[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



                 A CLOSER LOOK: THE INSPECTORS GENERAL
                   ADDRESS WASTE, FRAUD, AND ABUSE IN
                       FEDERAL MANDATORY PROGRAMS

=======================================================================

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

              HEARING HELD IN WASHINGTON, DC, JULY 9, 2003

                               __________

                           Serial No. 108-10

                               __________

           Printed for the use of the Committee on the Budget


  Available on the Internet: http://www.access.gpo.gov/congress/house/
                              house04.html


                                 ______

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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
CHRISTOPHER SHAYS, Connecticut,      JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
GIL GUTKNECHT, Minnesota               Ranking Minority Member
MAC THORNBERRY, Texas                JAMES P. MORAN, Virginia
JIM RYUN, Kansas                     DARLENE HOOLEY, Oregon
PAT TOOMEY, Pennsylvania             TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington             DENNIS MOORE, Kansas
ROB PORTMAN, Ohio                    JOHN LEWIS, Georgia
EDWARD SCHROCK, Virginia             RICHARD E. NEAL, Massachusetts
HENRY E. BROWN, Jr., South Carolina  ROSA DeLAURO, Connecticut
ANDER CRENSHAW, Florida              CHET EDWARDS, Texas
ADAM PUTNAM, Florida                 ROBERT C. SCOTT, Virginia
ROGER WICKER, Mississippi            HAROLD FORD, Tennessee
KENNY HULSHOF, Missouri              LOIS CAPPS, California
THOMAS G. TANCREDO, Colorado         MIKE THOMPSON, California
DAVID VITTER, Louisiana              BRIAN BAIRD, Washington
JO BONNER, Alabama                   JIM COOPER, Tennessee
TRENT FRANKS, Arizona                RAHM EMANUEL, Illinois
SCOTT GARRETT, New Jersey            ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   DENISE MAJETTE, Georgia
THADDEUS McCOTTER, Michigan          RON KIND, Wisconsin
MARIO DIAZ-BALART, Florida
JEB HENSARLING, Texas
GINNY BROWN-WAITE, Florida

                           Professional Staff

                       Rich Meade, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel


                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, July 9, 2003.....................     1
Statement of:
    Hon. Phyllis K. Fong, Inspector General, U.S. Department of 
      Agriculture................................................    59
    Hon. John P. Higgins, Jr., Inspector General, U.S. Department 
      of Education...............................................    73
    Ms. Dara Corrigan, Acting Principal Deputy Inspector General, 
      U.S. Department of Health and Human Services...............    79
    Hon. Kenneth M. Mead, Inspector General, U.S. Department of 
      Transportation.............................................    90
    Leonard E. Burman, Ph.D., Senior Fellow, Urban Institute.....   141
Prepared statement and additional submission of:
    Hon. Jim Nussle a Representative in Congress from the State 
      of Iowa:
        Prepared statement.......................................     3
        Letter from Secretary of Defense, Donald Rumsfeld........     6
    Hon. Joseph E. Schmitz, Inspector General, U.S. Department of 
      Defense....................................................     7
    Hon. Johnnie E. Frazier, Inspector General, U.S. Department 
      of Commerce................................................    11
    Hon. Daniel R. Levinson, Inspector General, U.S. General 
      Services Administration....................................    12
    Hon. Gordon S. Heddell, Inspector General, U.S. Department of 
      Labor......................................................    14
    Hon. Kenneth M. Donohue, Inspector General, U.S. Department 
      of Housing and Urban Development...........................    18
    Hon. Earl E. Devaney, Inspector General, U.S. Department of 
      the Interior...............................................    21
    Hon. Glenn A. Fine, Inspector General, U.S. Department of 
      Justice....................................................    22
    Hon. Hubert T. Bell, Inspector General, U.S. Nuclear 
      Regulatory Commission......................................    28
    Hon. Patrick E. McFarland, Inspector General, U.S. Office of 
      Personnel Management.......................................    29
    Hon. James G. Huse, Jr., Inspector General, U.S. Social 
      Securty Administration.....................................    33
    Hon. Anne M. Sigmund, Acting Inspector General, U.S. 
      Department of State........................................    36
    Hon. Pamela J. Gardiner, Deputy Inspector General for Audit, 
      U.S. Treasury Inspector General for Tax Administration.....    38
    Hon. Everett L. Mosley, Inspector General, U.S. Agency for 
      International Development..................................    49
    Hon. Richard J. Griffin, Inspector General, U.S. Department 
      of Veterans' Affairs.......................................    51
    Ms. Fong:
        Prepared statement.......................................    61
        Response to Ms. DeLauro's question regarding waste, 
          fraud, and abuse in USDA mandatory programs............   124
        Response to Mr. Baird's question regarding food stamp 
          eligibility............................................   127
    Mr. Higgins, Jr..............................................    74
    Ms. Corrigan:
        Prepared statement.......................................    82
        Response to Mr. Baird's question regarding refugees' 
          eligibility for Medicare and SCHIP.....................   128
        Response to Mr. Gutknecht's question regarding the 
          research methods of HHS................................   132
        Response to Ms. Brown-Waite's question regarding 
          Medicare+Choice........................................   136
        Response to Ms. Brown-Waite's question regarding 
          wistleblower protection................................   137
    Mr. Mead:
        Prepared Statement.......................................    93
        Supplement to the testimony..............................    99
    Dr. Burman:
        Prepared statement.......................................   144
        Response to Mr. Wicker's question regarding the IRS......   153
        Response to Mr. Neal's question regarding the Office of 
          Tax Shelter Analysis...................................   156

 
                 A CLOSER LOOK: THE INSPECTORS GENERAL
                     ADDRESS WASTE, FRAUD, ABUSE IN
                       FEDERAL MANDATORY PROGRAMS

                              ----------                              


                        WEDNESDAY, JULY 9, 2003

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:05 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Gutknecht, 
Thornberry, Ryun, Hastings, Schrock, Brown, Putnam, Wicker, 
Bonner, Garrett, Barrett, Diaz-Balart, Hensarling, Brown-Waite, 
Spratt, Moran, Neal, DeLauro, Thompson, Baird, Cooper, Emanuel, 
Davis, Majette, and Kind.
    Chairman Nussle. Good morning. If our guests and staff 
could take seats. This is the full committee hearing that we 
are titling ``A Closer Look: The Inspectors General Address 
Waste, Fraud, and Abuse in the Federal Mandatory Programs.''
    Today we have a number of excellent witnesses to discuss 
this topic. We have the Honorable Phyllis Fong, Inspector 
General of the Department of Agriculture; we have the Honorable 
John Higgins from the Department of Education; we have Dara 
Corrigan, from the Department of Human Services, she is the 
Acting Principal Deputy Inspector General; and the Inspector 
General from the Department of Transportation, Kenneth Mead. We 
welcome all of you to the Budget Committee.
    Let me open the hearing with just a few general remarks. A 
fair description of the Budget Committee, at least one that I 
use with my constituents back home, is that we are the 
architects and to some extent the general contractors of the 
Federal budget. Drafting the budget resolution is possibly akin 
to coming up with a blueprint. There are others who do the 
finishing work and the plastering and the painting and the 
carpentry and the plumbing, but we try and lay it out in a big 
picture format so that the American people can see the 
priorities come to life.
    And in this year's budget resolution we included 
instructions for every committee, both House and Senate, to 
identify waste, fraud, and abuse within their mandatory 
spending programs. It is why this committee joined with the 
leadership, and committee chairmen have publicly announced 
their commitment to ending the tolerance for waste within the 
Federal budget and the Federal Government. It is why a few 
weeks ago we heard from the Comptroller General, who shared 
with us several interesting examples of very substantial waste 
within the government found by the General Accounting Office in 
programs, and gave us some ideas on ways to improve in 
providing additional routine government oversight.
    I am happy to report that several of my fellow chairmen and 
their committees have already responded to the effort that we 
ushered in this year, including the House Veterans' Affairs 
Committee and Government Reform and Oversight. Also, both the 
Energy and Commerce and Ways and Means Committee have had 
waste, fraud, and abuse hearings.
    And, in fact, just--our last vote before we left for the 
Fourth of July recess, in, I believe Title 3 of the Medicare 
Reform and Modernization Bill, we eliminated $33 billion worth 
of waste, fraud, and abuse within the mandatory program of 
Medicare.
    General Walker noted within our last hearing that a 
periodic reexamination and reevaluation of the government's 
activities has never been more important than it is today. Our 
Nation faces long-term fiscal challenges, increased pressure 
from world events, and increased demands from the American 
public for modern organizations and workforces that are 
responsive and agile, accountable and responsible. In other 
words, pressure on our government and its resources is growing, 
and it is continuing to grow. We have a spending deficit. 
Reducing waste in the government has got to be a continuing 
effort and one that we do, not because it makes headlines or 
because it is politically attractive, but because it is our 
job.
    Today's hearing is another step in that process. On June 
23, I sent letters to the Inspectors General of all of the 
major agencies governed by the Chief Financial Officers Act, 
requesting that they submit testimony describing problems 
within their agencies, and today we will hear from four. And I 
thank all of them for being here and sharing their ideas.
    I also want to make a couple of other points. Why are we 
focusing on mandatory spending? The answer is that, as we 
discussed in the last hearing, it is a matter of 55 percent of 
the entire budget comes from mandatory spending. We will during 
the month of July spend a number of hours on the floor haggling 
and arguing and debating over a million here and a million 
there; and, yes, it does add up to real money.
    But if you look at the budget, you can see that the real 
money is in the mandatory as opposed to the discretionary 
programs. And unlike discretionary spending, which is subject 
every year to the appropriations process, and where there is a 
built-in process for review, there is no built-in process for 
review of the mandatory spending initiatives. The spending is 
automatic. It just continues, typically with large annual 
increases in the budget, as you can see from the chart that we 
have up in front of us now.
    Second, there was concern raised at our last hearing that 
we are only going after programs for low income or 
disadvantaged people in our Nation. Obviously that is not the 
case. Medicare, for example, is not a poverty program. Neither 
are veterans benefits or farm programs. Yet, we are looking for 
waste in all of these areas. It is a disservice to our veterans 
and our farmers and our seniors to waste even a penny in these 
programs and not apply it to benefits that are needed in order 
to make ends meet in many instances.
    Let me just make one other observation. I am not the first 
one to say that our tax code is a mess and needs to be 
reformed. And while the tax code is not part of the mandatory 
spending, I believe that it is too complex and unpredictable. 
We have seen wild swings in revenue projections. That is not 
the discussion for today's hearing, but it is clear that our 
tax code, as part of the overall budget blueprint and design, 
needs attention as well.
    So while we may differ on spending concerns and priorities, 
there is not one of us that sits at this hearing today that 
would disagree that a dollar wasted is inappropriate within our 
Federal budget and our Federal Government. I appreciate the 
work of the Inspectors General, because they oftentimes labor 
in absentia and anonymity without having the opportunity often 
for some of their work to get the spotlight and get the 
attention that it needs.
    We are going to try and do that to some extent today. It 
should not end with this hearing. We appreciate the work that 
you do, and we want to have the opportunity to examine some of 
it today. We welcome you.
    [The prepared statement of Mr. Nussle follows:]

  Prepared Statement of Hon. Jim Nussle, a Representative in Congress 
                         From the State of Iowa

    Good Morning. Let me open this hearing with a few general remarks.
    A fair description of the Budget Committee is that we are the 
architects and general contractors of the Federal budget architects in 
drafting the congressional budget resolution, which we often call the 
``blueprint'' for our tax and spending decisions; and general 
contractors in monitoring the spending bills that come through 
Congress, to make sure they conform with the specifications laid out in 
the budget.
    To push the metaphor a step farther, the structure also needs good 
maintenance after it's built. In budgetary terms, we have an obligation 
to make sure that once the spending is approved by Congress that it 
doesn't get wasted; that the taxpayers don't get ripped off by those 
who would cheat the system; and that it isn't intentionally misused by 
the people who handle it.
    That is why this year's budget resolution included instructions for 
every committee both House and Senate to identify waste, fraud, and 
abuse in their mandatory spending programs.
    It is why this committee, joined by House Republican leadership and 
committee chairmen, publicly announced our commitment to ending the 
tolerance for waste.
    It's why, a few weeks ago, we heard from the Comptroller General, 
who shared with us several examples of the substantial waste the 
General Accounting Office has found in government programs, and who 
reminded us of the great importance of improving and maintaining 
routine government oversight.
    I'm happy to report that several of my fellow chairmen and their 
committees have already responded to this effort, including the House 
Veterans' Affairs and Government Reform. Both the Energy and Commerce 
and Ways and Means committees have waste, fraud, and abuse hearings 
scheduled. It is a good start.
    And as General Walker noted at our last hearing, ``Periodic 
reexamination and revaluation of government activities has never been 
more important than it is today. Our Nation faces long-term fiscal 
challenges; increased pressure * * * from world events; and increased 
demands from the American public for modern organizations and 
workforces that are responsive, agile accountable and responsible * * 
*''
    In other words, pressure on our government and its resources is 
growing, and it's going to continue to grow. This effort to get our 
oversight up to speed cannot be a one-time or short-term project.
    Reducing waste in government has got to be a continuing effort. 
And, one that we do, not because it makes headlines, or because it's 
politically attractive, but because it's our job.
    Today's hearing is another step in that process.
    On June 23, I sent letters to the Inspectors General of all the 
major agencies governed by the Chief Financial Officers Act requesting 
that they submit testimony describing problems in their respective 
agencies.
    Today, we will hear from several of them directly. I am happy to 
welcome:
     Phyllis K. Fong, Inspector General, Department of 
Agriculture;
     John P. Higgins Jr., Inspector General, Department of 
Education;
     Dara Corrigan, Acting Principal Deputy Inspector General, 
Department of Health and Human Services;
     Kenneth M. Mead, Inspector General, Department of 
Transportation.
    I thank you all for being here.
    A few other points are worth making or repeating as well.
    First, why are we focusing on mandatory spending? The answer, as we 
discussed at the last hearing, is because it accounts for more than 
half--55 percent, in fact--of our total budget.
    And unlike discretionary spending, which is subject to review every 
year by the Appropriations Committee, mandatory spending has no built-
in process of review. The spending is automatic, it just continues 
typically with a large annual increases in the budget as you can 
clearly see from this chart.
    Second, there was a concern raised at our last hearing that we were 
only going after programs for low income or disadvantaged people. 
Obviously, this is not the case.
    Medicare, for example, is not a poverty program. Neither are 
veterans benefits, or farm programs. Yet we're looking for waste in all 
of these areas.
    Of course, many of the larger mandatory programs are for lower-
income people such as food stamps and Medicaid and the Earned Income 
Tax Credit. But if there's waste in these programs, it means a lot of 
money is not reaching the people it was intended to help. So yes, that 
has to stop.
    Finally, there were a lot of questions at our last hearing 
concerning corporate tax provisions. Some Members wondered why we 
weren't concentrating more on those. And don't get me wrong, I'm not 
the first one to say our tax code is a mess and needs to be reformed. 
The tax code is too complex and too unpredictable as we have seen with 
the wild swings in revenue projections.
    But that discussion is not the purpose of these hearings. Today is 
about furthering the effort to identify and eliminate the billions of 
dollars wasted each year in our Federal mandatory programs.
    And while we all may differ on spending concerns and priorities I'm 
certain that we can all agree that there should be no tolerance for 
waste. Reducing it, and if possible, eliminating it, is a goal we 
should all share.
    I appreciate the work the Inspectors General have already done on 
this matter, and I look forward to hearing your testimony today.
    Thank you.

    Chairman Nussle. And I now ask Mr. Spratt if he has any 
opening comments.
    Mr. Spratt. Thank you, Mr. Chairman.
    I want to echo what our chairman has said, and reemphasize 
once again that Democrats wholeheartedly support efforts to 
eliminate waste, fraud, and abuse. That is why Democratic 
Congresses past and Democratic presidents signed into law 
bipartisan reforms like the Inspector General Reform Act of 
1978 and the Government Performance and Results Act of 1993.
    And that is why we are eager to hear from today's panel of 
IGs about the progress you have made in rooting out waste, 
fraud, and abuse and protecting the Federal FISC and about what 
more can be done in the future.
    I have to say that I am a bit surprised that a major area 
of waste, fraud, and abuse is not within the scope of the panel 
that comes here today. And let me say to the committee that I 
don't think any comprehensive effort to root out waste, fraud, 
and abuse can overlook the elephant in the room; that is, the 
Pentagon with its $400 billion budget.
    Just last January in its report, the General Accounting 
Office, dealing with the Department of Defense, found that 
quote, ``longstanding financial management problems adversely 
affect DOD's ability to control costs, ensure basic 
accountability, anticipate future costs and claims on the 
budget, measure performance, maintain funds control, prevent 
fraud, and address pressing management issues.'' that covers 
just about the whole spectrum of management responsibility.
    And let me say, as someone who worked 2 years for the 
comptroller for the Department of Defense, the problems that 
existed 35 years ago, still exist today, and we absolutely have 
to face up to them if we are in earnest about dealing with 
waste, fraud, and abuse.
    In fact, if you stop the average person on the street, or 
for that matter, the average Congressman and ask him or her 
what would be the instances of waste, fraud, and abuse that 
they would point to, everybody would recall the $600 toilet 
seat cover for the PC-3. Everybody will recall the $200 allen 
wrench, and case after case after case.
    There is no question about it, we can't help but deal with 
this problem, and I think that the panel today is--
conspicuously absent from the panel today is somebody from DOD. 
I know we are just dealing with mandatory spending, but let's 
not forget that half of all discretionary spending gets spent 
by the Pentagon--and some of it not spent well.
    I would also remind the committee again, as the chairman 
did, the waste, fraud, and abuse that exists on the tax side of 
the government's ledger. We need to consider carefully the 
savings that can be realized by reducing legal and illegal tax 
avoidance, by reexamining abusive practices like offshore 
corporate tax shelters and many more.
    We look forward to the testimony today and appreciate the 
fact that the committee called the witness we recommended, Dr. 
Leonard Burman, who will address this particular area of abuse, 
which is enormous. Nevertheless, while noting all of these 
concerns, I want to underscore our support for the whole effort 
of tackling waste, fraud, and abuse in the Federal Government.
    We welcome our witnesses. We are appreciative of the work 
you do as our watchdogs, and we look forward to your testimony.
    Chairman Nussle. Thank you, Mr. Spratt. I would just share 
with you, Mr. Spratt, and the rest of the committee, I received 
a letter in response to a question I asked Secretary Rumsfeld 
at one of our briefings here.
    Recently I complained to him, and again while this is not a 
mandatory program, and the subject of today's hearing, I 
complained to him that we still have not been able to account 
for some of the money in the supplemental funds appropriated as 
a result of the September 11 attacks. And I will provide this 
for the record, but as he responds to me, he says, ``As you 
know, the accounting systems of the Department have long needed 
consolidation and modernization. With respect to supplemental 
appropriations, though, we have initiated several procedures to 
account for all funding received.''
    [The information referred to follows:]

        Letter Submitted for the Record by Mr. Nussle, From the
                 Secretary of Defense, Donald Rumsfeld

                                     Department of Defense,
                                                      July 1, 2003.
    Dear Congressman Nussle: You mentioned in a meeting last month that 
the Department of Defense has been unable to account for some of the 
money in supplemental funds appropriated since September 11, 2001.
    As you know, the accounting systems in the Department have long 
needed consolidation and modernization. With respect to supplemental 
appropriations, though, we have initiated several procedures to account 
for all funding received. Our fiscal year 2003 spending plan to 
Congress will highlight the accounting of these funds. Dr. Dov Zakheim, 
Under Secretary of Defense (Comptroller), is available to brief you and 
your staff in greater detail.
            Sincerely,
                                           Donald Rumsfeld,
                                              Secretary of Defense.

    Chairman Nussle. In other words, they still have not been 
able to account for them. We will have a hearing on this in 
September and delve into this a little bit further. But, again, 
and I will be glad to share this with you and we will continue 
to delve into this, as far as I am concerned, there is no stone 
that should go unturned.
    But, as is the focus today, we want to try and hone in 
slightly on the mandatory side of the ledger. I would just note 
that some of the witnesses had indicated that they have got so 
much that they have in their areas of jurisdiction that they 
wanted just a little bit more time on the shot clock. So we 
have put on 10 minutes on our new shot clock that we have for 
you. I don't know if the rest of you can see it, but the 
members can see our new device. I don't know if that is to try 
and rein us in or not. But we will see how it works.
    At any rate, we would invite our witnesses to go into 
slightly more detail than usual, just because we know this is 
not only complex, but there are a number of stones to turn 
over. I believe that we are going in order.

STATEMENTS SUBMITTED FOR THE RECORD OF HON. JOSEPH E. SCHMITZ, 
INSPECTOR GENERAL, U.S. DEPARTMENT OF DEFENSE; HON. JOHNNIE E. 
 FRAZIER, INSPECTOR GENERAL, U.S. DEPARTMENT OF COMMERCE; HON. 
 DANIEL R. LEVINSON, INSPECTOR GENERAL, U.S. GENERAL SERVICES 
ADMINISTRATION; HON. GORDON S. HEDDELL, INSPECTOR GENERAL, U.S. 
    DEPARTMENT OF LABOR; HON. KENNETH M. DONOHUE, INSPECTOR 
GENERAL, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT; HON. 
  EARL E. DEVANEY, INSPECTOR GENERAL, U.S. DEPARTMENT OF THE 
     INTERIOR; HON. GLENN A. FINE, INSPECTOR GENERAL, U.S. 
DEPARTMENT OF JUSTICE; HON. HUBERT T. BELL, INSPECTOR GENERAL, 
U.S. NUCLEAR REGULATORY COMMISSION; HON. PATRICK E. MC FARLAND, 
 INSPECTOR GENERAL, U.S. OFFICE OF PERSONNEL MANAGEMENT; HON. 
  JAMES G. HUSE, JR., INSPECTOR GENERAL, U.S. SOCIAL SECURITY 
ADMINISTRATION; HON. ANNE M. SIGMUND, ACTING INSPECTOR GENERAL, 
   U.S. DEPARTMENT OF STATE; HON. PAMELA J. GARDINER, DEPUTY 
                  INSPECTOR GENERAL FOR AUDIT,
                                 
  U.S. TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION; HON. 
     EVERETT L. MOSLEY, INSPECTOR GENERAL, U.S. AGENCY FOR 
 INTERNATIONAL DEVELOPMENT; HON. RICHARD J. GRIFFIN, INSPECTOR 
         GENERAL, U.S. DEPARTMENT OF VETERANS AFFAIRS.

    Prepared Statement of Hon. Joseph E. Schmitz, Inspector General,
                       U.S. Department of Defense

    Mr. Chairman and members of the committee: Thank you for the 
opportunity to provide the views of the Office of the Inspector General 
of the Department of Defense (DOD) regarding fraud, waste, and abuse in 
various mandatory spending programs within the DOD, specifically the 
TRICARE and the military retirement pay and survivor benefit programs.

                                TRICARE

                               background
    For fiscal year 2003 Congress appropriated $14.8 billion for the 
Defense Health Program. Of that amount approximately $6.9 billion is 
spent for purchased health care to include pharmacy, TRICARE managed 
care support contracts, and other purchased health care. In addition to 
the Defense Health Program appropriation, DOD estimates that it will 
spend approximately $4.1 billion from the DOD Medicare Eligible Retiree 
Health Care Fund in fiscal year 2003 for recently enacted benefits, 
including $3.3 billion for purchased care.
    TRICARE, formerly known as the Civilian Health and Medical Program 
of the Uniformed Service (CHAMPUS), is a regionally managed health care 
program for active duty and retired military members of the uniformed 
services, their families, and survivors. TRICARE is administered by the 
Assistant Secretary of Defense for Health Affairs and governed by Title 
32 C.F.R. Section 199. TRICARE consolidates the health care resources 
of the Army, Navy, Air Force, and Marine Corps and supplements them 
with networks of civilian healthcare professionals to provide better 
access and high quality service while maintaining the capability to 
support military operations. TRICARE is being implemented throughout 
the United States, Europe, Latin America, and the Pacific as a way to:
      Improve overall access to health care for beneficiaries;
      Provide faster, more convenient access to civilian health 
care;
      Create a more efficient way to receive health care;
      Offer enhanced services, including preventive care;
      Provide choices for health care; and
      Control escalating costs.
    The TRICARE Program serves over 8.6 million beneficiaries. Those 
who are eligible for TRICARE benefits are:
      Active duty members and their families;
      Retirees and their families; and
      Survivors of all uniformed services members who are not 
eligible for Medicare.
            magnitude of health care related investigations
    Since fiscal year 2000, the Defense Criminal Investigative Service 
(DCIS), the criminal investigative arm of the Office of Inspector 
General, has initiated 427 health care related investigations. During 
the same period $45,082,821 in recoveries was returned to TRICARE as a 
result of DCIS investigative efforts, often in concert with other 
investigative agencies. During this period of time health care related 
investigations have comprised approximately 16 percent of the total 
number of investigations initiated by DCIS.

                   NATURE AND HISTORY OF THE PROBLEM

    Since 1981, DCIS has participated in many health care fraud 
investigations, projects and undercover operations within the United 
States and abroad to thwart a myriad of health care related schemes. 
DCIS has established a broadband of cooperation with the TRICARE 
Management Activity and other Federal, State and local law enforcement 
agencies to actively investigate health care related fraud. In many 
locations, our efforts have resulted in the creation of Joint 
Healthcare Fraud Task Forces under the direction of the applicable 
United States Attorney. Our mutual goal is to identify trends, 
programs, processes, providers and individuals who commit acts that are 
conducive to fraud, waste, and abuse in the TRICARE Program and related 
health plans.
    DCIS has identified several significant areas in which TRICARE has 
been victimized. Although some systematic schemes have been curtailed, 
other vulnerable areas of the medical industry still need to be 
pursued.
    A growing concern within the medical industry is the dramatic 
increase in ``harm to patient'' cases. With the development of 
significantly more powerful, highly addictive narcotics, over 
prescription of these drugs by TRICARE providers (or any other doctors) 
could have devastating effects. For example, in February 2002, a 
TRICARE provider was convicted of four counts of manslaughter, five 
counts of drug trafficking, and one count of racketeering, in 
connection with the deaths of five patients, who overdosed on drugs 
that had been prescribed by the provider, who was sentenced to 755 
months incarceration. This case generated a great deal of national 
media attention.
    Another area of concern is corruption and kickbacks within the 
medical arena, which undermine the entire healthcare system and 
jeopardize the health and safety of TRICARE recipients. Corruption, in 
terms of kickbacks, is a serious crime and a major impediment to the 
proper administration of the TRICARE Program. TRICARE has a strict 
prohibition against the payment for patient referrals. For example, a 
$486 million global settlement was reached with a medical corporation 
headquartered in Lexington, MA. The settlement was the result of a 5-
year, multi-agency investigation into allegations that the corporation 
conspired to defraud the United States through the submission of false 
claims and the payment of kickbacks to healthcare providers for the 
payment of patient referrals. This remains an area of interest for 
DCIS.
    TRICARE provider fraud continues to be fertile ground for criminal 
investigators to uncover new systematic ways to commit fraud. Since 
1981 DCIS has opened 869 cases involving provider fraud. Those 
providers that choose to deceive and commit fraud against the DOD will 
continue to be investigated. Recently a medical doctor was sentenced in 
U.S. District Court in Kansas City, KS, to 72 months incarceration and 
36 months of supervised probation upon release. The scheme to defraud 
in that case included subjecting TRICARE patients, and others, to: 
unnecessary surgery; billing for multiple complex surgical procedures 
that could not have performed; and falsifying tests to justify the 
surgeries. The provider was found guilty in a jury trial on 33 counts 
of health care fraud, 7 counts of mail fraud, and three counts of 
perjury.
    A less pronounced area of fraud that has decreased over the years 
is fraud involving active duty military family members, retirees or 
ineligible recipients. Since 1981 DCIS has initiated 180 cases 
involving the aforementioned case categories and represents a fraction 
of the total case inventory. Beneficiary fraud is typically 
investigated by the Military Criminal Investigative Organizations 
(MCIO's), and there is little need for DCIS involvement.

      ACTIONS BEING TAKEN TO ELIMINATE OR REDUCE TRICARE PROBLEMS

    DCIS has historically taken a proactive approach to the detection, 
investigation, and prevention of health care fraud impacting DOD. DCIS 
has aggressively pursued proactive investigative projects and 
undercover operations, and has been an active participant in a number 
of health care fraud task forces as well as the National Healthcare 
Anti-Fraud Association (NHCAA). DCIS participation in these proactive 
efforts has been a major factor in the successful resolution of 
significant health care related investigations impacting the DOD.

                      ADDITIONAL ACTIONS REQUIRED

    Despite returning more than $45 million to TRICARE, DCIS has 
received little additional funding to further its investigations into 
allegations of health care fraud impacting the DOD. While other law 
enforcement organizations have the ability to receive a portion of the 
monetary recoveries resulting from healthcare fraud investigations,\1\ 
including many conducted by DCIS, DCIS has no direct ability to recover 
any of these funds. Were Congress to approve a system of sharing 
investigative recoveries resulting from DCIS investigations with DCIS, 
this Office of Inspector General would be able to more effectively 
participate in ongoing and future efforts to combat fraud, waste, and 
abuse in the TRICARE Program.
---------------------------------------------------------------------------
    \1\ The Health Insurance Portability and Accountability Act of 1996 
(42 USC Sec. 1320a-7c(b), Fraud and abuse control program) provides 
that the ``Inspector General of the Department of Health and Human 
Services is authorized to receive and retain for current use 
reimbursement for the costs of conducting investigations and audits and 
for monitoring compliance plans when such costs are ordered by a court, 
voluntarily agreed to by the payor, or otherwise.''

    Military Retirement Pay and the Survivor Benefits Program (SBP)

                               BACKGROUND

    Military service members who remain on active duty or serve in the 
Reserves or National Guard for a sufficient period of time may retire 
and receive retired pay. Generally, members who remain on active duty 
for 20 or more years are eligible for retirement under Title 10, United 
States Code, Sections 3911 through 3929. The primary survivor benefit 
applicable to survivors of military retirees (and, in some situations, 
active duty members) is the Uniformed Services Survivor Benefit Plan 
(SBP). The SBP is a benefit program authorized under Title 10, United 
States Code, Sections 1447 through 1455. The SBP is designed to make-up 
for retirement income lost by survivors of deceased military retirees 
as a result of the death of the military retiree.
    The Military Retirement Fund has a total liability of $730 billion 
as of September 30, 2002. Of this amount $554 billion is unfunded. For 
the last 5 years the Military Retirement Fund has been audited by and 
has received an unqualified opinion from the public accounting firm of 
Deloitte & Touche, LLP, under the oversight of this Office of Inspector 
General. This unqualified opinion is the only unqualified opinion that 
the Department received during the last fiscal cycle on a major DOD 
financial statement.

    MAGNITUDE OF THE FRAUDULENT RETIREMENT AND SBP PAYMENTS PROBLEM

    In fiscal year 2002, there were approximately 1.6 million military 
retirees and 267,000 individuals receiving survivor benefits. DOD spent 
approximately $35 billion in fiscal year 2002 for benefits to military 
retirees and survivors. Since fiscal year 2000, the DCIS has initiated 
27 cases and recovered approximately $587,495 in total monetary 
recoveries relative to investigations involving allegations of 
fraudulent military retirement and SBP payments. The average alleged 
dollar loss concerning these cases was approximately $31,559. As 
evidenced by the above statistics, the potential impact of fraud in the 
area of military retirement pay and SBP is relatively small and, 
accordingly, investigations into these types of allegations represent a 
very small percentage of the total workload of the DCIS (as measured by 
dollars received).

                   NATURE AND HISTORY OF THE PROBLEM

    The Defense Finance and Accounting Service (DFAS) administers 
retired military pay, including payments under the SBP. As a part of 
the process of making such payments, DFAS requires that retirees or 
their survivors complete a Certificate of Eligibility (COE) in order to 
continue to receive annuity payments without interruption. According to 
the DFAS guide to survivor benefits, dated November 2002, a COE is sent 
to annuitants each year prior to their birthday. If the COE is not 
returned within 90 days, the account will be suspended.
    Since 1994, auditors from this Office of Inspector General and DCIS 
Special Agents have supported Operation Mongoose, an internal control 
initiative of the then Deputy Secretary of Defense involving the use of 
computer matching techniques to detect fraud in DOD financial systems, 
including the area of military retiree pay and the SBP. This initiative 
uses the combined efforts of the DFAS, the Defense Manpower Data 
Center, and this Office of Inspector General to develop fraud 
indicators that can be used to spot discrepancies among various 
automated systems. For example, Operation Mongoose compared active 
military retiree pay and SBP annuitant accounts to death indices 
maintained by the U.S. Social Security Administration (SSA). The 
comparison of these two automated systems identified numerous instances 
of potential fraudulent payments and resulted in several DCIS case 
initiations.
    Some cases initiated as a result of this proactive initiative have 
successfully uncovered large scale criminal activity and resulted in 
significant criminal prosecutions. For example, an investigation was 
initiated based on allegations that a military retiree had continued to 
receive full retirement benefits for 12 years after his death on 
January 17, 1987, totaling $186,866. Investigation disclosed that the 
retiree's daughter continued to receive the full military retirement 
payment, which was electronically transferred to a joint bank account 
held by the retiree and his daughter. No death notifications were ever 
provided to DFAS and the retiree's daughter never removed the retiree's 
name from the account after his death.
    Another investigation was initiated based upon allegations that a 
military retiree continued to receive his full retirement benefit for 
many years after his death in March 1990. The investigation determined 
that DFAS paid the deceased retiree approximately $100,509 after his 
death. It was later determined that the retiree's daughter had received 
the payments knowing that she was not entitled to them and she 
subsequently pleaded guilty and was ordered to pay $100,509 in 
restitution to the U.S. Government.
    However, more often than not, these investigations involve 
relatively small dollar amounts. Cases initiated between October 1, 
1997, and the present involved an average alleged loss of approximately 
$32,877. Most of these investigations (85 percent) failed to undercover 
sufficient evidence of criminal intent to warrant prosecution and many 
were ultimately settled administratively based on publicly available 
information. For example, an investigation was initiated based on 
information received from Operation Mongoose that indicated a retiree 
had continued to receive full retirement benefits for several months 
after his death in February 1997. A Certificate of Eligibility was sent 
to the last known address of the retiree after his death. Information 
subsequently obtained from the U.S. Department of Treasury revealed 
that the checks that had been mailed to the retiree's last known 
address had never been cashed. The Military Retirement Trust Fund was 
subsequently credited for the amount of the unnegotiated Treasury 
checks and the investigation was closed.
    While DFAS requires that a COE be completed and returned annually 
by annuitants who are receiving military retirement or SBP payments, 
anecdotal evidence uncovered during the course of DCIS investigations 
suggests that this process does not effectively prevent erroneous or 
fraudulent payments from being made. For example, an investigation was 
initiated based upon information received through Operation Mongoose 
indicating that the spouse of a military retiree had continued to 
receive payments under the SBP for more than a year after the spouse's 
death in February 1998. The payments were suspended for several months 
in 1998 after the spouse failed to return a COE. However, the payments 
were resumed when a COE was received that ostensibly had been signed by 
the deceased retiree's SBP annuitant. The investigation ultimately 
disclosed that the annuitant's son had forged the COE causing DFAS to 
fraudulently pay an additional $20,096 in benefits that would not have 
otherwise been paid. This case example is illustrative of a basic flaw 
in the system that fails to require a positive identification by 
military retirees and SBP annuitants such as a signature guarantee 
similar to that which is required by many private financial entities 
before executing a routine financial transaction relative to a 
customer's account.

       ACTIONS BEING TAKEN TO ELIMINATE OR REDUCE THESE PROBLEMS

    The DCIS continues to maintain effective liaison with Operation 
Mongoose. Additionally, DCIS continues to investigate allegations of 
significant fraud in the area of retiree pay and SBP annuities. 
However, consistent with the DOD's emphasis on the international war on 
terror, the DCIS has dedicated significant resources to the prevention, 
detection, and prosecution of terrorism-related matters impacting the 
DOD. Consequently, fewer investigative resources are now available to 
devote to the investigation of criminal conduct with a relatively low 
monetary impact, such as fraudulent retirement and SBP payments.

                      ADDITIONAL ACTIONS REQUIRED

    Although DFAS regulations require that a COE be completed annually, 
there are numerous examples in the DCIS case inventory where payments 
were made for years without the completion of the required COE. 
Additionally, when COEs were sent to annuitants, there was nothing to 
prevent an unauthorized person from forging the annuitant's signature, 
mailing it in, and continuing to receive payments under false 
pretenses. A statutory requirement that COEs must be completed annually 
in order to receive benefits would carry more weight than DFAS' current 
administrative requirement and might ensure that such certifications 
are accomplished. Additionally, requiring some form of positive 
identification, such as a signature guarantee, relative to the 
execution of COEs would likely reduce the number of forged COEs that 
result in fraudulent payments being made.
    Additionally, retiree military identification cards are presently 
issued without an expiration date. Issuing retirees military 
identification cards with expiration dates would require retirees to 
positively confirm their status on a periodic basis and serve as a 
secondary control to ensure that payments do not continue for years 
beyond a retiree's death.

      DCIS STAFFING LEVELS AND POST SEPTEMBER 11, 2001 COMMITMENTS

    After the events of September 11, 2001, the mission of the DCIS, 
like most Federal law enforcement agencies, changed radically. In 
response to those events, DCIS modified its operational goals and 
objectives to be consistent with those of the department by 
establishing anti-terrorism efforts as a top priority. Pursuant to a 
post-9/11 ``memorandum of understanding'' with the Federal Bureau of 
Investigation, DCIS has 39 agents assigned full-time and an additional 
51 agents assigned part-time to 66 Joint Terrorism Task Forces (JTTF) 
throughout the country. The realigning of priorities has coincided with 
an approximate 17 percent decline in authorized and on-board agent 
staffing levels. Increased responsibilities combined with a significant 
decrease in available resources have had a profound impact DCIS 
operations and our ability to conduct investigations into allegations 
of fraudulent conduct within the DOD. In order for DCIS to resume its 
pre-9/11 level of involvement in the detection, investigation, 
prosecution, and prevention of fraudulent activity impacting the DOD, 
it is critical that the Congress provide the necessary funding to 
support additional full-time equivalent positions for the DCIS.

                               CONCLUSION

    In conclusion, I would like to thank the chairman and the members 
of this committee for the opportunity to present this testimony here 
today. Notwithstanding the increased demand on the limited resources 
available to this Office of Inspector General, we have continued to 
enjoy a high level of success relative to important issues affecting 
the Department. Fraud, waste, and abuse continue to pose significant 
threats to the readiness and capabilities of the DOD, and we remain 
committed to the detection, investigation, and prevention of any matter 
posing such significant threats to the Department.

   Prepared Statement by Hon. Johnnie E. Frazier, Inspector General,
                      U.S. Department of Commerce

    Mr. Chairman and members of the committee, I appreciate the 
opportunity to provide the following information about the Department 
of Commerce's mandatory spending programs.
    The Department of Commerce's annual budget authority is in excess 
of $5 billion; mandatory spending programs represent less than 2 
percent of that total. The schedule below summarizes the Department's 
mandatory and discretionary budget authority for the past 3 fiscal 
years.

                                   DEPARTMENT OF COMMERCE BUDGETARY AUTHORITY
                                            [In thousands of dollars]
----------------------------------------------------------------------------------------------------------------
                      Fiscal year                             Mandatory           Discretionary         Total
----------------------------------------------------------------------------------------------------------------
2000..................................................        $80,397 (0.9%)    $8,672,943 (99.1%)    $8,753,340
2001..................................................        $75,900 (1.5%)    $5,098,304 (98.5%)    $5,174,204
2002..................................................       $104,861 (1.9%)    $5,441,015 (98.1%)    $5,545,876
----------------------------------------------------------------------------------------------------------------


    Following is a list of the audit work we have conducted during 
those years that is related to the Department's mandatory spending 
programs:

                      FINANCIAL STATEMENTS AUDITS

     Fiscal year 2000 Department of Commerce Consolidated 
Financial Statements Audit (Report No. FSD-12849-1, 3/01).
     Fiscal year 2000 National Oceanic and Atmospheric 
Administration Financial Statements Audit (Report No. FSD-12855-2, 3/
01).
     Fiscal year 2000 Bureau of the Census Financial Statements 
Audit (Report No. FSD-12850-2, 3/01).
     Fiscal year 2001 Department of Commerce Consolidated 
Financial Statements Audit (Report No. FSD-14474-2, 2/02).
     Fiscal year 2001 National Oceanic and Atmospheric 
Administration Financial Statements Audit (Report No. FSD-14475-2, 2/
02),
     Fiscal year 2001 Bureau of the Census Financial Statements 
Audit (Report No. FSD-14473-2, 2/02).
     Fiscal year 2002 Department of Commerce Consolidated 
Financial Statements Audit (Report No. FSD-15214-2, 1/03).

                              OTHER AUDITS

     Departmental Fund Management Practices Need Improvement 
Audit (Report No. FSD-14271, 9/01).

    No problems specific to any of the Department's mandatory spending 
programs were detected in this audit work.
    This concludes my written statement. If you need additional 
information, please do not hesitate to contact me.

   Prepared Statement of Hon. Daniel R. Levinson, Inspector General,
                  U.S. General Services Administration

    Dear Mr. Chairman, thank you for the opportunity to provide to the 
committee information regarding the nature and scope of waste, fraud, 
and abuse within programs and operations of the General Services 
Administration (GSA). As further requested, I will also discuss actions 
taken to eliminate or reduce these problems.
    For clarification, GSA does not have major mandatory spending 
programs.\1\ Instead, GSA is principally a service organization whose 
mission is to help Federal agencies by arranging for the acquisition of 
goods, services and facilities they need to carry out their own unique 
program missions. Agency operations are underwritten from the fees 
received from customer agencies supplemented by small amounts of 
appropriated funds covering some administrative and staff costs.
---------------------------------------------------------------------------
    \1\ Under Public Law 107-252, The Help America Vote Act of 2002, 
GSA was designated responsibility for disbursing $650 million to the 
States, District of Columbia, and the Territories to implement various 
improvements to the Federal election process, including the replacement 
of voting equipment. As of July 7, 2003, GSA had disbursed $649.5 
million. The Act establishes the Elections Assistance Commission to 
carry out other provisions under the act and make further 
disbursements.
---------------------------------------------------------------------------
                   THE GSA ORGANIZATION AND PROGRAMS

    I believe it is useful to the understanding of the issues to first 
explain the nature and size of GSA's major programs.
    Federal Supply Service. The Federal Supply Service (FSS) has more 
than 10,000 commercial suppliers under contract ready to provide 
Federal customers any one of over 4 million products and services when 
needed. In 2002, this contract program generated over $21 billion in 
sales. In addition, FSS also manages a $1 billion supply activity which 
stocks items critical to national defense, natural disasters and other 
strategic purposes as well as managing a 188,000 vehicle fleet which 
last year experienced business volumes of over $2 billion.
    Federal Technology Service. The Federal Technology Service provides 
telecommunications services, information technology and information 
security services to Federal agencies on a fee for service basis. 
Revenues for fiscal year 2002 were: (1) Telecommunications Networks--
$950 million; and (2) Technology Equipment, Services and Management--$6 
billion.
    Public Buildings Service. The Public Buildings Service (PBS) 
provides workspace for 1.1 million Federal employees housed in over 
8,000 owned and leased facilities nationwide. PBS is responsible for 
construction, repairs and alterations, lease acquisitions, buildings 
operations and real property disposal. In fiscal year 2002, PBS 
collected fees in excess of $7.6 billion from its customers and paid 
contractors over $6.8 billion to provide the goods, services and 
facilities needed to meet its customers' housing needs.
    As one can see from the above descriptions, GSA is very much akin 
to a large commercial enterprise. Its $40 billion in business activity 
involving more than 15,000 commercial firms and their employees, all 
managed by 12,000 Federal employees, creates an environment that 
understandably has inherent risks to waste, fraud, and abuse. That fact 
is evidenced by data reported by our office in our Semiannual Reports 
to the Congress for fiscal year 2002 and the first half of 2003:
     Criminal indictments and information--63;
     New cases accepted for criminal prosecution--72;
     New cases accepted for civil action--23;
     Individuals/contractors suspended or debarred from 
competing for additional government contracts--72;
     Administrative actions taken against employees--55;
     Fines, settlements and restitutions--$10.3 million;
     Funds or property recovered--$2.2 million;
     Management decisions on audit recommendations that funds 
be put to better use, or questioned costs--$292 million.
    We, along with GSA management, are committed to taking measures to 
continue to address waste, fraud, and abuse in agency operations and 
reduce the amount of dollars lost. I would like to highlight for the 
committee a few of the key efforts underway to address problem areas.

                       THE MANAGEMENT CHALLENGES

    Each year, our office prepares for GSA management officials and the 
Congress an assessment of the major challenges facing the agency and 
what efforts have been taken to address them. Four of these challenges 
are especially relevant to this discussion:
    Management controls. The establishment of sound internal controls. 
In recent years, the agency has moved to streamline procedures and 
controls. These new processes make it essential that the few broad 
controls in place are consistently followed. Failure to do so is 
costly. For example, employees in one program directed contractors to 
provide additional services to client agencies. The orders were verbal 
and unrecorded in either the administrative or financial records. The 
failure to complete the control documents resulted in GSA having to pay 
$1.9 million to the contractors with no means to obtain repayment from 
the customer agencies.
    Procurement activities. With acquisition services being at the 
heart of GSA's business activities, weaknesses in procurement planning, 
negotiation or contract administration can have serious consequences; 
some brief examples from our work follow:
     A poorly crafted selection plan led to the selection of a 
marginally suitable contractor. Project delays occurred soon after, 
work became disorganized and costs started to rise because of delays 
and rework.
     Contracting officers creating contracts available for all 
agencies to use did not avail themselves of all the resources they 
could to establish the best prices, resulting in Federal customers 
paying for some items 5, 10 percent or more than their commercial 
peers.
     Personnel responsible for providing oversight of 
contractors' work did not require milestones or other means to assess 
project progress. Only months later it was learned that work was behind 
schedule and way over budget.
     A contractor hired as a construction project executive and 
another contractor engaged to provide quality assurance services for a 
GSA project were investigated and prosecuted for accepting over $80,000 
in bribes from a prospective firm seeking a multimillion dollar 
subcontract related to a Federal construction project.
     A contract manager whose performance evaluation was 
heavily weighted toward developing new business, awarded work to 
existing contractors who did not have suitable experience to meet the 
new requirement. The projects incurred at least $3 million in excess 
costs.
    Human capital issues. GSA, like other agencies, is losing its 
corporate knowledge base and most experienced personnel to retirement 
and at the same time has a shortage of personnel with skills necessary 
to function in the 21st century business environment. In several cases, 
personnel without the appropriate training or requisite skills have 
been given responsibilities well beyond their abilities to handle them. 
For example:
     A project manager placed a work order under the wrong type 
of contract causing the government to pay $288,000 for tasks that could 
have been obtained for less than $60,000 under a more suitable 
contract.
     An inexperienced contracting official agreed to a 
contractor's request for reimbursement of several administrative and 
general expenses associated with an existing contract. Subsequent 
evaluation found these costs were already considered in establishing 
the prices for the basic contract.
    Aging Federal buildings. More than half of GSA's Government-owned 
buildings are over 50 years old, and it is estimated that it would take 
several billion dollars in renovations to bring the inventory up to 
building standards. Older buildings are energy inefficient and lack the 
physical infrastructure necessary to support modern business 
operations. Without necessary funds to modernize, these marginal spaces 
often are underutilized or vacant and, they are excessively costly to 
operate and produce little or no revenue.

                             OTHER MEASURES

    In addition to our office's mission and programs aimed at 
eliminating waste, fraud, and abuse, GSA management works with us to 
enhance controls and exercise oversight to discourage wrongdoing and 
reduce errors. Our office, along with the agency's most senior leaders, 
comprise the Management Control and Oversight Council responsible for 
meeting the requirements of the Federal Managers' Financial Integrity 
Act and more recently used as a forum to discuss issues raised by the 
Office of Inspector General, the General Accounting Office, our public 
accountant and other evaluators. The Council, more importantly, designs 
corrective action plans and oversees implementation plans to help the 
agency move forward.
    I trust this presentation has been useful to the committee. We 
would be pleased to discuss more fully any of the issues raised or 
respond to any questions members of the committee may have. If I may be 
of personal service, please feel free to contact me.

 Prepared Statement of Hon. Gordon S. Heddell, Inspector General, U.S. 
                          Department of Labor

     Office of Inspector General, U.S. Department of Labor,
                                                      July 8, 2003.
    Dear Mr. Chairman: Thank you for the opportunity to submit 
information for the hearing record on waste, fraud, and abuse in the 
Department of Labor's (DOL) mandatory programs. Enclosed is information 
that we believe will be useful to the committee as it reviews mandatory 
programs in the Federal Government. We formatted the information to 
respond to the questions contained in your invitation letter. We focus 
on three mandatory programs under the DOL's jurisdiction: 1) the 
Unemployment Insurance (Ul) Program; 2) the Black Lung Disability Trust 
Fund; and 3) H-1B Technical Skills Training Grants. Our work in all 
three programs over the years has found instances of fraud, waste, or 
abuse.
    Of particular concern are the overpayments that are projected in 
the Ul Program due partly to claimants who failed to report earnings or 
other fraud-related schemes. In fiscal year 2002 alone, the Department 
of Labor projected that $3.4 billion in Ul benefits were overpaid. In 
addition, we have noted for the past 15 years that the Internal Revenue 
Service has overcharged the Unemployment Trust Fund, which funds the 
benefits paid to the unemployed, to administer the fund. An OIG audit 
estimated that the IRS overcharged the fund $174 million between fiscal 
years 1999-2002.
    I appreciate your interest in the work of the DIG. If you or your 
staff have any questions on this or any other matter, please do not 
hesitate to contact me.
            Sincerely,
                                         Gordon S. Heddell,
                       Inspector General, U.S. Department of Labor.

                     UNEMPLOYMENT INSURANCE PROGRAM

    The Unemployment Insurance (UI) Program is the Department of 
Labor's largest income maintenance program. This multibillion dollar 
program provides income maintenance to individuals who have lost their 
jobs through no fault of their own. While the framework of the program 
is determined by Federal law, the benefits for individuals are 
dependent on State law and are administered by State workforce agencies 
in 53 jurisdictions covering the 50 States, the District of Columbia, 
Puerto Rico, and the U.S. Virgin Islands, under the oversight of the 
Department of Labor.
    1. A current estimate of the magnitude (in dollars) of waste, 
fraud, and abuse within the Department's mandatory programs:
     In fiscal year 2001, the States identified and reported 
$699 million in actual UI overpayments. Of this amount, the largest 
single cause ($227 million or about 32 percent) of detected 
overpayments was unreported claimant earnings. Other causes for 
overpayments include a variety of eligibility reasons such as, failing 
to do a work search, being terminated by an employer for a reason that 
does not qualify for UI, and not qualifying for the benefit amount 
received because of insufficient base period wages. For fiscal year 
2002, the States identified $908 million in overpayments.
     The Employment and Training Administration's (ETA's) 
Benefit Accuracy Measurement (BAM) system projected claimant 
overpayments at $2.45 billion in fiscal year 2001 and $3.4 billion in 
fiscal year 2002. Of the fiscal year 2001 projected amount, ETA 
estimated fraud related overpayments to be $580 million while non-fraud 
overpayments were estimated at $1.865 billion.
     For the 1 year period ending June 3, 2003, OIG 
investigations involving the UI Program have resulted in 68 
indictments, 58, convictions, and $5.3 million in monetary results.

    2. The general nature of these problems and how long they have 
persisted:
     According to ETA's projections, for fiscal year 2001, 
fraud made up about 25 percent of the projected overpayments. Fraud was 
perpetrated through fictitious employer schemes, internal embezzlement, 
and false claims established through identity theft.
     The balance of overpayments, about 75 percent, is 
considered non-fraud overpayments. Such overpayments can occur when a 
State establishes and pays a claim, only to later discover that the 
claimant was not eligible for other reasons. Non-fraud overpayments can 
also occur when a claimant's earnings for a claimed week of 
unemployment exceed State law minimum.
     ETA has projected unemployment benefit overpayments since 
1987. Despite ETA's quality control program, including BAM, the UI 
overpayment rate has remained steady at between 8 and 9 percent for the 
past 12 years.
     From an investigative perspective, based on recent 
casework, the OIG is concerned about organized crime fraud activity in 
the UI Program. We have conducted several investigations that 
illustrate exploitation by organized crime groups of the UI Program 
through the use of theft.

    3. Illustrative examples of these problems:
     In addition to instances of millions of dollars of 
overpayments resulting from unreported claimant earnings and a variety 
of eligibility issues, the OIG continues to investigate fraud within 
the UI Program. Some recent examples include:
     A Washington State man was sentenced and ordered to pay 
nearly $700,000 in restitution in connection with UI fictitious 
employer, private insurance, and credit card schemes he orchestrated 
for more than 10 years. The investigation revealed that he orchestrated 
these schemes using multiple identities and fraudulently obtained 
Social Security numbers. He set up multiple fictitious businesses in 
Washington State and submitted false quarterly wage reports, enabling 
him to draw more than $100,000 in UI benefits.
     A New Jersey man who used fictitious companies to file 
false UI applications was sentenced and ordered to pay back more than 
$320,000 he fraudulently obtained from the New Jersey UI Program.
     A California man filed more than 30 fraudulent UI claims 
totaling $130,000 using identities of Los Angeles City and County 
employees stolen from a credit union.
     Thirteen members of a Mexican non-traditional organized 
crime group were indicted on charges of conspiracy, mail fraud, 
identity theft, and money laundering in connection with more than $10 
million in fraudulent UI claims. The investigation revealed that they 
defrauded the California, Washington, Nevada, and Arizona Unemployment 
Insurance Programs through the use of at least 3,000 stolen identities 
obtained from payroll servicing companies.
     Six members of a Mexican family living in California were 
indicted on charges of conspiracy, mail fraud, identity theft, and 
money laundering for defrauding the State of California UI Program. The 
investigation revealed that the family, which constituted a criminal 
group, opened approximately 100 mailboxes and established several 
business bank accounts to allegedly launder over $3 million dollars 
obtained from fraudulent UI checks.

    4. What actions are being taken to eliminate or reduce these 
problems:
     In 1987, ETA implemented a quality control program to 
address Federal regulations (20 CFR 602.1) that directs the UI system 
to implement a quality control program. A key component of this program 
was the BAM system.
     ETA increased the priority of preventing and detecting UI 
overpayments by establishing a Government Performance and Results Act 
overpayment measure.
     As stated in question two, ETA has projected unemployment 
benefit overpayments since 1987. Despite ETA's quality control program, 
including BAM, the UI overpayment rate has remained steady at between 8 
and 9 percent for the past 12 years.
     ETA issued an UI Program letter offering States grants to 
enhance their State's connectivity to the State directory of new hires. 
The new hire database with current employment information can detect 
``unreported earnings'' overpayments by matching the paid claims list 
to the database. Such a cross match can detect unreported earnings far 
quicker than traditional cross match methods which rely on employer 
quarterly wage reports.
     Most recently, the Department announced on July 2, 2003, 
that it awarded $4.8 million in grants to help 41 State workforce 
agencies implement or enhance systems to prevent and detect fraudulent 
payments of unemployment insurance benefits. One of the systems will 
allow State agencies to cross-match UI benefit claims against the State 
new hire reports; the other system allows electronic data exchange 
between State UI agencies and the Social Security Administration to 
help prevent identity theft by individuals filing UI claims.
     The OIG currently is auditing BAM to determine how well it 
projects overpayments and whether it can be used to point the way to 
program improvements.
     The OIG periodically sponsors fraud awareness seminars for 
State UTF Program directors and staff to make them aware of fraud 
problems within the UTF.

    5. What additional actions, either administrative or legislative in 
nature, are required:
     Past GAO and OIG audit reports have acknowledged the 
potential benefits of new hire data in UI overpayment detection. Most--
but not all--States are using their respective State new hire 
directories. However, the State directories alone do not afford the 
States access to nationwide data. Moreover, legislative restrictions 
currently bar States' access to the national directory of new hires 
maintained by the Department of Health and Human Services. Through 
connectivity to the national directory, the States could establish 
cross match procedures that detect overpayments early, thus preventing 
future overpayments on the same claim and increasing the likelihood of 
recovery.

              UNEMPLOYMENT TRUST FUND ADMINISTRATIVE COSTS

    1. A current estimate of the magnitude (in dollars) of waste, 
fraud, and abuse within the Department's mandatory programs:
     Another cause of continuing waste affecting the 
Unemployment Trust Fund (UTF) is the overcharging of the trust fund for 
costs incurred by the Internal Revenue Service (IRS) in collecting and 
processing employers' unemployment taxes.
     The OIG's March 2003 report estimated that overcharges to 
the UTF amounted to $174 million for fiscal years 1999-2002. This 
occurred because IRS did not have a cost accounting system to equitably 
recover its costs.

    2. The general nature of these problems and how long they have 
persisted:
     The OIG first reported this problem 15 years ago. In 
addition, in 1999, the OIG reported that the IRS did not have a cost 
accounting system to capture actual UTF-related costs and had 
overcharged the UTF in fiscal years 1996-98. While the IRS returned 
these overcharges to the UTF, ETA was unable to get the IRS to resolve 
the issues regarding its UTF charging process.
     The OIG recently completed a follow up audit of the IRS's 
process for identifying administrative costs charged to the UTF. We 
found that for fiscal years 1999-2002, the IRS did not have adequate 
support for these costs. In addition the Treasury Inspector General for 
Tax Administration (TIGTA) recently issued an audit report, which found 
that Treasury could not support the expenses charged to the UTF. The 
Treasury agreed with TIGTA's recommendations.

    3. Illustrative examples of these problems:
     Using fiscal years 1999-2002 as an example of IRS 
overcharges to the UTF, our March 2003 audit report disclosed that the 
IRS had charged the trust fund almost $300 million without adequate 
support. Using an alternative methodology based on percent-of-revenue-
received; we estimated the amount charged should have been $126 
million.

    4. What actions are being taken to eliminate or reduce these 
problems:
     The IRS recently proposed an alternative cost recovery 
methodology. We raised questions with one aspect of this methodology, 
and we recommended that ETA work with the IRS to address this issue and 
adopt an acceptable methodology. Using the IRS's proposed methodology, 
the IRS would have charged only $126 million rather than the nearly 
$300 million it actually charged.

    5. What additional actions, either administrative or legislative in 
nature, are required:
     We continue to recommend ETA negotiate with the IRS to 
adopt an acceptable alternative methodology for charging the UTF for 
the allocable administrative costs, and enter into a Memorandum of 
Agreement to ensure consistent application of the agreed upon 
methodology.
    IRS should also reimburse the UTF $118 million ($174 million minus 
$56 million already recovered) in overcharges. ETA and IRS are holding 
discussions to develop a mutually acceptable methodology.

                    BLACK LUNG DISABILITY TRUST FUND

    The Black Lung Disability Trust Fund (BLDTF) provides benefit 
payments to eligible coal miners disabled by pneumoconiosis when no 
responsible mine operator can be assigned liability. These benefits, 
along with administrative and other costs, are chiefly financed by 
excise taxes from the sale of coal by mine operators.

    1. A current estimate of the magnitude (in dollars) of waste, 
fraud, and abuse within the Department's mandatory programs:
     Outstanding advances to the BLDTF totaled $7.7 billion at 
the close of fiscal year 2002, up from $5 billion at the end of fiscal 
year 1996. Of the $7.7 billion in cumulative advances as of the end of 
fiscal year 2002, only $2 billion had been spent for benefit payments, 
with the remaining $5.7 billion used to pay interest on past advances. 
The BLDTF continues to be unable to repay any principal on these 
advances, and it must borrow to pay the interest.
     For the 1-year period ending June 3, 2003, OIG 
investigations involving the Black Lung Program have resulted in 4 
indictments, 3 convictions, and $7.1 million in monetary results.

    2. The general nature of these problems and how long they have 
persisted:
     The OIG first reported on the chronic insufficiency of 
trust fund revenues in our March 1997 semiannual report.
     The Black Lung Benefits Revenue Act provides for repayable 
advances to the BLDTF from the U.S. Treasury when trust fund resources 
are inadequate to meet obligations, as continues to be the case. 
Currently, coal excise taxes are sufficient to pay benefits and 
administrative costs; however, the fund must continue to borrow from 
the Treasury to pay the interest due on past advances. The Omnibus 
Budget Reconciliation Act of 1987 significantly reduces coal excise 
taxes after the year 2013, exacerbating the deficit. The Department's 
projections through September 30, 2040, indicate that, when the payment 
of interest on advances is taken into account, the trust fund will 
experience a negative cash flow--necessitating more borrowing--in each 
of the next 38 years, culminating in a projected $49.3 billion deficit 
by the end of fiscal year 2040.
     From an investigative perspective, our investigations have 
shown that a problem exists with the fraudulent conversion of deceased 
claimants' black lung payments by family members and friends. Our 
investigations have also demonstrated that the Black Lung Program is 
susceptible to fraud by doctors and other medical providers.

    3. Illustrative examples of these problems:
     In addition to the outstanding advances and mounting debt 
to the BLDTF, the following are examples of fraud against the program:
     A Virginia doctor, who was a provider to the Federal Black 
Lung Program, was sentenced to nearly 6 years in jail and fined $42,700 
after being found guilty of 427 counts of dispensing narcotics, 
including Oxycontin, without a legitimate medical purpose. A joint 
investigation revealed that the doctor was unnecessarily dispensing 
prescription narcotics to Black Lung claimants. This investigation is 
part of a larger probe into medical provider fraud in rural Virginia.
     In another case, two physicians were sentenced for 
defrauding the Black Lung Program of over $1.5 million and were ordered 
to jointly pay $2 million in restitution. The investigation found that 
the doctors billed and received payment from the Black Lung Program for 
excessive office visits and unnecessary medical treatments and 
supplies.

    4. What actions are being taken to eliminate or reduce these 
problems:
     The OIG continues to investigate fraud within the Black 
Lung Program. Our work has led to the Black Lung Program saving at 
least $4 million through our investigations of medical suppliers' 
inflated billing of an oxygen supplying device. Medicare paid only a 
fraction of the cost for the same devise. When the OIG brought this to 
the Black Lung Program's attention, the program immediately instituted 
a new purchasing policy, which resulted in the savings.

    5. What additional actions, of either an administrative or 
legislative nature, are required:
     Restructuring the BLDTF debt could address the mounting 
debt caused by the large interest bearing repayable advances received 
from the U.S. Treasury. The Department's 2004 budget justification 
States that the administration will propose legislation to (1) 
authorize a restructuring of the BLDTF debt, (2) extend, at the current 
rate, BLDTF excise taxes set to expire in January 2014, and (3) provide 
a one-time $2.3 billion appropriation to compensate the General Fund of 
the Treasury for forgone interest payments.

                 H-1B TECHNICAL SKILLS TRAINING GRANTS

    The American Competitiveness and Workforce Improvement Act of 1998 
was passed to help employed and unemployed U.S. workers acquire 
technical skills for occupations that are in demand and being filled by 
H-1B visa holders. DOL awards competitive H-1B Skills Training grants 
for this purpose.

    1. A current estimate of the magnitude (in dollars) of waste, 
fraud, and abuse within the Department's mandatory program:
     In fiscal year 2002, DOL awarded 38 H-1B grants totaling 
approximately $101 million. In fiscal year 2003, DOL's budget authority 
for Technical Skills Training grants is $97.6 million. In 2002, the OIG 
reported on audits of six of H-1B skills training grants totaling $15.4 
million. We found that the value of the grants we audited in achieving 
the legislative purpose--training in H-1B demand occupations--was 
questionable. None of the participants in two of the grants obtained 
employment or upgrades in occupations for which they were trained. Two 
other grantees did not track placements, and therefore employment 
outcomes were unknown. Further, just three of the six grantees 
demonstrated that their projects could continue to operate after the 
current grants ended, a requirement of the grants.

    2. The general nature of these problems and how long they have 
persisted:
     Our last audit covered grants through calendar year 2000. 
In this audit, we found that training provided by the grants was not 
related to H-1B occupations and training either did not result in 
target employment or the employment outcomes were not measurable.

    3. Illustrative examples of these problems:
     Training at one of the six grantees consisted of non-
technical courses such as diversity and anti-harassment.
     Three of the six audited grantees were not achieving 
employment outcome goals. Participants were not placed directly into H-
1B occupations and most did not have any type of placement or upgrade 
outcome.
     Employment outcomes for three of the six audited grantees 
were indeterminable because the grantees did not measure, achieve, and 
report the outcomes as specified in their grants.

    4. What actions are being taken to eliminate or reduce these 
problems:
     In October 2002, DOL revised its guidelines on the 
availability of skills training grants to ensure grants are awarded to 
high-skilled training programs. Recent DOL solicitations for H-1B Grant 
applications have focused on addressing high skill technology shortages 
of American businesses.

    5. What additional actions, either administrative or legislative in 
nature, are required:
     In our opinion, DOL should consider that grants be awarded 
only to entities that agree to provide the appropriate technical 
skills, and should consider monitoring grant performance to ensure the 
legislative intent and grant deliverables are met.

        Statement of Hon. Kenneth M. Donohue, Inspector General,
            U.S. Department of Housing and Urban Development

    Thank you for inviting me to submit a statement for the record on 
waste, fraud, and abuse in mandatory spending programs within the 
Department of Housing and Urban Development (HUD). For budgetary 
purposes, our insurance programs meet the definition of mandatory 
programs. Consequently, my remarks will only focus on our audit and 
investigative efforts involving the Department's insurance and 
guarantee programs, The Federal Housing Administration (FHA) and the 
Government National Mortgage Association, known as Ginnie Mae. While 
these government sponsored enterprises are considered mandatory 
programs, the monetary savings identified through our audits or 
investigations would generally not be returned to the U.S. Treasury. 
For example, the FHA insurance programs are self-sustaining. Income is 
generated through borrowers' mortgage insurance premiums and the costs 
for foreclosure losses are paid by the insurance fund. Mortgage 
insurance premiums are adjusted up or down to cover program needs. If 
there are excess premium revenues, the Assistant Secretary may 
authorize the payment of premium refunds.
    Last month, we provided testimony for the House Committee on 
Financial Services on areas of potential savings from our discretionary 
programs. We identified several older programs with remaining obligated 
funds from expired contracts (i.e., HUD's Section 8 Program which 
provides rental assistance to low income households). We recommended 
that these obligations be recaptured and used to offset future 
budgetary needs. In response to our findings, the Department has taken 
action to offset fiscal year 2004 funding by $1.7 billion.
    Program background. FHA was created as a U.S. Government 
corporation within HUD and administers active insurance programs 
designed to make mortgage financing available to the home buying 
public. FHA insures private lenders against loss on mortgages that 
finance single-family homes, multifamily projects, health care 
facilities' property improvements and manufactured loans. Ginnie Mae, 
through its Mortgage-Backed Securities Program, facilitates the 
financing of residential mortgages by guaranteeing the timely payment 
of principal and interest to investors. Ginnie Mae issuers pool FHA, VA 
and farmers' home mortgages into mortgage-backed securities. The Ginnie 
Mae guarantee gives lenders access to the capital markets to originate 
new loans.
    FHA insures more than a million loans each year. FHA's outstanding 
insurance portfolio exceeds $600 billion. Last year, Ginnie Mae reached 
the $2 trillion mark in mortgage-backed securities issued since 1970. 
The outstanding portfolio of these securities now exceeds $587 billion. 
FHA and Ginnie Mae, from a financial standpoint, are both fiscally 
sound organizations. FHA mortgage insurance premiums more than cover 
any losses incurred through the foreclosure and note sales processes. 
The FHA insurance fund is actuarially sound and it more than exceeds 
the 2 percent capital ratio requirement set by the Congress. Ginnie Mae 
fees charged to issuers currently earn Ginnie Mae between $700 and $800 
million annually.
    The magnitude of the problem. You requested an estimate of the 
magnitude of waste, fraud, and abuse in these programs. As you can see 
from the balance of my testimony, there are so many players in our 
programs that making such an estimate would be extremely difficult. HUD 
relies on thousands of approved FHA direct endorsement lenders for 
underwriting. These lenders accept applications, verify borrower 
income/assets/liabilities, and determine appraised property values. Any 
of these many processes in the origination of an FHA loan can be 
compromised. Much of our mortgage and lender targeting for OIG review 
is based on the small percentage of loans that may be in default or 
foreclosure at any time.
    With more than a million FHA loans insured each year, the slightest 
percentage of fraud can equate to high-risk loans valued at hundreds of 
millions in dollars. HUD uses a detailed lender default monitoring 
system to identify lenders with a high incidence of defaulted loans. 
FHA's Quality Assurance Division and our office both use this default 
information to identify lenders for review. An early loan default is 
generally a good indicator of underwriting irregularities. However, not 
all failed loans are fraudulent--job loss, health issues, divorce, 
etc., may be the reason for default. A significant part of our audit 
and investigative resources are committed to FHA lender and Ginnie Mae 
issuer reviews. Last year, we opened numerous investigations on 
individuals potentially involved in FHA insurance fraud and our 
workload continues to drastically increase.
    Single family mortgage fraud continues to be an investigative 
priority for the OIG. Our investigations of perpetrators of fraud 
include: title companies, loan officers, mortgage companies and 
brokers, real estate agents, closing attorneys and appraisers. These 
perpetrators, through a variety of schemes, submit fraudulent loan 
applications, appraisals, and other falsified loan documents and/or 
utilize straw buyers, and other conspirators, to effect the fraud.
    Our Semiannual Report to the Congress for the period ending 
September 30, 2002 reflected investigative recoveries of $59 million. 
During the same period approximately 60 percent of our cases and 90 
percent of our investigative recoveries were attributable to single 
family mortgage fraud cases. During the first 6 months of this fiscal 
year, investigative recoveries are approximately $65 million, a figure 
that already exceeds our recoveries for all of fiscal year 2002.
    Recent statistical information gathered from our 10 investigation 
regional offices shows that investigative efforts expended on these 
single family cases involve approximately 1,400 subjects who have 
originated more than $1 billion in loans affecting nearly 36,000 FHA-
insured properties. These investigations are worked in coordination 
with 148 assistant United States attorneys.
    A recent focus of our audit and investigative work has been on 
single family property flipping. In certain parts of the country, 
especially in urban areas, investors have been purchasing distressed 
properties and reselling them to an FHA-insured purchaser at an 
inflated value. The purchase and resale was often done on the same day. 
In many cases, there was collusion between sellers, lenders and 
appraisers to inflate values. In our OIG reviews, we found a wide 
disparity between the original purchase price and the resale price of 
the property. The concentration of flipped properties in certain 
neighborhoods resulted in one inflated property value being used as the 
comparable (i.e. setting the value for another property). We have 
found, in particular, a concentration of problems in Los Angeles, New 
York City, Ft. Lauderdale and Baltimore. These involved hundreds of 
properties and millions of dollars in losses to the FHA insurance fund. 
An example of one of our flipping investigation involved Schmidbauer 
Realty, Inc. of Baltimore, MD.
    The OIG identified a series of real estate ``flip'' transactions 
through a company owned by William Otto Schmidbauer. Schmidbauer bought 
and then resold numerous single family properties at prices well above 
their market value. He used straw buyers to complete the transactions 
and would use preselected lenders, loan officers and appraisers to 
facilitate the loans. The 58 real estate transactions identified to 
date involved approximately more than $5 million in fraudulent FHA 
loans. Eleven straw purchasers and one loan officer have entered guilty 
pleas in the district of Maryland.
    Early this year, working with HUD program staff, a property 
flipping rule was put in place to stop immediate property sales or 
flips. By establishing zero-day waiting period between FHA sales, 
investors cannot quickly resell properties as they did in the past. We 
anticipate this rule will deter a major part of fraudulent property 
flipping schemes.
    Multifamily equity skimming is another major focus of our audit and 
investigative endeavors in FHA programs. Equity skimming is the illegal 
use of rents, assets, proceeds, income or other funds derived from an 
FHA insured multifamily property for purposes other than to meet actual 
or necessary expenses. When owners do not pay their mortgages, the 
living conditions in the developments can deteriorate because the funds 
intended to maintain the individual units and common areas are diverted 
for unauthorized uses.
    A recent example of equity skimming involved a housing development 
in the Bronx, NY. The owner of the project was found guilty of equity 
skimming and ordered to pay restitution to HUD in the amount of 
$894,000. The owner took cash from the project for fraudulent expenses 
and stopped making mortgage payments. In another case, the project 
manager of four projects in West Virginia was found guilty of 
submitting false invoices for maintenance work not performed. As a 
result, the physical condition of the projects deteriorated. This case 
involved more than $800,000 of false invoices. The project manager was 
sentenced to 2 years in jail, 3 years probation and ordered to pay 
$250,000 in restitution.
    HUD requires that insured projects receive a financial audit each 
year. In the course of these reviews, the auditors identify the source 
and use of funds at the project. These reports may provide information 
that funds are being removed from projects in a non-surplus cash 
position and thereby assist HUD-OIG investigators and auditors and the 
Department in its efforts to uncover such activity.
    Ginnie Mae Issuers are responsible for pooling eligible mortgages 
into mortgage-backed securities and passing mortgage payments through 
to investors each month. Another recent OIG investigation involved 
First Beneficial Mortgage Corporation (FBMC) of North Carolina who was 
an approved FHA direct endorsement lender as well as an approved Ginnie 
Mae issuer. At the time the fraud was detected, this issuer had a 
Ginnie Mae mortgage-backed security portfolio worth $45 million. FMBC 
saw a window of opportunity to originate fraudulent FHA mortgages and 
then pool them into mortgage-backed securities. By using the investor 
proceeds from the sale of securities, the issuer was able to continue a 
``pyramid'' scheme by appearing to pass through mortgage proceeds. Over 
100 of the pooled mortgages in 11 Ginnie Mae pools were, in fact, 
fraudulent. FMBC systematically recruited straw buyers to sign 
fraudulent and fictitious mortgage notes for vacant parcels of land. 
FBMC would then submit these false notes to their registered document 
custodian as backing for their securities as required by Ginnie Mae.
    FBMC was permitted to sell millions of dollars of Ginnie Mae 
securities without verification through, or by, FHA that these 
mortgages were appropriately insured. FBMC was continuing to issue 
pools using false documents. FHA and Ginnie Mae communications could 
have detected the fraud earlier. A simple verification by Ginnie Mae 
that the FHA pooled loans were, in fact, insured would have raised a 
red flag. Ginnie Mae has since started a process of verifying whether 
Ginnie Mae pooled mortgages are FHA insured. This control should help 
detect improper pools within a few weeks of their origination.
    Corrective actions. As we identify possible systemic weaknesses in 
HUD's operations through our audits, we make recommendations that, in 
our opinion, will best correct the problem. These recommendations will 
assist in the correction of many internal control weaknesses by 
establishing sound checks and balances through handbook or regulatory 
changes. In addition to administrative recommendations, a legislative 
remedy may, in our estimation, be required in some instances. Over the 
years, we have submitted legislative proposals to the Congress in an 
effort to reform wasteful or ineffective features in HUD programs, 
increase accountability in the award of financial assistance, and 
improve program enforcement.
    Our last submission a number of years ago included close to 40 
proposals. Several of these proposals involved FHA activities. For 
example, we proposed the elimination of the Title 1 program under 
Section 2 of the Housing Act. This program provides insured loans for 
home improvements and for the purchase of mobile homes. We based our 
proposal on the small number of individuals served, the inability of 
HUD to effectively monitor this program and the availability of private 
sector financing. Another proposal was to eliminate investor 
participation in the Section 203(k) rehabilitation mortgage insurance 
program. We based our proposal on our findings in a comprehensive 
review of the 203(k) program where investors were using the program to 
obtain unjust enrichment. The Assistant Secretary for Housing 
voluntarily suspended the program for investors based on these 
findings. We have also made several other proposals to increase 
penalties for activities relating to mortgage fraud.
    In closing, our audits and investigations continue to uncover fraud 
and abuse in HUD's programs. Abuses, such as those discussed above, 
have a tremendous economic impact on the lives of the citizens these 
programs are intended to serve. We are continuing to work jointly with 
Departmental officials to correct the many problems I have discussed. I 
recently hosted a forum in Philadelphia wherein senior managers from 
OIG and HUD programs met to discuss waste, fraud, and abuse. We 
characterized this meeting as a ``fraud symposium'' where the OIG 
worked together with program staff in collectively addressing 
prevention and detection of losses in the programs. This collegial 
effort has been successful and will continue into the future.
    I've been the Inspector General at HUD for little more than a year. 
It has been a very productive time. I have a well trained and very 
dedicated staff. Our goal is to ensure that the billions of taxpayers' 
dollars appropriated by the Congress for HUD programs are used 
effectively to provide safe, decent, and sanitary housing for millions 
of Americans. I've tasked my staff and I have challenged program 
officials to work together to combat waste, fraud, and abuse. The 
structure of HUD programs and the diversity of programs make this a 
formidable task. But by working in coordination together with program 
staff and congressional staff, I think we can take positive steps to 
make HUD operate in an optimum manner.

     Prepared Statement of Hon. Earl E. Devaney, Inspector General,
                    U.S. Department of the Interior

      U.S. Department of the Interior, Office of Inspector 
                                                   General,
                                                September 23, 2003.
    Dear Mr. Chairman: Thank you for the opportunity to provide the 
Committee with information regarding waste, fraud, and abuse in the 
mandatory spending programs within the Department of the Interior 
(Department or DOI).
    Your letter of invitation asked for information concerning 
mandatory spending, or ``entitlements,'' which are funds controlled by 
laws other than annual appropriations acts. We used the list prepared 
by the Congressional Budget Office, which identified DOI accounts with 
this sort of funding, to determine those mandatory spending areas in 
which the Office of Inspector General (OIG) has reviewed and addressed 
potential for waste, fraud and abuse. The major program area in which 
the OIG has conducted audits and/or investigations and determined that 
funds were either misspent or that improvements over the control of 
funds were warranted was in assistance to U.S. Territories and Freely 
Associated States.
    The Department is appropriated over $300 million annually for 
distribution to U.S. Insular Area (IA or Insular Areas) governments. 
Most of these funds are given to the IA governments in the form of 
entitlement-type funding, over which the Department has little or no 
control.
    In fiscal year 2002, following years of frustration over the lack 
of responsiveness to OIG audit findings in the Insular Areas, we 
undertook an historic review of the often-reported weaknesses plaguing 
the IA governments. Based on this review, we concluded that the state 
of financial affairs in the Insular Areas was disturbing and that 
legislation might be required to effectively remedy part of the 
problem.
    In our April 2002 Semiannual Report to Congress, we called upon the 
Department and other Federal agencies that provide funding to the 
Insular Areas to take aggressive action to address these longstanding 
concerns. In that issue, we reported:
    The state of financial affairs of the Insular Areas is, in a word, 
disturbing. In no fewer than 458 audits conducted in the Insular Areas 
dating back to 1982, repeated deficiencies have been detected, 
reported, and passed on to the various governing entities. While a 
majority of the recommendations were accepted, in the end, most have 
gone unimplemented. The Federal Government can no longer continue to 
accept silence and inaction from appointed or elected officials, 
legislative bodies, or other responsible Insular Area entities 
concerning these deficiencies.
    The Insular Area governments (Guam, U.S. Virgin Islands, American 
Samoa, Commonwealth of the Northern Mariana Islands, Republic of the 
Marshall Islands, Federated States of Micronesia, and the Republic of 
Palau) face major management challenges that in most cases are not 
being addressed, yet program monies and grants continue to flow.
    The tax dollars at stake are not insignificant. Those funds 
aggregate to approximately three-quarters of a billion dollars 
annually, when Department of the Interior funded programs (fiscal year 
2002: $353 million) and other non-Interior Department funding such as 
from the Departments of Health and Human Services, Education, and 
Agriculture (which totaled $405 million in fiscal year 1999) are taken 
into account. The Department of the Interior does not have authority 
over any of the program grants funded by other Federal Departments or 
agencies.
    We believe unrealized opportunities for improvement exist in the 
fundamental areas of:
     Financial management;
     Revenue enhancement;
     Expenditure control;
     Program operations.
    Selected examples of the types of deficiencies uncovered during 
this reporting period include:
     Estimated lost potential tax revenues of $7.1 million in 
American Samoa in fiscal years 1997 through 1999 due to uncorrected 
long-standing deficiencies identified in five audit reports issued 
since 1986.
     The loss, or potential loss, of as much as $65.1 million 
by four semi-autonomous government agencies in Guam, brought about by 
not following financial advice available from the Guam Economic 
Authority.
     Failure to conduct required biennial fire safety 
inspections or collection of fire inspection fees of at least $1.1 
million by the Virgin Islands Fire Service in fiscal years 1999 and 
2000.
     The failure by the Virgin Islands Housing Finance 
Authority (Authority) to (1) establish competitive procurement 
procedures for selection of housing development contractors, and (2) 
ensure that program participants met eligibility requirements. This led 
to questionable payments of as much as $1.95 million to two 
preferential treatment to some clients as well as several interest-free 
loans to Authority employees.
     Inadequate controls over financial operations by the 
Authority also led to a debt of $809,500 for loans to two housing 
communities and the inability to use bond proceeds of $33.7 million to 
provide mortgages to eligible participants.
    There are many other examples that can be drawn from several prior 
audits. The common denominator, though, is the lack of responsiveness 
in seeking to remove impediments to efficiency. Legislation might be 
required to effectively remedy part of the problem. The Insular Areas 
may also require resources and other assistance in order to overcome 
these obstacles.
    Without implementation and enforcement of accepted business 
standards and improved accountability, waste and abuse in the Insular 
Areas will continue unabated. It is time for OIA and the other Federal 
grantor agencies to assign a degree of urgency in devising and 
implementing a realistic plan that will provide assistance and bring 
about results.
    Although over a year has passed since we made this report, we have 
no information to suggest that the state of affairs in the Insular 
Areas has unproved. The OIG has proposed a task force effort with its 
counterparts in other Departments and agencies that provide funding to 
the Insular Areas, with very limited success. We believe, however, that 
if funding to the Insular Area governments were tied to their 
responsible management of those funds, we would see a marked 
improvement in their fiscal operations. As we noted in our April 2002 
Semiannual Report, this may require legislation, in addition to 
resources and other assistance, to accomplish.
    I hope this information will be helpful to you and the Committee. 
If you have additional questions, please feel free to contact me or my 
deputy, Diary Kendall Adler.
            Sincerely,
                                           Earl E. Devaney,
                                                 Inspector General.

   Prepared Statement of Hon. Glenn A. Fine, Inspector General, U.S. 
                         Department of Justice

    Mr. Chairman, Congressman Spratt, and members of the Committee on 
the Budget:

                            I. Introduction

    I appreciate the opportunity to submit this written statement in 
connection with the committee's hearing on waste, fraud, and abuse in 
mandatory spending programs. Unlike other Federal Government agencies, 
the Department of Justice (Department) has few programs in which 
funding levels are set by law. Nonetheless, we expend significant 
efforts at the Office of the Inspector General (OIG) identifying and 
preventing waste, fraud, and abuse in a wide variety of Department 
programs--efforts that are consistent with the committee's goal of 
holding government agencies accountable for how they spend taxpayer 
money.
    In my statement today, I will describe the results of OIG audits, 
inspections, investigations, and special reviews that examined issues 
related to waste, fraud, and abuse. These issues fall into three 
general categories, each of which we have identified as top management 
challenges in the Department:
     Procurement, including contracting for detention space;
     Grant management; and
     Information technology (IT) systems planning and 
implementation.
    Before I turn to these OIG reviews, I want to describe for the 
committee an important initiative we have ongoing in our investigations 
division--our Fraud Detection Office (FDO). We formed this office in 
order to concentrate specialized investigative resources on detecting 
and investigating fraud in Department programs and expenditures. In 
addition, the FDO assists other OIG Investigations Division field 
offices by providing investigative and forensic audit support to their 
fraud investigations. Currently, the FDO consists of a Special Agent in 
Charge, Assistant Special Agent in Charge, five Special Agents, two 
Forensic Auditors, and a Fraud Analyst.
    The FDO has investigated several cases involving false claims or 
false statements related to the Department's September 11th Victim 
Compensation Fund, Office of Justice Programs (OJP) grants, and 
Community Oriented Policing Service (COPS) grants. In addition to 
working criminal and administrative fraud cases, the FDO conducts 
proactive fraud briefings in procurement offices throughout the 
Department.
    One of the FDO's major initiatives is to detect and deter fraud in 
Department credit card purchases. This initiative, which began in June 
2003, will examine whether Department credit cards used for purchases, 
employee travel, government vehicles, and telephones are used in 
accordance with applicable laws, regulations, and policies. Reviews in 
other Federal agencies, such as the Department of Defense and the 
General Services Administration, have disclosed particular 
vulnerabilities to fraud through use of agency credit cards, most of 
which center around unauthorized purchases for personal items and 
outright theft or embezzlements. The FDO project includes compliance 
checks of Department policies and procedures; data mining of credit 
card transactions for indications of fraud; verification of documents, 
account statements, and purchase invoices; and site visits to the 
component headquarters and field office units.

                            II. Procurement

    The Department spends over $4 billion annually on contracts for 
building construction; information technology; and professional, 
administrative, and management support services. In addition, in fiscal 
year 2002 the Department spent an additional $1 billion on 
intergovernmental agreements (IGAs) with State and local governments to 
house immigration detainees and individuals awaiting Federal criminal 
proceedings. Our audits of these IGAs have disclosed significant over-
billing of the Department for detention services. For example:
     In June 2001, we issued an audit of an IGA for detention 
space with York County, PA. The audit revealed that in fiscal year 2000 
York County overcharged the Department in excess of $6 million due to 
York County's understatement of its average daily population, a key 
figure used to determine reimbursement from the Immigration and 
Naturalization Service (INS). In addition, we found that the Department 
could realize annual savings of approximately $6.4 million if York 
County used the daily rate determined by our audit.
     Our audit of the IGA between the INS and the DeKalb 
County, GA, Sheriff's Office revealed that the county included $13.4 
million of operating costs that were unallowable, unallocable, or 
unsupported; understated its average total inmate population by more 
than 29 percent; and over-billed the INS $5.7 million in fiscal year 
2000.
     We examined an IGA involving the Government of Guam's 
detention of INS and U.S. Marshals Service (USMS) detainees and found 
that for fiscal year 1999-2000 the Department overpaid Guam more than 
$3.6 million based on the actual allowable costs and the average daily 
population. In addition, the OIG found that the Department could 
realize annual savings of $3.3 million by using the OIG's audited rate 
for future payments.
    The OIG has conducted reviews in other Department components in 
which we have identified significant potential cost savings, including 
an audit of the Drug Enforcement Administration's (DEA) contracts for 
linguistic services in which we identified $2.8 million in questioned 
costs out of $9.4 million paid to contractors. Specifically, we found 
that the DEA contracting officer's technical representatives did not 
provide adequate oversight of the contracts, and that the DEA paid 
contractors for services not authorized by delivery orders, services 
performed outside the allowable performance period, hours not supported 
by time sheets or logs, overtime that was not properly approved, and 
unauthorized or unsupported travel costs.
    Finally, the OIG continues to investigate individual allegations of 
fraud or misuse of government resources by Department employees and 
contractors. For example, a clerk in the U.S. Attorney's office in Los 
Angeles, CA, pleaded guilty to embezzling more than $400,000 using her 
government-issued procurement card. The OIG established that the clerk 
purchased computers, printers, copy machines, clothes, and vacation 
trips using the government credit card. The clerk was sentenced to 40 
days' incarceration, 5 years' probation, and ordered to pay $432,000 in 
restitution.
    In another case, the OIG found that an administrative officer for 
the U.S. Attorney's office in Portland, OR, misused her government-
issued credit card by obtaining cash advances and draft checks 
amounting to more than $39,000. The investigation further determined 
that the employee created fictitious obligation accounts and used 
existing obligation accounts with forged signatures in order to obtain 
the money. The employee pled guilty and received 10 months 
incarceration, 3 years' of probation, and was ordered to pay $39,000 in 
restitution.

                         III. Grant Management

    The number and amount of grants the Department awards have grown 
rapidly, increasing from $849 million in 1994 to nearly $5 billion in 
each of the past 5 years. Grants, which now account for almost 20 
percent of the Department's total budget, are primarily awarded by the 
Department's Office of Justice Programs (OJP) and the Office of 
Community Oriented Policing Services (COPS).
    Over the past decade, the Department has disbursed billions of 
dollars for, among other initiatives, community policing, drug 
treatment programs, reimbursement to States for incarcerating illegal 
aliens, and counterterrorism initiatives. Disbursement of such 
significant amounts of grant money has resulted in ongoing management 
challenges and our reviews, in addition to work performed by GAO, have 
identified problems with grant management in the Department.
    For example, OIG reviews have found that many grantees did not 
submit required program monitoring and financial reports and that 
program officials' on-site monitoring reviews did not consistently 
address all grant conditions. Grant monitoring is an essential 
management tool to ensure that grantees are properly expending funds 
and that the objectives of the grant program are implemented. 
Generally, each grant manager is required to prepare a monitoring plan 
that includes on-site visits, review of financial and progress reports, 
telephonic contacts, and review of audit reports. In some cases, 
however, we found that monitoring activities were not being documented 
in grant files, reports for on-site visits were not prepared, on-site 
inspections did not include visits to project sites, financial and 
progress reports were not submitted or not submitted timely, and grant 
managers were not reviewing carefully the information they received. As 
a result, grant managers failed to catch inconsistent or incorrect 
information on project activities.
    In April 1999, the OIG issued a report summarizing the findings 
from 149 audits of COPS grants conducted during fiscal years 1997 and 
1998, the OIG's first 2 years of auditing COPS grant recipients. These 
149 grants totaled $511 million, or about 10 percent of the $5 billion 
in grants COPS had obligated up to that time. Our individual audits 
focused on: 1) the allowability of grant expenditures; 2) whether local 
matching funds were previously budgeted for law enforcement; 3) the 
implementation or enhancement of community policing activities; 4) 
hiring efforts to fill vacant officer positions; 5) plans to retain 
officer positions at grant completion; 6) grantee reporting; and 7) 
analyses of supplanting issues.
    Our audits identified weaknesses in each of these areas. For the 
149 grant audits, we identified approximately $52 million in questioned 
costs and approximately $71 million in funds that could be better 
used.\1\ Our dollar-related findings amounted to 24 percent of the 
total funds awarded to the 149 grantees.
    In our judgment, based on our ongoing audit work, the Making 
Officer Redeployment Effective (MORE) Grant Program continues to be the 
COPS office's highest risk program. The MORE Grants have funded 
technology or the hiring of civilians to allow existing officers to be 
redeployed from administrative activities to community policing. More 
than $1 billion has been awarded under MORE Grant Programs since the 
first awards began in 1995. Although MORE grants are intended to last 
for 1 year, we found numerous instances where COPS extended grant 
periods several additional years. For example, when police departments 
buy computers or mobile data terminals and fail to install them in a 
timely manner, they may become obsolete by the time they are 
operational. Importantly, we rarely found that MORE grant recipients 
could demonstrate that they had redeployed the required number of 
officers to community policing as a result of the MORE grants. We 
believe the recent 2002 MORE grants add to the high-risk nature of the 
MORE Grant Program by not requiring tracking of officer redeployment.
    Over the years, the OIG has audited a variety of OJP grant 
programs, several of which we describe below.

        A. STATE CRIMINAL ALIEN ASSISTANCE GRANT PROGRAM (SCAAP)

    Under the SCAAP Program, OJP provides grants to State and local 
governments to help defray the cost of incarcerating undocumented 
criminal aliens convicted of State or local felonies. In an audit 
report issued in May 2000, we found that OJP had overcompensated State 
applicants approximately $19.3 million for unallowable inmate costs and 
ineligible inmates who were included in grant applications. We found 
that OJP's methodology for compensating States was over-inclusive and 
needed improvement, because OJP overpaid States for many inmates whose 
immigration status was unknown.

 B. SAFEFUTURES: PARTNERSHIPS TO REDUCE YOUTH VIOLENCE AND DELINQUENCY

    Partnerships to Reduce Youth Violence and Delinquency (Safefutures) 
was a 5-year demonstration grant program administered by OJP to help 
six competitively selected communities reduce juvenile delinquency. 
OJP's Office of Juvenile Justice and Delinquency Prevention (OJJDP) 
administered the grants that helped communities implement a continuum 
of care consisting of prevention, intervention, treatment, and 
graduated sanctions programs for at-risk and delinquent youth. Each 
grantee could receive up to $1.4 million per year, for a total of about 
$7 million, to implement nine specific programs and help reform its 
existing service delivery system. Total program costs were expected to 
be about $42 million. Our audit report, issued in April 1999, found 
that OJJDP program managers were not adhering to the grant monitoring 
plans, and their monitoring efforts were neither consistent nor 
consistently documented. As a result, we found it difficult to 
determine the level of monitoring that actually occurred. We found that 
a lack of current policies and procedures, unclear expectations, and 
insufficient accountability contributed to the monitoring problems.
    In addition, we found weak controls over fiscal monitoring of the 
program. Quarterly financial reports, which often were untimely and 
inaccurate, were not reviewed or corrected routinely. Additionally, we 
found that incomplete official grant files were a continuing problem. 
All of the files reviewed by the OIG in this audit were missing some of 
the required documents needed to record the activity of each grant.

 C. RESIDENTIAL SUBSTANCE ABUSE TREATMENT FOR STATE PRISONERS FORMULA 
                          GRANT (RSAT) PROGRAM

    The OIG reviewed RSAT Grants in six States from March 1999 through 
June 1999 and issued a summary report in September 2000. The purpose of 
the RSAT Grant Program is to develop or enhance residential drug and 
alcohol abuse treatment programs for adult and juvenile offenders in 
State and local correctional facilities. Funding for RSAT Grants from 
fiscal year 1996 through fiscal year 2002 has ranged from $27 million 
to $63 million. OIG site visits assessed the States' adherence to grant 
guidance and progress toward implementing residential substance abuse 
treatment programs.
    In a September 2000 summary report, we concluded that OJP's 
monitoring and oversight of the grant program needed strengthening. 
States received grant funds through a formula grant and had 
responsibility for monitoring any sub awards and providing the required 
monitoring reports to OJP. We found that OJP was not diligent in 
ensuring that States provided the required reports (such as financial 
status reports, semiannual progress reports, and individual project 
reports) on the use of grant funds and the progress of projects. All 
six RSAT grantees failed to submit accurate or timely reports. These 
reports are an important tool to help managers and grant monitors 
determine if grantees are meeting program objectives and financial 
commitments. Even when States provided the reports, the quality of the 
CPO review was not consistent. Further, OJP failed to ensure that 
conflicting or missing information in a State's reports were clarified 
or obtained.
    We found that OJP conducted limited site visits, citing 
insufficient staff resources. When visits were conducted, sub-
grantees--the organizations that actually implement the projects or 
programs--were not targeted and visits were generally limited to the 
State office designated to receive grant awards. Therefore, OJP did not 
assess the actual programs for compliance with grant requirements. We 
also found that on-site monitoring reports were not completed or 
included in the official grant file. Finally, we found that overall 
record keeping needed improvement. Official grant files were missing 
applications, award documents, State reports, and site visit reports so 
that the life cycle of a State's grant compliance could not be tracked 
readily.

           D. OIG INVESTIGATIONS IN DEPARTMENT GRANT PROGRAMS

    In addition to OIG audits and inspections, the OIG's Investigations 
Division investigates allegations of waste, fraud, and abuse in 
Department grant programs. Examples of cases that we have substantiated 
include:
     An Oklahoma death row inmate pled guilty to charges of 
false statements in connection with a fraudulent claim he made to the 
September 11th Victim Compensation Fund. The OIG developed evidence 
that the inmate submitted false statements purporting that his wife had 
been killed at the World Trade Center on September 11, 2001.
     An individual pled guilty in the Western District of 
Arkansas to charges of mail fraud for submitting a fraudulent 
application for compensation from the September 11th Victim 
Compensation Fund. The individual claimed that her brother, a New York 
City firefighter, was killed in the terrorist attacks. In fact, the OIG 
determined that her brother did not die in the terrorist attacks.
     In September 2002, OJP sent a letter to the City of 
Portland, OR, demanding repayment in the amount of $114,514 for misuse 
of funds received between 1996 and 1998 under an OJP Local Law 
Enforcement Block Grant. An OIG investigation disclosed that police 
officers received overtime pay from the Block Grant on more than 100 
occasions for work they did not perform.
     An OIG investigation led to the arrest and conviction of a 
former Missouri chief of police for false statements and theft. The OIG 
established that the former police chief in Novinger, MO, falsified 
COPS Universal Hiring Grant paperwork to claim he hired and paid one 
additional officer when, in fact, he used the grant to pay his own 
salary, including a $6,000 annual raise. When confronted by OIG special 
agents, the former police chief admitted falsifying grant applications. 
He was sentenced to 2 years' probation and ordered to pay $53,190 in 
restitution.
     A former acting chief of the Town of Navajo Department of 
Law Enforcement was convicted at trial in the District of New Mexico on 
charges of wire fraud. He was sentenced to 30 months incarceration and 
ordered to pay $102,877 in restitution. A joint investigation by the 
OIG and the Federal Bureau of Investigation (FBI) determined that the 
acting chief fraudulently applied for and received a COPS Problem-
Solving Partnership Grant to establish a ``Crime Busters'' program 
targeting burglaries. The acting chief diverted more than $100,000 in 
grant funds to personal use by making illegal sub-awards to members of 
his immediate family who used some of the money to purchase a used 
pickup truck and other vehicles.
     Based on an investigation by the OIG and the North 
Carolina Governor's Crime Commission, Hoke County repaid the State of 
North Carolina $93,467 in Byrne Formula grant funds awarded by the 
Department. The county manager was alleged to have purposefully 
submitted false documentation relating to police vehicle purchases 
under the grant and then diverted the funds to other uses. Although no 
proof of intent to defraud was sustained, the supplanted funds were 
recovered and returned to the State.

               IV. IT System Planning and Implementation

    The Department currently spends about $2 billion annually on IT, 
approximately 6 to 8 percent of its total budget. The OIG monitors the 
Department's IT system planning and implementation through a 
combination of performance reviews, financial statement audits, and 
computer security audits. Examples of our performance audits include 
reviews of IT management practices at the INS and the FBI.\2\
    For example, our December 2002 audit concluded that the FBI had not 
effectively managed its IT investments because it did not fully 
implement the management processes associated with successful IT 
investments. Consequently, the FBI continued to spend hundreds of 
millions of dollars on IT projects without adequate assurance that 
these projects would meet their intended goals. FBI managers recognized 
that the agency's past methods to manage IT projects were deficient and 
they have committed to changing those practices.
    Nonetheless, we concluded that the FBI must take further actions to 
ensure that it can implement the fundamental processes necessary to 
build an IT investment foundation, as well as the more mature processes 
associated with highly effective IT investment management. These 
actions include: 1) fully developing and documenting its new IT 
investment management process; 2) requiring increased participation 
from IT program managers and users; and 3) further developing the FBI's 
project management and enterprise architecture functions.
    Additionally, we issue annual reports that review the Department's 
financial statement as part of the Chief Financial Officers Act of 1990 
and the Government Management Reform Act of 1994. For the last two 
fiscal years, the Department has received an unqualified opinion on its 
financial statements. An unqualified opinion means that the financial 
statements present fairly, in all material respects, the financial 
position and results of operation for the Department of Justice. 
However, while Department components have made improvements in internal 
controls, material weaknesses remain in financial accounting and 
reporting procedures and in information systems. Many tasks had to be 
performed manually because the Department lacks automated systems to 
readily support ongoing accounting operations, financial statement 
preparation, and the audit process. Manual efforts compromise the 
ability of the Department to prepare financial statements timely and in 
accordance with generally accepted accounting principles, require 
expenditure of considerable monetary and human resources, and represent 
an inefficient use of these resources.
    Further, the lack of integration between principal financial 
management systems and sub-systems requires Department components to 
maintain duplicate records and perform additional account 
reconciliation. The Department currently has at least six major 
financial management systems used by its components, including both 
systems developed in-house and numerous off-the-shelf systems. Millions 
of dollars have been wasted in the last 5 years on installing these 
systems throughout the Department with varying success and, in some 
cases, little improvement in the quality or timeliness of financial 
data. These issues, which have existed for decades, continue to cause 
difficulties in preparing consolidated financial statements and in 
providing consistent and timely financial information to Department 
managers.

                            V. Ongoing Work

    While I have focused on the areas of procurement, grant management, 
and IT in this statement, the OIG reviews a variety of other Department 
programs as part of our ongoing efforts to identify and prevent waste, 
fraud, and abuse. Among our ongoing reviews:
     September 11th Victim Compensation Fund. The September 
11th Victim Compensation Fund was established in September 2001 as part 
of the Air Transportation Safety and Stabilization Act to provide 
``compensation to any individual (or relatives of a deceased 
individual) who was physically injured or killed as a result of the 
terrorist-related aircraft crashes of September 11, 2001.'' We are 
currently reviewing the Victim Compensation Fund to determine the 
effectiveness of the fraud controls used to identify fraudulent claims 
for compensation.
     The Department's Counterterrorism Fund. The Department of 
Justice Counterterrorism Fund (fund) was established to assist 
Department components with the unanticipated costs of responding to and 
preventing acts of terrorism. The fund is used to pay for expenses 
beyond what a component's appropriation reasonably could be expected to 
fund, such as: reestablishing the operational capability of a facility 
damaged by a terrorist act; investigating or prosecuting acts of 
terrorism; and conducting a terrorism threat assessment of Federal 
agencies and their facilities. Congress has appropriated more than $360 
million to the fund since its inception in 1995, of which about $290 
million has been obligated for counterterrorism expenses, including the 
Oklahoma City bombing investigation and trial, the U.S. embassy 
bombings in Africa, and the September 11 World Trade Center and 
Pentagon bombings. We are currently reviewing the fund to determine 
whether fund expenditures were authorized, supported, and obligated in 
accordance with the intent of the law.
     Vendor payments and credit card usage in the U.S. 
Attorneys' Offices (USAO) and the Executive Office for U.S. Attorneys 
(EOUSA). We are currently reviewing vendor payments and credit card 
usage in the USAOs and the EOUSA to determine whether payments were 
made in accordance with relevant policies and authorities.
     USMS medical care. As part of this audit, we are assessing 
whether USMS medical costs are necessary and reasonable and will 
examine potential double-billings.

                             VI. Conclusion

    The OIG has a long history of aggressively reviewing Department 
operations and programs in an effort to detect and deter waste, fraud, 
and abuse. As we look to the future, the OIG will continue to emphasize 
audits, inspections, and investigations while at the same time 
launching new initiatives such as the Fraud Detection Office in an 
effort to deter fraud and promote efficiency and effectiveness in 
Department activities.

                                ENDNOTES

    1. ``Questioned costs'' are expenditures that do not comply with 
legal, regulatory, or contractual requirements, are not supported by 
adequate documentation at the time of the audit, or are unnecessary or 
unreasonable. Questioned costs may be remedied by offset, waiver, 
recovery of funds, or the provision of supporting documentation. 
``Funds to better use'' are expenditures that would be better used if 
management acts on and implements our audit recommendations.
    2. As of March 1, 2003, the INS transferred from the Department of 
Justice to the Department of Homeland Security (DHS). Since March 1, 
oversight of immigration-related programs and personnel is the 
responsibility of the DHS-OIG.

     Prepared Statement of Hon. Hubert T. Bell, Inspector General,
                   U.S. Nuclear Regulatory Commission

                              INTRODUCTION

    I am pleased to have the opportunity to provide testimony with 
respect to fraud, waste, and abuse in the Nuclear Regulatory 
Commission's (NRC) spending programs. NRC is a fee-based regulatory 
agency and in fiscal year 2003 has a discretionary budget of 
approximately $578 million, of which about $331 million is for salaries 
and benefits (57 percent) and $247 million is for contractor support 
and travel costs (43 percent). The agency, in fiscal year 2003, is 
required to recover approximately 94 percent of its budget by 
collecting fees from agency licensees. NRC has no mandatory spending or 
entitlement programs.
    As you know, the mission of the Office of the Inspector General 
(OIG) at the NRC is to assist the NRC by ensuring the integrity, 
efficiency and accountability in the agency's programs that regulate 
the civilian use of byproduct, source and special nuclear material in a 
manner that adequately protects public health and safety and the 
environment, while promoting the Nation's common defense and security. 
My office carries out this mission by independently and objectively 
conducting and supervising audits and investigations related to NRC's 
programs and operations; preventing and detecting, fraud, waste, and 
abuse; and promoting economy, efficiency, and effectiveness in NRC's 
program's and operations. The OIG also keeps the NRC chairman and 
Members of Congress fully and currently informed about problems, 
recommends corrective actions, and monitors NRC's progress in 
implementing those actions.
    During the past year, my office reviewed agency programs and 
operations, conducted investigations and event inquiries, and reviewed 
legislative and regulatory proposals. In
    Fiscal year 2002, my office issued 17 audits of NRC's programs and 
operations and 17 contract audits. We completed 56 investigations that 
focused on violations of law or misconduct by NRC employees and 
contractors and 3 event inquiries into allegations of irregularities 
concerning staff actions cited as contributing to the occurrence of an 
event that could adversely affect public health and safety.
    To perform these activities, OIG employs auditors, management 
analysts, criminal investigators, investigative analysts, legal counsel 
and support personnel. The OIG also uses private-sector contractors to 
audit NRC's financial statements and for other audit, investigative and 
information technology support services. OIG audits and investigations 
make internal control recommendations to improve the agency's programs 
and safeguard its assets.

               FRAUD, WASTE, AND ABUSE IN NRC'S PROGRAMS

    Because NRC's has neither mandatory nor entitlement spending 
programs, the agency's vulnerability to fraud, waste, and abuse is 
significantly less than agencies with those programs. Furthermore, the 
high percentage of salaries and benefits (57 percent) to the total 
budget reduces NRC's exposure in this area. As a result, the greatest 
opportunities for fraud, waste, and abuse may exist in the contracts 
area, where estimated costs are approximately $150 million (25 percent) 
of the total agency budget. OIG has an active program to monitor 
contract expenditures and has identified internal control improvements 
needed to bolster the integrity of the agency's contracts program. For 
the year-ended September 30, 2002, OIG questioned $404,321 in costs and 
identified $3.6 million in unsupported contractor costs. The agency is 
in the process of completing corrective actions to remedy these issues.
    During fiscal year 2002, OIG reviewed the NRC's purchase card 
program. OIG's review was based on both a statistical sample of 
transactions and a judgment sample of transactions that appeared 
suspicious. Although reviews in other agencies have reported 
significant abuse of purchase cards, our audit disclosed only one minor 
improper use of a purchase card. We also continually monitor employees' 
use of travel cards. While we have observed and reported abuses, these 
instances are neither systemic nor financially material.
    As you know, the Office of Management and Budget requires Federal 
agencies to report on improper payments in their Performance and 
Accountability Reports. The NRC reported in its fiscal year 2002 report 
the following:
    Payment data for the period October 2000 to September 2002 was 
collected and analyzed to determine the number and dollar value of 
improper payments compared to total payments made. The results showed 
that there were 100 improper payments out of 103,724 total payments, or 
0.1 percent. The dollar value of improper payments was $135,626 out of 
$409,728,369 total dollars or 0.03 percent. This data supports the 
NRC's initial assessment that improper payments are an area of low 
management control risk. The agency will continue to monitor improper 
payments.
    On November 25, 2002, the NRC chairman advised Senator Joseph 
Lieberman that the approximately $135,000 in improper payments had been 
recovered.

                                SUMMARY

    The NRC is a fee-based regulatory agency that does not participate 
in loan, grant or benefit programs, which the GAO has traditionally 
cited as the basis of many of the government's improper payments. 
Salaries and benefits alone for fiscal year 2003 account for about 57 
percent of the agency's budget.
    OIG's makes recommendations to improve agency programs and 
safeguard its assets, and agency management has historically agreed to 
take corrective action on nearly all OIG recommendations. While there 
have been instances of irregularities in the areas we have reviewed, to 
date, no widespread instances of fraud, waste, or abuse in agency 
programs has been disclosed.
    Thank you for providing the opportunity to report on issues related 
to NRC's spending programs.

  Prepared Statement of Hon. Patrick E. McFarland, Inspector General,
                  U.S. Office of Personnel Management

    Mr. Chairman, ranking member and members of the committee. Thank 
you for giving me the opportunity to testify on the extent of waste, 
fraud, and abuse in mandatory programs of my agency, the U.S. Office of 
Personnel Management (OPM). At a time in which there are so many 
competing demands on the Federal budget, we join every taxpayer in 
concerns over whether funds available for mandatory Federal programs 
are being utilized in the most efficient and effective manner. We are 
all concerned in identifying existing problem areas and the actions 
being taken to eliminate or reduce them. You have addressed your 
concerns to the government officials charged with responsibility to 
oversee their respective agency's programs and who address your 
questions on a daily basis--the inspectors general. I have been honored 
to serve successive presidents and directors of the OPM for over 13 
years.
    In its role administering benefits to government employees, 
annuitants, survivors and their dependents, OPM has three mandatory 
programs that are susceptible to waste, fraud, and abuse. They are the 
Federal Employees Health Benefits Program (FEHBP), the Retirement 
Programs (RP), including both the Civil Service Retirement System and 
the Federal Employee Retirement System and the Federal Employees Group 
Life Insurance Program (FEGLI). However, it should be noted, the Thrift 
Savings Plan is not administered by OPM. As of fiscal year 2002, the 
outlays for each of the programs were: FEHBP $24 billion; and RP $48 
billion; and FEGLI $2 billion.
    In understanding our role in dealing with waste, fraud, and abuse, 
it is important to understand how these programs work. Under the FEHBP, 
OPM contracts with different health maintenance organizations (HMOs), 
employee organizations, such as the National Postal Mail Handlers 
Union, and the Blue Cross Blue Shield Association (the ``carriers'') to 
provide benefits to eligible persons. Payments to health care providers 
and suppliers are not made directly by OPM but by these organizations. 
Under the RP, claims are adjudicated and paid by OPM. Under the FEGLI, 
claims are made to a contractor who administers the program for OPM. In 
order to better understand the magnitude of waste, fraud, and abuse in 
OPM's mandatory programs, each program needs to be examined separately.

             THE FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM

    My office has the responsibility under the FEHBP to audit the 
carriers for the purpose of identifying funds improperly paid to them 
under their contracts with OPM. My office also has responsibility to 
investigate fraudulent claims submitted to carriers by health care 
providers and suppliers. Each demonstrates a different level and type 
of waste, fraud, and abuse and needs to be discussed separately.
    In dealing at the insurance carrier level, I would classify these 
improper payments primarily as waste of government funds rather than as 
fraud or abuse.
    At this level, OPM is justifiably proud of operating programs with 
relatively small amounts of waste. While improper payments amounting to 
about $160 million in fiscal year 2002 are not an insignificant figure, 
it amounts to less than 1 percent of FEHBP premiums paid.

        EXAMPLES OF IMPROPER PAYMENTS MADE TO CARRIERS INCLUDE:

     Coordination of benefits (COB)--Carriers are not properly 
coordinating claim payments with Medicare as required by their contract 
with OPM. As a result, the FEHBP is paying as the primary insurer when 
Medicare is, in fact, the primary insurer.
     Duplicate payments--Carriers are improperly charging the 
program for duplicate payments, such as paying a provider twice for the 
same services. These payments are unnecessary and unallowable charges 
according to the contract.
     Amount paid is greater than the covered benefit charge--
Carriers have paid more than the amount indicated in the carrier's 
contract with the provider.
    Another area where we continue to experience waste, as well as 
fraud and abuse within the FEHBP is in the rate setting process for 
community rated health benefits carriers. Defective pricing occurs when 
the FEHBP is not offered the same discount that a carrier offers to 
other large groups similar in size to the FEHBP. Historically, 
defective pricing has been an ongoing audit and investigative issue 
within the FEHBP. Several cases have been referred by my office to the 
Department of Justice. In our September 30, 2002 semi-annual report to 
Congress, my office highlighted a major recovery of funds to the FEHBP 
in the amount of $63.9 million resulting from defective pricing which 
was derived from payments made over multiple years to multiple plans.
    To address defective pricing issues, my office has and will 
continue to increase the number of audits performed on community rated 
contracts. By increasing our presence at a larger number of 
contractors, we believe the defective pricing issues can be reduced. 
The success of such an increased audit presence is demonstrated by an 
initiative we implemented in 1996 by conducting audits of premium rate 
calculations for the largest carriers on an annual basis. This process 
was known as rate reconciliation audits (RRA). In 1996, my office 
questioned $6.5 million for RRAs. During the first couple of years 
after the RRA process was implemented, we found that 60-70 percent of 
the carriers we audited under this process were not in compliance with 
OPM regulations. I am pleased to say that after 5 years of these annual 
audits, the noncompliance rate has dropped to approximately 40 percent 
of the carriers, and the dollar amounts in question have been reduced 
from $6.5 million to about $2.5 million.
    The largest amount of FEHBP fraud and abuse occurs at the health 
care provider or supplier level. My criminal investigators work with 
other law enforcement agencies and the carriers to identify and pursue 
prosecution for payments fraudulently submitted to and paid by the 
carriers to dishonest health care providers and suppliers. By its very 
nature, this fraud and abuse is hidden and therefore, difficult to 
detect. Adding to our difficulty in estimating the extent of provider 
fraud is the indirect nature of OPM's contractual relationship with 
health care providers. They are not government contractors or 
subcontractors and only have such relationships with the carriers. 
Therefore, my criminal investigators respond to allegations of provider 
fraud or abuse or irregularities detected through our audits. I do not 
have authority to audit health care providers generally. OPM is seeking 
contractual changes to provide audit authority for the very largest 
providers, such as pharmacy benefit managers. Therefore, I currently 
lack adequate information to accurately estimate the amount the FEHBP 
loses each year to health care provider and supplier fraud, but I do 
believe losses are significant and substantial.
    Examples of fraud against the FEHBP by providers and suppliers 
include submitting false claims for services not rendered, billing for 
medically unnecessary procedures, falsifying billing codes that lead to 
a higher rate of reimbursement, and placing FEHBP patients in harms way 
with their illegal activities. These types of waste, fraud, and abuse 
have been inherent in the FEHBP since the inception of the program. 
Despite their long-standing nature, we fight the waste, fraud, and 
abuse every day, using new and innovative techniques as they become 
available and assigning resources to new problem areas as soon as they 
are discovered.
    For example, a new problem area is pharmacy benefit manager 
organizations (PBMs). We are working closely with the Department of 
Justice to pursue waste, fraud, and abuse by the PBM industry. We 
currently do not have statistics to quantify the magnitude of problems 
that may exist in the prescription drug program since our involvement 
in this area has just begun. But given the large amount of funds 
expended on prescription drugs and the increases expected, we will be 
focusing a significant portion of our resources on this area in the 
future and should have a better idea of the magnitude of fraud 
involving PBMs, an issue recently brought to light by fraud allegations 
against Merck-Medco.
    Another example of action taken to reduce the waste, fraud, and 
abuse in the FEHBP at both the carrier level and the health care 
provider and supplier level is a new initiative to improve our benefit 
payment claims review capacity. The initiative combines the use of 
affordable computer technology with expert knowledge in the field of 
health benefit analysis. The goal is to develop a data warehouse, 
employ program-wide review strategies, and ultimately, implement 
sophisticated data mining techniques to thoroughly analyze FEHBP health 
benefit claims payments.
    We have developed an implementing strategy that has had an 
immediate impact on our claims analysis capabilities, while offering 
future opportunities for our auditors to use their expertise to 
discover other types of improper claims payments. We envision that this 
data warehouse/data mining project will significantly increase our 
ability to highlight trends of potential health care fraud in the 
FEHBP. The project will also provide our criminal investigative staff 
with the ability to react quickly to investigative leads. For example, 
our criminal investigators will be able to determine the potential 
program risks associated with an identified provider or subscriber 
fraud allegation, and take appropriate action in a matter of hours 
versus days or weeks.
    Our current data warehouse plan centers around health benefit 
claims data from the FEHBP contract with the BlueCross BlueShield 
Association (BCBS Association). In 2002, the BCBS Association paid 
$10.8 billion in FEHBP health benefit payments including $3 billion for 
prescription drug benefits. Our ultimate goal is to include claims data 
from all carriers who determine premium rates using the same 
methodology as FEHBP-participating Blue Cross and Blue Shield plans.
    We have recently implemented a series of computer claims analysis 
applications that our auditors are using as part of our routine BCBS 
Association FEHBP audits. The first application is designed to assist 
the audit staff in selecting a claims sample in order to verify various 
controls that have been established within the carrier's claims 
processing system. Additional applications have been designed to assist 
the audit staff in identifying the following types of routine claim 
payment errors:
     Coordination of Benefits;
     Duplicate Payments;
     Amount Paid is Greater than the Covered Benefit Charge; 
and
     Debarred Providers.
    Prior to the development of these applications, the auditors were 
required to work through a single computer specialist. While we were 
quite successful with this approach, it limited the number of audits 
that could be completed annually. Now, by applying these technical 
advancements in computer hardware and software with the skills of our 
staff (computer specialists, information systems audit staff and FEHBP 
Program auditors), we have realized two important auditing goals: 
First, we have made our claims analysis process more comprehensive; 
secondly, we have significantly increased the number of health care 
audits we are able to complete each year.
    These user friendly, computer assisted audit techniques have 
standardized the audit process, while allowing our auditors the 
necessary flexibility to adjust the applications to the specific 
requirements of their assignments. By empowering our auditors to 
complete more routine computer analyses, our computer specialists, in 
turn, are free to concentrate on more complex issues. These specialists 
also have time to work on the development of our OIG data warehouse 
and, ultimately, our data mining applications. These computer 
applications can be run from remote locations throughout the country 
through a secure, virtual private network.
    Another important new strategy in identifying potential program 
waste is to complete our claims analysis on a global rather than plan-
by-plan basis. This approach offers us the opportunity to address 
significant issues one time only instead of multiple times per year and 
to recover overcharges to the program when appropriate. We are in the 
process of completing our first such global review. This first review 
targeted our on-going problems with improperly coordinated claims with 
Medicare. While we have not finalized this review, we anticipate 
questioning over $22.5 million in improperly coordinated claims. We 
have targeted other claim payment issues, such as duplicate payments, 
for global reviews.
    One of the key components of this strategy is to work with OPM and 
the appropriate carriers to identify and resolve the root causes of 
these claim payment issues. The goal is to work cooperatively to 
resolve issues once and for all. With routine updates to the data 
warehouse, we will be able to monitor our joint efforts in resolving 
these global issues.
    Finally, we plan to apply data mining techniques to our data 
warehouse to automate the process of discovering suspect trends and 
unusual payment patterns. Our first step has been to form a data mining 
team. This team, made up of a senior FEHBP Program auditor and a senior 
computer specialist, will have the unique challenge of employing data 
mining software to discover relationships and hidden patterns in claims 
data. Using their combined technical skills, the team will use these 
relationships and patterns to identify potential health benefit payment 
errors and possible fraudulent payments. The data mining team is also 
supported by additional auditors with claims audit experience, as well 
as our OIG information systems audit unit.
    The key to our ongoing success is to provide the audit and criminal 
investigative staff--our experts--with powerful, yet easy-to-use, 
computer-assisted auditing tools to combat waste, fraud, and abuse in 
the FEHBP with increasing effectiveness and efficiency. This initiative 
mixes affordable computer technology with our human capital expertise 
to maintain and enhance our audit and criminal investigative 
capabilities in a rapidly changing technical environment.
    We are also combating fraud by health care providers and suppliers 
through our enhanced administrative sanctions and civil monetary 
penalty program. Since May 1993, our office has debarred or suspended 
over 24,000 health care providers who have committed serious violations 
that disqualify them from participating in the FEHBP.
    New regulations effective in February 2003 expand the range of 
actionable violations and substantially improved the operational 
efficiency of our sanctions activities. We anticipate that additional 
regulations will become effective later this year to enable OPM to 
impose, through administrative action, civil monetary penalties and 
financial assessments on health care providers who have knowingly 
committed claims-related violations resulting in incorrect payments of 
FEHBP funds. These financial sanctions will permit OPM to recover 
damages and costs resulting from provider misconduct and will carry a 
deterrent effect to such violations among providers participating in 
the FEHBP.

                      FEDERAL RETIREMENT PROGRAMS

    While my office focuses primarily on waste, fraud, and abuse in the 
FEHBP, we also guard against it in the RP. The RP has an erroneous 
payment rate of less than one-half of 1 percent of payments made or 
about $100 million in fiscal year 2002. Most of the erroneous payments 
are computation errors identified and corrected by the agency itself. 
However, there is other waste, fraud, and abuse within the RP, notably 
the failure to notify OPM of the annuitant/survivor's death, resulting 
in improper continuation of RP payments. This failure may often be due 
to unfamiliarity with the RP requirements. Unfortunately, it is 
frequently the result of deliberate fraud.
    OPM has tried to eliminate the erroneous payments by routinely 
performing computer matches using OPM's annuity rolls and the Social 
Security Administration's death records. We assist the agency by 
proactively reviewing RP annuity records for any type of irregularity, 
such as reaching 100 years of age. If we discover an irregularity, we 
conduct independent queries with other data bases to determine if 
annuitants are deceased. We will continue, as necessary and as our 
resources permit, to actually verify that annuitants are still alive by 
visiting them at their residences.
    As an additional measure to review the RP rolls, when we hire new 
criminal investigators, we will be placing them in areas of the country 
where large clusters of current and former Federal employees reside, 
such as California and Florida. This provides us with additional 
resources for fraud referrals against the FEHBP and the RP where the 
criminal activity is most likely to originate.

           FEDERAL EMPLOYEE GOVERNMENT LIFE INSURANCE PROGRAM

    FEGLI is the third mandatory program which my office has a 
responsibility to audit and investigate for waste, fraud, and abuse. 
However, our regular audits of the program and the financial statement 
audits by outside auditors demonstrate that there is not a significant 
amount of waste, fraud, and abuse in the FEGLI. While there undoubtedly 
is some, I would estimate it to be less than one-tenth of 1 percent of 
FEGLI payments each year or less than $2 million a year.
    At this time, we are unaware of any additional actions of an 
administrative or legislative nature needed to improve our ability to 
combat waste, fraud, and abuse in OPM mandatory programs. We are 
pleased with the support Congress has given us in recent years by 
providing effective administrative sanctions authority in the Federal 
Employees Health Protection Act of 1998 and providing statutory law 
enforcement authority for certain inspectors general offices through 
enactment of the Homeland Security Act. I will continue to keep you 
informed of our progress and future needs in our semi-annual reports 
and through such testimony as you may find helpful in the future. Thank 
you again for the opportunity to discuss the challenges, opportunities 
and progress that we have made at OPM in cooperation with the 
administration, Congress and other law enforcement agencies.

   Prepared Statement of Hon. James G. Huse, Jr., Inspector General, 
                  U.S. Social Security Administration

    Good morning, Chairman Nussle, Ranking Member Spratt, and members 
of the Committee on Budget. I welcome the opportunity to testify with 
several of my colleagues of other key agencies on this important issue 
of fraud, waste, and abuse in mandatory spending programs. Since these 
issues are at the heart of the Office of the Inspector General's (OIG) 
mission, I appreciate your letting me tell you about our efforts to 
identify and prevent fraud, waste, and abuse in the Old-Age, Survivor's 
and Disability Insurance (OASDI) and Supplemental Security Income (SSI) 
Programs administered by the Social Security Administration (SSA).
    We all know that prevention of program fraud, waste, and abuse is 
more cost effective and more meaningful if it can be detected before 
benefits are ever paid. To that end, our office has focused not only on 
identifying erroneous payments, but also preventing such payments from 
being issued in the first place.
    I would reiterate two comments Comptroller General David Walker 
made during questioning at your June 18 hearing. He noted that the 
greatest potential for cost savings lies in making fundamental 
reassessments of government programs, policies, and activities based in 
``21st century reality,'' and that smaller savings were possible 
primarily from improving economy, efficiency, and effectiveness of 
Federal programs. The smallest savings, he said, can be found in the 
areas of vulnerability to waste, fraud, abuse, and mismanagement. The 
sort of fundamental reassessment Comptroller General Walker described 
is not quick work, and will entail prolonged public discussion of the 
manner of government we want in the next century.
    Today's hearing pursues more modest, and hopefully more readily 
obtainable goals. Certainly there are still areas of waste, fraud, 
abuse, and mismanagement in government programs, though years of effort 
have reduced waste from every Federal agency. In finding those areas of 
fraud, waste, and abuse, we also devise the ways to improve economy, 
efficiency and effectiveness that the Comptroller General mentioned as 
a more productive source of savings.
    Let me add to what the Comptroller General advocated. He urged 
Congress to adopt the recommendations of the various Offices of the 
Inspector General and to hold agencies accountable for not adopting OIG 
recommendations--especially those that have not been implemented over 
time and could save Federal funds.
    For 25 years, Congress has tasked OIGs with reporting on the work 
we do. A great deal of our work product, as I will describe today, 
consists of the careful and thoughtful audit analyses we conduct. Twice 
each year we report to Congress--and specifically to the committees 
that oversee our parent agencies--on recommendations we have made to 
save money or to deliver agency services more effectively. Those 
reports are required by statute to advise you on what our agencies have 
done to put our recommendations into effect, and what they have left 
undone or done differently.
    The savings we propose represent great sums of money that could be 
used better elsewhere, whether within or outside of Government. The 
OIGs exist not only to capture frauds and cheats, but equally to find 
those savings that may be realized through better management and less 
waste. Our ability to do all of this is limited only by our resources, 
and we return more in savings than we cost in outlays by a return-on-
investment figure most corporations would envy. My colleagues and I 
appreciate the interest this hearing demonstrates in making greater use 
of the work we are paid to do. I believe we offer this committee and 
the other committees of Congress a great deal of help in oversight and 
decision-making.
    Within SSA, to focus on my own agency, despite significant strides 
there is still room for improvement. In fiscal year 2002, for example, 
SSA issued $483 billion in OASDI and SSI benefit payments to 53.1 
million people. Thus, considering the volume and amount of payments SSA 
makes each month, even a small percentage of fraud, waste, and abuse 
can result in millions of dollars in erroneous benefit payments. It can 
also harm SSA's reputation as a good steward of its programs and 
American's faith in Government overall.
    For instance, in fiscal year 2002, SSA identified and reported $1.6 
billion in overpayments in the OASDI Program and $2.0 billion in 
overpayments in the SSI Program--for a total of $3.6 billion in 
overpayments. The agency must now expend its scarce resources to 
recover and return those overpayments to either the OASDI Trust Fund or 
the General Fund. Although a portion of these could not be prevented 
under current legislative requirements or due to the current design of 
SSA's Programs, another portion can be attributed to fraud, and abuse.
    According to SSA statistics, the agency collected about $1.9 
billion in overpayments in fiscal year 2002 (for periods prior to and 
including fiscal year 2002). Further, $514 million in overpayments were 
waived and $506 million were deemed uncollectible in fiscal year 2002. 
(Charts attached to this testimony provide additional information.) 
There is also a portion of the debt that remains unresolved. Under 
1631(7)(B)(ii) and 204(b) of the Social Security Act, SSA has the 
authority to waive an overpayment. If an overpayment is waived, the 
individual is no longer liable for the debt and SSA can not collect the 
overpayment amount at a later date. On the other hand, overpayments 
that are deemed uncollectible may be recovered at a later date if a 
person's circumstances change. If an overpayment is deemed 
uncollectible, SSA will stop collection activity; however, if the 
person comes back into pay status or other circumstances arise that 
indicate the person can repay the debt, then SSA can try to recover the 
funds. These statistics represent only identified instances of 
overpayments in SSA's Program. They do not represent overpayments from 
fraud, waste, and abuse that are undetected.
    To quantify the magnitude of fraud, waste, and abuse, we plan to 
initiate a comprehensive study in fiscal year 2004 to estimate some of 
the unidentified overpayments in SSA's disability programs. 
Specifically, we plan to sample and analyze approximately 1,500 
disabled beneficiary cases to determine whether the benefits have been 
properly paid or should be terminated because of fraud, waste, or 
abuse. This work will focus on the 4 disability diagnosis groups that 
our prior audit and investigative work have shown to be most 
problematic. Due to the comprehensive nature of our planned review and 
the resources needed to investigate this type of activity, we expect 
that the work necessary to analyze these cases will take between 12 and 
15 months to complete.
    We are focusing our work on SSA's disability programs, in part, 
because the General Accounting Office designated modernizing Federal 
disability programs--including SSA's disability program--as a high-risk 
area in January 2003; and also because of the higher likelihood of 
fraud, and abuse in this area. To illustrate, in fiscal year 1998, with 
assistance from SSA and the State Disability Determination Services 
(DDS), we analyzed 66 SSI cases of individuals from an extended Georgia 
family of 181 SSI recipients who received in excess of $1 million based 
on alleged physical and emotional disorders, hyperactivity, and 
attention deficit disorders. During the continuing disability review 
(CDR) process, SSA halted benefits to these individuals. It is believed 
that most of these claimants initially qualified for benefits because 
they malingered or feigned a disability.
    In addition to our planned work to quantify the amount of 
unidentified improper payments due to fraud, waste, and abuse in SSA's 
disability program, our Cooperative Disability Investigations (CDI) 
teams--which first opened in fiscal year 1998--are at the forefront of 
our efforts to identify and prevent fraud. The CDI teams investigate 
suspicious disability claims under the DI and SSI Programs; and, 
generally, these teams consist of OIG special agents and personnel from 
SSA and the State DDS, as well as State and local law enforcement. 
These CDI teams have been identifying and investigating doctors, 
lawyers, and other third parties who facilitate disability fraud. 
Today, 17 CDI units have been opened in 16 States and we plan to add 
CDI units on a year-to-year basis, depending on availability of funds. 
In the first 6 months of this year, we reported that the CDI units had 
confirmed 733 fraud cases, recovered $879,235 in funds, and saved the 
Social Security Program over $43 million.
    Our work has also identified fraud, waste, and abuse in the 
disability program. For example, we recently completed an audit on 
SSA's procedures to control duplicate SSI checks issued to the same 
recipient and recover overpayments resulting from double check 
negotiations. We found that SSA recorded over 226,000 double check 
negotiations totaling about $104.7 million during the 2-year period 
ended March 31, 2002. During the most recent year, we identified 8,375 
individuals who negotiated both their initial and replacement checks 
from 3 to 12 times in the same year, resulting in overpayments of $16.7 
million. This category includes 1,271 individuals who negotiated 6 or 
more SSI replacement and initial checks, resulting in average 
overpayments of about $3,500. Our investigators are also involved in a 
project in Syracuse, NY--where 649 double check negotiations were 
processed--to seek prosecution of individuals who abused the 
replacement check process. As a result of our work, SSA has revised its 
procedures to improve its controls over double check negotiations and 
recovery of related overpayments.
    We also recently identified fraud, waste, and abuse involving the 
issue of unreported marriage information to SSA. Based on our analysis 
of some State Bureau of Vital Statistics records, we estimated that if 
SSA had purchased State vital records to identify unreported marriages 
at the end of 1999, the agency could have detected about $11.9 million 
in OASDI overpayments on an annual basis at a projected cost of $1.7 
million--resulting in net program savings of about $10.2 million. As a 
result of our work, we made several recommendations to SSA, including 
that the agency obtain marriage records from State Bureaus of Vital 
Statistics on a regular basis to identify beneficiaries who did not 
report their marriages. SSA did agree to continue its efforts to work 
with the National Center for Health Statistics and National Association 
for Public Health Statistics and Information Systems to promote the 
reengineering of State vital records processes. The initial phase of 
the effort deals with birth and death records. SSA plans to have 90 
percent of the States participating in the initial phase by 2005 at the 
earliest. Implementation of a computer match with marriage records 
would occur as a later phase.
    As you can see, we have made great strides in preventing fraud, 
waste, and abuse in SSA's Programs, as well as in identifying and 
recovering erroneous payments that result from it. We will continue to 
focus our resources on this critical area; and where necessary, we will 
work with SSA and Congress to make any needed administrative or 
legislative changes.
    I would be happy to answer any questions the committee might have.
    Thank you.

                                                                DISPOSITION OF OASDI DEBT
                                                                [In millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       Fiscal year      Fiscal year      Fiscal year      Fiscal year      Fiscal year
                         OASDI overpayments                                1998             1999             2000             2001             2002
--------------------------------------------------------------------------------------------------------------------------------------------------------
Collected..........................................................         $1,103.4         $1,191.3         $1,343.6         $1,121.1         $1,036.1
Waived.............................................................           $159.5           $201.8           $233.5           $260.2           $278.0
Uncollectible......................................................           $128.7           $110.5           $120.7            $95.1           $150.7
--------------------------------------------------------------------------------------------------------------------------------------------------------


    The bar chart shown above--which was provided by SSA--illustrates 
the disposition of SSA's OASDI overpayment debt for the past 5 years in 
terms of what has been collected (the green bar), what has been waived 
(the yellow bar) and what has been terminated as uncollectible (the red 
bar).
    As you can see, collections peaked in fiscal year 2000 at $1.34 
billion. However, they decreased the last 2 years; and collections were 
only a little over $1 million dollars in fiscal year 2002.
    This chart shows that if SSA were to collect just 10 percent of the 
OASDI funds it waived or wrote off as uncollectible for the last 5 
years, the agency could save about $174 million. (Breakdown: If SSA 
collected 10 percent of the funds it waived, savings would be $113.3 
million. If SSA collected 10 percent of the funds it deemed 
uncollectible, savings would be $60.6 million).
    The chart also shows the savings if SSA collected 30 percent or 50 
percent of the erroneous payments it waived or wrote off over the last 
5 years (from 1998-2002).

                                                                        SSI DEBT
                                                                [In millions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                       Fiscal year      Fiscal year      Fiscal year      Fiscal year      Fiscal year
                                                                           1998             1999             2000             2001             2002
--------------------------------------------------------------------------------------------------------------------------------------------------------
Collected..........................................................           $539.2           $639.9           $701.6           $795.5          $4859.7
Waived.............................................................            $91.1           $145.2           $194.4           $174.3           $196.7
Uncollectible......................................................           $215.2           $349.5           $301.2           $410.6           $326.6
--------------------------------------------------------------------------------------------------------------------------------------------------------


    As shown in the chart above (which was also provided by SSA), the 
agency's collection of SSI overpayments have been increasing slightly 
each year. For example, SSA collected of $795 million in fiscal year 
2001 and then collections increased to $859 million in fiscal year 
2002.
    However, as you can also see from the chart, waivers and 
uncollectible debt make up a larger percentage of the SSI Program than 
the OASDI Program. This is not unexpected since the SSI Program is a 
needs based program and it is difficult to collect overpaid funds from 
those who are financially needy in the first place. Also, the general 
limitation of only collecting 10 percent from current SSI benefits 
impacts the agency's ability to collect SSI overpayments.
    This chart show that If SSA were to collect just 10 percent of the 
SSI funds it waived or wrote off as uncollectible for the last 5 years 
that the agency could save about $240 million--$80 million from waivers 
and $160 million form funds deemed uncollectible.
    The chart also shows the savings if SSA collected 30 percent or 50 
percent of the overpayments it waived or wrote off over the last 5 
years (from 1998-2002)--$721 million in savings if 30 percent of 
waivers/uncollectible funds recovered and $1.2 billion in savings if 50 
percent of waivers/uncollectible funds recovered.

 Prepared Statement of Hon. Anne M. Sigmund, Acting Inspector General, 
                        U.S. Department of State

    Chairman Nussle and members of the committee:
    Thank you for this opportunity to highlight recent work of the 
Office of Inspector General (OIG) directed toward working with the 
Department of State and the Broadcasting Board of Governors (BBG) to 
improve the efficiency and effectiveness of their respective programs 
and operations and to prevent fraud, waste, and mismanagement. Several 
of our reviews were initiated at the request of the Department and the 
BBG and designed to ensure that tax dollars were utilized prudently and 
focused where needed most.

                  INFORMATION TECHNOLOGY AND SECURITY

    In the area of information technology, OIG has focused on the 
Department's vulnerabilities with respect to new technology and its 
efforts to develop new strategies for dealing with the communications 
challenges facing foreign affairs agencies. For example, we recently 
reviewed the Department's implementation of the Foreign Affairs System 
Integration (FASI) project. The Department was the lead agency in this 
global affairs initiative to acquire and test a standard system, 
featuring a web-based portal, applications, and tools for improved 
communications, information sharing, and knowledge management among 
U.S. foreign affairs agencies at overseas missions. In the past, each 
agency had its own information systems, which could not communicate 
easily with those of other organizations within a diplomatic mission, 
despite the need to share information on a variety of issues. OIG 
reviewed the FASI project, which was piloted at our embassy in Mexico 
City, and determined that the project was not meeting its objectives. 
Specifically, OIG found that FASI did not prioritize or obtain user 
input to requirements sufficiently to ensure that only the most 
essential needs were met with the interagency system. FASI did not 
adequately coordinate with or consider using existing systems as 
potentially less costly alternatives to eliminate duplication. 
Interagency commitment to the system also was uneven due to inadequate 
marketing to other organizations whose support also would be critical 
to supporting global system deployment. Further, OIG found that the 
overseas pilot test of the interagency system was at risk due to poor 
timing, inadequate communications and coordination, ineffective content 
management, and system and technical difficulties. Due to these 
concerns, OIG recommended that, after completing the pilot test, the 
project be streamlined and redirected. In keeping with OIG 
recommendations, the Department discontinued the FASI project, thereby 
avoiding the cost of $200 [million] to $235 million to deploy globally 
the interagency system. The Department has merged FASI objectives with 
those of a related messenging system replacement initiative, which will 
allow for reexamination of user requirements and consideration of 
alternative approaches for meeting the knowledge sharing requirements 
of the Department and the U.S. foreign affairs community.
    OIG conducted information technology (IT) inspections at four 
missions--Lisbon, Madrid, Montevideo and Buenos Aires--within the last 
6 months to assess how information was handled and protected. These 
reviews identified several opportunities for improving IT management 
controls, operational controls and technical controls. In terms of 
management controls, OIG recommended that these missions periodically 
assess their IT security vulnerabilities and risks; prepare and 
implement IT security plans to mitigate the identified vulnerabilities 
and risks; and routinely review and improve the established IT security 
controls. With respect to operational controls, OIG recommended that 
the Department address security awareness problems by conducting 
training and by ensuring that the administrators assigned to embassies 
overseas have in-depth knowledge of appropriate security. Finally, 
concerning technical controls, OIG recommended that the Department 
improve the management of its access controls to prevent unauthorized 
access to systems; systems configuration, including compliance with the 
Department's baseline security settings; and audit trails to ensure 
individual or process accountability to enable the reconstruction of 
events, detect intrusions, and identify problems.

                           INTERNAL CONTROLS

    OIG reviewed internal controls for several Department and BBG 
Programs to reduce vulnerabilities for fraud, waste, and mismanagement 
in the areas of real property systems as well as use of the government 
purchase cards and the domestic travel card program. In our review of 
the Department's domestic travel card program, we examined the policies 
and procedures that were in place for managing the program. We noted 
that the Department had recently instituted several steps to improve 
the oversight of 90-day and 120-day past due categories of 
delinquencies on cards held by employees. However, the Department had 
not addressed the 60-day past due category of delinquencies, which may 
cause the commercial credit card provider to reduce the volume-based 
refund it gives the Department and can lead to account suspension, 
which may hinder an employee's ability to travel on Department 
business. Moreover, OIG determined that the Department had not done 
enough to prevent and detect misuse of the cards. As a result, OIG 
recommended that the Department improve and centralize its travel card 
regulations and that program coordinators and cardholders receive 
better training. We also concluded that the Department's Bureau of 
Resource Management was working with the Bureau of Human Resources, the 
Bureau of Diplomatic Security, and OIG to develop an acceptable 
notification process when employees misuse the cards or become 
delinquent with repayment. OIG also determined that the Department did 
not have adequate internal controls for providing administrative 
oversight of the program. For example, the Department did not ensure 
that program coordinators were managing an appropriate number of 
accounts; that accounts were transferred or canceled as needed, when, 
for example, an employee transferred or left the Department; and that 
multiple accounts for an individual employee were identified and 
cancelled. We recommended that the Department develop guidelines to 
address travel card delinquencies in the 60-day past due category, 
provide program coordinators with clear written guidance on an Intranet 
site and through formal training, and improve the oversight of the 
travel card program by checking for multiple accounts and transferring 
or canceling travel cards when an employee leave a bureau within the 
Department.
    Our review of the Department's purchase card program was designed 
to evaluate the effectiveness of domestic operations for the program 
and determine whether the Department was achieving cost savings. We 
reported in 2001 that the program had experienced rapid growth in the 
number of cardholders since its inception and that the Department's 
customers were receiving goods and services more quickly under the 
program. However, we also found that part of the rapid growth in 
cardholders was attributable to purchase card users who made infrequent 
or no transactions, and, therefore, may not actually need the cards. 
Moreover, about 12 percent of the domestic transactions review by OIG 
lacked required documentation for OIG to independently verify that 
purchases were made properly and reconciled in a timely manner. 
Further, responsible officials interviewed by OIG had not conducted 
required annual reviews of their offices' purchase card operations. OIG 
also found that the Department's method for determining cost savings--
the reduction in the number of paper purchase orders processed--does 
not necessarily capture the actual administrative cost reductions that 
have occurred. Finally, OIG found inappropriate procurement practices 
that, if changed, could yield additional cost or time savings for the 
Department. Based on OIG's report recommendations and observations on 
the purchase card program, the Department has addressed the 
documentation and annual review issues. Additionally, the Department 
has taken steps to examine low purchase card use and withdraw unneeded 
cards, clarify reporting on cost savings from the program, and explore 
additional cost avoidance measures. Subsequent to the 2001 report, OIG 
advised the Department in their efforts to identify cardholders, who do 
not comply with program requirements and track corrective actions. 
Finally, OIG suggested and the Department agreed to identify cardholder 
best practices that can be used throughout the program for improving 
the economy and efficiency of operations. This fall, OIG will closely 
review ways for optimizing the overseas use of purchase cards and for 
preventing waste, fraud, and mismanagement.
    In our review of the Broadcasting Board of Governors (BBG) Controls 
on Domestic Personal Property, OIG examined whether the International 
Broadcasting Bureau (IBB) had established effective policies for 
inventory controls at six of its property management units. OIG found 
that the IBB did not have fully functioning property management 
policies and procedures to ensure that government property was properly 
used and safeguarded. Furthermore, there was no evidence that a 
complete property inventory had ever been conducted by the IBB. 
Therefore, OIG made several recommendations, including conducting an 
agency-wide inventory to provide an accurate property baseline, 
implementing a plan for bringing the agency into compliance with 
applicable accounting and reporting requirements, and establishing a 
single, centralized receiving operation for all international 
headquarters' offices to ensure better accountability. The IBB 
generally agreed with our report and is taking steps to implement our 
recommendations.

                            PREVENTING FRAUD

    Central to OIG's portfolio for preventing fraud, waste, and 
mismanagement is our investigative work. We identified approximately 
$2.5 million that had been embezzled from Embassy Lusaka as a result of 
a Foreign Service National directing funds to bank accounts associated 
with bogus vendors. OIG identified an additional $850,000 that had been 
embezzled between May 1997 and June 2000 from the Miami Passport Agency 
for which two Department employees were indicted on a conspiracy charge 
and were ultimately sentenced for imprisonment. In a recent review of 
the Department's domestic passport operations, OIG found that a 
comprehensive set of internal control procedures for cashiering and 
blank passport book controls had been established. However, we also 
found that internal control procedures for cashiering had not been 
implemented consistently at five of the six passport agencies visited. 
In addition, OIG found that the Department's management internal 
control reviews were not conducted frequently enough to assess 
adequately their reliability. Finally, OIG concluded that the 
unannounced adjudication audit program is not achieving its primary 
objective of preventing and detecting malfeasance. The Department 
agreed with all of OIG's recommendations with the exception of 
requiring all passport agencies to perform daily reconciliations of the 
cash receipts and cash register summary reports.
    Mr. Chairman, we have worked closely and collaboratively with 
Department and BBG senior managers to ensure accountability in programs 
and operations for these two agencies. We believe that this partnership 
has resulted in a more efficient and effective use of appropriated 
funds. Thank you.

Prepared Statement of Hon. Pamela J. Gardiner, Deputy Inspector General 
   for Audit, U.S. Treasury Inspector General for Tax Administration

    Mr. Chairman and members of the committee, I appreciate the 
opportunity to appear before you today to discuss five important 
questions involving waste, fraud, and abuse in Internal Revenue Service 
(IRS) programs. Government agencies must always spend taxpayers' 
dollars wisely. However, during times of extremely tight budgets, it 
becomes even more important that steps are taken to eliminate waste, 
fraud, and abuse.

1. YOUR CURRENT ESTIMATE OF THE MAGNITUDE (IN DOLLARS) OF WASTE, FRAUD, 
           AND ABUSE WITHIN YOUR AGENCY'S MANDATORY PROGRAMS
    It is impossible to accurately estimate the magnitude of waste, 
fraud, and abuse in IRS programs, but there are a number of areas of 
concern. For example, statistics are frequently cited that the tax gap 
(i.e., the difference between the amount of tax owed and the amount of 
tax voluntarily paid) is $280 billion. The IRS estimated between $8.5 
and $9.9 billion of the $31.3 billion in Earned Income Tax Credit (EIC) 
claims on tax year 1999 returns should not have been paid. Further, an 
estimated $40 to $70 billion in taxes are believed to be avoided by an 
estimated 1 to 2 million taxpayers using offshore bank accounts.
    However, all of these figures are just estimates, some are 
outdated, and some can be misleading. For example, it is not always 
clear what constitutes waste, fraud, and abuse. With respect to the 
EIC, if divorced parents share custody of a child, and both claim the 
EIC because each believes he or she is entitled to receive it, is that 
waste, fraud, or abuse? The $8.5 to $9.9 billion range cited earlier is 
for noncompliance; the amount involving outright waste, fraud, or abuse 
is not known.
    Nonetheless, there clearly is waste, fraud, and abuse in IRS 
programs. For example, during calendar year 2001, IRS Fraud Detection 
Centers, which are designed to detect fraudulent returns and prevent 
issuance of related false refunds, identified $338.3 million in 38,846 
fraudulent claims involving 3,447 schemes. In addition, the advent of 
electronic filing of income tax returns has provided a new mechanism 
for unscrupulous preparers to commit fraud. IRS Criminal Investigation 
determined that fraudulent electronic filings through December 16, 
2002, had increased 720 percent since the end of 1999. As another 
example, the IRS Frivolous Return Unit is using a computer program my 
office developed to identify and stop reparations credit claims (i.e., 
false claims for a special tax credit to African-American taxpayers who 
may be descendants of slaves). In just a 2-day period in March 2002, 
the Frivolous Return Unit reported that it identified 19 such claims, 
most of which were for more than $40,000. I will be discussing more 
specific instances of waste, fraud, and abuse in my response to 
question 3.

    2. THE GENERAL NATURE OF THESE PROBLEMS AND HOW LONG THEY HAVE 
                               PERSISTED

    The IRS has been experiencing many significant problems that 
include declining enforcement actions, the lack of a current baseline 
measure of reporting compliance, a growing balance of uncollected 
accounts receivable, delays in modernizing its computer systems, 
weaknesses in its financial management controls, increasingly complex 
tax laws, and IRS employees' concerns over the mandatory termination 
provision in section 1203(b) of the IRS Restructuring and Reform Act of 
1998 (RRA 98). Despite experiencing these problems, in recent years the 
IRS has processed a steadily increasing number of tax returns and 
revenue. From 1987-2001, the number of returns filed increased by 22 
percent, from 140 million to 171 million. In approximately the same 
time frame, the amount of revenue received by the IRS increased from 
$935 billion to $2.1 trillion.
    Declining enforcement actions: The examination rate has dropped 
significantly in recent years to a level that appears to have already 
been detrimental to the system. Specifically, the percentage of 
individual tax returns selected for examination has dropped from 1.67 
percent in fiscal year 1996 to .57 percent in fiscal year 2002. 
Additionally, a survey conducted for the IRS Oversight Board identified 
an 11-point drop (from 87 percent in 1999 to 76 percent in 2001) in the 
percentage of Americans who believe it is inappropriate to cheat on 
their tax returns.
    Enforcement actions against individuals and businesses that 
purposefully conceal tax liabilities or even refuse to submit tax 
returns have fallen dramatically, despite concerns that tax cheating 
remains at high levels. The following chart exhibits the fact that, 
since fiscal year 1996, the level of IRS enforcement activities has 
significantly declined.

          TABLE 1.--ENFORCEMENT ACTIONS SINCE FISCAL YEAR 1996
------------------------------------------------------------------------
                                                Overall decline  (fiscal
              Enforcement action                     year 1996-2002)
------------------------------------------------------------------------
Face-to-Face Audits...........................                      70%
Correspondence Audits.........................                      56%
Liens.........................................                      34%
Levies........................................                      79%
Seizures......................................                      97%
------------------------------------------------------------------------


    The overall decline in enforcement actions has been primarily 
attributed to a long-term reduction in compliance staffing, the 
redirection of compliance resources to customer service functions 
during the filing season, a decline in direct examination time, and 
concerns over section 1203(b) of the RRA 98. Specifically, collection 
revenue officer staffing decreased from 5,537 in fiscal year 1996 to 
3,495 in fiscal year 2002, while during the same time examination 
staffing decreased from 17,406 to 13,046. Further, the number of 
examination and collection staff years detailed to customer service 
increased from 165 in fiscal year 1996 to 974 in fiscal year 2000, 
although it has since declined to 217 for fiscal year 2002. Direct 
examination time decreased from 52 percent in fiscal year 1996 to 41 
percent in fiscal year 2000, but has since rebounded to 51 percent in 
fiscal year 2002. Finally, as a result of the mandatory termination 
provision in section 1203(b) of the RRA 98, some IRS employees have 
been reluctant to take enforcement actions. This has been a deterrent 
to fair enforcement of the tax laws.
    Lack of a current baseline measure of reporting compliance: The IRS 
has not conducted Taxpayer Compliance Measurement Program (TCMP) 
examinations since 1988. These examinations required an exhaustive 
review of the entire tax return for those taxpayers randomly selected. 
The results of the TCMP were used to improve the effectiveness of 
selecting for examination returns that would result in a change. 
Without the TCMP, the IRS has neither had a reliable method to measure 
voluntary compliance, nor been able to determine the effect that 
increased customer service and diversion of compliance resources are 
having on voluntary compliance.
    Uncollected accounts receivable: The IRS is challenged by an 
increasing balance of accounts receivable (i.e., amounts owed to the 
IRS because of balance due, but unpaid, filings by taxpayers, and IRS 
enforcement actions). From fiscal year 1996 to 2002, this balance 
increased from $216 billion to $280 billion. The IRS has estimated that 
approximately $77 billion of the $280 billion is potentially 
collectible.
    Need for modernized computer systems: The IRS' goal of providing 
efficient and responsive information services to its operating 
divisions is heavily dependent on modernizing its core computer systems 
while maintaining the existing systems. Since 2001, the Business 
Systems Modernization (BSM) Program has been deploying projects and 
learning valuable lessons that should help improve future projects. As 
of the end of fiscal year 2002, the 8 BSM projects that are currently 
being developed and deployed had experienced cost increases of 26 
percent and delays averaging 13 months over initial estimates, most 
occurring during the planning and design phases of these projects. The 
BSM Office forecasts that future project costs and schedules will be 
much closer to the estimates.
    One of these projects, the Customer Account Data Engine or CADE, 
will eventually replace the existing master file of taxpayer accounts. 
CADE will be the foundation for managing taxpayer accounts in the 
modernized IRS. CADE and related applications will improve customer 
service and compliance. Although the IRS and its contractor have made 
progress in delivering the CADE project, the Release 1 deployment date 
is now estimated to be August 2003, which is about 20 months behind its 
original planned delivery date. Since CADE is the foundation for other 
projects, its delay means that taxpayers are not receiving the benefits 
of faster processing, and other projects that will provide improved 
customer service and compliance activities will also be delayed.
    Weaknesses in financial management controls: Although the General 
Accounting Office (GAO) gave the IRS an unqualified (clean) opinion on 
its fiscal year 2002 financial statements, GAO reported that the IRS' 
internal controls were not effective and its financial management 
systems lacked substantive compliance with the Federal Financial 
Management Improvement Act. Some control weaknesses affect the IRS' 
ability to properly manage unpaid assessments, resulting in both 
taxpayer burden and potentially billions of dollars in lost revenue. 
Other weaknesses in controls over tax refunds could result in the 
disbursement of billions of dollars of improper refunds. Also, 
weaknesses in computer security controls may allow unauthorized 
individuals to access, alter, or abuse proprietary programs and 
electronic data and taxpayer information.
    Increasing complexity of the tax laws: This further complicates the 
IRS' efforts to administer the tax system and minimize waste, fraud, 
and abuse. For several years, the Taxpayer Advocate has identified tax 
law complexity as a major concern. For example, according to the fiscal 
year 2000 Taxpayer Advocate's Annual Report to Congress, tax law 
complexity was the highest-ranking problem individual and business 
taxpayers had with the IRS. In the 2002 report, the Taxpayer Advocate 
stated that the scope and complexity of the tax code make it virtually 
certain that taxpayers will face procedural, technical and bureaucratic 
obstacles in meeting their tax obligations. Small businesses are 
particularly affected by the complexity of tax law and IRS' related 
processes. For example, each year an estimated 46,000 small businesses 
are not successful in filing their U.S. Income Tax Return for an S-
corporation (Form 1120's) because the IRS does not have valid elections 
on file to allow their returns to be processed. Consequently, these 
taxpayers spend an estimated 2.3 million hours each year preparing 
returns that cannot be successfully processed.

               3. ILLUSTRATIVE EXAMPLES OF THESE PROBLEMS

    On June 20, 2003, TIGTA provided a letter to the chairman and this 
committee containing examples of audits and investigations that 
identified waste, fraud, and abuse involving the IRS in fiscal years 
2002 and 2003. Our letter was in response to an effort initiated in May 
2003 to scrutinize certain mandatory programs and identify examples of 
waste, fraud, and abuse sufficient to reduce outlays in those programs 
by 1 percent.
    The following three sections provide brief synopses of (1) audit 
reports resulting in cost savings,\1\ (2) significant audits/
investigations that identified internal and external fraud, and (3) 
audit reports that identified revenue protection \2\ or trends in 
compliance and systems modernization. The first two sections were 
included in our June 20 letter; the third section, while not directly 
related to cost savings in appropriated funds, is nonetheless important 
since this audit work shows the importance of protecting tax revenue 
and other important trends. For each audit report, we have included a 
link to our web site to provide access to the entire report.

  Reports That Identified Cost Savings at the Internal Revenue Service

           OPPORTUNITIES EXIST TO EXPAND THE TELEFILE PROGRAM

http://www.treas.gov/tigta/2003reports/200340092fr.pdf
    Opportunities exist for the IRS to expand its TeleFile Program to 
provide more taxpayers with the option of filing via telephone. The 
number of taxpayers who use the TeleFile system each year decreased 
from the 1998-2002 filing seasons. Since the expansion of the TeleFile 
Program in 1997, the IRS has not identified any additional 
opportunities to expand taxpayer TeleFile Program eligibility. The IRS' 
reluctance to expand the TeleFile Program is based primarily on 
management's incorrect perception that the processing costs for 
TeleFile tax returns significantly exceed the processing costs for 
paper filed and other electronically filed tax returns. Management also 
believes that the use of a telephone to file tax returns is considered 
obsolete because of the widespread use of computers and the Internet. 
To provide measurable benefits to both the taxpayer and the IRS, and to 
enable the IRS to continue to move toward its goal of having 80 percent 
of all tax returns e-filed by 2007, we recommended that IRS management 
develop a strategy outlining steps to be taken to offer the TeleFile 
Program to those taxpayers who file a Form 1040EZ and are currently 
ineligible to use the TeleFile system. We estimated that our audit 
would result in $31.86 million in funds put to better use.

 THE IRS CONTINUES TO OWE MILLIONS OF DOLLARS IN INTEREST TO TAXPAYERS 
                          WITH FROZEN REFUNDS

http://www.treas.gov/tigta/2002reports/200230062fr.pdf
    The IRS was experiencing problems in releasing large dollar refunds 
because of the automatic freeze placed on accounts containing a credit 
balance of $1 million or more. In a prior report, we indicated that 
controls did not ensure that frozen refunds were timely released and 
additional interest of approximately $17.5 million was paid to 
taxpayers with frozen accounts. The IRS did not implement our 
recommendations as agreed, and our current review found that the IRS 
continues to pay millions of dollars in interest to taxpayers with 
frozen refunds. In 51 percent of the frozen accounts we reviewed, the 
improperly frozen accounts resulted in issuing approximately $185.8 
million in refunds and paying taxpayers an additional $15.4 million in 
interest. As a result of our recommendation, we identified $12.9 
million in funds put to better use.

 IMPROVED OVERSIGHT OF THE GUARD SERVICES CONTRACT IS NEEDED TO ENSURE 
             COMPLIANCE WITH CONTRACT TERMS AND CONDITIONS

http://www.treas.gov/tigta/2003reports/200310076fr.pdf
    Increased oversight of the guard services contract is needed to 
ensure the contractor's compliance with all contract terms and 
conditions, particularly those concerning licensing. Although 
validations completed through October 2002 did not identify any issues 
related to the current employment of security guards with criminal 
convictions or immigration violations, the IRS paid $4.7 million in 
costs during the time when the contractor was in violation of the 
contract, all of which we classified as questioned costs.

    THE IRS COULD REDUCE THE NUMBER OF UNNECESSARY NOTICES SENT TO 
        TAXPAYERS REGARDING UNREPORTED INCOME FROM SCHEDULES K-1

http://www.treas.gov/tigta/2003reports/200330071fr.pdf
    In an effort to increase tax reporting compliance and because of a 
mandate from the Senate Committee on Finance, the IRS began matching 
information reported to taxpayers on Schedules K-1 to the taxpayers' 
individual income tax returns. The IRS must ensure notices issued to 
taxpayers as a result of this matching are appropriate; otherwise, the 
IRS' compliance efforts will be compromised. Recently, the IRS 
suspended issuing notices resulting from underreported Schedule K-1 
income and committed to evaluate the program to make enhancements. The 
IRS implemented several procedures to try and ensure notices were not 
issued to taxpayers unnecessarily. Despite these steps, the rate of 
assessments made on Underreporter Program cases related to Schedule K-1 
income is significantly lower than the rate of assessments made for 
other Underreporter Program case income types. We recommended that the 
IRS make changes to the Form 1040 Schedule E to account for the 
original amount of Schedule K-1 income and to show offsets to this 
income. We further recommended that the IRS reevaluate the costs and 
benefits of key verifying data (entering data twice) or evaluate other 
ways to improve the accuracy of Schedule K-1 information in the IRS' 
database. Our audit identified $3 million in funds put to better use 
that could be used to improve the accuracy of IRS processing of paper 
Schedules K-1.

    ADDITIONAL COST SAVINGS AND INCREASED PRODUCTIVITY IN THE PRINT 
 OPERATION AND COMPUTER SUPPORT FUNCTION CAN BE ACHIEVED AT THE CAMPUS 
                               LOCATIONS

http://www.treas.gov/tigta/2003reports/200320035fr.pdf
    IRS management has frequently evaluated and modified the 
organizational structure of its Information Systems Division to 
accomplish program objectives. However, management could further 
increase the electronic dissemination of internal reports and improve 
performance measures. IRS management should require users to 
discontinue printing reports that are currently available in both 
printed and electronic format, convert additional reports to electronic 
format, and establish a process for migrating identified efficient 
report distribution processes to all campuses. Performance measures 
should also be established to assess the efficiency of the print 
operation and computer support function. Finally, performance 
management reports for the print operation and computer support 
function should be created to ensure that results are compared against 
performance measure goals and actions are taken to improve operational 
efficiency. As a result of our recommendations, we identified $2.24 
million in funds put to better use.

  THE MANAGEMENT OF INFORMATION SYSTEMS MAINTENANCE CONTRACTS CAN BE 
                                IMPROVED

http://www.treas.gov/tigta/2002reports/200220100fr.pdf
    The IRS is unnecessarily paying for maintenance on some computer 
assets. Maintenance contracts costing an estimated $451,400 per year 
cover 5,236 computer monitors, 108 printers, and 206 fax machines. We 
estimated 10 percent of these items would fail and require repairs each 
year. Canceling the maintenance contracts and allocating approximately 
$57,500 for replacements would save approximately $393,900 per year 
($1,141,500 over 3 years).\3\ In addition, cabinets and racks typically 
do not require periodic maintenance and, therefore, should not be 
included in maintenance contract coverage. Canceling these maintenance 
contracts would save approximately $13,600 per year ($39,400 over 3 
years).\3\ In total, our recommendations resulted in $1.18 million in 
funds put to better use.

  PRICING DISCREPANCIES ON THE LONG TERM MAINTENANCE COMPUTING CENTER 
                                CONTRACT

http://www.treas.gov/tigta/2002reports/200210008fr.pdf
    The contractually agreed upon price for specific contract line 
items was incorrectly priced by the contractor and/or its 
subcontractor. Specifically, the IRS was billed monthly for the yearly 
costs of maintenance coverage for nine contract line items. 
Additionally, the IRS paid for a higher priced software upgrade than 
that provided by the contractor. Approximately $580,000 was associated 
with these billing discrepancies, all of which we classified as 
questioned costs.

 Audits and Investigations That Identified Internal and External Fraud

   SIGNIFICANT EFFORTS HAVE BEEN MADE TO COMBAT ABUSIVE TRUSTS, BUT 
 ADDITIONAL IMPROVEMENTS ARE NEEDED TO ENSURE FAIRNESS AND COMPLIANCE 
                        OBJECTIVES ARE ACHIEVED

http://www.treas.gov/tigta/2002reports/200230050fr.pdf
    Since 1997, the IRS has made significant efforts to combat abusive 
trusts. However, our review of abusive trust related returns examined 
and closed during the first quarter of fiscal year 2001 showed that the 
IRS may not be consistently asserting the accuracy related penalty. 
There is a risk that not penalizing taxpayers involved with abusive 
trusts could result in further noncompliance. We recommended that IRS 
management develop new penalty tables to monitor the application of the 
accuracy related penalty and develop a system to capture examination 
data. We estimate that this could result in $138.2 million in increased 
tax revenue over a 2-year period.

 COMPUTER PROGRAMMING CAN BE USED TO MORE EFFECTIVELY STOP REFUNDS ON 
                 ILLEGAL CLAIMS FOR REPARATIONS CREDITS

http://www.treas.gov/tigta/2002reports/200230071fr.pdf
    Since the early 1990s, thousands of false claims have been filed 
with the IRS for reparations credits. Promoters use a variety of 
techniques to market the promise of a special tax credit to African-
American taxpayers, who may be descendents of slaves. Because the 
manual screening of tax returns by IRS employees is subject to human 
error and some employees may knowingly allow these illegal claims to be 
processed, some claims for reparations credits are processed and 
refunds sent to taxpayers. IRS computer controls that identify and stop 
reparations claims processing could be significantly improved by using 
a TIGTA-developed computer program. It is estimated that by using this 
program, IRS employees could identify 91 percent more of these returns 
than they could using the existing processes and stop an additional 
$90.7 million in refunds (revenue protection) from claims for 
reparations credits over a 5-year period.

  MANAGEMENT ADVISORY REPORT: SIGNIFICANTLY MORE INDIVIDUAL TAXPAYERS 
INAPPROPRIATELY RECEIVED DISABLED ACCESS CREDITS FOR TAX YEAR 2000 THAN 
                                FOR 1999

http://www.treas.gov/tigta/2002reports/200230048fr.pdf
    We reported that individual taxpayers were inappropriately 
receiving tax credits on their tax year 1999 U.S. Individual Income Tax 
Returns (Form 1040). These taxpayers received the Disabled Access 
Credit even though their tax returns indicated no business reasons for 
taking the credits. The number of taxpayers involved was limited but 
the issue was significant in that many of the taxpayers were elderly 
Americans who were possible victims of promoters recommending unwise 
investments in pay telephones and automated teller machines and 
promising bogus tax credits. From tax years 1999-2000, the number of 
tax returns for which this credit was inappropriately allowed had 
increased by 28 percent. The amount of credit allowed on these returns 
totaled over $1.25 million.

     IDENTITY THEFT RING NETS $7 MILLION IN FRAUDULENT TAX REFUNDS

    A criminal complaint charged 19 individuals with conspiracy to file 
false claims against the United States. The investigation began when 
bank officials notified the TIGTA that tax refund checks were deposited 
in a tax preparer's bank account. TIGTA agents subsequently arrested 
the tax preparer for the theft and negotiation of stolen IRS income tax 
refund checks. The tax preparer, with co-conspirators, engaged in the 
filing of numerous fraudulent income tax returns using stolen Social 
Security numbers, resulting in millions of dollars in IRS refunds. The 
tax preparer pled guilty to conspiracy to file false claims against the 
United States.
    In April 2003, the eighteen co-conspirators were indicted by grand 
jury on 29 counts including conspiracy to file false claims.

                   TWO IRS EMPLOYEES DESTROY RECORDS

    Two IRS employees were indicted for their role in the attempted 
destruction of IRS records. A citizen contacted the IRS to advise that 
numerous tax returns and other confidential documents were strewn on a 
city street. TIGTA agents secured several trash bags filled with 
current tax returns and taxpayer correspondence that had been removed 
from an IRS processing center by one of the employees. The other 
employee placed the bags filled with the documents on the curb to be 
collected as trash. Both employees were terminated from employment and 
pled guilty to unauthorized disposal of government documents. The IRS 
reviewed over 300 taxpayer accounts and determined the total impact to 
the applicable taxpayers and the agency was approximately $1.2 million.

   IRS EMPLOYEE PLED GUILTY TO STEALING OVER $191,000 IN REMITTANCES

    An IRS submission processing site employee altered the payee named 
on tax remittance checks and attempted to convert the money for 
personal use by depositing the checks into a personal bank account. The 
employee pled guilty and was sentenced to 5 years probation for 
stealing checks and a money order totaling $191,871. TIGTA recovered 
the stolen money and the taxpayers' accounts were properly credited.

   IRS EMPLOYEE ARRESTED BY TIGTA SPECIAL AGENTS FOR SOLICITATION OF 
                             $200,000 BRIBE

    An attorney representing a corporation reported that during a 
routine IRS examination, an IRS employee solicited a cash bribe of 
$200,000 from the company's attorney to reduce the company's tax 
liability. In January 2002, with assistance from TIGTA, an 
electronically recorded meeting took place between the attorney and the 
employee. After receiving the $200,000 bribe, the IRS employee provided 
the attorney with a fraudulent Revenue Agent Report. TIGTA special 
agents arrested the IRS employee before the employee left the meeting. 
The former IRS employee was sentenced to 24 months in prison followed 
by 3 years of supervised probation.

 FORMER IRS EMPLOYEE PLED GUILTY TO MISUSE OF IRS COMPUTER SYSTEM AND 
                 IMPROPER RELATIONSHIPS WITH TAXPAYERS

    A former IRS revenue officer was charged with allegedly accepting 
gifts from different taxpayers, including approximately $1,000 in cash, 
a television set, free health club privileges, free auto repairs, and 
free garage door repairs, for a payment plan of taxes and abatement of 
penalties owed by the taxpayers totaling $158,741. The former employee 
was also charged with allegedly accessing an IRS computer without 
authorization and obtaining information from the IRS and with allegedly 
failing to deposit money of the United States under his control. The 
former IRS employee pled guilty and in March 2002, was sentenced to 4 
months imprisonment and ordered to pay restitution of $11,648.

                  BUSINESS OWNER INDICTED FOR BRIBERY

    A business owner owed the IRS approximately $410,829 in assessed 
taxes, penalties, and interest arising from an examination. The owner 
gave an IRS revenue officer checks totaling $18,665 in return for 
delaying the collection of the owner's tax liability. In June 2002, the 
owner was charged with bribing an IRS employee.

Reports That Identified Revenue Protection or Trends in Compliance and 
                         Systems Modernization

 MANAGEMENT ADVISORY REPORT: IMPROVEMENTS ARE NEEDED TO ASSESS THE USE 
          AND IMPACT OF THE EARNED INCOME CREDIT APPROPRIATION

http://www.treas.gov/tigta/2001reports/200140064fr.pdf
    In 1997, the Congress provided the IRS with a special 5-year, $716 
million appropriation for the improved application of the EIC. The IRS 
does not adequately validate EIC results information, causing the 
inaccurate reporting of the use of the EIC appropriation funds to the 
Congress. Also, although establishment of some compliance initiatives 
and a process to track the spending of funds have improved the 
application of the credit, the IRS has been unable to measure 
improvements in the EIC compliance for the approximately $297 million 
spent on improving the application of the EIC. We recommended the IRS: 
establish a process to ensure the workload results reported in the IRS 
Tracking Earned Income Tax Credit Appropriation report to the Congress 
are complete, accurate, and reliable; and effectively measure the 
impact of the EIC initiatives on improving EIC compliance. Based on 
audit tests, we determined 1 function overstated the number of EIC 
cases by approximately 29 percent (1,015 cases) and a second function 
overstated the number of notices sent to taxpayers by approximately 23 
percent (155,000 notices).

  BETTER CONTROLS ARE NEEDED TO ENSURE APPROPRIATED FUNDS ARE USED TO 
          IMPROVE THE APPLICATION OF THE EARNED INCOME CREDIT

http://www.treas.gov/tigta/2002reports/200240020fr.pdf
    The Congress has been concerned with the IRS' ability to administer 
the EIC. The IRS established the EIC Program Office to administer the 
EIC appropriation and oversee the EIC-related activities of IRS 
functions involved in efforts to ensure the efficient application of 
the law; to increase participation of eligible taxpayers; and to reduce 
waste, fraud, and abuse. However, the IRS does not have an effective 
process in place to ensure that the expenditure of the EIC 
appropriation is only for EIC issues, programs, and projects. We 
recommended the IRS establish procedures to ensure that funds 
appropriated by the Congress for the improved application of the EIC 
are used for that purpose. These procedures should include providing 
guidance to the appropriate functions on using the EIC-related funds 
for expenditures, maintaining reliable data, and conducting periodic 
reviews of the expenditures to ensure they are being used for EIC-
related items. Our analysis of the total labor expenses for 2 IRS 
functions and a judgmental sample of the IRS' equipment purchases for 
fiscal year 2000 and the first quarter of fiscal year 2001 identified 
approximately $28 million in questionable expenses.

  THERE ARE SIGNIFICANT WEAKNESSES IN THE INTERNAL REVENUE SERVICE'S 
           EFFORTS TO MEASURE EARNED INCOME CREDIT COMPLIANCE

http://www.treas.gov/tigta/2002reports/200240021fr.pdf
    From tax years 1997-99, the IRS made some improvements in its 
methodology to measure EIC compliance. However, that methodology still 
has some significant weaknesses. Specifically, some of the examinations 
in the tax years 1997 and 1999 EIC compliance studies lacked the 
necessary information to support the IRS' results, the IRS was 
inconsistent in its study methodology, the IRS' emphasis on EIC 
taxpayers with business income during the tax year 1999 EIC compliance 
study increased the time spent on the examinations but has not produced 
any apparent benefits, and poor planning by the IRS has caused 
taxpayers to be needlessly examined as part of the tax year 1998 EIC 
compliance study. We recommended the IRS coordinate among functions to: 
ensure the quality review process occurs immediately after the 
examinations are completed (before they are closed), ensure IRS 
auditors are effectively trained on EIC issues and reminded of the 
importance of the studies, ensure the examination results from the EIC 
compliance studies are accurately credited or charged to taxpayer 
accounts, develop an acceptable methodology concerning where and how 
examinations are to be conducted on all future EIC compliance studies, 
develop a standardized sampling methodology that will measure EIC 
compliance rates at the lowest cost with the least amount of burden to 
the taxpayers, and capture and maintain detailed costing figures to 
monitor each study's return on investment. Based on our audit tests, we 
believe approximately 308 examinations used for compliance measurement 
are questionable.

  SIGNIFICANT TAX REVENUE MAY BE LOST DUE TO INACCURATE REPORTING OF 
      TAXPAYER IDENTIFICATION NUMBERS FOR INDEPENDENT CONTRACTORS

http://www.treas.gov/tigta/2001reports/200130132fr.pdf
    The IRS' ability to encourage the filing of accurate information 
returns for nonemployee compensation, through its administration of the 
existing back-up withholding and penalty provisions, is extremely 
limited and largely ineffective. Between tax years 1995 and 1998, the 
number of Miscellaneous Income documents (Forms 1099-MISC) reporting 
nonemployee compensation, received by the IRS with missing or incorrect 
Taxpayer Identification Numbers (TIN), increased by 36 percent. We 
recommended the IRS propose to the Department of the Treasury changes 
to several tax laws, explore opportunities to supplement its future 
Internet-based TIN confirmation program, and modify some administrative 
guidelines. Because the IRS was unable to match the documents with tax 
returns, we estimated that our audit would result in $2.2 billion in 
income taxes collected per year through back-up withholding on 
nonemployee compensation payments to independent contractors that fail 
to furnish a TIN.

 THE INTERNAL REVENUE SERVICE HAS MADE SOME PROGRESS, BUT SIGNIFICANT 
   IMPROVEMENTS ARE STILL NEEDED TO REDUCE ERRORS IN MANUAL INTEREST 
                              CALCULATIONS

http://www.treas.gov/tigta/2002reports/200230042fr.pdf
    In 1993, the IRS Inspection Service (now the TIGTA) reported that 
40 percent of the tax accounts it reviewed either contained errors in 
interest amounts computed by IRS employees or were unnecessarily 
restricted from automated computations. In 1994, in accordance with the 
Federal Managers' Financial Integrity Act, the IRS reported this issue 
as a material weakness in its internal control system. As a result, the 
IRS established a goal to reduce its high number of erroneous 
restricted interest assessments. While the IRS has achieved some 
success in increasing the automation of interest calculations, overall, 
its actions taken to address the material weakness in its controls over 
the calculation of restricted interest have not been effective. We 
recommended the IRS: limit the calculation of restricted interest to 
centralized staffs within the various functions and locations of the 
IRS, establish a national quality review process that includes all 
restricted interest cases, establish training that must be completed 
before an employee can work restricted interest cases, authorize a 
standard interest computation tool that would be used by all employees 
working restricted interest cases, and explore all available options to 
provide the technology and programming necessary to allow more interest 
calculations to be performed by computer. We estimate that, over a 5-
year period, the IRS could undercharge some taxpayers over $145 
million.

        TRENDS IN COMPLIANCE ACTIVITIES THROUGH FISCAL YEAR 2002

http://www.treas.gov/tigta/2003reports/200330078fr.pdf
    The IRS' overall fiscal year 2002 compliance efforts and results 
were mixed but showed some continuing positive changes that started in 
fiscal year 2001. Specifically, the level of compliance activities and 
the results obtained in many collection areas in fiscal year 2002 
showed a continuing increase, although some measurements decreased 
slightly in fiscal year 2002 after increasing in fiscal year 2001. 
Enforcement actions were higher or about the same in fiscal year 2002 
compared to the numbers in fiscal year 2001. While enforcement revenue 
collected increased in fiscal year 2002, the inventory of delinquent 
accounts and the total amount of uncollected liabilities have continued 
to grow. For example, from fiscal year 1996 to fiscal year 2002, 
enforcement revenue collected decreased from a yearly total of $37.96 
billion to $34.09 billion, while gross accounts receivable increased 
from $216 billion to $280 billion. The number of examinations of tax 
returns increased in fiscal year 2002, but the overall percentage of 
tax returns examined stayed about the same due to increases in the 
number of tax returns filed. The numbers and percentages of 
examinations of corporate and other business returns (except 
partnerships and very large corporations) continued to decrease or stay 
at about the same level. There were also slight increases in the 
numbers of examinations of fiduciary income, employment, and excise tax 
returns. We made no recommendations in this report.

    ANALYSIS OF BUSINESS SYSTEMS MODERNIZATION COST, SCHEDULE, AND 
                       FUNCTIONALITY PERFORMANCE

http://www.treas.gov/tigta/2003reports/200320007fr.pdf
    Beginning in 2001, the BSM Program delivered business results by 
deploying projects and learning valuable lessons that should help 
improve future projects. Deployed projects have increased the capacity 
of the IRS telephone system; improved the ability to receive, route, 
and respond to taxpayer telephone calls; and provided refund 
information via the Internet. However, as reported in previous TIGTA 
and GAO reports, the BSM Program has been experiencing difficulties 
meeting the original cost, schedule, and functionality estimates 
included in the BSM Spending Plans submitted to the Congress. Since the 
purpose of this review was to identify and analyze the cost, schedule, 
and functionality performance compared to the original project 
estimates, we did not make any recommendations in this report.

 4. WHAT ACTIONS ARE BEING TAKEN TO ELIMINATE OR REDUCE THESE PROBLEMS

    Given the volume of returns and revenue processed by the IRS, it 
would be a difficult task to fully eliminate all the problems that lead 
to waste, fraud, and abuse. However, the IRS has taken or plans actions 
to at least partially address some of the more significant problems I 
have described.
    Compliance and enforcement: In recent years, the IRS has reversed 
the trend toward devoting significant compliance resources to customer 
service. This action has helped to stabilize some compliance results, 
and customer service activities have received staffing increases to 
provide services.
    For example, while the decline in many categories of enforcement 
actions and results since fiscal year 1996 has been dramatic, there are 
recent indications that in some categories this trend has stabilized or 
even shown improvement. Overall, the IRS' fiscal year 2002 compliance 
efforts and results were mixed, but showed some continuing positive 
changes that started in fiscal year 2001. Specifically, the level of 
compliance activities and the results obtained in many, but not all, 
collection areas in fiscal year 2002 showed an increase. In addition, 
for fiscal year 2002, the number of criminal investigation cases 
initiated and in ending inventory was the highest since fiscal year 
1998. However, the number of cases referred to the Department of 
Justice and case convictions remained lower in fiscal year 2002 than in 
fiscal year 1998, yet higher than in fiscal years 2000 and 2001.
    The IRS also increased the focus of its examination resources on 
six high-risk areas of non-compliance with the tax laws. These six 
strategic priority areas are: offshore credit card users; high-risk, 
high-income taxpayers; abusive schemes and promoter investigations; 
high-income non-filers; unreported income; and the National Research 
Program (NRP), which is discussed in more detail below.
    National Research Program: To address the void created from the 
discontinuation of the TCMP, the IRS NRP office was established in 
April 2000 as a component of the Research, Analysis, and Statistics 
Division. NRP is a comprehensive effort, using a statistically valid 
sample, to measure reporting, filing, and payment compliance for 
different types of taxes and various sets of taxpayers. The NRP will be 
used to update IRS' examination selection systems. After the IRS' 
workload selection formulas are updated with NRP data, the number of no 
change examinations is expected to significantly decrease. As of 
February 14, 2003, a total of 33,738 NRP sample cases had been shipped 
to the field, which represented about 72 percent of the total 2002 NRP 
sample of 46,860. Of this total, related information has been assembled 
on 22,256 cases, and they are ready to be assigned to an examiner.
    The NRP is scheduled to allow for the updating of the examination 
workload selection formulas by 2005. To accomplish this objective, 
examination of the NRP sample cases is scheduled to be completed by 
April 2004.
    GAO issued a report in June 2002 on the IRS' NRP planning efforts. 
GAO concluded that the NRP design is likely to yield the type of 
information the IRS needs. In addition, GAO concluded that the NRP 
meets one of the IRS' key goals to minimize the burden that the NRP 
poses to taxpayers. GAO has assessed the IRS' efforts to gather trend 
data regarding the overall burden imposed by the 2002 NRP and will 
issue a report in this area soon.
    TIGTA believes that the NRP is a much needed first step for 
providing the information necessary to gauge compliance levels and 
direct IRS compliance resources toward areas where attention is most 
needed. TIGTA is currently conducting audit work to provide an early 
assessment of the implementation of the 2002 NRP at the field office 
level. To accomplish this objective, TIGTA is performing on-site 
interviews and analyzing actions to date on a sample of NRP cases at 
selected IRS field offices. TIGTA has met with the GAO NRP team several 
times to coordinate the audit approach to avoid overlap.
    Planned use of collection agencies: The IRS' proposal to contract 
out the collection of delinquent accounts to private collection 
companies has the potential to recover a significant amount of IRS 
accounts receivable. In 1996, the IRS piloted the use of collection 
agencies, and after a detailed internal evaluation, concluded that 
their use was not economically viable. The IRS' current approach, 
however, differs significantly from the prior methodology. Most 
importantly, in 1996 the collection companies were compensated with 
monies from the IRS' appropriated funds. In contrast, as part of its 
2004 budget submission, the IRS has requested authority to fund the use 
of collection companies directly from the revenues collected by those 
companies.
    The IRS plans to eventually place 2.6 million cases annually with 
collection companies. Treasury projects that this initiative will 
produce revenue of as much as $1 billion through 2013. While this 
amount is significant, it represents a small portion of the $280 
billion in accounts receivable that were due at the end of fiscal year 
2002.
    EIC initiatives: IRS efforts to improve the administration of the 
EIC Program are ongoing. The IRS has implemented a number of 
initiatives targeting outreach, education, and compliance efforts. 
Also, it participated with Treasury in a task force to study EIC 
overclaims. This resulted in the IRS initiating significant changes to 
the way it will address EIC noncompliance, for example, by requiring 
some EIC applicants to provide additional information to the IRS to 
validate eligibility before payment (pre-certification).
    The President's fiscal year 2004 budget proposal includes an 
increase of $105 million in EIC funding. This increase includes $100 
million to implement the pre-certification initiative. The IRS is also 
supposed to use compliance and other available data to determine 
whether specific groups of claimants can be eliminated from the pre-
certification process because they pose less risk of claiming more EIC 
than that for which they are eligible. The Treasury's EIC taskforce 
estimated that the pre-certification process would potentially reduce 
EIC overclaims by $2.3 billion.
    In addition, the IRS recently reorganized the EIC Program Office to 
capitalize on the strategic planning and research resources in the Wage 
and Investment Division's Office of Strategy and Finance, and created 
an Executive Advisory Council made up of IRS executives involved in the 
administration of the EIC Program to help provide better oversight and 
coordination of the program. The Program Office has also drafted new 
annual performance measures for the EIC Program for fiscal years 2003 
and 2004.
    Offshore tax shelters: In fiscal year 2001, the IRS established the 
Offshore Credit Card Project. Underpinning the project are two ``John 
Doe'' summonses\4\ served on MasterCard International and Visa for the 
records of foreign bank accounts in more than 30 countries. This data, 
supplemented with merchant summons\5\ data, is to be used to develop 
cases for referral to the Compliance field function. TIGTA recently 
issued a draft report on its audit of the program, describing concerns 
with the IRS inconsistently using the accuracy-related penalty, 
potentially examining returns beyond the statute expiration date 
(which, except for special circumstances, would bar any tax 
assessments), and not having an adequate management information system 
to provide key information and trends for decision making.
    In addition, in January 2003, the IRS initiated the Offshore 
Voluntary Compliance Initiative to help taxpayers become compliant if 
they are involved in abusive arrangements. The program ended in April 
2003.
    BSM progress: During 2002, the IRS and its PRIME contractor 
identified and aggressively focused on improving 12 key processes to 
better ensure future success. Deployed projects have increased the 
capacity of the IRS' telephone system; improved the ability to receive, 
route, and respond to taxpayer telephone calls; and provided refund 
information via the Internet. There will be many challenges ahead, and 
the IRS and PRIME contractor need to effectively implement planned 
improvements in key management processes; commit the resources 
necessary to enable success; manage the increasing complexity and risks 
of the BSM Program; and maintain the continuity of strategic direction 
with experienced leadership.
    Scheduled corrective actions for financial management weaknesses: 
As shown in the attachment, the Department of the Treasury lists nine 
internal control and financial management weaknesses at the IRS, 
including such things as the EIC, the growing inventory of accounts 
receivable, and the need for detailed transactions data to support 
custodial financial reporting of revenue. Some of these weaknesses have 
existed for many years, for example, property management and accounts 
receivable have both been listed since the 1980s.
    Automated system for tracking tax law changes: In September 2002, 
TIGTA reported that the IRS had recognized the importance and 
sensitivity of tax law complexity, elevated the concerns to the highest 
levels within the IRS, and invested significant resources throughout 
the organization to address the problems. In addition, TIGTA concluded 
that the IRS' Legislative Implementation Tracking System will be an 
effective control to monitor the implementation of new tax legislation. 
The system is designed to provide timely, useful information to 
management and quickly elevate any delays in implementing new tax laws 
to a level of management high enough to address the problem.

5. WHAT ADDITIONAL ACTIONS, OF EITHER AN ADMINISTRATIVE OR LEGISLATIVE 
                          NATURE, ARE REQUIRED

    Addressing the issue of tax law complexity would require 
legislative actions. In fact, the National Taxpayer Advocate's Fiscal 
Year 2001 Annual Report to Congress outlined proposals to simplify or 
clarify six areas of tax law--family status issues, joint and several 
liability, alternative minimum tax for individuals, penalty and 
interest issues, home-based service workers, and IRS collection 
procedures. Also in 2001, the staff of the Joint Committee on Taxation 
issued a comprehensive study of tax law complexity, which included 
numerous specific recommendations.
    Legislation will have to be passed to authorize the Secretary of 
the Treasury to use private collection agencies and to allow the IRS to 
use a portion of taxes collected to fund the project. TIGTA has 
concerns whether IRS resources will be sufficient to provide adequate 
project management, contract oversight, and quality review; whether 
taxpayer rights and privacy will be adequately protected; and that the 
detailed design for the collection project has not been developed, 
including the system that will be responsible for selecting, 
controlling, and updating cases assigned to private collection 
companies.
    Tax law changes are needed to effect significant improvement in 
information reporting and to protect the substantial tax revenues that 
are potentially being lost each year. The IRS agreed to consider the 
feasibility of proposing some new legislation to require mandatory 
withholding of income taxes on nonemployee
    compensation payments, and changing the criteria for asserting the 
Incorrect Information Penalty. However, TIGTA is concerned that the IRS 
does not plan to enforce accurate TIN reporting once a TIN verification 
program is made available to payors. If the IRS does not require 
accurate TIN information from payors, compliance is not likely to 
improve.
    Tax professionals and others expressed concerns about the 
difficulty in matching information from Schedules K-1 to individual 
income tax returns. The IRS must ensure notices issued to taxpayers as 
a result of this matching are appropriate; otherwise, the IRS' 
compliance efforts would be compromised. The IRS should carefully 
consider the benefits of the program, the cost of the program to the 
Federal Government and to taxpayers, and the enhancements that can be 
made to the program in the near term as a result of its own analyses, 
before proceeding with a program to match all data from Schedules K-1 
again in 2003.
    With regard to the BSM Program, we have recommended that the IRS 
issue more performance-based contracts to the PRIME contractor, tie 
incentives and disincentives to performance, and require the use of 
firm fixed-price task orders whenever possible and appropriate. We also 
recommended that the IRS reduce the number of BSM projects being 
developed in order to better control and manage the program, and to 
improve its management and governance capabilities and processes. 
Finally, we recommended that the IRS ensure that project development 
teams follow the established systems development life cycle methodology 
and processes to increase the likelihood of success. We will be issuing 
audit reports this year with additional recommendations to improve the 
effectiveness and results of the program.
    The IRS needs to establish long-term goals and measures for the EIC 
Program that reflect the program's anticipated outcomes over time, and 
establish a consistent method to measure progress toward these long-
term goals. Only through consistent measurement will the IRS be able to 
demonstrate its progress over time and show how it has reduced 
erroneous payments or increased participation.
    Finally, the IRS and other important stakeholders, such as the IRS 
Oversight Board, believe the agency needs more resources to accomplish 
its mission and goals. For fiscal year 2004, the IRS requested funding 
of $10.4 billion and 100,043 full time equivalents. This is an increase 
of $521 million (5.3 percent) over the President's fiscal year 2003 
request. The largest portion of this increase will go toward 
strengthening compliance and customer service. The IRS emphasized that 
since
    71 percent of its budget consists of salaries and benefits, any 
negative changes in the agency's financial situation could result in a 
negative impact on staffing levels. We believe that the IRS should 
consider expanding its workforce planning process from 3 to 5 years. 
This would increase the IRS' ability to identify risks and provide 
necessary data to key stakeholders.
    Mr. Chairman and members of the committee, I appreciate the 
opportunity to share significant problems and challenges that confront 
the new Commissioner and IRS senior management. TIGTA will continue its 
efforts to provide reliable and objective reviews and assessments of 
IRS programs and operations. It is our intent to not only identify 
waste, fraud, and abuse in IRS programs, but also to propose solutions 
to IRS management that address the underlying causes of the problems.

                                ENDNOTES

    1. Cost savings include funds put to better use and questioned 
costs. Funds put to better use are defined as funds that could be used 
more efficiently if management took actions to implement and complete a 
recommendation. Questioned costs are costs that are questioned because 
of an alleged violation of a provision of a law, regulation, contract, 
or other requirement governing the expenditure of funds; or a finding 
that, at the time of the audit, such cost was not supported by adequate 
documentation.
    2. Revenue protection involves the proper denial of claims for 
refund, including recommendations that prevent erroneous refunds or 
efforts to defraud the tax system.
    3. This calculation was based on the estimated savings for 1 year 
and the current Federal Funds Rate of 1.75 percent.
    4. A John Doe summons is any summons that does not identify the 
person with respect to whose liability the summons is issued. A John 
Doe summons can only be issued after the approval by a Federal court.
    5. A merchant summons is a summons served on the merchants involved 
in transactions with the credit cards identified via the John Doe 
summons.

        Statement of Hon. Everett L. Mosley, Inspector General,
               U.S. Agency for International Development

    Mr. Chairman, other committee members, and committee staff, thank 
you for the opportunity to provide my written testimony for the record.
    This testimony is provided in response to your June 23, 2003, 
letter of invitation to me to testify before the committee or provide 
written testimony for the record. My testimony addresses the following:
    1) My current estimate of the magnitude of waste, fraud, and abuse 
within the USAID's mandatory programs.
    2) The general nature of these problems and how long they have 
persisted.
    3) Illustrative examples of these problems.
    4) What actions are being taken to eliminate or reduce these 
problems.
    5) What additional actions, of either an administrative or 
legislative nature, are required.
    USAID has two mandatory spending programs. They are 1) the Foreign 
Service retirement and disability fund, and (2) the credit subsidy 
under USAID's development credit authority.
    The Department of State manages the Foreign Service Retirement 
System. As a consequence, the Department of State's Office of Inspector 
General is responsible for audits of the Foreign Service Retirement and 
Disability Fund. However, USAID's contributions to the fund are 
included in USAID's financial statements, which we audit as required 
under the Government Management and Reform Act of 1994 (GMRA). No 
issues have been noted regarding USAID's contributions to the fund 
during our audit of USAID's financial statements.
    The credit subsidy under USAID's development credit authority is 
also included in USAID's financial statements, which are subject to an 
annual audit under the requirements of the GMRA. No issues have been 
reported regarding the subsidy during our audit of USAID's financial 
statements.
    While there are no issues to report regarding USAID's mandatory 
programs, as verbally requested, I would like to provide some 
information on some of USAID's management challenges and the results of 
one of our more recent significant audits. A full discussion of USAID's 
management challenges can be found in our most recent semiannual report 
to the congress. Our semiannual reports and our audit reports can be 
found on our website at http://www.USAID.gov/oig/.

                         MANAGEMENT CHALLENGES

    USAID still faces a number of major management challenges--which 
parallel the president's management agenda. These major management 
challenges are:
     financial management;
     information resource management;
     managing for results;
     procurement management;
     human capital management;

                          FINANCIAL MANAGEMENT

    Although USAID has made considerable progress toward resolving the 
challenges with its financial management system in the past year, USAID 
still faces challenges in reconciling financial data, calculating and 
reporting accounts payable, recording and classifying advances and 
related expenses, and recognizing and reporting accounts receivable.

                    INFORMATION RESOURCE MANAGEMENT

    OIG audits have identified significant weaknesses in USAID's 
management of information technology. The OIG reported that USAID 
processes for procuring and managing information resource technology 
have not followed the guidelines established by the Clinger-Cohen Act. 
Also, OIG audits have confirmed that, although USAID has taken steps to 
improve computer security, more work is needed to ensure sensitive data 
are not exposed to unacceptable risks of loss or destruction. In 
response to OIG audits, USAID has made substantial computer security 
improvements. The OIG will continue to monitor USAID's progress in 
improving computer security.

                          MANAGING FOR RESULTS

    Federal laws, such as the government performance and results act of 
1993 require Federal agencies to develop performance measurement and 
reporting systems that establish strategic and annual plans, set annual 
targets, track progress, and measure results. A significant element of 
USAID's performance management system is the annual reports prepared by 
each of USAID's operating units.
    For fiscal year 2002, the OIG reported that the performance 
information included in the management discussion and analysis section 
of USAID's consolidated financial statements actually represented 
accomplishments from fiscal year 2001 instead of fiscal year 2002. The 
OIG has reported this system's deficiency many times in prior audit 
reports. Further, OIG audits conducted at selected audit units over the 
past few years have consistently identified deficiencies in the 
performance measurement systems of USAID operating units, deficiencies 
which call into question the reliability of performance data included 
in the units' annual reports.

                         PROCUREMENT MANAGEMENT

    USAID's office of procurement has been the focus of various 
initiatives for defining ways to improve the effectiveness of USAID's 
acquisition and assistance process. These activities are in direct 
response to the long-standing challenges that the office of procurement 
has faced in the areas of procurement staffing, activity planning, and 
acquisition and assistance award administration.

                        HUMAN CAPITAL MANAGEMENT

    The ability of USAID to carry out its mission in the 21st century 
will depend, in part, on how well it manages all segments of its 
diverse and widespread workforce. USAID has made efforts to improve its 
human capital management. However, OMB has expressed concerns about 
current and future critical skill gaps, slow progress in redirecting 
staff from supervisory positions to the hands-on activities, and 
staffing decisions made without programmatic justifications.
    In the OIG's audit of human capital data, the OIG noted that the 
human capital data collected and maintained by USAID was neither 
complete nor totally accurate. The OIG made several recommendations to 
help improve the quality and completeness of the human capital data 
collected by USAID.

  AUDIT OF CARGO PREFERENCE REIMBURSEMENTS UNDER SECTION 901D OF THE 
                      MERCHANT MARINE ACT OF 1936

    The OIG's strategy is to help USAID address its major management 
challenges explained above. Some OIG audits directed toward USAID's 
major management challenges lead to recommendations with a significant 
financial impact. One such audit was the OIG's audit of cargo 
preference reimbursements under section 901d of the Merchant Marine Act 
of 1936.
    During the cargo preference audit, the OIG found that in accordance 
with established laws, policies, and procedures governing 
administration of cargo preference reimbursements from the department 
of transportation to the department of agriculture, USDA could be 
entitled to as much as $289 million in additional reimbursements. Of 
that amount, up to $175 million could be made available to the two food 
aid programs administered by USAID. Furthermore, the OIG found that at 
least $7.2 million in USAID cargo preference reimbursements had been 
misallocated to a USDA program.
    The OIG recommended that USAID seek $175 million in unclaimed 
reimbursements for excess ocean freight costs dating back to 1994, and 
further request correction of a $7.2 million misallocation of a 1995 
cargo preference reimbursement from USDA to USAID. USAID management 
agreed with the recommendations and are working with OMB and other 
Federal agencies to recover the funds.
    Thank you for this opportunity to submit written testimony 
concerning USAID's mandatory spending programs and management 
challenges. I will be happy to respond to any questions you may have.

   Prepared Statement of Hon. Richard J. Griffin, Inspector General,
                  U.S. Department of Veterans Affairs

                              Introduction

    Mr. Chairman and members of the committee, I am pleased to address 
the Office of Inspector General's (OIG's) efforts to identify and 
eliminate waste, fraud, and abuse in mandatory programs administered by 
the Department of Veterans Affairs (VA). We provide oversight that 
addresses mission-critical activities and programs in health care 
delivery, benefits processing, financial management systems, 
procurement practices, and information management. Our work is 
accomplished consistent with our strategic goals and aligned with the 
strategic goals of the Department.
    I will present my observations, identify current efforts that are 
helping to raise fraud awareness in VA, and summarize some of our most 
significant work. I will also highlight management areas where I 
believe improvement can be made to reduce waste, prevent fraud, and 
improve administration of VA programs.
    To provide continuing oversight of VA's operation, I established a 
Combined Assessment Program, (CAP), as part of my office's effort to 
ensure that high quality health care and timely benefits are provided 
to our Nation's veterans. CAP reviews combine the knowledge and skills 
of the OIG Offices of Audit, Investigations, and Healthcare Inspections 
to provide collaborative assessments of VA medical facilities and 
regional offices on a cyclic basis. The CAP assessments provide 
management independent and objective evaluations of key facility 
programs, activities, and controls.
    During CAPs, we conduct fraud, and integrity awareness briefings to 
raise employee awareness of fraudulent activities that can occur in VA 
programs. CAPs continue to identify investigative leads, systemic 
weaknesses, and vulnerabilities in program areas and conditions that 
require management attention.
    In March 1999, we issued our first CAP assessment and since that 
time we have completed almost 100 CAP reviews at VA healthcare systems, 
medical centers, and regional office facilities.
    We also provide oversight by performing national program audits, 
preaward and postaward contract reviews, hotline reviews, healthcare 
inspections, and investigations. The results help identify where the 
Department needs to address major program challenges and improve the 
economy and effectiveness of its operations.
    From fiscal year 1998 through March 31, 2003 we issued 872 reports, 
processed 2,008 hotline cases, and performed 7,073 investigations. We 
have made recommendations having the potential to save the Department 
approximately $1.5 billion by preventing waste, fraud, and other abuses 
in mandatory programs. My staff has detected major frauds impacting the 
delivery of benefits to veterans and their beneficiaries and 
investigated criminal activities perpetrated by employees and others 
that resulted in significant losses.
    I will highlight the most significant of this work and address 
management areas where I believe further improvement is needed.

                          Benefits Processing

    I am pleased to note the success of the Department's ongoing 
efforts to reduce the pending claims backlog that once peaked at about 
601,000. Today, the backlog of rating cases pending has been reduced to 
about 283,000. Over the last 5 years, we have made recommendations to 
VBA addressing many potential improvements and identified potential 
monetary savings in excess of $1.5 billion. In addition, investigations 
have led to the assessments of fines, restitution payments, and other 
recoveries through civil judgments totaling about $150 million.
    Overall, I appreciate the responsiveness the Secretary and Under 
Secretary have shown to ensure the Department addresses OIG concerns. 
However, while VBA is making progress, there are still many 
opportunities for improvement to ensure the timely delivery of benefits 
and services to veterans.
    OIG audits and investigations continue to find that improper 
benefit payments are a significant problem in the Department. Improper 
payments have been attributed to poor oversight, monitoring, and 
inadequate internal controls. Improper payments have also occurred 
because of payments to ineligible veteran beneficiaries, fraud, and 
other abuses. I believe the risk of improper payments is high 
considering the significant volume of transactions processed through VA 
systems, the complex criteria often used to compute veterans' benefits 
payments, and the numerous instances of improper and erroneous payments 
previously identified.
    As a result of our work, I have seen improvement in the 
Department's efforts to ensure benefits are terminated or reduced upon 
incarceration of veterans.

                         INCARCERATED VETERANS

    In July 1986, our office reported that veterans who were imprisoned 
in State and Federal penitentiaries were improperly receiving 
disability compensation benefits or needs based pension. This occurred 
because controls were not adequate to ensure benefits were terminated 
or reduced upon incarceration, as required by Public Law 96-385. As a 
result of our audit, Department managers agreed to implement certain 
measures to identify incarcerated veterans and reduce or terminate 
benefits as appropriate.
    We conducted a follow-up evaluation in 1999 to determine if 
disability benefit payments to incarcerated veterans were appropriately 
adjusted, and other procedures agreed to in 1986 had been implemented. 
We found that Department officials had not implemented the agreed to 
control procedures and improper payments to prisoners had continued.
    During the follow-up evaluation, we reviewed a sample of veterans 
incarcerated in State and Federal prisons and found that 72 percent of 
the cases were not adjusted as required. Based upon the number of 
beneficiaries that were incarcerated, we estimated that nationwide, 
about 13,700 incarcerated veterans had been, or would be overpaid by 
about $100 million. Additionally, overpayments to newly incarcerated 
veterans totaling about $70 million would occur over the next 4 years, 
if VBA did not establish appropriate controls.
    Subsequently, VBA initiated positive actions to enter into 
agreements with the Federal Bureau of Prisons to identify claimants in 
Federal prisons and with the Social Security Administration (SSA) that 
allows VBA to use the State Verification and Exchange System to 
identify claimants incarcerated in State and local facilities. As a 
result of their actions, the Department is in a much better position 
today to reduce erroneous payments paid to incarcerated veterans and 
realize the projected savings.
    I would also appreciate the opportunity to address our current work 
and provide some examples of where our work has identified large 
numbers and amounts of improper payments and to address where we have 
identified fraud in the administration of VA benefit programs.

                         FUGITIVE FELON PROGRAM

    In compliance with a recent law, I have established a fugitive 
felon program to identify VA benefits recipients and VA employees who 
are fugitives from justice. The program consists of conducting 
computerized matches between fugitive felon files of law enforcement 
organizations and VA benefit and personnel records. Once a veteran or 
employee is identified as a fugitive, information on the individual is 
provided to the law enforcement organization responsible for serving 
the warrant to assist in apprehension. Fugitive information is then 
provided to VA so that benefits may be suspended and to initiate 
recovery action for any overpayments. Based on our pilot study and 
matches conducted to date, I anticipate that between 1 and 2 percent of 
all fugitive felony warrants submitted will involve VA beneficiaries. 
Savings related to the identification of improper and erroneous 
payments are projected to exceed $209 million.
    To date, a Memorandum of Understanding has been completed with the 
U.S. Marshals Service, the States of California and New York, and most 
recently, the National Crime Information Center. While we are still in 
the initial phases of setting up the program, our data matching efforts 
have identified more than 11,000 matches of potential fugitive 
beneficiaries and employees. Details of recent investigations of such 
fugitives follow.
     My agents along with State investigators arrested a 
fugitive beneficiary wanted on a parole violation warrant for 
aggravated kidnapping. Photographs were circulated and a briefing was 
given to the VA Regional Office (VARO) on the fugitive status of the 
veteran. We provided intelligence and assisted in field operations that 
resulted in terminating the fugitive's VA benefit. Several months 
later, the fugitive attempted to enter the VARO to inquire about the 
status of his benefits checks, however he was turned away by security 
due to the fact that he had a knife on his person. A member of the VARO 
recognized the fugitive from the pictures we had provided and 
immediately alerted my staff. OIG agents were able to take the fugitive 
into custody and subsequently turned him over to the State 
investigative agents.
     In another case, a fugitive sought by the FBI was arrested 
at his residence based on a Federal arrest warrant issued for unlawful 
flight to avoid prosecution. The veteran was wanted on a State warrant 
for manslaughter, assault, and reckless driving and had fled to avoid 
prosecution of the State case. Allegedly, the veteran killed a 10-year-
old girl and injured her aunt because of his reckless driving. The 
Seattle VA Regional Office had previously suspended the veteran's 
benefits under the provisions of the fugitive felon project.
     In yet another instance, following due process, VA benefit 
payments going to a veteran wanted for armed robbery of a bank in Red 
Wing, MN, were suspended and later terminated. This action resulted in 
a $44,448 cost savings. In addition, during February 2003, the bank to 
which the veteran's funds were deposited was requested to return any 
available funds effective from the date the veteran became a fugitive 
felon. Accordingly, the veteran's bank sent VA a check for $8,975.90, 
the total amount of funds available in his account.
    This program contributes to Homeland Security by apprehending 
fugitive felons, including some who are wanted for violent offenses in 
their communities.

                          DEATH MATCH PROJECT

    In addition to the fugitive felon program, we are also conducting 
an ongoing proactive death match project. The OIG Death Match 
initiative is a continuous program that involves quarterly matching of 
the VA Compensation and Pension database with the SSA's records of 
death file. The purpose is to identify veterans who died, where VA is 
still erroneously paying benefits. Since we began this proactive 
initiative in fiscal year 2000, our data matching efforts have 
identified 8,754 possible cases. To date, we have closed 3,180 cases 
because the veteran was still alive or VA previously took corrective 
action. Of the 463 investigations completed to date, 76 individuals 
were arrested and $15.3 million is in the process of being recovered. 
Based on the results of the completed investigations, we project the 
remaining 5,111 cases may produce 855 arrests and $172 million in 
monetary benefits.

                       PHILIPPINES BENEFIT REVIEW

    During 2002, the OIG and VA Regional Office Manila staff worked 
together on an international review to identify and eliminate erroneous 
benefit payments to payees supposedly residing in the Philippines. Over 
1,100 interviews were conducted, approximately 2,600 files were 
reviewed, nine criminal cases were initiated and one search warrant was 
obtained and executed. As of May 2002, awards of 594 beneficiaries were 
identified for suspension or termination. The overpayments for these 
594 beneficiaries totaled approximately $2.5 million with a projected 
5-year cost avoidance of over $21 million. Criminal investigations 
initiated during the Philippines review were turned over to the 
Philippines National Police. We also referred 94 beneficiaries to the 
VARO for review regarding a possible increase in benefits; appointment 
of a fiduciary; change of address; Prisoner of War Medal status; and 
various other benefits changes. From this review effort, several 
criminal investigations have been developed that will continue to be 
pursued during the next fiscal year. VA officials from the Manila 
Regional Office and VA's Financial Systems Quality Assurance Service 
were instrumental to the success of this review.
    We are now looking at other areas outside the continental United 
States where large numbers of veterans or their dependents receive 
benefits. Presently, over 78,000 payees, outside the continental United 
States, receive approximately $49 million a month in benefit payments. 
For example, benefit payments of approximately $2.9 million are paid to 
approximately 5,100 veterans and their beneficiaries in Germany on a 
monthly basis. In addition, benefits valued at approximately $28 
million are paid monthly to about 42,000 payees in Puerto Rico.

                     VA Regional Office Fraud Cases

                       ATLANTA VA REGIONAL OFFICE

    An OIG investigation uncovered $11.2 million that had been 
fraudulently paid to a 30-year VA employee and her 11 co-conspirators 
representing the largest known embezzlement by a VA employee. Based on 
a phone call from an alert Naval Federal Credit Union employee, the OIG 
team's investigation determined that an employee of VA's Atlanta 
Regional Office devised a scheme whereby she used her position of trust 
and the VA computer system to resurrect the claims files of deceased 
veterans who had no known dependents. Once the files were 
reestablished, the employee generated large retroactive benefit 
payments and, in some cases, recurring monthly payments, to her co-
conspirators. After the payments were deposited in private bank 
accounts, the co-conspirators shared the proceeds with the VA employee 
by giving her what amounted to approximately one-third of the money 
they had received.
    The scheme started in July 1996, when the employee channeled funds 
to a retired career VA employee and a former VA employee. Between 1996 
and August 2001, the trio stole over $6 million. As a result, the OIG 
team and the U.S. Attorney's Office decided to review all claims files 
touched by these individuals. We discovered a second conspiracy that 
showed the same VA employee, starting in 1993, embezzled approximately 
$5 million while working with close friends and eight co-conspirators. 
This scheme was devised whereby large lump sum payments and recurring 
monthly benefit payments were made to these individuals. Like the 1996 
scheme, the VA employee received a share of the benefits when the 
checks were cashed. Over 100 bank accounts were analyzed to determine 
the disposition of the stolen money. The investigation generated 73 
seizure warrants and 30 forfeiture recoveries.
    The 12 co-conspirators pled guilty to various charges including 
theft of Government funds, conspiracy, and conspiracy to commit money 
laundering. The VA employee's guilty plea came after being indicted on 
1,000 counts from the two conspiracies. In addition to defrauding VA, 
three of the co-conspirators also pled guilty to defrauding the SSA. 
The 12 defendants were sentenced to a total of 37.5 years' 
imprisonment, 35 years' probation, and judicially ordered to make 
restitution totaling over $34 million.
    Property with an appraised value of almost $2.8 million was seized 
or forfeited. This included houses, airplanes, and such oddities as a 
mini submarine. In addition, numerous bank accounts, insurance 
policies, cash, jewelry, valuable collections (including a $40,000 
Barbie doll collection), antiques, cars, boats, and motor homes were 
recovered from the individuals involved.

                       HOUSTON VA REGIONAL OFFICE

    We also investigated a matter involving a Houston VA Regional 
Office employee who was found to have created a false veteran payee 
within VA data systems and, with the assistance of another VA employee, 
caused benefit payments to be disbursed to an address they controlled. 
In total, during a 3-year period, they stole over $229,700 from VA. 
Both employees were prosecuted and received prison sentences, 3 years' 
probation and were directed to make restitution totaling $459,572.

                      NASHVILLE VA REGIONAL OFFICE

    In another instance, a VA Regional Office employee, assigned to the 
Nashville Regional Office as a veteran services representative, was 
prosecuted because of a scheme he devised wherein he obtained the 
medical information of another veteran from VA's computerized Automated 
Medical Information Exchange. He then altered the patient information 
to show it was referring to his medical condition, and forwarded the 
fraudulent documents to the VA Regional Office in Cleveland for 
inclusion in his own claims folder.
    This action caused the VARO managing his records to re-evaluate the 
claim and upgrade his rating to a 100 percent disability. During the 
investigation, it was also determined that compensation granted the 
employee in 1988, based on his claim for suffering a gunshot wound, was 
based on fictitious information. The employee later resigned and prior 
to his prosecution, made restitution to VA amounting to $42,976. After 
pleading guilty to a Criminal Information charging him with aiding and 
abetting and wire fraud, the employee was sentenced to 6 months 
monitored home confinement and 24 months probation.
    In another Nashville case, a veteran was prosecuted on charges of 
wire fraud relating to falsified records submitted to VA. The records 
included his DD Form 214, Certificate of Release or Discharge from 
Active Duty. The veteran essentially misrepresented himself to VA as a 
wounded prisoner of war. He further fabricated his military service by 
claiming to have received the Distinguished Service Cross, and Silver 
Star; and, a battlefield commission. During a major news network 
interview, the veteran claimed to be a surviving member of an Army 
group and claimed he was ordered to fire on Korean civilians at No Gun 
Ri during the Korean War.
    Investigators proved he was not present and his account, therefore, 
was false. The veteran's false claims enabled him to wrongfully receive 
the Purple Heart and collect disability compensation and medical care 
benefits from VA for 16 years. The veteran was sentenced to 21 months 
imprisonment, 36 months supervised release and ordered to pay 
restitution to VA totaling $412,839.
    In other benefit fraud cases, two VBA claims examination employees, 
at separate VBA Regional Offices, each embezzled over $600,000 in 
unrelated schemes.

                      NEW YORK VA REGIONAL OFFICE

    In the first instance, a man was arrested in New Jersey on drug 
possession charges in April 1998. The arresting officers found a 
fictitious identification card on his person and records relating to a 
savings account in the name shown on the identification card. Our joint 
investigation led to the discovery that fraudulent VA disability 
compensation benefits were paid into the savings account monthly since 
August 1986. At the time the fraud was discovered, the payments were 
made at the rate of $5,011 monthly, the maximum VA compensation rate at 
that time.
    The arrested man turned out to be a former VA employee who had 
worked as a disability rating specialist at VA's New York Regional 
Office from January 1986 to May 1987. The former employee was 
ultimately convicted of having fraudulently received VA compensation 
benefits to which he was not entitled. The scheme was perpetrated using 
another person's Social Security Number (SSN). The name and date of 
birth used were not those of the person whose SSN was used. The monthly 
fraudulent payments continued to be processed for 12 years, totaling 
over $620,000.

                   ST. PETERSBURG VA REGIONAL OFFICE

    In this case, a supervisor at VA Regional Office St. Petersburg, 
FL, stole $615,451 by creating a fraudulent disability compensation 
award in the name of her fiance, a veteran who had served in the 
Persian Gulf War. The fraud began in March 1997 and continued until the 
employee's arrest in January 1999. The perpetrator used VBA's computer 
system on 10 occasions between March and October 1997, to retroactively 
increase the fraudulent payments she was sending to their bank account. 
These actions generated a series of one-time payments totaling about 
$520,000, and incrementally increased the recurring benefit payments to 
$5,011 monthly. At the time of her arrest, the perpetrator was a 
Veterans service center section chief, a mid-level managerial position.
    After learning of these thefts, the Under Secretary for benefits 
requested that my office review internal controls in the compensation 
and pension (C&P) program to determine what vulnerabilities existed 
that might have facilitated these crimes. I provided a vulnerability 
assessment, reporting on 18 observed vulnerabilities in six general 
internal control categories. We also began our CAP review initiative to 
assess the scope and breadth of current vulnerabilities at VA's 
regional offices.

           DEPARTMENT WIDE REVIEW OF LARGE ONE-TIME PAYMENTS

    In order to ensure the integrity of the benefits delivery system, 
the Secretary of Veterans Affairs requested the OIG conduct a 
department-wide review of large C&P one-time payments. We began a 
project examining all one-time payments of $25,000 or more made by the 
VBA, as well as a review of active awards that were considered 
vulnerable to fraud. One additional case of employee fraud was found in 
our review of 58,129 one-time payments. The OIG team was able to 
conclude that payments were valid for 99.8 percent of the cases 
reviewed, with the balance of cases being associated with the Atlanta 
Regional Office matter.
    Although the benefits delivery system and claims processing in 
general were free of any similar one-time pay fraud situations, we did 
find unacceptably high rates of non-compliance with internal control 
requirements related to the processing of one-time payment claims. As a 
result, VBA began requiring that regional office management review all 
large one-time payments to ensure that they were appropriate and that 
required reviews were performed. In addition, we recommended that 
security deficiencies discovered in the claims processing system be 
corrected, and that regional office managers certify annually that 
their claims processing security is in compliance with required 
controls.

                       INCOME VERIFICATION MATCH

    One of most significant and successful data matching initiatives 
was our November 2000 audit of VBA's Income Verification Match. We 
identified opportunities for VBA to:
     Significantly increase the efficiency, effectiveness, and 
amount of potential overpayments that are recovered.
     Better ensure program integrity and identification of 
program fraud.
     Improve delivery of services to beneficiaries.
    We found that VA's beneficiary income verification process with the 
Internal Revenue Service resulted in a large number of unresolved 
cases. We estimated the monetary impact of these potentially erroneous 
payments totaled $806 million. Of this amount, we estimated potential 
overpayments of $773 million were associated with benefit claims that 
contained fraud indicators such as fictitious Social Security numbers 
or other inaccurate key data elements. The remaining $33 million was 
related to inappropriate waiver decisions, failure to establish 
accounts receivable, and other process inefficiencies. We also 
estimated that $300 million in beneficiary overpayments involving 
potential fraud had not been referred to the OIG for investigation. 
While VA addressed most of the recommendations in our report, the 
recommendation to complete necessary data validation of beneficiary 
identifier information contained in compensation and pension master 
records to reduce the number of unmatched records with the SSA remains 
unimplemented.
    While the Department did not agree with our monetary impact, they 
did agree to report the Income Verification Match Program as an 
internal high priority weakness. We did not accept the Department's 
rationale for reducing the monetary impact, since our estimate was 
based on a statistical sampling methodology that reflected a 
conservative estimate of the dollar impact of overpayments that have 
occurred.

                     WORKER'S COMPENSATION BENEFITS

    We also audited VA's Federal Employee Compensation Act Program in 
July 1998 and concluded the program was not effectively managed and 
that by returning current claimants to work who are no longer disabled, 
VA could reduce future payments by $247 million. The audit found that 
the lack of effective case management practices placed the Department 
at risk for program abuse, fraud, and unnecessary costs.
    In April 1999, in response to requests for assistance by the 
Department, we provided the Department with a handbook for VA Facility 
Workers Compensation Program Case Management and Fraud Detection. As a 
result, Office of Workers Compensation Program costs had decreased by 
1.6 percent to about $130 million by the end of fiscal year 1999. 
However, since that time costs have increased to approximately $151 
million in 2002. We are currently performing a follow-up audit to our 
1998 audit. Our preliminary results indicate VA continues to be at risk 
for program abuse, fraud, and unnecessary costs because prior OIG 
program recommendations have not been fully implemented.

                      Financial Management Systems

    Over the last 5 years, OIG has made recommendations addressing 
improvements needed in Financial Management activities and identified 
the potential for monetary savings totaling about $600 million. Since 
fiscal year 1999, VA has achieved unqualified Consolidated Financial 
Statement (CFS) audit opinions. However, continuing material 
weaknesses, such as information technology security controls and 
noncompliance with Federal financial management system requirements 
have been identified. Corrective action needed to address noncompliance 
with financial system requirements is expected to take several years to 
complete.
    The material weakness concerning the Department's financial 
management systems underscores the importance of acquiring and 
implementing a replacement integrated core financial management system. 
Achieving the success of an unqualified CFS opinion currently requires 
a number of manual compilations and extraneous processes that the 
financial management system should perform. These processes require 
extraordinary administrative efforts by the program, financial 
management, and audit staffs. As a result, the risk of materially 
misstating financial information is high. Efforts are needed to ensure 
adequate accountability, and reliable, useful, and timely information 
needs to be available to help Department officials make well informed 
decisions and judgments.
    I will now highlight some additional concerns focusing on debt 
management activities in the Department.

                         DEBT MANAGEMENT ISSUES

    As of December 2002, debts owed to VA totaled over $3 billion, of 
which active vendee loans comprise about 52 percent. Debts owed to VA 
result from the payment of home loan guaranties; direct home loans; 
life insurance loans; medical care cost fund receivables; and 
compensation, pension, and educational benefits overpayments. Over the 
last 4 years, my office has issued reports addressing many facets of 
the Department's debt management activities. We reported that the 
Department should: (i) be more aggressive in collecting debts; (ii) 
improve debt avoidance practices; (iii) streamline and enhance credit 
management and debt establishment procedures; and (iv) improve the 
quality and uniformity of debt waiver decisions. While VA has addressed 
many of the concerns we reported over the last few years, our most 
recent audits continue to identify areas where debt management 
activities could be improved and OIG report recommendations have not 
been adequately addressed.

                      MEDICAL CARE COLLECTION FUND

    During fiscal year 2002, we conducted an audit of VA's Medical Care 
Collection Fund (MCCF) activities that resulted in identifying 
opportunities to maximize the recovery of funds due VA for the 
provision of health care services. We reported there were potential 
opportunities for VA to enhance its collection efforts. Recovered funds 
are used to supplement the Department medical care budget and from 
fiscal years 1997 through 2001 MCCF collections have total $3 billion.
    As of September 2001, VA reported a $1 billion backlog of unbilled 
care. We estimated that eliminating this backlog could result in 
additional collections of about $368 million.
    Our audits continue to identify additional opportunities for 
improvements that can ensure the accuracy of medical record 
documentation and coding and more aggressively pursue accounts 
receivable collections. We also reported that insurance companies were 
not always billed in patient discharges sampled because the attending 
physician's participation was not documented in the patient medical 
record. Missed billing opportunities were estimated to total $13.1 
million nationwide. Improvements can result in additional collections 
of about $4.6 million, based on projections that 35 percent of these 
billings are paid.
    In our MCCF audit, we also noted that VA's average number of days 
to bill for these services took about 95 days. Private sector hospitals 
generally bill within 10 days of care. VA continues to be at risk of 
losing revenues by under billing and not ensuring more timely billing 
efforts for services.
    Our 2002 Healthcare Inspections review found incorrect Current 
Procedural Terminology codes in 50 percent of the outpatient records 
sampled. Thus, we are continuing to evaluate the accuracy of medical 
record documentation and coding during our CAP reviews with emphasis on 
reviewing the quality of documentation and aspects of residency 
supervision to ensure the proper coding of services performed.
    I strongly support follow-up of unpaid bills and appeal of denied 
insurance claims to increase future collection results in the 
Department. We have recommended that the Department continue to 
aggressively pursue improvements in these activities. Promoting results 
oriented accountability over the MCCF Program will improve debt 
management in the Department.

 Additional Benefits of Computer Matching Efforts Can Be Achieved With 
                           Legislative Reform

    Data sharing has been an important and successful tool for 
identifying improper payments, as well as fraud, waste, and abuse. 
Verifying that the right person is getting the right benefit at the 
right time is a priority management objective. Computer data matching 
gives us the ability to verify program participant information and 
thereby detect improper payments sooner or perhaps even prevent them 
before they start. We find computer matching initiatives cost effective 
because this type of work saves a significant amount of labor.
    Unfortunately, under current regulations, we are not realizing the 
timesaving features that computers offer. There is a huge untapped 
potential for saving the Federal Government a significant amount of 
erroneous and improper payments in a timely manner through data 
matching. However, current regulations are overly cumbersome and time 
consuming.
    Currently, under the Privacy Act, an initial computer matching 
agreement between two agencies may remain in effect for 18 months. 
Extensions must be negotiated for an additional 12 months. After this 
12-month extension, agencies must then renegotiate a whole new 
agreement. Renegotiations are time consuming and unnecessarily increase 
workload demands on the agency. Furthermore, renegotiations do not 
always add any additional value to data sharing between agencies. For 
example, VA matches with the Social Security Administration wage data 
is an integral part of our efforts to review veterans eligibility for 
pension benefits. This match should be accomplished annually.
    There are other restrictions that keep us from realizing the full 
benefits of computer matching to identify fraud, waste, and abuse. For 
example, the cumbersome and time consuming process under the Computer 
Matching and Privacy Protection Act of 1988 (P. L. 100-503), does not 
apply when matching records from the Department's system of records. 
However, P.L. 100-503 prevents the matching of Federal personnel 
records when there is the possibility that the match results will 
subject the Federal employee to adverse financial, personnel, 
disciplinary or other adverse actions. In other words, the law prevents 
us from timely stopping Federal employees from defrauding the Federal 
Government.
    Here are some changes I believe would be beneficial:
     Lengthen the time periods that computer matching 
agreements can remain in effect.
     Amend the Computer Matching and Privacy Protection Act of 
1988's exclusionary clause to include Federal personnel records when 
making internal matches using only records from the Department's system 
of records.
     Develop a process to streamline the development and 
implementation of a computer matching program. Actions can include 
consolidating notice requirements and reevaluating the need to submit 
approved matches to Congress as well as OMB. Currently, we must provide 
record subjects with prior notice by direct notice, constructive 
notice, and a periodic notice.

                 Other Legislative Reform Opportunities

    Acquiring routine access to Social Security wage and employment 
data is also critical to ensuring effective oversight and 
administration of VA benefits such as eligibility for monthly 
compensation and pension payments, verification of income for home loan 
guarantees, eligibility for medical care (without copayment) and 
matching efforts to VA's payroll files for protection against employee 
fraud. We need to initiate actions that will improve VA's ability to 
review applicants' eligibility for benefits and enhance our efforts to 
detect and prevent fraud.
    For example, gaining timely access to Social Security wage data 
would be indispensable to efficient oversight of the Workers' 
Compensation Program. Investigation of workers compensation cases is 
very timely and resource intensive, frequently requiring lengthy 
surveillance to develop a fraud case. Access to the employment and 
earnings information held by IRS would also improve the effectiveness 
of our audits and investigations and ultimately free up audit and 
investigative resources for other high priority matters.
    Many overpayments are caused by the inability of VA Regional 
Offices to act on information provided by VA employees or other 
Government entities. All entities other than the beneficiary or 
fiduciary are considered third party for purposes of verified 
information. As a result, while it is important to protect the 
interests of beneficiaries, the designation of benefit delivering 
Government entities as third parties creates backlogs in VA's claims 
processing activities and benefit overpayments. VA policy should be 
revised to include all VA entities in the definition of first party. 
This would expedite the due process notification requirement; and 
reduce overpayments and other unnecessary claims processing work.
    This completes my written testimony on waste, fraud, and abuse in 
mandatory programs of the Department of Veterans Affairs. I would be 
pleased to provide information on other activities and findings and to 
answer any questions the committee may have.

    STATEMENTS OF HON. PHYLLIS K. FONG, INSPECTOR GENERAL, 
DEPARTMENT OF AGRICULTURE; HON. JOHN P. HIGGINS, JR., INSPECTOR 
    GENERAL, DEPARTMENT OF EDUCATION; DARA CORRIGAN, ACTING 
 PRINCIPAL DEPUTY INSPECTOR GENERAL, DEPARTMENT OF HEALTH AND 
 HUMAN SERVICES; AND HON. KENNETH M. MEAD, INSPECTOR GENERAL, 
                  DEPARTMENT OF TRANSPORTATION

    Chairman Nussle. First I would like to turn to Phyllis 
Fong, from the Department of Agriculture. Welcome. And we 
invite you to begin your testimony, and your written testimony 
will be made part of the record at this point.

                  STATEMENT OF PHYLLIS K. FONG

    Ms. Fong. Thank you, Mr. Chairman and members of the 
committee. I am pleased to be here today to testify about 
USDA's mandatory spending programs. I will focus on those 
programs that comprise a significant portion of USDA's program 
levels and that contain identified management challenges for 
the Department.
    As you know, mandatory programs within the Department 
comprise about $67 billion of the over $70 billion portfolio. 
The programs I will focus on today include the major food 
assistance programs--food stamps, school lunch and school 
breakfast--the farm programs, and the crop insurance programs.
    Over the past 7 years, IG audits and investigations in 
these areas have identified over $751 million in questioned 
costs, $466 million in potential program savings, and $497 
million in investigative results. So we have done quite a bit 
of work in these areas.
    First of all, I would like to turn to the Food Stamp 
Program. As you know, that program is the Nation's principal 
nutrition assistance program, which FNS, the Food and Nutrition 
Service, administers in cooperation with State agencies. Food 
stamp benefits are provided via paper coupons and EBT cards 
which can be redeemed at authorized retailers.
    In the area of retailer abuse, we have found that fraud in 
the program generally occurs when individuals sell their 
benefits for cash, in violation of the intent of the program as 
well as the law. This practice, which is known as trafficking, 
diverts food stamps away from their intended purpose. Curbing 
the incidence of trafficking by retailers and individuals 
remains an area of significant concern. The FNS has issued an 
estimate in fiscal year 2000, that disclosed that stores 
trafficked over $650 million each year for a 3-year period from 
1996-98. This amounts to approximately 3\1/2\ cents of every 
food stamp dollar that has been issued.
    The advent of EBT has not prevented fraud in the program. 
Rather, what we have seen is that fraud continues to exist, but 
the method of trafficking has moved from the streets to the 
stores. As a result, our investigations are now focusing almost 
solely on the retailers, because they are the only ones who can 
redeem food benefits for cash from the government, using 
coupons or the EBT cards.
    We have made a number of recommendations to the Department 
on this, and FNS has increased its onsite monitoring of 
retailers. And our belief is, they appear to be identifying and 
addressing problem retailers through that process.
    Another area of concern for us is the area of improper 
payments. Eligibility for the Food Stamp Program is generally 
based on an applicant's household income and other resources, 
and certain deductions are allowed from a household's gross 
income similar to a tax computation.
    FNS has undertaken to measure the accuracy of its payments 
using a statistical sampling system. And what they have found 
is that between fiscal years 1993-2001, the national error 
rates have fluctuated between 10.81 percent and 8.66 percent. 
These rates include both underpayments and overpayments to 
individuals. For fiscal year 2001, which is the most recent 
data, total erroneous payments were about $1.3 billion out of a 
total of $15.5 billion in issuances.
    Recently Congress has taken some action to address this. 
The Food Stamp Reauthorization Act of 2002 contains provisions 
to simplify the definitions of income, deductions, allowances 
and other kinds of costs. Those provisions became effective in 
October of 2002, and FNS plans to issue implementing 
regulations soon.
    While one would expect those provisions to result in fewer 
certification errors and therefore fewer improper payments, the 
determining factor will be how well FNS and the States actually 
implement the provisions of the new act and then make any 
adjustments based on their quality control process. We 
anticipate that we should be able to evaluate the results of 
that in the 2004-05 time frame.
    Next I will to the national school lunch and school 
breakfast programs. Under these programs, FNS can reimburse 
schools for all meals served that meet program requirements, 
and meals that are served free or at a reduced price receive an 
additional reimbursement from the Federal Government. 
Eligibility for these meals is based on household income, and 
school food authorities are required to sample applications to 
verify the reported income of recipients.
    The Department has acknowledged that eligibility 
determination and verification in those programs is a 
significant management challenge that must be addressed. The 
recent U.S. Census shows 27 percent more students are certified 
for free or reduced price meals than the census data itself 
would suggest are eligible. We have done a number of audits in 
this area, sampling specific jurisdictions, and we have also 
found that there are significant error rates, ranging from 19 
percent in Illinois to about 69.5 percent in New York City.
    As a result of this, FNS is exploring several options, and 
they have several pilot programs in place to address this 
problem.
    I would now like to turn to the crop insurance and farm 
programs of the Department. These programs are closely related 
and they use the same basic data to compute program benefits. 
Such data include acreage, crop location, production and 
shares, all of which are generally self-certified by program 
participants.
    Insurance companies for the crop insurance program and FSA 
for the farm programs, however, collect this data separately. 
They collect it from producers and they collect it in different 
formats. Because there are fundamental differences in how these 
two different entities collect data and in the definitions of 
their data, there is sometimes the appearance that there are 
significant discrepancies in the data.
    Congress took action with the Agricultural Risk Protection 
Act of 2000 to require these two entities within USDA to 
annually reconcile their data, and to address apparent 
discrepancies. The reason why this is significant is that if 
there are discrepancies in the data, it permits erroneous 
payments or improper payments to be made.
    The act also requires RMA to use data warehousing and data 
mining technologies to identify anomalies in these programs and 
the potential for fraud. We have reviewed the 2001 crop year 
data reconciliation process. We found that FSA was able to 
resolve about half of the data records that were not matched 
between the two entities. We believe significant action remains 
to be done. And until this happens, it is our belief that 
neither entity within USDA will be able to reduce its improper 
payment rate.
    In sum, in each of those mandatory programs that I have 
discussed, much has been done by USDA and the Congress to 
address some of the inherent weaknesses within USDA's programs. 
Overall I see the key to future improvement in this area as 
lying in the Department's response to implementing the 2002 
Improper Payments Information Act which Congress enacted last 
year. This will be a critical action item for the Department.
    In many of our programs, the Department has not yet done a 
full analysis as to the extent of improper, erroneous payments, 
and so it is very difficult for us to get a handle on it and to 
take appropriate corrective action.
    There must be management commitment, inter- and intra-
agency coordination, adequate information systems, and quality 
control processes and effective enforcement action for the 
Department to continue to move forward in these areas. We in 
the IG's office are committed to working with the Department 
and the Congress to address these areas, and we would be happy 
to address any questions that you may have.
    Chairman Nussle. Thank you very much for your testimony.
    [The prepared statement of Ms. Fong follows:]

     Prepared Statement of Hon. Phyllis K. Fong, Inspector General,
                     U.S. Department of Agriculture

    Thank you, Mr. Chairman and members of the committee. I am pleased 
to be here to provide testimony about the Office of Inspector General's 
(OIG) perspective on fraud, waste, and abuse in mandatory programs 
administered by the U.S. Department of Agriculture (USDA).

                               Background

    USDA's Office of Inspector General has over 40 years of service 
within the Department and as such has a long history of identifying 
fraud, waste, and abuse in USDA's programs. Although our tools and 
techniques have changed over the years, our purpose remains the same: 
to perform audits and investigations of the Department's more than 300 
programs and operations, recommend policies and actions to promote 
economy and efficiency, and prevent and detect fraud, waste, and abuse 
in these programs and operations. We have been actively involved in 
auditing and investigating the major USDA mandatory programs: food 
assistance programs and farm programs (including conservation) and crop 
insurance programs. We take as our motto and our purpose, ``Ensuring 
the integrity of American Agriculture.'' In 40 years, we have seen many 
changes in the Department's programs, just as we have seen many changes 
in the nature of the schemes and devices we encounter, and the program 
abuse and mismanagement we find.
                           improper payments
    Allow me to say from the outset that while OIG has a long history 
in identifying fraud, waste, and abuse in USDA programs, quantifying 
the extent of these offenses is extremely difficult. In the case of 
fraud in particular, people do not commit it with the idea that it will 
be discovered. Consequently, a reliable estimate is difficult to 
obtain. Both Congress and the administration recognize the importance 
of reducing waste in Government programs. As you know, one of the 
initiatives of the President's Management Agenda is to reduce erroneous 
(improper) payments. An erroneous payment is any payment that should 
not have been made, or that was made in an incorrect amount, to an 
ineligible recipient, or for an ineligible service. The 2002 Improper 
Payments Information Act now requires agencies to identify programs 
vulnerable to improper payments, estimate the extent of these erroneous 
payments, and develop a plan to prevent such errors. This new 
requirement will be a significant management challenge to Federal 
agencies, including USDA. Successful implementation will require a 
strong internal control structure, to include management commitment and 
the necessary resources, quality control processes, and information 
systems to prevent, detect, and measure the extent of erroneous 
payments. Ultimately, the goal will be to design internal control 
systems to detect and prevent improper payments before they ``go out 
the door.''
    Within USDA, the only agency that currently has a statistically 
based quality control program in place to measure the extent of 
improper payments is the Food and Nutrition Service (FNS). This program 
measures both over- and under-payments of Food Stamp Program benefits 
by State administering agencies, albeit ``after the fact.'' A key 
component of FNS' program is to provide a system of incentives and 
penalties to encourage State administering agencies to lower their 
error rates and ensure that eligible individuals receive the proper 
amount of program benefits. OIG recognizes the importance of preventing 
improper payments and has recently initiated a review to assess the 
progress of select agencies in implementing this new mandated 
requirement.
    Over the past several years, OIG has been requested to identify the 
top management challenges facing the Department. Among other things, we 
considered OIG's experience in finding fraud, waste, and abuse in the 
program and the nature of the program that might make it vulnerable to 
fraud, waste or abuse. USDA has about 70 mandatory spending programs 
(see Exhibit A). For fiscal year 2003, these mandatory programs 
amounted to approximately $67.8 billion, or 64 percent of the USDA's 
total estimated program dollar level. Today, we will focus our 
testimony on those programs that comprise a significant portion of 
USDA's program levels, in both dollars and participants, and that 
contain OIG-identified management challenges for USDA. The programs I 
will address are the major food assistance programs (Food Stamp and 
National School Lunch and Breakfast Programs); farm programs (including 
conservation); and crop insurance programs. Between fiscal years 1996 
and 2002, OIG conducted 509 audits and 3,492 investigations in these 
programs; our audits identified about $751 million in questioned costs 
and $466 million in potential program savings in these programs, and 
our investigations resulted in over $497 million in monetary results.

                        Food Assistance Programs

    FNS administers the food assistance programs of USDA. These 
programs include the Food Stamp Program, the National School Lunch and 
School Breakfast Programs, among others. The program goals are to 
provide access to a more nutritious diet for people with low incomes, 
to encourage better eating habits among the Nation's children, and to 
stabilize farm prices by distributing surplus foods.

                           FOOD STAMP PROGRAM

    The Food Stamp Program is the Nation's principal nutrition 
assistance program. FNS administers the program in cooperation with 
State agencies. Households apply for benefits at State or local welfare 
offices. Those offices certify the households' eligibility to 
participate and issue the benefits. Eligibility is generally based on 
the household's level of income and other resources of the applicant, 
including bank accounts and real estate. In fiscal year 2002 just over 
$18 billion in food stamps was issued to an average 8.2 million 
households. FNS funds the entire cost of program benefits and shares in 
the State agencies' administrative costs. The program provides monthly 
program allotments to households in the form of paper coupons or in the 
form of electronic benefits transfer (EBT) systems cards, which 
function much like bank debit cards. Food stamp benefits provided via 
coupons and EBT cards can be redeemed at authorized retailers. FNS 
began pilot implementation of EBT to provide food stamp benefits in 
1984. The Personal Responsibility and Work Opportunity Reconciliation 
Act of 1996 (welfare reform) mandated all States to implement EBT for 
food stamps by October 2002. As of July 2003, FNS reported 52 of 53 
State Agencies have operational systems with 48 being operational 
State- or district-wide. FNS now estimates that about 91 percent of 
participating households receive food stamp benefits through EBT 
systems, which is about 91 percent of the total issuances.
    Retailers apply to FNS for authorization to accept food stamps at 
their establishments, including supermarkets, corner grocery stores, 
convenience stores, and farmers' markets. To qualify for authorization, 
a retailer must stock an ample variety of staple foods including 
breads, dairy products, fruits and vegetables, and meats.

                            RETAILER ABUSES

    Fraud and abuse in the Food Stamp Program generally occurs when 
individuals sell their benefits for cash in violation of the intent of 
the program as well as the law. This practice, known as trafficking, 
diverts food stamps away from their purpose. Curbing the incidence of 
trafficking by retailers and individuals remains an area of significant 
mutual concern for FNS and OIG. FNS' latest estimate for trafficking 
was published in March 2000 (FNS is planning to issue a revised 
estimate this summer). The report used data from FNS investigations of 
authorized retailers and disclosed that stores trafficked over $650 
million each year during the period 1996-98. This amounted to 3\1/2\ 
cents of every food stamp dollar issued. The advent of EBT has not 
prevented fraud from occurring; the scheme of trafficking has not 
changed yet the method has. Specifically, trafficking of food stamp 
benefits has moved from the street to the stores. Our investigations 
now focus almost solely on the retailers because they are the only ones 
who can redeem food benefits for cash from the government using paper 
coupons or households' EBT cards. EBT systems do, however, provide an 
electronic record of transactions and make it easier to identify stores 
that may be trafficking. The systems also identify the households whose 
benefits were trafficked, something that was not possible under the 
coupon system.
    Since the FNS-authorized retailer is the key to redemption of 
program benefits, OIG has been concerned about the legitimacy and 
eligibility of these authorized retailers. We have testified in the 
past about our work in this area and the need for agency on-site 
reviews to determine if a retailer should be authorized or remain 
eligible for reauthorization. In 1995, we performed a review of 
retailer eligibility entitled ``Food Stamp Program, Store Eligibility 
Task Force.'' At that time, we visited over 5,000 authorized retailers 
and identified over 850 stores that were obviously not eligible to 
participate and another 450 stores whose eligibility was questionable. 
These stores had minimal or no staple foods, were out of business, or 
did not exist. FNS had not routinely conducted onsite preauthorization 
visits and had accepted the information provided on the store's 
application without verification. While FNS could require stores to be 
periodically reauthorized, site visits were not a requirement of the 
reauthorization process. We recommended that routine onsite visits be 
incorporated into both the application and reauthorization processes. 
In response to OIG's concerns, FNS contracted with outside vendors to 
make the visits and provide FNS with specific information to be used in 
the authorization and reauthorization process. The contractors were 
required to complete a checklist of food inventory and take 
representative photographs of each retailer's operation. We have 
reviewed this system and concluded that it is working. At the time of 
our initial review of retailer eligibility in 1995, there were about 
208,000 authorized retailers. At the end of fiscal year 2002, with 
increased onsite monitoring resulting in better information and more 
critical assessments, that number has now been reduced to 146,000. This 
being said, our ongoing investigations indicate FNS must remain 
vigilant in identifying and addressing problem retailers.
    As previously mentioned, EBT systems provide an electronic record 
of individual transactions. Because FNS has a reliable quality control 
system in place to detect erroneous payments due to errors in 
determining recipient eligibility, OIG audits over the past 5 years 
have been directed to evaluating State and EBT processor controls to 
ensure that EBT systems can accurately and reliably issue, account for, 
and report Food Stamp Program data. Our audits have shown that these 
EBT systems are working. Analyses of EBT data have proven invaluable in 
targeting retailers whose activities are questionable. With the 
majority of food stamp benefits now being issued through EBT systems, 
the focus needs to remain on using this data to better target problem 
retailers and refining analyses as problem retailers change their 
techniques to avoid detection.
    In fact, we focus our investigative efforts on retailer trafficking 
in an attempt to stem both the retailer's illegal gains and the 
recipient's illegal use of food stamp benefits. For the period fiscal 
years 1996-2002, we have conducted 2,540 food stamp related 
investigations. Of the investigations, 2,238 were retailer related, and 
of those, 491 involved trafficking with EBT benefits. Our food stamp 
related investigations for the past 7 years have resulted in 2,969 
indictments, 2,740 convictions, and over $264 million in monetary 
results.
    One example of our investigative work involved a joint 
investigation with the Internal Revenue Service of four food stores 
owned by family members in the Fort Worth, TX area. We found that from 
the period December 1996 through April 1999, the defendants' efforts in 
a food stamp trafficking scheme resulted in government losses exceeding 
$1.3 million. Part of the scheme involved trafficking food stamps 
through one authorized retail store via manual transaction over the 
telephone of another store. The owner of one store would call the owner 
of a second store and provide him with an EBT card number and 
associated PIN. The owner at the second location would enter the 
information into the point of sale (POS) device to complete the 
transaction. POS devices are terminals used to transact EBT benefits. 
Through our efforts five family members and several other store 
employees were convicted and received sentences ranging from 8 to 46 
months in prison. They were charged with violations of food stamp EBT 
trafficking and conspiracy. These individuals were also ordered to pay 
over $1.3 million in restitution for the Government's losses.
    We have recently identified a fraudulent scheme that while rare, 
appears to be growing in the Food Stamp Program. We noticed that 
authorized retailers are moving their POS devices to an unauthorized 
location, such as an unauthorized store or apartment, for trafficking 
purposes. We learned through investigation that unauthorized stores 
take possession of EBT POS devices, which are then used to conduct 
fraudulent transactions. Additionally, we found that stores work in 
concert with other unauthorized stores to further the scheme. We have 
met with FNS on this issue, and are working together to consider ways 
to prevent this activity from occurring. Factors such as cost, however, 
have been identified as potential impediments to some solutions.
    The nature of the Food Stamp Program and the large amount of money 
that it provides to recipients creates the potential for laundered 
monies to be transferred overseas, where it is not always possible to 
track how the funds are used. We have noticed trends in our food stamp 
trafficking investigations where such activity occurs. In fact, the 
elements of money laundering and overseas transfers led to our 
participation in the Federal Joint Terrorism Task Force (JTTF) and 
Operation Green Quest, which is a national project to target money 
transfer businesses sending funds overseas to terrorist groups.
    In one such investigation we uncovered a network of grocery stores, 
a wholesale distributing company and a video store, all owned by the 
same individuals that purchased food stamps and other program benefits 
for cash. The primary source of the trafficking occurred at the video 
store, which was located a few storefronts away from a food stamp 
issuance center. The video store would receive cash from one of the 
grocery stores, owned by the defendants, and use it to purchase food 
stamps and other program benefits. The video store would then provide 
the illegally obtained food stamps and other program benefits to the 
grocery store, which in turn redeemed the stamps or provided them to 
another authorized grocery store for redemption. Due to the large 
volume of food stamps and other program benefits, which needed to be 
redeemed, many authorized grocery stores were involved in the network, 
so that the fraud would go undetected. Through this investigation we 
discovered that approximately $1 million was transferred overseas. Two 
of the owners who pled guilty to food stamp fraud have fled the country 
and remain in a fugitive status. Additionally, the courts have entered 
a judgment against the store owners in an amount exceeding $71 million.
    We currently have active investigations with most of the 44 local 
JTTFs, and have an OIG representative serving on the National JTTF.
    FNS has the ability to take administrative action against 
authorized retailers using its own analysis of EBT data. FNS may also 
conduct retailer compliance investigations and take administrative 
action against retailers who violate the food stamp regulations. Such 
administrative actions include temporarily or permanently disqualifying 
retailers and their owners from participating in the program. In those 
instances when an FNS compliance investigation uncovers a retailer 
trafficking in food stamps, FNS promptly notifies OIG concerning the 
potential for a criminal investigation. Since fiscal year 1996, OIG has 
opened 1,159 food stamp trafficking investigations based on FNS 
referrals.
    An excellent example of an OIG investigation based on an FNS 
Compliance referral involves a matter in Philadelphia. Through a joint 
investigation with FNS Compliance and the U.S. Secret Service, we found 
that over an 18-month period, the two owners of an authorized store 
fraudulently redeemed $1.3 million in food stamp EBT benefits. Both 
owners were convicted of fraud. One was sentenced to 9 months 
incarceration, 3 years probation, and ordered to pay $1.3 million in 
restitution. The other was sentenced to 6 months home detention, 5 
years probation, and ordered to pay $1.3 million in restitution. 
Additionally, one of the owners agreed to cooperate and testify against 
the food stamp recipients who sold him their food stamp benefits. Thus 
far, the owner has identified about 3,000 recipients; over 2,000 of 
them have been notified that they will be removed from the food stamp 
rolls. The State of Pennsylvania has also indicted over 120 recipients 
in this matter.

                           IMPROPER PAYMENTS

    Eligibility for the Food Stamp Program is generally based on 
household income and other resources of the applicant, including bank 
accounts and real estate. Certain deductions are allowed from a 
household's gross income including dependent care, shelter, medical, 
and child support payments. Applicants must provide proof of income to 
become eligible to participate. Since 1974, FNS has measured payment 
accuracy using a statistical sampling system called the Quality Control 
(QC) system. Each State conducts monthly reviews of a statistical 
sample of households to measure payment accuracy (overpayments and 
underpayments) and the correctness of decisions to deny benefits. 
Between fiscal years 1993 and 2001, the national annual error rates 
have fluctuated between 10.81 percent and 8.66 percent, which include 
both over- and underpayments. For fiscal year 2001, the total erroneous 
payments were about $1.3 billion, with about $1 billion in over-
issuances and about $340 million in underissuances. Total issuances for 
fiscal year 2001 were about $15.5 billion. OIG considers the 
significance of these errors to be material to the Food Stamp Program.
    FNS' analyses of the error rates for fiscal year 2000 (the latest 
year published) shows that 54 percent of the dollar errors were 
attributed to the certifying agency, while about 46 percent were 
attributed to the households. The single biggest factor is determining 
or reporting income, which makes up almost 52 percent of the errors. 
This is followed by deductions from the household's gross income, which 
makes up about 28 percent of the errors.
    Our investigations have found that some recipients deliberately 
misrepresent their financial status, household income and composition, 
to obtain program benefits. Through this misreporting of information, 
individuals are certified as qualifying for food stamp benefits when, 
in fact, they do not. In a recent investigation worked jointly with the 
FBI, Immigration and Naturalization Service, Secret Service, Bureau of 
Alcohol, Tobacco, and Firearms, and two other Federal OIG offices, we 
found that an individual's personal finances and assets were 
inconsistent with those claimed on his food stamp and welfare 
applications. The investigation revealed that the individual provided 
false information in order to obtain credit cards, Social Security 
numbers, and alien registration documents. The individual was found 
guilty on several counts, including unlawful acquisition of food stamp 
benefits. He was sentenced to 30 months in prison and ordered to pay 
restitution in the amount of $41,805.
    We note that the Food Stamp Reauthorization Act of 2002 contains 
provisions to simplify the definitions of income, utility allowances, 
housing costs, resources, and determining deductions. These provisions 
of the act became effective October 1, 2002 and FNS plans to publish 
regulations to implement the act as soon as possible. While one would 
expect these provisions to result in fewer certification errors, the 
determining factor will be how well FNS and the States implement the 
provisions and then make any adjustments based on QC results. The QC 
results will not be available until fiscal year 2004 data are tested.
    At the time of OIG's audit in 1997, entitled ``Reinvestment of Food 
Stamp Penalties,'' it was thought that the high error rates were 
attributable to large increases in participation without a 
corresponding increase in State certification personnel. However, 
between 1995 and 2001 there was a significant decline in the number of 
participating households and a 34 percent decrease in program outlays. 
Yet the error rate for the same period only declined by 11 percent, 
which indicates that error rates are not directly linked to 
participation levels.
    Reducing the error rate, and thus the corresponding program losses, 
needs to remain an area of focus for FNS. This emphasis is supported by 
the Under Secretary for Food, Nutrition and Consumer Services, who 
noted in his fiscal year 2003 budget hearings that the Department's 
focus will be to deal with States with the most serious problems and 
consistently high error rates. In line with the Under Secretary's 
statement, the Department has recently fined California, Michigan, and 
Wisconsin, the three States with the highest error rates for 2002.
    The current law imposes QC liabilities each year a State's payment 
error rate is above the national average. Recent legislation (farm 
bill) made substantial changes to FNS' quality control system. 
Effective for fiscal year 2003, the reforms raise this threshold so 
that States are not penalized unless there is a 95 percent probability 
that their error rate exceeds 105 percent of the national average for 
two consecutive years. The law also contains various provisions for 
waiving penalties and provides bonuses for high performance. The impact 
of these changes on the payment accuracy rates and FNS' ability to 
encourage corrective actions by State administering agencies may not be 
known until fiscal year 2005. We plan to monitor the implementation of 
these program changes.
 fugitive felons made ineligible to receive food stamp program benefits
    In 1996, Congress passed the Personal Responsibility and Work 
Opportunity Reconciliation Act of 1996, generally known as the Welfare 
Reform Act. In the act, Congress recognized that certain people are not 
eligible for food stamps. The Act made felony fugitives ineligible to 
receive food stamp benefits. Additionally, this law allows the matching 
of law enforcement felony fugitive files with social service agencies' 
food stamp recipient records. To implement the law, OIG created 
``Operation Talon.'' This initiative capitalized on the provision of 
the act that declared individuals ineligible to receive Food Stamp 
Program benefits who are ``* * * fleeing to avoid prosecution, custody, 
or confinement after conviction.'' The provision also authorized State 
agencies to provide the addresses of food stamp recipients to any 
Federal, State, or local law enforcement officer for official purposes. 
Operation Talon was commenced in conjunction with other law enforcement 
agencies across the United States to locate and apprehend fugitives who 
may be illegally receiving food stamp benefits. It was designed to 
carry out the intent of Congress by:
     removing ineligible fugitive felons from Food Stamp Progam 
rolls, thereby reducing program outlays;
     removing fugitive felons from the streets in order to make 
our communities safer; and
     demonstrating to States how to carry out the statutory 
provisions on a continuing basis.
    Since its inception in early 1997, Operation Talon has resulted in 
8,793 arrests. Serious crimes perpetrated by those arrested include 
homicide related offenses, such as murder attempted murder, and 
manslaughter; sex offenses, such as child molestation, rape, and 
attempted rape; kidnapping/abduction; assault; robbery; and drugs/
narcotics violations. An example of an Operation Talon arrest involved 
an individual wanted for murder in southern New Jersey. The individual 
and two others were alleged to have executed a victim as part of a 
cocaine distribution conspiracy. OIG agents and detectives from the New 
Jersey State Police, the New York State Police, and the New York City 
Police Department, apprehended the individual in the Bronx, which was 
at the address he reported in his food stamp application.
    As successful as this initiative is, I unfortunately cannot provide 
the cost savings brought about by these operations. Since the States 
determine eligibility, they are the ones who are best positioned to 
make such determinations. For example, New Jersey has developed a 
formula for estimating costs avoided. To date, New Jersey estimates 
cost avoidance (program benefits now available for eligible recipients) 
of $1.9 million since the inception of Talon in 1996. It is difficult, 
however, for most States to determine cost savings because even though 
fugitives are removed from the food stamp eligibility roles, they may 
be only one member in an entire household that continues to be 
eligible.

          NATIONAL SCHOOL LUNCH AND SCHOOL BREAKFAST PROGRAMS

    The National School Lunch and School Breakfast Programs are 
administered by FNS through State educational agencies. The programs 
are designed to provide children with access to nutritious meals away 
from home and to improve their diets. Schools are eligible for 
reimbursement from FNS for all meals served that meet program 
requirements, with meals served free or at a reduced price receiving 
additional reimbursement. For fiscal year 2003, FNS estimates that 
National School Lunch Program outlays will be about $5.8 billion with 
the School Breakfast Program approaching $1.7 billion. Both programs 
share common eligibility requirements for free and reduced price meals. 
In fiscal year 2002, almost 58 percent of the National School Lunch 
meals were served free or at a reduced price, with the School Breakfast 
Program serving almost 83 percent of its meals as free or reduced 
price. Eligibility for free and reduced price meals is based on 
household income with households submitting applications at the 
beginning of the school year to their local school food authority. To 
test whether households correctly report their income, school food 
authorities are required to sample applications to verify the reported 
income.
    In August 1997, OIG issued a report entitled ``National School 
Lunch Program Verification of Applications in Illinois.'' We reported 
that while school food authorities generally followed regulations in 
conducting income verifications, they did not expand their sampling 
when high error rates were found. Overall, Illinois had a 19 percent 
error rate comprised of households underreporting income (about 9 
percent) or failing to respond to verification requests (about 10 
percent). This meant that $31.2 million, of the $165.1 million Illinois 
received in 1 year for free and reduced price meals, was potentially 
paid out for households that were not eligible. As part of the 
verification process, school food authorities are required to reduce or 
terminate benefits when the verification does not confirm the accuracy 
of the child's eligibility. OIG recommended that FNS establish a 
threshold for the maximum percentage of errors allowable during the 
verification process and require additional sampling when that 
percentage is exceeded. OIG further recommended that States be required 
to monitor school food authority verification efforts and follow-up to 
assure additional testing was undertaken where needed. FNS did not 
initially agree to make regulatory changes based only on our findings 
in Illinois, but subsequently revised this position when information it 
gathered on additional States showed an average error rate of 26 
percent.
    OIG's review, ``National School Lunch Program Operations in New 
York City,'' issued in September 2002, further confirmed the severity 
of the problem. For school year 1998/1999, in which New York City 
received $204 million in FNS reimbursement, the school food authority's 
testing of households' applications showed about 55 percent of those 
sampled underreported income (about 23 percent) or did not respond to 
verification requests (about 32 percent), with the error rate climbing 
to 59.5 percent in school year 1999/2000, 65.1 percent in school year 
2000/2001, and 69.5 percent in 2001/2002. Furthermore, the New York 
City school food authority did not always adjust its claims for 
reimbursement based on the verification results, as required.
    The Department has acknowledged that eligibility determinations and 
verification in the National School Lunch and School Breakfast Programs 
is an issue that needs to be addressed for program integrity. The Under 
Secretary for Food, Nutrition and Consumer Services noted in his 
testimony before the House Appropriations Subcommittee on Agriculture, 
Rural Development, Food and Drug, and Related Agencies in March 2002, 
that the recent U.S. Census shows 27 percent more students are 
certified for free or reduced price meals than the Census data itself 
would suggest are eligible. Since National School Lunch and School 
Breakfast Program reimbursements are estimated to reach $7.5 billion 
during fiscal year 2003, in response to these concerns, FNS has 
published a proposed rule requiring schools to report on the results of 
their verification reviews to the State agency. In turn, State agencies 
would consolidate the data and report to FNS. FNS also currently has 
pilot projects underway in 22 school food authorities in 16 States to 
assess three different options to address the verification process and 
the current high error rate. The first option requires households that 
are not eligible for free meals, by virtue of being eligible for Food 
Stamp Program or Temporary Assistance for Needy Family benefits, to 
provide upfront documentation of household income with their 
application. The second option requires school food authorities to 
expand verification sampling if the initial tests showed an error rate 
exceeding 25 percent. The third option requires school food authorities 
to verify direct certifications, namely those who reported receiving 
Food Stamp Program or Temporary Assistance for Needy Families benefits. 
The pilots are to be completed at the end of school year 2002/2003.
    FNS and OIG both agree that the eligibility determination and 
verification process is a management challenge that must be addressed 
to reduce fraud, waste, and abuse in FNS programs. The Under Secretary 
for Food, Nutrition and Consumer Services noted in his testimony before 
the Senate Committee on Agriculture, Nutrition and Forestry in April 
2003 that problems with school meals certification have worsened over 
time and that the Department has been working to develop and test 
policy changes that improve accuracy but do not deter eligible children 
from participation in the programs. Options being pursued by the 
Department include requiring direct certification for free meals 
through the Food Stamp Program, enhancing verification of applications 
by drawing samples early in the school year and expanding the 
verification sample, requiring a robust effort to follow up with those 
who do not respond to verification requests, streamlining the process 
by requiring a single application, and initiating a series of projects 
to test alternatives for certifying and verifying applicant information 
(including computer matching of wage data).
    Another area in the National School Lunch and Breakfast Programs 
prone to fraud, waste, or abuse involves local school food authority 
contracts with food service providers. OIG is working with FNS to 
address cost reductions in the form of contract discounts, rebates, and 
allowances. Federal cost principals require that such benefits accrue 
to the program. However, the Office of Management and Budget has 
recently determined that Federal cost principles do not apply to local 
contracts with food service management companies. FNS is pursuing 
regulatory action to address this problem. Our investigations have also 
identified schemes by food service providers to inflate expense claims. 
One large food service provider agreed to pay $325,000, in order to 
settle a lawsuit brought in regards to inflated National School Lunch 
Program claims. In its billings to several school districts, this firm 
inflated flat rate labor costs for employee related expenses and 
claimed for insurance expenses that had not been incurred.

                    Crop Insurance and Farm Programs

    We believe the Department confronts the same challenges in 
administering these two program areas, since they are closely related, 
interdependent, and prone to the same types of abuse. When Congress 
enacted the Agricultural Risk Protection Act of 2000 (ARPA), it 
mandated the Risk Management Agency (RMA) and Farm Service Agency (FSA) 
to work together to strengthen their programs and to better serve 
American farmers and ranchers.
    Federal crop insurance programs are delivered through private 
insurance companies under the oversight of the Federal Crop Insurance 
Corporation and RMA. Today's crop insurance programs help farmers 
survive depressed market prices and major crop losses through market-
based risk management solutions. At the same time, the farm programs 
administered by FSA serve to stabilize farm income, help farmers 
conserve land and water resources, provide credit to new or 
disadvantaged farmers and ranchers, and help farm operations recover 
from the effects of disaster. For the five fiscal years 1998-2002, the 
average value of all financial assistance provided to the public by 
RMA, FSA, and NRCS (actual program levels) were $2.432 billion, $32.073 
billion, and $1.426 billion respectively. Over those 5 years, RMA's, 
FSA's, and NRCS' combined program levels ranged from 28 to 45 percent 
of USDA's annual budget.
    While OIG has observed the general nature of fraud, waste, and 
abuse in crop insurance and farm programs, the overall magnitude of 
these problems is unknown. Fraud is commonly perpetrated through false 
certification of one or more of the basic data elements essential for 
determining program eligibility and amounts of benefits. In RMA cases, 
the scheme typically involves a conspiracy between an insurance company 
representative and a producer. For example, in one investigation it was 
determined that a producer who was also employed as an insurance agent 
paid employees of his insurance company to assist him in setting up 
sham farming operations. These sham operations enabled the individual 
to receive over $5.9 million in ineligible payments from FSA and RMA. 
The individual was also able to use the sham operations to offset his 
sizable insurance profits and file false income tax returns. This 
individual was convicted on money laundering, conspiracy, false 
statements, aiding and abetting, false tax returns, mail fraud, and 
wire fraud. The individual was sentenced to 60 months incarceration, 3 
years supervised release, $1,800 special assessment, $13,800 toward 
cost of prosecution, and forfeiture of $5.8 million.
    Abuse is more subjective and occurs when a participant's actions 
defeat the intent of the program although no law, regulation, or 
contract provision is actually violated. Waste, on the other hand, 
occurs when there are flaws in the program design. These program design 
flaws or weaknesses inevitably invite abuse by the program 
participants--what we refer to as ``moral hazards.'' For example, our 
September 2002 audit report, ``RMA Viability of Fall Watermelons in 
Texas and Their Inclusion in the 1999 Watermelon Insurance Pilot 
Program,'' showed RMA's internal policy approval process was not 
adequate to preclude the issuance of a crop insurance policy on crops 
that were not viable. Specifically, RMA offered a policy covering fall 
watermelon crops in south Texas although such crops ran a high risk of 
failure. This pilot program presented producers with a significant 
opportunity for monetary gain since the crop insurance indemnities 
substantially exceeded the producers' input costs. In response to the 
policy offering, producers significantly increased their acreage 
devoted to fall watermelons. In south Texas alone, annual fall 
watermelon acreage jumped from its pre-1999 level of about 1,000 acres 
to nearly 27,000 acres for 1999. The fall watermelon pilot program in 
Texas culminated in the expenditure of $21.2 million in insurance 
indemnities (44 percent of all watermelon claims nationwide in 1999). 
RMA discontinued the program effective for the 2000 crop year, and we 
observed a corresponding decrease in fall watermelon acreage for that 
year. In this case, we found that RMA had adequate procedures in place 
for reviewing and approving pilot programs, however, these procedures 
were not closely followed. We recommended that the RMA consider holding 
the responsible officials accountable for their actions. We are still 
waiting for a response from RMA.

             ACTIONS TAKEN TO ELIMINATE OR REDUCE PROBLEMS

    The crop insurance and farm programs use the same basic data to 
compute program benefits. Such data include acreage, crop, location, 
production, and shares, all of which are generally self-certified by 
the program participants. The insurance companies and FSA, however, 
separately collect the data from producers in different formats. OIG 
believes common data should be shared between the agencies and 
programs, as well as the responsibility to ensure the integrity of the 
data.

            AGRICULTURAL RISK PROTECTION ACT OF 2000 (ARPA)

    Fundamental differences in FSA and RMA definitions and program 
procedures sometimes give the appearance there are discrepancies in the 
data. For example, RMA and FSA have different definitions for common 
pieces of land: RMA identifies land by ``units,'' while FSA ``farms'' 
are composed of ``tracts'' which may further be broken into individual 
``fields.'' RMA units cannot be directly equated to FSA farms, tracts, 
or fields.
    ARPA requires RMA and FSA to annually reconcile information 
received from producers and to identify and address any apparent 
discrepancies. To further improve program compliance and integrity, 
ARPA requires FSA to assist RMA in ongoing monitoring of crop insurance 
programs and requires RMA to consult with State FSA committees on 
policies and plans for insurance offered in the State. In addition, 
ARPA requires RMA to make full use of data warehousing and data mining 
technologies to identify anomalies in the crop insurance programs.
    OIG reviewed the 2001 crop year data reconciliation process and 
found that FSA was able to resolve about 250,000 (52 percent) of the 
480,000 data records unmatched between RMA and FSA. We believe 
significant additional action is still needed by RMA to resolve the 
remaining discrepancies. Most of the discrepancies can be attributed to 
differences in RMA's and FSA's definitions of the basic data necessary 
to compute benefits and in how they collect and record such data. Until 
these differences are resolved, we believe neither of these agencies 
will be able to effectively and efficiently implement the data 
reconciliation process and, therefore, meet its intended goal of 
reducing improper payments. We plan to issue our audit report, ``USDA 
Implementation of the Agricultural Risk Protection Act of 2000,'' in 
September 2003. In fiscal year 2004, we plan to continue monitoring the 
agencies' implementation of ARPA. Our planned work includes emphasis on 
RMA's use of information provided through data mining.
    During the past 7 fiscal years, we conducted 655 investigations 
related to FSA mandatory programs, involving unauthorized disposition 
of property mortgaged to the government, fraud by warehouse operators, 
false statements by commodities producers and exporters, and false 
statements by borrowers in order to obtain more or greater dollar value 
loans or debt write-downs to those which they are actually entitled. 
These investigations have resulted in 310 indictments, 306 convictions 
and $116.1 million in monetary results. For this same period we 
conducted 154 investigations related to RMA mandatory programs, which 
have resulted in 49 indictments, 43 convictions, and $22 million in 
monetary results. We believe a more effective data reconciliation and 
data mining process could detect potentially fraudulent actions and/or 
abuse by program participants and, thereby, mutually benefit both RMA 
and FSA.

                    EXISTING QUALITY CONTROL SYSTEMS

    Because the crop insurance and farm programs fundamentally rely 
upon producers' self-certifications to determine eligibility for 
benefits, the agencies have in place a number of differing internal 
control systems to evaluate participant compliance with program 
provisions. For example, there exists within each FSA program specific 
compliance or spot check requirements. FSA regards such compliance 
reviews as collateral duties to be performed by FSA county office 
employees. FSA also has in place a County Operations Review Program 
(CORP). CORP was implemented in 1986, based upon an OIG audit that 
determined existing internal control processes did not meet the 
requirements of the Federal Managers' Financial Integrity Act (FMFIA) 
or the internal control guidelines established by the Office of 
Management and Budget (OMB). For fiscal year 2002, there were 74 county 
operations reviewers (COR) positions approved nationwide for FSA. The 
COR position is a full-time position used exclusively for county office 
internal control functions.
    The current internal review systems were developed independently of 
each other in response to known problems and without consideration of 
whether the reviews would be cost effective or the extent of the 
problems measurable. In addition, there has been no concerted effort to 
coordinate the conduct of the multiple reviews or to communicate the 
results to officials responsible for other programs that may be 
affected.
    To evaluate overall program integrity and compliance, RMA uses a 
system that consists largely of insurance company internal reviews and 
periodic RMA verifications. Given its resources, RMA must continue to 
rely on this approach in partnership with the insurance companies. In 
our March 2002 audit report, ``Risk Management Agency Monitoring of 
RMA's Implementation of Manual 14 Reviews/Quality Control Review 
System,'' we reported RMA continues to struggle to develop and 
implement a reliable QC system capable of evaluating private sector 
delivery of Federal crop insurance programs. RMA's stated commitment to 
QC has not answered basic policy questions, including what constitutes 
an error, the amount of improper payments made, and whether program 
delivery should be assessed at the national or at the insurance company 
level. We continue to monitor RMA's actions to implement our 
recommendations.
    In general, RMA's and FSA's QC systems rely on judgmental sampling 
and are not designed to estimate the magnitude of fraud, waste, and 
abuse in the programs. Statistical sampling is the only reasonable way 
to review large populations in an objective and unbiased manner. 
Statistical sampling is objective and defensible; it provides the means 
to estimate the sample size and sample error; it saves time and money; 
it has a proven scientific basis; and it generally yields results that 
have high visibility and impact. We are aware of only one RMA internal 
review designed to use a statistical sample. We believe the agencies 
must move toward standardized statistical sampling in order to estimate 
annual amounts of improper payments as required by the Improper 
Payments Information Act of 2002.
    The Department's conservation programs fall under the jurisdiction 
of FSA or the Natural Resources Conservation Service (NRCS). In some of 
these programs, such as the Conservation Reserve Program, FSA 
administers the program and NRCS provides technical assistance to the 
farmers. In other programs, such as the Wetlands Reserve Program, NRCS 
both administers the program and provides the technical assistance. For 
most programs, NRCS is responsible for monitoring the farmers' 
implementation of the conservation practices they agreed to. Farmers 
need to comply with the conservation provisions of their agreements 
with FSA or NRCS to remain eligible for farm program benefits. NRCS 
monitors this compliance through status reviews. The tracts it selects 
for these reviews are taken partly from a random sample and partly from 
referrals it gets from FSA, its own field offices, public complainants, 
or other sources. If NRCS finds that a farmer did not comply with the 
appropriate agreements, it may waive the noncompliance, recommend 
penalties, or ask FSA to withhold farm program benefits. In the past, 
NRCS has reported generally around a 98-percent rate of farmers' 
compliance with the conservation provisions.
    We recently evaluated the performance of the status reviews (that 
is, compliance reviews) in one State in response to a whistleblower 
complaint. In our September 2002 report, ``NRCS--Compliance With Highly 
Erodible Land Provisions,'' we pointed out a number of ways NRCS could 
strengthen its status reviews: clarify its handbook procedures, seek 
better coordination with FSA, perform more timely status review field 
visits, and require better reporting by the field offices of the 
results of the status reviews. The General Accounting Office's recently 
issued report, ``USDA Needs to Better Ensure Protection of Highly 
Erodible Cropland and Wetlands,'' raised similar concerns. It pointed 
out that in the process of selecting sample tracts for review, NRCS 
disproportionately emphasizes tracts (e.g., permanent rangelands) where 
the conservation compliance provisions may not be applicable. Since 
these tracts provide little potential for noncompliance, the status 
reviews that include them result in inflated compliance rates. GAO 
reported that for crop years 2000 and 2001, only 5 percent of all 
tracts selected for compliance review resulted in waivers or 
violations. And of those tracts with violations, over 60 percent of 
these cases from 1993 through 2001 were waived when the farmers 
appealed their cases to FSA. For fiscal year 2004, we plan to evaluate 
NRCS' compliance rates by verifying, through a statistical sample of 
tracts, that conservation provisions have been properly implemented.

                       RMA DATA ACCEPTANCE SYSTEM

    Crop insurance program benefits are based on information provided 
by the producers to the insurance companies. The insurance companies 
enter the data into their information technology (IT) systems and then 
download it to RMA, where the data purportedly first undergo a series 
of IT edit checks or validations to ensure the data are complete and 
accurate. Once the data are cleared through this electronic information 
processing application, known as the Data Acceptance System (DAS), 
RMA's crop insurance database is updated.
    For the 2001 crop year, we found RMA did not have documentation to 
describe all current DAS edits, users, and reports. We were unable to 
determine the internal controls in place to evaluate the quality of 
data downloaded to RMA from the insurance companies. Further, we 
discovered any updated or changed data overwrites and completely 
replaces any corresponding pre-existing data in RMA's crop insurance 
database. Thus, the audit trail or history of changes is effectively 
eliminated. Finally, the crop insurance database and RMA's accounting 
system do not interface with one another. Instead, RMA uses the 
database values at monthly cutoff dates to generate a monthly 
accounting report for each insurance company. These reports are sent to 
the companies for review and attestation and are ultimately signed and 
returned to RMA. RMA manually compares the current month's cumulative 
amounts to the prior month's cumulative amounts for each insurance 
company, and RMA accountants enter the calculated differences into the 
automated accounting system to make payments to or demand refunds from 
the individual insurance companies. RMA's current system makes it 
impossible to verify financial events at the transaction level and does 
not comply with Federal financial management and financial systems 
requirements. Our report on ``Risk Management Agency Survey of Data 
Acceptance System Processing Controls'' is scheduled to be issued in 
September 2003. We plan to do additional reviews of DAS, particularly 
testing the validity of the data including any changes to the database.

    COMMON COMPUTING ENVIRONMENT AND GEOGRAPHIC INFORMATION SYSTEMS

    The Department of Agriculture Reorganization Act of 1994 authorized 
the reorganization and modernization of USDA to achieve greater 
efficiency, effectiveness, and economy in program delivery. One major 
component of this effort targeted USDA's county-based agencies (FSA, 
the Natural Resources Conservation Service (NRCS), and the agencies in 
the Rural Development mission area). A key element under USDA's 
modernization initiative is the development of a common computing 
environment (CCE) to enable the county-based agencies to share data 
among themselves. USDA began implementation of the CCE in 1998 and 
plans to complete its installation in fiscal year 2004.
    Another component of the modernization initiative is implementation 
of Geographic Information Systems (GIS) and Global Positioning Systems 
(GPS) technology. GIS and GPS will allow the county-based agencies, and 
other USDA agencies, to electronically analyze data on land and crops. 
GIS is a computer-based tool for mapping and analyzing geographic 
information. GPS is an accompanying technology that can be integrated 
with GIS for even greater analysis of real world information. GPS data 
layers, ortho-photography, soils layers, public land survey data, and 
many other data layers can be placed atop one another inside of one GIS 
project. FSA plans to use the geo-spatial data and tools to improve 
assessment of crop conditions and producer compliance with FSA 
programs, as well as to maintain and share farm records and maps 
digitally with other agencies as appropriate. Based on our discussions 
with RMA compliance staff, such geo-spatial data and tools have allowed 
them to closely and timely monitor crop conditions and producer 
compliance, particularly in situations where they have received 
complaints or their reviews indicate potential problems.
    In our investigations, we have benefited from this modern 
technology by utilizing satellite imagery technology for crop 
identification and comparison during growing seasons. Specifically, 
thermal image technology has been used to determine acreage amount and 
whether or not a crop was planted, as well as the type of crop planted. 
Although this technology can be extremely useful in our audits and 
investigations, upfront costs, to include personnel expertise and 
training, are unknown at this time.

                               PENALTIES

    RMA and FSA distinguish between participant errors and agency 
errors in the programs. In cases of participant error, RMA and FSA 
generally demand refunds of overpayments, but greater leniency is 
afforded in cases of agency error, including cases of misaction or 
misinformation. Further, there are legislated disparities in RMA's and 
FSA's handling of agency errors. For example, FSA's Finality Rule 
waives repayment after 90 days unless the participant had reason to 
know the payment was made in error. If the participant is not notified 
within 90 days of the county committee's approval of the request that a 
potential overpayment may have occurred, FSA is precluded from 
recovering overpayments resulting from agency errors. Since recovery is 
moot, a reviewer is discouraged from actively seeking and identifying 
overpayments that could be the result of agency waste. In our August 
2002 report, ``FSA--Limited California Cooperative Insolvency Payment 
Program--Tri Valley Growers,'' we found agency errors in approximately 
20 percent of the program payments. Early on in the review, we raised 
these concerns to FSA who, in turn, notified participants of the 
potential payment problems. Fortunately, because of these 
notifications, FSA was able to issue bills of collections to recover 
these overpayments.
    In contrast, ARPA provides a 3-year period for the recovery of 
improper payments attributed to an insurance company's error. To 
adequately enforce program compliance and integrity, remedies should be 
consistent across agency lines and for similar violations.

                               Summation

    You have asked us here today to talk about our experiences in 
auditing and investigating fraud, waste, and abuse within USDA 
mandatory programs. In each of the mandatory spending programs I have 
discussed here today, much has been done by the USDA agencies and 
Congress to address inherent weaknesses and vulnerabilities within 
USDA's programs.
    In regards to the Food Stamp Program, FNS has a long history of 
identifying erroneous payments, as well as working with State 
administering agencies to lower error rates. What impact the recent 
legislative reforms will have on FNS' ability to continue to effect 
positive changes in State error rates will not be known for some time. 
We will continue to monitor this process. Also, both FNS and State 
administering agencies need to remain focused on using data available 
from EBT systems to target problem retailers and ensure program 
integrity. The eligibility issues in the National School Lunch and 
Breakfast Programs are more complicated and we would encourage the 
Congress to work with FNS to find a solution that will minimize 
erroneous payments and yet not deter those eligible from receiving 
program benefits.
    We believe the recent legislative initiatives for the farm and crop 
insurance programs, if effectively implemented, should have a positive 
impact on program administration and integrity. Key to effective 
implementation of this legislation is the development of common data 
reporting requirements (i.e., definitions for common pieces of land), 
which will facilitate more effective data reconciliation and data 
mining to detect improper payments.
    Overall, I see the Department's challenge in implementing the 2002 
Improper Payments Information Act as a critical action item in the 
identification and prevention of erroneous payments. For USDA to be 
successful in reducing erroneous payments in its spectrum of programs, 
there must be management commitment, inter-and intra-agency 
coordination, adequate information systems and quality control 
processes, and effective enforcement actions. Each of these areas is an 
interrelated element of an effective and efficient internal control 
system to reduce fraud, waste, and abuse.
    Commitment is the driving force of any system of internal controls: 
management (and Congress) must be willing to commit the necessary 
resources to the task of preventing and detecting errors and 
irregularities. Internal controls should not be secondary 
considerations or collateral duties. Program compliance and integrity 
must be impressed throughout the cultural climate as an integral part 
of program delivery.
    In the last decade, Congress has done much to mandate and encourage 
a coordinated Departmental approach to program delivery. To create a 
seamless interagency team approach to program integrity, the Department 
must encourage individual agencies and employees to work across 
organizational lines to share information and coordinate compliance and 
data mining activities which may affect multiple programs, both inter- 
and intra-agency.
    Integrated and collaborative information technology should also be 
a fundamental part of the Department's efforts to improve program 
compliance and integrity. Information technology is a means to pool the 
Department's limited resources to compare data throughout the 
Department and to identify and target anomalies for further analysis.
    Finally, a system of internal controls does nothing to discourage 
or deter fraud, waste, and abuse unless participants and USDA employees 
are held accountable for errors and irregularities. The Department must 
work to ensure penalties are consistently and fully enforced across 
agency lines. We will continue working with the Department and its 
agencies to strengthen their programs and to identify areas where cost 
avoidance and savings can be achieved. This concludes my statement, Mr. 
Chairman. I would be happy to answer any questions that you may have.

    Chairman Nussle. Next we will hear from John Higgins, who 
is Inspector General for the Department of Education. Welcome, 
and we are pleased to receive your testimony.

               STATEMENT OF JOHN P. HIGGINS, JR.

    Mr. Higgins. Mr. Chairman, members of the committee, thank 
you for the opportunity to testify about fraud, waste, and 
abuse in the student financial assistance programs. As you 
know, these grant and loan programs are very complex and 
involve many entities, and billions of taxpayer dollars.
    There are over 37 million students and parents, 5- to 6,000 
schools, more than 4,000 lenders, 3 dozen guaranty agencies and 
many contractors involved in these programs some way or 
another. Last year the Department disbursed and guaranteed 
approximately $65 billion and managed a $267 billion loan 
portfolio. To my knowledge, neither the Department nor my 
office has ever attempted to estimate the total amount of 
fraud, waste, and abuse in these programs. The Department does, 
however, estimate the amount of improper and erroneous payments 
each year.
    My office identifies the amounts of sustained, questioned 
and disallowed costs. Through audits and our investigative 
work, it produces criminal fines, restitutions and civil 
judgments.
    While I cannot provide you with a total estimate of the 
magnitude of the problems, I will give you a few examples. In 
the last 2 years, our audits of nine guaranty agencies found 
that the Federal Government should recover $164 million. In 
1999, an audit of the death and disability loan discharges 
found that over $77 million was discharged to borrowers who 
falsely claimed disability or death.
    Our audits in fiscal year 1996 found that $177 million in 
Pell Grants was disbursed because applicants understated their 
income on their application for aid. The Department updated and 
refined this estimate in 2001 to $336 million.
    Indications are that the fraud is growing. In one case a 
collection agency paid $6.4 million in settlement of 
allegations that it submitted false claims for payment under 
its contract with the Department to collect defaulted student 
loans. The false claims were based on consolidated loans that 
did not meet the legal requirements.
    Another investigation of a financial aid consulting 
business led to 411 settlements and a civil judgment totaling 
over $4 million. The owner of this business certified false 
Federal income tax returns that enabled ineligible students to 
qualify for financial aid.
    I have included many other examples in my written 
statement, with corresponding recommendations. Today I would 
like to focus on two corrective actions that we believe would 
have the most impact for reducing fraud, waste, and abuse in 
these complex programs: first, a match that verifies income 
with Internal Revenue Service; and second, the need for the 
Department to increase and improve its monitoring. The IRS 
income match is the single action that would have the biggest 
impact. As I noted above, the estimate of the Pell Grants 
disbursed based on understated income figures from applicants 
is growing.
    We have recommended such a match since 1997. While Congress 
amended the Higher Education Act in 1998 to permit the match, 
no corresponding change was made to the Internal Revenue Code. 
The Department has worked with OMB, the Department of Treasury, 
and the necessary changes to the Internal Revenue Code have 
been transmitted to Congress. We urge you to enact legislation 
to authorize this match permitting the Department to implement 
this significant control to guard against fraud, waste, and 
abuse in its programs.
    The Department also needs to increase and improve its 
monitoring. Monitoring is an essential component for improving 
the financial management of and accountability for Federal 
education dollars. Vigorous program and contract monitoring 
helps ensure that Federal education dollars are administered 
effectively and efficiently and reduces the potential for 
fraud, waste, and abuse.
    We found that the number of onsite program reviews 
conducted by the Department dropped significantly from 1996 to 
the present. And the Department performed only one program 
review out of all of its 4,000 lenders in fiscal year 2002. We 
have recommended to the Department that it increase program 
reviews at high-risk institutions, and improve its monitoring 
to help ensure that the institutions disburse the funds 
properly.
    Early on, Secretary Paige made reducing risk in these 
programs a top priority of his Department, including removing 
them from the GAO high-risk list. We look forward to continuing 
to work with the Department and the Congress to help safeguard 
the Federal education dollars and ensure that these programs 
reach the intended recipients.
    That concludes my statement.
    Chairman Nussle. Thank you very much.
    [The prepared statement of Mr. Higgins, Jr. follows:]

  Prepared Statement of Hon. John P. Higgins, Jr., Inspector General, 
                      U.S. Department of Education

    Mr. Chairman and members of the committee, thank you for the 
opportunity to testify about waste, fraud, and abuse in the student 
financial assistance programs within the Department of Education (the 
Department). As you requested, I will address some of these problems, 
their general nature, and corrective actions that have been, or that 
need to be, taken. I will also provide illustrative examples of 
problems we have identified.
    Most importantly, I want to urge Congress to amend the Internal 
Revenue Code to allow the Department to match the information provided 
on student applications with the income data that is maintained by the 
Internal Revenue Service (IRS). As I discuss more fully below, the 
Department currently estimates that $336 million in Pell Grants were 
improperly disbursed because applicants understated their income in 
fiscal year 2001.

       I. BACKGROUND ON THE STUDENT FINANCIAL ASSISTANCE PROGRAMS

    The Department's student financial assistance programs are large 
and complex. The loan and grant programs affect over 37 million 
individuals and involve 5,000-6,000 schools, more than 4,000 lenders, 
three dozen guaranty agencies, and many contractors. Last year the 
Department disbursed and guaranteed approximately $65 billion and 
managed a $267 billion loan portfolio for these programs. The size and 
scope of the programs have increased greatly in recent years, with 
total program dollars doubling in the last 10 years alone.
    These programs are inherently risky due to their complex design, 
reliance on numerous entities, and the nature of the borrower 
population. For example, borrowers are given access to Federal loan 
assistance even though they may have no credit or employment history.
    The student financial assistance programs have been on the General 
Accounting Office's (GAO) high-risk list since 1990. The Department has 
made a strong commitment to remove the programs from the list, and it 
is making progress toward this goal. Reducing risk in these programs is 
one of the Department's strategic goals, and a top priority for the 
Secretary who, at the beginning of his tenure, established a senior 
level management team to resolve financial management issues throughout 
the Department and in these programs.

           II. ESTIMATED MAGNITUDE OF WASTE, FRAUD, AND ABUSE

    You have requested that we provide specific dollar amounts of 
waste, fraud, and abuse in the Department's student financial 
assistance programs. We do not have a total, comprehensive estimate of 
these amounts.
    The Department is required to provide to the Office of Management 
and Budget (OMB) annually erroneous and improper payment estimates, and 
in 2002 the Department reported $401 million for student financial 
assistance programs. While we did not verify this figure, we think it 
is conservative.
    We report on monetary results from our work in our Semiannual 
Reports to Congress. For the last five and one half years (October 1, 
1998 through March 31, 2003), we reported more than $182 million in 
total sustained questioned and disallowed costs from our audits of 
student financial assistance programs.
    During the same period, we reported that our investigations in 
these programs resulted in restitutions, criminal fines, and civil 
actions totaling more than $152 million. Of course, this represents 
only the waste, fraud, and abuse that we have been able to identify 
through our work, with our limited resources.
    Following are some examples:
     During the last 2 years, we performed audits on nine 
guaranty agencies to assess the adequacy of their establishment of the 
Federal and Operating funds required under the Higher Education 
Amendment of 1998. These audits identified approximately $164 million 
that should be recovered by the Federal Government.
     In 1999, our audit of loan discharges based on death and 
disability found that over $77 million in loans were discharged to 
borrowers who falsely claimed they were disabled or dead. (``Improving 
the Process for Forgiving Student Loans,'' ED-OIG/ACN: 06-80001; June 
1999).
     Our audit of the 1995-96 award year found that over $177 
million in Pell Grants was improperly disbursed because applicants 
understated their income on their applications. The Department updated 
and refined this estimate to $336 million for fiscal year 2001. 
(``Accuracy of Student Aid Awards can be Improved by Obtaining Income 
Data from the Internal Revenue Service,'' ED-OIG/ACN: 11-50001; January 
1997).
     Our investigation of a financial aid consulting business 
led to 411 settlements and civil judgments totaling over $4 million. 
The owner of this business certified false Federal income tax returns 
to verify false income amounts that enabled ineligible students to 
qualify for financial aid. We identified over 700 students who used 
this service.
     A collection agency paid $6.4 million in settlement of 
allegations that it submitted false claims for payment under its 
contract with the Department to collect defaulted student loans. The 
alleged false claims were based upon consolidated loans that did not 
meet legal requirements.

III. GENERAL NATURE AND ILLUSTRATIVE EXAMPLES OF THE CURRENT CHALLENGES

    Based upon our work, we conducted an analysis of patterns of waste, 
fraud, and abuse in student financial assistance programs. We supplied 
this analysis, and suggestions for preventive measures, to the 
Department in March 2003. Implementation of our suggestions could save 
millions of dollars by preventing loans made to ineligible students, 
inappropriate loan discharges, abuse by guaranty agencies, and other 
types of mismanagement. Examples of the major issues we identified are 
provided in the following sections.

A. Fraud from lack of eligibility verification
    The Higher Education Act of 1965, as amended (HEA), requires 
applicants to provide eligibility information on their Free Application 
for Federal Student Aid (FASFA). Some applicants provide false 
information--for example, about their income or their dependency 
status--in order to receive funds for which they are not eligible.

    1. Income match. As I mentioned earlier, the Department currently 
estimates that in fiscal year 2001 $336 million in Pell Grants was 
improperly disbursed because applicants understated their income. The 
most effective way to detect this falsification is to match the 
information that applicants provide with the information maintained at 
the IRS. We have recommended this match since 1997.
    Though a provision in the Higher Education Amendments of 1998 was 
intended to permit this match, no corresponding change was made to the 
Internal Revenue Code. The Department has worked with OMB and the 
Department of Treasury on the necessary changes to the Internal Revenue 
Code, and they were submitted to the Congress. This legislative 
authority is one of the single most significant steps that Congress 
could take to reduce waste, fraud, and abuse in student financial 
assistance programs.
    During the 1990s we effectively used the process of computer-based 
matching of records to identify control weakness in the verification 
process for students applying for student financial assistance. In each 
of three successful matches, the OIG identified hundreds of millions of 
ineligible awards, and recommended corrective actions to prevent future 
ineligible awards. In response to each audit, the Department 
implemented management and system controls to address the abuses.

    2. Default match. In March 1992, we reported on a weakness in the 
screening of FAFSAs, that we estimated could cost the Department and 
the taxpayers $800,000 a day in ineligible funds being disbursed to 
previous defaulters. No edit check existed in the system controls to 
check for previous defaulters. In response, the Department quickly 
responded and implemented the edit check within 3 months of our report 
by matching applicants against the default data.

    3. Death and disability match. In an audit in 1999, we identified 
approximately $77 million in student loans that were discharged for 
total and permanent disability and death ($73 million disability, $4 
million death), even though the borrowers were apparently not totally 
and permanently disabled or deceased according to Social Security 
Administration's Master Earnings file. Improper discharges occurred 
because of control weaknesses in the system for determining borrower 
eligibility for the disability or death discharge. We also found that 
6,800 new loans totaling about $20 million were awarded to borrowers 
who had previously received disability loan discharges totaling $11.5 
million. The Department implemented the following corrective actions:
     Borrowers requesting total and permanent disability 
cancellations must use a revised form that includes the physician's 
State license number.
     A certified or original copy of the death certificate is 
required.
     Regulations published on November 1, 2000, require that a 
previous loan that had been discharged based on the disability of the 
borrower must be reinstated before the borrower can regain eligibility 
for new loans and grants if they return to school.
     The regulations also contain a provision for a 3-year 
conditional period for loan disability discharges. Before the loan is 
permanently discharged, the Department will verify to determine if the 
borrower has earned income that exceeds a threshold based on the 
poverty level. If the borrower's income has exceeded the established 
threshold, the loan will be reinstated.

    4. Citizenship match. An OIG audit performed for award year 1992-93 
determined that the citizen verification process allowed ineligible, 
non-U.S. citizens to receive Pell Grants totaling over $70 million 
during award year 1992-93. We matched the applicants claiming U.S. 
citizenship against the citizenship status maintained by the Social 
Security Administration (SSA). The ineligible non-citizens had 
indicated they were U.S. citizens on their applications. Although the 
Department verified the status of those applicants who marked on their 
applications they were non-U.S. citizens, the edit process did not 
verify the accuracy of applicants who indicated U.S. citizenship. The 
Department changed the edit process to match all applicants with the 
SSA.
    We also have investigated cases involving false citizenship 
information. Recently, a university director of foreign students and 
two professors were indicted on 113 counts for conspiring to commit 
student visa fraud, allowing ineligible students to receive student 
financial assistance.

B. Identity theft fraud by ineligible students
    Identity theft typically occurs on the FAFSA when a person 
intentionally uses someone else's name and Social Security number to 
fraudulently obtain student aid. People who obtain loans through 
identity theft almost always default on those loans. We have 
experienced an increase of these cases in recent years, and we have 
asked the Department to require that postsecondary institutions verify 
students' identity using picture identification, such as a driver's 
license.

C. Fraud by financial aid consultants
    We have investigated a number of financial aid consultants who 
submitted false FAFSAs and tax returns on behalf of their clients, 
enabling these clients to fraudulently qualify for aid. For example, we 
investigated a consultant who charged approximately $300 for weekly 
seminars, advising and assisting parents and students in preparing 
FAFSAs that deliberately misstated their income. For this single case, 
we identified a potential loss to the government of $800,000.
    Our investigation of another financial aid consulting business led 
to 411 settlements and civil judgments totaling over $4 million. The 
owner of this business certified false Federal income tax returns that 
contained false income amounts, enabling ineligible students to receive 
financial aid. We identified over 700 students who used this service.

D. Fraud and abuse by collection agencies
    A collection agency paid $6.4 million in settlement of allegations 
that it submitted false claims for payment under its contract with the 
Department to collect defaulted student loans. The alleged false claims 
were based upon consolidated loans that did not meet legal 
requirements.
    In an audit, we found that another collection agency owed more than 
$800,000 to 177 schools. Our subsequent investigation of that 
collection agency's officials resulted in a restitution order of more 
than $1 million because they used client trust funds for personal and 
operating expenses, instead of remitting the funds to clients. 
(``Review of Collection Activities at Unger and Associates'', ED-OIG/
ACN: A06-90011; February 2000).

E. Fraud related to foreign schools
    The regulations for foreign schools' participation in the Federal 
Family Education Loan (FFEL) program include fewer controls than those 
for domestic schools. FFEL funds are disbursed directly to students in 
foreign schools, while students in domestic schools receive FFEL funds 
through the schools they attend.
    We have investigated many cases of individuals who apply for FFEL 
loans, receive the loan money, and never attend the foreign schools. 
Our investigations of foreign schools to date have resulted in 
restitution of over $2 million. We have suggested that the Department 
require independent verification that the students are enrolled in the 
foreign schools before disbursing FFEL funds.

F. Fraud from failure to make refunds
    We have investigated cases in which schools deliberately failed to 
calculate or pay a student's refund of student financial assistance as 
required by law. We have suggested that the Department be alert for 
instances of this type of fraud when it conducts on-site reviews at 
high risk schools.

G. Waste and abuse from inadequate monitoring
    Our work has repeatedly documented instances of waste, and abuse 
that have been allowed to continue because of inadequate monitoring. As 
we noted earlier, the student financial assistance programs are complex 
and have many participants, including lenders, schools, guaranty 
agencies, collection agencies, and financial aid consultants. More 
effective monitoring of these participants would reduce the waste, and 
abuse that occurs in these programs. Some examples of our work 
documenting the need for increased monitoring follow.

    1. Insufficient program review monitoring. The Department is 
responsible for monitoring schools, guaranty agencies, and lenders. In 
an audit, we found that the number of on-site program reviews of 
schools dropped from 746 in fiscal year 1996 to 128 in fiscal year 
1998. We also found that by fiscal year 1999, the average program 
review liability had dropped to $4,624, from $71,209 in fiscal year 
1996. In response to our recommendation, the Department agreed to 
increase the number of program reviews at high risk institutions. 
(``Review of Case Management & Oversight's Program Review Function'', 
ED-OIG/ACN: A04-90003; September 2000).
    In the management letter accompanying the fiscal year 2002 
financial statement audit, the auditors noted that the Department 
performed only one program review at a lender during the year. There 
are approximately 4,000 lenders in the FFEL program.

    2. Abuse by guaranty agencies. During the last 2 years, we 
performed audits on nine guaranty agencies to assess the adequacy of 
their establishments of the Federal and Operating funds required under 
the Higher Education Amendments of 1998. These audits identified 
approximately $164 million that should be recovered by the Federal 
Government, including:
     Approximately $48.3 million that was not transferred to 
the Federal funds, or inappropriate expenses from Federal funds;
     Outstanding issues about the Federal interest in $10.9 
million in non-liquid assets remaining at several of the guaranty 
agencies; and
     Approximately $103 million in excess Federal funds at one 
guaranty agency that should have been recalled by the Department.
    The Department's program reviews at the same nine guaranty agencies 
conducted during fiscal years 2001 and 2002 did not detect these 
monetary findings.
    We audited only nine of the 36 guaranty agencies. Therefore, the 
potential exists for additional funds due to the Federal Government 
from the remaining 27 guaranty agencies we did not audit.

    3. Abuse in cash management. We have completed several audits 
identifying institutions that did not disburse Pell Grant and Direct 
Loan funds in accordance with student financial assistance program 
regulations. These institutions transferred funds to their operating 
accounts before identifying eligible students, as required under HEA. 
For example, we examined one institution that improperly kept over 
$146,000 in interest on Direct Loan funds it deposited into a money 
market fund. We have recommended that the Department improve its 
monitoring, to help ensure that institutions disburse funds in 
compliance with regulations. (``Bennett College's Compliance with Cash 
Management and Refund Procedures for Department of Education Funds for 
the Period July 1, 1997, through June 30, 2000'', ED-OIG/ACN: A04B0015; 
September 2002).

H. Waste from use of inaccurate guidance
    We alerted the Department that its Federal Student Aid Handbook 
contained inaccurate guidance that could result in schools disbursing 
student financial assistance to non-citizens who are not eligible for 
the aid. We found that the guidance the Department provided to schools 
on the interpretation of HEA's citizenship requirements was 
inconsistent and inaccurate. We estimated that this guidance 
contributed to the disbursement of approximately $5.4 million in aid to 
more than 2,000 potentially ineligible students. The Department is 
revising its guidance.

    IV. CORRECTIVE ACTIONS NEEDED TO REDUCE WASTE, FRAUD, AND ABUSE

    In recent years, the Department has focused on removing student 
financial assistance programs from GAO's high-risk list, and it has 
taken a number of management actions designed to achieve that goal. We 
believe the most immediate actions it needs to take to reduce waste, 
fraud, and abuse in the student financial assistance programs are to 
increase monitoring and to implement the IRS income match.

A. The department needs authority to implement the IRS income match
    As I noted earlier, we have recommended implementation of an IRS 
income match since 1997, and the Department has been working with OMB 
and the Congress for additional authorizing legislation. We have 
documented, and the Department concurs, that significant improper 
payments could be prevented with this match. The estimate of Pell 
Grants disbursed based upon understated income figures from the 
applicants is growing, from our $177 million estimate for award year 
1995-96, to the Department's current $336 million estimate for fiscal 
year 2001. We urge Congress to enact the legislation necessary to 
implement the IRS match.

B. The Department needs to increase monitoring
    The Department needs to increase its monitoring of schools, 
lenders, guaranty agencies, and other participants in these programs. 
Increased monitoring is needed to improve the financial management of, 
and accountability for, Federal education expenditures. Vigorous 
program and contract monitoring helps ensure that Federal education 
dollars are used effectively and efficiently, and it reduces potential 
for waste, fraud, and abuse. GAO has also informed the Department that 
monitoring the effectiveness and sustainability of its corrective 
measures is necessary to remove student financial assistance programs 
from the high risk list.
    Our audits have repeatedly cited deficiencies in the Department's 
oversight of schools, including a significant decrease in program 
reviews and inconsistent enforcement of financial responsibility. For 
example, as we discussed above, audits at nine guaranty agencies 
identified approximately $164 million due to the government. These 
monetary findings were not detected by the Department in its program 
reviews of the same nine agencies.
    GAO has also informed the Department that monitoring the 
effectiveness and sustainability of its corrective measures is 
necessary to remove the financial assistance programs from GAO's high-
risk list.
    We will continue to assist the Department in its efforts to reduce 
waste, fraud, and abuse, to safeguard Federal education dollars and 
help ensure that these funds reach the intended recipients.

    Chairman Nussle. Next we would like to hear from Dara 
Corrigan from the Department of Health and Human Services. 
Welcome. We are pleased to receive your testimony.

                   STATEMENT OF DARA CORRIGAN

    Ms. Corrigan. Thank you very much, Mr. Chairman and members 
of the committee. My job is to prevent and hopefully eliminate 
fraud, waste, and abuse at the Department of Health and Human 
Services in their programs, primarily in the Medicare and 
Medicaid programs.
    Those two programs are particularly vulnerable because of 
their sheer size. To give you an idea, as I am sure you know, 
those programs could cost $435 billion in fiscal year 2003. 
Health care fraud, waste, and abuse cost taxpayers billions in 
lost and wasted dollars. But, perhaps more importantly, they 
deprive vulnerable beneficiaries of the care and the support 
that they need.
    We often hear about the complexities of the Medicare and 
Medicaid programs, and how difficult they are to administer. It 
is important and necessary to think about the underlying causes 
of those problems, to think about the appropriate remedies for 
those problems, and to try and prevent them from recurring in 
the future.
    Now, not all health care fraud, waste, and abuse is that 
complicated. I have worked on cases and our office has worked 
on cases where doctors billed for more than 24 hours in a day, 
where people billed for services that aren't provided at all, 
where others lie about beneficiaries' diagnoses, and where 
people lie about whether or not people need certain medical 
procedures. Those cases aren't difficult, and people understand 
that that is wrong.
    What is difficult in these cases is finding out about the 
fraud in the first place, investigating it, and proving it to a 
court. In the past year, this office has investigated and 
prosecuted many cases. I wanted to give you some examples so 
that you would have an idea about the magnitude of the problem.
    One recent case was the HCA case. HCA was formerly known as 
Columbia HCA, and it is a large hospital chain in this country. 
In the last month, they settled the case with the government 
for $631 million. The allegations were that they had falsified 
cost reports and had paid kickbacks to doctors for referring 
beneficiaries to HCA hospitals. In addition to the $631 
million, HCA also paid the Centers for Medicare and Medicaid 
Services $250 million to settle outstanding administrative 
liability.
    And back in the year 2000, in December, several 
subsidiaries of HCA pleaded guilty to substantial criminal 
conduct and paid $840 million for various improper activities.
    Other examples in the past year come from the 
pharmaceutical industry. I can name three cases: TAP 
Pharmaceuticals, AstraZeneca Pharmaceutical and the Bayer 
Corporation that all settled with the government for 
substantial sums of money for what amounted to problematic and 
difficult prescription drug pricing practices. Those 
settlements were for $875 million, $355 million, and $14 
million respectively.
    And while those settlements sort of catch your attention 
because they are big dollars, I think it is also important to 
think about the cases that involved individuals and smaller 
fraudulent schemes, because it illustrates the extent of the 
problem that we are dealing with the Medicare and Medicaid 
programs.
    I will give you two quick examples. There was one case in 
Indiana where a doctor was billing the Medicare program for 
chemotherapy services, when what he was actually providing was 
something called ``live cell therapy,'' which was taking cells 
from pigs and cows and injecting them into people, then billing 
Medicare for chemotherapy. While that is not a big dollar case, 
I think it is just as significant in terms of the beneficiaries 
of the Medicare program.
    The other case example that I will give you was a case in 
Massachusetts where a lab was submitting many, many claims for 
laboratory tests for terminally ill dialysis patients, again 
tests that were totally unnecessary, invasive to the 
beneficiary, and ultimately totally unnecessary for the 
treatment of the patients.
    Beyond the settlements that we work on, there are also 
systemic vulnerabilities in the Medicare and the Medicaid 
programs, and I will just mention a few. I will start with 
prescription drugs on the Medicare side, which has been debated 
actively in a different way both by this body and by the Senate 
in recent months.
    With prescription drugs, what I want to focus on is the 
pricing structure for prescription drugs. As you know, Medicare 
only pays for a very limited family of drugs at the present 
time. But in fiscal year 2002, they paid $8.2 billion for those 
drugs. And our office's conclusion over the past few years is 
simply that Medicare is paying too much for these drugs 
compared to everyone else. And what our research has shown is 
that for 24 of the leading drugs that Medicare paid for in 
2000, we paid $887 million more than physicians and suppliers 
paid for those drugs. And perhaps even more interesting--or 
significant--is that we paid $1.9 billion more than prices 
available on the Federal Supply Schedule that is used by the 
Veterans Administration and by other government purchasers.
    It is a complicated question, Medicare pricing, but it is 
one that our office has looked at very carefully, and we have 
concluded that it is caused by a number of factors, including 
exploitation of the existing rules and flaws in the 
reimbursement system. And while the current system is based on 
something called ``average wholesale price,'' that term is not 
really defined, and it allows it to be exploited in a way that 
basically allows Medicare to pay a lot more than anyone else.
    Another area that is also subject to exploitation in 
Medicare is our payments for medical equipment and supplies. 
Now, what I mean by that is things like power wheelchairs and 
oxygen and nebulizers and things that physicians prescribe for 
someone to use at home. And it is a very big area in Medicare 
in terms of dollars; it is $9.4 billion in claims in 2002.
    And again, part of the problem with medical equipment and 
supplies is the pricing structure, where Medicare pays based on 
charges submitted in 1987, adjusted in certain ways, but that 
is essentially what Medicare is relying on. And all of the 
Office of the Inspector General studies have shown that 
Medicare is paying too much for this equipment and that the 
prices have no relationship to actual costs or any relationship 
to what other payers are paying.
    Medicaid has different challenges, because it is like 50 
separate programs. So you can have problems that are specific 
to a State or you can have problems that are nationwide.
    And the two that I would focus on are, one, again pricing 
for prescription drugs in Medicaid, which is a larger problem 
because Medicaid pays for a lot more drugs than Medicare. And 
the other one that I would just throw out there is the upper 
payment limits, which is the way that the Federal Government 
limits how much the Federal Government can pay to the States 
for their health care services.
    While the Centers for Medicare and Medicaid Services have 
made some effort in the past year to try and limit that by 
regulation, there still is a problem that some States are not 
using Medicaid dollars for Medicaid services. And that is 
something that we have looked at in the past, we pointed out, 
and we think needs continued vigilance into the future.
    Beyond the investigations and looking at vulnerabilities, 
our office thinks it is very important to try and prevent fraud 
rather than going after it after the fact. We have reached out 
to providers with compliance guidance and with town hall 
meetings to try and educate people about how to comply with the 
rules. We will continue to be a part of the error rate auditing 
at the Centers for Medicaid and Medicare Services, which is the 
way that CMS measures the fee-for-service erroneous payments.
    We have been an integral part of that for the past 7 years, 
and now it is going to an outside contractor. We hope that with 
CMS's more expanded use of this tool, they are going to have 
error rates on many more areas like contractor error rates, 
provider-specific error rates and error rates that are targeted 
to specific spending, like on power wheelchairs, and that we 
will be able to use that and that others will be able to use 
those error rates to be able to reduce the error rates at CMS 
even more.
    I think that HHS, and in particular the Office of Inspector 
General, has concentrated on eliminating fraud, waste, and 
abuse in the past, basically since HIPAA was passed. But it is 
important that we realize that all of this fraud has serious 
and profound consequences for the beneficiaries. I am 
particularly concerned about deliberate fraud that we know 
continues.
    I think that we are doing our best to stay on top of this 
situation, and we would hope that Congress as our partner would 
continue its work in enacting legislation that closes loopholes 
and fixes some of the exploitation of program vulnerabilities.
    From my part, our office is willing to continue to work 
with the Congress, and we welcome your input and suggestions 
and any questions that you might have. And I thank you for 
letting me speak today.
    Chairman Nussle. Thank you for your testimony.
    [The prepared statement of Ms. Corrigan follows:]

Prepared Statement of Dara Corrigan, Acting Principal Deputy Inspector 
         General, U.S. Department of Health and Human Services

    Good morning, Mr. Chairman and members of the committee. I am here 
today to discuss fraud, waste, and abuse in the Medicare and Medicaid 
programs.
    My job is to prevent and eliminate fraud, waste, and abuse in the 
many programs of the Department of Health and Human Services, including 
Medicare and Medicaid. The Office of Inspector General uncovers 
innocent errors, carelessness, mismanagement, exploitation of the 
programs, malfeasance, and outright fraud every day. Improper behaviors 
include providers billing for services not rendered, falsification of 
diagnoses, and unnecessary tests or services, abusing and neglecting 
beneficiaries, and accepting kickbacks. These activities cost taxpayers 
billions in lost and wasted dollars and deprive vulnerable 
beneficiaries of the care and support they need.
    The Medicare and Medicaid programs are managed by the Centers for 
Medicare and Medicaid Services (CMS), which is the largest component of 
the U.S. Department of Health and Human Services (HHS). The two 
programs are particularly vulnerable because of their sheer size. 
Combined, they constitute the largest single purchaser of health care 
in the world with fiscal year 2003 projected Federal outlays of over 
$435 billion. Medicare and Medicaid outlays represented 33 cents of 
every dollar of health care spent in the United States in fiscal year 
2002. Both programs have inherent risks not only because of their high 
outlays, but because of their complex reimbursement rules and 
decentralized operations. Medicare alone serves approximately 40 
million beneficiaries and processes almost 1 billion claims annually.
    With increasing dollars at stake, and with a growing beneficiary 
population, the potential for vulnerabilities in these programs is 
greater than ever. Fraud, waste, and abuse schemes are becoming 
increasingly complex, national in scope, and constantly changing in 
response to the latest oversight efforts by the congress, CMS, our 
office and our law enforcement partners.

                        Recent Major Settlements

    There is no better way to illustrate the problems we are facing in 
the area of fraud, and abuse than to describe some of our most recent 
settlements. The government alleged that HCA Inc. (formerly known as 
Columbia/HCA and HCA The Healthcare Company) submitted false hospital 
cost reports to the government and paid kickbacks to physicians in 
exchange for their referral of beneficiaries. HCA routinely prepared 
two sets of cost reports, one that was submitted to the Medicare 
program, and a set of ``reserve'' cost reports reflecting how the filed 
cost reports might be adjusted downward if Medicare were to audit them. 
The information in the detailed ``reserve'' cost reports showed that a 
variety of costs on the filed cost reports were intentionally inflated, 
including interest charges and capital expenditures. The government 
also alleged that HCA paid physicians illegal remuneration in the form 
of free rent, free staff, vacations, recruiting bonuses, payments for 
``consulting'' work that was not, in fact, performed, and phony 
partnership distributions. Last month, HCA agreed to pay the United 
States $631 million in civil penalties and damages to resolve its civil 
liability for these activities.
    HCA also entered into a separate administrative settlement with CMS 
under which it will pay an additional $250 million. Previously, on 
December 14, 2000, subsidiaries of HCA pleaded guilty to substantial 
criminal conduct, and HCA paid more than $840 million in criminal 
fines, civil restitution and penalties for a variety of conduct, 
including exaggerating the value of services, submitting separate bills 
for lab tests that should have been bundled, and issues related to the 
acquisition of home health agencies. This case involved the most 
comprehensive health care fraud investigation ever undertaken with 
total recoveries of $1.7 billion, by far the largest recovery ever 
reached by the government in a health care fraud investigation. More 
needs to be done on all levels to prevent such behavior from occurring.
    Other examples come from the pharmaceutical industry. Three 
pharmaceutical manufacturers recently entered into large settlements 
relating, in part, to their prescription drug pricing practices. TAP 
Pharmaceutical Products Inc., AstraZeneca Pharmaceuticals LP, and the 
Bayer Corporation agreed to pay $875 million, $355 million, and $14 
million, respectively. The government alleged that each company 
reported their wholesale prices at levels far higher than the actual 
acquisition cost paid by the majority of physicians and other 
customers, and marketed the ``spread'' between the acquisition cost and 
the reimbursement, thereby causing their customers to receive excess 
Medicare and Medicaid reimbursement.

                        Medicare Vulnerabilities

    Specific areas of the Medicare program are particularly vulnerable 
to fraud, waste, and abuse or quality control problems. They include 
the following:

                           PRESCRIPTION DRUGS

    As indicated by the settlements I described, prescription drug 
pricing is particularly problematic for Medicare. Because prescription 
drugs are essential to proper treatment, it is important that Medicare 
beneficiaries' access to pharmaceuticals not be hindered by 
overpricing. While the Medicare program covers only a limited family of 
drugs outside the hospital setting, the cost is quite substantial. 
Medicare and its beneficiaries paid more than $8.2 billion for covered 
drugs in fiscal year 2002.
    Our office has consistently found that Medicare pays too much for 
these drugs--more than most other payers. For example, Medicare 
payments for 24 leading drugs in 2000 were $887 million higher than 
actual wholesale prices available to physicians and suppliers and $1.9 
billion higher than prices available through the Federal Supply 
Schedule used by Veterans Affairs and other Federal purchasers. This 
excessive payment continues to grow as the amount paid by Medicare 
grows larger.
    Excessive Medicare prescription drug payments are caused by a 
number of factors, including billing errors, misinterpretations or 
abuse of existing rules, and flaws in the reimbursement system. By law, 
Medicare's payment is based on the drug's average wholesale price. 
However, our reports have shown that published wholesale prices used to 
establish Medicare payment rates often bear little or no resemblance to 
actual wholesale prices available to physicians, suppliers, and other 
large government purchasers. The Medicare program does not receive 
average wholesale prices directly from drug manufacturers or 
wholesalers. Instead, Medicare relies on prices published by data 
reporting companies that base the reported average wholesale price, in 
part, on the information provided by manufacturers. Because physicians 
and suppliers keep the difference between the actual price they pay for 
a drug and Medicare's reimbursement (based on its published average 
wholesale price), they have a financial incentive to buy from a drug 
company with the highest published amount. Thus, manufacturers may have 
a financial incentive to exaggerate their wholesale price in an attempt 
to gain market share.

                     MEDICAL EQUIPMENT AND SUPPLIES

    In fiscal year 2002, Medicare allowed $9.4 billion in claims for 
medical equipment and supplies, of which beneficiaries paid at least 
$1.9 billion out of their own pockets. Medicare covers nine varieties 
of medical equipment and supplies, such as durable medical equipment. 
These are items that can withstand repeated use and include oxygen 
equipment, hospital beds, wheelchairs, nebulizers, and other equipment 
that physicians prescribe for home use. Medical supplies include 
catheter, ostomy, incontinence, and wound care supplies. Medicare also 
covers braces and artificial limbs.
    Medicare pays too much for certain items of medical equipment and 
supplies because Medicare reimbursement rates for these items are based 
on charges submitted to the program in 1987. As a result, Medicare 
payments bear little resemblance to prices currently available in the 
marketplace or to the actual cost of manufacturing and distributing the 
equipment. We have also uncovered flaws in payment methods and 
practices for specific kinds of medical equipment.
    As part of a congressional request, we compared Medicare prices for 
16 medical equipment and supply items with the prices from the 
Department of Veterans Affairs (VA), State Medicaid agencies, Federal 
employee health plans, and retail suppliers. These 16 items, including 
standard wheelchairs, IV poles, and certain hospital beds and walkers, 
accounted for more than $1.7 billion of the $6.8 billion Medicare paid 
for medical equipment and supplies in 2000. This work confirms findings 
from previous reviews where we found that Medicare pays higher than 
market prices for some items. For example, we found that the VA median 
prices ranged from 31 to 88 percent less than the Medicare prices. In 
addition, Medicare prices were more than the median retail price for 10 
of the 16 items. These median prices were as much as 73 percent less 
than Medicare prices. If Medicare based reimbursement on such lower 
prices, the program could save an estimated $84 million to $958 million 
a year.
    In another review, we found that Medicare paid substantially more 
for maintenance on rented equipment than repairs on purchased 
equipment. Under current statutory requirements, Medicare pays for 
maintenance even if the supplier does not need to service the 
equipment. We found that only 9 percent of the rental equipment 
actually received any maintenance and servicing. We estimated that 
Medicare could save approximately $100 million per year by eliminating 
maintenance payments and instead paying only for repairs when needed.

                          MEDICARE CONTRACTORS

    The Medicare program is administered by CMS with the help of 47 
contractors that handle claims processing and administration. The 
contractors are responsible for paying health care providers, providing 
a full accounting of funds, and conducting activities designed to 
safeguard the program. The two main types of Medicare contractors are 
fiscal intermediaries and carriers. Intermediaries process claims filed 
under Part A of the Medicare program from institutions, such as 
hospitals, skilled nursing facilities and home health agencies; 
carriers process claims under Part B of the program from other health 
care providers, such as physicians and medical equipment suppliers. The 
CMS also uses specialty contractors such as payment safeguard 
contractors, which focus on matters related to fraud, waste, and abuse 
at the carrier and intermediary level, and the durable medical 
equipment regional carriers, which specialize in analysis and 
processing of billings for medical equipment and supplies.
    Of all the problems we have observed, perhaps the most troubling 
has to do with the contractors' own integrity such as misusing 
Government funds, actively trying to conceal these actions, and 
altering documents and falsifying statements that specific work was 
performed. This was illustrated by the 2002 settlement with General 
American Life Insurance Company, Inc., in which the company agreed to 
pay the government $76 million. The settlement resolved allegations 
that the former Medicare carrier engaged in improper claims handling 
and quality assurance reporting practices to maintain a high 
performance ranking. However, this is only one example. To date, the 
Federal Government has settled 19 cases involving contractor fraud, 
with settlements ranging from approximately $48,000 to $76 million.
    In some cases, contractors prepared documents that inaccurately 
indicated superior performance, which Medicare then rewarded with 
bonuses and additional contracts. Some contractors adjusted their 
claims processing so that system edits designed to prevent 
inappropriate payments were turned off, resulting in misspent Medicare 
Trust Fund dollars. Contractor cost reports were found to contain 
improprieties, such as double billing and claiming private insurance 
business costs as if they were costs incurred under Medicare contracts.

                             OTHER EXAMPLES

    The results of recent investigations reveal the great variety of 
fraudulent behavior that we must deal with. Here are a few examples.
    Cancer treatments. A physician in Indiana developed a scheme to 
defraud Medicare and several other insurance providers by providing 
unapproved treatments to terminally ill cancer patients. The doctor 
injected these patients with live cells from pigs and cows under the 
guise of ``live cell therapy.'' He also provided ``shake and bake 
therapy'' by injecting the patients with a sand-like substance that 
caused the patients temperature to rise to a point where they convulsed 
under the theory that the cancer was being baked out of the patients' 
systems. All of these therapies were billed as if chemotherapy was 
being provided.
    Nerve conduction tests. A South Carolina doctor schemed to defraud 
the Medicare program by forcing his patients to undergo unnecessary 
nerve conduction tests. These tests were conducted regardless of the 
patients' diagnoses or symptoms. The doctor would withhold the 
patients' medications until they agreed to undergo the tests.
    Lab tests. In Massachusetts, a laboratory submitted claims for 
unnecessary tests and blood draws on terminally ill dialysis patients. 
The blood drawn from these patients was then used to run series of 
unnecessary tests to receive Medicare reimbursements.
    Equipment and supplies. In Florida, over 30 people conducted a 
large-scale scheme to defraud the Medicare program by billing for 
durable medical equipment supplies that were not provided to 
beneficiaries and/or not medically necessary. This scheme involved 
billing Medicare for motorized wheelchairs and other high-cost 
equipment by more than 40 companies. Kickbacks were paid to doctors in 
return for their signing of required Certificates of Medical Necessity. 
Co-pays that should have been paid by the beneficiaries for the 
equipment were waived in order to establish ``good will'' with the 
beneficiaries and to keep them from possibly complaining. Much of the 
proceeds from this scheme were sent to overseas bank accounts.

                        Medicaid Vulnerabilities

    The Social Security Act authorizes grants to States to provide 
medical assistance to needy persons. The Medicaid program is 
administered by the various States in accordance with approved State 
plans. While States have considerable flexibility in designing their 
State plans and operating their Medicaid programs, they must comply 
with broad Federal requirements. Medicaid programs are jointly financed 
by the Federal and State governments according to a defined formula. 
The Federal percentage ranges from 50 percent to 83 percent, depending 
on each State's relative per capita income.

               PRESCRIPTION DRUG PRICING AND DRUG REBATES

    Like Medicare, the Medicaid program faces significant 
vulnerabilities in the prescription drug area, a weakness that is 
compounded by the fact the Medicaid currently reimburses for many more 
drugs than does Medicare. These vulnerabilities arise in two areas: 
reimbursements for prescription drugs and the collection of rebates 
under the Medicaid drug rebate program.
    The Medicaid program faces many of the same problems as Medicare in 
paying for prescription drugs. States generally use the average 
wholesale price minus a percentage discount as a basis for reimbursing 
pharmacies for both brand name and generic drug prescriptions. The 
average discount for both brand and generic drugs combined was about 
10.3 percent nationally in 1999. We believe larger discounts are 
warranted because of the wide disparity between what a Medicaid agency 
pays pharmacies for the drug as compared to the actual pharmacy 
acquisition cost. As discussed in the Medicare section, reimbursement 
based on the average wholesale price creates certain adverse incentives 
and is subject to abuse.
    Following are the results of our brand name and generic 
prescription drug reviews. These reviews were limited to ingredient 
acquisition costs and did not address other areas such as the cost of 
dispensing the drugs. Generally, States pay retail pharmacies for the 
ingredient cost of the drug (average wholesale price minus a certain 
percentage) plus a dispensing fee. We have recommended that CMS require 
the States to bring pharmacy drug reimbursement more in line with the 
actual acquisition costs of both brand and generic drugs. CMS concurred 
that an accurate acquisition cost should be used to determine drug 
reimbursement and will encourage States to review their estimates of 
acquisition costs in light of our findings.
    Brand name drugs. In a final report issued in August 2001, we 
pointed out that about $1 billion in savings could have been realized 
for 200 brand name drugs with the greatest amount of Medicaid 
reimbursement in 1999. Our review of pricing information from 216 
pharmacies in 8 States estimated that pharmacy actual acquisition costs 
nationwide averaged about 22 percent below the average wholesale price 
in 1999.
    Generic drugs. In a report issued in March 2002, we concluded that 
significant savings could be realized on generic prescription drugs 
reimbursed by States under the Medicaid program. Our review of pricing 
information from 217 pharmacies in 8 States estimated that pharmacy 
actual acquisition cost nationwide for generic drugs averaged 65.9 
percent below average wholesale price rather than the 10.3 percent 
discount most States averaged. For the 200 generic drugs with the 
greatest amount of Medicaid reimbursement in 1999, we calculated that 
as much as $470 million could have been saved if reimbursement had been 
based on a 65.9 percent average discount. Our current recommendations 
center on an additional analysis that I will describe next.
    Multi-tiered pharmacy reimbursement system. As a follow-up to our 
previous work on brand and generic drug pricing, we conducted an 
extended review by identifying discounts off the average wholesale 
price for specific categories of drugs. This analysis showed that there 
is a wide range of discounts for purchases depending on the category of 
drug that is being purchased. Accordingly, we recommended that if 
States continue to use a reimbursement system based on average 
wholesale price, CMS should encourage States to bring pharmacy 
reimbursement more in line with the actual acquisition cost of drug 
products.
    Drug rebates. As a condition for having their prescription drugs 
reimbursed by the program, Medicaid requires pharmaceutical 
manufacturers to enter into written agreements with the Department and 
to pay rebates to the States. This is a feature absent from the 
Medicare program. The Medicaid drug rebate program, for which no final 
regulation has ever been published, requires a manufacturer to report 
certain pricing information, including its best price, to CMS and to 
pay rebates to the State Medicaid programs based on the reported 
prices. A manufacturer's failure to properly determine and report its 
best price can lead to the significant underpayment of rebates to 
Medicaid. Three major pharmaceutical drug manufacturers recently 
settled False Claims Act cases for their failure to comply with 
requirements of the Medicaid drug rebate program and to pay appropriate 
rebates to the States. Bayer Corporation, GlaxoSmithKline and Pfizer 
Inc. paid approximately $257 million, almost $88 million, and $49 
million, respectively, to resolve these cases.
    We have often said that Medicaid should have a level playing field 
on how it collects rebates and how it pays for drugs. Currently, 
rebates are based on the average manufacturer's price while 
reimbursement is generally based on the average wholesale price. 
Significant savings could be realized if drug rebates and drug 
reimbursements both had the same basis. If the basis for reimbursement 
and rebates is the same, any increase in the reimbursement basis would 
have a corresponding increase in rebates to Medicaid.

                          UPPER PAYMENT LIMITS

    The Office of Inspector General has found problems with States 
billing the Federal Government for payments made to public providers 
when in fact the funds do not remain at the provider for use for 
medical services. For example, we found that some States required 
public providers to return Medicaid payments to the State governments 
through intergovernmental transfers. Once the payments were returned, 
the States would use the funds for other purposes, some of which were 
unrelated to Medicaid. Although this practice could potentially occur 
with any type of Medicaid payment to public facilities, we identified 
two instances in which such payments were prevalent: Medicaid enhanced 
payments available under upper payment limits and Medicaid 
disproportionate share hospital payments. I will discuss the upper 
payment limit provision first.
    State Medicaid agencies have flexibility to set the rates they pay 
to hospitals and nursing facilities. There is a limit, however, as to 
how much can be paid in the aggregate within the State. In regulation, 
this is termed a Medicaid upper payment limit. This upper limit 
required that all the individual payments to the facilities cannot 
exceed what the Medicare program would have paid for similar services. 
Federal regulations in effect before March 13, 2001 established two 
groups of aggregate limits. One group pertained to all providers in the 
State (private, State-, city-, or county-operated). This second group 
applied to the State-operated facilities.
    These payments were made as enhanced or additional payments that 
exceeded the regular payments for Medicaid services. For example, if 
Medicaid paid $5,000 for a hospital inpatient service, but Medicare 
would have paid $6,000 for that same service, the $1,000 difference 
would have been the additional amount that the State could have claimed 
under the regulations. The States used this calculation to their 
advantage by claiming Federal funds up to the limit but did not always 
allow for the facilities to retain these funds to pay for actual 
delivery of medical services. The Federal funds returned to the State 
through intergovernmental transfers were then available to the States 
for any purpose, including issues not related to health care.
    In short, this use of intergovernmental transfers as part of the 
enhanced payment program was a financing mechanism designed to maximize 
Federal Medicaid reimbursements by avoiding the Federal/State matching 
requirements. The result is a lack of accountability for Medicaid 
dollars, including their being used for purposes not intended by the 
Medicaid statute.
    In an effort to curb these practices and ensure that State Medicaid 
payment systems promote economy and efficiency, CMS issued a final 
rule, effective March 13, 2001, which modified upper payment limit 
regulations in accordance with the Benefits Improvement and Protection 
Act of 2000. The regulatory action created three aggregate upper 
payment limits--one each for private, State, and non-state government-
operated facilities. The new regulations will be gradually phased in 
and become fully effective on October 1, 2008. We commend CMS for 
changing the upper payment limit regulations. The CMS projected that 
these revisions will save $55 billion in Federal Medicaid funds over 
the next 10 years. The CMS also changed the enhanced payments that 
States may pay public hospitals from 100 percent to 150 percent of the 
amount that would be paid under Medicare payment principles. We 
recommended continuing to limit payments to 100 percent, and CMS 
implemented the recommendation, achieving an additional savings of 
$24.3 billion over 10 years. At the request of CMS, our office will 
conduct audits to monitor compliance with the new regulations.
    When fully implemented, CMS's changes will dramatically limit, 
though not entirely eliminate, the amount of State financial 
manipulation because the regulation does not require that enhanced 
funds be retained by the targeted facilities to provide medical 
services to Medicaid beneficiaries.

                DISPROPORTIONATE SHARE HOSPITAL PAYMENTS

    Medicaid makes special payments designed to assist hospitals that 
provide care to a large number of Medicaid beneficiaries and uninsured 
patients. These ``disproportionate share'' payments are important 
because public ``safety net'' hospitals face special circumstances and 
play a critical role in providing care to vulnerable populations. 
However, we found that hospitals that retained enhanced payments 
available under the upper payment limit regulations did not use the 
special payments for their disproportionate share of Medicaid and 
uninsured beneficiaries. Instead, audit results in several States 
showed that public hospitals returned large portions (80 to 90 percent) 
of the payments to the State Medicaid agencies through 
intergovernmental transfers. We have expanded our audit work to 
additional States to further review these special payments being made 
to hospitals.
    In addition, we have found that disproportionate share payments to 
individual hospitals exceeded hospital specific limits imposed by OBRA 
of 1993. To date, we have identified about $645 million (Federal share) 
in payments that exceed the OBRA limit. The limits were exceeded for a 
variety of reasons, including the lack of a mechanism at the State 
level to ensure that the payments did not exceed the actual cost of 
providing services, duplication of costs, exceeding Medicare cost 
limits, and the inclusion of unallowable/non-hospital costs in 
uncompensated care costs.
    We recommend that public hospitals retain the State and Federal 
shares of the enhanced Medicaid payments up to the 100 percent 
aggregate limit payable under Medicare payment principles and receive 
and retain 100 percent of the State and Federal shares of allowable 
disproportionate share payments and use the funds for delivering 
medical services to Medicaid beneficiaries.

                           Remedial Measures

              HEALTH CARE FRAUD AND ABUSE CONTROL PROGRAM

    The problems that I have discussed with you today are extremely 
complex. The Office of Inspector General helps prevent and detect 
fraud, waste, and abuse through a comprehensive and sustained program 
of audits, investigations, evaluations, enforcement, and outreach. 
Since the passage of the Health Insurance Portability and 
Accountability Act of 1996, our effectiveness has been strengthened 
through an increased and predictable funding base for our office and 
CMS for fraud, and abuse control efforts. Annual increases were 
authorized through the end of this year.
    With these resources, our office conducted or participated in 568 
successful health care prosecutions or settlements in fiscal year 2002. 
A total of 3,448 individuals and entities were excluded, many as a 
result of criminal convictions. In the same period, the Department 
acted on our recommendations to disallow almost $300 million in 
improperly paid health care funds, and another $1.5 billion is expected 
as receivables from investigative activities. Implementation of our 
recommendations to correct systemic vulnerabilites resulted in more 
than $19 billion in savings in fiscal year 2002.
    The Office of Inspector General does not work alone. We are joined 
by the Department of Justice and a host of other partners, among them 
the State Medicaid Fraud Control Units (MFCUs) and State auditors.

                      MEDICAID FRAUD CONTROL UNITS

    The responsibility for detecting, investigating and prosecuting 
fraud, and abuse in the Medicaid program is shared between the Federal 
and State governments. Each State is required to have a program 
integrity unit dedicated to detecting and investigating suspected cases 
of Medicaid fraud. Most States fulfill this requirement by establishing 
a Medicaid Fraud Control Unit. Each of the Medicaid State agencies also 
has a Medicaid Management Information System. A subpart of this data 
system is the Surveillance and Utilization Review Subsystems Units. 
These units are charged with ferreting out fraud by conducting 
preliminary reviews of providers and beneficiaries with aberrant claims 
or billing patterns that possibly indicate criminal fraud. When 
potential fraud cases are detected, the cases are referred to the 
MFCUs.
    Since the inception of the Medicaid fraud control program, the 
MFCUs have recovered hundreds of millions of program dollars. The 
Office of Inspector General, MFCUs, and other law enforcement agencies 
work together to coordinate anti-fraud efforts. These partnerships have 
greatly enhanced our ability to carry out our mission. In fiscal year 
2002, we conducted joint investigations with the MFCUs on 218 criminal 
cases and 37 civil cases. During this time there were 70 criminal 
convictions and 17 civil settlements or judgments on cases worked 
jointly with the MFCUs.

                    STATE MEDICAID AUDIT PARTNERSHIP

    Another important cooperative effort includes State Medicaid audit 
partnerships. The partnership plan was created as a way to provide 
broader coverage of the Medicaid program by collaborating with State 
auditors, State Medicaid agencies, and State internal audit groups. The 
level of involvement of each partner is flexible and can vary depending 
upon specific situations and available resources. The OIG role might 
entail sharing our methodology and experience in examining similar 
Medicaid issues. In other cases, we may join together with State teams 
to audit suspected problems.
    For example, an audit conducted with the Delaware State auditor 
indicated that a State agency had overpaid Medicaid managed care 
organizations and other health care providers $364,000 for services 
rendered on behalf of deceased recipients. The overpayments resulted 
because of major weaknesses in internal controls. The State agreed to 
recover the overpayments and has begun to strengthen internal controls. 
Other issues examined in this partnership program with State auditors 
include `Medicaid outpatient prescription drugs, unbundling of clinical 
laboratory services, outpatient non-physician services already included 
as an inpatient charge, excessive costs related to hospital transfers, 
excessive payments for durable medical equipment, acquisition costs for 
Medicaid drugs, and program issues related to managed care.
    To date, these joint efforts have been developed in 25 States. 
Completed reports have identified $263 million in Federal and State 
savings and included recommendations for improvement in internal 
controls and computer systems operations.

                    INDUSTRY OUTREACH AND EDUCATION

    The Office of Inspector General is interested not only in detecting 
and dealing with fraud, waste, and abuse, but also in preventing it. 
One way we do this through outreach. We have engaged in numerous 
outreach efforts designed to work with the health care industry to 
assist providers in preventing fraud, waste, and abuse, and to increase 
their compliance with Federal health care program requirements. 
Information about these outreach efforts and results of our audits, 
investigations, evaluations, and enforcement initiatives are routinely 
made available through the Internet on our website at www.oig.hhs.gov. 
Our office continues to work with the health care industry to gain an 
understanding of the issues confronted by the industry as providers 
implement and maintain compliance programs. Prevention initiatives, 
such as those listed below, inform and assist the health care industry 
and program beneficiaries.
    Compliance program guidance. Compliance program guidances promote 
industry awareness of models for corporate integrity and compliance 
programs. Thus far, we have issued 11 compliance program guidances for 
various sectors of the health care industry such as hospitals, 
laboratories, home health agencies, and ambulance services. Each 
guidance provides concrete suggestions for designing and implementing 
internal controls and procedures to address identified risk areas for 
the applicable health care sector. These guidances are not mandatory. 
They provide recommendations on the voluntary establishment of systems, 
structures and policies that enhance compliance with Federal health 
care program requirements.
    Advisory opinions. Through the advisory opinion process, parties 
can obtain binding legal guidance as to whether their existing or 
proposed health care business transactions violate the Federal anti-
kickback statute, the civil monetary penalties laws, or our office's 
exclusion authorities. The advisory opinion process enhances OIG's 
understanding of new and emerging health care business arrangements and 
informs our development of new safe harbor regulations, fraud alerts, 
and special advisory bulletins. We have issued 20 advisory opinions in 
fiscal year 2002 and 14 to date in fiscal year 2003. More than 100 
advisory opinions have been issued since 1997.
    Corporate integrity agreements. Many health care providers that 
enter into agreements with the United States in settlement of potential 
liability for violations of the False Claims Act or Civil Monetary 
Penalties Law also agree to adhere to a ``corporate integrity 
agreement.'' Under the agreement, the provider commits to establishing 
a program or taking other specified steps to ensure its future 
compliance with Federal health care program requirements. The duration 
of most agreements is 5 years, during which time providers must 
undertake audits of their billings to the Federal health care programs, 
typically conducted by an independent review organization, such as an 
accounting firm, and submit periodic reports to our office. Integrity 
agreements require a substantial commitment by the provider to ensure 
that the organization is operating in accordance with Federal health 
care program requirements and the parameters established by the 
agreement itself. Breach and default provisions in the CIAs help to 
ensure compliance with their requirements. As of the current date, we 
are monitoring more than 350 corporate integrity agreements.

           ASSESSMENT OF PROGRESS IN ADDRESSING THE CHALLENGE

    To help ensure the financial integrity of the Medicare program, and 
the continued availability of Medicare benefits, it continues to be 
essential that documented and accurate bills are submitted for correct 
payment for properly rendered health care services. We reported that 
improper payments under Medicare's fee-for-service system totaled an 
estimated $13.3 billion during 2002, or 6.3 percent of the $212.7 
billion in fee-for-service payments processed by CMS. That estimate is 
about half of the $23.2 billion that was estimated for 1996, when OIG 
developed the first national error rate. The error rate does not 
include improper payments made as a result of falsified documents, 
kickbacks, or other types of undetectable fraud. It does reflect 
progress in reducing waste due to improper billings. Our 7-year 
analysis indicates that over 80 percent of the claims that did not meet 
reimbursement requirements were attributable to unsupported and 
medically unnecessary costs two areas that will receive ongoing 
monitoring. As in past years, we estimated that over 92 percent of the 
2002 fee-for-service payments met Medicare reimbursement requirements. 
CMS has demonstrated continued vigilance in monitoring the error rate 
and developing appropriate corrective action plans. In addition, due to 
CMS's work with the provider community to clarify reimbursement rules 
and to impress upon health care providers the importance of fully 
documenting services, the overwhelming majority of health care 
providers follow Medicare reimbursement rules and bill correctly.
    In fiscal year 2003, CMS will fully implement its Comprehensive 
Error Rate Testing Program and the Hospital Payment Monitoring Program 
to produce a Medicare fee-for-service error rate. This methodology will 
establish, for the first time, baselines to measure each contractor's 
progress toward correctly processing and paying claims. The results 
will reflect the contractor's performance and will identify specific 
provider billing anomalies in the region. Contractors will then develop 
targeted corrective action plans to reduce payment errors through 
provider education, claim reviews, and other activities, and CMS will 
evaluate their rate of improvement.

                               Conclusion

    As I stated at the beginning of my testimony, I believe a 
concentrated effort by a large number of people has resulted in 
tangible progress in combating fraud, waste, and abuse in recent years. 
However, the problems that remain are serious, complicated, and have 
profound consequences. I am particularly concerned about the deliberate 
fraud that we know continues. We must never let down our guard, and we 
must continue to dedicate the resources and make the concerted effort 
to reduce these problems.
    We are doing our best to stay on top of this situation, and are 
continuously involving all of our partners in the enterprise. Since the 
Congress itself is one of our partners, I would like to take this 
opportunity to recommend for your consideration a dual strategy for 
dealing with fraud, waste, and abuse on the legislative front.
    The first strategy is to prevent these abuses from happening. This 
can be done through legislation to address aspects of programs where 
their underlying statutes make them vulnerable or where changes in the 
statutes would be more conducive to effective administrative action. 
One good example is the authority for Medicare payments for 
prescription drugs, frequently mentioned in my testimony. This problem 
needs prompt action to prevent wasteful spending of hundreds of 
millions of taxpayer dollars every year, with the losses mounting with 
each passing month. Additional proposals are found in our Red Book of 
savings that we publish annually based on our audits and evaluations.
    Of course, it is important to make sure that legislation for new 
programs does not create new vulnerabilities. Protection from fraud, 
waste, and abuse needs to be crafted into the legislation itself. We 
stand ready to assist the Congress in this regard. Indeed, one of our 
responsibilities under the Inspector General Act is to provide advice 
on proposed legislation.
    The second strategy is to ensure that adequate, reliable, and 
predictable resources are available to our office and our law 
enforcement and administrative partners. Most of the achievements by 
our office were made possible by the enhanced resources provided 
through the Health Care Fraud and Abuse Control Program. As stated 
previously, funding under this program at enhanced levels is essential 
to our continued success in addressing the problems I have identified 
in my testimony today. It will also further assist our office in its 
continued outreach activities with the health care industry to increase 
the industry's awareness and further improve its record of voluntary 
compliance.
    I appreciate the opportunity you have given me today to focus 
attention on the continuing problems and vulnerabilities that confront 
us and to share with you some of our efforts and recent initiatives. I 
welcome your questions.

    Chairman Nussle. Our final witness on this panel is Kenneth 
Mead, Inspector General for the Department of Transportation. 
Welcome. We are pleased to receive your testimony.

                  STATEMENT OF KENNETH M. MEAD

    Mr. Mead. Thank you, Mr. Chairman. The target the committee 
set for Transportation was about $500 million, a little less 
than 1 percent of the DOT's budget request of $54 billion. Your 
target is not unreasonable in my opinion. Your timing is also 
impeccable.
    As many of you may know, highways, transit programs, the 
aviation program, and the maritime programs are all up for 
reauthorization this year. Amtrak reauthorization expired last 
year and the appropriators did give them money, of course, but 
Amtrak really needs a reauthorization at some point in time.
    I want to say right up front that Secretary Mineta, Deputy 
Secretary Jackson, and the modal administrators have been 
extremely supportive of our work in every way. We really could 
not ask for any more.
    I would like to paint for the committee a frame of 
reference. You probably know that DOT relies very heavily on 
trust funds for its money. About 85 percent of the budget comes 
from Aviation/Highway Trust Funds. People don't always like to 
talk about this, but the revenue projections for both of those 
trust funds are down sharply. Over the next 4 years, Aviation 
Trust Fund revenue is expected to be about $10 billion less 
than projections; a big drop has also occurred in the Highway 
Trust Fund Revenue. Revenues there fell about 20 percent, from 
$39 billion in 1999 to $31 billion in 2001. Over the next 4 
years we expect about $18 billion less than had been projected.
    So, when you take the declining trust fund revenues and you 
couple that with a deficit of over $400 billion in 2003, the 
urgency of cost control is manifest.
    I would like to speak today to some opportunities for 
savings in the highway, transit, aviation, and maritime areas, 
and would like to close with some observations about Amtrak.
    First highways and transit. The key issue for the Federal 
Highway Administration and Transit Administration is ensuring 
that major projects are delivered on time, on budget, and free 
from fraud. You know, whether funds are lost to cost overruns, 
schedule delays or fraud, the result is fewer dollars for 
transportation projects. And to put that in perspective, the 
staff gave me an interesting figure: if the efficiency with 
which the $500 billion that was invested by the Federal and 
State governments over the past 6 years, if that efficiency 
were improved by just 1 percent, you would have an additional 
$5 billion, which would be enough to fully fund four of the 
fifteen active major highway projects in the United States.
    Here are some opportunities. Highways has to be more 
vigilant in identifying funds that are no longer needed by the 
States. We have found funds sitting idle on inactive projects 
that could be redeployed to fund active projects. We are not 
talking small change here. In 2001 we found $238 million in 
that category, in just the States we sampled. And we are going 
to report this year that the problem continues. So there is 
money that has already been appropriated; it is available, just 
not being used.
    Second area. There are a number of large projects that 
stand as examples of good project management practices, but 
there are also glaring examples of projects that have been 
plagued by some ineffective management. This is an issue at 
both the State and Federal levels. For example, we have seen 
unreliable cost estimates on major highway and transit projects 
lead to substantial cost increases. One that everyone in the 
room I am sure is aware of is the Central Artery in Boston. 
That project increased from $2.5 billion to $14.5 billion.
    The most recent example occurred in Virginia with the 
Springfield Interchange. That is a project that, as Mr. Moran 
knows--he requested us to do some work here--that moved from 
$300 million to about $675 million. The cost estimates for that 
project today, in today's environment, was shocking. They did 
not include something as basic as the cost of inflation.
    Another problem is that finance plans, which identify 
elementary things like a project's cost, schedule, funding 
sources, and risk, are usually not required for highway 
projects under $1 billion. In our opinion, it is just common 
sense that projects costing $100 million or more of taxpayer 
dollars ought to have a finance plan. The Department, the 
administration, has proposed this in the pending 
reauthorization proposal for highways.
    Our work has also disclosed that until very recently, the 
last couple of years, the Federal Highway Administration rarely 
focused on program and major project management and financial 
oversight. They took a partnership approach in exercising their 
oversight role on Federal highway projects. That is important, 
and it is good to have a partnership where it works. However, 
it is also important to keep the capability of stepping back 
and making the hard calls when necessary. We found that hadn't 
always been the case.
    Another interesting one is that today's modern highway 
projects also require professional competencies in financing, 
cost estimating, program analysis, a whole range of 
multidisciplinary skills. But Highway's expertise in this area 
is very limited. Most of their people are engineers. The 
Central Artery in Boston: we spent time approving 14,000 design 
changes and missed $1.5 billion in overruns.
    I think fraud in highway and transit construction projects 
remains a significant concern, not at the levels of the 1960s 
and 1970s, but it has tripled in the last several years, and we 
are very concerned about that.
    Another issue I would like to put on your radar screen as a 
national problem is abuse of the disadvantaged business 
enterprise program where people, in order to secure contracts, 
go out and create false front firms.
    Another significant opportunity exists to bolster revenue 
collections for the Highway Trust Fund. Fuel tax fraud is 
draining, it is estimated, about $1 billion annually from the 
fund.
    I would like to turn to FAA for a moment. FAA's budget 
request for $14 billion is exceeding projected trust fund 
revenues by about $3 billion. In 1996, Congress give FAA 
direction to become a performance-based organization. Congress 
also gave them personnel reform and acquisition reform 
authority. Seven years later, I don't see sufficient progress 
in meeting the outcomes. Instead, we have seen enormous costs 
growth at FAA.
    In terms of operating costs, the most discernible results 
of personnel reform have been higher salaries. The new pay 
system for controllers was a significant cost driver. Between 
1998 and 2003, the average base pay for a controller increased 
by nearly 50 percent. It is now over $100,000 a year. That 
compares to an average salary increase for other FAA employees 
of about 30 percent.
    Also, although linking pay and performance was a key tenet 
of personnel reform in FAA, roughly 36 percent of FAA employees 
today are based on--their pay is based on--individual 
performance. The remainder get largely automatic pay increases.
    I think the critical tool that FAA needs to control costs 
is a cost accounting system. In 1996, Congress, by law, 
directed FAA to create one. At that time it was estimated it 
would cost $12 million and to be completed in 1998. Well, we 
are 7 years into development and have spent $38 million. They 
estimate $7 million to go, and I hope we have a cost accounting 
system in place sometime in 2004.
    There are a number of opportunities for cost savings that 
we can get into in the Q and A if you would like.
    I would like to say a word about FAA's experience with 
procurement reform. They are doing a good job of awarding 
contracts quicker, but their major acquisitions continue to 
experience large cost increases, extended delays, and 
performance problems.
    We tracked 20 major air traffic control modernization 
acquisitions. They have experienced cost growth of over $4.3 
billion and schedule slips of 1.7 years. That is simply not 
sustainable. That cost growth alone now exceeds 100 percent of 
a full year's appropriation for the facilities and equipment 
accounts.
    And meanwhile, FAA is starting to launch and embark upon 
new multibillion-dollar procurements. At some point they have 
got to take some management actions to get control over these 
overruns.
    Maritime Administration. They have the loan guarantee 
program. We audited it and found that it was in need of 
fundamental reform in nearly every phase. They have had about a 
half a billion dollars in defaults over the past several years. 
Congress recently required those reforms and the Department is 
acting on them. I think there is a lot of promise there.
    In Amtrak, the message here is: the model that we have for 
Amtrak is broken. Amtrak is asking for $1.8 billion and the 
administration has requested about $1 billion. I think there 
are several possible options for dealing with Amtrak and they 
are described in the testimony submitted for the record. Amtrak 
is awash in debt--$4.8 billion today; compared to $1.7 billion 
the last time you reauthorized them. Their annual operating 
losses are about $1.1 billion. They have a capital repair 
backlog of $6 billion, even though their ridership revenue is 
up. I would just encourage the committee to take Amtrak's 
governance structure and consider what we want for rail in this 
country. Fundamentally, we are not going to get out of the 
Amtrak problem by saving your way out of it.
    Thank you.
    Chairman Nussle. Thank you.
    [The prepared statement of Mr. Mead follows:]

  Prepared Statement of Hon. Kenneth M. Mead, Inspector General, U.S. 
                      Department of Transportation

    Chairman Nussle, Ranking Member Spratt, and other members of the 
committee, we appreciate this opportunity to testify today about 
opportunities to control costs and improve the effectiveness of 
Department of Transportation (DOT) programs. At this committee's 
direction, the concurrent resolution on the Budget for fiscal year 2004 
requires House and Senate authorizing committees to identify 
opportunities to eliminate waste, fraud, and abuse in programs under 
their jurisdiction. Efforts to combat waste, fraud, and abuse take on 
even more importance today, when we face significant financial 
challenges. The Congressional Budget Office recently updated its 
estimate of the fiscal year 2003 deficit to $400 billion, or close to 4 
percent of gross domestic product.
    This committee and the Senate Budget Committee also identified 
savings targets expected from each authorizing committee. The target 
for budget authority that was provided to the House Transportation and 
Infrastructure Committee totaled $491 million, a little less than 1 
percent of DOT's fiscal year 2004 budget request. This approach calls 
for the committees with expertise about specific programs to target 
waste, fraud, and abuse associated with those programs. DOT, for 
example, administers several important transportation programs that 
contribute to meeting national economic, safety, and mobility goals. 
Overall, DOT's fiscal year 2004 budget request is $54.3 billion, of 
which $46.2 billion (85 percent) is from DOT trust funds and $8.1 
billion (15 percent) is from the General Fund.
    We believe the committee's target of identifying about $500 million 
in waste, fraud, and abuse in DOT programs is reasonable and can be 
achieved by implementing administrative and legislative opportunities 
to (1) improve the efficiency and effectiveness of DOT programs, (2) 
avoid unnecessary program cost increases, and (3) cut costs and reduce 
losses to fraud, and abuse.
    We in the DOT Office of the Inspector General have attempted to do 
our part to identify program improvements, cost avoidance 
opportunities, and direct cost savings to reduce program cost growth 
and ensure that we get the most from our transportation investments. 
From fiscal year 1997 through the first half of fiscal year 2003, we 
made over $6 billion in recommendations to put funds to better use, and 
we have questioned more than $475 million in costs. Our investigators 
also completed 1,486 convictions and obtained over $260 million in 
fines, restitutions, and civil judgments--bringing funds back to the 
U.S. Treasury or to affected programs.
    I want to use our time today to focus on opportunities we have 
identified to use funds more efficiently and effectively, avoid 
unnecessary cost increases, and reduce costs in (1) Federal Highway 
Administration (FHWA) and Federal Transit Administration (FTA) grants 
to States and localities; (2) Federal Aviation. Administration (FAA) 
operation, maintenance, and acquisition programs; and (3) Maritime 
Administration's (MARAD) Title XI Loan Guarantee Program.
    Finally, I will conclude my remarks with a few observations about 
Amtrak, which presents a different type of challenge because its 
program structure is fundamentally broken and needs to be rethought.
    DOT management has been responsive to our recommendations to 
correct the deficiencies in most of these areas. In particular, 
Secretary Mineta, Deputy Secretary Jackson, and the Administrators have 
emphasized the need to improve oversight to get more value from the 
Federal investment. This has included making tough calls in project 
funding decisions and proposing significant legislative changes to 
strengthen stewardship, oversight, and fraud detection and prevention 
provisions related to highway and transit investments.

   FEDERAL HIGHWAY ADMINISTRATION AND FEDERAL TRANSIT ADMINISTRATION

    FHWA has requested $30.2 billion (all from the Highway Trust Fund) 
for grants to States and local governments to build and repair highways 
and to reduce highway injuries and fatalities. FTA requested $7.2 
billion ($5.9 billion from the Highway Trust Fund and $1.3 billion from 
the General Fund) for grants to transit operators, and to State and 
local governments for the construction of transit facilities and 
purchase of transit equipment.
    However, Highway Trust Fund tax receipts have fallen from $39.3 
billion in fiscal year 1999 to $31.5 billion in fiscal year 2001, a 20 
percent decline. Current estimates show that between fiscal year 2003 
and fiscal year 2006, Highway Trust Fund tax revenues will be about $18 
billion less than projections made in April 2001, and are not expected 
to return to the fiscal year 1999 level until fiscal year 2008.
    Whether funds are lost to cost overruns, schedule delays, or fraud, 
the result is the same--fewer resources are available for important 
transportation projects. To illustrate, if the efficiency with which 
the $500 billion invested by the Federal Government and the States over 
the last 6 years on highway projects had been improved by only 1 
percent, an additional $5 billion would be made available--enough to 
fund 4 of the 15 active major highway projects.
    Although proposals have been made to increase funding for Federal-
aid Highways, and these proposals may have merit, we believe 
considerably more can and should be done to stretch Federal dollars by 
ensuring that funds are spent cost effectively.
    We have identified a number of ways, based on our audits and 
investigations, that FHWA and FTA could do a better job. These are:

                  MAKING BETTER USE OF AVAILABLE FUNDS

    FHWA must be more vigilant in identifying funds that are no longer 
needed by States. These funds, sitting idle on inactive projects can be 
redeployed to fund active projects. We found $238 million in funds that 
States no longer needed on projects that should have been redirected to 
other projects. Of this amount, $54 million had been idle for 16 years 
on a freeway project in Connecticut that had never been started.

                    STRENGTHENING PROJECT MANAGEMENT

    We have reviewed projects in which management and oversight were 
ineffective, leading to significant cost increases, financing problems, 
schedule delays, or technical or construction difficulties. These 
projects include the Central Artery, the Woodrow Wilson Bridge, the 
Springfield interchange in Virginia, Puerto Rico's Tren Urbano, the Los 
Angeles Metro Red Line, and the San Francisco Bay Area Rapid Transit 
(BART) Airport Extension.
    One problem we have repeatedly seen is that cost estimates on major 
highway and transit projects have been unreliable and have led to 
substantial cost increases in the long run. For example, we found the 
Virginia Department of Transportation understated project cost 
estimates by $236.5 million, or 35 percent, on the Springfield 
Interchange project by not including estimates for some known and 
planned costs. Significant cost estimating problems also occurred on 
the BART Airport Extension. Our April 2000 report noted that the 
project's costs had increased by $316 million over the initial cost 
estimate.
    Another problem is that finance plans are not usually required for 
highway projects under $1 billion, although such projects can also 
burden a State's management resources. A finance plan is a management 
tool that is vital in providing project managers and the public with 
information on how much a project is expected to cost, when it will be 
completed, whether adequate funding is committed to the project, and 
whether there are risks to completing the project on time and within 
budget.
    In our opinion, finance plans should be prepared for projects 
costing $100 million or more, and responsibility for approving those 
plans should be delegated to the States, with the Secretary reserving 
the right to review any plan. If the States are going to spend $100 
million of taxpayer money, it is reasonable to require them to develop 
an approved finance plan that identifies project costs, milestones, and 
funding sources. The Department has incorporated this new requirement 
in its reauthorization proposal.
    Our work has identified two reasons for ineffective oversight of 
Federal-aid highway projects. First, until recently, FHWA managers 
rarely focused on program and major project management and financial 
oversight. FHWA took a partnership approach in exercising its oversight 
role of Federal-aid Highway projects, with FHWA channeling money for 
highways to the States and working with State highway personnel to 
administer highway contracts. This partnership is important, but it is 
equally important that FHWA be willing to step back and make the hard 
calls when necessary.
    Second, today's highway projects require professional competencies 
in emerging technologies, financing, cost-estimating, program analysis, 
environmental processes, and schedule management. Yet, FHWA's expertise 
in these areas is severely limited because its workforce is structured 
almost exclusively around engineering skills that were in greater 
demand during construction of the interstate system. FHWA should 
restructure its staffing mix to bring the right set of skills to bear 
on oversight activities.

                     DETECTING AND PREVENTING FRAUD

    During the last 4\1/2\ years highway and transit-related fraud 
indictments have tripled, convictions have doubled, and monetary 
recoveries totaled more than $80 million. We currently have over 100 
ongoing investigations of infrastructure projects or contracts. Fraud 
schemes that we are commonly seeing today include bid-rigging and 
collusion among contractors; false claims for work or materials not 
provided on the project; product substitution by contractors or vendors 
who provide substandard or inferior materials; bribery of inspectors to 
look the other way on their duty to ensure quality of work or 
materials; failure by contractors to pay workers required prevailing 
wages; and fraud against the Disadvantaged Business Enterprise (DBE) 
Program for minority and women contractors who are used as ``false 
front'' companies.
    DBE fraud is an area with serious enforcement and compliance 
problems that requires more attention and appears to be nationwide in 
scope. In an effort to protect the Government's interest against fraud 
on transportation projects we recommended the Department adopt language 
in its highway reauthorization proposal to make debarment mandatory and 
final when a contractor is convicted of a fraud. In addition, since 
State programs are the ones damaged by fraud, allowing States to share 
in any recoveries would help them restore their programs and provide 
support for further fraud deterrence and detection efforts.

                     INCREASING REVENUE COLLECTIONS

    Fuel tax fraud drains the Highway Trust Fund of an estimated $1 
billon annually, which can be mitigated with strengthened enforcement 
and investigative efforts to increase tax collections. Cross-border 
bootlegging of fuel and diversion of aviation ``jet'' fuel are two 
areas needing further attention. Federal and State legislative changes 
could facilitate more effective tax collections and investigations.

                    FEDERAL AVIATION ADMINISTRATION

    In 1996, Congress acted to make FAA a performance-based 
organization by giving the agency two powerful tools--personnel reform 
and acquisition reform.
    The expectation was that, by being relieved of Government personnel 
and procurement rules, FAA would operate more like a business--that is, 
services would be provided to users cost effectively and air traffic 
control modernization programs would be delivered approximately on time 
and within budget. Seven years later, FAA's budget has grown from $8.2 
billion in fiscal year 1996 to $14 billion in fiscal year 2004--an 
increase of $5.8 billion, or over 70 percent. About half of that 
increase was attributable to FAA's operating budget. During this 
period, we have also seen large cost overruns and schedule slips in 
FAA's major acquisitions.
    Continued growth of that magnitude is unsustainable, given the 
multibillion-dollar declines in projected Aviation Trust Fund receipts 
and greater dependence of FAA in the General Fund. In fact, projected 
tax receipts to the Aviation Trust Fund for fiscal year 2004 have 
dropped from approximately $12.6 billion estimated in April 2001 to 
about $10.2 billion estimated in February 2003. Over the next 4 years 
(fiscal year 2004 through fiscal year 2007), Aviation Trust Fund tax 
revenues are expected to be about $10 billion less than projections 
made in April 2001.

            APRIL 2001 TF ESTIMATE FEBRUARY 2003 TF ESTIMATE

    We see three areas based on our audits and criminal investigations 
that need to be addressed to ensure that Federal funds are spent cost-
effectively.

   FAA'S SPIRALING OPERATING COSTS ARE UNSUSTAINABLE AND NEED TO BE 
                         BROUGHT UNDER CONTROL

    To date, the most visible results of personnel reform are increased 
workforce costs. While there has been improved labor/management 
relations with controllers (FAA's largest workforce), FAA's operating 
costs, which are primarily payroll, have increased by $3 billion, going 
from $4.6 billion in fiscal year 1996 to $7.6 billion in fiscal year 
2004--an increase of over 65 percent. The new pay system for 
controllers was a significant cost driver. Between 1998 (when the new 
system was implemented) and 2003, the average base pay for controllers 
increased from $72,000 to over $106,000--a 47 percent increase. This 
compares to an average salary increase for all other FAA employees 
during the same period of about 32 percent.
    Additionally, although linking pay and performance was a key tenet 
of personnel reform, only about 36 percent of FAA employees receive pay 
increases based on individual performance. The remainder of FAA 
employees receives largely automatic pay increases.
    We also found that there are somewhere between 1,000 and 1,500 side 
bar agreements or Memorandums of Understanding (MOUs) that FAA managers 
entered into. These agreements cover a wide range of issues such as 
implementing new technology, changes in working conditions, and--as a 
result of personnel reform--compensation, bonuses, and benefits. While 
many of the agreements serve legitimate purposes, we found some that 
had significant cost and/or operational impacts on FAA. For example, as 
part of a new pay system for controllers, FAA and the National Air 
Traffic Controllers Association (NATCA) entered into a national MOU 
providing controllers with an additional cost-of-living adjustment. As 
a result, at 111 locations, controllers receive between 1 and 10 
percent in ``Controller Incentive Pay,'' which is in addition to 
Government-wide locality pay. In fiscal year 2002, the total cost for 
this additional pay was about $27 million.
    Despite the cost implications, at the time of our review FAA 
management did not know the exact number or nature of these agreements, 
there were no established procedures for approving MOUs, and their cost 
impact on the budget had not been analyzed. Because of the significant 
control weaknesses, we briefed the FAA Administrator about our concerns 
in January 2003--two months after initiating this review. FAA has moved 
expeditiously to address this issue, including identifying those MOUs 
that are problematic or costly and opening discussions with NATCA to 
reopen several agreements.
    To effectively control costs, FAA needs accurate cost accounting 
and labor distribution systems. In 1996, Congress also directed FAA to 
have a fully functioning cost accounting system so it, as well as 
others, could know exactly where its costs were. Now, after nearly 7 
years of development and over $38 million, FAA still does not have an 
adequate cost accounting system, and it expects to spend at least 
another $7 million to deploy the cost accounting system throughout FAA. 
In our opinion, the principle reason that FAA does not have an 
effective cost accounting system is because it has not experienced any 
consequences for not having one. FAA also has not been held accountable 
to operate like a business, which must be able to identify costs by 
specific services, activities, and locations to support management 
decision making.
    To have an effective cost accounting system, FAA also needs an 
accurate labor distribution system. Cru-X is the labor distribution 
system FAA chose to track hours worked by air traffic employees. As 
designed, Cru-X could have provided credible workforce data for 
addressing controller concerns about staffing shortages, related 
overtime expenditures, and how many controllers are needed and where. 
That information, in turn, is especially important, given projections 
of pending controller retirements. Unfortunately, Cru-X has not been 
implemented as it was designed.
    Given the fiscal constraints facing FAA, the availability of 
critical, reliable, and competent data to make informed decisions about 
the agency's basic day-to-day operations must be an imperative for FAA. 
FAA needs to redouble its efforts to have a fully functional cost 
accounting and labor distribution system in place and operating. We are 
encouraged by FAA's response to our June 3, 2003 assessment of its cost 
accounting system, in which the agency agreed to have both its cost 
accounting and labor distribution systems in place and operating by 
September 30, 2004.
    FAA also needs to look at existing opportunities to reduce costs. 
For example, we estimate FAA could realize cost savings of nearly $500 
million over 7 years by reducing the number of existing automated 
flight service stations by over half in conjunction with deployment of 
new flight service software. We also identified that FAA could save 
over $57 million annually by expanding the contract tower program to 71 
visual flight rule towers still operated by FAA. Clearly, these actions 
are controversial among certain groups; however, given the current 
fiscal issues facing FAA, the agency needs to objectively consider 
these and other cost saving measures from a business perspective.

 FAA'S MAJOR ACQUISITIONS CONTINUE TO EXPERIENCE LARGE COST INCREASES, 
           EXTENDED SCHEDULE DELAYS, AND PERFORMANCE PROBLEMS

    In terms of acquisition reform, FAA has made progress in reducing 
the time it takes to award contracts, but the agency has not held 
managers accountable or used the benefits of acquisition reform to 
control cost and schedule slips. We found that cost growth, schedule 
delays, and performance problems continue with 9 FAA's major 
acquisitions. Overall, the 20 projects we reviewed have experienced 
cost growth of about $4.3 billion (from $6.8 billion to $11.1 billion) 
and schedule slips of 1 to 7 years.
    Billion dollar cost growth with acquisitions is not sustainable or 
affordable in light of declining trust fund revenues. Moreover, FAA is 
just starting complex, billion dollar efforts while continuing to fund 
projects that have been delayed for several years. If FAA does not 
exercise more management control over its acquisitions, existing 
projects will be delayed further, and new projects may not start as 
planned.
    FAA must take a number of steps to control costs of acquisitions 
and get as much as it can with each acquisition dollar. We recommended 
FAA update the cost, schedule, and performance baselines for many of 
its major acquisitions. Those baselines are misleading because they do 
not accurately reflect the true cost, schedule, or performance 
parameters of the projects. This process may require FAA to establish a 
new strategy that accelerates some projects and defers others.

     FAA NEEDS TO STRENGTHEN CONTROLS OVER PROGRAMS THAT HAVE BEEN 
                 SUSCEPTIBLE TO FRAUD, WASTE, AND ABUSE

    Our work has also found that FAA has not followed sound business 
practices for administering contracts. We have consistently found a 
lack of basic contract administration at every stage of contract 
management, from contract award to contract closeout. For example, we 
found that Government cost estimates were prepared by FAA engineers, 
then ignored; prepared using unreliable resource and cost data; 
prepared by the contractor (a direct conflict of interest); or not 
prepared at all. To protect the Government's interests, FAA needs to 
hold managers accountable and adhere to the basic principles of 
contract oversight and administration.
    We also found that FAA's Workers' Compensation Program continues to 
be subject to fraud and abuse, in terms of both stress-related claims 
and long-term injury claims. For example, we investigated one case of 
an FAA employee who received over $397,000 in workers' compensation 
claims over a 5-year period after allegedly falling out of a chair and 
injuring his back. While receiving those benefits, the individual 
obtained a pilot's license and was employed as a pilot at various 
organizations.
    Workers' Compensation is also an area that could benefit from 
Government-wide improvements. One issue we previously identified is the 
number of claimants who continue to receive workers' compensation 
benefits long after they are eligible to receive retirement benefits. 
For example, in 2001 for FAA alone, there were nearly 1,500 claimants 
over the age of 60 who were still receiving workers' compensation 
benefits. In fact, there were 218 claimants still receiving workers' 
compensation benefits who were 80 years old or older.
    Converting claimants from workers' compensation benefits to 
retirement benefits after they reach retirement age could result in 
significant savings Government-wide. However, changes of this magnitude 
would clearly require legislative actions.
    Lastly, FAA needs to remain vigilant in its oversight of airport 
revenue diversions. Airports that receive Federal grants are required 
to put any revenue generated at the airport back into the airport 
operating or capital funds in order to minimize Federal assistance. Any 
other use of the revenue is considered a diversion. Examples of common 
revenue diversions include airport sponsors or local governments (1) 
charging the airport for property or services that were not provided, 
or (2) renting airport property at less than fair market value.
    At a time when airports are continuing to look for new ways to fund 
their operations, we continue to find cases of airport revenue 
diversion. For example, at a sample of five airport sponsors reviewed, 
we found approximately $40.9 million in potential revenue diversions 
that were not detected by FAA's primary oversight methods. Since we 
completed our fieldwork, the American Institute of Certified Public 
Accountants and FAA have taken steps to better inform independent 
auditors about requirements for reviewing airport revenue use during 
single audits. In our opinion, those actions should improve FAA's 
ability to detect and prevent airport revenue diversions. However, to 
ensure that revenue diversions that occurred are resolved, FAA needs to 
verify the status of the $40.9 million in potential revenue diversions 
that we identified and seek recoveries as necessary.

                                 MARAD

    In the last 5 years, MARAD's Title XI Loan Guarantee Program has 
experienced an increase in loan defaults and in the number of firms 
with loan guarantees filing for bankruptcy protection. Since 1998, nine 
loans have defaulted, totaling approximately $490 million, six of which 
have occurred since December 2001. The bankruptcy of one firm affected 
over one quarter ($1.3 billion out of $4.9 billion at the time of 
default) of the value of MARAD's Title XI loan guarantee portfolio.\11\
    MARAD needs to improve administration and oversight in all phases 
of the Title XI loan process. During a recent audit, we identified a 
number of areas where MARAD could improve its Program practices, limit 
the risk of default, and reduce losses to the Government. For instance, 
in approving applications, MARAD agreed to waivers and modifications to 
Program financial requirements without adequate compensating provisions 
to reflect the increased risk to the Government. MARAD also lacked a 
formal process for closely monitoring the financial condition of 
borrowers and did not systematically monitor the physical condition of 
guaranteed assets.

     WE ALSO NOTE THAT PUBLIC LAW 108-11, MAKING EMERGENCY WARTIME 
                              SUPPLEMENTAL

    Appropriations for the fiscal year ending September 30, 2003, 
appropriated $25 million to MARAD for new loan guarantees. Before these 
funds can be obligated (these funds would likely guarantee loans with a 
face value of about $400 million), the law mandates that MARAD 
implement the recommendations in our report and that we certify to the 
Congress that our recommendations have been met. We are working with 
MARAD to analyze the new processes that it has proposed putting in 
place, and we will audit MARAD's compliance with the new processes once 
they are in use.

                                 AMTRAK

    We are including a brief discussion of Amtrak because even Federal 
funding levels of $1 billion a year are not going to solve the 
fundamental problem: the current Amtrak model is broken. The problem 
extends beyond funding to questions of who makes the decisions about 
and who controls the provision of service, including commuter service. 
The status quo pleases no one; it will require significant increases in 
funding just to maintain it; and it will not meet the mobility needs of 
this country in the years ahead.
    Although Amtrak has received about $1 billion in annual Federal 
assistance during the past 6 years, the general state of Amtrak's 
infrastructure and rolling stock continue to deteriorate. Amtrak's 
deferred capital investment is estimated at about $6 billion. Except 
for a handful of routes, the system continues to suffer operating 
losses on all services offered. In fact, the fully allocated losses on 
some trains (including depreciation and interest) can exceed $500 per 
passenger. For the company as a whole, annual cash operating losses 
have averaged $600 million for the last 6 years and are estimated to 
range between $700 million and $800 million over the next 5 years.

                        OPERATING LOSS CASH LOSS

    Amtrak has requested $1.8 billion for fiscal year 2004 in order to 
begin to address the capital backlog and to cover its large cash 
operating losses. The administration has requested $900 million for 
Amtrak for fiscal year 2004.
    That concludes my statement, Mr. Chairman. I would be pleased to 
address any questions you or members of the committee might have.

    [Supplemental information submitted for the record by the 
U.S. Department of Transportation follows:]

 Supplement to the Testimony Given by Hon. Kenneth M. Mead, Inspector 
               General, U.S. Department of Transportation

    OPPORTUNITIES TO REDUCE COSTS AND IMPROVE THE EFFECTIVENESS OF 
 DEPARTMENT OF TRANSPORTATION PROGRAMS FEDERAL HIGHWAY ADMINISTRATION 
                   AND FEDERAL TRANSIT ADMINISTRATION

    In fiscal year 2004, the Federal Highway Administration (FHWA) 
requested $30.2 billion (all from the Highway Trust Fund) for grants to 
States and local governments to build and repair highways and to reduce 
highway injuries and fatalities. These investments facilitate economic 
growth, increase mobility, and improve safety. For fiscal year 2004, 
the Federal Transit Administration (FTA) requested $7.2 billion ($5.9 
billion from the Highway Trust Fund and $1.3 billion from the General 
Fund) for grants to transit operators, and to State and local 
governments to construct transit facilities and purchase transit 
equipment.
    However, Highway Trust Fund tax receipts have fallen from $39.3 
billion in fiscal year 1999 to $31.5 billion in fiscal year 2001, a 20 
percent decline. Current estimates show that between fiscal year 2003 
and fiscal year 2006, Highway Trust Fund tax revenues will be about $18 
billion less than projections made in April 2001, and are not expected 
to return to the fiscal year 1999 level until fiscal year 2008.
    Whether funds are lost to cost overruns, schedule delays, or fraud, 
the result is the same--fewer resources are available for important 
transportation projects. To illustrate, if the efficiency with which 
the $500 billion invested by the Federal Government and States over the 
last 6 years on highway projects had been improved by only 1 percent, 
an additional $5 billion would be made available--enough to fund 4 of 
the 15 active major highway projects.



    Although proposals have been made to increase funding for Federal-
aid Highways, and these proposals may have merit, we believe 
considerably more can and should be done to stretch Federal dollars by 
ensuring that funds are spent cost effectively. The key issue for FHWA 
and FTA is ensuring that major projects are delivered on time, on 
budget, and free from fraud. Secretary Mineta has emphasized improving 
oversight and has fully supported our work to identify ways to get 
better value for the Federal investment. We have identified a number of 
ways, based on our audit and investigative work, that FHWA and FTA 
could do a better job. These are:

                  MAKING BETTER USE OF AVAILABLE FUNDS

     FHWA must be more vigilant in identifying and redeploying 
funds sitting idle on inactive projects. Our work has identified $238 
million in funds no longer associated with valid projects or 
liabilities. Of this amount, $54 million had been idle for 16 years on 
a freeway project in Connecticut that had never been started. Funds on 
inactive projects should be redeployed to active projects.
   strengthening project management of federally funded highway and 
  transit projects to minimize significant cost increases, financing 
 problems, schedule delays, and technical or construction difficulties
     Unreliable cost estimates on major highway and transit 
projects have led to substantial cost increases in the long-run. We 
found the Virginia Department of Transportation (VDOT) understated 
project cost estimates by $236.5 million on the Springfield Interchange 
project, or 35 percent, by not including estimates for some known and 
planned costs.
     In 2002, Maryland officials managing the Wilson Bridge 
project did not adopt a value engineering proposal to change from one 
type of girder to another. At our request, FHWA advised the State to 
more objectively reexamine the proposal. Project officials accepted it 
as a design change and saved $59 million.
     FHWA and FTA should ensure that master schedules that tie 
together the work of all the contractors and identify and track the 
costs of labor, material, and equipment resources required to complete 
each task are used on major projects and are based on accurate and 
reliable data.
     FHWA had not ensured that the Central Artery/Tunnel 
project in Boston took aggressive action to recover costs of design 
errors or omissions caused by engineering consultants. Eight years of 
cost recovery efforts have led to only $30,000 in recoveries from a 
single consultant--less than one-tenth of 1 percent of the amount in 
question.
     Finance plans that identify cost, schedule, funding, and 
risks to projects are not usually required for projects costing under 
$1 billion, although such projects can also burden a State's management 
resources.
     State plans, which are representations to the taxpayers of 
how the States intend to use the taxpayers' money to meet their 
transportation needs, are not always realistic. We found that of the 
152 interstate, primary, and urban construction projects in one State's 
plans for 1994-2000, 30 percent were started on time, 57 percent were 
delayed, and 13 percent were eliminated primarily due to understated 
cost estimates that led to insufficient funding.
     FHWA lacks the expertise to effectively oversee major 
projects and State management processes and should restructure its 
staffing mix to bring the right set of skills to bear on oversight 
activities.

          PREVENTING FRAUD AND INCREASING REVENUE COLLECTIONS

     During the last 4\1/2\ years, fraud indictments have 
tripled, convictions have doubled, and monetary recoveries have totaled 
more than $80 million.
     Fuel tax fraud may drain the Highway Trust Fund of an 
estimated $1 billion annually, which can be mitigated with strengthened 
enforcement and investigative efforts to increase tax collections.
    The demand for highway and transit funds remains great. The 
Department estimates that a $75.9 billion average annual capital 
investment from all levels of government will be required through 2020 
to maintain the condition and performance of the Nation's highways and 
bridges at the 2000 level, and a $14.8 billion average annual 
investment will be required to maintain transit assets at the 2000 
level. To expand system capacity and improve the condition of these 
assets, annual average investment requirements would increase to $106.9 
billion for highways and bridges and $20.6 billion for transit. All of 
these investment projections are significantly above Federal, State, 
and local annual capital spending levels for highway, bridge, and 
transit investments in the last 6 years.
    We have reviewed a number of large projects that stand as examples 
of good project management: projects such as Utah's I-15; New Jersey's 
Hudson Bergen Light Rail project; and California's Alameda Corridor. In 
contrast, we have reviewed projects in which management and oversight 
were ineffective, leading to significant cost increases, financing 
problems, schedule delays, and/or technical or construction 
difficulties. These projects include the Central Artery in Boston, MA; 
the Woodrow Wilson Bridge in the Washington, DC area; the Springfield 
interchange in Virginia; the Tren Urbano transit system in Puerto Rico; 
and the Los Angeles Metro Red Line and the San Francisco Bay Area Rapid 
Transit (BART) Airport Extension in California. In each of those cases, 
project management has agreed to take action to correct the 
deficiencies we reported. Many of these problems, as noted below, 
resulted from unreliable cost estimates; a not using proven management 
tools, such as finance plans and master schedules; and weaknesses in 
Federal oversight.
    Redeploying millions of dollars in idle funds to other projects. 
FHWA must be more vigilant in identifying funds that are no longer 
needed by States. These funds, sitting idle on inactive projects, can 
be used to fund active projects. In 2001, we found $238 million in 
funding that was obligated but never spent on specific projects that 
should have been redeployed to other projects. Of this amount, $54 
million had been sitting idle for 16 years on a freeway project in 
Connecticut that had not been constructed. The funds were subsequently 
de-obligated and used for other valid transportation projects or 
returned to the U.S. Treasury.
    Preparing reliable cost estimates. One problem we have seen 
repeatedly is that cost estimates on major highway and transit projects 
have been unreliable and have resulted in substantial cost increases in 
the long-run. The most recent example of this problem occurred on the 
Springfield Interchange project. We found that the Virginia Department 
of Transportation (VDOT) understated project cost estimates by $236.5 
million, or 35 percent, by not including some known and planned costs, 
such as $43 million for preliminary engineering and design and $44 
million for inflation. In addition, the baseline estimate for this 
project was prepared using design plans that were only 15-20 percent 
complete, which is far too early in the design to produce reliable 
estimates. VDOT agreed with our findings and has incorporated 
previously omitted costs in the project's $676.5 million budget. We 
also found unreliable cost estimates on the BART project. Our April 
2000 report noted that the project's cost had increased by $316 million 
over the initial cost estimate.
    As a result of finance plan requirements, FHWA has issued minimum 
cost estimating standards for projects costing $1 billion or more. Yet 
for the vast majority of projects, those costing less than $1 billion, 
FHWA has not established minimum cost estimating standards. In response 
to our recommendation, FHWA plans to issue draft cost estimating 
guidance for projects below $1 billion by August 2003.
    Implementing the most cost-effective projects and engineering 
alternatives. To maximize the return on transportation investments, the 
Federal Government could do more to help project sponsors identify more 
cost-effective solutions both when analyzing alternatives when defining 
the specific project characteristics. Based on reviews of alternatives 
during the project development process, the Miami-Dade Transit Agency 
expanded its existing busway system after determining that a heavy rail 
system would have cost 10 times as much to build, and a light rail 
system would have cost 4 times as much. In the testimony before the 
House Appropriations Committee, Subcommittee on Transportation, 
Treasury, and Related Agencies, in April 2003, the FTA Administrator 
discussed FTA's plans to help project sponsors make decisions based on 
cost-benefit analyses.
    FHWA's value engineering (VE) program, established in 1997, 
requires that a study be performed on all Federal-aid National Highway 
System projects with an estimated cost of $25 million or more and on 
other projects where using VE has a high potential for cost savings. 
According to FHWA's fiscal year 2001 Annual Federal-aid VE Summary 
Report, the latest report available, the States' VE studies included 
2,013 recommendations estimated to save $2.4 billion. FHWA and the 
States approved about 50 percent of the recommendations made in fiscal 
year 2001, saving approximately $865 million, or 36 percent of the 
total value of VE recommendations.
    For example, in 2002 Maryland officials who manage the Wilson 
Bridge project decided not to adopt a VE proposal to change from one 
type of girder to another. Maryland officials claimed that the VE 
proposal would cause significant delays that could result in additional 
costs. However, we conducted a review and found that the proposal was 
technically feasible and would not result in a cost increase or delay 
the schedule. After FHWA advised the State to more objectively 
reexamine the VE proposal, project officials accepted it as a design 
change and saved $59 million.
    Recovering overpayments and resolving construction claims promptly. 
Change orders to contracts are initiated by the project or contractors 
in response to changes in the project's scope or differing site 
conditions. However, some change orders are a result of design errors 
or omissions caused by consultant engineers. Recovering funds paid on 
these change orders offers an opportunity to reduce project costs, 
which benefits the Federal and State governments. Maintaining tight 
control over change orders and promptly resolving outstanding 
construction claims are key in controlling project costs. For example, 
the Central Artery/Tunnel project (the project) in Boston might be able 
to reduce project costs by aggressively pursuing opportunities to 
recover costs of design errors or omissions caused by engineering 
consultants.
    To date, the project's cost recovery efforts have been anemic. 
First, 8 years of cost recovery efforts have led to only $30,000 in 
recoveries from a single consultant--less than one-tenth of 1 percent 
(.056 percent) of the amount in question. Furthermore, the project has 
295 unresolved change orders, valued at $188 million, of which 76 have 
been outstanding for 2-7 years. Finally, the project has 3,200 
unresolved claims totaling about $1 billion and has reserved $633 
million or 63 percent of the total exposure to cover the cost of 
settlements.
    Preparing finance plans to identify cost, schedule, funding, and 
risks to the project. Finance plans are not usually required for 
highway projects costing under $1 billion, although such projects can 
also burden a State's management resources. A finance plan is a vital 
management tool that provides project managers and the public with 
information on how much a project is expected to cost, when it will be 
completed, whether adequate funding is committed to the project, and 
whether there are risks to completing the project on time and within 
budget.
    Our work has shown that adding a legislative provision in TEA-21 
requiring finance plans for projects costing more than $1 billion was a 
wise decision on the part of Congress. FHWA reviews and approves those 
plans and should continue to do so. In our opinion, finance plans 
should be prepared for projects costing $100 million or more, and 
responsibility for approving those plans should be delegated to the 
States, with the Secretary reserving the right to review any plan. If 
States plan to spend $100 million or more of taxpayer money, it is 
reasonable to require them to develop an approved finance plan that 
identifies project costs, milestones, and funding sources. The 
Department has incorporated this new requirement in its reauthorization 
proposal.
    Ensuring that statewide plans properly represent to the taxpayers 
how funds will be spent. State plans are representations to the 
taxpayers of how the States intend to use the taxpayers' money to meet 
their transportation needs and identify the projects that will be 
funded, their costs, schedules, and funding sources. However, these 
plans are not always realistic. For example, we found that of the 152 
interstate, primary, and urban construction projects in one State's 
plans for 1994-2000, 30 percent were started on time, 57 percent were 
delayed, and 13 percent were eliminated. One reason this occurred was 
that cost estimates included in the plan understated the actual cost of 
the projects, making the funding identified for the overall highway 
construction program insufficient. Despite these problems, FHWA had 
approved the plans.
    Refocusing FHWA efforts on project management and financial 
oversight. The failure to properly oversee States' project management 
practices has contributed to increased project costs. Our work has 
disclosed that until recently, FHWA managers rarely focused on program 
and major project management and financial oversight. FHWA took a 
partnership approach in exercising its oversight role of Federal-aid 
Highway projects, with FHWA channeling money for highways to the States 
and working with State highway personnel to administer highway 
contracts. This partnership is important, but it is equally important 
that FHWA be willing to step back and make the hard calls when 
necessary. For example, at the time the Central Artery announced a $1.4 
billion cost increase in 2000, FHWA had approved thousands of 
engineering design changes. Nonetheless, FHWA was caught unaware when 
the cost increase was announced, even though it had just approved the 
project's finance plan.
    Today's highway projects require professional competencies in 
emerging technologies, financing, cost-estimating, program analysis, 
environmental processes, and schedule management. Yet, FHWA's expertise 
in these areas is limited because its workforce is structured primarily 
around engineering skills that were in greater demand during 
construction of the interstate system. Of FHWA's workforce of 2,860 
employees, 1,130 or approximately 40 percent, are highway engineers. 
Yet, in the remaining 60 percent, or 1,730 employees, specialists 
skills needed to oversee State management processes are in short 
supply. For example, FHWA employs 88 financial specialists, who 
primarily perform financial management tasks internal to FHWA, rather 
than analyzing project finance plans and evaluating State financial 
management processes. Accordingly, FHWA should restructure its staffing 
mix to bring the right set of skills to bear on oversight activities. 
This is not to suggest FHWA needs more staff. A strategy for achieving 
a more multi-disciplinary approach to oversight activities within 
current staffing levels could include a mix of actions such as:
     Hiring staff with private sector project management 
skills, that is, financing, program analysis, and cost estimating; and
     Streamlining and delegating project-level approvals to the 
States so that staff time can be refocused on overseeing program-level 
management and financial issues.
    Detecting and preventing fraud. Fraud in highway and transit 
construction projects remains a significant concern, although it has 
not reached the levels experienced in the 1960s and 1970s. During the 
last 4\1/2\ years, highway and transit-related fraud indictments have 
tripled, convictions have doubled, and monetary recoveries have totaled 
more than $80 million. We currently have over 100 ongoing 
investigations of infrastructure projects or contracts. Fraud schemes 
that we are commonly seeing today include bid-rigging and collusion 
among contractors; false claims for work or materials not provided on 
the project; product substitution by contractors or vendors who provide 
substandard or inferior materials; bribery of inspectors to look the 
other way on poor quality work or materials; failure by contractors to 
pay workers required prevailing wages; and fraud against the 
Disadvantaged Business Enterprise (DBE) Program for minority and women 
contractors.
    We have found that DBE fraud is an area with serious enforcement 
and compliance problems, and requires more attention. Our work has 
disclosed that compliance problems with DBE Program regulations appear 
to be nationwide in scope with over 30 ongoing investigations in 16 
States. This type of fraud typically involves prime contractors who 
conspire with ``false front'' DBE firms to fraudulently meet required 
DBE participation criteria in order to obtain contracts. In such cases, 
DBEs either do not perform the work or yield total control of personnel 
and operations to the prime contractors. This crime defrauds the 
integrity of the DBE program and harms legitimate DBEs who abide by the 
law.
    In June 2003, as a result of its role in a DBE fraud scheme, a 
California concrete company operating as a DBE in the San Francisco Bay 
area, agreed to forfeit $1 million and accepted a voluntary 2 year 
exclusion from seeking contracts on DOT funded projects, as well as 
contracts with the City of San Francisco and the State of California. 
The company and its principals will also refrain from applying for any 
DBE certifications for 5 years.
    Debarment-Debarment is one administrative tool that can be used to 
protect the government's interest against fraud on transportation 
projects. Under current regulations, the Operating Administrations have 
wide discretion in determining whether or not to debar convicted 
contractors who, even though they have been convicted of defrauding 
Federal-aid projects, are also allowed to appeal debarments at any 
time. For example,
     In 2001 three major construction companies in the New York 
City area, co-owned by the Scalamandre brothers, pled guilty to felony 
fraud charges involving payoffs to organized crime to influence labor 
unions on FHWA-funded road projects. Because debarment is not mandatory 
under the current Federal-aid rules, it took over 6 months after 
conviction to obtain a 3-year debarment. Now, one year after debarment, 
the companies are appealing to FHWA to lift their debarment. Should 
FHWA turn down this appeal, the companies can file subsequent appeals 
with FHWA burdening the agency by requiring it to invest additional 
time and legal resources to defend its action. At our recommendation, 
the Department has proposed language in its highway reauthorization 
proposal to make debarment mandatory and final when a contractor is 
convicted of fraud.
    Sharing Federal recoveries with States. States are the first line 
of defense in preventing and detecting fraud in transportation 
projects. Since State programs are the first to be damaged by fraud, 
allowing States to share in Federal monetary recoveries would help to 
restore their programs and provide support for further fraud deterrence 
and detection efforts. However, States normally do not receive a 
portion of any monies recovered in successful fraud prosecutions 
because fines and recoveries from Federal case judgments must be 
returned to the Federal Treasury unless a judge determines otherwise or 
the law is changed to allow States to share in Federal fines and 
recoveries. For example:
     Recently, the United States and Louisiana shared a $30 
million recovery stemming from a civil settlement with Contech 
Construction Products, Inc., and Ispat-Inland, Inc. involving product 
substitution fraud. The companies substituted sub-standard polymer-
coated steel culvert pipe used in highway and road construction 
projects in Louisiana from 1992-97. Under the settlement agreement, the 
State of Louisiana received $5.2 million to compensate for the cost of 
the investigation and losses due to the product substitution, and 
another $5.4 million as a credit to its unobligated FHWA balance for 
use on future projects.
    Increasing revenue collections. Although the exact loss is 
difficult to quantify, FHWA estimates that fuel tax fraud drains the 
Highway Trust Fund of an estimated $1 billion annually, which can be 
mitigated with strengthened enforcement and investigative efforts to 
increase tax collections. For example:
     Cross-border bootlegging of fuel typically occurs when 
bordering States have a significant difference in their motor fuel tax 
rates. Bootleggers profit from the difference between the taxes charged 
in low-tax and high-tax jurisdictions by purchasing fuel--and paying 
the associated tax--in a low-tax jurisdiction, and then smuggling the 
fuel into a high-tax jurisdiction where they sell it and pocket the 
difference in taxes. The Federal tax code restricts the Internal 
Revenue Service's ability to share taxpayer information with all State 
and Federal agencies having an interest in the information, which makes 
it extremely difficult to investigate this crime.
    At the Federal level, aviation ``jet'' fuel tax evasion is an area 
several independent petroleum industry analysts allege is possibly 
costing billions of dollars of lost tax revenues, and which requires 
further examination. Tax evasion opportunities exist, in part, because 
jet fuel is sold tax-free to wholesalers and is not taxed until sold to 
an end user such as an airline. Taxing jet fuel at the terminal rack\1\ 
would bring it into conformity with Federal gasoline and diesel fuel 
taxes and could help reduce this evasion opportunity. For example, 
according to a recent KPMG Consulting analysis, on year after Florida 
began taxing aviation fuel at the rack in 1996 it experienced a 21.4 
percent increase in aviation fuel tax collections. While Florida's 
experience is not conclusive, it does illustrate the potential to 
increase tax collections by moving the point of taxation to the rack 
and reducing tax evasion opportunities.
---------------------------------------------------------------------------
    \1\ The Tax Reform Act of 1986, effective January 1, 1988, changed 
the point of taxation for gasoline tax collection from the wholesaler/
distributor to the fuel terminal (or ``rack''), which is the last 
``bulk storage'' point in the distribution chain. The Omnibus Budget 
Reconciliation Act of 1993, effective January 1, 1994, similarly 
changed the point of taxation for diesel fuels from the wholesaler/
distributor to the fuel terminal (or ``rack'').
---------------------------------------------------------------------------
                    FEDERAL AVIATION ADMINISTRATION

    For fiscal year 2004, the Federal Aviation Administration's (FAA) 
budget request is $14 billion, which is 26 percent of DOT's budget, 
representing a 3 percent increase above the fiscal year 2003 
appropriations of $13.6 billion. FAA's budget request exceeds projected 
Aviation Trust Fund revenues in fiscal year 2004 by over $3 billion. In 
fact, projected tax receipts to the Aviation Trust Fund for fiscal year 
2004 have dropped from approximately $12.6 billion estimated in April 
2001 to about $10.2 billion estimated in February 2003.
    Over the next 4 years (fiscal year 2004 through fiscal year 2007), 
Aviation Trust Fund tax revenues are expected to be about $10 billion 
less than projections made in April 2001. Assuming no new taxes or 
fees, this shortfall will have to be made up either by drawing down the 
uncommitted balance of the trust fund or tapping the General Fund.



    In 1996, Congress acted to make FAA a performance-based 
organization by giving the agency two powerful tools--personnel reform 
and acquisition reform. The expectation was that, being relieved from 
government personnel and procurement rules, FAA would operate more like 
a business--that is, services would be provided to users cost 
effectively and air traffic control modernization programs would be 
delivered approximately on time and within budget.
    Seven years later, we do not see sufficient progress toward 
achieving those outcomes. FAA's budget has grown from $8.2 billion in 
fiscal year 1996 to $14 billion in fiscal year 2004--an increase of 
$5.8 billion, or over 70 percent. About 33 percent of this increase was 
a result of higher airport funding, and about 15 percent was a result 
of increases in FAA's modernization budget, but the largest portion of 
this increase (52 percent) was attributable to FAA's operating budget. 
During this period, we have also seen large cost overruns and schedule 
slips in FAA's major acquisitions. Continued growth of that magnitude 
is unsustainable, given the multibillion-dollar declines in projected 
Aviation Trust Fund receipts, and greater dependence of FAA on the 
General Fund.

   FAA'S SPIRALING OPERATING COSTS ARE UNSUSTAINABLE AND NEED TO BE 
                         BROUGHT UNDER CONTROL

     FAA operating costs, which are primarily payroll, have 
increased 65 percent since personnel reform. Much of the increase has 
been as a result of workforce cost increases negotiated under FAA's 
personnel reform authority.
     Although linking pay and performance was a key tenet of 
personnel reform, only about 36 percent of FAA employees receive pay 
increases based on individual performance.
     FAA has not implemented a cost accounting system and labor 
distribution system for measuring the costs and productivity of its 
activities and workforce.
     FAA needs to take advantage of existing opportunities to 
reduce costs, such as consolidating flight service station operations 
which could save FAA $500 million over 7 years.

 FAA'S MAJOR ACQUISITIONS CONTINUE TO EXPERIENCE LARGE COST INCREASES, 
           EXTENDED SCHEDULE DELAYS, AND PERFORMANCE PROBLEMS

     Fourteen of 20 major acquisitions that we track have 
experienced substantial cost growth totaling more than $4.3 billion, 
which is more than an entire year's budget for FAA's modernization 
account.
     Thirteen of those 20 acquisitions have experienced 
schedule slips of up to 7 years.
     Many projects--both old and new--do not have reliable cost 
and schedule baselines. As a result, FAA cannot effectively plan, 
manage programs, or meet expectations for improving the safety and 
efficiency of the National Airspace System.
     Billion dollar cost growth with acquisitions is not 
sustainable given there are several multi-billion, complex projects 
just getting started. FAA must fund these projects while at the same 
time funding projects that have been delayed for several years.
    FAA needs to strengthen controls over programs that have been 
susceptible to fraud, waste, and abuse.
     FAA has not followed sound business practices for 
administering contracts. We found every stage of contract management, 
from contract award to closeout, was deficient, and lacked basic 
principles of sound contract administration.
     We found significant indications of abuse involving 
workers' compensation claims.
     At 5 airports sampled, we found approximately $40.9 
million in potential airport revenue diversions that were not detected 
by FAA's primary oversight methods.

   FAA'S SPIRALING OPERATING COSTS ARE UNSUSTAINABLE AND NEED TO BE 
                         BROUGHT UNDER CONTROL

    Although Congress envisioned that personnel reform would result in 
more cost-effective operations, this has not happened. To date, the 
most visible results of personnel reform are increased workforce costs. 
While labor/management relations with controllers (FAA's largest 
workforce) have improved, FAA's operating costs, which are primarily 
payroll, have increased by $3 billion, going from $4.6 billion in 
fiscal year 1996 to $7.6 billion in fiscal year 2004--an increase of 
over 65 percent.
    Much of that increase has been a result of salary increases 
negotiated under personnel reform. The new pay system for controllers 
was a significant cost driver. Between 1998 (when the new system was 
implemented) and 2003, the average base pay for controllers has 
increased 47 percent. This compares to an average salary increase for 
all other FAA employees during the same period of about 32 percent. 
Although linking pay and performance was a key tenet of personnel 
reform, only about 36 percent of FAA employees receive pay increases 
based on individual performance. The remainder of FAA employees 
receives largely automatic pay increases.
    We also found that FAA and the National Air Traffic Controllers 
Association (NATCA), FAA's largest union, have entered into hundreds of 
side bar agreements or memoranda of understanding (MOUs) outside the 
national collective bargaining agreement. These agreements cover a wide 
range of issues such as implementing new technology, changes in working 
conditions and(as a result of personnel reform(compensation, bonuses, 
and benefits.
    While many of the agreements we reviewed serve legitimate purposes, 
we found some that had significant cost and/or operational impacts on 
FAA. For example,
     As part of the controller pay system, FAA and NATCA 
entered into a national MOU providing controllers with an additional 
cost of living adjustment. As a result, at 111 locations, controllers 
receive between 1 and 10 percent in ``Controller Incentive Pay,'' which 
is in addition to government-wide locality pay. In fiscal year 2002, 
the total cost for this additional pay was about $27 million.
    We also reviewed a number of MOUs that provided controllers with 
salary increases that, in our opinion, were neither justified nor in 
the best interest of the government. For example:
     One MOU we reviewed allows controllers transferring to 
larger consolidated facilities to begin earning the higher salaries 
associated with their new positions substantially in advance of their 
transfer or taking on new duties. At one location, controllers received 
their full salary increases 1 year in advance of their transfer (in 
some cases going from an annual salary of around $54,000 to over 
$99,000). During that time, they remained in their old location, 
controlling the same air space, and performing the same duties.
    Some MOUs we reviewed provided large incentives to controllers for 
simply receiving training on new systems. For example:
     One MOU for a new software enhancement for controllers 
gave each controller a $500 cash award and a 24-hour time-off award for 
meeting certain training milestones on the new system. The MOU 
contained no distinction of awards for individual contributions other 
than coming to work and attending training. In fact, at two locations, 
11 controllers received the total $500 cash award and 16 controllers 
received the 24 hours of time-off even though they were on detail, on 
military leave, medically disqualified, or on workers' compensation.
    We estimate that at six facilities alone this MOU resulted in FAA 
incurring approximately $1.3 million in individual cash awards and 
62,500 hours in time off. If a similar agreement were to be reached for 
the next 14 sites scheduled to receive the new software, we estimate 
FAA could incur $53 million in additional overtime costs, over $3 
million in cash awards, and an additional 145,000 hours of time-off 
awards.
    We found controls over the MOU process were inadequate. For 
example, at the time of our review there was:
     No standard guidance for negotiating, implementing, or 
signing MOUs;
     Broad authority among managers to negotiate MOUs and 
commit the agency;
     No requirement for including labor relations specialists 
in negotiations;
     No requirement for estimating potential cost impacts prior 
to signing the agreement; and
     No system for tracking MOUs.
    Because of the significant control weaknesses, we briefed the FAA 
Administrator about our concerns in January 2003--two months after 
initiating this review. FAA has moved expeditiously to address this 
issue. For example, FAA is now in the process of identifying those MOUs 
that are problematic or costly and has begun correspondence with NATCA 
to reopen several agreements. FAA has also issued new procedures for 
MOUs, which include limiting approval authority and requiring that both 
the Human Resources and Budget divisions review proposed MOUs before 
they are signed by management. These are clearly steps in the right 
direction.
    Cost accounting and labor distribution systems. To effectively 
control costs, FAA needs accurate cost accounting and labor 
distribution systems. At the direction of Congress, FAA began 
developing its cost accounting system in 1996, which was estimated at 
that time to cost about $12 million and to be completed in October 
1998. Now, after nearly 7 years of development and over $38 million, 
FAA still does not have an adequate cost accounting system, and it 
expects to spend at least another $7 million to deploy the cost 
accounting system throughout FAA.
    Although FAA's cost accounting system is producing cost data for 
two of its lines of business, which, according to FAA, represent 80 
percent of the agency's costs, it still does not report actual costs 
for each facility location. For example, for the Terminal Service in 
fiscal year 2001, about $1.3 billion of $2.4 billion was reported in 
lump sum totals and not by individual facility locations. FAA cannot 
credibly claim to be a performance-based organization, nor can it 
function as one, until it has an effective cost accounting system.
    FAA also needs an accurate labor distribution system to track the 
costs and productivity of its workforces. For example, there has been 
much discussion as to what extent overtime costs are being driven by 
staffing levels, but those questions cannot be credibly answered until 
FAA has an accurate labor distribution system.
    Cru-X is the labor distribution system FAA chose to track hours 
worked by air traffic employees. As designed, Cru-X could have provided 
credible workforce data for addressing controller concerns about 
staffing shortages, related overtime expenditures, and how many 
controllers are needed and where. That information, in turn, is 
especially important, given projections of pending controller 
retirements.
    However, an agreement between FAA and the controllers' union has 
removed many of the internal control features of Cru-X including 
features that record the actual start and stop times worked by 
controllers. In fact, under provisions of the agreement, Cru-X would 
automatically sign controllers in and out of their work shifts even if 
they were not there. It also strips the system's ability to track the 
amount of time controllers spend actually controlling traffic and 
performing other collateral duties.
    Given the fiscal constraints facing FAA, the availability critical, 
reliable, and competent data to make informed decisions about the 
agency's basic day-to-day operations must be an imperative for FAA. FAA 
needs to redouble its efforts to have a fully functional cost 
accounting and labor distribution system in place and operating. We are 
encouraged by FAA's response to our June 3, 2003 assessment of its cost 
accounting system in which the agency agreed to have both its cost 
accounting and labor distribution systems in place and operating by 
September 30, 2004. FAA also agreed to make successful implementation 
of both systems a precondition to senior executives and program 
managers receiving annual bonuses.
    Other opportunities to save costs. There are also opportunities for 
FAA to save government funds while maintaining safety and system 
efficiency. For example, we estimated FAA could realize cost savings of 
nearly $500 million over 7 years without reducing safety or service by 
reducing the number of existing automated flight service stations by 
over half in conjunction with deployment of new flight service station 
software.
    We also identified that FAA could save over $57 million annually by 
expanding the contract tower program to 71 visual flight rule towers 
still operated by FAA. Clearly, these actions are controversial among 
certain groups; however, given the current fiscal issues facing FAA, 
the agency needs to objectively consider these and other cost saving 
measures from a business perspective.

 FAA'S MAJOR ACQUISITIONS CONTINUE TO EXPERIENCE LARGE COST INCREASES, 
           EXTENDED SCHEDULE DELAYS, AND PERFORMANCE PROBLEMS

    In terms of acquisition reform, FAA has made progress in reducing 
the time it takes to award contracts, but the agency has not held 
managers accountable or used the benefits of acquisition reform to 
control cost and schedule slips.
    We recently reported that 14 of 20 major acquisitions that we track 
have experienced substantial cost growth totaling more than $4.3 
billion (from $6.8 billion to $11.1 billion), which is more than an 
entire year's budget for FAA's modernization account.\2\ Also, 13 of 
the 20 acquisitions have experienced schedule slips ranging from 1 to 7 
years. In addition, many projects--both old and new--do not have 
reliable cost and schedule baselines.
---------------------------------------------------------------------------
    \2\ For additional details, see ``Status of FAA's Major 
Acquisitions'' (Report No. AV-2003-045, June 26, 2003).
---------------------------------------------------------------------------
    Problems with cost growth, schedule slips, and performance 
shortfalls have serious consequences--they result in costly interim 
systems, a reduction in units procured, postponed benefits (in terms of 
safety and efficiency), or ``crowding out'' other projects. For 
example, in fiscal year 2002 alone, FAA reprogrammed over $40 million 
from other modernization efforts (data link communications, oceanic 
modernization, and instrument landing systems) to pay for cost 
increases associated with the Standard Terminal Automation Replacement 
System (STARS)--new controller displays and related equipment for FAA 
terminal facilities. As a result, FAA is not getting as much as it can 
for its acquisition dollar.
    Multi-billion-dollar cost growth with major acquisitions is not 
sustainable or affordable. If FAA does not exercise more management 
control over its acquisitions, existing projects will be further 
delayed, and new projects may not start as planned. A key focus for FAA 
must be effective cost control for new projects that are just getting 
started that are high risk efforts because of their size, complexity, 
and level of software development work required such as the En Route 
Automation Modernization program. This a complex effort to replace all 
software and hardware for facilities that control high altitude traffic 
and is estimated to cost over $2.1 billion.
    FAA must take a number of steps to control costs of acquisitions 
and get as much as it can from each acquisition dollars. We recommended 
FAA update the cost, schedule, and performance baselines for many of 
its major acquisitions, including STARS and the Local Area Augmentation 
System (a new precision approach and landing system). Baselines for 
these and other major acquisitions are misleading because they do not 
adequately reflect the true cost, schedule, or performance parameters 
for the project. This process may require FAA to establish a new 
strategy for modernizing the National Airspace System that accelerates 
some projects and defers others. We also recommended FAA to develop--
and use--performance goals for assessing progress with its major 
acquisitions. This should involve holding staff and contractors 
accountable for keeping projects within cost and schedule.

     FAA NEEDS TO STRENGTHEN CONTROLS OVER PROGRAMS THAT HAVE BEEN 
                 SUSCEPTIBLE TO WASTE, FRAUD, AND ABUSE

    Contract oversight. Our work has also found that FAA has not 
followed sound business practices for administering contracts. We have 
consistently found a lack of basic contract administration at every 
stage of contract management, from contract award to contract closeout. 
For example, we found that government cost estimates were:
     Prepared by FAA engineers, then ignored;
     prepared using unreliable resource and cost data;
     prepared by the contractor (a direct conflict of 
interest); or
     not prepared at all.
    In our September 2000 report on the Technical Support Services 
Contract (with a potential cost of $875 million), we found that FAA did 
not control costs by developing reliable cost estimates for proposed 
projects. We found that in the majority of cases, FAA used the 
contractor's project cost estimate to set the project's budget. We also 
found that FAA did not evaluate contractor work performance, and nearly 
10 percent of the contract personnel reviewed did not meet contract 
standards for education and experience.
    In November 2002, we found that contract oversight of the National 
Airspace System Implementation Support Contract (NISC) was seriously 
inadequate. We concluded that of the 46 active task orders having 
obligated funds totaling $97 million, approximately $10 million (10 
percent) were in excess of the required amount to fully fund the task 
order deliverables. As a result, FAA reprogrammed $5 million from NISC 
to meet other agency priorities, and rebaselined NISC task orders to 
make better use of the remaining funds.
    In our May 2002 report on the oversight of cost reimbursable 
contracts, we found that contracting officers exercised little 
effective oversight, and in most cases, lacked the basic information 
needed to properly manage, pay, and close contracts. We found every 
stage of contract management was deficient, lacked accountability, and 
did not adequately protect FAA from waste, fraud, and abuse. For 
example:
     For the 54 cost reimbursable contracts totaling $3.6 
billion that we selected, FAA searched for 6 months and could not 
locate all or significant parts of 22 contract files totaling $274 
million.
     For 19 of the 32 contract files FAA found, totaling $585 
million, FAA did not have the required evidence showing the 
contractor's accounting system was adequate for cost reimbursable 
contracts.
     For 22 of the 32 contracts, totaling $2 billion, FAA did 
not obtain incurred cost audits as required. One contract for system 
engineering and integration work on the National Airspace System Plan 
had not received annual audits on the $1.1 billion of costs incurred 
for over 12 years.
    To protect the government's interests, FAA needs to hold managers 
accountable and adhere to the basic principles of contract oversight 
and administration. FAA also needs to make greater use of Defense 
Contract Audit Agency audits and institute cost control mechanisms for 
software intensive contracts. In addition, FAA needs to (1) develop 
independent cost estimates for proposed projects that allow FAA to 
better analyze a contractor's proposed work plan to ensure that costs 
are fair and reasonable, and (2) institute greater controls over 
evaluating education and experience qualifications of proposed 
contractor personnel.

 FAA HAS STATED THAT IT WILL TAKE ACTIONS TO ADDRESS THESE CONTRACTOR 
           OVERSIGHT CONCERNS--THE KEY NOW IS FOLLOW THROUGH

    Workers' compensation. Our review of the workers' compensation 
program within FAA's Air Traffic Services division found indications of 
potential fraud and/or abuse involving stress related traumatic injury 
claims. At several locations, we found stress related claims were being 
filed by controllers who were simply present when another controller 
was involved in an operational error (when controllers fail to maintain 
minimum separation requirements between aircraft) and did not 
experience the error themselves. Further, we found many of the stress 
related injury claimants were repeatedly diagnosed by the same doctors. 
At one facility, we found that virtually 100 percent of stress-related 
injury claimants went to the same two psychologists. These doctors, who 
distributed their cards at the facility, performed the same tests on 
each controller, completed a form letter on the individual, and 
specified the necessary time for recuperation. For these services, the 
doctors received payments from the government of up to $500 per claim.
    We have also found cases of fraud involving long-term claimants. 
For example, we investigated one case of an FAA employee who received 
over $397,000 in workers' compensation claims over a 5-year period 
after allegedly falling out of a chair and injuring his back. While 
receiving those benefits, the individual obtained a pilot's license and 
was employed as a pilot at various organizations. FAA is currently 
considering administrative action against the individual pending 
resolution of this criminal case.
    There are also government-wide improvements that can be made to the 
Workers' Compensation Program. One issue we previously identified is 
the number of claimants who continue to receive workers' compensation 
benefits long after they are eligible to receive retirement benefits. 
For example, in 2001 for FAA alone, there were nearly 1,500 claimants 
over the age of 60 who were still receiving workers' compensation 
benefits. In fact, there were 218 claimants still receiving workers' 
compensation benefits who were 80 years old or older. Converting 
claimants from workers' compensation benefits to retirement benefits 
after they reach retirement age could result in significant savings 
government-wide. However, changes of this magnitude would clearly 
require legislative actions.
    Airport revenue diversions. The Airport and Airways Improvement Act 
of 1982 requires that all airports receiving Federal assistance to use 
revenues generated at the airport for the capital or operating costs of 
the airport. Any other use of the airport's revenue is considered a 
revenue diversion. Examples of common revenue diversions include local 
governments (1) charging the airport for property or services that were 
not provided, or (2) renting airport property at less than fair market 
value.
    At a sample of five airport sponsors reviewed, we found 
approximately $40.9 million in potential revenue diversions that were 
not detected by FAA's primary oversight methods. These amounts were not 
detected because independent auditors of airport sponsors were not 
sufficiently aware of relevant Office of Management and Budget guidance 
on auditing airport revenue, and airport sponsors were not adhering to 
FAA requirements for airport financial reports.
    Since we completed our fieldwork, the American Institute of 
Certified Public Accountants (AICPA) and FAA have taken steps to better 
inform independent auditors about requirements for reviewing airport 
revenue use during single audits. In our opinion, the actions taken by 
the AICPA and FAA, when fully implemented, should improve FAA's ability 
to detect and prevent airport revenue diversions. However, to ensure 
that revenue diversions that occurred are resolved, FAA needs to verify 
the status of the $40.9 million in potential revenue diversions that we 
identified and seek recoveries as necessary.

                        MARITIME ADMINISTRATION

    Title XI of the Merchant Marine Act of 1936, as amended, 
established the Federal Ship Financing Guarantee Program to assist 
private companies to obtain financing for the construction of ships or 
to modernize U.S. shipyards. This program authorizes the Federal 
Government to guarantee full payment to the lender of the unpaid 
principal and interest of a commercial debt obligation, with the 
government holding a mortgage on the equipment or facilities financed.
 marad needs to strengthen financial oversight of borrowers and assets
     Our recent work found that all phases of the Title XI loan 
process need improvement.
     In the last 5 years, nine defaults totaling $490 million 
have occurred. One bankruptcy affected over one-quarter of MARAD's loan 
portfolio value.
     In approving applications, MARAD agreed to waivers and 
modifications to program financial requirements without adequate 
compensating provisions to reflect the increased risk to the 
government.
     MARAD lacked a formal process to continually monitor the 
financial condition of borrowers and did not systematically monitor the 
physical condition of guaranteed assets or ensure the maximum 
recoveries from foreclosed assets.
    Between fiscal years 1985 and 1987, 129 defaults occurred in the 
Title XI Program, and MARAD paid out approximately $2 billion in 
guarantees. These defaults were attributed to a downturn in the 
economic conditions in two key industries--oil and agricultural 
products. The Federal Credit Reform Act of 1990\3\ was established, in 
part, to measure more accurately the costs of Federal credit programs. 
In the 5 years following implementation of this Act (fiscal years 1993 
through 1997), only three loans defaulted, totaling approximately $12 
million.
---------------------------------------------------------------------------
    \3\ Public Law 101-508
---------------------------------------------------------------------------
    In recent years, however, the program has experienced an increase 
in loan defaults and in the number of firms with loan guarantees filing 
for bankruptcy protection. In the last 5 years, nine loans have 
defaulted, totaling approximately $490 million, six of which have 
occurred since December 2001. The bankruptcy of one firm significantly 
affected the program, although it does not threaten the program's 
immediate solvency. That firm's bankruptcy affected over one quarter 
($1.3 billion out of $4.9 billion at the time of default) of the value 
of MARAD's Title XI loan guarantee portfolio.
    MARAD needs to improve administration and oversight in all phases 
of the Title XI loan process. During a recent audit, we identified a 
number of areas where MARAD could improve its program practices, limit 
the risk of default, and reduce losses to the government. Specifically, 
we recommended that MARAD:
     Perform a rigorous analysis of the risks from modifying 
any loan approval criteria and impose compensating provisions on the 
loan guarantee to mitigate those risks;
     Formally establish an external review process as a check 
on MARAD's internal loan application review and as assistance in 
crafting loan conditions and covenants;
     Establish a formal process to continuously monitor the 
financial condition of borrowers, including requirements for financial 
reporting over the term of the guarantee as a condition of loan 
approval;
     Establish a formal process to continuously monitor the 
physical condition of guaranteed assets over the term of the loan 
guarantee; and
     Develop an improved process to monitor the physical 
condition of foreclosed assets and to recover the maximum amount of 
funds from their disposal.
    MARAD concurred with our recommendations and is designing 
additional policies and procedures to strengthen its financial 
oversight practices. One area where MARAD could reduce costs is 
collecting fees from applicants that fully recover the costs of 
obtaining an independent analysis of the applications, as we 
recommended. These analyses would supplement MARAD's in-house reviews 
and provide valuable third-party expertise and assistance in devising 
loan packages that reduce the default and loss risks to the government.

                                 AMTRAK

    We are including a brief discussion of Amtrak because even Federal 
funding levels of $1 billion a year are not going to solve the 
fundamental problem: the current Amtrak model is broken. The problem 
extends beyond funding to questions of who makes the decisions about 
and who controls the provision of service, including commuter services. 
The status quo pleases no one; it will require significant increases in 
funding just to maintain it; and it will not meet the mobility needs of 
this country in the years ahead.
    Although Amtrak has received about $1 billion in annual Federal 
assistance during the past 6 years, the general state of Amtrak's 
infrastructure and rolling stock continue to deteriorate. Amtrak's 
deferred capital investment is estimated at about $6 billion and its 
annual cash operating losses are expected to range between $700 million 
and $800 million over the next 5 years. Amtrak has requested $1.8 
billion for fiscal year 2004 to begin to address the capital backlog 
and to cover its large cash operating losses. The administration has 
requested $900 million for Amtrak for fiscal year 2004.

    CONGRESS AND THE ADMINISTRATION NEED TO CONSIDER NEW MODELS FOR 
      PASSENGER RAIL-FOCUSED ON SHIFTING MORE DECISIONS TO STATES

     The current model is broken: the system is under-funded 
and perpetually faces collapse.
     Cash losses have increased considerably in the last 2 
years and are expected to exceed $700 million this year.
     The investment backlog is approaching $6 billion.
     The vast majority of routes lose money--in some cases $500 
per passenger.
    Over the last year, Amtrak's president and the Department have 
worked diligently to improve cost control and achieve expense savings, 
and to bring more order to Amtrak's accounting and financial 
statements. These efforts need to continue. In addition, the Department 
has been given more authority to oversee and control Amtrak's adherence 
to its budget, ensuring that it operates within the Federal funding 
provided.
    Despite multiple efforts over the years to change Amtrak's goals, 
its structure, and its funding, the result always seems to be a status 
quo that is the product of seemingly inevitable budgetary compromises. 
These compromises over the years have produced a system that limps 
along, never in a state of good repair, and perpetually one, two, or 
three steps from the edge of collapse. These dire straits have been 
repeated time and again over Amtrak's history. In the end, Amtrak has 
been tasked to be all things to all people, but insufficiently funded 
to be fully anything to anyone.
    It is a system with a backlog of investment and maintenance needs 
that has reached at least $6 billion. Finally, this is a system that, 
except for a handful of routes, continues to suffer operating losses on 
all services offered. In fact, the fully allocated losses on some 
trains (including depreciation and interest) can exceed $500 per 
passenger. For the company as a whole, annual cash operating losses 
have averaged $600 million for the last 6 years and are estimated to 
range between $700 million and $800 million over the next 5 years.

  FIGURE III.--GROWTH IN AMTRAK'S OPERATING AND CASH LOSSES, 1997-2002



    Clearly, one option is to end the Federal role in intercity 
passenger rail services and leave all service decisions and 100 percent 
of the funding to the States. While this approach may seem appealing 
from a Federal budgetary standpoint, especially with large deficits 
looming, it would not address the mobility needs of certain congested 
regions of the country and the benefits that passenger rail may 
provide. Although these problems exist on local and regional levels, 
there is a national economic interest in assisting mobility that is the 
foundation for the Department's transit, highway, and aviation 
programs.
    Another option is to reduce the demand on Federal funds by 
eliminating all long-distance trains. Although this might eventually 
save $300 million or more (after labor protection and other shut-down 
costs are amortized), it does not come close to solving the $2 billion 
funding dilemma. Furthermore, in the past, the long-distance trains 
have been the political glue that has held together support for 
intercity passenger rail and Amtrak. Eliminating these trains, without 
a clear plan to improve mobility through a restructured Federal 
program, would likely lead to a continuation of a status quo, ``limp 
along'' Amtrak.
    A better option for the future of intercity passenger rail service 
lies in improving mobility in short-distance corridors around the 
country (not just in the Northeast Corridor) and in restructuring long-
distance services to complement these corridor services. It is in 
short-distance corridors that the Federal Government and the States 
should focus their investments to increase speeds, increase frequency, 
and improve the quality of the services offered. For the $2 billion 
that would need to be spent on a steady-State Amtrak system, 
significantly better service to a greater number of passengers is 
possible through a refocused Federal program that gives the States more 
control and authority.
    For the successful development of higher speed/higher frequency, 
short-distance corridors, there must be a new relationship established 
between the Federal Government and the States. An option is a 
transition to a Federal passenger rail program that is modeled more on 
the current transit program. This transition would likely require a 
number of years for institutional arrangements to be developed among 
the States (such as multi-state compacts) and for funding arrangements 
to be completed.
    This approach would involve Federal capital grants to the States 
for investment in short-distance corridors where States would have a 
more defined and consistent role in determining what services are 
provided and by whom. The States might choose to contract with Amtrak 
to operate these services or seek bids from alternative operators. 
States would also decide on the service attributes such as speed, 
frequency, and quality.
    With control comes funding responsibilities, and the States should 
be expected to provide capital funds to match in some proportion the 
Federal grants. Ultimately, these corridors should be self-sufficient 
from an operating (not necessarily capital) standpoint, either through 
farebox collections or through State and local subsidies. Currently, 
States provide about $138 million in operating support to Amtrak for 
corridor trains and provide capital funds on a project-by-project 
basis.

    Chairman Nussle. And I thank all of you for your testimony 
today. It is like drinking out of a fire hydrant. So I am sure 
we could go in a number of different areas.
    Let me ask, generally speaking, because it has been my 
frustration, and I know it is shared by a number of members, 
that some of the items that you have all mentioned have not 
been--have just not really received the attention that they 
deserve from Congress in a partnership sort of way.
    All of you mentioned that you are interested in helping us 
help you do the job to eliminate fraud within your departments, 
and waste, and other concerns. So I guess my first question is: 
How do you do your work? And particularly, how do you interact 
with Congress? We just had a Medicare bill. I would like to 
know, did we put any of your recommendations into that bill?
    We passed a farm bill. Were any of your recommendations in 
the farm bill? You know, we are--and higher Ed coming up this 
year. Are you talking--is the committee talking to you? Is 
anyone listening to your ideas?
    We have a transportation bill. Each one of you has a 
vehicle that is either already passed or is about to pass. And 
what interaction is Congress--what hearing are you getting from 
Congress in putting any or all of your recommendations into 
these bills?
    Since we just finished Medicare, let's start on one side 
and work down. If you would, just tell us how we are working 
with you to get this job under control.
    Ms. Corrigan. Well, let me answer it this way. I have been 
in the office for 5 weeks. I say that because I don't want to 
answer a question that I don't really know the answer to. But I 
will say that the office has been certainly working very 
closely with Congress on a number of issues, including nursing 
home issues.
    On the Medicare proposals, I know that certainly reports 
were provided, but I don't know the specifics of how the 
relationship worked. But I can get back to you, because I think 
it is an important relationship, and we would like to have 
input.
    Chairman Nussle. While I have you, what is the fee-for-
service error rate? You mentioned that there was an error rate, 
but you didn't mention what it was.
    Ms. Corrigan. This year--last year, in 2002, it was 6.3, I 
believe. Yes. It was 6.3 percent. It started out about 7 years 
ago in 1996, at 13.8 percent. It has gone down to 6.3 percent.
    Chairman Nussle. OK. Ms. Fong.
    Ms. Fong. I have been at USDA IG for 6 months. My 
understanding is that last year there was a significant piece 
of legislation that went through on the Department of 
Agriculture reauthorization, the farm bill, and that our office 
did work extensively with the oversight committees on a number 
of provisions, especially those dealing with animal welfare, 
which is another one of our major responsibilities.
    In terms of what is coming up this year, I believe the food 
stamp reauthorization is up. And Mr. Gutknecht I see is here 
today. He will be having a hearing later this month, and we 
will be testifying and providing our insights on that program, 
as well as the Under Secretary.
    Chairman Nussle. Thank you. Mr. Higgins.
    Mr. Higgins. We have had a working relationship with the 
Congress and also with the Department as far as the 
reauthorizations in the past go, and we assume that we will 
have the same relationship with the upcoming reauthorization.
    Do we get everything we want? No. We do fight for what we 
think are the more important issues. And it could be improved 
probably on all sides--more give and take perhaps.
    Chairman Nussle. Mr. Mead.
    Mr. Mead. I feel that at both the appropriation level and 
the authorizing committee level, Congress has been very 
responsive to our work. I have been an IG at Transportation for 
about 6 years now. We testify frequently before those 
committees.
    I gave one example in my testimony of FAA's cost accounting 
system, where Congress has directed FAA repeatedly to build a 
cost accounting system, because with a $14 billion annual 
budget. They have got to know what your costs are. Although 
FAA's cost accounting system is still not in place, FAA comes 
up to the Hill, gets more money, but suffers no consequences.
    So I think Congress can do a better job of holding the 
agencies accountable. By that I mean the authorizing committees 
and the appropriation committees.
    The other one, with all respect, like on Amtrak, every year 
we go through this--I don't know what the proper language for 
it is--but it is a tortuous path where we end up with a status 
quo that nobody likes, that is unacceptable, and Congress is 
probably the only one that can come to grips and closure on it. 
Otherwise, we are going to continue to limp along.
    And finally, both authorizing and appropriation committees, 
I think, could keep the pressure on the States to have more 
vigorous fraud enforcement efforts.
    Chairman Nussle. Mr. Mead mentioned that 1 percent was not 
unreasonable as far as being able to identify waste, fraud, and 
abuse within the Department of Transportation. Let me just ask 
the other three whether or not a 1 percent waste, fraud, and 
abuse target would be unreasonable within your departments.
    Mr. Higgins. The 1 percent target for the Department would 
be about $250 million, is that right?
    Chairman Nussle. I am not--right offhand I can't tell you 
that.
    Mr. Higgins. The Department's own figures are that they 
estimate that there are $401 million a year made in erroneous 
payments. My office thinks that figure is a little 
conservative.
    Chairman Nussle. So 1 percent would not be unreasonable?
    Mr. Higgins. I don't know what the 1 percent is but if----
    Chairman Nussle. I realize it sounds like a silly question. 
I know that you are, just by the way you are answering it, you 
think it sounds like that, but trust me this is not a silly 
question. We just had this debate. So let me ask from the 
Department of Agriculture is 1 percent an unreasonable figure?
    Ms. Fong. Let me respond on a couple of levels. I agree 
with you there is waste, fraud, and abuse in the USDA programs. 
I think all of us recognize that much more can be done to 
tighten up how the Department delivers its programs. The issue 
that we have at USDA is that right now we don't have a good 
handle on exactly the level of improper payments or waste in 
many of the programs, which is why the Improper Payments Act 
that you passed last year is such a critical tool for all of 
us. What it will do is it will require the Department and its 
agencies to analyze its programs, figure out where the 
vulnerabilities are and how many payments are, in fact, 
improper or erroneous and then to take some corrective action 
to stop those payments or to recoup them. And in our view, that 
is where we need as an IG office to focus our efforts, to 
encourage the Department to help them do that so that we do 
have a handle on how much fraud, waste, and abuse we are 
dealing with.
    Chairman Nussle. In the interest of time, I will yield to 
Mr. Spratt for his questions.
    Mr. Spratt. Ms. Corrigan, and all of you, thank you for 
your testimony. It has been very useful. When you mentioned a 
minute ago that the amount of overpayments or error payments 
had been reduced from 23 percent to about 6.3 percent over the 
last 5 or 6 years, does that number include improper and 
inadequately documented claims which when resupported qualify 
for payment? In other words, does it include negligent 
submissions as well as fraud and abuse?
    Ms. Corrigan. Yes.
    Mr. Spratt. What percentage is true fraud and true abuse as 
opposed to lack of properly supported or improper payment?
    Ms. Corrigan. Let me step back and answer the first part of 
your question perhaps. Because I think that much of the error 
rate in recent years has been improper documentation. The 
Office of the Inspector General got very good at getting 
documentation in determining whether or not the claim was 
properly paid. So I don't think that now much of it is improper 
documentation, but a lot of it is errors and improper payments 
that wouldn't be considered abuse.
    As far as fraud, I think it is even more difficult because 
fraud has to be adjudicated by a court. And it is very 
difficult to determine whether somebody knowingly submitted a 
claim when you are doing a medical review, which is essentially 
what we are doing in the error rate testing program. I think 
what you can say is that every part of the error rate in the 
past has been those claims that have been improperly paid for 
all sorts of reasons. But it isn't broken down quite in the way 
that you are suggesting.
    Mr. Spratt. You mentioned that the government, Medicare, 
Medicaid manifestly are paying too much for prescription drugs 
within the scope of coverage now provided. And you gave as one 
measure of that the Veterans Administration's price payment 
list, which is substantially below Medicare. Have any 
recommendations been made by the IG that the CMS or before that 
HCFA go to the same method of procuring drugs as the Veterans 
Administration?
    Ms. Corrigan. My understanding is that the Office of the 
Inspector General has never made a particular recommendation 
about drugs. But what it has said is that for the policy makers 
who are thinking about this, look at the Federal supply 
schedule. Now the VA procures drugs differently. Medicare 
doesn't procure drugs directly, so it may need to pay more than 
the Federal supply schedule. But it should at least be 
considered as part of the policy makers' thinking because it is 
so much less than Medicare is paying. There has to be some cost 
savings that Medicare could benefit from looking at those 
prices.
    Mr. Spratt. Let me ask you if we were to pass a law which 
says that HHS, CMS, shall not engage or interfere in any price 
negotiations for drugs procured by the government, do you think 
that would help your efforts to produce savings?
    Ms. Corrigan. Thinking about your question myself, 
negotiations would have to result in savings because the cost 
would be less. But my guess is that you would have a lot of 
opposition on the other side because of the way that Medicare 
pays for drugs. It is not like a wholesaler like the VA, so 
there would be some legitimate complaint about the lowering of 
the cost or the fixing of the cost at that rate.
    Mr. Spratt. What about CRADAs, have you looked at 
cooperative research and development agreements, particularly 
with pharmaceutical firms? One frequently offered example is 
Taxol, which NIH developed, at least initially investing $484 
million, a pharmaceutical firm took over the perfection of the 
drug and then has sold it to the tune of about $9 billion total 
sales and our royalty payments only total $35 million. Has HHS 
taken a look at whether or not these are good deals for the 
government?
    Ms. Corrigan. I am not sure whether we have. I am certainly 
willing--I think it is something we could look at.
    Mr. Spratt. OK. Thank you. One final question to the 
Department of Education, it would apply to all of you, let me 
ask of you would it help and do you think it would more than 
pay for itself if we provide you with more staff, more full 
time equivalents?
    Mr. Higgins. Definitely.
    Mr. Spratt. Is that the case in HHS and HIPAA, we provided 
additional funds for oversight and for inspector generals in 
particular, and you cut your error rate to--your overpayment 
rate, missed payment rate from 13.8 percent to 6.3 percent.
    Ms. Corrigan. I think that funding was critical.
    Mr. Spratt. Finally Department of Education, let's just 
take as an example, looking through your testimony it seems to 
me that you are claiming that the IG has filed a total of $334 
million in disallowed costs and recoveries from criminal 
investigations in the student loan programs over the last 
couple of years, over the last 5\1/2\ years. If we ask you to 
increase that so that we could get $2.5 billion of savings, 
increase it by a factor of four, do you think it could be done? 
Can we squeeze out that much waste, fraud and abuse in the DOE 
programs?
    Mr. Higgins. I don't really have any data to answer that 
question, to be honest about it. But the $334 million includes 
supported--sustained question and disallowed costs of $182 
million, and $152 million was the result of criminal 
activities.
    Mr. Spratt. OK. Thank you very much.
    Chairman Nussle. Mr. Thornberry. Mr. Ryun. Mr. Schrock.
    Mr. Schrock. Thank you, Mr. Chairman. Thank you for having 
this hearing today and thank you all for testifying. I think 
this is something the Budget Committee has talked about for a 
while, cutting 1 percent, I can't imagine why we can't. It 
sounds like the Department of Education might be a candidate 
for 2 percent if we really want to be good citizens based on 
the figure you gave us, but I don't think that is going to 
happen. I know in my own account if we have to cut back we need 
to. Frankly, I would love to cut 10 percent of my personal 
budget. I say that personally. I say that especially because my 
wife is here, but I don't think it is going to happen. But it 
would be nice if we could do that at the government level.
    I am really concerned, General Mead, you said that why 
can't we--why can't efficiency be increased 1 percent. I think 
it can. Obviously you are trying to get your hands around that. 
Is there a program in place to do that? Each of these agencies 
is so big I don't know how you get your hands around this to do 
that. But I would be curious to know. The Big Dig in Boston, of 
course we are building Big Dig part 2 across the street here. 
You can see what that is going to cost. So at some point that 
has got to happen. How do you all do that in your agency?
    Mr. Mead. Well----
    Mr. Schrock. Answer too about the fuel tax fraud. That 
really interests me. I don't understand that.
    Mr. Mead. During my time there as IG I haven't seen a real 
effort to save money until the budget crunch that started last 
year. One of the reasons why, as mentioned in my testimony is 
that Congress passed a law requiring that virtually all of the 
trust fund money that came in be spent. And when that is done 
there is less incentive to cut your costs. And I know both the 
aviation and the highway programs are up for reauthorization. I 
think now that there is a budget crunch, behooves not only the 
Office of the Secretary, but each of the operating 
administrations to come up with a cost cutting plan in a way to 
secure efficiencies. Congress should insist on the submission 
of a plan like that to the appropriation committees, the 
authorizing committees, and the Inspector Generals, at least 
while we are going through this period of tight revenues.
    Regarding fuel tax fraud, we used to prosecute a large 
number of cases and where people just wouldn't be paying the 
fuel tax. Congress plugged those holes, but we are now 
concerned that there are two other big holes. One is aviation 
fuel, which is very similar to the fuel used in trucks. You pay 
the tax for truck fuel at the rack--that is, before it is 
distributed to retail outlets. That same fuel, though, when 
destined for an airplane isn't paid at the rack. It is paid on 
delivery to the aviation facility. So you can say, well, I am 
taking this fuel for aviation purposes and instead divert it to 
trucking without paying tax. Pay taxes in a State with a low 
fuel tax, then sell it in a State with a higher fuel tax, 
pocketing the difference.
    Another hole is: each State has its own State tax on fuel, 
some States are fairly low, other States are higher. Well, you 
say the gasoline is destined for a State with low tax, and then 
you take that gasoline and you go over to a high tax State, and 
you save a large amount of money.
    We will need the help of the Internal Revenue Service to 
get to the bottom of the two holes I just described. But it is 
estimated that fuel tax evasion cost us over $1 billion a year. 
However, we will need the Congress' help to secure the 
commitment of the Internal Revenue Service to increase 
enforcement efforts.
    Mr. Schrock. One more quick question. You talked about why 
don't projects have a finance plan. I would think they did. I 
hate to keep picking on the Big Dig. I saw it recently. I was 
amazed by it. If there was an amount certain that they were 
going to use by, and it has increased by billions and billions 
and billions of dollars, 14,000 change orders, did they have to 
get approval from you to do that or is it a cost plus type 
thing or what? Help me understand that.
    Mr. Mead. No. Certainly they don't need approval from the 
Inspector General. The Federal Highway Administration approves 
change orders and so forth. Under the law, only one highway 
project in the United States is capped by law in terms of how 
much Federal money will go to it. And that was when Congress 
got fed up at the price increases at the Central Artery and 
said no more Federal money to the Central Artery beyond a 
certain amount. It was a fairly severe remedy, but I can tell 
you this, it has slowed the cost growth at the Central Artery. 
Once Congress acted, I saw the brakes go on to cost increases.
    Mr. Schrock. Maybe that is an answer, something we ought to 
look into. Thank you, Mr. Chairman.
    Chairman Nussle. Ms. Majette.
    Ms. Majette. Thank you, Mr. Chairman. I have a question or 
a couple of questions for Inspector General Fong. I understand 
from your testimony that you said that more people were being 
certified for free and reduced lunches than were identified by 
the Census as being counted. Or eligible, is that--did I say 
that correctly?
    Ms. Fong. Yes.
    Ms. Majette. Well, my question is: isn't it possible that 
those people are eligible but they just weren't counted in the 
Census so it is not necessarily a matter of fraud or abuse; it 
may be just a function of the undercount that took place in the 
Census? I believe you said that one of the places you talked 
about was New York, which had 69 percent variation. And as I 
recall there was a significant outcry in New York that there 
was a significant undercount with respect to the Census. So can 
you address for me those discrepancies and if there is a way 
that you can actually say or would be able to determine how 
much of that is fraud, waste, and abuse and how much it was 
just a function of our inability to determine who actually 
should receive those benefits?
    Ms. Fong. You are absolutely right. This is a very complex 
area in terms of determining eligibility for these programs and 
how we really nail down what the error rates are. As I 
mentioned, the Census indicated that perhaps 27 percent of the 
people receiving these benefits were not eligible and FNS 
itself acknowledges that. Our IG work indicated that there may 
be error rates ranging from 19 to 69 percent. These error rates 
are based on sampling and they are based on the fact that the 
responses to the income verification instruments may or may not 
have been received. So in fact these rates include, could 
include people who are truly not eligible as well as people who 
just did not respond to the verification questionnaires.
    For example, if you have a child in public school--I am a 
parent, I have this--and they send home the questionnaires for 
you to certify, and you decide for whatever reason that you 
don't want to fill it out or that you don't believe it is 
important to fill out because in some districts meals are 
provided regardless of whether you fill it out, that raises 
issues as to exactly what we are dealing with. FNS understands 
that this is a complex issue. They have instituted a number of 
pilot projects right now going on in 22 States to try to get a 
good measurement of the accuracy rate here. And they will be 
completing these pilots within this school year. And then we 
should have a much better sense of exactly what we are dealing 
with.
    Ms. Majette. To follow up on that as a more general 
question, do you have any estimates of what the cost of 
recovery is? Is it going to be a matter of we are spending $6 
million to recover $4 million, or $7 million to recover $2 
million? In other words, I guess how much more is it going to 
cost than what we are already spending in terms of staff and 
all of those things? How much more is it going to cost to 
determine what amounts are being paid fraudulently and what is 
it going to cost to stop or to stem those alleged abuses?
    Ms. Fong. That is one of the issues that makes this whole 
area very complex. I know that FNS's pilots are looking at a 
number of ways to verify eligibility, ranging from accepting 
certifications for other programs as an indication that you are 
eligible; for example, if you are eligible for food stamps, 
therefore you are eligible for school lunch. They are looking 
at another option which would actually require 100 percent 
verification and they are looking at a full range of options. 
It is going to have to be a cost-benefit analysis. I think at 
that point without having the results of the pilots and without 
knowing the amount of money that will be spent on these pilots 
to actually implement verification, it is probably premature 
for to us say at what point do we reach the optimum ratio of 
cost and benefit. But that is definitely one of the issues.
    Ms. Majette. Wouldn't you agree that is something that 
would need to be determined before we start cutting funding in 
these different areas?
    Ms. Fong. I agree that that is an issue that should be 
looked at. My sense is that FNS could probably give you a 
better read on exactly what their experience with it is at that 
point.
    Ms. Majette. What is the plan for looking at it? Is there 
one?
    Ms. Fong. The pilots are due to be completed this school 
year. The data should all be in very shortly and then the 
analysis will start. They will do their analysis. We should 
have some idea of where they are going I think shortly.
    Ms. Majette. I see that my time is up.
    Chairman Nussle. Thank you. Mr. Hastings.
    Mr. Hastings. Thank you, Mr. Chairman, for having this 
hearing. Thank all of you for testifying. I will just say at 
the outset if there is one thing that I think every American 
understands is that there could be efficiencies made in our 
Federal Government. Of course that generally always translates 
to saving dollars.
    I want to ask Ms. Corrigan, if I may, on your testimony 
which I thought very helpful with what had been uncovered in 
the past, nevertheless, the most recent report shows that there 
is about over 13 billion, I think $13.3 billion, in improper 
payments this year, which is over a billion more than last 
year. This thing seems to be getting worse. My question to you 
is there something more that maybe the executive branch ought 
to be doing? If so, what should they be doing? And probably 
more important, since we are right now debating having 
conference now on the Medicare reform bill with prescription 
drugs and you identified prescription drugs as some of the 
areas where there is some abuse, are there some things that we 
should be focusing on specifically to address the issue today?
    Ms. Corrigan. Well, I am hopeful that the data that comes 
out this year on the error rate will be more useful only if it 
shows more problems. I mean, I think it is very easy to 
criticize CMS because it is so large, but they are at least 
taking the step of focusing on themselves and saying, OK, we 
are going to look at everything in depth. We are going to look 
at every fee for service payment that we make, whether it is 
the hospital providers; we will look at our own contractors; we 
will look at every service that is provided. My guess is that 
some of those rates are going to be really high. What I think 
they are going to have to do is then take the next steps to fix 
the really high rates. I think they are on the path. But what I 
think needs to be done in the future is to perhaps focus on 
pricing. I mean, pricing hasn't really been focused on very 
much and it can't be done by the Department. And until there is 
some way to rationally pay for some of these services, I think 
you are going to have both problems where some services are--
some doctors are not being paid enough for certain services and 
vice versa.
    On prescription drugs and durable medical equipment, the 
prices are off the roof. Until there is some real debate, 
whether it is in Congress or in the executive branch, about how 
to somehow control what we are paying, there is no way that a 
lot of these problems are going to continue to exist. And 
people will come in and try and take some of that money. Where 
there are big pots of money it is known that people will try 
and take pieces of them. So I think what we have to keep doing 
is looking at where the big pots are, where the areas are that 
can be exploited.
    Look at outlier payments of last year. It was all over the 
news. Outlier payments were intended to be made to really 
egregious cases; but, instead, the money is being moved around 
in ways that were never intended by Congress. And I think there 
has to be vigilance to close loopholes that people find. That 
would be my suggestion.
    Mr. Hastings. Let me follow up because the chairman made an 
observation because there was a great deal of debate in this 
committee and on the floor about our suggestion that there 
ought to be 1 percent waste, fraud, and abuse, at least what I 
have heard from several of you that there is probably some room 
within each of your budgets to go after that. My question, to 
me the pertinent question is this: What if the Congress were to 
say you are directed to find 1 percent waste, fraud, and abuse, 
would this be a means by which to kick off maybe some of the 
things that you are talking about to look at? And invite 
everybody else to look at this. In other words, if you were 
forced to make a decision could that decision be made more 
aggressively to try to find that 1 percent that we are trying 
to identify? I would ask all of you if you could just briefly 
in a short period of time address that.
    Ms. Corrigan. I actually think that 1 percent is probably 
too much, but it is also very arbitrary. You would be forcing 
CMS, not us, to somehow reduce the error rate to 1 percent.
    Mr. Hastings. Not necessarily reducing but trying to find, 
acknowledge that there is at least that much there.
    Ms. Corrigan. CMS I think has acknowledged that already.
    Mr. Hastings. Excuse me because my time is clicking down 
very quickly. It seems to me the next logical step would be, 
OK, we will force you, we will mandate to you from the Congress 
as policy that you find it. What is wrong with that? Again if 
could you, Mr. Chairman, indulge me.
    Mr. Mead. I think the answer to your question is that would 
go a long way toward making it work. I think that performance 
measures like that are good.
    Mr. Higgins. The Department of Education has already 
identified $336 million of overpayments made, and we need the 
Congress to enact the legislation so we can verify the income 
with the IRS. So enacting that legislation would save you more 
than 1 percent in student aid programs.
    Mr. Hastings. Mr. Chairman, thank you.
    Chairman Nussle. Thank you. Mr. Moran.
    Mr. Moran. Thank you, Mr. Chairman. Let me start, Mr. Mead. 
First of all, I want to get what was the original figure on 
Springfield?
    Mr. Mead. I think it was--my numbers might be off a bit. I 
think it was around $265 million in the beginning and it is now 
$675 million. And since we issued our report, I think it has 
been holding.
    Mr. Moran. To what?
    Mr. Mead. $675 million.
    Mr. Moran. It went from $267 million to $675 million, 
Springfield. Now the----
    Mr. Mead. I am sorry. I misunderstood your question. The 
Central Artery project started at $2.5 billion and is now in 
the neighborhood of $14.5 billion.
    Mr. Moran. Up to $14.5 million from--$2.5 million to $14.5 
million in 10 years. I was just trying to figure whether--
compare it to our project at the Capitol Visitor's Center. It 
has gone from 300 million to what we now expect, if you include 
all the additional offices and so on that the leadership in the 
House and Senate have asked for, it will be about 500 million. 
But that really does pale in comparison. My friend Ed Schrock 
isn't here but I know there is going to be a lot of comparisons 
because the legislative branch bill is going to be on the floor 
today. But that doesn't mean that we don't have to be sensitive 
to cost overruns. And I know that you are and you gave us an 
excellent report on the Springfield interchange overrun, but 
when I look at the examples that you use of waste, fraud, and 
abuse, and then consider the fact that this committee 
instructed the Transportation Infrastructure Committee to come 
up with $5.5 billion in budget authority for mandatory programs 
over the next 10 years, I don't see that in your testimony 
because basically what you tell us about the Federal Aviation 
Administration, Amtrak, et cetera, those are discretionary 
programs, appropriated by the Appropriations Committee. Do you 
really think that you could come up with $5.5 billion in budget 
authority over 10 years for mandatory programs?
    Mr. Mead. No.
    Mr. Moran. The answer is no.
    Mr. Mead. The answer would be very difficult. But I also 
would take issue with respect to the characterization of the 
mandatory discretionary issue at Transportation. Why would I do 
that? Because both the aviation program and the highway program 
basically require--or at least in the past the current 
legislation requires the spending of money in the amount of the 
receipts.
    Mr. Moran. I appreciate that, Mr. Mead. I don't want to cut 
you short except I will run out of time. I don't want to ask 
for too much leniency on the part of the chairman because I 
want to ask two of the other departments. The problem is that 
the legislation that the Budget Committee included referred to 
mandatory programs. And under our definitional structure, the 
programs you referred to I don't think are considered 
mandatory.
    Let me get into the Department of Education because our 
Education Inspector General, and I appreciate your testifying 
as well, sir, you said we have found--you have found 334--
actually you cited the 401 million but let's talk about the 334 
million that you have repeatedly cited over the last 5\1/2\ 
years in disallowed costs and recoveries. That comes to about 6 
million. But the Budget Committee has required, Mr. Higgins, 
that you come up with considerably more than that. Do you have 
the actual figure that you had to take out of mandatory 
programs?
    Mr. Higgins. No.
    Mr. Moran. I think it is $2.5 billion in mandatory costs 
for waste, fraud, and abuse over the next 10 years. You cited 
$600 million, or $334 [million] over 5 years. Do you think it 
is possible to come up with 2.5 billion over the next 10 years 
in cuts to mandatory programs?
    Mr. Higgins. No. I was assuming that the----
    Mr. Moran. The answer is no. I need to get those answers on 
the record here and kind of underscore them because I want to 
see how realistic is our requirement.
    And then lastly and very quickly on, and again I don't mean 
to be rude here in moving so fast, but I have run out of time 
for my 5 minutes. The Agriculture Department is required to 
take $5 billion as well out of mandatory programs in waste, 
fraud, and abuse over the next 10 years. Let me ask 
Agriculture's Inspector General, do you think that is possible? 
And it is OK if you say no because you have two predecessors 
here, your two witnesses preceding you have said no. What do 
you think?
    Ms. Fong. I am going to plead relative inexperience with 
the range of the Department's programs. I will say I don't 
know.
    Mr. Moran. You don't know.
    Ms. Fong. I don't know.
    Mr. Moran. That is a ``know'' instead of a ``no''?
    Ms. Fong. Yes.
    Mr. Moran. But you are willing to have that requirement 
imposed on Agriculture from the Budget Committee. Do you think 
that is reasonable?
    Ms. Fong. I think it would spark some very useful debate as 
to how the Department can tighten up its programs.
    Mr. Moran. I am trying to figure out how realistic is this 
idea of cutting so much money out of waste, fraud, and abuse 
out of entitlement programs. And from the testimony, although 
the testimony is very enlightening, I don't see where we can 
get that money out of any of these departments, Mr. Chairman.
    Chairman Nussle. That is fine. Thank you, my friend from 
Virginia. Apologize for wasting your time today then. Mr. 
Brown.
    Mr. Brown. Mr. Chairman, on the other side of the coin, 
looks like to me that the 1 percent is a very workable goal and 
maybe in some areas might be even greater than that. I was 
amazed too as I listened to the testimony the amount of waste, 
fraud, and abuse that is in place. And Mr. Chairman, I am not 
so sure where the disconnect is. I think we all want to address 
it; we all want to identify it. We also want to prosecute those 
people that are abusing the system. But it seems like we all 
know about it, it is all on the table.
    I guess my point is what is the next step, Mr. Chairman? 
How do we go from identifying the problem to eliminating the 
problem? And I know we mentioned somewhere about being a little 
bit more proactive in trying to prevent some waste, fraud, and 
abuse from happening. But I see so many areas that we are 
concerned about that we talked about the Big Dig, Mr. Mead, and 
Amtrak and some of those other areas that we feel like the 
solution is just to continue to put more and more money. If 
that is the solution, then certainly you know it could continue 
to grow and the waste, fraud, and abuse would never be 
addressed.
    I was concerned also about the Food Stamp Program, where 
there is no disincentive for the States to be proactive, Ms. 
Fong. I don't know what we can do to build some kind of a 
checkpoint in that system to prevent that from happening. I 
understand, Ms. Corrigan, the differential in the cost of 
prescription drugs. I know one is a retail and one is a 
wholesale but there certainly shouldn't be that big of a 
disparity between those costs. So what can we do? Tell us what 
we can do to help you make these changes.
    Ms. Fong. Well, I think have you taken a very good first 
step today in having us come forward to testify about areas 
where we find problems, and I think bringing these things to 
light is always a very useful thing to do. And I think it 
certainly helps me in terms of formulating priorities for our 
office and where we need to spend time in the future in terms 
of helping the Department address some of these issues and make 
some progress on them. So I think in that sense this is a very 
good thing to do.
    Mr. Brown. I know that you mentioned about the altered, you 
know, income tax returns in order to get kids to qualify for 
the free lunch program. Did we prosecute those parents?
    Ms. Fong. I know we have investigations going on in all of 
our programs. And we receive allegations of fraud--whenever 
there is a government program there are allegations that people 
are trying to take advantage of these programs. In the Food 
Stamp Program what we have tended to do is to focus on the 
really big trafficking cases that involve retailers and multi-
millions of dollars because we want to get the most bang for 
our buck. Where there are cases that fraud has been committed 
by an individual we will usually refer that to the State for 
prosecution unless there is a reason for us to pursue that 
ourselves. But, yes, we do receive allegations of fraud by 
individuals. Those allegations are reviewed and referred to the 
appropriate people.
    Mr. Brown. OK. Mr. Higgins, if I could address the question 
to you. Has IG ever made an estimate of the amount of fraud and 
waste in the loan programs that occur each year through 
unrecovered and improper payments and waste loan administrative 
funds?
    Mr. Higgins. No. No, we have not.
    Mr. Brown. What percentage of loan funds do you think are 
awarded improperly?
    Mr. Higgins. We don't have any data on the amount of loan 
funds that have been awarded improperly. The only data that we 
have is on the Pell Grant program.
    Mr. Brown. Some individuals who claimed to be disabled and 
unable to work were actually earning six figure salaries. We 
talk about a $400 hammer and all those others out there. But 
the Department has since put in place administrative measures 
to guard against improper loan forgiveness. Have the new 
measures been successful?
    Mr. Higgins. We haven't gone back and audited it but they 
have taken steps where they are requiring the doctor's license 
number so they can verify that it is a real doctor. There is a 
conditional period where they monitor the salary of this 
individual for 3 years. And in the event that the person does 
start earning income again they reinstate the loan. If they 
come back in for another loan, they have to reinstate the loans 
that were discharged.
    Mr. Brown. I know my time just ended. I note as we deal 
with the reauthorization of the bill, looking to forgive more 
percentage of those loans if they go into certain Title I 
programs within certain accredited fields. I recognize there is 
a tremendous amount of waste, fraud, and abuse out there. I am 
sure that a 1 percent target is a very minimal figure. Thank 
you.
    Chairman Nussle. Ms. DeLauro.
    Ms. DeLauro. Thank you very much, Mr. Chairman. And I want 
to apologize to the panel for having to leave for some of the 
testimony. But I thank you for being here today, and I would 
echo what my colleague Mr. Spratt said about no one here from 
Defense, and as a matter of fact no one here from Treasury 
testifying here today. But I am hopeful that we will hear from 
them in the future. It is true we all want to crack down on 
waste, fraud, and abuse.
    In fact, the Clinton administration's National Performance 
Review saved more than $100 billion, I might add. And we know 
there still is waste. Cracking down on mismanagement is 
particularly important now in the current budgetary climate.
    I might add that it is--the administration's $1.2 trillion 
tax cut has stretched our resources to the limit. I have one 
question which I would like to have each of you answer. Looking 
through the mandatory programs under your jurisdictions, are 
you able to identify any areas of waste, fraud, and abuse that 
would generate savings even close to the $30 billion per year 
that we lose through the tax code through the underpayment of 
taxes? And in this respect these are taxes that are legally 
owed and we know who owes them. Do you agree that if we are 
truly committed to reducing fraud we should increase 
enforcement at the IRS to crack down on tax evasion? Right now 
56 percent of noncompliant taxpayers with incomes over $100,000 
get off scot free. Can I get each of you to respond to that 
question?
    Ms. Corrigan. I think that every violation of the law 
should be looked at and priorities have to be set by the 
administration and by Congress. And if you think that is an 
area that merits more focus then I think it is your right to do 
that.
    Ms. DeLauro. I understand that. But my question directly is 
do you believe you can generate savings even close to the $30 
billion that we lose through the tax code through the 
underpayment of taxes? And that is per year in your department. 
Does your--do you reach that level of $30 billion?
    Ms. Corrigan. I cannot imagine that we do.
    Ms. DeLauro. You cannot imagine that you do. OK. Ms. Fong.
    Ms. Fong. Let me just respond in terms of USDA programs. My 
staff has provided me with a list of mandatory programs within 
USDA. There are 70 of them. And leafing through them there are 
many of these programs that I am not familiar with. I am not 
sure our office has ever looked at them. So my answer is I do 
not know the extent of savings that we could generate from 
these programs. I am just not familiar enough with them.
    Ms. DeLauro. So with the mandatory programs you have no 
idea how much money we can deal with in term of waste, fraud, 
and abuse at the U.S. Department of Agriculture?
    Ms. Fong. We need to do a lot more work to nail that down.
    Ms. DeLauro. Can you get that information to us, let us 
know what you believe.
    Ms. Fong. I will try to provide you a response for the 
record.
    [The information referred to follows:]

 Ms. Fong's Response to Ms. DeLauro's Question Regarding Waste, Fraud, 
              and Abuse in Mandatory Programs in the USDA

    Within USDA, only one of the mandatory programs, the Food Stamp 
Program, has a system in place to measure payment accuracy. As noted in 
my statement, the total erroneous payments for the last year tested, 
fiscal year 2001, were about $1.3 billion out of total issuance of 
$15.5 billion. Because so few agencies had systems to determine or 
estimate improper payments, Congress passed the 2002 Improper Payments 
Information Act. Once the provisions of the act are implemented, USDA 
should have data that would permit it to identify programs with 
unacceptable rates of improper payments. We plan to monitor USDA's 
efforts to implement the act.

    Ms. DeLauro. Thank you. Mr. Higgins.
    Mr. Higgins. Is your question can the Department of 
Education absorb the $30 million?
    Ms. DeLauro. I am just saying can you generate savings 
close to $30 billion.
    Mr. Higgins. Not close to $30 billion.
    Ms. DeLauro. Not close. You may have said this before, 
what--well, you did talk about dollar amounts. I did hear Ms. 
Fong's comment about the amount that you thought you could 
save. So I won't go back. But you can't, you can't come close 
to that $30 billion?
    Mr. Higgins. No.
    Ms. DeLauro. Mr. Mead.
    Mr. Mead. I can't come close to that either. But I would 
say that we all have to do our part. And we could give you some 
tax collections on the Highway Trust Fund side. In my testimony 
I was referring to the motor fuel tax evasion. But I would need 
Congress' help to do that. We would need to agree on some 
jurisdiction, because right now it is pretty exclusively with 
the U.S. Treasury Department.
    Ms. DeLauro. So in essence, I mean it is self-explanatory 
with your own answers, I obviously believe that the answer to 
the question we should increase enforcement at IRS. I think you 
would all concur, as Ms. Corrigan says, if we decide to do that 
we should do that. It would appear to me on a per annum basis 
that we could recapture $30 billion and this is in taxes, 
legally owed, and we know who owes them, and that quite frankly 
that we don't move in that direction but we--and everyone is 
for tightening up on waste, fraud, and abuse. It is a sense we 
probably ought to have some level of priority in dealing with 
this effort and budgeting that I have understood in the past is 
that you kind of go for where the big numbers are and you see 
what you can do.
    I would suggest that as soon as possible we try to talk 
with people at the Department of Defense and look into where we 
can save $30 billion a year. I think we could all put it to 
very, very good use, particularly in these very tight budget 
times. I thank you again for your testimony this morning.
    Chairman Nussle. Mr. Garrett. Before the gentleman begins 
we have two votes on the floor. We will recess and come back 
after the second vote, immediately after the second vote.
    Mr. Garrett.
    Mr. Garrett. Question first for Mr. Mead. The stories you 
tell are the gut wrenching ones that I hear from constituents 
at town hall meetings asking what are we doing with their tax 
dollars. A study with regard to cost overrun, part of your 
testimony shows that researchers have found international 
studies that 90 percent of projects suffer from cost overruns. 
There is no difference whether you are talking about big 
projects or little projects. This has been the case over the 
last 70 years. My question to you is what can I tell my 
constituents as far as what are the ramifications or the 
repercussions to both the private and public sector on the 
private side for the firms that are engaged in these cost 
overruns? Do we continue to allow those firms to be employed 
and have contracts with the Federal Government and in the 
public sector, for those people who are on the Federal payroll 
that are involved in these projects from day one; are there 
repercussions to them when their cost estimates are so 
egregiously wrong as the cases that we have right here in town 
and also on the examples that you gave as well?
    Mr. Mead. No, sir. I don't think so. I think you are 
speaking of accountability. And I think we need a much larger 
dose of that at the State level and the Federal level. I would 
say there are a couple things that you could do if you want 
some explicit suggestions. One would be that your State, as in 
all States, has to submit a State transportation plan. This, by 
law, is not supposed to be a wish list. This is a 
representation to the taxpayers, our taxpayers, of projects 
that we are going to undertake accompanied with a cost 
estimate. If those were made a lot more realistic, I think we 
would have a lot more accountability.
    Secondly, in your consideration of the pending 
reauthorization of the highway and transit programs, you might 
put in a provision that explicitly requires the consideration 
of a contractor's prior performance in connection with future 
contract awards.
    Mr. Garrett. Thank you. This chairman and this committee 
worked hard on a budget that said we are going to try to reduce 
expenditures by 1 percent. Of course that went out the window 
once it got out of here. So is it fair to say that not only 
this Congress but past Congresses have basically been both 
encouraging and condoning this type of behavior?
    Mr. Mead. I don't think they are doing it consciously but 
sometimes, I think by indirection, that is the result.
    Mr. Garrett. With regard to Medicare and prescription 
drugs, prior testimony, we had someone else at this hearing 
previous on, gave an estimate as far as the--and you probably 
know the number off the top of your head as far as the fraud, 
waste, and abuse figure as far as the Medicare--ran a 5 percent 
figure that they were throwing out in the overall program. And 
now that we have a new $400 billion prescription drug program 
that is coming down the road conceivably, we are talking here 
about saving a million here, saving a million there when you 
can. We just are going to authorize the program's $400 billion, 
out of 5 percent waste, fraud, and abuse going into it you are 
looking at a $20 billion in additional waste, fraud, and abuse 
that we are basically authorizing at this point in time. And 
the 5 percent figure might be conservative inasmuch as the 
chairman--not this chairman, the chairman who crafted that 
bill, that says this is a bill that is so complex even he has a 
hard time getting his hands around it.
    What are your projections of what we may be looking forward 
to in actual dollars in waste, fraud, and abuse in the 
prescription drug program that is now coming out of Congress?
    Ms. Corrigan. That is a question I would have to give more 
thought to than I have thus far. But I will give you my 
preliminary thoughts on it, which is I think you are right to 
be very worried. I think any time you have that amount of money 
with complicated rules, it is a setup for, at the very least, 
abuse or misunderstanding, which results in the same type of 
loss that you are talking about, potentially a $20 billion 
loss.
    So I think that in crafting the legislation there has to be 
given thought to how we are going to protect against that type 
of abuse. And either you have to have some accounting mechanism 
for all of the dollars or you have to have a verification 
mechanism in place set by Congress that people will be held to 
or you have to provide more resources to the IG to look at the 
program.
    Mr. Garrett. Are any of those things in the bill as we see 
it right now?
    Ms. Corrigan. No, as far as I am aware of.
    Mr. Garrett. Should I be, as a State that already has a 
prescription drug program that does not see that level of 
waste, fraud, and abuse, should I be concerned for my State 
that we will be funding the waste, fraud, and abuse for the 
other 49 States?
    Ms. Corrigan. You should always be concerned about that, 
yes.
    Chairman Nussle. Mr. Baird.
    Mr. Baird. Thank the chairman. Thank the panel for this 
most informative hearing. I recently discovered a program, and 
this is for Ms. Fong, under the department the Farm Service 
Agency, which is really fascinating, Mr. Chairman, you might 
find this interesting as well, given the nature of this 
hearing, it is called the Livestock Compensation Program. And 
in essence what it does is provide compensation on a per head 
basis for farmers who have livestock in a disaster declared 
area. But what is intriguing about it is you don't actually 
have to sustain any damage to your herd. All you have to do if 
there is an earthquake in the area and you are in that area is 
send some documentation that you got some cattle or sheep above 
a certain weight or below a certain weight level and you get 
money for it. They don't have to have even fallen on the ground 
during the earthquake. You will just get money for it. You 
can't really blame the farmers for signing up for this. But it 
is really silly, and I would be very interested in working with 
the Department and others who are interested in this to try to 
solve this, because it just doesn't make any sense.
    If we could follow up on this at some point I would love to 
chat with you about it. This was called to my attention 
actually by a newspaper who discovered it. And the farmers, if 
I can use the pun word, sheepishly applied for the money and 
got it back. So maybe we could work on this. It is call the 
Livestock Compensation Program. At the very least we ought to 
demonstrate that you have somehow sustained damage.
    Second question I hear a lot--I am not really sure it 
relates to DHS and Agriculture--has to do with provisions that 
are made available to refugees who are immigrants our country 
in terms of eligibility for Federal funding. Food stamps are an 
example that I hear complaints about a lot. I hear also about 
Medicaid uses, et cetera. I wonder if you have any insights 
into that. Are there ways we can tighten up the controls on 
that? And any insights into that?
    Ms. Fong. I am not sure that our audit work has focused on 
that specific aspect of eligibility for food stamps. I would 
have to go back and provide you a response on that to see if we 
can give you something more focused.
    [The information referred to follows:]

   Ms. Fong's Response to Mr. Baird's Question Regarding Food Stamp 
                              Eligibility

    OIG has not undertaken a review focusing on refugees or immigrants 
participating in the Food Stamp Program. Since this is an eligibility 
issue, FNS's quality control system would test for this and other 
eligibility factors.

    Ms. Corrigan. I can do that for you on the Medicaid 
eligibility side. I am not sure we focused on it either, but we 
can certainly look at it and get back to you.
    [The information referred to follows:]

  Ms. Corrigan's Response to Mr. Baird's Question Regarding Refugees' 
                   Eligibility for Medicare and SCHIP

    Certain refugees designated in 42 C.F.R. section 435.408 are 
eligible for Medicaid, and some refugees are eligible for services 
under the State Children's Health Insurance Program (SCHIP). Those 
newly arrived refugees who do not meet all the eligibility requirements 
for Medicaid or SCHIP may qualify to receive medical services under the 
Refugee and Entrant Assistance program. This program provides Federal 
grant funds to States to provide medical assistance and limited cash 
assistance to qualified refugees. It also provides funding for child 
welfare and foster care services to unaccompanied minors. Under the 
same program, States receive grants to help refugees become 
economically self-sufficient as quickly as possible, primarily through 
the provision of employment services.

    Mr. Baird. I yield back.
    Chairman Nussle. We probably should head to the floor for 
this vote. So we will recess until right after the second vote 
and we will continue with this panel.
    [recess.]
    Mr. Hastings [presiding]. The committee will reconvene, and 
we will continue with the hearing. Before I call on the next 
member for questioning, I would like to--I understand Mr. 
Higgins would like to clarify an earlier remark that he made. 
So, Mr. Higgins, you have the floor.
    Mr. Higgins. Thank you.
    When I was asked the question about whether the Department 
could absorb the 1 percent, the figure that Mr. Moran used was 
$2 billion, I think--and that was for a 10-year period. I did 
not hear him say for the 10-year period, and it sort of took me 
off guard.
    But our mark is $220 million. The IRS match, we have an 
estimate on that, that the Department can save $336 million a 
year. So I would like to change my answer to yes, the 
Department could meet that with the IRS match. But, of course, 
the Congress has to enact that legislation to change the IRS 
code. That was my only point of clarification.
    Mr. Hastings. You have made that clear, even under 
questioning that I have had. So that is the third time that I 
have heard that. I think the record will reflect that.
    Next we will go to Mr. Diaz-Balart.
    Mr. Diaz-Balart. Thank you, Mr. Chairman. If I may, before 
I actually go to the question--I have a quick comment:
    I frankly am a little bit in awe, when I keep hearing from 
some of our dear friends in the minority party the 
rationalization for not going after waste, fraud, and abuse, 
because there may be some areas where there is more abuse or 
more waste or more fraud, then that means that we shouldn't go 
after areas that may have smaller numbers of that. But those 
smaller numbers are, I think, totally intolerable and 
unacceptable and, frankly, immoral to accept.
    I have a hard time dealing with--when you have, for 
example, according to GAO, in food stamps, improper payments 
totalling $1.34 billion in 2002. You know, when you look at a 
12-month allotment of food stamps for one person costing 
$1,700, according to the USDA figures which I obtained from 
their Web site, that means that the improper payments alone 
could have paid for a 12-month supply of food stamps for over 
803,000 people. And to rationalize that we shouldn't go after 
that is, frankly, not only unacceptable in my humble opinion, 
but immoral, totally immoral. I just wanted to say that for the 
record, Mr. Chairman.
    I do have a question for Ms. Corrigan, if I may, relating 
to Medicaid. In October 1999, the GAO issued a report titled 
``Health Care Fraud Schemes Committed by Career Criminals and 
Organized Criminal Groups, and Impact on Consumers and 
Legitimate Health Care Providers,'' not a real short title, by 
the way. But the report reviewed fraud, or at least alleged 
fraud, which was occurring in Florida, North Carolina, and 
Illinois between 1992 and 1998. GAO stated that legal actions 
are often ineffective in halting fraud.
    Do you agree with that statement? And if so, what other 
remedies would you propose to control widespread abuse and 
fraud? If not, please explain why not; because I think there is 
a lot of anecdotal evidence that suggests widespread fraud and 
abuse.
    Ms. Corrigan. I think a lot can be done to stop waste, 
fraud, and abuse. It is done every day. The problem is that as 
in any criminal area, the crooks get more sophisticated and 
they are able to devise more schemes. So I think vigilance is 
important. If you look at an area like murders in a city, I 
think that cities can take great steps to reduce them; but at 
the bottom, are you going to prevent every single one of them? 
I doubt it. It doesn't mean, though, that your vigilance should 
be decreased in any way, like you said.
    I mean, just because some area is a smaller area, I still 
think you have to use the most effective means you have and go 
after as much as you can, given the dollars that you have.
    Mr. Diaz-Balart. Mr. Chairman, if I may. But are current 
legal actions ineffective?
    Ms. Corrigan. I think current legal actions are very 
effective. In certain areas other legal actions might be 
helpful, but the False Claims Act has been incredibly 
successful in stopping fraud. I mean, the qui tam provisions of 
the False Claims Act expanded enormously the range of actions 
that were brought to protect--at least in the health care 
area--fraud, waste, and abuse.
    Mr. Diaz-Balart. And let me ask you, does that mean when a 
criminal steals from health care--a criminal steals from 
Medicaid, is that person more or less likely to be caught than 
if he or she were stealing from nonhealthcare-related areas? Is 
it less likely?
    Ms. Corrigan. I don't know if I can answer that question. I 
don't know what the answer to that question is. All I know is 
the increased focus on health care fraud has certainly helped. 
And the resources have really helped in stopping certain areas 
in health care fraud that had been very pervasive up until 
HIPAA was passed.
    Mr. Diaz-Balart. Thank you, Mr. Chairman. Again, I just 
want to reemphasize one last thing. I want to thank the 
chairman of this committee. I want to thank the witnesses who 
have done a great job.
    I, just for one, cannot rationalize, whether it is 1 cent 
or $10 or a billion or $50 billion, I cannot rationalize--
because there may be some other areas that we are not looking 
at--the justification of permitting waste, fraud, and abuse.
    I want to thank all of you. Thank you, Mr. Chairman.
    Mr. Hastings. Thank you, Mr. Diaz-Balart.
    Next, Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman.
    I would like to shift the focus a little bit, because it 
seems to me that the key question is how do you incent 
individual civil servants and agencies as a whole to spend 
money more wisely? Because I think American taxpayers would 
like to see a lot of spending cut, but for worthy programs they 
would like to see it increased.
    It seems to me that the central failure is a lack of 
incentives for the decisionmakers, those most intimately aware 
of the problems and benefits of programs, to do the right 
thing. In short, you cannot build a career in Washington, DC if 
you cut spending or eliminate agencies. We get rewarded with 
pens at the White House if we have a new agency created or a 
new program expanded.
    Perhaps I should make an exception. Perhaps IGs can advance 
their careers by cutting spending. But you are about the only 
folks in this town who can do this.
    So I would say that the problem is on both sides of the 
witness table. Can you help me think of any ways to incent 
individual civil servants or agencies to want to reduce 
spending? Because I think what the agencies fear is, if you go 
ahead and cut 1 percent, why then the next year somebody will 
ask you to cut even more.
    The slower you achieve the cut, the more likely you are 
able to preserve your prerogatives. And individuals don't like 
to be whistleblowers and to expose the waste or fraud or abuse 
within their own agency, because it is not a popular thing to 
do. So the result is, the average American taxpayer trusts for-
profit companies to be efficient, but they do not trust 
government to be efficient.
    So how do we change that? Instead of continuing the 200-
plus-year-old game that we play here about how everybody is 
going to root out the waste, fraud, and abuse using existing 
methods? We haven't done that.
    What are some ways? Let me hopefully provoke some thinking. 
In the pollution reduction area, we moved to cap and trading 
systems, so that virtue for the first time would be rewarded. 
If you cut your pollution more than the law required, and did 
so voluntarily, you get a piece of paper that had value, and 
you could buy it or sell it in the marketplace.
    This committee used to have budget discipline rules. For 12 
years we had cap and pay go, so that an agency could not have 
spending increased unless it found ways to save money within 
the agency. Those rules, unfortunately, lapsed in 2002, so our 
equivalent of cap and trade is now no longer in place. But that 
would be a market-based way of encouraging agencies to find 
savings within their own bailiwick, so they could increase 
spending on their worthier programs in their own area.
    Can any of the panelists help me think of other ways? Mr. 
Mead.
    Mr. Mead. I think generally it is more effective to use 
incentives than a club. And I would like, just to bring it back 
home to Transportation for a moment, to provide a specific 
example that Congress currently has an opportunity to act on. I 
don't know if you will. When we pursue a fraud investigation, a 
criminal fraud investigation, under current law if we secure a 
conviction and a fine, the money comes back to the U.S. 
Government.
    The fact is, in the highway program, you have to have the 
States involved. We need the State auditors involved. We need 
the State attorneys involved. In most instances when there is a 
fraud committed against the highway program, the damage is done 
most directly and immediately to the State.
    I think if Congress were to pass a law that allowed the 
States to retain some of the money secured in connection with 
the fraud conviction, that would incentivize the States to 
dedicate more resources to ferreting out fraud, which would in 
turn have a benefit for us. So that is just one example. But it 
is currently an opportunity for us, I think.
    Mr. Cooper. So we could incent Federalism cooperation. Any 
other suggestions from the panelists?
    Mr. Higgins. Yes. I will go back to the Department of 
Education. The bureaucrats take the lead from the new leaders 
of the agency when the administration changes parties or 
whatever. And when this Secretary came into Education, one of 
the first things he did was to established a task group of 10 
to 12 career SES's to attack the management problems in the 
Department. And by doing this, the culture in the Department of 
Education is changing more to one of--they are more 
accountability conscious than it was 2 years ago. So I think 
the key is who you are putting in these leadership positions, 
and what they do is very important.
    Mr. Cooper. I see that my time has expired. Thank you, 
chairman.
    Mr. Hastings. Thank you, Mr. Cooper.
    Mr. Gutknecht.
    Mr. Gutknecht. Thank you, Mr. Chairman. And I ask unanimous 
consent that I be given 1 hour to question Ms. Corrigan. I hear 
objection. But I will have a chance later on to question Ms. 
Fong, so I want to get to her as well.
    But let me make a couple of points, first of all. The 
gentleman just said that worthy programs should perhaps be 
increased, and those less worthy decreased. That is part of the 
problem that we have, though; and that is, all of the programs 
are worthy.
    And the problem is that the way they are set up is, it is 
sort of this perverse incentive that no good deed goes 
unpunished, and if you really save, you get punished. So in 
some respects we have to change the system. One of the things, 
though, I think we have to do--and this hearing is a very good 
start--I think we ought to have hearings like this every 2 
weeks. And I think we ought to have different people come and 
cast light on some of these things, because I do believe that 
sunshine is the best antiseptic.
    Let me also say that in some respects, I made the comment 
before, we are a little like Scrooge, you know, after he had 
his transformation. He woke up on the day after Christmas and 
Bob Cratchit came in late for work, and some of you remember 
what happened. He said, ``Well, Mr. Cratchit, I guess we have 
no choice but to raise your salary.''
    We have groups come in here, like the Defense Department. 
They can't account for something like $11 billion in assets. 
They don't know where they are. They have lost a boat. They 
don't know where it is. And yet our answer is, well, I guess we 
have to increase your budget. And we do that year after year.
    Ms. Fong, I want to come back, and I am going to have 
plenty of time to talk to you about the nutrition programs and 
how much there may or may not be in terms of abuse.
    One of the fundamental problems is, isn't it, that when 
States aren't doing a good job, we increase their budget? Isn't 
that a fact? I mean, how do we ever recover from States that 
are doing a miserable job of managing these programs?
    Ms. Fong. That is one of the problems with the Food Stamp 
Program. I am sure you are well aware of the system that exists 
currently. There are provisions in the current legislation that 
allow the Department to impose penalties when the error rate 
goes too high. And they also allow the States to reinvest those 
penalties. Instead of actually paying them back to the Federal 
Government, they can reinvest them in their own programs. That 
is, in fact, what generally occurs.
    So one might ask, what kind of sanction effect does that 
have? That is a very good question. My guess is that it doesn't 
have much of a deterrent effect at all.
    Mr. Gutknecht. I think that is a pretty good guess. But 
sometime in the next 2 weeks, hopefully, we can come up with 
some ideas and answers and begin to create a system that 
invites more accountability. Somebody used that word. And that 
is a very important word. It is a word our taxpayers want to 
hear more of coming from Washington.
    Ms. Corrigan, I do feel--and I said this to you privately--
I do feel like Diogenes. He is the guy that went around the 
world looking for an honest man. I finally have found someone 
inside the administration who acknowledges that we pay way too 
much for prescription drugs. I want to thank you for coming 
forward to say that publicly, because for a long time I thought 
either I am crazy or the rest of the Federal Government is 
crazy.
    I want to know, exactly how did you find out what the VA is 
paying for drugs? Because we tried to find out from them. As a 
Member of Congress, and a member of the Budget Committee, a 
member of an oversight subcommittee, we could not get VA to 
tell us how much they paid for their drugs.
    Ms. Corrigan. I believe that it was part of one of our 
either audits or evaluations. We found that in the context of 
that evaluation. But I can find out. I will find out 
specifically how we found out. And I will let you know.

Ms. Corrigan's Response to Mr. Gutknecht's Question Regarding Research 
                             Methods of HHS

    My testimony refers to a January 2001 evaluation report in which we 
found that Medicare and its beneficiaries would save $1.6 billion a 
year if 24 selected drugs were reimbursed at amounts available to the 
VA. We obtained a file from the VA containing second-quarter 2000 
contract acquisition costs and used the Federal Supply Schedule price 
for comparison purposes. A conversion factor was used in some cases to 
ensure that the VA price and the Medicare price were for equivalent 
amounts. The report is available on our web site at http://
www.oig.hhs.gov/oei/reports/oei-03-00-00310.pdf.

    Mr. Gutknecht. I want to go back to the numbers you cited 
earlier in your testimony, because I only have 5 minutes, they 
didn't give me the full hour. You said we are spending about 
$8.2 billion in Medicare today for approved drugs. You said 
that according to your figures, that was about $1.9 billion 
more than the VA.
    That is more than--I mean if my arithmetic is correct, that 
is almost 25 percent more than just the VA. Did I hear those 
numbers right; $8.9 billion for Medicare-approved drugs, and 
that translated to about $1.9 billion more than those drugs if 
they had been bought at the VA prices?
    Ms. Corrigan. Yes, that is basically correct. The $1.9 
billion, that is for 24 specific drugs. And the $8.2 billion is 
for the entire Medicare payment for drugs, but it is the same 
thing.
    Mr. Gutknecht. So it is roughly 25 percent more than just 
in VA?
    Ms. Corrigan. Yes.
    Mr. Gutknecht. Has there ever been an analysis done between 
what we pay in the United States for those drugs and what just 
regular consumers can buy them for in the G8 countries?
    Ms. Corrigan. I don't believe we have conducted a study 
like that. I don't know whether someone else has.
    Mr. Gutknecht. As far as I know, no one has. But what do we 
need to do to get that study done? In other words, if we came 
to you, or the GAO and asked for a study, would you be 
compelled to do that?
    Ms. Corrigan. Certainly, if you made a request, if the 
committee made a request for us to look at that, we would want 
to. I think it is an area that is very important and we would 
be willing to do that, if we had the ability to do it. I just 
don't know how we would get those prices. But assuming we can 
do it, we would be happy to do it.
    Mr. Gutknecht. Well, I have been able to get some of those 
prices, but I have a relatively small staff, and one of them 
happens to speak German, so we were able to buy some drugs in 
Germany and get some comparisons there. I mean, we are paying 
almost 2\1/2\ times more for those drugs here in the United 
States than they pay in Germany.
    I do think this a very important issue, Mr. Chairman. When 
you start looking at where we can save money, it may well be 
that some of the programs can be difficult to find 1 percent, 
other programs I think the numbers are huge. And they are big 
numbers. I don't think we should just confine ourselves to an 
across-the-board-type scope. I think we need to look at every 
program, because I agree with Mr. Diaz-Balart: to say because 
we can't find 1 percent in one program, that we shouldn't look 
for savings anywhere else, it seems to me is just an abrogation 
of our responsibility.
    As I say, I think the American taxpayers expect and demand 
that we find accountability in every single Federal program.
    Thank you very much, and I yield back whatever time I have 
left.
    Mr. Hastings. The gentleman's time had expired. Mr. 
Emanuel.
    Mr. Emanuel. Thank you. It may not be a full hour, but I 
will add another 5 minutes to this, since we are both sponsors 
of the same legislation, which deals with market access on 
prescription drugs, getting access to the best value and 
allowing you to buy anywhere within the G8.
    My colleague, Mr. Gutknecht, has shown specifically where 
you can buy 10 drugs, same medications in Germany, for a total 
of about $300-and-some-odd dollars, here in the U.S. for 
$1,000; 700 bucks disparity.
    And I believe that, I think it was last week or 2 weeks 
ago, we had a hearing on waste, fraud, and abuse, and the 
comptroller talked about not only waste, fraud, and abuse, but 
the other side of the coin having to deal with economies and 
efficiencies. And that is, if you can buy medications cheaper, 
more cost effective, whether that is through negotiating bulk 
prices like SAM's Clubs do, that is what we would advocate. And 
the other idea is to allow you to buy, whether it is from 
Canada or the other G8 countries, you would save billions of 
dollars. And I think if we are going to have the largest 
entitlement expansion in over 40 years, you would want to do it 
to get the best bang for your buck.
    Now, I am going to be a supporter if we can ask you to 
study how the veterans have done something that we are 
prohibiting the HHS Secretary from doing. I have full 
confidence in the Secretary of HHS, Tommy Thompson's ability to 
negotiate. I wish my colleagues on the other side would have as 
much confidence as I do in a former Republican Governor, and 
now a member of the Cabinet in a Republican administration, 
that he can negotiate good prices.
    That I think also has the ability, as our amendment does--
it allows consumers, government, businesses, private insurers, 
to buy the cheapest price. And so I will be a supporter of that 
study that asks you to go out and review how the Veterans 
Administration can buy the same types of medications to the 
tune of about $2 billion in savings. That is essential. So if 
we are going to talk about waste, fraud, and abuse, I am sure 
all of you have analysis, your remarks are focused on waste, 
fraud, and abuse.
    There are efficiencies in economies that you can bring to 
that same debate. And as I have for the Department of 
Education, Mr. Higgins, a question, which is--you know, I have 
noticed everybody talking about the virtues of low interest 
rates on student loans. I have looked at your remarks. I wasn't 
here for all of them, but I looked at the remarks earlier. And 
we talked about in the housing industry people refinancing 
their home mortgages. And yet everybody is taking advantage of 
the free market in the refinancing of the lower interest rates, 
yet we have locked students in, some students with their 
student loans at 6, 6\1/2\ percent, yet they are not being 
allowed to take advantage of where interest rates are today and 
being able to renegotiate like we have done in the home 
financing area.
    So we have saddled families and students, who are emerging 
into a bad job market, with interest rates that are 200-300 
basis points higher than you can get in the marketplace. We are 
not allowing students to take advantage of the low interest 
rates that exist in the market. So again, although we focus on 
waste, fraud, and abuse, I would hope that we would at some 
point take our attention to economies and efficiencies, which 
is what the comptroller said 2 weeks ago, both on the 
prescription drugs and on the student loans, that we can save 
the government money using market mechanisms, not mandated.
    If we are supposed to talk about the virtues of 
globalization let's bring it to the prescription drug bill. We 
have the largest expansion of an entitlement in 40 years. A, we 
prohibit the Secretary of HHS from negotiating best price. Yet 
SAM's Clubs exist all over America where people are negotiating 
best price. B, allow people to buy from Canada, France, 
Germany, where the prices are cheaper. Why would we lock them 
into a captive market to the highest price? Let the free market 
bring prices down.
    And, third, on the student loans, we are locking students 
in to 6\1/2\, 7 percent interest rates, when in the marketplace 
they can get them at 3\1/2\, 3\3/4\.
    So I would hope in your remarks, and hopefully later, that 
you would not only address waste, fraud, and abuse--because it 
is all dollars and cents--that if we can find savings and 
efficiencies in economies, you would also address that point to 
what you would do different.
    If anybody wanted to grab--you have exactly 35 seconds, or 
the other 50 minutes of Mr. Gutknecht's hour.
    Mr. Hastings. Thank you.
    Mr. Emanuel. I will take the silence as maybe yes. That is 
how my kids treat me at home.
    Mr. Hastings. I don't want to comment on that.
    Ms. Brown-Waite.
    Ms. Brown-Waite. Thank you very much. My question, my first 
question is for Ms. Corrigan. I had a problem with 
Medicare+Choice in my area where they were just moving out, and 
yet they were flourishing in south Florida. I said to an 
entrepreneur who owns an HMO, Why don't you come up to north of 
the Tampa area? And his response to me took me totally by 
surprise. He said to me, I do a better job of rooting out fraud 
and abuse in south Florida.
    And, Mr. Diaz-Balart, I am not impugning your part of the 
State at all. But he said, there is more fraud and abuse in 
south Florida than anyplace. He said he does a better job of 
catching the fraudulent providers in south Florida than the 
government does.
    First of all, I would like your response to that.
    Ms. Corrigan. Well, I don't know if that is true. If it is 
true, it is very sad. I think there historically has been a lot 
of fraud in south Florida. It is no surprise. Very captive 
beneficiary audience. And I think that it is likely a lot of 
people could catch fraud there, and that the government can 
always do a better job, but it has traditionally focused on 
that area and tried very hard there.
    Ms. Brown-Waite. My next question to you, actually I guess 
I have 3 questions now. If fraud and abuse is so rampant in 
south Florida, tell me why, the way that Medicare+Choice is set 
up right now, my seniors have to pay a substantial copay, 
whereas everything is free if fraud is rampant, and yet in 
south Florida there is no copay.
    Ms. Corrigan. I don't know the answer to that question off 
the top of my head, but I can get back to you. But I will say, 
and I think we may have to check with CMS, I am not sure how 
the HMOs that you are talking about the ability internally to 
set prices that is some way independent from CMS. So it may be 
that there are efficiencies in certain HMOs that are not in 
others, that have no relationship to fraud.
    But I will have to get back to you on that question.
    [The information referred to follows:]

    Ms. Corrigan's Response to Ms. Brown-Waite's Question Regarding 
                            Medicare+Choice

    Based on available data, it is our understanding that every 
Medicare+Choice plan in south Florida charges Medicare beneficiaries 
some form of copayment or premium charge. However, that does not mean 
that every service requires a copayment. The regulations on premiums 
and cost sharing can be found at 42 C.F.R. section 422, subpart G. In 
some situations, plans are able to offer a reduction in premiums or 
cost sharing as an additional benefit. With regard to the earlier 
question about fraud in south Florida, our office has been involved for 
several years with interagency task forces formed to deal with health 
care fraud in that part of the State. These task forces are led by 
various U.S. Attorneys and include our office, the FBI, the State 
Medicaid Fraud Control Unit, and other State and local officials as 
needed. If the entrepreneur you mentioned has information he would like 
to share with us, I would be happy to coordinate a meeting with our 
agents in Miami or the Tampa area.

    Ms. Brown-Waite. My next question is for everyone on the 
panel. I was a State senator, and now in Congress I regularly 
hear about the problems of whistleblowers in agencies, if they 
go to their superior and aren't happy with reporting fraud and 
abuse and nothing gets done, and they go higher, that virtually 
they become isolated.
    And I would just like to ask each and every one of you your 
reaction to that; that being a whistleblower at the Federal 
level is not a badge of courage, but rather a source of an 
underground discipline system. If you would begin with 
Transportation.
    Mr. Mead. I think there is truth to what you say. One 
reason you have Inspector Generals is so that the stature of 
legitimate whistleblowers is there and that retribution can't 
be taken.
    I think in any bureaucracy it is a good thing to have an 
Inspector General operation. But I do think there is truth to 
what you say. I would like to see more whistleblowers coming 
from the private sector. We do--and the Federal Aviation 
Administration do as well--for example, a lot of contracting. 
And I would like to see more encouragement of whistleblowers at 
these firms that have multibillion-dollar contracts with the 
Department of Transportation.
    I think we always have to be vigilant, though, to make 
certain that whistleblower protections are kept in place for 
the Federal employee.
    Ms. Brown-Waite. Mr. Higgins.
    Mr. Higgins. I also think there is some truth to that. In 
Education, though, I have been there almost 35 years. And I 
only know of one or two cases where the employees have alleged 
that there was retaliation. But I do think that there is this 
perception among the employees that it is not a good thing to 
do.
    Ms. Brown-Waite. Ms. Fong.
    Ms. Fong. Yes. We are very sensitive to the issue at USDA. 
I will say that I am very pleased to learn from my staff that 
we get a large number of our clues, our allegations as to 
wrongdoing, from USDA employees; which would seem to indicate a 
certain level of confidence on the part of Department employees 
in coming forth toward us.
    And we do take very seriously our responsibility to protect 
the identities and to go after, actively go after issues where 
there may be retaliation and reprisal. And I think that has 
contributed to a positive atmosphere.
    Ms. Brown-Waite. My time is up, so I would ask Ms. Corrigan 
to answer it in writing.
    Mr. Hastings. Thank you.
    [The information referred to follows:]

    Ms. Corrigan's Response to Ms. Brown-Waite's Question Regarding 
                        Wistleblower Protection

    Both the Office of Special Counsel (OSC) and my office may 
investigate allegations of whistleblower retaliation involving 
employees of the U.S. Department of Health and Human Services. However, 
my office only has the authority to investigate potential reprisal 
cases and forward the investigative findings to the Department. The 
OSC, on the other hand, has a broad range of powers available in 
whistleblower protection cases, including the ability to bring a 
disciplinary action against a supervisor who retaliates against a 
whistleblower, to take steps to prevent future reprisal, and to make an 
injured whistleblower whole. For this reason, we often advise 
whistleblowers who contact our office about possible retaliation that 
it might be in their best interest to report the allegations to the 
OSC.

    Mr. Mead. I have something that I would like to add to the 
question. You know, our Department, and I imagine the other 
departments here, we get a lot of Mr. and Mrs. anonymous 
complaints. I think there is a reason why people don't affix 
their name to that complaint.
    Mr. Hastings. Thank you, Mr. Mead.
    Mr. Wicker.
    Mr. Wicker. Thank you very much, Mr. Chairman, members of 
the panel. I am Roger Wicker, I am supposed to be sitting down 
at the end of that table there, but I sort of feel like I am 
sitting in your laps if I am doing that. So that is why I am up 
here in Mr. Shays' chair.
    This is a hearing about the waste, fraud, and abuse in 
mandatory programs. Let me just ask each of you if you have 
given any thought--and we will start down here at this end and 
go from my right to the left. Have you given any thought to 
whether there is more waste, fraud, and abuse in mandatory 
programs as opposed to discretionary programs? Assuming that 
there is more oversight of year-to-year discretionary programs, 
and oversight prevents waste, fraud, and abuse, is this 
something that we need to look at, or am I just down an empty 
pig trail?
    We will start with Ms. Corrigan.
    Ms. Corrigan. I think that we traditionally have looked at 
both the discretionary and the mandatory programs. Probably 
mandatory is about 80 percent of our budget and discretionary 
is about 20 percent. So your assumption is correct that the 
oversight over discretionary programs is much less. But that 
being said----
    Mr. Wicker. The oversight over discretionary programs is 
much less in your Department?
    Ms. Corrigan. Yes, much. That being said, we do our best 
with the limited dollars that we have to oversee those 
programs. But I do think that it is going to be an area in the 
future where scrutiny could be focused. For example, NIH 
receives a huge amount of funding and they give many grants. We 
have started to do studies and audits to see whether those 
grant moneys are being spent properly. Many of the 
discretionary programs that we look at are grant programs.
    So again, our role is to look at where are those grant 
funds going; how are they being spent? And we expect to find 
some problems. It isn't an area that has been focused on a lot 
in the past, but we feel like it is an area that is a huge part 
of the Department, and it merits a really good look, like we do 
to the mandatory programs.
    Mr. Wicker. So that I can move along, Ms. Fong, are 
mandatory programs more or less susceptible to waste, fraud, 
and abuse than discretionary programs?
    Ms. Fong. I don't think we have done an analysis coming 
from that perspective per se. We do look at the full range of 
programs within USDA and we have talked about the mandatory 
ones today, food stamps and some of the others.
    There are other programs that are discretionary; the WIC 
Program--Women, Infant and Child Feeding Program--the rural 
programs, housing, loans and some of the other farm programs 
where there are examples of fraud, waste, and abuse also. We 
have done substantial work in those programs as well. So I 
would say, you know, the opportunity exists in all of the 
programs of the Departments.
    Mr. Higgins. For the Department of Education, 93 percent of 
what we find in sustained questioned cost, civil cases and 
criminal cases, is in the mandatory programs. But, we also 
devote the majority of our resources to the mandatory programs 
because that is where the dollars are in the Department. That 
is where the big risk is in this Department. So I don't know if 
you can make the correlation.
    Mr. Wicker. It is like the bank robber; that is where the 
money is.
    Mr. Mead. In the context of the Department of 
Transportation, I think probably most of it is. Like if you 
take the highway program, people automatically get the money. 
You automatically get the money, I think there is likely to be 
a little more abuse of it. And I think the same is true--FAA 
has a mandatory component to the airports. I think you would 
probably find that things were a little looser there in terms 
of the level of oversight.
    Mr. Wicker. Alright.
    Well, let me then just briefly direct a question to Ms. 
Corrigan. At a previous hearing, I raised the question of 
whether any attention has been given to the issue of medical 
errors being paid for--well, causing a double payment under 
Medicare. And basically here is my question.
    A physician or provider commits a medical error. That 
procedure is paid for under Medicare. Then the corrective 
procedure is also done by a provider or a hospital, and often 
the same one. And that procedure is paid for under Medicare.
    Do you have any information about that? Have you given any 
thought to it? Isn't this something that we need to look into?
    Ms. Corrigan. It is a very legitimate concern. And, in the 
case that comes into my head, there was a class action suit for 
beneficiaries who had hip replacement surgery, and because 
there were actually defects in the hip replacement, the 
surgeries had to be performed twice. The question was whether 
the manufacturer should be paying for the first one or the 
second one.
    It is the same thing that you are saying. Should Medicare 
being paying twice? And that is what comes into my own mind. I 
don't know if there has ever been a study or an evaluation by 
my office on that issue. But, I think it is just a very 
different way of looking at the abuse or waste issue that we 
can certainly look into.
    Mr. Wicker. Well, it would, it seems to me, be thinking 
outside the box. I can't give myself credit for thinking of the 
idea to begin with. But what would it take--and the Chair is 
indulging me for a second here--what would it take for you to 
feel like you were directed to look into this question? Would 
this committee have to make a formal request? Could one 
Congressman make such a request?
    Ms. Corrigan. The committee would make a request, is my 
understanding.
    Mr. Wicker. Thank you very much, Mr. Chairman.
    Mr. Hastings. Thank you. Next, Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. The good news is I 
appear to be your last questioner. The bad news is, inasmuch as 
I was attending a Financial Services Committee meeting today, I 
missed your testimony, so please forgive me if these questions 
are redundant, but at least they will be very helpful to my 
education.
    In some of the written testimony and testimony that this 
committee has received in the past, we have seen where HUD lost 
roughly 10 percent of their entire budget in erroneous 
payments. I believe it was 2 years ago, roughly $3 billion; 
apparently Medicare had $13.3 billion in overpayments last 
year, we had $1.4 billion in erroneous payments in the Food 
Stamp Program, I believe that is approximately 9 percent of the 
program--9.3 billion in erroneous payments in the earned income 
tax credit.
    We had apparently 25 percent of the people who had student 
loans that were forgiven because of disability were found to 
actually hold full-time jobs.
    There seems to be a constant thread that runs through this, 
and that is that in many government programs we are just seeing 
anywhere from 10 to 30 percent of waste, fraud, and abuse.
    Now, previous to being elected to Congress, I was a small 
businessman. And I can tell you out in the business world, if 
10 to 30 percent of your money just disappears, either you go 
broke or somebody goes to jail. And in the culture of 
Washington, DC, it seems to be an excuse to ask for even more 
money next year. So I have several questions that follow from 
these observations.
    And No. 1, is it your observation that indeed most of the 
programs that you oversee see these levels of money being lost? 
If each of you could address the question. Mr. Mead.
    Mr. Mead. I don't know if it is on the order of 30 percent. 
But yes, I gave an example in my testimony of the FAA 
acquisitions program, where you have $4.3 billion in cost 
overruns in air traffic control acquisitions, which equates to 
over 100 percent of an entire year's budget for air traffic 
control acquisitions.
    Mr. Higgins. Well, as I have said before, the Department 
itself estimates that in fiscal year 2002, the erroneous and 
improper payments were $401 million. We think that is a 
conservative figure. Again, I hate to keep on bringing this up, 
but if we had the IRS match, 366 million of that would be 
potentially eliminated.
    Ms. Fong. As you mentioned in the Food Stamp Program, the 
Department has acknowledged an error rate that ranges over the 
last few years between 8 and 11 percent. So that is clearly on 
the record. In the school lunch and breakfast program, there is 
information that indicates that there are substantial 
overpayments being made. So there is a significant level of 
concern here.
    Ms. Corrigan. In the Medicare program, the Medicare fee-
for-service error rate has declined over the past 7 years from 
about 14 percent in 1996 to 6.3 percent last year. And while 
6.3 percent represents a lot of money, it is a significant step 
toward the right thing, which is to really reduce these errors.
    Mr. Hensarling. Given these rates of error or fraud or 
waste, can you tell me what percentage of the budgets of your 
departments are devoted to policing and ferreting out the 
waste, the fraud, the abuse, the errors? Starting with you, Mr. 
Mead.
    Mr. Mead. Less than 1 percent. In fact, this may sound 
self-serving, you look at the IG budgets, you look at the 
financial benefits you get out of them, they are worth every 
dollar you put into them. In terms of the return, there are 
very few places you get a return on your investment like that.
    Mr. Higgins. Well, the second area where we think the 
Department could have the most impact, is if they increased the 
monitoring that they are doing. We have seen a large drop in 
the amount of monitoring from 5, 6 years ago. I don't have an 
exact percentage on how much effort is spent on this, though.
    Mr. Hensarling. Well, seeing as how I am down to 8 seconds, 
Ms. Fong.
    Ms. Fong. I don't have exact numbers either. I do know that 
the Food and Nutrition Service has, in response to our 
recommendations, increased its monitoring of providers to deal 
with some of these issues.
    Ms. Corrigan. I can certainly get you those numbers. But, 
for example, CMS has a program integrity section that is 
devoted to looking for the types of things that you are talking 
about, in addition to the Office of the Inspector General, plus 
other programs have little pieces that also help in the effort. 
But, I am sure it is still a significantly small proportion of 
the budget overall.
    Mr. Hensarling. I am out of time. Thank you.
    Mr. Hastings. Thank you, Mr. Hensarling.
    I want to thank the panel for their testimony and for the 
members' interaction on this. I would agree with my colleague 
from Minnesota, Mr. Gutknecht, that we should have more of 
these. And, in fact, there are more of these that are planned, 
because as I mentioned in my open remarks, this is one area 
that you don't have to draw a real picture for the American 
people to understand. And I think to the extent that we can get 
a handle on this, I think everybody will be better off for 
that.
    So I want to thank the panel for your testimony here today. 
Maybe sometime in the future you will be called back. But with 
that, we will dismiss the first panel. Thank you very much.
    I would like to call the next panel forward, consisting of 
one individual, Mr. Leonard Burman. Mr. Burman, if you would 
take your seat. Thank you very much for being here.
    Mr. Burman is a senior fellow with the Urban Institute, and 
he is the Co-director of the Tax Policy Center, research 
professor at the Georgetown Public Policy Institute.
    Thank you very much for your indulgence earlier with that 
break in the first panel. Sometimes that prolongs the process. 
But I want to thank you very, very much for being here. And as 
per our rules with the first panel, Mr. Burman, you will have 
10 minutes to take however you want.
    And with that, I will just introduce you. Mr. Burman.

  STATEMENT OF LEONARD E. BURMAN, PH.D., SENIOR FELLOW, URBAN 
                           INSTITUTE

    Mr. Burman. Thank you, Mr. Chairman, Mr. Spratt, and 
distinguished members of the committee. I want to thank you for 
inviting me to share my views on waste, fraud, and abuse in the 
tax system. I applaud the committee for its recognition that 
fraud is not only a problem on the spending side of the ledger, 
but also appears on the tax side. And as I will explain, there 
are some serious numbers involved here.
    Mr. Chairman, in an earlier hearing on the same subject, 
you noted that, quote, ``wasteful Washington spending is not a 
Republican problem or a Democrat problem.'' When I was looking 
at this issue, it struck me that tax evasion is exactly the 
same situation. Whether you seek a larger role for government 
or you favor smaller government and lower taxes, tax evasion 
undermines your objectives.
    In brief, here are my main points. Tax evasion is a huge 
problem costing the Treasury and honest taxpayers that get 
stuck with the disproportionate load hundreds of billions of 
dollars a year. The IRS needs more resources, and it needs to 
be able to focus those resources on addressing the most serious 
elements of noncompliance.
    And although the IRS is doing many things right in this 
area, its preoccupation with the EITC noncompliance is not one 
of them. The EITC noncompliance is, unfortunately, a symptom of 
systemic problems and the appropriate solution is a broad based 
attack on noncompliance and the causes of noncompliance 
throughout the income tax system.
    Former IRS Commissioner Charles Rossotti, estimates that in 
a given year the IRS assesses almost $30 billion in taxes that 
it will never collect. This isn't a theoretical measure of tax 
evasion. The $30 billion represents underpayment of tax that 
the IRS has identified but can't collect because its staff is 
spread so thin. Rossotti estimated that it would cost about 
$2.2 billion to collect that money. So in net there is $28 
billion waiting for the IRS to collect.
    It is also serious money. If we can collect these 
assessments, we could raise enough money over the next decade 
to pay for the new prescription drug benefit under Medicare. 
That is more than the entire cost of the tax bill that was just 
enacted last month.
    But even this amount is tiny compared to the entire tax gap 
that is the IRS's measure of total taxes due but not collected. 
The IRS estimates that $232 billion in taxes, almost 15 percent 
of the total due in 1998, were never collected. A figure at the 
end of my testimony, Figure 1, shows the composition of that 
gap.
    These estimates are highly uncertain, because the IRS 
stopped systematically measuring tax compliance for all but 
working poor people after 1988, but it suggests that tax 
compliance is a huge problem, and there is a lot of evidence 
that it has been growing.
    My written testimony discusses several reasons why the gap 
is so big. The main reason is that the IRS doesn't devote 
enough resources to audits and compliance activity. Its main 
responsibility is to run processing and customer service, 
answering telephones, et cetera. Compliance is the residual 
category and audits get squeezed when there are budget cuts or 
the IRS is asked to do other things.
    And unfortunately, the IRS is often asked to do other 
things. As an example, the tens of millions of special refund 
checks that the IRS is rushing to get out right now, the 
advance payment on the tax cut that was just enacted, are 
likely to draw resources out of the residual category, tax 
compliance.
    Tax evasion matters not just because it costs the 
government money, but it is also unfair. It costs revenues that 
could be used to make the tax system better, to pay down the 
debt or to provide additional government services. It wastes 
resources; that is, it hampers economic growth. It feeds on 
itself, reducing respect for the integrity of the tax system 
and leading to more cheating.
    The IRS is doing a lot of sensible things to stem evasion. 
They are raising the probability that people will be caught. 
They have asked for a significant budget increases to increase 
compliance.
    But the EITC compliance initiative is an exception. Now, 
admittedly, EITC noncompliance appears to be a problem. The IRS 
estimates that somewhere between 27 and 31 percent of earned 
income tax credits were issued erroneously in 1999 either 
because of taxpayer confusion or fraud. They estimate the EITC 
compliance gap at $7.8 billion in 1998. That is the number that 
corresponds to the table at the end of the testimony. For 
various reasons, that is likely to be an overestimate of the 
current problem. But even if taken at the face value, the $7.8 
billion estimate is only about 0.5 percent of revenues or 2.8 
percent of the total tax gap. EITC enforcement accounts for 3.8 
percent of the total enforcement budget in 2003. Indeed, the 
IRS has requested a 68.5 percent increase in its EITC 
enforcement budget, while increasing other enforcement by only 
3.3 percent.
    I should point out, with some embarrassment, that there is 
a typo in the testimony that you have, that the 3.3 percent 
number was overstated in that version. In fact, the increase in 
the EITC enforcement would account for 45 percent of all new 
compliance dollars.
    On the previous panel, someone was talking about his 
experience as a small businessman. I talked to a former student 
yesterday, and I talked to her about what I was going to 
testify on. She had run a business. I told her that there are 
$30 billion in uncollected assessments that the IRS can't 
collect, and they are spending most of their new resources 
trying to figure out how to find noncompliance among the 
working poor.
    She said that she would never run a business that way. You 
go after the big debts first, and the small fish last.
    Now, I admit to being a big fan of the earned income tax 
credit. As an economist, I have a great respect for the 
efficiency of markets, but I also recognize the market outcomes 
aren't always fair. Some people can work as hard as they can 
and never earn more than $5 or $6 an hour.
    The EITC helps hardworking poor people to feed their 
families without interfering with the market determination of 
wages. That is why Ronald Reagan called it the best antipoverty 
program there is.
    The apparently high rates of noncompliance for the EITC are 
troubling, for two reasons. First, cheating is wrong no matter 
who does it. Second, noncompliance threatens to undermine 
political support for a program that helps millions of people.
    But it is necessary to put the noncompliance statistics in 
context. It is likely that much of the EITC noncompliance 
reflects compliance problems that are endemic to the entire 
income tax. If that is true, then targeting compliance activity 
of the EITC participants alone doesn't make a lot of sense. A 
lot of the noncompliance has to do with the definition of an 
eligible child for purposes of the EITC. If people think that 
they can get away with it, some will claim child benefits to 
which they are not entitled. And that happens throughout the 
tax filing population.
    In 1986 the IRS started requiring taxpayers to list the 
Social Security numbers of their kids on tax returns. 
Overnight, 7 million dependents vanished. Treasury economists 
looked at the data on the EITC, and they looked at mistakes 
people made with eligible children, for the EITC, and they also 
looked at mistakes they made in claiming dependent exemptions. 
What they found is on those returns, people were more likely to 
make mistakes with dependent exemptions, and it is likely that 
this kind of problem exists throughout the tax filing 
population.
    The study by these two Treasury economists also found on 
the EITC there was homemade marriage penalty relief. People 
pretended not to be married to claim more EITC.
    Now, we don't have any data on this for higher-income 
people, because the IRS doesn't do systematic compliance 
assessments for higher-income people although they are planning 
to, going forward. My guess is that there are problems with 
roll your own marriage penalty relief with higher-income people 
as well, and chances are that any approach to that should be 
systematic and not just for low income people.
    Some EITC recipients misstated their income. The ones most 
likely to do that were the self-employed. Based on very, very 
old compliance data, we know that self-employed people are also 
most likely to misstate their income for regular tax purposes.
    There is a lot of evidence that some EITC noncompliance is 
unintentional. The program is complicated. These people have 
complicated lives. The solution to that is probably to make the 
program simpler. And also education and outreach.
    Congress and the IRS have both taken steps to improve 
compliance. But the IRS is about to start a new 
precertification program for the EITC. Certain people will have 
to prove they are eligible before they can claim the credit. 
Although it would probably improve compliance, it would also 
significantly reduce participation in the program and might not 
save the government much money.
    Those two Treasury economists compared the overall costs of 
the EITC, including the cost of noncompliance, with the cost of 
programs like food stamps and welfare. And they found that the 
overall costs are very similar. So the net effect of spending a 
whole lot of money on precertification might be to scare away a 
lot of eligible participants without actually making the 
program, overall, much more efficient, which would be a 
problem.
    There are real issues in subjecting the EITC recipients to 
a precertification process that doesn't apply to other tax 
filers. We don't do that anywhere else in the tax system, even 
though we know there are lots of sources of noncompliance.
    The IRS's proposed strategy now is to select about 45,000 
single fathers and grandparents and other adults and have them 
prove that the child lives with them. Bob Greenstein has 
documented all the ways in which that is not going to work. 
Basically, a child living with her grandparent and who goes to 
an uncertified day care center, would not have any way of 
proving to the IRS's satisfaction that she is eligible. At a 
minimum, we should check that precertification meets its 
objective before subjecting 2 million or more taxpayers to it.
    That concludes my testimony. And I would be pleased to 
answer your questions.
    Mr. Wicker [presiding]. Thank you very much.
    [The prepared statement of Mr. Burman follows:]

   Prepared Statement of Leonard E. Burman, Senior Fellow, the Urban 
  Institute, Co-Director, the Tax Policy Center, Research Professor, 
                   Georgetown Public Policy Institute

    Mr. Chairman, Mr. Spratt, and distinguished members of the 
committee, thank you for inviting me to share my views on waste, fraud, 
and abuse in the tax system. The views I express are mine alone and 
should not be attributed to any of the organizations with which I am 
affiliated.
    I applaud the committee's efforts to rein in waste, fraud, and 
abuse, and its recognition that fraud is not only a problem on the 
spending side of the ledger, but also appears on the tax side. Indeed, 
there is overwhelming evidence that tax fraud is epidemic, and the IRS 
has already identified tax underpayments that dwarf any amounts the 
distinguished Inspectors General who testified on the first panel are 
likely to unearth in their examination of cash transfer programs. The 
main issue is whether the IRS can deploy its resources to effectively 
collect a larger share of taxpayers' legal obligations.
    Mr. Chairman, in an earlier hearing on the same subject, you noted 
that ``wasteful Washington spending is not a Republican problem or a 
Democrat problem.'' I will argue that the same may be said for tax 
evasion. Whether you see a larger role for government or favor smaller 
government and lower taxes, tax evasion undermines your objectives.
    I'd like to start with some startling statistics on tax evasion. I 
will then turn to the argument for trying to stem it, and discuss why 
IRS efforts so far have been disappointing. I will then focus on 
specific issues related to the earned income tax credit (EITC), since 
that program has been the center of a disproportionate amount of IRS 
compliance activity and current compliance plans raise many issues.

                I. THE SCOPE OF THE TAX EVASION PROBLEM

    Former IRS Commissioner Charles Rossotti (2002) estimated that in a 
given year, the IRS assesses almost $30 billion of taxes that it will 
never collect. This is not theoretical tax evasion. The $30 billion 
represents underpayments of tax that the IRS has identified, but cannot 
collect because its staff is spread so thin. Rossotti estimated that it 
would cost about $2.2 billion to collect that money. If you accept that 
estimate, there is almost $28 billion in tax fraud and errors that are 
identified and ripe for collection.
    Assuming that the amount grows with GDP, collecting on assessments 
would, over the next decade, cover the entire cost of the new 
prescription drug benefit under Medicare (although not the superfluous 
new savings accounts in the House version of the bill). It is more than 
the entire cost of the Jobs and Growth Tax Reconciliation Act of 2003 
as scored by the JCT (although not enough to finance the extension of 
the myriad expiring provisions). It is serious money.
    But it is tiny compared with the entire ``tax gap''--the IRS's 
estimate of total taxes due but not collected. The IRS estimated that 
$232 billion in taxes were due in 1998, but never collected. (See 
Figure 1.) These estimates are highly uncertain because the IRS stopped 
systematically measuring tax compliance for all but working poor people 
after 1988, but it suggests that tax compliance is a huge problem, and 
it has been growing.
    According to Commissioner Rossotti, ``Despite significant 
improvements in the management of the IRS, the health of the Federal 
tax administration system is on a serious long-term downtrend. This is 
systematically undermining one of the most important foundations of the 
American economy.''
    Why is the gap growing? To begin with, the number of tax returns 
has been growing much faster than the IRS staff. This has occurred for 
several reasons. There are more head of household and single returns 
and fewer married filing joint returns because couples are marrying 
later, if at all, and the divorce rate is rising. Also, many more 
children are filing tax returns. (Plumley and Steuerle, forthcoming).
    Moreover, after steady growth in compliance resources through the 
1980s, IRS staff dedicated to compliance and enforcement plummeted in 
the 1990s. Between fiscal years 1992 and 2001, the IRS workload 
increased by 16 percent while its staff declined by 16 percent. Field 
Compliance personnel fell by 28 percent--more than 8,000 FTEs--between 
fiscal years 1992 and 2002.
    The effect on examinations is even more striking. According to the 
Internal Revenue Service (2001), the number of field examiners fell by 
almost two-third between 1997 and 2000. The number of collection cases 
closed fell by nearly half over the same interval. The number of 
criminal tax cases not related to income from illegal activities fell 
by more than two-thirds, from 1,498 in 1997 to 409 in 2000.
    A large part of the problem, according to the Commissioner, is 
``unrealistic assumptions about such items as pay raises, inflation and 
other mandates, including specific mailing and notification 
requirements.'' In the late 1990s, a key factor was the taxpayer bill 
of rights, which required the IRS to answer its telephones and focus 
its efforts on ``customer service.'' The better service, while surely 
welcome, came at the expense of audit activity. This decade, Congress 
has twice mandated that the IRS interrupt its ordinary operations to 
mail out springtime checks to most taxpayers--advance payments on the 
low-end tax rate cut in 2001 and on the child credit increase in 2003. 
Without a supplemental appropriation to pay for additional staff, the 
staff managing these huge mailings must come out of existing employees, 
typically compliance staff.
    Finally, the opportunities for evasion have been growing. While the 
overall number of returns grew by 16 percent, the number of tax returns 
reporting more than $100,000 of income grew by 342 percent. These 
people who face the highest marginal tax rates have the most to gain 
from tax evasion, and the most opportunities to engage in it. 
Commissioner Rossotti reported that ``enormous amounts of money * * * 
flow through `pass-through entities'--such as partnerships, trusts, and 
S-corporations,'' which are ideally suited to hiding income. In tax 
year 2000, pass-throughs accounted for 4.8 million tax returns with 
over $660 billion of income.
    Commissioner Everson has taken up where Mr. Rossotti left off 
calling for a renewed focus on enforcement: ``* * * (T)he IRS is 
committed to ensuring everyone pays his or her fair share, including 
those who have the resources to move money offshore or engage in 
abusive schemes or shelters. We must focus our efforts on achieving 
greater corporate accountability and ensure that high-end taxpayers 
fulfill their responsibilities. Honest taxpayers should not bear the 
burden of others who skirt their responsibility.''(May 20, 2003.)

                      II. WHY TAX EVASION MATTERS

    Tax evasion undermines the tax system in numerous ways. It is 
unfair. It costs revenues that could be used to make the tax system 
better, pay down the debt, or provide additional government services. 
It wastes resources--i.e., hampers economic growth. And it feeds on 
itself, reducing respect for the integrity of the tax system and 
leading to more cheating.
    Tax evasion is fundamentally unfair: unless they are caught, 
cheaters pay less tax than their law-abiding neighbors. But Figure 1 
shows that getting caught is highly unlikely. Of the $282 billion of 
taxes not paid on time in 1998, only about $50 billion was eventually 
collected, and about half of that was voluntarily remitted by tardy 
taxpayers. Thus, the IRS only collected about 10 percent of underpaid 
tax through enforcement activity. The individual audit rate has fallen 
from 2.15 percent in 1978 to 0.58 percent in 2001. Almost 4 percent of 
individuals with business income were audited in 1995, because they 
were known to be comparatively noncompliant. That rate fell in half--to 
2 percent--in 2001. In 1993, more than 3 percent of corporate income 
tax returns were audited. By 2001, despite a well publicized epidemic 
of questionable and illegal corporate tax shelters in the late 1990s, 
less than 1 percent of corporations were audited. (Indeed, that 
statistic makes one suspect that the corporate tax shelter boom was fed 
by the IRS's apparent indifference.)
    Tax evasion undermines both Republicans' and Democrats' notion of a 
good government. The lost tax revenue inevitably means higher taxes on 
law-abiding citizens, less government services, or both. If we could 
close half of the tax gap, the IRS could raise close to $150 billion on 
tax year 2003 returns (assuming that the tax gap grows at the same rate 
as GDP). Over the decade, collections would increase by something like 
$1.7 trillion--the entire cost of the 2001 tax cut as scored by the 
JCT. With that money, we could (1) eliminate more than two-thirds of 
the public debt according to CBO projections, or (2) cut income tax 
rates across the board by more than 10 percent, or (3) provide health 
care for the uninsured and a generous prescription drug benefit under 
Medicare, or (4) fully fund the transition to individual accounts under 
Social Security. I don't mean to endorse any of these policy proposals 
(my four kids, however, think that paying down the debt is a very good 
idea), but they illustrate that this huge hole in our income tax is 
keeping us from getting the government any of us wants.
    Second, some argue that tax evasion might be OK because it lowers 
tax burdens. That argument is obviously false in the aggregate-tax 
evasion simply reallocates tax burdens from noncompliant to compliant 
taxpayers. But, it also is a uniquely inefficient way to cut taxes. 
Companies alter their business practices to hide income from the IRS, 
as Bob McIntyre explained in his testimony in the earlier hearing. A 
good tax system interferes as little as possible in businesses' and 
individuals' decisions, but abusive tax shelters virtually always 
involve substantial distortions. Some companies now view their tax 
departments as profit centers--that is, they make money by hiding it 
from the IRS rather than by producing more and better products. 
Individuals make investment decisions not based on where they will earn 
the highest pre-tax rate of return, but where they can make the most 
money after subtracting taxes, promoters' fees, and legal fees. Thus, 
money is not going to where it can produce the most return, but to 
where it can produce the most tax savings. Moreover, the fees paid to 
tax shelter promoters, unethical lawyers, financial wizards, etc. are a 
pure waste of resources. Most of these intermediaries could be doing 
productive work if inadequate enforcement did not make tax evasion so 
lucrative.
    In contrast, if the IRS stems tax evasion and uses the money to pay 
for debt reduction or tax rate cuts, the economy is sure to grow 
faster. First, there would be fewer distortions from the tax shelter 
arrangements. Second, debt reduction would reduce government crowding-
out of private investment: that is, it would lower interest rates, 
making capital less costly for businesses. Or tax rate reductions would 
reduce the incentive to avoid tax by working less, saving less, or 
engaging in legal or illegal tax shelters.
    Finally, tax evasion can create a vicious cycle of growing 
disrespect for the tax system, which undermines voluntary compliance. 
The IRS has some evidence that this is happening now from Roper surveys 
they commissioned in 1999 and 2001. In 1999, 87 percent of respondents 
said that cheating on taxes was unacceptable; in 2001, only 76 percent. 
In 1999, 96 percent of respondents agreed that it is everyone's duty to 
pay their fair share of taxes; in 2001, 91 percent. And, in 2001, 
respondents were skeptical that cheaters would be caught. A plurality 
of respondents (37 percent) said that cheaters were less likely to be 
audited in 2001 than in the past. Only one in three thought the odds of 
detection had increased.

                             III. SOLUTIONS

    What can be done about the epidemic of tax evasion? Two things can 
deter those who are inclined to cheat: a high probability of detection 
and a high penalty if caught. In this regard, the first order of 
business ought to be to make sure that, barring extenuating 
circumstances, everyone who is caught underpaying their tax is made to 
pay what they owe. Correcting the alarming statistics reported by 
Commissioner Rossotti should be the first order of business: (1) 60 
percent of identified tax debts are not collected; (2) 75 percent of 
identified nonfilers are not pursued; (3) 79 percent of taxpayers who 
use known abusive devices to avoid tax are not pursued; (4) 78 percent 
of taxpayers identified through document matching programs are not 
pursued; and (5) 56 percent of noncompliant taxpayers with incomes over 
$100,000 get off scot-free.
    Given the large amounts of money involved, it should be possible to 
solve this problem without costing anything. One option would be to 
raise the penalties and/or interest for taxpayers once they are 
identified as noncompliant. The clock on these excess penalties could 
stop for nonfrivolous legal challenges, but taxpayers who decided to 
try a rope-a-dope strategy with the IRS would find it unprofitable. A 
second option would be to allow the IRS to divert a fraction of the 
revenues it collects from enforcement action into a trust fund that 
could be tapped to pay for other enforcement activities. (Since money 
is fungible, this strategy only works if the Congress does not cut the 
rest of the IRS's budget at the same time that they are tapping the 
trust fund to finance enhanced enforcement.)
    The IRS is taking steps to raise the probability of detection, 
which is good, both by expanding its document matching program and 
increasing the number of examiners (although the latter might be 
derailed by the rebate program and other competing demands for scarce 
resources). It is well known that compliance is much higher when the 
IRS has an independent source of verification.
    There is, of course, a risk that compliance activity could go too 
far. Arguably, that is why the Congress terminated the taxpayer 
compliance measurement program (TCMP), which involved highly intrusive 
random audits. Arguably, the taxpayer bill of rights was aimed at 
redressing a system that favored the tax collector too much at the 
expense of law abiding citizens. Unfortunately, the resources to 
protect taxpayer rights came out of the resources used for enforcement, 
so the balance may have shifted too far in the other direction.
    Given scarce resources, it is important that the IRS targets them 
where the payoff is greatest. The TCMP was designed to allow that, but 
was terminated because it was too intrusive on lawful taxpayers. The 
IRS is now engaging in a new audit strategy called the National 
Research Program, which will adjust audit rates based on the yield from 
less intrusive audits--many of which will not involve any taxpayer 
contact unless a problem is discovered. This is clearly a promising 
approach to balancing taxpayer rights with the imperative to improve 
collections.

                    IV. THE EITC COMPLIANCE PROGRAM

    Amid all this enlightened activity by the IRS, one example stands 
out as a misallocation of resources and a failure to balance the rights 
of taxpayers against the need for enforcement--the EITC compliance 
initiative. EITC noncompliance appears to be a problem. The IRS 
estimates that somewhere between 27 and 31 percent of earned income tax 
credits were issued erroneously in 1999, either because of taxpayer 
confusion or fraud. They estimate the EITC compliance gap at $7.8 
billion in 1998 (See Table 1), about 0.5 percent of revenues and about 
2.8 percent of the total tax gap. But EITC enforcement accounts for 3.8 
percent of total enforcement budget in 2003. Indeed, the IRS has 
requested a 68.5 percent increase in its EITC enforcement budget, while 
increasing other enforcement by only 3.3 percent. In fact, the increase 
in EITC enforcement would account for 45 percent of all new compliance 
dollars. (Internal Revenue Service 2003) On its face, this seems like 
an inefficient way to spend scarce compliance resources.
    The apparently high rates of noncompliance are troubling, but it is 
necessary to put them in context. Indeed, it is likely that much EITC 
noncompliance reflects compliance problems that are endemic to the 
entire income tax. If that is true, then targeting compliance activity 
at EITC participants alone may not be the most effective use of IRS 
resources.
    The IRS's current compliance initiative, which will for the first 
time since 1988 collect information about other than low income 
taxpayers, may help resolve some of these issues.

A. EITC Noncompliance in perspective
    Two Treasury economists (Holtzblatt and McCubbin, forthcoming) used 
data from the IRS's 1999 EITC compliance study to draw out some 
comparisons between EITC compliance and compliance with other tax 
provisions that require some definition of an ``eligible child.'' Of 
children claimed for both the EITC and the dependent exemption (97 
percent of ``qualifying children'' claimed for EITC were also claimed 
as dependents), more tax filers failed the test for dependency status 
(for the exemption) than the test for qualifying child (for the EITC). 
It is striking that one-third of children were claimed in error for the 
dependent exemption, the EITC, or both. However, while 6 percent 
qualified as a dependent but not as an EITC-qualifying child, 11 
percent (almost twice as many) were eligible for qualifying child 
status but not for a dependent exemption. That is, there were more 
children claimed in error as a dependent for purposes of the exemption 
than as an EITC-qualifying child. An additional 17 percent of children 
were ineligible for both.
    While this level of noncompliance with both provisions is 
troubling, the statistics only apply to low income tax filers who were 
audited as part of the EITC compliance program. These statistics raise 
the question of whether higher income people have the same propensity 
to claim dependent exemptions for children who do not qualify. There is 
some historical evidence (from 1986) that people are prone to cheat 
with dependent exemptions when they think they can get away with it. In 
that year, five million children disappeared when the IRS started 
requiring reporting of Social Security numbers to verify dependent 
exemptions (Graetz 1997).
    The ineluctable conclusion is that there are likely to be many 
dependents claimed incorrectly at all income levels--not just among the 
poor. Thus, the relevant policy response would be to study compliance 
in the entire taxpaying population, not just among low income people.
    Another fascinating set of statistics drawn from the EITC 
compliance data relates to homemade marriage penalty relief. In 1999, 
0.5 million people filed as head of household when they were actually 
married and living together, possibly to avoid EITC marriage penalties. 
Another 0.4 million filed as single when they should have claimed 
another unspecified status. Three-quarters of a million filed as head 
of household when they lived apart from their spouse for at least part 
of the year, but were still married and should have filed as married 
filing joint or married filing separate. The obvious question is the 
extent to which this type of roll-your-own marriage penalty relief 
occurs among higher-income taxpayers (who often have a far greater 
incentive to misstate their filing status).
    Some EITC recipients with income in or beyond the phase out range 
of the credit underreported their income and thus increased their tax 
refund. Half of the unreported income was from self-employment, 
consistent with ancient evidence from the TCMP that self-employment 
income is an area of rampant evasion. Again, while the noncompliance 
among EITC recipients is troubling, there is no reason to think that it 
is any worse than exists among the taxpaying public generally.

B. How much noncompliance is intentional?
    A key question is how much of EITC noncompliance is intentional, 
and how much inadvertent. If intentional tax evasion is rampant, then 
the solution is to ramp up enforcement. However, if a major source of 
noncompliance comes from taxpayer confusion, then education, assistance 
in preparing tax returns, and simplification of the tax law would be 
better-targeted policy responses.
    Janet McCubbin (2000) reported that at least 28 percent of 
qualifying child errors are systematic, and thus intentional attempts 
to overclaim the EITC. Some of the remaining 72 percent may be 
influenced by other elements of code, such as the dependent exemption. 
How many of the 72 percent are simply confused tax filers?
    There's certainly evidence of confusion. As Holtzblatt and McCubbin 
report, the IRS mailed notices to 194,000 taxpayers who appeared to be 
eligible for the EITC based on income and the presence of dependent 
children reported on their 1998 return. About one-third responded 
requesting the credit. The IRS also sent 680,000 notices to low-wage 
single filers notifying them that they appeared to be eligible. About 
45 percent of them responded requesting the credit. The people who only 
requested the credit after being notified by the IRS almost surely 
underclaimed the credit unintentionally. Some of those who overclaimed 
are surely similarly uninformed.
    It is also worth mentioning that not all of the EITC tax gap would 
be collected if EITC enforcement were perfect. In many cases where one 
person wrongly claims the EITC as the eligible custodial adult, another 
person might be eligible for an EITC, albeit possibly a smaller one. We 
have no evidence on whether someone else is eligible for the EITC when 
a person is found to be disqualified, although this is clearly an 
important measure of the costs of noncompliance to the Treasury. In 
addition, because of flaws in the design of the compliance studies, it 
is possible that actual noncompliance is much less than the IRS 
estimates. (Greenstein 2003b.)

C. Addressing EITC noncompliance
    As in other areas of the tax law, there is a trade-off between 
administration and compliance costs on the one hand and targeting, 
compliance, and participation on the other. The question for policy 
makers is how to strike the right balance. The IRS could audit every 
return, which would minimize noncompliance, but would maximize 
enforcement and compliance costs. At the other extreme, the IRS could 
make all low-earning families eligible for EITC, without regard to 
children, which would also reduce noncompliance, but at great cost in 
terms of tax revenues. In that context, one might argue that the 
current system does not do a bad job of balancing competing objectives.
    The compliance problems with EITC may be viewed as comprising two 
parts, each of which has a specific policy implication: systemic 
problems and those specific to the EITC. There are errors and fraud 
that are endemic to the income tax, such as children claimed 
incorrectly, understated income, and incorrect filing status. The 
solution to that problem is system-wide enforcement, not a specific 
EITC compliance program. Indeed, targeting scarce enforcement resources 
on low-wage returns to catch systemic noncompliance would be a highly 
inefficient audit strategy, since so much more money is at stake on the 
high-income returns.
    Certain errors are specific to the EITC. For example, a major 
factor in the 1999 data involves parents who violated the confusing AGI 
tie-breaker rule or were disqualified because of too much non-cash 
earned income (such as pensions, parsonage benefits, and the like). In 
these cases, Congress ultimately decided that the targeting rule was 
not worth the cost and the rules were simplified to reduce chances of 
inadvertent errors.
    A similar example is the inconsistent definition of a child for 
different purposes. The Treasury has proposed rules to make the 
definitions more consistent and intuitive, and the Senate included them 
in the Relief for Working Families Tax Act Of 2003, but they have not 
yet been enacted. (Treasury 2002). Further simplifications would be 
possible, such as automatically allowing a dependent to be a qualifying 
child for EITC purposes so long as the other parent does not claim the 
child for the EITC. These simplifications all involve some cost in 
terms of tax revenues, but they would significantly reduce confusion 
for low income working families who do not tend to think like tax 
lawyers.
    Another promising approach is to enlist the help of those who 
prepare tax returns for low income people. Almost two-thirds of EITC 
returns are prepared by paid preparers. IRS statistics show that more 
competent preparers--accountants, lawyers, enrolled agents, major tax 
preparation firms--produce returns with fewer errors than less 
competent preparers. Volunteer tax preparers have the lowest error 
rate, although the sample is too small to draw firm inference. It is at 
least possible that spending more time on tax returns reduces the 
likelihood of errors. It is also possible that differences in 
performance among preparers reflect self-selection--that noncompliant 
taxpayers are more likely to seek the help of disreputable tax 
preparers--but this conjecture should be tested.
    In 1999, the IRS initiated a large-scale outreach program aimed at 
tax return preparers who had recently prepared at least 100 EITC 
returns. During those visits, preparers (other than national firms, 
CPAs, lawyers, and enrolled agents) received one-on-one instruction 
from Revenue agents on EITC compliance and preparers' due diligence 
responsibilities. Because most EITC claimants use paid preparers, such 
a strategy could prevent both unintentional and intentional errors on 
tax returns claiming the EITC. The value of this approach could be 
measured by comparing the accuracy of trained preparers with similar 
preparers who did not get training. However, no data are available yet 
and it is not clear that the IRS followed up. If not, they lost an 
important opportunity to improve compliance without adding extra 
burdens for low income taxpayers.
    The other tool to improve compliance is to strengthen EITC 
enforcement. The IRS is about to start a new precertification program 
for the EITC. This probably would improve compliance, but also could 
significantly reduce participation, and might not save the government 
much money. The cash assistance programs that you heard about this 
morning cost about as much to administer as the EITC, including both 
the administration and compliance costs and the revenues lost due to 
noncompliance, but EITC participation is much higher than participation 
in direct transfer programs. (Holtzblatt and McCubbin, forthcoming). So 
the result of the IRS's EITC compliance offensive may be less payments 
to low income families, including many who are eligible but deterred by 
the new hurdles to participation, but little or no overall budget 
savings
    The proposed precertification program is supposed to be non-
intrusive, but it is not clear how the IRS can accomplish that. How can 
they determine that the residency requirement is met in advance, 
especially for households that are highly mobile? Arguably, it is 
unfair to single out the EITC. Eligibility for other tax benefits, such 
as head of household status and the dependency exemption, also 
theoretically require extensive record keeping. Resolving filing status 
errors would require fairly intrusive tests, which again might be hard 
to certify in advance. The fear among those who care about the EITC is 
that the precertification strategy is tantamount to a 100 percent audit 
rate (in advance) for certain people who claim the EITC.
    There are also real issues in subjecting EITC recipients to a 
precertification process that does not apply to any other tax filers. 
People do not need to precertify before taking a charitable deduction 
for a used car or clothing, even though there is ample evidence that 
these deductions are overstated. Sole proprietorships do not need to 
precertify that they are not hiding cash from the tax authority before 
claiming deductions for inventories, rent, and equipment, even though 
sole props are notoriously noncompliant. And so on.
    In point of fact, the IRS's proposed strategy now is to select 
about 45,000 single fathers, grandparents, and other adults who claim 
to care for a qualifying child for the precertification process. Bob 
Greenstein (2003a) has documented the ways in which the 
precertification requirements create a catch-22 for many grandparents 
and fathers who are lawfully eligible for the credit. For example, a 
grandparent who leaves her child with a nonlicensed family day care 
center cannot rely on an affidavit from the day care provider or from a 
relative or neighbor to prove that the child lived with her for the 
year. Since most low income people cannot afford expensive licensed day 
care facilities, this means that many eligible people will not be able 
to prove eligibility to the IRS. Add to this the problems of 
establishing eligibility for people who are transient or have language 
problems and you have a recipe for excluding many eligible recipients.
    At a minimum, we should check that precertification meets its 
objectives before subjecting 2 million or more taxpayers to it.

                               CONCLUSION

    Noncompliance is a serious issue that undermines the tax system and 
carries a huge cost in terms of higher taxes on law-abiding citizens, 
fewer government services, and more government debt. The IRS is taking 
a number of important steps to improve tax compliance. However, the 
IRS's preoccupation with EITC recipients seems like a poor use of 
scarce audit resources, that is likely to undermine the EITC program, 
and is unfair. It would be better to address the endemic problems in 
the income tax at all income levels. EITC compliance, and compliance in 
other areas, could also be improved by simplifying the program.

                               REFERENCES

    Graetz, Michael. 1997. The Decline [and Fall?] of the Income Tax, 
W. W. Norton and Company.
    Greenstein, Robert. 2003a. ``The New Procedures for the Earned 
Income Tax Credit,'' Center on Budget and Policy Priorities. http://
www.cbpp.org/5-20-03eitc2.pdf.
    Greenstein, Robert. 2003b. ``What is the Magnitude of EITC 
Overpayments?'' Center on Budget and Policy Priorities. http://
www.centeronbudget.org/5-20-03eitc3.pdf
    Holtzblatt, Janet and Janet McCubbin. Forthcoming. ``Complicated 
Lives: Tax Administrative Issues Affecting Low-Income Filers,'' in 
Henry Aaron and Joel Slemrod, The Crisis in Tax Administration, 
Brookings Institution Press.
    Internal Revenue Service. 2001. ``IRS Strategic Plan: Fiscal Years 
2000-2005,'' http://www.irs.gov/pub/irs-utl/irs--strategic--plan.pdf.
    Internal Revenue Service. 2003. ``Budget in Brief, Fiscal Year 
2004,'' http://www.irs.gov/pub/irs-utl/budget-brief.pdf
    McCubbin, Janet. 2000. ``EITC Noncompliance: The Determinants of 
the Misreporting of Children,'' National Tax Journal, 53(4): 1135-1164.
    Plumley, Alan H., and C. Eugene Steuerle. Forthcoming. ``What 
Should the Ultimate Objective of the Internal Revenue Service Be? A 
Fresh Look from an Historical Perspective,'' in Henry Aaron and Joel 
Slemrod, The Crisis in Tax Administration, Brookings Institution Press.
    Rossotti, Charles O. 2002. ``Report to the IRS Oversight Board: 
Assessment of the IRS and the Tax System,'' Internal Revenue Service, 
September.
    U.S. Department of the Treasury. 2002. ``Proposal for a Uniform 
Definition of a Qualifying Child,'' http://www.ustreas.gov/press/
releases/docs/child.pdf, April.

    Mr. Wicker. Questions now by Mr. Emanuel.
    Mr. Emanuel. Dr. Burman, if I get the gist of what you said 
at least as it relates to the earned income tax credit, that 
through simplification a lot of the $7.8 [billion] or $8 
billion that one throws under the title of waste, fraud, and 
abuse, would be eliminated; that, because of the complexity of 
the actual form, there are other pieces to this problem, but a 
good portion--we can net a lot of the savings that we are 
looking for by just simplifying the form, making it clear.
    We have the credit on the books. It has been endorsed going 
back from actually Milton Friedman through Ronald Reagan, 
through President Clinton; has in the past, at least until 
recently, bipartisan support.
    But my understanding, the gist of what you basically said, 
simplicity would garner a good--and do you have a percentage 
number on that or a dollar figure on that?
    Mr. Burman. It is hard to measure the actual dollar effect. 
Actually, the Congress enacted last year a provision that would 
allow parents to claim their children for purposes of the EITC 
even if they are living with someone else, like a grandparent. 
A lot of people couldn't understand why a mother couldn't claim 
the EITC with respect to her child, but the rules for targeting 
said the person with the higher income had to claim the credit.
    I asked Treasury how much they could save. It was on the 
order of like $1 [million] to $2 million of the erroneous----
    Mr. Emanuel. One to $2 billion you mean?
    Mr. Burman. One to $2 million returns were related to these 
qualifying child errors. I think actually if Congress were 
interested, they could simplify the EITC in a way that would 
vastly reduce noncompliance. A lot of the problems arise 
because with we have combined a program that is supposed to 
encourage work, with a subsidy for child rearing. If we 
actually separated the work subsidy from the child subsidy, 
things could be made a lot simpler.
    Mr. Emanuel. Since we only have 5 minutes to have this 
conversation, have you looked at on the precertification--not 
the EITC part, but what if we did that on the corporate side, 
what would happen?
    Mr. Burman. That is a good question. We know there is a 
huge amount of corporate noncompliance. I mean, there are some 
large corporations that have live-in auditors with them, But 
still there is a lot that escapes Treasury's attention.
    Treasury actually proposed in 2000, when I was Deputy 
Assistant Secretary, a whole set of disclosures for tax 
shelters--and those have never been enacted into law--that 
could raise several billion dollars and reduce tax evasion.
    Mr. Emanuel. I am cutting you off early, only because I 
have a few minutes here. But the Wall Street Journal the other 
day estimated that corporations dodge as much as about $11 
billion. Have there been any studies done out there on how much 
money has actually been lost through abusive use of tax 
shelters?
    Mr. Burman. A Stanford lawyer, Professor Bankman, I think, 
has studied this problem. And he had estimated the overall cost 
is like $10 [billion] or $11 billion. There is a problem in 
actually measuring the scope of the problem because it is 
hidden from the IRS. But we know that when Treasury--when the 
IRS has actually found these abusive shelters, they raised tens 
of billions of dollars already, things like lease-in/lease-out 
arrangements where companies lease city halls in Switzerland 
back to localities just to avoid tax.
    Mr. Emanuel. I want to follow up some pieces of questions 
on the corporate side. You basically said we have on the EITC a 
pre-registry. We haven't thought about and haven't looked at it 
on the corporate side. One of the questions on the corporate 
side is that we have abuse on the shelter side.
    The other point you made was I think on--I want to sum up 
for you--is that we have a lot of moneys on the compliance side 
being dedicated toward the EITC, yet not equal dollars at all. 
Could you repeat the dollar spread or the percentage spread 
that you had earlier?
    Mr. Burman. The estimate was that 45 percent of the new 
compliance money was going into EITC enforcement. The overall 
enforcement budget increased by 3.3 percent while the increase 
in the EITC enforcement budget is 68.5 percent.
    Mr. Emanuel. Some of the 3.3, 68 percent is going toward 
EITC? Is that correct?
    Mr. Burman. It is actually 45 percent of the 3.3 is going 
to EITC.
    Mr. Emanuel. Thank you. Just wanted to make sure I 
understood. I have no other questions.
    Mr. Wicker. Thank you, Mr. Emanuel.
    Dr. Burman, let me just follow up on that point to begin 
with. I do not doubt your figures that there has been a 68.5 
percent increase in the EITC enforcement as opposed to 3.3 
percent in the other aspects. But I guess the more important 
statistic would be the base from which that increase began. I 
mean that, certainly on its face, is a startling figure. But it 
also might be because so little was being spent to begin with 
on the EITC enforcement. Wouldn't that be a better measure?
    Mr. Burman. EITC enforcement accounts for 3.8 percent of 
the total enforcement budget, whereas the measured EITC 
noncompliance, which is probably an overestimate, is 2.8 
percent of the overall gap. So it is still disproportionate.
    Mr. Wicker. By 1 percentage point?
    Mr. Burman. Yes.
    Mr. Wicker. Now, you say that the IRS estimates that 
somewhere between 27 and 31 percent of earned income tax 
credits were issued erroneously. That does strike me as very 
troublesome and very, very high. Is there that high of an 
estimate in any other aspects of the IRS compliance?
    Mr. Burman. Basically compliance is related to the IRS's 
ability to track the data--to track from independent sources. 
Compliance on wage income is quite high because of withholding.
    Compliance where the IRS has document tracking programs, 
like dividends and interest, things like that is also fairly 
high, although not as high as for wages. There is very high 
noncompliance for self-employment income, at least based on 
what is now 15-year-old data. We haven't been tracking it 
lately. The noncompliance rate is the same order of magnitude 
or even higher. So basically----
    Mr. Wicker. In other words, your testimony is that for 
self-employment, it is around 27 to 31 percent noncompliance?
    Mr. Burman. I haven't looked at the data recently, but my 
recollection is that the numbers were at least 30 percent.
    Mr. Wicker. It would be perfectly fine for you to 
supplement your answer.
    Mr. Burman. I would be happy to do that.
    [The information referred to follows:]

    Mr. Burman's Response to Mr. Wicker's Question Regarding the IRS

    In 1987 and 1988, the IRS estimated that self-employed people 
understated income by 32 to 49 percent. Those in the informal sector 
did so by between 81 and 87 percent. Farm income was also understated 
by an estimated 30 percent in 1998 (data were not available for 1997).

    Mr. Wicker. In terms of loss to the Treasury, is your 
testimony that the Treasury loses some $7.8 billion per year 
because of fraud or error in the EITC?
    Mr. Burman. The 7.8 billion actually corresponds to the 
chart in the packet. The IRS's most recent estimate for 1999 is 
$8.5 billion. The IRS's estimate might well be an overstatement 
of what the current loss is for a couple of reasons. One, based 
on a sample of taxpayers, they basically sent people letters, 
and said come into our office for an audit. Everyone who didn't 
come in was assumed to be noncompliant. But these are low 
income working people who often couldn't get away during 
working hours. Some of the sources of noncompliance might well 
have been dealt with through other IRS initiatives.
    The IRS has access to something called the Federal Case 
Registry. Basically it is a registry of information from Health 
and Human Services of custodianship orders and divorce decrees. 
And basically they can track independently whether fathers are 
living with their children or not. That was a big source of 
noncompliance. And the IRS can now actually disallow a credit 
to a father who doesn't appear to be living with their child.
    Now, the other thing is that----
    Mr. Wicker. What is your best guess if $8.5 billion is an 
overstatement?
    Mr. Burman. I can't tell you exactly. I am actually not 
trying to understate the size of the problem. There is a 
serious problem. I don't have a better estimate. But it is 
likely to be smaller, just because of things that have already 
been done and because of the errors in the study.
    Mr. Wicker. Now, from the very beginning of your testimony, 
do I understand that the total loss to the Treasury in all 
forms of nontax compliance per year is approximately $30 
billion? Is that your testimony?
    Mr. Burman. Actually the total loss is $230 billion 
according to the IRS estimates. The $30 billion is Commissioner 
Rossotti's estimate of payments that the IRS is due that it is 
not collecting on. So these are actually people who have 
already been identified, people that didn't file tax returns, 
people who engaged in abusive tax shelters and things like 
that, and the IRS is just not collecting the money. That, to 
me, seems like it should be easy pickings, and I don't 
understand why we are not collecting that.
    Mr. Wicker. That is a very good question. Mr. Neal.
    Mr. Neal. Thank you very much, Mr. Chairman.
    Mr. Burman, one of the distinct advantages in this 
institution of not having term limits is it gives one an 
institutional memory and also an element of consistency in the 
sense that not only did I not vote for term limits, I thought 
it was a bad idea. There is an element, as you know, in this 
House that thought it was a grand idea at election time but 
didn't think it was such a grand idea after they had been here 
for a while, and there is very little attention paid to what 
they said and did at the time.
    But I want to go into a little bit of statistical data that 
you used in your testimony, and I am going to take you to that 
point about why an institutional memory is important. You cite 
a 16 percent drop in staff over the last decade, while cases 
with the IRS grew by 16 percent; a 28 percent drop in field 
compliance personnel, and field examiners having been cut by 
two-thirds over the last 5 years, with collection cases 
dropping in half, and criminal cases by two-thirds over the 
same period.
    At the same time, the newly appointed IRS Commissioner has 
quote, ``tossed in the towel,'' and said private collection 
agencies should come in to do what the IRS cannot seem to do. 
Well, we have to ask, does this stem from inefficiency in terms 
of our cuts to the IRS personnel? And does the advocacy of 
hiring nongovernment workers to collect taxes make sense?
    Now, here is where I take you back to that term limits 
example. Our colleague and my classmate, Mr. Hancock from 
Missouri, did a credible job some years ago in citing why the 
IRS needed to have some changes institutionally made. And Mr. 
Hancock did a lot of good work on it. He brought a couple from 
Missouri, I believe, that had an age old problem, and we had a 
chance to meet with them. And Mr. Hancock was really a very 
nice fellow, and we had a pretty good working relationship 
within the Ways and Means Committee.
    But my point is that at that time, 60 Minutes and a number 
of other investigative shows did a series of stories on what 
was wrong with the notion of bounty hunters going out to 
collect. That was the basis. That was the pretext. That was the 
premise for Mr. Hancock's assault on the IRS, which the House 
voted overwhelming to change.
    Now, is the argument that is currently being offered that 
we ought to return to these bounty hunters, that we ought to 
return to those private collection agencies?
    Mr. Burman. That seems to be the argument. It is a little 
bit baffling. Actually one of the problems that the IRS has is 
that there were highly publicized hearings, which I am sure you 
remember, in which taxpayers talked about ways in which they 
had been abused by the IRS. The IRS are doing is, they clearly 
seems to be treating taxpayers better. Also, a lot of those 
stories turned out to be false as it turned out.
    The bad thing is that all of the resources for answering 
people's telephones, making sure that people got proper service 
from the IRS, came from reducing compliance, and at the same 
time they are cutting staff overall.
    It doesn't seem to me to make a lot of sense for the IRS to 
lose control of the process of collection, which has to be one 
of the touchiest aspects of its dealing with taxpayers, and 
cede it to private collections agencies. I don't see how they 
can control them. And it is very important that people believe 
that the tax system is administered fairly, and the IRS has to 
be responsible for how its interactions with taxpayers go.
    Mr. Neal. Well, the enthusiasm for the term limits 
advocates, that turned out to be false as well. I run that 
point by you. You don't have to comment on that if you don't 
want to.
    But let me speak also about the concerns that----
    Mr. Wicker. If the gentleman would yield.
    Mr. Neal. Am I out of time?
    Mr. Wicker. If the gentleman will yield--I just wanted to 
interject that he and I are unanimous both in our admiration 
for Mel Hancock and also our longstanding opposition to term 
limits.
    Mr. Neal. I thank the gentleman. I thank the gentleman for 
that, but I think one could argue that the majority today in 
some measure is the majority because they embraced the term 
limits notion, only not to abide by it once they became the 
majority. Or, to better state, that they really liked it, but 
since it had not become law, they felt that they had to stay 
for the good of the institution.
    Mr. Wicker. Well, the gentleman is entitled to make his 
point. But I was never a devotee of that particular concept, 
and never ran on it. I am glad it didn't pass.
    Mr. Neal. Well, I am most appreciative of the chairman's 
position in this instance, but I think you could make the case 
that it was an item in what was also known as the ``Contract 
With America.'' I think that was the cornerstone of the 
contract. In fact, the author of that contract proposed that 
there be a 12-year limit for Members of Congress, even though 
at the time he had been here 14 years when he proposed it.
    So I think it--just in terms of raising that collective 
memory that we have. Mr. Chairman, since I yielded, will I be 
able to use an extra minute or so here?
    Mr. Wicker. Absolutely. The gentleman can use several extra 
minutes.
    Mr. Neal. I thank the gentleman.
    We are dedicating a large number of resources to pursuing 
this whole notion of the earned income tax credit. Do you have 
any idea what sort of resources are used against corporate 
taxpayers? Just last week, we heard about some action being 
taken against some of the accounting houses that were offering 
apparently a false premise for some of the tax shelters that 
they had advised clients that they should take advantage of.
    And, more broadly speaking, do you have any idea of what 
sort of resources are being devoted at the IRS to cracking down 
on those companies that kind of move off-shore for the purpose 
of avoiding American corporate taxes?
    I know some of it you can argue is legal. And despite the 
fact that I was assured that there would be a vote in this 
institution on that a year ago, and I haven't gotten that vote 
yet. But do you have any idea how many employees are devoted to 
tracking down some of those companies who move money back and 
forth in an effort to avoid the long reach of the IRS? I assume 
individuals couldn't get away with saying that they don't owe 
taxes by opening a post office box in Bermuda.
    Mr. Burman. Until a couple of years ago, the IRS didn't 
even have a compliance program for corporate tax shelters 
specifically. I think that one of Commissioner Rossotti's last 
acts was to set up a group that would do that.
    I don't know how many employees are involved, but I know 
that the overall level of corporate tax audits has declined 
markedly over the last decade. In 1993, 3 percent of corporate 
income tax returns were audited. By 2001 it was less than 1 
percent, despite the fact that over the course of the decade, 
as you know, there was an epidemic of corporate tax shelters. 
So the IRS is seriously outgunned in this area.
    Mr. Neal. Have you picked up any information that would 
indicate that the IRS is developing any new plans to scrutinize 
some of these proposals?
    Mr. Burman. I know the IRS has started a new corporate tax 
shelter compliance program within the IRS that they didn't have 
before. If you would like, I can find out more about it and I 
can get back to you.
    Mr. Neal. That would be helpful.
    [The information referred to follows:]

 Mr. Burman's Response to Mr. Neal's Question Regarding The Office of 
                          Tax Shelter Analysis

    Here is the IRS description of its Office of Tax Shelter Analysis, 
submitted for the record.
    The Office of Tax Shelter Analysis (OTSA) was established in 2000 
as part of the Large and Mid-Size Business (LMSB) Division of the IRS. 
The office serves as focal point for efforts to gather and analyze 
information relating to tax shelter activity and to coordinate 
appropriate responses. Their work includes: collection and analysis of 
tax shelter data, including registrations and disclosures required by 
Treasury regulation; analysis of current and emerging tax shelter 
transactions; technical support to the field; coordination of strategic 
actions for the many functional units involved in combating abusive 
shelters; and serving as public ``hotline'' point of contact.
    OTSA has a full time staff of nine people. Additionally, there is a 
tax shelter analyst in each of the five LMSB industry offices.
    Source: IRS Announcement 2000-12, March 2000; Henry B. Holmes, LMSB 
Communications Specialist

    Mr. Neal. Thanks to the chairman. Thanks to a long career.
    Mr. Wicker. Four terms under my belt so far.
    Let me just ask a couple of follow-up questions. And I will 
also say to our witness that we--the members of this committee 
are scattered to the four winds, and we mean no disrespect by 
the fact that it is only down to two of us.
    You mentioned the complexity of the EITC system. Could you 
describe that to me, what is complex about filing for the 
earned income tax credit?
    Mr. Burman. Well, I have actually prepared a number of 
returns for low income people, and I will tell you that even 
though I am supposed to be an expert on this, I get confused 
every year. I mean, the rules are aimed at making sure that low 
income people claim children who live with them for at least 
half of the year and that the people themselves are eligible 
for the credit.
    There are tests that have to do with citizenship, with 
whether you and your child are living in the United States or 
not. The definition of a child for purposes of the EITC are 
different than the definitions that apply for other kind of 
child subsidies, like the child tax credit, and the dependent 
exemption.
    There actually is a proposal in the Senate--the Senate 
version of the provision that would allow low income working 
people to take the child tax credit--that includes a provision 
that would make more uniform the definition of a child across 
these different programs. It was a proposal made by the 
Treasury Department.
    Part of the problem, low income people have is just 
documenting things like that they live with their child. They 
move around a lot. They are more mobile than higher-income 
people. A lot of them are homeless. And to claim the credit, 
you have to be living in the same home as your child for at 
least half of the year.
    Mr. Wicker. A lot of recipients of the earned income tax 
credit are homeless?
    Mr. Burman. For part of the year. They are moving around. I 
have done tax returns for one or two people who said that for a 
portion of the year they were living in a homeless shelter with 
their child, working poor people who are eligible for the 
credit but are just moving around a lot. I have done tax 
returns for people who said that for 2 months of the year they 
were living with an aunt, for another 3 months of the year they 
were living with a boyfriend; you know, for 4 months of the 
year they were living somewhere else.
    Basically these are people--some of them are people on the 
edge, who are doing what they can just to provide a roof over 
the head of their child. They don't have checking accounts. We 
can sort of verify things. We can verify our financial 
arrangements by just looking at our check register. A lot of 
these low income people don't have checking or savings 
accounts.
    You know, the rules have gotten a little bit simpler. There 
used to be this AGI tie-breaker test, so if you lived with a 
higher-income person you might become ineligible for the 
credit. And actually the AGI tie-breaker test still applies in 
the case where the mother doesn't claim the credit or isn't 
taking care of the child.
    Just as an example, the IRS has proposed that people who 
would be subject to this percertification program should have 
to prove that the child lives with them for at least 6 months 
of the year. And they would target grandparents and fathers. I 
think there are serious problems in just going after men and 
not women. In the case of a grandparent or a father, if the 
grandparent has the child staying with a neighbor while she is 
working, she doesn't have any way of certifying eligibility to 
the satisfaction of the IRS under this new program. Neighbors 
are ineligible and noncertified child care providers are 
considered ineligible, because I think the IRS is concerned 
that these people would file an affidavit that was false.
    But the problem is, if you don't have money, if you are not 
writing checks to people, your kids aren't in the same school 
for the whole year, it is going to be hard to get one of the 
eligible entities to verify that the child is actually living 
with their parent or grandparent or whoever.
    Mr. Wicker. Well, if the process is anywhere near as 
complex as your answer was thorough, then it is complex.
    How many pages must one fill out to get the EITC?
    Mr. Burman. I think it is just a one-page credit worksheet, 
but the IRS has actually prepared a little pamphlet that people 
can go through to determine eligibility.
    Mr. Wicker. There is an entire pamphlet about that one tax 
credit?
    Mr. Burman. Several pages in the instructions.
    Mr. Wicker. OK. Now, I know all of this is tax compliance, 
But there is no question that EITC is a form of social welfare. 
And you have cited a number of people who cited--who feel that 
it is a very good form of social welfare. Do you have any 
comparison with the compliance costs for EITC as opposed to 
compliance costs for other forms of welfare in our Federal 
Government? Are we putting way too much emphasis on EITC, or is 
it about the same as in the other departments of the 
Government?
    Mr. Burman. Actually, one of the big advantages of the EITC 
is despite the complexity that I talked about, it is a lot 
easier to deal with than food stamps or TANF or something like 
that. Food stamps, you may have to go to a welfare office once 
a quarter, or sometimes even more frequently, to fill out your 
certification forms.
    Mr. Wicker. So in terms of compliance, we may be spending 
an even larger proportionate amount on other forms of social 
welfare?
    Mr. Burman. The two Treasury economists, Janet McCubbin and 
Janet Holtzblatt, wrote a paper that is going to be in a book 
published sometime this year, I think. And they compared the 
overall cost of food stamps with the cost of the EITC. And they 
find on food stamps they spend a whole lot more on compliance 
activities, keeping those welfare offices running, and the 
level of abuse seems to be lower. So they lose less from abuse.
    In the case of the EITC, there seems to be a higher error 
rate, but the compliance costs for the IRS and for taxpayers 
for the low income families is lower. And EITC participation is 
a lot higher than it is for other programs. One of the big 
advantages is that a large percentage of the people eligible 
actually manage to get the credit.
    That is less true in the case of programs like food stamps 
and TANF. And it is because there is no welfare stigma 
associated with it; you can get the credit just on your income 
tax return.
    Mr. Wicker. We have a vote going and I want to get in two 
other quick questions. Could your statement about complexity 
also apply to the IRS code in general? And, is part of the 
reason for noncompliance in the system the complexity of the 
entire tax code?
    Mr. Burman. Absolutely.
    Mr. Neal. Mr. Chairman. Will you yield?
    Mr. Wicker. I will be happy to yield.
    Mr. Neal. Mr. Chairman, in 1995 that was one of the 
promises if you recall, simplifying the tax system. And the 
words I think at the time were, we are going to ``rip the tax 
code out by its roots.''
    Mr. Wicker. We are going to have a debate about the 
Contract With America?
    Mr. Neal. Well, I am only pointing out that the majority at 
that time said that they were going to do that, they were going 
to get that done. Here we are 8 years later, and we probably 
had in Ways and Means two hearings on tax simplification, and 
we are no closer today to clearing up tax code complexity. What 
you have said is very accurate.
    Mr. Wicker. I would absolutely agree that tax 
simplification has proved to be a tougher nut to crack than 
about anything we ought to be doing. It seems like whenever we 
go back and even try to lower taxes on individuals and 
businesses to try to encourage economic growth, even that ends 
up making the system more complex.
    I take it that my friend, Mr. Neal, is a member of Ways and 
Means?
    Mr. Neal. Yes.
    Mr. Wicker. I am not. But I hope you will continue to push 
for tax simplification.
    Mr. Neal. Well, one of the easiest things to do rather than 
cutting taxes, we perhaps could have simplified the tax code 
and then we could have figured out where to go with the next 
proposal.
    Mr. Wicker. I eagerly await your legislation on that.
    Mr. Neal. Thank you.
    Mr. Wicker. One final question. Have you assessed the cost 
to the private sector of additional compliance agents? And I 
realize you might think that it is a defensible cost to the 
private sector, But when you send out more agents to do audits, 
and businesses or firms or individuals that are in small 
business have to hire someone to help them work through the 
audit, isn't that--clearly that will increase the cost to the 
business and the private sector?
    Mr. Burman. I don't think anybody has actually measured 
that cost. I think there is clearly a trade off. You don't want 
to have a system where everybody is audited, even though that 
would be a way to maximize compliance. There has got to be a 
balance. And my view is just that the balance is out of whack.
    We have got 30 billion that we know is owed to the IRS 
under the current system and we can't collect the money. 
Clearly we ought to be doing that. I think there are areas 
where we know that there is high noncompliance, not just the 
EITC. The IRS ought to be targeting additional resources. The 
money that people aren't paying there means more tax burdens 
for everybody else, and that is just not fair.
    Mr. Wicker. Well, Dr. Burman, I think you have made some 
very excellent points in your testimony today. I appreciate it. 
I would simply suggest that perhaps the Urban Institute might 
want to at least explore the costs to the private sector in 
sitting down with all of those auditors and oftentimes proving 
that, in fact, the taxpayer is honest.
    Mr. Burman. The ideal thing is, you would like the auditors 
just to be able to collect information without hassling the 
taxpayers, to be able to find with a high probability the 
people who are not compliant, and to leave the compliant people 
alone.
    Mr. Wicker. On behalf of the committee, I want to thank you 
very much. We have a vote now and there are 6\1/2\ minutes 
left. And so I do thank you, and at this point, I will adjourn 
the hearing.
    [Whereupon, at 1:45 p.m., the committee was adjourned.]

                                
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