[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.
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\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.
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\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.
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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'').
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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.
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\2\ For additional details, see ``Status of FAA's Major
Acquisitions'' (Report No. AV-2003-045, June 26, 2003).
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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.
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\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.]