firm’s own true risk estimates were being used to set minimum capital requirements.
Increasing Complexity of Large Firms’ Activities Raises Issues Regarding Administration of Capital Requirements
Our interviews with industry representatives, regulators, and others and review of the literature on capital requirements identified issues in the administration of capital requirements. One issue concerns the reasonableness of using the same approach to capital regulation for firms of a similar type (e.g., banks) but with varying sizes and degrees of complexity. That is, as the activities of large firms diverge from those of small firms, a single standard for all firms may become increasingly inappropriate.
As the activities of large firms become more complex, regulators and firms are concerned about proper regulatory oversight of the use of statistical models for regulatory purposes. Regulatory confidence in the effectiveness of capital standards in accomplishing the regulatory purpose depends in part on those standards being auditable and understandable, which is significantly complicated by the use of sophisticated measures and firm proprietary models. In the views of both regulators and other experts, many auditors and regulators may not yet have the expertise needed to verify the accuracy of the measures calculated in the models used in determining minimum capital standards. In addition, depending on their business mix, smaller firms are less likely to have the resources or the need to develop sophisticated models.
Part of this issue concerns the costs to the regulators if they adopt sophisticated approaches to setting minimum capital requirements. Financial regulators understand that their adoption of more sophisticated regulatory capital requirements (e.g, increased use of firms’ internal models) would mean increased regulatory costs related to hiring and training regulatory staff.
Complexities associated with the increasing use of sophisticated measures and firms’ proprietary models in determining capital requirements could also pose challenges for regulators and industry representatives in promptly analyzing and addressing policy or administrative issues in capital standards. For example, representatives from a number of firms we spoke with said that as their internal modeling and capital allocation processes become more complex, it is more difficult for managers who do not necessarily have the technical expertise to judge the quality of the models, processes, and their results.
In the view of the Federal Reserve Chairman, no matter how complex capital requirements become, firms will develop new products to exploit the remaining inevitable distortions in the regulations to lower their capital requirements. As previously discussed, examples of such distortions are the current credit risk-based capital rules that treat all commercial loans as if they had equal degrees of riskiness. As discussed in the next section, some other experts argue that trying to address all of the firms’ potential activities through increasingly sophisticated capital regulation is impossible. They suggest that the use of simplified regulations, such as an incentive-based approach or an approach based on strict supervisory oversight and increased disclosure, would be a better way to implement capital requirements.
The importance of these and other issues is apparent in the initiatives discussed in the next section. Some of the issues have more relevance for some of the initiatives than for others. Some of the initiatives are actual proposals, and others are still in the exploratory stage. Because they are all either proposals or ideas being explored, we did not evaluate them.
Most of the initiatives discussed below are attempts to make capital requirements more sensitive to risks in firm activities, and others represent new approaches to capital regulation. Banking regulators have noted, however, that in consideration of new approaches to capital regulation, there are both statutory and international constraints on the changes they can make. With regard to statutory constraints, because FDICIA institutionalized regulatory capital using risk-weights plus leverage as a matter of law, regulatory capital with a risk-based component will be an integral part of the overall U.S. supervisory approach until it is changed by Congress. Internationally, U.S. bank regulators have agreed to coordinate their capital regulations with those of the other Basle Committee members, and U.S. regulators are actively involved in the committee’s work. Although the Basle Committee is aware of and is studying many of the initiatives proposed in the United States, none of the U.S. regulators we spoke with expected any unilateral new approaches or any major changes to the Basle Accord or its approach in the near future.
Financial Regulators and SROs Are Exploring Ways to Make Capital Requirements More Sensitive to Risk
Regulatory agencies and SROs are exploring or have proposed a number of initiatives for modifying or changing current capital requirements in banking, securities, futures, and life insurance that would make the requirements more sensitive to the actual risks in firm activities. The banking initiatives range from a proposal that would allow banks to use credit ratings from rating agencies to determine risk-based capital requirements for certain products to taking an approach to measuring credit risk that is based on statistical modeling. SEC and CFTC are monitoring and evaluating the DPG’s voluntary efforts to relate capital to risks. In addition, SEC issued (1) a concept release on the extent to which a statistical modeling approach should be used by broker-dealers to better reflect market risks in their activities; (2) a proposal that would create a new class of broker-dealers, called OTC derivatives dealers, that would be subject to modified capital requirements in connection with conducting an OTC derivatives business; and (3) proposed amendments to the net capital rule regarding the method of computing haircuts applicable to interest rate products. CFTC is also exploring whether the regulatory structure should be changed for OTC derivatives dealers. Two futures industry exchanges have taken steps to make minimum capital requirements more risk-based to reflect the total risks to the FCM. Although life insurance industry regulators have no current plans to fundamentally change their formula-based approach to setting capital requirements, they are working to modify various components of the current risk-based capital requirements.
Bank Regulators Are Exploring Risk-Based Capital Initiatives for Credit Risk
Bank regulators have recently proposed revisions to the risk-based capital standards that, if adopted, would affect the method used to measure the relative exposure to credit risk for certain products. This is in response to the concerns, discussed earlier, about the imprecise nature of the current credit risk-based capital standards, which have created conflicts between the regulators and banks. In addition, regulators are exploring other modifications to the standards that would more precisely measure the credit risks firms face in their activities.
Bank Regulators Have Proposed Use of Credit Ratings to Measure Relative Risk Exposure in Certain Products
In November 1997, the banking regulators asked for comments on a proposal that would revise the risk-based capital standards to allow the use of credit ratings from the nationally recognized statistical rating agencies (e.g., Moody’s Investors Service) to measure relative exposure to credit risk and to determine the associated risk-based capital requirement for certain products. The regulators believe the use of credit ratings would provide a way for them to use market determinations of credit quality to identify different loss positions for capital purposes in an asset securitization structure. Such a change might open the way for them to determine capital requirements more precisely across a wide variety of transactions and structures in administering the risk-based capital system.
Because credit ratings may not exist for some nontraded positions, the regulators are also considering some alternative approaches to the use of credit ratings—the ratings benchmark approach and the internal information approaches. Under the first alternative, the regulators would issue benchmark guidelines that banks would use in assessing the relative credit risk of nontraded positions in specified standardized securitization structures. The second alternative consists of two different internal information approaches under which banks would use credit information they have about the credit quality of assets underlying a position to set the capital requirement for that position. The first, the historical loss approach, would take into account unexpected losses over the life of the asset pool. The second, the bank model approach, would base capital requirements for certain positions on the internal risk assessments made by banks’ “internal models” for measuring credit risk. Although regulators have permitted the use of credit ratings for other purposes, these revisions to the credit risk-based capital standards, if adopted, would be the first time banks have been permitted to use credit ratings, benchmarks, or their own internal risk assessments in determining credit risk-based capital requirements.
Bank Regulators Are Also Exploring Other Possible Modifications to Credit Risk Capital Requirements
According to a 1997 paper by two Federal Reserve officials, there is increasing discussion in the banking industry as well as the regulatory community about the possibility for further evolution of bank capital regulation. This paper was intended to provide the equivalent of a briefing paper on some of the specific alternative proposals that have been put forward concerning the future of capital regulation. In the view of the authors, the paper was not intended to pass judgment—positive or negative—on any of these alternatives, but it sought to raise issues that are likely to be important as the discussion of the proposals continues.
In considering the possibility of such evolution, these officials believe it is helpful to keep in mind several recent changes that they believe will influence possible future changes. First, the overall approach to bank supervision is also undergoing continuing review. For example, the bank examination process has been increasingly focused on risk management and internal controls. Second, banks today, especially large internationally active banks, face a number of different types of risks. Some of these risks, such as the market risk of traded instruments, are easier to quantify than others, such as operational risk. In addition, the computer systems and analytical abilities of these banks to measure and manage these risks are evolving themselves.
One modification under consideration would be to continue to extend and revise existing risk-based standards with the goal of improving the extent to which the risk weights for credit risk reflect the true economic risk of the underlying positions. As discussed in chapter 2, many bankers have commented that some of the current risk-weights do not accurately reflect the risk inherent in particular assets, and some have argued that the current risk-based capital framework introduces distortions into the risk-return trade-offs that banks face. Such changes may help address the issue of inappropriate incentives being created for firms by the current risk-weighting scheme.
However, in the view of these Federal Reserve officials, it is not clear that it is possible to better correlate the regulatory risk calculation with true economic risk. In order to eliminate inefficiencies in the risk weights, many believe it would be necessary to mark loan portfolios to market. However, there is no consensus that this is desirable or feasible because there is no readily available resale market for most loans and, therefore, no current market value for them.
Some in the industry are exploring the possibility of using portfolio-based models of credit risk for regulatory capital purposes, much as banks’ internal models of market risk are now being used. According to these Federal Reserve officials, these credit risk models have yet to be empirically tested. Such testing appears to require long periods due to the time period required to observe changes in credit risks. One model, called CreditMetrics, was introduced in 1997 and was accompanied by statements that a primary goal was to encourage a change in regulatory credit risk capital calculations. One problem in the development of credit risk models noted in the paper is that data for such models are sparse. Also, it is not clear what the appropriate holding period is in the case of credit risk. Another issue, noted in the paper, is how far to take this modeling—is there value in attempting to include operational risk, for example, into such a framework?
SEC, CFTC, and Some SROs Are Exploring Approaches to Correlate Regulatory Capital Requirements More Closely to the Risks Inherent in a Firm’s Operations
SEC, CFTC, and some SROs are continuing efforts to revise regulatory capital charges to (1) reflect the economic risks being undertaken by broker-dealers and FCMs more precisely and (2) reduce incentives for some broker-dealers and FCMs to conduct certain activities through their unregistered affiliates to avoid capital requirements that apply only to registered broker-dealers and FCMs. For example, the current SEC and CFTC capital requirements consider any net interest payments due a broker-dealer or FCM from interest rate swaps to be unsecured receivables. As such, they are deducted from the firm’s GAAP equity (which is the equivalent of a 100 percent capital charge). Many broker-dealers and FCMs consider this charge to be an excessive capital requirement. However, if these same swaps were to be conducted in an unregistered affiliate, they would not be subject to capital requirements.
SEC and CFTC Are Exploring the Use of Value-At-Risk Models for Determining Capital Requirements for Market Risk
Value-at-Risk (VAR), a statistical modeling approach, is increasingly being used by a few large broker-dealers in varying ways to measure, control, and report the amount of market risk incurred in their trading activities. According to market participants, SEC’s current net capital requirements do not accurately reflect the economic risks being taken by a broker-dealer’s activities, because such requirements do not incorporate modern finance and risk management techniques. Because the current net capital rule generally does not recognize portfolio diversification, correlation among asset prices, or the many hedging strategies firms employ to reduce their risk, these market participants argue that capital requirements and risk do not always move in the same direction; i.e., if risks increase, then capital requirements should increase and vice versa. Accordingly, certain broker-dealers and their industry associations have been urging SEC to allow broker-dealers to use their internal models for determining regulatory capital requirements for market risk (like banks). In response to such industry urging, SEC issued a concept release in December 1997 on the extent to which a firm’s statistical models might be used in setting capital requirements for a broker-dealer’s proprietary positions.
The statistical modeling approach is intended to more accurately reflect the risk-return trade-off and the relationship between risks and regulatory capital. In the same concept release, SEC discussed the possibility of adopting a “precommitment” feature similar to that being considered by banking regulators.
The DPG Framework Suggested How to Estimate Capital-At-Risk but Did Not Establish Capital Standards
In 1995, DPG member firms, in coordination with SEC and CFTC, developed a self-regulatory framework to address public policy issues raised by the OTC derivatives activities of “unregulated affiliates of SEC-registered broker-dealers and CFTC-registered FCMs.” DPG’s voluntary self-regulatory framework includes, among other things, a provision for evaluating risk in relation to capital. As noted in the framework, this initiative is considered part of a process, not a single event. As DPG member firms and SEC and CFTC gain insights, they anticipate further refinements to the framework.
The “risk in relation to capital” provision of the framework has two parts. First, it suggests a way to estimate market and credit exposures associated with OTC derivatives activities. The market risk approach is similar to the approach used by bank regulators in that it uses internal models; but the credit risk approach is different in that it is based on rating agency information, not on regulatory risk-weights. Second, it advocates an approach for evaluating those risks in relation to capital. According to the DPG framework, capital-at-risk estimates are imperfect measures of potential losses associated with market and credit risks. However, it noted that managers and supervisors can use them to gauge capital adequacy, and the firms have agreed to report their estimates periodically to SEC and CFTC.
Although DPG firms’ estimates of capital-at-risk are not intended to be capital standards, the estimates incorporate elements similar to some of those used in the banks’ risk-based capital regulations. The DPG capital-at-risk for market risk is to be generated by the DPG reporting firm’s internal model using the same parameters (10-day price shock, 99 percent confidence interval) required by the bank regulators. DPG, however, rejected the use of a multiplier to link capital-at-risk to capital levels. Moreover, for credit risk, DPG adjusts for historical default ratios as published by the rating agencies. The DPG firms rejected the bank regulators’ method of estimating potential future credit risk because the bank regulators’ method is based on notional/contract amounts, which the DPG firms do not consider to be meaningful measures of risk.
DPG firms consider this to be an interim approach for estimating current and potential credit risk. They noted in the framework that they anticipate cooperating with requests by SEC and CFTC to compute potential credit risk using other methodologies.
Because the potential for risk of loss beyond the capital-at-risk estimate exists, DPG firms agreed to supplement these estimates with other potential loss estimates resulting from defined stress scenarios. The framework also outlines a common approach to audit and verify technical and performance characteristics because it allows the DPG firms to use internal models that may be unique. DPG member firms developed minimum standards and audit and verification procedures to ensure that performance characteristics of all models used to estimate capital-at-risk for market risk are broadly similar and rigorous.
SEC and CFTC have received annual reports from the DPG reporting firms that summarized external auditors’ reviews of these models. However, because no generally accepted criteria for modeling yet exist that would allow an external auditor to give an opinion on the model’s adequacy, the independent accountants filed reports regarding only limited agreed-upon procedures with respect to their reviews of these models.
In the second part of the framework’s capital-at-risk component, the DPG firms advocate, for a transitional period, an approach for evaluating market- and credit-risk estimates in relation to capital levels. To evaluate the adequacy of existing capital levels at DPG-member affiliates, the framework advocates an oversight approach that encourages regulators and senior managers to take into account the following factors: the firm’s structure, internal controls, and risk management systems; quality of management; risk profile and credit standing; actual daily loss experience; ability to manage risks as indicated by the firm’s ability to perform and document stress testing; and overall compliance with the framework’s policies and procedures. The DPG firms anticipate that as experience is gained with the overall DPG framework, and depending on the evolution of thinking and policies among regulators internationally, this approach may require further refinement or modification.
Concerns remain about using internal models for regulatory purposes (e.g., validating the accuracy of the results). However, SEC and CFTC have been collecting and examining data from broker-dealers’ internal models, via DPG, to gain a better understanding of the manner in which the models operate and the adequacy of capital charges derived from them.
SEC Is Considering Creating OTC Derivatives Dealers
Current capital and margin requirements applicable to registered broker-dealers impose substantial costs on the operation of an OTC derivatives business and make it difficult for U.S. securities firms to compete effectively with banks and foreign dealers in the OTC derivatives markets. In December 1997, in order to allow broker-dealers to take better advantage of counterparty netting and to adjust the capital rule to better reflect the risks of OTC derivatives, SEC proposed the creation of a new class of broker-dealers called OTC derivatives dealers. This limited regulatory structure would be available only to entities acting primarily as counterparties in privately negotiated over-the-counter derivatives transactions and would be subject to modified capital, margin, and other regulatory requirements tailored to the OTC derivatives business. For example, under the limited regulatory structure, OTC derivatives dealers would be required to maintain at least $100 million in tentative net capital (i.e., capital before haircuts and undue concentration charges are taken) and at least $20 million in regulatory net capital. Also, OTC derivatives dealers would be exempted from certain margin requirements.
SEC believes the proposed minimum of $100 million in tentative net capital is necessary to ensure against excessive leverage and risks other than credit or market risk, all of which are now factored into the current haircuts, and to provide for a cushion of capital against severe market disturbances. Under the proposal, OTC derivatives dealers would be given the option of either taking haircuts, as currently required under SEC’s net capital rule, or using a rule proposed to calculate capital charges for credit risk and using a VAR model to determine capital charges for market risk. SEC’s proposed rule would require that any VAR models meet certain minimum qualitative and quantitative requirements.
In calculating capital charges for market risk, OTC derivatives dealers could elect one of two methods. First, OTC derivatives dealers would be able to use the full VAR method to calculate capital charges for market risk exposure for transactions in eligible OTC derivatives instruments and other proprietary positions of the OTC derivatives dealer. Under the full VAR method, a market risk capital charge would be equal to the VAR of its positions multiplied by a factor specified in the proposed rule. Second, an OTC derivatives dealer could use an alternative method of computing the market risk capital charge for equity instruments and OTC options and use VAR for its other proprietary positions. Because OTC derivatives dealers would be required to obtain authorization from SEC before using VAR models, this alternative method would also be used by a firm that does not receive SEC authorization to use a VAR model for equity instruments.
In calculating capital charges for credit risk, OTC derivatives dealers electing to apply the proposed rule would compute a two-part charge on a counterparty basis. First, for each counterparty, OTC derivatives dealers would take a capital charge equal to the net replacement value in the account of the counterparty multiplied by 8 percent, and further multiplied by a counterparty factor ranging from 20 to 100 percent based on the counterparty’s rating by at least two nationally recognized statistical rating agencies. The counterparty factors would link the size of the credit risk capital charge to the perceived risk that the counterparty may default.
The second part of the credit risk charge would consist of a concentration charge that would apply when the net replacement value in the account of any one counterparty exceeds 25 percent of the OTC derivatives dealer’s tentative net capital and would also be based on the counterparty’s rating by at least two rating agencies. The concentration charge would equal 5 percent of the amount of the net replacement value in excess of 25 percent of the OTC derivatives dealer’s tentative net capital for counterparties that are highly rated and would increase in relation to the OTC derivatives dealer’s exposure to lower rated counterparties.
SEC Proposed New Net Capital Rule Treatment for Interest Rate Products
In addition to the OTC derivatives dealers release, in December 1997, SEC proposed amendments to the net capital rule, Rule 15c3-1, regarding the method of computing haircuts applicable to interest rate products. The proposed amendments would treat most types of interest rate products as part of a single portfolio and would recognize various hedges among a portfolio of government securities, investment grade nonconvertible debt securities (or corporate debt securities), certain pass-through mortgage-backed securities, repurchase and reverse repurchase agreements, money market instruments, futures and forward contracts on these debt instruments, and other types of debt-related derivatives. The proposed amendments are intended to better match capital charges with actual market risk hedging practices employed by broker-dealers.
CFTC Is Exploring the Regulatory Structure Applicable to OTC Derivatives
As part of its comprehensive regulatory reform efforts to update its oversight of both exchange and off-exchange markets, CFTC published a concept release in May 1998, on issues relating to the OTC derivatives market. The concept release requests comments on whether the regulatory structure applicable to OTC derivatives under CFTC regulations should be changed in light of the growth in the derivatives marketplace since CFTC’s last major regulatory actions involving OTC derivatives in 1993.
CME and CBOT Adopted Risk-Based Capital Requirements for Their Clearing Organizations
In 1995, two futures industry SROs, the Chicago Board of Trade (CBOT) and the Chicago Mercantile Exchange (CME), informally proposed to CFTC to base minimum capital requirements on “funds at risk” as opposed to the current “funds required to be segregated.” In their view, the current CFTC net capital requirements (CFTC Rule 1.17) do not fully reflect all of the risks (e.g., foreign customers trading in foreign markets) faced by FCMs’ trading activities and thus impose insufficient capital requirements on FCMs. Funds at risk are generally defined as the initial margin requirements, which are themselves risk-based, imposed by the various exchanges on all open positions held at those exchanges; segregated funds are generally balances that FCMs owe to customers.
The CBOT and the CME risk-based capital proposals were positively received by CFTC, which consulted with the SROs on the parameters of the risk model. The SROs’ risk-based capital requirements for their clearing organizations became effective on January 1, 1998. Under the newly adopted risk-based capital requirements, all members of the two SROs are required to maintain adjusted net capital in excess of the greater of (1) the minimum dollar balances of the respective clearing organizations, or (2) 10 percent of domestic and foreign domiciled customer and 4 percent of noncustomer (excluding proprietary) risk maintenance margin/performance bond requirements for all domestic and foreign futures and options on futures contract, or (3) the CFTC/SEC minimum regulatory capital requirements. CME and CBOT believe that these new requirements will correlate FCMs’ capital requirements more closely to the total risks they face in their business.
To aid in the adoption of an industrywide risk-based capital standard, CBOT and CME plan to collect and analyze data over several years to determine the effect of the new requirements on overall industry capital levels.
Life Insurance Regulators Are Exploring Changes to Their Risk-Based Capital Requirements
NAIC has asked the American Academy of Actuaries to study the possibility of increasing the level of quantification in the interest rate risk component of the life insurance risk-based capital requirements. The reason for changing the interest rate risk component is due to the difficulty in managing interest rate risk for life insurance companies. This difficulty increases as financial products become more complex, and interest rate risk exists in both the assets and liabilities of life insurance companies. The current risk-based capital formula addresses interest rate risk only in the asset side.
Changes to the interest rate risk component of the risk-based capital requirements are seen by life insurance regulators and companies as a major change. Other changes that are being made to the risk-based capital formula are considered to be minor modifications. For example, since the initial formula was adopted, changes have been made to the mortgage loan factors, and the treatment of insurers’ investments in certain mutual funds have been given different treatment depending upon what the mutual funds invest in. Regulators we spoke with expected further changes similar to these to continue in the future.
New Approaches to Capital Regulation Are Also Being Explored
In addition to initiatives that would make regulatory capital requirements more sensitive to risks in firms’ activities, a number of other ideas are being explored, primarily in banking, that would take different approaches to simplifying capital regulation. Three of them would use various incentives rather than detailed requirements to deter excessive risk-taking by firms. The final idea in this section is motivated by a desire of some in the industry to keep capital requirements from becoming extremely complex and comes from the recognition that minimum regulatory capital standards and banks’ own internal capital allocation models serve different purposes.
The Precommitment Approach Was Pilot Tested
In July 1995, the Federal Reserve Board requested public comment on the so-called precommitment approach to market risk capital requirements, which was introduced in a paper by two Federal Reserve officials. It was developed in response to perceived difficulties with the internal models approach to market risk capital. For example, banks’ internal models are not designed to measure risk exposure over the time horizons of regulatory concern and thus may not accurately translate to these intervals. In addition, model-based capital calculations cannot account for the fact that some banks will be in a position to reduce their exposure to losses through investment in superior information systems or other aspects of risk management.
Under the precommitment approach, the bank would specify an amount of capital it believed was adequate to cover its risk exposure over a fixed subsequent interval and would commit to manage its trading portfolio to limit losses over the interval to this amount. If the bank’s losses exceeded the precommitment amount, it would face penalties that could range from public disclosure to additional capital requirements or monetary fines. Under this approach, both the commitment and the bank’s risk management system would be subject to review by regulatory authorities. The penalties associated with a breach of the capital commitment are to provide the incentive for banks to commit honestly and to manage risk to stay within the commitment.
Some industry analysts considered such an approach to be a major improvement in capital regulation. However, others believe the approach raises a number of issues because of its departure from traditional capital regulation—comparability, interaction with other supervisory policies, enforceability, and the role of penalties.
Regarding comparability, on the surface it would seem that precommitted amounts would be comparable across firms because the firms are all being asked about the maximum amount they could lose over the same time interval. However, the amounts are likely to differ because they would still be based on subjective estimates of the quality of internal risk management and differences in firms’ tolerances for risk. Comparability might also be compromised because the cost of capital differs across firms.
With regard to interaction with other supervisory policies, bank supervisors are already required to focus on bank internal risk measurement and management systems. Thus, it is not clear that the adoption of the precommitment approach would eliminate supervisory interest in the validation of such systems.
With regard to enforcement and the role of penalties, there is a concern not only about the types of penalties that should be used, but also whether it would be counterproductive to enforce them during stressful market conditions. The paper notes that in choosing penalties, it will be important to determine what the goal of penalties is—that is, the degree of incentive they are to provide the bank. Some experts believe that to reliably achieve regulatory objectives, the penalties would need to be bank specific and that the appropriate penalty would depend on a bank’s cost of capital and its individual investment opportunities. However, these factors are not ascertainable by regulators. In addition, recent work by the original designers of the precommitment approach acknowledges that the link between after-the-fact penalties and regulatory capital objectives is tenuous. In the view of a Federal Reserve official, the appropriate penalty for achieving regulatory capital objectives for market risks is bank specific and depends on characteristics that regulators cannot precisely measure. Moreover, an approach that relies on after-the-fact penalties to influence bank behavior implicitly assumes that the bank is forward-looking and takes potential penalties into account when making current capital allocation decisions. This might be a reasonable assumption for healthy banks, but weak banks may not care about future penalties that, in the extreme, might not be enforceable if the bank is insolvent.
The New York Clearing House Association (Clearing House) conducted a four-quarter test of the precommitment approach that began in October 1996. The pilot was designed to assist the bank regulators and the participating banks and bank holding companies in evaluating and assessing the usefulness and viability of the approach for regulatory capital purposes. In a comment letter to the Federal Reserve, the Clearing House suggested that the U.S. bank regulators consider adoption of this approach for two reasons: (1) it might constitute a way to effectively establish a relationship between an institution’s calculation of value-at-risk for management purposes and prudent capital requirements for regulatory purposes, and (2) it would result in capital requirements for market risks tailored to the particular circumstances of each institution.
There were 10 participants in the pilot—8 U.S. and 2 foreign banking organizations. During the pilot, each participant precommitted the amount of capital it needed to hold against its market risk for four 3-month periods. The pilot was conducted on a consolidated basis in that participants precommitted capital for the consolidated trading operation of the holding company, including bank and Section 20 subsidiaries. After the end of each period, participants reported their results to their primary regulators and provided copies of the reports to the Clearing House. The participants conducted the pilot under the assumption that the penalty would be disclosure, not financial penalties.
In its report on the pilot’s results, the Clearing House said that the participants believe (1) the precommitment approach is a viable alternative to the internal models approach for establishing capital adequacy of a trading business for regulatory purposes; and (2) when properly structured and refined, steps should be taken to implement it as an alternative to existing market risk capital standards. Further, the participants believe this approach provides strong incentives for prudent risk management and more efficient allocation of capital as compared to other existing capital standards. The Clearing House believes the pilot contributed to the development and depth of the participants’ thinking about the purpose of capital and about the distinction between economic capital maintained for the benefit of shareholders and minimum regulatory capital.
Pilot results showed that the participants’ precommitted capital amounts were less than the market risk regulatory capital requirements. No participant reported a negative change that exceeded its precommitted capital amount. Finally, the participants believe the benefits of the precommitment approach are likely to apply to other risks of trading businesses, such as operational risk, as well. In their view, the approach avoids many of the complications and inefficiencies that are generated when capital requirements are set separately for each category of risk.
One high level regulatory official, reflecting the generally held regulatory and industry views, said that the pilot demonstrated that the participants have internal procedures for allocating capital for market and other risks in their portfolios; but it did not, and realistically could not, demonstrate that these internal allocations are sufficiently large to meet regulatory objectives with respect to minimum capital. Even though none of the participants reported losses in excess of their commitments during the pilot, in reality, none of the participants incurred any cumulative loss over any of the four quarters. Hence, no violations would have occurred if no capital had been committed.
An Approach That Emphasizes Supervision Is Being Explored
Another alternative approach to the evolution of bank capital regulation would be one that emphasizes supervision rather than minimum standards. In a 1995 paper, a Federal Reserve official argued that the distinct uses and characteristics of minimum regulatory capital requirements and firm internal capital allocations make it inadvisable to combine them into a single measure. In his view, they are so naturally contradictory that a hybrid would be much less informative than two individual measures. Moreover, he believes an attempt to bring the two constructs closely in line could undermine the useful objectivity of minimum capital and deprive firms of the flexibility they need to determine optimum capital levels. Under this approach, the firm would be accountable for determining its own appropriate level of capital while abiding by sound practices developed in the context of the business. Firms engaged in trading complex instruments would need to apply sophisticated mathematical techniques; those that focus on, for example, small business lending would have to apply different techniques (e.g., traditional credit analysis). The supervisor would monitor the performance of the firm in the firm’s determination of its appropriate capital level.
Like the precommitment approach discussed above, this approach also relies on incentives. However, in contrast to the precommitment approach in which penalties are to act as a deterrent to excessive risk taking, the key to the success of this approach would be the supervisor. The supervisor would monitor compliance with minimum requirements as frequently as feasible and then supplement the effectiveness of minimum requirements by ensuring that the firm makes its best efforts to determine an optimum level of capital. In this way, the development and determination of the optimum are best left to the firm, and supervisors would work closely with the firm to ameliorate the situation if they find capital levels declining toward the minimums. The Federal Reserve official also believes this approach would be consistent with the prompt corrective action rules. (See app. I for more information on prompt corrective action.)
An Approach That Emphasizes Disclosure Is Also Being Explored
In their 1997 paper, two Federal Reserve officials noted that a number of different approaches exist that would emphasize disclosure rather than minimum standards. One of these approaches would operate along the same lines as the approach emphasizing supervision discussed above. It would develop a two-pronged capital structure that would separate minimum standards, which would be set by the supervisor, from the optimal capital held by the firm, which should be its own decision. The first prong could be a minimum capital calculation in which the method would be chosen to emphasize comparability across firms; the second prong would be an internal capital calculation in which the bank would have greater freedom to use its own methodology. The bank would publicly disclose the results of both calculations. In the authors’ view, this approach would seek to combine public disclosure and the discipline of the marketplace to ensure that banks had appropriate incentives in the development of these internal calculations.
Other Approaches to Changing Bank Capital Regulation Emphasize Reducing the Complexity of the Rules
A number of other approaches to capital regulation are being explored, particularly in the banking area, that would also simplify capital requirements. One possible approach discussed by the Federal Reserve officials in their paper is, in their view, motivated by the desire of some in the industry to keep the capital rules from becoming extremely complex and by the recognition that minimum capital standards serve a different purpose from banks’ own internal capital allocation models. This approach would develop a capital framework that would not require ever more complex measures of portfolio risk. The hope in developing such a framework is that a suitable proxy for true economic risk could be found. This proxy would not be intended to be extremely precise, but it would need to roughly capture the bulk of the firm’s exposures. According to the Federal Reserve officials, the key issue for this alternative approach is whether it is possible to achieve this goal. There are two interpretations for this approach. In the first, the aim is for the simple measure of risk to be roughly accurate in that, on average, it produces a measure of risk that is equivalent to what an ideally precise measure would produce. In the second, the goal would be a simple measure of risk that is good enough to determine whether the firm has a dangerously low level of capital.
Another approach discussed by the Federal Reserve officials in their paper is one that would base capital regulation on observed measures of volatility, such as earnings volatility. This approach is also motivated by a desire to develop a simple but comprehensive approach to bank capital regulation that would not require the separate specification of each risk. One possibility suggested in the paper would be for minimum capital to equal some multiple of quarterly earnings volatility. Such an approach would require almost no additional calculations by the bank and, in the authors’ view, it would be objective and verifiable; however, they noted a number of drawbacks to such an approach. First, it is not clear that earnings volatility is itself a good proxy for economic risk. Second, because it is a transformation of publicly available information, it does not provide any additional information to the marketplace. Third, it would potentially create incentives for bank behavior aimed at smoothing reported income.
Bank Risk-Based Capital Standards
The current U.S. bank risk-based capital regulations implement the Basle Accord on risk-based capital. In implementing the Basle Accord each national bank regulator was to make its own regulations at least as strict as the Accord. In the United States, U.S. bank regulators applied it to all banks, rather than just internationally active ones, which were targeted by the Accord. Since 1990, banks and bank holding companies in the United States have been subject to risk-based capital standards. This appendix describes the risk-based capital standards for banks. The standards for bank holding companies are similar.
Although U.S. bank risk-based capital guidelines address a number of types of risk, only credit and market risk are explicitly quantified. The quantified risk-based capital standard is defined in terms of a ratio of qualifying capital divided by risk-weighted assets. In addition to the quantified risk-based capital ratio for credit and market risks, bank regulators are required by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) to monitor other risks, such as interest rate risk and concentration risk.
Calculating the Risk-Based Capital Ratio for Credit Risk
All banks are required to calculate their credit risk for assets, such as loans and securities; and off-balance sheet items, such as derivatives or letters of credit. The credit risk calculation assigns all assets and off-balance sheet items to one of four broad categories of relative riskiness (0, 20, 50, or 100 percent) according to type of borrower/obligor and, where relevant, the nature of any qualifying collateral or guarantee. Off-balance sheet items are converted into credit equivalent amounts. The assets and credit equivalent amount of off-balance sheet items in each category are multiplied by their appropriate risk-weight and then summed to obtain the total risk-weighted assets for the denominator of the credit risk-based capital ratio. Capital, the numerator of the capital ratio, is long-term funding sources for the bank that are specified in the regulations. A bank is to maintain a total risk-based capital ratio (total capital/risk-weighted assets) of at least 8 percent.
Measuring Risk-Weighted Assets for Credit Risk
The credit risk regulation requires the use of two sets of multipliers. One set of multipliers places each off-balance sheet item into one of four categories and converts items in each category into asset equivalents. These conversion factors are multiplied by the face or notional amount of the off-balance sheet items to determine the “credit equivalent” amounts. In addition, for derivatives, these credit equivalent amounts are the value of the bank’s claims on the counterparties plus add-on factors to cover the potential future value of the derivative contracts. Then the other set of multipliers applies the risk-weights to assets and off-balance sheet credit equivalent amounts according to the type of borrower/obligor (and, where relevant, the nature of any qualifying collateral or guarantee). The sum of the risk-weighted assets in all categories is the credit risk-weighted assets for the bank.
There are four conversion factors that convert off-balance sheet items into their asset equivalents. The conversions are based on multiplying the conversion factors by the face or notional amounts of the relevant off-balance sheet position.
The 100 percent credit conversion factor applies to direct credit substitutes, such as guarantee-type letters of credit, risk participations in bankers acceptances, and asset sales with recourse.
The 50 percent credit conversion factor applies to items such as performance bonds, revolving underwriting facilities, or unused commitments with an original maturity exceeding 1 year.
The 20 percent credit conversion factor applies to short-term, self-liquidating, trade-related contingencies, including commercial letters of credit.
The 0 percent credit conversion factor applies to unused portions of commitments with an original maturity of 1 year or less and unused portions of commitments that can be cancelled at any time.
Credit equivalent amounts are also calculated for off-balance sheet derivatives contracts. The credit equivalent amounts on such contracts are the sum of the present positive value (if any) of the contracts plus estimated potential future exposure.
Under the capital regulations, the credit equivalent of the potential future exposure of derivatives contracts is estimated by multiplying the notional values of the contracts by specified percentages. The multipliers range from 0 to 15 percent; cover 6 types of derivatives contracts (interest rate, exchange rate, equity, gold, other precious metals, and other commodities); and include maturity categories of 1 year or less, 1 to 5 years, and over 5 years.
Although the Basle Accord adopted five risk weight categories, U.S. regulations allow only four risk categories.
Category 1 has a zero risk-weight and includes items such as cash, claims on Organization for Economic Cooperation and Development (OECD)central governments and central banks, and claims on U.S. government agencies. The zero weight reflects the lack of credit risk associated with such positions.
Category 2 has a 20-percent risk-weight and includes items such as long-term claims on banks in OECD countries, general obligations of OECD governments below the national level, obligations of government-sponsored enterprises, or cash items in the process of collection.
Category 3 has a risk-weight of 50 percent and includes items such as certain loans secured by first liens on 1 to 4 family residential real estate and obligations of local governments in OECD countries that depend on revenue flows from projects financed by the debt.
Category 4 has a risk-weight of 100 percent and represents the presumed bulk of the assets of commercial banks. It includes, among other things, commercial loans and claims on non-OECD central governments.
Defining Capital in the Credit-Risk Capital Ratio
Before the capital ratio can be calculated, capital must be defined and quantified. There are two qualifying capital components in the risk-based credit risk computation—“core capital” (tier 1) and “supplementary capital” (tier 2). Tier 1 includes common stockholders’ equity; noncumulative perpetual preferred stock (including any related surplus); and minority interests in consolidated subsidiaries, less deductions for certain assets such as goodwill and core deposit intangibles. Tier 1 is stockholder ownership value that cannot be removed if the bank faces financial difficulties. Tier 2 includes the allowance for loan loss reserves, up to a maximum of 1.25 percent of risk-weighted assets; other preferred stock (subject to limitations); and various long-term debt instruments, such as subordinated debt, that provide support to the firm if it is facing financial difficulties because they cannot be readily liquidated by creditors or bond holders prior to maturity. In addition, the regulations limit the amount of tier 2 capital in total capital and the amount and type of qualifying intangible assets that can be recognized for tier 1 capital purposes.
The regulation outlines a number of deductions from the capital base. Goodwill and other intangible assets are to be deducted from tier 1 capital as prescribed in the rules. Other deductions from total capital include investments in unconsolidated banking and financial subsidiary companies that are deemed to be capital of the subsidiary, and reciprocal bank holdings of investments in the capital of other banks and financial institutions.
With capital and risk-weighted assets defined, the ratio calculation is the sum of tier 1 and tier 2 capital divided by total risk-weighted assets. Table I.1 summarizes the mechanics of converting on- and off-balance sheet assets in each category into the risk-weighted assets and computing the credit risk-based capital ratio. The minimum standard risk-based capital ratio is 8 percent, of which core capital (tier 1) is to be at least 4 percent.
Convert all off-balance sheet items into credit equivalent amounts using a conversion factor from the regulation. The asset equivalent of each off-balance sheet item is the notional or face amount of that item multiplied by a conversion factor. The converted amount of each off-balance sheet item is then placed into one of the four risk categories.
Sum the balance sheet asset values and the credit equivalent amount of off-balance sheet items in each risk category.
Determine the risk-weighted assets in each risk category by multiplying the balance sheet asset values and the credit equivalent amount of off-balance sheet items in each risk category by the appropriate risk-weight percentage for that category found in the regulation.
Calculate risk-weighted assets as the sum of the risk-weighted assets across the four risk categories.
Calculate the credit risk-based capital ratio: tier 1 capital + tier 2 capital risk-weighted assets Compare the calculated ratio to the standards in the regulation.
Calculating the Risk-Based Capital Ratio for Market Risk
The risk-based capital regulation requires a bank with a significant market risk exposure to calculate a risk-based capital ratio that takes into account market risk as well as credit risk. The market risk capital regulation applies to positions in an institution’s trading account such as securities and derivatives; and all foreign exchange and commodity positions, wherever they are located in the bank. Market risk exposure is the gross sum of trading assets and liabilities on the bank’s balance sheet. To be considered a significant exposure, this gross exposure must exceed 10 percent of total assets or exceed $1 billion. Credit risk determinations are also made, where necessary, for items included in the market risk calculation. Over-the-counter derivatives and foreign exchange positions outside of the trading account are items subject to both market and credit risk charges.
This adjusted risk-based capital ratio requires banks to determine whether positions are subject to market risk capital requirements, credit risk capital requirements, or both. The denominator of the risk-based capital ratio is the sum of credit risk-weighted assets for assets with credit risk and market risk-equivalent assets. To determine market risk-equivalent assets, the bank is required to use its own internal model to calculate its daily value-at-risk (VAR). The numerator of the risk-based capital ratio expands the definition of capital to include a tier 3, which is a special form of subordinated debt as defined in the regulations. The market risk regulation imposes qualitative requirements on the banks and specifies quantitative parameters to be used with the banks’ internal models.
Measuring Market Risk and Market Risk-Equivalent Assets
Market risk consists of general market and specific risk components. To determine the market risk-equivalent assets, the risk or capital charges must be calculated for both components.
Market risk capital charges are based on general market and specific risks. Examples of general market risk factors are interest rate movements and other general price movements. Capital charges for general market risks are to be based on internal models developed by each bank to calculate a VAR estimate, i.e., potential loss that capital will need to absorb. The internal VAR estimate for general market risks is to be based on statistical analyses that determine the probability of a given loss, based on at least 1 year of historical data. This VAR estimate is to be calculated daily using a 99 percent one-tailed confidence interval with a price shock equivalent to a 10-business day movement in rates and prices; i.e., 99 percent of the time the calculated VAR would not be exceeded in a 10-day period.
Specific risk arises from factors relating to the characteristics of specific issuers of instruments. Specific risk factors reflect both idiosyncratic price movements of individual securities and “event risk” from incidents, such as defaults or credit downgrades, which are unique to the issuer and not related to market factors. If a bank’s internal model does not capture all aspects of specific risk, an add-on to the capital charge is required for specific risk. Specific risk estimates based on internal models are subject to adjustments based on the precision of the model.
The total market risk capital charge is the sum of the capital charges for general market and specific risk. The total market risk capital charge is based on the larger of the previous day’s VAR estimate and the average of the daily VAR estimates for the past 60 days times the multiplier. The multiplier ranges from 3 up to a maximum of 4 depending on the results of backtesting. Market risk-equivalent assets are the total market risk capital charges multiplied by 12.5.
Defining Capital in the Market Risk Capital Ratio
The market risk capital ratio augments the definitions of qualifying capital in the credit risk requirement by adding an additional capital component (tier 3). Tier 3 capital is unsecured subordinated debt that is fully paid up, has an original maturity of at least 2 years, and is redeemable before maturity only with approval by the regulator. To be included in the definition of tier 3 capital, the subordinated debt is to include a lock-in clause precluding payment of either interest or principal (even at maturity) if the payment would cause the issuing bank’s risk-based capital ratio to fall or remain below the minimum requirement. Tier 3 capital provides another capital cushion against losses due to market risk.
Calculating the Market Risk-Based Capital Ratio
Application of the market risk capital ratio requires the use of a two-part test. The sum of tiers 1, 2, and 3 capital must equal at least 8 percent of total adjusted risk-weighted assets. The tier 3 capital in this sum is only to be allocated to cover market risk. In addition, the sum of tier 2 and tier 3 capital for market risk may not exceed 250 percent of tier 1 capital allocated for market risk. The regulation includes other restrictions on the use of tier 2 and 3 capital.
Table I.2 shows the mechanisms by which the risk-based capital ratio is calculated for credit and market risk.
Determine whether positions are subject to market risk capital requirements, credit risk capital requirements, or both.
For the credit risk assets and off-balance sheet items, calculate the credit risk-weighted assets as described in table I.1.
Quantify general market risks using the bank’s VAR model to estimate the volatility of the prices of market risk assets and items using a VAR model. The estimated VAR is the higher of the previous VAR or the average of the daily VAR estimates for the past 60 days multiplied by a factor between 3 and 4 depending on the accuracy of the VAR model.
Quantify specific risks using risk add-ons or estimates based on the bank’s internal model, or some combination of both.
Determine the total risk-weighted assets for market risk by summing the measures of general market and specific risks and multiply this sum by 12.5.
Calculate the total risk-weighted assets for market risk by summing the credit risk-weighted and market risk-equivalent assets.
Determine tier 3 capital and the total capital for the numerator. The mix of the capital tiers in the numerator of the combined credit and market risk-based capital ratio is limited by the regulation.
Calculate the total risk capital ratio subject to the capital restrictions in step 7. (tier 1 + tier 2 + tier 3 capital) (credit risk-based assets + market risk-equivalent assets)
Compare the calculated ratio to the standards in the regulation.
Internal Model Specifications and Requirements
The regulation requires the bank’s internal model to address all major market risk categories using factors sufficient to measure market risks in all covered positions. The regulation specifies certain requirements for the bank’s internal model. In developing its internal model, the bank may use any generally accepted measurement technique, such as variance-covariance models, historical simulations, or Monte Carlo simulations. However, the level of sophistication and accuracy of the model must be commensurate with the nature and size of the bank’s covered positions.
Quantitative Requirements for General Market Risk
For regulatory capital purposes, the VAR measures must meet the following quantitative requirements: 1. The VAR measure or maximum likely loss is to be calculated on a daily basis with a 99 percent one-tailed confidence level with a price shock equivalent to a 10-business day holding period. This 10-day shock can be calculated directly or be based on the 1-day VAR figures. 2. The VAR calculation is to be based on historical data of at least 1 year. 3. The VAR calculation is to account for nonlinear price characteristics of options positions and the sensitivity of the market value of the positions to changes in the volatility of the underlying rates or prices. That is, the calculation must take into account the fact that certain financial positions imply minimal risk for certain market price movements and much larger risks for other market price movements. 4. The VAR measures may incorporate quantified empirical correlationswithin and across risk categories, provided that the bank’s process for measuring correlations is sound. 5. Beginning 1 year after adoption of the rules, backtesting will be required and it is to be based on the most recent 250 days of trading. The testing is to be done on a 1-day holding period and a 99 percent one-tailed confidence level.
Quantitative Requirements for Specific Risk
An institution whose internal model does not adequately measure specific risk must continue to calculate standard specific risk capital charges or add-ons to the VAR-based capital charge to determine market risk capital requirements. An institution whose internal model adequately captures specific risk may base its specific risk capital charge on the model’s estimates.
Specific risk means the changes in the market value of specific positions due to factors other than broad market movements, including idiosyncratic variations as well as event and default risk. In order to capture specific risk, the internal model is to explain the historic price variation in the portfolio and be sensitive to changes in portfolio concentrations—the extent to which one type of asset dominates the portfolio—requiring additional capital for greater concentrations. The internal model is required to be robust to adverse environments. The model’s ability to capture specific risks is to be validated through backtesting. Institutions with models that are not validated with backtesting are to continue to use specific risk add-ons as defined in the regulations.
Qualitative Restrictions in Applying the Market Risk-Based Capital Regulation
The risk management system of any bank subject to the market risk requirement is required to meet the following minimum qualitative requirements. It is to have a risk control unit that reports directly to senior management and is independent from business trading units, an internal risk management model that is integrated into daily policies and procedures to identify and conduct appropriate stress tests and backtests of the model,independent annual reviews of its risk measurement and risk management systems.
FDICIA Required Revisions to U.S. Risk-Based Capital Standards
FDICIA was enacted to make fundamental changes in federal oversight of depository institutions in response to the thrift and banking crisis of the 1980s, which resulted in large federal deposit insurance fund losses. Section 305 of FDICIA required, among other things, that bank regulators revise their risk-based capital standards to include concentration of credit risk, risks of nontraditional activities, and interest rate risk. Inadequate management of these risks had created problems for the bank and thrift deposit insurance funds.
In response, on December 13, 1994, bank regulators amended risk-based capital standards for depository institutions to “ensure that those standards take adequate account of concentration of credit risk and the risks of nontraditional activities,” which include derivatives activities. Regulators are to consider the risks from nontraditional activities and management’s ability to monitor and control these risks when assessing the adequacy of a bank’s capital. Similarly, institutions identified through the examination process as having exposure to concentration of credit risk or as not adequately managing their concentration of risk are required to hold capital above the regulatory minimums. Because no generally accepted approach exists for identifying and quantifying the magnitude of risk associated with concentrations of credit, bank regulators determined that including a formula-based calculation to quantify the related risk was not feasible.
U.S. bank regulators addressed the interest rate risk portion of section 305 through a two-step process. Step one consisted of a final rule issued on August 2, 1995, that amended the capital standards to specify that bank regulators will include in their evaluations of a bank’s capital adequacy an assessment of the exposure to declines in the economic value of the bank’s capital due to changes in interest rates. The final rules specify that examiners will also consider the adequacy of the bank’s internal interest rate risk management. Step one also included a proposed joint policy statement that was issued concurrently with the final rule. This joint policy statement described how bank regulators would measure and assess a bank’s exposure to interest rate risk.
Originally, bank regulators intended that step two would be the issuance of a proposed rule based on the August 2, 1995, joint policy statement that would have established an explicit minimum capital requirement for interest rate risk. Subsequently, bank regulators elected not to pursue a standardized measure and explicit capital charge for interest rate risk.
According to the bank regulators’ June 26, 1996, joint policy statement on interest rate risk, the decision not to pursue an explicit measure reflects concerns about the burden, accuracy, and complexity of developing a standardized model and the realization that interest rate risk measurement techniques continue to evolve. Nonetheless, bank regulators said they will continue to place significant emphasis on the level of a bank’s interest rate risk exposure and the quality of its risk-management process when they are evaluating its capital adequacy.
The regulators concluded that interest rate risks were too difficult for many institutions to quantify, and concentration risk was too difficult to quantify in a manner that could be used in a risk-based capital calculation. Therefore, instead of developing a quantitative standard for each of these risks, the regulators decided that both risks need to be carefully monitored by examiners and that regulators could increase capital requirements for any institution on a case-by-case basis.
FDICIA Uses Capital Ratios to Determine Bank Capital Adequacy
FDICIA contains several provisions that were intended to collectively improve supervision of federally insured depository institutions. FDICIA’s Prompt Regulatory Action provisions created two new sections in the Federal Deposit Insurance Act—sections 38 and 39—which mandate that regulators establish a two-part regulatory framework to improve safeguards for the deposit insurance fund. Section 38 creates a capital-based framework for bank and thrift oversight that is based on the placement of financial institutions into one of five capital categories. FDICIA requires that banks meet both a risk-based and a leverage requirement.
Capital was made the centerpiece of the framework because it represents funds invested by an institution’s owners, such as common and preferred stock, that can be used to absorb unexpected losses before the institution becomes insolvent. Thus, capital was seen as serving a vital role as a buffer between bank losses and the deposit insurance system. Although section 38 does not in any way limit regulators’ ability to take additional supervisory action, it requires federal regulators to take specific actions against banks and thrifts that have capital levels below minimum standards. The specified regulatory actions are made increasingly severe as an institution’s capital drops to lower levels. By focusing on capital, which absorbs losses, and requiring regulators to take actions when capital levels fall below predetermined thresholds, including requiring closure if capital levels become too low, FDICIA was meant to curb failures and deposit insurance losses if regulators had to close an institution.
Section 38 of FDICIA requires regulators to establish criteria for classifying depository institutions into the following five capital categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. The section does not place restrictions on institutions that meet or exceed the minimum capital standards—that is, those that are well-capitalized or adequately capitalized—other than prohibiting the institution from paying dividends or management fees that would drop them into the undercapitalized category.
The regulators jointly developed the implementing regulations for section 38 and based the criteria for four of the five capital categories on the international risk-based capital calculation and the leverage capital ratio. The fifth category—critically undercapitalized—is based on a tangible equity-to-total assets ratio.
The four regulators specifically based the benchmarks for an adequately capitalized institution on the Basle Committee’s risk-based capital requirement, which stipulates that an internationally active bank must have at least 8 percent total risk-based capital and 4 percent tier 1 risk-based capital. The benchmarks are also based on the U.S. leverage capital standard, which generally requires U.S. banks to have tier 1 capital equal to at least 4 percent of total assets. For the definition of a critically undercapitalized institution, the regulators adopted section 38’s requirement of a tangible equity ratio of 2 percent or less.
As shown in figure I.1, three capital ratios are used to determine if an institution is well-capitalized, adequately capitalized, undercapitalized, or significantly undercapitalized. A well-capitalized or adequately capitalized institution must meet or exceed all three capital ratios for its capital category. To be deemed undercapitalized or significantly undercapitalized, an institution need fall below only one of the ratios listed for its capital category. Although not shown in the figure, a fourth ratio—tangible equity—is used to categorize an institution as critically undercapitalized.Any institution that has a 2 percent or less tangible equity ratio is considered critically undercapitalized, regardless of its other capital ratios.
Figure I.1: Summary of Four Section 38 Capital Categories and Ratio Requirements Tier 1 risk-based capital ratio The leverage ratio can be as low as 3 percent if the institution has a regulator-assigned composite rating of 1. Regulators are to assign a composite rating of 1 only to institutions considered to be sound in almost every respect of operations, condition, and performance.
An institution cannot be considered to be well-capitalized if it is subject to a formal regulatory enforcement action that requires the institution to meet and maintain a specific capital level.
Key SEC Financial Responsibility Rules
The Securities and Exchange Commission’s (SEC) uniform net capital rule (15c3-1) and customer protection rule (15c3-3) form the foundation of the securities industry’s financial responsibility framework. The net capital rule focuses on liquidity and is designed to protect securities customers, counterparties, and creditors by requiring that broker-dealers have sufficient liquid resources on hand at all times to satisfy claims promptly. Rule 15c3-3, or the customer protection rule, which complements rule 15c3-1, is designed to ensure that customer property (securities and funds) in the custody of broker-dealers is adequately safeguarded. By law, both of these rules apply to the activities of registered broker-dealers, but not to unregistered affiliates.
The SEC Net Capital Rule (Rule 15c3-1)
Background
SEC amended the net capital rule (Rule 15c3-1) in 1975 to establish uniform net capital standards for brokers and dealers registered with SEC under Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act). With few exceptions, all broker-dealers registered with SEC must comply with this liquidity standard. The primary purpose of this rule is to ensure that registered broker-dealers maintain at all times sufficient liquid assets to (1) promptly satisfy their liabilities—the claims of customers, creditors, and other broker-dealers; and (2) to provide a cushion of liquid assets in excess of liabilities to cover potential market, credit, and other risks if they should be required to liquidate. The rule achieves its purpose by prescribing a liquidity test that requires a broker-dealer to maintain the greater of a specified minimum dollar amount or specified percentage of net capital in relation to either aggregate indebtedness (generally all liabilities of the broker-dealer) or customer-related receivables (money owed to the broker-dealer by customers) as computed by the reserve requirements of Rule 15c3-3. The net capital rule thus enhances investor/customer confidence in the financial integrity of broker-dealers and the securities market. The net capital rule applies only to the registered broker-dealer and does not apply to the broker-dealer’s holding company or unregulated subsidiaries or affiliates.
Net Capital Computation
To comply with SEC’s net capital rule, broker-dealers must perform two computations: one computation determines the broker-dealer’s net capital (liquid capital), and another computation determines the broker-dealer’s appropriate minimum net capital requirement (base capital requirement).
Net capital is defined as U.S. Generally Accepted Accounting Principles (GAAP) equity plus qualified subordinated liabilities and credits less nonallowable assets, certain operational charges (e.g., fail-to-deliver),and prescribed percentages of the market value (otherwise known as haircuts) of securities and commodities that constitute the broker-dealer’s trading and investment positions. See figure II.1 below.
Liquid capital available to meet requirements.
Greater of $250,000 or 6-2/3 percent of aggregate indebtedness (basic method); or greater of $250,000 or 2 percent of customer-related receivables or 4 percent of customer aggregated funds if the broker dealer is also registered as an FCM under CEA (alternative method)
Net capital above requirement.
The process of computing a broker-dealer’s regulatory net capital is really a process of separating its liquid and illiquid assets. In computing net capital, under either the basic or alternative method (discussed below), the broker-dealer must first determine its equity in accordance with GAAP. GAAP liabilities deducted from GAAP assets result in GAAP equity. GAAP requires that the broker-dealer mark to market all securities and commodities positions daily, thereby reflecting unrealized gains (which add to equity) and losses (which subtract from equity)—the current market value—and making it difficult to forbear market losses beyond a day.
Once GAAP equity is computed, a number of adjustments are made to reflect the estimated value of the broker-dealer if it was liquidated in a hurry. Liabilities that are properly subordinated to the claims of creditors, including customers, are then added back to GAAP equity as well as certain deferred income tax liabilities and accrued liabilities. Assets considered not readily convertible into cash are deducted from GAAP equity. This includes intangible assets (goodwill); fixed assets (furniture, fixtures, and buildings); prepaid items (rent and insurance); and the value of exchange memberships. The broker-dealer also deducts most unsecured receivables, including unsecured customer debits and bridge loans; and charges for delays in processing securities transactions beyond the normal settlement date. These collective additions and subtractions to GAAP equity result in an amount called tentative net capital. Tentative net capital is then reduced by certain percentage deductions, called haircuts, of the current market value of a broker-dealer’s securities and commodities positions and an undue concentration charge, which reflects the risk of a large, concentrated holding in one security, to arrive at the broker-dealer’s net capital. Then, the net capital base requirement (required net capital amount) is subtracted from the net capital amount to determine the amount of excess net capital held by the broker-dealer.
Methods Available for Broker-Dealers to Compute Required Net Capital
A broker-dealer may compute its net capital requirement by one of two methods. The first method, called the basic or aggregate indebtedness method, requires that the net capital of a broker-dealer conducting a general securities business (i.e., a firm that clears securities transactions and carries customer accounts) be equal to the greater of $250,000 or 6-2/3 percent of its aggregate indebtedness. The 6-2/3 percent requirement says a broker-dealer must have at least $1 of net capital for every $15 of its indebtedness (i.e., a leverage constraint). In the broker-dealer’s first year of operation, its net capital must exceed 12.5 percent of its aggregate indebtedness. Most of the smaller broker-dealers typically use the basic method to compute their net capital requirements because of the nature of their business. Typically, smaller broker-dealers either do not hold customer or broker-dealer accounts and therefore need less than the $250,000 required for broker-dealers that carry customer accounts; or they want to be subject to the less stringent requirements of Rule 15c3-3.
Under the second method, the so-called alternative method, the broker-dealer is required to have net capital equal to the greater of $250,000 or 2 percent of its customer-related receivables from the reserve calculation of Rule 15c3-3 or, if registered as a futures commission merchant (FCM), 4 percent of the customer funds required to be segregated pursuant to the Commodity Exchange Act (CEA) and the regulations thereunder (less the market value of commodity options purchased by option customers on or subject to the rules of a contract market, each such deduction not to exceed the amount of funds in the customer’s account). When a firm is registered both as a securities broker-dealer with SEC and an FCM with CFTC, known as being “dually-registered,” it must comply with both agencies’ regulations. However, a dually-registered firm is required to meet only the capital standard that would cause it to hold the most capital. SEC offers this method to broker-dealers as a voluntary alternative (with self-regulatory organization approval) to the basic net capital requirement. This method is based on the broker-dealers’ responsibilities to customers rather than aggregate indebtedness. Reversion to the basic method by the broker-dealer requires SEC’s approval. This option (most commonly used by large broker-dealers because it can result in a lower net capital requirement than under the basic method), in conjunction with Rule 15c3-3 (discussed below), is designed to ensure that sufficient liquid capital exists to return all property (assets—funds and securities) to customers, repay all creditors, and have a sufficient amount of capital remaining to pay the administrative costs of a liquidation if the broker-dealer fails. The broker-dealer’s ability to return customer property is addressed by Rule 15c3-3. The repayment of creditors and the payment of the broker-dealer’s liquidation expenses is addressed by the 2 percent of customer-related receivables net capital requirement and the deductions from net worth for illiquid assets and risk in securities and commodities positions. See pages 148-151 for an example of a hypothetical simplified net capital computation under the alternative method.
There are some differences between the two methods of computation. For example:
The alternative method ties required net capital to customer-related assets (receivables) rather than all liabilities like the basic method.
The alternative method requires a broker-dealer to provide a bad debt reserve of 3 percent of its customer-related receivables versus 1 percent under the basic method.
Under the alternative method, stock record differences and suspense account items (prospective losses due to recordkeeping problems) must be included in the calculation of net capital after 7 business days versus the 30 calendar days required under the basic method.
However, both methods limit a broker-dealer’s ability to increase its customer commitments only to the extent that net capital supports such an increase.
Also, the type of securities business a broker-dealer conducts determines its minimum net capital requirements. For example, for broker-dealers engaging in all facets of a securities business (involves clearing securities transactions and holding customer and broker-dealer accounts), the minimum dollar net capital requirement is $250,000; for broker-dealers that generally do not carry customer or broker-dealer accounts (introducing brokers), the minimum dollar amount is $5,000. See pages 152-153 for more detail on the SEC minimum net capital requirements for specialized types of business.
Early Warning Capital Levels
In addition to the minimum base net capital requirements, SEC and SROs (such as the National Association of Securities Dealers and the national exchanges) have established “early warning” levels of capital that exceed the broker-dealer’s minimum capital requirement. This advance warning alerts SEC and the SROs to the fact that a broker-dealer is experiencing financial difficulty (i.e., broker-dealer’s net capital is dropping toward its minimum requirement) and allows time for initiation of corrective action. Broker-dealers that violate the early warning levels must immediately notify SEC and their designated SRO and are thereby subject to closer regulatory scrutiny by SEC and the SRO. SROs may also impose additional operating restrictions or warning requirements on their members, which can be more stringent than SEC’s. For example, the New York Stock Exchange’s rule 326 restricts the business activities of member broker-dealers that are approaching financial or operational difficulties. When a broker-dealer’s net capital drops below its minimum net capital requirements, SEC requires the broker-dealer to cease operations immediately and get additional capital to come into capital compliance or liquidate its operations.
The early warning notice levels are as follows:
Under the basic method, the broker-dealer’s ratio of aggregate indebtedness to net capital is greater than 1,200 percent.
Under the alternative method, the broker-dealer’s net capital is less than 5 percent of customer-related receivables or, if an FCM, net capital is less than 6 percent of CEA customer segregated funds.
The broker-dealer’s net capital is less than 120 percent of its required minimum dollar net capital.
Market participants indicated that prudent broker-dealers maintain capital levels far in excess of their required minimum net capital amount. They told us that the largest broker-dealers typically hold $1 billion or more in excess of their required capital levels because, among other reasons, their counterparties require it for conducting business with them.
Financial Reporting Requirements
SEC has delegated to the SROs primary responsibility for enforcing broker-dealer compliance with the net capital and customer protection rules. SEC and the SROs have established a uniform system of reporting by broker-dealers and inspection schedules and procedures to routinely monitor broker-dealers’ compliance with such rules. Registered broker-dealers, depending on their type of business, are required to file either monthly or quarterly reports with their designated SROs. FOCUS (an acronym for Financial and Operational Combined Uniform Single Report (SEC Form X-17A-5)), the report broker-dealers are required to file, contains confidential key financial and operational information of a broker-dealer’s operations. If a broker-dealer has financial or operational difficulties, SEC or the SRO may require it to accelerate its reports filing at any time as specified in Rule 17a-5(a)(2)(iv). FOCUS is an integral part of the SRO’s early warning system and provides the SRO with a substantial amount of information to detect existing or potential financial and operational problems. Additionally, Rule 17a-5 requires broker-dealers to file annual audited financial statements supplemented by an accountant’s report setting forth any material inadequacies.
The SEC Customer Protection Rule Restricts Broker-Dealer Use of Customer Securities and Funds
SEC Rule 15c3-3, adopted in 1972, provides regulatory safeguards regarding the custody and use of customer securities and free credit balances (funds) held by broker-dealers. The rule, with limited exceptions,requires compliance by all registered broker-dealers. The purpose of Rule 15c3-3 is to protect customer funds and securities held by the broker-dealer.
Rule 15c3-3 has two parts. The first part requires broker-dealers to promptly obtain and maintain the physical possession or control of all fully paid and excess margin customer securities. The second part requires broker-dealers to segregate all customer cash or money obtained from the use of customer property that has not been used to finance transactions of other customers.
Part 1: Physical Possession or Control of Customer Securities
SEC’s requirement that broker-dealers maintain possession or control of all customer fully paid and excess margin securities substantially limits broker-dealers’ abilities to use customer securities. Rule 15c3-3 requires broker-dealers to determine, each business day, the number of customer fully paid and excess margin securities in their possession or control and the number of fully paid and excess margin securities that are not in the broker-dealer’s possession or control. Should a broker-dealer determine that fewer securities are in its possession or control than is required (a deficit position in security), Rule 15c3-3 requires the broker-dealer to initiate action and specifies time frames by which these securities must be placed in the broker-dealer’s possession or control. For example, for securities that are subject to a bank loan, the broker-dealer must issue a recall instruction within 1 business day of a deficit position determination, and the securities must be returned to the broker-dealer’s possession or control within 2 business days of the recall instruction. Once a broker-dealer obtains possession or control of customer fully paid or excess margin securities, the broker-dealer must thereafter maintain possession or control of those securities.
Rule 15c3-3 also specifies where a security must be located to be considered “in possession or control” of the broker-dealer. “Possession” of securities means the securities are physically located at the broker-dealer. “Control” of securities means the securities are located at one of the approved “control” locations discussed below. “Control” locations include a clearing corporation or depository, free of any lien; a Special Omnibus Account in compliance with Federal Reserve System Regulation T with instructions for segregation; a bona fide item of transfer of up to 40 calendar days (longer with written permission from the transfer agent); foreign banks or depositories approved by SEC; a bank (as defined by the Exchange Act) supervised by a federal banking authority, provided the securities are being held free of any lien; in transit between offices of the broker-dealer (for no more than 5 business days) or held by a majority-owned corporate subsidiary of the broker-dealer if the broker-dealer assumes or guarantees all of the subsidiary’s obligations or liabilities; or in any other location designated by SEC (e.g., a mutual fund or its agent in the case of a registered open-ended investment company).
Part 2: Segregation of Customer Funds and the Reserve Formula
The second requirement of Rule 15c3-3 dictates how broker-dealers may use customer cash credit balances and cash obtained from the permitted uses of customer securities, including from the pledging of customer margin securities. Essentially, the customer protection rule restricts the use of customer cash or margin securities to activities directly related to financing customer securities purchases. That is, the broker-dealer may not use customer property as a source of working capital for its operations.
The rule requires a broker-dealer to periodically (weekly for most broker-dealers) compute the amount of funds obtained from customers or through the use of customer securities (credits) and compare it to the total amount it has extended to finance customer transactions (debits). If credits exceed debits, the broker-dealer is required to have on deposit in an account for the exclusive benefit of customers at least an equal amount of cash or cash-equivalent securities (e.g., U.S. treasuries). Consequently, the rule serves to protect any required deposit in a secured location from creditors of the broker-dealer in an insolvency. For most broker-dealers, the calculation must be made as of the close of business every Friday, and any required deposit must be made by the following Tuesday morning. If the required deposit is not made by the broker-dealer, the broker-dealer must immediately notify its SRO and SEC by telegram and promptly confirm such notice in writing. Such notice must be given even if a broker-dealer is presently in compliance with the reserve portion of the rule but discovers that it was previously out of compliance due to a computational error or otherwise. If a broker-dealer fails to make a deposit to the special reserve account when required to do so, it is a criminal violation, and the broker-dealer must cease doing business. If the debits exceed the credits, no deposit is required.
U.S. Securities Haircuts
The haircuts described below are from SEC Rule 15c3-1(c)(2)(vi)(A)-(M).
Securities Haircuts
The percentage amount of the haircut varies depending on the type of security, the maturity date, the quality, and the marketability. Generally, the haircut is deducted from the market value of the greater of the long or short position in each security; however, in some cases haircuts apply to the lesser position as well. The haircuts are designed to discount the firm’s own positions to account for adverse market movements and other risks faced by the firms, including liquidity and operational risks.
U.S. and Canadian Government and Agency Debt Securities
This refers to securities issued (or guaranteed as to principal and interest) by the U.S. or Canadian government or agency. A haircut is applied to aggregate net long or short positions in 4 main categories (and 12 subcategories) of maturity dates ranging from less than 3 months to 25 years or more. The haircuts range from 0 percent for the short-term securities (0-3 months) to 6 percent for securities with later maturities.
For the most part, government securities haircuts are also applied to quasi-agency debt securities, such as those issued by the Export-Import Bank, Tennessee Valley Authority, and the Government National Mortgage Association (Ginnie Mae).
Municipal Debt Securities
These are securities that are direct obligations of, or guaranteed as to principal and interest by, a state or any political subdivision thereof as well as agencies and other state and local instrumentalities. Haircut percentages are applied to the market value of the greater of the long or short position according to maturity date. For municipal securities issued with stated maturities of 2 years or less, haircuts range from 0 percent for securities maturing under 30 days to 1 percent for those maturing in 456 days but less than 732 days.
For longer term securities with stated maturities of 2 years or longer, haircuts range from 3 percent to 7 percent.
Certain Municipal Bond Trusts and Liquid Asset Funds
These funds are redeemable securities issued by investment companies whose assets consist of cash, securities, or money market instruments. The haircut ranges from 2 percent to 9 percent based upon the types of assets held by the fund.
Commercial Paper, Bankers Acceptances, and Certificates of Deposit
The percentage deductions for highly rated corporate short-term debt instruments (money market instruments) that (1) have a fixed rate of interest or (2) are sold at a discount and that have maturity dates not exceeding 9 months range from 0 percent to 0.5 percent in five maturity categories ranging from less than 30 days to less than 1 year.
Bankers acceptances and certificates of deposit guaranteed by a bank and with maturity dates over 1 year have the same haircuts as U.S. government securities.
Nonconvertible Debt Securities
These securities are corporate bonds that cannot be exchanged for a specified amount of another security, (e.g., equity securities), at a stated price. Highly rated bonds are assigned haircuts ranging from 2 percent to 9 percent for maturity dates ranging from less than 1 year to over 25 years. Certain positions in nonconvertible securities can be excluded from the foregoing haircuts if hedged with U.S. government securities.
Also included in this category are foreign debt securities for which a ready market exists. For purposes of foreign securities, a ready market is deemed to exist if such securities (1) are issued as a general obligation of a sovereign government; (2) have a fixed maturity date; (3) are not traded flat or in default as to principal or interest; and (4) are highly rated (implicitly or explicitly) by at least two nationally recognized statistical rating organizations, such as Standard & Poor’s and Moody’s Investors Service.
For positions hedged with U.S. government securities, haircuts on the hedged positions range from 1.5 percent for maturities of less than 5 years to 3 percent for maturities of 15 years or more. For positions hedged with nonconvertible debt, haircuts on the hedged positions range from 1.75 percent for a maturity of less than 5 years to 3.5 percent for a maturity of 15 years or more. In either case, no haircut is taken on the hedging position (i.e., the U.S. government securities or the nonconvertible debt).
Convertible Debt Securities
The treatment of debt securities that can be converted into equities and have fixed rates of interest and maturity dates is based on the securities’ market value. If the market value is 100 percent or more of the principal amount, the haircut is the same as that applied to “all other securities,” or 15 percent of the market value of the greater of the long or short positions, plus 15 percent of the market value of the lesser position, but only to the extent that this lesser position exceeds 25 percent of the greater position. If the market value is less than the principal amount, the haircut is the same as for nonconvertible debt securities.
Preferred Stock
This stock is cumulative, nonconvertible, highly rated, and ranked prior to all other classes of stock. The stock is not in arrears as to dividends and carries a haircut of 10 percent of the market value of the greater of the long or short position.
Open Contractual Commitments
These commitments are haircut at 30 percent of the market value of the greater of the net long or net short position (minus unrealized profits), unless the class and issue of securities are listed on a national securities exchange or are designated as NASDAQ National Market System Securities. If the securities are listed or designated, the haircut is then 15 percent (unless the security is an initial public offering whereupon the percentage deduction reverts to 30 percent).
All Other Securities
These securities include corporate equities and certain foreign securities (other than preferred stock discussed above). They are assigned haircuts of 15 percent of the market value of the greater of the long or short positions, plus 15 percent of the market value of the lesser position, but only to the extent that this lesser position exceeds 25 percent of the greater position (i.e., the first 25 percent of the lesser position incurs no haircut).
Securities With a Limited Market
In cases where there are only one or two independent market makers submitting regular quotations in an interdealer quotation system for the securities, the haircut is 40 percent on both the long and short positions. In cases where there are three or more independent market makers submitting regular quotations, the haircut is the same as for the “all other securities” category above.
Undue Concentration
This refers to a situation where a broker-dealer has a securities position for which the market value is more than 10 percent of the broker-dealer’s net capital before haircuts (i.e., “tentative net capital”). For the charge to apply to equities, the market value of the position must exceed the greater of $10,000 or the market value of 500 shares. For debt securities, the provision applies to positions valued over $25,000. The haircut is an extra percentage of the usual haircut applied, and it is applied only to the excess portion of the total position (over 10 percent). The additional haircut for concentrated positions in equity securities is 15 percent. For other securities, it is 50 percent of the normal haircut on the concentrated securities.
Nonmarketable Securities
These are securities for which there is no ready market, and they carry a 100-percent haircut. Such securities have no independent market makers, have no quotations, and are not accepted as collateral for bank loans.
U.S. Options and Commodities Haircuts
The net capital rule also includes deductions for hedged positions, including futures and options contracts. Options to buy and sell securities and commodities are subject to haircuts because their market values change. See Appendix A to Rule 15c3-1 for options contracts and Appendix B to Rule 15c3-1 for relevant haircuts for futures contracts. CFTC generally has jurisdiction over the regulation of futures and options markets, including their relevant haircuts. Since securities broker-dealers hold futures and options positions in their portfolios, SEC incorporates CFTC’s haircuts for commodities futures and options into its net capital rule. CFTC also incorporates SEC’s securities haircuts into its net capital rule (Rule 1.17).
Appendix A to SEC Rule 15c3-1 (Options Haircuts)
Appendix A to SEC Rule 15c3-1 prescribes haircut methodologies for listed and unlisted options.
Risk-Based Haircut Methodology for Listed Options
Recently, to better reflect the market risk in broker-dealers’ options positions and to simplify the net capital rule’s treatment of options for capital purposes, SEC adopted a risk-based methodology using theoretical option pricing models to calculate required capital charges (haircuts) for listed options and related hedged positions. A simple, strategy-based methodology, similar to the old haircut methodology, remains for those firms that do not transact enough options business to warrant the expense of using option pricing models. This is the first time SEC has approved the use of modeling techniques for computing regulatory capital charges. The effective date of the new rule was September 1, 1997.
Third-party source models (and vendors) approved by a designated examining authority (i.e., self-regulatory organization) are used to perform the actual theoretical gain and loss calculations on the individual portfolios of the broker-dealers. Such approved vendors provide, for a fee, a service by which the broker-dealers may download the results generated by the option pricing models to allow broker-dealers to then compute the required haircut for their individual portfolios. The greatest loss at any one valuation point would be the haircut. At this time, the only approved vendor/model is the Options Clearing Corporation’s Theoretical Intermarket Margining System (TIMS).
Underlying Price Movement Assumptions
Specified underlying price movement assumptions designed to provide for the maintenance of capital sufficient to withstand potential adverse market moves are included. The underlying price movement assumptions were established to be consistent with the volatility assumptions currently incorporated into the net capital rule. Specifically, the models calculate the theoretical gains and losses for a portfolio containing proprietary or market maker options positions at 10 equidistant valuation points using specified increases and decreases in the price of the underlying instrument. The greatest loss at any valuation point becomes the haircut for the entire portfolio.
Permissible Offsets
A percentage of a position’s gain at any one valuation point is allowed to offset another position’s loss at the same valuation point. For example, options covering the same underlying instrument are afforded a 100-percent offset. Other offsets are permitted between qualified stock baskets and index options, futures, or futures options on the same underlying index. Broker-dealers are permitted to offset 95 percent of gains with losses (i.e., a 5 percent capital charge).
Minimum Charge
In addition, broker-dealers must take certain minimum deductions to address decay and liquidity risk if the option pricing model calculated an insignificant or no capital charge for a portfolio. This minimum charge is generally one-quarter of a point, or $25 per option contract, unless the basic equity option contract covers more than 100 shares. In this case, the charge is proportionately increased.
SEC rules also require a deduction of 7.5 percent of the market value for each qualified stock basket of non-high-capitalization diversified indexes. The rules also require 5 percent of the market value for each qualified stock basket of high-capitalization diversified and narrow indexes used to hedge options or futures positions that are subject to the minimum charge.
Alternative Strategy-Based Haircut Methodology for Listed and Unlisted Options
SEC also permits firms with limited options business to use an alternative strategy-based haircut methodology that generally follows the haircut approach in the previous version of Appendix A to the net capital rule. See Table II.1. This rule was designed for firms whose options business would not make it cost effective to use an option pricing model. A similar strategy-based methodology is also employed for broker-dealers that engage in buying and writing unlisted over-the-counter options. See Table II.2.
Table II.1: Alternative Strategy-Based Haircut Methodology for Listed Options Adjustments to net worth: listed options only Add market value of option.
Add time value of short option position.
Appropriate percentage of the current market value of the securities underlying the option security less the out-of-the-money amount, but reduction cannot serve to increase net capital. Minimum haircut is the greater of $250 per 100 share option contract or 50 percent of aforementioned percentage. 50 percent of the current market value of the option.
Deduct time value on long call.
Take applicable haircut on the short stock position not to exceed the out-of-the-money amount on the call option. Minimum haircut of $25 for each 100 share option contract, but minimum charge need not exceed intrinsic value of the option.
Deduct time value on long put.
Take applicable haircut on the long stock position not to exceed the out-of-the-money amount on the call option. Minimum haircut of $25 for each 100 share option contract, but minimum charge need not exceed intrinsic value of the option.
Add time value of short option.
Take applicable haircut on the long stock position reduced by the call’s intrinsic value. The minimum charge here is $25 per each 100 share option contract.
Spread: Long put options vs. short put options and long call options vs. short call options.
Add net short market value or deduct net long market value of options.
Call spread: excess of exercise value of long call over short call. If exercise value of long call is less than or equal to the exercise value of the short call, no haircut is required. Put spread: excess of exercise value of short put over long put. If exercise value of long put is greater than or equal to exercise value of short put, no haircut is required. (Table notes on next page)
A listed option is any option traded on a registered national securities exchange or automated facility of a registered national securities association.
Uncovered means an option that is written without any corresponding security or option position as protection in seller’s account. A call is an option giving its holder (buyer) the right to demand the purchase of a certain number of shares of stock at a fixed price any time within a specified period. A put is an option giving its holder (seller) the right to demand acceptance of delivery of a certain number of shares of stock at a fixed price any time within a specified period. Short means the investor sells the option. Long means the investor buys the option. Hedge means any combination of long and/or short positions taken in securities, options, or commodities in which one position tends to reduce the risk of the other. A spread is the simultaneous purchase and sale of the same class of options at different prices. 15 percent, if equities, (or appropriate other percentage) of the current market value of the underlying security less any out-of-the-money amount. Minimum haircut of $250 per 100 share option contract. 15 percent, if equities, (or appropriate other percentage) of the current market value of the underlying security less any in-the-money amount. Net capital cannot be increased because of haircut. 5 percent, if equities, (or 1/2 the appropriate other percentage for other securities as set forth in the rule) of the current market value of the underlying security. 15 percent, if equities, (or appropriate other percentage for other securities as set forth in the rule) of the current market value of the underlying security. Limited to allowable asset value of the option.
Appendix B to SEC Rule 15c3-1 (Commodities and Commodities Futures Haircuts)
As for securities, the net capital rule imposes a series of deductions from the market values of commodities. The amount of the deductions varies depending on whether the commodities are part of a hedged or spread position; whether the commodities stand alone as a long or short position; and what types of commodities accounts (inventory accounts, customer accounts) are at issue. These haircuts generally conform with similar provisions in CFTC’s net capital rule and are dependent on the margin requirements set by the commodities boards of trade and clearing organizations. See Table II.3.
Hypothetical Example of a Broker-Dealer’s Net Capital Calculation Under the Alternative Method
Tables II.4 and II.5 and II.6 provide information for calculating net capital. Table II.4, a trial balance, provides a starting point for our simplified hypothetical example of a broker-dealer’s net capital calculation under SEC’s alternative method. A trial balance is a list of all open accounts in the general ledger and their balances. A general ledger is a collection of all assets, liabilities, capital, revenue, and expense accounts. Accounts are the means by which differing effects on business elements (e.g., revenues) are categorized and collected. In table II.5, we converted the trial balance into a balance sheet of assets, liabilities, and capital. In table II.6, we compute the broker-dealer’s net capital, including haircuts, using information contained in table II.5. The result of the computation shows that the broker-dealer is in capital compliance and has $352.6 million in excess net capital.
Furniture and fixtures (net)
Notes to financial statements: Furniture & fixtures (net)
Mark to market (investment) (1,000,000)
Mark to market (trading)
Computation of Alternative Net Capital Compliance: Base requirement: broker-dealer’s net capital must be the greater of $250,000 or 2 percent of aggregate customer debits (i.e., customer-related receivables) as computed per Rule 15c3-3’s reserve formula.
Aggregate customer debits equal (customer debits - (customer debits x 3%)). In our example, aggregate customer debits equal $38,800,000 ($40,000,000 -($40,000,000 x 3%)). The 3 percent is analogous to the broker-dealer’s loss reserve for the loans made to customers. Our base requirement is $776,000 (2% x $38,800,000).
Because the $776,000 is more than the $250,000 minimum dollar requirement, the broker-dealer must hold at least a minimum of $776,000 in net capital. The broker-dealer is in compliance with this requirement because it has $353,400,000 in net capital.
Another requirement is that the broker-dealer’s subordinated debt to total debt-equity ratio may generally not exceed 70 percent for 90 days. The ratio is calculated by dividing a broker-dealer’s total net worth into its subordinated debt ($40,000,000/$479,000,000). With a ratio of only 8.35 percent, the broker-dealer meets this requirement.
1. Firms that carry customer accounts or broker or dealer accounts and receive or hold funds or securities for those persons (known as general securities brokers or dealers).
Greater of $250,000 or 6-2/3% of AI Greater of $250,000 or 2% of Rule 15c3-3 Reserve Formula debits 2. Firms that carry customer accounts, receive but do not hold customer funds or securities, and operate under the paragraph (k)(2)(i) exemption of Rule 15c3-3.
Greater of $100,000 or 6-2/3% of AI 1. Firms that introduce accounts on a fully disclosed basis to another broker or dealer and do not receive funds or securities.
Greater of $5,000 or 6-2/3% of AI 2. Firms that introduce accounts on a fully disclosed basis to another broker or dealer and receive, but do not hold, customer or other broker-dealer securities and do not receive funds.
Greater of $50,000 or 6-2/3% of AI 1. Brokers or dealers that trade solely for their own accounts, endorse or write options, or effect more than 10 transactions for their investment account in any 1 calendar year.
Greater of $100,000 or 6-2/3% of AI 1. Brokers or dealers transacting a business in redeemable shares of registered investment companies and certain other share accounts.
Greater of $100,000 or 6-2/3% of AI or $2,500 per security for securities with a market value greater than $5 per share, and $1,000 per security for securities with a market value of $5 or less with a maximum requirement of $1 million 1. Firms that deal only in Direct Participation Programs (i.e., real estate syndications).
Greater of $5,000 or 6-2/3% of AI 2. Firms that do not take customer orders, hold customer funds or securities or execute customer trades, because of the nature of their activities (e.g., mergers and acquisitions).
Greater of $5,000 or 6-2/3% of AI 1. Brokers or dealers registered with CFTC.
Greater of $250,000 or 4% of customer funds required to be segregated pursuant to the CEA and regulations thereunder (continued)
1. Any firm may elect this method; however, the firm will be subject to the $250,000 minimum net capital requirement.
Greater of $250,000 or 2% of Rule 15c3-3 Reserve Formula debits A broker or dealer electing this method to calculate its net capital levels must notify its examining authority in writing and may not thereafter revert to the Aggregate Indebtedness Method (unless approved by SEC.) * The minimum capital requirements opposite the type of broker-dealers are under the Basic (or Aggregate Indebtedness) Method.
Bonds
The bond holdings of insurers are split into seven different risk classifications or categories based on bond quality. Class 1 bonds are those of the highest quality, while Class 6 bonds are those bonds that are in or near default. The seventh bond classification is for U.S. government securities.
Each bond classification has a different risk factor by which bond holdings in that category are multiplied. The risk-based capital requirement for a U.S. government security is zero because there is no default risk for those bonds. The risk factors for other bonds range from 0.003 ($3 per $1000 of value) for Class 1 bonds to 0.300 ($300 per $1000 of value) for high risk bonds in Class 6. As the risk gets higher, the risk-based capital requirement increases. In addition, there are other statutory limitations on the amount of junk bonds that insurers are permitted to carry on their books.
There is also an adjustment, called the bond size factor, that increases the nominal risk factors for insurers that have less diversification in their bond portfolio, after excluding U.S. government issues and certain U.S. agency issues. For insurers with relatively few different issuers (that is, little diversification), the bond size factor increases the risk-based capital factor by 2.5 times. Only a handful of insurers with at least 1,300 issuers in their bond portfolio can use the nominal factors.
Mortgages
The risk-based capital formula treatment of mortgages differs by the type of mortgage and the mortgage status. Mortgages are generally broken down into three main categories—farm, residential, and commercial. These categories are also further subdivided as to whether the mortgage is insured/guaranteed or not. The risk-based capital factors also differ for current mortgages, those 90 days overdue, and those in the process of foreclosure. There is also a company-specific experience adjustment to the risk-based capital factors for farm and commercial mortgages, based on the experience of the insurer relative to the industry as a whole.
Beginning in 1997, the risk-based capital calculation for troubled mortgages is made on a mortgage-by-mortgage basis in order to recognize the extent to which the statement value of each of those troubled mortgages has already been marked to market or otherwise written down.
Unaffiliated Preferred and Common Stocks
In contrast to banks, insurance companies are permitted to hold stocks as investments.
Unaffiliated Preferred Stock
Experience data to develop preferred stock factors are not readily available; however, it is believed that preferred stocks are somewhat more likely to default than bonds, and the loss or default would be somewhat higher than that experienced on bonds. Formula factors are equal to bond factors plus 2 percent (but not more than 30 percent). This is consistent with the approach adopted for preferred stock factors for AVR purposes.
Unaffiliated Common Stock
The factor for unaffiliated common stock is based on studies conducted at two large life insurance companies. Both of these studies indicated that a 30-percent factor is needed to provide capital to cover approximately 95 percent of the greatest losses in common stock value over a 2-year period. This factor assumes capital losses are unrealized and not subject to favorable tax treatment at the time loss in market value occurs. Two other classes of common stock receive a different treatment. Nongovernment money market mutual funds are more like cash than common stock; therefore, the factor used is 0.3 percent, the same factor used for cash. Federal Home Loan Bank stock has characteristics more like a fixed income instrument rather than common stock. A 2.3-percent factor was chosen.
Separate Accounts
Separate accounts are investment pools held separately from all other assets of the insurer. The primary purpose of separate accounts is to allow the insurer to make investments exempt from the usual investment restrictions imposed by state law. Separate accounts are authorized by states to permit insurers to offer customers investment strategies that would not otherwise conform to insurance regulations. Because of the nature of separate accounts, losses cannot exceed the funds held in the separate account and thus are insulated from the general accounts of the insurer. The customer, rather than the insurer, is responsible for all investment gains and losses. Separate accounts are maintained primarily for pension funds and variable life and annuity products. Although separate accounts represent a large segment of the aggregate assets and liabilities of the life insurance industry, they have considerably less of a risk-based capital requirement than other investment assets used to fund general account obligations.
Real Estate
Life insurance risk-based capital makes a distinction between company-occupied real estate, real estate acquired by foreclosure, and investment real estate. Furthermore, real estate may be owned directly, in which case it is reported as “real estate,” or it may be owned through a partnership. Partnerships and joint ventures are referred to as “Schedule BA” assets and are discussed separately. Like mortgage risk, the real estate risk for real estate directly owned is calculated separately for each property. There is a charge for the statement value of the property as well as a charge for the amount of encumbrances.
Companies that have developed their own risk-based capital factors have used factors ranging from 5 percent to 20 percent. One study indicated real estate volatility is about 60 percent of common stock, suggesting a factor in the range of 18 percent. Assuming some tax effect for losses, a factor of 10 percent was chosen. Foreclosed real estate would carry a somewhat higher risk at 15 percent. The foreclosed real estate factor is lower than the factor for mortgages in foreclosure (20 percent) because mortgages in foreclosure have already been written down when they are moved to the foreclosed real estate category. Because a surplus reduction has already been taken, the factor is lower.
Other Long-Term Assets
Schedule BA on the life insurers’ regulatory financial report (known as the Annual Statement) includes those long-term assets that, because of their peculiar nature, are not included elsewhere on the report. These include assets owned by the insurer through partnership arrangements as well as other unusual assets. In recognition of the diverse nature of Schedule BA assets, the risk-based capital is calculated by assigning different risk factors according to the different type of assets. Assets with underlying characteristics of bonds and preferred stocks rated by the NAIC Securities Valuation Office have different factors according to the Office’s assigned classification. Unrated fixed-income securities are treated the same as Other Schedule BA Assets and assessed a 30-percent charge. Rated surplus and capital notes have the same factors applied as Schedule BA assets with the characteristics of preferred stock. Schedule BA real estate also has a 15-percent factor because of the additional risks inherent in owning real estate through a partnership. The factors used for Schedule BA mortgages are the same as for commercial mortgages. Where it is not possible to determine the risk-based capital classification of an asset reported on Schedule BA, a 30-percent factor is applied.
Asset Concentration Factor
The purpose of the concentration factor is to reflect the additional risk of high concentrations in single exposures (represented by an individual issuer of a security or a holder of a mortgage, etc.). The concentration factor doubles the risk-based capital factor (with a maximum of 30 percent) of the 10 largest asset exposures, excluding various low-risk categories or categories that already have a 30-percent factor. Because the risk-based capital of the assets included in the concentration factor has already been counted once in the basic formula, this factor itself serves only to add in the additional risk-based capital required. The calculation is completed on a consolidated basis; however, the concentration factor is reduced by amounts already included in the concentration factors of subsidiaries to avoid double counting.
Miscellaneous Assets: Cash, Short-Term Investments, and Derivatives
The factor for cash is 0.3 percent. It is recognized that there is a small risk related to possible insolvency of the bank where cash deposits are held. The 0.3 percent, equivalent to a class 1 bond, reflects the short-term nature of this risk.
The short-term investments to be included here are those that are not reflected elsewhere in the formula. Commercial paper, negotiable certificates of deposit, repurchase agreements, collateralized mortgage obligations, mortgage participation certificates, interest only and principal only certificates, and equipment trust certificates, should be included in appropriate bond classifications (class 1 through class 6) and should be excluded from short-term investments. The 0.3-percent factor is equal to the factor for cash.
For derivative instruments, the statement value exposure net of collateral (the balance sheet exposure) is included under miscellaneous C-1 risks. Because collars, swaps, forwards, and futures can have statement values that are positive, zero, or negative, the potential exposure to default by the counterparty for these instruments cannot be measured by the statement values and must be calculated. The factors applied to the derivative’s off-balance sheet exposure are the same as those applied to bonds and reflect the insurer’s exposure to loss upon default of the counterparty.
Reinsurance
Insurance companies often lay off part of their risk by purchasing reinsurance. There is a risk associated with recoverability of amounts from reinsurers. The risk is deemed comparable to that represented by bonds rated as risk classes 1 and 2 and is assigned a factor of 0.5 percent. Some types of reinsurance such as reinsurance with nonauthorized companies, reinsurance among affiliated companies, reinsurance with funds withheld, and reinsurance involving policy loans, are subject to a separate surplus charge. To avoid an overstatement of risk-based capital, the formula gives a 0.5-percent credit for these types of reinsurance.
Life Insurance
Life insurers establish reserves to cover expected claims costs from their outstanding insurance-in-force. The life insurance risk-based capital factors chosen represent the surplus needed to provide for excess claims over expected claims, both from random fluctuations and from inaccurate pricing, for future levels of claims. For a large number of trials, each insured either lives or dies according to a “roll of the dice” reflecting the probability of death. The present value of the claims generated by this process, less expected claims, will be the amount of surplus needed under that trial. The factors chosen under the formula produce a level of surplus at least as much as needed in 95 percent of the trials.
The model was developed for portfolios of 10,000, 100,000, and 1 million lives; and it was found that the surplus needs decreased with larger portfolios, consistent with the law of large numbers.
One set of factors is applied to individual and industrial insurance-in-force and another set for group and credit insurance.
Amount of insurance-in-force (in dollars)
Premium Stabilization Reserves
Premium stabilization reserves are funds held by the company in order to stabilize the premium a group policyholder must pay from year to year. Usually experience rating refunds are accumulated in such a reserve so that they can be drawn upon in the event of poor future experience. This reduces the insurer’s risk. For group life and health insurance, 50 percent of premium stabilization reserves held in the Annual Statement as a liability (not as appropriated surplus) are permitted as an offset up to the amount of risk-based capital.
Health Insurance
Risk-based capital factors for health insurance are applied to medical and disability income premiums and claim reserves with an offset for health premium stabilization reserves.
Calculating the Authorized Control Level Risk-Based Capital
The purpose of the life insurance risk-based capital formula is to estimate the risk-based capital levels required to manage losses that can result from a series of catastrophic financial events. These are the C-0 through C-4 calculations described above. However, chances are remote that all such losses will occur simultaneously. The covariance adjustment states that the combined effect of the C-1, C-2, and C-3 risks are not equal to their sum but are equal to the square root calculation described below. It is statistically assumed that the C-1 risk and C-3 risk are correlated, and the C-2 risk is independent of both. This assumption provides what is considered by NAIC to be a reasonable approximation of the capital requirements needed at any particular level of risks.
ACLRBC is 50 percent of the sum of the C-0 plus the C-4 risk-based capital and the square root of the sum of the C-1 and C-3 risk-based capital squared and the C-2 risk-based capital squared.
Total Adjusted Capital
In order to calculate their TAC capital for risk-based capital purposes, insurers are allowed to make several adjustments to their reported total capital. These include adding to total capital their AVR, part of the provision for future dividends, and an adjustment to avoid double counting for some subsidiary amounts.
Risk-Based Capital Level of Action
Under the Life Risk-Based Capital Model Act, a comparison of the ACLRBC with the level of TAC determines the level of regulatory attention, if any, applicable to the company.
Trend Test
Companies whose TAC is between 2.0 and 2.5 times the ACLRBC are subject to a trend test. The trend test calculates the greater of the decrease in the margin between the current year and the prior year and the average of the past 3 years. It assumes that the decrease could occur again in the coming year. Any company with a trend below 1.9 times ACLRBC would trigger Company Action Level risk-based capital regulatory action.
Sensitivity Tests
The sensitivity tests provide a “what if” scenario to the calculation of risk-based capital by recalculating ACLRBC or TAC using a specified alternative for a particular factor in the formula.
The amounts reported in the sensitivity tests are an actual recalculation of ACLRBC and TAC. If a company does not have any of the assets or liabilities specified by the sensitivity tests, including affiliates, noncontrolled assets, guarantees for affiliates, contingent liabilities, long-term leases, and interest swaps, the amounts reported after the tests are the same ACLRBC and TAC as originally calculated.
Bank Holding Companies
Securities/Futures Firms
ED&F Man International, Inc. Goldman, Sachs & Co. Lehman Brothers, Inc. Merrill Lynch & Co., Inc. Morgan Stanley & Co., Inc.Salomon Brothers, Inc.
Insurance Companies | Why GAO Did This Study
GAO reviewed: (1) the regulatory views on the purpose of capital and current regulatory requirements; (2) the approaches of some large financial firms to risk measurement and capital allocation; and (3) issues in capital regulation and initiatives being considered for changes to regulatory capital requirements.
What GAO Found
GAO noted that: (1) capital requirements differ by financial regulator due to differences in the regulators' purpose; (2) historically, regulators based capital regulation on the traditional risks in each financial sector; (3) within the past decade, both the banking and life insurance sectors adopted new capital requirements that are specifically designed to be more sensitive to exposure to multiple risks; (4) securities broker-dealers and futures commission merchants continue to operate under net capital rules that the Securities Exchange Commission and the Commodity Futures Trading Commission use in order to protect customers and other market participants in the financial markets from losses due to firm failures, not from bad investments; (5) unlike regulators, firms analyze their use of capital to help ensure that they can achieve their business objectives; (6) although many large firms GAO spoke with use the results of their risk measurements to set limits on trading activities, some go farther and use them to allocate capital within the firm; (7) these techniques have limitations; however, firms and regulators believe they significantly improve firms' ability to measure and manage their risks; (8) the three principal issues pertaining to regulatory capital requirements that are important when considering possible future changes include: (a) the competitive implications for firms stemming from differences in capital rules of different financial regulators; (b) whether regulatory capital requirements create incentives to manage risks inappropriately; and (c) the administration of regulatory capital rules; and (9) regulatory agencies and self-regulatory organizations are exploring or have proposed a number of initiatives for modifying or changing current capital requirements in the banking, securities, futures, and life insurance sectors. |
gao_GAO-07-234 | gao_GAO-07-234_0 | Background
For 16 years, DOD’s supply chain management processes have been on our list of high-risk areas needing urgent attention because of long-standing systemic weaknesses that we have identified in our reports. We initiated our high-risk program in 1990 to report on government operations that we identified as being at high risk for fraud, waste, abuse, and mismanagement. The program serves to identify and help resolve serious weaknesses in areas that involve substantial resources and provide critical services to the public.
Removal of a high-risk designation may be considered when legislative and agency actions, including those in response to our recommendations, result in significant and sustainable progress toward resolving a high-risk problem. Key determinants include a demonstrated strong commitment to and top leadership support for addressing problems, the capacity to do so, a corrective action plan that provides for substantially completing corrective measures in the near term, a program to monitor and independently validate the effectiveness of corrective measures, and demonstrated progress in implementing corrective measures.
Beginning in 2005, DOD developed a plan for improving supply chain management that could reduce its vulnerability to fraud, waste, abuse, and mismanagement and place it on the path toward removal from our list of high-risk areas. This supply chain management improvement plan, initially released in July 2005, contains 10 initiatives proposed as solutions to address the root causes of problems we identified from our prior work in the areas of requirements forecasting, asset visibility, and materiel distribution.
DOD defines requirements as the need or demand for personnel, equipment, facilities, other resources, or services in specified quantities for specific periods of time or at a specified time. Accurately forecasted supply requirements are a key first step in buying, storing, positioning, and shipping items that the warfighter needs. DOD describes asset visibility as the ability to provide timely and accurate information on the location, quantity, condition, movement, and status of supplies and the ability to act on that information. Distribution is the process for synchronizing all elements of the logistics system to deliver the “right things” to the “right place” at the “right time” to support the warfighter.
Improvements to Supply Chain Management Are Linked with Overall Defense Business Transformation and Completion of a Comprehensive, Integrated Logistics Strategy
DOD’s success in improving supply chain management is closely linked with its overall defense business transformation efforts and completion of a comprehensive, integrated logistics strategy. In previous reports and testimonies, we have stated that progress in DOD’s overall approach to business transformation is needed to confront problems in other high-risk areas, including supply chain management. DOD has taken several steps intended to advance business transformation, including establishing new governance structures and aligning new information systems with its business enterprise architecture. Another key step to supplement these ongoing transformation efforts is completion of a comprehensive, integrated logistics strategy that would identify problems and capability gaps to be addressed, establish departmentwide investment priorities, and guide decision making.
DOD Is Taking Steps to Advance Business Transformation
DOD’s success in improving supply chain management is closely linked with overall defense business transformation. Our prior reviews and recommendations have addressed business management problems that adversely affect the economy, efficiency, and effectiveness of DOD’s operations, and that have resulted in a lack of adequate accountability across several of DOD’s major business areas. We have concluded that progress in DOD’s overall approach to business transformation is needed to confront other high-risk areas, including supply chain management. DOD’s overall approach to business transformation was added to the high-risk list in 2005 because of our concern over DOD’s lack of adequate management accountability and the absence of a strategic and integrated action plan for the overall business transformation effort. Specifically, the high-risk designation for business transformation resulted because (1) DOD’s business improvement initiatives and control over resources are fragmented; (2) DOD lacks a clear strategic and integrated business transformation plan and investment strategy, including a well-defined enterprise architecture to guide and constrain implementation of such a plan; and (3) DOD has not designated a senior management official responsible and accountable for overall business transformation reform and related resources.
In response, DOD has taken several actions intended to advance transformation. For example, DOD has established governance structures such as the Business Transformation Agency and the Defense Business Systems Management Committee. The Business Transformation Agency was established in October 2005 with the mission of transforming business operations to achieve improved warfighter support and improved financial accountability. The agency supports the Defense Business Systems Management Committee, which is comprised of senior-level DOD officials and is intended to serve as the primary transformation leadership and oversight mechanism. Furthermore, in September 2006, DOD released an updated Enterprise Transition Plan that is intended to be both a business transformation roadmap and management tool for modernizing its business process and underlying information technology assets. DOD describes the Enterprise Transition Plan as an executable roadmap aligned to DOD’s business enterprise architecture. In addition, as required by the National Defense Authorization Act for Fiscal Year 2006, DOD is studying the feasibility and advisability of establishing a Deputy Secretary for Defense Management to serve as DOD’s Chief Management Officer and advise the Secretary of Defense on matters relating to management, including defense business activities.
Business systems modernization is a critical part of DOD’s transformation efforts, and successful resolution of supply chain management problems will require investment in needed information technology. DOD spends billions of dollars to sustain key business operations intended to support the warfighter, including systems and processes related to support infrastructure, finances, weapon systems acquisition, the management of contracts, and the supply chain. We have indicated at various times that modernized business systems are essential to the department’s effort in addressing its supply chain management issues. In its supply chain management improvement plan, DOD recognizes that achieving success in supply chain management is dependent on developing interoperable systems that can share critical supply data. One of the initiatives included in the plan is business system modernization, an effort that is being led by DOD’s Business Transformation Agency and includes achieving materiel visibility through systems modernization as one of its six enterprisewide priorities.
Improvements in financial management are also integrally linked to DOD’s business transformation. Since our first report on the financial statement audit of a major DOD component over 16 years ago, we have repeatedly reported that weaknesses in business management systems, processes, and internal controls not only adversely affect the reliability of reported financial data, but also the management of DOD operations. Such weaknesses have adversely affected the ability of DOD to control costs, ensure basic accountability, anticipate future costs and claims on the budget, measure performance, maintain funds control, and prevent fraud. In December 2005, DOD issued its Financial Improvement and Audit Readiness Plan to guide its financial management improvement efforts. The Financial Improvement and Audit Readiness Plan is intended to provide DOD components with a roadmap for (1) resolving problems affecting the accuracy, reliability, and timeliness of financial information; and (2) obtaining clean financial statement audit opinions. It uses an incremental approach to structure its process for examining operations, diagnosing problems, planning corrective actions, and preparing for audit. The plan also recognizes that it will take several years before DOD is able to implement the systems, processes, and other changes necessary to fully address its financial management weaknesses. Furthermore, DOD has developed an initial Standard Financial Information Structure, which is DOD’s enterprisewide data standard for categorizing financial information. This effort focused on standardizing general ledger and external financial reporting requirements.
While these steps are positive, defense business transformation is much broader and encompasses planning, management, organizational structures, and processes related to all key business areas. As we have previously observed, business transformation requires long-term cultural change, business process reengineering, and a commitment from both the executive and legislative branches of government. Although sound strategic planning is the foundation on which to build, DOD needs clear, capable, sustained, and professional leadership to maintain continuity necessary for success. Such leadership would provide the attention essential for addressing key stewardship responsibilities—such as strategic planning, performance management, business information management, and financial management—in an integrated manner, while helping to facilitate the overall business transformation effort within DOD. As DOD continues to evolve its transformation efforts, critical to successful reform are sustained leadership, organizational structures, and a clear strategic and integrated plan that encompasses all major business areas, including supply chain management.
Completion of a Comprehensive, Integrated Logistics Strategy Could Supplement Business Transformation Efforts
Another key step to supplement ongoing defense business transformation efforts is completion of a comprehensive, integrated logistics strategy that would identify problems and capability gaps to be addressed, establish departmentwide investment priorities, and guide decision making. Over the years, we have recommended that DOD adopt such a strategy, and DOD has undertaken various efforts to identify, and plan for, future logistics needs. However, DOD currently lacks an overarching logistics strategy. In December 2005, DOD issued its “As Is” Focused Logistics Roadmap, which assembled various logistics programs and initiatives associated with the fiscal year 2006 President’s Budget and linked them to seven key joint future logistics capability areas. The roadmap identified more than $60 billion of planned investments in these programs and initiatives, yet it also indicated that key focused logistics capabilities would not be achieved by 2015. Therefore, the Under Secretary of Defense for Acquisition, Technology, and Logistics directed the department to prepare a rigorous “To Be” roadmap that would present credible options to achieve focused logistics capabilities.
According to officials with the Office of the Secretary of Defense, the “To Be” logistics roadmap will portray where the department is headed in the logistics area and how it will get there, and will allow the department to monitor progress toward achieving its objectives, as well as institutionalize a continuous assessment process that links ongoing capability development, program reviews, and budgeting. It would identify the scope of logistics problems and capability gaps to be addressed and include specific performance goals, programs, milestones, resources, and metrics to guide improvements in supply chain management and other areas of DOD logistics. Officials anticipate that the initiatives in the supply chain management improvement plan will be incorporated into the “To Be” logistics roadmap.
DOD has not established a target date for completing the “To Be” roadmap. According to DOD officials, its completion is pending the results of the department’s ongoing test of new concepts for managing logistics capabilities. The Deputy Secretary of Defense initiated this joint capability portfolio management test in September 2006 to explore new approaches for managing certain capabilities across the department, facilitating strategic choices, and improving the department’s ability to make capability trade-offs. The intent of joint capability portfolio management is to improve interoperability, minimize redundancies and gaps, and maximize effectiveness. Joint logistics is one of the four capability areas selected as test cases for experimentation. The joint logistics test case portfolio will include all capabilities required to project and sustain joint force operations, including supply chain operations. According to DOD officials, initial results of the joint logistics capability portfolio management test are expected to be available in late spring 2007, and the results of the test will then be used to complete the “To Be” logistics roadmap. The results of the test are also expected to provide additional focus on improving performance in requirements determination, asset visibility, and materiel distribution, officials said.
We have also noted previously that while DOD and its component organizations have had multiple plans for improving aspects of logistics, the linkages among these plans have not been clearly shown. In addition to the supply chain management improvement plan, current DOD plans that address aspects of supply chain management include the Enterprise Transition Plan and component-level plans developed by the military services and the Defense Logistics Agency. Although we are encouraged by DOD’s planning efforts, the department lacks a comprehensive, integrated strategy to guide logistics programs and initiatives across the department.
Without such a strategy, decision makers will lack the means to effectively guide program efforts and the ability to determine if these efforts are achieving the desired results.
DOD Is Unable to Demonstrate the Full Extent of Its Progress Toward Improving Supply Chain Management
Although DOD is making progress implementing supply chain management initiatives, it is unable to demonstrate at this time the full extent to which it is improving supply chain management. DOD has established some high- level performance measures but they do not explicitly address the focus areas, and an improvement in those measures cannot be directly attributed to the initiatives. Further, the metrics in DOD’s supply chain management improvement plan generally do not measure performance outcomes and costs.
DOD Is Making Progress Implementing Supply Chain Management Initiatives
In addition to implementing audit recommendations, as discussed in the next section of this report, DOD is making progress improving supply chain management by implementing initiatives in its supply chain management improvement plan. For example, DOD has met key milestones in its Joint Regional Inventory Materiel Management, Radio Frequency Identification, and Item Unique Identification initiatives.
Through its Joint Regional Inventory Materiel Management initiative, DOD began to streamline the storage and distribution of defense inventory items on a regional basis, in order to eliminate duplicate materiel handling and inventory layers. Last year, DOD completed a pilot for this initiative in the San Diego region and, in January 2006, began a similar transition for inventory items in Oahu, Hawaii, which was considered operational in August 2006.
In May 2006, DOD published an interim Defense Federal Acquisition Regulation clause governing the application of tags to different classes of assets being shipped to distribution depots and aerial ports for the Radio Frequency Identification initiative.
The Item Unique Identification initiative, which provides for marking of personal property items with a set of globally unique data items to help DOD value and track items throughout their life cycle, received approval by the International Organization for Standardization/International Electrotechnical Commission in September 2006 for an interoperable solution for automatic identification and data capture based on widely used international standards.
DOD has sought to demonstrate significant improvement in supply chain management within 2 years of the plan’s inception in July 2005; however, the department may have difficulty meeting its July 2007 goal. Some of the initiatives are still being developed or piloted and have not yet reached the implementation stage, others are in the early stages of implementation, and some are not scheduled for completion until 2008 or later. For example, according to DOD’s plan, the Readiness Based Sparing initiative, an inventory requirements methodology that the department expects will enable higher levels of readiness at equivalent or reduced inventory costs using commercial off-the-shelf software, is not expected to begin implementation until January 2008. The Item Unique Identification initiative, which involves marking personal property items with a set of globally unique data elements to help DOD track items during their life cycles, will not be completed until December 2010 under the current schedule.
While DOD has generally stayed on track, it has reported some slippage in meeting scheduled milestones for certain initiatives. For example, a slippage of 9 months occurred in the Commodity Management initiative because additional time was required to develop a departmentwide approach. This initiative addresses the process of developing a systematic procurement approach to the department’s needs for a group of items. Additionally, according to DOD’s plan, the Defense Transportation Coordination initiative experienced a slippage in holding the presolicitation conference because defining requirements took longer than anticipated. Given the long-standing nature of the problems being addressed, the complexities of the initiatives, and the involvement of multiple organizations within DOD, we would expect to see further milestone slippage in the future.
DOD’s Supply Chain Management Plan Does Not Track Performance Outcomes and Costs Metrics Associated with Focus Areas and Initiatives
The supply chain management improvement plan generally lacks outcome- focused performance metrics that track progress in the three focus areas and at the initiative level. Performance metrics are critical for demonstrating progress toward achieving results, providing information on which to base organizational and management decisions, and are important management tools for all levels of an agency, including the program or project level. Moreover, outcome-focused performance metrics show results or outcomes related to an initiative or program in terms of its effectiveness, efficiency, impact, or all of these. To track progress toward goals, effective performance metrics should have a clearly apparent or commonly accepted relationship to the intended performance, or should be reasonable predictors of desired outcomes; are not unduly influenced by factors outside a program’s control; measure multiple priorities, such as quality, timeliness, outcomes, and cost; sufficiently cover key aspects of performance; and adequately capture important distinctions between programs. Performance metrics enable the agency to assess accomplishments, strike a balance among competing interests, make decisions to improve program performance, realign processes, and assign accountability. While it may take years before the results of programs become apparent, intermediate metrics can be used to provide information on interim results and show progress towards intended results. In addition, when program results could be influenced by external factors, intermediate metrics can be used to identify the program’s discrete contribution to the specific result.
DOD’s plan does include four high-level performance measures that are being tracked across the department, and while they are not required to do so, these measures do not explicitly relate to the focus areas. The four measures are as follows: Backorders—number of orders held in an unfilled status pending receipt of additional parts or equipment through procurement or repair.
Customer wait time—number of days between the issuance of a customer order and satisfaction of that order.
On-time orders—percentage of orders that are on time according to DOD’s established delivery standards.
Logistics response time—number of days to fulfill an order placed on the wholesale level of supply from the date a requisition is generated until the materiel is received by the retail supply activity.
Additionally, these measures may be affected by many variables; hence, improvements in the high-level performance measures cannot be directly attributed to the initiatives in the plan. For example, implementing RFID at a few sites at a time has only a very small impact on customer wait time. However, variables such as natural disasters, wartime surges in requirements, or disruption in the distribution process could affect that measure. DOD’s supply chain materiel management regulation requires that functional supply chain metrics support at least one enterprise-level metric.
DOD’s plan also lacks outcome-focused performance metrics for 6 of the 10 specific improvement initiatives contained in the plan. For example, while DOD intended to have RFID implemented at 100 percent of its U.S. and overseas distribution centers by September 2007—a measure indicating when scheduled milestones are met—it had not yet identified outcome- focused performance metrics that could be used to show the impact of implementation on expected outcomes, such as receiving and shipping timeliness, asset visibility, or supply consumption data. Two other examples of improvement initiatives that lack outcome-focused performance metrics are War Reserve Materiel, which aims to more accurately forecast war reserve requirements by using capability-based planning and incorporating lessons learned in Operation Iraqi Freedom, and Joint Theater Logistics, which is an effort to improve the ability of a joint force commander to execute logistics authorities and processes within a theater of operations.
One of the challenges in developing departmentwide supply chain performance measures, according to a DOD official, is obtaining standardized, reliable data from noninteroperable systems. For example, the Army currently does not have an integrated method to determine receipt processing for Supply Support Activities, which could affect asset visibility and distribution concerns. Some of the necessary data reside in the Global Transportation Network while other data reside in the Standard Army Retail Supply System. These two databases must be manually reviewed and merged in order to obtain the information for accurate receipt processing performance measures. Nevertheless, we believe that intermediate measures, such as outcome-focused measures for each of the initiatives or for the focus areas, could show near-term progress.
According to a DOD official, in September 2006, DOD awarded a year-long supply chain benchmarking contract to assess commercial supply chain metrics. The official indicated that six outcome measures were chosen for the initial effort: on-time delivery, order fulfillment cycle time, perfect order fulfillment, supply chain management costs, inventory days of supply, and forecast accuracy. Furthermore, the specific supply chains to be reviewed will be recommended by the various DOD components and approved by an executive committee. According to the same DOD official, the contractor will be looking at the specific supply chains approved and the industry equivalent; and a set of performance scorecards mapping the target supply segment to average and best-in-class performance from the comparison population will be developed for each supply chain and provided to the component. This assessment is a good step but it is too early to determine the effectiveness of this effort in helping DOD to demonstrate progress toward improving its supply chain management.
Further, we noted that DOD has not provided cost metrics that might show efficiencies gained through supply chain improvement efforts. In addition to improving the provision of supplies to the warfighter and improving readiness of equipment, DOD’s stated goal in its supply chain management improvement plan is to reduce or avoid costs. However, 9 of the 10 initiatives in the plan lack cost metrics. Without outcome-focused performance and cost metrics for each of the improvement initiatives that are linked to the focus areas, such as requirements forecasting, asset visibility, and materiel distribution, it is unclear whether DOD is progressing toward meeting its stated goal.
DOD Has Implemented Recommendations for Improving Aspects of Supply Chain Management
Over the last 5 years, audit organizations have made more than 400 recommendations that focused specifically on improving certain aspects of DOD’s supply chain management. DOD or the component organization concurred with almost 90 percent of these recommendations, and most of the recommendations that were closed as of the time of our review were considered implemented. We determined that the three focus areas of requirements forecasting, asset visibility, and materiel distribution accounted for 41 percent of the total recommendations made, while other inventory management and supply chain issues accounted for the remaining recommendations. We also grouped the recommendations into five common themes—management oversight, performance tracking, policy, planning, and processes. Several studies conducted by non-audit organizations have made recommendations that address supply chain management as part of a broader review of DOD logistics.
Appendixes I through V summarize the audit recommendations we included in our baseline. Appendix VI summarizes recommendations made by non-audit organizations.
DOD or the Component Organization Concurred with Most of the Recommendations
In developing a baseline of supply chain management recommendations, we identified 478 supply chain management recommendations made by audit organizations between October 2001 and September 2006. DOD or the component organization concurred with 411 (86 percent) of the recommendations; partially concurred with 44 recommendations (9 percent); and nonconcurred with 23 recommendations (5 percent).
These recommendations cover a diverse range of objectives and issues concerning supply chain management. For example, one recommendation with which DOD concurred was contained in our 2006 report on production and installation of Marine Corps truck armor. To better coordinate decisions about what materiel solutions are developed and procured to address common urgent wartime requirements, we recommended—and DOD concurred—that DOD should clarify the point at which the Joint Urgent Operational Needs process should be utilized when materiel solutions require research and development.
In another case, DOD partially concurred with a recommendation in our 2006 report on Radio Frequency Identification (RFID), which consists of electronic tags that are attached to equipment and supplies being shipped from one location to another, enabling shipment tracking. To better track and monitor the use of RFID tags, we recommended—and DOD partially concurred—that the secretaries of each military service and the administrators of other components should determine requirements for the number of tags needed, compile an accurate inventory of the number of tags currently owned, and establish procedures to monitor and track tags, including purchases, reuse, losses, and repairs. In its response to our report, DOD agreed to direct the military services and the U.S. Transportation Command to develop procedures to address the reuse of the tags as well as procedures for the return of tags no longer required. However, the department did not agree to establish procedures to account for the procurement, inventory, repair, or losses of existing tags in the system.
On the other hand, an example of a recommendation that DOD did not concur with was contained in our 2005 report on supply distribution operations. To improve the overall efficiency and interoperability of distribution-related activities, we recommended—but DOD did not concur—that the Secretary of Defense should clarify the scope of responsibilities, accountability, and authority between U.S. Transportation Command’s role as DOD’s Distribution Process Owner and other DOD components. In its response to our report, DOD stated that the responsibilities, accountability, and authority of this role were already clear.
Most Closed Recommendations Were Considered Implemented
The audit organizations had closed 315 (66 percent) of the 478 recommendations at the time we conducted our review. Of the closed recommendations, 275 (87 percent) were implemented and 40 (13 percent) were not implemented as reported by the audit agencies. For example, one closed recommendation that DOD implemented was in our 2005 report on oversight of prepositioning programs. To address the risks and management challenges facing the department’s prepositioning programs and to improve oversight, we recommended that the Secretary of Defense direct the Chairman, Joint Chiefs of Staff assess the near-term operational risks associated with current inventory shortfalls and equipment in poor condition should a conflict arise. In response to our recommendation, the Joint Staff conducted a mission analysis on several operational plans based on the readiness of prepositioned assets. On the other hand, an example of a closed recommendation that DOD did not implement was in our 2003 report on Navy spare parts shortages. To provide a basis for management to assess the extent to which ongoing and planned initiatives will contribute to the mitigation of critical spare parts shortages, we recommended that the Secretary of Defense direct the Secretary of the Navy to develop a framework that includes long-term goals; measurable, outcome-related objectives; implementation goals; and performance measures as a part of either the Navy Sea Enterprise strategy or the Naval Supply Systems Command Strategic Plan. DOD agreed with the intent of the recommendation, but not the prescribed action. The recommendation was closed but not implemented because the Navy did not plan to modify the Naval Supply Systems Command Strategic Plan or higher-level Sea Enterprise Strategy to include a specific focus on mitigating spare parts shortages.
Recommendations to Improve Supply Chain Management Address Five Common Themes
Audit recommendations addressing the three focus areas in DOD’s supply chain management improvement plan—requirements forecasting, asset visibility, and materiel distribution—accounted for 196 (41 percent) of the total recommendations. The fewest recommendations were made in the focus area of distribution, accounting for just 6 percent of the total. Other inventory management issues accounted for most of the other recommendations. In addition, a small number of recommendations, less than 1 percent of the total, addressed supply chain management issues that could not be grouped under any of these other categories. In further analyzing the recommendations, we found that they addressed five common themes—management oversight, performance tracking, policy, planning, and processes. Table 1 shows the number of audit recommendations made by focus area and theme.
Most of the recommendations addressed processes (38 percent), management oversight (30 percent), or policy (22 percent), with comparatively fewer addressing planning (7 percent) and performance tracking (4 percent). The management oversight theme includes any recommendations involving compliance, conducting reviews, or providing information to others. For example, the Naval Audit Service recommended that the Office of the Commander, U.S. Fleet Forces Command should enforce existing requirements that ships prepare and submit Ship Hazardous Material List Feedback Reports and Allowance Change Requests, whenever required. The performance tracking theme includes recommendations with performance measures, goals, objectives, and milestones. For example, the Army Audit Agency recommended that funding for increasing inventory safety levels be withheld until the Army Materiel Command develops test procedures and identifies key performance indicators to measure and assess its cost-effectiveness and impact on operational readiness. The policy theme contains recommendations on issuing guidance, revising or establishing policy, and establishing guidelines. For example, the DOD-IG recommended that the Defense Logistics Agency revise its supply operating procedures to meet specific requirements. The planning theme contains recommendations related to plan, doctrine, or capability development or implementation, as well as any recommendations related to training. For example, the Army Audit Agency recommended the Defense Supply Center in Philadelphia implement a Quality Assurance Surveillance Plan that encompasses all requirements of the prime vendor contract. The largest theme, processes, consists of recommendations that processes and procedures should be established or documented, and recommendations be implemented. For example, we recommended that the Secretary of Defense direct the service secretaries to establish a process to share information between the Marine Corps and Army on developed or developing materiel solutions.
Non-audit Organizations’ Recommendations Address Supply Chain Management as Part of a Broader Review of DOD Logistics
Studies conducted by non-audit organizations contain recommendations that address supply chain management as part of a broader review of DOD logistics. For example, the Center for Strategic and International Studies and the Defense Science Board suggested the creation of a departmentwide logistics command responsible for end-to-end supply chain operations. In July 2005, the Center for Strategic and International Studies issued a report, “Beyond Goldwater-Nichols: U.S. Government and Defense Reform for a New Strategic Era,” which addressed the entire U.S. national security structure, including the organization of logistics support. In this report, the study team acknowledged that recent steps, such as strengthening joint theater logistics and the existence of stronger coordinating authorities have significantly increased the unity of effort in logistical support to ongoing operations. However, according to the study, much of this reflects the combination of exemplary leadership and the intense operational pull of Operation Iraqi Freedom, and has not been formalized and institutionalized by charter, doctrine, or organizational realignment. It further noted that the fact that a single Distribution Process Owner was needed to overcome the fragmented structure of DOD’s logistical system underscores the need for fundamental reform. The study team recommended the integration of the management of transportation and supply warehousing functions under a single organization such as an integrated logistics command. The report noted that the Commission on Roles and Missions also had recommended the formation of a logistics command back in 1995.
In 2005, the Summer Study Task Force on Transformation, under the direction of the Under Secretary of Defense for Acquisition, Technology, and Logistics, convened to assess DOD’s transformation progress, including the transformation of logistics capabilities. In this assessment, issued in February 2006, the Defense Science Board suggested that each segment in the supply chain is optimized for that specific function. For example, in the depot shipping segment of the supply chain, packages are consolidated into truck-size loads in order to fill the trucks for efficiency. Yet, optimizing each segment inevitably suboptimizes the major objective of end-to-end movement from source to user. The Defense Science Board report further indicated that although the assignment of the U.S. Transportation Command as the Distribution Process Owner was an important step towards addressing an end-to-end supply change, it did not go far enough to meet the objective of an effective supply chain. The necessary step is to assign a joint logistics command the authority and accountability for providing this essential support to global operations.
Unlike recommendations made by audit agencies, DOD does not systematically track the status of recommendations made by non-audit organizations. Hence, in our analysis, we did not determine the extent to which DOD concurred with or implemented recommendations from these organizations.
Conclusions
Overcoming systemic, long-standing problems requires comprehensive approaches. Improving DOD’s supply chain management will require continued progress in defense business transformation, including completion of a comprehensive, integrated strategy to guide the department’s logistics programs and initiatives. In addition, while DOD has made a commitment to improving supply chain management, as demonstrated by the development and implementation of the supply chain management improvement plan, the plan generally lacks outcome-focused performance metrics that would enable DOD to track and demonstrate the extent to which its individual efforts improve supply chain management or the extent of improvement in the three focus areas of requirements forecasting, asset visibility, and materiel distribution. Furthermore, without cost metrics, it will be difficult to show efficiencies gained through supply chain improvement initiatives.
Recommendations for Executive Action
To improve DOD’s ability to guide logistics programs and initiatives across the department and to demonstrate the effectiveness, efficiency, and impact of its efforts to resolve supply chain management problems, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to take the following two actions: Complete the development of a comprehensive, integrated logistics strategy that is aligned with other defense business transformation efforts, including the Enterprise Transition Plan. To facilitate completion of the strategy, DOD should establish a specific target date for its completion. Further, DOD should take steps as appropriate to ensure the supply chain management improvement plan and component-level logistics plans are synchronized with the department’s overall logistics strategy.
Develop, implement, and monitor outcome-focused performance and cost metrics for all the individual initiatives in the supply chain management improvement plan as well as for the plan’s focus areas of requirements forecasting, asset visibility, and materiel distribution.
Agency Comments and Our Evaluation
In its written comments on a draft of this report, DOD concurred with our recommendations. The department’s response are reprinted in appendix VII.
In response to our recommendation to complete the development of a comprehensive, integrated logistics strategy, DOD stated that the strategy is under development and is aligned with other defense business transformation efforts. DOD estimated that the logistics strategy would be completed 6 months after it completes the logistics portfolio test case in the spring of 2007. DOD did not address whether it would take steps to ensure the supply chain management improvement plan and component- level logistics plans are synchronized with the department’s overall logistics strategy. We continue to believe that these plans must be synchronized with the overall logistics strategy to effectively guide program efforts across the department and to provide the means to determine if these efforts are achieving the desired results.
In response to our recommendation to develop, implement, and monitor outcome-focused performance and cost metrics, the department indicated it has developed and implemented outcome-focused performance and cost metrics for logistics across the department. However, DOD acknowledged that more work needs to be accomplished in linking the outcome metrics to the initiatives in the supply chain management improvement plan as well as for the focus areas of requirements forecasting, asset visibility, and materiel distribution. DOD stated that these linkages will be completed as part of full implementation of each initiative. We are pleased that the department recognized the need for linking outcome-focused metrics with the individual initiatives and the three focus areas in its supply chain management improvement plan. However, it is unclear from DOD’s response how and under what timeframes the department plans to implement this goal. As we noted in the report, DOD lacks outcome- focused performance metrics for supply chain management, in part because one of the challenges is obtaining standardized, reliable data from noninteroperable systems. In addition, initiatives in the supply chain management plan are many years away from full implementation. If DOD waits until full implementation to incorporate outcome-based metrics, it will miss opportunities to assess progress on an interim basis. We also continue to believe that cost metrics are critical for DOD to assess progress toward meeting its stated goal of improving the provision of supplies to the warfighter and improving readiness of equipment while reducing or avoiding costs through its supply chain initiatives.
Scope and Methodology
Our discussion of the integration of supply chain management with broader defense transformation efforts is based primarily on our prior reports and testimonies. We obtained information on DOD’s “To Be” logistics roadmap and the joint logistics capabilities portfolio management test from senior officials in the Office of the Deputy Under Secretary of Defense for Logistics, Materiel, and Readiness. We met regularly with DOD and OMB officials to discuss the overall status of the supply chain management improvement plan, the implementation schedules of the plan’s individual initiatives, and the plan’s performance measures. We visited and interviewed officials from U.S. Transportation Command, the Defense Logistics Agency, the military services, and the Joint Staff to gain their perspectives on improving supply chain management.
To develop a baseline of recommended supply chain management improvements, we surveyed audit reports covering the time period of October 2001 to September 2006. We selected this time period because it corresponds with recent military operations that began with the onset of Operation Enduring Freedom and, later, Operation Iraqi Freedom. We surveyed audit reports issued by our office, the DOD-IG, the Army Audit Agency, the Naval Audit Service, and the Air Force Audit Agency.
For each audit recommendation contained in these reports, we determined its status and focus. To determine the status of GAO recommendations, we obtained data from our recommendation tracking system. We noted whether DOD concurred with, partially concurred with, or did not concur with each recommendation. In evaluating agency comments on our reports, we have noted instances where DOD agreed with the intent of a recommendation but did not commit to taking any specific actions to address it. For the purposes of this report, we counted these as concurred recommendations. We also noted whether the recommendation was open, closed and implemented, or closed and not implemented. In a similar manner, we worked with DOD-IG and the service audit agencies to determine the status of their recommendations. We verified with each of the audit organizations that they agreed with our definition that a recommendation is considered “concurred with” when the audit organization determines that DOD or the component organization fully agreed with the recommendation in it entirety and its prescribed actions, and “partially concurred with” is when the audit organization determines that DOD or the component organization agreed to parts of the recommendation or parts of its prescribed actions. Furthermore, we verified that a recommendation is officially “closed” when the audit organization determines that DOD or the component organization has implemented its provisions or otherwise met the intent of the recommendation; when circumstances have changed, and the recommendation is no longer valid; or when, after a certain amount of time, the audit organization determines that implementation cannot reasonably be expected. We also verified that an “open” recommendation is one that has not been closed for one of the preceding reasons. We assessed the reliability of the data we obtained from DOD-IG and the service audit agencies by obtaining information on how they track and follow up on recommendations and determined that their data were sufficiently reliable for our purposes.
In analyzing the focus of recommendations, we identified those addressing three specific areas—requirements forecasting, asset visibility, and materiel distribution—as well those addressing other supply chain management concerns. We selected these three focus areas as the framework for our analysis based on our prior work in this high-risk area and because DOD has structured its supply chain management improvement plan around them. We then analyzed the recommendations and further divided them into one of five common themes: management oversight, performance tracking, planning, process, and policy. To identify the focus area and theme for each report and recommendation, three analysts independently labeled each report with a focus area and identified a theme for each recommendation within the report. The team of analysts then reviewed the results, discussed any discrepancies, and reached agreement on the appropriate theme for each recommendation. In the event of a discrepancy which could not be immediately resolved, we referred to the original report to clarify what the intent of the report had been in order to decide on the appropriate focus area and theme. For the purpose of our analysis, if a recommendation consisted of multiple actions, we counted and classified each action separately. We excluded from our analysis recommendations that addressed only a specific piece of equipment or system. We also excluded recommendations that addressed other DOD high-risk areas, such as business systems modernization and financial management. While we included recommendations by non-audit organizations in our analysis, we did not determine the extent to which DOD concurred with or implemented them because their status is not systemically tracked.
We conducted our review from January through November 2006 in accordance with generally accepted government auditing standards.
We are sending copies of this report to the Director, Office of Management and Budget; the Secretary of Defense; the Deputy Secretary of Defense; the Under Secretary of Defense for Acquisition, Technology, and Logistics; and other interested parties. This report will also be available at no charge on our Web site at http://www.gao.gov.
Should you or your staff have any questions concerning this report, please contact me at (202) 512-8365 or [email protected]. Key contributors to this report are listed in appendix VIII.
Supply Chain Management: Summary of GAO Report Recommendations
To ensure that the services make informed and coordinated decisions about what materiel solutions are developed and procured to address common urgent wartime requirements, GAO recommended that the Secretary of Defense take the following two actions: (1) Direct the service secretaries to establish a process to share information between the Marine Corps and the Army on developed or developing materiel solutions, and (2) Clarify the point at which the Joint Urgent Operational Needs process should be utilized when materiel solutions require research and development.
GAO recommended that the Secretary of Defense direct the Under Secretary of Defense, Acquisition, Technology and Logistics to ensure that the Director of the Defense Logistics Agency provide continual management oversight of the corrective actions to address pricing problems in the prime vendor program.
GAO recommended that the Secretary of Defense take the following seven actions: To ensure DOD inventory management centers properly assign codes to categorize the reasons to retain items in contingency retention inventory, direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to: (1) Direct the Secretary of the Army to instruct the Army Materiel Command to modify the Commodity Command Standard System so it will properly categorize the reasons for holding items in contingency retention inventory. (2) Direct the Secretary of the Air Force to instruct the Air Force Materiel Command to correct the Application Programs, Indenture system’s deficiency to ensure it properly categorizes the reasons for holding items in contingency retention inventory.
To ensure that the DOD inventory management centers retain contingency retention inventory that will meet current and future operational requirements, direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to: (3) Direct the Secretary of the Army to instruct the Army Materiel Command to require the Aviation and Missile Command to identify items that no longer support operational needs and determine whether the items need to be removed from the inventory. The Army Materiel Command should also determine whether its other two inventory commands, the Communications-Electronics Command and Tank-automotive and Armaments Command, are also holding obsolete items, and if so, direct those commands to determine whether the disposal of those items is warranted.
To ensure that DOD inventory management centers conduct annual reviews of contingency retention inventory as required by DOD’s Supply Chain Materiel Management Regulation, direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to: (4) Direct the Director of the Defense Logistics Agency to require the Defense Supply Center Richmond to conduct annual reviews of contingency retention inventory. The Defense Logistics Agency should also determine whether its other two centers, the Defense Supply Center Columbus and the Defense Supply Center Philadelphia, are conducting annual reviews, and if not, direct them to conduct the reviews so they can ensure the reasons for retaining the contingency retention inventory are valid. (5) Direct the Secretary of the Navy to instruct the Naval Inventory Control Point Mechanicsburg to conduct annual reviews of contingency retention inventory. The Naval Inventory Control Point should also determine if its other organization, Naval Inventory Control Point Philadelphia, is conducting annual reviews and if not, direct the activity to conduct the reviews so it can ensure the reasons for retaining the contingency retention inventory are valid. (6) Direct the Secretary of the Army to instruct the Army Materiel Command to require the Aviation and Missile Command to conduct annual reviews of contingency retention inventory. The Army Materiel Command should also determine if its other two inventory commands, the Communications-Electronics Command and Tank- automotive and Armaments Command, are conducting annual reviews and if not, direct the commands to conduct the reviews so they can ensure the reasons for retaining the contingency retention inventory are valid.
To ensure that DOD inventory management centers implement departmentwide policies and procedures for conducting annual reviews of contingency retention inventories, direct the Office of the Deputy Under Secretary of Defense for Logistics and Materiel Readiness to take the following action: (7) Revise the DOD’s Supply Chain Materiel Management Regulation to make clear who is responsible for providing recurring oversight to ensure the inventory management centers conduct the annual reviews of contingency retention inventory.
To ensure funding needs for urgent wartime requirements are identified quickly, requests for funding are well documented, and funding decisions are based on risk and an assessment of the highest priority requirements, GAO recommended the Secretary of Defense direct the Secretary of the Army to establish a process to document and communicate all urgent wartime funding requirements for supplies and equipment at the time they are identified and the disposition of funding decisions.
GAO recommended that the Secretary of Defense direct the Under Secretary of Defense (Acquisition, Technology, and Logistics) to take the following two actions: (1) Modify the July 30, 2004, RFID policy and other operational guidance to require that active RFID tags be returned for reuse or be reused by the military services and other users. (2) Direct the secretaries of each military service and administrators of other components to establish procedures to track and monitor the use of active RFID tags, to include determining requirements for the number of tags needed, compiling an accurate inventory of the number of tags establishing procedures to monitor and track tags, including purchases, reuse, losses, repairs, and any other categories that would assist management’s oversight of these tags.
To improve accountability of inventory shipped to Army repair contractors, GAO recommended that the Secretary of Defense direct the Secretary of the Army to instruct the Commanding General, Army Materiel Command, to take the following six actions: (1) Establish systematic procedures to obtain and document contractors’ receipt of secondary repair item shipments in the Army’s inventory management systems, and to follow up on unconfirmed receipts within 45 days of shipment. (2) Institute policies, consistent with DOD regulations, for obtaining and documenting contractors’ receipt of government-furnished materiel shipments in the Army’s inventory management systems. (3) Provide quarterly status reports of all shipments of Army government-furnished materiel to Defense Contract Management Agency, in compliance with DOD regulations. (4) Examine the feasibility of implementing DOD guidance for providing advance notification to contractors at the time of shipment and, if warranted, establish appropriate policies and procedures for implementation. (5) Analyze receipt records for secondary repair items shipped to contractors and take actions necessary to update and adjust inventory management data prior to transfer to the Logistics Modernization Program. These actions should include investigating and resolving shipments that lack matching receipts to determine their status. (6) To ensure consistent implementation of any new procedures arising from the recommendations in this report, provide periodic training to appropriate inventory control point personnel and provide clarifying guidance concerning these new procedures to the command’s repair contractors.
To enhance DOD’s ability to take a more coordinated and systemic approach to improving the supply distribution system, GAO recommended that the Secretary of Defense take the following three actions: (1) Clarify the scope of responsibilities, accountability, and authority between the Distribution Process Owner and the Defense Logistics Executive as well as the roles and responsibilities between the Distribution Process Owner, the Defense Logistics Agency, and Joint Forces Command. (2) Issue a directive instituting these decisions and make other related changes, as appropriate, in policy and doctrine. (3) Improve the Logistics Transformation Strategy by directing the Under Secretary of Defense (Acquisition, Technology, and Logistics) to include specific performance goals, programs, milestones, and resources to achieve focused logistics capabilities in the Focused Logistics Roadmap.
To address the current underfunding of the Very Small Aperture Terminal and the Mobile Tracking System, GAO recommended that the Secretary of Defense direct the Secretary of the Army to determine whether sufficient funding priority has been be given to the acquisition of these systems and, if not, to take appropriate corrective action.
To address the risks and management challenges facing the department’s prepositioning programs and improve oversight, GAO recommended that the Secretary of Defense take the following five actions: (1) Direct the Chairman, Joint Chiefs of Staff, to assess the near-term operational risks associated with current inventory shortfalls and equipment in poor condition should a conflict arise. (2) Direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to provide oversight over the department’s prepositioning programs by fully implementing the department’s directive on war reserve materiel and, if necessary, revise the directive to clarify the lines of accountability for this oversight. (3) Direct the Secretary of the Army to improve the processes used to determine requirements and direct the Secretary of the Army and Air Force to improve the processes used to determine the reliability of inventory data so that the readiness of their prepositioning programs can be reliably assessed and proper oversight over the programs can be accomplished. (4) Develop a coordinated departmentwide plan and joint doctrine for the department’s prepositioning programs that identifies the role of prepositioning in the transformed military and ensures these programs will operate jointly, support the needs of the war fighter, and are affordable. (5) Report to Congress, possibly as part of the mandated October 2005 report, how the department plans to manage the near-term operational risks created by inventory shortfalls and management and oversight issues described in this report.
Defense Logistics: Better Strategic Planning Can Help Ensure DOD's Successful Implementation of Passive Radio Frequency Identification (GAO-05- 345, September 12, 2005)
GAO recommend that the Secretary of Defense take the following three actions: (1) Direct the Under Secretary of Defense (Acquisition, Technology, and Logistics) to expand its current RFID planning efforts to include a DOD-wide comprehensive strategic management approach that will ensure that RFID technology is efficiently and effectively implemented throughout the department. This strategic management approach should incorporate the following key management principles: an integrated strategy with goals, objectives, and results for fully implementing RFID in the DOD supply chain process, to include the interoperability of automatic information systems; a description of specific actions needed to meet goals and performance measures or metrics to evaluate progress toward achieving the goals; schedules and milestones for meeting deadlines; identification of total RFID resources needed to achieve full an evaluation and corrective action plan. (2) Direct the secretaries of each military service and administrators of other DOD military components to develop individual comprehensive strategic management approaches that support the DOD-wide approach for fully implementing RFID into the supply chain processes. (3) Direct the Under Secretary of Defense (Acquisition, Technology, and Logistics), the secretaries of each military service, and administrators of other military components to develop a plan that identifies the specific challenges impeding passive RFID implementation and the actions needed to mitigate these challenges. Such a plan could be included in the strategic management approach that GAO recommended they develop.
To improve the effectiveness of DOD’s supply system in supporting deployed forces for contingencies, GAO recommended that the Secretary of Defense direct the Secretary of the Army to take the following three actions and specify when they will be completed: (1) Improve the accuracy of Army war reserve requirements and transparency about their adequacy by: updating the war reserve models with OIF consumption data that validate the type and number of items needed, modeling war reserve requirements at least annually to update the war reserve estimates based on changing operational and equipment requirements, and disclosing to Congress the impact on military operations of its risk management decision about the percentage of war reserves being funded.
Concurred with intent, open (2) Improve the accuracy of its wartime supply requirements forecasting process by: developing models that can compute operational supply requirements for deploying units more promptly as part of prewar planning and providing item managers with operational information in a timely manner so they can adjust modeled wartime requirements as necessary. (3) Reduce the time delay in granting increased obligation authority to the Army Materiel Command and its subordinate commands to support their forecasted wartime requirements by establishing an expeditious supply requirements validation process that provides accurate information to support timely and sufficient funding. (4) GAO also recommended that the Secretary of Defense direct the Secretary of the Navy to improve the accuracy of the Marine Corps’ wartime supply requirements forecasting process by completing the reconciliation of the Marine Corps’ forecasted requirements with actual OIF consumption data to validate the number as well as types of items needed and making necessary adjustments to their requirements. The department should also specify when these actions will be completed.
GAO recommended that the Secretary of Defense direct the Secretary of the Army and Director of the Defense Logistics Agency to take the following two actions: (5) Minimize future acquisition delays by assessing the industrial-base capacity to meet updated forecasted demands for critical items within the time frames required by operational plans as well as specify when this assessment will be completed, and (6) Provide visibility to Congress and other decision makers about how the department plans to acquire critical items to meet demands that emerge during contingencies.
GAO also recommended the Secretary of Defense take the following three actions and specify when they would be completed: (7) Revise current joint logistics doctrine to clearly state, consistent with policy, who has responsibility and authority for synchronizing the distribution of supplies from the United States to deployed units during operations; (8) Develop and exercise, through a mix of computer simulations and field training, deployable supply receiving and distribution capabilities including trained personnel and related equipment for implementing improved supply management practices, such as radio frequency identification tags that provide in-transit visibility of supplies, to ensure they are sufficient and capable of meeting the requirements in operational plans; and (9) Establish common supply information systems that ensure the DOD and the services can requisition supplies promptly and match incoming supplies with unit requisitions to facilitate expeditious and accurate distribution.
GAO continued to believe, as it did in April 1999, that DOD should develop a cohesive, departmentwide plan to ensure that total asset visibility is achieved. Specifically, GAO recommended that the Secretary of Defense develop a departmentwide long-term total asset visibility strategy as part of the Business Enterprise Architecture that: (1) Describes the complete management structure and assigns accountability to specific offices throughout the department, with milestones and performance measures, for ensuring timely success in achieving total asset visibility; (2) Identifies the resource requirements for implementing total asset visibility and includes related investment analyses that show how the major information technology investments will support total asset visibility goals; (3) Identifies how departmentwide systems issues that affect implementation of total asset visibility will be addressed; and (4) Establishes outcome-oriented total asset visibility goals and performance measures for all relevant components and closely links the measures with timelines for improvement. In addition, since 2001, GAO made a number of recommendations aimed at improving DOD’s refinement and implementation of the business management modernization program. Most recently, GAO identified the need to have component plans clearly linked to the long-term objectives of the department’s business management modernization program. As they relate to total asset visibility, GAO continued to believe that these recommendations were valid.
To reduce the likelihood of releasing classified and controlled spare parts that DOD does not want to be released to foreign countries, GAO recommended that the Secretary of Defense take the following three actions: (1) Direct the Under Secretary of Defense for Policy, in conjunction with the Secretaries of the Army and the Navy, and direct the Secretary of the Air Force to develop an implementation plan, such as a Plan of Actions & Milestones, specifying the remedial actions to be taken to ensure that applicable testing and review of the existing requisition-processing systems are conducted on a periodic basis. (2) Direct the Under Secretary of Defense for Policy, in conjunction with the Secretaries of the Army, the Air Force, and the Navy, to determine whether current plans for developing the Case Execution Management Information System call for periodic testing and, if not, provide for such testing. (3) Direct the Under Secretary of Defense for Policy, in conjunction with the Secretary of the Navy, and direct the Secretary of the Air Force to determine if it would be beneficial to modify the Navy’s and the Air Force’s requisition-processing systems so that the systems reject requisitions for classified or controlled parts that foreign countries make under blanket orders and preclude country managers from manually overriding system decisions, and to modify their systems as appropriate.
To improve the control of government-furnished material shipped to Navy repair contractors, GAO recommended that the Secretary of Defense direct the Secretary of the Navy to instruct the Commander, Naval Inventory Control Point, to implement the following three actions: (1) Require Navy repair contractors to acknowledge receipt of material that is received from the Navy’s supply system as prescribed by DOD procedure. (2) Follow up on unconfirmed material receipts within the 45 days as prescribed in the DOD internal control procedures to ensure that the Naval Inventory Control Point can reconcile material shipped to and received by its repair contractors. (3) Implement procedures to ensure that quarterly reports of all shipments of government-furnished material to Navy repair contractors are generated and distributed to the Defense Contract Management Agency.
To address the inventory management shortcomings that GAO identified, GAO recommended that the Secretary of Defense take the following three actions: (1) Direct the military services and the Defense Logistics Agency to determine whether it would be beneficial to use the actual storage cost data provided by Defense Logistics Agency in their computations, instead of using estimated storage costs, and include that data in their systems and models as appropriate; (2) Direct the Secretary of the Air Force to establish and implement a systemwide process for correcting causes of inventory discrepancies between the inventory for which item managers are accountable and the inventory reported by bases and repair centers; and (3) Direct the Secretary of the Air Force to revise its policy to require item managers to code inventory so that the inventory is properly categorized.
To improve internal controls over the Navy’s foreign military sales program and to prevent foreign countries from obtaining classified and controlled spare parts under blanket orders, GAO recommended that the Secretary of Defense instruct the Secretary of the Navy to take the following six actions: (1) Consult with the appropriate officials to resolve the conflict between the DOD and Navy policies on the Navy’s use of waivers allowing foreign countries to obtain classified spare parts under blanket orders. (2) Determine and implement the necessary changes required to prevent the current system from erroneously approving blanket order requisitions for classified spare parts until the new system is deployed. (3) Establish policies and procedures for the Navy’s country managers to follow when documenting their decisions to override the system when manually processing blanket order requisitions. (4) Require that the Navy’s country managers manually enter blanket order requisitions into the Navy’s system to correctly represent foreign-country-initiated orders versus U.S. government-initiated orders so the Navy’s system will validate whether the foreign countries are eligible to receive the requested spare parts.
Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Partially concurred, closed, implemented Concurred, closed, implemented Partially concurred, closed, implemented (5) Establish policies and procedures to follow for blanket orders when the Navy’s country managers replace spare parts requested by manufacturer or vendor part numbers with corresponding government national stock numbers. (6) Establish interim policies and procedures, after consulting with appropriate government officials, for recovering classified or controlled spare parts shipped to foreign countries that might not have been eligible to receive them under blanket orders until the Defense Security Cooperation Agency develops guidance on this issue.
To improve the Navy system’s internal controls aimed at preventing foreign countries from obtaining classified and controlled spare parts under blanket orders, GAO recommended that the Secretary of Defense direct the Under Secretary of Defense for Policy to require the appropriate officials to take the following two actions: (7) Modify the Navy’s system to revalidate blanket order requisitions when the Navy’s country manager replaces spare parts that are requested by manufacturer or vendor part numbers. (8) Periodically test the system to ensure that it is accurately reviewing blanket order requisitions before approving them.
To improve internal controls over the Army’s foreign military sales program and to prevent foreign countries from being able to obtain classified spare parts or unclassified items containing military technology that they are not eligible to receive under blanket orders, GAO recommended that the Secretary of Defense instruct the Secretary of the Army to take the following two actions: (1) Modify existing policies and procedures, after consultation with the appropriate government officials, to cover items shipped in lieu of items ordered to also ensure the recovery of classified spare parts that have been shipped to foreign countries that may not be eligible to receive them under blanket orders. (2) Modify existing policies and procedures covering items, after consultation with the appropriate government officials, to cover items shipped in lieu of items ordered to also ensure the recovery of unclassified items containing military technology that have been shipped to foreign countries that may not be eligible to receive them under blanket orders.
To improve the Army system’s internal controls aimed at preventing foreign countries from obtaining classified spare parts or unclassified items containing military technology under blanket orders, GAO recommended that the Secretary of Defense direct the Under Secretary of Defense for Policy to require the appropriate officials to take the following two actions: (3) Modify the system so that it identifies blanket order requisitions for unclassified items containing military technology that should be reviewed before they are released. (4) Periodically test the system and its logic for restricting requisitions to ensure that the system is accurately reviewing and approving blanket order requisitions.
In order to improve supply availability, enhance operations and mission readiness, and reduce operating costs for deployed ships, GAO recommended the Secretary of Defense direct the Secretary of the Navy to: (1) Develop plans to conduct periodic ship configuration audits and to ensure that configuration records are updated and maintained in order that accurate inventory data can be developed for deployed ships; (2) Ensure that demand data for parts entered into ship supply systems are recorded promptly and accurately as required to ensure that onboard ship inventories reflect current usage or demands; (3) Periodically identify and purge spare parts from ship inventories to reduce costs when parts have not been requisitioned for long periods of time and are not needed according to current and accurate configuration and parts demand information; and (4) Ensure that casualty reports are issued consistent with high priority maintenance work orders, as required by Navy instruction, to provide a more complete assessment of ship’s readiness.
To improve the supply availability of critical readiness degrading spare parts that may improve the overall readiness posture of the military services, GAO recommended that the Secretary of Defense direct the Director of the Defense Logistics Agency to: (1) Submit, as appropriate, requests for waiver(s) of the provisions of the DOD Supply Chain Materiel Management Regulation 4140.1-R that limit the safety level of supply parts to specific demand levels. Such waivers would allow Defense Logistics Agency to buy sufficient critical spare parts that affect readiness of service weapon systems to attain an 85 percent minimum availability goal; (2) Change the agency’s current aggregate 85 percent supply availability goal for critical spare parts that affect readiness, to a minimum 85 percent supply availability goal for each critical spare part, and because of the long lead times in acquiring certain critical parts, establish annual performance targets for achieving the 85 percent minimum goal; and (3) Prioritize funding as necessary to achieve the annual performance targets and ultimately the 85 percent minimum supply availability goal.
To improve internal controls over the Air Force’s foreign military sales program and to minimize countries’ abilities to obtain classified or controlled spare parts under blanket orders for which they are not eligible, GAO recommended that the Secretary of Defense instruct the Secretary of the Air Force to require the appropriate officials to take the following steps: (1) Modify the Security Assistance Management Information System so that it validates country requisitions based on the requisitioned item’s complete national stock number. (2) Establish policies and procedures for recovering classified or controlled items that are erroneously shipped. (3) Establish polices and procedures for validating modifications made to the Security Assistance Management Information System to ensure that the changes were properly made. (4) Periodically test the Security Assistance Management Information System to ensure that the system’s logic for restricting requisitions is working correctly. (5) Establish a policy for command country managers to document the basis for their decisions to override Security Assistance Management Information System or foreign military sales case manager recommendations.
GAO recommended that the Secretary of Defense direct the Secretary of the Navy to: (1) Develop a framework for mitigating critical spare parts shortages that includes long-term goals; measurable, outcome-related objectives; implementation goals; and performance measures as a part of either the Navy Sea Enterprise strategy or the Naval Supply Systems Command Strategic Plan, which will provide a basis for management to assess the extent to which ongoing and planned initiatives will contribute to the mitigation of critical spare parts shortages; and (2) Implement the Office of the Secretary of Defense’s recommendation to report, as part of budget requests, the impact of funding on individual weapon system readiness with a specific milestone for completion.
In order to improve the department’s logistics strategic plan to achieve results for overcoming spare parts shortages, improve readiness, and address the long-standing weaknesses that are limiting the overall economy and efficiency of logistics operations, GAO recommended that the Secretary of Defense direct the Under Secretary for Acquisition, Technology, and Logistics to: (1) Incorporate clear goals, objectives, and performance measures pertaining to mitigating spare parts shortages in the Future Logistics Enterprise or appropriate agencywide initiatives to include efforts recommended by the Under Secretary of Defense, Comptroller in his August 2002 study report.
GAO also recommended that the Secretary of Defense direct the Under Secretary of Defense, Comptroller to (2) Establish reporting milestones and define how it will measure progress in implementing the August 2002 Inventory Management Study recommendations related to mitigating critical spare parts shortages.
GAO recommended that the Secretary of Defense direct the Secretary of the Air Force to take the following steps: (1) Incorporate the Air Force Strategic Plan’s performance measures and targets into the subordinate Logistics Support Plan and the Supply Strategic Plan. (2) Commit to start those remaining initiatives needed to address the causes of spare parts shortages or clearly identify how the initiatives have been incorporated into those initiatives already underway. (3) Adopt performance measures and targets for its initiatives that will show how their implementation will affect critical spare parts availability and readiness. (4) Direct the new Innovation and Transformation Directorate to establish plans and priorities for improving management of logistics initiatives consistent with the Air Force Strategic Plan. (5) Request spare parts funds in the Air Force’s budget consistent with results of its spare parts requirements determination process.
GAO recommended that the Secretary of Defense direct the Secretary of the Army to: (1) Modify or supplement the Transformation Campaign Plan, or the Army-wide logistics initiatives to include a focus on mitigating critical spare parts shortages with goals, objectives, milestones, and quantifiable performance measures, such as supply availability and readiness-related outcomes and (2) Implement the Office of Secretary of Defense recommendation to report, as part of budget requests, the impact of additional spare parts funding on equipment readiness with specific milestones for completion.
Defense Inventory: Overall Inventory and Requirements Are Increasing, but Some Reductions in Navy Requirements Are Possible (GA0-03-355, May 8, 2003)
To improve the accuracy of the Navy’s secondary inventory requirements, GAO recommended that the Secretary of Defense direct the Secretary of the Navy to require the Commander, Naval Supply Systems Command, to require its inventory managers to use the most current data available for computing administrative lead time requirements.
Given the importance of spare parts to maintaining force readiness, and as justification for future budget requests, actual and complete information would be important to DOD as well as Congress. Therefore, GAO recommended that the Secretary of Defense: (1) Issue additional guidance on how the services are to identify, compile, and report on actual and complete spare parts spending information, including supplemental funding, in total and by commodity, as specified by Exhibit OP-31 and (2) Direct the Secretaries of the military departments to comply with Exhibit OP-31 reporting guidance to ensure that complete information is provided to Congress on the quantities of spare parts purchased and explanations of deviations between programmed and actual spending.
GAO recommended that the Secretary of Defense establish a direct link between the munitions needs of the combatant commands—recognizing the impact of weapons systems and munitions preferred or expected to be employed—and the munitions requirements determinations and purchasing decisions made by the military services.
Defense Inventory: Improved Industrial Base Assessment for Army War Reserve Spares Could Save Money (GA0-02- 650, July 12, 2002)
In order to improve the Army’s readiness for wartime operations, achieve greater economy in purchasing decisions, and provide Congress with accurate budget submissions for war reserve spare parts, GAO recommended that the Secretary of Defense direct the Secretary of the Army to have the Commander of Army Material Command take the following actions to expand or change its current process consistent with the attributes in this report: (1) Establish an overarching industrial base capability assessment process that considers the attributes in this report. (2) Develop a method to efficiently collect current industrial base capability data directly from industry itself. (3) Create analytical tools that identify potential production capability problems such as those due to surge in wartime spare parts demand. (4) Create management strategies for resolving spare parts availability problems, for example, by changing acquisition procedures or by targeting investments in material and technology resources to reduce production lead times.
To improve the control of inventory being shipped, GAO recommended that the Secretary of Defense direct the Secretary of the Air Force to undertake the following: Improve processes for providing contractor access to government-furnished material by: (1) Listing specific stock numbers and quantities of material in repair contracts (as they are modified or newly written) that the inventory control points have agreed to furnish to contractors. (2) Demonstrating that automated internal control systems for loading and screening stock numbers and quantities against contractor requisitions perform as designed. (3) Loading stock numbers and quantities that the inventory control points have agreed to furnish to contractors into the control systems manually until the automated systems have been shown to perform as designed. (4) Requiring that waivers to loading stock numbers and quantities manually are adequately justified and documented based on cost-effective and/or mission-critical needs.
Revise Air Force supply procedures to include explicit responsibility and accountability for: (5) Generating quarterly reports of all shipments of Air Force material to contractors. (6) Distributing the reports to Defense Contract Management Agency property administrators. (7) Determine, for the contractors in our review, what actions are needed to correct problems in posting material receipts. (8) Determine, for the contractors in our review, what actions are needed to correct problems in reporting shipment discrepancies. (9) Establish interim procedures to reconcile records of material shipped to contractors with records of material received by them, until the Air Force completes the transition to its Commercial Asset Visibility system in fiscal year 2004. (10) Comply with existing procedures to request, collect, and analyze contractor shipment discrepancy data to reduce the vulnerability of shipped inventory to undetected loss, misplacement, or theft.
For all programs, GAO recommended that the Secretary of Defense direct the Director of the Defense Logistics Agency to take the following actions: (1) As part of the department’s redesign of its activity code database, establish codes that identify the type of excess property—by federal supply class—and the quantity that each special program is eligible to obtain and provide accountable program officers access to appropriate information to identify any inconsistencies between what was approved and what was received. (2) Reiterate policy stressing that Defense reutilization facility staff must notify special program officials of the specific tracking and handling requirements of hazardous items and items with military technology/applications.
Concurred, closed, implemented Nonconcurred, closed, not implemented Partially concurred, closed, not implemented Partially concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, not implemented Concurred, closed, not implemented Concurred, closed, implemented Partially concurred, closed, not implemented Partially concurred, closed, implemented Concurred, closed, implemented GAO also recommended that the Secretary of Defense ensure that accountable program officers within the department verify, prior to approving the issuance of excess property, the eligibility of special programs to obtain specific types and amounts of property, including items that are hazardous or have military technology/applications. This could be accomplished, in part, through the department’s ongoing redesign of its activity code database.
For each individual program, GAO further recommended the following: (1) With regard to the 12th Congressional Regional Equipment Center, that the Secretary of Defense direct the Director of the Defense Logistics Agency to review and amend, as necessary, its agreement with the Center in the following areas: (a) The Center’s financial responsibility for the cost of shipping excess property obtained under the experimental project, (b) The ancillary items the Center is eligible to receive, (c) The rules concerning the sale of property and procedures for the Center to notify the Agency of all proposed sales of excess property, (d) The Center’s responsibility for tracking items having military technology/application and hazardous items, and (e) The need for Agency approval of the Center’s orders for excess property. (2) With regard to the Army, the Navy, and the Air Force Military Affiliate Radio Systems, GAO recommended that the Secretary of Defense direct the Chairman of the Joint Chiefs of Staff to have the Joint Staff Directorate for Command, Control, Communications, and Computer Systems review which items these systems are eligible to receive, on the basis of their mission and needs, and direct each of the Military Affiliate Radio Systems to accurately track excess property, including pilferable items, items with military technology/ applications, and hazardous items. (3) With regard to the Civil Air Patrol, GAO recommended that the Secretary of Defense direct the Secretary of the Air Force to have the Civil Air Patrol-Air Force review which items the Patrol is eligible to receive, on the basis of its mission and needs, and direct the Patrol to accurately track its excess property, including pilferable items, items with military technology/applications, and hazardous items.
To provide the military services, the Defense Logistics Agency, and the U.S. Transportation Command with a framework for developing a departmentwide approach to logistics reengineering, GAO recommended that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to revise the departmentwide Logistics Strategic Plan to provide for an overarching logistics strategy that will guide the components’ logistics planning efforts. Among other things, this logistics strategy should: (1) Specify a comprehensive approach that addresses the logistics life-cycle process from acquisition through support and system disposal, including the manner in which logistics is to be considered in the system and equipment acquisition process and how key support activities such as procurement, transportation, storage, maintenance, and disposal will be accomplished. (2) Identify the logistics requirements the department will have to fulfill, how it will be organized to fulfill these requirements, and who will be responsible for providing specific types of logistics support. (3) Identify the numbers and types of logistics facilities and personnel the department will need to support future logistics requirements. (4) GAO also recommended that the Under Secretary of Defense for Acquisition, Technology, and Logistics establish a mechanism for monitoring the extent to which the components are implementing the department’s Logistics Strategic Plan. Specifically, the Under Secretary of Defense for Acquisition, Technology, and Logistics should monitor the extent to which the components’ implementation plans are (a) consistent with the departmentwide plan, (b) directly related to the departmentwide plan and to each other, and (c) contain appropriate key management elements, such as performance measures and specific milestones.
Supply Chain Management: Summary of DOD-IG Report Recommendations
Prepare quarterly statistic reports quantifying the cost effectiveness of the special program requirement initiative to reduce or cancel procurement actions by the use of adjusted buy-back rates, segregated by Defense Supply Centers.
A.1. Transmit shipment notification transactions to the Defense Reutilization and Marketing Service when materiel is shipped to the Defense Reutilization and Marketing Office and ensure the data in the shipment notification are accurate.
A.2. Review and research Defense Reutilization and Marketing Service follow-up transactions for materiel reported as shipped but not received, and respond to the Defense Reutilization and Marketing Service follow-up transactions in a timely manner.
B. Establish controls to ensure that Navy organizations either demilitarize materiel or provide demilitarization instructions to the Defense Logistics Agency Depots, prior to requesting the depot ship materiel to disposal, and respond to depot requests for demilitarization instructions in a timely manner.
C. Validate that the Realtime Reutilization Asset Management Program Office reprograms its computer system to ensure that disposal shipment notifications, rather than disposal shipment confirmations, are sent to Defense Reutilization and Marketing Service for disposal shipments.
D. Request that the Defense Reutilization and Marketing Service provide management reports which identify Navy organizations that are not responding to disposal follow-up transactions for materiel reported as shipped but not received and that are not sending disposal shipment notifications for materiel shipped to disposal.
A. Establish controls to ensure that Defense Distribution Depot personnel request the required demilitarization instructions for all materiel awaiting disposal instructions and reverse the disposal transactions if the required instructions are not received.
B. Establish controls to ensure that the Defense Reutilization and Marketing Service reviews and analyzes management data to identify Navy organizations that are not routinely preparing shipment disposal notifications or are not routinely responding to follow-up transactions and identify to the Naval Supply Systems Command potential problems with data in the in-transit control system in order for the Naval Supply Systems Command to ensure that Navy organizations comply with disposal procedures.
The Commanding General, Marine Corps Logistics Command should: 1. Identify all excess materiel and return the materiel to the supply system, as required by Marine Corps Order P4400.151B, “Intermediate-Level Supply Management Policy Manual,” July 9, 1992. 2. Perform physical inventories of all materiel in all storage locations and adjust inventory records accordingly.
The Director, Defense Logistics Agency should: 1. Reevaluate the cost categories for determining the average annual cost for maintaining an inactive national stock number item in the Defense Logistics Agency supply system and recalculate the average annual cost consistent with other pricing and cost methodologies. 2. Discontinue application of the draft Defense Logistics Agency Office of Operations Research and Resource Analysis report, “Cost of a DLA Maintained Inactive National Stock Number,” July 2002, to any authorized programs of DOD or the Defense Logistics Agency until all applicable cost categories are fully evaluated and the applicable costs of those relevant categories are incorporated into the cost study.
A. Identify the circumstances or conditions under which other nonrecurring requirements are authorized for processing.
B. Identify the requirements for documenting the methodology and rationale for using other nonrecurring requirement transactions.
C. Establish requirements for identifying the supply center personnel who enter other nonrecurring requirements in the Defense Logistics Agency supply system and retaining other nonrecurring requirement records after the support dates have passed.
Establish a timeline for the Defense supply centers to validate outstanding other nonrecurring requirement transactions in the Defense Logistics Agency supply system. Other nonrecurring requirement transactions that do not have sufficient supporting documentation or that cannot be validated should be canceled or reduced and reported to the Defense Logistics Agency. The report should include the total number of other nonrecurring requirement transactions that were deleted and the dollar value of procurement actions that were canceled as a result.
The Commander, Ogden Air Logistics Center should immediately: 1. Comply with the guidance in Air Force Manual 23-110, “U.S. Air Force Supply Manual,” and Air Force Materiel Command Instruction 21-130, “Equipment Maintenance Materiel Control,” regarding the management of maintenance materiel stored at the Air Logistics Center. 2. Perform an annual physical inventory of all materiel recorded in the D035K Wholesale and Retail and Shipping System that is the responsibility of the Maintenance Directorate, reconcile the results, and turn in excess materiel to supply. 3. Perform a physical count of all materiel located on the maintenance shop floors and in storage areas to identify unaccountable and excess materiel, reconcile the physical count to the D035K Wholesale and Retail and Shipping System, and turn in excess materiel to supply. 4. Complete the review of courtesy storage materiel listed in the materiel processing system and either turn in the excess to supply, move to the D035K Wholesale and Retail and Shipping System, or dispose of the materiel.
A. Expedite funding and the deployment of the Commercial Asset Visibility system to Army commercial repair facilities. Funding and deployment should be prioritized based primarily on the dollar value of repairable assets at the commercial repair facilities.
B. Perform oversight of compliance with DoD 4000.25-2-M, “Military Standard Transaction Reporting and Accounting Procedures,” March 28, 2002, to conduct annual location reconciliations between inventory control point records and storage depot records.
A. Determine whether the items with inventory records that were adjusted as a result of the October 2002 reconciliation between the Communications-Electronics Command and the Defense Depot Tobyhanna Pennsylvania are obsolete or excess to requirements. That determination should be made before requesting special inventories or performing other costly causative research procedures.
B. Dispose of those assets that are identified as obsolete or excess to projected requirements.
A. Develop in-house procedures to provide management information reports to the inventory accuracy officer, comparable to the management information reports required in the February 2003 contract awarded to Resources Consultant Incorporated, to assist in reducing in-transit inventory.
B. Establish controls to ensure that all in-transit items that meet the criteria in Naval Supply Systems Command Publication 723, “Navy Inventory Integrity Procedures,” April 19, 2000, are reviewed prior to writing them off as an inventory loss.
The Commander, Warner Robins Air Logistics Center should immediately: 1. Comply with Air Force guidance regarding the management of maintenance materiel stored at the Air Logistics Center. 2. Issue guidance regarding materiel management reports for management review. 3. Perform an annual physical inventory of all materiel recorded in the D035K Wholesale and Retail and Shipping System that is the responsibility of the Maintenance Directorate, reconcile the results, and turn in excess materiel to supply. 4. Perform a physical count of all materiel located on the maintenance shop floors and in storerooms, reconcile the physical count to the D035K Wholesale and Retail and Shipping System, and turn in excess materiel to supply.
Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented 5. Update or complete Air Force Materiel Command Form 100 for each line of floating stock and spares inventory. Submit to the floating stock and spares monitor for processing those forms in which the authorization level changes. 6. Perform semi-annual reviews of materiel stored in the courtesy storage area and turn in excess materiel to supply. 7. Perform quarterly reviews of bench stock materiel in the Low Altitude Navigation and Targeting Infrared for Night shop of the Avionics Division and turn in excess materiel to supply.
A. Enforce the requirements of Naval Air Systems Command Instruction 4400.5A to identify excess materiel that has been inactive for more than 270 days for routine use materiel and 12 months for long lead-time or low demand materiel.
B. Require quarterly reporting of excess of materiel at Naval Air Depots to ensure excess materiel does not accumulate.
C. Develop policy for point of use inventory.
A. Perform physical inventories of materiel stored in all storage locations and adjust inventory records accordingly.
B. Perform the required quarterly reviews of materiel stored in maintenance storerooms to determine whether valid requirements exist for the materiel.
C. Identify all excess materiel stored in maintenance storerooms and return the materiel to the supply system.
A. Comply with Navy guidance regarding the storage of maintenance materiel at the depot, performance of quarterly reviews of maintenance materiel on hand, and submission of management reports for review.
B. Develop and implement an effective management control program.
A. Inventory materiel stored in work center storerooms, record all of the on-hand materiel on accountable records, identify the materiel for which a valid need exists, and return the items with no known requirement to the supply system.
B. Review jobs at closeout to determine whether a need exists for leftover materiel. Leftover, unneeded materiel should be made visible to item managers and disposed of in a timely manner.
C. Perform the required quarterly reviews of materiel stored in work center storerooms to determine whether valid requirements exist for the materiel.
Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented D. Perform physical inventories of materiel stored in all storage locations and adjust inventory records accordingly.
A. Comply with the Defense Logistics Agency Manual 4140.2 requirement that Defense Logistics Agency item managers contact the supply center monitor for the weapon system support program to coordinate the deletion of the code that identifies the national stock number item as a weapon system item.
B. Comply with the Defense Logistics Agency Manual 4140.3 requirement that the supply center monitor for the weapon system support program notify the Military Departments when a national stock number item supporting a weapon system is to be deleted from the supply system as a result of the Defense Inactive Item Program process.
Determine the most efficient and cost-effective method to reinstate national stock number items that were inappropriately deleted from the supply system.
A. Review the revised procedures for processing Defense Inactive Item Program transactions when the FY 2002 process is complete to ensure the procedures are working as intended and that inactive item review notifications are being promptly returned to the Defense Logistics Agency.
B. Establish controls to ensure that inactive item review notifications are reviewed by the user and are returned to the Defense Logistics Agency before an automatic retain notification is provided to the Defense Logistics Agency.
C. Establish controls to review Defense Logistics Agency transactions deleting national stock numbers from Air Force systems so that the inappropriate deletion of required data from the Air Force supply system is prevented.
A. Describe the factors to be used by the Military Departments and supply centers to evaluate the validity of potential candidates for additive investment.
B. Require that additive safety level requirements be based on consistent and up-to-date supply availability data.
C. Require regular reviews to determine whether additive safety levels continue to be appropriate. Establish a frequency for when and how often reviews should be made and the criteria for making necessary safety level adjustments and reinvesting funds.
D. Establish a method for maintaining safety level increases that adheres to the DoD safety level limitation while recognizing and adjusting to changes in the supply system.
Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Partially concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented E. Establish a time frame for continuous program evaluation and a resolution process that includes a flag or general officer from each Military Department whenever problem elevation is needed.
Approve and coordinate with the Military Departments the revised implementation plan.
A. Revise Defense Logistics Agency Manual 4140.2, “Supply Operations Manual,” July 1, 1999, to include terminal national stock number items with registered users in the Defense Inactive Item Program.
B. Maintain and report statistics on how many terminal national stock number items are deleted from the supply system after the North Atlantic Treaty Organization and foreign governments review the items.
Establish controls to ensure that the Navy is removed as a registered user of Defense Logistics Agency-managed national stock number items that are no longer required.
A. Discontinue the use of the market basket approach to determine which bench-stock items are placed on the industrial prime vendor contract. Instead, evaluate each item separately and select the most economical source to supply material.
B. Review inventory levels and discontinue placing items on the industrial prime vendor contract with more than 3 years of inventory.
C. Take appropriate action in accordance with contract terms to remove items with more than 3 years of inventory and start using existing depot inventories as the first choice to fill contract demand.
Convene a performance improvement team composed of representatives from all relevant stakeholders, including appropriate oversight agencies, to plan and execute a reengineered best value approach to manage bench-stock material for all customers that addresses competition and restriction on contract bundling.
B. The Commander, Defense Supply Center Philadelphia should: 1. Implement procedures to ensure that future spot buy material procurements are priced and paid for in accordance with the terms of the contract. 2. Obtain a full refund from the Science Application International Corporation for erroneous charges, including lost interest, and take appropriate steps to reimburse the air logistics centers for the full amount of the contract overcharges.
Direct the Corpus Christi Army Depot to comply with Army guidance regarding the storage of maintenance materiel at the depot and the preparation and submission of management reports for review.
A. Price the materiel stored in the Automated Storage and Retrieval System that has no extended dollar value or that has been added to the physical inventory, and identify the value of inventory excess to prevailing requirements.
B. Inventory materiel stored in work centers on the maintenance shop floors, record the materiel on accountable records, identify the materiel for which a valid need exists, and turn in or transfer to other programs excess materiel.
C. Perform an annual physical inventory of all of the materiel stored in the Automated Storage and Retrieval System.
D. Perform the required quarterly reviews of materiel stored in the Automated Storage and Retrieval System to determine if valid requirements exist for the stored materiel.
E. Review projects at the 50-percent, 75-percent, and 90- percent completion stages to determine if a need exists for materiel in storage.
F. Perform a reconciliation between the Automated Storage and Retrieval System and Maintenance Shop Floor System files, at a minimum monthly, to determine if files are accurate. A physical inventory should be performed to correct any deficiencies.
2. (G) The Commander, Corpus Christi Army Depot should immediately prepare and submit the following report to management for review: 1. A monthly total dollar value for materiel stored in the Automated Storage and Retrieval System. 2. Items stored in the Automated Storage and Retrieval System with no demand in the last 180 days. 3. Materiel stored in the Automated Storage and Retrieval System against closed program control numbers. 4. Materiel stored against overhead program control numbers. 5. Potential excess materiel by program control number.
A. The Commander, U.S. Forces Korea should: 1. Establish guidance for delivery of cargo from ports of debarkation within the theater using Uniform Materiel Movement and Issue Priority System standards or U.S. Forces Korea supplemental standards to the Uniform Materiel Movement and Issue Priority System criteria more applicable to theater requirements.
Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Partially concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred , closed, implemented Concurred, open 2. Establish procedures for using and maintaining documentation that provides evidence of delivery times and the accuracy of the delivered cargo. 3. Prepare or amend commercial carrier contracts that contain delivery provisions for weekend and holiday deliveries, and penalties for nonperformance compliance with the standards established by the provisions of Recommendation A.1. 4. Establish procedures to ensure that the priority of the cargo to be delivered from a port of debarkation is matched with a commercial carrier contract that has the necessary provisions that will ensure delivery within the standards established by Recommendation A.1. 5. Establish procedures, metrics, and surveillance plans that will monitor and ensure carrier performance of contract specifications and reconcile movement control documents received from commercial carriers to ensure consignees received prompt and accurate delivery of all cargo.
B. The Commander, U.S. Forces Korea should revise U.S. Forces Korea Regulation 55-355 to require: 1. Supply Support Activities to maintain dated and signed truck manifests and pickup sheets to confirm receipt. 2. Supply Support Activities immediately contact end users for pickup of high priority cargo within the same day the cargo is made available for end user.
The Director, Defense Logistics Agency should: 1. Revise Defense Logistics Agency Manual 4140.2, “Supply Operations Manual,” July 1, 1999, to include terminal national stock number items with no registered users in the Defense Inactive Item Program last user withdrawn process. 2. Maintain and report statistics on how many terminal national stock number items are deleted from the supply system after the North Atlantic Treaty Organization and foreign governments review the items.
Ensure that the Joint Total Asset Visibility Program is funded until sufficient operational capabilities of the Global Combat Support System have been fielded and can provide capabilities that are at least equivalent to the existing Joint Total Asset Visibility Program.
The Deputy Under Secretary of Defense (Logistics and Materiel Readiness) should: 1. Evaluate the usefulness of the DoD Total Asset Visibility performance measure. 2. Issue specific, written, performance measure guidance that standardizes and clarifies the required data elements for the Total Asset Visibility measure consistent with the evaluation of the usefulness of the measure. 3. Establish and institutionalize a process to evaluate and verify data submitted by DoD Components for the Total Asset Visibility performance measure, consistent with the evaluation of the usefulness of the measure.
Reassess guidance regarding the 60-day storage and requisitioning of fabrication materiel at maintenance depots and revise Army Regulation 750-2. The guidance should state the following: the appropriate number of days depots should be allowed for storing and requisitioning fabrication materiel. quarterly reviews should be performed to determine if materiel is still required.
Issue guidance regarding management of the Automated Storage and Retrieval System at Tobyhanna. The guidance should include the following: all materiel stored in the Automated Storage and Retrieval System shall be, at a minimum, identified by owning cost center; national stock number/part number; program control number; quantity; acquisition source code; nomenclature; and condition code. a review of any materiel with a date of last activity more than 6 months shall be performed. an annual physical inventory of any materiel stored in the Automated Storage and Retrieval System shall be performed. items stored in mission stocks must represent a bona fide potential requirement for performance of a maintenance or fabrication requirement. availability of materiel from previously completed fabrication orders must be determined before placing new requisitions. projects shall be reviewed at the 50 percent, 75 percent, and 90 percent completion stages to determine if a need exists for materiel still in storage. reclaimed materiel, materiel removed from assets in maintenance, and work in process may be stored until reutilized on the maintenance program. Excess reclaimed materiel shall be turned in or transferred to a valid funded program. materiel shall not be stored in Automated Storage and Retrieval System in an overhead account. quarterly reviews shall be performed on materiel stored in the Automated Storage and Retrieval System to determine if requirements still exist. prior to closing a depot maintenance program, any associated remaining repair parts, spares, and materiel on hand shall be transferred to an ongoing program or a program that will begin within 180 days or turned in to the installation supply support activity within 15 days. The gaining program must be funded, open, and valid. The transferred materiel must be a bona fide potential requirement of the gaining program.
A.3. The Commander, Communications-Electronics Command should direct Tobyhanna to immediately: a. Price the materiel stored in the Automated Storage and Retrieval System that has no extended dollar value or that has been added to the physical inventory, identify the value of inventory excess to prevailing requirements, and notify the Inspector General, DoD, of the corrected dollar value of the inventory and value of inventory excess to the requirements. b. Limit the storage of materiel in the Automated Storage and Retrieval System under overhead accounts. Specifically, remove materiel obtained from the Sacramento Air Logistic Center from the overhead account program control numbers. c. Record the Tactical Army Combat Computer System equipment on accountable records and inventory and turn in the computer equipment to the supply system because no requirement for the equipment exists at Tobyhanna.
Issue guidance regarding reports that should be submitted to management for review. The guidance should require the following reports: an annual physical inventory of all materiel stored in Automated Storage and Retrieval System. a reconciliation between the Automated Storage and Retrieval System and Maintenance Shop Floor System files, at a minimum monthly, to determine if files are accurate. a physical inventory should be performed to correct any deficiencies. Reports should be prepared for management review. a monthly total dollar value for materiel stored in the Automated Storage and Retrieval System. items stored in the Automated Storage and Retrieval System with no demand in the last 180 days. materiel stored in the Automated Storage and Retrieval System against closed program control numbers. materiel stored against overhead program control numbers. potential excess materiel by program control number.
Direct the Tobyhanna Army Depot to immediately perform a physical inventory and reconcile the Automated Storage and Retrieval System records with the Maintenance Shop Floor System records to verify the accuracy of inventory records and submit report for review.
Supply Chain Management: Summary of Army Audit Agency Report Recommendations
A-1. Include placement of stocks (malpositioned) as part of the Army Pre-positioned Stocks program performance metrics. As a minimum: clearly define malpositioned stocks and establish procedures for calculating the data to minimize inconsistency or data misrepresentation reported by the subordinate activities. establish long-term goals for correcting the problems and annually monitor the progress in meeting the goals to ensure the situation doesn’t deteriorate. examine the feasibility of correcting the Web Logistics Integrated Database limitations and shortfalls identified within this report so the system can be used to produce reliable performance data.
A-2. Improve shelf-life management controls and oversight. As a minimum: develop stock rotation plans for items in long-term storage outside Continental U.S. or remove the items from outside Continental U.S. storage. prepare an annual list of all Army Pre-positioned Stocks items due to expire within 12 and 24 months and have U.S. Army Field Support Command ensure stock rotation plans are adequate to minimize expired assets. Use the data to formulate funding requirements for test and inspection. use critical data fields within information management systems to assist in shelf-life stock rotations. Require U.S. Army Field Support Command to monitor shelf-life data—such as dates of manufacture and expiration dates—provided by its Army Pre- positioned Stocks sites to ensure it is current and complete. Perform quarterly reconciliations. include shelf-life management metrics as part of the Army Pre- positioned Stocks program performance assessment. Establish goals and develop methods to track and minimize the loss of items due to the expired shelf-life.
Concurred, open A-3. Strengthen accountability controls and enhance data integrity, reliability, and visibility of pre-positioned stocks. Specifically: require U.S. Army Communications-Electronics Life Cycle Management Command and U.S. Army Tank-automotive and Armaments Life Cycle Management Command to incorporate controls similar to U.S. Army Aviation and Missile Life Cycle Management Command that will identify and track unauthorized transactions—that is, situations where the ownership purpose code of an item was changed from a war reserve purpose code to a general issue code without first receiving approval from Army Pre-positioned Stocks personnel. execute the required steps to place data associated with loan transactions onto the Army knowledge online account to facilitate oversight of loan transactions. numerically sequence each approved request and use the number to cross-reference back to the approved request. include all Open Army Pre-positioned Stocks loan transactions issued to item managers that weren’t paid back as part of the Army Pre-positioned Stocks program performance assessment. require U.S. Army Communications-Electronics Life Cycle Management Command and U.S. Army Tank-automotive and Armaments Life Cycle Management Command to track the paybacks by establishing a scheduled payback target date so they can be proactive in pursuing collections. track inventory loss adjustment statistics as a potential source for benchmarking progress on reducing repetitive errors and identifying performance problems. establish dollar values for supply class VII inventory adjustments in Logistics Modernization Program so loss adjustments meeting the causative research criteria are researched. randomly sample 25 percent of the inventory loss adjustment transactions to verify the adjustments are supported by evidence of documented causative research and an adequate explanation is documented.
A-4. Track Army Pre-positioned Stocks site weekly data reconciliations to evaluate performance and data reliability.
For the Commander, 10th Mountain Division (Light Infantry)
A-1. Provide unit commanders with a block of instructions that explain the process and importance of accurately accounting for assets and maintaining the property book.
A-2. Establish a reminder system to notify gaining and losing units when equipment transfers occur.
A-3. Develop and distribute guidance to operations personnel stressing the need to follow established procedures for accounting for assets and the importance of providing necessary documentation to property book officers.
Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented A-4. Research each discrepancy with equipment transfers and turn-in documents and make appropriate adjustments to the property book records for the 1st and 2nd BCTs. If the missing vehicles can’t be located in a reasonable time period, initiate an AR 15-6 investigation and, if warranted, take further appropriate action.
B-1. Research the discrepancies we found with the 1st, 2nd, and 3rd BCT vehicles and make appropriate adjustments to the respective property books.
For the Commander, U.S. Army Aviation and Missile Life Cycle Management Command 1. Require: item managers to consider historical procurement data in the Master Data Record’s Sector 10 when justifying values they enter for the Requirements System to use as representative estimates of procurement lead time. integrated Materiel Management Center second-level supervisors to review and explicitly approve the procurement lead time values entered into the Master Data Record by item managers. 2. Require contract specialists to adhere to Army and Aviation and Missile Life Cycle Management Command guidance on considering the extent of delay in awarding procurements to vendors when justifying if a procurement should be identified as a representative estimate of a future procurement’s administrative lead time.
A-1. Initiate DA staff action to withhold funding for increasing safety levels until Army Materiel Command develops test procedures and identifies key performance indicators to measure and assess the cost-effectiveness and impact on operational readiness.
For the Commander, Defense Supply Center Philadelphia 1. Monitor the contractor’s progress to ensure the contractor completes the reorganization of the bulk storage warehouses with a location grid plan and subsequent warehousing of operational rations with specific location areas in the warehouses. Then ensure contractor records updated locations of these rations in the warehouse management system database to ensure physical location of products match the database. 2. Complete and implement the software change package to ensure operational rations containing more than one national stock number are allocated from inventory based on the first-to-expire inventory method.
Concurred, closed, implemented Concurred, closed, implemented 3. Develop and implement guidance for the contractor regarding the requirements for the destruction of government-owned operational rations which have been deemed unfit for human consumption. Require the contracting officer representative to certify the destruction certification package only when adequate documentation is attached to support the operational rations being destroyed. Also, require the contracting officer representative to ensure products are destroyed in a reasonable time frame after the Army Veterinarians recommend destruction of the products. If Implemented, this recommendation should result in monetary savings to the government. 4. Before shipping excess to theater, review the worldwide excess stock of operational rations and identify the expiration dates on products that may be considered for shipping to replenish operational ration stock in theater. Before shipping stock, coordinate with the Theater Food Advisor to ensure the products can be incorporated into the existing stock on hand and be effectively managed. Also, don’t consider for shipment any products with less than 4-months’ remaining shelf life unless the Army Veterinarians have inspected and extended the shelf life of the products. In such cases, ensure the documentation accompanies the shipments. 5. Implement a Quality Assurance Surveillance Plan that encompasses all requirements of the prime vendor contract. Require the Administrative Contracting Officer and the contracting officer representative located at the prime vendor’s location in Kuwait to monitor and document the contractor’s performance using the Quality Assurance Surveillance Plan on a scheduled basis. Upon completion of each review, the Contracting Officer should review the results of the Quality Assurance Surveillance Plan and determine if any actions are required to correct the areas of concern.
For the Commander, Defense Supply Center Philadelphia and for the Commander, Coalition Forces Land Component Command 6. Require the Theater Food Advisor and Defense Supply Center Philadelphia to review the quantities of operational rations that are currently excess in the prime vendor’s warehouses and ensure none of these products have orders placed until the excess quantities are projected to be depleted. If implemented, this recommendation will result in funds put to better use.
For the Commander, Coalition Forces Land Component Command 7. Require the Theater Food Advisor to periodically review the inventory of government-owned operational rations and ensure appropriate action is taken when products reach their expiration date but remain in the prime vendor’s inventory. If implemented, this recommendation should result in monetary savings to the government.
A-1. Ensure that the Defense Contract Audit Agency remains actively involved in monitoring the contractor’s costs.
For the Assistant Secretary of the Army (Acquisition, Logistics and Technology)
B-1. Develop Army guidance for approving contract requirements for deployment operations to include acquisition approval thresholds, members of joint acquisition review boards, and documentation of board actions.
C-1. Establish guidance addressing how to transfer government property to contractors in the absence of a government property officer to conduct a joint inventory.
C-2. Issue specific policy on (i) screening the contingency stocks at Fort Polk for possible use on current and future Logistics Civil Augmentation Program contracts, and (ii) returning commercial- type assets to the contingency stocks at Fort Polk after specific contract operations/task orders are completed.
C-3. Update Army Materiel Command Pamphlet 700-30 to include specific procedures on: screening the contingency stocks at Fort Polk for possible use on current and future Logistics Civil Augmentation Program contracts. returning commercial-type assets to the contingency stocks at Fort Polk after contracts are completed. disposing of obsolete or unusable property.
D-1. Include in an annex to AR 715-9 (Contractors Accompanying the Force) the key management controls related to Logistics Civil Augmentation Program, or specify another method for determining whether the management controls related to the program are in place and operating.
For the Deputy Chief of Staff, G-4 1. Authorized Stockage Lists (Inventory On-Hand): Army should issue a change to policy and update AR 710-2 to require forward distribution points in a deployed environment to hold review boards for authorized stockage lists when they deploy and no less often than quarterly thereafter. Require review boards to accept recommendations from dollar cost banding analyses or justify why not. Improvements needed to better meet supply parts demand.
A-1. Develop policy and procedures for the program executive office community to follow to identify, declare, and return excess components to the Army supply system.
A-2. Develop and issue guidance that states ownership of Army Working Capital Fund (AWCF) components that subordinate management offices possess and control through modification, conversion, and upgrade programs resides with the Army supply system.
Concurred, closed, implemented Nonconcurred, closed, not implemented Nonconcurred, closed, not implemented Partially concurred, closed, not implemented Concurred, closed, implemented Concurred, open A-3. Make sure policy is clear on the responsibilities of program executive offices and their subordinate management offices in complying with established Army policy and procedures for asset accountability. Specifically, record and account for all Army assets in a standard Army system that interfaces with the Army system of accountability. As a minimum, make sure item managers: have all transactions and information on acquisition, storage, and disposition of their assets. are notified of any direct shipments so that the item managers can record the direct shipments to capture demand history for requirements determination.
A-1. Construct permanent or semipermanent facilities in Kuwait and Iraq in locations where a continued presence is expected and that have a large number of containers being used for storage, force protection, and other requirements. For those locations where construction of permanent or semipermanent facilities isn’t feasible, use government-owned containers to meet storage, force protection, and other requirements.
A-2. Align the Theater Container Management Agency at the appropriate command level to give it the authority to direct and coordinate container management efforts throughout the Central Command area of responsibility.
A-3. Direct the Theater Container Management Agency to develop and maintain a single theater container management database. Issue guidance that requires all activities in the area of responsibility to use this database for their container management.
A-4. Coordinate with Military Surface Deployment and Distribution Command to purchase commercial shipping containers in the Central Command area of responsibility that are currently accruing detention. In addition, discontinue use of the Universal Service Contract and only use government-owned containers or containers obtained under long-term leases for future shipment of equipment and supplies into the Central Command area of responsibility. Ensure any long-term lease agreements entered into include provisions to purchase the containers.
A-5. Coordinate with Military Surface Deployment and Distribution Command to either get possession of the 917 government-owned containers still in the carriers’ possession, obtain reimbursement from the carriers for the $2.1 million purchase price of the containers, or negotiate with the carriers to reduce future detention bills by $2.1 million.
A-6. Coordinate with Military Surface Deployment and Distribution Command to reopen the 6-month review period under the post- payment audit clause to negotiate with commercial carriers to either obtain reimbursement of $11.2 million for detention overcharges on the 29 February 2004 detention list, or negotiate with the carriers to reduce future detention bills by $11.2 million.
A-7. Perform either a 100-percent review of future detention bills or use statistical sampling techniques to review carrier bills prior to payment.
B-1. Include the minimum data requirements identified in the July 2004 DOD memorandum that established policy for the use of radio frequency identification technology in the statements of work for task order 58 and all other applicable task orders.
For the Deputy Chief of Staff, G-4 1. Clarify accountability requirements for rapid fielding initiative (RFI) property distributed through program executive officer (PEO) Soldier; specifically, accountability requirements for organizational clothing and individual equipment (OCIE) items when not issued by a central issued facility (CIF).
For the Program Executive Officer, Soldier and For the Executive Director, U.S. Army Research, Development and Engineering Command Acquisition Center 2. Instruct the appropriate personnel at the rapid fielding initiative warehouse to complete and document causative research within 30 days of inventory. Have the causative research: identify documents used in the causative research process and the procedures followed to resolve the error in the results of the causative research. identify the circumstances causing the variance. make changes to operating procedures to prevent errors from recurring. include government approval signatures before processing inventory adjustments and a system for tracking inventory adjustments so managers can cross-reference adjustments and identify those representing reversals. 3. Assign a quality assurance representative to the rapid fielding initiative warehouse that can provide the appropriate contract oversight and prompt feedback to the contractor on accountability and performance issues. Direct the individual to coordinate with the contracting officer to ensure the contracting officer incorporates instructions for evaluating contract requirements into key documents, such as a surveillance plan and an appointment letter. 4. Coordinate with the contracting officer to instruct the contractor to include the results of performance metrics related to inventory adjustments, location accuracy, inventory accuracy, and inventory control in the weekly deliverables or other appropriate forum. Have the contractor also include a spreadsheet with the overall accountability metric in the weekly reports for each line item and a continental United States (CONUS) fielding accountability spreadsheet after each fielding is completed. The data fields would include: overall inventory control accountability would include: Prior week ending inventory balance + all receipts and returns for the current week = all shipments from the warehouse + ending inventory on hand.
Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented 5. Direct the RFI contracting officer technical representative from program executive officer Soldier to work together with the contracting officer to develop a surveillance plan and provide the plan to the contract monitor. Include in the plan provisions for spot- checks if developers rely on the contractor’s quality control plan.
A-1. Coordinate with the Deputy Chief of Staff, G-3 to develop guidance that instructs deploying units on protecting automation equipment from voltage differences and extreme environmental temperature conditions.
A-2. Direct all units in the Kuwaiti area of operations to provide controlled temperature conditions for automation equipment.
A-3. Instruct all units arriving in the Kuwaiti area of operations on how to protect automation equipment from voltage differences.
B-1. Declassify the order that identifies which combat service support automation management office units should contact for assistance.
A-1. Evaluate lessons learned from Operation Iraqi Freedom. As appropriate, adjust force structure requirements for military police and transportation personnel during the Total Army Analysis and contingency operations planning processes.
A-2. Reduce the number of trucks assigned to the aerial port of debarkation to better reflect actual daily requirements. Coordinate with the Air Force at the aerial port of debarkation to obtain advanced notice of air shipments on a daily basis. Monitor use periodically to determine if future adjustments are required.
A-3. Reestablish a theater distribution management center and make it responsible for synchronizing overall movement control operations for the Iraqi theater of operations. Coordinate with the Multi-National Force-Iraq to establish a standardized convoy tracking and reporting procedure.
A-1. Coordinate with depots currently using local databases to track receipt transactions and develop a standard database that can be used by all depots to effectively track receipts from arrival date to posting. Each depot should be required to use this comprehensive database to track receipts and monitor the suspense dates to ensure receipts are posted to the Standard Depot System within the time standards. At a minimum, this database should include: start and completion dates for key management controls. date of arrival. receipt control number and date assigned. cross Reference Number assigned by the Standard Depot System. suspense dates (when receipt should be posted to record). date of physical count and reconciliation to receipt documentation. if receipt required Report of Discrepancy be sent to shipper and date report was sent if required. daily review control (list of receipts that are approaching required posting date). date stored. date posted. reason for not posting within required time frame.
A-2. Initiate a change to Army Materiel Command Regulation 740- 27 to incorporate steps for identifying misplaced or lost labels in depot quality control checks, command assessments, and other tools used to measure depot performance.
A-3. Fully use performance indicators (Depot Quality Control Checks, 304 Reports, and command assessments) as management tools to ensure necessary management controls are in place and operating for all depots’ receipt process. Also, ensure depots have effective training programs that consist of both on-the- job training and formal training to ensure depot personnel are aware of key controls and their responsibilities. Provide training on weaknesses and negative trends identified during biannual command assessments.
A-4. Assign receipt control numbers based on the date the receipt arrived, and accountability transfers from transporter to depot.
A-5. Submit Reports of Discrepancy to shipper for all discrepancies between physical counts and receipt documents, including when no receipt documents are received.
A-6. Post receipts to records in temporary location, when it meets the requirement for a reportable storage location, to ensure receipt transactions are posted so that munitions can be made visible for redistribution in a timely manner.
For the Commander, U.S. Army Communications- Electronics Command 1. Reemphasize to item managers to use supply document transactions, as specified in AR 725-50, to generate due-ins in command’s wholesale asset visibility system when directing the movement of military equipment items to a conversion contractor. 2. Direct item managers to use a GM fund code in disposition instructions to troop turn-in units and materiel release orders to storage activities directing shipments of equipment items to conversion contractors or to an Army depot maintenance facility. 3. Request the Logistics Support Activity to assign Routing Identifier Codes and related DOD Activity Address Codes for all conversion contractor operating locations where the contractor maintains quantities of items in the conversion process, but doesn’t presently have the codes. For future conversion contracts develop a process to ensure that all required codes are assigned immediately following contract award. 4. Reemphasize to item managers to: monitor asset visibility system management reports for creation of due-ins. require immediate corrective actions when due-ins aren’t created in the asset visibility system. 5. Reemphasize to item managers the requirement to perform follow up on due-ins when receipts aren’t posted in command’s asset visibility system within time periods stated in AR 725-50. 6. Incorporate into the current and all future conversion contracts, in coordination with the appropriate Project/Program Managers, the requirement for conversion contractors to transmit supply document transactions to the asset visibility system at Communications-Electronics Command in order to report: receipts of assets upon arrival at the contractor’s plant. changes in item configurations during the conversion process. shipments to gaining activities following conversion operations. 7. Until the conversion contracts are modified as detailed in Recommendation 6, require operating personnel to obtain all necessary supply documents and manually enter all necessary transactions into command’s asset visibility system to report receipts at contractor locations from turn-in units and storage activities, changes in equipment item configurations, and shipments of converted items to gaining activities. 8. Take appropriate actions to ensure unused component parts returned from conversion programs are not improperly reported in command’s asset visibility system as complete military equipment systems. Specifically, for National Stock Number 5840-01-009- 4939: request an inventory at the depot storage activity to identify all component parts improperly returned as complete systems. use the inventory results to adjust on-hand quantities in command’s asset visibility system to ensure accurate balances.
Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented 9. Direct the Tobyhanna Army Depot maintenance facility to take all actions necessary to ensure appropriate supply document transactions are processed when equipment items are received, converted, and transferred back to storage ready for issue. 10. Direct operating personnel to evaluate all Communications- Electronics Command equipment items undergoing disassembly, conversion, modification, or overhaul programs to determine if the same processes used for the items discussed in this report are applicable to them. If so, require operating personnel to apply the recommendations in this report to those affected items.
For the Commander, U.S. Army Materiel Command 1. Establish Army guidance requiring integrated materiel managers to perform annual reviews of holding project assets and follow up on redistribution actions. 2. Direct commodity commands to redistribute holding project assets to other pre-positioned stock projects or to general issue. 3. Direct commodity commands to dispose of excess, unserviceable, and obsolete assets in holding projects. Direct materiel managers to review the 38 bulky items in holding projects to identify excess assets and dispose of them. 4. Establish guidance on the use of holding projects that requires managers to either provide a documented rationale for retaining excess assets in holding projects or dispose of them. Include in the guidance the requirement that inventory management commanders or their designees review the retention rationales for approval or disapproval. 5. Establish guidance that requires materiel managers to review holding projects annually to identify unserviceable (condemned, economically unrepairable, and scrap) and obsolete assets in holding projects. Include in the guidance the requirement that the identified assets be disposed of within 12 months.
For the Joint Munitions Command 1. Use the integration plan to manage the integration of automatic identification technology in receiving and shipping processes, as well as the seal site program. At a minimum, the plan should be periodically reviewed to make sure: adequate workforces are dedicated for integration tasks in the future. equipment and software are thoroughly tested and determined to be functional before being fielding to ammunition storage activities.
Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented 2. Require contractor to use Standard Depot System’s composition rules and traditional edit checks in software development for the remaining applications to automatic identification technology. The development should include the: use of established performance measures to ensure that all the contractor’s products and services meet Joint Munitions Command’s automatic identification technology needs, such as appropriate edit checks before fielding. development of specific tasks with timelines to ensure that established implementation goals are met in the most effective and efficient manner. This should include penalties to ensure timely delivery of necessary equipment and software applications from contractors.
A-1. Establish procedures that ensure commands and units reduce training ammunition forecasts when units determine that training ammunition requirements have changed.
B-1. Make sure ammunition supply point personnel follow procedures to post all ammunition supply transactions in the Training Ammunition Management System on the day the transaction occurs.
B-2. Make sure the ammunition supply point has procedures to maintain updated plan-o-graphs that show the locations and lot numbers of the ammunition stored in the ammunition supply point bunkers and includes the procedures in the supply point’s standing operating procedures.
B-3. Develop a plan to establish a reliable quality assurance specialist (ammunition surveillance) capability for the ammunition supply point and California Army National Guard units. Include in the plan an evaluation of whether the California Guard should have an internal quality assurance capability instead of relying on a memorandum of agreement with Fort Hunter-Liggett.
B-4. Correct the contingency ammunition control problems at California Guard units by: identifying all contingency ammunition that is currently on-hand at all California Guard units and establishing proper accountability over the ammunition. preparing a serious incident report if the amount of ammunition unaccounted for that is identified at the units meets the criteria in AR 190-40. ensuring that units and the ammunition supply point follow established procedures for maintaining all issue and turn-in documentation for security ammunition to support the quantities recorded on the units’ hand receipt.
Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented B-5. Follow procedures for reviewing and updating security and contingency ammunition requirements. At a minimum: determine ammunition requirements based on threat assessments, potential missions and force structure available to provide a response. coordinate and establish a current ammunition distribution plan. conduct an annual review of ammunition requirements. maintain a list of where ammunition is being stored for State contingency by type and quantity.
B-6. Make sure units follow the requirement to provide all small arms supply transactions to the U.S. Property and Fiscal Office within 5 working days so that the DA central registry can be updated within 10 working days.
B-7. Make sure units follow the checklist in AR 190-11 related to physical security over the storage of small arms and document the results of their inspections.
For the Commander, Eighth U.S. Army 1. Take appropriate action to perform and document required Operational Project reviews. Specifically: establish and prescribe guidelines and criteria that will inject more discipline into the Operational Project review and validation process. Prescribe key factors, best practices, and methods for determining and documenting Operational Project requirements. have each project proponent perform an analysis each year in accordance with the annual review process in Army Regulation 710-1 and whenever the Operational Plan changes. The project proponent should include an updated letter of justification that references where each project’s list of requirements originated and how the quantities for each item were computed. after receiving the official response from the project proponent, Eighth Army, G-4, War Reserve, should submit a memorandum to Headquarters, DA, G-4 for the purpose of documenting the annual review. 2. Have the War Reserve Branch track completion of annual reviews and 5-year revalidations; periodically review documentation of reviews and revalidations to evaluate their sufficiency.
For the Deputy Chief of Staff, G-3 1. Develop and apply detailed criteria to assess the adequacy of operational project packages and the validity of related requirements, and approve only those projects that meet the criteria. 2. Establish criteria and guidelines that require proponent commands to identify and prioritize mission essential equipment in operational projects. Establish a policy to fund the higher priority items first.
For the Deputy Chief of Staff, G-3 and For the Deputy Chief of Staff, G-4 3. Establish and prescribe guidelines and criteria that will inject more discipline into the operational project requirements determination process. Prescribe key factors, best practices, and methods for determining and documenting operational project requirements.
For the Deputy Chief of Staff, G-4 4. Designate only commands with clear or vested interest in projects as the proponents. 5. Provide guidance to project proponents that outline strategies and methodologies for reviewing and revalidating operational projects. 6. Track completion of reviews and 5-year revalidations, periodically review documentation of reviews and revalidations to evaluate its sufficiency, and reestablish the enforcement policy that would allow cancellation of operational projects when proponents don’t perform timely, adequate reviews or revalidations. Consider having a formal Memorandum of Agreement with Army Materiel Command to track operational project reviews and revalidations. 7. Revise guidance requiring annual reviews for all operational projects to consider the individual characteristics of projects when scheduling the frequency of reviews.
For the U.S. Army Aviation and Missle Command 1. Instruct the responsible item managers to: initiate actions to dispose of quantities that exceed documented requirements for the seven items identified. determine if it’s economical to reduce the planned procurement quantities excess to requirements for the five items identified. For those that are economically feasible, take action to reduce planned procurement quantities.
If these actions are implemented, we estimate they will result in potential monetary savings of about $1.7 million.
For the Commanding General, Combined Joint Task Force 180 1. Build semi-permanent storage facilities for class I supplies at Bagram and Kandahar, including facilities for dry and frozen goods storage. 2. Direct base operations commanders to record all containers purchased with Operation Enduring Freedom funds in the installation property books. In addition: conduct a 100-percent physical inventory of shipping containers at each installation. record all leased and purchased containers in the property book.
Make sure the serial numbers of the shipping containers are recorded, too. establish procedures with the contracting office to ensure that the installation property book officer is given documentation when containers are purchased or leased.
For the Commander, Combined Joint Task Force 180 1. Increase the size of the supply support activity in Bagram to 1,700 line items of authorized stockage list to ensure the availability of critical aviation spare parts. 2. Require the supply support activity officer to hold inventory reviews every 30 days or less with aviation maintenance units to ensure adequate inventory levels of items on the authorized stockage list. 3. Place Army expeditors—“the go-to guys”—familiar with class IX aviation spare parts at choke points located in Germany in the Army and Air Force delivery system to prioritize pallets and shipments.
For the Deputy Chief of Staff, G-4 1. Establish theater DOD activity address codes for units to fall in on when assigned to Operation Enduring Freedom.
For the Deputy Chief of Staff, G-4 1. Issue guidance directing activities to attach radio frequency tags to shipments en route to the Operation Enduring Freedom area of responsibility. Enforce requirements to tag shipments by directing transportation activities not to allow the movement of cargo without a radio frequency tag attached. 2. Direct Military Traffic Management Command to obtain radio frequency tag numbers from activities shipping goods and to report those tag numbers to transportation officers by including them in the in-transit visibility (ITV) Stans report. 3. Issue additional guidance to activities clarifying procedures they should follow for the retrograde of radio frequency tags and to replenish their supply of tags.
For the Joint Logistics Command 1. Make sure movement control teams tag shipments as required by US Central Command guidance to ensure that improvements continue during future rotations.
A-1. Direct responsible activities to: validate current requirements for subproject PCA (authorizing chemical defense equipment for 53,000 troops) to augment U.S. Army Europe’s second set deficiencies and submit the requirements to DA for approval in accordance with AR 710-1. revalidate requirements for chemical defense equipment for project PCS (see PCA), including the addition of equipment decontamination kits. Revise requirements for chemical defense equipment for the Kosovo Force mission and submit the changes to DA.
A-2. Ask Army Materiel Command to fully fill revised requirements for chemical defense equipment for operational project PCS and to redistribute or dispose of excess items from operational projects PCA and PBC.
Concurred, closed, implemented Concurred, closed, implemented Nonconcurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, not implemented Concurred, closed, not implemented B-1. Direct responsible activities to review and validate all project requirements for collective support systems as required by AR 710-1.
C-1. Direct responsible activities to: ask DA to cancel subprojects PZP and PZQ (project codes to provide equipment for reception of reinforcing forces deploying to Europe and other theaters). develop requirements and request a new receiving, staging, onward movement and integration operational project, if needed, in accordance with AR 710-1.
D-1. Ask DA to cancel operational subproject PYN (project code) for aircraft matting.
D-2. Submit new operational project requirements for aircraft matting to DA in accordance with AR 710-1.
A-1. Develop a system of metrics, to include performance goals, objectives, and measures, for evaluating the reliability of data in the capability. Establish processes for comparing actual performance to the metrics and taking remedial action when performance goals and objectives aren’t met. (Recommendation B-3 calls for a process to compare data in the capability and feeder systems. The results of these comparisons would constitute the actual data reliability performance.)
A-2. Develop goals and objectives for use in evaluating the success of redistribution actions for Army assets. Develop procedures for identifying and correcting the causes for referral denials that exceed the established goals.
B-1. Issue guidance to project and product managers detailing the proper use of bypass codes on procurement actions.
B-2. Include definitive guidance on the use of bypass codes into appropriate guidance documents on The Army’s business processes, such as AR 710-1. Make sure the guidance explains the ramifications of using the different codes.
B-3. Direct the Logistics Support Activity to perform periodic reviews of data in the capability to ensure that it agrees with data in feeder systems, and take action to identify and correct the causes for any differences.
B-4. Require commodity commands to use the Post-award Management Reporting System to help manage contract receipts. Also, make sure the Logistics Modernization Program has the capability to manage invalid due-in records.
B-5. Direct commodity commands to delete all procurement due-in records with delivery dates greater than 2 years old. Have the commodity commands research and resolve due-in records with delivery dates more than 90 days old but less than 2 years old.
B-6. Direct commodity commands to review and remove invalid due-in records for field returns with delivery dates over 180 days.
Concurred, closed, not implemented Concurred, closed, not implemented Concurred, closed, not implemented Concurred, closed, not implemented Nonconcurred, closed, not implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, open B-7. Require commodity commands to periodically scan the Commodity System for procurement actions issued with bypass codes. Ask project and program managers to explain the decision to use a bypass code. Report the results of the review to the Assistant Secretary of the Army (Acquisition, Logistics and Technology). If the Logistics Modernization Program continues to employ bypass codes or other methods that prevent the creation of a due-in record, conduct similar reviews when the Logistics Modernization Program is implemented.
C-1. Incorporate instructions on the use of the capability into appropriate guidance documents on The Army’s logistics business processes, such as AR 710-1. These instructions should address topics such as reviewing the capability for excess items before procuring additional stocks.
C-2. Direct the Logistics Support Activity to review data in the Army Total Asset visibility capability for potentially erroneous data. Establish a procedure for reporting the potentially erroneous data to the activities responsible for the data and performing research to determine the validity of the data.
D-1. Revise AR 710-2 and 710-3 to comply with the requirements of AR 11-2. Specifically: develop management control evaluation checklists addressing the accuracy and reliability of data in the Army Total Asset visibility capability and publish these controls in the governing Army regulations, or identify other evaluation methods and include these in the applicable Army regulations.
For the Commander, U.S. Army Materiel Command 1. Emphasize to the commodity commands the need to periodically review the process for creating asset status transactions in the Commodity Command Standard System to ensure the transactions are properly created and forwarded to the Logistics Support Activity. 2. Revise Automated Data Systems Manual 18-LOA-KCN-ZZZ-UM to require activities to promptly submit monthly asset status transactions to the Logistics Support Activity.
For the Commander, U.S. Army Materiel Command Logistics Support Activity 3. Establish procedures for notifying source activities when the capability rejects asset status transactions. Make sure that rejected and deleted transactions are reviewed to identify reasons for the transactions being rejected or deleted. If appropriate, correct the rejected transactions and resubmit them for processing to the capability. Based on the results of the reviews, take appropriate action to correct systemic problems. 4. Establish a control log to monitor participation of Army activities in the monthly asset status transaction process. Use the log to identify activities that didn’t submit a monthly update and determine why an update wasn’t submitted. Report frequent abusers of the process through appropriate command channels. 5. Report to the Deputy Chief of Staff, G-4 that AR 710-3 needs to be revised to require activities to promptly submit monthly asset status transactions to the Logistics Support Activity. 6. Document the process used to update information in the asset visibility module of the Logistics Integrated Data Base.
A-1. Obtain a document number from the installation property book office before ordering installation property or organizational clothing and individual equipment. Order only equipment and vehicles for valid requirements approved by the Joint Acquisition Review Board.
A-2. Include written justification, analyses and study results in documentation for purchase requests and commitments before acquisition decisions are made.
A-3. Determine the number of vehicles required for the mission. Consider adjusting dollar thresholds for approval by the Joint Acquisition Review Board.
A-4. Establish written policy to secure explosives using the interim plan. Build a permanent secure area for explosives awaiting movement as soon as possible.
A-1. When updating the variable cost-to-procure factor, make sure the following steps are completed until a system like activit-based costing is available to capture costs: develop cost data for each functional area using groups of well- trained, function experts. properly document the process used to develop costs. research and substantiate variances in cost data among buying activities.
A-2. Make sure updates to the variable cost-to procure factor are given to each buying activity and properly input into the materiel management decision file in the Commodity Command Standard System.
Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, open A-3. Review the variable cost-to-procure elements in the materiel management decision file and determine which of the three variable cost-to-procure cost categories should be used to update each element. Provide this information to the buying activities for implementation. Do periodic checks to make sure the elements are updated properly.
A-4. Review the other factors in the materiel management decision file mentioned in this report for accuracy, especially those that haven’t been updated in the past 2 years. Specifically make sure the buying activities update the following factors using data related to the commodity they manage: Variable Cost to Hold (General Storage Cost, Discount Rate, Storage Loss Rate, and Disposal Value).
Probability of No Demands. Depot Cost Elements (Stock Issue Cost, Fixed Cost, Receipt Cost for Stocked Item, and Non-Stocked Cost).
Percent Premium Paid. Add-Delete Demands.
B-1. Have the Requirements Integrity Group (or a similar working group) periodically review the factors used in the economic order quantity/variable safety level model for accuracy—especially those discussed in this objective. Provide guidance to buying activities for properly updating factors and make sure updated factors are processed in the automated system.
For the Assistant Secretary of the Army (Acquisition, Logistics and Technology)
1. Issue written policy prescribing the specific roles and responsibilities, processes, and key management controls for developing and integrating automatic identification technology into logistics processes. As a minimum, include requirements for funding, milestone decisions, in-process reviews, test and evaluation plans, life-cycle cost estimates, benefit analyses, coordination with other system developments, and transfer of finished products. Also, consider subjecting the Army’s development of automatic identification technology to the prescribed acquisition procedures of AR 70-1. 2. Prepare a business case analysis for each automatic identification technology application that the Army has ongoing and planned. Adjust applications, if appropriate, based on the results of the business case analyses. 3. Establish a central oversight control within the Army for automatic identification technology. As a minimum, set up a process to: monitor all development and funding within the Army for automatic identification technology. verify that similar developments aren’t duplicative.
For the Commander, U.S. Army Training and Doctrine Command 4. Update the operational requirements document for automatic identification technology. As a minimum, determine the Army-wide need for standoff, in-the-box visibility and document the results in an updated operational requirements document.
Revise the current version of AR 710-2 to make Dollar-Cost Banding mandatory. Set a date for implementing Dollar-Cost Banding that will allow for gradual implementation by major commands, divisions, and other activities with supply support activities.
A-1. Issue a message to all major command and subordinate activities informing them of problems and best practices identified during our audit. Use the draft advisory message as a guide for preparing the message (Annex E). Advise major commands and divisions responsible for maintaining units on alert status for rapid deployment in response to a crisis to ensure their local policies (such as major command regulations or division Readiness Standing Operating Procedures) include the provisions outlined in the message.
A-2. Modify AR 710-2 to include guidance for major commands and subordinate activities responsible for maintaining units on alert status for rapid deployment to follow to ensure adequate repair parts support during the initial period of deployment. As a minimum, require that divisions with alert units have: an assumption process in place that includes procedures for detailed planning of Class IX requirements. a deployment notification process in place with procedures for conducting a summary review of Class IX stocks planned for deployment, considering such factors as the deployment environment, anticipated operating tempo, or intensity of the operations.
A-3. Modify DA Pamphlets 710-2-1 and 710-2-2 to include detailed procedures for divisions to follow to ensure alert forces have adequate Class IX repair parts support. Review the best practices outlined in this report (and the draft advisory message in Annex E) as a starting point for revising the pamphlets.
A-4. Update Field Manual 10-15 (Basic Doctrine Manual for Supply and Storage) to reflect current policies and address the key procedures discussed earlier in this report. Additionally, update the field manual to provide guidance on such issues as: how to identify Class IX repair part requirements for alert forces. how to identify repair parts shortages and whether to requisition shortage items. what priority designator code to use for requisitioning parts during the assumption process and when in alert status. when to use pre-packaged inventories. when to pre-position parts at airfields (with alert force equipment).
B-1. Include key management controls for alert forces in an appendix of AR 710-2 as prescribed by AR 11-2 or incorporate these controls into the existing Command Supply Discipline Program. Consider our list of key controls contained in Annex H to identify controls for inclusion in the regulation.
Supply Chain Management: Summary of Air Force Audit Agency Report Recommendations
The Director of Logistics Readiness, Air Force Deputy Chief of Staff for Installations, Logistics and Mission Support should: a. Require Air Force personnel to delete all invalid adjusted stock levels identified in the audit. b. Establish procedures to improve adjusted stock level management. Specifically, revise Air Force Manual 23-110 to: address the role of the Logistics Support Centers. Specifically, require Logistics Support Center personnel only approve base- initiated adjusted stock levels with sufficient justification on the Air Force Forms 1996, maintain all Air Force Forms 1996, and initiate the revalidation process. improve the revalidation process. Specifically, the guidance should contain the following controls: a revalidation checklist detailing procedures logistics personnel should use to revalidate adjusted stock levels. ensure personnel accomplish the revalidation every 2 years. a requirement to use Air Force Form 1996 to establish each adjusted stock level (including MAJCOM-directed adjusted stock levels) and include a detailed justification of the adjusted stock level purpose and duration.
A.1. The Air Force Materiel Command Director of Logistics should: a. Direct air logistics center shop personnel to delete the invalid Credit Due In From Maintenance details identified by audit (provided separately). b. Establish procedures requiring an effective quarterly Credit Due In From Maintenance Reconciliation. Specifically, Air Force Manual 23-110, US Air Force Supply Manual, and Air Force Materiel Command Instruction 23-130, Depot Maintenance Material Control, should require maintenance personnel to provide written documentation for each Credit Due In From Maintenance detail (i.e., supported by a “hole” in the end item). If such supporting documentation is not provided, require retail supply personnel to delete the unsupported Credit Due In From Maintenance details. c. Develop training for air logistics center shop personnel regarding proper spare part turn-in and Credit Due In From Maintenance Reconciliation procedures. Specifically, the training should define the various ways to turn spare parts in, and the differences between each method, to include the impact of improperly turning in spare parts. In addition, proper Credit Due In From Maintenance Reconciliation procedures should be covered in depth to include training on what constitutes appropriate supporting documentation.
A.2. The Air Force Materiel Command Director of Logistics should: a. Establish detailed procedures in Air Force Manual 23-110 on how an item manager should validate Due Out to Maintenance additives (i.e., what constitutes a Due Out To Maintenance additive, where the item manager can validate the additive, which priority backorders are associated with Due Out To Maintenance, etc.).
Concurred, open b. Direct Warner Robins Air Logistics Center to rescind local policy allowing item managers to increase the Due Out To Maintenance additive quantity to account for install condemnations. c. Issue a letter to item managers reemphasizing the requirement to document the methodology used to validate changes to Due Out to Maintenance additives, and retain adequate support for the Due Out To Maintenance additive quantity.
A.1. Air Force Materiel Command Directorate of Logistics and Sustainment personnel should update Air Force Materiel Command Manual 23-1, Requirements for Secondary Item, to: a. Include instruction on what information should be developed and retained to support estimated condemnation rates. The guidance should include maintaining documentation on key assumptions, facts, specific details, decision makers’ names and signatures, and dates of decisions so the condemnation percentage can be recreated. b. Establish sufficient guidance to instruct equipment specialists on managing parts replacement forecasting. Specifically, develop a standardized method to plan for replacement part acquisition while phasing out the old parts.
The Air Force Materiel Command Director of Logistics and Sustainment should: a. Correct the shop flow times for the 211 items with requirements discrepancies. b. Revise the process for computing shop flow times to adhere to DoD 4140.1-R, which requires the removal of awaiting maintenance and awaiting parts times from requirements computations. c. Evaluate the D200A Secondary Item Requirements System computer program to identify and correct the programming deficiencies adversely impacting the shop flow times computation. d. Complete the ongoing automation effort designed to eliminate manual processing errors.
A.1. The Air Force Deputy Chief of Staff, Installations and Logistics, should: a. Revise Air Force Manual 23-110 to: (1) Provide supply discrepancy report missing shipment procedures consistent with Air Force Joint Manual 23-215 guidance. (2) Establish supply discrepancy report dollar value criteria consistent with DoD 4500.9-R guidance. b. Establish base supply personnel training requirements on supply discrepancy report procedures and communicate those requirements to the field.
Request Defense Logistics Agency comply with procedures requiring depot supply personnel inspect packages and submit supply discrepancy reports when appropriate.
A.1. The Air Force Deputy Chief of Staff, Installations and Logistics, should: a. Revise Air Force Manual 23-110 to (1) describe more thoroughly documentation requirements for data elements used to compute readiness spares package item requirements and (2) require all readiness spares package managers to attend training that includes an adequate explanation of data element documentation requirements.
Concurred, open b. Upgrade the Weapons System Management Information System Requirements Execution Availability Logistics Model to (1) accept mechanical data element transfers directly from other source systems and (2) prompt readiness spares package managers to input documentation notations supporting the rationale of changes in readiness spares package data elements.
A.1. The Air Force Materiel Command Directorate of Logistics and Sustainment personnel should: a. Reduce the stock level day standard value from 10 days to 4 days in the D200A Secondary Item Requirements System. b. Develop and implement an automated method in the Advanced Planning and Scheduling system to measure the actual order and ship time needed to replenish depot level maintenance serviceable stock inventories. c. Develop and implement an interim method to measure or estimate depot order and ship time until an automated method is developed.
A.1. The Deputy Chief of Staff, Installations and Logistics, Directorate of Logistics Readiness should require the Distribution and Traffic Management Division to: a. Direct Transportation Management Office personnel to communicate to the consignors the cost and timing benefits to move shipments via door-to-door commercial air express carrier service when eligible based on DoD and Air Force guidance. If the consignor refuses the cost-effective mode, require a waiver letter expressing the need to use the Air Mobility Command carrier. b. Develop criteria to allow consignors to adequately identify priority requirements and assign appropriate priority designator codes when shipping assets via Air Mobility Command airlift. This criteria should be included in Air Force Instruction 24-201. c. Instruct Transportation Management Office personnel to properly review all shipping documentation to ensure all required information is completed by the consignor prior to accepting cargo for movement to the Air Mobility Command aerial port.
A.1. The Air Force Materiel Command Director of Logistics and Sustainment should: a. Establish procedures to properly budget for delayed discrepancy repair requirements by accounting for the eventual return and repair of unserviceable items in the requirements/budget process starting with the March 2005 computation cycle. b. Develop procedures or include an edit in the new system that flags additives and prompts the item manager to perform thorough reviews of additive requirements. c. Develop a process that requires program managers, item managers, and other applicable program directorate personnel to periodically review program and mission direct additive requirements to verify that duplication has not occurred.
Concurred, closed, implemented Concurred, open d. Inform all item managers and air logistics center managers that it is an inappropriate use of mission direct additives to retain excess inventory or preclude contract terminations. Additionally, reiterate regulatory guidance delineating the approved process for retaining excess materiel and preventing contract terminations.
A.1. The Air Force Materiel Command Director of Logistics and Sustainment should: a. Direct item managers to correct erroneous requirements identified during this review. b. Revise Air Force Materiel Command Manual 23-1 to clarify procedures for adjusting low demand item requirements. Specifically, ensure the guidance clearly states item managers may restore previously decreased requirements to their original level.
A.1. The Air Force Materiel Command Director of Logistics and Sustainment should: a. Direct item managers to correct all erroneous requirements computations and related budgets identified during this review. b. Revise Air Force Materiel Command Manual 23-1 to correct guidance conflicts. Specifically, ensure the guidance only contains the correct standards requirements (3 days for base processing times and 10 days for reparable intransit times).
A.1. The Air Force Materiel Command Director of Logistics should revise Air Force Materiel Command Manual 23-1 to: a. Require item managers review and identify excess next higher assemblies that could be used to satisfy indentured item repair, as well as buy, requirements. b. Provide specific procedures for item managers to follow to satisfy the indentured item buy and repair requirements.
Revise training, and then train item managers to use indentures system data to identify excess next higher assemblies that could be used to satisfy indentured item requirements.
B.1. The Air Force Material Command Director of Logistics should: a. Require equipment specialists correct inaccurate indentures system data. b. Publish the draft guidance requiring equipment specialists ensure indentures system data accuracy. c. Train equipment specialists to maintain indentures system data accuracy.
The Air Force Materiel Command Director of Logistics should: a. Collect the unserviceable parts identified during the audit from the contractors or adjust the price of those parts (FY 2000-2002, $238.9 million and estimated FY 2003, $79.6 million). b. Establish a mechanism to track the issue and return of parts issued to customers who subsequently provide those parts to contractors as prescribed in Air Force Manual 23-110, Volume I, Part 3, Chapter 7. c. Either revise the policy to issue parts to customers who subsequently provide those parts to contractors at standard price or develop a due-in-from-maintenance-like control to adjust the part’s price if the unserviceable parts are not returned.
A.1. The Deputy Chief of Staff, Installations and Logistics should: a. Revise Air Force Instruction 21-104 to require engine managers to input a follow-on tasked unit into the requirements computation system as a single unit. b. Modify PRS software to compute spare engine needs based on the combined flying hours for follow-on tasked units.
A.1. The Air Force Materiel Command Supply Management Division should: a. Implement corrective software changes to the Secondary Item Requirements System and Central Secondary Item Stratification Subsystem systems to remove the Other War Reserve Materiel requirements from the Peacetime Operating Spares requirements and report Other War Reserve Materiel requirements separately. b. Implement interim procedures to remove Other War Reserve Materiel requirements from the Peacetime Operating Spares requirements and budget and report Other War Reserve Materiel requirements separately until they implement Recommendation A.1.a.
A.1. The Air Force Materiel Command Director of Logistics should: a. Direct maintenance management personnel to provide adequate oversight to ensure maintenance personnel turn in all aircraft parts to the Weapon System Support Center or courtesy storage areas. b. Revise Air Force Materiel Command Instruction 21-130 directing air logistics center Weapon System Support Center management to establish a supply inventory monitor to oversee maintenance work areas ensuring excess parts are turned in to Weapon System Support Center or courtesy storage areas.
Reemphasize the regulatory requirement (Air Force Materiel Command Instruction 21-130) to the air logistics center maintenance supervisors to assign a maintenance inventory control monitor to oversee the maintenance areas and ensure maintenance personnel tag and label all parts with the applicable aircraft number and the serviceability condition.
Request that the Air Force Materiel Command Director of Logistics include Air Force Logistics Management Agency Stocking Policy 11 in the Readiness Base Leveling system to calculate C-5 forward supply location spare parts stock levels.
Instruct item manager specialists that Air Force Form 1996 is not required to maintain Army Materiel Command Forward supply secondary item requirements in the Secondary Item Requirements System.
A.1. The Air Force Materiel Command Director of Logistics should: a. Remove the D200A Secondary Item Requirements System automatic asset balance variance adjustment. b. Establish training requirements for air logistics center personnel on how to research and resolve D200A Secondary Item Requirements System asset balance variances.
Concurred, closed, implemented Concurred, closed, not implemented Concurred, closed, not implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, not implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented c. Revise the Air Force Materiel Command Manual 23-1 to require that item managers defer an item’s buy and/or repair requirement until reconciling any asset balance variance greater than a specified threshold (variance percent, quantity, and/or dollar value). d. Establish asset balance variance oversight procedures to verify item managers resolve asset balance variances.
A.1. The Air National Guard, Deputy Chief of Staff, Logistics, should: a. Address to subordinate units the importance of following Air Force equipment guidance related to small arms accountability, inventory, documentation, storage, and disposal, and the competitive marksmanship program. b. Request the Air National Guard Inspector General to include small arms accountability, inventory, documentation, storage, and disposal requirements as a special emphasis area in unit inspections.
B.1. The Air National Guard, Deputy Chief of Staff, Logistics, should: a. Direct all Air National Guard units revalidate small arms and conversion kit requirements using Allowance Standard 538. b. Recompute requirements (including M-16 conversion kits), reallocate small arms on-hand based on adjusted authorizations, and adjust requirements and requisitions, as needed, following the reallocations.
A.1. The Air Force Materiel Command Director of Logistics should revise Air Force Manual 23-110 to include specific material management transition guidance. Specifically, the guidance should require: a. Transition gaining locations to have a training plan in place to ensure personnel are adequately trained before working asset buy and repair requirement computations. b. Air Force Materiel Command personnel to establish a transition team to monitor all stages of the transition, to include ensuring personnel are adequately trained and providing additional oversight over requirement computations worked by new item managers.
Revise Standard Base Supply System transaction processing procedures to automatically select special requisition Air Force routing identifier codes.
Issue guidance to base supply personnel reminding them of proper receipt transaction procedures.
Discontinue the automated transaction deletion program since the revised Standard Base Supply System procedures render the program obsolete.
C.2. The Deputy Chief of Staff, Installations and Logistics should: a. Revise Air Force Manual 23-110 to direct working capital fund managers to input reversing entries that will correct erroneous transactions identified during monthly M01 list reviews. b. Direct all base supply working capital fund managers to: (1) Review the most current M01 list to evaluate the propriety of all transactions affecting the Purchases at Cost account. (2) Input reversing entries to correct any erroneous transactions identified during the M01 list review. This will correct all deficiencies, including those described in Results-A and Results-B.
A.1. The Air Force Reserve Command, Deputy Chief of Staff, Logistics, should: a. Address to subordinate units the importance of following Air Force equipment guidance related to small arms accountability, inventory, documentation, storage, and disposal. b. Request the Air Force Reserve Command Inspector General to include small arms accountability, inventory, documentation, storage, and disposal requirements as a special emphasis area in unit inspections.
B.1. Air Force Reserve Command, Deputy Chief of Staff, Logistics, should: a. Request all Air Force Reserve Command units revalidate small arms and conversion kit authorizations using Allowance Standard 538. b. Recompute requirements (including M-16 conversion kits), reallocate small arms on-hand based on recomputed authorizations, and adjust requirements and requisitions, as needed, following the reallocations.
Finalize and issue the revised Air Force Manual 23-110 requiring personnel to identify and timely return secondary items to the primary control activity.
Finalize and issue the revised Air Force Manual 23-110 requiring personnel to research and validate credit due on repairable items returned to the primary control activity.
Supply Chain Management: Summary of Naval Audit Service Report Recommendations
The Office of the Commander, U.S. Fleet Forces Command should: 1. Emphasize Chief of Naval Operations requirements that all ships maintain proper inventory levels based on authorized allowances and demand history. 2. Emphasize Chief of Naval Operations and Naval Supply Systems Command internal control procedures to ensure inventory levels in the Hazardous Material Minimization Centers remain within the authorized limits, and return material exceeding requisitioning objectives to the supply system. 3. Emphasize Chief of Naval Operations requirements that ships requisition only hazardous materials authorized for shipboard use, and return unauthorized material to the supply system. 4. Enforce Naval Supply Systems Command requirements that ships prepare and submit Ship’s Hazardous Material List Feedback Reports and Allowance Change Requests, whenever required.
The Naval Supply Systems Command should: 5. Establish an interface between authorized allowance documents and the Type-specific Ship’s Hazardous Material List to ensure that hazardous material items authorized for shipboard use also have authorized allowance levels. 6. Establish procedures to validate Hazardous Material Minimization Centers low and high inventory levels with those inventory levels in Relational Supply for the same items to ensure Hazardous Material Minimization Centers high limits do not exceed Relational Supply high limits. 7. Establish procedures that require unissued hazardous material in the Hazardous Material Minimization Centers be counted as on-hand inventory before reordering Relational Supply stock. 8. Develop and implement a hazardous material usage database that accumulates and retains data on supply system hazardous material ordered and used by the ship for use in planning future hazardous material requirements. 9. Establish procedures to ensure that Enhanced Consolidated Hazardous Material Reutilization and Inventory management Program Afloat Program technicians perform tasks in accordance with the Enhanced Consolidated Hazardous Material Reutilization and Inventory management Program Afloat Program Desk Guide. 10. Establish a working group to determine the feasibility for the development of ship-specific allowance-control documents for all items managed in the Hazardous Material Minimization Centers not already on an approved allowance list.
The Office of the Commander, U.S. Fleet Forces Command should: 11. Return the prohibited undesignated hazardous material items to the supply system for credit.
The Naval Sea Systems Command, with the assistance of Naval Supply Systems Command should: 12. Establish formal written guidance stating what system allowance list hazardous material is designated for and their current quantities allowed. Guidance should include requisitioning metrics that cross check hazardous material items against designated system designs as generated by Naval Inventory Control Point and Naval Surface Warfare Center Carderock Division – Ship System Engineering Station, technical manuals, and one-time General Use Consumable List. 13. Clarify Naval Sea Systems Command Instruction 4441.7B/Naval Supply Systems Command Instruction 4441.29A to measure the quality of hazardous material load outs instead of the quantity or percentage of hazardous material loaded on ships.
The Office of the Supervisor of Shipbuilding, Conversion, and Repair Newport News should: 14. Discontinue requisitioning aircraft cleaning, maintenance, and preservation hazardous material for actual aircraft before Post Shakedown Availability. 15. Establish formal written local procedures that require detailed support, justification, and audit documentation for system validation on all hazardous material requisitions received from ship personnel after Load Coordinated Shipboard Allowance List delivery. This support should indicate the specific system the item is required for and the document numbers for Preventative Maintenance Schedule, Maintenance Request Cards, Allowance Equipage List, Allowance Parts List, General Use Consumables List, and technical manuals. An Allowance Change Request should be included, if applicable. 16. Use Outfitting Support Activity when requisitioning all hazardous material items for ship initial outfitting to minimize local procurement as required by the Navy Outfitting Program Manual of September 2002.
The Naval Supply Systems Command should: 17. Enforce compliance with established guidance for material offloads to ensure a uniform use of DD Form 1348 documents among ships and the proper processing of Transaction Item Reporting documents to ensure inventory accuracy. 18. Update the Enhanced Consolidated Hazardous Material Reutilization and Inventory management Program Afloat Program Desk Guide to include specific requirements for the Enhanced Consolidated Hazardous Material Reutilization and Inventory management Program Afloat Program technician when offloading Naval Supply Systems Command-owned hazardous material.
The Naval Inventory Control Point should: 1. In coordination with Naval Air Systems Command, update policy and procedures issued to field activities on managing and reporting aircraft engine/module container inventory. 2. Require Fleet activities to provide a daily transaction item report of all intra-activity receipts and issues of engine/module containers to item managers. 3. Establish controls to ensure containers are not procured in excess of requirements.
Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Concurred, closed, implemented Nonconcurred, closed, implemented Concurred, closed, implemented 4. Include the Aircraft Engine Container Program as an assessable unit in Naval Inventory Control Point’s Management Control Program.
The Naval Air Systems Command should: 5. Fully fund the engine/module repair container program in accordance with requirements generated by Naval Inventory Control Point. 6. Report any engine/module containers costing $5,000 or more in the Defense Property Accounting System.
The Naval Inventory Control Point and Naval Air Systems Command should: 7. Require Naval Aviation Depots, Aircraft Intermediate Maintenance Depots, and Fleet activities to perform periodic inventories of engine/module containers, and report the results to Naval Inventory Control Point’s item managers.
The Commandant of the Marine Corps should: 1. Terminate the Norway Air-Landed Marine Expeditionary Brigade program. 2. Prepare a comprehensive statement encompassing disposal costs, equipment condition, and status of outstanding procurements and repairs of the excess onhand ground equipment and supplies, and identify Norway Air-Landed Marine Expeditionary Brigade program items that would satisfy outstanding procurements and repairs for fiscal year 2003 and the out years. 3. Cancel the planned modernization procurements associated with the replacement of Norway Air-Landed Marine Expeditionary Brigade equipment, subject to negotiated termination costs for one of the six modernization projects. 4. Cancel all procurements that replenish Norway Air-Landed Marine Expeditionary Brigade preposition inventory shortages.
The Deputy Chief of Naval Operations, Warfare and Requisitions Programs should: 1. Perform analyses to establish validated engine readiness requirements, incorporate ready-for-training engine readiness rates for training aircraft engines, and establish separate requirements for different categories of aircraft (such as combat, support, and training). 2. Formally document the engine requirements and supporting rationale in Department of the Navy guidance.
The Deputy Chief of Naval Operations, Fleet Readiness and Logistics should: 3. Coordinate with Naval Inventory Control Point and Naval Air Systems Command to require more realistic parameter inputs to the Retail Inventory Model for Aviation while encouraging engine maintenance strategies that will ultimately reduce turn around time and increase reliability (mean time between removal). 4. Issue written guidance to assign responsibility for calculating engine war reserve requirements and the need to compute additional war reserve engine/module requirements.
The Deputy Chief of Naval Operations, Warfare Requirements and Programs should: 5. Adjust out-year F414-GE-400 engine and module procurement requirements (to be reflected in the President’s 2004 Budget) to agree with Naval Inventory Control Point’s revised Baseline Assessment Memorandum 2004 requirements.
The Commander, Naval Inventory Control Point should: 6. Reiterate Secretary of the Navy policy that documentation supporting official Baseline Assessment Memorandum submissions be retained for no less than 2 years.
The Deputy Chief of Naval Operations, Fleet Readiness and Logistics should: 7. In coordination with Deputy Chief of Naval Operations, Warfare Requirements and Programs, establish policy and adjust the procurement strategy for F414-GE-400 engines and modules to procure (based on current audit analyses) approximately 30 percent whole engines and 70 percent separate engine modules and thereby improve the engine/module repair capability. 8. Issue guidance requiring Naval Air Systems Command to determine, and annually reevaluate, the engine-to-module procurement mix for the F414-GE-400.
The Commander, Naval Air Systems Command should: 9. Reduce out-year AE1107C spare engine procurement by 12 (changed to 8 after receipt of management comments) through fiscal year 2008. 10. Adhere to the Chief of Naval Operations-approved model (Retail Inventory Model for Aviation) for calculations of spare engine requirements.
The Deputy Chief of Naval Operations, Warfare Requirements and Programs should: 11. Adjust planned out-year Aircraft Procurement, Navy-6 (APN-6) procurement requirements to reduce the quantities of T700-401C Cold and Power Turbine Modules by 10 each.
The Commandant of the Marine Corps should: 1. Validate the Time-Phased Force Deployment Database equipment requirements and determine how the Marine Corps will source (make available) the equipment required and determine if the equipment required is on the unit’s table of equipment. 2. Evaluate the Asset Tracking Logistics and Supply System II+ to determine if it adequately meets user needs and, if not, take sufficient action to correct identified deficiencies. 3. Perform onsite technical assessments to determine the extent of required maintenance/repair. 4. Provide dedicated organic or contract resources to reduce maintenance backlogs. 5. Establish an acceptable level of noncombat deadline equipment relative to the total combat deadline equipment and total equipment possessed and report outside the unit to the Marine Expeditionary Force commander. This would help ensure that the extent of nonmajor maintenance/repair requirements receives appropriate visibility and support requests for resources to reduce maintenance backlogs.
Supply Chain Management: Summary of Non-audit Organization Report Recommendations
Create a Joint Logistics Command: Responsible for global end-to-end supply chain, That includes the U.S. Transportation Command mission, Defense Logistics Agency, service logistics and transportation commands as components to Joint Logistics Command with: Regional Combatant Commanders retaining operational control of the flow of in-theater logistics; and Program managers retaining responsibility for lifecycle logistics support plan and configuration control.
Lead the work to create an integrated logistics information system.
Appoint an external advisory board of relevant industry experts to assist in guiding this effort.
Specific recommendations made for tactical supply, theater distribution, strategic distribution, national- and theater-level supply, and command and control.
Supply chain planning needs to be better integrated with a common supply chain vision. The newly designated distribution process owner (U.S.
Transportation Command), in concert with the Army, the other services, and the Defense Logistics Agency, should develop and promulgate a common vision of an integrated supply chain. The complementary, not redundant roles, of each inventory location, distribution node, and distribution channel should be defined.
Every joint logistics organization should examine and refine its processes to ensure detailed alignment with this vision. Review doctrine, organizational designs, training, equipment, information systems, facilities, policies, and practices for alignment with the supply chain vision and defined roles within the supply chain.
The assumptions embedded within the design of each element of the supply chain with regard to other parts of the supply chain should be checked to ensure that they reflect realistic capabilities.
Improve the joint understanding of the unique field requirements of the services. Likewise, the services need to understand the Defense Logistics Agency, the U.S. Transportation Command, and the General Services Agency processes and information requirements, as well as those of private-sector providers.
Metrics should be adopted to maintain alignment with the vision.
Logistics information systems need adequate levels of resources to provide non-line-of-sight mobile communications and effective logistics situational awareness in order to make new and emerging operational and logistics concepts feasible.
Deliberate and contingency planning should include improved consideration of the logistics resource requirements necessary to execute sustained stability and support operations.
Resourcing processes should consider uncertainty and implications of capacity shortages. The flexibility of financial and resource allocation processes to rapidly respond to the need for dramatic changes in logistics capacity that sometimes arises from operational forecast error should be improved.
Logistics resource decisions should more explicitly consider how much buffer capacity should be provided in order to handle typical operational and demand variability without the development of large backlogs.
Joint training should be extended to exercise the entire logistics system. The Army should review all wartime and contingency processes from the tactical to the national level to determine which are not exercised in training with all requisite joint organizations participating. Such processes range from setting up tactical logistics information systems to planning a theater distribution architecture to determining national level spare parts distribution center capacity requirements.
Review which tasks and processes do not have adequate doctrine and mission training plans.
Planning tools and organizational structures need to better support expeditionary operations. Automation should more effectively support the identification of logistics unit requirements to support a given operation.
Unit “building blocks” should be the right size and modular to quickly and effectively provide initial theater capabilities and then to facilitate the seamless ramp-up of capacity and capability as a deployment matures.
Conclusions and recommendations fall into three categories: programmatic, constructive, and operational. Programmatic conclusions and recommendations include: logistics transformation and interoperability. If interoperability is important to transformation, the Office of the Secretary of Defense must fund it adequately and specifically, not just the component systems and organizations being integrated. Services and agencies will be reluctant to act against their own financial interest.
Title 10 can be used to prevent joint logistics transformation and interoperability, and needs clarification. If a Logistics Command is created, Title 10 may need to be amended.
Expanded Office of the Secretary of Defense leadership (beyond technical standardization) for joint logistics transformation is necessary to effect change. The Logistics Systems Modernization office efforts to realign business processes and to prioritize rapid return on investment initiatives are a good start and can be expanded.
A 4-Star Combatant Command – U.S. Logistics Command – in charge of logistics needs to be created, following the example of the U.S. Strategic Command. The responsibilities and enforcement powers of this Logistics Command may be significantly different than the U.S. Strategic Command model and require clear specification. Some responsibilities that this Command could undertake include: Defining the distribution authorities, scenarios, business processes and process ownership at the “hand-off” from U.S. Transportation Command distribution to services distribution.
Developing doctrine and implementing joint business processes and rules for logistics interoperability between services, prioritizing known problem and conflict areas, and assigning ownership of business processes across the broader Supply Chain Operations Reference-defined supply chain.
Identifying budget requirements for logistics interoperability, and requiring logistics interoperability to be adequately funded and planned as part of the acquisition process of any logistics systems.
Accelerating interoperability testing of all Global Combat Support System implementations both within and across services and agencies, with a spiral development methodology.
Coordinating and communicating various isolated ongoing efforts in defining logistics Extensible Markup Language schema, business processes, databases, published web services and other joint logistics projects, with the Integrated Data Environment and Enterprise Resource Planning programs underway in the services and agencies. Where conflicts, redundancies or gaps are identified, the U.S. Logistics Command may function as an “honest broker” to develop an interoperable solution, or as a “sheriff” to enforce an interoperable solution.
A single logistics business process modeling needs to be created as a common reference, with the understanding that the modeling effort will be descriptive rather than prescriptive, due to Services’ autonomy and the need to continue migrating legacy systems and building new logistics capability. Since all Services, Agencies and the Office of the Secretary of Defense are employing the Supply Chain Operations Reference Model for logistics, some degree of commonality should already exist. If the process modeling effort can build on existing U.S. Transportation Command/Defense Logistics Agency business process models, and incorporate business process models from each of the Services, it may be available earlier and used more effectively. A “greenfield” effort may have limited utility and never get beyond the requirements stage. Efforts to align logistics data are underway within the Joint Staff Logistics Directorate, and in the ongoing U.S. Transportation Command/Defense Logistics Agency modeling. The touchpoints between these alignment efforts and the actual Enterprise Resource Planning implementations within the services and joint agencies could be expanded. A variety of “to-be” logistics business process models must be generated to meet the requirements of varying future war fighting scenarios. For example, loss of space assets or enemy use of electromagnetic pulse will create significant constraints on logistics interoperability, and contingency business processes should be designed for those scenarios.
The logistics business process must be defined from end-to- end at the DOD level, and then Services and Agencies must assess how they will or will not align with those processes. Alignment, interoperability and jointness are consensus goals for system development, but some Service decisions not aligned with specific DOD level processes may provide net benefits and increase the robustness of the overall logistics System of Systems (the federated supply chain, or loosely-coupled approach). The ongoing questions that the U.S. Logistics Command will address are these: Should the default state for interoperability be alignment, with non- alignment developed as a scenario-based exception? Or should the default state for interoperability be non-alignment, with occasional moments of alignment (specific data feeds of a finite duration)?
Some form of charter or statutory legislation is needed to prevent joint logistics transformation from backsliding into non-interoperable organizations and systems, when leadership changes.
Change management for joint logistics needs to be resourced specifically, in addition to current resources for logistics transformation within services and joint agencies.
Fuse the logistics and transportation functions into an integrated U.S. Logistics Command.
Implement the Beyond Goldwater-Nichols Phase I recommendation to merge much of the Joint Staff Directorate of Logistics with its Office of the Secretary of Defense counterpart, the Deputy Under Secretary of Defense (Logistics & Material Readiness) into an office that reports to both the Under Secretary for Technology, Logistics, and Acquisition Policy.
The public sector should seek to bolster the fault tolerance and resilience of the global container supply chain. The closure of a major port-for whatever reason-would have a significant effect on the U.S. economy. The federal government should lead the coordination and planning for such events for two reasons. First, the motivation of the private sector to allocate resources to such efforts is subject to the market failures of providing public goods. Second, the government will be responsible for assessing security and for decisions to close and reopen ports.
Security efforts should address vulnerabilities along supply- chain network edges. Efforts to improve the security of the container shipping system continue to be focused on ports and facilities (although many ports around the world still failed to meet International Ship and Port Security Code guidelines even after the July 1, 2004, deadline.) Unfortunately, the route over which cargo travels is vast and difficult to secure. Measures to keep cargo secure while it is en route are essential to a comprehensive strategy to secure the global container supply chain.
Research and development should target new technologies for low-cost, high-volume remote sensing and scanning. Current sensor technologies to detect weapons or illegal shipments are expensive and typically impose significant delays on the logistics system. New detection technologies for remote scanning of explosives and radiation would provide valuable capabilities to improve the security of the container shipping system. level logistics and Army/Land component logistics requirements and the need for a joint theater-level logistics commander.
Codify in joint doctrine the distinction between joint theater Document a Joint Theater Sustainment Command and assign to Combatant Commands.
Implement useful practices of other services.
Don’t preclude early use of Logistics Civilian Augmentation Program.
Complete a thorough business-based cost/benefit analysis of Radio Frequency Identification before spending more money on it.
Make directive authority for the Combatant Command real.
Joint doctrine must: Be prescriptive in its language, purging words like “should” and “attempt” and replacing them with specific direction.
Be joint and comprehensive. It must explicitly address the joint organizational structure and staffing, develop and institutionalize joint processes and procedures, and specifically require, not assume, the necessary communications infrastructure and information tools to support this vision.
Support an expeditionary logistics capability to enable rapid deployment and sustainment of flexible force structures in austere theaters around the globe.
Reconcile with the emerging concepts of net-centric warfare and sense and respond logistics, balancing past lessons with the needs for the future. Joint doctrine must be based on today’s capabilities, not tomorrow’s promises.
Continue to identify the combatant commander as the locus of control for logistics in support of deployed forces, and specify the tools, forces, processes, and technologies required from supporting commands.
Develop a true expeditionary logistics capability.
Develop logistics systems able to support expeditionary warfare. Logistics systems must be designed, tested, and developed to support a mobile, agile warfighter.
Logistics capabilities need to be native to an expeditionary unit for swift and agile deployment. The people, equipment, and systems that accompany these small, cohesive units must be able to integrate data within the services and commands as well as among the coalition partners.
Logistics communications planning and infrastructure are an integral part of any operation, and must be robust, fully capable, and deployable in both austere to developed environments. Planning and development of the required infrastructure must consider the issues of bandwidth, mobility, security and aggregation of logistics data.
Retool the planning processes.
A follow-on replacement for the current Time-Phased Force and Deployment Data /Joint Operation Planning and Execution System process is required, with the necessary improvements in task structures and planning speed. This process should directly drive sustainment planning, including acquisition and distribution decisions.
The challenge of requirements identification and fulfillment in a deployed environment is a joint challenge. Planning tools must be developed that recognize and fuse the consumption of materiels and fulfillment of warfighter requirements across the joint force.
The speed and flexibility of future operations demand that a closer and more dynamic relationship be developed with suppliers in the industrial base and prime vendor partners.
Create an integrated theater distribution architecture Theater distribution capability must be embedded in a permanent organization within the theater or at least rapidly deployable to any global location. The balance of reserve forces and the implications of the activation cycle must be considered in the development of this organizational structure and manning.
The need for a joint in-theater distribution cross dock, staging, and break-bulk operation must be explicitly recognized in every Combatant Command Area of Responsibility. Rapid maneuver and task reorganization precludes a 100% “pure pallet” shipment. Retrograde and reverse logistics capabilities must also be embedded.
Leadership must recognize that the growth and development of “joint logisticians” who can operate and lead effectively in the theater environment will take time and effort, potentially altering established career progression plans.
Resolve the technology issues.
Rationalize logistics systems. Current battlefield and deployment realities include the existence of multiple systems for logistics support. DOD must complete and deploy an integrated architecture, including operational, systems, technical, and data elements to streamline the systems capabilities to the joint warfighter, and manage the portfolio of systems to eliminate those that cannot support the future state.
Create visibility within logistics and supply systems that extends to the tactical units. Today’s warfighting mission includes mobile expeditionary engagements. Support systems need to include the ability to communicate and synchronize with rear support units and systems 24 hours a day, 365 days a year in both austere and developed environments.
Ensure communications capability and availability for logistics, the environment. Logistics is an information- intensive function with constant requirements for updated information. Logistics support planning needs to include communications-level planning and should be completed before deployment.
Development of the foundational role of the Distribution Process Owner. The Distribution Process Owner concept must be implemented swiftly and should recognize the potential resource requirements in the near- and mid-term to complete this task. This is a necessary first step, addressing distribution challenges, and should facilitate the establishment of an integrated, end-to-end logistics architecture, eliminating the confederation of stovepipes.
Financial and transactional systems should not be a hindrance to going to war: They must be designed so that the transition from peace to war is seamless; the ability to employ these systems in a deployed environment must take precedence over garrison requirements. More emphasis needs to be placed on managing retrograde and repairables.
Processes must be synchronized and integrated across the stovepipes.
Synchronize the chain: from Continental United States to Area of Responsibility. Capacities across the distribution nodes and distribution links, and across the entire logistics network but particularly in theater, must be reviewed, understood, and actively managed. The ability to determine and manage practical and accurate throughput capacities for air and seaports, along with an understanding of the underlying commercial infrastructure is essential to future planning. The ability to evaluate possible scenarios for host nation support is also critical.
Deploy Performance Based Logistics agreements more comprehensively. Standardize Performance Based Logistics implementation.
Implementation of Performance Based Logistics must become more standard to prevent confusion with other contractor support services and activities. To the extent possible, common metrics and terms must be developed and applied.
Implement Performance Based Logistics across total weapons systems.
Support broad end-to-end application. Much integration and synchronization is required to ensure full system synchronization of performance metrics but the end capability of tracking total system performance to both cost and “power by the hour” is a significant potential advancement in warfighter support.
Make Radio Frequency Identification real.
Extend Radio Frequency Identification to the warfighter.
Asset tracking system capabilities, infrastructure, and support must extend to the farthest reaches of the logistics supply chain, even in austere environments.
Do not combine U.S. Transportation Command and Defense Logistics Agency. Roles, missions and competencies of the two organizations are too diverse to create a constructive combination.
Organizational merger would not significantly facilitate broader transformational objectives of supply chain integration.
Both organizations perform unique activities/functions in the supply chain. The real problem is not that the two organizations are separate, but that their activities are not well integrated.
Elevate leadership for Department of Defense global supplies chain integration. Designate a new Under Secretary of Defense for Global Supply Chain Integration reporting directly to the Secretary of Defense.
Ensure the Global Supply Chain Integration is a civilian with established credibility in the field of supply chain management.
Establish the Global Supply Chain Integration’s appointment as a fixed term for a minimum of 6 years.
Direct the U.S. Transportation Command and the Defense Logistics Agency to report to Global Supply Chain Integration.
Create a working relationship for the Global Supply Chain Integration with the Chairman of the Joint Chiefs of Staff.
Build the Global Supply Chain Integration’s staff from existing staffs in the Office of the Secretary of Defense, the U.S. Transportation Command, and the Defense Logistics Agency.
Empower a Global Supply Chain Integrator with the required authority and control to effect integration. The Global Supply Chain Integrator should be granted authority to: Build end-to-end integrated supply chains through the establishment of policies and procedures.
Enable privatization and partnering with global commercial distributors.
Oversee program management decisions related to major systems vendor support.
Establish/authorize organizations and processes to control flow during deployment/wartime scenarios.
Control budgetary decisions affecting the U. S.
Transportation Command, the Defense Logistics Agency, and the distribution budgets of the services.
Comments from the Department of Defense
GAO Contact and Staff Acknowledgments
GAO Contact
Acknowledgments
In addition to the contacts named above, key contributors to this report were Thomas W. Gosling, Assistant Director, Susan C. Ditto, Amanda M. Leissoo, Marie A. Mak, and Janine M. Prybyla. | Why GAO Did This Study
Military operations in Iraq and Afghanistan have focused attention on the Department of Defense's (DOD) supply chain management. The supply chain can be critical to determining outcomes on the battlefield, and the investment of resources in DOD's supply chain is substantial. In 2005, with the encouragement of the Office of Management and Budget (OMB), DOD prepared an improvement plan to address some of the systemic weaknesses in supply chain management. GAO was asked to monitor implementation of the plan and DOD's progress toward improving supply chain management. GAO reviewed (1) the integration of supply chain management with broader defense business transformation and strategic logistics planning efforts; and (2) the extent DOD is able to demonstrate progress. In addition, GAO developed a baseline of prior supply chain management recommendations. GAO surveyed supply chain-related reports issued since October 2001, identified common themes, and determined the status of the recommendations.
What GAO Found
DOD's success in improving supply chain management is closely linked with its defense business transformation efforts and completion of a comprehensive, integrated logistics strategy. Based on GAO's prior reviews and recommendations, GAO has concluded that progress in DOD's overall approach to business defense transformation is needed to confront problems in other high-risk areas, including supply chain management. DOD has taken several actions intended to advance business transformation, including the establishment of new governance structures and the issuance of an Enterprise Transition Plan aligned with the department's business enterprise architecture. As a separate effort, DOD has been developing a strategy--called the "To Be" logistics roadmap--to guide logistics programs and initiatives across the department. The strategy would identify the scope of logistics problems and capability gaps to be addressed and include specific performance goals, programs, milestones, and metrics. However, DOD has not identified a target date for completion of this effort. According to DOD officials, its completion is pending the results of the department's ongoing test of new concepts for managing logistic capabilities. Without a comprehensive, integrated strategy, decision makers will lack the means to effectively guide logistics efforts, including supply chain management, and the ability to determine if these efforts are achieving desired results. DOD has taken a number of actions to improve supply chain management, but the department is unable to demonstrate at this time the full extent of its progress that may have resulted from its efforts. In addition to implementing audit recommendations, DOD is implementing initiatives in its supply chain management improvement plan. However, it is unclear how much progress its actions have resulted in because the plan generally lacks outcome-focused performance metrics that track progress in the three focus areas and at the initiative level. DOD's plan includes four high-level performance measures, but these measures do not explicitly relate to the focus areas, and they may be affected by many variables, such as disruptions in the distribution process, other than DOD's supply chain initiatives. Further, the plan does not include overall cost metrics that might show efficiencies gained through the efforts. Therefore, it is unclear whether DOD is meeting its stated goal of improving the provision of supplies to the warfighter and improving readiness of equipment while reducing or avoiding costs. Over the last 5 years, audit organizations have made more than 400 recommendations that focused specifically on improving certain aspects of DOD's supply chain management. About two-thirds of the recommendations had been closed at the time GAO conducted its review, and most of these were considered implemented. Of the total recommendations, 41 percent covered the focus areas in DOD's supply chain management improvement plan: requirements forecasting, asset visibility, and materiel distribution. The recommendations addressed five common themes--management oversight, performance tracking, planning, policy, and processes. |
gao_GGD-98-44 | gao_GGD-98-44_0 | Scope and Methodology
This report is based on our reviews of 24 major agencies’ strategic plans that were formally submitted to Congress and OMB by September 30, 1997. To do these reviews, we used the Results Act supplemented by OMB’s guidance on developing the plans (Circular A-11, part 2) as criteria to determine whether the plans contained the six elements required by the Act. As agreed, we focused our reviews on the progress of agencies’ strategic planning efforts, specifically their efforts to improve their strategic plans, with particular attention to the key planning challenges that are most in need of sustained attention. Agencies included in our analysis are listed in appendix I, and our observations on individual agencies are summarized in appendixes II through XXV. To gather information on how annual performance planning and measurement could be used to address the critical planning challenges we observed in our reviews of the September plans, we relied on our recent report on critical challenges needing sustained attention, our report on governmentwide implementation of the Results Act, our guidance for congressional review of Results Act implementation, and our guidance on effectively implementing the Act.
We reviewed individual agency plans from September 30, 1997, through November 1997. Our work was conducted in accordance with generally accepted government auditing standards. We provided a draft of this report for comment to the Director of OMB on January 5, 1998; a discussion of OMB’s comments appears at the end of this letter. In addition, we provided drafts of the appendices we prepared on individual agency plans to the relevant agencies for comment. The comments from those agencies are summarized in the relevant appendixes.
Background
The Results Act is the centerpiece of a statutory framework that Congress put in place during the 1990s to help resolve the long-standing management problems that have undermined the federal government’s effectiveness and efficiency and to provide greater accountability for results. In addition to the Results Act, the framework comprises the CFO Act and information technology reform legislation, including the Paperwork Reduction Act of 1995 and the Clinger-Cohen Act of 1996. Congress enacted the CFO Act to remedy decades of serious neglect in federal financial management by establishing chief financial officers across the federal government and requiring the preparation and audit of annual financial statements. The information technology reform legislation is based on the best practices used by leading public and private sector organizations to manage information technology more effectively.
Under the Results Act, strategic plans are the starting point and basic underpinning for performance-based management. In our report on agencies’ draft strategic plans, we noted that complete strategic plans were crucial if they were to serve as a basis for guiding agencies’ operations and be used to help congressional and other policymakers make decisions about activities and programs. The Act requires that an agency’s strategic plan contain six key elements. These elements are (1) a comprehensive agency mission statement; (2) agencywide long-term goals and objectives for all major functions and operations; (3) approaches (or strategies) and the various resources needed to achieve the goals and objectives; (4) a description of the relationship between the long-term goals and objectives and the annual performance goals; (5) an identification of key factors, external to the agency and beyond its control, that could significantly affect the achievement of the strategic goals; and (6) a description of how program evaluations were used to establish or revise strategic goals and a schedule for future program evaluations.
Building on the decisions made as part of the strategic planning process, the Results Act requires executive agencies to develop annual performance plans covering each program activity set forth in the agencies’ budgets. The first annual performance plans, covering fiscal year 1999, are to be submitted to Congress after the President’s budget is submitted, which is approximately February 1998. Each plan is to contain an agency’s annual performance goals and associated measures, which the agency is to use in order to gauge its progress toward accomplishing its strategic goals. OMB is to use the agencies’ performance plans to develop an overall federal government performance plan that is to be submitted with the President’s budget. The performance plan for the federal government is to present to Congress a single cohesive picture of the federal government’s annual performance goals for a given fiscal year.
September Plans Included Required Elements and Addressed Many Weaknesses in Draft Plans
Agencies’ September plans appear to provide a workable foundation for the continuing implementation of the Results Act. These plans represent a significant improvement over the draft plans we reviewed last summer.In those reviews, we found that all but six of the draft strategic plans were missing at least one required element, and about a third were missing two of the six required elements. In addition, just over a fourth of those plans failed to cover at least three of the required elements. Moreover, we found that many of the elements included in the plans contained weaknesses—some that were more significant than others.
The agencies, on the whole, made a concerted effort during August and September to improve their plans. For example, all of the September plans we reviewed contained at least some discussion of each element required by the Act. And, in many cases, those elements that contained weaknesses were substantially improved by September. For example:
The Department of Transportation explained more clearly how its mission statement is linked to its authorizing legislation.
The Small Business Administration (SBA) improved its ability to assess progress toward its strategic goals by stating when specific performance objectives would be met.
The Nuclear Regulatory Commission (NRC) better explained the scope of its crosscutting functions by identifying major crosscutting functions and interagency programs and its coordination with those agencies.
The Department of Education improved its discussion of external factors that could affect its achievement of strategic goals by describing agency actions to mitigate against those factors.
Appendixes II through XXV contain our observations on the progress and remaining challenges of individual agencies’ strategic planning efforts.
Critical Planning Challenges Remain to Be Addressed as Efforts Under the Results Act Proceed
Although the September plans appear to provide a workable foundation for the continuing implementation of the Results Act, we found that critical planning challenges remain. Among the remaining critical challenges are (1) clearly establishing a strategic direction for agencies by improving goal-setting and measurement; (2) improving the management of crosscutting program efforts by ensuring that those programs are appropriately coordinated to avoid duplication, fragmentation, and overlap; and (3) ensuring that agencies have the data systems and analytic capacity in place to better assess program performance and costs, improve management and performance, and establish accountability. The forthcoming annual performance planning and measurement processes offer agencies an opportunity to make progress in addressing these challenges.
Agencies Can Use the Annual Performance Planning Process to Build Upon Their Initial Efforts to Establish a Strategic Direction
By improving on their draft strategic plans, agencies’ September plans undertook the first steps toward setting a strategic direction for their programs and activities. However, we found that the September plans often lacked clear articulation of the agency’s strategic direction: (1) strategic goals and objectives were not as measurable and results oriented as possible, (2) linkages among planning elements were not clear, and (3) strategies for achieving those goals and objectives were incomplete or underdeveloped. However, the performance planning and measurement phase of the Results Act offers agencies an opportunity to continue to refine their strategic directions.
In our reviews of agencies’ September plans, we found that some agencies have begun to address the challenge of setting a strategic direction. For example:
The most notable improvement in the plan for the Department of Health and Human Services (HHS) is the inclusion of an outline of strategic objectives for accomplishing the Department’s six strategic goals. Those objectives are largely focused on outcomes and are defined in measurable terms. This plan also identifies for each strategic objective the key measures of progress. For example, one measure of progress for the outcome-oriented objective of “reducing the use of illicit drugs” is “death rate of persons aged 15 to 65 attributed to drug use.”
The September plans of the Departments of Agriculture, Education, and the Treasury now include helpful matrixes to link various planning elements, such as goals, objectives, measures, and programs or responsible organizational components. These matrixes are also useful in assessing a plan’s underlying logic, determining programmatic accountability, and identifying crosscutting programs and potential duplication and overlap among program efforts. For example, Treasury’s September plan contained an appendix that identified which bureau or office is responsible for achieving its Department-wide goals and objectives.
The September plan for the Department of Energy (DOE) better explains how it plans to accomplish many of its goals. The plan provides greater specificity on the money, staff, workforce skills, and facilities that the agency plans to employ to meet its goals. For example, to support its national security goal, DOE’s plan says it will need to change the skills of its workforce and how it constructs new experimental test facilities.
Although improvements were not isolated to these agencies, we also found that agencies need to further clarify their strategic directions if the Results Act is to be effective in guiding the agencies and informing congressional and other decisionmakers. The goals and objectives of many agencies could be more results oriented and expressed in a manner that will better allow for a subsequent assessment of whether the goals and objectives have been achieved. For example, the plan for the Department of Veterans Affairs (VA) contains the following objectives supporting the goal for its compensation and pension area: “(1) evaluate compensation and pension programs and (2) modify these programs, as appropriate.” Also, although the first goal in the Social Security Administration’s (SSA) September plan “o promote valued, strong, and responsive social security programs and conduct effective policy development, research, and program evaluation” sets a strategic direction for the agency, it could be stated in more measurable terms to better enable the agency to make a future assessment of whether it is being achieved.
Another challenging area for agencies in setting strategic direction in the September plans was to establish linkages among planning elements, such as goals, objectives, and strategies. For example, Treasury’s plan says that the Internal Revenue Service (IRS) has a role in three law enforcement objectives—to reduce counterfeiting, money laundering, and drug smuggling. However, the IRS plan contained no specific strategy to help achieve any of those objectives. In another example, the September plan for the Federal Emergency Management Agency (FEMA) included lists of objectives and strategies under each goal with no explanation of how the strategies would contribute to achievement of the objectives.
Another weakness of agencies’ September plans was incomplete and underdeveloped strategies for achieving long-term strategic goals and objectives. More specifically, we found that agencies did not always provide an adequate discussion of the resources needed to achieve goals. For example, SBA’s September plan did not contain any discussion on the resources, such as human resources and information technology, needed to achieve its goals. Although other plans we reviewed discussed resources, the discussions were incomplete. For example, few plans discussed the physical capital resources, such as facilities and equipment, needed to achieve their goals. Although many agencies may not rely heavily on physical capital resources, even the plans of some of those that do, such as the General Services Administration and the National Park Service, a component of the Department of the Interior, did not provide a focused discussion of their capital needs and usage.
The role that information technology played, or can play, in achieving agencies’ long-term strategic goals and objectives was generally neglected in the September plans. The government’s track record in employing information technology is poor, and the strategic plans we reviewed often contained only limited discussions of technology issues. For example, most of the Department of Defense’s (DOD) strategic goals are fundamentally linked to information technology. However, we have placed DOD’s management of critical information management processes on our high-risk list. We believe DOD’s strategic plan would be significantly enhanced if it more explicitly linked its strategic goals to a strategy for improving management and oversight of information technology resources. Additionally, DOD should recognize the dramatic impact the Year 2000 problem will likely have on its computer operations, including the mission-critical applications identified in its strategic plan.
The Department of State’s September plan also does not specifically address the serious deficiencies in State’s information and financial accounting systems. Rather, the plan notes, in more general terms, that it will take State several years to develop performance measures and related databases in order to provide sufficient information on achievement of its long-term goals. The lack of such a discussion in many of the plans is of particular concern because, without it, agencies cannot be certain that they are (1) addressing the federal government’s information technology problems and (2) better ensuring that technology acquisition and use are targeted squarely on program results.
Annual Performance Planning and Measurement Offers Agencies Opportunity to Better Clarify a Strategic Direction
Strategic planning—setting a strategic direction for agency operations—did not end with the submission of a strategic plan to Congress last September. Performance-based management, as envisioned by the Results Act, is not a linear, sequential process but, rather, an iterative one in which strategic and performance planning cycles will result in subsequent revisions to both strategic and annual performance plans. Each cycle of strategic planning and performance planning, particularly in the first few years of governmentwide implementation of the Results Act, will likely result in agencies making significant changes and improvements in those documents.
Consequently, agencies can continue to address the critical planning challenges associated with setting a strategic direction as they develop their first annual performance plans. For example, the process of defining targeted levels of performance within set time frames and providing baselines against which to compare actual performance will likely produce opportunities for agencies to revisit and improve upon their strategic goals and objectives so that those goals are as results oriented and measurable as they can be.
If successfully developed, those annual performance goals can function as a bridge between long-term strategic planning and day-to-day operations, thereby assisting agencies in establishing better linkages among planning elements. For example, agencies can use performance goals to show clear and direct relationships in two directions—to the goals in the strategic plans and to operations and activities within the agency. By establishing those relationships, agencies can (1) provide straightforward roadmaps that show managers and staff how their daily activities can contribute to attaining agencywide strategic goals, (2) hold managers and staff accountable for contributing to the achievement of those goals, and (3) provide decisionmakers with information on their annual progress in meeting the goals. As agencies gain experience in developing these annual performance goals, they likely will become better at identifying and correcting misalignment among strategic goals, objectives, and strategies within their plans.
The importance of clearly showing how strategies are linked to goals is underscored by the Results Act requirement that annual goals are to be based on budgetary program activities. Unlike previous federal reform initiatives, the Results Act requires agencies to plan and measure performance using the same program activity structures that form the basis for their budget requests. However, we have found that the relationships among the budget structures, performance plans, and strategic plans will require coordinated and recurring attention by Congress, OMB, and agencies as they move to implement the annual performance planning and measurement phase of the Act. This attention is important because the wide variability of the budget structures indicates that the suitability of those structures for the Results Act’s performance planning and measurement will also vary.
For example, we reported in 1997 that agency officials we spoke with confirmed the varying suitability of their program activity structures for the Results Act’s purposes. One agency successfully worked through its recent performance-planning process using its existing program activities. A second agency had a program activity structure that reflected its organizational units—a structure that is useful for traditional accountability purposes, such as monitoring outputs and staff levels—but less useful for results-oriented planning. Still other agencies separated performance planning from program activity structures, believing it necessary to first establish appropriate program goals, objectives, and measures before considering the link to the budget. These agencies planned to rely on the Results Act’s provision to aggregate, disaggregate, or consolidate program activities in constructing their annual performance plans.
In addition, annual performance planning can be used to better define strategies for achieving strategic and annual performance goals. For example, annual performance plans provide agencies with another opportunity to further discuss strategies for information technology investments and the operational improvements expected from those investments. The annual performance plans should also provide annual performance measures that Congress and other decisionmakers can use to determine if those investments are achieving the expected improvements. Thus, annual performance planning and measurement can provide decisionmakers with an early warning of information investment strategies that need to be revisited.
Agencies and Congress Can Use Performance Planning to Address Crosscutting Program Efforts
A focus on results, as envisioned by the Results Act, implies that federal programs that contribute to the same or similar results should be closely coordinated to ensure that goals are consistent and, as appropriate, program efforts are mutually reinforcing. We have found that uncoordinated program efforts can waste scarce funds, confuse and frustrate program customers, and limit the overall effectiveness of the federal effort. This suggests that federal agencies are to look beyond their organizational boundaries and coordinate with other agencies to ensure that their efforts are aligned and complementary.
Agencies’ September plans show progress in this area, but coordination of crosscutting programs continues to be a strategic planning challenge. During the summer of 1996, in reviewing early strategic planning efforts, OMB alerted agencies that augmented interagency coordination was needed at that time to ensure consistency among goals in crosscutting programs areas. However, the draft strategic plans we reviewed during the summer of 1997 often lacked evidence that agencies in crosscutting program areas had worked with other agencies to ensure that goals were consistent; strategies were coordinated; and, as appropriate, performance measures were similar.
Agencies’ September plans better described crosscutting programs and coordination efforts. Some plans, for example, contained references to other agencies that shared responsibilities in a crosscutting program area or discussed the need to coordinate their programs with other agencies. For example, as noted earlier, NRC better explained its crosscutting functions in its September plan. In addition, the Environmental Protection Agency’s (EPA) plan contains an appendix that lists the federal agencies with which EPA coordinated. This appendix describes the major steps in the coordination process and lists by strategic goal the agencies with which EPA believes greater integration and review of efforts will be needed. Similarly, the plan for the Department of Transportation contains a table that shows the contributions of other federal agencies to each of its major mission areas. NRC’s, EPA’s and Transportation’s plans illustrate the kind of presentation that could be especially helpful to Congress and the administration in identifying program areas to monitor for overlap and duplication.
These presentations, and similar ones in other agencies’ September plans that identify agencies with crosscutting programs, also provide a foundation for the much more difficult work that lies ahead—undertaking the substantive coordination that is needed to ensure that those programs are effectively managed. For example, in an improvement over its draft plan, the Department of Labor’s September plan refers to a few other agencies with responsibilities in the area of job training programs and notes that Labor plans to work with them. However, the plan contains no discussion of what specific coordination mechanism Labor will use to realize efficiencies and possible strategies to consolidate job training programs to achieve a more effective job training system.
Our work has shown that the next phases of the Results Act’s implementation will offer a structured framework to address crosscutting issues. For example, the Act’s emphasis on results-based performance measures as part of the annual performance planning process should lead to more explicit discussions concerning the contributions and accomplishments of crosscutting programs and encourage related programs to develop common performance measures. As agencies work with OMB to develop their annual performance plans, they can consider the extent to which agency goals are complementary and the need for common performance measures to allow for cross-agency evaluations. Also, the Results Act’s requirement that OMB prepare a governmentwide performance plan that is based on the agencies’ annual performance plans can be used to facilitate the identification of program overlap, duplication, and fragmentation.
Our work also indicates that if agencies and OMB use the annual planning process to highlight crosscutting program efforts and provide evidence of joint planning and coordination of those efforts, the individual agency performance plans and the governmentwide performance plan should help provide Congress with the information needed to identify agencies and programs addressing similar missions. Once these programs are identified, Congress can consider the associated policy, management, and performance implications of crosscutting program efforts and whether individual programs make a sufficiently distinguishable contribution to a crosscutting national issue. This information should also help identify the performance and cost consequences of program fragmentation and the implications of alternative policy and service delivery options. These options, in turn, can lead to decisions concerning department and agency missions and the allocation of resources among those missions.
Performance Planning Can Assist Agencies in Building the Capacity to Gather, Process, and Analyze Performance and Program Cost Information
Our previous work has shown that agencies need to have reliable data during their planning efforts to set realistic goals and later, as programs are being implemented, to gauge their progress toward achieving those goals. In addition, in combination with an agency’s performance measurement system, a strong program evaluation capacity is needed to provide feedback on how well an agency’s activities and programs contributed to achieving its goals and to identify ways to improve performance. However, our work has also found serious shortcomings in agencies’ ability to generate reliable and timely data to measure their progress in achieving goals and to provide the analytic capacity to use that data. The Results Act’s requirement that annual performance plans discuss the verification and validation of data provides agencies with an opportunity to be forthcoming about data limitations and to show how those limitations will be addressed. Verified and validated performance information, in conjunction with augmented program evaluation efforts, will help ensure that agencies are able to report progress in meeting goals and identify specific strategies to improve performance.
The absence of both sound program performance and cost data and the capacity to use those data to improve performance is a critical challenge that agencies must confront if they are to effectively implement the Results Act. Efforts under the CFO Act have shown that most agencies are still years away from generating reliable, useful, relevant, and timely financial information, which is urgently needed to make our government fiscally responsible. The widespread lack of available program performance information is equally troubling. For example, in our June report on a survey of managers in the largest federal agencies, we found that fewer than one-third of those managers said that results-oriented performance measures existed to a great or very great extent for their programs.
Our work also suggests that even when performance information exists, its reliability is frequently questionable. For example, our work has shown that the reliability of performance data currently available to a number of agencies is suspect, because the agencies must rely on data collected by parties outside the federal government. In a recent report, we noted that the fact that data were largely collected by others was the most frequent explanation offered by agency officials for why determining the accuracy and quality of performance data was a challenge. In our June 1997 report on the implementation of the Results Act, we also reported on the difficulties that agencies were experiencing as a result of their reliance on outside parties for performance information.
Agencies are required under the Results Act to describe in their annual performance plans how they will verify and validate the performance information that will be collected. This section of the performance plan can provide important contextual information for Congress and agencies to address the weaknesses in this area. For example, this section can provide an agency with the opportunity to alert Congress to the problems the agency has had or anticipates having in collecting needed results-oriented performance information. Agencies can also use this section to alert Congress to the cost and data quality trade-offs associated with various collection strategies, such as relying on sources outside the agency to provide performance data and the degree to which those data are expected to be reliable. The discussion in this section can also provide Congress with a mechanism for examining whether the agency currently has the data to confidently set performance improvement targets and will later have the ability to report on its performance.
More broadly, continuing efforts to implement the CFO Act also are central for ensuring that agencies resolve their long-standing problems in generating vital information for decisionmakers. In that regard, the Federal Accounting Standards Advisory Board (FASAB) has developed a new set of accounting concepts and standards that underpin OMB’s guidance to agencies on the form and content of their agencywide financial statements. As part of that effort, FASAB developed managerial cost accounting standards that were to be effective for fiscal year 1997. These standards are to provide decisionmakers with information on the costs of all resources used and the costs of services provided by others to support activities or programs. Such information would allow for comparisons of costs across various levels of program performance.
However, because of serious agency shortfalls in cost accounting systems, the Chief Financial Officers Council—an interagency council of the CFOs of the major agencies—requested an additional 2 years before the standard would be effective. FASAB recommended extending the date by 1 year, to fiscal year 1998, with a clear expectation that there would be no further delays.
Under the Results Act, another aspect of performance planning is a requirement for agencies to discuss the use and planned use of program evaluations that can provide feedback on how well an agency’s activities and programs contributed to the achievement of its goals and to assess the reasonableness and appropriateness of those goals. However, our recent report on agencies’ draft plans stated that 16 of the 27 draft plans did not discuss program evaluations. Although all the September plans included discussions of program evaluations, we continued to find weaknesses in those discussions. However, this is not surprising because agencies that had not undertaken program evaluations prior to the preparation of the first cycle of strategic plans would not likely be able to discuss in their September plans how they used program evaluations to help develop the plans.
Of greater concern, many agencies, including the Departments of Health and Human Services, Justice, and Labor, also did not discuss how they planned to use evaluations in the future to assess progress or did not offer a schedule for future evaluation as required by the Results Act. In contrast, the National Science Foundation’s September plan contains a noteworthy exception to this trend. The plan discusses how the agency used evaluations to develop key investment strategies, action plans, and its annual performance plan. It also discusses plans for future evaluations and provides a general schedule for their implementation.
Over the longer term, the program performance information that agencies are to generate under the Results Act should be a valuable new resource for Congress to use in its program authorization, oversight, budget, and appropriation responsibilities. As we have noted before, to be most useful in these various contexts, that information needs to be consolidated with budget data and critical financial and program cost data, which agencies are to produce and have audited under the CFO Act. This consolidated program performance, cost, and budget information, in conjunction with the annual performance plans, should provide congressional and other decisionmakers with a more complete picture of the results, operational effectiveness, and costs of agencies’ operations.
Conclusion
Agencies, on the whole, made significant progress in improving their plans during August and September 1997. The strategic plans they formally submitted to Congress and OMB in September 1997 appear to provide a workable foundation for the continuing implementation of the Results Act. Nonetheless, the critical planning challenges that we found demonstrate that the effective implementation of performance-based management and accountability, as envisioned by the Results Act, is still, as to be expected, very much a work in progress.
Since performance-based management is not a linear, sequential process but, rather, an iterative one, each subsequent strategic and performance planning cycle can, and likely will, result in revisions to preceding planning documents. Therefore, Congress, OMB, and agencies’ senior managers can use the next stage of performance-based management —performance planning and measurement—to ensure that agencies continue to address the critical planning challenges as well as maintain momentum on the implementation of the Results Act.
Agency Comments and Our Evaluation
On January 5, 1998, we provided a draft of this report to the Director of OMB for comment. We provided drafts of the appendixes we prepared on individual agency plans to the relevant agencies for comment, and the comments from those agencies are summarized in the relevant appendixes.
On January 13, 1998, a senior OMB official provided us with OMB’s comments on this report. He generally agreed with our observations and said that the report was a useful compilation of our work on agencies’ September strategic plans. The official also said that this report underscores that the implementation of the Results Act will be an ongoing, iterative process in which agencies will learn from their initial experiences in developing strategic plans and can then apply those lessons learned as they continue to develop strategic planning processes. In addition, the official provided technical comments that were incorporated in this report.
As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Minority Leader of the House; the Ranking Minority Members of your Committees; other appropriate congressional committees; and the Director, Office of Management and Budget. We will also make copies available to others on request.
If you have any questions concerning this report, please contact me on (202) 512-8676.
Agencies Covered by This Review
Observations on the Department of Agriculture’s Strategic Plan
On July 10, 1997, we issued a report on the U.S. Department of Agriculture’s (USDA) May draft strategic plan (Results Act: Observations on USDA’s Draft Strategic Plan, GAO/RCED-97-196R). USDA’s publicly issued strategic plan was submitted to the President and Congress on September 30, 1997. As requested, we have reviewed USDA’s September strategic plan and compared the results of our assessment with our observations on the draft plan, as reported in July. On October 17, 1997, we briefed your staffs on our assessment of the September strategic plan. The key points from that briefing are summarized herein.
Summary of Key Observations From Our July Report on USDA’s Draft Strategic Plan
USDA’s May 1997 draft strategic plan included a Department-wide strategic overview as well as 30 plans for the mission areas, agencies, and staff offices that make up the Department. We reviewed the overview and the 16 agency plans that are directly related to accomplishing USDA’s mission and implementing its programs. We also reviewed the plans for the offices of the Chief Financial Officer and the Chief Information Officer.
We observed that the May draft strategic plan did not fulfill the requirements of the Results Act. USDA’s overall mission and goals were contained in the Department-wide strategic overview; the overview then referred the reader to the agencies’ plans for information on the six required elements. However, only one of the agencies’ plans we reviewed contained all six required elements. The draft strategic plan also fell short in several other areas necessary for achieving the purposes of the Results Act. Among other things, the draft strategic plan lacked an emphasis on externally focused goals and objectives, adequate quantifiable performance measures, and good linkages between the agencies’ goals and the Department’s goals.
We also reported that we could not determine the extent to which coordination with other federal agencies, both within and outside the Department, occurred in the formulation of the draft strategic plan. It was also unclear whether agencies’ goals and objectives had been assessed for duplication and complementary functions. USDA’s Department-wide strategic overview acknowledged the role of USDA agencies that carry out similar and/or complementary functions but did not recognize the role of other federal agencies. Many of the agencies’ plans generically recognized the roles of other federal agencies in accomplishing their missions. However, there was little evidence in either the Department-wide strategic overview or the agencies’ plans to suggest that the agencies coordinated with other agencies—internally or externally—when developing their goals and objectives.
USDA’s draft plan addressed some, but not all, of the high-risk issues and management problems we had previously identified. Generally, information on how USDA planned to address these high-risk issues and management problems, such as the need to reduce losses in the farm loan program, was included as goals and objectives in the agencies’ plans. However, USDA’s draft plan did not address some management issues, such as the need to reform milk marketing orders, improve the management of agricultural trade programs, and strengthen financial controls under credit reform. In addition, we have identified significant, long-standing Department-wide problems in information technology, accounting, and financial management. However, USDA’s draft strategic plan did not adequately recognize and address these problems. For example, the plan for the Office of the Chief Information Officer lacked time frames and milestones and the resources needed to accomplish the stated goals. We also noted that it lacked an explanation of how the goals were specifically linked to the agencies’ plans.
Improvements Made in USDA’s September Strategic Plan
USDA made significant improvements in its September strategic plan. This plan incorporates many changes that make it more responsive to the requirements of the Results Act. The strategic plan complies with the six elements required by the Results Act and includes many of the key attributes necessary for a quality plan. It also includes information on some management challenges that we identified in the past.
While all 16 agencies’ plans contain the six required elements, the clarity of information presented varies across the plans. For example:
Most of the agencies’ plans have comprehensive and concise mission statements. However, the mission statements for two agencies’ plans—concerning the Agricultural Marketing Service and Rural Development—are stated so broadly that it is difficult to determine what the basic purpose of the agency is or how it differs from that of other agencies. For example, it is unclear how the mission of the Agricultural Marketing Service differs from the missions of the Grain Inspection, Packers and Stockyards Administration and the Foreign Agricultural Service.
Most of the agencies’ plans have results-oriented goals and objectives.
However, some plans—those of the Farm Service Agency, Food and Consumer Service, Animal and Plant Health Inspection Service, and the Forest Service—have too many goals and objectives structured around existing programs and activities rather than the ultimate results that these agencies should achieve. For example, the Farm Service Agency’s plan has four goals that we believe could be combined under two that would fulfill the agency’s mission—(1) improving the economic viability of the agriculture sector and (2) protecting the environment.
All of the agencies’ plans provide more detailed strategies and improved information on the resources needed for achieving goals and objectives, compared with the information provided in the May draft plan.
All of the agencies’ plans provide a detailed discussion of the external factors beyond the control of the agency that could affect the achievement of the goals. However, the linkages between external factors and their impact on specific goals could be improved in some plans, such as the plans for the four research agencies.
Unlike the May draft, in which only 1 of the 16 agencies’ plans included information on the relationship between annual performance goals and strategic goals, all of the agencies’ September plans include this information. However, the quality of the descriptions provided in this section of the agencies’ plans varies by agency. For example, some plans, such as those for the Food and Consumer Service, Farm Service Agency, Food Safety and Inspection Service, and Center for Nutrition Policy and Programs, easily allow the reader to envision how the annual performance goals relate to the strategic goals; other agencies’ plans, such as those for the Economic Research Service and the Risk Management Agency, are less clear.
Most of the agencies’ plans provide greater detail than they did in the May draft on how program evaluations were used to develop the strategic plan and how they will be used in the future. However, two plans—those for the Food Safety and Inspection Service and the Agricultural Research Service—state that program evaluations were not used to develop the strategic plan, although information on program evaluations planned for the future is included; and the plan for the Agricultural Marketing Service states that program evaluations were not used to develop the plan and are not planned for the future. While these agencies state that they did not use formal program evaluations when developing their plans, the information provided in the plans indicates that the results of relevant studies and assessments were actually used to help develop the plans—which in our opinion meets the requirements of the Results Act. Consequently, we believe that these agencies may be using too narrow a definition for the term “program evaluation.” According to an August 7, 1997, letter, sent by the House Majority Leader to the Director, OMB, program evaluations should include all significant evaluations relevant to the development and future assessment of an agency’s plan. The letter suggested that this definition include reviews by the Inspector General, GAO, and others that deal with program implementation and operating policies and practices.
Moreover, we found that many of the key attributes necessary for a quality plan, which were missing in the May draft plan, have been included in the September strategic plan. These include clear linkages between the agencies’ goals and their statutory authorities as well as the Department-wide goals; a better focus on external goals rather than internal processes (the result of a separation of strategic goals from management initiatives); and a more complete discussion of relevant performance measures, although some agencies are still developing baseline information and targets. For targets included in the plans, it is sometimes unclear whether they are annual or 5-year targets.
Some of the management challenges facing USDA that we raised in the past have been included in the September plan. For example, reform of the milk marketing orders is included in the Agricultural Marketing Service’s plan as an objective. Similarly, USDA revised its strategic plan to address certain accounting and financial management issues that the draft plan did not adequately address. For example, the strategic plan reflects USDA’s efforts to strengthen controls for establishing and reestimating loan subsidy costs, as required under credit reform. Also, the strategic plan recognizes that additional staff and resources may be needed to ensure that USDA can accomplish the goals set out in the plan for the Office of the Chief Financial Officer.
USDA’s Strategic Plan Can Be Improved Further
In addition to the suggestions that we have made herein to improve the clarity of some agencies’ plans, some more significant aspects of the strategic plan could be further improved. These improvements include (1) explaining interagency coordination for crosscutting issues and (2) addressing previously identified management problems.
USDA’s September strategic plan provides more detailed information about other agencies—both internal and external to the Department—that share responsibilities for achieving the stated goals and objectives. The Department-wide strategic overview now includes links to agencies outside of the Department that are important partners to USDA agencies. In addition, the agencies’ plans not only identify the agencies that they coordinate and consult with, in some cases they also identify the specific roles of these other agencies. However, we still could not determine from the information provided in most of the agencies’ plans whether consultations actually took place with these agencies to resolve crosscutting issues. Moreover, we could not determine whether an assessment of duplicative or complementary programs and activities was performed when the agencies were developing their goals and objectives. In addition, we found that while many agencies’ plans explain that stakeholders were consulted during the plan’s development, they usually do not clearly identify the stakeholders. Although this information is not required to be included in the strategic plan by the Results Act, we believe that including information in the agencies’ plans that clearly identifies all stakeholders would be helpful.
In addition, the September plan still does not include two management issues that we identified in the past. In particular, the Foreign Agricultural Service’s plan still does not address the numerous problems we have identified in agricultural trade programs. Furthermore, there is little evidence to suggest that substantial progress has been made in addressing our concerns about information technology. Although USDA has added time frames for completing the 14 objectives appearing in its Office of Chief Information Officer’s plan, each time frame has a completion date “through FY 2002.” We are concerned about the absence of earlier time frames, or at least interim ones, for resolving major Department-wide information technology problems, such as the Year 2000 issue. By establishing such time frames, it is not clear what priority USDA is really placing on solving its information technology problems or whether the Department has adequate strategies for doing so. In addition, although the Office of Chief Information Officer’s plan includes a number of goals and objectives to better manage its $1 billion in annual investments for information technology, we remain concerned about the lack of information in the plan on the resources needed to accomplish these goals and objectives and how they link to the agencies’ plans.
Agency Comments
We provided a draft of our observations on USDA’s strategic plan for the Department’s review and comment. We met with USDA’s Acting Chief Financial Officer and the Director, Planning and Accountability Division, Office of Chief Financial Officer, who told us that they were pleased that we had recognized the significant improvements made to the strategic plan and that the additional comments made by us would help them as they continue to refine and enhance the plan. In addition, USDA made the following observations:
USDA disagreed with our statement that program evaluations were not used to develop the Animal and Plant Health Inspection Service’s plan. While we agree that this plan recognizes the importance of using program evaluations to set performance goals, it does not clearly identify how the results of program evaluations were used to develop the strategic plan. Consequently, we have deleted this statement from our report to reflect the agency’s comment, but we would suggest that the Animal and Plant Health Inspection Service add language to clarify how program evaluations were used to develop its plan.
USDA noted that while there is no duplication of services between the Agricultural Marketing Service and the Grain Inspection, Packers and Stockyards Administration and the Foreign Agricultural Service, the mission statement of the Agricultural Marketing Service would be clarified, in future versions of the plan, to distinguish it from the mission statements of the other two agencies. In connection with our observation about the Food and Consumer Service’s plan having too many goals that were structured around current programs rather than results, USDA told us that the Food and Consumer Service had considered structuring its plan around a smaller number of generic goals. However, the agency chose to establish six goals corresponding to its existing programs because it believed that a plan structured in this manner would be more meaningful to all interested parties, including external partners and program participants. While we agree that setting up goals around familiar programs and activities may make the plan easier to understand, this approach may ultimately defeat the purpose of the Results Act—which is to require agencies to focus on outcomes by reevaluating what they do and why they do it. Therefore, we would suggest that the Food and Consumer Service consider restructuring the goals in its plan around broader outcomes rather than current programs.
USDA disagreed with our statement that the Foreign Agricultural Service plan still does not address the numerous problems that we have identified in the past relating to agricultural trade programs. For example, USDA believes that the Foreign Agricultural Service has addressed the concerns outlined in our report entitled U.S. Department of Agriculture: Foreign Agricultural Service Could Benefit From Better Strategic Planning (GAO/GGD-95-225, Sept. 28, 1995) by including information on agency resource allocation, overseas priorities, and trade opportunities under the management initiatives section of the plan. According to USDA, other issues raised by us, such as streamlining the agency’s foreign service, will be addressed in the annual performance plan. Although we agree that some issues that we have raised in the past can be appropriately addressed by including them in the annual performance plan, others cannot. Over the past decade, we have issued a series of reports that raise serious concerns about the fundamental operations of the Foreign Agricultural Service’s export programs, such as the Foreign Market Development Program, Market Access Program, P.L. 480 Program, and Export Credit Guarantee Program. We believe that solutions to these problems will require long-term planning that has not been adequately addressed in the strategic plan.
Finally, USDA stated that it did not believe that the Office of Chief Information Officer’s strategic plan had to be the medium to address specific solutions to the individual agencies’ issues identified in previous audits. Our observations on the Office of Chief Information Officer’s plan, however, did not discuss the need for specific solutions; rather, we noted that the plan lacked sufficient information on time frames, resources, and how the goals and objectives were linked to other USDA agencies’ plans. We believe that such information is essential to clearly identify what priority USDA is placing on solving its information technology problems and determining whether the Department has adequate strategies for addressing these issues. This is especially important given the Secretary of Agriculture’s May 1997 direction to subcabinet officials that fixing USDA’s long-standing, pervasive information technology management problems must be a top priority. USDA also disagreed with our statement that there is a perceived lack of attention on the Year 2000 issue. While we recognize that the plan discusses the Year 2000 issue, we are concerned about the stated time frames for completion for this objective. By stating a “through FY 2002” completion time frame for the Year 2000 problem, we believe that the plan does not present an adequate strategy for resolving one of USDA’s most pressing information technology management problems and one that must be solved within the next 2 years.
Issue Area Contact
Robert A. Robinson, Director, Food and Agriculture Issues; Resources, Community, and Economic Development Division, (202) 512-5138.
Observations on the Department of Commerce’s Strategic Plan
On July 14, 1997, we issued a report on the Department of Commerce’s draft strategic plan (The Results Act: Observations on Commerce’s June 1997 Draft Strategic Plan, GAO/GGD-97-152R). Commerce’s formally issued strategic plan was submitted to OMB and Congress on September 30, 1997. As requested, we reviewed Commerce’s revised strategic plan, compared it with the earlier draft version that we reported on in July, and identified significant changes or improvements that Commerce made in the areas covered by our July report and areas or required plan elements where additional improvements still could be made as the plan evolves. We briefed your staffs on our findings on October 17, 1997. Our findings are summarized herein.
Summary of Key Observations From Our July Report
Commerce’s draft strategic plan was inadequate and incomplete in several respects. Of the six elements required by the Results Act, four were included in the draft plan—a mission statement, goals and objectives, strategies for achieving goals and objectives, and a discussion of key external factors—but each of these had weaknesses, some more significant than others. For example, the mission statement included the core functions of the Department and mentioned the role of businesses and universities but not the important role also played by other government entities. While there were useful linkages among themes, goals, objectives, and responsible components, the goals and objectives were not as results oriented as they could be. The draft plan identified the Commerce bureau responsible for each goal and objective but did not adequately discuss strategies for achieving those goals and objectives or include required information describing the operational processes, staff skills, and technologies, as well as the human, capital, information, and other resources needed to achieve them. Many but not all key external factors were discussed, but the factors that were identified appeared to be used to justify programs rather than to show how those factors could affect the achievement of goals.
Commerce’s draft strategic plan did not explicitly discuss the other two elements required by the Results Act—the relationship between long-term goals and objectives and annual performance goals and the description of program evaluations used to establish general goals and objectives and a schedule for future program evaluations. The draft plan said that relating long-term goals and objectives to annual performance goals will more appropriately be done in the Department’s future annual budget requests. The draft plan made limited references in various sections to a few past studies of Commerce programs, but those references did not describe how the studies were used to establish general goals and objectives, and the draft plan did not provide a schedule for future program evaluations. Concerning other plan components, the draft plan provided much useful information on Commerce’s statutory authorities. However, the draft plan could have been more useful to Commerce, Congress, and other stakeholders if it had provided a more explicit discussion of crosscutting activities, the major management challenges the Department faces, and the Department’s ability to provide reliable financial and other management and program information to measure achievement of its goals.
Improvements Made in Commerce’s Strategic Plan
Commerce’s publicly issued strategic plan incorporated improvements in several areas and now addresses, to some extent, all of the elements required by the Results Act. The improvements that the Department made are steps in the right direction and address some but not all of the weaknesses discussed in our July 1997 report on an earlier draft of the plan. The plan’s discussions of strategic goals have been expanded to briefly indicate Commerce’s strategy for achieving each goal. For example, under the theme of keeping America competitive with cutting-edge science and technology, the National Oceanic and Atmospheric Administration (NOAA) has a goal to “predict and assess decadal to centennial change.” The plan now describes how NOAA will approach this goal by addressing questions dealing with air quality, ozone depletion, greenhouse warming, and climate change.
Also, the plan now more explicitly acknowledges the need to link strategic goals and objectives to annual performance goals and includes an illustrative performance measure for each of the objectives under the three strategic themes. For example, the illustrative performance measure for two of the Patent and Trademark Office’s (PTO) objectives is “reduced pendency time.” This illustrative performance measure is one of several that addresses PTO’s goal of granting exclusive rights for limited times to inventors for their discoveries. Similarly, the plan’s three strategic theme chapters now more strongly emphasize the importance of external factors that could affect achievement of Commerce’s strategic goals and identify more key external factors. Under the economic infrastructure strategic theme, for example, the plan now includes a reference to the International Trade Administration’s (ITA) strategy to identify obstacles to U.S. exports and plans for removing such obstacles and marshaling U.S. government resources to eliminate barriers.
Commerce’s revised strategic plan includes new sections on program evaluations, interagency linkages, and major management challenges. The new section on the role of program evaluations discusses current evaluations as well as future evaluation plans, provides examples, highlights the difficulties in specifying the level and focus of future evaluations because of year-to-year competition for funds, and states that future evaluations for many Commerce bureaus will be included in annual performance plans and budgets. The new section on interagency linkages acknowledges the importance of close interagency ties and emphasizes the Department’s commitment to strengthen those ties by reaching out to other federal agencies with complementary responsibilities. In addition, the partnership sections of the three strategic theme chapters now more fully identify and discuss Commerce’s shared mission responsibilities with other federal agencies. Under the economic infrastructure theme, for example, the plan now emphasizes those aspects of Commerce’s mission that are complementary. It points out that Commerce chairs the Trade Promotion Coordinating Committee (TPCC), a 20-member interagency task force charged by the President and Congress with developing and implementing the National Export Strategy.
The new section on management challenges recognizes and discusses three of the key management challenges facing the Department that were highlighted in our July report—weather service modernization, Census 2000, and financial management systems. Finally, the usefulness of the plan has been improved by the addition of an index or matrix, which shows which Commerce bureaus are responsible for which strategic themes and goals; and an appendix, which provides clearer and more comprehensive information on, and consolidates in one place in the plan, the statutory and other authorities for the Department and its bureaus, themes, and goals and objectives.
Commerce’s Strategic Plan Can Be Further Improved
While the overall quality of Commerce’s strategic plan has been improved since we reported in July 1997 on an earlier draft of the plan, further improvements still could be made in each of the elements required by the Results Act. As we indicated in our July report, the mission statement could be made more complete by explicitly recognizing that several other federal agencies as well as state and local governments also play major roles in the areas covered by Commerce’s three strategic themes. In the export controls area under the economic infrastructure theme, for example, the plan acknowledges that Commerce shares mission responsibilities with the Departments of Defense, Energy, and State and the Arms Control and Disarmament Agency, but the mission statement does not recognize this or other shared responsibilities.
Similarly, the treatment of crosscutting functions could clarify Commerce’s role in the three strategic theme areas, specify how the Department’s efforts intersect with or complement the efforts of the other participants, and identify which other government entities Commerce coordinated its plan with and the results of that coordination. The Department’s September 30, 1997, letter transmitting the revised plan to Congress said that Commerce consulted with stakeholders, provided them and congressional committees with copies of its draft plans, and responded to stakeholder and congressional comments. According to Commerce’s transmittal letter, there were no unresolved contrary views concerning its plan.
The strategies for achieving each strategic goal could be further expanded to specify how Commerce will hold its bureaus and managers accountable for meeting strategic goals and the resources that will be required to meet them. The linkages between long-term strategic goals and objectives and annual performance goals could be improved by (1) making the illustrative performance measures more outcome oriented, such as by using the “number of counseling sessions” as a measure of ITA’s economic infrastructure objective to “increase trade assistance targeted to small and medium-sized businesses,” or (2) showing how the performance measures that were added cause results. The discussion of external factors could identify and discuss more key factors beyond Commerce’s direct control that could affect achievement of its goals, such as congressional concerns about the Census Bureau’s plans for conducting Census 2000, and specify how the external factors that are identified will be addressed or mitigated. The discussion of program evaluations could indicate more specifically how evaluations were used to establish goals/objectives and performance measures.
Finally, the discussions of Commerce’s major management challenges and its capacity to provide reliable data on performance could acknowledge and discuss more of the major management challenges and data capacity problems that we emphasized in our July 1997 report, such as managing modern information technology and the “year 2000 computer problem.” Also, the plan could relate identified management challenges, including performance measurement limitations, to Commerce’s strategic goals and objectives, discuss their implications for achievement of its strategic goals and objectives, and indicate more specifically how and when the Department expects to overcome these challenges. The plan could be made more useful to stakeholders and would better meet the intent of the Act if it identified and discussed these types of problems as well as other material weaknesses or high-risk areas, such as NOAA’s fleet for acquiring marine data, that are disclosed in Commerce’s Federal Managers’ Financial Integrity Act reports or financial statements.
Other Observations on Commerce’s Strategic Plan
Given the diversity of its programs and activities and its bureaus’ independence, Commerce faced an especially formidable challenge in developing its strategic plan. The Department developed a “thematic” strategic plan that covers its major functions and activities; is consistent with relevant statutory and other authorities; and addresses, to some extent, the various elements required by the Results Act. The plan’s readability, usefulness, and overall effectiveness as a planning and oversight tool could be enhanced by streamlining its organization and content to eliminate many of the details that do not relate directly to the Act’s requirements, thus reducing its 178-page length.
Agency Comments and Our Evaluation
We provided a copy of a draft of this briefing document to the Department of Commerce for review and comment. On October 17, 1997, the Director for Budget, Management and Information and Deputy Chief Information Officer provided us with written comments. He characterized our review as balanced and fair and said that the Department clearly agrees that it needs to do more planning with other agencies and crosscutting programs and that this is a very high departmental priority. In this regard, he said that the Department has stepped forward as the lead agency to link with the National Academy of Public Administration (NAPA) in forming the Performance Consortium and that a dozen other federal departments and agencies have joined Commerce in this effort to develop common planning activities and elements.
The Director also said that the Department disagrees with our suggestion that its plan could be improved by providing additional information in certain areas and eliminating many of the details that do not relate directly to the Act’s requirements. He said that the Department made a specific decision to have a single, integrated strategic plan that covers all its bureaus. The Department believes that its plan demonstrates clearly how the Commerce bureaus fit together and provide critical service to the nation and that it addresses some of the administration’s key priorities and secures the buy-in of its bureaus. As Commerce’s strategic plan evolves, we continue to believe that its readability and specificity could be improved by streamlining its organization, content, and presentation.
Issue Area Contact
L. Nye Stevens, Director, Federal Management and Workforce Issues; General Government Division, (202) 512-8676.
Observations on the Department of Defense’s Strategic Plan
On August 5, 1997, we issued a report on DOD’s draft strategic plan (The Results Act: Observations on DOD’s Draft Strategic Plan, GAO/NSIAD-97-219R). The Department of Defense’s formally issued Results Act strategic plan was submitted to OMB and Congress on September 30, 1997. As requested, we reviewed the strategic plan and compared its changes to DOD’s draft plan. On October 17, 1997, we briefed your staffs on our further observations on the strategic plan. The key points from that briefing are summarized herein.
Summary of Key Observations From Our August Report
Our prior evaluation revealed that DOD’s draft plan included discussions of each of the six critical components required in strategic plans but that some were of higher quality than others. We noted, for example, that DOD’s draft plan contained a succinct mission statement and general goals and objectives that cover its major functions and operations and reflect its broad statutory defense responsibilities, but it did not include schedules for initiating and completing significant actions to achieve its goals. We also noted that, although DOD included some discussion of other elements, such as formidable management problems, these discussions could be more complete. And, we suggested several improvements to the draft plan, including that DOD (1) more completely state strategies for achieving its goals and include schedules of significant actions; (2) link and discuss how external factors could affect its ability to achieve its goals; (3) discuss how program evaluations were used in developing its goals and identify key issues for future evaluations; (4) discuss planned or ongoing actions to resolve persistent management problems, including time frames and required resources; and (5) identify and discuss coordination efforts for programs that crosscut with other agencies’ programs. Finally, we suggested that DOD develop one clear and succinct document to serve as its strategic plan.
Improvements Made in the Strategic Plan
DOD revised its general goals and objectives to provide a clearer presentation. In line with the revision, DOD also rearranged its description of how the performance goals it is developing will be related to the general goals in an effort to improve the description’s clarity. It also defined some terms and included some additional information in the rearranged description. DOD’s general goals and objectives as reworded still cover its major functions and operations and reflect its broad statutory defense responsibilities.
DOD also included a table listing the major management problems that we have identified as high-risk areas and the documents, such as the DOD Logistics Strategic Plan, that address each of the high-risk areas. However, it did not include an explanation of what actions will be taken to address the high-risk areas and when the problems in these areas are expected to be corrected. Additionally, DOD did not adopt our other suggested improvements, nor did it consolidate the strategic plan into one succinct document.
Strategic Plan Can Be Further Improved
We believe that DOD’s strategic plan could be further improved by adopting the suggestions we made in our August 5, 1997, report (summarized herein). We believe that addressing these areas would provide decisionmakers and stakeholders the information necessary to ensure that DOD has well-thought-out strategies for resolving ongoing problems, achieving its goals and objectives, coordinating crosscutting activities, and becoming more results oriented, as expected by the Results Act.
Agency Comments
DOD officials reiterated that the QDR, alone, has been the Department’s finalized strategic plan since it was issued in May 1997. They also stated that they included a table listing the underlying plans that address the high-risk management problems noted in our August 5 report but did not attach or include significant detail from the underlying plans because that would have made their submission too voluminous. They said that they did not include details in summary fashion because that would not have provided enough information. They noted that DOD is working to address its management problems and said that those interested in seeing how the problems are being addressed should read the underlying plans. Additionally, the officials noted that although coordination of programs and activities that crosscut other agencies’ programs are not discussed in DOD’s strategic plan, DOD coordinates and cooperates extensively with other federal agencies as part of its ongoing strategic planning process.
Finally, DOD officials commented that in congressional consultations, the only change suggested was that DOD reword a couple of its general goals and objectives.
Issue Area Contact
David R. Warren, Director, Defense Management Issues; National Security and International Affairs Division, (202) 512-8412.
Observations on the Department of Education’s Strategic Plan
On July 18, 1997, we issued a report on the Department of Education’s draft strategic plan (The Results Act: Observations on the Department of Education’s June 1997 Draft Strategic Plan, GAO/HEHS-97-176R). Education’s formally issued strategic plan was submitted to OMB and Congress on October 3, 1997. As requested, we have reviewed the publicly issued strategic plan and compared it with the observations in our July 18 report. On October 16, 1997, we briefed your staffs on further observations on the strategic plan. The key points from that briefing are summarized herein.
Summary of Key Observations From Our July Report
The Department’s June 17, 1997, draft plan generally complied with the Results Act. Overall, it is a useful document and included all but one of the six elements required by the Act—it did not discuss how the agency’s long-term goals and objectives will be related to its annual performance goals. The plan’s long-term goals and objectives were succinct and logically linked to its mission statement, and the quality of the goals and objectives reflected the Department’s thoughtful deliberation in its efforts to comply with the Results Act. In addition, the plan addressed in some form all of the Department’s major statutory responsibilities.
Although the plan presented a logical and fairly complete description of how the Department intends to achieve its mission, we identified a few areas in the draft plan that could be improved. We observed that the plan could benefit from more information, clarity, and context in some of its components. The plan should have included an explanation of the relationship between its long-term goals and objectives and its annual performance goals as well as a complete description and schedule of program evaluations. It could also have better addressed the Department’s major statutory responsibilities.
The Department has the primary responsibility for implementing federal education policy and programs, but several other federal agencies also provide education-related programs and services. In our past work, we have identified opportunities for consolidating programs in certain areas, such as job training and early childhood education, to eliminate inappropriate duplication. The draft strategic plan did a good job of identifying crosscutting program activities in elementary and secondary programs, but it did not identify or discuss activities for postsecondary programs that require coordination. By discussing the agencies and activities involved with the Department’s higher education programs, the strategic plan could provide Congress with a more complete picture of the scope of the Department’s coordination activities.
In its discussion of core strategies for achieving its strategic goals and objectives, the Department identified several management challenges it will face in the coming years, but it provides little detail about these challenges and how it will meet them. This type of information could help the Department and its stakeholders identify major management problems that could impede the Department’s efforts to achieve its goals and objectives. Further, stakeholders could benefit from knowing what the Department has done, is doing, or plans to do to address such problems.
Improvements Made in the Strategic Plan
The Department’s strategic plan issued October 3, 1997, included several significant improvements that make it more responsive to the requirements of the Results Act than its draft plan. The Department’s plan now addresses all six elements required by the Results Act. The plan addressed the relationship between the agency’s long-term goals and objectives and its annual performance plan—the only element missing from its draft plan—by including a matrix linking long-term goals and objectives in the strategic plan with fiscal year 1997 appropriation information and agency programs. The matrix indicated where programs have a significant number of activities or products supporting an objective. Though the strategic plan does not specifically describe how the Department intends to measure the performance of its programs each year, the matrix and the supplemental information on the Department’s performance indicators (shown in appendix A of the plan) provided a better understanding of the relationship between the Department’s strategic and annual performance plans. The Department states that the strategic plan was based, in part, on objectives and indicators in draft program performance plans prepared for key programs in the winter of 1997. According to the plan, the annual performance plan (which includes budget and performance plans for each of the Department’s programs) will further clarify this linkage.
The Department’s October 1997 plan also provided a description of the program evaluations and assessments that were used to develop each of its four strategic goals as well as evaluations that will help to “inform the implementation” of the plan and provide data for the performance indicators supporting the goals. For example, at the end of the narrative describing Goal 2 (build a solid foundation for learning for all children), the plan stated that early evaluations of the Even Start program and crosscutting evaluations of Goals 2000 and the reauthorized elementary and secondary education programs were used to develop this goal. In addition to the evaluations highlighted in the introduction of each goal, appendix B of the plan described 57 key program evaluations and other studies, including information on when the evaluation data were or will be collected and, in many instances, how often the data will be collected in the future. The Department’s strategic plan also identified agency efforts that will help to avoid duplication among its evaluation efforts and reduce respondent burden.
In addition, the narrative supporting the Department’s mission statement now encompasses the Department’s major statutory responsibilities. Our review of the Department’s draft plan indicated that it had failed to address the agency’s statutory requirements for basic education for adults, vocational rehabilitation, education of individuals with disabilities, and school-to-work opportunities. In its October 1997 plan, the Department addressed this weakness by including as one of its key agency functions “providing grants for literacy, employment, and self-sufficiency.”
The plan more clearly addressed the Department’s civil rights function within the goals and objectives sections. During our review of the Department’s draft plan, we observed that the agency’s civil rights function, although reflected in its mission statement, was not addressed in the plan’s long-term goals or objectives. In support of two objectives related to goals 1 and 4, the Department added strategies for addressing its civil rights function. Objective 1.5 is to get families and communities fully involved with schools and school improvement efforts. In support of this objective, the plan states that the Department will create collaborative partnerships among parents, community groups, and other stakeholders that ensure equal educational opportunity, and provide civil rights training and technical assistance to build these linkages. Objective 4.2 is to provide Education’s partners the support and flexibility they need without diminishing accountability. In support of this objective, the plan adds the following strategy: to build civil rights partnerships to achieve shared civil rights objectives and secure timely improvements for students.
As required by the Results Act, the Department described in its draft plan several factors outside the agency’s program scope and responsibilities that could negatively affect its ability to achieve its strategic goals. The Department strengthened this discussion in the plan by describing agency actions intended to mitigate against seven key external factors that could affect the achievement of its long-term goals. For example, the plan states that school systems will need to undertake long-term investments in professional development and other capacity-building activities if education reforms are to succeed. Yet, pressures outside of the Department’s control may encourage school systems to focus instead on demonstrating short-term gains. To counter these pressures, the plan states that the Department will (1) work with program and technical assistance providers to highlight the importance of sustained professional development aligned with the standards and (2) emphasize the importance of professional development in its performance indicators.
Consistent with our suggestions in our July report, the Department’s strategic plan also addressed several other issues. The plan specifically identified coordination activities related to the Department’s postsecondary education programs and activities. It listed interagency coordination and data matches with, for example, the Social Security Administration, the Immigration and Naturalization Service, and the Selective Service as a strategy for ensuring that postsecondary student aid delivery and program management are efficient (objective 3.3). Core strategies to achieve this objective also included working with the Internal Revenue Service on tax refund offsets and address matches and the Department of the Treasury on administrative offsets to increase defaulted student loan collections.
In addition, the Department has taken the important step to revise the date for its Year 2000 conversion performance indicator. The plan established 1998, rather than 1999, as the year all of its relevant computer systems will be Year 2000 compliant, thus allowing more time for system testing and validation. While the Department had previously included the Year 2000 conversion effort in its draft plan, it established in its current plan December 31, 1999, as the deadline for repairing seven mission critical systems. As we pointed out, the Year 2000 problem is not technically challenging; however, it is massive and complex. With about 800 days before the Year 2000 deadline, the current plan’s performance indicator of assuring that all systems have been evaluated and, where necessary, converted to make them Year 2000 compliant by December 31, 1998, is a major improvement. In recognition of the critical challenge facing federal agencies in dealing with this issue, GAO has added the Year 2000 problem as one of its high-risk areas.
Other Observations
The Department has made significant strides in its October 1997 plan in recognizing major management challenges facing the Department. In our review of its draft strategic plan, we discussed the Department’s particularly difficult challenge in improving its information systems for the student aid program. We discussed the problems that the lack of an integrated student financial aid system creates. We also discussed the Department’s reengineering effort, known as “Easy Access for Students and Institutions (EASI),” which was being developed to redesign the entire student assistance program delivery system. In its draft strategic plan, the Department identified EASI as an important part of its core strategy for integrating its aid systems. However, as we pointed out, the project had a history of false starts. We subsequently recommended in another report that the Department should first develop a systems architecture to address system integration deficiencies before proceeding with new major systems development. The Department’s plan eliminated EASI from its core strategies and adopted the broader core strategy of (1) developing an “integrated, accurate, and efficient student aid delivery system” and (2) ensuring that systems are mission-driven and consistent with the Department’s information technology architecture.
In our July 18, 1997, report we also highlighted problems with the Department’s management, systems, and processes that affect its ability to ensure financial accountability, particularly among its student financial aid programs. The Department recognized these problems in its strategic plan and listed the following as its most important challenges: (1) student aid systems that are incompletely integrated, (2) financial data from aid programs that are only partially consolidated at the student level, and (3) too many contractors who use different operating systems. The plan stated that correcting this situation will require the redesign and modernization of the federal student financial aid system using the latest information engineering and computer system technology. To address these and other issues, the Department included under Goal 3 a new, separate objective for the management of its postsecondary student financial aid programs: “Postsecondary student aid delivery and program management is efficient, financially sound, and customer-responsive” (objective 3.3). The Department identified with specificity numerous strategies and performance indicators that will help to address and track agency efforts to achieve this objective.
Postsecondary program management. To improve efforts in this area, the strategic plan states that the Department will develop and utilize a risk management system to target compliance and enforcement activities on poorly performing institutions while reducing burdens on high performing ones. Responding to a recommendation from its fiscal year 1996 Department-wide financial audit, the Department is currently developing this new risk analysis system to better utilize its limited monitoring resources towards the highest risk institutions. However, this system will not be fully implemented until fiscal year 1998. Another Department strategy to improve the management of its student financial aid programs involves expanding the use of the case management approach to maximize the effectiveness of institutional oversight. According to the plan, this approach encompasses review of recertification applications, compliance audits, financial statements, risk management system inputs, and program reviews.
Financial integrity. The Department stated in its draft strategic plan that poor data from the Federal Family Education Loan Program (FFELP) have prevented it from obtaining an unqualified audit opinion on its annual financial statements for the past 4 years. The Department’s plan included several core strategies for addressing this data integrity problem, such as integrating the multiple student aid databases based on student-level records and improving contract performance for major information systems by increased use of performance-based contracting. The Department also added to its plan an indicator to track the accuracy and integrity of data supplied by applicants, institutions, lenders, and guaranty agencies. Data from these sources have been problematic in the past. In addition, the Department’s October 1997 strategic plan included a new performance indicator related to the financial integrity of the Department’s postsecondary financial aid programs. It states that: “There will be no material internal weaknesses identified in the student aid programs’ portions of the Department-wide financial statement audit and no student aid program issues that prevent the Department from receiving an unqualified opinion on the financial statements.” This indicator is linked to and supports indicator 26, which now definitively states that auditors will issue a clean opinion on the Department-wide financial statements every year.
Although, in general terms, the plan better specifies how the Department will address this critical financial management weakness, it still has not completely clarified how it will resolve the data integrity issues for FFELP or accurately estimate the government liability that has prevented the Department from obtaining an unqualified opinion.
Agency Comments
On October 21, 1997, the Department provided written comments on a draft summary of our observations of its October 3, 1997, strategic plan. The Department generally had no objections to our observations but wanted to clarify several issues we raised in the draft.
To measure the performance of Department programs, the agency will include program performance plans in its detailed annual plan currently being prepared by Department staff in conjunction with OMB. The individual program plans will be linked directly to “budget activity lines” and will accompany the Department’s fiscal year 1999 budget justification to Congress in February 1998. The Department submitted 17 draft program plans to Congress in March 1997 that, among other things, identified each program’s goals and objectives, key performance indicators, program evaluations and other data sources, the year the performance indicator data will first be available, and key strategies for achieving the objectives. These performance plans were developed by the program offices and have been reviewed extensively internally—some have been shared with stakeholders. Program performance plans covering the Department’s approximately 100 program activities will include essentially the same information as the 17 draft plans and will be reviewed and updated this fall for inclusion in the agency’s annual plan.
The Department’s Chief Information Officer has contracted with Lockheed to work with the agency to ensure that it meets its Year 2000 performance indicator target of December 31, 1998. This activity will be monitored at the highest levels within the agency, and progress will be reported at least quarterly through the strategic planning tracking process.
The Department is engaged in several activities that should help to resolve the data integrity issues for FFELP and accurately estimate the government’s liability for this program. Specifically, the Department (1) has developed a workplan, approved by the independent accounting firm of Price Waterhouse, to address concerns about the government’s liability estimate in time for the Department’s fiscal year 1997 audit; (2) is comparing data from the National Student Loan Data System (NSLDS) with audited data submitted by selected guaranty agencies; and (3) is working with E-Systems, Inc., and direct loan origination and servicing contractors to ensure the accuracy and timeliness of direct loan data submitted to NSLDS.
Issues Area Contact
Carlotta C. Joyner, Director, Education and Employment Issues; Health, Education, and Human Services Division, (202) 512-7014.
Observations on the Department of Energy’s Strategic Plan
On July 11, 1997, we issued a report on the Department of Energy’s (DOE) draft strategic plan dated June 16, 1997 (Results Act: Observations on the Department of Energy’s Draft Strategic Plan, GAO/RCED-97-199R). DOE formally submitted its strategic plan to OMB and Congress on September 30, 1997. As requested, we have reviewed this strategic plan and compared it with the observations in our July report. On October 14, 1997, we briefed your staffs on our further observations on DOE’s strategic plan. The key points from that briefing are summarized herein.
Summary of Key Observations From Our Reports
As we reported in July 1997, the draft plan did not meet all the requirements of the Results Act. It fully addressed two of the six required elements of the Results Act—the mission statement and goals and objectives—partially addressed a third, and acknowledged that three others needed to be completed for the September plan. Furthermore, the draft plan did not expressly link its missions, goals, objectives, and strategies with DOE’s relevant major statutory responsibilities, although we noted that the missions and activities defined in DOE’s draft plan were generally supported by legislation and that the draft plan accurately reflected all of DOE’s major legislative requirements. However, we observed that DOE’s missions have evolved from those that Congress envisioned when it created the Department in 1977 and that the Results Act provides a forum through which Congress can review the appropriateness of these missions.
Our July 1997 report also noted that the draft plan did not identify programs and activities that are crosscutting or similar to those of other federal agencies. In addition, some of the draft plan’s measures addressing management challenges appeared limited in scope or were unclear. Finally, we noted several weaknesses in the information system that DOE uses to track performance measures.
In addition to our July report, the Secretary of Energy requested our continued involvement in refining DOE’s plan. On September 2, 1997, we provided the Department with our comments on its revised draft strategic plan—dated August 15, 1997 (Results Act: Observations on the Department of Energy’s August 15, 1997, Draft Strategic Plan, GAO/RCED-97-248R). In that report, we noted that the revised draft plan was much improved over the earlier draft. Specifically, the revised plan included all six elements required by the Results Act. However, we reported that some of the strategies and many of the measures still did not appear to be results oriented.
Improvements Made in DOE’s Strategic Plan
DOE’s September 30, 1997, strategic plan incorporated several improvements that make it more responsive to the requirements of the Results Act than was the June draft plan. In July, we observed that DOE’s draft plan fully addressed two of the six required elements of the Results Act—the mission statement and goals and objectives—partially addressed a third, and acknowledged that three others needed to be completed for the September plan. The September plan complies with the Results Act requirements by including the remaining three sections and fully developing the third by adding a discussion of resource requirements. In describing its resource requirements, the September plan states that the Department assumed budget appropriations consistent with the administration’s and Congress’ agreed-upon 5-year budget deficit reduction targets through fiscal year 2002.
Our July report also observed that the draft plan did not expressly link its missions, goals, objectives, and strategies with DOE’s relevant major statutory responsibilities. The September plan now shows the linkage between the Department’s business line objectives and its relevant major statutory responsibilities.
Furthermore, DOE’s strategic plan now acknowledges—in its discussion of key external factors—that the Department participates in some crosscutting government functions and initiatives that are beyond the mission of any one agency. While the plan does not describe how DOE will work in concert with other agencies, it does acknowledge DOE’s commitment to work closely with other federal agencies, OMB, and Congress to ensure that its programs provide critical and unique contributions to these crosscutting efforts.
DOE’s Strategic Plan Can Be Further Improved
DOE did not adopt all of the suggested improvements noted in our July and September reports. These suggestions were based on several of our past reports and represent areas in which we have had disagreements with DOE in the past. However, we still believe that if the Department made these suggested changes—as outlined in our July and September reports—the plan would better address the goals of the Results Act.
One such example that we identified in our September report relates to an evaluation that we made concerning the vulnerability of U.S. oil supplies to disruptions. On the basis of that report, we believe that DOE’s measures for its objective to “reduce the vulnerability of the U.S. economy to disruptions in energy supplies” are not very useful indicators of how the Department’s programs will affect the economy’s vulnerability. DOE’s measures are based on six strategies: to (1) support activities capable of ending the decline in domestic oil production, (2) maintain an effective Strategic Petroleum Reserve, (3) diversify the international supply of oil and gas, (4) develop alternative transportation fuels and more efficient vehicles, (5) maximize the productivity of federal oil fields, and (6) take measures to avoid and respond to domestic energy disruptions. However, our report on the vulnerability of oil supplies observed that, in today’s world oil market, replacing oil imports with domestically produced oil would only marginally lower the potential costs of disruptions because oil prices are set in the global marketplace and the price for all oil rises during disruptions.
While we agree that one of DOE’s strategies—diversify the international supplies—can lead to measures that contribute to reducing the vulnerability of the U.S. economy to disruptions in the energy supply, our vulnerability report offers five other factors that we believe would better focus DOE’s efforts in developing strategies and measures for its objective of reducing the vulnerability to energy supply disruptions: (1) excess world oil production capacity, (2) the oil intensity of the U.S. economy, (3) the oil dependency of the U.S. transportation sector, (4) world oil stocks, and (5) the dependence of the U.S. economy on oil imports.
Finally, our July report noted several weaknesses in the information system that DOE uses to track performance measures. However, DOE’s September 1997 strategic plan makes no reference to these problems. We still believe that DOE will need to modify the information system it anticipates using to track the strategic plan’s performance measures and identify management problems. In addition, we also noted that the information used to update the tracking system depends on various other information systems that we and DOE’s Inspector General have found contain incomplete or inaccurate information.
Other Observations
While DOE’s strategic plan is organized along four business lines—energy resources, national security, environmental quality, and science and technology—the agency is organized by program, and it is not clear from the plan which program offices are accountable for implementing the different sections of the plan. For example, several of the Department’s program offices have science missions, including the Office of Nuclear Energy, Science and Technology and the Office of Energy Research; the Office of Nonproliferation and National Security and the Assistant Secretary for Defense Programs have defense missions. However, the plan does not describe how the Department’s current organizational alignment is suited to the plan’s four business lines, nor does it provide a matrix showing which program offices will be held accountable for implementing each section of the plan.
Agency Comments
On October 10, 1997, we met with DOE officials, including the Acting Director, Office of Strategic Planning, Budget and Program Evaluation, to obtain the Department’s comments on our observations about its strategic plan. DOE officials made three points. First, they stated that development of performance measures is difficult—especially in the science area—and that they recognize the need to continually work to improve these measures.
Second, in reference to the disagreements that they had with some of the policy positions of our past reports, they noted that these differences will continue; however, they do not believe that they are strategic planning differences. We disagree because such differences have an impact on the substance of the plan. For example, if DOE uses incorrect measures, it will not know if it has achieved its goals and objectives.
Finally, the officials acknowledged that DOE’s strategic plan does not show program accountability but stated that the Department has developed a draft matrix document that provides a crosswalk between its performance measures and the programs. They also pointed out that after the Department-level matrix is completed, each program will need to cascade performance measure accountability to it subunits.
Issue Area Contact
Victor S. Rezendes, Director, Energy, Resources, and Sciences Issues; Resources, Community, and Economic Development Division, (202) 512-3841.
Observations on the Department of Health and Human Services’ Strategic Plan
On July 11, 1997, we issued a report on the Department of Health and Human Services’ (HHS) draft strategic plan (The Results Act: Observations on the Department of Health and Human Services’ April 1997 Draft Strategic Plan, GAO/HEHS-97-173R). HHS submitted its revised strategic plan to the Office of Management and Budget and Congress on September 30, 1997. As requested, we reviewed the revised plan and briefed your staffs on our observations. The key points from that briefing are summarized herein, together with a brief overview of our comments on the initial HHS plan.
Summary of Key Observations From Our July Report
We found HHS’ draft strategic plan to be missing most of the key elements required by the Results Act and to be more a summary of current programs than a document projecting actions HHS might take in the next several years to achieve the goals of the Act. Although HHS had developed a mission statement that successfully captured the broad array of its activities, the draft plan did not define measurable goals and objectives, describe approaches to achieving these goals and objectives, describe the relationship between long-term goals and objectives and annual performance, identify key external factors beyond HHS’ control, or describe how program evaluations were used to establish or revise strategic goals.
Furthermore, although the draft strategic plan recognized that many different HHS operating divisions and programs are responsible for meeting each of HHS’ goals, it did not discuss strategies for coordinating such efforts, nor did it discuss HHS’ need to coordinate its work with other federal agencies.
Finally, we observed that HHS faces many major management challenges in carrying out both its program responsibilities and the type of strategic planning and performance measurement the Results Act requires. Two challenges that we highlighted were HHS’ reliance on state, local, and private agencies to carry out many programs for which it is responsible and HHS’ maintenance of financial management and program integrity. Although we believed HHS was aware of these challenges, its plan did not address them. By acknowledging these challenges in its plan, however, we pointed out that HHS could foster a more useful dialogue with Congress about its goals and the strategies for achieving them.
Improvements Were Made in HHS’ Strategic Plan
HHS’ revised strategic plan incorporated many of the elements that were missing from its earlier draft, making it a more useful document and one that is more responsive to the requirements of the Results Act. The current strategic plan includes all six critical elements as required by the Act. The most notable improvement is in the plan’s outline of objectives for accomplishing HHS’ six strategic goals. The objectives are largely focused on outcomes, such as reducing the use of illicit drugs, and they are defined in measurable terms, such as increasing the percentage of the nation’s children and adults who have health insurance coverage. The plan also identifies for each strategic objective the key measures of progress. For example, the two measures to determine the reduction of tobacco use are the rate of tobacco use among the young and rate of smoking among adults.
HHS also added descriptions of its efforts to coordinate both internally among its operating divisions and externally with other departments and agencies. It describes, for example, a range of approaches to improve internal coordination among the various operating divisions, such as special initiatives managed by two or more operating divisions and coordinating councils that integrate planning and policy development across HHS. The discussions of several strategic objectives include a recognition of the need to cooperate with other departments and agencies. For example, the plan indicates that HHS’ substance abuse treatment and prevention programs will work with the Health Resources and Services Administration as well as the Departments of Education and Justice to support an initiative to provide information to communities on the incidence of street and gang violence, domestic violence, and substance abuse and violence.
The plan is also improved by HHS’ discussion of three types of challenges that could significantly affect its ability to achieve its strategic goals—external factors, management issues, and data administration. The plan discusses these issues as general obstacles to achieving the Department’s overall goals. Moreover, it describes the Department’s current status in improving performance with respect to these specific issues.
Strategic Plan Can Be Further Improved
As its strategic planning process evolves, HHS’ plan should continue to reflect its progress toward results-oriented management. In the meantime, however, we observed several opportunities for further improvements in the plan.
The greatest opportunities for improvement, in our view, are in HHS’ discussion of its strategies for accomplishing its objectives. First, its strategies are not clearly linked to the attendant measures of success, making it difficult to determine how the strategies would contribute to the desired outcomes. For example, to increase the economic independence of families on welfare, the plan specifies three strategies—providing technical assistance, promoting employment, and improving access to child care. The four measures of success for economic independence, however, are all related to employment, with no apparent relationship to the strategies for child care or technical assistance.
Second, the plan does not discuss the effectiveness of the outlined strategies, making no mention of either existing evaluations to indicate what is known about the effectiveness of these strategies or plans for future evaluation to determine their effectiveness. For example, some of the strategies were built around a common HHS approach to support state-administered programs: technical assistance, training, and identifying and disseminating best practices. Yet, we have found in our work on these programs that there have been problems in implementing such strategies: in some cases, HHS’ technical assistance was inadequate, the capacity of regional offices to provide assistance and training was limited, and the dissemination of research and best practices was lacking. In addition to drawing on past evaluations, HHS’ plans should identify future evaluations to determine how well its strategies are working.
Third, the plan does not discuss the resources required to implement the strategies. For example, strategies to enhance the fiscal integrity of the Health Care Financing Administration (HCFA) programs include consolidation of Medicare payment systems to improve HHS’ ability to identify aberrant billing and improve payment accuracy. However, there is no mention of the resources necessary to implement such a strategy.
Fourth, although the plan identifies key external factors that affect achievement of the strategic objectives, there is little discussion of how HHS intends to ameliorate these factors. For example, a key external factor to achieving a number of objectives is the state of the economy, yet the plan does not indicate how the strategies will adjust to changes in the economy.
While the plan reflects a recognition of management and information challenges to achieving HHS’ goals, including those mentioned in our July correspondence, it provides little discussion of potential solutions. For example, the plan acknowledges HHS’ reliance on state, local, and tribal government organizations, contractors, and private entities and mentions the need to coordinate with them but is less specific on how it would do so.
Similarly, HHS’ plan recognizes the importance of improving its financial management information. In July, we reported that HHS had not addressed its problems in complying with the Government Management Reform Act of 1994 (GMRA), which would furnish decisionmakers with reliable, consistent financial data. While the revised plan acknowledges that obtaining an unqualified or clean opinion on its financial statements is a fundamental and critical objective and challenge for HHS, it does not specify the corrective actions and timetables to address these concerns.
With respect to information technology, we noted in our July correspondence that the Paperwork Reduction Act of 1995 and the Clinger-Cohen Act of 1996 set forth requirements that promote more efficient and effective use of information technology to support agency missions and improve program performance. While the plan identified several information technology initiatives that may help HHS achieve some program objectives, the plan does not discuss how HHS intends to identify and coordinate information technology investments in support of overall Department-wide goals and missions.
Agency Comments
We provided HHS officials with a draft of this appendix. While they were pleased that we recognized the improvements made to the plan, they agreed that the plan can be further improved. In their view, strategic planning is a continuous process; ongoing assessments and updates will be needed to strengthen the plan and ensure that it continues to provide relevant direction for their program activities.
Issue Area Contact
Bernice Steinhardt, Director, Health Services Quality and Public Health Issues; Resources, Community, and Economic Development Division, (202) 512-7119.
Observations on the Department of Housing and Urban Development’s Strategic Plan
On August 8, 1997, we issued a report on the Department of Housing and Urban Development’s (HUD) draft strategic plan (Results Act: Observations on the Department of Housing and Urban Development’s Draft Strategic Plan, GAO/RCED-97-224R). HUD submitted its strategic plan to OMB and Congress on September 30, 1997. As requested, we have reviewed the strategic plan and compared it with the observations in our August report. On October 14, 1997, we briefed your staffs on our further observations on the strategic plan. The key points from that briefing are summarized herein.
Summary of Key Observations From Our August Report
HUD’s draft strategic plan included five of the six components required by the Results Act. The plan was missing a description of how program evaluations were used in establishing the strategic objectives, including a schedule of future evaluations. Also, HUD’s treatment of the other five required components did not yet fully comply with the Results Act or OMB’s guidance. The draft included two separate mission statements, which did not define the agency’s basic purpose or focus on its core programs. One of the statements, which focused on restoring the public’s trust, was not clearly supported by HUD’s strategic objectives. While the strategic objectives covered HUD’s major program activities, they did not clearly describe how HUD would assess whether it was making progress toward achieving those objectives. Also, the discussion of HUD’s strategies to achieve its objectives and the relationship of annual performance goals to the strategic objectives was missing a discussion of the resources needed and the type of information needed for its performance goals. The draft strategic plan only partially met the requirements of the Results Act to describe key factors that are external to an agency and beyond its control that could significantly affect the achievement of its objectives. The plan also did not cover the time frames specified by the Results Act.
The draft strategic plan generally reflected consideration of HUD’s key authorizing statutes. The draft also discussed HUD’s consultation process and its many community partnerships but did not reflect whether the Department coordinated with other federal agencies and did not identify programs or activities that were crosscutting or similar to those of other agencies.
HUD’s draft strategic plan acknowledged that it faced significant management challenges and broadly described how these problems would be addressed. However, we observed that HUD could improve the plan by more fully integrating its management reform plan with the strategic plan and providing specific information about how the plan addressed the Department’s financial and management information weaknesses. HUD’s capacity to provide reliable information on the achievement of its strategic objectives was uncertain because the draft strategic plan had not yet been developed sufficiently to identify the types and sources of the data needed to evaluate progress. The plan identified some annual performance goals for which obtaining reliable data could be difficult because of the weaknesses associated with HUD’s current financial and management information systems.
Improvements Made in the Strategic Plan
HUD’s September 30, 1997, strategic plan covers all six components required by the Results Act and incorporates many improvements that make it more responsive to the requirements of the Act. Specifically, the plan discusses past evaluations and refines HUD’s mission statement. The new mission statement clearly identifies HUD’s role in achieving the nation’s housing mission. However, the language remains very broad in terms of how HUD can empower communities and individuals to succeed. A mission statement related to the management reforms was reworked and is now included in the plan as the Secretary’s personal mission to emphasize the importance the Secretary places on these reforms. The strategic plan also links the strategic objectives and the annual performance goals, expands the discussion of external factors, and covers the appropriate time frame. Additionally, the revised plan addresses HUD’s consultation process and interagency coordination efforts. The strategic plan discusses HUD’s ongoing and planned coordination with the Departments of Health and Human Services and Labor. This coordination will give HUD the opportunity to identify in future plan updates any programs that complement or duplicate those administered by other federal agencies.
HUD has also improved the discussion of the management problems it faces and the corrective actions it plans to take. The strategic plan now includes (1) an explanation of the agency’s current efforts to integrate its program and financial management systems and clean up the data in those systems, (2) a discussion of HUD’s plans to address the issues that led to a qualified opinion on the agency’s financial statements for fiscal year 1996, (3) a discussion of the reform efforts that will affect each objective, and (4) an appendix that lists the management reform goals to be completed in fiscal year 1998. The plan also includes a brief discussion of HUD’s efforts to ensure the quality of performance measurement data by requiring program offices to develop quality assurance plans that will be reviewed and approved by the Chief Financial Officer. However, the agency’s ability to accurately measure progress in achieving its strategic objectives is uncertain because doing so depends on completing its goal of integrating program and financial management systems, cleaning up the data in most of HUD’s existing systems, and receiving accurate reporting from local and federal entities. Despite the improvements in the discussion of HUD’s management problems, the plan lacks details on how the agency will address the internal control weaknesses reported by the Office of Inspector General in the agency’s financial statement audit report.
Strategic Plan Can Be Further Improved
Some elements of HUD’s strategic plan could be further improved to better meet the purposes of the Results Act. HUD will have an opportunity to address these issues as the strategic plan evolves further over time.
While the plan includes a listing of the program evaluations under each objective, it does not describe how the evaluations were used to develop the strategic objectives and does not include a schedule of future evaluations. Although wording was added to the plan stating that evaluation schedules are determined on an annual basis, the plan does not include a schedule, which is required by the Results Act.
HUD’s discussion of its strategies does not discuss the staff, capital, and technology resources needed to achieve the Department’s strategic objectives, as called for by the Results Act. This issue is a critical one for HUD because of its downsizing efforts and planned organizational changes.
While the discussion of external factors was expanded, the plan does not discuss the impact on the strategic plan or on HUD’s programs if the legislative proposals discussed in the plan are not enacted. Additionally, some of the discussions indicate that the external factors may have such a great impact on the strategic objectives that HUD may not be able to achieve its objectives. For example, under the strategic objective to provide self-sufficiency opportunities for low-income individuals, the plan states that HUD has no direct control over the extent to which funds will be used to address this objective. Furthermore, the plan states that “realistically, relatively few people who have reached their 30s with little education, with families, and little work history, will achieve great success in this economy.”
While HUD included additional information to aid in the assessment of the strategic objectives, it is not yet clear whether the achievement of a number of the objectives will be assessable. The evaluation component is not yet complete, the discussions of strategies omit significant information about resources, and the discussions of external factors indicate that HUD sees significant impediments to achieving its objectives. As HUD is developing future strategic plan updates and annual performance plans, additional consideration should be given to what each objective is intended to achieve and how that can best be assessed.
Agency Comments
We provided HUD with a draft of this section of the report for review and comment. We met with HUD officials from the Office of the Chief Financial Officer and the Office of Policy Development and Research, who generally agreed with our observations. They said that information in the annual performance reports and the next update of the plan, which should be available around the end of fiscal year 1998, together should address our observations. Additionally, they said HUD prefers to keep the strategic objectives broad so that the program offices maintain a long-term focus and continue to think of ways to achieve the objectives.
Issue Area Contact
Judy A. England-Joseph, Director, Housing and Community Development Issues; Resources, Community, and Economic Development Division, (202) 512-7631.
Observations on the Department of the Interior’s Strategic Plan
On July 18, 1997, we issued a report on the Department of the Interior’s draft strategic plan (The Results Act: Observations on the Department of Interior’s Draft Strategic Plan, GAO/RCED-97-207R). Interior formally submitted its strategic plan to OMB and Congress on September 29, 1997. As requested, we have reviewed the publicly issued strategic plan and compared it with the observations in our July 18 report. On October 14, 1997, we briefed your staffs on our further observations on the strategic plan. The key points from that briefing are summarized herein.
Summary of Key Observations From Our July Report
Interior’s draft strategic plan did not meet the requirements of the Results Act. The Department-wide strategic overview contained the Department’s overall mission and goals and referred to the plans of its eight components or subagencies for information on the six elements required by the Act. However, half of the eight subagency plans lacked at least two of the six required elements. Furthermore, the overall quality of the plan was not yet sufficient to achieve the purposes of the Act. Among other things, it did not provide clear linkages between the subagencies’ goals and objectives and the contributions of these goals and objectives to the Department’s major goals, and some of the goals and objectives in the subagencies’ plans were not stated in a manner to allow for a future assessment of whether the goals have been achieved.
We pointed out that Interior has a number of crosscutting areas in which a more coordinated strategic planning process would help to provide Department-wide information on programs’ results. These include environmental protection and remediation, stewardship assets, Indian programs, land and natural resources management, and recreation programs.
Although Interior identified information management resource goals in its strategic plan, how it plans to achieve and measure the success of those goals was not clearly delineated. Traditionally, Interior has allowed its subagencies to independently acquire and manage information technology. This culture has resulted in inefficiencies in technology investments and information sharing.
We also noted that Interior needs to continue to address certain accounting and financial management internal control weaknesses, including, among other things, weaknesses in accounting for investments in fixed assets and project cost accounting controls.
Improvements Made in the Strategic Plan
The September 1997 strategic plan—the Department’s strategic overview plan as well as each of the eight subagencies’ plans—incorporates several improvements that make it more responsive to the requirements of the Results Act than was the draft plan. As a whole, the plan provides a clearer presentation of how it covers the six required elements of the Act by providing explicit linkages between the requirements of the Act and the relevant parts of the plan. Furthermore, each of the four subagencies that had lacked a number of required elements in the draft plans has added or further developed many of these elements in the issued plan. In particular, each of these four subagencies—the National Park Service (NPS), Fish and Wildlife Service (FWS), Bureau of Indian Affairs (BIA), and Minerals Management Service (MMS)—added material to address the relationship between long-term goals and performance goals. In addition, both BIA and FWS have included discussions of the approaches or strategies they will use to achieve their respective goals and objectives—information that was not present in the draft plans for these subagencies. Also, additional information was added to the overview section of the plan to more fully explain the Department’s approach to program evaluations.
In addition to more fully addressing several required elements, the September 1997 overview and subagencies’ plans now contain explicit linkages between the subagencies’ goals and objectives and the contributions of these goals and objectives to the Department’s goals and commitments. Also, many of the goals included in the issued plan have been restated in a quantitative manner. These are positive changes and will facilitate a future assessment of whether the goals have been or are being achieved.
Consistent with the suggestions in our July report, Interior included a section in the departmental overview discussing its current efforts to address crosscutting issues throughout the Department and its strategy for further coordination. Interior’s strategic plan also includes a more aggressive goal for addressing internal control weaknesses. Additionally, a section has been added that specifically discusses accountability for personal, real, and museum property (fixed assets). The plan also discusses integrating the personal and real property systems with financial and procurement systems that would appear to represent progress toward attaining project cost accounting.
Interior’s Strategic Plan Can Be Further Improved
There are a number of aspects of Interior’s plan that still can be improved to better meet the purposes of the Results Act. In particular, some of the subagencies—BIA, the Bureau of Reclamation (BOR), FWS, and NPS—need to more fully develop the program evaluation component of their plans. While each of these subagencies, as well as the departmental overview, has made revisions to its draft plan in this area, the revisions still do not provide a complete understanding of specifically how program evaluations were used in developing the plan or what future evaluations will be done and when for each of the subagencies. Including this kind of information is important because without it, it is difficult for both the subagencies and other users of the plan to have confidence that the goals are the correct ones and that the strategies will be effective.
Furthermore, while the subagencies have made progress in restating a number of their goals and objectives in a more measurable way as we suggested in our July report, this area of the plan still can to be improved. Many of the goals and objectives are still process oriented, not results oriented, and/or expressed in a manner that will make meaningful performance measurement difficult. For example, one of the strategic goals in FWS’ plan states that: “By 2002, the current maintenance backlog will be reduced annually.” As stated, it is not clear what level of performance is expected or will be considered acceptable in achieving this goal. We observed similar difficulties in several of the subagencies’ plans.
While the September 1997 plan now includes a discussion of ongoing efforts to coordinate a number of crosscutting issues facing the Department and identifies its future approach in this area, the plan still does not explicitly address the crosscutting issues identified in our July report. These included the Department’s environmental protection and remediation, stewardship assets, Indian programs, land and natural resource management, and recreation programs.
In our July report, we noted that the plan needed to more fully address information management issues. This need still exists in the September plan. In the September plan, Interior has identified goals and actions needed to implement the provisions of the Paperwork Reduction Act of 1995 and the Clinger-Cohen Act of 1996 but does not clearly describe how it plans to achieve, or to measure its success in achieving, its goals. Also, Interior needs to explain how it plans to address the Year 2000 problem as well as significant information security weaknesses—two issues that we have identified as high risk across the federal government. Furthermore, the September plan now states that Interior’s critical information systems will be Year 2000 compliant by September 30, 2000—9 months after the January 1, 2000, deadline.
Agency Comments and Our Evaluation
On October 10, 1997, we met with Interior officials, including the Deputy Assistant Secretary for Budget and Finance, to obtain the Department’s comments on our observations about its strategic plan. Interior believes that the September 1997 plan meets the requirements of the Results Act. However, the Department acknowledges that improvements can be made in several areas. Interior noted that the development of its strategic plan is an iterative process and that future versions of the plan will address areas in which we and others show a need for improvement. Furthermore, in connection with crosscutting issues, Interior commented that it believes that its current efforts and initiatives in this area are sufficient. However, in our view, focusing on results implies that federal programs’ contribution to the same or similar results should be closely coordinated to ensure that goals are consistent and that, as appropriate, program efforts are mutually reinforcing. In connection with information management issues, Interior commented that it has detailed plans to address Year 2000 issues and does not believe the level of detail that we suggested is necessary for inclusion in a strategic plan. We continue to believe that clear discussions of Year 2000 and information security issues would strengthen the strategic plan and provide linkages for its operational plans. This disclosure would help Congress, departmental customers, and the general public to better understand the Department’s goals, strategies, and measures.
Issue Area Contact
Victor S. Rezendes, Director, Energy, Resources, and Science Issues; Resources, Community, and Economic Development Division, (202) 512-3841.
Observations on the Department of Justice’s Strategic Plan
On July 11, 1997, we issued a report on the Department of Justice’s February draft strategic plan (The Results Act: Observations on the Department of Justice’s February 1997 Draft Strategic Plan, GAO/GGD-97-153R). On August 15, 1997, Justice revised its plan and we testified on September 30 on the plan’s compliance with the Act’s requirements (Results Act: Comments on Justice’s August Draft Strategic Plan, GAO/T-GGD-97-184). Justice’s formally issued strategic plan was submitted to OMB and Congress on September 30, 1997. As requested, we have reviewed the issued strategic plan and compared it with the observations in our July 11 report and September 30 testimony. On October 7, 1997, we briefed your staffs on our further observations on the strategic plan. The key points from that briefing are summarized herein.
Summary of Key Observations From Our July Report and Our September Testimony
In response to comments on its February strategic plan, Justice revised its plan in August. The revised plan addressed many of the issues we raised in our July report.
In our July report, we pointed out that of the six elements required by the Act, three—the relationship between long-term goals and the annual performance plans, the key external factors that could affect Justice’s ability to meet its goals, and a program evaluation component—were not specifically identified in the draft plan. The remaining three elements—the mission statement, goals and objectives, and strategies to achieve those goals and objectives—were discussed, but each had weaknesses. The most important of these were that the mission statement did not cover a major statutory responsibility, goals and objectives were not consistently as results oriented or measurable as they could have been, and strategies were not fully developed.
In addition, we observed that the February draft plan could be more useful to Justice, Congress, and other stakeholders if it provided a more explicit discussion of (1) crosscutting activities, (2) major management challenges, and (3) Justice’s capacity to provide reliable information to manage its programs or determine if it is achieving its strategic goals. Recognizing crosscutting issues and the coordination required to address them is particularly important for Justice because, as the federal government’s attorney, it helps the various federal law enforcement agencies enforce the law in federal courts. Explicit consideration of major management challenges, including the capacity to produce reliable information for management decisionmaking, is important because these challenges could affect Justice’s ability to develop and meet its goals.
In our September testimony, we pointed out that Justice’s August draft plan discussed, to some degree, five of the six required elements—a mission statement, goals and objectives, key external factors, a program evaluation component, and strategies to achieve the goals and objectives. The August draft plan did not include a required discussion on the relationship between Justice’s long-term goals/objectives and its annual performance plans.
In addition, we noted that the August draft plan could have better addressed how Justice plans to (1) coordinate with other federal, state, and local agencies that perform similar law enforcement functions, such as the Defense and State Departments with regard to counter-terrorism; (2) address the many management challenges it faces in carrying out its mission, such as internal control and accounting problems; and (3) increase its capacity to provide performance information for assessing its progress in meeting the goals and objectives over the next 5 years.
Improvements Were Made in Justice’s Strategic Plan
Justice’s issued strategic plan incorporated several improvements that make it more responsive to the requirements of the Results Act than were the February and August draft plans. Its September plan discusses each of the Act’s required elements. In particular, Justice added in its August plan a discussion of eight key external factors that could significantly affect achievement of its long-term goals, information that is helpful to Congress in its consideration of Justice’s plan. However, information about alternatives that could reduce the potential impact of these external factors was not provided.
In addition, Justice’s August strategic plan included a discussion of the role program evaluation is to play in Justice’s strategic planning efforts. Justice recognized that it has done few formal evaluations of Justice programs in the past, but the plan acknowledged that sound program evaluation is an essential aspect of achieving the purposes of the Act and stated that Justice plans to examine its evaluation approach to better align evaluations with strategic planning efforts. Further, Justice pointed out that it will continue to improve its efforts to benefit from our evaluations. This element of the plan could be more helpful to decisionmakers if it identified future planned evaluations and their general scope and time frames, as encouraged by OMB strategic plan guidance. address (1) its process for managing its information technology investments, steps taken to provide security over its information systems, and strategy to ensure that computer systems accommodate dates beyond the year 2000; and (2) aspects of its internal control processes that identify management weaknesses and vulnerabilities. Justice also added a discussion on “accountability,” debt collection, and asset forfeiture. However, the plan would be more helpful if it included a discussion of corrective actions Justice has planned for significant internally and externally identified management weaknesses, as well as how it plans to monitor the implementation of such actions. In addition, the plan does not address how Justice will correct significant problems identified during the Inspector General’s fiscal year 1996 financial statement audits, such as inadequate safeguarding and accounting for physical assets and weaknesses in the internal controls over data processing operations.
Justice’s Strategic Plan Can Be Further Improved
Several elements of Justice’s issued strategic plan could be further improved to better meet the purposes of the Results Act. In particular, some of the plan’s goals and objectives still were not stated in as results oriented or measurable a form as they could be, and some of the strategies to achieve the goals and objectives did not clearly explain how and to what extent Justice programs would contribute to achieving the goals, how its resources are to be utilized to achieve the goals, or how Justice plans to assess progress in meeting those goals. For example, Justice has a goal to maximize deterrents to unlawful immigration by reducing the incentives of unauthorized employment and entitlements. It is likewise unclear how Justice will be able to determine the effect of its efforts to deter unlawful immigration, compared to the effect of changes in the economic and political conditions in countries from which illegal aliens originated. In addition, Justice’s mission statement, which we observed in July as seeming to be incomplete because it omitted one of its largest budget items—detention and incarceration function—was not changed. reflects high level and crosscutting annual goals and indicators and (2) more detailed component and appropriation-specific performance information. Justice added that goals and indicators will be supportive of, and derived from, those set forth in the strategic plan. Recognizing that the linkage between the strategic plan and the annual performance plan is a critical element of the Act, Justice said that it has revised its internal processes to ensure that the strategic plan serves as the foundation for the development of annual budgets and performance plans. In our opinion, Justice’s September strategic plan could better meet the purposes of the Act by discussing, as contained in OMB guidance, (1) the type, nature, and scope of the performance goals to be included in its performance plan; (2) the relation between the performance goals and the general goals and objectives; and (3) the relevance and use of performance goals in helping determine the achievement of general goals and objectives. This information is important because the linkage between the goals and objectives and annual performance plan provides a basis for judging whether an agency is making progress toward achieving its long-term goals, not just its annual goals, which would be reflected in the annual performance plan.
We observed that the February and August draft plans did not include a discussion of how Justice’s activities would be coordinated with other related crosscutting law enforcement activities. The issued strategic plan includes a goal to coordinate and integrate law enforcement activities wherever possible and to cooperate fully with other federal agencies. However, the plan could better serve the purposes of the Results Act by discussing how Justice plans to implement that goal and to measure and assess inputs, outputs, and outcomes to achieve crosscutting law enforcement goals.
Agency Comments
On October 14, 1997, we obtained oral comments from Justice officials, including the Director, Management and Planning Staff, on a draft of our analysis and observations of Justice’s issued strategic plan. They said that our analysis and observations fairly represent Justice’s strategic plan.
Issue Area Contact
Norman J. Rabkin, Director, Administration of Justice Issues; General Government Division, (202) 512-8777.
Observations on the Department of Labor’s Strategic Plan
On July 11, 1997, we issued a report on the Department of Labor’s draft strategic plan (The Results Act: Observations on Department of Labor’s June 1997 Draft Strategic Plan, GAO/HEHS-97-172R). Labor formally submitted its plan to OMB and Congress on September 30, 1997. As requested, we have reviewed this strategic plan and compared it with the observations in our earlier report. On October 16, 1997, we briefed your staffs on our further observations on the strategic plan. The key points from that briefing are summarized herein.
Summary of Key Observations From Our July Report
To meet the Results Act requirements for a strategic plan, Labor submitted individual plans for 15 of its 24 component offices or subunits, which it supplemented with a “strategic plan overview.” In one case, one of Labor’s offices—the Employment Standards Administration (ESA)—did not submit a plan itself, but instead submitted plans for the four subunits under its responsibility. While OMB Circular No. A-11 provides agencies discretion to submit strategic plans that cover only major functions or operations, Labor provided no indication as to why its other offices or subunits did not provide plans.
We reported that neither the overview nor the component plans fully met the Act’s requirements or OMB guidance. For example, the overview’s mission statement was not sufficiently descriptive of Labor’s basic purpose, and the overview did not include elements identified by the Act, such as strategies to achieve goals or evaluations used to establish goals. Further, a majority of the component plans did not include all of the elements required by the Act, such as the strategies to achieve the goals or key factors affecting goal attainment. We noted that the overview would be more useful if it included all of the elements identified by the Act and, regarding the mission statement specifically, if it communicated more about Labor’s purpose, referring to such basic responsibilities as job skills development, job placement, and worker protection. three broad programmatic categories that were not developed into goals. We observed that Department-wide goals enunciated by the Secretary in recent congressional testimony could serve as the basis from which to develop Department-wide goals that are results oriented and set out the long-term programmatic policy and management goals of the agency.
We found that the goals in the overview and in the component plans were generally consistent with Labor’s statutory responsibilities, and the plans generally covered all of Labor’s major functions and operations.
Regarding crosscutting issues, we reported that the strategic overview recognized the roles of other organizations in carrying out particular functions and the importance of establishing partnerships with these organizations to carry out such functions. However, we indicated that the overview could be improved if it recognized the importance and number of other participants—namely, the other 14 federal agencies—involved in one major area of responsibility—job training. In so doing, Labor could discuss how its programs fit in with a broader national job training strategy. We also found that the Labor officials responsible for preparing the plan and monitoring its progress had not consulted with congressional staff regarding the overview or the component plans.
Finally, we reported that the strategic overview highlighted the need for information and data systems to ensure timely and sound evaluations to assess agency progress in meeting its goals. However, the overview did not describe Labor’s strategy for ensuring that this kind of information was collected and used to assess progress and performance. The overview also did not discuss how Labor planned to use information technology to achieve its mission, goals, and objectives, or to improve performance and reduce costs. We reported that the plan could be improved by including a discussion of Labor’s investment technology process, including how Labor planned to address the Year 2000 problem, or how Labor planned to comply with the Clinger-Cohen Act of 1996, which calls for agencies to implement modern technology management to improve performance and meet strategic goals.
Improvements Made in the Strategic Plan
prepared draft plans previously (including 1 that has overall management responsibility for implementing the Results Act) and the 4 plans originally submitted by ESA’s subunits were consolidated into 1 ESA-level plan for a total of 15 component-level plans. In its overview, Labor provided a rationale for the components included, noting that “. . . strategic plans have only been required of the 15 program and management agencies of the Department. Several staff offices whose functions are in direct support of the Secretary’s office are not included.”
Labor’s strategic overview and all but 1 of the 15 component unit plansinclude all 6 elements. Further, the overview’s mission statement now provides a more complete description of Labor’s basic purpose of “foster and promot the welfare of job seekers, wage earners, and retirees of the United States by improving their working conditions, advancing their opportunities for profitable employment, and protecting their retirement investments.” Moreover, discussions of strategies to achieve goals and external factors that could affect the achievement of goals are discussed alongside individual goals, which facilitates the understanding of how particular strategies and external factors are linked to each goal.
The overview also appears to address Labor’s traditionally decentralized management approach, which has posed numerous management challenges for Labor in the past. For example, the overview now contains five clearly articulated Department-wide goals that are generally results oriented and that are consistent with those recently enunciated by the Secretary. The overview also includes a sixth Department-wide goal of maintaining a departmental strategic management process, which may be an indication of a renewed emphasis by Labor to develop a more strategic approach to departmental management. Other indications of this renewed approach to Department-wide leadership are evident in the similar organizational style of each of the component plans and the clear linkage between the strategic overview and the plans. For example, in the overview, the strategic goals of each of the units/offices are highlighted under the appropriate Department-wide goal; and in each of the plans for the offices/units, the office/unit strategic goals are categorized according to the Department-wide goal to which they correspond. Further, the overview now includes a discussion of the relationship between the goals in the annual performance plan and in the strategic plan.
The overview and component plans we reviewed continue to describe all of Labor’s major functions, and the goals are consistent with relevant statutes.
Strategic Overview Plan Can Be Further Improved
Although Labor has made significant improvements to its strategic plan overview, some sections in the overview may benefit from further elaboration. For example, the overview does not detail how information from evaluations was used to develop the plan, nor does it specify how future evaluations will help assess Labor’s success in achieving its stated goals. Instead, the overview discusses the fact that evaluations in the regulatory agencies have lagged behind those in the employment and training area. In that respect, it is even more important that the overview provide schedules or time lines for future evaluations, identify what evaluations will be done, and highlight how future program evaluations will be used to improve performance. Along those lines, we had earlier reported that the experiences of Labor’s Occupational Safety and Health Administration (OSHA) as a pilot could provide insight on how evaluations can be managed. OSHA has been involved in a number of activities geared toward making the management improvements intended by the Results Act. Although it is not a requirement of the strategic planning process, we continue to believe that a discussion in Labor’s overview related to the experiences gained from the OSHA pilot project—including lessons learned and whether best practices or other lessons could be applied Department-wide or in units with similar functions—may prove helpful.
Labor could also improve the overview by continuing to enhance the discussion of crosscutting issues, such as coordination with others who have similar roles for particular functions. While the overview does make reference to a few other organizations with responsibilities in this area and notes that Labor will work with them, there is no discussion of what specific strategies Labor will use to realize efficiencies through coordination and possible consolidation of job training programs in order to achieve a more efficient employment training system. from additional discussion on how these agencies are working together to share information on efficient enforcement and public education strategies or measurement tools.
The overview could also benefit from a more elaborate discussion of the strategies Labor will use to ensure that its information technology allows it to achieve its goals. While the overview continues to cite the vision of expanded use of technology across Labor and its component units, the plan does not adequately discuss the inclusion of a framework—sometimes called a systems architecture—that will serve as a blueprint for developing and maintaining integrated information systems. Such a framework would help ensure that the data being collected and maintained within Labor are structured and stored in a manner that makes them consistent, accessible, understandable, and useful. The overview also still does not include a clear, integrated, measurable Year 2000 strategy, which may be needed to adequately consider the multitude of system and information interfaces inside and outside of Labor that must be addressed prior to the millennium change.
Agency Comments
In an October 14, 1997, letter from Labor’s Acting Assistant Secretary for Administration and Management, Labor thanked us for acknowledging the substantial progress in Labor’s plan. The letter noted that there is more work to be done and that Labor will address the concerns we raised about the use of evaluations in developing plans and evaluating results, crosscutting issues, and internal coordination among safety and health agencies during the next revision. Labor also noted that it will expand its presentation in the strategic overview to provide additional information on its information technology. However, Labor noted that a more detailed discussion of its systems architecture and its Year 2000 compliant strategy are included in Labor’s separate Information Technology Strategic Plan and other documents. Additionally, it said its approach for addressing information technology in the overview was to describe the linkage and the importance of information technology in support of program agencies and the achievement of goals. While this approach is reasonable, and our preliminary review of the Information Technology strategic plan indicates that it tries to address many of the issues we outlined previously, the strategic overview could still benefit from clearer cross-referencing and linkage between the two plans. Additionally, the Information Technology Strategic Plan may benefit from clearer linkage between the components’ activities and Labor’s activities as a whole to enhance information technology.
Issue Area Contact
Carlotta C. Joyner, Director, Education and Employment Issues; Health, Education, and Human Services Division, (202) 512-7014.
Observations on the Department of State’s Strategic Plan
On July 18, 1997, we issued a report on the Department of State’s draft strategic plan (The Results Act: Observations on the Department of State’s May 1997 Draft Strategic Plan, GAO/NSIAD-97-198R). State issued its formal strategic plan and submitted it to OMB and Congress on September 27, 1997. As requested, we have reviewed the publicly issued strategic plan and compared it with the observations in our July 18 report. On October 20, 1997, we briefed your staffs on our further observations on the strategic plan. The key points from that briefing are summarized in the following sections.
Summary of Key Observations From Our July Report
State’s draft strategic plan was useful in setting and clarifying U.S. foreign policy goals, but it did not contain sufficient information to fully achieve the purposes of the Results Act and was incomplete in several important respects. In particular, the draft plan omitted two elements required by the Act: (1) components identifying the relationship between long-term goals/objectives and annual performance goals and (2) a description of how program evaluations were used to establish or revise strategic goals and a schedule for future program evaluations. To fully achieve the purposes of the Act, State’s draft plan needed to be more descriptive and consistent with OMB guidance. For example, the plan contained several sections labeled strategy for specific goals, but it did not specifically identify the actions and resources needed to meet the plan’s goals or include a schedule for taking significant actions. State’s strategies often focused on describing the Department’s role in various areas instead of describing how State’s programs and operations would help achieve the goals.
We observed that State’s draft plan did not specifically discuss the likelihood that other agencies might have functions similar to or possibly duplicative of State’s role that could affect the formulation and implementation of strategies. administrative systems. These issues were discussed separately in a diplomatic readiness section of the strategic plan. We said that the draft plan would be strengthened if it better described how meeting these management challenges could affect achievement of the plan’s strategic goals. Furthermore, we noted that the draft plan would have been enhanced if it had included a discussion of how the proposed consolidation of State, U. S. Information Agency, and Arms Control and Disarmament Agency might affect goals, strategies, and resource requirements. In addition, we suggested that State’s plan would be easier to use if it contained a clearly labeled agency mission statement and included a discussion of the Department’s key legal authorities.
We also observed that State’s capacity to provide reliable information about its operations and program performance was questionable because of long-standing deficiencies in the Department’s information and financial accounting systems. Successfully resolving a number of these material deficiencies in the Department’s financial and information management systems will be critical to implementing the plan.
Some Improvements Were Made in State’s Strategic Plan
State’s September 1997 strategic plan incorporated some improvements that help make it more responsive to the requirements of the Results Act.
With respect to the first element required by the Results Act that was missing in the draft plan, State introduced a separate section describing the relationship between the plan’s strategic goals and the goals and objectives in the Department’s performance plan. It used only one example to describe this relationship, discussing the linkages between operational and performance goals for achieving the strategic goal of eliminating the threat from weapons of mass destruction or destabilizing conventional arms. This example is helpful, but it would be more useful if it clearly described how the resource and performance measurement components will be handled in the Department’s annual program planning cycle. With respect to the second missing element, the plan now includes a section dealing with program evaluations. However, instead of including a description of the program evaluations used in developing goals and objectives, as required by the Results Act, the new section is largely a discussion of State’s rationale for not fully meeting this requirement. explaining how resources from various sources, and managed by different agencies, are established in the international affairs function of the President’s budget—the “150” account.
Strategic Plan Can Be Further Improved
State’s strategic plan focused on the Department’s mission and role in carrying out 16 strategic foreign policy goals. A few modifications were made in the strategic goals since our July review (for example, a goal of promoting broad-based economic growth in developing and transitional economies was added, and a goal of improving the well-being of the world’s poor was dropped), but the plan still did not consistently explain what results are expected from the Department’s major functions or when to expect the results. Some changes in the Department’s strategies were also made, but it remained unclear how some of the goals are to be achieved or what level of resources is required. State’s plan specifically acknowledged that more needs to be done to identify agencies’ capabilities and the resources needed to achieve the goals.
The plan’s section on program evaluations is essentially an explanation of why the plan does not fully meet the requirements of the Results Act. The plan pointed out that no process existed for systematic evaluation of the foreign affairs goals. As a result, the plan did not identify any evaluations used for establishing or revising the strategic goals or include a schedule for future evaluations. It is State’s position that it should not be held strictly accountable for this and other requirements of the Act because of the complexities of foreign policy, the scope of the Department’s responsibilities that cover most other agencies, and the complexities of managing overseas missions. We recognize that program evaluations in the foreign affairs area are difficult, but we believe that an effective evaluation process will be critical to determining the extent to which State is successfully achieving/helping to achieve goals and what actions may be necessary to help improve performance. global programs, and international security functions. The plan also noted that the incorporation of management goals for the integration of other foreign affairs agencies awaits decisions concerning how the reorganization will proceed.
The plan’s section on management issues emphasized the importance of the strategies for achieving diplomatic readiness but noted that this represents a first effort to set strategic goals for the Department’s major management responsibilities. It still did not address the serious management problems related to cost control, overseas embassy management, and financial management identified in our prior work and discussed in our July report. The plan’s discussion of data capacity did not specifically address the serious deficiencies in State’s financial accounting and information systems, but it noted in more general terms that it will take several years to develop performance measures and related databases in order to provide sufficient information on achievement of the goals. The Chief Financial Officers Act requires agencies to have accounting and financial accounting systems that provide for the development of cost information and systematic measurement of performance. Currently, State does not have a true cost accounting system, and, as a result, reliable cost information by function cannot be provided.
Other Observations
In addition to developing the data capacity and information systems essential for measuring progress, State’s strategic plan also acknowledged that much more remains to be done to adequately develop the Department’s long-term strategic planning process. State’s plan identified several long-term actions as critical to the process, including the development of an agency performance plan and mission performance plans for each overseas embassy linking annual goals with long-term strategic goals, performance measures, and a process for conducting performance evaluations.
State’s strategic plan cautioned that it will take substantial effort to develop a fully refined set of performance measures and a performance evaluation process. In discussing its efforts to develop an integrated planning process, State noted that a process linking overseas mission performance plans to the Department’s strategic and diplomatic readiness goals will first be in place for the Department’s fiscal year 2000 budget submission.
As State’s strategic plan evolves over time, other matters will clearly require attention. For example, State’s performance plan will need to be definitive to compensate for the continued lack of specificity in State’s strategies concerning how the Department will achieve individual long-term goals and the level of resources needed for State’s activities. The overseas mission performance plans will also need to be high quality to be successfully integrated into State’s master plan, in view of (1) the billions of dollars in resources associated with State’s overseas operations and (2) the historical weaknesses we have identified in overseas embassy management. These weaknesses have included insufficient staff training, poor inventory controls, and questionable procurement practices. State’s lack of attention to the use of evaluations in setting and refining its long-term goals and the lack of a specific schedule for future evaluations are other areas that deserve attention. We believe that several areas may require evaluation to ensure that the Department’s strategic planning process is sound, including the adequacy of State’s performance and program planning processes, the extent to which State and other agencies’ functions may or may not be duplicative, and the adequacy of State’s overseas staffing decisions based on design and implementation of its new staffing model.
Agency Comments
We obtained oral comments from State officials responsible for the Department’s strategic planning efforts. They generally agreed with our description of the progress State made in its strategic plan and the issues that require further attention. However, they noted that in judging the quality of the plan, it is important to keep in mind the complexities of strategic planning in the foreign affairs area. These complexities include the scope of the strategic goals and the national interests involved, the numerous government agencies sharing responsibilities, and the lack of proven performance measures in key functional areas. Department officials also recognized that the strategic planning process has not yet paid sufficient attention to management and cost issues. However, they expect that the diplomatic readiness section of the plan will be revised in the spring of 1998, along with other parts of the plan, based on a series of seminars and stakeholder discussions scheduled to begin in November 1997.
Issue Area Contact
Benjamin F. Nelson, Director, International Relations and Trade Issues; National Security and International Affairs Division, (202) 512-4128.
Observations on the Department of Transportation’s Strategic Plan
On July 30, 1997, we issued a report on the Department of Transportation’s (DOT) draft strategic plan (Results Act: Observations on the Department of Transportation’s Draft Strategic Plan, GAO/RCED-97-208R). DOT’s formally issued strategic plan was submitted to OMB and Congress on September 30, 1997. As requested, we have reviewed the September plan and compared it with the observations in our July report. On October 16, 1997, we briefed your staffs on our further observations on the strategic plan. Our key points are summarized herein.
Summary of Key Observations From Our July Report
DOT’s draft strategic plan did not fulfill all of the requirements of the Results Act. The draft plan met the Results Act’s requirements for mission statement, long-term goals, and a description of program evaluations; however, each component had weaknesses that could be improved. The draft plan did not meet the Act’s requirements to describe strategies for achieving goals, a linkage between long-term goals and annual performance goals, and those key external factors that could significantly affect DOT’s achieving its goals. Overall, the draft was so general that it did not clearly identify the Department’s priorities. We reported that the quality of the draft plan could have been improved throughout by adhering more closely to OMB’s guidance for preparing strategic plans and including more detailed information.
In addition, the draft plan did not (1) show evidence of coordination with other agencies that have programs and activities that are crosscutting or similar to DOT’s or (2) adequately address major management challenges and high-risk areas that we and others previously identified. We also observed that DOT’s ability to produce reliable performance information was uncertain because the draft plan was unclear about what information would be needed to measure performance. Finally, the draft plan reflected the Department’s key statutory authorities.
Improvements Made in DOT’s Strategic Plan
contribute significantly to each goal. Finally, the discussion of program evaluations has been revised to include a table that lists future evaluations and, for each, describes the scope, methodology, key issues to be addressed, schedule, and relationship to the plan’s long-term goals.
Moreover, the September plan meets two of three additional requirements of the Results Act that the draft plan did not meet. First, the revised plan now meets the Act’s requirements by discussing how the annual performance goals, which are being developed for the fiscal year 1999 budget submission, will link to DOT’s mission and long-term goals. The September plan also includes a table for each long-term goal showing examples of possible indicators that may be used to measure annual performance and the availability of data. Second, the discussion of those key external factors that could significantly affect DOT’s ability to achieve its goals has been rewritten and expanded to meet the Act’s requirements. The September plan identifies new factors—such as legislation to address long-term financing for the Federal Aviation Administration (FAA) and Amtrak—that will affect DOT’s ability to achieve its long-term goals. The plan also summarizes how economic, social, political, environmental quality, national defense and security, and technology trends affect each long-term goal; provides a few examples of activities needed to mitigate the effect of these trends; and explains each factor in greater detail in both a separate section and an appendix. security weaknesses; and (6) change computer systems to accommodate dates beyond the year 1999, that is, address the Year 2000 problem.
Finally, the September plan continues to reflect DOT’s key statutory authorities in an appendix and includes minor clarifications.
DOT’s Plan Can Be Further Improved
DOT’s September plan can be further improved in two areas. First, the plan’s discussion of strategies for achieving its long-term goals has improved in some areas but still does not meet all requirements of the Results Act. The revised plan describes corporate management strategies for implementing the plan that cut across the Department. These strategies provide useful information, for example, in explaining how long-term goals will be communicated to employees and how personnel will be assigned accountability for achieving the goals. However, the revised plan still does not describe the operational processes, skills, technology, and resources required to meet the long-term goals, as required by the Results Act. The general discussion of corporate management strategies does not meet these requirements, which should be addressed for each goal. Furthermore, the plan could be improved by following OMB’s guidance on strategic plans and providing additional detail when achieving a goal is predicated on a significant change in resource or technology levels. For example, we have reported that successful implementation of certain aviation security measures mentioned in the plan is contingent upon deciding who will finance the security improvements and developing the needed technology. In addition, the plan could be improved by following OMB’s guidance on including time frames for initiating or completing significant actions. The September plan contains time frames for some significant actions, such as addressing the Year 2000 problem and obtaining reliable financial statements by fiscal year 2000; but it does not include time frames for other significant actions, such as completing air traffic control modernization and improvements to Amtrak’s Northeast Corridor. these problems, it does not demonstrate a firm commitment to resolve them through specific strategies. For example, the plan mentions our concerns about the need to improve the oversight of highway and transit projects, which are continuing to incur cost increases, experience delays, and have difficulties acquiring needed funding commitments. The plan states that these concerns are addressed under corporate management strategies. The strategies, however, provide insufficient details to address the problems with these projects. As another example, the revised plan mentions Amtrak in an appendix but provides too little information to adequately address our concerns about the corporation’s very precarious financial condition, which threatens its survival. The plan could be improved by addressing Amtrak’s role in a national transportation framework and providing objectives concerning the future of Amtrak and strategies for meeting these objectives.
The plan acknowledges the significance of financial management to the achievement of its long-term goals and is generally responsive to specific comments that we made about the draft plan. The revised plan includes a new section that discusses (1) general financial management and (2) the need for and plans to improve financial management of and accountability for the Department’s financial resources. However, while the revised plan acknowledges that unreliable accounting (including cost accounting) information exists at the program level, it does not provide specific strategies or timetables for resolving key problems.
Other Observations
DOT has added specificity to the plan that greatly improves its overall quality. However, the plan still takes an “umbrella” approach—it is expansive enough to encompass all of DOT’s programs, but it does not describe the contributions from specific modes to implement the plan. The plan refers to the development of a “National Transportation Strategy” with subordinate strategies for air, surface, and maritime elements. This strategy might provide the missing link between the Department-wide goals and the programs throughout DOT.
Agency Comments
in two ways. First, in discussing each strategic goal, the plan includes a section entitled “How We Will Achieve the Strategic Goal” that describes the processes that DOT will employ to achieve the goal. Second, the Department stated that the plan meets this requirement in a section that describes six overarching management strategies—the “ONE DOT management philosophy,” human resources, customer service, resource and technology, information technology, and resource and business process management.
We disagree that the sections of the plan mentioned by DOT fulfill the Act’s requirements. For the most part, the sections that discuss how DOT will achieve the goals are too general to do so. For example, the plan states that to achieve the mobility goal of ensuring an accessible, efficient transportation system, DOT will improve technical assistance. The plan does not explain the type of technical assistance, who will receive the assistance, or how the assistance will improve mobility. As another example, the plan states that to achieve its economic growth and trade goal, DOT will assess the performance of the transportation system as a whole. The plan does not explain how such an assessment will help the Department achieve this goal. Furthermore, as we mentioned, the plan’s corporate management strategies are also too general to meet the Act’s requirement, although they do provide useful information in certain areas, such as explaining how the goals will be communicated to employees. These strategies provide a philosophy for the Department to operate under, but not specific steps to achieve the goals. For example, the human resources management strategy states that the Department will “achieve its strategic goals with a workforce that is knowledgeable, flexible, efficient, and resilient.” The actions to accomplish this include redesigning human resources programs to “allow DOT to recruit, develop, and deploy a diverse workforce with those 21st Century competencies needed to achieve the DOT’s strategic goals.” The strategy does not explain what competencies are needed.
Finally, DOT commented that achieving its strategic goals is not predicated on a significant change in resource or technological levels. We disagree. As we stated in our observations, successful implementation of certain aviation security measures mentioned under the national security goal is contingent upon deciding who will finance the security improvements and developing the needed technology.
Issue Area Contact
Phyllis F. Scheinberg, Associate Director, Transportation Issues; Resources, Community, and Economic Development Division, (202) 512-2834.
Observations on the Department of the Treasury’s Strategic Plan
On July 31, 1997, we issued a report on the Department of the Treasury’s draft strategic plan (The Results Act: Observations on the Department of the Treasury’s July 1997 Draft Strategic Plan, GAO/GGD-97-162R). Treasury’s formally issued strategic plan was submitted to OMB and Congress on September 30, 1997. As requested, we have reviewed the September 30 strategic plan and compared it with the observations in our July 31 report. On October 15, 1997, we briefed your staffs on our further observations on the strategic plan. The key points from our July report and October briefing are summarized herein.
Summary of Key Observations From Our July Report
Treasury’s July draft strategic plan was incomplete and did not meet all of the requirements of the Results Act. Of the six elements required by the Act, the Treasury draft plan included four. Of these four elements, two—the mission statement and key factors external to the agency that could significantly affect achievement of the strategic goals and objectives—generally met the Act’s requirements, but, as we stated, these could have been strengthened. The information contained in the plan on the two other elements—goals and objectives and the strategies to achieve them—was often too general and vague to be used effectively by Treasury management, Congress, and other stakeholders. We said these two elements could be improved if they were more specific, results oriented, and linked to the plans of Treasury’s bureaus and major program offices. Two elements—the relationship between long-term goals and objectives and annual performance goals, and a description of how program evaluations were used to establish or revise strategic plans—were missing from the draft plan we reviewed.
The draft strategic plan did not adequately address crosscutting issues and made no mention of whether Treasury had coordinated with other federal departments and agencies that shared related functions. In addition, although a major part of the mission statement was focused on management, the draft plan did not adequately address some of the critical management problems facing Treasury that could affect its ability to achieve its strategic goals and objectives. Finally, we said that Treasury’s capacity to provide reliable information on the achievement of strategic and program performance was questionable.
Improvements Made in Treasury’s Strategic Plan
Treasury revised the four elements that were in its draft plan so that they better meet the requirements of the Results Act. In addition, the plan better addresses Treasury’s critical management problems and includes more information on how the Department plans to coordinate with other agencies on crosscutting issues.
Treasury’s plan is now presented as an overview with more detailed information provided in the plans of its 17 bureaus and major program offices. Taken together, the 18 plans comprise Treasury’s strategic plan.Treasury’s goals and objectives are now linked with those of its bureaus and major program offices. Consequently, the plan provides a clearer discussion of which bureaus and program offices have responsibility for carrying out the goals and objectives. Treasury’s plan also states that details on resources needed to implement strategies are to be included in bureau and program office strategic plans as well as the Department’s budget submission. Because the plan also links the goals and objectives in the overview plan to the annual performance goals and measures in the strategic plans of the bureaus and program offices, it provides information on one of the elements required by the Results Act that was missing from the draft plan.
Treasury has also made several other improvements to its plan. A section was added describing how program evaluations were used to develop the plan. This section also cites examples of planned evaluations that Treasury is to use as input for future plans. The plan includes more information aimed at addressing the critical management problems the Department faces. For example, an objective has been added to the plan to address the Year 2000 computer problems. Also, throughout its plan, Treasury addresses crosscutting issues by pointing out where coordination is required with other agencies.
Treasury’s Strategic Plan Can Be Further Improved
its bureaus and program offices. Treasury’s plan could also be improved if performance goals were provided for each objective and if some of these goals were more results oriented. Treasury could also improve its plan by more explicitly addressing its critical management problems. Finally, Treasury’s plan could better address issues relating to its capacity to provide the types of reliable data needed to measure performance and assess progress in meeting its goals and objectives.
Treasury’s plan could be improved if the linkage between Treasury’s goals and objectives and those of its bureaus and program offices were more complete. Specifically, we found several gaps in the linkage between Treasury’s plan and the plans of its bureaus and components. For example, Treasury has an objective to “ensure strong financial management of Treasury accounts.” However, only six bureaus or program offices have corresponding objectives. For this objective, Treasury’s plan does not include a related objective for the Financial Management Service, which is responsible for managing the government’s finances, and IRS, the government’s primary revenue collector.
Treasury’s plan could also be improved if more complete and detailed information on strategies for achieving goals and objectives were included in the plans of its bureaus and program offices. Treasury’s plan contains general information on some strategies that are needed to achieve its goals and objectives. It also states that more detailed information regarding resource needs is to be included in its budget submission and the plans of its bureaus and program offices. However, we found several instances where a Treasury objective was linked to a bureau objective, but the bureau plan contained no corresponding strategy. For example, Treasury has three law enforcement objectives—to reduce counterfeiting, money laundering, and drug smuggling—where IRS has a role. However, IRS’ plan contains no specific strategy related to these three objectives. Also, where strategies were found in the bureau plans, they could be improved if more detailed information, such as technological and resource needs, were included. For example, IRS lists several strategies, including expanding nationwide access to taxpayer information on-line and updating taxpayer information daily, to achieve its objective to “improve customer service.” However, IRS’ plan does not discuss the resources needed to carry out these strategies.
Treasury’s plan has an objective to “improve capacity to recruit, develop, and retain high-caliber employees.” The plan lists six bureaus and program offices that have related objectives, but only one, the U.S. Mint, has a related performance goal.
Likewise, Treasury could enhance its plan by making its performance measures more results oriented. For example, Customs’ strategic plan includes a strategy to prevent drug smuggling whose performance measures (the number of arrests, seizures, and convictions, for example) are output oriented. The plan could be improved if more results-oriented measures, focusing on lowered drug smuggling rates, were developed in support of Customs’ strategy to prevent drug smuggling.
Treasury officials stated that they will attempt to develop results-oriented measures whenever possible, but that performance data may be difficult to collect in some cases, and output measures may be the best data available, at least for the near term. Furthermore, they felt that a balance of output-oriented and results-oriented measures may be desirable since the purpose of performance measures is to determine an agency’s effect on results. Nonetheless, Treasury’s plan could be further improved if results-oriented measures were developed to complement output measures wherever possible.
As we observed in our review of Treasury’s draft strategic plan, the current plan could also be improved if it explicitly addressed all critical management problems. Although the plan states that it addresses all our high-risk areas and other critical management issues, its discussion of Treasury’s critical management problems is not always explicit. For example, IRS’ accounts receivable—a high-risk area—is not addressed specifically in Treasury’s or IRS’ plan. Both plans contain goals related to increasing compliance with the tax laws and improving customer service, which indirectly could address IRS’ accounts receivable. However, as we previously reported, Treasury’s strategic plan could be more useful to Congress and other stakeholders if it more clearly presented how Treasury will address its critical management problems and how this will facilitate the Department’s achievement of its strategic goals and objectives. performance measures are contained within the plans of the bureaus and program offices. However, the Treasury plan does not address the difficulties of developing measures and collecting reliable data for some important areas of performance. For example, IRS and the Bureau of Alcohol, Tobacco and Firearms both use taxpayer burden as a performance indicator, but neither agency has adequate measures or data for tracking taxpayer burden. We recognize that developing measures of some areas of Treasury’s performance, such as taxpayer burden, will be very challenging, but the Treasury plan does not discuss how the Department plans to deal with these challenges.
Agency Comments
On October 30, 1997, we obtained oral comments from Treasury officials, including the Director of the Office of Strategic Planning, on a draft of our analysis of Treasury’s strategic plan. The officials generally agreed with our observations but suggested several changes to clarify areas where Treasury has improved its plan. They said that it was important to emphasize that their July 1997 draft strategic plan was a “working document” issued as required for consultation purposes with Congress and other stakeholders. As a result of the consultation process, they said that the plan was revised to address the concerns of Congress and other stakeholders, including GAO and OMB. Also, while the officials agreed that the current plan could be further improved in several areas, they said that the plan meets the Results Act’s requirements in that it contains all six required elements.
The officials also reiterated that the Department should be recognized for its Results Act implementation efforts. In particular, the officials told us that Treasury has reformatted its budget to serve as the performance plan required by the Results Act for the past 2 fiscal years. Also, last year, the Department issued its performance report for fiscal year 1996 as part of its budget submission—ahead of the Act’s requirements. They said that Treasury intends to better align its performance plan with the goals and objectives in its strategic plan and to submit the plan as part of its fiscal year 1999 budget request, scheduled to be released in February 1998. attempt to develop performance measures that are results oriented and for which reliable data exist.
Issue Area Contact
Jim White, Associate Director, Tax Policy and Administration Issues; General Government Division, (202) 512-9110.
Observations on the Department of Veterans Affairs’ Strategic Plan
On July 11, 1997, we issued a report with our observations on the Department of Veterans Affairs’ (VA) draft strategic plan, dated June 9, 1997 (The Results Act: Observations on VA’s June 1997 Draft Strategic Plan, GAO/HEHS-97-174R). Following this review, VA issued two additional drafts, dated August 1 and August 15, 1997. The August 15 draft was sent by VA to OMB for review and interagency coordination. On September 18, 1997, we testified before the Subcommittee on Oversight and Investigations, House Committee on Veterans’ Affairs, on the improvements in VA’s August 15 draft and the challenges remaining for VA in implementing the Results Act.VA submitted its formally issued plan to Congress and OMB on September 25, 1997. On October 14, 1997, we briefed your staffs on the observations we made in our September 18 testimony and further observations based on our review of the formally issued strategic plan.
Summary of Key Observations From Our July Letter
We found that VA’s June 1997 draft strategic plan represented an inconsistent and incomplete application of the six key components of a strategic plan as required under the Results Act. Also, the draft plan was somewhat confusing and difficult to follow, mainly because it had several different levels of goals, objectives, and strategies. In addition, the draft plan had not clearly identified needs for VA to coordinate and share information with other federal agencies. In terms of the key strategic planning elements, VA’s draft plan (1) focused more on the process of providing benefits and services than on results of VA programs for veterans and their families; (2) lacked objectives and strategies for achieving some of VA’s major strategic goals—in particular, for veterans’ benefits programs; (3) provided only limited discussions of external factors beyond the control of VA that could affect achievement of strategic goals; and (4) was not based on formal program evaluations.
VA officials acknowledged that these elements still need to be developed. The June 1997 draft included plans to establish a schedule of evaluations for VA’s major programs. These evaluations, in turn, would lead to development of results-oriented strategic goals. Also, the draft included plans to identify coordination efforts with other federal agencies and to develop communication mechanisms with them.
Improvements Were Made in VA’s Strategic Plan
VA made significant progress in making the strategic plan clearer, more complete, and more results oriented. Instead of presenting four overall goals, three of which were process oriented, VA has reorganized its draft strategic plan into two sections. The first section, entitled “Honor, Care, and Compensate Veterans in Recognition of Their Sacrifices for America,” is intended to incorporate VA’s results-oriented strategic goals. The second section, entitled “Management Strategies,” incorporates the three other general goals, related to customer service, workforce development, and taxpayer return on investment. VA believes that the process-oriented portions of the plan are important as a guide to VA’s management. We agree, as long as they are integrated with the plan’s primary focus on results. In addition, VA filled significant gaps in the discussions of strategic goals. The formally issued plan includes strategic goals covering all of its major programs and includes objectives, strategies, and performance goals supporting the strategic goals.
VA’s Strategic Plan Can Be Further Improved
VA’s strategic plan still needs improvement in four major areas: (1) development of results-oriented goals, (2) descriptions of how the goals are to be achieved, (3) discussion of external factors, and (4) discussion of coordination efforts with other agencies. Until VA makes improvements in these areas, its strategic plan will be incomplete and will not fully comply with the strategic planning requirements of the Results Act.
Perhaps the most significant challenge for VA is to develop results-oriented goals for its major programs, particularly for benefit programs. For some major VA programs, the strategic plan’s goals are placeholders for results-oriented goals that have not yet been developed. For example, the general goals for four of five major benefit program areas—compensation and pensions, education, vocational rehabilitation, and housing credit assistance—are stated in terms of ensuring that VA is meeting the needs of veterans and their families. The objectives supporting VA’s general goal for its compensation and pension area are to (1) evaluate compensation and pension programs to determine their effectiveness in meeting the needs of veterans and their beneficiaries and (2) modify these programs, as appropriate. defining program results is difficult for programs where congressional statements of the program purposes and expected results are vague or nonexistent. This is an area where VA and Congress can make progress in further clarifying program purposes and expected results. Once VA has developed strategic goals focused on results, it can develop objectives and strategies for achieving the goals.
Another remaining challenge for VA is to better integrate discussions of external factors that could affect its strategic planning. While VA added discussions of the implications of demographic changes among veterans, they are not linked to specific goals in the plan. For example, VA noted the impact of increased veteran death rates on demands for burials in VA and state veterans’ cemeteries. However, this is not linked to VA’s performance goals to complete specific numbers of cemetery construction and land acquisition projects by fiscal year 2002. Discussions of external factors were often limited to whether Congress would appropriate sufficient funds or make substantive legislative changes. Assessments of factors outside VA’s control, such as economic, social, and demographic changes, are also important in setting VA’s goals and in assessing VA’s progress in meeting them.
The other remaining challenge for VA is to identify areas where it needs to coordinate and share information with other federal agencies, as well as develop coordination plans. VA’s strategic plan identifies this need and includes a goal to (1) identify overlaps and links with other agencies, (2) enhance communication links with other agencies, and (3) keep state directors of veterans’ affairs and other state officials apprised of VA benefits and opportunities for collaboration and coordination.
Other Observations
VA had substantial consultations with Congress, and we participated in these consultations at the request of the House and Senate Committees on Veterans’ Affairs. In addition, VA held consultation sessions with representatives of veterans service organizations. VA has attributed improvements in its formally issued strategic plan to these consultations.
VA officials have stressed that they consider strategic planning a continuing, long-term process. Based on comments by VA officials and the changes VA has already made to its strategic plan, we expect further improvements over the next few years.
Agency Comments
In transmitting the formally issued strategic plan to Congress and OMB, VA also provided detailed responses to comments on its draft plans from the House Committee on Veterans’ Affairs, GAO, OMB, veterans service organizations, and VA employee organizations. These comments addressed the observations in both our July 11 letter and September 18 testimony. In general, VA agreed with our observations and indicated areas where it has revised its plan since the June 1997 draft. Also, we sent a draft of this appendix to VA officials, who had no additional substantive comments.
Issue Area Contact
Cynthia M. Fagnoni, Associate Director, Veterans’ Affairs and Military Health Care Issues; Health, Education, and Human Services Division, (202) 512-7202.
Observations on the Environmental Protection Agency’s Strategic Plan
On July 30, 1997, we issued a report on the Environmental Protection Agency’s (EPA) draft strategic plan (Results Act: Observations on EPA’s Draft Strategic Plan, GAO/RCED-97-209R). EPA made revisions to the draft plan and formally submitted it to OMB and Congress on September 30, 1997. As requested, we have reviewed the September 1997 plan and compared the changes with the observations we made in our July 30 report. On October 15, 1997, we briefed your staffs on our further observations on the strategic plan. The key points from that briefing are summarized herein.
Summary of Key Observations From Our July Report
EPA’s draft strategic plan contained four of the six elements required by the Results Act: (1) a mission statement, (2) general goals and objectives, (3) approaches or strategies to achieve the goals and objectives, and (4) an identification of key external factors. For these four elements, we noted that the draft plan did not contain all of the details suggested by OMB Circular A-11 and/or that other improvements could be made to increase the plan’s usefulness. The two elements not included in the draft plan were (1) the relationship between the general goals and objectives and the annual performance goals and (2) the program evaluations used in developing the plan and a schedule for future evaluations. Although the draft plan contained a section on program evaluation, the discussion focused on the role of evaluation in assessing future results and provided general criteria for deciding which evaluations to perform in the future.
The draft strategic plan did not discuss interagency coordination for crosscutting programs, activities, or functions that are similar to those of other federal agencies. It is important that the plan do so because EPA and other agencies carry out a number of mission-related activities that are crosscutting or similar. Our July 30, 1997, report noted that EPA had begun taking steps to coordinate its plan with other agencies, such as the Department of Energy and the National Aeronautics and Space Administration, to address crosscutting programs and activities.
The draft plan included actions to address major management challenges that we had previously identified. However, it provided limited details on how these long-standing problems are to be resolved.
Improvements Were Made in EPA’s Strategic Plan
addition, the agency strengthened the plan’s treatment of management problems by setting out several additional actions to resolve them.
In the September 30, 1997, version of its strategic plan, EPA added the two elements required by the Results Act that were missing from the draft plan: (1) the relationship of the general goals in the strategic plan to the performance goals to be included in the annual performance plan and (2) the program evaluations used in developing its general goals and objectives. The issued plan also incorporates improvements in other elements required by the Results Act. For example, the section identifying key external factors was expanded to include other factors, such as producer and consumer behavior, that could directly affect the achievement of the plan’s goals and objectives. The mission statement was also revised to more closely coincide with the language of the agency’s statutes.
EPA improved the clarity of its strategic plan in several ways. It added information that explains how the agency’s responsibilities for human health and the environment intersect with or support the work of other federal departments or agencies, such as the Departments of the Interior and Health and Human Services. It also added information that better describes the important role of the states as having primary responsibility for implementing many day-to-day environmental program activities, such as issuing permits and monitoring environmental conditions. In addition, EPA added statements to clarify the relationship among certain components of its plan, that is, the goals and objectives, guiding principles, and planned cross-agency program activities. Furthermore, an addendum listing the agency’s potential authorities was revised to identify the actual authorities by goal and objective.
The information that EPA added on interagency coordination of the plan included the major steps it took to coordinate with other agencies. The plan also identifies a total of 25 federal agencies whose activities relate to EPA’s efforts under one or more of its goals. According to the plan, the actions taken to coordinate with other agencies on the plan will help to establish long-term efforts to address any inconsistencies, conflicts, or redundancies among federal programs, as identified in any future strategic and annual performance plans.
Environmental Performance Partnership System was developed by EPA and the states in 1995 as a more collaborative approach to implementing environmental programs. The plan now sets out the objectives of the partnership system and identifies how they will be accomplished. In addition, the plan now makes conducting peer reviews and providing guidance on the science underlying the agency’s decisions an objective under the “sound science” goal. As noted in our July 1997 report, the use of peer review is an important means of ensuring the credibility of the scientific and technical documents that the agency uses in its work. Furthermore, EPA added a performance measure to the “effective management” goal dealing with the need to achieve success in implementing the Chief Financial Officers Act and the Government Management Reform Act. This performance measure will help ensure that EPA addresses financial management issues that resulted in the agency’s receiving a qualified opinion on its fiscal year 1996 financial statements.
Strategic Plan Can Be Further Improved
Several revisions that we suggested in our previous report have not been made. Some of these relate to improvements in aspects of the six elements required by the Results Act, while others deal with further improvement in the treatment of management and data problems and the effectiveness of the plan in conveying the agency’s priorities.
Although the plan provides a general methodology for selecting future program evaluations and describes how they are to be used, it does not identify the general scope and time frames of the evaluations, as encouraged by OMB’s guidance. In addition, as in the draft plan, (1) some of the goals and objectives, such as those for effective management, are not stated in quantifiable or measurable terms; (2) staffing skills and resources are generally not discussed in describing how the plan’s goals and objectives are to be achieved; and (3) because strategies are generally organized by goal rather than objective, it is not always clear how specific strategies relate to specific objectives. Moreover, future revisions or updates of the plan could further benefit from a more detailed discussion of how other federal agencies and the states are to contribute to individual goals and objectives. demonstrating that the agency recognizes the significance of these problems and is committed to resolving them.
As the strategic plan evolves over time, EPA could improve its effectiveness in conveying the agency’s priorities. The large number of goals and objectives, coupled with the guiding principles and planned cross-agency program actions, continues to make it difficult to discern EPA’s priorities. To better convey its priorities, EPA could directly relate the cross-agency programs to specific goals and objectives or further consolidate its goals or objectives.
Agency Comments
We provided a draft of our observations on EPA’s strategic plan for its review and comment. EPA officials, including the Director of the Office of Planning, Analysis, and Accountability, told us that the strategic plan was a product of a broader reform of the agency’s planning, budgeting, analysis, and accountability functions and that the consolidation and harmonization of these functions will, over time, bring about many of the improvements that we have suggested. EPA noted that as EPA refines its approaches to analysis and accountability, the agency will be better able to outline the prospective uses of program evaluation and consequent refinements to its goals, objectives, and performance measures. In addition, EPA said that the agency has taken the “unprecedented” step of submitting its first annual performance plan under the Results Act and its fiscal year 1999 budget request to OMB as a single document. According to EPA, this action has had the effect of transforming budgetary decisions into the structure of strategic goals and objectives, which makes the kind of direct budget and performance linkages that we have suggested. While we recognize that EPA’s annual performance plan will provide detailed information on resources, strategies, goals, and objectives, we believe that the strategic plan would be more complete and useful to congressional and other stakeholders if it provides an overview of resource needs and links the agency’s major strategies to individual goals and objectives.
Issue Area Contact
Peter F. Guerrero, Director, Environmental Protection Issues; Resources, Community, and Economic Development Division, (202) 512-6111.
Observations on the Federal Emergency Management Agency’s Strategic Plan
On July 22, 1997, we issued a report on the Federal Emergency Management Agency’s (FEMA) draft strategic plan (Results Act: Observations on the Federal Emergency Management Agency’s Draft Strategic Plan, GAO/RCED-97-204R). FEMA’s strategic plan was submitted to OMB and Congress on September 30, 1997. As requested, we have reviewed the September 30 strategic plan and compared it with the observations in our July 22 report. On October 16, 1997, we briefed your staffs on our further observations on the strategic plan. The key points from that briefing are summarized herein.
Summary of Key Observations From Our July Report
As we reported in July, FEMA’s draft plan indicated that the agency had made good progress toward fulfilling the requirements of the Results Act but needed improvements to fully meet those requirements. For instance, we observed that the draft plan lacked two of the six elements required by the Results Act: (1) the relationship between strategic goals and annual performance goals and (2) the role of program evaluations. The required elements contained in the plan could have better conformed to the Act’s requirements and OMB’s guidance. For example, the plan did not explicitly address the major legislation or executive orders that serve as a basis for FEMA’s mission statement, goals, and strategies or sufficiently deal with financial and information management issues that we and others have previously identified. We also noted that clarifying the linkage between FEMA’s strategic objectives and the strategies intended to achieve them would make the plan more useful to FEMA and to Congress. Furthermore, the draft plan did not address the roles of external stakeholders and how FEMA coordinated with them in developing the plan.
Improvements Made in FEMA’s Strategic Plan
FEMA’s September 30 plan incorporates many improvements that make it more responsive to the requirements of the Results Act. First, it contains explicit language describing the role of program evaluations, a key element missing from the earlier version. For instance, the plan includes for each of FEMA’s three strategic goals a discussion of the type(s) of program evaluation that have been completed and are planned to help assess the accomplishment of those goals. and the agency in ensuring that FEMA’s stated goals respond to the entire spectrum of its key statutory authorities.
Following suggestions in our July report, FEMA’s September 30 plan elaborates on certain aspects of two issues that we felt were not fully discussed in the draft plan: (1) management issues that we and others have previously identified and (2) the agency’s capacity to provide reliable information assessing the achievement of its goals and objectives. For example, the plan now reflects consideration of containing disaster program costs and remedying financial management problems. It also now more fully addresses how FEMA intends to address the Year 2000 problem, which is an issue that we have identified as high risk across the government.
Unlike the earlier version, the September 30 plan discusses external stakeholders involved in the development of the plan. Identifying external stakeholders is important given the many and varied stakeholders that have critical roles in determining the extent to which FEMA’s goals are met. For example, the U.S. Army Corps of Engineers provides assistance for constructing flood control facilities and clearing debris from disaster-ravaged areas. FEMA could further enhance its strategic plan by clearly identifying federal agencies, or programs within those agencies, with related missions or potentially crosscutting program activities, and how coordination with them shaped FEMA’s plan.
FEMA’s Strategic Plan Can Be Further Improved
Some of the elements of FEMA’s strategic plan could be further improved to more fully meet the purposes of the Results Act. For example, while the revised plan incorporates language on the relationship between annual goals and the strategic goals and objectives, the plan would benefit from elaboration on this issue. OMB’s guidance suggests that strategic plans include a discussion of the type, the nature, and the scope of the performance goals to be included in the annual performance plans. While FEMA’s September 30 plan states that the agency’s annual performance plans will illustrate how annual performance goals will support the strategic goals and objectives, it lacks an explicit discussion of the type, the nature, and the scope of the performance goals to be included in the plans and their linkages to the strategic goals and objectives. also describe how achieving the goals could be influenced by the factors. While the plan contains a section on external factors, it does not link the factors to specific goals or objectives or articulate strategies for mitigating the factors’ effects.
Also, in our July report, we suggested that FEMA’s plan could be strengthened if the strategies were more integrally linked to FEMA’s strategic objectives. The September 30 plan does more clearly link strategies with overall goals, although not with specific objectives. Because of this structure, the plan is not as useful as it could be in assigning accountability for achieving specific objectives.
Other Observations
The Results Act requires that strategic plans contain goals and objectives that are expressed in a manner allowing a future assessment of whether they are being achieved. While the goals in FEMA’s September 30 plan are not substantially different from those in the earlier version, the proposed assessment approaches are. The revised approaches raise questions as to their feasibility. For example, the first goal—“protect lives and prevent the loss of property from all hazards”—includes an approach that relies on incomplete modelling and data collection efforts and an implied but unquantified relationship between an increase in readiness and a decrease in risk. Because of the potential assessment difficulties, it is less clear that FEMA’s goals and objectives are expressed in a manner that allows a future assessment of whether they are being achieved.
The plan’s usefulness could be enhanced if it were easier to read and follow. More explanatory language and/or a visual “road map” might help show how the major elements of the plan relate to one another. For example, a few sentences explaining that the operational objectives link to the strategic goals rather than the strategic objectives would be helpful. Finally, providing clarifying and simplified language would enhance the plan’s usefulness to audiences external to FEMA.
Agency Comments
achievement of goals and objectives. We incorporated their suggested changes where appropriate.
Issue Area Contact
Judy A. England-Joseph, Director, Housing and Community Development Issues; Resources, Community, and Economic Development Division, (202) 512-7631.
Observations on the General Services Administration’s Strategic Plan
On July 7, 1997, we issued a report on the General Services Administration’s draft strategic plan (The Results Act: Observations on GSA’s April 1997 Draft Strategic Plan, GAO/GGD-97-147R). GSA has since revised its strategic plan and formally submitted it to OMB and Congress on September 30, 1997. As requested, we have reviewed the September 30 strategic plan and compared it with the observations in our July 7 report. On October 16, 1997, we briefed your offices on our further observations on the strategic plan. The key points from that briefing are summarized herein.
Summary of Key Observations From Our July Report
We reported in July that the April 28 draft plan included the six components required by the Results Act and that the general goals and objectives in the plan reflected GSA’s major statutory responsibilities. However, our analysis showed that the plan could have better met the purposes of the Act and related OMB guidance. Two of the required components—how goals and objectives were to be achieved and program evaluations—needed more descriptive information on how goals and objectives were to be achieved, how program evaluations were used in setting goals, and what the schedule would be for future evaluations to better achieve the purposes of the Act. The four other required components—mission statement, general goals and objectives, key external factors, and relating performance goals to general goals and objectives—were more responsive to the Act but needed greater clarity and context. We also noted that the general goals and objectives and the mission statement in the draft plan did not emphasize economy and efficiency, as a reflection of taxpayers’ interests. Also, the general goals and objectives seem to have been expressed in terms that may be challenging to translate into quantitative or measurable analysis, and there could have been better linkages between the various components of the plan.
We also reported that the draft plan could have been made more useful to GSA, Congress, and other stakeholders by providing a fuller description of statutory authorities and an explicit discussion of crosscutting functions, major management problems, and the adequacy of data and systems. Although the plan reflected the major pieces of legislation that establish GSA’s mission and explained how GSA’s mission is linked to key statutes, we reported that GSA could provide other useful information, such as listing laws that broaden its responsibilities as a central management agency and that are reflected in the goals and objectives.
Relatedly, the draft plan did not discuss the potential for crosscutting issues to arise or how these issues might affect successful accomplishment of goals and objectives. It also made no mention of whether GSA coordinated the plan with its stakeholders. The plan was also silent on the formidable management problems we have identified over the years—issues that are important because they could have a serious impact on whether GSA can achieve its strategic goals. Finally, the plan made no mention of how data limitations would affect GSA’s ability to measure performance and ultimately manage its programs. We reported that consideration of these areas would give GSA a better framework for developing and achieving its goals and help stakeholders better understand GSA’s operating constraints and environment.
Improvements Made in the Strategic Plan
The September 30 plan reflects a number of the improvements that we suggested in our July 1997 report. The clarity of the September 30 plan is improved, and it provides more context, descriptive information, and linkages within and among the six components that are required by the Act. Compared to the April 28 draft, the September 30 plan generally should provide stakeholders with a better understanding of GSA’s overall mission and strategic outlook. Our analysis of the September 30 plan also showed that, in line with our suggestion, GSA placed more emphasis on economy and efficiency in the comprehensive mission statement and general goals and objectives components. The September 30 plan also generally described the operational processes, staff skills, and technology required, as well as the human, information, and other resources needed, to meet the goals and objectives. The plan now contains a listing of program evaluations that GSA used to prepare the plan and a more comprehensive discussion of the major pieces of legislation that serve as a basis for its mission, reflecting additional suggestions we made in our July 1997 report. improvements, which are described in the following section, would strengthen the strategic plan as it evolves over time.
Strategic Plan Can Be Further Improved
As we discussed in our July 7, 1997, report on the draft plan, the September 30 plan continues to have general goals and objectives that seem to be expressed in terms that may be challenging to translate into quantitative or measurable analysis. This could make it difficult to determine whether they are actually being achieved. For example, the goal to “compete effectively for the federal market” has such objectives as “provide quality products and services at competitive prices and achieve significant savings” and “open GSA to marketplace competition where appropriate to reduce costs to the government and improve customer service.” However, this goal, its related objectives, and the related narrative do not state specifically how progress will be measured, such as the amount of savings GSA intends to achieve or the timetable for opening the GSA marketplace for competition. OMB Circular A-11 specifies that general goals and objectives should be stated in a manner that allows a future assessment to be made of whether the goals are being met. The OMB guidance states that general goals that are quantitative facilitate this determination, but it also recognizes that the goals need not be quantitative and that related performance goals can be used as a basis for future assessments. However, we observed that many of the performance goals that GSA included in the plan also were not expressed in terms that could easily enable quantitative analysis, which could make gauging progress difficult in future assessments.
The strategies component—how the goals and objectives will be achieved—described the operational processes, human resources and skills, and information and technology needed to meet the general goals and objectives. This component is an improvement over the prior version we reviewed, and applicable performance goals are listed with each of these factors. Although GSA chose to discuss generally the factors that will affect its ability to achieve its performance goals, we believe that a more detailed discussion of how each goal will actually be accomplished would be more useful to decisionmakers. To illustrate with a specific example, the plan could discuss the approaches that GSA will use to meet the performance goals related to its general goal of promoting responsible asset management using operational processes, human resources and skills, information and technology, and capital/other resources.
The September 30 plan does discuss, in the general goals and objectives component, an operational/human resource change involving the appointment of a new Chief Measurement Officer in the Public Buildings Service. More discussion of this type of change in the strategies component would help stakeholders better understand GSA’s specific strategies to ensure that it is achieving its goals and objectives. We also noted that the strategies component does not discuss priorities among the goals and objectives. Such a discussion would be helpful to decisionmakers in determining where to focus priorities in the event of a sudden change in funding or staffing. Finally, GSA deferred to the President’s budget its discussion about capital and other resources. We believe it seems reasonable to include in this component at least some general discussion of how capital and other resources will be used to meet each general goal.
Although the external factors component in the September 30 plan is much clearer and provides more context than the draft plan we reviewed, the factors are not clearly linked to the general goals and objectives. OMB Circular A-11 states that the plan should include this link, as well as describe how achieving the goals could be affected by the factors. This improvement would allow decisionmakers to better understand how the factors potentially will affect achievement of each general goal and objective. The program evaluations component in the September 30 plan provides a listing of the various program evaluations that GSA indicates were used in developing the plan. However, it still does not include a schedule of future evaluations. Instead, the plan states that the schedule for future program evaluations is under development and that GSA intends to use the remainder of the consultation process to obtain input from Congress and stakeholders concerning the issues that should be studied on a priority basis. However, OMB Circular A-11 indicates that the schedule should have been completed and included in the September 30 plan, together with an outline of the general methodology to be used and a discussion of the particular issues to be addressed. decisionmakers understand the crosscutting issues that affect GSA as a central management agency. However, explicit discussion of these issues is limited, and the September 30 plan makes no reference to the extent to which GSA coordinated with stakeholders.
The September 30 plan references major management problems in the program evaluations component, but it does not explicitly discuss these problems or identify which problems could have an adverse impact on meeting the general goals and objectives. Our work has shown over the years that these types of problems have significantly hampered GSA’s and its stakeholder agencies’ abilities to accomplish their missions. For example, the plan could address how GSA will attempt to ensure that its information systems meet computer security requirements or how GSA plans to address the Year 2000 problem in its computer hardware and software systems. The plan does reference data reliability in the general goals and objectives component. However, the discussion of data reliability, which is so critical for measuring progress and results, is limited and not as useful as it could be in attempting to assess the impact that data problems could have on meeting the general goals and objectives. We continue to believe that greater emphasis on how GSA plans to resolve management problems and on the importance of data reliability could improve the plan.
Agency Comments
On October 9, 1997, we obtained oral comments from GSA’s Director of Performance Management on a draft of our analysis of GSA’s September 30 plan. She said that GSA generally agreed with our observations about the September 30 plan and said that many of the observations will be addressed in future versions of the plan and in the various performance plans that GSA has drafted. However, she added that GSA is concerned that many of our observations could lengthen the plan, thereby making it less usable or readable to GSA’s broad constituency, including Congress, OMB, GSA employees, and GSA’s various business partners. concerns in a succinct fashion that is both usable and reader-friendly while, at the same time, better achieving the purposes of the Act and related OMB guidance.
Issue Area Contact
Bernard L. Ungar, Director, Government Business Operations Issues; General Government Division, (202) 512-4232.
Observations on the Office of Personnel Management’s Strategic Plan
On July 11, 1997, we issued a report on the Office of Personnel Management’s (OPM) draft strategic plan (The Results Act: Observations on OPM’s May 1997 Draft Strategic Plan, GAO/GGD-97-150R). OPM’s formally issued strategic plan was submitted to OMB and Congress on September 29, 1997. As requested, we have reviewed the publicly issued strategic plan and compared it with the observations in our July 11 report. On October 17, 1997, we briefed your staffs on our further observations on the strategic plan. The key points from that briefing are summarized herein.
Summary of Key Observations From Our July Report
Of the six components required by the Results Act, two—how the goals and objectives will be achieved and relating performance goals to general goals/objectives—were not specifically identified in the draft plan. The remaining four components—mission statement, goals and objectives, external factors, and program evaluations—were discussed in the draft plan. However, each of these components had weaknesses, some of more significance than others. Specifically, the mission statement was too broad, lacking explicit reference to certain key responsibilities; the goals and objectives suggested some results to be achieved but provided little basis for judging how OPM would know whether those goals were being achieved or what OPM’s contribution toward achieving those results might be; some external factors were identified, but others were not included in the plan, which also did not meet the Act’s requirement to link each factor to a particular goal or to identify how it might affect OPM’s success in meeting its goals; and, finally, the program evaluation component discussed customer satisfaction with OPM services but did not indicate how evaluations were used in developing strategic goals or provide a schedule for future evaluations as the Act requires and OMB guidance reiterated.
In addition, while the draft plan did identify a number of OPM’s crosscutting program activities, it did not discuss coordination or indicate that OPM, in developing the plan, coordinated with the entities involved in these crosscutting activities. Including a fuller discussion of OPM’s interrelationship with other agencies in the plan would be consistent with the purposes of the Act. Such a discussion likely would also provide more information for Congress and other stakeholders to use in judging whether OPM’s crosscutting responsibilities should be modified in any way. competitive in obtaining future workers; (2) determining whether federal employee compensation (e.g., pay and benefits) is appropriate; and (3) ensuring that decisions for information technology projects are based on assessments of mission benefits, risks, and costs. Discussion of these challenges as well as of management problem areas where OPM has taken successful corrective actions would be informative and useful to both OPM and Congress.
Improvements Were Made in OPM’s Strategic Plan
OPM’s publicly issued strategic plan incorporated several improvements that make it more responsive to the requirements of the Results Act than was the draft plan. In particular, OPM revised its mission statement to recognize its key responsibilities. OPM’s revised mission statement is more results oriented and outlines OPM’s functions and activities as the government’s central personnel agency. OPM has added specific sections to its plan describing OPM and what it does, OPM’s history, and its statutory responsibilities. These sections augment the mission statement by linking it to relevant statutory authorities.
Two of the components required by the Results Act that were missing when we reviewed the draft plan in July—how the goals and objectives will be achieved and relating annual performance goals to general goals/objectives—have been added to the issued strategic plan. OPM has a section under each goal entitled “Strategies for Achieving Objectives” that lists general action items OPM has identified for achieving its goals and objectives. Also, under each strategic goal, OPM has proposed measures to assess progress toward its overall goals. In several cases, OPM has established measurable targets that can be used to gauge the agency’s progress. OPM’s issued plan includes a section on the relationship between its strategic goals and objectives and its forthcoming annual performance plans. This section generally states that strategic goals will be linked to specific performance goals and performance improvements in the annual performance plan and that the plan’s program evaluation section further links the strategic plan to the annual performance plans.
OPM’s evaluation agenda and schedule and also describes the evaluations used to provide baseline data for some of OPM’ s performance measures.
We observed in July that the draft plan did not assess the potential for overlap and duplication or, conversely, cooperation and coordination with agencies and others on crosscutting issues. The issued plan includes a strategy to identify and solve common problems and avoid duplication of effort by working cooperately with consortia, agencies, and interagency groups such as the Interagency Advisory Group of Federal Human Resources Directors.
OPM’s issued plan includes specific sections on its information technology and financial management systems strategies. For example, the financial management strategies section addresses goals in improving OPM’s financial information. This is a positive step since data reliability is extremely important for obtaining reliable performance measures to evaluate management performance and measure progress and results. Although the plan does not have specific sections that address other challenges, such as attracting and retaining well-qualified employees and determining appropriate compensation, as we had suggested, we note that OPM has included under its strategic goals certain objectives and strategies regarding staffing and examining and federal compensation.
OPM’s Strategic Plan Can Be Further Improved
Although OPM made several improvements that we suggested in our previous report, some elements of its issued plan could be further improved. OPM’s five strategic goals, which we previously characterized as process oriented as opposed to results oriented, have not been revised from OPM’s May 1997 draft. However, for each of the five goals, OPM has provided a number of corresponding results-oriented objectives. Several of these objectives are time specific and allow future assessments to be made of whether they were or are being achieved. We acknowledge that not all objectives may lend themselves to quantification; however, this element of the plan could be more helpful to decisionmakers if more of the objectives had specified time frames, quantifiable targets, or identified base points against which progress could be measured. For example, neither OPM’s objective for fostering movement by senior executives nor its associated measures of success provide a sense of how much more movement may be desirable or how OPM or others will know when movements of executives have reached a more appropriate level.
As previously mentioned, OPM has added specific strategies for achieving its objectives. However, these strategies generally do not include a description of the processes and the human, capital, and information resources required to achieve the goals and objectives as called for by the Results Act. OPM officials point to the fifth goal and its accompanying strategies as providing this information. However, although one strategy states in part that OPM will “acquire the necessary resources,” thus implying that additional resources will be needed, none of the strategies under this goal specify the necessary resources, costs, or information technology OPM will need to achieve its goals.
One of the elements required by the Results Act that was missing when we reviewed the draft plan in July—the relationship between long-term goals and objectives and annual performance plans—is addressed in the issued strategic plan as previously described. By explicitly recognizing that future annual performance goals will be needed to assess progress toward the targets set in the strategic plan and by adding additional measurable targets to its issued plan, OPM has provided a greater assurance that combined information in the strategic and annual plans will be useful to OPM and stakeholders in tracking OPM’s progress. However, particularly because a significant number of OPM’s goals and objectives are not expressed in a manner readily susceptible to progress assessments, additional discussion of how OPM will assess progress over the 5-year period covered by the plan would have been useful.
OPM’s discussion of external factors also could be further improved. Specifically, OPM could provide more information on how the external factors may affect goals and also identify additional actions by OPM to reduce potential impact. For example, the issued plan notes that the accelerated loss of experienced managers and personnelists throughout the federal government may affect strategic goals II, III, and IV. However, the plan does not indicate how OPM believes this external factor will affect each goal, nor does it indicate the actions that OPM plans to take to reduce the potential impact of the factor on OPM’s efforts to achieve its goals.
Agency Comments
On October 17, 1997, the Acting Director of OPM provided written comments on a draft analysis of the issued strategic plan. OPM expressed appreciation for our recognition that improvements had been made in its plan and said that it would give consideration to our comments as it further revises and updates the strategic plan and also as it develops the annual performance plan.
Issue Area Contact
Michael Brostek, Associate Director, Federal Management and Workforce Issues; General Government Division, (202) 512-8676.
Observations on the National Aeronautics and Space Administration’s Strategic Plan
On July 22, 1997, we issued a report on the National Aeronautics and Space Administration’s (NASA) draft strategic plan (Results Act: Observations on NASA’s May 1997 Draft Strategic Plan, GAO/NSIAD-97-205R). NASA formally transmitted its strategic plan to OMB and Congress on September 30, 1997. As requested, we reviewed this plan and compared it with the observations in our July report. On October 17, 1997, we briefed your staffs on our further observations on the plan. The key points from that briefing are summarized herein.
Summary of Key Observations From Our July Report
NASA’s draft strategic plan included four of the six elements required by the Results Act. Those four elements were a mission statement, goals and objectives, strategies for achieving the goals and objectives, and a discussion of external factors. Two of the four elements had weaknesses. The other elements—relating annual performance goals to general goals and objectives, and providing a description of program evaluations used to establish general goals and objectives and a schedule of future program evaluations—were not explained in enough detail in the draft plan.
Although many of NASA’s objectives are shared with or involve other agencies, the draft plan did not discuss whether interagency coordination occurred to address duplication or overlap of activities. Also, the draft plan did not address the importance of working with other agencies to achieve its objectives. Although NASA officials said that activities are coordinated at the program level, such efforts were not discussed in the plan.
Major management problems that could affect NASA’s ability to achieve its mission were not explicitly discussed in the draft plan. For example, NASA did not discuss its long-standing problems with managing contracts, managing information technology, and developing a fully integrated accounting system, even though the agency has recognized them as problems and has initiated some steps designed to address them. This information could be beneficial to NASA and its stakeholders because major management problems could impede the agency’s efforts to achieve its goals and objectives.
Improvements Were Made in NASA’s Strategic Plan
performance goals to general goals and objectives and (2) describing how program evaluations were used to establish general goals and objectives and a schedule for future program evaluations. In addition, the relationship between questions and missions has been clarified.
NASA’s plan now includes a more detailed discussion of the element relating performance goals to general goals and objectives. A new chart (characterized by NASA as the “Strategic Management System Roadmap”) illustrates the relationship between agency-level goals and the goals and objectives of the four Enterprises. Also, in the crosscutting processes section of the plan, NASA provides examples of how agency goals relate to performance goals. In our July report, we observed that the draft plan did not clearly indicate whether near-term, mid-term, or long-term goals would be used for performance measurement, or whether performance would be measured against the strategic outcomes, agencywide goals, or Enterprise goals. The plan now includes provisions for reviewing performance goals against the near-term objectives of the Enterprises and the four crosscutting processes that support all agency activities.
Responding to our concern that the draft plan did not provide a description of program evaluations used to establish general goals and objectives and a schedule of future program evaluations, NASA has included a description of its strategic plan provisions for semiannual reviews by NASA’s Senior Management Council. These reviews are to take place in March and September of each year. The plan also provides a more detailed explanation of NASA’s planning process. According to the plan, NASA’s Strategic Management System will provide the information and results to fulfill the planning and management requirements of the Results Act. Furthermore, a series of documents, such as the Headquarters Functional/Staff Office Implementation Plans, will explain how NASA plans to implement activities to accomplish its goals.
The draft plan included “fundamental questions” posed by the NASA Administrator. In our July report, we noted that these questions were not discussed in the context of the stated missions of the agency. The plan addresses this concern by including the questions in the Strategic Management System Roadmap chart and linking them to the mission, Enterprises, and crosscutting processes.
NASA’s Strategic Plan Can Be Further Improved
implementation of an integrated financial management system, contract management reform, and information technology management in the context of their having been long-standing management challenges.
Agency Comments
On October 15, 1997, NASA’s Senior Advisor for Strategic Planning and Management provided us with the agency’s comments on our observations about its strategic plan. The Senior Advisor made three points. First, he said that NASA strongly believes that the agency has addressed all six required elements of the Results Act. Second, he stated that NASA is pleased that we recognize that many improvements have been made. He added that NASA has gone to great lengths and effort to ensure that concerns about the draft strategic plan expressed by Congress, OMB, and GAO were addressed. In particular, he said that numerous examples have been added to illustrate the fact that NASA is committed to leveraging other agency programs and resources. Third, NASA agrees with our view that developing a strategic plan is a dynamic process and that NASA will consider our suggested improvements when the agency moves forward in future updates to the plan.
Issue Area Contact
Allen Li, Associate Director, Defense Acquisitions Issues; National Security and International Affairs Division, (202) 512-4841.
Observations on the National Science Foundation’s Strategic Plan
On July 11, 1997, we issued a report on the National Science Foundation’s (NSF) draft strategic plan (Results Act: Observations on the National Science Foundation’s Draft Strategic Plan, GAO/RCED-97-203R). NSF’s formally issued strategic plan was submitted to OMB and Congress on September 30, 1997. As requested, we have reviewed the publicly issued strategic plan and compared it with the observations in our July 11 report. On October 15, 1997, we briefed your staffs on our further observations on the strategic plan. The key points from that briefing are summarized herein.
Summary of Key Observations From Our July Report
Of the six elements required by the Act, one—external factors that could affect the achievement of the plans’ goals—was not specifically identified in the draft plan. Of the remaining five elements, three—goals and objectives, strategies for achieving goals, and how program evaluation was used—were discussed but were not complete. Specifically, some of the goals were not expressed in a measurable form, the strategies to achieve NSF’s goals lacked precision, and the description of program evaluations was not fully developed.
In addition, we observed that the draft plan could be more useful to NSF, Congress, and other stakeholders if it provided a more explicit discussion of crosscutting activities, statutory authorities, and NSF’s capacity to provide reliable information to manage its programs or determine if it is achieving its strategic goals. Recognizing crosscutting issues and the coordination required to address them is particularly important for NSF because in the science and technology area, for which the federal government spent $60 billion in fiscal year 1996, the potential for unnecessary overlap is particularly high. While NSF’s draft plan reflected its key statutory authority, other statutes broaden the scope of its responsibilities and are embedded in NSF’s goals and objectives. Explicit consideration of NSF’s capacity to produce reliable information for management decisionmaking is important because it could affect NSF’s ability to develop and meet its goals.
Improvements Were Made in NSF’s Strategic Plan
future program evaluation efforts, (4) interagency crosscutting activities, and (5) how NSF plans to use information technology.
External factors are now addressed in appendix 1 of NSF’s plan. In it, NSF describes the challenges that science and engineering faculty and students face in the current research environment and identifies how the achievement of four of its five goals could be affected by external factors. Consistent with OMB Circular No. A-11, Part 2, NSF briefly describes external factors, their link with a particular goal, and how the achievement of the goal could be affected by the factor. For example, for goal 1—“discoveries at and across the frontier of science and engineering,” NSF raises concern about the quality of research facilities and their influence on the pace of discovery. In particular, NSF relies on the academic research facilities available at colleges and universities to provide a base from which grantees can build their research programs. To the extent that moves toward cost efficiency in academic institutions affect this base, allowing it to deteriorate or failing to maintain it at the state of the art, NSF’s costs for the support of research will increase, which could slow the pace of discovery or change the types of discoveries open to researchers. NSF states that it would need to balance the number of researchers whose work could be supported with the added cost of conducting the research.
NSF’s outcome goals are addressed more fully in appendix 2 and in the body of the report. In our earlier report on the draft plan, however, we had several reservations about NSF’s goals, some of which remain. In particular, we noted in our earlier report that while NSF’s draft plan provided some general dates for achieving its goals, it did not provide underlying assumptions, projections, or a schedule for initiating or completing significant actions. It also lacked a process for communicating goals and objectives throughout the agency and for assigning accountability to managers and staff for the achievement of goals. While the goals are still not expressed in a measurable fashion, the plan now describes examples of performance goals for NSF management and programs and includes both investment strategies and action plans for achieving each goal. According to OMB Circular A-11, when the goals are defined in a way that precludes a direct, future determination of achievement, the performance goals and indicators in the performance plan should be used to provide the basis for assessment. According to NSF, the action plans are provided to operationalize each strategy; to provide guidance to program officers; and through quantitative indicators, to link the goals to the development of annual budgets and performance plans.
Current and future program evaluation efforts are now addressed in appendix 3. NSF discusses how the agency used specific formal and informal evaluations to develop key investment strategies, action plans for the strategic plan, and aspects of performance plans. Also included are details on future evaluations, a rough schedule for their implementation, and how the findings could be useful (1) in assessing NSF’s progress toward outcome goals and (2) for strategic planning discussions. For example, a Results Act pilot project on the physical sciences facilities gave NSF experience with setting performance goals and performance baselines for NSF’s oversight of the construction and operation of large facilities. This effort facilitated NSF’s development of appropriate performance goals for facilities management that are applicable across NSF for its performance plans. In addition, in connection with future evaluations and beginning in fiscal year 1998, NSF is planning to develop a formal process of assessment that includes periodic external assessment of progress toward outcome goals. programs are the U.S. Global Change Research Program and the High Performance Computing and Communications Program, both of which NSF participates in.
Information technology in support of NSF’s mission is now discussed in appendix 5, and strategies for addressing information technology needs are identified in the section on “Critical Factors For Success.” In connection with its attention to Year 2000 issues, NSF states that it sent a notification to all grantees describing this potential problem and making clear that grantees bear the responsibility of addressing any difficulties it might create for the conduct of the research and education awards they hold. NSF refers to the fiscal year 1996 Annual Financial Report in its strategic plan; in that report, the Chief Financial Officer noted that NSF continues to meet or exceed virtually every federal goal for financial management performance. In addition, NSF has noted its commitment to manage its systems in support of the Results Act and the Chief Financial Officers Act as a key strategy in its plan.
NSF’s Strategic Plan Can Be Further Improved
We observed in July that the draft plan could be enhanced by further discussion of statutory authorities and additional detail on NSF’s use of information. While our earlier report indicated that NSF’s statutory responsibilities were generally reflected in NSF’s draft strategic plan, we also stated that NSF is subject to other statutes related to its core functions. We suggested that providing a description of its responsibilities under its various statutory authorities could be useful, as a supplement to its plan, since the plan includes goals and objectives based on them. We also noted that it might be helpful to link the stated outcome goal to the relevant statutory objective. In this regard, NSF’s mission statement briefly touches on additional charges to the agency beyond the initial authorizing legislation, but the plan does not attempt to link NSF’s goals and strategies to the relevant statutory objective.
As previously stated, information technology in support of NSF’s mission is now discussed in appendix 5, and strategies for addressing information technology needs are identified in the section on Critical Factors For Success. However, with respect to the high-risk issue of information security, the plan is still silent. Also, the revised plan does not discuss how NSF intends to improve its accounting for property, plant, and equipment in the possession of contractors and grantees in order to attain an unqualified audit opinion—which would seem to be a key goal for the financial management area.
Other Observations
NSF’s performance goals for the results of its investments will appear as descriptive standards developed under the Results Act option to set performance goals in alternative formats. Since the timing of outcomes from NSF’s activities is unpredictable and annual change in the outputs does not provide an accurate indicator of progress toward outcome goals, performance goals for results are not specific to a fiscal year. NSF plans to use data and information on the products of NSF’s investments combined with the expert judgment of external panels to assess NSF’s performance over time and to provide a management tool for initiating changes in direction, when needed. As we stated in our earlier report, quantitative and qualitative indicators are widely used as proxies to assess research and development results because of the difficulties in identifying the impacts of research. Yet, while implying a degree of precision, these indicators were not originally intended to measure long-term research and development results. It remains to be seen whether NSF’s use of descriptive standards to evaluate results will become valuable sources of information for tracking progress and measuring outcomes.
Agency Comments
On October 10, 1997, we spoke with NSF’s Assistant to the Director for Science Policy and Planning to obtain the agency’s comments on our observations about its strategic plan. NSF generally supported our observations and agreed that some stakeholders may find useful the addition of an appendix explicitly identifying the links between the goals and strategies to the relevant statutory objective. In addition, NSF pointed out that attention to information security is addressed in another strategic plan in accord with the Information Technology Management Reform Act. Finally, with respect to NSF’s accounting for property, plant, and equipment, the agency indicated that NSF is taking necessary preliminary steps while awaiting guidance from the Federal Accounting Standards Advisory Board and OMB and expects to address this topic in a forthcoming performance plan.
Issue Area Contact
Victor S. Rezendes, Director, Energy, Resources, and Science Issues; Resources, Community, and Economic Development Division, (202) 512-3841.
Observations on the Nuclear Regulatory Commission’s Strategic Plan
On July 31, 1997, we issued a report on the Nuclear Regulatory Commission’s (NRC) draft strategic plan (The Results Act: Observations on the Nuclear Regulatory Commission’s Draft Strategic Plan, GAO/RCED-97-206R). NRC’s formally issued strategic plan was submitted to OMB and Congress on September 30, 1997. As requested, we have reviewed the publicly issued strategic plan and compared it with the observations in our July 31 report. On October 15, 1997, we briefed your staffs on our further observations on the September 1997 plan. The key points from the briefing are summarized herein.
Summary of Key Observations From Our July Report
The draft strategic plan contained two of the six required components of the Results Act—the mission and the goals and objectives. While NRC’s draft strategic plan met some of the requirements for three other components, it did not describe (1) the resources, such as staff skills and experiences, capital, and information, that will be needed to execute the plan’s strategies; (2) how key external factors could affect the achievement of its goals; and (3) its schedule for future program evaluations. Finally, NRC had not included in its draft plan the relationship between its long-term goals and objectives and its annual performance goals.
Although NRC shared its draft and consulted with other agencies, the draft strategic plan did not fully discuss some programs and activities that were crosscutting or similar to those of other federal agencies. For example, NRC and the Department of Energy (DOE) share the responsibility for the federal government’s high-level waste disposal program; DOE builds such facilities, which NRC must license. Consequently, NRC is affected by changes in DOE’s strategies and program funding. The draft plan would have benefited by a more thorough discussion of these issues. realistic, which could mean future problems for those licensees not having sufficient funds to properly close their facilities.
Improvements Were Made in NRC’s Strategic Plan
NRC’s September 1997 plan incorporated several improvements that make it more responsive to the requirements of the Results Act than was the draft strategic plan. In response to our concern that resource needs to execute strategies were not discussed, NRC added a statement to the September 1997 plan explaining that it did not anticipate any major, unique resource requirements and that its budget will identify the specific resources needed to implement the plan. NRC noted in its September 1997 plan that performance indicators have been established for human, capital, information, and funding resources in its performance plan. NRC explained that in the event legislation is enacted to have NRC oversee DOE’s facilities, changes to NRC’s strategies and resource needs could be required.
NRC also added key external factors, which it called “major factors or assumptions,” affecting the achievement of its goals for the two strategic arenas that had none—“Protecting the Environment” and “Excellence.”
NRC also expanded its goals section to provide a clearer link between the long-term (general) goals in its September 1997 strategic plan and those to be included in the annual performance plan. NRC added intermediate performance goals from the annual performance plan to the general goals to show the relationship between the final September 1997 plan and the annual performance plan; it also provided additional measures of results.
In July, we observed that NRC did not fully address crosscutting program activities. The September 1997 plan was extensively revised to include a section in the appendix, entitled “Cross-Cutting Functions,” that identifies major crosscutting functions and interagency programs and discusses NRC’s coordination with other agencies, such as DOE and the Environmental Protection Agency (EPA). plan to discuss its actions to provide reliable performance information . Most of the data that NRC plans to use to measure performance will come from existing reports to Congress; and, in fiscal year 1998, it plans to identify any primary data systems that require improvement to provide any other information needed.
NRC also addressed our concern that it had not discussed legislative needs that it may have had. NRC added a statement to its September 1997 plan to indicate its conclusion that it had not identified a need for any significant legislative changes to achieve its goals and strategies. NRC noted, for certain substrategies related to reactor and nonreactor decommissioning, that it is seeking legislation that would eliminate the overlap in the standard-setting authority of NRC and EPA in connection with Atomic Energy Act sites and materials by recognizing NRC’s and Agreement States’ standards in these areas.
NRC’s Strategic Plan Can Be Further Improved
While NRC described in its September 1997 plan its program evaluation process, NRC still needs to include schedules for future program evaluations as required by the Results Act. Moreover, the September 1997 plan does not describe the general methodology to be used and the scope and issues to be addressed in such evaluations.
The NRC plan indicates that no unique resources are anticipated, but it does not explicitly describe the resources and processes required to achieve its goals—in particular, its goal for nuclear waste safety. The Act states that the strategic plan is to contain a description of how the goals and objectives are to be achieved, including a description of the operational processes, skills and technology, and other resources required to meet the goals and objectives. To the extent that the achievement of a goal (i.e., the nuclear waste safety goal) relies on the resources or activities of others, NRC should describe those resources and activities in describing how its goals are to be achieved. Discussions of major management challenges and how NRC will meet them should appear in NRC’s plan, either under its “Excellence” goal or as strategies for achieving programmatic goals. While NRC’s 1997 strategic plan provides a set of strategies that are linked to specific goals, these strategies could be more complete. planned or directly under way and will not provide the information needed to assess the achievement of the strategic goals. Also, the precise meaning of some of its goals—in particular, its “Common Defense and Security and International Involvement” goal relating to international involvement—could be further clarified.
We observed in July that NRC’s draft strategic plan did not discuss how NRC intended to plan for and use information technology to support the agency’s missions and improve its program performance. NRC modified its draft strategic plan to explain that annual performance plans that will delineate objective, quantifiable, and measurable goals to be achieved in a given fiscal year will be developed to further the general goals in the strategic plan. NRC’s September 1997 plan does not indicate how it intends to address such key information technology issues as the Year 2000 problem and the information security problem, or how it intends to plan for and use information technology to support the agency’s mission. Instead, the strategic plan says that these key issues are included in NRC’s fiscal year 1999 performance plan.
NRC recognizes that assuming the regulation of the nuclear activities of DOE may be required in the future, but it has not yet begun projecting plans for that purpose. NRC has, however, agreed to pursue a pilot program of simulated regulation of DOE, in which regulatory concepts may be tested. NRC and DOE believe that information from the pilot program should be available before legislation to transfer regulatory responsibility is enacted.
Other Observations
We had suggested that NRC link all of its goals and strategies to its major statutory authorities to facilitate a better understanding of the diversity and complexity of its overall mission, goals, and strategies. NRC responded to this suggestion by listing the statutory authorities for its general goals under five of its seven strategic arenas, but it did not include specific statutory references for its “Public Confidence” and “Excellence” arenas.
Agency Comments
On October 8, 1997, we met with NRC officials, including NRC’s Chief Financial Officer, to obtain NRC’s comments on our observations about the September 1997 plan. NRC said that the Commission is committed to implementing the Results Act and will continue to make improvements to its first strategic plan, including addressing our observations for future improvements, and take the other actions necessary to make managing for results a reality at NRC.
Issue Area Contact
Victor S. Rezendes, Director, Energy, Resources, and Science Issues; Resources, Community, and Economic Development Division, (202) 512-3841.
Observations on the Small Business Administration’s Strategic Plan
On July 11, 1997, we issued a report on the Small Business Administration’s (SBA) draft strategic plan (Results Act: Observations on the Small Business Administration’s Draft Strategic Plan, GAO/RCED-97-205R). SBA’s formally issued strategic plan was submitted to OMB and Congress on September 30, 1997. As requested, we have reviewed the publicly issued strategic plan and compared it with the observations in our July 11 report. On October 16, 1997, we briefed your staffs on our further observations on the strategic plan. The key points from that briefing are summarized herein.
Summary of Key Observations From Our July Report
SBA’s draft strategic plan, as discussed in our July report, lacked two required elements: (1) a discussion of the relationship between the long-term goals and objectives and the annual performance goals and (2) a description of how program evaluations were used to establish or revise strategic goals and a schedule for future program evaluations. The four required elements contained in the plan could have better conformed to the Results Act’s requirements and OMB’s guidance. For example, (1) the mission statement did not encompass SBA’s significant disaster loan program for individuals, (2) many of the goals and objectives appeared less outcome oriented than process oriented, (3) the strategies consisted entirely of one-line statements and were not detailed enough to enable an assessment of how they would help achieve the plan’s goals and objectives, and (4) the plan did not discuss how identified external factors would be taken into account when assessing progress toward goals. Also, because of the way in which the information was presented, the linkages among specific performance measures, strategies, and objectives were not clear.
SBA’s draft strategic plan also did not explicitly address the relationship of SBA’s activities to similar activities in other agencies and provided no evidence that SBA coordinated with other agencies in developing its plan. In addition, the plan could have benefited from an explicit acknowledgment of the extent to which SBA must rely on other federal agencies in carrying out its federal procurement-related responsibilities. processes but did not describe the specific strategies to achieve the objectives.
Improvements Were Made in SBA’s Strategic Plan
SBA’s September 30, 1997, strategic plan includes several improvements that make it more responsive to the requirements of the Results Act than the earlier version. At the same time, SBA’s September plan differs significantly from the earlier draft in that it includes, as appendixes, separate strategic plans for SBA’s Office of Inspector General and Office of Advocacy. As discussed further on, SBA has not made clear the relationship between the goals and objectives in the plans included in the appendixes and those in the main text of the plan.
With a discussion of (1) the relationship between the long-term goals and objectives and the annual performance goals and (2) how program evaluations were used to establish or revise strategic goals, SBA’s September plan addresses all six required elements. The plan’s five new strategic goals, as a group, are more clearly linked to SBA’s statutory mission than were the previous plan’s seven goals. In addition, the inclusion of date-specific performance objectives that incorporate performance measures make the strategic goals more amenable to a future assessment of SBA’s progress. For example, under the goal to “increase opportunities for small business success,” one of SBA’s performance objectives is as follows: “By the year 2000, SBA will help increase the share of federal procurement dollars awarded to small firms to at least 23 percent.” Also, SBA significantly improved its plan by more clearly and explicitly linking the strategies to the specific objectives that they are intended to accomplish.
Other improvements include a mission statement that includes the disaster loan program for individuals and more accurately reflects SBA’s statutory authorities, a better recognition that SBA’s success in achieving certain goals and objectives in the plan is dependent on the actions of other agencies, and the addition of a section that discusses how SBA’s programs and activities interact with other federal agencies’ programs and activities. While the latter section states that SBA will coordinate with other agencies in the future, it does not provide evidence that SBA coordinated with the other agencies in the plan’s development. Also, the section that discusses SBA’s goal to improve internal controls implicitly addresses management problems that we and others have identified. However, specific strategies to address the identified management problems are not described.
Strategic Plan Can Be Further Improved
While SBA’s goals are more clearly linked to SBA’s statutory mission, the relationship of one goal—leading small business participation in the welfare-to-work effort—to SBA’s mission is unclear. While the plan’s performance objective places an emphasis on helping small businesses meet their workforce needs, the subsequent discussion implies a focus on helping welfare recipients find employment; for example, the plan states that “SBA’s goal is to help 200,000 work-ready individuals make the transition from welfare to work . . . .” It is not clear why SBA is focusing on welfare recipients only and not on other categories of potential employees to help meet small businesses’ workforce needs.
SBA’s plan mentions certain program evaluations that SBA plans for future fiscal years, as well as the continuation of its goal of monitoring field and headquarters offices. However, the plan does not contain schedules of future comprehensive program evaluations for SBA’s major programs, including its 7(a) loan program and 8(a) business development program. (The Inspector General’s plan references future audits and evaluations that the Inspector General plans to conduct to improve SBA management.) In addition, the plan acknowledges that SBA needs a more systematic approach for using program evaluations for measuring progress toward achieving its goals and objectives, but it does not outline how SBA will develop and implement such an approach. Also, the strategy sections in the plan do not describe the human, capital, and information resources that are needed to achieve the goals and objectives.
The September plan identifies various external factors, such as the economy and congressional support, that could affect the achievement of the plan’s goals. However, with the exception of “interagency coordination,” the plan does not link these factors to particular goals or consistently describe how the factor(s) could affect achievement of the goals and objectives. Furthermore, the plan also does not articulate strategies for mitigating the factors’ effects. Also, while recognizing the need for reliable information to measure progress toward the plan’s goals and objectives, the plan notes that SBA currently does not collect or report many of the measures that it will require to assess performance. The plan would benefit from brief descriptions of how SBA plans to collect the data to measure progress toward its goals and objectives.
Other Observations
General’s plan as an appendix, without cross-reference to any specific SBA goal or objective. Also, the September plan includes an appendix containing a plan for the Office of Advocacy; this material did not appear in SBA’s earlier plan. Generally, the goals and objectives in the Inspector General and Advocacy plans appear consistent with, and may contribute to the achievement of, the goals and objectives in SBA’s plan, but the relationship is not explicit. SBA’s plan makes little mention of the Inspector General and Advocacy plans and does not indicate at all how, or if, the Inspector General and Advocacy activities are intended to help SBA achieve the agency’s goals and objectives. Similarly, the Inspector General and Advocacy plans do not make reference to the goals and objectives in the SBA plan. These plans could be more useful to decisionmakers if their relationships were clearer.
Agency Comments
We provided copies of a draft of these observations to SBA for review and comment. We received comments from the SBA Administrator. SBA commented that our analysis of the plan provided useful suggestions that will be used in its next draft of the plan. SBA also provided additional information concerning two of our observations. First, SBA stated that the emphasis of the fourth goal—to lead small business participation in the welfare-to-work initiative—is focused on helping small businesses rather than former welfare recipients. Second, SBA commented that the agency works with the Inspector General and Advocacy offices to carry out SBA’s mission, and the Inspector General and Advocacy plans were included as appendixes to its strategic plan to highlight the offices’ statutory independence.
Issue Area Contact
Judy A. England-Joseph, Director, Housing and Community Development Issues; Resources, Community, and Economic Development Division, (202) 512-7632.
Observations on the Social Security Administration’s Strategic Plan
On July 22, 1997, we issued a report on the Social Security Administration’s (SSA) draft strategic plan (The Results Act: Observations on the Social Security Administration’s June 1997 Draft Strategic Plan, GAO/HEHS-97-179R). SSA’s formally issued strategic plan was submitted to OMB and Congress on September 30, 1997. As requested, we reviewed the September 30 plan and compared it with the observations in our July 22 report. On October 14, 1997, we briefed your staffs on our further observations on the strategic plan. The key points from that briefing are summarized herein.
Summary of Key Observations From Our July Report
SSA’s draft strategic plan contained all six of the elements required by the Results Act and reflected its status as an independent agency. To the agency’s credit, the draft plan was forward-looking and provided a solid foundation for SSA’s consultation with Congress and other stakeholders. Also, the goals in the draft plan were more balanced than those of prior SSA plans because they emphasized sound program management in addition to customer service. However, some of the required elements in the plan could have been strengthened in important ways. For example, for some goals, it was not clear what SSA hoped to achieve and how it planned to measure its achievement, and some goals seemed to overlap. In addition, the plan cited many initiatives that SSA intends to begin or continue without additional agencywide resources and without setting priorities or delineating time frames and schedules. As a result, it was difficult to see how SSA could accomplish all of its planned initiatives. SSA went beyond minimum requirements by providing numerous performance measures. However, we noted that it was sometimes difficult to link the performance measures with specific objectives. The draft plan included a description of the external factors that SSA considered in developing the plan, but this discussion could have been improved had SSA more explicitly linked the effects of certain external factors, such as changes in available technology, with goal attainment and had it more clearly explained how it has used and plans to use program evaluations. disclose the challenges SSA has faced in redesigning its disability process and did not fully integrate a return-to-work strategy for its disabled beneficiaries throughout the agency’s operations.
SSA’s draft plan accurately conveyed the agency’s strong reliance on improved information technology to provide world-class service and to better manage its programs with its existing resources. However, we observed that the plan would be strengthened by adding information on how SSA will use information technology to achieve the agency’s goals and objectives. Finally, the draft could have discussed in more detail SSA’s plans to cope with two technology-related high-risk areas—the Year 2000 computer problem and the need to adequately protect the sensitive data in its computer systems.
Improvements Made in SSA’s Strategic Plan
SSA incorporated several of the changes we suggested in its formally issued plan, but the extent of the revisions and the attendant improvements vary from element to element. Throughout the plan, SSA added pieces of information on processes and technologies it will use to achieve its goals. However, this information, along with the needed staff skills and timetables, is not discussed uniformly for each goal. In response to the need to better link performance measures with specific objectives, SSA added a matrix that presents the goals, objectives, and related performance indicators. In most cases, the goals, objectives, and measures are clearly stated in the body of the plan, and the matrix provides a useful summary of how SSA will assess its performance. In other cases, however, it is difficult to relate the discussion of performance measures in the body of the plan with the indicators in the matrix. SSA appropriately included its program evaluation activities in its first goal; it also added more information about the types of program evaluations used or planned for the future and the timetables for some of the planned evaluations. discussion of goals and strategies. For example, SSA describes its need to cooperate with law enforcement agencies in its discussion on ways to combat fraud.
SSA also acknowledged that some of its management challenges were not adequately addressed in its draft plan. SSA recognized SSI as a high-risk area and noted that the agency intends to develop a separate plan to improve the program. For its disability process redesign, SSA added a short explanation of the complexity of the redesign process and recent attempts to narrow its focus. SSA also expanded its discussion of its return-to-work efforts and included information on the studies it plans to undertake. Finally, SSA has improved its plan by including discussions of the Year 2000 problem, the importance of resolving it, and the need to mitigate any future problems with other agencies with whom SSA shares information.
SSA’s Strategic Plan Can Be Further Improved
future if SSA linked the discussion of these external factors with goal attainment and consistently included any mitigation strategies.
As previously stated, the success of several goals is dependent on technological improvements or changes in agency operational processes, but we found that SSA has encountered difficulty implementing some of these changes. SSA has not acknowledged these difficulties, such as the challenges it faces in developing new software to complement the redesigned disability determination process, and the plan could be improved by providing additional information on how information technology strategies will be used to achieve the agency’s goals and objectives. Relative to changes in technology, SSA has not incorporated any plans to begin the difficult task of assessing its current service delivery structure and how it should change in the future.
Agency Comments
We provided SSA with a draft of our observations on its strategic plan. In its written reply, SSA said that it appreciated that we recognized the improvements made to the draft plan. SSA also stated that it believes that the strategic plan contains as much detail as is possible and appropriate at this point in its planning cycle. It is refining and refocusing its current key initiatives, as necessary, and developing plans for new initiatives to ensure that the agency reaches its objectives.
Issue Area Contact
Jane L. Ross, Director, Income Security Issues; Health, Education, and Human Services Division, (202) 512-7215.
Observations on the U.S. Agency for International Development’s Strategic Plan
On July 11, 1997, we issued a report on the U.S. Agency for International Development’s (USAID) draft strategic plan (The Results Act: Observations on USAID’s November 1996 Draft Strategic Plan, GAO/NSIAD-97-197R). USAID submitted its formally issued strategic plan to OMB and Congress on September 30, 1997. As requested, we have reviewed the publicly issued strategic plan and compared it with the observations in our July 11 report. On October 24, 1997, we briefed your staffs on our further observations on USAID’s strategic plan. We summarize the key points from that briefing herein.
Summary of Key Observations From Our July Report
USAID’s November 1996 draft strategic plan included the six elements required by the Results Act. However, two components of the plan—sections on (1) relating performance goals to general goals and objectives and (2) program evaluations—did not contain sufficient information to fully achieve the purposes of the Results Act and related OMB guidance. More specifically, these sections did not include a discussion of performance goals, relevant evaluation findings USAID used to develop its plan, or USAID’s plan for conducting future evaluations.
Many agencies are involved in activities directly related to USAID’s mission, goals, and objectives, and there is potential for crosscutting issues. Nevertheless, the draft strategic plan did not address areas of possible duplication and USAID’s efforts to minimize them or the extent to which USAID relies on other agencies to meet its goals and objectives.
We also observed that the draft plan did not address key management challenges that the agency faces. The plan provided a general description of recent management initiatives but did not discuss how effective these initiatives have been in resolving critical management problems USAID has acknowledged in nearly all areas of its operations. In particular, the plan did not describe difficulties USAID has encountered in developing a performance measurement system, in reforming its personnel systems, in implementing the Chief Financial Officers Act of 1990 (P.L. 101-576), and in deploying a new information management system that is intended to correct several material weaknesses in its financial management processes.
Improvements Were Made in USAID’s September Strategic Plan
USAID’s publicly issued strategic plan incorporated some improvements that make it more responsive to the requirements of the Results Act. In particular, USAID has developed performance goals related to the agency’s overall goals and objectives. These goals generally appear to be objective, quantifiable, and measurable. The rationale and data sources for the indicators are described in detail in an appendix to the plan. Although the performance goals presented are generally long-term ones, it appears that USAID will be able to derive required annual performance goals from many of them in the future. We did not evaluate the appropriateness of these indicators or the reliability of the data sources cited.
USAID’s plan is clearer and more explicit about its long-term goals and objectives. The seven goals are clearly identified in narrative form, and both the goals and related objectives are presented graphically in an appendix. USAID has also improved this element of its plan by omitting other implicit goals, included in the November 1996 draft plan, that made it unclear what USAID intended to achieve. However, USAID’s goals and objectives are targeted at results over which USAID does not have a reasonable degree of influence. As we previously reported, USAID officials have acknowledged that in only a few cases have USAID’s programs been directly linked to the types of country-level development results described in the plan.
With regard to strategies to achieve these goals, USAID’s plan now includes the goal of improving its management efficiency and effectiveness, including the steps that it is taking in that regard, and indicators for measuring progress. Consistent with suggestions in our July report, the plan now also includes an explicit discussion of the program, support, and workforce resources USAID believes are necessary to achieve its performance goals. The plan presents resource needs at an aggregate level and does not specify the level of resources needed to achieve each of USAID’s strategic objectives. contribution that USAID’s development partners make toward achievement of the agency’s goals and objectives. In particular, the plan identifies the commitment of other donor countries and multilateral agencies as the major external factor affecting USAID’s performance.
USAID’s plan now includes a discussion of crosscutting functions across the U.S. government. It recognizes that other agencies provide technical assistance to developing and transitional countries and that achievement of USAID’s goals is affected by the actions of these agencies. The plan states that mechanisms are in place to reduce or minimize duplication at the field level, and for each goal it identifies those agencies with which it coordinates on related activities. However, it does not indicate what these coordination mechanisms are and lacks the information to demonstrate that they are adequate. The plan implies that only limited coordination with these other agencies on strategic planning has taken place and indicates that USAID anticipates expanded and ongoing interagency dialogue.
The plan more fully addresses key principles of the Foreign Assistance Act of 1961 (P.L. 87-195), as we suggested in our July report. For example, it more extensively discusses the principles of coordination of foreign assistance with other donors and supporting development goals chosen by the recipient country. However, it does not specifically address the principle of encouraging regional cooperation by developing countries.
USAID’s Strategic Plan Can Be Further Improved
We suggested in our previous report that several elements of the USAID plan could be further improved to better meet the purposes of the Results Act. The plan still does not contain sufficient information on program evaluations. It does not show how program evaluations by USAID or external organizations were used to establish strategic goals and does not outline the scope, methodology, key issues, or schedule for future evaluations. Although the plan refers to other documents and means by which USAID communicates evaluation schedules and findings, a summary of that information would be appropriate in this section to demonstrate the role that program evaluation plays in USAID’s strategic planning and results assessment. difficulties USAID has encountered in its efforts to improve. For example, the plan indicates that USAID hopes to improve the availability of financial and program results information. However, it does not convey the significant problems USAID has had to date generating complete, timely, and reliable financial and performance data—problems that hamper USAID’s ability to identify costs and measure performance. Nor does the plan establish a time frame for achieving substantial and verifiable improvement in this area. Frank acknowledgement of specific management challenges in the area of information technology is also absent from the strategic plan. The plan describes progress USAID has made in implementing a new management system but is silent on the major setbacks it is having with this implementation, even though this system will be critical to the success of financial and program management reforms. Similarly, the plan does not address information security and the Year 2000 problem, which we have identified as high-risk areas governmentwide. Instead of dealing with these issues directly, the plan refers to a Strategic Information Resource Management Plan that is said to set the direction for USAID to meet its information needs through 2002. A summary of the plan would be helpful, inasmuch as it acknowledges the hurdles USAID must overcome in achieving its goals.
While USAID recognizes its dependence on other donors and its susceptibility to factors beyond its control, as we had suggested, we believe that USAID has not adequately emphasized the importance of these issues. The plan could articulate the relative magnitude of USAID’s assistance within the donor community to more clearly convey the extent of USAID’s dependence on the contributions of other donors to meet the performance goals it has established. In addition, the plan could articulate the extent of USAID’s ability to offset country and international conditions that hamper development to more realistically convey the magnitude of the risk and uncertainty that USAID faces in trying to achieve its goals.
Further, USAID’s strategic plan does not specifically discuss its Economic Support Fund programs and its programs in the East European and Baltic states and newly independent states of the former Soviet Union. We noted in our July report and continue to believe that the plan could benefit from greater discussion of these activities, which directly serve U.S. foreign policy interests and represent about 60 percent of USAID’s budget.
Other Observations
whether the goals apply to each recipient country individually or to all collectively. In some, but not all, cases this is clarified within the text of the appendix containing the rationale for the indicators used.
USAID substantially reorganized the strategic plan from the November 1996 version. Many key elements of the plan have been consolidated into one section with no indication of where one element ends and another begins. Separate sections or increased use of subheadings would significantly improve the presentation and the ease of using this plan.
Agency Comments
On October 10, 1997, we briefed USAID officials on our observations about the issued strategic plan. On November 3, 1997, USAID officials provided us with comments on a draft of this appendix. They generally believe that we have fairly recorded the progress made to date, but they provided additional comments and clarification of several points, which we have incorporated as appropriate. They acknowledged that in some cases, for the sake of brevity, the plan did not reflect the level of specificity that is called for by the OMB and our guidance, particularly with regard to program evaluations, crosscutting functions, and information resource management issues. They noted that such detail is readily available from other USAID sources and believe that including it in the plan would add little value and would unduly increase the plan’s size. We continue to believe that the clarity and credibility of USAID’s strategic plan could be improved with the inclusion of the type of detail we have outlined.
USAID officials also contended that the plan acknowledges USAID’s management challenges by outlining management improvement strategies that would resolve the types of problems we raised. However, we believe that an explicit description of management challenges would provide the reader a better sense of the nature and gravity of the problems USAID must overcome and the implications for USAID’s performance if it is not successful in overcoming these problems. country-level results. They stated that USAID has been able to influence the use of the resources of other donors, which affects the development goals USAID seeks to achieve.
Issue Area Contact
Benjamin F. Nelson, Director, International Relations and Trade Issues; National Security and International Affairs Division, (202) 512-4128.
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Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Why GAO Did This Study
Pursuant to a congressional request, GAO reviewed federal agencies' strategic plans submitted in response to the Government Performance and Results Act of 1993, focusing on: (1) summarizing its observations on agencies' September plans; and (2) providing additional information on how the next phase of the Results Act's implementation--performance planning measurement--can be used to address the critical planning issue GAO observed in reviewing the September strategic plans.
What GAO Found
GAO noted that: (1) on the whole, agencies' September plans appear to provide a workable foundation for Congress to use in helping to fulfill its appropriations, budget, authorization, and oversight responsibilities and for agencies to use in setting a general direction for their efforts; (2) agencies' strategic planning efforts are still very much a work in progress; (3) GAO's reviews of September plans indicate that continued progress is needed in how agencies address three difficult planning challenges--setting a strategic direction, coordinating crosscutting programs, and ensuring the capacity to gather and use performance and cost data; (4) GAO found that agencies can build upon their initial efforts to set a strategic direction for their programs and activities; (5) the next stage in the Results Act's implementation--performance planning and measurement--can assist agencies in addressing the challenge of setting a strategic direction; (6) as an agency develops its performance plan, it likely will identify opportunities to revise and clarify those strategic goals in order to provide a better grounding for the direction of the agency; (7) also, as agencies develop the objective, measurable annual performance goals as envisioned by the Act, those goals can serve as a bridge that links long-term strategic goals to agencies' daily operations; (8) the Results Act's requirements for annual performance plans and performance measurement can also provide a structured framework for Congress, Office of Management and Budget, and agencies to address agencies' crosscutting programs--the second critical planning challenge; (9) GAO found that although agencies have begun to recognize the importance of coordinating crosscutting programs, they must undertake the substantive coordination that is needed for the effective management of those programs; (10) the third critical planning challenge is the need for agencies to have the capacity to gather and use sound program performance and cost data to successfully measure progress toward their intended results; (11) under the Results Act, agencies are also to discuss in their annual performance plans how they will verify and validate the performance information that they plan to use to show whether goals are being met; and (12) verified and validated performance information, in conjunction with augmented program evaluation efforts, will help ensure that agencies are able to report progress in meeting goals and identify specific strategies for improving performance. |
gao_GAO-10-807 | gao_GAO-10-807_0 | Background
Given the large influx of Recovery Act funds that LEAs and IHEs are receiving, the Administration has stated its intention to ensure that federal agencies provide information to the public that is transparent and useful. Further, the Act contains numerous provisions to increase transparency and accountability. For example, under section 1512 of the Act, recipients of funds are required to report certain information quarterly. In addition, the Act created the Recovery Board and required it to establish and maintain a user-friendly, publicly available Web site (Recovery.gov) to foster greater accountability and transparency in the use of Recovery Act funds. The Act directs that the Web site function as a gateway to key information relating to the Recovery Act and provide links to other government Web sites with related information. The information that is provided by recipients in accordance with the reporting requirements under section 1512 is made available to the public on Recovery.gov.
The Act created broad requirements for recipient reporting. Specifically, the Act requires, among other types of information, that recipients report the total amount of Recovery Act funds received, associated obligations and expenditures, and a detailed list of the projects or activities supported by Recovery Act funds. For each project or activity, the detailed list must include the name and description of the project or activity, an evaluation of its completion status, and an estimate of the number of jobs created and the number of jobs retained through that project or activity. The prime recipient, which for these education programs is the state, is responsible for the reporting of all data required by section 1512 of the Recovery Act.
To implement recipient reporting requirements, OMB worked with the Recovery Board to deploy a nationwide system for collecting data submitted by the recipients of funds. One of the functions of the Recovery Board was to establish a Web site and to publish a variety of data, including recipient data once it has been reviewed by the relevant federal agencies. These data, collected through www.FederalReporting.gov, are made available to the public for viewing and downloading on www.Recovery.gov. The Recovery Act set a demanding schedule for implementing Recovery.gov, requiring the Recovery Board to establish the Web site within 30 days of the law’s enactment. The Recovery Board’s goals for this Web site are to promote accountability by providing a platform to analyze Recovery Act data and to serve as a means of detecting fraud, waste, and abuse by providing the public with accurate, user-friendly information.
Recipients are required to submit their section 1512 reports within 10 days of the end of each quarter. Federal agencies then review the reports for significant errors and missing information, and as required by law, make them available on Recovery.gov within 30 days of the end of each quarter. For the programs discussed in this report, information was submitted by recipients for the quarter ending March 31, 2010 and posted on Recovery.gov on April 30, 2010.
OMB Provided General Guidance, and Education Provided Guidance with Suggested Standard Language
OMB Provided General Guidance for Recovery Act Programs across Agencies
OMB provided recipients guidance through memorandums, supplemental materials, and reporting instructions. Specifically, starting for the period ending September 30, 2009 (and repeated for the quarters ending December 31, and March 31), OMB’s reporting instructions specified that recipients must provide, among other things, the project name, which should be brief and descriptive; a project description that captures the overall purpose of the award, quarterly activities, and expected outputs and outcomes or results; an award description that describes the overall purpose, expected outputs, and outcomes or results of the award, including significant deliverables and, if appropriate, units of measure; a jobs created description that captures the types of jobs created or the project status, which was specified as not started, less than 50 percent complete, completed 50 percent or more, or complete; an activity description, which categorizes projects and activities; the amount of the award; and the primary place of performance, which is the physical location of award activities.
Four of these fields—project name, description of jobs created, quarterly activities/project description, and award description—are narrative fields. In its December 2009 guidance to heads of executive departments and agencies, OMB stated that the narrative information must be sufficiently clear to facilitate the general public’s understanding of how Recovery Act funds are being used.
As we reported in our May 2010 transparency report, OMB provided guidance that required general information that could be applied broadly across a wide range of recipients. OMB defined narrative fields to solicit high-level information that is not specific to a single program. OMB officials also told us the agency created generic reporting guidance that would provide basic guidance for recipient reporting and that individual agencies could provide supplemental guidance—that was more specific to their program characteristics—if the agency considered additional guidance necessary.
Reporting Mechanism Limits the Amount of Information on Local Project Descriptions
Detailed information on how subrecipients are spending their Recovery Act funds is limited, in part because data collection for Recovery.gov, through FederalReporting.gov, does not provide specific narrative fields for collecting information on how each subrecipient is using its funds. Because OMB and Education guidance instructs prime recipients to include information about subrecipients in the information they report on FederalReporting.gov, a state is required to report information that captures the overall purpose of the award, including how subrecipients have used the funds. Information required about each subrecipient is limited to basic information, such as award amounts and place of performance. Our May 2010 report notes that this practice is not consistent with the requirement in the Act to report a detailed list of all projects and activities, each having its own name, description, completion status, and potential outcomes. In addition, we reported that requiring information on status, outcomes, or other items without information on subrecipient activities may convey an incomplete impression of how funds are being used.
Furthermore, FederalReporting.gov restricts the amount of information prime recipients can report. Prime recipients are allowed to input up to 4,000 characters for each narrative field. While this limitation may not affect grants that provide funds for limited projects and activities, some states have thousands of subrecipients for each of these three education grants. For example, California’s SFSF grant has over 1,500 subrecipients. Providing detailed information on how each subrecipient is using the funds within the character limitation would be extremely challenging, if not impossible for some states. Because of these complexities, OMB officials allowed individual federal agencies to provide program-specific guidance that was tailored to the awards made under their programs, if the agency determined such guidance was necessary. They noted, however, that while information on subrecipient activities and fund uses may not be specifically included on Recovery.gov, the information included in the prime recipient reports should, as a whole, represent the entire grant, including subrecipient information. They told us that they will continue to evaluate and update guidance on Recovery Act reporting requirements, but that they do not have plans to require more information on subrecipients. The officials emphasized the need to balance transparency with the burden of recipient reporting.
Education Provided Standard Language to Ease State and Local Reporting Burden
Education developed guidance and tip sheets with suggested text for recipients to use when reporting on Recovery Act funds. Education officials reported they provided this information to recipients to ease the burden of Recovery Act reporting. For example, each prime recipient is required to submit information each quarter for over 60 data elements for each Recovery Act grant it receives. Since the Act funded multiple formula grants to states, many were required to submit as many as nine reports totaling up to approximately 540 required data elements. Several state officials told us that including subrecipient information in their reporting required additional resources and time. For example, Colorado officials told us that summarizing information from nearly 300 separate subrecipient reports was their biggest challenge in compiling and reporting on the data required by section 1512.
In its tip sheets, Education provided suggested standard language that recipients could use when reporting on three of the four narrative fields. Education officials told us they provided the language for the project name, award description, and quarterly activities/project description fields in order to balance the reporting burden with transparency by providing information on the grants without requiring each recipient to develop its own information. The only narrative field without this language was the description of jobs created. Officials told us that information in the description of jobs created field needed to be individualized for each grant and therefore standard language would not be appropriate for that field. Education’s guidance and tip sheets—including the suggested standard language—were reviewed and approved by OMB.
For each of the three programs we reviewed, the standard language for two of the narrative fields in the recipient reports—award description and quarterly activities/project description—is worded almost exactly the same. By using the suggested text for both the award description and quarterly activities/project description narrative fields, recipients duplicate the generic information and lose an opportunity to provide information on how they are using their grant funds. For example, Education’s tip sheet for IDEA Part B instructs recipients to enter “Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.”
While this information does provide the public with a general description of whom the program serves (children with disabilities), and its purpose (providing special education and related services), it does not provide information on what specific activities or programs are being funded by the grant. Therefore when states use the standard language, the public cannot discern if the grant is paying for additional teachers, textbooks, installation of wheelchair accessible ramps, creating a tutoring program, providing professional development, purchasing technology, or any of the activities allowed by IDEA Part B. (See table 1 below for standard language.)
Few State Project Descriptions Fully Met Our Criteria for Transparency; Many Only Used Education’s Suggested Standard Language
We found that 9 percent of the awards for the three programs we reviewed were transparent—that is, they had sufficiently clear and understandable information on the award’s purpose, scope, location, award amount, nature of activities, outcomes, and status of work. We determined that 13 percent contained most, but not all, of this information. However, the majority (78 percent) of descriptions for all three programs we reviewed had limited information—that reduced the public’s ability to understand how the funds were being used—because they primarily relied on Education’s standard language to describe how they spent their Recovery Act funds. We also found that many states and LEAs made information on their grants available to the public through mechanisms other than Recovery.gov.
Descriptions That Fully Met Our Transparency Criteria Went beyond Standard Language and Contained Sufficient Information on Local Fund Use
A few of the descriptions (9 percent) fully met our transparency criteria because their project descriptions included information on subrecipient use of funds. To assess the extent to which descriptions of awards transparently described how funds were being used, we developed a transparency assessment based on the Recovery Act; OMB’s guidance, including OMB’s Recipient Reporting Data Model; the Federal Funding Accountability and Transparency Act of 2006; and professional judgment. (See app. VII for additional information on how we developed our transparency assessment.) Similar to our May 2010 transparency review, we identified key fields on Recovery.gov that describe the uses of Recovery Act funds, including project name, award description, and quarterly activities/project description. In addition to these fields, we reviewed the description of jobs created field, in which prime recipients were advised by Education to briefly describe the types of jobs created or retained. In December 2009 we reported in our congressionally mandated bimonthly review of Recovery Act funds that retaining and creating jobs was the primary use of funds by LEAs across the three education programs.
In assessing transparency, we reviewed all available prime recipient award records on Recovery.gov as of April 30, 2010, for the three education programs covered in this review. To apply our transparency criteria to award information, we looked for information on the general purpose of the award (e.g., retaining funding for K-12 schools or programs) and the nature of activities being conducted (e.g., purchase of educational technology or training of instructional support staff) in the fields we reviewed on Recovery.gov. We also looked for information on where award activities are being conducted, the amount awarded, the status (percentage complete), what is expected to be achieved (outcomes), and the scope (e.g., number of schools or students covered by the project).
Using these seven attributes and our professional judgment, we assessed information in the selected data fields collectively for understandability, clarity, and completeness to determine whether they met our transparency criteria. We did not find any descriptions that did not include at least some of the information needed to inform the public. (See table 2.)
States that were able to provide enough detailed information to fully meet our transparency criteria made few or no awards to subrecipients and/or they reported that their subrecipients used Recovery Act funds for a limited purpose, such as teacher retention. For example, Hawaii, which has only one LEA, provided information on its use of Recovery Act ESEA Title I Part A funds that was clear and included sufficient detail for the general public to understand the award’s purpose, scope, location, award amount, nature of activities, outcomes, and status of work (see table 3). Specifically, the description of the award notes that the funds were used for continued support of the state’s Extended Learning Opportunities program, which served 8,018 economically disadvantaged students across 90 campuses statewide. The state also reported on a number of outcomes from its Recovery Act ESEA Title I, Part A fund use, including student improvement over the course of the program, as well as jobs created.
Thirteen percent of descriptions by states included most, but not all information needed to allow the public to understand how Recovery Act education funds were being used. For example, Kentucky’s information for its Recovery Act ESEA Title I, Part A award met all elements of our transparency criteria except for outcomes (see table 4). Specifically, Kentucky’s description reported that its LEAs primarily used these funds for job retention across a number of occupational types. However, while the purpose of these funds is clear, “to improve the teaching and learning of targeted low performing students and schools,” it is not clear what specific outcomes had resulted or were expected to result from their fund use (for example, averting staff layoffs, preventing teacher furloughs, or maintaining current class size).
Most states (78 percent) only partially met our transparency criteria because their description contained much less information and met only a few attributes of our criteria. For example, Alaska’s description does not provide sufficient information on what project activities were supported and what outcomes resulted from the use of these funds to enable the public to understand how it is using Recovery Act funds (see table 5). While Alaska does provide jobs-related information in terms of the number of jobs created or retained, the information is not clear as to whether or not job creation or retention was the only or primary use of its Recovery Act SFSF education stabilization funds.
We found that for all three education programs, descriptions that contained only Education’s suggested standard language were less transparent than those that entered information specific to the program and activities conducted in their states. Education’s reporting guidance provided standard language for the quarterly activities/project description field but it did not contain instructions or guidance for recipients to describe how funds were being used by subrecipients. For example, the suggested language for the ESEA Title I, Part A program instructed states to enter “Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards.” While the use of such language by states may facilitate the process of reporting their section 1512 data (i.e., reduce the reporting burden), it does not provide information on what funds are being spent on (e.g., professional development, technology, or testing assessments) and it provides the public with little information on how funds are being used at the local level. For example, we collected information from seven LEAs in Texas that reported they used ESEA Title I, Part A Recovery Act funds for technology purchases for at-risk students, but the information in Texas’ Recovery Act ESEA Title I, Part A project description contains only the standard language discussed above.
Our May 2010 report made several recommendations to OMB with the goal of helping the public gain a better understanding of how Recovery Act funds are being spent. One of those recommendations was that OMB work with executive departments and agencies to ensure that supplemental guidance (like Education's tip sheets) provides for transparent descriptions of funded activities. OMB agreed with these recommendations and reported that it is making plans to address them.
Many States and LEAs Made Information on Their Grants Available to the Public in Addition to the Information on Recovery.gov
All 15 states and the District of Columbia we visited have mechanisms to provide the public with information about uses of award funds. The states reported that the information is available online through, for example, state Recovery Act Web sites or state department of education Web sites. Some states also included information on these Web sites about frequently asked funding questions, subrecipient information, and expenditures to vendors. Other states reported that they had additional mechanisms to make the public aware of their uses of award funds. For example, officials in Arizona reported that they issued press releases about uses of their SFSF education stabilization funds, and Florida officials reported that they provided information to the public during sessions of the state’s legislative committees.
In addition, 14 of the 17 LEAs we visited made information available to the public on how they were using their ESEA Title I, Part A, IDEA, Part B for school aged children, and SFSF education stabilization funds. These LEAs used different ways to report this information. The most common means was through their Web sites or those of their state education agencies. Other ways included disseminating information through public meetings. For example, York, Pennsylvania presented expenditure data at school board meetings, the District of Columbia Public Schools held parent forums about the use of Recovery Act IDEA, Part B for school aged children funds, and Springfield, Massachusetts held a public budget presentation. In addition, some LEAs disseminated Recovery Act information through newsletters. For example, Rock Round Independent School District in Texas published a newsletter that included information on the status and implementation of its Recovery Act funds.
Conclusions
Education faced an extraordinary task in developing the new SFSF program and significantly expanding funding for ESEA Title I, Part A and IDEA, Part B for school aged children while at the same time trying to ensure that the information recipients report is transparent and useful to the public. The transparency and understandability of descriptions on Recovery.gov are important aspects of the Recovery Act as they provide a key mechanism through which the public can understand how tax dollars are being spent and what is likely to be achieved from these expenditures. However, because descriptive information on how subrecipients are using the funds is not included in the quarterly activities/project description field on Recovery.gov, the public may not be able to clearly discern how Recovery Act education funding is being spent in their state. Still, Education officials noted that requiring states to report this information could impose an undue reporting burden on many states, and may be impossible for states that have high numbers of subrecipents because of the reporting field character limitations built into the recipient reporting system. Guidance on reporting requirements for Recovery Act grants that pass through a prime recipient to a subrecipient should balance the need for transparency with the reporting burden and these system limitations. However, because Education’s suggested standard language for two fields—award description and quarterly activities/project description—is exactly the same, an opportunity for greater transparency is lost if recipients use only this language. Providing more information than offered in Education’s standard language, such as an overview analysis of how localities are spending the funds and the anticipated results, could help the public gain a better understanding of how the funds are being used.
Recommendation for Executive Action
In order to provide the public with more useful information on how Recovery Act funds are being used, we recommend that the Secretary of Education, in consultation with OMB, remove the standard language for one field—the quarterly activities/project description field—from its guidance and instruct states to include, to the extent possible, information on how the funds are being used and potential project outcomes or results.
Agency Comments and Our Evaluation
Education provided comments on a draft of this report by email and agreed with the information in our draft report and our recommendation. Education noted that it strongly supports efforts to improve the transparency and accountability of federal spending as exemplified by the resources it devoted to executing the reporting process under section 1512 of the Recovery Act. Education reported that it was encouraged by our finding that 100 percent of the Education descriptions we reviewed included at least some of the information needed to meet our criteria for transparency.
Education noted that our report clearly describes the challenge states face in providing detailed information on the uses of funds without creating undue burden because programs are primarily executed by local educational agencies (LEAs) and because the current reporting mechanism restricts the amount of information that states can report. Education emphasized, as stated in our report, that it would be extremely burdensome and challenging, if not impossible, for many states to provide detailed information for each LEA. Finally, Education agreed to work toward implementing our recommendation of increasing the transparency of descriptions required by recipient reporting while balancing the reporting burden on states.
As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Education and interested congressional committees.
In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. Please contact me at (202) 512-7215 or [email protected] if you have any questions about this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report.
SFSF Education Stabilization Funds Prime Recipient Review and Descriptions
The State Fiscal Stabilization Fund (SFSF) included approximately $48.6 billion to award to states by formula and up to $5 billion to award to states as competitive grants. The Recovery Act created the SFSF in part to help state and local governments stabilize their budgets by minimizing budgetary cuts in education and other essential government services, such as public safety. Stabilization funds for education distributed under the Recovery Act must first be used to alleviate shortfalls in state support for education to local educational agencies (LEA) and public institutions of higher education (IHE). States must use 81.8 percent of their SFSF formula grant funds to support education (these funds are referred to as education stabilization funds) and must use the remaining 18.2 percent for public safety and other government services, which may include education (these funds are referred to as government services funds). After maintaining state support for education at fiscal year 2006 levels, states must use education stabilization funds to restore state funding to the greater of fiscal year 2008 or 2009 levels for state support to LEAs and public IHEs. When distributing these funds to LEAs, states must use their primary education funding formula, but they can determine how to allocate funds to public IHEs. In general, LEAs maintain broad discretion in how they can use education stabilization funds, but states have some ability to direct IHEs in how to use these funds.
Eighteen Percent of SFSF Descriptions Met Our Transparency Criteria
We assessed the transparency of descriptive information for SFSF awards available on Recovery.gov. We found that 18 percent met our transparency criteria, 12 percent significantly met our criteria, 69 percent partially met our criteria, and zero percent did not meet our criteria.
Given that few descriptions met our transparency criteria we conducted a national survey of school districts to discover how they are using the funds. The information on SFSF is found in appendix IV.
SFSF Descriptions That Met Our Transparency Criteria
The following award descriptions contained sufficient information on general purpose, scope and nature of activities, location, and expected outcomes to meet our transparency criteria. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
EXECUTIVE OFFICE OF THE STATE OF COLORADO State Fiscal Stabalization Fund-Education Grants, Recovery Funds Education Fund - for the support of public elementary , secondary, postsecondary and, as applicable, early childhood education programs and services.
The State of Colorado awarded public Institutes of Higher Education Stabilization dollars for Fiscal Years 2008-2009 and 2009-2010 in order to maintain the State's financial support to public education. Currently, the Institutes of Higher Education have sought reimbursement for over 50% of the currently awarded funds.
As stipulated by the U.S. Department of Education, State Fiscal Stabilization Funds were primarily utilized to provide support for salaries and benefits related to the classroom and laboratory instruction, student services and administrative support within the Colorado public university system. As such, the majority of the positions covered related to the Professorial job series as well as Graduate Teaching Assistants. Other positions supported included accountants, administrative assistants, general professionals, IT support staff, as well as college and central level administrators.
Place of performance (city, state, zip code) Denver, Colorado 802031792 More than 50% Completed State Fiscal Stabilization Fund-Education Fund $823661223 Education Fund-for the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
No activity this quarter. Funds expended in calendar year 2009 were used to restore state funding levels for LEAs in accordance with the submitted state plan. Distributions for IHEs planned in future quarters.
No funds expended this quarter.
Place of performance (city, state, zip code)
More than 50% Completed STATE FISCAL STABILIZATION FUND-EDUCATION GRANTS, RECOVERY FUNDS Education Fund- for the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
Funds are being used to support K-12 and post-secondary education throughout the Commonwealth of Kentucky. We have established Memorandum of Agreements (MOAs) with ten sub-recipients. The sub-recipients are the Kentucky Department of Education (KDE) and the 9 public universities in KY. We expect KDE to interface with the school districts across the Commonwealth for K-12. They collect financial information and job creation data and report that to our office in the Finance & Administration Cabinet. The universities report similar data to our office. We review that data and file the required 1512 reports. As reported on the sub-recipient tab of this report, all of the sub-recipients have incurred expenses and received reimbursement through ARRA funds.
Local educational agencies (LEA) primarily used the funds to retain certified and classified positions in their school districts such as: elementary, middle and high school teachers, alternative school teachers, elementary, middle, and high school counselors, nurses, elementary, middle and high school librarians, math and science teachers, curriculum coordinators, technology coordinators, clerical staff, elementary, middle and high school resources teachers, speech language pathologists, arts and humanities teachers, instructional assistants, full-day kindergarten teachers, preschool program positions, and district coordinators. The retained positions allowed LEAs to maintain the same level of staff support as from the previous year. Also, two of the nine public universities that are sub- recipients used ARRA funds to pay the salaries of some full-time faculty.
Place of performance (city, state, zip code) Frankfort, Kentucky 406013410 More than 50% Completed TREASURY, LOUISIANA DEPARTMENT OF THE State Fiscal Stabilization Fund-Education Fund The grant is used for creating and/or retaining educational jobs and programs by supporting staff salaries for teachers, faculty, professors, professional, and support employees in higher education and public elementary secondary and postsecondary educati The grant provides support of institutes of higher education, public elementary secondary and postsecondary education, and, as applicable, early childhood education programs and services to continue educating the citizens of the state.
The majority of the jobs retained and/or created are instructional jobs (teachers, faculty, and professors). Other jobs created are for pupil support, operational support, school administration, and clerical or service worker related. Retaining educational jobs during an economic downturn ensures the continued education of the youth in the state. Education is a major economic driver and vital for the success of the state's and country's economy.
Place of performance (city, state, zip code)
Baton Rouge, Louisiana 708025243 More than 50% Completed State Fiscal Stabilization Fund - Education Fund State Fiscal Stabilization Fund - Education Fund: For the support of public elementary, secondary, and postsecondary education and as applicable, early childhood education programs and services.
Place of performance (city, state, zip code) Helena, Montana 596200801 More than 50% Completed NORTH DAKOTA, STATE OF State Fiscal Stabilization - Education Fund Education Fund - for the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
North Dakota used all education stabilization funds to restore state support for elementary and secondary education to the FY 2009 level freeing up state funds for other one-time school district infrastructure investments.
North Dakota distributed ARRA education stabilization funds through the state's school aid funding formula. All school districts agreed to apply the share of the state school aid formula funding identified as federal ARRA funds to instructional salaries. Instructional staff are hired for a 'definite term with salaries paid out of Recovery Act funds and the remaining portion with non-Recovery Act funds. Using the guidance provided in M-10-08 (Part2.5.8), the 'Number of jobs* reporting uses an alternative calculation in which an adjustment is made to the FTE number to match the appropriate percentage of Recovery funding. The 'Number of jobs* calculation is for the entire project and will be used for each reporting quarter.
Place of performance (city, state, zip code) Bismarck, North Dakota 585050001 More than 50% Completed 175 STATE OF OKLAHOMA, THE State Fiscal Stabilization Fund - Education Fund.
Education Fund- for the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services.
Education Budget Stabilization - Budget stabilization grant funds were used to supplement state appropriations and other revenues used for the payment of public schools' and higher education institutions' payroll costs. Funds were used pay a portion of the monthly payrolls at numerous public schools at both the common education and higher education levels.
Funded a portion of public schools' and higher education institutions' FTEs by offsetting a portion of the current year budget reduction.
Place of performance (city, state, zip code) Oklahoma City, Oklahoma 731054801 More than 50% Completed EXECUTIVE OFFICE OF THE STATE OF UTAH State Fiscal Stabilization Fund: Education Fund Education Fund- for the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services.
Retain 1,259.69 full-time-equivalent administrative, support and faculty positions within Utah's Higher Education System; 110.7 full-time-equivalent administrative and faculty positions within Utah's Applied Technology College; and 1,717.77 full-time-equivalent teaching positions within Utah's Local Education Agencies in order to maintain quality education programs and student support services within Utah's education system.
Instructional, teaching and administrative positions for Local Education Agencies (1,717.77 FTEs), Higher Education Institutions 1,259.69 FTEs) and Applied Technology Colleges (110.7 FTEs) within the State of Utah.
Place of performance (city, state, zip code) Salt Lake City, Utah 841142210 More than 50% Completed 130 EXECUTIVE OFFICE OF THE STATE OF WYOMING State Fiscal Stabilization Fund - Education Stimulus Phase 1 of the State Fiscal Stabilization Fund-Education Grant program, as amended, allocates stabilization funds to the University of Wyoming and the state�s seven community colleges. Specifically, funding will be used by IHEs for education and general expenditures, in such a way as to mitigate the need to raise tuition and fees, and for modernization, renovation or repair of facilities primarily used for instruction or research. Wyoming's amended Phase II application, which is waiting approval, reduced the amount designated for educational purposes from $67,507,805 to $57,568,071. At March 31, 2010, the remaining balance of the Education Grant funding, $10,052,126, has not been allocated by the Governor.
State Fiscal Stabilization Fund - Education Grant program, as amended, provides funding to the State's IHEs: the University of Wyoming and the state's seven community colleges. Allocated funding will be expended during FY 2011. The Governor's office has finalized agreements for renovation, modernization or repair of facilities and general education operations funding which outline the special ARRA contracting provisions, reporting requirements and limitations on qualifying expenditures. The state's IHEs executed agreements for renovation, modernization or repair of facilities with the Governor on February 24th and March 3rd, 2010. It is anticipated that the IHEs' general education operations agreements will be signed by April 2010. The balance of Wyoming's SFSF - Educaton Grant funding, $10,052,126, has not been allocated by the Governor. At March 31, 2010, the State is waiting approval of the SFSF Phase II application and has not expended any portion of the education related SFSF resources. As a result, there are no activities currently funded by SFSF- Education Grant resources.
Stabilization dollars will be used to fund top educational priorities for which a shortfall exists, i.e., library acquisitions and instructional excellence. Instructional excellence would cover general education costs such as support budgets and student lab equipment. A large amount of these funds will be used for removation, modernization, or repair of facilities dedicated for instruction and research. It is anticipated that a substantial number of jobs would be created or retained through this renovation effort.
SFSF Descriptions That Significantly Met Our Transparency Criteria
The following award descriptions contained most but not all details on one or more of the following pieces of information necessary to facilitate general understanding of the award, based on our criteria: general purpose, scope and nature of activities, location, or expected outcomes. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
State Fiscal Stabilization Funds - Education Grants, Recovery Funds Education Fund - For the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
Support elementary, secondary and postsecondary, and early childhood education programs; Hire and retain teachers and reduce potential layoffs; cover budget shortfalls or gaps in state's budgets and restore funding cuts to programs; improve student achievement through school improvement and reform; make progress toward rigorous college-and career-ready standards, including English Language for Learners (referred to hereafter as ELL) and Individuals with Disabilities Education Act (referred to hereafter as IDEA); establish Pre-K to College and Career Data Systems; make improvements in teacher effectiveness and equitable distribution of qualified teachers; provide intensive support and effective interventions for the lowest performing schools.
Instructors/faculty, EMT Program Coordinator, Librarian, Website Coordinator, Associate Director of Planning and Research, Administrative Staff, Janitorial Staff, Coach, Security Staff, Child Development Coordinator, Principals, Certified School Personnel, School Support Personnel, and Professors.
Less Than 50% Completed OFFICE OF THE GOVENOR, ARIZONA OFFICE OF ECONOMIC RECOVERY, THE State Fiscal Stabilization Fund - Education Grant Funds Education Fund – for the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services.
In previous quarters this funding was used to create or save education jobs at K-12, Community College, and Higher Educational institutions. The timing of these disbursements are such that no payments were made during this reporting period and thus there were no programmatic activities this quarter. Further, on October 29, 2009 the State of Arizona’s amendment to the Statewide Cost Allocation Plan (SWCAP) was approved by the Department of Health & Human Services Division of Cost Allocation. The approved amendment granted the State of Arizona the ability to charge the estimated ARRA administrative costs for the period beginning February 17, 2009 through June 30, 2013. A portion of this agreement’s share of the SWCAP expenses was drawn down and expended during this quarterly reporting period and thus this activity is captured in the financial transactions in this report. Jobs and quarterly activities may appear disproportionate to the overall funds drawn down and expended due to this SWCAP reconciliation.
In previous quarters this funding was used to create or save education jobs at K-12, Community College, and Higher Educational institutions. The timing of these disbursements are such that no payments were made during this reporting period and thus no jobs were created or saved this quarter. Further, on October 29, 2009 the State of Arizona’s amendment to the Statewide Cost Allocation Plan (SWCAP) was approved by the Department of Health & Human Services Division of Cost Allocation. The approved amendment granted the State of Arizona the ability to charge the estimated ARRA administrative costs for the period beginning February 17, 2009 through June 30, 2013. A portion of this agreement’s share of the SWCAP expenses was drawn down and expended during this quarterly reporting period and thus this activity is captured in the financial transactions in this report. Jobs and quarterly activities may appear disproportionate to the overall funds drawn down and expended due to this SWCAP reconciliation.
Place of performance (city, state, zip code) Phoenix, Arizona 850072812 More than 50% Completed EXECUTIVE OFFICE OF THE STATE OF ARKANSAS State Fiscal Stabilization Fund - Education Grants Education Fund-for the support of public elementary, secondary, past secondary education, and, as applicable, early childhood education programs and services.
Place of performance (city, state, zip code)
Little Rock, Arkansas 722010000 Less Than 50% Completed PLANNING AND RESEARCH, GOVERNOR'S OFFICE OF State Fiscal Stabilization Fund - Education Fund SFSF-Education Fund - for the support of public elementary, secondary and postsecondary education, and, as applicable, early childhood education programs and services.
SFSF - Education State Grants Recovery Act funds were provided to help stabilize State and local budgets in order to mitigate and avoid reductions in education and other essential services in exchange for a State’s commitment to advance essential education reform in four areas: (1) making improvements in teacher effectiveness and in the equitable distribution of qualified teachers for all students, particularly students who are most in need; (2) establishing pre-K-to-college-and-career data systems that track progress and foster continuous improvement; (3) making progress toward rigorous college- and career-ready standards and high-quality assessments that are valid and reliable for all students, including limited English proficient students and students with disabilities; and (4) providing targeted, intensive support and effective interventions for the lowest-performing schools. Local Education Agencies were able to use funds for activities previously authorized in various federal education acts. Possible uses of the funds may include using them to avert layoffs of teachers and other personnel; furthering education reform in the key areas of teacher quality, standards and assessments; using longitudinal data to improve instruction; and supporting struggling schools. With respect to postsecondary, the University of California used ARRA funds to retain the University's state-funded workforce responsible for core operations - teaching, research and public service. The California State University used ARRA funds to retain positions in the areas of instruction, academic support, student services, institutional support, and public services. The California Community Colleges used ARRA funds for workforce salaries and academic and operating expenses at its local college campuses. 35323.480000000003 Jobs created or retained include 3547.13 classified jobs, 16139.08 certificated jobs, 286.16 vendor jobs, and 15351.11 IHE jobs. Classified jobs include non-teaching positions such as food service, bus drivers, teacher assistants, custodians, office staff, librarians, and instructional aides. Certificated jobs include teaching positions. Vendor jobs represent a variety of different types of jobs. With respect to postsecondary, a total of 15351.11 FTE were funded using ARRA funds as calculated using the OMB 'definite term guidance. The positions funded at the University of California (UC) include 27.5% (an estimated 9,617.3 FTE) of the UC’s state-funded workforce responsible for core operations: teaching, research and public service. CSU used funds to retain 5,254 FTE positions in the areas of instruction, academic support, student services, institutional support, and public services. The California Community Colleges (CCC) distributed funds to its 72 local campuses to be used for campus expenses, including workforce payroll, instructional materials, and operating costs, specifically funding 479.81 FTE jobs.
More than 50% Completed ADMINISTRATION, NEVADA DEPARTMENT OF State Fiscal Stabilization Fund - Education Fund Education Fund for the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services Support of public postsecondary education. Includes 2 Universities, 1 State College and 4 Community colleges in Las Vegas, Reno/ Carson City and rural Nevada. Expenditures supported include salary and benefits for instructional and support positions as well as related expenses.
Using the methodology outlined in M-10-08, released 12/18/2009, the Nevada System of Higher Education calculated the number of jobs retained (none were created) as 'one in which the wages or salaries are either paid for or will be reimbursed with Recovery Act funding.' (section 5.2). It should be noted that state fiscal stabilization funds account for approximately 28% of the operating budgets of 7 institutions; however the allocation of stabilization funds/ fund maps within those budgets was made July 1, 2009 and revised through the year for accounting purposes only and does not reflect Board of Regents or Legislative priorities on what positions would have been eliminated or what other cuts would have been made had these funds not been available. The number of jobs retained presented here only reflects positions that were paid for with recovery act dollars this quarter and should not be interpreted as more than a financial accounting.
NEW YORK, STATE OF State Fiscal Stabilization Fund - Education Fund For the support of public elementary, secondary, and post secondary education and, as, applicable early childhood education programs and services For the support of public elementary, secondary, and post secondary education and, as, applicable early childhood education programs and services New York State primarily used the ARRA State Fiscal Stabilization Fund (SFSF) to restore proposed cuts in school aid compared to earlier levels caused by the severe economic recession effect on State tax revenues. Public school districts were eligible for the Education Stabilization Fund (ESF) portion of the State Fiscal Stabilization Fund.
SFSF Descriptions That Partially Met Our Transparency Criteria
The following award descriptions did not contain sufficient details on one or more of the following pieces of information necessary to facilitate general understanding of the award, based on our criteria: general purpose, scope and nature of activities, location, or expected outcomes. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
Place of performance (city, state, zip code)
State Fiscal Stabilization Fund -- Education Fund.
Education Fund- for the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
For the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
For Central Administration staff, 0.13 jobs created and 32.65 jobs retained. For Teachers/Instructors/Department Heads staff, 51.05 jobs created and 2537.36 jobs retained. For Paraprofessionals staff, 3.50 jobs created and 143.87 jobs retained. For Clerical Support staff, 0.45 jobs created and 12.75 jobs retained. For Guidance Counselors staff, 0.83 jobs created and 18.55 jobs retained. For School Nurse/Health Services staff, 0.00 jobs created and 3.00 jobs retained. For Maintenance Personnel staff, 1.00 jobs created and 24.95 jobs retained. For Technical/Computer Specialists staff, 0.30 jobs created and 5.00 jobs retained. For Library/Media staff, 0.00 jobs created and 13.48 jobs retained. For Food Services staff, 0.50 jobs created and 0.00 jobs retained. For Athletics/Coaches staff, 0.00 jobs created and 0.50 jobs retained. For Class Advisors staff, 0.00 jobs created and 0.50 jobs retained. For All Outside Consultants and Vendors except for RESCs and SERC staff, 1.00 jobs created and 2.00 jobs retained. For the current fiscal year, SFSF comprises 14.26 percent of the Education Cost Sharing (ECS) grant, Connecticut's major education funding mechanism (9.19 percent from the Education State Grants and 5.07 percent from Government Services).
Place of performance (city, state, zip code) HARTFORD, Connecticut 061061659 Less Than 50% Completed State Fiscal Stabalization Fund-Education Grants, Recovery Funds Education Fund- for the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services For the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services.
Place of performance (city, state, zip code) Dover, Delaware 199010000 Less Than 50% Completed DISTRICT OF COLUMBIA, GOVERNMENT OF SFSF: Education Stabilization Fund Education Fund- for the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services.
Funds are used for the support of public elementary, secondary, and higher education, and, as applicable, early childhood education programs and services. These funds are used to help restore for FY 2009, 2010, and 2011 support for public elementary, secondary, and postsecondary education to the greater of the FY 2008 or FY 2009 level. The funds needed to restore support for elementary and secondary education are run through the state's primary elementary and secondary education funding formulae. The funds for higher education go to the University of DC.
All reported jobs are for instructional, support services, and administrative positions within District of Columbia school districts.
EXECUTIVE OFFICE OF THE GOVERNOR OF FLORIDA State Fiscal Stabilization Fund - Education Fund Education Fund - for the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
Education Fund - for the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
The majority of the jobs saved and created related to instruction or instructional support. Types of jobs included but were not limited to adjunct faculty, faculty, classroom teachers, school-based administrators, clerical personnel, instructional aides, librarians/media specialists, career specialists, supervisors, and paraprofessionals.
Place of performance (city, state, zip code) Tallahassee, Florida 323990400 Less Than 50% Completed State Fiscal Stabilization Fund â “ Education Fund Education Fund- for the support of public elementary, secondary, and postsecondary education, as, applicable, early childhood education program and services.
For the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
Place of performance (city, state, zip code) Atlanta, Georgia 303341600 More than 50% Completed EXECUTIVE OFFICE OF THE STATE OF HAWAII State Fiscal Stabilization Fund - Education Fund Education Fund - for the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
For support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
State Fiscal Stabilization Funds, Education funds were used to retain teachers, counselors,lecturers, teaching faculty, and support staff positions necessary to support the State's public elementary, secondary, and postsecondary education programs. For the State's public traditional schools, preference is for positions requiring a teaching license that is assigned to a classroom and/or carry out an instructional role.
Place of performance (city, state, zip code) Honolulu, Hawaii 968132407 More than 50% Completed EXECUTIVE OFFICE OF THE STATE OF IDAHO State Fiscal Stabilization Fund-Educational Grants, Recovery Funds State Fiscal Stabilization Fund - Educationl Grants, Recovery Funds for higher educatin and support of public elementary and secondary education (K-12) programs and services.
K-12 Education Fund for the support of public elementary and secondary education programs and services. Higher Education to maintain publicly supported education opportunities in the state.
Higher Education retained faculty, administrative and infrastructure support staff. K-12 66.61% Teacher/Teacher Aides, 8.79% Custodial/Maintenance, 8.44% School Administraitive/Office Support, 5.76% Special Education Services, 2.75% District Administrative/Office Support, 2.40% Student Transportation, 1.65% Guidance/Health Workers, 1.51% Alternative School Programs, 0.98% Information Technology Workers, 0.64% Education Media Workers, 0.44% Extracurricular Program Workers, and 0.03% Child Nutrition Workers.
Place of performance (city, state, zip code) Boise, Idaho 837200034 More than 50% Completed 150 .
State Fiscal Stabilization Fund - Education Fund Education Fund - for the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
For the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
Management Occupations, Computer and Mathematical Occupations, Life, Physical, and Social Science Occupations, Community and Social Service Occupations, Education, Training and Library Occupations, Health Practitioners and Technical Occupations, Protective Service Occupations, Food Preparation and Service Related Occupations, Building and Grounds Cleaning and Maintenance Occupations, Personal Care and Service Occupations, Sales and Related Occupations, Office and Administrative Support Occupations, Construction and Extraction Occupations, Installation, Maintenance and Repair Occupations, Production Occupations, Transportation and Material Moving Occupations.
Place of performance (city, state, zip code) Springfield, Illinois 627770002 More than 50% Completed EXECUTIVE OFFICE OF THE STATE OF IOWA Fiscal Stabilization Fund - Education Education Fund- for the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services.
Place of performance (city, state, zip code) Des Moines, Iowa 503190000 More than 50% Completed State Fiscal Stabilization Fund - Education Fund Education Fund - for the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
For the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
Place of performance (city, state, zip code) Topeka, Kansas 666121590 More than 50% Completed State Fiscal Stabilization Fund - Education grants, Recovery Funds Education Fund - for the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
Education Fund - for the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services. 149.80 FTE jobs were created or retained as a result of the ARRA funds for K - 12 public education; 14 limited period teachers, 1 limited period SRO, 126.8 teachers, 1 Librarians, 2 School Resource Officers, and 4 educational technicians and 1 support person. Higher Ed Total jobs 5.7 FTE are CMCC; Jalbert Hall Renovations 3 hours, CMCC; Parking Lot 82 hours, SMCC; Roofing Repairs 727.75 hours, SMCC; Heating Improvements 850.75 hours, SMCC; Auto Tech Envelope Repair 144.50 hours, SMCC; Museum & Storage Renovations 602.75 hours, SMCC; SEA Center 9.5 hours, SMCC; Salt Shed 9 hours WCCC; Residence Hall Renovations 319 hours WCCC; Harol Howland Building Renovations 45 hours, YCCC; Phone Modernization 87 hours YCCC; Rooftop HVAC Unit Replacement 35.5 hours, YCCC; Emergency Generator Replacement 27 hours, Total; 2,942.75 hours/520 hours=5.7 FTE. For the University of Maine System jobs, 50.09 FTE jobs were funded with State Fiscal Stabilization Funds. For narrative -- 39.43 FTE were faculty and 10.66 were students.
State Fiscal Stabilization Fund - Education Fund Education Fund - for the support of public elementary, secondary, past secondary education, and, as applicable, early childhood education programs and services.
Education Fund - for the support of public elementary, secondary, past secondary education, and, as applicable, early childhood education programs and services.
Teaching positions (full time, substitute and tutors).
Place of performance (city, state, zip code) Baltimore, Maryland 212012595 Less Than 50% Completed State Fiscal Stabilization Fund - Education Stabilization Fund Education Fund - for the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
For the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
Commercial and Institutional Building Construction These funds have supported administrators, teachers, paraprofessionals, and staff members in school districts across Massachusetts. In addition, these funds have supported administrators, faculty members, and staff members at the state and community colleges and the University of Massachusetts campuses.
Place of performance (city, state, zip code) BOSTON, Massachusetts 021331099 More than 50% Completed 483 STATE OF MICHIGAN, EXECUTIVE OFFICE OF THE State Fiscal Stabilization Fund-Education Fund Education Fund-for the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
For the support of public elementary, secondary, and postsecondary education, and, as applicable, early childhood education programs and services.
State Fiscal Stabilization Fund (SFSF) sub-recipients created and retained jobs in several categories. The majority of sub-recipients retained jobs, indicating that they would have had to lay off the positions that were retained by the use of SFSF monies. The following jobs categories apply to the positions that were created and/or retained: K-12 Teachers in the following subject areas - Language Arts, Science, Math, Physical Education, Social Studies, Art, Music, Drama, Spanish, Computer Technology, English as a Second Language, Business Management, Reading Recovery, English, Home Economics, Chemistry, Physics, Economics, Government, U.S. History, World Languages, and General Education; Supplemental Enrichment Instructors; Paraprofessionals; Bus Drivers; Custodians; Mechanics; Administrative Professionals; School Librarians; School Counselors; Recess Aides; Library Aides; Social Workers; Nurses; Hall Monitors; Athletic Directors; Media Specialists; Literacy Coaches; Cooks; Technology Assistants; Principals; School Administrators; Support Staff; Assistant Principals; and College Work Study Student Positions.
Place of performance (city, state, zip code) Lansing, Michigan 489330000 More than 50% Completed EXECUTIVE OFFICE OF THE STATE OF MINNESOTA State Fiscal Stabilization Fund - Education Fund Education Fund - for the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services.
Education Fund - for the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services. 4667.2399999999998 Types of jobs created or retained with this grant include administration/supervision, counselor, educational speech/language pathologist, licensed instructional support, non- instructional support, non-licensed classroom personnel, non-licensed instructional support, other, paraprofessional, school psychologist, school nurse, security specialist, social worker, substitute teacher salaries, teachers, and cultural liaison. Types of jobs created or retained in higher education include, professors, instructional lab assistants, administrative support, graduate instructors, teaching specialists, adjunct instructors, lecturers, research and teaching assistants, assistant scientists, personnel specialists, clinical specialists and information technology professionals.
Place of performance (city, state, zip code) St. Paul, Minnesota 551551606 More than 50% Completed EXECUTIVE OFFICE OF THE STATE OF MISSISSIPPI State Fiscal Stabilization Fund - Education Grants For the support of elementary, secondary and postsecondary education and, as applicable, early childhood education programs and services and local educational agencies in the state of Mississippi.
Provided support for Local Education Agencies; teacher salaries and Institutions of Higher Education faculty salaries, operating costs and student financial aid.
Classroom teachers, assistant teachers, lobrarians, guidance couselors, school administrators. All LEA's used ARRA SFSF to reimburse salary expenditures for district personnel.
Place of performance (city, state, zip code)
Place of performance (city, state, zip code) Lincoln, Nebraska 685094987 Less Than 50% Completed EXECUTIVE OFFICE OF THE STATE OF NEW HAMPSHIRE State Fiscal Stabilization Fund (SFSF) Education State Grants, Recovery Act Education Fund – for the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services.
No funds paid for jobs during this reporting period.
These funds paid for jobs between 7/1/09 and 9/30/09. Using the definite term methodology, 510.23 jobs were created / retained in Q1 2010. Position types include teachers, support staff at School Administrative Units across the states, as well as at the University of New Hampshire system.
Place of performance (city, state, zip code) Concord, New Hampshire 033016312 More than 50% Completed NEW JERSEY, STATE OF State Fiscal Stabilization Fund-Education Fund Education Fund for the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services.
For the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services.
With regard to K-12 education, the following were the types of jobs created or retained: instructional positions, student support positions, and administrative positions. With regard to higher education, the following were the types of jobs created or retained: full-time faculty, administrative/staff positions, clerical positions, part-time faculty/adjunct custodians, police/security, and teaching assistants.
Place of performance (city, state, zip code) Trenton, New Jersey 086250001 More than 50% Completed SECRETARY OF STATE, NEW MEXICO STATE FISCAL STABILIZATION FUND - EDUCATION GRANTS, RECOVERY FUNDS Education Fund - for the support of public elementary, secondary, and postsecondary education and as applicable, early childhood education programs and services.
Place of performance (city, state, zip code) SANTA FE, New Mexico 875012744 Less Than 50% Completed State Fiscal Stabilization Fund - Education Fund Education Fund- for the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services.
For the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services.
For the LEAs and Charter Schools these are the following job types: Teachers, Teacher Assistants, Assistant Principals, Instructional Support, Clerical Personnel, Custodians, and Transportation Personnel. For the Universities the job type was: Instructional Faculty.
Place of performance (city, state, zip code) Raleigh, North Carolina 276038001 Less Than 50% Completed EXECUTIVE OFFICE STATE OF OHIO State Fiscal Stabilization Fund - Education Fund Education Fund- for the support of public, elementary, secondary and post-secondary education and, as applicable, early childhood education programs and services.
For the support of public, elementary, secondary and post-secondary education and, as applicable, early childhood education programs and services. 8465.1499999999996 Elementary and Secondary Education: Teachers, school administrators, school counselors, librarians, lunchroom personnel, school bus drivers, technology coordinators, secretaries, educational aides, tutors, construction and renovation jobs. Higher education institutions retained professional and support staff in the following functional areas of a campus budget: instructional staff; academic support staff; student services staff; institutional support staff; and plant operations and maintenance staff. No infrastructure funds were used for higher education.
Place of performance (city, state, zip code) Columbus, Ohio 432154183 Less Than 50% Completed State Fiscal Stabilization Fund-Education Fund Education Fund -- for the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
For the support of pubic elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
Teachers, instructional aides, and professors for Oregon public K-12 and university educational institutions.
More than 50% Completed EXECUTIVE OFFICE OF THE COMMONWEALTH OF PENNSYLVANIA STATE FISCAL STABILIZATION FUND - ED GRANTS, RECOVERY FUNDS Education Fund – for the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services.
For the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services. 7875.5600000000004 Reflects sub-recipient submitted information on school administrators, teachers, student aids and other educational support staff providing services detailed in the Project Description for the current reporting quarter for this award.
Place of performance (city, state, zip code) Harrisburg, Pennsylvania 171012210 Less Than 50% Completed State Fiscal Stabilization Fund - Education Fund Education Fund - for the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
For the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
Principal, Assistant Principal, Preschool Teacher, Kindergarten Teacher, Special Education (Self Contained), Special Education teachers, Classroom Teacher, Media Specialist, Guidance Counselor, Other Professional Instruction-Oriented, Adult Education Supervisor/Teacher, Temporary Instruction Oriented Staff, Bookkeeper, Technology/IT Personnel, Professional Development Director, Director of Technology, Coordinator, Federal Projects, Nurse, Director, Attendance, Other Nonprofessional Staff, Assistance Superintendent, District Superintendent, Supervisor Secondary Education, Director, Career and Technology Education, Special Services Coordinator, Guidance Coordinator, Support Personnel, Library Aide, Kindergarden Aide, Special Education Aide, Instructional Aide, Director, Communication/PIO, Instructional Coach, Other District Office Staff, School-to-Work coordinator, Social Worker, Director of Student Services, Purchased-Service Teacher, School Resource Officers, Bus Driver, Custodian, Secretary, Certification Specialist, Clerical Assistant/Administration, Data Specialist, SASI Clerk, Attendance Clerk, Parent Educator, Coordinator-REAL Project, Security Monitor, Academic Success Tutors, Accountant/fiscal Analyst I, Admin Asst/Coord, Administrators, Assistant Professor, Associate Professor, Campus Ambassadors, Cashier, Cliniacal Assistant Professor, Community Intern Director, Community Interns, Curriculum Coordinator I, Custodian, Development/Alumni, Executive, Facilities Worker, Faculty, Graduate Staff Assistants, Grants Administration, Groundskeeper, Human Resources Staff, Information Technology, Instructors, International Recruitment Mgr, Laboratory Manager, Law Enforcement Officer I, Librarians, Mail Room Clerk, Master Instructor/Trainer, Multicultural Outreach Coord., Professor, Program Coordinator II, Receptionist/Admin Asst., Records/Info Resource Asst., Regional Admissions Associates, Research Assistant Professor, Sponsored Award Management, Student Svcs Prog Coord II, Support, Visitors Center Staff, Administration; Administration Specialist; Bookstore Specialist; Cashier; Counselor; Foundation Associate; Job Developer; Procurement Officer; Coordinator; Adjunct Instructor; Business Instructor; Math Instructor; Transitional Studies Columbia, South Carolina 292112267 Less Than 50% Completed SOUTH DAKOTA, STATE OF State Fiscal Stabilization Fund - Education Fund Education Fund - for the support of public elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
For the support of public elementary, secondary, and postsecondary education and as applicable, early childhood education programs and services.
Colleges, Universities, and Professional Schools Staff to provide the opportunity for maximum citizen access to appropriate, high quality collegiate and university degree programs.
Pierre, South Dakota 575015007 More than 50% Completed EXECUTIVE OFFICE OF THE STATE OF TENNESSEE State Fiscal Stabilization Fund - Education Fund The SFSF Education Fund helps states restore support for public elementary, secondary, and postsecondary education and, as applicable, early childhood programs and services.
Activities conducted under the SFSF Education Fund include maintaining educational, administrative, clerical, support, professional, teaching and other positions essential to the delivery of public education in Tennessee's K-12 and higher education systems. 4706.8199999999997 TDOE: Teachers, K-12 Higher Education: Support staff, Professional support staff, Professional support temporary, Student workers, Adjunct faculty, Overload faculty, Accountant, Instructor of Engineering, Lecturers, Professors, Student assistant, Administrative staff, Graduate Assistants, Graduate Teaching Assistants, Instructors, IT technicians, Director, Extension agents, Post retirement appointments, Coordinator, IT Administrator, Graduate Research Assistants, Service Aides, Research Associates, Research Technician, Clerical positions, Professional positions, Academic Faculty positions, Technology, Foundations Instructor, Counselors, Part-time Instructors, Receptionists, PT Faculty Welding Instructor, PT Dental Assistant Instructor, Secretaries, Federal Work-Study Positions, Admissions Office clerical, Asst Dir of Fin Aid, Clinical Assistant, Custodians, Director, Executive Aides, Financial Aid, Counselor, Financial Management Analyst, Forensic Tech, Full Time Adjuncts, GME Coordinator, Graduate Program Specialist, Info Res Tech, Int Med/Psych, Internal medicine, Lab Coordinator, Lecturers, Manager, OB/GYNs, Office Coordinator, Post Doc, Psychiatry, Research Specialist, Technical Clerk, Hourly Temps, Visiting Assistant Professors, Financial Management Analyst, Executive Aides, Student Help Staff, Temporary clerical support, Accountant, Consultant, Extension Agents, IT Administrator, Visiting Scholar, Temp hourly instructional, website developers.
Less Than 50% Completed GOVERNOR, TEXAS OFFICE OF THE State Fiscal Stabilization Fund -Education Fund.
Education Fund- for the support of public elementary, secondary, and post secondary education and, as, applicable, early childhood education programs and services.
Education Fund- for the support of public elementary, secondary, and post secondary education and, as, applicable, early childhood education programs and services.
Instructional and non-instructional staff employed by school districts and open enrollment charter schools, including teachers, educational aides, support staff, administrators, counselors, librarians, school nurses, federal program directors and speech pathologists.
Place of performance (city, state, zip code) AUSTIN, Texas 787011935 Less Than 50% Completed 1181 EXECUTIVE OFFICE OF THE STATE OF VERMONT State Fiscal Stabilization Fund - Education Fund Education Fund - for the support of public, elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
Education Fund- For the support of public, elementary, secondary, and postsecondary education and, as applicable, early childhood education programs and services.
Preschool/PreKindergarten Teachers, Kindergarten Teachers, Elementary Teachers (Grades 1-6), Secondary Teachers (Grades 7-12), Teachers of Ungraded Classes (include EEE, Special Ed.), Teachers Aides - (PAID only), Guidance Counselors/Directors - Elem (Grades 1-6), Guidance Counselors/Directors - Sec (Grades 7-12), Nurses, Admin. Assists., Clerical & Secretarial Support Staff, Athletic Directors, Audiovisual & Instructional Technology Staff, Librarians, School Library Support Staff, Superintendents, Assistant Superintendents, Principals, Assistant Principals, Business Managers, Maintenance and Security. Although it is impossible to know whether these jobs or others would have been eliminated in the absence of ARRA-funding, these jobs were in existence and are maintained with funds which will be reimbursed from the State Fiscal Stabilization Fund. Since only expenditures of ARRA funds received are reportable by the State, the expenditures made by the State will be reported in the period in which the federal ARRA reimbursement for those expenditures is made.
Place of performance (city, state, zip code) Montpelier, Vermont 056090003 Less Than 50% Completed State Fiscal Stabilization Fund (SFSF) - Education State Grants, Recovery Act State Fiscal Stabilization Fund (SFSF) - Education State Grants, Recovery Act To support and restore funding for elementary, secondary, and postsecondary education and, as applicable, early child hood education programs and services in States and local ed For the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services. 6357.1000000000004 Jobs accounted for during the quarter ended 3/31/2010 represent employment types including: 5981.1 teachers, 2 bus drivers, 15.5 technology support, 36.8 Principals, 93.6 instructional assistants, 16.8 guidance councelors, 15 librarians, 67.5 aids, 50.8 clerical staff, 11 custodians, 9.3 truancy officers, 6 nurses, and 51.7 other. This total is made up of 6235.4 saved positions and 121.7 created positions.
Less Than 50% Completed EXECUTIVE OFFICE OF THE STATE OF WASHINGTON State Fiscal Stabilization Fund - Education Fund Education Fund - for the support of public elementary, secondary, postsecondary education, and, as applicable, early childhood education programs and services For the support of public elementary, secondary, postsecondary education, and, as applicable, early childhood education programs and services.
K-12 education staff, including certificated teachers, teacher/classroom aides and other classified staff (administrative assistants, building operations, information services and other technical staff).
Place of performance (city, state, zip code) Olympia, Washington 985040002 Less Than 50% Completed State Stabilization Fund- Education Fund Education Fund - for the support of public elementary, secondary, and postsecondary education and, as, applicable, early childhood education programs and services.
For the support of public elementary and secondary education and, as applicable, early childhood education programs and services. 3937.3600000000001 Jobs created and retained include teachers, education aides, administrative assistants, custodians, bus drivers, principals, and information technology specialists.
IDEA Part B for School Aged Children Prime Recipient Review and Descriptions
The Recovery Act provided supplemental funding for programs authorized by the Individuals with Disabilities Education Act (IDEA), as amended, the major federal statute that supports the provisions of early intervention and special education and related services for children, and youth with disabilities. Part B ($11.7 billion) provides funds to ensure that preschool and school-aged children with disabilities have access to a free and appropriate public education and is divided into two separate grant programs —Part B grants to states (for school-age children) and Part B preschool grants.. Our review focused only on Part B grants to states for school aged children.
Four Percent of IDEA Descriptions Met Our Transparency Criteria
We assessed the transparency of descriptive information for IDEA Part B for school aged children awards available on Recovery.gov. We found that an estimated 4 percent met our transparency criteria, 9 percent significantly met our criteria, 87 percent partially met our criteria, and zero percent did not meet our criteria.
Given that few descriptions met our transparency criteria we conducted a national survey of school districts to discover how they are using the funds. The information on IDEA is found in appendix V.
IDEA Descriptions That Met Our Transparency Criteria
The following award descriptions contained sufficient information on general purpose, scope and nature of activities, location, and expected outcomes to meet our transparency criteria. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
EDUCATION, HAWAII DEPT OF Grants to States for the Education of Children with Disabilities Assist states in providing special education and related services to children with disabilities in accordance with Part B of the Individuals with Disabilities Education Act (IDEA).
Assist states in providing special education and related services to children with disabilities in accordance with Part B of the Individuals with Disabilities Education Act (IDEA). Funds were used up to the September 30, 2009 quarter, to pay for contracted special education- related services. Calculated 'jobs retained' were 346.86 for that quarter, as noted above, based on vendor hours of service. For the quarters ended December 31, 2009 and March 31, 2010, no additional expenditures were made. Therefore, the 'number of jobs' for this reporting quarter is zero.
In the quarter ended September 30, 2009, jobs were create/retained totaling 346.86 FTEs, for contracted special education-related services. In that quarter, vendors provided services in the areas of school-based behavioral health services, and assistance to students diagnosed with the autism spectrum disorder. Based on vendor data and prime recipient- analyzed detailed records of minutes, and 445,834 hours of service, and standard cumulative hours since grant origination date of February 17, 2009 to September 30, 2009 of 1,285.33 hours, the FTE calculation was 346.86 for that quarter. For the quarters ended December 31, 2009 and March 31, 2010, no additional expenditures were made. Therefore, the 'number of jobs' for this reporting quarter is zero.
Place of performance (city, state, zip code) Honolulu, Hawaii 968132403 More than 50% Completed Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Funds were just released to LEAs in January and most districts are still planning and goal setting, prior to expenditures. ALBANY 1, BIG HORN 1, CARBON 1, CARBON 2, CROOK 1, FREMONT 1, FREMONT 21, FREMONT 24, FREMONT 6, HOT SPRINGS 1, JOHNSON 1, LARAMIE 1, LINCOLN 1, NATRONA 1, NIOBRARA 1, PARK 1, PLATTE 1, SHERIDAN 2, SUBLETTE 1, SUBLETTE 9, SWEETWATER 1, SWEETWATER 2, UINTA 4, WASHAKIE 2 Waiting on application approval, were just approved, not fully started, OR still in planning phase. BIG HORN 2 We are setting up spread sheets and budgets. BIG HORN 3 Purchased computers, amplification system, travel expenses, data management system, resource classroom equipment. All items were purchase ordered in February, but draw down will happen in March. BIG HORN 4 Projects have not been funded through Feb. 28, but we have expenses planned for March. CAMPBELL Have made some minor purchases and are in the process of starting our first large project this month. CONVERSE 1 Application approved and we are beginning the activities. Have generated purchase orders for activities and equipment. CONVERSE 2 Submitted purchase orders in line with our budgeted expenditures. Waiting for receipt of items on those purchase orders. We have not yet expended any funds. FREMONT 14 Purchase orders for materials and some staff training have been processed, but none have been submitted for payment. FREMONT 25 Grant approved in Feb, we are preparing budgets and getting bids/quotes for future purchases. We expect to start expending funds in March. GOSHEN 1 Application approved, action will begin in June 2010. LARAMIE 2 Planning continues. Some encumbrances have been made, but no expenditures - to date. LINCOLN 2 Built tracking device for ARRA spending, processed purchase requisitions, and report generation. PARK 16 Increased capacity and productivity by purchasing contract services for students w/disabilities. Occupational Therapy and psycholog 5.6600000000000001 LEAs have just begun to save or create jobs with this funding. The initial job information is as follows: BIG HORN 4 Admin Support has been given a stipend to help TVI director with the administration of ARRA funds. She stays after her normal workday to assist with purchasing, labeling tracking of funds. In March she worked 3 hours. She has not yet been paid her stipend for this time. FREMONT 1 The job created by this grant is 35 hours per week. There were 20 days worked in March. This position is 100% funded by ARRA grant. The district tells us they are tracking this with a time sheet. DB LARAMIE 1 Clerical work has begun. LINCOLN 2 Job 1: Administration services for managing ARRA funding and requests. I have logged 29 hours in the first quarter for administrative work which was 100% funded by ARRA. Job 2: Professional development for special educators--a series of six classes two hours each--total of 12 hours per teacher. There are currently 20 teachers enrolled estimating a total of 240 hours training. To date, we have a total of 104 hours completed. Hours of completion is based on actual attendance logs at each of the trainings. PARK 16 The job information listed is for contract services. PARK 6 Retained Case Manager and Job Coach positions; start date for both was 2/8/10 . Created Reading Teacher fully funded from this grant; start date was 2/23/10. Also created RtI Coordinator and ARRA Secretary positions to oversee all ARRA activities and expenditures. RtI Coordinator worked 184 hours this quarter, ARRA Secretary worked 167 hours this quarter. 47% of these positions are paid from this grant. SHERIDAN 2 2 Part time jobs created this quarter SWEETWATER 1 Part time administrative assistant was hired to coordinate professional development. The ARRA funded admin. assistant submits a monthly report documenting ARRA hours. SWEETWATER 2 Hours reported were for after school tutoring positions, staff development, and ELL translation. TETON 1 Admin program development, oversight and compliance. ALBANY 1, BIG HORN 1, BIG HORN 2, BIG HORN 3, CAMPBELL 1, CARBON 1, CARBON 2, CONVERSE 1, CONVERSE 2, CROOK 1, FREMONT 14, FREMONT 21, FREMONT 24, FREMONT 25, FREMONT 6, GOSHEN 1, HOT SPRINGS 1, JOHNSON 1, LARAMIE 2, LINCOLN 1, NATRONA 1, NIOBRARA 1, PARK 1, PLATTE 1, PLATTE 2, SHERIDAN 1, SHERIDAN 3, SUBLETTE 1, SUBLETTE 9, UINTA 1, UINTA 4, UINTA 6, WASHAKIE 2, WESTON 1, WESTON 7 No jobs this quarter.
IDEA Descriptions That Significantly Met Our Transparency Criteria
The following award descriptions contained most but not all details on one or more of the following pieces of information necessary to facilitate general understanding of the award, based on our criteria: general purpose, scope and nature of activities, location, or expected outcomes. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
EDUCATION, GEORGIA DEPARTMENT OF IDEA Part B Flow Thru - ARRA H391A090073A The Individuals with Disabilities Education Act (IDEA) 2004, Section 611 ensures that all children with disabilities have available to them a free appropriate public education (FAPE) in the least restrictive environment that emphasizes special education and related services designed to meet their unique needs and prepare them for further education, employment and independent living.
IDEA funds are used to assist LEAs with the excess costs of providing special education and related service to students with disabilities; provide LEAs with assistive technology, alternative materials and programs and positive behavioral supports; and, support LEAs to collect, manage, analyze and report data through their district to enhance school system improvement strategies and results for students with disabilities. Funded programs must use instructional strategies based on scientifically based research and implement parental involvement activities.
Teachers (693.30); Aides & Paraprofessionals (1528.57); Clerical Staff (27.95); Interpreter (2.63); Technology Specialist (4.00); School Nurse (2.69); Physical Therapist (5.50); Teacher Support Specialist (55.47); Secondary Counselor (3.00); School Psychologist (22.33); School Social Worker (3.91); Family Services/Parent Coordinator (5.00); Bus Drivers (57.30); Other Management (21.07); Other Administration (89.79); Other Salaries & Compensation (11.38); Speech Language Therapist (2.95); Other (15.26)
Place of performance (city, state, zip code) Atlanta, Georgia 303349049 Less Than 50% Completed EDUCATION, INDIANA DEPARTMENT OF Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA. Used for hiring and retaining staff, and purchasing equipment.
Education of Children with Disabilities (ages 3-21)
Special education teachers, aides and related services personnel such as occupational/physical therapists, job coaches, music therapists, mental health therapists, audiologists, psychologists and coordinators.
Place of performance (city, state, zip code)
Less Than 50% Completed Grants to States for the Education of Children with Disabilites Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA Local educational agencies primarily used the funds to retain elementary, middle and high school positions such as: special education teachers, ECE instructional assistants, psychologist, therapist, interpreters and paraprofessionals. The positions were retained to provide continuation services to special needs students and also provide differentiated instruction targeted at each individual student’s needs.
Place of performance (city, state, zip code)
IDEA Descriptions That Partially Met Our Transparency Criteria
The following award descriptions did not contain sufficient details on one or more of the following pieces of information necessary to facilitate general understanding of the award, based on our criteria: general purpose, scope and nature of activities, location, or expected outcomes. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
EDUCATION, ALABAMA DEPT OF Special Education - Grants to States, Recovery Act / State Grants Provide a free and appropriate public education to all children with disabilities.
Provide a free and appropriate public education to all children with disabilities.
Place of performance (city, state, zip code)
Less Than 50% Completed 132 EDUCATION & EARLY DEVELOPMENT, ALASKA DEPARTMENT OF Grants to states for the education of Children with Disabilities Assist State in Providing Special Education and related services to children with disabilities in accordance with Part B of the IDEA. To date, 52 of 54 districts in the state have received an ARRA award under this GAN.
Assist State in Providing Special Education and related services to children with disabilities in accordance with Part B of the IDEA Teaching and Support Staff. The number of jobs reported was calculated in a manner consistent with OMB Memo 10-08 (December 18, 2009)
Less Than 50% Completed IDEA Grants to States Part B Sec 611 Recovery Act To provide grants to States to assist them in providing a free appropriate public education to all children with disabilities.
Ensure that all children with disabilities have available to them a free appropriate public education that emphasizes special education and related services designed to meet their unique needs and prepare them for further education, employment and independent living.
Paraprofessionals, transition coordinators, special education teachers, occupational therapists, speech-language pathologists.
EDUCATION, ARKANSAS DEPARTMENT OF Grants to States for Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Place of performance (city, state, zip code)
Little Rock, Arkansas 722010000 Less Than 50% Completed EDUCATION, CALIFORNIA DEPARTMENT OF Grants to States for the Education of Children with Disabilities Special Education Grants to States, Recovery Act funds to assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
The Special Education Grants to States, Recovery Act funds are provided to ensure that children with disabilities have access to a free appropriate public education to meet each child’s unique needs and prepare each child for further education, employment, and independent living. The uses of funds under the Special Education Grants to States, Recovery Act are to be consistent with the current IDEA, Part B statutory and regulatory requirements. Some of the valid uses of the funds may include: (1) purchases of equipment for student use in instruction, (2) purchases of workstations for student use, (3) purchases of new resources and materials for use in instruction, (4) provide intensive professional development on evidence-based practices for academics and behavior, and (5) expand staff to support closing the achievement gap. 5715.5699999999997 Jobs created or retained include 3160.76 classified jobs, 2359.00 certificated jobs, 193.81 vendor jobs, and 0.00 IHE jobs. Classified jobs include non-teaching positions such as food service, bus drivers, teacher assistants, custodians, office staff, librarians, and instructional aides for special education. Certificated jobs include teaching positions. Vendor jobs represent a variety of different types of jobs.
Place of performance (city, state, zip code)
Less Than 50% Completed EDUCATION, COLORADO BOARD OF Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA Special Education Certified Teachers, Speech Therapists/Pathologists, School Psychologists, Severe Needs Paraprofessionals, Social Workers, Program Coordinators and Directors, Autism Specialists, Grant Accountants, Data Analysts, Hearing and Vision Screener, Occupationsl Therapists, Nurses, Physical Therapists, Administrative, Consultants.
Place of performance (city, state, zip code)
Less Than 50% Completed Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA. 744.16999999999996 For Central Administration staff, 7.82 jobs created and 8.24 jobs retained. For Teachers/Instructors/Department Heads staff, 151.87 jobs created and 226.92 jobs retained. For Paraprofessionals staff, 143.42 jobs created and 156.42 jobs retained. For Clerical Support staff, 7.19 jobs created and 4.63 jobs retained. For Guidance Counselors staff, 4.74 jobs created and 1.50 jobs retained. For School Nurse/Health Services staff, 2.66 jobs created and 2.86 jobs retained. For Maintenance Personnel staff, 0.00 jobs created and 0.08 jobs retained. For Technical/Computer Specialists staff, 0.82 jobs created and 2.00 jobs retained. For Library/Media staff, 0.00 jobs created and 0.00 jobs retained. For Food Services staff, 0.00 jobs created and 0.00 jobs retained. For Athletics/Coaches staff, 0.00 jobs created and 0.00 jobs retained. For Class Advisors staff, 0.00 jobs created and 0.00 jobs retained. For All Outside Consultants and Vendors except for RESCs and SERC staff, 16.63 jobs created and 6.37 jobs retained.
Place of performance (city, state, zip code)
Less Than 50% Completed EDUCATION, DELAWARE DEPARTMENT OF State Grants - Special Education To enhance and supplement services provided by IDEA and to cushion the progam from the current economic conditions.
To enhance and supplement the IDEA progam and cushion it from the current negative economic financial conditions Funding was used to increase the number of services available to Special Ed Students including the need to hire additional staffing to serve them.
Place of performance (city, state, zip code)
Less Than 50% Completed Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Place of performance (city, state, zip code)
Washington, District of Columbia 200020000 Less Than 50% Completed EDUCATION, FLORIDA DEPARTMENT OF Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
The majority of the jobs paid for with ARRA funds related to instruction or instructional support. Types of jobs included but were not limited to classroom teacher, paraprofessionals, career specialists, school-based administrators, clerical, supervisors, guidance counselors, pre-kindergarten teachers, psychologists, social workers, and technicians.
Less Than 50% Completed IDAHO STATE BOARD OF EDUCATION Grants to States for the Education of Children with Disabilities Assist State in providing special education and related services to children with disabilities in accordance with Part B of IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Special Education 77.44% Teacher/Teacher Aides, 14.21% School/District Administration/Office Support, 5.05% Speech/Physical/Occupational/Behavioral/Other Therapists, 0.76% IEP Services, 0.53% Nurses, 0.50% Social Workers, 0.42% Interpriter, 0.27% Special Education Data Plan Work, 0.20% PSR Facilitator, 0.19% Job Coaches, 0.16% IBI Services, 0.10% Day Tratement, 0.10% Professional Development, 0.07% other services.
Less Than 50% Completed EDUCATION, ILLINOIS STATE BOARD OF Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of IDEA Assist States in providing special education and related services to children with disabilities in accordance with Part B of IDEA Education, Training and Library Occupations, Office and Administrative Support Occupations, Management Occupations, Computer and Mathmatical Occupations, Life, Physical and Social Science Occupations, Community and Social Service Occupations, Health Practitioners, Building and Grounds Cleaning and Maintenance Occupations, Personal Care and Service Occupations, Installation, Maintenance and Repair Occupations, Healthcare Support Occupations, Food Preparation and Serving Related Occupations, Construction and Extraction Occupations, Transportation and Material Moving Occupations.
Place of performance (city, state, zip code) Springfield, Illinois 627770002 Less Than 50% Completed EDUCATION, IOWA DEPARTMENT OF Assist States in providing special education and related services to children with disabilities in accordance with Part B of IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of IDEA.
Place of performance (city, state, zip code) Des Moines,,, Iowa 503190000 Less Than 50% Completed Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Place of performance (city, state, zip code) Topeka, Kansas 666121103 Less Than 50% Completed EDUCATION, MAINE DEPARTMENT OF Individuals with Disabilities Education Act Grants to States "Recovery Act" IDEA Special Education Grant to the State for distribution the the school administrative units.
IDEA Special Education Grant to the State for distribution the the school administrative units.
Place of performance (city, state, zip code)
More than 50% Completed EDUCATION, MARYLAND DEPARTMENT OF Grants to states for the education of children with disabilities To assist states in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist states in providing special education and related services to children with disabilities in accordance with Part B of the IDEA Teachers, Teaching Assistants, Student Services, Staff Development workshop staff, Dropout Prevention Specialists, Technology Specialist, Behavior Specialists, Psychologist Intern, Physical Therapists, Occupational Therapists, Sign Language Interpreter, Speech Therapists, Reading Intervention Tutors.
Place of performance (city, state, zip code) Baltimore, Maryland 212012549 Less Than 50% Completed DEPARTMENT OF ELEMENTARY AND SECONDARY EDUCATION Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the Individuals with Disabilities Education Act.
Support special education and related services to children with disabilities. 1694.9100000000001 Special education teachers, paraprofessionals, and service providers were hired or retained.
Place of performance (city, state, zip code)
Less Than 50% Completed Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Teachers of students with Cognitive Impairment, Emotional Impairment Autism Spectrum Disorder, Visual Impairment and Early Childhood Special Education and Resource Room Teachers; School Psychologists; School Social Workers; Para-Professionals; Assistive Technology Staff and Assistants; Speech Therapist and Pathologists; Special Education Supervisors and Directors; Behavior Specialists; Response to Intervention Specialists, Coaches, Aides and Consultants; Transition Coordinators; Occupational Therapists; Vocational Education Coordinators; Technology Interventionist; Diagnostic Aide; Curriculum Consultants; Professional Development and Training Coordinators; Administrative Support Staff; Reading Teachers and Literacy Consultants; Special Education Planners/Coordinators and Compliance Staff; Positive Behavior Support - Behavior Specialists; Music Therapist; Emotionally Impaired Crisis Aides; Differentiated Instruction Educational Coaches; Curriculum Specialists; Instructional Trainers for Special Education Teachers; Technology and Data support.
Place of performance (city, state, zip code)
Less Than 50% Completed EDUCATION, MINNESOTA, DEPARTMENT OF Grants to State for the Education of Children with Disabilities Assist states in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist states in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Types of jobs created or retained with this grant include administration/supervision, cultural liaison, educational speech/language pathologist, licensed instructional support, mental health professional,licensed nursing services, non-instructional support, non- licensed classroom personnel, non-licensed instructional support, paraprofessional, physical/occupational therapist, school psychologist, school nurse, social worker, substitute teacher salaries, teachers, and other.
Place of performance (city, state, zip code)
Less Than 50% Completed ELEMENTARY AND SECONDARY EDUCATION, MISSOURI DEPARTMENT OF Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Place of performance (city, state, zip code)
Jefferson City, Missouri 651012901 Less Than 50% Completed PUBLIC INSTRUCTION, MONTANA OFFICE OF Grants to States for the Education of Children with Disabilities Assist states in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Teachers, aides, specialists, and administrative staff needed to provide special education instruction and related services for K-12 elementary and secondary schools.
Teachers, aides, specialists, and administrative staff needed to provide special education instruction and related services for K-12 elementary and secondary schools.
Place of performance (city, state, zip code)
Less Than 50% Completed EDUCATION, NEBRASKA DEPARTMENT OF Grants to States for the Education of Childrenwith Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of IDEA Assist States in providing special education and related services to children with disabilities in accordance with Part B of IDEA Positions created or retained were to provide a free appropriate public education for students with verified disabilities.
Place of performance (city, state, zip code)
Less Than 50% Completed EDUCATION, NEVADA DEPARTMENT OF Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilitiesin accordance with Part B of the IDEA.
Assist States in providing special education and related services to children with disabilites in accordance with Part Bof IDEA. 45.2 FTE Teachers jobs paid by ARRA funds. 48.37 FTE Teachers aide jobs paid with ARRA funds. .62 FTE Speech Therapist job paid by ARRA funds. 2.06 Support staff paid with ARRA funds. .33 Nurse FTE paid with ARRA funds.
Place of performance (city, state, zip code)
Carson City, Nevada 897015096 Less Than 50% Completed EDUCATION, NEW JERSEY DEPARTMENT OF Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
A total of 1396.0 jobs were created or retained. Of those, 729.4 were instructional positions, 314.0 were student support services positions, 22.0 were administrative positions and 330.6 did not indicate a job classification. We provide funds on a reimbursement basis, and therefore it is not unusual for LEAs to report jobs created or retained prior to actually receiving the funds.
Place of performance (city, state, zip code)
Trenton, New Jersey 086250500 Less Than 50% Completed NEW MEXICO EDUCATION, DEPARTMENT OF Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA Assist States in providing special education and related services to children with disabilities in accordance with Part B of the Individuals with Disabilities Education Act (IDEA-B). IDEA-B allocations that are funded by ARRA are formula driven flow-through allocations to LEAs. 169.72 For the current quarter, Local Educational Agencies (LEA) have reported that jobs created or saved included teachers, related service providers, and instructional assistants. The creation of the new teaching jobs helped reduce the student teacher ratio in classrooms in New Mexico. This allowed students to receive a more individualized education tailored to meet their unique needs. The additional related service providers allowed students with disabilities to receive additional therapy services to assist them in the educational setting. Instructional assistants provide students with disabilities with needed instructional support and assistance with behavioral and/or medical needs.
Place of performance (city, state, zip code)
SANTA FE, New Mexico 875012744 Less Than 50% Completed NEW YORK STATE EDUCATION DEPARTMENT Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA Commercial and Institutional Building Construction New York State used the ARRA IDEA grants for sub-recipients receiving IDEA funds and used part of these funds to save or create jobs. These programs were implemented consistent with federal IDEA requirements and it is expected that sub-recipients will report additional jobs saved or created in future quarters.
Place of performance (city, state, zip code)
Albany, New York 122340000 Less Than 50% Completed PUBLIC INSTRUCTION, NORTH CAROLINA DEPARTMENT OF Grants to states for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Director and/or Supervisor (113) Person assigned to direct or supervise staff members, a function, a program, or a support service. Teacher (121)Person certified to teach the standard course of studies and assigned to instruct pupils not classified elsewhere New Teacher Orientation (125) Person attending assigned new teacher orientation, outside of the teacher's contract calendar, not to exceed 3 days.Re-employed Retired Teacher - Exempt from the Earnings Cap (128)Retired teachers hired back into the classroom.Instructional Support I (131)Person assigned duties that require a high degree of knowledge and skills, in support of the instructional program. Duties include health services, attendance counseling, guidance services, media services, and nurses.Instructional Support II (132)Person assigned duties that require a high degree of knowledge and skills which place them on the advanced pay scale. Includes speech and audiologists Psychologist (133)Person assigned to perform duties involving psychology.Teacher Mentor (134) Individuals who are employed to serve as full-time mentors to teachers only.Lead Teacher (135)Includes curriculum specialists, instructional facilitators, as well as lead teachers in the summer school program. Teacher Assistant (141)Person assigned to assist with students in roles without the extra education required for NCLB. Examples include personal care assistants and physical therapy assistants.Teacher Assistant ? NCLB (142) Person assigned to perform the day- to-day activities of assisting the regular classroom teacher, in roles requiring the extra education of NCLB.Tutor (Within the instructional day) (143) Person assigned to perform tutorial duties. Interpreter, Braillist, Translator, Education Interpreter (144) Person assigned to perform the activities of an interpreter, brail, translator, or education interpreter, and their assistants.Therapist (145) Person assigned to perform the activities of physical or occupational therapy. Includes the positions of physical therapist, occupational therapist.Specialist (School-Based) (146) Person assigned to perform technical activities in a support capacity such as data collection, compiling research data, preparing statistical reports, technology and other technical duties. Includes the positions such as certified nurses, computer lab assistants, technology assistants, CTE tech assistants, and behavioral modification techs, parent liaisons, and home school coordinators.Monitor (147)Person assigned to perform the activities of a monitor - bus monitors, lunchroom monitors, and playground monitors. Office Support (151)Person assigned to perform activities concerned with preparing, transferring, transcribing, systemizing, or filing written communications and records. Includes secretary, accounting personnel, admin assistant, photocopy clerk, file clerk, NCWise specialist, clerical specialist in a central office role, cost clerk, and school-based office personnel Driver (171)Person whose assignment consists primarily of driving a vehicle, such as a bus, truck, or automobile.
Place of performance (city, state, zip code)
Raleigh, North Carolina 276011058 Less Than 50% Completed PUBLIC INSTRUCTION, NORTH DAKOTA DEPARTMENT OF IDEA-B Grants for Children with Disabilities H391A090049A Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Place of performance (city, state, zip code)
Bismarck, North Dakota 585050602 Less Than 50% Completed Special Education - Grants to States, Recovery Act Special Education - Grants to States, Recovery Act The purposes of the Individuals with Disabilities Education Act (IDEA) are to ensure that all children with disabilities have available to them a free appropriate public education (FAPE) that emphasizes special education and related services designed to meet their unique needs and prepare them for further education, employment and independent living; to ensure that the rights of children with disabilities and parents of such children are protected; and to assist States, localities, educational service agencies, and Federal agencies to provide for the education of all children with disabilities; to assist States in the implementation of a statewide, comprehensive, coordinated, multidisciplanary, interagency system of early intervening services for infants and toddlers with disabilities and their families; to ensure that educators and parents have the necessary tools to improve educational results for children with disabilities by supporting system improvement activities; coordinated research and personnel preparation; corrdinated technical assistance, dissemination, and support; and technology developement and media services; and to assess, and ensure the effectiveness of, efforts to educate children with disabilities.
Intervention Specialists, licensed as a Special Education Teachers , special education aide, director of pupil services, tutoring, paraprofessional positions, support staff, Behavior Intervention Specialist,Transition Services Coordinator, Special Education Compliancy Coordinator,Federal adminstrator, speech and psychologist services, Medical Assistant, Special Education Bus Driver, Reading Specialists,Brailist, Literacy Coaches, ESL Liaison, Secondary Curriculum specialist, Special Services Liaison.
Place of performance (city, state, zip code)
Columbus, Ohio 432154183 Less Than 50% Completed EDUCATION, OKLAHOMA STATE DEPARTMENT OF Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Place of performance (city, state, zip code)
Oklahoma City, Oklahoma 731054503 More than 50% Completed Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
These Recovery Act funds have been crucial to retain jobs to provided educational services to students with disabilities. Of jobs reported, 72% are those that have been retained. These positions include autism specialists, behavioral specialists, case managers, early interventionists, instructional assistants, literacy specialists, occupational therapists, psychologists, reading specialists, nurses, special education teachers, speech and language pathologists, and transition specialists.
Place of performance (city, state, zip code)
Less Than 50% Completed EDUCATION, PENNSYLVANIA DEPT OF GRANTS TO STATES FOR THE EDUCATION OF CHILDREN WITH DISABILI Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Reflects sub-recipient submitted information on educators and other support staff providing services detailed in the Project Description for the current reporting quarter for this award.
Place of performance (city, state, zip code)
Less Than 50% Completed DEPARTMENT OF EDUCATION, SOUTH CAROLINA Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to students with disabilities in accordance with Part B of the IDEA.
Place of performance (city, state, zip code)
Columbia, South Carolina 292013730 Less Than 50% Completed Grants to States for the Education of Children with Disabilities.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Teacher and paraprofessional positions were created to assist school districts in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Place of performance (city, state, zip code)
Pierre, South Dakota 575012291 Less Than 50% Completed EDUCATION, TENNESSEE DEPARTMENT OF Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA The hiring and retaining of special education teachers, paraprofessionals, support and related service personnel to provide free appropriate public education to children with disabilities.
Place of performance (city, state, zip code)
Less Than 50% Completed Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
The positions created or retained during this period included professional jobs as well as positions for support staff. The major job categories include counselors, teachers, educational aides, administrators, and speech pathologists.
Place of performance (city, state, zip code)
Less Than 50% Completed Grants to States for the Education of Children with Diabilities Ensure that all children with disabilities have available to them a free appropriate public education that emphasizes special education and related services designed to meet their unique needs and prepare them for further education, employment, and indepe Ensure that all children with disabilities have available to them a free appropriate public education that emphasizes special education and related services designed to meet their unique needs and prepare them for further education, employment, and independent living.
Place of performance (city, state, zip code)
Less Than 50% Completed EDUCATION, VIRGINIA DEPARTMENT OF Special Education Grants to States, Recovery Act Special Education Grants to States, Recovery Act To provide grants to States to assist them in providing a free appropriate public education to all children with disabilities.
Funds are used by State and local educational agencies, in accordance with the IDEA, to help provide the special education and related services needed to make a free appropriate public education available to all eligible children and, in some cases, early intervening services.
Jobs accounted for during the quarter ended 3/31/2010 represent employment types such as: special education teachers, councelors, psychologists, special education services coordinators, and early intervention specialists. This total is made up of 600.5 saved positions and 310.6 created positions.
Place of performance (city, state, zip code)
Less Than 50% Completed PUBLIC INSTRUCTION, WASHINGTON STATE SUPERINTENDENT OF Grants to States for the Education of Children with Disabilities H391A090074A Assist States in Providing Special Education and Related Services to Children with Disabilities in Accordance with Part B of the IDEA.
Assist States in Providing Special Education and Related Services to Children with Disabilities in Accordance with Part B of the IDEA.
Place of performance (city, state, zip code)
Less Than 50% Completed PUBLIC INSTRUCTION, WISCONSIN DEPT OF Grants to States for the Education of Children with Disabilities Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
Assist States in providing special education and related services to children with disabilities in accordance with Part B of the IDEA.
The types of jobs created and/or retained as a result of the American Recovery and Reinvestment Act at the local district level include: special education teachers, special education paraprofessionals, substitute special education teachers, special education administrative assistants, transition coordinators, speech and language therapists, occupational therapists and assistants, school psychologists, social workers, directors of special education, special education program support teachers and coordinators, assistive technology personnel, diagnosticians, behavioral analysts, audiologists, orientation and mobility specialists, special education transportation providers, and personnel supporting infrastructure investments (i.e. electricians, construction workers, etc.). An ARRA Coordinator position has also been created at the SEA level.
Place of performance (city, state, zip code)
ESEA Title I, Part A Grants Prime Recipient Review and Descriptions
The Recovery Act provides $10 billion to help local educational agencies (LEA) educate disadvantaged youth by making additional funds available beyond those regularly allocated through Title I, Part A of the Elementary and Secondary Education Act of 1965 as amended (ESEA). These additional funds are to be distributed through states to LEAs using existing federal funding formulas, which target funds based on such factors as high concentrations of students from families living in poverty. In using the funds, LEAs are required to comply with current statutory and regulatory requirements and must obligate 85 percent of the funds by September 30, 2010. Education is advising LEAs to use the funds in ways that will build the agencies’ long-term capacity to serve disadvantaged youth, such as through providing professional development to teachers.
Four Percent of ESEA Title I Descriptions Met Our Transparency Criteria
All states and the District of Columbia received Recovery Act grant awards for the three education programs included in our review. However, award-related information for the following prime recipients was not available on Recovery.gov during the period of our review, and therefore these states were excused from our analysis: Rhode Island was not included in the number of awards for ESEA Title I because it was granted a reporting waiver by Education. Utah was not included in the number of Recovery Act Title I awards because Education reported that it failed to submit its 1512 reports by the deadline, primarily because of various technical issues.
ESEA Title I Descriptions That Met Our Transparency Criteria
The following award descriptions contained sufficient information on general purpose, scope and nature of activities, location, and expected outcomes to meet our transparency criteria. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
EDUCATION, HAWAII DEPT OF Title I, Part A -- Improving Basic Programs Operated by Local Educational Agencies. Initial project provided Extended Learning Opportunities ('ELO') during summer 2009 for economically disadvantaged students.
Improve teaching and learning for students most at risk of failing to meet state academic achievement standards.
Third Quarter activities provided more Extended Learning Opportunities ('ELO') during school year 2009-10 for after-school and other non-school hour time periods such as 'intersessions,' for economically disadvantaged students, struggling to demonstrate grade level proficiency in English Language Arts ('ELA') and Mathematics, as measured by the Hawaii State Assessment ('HSA'). In addition, this quarter's activities included payments to vendors for the ELO Summer 2009 program, The initial Title I Recovery Act project provided Extended Learning Opportunities ('ELO') during summer 2009 for the same types of students. Students' growth is measured by teacher-developed assessments; school quarterly assessments; and the HSA. During the first quarter ELO in 2009, 8,018 students participated in the program, with an average of 76% showing improvement over the course of the program.
First Quarter included 202.49 FTE for an initial Title I Recovery Act Extended Learning Opportunities ('ELO') project. Second Quarter included 13.40 additional FTEs, to provide more ELO services during the 2009-10 school year at 35 schools so far, for after-school and other non-school hour time periods such as 'intersessions,' with part-time teachers, tutors, and other support staff. Third Quarter included 43.78 FTEs, providing ELO services during the 2009-10 school year, for after-school and other non-school hour time periods, with part-time teachers, tutors, and other staff. ELO has provided a stimulus to the local economy by providing additional employment opportunities during the summer of 2009, and during school year 2009-10. The summer program was held at 90 campuses statewide, with 8,018 students who participated. These students were supported by 1,146 staff members during the summer, equating to 202.49 FTE for the First Quarter, based on 105,295.50 hours worked, divided by 520 standard hours for the quarter, as noted in the 'Number of Jobs' total in the preceding reporting data field, in accordance with U.S. Department of Education specific guidance. These employees hired included part-time and substitute teachers; program directors; para-professionals; and other support positions.
Place of performance (city, state, zip code) Honolulu, Hawaii 968132403 Less Than 50% Completed Title 1, Part A - Improving Basic Programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
BIG HORN 1, 2, 4 CARBON 1, 2 CONVERSE 2 CROOK 1 FREMONT 1, 21, 24, 38 , 6 HOT SPRINGS 1 JOHNSON 1 LARAMIE 1, 2 NATRONA 1 PARK 1 PLATTE 1, 2 SHERIDAN 2 SUBLETTE 1, 9 SWEETWATER 2 TETON 1 UINTA 1, 6 WESTON 1,7 WASHAKIE 2 Just getting started. PARK 16 Purchased a literacy intervention program as part of our current balanced literacy program called RIGBY Reading. Professional development workshops have been attended and many of the leveled books have been ordered. BIG HORN 3 PO for comp equip. Bought Ascend Math intervention licensing. 75% of computers are installed at the elementary school and in use. UINTA 4 Prof services for staff dev implemented. Reg and org dues paid for IRA Annual Convention, I Teach K conf and WYO NCA Spring Improvement Conf. SHERIDAN 1 Math Tutor works with students on a weekly basis. Tutors work with students in Homework Club/Friday School on a weekly basis. CONVERSE 1 Job ad and interviews for T1 . Retained teacher planning the 2nd sem. Purchased supports required for parent involvement activities. Conf travel expenditures. LINCOLN 2 Built tracking devices for ARRA. Ordered books. Set up tracking system for Prof Dev activities. PARK 6 Hired 6 new positions. Four T1 Teachers, RTI Coordinator and ARRA Secretary SWEETWATER 1 Expanded before and after school programs at 2 Title I schools. Parent liaison is beginning to provide parenti nvolvement activities and support to T1 parents. Title I sec working additional hours manage requirements for the ARRA funds. FREMONT 25 Continued to evaluate our program and process purchase orders for future expenditures. CAMPBELL 1 - Hired 4 positions. 1 more to be filled. Started 2 FAST cycles at schools. Ordering technology and starting staff development. CAMPBELL 1 Purchased computers and supplies for students. AMANDA SCHAFER Doing help desk to assist districts and proceeding according to the contract. PARK 1 SWEETWATER 1 ALBANY 1 SHERIDAN 2 LINCOLN 1 N 13.06 Some LEAs have begun to add funded jobs this month, as follows: ALBANY 1, BIG HORN 1, BIG HORN 2, BIG HORN 3, BIG HORN 4, CAMPBELL 1, CARBON 1, CARBON 2, CONVERSE 2, CROOK 1, FREMONT 1, FREMONT 14, FREMONT 21, FREMONT 38, FREMONT 6, GOSHEN 1, HOT SPRINGS 1, JOHNSON 1, LARAMIE 1, LARAMIE 2, LINCOLN 1, NATRONA 1, NIOBRARA 1, PARK 1, PARK 16, SHERIDAN 2, SUBLETTE 1, SUBLETTE 9, SWEETWATER 1, UINTA 1, UINTA 4, UINTA 6, WESTON 1, WESTON 7 No jobs impact this quarter. WASHAKIE 2 Full Time Title I Paraeducator funded by ARRA for 86% of the work day worked 60 days at 7 hours a day for Quarter 1. FREMONT 24 A teacher worked a total of 3 additional hours for an extended school day. This was funded 100% with ARRA T1 funds. PLATTE 2 Retained 1 Teacher (Ayers) and 1 Para (Wambach). Both began work on February 1, 2010 and worked a 35 hour weekly schedule through the end of the quarter (8 weeks x 35 hours). SHERIDAN 1 A math tutor was hired to help students in Title I which will be reimbursed 100% with ARRA funds. 6 Tutors were hired to help students in Title I at Homework Club/Friday School (after hours) and worked a total of 36 hours, funded at 45% from TETON 1 Admin hours 1/2 half funded by Title IA for program development, oversight, and compliance. SWEETWATER 2 Created Title I at Granger School. Additional hours reported were substitute teachers for training of teachers, and pay for classroom aides to attend training. CONVERSE 1 Title I teacher is retained. PLATTE 1 Sub teachers for 7 days at 7 hours per day, all funded by ARRA funds LINCOLN 2 Administrative services for maintaining ARRA funding and spending requests. Professional Development/Inspiring Education for teachers--this will be a six session course of 2 hours per session with currently 119 teachers enrolled. Estimated hours of training 1,428. This project is near 50% complete with a total of 611 training hours complete. PARK 6 Four new Title 1 Teacher positions were created that were fully funded by ARRA. All 4 started on 2/18/2010. Also created RtI Coordinator and ARRA Secretary positions to oversee all ARRA activities and expenditures, funded 51%. SWEETWATER 1 Teachers are providing an extra 1/2 to one hour of instruction per day for T I students during before and after school programs. Parent liaison has been hired to provide parent involvement activities and support in Title I schools.The Title I secretary is working additional hours to help with ARRA fiscal and program needs. FREMONT 25 Two classified aide positions were filled during the month of March 2010 CAMPBELL 1 Expanded our Ready 4 Learning program by 2 class room adding 2 full time teachers. Added a Title I Resource Center Clerk to help in the center while ARRA funds are being distributed. This is a full time position that was added at the beginning of March. Added a part time Title I ESL Assistant to one school which was added in March. Position is 40% out of ARRA. LARAMIE 1 Clerical work has begun. PLATTE 2 1 full time teaching position was retained and funded from February 1, 2010 to the end of the quarter. With short Fridays, this averages to be 35 hours per week.1 full time para educator was hired beginning February 16, 2010, and worked until the end of the quarter. AMANDA SCHAFER Amanda is a hired consultant that assists with page design and grant design, along with help desk efforts. An estimated 70% of her working hours are funded by this ARRA project for January, and 100% for February and the future. She worked 40 hours a week for the entire quarter so far.
Title I Descriptions That Significantly Met Our Transparency Criteria
The following award descriptions contained most but not all details on one or more of the following pieces of information necessary to facilitate general understanding of the award, based on our criteria: general purpose, scope and nature of activities, location, or expected outcomes. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
EDUCATION, CALIFORNIA DEPARTMENT OF Title I, Part A--Improving Basic Programs Operated by Local Educational Agencies Title I - Grants to LEAs, Recovery Act funds to improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Title I - Grants to LEAs, Recovery Act funds provided to assist LEAs and schools that have high concentrations of students from families that live in poverty in order to help improve teaching and learning of students most at risk of failing to meet State Academic Achievement Standards. The uses of funds under Title I – Grants to LEAs, Recovery Act are to be consistent with the Title I, Part A and D statutory and regulatory requirements, including the requirements to provide equitable services to eligible private school students. Uses should be aligned with the core goals of the ARRA to save and create jobs and to advance reforms consistent with the requirements of Title I. Possible uses of funds may include: (1) establishing a system for identifying and training highly effective teachers to serve as instructional leaders in Title I schoolwide programs; (2) strengthening and expanding early childhood education by providing resources to align a district-wide Title I pre-K program with state early learning standards and state content standards for grades K–3; (3) providing new opportunities for Title I schoolwide programs for secondary school students to use high- quality, online courseware as supplemental learning materials for meeting mathematics and science requirements; and (4) using reading or mathematics coaches to provide professional development to teachers in Title I targeted assistance programs.
Jobs created or retained include 1030.83 classified jobs, 3517.20 certificated jobs, 223.15 vendor jobs, and 0.00 IHE jobs. Classified jobs include non-teaching positions such as bilingual teacher assistants, office staff, district coordinators, and instructional aides. Certificated jobs include teaching positions. Vendor jobs represent a variety of different types of jobs.
EDUCATION, GEORGIA DEPARTMENT OF Title I-A, Grants - ARRA Title I, Part A, is a formula grant program that provides financial assistance to LEAs and schools with high numbers or high percentages of poor children to help ensure that all children meet challenging state academic standards.
Title I funds are used to provide additional academic support and learning opportunities to help low-achieving children master challenging curricula and meet state standards in core academic subjects. For example, funds support extra instruction in reading/English language arts, science, social studies, and mathematics, as well as, after-school, and summer programs to extend and reinforce the regular school curriculum. Funded programs must use instructional strategies based on scientifically based research and implement parental involvement activities.
Teachers (947.85); Aides & Paraprofessionals (219.83); Clerical Staff (2.25); Technology Specialist (4.00); Teacher Support Specialist (3.75); Elementary Counselor (1.50); Secondary Counselor (23.50); Family Services/Parent Coordinator (68.57); Bus Drivers (20.80); Other Management (49.59); Other Administration (195.09); Other Salaries & Compensation (46.71); Other (53.18); Administrative Specialist - GaDOE (2.00)
Place of performance (city, state, zip code)
Less Than 50% Completed Title I, Part A--Improving Basic Program operated by Local Educational Agencies Improve teaching and learning for student most at risk of failing to meet State academic achievement standard.
Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards 1024.26 Local educational agencies primarily used the funds to retain positions such as Title I teachers, instructional coaches, instructional assistants, paraprofessionals, preschool teachers, literacy specialists, curriculum specialists and teacher mentors. The positions were retained to improve the teaching and learning of targeted low performing students and schools. Job embedded professional development for elementary teachers and administrators were also provided.
Place of performance (city, state, zip code)
Less Than 50% Completed ADMINISTRATION, LOUISIANA DIVISION OF Title I Part A Improving Basic Programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards.
Title I ARRA Statement For Jobs Saved - Retained Districts have targeted 4 major areas regarding pending Title I Part A ARRA funding. The areas are as follows:(1) College and career-ready standards and high quality valid and reliable assessments for all students including ELL?s and students with disabilities.(2)PreK to Higher Education data systems that meet the principles in the America COMPETES Act.(3)Teacher effectiveness and equitable distributions of effective teachers and(4)Intensive support and effective interventions for lowest performing schools.All jobs that have been retained or saved are related to the 4 major areas of focus. They include Instructional coaches (Reading/ Math coaches) Graduation Coaches Reading/Math Interventionist Reading Content Leaders Professional Development Coordinators Pre-school teachers and Pre-school paraprofessionals Class size reduction teachers Technology Facilitators/Coaches Academic Behavior Counselors Turn Around specialist and Drop-out Interventionist and Curriculum Specialist.
Place of performance (city, state, zip code)
Place of performance (city, state, zip code)
Less Than 50% Completed 26 EDUCATION, MARYLAND DEPARTMENT OF Title I, PartA--Improving Basic Programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
The type of jobs created and retained includes teachers, paraprofessionals, coordinators, and other instructional and administrative support staff. These jobs enable local school systems and schools to maintain and in some cases upgrade the level of supplemental services to students failing or at-risk of failing who are enrolled in high poverty schools. The jobs created and retained data was obtained from reports submitted from each sub- recipient. Each sub-recipient report is maintained at the Maryland State Department of Education EDUCATION, NEBRASKA DEPARTMENT OF TITLE I, Part A Improving Basic Programs Operated by Local Educational Agencies Improving teaching and learning for students most at risk of failing to meet State academic achievement standards Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards Title I funds are used to provide services to meet the educational needs of low-achieving students and to work toward closing the achievement gap between high- and low- performing students.
Place of performance (city, state, zip code)
Less Than 50% Completed 248 EDUCATION, NEW HAMPSHIRE DEPARTMENT OF Title I, Part A - Improving Basic Programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
The addition of Title I ARRA funds has resulted in an increase in the number of students, duration of services, resources utilized and the variety of intervention programs used to support school district's most academically at risk students. The personalized, supplemental services provided are expected to increase student achievement and decrease achievement gaps. Projects range in design and implementation, based on specific student and school needs and resources, but include supplemental instructional support in and outside the classroom as well as extended day learning opportunities and professional development opportunities to stafff.
Title I ARRA funds have been used to secure previously funded Title I positions that would have been eliminated due to decreases in regular Title I funding to particular school districts. Title I ARRA funds have also been used to add positions in school districts including: teachers, tutors, paraprofessionals, content specialists, professional development coordinators and providers, project managers and various other positions. Through the creation and maintenance of these jobs, school districts have been able to strengthen existing programs as well as expand the number of students served (including increasing the number of Title I schools in districts) and provide additional professional development opportunities for staff.
Place of performance (city, state, zip code)
Concord, New Hampshire 033013852 Less Than 50% Completed NEW YORK STATE EDUCATION DEPARTMENT Title I, Part A -- Improving Basic Programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards 4366.7200000000003 The Title I portion of the ARRA was an increase to the allocation under ESEA Sections 1125 and 1125A for Title I Part A. Sub-recipients of ARRA Title I included 650 public school districts and 150 charter school local educational agencies. Recipients used the funds primarily to cover compensatory education expenses not previously funded by Title I. The ability to pay for a higher proportion of allowable Title I positions freed up funds for other purposes including instructional positions and professional development opportunities for teachers such as through literacy coaching. ARRA Title I funds were used to save existing positions (especially in academic intervention services) and to create new ones (especially for professional development).
Place of performance (city, state, zip code)
Title I Descriptions That Partially Met Our Transparency Criteria
The following award descriptions did not contain sufficient details on one or more of the following pieces of information necessary to facilitate general understanding of the award, based on our criteria: general purpose, scope and nature of activities, location, or expected outcomes. The award description information is taken directly from Recovery.gov. We did not edit it in any way, such as to correct typographical or grammatical errors.
EDUCATION, ALABAMA DEPT OF Title I Grants to LEAs, Recovery Act Help local education agencies and schools improve the teaching and learning of children failing, or most at-risk of failing, to meet challenging State academic achievement standards.
Help local education agencies and schools improve the teaching and learning of children failing, or most at-risk of failing, to meet challenging State academic achievement standards.
Place of performance (city, state, zip code)
Place of performance (city, state, zip code)
Less Than 50% Completed Title 1 Grants to Local Educational Agencies, Recovery Act To help local educational agencies (LEAs) and schools improve the teaching and learning of children failing, or most at-risk of failing, to meet challenging State academic achievement standards.
Improving the opportunity for disadvantage children and ensuring disadvantage children have a fair, equal, and significant opportunity to obtain a high-quality education and reach, at a minimum, proficiency on challenging State academic achievement standards and state academic assessments.
Title I teachers, paraprofessionals, professional development positions and education coaches.
Place of performance (city, state, zip code)
Less Than 50% Completed 156 EDUCATION, ARKANSAS DEPARTMENT OF Title I, Part A - Improving Basic Programs Operated by Local Education Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards. 14.7 Unclassified Jobs Created * 28.18 Contracted Staff Jobs Created * 73.11 Licensed Staff Jobs Created * 29.97 Non- Licensed Staff Jobs Created * 32.35 Unclassified Jobs Retained * 7.19 Contracted Staff Jobs Retained * 37.365 Licensed Staff Jobs Retained * 10 Non- Licensed Staff Jobs Retained * Little Rock, Arkansas 722010000 Less Than 50% Completed EDUCATION, COLORADO BOARD OF Title I, Part A--Improving Basic Programs Operated by Local Educational Agencies.
Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards.
Integration Specialists, Full and Part Time Teachers, English Language Teachers, Paraprofessionals, Literacy & Math Coaches, Classroom Assistants, Interventionists, Family Center Coordinators, Secretaries, Intervention School Director, Title I Coordinators, Consultants, Computer Technicians, Bookkeepers, Family and Community Outreach Liaisons, Onsite Technical Staffing, Mentors, Nurses, Administrative Staff, Counselors, Psychologists, Social Workers, Consultants.
Less Than 50% Completed 114 Title I, Part A--Improving Basic Programs Operated by Local Educational Agencies.
Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards.
For Central Administration staff, 4.70 jobs created and 6.66 jobs retained. For Teachers/Instructors/Department Heads staff, 125.62 jobs created and 196.14 jobs retained. For Paraprofessionals staff, 31.31 jobs created and 49.53 jobs retained. For Clerical Support staff, 2.36 jobs created and 2.45 jobs retained. For Guidance Counselors staff, 0.70 jobs created and 0.00 jobs retained. For School Nurse/Health Services staff, 0.86 jobs created and 0.00 jobs retained. For Maintenance Personnel staff, 0.00 jobs created and 0.00 jobs retained. For Technical/Computer Specialists staff, 2.00 jobs created and 1.00 jobs retained. For Library/Media staff, 0.00 jobs created and 0.00 jobs retained. For Food Services staff, 0.00 jobs created and 0.00 jobs retained. For Athletics/Coaches staff, 0.00 jobs created and 0.00 jobs retained. For Class Advisors staff, 0.00 jobs created and 0.00 jobs retained. For All Outside Consultants and Vendors except for RESCs and SERC staff, 9.60 jobs created and 7.53 jobs retained.
Less Than 50% Completed EDUCATION, DELAWARE DEPARTMENT OF Title I Grants to LEA, Awards granted in order for LEAs to maintain Title I services and retain instructional staff to provide those Title I services..
Funding used to increase the number of services availabale to Title I Students including retaining Title I teachers to continue Title I services and provide additional services.
Funding used to increase the number of services availabale to Title I Students including retaining Title I teachers to continue Title I services and provide additional services.
Less Than 50% Completed Title I, Part A: Grants to Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards The Title I, Part A program provides financial assistance to LEAs and schools with high numbers or high percentages of poor children to help ensure that all children meet challenging state academic standards. Recovery Act funds create new opportunities for educators to implement innovative strategies in Title I schools that improve education for at- risk students and close achievement gaps while also stimulating the economy.
Jobs created or retained include instructional and support services staff.
Place of performance (city, state, zip code) Washington, District of Columbia 200020000 Less Than 50% Completed EDUCATION, FLORIDA DEPARTMENT OF Title I, Part A--Improving Basic Programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards.
Types of jobs included but were not limited to classroom teachers, instructional aides, school-based administrators, clerical support, librarians/media specialists, supervisors, guidance counselors, social workers, psychologists, and instructional district-based administrators.
Place of performance (city, state, zip code)
Tallahassee, Florida 323990400 Less Than 50% Completed IDAHO STATE BOARD OF EDUCATION Title I, Part A -- Improving Basic Programs Operated by Local Educational Agencies.
Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards. 82.83% Teachers/Teacher Aides, 4.94% School/District Administration/Office Support, 3.71% Tutors/Substitutes, 1.61% State Administration/Office Support, 1.55% Instructional Improvement Coaches, 1.12% Educational Media Workers, 1.07% Behavior Specialists, 0.85% Reading Coaches, 0.78% After School Program, 0.50% Professional Development, 0.38% Technology Specialist, 0.15% Computer Lab Technicians, 0.13% Math Intervention Specialist, 0.12% Testing Facilitator, 0.11% Social Worker, 0.07% Program Review Contractors, 0.05% Counselors, 0.02% Library Technicians, 0.01% Programmer for Data Collection.
Place of performance (city, state, zip code) Boise, Idaho 837200027 Less Than 50% Completed EDUCATION, ILLINOIS STATE BOARD OF Title I, Part A -- Improving Basic Programs Operated by Local Education Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Education, Training and Library Occupations, Management Occupations, Computer and Mathmatical Occupations, Community and Social Service Occupations, Health Practitioners and Technical Occupations, Office and Administrative Support Occupations. Personal Care and Service Occupations.
Place of performance (city, state, zip code) Springfield, Illinois 627770002 Less Than 50% Completed EDUCATION, INDIANA DEPARTMENT OF Title I Part A-Improving Basic Programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards.
At risk intervention teachers and aides. Instructional coaches for professional development.
Place of performance (city, state, zip code)
Less Than 50% Completed EDUCATION, IOWA DEPARTMENT OF Title I - Basic LEA Grants Funding to school districts to support struggling readers (consistent with regular Title I programming)
Expansion of Title I basic grants intended to support students struggling with reading and math.
Title I, Part A --Improving Basic Programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Place of performance (city, state, zip code)
Place of performance (city, state, zip code) Augusta, Maine 043330023 More than 50% Completed DEPARTMENT OF ELEMENTARY AND SECONDARY EDUCATION Title I, Part A - Improving Basic Programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Provide educational services to students most at risk of failing to meet academic standards. Remaining funds will be expended by school districts as needed to supplement existing Title I funds.
Title I teachers, paraprofessionals, and support staff members were hired or retained.
Place of performance (city, state, zip code) MALDEN, Massachusetts 021484906 Less Than 50% Completed Title I, Part A--Improving Basic Programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
The following jobs were created and retained with ARRA Title I, Part A funds: Academic Counselors, Aides/Paraprofessionals, Classroom/Instructional Interventionists, Early Childhood Intervention Specialists, Instructional Coaches, Instructional Specialists Program Coordinators, Reading Recovery Teachers, Social Workers, Substitute Teachers Summer School Teachers, Teachers, and Tutors.
EDUCATION, MINNESOTA, DEPARTMENT OF Title1-PartA-Improving Basic Programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Types of jobs created or retained with this grant include administration/supervision, counselor, cultural liaison, licensed instructional support, mental health professional, non- licensed classroom personnel, non-licensed instructional support, other, paraprofessional, physical/occupational therapist, substitute teacher salaries, and teachers.
Place of performance (city, state, zip code) Roseville, Minnesota 551134266 Less Than 50% Completed MISSISSIPPI STATE DEPARTMENT OF EDUCATION Title I, Part A - Improving Basic Programs Operated by Local Education Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards.
The jobs created/retained with Title I, Part A ARRA funds include instructional and non- instructional positions which all directly impact increasing the academic achievement of at- risk populations. Instructional positions include teachers, paraprofessionals, speech therapists, interventionists, in-school and after school tutors. Non-instructional positions include guidance counselors, social workers, security officers, and library/media specialists.
ELEMENTARY AND SECONDARY EDUCATION, MISSOURI DEPARTMENT OF Title I, PartA--Improving Basic Programs Operated by Local Educational Agencies.
Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards.
Place of performance (city, state, zip code)
Jefferson City, Missouri 651012901 More than 50% Completed PUBLIC INSTRUCTION, MONTANA OFFICE OF Title I, Part A -- Improving Basic Programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Public Elementary and Secondary school subgrantees continued their school year projects. Funding is being distributed based on subrecipients' monthly cash requests and reporting.
Jobs related to the provision of educational services in public elementary and secondary schools under Title I, Part A Improving Basic Programs Operated by Local Educational Agencies, Recovery Act.
EDUCATION, NEVADA DEPARTMENT OF Title I, Part A-Improving Basic Programs Operated by Local Education Agencies.
Improve teaching and learning for students most at risk of failing to meet State academic acchievement standards Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards 230.49 Teaching jobs and 93.2 Teachers Aid Jobs were paid with ARRA funds.
Place of performance (city, state, zip code) Carson City, Nevada 897015096 Less Than 50% Completed EDUCATION, NEW JERSEY DEPARTMENT OF Title I, Part A--Improving Basic Programs Operated by Local Educational Agencies.
Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards.
A total of 794.2 jobs were created or retained. Of those, 577.5 were instructional positions, 62.4 were direct student support services positions, 40.0 were administrative positions and 114.3 did not indicate a job classification. We provide Title 1 funds on a reimbursement basis, and therefore it is not unusual for LEAs to report jobs created or retained prior to actually receiving the funds.
Place of performance (city, state, zip code)
Trenton, New Jersey 086250500 Less Than 50% Completed 291 NEW MEXICO EDUCATION, DEPARTMENT OF Title I, Part A--Improving Basic Programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards.
New Mexico’s public school districts and charter schools reported 145.08 positions for the Title I Grant. The positions created/retained are teachers, educational assistants, curriculum coaches, subject matter specialists, data specialists, counselors, and school nurses.
Place of performance (city, state, zip code)
SANTA FE, New Mexico 875012744 Less Than 50% Completed PUBLIC INSTRUCTION, NORTH CAROLINA DEPARTMENT OF Title I, Part A--Improving Basic programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards 2789.27 Director and/or Supervisor (113) Person assigned to direct or supervise staff members, a function, a program, or a support service.Assistant Principal (116) Person, licensed as an assistant principal, who has been designated by a local board of education to perform the duties of a non-teaching assistant principal. Teacher (121)Person certified to teach the standard course of studies and assigned to instruct pupils not classified elsewhere New Teacher Orientation (125) Person attending assigned new teacher orientation, outside of the teacher's contract calendar, not to exceed 3 days.Re-employed Retired Teacher - Exempt from the Earnings Cap (128)Retired teachers hired back into the classroom.Instructional Support I (131)Person assigned duties that require a high degree of knowledge and skills, in support of the instructional program. Duties include health services, attendance counseling, guidance services, media services, and nurses.Instructional Support II (132)Person assigned duties that require a high degree of knowledge and skills which place them on the advanced pay scale. Includes speech and audiologists Psychologist (133)Person assigned to perform duties involving psychology.Teacher Mentor (134) Individuals who are employed to serve as full-time mentors to teachers only.Lead Teacher (135)Includes curriculum specialists, instructional facilitators, as well as lead teachers in the summer school program. Teacher Assistant (141)Person assigned to assist with students in roles without the extra education required for NCLB. Examples include personal care assistants and physical therapy assistants.Teacher Assistant – NCLB (142) Person assigned to perform the day-to- day activities of assisting the regular classroom teacher, in roles requiring the extra education of NCLB.Tutor (Within the instructional day) (143) Person assigned to perform tutorial duties. Interpreter, Braillist, Translator, Education Interpreter (144) Person assigned to perform the activities of an interpreter, brail, translator, or education interpreter, and their assistants.Therapist (145) Person assigned to perform the activities of physical or occupational therapy. Includes the positions of physical therapist, occupational therapist.Specialist (School-Based) (146) Person assigned to perform technical activities in a support capacity such as data collection, compiling research data, preparing statistical reports, technology and other technical duties. Includes the positions such as certified nurses, computer lab assistants, technology assistants, CTE tech assistants, and behavioral modification techs, parent liaisons, and home school coordinators.Monitor (147)Person assigned to perform the activities of a monitor - bus monitors, lunchroom monitors, and playground monitors. Office Support (151)Person assigned to perform activities concerned with preparing, transferring, transcribing, systemizing, or filing written communications and records. Includes secretary, accounting personnel, admin assistant, photocopy clerk, file clerk, NCWise specialist, clerical specialist in a central office role, cost clerk, and school- based office personnel.Administrative Specialist (Central Support) (153)Person assigned to perform activities concerned with the administrative specialties of a school system. Includes internal auditor, budget specialist, administrative support, HR specialist, public relation personnel, energy and safety monitor, central office specialist, nutritional specialist, and specialists who manage a program area Driver (171)Person whose assignment consists primarily of driving a vehicle, such as a bus, truck, or automobile.Custodian (173) Person assigned to perform plant housekeeping and operating heating, ventilating, and air conditioning systems. Manager (176) Person assigned to direct the day-to-day operations of a group of skilled, semi-skilled, or unskilled workers. Examples would include child nutrition manager, and maintenance foreman.
Place of performance (city, state, zip code) Bismarck, North Dakota 585050440 Less Than 50% Completed Title I - Grants to LEAs, Recovery Act Title I Grants to Local Educational Agencies, Recovery Act Title I, Part A funds are distributed to school districts based on four distinct funding formulas as affected by census poverty data. Districts determine which eligible buildings are to participate based on federal requirements. Targeted Assistance buildings must direct services to specific students. Schoolwide building may use the funds for more schoolwide activities intended to improve outcomes across the building. Purpose: To provide supplemental funding to economically disadvantaged districts and some of their elegible schools for improving educational outcomes for students. Building projects are either Targeted Assistance whereby students to be served are selected based on academic needs or school-wide whereby an improvement plan can be focused on any or all students.
Place of performance (city, state, zip code) Oklahoma City, Oklahoma 731054503 More than 50% Completed Title I, Part A--Improving Basic Programs Operated by Local Educational Agencies.
Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
The jobs created or retained with these Recovery Act funds include K-12 teachers, instructional assistants, and mentor positions for new teachers. Teaching positions focus on reading and math. Of the total number of jobs reported, over 50% are newly created positions.
Place of performance (city, state, zip code)
Less Than 50% Completed 171 EDUCATION, PENNSYLVANIA DEPT OF TITLE I, PART A--IMPROVING BASIC PROGRAMS OPERATED BY LOCAL Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards Reflects sub-recipient submitted information on educators and other support staff providing services detailed in the Project Description for the current reporting quarter for this award.
More than 50% Completed DEPARTMENT OF EDUCATION, SOUTH CAROLINA Title I, Part A--Improving Basic Programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards.
Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards.
Pre-K Teacher, Kindergarten Teachers, Special Education (self -contained), Special Ed (resource), Classroom Teacher, Retired Teacher, Media Specialist, Guidance, Other Professional Instructional Oriented, Extended Day Teacher, Title I Director, School Nurse, Social Worker, Clerical Support, Teacher Leader, Coordinators, Administrator, Title I Instructional Paraprofessionals, Child Development Aide, Instructional Assistants, Instructional Aides, Instructional Coach, Other Aides, Principal, Assistant Principal, Computer Technician, Supervisor, Support Personnel, Kindergarten Aide, School Food Service Worker, School Logistical Support Staff, Curriculum/Academic Specialist, Interventionist, ESOL Part- Time teacher, Short-Term Substitutes, Consultant, School Parent Facilitators Columbia, South Carolina 292013730 Less Than 50% Completed Title I Part A--Improving Basic Programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Teacher and paraprofessional positions were created to improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Pierre, South Dakota 575012291 Less Than 50% Completed EDUCATION, TENNESSEE DEPARTMENT OF Title I Grants to Local Educational Agencies, Recovery Act Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Teachers, paraprofessionals, instructional facilitators, parent involvement coordinators, guidance counselors, resource specialists, tech coaches, clerical, and other educational specialists.
Place of performance (city, state, zip code) Nashville, Tennessee 372431219 Less Than 50% Completed Title I, Part A--Improving Basic Programs Operated by Local Educational Agencies.
Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
The positions created or retained during this period included professional jobs as well as positions for support staff. The major job categories include counselors, teachers, educational aides and administrators.
Place of performance (city, state, zip code) AUSTIN, Texas 787011402 Less Than 50% Completed Title I , Part A - Improving Basic Programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
Place of performance (city, state, zip code) Montpelier, Vermont 056202501 Less Than 50% Completed EDUCATION, VIRGINIA DEPARTMENT OF Title I Grants to Local Educational Agengies, Recovery Act Title I Grants to Local Educational Agengies, Recovery Act To help local education agencies (LEAs) and schools improve the teaching and learning of children failing, or most at-risk of failing, to meet challenging State academic standards.
Improve teaching and learning for students most at risk of failing to meet State Academic Achievement Standards.
Jobs accounted for during the quarter ended 3/31/2010 represent employment types such as: teachers, paraprofessionals, literacy coaches, reading specialist, math specialists, intervention specialist, aids, and resource professionals. This total is made up of 333.6 saved positions and 245.5 created positions.
Place of performance (city, state, zip code) Richmond, Virginia 232193673 Less Than 50% Completed PUBLIC INSTRUCTION, WASHINGTON STATE SUPERINTENDENT OF Title I, Part A - Improving Basic Programs Operated by Local Educational Agencies.
Improve teaching and learning for students most at risk of failing to meet state academic achievement standards.
Improve teaching and learning for students most at risk of failing to meet state academic achievement standards.
Place of performance (city, state, zip code) Olympia, Washington 985047200 Less Than 50% Completed 286 WEST VIRGINIA DEPARTMENT OF EDUCATION Improve teaching and learning for students most at risk of failing to meet the State academic achievement standards.
Place of performance (city, state, zip code) Charleston, West Virginia 253050330 Less Than 50% Completed PUBLIC INSTRUCTION, WISCONSIN DEPT OF Title I, Part A--Improving Basic Programs Operated by Local Educational Agencies Improve teaching and learning for students most at risk of failing to meet State academic achievement standards.
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353.70 jobs were reported in this quarter. These positions include: math and reading literacy coaches; math support teacher; substitute teachers; literacy specialist/coach; reading teachers and specialists; day program teachers; counselors; stimulus projects coordinator; literacy support teachers; teacher; administrative assistant; instructor; Director of Learning & Reform; Title I coordinator; English teacher; parent assistant; paraprofessionals; clerical staff; intermediate literacy support coach; direct instruction specialist; site specific school improvement; teacher mentor; RTI coordinator; Title I inclusion teacher; Title I teachers; speech pathologist; aide; social worker; behavioral specialist; academic intervention specialist; secretarial support; academic support; remediation specialist; teacher assistant; Title I paraprofessional; home visitors; speaker/presenter/trainer; reading/literacy consultant; curriculum consultant; data consultant; math consultant; IT staff; principal; new leader advanced placement; early childhood workers; at-risk teacher; curriculum development coordinator; Title I teacher 316- License; remediation skills coordinator; reading coordinator; reading recovery teacher; kindergarten assistance; math resource teacher; parent involvement coordinator; Title I family coordinator; literacy coordinator; family outreach coordinator; resource teacher (preschool, elementary); secondary reading support teachers; homeless community liaison; research analyst; goal aide; solutions coordinator; dean of students; music teacher; student success coordinator; art therapist; AutoSkill coordinator; homework club staff; hearing interpreter; electronic sub; afterschool program tutor and administrator; expended day coordinator, secretary, clerk and extended day staff; school family liaison; ELL teacher; data analysis coach; program managers; parent presenters; mentors; tutors; accounting staff; education consultant; SIFI/AYP coordinator; dual language immersion teacher; culturally relevant teacher; private/parochial professional development teacher; after school professional development coordinator; after school program coordinator; parent involvement teachers; reading consultant; science teacher; interventionists; family coordinator; staff development specialist; food service support; bilingual resource specialist- Saturday program; learning facilitator; librarian; AmeriCorps workers; and ARRA administration coordinator.
SFSF Education Stabilization Funds: Selected Subrecipient (LEA) Descriptions
The State Fiscal Stabilization Fund included approximately $48.6 billion to award to states by formula and up to $5 billion to award to states as competitive grants. The Recovery Act created the SFSF in part to help state and local governments stabilize their budgets by minimizing budgetary cuts in education and other essential government services, such as public safety. Stabilization funds for education distributed under the Recovery Act must first be used to alleviate shortfalls in state support for education to local educational agencies and public institutions of higher education. States must use 81.8 percent of their SFSF formula grant funds to support education (these funds are referred to as education stabilization funds) and must use the remaining 18.2 percent for public safety and other government services, which may include education (these funds are referred to as government services funds). After maintaining state support for education at fiscal year 2006 levels, states must use education stabilization funds to restore state funding to the greater of fiscal year 2008 or 2009 levels for state support to LEAs and public IHEs. When distributing these funds to LEAs, states must use their primary education funding formula, but they can determine how to allocate funds to public IHEs. In general, LEAs maintain broad discretion in how they can use education stabilization funds, but states have some ability to direct IHEs in how to use these funds.
Given that few descriptions fully met our transparency criteria, we administered a web-based survey to school district superintendents in the 50 states and the District of Columbia to determine how they are using Recovery Act funds. We conducted our survey between March and April 2010, with a 78 percent final weighted response rate. We selected a stratified random sample of 575 LEAs from the population of 16,065 LEAs included in our sample frame of data obtained from the Common Core of Data in 2007-2008. Of this sample, we randomly selected 150 LEAs (50 for each program) to gather illustrative information on how they used their Recovery Act funds. See appendix VII for more information on how we designed our survey. What follows are summaries of how these LEAs described their use of Recovery Act SFSF funds, based on their survey responses as well as information we collected through follow-up communications.
Acton-Boxborough Regional School District Acton, MA 01720 Award amount: $1,366,907 Acton-Boxborough Regional School District reported that it used its Recovery Act SFSF award to address special needs of its students and teachers. These funds covered the two schools in the district—the Raymond Grey Junior High and the High School. Specifically, the funds were used for paraprofessional staff retention, for teachers’ health insurance, and for special education out-of-district tuition. As a result of these funds, officials reported that the district was able to retain approximately eight paraprofessionals and recover two special education assistants. Therefore, officials reported that the district could maintain its student-teacher ratios for special education and other classes and allow the district to remain in compliance with Massachusetts regulations that require special education assistant teachers for every nine special education students. They also said these funds resulted in the district being able to pay for staff members’ health insurance and tuition for four out-of- district students (which totaled $220,670). Officials indicated that their Recovery Act SFSF award activities were less than 50 percent completed.
Anchorage School District Anchorage, AK 99504 Award amount: $23,231,318 Anchorage School District reported that it used its Recovery Act SFSF award to enhance existing effective programs; implement innovative new programs; and ensure a safe learning environment with modern, efficient, and functional technology. Not including substitute teachers hired because of the impact of ARRA-funded professional development, or parents and families affected by ARRA-funded programs, the SFSF award covered 4,969 teachers, teacher aides, administrators, and staff, and 47,089 students in a range of schools and programs within the district. Specifically, the funds were used to retain and hire staff, provide professional development for instructional staff, purchase instructional materials, support preschool and summer school programs, enhance parent involvement activities, purchase or upgrade computer technology (hardware, software, servers, and systems), conduct student assessments and internal program evaluations, replace failing equipment, and implement building system renewals. Anchorage School District selected projects that would continue its ongoing work to improve scores on standardized tests, increase graduation rates, decrease student dropout rates, and prepare students for college and careers following graduation, all in a safe learning environment. District officials indicated that their Recovery Act SFSF award activities were less than 50 percent completed.
Arcadia Unified School District Arcadia, CA 91007 Award amount: $3,294,536 Arcadia Unified School District reported that it used its Recovery Act SFSF award to backfill staff reductions caused by state budget cuts, thereby ensuring student progress by maintaining the district’s standard of an approximate 30-to-1 student-teacher ratio and providing the necessary programs to meet student needs. These funds covered all 10 schools in the district that serve approximately 10,000 students. Specifically, the funds were used to retain staff and support the district’s Response-to- Intervention program, its Walk-to-Read program, and before-school intervention in math and language arts. As a result of the SFSF award, officials reported that the district was able to retain approximately 20 of its 450 instructional positions and continue programs that meet the needs of its students, including those with special needs. They also said that these funds had the indirect result of allowing the district’s student-teacher ratio in grades K-3 to remain at approximately 20-to-1. Officials indicated that their Recovery Act SFSF award activities were less than 50 percent completed.
Atlanta Public Schools Atlanta, GA 30303 Award amount: $14,536,203 Atlanta Public Schools reported that it used its Recovery Act SFSF award to save and retain instructional and noninstructional jobs. These funds benefited the district’s 107 schools and student population of approximately 47,000. Specifically, the district reported that the funds are being used to retain jobs that would have been lost because of a decrease in funding. As a result of the award, officials reported that Atlanta Public Schools saved over 440 jobs, which allowed class sizes to remain the same and support personnel to continue providing high levels of instruction with little or no distraction. Furthermore, the district reported that it anticipates that the additional funds will significantly assist the district with maintaining and expanding instructional reform efforts that focus on building capacity. Officials also anticipate that student achievement will be affected in a positive manner, as will standardized test scores, high school graduation rates, and teacher and principal effectiveness. District officials indicated that their Recovery Act SFSF award activities were less than 50 percent completed.
Broward County Public Schools Fort Lauderdale, FL 33301 Award amount: $91,104,960 Broward County Public Schools reported that it used its Recovery Act SFSF award to save as many jobs as possible, which primarily included teaching positions and school support positions. These funds covered 234 schools. As a result of these funds, officials reported that the district was able to save over 1,400 jobs. Officials indicated that their Recovery Act SFSF award activities were fully completed.
Burton Elementary Porterville, CA 93257 Award amount: $1,224,856 Burton Elementary reported that it used its Recovery Act SFSF award to save staff positions, including classified positions for those who work as classroom aides, librarians, and office clerks; maintain professional development and student programs; and purchase instructional materials. These funds covered approximately 3,800 students in seven schools. Specifically, the funds were used to pay staff salaries, and thus maintain low class sizes and programs such as art, music, libraries, and physical education. In addition, Burton Elementary used the funds to maintain staff development in order to help its teachers become better leaders and give them the necessary resources to help their students be successful. As a result of these funds, officials reported that the district was able to save 15 instructional positions and 5.25 classified positions and maintain its current student-teacher ratio of 20 to 1 in its lower grades. They also said that the funds will result in the district achieving higher levels of student success, improving scores on standardized tests, exiting program improvement status, and maintaining the district’s purpose and goals. Officials indicated that their Recovery Act SFSF award activities were more than 50 percent completed.
Central Union High School District El Centro, CA 92243 Award amount: $1,895,213 Central Union High School District reported that it used its Recovery Act SFSF award to continue academic counseling and provide development for certified staff. The funds covered 10.6 full-time-equivalent counselors who advised 4,000 students in two comprehensive and one continuation high school. In addition, the district used the funds to provide 3 full days and 12 half days of staff development to 225 teachers. Specifically, the funds were used to continue previous allocation of staff development time, collaboration, and standards-based assessment. In addition, the funds were used to focus on a formative instructional methodology called Assessment for Learning, which uses information from a variety of sources to inform pedagogical decisions. As a result of these funds, officials reported that the district was able to maintain existing levels of academic advisement and its previous commitment to Assessment for Learning and standards-based initiatives. They also said that these funds resulted in retaining existing counseling staff and the services they were providing. Officials indicated that their Recovery Act SFSF award activities were 50 percent or more completed.
Cheney Unified School District #268 Cheney, KS 67025 Award amount: $493,548 Cheney Unified School District #268 reported that it used its Recovery Act SFSF award to maintain its educational system at the current level to ensure student progress. These funds covered the three schools in this district that serves 775 students. Specifically, the funds were used to save certified and classified staff positions and maintain a desired student- teacher ratio. As a result of these funds, officials reported that the district was able to maintain a 20-to-1 student-teacher ratio at its elementary school and a 24-27-to-1 ratios at the middle and high schools. They also said that these funds resulted in the district saving between three and five positions, including a part-time math position, which kept math classes from having more than 30 students. Officials reported that their Recovery Act SFSF award activities were more than 50 percent completed.
Chester School District Deep River, CT 06417 Award amount: $61,222 Chester School District reported that it used its Recovery Act SFSF award to retain teachers and to provide them with professional development in teaching strategies and data analysis. These funds covered teachers in all three elementary schools in the district. Specifically, the funds were used to provide consultation services through Performance Pathways, which is a technical tool that uses student data such as regular, standardized, and benchmark testing to inform decisions about changes in students’ academic programs. As a result of the SFSF award, officials reported that the district expects to see improved scores on standardized tests as well as improved strategies using data-driven decisions in the classroom. They indicated that their Recovery Act SFSF award activities were less than 50 percent completed.
Clayton County Public Schools Jonesboro, GA 30236 Award amount: $23,144,036 Clayton County Public Schools reported that it used its Recovery Act SFSF award to retain personnel. These funds supported approximately 312 personnel at 62 schools. Specifically, the funds were used for salaries of teachers across all grade levels and subject areas (except for vocational and special education). As a result of these funds, officials reported that the district was able to retain approximately 312 personnel. They indicated that their Recovery Act SFSF award activities were less than 50 percent completed.
Coeur d’Alene District Coeur d’Alene, ID 83814 Award amount: $4,182,019 Coeur d’Alene District reported that it used its Recovery Act SFSF award to support existing employee salaries and benefits for a month. These funds supported 17 schools and approximately 1,100 employees working in maintenance, transportation, and administrative offices. Specifically, the funds were used to help offset the cost of existing staff so that their health insurance benefits could be maintained and so that further cuts to existing programs would not be made. As a result of these funds, officials reported that the district was able to save extracurricular programs at the schools and health benefits for employees, but did not necessarily save any positions. They indicated that their Recovery Act SFSF award activities were less than 50 percent completed.
Creighton Elementary District Phoenix, AZ 85016 Award amount: $2,275,658 Creighton Elementary District reported that it used its Recovery Act SFSF award to maintain class sizes at levels prior to those of 2010 and retain teaching staff. These funds provided support to approximately 7,400 students in nine schools and approximately 500 teachers and other staff members. Specifically, the funds mitigated losses in state funding by paying for staff salaries. As a result of the SFSF award, officials reported that the district was able to maintain student-teacher ratios at pre 2009-2010, levels that were a maximum of 27 to 1 for grades K-3 and 32 to 1 for grades 4-8. Officials reported that maintaining these student-teachers ratios will ensure that students receive meaningful instructional opportunities. They indicated that their Recovery Act SFSF award activities were 50 percent or more completed.
Crossroads Charter High School Charlotte, NC 28213 Award amount: $61,050 Crossroads Charter High School reported that it used its Recovery Act SFSF award to hire and retain teachers, paraprofessionals, and contractors; to enhance technology for computer-based instruction and school safety, and to purchase educational supplies and materials. These funds covered Crossroads Charter High School’s one site that serves 271 students, has 16 teachers, and employs a host of paraprofessionals and contractors. Specifically, the funds were used for providing staff development for teachers and administrators, purchasing computers and safety equipment, and allowing for college and career readiness tours. As a result of these funds, officials reported that the school was able to save five positions, create three positions, and thus maintain its student-teacher ratio of 20 to 1. School officials said they also hope that the funds will facilitate increased graduation rates and improved high-stakes test scores from the concentrated staff and career exploration activities. They indicated that their Recovery Act SFSF award activities were less than 50 percent completed.
E-Cademie, A Charter School Phoenix, AZ 85006 Award amount: $123,381 E-Cademie, A Charter School reported that it used its Recovery Act SFSF award to pay for monthly maintenance and operations expenses so the school could keep its doors open after the state of Arizona cut its regular payments for October, November, May, and June. These funds covered approximately 170 students, 10 teaching staff, and 6 support staff. As a result of the SFSF award, officials reported that the school was able to pay its staff and rent, thus preventing it from going into massive debt or closing down. They indicated that their Recovery Act SFSF award activities were fully completed.
Fairfax County Public Schools Falls Church, VA 22042 Award amount: $37,426,150 Fairfax County Public Schools reported that it used its Recovery Act SFSF award to avoid further increases in general education class size by retaining an average of 1.5 teachers per school in approximately 189 schools. As a result of these funds, officials reported that the district was able to retain approximately 276 classroom teachers. They indicated that their Recovery Act SFSF award activities were 50 percent or more completed.
Flathead High School Kalispell, MT 59901 Award amount: $893,761 Flathead High School reported that it used its Recovery Act SFSF award to retain and hire staff, pay for professional development, and purchase instructional materials. These funds covered six schools, which included elementary, middle, and high schools. Specifically, the funds were used to maintain its current level of staffing for at-risk students and to maintain tutors for those students without using other funds. As a result of these funds, officials reported that the district was able to maintain its 20-to-1 student-teacher ratio for its special education classes. They indicated that their Recovery Act SFSF award activities were more than 50 percent completed.
Forsyth County Schools Winston Salem, NC 27103 Award amount: $13,621,983 Forsyth County Schools reported that it used its Recovery Act SFSF award for offsetting pay for noninstructional personnel to replace the loss of state funds, as dictated by the North Carolina General Assembly. These funds covered all noninstructional personnel in the district—specifically, clerical and custodial positions. As a result of these funds, officials reported that the district was able to save 389 positions, as the average salary and total benefits of each position is approximately $35,000. They indicated that their Recovery Act SFSF award activities were more than 50 percent completed.
Fort Sam Houston Independent School District San Antonio, TX 78234 Award amount: $843,721 Fort Sam Houston Independent School District reported that it used its Recovery Act SFSF award to purchase technology infrastructure, hardware, software, and training for staff. These funds covered approximately 1,500 students in three schools—an elementary, middle, and high school. Specifically, they were used to purchase network servers, mounting racks, and catalyst SmartNet power supplies. As a result of these funds, officials reported that the district was able to upgrade its technological infrastructure, hardware, and software for its staff and students. As a result of enhancements to the district’s infrastructure, teachers and students have more access to the latest technology for general classroom instruction. Officials indicated that their Recovery Act SFSF award activities were more than 50 percent completed.
Hooksett School District Hooksett, NH 03106 Award amount: $426,184 Hooksett School District reported that it used its Recovery Act SFSF award to move more students with educational disabilities from special education classrooms into the general education classrooms by hiring new staff, providing professional development, and purchasing technology and instructional materials that target the special education population. These funds supported five schools, with a combined population of about 1,275 students. As a result of these funds, officials reported that the district was able to improve instructional practices resulting in increased student achievement. They indicated that their Recovery Act SFSF award activities were less than 50 percent completed.
Houston Heights Learning Academy, Inc. Houston, TX 77007 Award amount: $20,267 Houston Heights Learning Academy, Inc., reported that it used its Recovery Act SFSF award to maintain two full-day prekindergarten programs for school readiness at one school. These funds targeted seven teachers and 129 students at the one school. Specifically, the funds were used for students who are in a lower economic bracket, have limited English proficiency, and need a full-day program to prepare them for school readiness. As a result of these funds, officials reported that they expect the school’s students will receive a strong foundation for academic achievement, which will eventually close gaps on standardized tests and improve graduation rates. In addition, the school will be able to retain two full-day prekindergarten teachers. Officials indicated that their Recovery Act SFSF award activities were 50 percent or more completed.
Huron School District 02-2 Huron, SD 57350 Award amount: $920,254 Huron School District 02-2 reported that it used its Recovery Act SFSF award for general day-to-day operations of the district. These funds covered all 2,000 students in the district and supplanted South Dakota state aid. As a result of these funds, officials reported that the district was able to save 8 to 10 staff positions and maintain the same level of services offered in the prior year. They indicated that their Recovery Act SFSF award activities were fully completed.
Integrity Education Corporation Scottsdale, AZ 85271 Award amount: $41,640 Integrity Education Corporation reported that it used its Recovery Act SFSF award to maintain its education program in the face of declining state funding. These funds covered one school consisting of 70 students. Specifically, the funds were used to retain staff and purchase instructional materials and kitchen equipment. As a result of this SFSF award, officials reported that the school was able to save one instructional position and improve scores on standardized tests. They indicated that their Recovery Act SFSF award activities were fully completed.
Joshua Academy Evansville, IN 47713 Award amount: $126,496 Joshua Academy, a charter school, reported that it used its Recovery Act SFSF award to maintain normal operations after the state of Indiana substituted its regular funding with the award money. Thus, the academy received the same funding as usual, just from a different source. These funds covered the 22 teachers and 240 students at Joshua Academy. As a result of these funds, officials reported that the academy was able to continue operations as normal without undertaking additional budget cuts even though the state of Indiana is undergoing budget cuts. They indicated that their Recovery Act SFSF award activities were fully completed.
Lee County School District Bishopville, SC 29010 Award amount: $796,651 Lee County School District reported that it used its Recovery Act SFSF award to save instructional positions. These funds primarily targeted 12 instructional positions and affected all schools in the district—including its elementary, middle, and high schools. Specifically, the funds were used to pay for the district’s utility bills and property, casualty, and worker’s compensation insurance premiums, which freed up state and local funds to pay for instructional staffs’ salaries and fringe benefits. As a result of these funds, officials reported that the district was able to save approximately 12 instructional positions by using state and local funds for the salaries, which have helped maintain class sizes in its elementary schools and helped the district continue offering assistance to its ESOL (English for Speakers of Other Languages) students at all locations. The funds also resulted in the district keeping programs such as AP (Advanced Placement) English, the teacher cadet program, art and music in its middle and high schools, and a vocational program directed at special needs students. Officials reported that their Recovery Act SFSF award activities were 50 percent or more completed.
Liberty School District Roland, OK 74954 Award amount: $85,795 Liberty School District reported that it used its Recovery Act SFSF award to save and retain instructional positions. These funds covered all 325 students and 24 certified teachers in this K- 8 district. Specifically, the funds were used to save and retain third, fifth, and sixth grade instructional positions. As a result of these funds, officials reported that the district was able to save a total of three positions. They indicated that their Recovery Act SFSF award activities were more than 50 percent completed.
Liberty-Eylau Independent School District Texarkana, TX 75501 Award amount: $971,887 Liberty-Eylau Independent School District reported that it used its Recovery Act SFSF award to provide the best education possible for its students by providing services and implementing programs. These funds covered all six campuses in the district that serves a total of 2,900 students. Specifically, the funds were used to hire and retain supplemental classrooms teachers and instructional aides, as well as a career and technology specialist for its vocational program. In addition, officials reported that the district used the funds to provide core subject professional development for teachers at a local service center, pay for substitute teachers so that new teachers could participate in a mentoring program, and purchase test preparation materials and several new computers and projectors. As a result of these funds, officials said the district was able to improve technology availability in the classroom and save or retain 10 to 12 positions, which the district hopes will improve scores on standardized tests. They indicated that their Recovery Act SFSF award activities were more than 50 percent completed.
Life Skills Center-Middletown Middletown, OH 45042 Award amount: $164,378 Life Skills Center-Middletown reported that it used its Recovery Act SFSF award to hire and retain teachers despite budget cuts. These funds covered this dropout recovery high school and affected teachers in the school’s learning lab that serves 30 to 50 students per day. Specifically, the funds were used to serve all new students with the transition lab, which will prepare them for the classroom labs. As a result of these funds, officials reported that the school was able to retain three full-time equivalents and that they hope to increase retention, attendance, and student acclimation, thereby leading to increased graduation rates. In addition, they said they hope that the increased individualized attention will increase scores on students’ standardized tests. Officials indicated that their Recovery Act SFSF award activities were more than 50 percent completed.
Lombard School District 44 Lombard, IL 60148 Award amount: $460,145 Lombard School District 44 reported that it used its Recovery Act SFSF award to construct a four-classroom addition at its Butterfield School. These funds will affect approximately 100 students and six schools, two directly and four indirectly. Specifically, the four-classroom addition will house the district’s early childhood and kindergarten readiness programs. As a result of these funds, officials reported that the district will be able to serve all of its early childhood and kindergarten readiness programs at one building with state-of-the-art facilities, which will alleviate overcrowding at their current location. Officials indicated that their Recovery Act SFSF award activities were less than 50 percent completed.
Marietta City Schools Marietta, GA 30060 Award amount: $3,484,874 Marietta City Schools reported that it used its Recovery Act SFSF award for instructional personnel salaries and benefits to offset state funding reductions in accordance with directions from the state. Officials said it was not possible to say how many schools or students were affected. They reported that the funds were reclassified to compensate for funds the state could not provide because of a decline in state revenues. As a result of these SFSF funds, officials said that the district was able to save about 97 staff positions according to the state budget calculation. Officials indicated that their Recovery Act SFSF award activities were fully completed.
Medical Center Charter School Houston, TX 77030 Award amount: $37,889 Medical Center Charter School reported that it used its Recovery Act SFSF award to increase special education services and increase teacher quality. These funds covered one campus with about 250 students in grades prekindergarten through sixth. Specifically, the funds were used for the early detection of learning disabilities and the expansion of all-day prekindergarten. In addition, the school used the funds for the implementation of new software, staff retention, professional development, and incentives. As a result of these funds, officials reported that the school was able to support eight positions and increase staff job satisfaction. They indicated that their Recovery Act SFSF award activities were 50 percent or more completed.
Mobile County Public Schools Mobile, AL 36618 Award amount: $14,817,861 Mobile County Public Schools reported that it used its Recovery Act SFSF award to pay for teachers, which allowed the district to avoid reducing its number of teachers. In addition to retaining teacher positions, the funds were used for professional development (specific to their grade level and subject area) that allowed teachers to meet school system requirements. The award funds affected about 60,000 students and about 6,000 teachers in the district’s 89 schools. As a result of this SFSF award, officials reported that the district was able to maintain its 20-to-1 student-teacher ratio for grades K through 3, 24–to-1 ratio for grades 4 through 6, and 28–to-1 ratio for grades 7 through 12. They indicated that their Recovery Act SFSF award activities were 50 percent or more completed.
Mount Vernon School District 17-3 Mount Vernon, SD 57363 Award amount: $133,960 Mount Vernon School District 17-3 reported that it used its Recovery Act SFSF award to supplant money from the state and that the funds were used for salaries. These funds covered all 240 students in the district, but officials indicated that it was not possible to say which positions would have been affected. As a result of these funds, officials reported that the district was able to save two positions. They indicated that their Recovery Act SFSF award activities were fully completed.
Muscogee County School District Columbus, GA 31906 Award amount: $16,907,769 Muscogee County School District reported that it used its Recovery Act SFSF award for staff retention throughout the district. Specifically, these funds were used to retain elementary teachers, media specialists, paraprofessionals, clerks, and assistant principals. As a result of these funds, officials reported that the district was able to save 223.4 jobs. They indicated that their Recovery Act SFSF award activities were less than 50 percent completed.
Newhall Elementary Valencia, CA 91355 Award amount: $2,206,649 Newhall Elementary reported that it used its Recovery Act SFSF award to retain teachers and maintain programs. These funds targeted 10 schools and affected approximately 758 students. Specifically, the funds enabled the district to enrich the learning experience in the primary grades by keeping class sizes low as part of the state’s class size reduction program in grades K-3. As a result of the SFSF award, officials reported that the district was able to retain 31 teachers, and thus maintain an average student/teacher ratio of 22 to 1 in grades K-3. They indicated that their Recovery Act SFSF award activities were 50 percent or more completed.
North Merrick Union Free School District Merrick, NY 11566 Award amount: $675,135 North Merrick Union Free School District reported that it used its Recovery Act SFSF award to maintain a comprehensive educational program for both general and special education students, equitably supporting programs in each of its schools. These funds targeted each of the district’s three elementary schools, which serve approximately 1,320 students. Specifically, the district used the award predominantly to retain staff and provide ongoing professional development in support of important federal/state initiatives (e.g., Response to Intervention) and used a small portion of it to purchase educational technology in support of district initiatives. As a result of these funds, officials reported that the district expects to maintain important district educational programs and staff in the arts, music, library, and literacy; continue to demonstrate excellent student results on all educational assessments; and continue to meet the goals of the district technology plan, especially in terms of technology integration with instruction. Officials indicated that their Recovery Act SFSF award activities were 50 percent or more completed.
Northwestern School Corporation Kokomo, IN 46901 Award amount: $943,353 Northwestern School Corporation reported that it used its Recovery Act SFSF award to retain current staffing as a substitute for its state tuition support. These funds covered about 115 teachers at four schools that have a total of about 1,650 students. As a result of these funds, officials reported that the district was able to maintain its level of teachers, its current academic program, and high test scores. They indicated that their Recovery Act SFSF award activities were fully completed.
Pacific Elementary Davenport, CA 95017 Award amount: $39,724 Pacific Elementary reported that it used its Recovery Act SFSF award to maintain an intervention program for the lowest-performing students by retaining the program’s staff. These funds affected one position and covered 14 of the 101 students at Pacific Elementary, which is a single school district. Specifically, the funds were allocated for a reading specialist, funding 80 percent of the position in the 2009-2010 school year and allowing the district to retain the position for the 2009-2010 and 2010- 2011 school years, even though doing this will require spending down reserves. As a result of the SFSF award, officials reported that the specialist can continue providing significant interventions for students performing below grade level. According to officials, these learners are making academic progress based on a variety of assessments such as the Bader Reading and Language Assessment, the Lindamood Auditory Conceptualization Test, and the Comprehensive Test of Phonological Awareness. Officials indicated that their Recovery Act SFSF award activities were more than 50 percent completed.
Pelham City School District Pelham City, GA 31779 Award amount: $915,617 Pelham City School District reported that it used its Recovery Act SFSF award to hire and retain instructional staff. The funds targeted three schools—one elementary, middle, and high school—that serve a total of approximately 1,425 students. Specifically, the funds were used to hire and retain paraprofessionals, full-time certified staff, and an instructional specialist. As a result of these funds, officials reported that the district was able to save six paraprofessionals, two full-time certified staff, and 25 percent of an instructional specialist’s position. They indicated that their Recovery Act SFSF award activities were 50 percent or more completed.
Prince George’s County Public Schools Upper Marlboro, MD 20772 Award amount: $46,542,234 Prince George’s County Public Schools reported that it used its Recovery Act SFSF award to restore financial support to maintain its buildings in a manner that provides for a safe, healthy, and comfortable learning environment. These funds affected all of the district’s 127,000 students and 202 schools. Specifically, the funds were used to support districtwide fixed utility costs as an indirect way of continuing to build academic progress, maintain successful instructional programs, and fund the necessary resources to prepare students for state assessments. As a result of these funds, officials reported that the district was able to prevent districtwide employee furloughs, saving the district from a potential lost of 37 days across various employee classifications. Next, officials reported that the funds prevented the potential downgrade of activities and programs, such as the Advancement Via Individual Determination program--an instructional program designed to improve extended learning opportunities in the core subject areas. In addition, the SFSF award resulted in the district not increasing its student-teacher ratios of 22 to 1 in grades K through 2, 25 to 1 in grades 3 through 6, 30 to 1 in grades 7 through 8, and 20 to 1 in grades 9 through 12. Last, the funds allowed them to restore bus driver and bus attendant positions. District officials indicated that their Recovery Act SFSF award activities were 50 percent or more completed.
Recovery School of Southern Minnesota Owatonna, MN 55060 Award amount: $16,823 Recovery School of Southern Minnesota reported that it used its Recovery Act SFSF award to provide instruction to students by retaining instructional staff. These funds covered one site that serves approximately 30 students. In particular, the funds were used, along with other funds, to retain a full-time general education/ special education teacher. According to school officials, these funds assisted the school with retaining one instructional position. They indicated that their Recovery Act SFSF award activities were more than 50 percent completed.
San Bernardino City Unified School District San Bernardino, CA 92410 Award amount: $22,316,420 San Bernardino City Unified School District reported that it used its Recovery Act SFSF award to reduce layoffs due to budget cuts. These funds covered 44 elementary schools, which have a combined enrollment of approximately 25,175 students. Specifically, the funds were used to keep class sizes lower in grades K-3. As a result of the SFSF award, officials reported that the district was able to save 65 positions and maintain a class size of 21:1, rather than increasing to 22: 1 for grades K- 3. District officials reported that their Recovery Act SFSF award activities were less than 50 percent completed.
Santa Clara County Office of Education San Jose, CA 95131 Award amount: $3,414,075 Santa Clara County Office of Education (SCCOE) reported that it used its Recovery Act SFSF award to maintain and augment its support to school districts, charter schools, regional occupation programs, and alternative education programs through creating and retaining staff positions. The SCCOE reported that the award was used to augment its support of 12,749 teachers for 261,945 students at 36 school districts (21 elementary, 6 unified, 5 high school, 4 community colleges) and 387 public school sites inclusive of 34 charter schools (239 elementary, 55 middle, 51 high school, 18 continuation, 10 alternative, 9 community day, 2 K-12, 1 special education, 1 juvenile hall, and 1 county community). Specifically, they said the funds were used to maintain and augment support for curriculum, instruction, assessment, accountability, career technology education, preschool services, school health services, and categorical programs. . As a result of their SFSF funds, officials reported that the district was able to create 17.1 positions, which was the equivalent of 14.45 FTEs. They indicated that their Recovery Act SFSF award activities were projected to be more than 50 percent completed by June 30, 2010.
Sbe–The School of Arts and Enterprise Sacramento, CA 95814 Award amount: $187,919 Sbe–The School of Arts and Enterprise reported that it used its Recovery Act SFSF award to maintain standards by preventing layoffs. These layoffs would have occurred because the state reduced per student funding by $500, which would have meant a $200,000 reduction for the school. These funds covered all 400 students at the school by retaining staff and replacing employees from turnover. As a result of these funds, officials reported that the school was able to save three to four teacher positions, which allowed it to have a 20-to-1 student-teacher ratio rather than a 25-to-1 ratio that it would have had without the award funds. They indicated that their Recovery Act SFSF award activities were more than 50 percent completed.
Terrebonne Parish School District Houma, LA 70360 Award amount: $2,659,177 Terrebonne Parish School District reported that it used its Recovery Act SFSF award to retain master teachers, to fund performance pay for employees at schools that meet the state-established growth target on the LEAP test, and to fund its summer school and remediation programs. The award helped fund performance pay for employees at the 12 district schools that met state growth targets, targeted 10 schools where master teachers serve, and provided partial funding for approximately 3,000 students in its summer program. Specifically, the funds covered summer school stipends, materials and transportation, and teachers’ performance pay stipend and benefits costs. As a result of their SFSF funds, officials reported that the school was able to retain 10 master teachers who assisted with curriculum and instruction. They also said that these funds resulted in the school continuing its summer school and remediation programs so that students who did not pass the LEAP test could have additional instructional time before they retake it. Officials indicated that their Recovery Act SFSF award activities were more than 50 percent completed.
Tulelake Basin Joint Unified School District Tulelake, CA 96134 Award amount: $295,390 Tulelake Basin Joint Unified School District reported that it used its Recovery Act SFSF award to support the continued operation of its music program and staff retention. Specifically, the funds were used to rehire the music teacher and retain one teacher at the elementary school and another at the middle school. These funds affected a total of 536 students who took classes from the music teacher, 125 students at a K through 2 elementary school, 170 students at a 3 through 6 elementary school, and 241 students at the middle and high schools. As a result of these funds, officials reported that the district was able to maintain class sizes of approximately 20 students and save three instructional positions. These funds also allowed the district to keep its arts program in the schools. District officials indicated that their Recovery Act SFSF award activities were 50 percent or more completed.
Valley View Elementary Polson, MT 59860 Award amount: $14,664 Valley View Elementary reported that it used its Recovery Act SFSF award to retain highly qualified teachers and an instructional aid at its 23-student school. In particular, the funds were used to retain the staff and pay for the cost of additional benefits, especially its health insurance costs. As a result of the SFSF award, the school anticipates it will be able to retain three staff, and it hired one instructional aide. School officials reported that their Recovery Act SFSF award activities than 50 percent completed.
Vineland Public School District Vineland, NJ 08360 Award amount: $14,788,960 Vineland Public School District reported that it used its Recovery Act SFSF award to pay for employee health benefits that are a key part of the budget. District officials said that they decided to use the funds for health benefits because doing so allows them to charge as few items as possible to the SFSF award, thus enabling the greatest amount of transparency and taxpayer review. These funds covered health benefits for all of the district’s 431 administrative staff members and 352 high school staff members at the two campuses that do not receive Title I funds. Specifically, the funds were used for benefits of bus drivers, assistant elementary school principals, basic skills teachers, and other instructional and noninstructional positions. As a result of these funds, officials reported that the district was able to retain approximately 219.5 positions—specifically 61 bus drivers, 7 assistant elementary school principals, 41 basic skills teachers, and 110.5 other instructional and noninstructional positions throughout the district. They indicated that their Recovery Act award activities were more than 50 percent completed.
Wake County Schools Raleigh, NC 27609 Award amount: $35,150,824 Wake County Schools reported that it used its Recovery Act SFSF award to offset a reduction in state funds for noninstructional support, which the North Carolina Department of Public Instruction reduced for the 2009-2010 and 2010-2011 school years. These funds covered all schools in the Wake County Public School System. Specifically, the funds were used to support custodial and clerical positions. As a result of these funds, officials reported that the district was able to continue to provide school-based clerical and custodial support and save an estimated 493 custodial and 423 clerical jobs. Specifically, they said it saved a total of 10,552.25 months of school-based employment and 48 months of employment in central services for a total of 10,600.25 months of employment per year. Officials indicated that their Recovery Act SFSF award activities were less than 50 percent completed.
West Holmes Local School District Millerburg, OH 44654 Award amount: $908,249 West Holmes Local School District reported that it used its Recovery Act SFSF award to maintain purchased services that were previously state- funded. Because West Holmes Local School District is over 50 percent state-funded, it used the SFSF funds to offset what it had always received. These funds included general funding for an alternative school, virtual classroom, and community school; Internet services for the district; gifted education services; computer technician services; and district audit services. However, it is not possible to say exactly how many students or schools were affected. As a result of these funds, officials reported that the district was able to maintain its property, fleet, and liability insurance coverage and pay for audit-related and technology fees. These funds also allowed the district to save several jobs and maintain its current student- teacher ratio to help it achieve its goal of improved scores on standardized tests. They indicated that their Recovery Act SFSF award activities were less than 50 percent completed.
Woodson Independent School District Woodson, TX 76491 Award amount: $46,884 Woodson Independent School District reported that it used its Recovery Act SFSF award to purchase hardware and software to improve, supplement, and expand instructional programs, including response-to- intervention and progress monitoring. These funds supported all students—120 total—in this K-12 district. As a result of these funds, officials reported that the district was able to retain staff. They also said they expect that student achievement will increase. Officials indicated that their Recovery Act SFSF award activities were 50 percent or more completed.
IDEA Part B for School Aged Children: Selected Subrecipient (LEA) Descriptions
The Recovery Act provided supplemental funding for programs authorized by the Individuals with Disabilities Education Act, as amended, the major federal statute that supports the provisions of early intervention and special education and related services for children, and youth with disabilities. Part B ($11.7 billion) provides funds to ensure that preschool and school-aged children with disabilities have access to a free and appropriate public education and is divided into two separate grant programs: Part B grants to states (for school-age children) and Part B preschool grants. Our review focused only on Part B grants to states for school aged children.
Given that few descriptions fully met our transparency criteria, we administered a web-based survey to school district superintendents in the 50 states and the District of Columbia to determine how they are using Recovery Act funds. We conducted our survey between March and April 2010, with a 78 percent final weighted response rate. We selected a stratified random sample of 575 LEAs from the population of 16,065 LEAs included in our sample frame of data obtained from the Common Core of Data in 2007-2008. Of this sample, we randomly selected 150 LEAs (50 for each program) to gather illustrative information on how they used their Recovery Act funds. See appendix VII for more information on how we designed our survey. What follows are summaries of how these LEAs described their use of Recovery Act IDEA Part B funds, based on their survey responses as well as information we collected through follow-up communications.
American Charter Schools Foundation d.b.a. Sun Valley High School Phoenix, AZ 85020 Award amount: $27,382 American Charter Schools Foundation D.B.A. Sun Valley High School reported that it used its Recovery Act IDEA award to improve scores on standardized tests, increase special education students’ access and understanding of general education curriculum, and enhance supports and instructional modifications for special education students in the inclusive setting. These funds served over 70 special education students. Specifically, the funds were used to hire a part-time special education coordinator to enhance supports and instructional modifications, purchase instructional materials, and provide related services for special education students such as speech, physical therapy, psychological, hearing and vision services. As a result of these IDEA funds, officials reported that the school was able to improve standardized test scores, improve of dropout and graduation rates, and increase understanding of and accessibility to general education curriculum. Officials indicated that their Recovery Act IDEA award activities were more than 50 percent completed.
Arp Independent School District Arp, TX 75750 Award amount: $382,876 Arp Independent School District reported that it used its Recovery Act IDEA award to hire a special education teacher and instructional aide to work with students with emotional disabilities, purchase special education manager software, and purchase a bus for hearing-impaired students. These funds supported one campus and approximately 90 students. The funds were also used to create two new staff positions. As a result of these IDEA funds, officials reported that the district was able to transport students with hearing impairments more efficiently, individualize instruction to the needs of students with emotional disabilities, and cut down on referrals by identifying students with special needs. They indicated that their Recovery Act IDEA award activities were more than 50 percent completed.
Biloxi Public School District Biloxi, MS 39530 Award amount: $1,165,859 Biloxi Public School District reported that it used its Recovery Act IDEA award to retain jobs and replace and upgrade technology for students with special needs. These funds supported 593 students with special needs across all 11 schools. Specifically, the funds were used to retain two examiners and two psychologists and purchase new computers and printers for student use. As a result of IDEA funds, officials reported that the district was able to ensure that students with disabilities receive assessment services and provide them more individualized assistance. The technology will allow the students to access the newer intervention software. District officials reported that their Recovery Act IDEA award activities were completed 50 percent or more.
Blackstone Valley Regional Vocational Technical High School Upton, MA 01568 Award amount: $215,190 Blackstone Valley Regional Vocational Technical High School reported that it used its Recovery Act IDEA award to fund administrative stipends for two special education personnel. These funds supported the single regional school in the district, affecting the entire special education population of 140 students. Specifically, the funds were used to support a special education chair whose purpose is to carry out many aspects of administration of special education, and a special education Team Leader whose purpose is to improve coordination within the department and among the different disciplines. As a result of these funds, officials reported that the school was able to integrate academic and vocational studies, revise its curriculum with recommendations from state and federal agencies, and assist with an inclusion program for special education students. Officials also said that these funds also resulted in coordination of individualized education program (IEP) services and reevaluations, provision of liaisons with parents, and improvement of services to Special Education students. They indicated that their Recovery Act IDEA award activities were more than 50 percent completed.
Bonham Independent School District Bonham, TX 75418 Award amount: $387,509 Bonham Independent School District reported that it used its Recovery Act IDEA award to purchase technology and instructional materials, provide professional development, and create one part-time position. Because students with special needs are included in the general education classroom, these funds affected all students in the district (approximately 2,000). Specifically, the funds were used to purchase technology and software for students with special needs, a special needs school bus, instructional materials, and additional technology for the classrooms. The award was also used for professional development for teachers working with students with special needs and to create one part-time social worker position. As a result of these IDEA funds, officials reported that the district was able to positively affect the ability of the teachers to improve their instructional techniques and increase student achievement. They also said that these funds resulted in better transportation of students with special needs so they can participate in school activities. Officials indicated that their Recovery Act IDEA award activities were more than 50 percent completed.
Christina School District Wilmington, DE 19801 Award amount: $4,954,517 Christina School District reported that it used its Recovery Act IDEA award to support Coordinated Early Intervention Services for students with disabilities who have academic or behavioral issues, to supplement funds to secondary schools for extended day and extended year programs for students with disabilities, to provide professional development to staff working with students with disabilities, and to expand birth-to-five activities for parents and students. These funds supported about 22 schools and 16,000 students. Specifically, the funds were used to: expand birth to 3- year-old parent and child programs in high-need areas; provide afternoon preschool programs for 30 children, construct an academic support center at one high school to assist and enrich students at a variety of achievement levels, hire academic and behavior interventionists to support student needs, conduct training in research-based instructional practices, and conduct formal-third party reviews of all schools to gather baseline information on the school's performance, and create professional development plans for the staff and school leaders. As a result of these IDEA funds, district officials reported seeing a significant improvement in behavioral referrals this school year and expect student enrollment and retention rates to improve as well as improvement in academic achievement over time. Officials indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Colton-Pierrepont Central School District Colton, NY 13625 Award amount: $41,595 Colton-Pierrepont Central School District reported that it used its Recovery Act IDEA award to keep in place a Response to Intervention reading program, purchase materials for this program, and retain one position. These funds supported one school with approximately 330 students and were specifically used for both special education students and regular education students to help prevent their classification into special education. Specifically, the funds were used to keep the district’s co- teacher model working by employing a special education teacher, purchase teaching materials to update literacy programs, and provide staff with high- quality, research-based professional development. As a result of these funds, officials reported that the district was able to retain its small class sizes by not having to reduce teaching staff. They also said that these funds resulted in the reading groups remaining small with the assistance of reading specialists to provide the best literacy instruction they need. Officials reported that their Recovery Act IDEA award activities were 50 percent or more completed.
DeKalb County School System Decatur, GA 30032 Award amount: $19,669,324 DeKalb County School System reported that it used its Recovery Act IDEA award to increase the achievement of students with disabilities. These funds affected roughly 20 high schools and 20 middle schools. Specifically, the funds were used to retain staff, hire additional board certified behavior analysts to support schools as needed, fund special education paraprofessionals, and hire lead teachers for special education to provide support to elementary schools. The funds were also used to provide professional development, provide personnel to supply ongoing coaching and support to school staff, and purchase equipment. As a result of these funds, officials reported that the district was able to improve the achievement of students with disabilities and provide elementary schools with more time with their existing lead teachers for special education. In addition, they said that the district was able to fund special education paraprofessionals who were previously paid through local dollars. Officials indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Eastern York School District Wrightsville, PA 17368 Award amount: $310,132 Eastern York School District reported that it used its Recovery Act IDEA award to provide services and mental health/behavioral counseling to students with disabilities as well as professional development to staff. These funds supported 35 schools across York County and 111 students. Specifically, the funds were used to provide transportation; occupational/physical therapy; speech, vision, and transition services to students; and Response to Instruction and Intervention and schoolwide positive behavior support training for instructional staff and paraeducators. As a result of these IDEA funds, officials reported that they were able to reduce dropout rates from 14 percent in the 2007-2008 school year to two percent in the 2009-2010 school year and continue to provide a low student-teacher ratio. District officials reported that their Recovery Act IDEA award activities were fully completed for the 2009-2010 school year, and they plan to continue these activities even after the Recovery Act funds expire.
Elko County School District Elko, NV 89803 Award amount: $1,402,931 Elko County School District reported that it used its Recovery Act IDEA award to assist in maintaining innovative programs that were in jeopardy of being eliminated. Funds were also used to incorporate new strategies and retain jobs. These funds supported approximately 1,500 students throughout the 22 schools in the district. Specifically, the funds were used for 25 percent of each of four RISE (a student retention and teacher mentor program) instructional coaches’ salaries; one RTI (Response to Intervention) coordinator, 25 percent of the salary of one special teacher who works with the administration of the Positive Behavior Support model across the district, and one teacher who provides support to teachers working with students with autism. In addition, a significant amount of professional development was offered, and SmartBoards, SmartResponse systems, audio enhancement technology, and other assistive technology were infused into the classrooms. As a result of these funds, officials reported that the district was able to provide additional instructional materials and resources for teachers, maximizing the impact on children directly as well as saving jobs. They also said that these funds resulted in efforts to positively affect student achievement. Officials indicated that their Recovery Act IDEA award activities were 50 percent or more completed.
Florence City Schools Florence, AL 35630 Award amount: $1,010,802 Florence City Schools reported that it used its Recovery Act IDEA award to provide instruction and support to at least 724 special needs children in eight schools. Specifically, the funds were used to retain or hire staff and purchase instructional software for Title I schools. As a result of these funds, officials reported that the district was able to save at least six instructional and clerical positions. They indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Galesville-Ettrick-Trempealeau School District Galesville, WI 54630 Award amount: $284,286 Galesville-Ettrick-Trempealeau School District reported that it used its Recovery Act IDEA award to improve literacy scores in grades K-8 for all students, including special education students. These funds supported four schools with a total student population of 950 students, 120 of whom are special education students. Specifically, the funds were used to add a middle school literacy program called Read 180, which includes books, software, and computers. Additionally, the funds were also used to hire a literacy coach for elementary schools. As a result of these IDEA funds, officials reported that the district was able to increase reading levels and help teachers identify students who struggle in reading and develop strategies to improve reading. They indicated that their Recovery Act IDEA award activities were more than 50 percent completed.
Glasgow K-12 Schools Glasgow, MT 59230 Award amount: $219,619 Glasgow K-12 Schools reported that it used its Recovery Act IDEA award to establish new learning centers to help at-risk students before and after school. These funds targeted 25 students with special needs or who are at risk in three schools. Specifically, the funds were used to hire three paraprofessionals to assist in these learning centers. As a result of these funds, officials reported that the district was able to increase the level of achievement, especially in the area of communication arts. They indicated that their Recovery Act IDEA activities were less than 50 percent completed.
Greenville County Schools Greenville, SC 29602 Award amount: $8,466,248 Greenville County Schools reported that it used its Recovery Act IDEA award to maintain the same level of Special Education Service delivery and support for Special Education students within the School District of Greenville County. These funds supported all preschool, elementary, middle, and high schools, as well as a number of special centers in the district (98 locations total) and served 10,251 students as of December 1, 2009. Specifically, the funds were used to retain personnel, as well as provide instructional and contract services, and purchase instructional materials and equipment. They also provided in-county travel mileage for staff members. As a result of these IDEA funds, officials reported that the district was able to save approximately 100 jobs, many of which were classroom positions. They also said that these funds resulted in maintaining classroom sizes to prevent compromising Special Education Services. Officials indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Harmony Science Academy (Waco) Waco, TX 77099 Award amount: $77,766 Harmony Science Academy (Waco) reported that it used its Recovery Act IDEA award to contract for services to provide professional development and educational materials for the special education teacher. These funds supported approximately 10 special education students being served at this school. Specifically, the funds were used to retain one special education teacher, provide new instructional materials, and provide professional development to the teachers. As a result of these funds, officials reported that the school was able to improve instruction for students. School officials indicated that their Recovery Act IDEA award activities were more than 50 percent completed.
Henry Johnson Charter School Albany, NY 12206 Award amount: $54,628 Henry Johnson Charter School reported that it used its Recovery Act IDEA award to add staff for Academic Intervention Services (AIS) math intervention. These funds targeted 20 to 25 students served daily by an AIS teacher. Specifically, the funds were used to hire an AIS math teacher to provide math intervention for students with special needs as well as those students who are struggling with math learning. As a result of these IDEA funds, officials reported that the school was able to improve math achievement and scores on standardized tests. They indicated that their Recovery Act IDEA award activities were fully completed.
Houston Independent School District Houston, TX 77092 Award amount: $42,407,819 Houston Independent School District reported that it used its Recovery Act IDEA award to retain and hire staff, provide professional development, purchase instructional materials, and provide social and emotional services. These funds served 297 schools and 200,345 students, including 16,503 IDEA students in grades K through 12 and 1,342 IDEA students in preschool. Specifically, the funds were used to restructure the school day and class size, support new professional development programs, provide resources to establish and support differentiated instructional programs and online learning, provide social and emotional support activities, and provide academic reinforcement. As a result of these funds, officials reported that the district was able to improve scores on standardized tests and increase graduation rates. They indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Hunterdon Central Regional High School Flemington, NJ 08822 Award amount: $625,920 Hunterdon Central Regional High School reported that it used its Recovery Act IDEA award to improve the district's self-contained programs in life skills education and the behavioral disabilities program and to improve core content instruction in special education academic settings. These funds supported approximately 500 students with special needs in the district’s single school. Specifically, the funds were used to hire consultants to train staff about behavioral interventions in the classroom and on using new computer-assisted materials that remediate writing, reading, and mathematics weaknesses. New materials were purchased to improve the depth of the curriculum offered in special education classrooms and that focus on the remediation of writing, reading, and math skills. In addition, personal computing devices will be purchased for special education students to assist with coursework completion. As a result of these funds, officials reported that the district was able to maintain programs for students with multiple disabilities and behaviorally disabled students. They also said that they anticipate improved test results on standardized state testing. They indicated that their Recovery Act IDEA award activities were 50 percent or more completed.
Lafayette School Corporation Lafayette, IN 47904 Award amount: $5,099,284 Lafayette School Corporation reported that it used its Recovery Act IDEA award to provide additional educational services for students with special needs and students with academic deficiencies. These funds have allowed increased educational services to 1550 IDEA students within the 11 schools in the school corporation. Specifically, the funds were used to hire additional staff to work with special needs students and students with academic needs. As a result of these IDEA funds, officials reported that Lafayette School Corporation was able to retain or hire staff for over 130 instructional positions to work with IDEA students. They also said that these funds resulted in the preservation of programs and maintenance of current student-teacher ratios. Officials indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Metropolitan School District of Decatur Township Indianapolis, IN 46221 Award amount: $764,847 Metropolitan School District of Decatur Township reported that it used its Recovery Act IDEA award to continue and expand IDEA reform efforts in the district by providing professional development for special education teachers. These funds supported the retention of nine teachers who function as instructional coaches, benefiting all students and teachers in the district. These instructional coaches concentrate half their time supporting professional development for staff who work with IDEA students, and half their time providing interventions for IDEA students. As a result of these funds, officials reported that in response to the increased focus on instructional strategies and smaller learning communities, they expect that IDEA students in all grades will have strong gains in standardized testing in areas where improvement was stagnant last year. In addition, officials report that they expect their graduation rate to continue to improve to at least 80 percent in the near future.. Officials indicated that their Recovery Act IDEA award activities were more than 50 percent completed.
Detroit Midtown Academy Detroit, MI 48201 Award amount: $79,647 Detroit Midtown Academy reported that it used its Recovery Act IDEA award to retain and improve the capacity of special education programming. These funds supported one school with approximately 52 students with special needs. Specifically, the funds were used to hire an additional full-time teacher, retain a part-time aide, purchase computer equipment for one special education lab, purchase additional instructional supplies, and purchase adaptive technology. As a result of these funds, officials reported that the school was able to maintain the current student- teacher ratio and improve scores on standardized tests because of greater use of instructional technology and new instructional materials. They indicated that their Recovery Act IDEA award activities were 50 percent or more completed.
Mattoon Community Unit School District #2 Mattoon, IL 61938 Award amount: $805,786 Mattoon Community Unit School District #2 reported that it used its Recovery Act IDEA award to implement a vocational program for IDEA students in high school and retain staff who work with IDEA students. These funds benefited all students in the district, which serves about 3,300 students, including approximately 700 IDEA students. Specifically, the funds were used to retain and hire staff who work with IDEA students, as well as for professional development of IDEA staff, and the purchase of some new equipment for IDEA students. As a result of these funds, officials reported that the district increased graduation rates among IDEA students. They indicated that their Recovery Act IDEA award activities were more than 50 percent completed.
Menifee Union Elementary Menifee, CA 92584 Award amount: $3,040,489 Menifee Union Elementary reported that it used its Recovery Act IDEA award to integrate more special education pupils into the regular curriculum. These funds supported 11 schools and 811 pupils. Specifically, the funds were used to retain staff and provide professional development for classroom management and instructional delivery to pupils. As a result of the IDEA funds, officials reported that the district was able to save 50 positions and improve learning opportunities for students. They indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Mesa Arts Academy Mesa, AZ 85210 Award amount: $36,983 Mesa Arts Academy reported that it used its Recovery Act IDEA award for staff salaries and to purchase supplies and computer equipment to maintain or improve the quality of special education services. These funds supported one school serving approximately 230 children, including 15 special education students. Specifically, the funds were used to increase the instructional hours of the speech and special education teachers, as well as purchase supplies, assistive technology, and computer equipment. As a result of these IDEA funds, officials reported that school increased special education students’ access to resources and instruction. They indicated that their Recovery Act IDEA award activities were more than 50 percent completed.
Omaha Public Schools Omaha, NE 68131 Award amount: $14,300,464 Omaha Public Schools reported that it used its Recovery Act IDEA award to expand early-childhood services, expand the district's data systems, increase teacher effectiveness through professional development, and undertake dropout prevention efforts. IDEA funds were also used for assistive technology and summer school expansion programs for students with special needs. These funds covered 79 schools and seven alternative programs, which serve 49,079 students. Specifically, the funds were used to implement an online assessment system to support classroom instruction, provide professional development for instructional staff, increase student support to prevent students from dropping out of school, implement an online system for Individualized Education Programs, and expand early childhood programming. As a result of these funds, officials reported that the district was able to improve scores on state reading and mathematics tests, decrease the dropout rate, increase the graduation rate, increase the number of high-need children in prekindergarten programs, and create or retain 298 jobs. They also said that these funds resulted in more learning opportunities for the students by expanding the school day and offering summer school and tutoring. Officials indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Oxnard Elementary Oxnard, CA 93030 Award amount: $2,773,322 Oxnard Elementary reported that it used its Recovery Act IDEA award to start up a cochlear implant classroom in the district, which required special acoustics, and furniture and included the hiring and training of a teacher. These funds served three students in the district and approximately six more from neighboring districts. In particular, the funds were used to create a classroom, train staff, and buy supplies. As a result of these IDEA funds, officials reported that the district was able to provide services locally at a much reduced cost rather than sending students to an institute in Los Angeles. They also said that the district can now serve students in their own district as well as students in surrounding districts. The cochlear implant classroom will open in the 2010-2011 school year. Officials indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Pasadena Independent School District Pasadena, TX 77502 Award amount: $10,757,671 Pasadena Independent School District reported that it used its Recovery Act IDEA award to improve and enhance programming for students with disabilities. These funds affected all schools and all special needs students (approximately 3,800) in the district. Specifically, the funds were used to retain special education staff, add support staff such as diagnosticians and transition teachers, implement data management systems for special education programs, and provide professional development for staff who work with special needs students in the area of autism, inclusion/co-teach, and other specialized programming. As a result of these IDEA funds, officials reported that the district was able to maintain 26 support positions to improve instructional practices resulting in improved student outcomes, and improve data integrity to meet compliance requirements. They also said that these funds resulted in improved functioning capability and skills of campus and district staff in order to build capacity to sustain improvement. Officials indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Pima Accommodation District Tucson, AZ 85701 Award amount: $16,917 Pima Accommodation District reported that it used its Recovery Act IDEA award to provide related special education services to the new 18–to 21- year-old special education inmates at the Pima County Adult Detention Facility so that they can acquire a General Equivalency Diploma or work toward high school completion. These funds targeted 32 students in one school. Specifically, the funds were used to purchase direct and support services, buy instructional material, provide special education staff development, and provide inmates with transitional support. As a result of these funds, officials reported that the district was able to provide 4 hours of daily instruction in the adult special education classroom to inmates at the jail facility. They indicated that their Recovery Act IDEA award activities were fully completed.
Pinellas County Schools Largo, FL 33770 Award amount: $25,539,310 Pinellas County Schools reported that it used its Recovery Act IDEA award to enhance services to students with disabilities by providing Response to Intervention/Early Intervening Services (EIS) and by providing services to private school students with disabilities. These funds supported all 122 Pinellas schools. Specifically, the funds were used to hire instructional and content coaches for RTI/EIS and social workers for counseling services for students with disabilities as well as to hire Exceptional Student Education teachers to serve private school students with disabilities. Funds were also used to provide teacher training and to provide instructional materials and technology for students with disabilities, students requiring RTI/EIS, and private school students with disabilities. As a result of these IDEA funds, officials reported that the district was able to improve achievement for students with disabilities and students requiring RTI/EIS. Officials indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Puritas Community School Cleveland, OH 44135 Award amount: $41,797 Puritas Community School reported that it used its Recovery Act IDEA award to provide ongoing high-quality special education services to students who need assistance in their educational processes and experiences. These funds covered 13 special needs students out of a total student population of 196. Specifically, the funds were used to retain staff. As a result of these IDEA funds, officials reported that the school was able to retain 0.25 full-time-equivalent staff to maintain its special education program for all students. They indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Sacramento City Unified Sacramento, CA 95824 Award amount: $10,069,615 Sacramento City Unified reported that it used its Recovery Act IDEA award to retain instructional staff, provide professional development for special education staff and upgrade facilities to include an occupational therapy clinic at a school that serves a large number of special education students.. These funds served approximately 2,000 students with special needs in the district. Specifically, the funds were used to retain special education staff, provide professional development for instructional staff, and to make school facility upgrades so that students could receive occupational therapy services while at school rather than being bussed to another location. As a result of these IDEA funds, officials reported that the district was able to increase academic proficiency in California Standards Tests (CST) and retain approximately 10 instructional positions. In addition, the facility update allowed students with special needs to receive services during their school day, thereby reducing disruptions to their education. They indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Salt Lake District Salt Lake City, UT 84111 Award amount: $5,757,525 Salt Lake City School District officials reported that it used its Recovery Act IDEA award for five main purposes. First, they used the funds to develop and expand their capacity to collect and use data for student achievement and progress monitoring in 28 elementary schools and 5 middle schools as a way to improve teaching and learning. To that end, they retained a special education supervisor to oversee implementation of ARRA-funded activities; hired a part-time data specialist to support data collection, analysis and reporting requirements; contracted a parent liaison to help parents understand the use of data for decision making; and purchased laptops and personal digital assistants for approximately 56 itinerant support staff (e.g., occupational therapists, school psychologists) who are responsible for monitoring student progress.
Second, officials reported that they used the funds to obtain and upgrade assistive technology devices for approximately 375 students in special classes at 22 elementary and three middle schools. Specifically, they purchased computers, monitors, and technology assistance for the academic and behavior support classrooms in the elementary schools and purchased computers, applications, and site licenses for reading, math, and science instruction in the middle schools. In addition, officials provided training for approximately 140 special and regular education teachers in using the technology to improve instruction and monitor student progress.
Third, Salt Lake City School District officials used the funds to hire high school transition and compliance coaches at the district’s four high schools to work with employers in the community, postsecondary schools, and 44 high school special education teachers to develop appropriate transitions for approximately 750 high school and post-high special education students. For all high school special education teachers, the district used the funds for professional development on transition issues. The district also has plans to hire a certified teacher to support students in acquiring adult living skills and participating in adult basic education classes; hire eight job coaches to support students in integrated job settings, and contract with the University of Utah special education department for job coach training and monitoring of student job training outcomes.
Fourth, officials reported that they used the funds to provide intensive districtwide professional development for 75 special education and regular education teachers at 28 elementary schools and 5 middle schools that focus on scaling-up evidence-based, schoolwide strategies to improve behavioral outcomes, interventions and supports for students with disabilities. Furthermore, the district hired 2.5 licensed clinical social workers for the middle schools and 3 behavior staff to support schools with intervention plans for students, implement least restrictive behavioral interventions, and train staff in behavior de-escalation.
Finally, Salt Lake City School District used its Recovery Act IDEA award to improve language arts, math, and science instruction and student outcomes through providing intensive district-wide professional development for 130 special education and regular education teachers in evidence-based, schoolwide strategies to improve outcomes for students with disabilities. To assist teachers, district officials hired 6 special education interns to support selected elementary schools in early intervening services in reading and math; 2.5 elementary special education academic coaches to improve student achievement in elementary academic support and behavior support classes; two elementary and middle school special education academic coaches to improve student achievement in elementary and middle school functional academic classes; 3.5 speech language pathologists to support elementary schools in literacy acquisition programming; and a .5 autism specialist and 2 autism coaches to support students with high functioning autism. Each school also received supplemental and intensive interventions curricula to support students with disabilities. In addition, the district plans to purchase research-based curriculum for language arts, math, and science for middle school and high school special education classrooms and professional development on effective instruction for special and general education teachers.
Overall, Salt Lake School District officials reported that through the use of the Recovery Act IDEA funds, they have created or retained a total of 38 jobs and obtained technology and software for special education staff, classrooms, and students to use for student record keeping, teaching and learning. They expect to involve other stakeholders (e.g., parents, universities) in identifying appropriate outcomes for students with disabilities; increase the graduation rate and reduce the dropout rate of students with disabilities; prepare students with disabilities for adult- oriented outcomes, increase the capacity of special education and general education teachers to teach and accommodate (both academically and behaviorally) students with disabilities; design more efficient systems and processes to improve compliance and to meet the state performance plan indicators; and increase grade-level achievement of students with disabilities in language arts and math. Officials indicated that their Recovery Act IDEA award activities were more than 50 percent completed.
San Antonio Independent School District San Antonio, TX 78210 Award amount: $2,144,674 San Antonio Independent School District reported that it used its Recovery Act IDEA award to enhance each special education program to support activities that will improve results for students. These funds served over 5,900 students at over 90 campuses across the district. Specifically, the funds were used on a full range of activities including professional development, computer software packages for instructional programs and student data management, upgrade of technology equipment in classrooms serving special education programs, purchase of assistive technology, and parent involvement activities. As a result of these funds, officials reported that the district was able to improve student achievement and performance resulting in reduced dropouts, higher graduation rates, and improved postsecondary student outcomes, as well as retaining teaching and other instructional support staff positions. They indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
San Dieguito Union High Encinitas, CA 92024 Award amount: $1,431,581 San Dieguito Union High School District officials reported that it used its Recovery Act IDEA award for four main activities. First, officials told us that they used the funds to train 25 staff in writing transition plans for students who have individualized education programs (IEP) and working with autistic students. Therefore, officials could ensure staff members’ compliance with writing transition plans and decrease the use of nonpublic agencies for students with autism. Second, officials reported that they used the funds for special education students at eight schools by assisting them with making up course credits and implementing a literacy program called Read 180. Officials told us that they were able to decrease the number of special education students who are credit deficit in the twelfth grade and improve their reading success. Third, the officials told us that they used $577,456 of the funds to reduce contributions from the district’s general fund. They could therefore pay for nonpublic schools and agencies that provide services for students with special needs. Last, officials reported that they replaced seven older buses that serve 63 students in need of transportation per their IEP. Specifically, the buses that were replaced were 1988-1995 models that had between 250,000-399,000 miles. The buses went into service in May 2010 and have allowed San Dieguito Union High to increase the reliability of its transportation. Officials indicated that their Recovery Act IDEA award activities were more than 50 percent completed.
San Juan Unified Carmichael, CA 95609 Award amount: $9,330,839 San Juan Unified reported that it used its Recovery Act IDEA award to focus on instruction and best practices for all administrators and teachers, from pre-K to grade 12. These funds affected 1,000 IDEA students in 50 school sites, and were used to hire two reading coaches and two behavior specialists. Additionally, 100 teachers, 30 psychologists, and 20 administrators participated in intensive behavior training. Specifically, the funds were used to implement an intensive reading intervention for IDEA students, train staff to build positive behavior interventions, replace and upgrade older computers for 11 psychologists and five other special education managers, and establish a preschool special education class equipped with preschool furniture and playground equipment for students with disabilities. As a result of these IDEA funds, officials reported that the district was able to develop reading skills for IDEA students, implement positive behavior interventions in schools and dramatically reduced school suspensions in some schools, and improve preschool programs. They indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Scholarts Preparatory School Columbus OH 43236 Award amount: $72,409 Scholarts Preparatory School reported that it used its Recovery Act IDEA funds for professional development as well as technology purchases. The funds supported the professional development in data-driven instruction and assessment planning of two school administrators and 15 instructional staff, including special education teachers. Overall, 180 students in the school, and specifically 110 special education students were affected by the funds. Specifically, by paying salaries, the school used its Recovery Act IDEA funds for special education support services such as tutoring, psychologists, social workers, and transportation. The funds were also used to purchase SmartBoards and associated technology for schoolwide use that the school could not afford in the past. As a result of these funds, officials reported that the school was able to pay approximately five to six teacher salaries, increase its professional development program, and enhance classroom instruction through the use of technology. School officials said they also hoped to increase standardized test scores. They indicated that their Recovery Act IDEA award activities were completed.
Sea Girt Borough Public Schools Sea Girt, NJ 08750 Award amount: $43,835 Sea Girt Borough Public Schools reported that it used its Recovery Act IDEA award to provide all special education teachers with a full range of multisensory approaches to improve the teaching of reading. It also offset the unbudgeted cost due to specific individualized education program (IEP) demands. These funds supported approximately 10 to15 percent of the single school district’s 180 students. Specifically, the funds were used to provide professional development (i.e., Wilson Training and instructional materials) and make capital improvement to the classroom through installation of infrared sound field systems. As a result of these IDEA funds, officials reported that the district was able to increase classified students' ability to perform on all academic assessments (i.e., greater reading proficiency) and continue with regular established programs to the benefit of all students. Officials indicated that their Recovery Act IDEA award activities were more than 50 percent completed.
South Pointe Public Charter Middle School Phoenix, AZ 85020 Award amount: $33,948 South Pointe Public Charter Middle School reported that it used its Recovery Act IDEA award to improve scores on standardized tests, increase special education students’ access and understanding of the general education curriculum, and enhance supports and instructional modifications for special education students in the inclusive setting. These funds served over 35 special education students. Specifically, the funds were used to hire a part-time special education coordinator to enhance supports and instructional modifications, purchase instructional materials, and provide related services for special education students such as speech, physical therapy, psychological, hearing, and vision services. As a result of these funds, officials reported that the school was able to improve standardized test scores, improve dropout and graduation rates, and increase understanding of and accessibility to the general education curriculum. They indicated that their Recovery Act IDEA award activities were more than 50 percent completed.
Southwest Schools Houston, TX 77057 Award amount: $422,874 Southwest Schools reported that it used its Recovery Act IDEA award to increase instructional staff and provide additional related services. These funds served 285 IDEA students across five campuses. Specifically, the funds were used to increase instructional staff by hiring one educational diagnostician and one licensed specialist in school psychology; provide additional professional development for instructional staff; purchase supplemental instructional material; provide additional related services such as speech therapy occupational therapy, and physical therapy for students with disabilities; and provide one-on-one aides for autistic students. As a result of these IDEA funds, officials reported that the district was able to improve IDEA students’ performance in the classroom and on standardized tests and increase graduation rates for IDEA students. They indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Special School District Baton Rouge, LA 70802 Award amount: $125,077 Special School District reported that it plans to use its Recovery Act IDEA award to focus on improving student performance. These funds will serve 550 special education students in 13 programs. Specifically, the funds will be used to purchase research-based, technology-rich instructional programs focused on literacy and numeracy, and provide professional development teachers with instructional materials and strategies. As a result of these funds, officials reported that they expect improved academic achievement, especially in literacy and numeracy areas, enhanced student engagement, and teacher growth. Officials indicated that their Recovery Act IDEA award activities have not started.
Telfair County School District McRae, GA 31055 Award amount: $334,766 Telfair County School District reported that it used its Recovery Act IDEA award to maintain a low student-teacher ratio; increase inclusion as a model for special education students; use implementation specialists in reading/English language arts, math, and technology to support best practices with teaching staff; train staff in direct instruction; and increase the use of technology in the classrooms. These funds covered all 1,800 students in the district and over 200 teachers, including 22 special education teachers and 5 Pre-K teachers. Specifically, the funds were used to hire implementation specialists in reading/English language arts, math, and technology for job-embedded training and staff development in grades K-8, as well as to initiate a specialized program to meet the needs of special learners and decrease achievement gaps. As a result of these IDEA funds, officials reported that the district was able to encourage implementation of standard-based instruction using best practices in all schools. They also said that these funds resulted in maintenance of a low student-teacher ratio, enabling the district to better support student learning, which they expect will increase the academic performance of struggling students on standardized tests. Officials indicated that their Recovery Act IDEA award activities were more than 50 percent completed.
Tennessee School for the Deaf Knoxville, TN 37920 Award amount: $37,051 Tennessee School for the Deaf, a residential facility for deaf and hard-of- hearing students, reported that it used its Recovery Act IDEA award to purchase classroom supplies and two-way radios to be used by principals and other administrators in case of an emergency. These funds supported each of its three schools (an elementary, middle, and high school) and approximately 180 students from across the state of Tennessee. Specifically, the funds were used to purchase instructional materials and emergency radio equipment. As a result of funds, officials reported that the school was able to enhance students' learning through instructional materials. Additionally, they said that two-way radios will be used in emergency situations to relay information quickly to the school departments. Officials indicated that their Recovery Act IDEA award activities were more than 50 percent completed.
The Max Charter School Houma, LA 70364 Award amount: $22,423 The Max Charter School reported that it used its Recovery Act IDEA award to improve academic progress and standardized tests scores for students with disabilities and at-risk students. These funds covered students districtwide, including approximately 65 students of the 106 enrolled at Max Charter School (61 percent of the LEA's membership). Specifically, the funds were used to hire three part-time paraprofessionals to provide small- group instruction/remediation to at-risk and learning disabled students and to hire two instructional staff to provide after school remediation and tutoring to at-risk and learning disabled students. As a result of these funds, officials reported that the school was able to create five part-time instructional positions. Additionally, they said that the activities were expected to increase academic progress and proficiency and scores on standardized tests in English language arts and math for at-risk students and students with disabilities. School officials indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Tippecanoe School Corporation Lafayette, IN 47909 Award amount: $2,663,788 Tippecanoe School Corporation reported that it used its Recovery Act IDEA award to hire and pay staff and provide additional educational services for students with special needs and academic deficiencies. By using these funds to retain or hire over 130 instructional positions who work with IDEA students, the funds have allowed increased educational services to 1,563 IDEA students in the school corporation. Specifically, as part of the Greater Lafayette Area Special Services (GLASS) cooperative, Tippecanoe School Corporation worked with Lafayette School Corporation and West Lafayette School Corporation to hire additional staff to work with special needs students and students with academic needs. As a result of these funds, officials reported that the school corporation and the special education cooperative to were able to preserve programs and maintain current student-teacher ratios. Officials indicated that their Recovery Act IDEA award activities were more than 50 percent completed.
Tucson Unified District Tucson, AZ 85719 Award amount: $4,938,806 Tucson Unified District reported that it used its Recovery Act IDEA award to hire and retain staff to provide services to students with disabilities, order assistive technology, and purchase updated software for students with academic difficulties. These funds supported over 8,000 students with special needs who receive services in more than 100 schools in the district. Specifically, the funds were used to hire 15 new teachers and over 30 new paraprofessionals to work with students on a one-to-one basis. Other staff were contracted to provide therapy services and translate documents into Spanish. Additionally, devices for better movement, sight, and hearing were used to meet the adaptive needs of students. Updated software was ordered for students with academic difficulties and for better case management of these students. As a result of these IDEA funds, officials reported that they expect the district to improve academic performance and help students gain access to the general curriculum. They indicated that their Recovery Act IDEA award activities were more than half completed.
Twinsburg City Schools Twinsburg, OH 44087 Award amount: $798,028 Twinsburg City Schools reported that it used its Recovery Act IDEA award to create staff positions and provide staff development. These funds were used in all five schools in the district. These schools together serve approximately 400 special education students. The district also used the funds to add approximately five staff positions. Specifically, the funds were used for staff development, to add two instructional staff and three instructional assistants, and to purchase technology for special education classrooms, such as SmartBoards and projectors. Additional items were purchased for the district to provide an after-school game club for students with special needs to promote peer interaction. As a result of these IDEA funds, officials reported that the district improved student achievement by reducing class size and the caseload in the special education program to provide students with special needs the same extracurricular opportunities as their peers. District officials reported that their Recovery Act IDEA award activities were less than 50 percent completed.
Waconia Public School District Waconia, MN 55387 Award amount: $696,390 Waconia Public School District reported that it used its Recovery Act IDEA award to maintain staff and its student-teacher ratio, especially in the elementary grade levels. These funds targeted two schools and approximately 178 students with special needs. Specifically, the funds were used to retain staff. As a result of these funds, officials reported that the district was able to save four instructional positions and maintain its current student-teacher ratio. They indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Wareham Public Schools Wareham, MA 02571 Award amount: $443,782 Wareham Public Schools reported that it used its Recovery Act IDEA award to improve prekindergarten and kindergarten services, decrease class size, retain staff, provide professional development, purchase instructional materials and software, and implement a new program. These funds supported approximately 600 students with special needs, in addition to approximately 345 regular education students in inclusion classrooms throughout the district’s eight schools. Specifically, the funds were used to hire an elementary school special education teacher, retain special education teachers at the middle and high school levels, provide professional development for staff who work with students with special needs, provide seed money for a new alternative placement program for behaviorally challenged special education students, purchase instructional materials for students with special needs and an IEP software program (E- SPED). The funds were also used to decrease class size at the elementary level in inclusion programs. As a result of these funds, officials reported that the district was able to reduce district costs by implementing the new program and improve the network for data retrieval and collection. They indicated that their Recovery Act IDEA award activities were less than 50 percent completed.
Wayzata Public School District Wayzata, MN 55391 Award amount: $2,301,098 Wayzata Public School District reported that it used its Recovery Act IDEA award to provide services to students with disabilities and to prevent the need for future services by concentrating on early identification and intervention. These funds targeted 11 sites with a total of 1,100 students benefiting directly from the funds. Specifically, the funds were used to continue to dedicate 2 percent of the district’s $100 million budget for staff development activities on a districtwide basis. As a result of these funds, officials reported that the district was able to continue staff development through education and integration, which allowed the teachers to properly identify strategies to assist students with special needs. They also said that these funds resulted in enhanced student learning. Officials indicated that their Recovery Act IDEA award activities were 50 percent or more completed.
West Salem School District West Salem, WI 54669 Award amount: $367,098 West Salem School District reported that it used its Recovery Act IDEA award to hire a staff person to help teachers improve lesson plans for special education students, purchase a software program for special education students, purchase textbooks for special education students; and purchase equipment for students with physical disabilities. The district has additional plans to remodel a classroom to improve accessibility for students with physical disabilities. These funds served 186 special education students across the district. Specifically, the funds were used to hire an experienced special education teacher to teach general education high school teachers how to modify tests and assignments for special education students and how to address modifications and accommodations for students with IEPs; purchase a software program for special education students that enables them to follow a modified version of the general education curriculum, purchase textbooks for students with learning disabilities who read at lower reading levels, and purchase two Hoyer Lifts for students with physical disabilities in middle school. The district also has plans to remodel a classroom to increase accessibility for students with physical disabilities. As a result of these IDEA funds, officials reported that they expect reading scores to increase, the quality of instruction for students with disabilities to improve (especially in inclusion classes), and the school to have a more accessible classroom for students with physical disabilities. Officials indicated that their Recovery Act IDEA award activities were more than 50 percent completed.
ESEA Title I, Part A Grants to Local Educational Agencies: Selected Subrecipient (LEA) Descriptions
The Recovery Act provides $10 billion to help local educational agencies educate disadvantaged youth by making additional funds available beyond those regularly allocated through Title I, Part A of the Elementary and Secondary Education Act of 1965, as amended (ESEA). These additional funds are to be distributed through states to LEAs using existing federal funding formulas, which target funds based on such factors as high concentrations of students from families living in poverty. In using the funds, LEAs are required to comply with current statutory and regulatory requirements and must obligate 85 percent of the funds by September 30, 2010. Education is advising LEAs to use the funds in ways that will build the agencies’ long-term capacity to serve disadvantaged youth, such as through providing professional development to teachers.
Given that few descriptions fully met our transparency criteria, we administered a web-based survey to school district superintendents in the 50 states and the District of Columbia to determine how they are using Recovery Act funds. We conducted our survey between March and April 2010, with a 78 percent final weighted response rate. We selected a stratified random sample of 575 LEAs from the population of 16,065 LEAs included in our sample frame of data obtained from the Common Core of Data in 2007-2008. Of this sample, we randomly selected 150 LEAs (50 for each program) to gather illustrative information on how they used their Recovery Act funds. See appendix VII for more information on how we designed our survey. What follows are summaries of how these LEAs described their use of Recovery Act Title I, Part A funds, based on their survey responses as well as information we collected through follow-up communications.
Alamo Heights Independent School District San Antonio, TX 78209 Award amount: $181,506 Alamo Heights Independent School District reported that it used its Recovery Act Title I award to retain a teaching position and increase the effectiveness of its teachers. These funds supported one teacher who serves at-risk children in reading and math at and professional development for several teachers in two other schools, affecting about 100 students all together. The professional development was in Data Director, a software program that allows data disaggregation to better inform curricular and instructional decisions. As a result of these funds, officials reported that the district was able to save an instructional position and improve test scores of at-risk students. They indicated that their Recovery Act Title I award activities were less than 50 percent completed.
Arizona Call-a-Teen Youth Resources, Inc. Phoenix, AZ 85003 Award amount: $37,375 Arizona Call-a-Teen Youth Resources, Inc., reported that it used its Recovery Act Title I award to increase student achievement in math and reading. These funds targeted 125 students at one school. Specifically, the funds were used to retain staff, purchase instructional materials, and provide professional development. As a result of these Title I funds, officials reported that they were able to save two instructor positions. They also said these funds resulted in improved scores on standardized tests. Officials reported that their Recovery Act Title I activities were 50 percent or more completed.
Arlington Independent School District Arlington, TX 76013 Award amount: $11,345,205 Arlington Independent School District reported that it used its Recovery Act Title I award to provide Title I resources to students who attend campuses that were eligible, but not previously served under Title I; improve instructional practices; provide supplemental resources for students; and enhance the family involvement program. These funds supported approximately 42 Title I campuses serving about 32,000 students and families who live in Title I attendance zones. Specifically, the funds were used to hire additional curriculum specialists to work directly with teachers, a social worker to provide support for families, a Spanish language translator to meet the oral and written needs of families, and a fathers’ outreach liaison to work specifically to get more fathers involved with their children's education. The funds were also used to provide professional development for instructional staff and coaches and to purchase instructional materials and technology for classrooms. As a result of Title I funds, officials reported that the district was able to improve the achievement of students, improve classroom teaching using 21st century technology and materials, and better meet the needs of families so that the children may improve their academic achievement and attendance. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Austin Independent School District Austin, TX 78703 Award amount: $22,974,560 Austin Independent School District reported that it used its Recovery Act Title I award to support English language learners’ academic achievement and math and science achievement in elementary and middle schools. The district also used its funds to support credit recovery and dropout prevention, and increase graduation rates in addition to intervention and supports for persistently low-performing schools. These funds supported over 50,000 students in 52 elementary schools, 10 middle schools, and 5 high schools. Specifically, the funds were used to hire staff and purchase supplies and materials, including computer equipment, software, and site licenses. Instructional materials and curriculum were purchased to support math and science education at the elementary and middle school levels. Science Technology Engineering and Mathematics (STEM) materials and equipment were purchased for use at the high school level. The funds were also used to provide professional development, additional intervention to struggling students, and support for parent involvement and college and career readiness. As a result of these Title I funds, official reported that the district was able to continue full-day prekindergarten, improve scores on standardized tests, improve rigor and uniformity of math and science instruction, turnaround struggling schools, and improve academic performance for English language learners. They also said that these funds resulted in the creation of 16 positions and the retention of approximately 26 positions. Officials indicated that their Recovery Act Title I award activities were less than 50 percent completed.
Beal City Public Schools Mt. Pleasant, MI 48858 Award amount: $28,009 Beal City Public Schools reported that it used its Recovery Act Title I award to purchase technology that would assist a specific group of boys who were struggling in reading. These funds targeted 30 to 40 fifth grade boys in the district’s elementary school, who according to test scores, were lagging behind in reading. Specifically, the funds were used to purchase technology that included computers, a SmartBoard, projectors, and Kindles for intensive direct instruction in reading. As a result of these Title I funds, officials reported that the district was able to increase scores on standardized tests for the male students. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Bourbonnais School District 53 Bourbonnais, IL 60914 Award amount: $138,439 Bourbonnais School District 53 reported that it used its Recovery Act Title I award to expand the use of technology in early interventions with at-risk students. These funds supported 300 students at four schools. Specifically, the funds were used to hire extra staff for after school and summer school programs and provide cutting edge technology to support these programs. As a result of these Title I funds, officials reported that the district was able to decrease the number of elementary students who are currently academically at risk. They indicated that their Recovery act Title I activities were 50 percent or more completed.
Callaway Public Schools Callaway, NE 68825 Award amount: $19,230 Callaway Public Schools reported that it used its Recovery Act Title I award to acquire technology to aid in computer-assisted instruction for Title I students. These funds supported approximately 40 students in the elementary school. Specifically, the funds were used to purchase a SmartBoard and a projector. As a result of these Title I funds, officials reported that the district was able to increase student test scores on classroom assessments, as well as standardized test scores. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Camden City Public Schools Camden, NJ 08102 Award amount: $6,397,060 Camden City Public Schools reported that it used its Recovery Act Title I award to provide professional development for instructional staff and purchase materials to implement a reading program. These funds covered all schools in the district, which includes 5 high schools, 5 middle schools, and 22 elementary schools that serve 12,068 students. Specifically, the funds were used to provide an intensive districtwide reading program, including professional development and an intense data component that allows teachers and administrators to track the students’ progress. The funds were also used to provide additional tutoring services for those students who are failing or most at risk of failing to meet the state’s academic achievement standards. As a result of these Title I funds, officials reported that they expected improved scores on standardized state tests. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Cedar Ridge School District Newark, AR 72562 Award amount: $160,979 Cedar Ridge School District reported that it used its Recovery Act Title I award to enhance the curriculum, ensure that high-quality instruction is being delivered in every classroom, ensure that curriculum frameworks are being taught at every grade level; find strengths and weaknesses in the curriculum, and assist and ensure that the curriculum is taught at the appropriate level. These funds supported approximately 852 students at two elementary schools and one junior/senior high school. Specifically, the funds were used to hire an assistant superintendent of curriculum and instruction and a resource officer. Professional development time was given to teachers to develop pacing guides, and Compass Learning software was purchased to provide assistance to teachers. As a result of these Title I funds, officials reported that they expect standardized test scores to increase. They also said that these funds helped teachers become more effective and the curriculum become more enriched Officials indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Colon Community School District Colon, MI 49040 Award amount: $140,013 Colon Community School District reported that it used its Recovery Act Title I award to implement a Title I Preschool and offer summer school for students not achieving at grade level. These funds supported 16 students in preschool and 40 students in summer school. Specifically, the funds were used to retain one staff member, hire one staff member, and purchase some instructional materials. As a result of Title I funds, officials reported that the district met the challenge of closing its socioeconomic gaps by providing preschool opportunities and by offering summer school. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Commerce City Schools Commerce, GA 30529 Award amount: $140,824 Commerce City Schools reported that it used its Recovery Act Title I award to retain personnel and provide professional development. These funds supported an elementary school and a primary school. Specifically, the funds were used to retain two teachers and one paraprofessional and use one academic coach for professional development related to science curriculum at the elementary school. As a result of these Title I funds, officials reported that the district was able to retain three staff positions and maintain programs. They also said that these funds allowed the district to pay for professional development. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Cotter School District Cotter, AR 72626 Award amount: $173,280 Cotter School District reported that it used its Recovery Act Title I award to lower the student-teacher ratio and enhance instructional effectiveness. These funds supported a student population of approximately 350 at Amanda Gist Elementary, a K-6 school. Specifically, the funds were used to provide professional development to teachers, retain a licensed teacher and a paraprofessional, and purchase instructional materials for literacy and mathematics and technology hardware and software for instructional use. As a result of these funds, officials reported that the district was able to save two instructional positions and provide additional instructional materials and current technology. They also said they anticipate these funds will result in increased student achievement, higher graduation rates, and greater college or technical school completion rates. Officials indicated that their Recovery Act Title I award activities were less than 50 percent completed.
Des Moines Independent Community School District Des Moines, IA 50309 Award amount: $6,550,371 Des Moines Independent Community School District reported that it used its Recovery Act Title I award to increase the number of schools receiving Title I services, to initiate a School Improvement Leader model, and to provide instructional materials in reading and math. These funds increased Title I support in 7 schools (2 high schools, 1 middle school, 4 elementary schools) serving a total of 4,000 students, supported 6 School Improvement Leaders (3 at each of 2 middle schools) serving a total of 1,000 students, and targeted more than 60 schools districtwide serving over 30,000 students. Specifically, the funds were used to retain staff at schools previously designated as Title I, hire additional staff to increase the number of schools receiving Title I services, and purchase reading and math instructional materials. As a result of these Title I funds, officials reported that the district was able to retain 11 to 14 positions, maintain its current level of Title I services, and improve achievement in reading and math. They indicated that their Recovery Act Title I award activities were less than 50 percent completed El Paso Independent School District El Paso, TX 79998 Award amount: $28,173,486 El Paso Independent School District reported that it used its Recovery Act Title I award to attain high student achievement, provide a challenging learning environment, and graduate mentally, emotionally, and physically healthy students who are lifetime learners. These funds supported each of the 76 Title I schoolwide campuses serving 54,195 students. Specifically, the funds were used to retain and hire staff, provide professional development activities for instructional staff, integrate instructional technology in the classroom, and purchase other instructional materials. As a result of these Title I funds, officials said that the district expects to improve scores on standardized tests, decrease the number of schools in school improvement, and increase the number of students that graduate on time that are ready for college or the world of work. These funds also resulted in the retention of 50 instructional positions and maintained the current student-teacher ratio. District officials reported that Recovery Act Title I award activities were less than 50 percent completed.
Escondido Union High School District Escondido, CA 92027 Award amount: $637,836 Escondido Union High School District reported that it used its Recovery Act Title I to purchase instructional equipment. These funds targeted three comprehensive school sites that serve over 7,700 students. Specifically, the funds were used to purchase equipment for an LCD projector installation project. Technology components that were added to the classrooms were computers to run software for the at-risk math and reading students. In addition, there was a technology component of the State Adopted Materials that required additional equipment for the teachers to use in classroom instruction. As a result of these Title I funds, officials reported that the district was able to upgrade its instructional technology. They indicated that their Recovery Act Title I award activities were less than 50 percent completed.
Fairland Local School District Proctorville, OH 45669 Award amount: $380,588 Fairland Local School District reported that it used its Recovery Act Title I award to create instructional positions and will also use funds from the award to retain instructional positions and purchase computer equipment for two elementary schools. The district will also use funds from the award to provide a substitute teacher for intervention services. As a result of these Title I funds, officials reported that the district has been able to create two instructional positions and reduce class size. District officials reported that their Recovery Act Title I award activities were less than 50 percent completed.
Goddard Public Schools USD 265 Goddard, KS 67052 Award amount: $203,973 Goddard Public Schools USD 265 reported that it used its Recovery Title I award to promote programs that help students acquire skills needed to succeed in life and provide services to students deficient in reading and math skills and foundational academic skills to all. These funds supported four elementary schools serving approximately 1,950 students. Specifically, the funds were used to retain staff. As a result of Title I funds, district officials said they were able to maintain the district’s student-teacher ratio of approximately 22 to 1 and save two teaching positions. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Green Woods Charter School Philadelphia, PA 19128 Award amount: $131,622 Green Woods Charter School reported that it used its Recovery Act Title I award to provide additional supports for at-risk students in reading and math. These funds supported a single charter school that serves approximately 220 students. Specifically, the funds were used to hire new staff, purchase instructional materials, and provide new professional development opportunities for instructional staff. Additionally, classroom libraries, communications systems for parents, and computers for classrooms were purchased. Substitutes were also provided so teachers could attend professional development, and a part-time reading specialist was hired. As a result of these Title I funds, officials reported that the school was able to improve test scores. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Greene County Tech School District Paragould, AR 72450 Award amount: $345,010 Greene County Tech School District reported that it used its Recovery Act Title I award to improve student achievement by updating technology and providing supplies. These funds supported the district’s five schools that serve approximately 3,600 students. Specifically, the funds were used to update technology and purchase supplies, which assisted with remediation efforts for state achievement tests. As a result of these Title I funds, officials reported that the district was able to improve student achievement on the state tests and improve graduation rates. They indicated that their Recovery Act award activities were less than 50 percent completed.
Gurdon School District Gurdon, AR 71743 Award amount: $157,722 Gurdon School District reported that it used its Recovery Act Title I award to improve technology in classrooms and provide instruction for teachers. These funds targeted three schools and affected approximately 750 students. Specifically, the funds were used to retain one teacher, hire a classified instructional staff member and purchase 56 multimedia classroom sets. As a result of these Title I funds, officials reported that the district was able to maintain its student-teacher ratio and expects student scores to increase 15 percent. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Hillsborough County Public Schools Tampa, FL 33602 Award amount: $36,169,731 Hillsborough County Public Schools reported that it used its Recovery Act Title I award to provide professional development, early intervention activities, curriculum support for academic achievement, instructional technology, and career and college ready support. These funds supported 125 Title I schools serving approximately 80,000 students. Specifically, the funds were used to provide additional guidance services to high-need elementary schools, hire additional tutors to work with students at Level 1 and 2 on the state assessment, establish a robotics pilot at 24 schools to support math and science at STEM feeder schools, and hire additional reading coaches at high-poverty elementary schools. The funds were provided to participating private schools to support additional services to Title I eligible students. Title I funds were also used to provide additional performance pay at the district's highest-poverty schools in order to better recruit and retain instructional staff, provide professional development in content and pedagogical areas for teachers, upgrade instructional technology and hardware, establish a Parent Involvement Pilot in the district's urban core to better engage parents in the education of their children, and purchase instructional materials to support early childhood programs. As a result of these Title I funds, officials reported that the district was able to improve academic achievement for students on state- administered assessments. They indicated that their Recovery Act Title I activities were 50 percent or more completed.
Imagine Charter Elementary At Camelback, Inc. Phoenix, AZ 85053 Award amount: $57,864 Imagine Charter Elementary At Camelback, Inc., reported that it used its Recovery Act Title I award to install technology to aid in tutoring activities for at-risk students. These funds targeted 60-70 students per week at one location. Specifically, the funds were used to install six interactive whiteboards in Title I pull-out rooms and Title I tutoring rooms. The funds were also used to provide professional development for teachers providing the tutoring services. As a result of these Title I funds, officials reported that they hope to see an increase in their standardized testing. They indicated that their Recovery Act Title I award activities were fully completed.
Integrated Design Electronics Academy Washington, DC 20019 Award amount: $228,868 Integrated Design Electronics Academy reported that it used its Recovery Act Title I award to retain staff. These funds targeted one school with 450 students. Specifically, the funds were used to retain teachers. As a result of these Title I funds, officials reported that the school was able to save 12 instructional positions and maintain the current student-teacher ratio. They also said that the funds resulted in improved scores on standardized tests and increased graduation rates. Officials indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Irvington Community School Indianapolis, IN 46219 Award amount: $251,501 Irvington Community School reported that it used its Recovery Act Title I award to improve student achievement in computation skills and comprehension of nonfiction texts and writing skill, and to provide intensive, targeted interventions to students in all grade levels in order to improve achievement in all academic areas. These funds supported four staff positions at the K-8 building, which serves approximately 420 students and one staff position at the high school which serves approximately 280 students. Specifically, the funds were used to retain two current staff members, and ICS’s Lead Teacher and Math Coach and hire three new staff members, a math aide, a literacy aide, and an aide at the high school. These Title I funds were also used to support programs and services including parental involvement, professional conferences for teachers, assessment materials, and curriculum materials for use by the Title I team. Two “family nights” were hosted in order to get parents involved in literacy and math activities, and the Fountas and Pinnell diagnostic system was purchased to use in assessing students’ reading abilities and plan instruction. As a result of these funds, officials reported that the school was able to implement a Response to Intervention program to address the individual needs of each student. The school also expects to increase student achievement on standardized and norm-referenced tests, improve student performance in classrooms, reduce retention rates, and achieve and maintain an acceptable graduation rate for their students. Officials also said that use of the funds is intended to improve teacher performance, provide teachers with a variety of instructional strategies for differentiated instruction, provide parents with additional resources for supporting their children’s education at home, and bridge the home-school connection. Officials indicated that their Recovery Act Title I award activities were less than 50 percent completed.
Jefferson County Public Schools Louisville, KY 40232 Award amount: $33,736,253 Jefferson County Public Schools reported that it used its Recovery Act Title I award to move students to proficiency in reading and math. These funds supported 97 schools serving approximately 49,000 students. Specifically, the funds were used to retain full-time staff and/or hire part-time staff; purchase technology items, such as SmartBoards; and purchase books or other reading and math items. As a result of these funds, officials reported that the district was able to save over 31 teacher positions, and 11 instructional assistant positions, and hire over 44 retired teachers to work with students in small groups. They also expect scores on standardized tests to improve. Officials indicated that their Recovery Act Title I award activities were less than 50 percent completed.
Katy Independent School District Katy, TX 77492 Award amount: $2,914,931 Katy Independent School District reported that it used its Recovery Act Title I award to improve student performance, build capacity of instructional staff, enhance digital learning, and maintain high-quality English as a Second Language/bilingual staff and a safe, comfortable learning environment. These funds supported 20 campuses that serve approximately 13,429 students. Specifically, the funds were used to provide professional development and purchase technology and instructional materials. The funds were also used for supplemental tutorials, parent involvement activities, and staff retention. As a result of these Title I funds, officials said that the district was able to increase student achievement and parent involvement. They also said that these funds resulted in highly effective teachers, more teachers who were trained for English language learners, increased use of digital tools to enhance instruction, and an improvement in program effectiveness and the quality of services. Officials indicated that their Recovery Act Title I award activities were less than 50 percent completed.
KIPP Austin Public Schools, Inc. Austin, TX 78724 Award amount: $154,743 KIPP Austin Public Schools, Inc., reported that it used its Recovery Act Title I award to add staff, provide professional development, and purchase technology. These funds supported three schools and approximately 630 students. Specifically, the funds were used to create two instructional coaching positions in math and science and purchase a new software platform for collecting and analyzing student data. As a result of these Title I funds, officials reported that the school was better able to access data. They also said these funds resulted in improved results on state and national assessments. Officials indicated that their Recovery Act Title I award activities were less than 50 percent completed.
Lakeview Community Schools Columbus, NE 68601 Award amount: $65,274 Lakeview Community School reported that it used its Recovery Act Title I award to retain the reading coach position in the district. These funds supported the reading coach, who serves both elementary schools and approximately 300 students. Specifically, the funds were used to retain the reading coach at the elementary level. As a result of these funds, officials reported that the district was able to maintain and improve upon their reading skills for all students, especially for those students who are English language learners. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Legacy Education Group Mesa, AZ 85207 Award amount: $56,622 Legacy Education Group reported that it used its Recovery Act Title I award to increase technology and classroom teaching materials. These funds supported one K-8 charter school. Specifically, the funds were used to create a position that is responsible for data-driven decision-making processes. As a result of these funds, officials reported that the school was able to improve student performance. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Medford School District 549C Medford, OR 97501 Award amount: $2,185,314 Medford School District 549C reported that it used its Recovery Act Title I award to retain teaching staff and other resources to continue serving children's educational programs and needs. These funds supported seven elementary schools in the district serving approximately 3,500 students. Specifically, the funds were used to retain teaching personnel. As a result of these funds, officials reported that the district was able to retain approximately 77 full-time-equivalent positions, roughly maintain student- teacher ratios, and limit the number of budget-cut days for the 2010 school year. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Memphis City School District Memphis, TN 38112 Award amount: $57,244,262 Memphis City School District reported that it used its Recovery Act Title I award to improve academic achievement. These funds supported approximately 100,000 students in over 175 schools. Specifically, the funds were used for intervention initiatives, to retain and hire staff, provide professional development for instructional staff, and purchase student instructional materials for project base learning. As a result of these funds, officials reported that the district was able to retain more than 180 pre-K positions and more than 35 district-level instructional support positions. They also said that the funds resulted in improved student scores on standardized tests by adding more than 120 staff positions for academic intervention. District officials reported that their Recovery Act Title I activities were less than 50 percent completed.
Milford Exempted Village School District Milford, OH 45150 Award amount: $346,795 Milford Exempted Village School District reported that it used its Recovery Act Title I award to improve student achievement, particularly in reading and math. These funds supported approximately 1,000 at-risk students, but could affect all 6,400 students in the district. Specifically, the funds were used to add instructional staff and purchase materials and software for the at-risk students. The funds were also used to provide professional development in reading and math strategies. As a result of these funds, officials reported that the district was able to create one part-time reading coach position and four part-time teacher positions. They also said they expect improvement in achievement scores for all student subgroups in reading and math. They indicated that their Recovery Act Title I award activities were less than 50 percent completed.
Milford School District Milford, CT 06460 Award amount: $377,262 Milford School District reported that it used its Recovery Act Title I award to enhance student achievement at the middle school level in math and English. These funds supported approximately 10 percent of the student enrollment. Specifically, the funds were used to hire morning and afternoon staff to provide math and English instruction through morning and afternoon programs to students who were not proficient. As a result of Title I funds, officials reported that they expect results on the Connecticut Mastery test to improve, with more students achieving proficiency. District officials indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Muncie Community Schools Muncie, IN 47304 Award amount: $2,496,075 Muncie Community Schools reported that it used its Recovery Act Title I award to save and create staff positions, purchase technology, and fund professional development. These funds supported seven elementary schools serving approximately 2,940 students in grades K through 5. Specifically, the funds were used for professional development and supplies to implement the school improvement initiative. Funds were also used to purchase technology, such as computers and SmartBoards. As a result of these funds, officials reported that the district was able to save and create a total of four positions that include an interventionist and three data coaches. They also said that the funds resulted in improved student achievement. Officials indicated that their Recovery Act Title I award activities were less than 50 percent completed.
Neenah School Neenah, WI 54956 Award amount: $376,149 Neenah School reported that it used its Recovery Act Title I award to provide professional development for teaching staff, create an instructional coach position, provide time for staff to analyze data, and hire a facilitator to assist in the analysis. These funds targeted six campuses, but because of the nature of the fund use, all or nearly all 6,500 students in the district were directly or indirectly affected. Specifically, the funds were used to create one Response to Intervention (RTI) instructional coach position, provide RTI professional development for instructional staff, and contract with a personal services facilitator to help with the data analysis and interpretation. As a result of these funds, officials reported that the district was able to improve its approaches to and techniques for teaching, which should have a positive impact on student achievement. They indicated that their Recovery Act Title I award activities were 50 percent or more completed New Foundations Charter School Philadelphia, PA 19136 Award amount: $401,559 New Foundations Charter School reported that it used its Recovery Act Title I award to improve science, technology, and special education. These funds supported approximately 575 students at one school. Specifically, the funds were used to purchase technology, such as SmartBoards for classrooms, graphing calculators, and a software program called Read 180. Additionally, the funds were used to hire technology support personnel, provide professional development, and purchase instructional materials, such as FOSS (Full Option Science System) science materials. As a result of these funds, officials reported that the school was able to improve student outcomes on standardized tests and hire one technology support personnel. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Northeastern Clinton Central School District Champlain, NY 12919 Award amount: $119,554 Northeastern Clinton Central School District reported that it used its Recovery Act Title I award to improve literacy instruction and enhance state test results. These funds supported three schools in a 1,400-student district. Specifically, the funds were used to retain staff. As a result of these funds, officials reported that the district was able to create a new position when a current employee became the literacy coach and hire a replacement. They indicated that their Recovery Act Title I award activities were less than 50 percent completed.
Orange County Public Schools Orlando, FL 32801 Award amount: $29,879,628 Orange County Public Schools reported that it used its Recovery Act Title I award to provide supplemental services to students to ensure they make continuous academic improvement. These funds supported all 70 Title I schools and approximately 42,000 students. Specifically, the funds were used to retain reading coaches at all 70 schools, 50 math and science coaches, 19 social workers, 11 Student Assistance Family Empowerment coordinators at middle schools, and a guidance counselor at the Juvenile Assessment Center. As a result of these funds, officials reported that the district expects increased student performance on standardized reading, math and science exams and anticipates improved graduation rates. They indicated that their Recovery Act Title I award activities were fully completed.
Paintsville Independent Schools Paintsville, KY 41240 Award amount: $240,013 Paintsville Independent Schools reported that it used its Recovery Act Title I award to improve student services and instruction. These funds supported one school with 400 students. Specifically, the funds were used to retain staff and programs, add technology to classrooms, and provide professional development to staff. As a result of these Title I funds, officials said the district was able to save four Title I teacher positions, improve instruction, and improve student academic results. District officials indicated that their Recovery Act Title I award activities were 50 percent or more completed.
San Antonio Can! High School Dallas, TX 75208 Award amount: $2,099,018 San Antonio Can! High School reported that it used its Recovery Act Title I award for retaining instructional positions schoolwide that would have been lost without these funds. Specifically, the funds were used to retain one instructional staff position. As a result of these Title I funds, officials reported that the school was able to maintain its low student-teacher ratio and increase the number of graduates by 12. They also said that they are expecting additional graduates after the July Texas Assessment of Knowledge and Skills (TAKS) administration. They indicated that their Recovery Act Title I award activities were less than 50 percent completed.
San Leandro Unified School District San Leandro, CA 94579 Award amount: $607,453 San Leandro Unified School District reported that it used its Recovery Act Title I award to hire staff, get intervention opportunities, purchase materials and equipment to accelerate support for student learning, and fund programs to increase Adequate Yearly Progress in all significant subgroups. These funds supported approximately 1,300 Title I students at five elementary sites. Specifically, the funds were used to retain and hire staff, provide professional development, and purchase instructional materials. As a result of these funds, officials said the district was able to increase standardized test scores. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Santa Ana Unified School District Santa Ana, CA 92701 Award amount: $11,429,961 Santa Ana Unified School District reported that it used its Recovery Act Title I award to maintain positions and staff development programs. These funds supported 62 schools with approximately 54,000 students. Specifically, the funds were used to retain staff both certificated and classified and to pay for the salaries of teachers on special assignments who support teachers through staff development, demonstration lessons, and the coordination of instructional materials. As a result of these Title I funds, officials reported that the district was able to maintain 62 special assignment teachers. They indicated that their Recovery Act Title I award activities were fully completed.
Wiggins School District RE-50J Wiggins, CO 80654 Award amount: $57,733 Wiggins School District RE-50J reported that it used its Recovery Act Title I award to hire a math coach. These funds supported 55 students in the middle school in addition to teachers the math coach worked with. As a result of these funds, officials reported that they expect to see student math test scores improve. They indicated that their Recovery Act Title I activities were more than 50 percent completed.
Scottsdale Unified District Phoenix, AZ 85018 Award amount: $2,352,308 Scottsdale Unified District reported that it used its Recovery Act Title I award to strategically fund positions, activities, and items that will help all students to improve academically. These funds supported over 5,500 Title I students in seven schoolwide and two targeted Title I programs. Specifically, the funds were used to fund academic intervention specialists at several Title I schools, provide funding for items needed to expand Title I pre-K programs, and purchase instructional materials, supplies, and software to support interventions at Title I schools. Funds were also used to support ongoing professional development by funding instructional coaches at several Title I schools and by funding the registration and travel fees associated with Title I teachers and administrators attending professional development workshops. As a result of these funds, officials reported they expect to see improvement in student academic achievement and see increases in student state test scores. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Somerset Independent Schools Somerset, KY 42502 Award amount: $427,661 Somerset Independent Schools reported that it used its Recovery Act Title I award to serve students in middle grades, where services were not provided previously. These funds targeted one middle school that serves approximately 350 students. Specifically, the funds were used to retain a math resource teacher, a reading resource teacher, and an instructional assistant and to provide Response to Intervention (RTI) services. As a result of these funds, officials reported that the district was able to save three positions that would have been lost. They also said they expect an increase in scores on state tests. Officials indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Summit Academy of Alt Learners Akron, OH 44305 Award amount: $59,898 Summit Academy of Alt Learners reported that it used its Recovery Act Title I award to upgrade its instructional materials. These funds covered a complete replacement and replenishment of instructional materials for all learners. Specifically, the funds were used to purchase new literacy, math, science and social studies materials, which are fully integrated with computer support. As a result of these Title I funds, officials reported that they expect to see improved scores on state tests, improved attainment of individualized education programs (IEP) goals, and more engagement on the part of their reluctant learners. School officials reported that their Recovery Act Title I award activities were 50 percent or more completed Susquehanna Township School District Harrisburg, PA 17109 Award amount: $225,856 Susquehanna Township School District reported that it used its Recovery Act Title I award to purchase new materials, add additional courses, and provide staff development. These funds supported two schools with a total of 112 teachers and 1,257 students. Specifically, the funds were used to provide additional staff development to the teachers in positive discipline and instructional strategies. As a result of these funds, officials reported that the district was able to improve scores on standardized tests, decrease problems with student discipline, and increase student attendance. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Texas School for the Deaf Austin, TX 78704 Award amount: $72,743 Texas School for the Deaf reported that it used its Recovery Act Title I award to enhance instructional and student support services for its deaf and hard-of-hearing students, increase the number of parents and teachers that have access to school data, and increase the number of teachers receiving professional development. These funds covered 165 professional development workshops for teachers and targeted the parents of the 552 students and 427 teachers and staff. Specifically, the funds were used to provide additional assistive technology equipment, such as adaptive keyboards and touch screen monitors, as well as graphing calculators for high school students, and instructional hardware and software. The school has also purchased internal student information system software for individualized education program management. As a result of these funds, officials reported that the school was able to improve parent and staff access to instructional information and improve the number of highly qualified staff. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Volusia County Schools Deland, FL 32720 Award amount: $15,267,330 Volusia County Schools reported that it used its Recovery Act Title I award to increase the capacity for schools to close the achievement gap between subgroups. These funds supported all students at 65 schools consisting of 37 elementary schools, 9 middle schools, 1 middle/high school, 3 high schools, 11 alternative schools, and 4 charter schools. Specifically, the funds were used for academic coaches for staff development on best practices identified by the state, the expansion of the AVID (Advancement Via Individual Determination) Program in secondary schools, dedicated teaching professionals for intervention and intensive instruction for low- performing students, expanded classroom libraries, and supplemental educational materials to enhance the core instruction. As a result of these funds, officials reported that the district was able to retain or create 427 jobs to direct every AVID student toward the appropriate path to graduation. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Yuma 1 School District Yuma, CO 80759 Award amount: $97,899 Yuma 1 School District reported that it used its Recovery Act Title I award for teacher retention and the purchase of intervention materials and computers. These funds were spread across three schools serving approximately 350 students who had poor math or reading scores. Specifically, the funds were used to retain an intervention teacher and purchase two computers. As a result of Title I funds, officials reported that the district was able to retain one intervention specialist position and prevent larger intervention class sizes at the middle school. They indicated that their Recovery Act Title I award activities were 50 percent or more completed.
Scope and Methodology
To understand how the Office of Management and Budget (OMB) and Education facilitated implementation of Recovery Act requirements for recipients to describe the use of funds, we reviewed the Act for reporting requirements. We also reviewed reporting guidance established by OMB, the Recovery Board, and any supplemental guidance and technical assistance developed by Education for the three programs covered in our review. We met with OMB, Education, and Recovery Board officials to gain an understanding of the reporting requirements and systems.
To assess the extent to which descriptions of awards transparently described how funds were being used, we utilized a GAO transparency assessment methodology developed for our May 2010 report on Recovery Act transparency. This assessment was based on the requirements of the Recovery Act; OMB’s guidance, including OMB’s Recipient Reporting Data Model; the Federal Funding Accountability and Transparency Act of 2006; and professional judgment. We considered descriptions of awards transparent if they conveyed, in a manner understandable to the general public, a basic understanding of the activities to be carried out and the expected outcomes. This effort was meant to be an assessment of transparency only with regard to the specific reporting fields we reviewed, not to Recovery.gov as a whole or to the Administration’s efforts to make this information available frequently and in a timely manner.
In assessing transparency, we reviewed all prime recipient award records on Recovery.gov as of April 30, 2010, for the three education programs covered in this review. Similar to the transparency review we conducted in May 2010, we reviewed the required fields on Recovery.gov that describe the uses of Recovery Act funds, including project name, award description, and quarterly activities/project description. In addition to these fields, we reviewed the description of jobs created field. For this field, prime recipients were advised by Education to briefly describe the types of jobs created or retained. Education officials told us that this field may contain important information that would help the public understand how states are using their Recovery Act funds. In addition, as reported in our December 2009 bimonthly report, we found that creating and retaining jobs was the top use of funds for all three of the programs we reviewed. Finally, because the education programs in our review provide states with formula grants that state education agencies (SEA) pass through to LEAs, we also reviewed the number, location, and award amount of subawards reported on Recovery.gov by prime recipients.
To apply our transparency criteria, we discerned if the information on Recovery.gov contained the following specific attributes: general purpose of the award (e.g., retaining funding for K-12 schools or nature of activities being conducted (e.g., purchases of educational technology and training of instructional support staff), location (where award activities are being conducted; e.g., school district or city), status (percentage complete), outcome (what is expected to be achieved; e.g., increased student achievement reflected by higher test scores), and scope (i.e., number of schools or students covered by project).
Using these seven attributes and our professional judgment, we assessed information in the selected data fields for understandability, clarity, and completeness. Two analysts independently reviewed information on each award from the selected fields and then compared results to reach a consensus on whether the description fully met, significantly met, partially met, or did not meet the transparency criteria. If they could not agree, a third analyst reviewed the award information without regard to the original determinations and made a deciding assessment. Descriptions that were understandable, clear, and complete met our transparency criteria. Descriptions that contained information for almost all the attributes cited above (purpose, nature of activities, location, and so on) “significantly met” our transparency criteria, while those that contained some information were considered to “partially meet” our transparency criteria. Descriptions that contained little or no information did not meet our transparency criteria. Finally, for the recipient reports we reviewed, we performed a number of electronic edit checks on the awards for the prime recipients, including any associated subrecipients, to determine whether there were possible anomalies in the award information. We also discussed data reliability issues with OMB and Education to ensure data quality.
In addition to the review described above, we met with federal officials and state and local officials responsible for recipient reporting in 15 states and the District of Columbia included in our bimonthly review to discuss the procedures for compiling and reporting information on Recovery Act funds and how information on awards is made available to the public.
To obtain national-level information for our bimonthly review on how Recovery Act SFSF education stabilization funds; ESEA Title I, Part A funds; and IDEA Part B for school-aged children funds were used at the local level, we designed and administered a Web-based survey of local educational agencies (LEAs) in the 50 states and the District of Columbia. We surveyed school district superintendents across the country to learn how Recovery Act funding was used and what impact these funds had on school districts. Given that few descriptions fully met our transparency assessment, we included on this survey several questions related to how LEAs were using funds from these three programs. We conducted our survey between March and April 2010, with a 78 percent final weighted response rate. We selected a stratified random sample of 575 LEAs from the population of 16,065 LEAs included in our sample frame of LEAs obtained from Education’s Common Core of Data in 2007-2008. We selected a nongeneralizable subsample of 50 LEAs per education program we reviewed (150 LEAs total) to provide illustrative information on how LEAs are using their Recovery Act funds. We took steps to minimize nonsampling errors by pretesting the survey instrument with officials in 5 LEAs in January and February 2010.
We did not determine whether federal agencies or prime recipients selected the awards discussed in this report to ensure that the awards met the requirements of the Act or whether the recipients met the Act’s eligibility requirements. We conducted this performance audit from February 2010 through July 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. As part of our work, we assessed the reliability of certain Recovery Act data that were pertinent to our effort. We determined that the data elements were sufficiently reliable for our purposes.
GAO Contact and Staff Acknowledgments
GAO Contact
Cornelia Ashby (202) 512-7215 or [email protected].
Staff Acknowledgments
James Ashley, Edward Bodine, Karen Brown, Jessica Botsford, Amy Buck, Karen Febey, Hedieh Fusfield, Alexander Galuten, Bryon Gordon, Sonya Harmeyer, Sheila McCoy, Jean McSween, Elizabeth Morrison, James Rebbe, Catherine Roark, Crystal Robinson, Beverly Ross, Susan Sachs, Michelle Verbrugge, Charles Willson, and Sarah Wood made significant contributions to this report.
Related GAO Products
Recovery Act: Increasing the Public’s Understanding of What Funds Are Being Spent on and What Outcomes Are Expected, GAO-10-581, Washington, D.C.: May 27, 2010.
Electronic Government: Implementation of the Federal Funding Accountability and Transparency Act of 2006, GAO-10-365, Washington, D.C.: March 12, 2010.
Congressionally Mandated Bimonthly Reviews of Recovery Act Funds
Recovery Act: States’ and Localities’ Uses of Funds and Actions Needed to Address Implementation Challenges and Bolster Accountability, GAO-10- 604 (Washington, D.C.: May 26, 2010).
Recovery Act: States’ and Localities’ Uses of Funds and Actions Needed to Address Implementation Challenges and Bolster Accountability (Appendixes), GAO-10-605SP (Washington, D.C.: May 26, 2010).
Recovery Act: One Year Later, States’ and Localities’ Uses of Funds and Opportunities to Strengthen Accountability, GAO-10-437 (Washington, D.C.: Mar. 3, 2010).
Recovery Act: Status of States’ and Localities’ Use of Funds and Efforts to Ensure Accountability, GAO-10-231 (Washington, D.C.: Dec. 10, 2009).
Recovery Act: Status of States’ and Localities’ Use of Funds and Efforts to Ensure Accountability (Appendixes), GAO-10-232SP (Washington, D.C.: Dec. 10, 2009).
Recovery Act: Funds Continue to Provide Fiscal Relief to States and Localities, While Accountability and Reporting Challenges Need to Be Fully Addressed (GAO-09-1016, Washington, D.C.: Sept. 23, 2009).
Recovery Act: Funds Continue to Provide Fiscal Relief to States and Localities, While Accountability and Reporting Challenges Need to Be Fully Addressed (Appendixes) (GAO-09-1017SP, Washington, D.C.: Sept. 23, 2009).
Recovery Act: States’ and Localities’ Current and Planned Uses of Funds While Facing Fiscal Stresses, GAO-09-829 (Washington, D.C.: July 8, 2009).
Recovery Act: States’ and Localities’ Current and Planned Uses of Funds While Facing Fiscal Stresses (Appendixes), GAO-09-830SP, Washington, D.C.: July 8, 2009.
Recovery Act: States’ and Localities’ Current and Planned Uses of Funds While Facing Fiscal Stresses, GAO-09-831T (Washington, D.C.: July 08, 2009).
Recovery Act: As Initial Implementation Unfolds in States and Localities, Continued Attention to Accountability Issues Is Essential (GAO-09-580, Washington, D.C.: Apr. 23, 2009).
Recovery Act: As Initial Implementation Unfolds in States and Localities, Continued Attention to Accountability Issues Is Essential (GAO-09-631T, Washington, D.C.: Apr. 23, 2009). | Why GAO Did This Study
The American Recovery and Reinvestment Act of 2009 (Recovery Act) provides $70.3 billion for three education programs--the State Fiscal Stabilization Fund (SFSF), Title I of the Elementary and Secondary Education Act (Title I), and Individuals with Disabilities Education Act (IDEA). The Act requires recipients to be accountable for how these funds are being used and what is being achieved. To help attain the level of transparency needed for accountability, recipients are to report quarterly on their award activities and expected outcomes. This information is available to the public on Recovery.gov, the government's official Recovery Act Web site. This report covers three Education programs funded by the Recovery Act. It (1) describes what the Office of Management and Budget (OMB) and the Department of Education (Education) did to facilitate implementation of requirements for recipients to describe the use of funds and (2) assesses the extent to which award descriptions are transparent It also describes reported fund uses for a sample of subrecipients. GAO reviewed requirements for reporting in the Act as well as guidance provided by OMB and Education. GAO assessed the transparency of descriptions for the three education programs on Recovery.gov.
What GAO Found
Both OMB and Education provided guidance to recipients on how to meet the Recovery Act requirement that they report quarterly on the amount and use of the funds they have received. OMB's guidance was generic for all agencies and instructed recipients to report narrative information that captures the overall purpose of the award, describes projects or activities, and states the expected results. Education's guidance was supplemental and program specific to its formula grants that pass through states as the prime recipient to subrecipients, which are local educational agencies (LEA) and institutions of higher education. However, the Recovery Act reporting system does not provide specific narrative fields for collecting information on how each subrecipient is using the funds. Instead, the states are tasked with reporting on fund use throughout the state, and the reporting system limits the amount of narrative information states may enter. For states with many subrecipients, including detailed information on how each subrecipient is using the funds would be extremely challenging, if not impossible. To ease the reporting burden for prime recipients, Education's guidance provided recipients with suggested standard language for use in important narrative fields. GAO determined that 9 percent of the descriptions fully met our transparency criteria; that is, they had sufficiently clear and complete information on the award's purpose, scope and nature of activities, location, cost, outcomes, and status of work. Most descriptions did not include sufficient information on local fund use. Specifically, while 13 percent had most but not all information, the remaining 78 percent contained much less information and only partially met attributes for transparency. We did not find any descriptions that did not include at least some of the information needed to inform the public. Descriptions limited to Education's standard language were less transparent than those with specific information on the programs and activities subrecipients conducted in the state. For example, officials from seven Texas LEAs told us they used ESEA Title I Recovery Act funds for technology purchases for at-risk students, although the information in Texas' project description uses only the standard language. Guidance on reporting requirements for Recovery Act grants that pass through a prime recipient to a subrecipient should balance the need for transparency with the reporting burden and these system limitations. While most states cannot provide information on how each subrecipient is using its funds, providing more information than Education's standard language, such as an overview analysis of how localities are spending the funds, could help the public gain a better understanding of how the funds are being used.
What GAO Recommends
GAO recommends that the Secretary of Education, in consultation with OMB, remove the suggested language for the project description field from its guidance and instruct states to include information, to the extent possible, on how the funds are being used and potential project outcomes or results. |
gao_GAO-02-3 | gao_GAO-02-3_0 | Introduction
An election is the act or process by which citizens cast a vote to select an individual for an office. Although an election is a single event, an election system involves the integration of the people, processes, and technology that are generally associated with the preparation and administration of an election. The basic goals of election systems in the United States are to enable every eligible citizen who wishes to vote to cast a single ballot in private and have the votes on that ballot counted accurately. Administering an election is a year-round activity that generally consists of the following: Voter registration--This includes local election officials registering eligible voters and maintaining voter registration lists to include updates to registrants’ information and deletions of the names of registrants who are no longer eligible to vote.
Absentee and early voting--This type of voting allows eligible persons to vote in-person or by mail before election day.
The conduct of an election--This aspect of election administration includes preparation before election day, such as local election officials arranging for polling places, recruiting and training poll workers, designing ballots, and preparing voting equipment for use in casting and tabulating votes; and election day activities, such as opening and closing polling places and assisting voters to cast votes.
Vote counting--This includes election officials tabulating the cast ballots; determining whether and how to count ballots that cannot be read by the vote counting equipment; certifying the final vote counts; and performing recounts, if required. As shown in figure 3, each stage of an election involves people and technology.
Major Federal Voting Requirements
Under its various constitutional authorities, Congress has passed legislation regarding the administration of both federal and state elections, including voter registration, absentee voting, accessibility provisions for the elderly and handicapped, and prohibitions against discriminatory practices. Congress enacted the National Voter Registration Act of 1993 (NVRA) commonly known as the “Motor Voter” Act, to establish registration procedures designed to “increase the number of eligible citizens who register to vote in elections for Federal office,” without compromising “the integrity of the electoral process” or the maintenance of “accurate and current voter registration rolls.” NVRA expanded the number of locations and opportunities for citizens to apply to register. For example, under NVRA, citizens are to be able to apply to register (1) when applying for or renewing a driver’s license; (2) at various state agencies, such as public assistance centers; or (3) by mailing a national voter registration application to a designated election official. NVRA also establishes requirements to ensure that state programs to identify and remove from voter registration rolls the names of individuals who are no longer eligible to vote are uniform, nondiscriminatory, and do not exclude a voter from the rolls solely because of his or her failure to vote. Finally, NVRA requires that the Federal Election Commission (FEC) submit to Congress a biennial report with recommendations assessing the impact of the NVRA on the administration of elections for federal office during the preceding 2-year period.
The Uniformed and Overseas Citizens Absentee Voting Act of 1986 (UOCAVA) requires that states permit the following categories of citizens to apply to register and vote by absentee voting in federal elections: (1) members of the uniformed services living overseas, (2) all other citizens living overseas, and (3) uniformed services voters and their dependents in the United States who are living outside of their voting jurisdiction.
In addition, the Voting Accessibility for the Elderly and Handicapped Act of 1984 requires, with some exceptions, election jurisdictions to provide alternate means of casting a ballot (e.g., absentee and early voting) for all elections in which election day polling places are not accessible to people with disabilities.
Congress, however, has been most active with respect to enacting prohibitions against discriminatory voting practices. For example, the Voting Rights Act of 1965 codifies and effectuates the Fifteenth Amendment’s guarantee that no person shall be denied the right to vote on account of race or color. Subsequent amendments to the Act expanded it to include protections for members of language minority groups, as well as other matters regarding voting registration and procedures.
State Responsibilities
States regulate the election process, including, for example, ballot access, registration procedures, absentee voting requirements, establishment of voting places, provision of election day workers, and counting and certification of the vote. As described by the Supreme Court, “the tates have evolved comprehensive, and in many respects complex, election codes regulating in most substantial ways, with respect to both federal and state elections, the time, place, and manner of holding primary and general elections, the registration of voters, and the selection and qualification of candidates.” In fact, the U.S. election system comprises 51 somewhat distinct election systems—those of the 50 states and the District of Columbia. However, although election policy and procedures are legislated primarily at the state level, states typically have decentralized this process so that the details of administering elections are carried out at the city or county levels, and voting is done at the local level.
Election Administration
At the federal level, no agency bears direct responsibility for election administration. However, in 1975, Congress created FEC to administer and enforce the Federal Election Campaign Act. To carry out this role, FEC discloses campaign finance information; enforces provisions of the law, such as limits and prohibitions on contributions; and oversees the public funding of presidential elections. FEC’s Office of Election Administration (OEA) serves as a national clearinghouse for information regarding the administration of federal elections. As such, OEA assists state and local election officials by developing voluntary voting system standards, responding to inquiries, publishing research on election issues, and conducting workshops on matters related to election administration.
The administrative structure and authority given to those responsible for elections vary from state to state. The majority of states vest election authority in a secretary of state (or other state cabinet-level official) who is elected for a term of 2 to 4 years. The approval of voting equipment for use in a state may be a responsibility of the secretary of state or another entity, such as a State Board of Elections. State officials usually provide information services and technical support to local election jurisdictions but seldom participate in the day-to-day administration of an election.
Local Election Jurisdictions Conduct Elections
Local election jurisdictions, such as counties, cities, townships, and villages, conduct elections, including federal and state contests. Although some states bear some election costs, it is local jurisdictions that pay for elections and provide the officials who conduct the elections. Local election administration officials may be elected, appointed, or be professional employees. State or local regulations determine who functions as the chief elections official. Elections may be conducted by county or town clerks, registrars, election boards, bureaus, or commissions, or some combination thereof. The election administration official may have extensive or little experience and training in running elections. Local jurisdictions administer elections within the framework of state laws and regulations that provide for differing degrees of local control over how elections are conducted, including voting equipment to be used, ballot design, and voter identification requirements at polling places.
One of the responsibilities of state and/or local election officials is to recruit, train, assign, and compensate permanent and temporary personnel. These personnel may include: voting equipment operators, voter registrars, absentee ballot clerks, polling place workers, and election day phone bank operators. Depending on the jurisdiction, these workers could be part-time or full-time, appointed or elected, paid or unpaid volunteers. Some election workers support election administration activities during the year, and others work only on election day. For the November 2000 election, about 1.4 million poll workers staffed precincts across the country on election day.
All Voters Are Assigned to a Precinct to Vote
The size of local election jurisdictions varies enormously, from a few hundred voters in some rural counties to Los Angeles County, whose total of registered voters exceeds that of 41 states. For the purposes of voting, election authorities subdivide local election jurisdictions into precincts, which range in size from a few hundred to more than a thousand people. Voters are assigned to a specific precinct where they are to vote on election day. All voters in a precinct vote at one place, such as a school or other public facility. For the November 2000 election, there were more than about 186,000 precincts in about 10,000 local election jurisdictions. However, precincts may be combined in a single polling place. For example, voters from a few precincts in a small jurisdiction may vote in a single location, such as the town high school.
Voting Technologies
Voting technologies are tools for accommodating the millions of voters in our nation’s approximately 10,000 local election jurisdictions. These tools can be as simple as a pencil, paper, and a box, or as sophisticated as computer-based touchscreens—and one day, perhaps, Web-based applications running on personal computers. To be fully understood, all these technologies need to be examined in relation to the people who participate in elections (both voters and election workers) and the processes that govern their interaction with each other and with the technologies. To integrate the functions associated with readying vote casting and tallying equipment for a given election with other election management functions, jurisdictions can use election management systems.
Five Voting Methods Were Used in the November 2000 Election
The methods by which votes are cast and counted in the United States today can be placed into five categories; the latter four methods employ varying degrees of technology. The five methods are paper ballot, lever machine, punch card, optical scan, and direct recording electronic (DRE). Table 1 shows the percentage of jurisdictions, precincts, and registered voters who used the different voting methods.
The paper ballot and lever machines have been used in the United States for more than a century, and versions of the other three methods have been used for 20 to 40 years. For paper ballots, the vote count is done by hand; lever machines keep a mechanical count. The three newer methods (punch card, optical scan, and DRE) depend on computers to tally votes. In three of the five methods (paper ballot, punch card, and optical scan), voters use paper to cast their votes. In the other two methods (lever machine and DRE), voters manipulate the equipment.
Each method possesses a unique history and set of characteristics. When these are overlaid with the evolution and composition of the more than 10,000 local election jurisdictions in the United States, the result is much diversity across the nation in the technology used to conduct elections and how it is used.
Paper Ballot
The paper ballot, sometimes referred to as the Australian ballot, was first used in the United States in 1889 and is still used in some jurisdictions today. Paper ballots, which are generally uniform in size, thickness, and color, list the names of the candidates and the issues to be voted on. Voters generally complete their ballots in the privacy of a voting booth, recording their choices by placing marks in boxes corresponding to the candidates’ names and the issues. After making their choices, voters drop the ballots into sealed ballot boxes. Election officials gather the sealed boxes and transfer them to a central location, where the ballots are manually counted and tabulated. Figure 4 shows an example of a paper ballot.
In 1892, the lever voting machine, known then as the Myer Automatic Booth, was first used in the United States. By 1930, lever machines were used in almost all major cities, and by the 1960s, over half the nation’s votes were cast and counted on lever machines. During this time, lever machines helped alleviate concerns about vote fraud and manipulation that were common with paper ballots. Unlike paper ballots, however, lever machines do not provide individual records of each vote.
Lever machines are mechanical, with a “ballot” composed of a rectangular array of levers, which can be physically arranged either horizontally or vertically. Adjacent levers in each row are placed about one inch apart, and the rows of levers are spaced 2 to 3 inches apart. Printed strips listing the candidates and issues are placed next to each lever. Because the ballot is limited to the size of the front of the lever machine, it is difficult to accommodate multiple languages.
When using a lever machine, voters first close a privacy curtain, using a long handle attached to the machine. They vote by pulling down those levers next to the candidates or issues of their choice. Making a particular selection prevents any other selection in that contest (unless it is a vote-for- no-more-than-N contest, in which case no more than N levers would be selectable). Overvoting is prevented by the interlocking of the appropriate mechanical levers in the machine before the election.
Write-in votes are recorded on a paper roll within the lever machine. The voter opens the write-in slot by moving the lever to the appropriate position and then writes in his or her choice on the exposed paper above the office name. Once this occurs, the machine locks and will no longer allow the voter to vote for another candidate listed on the ballot for that particular contest.
After voting, the voter once again moves the handle, which simultaneously opens the privacy curtain, records the vote, and resets the levers. Figure 5 shows a lever machine.
Votes are tallied by mechanical counters, which are attached to each lever. These counters rotate after the voter moves the handle to open the privacy curtain. The counters are composed of three gears—units, tens, and hundreds. Each vote causes a gear to make one tenth of a turn. After 10 turns, the units gear turns to 0, and the tens gear turns to 1, equaling 10 votes. Similarly, after 100 turns, the tens gear turns to 0, and the hundreds gear turns to 1, equaling 100 votes. At the close of the election, election officials tally the votes by reading the counting mechanism totals on each lever voting machine. Some machines can also print a paper copy of the totals.
The design of the lever machine does not allow for a recount of individual voter records. Therefore, if the machine malfunctions and a gear fails to turn, no record exists from which a proper tally can be determined. Mechanical lever machines are no longer manufactured. As a result, maintaining lever machines is becoming more challenging, and some jurisdictions have turned to “cannibalizing” machines to get needed parts.
Punch Card
The punch card was invented by Herman Hollerith to help perform statistical computations analyzing data from the 1880 U.S. Census. In the 1960s, this technology was first applied to vote casting and tallying. In 1964, Fulton and De Kalb counties in Georgia, Lane county in Oregon, and San Joaquin and Monterey counties in California were the first jurisdictions to use punch cards and computer tally machines in a federal election.
Punch card voting equipment is generally comprised of a ballot, a vote recording device (this device holds the ballot in place and allows the voter to punch holes in it), a privacy booth, and a computerized tabulation device. There are two basic types of punch card devices: Votomatic and Datavote.
The Votomatic relies on machine-readable cards that contain 228, 312, or 456 prescored numbered boxes representing ballot choices. The corresponding ballot choices are indicated to the voter in a booklet attached to the vote recording device, with the appropriate places to punch indicated for each candidate and ballot choice. To vote, the voter inserts the ballot into the vote-recording device and uses a stylus to punch out the appropriate prescored boxes.
Votomatic punch card voting offers certain challenges because the ballot must be properly aligned in the vote-recording device for the holes in the ballot card to be punched all the way through. Incomplete punches are not uncommon, so that the rectangular scrap (the “chad”) punched by the stylus may cling to the hole in the card and create what is referred to as a “hanging chad.” Hanging chads can cause tabulation machines to read votes incorrectly and can make it difficult to determine voter intent in a recount or contested election. Voters cannot easily review a completed ballot, because the ballot lacks candidate or issue information, having only hole numbers. In addition, voters must use a separate piece of paper and attach it to the ballot with the names of write-in candidates. Figure 6 shows a Votomatic vote recording device and a Votomatic ballot.
The Datavote also relies on a machine-readable card, but unlike the Votomatic, the names of the candidates and issues are printed on the card itself, eliminating the need for a ballot booklet. The ballots are not prescored, except for those used for absentee voting. The voter uses a stapler-like punching device to punch a hole corresponding to each candidate and issue. Spaces for write-in candidates are generally placed on the ballot. Because the candidates' names are printed on Datavote punch card ballots, each voter may require multiple ballot cards in elections that have a large number of candidates and issues. (Figure 7 shows a Datavote ballot.)
For both the Votomatic and Datavote, software is used to program each vote tabulation machine to correctly assign each vote read into the computer to the proper contest and candidate or issue. Generally, the software is used to identify the particular contests in each precinct, assign punch card positions to each candidate, and configure any special options, such as straight party voting and vote-for-no-more-than-N contests. In addition, vote-tally software is often used to tally the vote totals from one or more vote tabulation machines.
For both types of punch cards, jurisdictions can count the ballots either at the polling place or at a central location. In a polling place count, either the voters or election officials put their ballot cards into the vote tabulators. In a central count, voters drop ballots into sealed boxes, and the sealed boxes are transferred to a central location after the polls close. At the central location, ballots are run through the vote tabulators. In either case, the tabulator counts the ballots by reading the holes in the ballots. Generally, central-count tabulators are higher speed machines, allowing more ballots to be counted in less time than do precinct-based machines. Both precinct- count and central-count tabulators store votes on electronic storage media. These media can be removed manually or transferred via cable communication. Figure 8 shows punch card tabulation machines.
Optical scan technology has been used for decades for such tasks as scoring standardized tests, but it was not applied to voting until the 1980s. An optical scan voting system is comprised of computer-readable ballots, appropriate marking devices, privacy booths, and a computerized tabulation machine. The ballot can vary in size and lists the names of the candidates and the issues. Voters record their choices using an appropriate writing instrument to fill in boxes or ovals, or to complete an arrow next to the candidate’s name or the issue. The ballot includes a space for write-ins to be placed directly on the ballot. Figure 9 shows an optical scan ballot.
Like punch card software, the software for optical scan equipment is used to program the tabulation equipment to correctly assign each vote read into the computer to the proper contest and candidate or issue (i.e., to assign the location of valid marks on the ballot to the proper candidate or issue). In addition to identifying the particular contests and the candidates in each contest, the software is also used to configure any special options, such as straight party voting and vote-for-no-more-than-N contests. Precinct-based optical scanners can also be programmed to detect and/or reject overvotes and undervotes (where the voter does not vote for all contests and/or issues on the ballot). In addition, similar to punch cards, optical scan systems often use vote-tally software to tally the vote totals from one or more vote tabulation machines.
Like punch cards, optical scan ballots are counted by being run through computerized tabulation equipment, in this case, optical-mark-recognition equipment. This equipment counts the ballots by sensing or reading the marks on the ballot. Ballots can be counted in the polling place or in a central location. If ballots are counted at the polling place, voters or election officials put the ballots into the tabulation equipment. In this case, either vote tallies can be captured in removable storage media that can be taken from the voting equipment and transported to a central tally location, or they can be electronically transmitted from the polling place to the central tally location. If ballots are centrally counted, voters drop ballots into sealed boxes, and election officials transfer the sealed boxes to the central location after the polls close, at which time election officials run the ballots through the tabulation equipment.
Election officials can program precinct-based optical scan equipment to detect and reject overvotes and undervotes, which allows voters to fix their mistakes before leaving the polling place. However, if voters are unwilling or unable to correct their ballots, a poll worker can manually override the program and accept the ballot, even though it has been overvoted or undervoted. If ballots are tabulated centrally, voters do not have the opportunity to correct mistakes that may have been made.
Precinct-count optical scan equipment sits on a ballot box with two compartments for scanned ballots—one for accepted ballots (i.e., those that are properly filled out) and one for rejected ballots (i.e., blank ballots, ballots with write-ins, or those accepted because of a forced override). In addition, an auxiliary compartment in the ballot box is used for storing ballots if an emergency arises (e.g., loss of power or machine failure) that prevents the ballots from being scanned. Figure 10 shows precinct- and central-count optical scan tabulators.
First introduced in the 1970s, DRE equipment is an electronic implementation of the old lever machines. DREs come in two basic types, pushbutton or touchscreen, the pushbutton being the older and more widely used of the two. The two types of DREs vary considerably in appearance. Pushbutton DREs are larger and heavier than touchscreens. Figure 11 shows DRE pushbutton and touchscreen voting machines.
Pushbutton and touchscreen DREs also differ significantly in the way they present ballots to the voter. With the DRE pushbutton, all ballot information is presented on a single “full-face” ballot. For example, a ballot may have 50 buttons on a 3 by 3 foot ballot, with a candidate or issue next to each button. In contrast, touchscreen DREs display the ballot information on an electronic display screen. For both pushbutton and touchscreen DREs, the ballot information is programmed onto an electronic storage medium, which is then uploaded to the machine. For touchscreens, ballot information can be displayed in color and can incorporate pictures of the candidates. Because the ballot space is much smaller than the pushbuttons, voters who use touchscreens must page through the ballot information. Both touchscreen and pushbutton DREs can accommodate multilingual ballots; however, because the ballot is limited to the size of the screen, pushbutton machines can generally display no more than two languages.
Despite the differences, the two types of DREs have some similarities, such as how the voter interacts with the voting equipment. For pushbuttons, voters press a button next to the candidate or issue, which then lights up to indicate the selection. Similarly, voters using touchscreen DREs make their selections by touching the screen next to the candidate or issue, which is then highlighted. When voters are finished making their selections on a touchscreen or a pushbutton DRE, they cast their votes by pressing a final “vote” button or screen. Both types of DREs allow voters to write in candidates. While most DREs allow voters to type write-ins on a keyboard, some pushbutton DREs require voters to write the name on paper tape that is part of the voting equipment.
Unlike punch card and optical scan voting equipment, DREs do not use paper ballots. However, they do retain permanent electronic images of all the ballots, which can be stored on various media, including internal hard- disk drives, flash cards, or memory cartridges. These ballot images, which can be printed, can be used for auditing and recounts.
Like punch card and optical scan devices, DREs require the use of software to program the various ballot styles and tally the votes, which is generally done through the use of memory cartridges or other media. The software is used to generate ballots for each precinct within the voting jurisdiction, which includes defining the ballot layout, identifying the contests in each precinct, and assigning candidates to contests. The software is also used to configure any special options, such as straight party voting and vote-for-no- more-than-N contests. In addition, for pushbutton DREs, the software assigns the buttons to particular candidates and, for touchscreens, the software defines the size and location on the screen where the voter makes the selection. Vote-tally software is often used to tally the vote totals from one or more DREs.
DREs also offer various configurations for tallying the votes. Some contain removable storage media that can be taken from the voting equipment and transported to a central location to be tallied. Others can be configured to electronically transmit the vote totals from the polling place to a central tally location.
Because all DREs are programmable, they offer various options that are not as easily supplied by other voting methods. For example, they do not allow overvotes. In addition, voters can change their selections before hitting the final button to cast their votes.
DRE touchscreens offer the most flexibility because they can present numerous screens of data; for example, they allow unlimited multilingual ballots, unlike pushbutton DREs. They can also offer a “review” feature (i.e., requiring voters to review each page of the ballot before pressing the button to cast the vote) and various visual enhancements (such as color highlighting of ballot choices, candidate pictures, etc.).
Election Management Systems
Each type of voting equipment performs critical vote casting and tallying functions. However, before the equipment can be used in any given election to perform these functions, election officials must program the equipment to accommodate the unique characteristics of that election. For example, regardless of the voting equipment used, election officials must prepare a ballot that is unique to that election and, depending on the voting equipment, program the equipment to present the ballot to the voter and/or read the ballot as voted.
Election management systems integrate the functions associated with readying vote casting and tallying equipment for a given election with other election management functions. Election management systems run on jurisdictions’ existing personal computers or vendor-provided election management system computer platforms. In brief, election management systems (hardware and software) generally consist of one or more interactive databases containing information about a jurisdiction’s precincts, the election contest, the candidates, and the issues being decided. These election management systems can be used to design and generate various ballots. Election management systems also allow jurisdictions to program their vote casting and tallying equipment to properly assign each vote to the proper contest and candidate. These systems also can centrally tally and generate reports on election progress and results.
Some election management systems offer more sophisticated capabilities, such as managing the absentee ballot process. For example, some systems have the capability to automate the massive ballot mailings and recording of returns and support barcoding and imaging for ballot application signature verification.
Scope and Methodology
To describe elections in the United States, we reviewed reports by FEC and others, including the reports of the various national and state election reform commissions as they were completed. To obtain examples of the various stages of an election and any associated challenges, we had to get information from the level of government responsible for administering elections-that is, from the local election jurisdictions, which in most states involved counties. To get this information about the November 2000 election, we used a mail survey that is generalizable to 90 percent of the U.S. population, and a telephone survey that is generalizable nationwide. We also interviewed local election officials. To describe selected statutory requirements in the 50 states and the District of Columbia for voter registration, absentee and provisional balloting, and recounts, we reviewed state and D.C. statutes. We also conducted a survey of D.C. and state election directors, and reviewed information from the National Conference of State Legislatures on state election requirements and recent amendments to those requirements.
To identify the types of voting methods used on November 7, 2000, and the distribution of these methods among local election jurisdictions and their precincts, we used several sources of information, including two databases—one for counties and one for subcounty minor civil divisions (MCDs) in the New England states—from Election Data Services, Inc., a private company that collects election-related data from state and local jurisdictions. We then used several methods to validate the data in the databases. We also checked state Web sites, such as those of the Secretaries of State, and compared any data on voting methods from these sources to those in Election Data Services, Inc.’s database for the respective states.
To assess the characteristics of different types of voting equipment, we reviewed available studies, interviewed voting equipment vendors, reviewed vendor documentation on their equipment, used data from our mail survey of local election jurisdictions and data from our survey of state election directors, and interviewed election officials from our 27 judgmentally selected local election jurisdictions. Two of these jurisdictions had recently used new voting equipment in the November 2000 election, and one had purchased new equipment for delivery in 2001. To identify new voting equipment, we surveyed vendors and reviewed vendor publications, attended vendor marketing events and conferences, and researched periodicals and vendor Web sites. To estimate the potential cost of replacing existing voting equipment in the United States, we developed data on the distribution of voting equipment in the United States—among the states, counties within the states, and precincts within each county. For the cost of purchasing optical scan or DRE equipment, we used data obtained from voting equipment vendors. Our estimates generally include only the cost to purchase the equipment and do not contain software costs associated with the equipment to support a specific election and to perform related election management functions, which generally varied by the size of the jurisdiction that purchased the equipment. Because of the wide variation in the ways jurisdictions handle operation and maintenance (e.g., in-house or by a contract), our estimates do not include operations and maintenance costs. The cost of software and other items could substantially increase the actual cost of purchasing new voting equipment.
To identify and describe issues associated with the use of the Internet for vote casting and tabulation, we interviewed vendors, reviewed vendor publications, attended vendor marketing events, and researched periodicals and vendor Web sites. We did not independently validate vendor-provided information. To identify Internet voting options and issues, we reviewed relevant recent studies, researched publications and material, and assessed preliminary Internet voting pilot reports. We also interviewed recognized experts from various institutions—academia, professional associations, and voting industry—that are familiar with issues surrounding Internet voting. In addition, we interviewed Internet voting equipment vendors that were involved in conducting these Internet voting pilots.
We did our work between March 2001 and September 2001 in Washington, D.C.; Atlanta; Los Angeles; Dallas; Norfolk; San Francisco; and 27 local election jurisdictions in accordance with generally accepted government auditing standards.
Appendix I contains additional detail on our objectives, scope, and methodology.
Voter Registration
The November 2000 election resulted in widespread concerns about voter registration in the United States. Headlines and reports have questioned the mechanics and effectiveness of voter registration by highlighting accounts of individuals who thought they were registered being turned away from polling places on election day, the fraudulent use of the names of dead people to cast additional votes, and jurisdictions incorrectly removing the names of eligible voters from voter registration lists.
For purposes of this report, voter registration includes the processes, people, and technology involved in registering eligible voters and in compiling and maintaining accurate and complete voter registration lists. List maintenance is performed by election officials and consists of updating registrants’ information and deleting the names of registrants who are no longer eligible to vote. This chapter discusses (1) state requirements to vote, (2) applying to register to vote, (3) compiling voter registration lists, and (4) voter registration list maintenance.
State Requirements to Vote
Voter Eligibility Requirements Varied From State to State Registration Was a Prerequisite to Vote in All States but One Although the federal government has enacted legislation that affects registration procedures, registering to vote is not a federal requirement. Instead, registration is one of several potential requirements, in addition to citizenship, age, and residency, that states may require citizens to meet to be eligible to vote. Although voter eligibility requirements varied from state to state, registration was a prerequisite to vote in nearly all jurisdictions in the United States. However, because of differences in state voter eligibility requirements, citizens with the same qualifications were eligible to vote in some states but not in others.
Voter Eligibility Requirements Varied From State to State
The 50 states and the District of Columbia are empowered by the U.S. Constitution to establish voter eligibility requirements within their jurisdictions. At a minimum, every state and the District of Columbia required that a voter be at least 18 years of age, a U.S. citizen, and a resident of the state or the District. In addition, most states limited voter eligibility on the basis of criminal status and mental competency, although the specifics of these limitations varied.
Criminal Status
Based on our review of information developed by the Justice Department, 48 states and the District of Columbia prohibited individuals from voting while incarcerated for a felony conviction but varied in their provisions for restoring voting rights after the incarceration period. Thirty-eight states and the District of Columbia provided for automatic restoration of voting rights. In 12 of these states and the District of Columbia, restoration occurred after the individual's release from incarceration. In the other 26 states, restoration occurred after the individual completed his or her sentence, including any term of probation or parole. Ten states did not provide for automatic restoration of voting rights. In these states, individuals could seek restoration of voting rights through pardon procedures established by the state (e.g., gubernatorial pardons). In a few states, individuals convicted of specific offenses permanently lost the right to vote. Maryland, Missouri, and Tennessee permanently disenfranchised those convicted of certain voting-related crimes, such as buying or selling votes. Tennessee also permanently disenfranchised those convicted of treason, rape or murder. In Delaware, individuals convicted of murder, manslaughter, felony sexual offenses, or certain public corruption offenses permanently lost the right to vote.
Mental Competence
The majority of states and the District of Columbia also prohibited individuals who were mentally incompetent from voting. Nearly all of these states and the District of Columbia required a judicial determination of incompetence to disqualify a citizen from voting. For example, in Texas, those who were judged by a court to be mentally incompetent were ineligible to vote. In Oklahoma, individuals judged to be incapacitated could not vote, and those judged to be partially incapacitated also could not vote, if so stated in the court order. A few states, such as Delaware, did not require a judicial determination of incompetence, but simply disqualified individuals who were mentally incompetent from voting.
Registration Was a Prerequisite to Vote in All States But One
Registration was a prerequisite to vote in nearly all jurisdictions. In the United States, citizens were responsible for applying to register to vote. For the November 2000 election, FEC reported that nearly 168 million people, or about 82 percent of the voting age population, were registered to vote.
All states, except North Dakota with 53 counties, required citizens to apply to register and be registered with the appropriate local election official before they could vote in an election. Because of North Dakota’s rural character, voting occurred in numerous relatively small precincts, which are the areas covered by a polling place. According to North Dakota officials, the establishment of small precincts was intended to ensure that election boards knew the voters who came to the polls and could easily determine if an individual should not be voting in the precinct. In the November 2000 election, North Dakota voters in 696 precincts cast 292,249 ballots, representing about 62 percent of the voting age population.
Applying to Register to Vote
Citizens Could Apply to Register to Vote in Many Ways Citizens Learned About the Registration Process Through Different Officials Faced Challenges in Processing Applications Officials Had Concerns About Applications Submitted at Motor Registering to vote appeared to be a simple step in the election system- generally, a qualified citizen provided basic personal information, such as name and address, to an election official and was able to vote in all subsequent elections. But applying to register and being registered were not synonymous. A citizen became a registered voter only after his or her application was received, processed, and confirmed by an election official. We found that citizens could apply to register to vote and could learn about the registration process in numerous ways, and that election officials faced challenges in processing these applications, especially in processing applications received from motor vehicle authorities.
Citizens Could Apply to Register to Vote in Many Ways
Citizens had numerous opportunities to apply to register to vote. Figure 12 shows several of these opportunities, such as applying at a local election office or at a motor vehicle authority, or obtaining and mailing an application to a local election official. These and other examples of how citizens were able to apply to register are illustrated by the situations we found in our visits to local election jurisdictions-cities, counties, and townships.
In most of the jurisdictions we visited, individuals were able to apply in person to register at (1) their local election office, (2) a motor vehicle authority, and (3) various other agencies such as public assistance agencies, or via voter registration drives through political parties or other organizations.
Applying Through Local Election Offices To apply at a local election office, individuals completed an accepted state registration application and submitted it to their local election official. Some local election officials we visited also provided registration services outside of their offices, such as at schools or other community events. For example, officials at some jurisdictions told us they visited high schools to provide eligible students with voter education, registration forms, and assistance. Officials in some jurisdictions said they held registration events at local malls, county open houses, libraries, county fairs, and at other community programs. In one medium-sized jurisdiction, 600 deputy registrars were trained to register citizens at various events and within their communities and civic organizations. Finally, citizens in one large jurisdiction we visited were able to apply to register at a mobile voter registration van (shown in figure 13).
Applying at a Motor Vehicle Authority In most states, citizens could apply to register to vote at a motor vehicle authority under NVRA, which is widely known as the Motor Voter Act. There were variations in how NVRA was implemented and how citizens were able to apply to register at motor vehicle authorities in the jurisdictions we visited.
National data from FEC and the Census Bureau indicated that the use of motor voter programs increased over the past 4 years. The percentage of all applications received through motor vehicle authorities in states covered by NVRA increased to 38 percent of the total number of registration applications received from 1999 through 2000, from 33 percent from 1995 through 1996. Similarly, we estimate that at least one-third of people in 2000 reported registering to vote when obtaining or renewing a driver’s license, up from 1996 levels.
The jurisdictions we visited varied in their implementation of motor voter programs. In many of these jurisdictions, election officials told us that motor vehicle authority staff were to offer to assist individuals obtaining or renewing a driver’s license or other form of identification, in applying to register to vote. In other jurisdictions, we were told that the voter registration assistance provided by the motor vehicle authority consisted of making voter registration applications available on a table. However, in one small jurisdiction we visited, an election office employee was available at the motor vehicle authority to provide individuals with registration information and assistance.
The procedure for applying to register to vote at motor vehicle authorities also varied across the jurisdictions we visited. For example, at some jurisdictions, a citizen applied to register by completing a voter registration section of the driver’s license application. In others, we were told that the voter registration application was printed using information from the motor vehicle authority database and was provided to the applicant for verification, confirmation of citizenship, and signature. Two jurisdictions in the same state provided voter registration terminals at motor vehicle authorities where applicants could complete their voter registration form and obtain a copy of the transaction.
Applying at Other Agencies and Locations Finally, citizens could apply in person to register to vote at several state agencies and locations, or through other organizations. NVRA requires states to provide citizens with the opportunity to apply to register at public assistance agencies; state-funded disability service offices; armed forces recruitment offices; and state-designated agencies, such as public libraries, public schools, or marriage license bureaus.
The number of voter registration applications submitted at NVRA- designated agencies decreased during the past 4 years. According to FEC, from 1999 through 2000, voter registration applications received at these agencies and locations accounted for less than 8 percent of the total, a decrease from 1995 through 1996, when 11 percent of applications had been submitted at these agencies. In a very large jurisdiction we visited, local election officials reported a substantial decline in the number of registration applications received from social service agencies from 24,878 applications in 1996 to 1,309 in 2000. Officials in that jurisdiction noted that “when the program was initially instituted, there was widespread interest both from potential voters as well as from agency personnel.” The officials suggested possible reasons for the decline in applications, including that the majority of social service clients were repeat clients, and thus already registered, or that some clients were no longer using social services because they had been placed in jobs.
Citizens could also apply to register to vote in person through other organizations. We estimate that in November 2000, at least 16 percent of respondents completed an application at a registration drive, which included political rallies, someone coming to their door, or registration drives at a mall, market, fair, or public library. Officials in some jurisdictions we visited noted that political parties were a major source of voter registration applications in their jurisdiction.
Mail Application for Voter Registration
In addition to applying to register in person, citizens could apply by obtaining, completing, and mailing a voter registration application to the appropriate election official. According to FEC, during 1999-2000, 31 percent of total registration applications submitted in the states covered by NVRA were submitted by mail. In the jurisdictions we visited, we found a variety of ways for citizens to obtain applications and multiple forms for citizens to use.
Sources for Voter Registration Applications Within most jurisdictions we visited, registration applications generally were available at many places, including at state and local election offices, public libraries, post offices, and schools. In one very large jurisdiction, registration applications were available at over 1,200 locations. Other jurisdictions we visited included registration information and applications in the local telephone book or in state tax packets.
Some states and jurisdictions provided citizens the opportunity to download or request registration application forms over the Internet. Many of the states and jurisdictions we visited included on their Web sites registration application forms that could be downloaded and used for registering, while others included a form for requesting a registration application. Still others allowed citizens to complete and electronically submit an application form on the state’s Web site. The state election office then mailed the applicant the completed application form to be signed and then mailed back to the office. The applicant would not be officially registered until election officials accepted the signed form.
In November 2000, U.S. citizens could use over 50 different forms to apply to register to vote. For example, some states used more than one form, having a standard state application as well as a separate form for NVRA- designated agencies. In addition, citizens could apply to register using the National Mail Voter Registration Form and the Federal Post Card Application (FPCA). The National Mail Voter Registration Form was developed by FEC to allow citizens to register to vote from anywhere in the United States. NVRA required states to accept and use the National Mail Voter Registration Form in addition to their own state application form. According to FEC, as of June 2001, 26 states accepted paper reproductions of the form.
U.S. citizens serving with the military or working overseas and their dependents were allowed to register to vote by mail using the FPCA (shown in figure 14). This form allowed an applicant to simultaneously register to vote and request an absentee ballot. In some states, those who used the FPCA were not placed on the state’s permanent registration list. Instead, their registrations were valid for only 1 year, after which they were required to reregister in order to be eligible to vote.
We found variation in the application forms available to apply to register to vote. At the jurisdictions we visited, the most common information requested on applications was full name, address, and signature. Most jurisdictions also requested date of birth, while others requested social security number, gender, race, and/or place of birth. Some registration applications requested more or less information from an applicant than was required to register to vote within the particular jurisdiction. On some forms, information not required to register to vote was clearly indicated as optional; on other forms it was not. As a result, one completed application might be accepted in some states but not in others. Examples of differences in the applications included the following: According to FEC, as of June 2001, seven states required applicants to provide their full social security number, and two required the last four digits of the number. Twenty others only requested that applicants provide the number (17 full and 3 the last four digits). The National Mail Voter Registration Form did not provide a specific space for applicants to provide their social security number, but the FPCA did.
The application forms in several of the jurisdictions we visited requested that the applicant provide more information than was required to register, such as gender and telephone number. Application forms in some of these jurisdictions stated that identifying gender or providing a telephone number was optional; others did not. The FPCA had spaces for applicants to indicate their gender, but not telephone number. The National Mail Voter Registration Form did not include a space for applicants to provide gender, and indicated that providing a telephone number was optional.
The application forms for some states and jurisdictions asked for applicants to identify their race or ethnic group and their place of birth. Both the FPCA and the National Mail Voter Registration Form had spaces for an applicant to use to identify race, but neither form had a space to indicate place of birth. Figures 15 and 16 show voter registration forms from jurisdictions we visited.
Citizens Could Learn About the Registration Process Through Different Means
Informing citizens about the registration process was important, given the various ways people could apply to register, the numerous forms they could complete, and different information required for completing the applications. On the basis of our mail survey, we estimated that 14 percent (plus or minus 4 percent) of jurisdictions nationwide actively sought comments or suggestions from voters about voter registration. The jurisdictions we visited differed in the emphasis they placed on voter education. Officials at some jurisdictions told us they offered little in the way of registration education. A few jurisdictions said that they relied on external organizations, such as the League of Women Voters and/or political groups, to educate voters. However, most of the jurisdictions we visited educated voters about registration in a variety of ways.
Many of the jurisdictions we visited printed registration deadlines, locations, and procedures in at least one newspaper. Some used television and others used radio to publicize registration information. In some states and jurisdictions we visited, Web sites offered voter registration information, including deadlines, qualifications to register, and where to submit an application. Some of these jurisdictions offered interactive Web sites where individuals could determine their registration status and locate their voting precinct. Other registration education efforts included mailing each household a voter guide with registration information; speaking to civic groups, churches, unions, high schools, and other providing handouts and registration applications at naturalization distributing flyers and newsletters.
Election Officials Faced Challenges in Processing Registration Applications
The results of our nationwide surveys and meetings with election officials indicated that election officials faced challenges, such as implementing state requirements, handling applicant errors, and coordinating with multiple agencies, in processing applications. Local election officials described how they processed applications, including (1) receiving applications, (2) obtaining information from registrants who submit incomplete applications, (3) verifying information on the application, and (4) confirming registration status.
Receiving Registration Applications
Citizens were required to submit registration applications to local election officials by certain deadlines, specified by state statutes, to be eligible to vote in an upcoming election. These deadlines varied, allowing citizens in different states different amounts of time to submit applications. Local election officials expressed concerns about processing applications in the allotted time before election day and varied in how they handled late applications.
In 30 states, registration applications were to be received by the local election office about 1 month before the election. Six states–Idaho, Maine, Minnesota, New Hampshire, Wisconsin, and Wyoming--allowed same-day registration where their residents could register to vote on election day. In Maine, for same-day registration, citizens were to register at the voter registrar’s office or the board of elections instead of at the polls as in the 5 other states that allowed same-day registration. Figure 17 shows the registration deadlines across the United States, and appendix IV contains information about these deadlines.
Deadlines closer to election day, or election day itself, provide citizens more time to apply to register. However, some local election officials expressed concerns about not having enough time to process applications if deadlines for their submission were shortened or eliminated. California recently passed legislation that shortened its registration deadline from 29 days before an election to 15 days. A local election official in a very large jurisdiction in California said that processing the registration applications, sending out the sample ballots, and processing registrants absentee ballot requests within 15 days, instead of 29 days, would be “impossible for a major election.”
A few local election officials raised concerns about the possibility of voter fraud, as there may not be time to verify an applicant’s eligibility. All of the states that allowed same-day registration required citizens to sign a registration oath or to show some proof of identification or residency when applying to register. For example, Minnesota allowed citizens to register on election day by completing the registration card under oath and by providing proof of residence, such as a Minnesota driver’s license. However, one local election official from a state that allowed same-day registration said that she “didn’t believe same-day voter registration should be allowed as there is little regulation, nor proper time to verify voters.” The official noted that in the last election they averaged one a minute. In contrast, officials in another jurisdiction that allowed same-day registration said that they did not have concerns about fraud, nor did they have concerns about verifying applications on election day.
In those states that had registration deadlines, local election officials in jurisdictions we visited differed in how they dealt with applications received after the deadline. In some jurisdictions, registrants were informed via mail that their application was received late and that they were not eligible to vote in the upcoming election. Officials in one large jurisdiction said that applications were officially accepted for 5 working days after the close of the registration period if the date on the form was before the 30-day deadline. However, they said that in practice they accepted registration applications at any time before the day of the election.
Obtaining Information From Registrants Who Submit Incomplete Applications
Local election officials we visited reviewed applications for completeness. However, they varied in how they processed applications missing any of the required or requested information. The variations included how strict they were in accepting applications with missing information and how they attempted to obtain missing information. In addition, even within the same jurisdiction, applicants who submitted different types of forms lacking the same piece of information were treated differently.
At one medium-sized jurisdiction we visited, election officials said that if someone applying in person refused to provide his or her birth date, he or she was registered if “it was clear” the individual was 18 or older. Officials at some other jurisdictions said they called (if a phone number was provided) or sent written notification to the applicant to get the missing information. For example, in one large jurisdiction, officials told us if there was not enough time for the applicant to provide the birth date before the registration deadline, they registered him or her anyway and tried to get the information at the polling precinct. The official at one small jurisdiction said that when a birth date was missing from the application, she registered the applicant and entered the birth date as January 1, 1850. She told us that people were usually more than willing to correct that date at the polls.
Differences in Processing Applications Within the Same Jurisdiction Even within the same jurisdiction, there were differences in how applications missing the same piece of information were treated. Officials at these jurisdictions told us these differences were the result of accepting different types of application forms for registration. For example, in one large jurisdiction we visited where the last four digits of the social security number were required by the state, applicants who did not provide the information were treated differently, depending on the form they used to apply. Officials at that jurisdiction told us that some motor vehicle authorities were still using an old voter registration form that did not request the social security information. In order not to disadvantage these applicants, they were registered without having to provide the information and were able to vote in the November 2000 election. Other applicants in the same jurisdiction downloaded and used the National Mail Voter Registration Form from the Internet. That form also did not ask for the social security number, although the state-specific directions for the form noted that the information was required and instructed applicants to provide it. Notices were sent to any applicants who used the National Mail Voter Registration Form and did not provide the social security information. Unless they reapplied with the social security information, they were not registered or allowed to vote in the November 2000 election.
In another very large jurisdiction, election officials told us that the standard state voter registration form asked for information on place of birth and that applicants who mailed the standard state form but did not provide their place of birth, were put in a “pending” status and were notified by mail that they would not be registered until the information was provided. However, when applicants used the National Mail Voter Registration Form or the FPCA, which did not request the applicant’s place of birth, the officials told us they registered the applicant and then tried to obtain the information by sending the registrant a letter requesting the place of birth.
At one medium-sized jurisdiction we visited, the officials told us that if an applicant registered in person, he or she had to use a state form and present identification, but if the same applicant registered by mail, the National Mail Voter Registration Form could be used and no identification was required.
Verifying Information on the Application
When jurisdictions received completed applications, the degree to which they verified the information on the forms to ensure the applicant was truly eligible to vote, based on statutory requirements, varied. Some local officials in jurisdictions we visited said they considered the registration application process to be an honor system and they simply relied on the applicant to tell the truth. All registration applications in the jurisdictions we visited required the applicant to sign an oath declaring that they were citizens and were eligible to vote. In other cases, an applicant may have had to present identification at the time of application. Officials at one very large jurisdiction told us they verified application information for a random 1 percent of all applicants. A form letter and a copy of the registration application were mailed to these applicants, who were asked to complete and return the form as verification of the application. We found varying degrees of checks on citizenship, residency, and multiple registrations to ensure that the applicant was qualified to register.
On the basis of our telephone survey, we estimate that 34 percent (plus or minus 11 percent) of jurisdictions nationwide checked for U.S. citizenship to determine initial and/or continued eligibility for voter registration. Some election officials said that they checked that the affirmation on the application was signed or that the applicant had marked the box on the application indicating that he or she was a citizen. Other election officials told us they used jury lists to compare with voter registration records, since some people identified themselves as noncitizens as a reason for declining to perform jury duty. However, some local election officials we met with indicated that they had no way to verify that an applicant was indeed a citizen.
We estimate that nearly all (96 percent) jurisdictions nationwide checked whether an individual’s address was outside of their jurisdiction to determine eligibility for voter registration.
GAO Telephone Survey of Jurisdictions On the basis of our telephone survey, we estimate that 96 percent of jurisdictions nationwide checked whether an individual’s address was outside of their jurisdiction. Some local election officials we visited used street maps or city planning files to confirm whether an address was a valid location within their jurisdiction. Others said that they used information such as property tax appraisal and building permit files to verify addresses within their jurisdictions. “You can ask any county clerk in the state and they will tell you that the biggest problem is motor voter. Residents can register at the welfare office, the health department, the motor vehicle authorities, and they do, time and again. This results in tons of registrations which are costly and time-consuming to sort through and check against records.”
We estimate that nearly all (99 percent) jurisdictions nationwide checked whether an individual was already registered within their jurisdiction to determine eligibility for voter registration.
GAO Telephone Survey of Jurisdictions On the basis of our telephone survey, we estimate that 99 percent of jurisdictions nationwide checked whether an individual was already registered in their jurisdiction. Jurisdictions we visited varied in the processes they used to check for multiple registrants. For example, in a medium-sized jurisdiction we were told that the state provided the election officials with a report identifying possible duplicate registrants. The officials investigated these and canceled any they found to be duplicates. In many jurisdictions we visited, however, officials checked new registration applications against records of registered citizens.
Officials in several jurisdictions noted that names alone were not a sufficient identification source. For example, after the November 2000 election, the Illinois State Board of Elections completed a brief analysis of multiple registrations by looking at voter registration records submitted by local election officials in all but 2 counties in the state. Using data collected between December 15, 2000 and February 28, 2001, the study found that of 7,197,838 voters registered in Illinois, 143,080, or 2 percent, were multiple instances of the same voter. The study also found that there were 283 people registered as “Maria Rodriguez” in Chicago and 159 as “Jose Hernandez.” There were also 919 “Robert Smiths” registered in Illinois. The study noted that “additional criteria are needed to differentiate these voters, as they are obviously not all multiple registrations of the same person.” According to some local election officials, using social security numbers to identify registered voters helped to avoid multiple registrations of the same person. One small jurisdiction we visited used the first three letters of the last name and date of birth to identify any registrants who may already be registered. “…We were even on 60 Minutes in 1998 with our 16,000 fraudulent voter registrations….However, we did track those. We did not have a single one of those people vote.”
Confirming Registration Status
After accepting a registration application, election officials informed the applicant that he or she had been registered. In all of the jurisdictions that we visited, officials informed citizens that they had been registered by mailing a voter registration card or letter (an example of which is shown in figure 18). Registration confirmation was also an important step in the verification process. Local election officials told us that registration confirmations were mailed as nonforwardable mail and thus also served as a check on the registrant actually living at the address provided. In addition, the confirmation allowed registrants to review and correct any information about their registration status before election day.
Some jurisdictions varied in how they confirmed individuals’ registration status close to the date of elections. A few local election officials said that closer to election day they might not have been sufficiently staffed to confirm all applicants’ registrations.
Local Election Officials Expressed Concerns About Processing Applications Submitted at Motor Vehicle Authorities
We estimate that about 46 percent of jurisdictions nationwide had problems with NVRA during the November 2000 election.
GAO Telephone Survey of Jurisdictions NVRA expanded the opportunities for citizens to apply for registration to include submitting applications at motor vehicle authorities, and in the recent election cycle, such applications have increased. Local election officials around the country expressed concerns about processing applications submitted at motor vehicle authorities. At most of the jurisdictions we visited, applications submitted by citizens at motor vehicle authorities were hand delivered, mailed, or electronically transmitted to a state or local election office. On the basis of our telephone survey, we estimate that 46 percent of jurisdictions nationwide had problems, in general, with NVRA registrations during the November 2000 election. Officials most frequently noted challenges with processing incomplete or illegible applications, applications that arrived late at the local election office, and applications that never arrived. According to local election officials, each of these three situations could result in individuals showing up at the polls to vote and discovering that they were never registered. Local election officials offered suggestions to address these problems, such as using technology, expanding voter education, and increasing training at motor vehicle authorities.
Incomplete and Illegible Applications
Local election officials at the jurisdictions we visited described instances in which they received incomplete or illegible applications from the state motor vehicles authorities that had incomplete or incorrect addresses; were missing signatures; were missing required information, such as date of birth or social had signatures that were illegible or did not match the typed name on the application.
In particular, one challenge that local election officials noted involved state statutory requirements for an original signature on the registration application. Local election officials in jurisdictions that received applications via electronic transmission also had to receive a separate paper application that contained the applicant’s original signature. Officials in a large jurisdiction we visited noted problems because the mailed signature cards did not arrive at the same time as the electronically submitted applications and, in some instances, took up to 3 months to arrive.
Late Applications
Processing late applications submitted at motor vehicle authorities was a challenge in some of the jurisdictions that we visited. In one medium-sized jurisdiction, applications dated in July were received at the election office with October transmittal dates from the motor vehicle authority. For the November 2000 election, to speed up the process of mailing applications, one large jurisdiction arranged to send elections staff to the offices of the motor vehicle authority on the last day citizens could apply to register to pick up and deliver the applications directly to the county elections office.
Applications That Never Arrived at Local Election Offices
When election offices failed to receive applications, citizens could show up to vote on election day to find that they were not registered. Local election officials we met with described the following accounts of citizens not included on registration lists showing up at polling precincts on election day claiming that they had registered to vote at a motor vehicle authority.
In one very large jurisdiction we visited, between September 15, 2000, and November 28, 2000, a total of 688 calls were received from potential voters who claimed they had either registered or changed their address through the motor vehicle authority. Upon investigation of these cases, 39 percent needed to either register or reregister at their current address.
In one medium-sized jurisdiction, 22 percent of citizens who were not on registration lists, but who claimed that they had registered, said they did so at a motor vehicle authority. However, the local election official believed that most of these citizens were not registered to vote.
Election Officials’ Suggested Ways to Improve Registration at Motor Vehicle Authorities
Election officials suggested ways for addressing the occurrence of a citizen showing up at the polls on election day after incorrectly assuming that he or she had registered to vote at a motor vehicle authority. These fixes included implementing technology options, such as electronically submitting applications, increasing voter education efforts, and providing training opportunities for motor vehicle authority employees.
Local election officials relied on available technology and suggested changes to current systems they believed could address problems with registration applications. Some local election officials suggested that voter registration information be transmitted electronically to election offices. Officials in two small jurisdictions in the same state described how registration information was sent electronically from the motor vehicle authority to the statewide voter registration system, which then sent the information to the jurisdiction in which the applicant wished to be registered. In addition, local election officials in a medium-sized jurisdiction said they would like to redesign the application used to apply at motor vehicle authorities to allow a user to input registration information into a computer and have an application print out for the applicant to sign and submit. However, electronic transmission of registration applications in states that required an original signature on an application would still require that a paper copy be transferred to local election officials.
Increased public education may reduce the number of people who come to vote on election day believing they are registered when they are not. The public should be educated about the importance of receiving the confirmation card in the mail after registering and the importance of saving the receipt given to voters who register at the motor vehicle authority until the confirmation card is received. “The biggest problem is that voters are not educated on motor voter procedures. New voters misunderstand that a driver license card is not a voter registration card… that they are applying to register to vote, not actually registering to vote… Motor voter has helped registration activities in the latest election because it has provided a steadier stream of new voters. But, the enactment of motor voter makes it easier for applicants to place the blame for registration problems on others instead of themselves.”
Training Opportunities for Motor Vehicle Authority Employees As a result of NVRA, election officials were to share some of the responsibility of administering voter registration with motor vehicle authorities, whose primary purpose is unrelated to election administration. Some local election officials felt that, as a result, the registration process was more difficult to manage, and that motor vehicle authority staff had too much responsibility for registering voters. Others we surveyed and met with agreed that for motor voter programs to successfully function, motor vehicle authority staff needed to be trained about registering voters. In one very large jurisdiction we visited, local election officials coordinated with motor vehicle staff to provide training sessions and information about registering voters. In one small jurisdiction, a local election official was situated in the lobby of the motor vehicle authority. The election official provided voter registration services to reduce the number of citizens who mistakenly believed that they had registered and to reduce the number of applications denied due to missing or incomplete information.
Compiling Voter Registration Lists
Lists Had Multiple Uses and Helped Ensure That Only Qualified Officials Used Different Methods, Providing Varying Capabilities, to Election officials compiled confirmed registration applications into lists of registered voters for use throughout the election process. Officials used different technologies and systems to compile the lists, and each system had different capabilities and limitations.
Voter Registration Lists Had Multiple Uses and Helped Ensure That Only Qualified Persons Voted
Election officials used lists of registered voters for several purposes. A citizen’s access to voting was based primarily on the appearance of his or her name on such a list. For example, for both absentee and election day voting, election officials typically verified an individual’s eligibility using a list of registered voters or a poll book before allowing him or her to vote. In some jurisdictions, officials also used registration lists for defining who in the jurisdiction received election-related information like sample ballots or voter information guides. The registration lists also provided election officials with a basis for determining the quantity of supplies, such as ballots and voting machines and the numbers of personnel needed on election day.
Officials Used Different Methods, Which Provided Varying Capabilities, to Compile Registration Applications Into a List of Registered Voters
States and local election jurisdictions used different systems to compile registration applications into a list of registered voters. Some officials compiled voter registration lists manually or, as most did, through an automated system. All of the local election jurisdictions we visited used automated systems to compile registration lists. Some jurisdictions used a local computerized system for maintaining registration lists, and others were linked to a statewide automated voter registration system. The various systems provided different capabilities, such as those for processing applicants’ signatures, generating reports and notifications for registrants, and sharing information with other jurisdictions.
Local Automated Voter Registration Systems
Many of the local election jurisdictions we visited used local automated voter registration systems. Local election officials told us that, in comparison to manual systems, their automated systems saved time and effort by allowing them to more easily perform a number of routine tasks. Some jurisdictions operated their own local voter registration system, and others shared a jurisdiction-wide system with other government offices in the jurisdiction.
Jurisdictions With Their Own Systems
We estimate that 61 percent of jurisdictions nationwide had their own computerized voter registration system.
GAO Telephone Survey of Jurisdictions On the basis of our telephone survey, we estimate that 61 percent of jurisdictions nationwide had their own computerized voter registration system. Local election officials we visited noted that their systems allowed them to retain possession and control of their voter registration lists at all times, and to perform several functions, such as checking for duplicate registrations within their jurisdiction, updating registration records, generating forms and letters to send to registrants, and compiling and producing reports.
Some automated systems provided additional capabilities and features. Several local election jurisdictions used systems that scanned an applicant’s signature from the application into the voter registration system. The automated system used by one very large jurisdiction interfaced with the jurisdiction’s system for election tallying, and with geographic street reference files, which were used for assigning registrants to a precinct.
Some jurisdictions used an automated system that was part of the central computer system that ran applications in support of other county functions. Officials at one medium-sized jurisdiction told us that with their automated system they could perform all of the routine election-related tasks. However, jurisdictions that shared with the county system could have problems based on the capacity limits of the county’s servers, and the need for extra security to maintain the integrity of the election-related functions of the system. We visited one medium-sized jurisdiction that was in the process of implementing its own voter registration system. A local election official in that jurisdiction said that they were “being kicked off the county’s system” because their computer needs had outgrown the system.
Sharing Information With States and Other Jurisdictions On the basis of our telephone survey, we estimate that 75 percent of jurisdictions nationwide used or shared information with a statewide computerized voter registration system. Of the jurisdictions we visited that had automated systems, many shared registration information with the state election office. Some shared information electronically, providing registration lists to the state periodically. For example, one medium-sized jurisdiction we visited provided the state a computerized file of their registration list every 6 months.
Some local election officials in the jurisdictions that we visited noted that there were limitations in their capacity to share information on a real-time basis. Officials in one medium-sized jurisdiction said that while they provided the state a computerized file of their registration list, the jurisdiction had no automated method for checking the registration list against those of other jurisdictions to identify potential duplicates. In May 2001, their state conducted a study of multiple registrations by matching computerized voter registration files using registrants’ names and dates of birth. The study identified as many as 10 percent of the people on that jurisdiction’s registration list that might also have been registered to vote in another jurisdiction in the state.
In two very large jurisdictions in one state we visited, the state operated a statewide database that contained information provided by all of the state’s jurisdictions, its motor vehicle authority, and its Bureau of Vital Statistics. The state system provided the jurisdictions with query capability. Local election officials said that, through queries, they could identify registrants on their list, who might also be on the registration list of another jurisdiction in the state, who were officially reported to have died, or who had moved. However, officials there noted that the jurisdictions were not directly on-line with the system.
Statewide Automated Voter Registration Systems
We visited several jurisdictions that were linked to a statewide voter registration system. In most of these jurisdictions, states had provided software allowing on-line access to a central voter database. The local officials told us of a number of advantages the statewide system provided them. Specifically, they noted the reduced potential for duplicate registrations in the state and the ability to electronically receive applications submitted at motor vehicle authorities.
Reducing Multiple Registrations Within the State In one state with a statewide voter registration system, we met with local officials who said that their system significantly reduced the potential for multiple registrations in the state. When a citizen reregistered in a new jurisdiction in the state, his or her registration was automatically cancelled in the former jurisdiction of residence. Local election officials in another state said their statewide system automatically flagged potential multiple registrations before transmitting applications to the appropriate local election official. These officials also noted that their statewide voter registration system was linked to the motor vehicle authority and flagged potential multiple registration applications submitted from that source.
Coordination With Motor Vehicle Authorities Some of the statewide systems in jurisdictions that we visited were linked to motor vehicle authorities. Such a linkage decreased the potential for losing application information in the process of transferring it from the application site to the local election office. Local election officials in one small jurisdiction told us the motor vehicle authority transmitted the application to the state office, which then transmitted the application to the jurisdiction in which the applicant lived. At another small jurisdiction the officials told us that, for each application, the motor vehicle authority created a record in the state-operated voter registration database and the local election officials retrieved the application information that applied to their residents.
Information Sharing With Other States
On the basis of our telephone survey, we estimate that 74 percent of jurisdictions nationwide used information from local jurisdictions in other states to help maintain their registration lists. Some local election officials we visited told us that they shared voter registration information with other states and jurisdictions from time to time. For example, in a large jurisdiction we visited, of the 5,299 voters removed from the registration list in 2000, 1,571 were as a result of notifications from other states about the individuals moving to a new state. Officials in the jurisdiction showed us notices from a Florida and a Utah jurisdiction informing them about voters who had recently moved and should be removed from their registration list. Some agreements to share information were established by neighboring states or jurisdictions. For example, a local election official in the District of Columbia told us that they were beginning to exchange voter registration lists with surrounding states, after having compared registration lists with several nearby counties in 1997. In contrast, states could also choose not to share information. For example, election officials in one state we visited were statutorily prohibited from providing voter registration lists to other states, since only candidates and certain other designated individuals were allowed to view lists of registered voters.
Voter Registration List Maintenance
NVRA and State Election Codes Provided for Registration Officials Relied on Information From Numerous Sources to Maintain Officials Had Varying Degrees of Confidence in Their Lists Statewide Systems Provided Benefits, but Required Resources and Coordination to Develop and Maintain In addition to processing new applications, election officials maintained lists of registered voters, which involved the continual updating and deleting of information from the registration list, using information from numerous sources to keep voter registration lists accurate and current. Election officials reported difficulties in obtaining accurate and timely information from these sources and expressed varying degrees of confidence in the accuracy and currency of their registration lists. Statewide voter registration systems offered the potential to assist election officials with establishing and maintaining registration lists.
Federal Law and State Election Codes Provided For Registration List Maintenance and Provided for Cancellation of Registration Under Certain Circumstances
In passing NVRA, the federal government attempted to establish uniformity in certain list maintenance processes. NVRA required states to conduct a uniform and nondiscriminatory “general program” that makes a reasonable effort to remove ineligible voters from the list. NVRA permitted removing the names of individuals upon written confirmation of a change of address outside the election a change of address along with failure to respond to confirmation mailings and failure to vote in any election within two subsequent general federal elections, the request of the registrant, death, mental incapacity as provided for in state law, and criminal conviction as provided for in state law.
One of the purposes of NVRA was to ensure that once an individual was registered to vote, he or she remained on the voting list as long as he or she remained eligible to vote in the same jurisdiction. NVRA’s list maintenance provisions specifically prohibited removing a name from the voter registration list solely for failure to vote or for a change of address to another location within the same election jurisdiction.
The state election codes for all 50 states and the District of Columbia specifically provided for registration list maintenance and required cancellation of registrations under certain circumstances. An examination of the state statutes cited in our nationwide survey of state election officials showed that “purge” or registration cancellation requirements varied from state to state but were primarily based upon change of residency, death, criminal conviction, and mental incapacity. Most of the states examined required in certain cases that registered voters be informed of changes made to their registration status. See appendix IV for selected statutory requirements for list maintenance for the 21 states we visited.
Election Officials Relied on Information From Numerous Sources to Maintain Their Registration Lists
Local election officials at the jurisdictions we visited used a number sources of information and a variety of procedures to remove the names of registrants no longer eligible to vote. Local election officials used information obtained from these sources to both systematically verify the registration list and conduct ongoing identification efforts aimed at removal of ineligible registrants. However, officials noted difficulties with obtaining accurate and current information to perform list maintenance. Figure 19 shows an example of a list maintenance process and some of the numerous sources of information that local election officials could use to maintain accurate and current registration lists.
Election officials used various means to systematically verify their registration lists and identify voters who were no longer eligible to be registered, either because they moved or because they failed to respond to certain confirmation mailings. These means included mass mailings, comparing their entire voter registration list against information from the U.S. Postal Service National Change of Address (NCOA) program, and conducting door-to-door canvassing.
Some of the jurisdictions we visited relied on mass mailings of nonforwardable election-related material to confirm registrants’ eligibility. For example, officials in one large jurisdiction mailed a nonforwardable sample ballot to every registered voter before each election. If the ballot was returned as undeliverable, the officials sent forwardable mailings asking the registrant to confirm his or her address. Registrants who responded either remained on the registration list or, if their current address was outside the election jurisdiction, were removed from the registration list. Those who did not respond were designated inactive within the registration system. Within NVRA provisions, an inactive registrant can be removed from the registration list if he or she has not voted during the period of time between the date of the required confirmation notice and the second general election for federal office which occurs after the date of the notice. Some other jurisdictions we visited also conducted mass mailings using the same basic process. However, they used different mailing materials, such as voter registration confirmation cards or voter guides, conducted the mailings with different frequencies (i.e., every 2 years or 5 years) and/or targeted the mailings to those registrants who failed to vote in two federal elections.
Mass mailings, because they typically included every registered voter on the list, were costly compared to other verification checks that targeted particular groups of registrants, such as those who had moved. Also, the results were incomplete, since many people who had moved did not always confirm their change of address. According to FEC, from 1999 through 2000, local election officials mailed a nationwide total of 18,892,331 confirmation notices to persons who were reported to have moved outside the local election jurisdiction, and there was a 23-percent response rate to these notices.
U.S. Postal Service’s National Change of Address Program We estimate that 70 percent of jurisdictions nationwide used information from the U.S. Postal Service to help maintain accurate voter registration lists.
GAO Telephone Survey of Jurisdictions On the basis of our telephone survey, we estimate that 70 percent of jurisdictions nationwide used U.S. Postal Service information to help maintain accurate voter registration lists. Election officials used the U.S. Postal Service’s computerized NCOA files to match against their registration lists to identify those registrants who had moved. Some officials we visited said they relied on private vendors to perform the match; others contracted with the U.S. Postal Service to compare voter files with postal records.
The change of address program relied on registrants completing a change- of-address form to allow for the forwarding of mail. The NCOA files did not identify all people who moved because some did not submit a change of address form, nor did the files capture information about other sources of removal, such as deaths or criminal convictions. Some local election officials we visited expressed concerns that postal information did not always match information from their jurisdictions.
Two of the jurisdictions we visited used their required annual census as a means of verifying their registration lists. In one small jurisdiction, registrants who did not respond to the town’s annual census and had not voted in 2 years were placed in inactive status and notified of this change in status. If they remained inactive for another 2 years, they were removed from the registration rolls and notified of their removal. In another small jurisdiction, registrants were designated inactive if they did not respond to the town census and were removed from the rolls after no response to two subsequent confirmation letters.
Verifying Individual Registration Status
Election officials received information from a variety of sources to make individual changes to registration lists, including from state motor vehicle authorities, directly from the registrant, and from a variety of other sources, such as county and state courts.
To help maintain accurate voter registration lists, we estimate the following: To help maintain accurate vot Sixty-four percent of jurisdictions nationwide used information from motor vehicle authorities.
Ninety-three percent of jurisdictions nationwide used information from registrants.
GAO Telephone Survey of Jurisdictions Officials at many of the jurisdictions we visited said they received information from motor vehicle authorities on changes registrants made to their voter registration information. On the basis of our telephone survey, we estimate that 64 percent of jurisdictions nationwide used information from motor vehicle authorities to help maintain accurate voter registration lists. Motor vehicle authorities conveyed information about changes to a registrant’s information to election officials in a variety of ways, and some officials said timeliness was often a problem.
On the basis of our telephone survey, we estimate that 93 percent of jurisdictions nationwide used information received directly from registrants to help maintain their registration lists. Registrants could have their names removed from the list at their request. They could also request changes to their registration information, such as name or address. Some local election officials said that although registered voters were required to inform them of any change of address, the registrants frequently failed to do so. The officials told us they believed registrants were not aware of this requirement and that the problem was escalating due to the increasing transience of the population. The mobility of the population created a challenge for local election officials in one very large jurisdiction we visited where it is estimated that approximately 15 to 20 percent of the jurisdiction’s population moves each year.
Officials used a variety of other sources to identify registrants made ineligible by death, criminal conviction, or mental incompetence.
Local election officials obtained information about the deaths of registrants from sources such as state and county departments of health or vital statistics, the state election office, and newspaper obituaries. Most of the officials with whom we met said they received lists of death notices from their state’s department of health and removed those listed from their registration lists. Officials in some jurisdictions complained that this process was not always timely. Some said they had not received a death listing for several months; others said it was sometimes more than 1 year.
Some officials also reviewed newspaper obituaries and used them as a basis for removing registrants from their registration lists. In three small jurisdictions we visited, the local election official was also responsible for issuing death certificates, as the local election official was the clerk of the jurisdiction. Officials in some jurisdictions expressed concern that they often do not find out about registrants who die in other states. In some jurisdictions we visited, registrants were removed from the registration lists on the basis of a death notification from a family member. In others, the individual reporting the death of a registrant had to provide a copy of the death certificate for the name to be removed from the list.
Officials from most of the jurisdictions we visited said that they relied on information from the court system to identify convicted felons. However, some of those officials also said that the court system did not always notify them of criminal convictions or releases. For example, in one large jurisdiction we visited, officials said that they received no information on convictions from the court system. Some jurisdictions said they occasionally received information on convicted felons within their jurisdiction, but timeliness was often an issue. For example, one large jurisdiction said they had not received any information on felony convictions in over a year. Some of the jurisdictions we visited received no information of felons convicted outside of their counties or states.
If the court system provided information about criminal convictions, local election officials in some states had to interpret and spend time and effort researching a particular individual’s case to determine whether voting rights had been restored. For example, in Delaware, those convicted of certain offenses, such as murder, manslaughter, felony sexual offenses, or certain public corruption offenses, may not have voting rights restored. Any other person who is disqualified as a voter may vote 5 years after expiration of sentence, including probation or parole, or upon being pardoned, whichever occurs first. Thus, election officials in Delaware would need to investigate a particular individual’s offense and sentence to determine whether he or she was eligible to vote.
Officials at some of the jurisdictions we visited said they did not routinely receive information from the courts on persons who, as a result of mental incompetence, were no longer eligible to vote. Officials in one large jurisdiction in a statewide system said that the election office did not normally receive information about mental incompetence. Officials in a few jurisdictions said that the only information on mental incompetence was the affidavit the voter signed on the registration form affirming he or she was not mentally incompetent. Where mental incompetence was an eligibility restriction, several officials said they had not removed or could not remember removing anyone from their rolls for this reason. An official in one large jurisdiction said such a disqualification had not happened in 27 years. Local election officials from two jurisdictions said that should they receive information from the courts on a state mental capacity restriction, they would send a confirmation letter to the registrant. Officials in other jurisdictions said they had no process for removing registrants for this criterion.
Local Election Officials Expressed Varying Degrees of Confidence in the Accuracy and Currency of Their Lists
The maintenance of registration lists depended not only on the actions of election officials, but also on the timely receipt of accurate information from numerous sources. Some local election officials expressed concern about the accuracy and currency of their voter registration rolls, while others felt that as a result of NVRA, the voter registration lists were more accurate.
Some local election officials were not able to access information on a timely basis. On the basis of our telephone survey, we estimate that 84 percent of jurisdictions nationwide checked death records and 76 percent of jurisdictions nationwide checked ineligibility due to a criminal conviction initially and/or on a continual basis. However, we estimate that only 40 percent of jurisdictions nationwide had the ability to make death record checks on a “real-time” or immediate basis. Similarly, only 33 percent of jurisdictions nationwide had the ability to make criminal conviction checks on a real-time basis. “Currently, we are required to keep voters who have moved and a third party, primarily the post office, has notified us that they do not live at that residence. We cannot cancel them off our voter rolls. We have to carry them on an inactive roll. In the jurisdiction, we have about 200,000 of those people on the inactive roll that we have to supply to those poll workers. Yet, in looking at our database, about 100 of those actually show up and vote.”
Despite concerns, some election officials felt that NVRA had increased the accuracy of the voter rolls because registration lists were updated more frequently. They also noted that because NVRA increased the opportunities and locations at which to register, the registration workload had stabilized over the year. Officials in one small jurisdiction noted that NVRA had greatly helped them to purge inactive voters from registration lists following confirmation mailings. Officials said their list is now “more pure” in terms of having more “real” registered voters.
Information about the accuracy and currency of voter registration lists nationwide was difficult to obtain, and even more difficult to find was information on the extent of the effect of errors on voter registration lists. Errors and inaccuracies, such as multiple registrations or ineligible voters appearing on the list, could occur as a result of different reasons. However, when explicitly asked about problems with list maintenance in the November 2000 election, most local election officials did not indicate that they had any problems.
Statewide Voter Registration Systems Provided Benefits, but Required Resources and Coordination to Develop and Maintain
Thirteen states and the District of Columbia operated statewide voter registration systems, which covered all local jurisdictions. Several other states were implementing such systems, while others operated systems with some local jurisdictions on-line. Local election officials we visited described benefits that statewide voter registration systems provided. However, the implementation and maintenance of such systems required significant resources and the coordination of many jurisdictions.
Benefits of Statewide Voter Registration Systems
Local election officials in jurisdictions we visited that had statewide registration systems described several benefits of their system. These benefits included real-time access to information about registrants from other jurisdictions in the state, and potentially in other states; the reduction of duplicate registrations across the state; and the potential for instant transmittal of registration applications and information from state motor vehicle authorities and other intake offices to the appropriate election official.
FEC described several benefits for list maintenance to operating an automated statewide voter registration system. These benefits included capabilities to “handily” remove names of registrants by reason of death, felony conviction, and mental incompetence; run the statewide list against NCOA files to identify persons who have moved and left a forwarding address with the U.S. Postal Service; receive cancellation notices electronically from motor vehicle authorities, or from other election jurisdictions throughout the nation; perform internal checks to guard against multiple or improper handle any or all of the mailings required under NVRA, such as acknowledgement notices, confirmation notices, and verification mailings; and generate much of the data that FEC required under provisions of NVRA.
Limitations of a Statewide System
Statewide voter registration systems had the potential to assist election officials with establishing and maintaining registration lists. However, implementing a statewide system required resources, time, and the coordination of multiple jurisdictions. Also, a statewide system could not ensure the accuracy of a state’s voter registration lists because data may not have been received or entered correctly, or inaccurate data may have been entered.
The development and implementation of a statewide voter registration system would not necessarily be an inexpensive or short process. FEC estimated that the process could take 2 to 4 years or longer, and that the costs to implement such systems over the past 2 decades have ranged from under $1 million to over $8 million for the first year. In Maryland, the State Board of Elections and its contractor have worked on the statewide voter registration system since 1998 and expect to finish by the end of 2001 at a cost of $3 to $4 million. In Michigan, the statewide voter registration system was developed within the $7.6 million that was appropriated for the program, with more than half of the funds going to local units of government. Most local election officials we visited that were linked to statewide systems were very pleased with their system. However, officials in one very large jurisdiction in a state without a statewide system indicated that they would prefer to maintain a county-based system because of funding concerns. The jurisdiction currently shares computer capacity with a countywide computer system, and the county pays the bill for processing requirements. With a statewide system, the official said that the jurisdiction “would have to foot the bill for operating and maintenance costs.” Ultimately, some states have implemented statewide systems, and have found the system to be beneficial, while others have felt the investment may not be worth the price.
An integrated statewide system required the coordination of all jurisdictions within a state. Coordination could be affected by the size of the state, the number of local election jurisdictions within the state, the variations of the automated systems the jurisdictions operated independently, and the cooperation of local election officials within the state. For example, some large states such as Pennsylvania, New York, Illinois, and New Jersey did not have statewide systems. Less than half of the counties in Texas are linked to the statewide system operated by that state. States with numerous local election jurisdictions, such as townships and cities, also typically did not operate statewide systems. A local election official in a state with several jurisdictions said that when the state was implementing their integrated system, one official was so reluctant that she did not take the system hardware out of the box until the “state forced her to.”
Finally, a statewide voter registration system could not ensure the accuracy of a state’s voter registration lists because data may not have been received or entered correctly, or inaccurate data may have been entered. For example, Alaska, despite the implementation of a statewide voter registration system, reported that it has at least 11 percent more active registered voters than voting age population. Maintaining accurate voter registration lists depended on the timely receipt of accurate information from multiple sources. In none of the local election jurisdictions that we visited, did officials say that they received comprehensive, timely information from all of the sources they used to update their registration list. Even with an integrated system, these jurisdictions would still require processes to obtain more timely and accurate data. For example, a statewide voter registration system would not be able to remove from the lists the names of registrants who have died if timely death records were not available. Further, adequate quality assurance processes for the data would also need to be developed as data entry errors can and will occur. One jurisdiction we visited addressed this issue by printing out all registration record changes in the voter registration system on a daily basis to be checked against the paper forms initiating the changes.
Challenges
Local election officials nationwide processed registration applications and, using various systems and sources of information, compiled and maintained lists of registered voters to be used throughout the election process. In summary, the following are the challenges election officials identified for voter registration: Officials faced challenges in processing incomplete applications, identifying ineligible individuals and those who had applied to register more than once, and minimizing the number of individuals who showed up at polling places but had never been registered to vote. In particular, officials faced challenges coordinating the events necessary to process registration applications submitted at motor vehicle authorities. Increasing the use of technology options, such as electronically transmitting applications from motor vehicle authorities to election offices, expanding voter education, and improving the training of motor vehicle authority staff were identified as means of addressing these challenges.
Obtaining accurate and timely information from numerous sources to update voter registration lists was a challenge noted by election officials. These officials relied on local, state, and federal sources to provide accurate and current information about changes to registration lists. Information did not always match their records, was received late, or was never received at all. Jurisdictions varied in capability and opportunity to share information with other jurisdictions and states. In none of the local election jurisdictions that we visited, did officials say that they received comprehensive, timely information from all of the sources they used to update their registration list.
Finally, integrating technology, process, and people to accept registration applications and compile registration lists, to ensure all eligible citizens who intended to register were able to do so, was identified by officials as a challenge. Election officials processed registration applications, and using various technologies and systems compiled lists of registered voters to be used throughout the election process. They faced challenges with inaccuracies, such as multiple registrations, ineligible voters appearing on the list, or eligible voters who intended to register not being on the list. Local election officials expressed varying levels of confidence in the accuracy of their voter registration lists.
Absentee and Early Voting
The narrow margin of victory in the November 2000 general election raised concerns about absentee voting in the United States. Headlines and reports have questioned the fairness and effectiveness of the absentee voting process by featuring accounts of large numbers of mail-in absentee ballots being disqualified and by highlighting opportunities for mail-in absentee voting fraud.
A growing number of citizens seem to be casting their ballots before election day. However, the circumstances under which these voters vote and the manner in which they cast their ballots differ because there are 51 unique election codes. Due to the wide diversity in absentee and early voting requirements, administration, and procedures, citizens face different opportunities for obtaining and successfully casting ballots before election day. In particular, the likelihood that voters’ errors in completing and returning mail-in absentee ballots will result in their ballot being disqualified varies, even, in some instances, among jurisdictions within the same state. However, states do not routinely collect and report absentee and early voting data. Thus, no national data currently are maintained regarding the extent of voting prior to election day, in general. More specifically, no data are maintained regarding the number of mail-in absentee ballots that are disqualified and therefore not counted. In addition, election officials face a variety of challenges in administering absentee and early voting, including establishing procedures to address potential fraud; addressing voter error issues, such as incomplete applications and ballots; handling late applications and ballots; and managing general workload, resource, and other administrative constraints.
In this chapter, we will describe (1) the frequency and availability of voting before election day, (2) the mail-in absentee voting process and challenges faced by election officials in conducting this type of voting, and (3) the types of in-person absentee and early voting programs available and the challenges encountered by election officials in administering these efforts.
Voting Before Election Day
Although most voters cast their ballots at their precincts on election day, every state and the District of Columbia has procedures by which voters can cast their ballots prior to election day. Generally, any voting that occurs before election day has been called "absentee" voting because the voters are absent from their precinct on election day. Registered voters may obtain their ballots prior to election day in one of two ways—through the mail or in person. States do not routinely collect and report data on the prevalence of voting before election day. Using Census data, we estimate that, in the November 2000 general election, about 14 percent of voters nationwide cast their ballots before election day. Of these voters, about 73 percent used mail-in ballots and about 27 percent voted in person (as seen in figure 20). This represents an increase from the 1996 presidential election in which we estimate a total of about 11 percent of voters cast ballots before election day. Many of the election officials in the jurisdictions we visited reported that voting before election day had been increasing in the past few years. For example, in one jurisdiction, voting before election day has increased in the past few years from 50 percent in the 1996 election to a little over 60 percent of the total ballots cast in the November 2000 general election. In another jurisdiction, where the state had passed legislation making voting before election day easier and more convenient, this type of voting increased from about 26 percent of all ballots cast in the November 1996 general election to about 60 percent for the November 2000 general election.
As shown in figure 21, the total percentage of individuals voting before election day in the November 2000 general election varied among the states from about 2 percent in West Virginia to about 52 percent in Washington. In 31 states, less than 10 percent of voters cast their ballots before election day. However, in 6 states over 25 percent of the voters cast their ballots before election day, including 1 state with more than half of the voters casting their ballots in this manner.
Some states require voters to meet one of several criteria to be eligible to vote before election day, such as being disabled, elderly, or absent from the jurisdiction on election day. However, as seen in figure 22, as of July 2001, 18 states have initiated "no excuse" absentee voting in which any voter who wishes to do so may vote absentee. These voters may vote a mail-in ballot or vote in person as established by state requirements, without first having to provide a reason or excuse. In addition, some states have initiated "early voting" in which local election jurisdictions may establish one or, particularly in larger jurisdictions, several locations at which any voter may cast his/her ballot in person a number of days before election day, based on state statutory requirements.
One of the primary purposes of absentee and early voting is to increase voter participation. For example, being able to vote before election day provides greater accessibility to voting for certain voters, such as those who are disabled, living internationally, traveling extensively, or residing in distant rural communities with long commutes to work. In addition, allowing voters to vote before election day can make voting more convenient, particularly in states that allow no-excuse absentee or early voting. Election officials in some jurisdictions we visited stated that no- excuse absentee and/or early voting had increased overall voting before election day, particularly when these programs first became available. Election officials were less certain about any positive effects these efforts have had on overall voter participation. For example, several jurisdictions that offer no-excuse absentee and/or early voting stated that they have had a greater shift of voters from election day to absentee and early voting than overall increases in voter participation. However, election officials in Oregon have reported that their efforts to conduct entire elections by mail have resulted in some significant increases in voter participation.
Election officials disagree regarding whether the additional accessibility and convenience gained from the increased availability and use of mail-in absentee voting and all vote-by-mail elections outweigh the increased opportunities for voter fraud. This disagreement represents a clear example of how election officials often must weigh opportunities to increase access to voting against the elevated potential risks to integrity in the voting process. Election officials generally did not have similar concerns regarding increases in early and no-excuse, in-person absentee voting—possibly due to the resemblance of these processes and procedures to election day voting. However, regardless of the effects on overall voter participation and election officials’ concerns regarding increased opportunities for fraud, many election officials agreed that voters liked the convenience of no-excuse and early voting.
Conducting Mail-in Absentee Voting
Different State Requirements to Vote, but Basic Steps Similar Manner, Frequency, and Deadlines for Applying Vary Across States Ballot Casting Differs Across States and Jurisdictions Processes for Qualifying Ballots Vary, but Similar Challenges Exist Voter Education Efforts Are Diverse The basic steps for mail-in absentee voting are similar. Registered voters apply for and receive their ballots; voters complete and return their ballots and related materials; and local election officials review ballot materials prior to counting them. However, the circumstances under which voters are allowed to vote by a mail-in absentee ballot, the manner and deadlines for applying and casting these ballots, and the processes by which these ballots are reviewed, differ widely across states and even, in certain instances, within the same state. In addition, local election officials face several challenges in administering this type of voting. While election officials have established procedures to address certain potentials for fraud, some officials expressed concerns regarding their ability to fully address this issue. In addition, election officials identified several other key challenges in the mail-in absentee voting process. These issues include responding to voter error issues, such as incomplete applications and ballots; handling late applications and ballots; and dealing with general workload issues related to processing large numbers of applications and ballots in a timely manner, including addressing postal concerns such as delivery, priority, and timeliness.
States Had Different Requirements to Vote Mail- in Absentee, but the Basic Steps in the Process Were Similar
All 50 states and the District of Columbia have some statutory provisions allowing registered voters to vote by mail, but not every registered voter is eligible to do so. Some states allow all registrants to vote with a mail-in absentee ballot, but other states require that registrants provide certain reasons or excuses. Examples include being absent from the state or county on election day; a member of the U.S. Armed Forces or a dependent; permanently or totally disabled; ill or temporarily disabled; over a certain age, such as 65; an observer of a religious holiday on election day; at a school, college, or university; employed on election day in a job for which the nature or hours prevent the individual from voting at their precinct, such as an election worker; and involved in emergency circumstances, such as the death of a family member.
On the basis of Census data, we estimate that about 10 percent of voters nationwide cast their circumstances differed under which voters in different states were allowed to vote by a mail-in absentee ballot, the basic steps in the process were similar. As seen in figure 23, the basic process of mail-in absentee voting includes the following steps: Registered voter applies for a mail-in absentee ballot. Local election officials review the applications and, if the voter meets the established requirements, sends the voter a mail-in absentee ballot.
The voter votes and returns the ballot in accordance with any administrative requirements (such as providing a signature or other information on the ballot/return envelope, often referred to as the affidavit envelope).
Local election officials or poll workers review the information on the ballot/return (i.e., affidavit) envelope and subsequently “qualify” or “disqualify” the ballot for counting based on compliance with administrative requirements, such as signatures.
The Manner, Frequency, and Deadlines for Applying for Mail-in Absentee Ballots Varied Across States
The manner in which registered voters were to apply, how frequently they were to apply, and when they were to apply to vote a mail-in absentee ballot varies based on state requirements. Depending on these requirements, registered voters may fax, call, write, or visit their local election official to obtain an application or learn what information is required to request a mail-in absentee ballot. All jurisdictions we visited had a standard state or jurisdiction application form available from local election officials for registered voters to obtain a mail-in absentee ballot. Figure 24 shows an example of the application forms used. In addition, several states we visited allowed voters to apply for an absentee ballot by using a variety of other means, such as a letter or telegram sent to local election officials. In addition, some jurisdictions have a variety of application forms, which are used based on the circumstances under which voters qualify to vote by a mail-in absentee ballot.
In addition to providing absentee ballot applications in response to voter’s requests, some jurisdictions made absentee ballot applications available at voter registration locations, such as state motor vehicle licensing and public service agencies, and other public locations, such as libraries. Mail- in absentee ballot applications were also available on-line in many states. For example, Colorado, Georgia, Massachusetts, Oklahoma, and Texas all have state election Web sites that provide mail-in absentee ballot request forms, which can be downloaded, printed, and returned to the appropriate local election office by mail, fax, or in person. See figure 25 for an example of a mail-in application form available on a local jurisdiction’s Web site.
Some local election officials took an even more proactive approach to providing applications for mail-in absentee voting. For example, elections officials in one large jurisdiction sent an absentee voting application and a letter explaining the procedures for absentee voting to all registered voters who were eligible to vote absentee, so that they did not need to request an application. These included registrants who were 60 or older, disabled, or poll workers who would not be working in their precinct on election day. As another example, all California jurisdictions sent every registered voter an absentee ballot application as part of their sample ballot package. Since California does not require an excuse to vote absentee, registered voters who wished to vote in this manner simply needed to complete the application and return it to their local elections office.
State requirements varied regarding how frequently a voter had to apply for a mail-in absentee ballot. Depending upon the state, voters may have been required to apply for each election in which they wished to vote by mail, apply once for all or certain elections held during a year, or apply for “permanent” absentee status, in which a mail-in ballot is automatically sent for at least 5 years or for all future elections until the voters request to have their absentee status revoked. appendix V provides a summary of the state statutory provisions permitting permanent mail-in absentee voting. As shown in appendix V, voters may have to meet certain state qualifications, such as permanent disability, to qualify for a permanent mail-in absentee ballot application. For example, in New York and California, a person could apply for permanent absentee voter status due to a permanent illness or disability by checking a box on the absentee ballot application. However, in Washington, for example, no excuse was needed for permanent absentee status. In the jurisdiction we visited in this state, about 50 percent of the registered voters were permanent absentee voters, and absentee ballots represented about 62 percent of all ballots cast in the November 2000 general election Differences existed in state statutory requirements regarding the deadline for requesting a mail-in absentee ballot. In the states we visited, the deadline for returning completed mail-in absentee ballot applications ranged from 1 day to 7 days before the election. Some states, such as California and Colorado, had a procedure for registered voters to obtain an emergency ballot after the deadline to apply for a mail-in ballot had passed.
To exercise this option, voters were required to have a circumstance that came up after the absentee application period had closed that prevented them from voting at their precincts on election day. For example, Illinois has a strict set of criteria for emergency voting. Under one circumstance, a voter admitted to the hospital not more than 5 days before the election is entitled to personal delivery of a ballot if a doctor signs an affidavit attesting that the voter will not be released on or before election day.
Some Jurisdictions Provided More Assistance to Mail-in Absentee Applicants With Incomplete Applications Than Did Others
Once local election officials receive mail-in absentee ballot applications or requests, they are to review them to determine if they meet state requirements for mail-in absentee voting. These requirements may include whether the applicant is a registered voter, the application includes all the information required (e.g., applicant’s signature, witness), and the applicant meets the state’s approved eligibility requirements for absentee voting. If all the required information is not provided on the application (such as name, address, birth date, and/or voter signature), most jurisdictions we visited had standard letters that were to be sent to voters requesting them to provide the missing information. In one jurisdiction, election officials said that state law requires that all jurisdictions in the state notify applicants of the status of their request, particularly if they are unable to process it. In contrast, election officials in a very large jurisdiction stated that they do not provide any feedback to applicants with problem applications, unless the voters contact them regarding the their application’s status. Officials from another very large jurisdiction stated that, when applications were missing information, the officials would send out the absentee ballot along with a request for the applicants to provide the missing information with the absentee ballot, rather than delay when the voter receives their ballot. However, officials from most other jurisdictions we visited stated they would not send voters their absentee ballot until the voters had provided all the required application information. In addition, officials from most jurisdictions stated that they only provide feedback to the applicants if there is a problem with the applications. Otherwise, the voters received the absentee ballots, once they were available, as their confirmation that their request was received.
Election officials in several jurisdictions stated that they attempted to make more direct contact with voters as the application deadline approached. For example, election officials in both small and very large jurisdictions said they attempted to contact voters regarding problems with their applications by telephone if there was insufficient time to allow for a letter to be sent. However, election officials in one medium-sized jurisdiction said that they did not attempt to contact any voters by telephone because they would only take such actions or provide such assistance that they could provide to all voters, not just some portion of them. In contrast, an election official in one large jurisdiction personally resolved problem applications. For example, this official drove to a nursing home before the November 2000 general election to obtain a signature on a mail absentee ballot application from a 99-year-old woman whose daughter had mistakenly signed the application.
Officials Faced Several Challenges in Successfully Processing Applications
Officials in November 2000 faced a variety of challenges in successfully processing applications for mail-in absentee ballots, including voter errors and voter’s not understanding the process, late applications, and workload difficulties. Local jurisdiction officials described voters’ failure to provide critical information, such as a signature and/or valid residence or mailing addresses, as a principal challenge to successfully processing applications. On the basis of our telephone survey nationwide, we estimate that 47 percent of jurisdictions encountered problems with voters failing to properly complete their applications, such as providing a signature; 44 percent of jurisdictions encountered problems with voters failing to provide an adequate voting residence address; and 39 percent of jurisdictions encountered problems with voters failing to provide an adequate mailing address.
We estimate that 47 percent of jurisdictions nationwide experienced W ti problems with voters not properly completing applications, such as not providing a signature. We also estimate that 39 and 44 percent of jurisdictions had problems with voters failing to provide adequate mailing or voting residence addresses, respectively.
In addition, jurisdictions faced challenges with voters who did not fully understand the mail-in absentee voting process. For example, on the basis of our telephone survey of jurisdictions, we estimate that 51 percent of jurisdictions nationwide encountered problems processing applications because citizens did not register to vote before applying for a mail-in absentee ballot. Also, local election officials said that political parties in one large jurisdiction sent all their members forms to request absentee ballot applications. After some voters filled out the forms and then received absentee ballot applications, they called the local elections office to tell them they did not want to vote absentee. In another jurisdiction, some voters sent in more than one ballot application for themselves.
We estimate that 51 percent of jurisdictions nationwide experienced W ti problems processing applications because citizens did not register to vote before applying for a mail-in absentee ballot.
In addition, jurisdictions experienced problems with receiving applications after the deadline. We estimate that 54 percent of jurisdictions nationwide experienced problems with receiving applications late. An official in a medium-sized jurisdiction stated that their "primary difficulty in absentee voting is getting voters to respond in a timely fashion to meet mailing deadlines.”
We estimate that 54 percent of jurisdictions nationwide experienced W ti problems with receiving late applications.
We estimate that local election officials nationwide received about 14.5 million applications for absentee mail-in ballots (plus or minus 3 million) for the November 2000 general election. As seen in figure 26, the number of absentee ballot applications can result in large volumes of absentee ballot packages being mailed to voters. Election officials in both small and large jurisdictions said they considered processing applications a workload challenge for their staff. For example, election officials in a very large jurisdiction stated that they received over 640,000 applications for absentee ballots. Officials in a large jurisdiction, as a result of applications received, sent out about an average of 2,000 absentee ballots each day for several weeks before the election. Officials from a small jurisdiction stated that processing absentee voting materials was time-consuming and expensive, and expressed concerns that they would face significant challenges if the number of absentee ballot applications increased. In addition, several local election officials specifically mentioned the large number of absentee ballot applications received the day of the absentee ballot application deadline, particularly the increased volume of faxed absentee ballot applications received on the last day to be an administrative challenge.
Officials from two very large jurisdictions specifically mentioned that they hoped their recently instituted early voting programs would reduce the number of voters using mail-in absentee ballots and, thereby, reduce the workload burden and other challenges in processing mail-in absentee applications.
In addition, some of the jurisdictions that we visited had deadlines for absentee ballot applications that were very close to election day—as little as 1 to 5 days before election day. Such jurisdictions faced challenges in ensuring that all ballot applications received by the deadline could be processed and the ballots mailed back to voters with sufficient time for the ballots to be voted and returned. Some officials from such jurisdictions expressed doubt that voters would be able to return their ballots by the election night deadline if they received the ballots 5 days or less before the deadline. For example, one jurisdiction had an mail-in absentee application deadline of the Saturday before election day, clearly a short amount of time to mail the voter the ballot and have it returned by election night. To address these deadline issues, some officials stated that they used overnight mail to speed up ballot distribution as the deadline approached. When allowed by state law, some jurisdictions also encouraged voters, at their own expense, to return voted ballots by overnight mail. In addition, several local election officials indicated that their states were considering legislative changes, such as allowing more time between primaries and general elections, to provide for more time for the mail-in absentee process.
The Manner in Which Mail- in Absentee Ballots Were Cast Differed Across States and Jurisdictions
Once local election officials obtained any additional needed information and approved the application, they mailed an absentee ballot to the registered voter. Once registered voters receive their absentee ballots, it was their responsibility to vote and return their ballot. As on election day, the type of voting methods used for mail-in absentee voting varied from one jurisdiction to another, even within the same state.
We estimate that most jurisdictions nationwide used either optical scan or W ti paper ballots for mail-in absentee voting.
Nationwide, for the November 2000 general election, we estimate that over half of the local jurisdictions, about 61 percent, used the same method for mail-in absentee voting as they used on election day for the November 2000 general election. Moreover, we estimate that 89 percent of jurisdictions nationwide that used election day methods that lent themselves to mail-in voting (i.e., punch card, optical scan, and paper ballots) used the same voting equipment for both types of voting. Overall most jurisdictions nationwide used either optical scan or paper ballots for mail-in absentee voting during the November 2000 general election. Specifically, as seen in figure 27, nationwide for mail-in absentee voting, we estimate the following: about 44 percent of election jurisdictions used optical scan ballots; about 45 percent of election jurisdictions used paper ballots; and about 13 percent of election jurisdictions used punch card ballots.
Some jurisdictions using either punch card or paper ballots as of November 2000 indicated that they are considering or have already made plans to change to optical scan ballots for mail-in absentee voting. One jurisdiction indicated that it was keeping its punch card equipment for mail-in absentee ballots, but was planning to change to a styrofoam-backed ballot to reduce the occurrence of pregnant or dimpled chads. For more information regarding characteristics of these voting methods, see chapter 1 of this report.
In addition to voting the ballot, absentee voters must complete additional information on the ballot or return envelope, often referred to as the affidavit envelope, in accordance with their state’s administrative requirements. Typically, the absentee voter’s signature, and, possibly, name and address, were required on the absentee ballot or return envelope. In addition, as shown in appendix V, in an effort to ensure that the appropriate person completes the ballot, five states require that the voter’s signature be witnessed; one state requires that the signature be notarized; and seven states require that the statement be witnessed or notarized.
Frequently, the voted ballot was to be sealed within a series of envelopes. For example, as seen in figure 28, the ballot was to be sealed within a secrecy envelope. The secrecy envelope containing the ballot was to be subsequently sealed in the return envelope on which the voter was to provide the required administrative identifying information (e.g., signature). In some jurisdictions, the entire package is then further sealed in an additional envelope provided by the election office in which to return the ballot.
Once the ballot and accompanying materials are completed, the voters are to return their voted ballots to their local election jurisdiction’s office. State requirements vary regarding the manner in which absentee ballots may be returned. Some states, such as Oklahoma and Texas, required that these ballots only be returned by mail, and other states, such as New York and New Mexico, allowed the voter return the voted ballot by personally delivering it. In addition, some states we visited, such as Michigan, Illinois, and California, allowed for the voted ballot and accompanying materials to be delivered in person by the voter or by a family member of the voter to the local elections office and/or the voter’s precinct on election day. In an effort to ensure integrity of the process, some states require the voter to provide written authorization in order for the family member to deliver the ballot. By contrast, California allows any authorized representative to return a voter’s absentee ballot during the last 7 days of an election, up to and including election day.
Most States Require Absentee Ballots to Be Received by Election Day
State deadlines for receiving absentee ballots from civilians living within the United States range from the Friday before election day to 10 days after election day. However, as seen in figure 29, most states require absentee ballots to be returned no later than election day, unless the voter meets certain special circumstances, such as being in the active military or residing overseas. In the nine states and the District of Columbia where a mail-in absentee ballot may be returned after election day, all but one required the envelopes to be postmarked on or before election day. See appendix V for each state’s specific deadlines for receiving mail-in absentee ballots. Several local election officials recommended that a standard, nationwide deadline for receiving mail-in absentee ballots should be set for federal elections.
In some jurisdiction election officials stated that they consider postal problems a significant challenge for mail-in absentee voting within the United States. Generally, these jurisdictions reported that they had experienced some problems with postal deliveries and/or the priority given to the delivery of election and balloting materials, such as applications. However, officials expressed fewer concerns about postal delivery and timeliness in the jurisdictions we visited for domestic delivery than for overseas delivery. In one jurisdiction, election officials said that election day was designated as a holiday and, as such, they had trouble receiving mail delivery of absentee ballots on election day, the last day they could be received. Officials from a very large jurisdiction reported that, generally, postal delivery problems do not occur repeatedly in the same area of their jurisdiction. However, one jurisdiction reported consistent delivery delays after the U.S. Postal Service centralized its operations. Election officials worked with the Postal Service to mitigate this problem.
Several other election officials provided additional examples of having worked closely with the local Postal Service offices to develop workable solutions regarding delivery and timeliness issues. In many jurisdictions we visited, absentee voting materials were printed in colored or specially marked envelopes to assist Postal Service employees in identifying and facilitating delivery. Rather than waiting for postal delivery, several other jurisdictions sent election employees to local post offices several times a day to pick up absentee ballots as the deadline approached and/or arrived. In addition, officials at some locations we contacted had suggestions for changes in their procedures to mitigate postal delivery challenges. For example, on official suggested requiring additional information on the voter’s absentee ballot application, such as an e-mail address and/or a telephone number, to facilitate processing applications with incomplete information, rather than having to rely solely on correspondence through the Postal Service.
In addition, some jurisdictions allowed voters to use overnight mail, at their own expense, to return voted absentee ballots, which was particularly useful to voters as the deadline approached. Other jurisdictions stated that they were required by state law to only accept ballots through mail delivery by the U.S. Postal Service. Some of these officials agreed that a change in state laws allowing receipt of absentee ballots from overnight carriers, at the voter's expense, would be helpful in addressing the problem of absentee ballots from some voters that arrive too late to be counted.
Generally, jurisdictions pay for postage-related costs for mail-in absentee voting, such as the costs to mail ballot applications and ballots to voters. As deadlines approached, some jurisdictions even incurred overnight delivery costs in an attempt to provide absentee balloting materials to voters in a timely fashion. Voters often must pay for the postage to return applications and ballots to local election offices. Some local election officials expressed concerns regarding growing postal costs to provide election-related materials, such as absentee applications and ballots, to voters. From our mail survey, we estimate that about half of the jurisdictions nationwide (54 percent) would like for the federal government to assist them with postage for election related materials. As another alternative, several election officials suggested having special postage rates for election related materials, particularly absentee balloting materials. In some instances, states have begun to assume all or some of the postage costs for absentee voting materials for statewide elections. In addition, some jurisdiction officials said that they provided voters with postage-paid return envelopes for absentee ballots. In some instances, these envelopes were provided through fiscal support from the state. Other officials suggested that they would like to provide such services to voters but did not have the funds to be able to do so. One jurisdiction official stated that the state or federal government should, at a minimum, assume the costs incurred by voters to return absentee ballots by mail, which could be interpreted, in his opinion, as a poll tax. Further, a few jurisdiction officials commented that U.S. Armed Forces personnel and overseas citizens do not have to pay postage to return their voted absentee ballots in some jurisdictions and questioned whether this service should be extended to all voters. Election officials in two jurisdictions said that, although the jurisdictions indicated the required postage in the corner of the return envelope, they would assume the costs if the voter did not pay.
Oregon and Some Local Jurisdictions Have Conducted All Vote-by-Mail Elections
In addition to mail-in absentee voting, some jurisdictions have conducted entire elections by mail. The state of Oregon conducted its first general election using all voting by mail in November 2000. All registered voters in the state were mailed a ballot and allowed to return the ballots by election day through the mail, or by personally delivering them to the elections office or various manned, drop-off sites located throughout the jurisdiction. Oregon reported some increases in voter turnout for the November 2000 general election as well as other statewide elections. For example, voter turnout in an all vote-by-mail primary in 1995 rose to 52 percent, up from 43 percent previously. In a vote-by-mail special election for U.S. Senator, voter turnout was 65 percent, representing a record for special elections. In addition, some jurisdictions have conducted all voting by mail for certain elections or in certain precincts in which the number of registered voters are very small.
Officials Have Established Procedures for Preventing Mail- in Absentee Fraud, but General Concerns Remain in Some Jurisdictions
While jurisdictions have procedures to address certain potentials for fraud in mail-in absentee voting, some local election officials expressed concerns regarding their ability to fully address this issue, particularly regarding an absentee voter being unduly influenced or intimidated while voting. Based on our telephone survey of jurisdictions, we estimate that less than 1 to 5 percent of jurisdictions nationwide experienced special problems with absentee voting fraud during recent elections. In general, absentee voting fraud concerns tend to fall into three categories, including (1) someone other than the appropriate voter casting the mail-in absentee ballot, (2) absentee voters voting more than once, and (3) voters being intimidated or unduly influenced while voting the mail-in absentee ballot.
Local election jurisdictions use a number of procedures to ensure the appropriate voter completes a mail-in absentee ballot. For example, from GAO’s telephone survey of jurisdictions, we estimate that nationwide 55 percent of the voting jurisdictions check a voter’s signature on the absentee ballot materials with the signature originally provided on the voter’s registration documents (as illustrated in figure 30); 55 percent of jurisdictions check a voter’s signature on the absentee ballot materials with the signature originally provided on the application for a mail-in absentee ballot; and/or 36 percent of jurisdictions require a voter’s signature on the absentee ballot materials to be witnessed or notarized.
All of the jurisdictions we visited used either one of these or other procedures, and most jurisdiction officials did not identify this type of fraud as a major concern. In particular, Oregon officials expressed confidence in their procedures designed to reduce the potential for someone other than the registered voter voting the mailed ballot. Oregon officials compared signatures on mailed ballot materials to voter registration materials. The officials said that this signature comparison provides even greater security against this type of fraud than many jurisdictions’ election day procedures in which voters may not have to show identification or have their signatures checked before casting a ballot. However, even with the described procedures in place, a few jurisdiction officials said that they ultimately have no way of knowing with absolute certainty that only the appropriate person requests and casts an absentee mail ballot.
Likewise, local election jurisdictions in November 2000 employed several procedures to prevent voters from voting more than once. From GAO’s telephone survey of jurisdictions, we estimate that, before election day, 64 percent of jurisdictions nationwide checked the absentee ballot applications against their voter records to determine whether a voter had previously applied for a mail-in ballot for that election before providing a voter an absentee ballot. On election day, we estimate that 78 percent of the jurisdictions nationwide checked election day poll books, lists, or logs to determine whether a voter had requested, been sent, or already voted an absentee ballot. For example, as seen in figure 31, one jurisdiction used bar coding on mail-in absentee applications to identify voters who have been sent absentee mail ballot packages. This information is to be scanned into the system used to generate election day poll books, so that voters who have been sent a mail-in absentee ballot can be identified if they attempt to vote on election day. We also estimate that 46 percent of jurisdictions nationwide checked absentee ballots received against election day poll books, lists, or logs to determine if an absentee voter voted on election day before counting the absentee ballot. In addition, we estimate that 10 percent of jurisdictions nationwide employ other methods to ensure an absentee voter only votes once during an election. For example, poll workers on election day can check on-line database containing absentee voting information to verify that voters had not voted before election day. All of the jurisdictions we visited used either one of these or other procedures, and most jurisdiction officials did not identify this type of fraud as a major concern.
Officials from some jurisdictions stated that a potential for abuse continues to exist with mail-in voting through voters possibly being intimidated or unduly influenced in their homes when casting their mail-in ballot. This more general fraud concern is, to some extent, inherent in the process and, thus, more difficult to address and causes more concern among some officials. For example, an election official from one very large jurisdiction stated he experienced a situation with absentee ballot fraud allegations during a recent local election. He was informed that people were going door-to-door in low-income neighborhoods to obtain and complete absentee ballot applications and ballots. Because of these types of allegations, he stated that absentee voting by mail is the area that concerns him the most about the elections process. Generally, he said these problems are more likely to occur in smaller elections, such as primaries or local elections, where such efforts have the greatest potential to have an effect on the actual outcome of the election. However, smaller elections, such as primaries, can still have significant impacts on the outcome of general elections in certain circumstances for certain races. This official stated that, at a minimum, he would like to see state law designate people’s homes as polling places while they are completing their absentee ballot. This type of law would make electioneering illegal while a person is casting his or her mail absentee ballot. In addition, one jurisdiction officials stated that political parties attempt to increase turn out for their party by sending ballot applications to voters directly. These efforts result in the election officials not knowing for certain who filled out the application and, subsequently, the ballot, or if it was even completed per the voter’s wishes.
Besides the general procedures for preventing mail-in absentee fraud, a number of jurisdictions have taken specific measures to prevent such abuses in high-risk places, like nursing homes. For example, several jurisdictions send a team of election workers, at times consisting of members from both major parties, to nursing homes to give out ballots, assist voters, and deliver the voted ballots back to the elections office. Another location placed restrictions on the number of absentee ballots that a single person could sign as a witness. One election official in a small jurisdiction stated that she personally knows and has provided specific training to the nursing home employees who witness and assist nursing home patients in voting.
In addition, in almost all of jurisdictions we visited, the mail-in absentee ballot package provided to voters included statements and/or reminders, such as within the oath or other materials, regarding the possible legal consequences of providing inaccurate or fraudulent information on the balloting materials. Several jurisdiction officials commented that, in the few instances in which they identify or suspect mail-in absentee voter fraud, they refer the case to the local district attorney’s office for possible prosecution.
Processes for Qualifying Mail-in Absentee Ballots Varied, but Local Election Officials Face Similar Challenges
Although states establish the requirements for qualifying mail-in absentee ballots to be counted, local election officials must implement and, at times, interpret these requirements. Most frequently, election officials disqualify mail-in absentee ballots due to voter error in completing the balloting materials or the ballots arriving after the deadline. However, due to differences in procedures and requirements, the likelihood that voters’ errors in completing and returning mail-in ballots will result in their ballots being disqualified varies, even, in some instances, among jurisdictions within the same state. In addition, this qualification process results in local election officials facing similar workload challenges in processing mail-in absentee ballots as they faced in reviewing applications.
The Process for Qualifying Mail- in Absentee Ballots Varied, at Times, Even Among Jurisdictions Within the Same State
Generally, once the election officials receive the absentee ballots, the ballots were to be secured until state requirements allow the officials to review them. As with many other aspects of voting, the process for qualifying absentee ballots for counting varied across voting jurisdictions, even within the same state. In some jurisdictions, absentee ballots are reviewed centrally by election officials or special absentee voting boards. In other jurisdictions, absentee ballots are sent to the precincts in which the voters would have voted on election day and reviewed by poll workers. Regardless of who conducts this effort, the accompanying documents (e.g., affidavit envelopes) are reviewed to determine whether all the required information is complete and state requirements are met. Absentee ballots may be disqualified from the count for a number of reasons. For example, as seen in figure 32, the voter may have failed to appropriately sign the affidavit or ballot envelope, or provide other information as required by the jurisdiction. Absentee ballots may also be disqualified if the jurisdiction receives them after the deadline.
While the states establish the requirements for mail-in absentee voting, local jurisdictions’ interpretation of the requirements and the resulting practices may vary within the same state—with some jurisdictions holding strictly to the letter of the law, and others applying more flexibility in qualifying ballots. The following examples demonstrate this variety: In one state, officials in three counties said that they accepted any ballot that showed a signature anywhere or return envelope to compare with registration documentation, although officials in two other counties disqualified any ballot when the envelope did not strictly meet all the technical requirements.
In another state, officials in two jurisdictions told us that there is no discretion in accepting ballots—either they meet the technical requirements completely or they do not meet them and are not accepted. On the other hand, officials in another jurisdiction told us that if a returned ballot envelope lacked some information, such as an address, that is available on the return address, the ballot would be accepted.
In another state, officials in one jurisdiction strictly followed the ballot receipt deadline and did not count any absentee mail ballots received after the Friday before election day. In contrast, officials in another jurisdiction told us that ballots received after Friday but before 8:00 PM on election day were counted.
Disqualified Absentee Ballots Were Generally Due to Voter Error or Arriving Late
We estimate that less than 2 percent of the total mail-in absentee ballots received for the November 2000 election were disqualified; about two-thirds were disqualified because the ballots arrived late or because the envelopes or forms accompanying the ballots not being properly completed, such as having missing or incorrect voters' signatures.
As with processing absentee ballot applications, officials from several jurisdictions cited voter error in completing absentee balloting materials, such as envelopes, as a major problem. States do not routinely collect and report data on the number of mail-in absentee ballots that are disqualified. We estimate that 230,000 (plus or minus 50,000) absentee ballots were disqualified nationwide in the November 2000 election and that the national disqualification rate for absentee ballots was 1.7 percent. We estimate that 64 percent of all disqualified absentee ballots were rejected because the ballots arrived late or the envelopes or forms accompanying the ballots were not completed properly (e.g., missing the voter’s signature or containing an incorrect voter’s signature). Another 35 percent were rejected for one of the following reasons: no postmark or date; late postmark or date; voter not registered or not qualified; improper witness, attestation, or notarization; a previous vote in the election; and other.
In general and as with absentee ballot applications, the principal challenges to successfully processing absentee ballots, according to local officials, are caused by voters’ failure to provide critical information. The errors include such things as the ballot envelope lacking a voter’s signature, witness’ signature and/or notarization, or the voter not providing a valid address within the local jurisdiction. For example, in one very large jurisdiction about one-third of the ballots disqualified were because the voter’s signature was missing or the envelope was improperly completed. In addition, election officials in one jurisdiction estimated that about 80 percent of the ballots disqualified were due to being returned after the deadline. The other major challenge the officials mentioned was receiving the ballot after the required deadline.
Some jurisdictions have attempted to address problems with voters returning ballots unsigned or otherwise incomplete. In California, a number of counties have begun to put brightly colored stickers with arrows pointing to the signature line or fluorescent colored inserts reminding the voter to sign the envelope. In addition, in several jurisdictions election officials pre-print labels on the absentee ballot envelopes to minimize the amount of information the voter has to provide. Officials from the counties taking these steps reported a reduced number of voters submitting unsigned or incomplete absentee ballots. In a further effort to address these challenges, one large jurisdiction implemented a project for the November 2000 general election in which trained volunteers physically took unsigned absentee ballot envelopes, with the ballots still enclosed, to the voters to obtain their signatures. This reduced the number of unsigned ballots from 500 in previous general elections to 50 in November 2000. In addition, to obtain a necessary signature, one jurisdiction indicated that it returned unsigned mail-in absentee ballot envelopes, with the ballots still enclosed, to the voters through the mail, when time allowed before the deadline. Other jurisdictions said that they are considering doing so as well.
Furthermore, our telephone survey results indicated that notifying voters about whether their ballots were received and counted was not a standard practice. We estimate that 29 percent of jurisdictions nationwide notified absentee voters when their ballots are disqualified and, in so doing, provided the reason for the disqualification. Several of the jurisdictions we visited stated that they are required by state law to notify voters whose mail-in absentee ballots were disqualified. These jurisdictions often use a standard letter to do so, which details the reasoning behind the disqualification. This feedback represents one way in which election officials can educate voters regarding proper completion of the mail-in absentee balloting materials.
We estimate that 29 percent of jurisdictions nationwide notified absentee W ti voters when their ballots were disqualified and, in so doing, provided the reason for the disqualification.
In addition, some election officials said that they plan to begin maintaining data on the number of disqualified mail-in absentee ballots, the reason for the disqualification, and the type of absentee voter (e.g., military, overseas civilian, domestic civilian) whose ballot is being disqualified. Election officials stated that they had not previously tracked this data because they were not required to report this data to their state elections office.
Several Officials Said They Experienced Workload Challenges in Processing Absentee Ballots
Each of the millions of mail-in absentee ballots received by local election officials had to be qualified before being counted. We estimate that nationwide local election officials received about 13 million mail-in absentee ballots (plus or minus 2.7 million) for the November 2000 general election. Officials from several local election jurisdictions considered the mail-in absentee voting process a challenge because of the workload involved in reviewing the sheer volume of ballots. For example, officials from one very large jurisdiction stated that the sheer volume of mail-in ballots received creates a greater potential for errors.
All Mail-in Absentee Ballots Were Counted, But the Process Varied Even Within the Same State
Once mail-in absentee ballots are qualified, the ballots are counted. After the November 2000 general election, some voters expressed doubt that local jurisdictions count absentee ballots at all if they would not change the outcome of the election, especially if they were received during extended deadlines after election day. On the basis of our telephone survey, we estimate that between 98 and 100 percent of counties nationwide include absentee ballots in their certified vote totals. All officials in each of the counties we visited confirmed that all ballots are included in certified totals, although ballots arriving during extended deadlines may not be included in totals announced on election night.
The process for counting absentee ballots varies across voting jurisdictions. As with qualifying the ballot, some jurisdictions counted absentee ballots centrally by election officials or special absentee voting boards, while others had absentee ballots counted by poll workers at the voters’ respective precincts. For more information on the counting of absentee ballots, see chapter 5 of this report.
Jurisdictions Used a Variety of Efforts to Educate Voters Regarding Mail-in Absentee Voting
Crucial to the successful casting of mail-in absentee ballots is the voter’s knowledge of application and casting, such as necessary signatures and deadlines. Although voters have the ultimate responsibility for understanding and complying with state and local requirements for mail-in absentee voting, the process is complicated. If absentee voters did not fully understand and, subsequently, comply with the absentee voting requirements in their state, their votes may not have been counted. Thus, for each election, local election officials said they needed to educate voters regarding how and when to cast a valid mail-in absentee ballot. The information officials needed to provide to voters included deadlines for submitting applications and ballots, any requirements that registrants must meet to vote the mail-in absentee ballot, how often the registrants must apply for an absentee ballot, and any administrative requirements, such as signatures and witnesses.
Local election officials used a variety of means to provide this necessary information. Almost all local election offices we visited prepared press releases and/or asked the media to inform the public how and when to vote absentee by mail. Several locations we visited had informational fliers developed by the state or local jurisdictions, which were provided to voters on request or were available at local election offices, voter registration locations (e.g., motor licensing agencies), or public offices (e.g., libraries). Some jurisdictions relied on various organizations, such as political parties and other election watchdog organizations, to inform their respective constituents on the requirements concerning absentee voting. In addition, the officials in one jurisdiction we visited appealed directly to its eligible absentee voters to encourage them to vote an absentee ballot in the November 2000 general election. These officials believed that the November 2000 ballot in their jurisdiction was particularly complex and decided it would be beneficial for their eligible absentee voters, particularly those over age 62, to vote an absentee ballot rather than trying to vote the ballot at their precincts.
In addition, most states and many counties had Web sites that provided information on mail-in absentee voting. Generally, these Web sites had very detailed information regarding mail-in absentee voting, including information on the requirements, how to apply, what information is required in completing the absentee voting application, the deadline for applying, and how often an application has to be completed. Some Web sites even include an absentee ballot application, which can be printed and mailed to the appropriate local election office.
Voter educational materials provided on or with the mail-in absentee applications and/or ballots from the jurisdictions we visited contained instructions and/or information necessary for voters to successfully obtain and cast an absentee ballot. Some jurisdictions also included a number of user-friendly, reminders and notices to assist absentee voters in properly completing their absentee ballots and envelopes. For example, some jurisdictions, in addition to providing instructions on how to mark the ballot, provided absentee voters with reminders and additional notices highlighting information that was key to successfully completing and returning the absentee ballot. These notices included reminding voters to use a number two pencil on an optical scan ballot (or even providing the pencil), seal their ballots in the secrecy envelopes, and sign the appropriate envelope. Several election officials made or planned changes to improve voter education on mail absentee voting, such as clarifying or simplifying voter instructions in absentee mail materials.
Although a variety of methods is used to provide necessary information for voters to vote by mail-in absentee, we estimate that only 15 percent of jurisdictions nationwide actively sought feedback from voters regarding the absentee process, based on our mail survey of jurisdictions, for the November 2000 general election.
Conducting In-Person Absentee and Early Voting
Thirty-nine States and the District of Columbia Allow In-Person Programs Differ, but Challenges Similar to Election Day Voter Education Efforts Vary Between Jurisdictions There is no clear distinction in state statute between in-person absentee and early voting. Basically, these programs offer voters the opportunity to obtain and cast a ballot in person during a certain period of time prior to election day. However, the length of the early or in-person voting period, location(s) at which voters may vote, and statutory requirements and paperwork required to vote in-person absentee or early differ among states. For example, in-person absentee voters generally must complete an application before voting similar to voters that vote mail-in absentee ballots, while early voters are not always required to do so. Generally, local election officials were comfortable with their procedures to ensure that an early or in-person voter only voted once during an election. However, election officials still faced several challenges similar to those encountered on election day when conducting in-person absentee and early voting, such as having adequate staffing, supplies (including ballots), and locations for voting.
Thirty-nine States and the District of Columbia Allowed In-person Absentee or Early Voting
For the November 2000 general election, in addition to mail-in absentee ballots, over three-quarters of the states and the District of Columbia allowed some or all registered voters to obtain and cast ballots in person before election day. We estimate that about 4 percent of voters cast their ballots this way for the November 2000 general election. It is difficult to differentiate between in-person absentee and early voting programs in state statutes.
As with mail-in absentee voting, states may or may not require voters to provide a reason or excuse for casting an absentee ballot in person. Most frequently, in-person absentee voting programs allow voters to obtain their ballot, complete any paperwork required, and vote their absentee ballot at their local election office. For example, in one jurisdiction in Virginia, in- person absentee voting is conducted at the local election jurisdiction’s office during normal business hours during the 45 days before the election. To cast an in-person absentee ballot, registered voters were to go to the office and complete an in-person absentee application on which they provide one of several reasons or excuses defined in state statute. These reasons could include being a student at an institution of higher learning, being absent for business or vacation, being unable to go to their precinct due to illness, having a religious obligation, working 11 of the 13 hours the polling precincts are open, or being a caretaker of a confined family member. During the visit, election officials approve the application and give the applicant a ballot, which the voter casts before leaving the office. Thus, to vote in-person absentee in Virginia, registered voters must go to their local election office, complete an application, and meet certain requirements (i.e., provide an excuse).
Some states also have initiated “early voting” as a unique form of in-person voting in which local election jurisdictions may establish one or, possibly, several polling places a number of days before election day where any voter may cast their vote in person without having to provide an excuse. Voters were not required to cast their ballot at a particular polling place; rather, registered voters can vote at whatever location is most convenient for them. For example, in Texas, local jurisdictions are allowed to establish several “early voting” polling places at schools, libraries, shopping malls, or other locations that essentially function in the same manner as any election day polling place. Election workers staffed these early voting locations for each day they were open and, generally, followed whatever voting procedures would be used on election day. For example, voters at these early voting locations show up and vote their ballots without having to fill out an application, provide a reason for voting early, or complete any additional paperwork or provide any information other than what would normally be required on election day. Thus, to vote early in Texas, registered voters may be allowed to vote at any of several early voting locations, do not have complete an application, and do not have to meet any requirements (i.e., provide an excuse).
In the November 2000 general election, in one jurisdiction in Texas, about 44 percent of the ballots were cast by voters at early voting locations, representing about a 10-percent increase from the previous presidential election in 1996.
As seen in figure 33, 39 states and the District of Columbia have developed various types of early and in-person voting programs, some of which are more similar to the Texas and Colorado programs and others closer to the Virginia program. For example, California and Arkansas, allow in-person, early voting without a reason or excuse, which may be conducted at more than one location; however, both states require early voters to complete an application before voting—an additional step that is not required on election day nor at early voting locations in Texas and Colorado. Other states, such as North Carolina and New Mexico, allow for no-excuse, early voting in person, but only at the local election jurisdictions’ offices; these states also require voters to apply to vote early. There is no clear distinction in state statute between in-person absentee voting and early voting. However, in effect, in-person absentee voting and early voting programs stretch an election from a single day into an election period ranging from 1 to over 40 days.
Voting Programs Varied Among States and Jurisdictions, Challenges Similar to Election Day
In-person absentee and early voting programs vary considerably from one state to another. Variations include the number and type of locations at which this type of voting is conducted, duration of the in-person or early voting period, and voting methods used. However, local election officials faced many of the same challenges in administering their in-person and early voting programs. These challenges, such as obtaining sufficient poll workers, ballots and supplies, and locations, were similar to the challenges faced in administering election day voting.
Location and Time Frame for Casting Early and In-Person Absentee Voting Ballots Varied by State Statute
The location(s) and time periods in which voters may cast in-person absentee or early ballots differ based on the requirements established by each state. The number of locations vary from one to an unspecified number to be established at the discretion of local election officials. For example, in one very large jurisdiction in Texas, 25 early voting locations were established throughout the jurisdiction for the November 2000 general election. The in-person absentee and early voting period also varies, ranging from 1 day to 45 days before election day. Appendix V summarizes the various in-person absentee and early voting programs established in state statutes as of July 2001. In addition to differences among states, in-person absentee and early voting may even vary from one jurisdiction to another within the same state. For example, in Texas, larger jurisdictions may establish numerous early voting locations, such as at schools and libraries, which are open for extended hours, even some weekends. In contrast, smaller jurisdictions may hold early voting only at the local election official’s office during regular business hours.
Type of Voting Methods Used for Early Voting Similar to Those Used on Election Day
We estimate that most jurisdictions used optical scan or paper ballots for in-person absentee and early voting, as they do with mail-in absentee voting.
As with the type of voting methods used for election day and mail-in absentee voting, the type of ballots used for in-person absentee or early voting also varies from one jurisdiction to another, even within the same state. Nationwide, we estimate that two-thirds of the local jurisdictions, about 67 percent, used the same method for in-person absentee and early voting as they used on election day for the November 2000 general election. We further estimate that most jurisdictions used either optical scan or paper ballots for in-person absentee or early voting during the November 2000 general election. Specifically, as seen in figure 34, we estimate that nationwide 42 percent of election jurisdictions used optical scan ballots; 35 percent of election jurisdictions used paper ballots; and 14 percent of election jurisdictions used punch card ballots.
Unlike voting a mail-in absentee ballot, absentee in-person and early voting includes the use of DREs and lever equipment, which voters of a mail-in ballot could not use for logistical reasons. As seen in figure 34, we estimate that 14 percent of election jurisdictions used direct recording electronic machines, and 1 percent of election jurisdictions used lever machines for early or in-person absentee voting.
Several election officials indicated that they are considering or planning to change to DRE equipment for early and/or in-person absentee voting. For more information regarding the characteristics of these voting methods, see chapter 1 of this report.
Officials Had Procedures For Ensuring In-Person and Early Voters Vote Only Once
Most jurisdictions we visited that allow early or in-person absentee voting at numerous voting locations, used a direct on-line, electronic link to their registration records to ensure an absentee in-person or early voter votes no more than once. Whether the early or in-person absentee voter is required to fill out an application and/or show a voter identification card is established by state law. In on jurisdiction, election officials or poll workers check the voter’s signature in the poll book or on the application against the registration record to confirm the voter’s identity. In some states, the voter’s voting record is checked to determine if he or she has voted previously in the election–even as recently as a few minutes earlier on the same day. For example, typically, in jurisdictions we visited that established more than one early voting location, once poll workers give a voter a ballot, the voter’s voting record was updated automatically on the registration or election management system to which all early voting locations had direct, on-line access.
In addition, as with mail-in absentee voting, the poll books used on election day note every voter who has voted early. However, one jurisdiction we visited held early voting that ended on the day before election day. The election day poll books in this jurisdiction identified voters who had been sent a mail-in absentee ballot, but not early voters, because of the jurisdiction’s need to begin printing the books before the close of early voting. In this case, it is possible that an individual could have voted early and again on election day. However, these election officials said they track which registered voters have voted on their election management system by giving each voter credit for having voted during the election. According to election officials in this jurisdiction, after the election when they attempted to give voters credit for voting election day, their on-line election management system would alert them to any people casting two ballots because they had already been given credit for early voting. According to these officials, any cases of duplicate voting would have been provided to the district attorney’s office for possible prosecution. The officials said that in the few instances when this has occurred over the past 10 years, it was generally an older individual who was confused about the election process, rather than an individual intending to commit voter fraud.
Election Officials Said They Faced Challenges Similar to Election Day in Conducting In- Person Early Voting
In our discussions with election officials about early and in-person absentee voting, the officials raised a number of challenges or concerns specific to this type of voting. The issues generally fell into three categories: obtaining poll workers, ballots and other supplies, and suitable early voting locations. Officials from several jurisdictions cited having difficulty obtaining and/or training the poll workers who were needed to work over the period required for early voting (as much as over 40 days). One jurisdiction said that they did not have enough staff to support early voting at the election office and conduct other election day preparations at the same time, especially in the days just before election day. In particular, election officials from one very large jurisdiction with numerous early voting locations stated that their biggest challenge for each election is obtaining sufficient staff to handle the number of voters who vote on the last day of the early voting period. In fact, the lines and waits for certain elections and locations have been longer for voters on the last day of early voting than on election day.
Officials from a number of jurisdictions cited ensuring that early voting locations had enough ballots and supplies as a challenge. For example, one medium-sized jurisdiction in Texas that used a punch card voting method needed to have enough copies of every ballot style voted in their jurisdiction, at every satellite location, to support all the voters who could come in to vote, because voters are not assigned to a particular location like they are on election day. For the November 2000 general election, this included 26 different ballot styles. By contrast, two very large jurisdictions, which use a DRE touch screen voting method, had all the ballot types electronically stored within each unit, but still needed to have enough other election-related supplies to support their operations through the entire early voting period.
Officials from a few jurisdictions had concerns with getting enough adequate polling locations, such as locations that were sufficiently large, had digital lines for electronically connecting to the registration system, and were conveniently located. For example, officials in one large jurisdiction stated that they had problems establishing early voting locations that were convenient to all voters, and that some early voting locations were too small for the crowds that came at peak times.
Another challenge faced by jurisdictions that conduct early voting is the limited amount of time between finalizing and printing the ballots and accompanying materials. For example, in one jurisdiction early voting begins 17 days before election day. Thus, election officials essentially have 17 fewer days to prepare for elections.
Officials Undertook a Variety of Voter Education Efforts
For each election, state and local election officials are to provide information to voters about when and where to vote early or absentee in- person, including the time during, dates on, and locations at which to vote, among other information. As with by-mail absentee voting, most jurisdictions we visited that offered in-person absentee or early voting prepared press releases and/or asked the media to inform the public when and where to vote early or absentee in-person. In addition, most states and/or counties had Web sites that provide information on such voting. In some jurisdictions, political parties and other election organizations provided information to voters on in-person absentee and early voting. In one very large jurisdiction, election officials, in conjunction with the vendor of the jurisdiction’s voting equipment, advertised their early voting program on a billboard at the juncture of the county’s two major freeways.
Challenges
In summary, election officials identified the following challenges in the absentee and early voting process: Preventing mail-in absentee voting fraud. Our telephone survey of jurisdictions and discussions with local election officials revealed that officials had established procedures to address certain potentials for fraud, such as someone other than the registered voter completing the ballot or voters casting more than one ballot in the same election. However, some mail-in absentee voting fraud concerns remained, particularly regarding absentee voters being unduly influenced or intimidated while voting.
Addressing voter error issues, such as unsigned or otherwise incomplete application and ballot materials, and receiving late applications and ballots. Our telephone survey of jurisdictions and discussions with local election officials showed that voters’ failures to provide critical information, such as signatures and addresses, or jurisdictions receiving applications and ballots after state statutory deadlines represent principal challenges to successfully processing mail-in absentee applications and qualifying ballots for counting.
Processing large numbers of mail-in absentee applications and ballots in a timely manner. Local election officials indicated that large volumes of mail-in absentee applications and ballots represent workload and administrative challenges. In particular, officials expressed concerns regarding the timely processing of applications received close to the deadlines and the enhanced potential for errors in processing large volumes of applications and ballots. In addition, officials identified some concerns with postal costs, delivery, and/or timeliness. However, officials expressed fewer concerns about postal delivery and timeliness for domestic delivery than for overseas delivery.
Obtaining adequate staffing, supplies (including ballots), and locations for conducting early voting. As on the election day, local election officials indicated that the principal challenges in conducting in-person absentee and early voting were having enough workers and locations for the entire early voting period, as well as having all ballot styles available at a single location.
Conducting Elections
Despite the numerous responsibilities that involve coordinating people, preparing and using voting technologies, and following election rules and processes, the behind-the-scenes efforts of election officials generally attract little public notice. Election officials ordinarily find themselves in the spotlight only when citizens experience difficulties on election day. Long lines at the polls, voters’ names missing from the registration lists, a complicated ballot, voting machine malfunctions preventing vote casting, or, as was the case in the 2000 presidential election in Florida, hotly contested election results, may focus public attention on the otherwise unnoticed details of election administration.
This chapter describes those activities that election administration officials identified to us as important to planning and conducting an election. This chapter also outlines the challenges those officials encountered in the November 2000 election.
Overview of Election Administration
Conducting an election involves activities that must be concluded prior to the election and on election day itself. As illustrated in figure 35, election officials are responsible for a wide range of activities, all necessary to ensure that all eligible citizens may freely cast their votes in private and have them counted in federal, state, and local elections.
The ways that local jurisdictions perform what can be an enormously complicated civic duty vary widely across the country for several reasons. First, states have different laws and regulations that govern elections; some states exercise a relatively high degree of control over local elections while others allow local jurisdictions to operate with more autonomy. For example, some states have statewide election systems so that every voting jurisdiction uses the same procedures for administering elections, including registering voters, processing absentee ballots, using common voting equipment, and tallying votes. Oklahoma, for example, standardizes most aspects of local and statewide elections. In other states, local jurisdictions run elections with less direction from the state, which means local officials may exercise a larger degree of autonomy in conducting elections. For instance, in Pennsylvania, local election officials told us there are 67 counties and consequently 67 different ways of handling elections. Figure 36 illustrates these differences.
Other states are somewhere in between Oklahoma and Pennsylvania on the continuum of greater to lesser state direction of local elections. Virginia, for example, requires local jurisdictions to follow many standardized election procedures, but leaves their implementation largely to local jurisdictions.
Second, the type of voting technology used by a jurisdiction influences how election officials plan and conduct an election. Usually it is local election officials who choose the voting technology to be used in their precincts, often from a list of state certified options, but in some states, state law prescribes the use of common voting technology throughout the state. The types and uses of voting technology are extensively described in chapter 1. Depending on their jurisdiction’s type of voting equipment, election officials face different challenges in ballot preparation, voter education, poll worker training, and setting up the polls. “the logistics of preparing and delivering voting supplies and equipment to the county’s 4,963 voting precincts, recruiting and training 25,000 election day poll workers, preparing and mailing tens of thousands of absentee ballot packets daily and later signature verifying, opening and sorting 521,180 absentee ballots, and finally, counting 2.7 million ballots is extremely challenging.”
In contrast, one small jurisdiction we visited had only 2,843 registered voters, 5 voting precincts, and 28 poll workers. As illustrated in figure 37, the magnitude of key tasks for election officials in the large jurisdiction is a thousand times larger than for the small jurisdiction.
Fourth, jurisdictions face different burdens in preparing for election day because where some have relatively homogeneous populations, others service highly heterogeneous publics, with diverse histories, cultures, and languages. In some jurisdictions, large segments of the population speak languages other than English. In these jurisdictions, ballots must be prepared in those languages. In November 2000, Los Angeles County, for instance, provided ballots in Spanish, Chinese, Korean, Vietnamese, Japanese, and Tagalog, as well as English. On the basis of a consent decree with the Justice Department, Bernalillo County, New Mexico, will provide certain types of voting assistance in the Navajo language, including translation of the ballot. Election officials said, in the future, they anticipate having to provide ballots in other Native American languages, some of which have no written form.
And finally, the voting jurisdictions themselves may develop their own election day traditions and cultures. For example, jurisdictions generally seek to ensure that only eligible voters can cast their ballots on election day. However, the procedures adopted to determine whether a citizen who appears at the polls is eligible to vote differ. Jurisdictions may place different emphasis on preventing ineligible people from voting than they do on facilitating voting for eligible voters. States have different legal requirements for verifying voters’ identities, and localities develop different procedures for handling questions about eligibility that arise on election day. In some jurisdictions, voters identified themselves by stating their names and addresses to the poll workers, who also matched the signature on the voter application with the voter registration records. Other jurisdictions require voters to present a valid photo identification card and require the signature on their application to vote to match the signature on their voter registration card. In other jurisdictions presenting some form of identification, such as a hunting or fishing license, is sufficient to verify one’s identity. Still other jurisdictions require no identification other than the voter stating his or her name.
Preparing for Election Day
Recruiting and Training Poll Workers Was Major Problem for Many Selecting Polling Places That Met Standards Was Not Always Possible Designing Ballots That Were Clear to Voters Was More Challenging for Long, Complex Ballots Educating Voters Can Help Reduce Election Problems Preparing and Delivering Equipment and Supplies Was Logistical In some jurisdictions, preparing for the presidential election began as early as 10 months before the November 2000 general election. Despite differences among local voting jurisdictions, five key tasks have emerged from our interviews with election officials as integral to preparing for elections. Prior to election day, officials must recruit and train a sufficient number of poll workers with appropriate skills to open, operate, and close polling places. Suitable polling places located in the voting precincts must be reserved. Election officials are responsible for designing and producing multiple versions of ballots, which may vary not only by voting precinct but by address within a voting precinct. Many jurisdictions educate voters about the ballot, the voting technology they will use, and where to vote. In the days leading up to election day, voting equipment and supplies, prepared weeks in advance, must be delivered to thousands of polling places.
According to the results of our mail survey of local election officials, nationwide 57 percent (plus or minus 4 percent) of voting jurisdictions said they encountered major problems in conducting the November 2000 election. During our on-site visits, election officials described in greater detail the problems and challenges they faced and the ways they addressed these challenges. These challenges include labor shortages among the ranks of qualified poll workers, exacerbated limited access to a shrinking number of appropriate polling places; complicated ballots or new voting technology unfamiliar to voters; and limited resources for voter education.
Recruiting and Training Poll Workers Was Major Problem for Many Jurisdictions
We estimate that 51 percent of the jurisdictions nationwide reported that it was somewhat or very difficult to find a sufficient number of poll workers.
Elections in all states could not take place without an army of poll workers who run the polls on election day. Poll workers are the frontline of democracy. They are the public face of elections for most citizens, whose voting experience is largely informed by their interaction at the polls with poll workers. Although these workers are usually employed for only one day, the success of election administration partly hinges upon their ability to perform their jobs well. Therefore, recruiting and training qualified poll workers becomes one of the most crucial tasks that election officials face in most locations. On the basis of our mail survey, we estimate that 51 percent of jurisdictions nationwide had a somewhat or very difficult time getting enough poll workers. Of these jurisdictions, 27 percent had difficulty obtaining enough poll workers, and 23 percent had difficulty obtaining enough required Democrat or Republican poll workers. These problems were the most frequently identified by the jurisdictions in preparing for elections. Factors that can work in concert to complicate an already difficult task for election officials include an aging work force, low pay, little or no training, and limited authority to hold poll workers accountable for their job performance. To meet these challenges, some election officials said that they have developed specific recruiting and training strategies.
Some poll workers are elected; some are appointed; and some are volunteers. For example, Pennsylvania law specifies that poll workers be elected to the position. One official in a small jurisdiction told us that “We beg people to do it.” Political parties often play a key role in identifying poll workers. For example, Illinois statutes require leading political parties to nominate all election judges needed at the polls on election day. Many jurisdictions require that poll workers from each of the two major parties staff each precinct. For example, New York law requires that each polling place must be staffed with four election inspectors equally divided between the major political parties.
Poll workers have different titles, levels of pay, training requirements, and responsibilities, depending on state law and the organization and traditions of the local jurisdiction. Jurisdictions assign their poll workers different responsibilities in the polling place and call them by different titles, including clerks, wardens, election judges, inspectors, captains, and precinct officers. Often jurisdictions have a chief poll worker. Virtually all the jurisdictions we visited provide some compensation to poll workers for their service on election day, ranging from $55 a day for clerks to $150 a day for a coordinator. These amounts differ by jurisdiction and level of responsibility within the polling place. Jurisdictions also differ in the training that they provide and require for poll workers prior to the election. Most of the election officials we talked to said that they offer some training for poll workers, and some said that the training is mandatory. One jurisdiction requires that each poll worker be certified as an inspector by the county board after attending an official training class and passing a written test. Some jurisdictions only require training for individuals who have not previously served as poll workers. Other jurisdictions require only that the lead poll workers be trained before each election.
In addition to the number, pay, and training of poll workers, jurisdictions differ in the levels of authority and responsibility they grant to poll workers. Poll workers may have significant autonomy over the operation of the polling place and decisions, being the final authority on interpreting guidance in areas such as deciding who can vote and determining voter intent. In other jurisdictions, poll workers have limited discretion and function primarily as clerks and facilitators, referring decisions back to elections headquarters. “ inspectors serve 17 or 18 hours, a very long day. Because many of our inspectors are senior citizens, between the age of 70 and 80-plus years, such conditions are difficult on them physically, as well as creating the potential for errors at the end of election day. Since compensation for this job is only $80 to $135 per day, depending upon the election district, it is not sufficient to attract a younger workforce.”
Low Pay, Long Hours Often Created Problems in Recruiting Enough Poll Workers
Election officials often face a plethora of problems recruiting and training their poll workers. Some election officials simply cannot recruit enough poll workers; others have a stable but aging workforce, and still others cannot recruit reliable workers with the requisite skills. Particular recruitment problems vary. Election officials from several jurisdictions mentioned that they have problems getting enough poll workers in the manner specified by law. For example, in a jurisdiction that requires election of poll workers, election officials told us that they rarely have enough poll workers running for the positions. Several election officials noted that often the political parties do not provide enough poll worker nominations to cover the needs of the jurisdiction, despite a legal requirement that they provide all the poll workers. One official in a small jurisdiction that typically votes for candidates of one party said that they often could not find enough poll workers from the other party.
Several officials said that their election workforce was aging and they were having difficulty recruiting younger workers. The pool of potential poll workers may be shrinking because a greater proportion of the population have full time employment and poll worker pay is inadequate to attract employed or more skilled workers. One official remarked that volunteering is characteristic of an older generation. Another official said that “hat they used to consider as a fun and interesting day and an American duty has become ‘heavy duty.’” The length of the day is a complaint of many poll workers. In one large jurisdiction, election officials asked poll workers to provide feedback on their experience in the November 2000. One poll worker responded that it was “bsolutely, positively too long a day. I am 26 years old and very athletic and still went home at night and fell asleep with my clothes on. With the majority of helpers either older or disabled, I have no idea how they survived the day.”
Poll Workers With Specialized Skills Were Often Difficult to Find
Another problem is addressing the specialized labor needs unique to particular polling sites, according to several local election officials. Some polling places required poll workers to have specific language skills; other locations needed poll workers who were able to learn the technical skills necessary to operate voting equipment. Finding qualified bilingual workers, specifically workers fluent in Asian languages, is one very large jurisdiction’s biggest recruiting problem. Some places had trouble finding poll workers with the skills to use computers and newer technologies. One election official wrote that “it is increasingly difficult to find folks to work for $6 an hour. We are relying on older retired persons – many who can’t/won’t keep up with changes in the technology or laws. Many of our workers are 70+.” Officials in one very large jurisdiction said they have no scarcity of people willing to serve, but finding people to meet specialized needs is the issue.
Officials Reported Problems With Reliability of Some Available Poll Workers
Because election officials have little ability to hold poll workers accountable for how well they do their jobs on election day, they try to find reliable workers, but must sometimes take whomever they can find. Officials we talked to cited a number of examples from the November 2000 election. An election official in a medium-sized jurisdiction said that not only did she have difficulty finding a sufficient number of poll workers, but also that she was not satisfied with the performance of some of the workers she did recruit. Some officials said that problems with performance and an aging poll worker labor pool can overlap. As an example, one official said she had to let an elderly worker go because the person could no longer reconcile the ballot roster at the end of the day. An election official in a large jurisdiction said that the worst part of his job was signing letters to older poll workers thanking them for their years of service and telling them that their services would no longer be needed. Because workers are in short supply, some election officials stated that they found themselves on the horns of a dilemma, choosing between finding enough workers versus hiring skilled and reliable workers.
One major problem for election officials is absenteeism on election day. As one official from a very large county told us, “our biggest fear concerning election workers is whether they will show up on election day.” In the November 2000 election, one very large jurisdiction had 20 percent of its poll workers cancel or not show up on election day. Some jurisdictions tried to plan around poll worker absenteeism by recruiting and training more than they needed, but still had insufficient poll workers on election day. As one official from a medium-sized jurisdiction said, “e are usually able to recruit more poll workers than needed. However, because of no- shows, we came up short on election day. No one has an abundance of good poll workers.”
Minimal Training May Not Have Adequately Prepared Poll Workers for Election Day
We estimate that 87 percent of jurisdictions nationwide provided some training for poll workers. Poll worker training courses generally span a few hours time and focus on the key processes that poll workers should follow, including how to operate voting equipment. Although most of the jurisdictions we visited required some poll worker training, election officials cited instances where poll workers who had attended either still did not understand what they were to do or chose not to follow specific instructions on how to run the polls. For example, to handle unregistered voters in one very large jurisdiction, the poll workers were instructed to provide those voters with questionable credentials a provisional ballot. However, some poll workers failed to follow these rules and turned away some voters from the polling place. Poll worker training in the sites we visited rarely included discussion of the interpersonal skills that poll workers should employ when dealing with frustrated citizens or with each other.
Concerned Officials Developed Recruiting and Training Strategies
Some jurisdictions have developed strategies for addressing the particular challenges associated with poll worker recruitment and training. Officials in the jurisdictions we visited described both measures that their jurisdictions have adopted and ones that they would like to institute if they had the funding and legal authority to do so. Many election officials told us that increasing poll worker pay would be an important step in efforts to solve poll worker recruitment problems.
Recruiting Strategies Targeted Youth, Civil Servants, Businesses, and Civic Groups To recruit more poll workers, jurisdictions have special recruitment programs in place.
Student Poll Worker Programs: Some jurisdictions have been participating in student poll worker programs. For example, in its 1999- 2000 legislative session, Colorado passed legislation that allowed junior and senior high school students, ages 16 and older, to serve as election judges as long as they also met other criteria, such as being recommended by a school official and having a parent’s or guardian’s permission. Students must pass the same training courses as nonstudent election judges. Other states also allow for the use of student judges. In the 2000 general election, one very large jurisdiction used 969 students from 91 schools as election judges. This number included 453 bilingual students.
State and County Employees as Poll Workers: Civil servants were recruited to serve as poll workers in a number of jurisdictions. One very large jurisdiction had a County Poll Worker Program that permitted county employees to volunteer as poll workers. Those employees participating received their county pay for election day, plus either a $55 or $75 stipend, and $25 for attending the training. For the November election, 1,400 county employees worked as poll workers. Our mail survey results showed that 21 percent of jurisdictions nationwide used workers from local governments or schools to help staff the polls in the November 2000 general election. Election officials in one medium-sized jurisdiction we visited said they used 25 to 30 state employees as election judges in November 2000. These state employees received their regular pay in addition to the poll worker compensation.
Adopt-a-Poll Programs: Some jurisdictions have developed a program to let businesses or community groups adopt a poll and use their employees or volunteers to staff that polling place. Election officials in a very large jurisdiction encouraged companies and service organizations to adopt a poll. Participating organizations provided the poll workers, who were allowed to wear shirts with the logo of the company or organization. In another large jurisdiction, volunteers from a charity organization adopted a poll and donated their poll worker pay to the charity. In this case, staffing a poll was both an exercise of civic duty and a fundraising event.
Split Shifts for Poll Workers: To make the poll worker’s day more manageable, some jurisdictions are allowing poll workers to serve only half of the election day, rather than asking them to commit to a 12 to 18 hour day. Election officials from one jurisdiction that uses split shifts said that poll workers are very pleased with the option of working only part of a day. Additionally, they said that they have had less trouble recruiting poll workers since they don’t have to work an entire election day.
In addition to these recruiting strategies, jurisdictions have proposals that are pending necessary legislative changes and funding. Several jurisdictions told us that their state has legislation pending that would allow serving as a poll worker to satisfy jury duty requirements. Officials in several jurisdictions expressed the view that an election holiday at the state or national level would, among other things, make more citizens who are employed full time free to serve at the polls. Our mail survey results indicate that 29 percent of the jurisdictions nationwide favor establishing election day as a national holiday; 19 percent support providing federal employees time off to assist at the polls; but only 5 percent favor extending voting hours or holding Saturday voting.
Officials Turned to Training Efforts to Improve Poll Worker Performance To prepare poll workers for election day, many jurisdictions have focused on improving poll worker training. Although training may be required, some poll workers do not attend and are still allowed to work. To encourage attendance at training sessions, some jurisdictions offer attendees a stipend in addition to their nominal poll worker pay.
Localities have pursued a variety of approaches for improving training classes. For example, one very large jurisdiction hired experts in adult education to improve the quality of their training courses. Some states provide localities with training resources. For example, in Washington and West Virginia, the states produce standard training materials, relieving the local voting jurisdiction from the cost of producing such materials, and offering a consistent curriculum for poll workers.
Some jurisdictions tailored the content of the training sessions to focus on changes that have occurred in the election system or on problematic tasks that poll workers are likely to encounter on election day. For example, when introducing a new voting technology, one very large jurisdiction produced a video to train poll workers in the use of their new optical scan counters. When introducing its touchscreen DRE voting equipment, another very large jurisdiction had the equipment vendor provide the training video and materials. To prepare poll workers for situations they may encounter on election day, several jurisdictions had poll workers participate in simulated precinct operations in their training class.
Recruiting and training poll workers are major concerns for election officials. When asked what their three top priorities would be if federal funds were available for election administration, over half of the election officials from the jurisdictions that we visited told us that they would use the money to increase poll worker pay and/or to improve poll worker training.
Selecting Polling Places That Met Standards Was Not Always Possible
We estimate that 9 percent of the jurisdictions nationwide had a major problem obtaining enough polling places accessible to voters with disabilities.
Election officials are responsible for obtaining a sufficient number of polling places that meet basic standards. To meet the needs of the voting population, the polling places should be available on election day and easily accessible to all voters, including voters with disabilities. They should also have a sufficient infrastructure to support voting machines and provide basic comforts for voters and poll workers alike. This infrastructure includes electricity, communication lines, heating, and cooling units. Many public and private facilities are used as polling places, including schools, churches, community buildings, malls, and garages. Specific legal requirements relating to the number, location, and characteristics of polling places can vary from state to state.
For nearly two-thirds of the jurisdictions nationwide, we estimate that obtaining polling places did not pose a major problem. Our mail survey results also indicate that only 5 percent of the jurisdictions nationwide said they had a major problem obtaining enough polling places and 9 percent said that they had a major problem obtaining enough polling places accessible to voters with disabilities. However, in our site visits many election officials did identify difficulties they had securing polling places. According to election officials, low rental fees, the disruption of business that ordinarily takes place at a facility, and the possibility of damage to facilities are the primary reasons that fewer and fewer locations are willing to serve as polling places. In many jurisdictions, officials said that they still had jurisdictions that were not fully accessible to voters with disabilities. To address this challenge, some officials have consolidated precincts or created a “super precinct,” a single, centralized location where all voters cast their ballots no matter what the geographic boundaries of their assigned precinct. Some jurisdictions have adopted election day holidays, which help resolve some problems of using schools as polling places when students are present. Additionally, officials said they have taken steps to provide alternatives to voters with disabilities when the polling places are not fully accessible.
Some Jurisdictions Failed to Find Enough Polling Places That Met Standards
Among jurisdictions where reserving polling places is an ongoing problem, officials may be faced with the problem of accepting polling places that do not meet all of the basic standards in order to have enough places to conduct the election. For example, election officials in different jurisdictions said that they used polling places in the November 2000 election that did not fully meet requirements that polling places limit the number of voters who may vote in one location, be located within the precinct they serve or be centrally located within be accessible to voters with disabilities, or provide the infrastructure necessary to support election activities.
Finding locations that are handicapped-accessible is a particular concern for local election officials; in many places, officials have not located enough polling places that meet the needs of voters with disabilities and the elderly. Our onsite work on the November 2000 election found that polling places are generally located in schools, libraries, churches, and town halls, as well as other facilities. Although the extent to which any given feature may prevent or facilitate access is unknown, we estimate that, from the parking area to the voting room, 16 percent of all polling places have no potential impediments. Fifty-six percent have one or more potential impediments but offer curbside voting, and 28 percent have one or more potential impediments and do not offer curbside voting. Although efforts have been made to improve voting accessibility for people with disabilities, state and local election officials we surveyed cited a variety of challenges to improving access. Facilities used as polling places are generally owned or controlled by public or private entities not responsible for running elections, complicating attempts to make them more accessible. Places in older, denser cities have particular difficulties locating not only buildings that are accessible but that also have accessible parking facilities. For example, in one very large jurisdiction we found that of the 1,681 polling places used in the November 2000 election, only 440 were handicapped accessible. Even fewer, 46, had handicapped parking.
A scarcity of available polling places also led some officials to accept facilities that did not meet other specifications. Officials in a large jurisdiction told us they had to settle for substandard buildings, some of which were being renovated, that did not have electricity or heating. Additionally, the officials told us that every year the department of elections buys heaters for some buildings that serve as polling locations. A small jurisdiction faced a temporary problem with the school gymnasium that the town uses as its super precinct–a single polling location for all precincts. During the 2000 primary election, the gym was undergoing significant renovation, and half of the space usually available for elections was closed off. Additionally, temporary electricity, communication lines, and toilet facilities had to be added for the election. Because the construction was completed before the general election, the jurisdiction did not have these problems in November 2000.
Election officials expressed concern that it is not only difficult to retain current polling places but also challenging to find replacements. Some jurisdictions lack funds to pay a large enough stipend to a facility to provide an incentive for its owners to offer it for use as a polling place. In one case, according to the election official, the stipend was so small that it may not have even covered the owner’s electricity costs. Election officials may be hampered by laws that restrict them from spending public funds to modify private facilities to make the spaces ready for the elections or to repair damage to those facilities that result from their use as a polling place. Schools are often used as polling places. But space constraints and security considerations raised by having nonstudents entering the school grounds during school hours have led some schools to withdraw their facilities as polling places.
Lacking Access to and Control of Facilities Presented Problems for Some Officials
Election officials do not generally have control over polling places. Some must rely on building managers or custodians to unlock the buildings and ready the space for election day. Because the polls typically open so early in the morning, custodians may not have opened the space so that the poll workers could enter on time. For example, officials in both a large and a medium-sized jurisdiction reported that poll workers were delayed because buildings were not unlocked and accessible at the appointed time on election day.
Before every election, some jurisdictions provide information to voters about their polling place location. For example, one medium-sized jurisdiction mailed out polling place location information to every household. Many jurisdictions may also describe the location of the voter’s polling place in print, radio, and television announcements. Canceling locations after they have been publicized presents difficulties for election officials who must find substitute locations and then try to notify the voters of the last minute change. For example, in one very large jurisdiction, five locations canceled after the sample ballot, which lists the precinct the voter is assigned to, was mailed. The jurisdiction had to mail out 110,500 post cards to the affected voters notifying them of their new polling place.
Officials Developed Strategies to Compensate for Lack of Adequate Facilities
To compensate for the lack of an adequate number of facilities, election administration officials have pursued or proposed the following actions: Consolidated Precincts: To ease the difficulty of finding polling places for each voting precinct, some jurisdictions are consolidating several precincts into a single location. One small jurisdiction crafted a super precinct with all six precincts in one polling place. This solution offers the advantages of providing a known, central location easy for voters to find and alleviating the pressure to provide poll workers for each polling place. By using this super precinct, the jurisdiction is able to provide handicapped access and parking to all its voters. Additionally, the county clerk, who is the chief election official, is on site to resolve any issues over voters’ eligibility to vote. Rather than creating a super precinct, some jurisdictions are consolidating voting precincts. One large and one medium jurisdiction consolidated several precincts resulting in fewer polling places. One of these jurisdictions has 45 polling places with as many as 4 precincts per polling place; the other has 270 polling locations for 576 precincts.
Revised State Limits on Number of Voters Per Precinct: In some cases the election officials’ proposed strategies for dealing with these problems involve changing state laws that prescribe the number of registered voters per precinct. By increasing the number of registered voters per precinct, officials hope to decrease the number of required polling locations. California introduced legislation to increase the number of voters in each precinct from 1,000 to 1,250, which would reduce the number of polling places needed. This solution would also reduce the number of poll workers needed on election day. However, as one election official observed, an unintended consequence of condensing precincts may be longer lines at polling places, which makes voting a more time-consuming and difficult activity.
School Holidays on Election Day: Traditionally, schools have served as polling places. However, several election officials mentioned that they are increasingly difficult to obtain because of security concerns and competition for space when students are present. In one large jurisdiction, election officials, in cooperation with school boards, have made election day a student holiday. The schools, which account for two-thirds of the polling places, are then available as polling locations with teachers present, alleviating some of the security concerns. Similarly, a medium-sized jurisdiction persuaded three of its four school districts to schedule a student holiday on election day.
All-Mail Voting: Oregon is the only state that has adopted mail voting for all its elections statewide. Election officials told us that one of the positive effects of their move to all-mail voting is that election jurisdictions no longer have to contend with the logistical problem of securing polling places or hiring poll workers. Other jurisdictions use all-mail voting on a more limited scale. For example, one medium-sized jurisdiction has mail-only precincts for sparsely populated areas. In another medium-sized jurisdiction, officials said they also permit smaller election jurisdictions, such as a water district, to opt to hold a special election entirely by mail.
Designing and Producing Ballots That Were Clear to Voters Was More Challenging For Long, Complex Ballots
We estimate that 42 percent of the jurisdictions nationwide indicated that the federal government should subsidize the operational costs of elections (e.g. printing ballots or paying poll workers).
Despite the controversy over the “butterfly ballot” and other ballot problems in the aftermath of Florida’s 2000 election, few election officials we spoke with reported experiencing major difficulty with ballot design for the November 2000 general election. We estimate that only 2 percent of jurisdictions nationwide thought that confusing ballot design was a major problem. However, we emphasize that this is the view of election officials and not voters. Election officials are responsible for designing ballots that meet both statutory requirements and the requirements of the particular voting equipment and that are easy for voters to understand. Officials we met with did identify a number of challenges they faced in ballot design. They noted that designing usable, easily understood ballots that meet the constraints of particular voting equipment can become much more difficult in jurisdictions where the ballot is printed in multiple languages, or a large number of offices or initiatives are on the ballot.
Many states have statutory requirements that affect the design and layout of ballots. The specific statutory requirements and the level of detail specified differ by state. Many states prescribe specific features of ballot design. For example, some states require that ballots provide for rotation of candidates so that the no candidate of a particular party consistently has the advantage of appearing first on the ballot. State law in other states dictates that voters be offered a ballot that allows them to vote a straight- party ticket. Some states identify the order of races and ballot issues. For example, Washington law specifies that state ballot issues appear before all offices on the ballot. In New York, state law even includes specifications relating to the size of the print and the size of the checkboxes for the ballot. States also differ in the degree of state oversight of ballot design. In some statewide systems, such as those in Oklahoma, ballot design is done primarily at the state level for state and federal offices. In Massachusetts, the state designs and prints all ballots for state elections. In other states, such as Virginia, local officials develop ballots, but the State Board of Elections must approve them. Other states have no statutes that provide instruction on ballot design, leaving ballot design in the hands of local officials without state oversight.
The voting technology that a jurisdiction uses is the major factor that influences ballot design and defines the tasks that election officials face as they prepare the ballot. As we discussed in chapter 1, different voting machines require different types of ballots and each different type has its own constraints. For example, the size of ballot, type of paper, and other features of the ballot must follow physical characteristics of the voting machine. Figure 38 illustrates two punch card ballots and identifies some of the characteristics that caused problems with the ballots for the November 2000 election.
Figure 39 shows an optical scan ballot and a ballot for a pushbutton DRE voting machine.
Election officials must determine all the ballot styles needed for every precinct in the jurisdiction. They must “define the election,” which entails identifying all races, candidates, and issues such as statewide referenda or local tax levies in a particular election. Additionally, officials must determine how many variations of the ballot they need to produce. A voting jurisdiction, which is generally a county, is comprised of precincts. Voters in the same precinct may vote a different ballot because boundaries of certain election districts, such as congressional districts and special districts, may vary within the precinct. Therefore, voters in the same precinct may vote different ballot styles, depending on where the voter lives.
Jurisdictions design their ballots to meet the special needs of their constituents in various ways. Certain jurisdictions may require that ballots be prepared in multiple languages. Others prepare audio versions of their ballot for sight-impaired voters. For example, one very large jurisdiction, which uses touch screen DRE machines, provides an audio option to allow blind voters to cast their ballots in privacy without outside assistance. No matter the ballot style or unique aspects of ballot design, all ballots must include instructions to voters on how to complete their ballots.
Once election officials determine everything that must appear on the ballot, they must construct detailed layouts for a particular type of ballot used for their election equipment. In many jurisdictions, the ballot layout is completed in-house. Some jurisdictions have computer programs that they use for ballot layout. In other places, election officials rely on voting equipment vendors, printers, or other outside contractors to fit the candidates and issues onto the ballot.
Officials Reported Voters Confused by Some Ballots
Although most officials did not identify ballot design as a major problem area, some officials reported the design of the ballot created problems and confusion for some voters in the November 2000 election. These problems generally varied by the type of voting equipment used by the jurisdiction. On the ballot for a medium-sized jurisdiction that used lever machines, the list of names for president was so long that it extended into a second row. Election officials said that listing candidates in a second row confused some voters. In a small optical scan jurisdiction, officials said that their voters seemed to have problems with the write-in section of their ballot. Voters selected a choice from the candidates listed on their ballots and then also wrote in the candidate's name in the write-in section. The officials believe that this confusion on the part of the voters accounted for much of their county’s 5 percent overvote for president. In one small jurisdiction, officials said that they had to use both sides of their optical scan ballot because of the number of issues on the ballot. They said that two-sided ballots generally created some voter confusion. Some voters did not flip their two-sided ballot over and only voted on one side.
In one very large punch card jurisdiction election officials said that after the difficulties with the butterfly ballot in Florida were publicized, they also received complaints that the butterfly ballot for their punch card machines was confusing. Additionally, they said that approximately 1,500 voters put their punch cards into the machine upside down, thereby negating their vote. In a jurisdiction that uses a full-face electronic DRE machine, officials had to use a small print size, difficult for some voters to read, to ensure that their ballot could (1) include all of the races and candidates, (2) meet the legal requirement that the full text of all ballot issues appear, and (3) have all text in English and Spanish. Additionally, because many voters had not received advanced information on the issues on the ballot, they took more time in the voting booth; thus, waiting times at polls became lengthy.
Production of Paper and Punch Card Ballots Added an Extra Layer of Difficulty
The preparation of paper and punch card ballots requires an extra step in the production process. These types of ballots must be printed or produced separately from the voting machine, which introduces the potential for other problems. In a medium-sized jurisdiction that uses punch card ballots, officials said the printer trimmed ballots too closely, and the ballots had to be redone. Locations that use punch card machines provide a ballot book that fits onto the machine and identifies for the voter the correct location to punch. The paper ballot book and the punch card must be correctly aligned in the machine. Small deviations can result in erroneous punches. Officials in optical scan jurisdictions also reported ballot production problems. For example, officials said that a printing error on the ballots caused the counting machines to reject the ballots in one medium-sized jurisdiction. A small ink dot in the ballot coding section made the ballots unreadable by the machines.
Officials Did Not Have Many Options for Ballot Design
Election officials told us that they anticipated that long lists of candidates or changes in their traditional ballot format would lead to ballots that would confuse some voters. However, they often had limited alternatives, given everything they had to fit on the ballot for the November 2000 election. Some officials attempted to mitigate the impact of confusing ballot features by focusing voter education on these features. For example, officials in a large jurisdiction anticipated that they would have a problem with their three-column ballot design and the straight-party ballot option. If voters wanted to vote a straight party ticket in the November 2000 election, they had to mark the ballot in four different places, which was a departure from the usual way ballots were voted. These officials said that they tried to avert a problem for the voters by emphasizing this change in the ballot in voter education efforts before the election.
Some other jurisdictions have adopted longer range efforts to limit the length and complexity of ballots. To minimize the length of the ballot, officials in South Carolina recommended the creation of two different ballots–one for candidates and one for ballot issues. Washington pursued a similar course of action, scheduling state elections in the off-years of the presidential election cycle.
Jurisdictions identified other ideas to improve ballot design that are still in the proposal stage. Officials in one jurisdiction said they would like to use professional design consultants to create ballots that are easy to use and understand. Another jurisdiction is proposing to pretest ballots with selected groups of voters to identify and resolve design flaws before the election. Given the many problems of voter confusion with ballot design identified in the detailed reviews of ballots cast in Florida, many are interested in applying the principles of the field of information design to developing usability standards for ballot design. Some jurisdictions are planning to acquire new voting equipment and the characteristics of the ballots associated with different equipment will play a big role in their decision. One official in a very large jurisdiction told us that they would not even consider optical scan equipment because the amount of paper that would be required for their complex ballots would be prohibitive.
Educating Voters Can Help Reduce Problems in Conducting Elections
We estimate that over a third of the jurisdictions nationwide believed that federal government should provide monetary assistance for voter education programs.
To educate voters on how to translate their choices of candidates and issues into votes on election day, jurisdictions employ a range of activities. Jurisdictions place varying degrees of emphasis on educating voters on election processes and procedures. Some officials publish a sample ballot in local newspapers; others publish voter guides, mail out sample ballots and election information to every registered voter, and fund public service announcements. Officials told us that the introduction of new voting technologies or other significant changes in the way elections are conducted increases the need for educating voters on how the changes will affect the way they vote. A lack of funds is the primary challenge that election officials said they face in expanding their efforts to educate voters about elections. On the basis of our mail survey, we estimate that over a third of the jurisdictions nationwide believed that the federal government should provide monetary assistance for voter education programs.
Emphasis Placed on Informing Voters Differed Across Jurisdictions
Virtually all jurisdictions we visited provide some information to assist voters in knowing how, when, and where to vote. However, there is wide variation in the amount and type of information provided and in the importance elections officials attach to voter education. In one small jurisdiction, for example, an election official told us, “eople have been voting here the same way all their lives. They don’t need voter education.” However, in many jurisdictions, election officials consider more extensive voter education campaigns to be an important way to minimize voter errors on election day. Some jurisdictions use multiple media for providing information to the public before election day, and other jurisdictions would like to provide more extensive voter education, but lack resources to do so.
Some Jurisdictions Use Multiple Media to Disseminate Voter Information
Jurisdictions provide voter education through print and electronic media, public demonstrations of the voting process, and public forums. In our mail survey of jurisdictions, we asked local election officials to identify ways they provided information to voters for the November 2000 election. Making information available at the election office and printing election information in the local newspaper were by far the most common ways of providing information to voters. Our mail survey results indicate that about 91 percent of the jurisdictions nationwide made sample ballots available at the election office; 74 percent printed sample ballots in the local newspaper; and 82 percent printed a list of polling places in the local paper. In contrast, between 18 and 20 percent of jurisdictions nationwide indicated they placed public service ads on local media, performed community outreach programs, and/or put some voter information on the Internet. Mailing voter information to all registered voters was the least used approach. Thirteen percent of the jurisdictions mailed voting instructions; 7 percent mailed sample ballots; and only 6 percent mailed voters information on polling locations.
All election officials we visited provide information to the public at the elections office and answer inquiries from citizens. Most jurisdictions also provide information on elections to the public by publishing sample ballots, candidate lists and positions, registration deadlines, polling place location, and times the polls open and close. Fewer jurisdictions mail information on the election directly to voters. Some states mail voter guides, which provide detailed explanations of ballot issues and describe all the candidates for state and federal office to registered voters. Some local jurisdictions have developed voter guides and other information on the election to help educate voters. Jurisdictions we visited provided an array of different types of voter information and aids. In one large jurisdiction, election officials distributed business cards with instructions on how to complete optical scan ballots on one side and dates of elections on the other. A very large jurisdiction provided voters a demonstration that included instructions on punch card voting and sample ballots. Some of the materials alert voters to common mistakes that they should avoid. Voter education materials are often both distributed before the election and available at the polls on election day. Figure 40 provides examples of materials jurisdictions used to inform voters in the November 2000 election.
Other forums for educating voters include discussions sponsored by organizations such as churches and civic and advocacy groups. Election officials in several jurisdictions said they frequently spoke to civic and educational organizations about the voting system. One large jurisdiction has an NVRA coordinator with responsibility for outreach to community groups, and another jurisdiction has an Election Ambassador Program aimed at citizens 18 to 35 years old. The Internet provides another medium for communicating voting process information to voters. All but three of the jurisdictions we visited have established a Web site as an additional means of educating voters. Many of the Web sites simply provide general information about elections and the requirements for participation. Others permit the voter to search a database to find information, such as the location of the voter’s polling place. A number of sites have forms the voter can get and print, but none permits the voter to actually submit the form electronically. Some jurisdictions may also operate telephone information hotlines so those voters may call in to obtain information about their polling place location. For example, Delaware has a computerized telephone system answering calls at election headquarters. The system handled over 11,000 calls on election day in November 2000. Many of the calls were from voters using the polling place locator feature. Use of such a system frees up the time of election officials to field questions from poll workers.
Some jurisdictions rely on civic organizations, such as the League of Women Voters, to supplement their voter education efforts. In some locations, such groups provide almost all voter education. In one very large jurisdiction, a nonprofit, nonpartisan, watchdog organization provides voter education before election day. On election day, the group operates a voting control center from its offices to respond to questions and field complaints from citizens, election board officials, and party representatives. In another large jurisdiction, officials said that they relied on the League of Women Voters and the media to provide the community with voter education information.
To familiarize citizens with the mechanics of voting, some jurisdictions conduct nongovernmental elections for groups such as unions and schools. For example, local election officials in one large jurisdiction will, on request, run local high school elections such as those for student council officers. The officials follow the same procedures as they would in a general election—developing the ballots and using the same voting machines used in the general election. Officials in other jurisdictions also conduct nongovernmental elections at the request of community groups as an educational tool.
Introduction of New Technology Increased the Need for Voter Education
When election jurisdictions changed the equipment they use for voting, there was a particular need for voter education to help citizens understand how the new equipment would change the way they cast their ballots. Two of the jurisdictions we visited had developed extensive voter education programs in connection with introducing new voting technology. One large jurisdiction introduced new optical scan voting equipment that was used in November 2000. As a part of planning the transition, election officials significantly increased voter education to ease the transition. Consequently, voting error decreased in this jurisdiction in the November 2000 election. A very large jurisdiction was the first jurisdiction in the country to move completely to touchscreen DRE machines. The vendor supplying the new voting technology also provided $80,000 for voter education. Among other things, their education program included the development of videotapes and billboards. The vendor also published a voter guide with the county.
Many jurisdictions would like to provide more extensive voter education tailored to the needs of particular elections. However, voter education programs compete with other needs for scarce local resources in conducting an election. Officials in two large jurisdictions said that they could not mail sample ballots to registered voters because of the postal costs they would incur. Spending for voter education is considered discretionary. Some local officials must first take care of mandatory items such as equipment, supplies, poll workers and polling places. Many officials said that they see voter education as an area where federal funds could be particularly helpful. When asked what their priorities would be were federal funds to become available for election administration, two- thirds of these election officials identified increasing voter education among the top three spending priorities.
Preparing and Delivering Supplies and Equipment Was Often a Logistical Challenge
Supplies and equipment are generally prepared before the election and either delivered to each polling location or picked up by poll workers. Although no election official mentioned this task as a major problem, it is crucial to administering a successful election. The logistics of preparing supplies and machines for election day can be daunting, particularly for larger jurisdictions. As discussed in chapter 1, the type of voting equipment a jurisdiction uses influences the equipment testing routines required before election day as well as the kind of ballots and supplies that are needed.
Officials typically put all supplies needed by voters and poll workers in a supply box which, in many jurisdictions, doubles as a ballot box. Generally, officials assemble a supply box for every precinct which typically includes (1) voter registration books or lists; (2) signs to identify the polling places; (3) voter education materials; and (4) instructions for poll workers that explain how to open, operate, and close the polls. The supply boxes may also contain incidentals such as bibles, American flags, and other items; for example, one jurisdiction’s box included a 50-foot length of string to mark an electioneering-free zone around the polls. Additionally, supply boxes can have forms, such as voter challenge forms and voter assistance requests; tally sheets to count blank, spoiled, absentee, and properly voted ballots; and a ballot box. The boxes may include color-coded envelopes or other dividers to separate different kinds of ballots. All boxes are checked by an election official to ensure that they contain the correct supplies. A lock or security tab must secure the supply boxes.
In addition to preparing the supply boxes, election officials must prepare and deliver the voting equipment, except in jurisdictions that use paper ballots. Depending on the size of the jurisdiction and the types of equipment, the logistics of delivering the voting machines will vary. For example, in one very large jurisdiction, the election board hires a fleet of trucks to distribute the supplies and equipment to nearly 5,000 precincts for election day. The election board in a medium-sized jurisdiction hires a contractor who stores and delivers the equipment. The machines are prepared and tested while they are still in the warehouse, and then the contractor delivers them to the appropriate polling place. Jurisdictions using lever machines have different logistical problems. Lever machines weigh 700 to 900 pounds apiece, depending on the construction material. Prior to election day election officials in one jurisdiction delivered 464 of these lever machines to 327 election districts. A small jurisdiction that uses lever machines avoids delivering heavy lever machines by storing the machines at the polls.
Election Day Activities
Setting Up the Polling Place Required Different Steps Determining Voter Eligibility Often Created the Biggest Election Day Our site visits with election officials indicated that these officials were generally satisfied with the way the November 2000 general election was conducted within their jurisdiction. However, few of them reported keeping data or evaluating the way in which the election was conducted. Therefore, it is likely that the election officials’ views about how well the election was run at the polling place level were shaped by anecdotal information that was voluntarily supplied or by public complaints. In our mail survey, jurisdictions nationwide identified determining voter eligibility at the polls and communication inadequacies as the key problems they faced on election day. Election officials we visited noted that the problems they face with registration, absentee voting, and other preparations for election day often manifest themselves on election day.
Election day marks the point at which election officials delegate much of the actual operation of the election to poll workers, who become the public face of the election to most citizens. Entrusting an election to temporary workers requires a leap of faith for some election officials. One election official told us that he could spend a year planning for an election, preparing for every possible contingency, meeting all required deadlines, and ensuring all materials were in their proper places. However, on the day of the election, the fate of his professional reputation rested in the hands of strangers, and at the end of the day he would learn how well he had done his job during the preceding year.
Poll workers carry out many important tasks on election day. In a number of jurisdictions, election administrators have developed detailed checklists that direct poll workers in opening, running, and closing the polls. From our mail survey, we estimate that 74 percent of the jurisdictions nationwide provided poll workers with checklists of procedures to follow on election day. The checklists we saw in different jurisdictions varied significantly in detail.
Setting Up the Polling Place Required Different Steps
Before the polls open on election day, election officials must ensure that the people, processes, and technology to conduct the election are in place. Election officials did not identify the setting up of the polling place as a major problem although they did encounter routine glitches on election day in November 2000.
To set up the polling place and begin preparing the site for the voters, poll workers in some jurisdictions arrive at the polling place as early as 5:45 a.m. In other places the polls are set up the night before election day. Opening the polls entails swearing in the officials, setting up the machines, unpacking the supply box, setting up voting booths, testing equipment, and completing paperwork such as confirming that the correct ballot styles and number of blank and demonstrator ballots have been delivered, and posting signs.
There are many different ways polls are set up. The type of voting technology influences the types and sequence of tasks poll workers perform. For example, in a small jurisdiction that uses paper ballots, the lead poll worker is responsible for picking up the supply box the day before the election. He or she must be the first person to enter the polling place the next day, and the supply box must be opened in the presence of the other poll workers in the morning before the polls open on election day.
In contrast, in a very large jurisdiction, which uses precinct-count optical scan machines (in which the ballots are counted at the polls), the supply box contains the ballots and is locked inside the machine. Election warehouse employees deliver the machines to the polling places the night before election day. The election judge and at least one other poll worker go to the polling place to unpack supplies and prepare and test the optical scan vote-counting machine. When they complete these tasks, they secure the polling place until the next morning.
One very large jurisdiction uses touchscreen DRE machines that are portable voting devices. On election eve, the poll workers set up the machines in each polling place. The lead poll worker must test the separate devices at home that will be used to activate the DREs. Election morning, the lead poll worker powers up the machines and runs the self- test to ensure the system is operating properly. The first voter of the day activates the machines for all subsequent voters.
Although election officials did not say that setting up the polls created major problems for them, they did remark that they always have last minute problems to deal with, such as absent poll workers and polling places canceling on the day of the election. But election officials said that they have contingency plans for most of these problems. For example, in one small jurisdiction, the polls cannot open until all the poll workers are present. In this jurisdiction, each polling location has alternative poll workers in case a designated poll worker cannot be present on election day. However, in the November 2000 election, one polling location opened 45 minutes late because an alternate who lived a great distance from the polling place had to be summoned at the last minute.
The schematic diagram in figure 41 illustrates the way that poll workers in one jurisdiction were instructed to position the voting booths, election judges’ tables, signage, and the ballot box in each polling place. This diagram also shows the path the voter takes upon entering the polling place.
State law determines the hours that polling places open and close for all jurisdictions within the state, as shown in table 21 in appendix VI. When the polls open and voters enter the polling place, they will generally follow the path laid out in figure 41. The particular steps and stops on the way to casting a ballot differ, but in most cases, voters must check in at an official table and a poll worker must verify that they are registered and otherwise eligible to vote. When eligibility has been verified, the voter receives a ballot or an authorization to use a voting machine and proceeds to the voting booth. Once the voter’s choices have been recorded on the ballot, the voter must make sure the ballot is cast. For punch card and paper ballots, the voter must take the ballot to the ballot box or ballot counter; for lever and DRE voting machines, the voter casts the ballot on the machine. At each step, there is the potential for problems or voter confusion.
Determining Voter Eligibility Often Created the Biggest Election Day Problem
We estimate that 30 percent of jurisdictions considered dealing with unregistered voters at the polls to be a major problem and 20 percent considered other voter eligibility issues to be major problems at the polls.
From the perspective of election officials that we contacted, the biggest problems on election day stem from resolving questions about voter eligibility. Provisional ballots, court orders, and affidavits were used in some jurisdictions to resolve voter eligibility problems. High numbers of voters with these eligibility issues create challenges on election day, particularly by creating frustration for voters, long lines, and problems communicating between the polls and election headquarters as poll workers work to resolve the problems.
Provisional Ballots and Court Orders Were Used to Resolve Voter Eligibility Problems
Election jurisdictions have different requirements for establishing that the voter is eligible to vote at a particular polling place on election day. As noted in figure 42, different states have different requirements for checking the voter’s identity.
Although many jurisdictions have stringent requirements for identifying voters and confirming their eligibility to vote, many others have very limited procedures. Twenty-three states require or authorize poll workers to inspect proof of the voter's identity, such as a driver's license or a birth certificate, before allowing him or her to vote. Thirty-eight states and the District of Columbia require a voter signature at the polls. Sixteen of these states provide for verification of the voter's signature based, for example, on a comparison with the voter's signature on a registration application.
Before a voter receives a ballot, his or her eligibility must be confirmed. Typically, the poll worker examines the registration list for the person’s name. As discussed in chapter 2 of this report, jurisdictions produce poll books or lists of registered voters in a number of different ways. If the name appears on the list and other identification requirements are met, the voter is given a ballot and proceeds to vote.
If the voter’s name does not appear on the registration list, jurisdictions have different procedures for dealing with the question of the voter’s eligibility. Twenty states plus the District of Columbia utilize some form of provisional ballot. Provisional balloting is typically identified by (1) the provision of a ballot to voters whose names are not on the precinct level voter registration list, (2) the identification of such ballot as some type of special ballot, and (3) the post election verification of the voter’s registration status before the vote is counted. Provisional balloting measures go by differing names among the states including, provisional ballot, challenged ballot, ballot to be verified, special ballot, emergency paper ballot, and escrow ballot. Five states use a form of affidavit ballot whereby upon completion of an affidavit the vote is cast and counted without the confirmation of such registration prior to the counting of the ballot. Table 22 in appendix VI details the provisions in the laws of different states for provisional voting and other procedures to address voters whose names do not appear on the registration list.
Our mail survey showed that over three-quarters of the jurisdictions nationwide had at least one procedure in place to help resolve eligibility questions for voters who did not appear on the registration list at the polling place. Poll workers will often first try to reconcile this type of problem by contacting election headquarters and verifying their registration list against the more current master registration list. If election headquarters cannot provide a definitive answer about a voter’s eligibility, many jurisdictions allow the individual to vote some type of provisional ballot. Several election officials told us that provisional ballots are a great help in conducting elections. One director of elections said that in order to keep the polling places operating smoothly, no person who asks to vote is denied a ballot. In this jurisdiction, poll workers are instructed to give a provisional ballot to persons whose names do not appear in the poll book. The provisional ballot will not be counted if the person is not a registered voter. In the 2000 general election, this jurisdiction distributed 18,000 provisional ballots to voters, and about half of these ballots were rejected, primarily because the person casting the ballot was not registered. This jurisdiction, unlike most, posted the names of those persons whose ballots were rejected and, therefore, not counted in the election. Voters whose ballots were rejected could appeal the decision.
The procedures and specific instructions that jurisdictions develop to permit provisional voting differ across jurisdictions. For example, in some jurisdictions, the voter must sign a sworn statement to cast a provisional ballot, but not in others. Figure 43 shows a provisional flow chart that officials in one very large jurisdiction developed to spell out for poll workers and voters the specific steps that have to be taken to vote a provisional ballot.
Figure 44 illustrates the special envelope or sleeve that one very large jurisdiction uses for provisional ballots. In this jurisdiction, the voter must place his or her punch card provisional ballot in the sleeve, fill in the required information, and sign the ballot.
Our mail survey results indicate that nationwide only 12 percent of jurisdictions reported turning away from the polls persons who desired to vote but whose names did not appear on the list of registered voters.
High Numbers of Voters With Eligibility Questions Created Challenges on Election Day
Several election officials we visited in jurisdictions that did not have provisional voting said that introducing provisional voting would be an important step in helping assure that all eligible voters were permitted to vote at the polls on election day. Additionally, they said that the option of provisional voting could also help minimize other problems that interfere with the smooth operation of the polling place. According to the election officials we spoke with, resolving a high number of voter eligibility questions contributed to two other election day problems: communications between polling places and election headquarters and long lines at polling places. To help resolve these problems, election officials have proposed or taken the following steps: Adding Telephone Lines: Some jurisdictions have added telephone lines both in the election headquarters office and at polling places to alleviate some of the communication problems. Other jurisdictions are providing poll workers cell phones to ensure that they have access to telephones to call headquarters. One of the most promising solutions to this problem is to provide poll workers direct access to central registration files.
Electronic Poll Books: If funds were available, officials in one very large jurisdiction said they would buy electronic poll books that can be directly linked to the central registration files.
Conducting Voting Varied Widely
We estimate that communication between the polls and the central election office was a major problem for 17 percent of the jurisdictions nationwide and long lines at polling places was a major problem for 13 percent.
There is tremendous variability in the tasks performed throughout election day among jurisdictions. Not only is this variability dictated by the voting system, but also by the culture and traditions that have emerged in each jurisdiction. Typically, many of the tasks required to successfully conduct voting are handled routinely. However, election officials identified long lines and inadequate communication links as major challenges.
Steps to Voting After Eligibility Is Established
Once officials have ascertained the voter is eligible to vote, they give the voter the appropriate ballot or authorize the voter to use the voting machine containing the appropriate ballot. Some precincts have multiple versions of the ballot because some voters in the same precinct for the presidential election live in different jurisdictions for other races. In one medium-sized jurisdiction, the different ballot styles were color-coded so that the poll workers could quickly identify the appropriate ballot for the voter.
Once a voter completes the ballot, how he or she casts the ballot depends on the type of voting system. In precincts that count paper, punch card, and optical scan ballots centrally, typically the voter will carry the ballot to an election official, who deposits the ballot in the ballot box. Where there are precinct-level counters for punch cards or optical scan ballots, voters place their ballots in the automatic feed slot of the counting machine. The precinct-level counting machine tells the voter if there is an error on the ballot, such as an undervote, an overvote, or a damaged ballot, giving the voter an opportunity to correct the ballot. To cast a ballot using electronic voting systems or lever machines, the voter pushes a “cast vote” button or pulls a lever to register the vote. Figure 45 illustrates how a voter would cast an electronic vote on a touch screen DRE machine that resembles an ATM.
Voters can change their votes on the DRE machine until they push the “vote” button. Many jurisdictions using other voting equipment, such as optical scan or punch card machines, permit voters who request them, a second or third replacement ballot if they have spoiled the previous one. Our mail survey results indicate that nationwide, 71 percent of jurisdictions allowed voters to correct their ballots or get new ones if the original is spoiled. However, the voter must realize that he or she has made a mistake and ask for a new ballot. Once the ballot is cast, some jurisdictions require a checkout procedure, and some simply give the voter an “I voted” sticker.
Tasks Accomplished Throughout the Day by Most Poll Workers
Election officials perform many other tasks throughout the day to ensure that the elections run smoothly and that voters move expeditiously through the polling place. Culture and tradition influence how the polling places carry out these tasks on election day. Some polling places are more indulgent, while others more rigorously follow required procedures. For example, jurisdictions using DRE machines require the voter to push a button to record his or her vote, but if the voter exits before properly recording the vote, various jurisdictions follow different procedures. Election officials in a large jurisdiction using DRE machines told us that if the voter leaves the voting machine without pushing the green “vote” button, the poll worker at the machine is to void the vote. In contrast, in a different jurisdiction, the election official said the poll worker may reach discreetly under the curtain and press the “vote” button, thus recording the vote. In another jurisdiction, if a voter leaves without hitting the “cast vote” button, then the poll worker can cast the vote only if two poll workers, a Democrat and Republican, are present.
For many places, an election is not only a civic event but also an occasion for socializing. In small voting jurisdictions, the poll workers often share potluck meals with one another. Neighbors and friends not only vote, but also visit at the polls. In contrast, many large jurisdictions manage their polling places in a business-like fashion, and voters want to get in and out of the polls as quickly as possible.
While the polls are open, poll workers are responsible for making sure that no one violates electioneering laws; for example, by passing out campaign literature at the polling place. In one jurisdiction, a string is included in the supply box to mark off the “electioneering free zone” outside the polling place. Periodically, the poll workers check to ensure that no one has left campaign or other materials in the voting booths, that the instruction cards are still posted and intact, and that the voting equipment is still functioning properly.
Poll workers also monitor voters in the polling place and provide assistance and information as needed. Our mail survey results indicate that nationwide, 51 percent of jurisdictions instructed poll workers to ask voters if they had any questions about operating the voting equipment or casting their votes before voting. This assistance may include helping handicapped voters. In one jurisdiction, if voters call in advance, they may arrange for curb side voting, in which case the town clerk and another poll worker deliver ballots to the voter’s vehicle.
Although many jurisdictions are required to have voting instructions on every machine, poll workers also provide other types of voter education. As illustrated in figure 46, poll workers can explain how to complete ballots before the voter enters the voting booth.
Most of the jurisdictions we visited identified several types of assistance that are offered to voters at the polls, although the amount and type of voter education at the polls varied. Of the voting jurisdictions nationwide, our mail survey results indicate that 84 percent made written instructions available for voters to review before voting, and 37 percent provided demonstrations on how to vote through a videotape or in person. At some polling places, poll workers hand the voter an instruction card to take in the voting booth with them. When introducing a new technology, one jurisdiction dedicated a voting machine for teaching purposes, allowing voters to familiarize themselves with the equipment before actually voting. Other places have continuously running video for voter education.
Long Lines and Inadequate Communication Links Pose Major Challenges
Long voter wait times are a problem that election officials try to avoid. Our mail survey results indicate that 13 percent of jurisdictions in the United States considered long lines at the polling places to be a major problem in the November 2000 election. These results also indicate that 88 percent of jurisdictions did not collect information on the average time that it took voters to vote in November 2000; thus, the cause of long wait times remains unclear. However, some jurisdictions reported to us anecdotally that the length of time voters must wait is affected by ballots that include many races and issues. Underestimating voter turnout also may contribute to long wait times. Some jurisdictions reported their ballot was so long that it took voters a long time in the voting booth to read it and vote. As a result, lines backed up, and some voters had to wait for over an hour to cast their votes. Officials in a very large jurisdiction said that their voters experienced long wait times, in part because redistricting caused confusion among voters, who often turned up at the wrong polling places.
Election officials cited inadequate communication links from the polling places to headquarters as a problem. For instance, officials from a medium-sized jurisdiction told us that their phones were inadequate to handle the large volume of calls coming into the office so poll workers found it difficult to get through with their questions. For the November 2000 election, some jurisdictions dealt with the problem of inadequate communication links by installing more phone lines or using cell phones. One small jurisdiction distributed cell phones to poll workers whose polling places did not have phone lines. A large jurisdiction provided all polling places a cell phone. In another large jurisdiction, even though more phone lines were installed in election headquarters offices and additional staff were added to answer questions from precincts and voters, the phone system was overloaded and down at various points during election day.
Overall, election officials reported a high degree of satisfaction with how the November 2000 general election was conducted in their jurisdiction.
However, jurisdictions did not comprehensively collect and report on their performance. According to our mail survey, four-fifths of the jurisdictions nationwide did not seek feedback from voters on how well voter registration, absentee voting, polling place locations and times, voting equipment, polling place procedures, or other areas were administered.
Some jurisdictions conducted selective evaluations of their elections. For example, some jurisdictions maintained information on overvotes and undervotes, but many did not. In one large jurisdiction, election officials conducted a survey of poll workers after the election to obtain their views of problems encountered on election day. In one medium-sized jurisdiction, officials performed an evaluation of their voting procedures. Many jurisdictions maintained logs of voter complaints. An election official from a large jurisdiction said that they do not need to solicit feedback from the voters because they receive enough unsolicited feedback.
Challenges
In summary, election officials face many challenges as they pursue their goal of planning and conducting an election that permits eligible citizens to cast their ballots without difficulty on election day. The following are the key challenges that election officials faced as they planned and conducted the November 2000 general election and their views on how these challenges might be addressed.
Local election officials were generally satisfied that the election of November 2000 was conducted well in their jurisdictions. However, many also identified major problems that they faced, particularly in recruiting qualified poll workers who, for nominal pay, would commit to a long election day, and in handling a range of problems associated with determining voter eligibility at polling places on election day.
There is wide diversity in how elections are conducted within and across states. Often these differences reflect local needs and customs. Local election officials frequently told us that “one size does not fit all.” However, local election officials acknowledge that standardization of certain aspects of election administration may be appropriate at the state and even the federal level. Based on our mail survey, we estimate that over 14 percent of local election officials nationwide are supportive of federal development of voluntary standards for election administration similar to the voluntary standards now available for election equipment. An additional 26 percent support federal development of mandatory standards for election administration.
Few local election officials systematically collected information on the performance of the people, processes, and equipment on election day or conducted post-election assessments to help them understand the impact of some problems on the election. For example, few of the jurisdictions surveyed voters to obtain their views on how easy it was to understand the ballots or other voting procedures. Additionally, few states routinely ask for information on or compare the problems and performance of local election jurisdictions. However, some local election officials believe that greater sharing of information on best practices and systematic collection of standardized information on elections can help improve election administration across the United States and within states. Some also suggested this would be an appropriate role for a national election administration office and clearinghouse.
If federal funds are made available for election reform, local officials believe that such funds should not be limited to equipment replacement but that they should have the option to use funds for other improvements to election administration, such as increasing poll worker pay or voter education. They also believe that they should be able to use such funds to help with what they believe are their most pressing needs. In the jurisdictions we visited, officials identified purchasing new equipment or software (for registration, absentee voting, or election day voting), increasing voter education, and poll worker pay to be their top priorities for the use of federal funds.
Counting the Votes
The polls close on election day. The votes are counted, and final election results are reported. It sounds simple, but the presidential election in Florida in November 2000 revealed just how difficult the vote counting process can be as the state scrambled to provide an accurate count of the votes cast. Problems with vote counting can occur because of the way people—election officials or voters--interact with technology. For example, in New Mexico, an election official in one county incorrectly programmed the software used to count votes. The result was that more than 20,000 votes cast for President were not included in the initial counts, and the final vote totals could not be determined until the problem was resolved. In another example, the Clerk for Cook County, Illinois reported that a defect in the some of the templates used for punch card votes may have accounted for one-third of the 123,000 ballots with errors in the November 2000 election.
Overview of the Vote Counting Process
The Methods Used to Count Votes Varied Among the Jurisdictions but The Greatest Vote Counting Challenges Occur, Not When the Margin of Victory Is Wide or Ballots Are Properly Marked, but When Elections Are Close or Voters Mark Their Ballots in Ways That Prevent the Vote Counting Equipment from Reading and Counting the Vote The methods used to count votes vary among jurisdictions, depending on the type of voting method or methods used, the type of ballots being counted, and whether some or all ballots are counted at the precinct or at a central location. However, all vote-counting methods have certain steps in common. Following the close of the polls, election officials and poll workers generally take a number of basic steps to count or tabulate votes, including securing voting machines and ballots so that no additional votes can be accounting for all ballots, reconciling any differences between the total number of ballots on hand at the beginning of the day with the number of voters who signed in at the polling place, the number of ballots distributed, and/or the number of ballots cast; qualifying and counting mail absentee ballots and provisional ballots (i.e., ballots issued to voters whose voter registration could not be confirmed at the polling place); securely transferring—electronically, physically, or both—ballots and election results (if ballots are counted at the polling place) to a central location; canvassing the votes, which includes reviewing all votes by precinct, resolving problem votes, and counting all valid votes (absentee and other preelection day; regular election day, provisional election day) for each candidate and issue on the ballot and producing a total vote for each candidate or issue; certifying the vote, in which a designated official certifies the final vote totals for each candidate and each issue on the ballot, within a specific timeframe; conducting any state-required recounts and responding to any requests responding to allegations regarding a contested election.
Vote counting is not necessarily completed on election day or even on the day after. For example, nine states and the District of Columbia allow absentee ballots to be counted if they arrive after election day. To be counted, however, all of them but one require that the absentee ballot be postmarked on or before election day. Canvassing the vote—when election officials combine totals for each type of vote and the votes from each voting precinct into a total vote for each candidate and issue on the ballot—usually occurs one or more days after election day. With regard to certification of the vote, some states have a specific deadline following an election, and others do not. The election board or official may order a recount or partial recount. Most state codes contain specific provisions for conducting a recount, which may be mandatory if there is a tie vote or if the vote for a specific office falls within a certain margin of victory, such as one-half of 1 percent. If there is no recount, or when the recount has been resolved, the local results are totaled, certified, and reported to the state’s chief election official.
The greatest vote counting challenges occur not when the margin of victory is wide or ballots are properly marked, but when elections are close or voters mark their ballots in ways that prevent the vote counting equipment from reading and counting the vote. This can occur, for example, when voters circle a candidate’s name on an optical scan ballot instead of filling in the oval, box, or arrow beside the candidate’s name. In close elections where there are a large number of ballots that vote counting equipment cannot read, questions may arise about the accuracy of the vote count, and recounts may be required or election results contested.
How Local Jurisdictions Count Votes For Each Precinct
Local Election Jurisdictions May Need to Count Several Different Types of Votes That Were Cast at Different Times Using Different Voting Methods Votes May Be Counted at the Precinct, at a Central Location, or at a The Counting of Each Type of Vote May Be Done by Some Type of Vote Tabulating Machine, by Hand Count, or a Combination To determine the final vote count, local election jurisdictions may need to count several different types of votes that were cast at different places using different voting methods. These types of votes include votes cast at individual polling places by registered voters who appear in the registration lists for that precinct, votes cast at individual polling places by voters who do not appear in the registration lists for that precinct and whose eligibility to vote cannot be determined at the polling place, absentee votes cast by mail before election day, and absentee and early votes cast in person before election day.
Each of these types of votes may be counted at the precinct, at a central location, or at a combination of the two. In one medium-sized jurisdiction, absentee votes exceeded the number of votes cast at the voting precincts on election day in November 2000. Absentee ballots may be counted centrally, while the votes cast at the polling place by eligible voters may be counted centrally or at the precinct.
The results of our national mail survey indicate that many jurisdictions count votes both centrally and at the precinct. We estimate that about 52 percent of the local election jurisdictions nationwide counted votes centrally and about 58 percent counted votes at the precinct. Of the optical scan jurisdictions, about 56 percent counted votes centrally, and about 51 percent counted votes at the precinct.
We estimate that nationwide, of those jurisdictions that counted votes at a central location, about 70 percent of all jurisdictions and 90 percent of optical scan jurisdictions programmed their equipment to reject or separate ballots that the equipment could not read.
The counting of each type of vote may be done by some type of vote tabulating machine, by hand-count, or a combination. According to our analysis of available data on voting jurisdictions, about 2 percent of the approximately 186,000 precincts nationwide are in jurisdictions that hand- count paper ballots. The remaining 98 percent of the precincts use some type of vote-counting equipment. The 27 local election jurisdictions we visited illustrate the wide variation among election jurisdictions. Twelve of the these jurisdictions used one voting method for casting election day ballots and a different method for casting absentee or early voting ballots. Ten jurisdictions used ether DRE or lever equipment on election day. With DRE and lever equipment, voters cast their ballots directly on the equipment; they do not use individual paper ballots. Thus, DRE and lever jurisdictions use a different type of voting method that uses some type of individual paper ballot for mail absentee voting. Fourteen jurisdictions used the same voting method for election day and absentee and early voting ballots—all were jurisdictions in which voters cast their votes on individual punch cards or paper ballots. Eighteen of the 27 jurisdictions counted ballots cast on election day at the precinct, and 10 of the 27 counted absentee ballots at the precinct. In one jurisdiction, absentee ballots were qualified for counting at the precincts, but counted centrally. One jurisdiction counted mail absentee ballots centrally, but counting other preelection day ballots at the precinct. Details for each jurisdiction are shown in table 23 in appendix VII.
The way in which votes are counted on each type of voting equipment is described in detail in chapter 1. Here we focus on the ways in which election jurisdictions used those technologies.
Counting Votes at a Central Location
After voting, the voter deposits his or her ballot in a ballot container placed in the polls. The ballot may remain in a secrecy envelope or slip from the secrecy envelope as it is deposited into the ballot container. After the polls close, the ballots are transported to a central-count location where they are fed into a tabulator and counted by precinct. After the completion of the tabulation process, the election workers responsible for managing the counting center use the tabulator to generate a report, which lists the voting results by precinct and by candidate. Figure 47 shows a central- count tabulation machine.
Nationwide, of those jurisdictions that used central vote counting equipment in November 2000, about 70 percent programmed the vote counting equipment to reject or separate ballots that the equipment could not read. Almost 90 percent of jurisdictions that used central-count optical scan equipment did this. Where central counting was used, voters did not have an opportunity to correct ballots that could not be read by the counting equipment.
Counting Votes at the Precinct
Votes may be counted at the precinct. Hand-counted paper ballots are usually counted at the voting precinct. Lever and DRE equipment is designed to automatically tabulate the votes cast on each machine at the precinct. Generally, punch card jurisdictions use central counting equipment. However, punch cards may be counted at the precinct in some cases.
One advantage of precinct counting is that the counting equipment at each precinct can be configured to notify voters of errors they have made on their ballots that would prevent any of their votes from being counted. This includes overvotes—voting for more than the allowed number of candidates for an office—and undervotes—voting for no candidates or fewer than the permitted number of candidates for an office. DRE and lever equipment can be programmed to prevent voters from casting overvotes. DRE equipment can also be programmed to alert voters to undervotes.
A jurisdiction may have had the precinct count technology available, but could not use it in the November 2000 election. For example, Cook County, Illinois, which includes Chicago, had the technology for their punch card ballots but were prohibited by state law from using it. All five of the punch card jurisdictions we visited used central counts, where the punch cards were collected from the precincts and sent to a central-count location. About half of optical scan jurisdictions used precinct counts in November 2000.
Generally, in jurisdictions that count ballots by hand at the precinct, election workers remove ballots from the ballot container and tally the valid votes. We visited two small jurisdictions that counted votes by hand. As described by local election officials in one of these jurisdictions, each precinct filled out a certificate of results once the counting was complete. The certificate showed how many votes each candidate received. Poll workers also must record the number of unused, spoiled, challenged, and absentee ballots on a separate form. When the poll workers have completed the certificate, they posted a copy of the precinct results outside the precinct and sent another to the county clerk’s office.
With lever machines and DREs, voters do not receive individual paper ballots to mark. Poll workers take counts at the precinct from lever machines. For lever machines, the votes cast by each voter trigger mechanically controlled tumblers, which are concealed in a sealed compartment at the back of the machine. After the polls close, poll workers open the sealed compartment and record the vote totals shown on the tumblers. After recording the vote results, the machine is resealed to prevent tampering. Some lever machines can print a paper copy of the vote totals shown on the tumblers. To get the printed copy, a poll worker must pull a sheet of roll paper over the tumblers and rub the number indicated for each candidate in each contest and for each issue. Figure 48 shows the back of such a machine and the sheet of paper with the vote totals.
With DREs, the votes cast by the voter are stored in the unit’s memory component after the voter indicates that he or she has completed the voting process, usually by pressing a “Vote” button or screen. After the close of the polls, the poll workers responsible for managing the precinct use the unit to generate a report, which lists the voting results. Different methods may be used to transmit the results. For example, in one medium-sized jurisdiction, the DRE cartridges were delivered to the various municipal clerks’ offices, where the voting results were transmitted electronically to the county clerk’s office. In a large jurisdiction, the DRE cartridges were transported to one of seven counting centers. The results were transmitted over the county’s secure data network to the registrar’s office.
With precinct-based optical scan equipment, the voter removes the ballot from the secrecy envelope and feeds it into a tabulator placed in the polls. “Read heads” engineered in the tabulator identify the votes cast on the ballot and electronically record them in a memory component housed in the tabulator. After passing over the read heads, the ballot is channeled into a storage bin, where it remains until the close of the polls. After the close of the polls, the election workers responsible for managing the precinct use the tabulator to generate a report that lists the voting results. Figure 49 shows a precinct-count optical scan machine.
Securing Voting Equipment and Ballots
Voting Equipment Can Be Locked and Ballots Sealed so That the Voting Results May Not Be Altered Once the Precinct Has Closed Poll Workers May Use Some Method to Ensure That All Ballots Are Accounted for at Precinct Closing Once a precinct has closed, voting equipment can be locked and ballots sealed so that the voting results may not be altered. When this is done depends on whether votes are counted at the precinct or centrally. In jurisdictions in which all votes are counted centrally and in precinct-count jurisdictions in which absentee and provisional votes are counted centrally, poll workers can lock voting equipment and secure ballots shortly after the polls close. In jurisdictions in which only absentee and provisional ballots are counted at the precincts, one or more precinct counters may remain unlocked so that poll workers may use them to count these ballots after the polls close.
The procedures for securing and locking voting equipment varies by the type of voting equipment used. For example, for optical scan equipment, poll workers may read an “end” ballot into the optical scan counter at the precinct, which instructs the equipment to accept no more ballots and locks it, at which point the counter begins tallying the vote. For DREs and some optical scan equipment, poll workers may use a key to initiate the program that tabulates the total votes counted for each candidate and issue from the ballots read by the equipment. This procedure can lock the vote reading mechanism in the equipment. Poll workers can lock lever machines so that no additional votes can be recorded. However, in precincts at which absentee and provisional votes are counted, an optical scan counter or a DRE may remain unlocked so that it may be used to count these votes.
Reconciling Total Ballots With Total Voters
In conjunction with securing voting machines and ballots at the precinct, poll workers may use some method of ensuring that all ballots are accounted for at closing. Jurisdictions can also employ one or more methods to reconcile the number of blank ballots on hand at the voting precinct at the end of election day (including any supplemental ballots provided during the day) with the number of ballots issued or the number of voters who signed in. This reconciliation may take place before or after the votes are counted at a precinct. In jurisdictions that use central count, this reconciliation can occur at the precinct before poll workers transport the ballots to the central tabulation center. Figure 50 shows a form that poll workers used at one of the jurisdictions we visited for reconciling the ballot count.
We estimate that about 88 percent of jurisdictions nationwide compared the number of ballots cast with the number of voters who signed in at the voting precinct in the November 2000 election.
Our mail survey of local election jurisdictions indicates that most jurisdictions nationwide compared the number of ballots cast to the number of voters who signed in to vote on election day. Specifically, we estimate that in November 2000 about 88 percent of jurisdictions nationwide compared the number of ballots cast to the number of voters who signed in to vote on election day. We estimate that about 64 percent of jurisdictions nationwide compared the total number of ballots cast, spoiled, and unused to the original supply of ballots. Nationwide, we estimate that about 78 percent of optical scan jurisdictions did such a comparison. However, only about 1 in 10 DRE jurisdictions noted took this step. This difference may be due to the differences between voting technologies that use individually marked paper ballots and those that do not. Except for voters who cast a provisional ballot, jurisdictions that use DRE or lever equipment had no paper ballots for voters to complete. About 6 percent of jurisdictions used some other type of procedure.
A medium-sized punch card jurisdiction we visited provided an example of other types of procedures used to reconcile ballots and voters. There, election officials said that election judges counted the number of ballots in the ballot box after the polls closed and compared the total with the number of ballots cast. If there was a discrepancy, the ballots were recounted and the applications checked to make sure they were numbered correctly. If the count was a ballot short, it was noted. If the count was a ballot over, a ballot was randomly withdrawn from the box and placed in an envelope for excess ballots. Two election judges took the ballots in a locked transfer case to the counting center. The ballots were machine tabulated and a count provided. If the count did not match the judges’ count, the ballots were retabulated by a different machine. If the count still did not match, the ballots were sent to a discrepancy team where they were hand counted again. After this, the ballots were once again machine tabulated. These processes were from guidelines provided by the state election board.
Counting Absentee and Provisional Ballots
Jurisdictions May Use Different Equipment to Count Absentee or Provisional Ballots Than Regular Ballots Cast at the Voting Precinct Absentee or Provisional Ballots May Also Be Counted at a Different Place Than Regular Ballots Cast at the Voting Precinct Both mail absentee and provisional ballots must first be qualified as eligible for counting. For mail absentee ballots, this may include checking postmarks, voter signatures, or other required items on the outer envelope containing the ballot envelope. For provisional ballots, this means determining that the voter was registered and eligible to vote in the precinct in which the provisional ballot was cast. Absentee and provisional ballots may be counted at a different place using different types of vote counting equipment than those cast at the voting precinct on election day. Different equipment may also be used to record the votes.
Counting Absentee Ballots
There were considerable variations in how absentee ballots were counted; for example, by hand at the precinct or by machine at the precinct or centrally. One large jurisdiction we visited used DRE equipment at the polling place in November 2000 but paper ballots for absentee ballots. These paper ballots were counted by hand at the precinct and the votes entered into a DRE unit at the precinct by poll workers. Two other DRE jurisdictions we visited also used DRE equipment at the polling place but counted both absentee and provisional ballots at a central place, using optical scan equipment. However, in one of these jurisdictions, voters casting early voting ballots used an optical scan machine that notified voters if their ballot could not be read, allowing them an opportunity to correct errors. Absentee ballots were initially counted at a central location after a review by an absentee board. Voting results stored on cartridges from the optical scan equipment from both absentee and early voting ballots were tabulated at a central location, using software customized for each election.
Counting Provisional Ballots
Jurisdictions used different methods to allow a person to vote when his or her name did not appear on the official voter registration list and their voter registration could not be confirmed at the voting precinct. In such cases, jurisdictions in some states provided voters with a provisional ballot. Provisional ballots were generally kept separate from other ballots and researched by election officials to determine the voter’s eligibility to vote. Only those ballots cast by voters whose eligibility had been confirmed were generally counted. However, provisional ballots were not always counted. In a small jurisdiction we visited, for example, if a voter was not listed in the voting precinct’s list of registered voters, local election officials searched for the person’s name by computer using a statewide database of voter registration records. If the voter’s name still could not be found, the voter was permitted to fill out an “escrow” ballot, this jurisdiction’s term for provisional ballots. However, these provisional votes are not counted unless the election is close enough that the provisional votes, if all cast for the same candidate, would be sufficient to change the outcome of the election for one or more offices on the ballot. If the number of provisional ballots were sufficient to change the outcome, the ballots would only be counted after additional research was completed to verify the voter’s registration status.
In one large jurisdiction, election officials said that, partly to avoid confrontation with people on election day, they provided provisional ballots to individuals who appeared at the front desk of the central election office and stated that they were registered to vote and wished to vote. If a person’s registration was confirmed, his or her vote was counted with all the rest. Election officials tracked the number of provisional ballots that could not be counted because they found that the person was not registered. In the November 2000 election, 1,302 provisional ballots in this jurisdiction were rejected from the count—less than one-half of 1 percent of the total 299,776 votes cast in the election.
Canvassing the Vote— Reviewing the Accuracy of the Initial Vote Count
A Canvass of the Election Results Is Usually Conducted a Day or Two After Election Day by the Jurisdiction’s Canvass Board or an Official, at Which Time All the Precinct Results Are Tabulated Together Eight of 27 Election Jurisdictions Selected for Our Site Visits Reported Problems With the Vote Counting Equipment, Involving Either Technical Difficulties or Human Error That Caused Problems in Obtaining an Accurate Count Once the polls close and the votes are transported to a central location where they are counted, or voting results are transmitted from the polling place to a central location, the canvassing process may begin. Canvass is the term used in many states to describe the process of vote counting, including aggregating the votes from all precincts to obtain the jurisdictional totals, and from all jurisdictions to obtain statewide totals. A recanvass is a repetition of the canvass. A canvass of the election results is usually conducted a day or two after election day by the jurisdiction’s canvass board or an official. Once the canvass is completed, the final vote counts are certified, the official results issued, and the canvass board or other official certifies the vote count by a specific date after the election. Dates vary by state.
Canvassing Process
The canvassing process varies widely, as illustrated by several examples from our site visits. The process may be conducted by a canvassing board, board of elections staff, or bankers and lawyers hired for the canvass. It may include provisional ballots in the canvassed totals. The process can involve some hand counts, a comparison of results from individual voting machines to precinct totals or totals reported to the state, or a comparison of hand counts of absentee votes to the machine counts for absentee votes. Regardless of how canvassing is done, its principal purpose is to produce an accurate vote count.
In one medium-sized jurisdiction, the election canvass process consisted of an internal audit conducted by the canvass board. Canvass board duties included processing absentee ballots, checking postmarks, verifying signatures, opening envelopes, and sorting ballots. The canvass was required by state law to ensure the accuracy of election results. The canvass board certified special elections or primary elections on the tenth day after the election and general election results on the fifteenth day after the election. During the canvass process, absentee and provisional ballots not counted on election night were researched to validate their eligibility to be counted. In addition, the canvassers conducted an audit and reconciliation of the number of signatures indicated by the poll inspector on the poll roster with the number of ballots tabulated by the counter. The canvass was completed with the certification and issuance of official election results.
In another medium-sized jurisdiction, officials noted that the voting machines were canvassed after the polls close. All of the paper ballots, including affidavit ballots, which is this jurisdiction’s term for provisional ballots, and emergency ballots were returned to the Board of Elections. If required, affidavit ballots and absentee ballots were researched. The paper ballots were counted and the results tallied. The ballots were counted during the 7 days after the election at the county court house office. Officials said the lever machine totals were recanvassed by Board of Elections staff, including one Democrat and one Republican.
In a large jurisdiction, bankers and lawyers were hired for the canvass and worked together in separate banker or lawyer teams; each team did its own vote tally sheet. Bankers did not review the tally until the lawyers were done. Write-in votes for candidates were added as adjustments to DRE machine tabulations. The teams verified the information on the tally sheets by comparing information from each DRE machine’s paper tape to printed results collected by the State Election Director’s office. Absentee votes were tallied by hand and then compared to the machine’s reported count for absentee votes. This was done to confirm the accuracy of the hand- counted absentee vote totals entered into one of the DRE machines at each precinct. The Chancery Court certified the canvass in the county. The canvass process began the Thursday following election day. Two judges from different political parties are to resolve any challenges to the vote count.
Testing the Vote Counting Equipment
As discussed in the section on voting technology, pre- and post-election tests were widely performed on voting equipment, at precincts and central counting locations, to make sure the equipment was operating properly, to check for accuracy, and to guard against tampering. In addition to testing the voting equipment, a manual recount may be routinely performed on a small percentage of ballots, as a check on the validity and accuracy of the machine count. Accuracy operational tests are most difficult with DRE and lever equipment, where there is no ballot document and the count is recorded at the voting booth on each individual machine. A thorough preelection test would require hundreds of simulated votes to be placed on each machine.
Election officials in the 27 sites we visited were generally satisfied with the performance of the vote casting and tabulating equipment used in the November 2000 election. Officials in 18 jurisdictions reported no problems with vote counting; 8 sites reported problems; and 1 site provided no response. The problems reported by the 8 sites mostly concerned the vote counting equipment, involving either technical difficulties or human error. Other problems mentioned included reconciling hand and machine counts with poll books and the counting of absentee and provisional ballots. Some of the technical difficulties included punch cards that stuck together and could not be read by the counting machines that were fed stacks of cards at a time; punch card counting machines that froze up during the count; 5,000 regular and absentee punch card ballots that had to be remade because they could not be machine read; slight variances in the punch card ballots produced by two different card vendors that made it difficult to use the machines that counted the punch cards; optical scan equipment that stopped working because it became clogged with paper dust due to the size of the ballot and the number of ballots received; and integrating the operations of two different DREs that were being tested in the same jurisdiction.
Some of the human errors that contributed to problems in counting the vote included incorrect marks by voters on optical scan ballots that could not be programming errors in the software used to tally optical scan ballots.
Among those jurisdictions that reported no problems, officials from one site mentioned some growing pains with remote tallying. One reported that checks and balances used throughout the day prevented counting problems, and another reported no problems since switching to DRE equipment. The remaining sites identified a “smooth election” or simply no problems in counting the vote.
Issues Associated with the Canvassing Process
State Guidance on What Is a Proper Mark on a Ballot and How to Interpret Variations From Proper Ballot Marks Varied Some States Are Voter Intent States, and Election Officials Are Tasked With Determining How a Voter Intended to Cast a Vote When a Question About the Ballot Arises Other States Do Not Try to Interpret Voter Intent, but Instead Rely Solely on Specific Voter Actions In the canvassing process, election officials generally must consider issues regarding ballots that have not been marked properly—for example, an optical scan ballot in which the voter has circled a candidate’s name, instead of completing the oval, box, or arrow next to the candidate’s name. State guidance on what is a proper mark on a ballot and how to interpret variations from proper ballot marks vary. Each type of voting equipment presents different issues.
Proper Ballot Marking
What constitutes a proper mark on a ballot can differ based on the type of voting method used. With DRE and lever equipment, voters record their vote directly on the equipment. Because there is no separate ballot, there is generally no need for a specification of what constitutes a properly marked ballot. With paper, optical scan, and punch card ballots, there is the possibility that such a determination would need to be made. With these methods, a voter must make the proper mark or punch to indicate which candidate or issue he or she is voting for. If the mark is not made correctly, it can result in an improperly marked ballot that may be subject to review. Depending on the requirements in the jurisdiction, these problem ballots may be reviewed to determine a voter’s intent; in other jurisdictions, they will not.
State Guidance on What Constitutes a Proper Ballot Mark
On the basis of our survey of state election directors, 30 states and the District of Columbia reported that they had a state law or other provision that specified what is a proper ballot marking for each voting method. Definitions regarding what constitutes a proper ballot marking for paper, punch card, and optical scan ballots varied by state, where they existed, and for the type of machine. Some statutes did not contain specific definitions of proper ballot markings, but instead referred to instructions on the ballot or to requirements of the voting method. For example, in Maine “the voter must mark the ballot as instructed in the directions on the ballot to indicate a vote for the name of each nominee for whom the voter wishes to vote.” In Iowa "the instructions appearing on the ballot shall describe the appropriate mark to be used by the voter. The mark shall be consistent with the requirements of the voting system in use in the precinct.”
Other states had statutory provisions that were more specific regarding the type of marks that would count as a valid vote. For paper ballots, for example, Michigan was specific about the type of proper marks that should be counted as a valid vote, requiring that a cross, the intersection of which is within or on the line of the proper circle or square, or a check mark, the angle of which is within a circle or square, is valid.
Some states also provided specific instructions on how optical scan ballots should be marked. For example, Alaska requires that the mark be counted if it is substantially inside the oval provided, or touching the oval so as to indicate clearly that the voter intended the particular oval to be designated. In Nebraska, to vote for a candidate, “the registered voter shall make a cross or other clear, intelligible mark in the square or oval to the left of the name of every candidate, including write-in candidates, for whom he or she desires to vote.”
For states that use punch card ballots, the definitions varied from general instructions on what should constitutes a proper ballot mark under all types of voting methods, as previously described, to more specific instructions. For example, in Massachusetts, the instructions state “a voter may vote by punching holes in a data processing card.” In Texas, in any manual count, the instructions state a punch card ballot may not be counted unless “(1) at least two corners of the chad are detached; (2) light is visible through the hole; (3) an indentation on the chad from the stylus or other object is present and indicates a clearly ascertainable intent of the voter to vote; or (4) the chad reflects by other means a clearly ascertainable intent of the voter.”
Variations from Proper Ballot Marking
The problem of trying to interpret variations from proper ballot marking was clearly evident in the November 2000 presidential election in Florida. Issues arise with paper, optical scan, and punch card ballots, not when the ballots are marked properly for the type of ballot used, but when there are variations from proper marking. In our survey of state election directors, 25 states and the District of Columbia reported that they had a state law or other provision that specified for variations from proper ballot markings.
In addition, some states are voter intent states, and election officials are tasked with determining how a voter intended to cast a vote when a question about the ballot arises. Other states do not try to interpret voter intent but instead rely solely on specific voter actions. Some states had general statutory provisions that they provided general provisions that covered all types of voting methods. For example, California law requires that each voting method have procedures adopted for use with that method and each set of procedures addresses this issue in detail. In California, these procedures are set out in a separate voting procedures manual. Some states had specific guidance for different types of voting methods.
State Guidance for Paper Ballots
Some states had specific instructions on how to interpret variations from proper markings on paper ballots. Minnesota law contains detailed specifications as to where the mark “X” on the ballot can be placed and still be a valid vote, and regarding the use of marks other than the mark “X.” New Jersey law is also specific as to where the mark is placed and the type of mark to make on the ballot. Marks must be substantially in the square to the left of the candidate’s name and must be substantially a cross, plus, or check.
State Guidance for Optical Scan Ballots
State law differed among some states for interpreting variations from proper marking on optical scan ballots. In Illinois, a voter casts a proper vote on a ballot sheet by making a mark in a designated area. A mark is an intentional darkening of the designated area on the ballot sheet, and shall not be an “X,” a check mark, or any other recognizable letter of the alphabet, number, or other symbol which can be recognized as an identifying mark. On the other hand, Wisconsin requires that a mark be counted if a voter marks a ballot with a cross or other marks within the square to the right of the candidate’s name, or any place within the space in which the name appears, indicating an intent to vote for that candidate.
State Guidance for Punch Card Ballots
Some state laws are specific on how to count punch card ballots, but these laws can vary by state. For example, under a recent amendment to Ohio law, effective August 2001, a chad with three corners attached to a ballot and detached at one corner must not be counted as a vote. Under a recently passed Nevada law, effective October 2001, a chad with three corners attached to the ballot and one detached must be counted as a vote.
Other punch card states provided general or no guidance for interpreting variations from proper marking directive or procedures. In Arizona, according to the Secretary of State’s procedures manual for inspection boards, board members are to remove hanging chads prior to tabulating the ballots; “hanging chad” means hanging by one or two corners. In Oregon, a Secretary of State directive provides the instruction to “remove loose chad to insure that voters’ choices are accurately reflected in the count,” but there were no specific instructions about how many corners must be hanging to be counted.
Voter Intent
We estimate that nationwide about 32 percent of local election jurisdictions had no written instructions, either from the state or local jurisdiction, on how to interpret voter intent, such as stray marks on ballots or partially punched punch card boxes.
As discussed earlier, states have varying requirements for the counting of improperly marked ballots. Even if a state has specified how a ballot should be marked, there are often variations from those ballot markings that are allowed to be counted. Beyond counting ballots with specified variations from proper ballot markings, many states specifically require election officials to count ballots if the “intent of the voter” can be determined. In our survey of state election directors, 31 states and the District of Columbia reported that they make some determination of voter intent.
State statutes specifically address voter intent in a number of different contexts, including the count of all votes, absentee votes, write-in votes, manual recounts, and others. Certain states apply either an “intent of the voter” standard or an “impossible to determine the elector’s choice” standard in the review of ballots. For example, Vermont law states that “in counting ballots, election officials shall attempt to ascertain the intent of the voter, as expressed by his markings on the ballot.” Illinois law states that “if the voter marks more candidates than there are persons to be elected to an office, or if for any reason it is impossible to determine the voter’s choice for any office to be filled, his ballot shall not be counted for such office….” Although many states allow for a determination of voter intent, it is difficult to describe how this determination is being made in each of the states, because the responsibility is often delegated to local election officials.
Sources of Available Guidance Identified by Local Jurisdictions
Below the state level, we asked the local election jurisdictions in our national mail survey if they had specific instructions on how to interpret voter intent, such as stray marks on paper ballots, dimples, or partially punched chads on punch card ballots. Our mail survey results indicate about 30 percent of local jurisdictions nationwide had written state instructions, about 15 percent had instructions developed by the jurisdictions, and about 23 percent had both. Optical scan jurisdictions were the most likely to have any one of the three types of instructions and DRE jurisdictions the least likely. Overall, we estimate that about 32 percent of jurisdictions nationwide had no written instructions and about 92 percent of DRE jurisdictions had no written instructions.
In addition, during our visits to 27 election jurisdictions, we asked election officials if they had a definition of what constitutes a vote. We also asked the officials if they had written instructions on how to handle those ballots that could not be machine counted, such as those with hanging chads.
Instructions, when they existed, were often detailed and specific to a location. The most notable differences were in the punch card jurisdictions.
Punch Card Ballots
With regard to punch card ballots, jurisdictions we visited reported various ways to handle problem ballots. For example, in one medium-sized jurisdiction, election officials told us if the punch card ballot contained a dimple with a pinhole, employees were instructed to put the original ballot over a pink (or duplicate) ballot, hold it up to the light, and punch where they saw light. The employee also turned over the ballot and looked for bumps, which indicated the voter inserted the ballot backwards. If a ballot contained bumps on the backside, the ballot could be duplicated properly by election officials so that it could be read by the vote counting equipment.
In another medium-sized jurisdiction, a vote on a punch card was defined as any removed chad plus any chad that freely swung by one side. The person scanning the ballot was to inspect it for improperly punched chads by running the ballot through his or her fingers. In one very large jurisdiction, the ballot inspection teams were given a pair of tweezers and told to remove any chads remaining on the punch card. In another very large jurisdiction election workers were to remove a chad if it was broken on three sides and connected to the punch card by no more than two sides.
One medium jurisdiction used persons called “scanners” to go over the ballots before they were counted. Each ballot was inspected for improperly punched chads by running the ballot cards between the scanners fingers. Very loose chads would be removed through this process. If the chad did not come off and freely swings by one side, it could be removed. Problem ballots, such as those that were unreadable because of incompletely removed punches or incorrect punches, which can alter the counting results or create problems with the computer processing, were given to “makeover scanners.” Ballots that needed to be reviewed and possibly remade by the make-over scanners were placed in the ballot transfer case, either on top of the rest of the materials, or sideways in the stack of ballots, so that they were easily recognizable. For example, a ballot with an improper punch, such as those made with a pen or pencil, were sent to the “make-over scanners” to be remade.
In one medium-sized jurisdiction, all ballot cards were inspected, marked with a precinct, and had the chad removed regardless of whether the ballot was regular or irregular. Careful attention was directed to finding a loose “chad” (partially punched) and bent or torn cards. If a “chad” was loose (attached by two corners or less), it was considered an attempt to vote for that choice and the “chad” was completely removed to enable the ballot tabulator to properly count that vote. Ballot cards were inspected for bends or tears that would prevent the ballot tabulator from counting the votes. Those that were imperfect were placed with irregular ballots. Each ballot card was also checked for punch positions that were circled or crossed out that would have indicated that the voter had changed their vote on the ballot card. Any ballot card with pen or pencil marks, tape, glue, or grease was placed with the irregular ballot cards.
DRE Ballots
Although DRE equipment is designed to minimize voter error, problems can also occur with this voting method as well. However, the problems, do not generally involve the interpretation of improperly marked ballots, but rather with voter error in using the DRE equipment. As with the other voting methods, the jurisdictions may deal with the problems raised in different ways. For example, many DREs require the voter to push a cast- vote button before leaving the booth or the vote is not recorded. However, some voters forget to push this button and leave the polling place. One medium-sized jurisdiction required that an election official reach under the voting booth curtain and push the cast-vote button without looking at the ballot to cast the vote. However, a large jurisdiction required that the election official shall invalidate such ballots and reset the machine for a new voter. After pressing the final cast vote button on DRE equipment, voters cannot alter their votes. Election officials told us of small children being held by parents who kicked the final vote button, located at the lower right of the machine, before the parent had completed their ballot. In such cases, the voter may not be permitted to complete the ballot using some alternative method.
Certification of the Final Vote Count
When the Results Are to be Certified and by Whom Varied Among the Rather Than a Single Event, the Certification Process Can Occur in The media may report election results on election night and declare winners, but those returns are not official. In most states, the election returns posted on election nights are unofficial results. The results of an election are not final until the results have been certified. Different states have different methods of certifying the final results.
Who Certifies the Vote
In an Election Administration Survey performed by the National Association of State Election Directors in December 2000, respondents from different states replied that different individuals or boards are to certify the election returns. The responses on who is to certify the vote included, depending on the state, the Secretary of State, the Director of Elections, the Governor, the State Board of Canvassers, the State Board of Elections, or the State Board of Certifiers. The response from Pennsylvania cited the Secretary of the Commonwealth as the person who is to certify the election returns. In Tennessee, the response was that the Secretary of State, the Governor, and the Attorney General all are to certify the election returns.
Calendar Days Allowed for State Certification
When the election must be certified also varied among the states, with some states having no state deadline for vote certification. Some respondents replied that the time that the state has to certify the returns was expressed as a number of days after the election. For example, Texas and Washington have 30 days to certify; Iowa has 27; New Mexico has 21; Hawaii, Michigan, and Illinois have 20; North Dakota has 17; Alabama and Idaho have 15; and Colorado has 14. Some states have extensions and caveats. For example, Louisiana requires certification in 12 days unless the last day falls on a holiday or weekend. Other respondents replied that the time to certify was expressed as a time period, including the third Monday following the election for Arizona, the first day of the next month for Kansas, the fourth Monday after the election for Nebraska, 5 p.m. on the Friday following the election for Oklahoma, the fourth Monday in November for Utah, no later than December 1 for Wisconsin, and the second Wednesday following the election for Wyoming.
The response from Alaska was that there was no actual statutory deadline to certify the election results. Maryland also reported having no specific time in which to certify the election returns, but the statewide canvassers convene within 35 days after the election. Rhode Island reported that the requirement on the time to certify the election results was simply sufficient time for the candidates to be sworn in.
Certification Process
During our site visits, we also found differences in the how local election jurisdictions certified their results. Rather than a single event, the certification process can occur in steps, as shown in the following examples.
At one very large jurisdiction, the Board of Elections completed the certification process. After all the votes had been counted and recorded, the Board of Elections held a public hearing during which the votes for each office were announced. A five-day appeal period followed. The Board of Elections signed the official count of the votes, certified the results, and sent the results to the state election director. According to local election officials, the certification was to occur within 20 days of the date of the election by state law. The officials said that it is difficult to meet that deadline, given all the hand counting and recounting required.
In one large jurisdiction we visited, each of 10 counting centers had a modem to electronically transmit the voting results to Election Headquarters in the Department of Elections building. Optical scan equipment counted the absentee ballots at the Central Counting Board in a convention center. The Central Counting Board transmitted the absentee voting results to elections headquarters using a dedicated phone line. The Board of Canvass certified the final count and submitted it to the county, which in turn submitted it to the Board of State Canvassers, which had 20 days to certify the results.
In another large jurisdiction, the County Election Board met on election night to certify the election to the state for state and federal candidates. One person was assigned to read the memory packs from the optical scan equipment for each precinct into the equipment as they were received. When all memory packs had been read into the equipment, a precinct report was printed. The report was proofread against the total printout tapes from every precinct. When this task was completed, the certification report was printed and proofread. Two copies of the certification report were printed and signed by the County Election Board secretary and members, and the Election Board seal was affixed. The county kept one copy, and the other was mailed to the Secretary of State on the day after the election. The Secretary of State certified the results after 5 p.m. on the Friday after the election.
In one small jurisdiction, the County Board of Elections prepared a county- wide tally sheet for the results from all nine precincts. The county-wide tally sheet numbers were transcribed to a state form, which was secured using tabs and taken by courier to the State Board of Elections in the state capital. The county-wide tally sheets were provided to the Chairmen of the Republican and Democratic Parties, to the General Registrar, and a copy was provided for the Minute Book and the County Office. The sheets are certified by the local county Board of Elections, and the board members signed the county-wide tally sheet.
Recounts
Forty-seven States and the District of Columbia Have Provisions for a Election Officials from 42 of the 513 Responding Jurisdictions in Our Mail Survey Said That They Had One or More Recounts for Federal or Statewide Office Between 1996 and 2000 According to Officials in the 42 Jurisdictions, None of the Recounts Changed the Original Outcome of the Election When the margin of victory is close, within a certain percentage or number of votes, issues may arise about the accuracy of the vote count, and recounts may be required and/or requested. When this occurs, each jurisdiction must recount the votes for the office or issue in question. Each jurisdiction must adhere to different guidelines to ensure an accurate and timely recount of election results. Depending on state law and the type of voting method in each jurisdiction, the recount process differs.
Recount Law
Forty-seven states and the District of Columbia have provisions for a recount. The exceptions are Hawaii, Mississippi, and Tennessee. Illinois only allows a discovery recount that does not change the election results. Seventeen states have provisions that call for a mandatory recount, often when there is a tie or the margin between the candidates is a small percentage or number of votes, such as when the difference between the candidates is less than a certain percent or number of votes. For example, the criterion for a mandatory recount in South Dakota and Alaska is a tie vote. The margin for a mandatory recount in Arizona is one-tenth of 1 percent, or 200 votes. In Michigan, the margin is 2,000 or fewer votes. The recount may be conducted before or after the certification, and the recount may be an administrative process or to may be a judicial process or both. The Secretary of State, a state election board, local election officials, or court-appointed counters may conduct the recount, also depending on the state. To determine the recount provisions in each state, we analyzed state statutes and surveyed state election directors and the election director for the District of Columbia. Table 24 in appendix VII provides the conditions for a mandatory recount, whether requested recounts are permitted, and who is responsible for conducting the recount in each of the 50 states and the District of Columbia.
Recount Results
When the margin of victory is very close, recounts can occur, and flaws in the vote counting system may become apparent. In the November 2000 presidential election, the winner’s margin was less than one-half of 1 percent in four states—Florida, New Mexico, Wisconsin, and Iowa. From 1948 through 2000, the winning margin in 31 presidential elections in 22 states has been less than 1 percent.
In response to a question in our mail survey, election officials from 42 of the 513 responding jurisdictions said that they had a recount for federal or state office between 1996 and 2000. The recounts occurred in 16 states. Because some of the recounts were for the same office and some jurisdictions had more than one recount, the 42 jurisdictions reported recounts for 55 offices. For example, one county in Florida conducted a recount both for a state office in 1998 and President in 2000. Additional details on these jurisdictions are provided in appendix VII in table 25.
In addition to the presidential election in Florida in November 2000, jurisdictions reported that they had recounts for the U.S. Senate contests, governor, state representatives, judges, state board of education, superintendent of schools, the register of deeds, state controller, state secretary or commissioner of labor, and state secretary or commissioner of agriculture.
Election officials most often identified a requirement in state law as the reason that a recount occurred, such as the margin between the candidates being within a given percentage or number of votes. Other reasons noted were candidate request, secretary of state order, and court order. Officials in a few jurisdictions could not recall why they performed the recount. Figure 51 shows the reasons for which officials in these 42 jurisdictions said the recounts were conducted. The officials who reportedly authorized the recounts are shown in figure 52, and the board or official who actually conducted the recount is shown in figure 53.
The jurisdictions were split in their responses as to whether the recount occurred before or after certification. Of the jurisdictions, 26 responded that the recount occurred before certification, and 19 responded that the recount occurred after certification. Eight jurisdictions didn’t know if they recounted the votes before or after certification, and three did not respond.
All but one recount involved recounting all precincts. The exception involved a recount of just absentee ballots in one jurisdiction. However, absentee ballots were included in all of the recounts. According to election officials, 27 of the reported recounts involved optical scan ballots that were recounted using vote-counting equipment. Hand recounts were done in 8 cases, some included paper ballots or optical scan ballots. Paper tapes were reconciled to totals from direct recording equipment in 11 cases. Punch cards were recounted by machine in 6 cases. One recount involved a lever machine.
However, in the end, it did not matter who requested or ordered the recount, the office that was at stake, who conducted the recount, the method used for the recount, or whether it occurred before or after certification. According to officials in the 42 jurisdictions, none of the recounts changed the original outcome of the election. Additional details on some of these recounts are provided in appendix VII.
Contested Elections
Contested Elections Can Occur When a Party Alleges Misconduct or Fraud on the Part of the Candidate, the Election Officials, or the Voters CRS Identified Five House of Representative Elections That Were Contested in the Period 1996 to 2000, and None Changed the Original Outcome of the Election Two Jurisdictions From Our Sample of 513 Election Jurisdictions Identified Two Contested Elections for National or Statewide Office Between 1996 and 2000, and Neither Contested Election Changed the Original Outcome of the Election Although recounts are to be conducted when the margin of victory is close and the accuracy of the vote count is questioned, they can also occur as a result of an election that is contested. Contested elections can occur when a party alleges misconduct or fraud on the part of the candidate, the election officials, or the voters.
Federal Contested Elections Act
The Constitution provides that “ach House shall be the Judge of the Elections, Returns, and Qualifications of its own Members…” (Art. I, sec. 5). Within this constitutional framework, the Federal Contested Elections Act of 1969 governs contests for the seats in the House of Representatives. By contrast, the Senate does not have codified provisions for its contested election procedures. The act essentially sets forth the procedures by which a defeated candidate may contest a seat in the House of Representatives. The contest is first heard by the Committee on House Administration, which can conduct its own investigation of the contested election and report the results. Then the whole House, after discussion and debate, can dispose of the case by privileged resolution by a simple majority vote.
Based on House precedent, certification of the election results is important, since the official returns are evidence of the regularity and correctness of the state election returns. The certification process places the burden of coming forward with evidence to challenge such presumptions on the contestants. The contestant has the burden of proving significant irregularity which would entitle him or her to a seat in the House. Fraud is never presumed but must be proven by the contestant.
House Contested Elections
The Congressional Research Service (CRS) identified 102 contested elections for the House of Representatives from 1933 to 2000. According to CRS, the vast majority of these cases was resolved in favor of the candidate who was originally declared the victor. Since the Federal Contested Elections Act of 1969 was enacted, most cases have been dismissed because the contestant failed to sustain the burden of proof necessary to overcome a motion to dismiss.
CRS identified five House of Representative elections that were contested in the period 1996 to 2000. The House of Representatives adopted the House Committee motion to report dismissing the election contests in three cases, and the contestants withdrew the challenges in the other two.
In three cases, the House Committee did not find for the contestant and adopted resolutions dismissing the election contests, which were passed by House vote. In one case, Anderson v. Rose, H.Rep. 104-852 (1996) in the 7th District of North Carolina, the contestant presented credible allegations that spotlighted serious and potentially criminal violations of election laws. However, the House Committee found that they were not sufficient to change the outcome of the election if proven true. In another case, Haas v. Bass, H.Rep. 104-853 (1996) in the 2nd District of New Hampshire, the contestant claimed that the other candidate failed to file an affidavit attesting to the fact that he was not a subversive person as defined by New Hampshire law. However, the House Committee found that the law the contestant relied upon had been declared unconstitutional by the U.S. Supreme Court and repealed by the New Hampshire legislature prior to the election. In the third case, Dornan v. Sanchez, H.Rep. 105-416 (1998) in the 46th District of California, the contestant alleged noncitizen voting and voting irregularities, such as improper delivery of absentee ballots, double voting, and phantom voting. The Task Force on Elections found clear and convincing evidence that 748 invalid votes were cast in the election, but it was less than the 979-vote margin in the election.
In two cases, the contestants withdrew the challenges. In one case, Munster v. Gejdenson, 104th Congress (no report filed) in the 2nd District of Connecticut, the contestant claimed vote counters made errors of judgment. In the second case, Brooks v. Harman, 104th Congress (no report filed) in the 36th District of California, the contestant claimed the 812-vote margin of victory was based on illegal ballots, including votes from nonresidents, minors, and voters illegally registered at abandoned buildings and commercial addresses.
Other Contested Elections
In our survey of 513 jurisdictions, we asked them if they had a contested election for federal or statewide office during the period 1996 to 2000. Two jurisdictions reported contested elections for a federal office, and neither contest changed the outcome of the election. None of the jurisdictions reported a contested election for statewide office during that time period.
The first contested election was the 1996 U.S. senate contest in Louisiana, Landrieu v. Jenkins. The jurisdiction reported that candidate Jenkins contested the election, raising questions of voter integrity. Allegations included people voting twice, people voting using the names of the deceased, people voting using the identity of others, vote buying, political machine influences, election official conspiracy, and machine tampering and malfunctions. According to the jurisdiction, the contest went first to the Louisiana state legislature, then to the U.S. Congress, which investigated the issue. Retired FBI agents investigated the allegations by interviewing election officials and testing voting machines. The investigation was completed within 6 months. The contest did not change the outcome of the election.
The second contested election was the Florida presidential contest in November 2000, Bush v. Gore. The jurisdiction reported that the narrow margin in the contest triggered a recount, and then voter integrity was also questioned. Both the Republican and Democratic parties and candidates contested the election. Allegations included voters who cast duplicate ballots, voters who were ineligible to vote because of felonies, voters who were not U.S. citizens, people who voted in the name of voters deceased before the election, people who voted using the identity of others, and people who voted but were not registered to vote. There were also allegations that the polls closed too early and that law enforcement officers detained voters on their way to the polls. The contested presidential election in Florida was ultimately resolved by the United States Supreme Court in Bush v. Gore, 531 U.S. 98 (2000). The Court, in determining whether manual recount procedures adopted by the Florida Supreme Court were consistent with the obligation to avoid arbitrary and disparate treatment of the electorate, found a violation of the Equal Protection Clause of the Fourteenth Amendment.
Challenges
Most jurisdictions did not report any problems in counting the vote, but when they did, it usually involved either technical or human error that affected the voting equipment. The challenge for voting officials is developing an awareness of and planning for addressing such errors. Having multiple checks on the people involved and the processes followed can help prevent human errors. Although technical errors cannot always be anticipated, an awareness of the types of errors that have occurred in other jurisdictions and contingency planning for them can help when they do occur.
A challenge for many jurisdictions is how to determine voter intent for improperly marked optical scan, paper, and punch card ballots that counting equipment could not read and count or that those who hand counted the paper ballots could not clearly interpret. An issue in the recount of presidential votes in Florida in 2000 was the variation in the interpretation of improperly marked ballots in different jurisdictions. Our data suggest that similar issues could arise in other states.
The process for initiating and conducting recounts and contested elections varied by jurisdiction. Regardless of the processes used, the challenge is the same—to complete the recount or determine the contested election in a fair, accurate, and timely manner.
Voting Methods: Looking Back at the November 2000 Election and Forward to New Options
Voting methods can be thought of as tools for accommodating the millions of voters in our nation’s more than 10,000 local election jurisdictions. These tools are as simple as a pencil, paper, and a box, or as sophisticated as computer-based touchscreens. However, to be fully understood, all these methods need to be examined in relation to the people who participate in elections (both voters and election workers) and the processes that govern their interaction with each other and with the voting method.
This chapter focuses on the technology variable in the people, process, and technology equation. It describes the various voting methods used in the November 2000 election in terms of their accuracy, ease of use, efficiency, security, testing, maintenance, and cost; provides cost estimates for purchasing new voting equipment for local election jurisdictions; and describes new voting equipment and methods that are currently available or under development.
Use of Voting Methods Varied Widely by Jurisdiction
Each of the five voting methods was used extensively in the United States in the November 2000 election. Punch card and optical scan equipment were most widely used, together accounting for about 60 to 70 percent of the total. Figure 54 shows the distribution of voting methods in the United States by counties, precincts, and registered voters. As figure 54 shows, the results vary according to whether they were reported by county, precinct, or registered voter, but no matter how the data were reported, optical scan and punch card equipment were the most common voting methods used.
Figures 55 to 59 show the distribution of various voting methods by counties, and figures 60 to 64 show the distribution of the various voting methods by MCDs, such as the cities, towns and townships. These breakouts also show that the two most used methods were optical scan and punch cards.
Integration of People, Processes, and Technology Design Leads to Variations in Voting Equipment Characteristics
People and Process Affect Equipment Accuracy Ease of Use Depends on Friendliness of Voting Equipment Voting Equipment’s Efficiency Is Not Consistently Measured Security of Voting Equipment Is Generally an Area of Mixed State and Local Jurisdictions Generally Tested Voting Equipment Type and Frequency of Equipment Maintenance Performed Varied Equipment Costs Vary by Unit Cost, Jurisdictions’ Size, and Voting equipment can be examined according to a range of characteristics, including accuracy, ease of use, efficiency, security, testing, maintenance, and cost. Because all these characteristics affect election administration, all should be considered in any assessment of voting equipment. Further, all these characteristics depend on the integration of three variables: (1) the equipment itself, (2) the people who use and operate the voting equipment, and (3) the processes and procedures that govern people’s use of the equipment.
Accuracy, ease of use, and efficiency can all be considered performance characteristics, and measuring these performance characteristics can help determine whether voting equipment is operating as intended, or whether corrective action is needed. Accuracy refers to how frequently the equipment completely and correctly records and counts votes; ease of use refers to how understandable and accessible the equipment is to a diverse group of voters, and election workers; and efficiency refers to how quickly a given vote can be cast and counted. By measuring and evaluating how accurate, easy to use, and efficient voting equipment is, local election jurisdictions can position themselves to better ensure that elections are conducted effectively and efficiently.
However, jurisdictions cannot consider voting equipment’s performance in isolation. To protect the election and retain public confidence in its integrity, other characteristics should also be considered. Ensuring the security of elections is essential to public confidence, and properly testing and maintaining voting equipment is required if its optimum performance is to be achieved. Finally, the overriding practical consideration of the equipment’s lifecycle cost versus benefits, which affects and is affected by all the characteristics, must be considered.
Generally, our survey of vendors showed little difference among the basic performance characteristics of DRE, optical scan, and punch card equipment. However, when local election jurisdictions’ experiences with the equipment are considered, performance differences among voting equipment become more evident. These differences arise because a real- world setting—such as an election in which equipment is operated by actual voters, poll workers, and technicians—tends to result in performance that differs from that in a controlled setting (such as in the manufacturer’s laboratory). This difference demonstrates the importance of the effect of people and process on equipment performance.
On the basis of the results of our mail survey and visits to 27 local election jurisdictions, we found that while most jurisdictions did not collect actual performance data for the voting equipment that they used in the November 2000 election, jurisdiction election officials were nevertheless able to provide their perceptions about how the equipment performed. For example, our mail survey results indicate that 96 percent of jurisdictions nationwide were satisfied with the performance of their voting equipment during the November 2000 election. Table 2 shows the percentage of jurisdictions satisfied with equipment performance during the November 2000 election, by type of voting equipment.
Figure 65 shows a relative comparison of certain characteristics— accuracy, ease of use, efficiency, and security—of the various types of voting equipment used in the November 2000 election. The comparison reflects the results of our survey of voting system vendors and of 513 local election jurisdictions. In our survey of jurisdictions, we grouped those that used punch card, lever, and hand-counted paper ballots, and placed them in an “other” category. In our vendor survey, we excluded lever equipment because it is no longer manufactured and, of course, hand-counted paper ballots, for which no equipment is needed.
Confidence intervals were calculated at the 95 percent confidence level. Unless otherwise noted, all estimates from our mail survey have a confidence interval of plus or minus 4 percentage points or less.
Overall, from both the vendor and jurisdiction perspective, DREs are generally easier to use and more efficient than the other types of equipment. In the area of security, DRE and optical scan are relatively equal, and in the area of accuracy, all equipment is relatively the same.
The differences among voting equipment reported by local election jurisdictions can be attributed, in part, to the differences in the equipment itself. However, they also can be attributed to the people who use the equipment and the rules or processes that govern its use. For example, how voters interact with DREs differs from how they interact with optical scan, punch card, or lever machines. In each case, different opportunities exist for voter misunderstanding, confusion, and error, which in turn can affect the equipment’s performance in terms of accuracy, ease of use, and efficiency. Further, all voting equipment is influenced by security, testing, maintenance, and cost issues, each of which also involves people and processes. Thus, it is extremely important to define, measure, evaluate, and make decisions about equipment choices within the context of the total voting system—people, processes, and technology.
We estimate that 96 percent of jurisdictions nationwide were satisfied with the performance of their voting equipment during the November 2000 election. We estimate that only about 48 percent of jurisdictions nationwide collected data on the accuracy of their voting equipment for the election.
Accuracy of Voting Equipment Is Affected by People and Process
Ensuring that votes are accurately recorded and tallied is an essential attribute of any voting equipment. Without such assurance, both voter confidence in the election and the integrity and legitimacy of the outcome of the election are at risk.
Our vendor survey showed virtually no differences in the expected accuracy of DRE, optical scan, and punch card voting equipment, measured in terms of how accurately the equipment counted recorded votes (as opposed to how accurately the equipment captured the intent of the voter). Vendors of all three types of voting equipment reported accuracy rates of between 99 and 100 percent, with vendors of DREs reporting 100-percent accuracy.
In contrast to vendors, local election jurisdictions generally did not collect data on the accuracy of their voting equipment, measured in terms of how accurately the equipment captures the intent of the voter. Overall, our mail survey results revealed that about 48 percent of jurisdictions nationwide collected such data for the November 2000 election. Table 3 shows the percentage of jurisdictions that collected data on accuracy by type of voting equipment.
Further, it is unclear whether those jurisdictions that reported collecting accuracy data actually have meaningful performance data. Of those local election jurisdictions that we visited that stated that their voting equipment was 100-percent accurate, none was able to provide actual data to substantiate these statements.
Similarly, the results of our mail survey indicates that only about 51 percent of jurisdictions nationwide collected data on undervotes, and about 47 percent of jurisdictions nationwide collected data on overvotes for the November 2000 election. Table 4 shows the percentage of jurisdictions that collected data on undervotes and overvotes by type of equipment.
In contrast, less than half of the 27 jurisdictions that we visited indicated that they collected data for undervotes, overvotes, or both. For those that did, the percentage of undervotes was slightly higher for punch cards than for DRE and optical scan. For overvotes, the percentages for both optical scan and punch cards were relatively similar, generally less than 0.5 percent. However, election officials in one jurisdiction that used optical scan equipment reported an overvote rate of 4.9 percent, and officials in one jurisdiction that used punch card equipment reported an overvote rate of 2.7 percent.
Although voting equipment may be designed to count votes as recorded with 100-percent accuracy, how frequently the equipment counts votes as intended by voters is a function not only of equipment design, but also of the interaction of people and processes. These people and process factors include whether, for example, technicians have followed proper procedures in testing and maintaining voters followed proper procedures when using the equipment, election officials have provided voters with understandable procedures poll workers properly instructed and guided voters.
To illustrate this point, officials from a very large jurisdiction stated that 1,500 voters had inserted their punch cards in the recording device upside down, thus causing the votes to be inaccurately recorded. Fortunately, officials stated that they detected the error and remade and counted the ballots. Election officials further stated that they remake, on average, about 1,100 ballots for every election because voters improperly insert their ballots into the recording device. Similarly, at a small jurisdiction that we visited where optical scan equipment was used, officials reported that some voters incorrectly marked the ovals or used a nonreadable pen to mark the ballot, resulting in partially read ballots. In another medium-sized jurisdiction that we visited, the ballot section permitting write-in votes confused voters. Voters selected a candidate on the ballot and then wrote the candidate’s name in the write-in section of the ballot, thus overvoting and spoiling the ballot. The election officials stated that they believed that this misunderstanding contributed to the jurisdictions’ almost 5 percent overvote rate. In each of these cases, the way that the voter completed the ballot caused the vote to be recorded inaccurately, even though the voting equipment correctly counted the votes as recorded.
In addition, the accuracy of voting equipment can be affected by the procedures that govern how voters interact with the technologies. Differences in these procedures can have noticeable effects on the prevalence of undervotes and overvotes, for example. In particular, we found that some precinct-count optical scan voting equipment can be programmed to return a voter’s ballot if the ballot is overvoted or undervoted. Such programming allows the voter to make any changes necessary to ensure that the vote is recorded correctly. However, not all states allow this. For example, election officials in one Virginia jurisdiction stated that Virginia jurisdictions must accept ballots as cast.
Ease of Use Depends on Friendliness of Voting Equipment
The extent to which voters can easily use voting equipment largely depends on how voters interact, physically and intellectually, with the equipment. This interaction, commonly referred to as the human/machine interface (or in the case of voting technology, the voter/machine interface), is a function both of the equipment design and of the processes established for its use. For example, how well jurisdictions design ballots and educate voters on the use of voting equipment can affect how easy voters find the equipment to use. Ease of use (i.e., the equipment’s user friendliness) is important not only because it influences the accessibility of the equipment to voters but because it also affects the other two performance measures discussed here—accuracy (i.e., whether the voter’s intent is captured) and the efficiency of the voting process.
Our vendor survey showed that, in general, most voting equipment is limited in its ability to accommodate persons with special physical needs or disabilities. Most vendors, for example, reported that their equipment accommodates voters in wheelchairs; however, vendors of DRE equipment reported providing accommodations for more types of disability than other vendors. For instance, many of the DREs offer accommodations for voters who are blind, such as Braille keyboards or an audio interface. In addition, at least one vendor reported that its DRE accommodates voters with neurological disabilities by offering head movement switches and “sip and puff” plug-ins. Table 5 summarizes vendor-reported accessibility options by voting equipment type and device.
Our work on the accessibility of voting equipment to persons with disabilities during the November 2000 election found that most voting equipment presents some challenges to voters with disabilities. For example, persons in wheelchairs may have difficulty reaching and manipulating the handles on lever machines or reaching and pressing the buttons/screens on DREs. In addition, persons with dexterity impairments may find it difficult to hold the pencil or pen for optical scan, apply the right amount of pressure to punch holes in punch cards, press the buttons/screens on DREs, or manipulate the levers on lever machines. Similarly, for all the voting methods, voters with visual impairments may have difficulty reading the text. Consistent with our vendor survey, however, election officials and representatives of disability organizations told us that DREs can be most easily adapted (with audio and other aids) to accommodate the widest range of disabilities.
We estimate that jurisdictions nationwide that used DREs were generally more satisfied than those that used optical scan or punch cards with how easy their voting equipment was for voters and election workers to use.
Differences are apparent in local election jurisdictions’ perceptions of how easy their voting equipment was for the voters to use, with jurisdictions using DREs being generally more satisfied with how easy their equipment was for voters to use and to correct mistakes (see table 6).
Likewise, the results of our mail survey reveal that 83 percent of jurisdictions nationwide were satisfied with how easy it was for election workers to operate and set up the voting equipment on election day. Again, jurisdictions that used DREs expressed a higher rate of satisfaction (see table 7).
Figure 66 summarizes jurisdictions’ satisfaction with the various types of voting equipment on ease of use by voters, ability to correct mistakes, and ease of operation and setup for election workers.
Another key component of the voter/machine interface for voting equipment is the design of the ballot, which is generally a state and/or jurisdictional decision for each election. For example, in a medium-sized jurisdiction that used lever machines, the list of names for president was so long that it extended into a second column. According to jurisdiction officials, this layout confused voters because they were not used to seeing the ballot this way. Similarly, at a small jurisdiction that used optical scan equipment, officials stated that they had to use both sides of the ballot, which was confusing to voters who did not think to turn over the ballot and vote both sides. In addition, the well-known Florida “butterfly” ballot was confusing to many voters, because candidates’ names were printed on each side of the hole punches, with arrows pointing to alternating candidates. For example, the first candidate in the left column was paired with the first hole; the first candidate in the right column with the second hole; the second candidate in the left column with the third hole; and so on. Voters found the arrows confusing and hard to follow. Such situations illustrate the importance of ensuring a friendly voter/machine interface.
Voting Equipment’s Efficiency Is Not Consistently Measured
Efficiency is important because the speed of casting and tallying votes influences voter waiting time, and thus potentially voter turnout. Efficiency can also influence the number of voting machines that a jurisdiction needs to acquire and maintain, and thus the cost. Efficiency can be measured in terms of how quickly the equipment can count votes, the number of people that the equipment can accommodate within a given time, and the length of time that voters need to wait. Like the other characteristics discussed so far, the efficiency of voting equipment (i.e., how many ballots can be cast in a given period of time) is a function of the interaction of people, processes, and technology.
As our vendor survey showed, efficiency metrics vary for the DRE, optical scan, and punch card equipment because of the equipment itself. With DREs, the vote casting and counting functions are virtually inseparable, because the ballot is embedded in the voting equipment. In contrast, with optical scan and punch cards, the ballot is a distinctly separate medium (i.e., a sheet of paper or a computer card), which once completed is put into the vote counting machine. As a result, vendors reported that the efficiency of optical scan and punch cards is generally measured in terms of the speed of count (i.e., how quickly the equipment counts the votes on completed ballots). In contrast, DRE vendors reported that because DREs count the votes as soon as the voter pushes the button to cast the vote (i.e., instantaneously), efficiency is measured in terms of the number of voters that each machine accommodates on election day.
Complicating any measurements of efficiency is the fact that optical scan and punch card equipment’s efficiency differs depending on whether central-count or precinct-based equipment is used. Central-count equipment generally counts more ballots per hour because it is used to count the ballots for an entire jurisdiction, rather than an individual polling site. For central-count optical scan equipment, vendors reported speed of count ranges from 9,000 to 24,000 ballots per hour. For precinct-count optical scan and punch card equipment, vendors generally did not provide specific speed of count data, but they stated that one machine is generally used per polling site. For DREs, vendors reported that the number of voters accommodated per machine ranges from 200 to 1,000 voters per machine per election day.
We estimate that during the November 2000 election, only 26 percent ( W ti of jurisdictions nationwide collected actual performance data on counting speed, and 10 percent collected data on voter wait time. We estimate that more than 80 percent were satisfied with count speed and voter wait time. ±5)
The results of our mail survey and visits to 27 local election jurisdictions revealed that most jurisdictions did not collect actual performance data on the efficiency of the voting equipment that they used in the November 2000 election. For example, from our mail survey, we found that only 26 percent (± 5 percentage points) of local election jurisdictions nationwide collected information on the speed at which their equipment counted votes, and only 10 percent of jurisdictions nationwide collected information on the average amount of time that it took voters to vote. Despite the absence of performance data on efficiency, officials in jurisdictions that we visited reported some perceptions about how the respective voting equipment performed.
Overall, our mail survey results reveal that 91 percent of jurisdictions nationwide reported that they were satisfied with the speed at which their equipment counted votes. Further, 84 percent of jurisdictions nationwide reported that they were satisfied with the amount of voter wait time at the polling place during the November 2000 election. Figure 67 summarizes jurisdictions’ satisfaction with speed of count of voting equipment and voter wait time, by equipment type.
Security of Voting Equipment Is Generally an Area of Mixed Attention
Effectively securing voting equipment depends not only on the type of equipment but on the procedures and practices that jurisdictions implement and the election workers who execute them. Effective security includes, at a minimum, assigning responsibility for security, assessing security risks and vulnerabilities and implementing both manual and technology-based security measures to prevent or counter these risks, and periodically reviewing the controls to ensure their appropriateness.
The results of our mail survey indicate that most jurisdictions nationwide have implemented some of these important elements of security, but not all. Figure 68 summarizes jurisdictions’ implementation of security controls.
Assigning responsibility: Our mail survey results indicate that 89 percent of jurisdictions assigned responsibilities to one or more individuals for securing voting equipment for the November 2000 election. From our visits to 27 local election jurisdictions, we learned that individuals assigned responsibility for securing voting equipment were generally election administrator’s staff, county warehouse staff, or county clerks before election day, and poll workers or county clerks at the polling site on election day.
Assessing risks and implementing controls: Similarly, our mail survey results indicate that 87 percent of jurisdictions nationwide had implemented security controls to protect their voting equipment during the November 2000 election. However, only 60 percent of jurisdictions had ever assessed security threats and risks, such as modification or loss of electronic voting data, loss or theft of ballots, or unauthorized access to software.
From our visits to 27 jurisdictions, we learned that the controls implemented generally included physical controls for securing the voting equipment and ballots. For example, officials from one large jurisdiction stated that they provided 24-hour, 7-day-per-week security for voting equipment in a controlled access facility that included a security surveillance system linked to the Sheriff’s Department. In another large jurisdiction officials reported that they stored voting equipment in a warehouse that required a four-digit passcode to enter. In contrast, however, officials from a small jurisdiction reported that they stored their lever machines at the polling places all year, with no control over how the equipment is secured.
Election officials in jurisdictions we visited also reported that they have implemented access controls to limit the number of people who can operate their election management system and/or their vote tabulation equipment. For example, officials from one large and one medium-sized jurisdiction reported that they safeguarded their election management software by using a firewall and access controls.
In addition, the vendors we surveyed reported that voting equipment has been developed with certain embedded security controls, although these controls vary. In general, these controls include the following: Identification (ID) names and passwords control access to the voting equipment and software and permit access only to authorized users.
Redundant storage media provide backup storage of votes cast to facilitate recovery of voter data in the event of power or equipment failure.
Encryption technology scrambles the votes cast so that the votes are not stored in the same order in which they were cast. If vote totals are electronically transmitted, encryption technology is also used to scramble the vote count before it is transmitted over telephone wires and to unscramble it once it is received.
Audit trails provide documentary evidence to recreate election day activity, such as the number of ballots cast (by each ballot configuration/type) and candidate vote totals for each contest.
Hardware locks and seals protect against unauthorized access to the voting equipment once it has been prepared for the election (e.g., vote counter reset, equipment tested, and ballots prepared).
Table 8 shows security controls by type of voting equipment for the systems we surveyed.
Generally, DRE and optical scan equipment offer more security controls than punch cards. DRE and optical scan equipment are fairly comparable in terms of the security controls that they offer; DREs generally offer more redundant storage media, which provides backup storage of votes cast to facilitate recovery of voter data in the event of power or equipment failure. However, both optical scan and punch card equipment use a paper ballot, which could be recounted in the case of equipment failure. In addition, punch card equipment generally does not have hardware locks and seals.
Reviewing controls: The results of our survey indicate that about 81 percent of jurisdictions nationwide periodically review the steps taken to ensure that these are sufficient. However, most jurisdictions that we visited indicated that they did not periodically review controls.
State and Local Jurisdictions Generally Tested Voting Equipment
To ensure that voting equipment performs as intended on election day, it must be tested, both before it is accepted from the manufacturer and before it is used. Although effective testing does not guarantee proper performance, it can greatly reduce the chances of unexpected equipment problems and errors. Further, the people who plan and conduct the tests, as well as the processes and procedures that govern the conduct of tests, are central to effective testing.
Generally, voting equipment testing can be viewed as consisting of five stages. The initial three stages—qualification, certification, and acceptance—are typically conducted before the purchase and acceptance of the voting equipment by the jurisdiction. After the voting equipment has been purchased, jurisdictions typically conduct two additional stages of testing to ensure that the voting equipment operates properly before each election—readiness and verification testing. Each of these five stages of testing includes similar steps: defining the equipment requirements to be tested, planning the tests (e.g., determining what level of tests to be performed), executing the tests, documenting the test results, and completing the tests (e.g., ensuring that the test criteria have been met). (Figure 69 provides a simplified model of the voting equipment testing process.)
Qualification testing validates the compliance of the voting equipment with the requirements of FEC’s voting system standards (applicable to punch card, optical scan, and DRE voting equipment) and with the vendor’s equipment design specifications for the equipment. These tests are conducted by independent test authorities accredited by the National Association of State Election Directors (NASED). Vendors are expected to resubmit their voting equipment to the qualification test process whenever they modify the equipment.
The majority of states (38) have adopted the FEC standards, which means that the majority of states require voting equipment used in their jurisdictions to be NASED qualified. However, because the standards were not published until 1990 and the qualification testing program was not established until 1994, many jurisdictions may be using voting equipment that did not undergo qualification testing. This may be particularly true for those jurisdictions that use punch card equipment; only one punch card machine is on NASED’s list of qualified voting equipment. However, in our survey of states and the voting equipment they used in the November 2000 election, we identified 19 different types of punch card equipment being used by jurisdictions. Further, the FEC standards do not address lever machines. In contrast, the results of our mail survey revealed that 49 percent (plus or minus 7 percentage points) of jurisdictions nationwide that use DREs and 46 percent (plus or minus 7 percentage points) of jurisdictions nationwide that use optical scan equipment use voting equipment had been qualified by NASED.
We estimate that 39 percent (±4.33) of jurisdictions nationwide used voting equipment that was NASED qualified. About half of those using DRE or optical scan equipment used equipment that was NASED qualified. Also, 90 percent used equipment that had been certified by the state.
Certification testing validates compliance of the voting equipment with state-specific requirements and can also be used to confirm that the presented voting equipment is the same as the equipment that passed NASED qualification testing. Certification tests are generally conducted by the states and can be used to establish a baseline for future evaluations.
Although states establish certification test requirements, FEC recommends that state certification tests not duplicate NASED qualification tests and that they include sufficient functional tests and qualitative assessments to ensure that the voting equipment operates in compliance with state law. Further, FEC recommends that states recertify voting equipment that has been modified to ensure that it continues to meet state requirements. However, it is not clear that this recertification always occurs. For example, one state election director cited repeated problems with local jurisdictions and vendors modifying their voting equipment after state certification. In fact, the election director stated that in some cases, vendors modified equipment without even notifying the local jurisdiction.
Forty-five states and the District of Columbia reported that they have certification programs to identify voting equipment that may be used in the state. Of these 46, 38 require certification testing. Four states—Alaska, Mississippi, North Dakota, and Utah—do not require that voting equipment used in these states be NASED qualified and do not perform certification testing of voting equipment. Our mail survey results show, however, that 90 percent of jurisdictions used state-certified voting equipment in the November 2000 election. Table 9 shows the percentage of jurisdictions that use state-certified voting equipment.
Acceptance testing checks that the voting equipment, as delivered by the vendor, meets the requirements specified by the states and/or local jurisdictions. State or local jurisdictions conduct acceptance tests, which can be used to establish a baseline for future evaluations.
Many of the jurisdictions that we visited had recently procured new voting equipment, and most of these jurisdictions had conducted some form of acceptance testing. However, the processes and steps performed and the people who performed them varied by jurisdiction and by equipment type. For example, in a very large jurisdiction that had recently purchased DRE equipment, election officials stated that testing consisted of a visual inspection, power-up, opening of polls, activation and verification of ballots, and closing of polls. In contrast, officials in one large jurisdiction stated that they relied entirely on the vendor to test the equipment. In jurisdictions that used optical scan equipment, acceptance testing generally consisted of running decks of test cards. For example, officials from another large jurisdiction stated that they tested each voting machine with the assistance of the vendor using a vendor-supplied test deck.
Readiness tests, often referred to as logic and accuracy tests, check that the voting equipment is properly functioning. Jurisdictions normally conduct readiness tests in the weeks leading up to election day—often while the equipment is still at the warehouse—to verify that the voting equipment has been properly prepared for the election (e.g., that ballots have been properly installed in voting devices).
Our mail survey results indicate that 94 percent of jurisdictions nationwide conducted readiness (logic and accuracy) testing before the November 2000 election. Figure 70 shows the percentage of jurisdictions that conducted readiness testing by equipment type.
Although most jurisdictions nationwide performed readiness testing, the actual testing activities varied by the type of equipment and by jurisdiction. For example, jurisdictions that used DREs performed readiness testing by running diagnostic tests that the equipment is designed to perform, using vote simulation cartridges, and by conducting mock elections; jurisdictions that used optical scan and punch cards generally relied on the use of test decks. In a large jurisdiction that used DREs, the election officials stated that the county’s readiness tests included checking the battery, paper tapes, machine labels, curtain rods, and the memory cartridge against the ballot and the equipment; performing voting tests, such as voting for each candidate; and testing the write-in capabilities. At the conclusion of the tests, election officials checked the counters and the memory tapes to ensure that the results matched the testers’ entries. In a very large jurisdiction that used punch cards, election officials stated that they conducted a public test on the Monday before election day with a test deck of 55 cards that included numerous configurations for valid ballots, overvoted ballots, and undervoted ballots. One of the most comprehensive tests was conducted in a very large jurisdiction. This jurisdiction tested the integration of all its voting equipment. Officials conducted a mock election that included testing the precinct-based optical scanner, the central-count optical scanner used for absentee ballots, DREs used for early voting, and the election management system. For this test, they prepared each type of equipment and had each type of equipment transmit vote totals created using test decks to the election management system to ensure that it prepared the results correctly.
Effectively testing voting equipment depends not only on the voting equipment itself, but also on the procedures developed by the jurisdiction and the people that implement them. For example, in one large county, an election official misprogrammed software on the optical scan equipment used to tally early and absentee votes, which affected all ballots with a straight party vote in the November 2000 election. About a third, or 66,000, of the ballots cast in the county were cast early or absentee. Of these, over 20,000 voters had cast a ballot with a straight party vote. According to county officials, although the equipment detected the straight party vote, it did not properly distribute the vote to each of the party candidates. That is, if a voter checked a straight party vote for Democrat, the optical scan equipment detected the vote but did not properly add a vote for the Democratic candidates on the ballot. Although county officials agreed that this problem should have been detected during readiness testing, they stated that the confirmation of the results of the test deck had been incomplete. According to county officials, test personnel verified only that the system accurately detected the straight party vote and did not verify whether the tallies resulting from the test deck were correct. Further, the county had no written procedures to ensure that the software was properly tested. Fortunately, county officials detected the software problem during the vote tallying process. However, if the problem had gone undetected, over 20,000 properly cast votes would not have appeared in the official vote totals.
We estimate that 94 percent of jurisdictions nationwide conducted readiness testing before the November 2000 election, and 95 percent of jurisdictions nationwide conducted verification testing before the election.
Verification Testing
The purpose of verification testing is to verify that the voting equipment is operating properly before the election. This testing is typically conducted by poll workers or election officials at the poll site on election day unless a central-count configuration is used.
Our mail survey results show that 95 percent of jurisdictions nationwide conducted verification testing before the November 2000 election. Figure 71 shows the percentage of jurisdictions that conducted verification testing by type of voting equipment.
Verification tests generally vary by type of technology. For jurisdictions that use optical scan and DREs, verification testing generally includes generating a zero tape that verifies that the equipment is ready to start processing ballots. Zero tapes typically identify the specific election, the equipment’s unit identification, the ballot’s format identification, and the contents of each active candidate register by office (showing that they contain all zeros). In addition to running the zero tapes, jurisdiction officials indicated that they also check the security seals on the machines to ensure that they have not been tampered with, compare the ballot on the machine with the sample ballot for the polling place, and check the protective counter number on the voting machine before voting begins. Figure 72 shows a zero tape.
Jurisdictions that use punch cards also need to test the vote recording device. For example, in a medium-sized jurisdiction, election officials stated that before opening the polls, the poll workers inspected each ballot page in the ballot book and compared each to the specimen ballot for the precinct. Further, these officials and officials in another medium-sized jurisdiction stated that poll workers checked that the punch positions for each vote recording device worked properly.
Similarly, for those jurisdictions that we visited that use lever machines, verification testing includes making sure the public counters are set to zero and checking the security seals, the protective counters on the machines, the paper rolls, and the ballot labels to ensure that the names of the parties, office titles, candidate names, and ballot proposals match the sample ballot displayed at the polling place.
Jurisdictions Varied in Type and Frequency of Voting Equipment Maintenance Performed
As with security and testing, proper maintenance is important to ensure that voting equipment performs as intended and problems are prevented. According to voting equipment vendors, routine maintenance for most voting equipment generally includes inspecting the voting equipment for damage; testing and recharging batteries, if applicable; and cleaning the equipment before the election. Not effectively maintaining voting equipment could contribute to equipment failures or malfunctions, which in turn could cause voters to wait longer and could cause vote and tally errors.
Our mail survey results indicate that about 80 percent of jurisdictions nationwide performed routine or manufacturer-suggested maintenance on their voting equipment before the November 2000 election. For those jurisdictions that we visited, the maintenance activities performed were generally consistent with those recommended by the vendors for their respective voting equipment, such as inspecting and cleaning the machines, testing and recharging batteries, and replacing malfunctioning parts. However, despite performing regular maintenance, jurisdiction officials stated that they had experienced equipment failures during the November 2000 election. In most cases, officials characterized these failures as not significant because they were resolved on-site through repairs or replacements.
The specific maintenance procedures that jurisdictions performed varied because of differences in the physical characteristics of the equipment. Table 10 shows examples of maintenance procedures, by equipment type.
Our mail survey shows that a significantly higher percentage of jurisdictions nationwide using DRE and optical scan equipment had performed maintenance than had jurisdictions using lever and punch card equipment. Figure 73 presents summary information on jurisdictions that conducted maintenance, by equipment type.
Our visits to 27 local election jurisdictions also revealed variations in the frequency with which jurisdictions perform routine maintenance. For example, some jurisdictions perform maintenance before an election, while others perform maintenance regularly throughout the year. For example, officials in a medium-sized jurisdiction that uses DREs, stated that they test the batteries monthly. Likewise, officials from a very large jurisdiction reported that its warehouse staff worked year-round to repair Votomatic units and booths.
Our site visits also showed that local jurisdictions have experienced few problems with equipment maintenance. Only one large jurisdiction reported that it had experienced problems with obtaining replacement parts for its optical scan equipment.
Equipment Costs Vary Because of Differences in Unit Costs and Jurisdictions’ Size and Equipment Configuration
The cost to acquire, operate, and maintain voting equipment over its useful life varies, not only on a unit cost basis but also on a total jurisdiction basis, depending on such decisions as whether ballots will be counted at poll sites or centrally, who will perform maintenance, and how frequently maintenance will be performed.
Our vendor survey showed that voting equipment costs vary among types of voting equipment and among different manufacturers and models of the same type of equipment. For example, DRE touchscreen unit costs ranged from $575 to $4,500. Similarly, unit costs for precinct-count optical scan equipment ranged from $4,500 to $7,500. Among other things, these differences can be attributed to differences in what is included in the unit cost as well as differences in the characteristics of the equipment. Table 11 shows equipment costs by unit, software, and peripheral components.
In addition to the equipment unit cost, an additional cost for jurisdictions is the software that operates the equipment, prepares the ballots, and tallies the votes (and in some cases, prepares the election results reports). Our vendor survey showed that although some vendors include the software cost in the unit cost of the voting equipment, most price the software separately. Software costs for DRE, optical scan, and punch card equipment can run as high as $300,000 per jurisdication. The higher costs are generally for the more sophisticated software associated with election management systems. Because the software generally supports numerous equipment units, the software unit cost varies depending on the number of units purchased or the size of the jurisdiction. Other factors affecting the acquisition cost of voting equipment are the number and types of peripherals required. In general, DREs require more peripherals than do optical scan and punch cards. For example, some DREs require smart cards, smart card readers, memory cartridges and cartridge readers, administrative workstations, and plug-in devices (for increasing accessibility for voters with disabilities). Touchscreen DREs may also offer options that affect the cost of the equipment, such as color versus black and white screens. In addition, most DREs and all optical scan and punch cards require voting booths, and most DREs and some precinct-based optical scan and punch card tabulators offer options for modems. Precinct- based optical scan and punch card tabulators also require ballot boxes to capture the ballots after they are scanned.
Once jurisdictions acquire the voting equipment, they must also incur the cost to operate and maintain it. Our visits to 27 local election jurisdictions indicated that annual operation and maintenance costs, like acquisition costs, vary by the type and configuration of the voting equipment and by the size of the jurisdiction. For example, jurisdictions that used DREs reported a range of costs from about $2,000 to $27,000. Similarly, most jurisdictions that used optical scan equipment reported that operations and maintenance costs ranged from about $1,300 to $90,000. Most punch card jurisdictions reported that operations and maintenance costs ranged from $10,000 to over $138,000. The higher ends of these cost ranges generally related to the larger jurisdictions. In fact, one large jurisdiction that used optical scan equipment reported that its operating costs were $545,000, and one very large jurisdiction that used punch cards reported operations and maintenance costs of over $600,000. In addition, the jurisdictions reported that these costs generally included software licensing and upgrades, maintenance contracts with vendors, equipment replacement parts, and supply costs. Figure 74 shows the ranges of operations and maintenance costs, by type of voting equipment.
For decisions on whether to invest in new voting equipment, both initial capital costs (i.e., cost to acquire the equipment) and long-term support costs (i.e., operation and maintenance costs) are relevant. Moreover, these collective costs (i.e., lifecycle costs) need to be viewed in the context of the benefits the equipment will provide over its useful life. These benefits should be directly linked to the performance characteristics of the equipment and the needs of the jurisdiction.
Estimated Costs of Purchasing New Voting Equipment for Local Election Jurisdictions in the United States
Estimated Costs of Buying Central-Count Optical Scan Voting Estimated Costs of Buying Precinct-Based Optical Scan Voting Estimated Costs of Buying Touchscreen DRE Voting Equipment Election jurisdictions used five basic types of voting methods in the November 2000 election—hand-counted paper ballots and lever machines, punch card, optical scan, and DRE voting equipment. In some cases, the same method was used for all votes cast—mail absentee, in-person absentee, early, normal election day, and provisional election day. Others used different methods for different types of votes. For example, any jurisdiction that used lever or DRE equipment normally used some different method of counting mail absentee ballots, because neither method uses individual paper ballots that could be mailed to absentee voters.
As discussed earlier in this chapter, any of these voting methods can produce accurate, reliable vote counts if the people, processes, and technology required to accomplish this task are appropriately integrated. However, in considering new voting equipment, most jurisdictions have focused on two types of equipment—optical scan and DRE. Optical scan equipment can be used for counting ballots at a central location or a counter can be located at each precinct where voters cast their votes. A central-count configuration is generally less expensive, particularly in larger jurisdictions, because fewer pieces of equipment are needed. However, with a central-count configuration, voters cannot be notified of any mistakes they made in filling out their ballots and offered an opportunity to correct them. Optical scan counters located at voting precincts can be programmed to notify voters if they have voted for more candidates for an office than permitted (overvotes) or have not voted for a specific office (undervotes). Such voters can then be offered an opportunity to correct their ballot, if they wish. For example, the voter may wish to correct any overvotes but deliberately chose not to vote for any candidates for a specific office. Properly programmed, DRE voting equipment does not permit the voter to overvote and can also notify the voter of any undervotes.
Jurisdictions may have different requirements for evaluating the purchase of new voting equipment. For example, large jurisdictions with long ballots with multiple offices and initiatives that must be printed in multiple languages will have requirements different from the requirements in small jurisdictions with short ballots printed only in English. Some equipment has more features to accommodate those with disabilities than others. For example, with most types of voting equipment, ballots with larger print or magnifying glasses can be offered to voters with impaired sight. Currently, however, only certain models of touchscreen DRE equipment can be configured to accommodate most persons with disabilities, such as persons who are blind, deaf, paraplegic, or quadriplegic.
We developed cost estimates for three approaches to replacing existing voting equipment—central-count optical scan equipment; precinct-count optical scan equipment; and touchscreen DRE equipment that could accommodate persons with disabilities, except those who are quadriplegic. The cost estimate for each approach used a set of assumptions that may overestimate the needs and costs for some jurisdictions and underestimate the needs and costs for other jurisdictions. These assumptions and limitations are discussed in more detail in the text that accompanies each estimate. Our estimated purchase costs range from about $191 million for central-count optical scan equipment to about $3 billion for touchscreen DRE units, where at least one of which in every precinct was a unit equipped to enable most voters with disabilities to cast their votes on DRE units in secrecy.
Our estimates used vendor cost data provided in August 2001, and these costs are subject to change. With the exception of central-count optical scan units for jurisdictions with fewer than 25,000 registered voters, these cost estimates did not include software or other necessary support items. Our estimates generally included only the cost to purchase the equipment and do not contain software costs associated with the equipment to support a specific election and to perform related election management functions, which generally varied by the size of the jurisdiction that purchased the equipment. Also, our estimates did not include operations and maintenance costs, because reliable data were not available from the jurisdictions. The cost of software and other items could substantially increase the actual cost to purchase new voting equipment. Actual costs for any specific jurisdiction would depend upon the number of units purchased, any quantity discounts that could be obtained, the number of reserve units purchased, and the cost of software and other necessary ancillary items.
Estimated Costs of Buying Central-Count Optical Scan Equipment
In a central-count optical scan system, ballots are transported from the precincts to a central location for counting. Our estimates used vendor cost data provided in August 2001. Actual cost per unit may be more or less than those used in our estimates. Vendors provided data on three central-count optical scan units. The least expensive unit costs $20,000, including a personal computer, card reader, and software. The vendor recommends 1 unit for each 25,000 registered voters. This is the unit we used in our cost estimates for election jurisdictions with 25,000 or fewer registered voters. We had data on two high-speed central-count units that we used for jurisdictions with more than 25,000 registered voters. The $24,000 unit had a counting capacity of 9,000 ballots per hour and the $55,000 unit had a capacity of 24,000 ballots per hour. Prices did not include software costs, which varied by the number of registered voters in the jurisdiction, and ranged from $15,000 to $300,000 per jurisdiction. For jurisdictions with more than 25,000 registered voters, we estimated costs assuming that each jurisdiction would have one $55,000 unit and one $24,000 unit. None of our estimates included such associated costs as the cost of purchasing individual “privacy booths” for voters to mark their ballots or the cost of ballots and other supplies. In addition, our estimates for central-count systems did not include separate units for subcounty minor civil divisions that have responsibility for conducting elections in some states. The number of registered voters in these subcounty election jurisdictions— more than 7,500—varied widely. Some had fewer than 100 registered voters; others have 40,000 or more. The cost estimate shown in table 12 would be considerably higher if we assumed that each election jurisdiction within a county purchased central counters.
Given the assumptions we used, we estimated that it would cost about $191 million to purchase 2 central-count optical scan units for 3,126 counties election jurisdictions in the United States, plus 1 reserve unit for each jurisdiction with more than 25,000 registered voters. We developed separate cost estimates for replacing each type of voting method used in the November 2000 general election.
Of the 3,126 counties, 2,072, or about two-thirds, had 25,000 or fewer registered voters. We estimated it would cost just about $83 million to purchase two $20,000 units—one for election day and one for absentee ballots—for each of these jurisdictions. Each unit would include a personal computer, card reader, and software. Because each individual unit should accommodate the entire vote counting needs of these jurisdictions, we did not include an estimate for reserve units for these smaller jurisdictions. We assumed that the second machine could function as the reserve for these election jurisdictions.
For the 1,054 election jurisdictions with more than 25,000 registered voters, we estimated that it would cost about $109 million to buy 2 central-count optical scan machines for election jurisdictions plus 1 reserve unit per jurisdiction. The election day unit would cost $55,000 and have a counting capacity of 24,000 ballots per hour. The absentee ballot and reserve units would cost $24,000 each and have a counting capacity of 9,000 ballots per hour. The cost per unit does not include software or other associated costs. It is important to remember that within each of the categories we used— small and large—there is wide variation in the numbers of registered voters. Some of the small jurisdictions had fewer than 3,000 registered voters. Some of the large jurisdictions had more than 500,000. The largest election jurisdiction in the nation had more than 4 million registered voters. Thus, our assumptions would not necessarily match the needs of individual jurisdictions. For example, the capacity of the 2 central-count units used in the estimate for small jurisdictions would exceed the needs of jurisdictions with fewer than 5,000 registered voters. Similarly, the capacity of the 2 central-count units used in the estimate for large election jurisdictions would probably exceed the needs of jurisdictions with 100,000 registered voters. However, for the largest jurisdictions, these same two central-count units would probably have insufficient capacity to count votes in 1 or 2 days. We have assumed that each election jurisdiction with more than 25,000 voters would have one of the $24,000 units in reserve, should either of the other 2 units break down. The estimate in table 12 included the 36 election jurisdictions in Oregon. We assumed that Oregon would use a central-count system because Oregon used mail ballots for all ballots cast in the November 2000 general election.
Estimated Costs of Buying Precinct-Based Optical Scan Equipment
Purchasing optical scan equipment that is placed in each voting precinct is more expensive than purchasing central-count optical scan equipment because each election jurisdiction usually has multiple precincts. We estimated that it would cost about $1.3 billion to purchase an optical scan unit for each of 185,622 precincts in the country, excluding Oregon. Although the cost per unit is much less, the number of units is much higher. According to vendor-provided data, optical scan units for precincts range from $4,500 to $7,500 each. None of the prices included software. For our estimate, we assumed that each precinct would have a $6,500 optical scan unit—neither the least nor most expensive available. Each unit could be programmed to alert voters to errors (overvotes and undervotes) on their ballots. Each unit would also record and total the votes cast for each candidate and each issue on the ballot at the precinct at which it was placed. With this option, we also assumed that each election jurisdiction would have a central-count optical scan unit for counting absentee ballots within the jurisdiction. Placing a central-count optical scan unit within each subcounty election jurisdiction—more than 7,500—would increase the cost estimates shown in table 13. The unit costs used for the estimates do not include software, which ranges from $15,000 to $300,000 per jurisdiction, depending upon the number of registered voters in the jurisdiction. The estimated costs also do not include training, supplies (such as ballots), or other costs associated with operating and maintaining the units. Finally, although we could determine the types of voting methods used within 36 election jurisdictions that used mixed methods, we could not make this determination at the precinct level for 3,472 precincts in these jurisdictions. Therefore, the cost estimates for any specific type of voting method, such as punch cards, may not include all precincts that used that method.
Actual costs would depend upon the number of units purchased, any quantity discounts that could be obtained, the number of reserve units purchased, and the cost of software and other necessary ancillary items.
Estimated Costs of Buying Touchscreen DRE Equipment
DRE equipment is available in two basic types. With full-face DRE equipment, the entire ballot is placed on the machine, with buttons beside each candidate or issue choice on the ballot. However, it may be difficult to design an easily readable ballot for a full-face DRE machine that includes many candidates and issues or that must be printed in multiple languages. The second type of DRE machine is the touchscreen, analogous to a bank ATM machine. DRE machines range in price from $2,000 to $6,000 depending upon the features offered. These prices did not include costs that can substantially increase per unit cost, such as for software and in some cases such essential equipment as card readers and smart cards for each machine. Our estimate used a touchscreen machine that cost $3,995 for each unit equipped for the disabled and $3,795 for each unit not so equipped. The equipped unit for the disabled can accommodate all disabled voters except those who are quadriplegic. The unit cost includes the vote count cartridge but does not include software, which ranges from $15,000 to $300,000 per jurisdiction, depending upon the number of registered voters in the jurisdiction.
One reason that touchscreen DRE equipment is generally more costly than precinct optical scan equipment is that more units are required. Voters do not vote on precinct optical scan units—they mark their ballots at the voting place and then feed their individual ballots into the precinct counter to be read and counted. However, as with lever equipment, voters actually cast their ballots on DRE units. Thus, the cost of purchasing DRE equipment is affected by the number of voters who use each DRE unit during the course of an election day. Some states have statutory standards for the maximum number of voters per voting machine. We used two assumptions—1 unit for each 250 registered voters per precinct and 1 unit for each 500 registered voters per precinct. We also assumed that there would be at least 1 unit equipped for the disabled at every precinct—or a minimum of 185,622 units. Because there were no data available on the number of registered voters in each precinct in Alaska, North Dakota, and Wisconsin, our estimate provides a single disabled equipped unit for each precinct in those states. Consequently, our estimates may understate the total number of touchscreen units needed.
Using 250 voters per DRE unit, we estimated that 763,196 DRE units would be required to replace all voting equipment in the United States (see table 14). This includes more than 24,000 reserve units, assuming reserves were 3 percent of the estimated average number of units needed in each election jurisdiction. The estimated total cost of purchasing these units is $3 billion, including one $20,000 central-count optical scan unit for each of the 2,072 election jurisdictions that had 25,000 or fewer registered voters and one $24,000 central-count optical scan unit for each of the 1,054 election jurisdictions that had more than 25,000 registered voters (excluding Oregon). The central-count units were for counting absentee ballots in each election jurisdiction. As shown in table 15, purchasing 1 unit for each 500 registered voters per precinct reduces the estimated number of touchscreen units needed, including reserves, to 388,198 and the cost to around $1.6 billion, including the central optical scan counters for each jurisdiction. Again, software is a substantial additional cost, approximately $46 million ($15,000 per jurisdiction) to $927 million ($300,000 per jurisdiction). Purchasing software separately for each of the more than 7,500 subcounty election jurisdictions—cities, townships, villages—would cost more. For example, if the average software cost for each of 7,500 jurisdictions were $20,000, the additional cost would be $150 million. Actual costs for any specific jurisdiction would depend upon the number of units purchased, any quantity discounts that could be obtained, the number of reserve units purchased, and the cost of software and other necessary ancillary items. Notes for tables 14 and 15 are found at the end of table 15.
New Models of Voting Equipment Are Available and a New Method Is Being Proposed
New DRES Are Similar to Existing DREs, With Added Features to New Optical Scan Equipment Is Very Similar to Those Currently Feasibility of Telephone-Based Voting is Being Proposed Explored On the basis of vendors surveyed, we identified five new models of voting equipment—four DRE touchscreens and one optical scan. We also identified two proposals for a new method of voting—telephone-based voting. None of these were used in the November 2000 election.
New DRE Models Are Generally Similar to Current Models, With Added Features to Improve Usability and Security
Four new DRE models are available that build on the advanced features already present in the most recent of the DREs used in the November 2000 election and offer several new options. In general, these new options are intended to improve the DREs’ ease of use and security characteristics. Other characteristics, such as accuracy, efficiency, and cost, are generally not affected. The new options include the following: A “no-vote” option helps avoid unintentional undervotes (offered by three of the four new DREs). These DREs’ touchscreens provide the voter with the option to select “no vote (or abstain)” on the display screen if the voter does not want to vote on a particular contest or issue. A recover spoiled ballots option allows voters to recast their votes after their original ballots are cast. In this scenario, every DRE at the poll site is connected to a local area network. A poll official would void the original “spoiled” ballot through the administrative workstation that is also connected to the local area network. The voter could then cast another ballot.
Voice recognition capability allows voters to make selections orally. Printed receipts for each vote option provides a paper printout or ballot each time a vote is cast. Vendors claim that this feature provides voters and/or election officials an opportunity to check what is printed against what is recorded and displayed. It is envisioned that procedures would be in place to retrieve the paper receipts from the voters so that they could not be used for vote selling. One of the new DREs also has an infrared “presence sensor” that is used to control the receipt printer in the event the voter is allowed to keep the paper receipt; if the voter leaves without taking the receipt, the receipt is pulled back into the printer.
Characteristics of New Optical Scan Model Are Similar to Those Currently Available
Our survey also identified one vendor that proposed a new model of its existing precinct-based optical scanner. According to the vendor, the primary advantage of this new model is that it is lighter and quieter than the previous model, and it has expanded memory capabilities. However, this model’s accuracy, ease of use, efficiency, and security characteristics do not generally differ from those of comparable existing optical scan devices. The new model is slightly more expensive than the existing model.
Feasibility of Telephone- Based Voting Is Being Explored
Our survey identified two vendors that are exploring the feasibility of a new method of voting in which voters would record their votes using a touch- tone telephone; the votes would be transmitted in real time over public telephone lines and recorded electronically at a central location. According to one of the vendors, this method of voting could be based at poll sites and/or remote locations. In either case, the voter interacts with the telephone in essentially the same way. As with the new DREs, telephone- based voting is generally concerned with improving a voter’s ease of using the equipment. A general description follows of the vendors’ respective approaches to implementing this method of voting.
Vendor A (poll-site or remote voting): Once a voter was authenticated (the vendor did not say how this would be done, although for poll-site voting it could be done by traditional means), he or she would be provided with an ID and a list of the candidates or issues, each with corresponding unique code numbers. For poll-site voting, the poll-site worker would hand these code numbers to the voter and provide necessary instructions; for remote voting, the codes would be mailed before election day to the voter. The voter would use the touch-tone telephone feature to key in the ID number to gain access and then enter the code numbers for each selection. After each selection, a recorded message would be sent to the voter to confirm the selection. The voter could make any necessary changes and would have access to live assistance if necessary. For poll-site voting, the vote would be recorded on a PC at the polling site, which would send the information to an election data center over the telephone once the polls closed. For remote voting, the vote would be sent directly to the data center. According to the vendor, the system would provide multiple languages and interactive voice recognition technology to accommodate persons with disabilities.
Vendor B (poll-site voting for persons with disabilities): Once the voter was authenticated (again the vendor did not specify how, although traditional approaches could be used), the person would be provided with an ID and directed to a poll worker, who would dial up the system and input the ID. Once the ID number was input, a recording would ask, “Is your candidate ready to vote?” At this point, the poll worker would hand the phone (which could include a headphone set) with button panel to the voter. The voter would then be prompted to request a language of preference and would be directed through the voting sequence. The voter could vote by using the touch-tone keys on the telephone or by speaking responses. After the voter selected a candidate or issue, the system would provide feedback to confirm the selection. The telephone also would read a summary of the results and allow the voter to revise any previous selections. Once the voter finished, the system would hang up, and the ballot would be recorded on a central system.
Challenges
The challenges confronting local jurisdictions in using voting technologies are not unlike those faced by any technology user. As discussed throughout this section, these challenges include the following: Having reliable measures and objective data to know whether the technology being used is meeting the needs of the jurisdiction’s user communities (both the voters and the officials who administer the elections). Looking back to the technology used in the November 2000 election, our survey of jurisdictions showed that the vast majority of jurisdictions were satisfied with the performance of their respective technologies. However, this satisfaction was mostly based not on hard data measuring performance, but rather on the subjective impressions of election officials. Although these impressions should not be discounted, informed decisionmaking on voting technology investment requires more objective data.
Ensuring that necessary security, testing, and maintenance activities are performed. Our survey of jurisdictions showed that the vast majority of jurisdictions perform these activities in one form or another, although the extent and nature of these activities vary among jurisdictions and depend on the availability of resources (financial and human capital) that are committed to them.
Ensuring that the technology will provide benefits over its useful life commensurate with lifecycle costs (acquisition as well as operations and maintenance) and that these collective costs are affordable and sustainable. Our survey of jurisdictions and discussions with jurisdiction officials showed that the technology type and configuration that jurisdictions are employing vary depending on their unique circumstances, such as size and resource constraints, and that reliable data on lifecycle costs and benefits are not available.
Ensuring that the three elements of people, process, and technology are managed as interrelated and interdependent parts of the total voting system. We must recognize that how well technology performs is not only a function of the technology design itself, but also of the people who interact with the technology and the processes governing this interaction.
Broad Application of Internet Voting Faces Formidable Technical and Social Challenges
The growing use of the Internet for everyday transactions, including citizen-to-government transactions, has prompted considerable speculation about applying Internet technology to elections. Such speculation was recently fueled by the vote counting difficulties of the November 2000 election, which sparked widespread interest in the reform of elections (particularly the technology used to record and count votes). However, well before the November 2000 election, some groups had already begun considering the pros and cons of Internet voting.
In addition to the growing popularity of the Internet, interest in Internet voting was spurred by claims that it would increase the convenience of voting (particularly for those with limited mobility) and add speed and precision to vote counts. Further, it has been claimed by Internet voting proponents that the convenience of Internet voting could increase voter turnout. As a result, academics, voting jurisdiction officials, state election officers, and others have been examining Internet voting for some time. Although opinion is not unanimous, consensus is emerging on some major points: Security is the primary technical challenge for Internet voting, and addressing this challenge adequately is vital for public confidence.
Internet voting as an additional method of voting at designated poll sites may be technically feasible in the near term, but the benefits of this approach are limited to advancing the maturity of the technology and familiarizing voters with the technology.
The value of Internet voting is uncertain because reliable cost data are not available and its benefits are in dispute.
Voter participation and the “digital divide” are important issues, but controversy reigns over their implications.
As the Internet Has Evolved, Its Uses and Challenges Have Expanded
The Internet originated in the late 1960s through government-funded projects to demonstrate and perform “remote-access data processing,” which enabled researchers to use off-site computers and computer networks as if they were accessible locally. Although these networks were initially intended to support government and academic research, when their public and commercial value was realized, they were transformed into the medium known today as the Internet. Over time, these networks were privatized, and additional networks were constructed; the spread of networks along with advances in computing technology fostered the Internet’s growth. The development of the World Wide Web and “browser” software and advancements in the processing capability of personal computers greatly facilitated public use of the Internet. In the early 1990s, a major surge occurred in Internet use that continues unabated today. According to the Department of Commerce, the number of Internet users in the United States rose to about 117 million in the year 2000. (The population of the United States is over 281 million.)
Promoting the easy sharing of information was a prime motivation for the Internet. To this end, systems and software followed open rather than proprietary standards, and software tools were put into the public domain, so that anyone could copy, modify, and improve them. This approach is a source of both strength and weakness. Openness and flexibility contributed to the rapid evolution and spread of Internet information and technology. But this openness and flexibility, and the vast web of interconnections that resulted, are also the source of widespread and growing security problems. This interconnectivity has also led to growing concerns about individual privacy. Information that may previously have been publicly available in principle has become easily available in practice to almost anyone, and even private information can be accessed if security protections break down. Another growing concern is that the availability of Internet technology is producing a “digital divide”: two classes of people separated by their ability to access the Internet and all that it offers. In investigating this question, both we and the Department of Commerce found greater home usage of the Internet by more highly educated and wealthier individuals.
For Internet-based voting, the generic Internet issues—security, privacy, and accessibility—are entwined with issues relating to the unique nature of voting (such as ballot secrecy). Another important issue is the practical consideration of the costs of Internet voting versus its benefits.
Internet Voting Can Be Categorized Into Three Types
Poll-site Internet Voting Kiosk Voting Remote Internet Voting When Internet voting is discussed, the popular image is of citizens voting on-line from any computer anywhere in the world. However, other possible scenarios have been suggested for applying Internet technology to elections. Such groups as the Internet Policy Institute and the California Internet Voting Task Force have pointed out that various approaches to Internet voting are possible, ranging from the use of Internet connections at traditional polling stations to the ability to vote remotely from anywhere. An intermediate step along this range is an option referred to as “kiosk voting,” in which voters would use conveniently located voting terminals provided and controlled by election officials.
Some voting experts see the three types of Internet voting as evolutionary, because the issues become more complex and difficult as elections move from poll sites—where limited numbers of voting devices are physically controlled by election officials—to sites where voting devices are not under such direct control, and the number of devices is much greater (see figure 75).
Poll-Site Internet Voting
In poll-site Internet voting, Internet-connected computers either replace or reside alongside conventional dedicated poll-site equipment. In its most limited configuration, in which voters vote only at their traditional assigned polling places, poll-site Internet voting is little more than another type of voting equipment. An expanded configuration would permit voters to vote at any polling place within their jurisdiction, thus expanding their voting options—as well as increasing the complexity of the system required to support these options.
In poll-site Internet voting at assigned polling places, poll workers would authenticate voters as they traditionally do; that is, they would follow the local procedures for ensuring that the voter was who he or she claimed to be and that the voter was registered in that precinct. However, if a voter wished to use an Internet device to vote, a poll worker would also assign the voter a computer-recognizable means of identification—a password or personal identification number (PIN), for example. At the Internet voting device, the voter would identify himself or herself to the system using the identification assigned; the voter would then be presented with an electronic ballot on which to vote. When the voter submitted the ballot electronically, it would be encrypted and sent via the Internet to the jurisdiction’s central data center, where the vote would be decrypted, the voter ID separated from the vote, and the vote and voter ID stored separately. Through software checks, the system would check the validity of the ballot and ensure that it had not been altered in transit. The system would also send an acknowledgment to the voter that the vote was received. However, the acknowledgment would not indicate how the voter voted, because the system would have separated that information from the voter’s identity to preserve the secrecy of the ballot.
An extended version of poll-site Internet voting would allow voters to vote at other poll sites within a jurisdiction, rather than limiting them to their traditional assigned sites. These poll sites could be either within the same precinct or beyond the precinct within the voting jurisdiction. In any case, poll workers would have to be able to authenticate voters from a larger population than they do now that is, the voters in the entire precinct or voting jurisdiction, rather than simply those assigned to an individual poll site. Further, the election officials would have to present voters with the appropriate ballot style for which they were eligible to vote (corresponding to their local precinct). Figure 76 summarizes the process for poll-site voting.
Of the various types of Internet voting, poll-site Internet voting requires the least change to current election processes. For example, traditional means can be employed for poll watching and physical security. For voting at assigned poll sites, voter authentication could also be done traditionally. However, if jurisdictions offer more options for polling places, the voter authentication system becomes more complex.
Poll-site Internet voting in general does not offer advantages over traditional voting technology. The California Internet Task Force described poll-site Internet voting as primarily useful for testing technology that would allow voters to cast ballots from sites other than their assigned polling places.
In the November 2000 federal election, poll-site Internet voting was tested in nonbinding pilot projects in four counties in California to ascertain voter satisfaction and acceptance of the technology. Voters who chose to participate, as well as election officials, generally reacted positively to the tests. However, some voters had security concerns, and some jurisdictions questioned the cost-effectiveness of expanding the pilots.
Kiosk Voting
An extension of poll-site Internet voting is the proposal to establish Internet voting sites at convenient public places, such as libraries and community centers. In this scenario, jurisdictions would provide Internet voting equipment but generally not staff the voting sites. If the voting sites were unstaffed, the voting equipment would require protection against tampering, and advance voter authentication would have to be implemented.
In kiosk Internet voting, voters would have to be authenticated and provided with a means of identification (such as a password or PIN), just as in poll-site Internet voting. How this process would take place would depend on whether the voting sites were staffed by poll workers. In this scenario, poll workers could use the same means of voter authentication used for the expanded poll-site voting. In an unstaffed setup, voters would have to authenticate themselves in advance. For advance authentication, the voter would contact the authentication authority before the election, and the means of identification would be sent to the voter, similar to the way absentee ballots are requested and mailed out in a conventional election system.
Once the voter received the means of identification, the rest of the voting process would be the same as for extended poll-site Internet voting. Figure 77 summarizes this kiosk voting process. Steps differing from the process described in figure 76 are shown in heavily outlined boxes.
Retaining some of the features of traditional poll-site voting, this option adds some of the features of remote voting. As in traditional poll-site voting, the equipment is under the control of election officials. (For unmanned voting kiosks, some form of security is usually proposed to avoid tampering, such as camera surveillance or security guards.) However, as in remote voting, procedures and technology must be in place for voter authentication in the absence of poll workers. Kiosk voting is currently a purely conceptual alternative; no jurisdiction has yet tried to demonstrate the concept.
Remote Internet Voting
In its ultimate form, remote Internet voting allows voters to cast ballots from any Internet-connected computer anywhere in the world. This form of Internet voting would allow maximum convenience to those voters with access to networked computers. However, because neither the actual machines used for voting nor the network environment could be directly controlled by election officials, this option would present election systems with the greatest technological challenge.
Proposals for remote Internet voting, as well as for kiosk voting, usually assume that voters will submit requests for Internet voting in advance and that means of identification will be sent to these voters before the election. In addition to the means of identification, the jurisdiction would also have to take steps to ensure that voters secured the platform on which they proposed to vote. Some have suggested that the jurisdiction would have to send out software for the voter to install, such as a dedicated operating system and Web browser; such software would have to accommodate many platforms and system configurations.
Once the voter had secured the computer by the means prescribed by the jurisdiction, the rest of the voting process would be similar to that described earlier. One difference, however, would be that after voting, voters would have to reconfigure their computers to return them to their previous state (for example, they might need to reset their network settings to those needed to connect to their Internet service providers). In cases where voters wished to vote from computers they did not own (at schools or businesses, for example), this process could be problematic. Figure 78 summarizes the process for remote Internet voting. Steps that differ from the processes in figures 76 and 77 are shown in heavily outlined boxes.
Like any form of remote voting, including the mail-in absentee voting used in most states today, remote Internet voting lacks some of the safeguards associated with voting within the controlled environment of a traditional polling place; that is, election officials cannot guarantee that the ballot is kept secret and that voters are not coerced. Likewise, traditional citizen poll watching is impossible, because voting takes place in private settings.
Remote Internet voting has been used for private elections for several years, but only recently have attempts been made to use Internet technology for public elections in which candidates were running for federal office. To date, no jurisdiction has attempted to use remote Internet voting in a binding general election, although some political parties have used remote Internet voting in binding primary elections. In addition, the Department of Defense (DOD) conducted a pilot project to allow military service members, their dependents, and citizens stationed overseas to send binding absentee ballots over the Internet rather than by mail. The DOD pilot, however, differed in a number of aspects from what a jurisdiction-run remote Internet election would be. In the DOD pilot, the ballots were not sent to an electronic data center for tallying, but rather were sent to various local jurisdictions, where officials printed the ballots out and processed them like paper absentee ballots. Further, responsibility for voter authentication was delegated to DOD, so the local jurisdictions did not have to perform that step or issue computer-readable means of identification.
In some of the primary elections that allowed for remote Internet voting, results were mixed. Many voters were comfortable with the process, but some also expressed concerns about security. Disputes about Internet accessibility also led to a lawsuit in the case of the 2000 Arizona Democratic primary. Further, a range of problems surfaced, from the technical (some computers and Web browsers were incompatible with the election system) to the procedural (additional telephone help lines had to be added).
Major Issues Confront Internet Voting
The standards by which new election technologies, such as Internet voting, should be judged combine practical considerations (such as cost and benefits) with generally recognized requirements for free and fair elections: (1) the secrecy of the ballot should be ensured; (2) only authorized persons should be able to vote; (3) no voter should be able to vote more than once; (4) votes should not be modified, forged, or deleted without detection; (5) votes should be accurately accounted for and verifiable; and (6) voters should not be denied access to the voting booth.
For Internet voting to reasonably meet these requirements, a number of issues need to be resolved. These issues have been raised by groups and individuals with voting expertise, including election officials, citizens groups, voting technology vendors, and academics. Among these issues, we have identified those that have received the widest discussion and are generally agreed to be of primary importance; these can be placed into four general categories: ballot secrecy/voter privacy, security, accessibility, and cost versus benefits.
Ballot Secrecy and Voter Privacy
Although ballot secrecy and voter privacy are closely related, they can be distinguished and are treated differently in practice in many forms of elections. Ballot secrecy refers to the content of the vote; voter privacy refers to the voter’s ability to cast a vote without being observed. In poll- site voting, protecting voter privacy is generally ensured by election officials and observers. However, in voting that does not take place at poll sites, including traditional mail-in absentee balloting, election officials cannot safeguard voter privacy, although they can and do take steps to protect ballot secrecy.
Ballot Secrecy and Voter Privacy are Difficult to Ensure in Remote Voting
In any form of voting that takes place away from a poll site (including conventional mail-in absentee voting), safeguards are imposed to protect ballot secrecy at the receiving end (the election office) and in transit, but it is not practical to impose such safeguards at the origin (the voter’s location). The current mail-in absentee balloting process offers some procedural assurances that election officials cannot trace votes back to individuals. That is, the voter returns the absentee ballot in two envelopes: the outer envelope includes identifying information about the voter and is signed, but the internal one has no identifying information that links the ballot to the voter. When absentee ballots arrive at the election office, election workers separate the inner envelopes from the outer ones and randomize them before the ballots are inspected. This procedure ensures secrecy at the receiving end (as long as more than one absentee ballot is received). It does not ensure ballot secrecy or voter privacy at the origin or in transit. With absentee balloting, like remote Internet voting, practical solutions are not available to ensure that voters are not spied on or coerced by a third party.
The digital process proposed by the California Voting Task Force for transmitting ballots over the Internet is generally patterned after the mail-in absentee ballot process. The process aims to preserve ballot secrecy and integrity through the use of encryption technology working with various forms of authentication, such as digital certificates. Encryption technology would act as the “envelopes” preserving the secrecy and integrity of the ballot, and the electronic voter authentication would be automatically stripped from the ballot before the votes were tabulated. As in the mail-in absentee ballot process, the voter authentication and the actual ballot would be stored separately and randomized to preserve ballot secrecy. Assuming that these technologies work as designed, this means of transmitting and receiving the ballot would protect the ballot’s secrecy. As in mail-in absentee balloting, voters would be responsible for protecting their own physical privacy.
Like other forms of remote voting, then, proposed implementations of remote Internet voting would not protect voters’ physical privacy (leaving open the risk that voters may be coerced—through threats, bribery, and other forms of pressure); however, unlike paper-based voting, remote Internet voting also introduces threats to electronic privacy. For example, voters who access the Internet through a local area network (such as at an office, school, or library) might have their privacy compromised by a network administrator who could access the voter’s computer while the ballot was in an unencrypted state. In one of the Internet voting pilots where remote voting was allowed, voters relied heavily upon computers at offices and public libraries. Because these computers were tied into central networks, the potential for compromise was present. Reducing the likelihood of such breaches of privacy require that substantial legal penalties be imposed on such activities.
Finally, any connection to the Internet brings with it the possibility that hackers or malicious software could target the connected computer for attack. Software is available now that allows users to remotely monitor other people’s activities over the Internet, without necessarily being detected or causing any obvious harm. Such snooping allows hackers to look for transactions of interest to them. As transactions increase in significance, their attraction to hackers increases. The challenge and high stakes of an Internet election are very likely to attract not only snooping, but also determined efforts at disruption and fraud.
The process described for transmitting and receiving ballots would be used in all the forms of Internet voting proposed, not just remote voting. This process does not address protection of voters’ privacy while they are generating ballots. However, in poll-site Internet voting as in other poll-site voting, election officials can institute procedures to protect voters’ physical privacy at the poll site. Similarly, in kiosk voting, election officials could also establish procedures to protect against coercion.
What Is the Consensus on This Issue?
Of the three types of Internet voting, remote Internet voting is recognized as least protective of ballot secrecy and voter privacy. On the assumption that techniques such as digital certificates and encryption are effective safeguards for transmission and reception, poll-site Internet voting provides the most privacy safeguards, covering origination, transmission, and reception; kiosk Internet voting could safeguard transmission and reception and (depending on the setup) provide some safeguards on origination; and remote Internet voting could safeguard transmission and reception, but not origination.
Some experts consider that the safeguards now available would be effective for protecting ballot secrecy during transmission and reception. However, other voting experts believe that although digital certificates and encryption could in theory provide the transmission and reception safeguards described, these technologies are not yet mature enough to do so in any large-scale implementation of Internet voting, particularly remote voting. These experts note that as encryption algorithms improve, so do the encryption-cracking tools and the power of the computers that run them.
Further, even with perfect technology, they note that the human factor can undermine the goal. Digital certificates and encryption depend on passwords or keys, which can be stolen or voluntarily revealed.
A further practical difficulty is the cost and technological challenge of creating the infrastructure required for a large-scale implementation of digital certificates. Systems would have to be set up to positively identify voters, issue digital certificates, and manage the exchange and verification of certificates. In the DOD Voting Over the Internet pilot, the system depended on the public key infrastructure that was already in place on DOD’s systems for electronic certificate registration and management services.
In addition, for remote Internet voting, some experts believe that any large- scale solution would have to address the problem of maintaining ballot secrecy across different Internet browsers and computing platforms (that is, computers running various versions of Windows, Macintosh, and Linux operating systems). This problem would require continual attention as operating systems themselves evolve and change; it was not solved in the remote pilot elections in November 2000. In one of these pilots, the vendor that ran the Internet voting software discovered during the election that its voting encryption software was not supported by older Internet browsers. The vendor also reported that several Macintosh users had problems casting their votes on-line and were advised to vote in person.
Beyond the cost and technological problems are the social problems that some experts foresee arising from more widespread use of remote voting. Some voting experts believe that remote voting would encourage organized voter coercion by such groups as employers, unions, nursing homes, and others. One election expert has also noted that the laptops now prevalent in campaign organizations could be used to turn out the vote in favorable precincts, removed from the scrutiny of election officials or poll watchers.
The risk of fraud in remote Internet voting has been likened to that in mail- in absentee balloting. In a 1998 report, the Florida Department of Law Enforcement concluded that “The lack of ‘in-person, at-the-polls’ accountability makes absentee ballots the ‘tool of choice’ for those inclined to commit voter fraud.” Some experts suggest that remote Internet voting could compound this problem significantly.
Election officials can provide reasonable assurance to voters of the secrecy of their ballots when these officials control the voting equipment. However, when elections are remote, this assurance fades, and when Internet technology is introduced, local election officials can have very little control over the technology. Even with encryption, election officials would not be able to guarantee that the voter’s computer or the jurisdiction’s election servers or communication link would not be compromised. Further, given the vulnerability of the Internet to manipulation, it may ultimately be difficult to convince voters that their votes over the Internet will remain secret.
Security
The primary issue for Internet voting is security-that is, ensuring that the voting technology (and related data and resources) is adequately safeguarded against intentional intrusions and inadvertent errors that could disrupt system performance or compromise votes. In Internet voting, the familiar security threats of the Internet are compounded by the particular security requirements of elections-that is, primarily the secret ballot, but also their low tolerance for fraud and disruption.
General Internet Security Threats Pose Risks to Internet Voting
Because the Internet is being increasingly used to transmit proprietary or privacy-sensitive information—health care records, business documents, engineering drawings, purchase orders, credit information—it has become an increasingly tempting target for attackers. Security experts contend that significant efforts are needed to define, develop, test, and implement measures to overcome the security challenge posed by the increasing complexity, interconnectivity, and sheer size of the evolving Internet.
Although complete summary data are not available (many computer security incidents are not reported), the number of reported Internet- related security incidents is growing. For example, the number of incidents handled by Carnegie Mellon University’s CERT Coordination Center increased from 1,334 in 1993 to 8,836 during the first two quarters of 2000. Similarly, the Federal Bureau of Investigation (FBI) reported that its caseload of computer intrusion-related cases is more than doubling every year. The fifth annual survey conducted by the Computer Security Institute in cooperation with the FBI found that 70 percent of respondents (primarily large corporations and government agencies) had detected serious computer security breaches within the last 12 months and that quantifiable financial losses had increased over past years.
These Internet security hazards are especially significant in the context of voting, because voting is an especially significant form of electronic transaction. For remote Internet voting, the problem of malicious software (such as computer viruses, worms, or “Trojan horses”) is acute-that is,such software could be introduced into computers without voters being aware of its presence. Hackers could thus alter ballots, spy on citizens’ votes, or disrupt Web sites, preventing voters from voting. The accessibility and speed that are the hallmarks of the Internet—the very attributes that make Internet voting attractive—are also attractions for malicious or mischievous individuals and organizations that might wish to attack on-line elections. Recent software attacks (such as the ILOVEYOU virus in May 2000, the 1999 Melissa virus, the 2001 Code Red worm, and the Nimda worm of September 2001) illustrate the disruptive potential of such malicious software. In addition, inadvertent errors by authorized computer users could have equally serious consequences if the election systems were poorly protected.
Hackers could attack not only the computer on which voting was taking place, but also the communication links between the voters and the election system. Commercial Web sites have been brought down by a technique known as a “denial of service” attack, in which the attacker overloads a Web site with requests for information, jamming the communication lines and preventing legitimate users from interacting with the site. A more refined version of this type of attack, developed recently, is referred to as a distributed denial of service attack. In this type of assault, software programs called worms, which propagate through the network without user intervention, are installed on several computers without the knowledge or consent of their owners. The hacker basically penetrates several computers and turns them into agents, using them to target Web sites. These types of attacks spread quickly and are very difficult to trace. The public became aware of these attacks in February 2000, when Web sites owned by eBay, E*Trade, CNN, and Yahoo were assaulted and their operations affected.
Denial of service attacks would be especially threatening to remote Internet voting, since they could prevent voters from voting. In poll-site voting, however, the election system could mitigate the denial of service problem, because voting devices could be disconnected from the network until the attack was over, votes could be stored and transmitted later, or other voting technologies could be used.
All types of Internet voting are at risk from malicious software attacks. Remote voting is riskiest; in poll-site and potentially kiosk voting, in which the voting equipment is under the control of election officials, the danger of such attacks is reduced, although not eliminated. Poll-site voting does permit remedies that are not available with remote voting (e.g., controlling the computers used for voting, disconnecting machines from the network if an attack or other disruption occurs, and offering alternative means of voting); some of these remedies would also be available for kiosk voting. Other kinds of remedies for all types of Internet voting would include measures such as system redundancies and backup systems; contingency plans would also need to be designed into any Internet voting system.
Internet Voting Requires Higher Security Standards Than Other On-Line Transactions
Internet voting systems face greater security challenges than other Internet systems, because voting requires more stringent controls than other electronic transactions. In particular, elections could not tolerate the level of fraud that occurs in other electronic transactions, such as on-line banking and commerce. (One study reported that 6 million Internet users claimed that they had been victimized by credit-card-related fraud in e- commerce transactions.)
Compounding the problem of fraud for Internet voting is a security requirement that is unique among on-line transactions: ballot secrecy. Under current election laws, the requirement for ballot secrecy prevents election systems from associating voters with their ballots or providing confirmation of how they voted. As a result, audit trails in public elections are specifically designed not to associate the voter with a ballot; for Internet voting, this would mean that voters could not be issued electronic receipts confirming that their votes were cast as they intended. In contrast, in both e-commerce and on-line banking, receipts providing transaction details for verification are routinely used to protect consumers from error.
To date, there is no way to authenticate every voter’s identity on-line. This raises the problem of devising means to ensure that electronic ballots are not cast by individuals who are not registered to vote, who are ineligible to vote, or who have already voted (whether on-line or by other means). Although this problem is mostly avoided with the poll-site approach to Internet voting, it emerges with any system in which voting takes place at sites that are not monitored by election officials.
What Is the Consensus on This Issue?
It is generally agreed that system security is the biggest obstacle to Internet voting. In view of the Internet’s multiple vulnerabilities, security experts question whether the Internet is ready to offer the level of security necessary to ensure the integrity of an election. Two experts assert that the Internet can never be used for secure elections, because the Internet, which was designed to facilitate information accessing and sharing, is inherently insecure. The proposals for poll-site and kiosk Internet voting, in which voting equipment is under the control of election officials, are largely motivated by the desire to avoid some of the security problems associated with remote Internet voting.
Some experts believe that security mechanisms may evolve one day to the point that they could form the framework for secure Internet voting solutions. In our interviews with several Internet voting vendors, one vendor stated that its product had adequate security measures in place now that would make it possible to conduct a secure public election with remote voting over the Internet. However, some security experts dispute this statement, pointing out that security breaches are being experienced every day by the most technologically sophisticated companies in our country. Most technology experts agree that today no organization is immune from security breaches over the Internet.
The vendors that we contacted are exploring solutions to these challenging security issues. Like any security system, these solutions will involve design trade-offs between the ease of voters using the system and the protection afforded by it, as well as between protection and cost. Because our nation’s election system has rigorous security requirements, the expectation is that considerable complexity and cost would be introduced by whatever solution is devised.
In general, the election community agrees that remote Internet voting is not now practical; a few suggest that it may never be. Most agree that Internet voting at designated poll sites is feasible; although the security issues are still significant, technological and procedural solutions could probably be devised to allow Internet voting at poll sites.
Accessibility
The accessibility of the polls is fundamental to the right to vote. All eligible voters, including those with disabilities, should have equal access to voting, and election systems should be easy for all voters to use. The ease of use aspect of accessibility is important not only to minimize voter confusion and thus error, but also because voting technology that is easy to use is more likely to capture the intent of the voter. Election systems should strive to minimize the opportunities for errors that invalidate or misdirect votes.
In the context of Internet voting, the digital divide takes on particular importance. If access to the Internet continues to be divided along socioeconomic lines, remote Internet voting would likely benefit only the more privileged classes in American society. For voting, the need to minimize the effect of socioeconomic divisions is particularly pressing, because it is a fundamental principle of American democracy that elections should be free and fair. Any system that is perceived to offer unfair advantage to certain classes of people could undermine public confidence in elections and in the governments they produce.
Accessible Internet Voting Software Would Not Solve All Accessibility Problems for Voters With Disabilities
As we have reported, Internet voting presents increased participation opportunities for voters with disabilities as well as implementation challenges. Because Web software can be accessible to voters with disabilities, Internet voting could potentially provide voters with disabilities the convenience of voting from remote locations, such as their homes, thereby promoting voter participation. We identified the following as possible advantages of Internet voting for voters with disabilities: Voters would have more flexibility to vote when they want and from convenient locations if remote Internet voting were allowed.
Blind individuals might be able to vote independently with special equipment and a Web site designed to provide universal access.
However, we also reported concerns expressed about the Internet’s security and reliability, as well as the lack of widespread Internet access. Some of the disadvantages include the following: Voters who are accustomed to traditional methods might resist the Internet method.
Voters who lacked a convenient connection to the Internet would not have equal access to voting.
Blind voters may need special equipment to allow them to use the Internet.
Some disability advocates believe that although alternative voting methods, like Internet voting, do expand options for voters with disabilities, they do not provide the same voting opportunities afforded the general public and thus should not be viewed as permanent solutions to the problem of inaccessible polling places. Moreover, although the Internet is potentially accessible to people with disabilities, they are in fact less likely to have access to the Internet than the general population. According to the Department of Commerce, people with disabilities are only half as likely to have access to the Internet as those with no disability: about 22 percent of the persons with disabilities are on-line compared to about 42 percent of the general population. And while just under 25 percent of people with no disability have never used a personal computer, close to 60 percent of people with a disability fall into that category. Different types of disabilities also lead to different rates of access. Among people with a disability, those who may require special equipment to use computers (such as those who have impaired vision and problems with manual dexterity) have lower rates of Internet access and are less likely to use a computer regularly than people who need no special equipment, such as those with hearing difficulties. According to Commerce, this difference holds in the aggregate, as well as across age groups.
Ease of Use Must Be Addressed in All Forms of Internet Voting
Because experience so far with any kind of public election using Internet technology is limited, knowledge concerning ease of use and Internet elections is similarly limited. However, information that is available suggests that problems with ease of use would arise in Internet elections as in all voting methods and technologies, and voters who are unfamiliar with computers are most likely to have difficulty.
For example, in the nonbinding pilot projects on poll-site Internet voting run by a few jurisdictions in the November 2000 elections, voters chose whether or not to participate, so it is believed that most participants were already familiar with computers and the Internet. Thus, when these voters were surveyed concerning ease of use, most expressed satisfaction. One jurisdiction reported that 100 percent of voters surveyed were satisfied with the ease of the Internet voting implementation; however, another jurisdiction also reported anecdotally that two senior citizens who attempted to use the system became so frustrated with using the computer mouse that they abandoned the attempt within a minute of sitting down. Another of the jurisdictions running a pilot also reported that voters who had never used a computer had difficulties with the keyboard and mouse.
Further, even voters who were familiar with computers ran into problems. One jurisdiction reported that several voters did not read directions and had difficulty performing the steps needed for authentication. Also, in one nonbinding primary in which remote Internet voting was tested, several survey respondents commented on their reluctance to download and install the security software, whose function they did not understand. In the DOD Internet absentee ballot pilot, organizers also commented that participants were not familiar with digital certificates.
Increasing Voter Participation Confronts the Digital Divide
Removing obstacles that prevent or discourage eligible voters from voting is one aspect of accessibility; actively encouraging eligible voters to vote is another. The term generally used in discussions of this aspect of accessibility is “voter participation.” This issue may be as important to the Internet voting debate as security concerns.
The goal of increasing accessibility/voter participation has been cited in arguments both for and against remote Internet voting. Some social scientists contend that remote Internet voting would improve the convenience of voting by removing the need for voters to go in person to poll sites at particular hours, and that this convenience would attract voters to exercise their right to vote. Proponents of remote Internet voting argue that Internet voting would thus increase voter participation, particularly among underrepresented groups, such as young people; people with limited mobility (such as the elderly and the physically challenged); and voters living overseas, including military personnel.
On the other hand, in the long term, Internet voting could decrease voter participation, because it could undermine confidence in the security and fairness of the election process. That is, if the electorate lost confidence that Internet voting was secure or grew to believe that Internet voting unfairly favored certain classes of voters, the resulting disillusionment could discourage voters from participating.
Some evidence that increased convenience could increase participation is found in the Oregon experience with mail-in voting, which resulted in significant increases in turnout. In 1995, when Oregon held the nation’s first all-vote-by-mail statewide congressional primary election, turnout in Oregon primaries rose to 52 percent, up from 43 percent previously. In the special election for U.S. Senator that followed these primaries, the turnout was 65 percent, a record for special elections.
For more direct evidence that remote Internet voting could encourage participation, proponents cite the increased turnout seen in the Arizona 2000 Democratic presidential primary. In this primary, which provided for remote voting, the Democratic party saw an increase in voter participation of over 600 percent in comparison with both the 1992 and 1996 presidential primaries. This surge exceeded increases in every state that had Democratic and/or Republican primary elections during that year (although some other states, which did not provide Internet voting, also showed impressive surges: 419 percent in Rhode Island, 260 percent in Massachusetts, and 200 percent in Georgia). A study done at Northern Arizona University concluded that the availability of Internet voting contributed to Arizona’s increase in political participation, along with other factors, such as the contested primary and media attention focusing on the availability of Internet voting. The study further concluded that participation would have been greater if all technical glitches had been anticipated and corrected before voting began (some voters who ran into technical difficulties ended up by not casting any kind of ballot).
Some suggest that after the novelty of Internet voting is dissipated, this increase in participation will subside. They argue that Internet voting is likely to be similar to previous election reforms (such as early voting, motor voter registration, and absentee balloting), which have had very little, if any, effect on participation. Some voting experts have suggested that information and mobilization are much more important than convenience in increasing voter participation.
A slightly different argument is made about the participation of young voters in remote Internet voting. The argument here is that the 18 to 24 age group, which is least likely to vote (according to FEC), is also the age group whose access to and familiarity with the Internet is highest. Thus, that age group, it is argued, would be most likely to respond to the opportunity to use remote Internet voting.
For older voters, on the other hand, particularly those with no exposure to computers, Internet voting could actually discourage participation. The Internet usage rate for people 50 and over was about 30 percent in 2000, compared to about 42 percent for the general population. Thus, poll-site Internet voting (if it were the only option) might be discouraging to such voters, as the anecdotal evidence from the pilot voting projects suggests. Remote and kiosk voting would be even less likely to attract such voters.
Even if remote Internet voting did result in increased turnout, many voting experts believe that such an increase would be likely to appear in some voter groups more than others (in particular, those who have Internet- connected computers in their homes). Thus, Internet voting could serve to widen the gap that already exists in the way different socioeconomic groups are represented at the polls. Less privileged groups could be disadvantaged by the new technology.
What Is the Consensus on This Issue?
There is little suggestion that poll-site Internet voting would have a significant effect on accessibility and participation, any more than any other form of voting device. The experience with pilots shows, however, that ease of use issues arise especially for voters unfamiliar with computers and are present even for those who do use computers. Kiosk voting remains a concept only, with no real-world pilots or testing. Therefore, few have commented on the issues of accessibility, ease of use, and participation. The arguments on accessibility and participation all concentrate on remote Internet voting—both those in favor and those against. (Ease of use tends to be discussed only in terms of its effect on convenience-that is, if security requirements are too difficult or too much trouble for voters, the convenience of Internet voting is undermined.) Consensus does not exist on accessibility for those with disabilities. Although remote Internet elections could in theory be made accessible for this group and thus could increase their opportunities to vote, in practice Americans with disabilities are among those groups who have the least access to computers and the Internet.
On the question of voter participation, there is little evidence, and thus consensus, that the availability of remote Internet voting would succeed in bringing substantial increases in voter turnout. However, as there is also little evidence against this proposition, most agree that further study and debate are warranted. Further, whether any increase in participation that resulted from remote Internet voting would benefit the democratic process or only the well-off is likewise in dispute.
Cost Versus Benefits
Before committing to any new technology, jurisdictions faced with multiple competing needs, investment options, and budget constraints will want to assess the technology’s potential cost and benefits.
Assessing Cost and Benefits Requires Estimates of Costs and Understanding of Benefits
The ACE Project partners are the International Foundation for Election Systems, the International Institute for Democracy and Electoral Assistance, and the United Nations Department of Economic and Social Affairs. analysis should be performed. According to the ACE project, the analysis should incorporate the elements described in table 16.
Little of the information needed for an analysis of the kind described in table 16 is currently available for Internet voting of any type. In the absence of such information, most of the Internet voting debate consists of hypotheses concerning possible outcomes and benefits. Arguments have been offered both that Internet voting would save jurisdictions money and that Internet voting would cost more than current elections. Some Internet voting proponents have said that remote Internet voting could have the benefit of increasing voter participation and thus decreasing the cost per voter. They contend that remote Internet voting would permit jurisdictions to save money by using fewer printed ballots, storage facilities, polling places, and poll workers. Others, however, have noted that substantial costs would be incurred in implementing security solutions. One security expert has said that the initial investment for Internet voting will be substantial and not affordable to many jurisdictions.
Because of the different types of Internet voting being proposed (poll site, kiosk, and remote), it is unclear whether introducing Internet voting technology to the electoral process would increase or decrease costs. Some argue that the cost would depend on the voting expenses and equipment the technology replaced. However, most scenarios envision Internet voting to be used concurrently with existing voting methods.
We were unable to acquire information on costs from the jurisdictions involved in the pilots, because in most cases the vendors incurred the costs, not the jurisdictions. We were able to acquire cost data on the DOD absentee ballot pilot project, but DOD warned against equating its cost with that of owning and operating an Internet voting system. Rather, the project was described as a “proof-of-concept research and development project.” DOD reported that the project cost $6.2 million. In the project, 84 electronic ballots were transmitted over the Internet, and 74 were counted (10 were not counted because paper ballots from those voters had already been delivered and deposited in sealed ballot boxes). DOD provided no cost estimates for a final operational system.
Four of five vendors currently providing Internet voting solutions, however, provided us with information on costs for poll-site voting solutions; only one of these vendors provided us with a cost estimate for remote voting.
One Internet vendor estimated that his organization could host a poll- site Internet voting configuration for approximately $300 to $1,500 per day (including 12 computer voting stations with all associated hardware and software); the vendor did not provide any cost estimates for support services. Moreover, the vendor stated that certain variables would affect this cost estimate, such as the length of the election, level of security, and ballot complexity.
Another Internet vendor declined to give a cost estimate because any estimate would depend on a number of variables unique to a jurisdiction, such as its existing technology and networking infrastructure, number of devices required, technical proficiency of in- house staff, and other customer specifications.
Two other vendors provided us with “cost per vote” estimates. One vendor stated that it could provide a poll-site Internet voting solution for approximately $3 per vote. This system would provide 4 Internet voting stations (computers) per precinct, each of which could support 300 voters. Another vendor stated that it could provide poll-site Internet voting for $1.70 per voter and remote Internet voting for 10¢ to 50¢ per voter. This vendor was the only one willing to give a cost estimate for remote Internet voting.
Some of the vendors we spoke with stated that an Internet voting solution could be more cost effective if the costs could be spread out and shared. They proposed that jurisdictions could use computers used for Internet voting for other purposes (e.g., in schools) when they were not being used for election functions. However, some security experts have expressed concerns that this approach would compromise the use of the computers for elections, because they might become infected with malicious software.
What Is the Consensus on This Issue?
We could arrive at no consensus on costs from the information currently available beyond the general recognition that potentially sizable up front infrastructure costs would be incurred. Some experts acknowledge that the Internet and the associated technology are evolving so rapidly that it is difficult to reliably estimate costs at this time. There is likewise no consensus on the suggestion that jurisdictions might mitigate their costs by using equipment acquired for Internet voting for purposes other than elections. Except for DOD’s pilot project, cost information was unavailable for the pilots.
As acknowledged by some experts who have commented on this topic, given that most proposals to use Internet technology for voting in the near term envision poll-site voting, and given that most suggestions for possible cost savings envision remote voting, it appears that Internet technology offers no near-term promise of significant cost savings.
Other Issues
In addition to the major issues we have discussed, a number of other issues have been raised in discussions of Internet voting; however, extensive information for these issues is not available, and so we do not address them in detail. For some, discussion has been largely at the level of speculation. Further, some issues cannot be resolved not only because of the uncertainties about the form of Internet voting, but also because of ongoing rapid changes in information technology.
For example, it has been suggested that election officials would need to find new means of communicating with voters (for instance, sending out sample ballots); providing voter assistance; recruiting and training poll workers; identifying polling places (which would have to have Internet connections); storing and maintaining equipment; and designing ballots, among other processes. The times for elections may be lengthened (to avoid network traffic problems, to allow time for voters to overcome technical difficulties, and to permit Internet voting systems to recover from disruptions such as system failures or denial of service attacks). The Internet Policy Institute also points out that “for Internet voting to gain acceptance, new ways of testing, certifying and developing standards for election systems will have to be explored.”28, 29 Election officials would also have to examine laws concerning elections for their application to Internet voting, and they may find that some need to be changed to allow implementation of such a system. For example, state laws may prescribe certain types of acceptable voting equipment or certain ratios of equipment to voters. Further, election officials might recommend new laws to address the new possibilities for election fraud and improprieties opened up by Internet voting. (Examples of such laws would be prohibitions against buying, stealing, selling, or giving away digital signatures for the purpose of fraudulent voting; hacking voting systems or individual votes; interfering with voting systems by reducing or eliminating access to the system; or invasion of privacy by attacking a ballot or Web site with the intent to examine or change votes).
Report of the National Workshop on Internet Voting, March 2001.
No Internet voting equipment and software standards are currently in place. However, FEC has released for comment a draft of its voting systems standards, which outline some Internet voting standards.
Democratic Party made efforts to increase minority participation, and the election was allowed to proceed.
Some of the issues raised are not unique to Internet voting, but rather are applicable to any kind of electronic, computer-based voting. It is suggested, for example, that the use of computers for voting requires new ways to maintain public confidence in the integrity of the ballot count; traditional confidence measures are not effective for computer-based voting. Trust in electronic voting technology depends on persuading the public to place trust in technical experts. For Internet voting, the trust issue is particularly important, because Internet security threats are significant and well known.
Challenges
Although the nature and significance of the challenges vary somewhat depending on the type of Internet voting in question (poll site, kiosk, or remote), broad application of Internet voting in general faces several formidable social and technological challenges. These challenges were explicitly highlighted and discussed in depth in this chapter. They include providing adequate ballot secrecy and voter privacy safeguards to protect votes from unauthorized disclosure and to protect voters from coercion; providing adequate security measures to ensure that the voting system (including related data and resources) is adequately safeguarded against intentional intrusions and inadvertent errors that could disrupt system performance or compromise votes; providing equal access to all voters, including persons with disabilities, and making the technology easy to use; and ensuring that the technology is a cost-beneficial alternative to existing voting methods, in light of the high technology costs and security requirements, as well as the associated benefits to be derived from such investments. | What GAO Found
Events surrounding the 2000 presidential election raised concerns about the reliability of various types of voting equipment, the role of election officials, the disqualification of absentee ballots, and the accuracy of vote counts and recounts. As a result, public officials and various interest groups have proposed reforms to address perceived shortcomings. This report discusses: (1) voter registration; (2) absentee and early voting; (3) election day administration; and (4) vote counts, certification, and recounts. |
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