Supporting Congressional Oversight: Budgetary Implications of	 
Selected GAO Work for Fiscal Year 2003 (26-APR-02, GAO-02-576).  
                                                                 
This report discusses the budgetary implications of selected	 
program reforms discussed in GAO work but not yet implemented or 
enacted. To help congressional budget and appropriations	 
committees identify ways to reduce federal spending or increase  
revenues, this year's report contains more than 100 examples of  
budget options organized by budget function. Where possible,	 
budgetary savings estimates provided by the Congressional Budget 
Office or the Joint Committee on Taxation are presented.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-576 					        
    ACCNO:   A03171						        
  TITLE:     Supporting Congressional Oversight: Budgetary	      
Implications of Selected GAO Work for Fiscal Year 2003		 
     DATE:   04/26/2002 
  SUBJECT:   Balanced budgets					 
	     Budget administration				 
	     Budget outlays					 
	     Budget surplus					 
	     Congressional oversight				 
	     Economic analysis					 
	     Fiscal policies					 
	     Future budget projections				 
	     Productivity in government 			 
	     Strategic planning 				 


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GAO-02-576
     
A

Report to the Congress

April 2002 SUPPORTING CONGRESSIONAL OVERSIGHT

Budgetary Implications of Selected GAO Work for Fiscal Year 2003

GAO- 02- 576

Letter 1 Appendixes

Appendix I: Explanation of Conventions Used to Estimate Savings and Revenue
Gains 4

Appendix II: A Framework for Considering Cost Savings and Revenue Increases
6 Reassess Objectives 6 Redefine Beneficiaries 7 Improve Efficiency 9

Appendix III: Options for Increased Savings and Revenue Gains 13

050 National Defense 13 Reduce the Number of Carrier Battle Group Expansions
and Upgrades 14

Limit Commitment to Production of the F- 22 Fighter until Operational
Testing Is Complete 16 Delay the Army?s Comanche Helicopter Program?s Low-
Rate Initial

Production 19 Reassess the Army?s Crusader Program 22 Reassess the Need for
the Selective Service System 24 Consolidate Military Exchange Stores 26
Assign More Air Force Bombers to Reserve Components 29 Reorganize C- 130 and
KC- 135 Reserve Squadrons 32 Eliminate Unneeded Naval Materials and Supplies
Distribution

Points 34 Acquire Conventionally Rather than Nuclear- Powered Aircraft
Carriers 36

Improve the Administration of Defense Health Care 39 Seek Additional
Opportunities for VA and DOD Medical Sharing to Enhance Services to
Beneficiaries and Reduce Costs 41

Continue Defense Infrastructure Reform 44 Reduce Funding for Renovation and
Replacement of Military Housing until DOD Completes Housing Needs Assessment
50

Delay Production of Space- Based Infrared System- low Satellite System until
Testing Is Complete 52 Consolidate the Nuclear Cities Initiative and the
Initiatives for Proliferation Prevention Program into One Effort 54

150 International Affairs 56 Eliminate U. S. Contributions to Administrative
Costs in Rogue

States 57 Improve State Department Business Processes 59 Streamline U. S.
Overseas Presence 62

250 Science, Space, and Technology 65 Continue Oversight of the
International Space Station and Related

Support Systems 66

270 Energy 69 Corporatize or Divest Selected Power Marketing

Administrations 70 Recover Power Marketing Administrations? Costs 74
Increase Nuclear Waste Disposal Fees 78 Recover Federal Investment in
Successfully Commercialized

Technologies 80 Reduce the Costs of the Rural Utilities Service?s
Electricity and Telecommunications Loan Programs 82

Consolidate or Eliminate Department of Energy Facilities 84

300 Natural Resources and Environment 87 Terminate Land- Exchange Programs
88 Defer Fish and Wildlife Service?s Acquisition of New Lands 90 Deny
Additional Funding for Commercial Fisheries Buyback

Programs 92 Revise the Mining Law of 1872 94 Coordinate Federal Policies for
Subsidizing Water for Agriculture and Rural Uses 96

Reassess Federal Land Management Agencies? Functions and Programs 100 Pursue
Cost- Effective Alternatives to NOAA?s Research/ Survey

Fleet 103 Increase Federal Revenues through Water Transfers 106

350 Agriculture 108 Terminate or Significantly Reduce the Department of
Agriculture?s

Market Access Program 109 Lower the Sugar Program?s Loan Rate to Processors
112 Consolidate Common Administrative Functions at USDA 114 Further
Consolidate USDA?s County Offices 116 Revise the Marketing Assistance Loan
Program to Better Reflect

Market Conditions 118

370 Commerce and Housing Credit 121 Recapture Interest on Rural Housing
Loans 122

Require Self- Financing of Mission Oversight by Fannie Mae and Freddie Mac
124 Reduce FHA?s Insurance Coverage 126 Merging USDA and HUD Single- Family
Insured Lending Programs

and Multifamily Portfolio Management Programs 128 Consolidate Homeless
Assistance Programs 130

400 Transportation 132 Eliminate the Pulsed Fast Neutron Analysis Inspection
System 133 Restructure Amtrak to Reduce or Eliminate Federal Subsidies 135
Eliminate Cargo Preference Laws to Reduce Federal Transportation

Costs 138 Increase Aircraft Registration Fees to Enable the Federal Aviation
Administration to Recover Actual Costs 140

Improve Department of Transportation?s Oversight of Its University Research
142 Apply Cost- Benefit Analysis to Replacement Plans for Airport

Surveillance Radars 144 Close, Consolidate, or Privatize Some Coast Guard
Operating and

Training Facilities 146 Convert Some Support Officer Positions to Civilian
Status 148

450 Community and Regional Development 150 Limit Eligibility for Federal
Emergency Management Agency Public

Assistance 151 Eliminate the Flood Insurance Subsidy on Properties That
Suffer the Greatest Flood Loss 153

Eliminate Flood Insurance for Certain Repeatedly Flooded Properties 155
Consolidate or Terminate the Department of Commerce?s Trade Adjustment
Assistance for Firms Program 157

500 Education, Training, Employment, and Social Services 159 Consolidate
Student Aid Programs 160

550 Health 162 Improve Fairness of Medicaid Matching Formula 163 Charge
Beneficiaries for Food Inspection Costs 165 Implement Risk- Based Meat and
Poultry Inspections at USDA 167 Prevent States from Using Illusory
Approaches to Shift Medicaid

Program Costs to the Federal Government 169 Create a Uniform Federal
Mechanism for Food Safety 172 Convert Public Health Service Commissioned
Corps Officers to

Civilian Status 175 Control Provider Enrollment Fraud in Medicaid 177

570 Medicare 179 Reassess Medicare Incentive Payments in Health Care
Shortage

Areas 180 Adjust Medicare Payment Allowances to Reflect Changing

Technology, Costs, and Market Prices 183 Increase Medicare Program Safeguard
Funding 187 Continue to Reduce Excess Payments to Medicare+ Choice Health

Plans 191 Modify the New Skilled Nursing Facility Payment Method to Ensure
Appropriate Payments 194

Implement Risk- Sharing in Conjunction with Medicare Home Health Agency
Prospective Payment System 197 Eliminate Medicare Competitive Sourcing
Restrictions 199 Change Pricing Formula for Medicare- Covered Drugs 202

600 Income Security 204 Develop Comprehensive Return- to- Work Strategies
for People with

Disabilities 205 Revise Benefit Payments under the Federal Employees?
Compensation Act 208

Increase Congressional Oversight of PBGC?s Budget 215 Share the Savings from
Bond Refundings 217 Implement a Service Fee for Successful Non- Temporary
Assistance

for Needy Families Child Support Enforcement Collections 219 Improve
Reporting of DOD Reserve Employee Payroll Data to State

Unemployment Insurance Programs 221 Improve Social Security Benefit Payment
Controls 224 Simplify Supplemental Security Income Recipient Living
Arrangements 226

Reduce Federal Funding Participation Rate for Automated Child Support
Enforcement Systems 228 Obtain and Share Information on Medical Providers
and Middlemen to Reduce Improper Payments to Supplemental Security Income
Recipients 230

Provide Congress More Information to Assess the Performance of the Special
Supplemental Nutrition Program for Women, Infants, and Children 232

700 Veterans Benefits and Services 234 Revise VA?s Disability Ratings
Schedule to Better Reflect Veterans? Economic Losses 235

Discontinue Veterans? Disability Compensation for Nonservice Connected
Diseases 237 Increase Cost Sharing for Veterans? Long- Term Care 239

Reassess Unneeded Health Care Assets within the Department of Veterans
Affairs 241 Reducing VA Inpatient Food and Laundry Service Costs 243

800 General Government, 900 Net Interest, and 999 Multiple 245 Prevent
Delinquent Taxpayers from Benefiting from Federal Programs 246 Target
Funding Reductions in Formula Grant Programs 248 Adjust Federal Grant
Matching Requirements 252 Replace the 1- Dollar Note with a 1- Dollar Coin
255 Eliminate Pay Increases after Separation in Calculating Lump- Sum

Annual Leave Payments 257 Increase Fee Revenue from Federal Reserve
Operations 259 Recognize the Costs Up- front of Long- Term Space
Acquisitions 261 Seek Alternative Ways to Address Federal Building Repair
Needs 264

Improper Benefit Payments Could Be Avoided or More Quickly Detected if Data
from Various Programs Were Shared 266 Better Target Infrastructure
Investments to Meet Mission and Results- Oriented Goals 269

Information Sharing Could Improve Accuracy of Workers? Compensation Offset
Payments 271 Determine Feasibility of Locating Federal Facilities in Rural
Areas 274

Receipts 276 Tax Interest Earned on Life Insurance Policies and Deferred

Annuities 277 Further Limit the Deductibility of Home Equity Loan Interest
279 Limit the Tax Exemption for Employer- Paid Health Insurance 281 Repeal
the Partial Exemption for Alcohol Fuels from Excise Taxes

on Motor Fuels 283 Index Excise Tax Rates for Inflation 285 Increase Highway
User Fees on Heavy Trucks 287 Require Corporate Tax Document Matching 289
Improve Administration of the Tax Deduction for Real Estate

Taxes 290 Increase Collection of Returns Filed by U. S. Citizens Living

Abroad 292 Increase the Use of Seizure Authority to Collect Delinquent Taxes
294

Increase Collection of Self- employment Taxes 296

Increase the Use of Electronic Funds Transfer for Installment Tax Payments
298 Reduce Gasoline Excise Tax Evasion 300 Improve Independent Contractor
Tax Compliance 301 Expand the Use of IRS?s TIN- Matching Program 303

Appendix IV: Options Not Updated for This Report 305

Appendix V: GAO Contacts and Staff Acknowledgments 307 Figures Figure 1:
Reassess Objectives (Budget Function) 7

Figure 2: Redefine Beneficiaries (Budget Function) 9 Figure 3: Improve
Efficiency (Budget Function) 11

Lett er

April 26, 2002 To the President of the Senate and the Speaker of the House
of Representatives This report contains in a single document the budgetary
implications of selected program reforms discussed in past GAO work but not
yet implemented or enacted. Since 1994, we have prepared annual reports
similar to this product. In order to continue to assist congressional budget
and appropriations committees in identifying approaches to reduce federal
spending or increase revenues, this year?s report contains over 100 examples
of budget options organized by budget function. Where possible, budgetary
savings estimates provided by the Congressional Budget Office (CBO) or the
Joint Committee on Taxation (JCT) are presented. The

conventions used by CBO and JCT to estimate budgetary savings are described
in appendix I.

Following the events of September 11, 2001 and the anticipated return of
budget deficits in Fiscal Year 2002, the Congress and the administration
face a new set of challenges, both immediate and long term. In the near
term, Congress and the administration are faced with the challenge of
combating terrorism and ensuring the security of our homeland. In the

long term, the nation faces immense fiscal and economic pressures created by
known demographic trends and rising health care costs. Both new commitments
undertaken after September 11 and longer- term pressures sharpen the need to
look at competing claims and new priorities. As we have noted in recent
testimonies, 1 a fundamental review of existing

programs and activities is necessary both to increase fiscal flexibility and
adapt government programs and activities to the 21st Century. This report
provides specific options that Congress may wish to consider as it
reexamines current federal programs. These budget options are based on

past GAO work, and have not yet been addressed by any federal agency or
Congress. While this report is not intended to represent a complete summary
of possible options, it does provide specific examples that demonstrate the
programmatic and fiscal oversight needed as we reassess

our nations priorities in light of our short and long- term challenges. 1
Budget Issues: Long- Term Fiscal Challenges (GAO- 02- 467T, February 27,
2002) and

Homeland Security: Challenges and Strategies in Addressing Short- and Long-
Term National Needs (GAO- 02- 160T, November 7, 2001).

To assist the Congress in its oversight capacity, we have developed an
oversight framework that is intended to allow the Congress to systematically
address the goals, scope and approaches for delivering these on- going
programs. Specifically, the options in this report fall under one of the
following three areas that constitute one potential framework for

congressional oversight:  Reassess objectives: Options for reconsidering
whether to terminate or revise services and programs because goals have been
achieved, have been persistently not met, or are no longer relevant due to
changing conditions.

 Redefine beneficiaries: Options for revising formulas or eligibility rules
or improved targeting of benefits or fees.

 Improve efficiency: Options to address program execution problems through
consolidation, reorganization, improving collections methods, or attacking
high- risk activities. The specific options described in each example are
not intended to suggest the only way to address some of the significant
problems identified in our reviews of federal programs and activities. Each
example presents only one of many possible options available to the
Congress, and including a

specific option in this report does not mean that we endorse it or that the
chosen option is the only or the most feasible approach.

Lastly, Appendix IV lists options from our March 2001 report 2 that are not
included in this report. These options were not updated either because (1)
the option was fully or substantially acted upon by the Congress or the
cognizant agency, (2) the option was no longer relevant due to environmental
changes or the recency of our work, or (3) the Congress or the cognizant
agency chose a different approach to address the issues

discussed in the option. We will continue to monitor many of these areas to
assess whether underlying issues are ultimately resolved based on the
actions taken.

Each example in this report includes a listing of relevant GAO reports and
testimonies and a GAO contact. Although we derived the examples in this 2
Supporting Congressional Oversight: Framework for Considering the Budgetary
Implications of Selected GAO Work (GAO- 01- 447, Mar. 9, 2001).

report from our existing body of work, there are similarities between the
specific options presented in this report and other proposals. For example,
some options contained in this report have also been included in CBO?s
annual spending and revenue options publication, 3 House and Senate Budget
Resolution proposals, and the President?s annual budget submission.

We are sending copies of this report to the chairmen and ranking minority
members of the Senate Committee on Appropriations and relevant
subcommittees, the Senate Committee on the Budget, the Senate Committee on
Governmental Affairs, the Senate Committee on Finance,

the House Committee on Appropriations and relevant subcommittees, the House
Committee on the Budget, the House Committee on Government Reform, and the
House Committee on Ways and Means. Copies will be made available to others
upon request.

This report was prepared under the direction of Paul L. Posner, managing
director, Federal Budget Analysis, Strategic Issues, who may be reached at
(202) 512- 9573. Specific questions about individual options may be

directed to the GAO contact listed with each option. Major contributors to
this report are listed in appendix V. David M. Walker Comptroller General of
the United States

3 Congressional Budget Office, Budget Options (Feb. 2001).

Appendi xes Explanation of Conventions Used to Estimate

Appendi x I

Savings and Revenue Gains CBO and JCT provided cost estimates for many of
our options. As in our March 2001 report, a brief explanation is included
with the option if specific estimates could not be provided. Where estimates
are provided, the following conventions were followed. 4  For revenue
estimates, the increase in collections reflects what would

occur, over and above amounts due under current law, if the option were
enacted.  For direct spending programs, estimated savings show the
difference

between what the program would cost under the CBO baseline, which assumes
continuation of current law, and what it would cost after the suggested
modification.

 For discretionary spending programs the estimates show savings compared to
the fiscal year 2001 appropriations adjusted for inflation. Savings for most
defense options are estimated relative to DOD?s planned program levels.

 Specific assumptions made in estimating individual options are noted in
the option narratives in appendix III. Subsequent savings and revenue
estimates provided by CBO and JCT may not match exactly those contained in
this report. Differences in details of

specific proposals, changes in assumptions which underlie the analyses, and
updated baselines can all lead to significant differences in estimates.
Also, a few of our options- involving the sale of real estate and other

government- owned property- constitute asset sales. Under the Balanced
Budget and Emergency Deficit Control Act of 1985, as amended, proceeds from
an asset sale may be counted only if the sale entails no net financial cost
to the government. We have included those options that constitute asset
sales whether or not they meet that test.

Finally, some of the options could not be scored by CBO or JCT. Several of
these involve management improvements that we believe can contribute to
reduced spending or increased revenues but whose effects are too uncertain
to be estimated. A few options are not estimated because they concern future
choices about spending that are not currently in the 4 For a complete
discussion of the uses and caveats of the CBO estimates, see CBO?s report,
Budget Options (March 2000).

baseline used to calculate annual spending and revenue. In other cases,
savings are likely to come in years beyond the 10- year estimation period
that CBO uses.

A Framework for Considering Cost Savings

Appendi x II

and Revenue Increases The history of deficit reduction efforts suggests that
basing decisions on explicit policy rationales, rather than considering
separate program- byprogram assessments, may improve chances for success. A
consistent and systematic framework can be an effective means to formulate
and package broad- based spending and revenue proposals. Also, this kind of
approach

can be used regardless of any other budgetary control mechanism (for
example, discretionary spending limits or sequestration procedures) or any
given level of desired deficit reduction. Our framework consists of three
broad themes: reassess objectives, redefine beneficiaries, and improve
efficiency. These three fundamental strategies are based on an implicit set
of decision rules that encourage decision makers to think systematically,
within an ever- changing environment, about

 what services the government provides or should continue to provide,

 for whom these services are or should be provided, and

 how services are or should be provided. By using a policy- oriented
framework such as this, choices can be made more clearly and the results
become more defensible.

Reassess Objectives The first framework theme focuses on the objectives of
federal programs or services. These options offer opportunities to
periodically reconsider a program?s original purpose, the conditions under
which it continues to

operate, and whether its cost effectiveness is appropriate. Our work
suggests three decision rules that illustrate this strategy.

 Programs can be considered for termination if they have succeeded in
accomplishing their intended objectives or if it is determined that the
programs have persistently failed to accomplish their objectives.

 Programs can be considered for termination or revision when underlying
conditions change so that the original objectives may no longer be valid.

 Programs can be reexamined when cost estimates increase significantly
above those associated with original objectives, when benefits fall
substantially below original expectations, or both.

For example, the Comanche helicopter is intended to replace the Vietnamera
scout and attack helicopters that the army considers incapable of meeting
its existing or future requirements. However, real and probable development
cost increases, uncertain operating and support cost savings,

questions about the role of the Comanche compared to other more affordable
army helicopters, deferral of the production decision, and current defense
budgets raise questions about the cost/ benefits of this program. Figure 1:
Reassess Objectives (Budget Function)

* Reduce the Number of Carrier Battle Group Expansions and Upgrades (050) 
Limit Commitment to Production of the F- 22 Fighter Until Testing is
Complete (050)  Delay the Army?s Comanche Helicopter Program?s Low- Rate
Initial Production (050)  Reassess the Army?s Crusader Program (050) 
Reassess the Need for the Selective Service System (050)  Delay Production
of Space- Based Infrared System- low Satellite System Until Testing is
Complete (050)  Eliminate U. S. Contributions to Administrative Costs in
Rogue States (150)  Continue Oversight of the International Space Station
and Related Support Systems (250)  Corporatize or Divest Selected Power
Marketing Administrations (270)  Terminate Land- Exchange Programs (300) 
Defer Fish and Wildlife Service?s Acquisition of New Lands (300)  Deny
Additional Funding for Commercial Fisheries Buyback Programs (300) 
Terminate or Significantly Reduce the Department of Agriculture?s Market
Access Program (350)  Eliminate the Pulsed Fast Neutron Analysis Inspection
System (400)  Restructure Amtrak to Reduce or Eliminate Federal Subsidies
(400)  Eliminate Cargo Preference Laws to Reduce Federal Transportation
Costs (400)  Consolidate or Terminate the Department of Commerce?s Trade
Adjustment Assistance for Firms Program (450)  Improve Fairness of Medicaid
Matching Formula (550)  Reassess Medicare Incentive Payments in Health Care
Shortage Areas (570)  Develop Comprehensive Return- to- Work Strategies for
People With Disabilities (600)  Revise Benefit Payments Under the Federal
Employees? Compensation Act (600)  Increase Congressional Oversight of
PBGC?s Budget (600)  Revise VA?s Disability Ratings Schedule to Better
Reflect Veterans? Economic Losses (700)  Tax Interest Earned on Life
Insurance Policies and Deferred Annuities (Receipt)  Further Limit the
Deductibility of Home Equity Loan Interest (Receipt)

Redefine Beneficiaries The second theme within our framework focuses on the
intended beneficiaries for federal programs or services. The Congress
originally defines the intended audience for any program or service based on
some

perception of eligibility and/ or need. To better reflect and target
increasingly limited resources, these definitions can be periodically
reviewed and revised. Our body of work suggests four decision rules that
illustrate this strategy.

 Formulas for a variety of grant programs to state and local governments
can be revised to better reflect the fiscal capacity of the recipient
jurisdiction. This strategy could reduce overall funding demands while
simultaneously redistributing available grant funds so that the most needy
receive the same or increased levels of support.  Eligibility rules can be
revised, without altering the objectives of the

program or service.

 Fees can be targeted to individuals, groups, or industries that directly
benefit from federal programs. Also, existing charges can be increased so
that the direct beneficiaries share a greater portion of a program?s cost.

 Tax preferences can be narrowed or eliminated by revising eligibility
criteria or limiting the maximum amount of preference allowable.

For example, at a time when federal domestic discretionary resources are
constrained, better targeting of grant formulas offers a strategy to bring
down federal outlays by concentrating reductions on wealthier localities
with fewer needs and greater capacity to absorb cuts. Federal grant formulas
could be redesigned to lower federal costs by disproportionately reducing
federal funds to states and localities with the strongest tax bases

and fewer needs, as shown in our option on formula grants.

Figure 2: Redefine Beneficiaries (Budget Function)

 Recover Power Marketing Administrations? Costs (270)

 Increase Nuclear Waste Disposal Fees (270)

 Recover Federal Investment in Successfully Commercialized Technologies
(270)

 Revise the Mining Law of 1872 (300)

 Coordinate Federal Policies for Subsidizing Water for Agriculture and
Rural Uses (300)

 Lower the Sugar Program?s Loan Rate To Processors (350)

 Recapture Interest on Rural Housing Loans (370)

 Require Self- Financing of Mission Oversight by Fannie Mae and Freddie Mac
(370)

 Increase Aircraft Registration Fees to Enable the Federal Aviation
Administration to Recover Actual Costs (400)

 Limit Eligibility for Federal Emergency Management Agency Public
Assistance (450)

 Eliminate the Flood Insurance Subsidy on Properties That Suffer the
Greatest Flood Loss (450)

 Eliminate Flood Insurance for Certain Repeatedly Flooded Properties (450)

 Charge Beneficiaries for Food Inspection Costs (550)

 Implement Risk- Based Meat and Poultry Inspections (550)

 Prevent States from Using Illusory Prevent States from Using Illusory
Approaches to Shift Medicaid Program Costs to the Federal Government (550)

 Change Pricing Formula for Medicare- covered Drugs (570)

 Share the Savings From Bond Refundings (600)

 Implement a Service Fee for Successful Non- Temporary Assistance for Needy
Families Child Support Enforcement Collections (600)

 Improve Reporting of DOD Reserve Payroll Data to State Unemployment
Insurance Programs (600)

 Discontinue Veterans? Disability Compensation for Non- Service Connected
Diseases (700)

 Increase Cost Sharing for Veterans? Long- Term Care (700)

 Prevent Delinquent Taxpayers from Benefiting from Federal Programs (800)

 Target Funding Reductions in Formula Grant Programs (800)

 Adjust Federal Grant Matching Requirements (800)

 Repeal the Partial Exemption for Alcohol Fuels from Excise Taxes on Motor
Fuels (Receipt)

 Index Excise Tax Bases for Inflation (Receipt)

 Increase Highway User Fees on Heavy Trucks (Receipt)

Improve Efficiency The third theme within our framework addresses how the
program or service is delivered. This strategy suggests that focusing on the
approach

or delivery method can significantly reduce spending or increase
collections. Our body of work suggests the following decision rules that
illustrate this strategy.

 Reorganizing and consolidating programs or activities with similar
objectives and audiences can eliminate duplication and improve operational
efficiency.

 Using reengineering, benchmarking, streamlining, and other process change
techniques can reduce the cost of delivering services and programs.

 Using performance measurement and generally improving the accuracy of
available program information can promote accountability and effectiveness
and reduce errors.

 Attacking activities at risk of fraud, waste, abuse, and mismanagement.

 Improving collection methods and ensuring that all revenues and debts owed
are collected can increase federal revenues.

 Establishing market- based prices can help the government recover the cost
of providing services while encouraging the best use of the government?s
resources.

As an illustration of this theme, the Department of Veterans Affairs (VA)
and the Department of Defense (DOD) provide health care services to more
than 12 million beneficiaries and operate more than 700 medical facilities
at a cost of about $34 billion annually. Over the past two decades, DOD and
VA have entered into a sharing program that has yielded benefits in both
dollar savings and qualitative gains, illustrating what can be achieved when

the two agencies work together to identify where excess capacity and cost
advantages exist. However, although VA and DOD continue to share resources
to provide quality and cost- effective health care services, existing
sharing agreements are not being taken full advantage of and additional
sharing opportunities could be pursued. Long- standing barriers along with
recent changes in how VA and DOD provide medical care have

created confusion about the status of current agreements and present
challenges for future collaboration and cost efficiencies. Given the
changing health care environment, the criteria and conditions that make
resource sharing a cost- effective option for the federal government need to

be reviewed and strategies for sharing rethought. VA and DOD need to work
together to determine an appropriate course of action to ensure that
resource- sharing opportunities are realized, and the Congress may wish to
provide specific guidance clarifying the criteria, conditions, and
expectations for VA and DOD collaboration.

Figure 3: Improve Efficiency (Budget Function)

 Consolidate Military Exchange Stores (050)

 Assign More Air Force Bombers to Reserve Components (050)

 Reorganize C- 130 and KC- 135 Reserve Squadrons (050)

 Eliminate Unneeded Naval Materials and Supplies Distribution Points (050)

 Acquire Conventionally Rather than Nuclear- Powered Aircraft Carriers
(050)

 Improve the Administration of Defense Health Care (050)

 Seek Additional Opportunities for VA and DOD Medical Sharing to Enhance
Services to Beneficiaries and Reduce Costs (050)

 Continue Defense Infrastructure Reform (050)

 Reduce Funding for Renovation and Replacement of Military Housing Until
DOD Completes Housing Needs Assessment (050)

 Consolidate the Nuclear Cities Initiative and the Initiatives for
Proliferation Prevention Program Into One Effort (050)

 Improve State Department Business Processes (150)

 Streamline U. S. Overseas Presence (150)

 Reduce the Costs of the Rural Utilities Service?s Electricity and
Telecommunications Loan Programs (270)

 Consolidate or Eliminate Department of Energy Facilities (270)

 Reassess Federal Land Management Agencies Functions and Programs (300)

 Pursue Cost Effective Alternatives to NOAA?s Research/ Survey Fleet (300)

 Increase Federal Revenues Through Water Transfers (300)

 Consolidate Common Administrative Functions at the Department of
Agriculture (350)

 Further Consolidate USDA?s County Offices (350)

 Revise the Marketing Assistance Loan Program to Better Reflect Market
Conditions (350)

 Reduce FHA?s Insurance Coverage (370)

 Merging USDA and HUD Single- Family Insured Lending Programs and
Multifamily Portfolio Management Programs (370)

 Consolidate Homeless Assistance Programs (370)

 Improve Department of Transportation?s Oversight of its University
Research (400)

 Apply Cost- Benefit Analysis to Replacement Plans for Airport Surveillance
Radars (400)

 Close, Consolidate, or Privatize Some Coast Guard Operating and Training
Facilities (400)

 Convert Some Support Officer Positions to Civilian Status (400)

 Consolidate Student Aid Programs (500)

 Create a Uniform Federal Mechanism for Food Safety (550)

 Convert Public Health Service Commissioned Corps Officers to Civilian
Status (550)

 Control Provider Enrollment Fraud in Medicaid (550)

 Adjust Medicare Payment Allowances to Reflect Changing Technology, Costs,
and Market Prices (570)

 Increase Medicare Program Safeguard Funding (570)

 Continue to Reduce Excess Payments to Medicare+ Choice Health Plans (570)

 Modify the Skilled Nursing Facility Payment Method to Ensure Appropriate
Payments (570)

 Implement Risk- sharing in Conjunction with Medicare Home Health Agency
Prospective Payment System (570)

 Eliminate Medicare Competitive Sourcing Restrictions (570)

 Improve Social Security Benefit Payment Controls (600)

 Simplify Supplemental Security Income Recipient Living Arrangements (600)

 Reduce Federal Funding Participation Rate for Automated Child Support
Enforcement Systems (600)

 Obtain and Share Information on Medical Providers and Middlemen to Reduce
Improper Payments to Supplemental Security Income Recipients (600)

 Reassess Unneeded Health Care Assets Within the Department of Veterans
Affairs (700)

 Reducing VA Inpatient Food and Laundry Service Costs (700)

 Replace the 1- Dollar Note With the 1- Dollar Coin (800)

 Eliminate Pay Increases After Separation in Calculating Lump- Sum Annual
Leave Payments (800)

 Increase Fee Revenue From Federal Reserve Operations (800)

 Recognize the Costs Up- Front of Long- Term Space Acquisitions (800)

 Seek Alternative Ways to Address Federal Building Repair Needs (800)

 Improper Benefit Payments Could be Avoided or More Quickly Detected if
Data from Various Programs Were Shared (999)

 Better Target Infrastructure Investments To Meet Mission and Results-
Oriented Goals (999)

 Information Sharing Could Improve Accuracy of Workers? Compensation Offset
Payments (999)

 Determine Feasibility of Locating Federal Facilities in Rural Areas (999)

 Require Corporate Tax Document Matching (Receipt)

 Improve Administration of the Tax Deduction for Real Estate Taxes
(Receipt)

 Increase Collection of Returns Filed by U. S. Citizens Living Abroad
(Receipt)

 Increase the Use of Seizure Authority to Collect Delinquent Taxes
(Receipt)

 Increase Collection of Self- Employment Taxes (Receipt)

 Increase the Use of Electronic Funds Transfer for Installment Tax Payments
(Receipt)

 Reduce Gasoline Excise Tax Evasion (Receipt)

 Improve Independent Contractor Tax Compliance (Receipt)

 Expand the Use of IRS? TIN- Matching Program (Receipt)

Options for Increased Savings and Revenue

Appendi x II I Gains 050 National Defense Reduce the Number of Carrier
Battle Group Expansions and Upgrades Limit Commitment to Production of the
F- 22 Fighter until Operational Testing Is Complete Delay the Army?s
Comanche Helicopter Program?s Low- Rate Initial

Production Reassess the Army?s Crusader Program Reassess the Need for the
Selective Service System Consolidate Military Exchange Stores Assign More
Air Force Bombers to Reserve Components

Reorganize C- 130 and KC- 135 Reserve Squadrons Eliminate Unneeded
Department of Navy Distribution Sites Acquire Conventionally Rather than
Nuclear- Powered Aircraft Carriers

Improve the Administration of Defense Health Care Seek Additional
Opportunities for VA and DOD Medical Sharing to Enhance Services to
Beneficiaries and Reduce Costs Continue Defense Infrastructure Reform Delay
Commitment to New Radar Countermeasures System Reduce Funding for Renovation
and Replacement of Military Housing until DOD Completes Housing Needs
Assessment Delay Production of Space- Based Infrared System- Low Satellite
System

until Testing Is Complete Consolidate the Nuclear Cities Initiative and the
Initiatives for Proliferation Prevention Program into One Effort

Reduce the Number of Carrier Battle Group Expansions and Upgrades

Authorizing committees Armed Services (Senate and House) Appropriations
subcommittees Defense (Senate and House) Primary agency Department of
Defense Accounts Multiple Spending type Discretionary Budget subfunction
051/ Department of Defense- Military Framework theme Reassess objectives
Aircraft carrier battle groups are the centerpiece of the Navy?s surface

force and significantly influence the size, composition, and cost of the
fleet. The annualized cost to acquire, operate, and support a single navy
carrier battle group is about $2 billion (in fiscal year 2000 dollars) and
is likely to increase as older units are replaced and modernized. The Navy
has several

costly ongoing carrier- related programs: two nuclear- powered Nimitz- class
carriers are under construction ($ 9.9 billion); a research and development
program ($ 3.6 billion) for a new nuclear- powered carrier design is
underway; the second ship of the 10- ship Nimitz- class began its 3- year

refueling complex overhaul in 2001 ($ 2.5 billion) and subsequent class
refuelings will follow about every 3 years; AEGIS destroyers are being
procured and the next generation of surface combatants is being designed;
and carrier- based aircraft are expected to be replaced/ upgraded by a new
generation of strike fighters and mission support aircraft throughout the
next decade.

Our analysis indicates that there are opportunities to use less costly
options to satisfy many of the carrier battle groups? traditional roles
without unreasonably increasing the risk that U. S. national security would
be threatened. For example, one less costly option would be to rely more on
increasingly capable surface combatants and submarines, such as cruisers,
destroyers, and Trident SSGNs, for overseas presence and crisis response. If
the Congress chose to retire one aircraft carrier, the CVN- 70, and one
active air wing in 2005, the following savings could be achieved.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from 2002 plan Budget authority 300 360 940 1,860 870 Outlays 100
220 710 1,330 1, 320 Source: Congressional Budget Office.

Related GAO Products Navy Aircraft Carriers: Cost- Effectiveness of
Conventionally and Nuclear- Powered Carriers (GAO/ NSIAD- 98- 1, Aug. 27,
1998).

Aircraft Acquisition: Affordability of DOD?s Investment Strategy (GAO/
NSIAD- 97- 88, Sept. 8, 1997).

Surface Combatants: Navy Faces Challenges Sustaining Its Current Program
(GAO/ NSIAD- 97- 57, May 21, 1997).

Cruise Missiles: Proven Capability Should Affect Aircraft and Force
Structure Requirements (GAO/ NSIAD- 95- 116, Apr. 20, 1995).

Navy?s Aircraft Carrier Program: Investment Strategy Options (GAO/ NSIAD-
95- 17, Jan. 1, 1995).

Navy Carrier Battle Groups: The Structure and Affordability of the Future
Force (GAO/ NSIAD- 93- 74, Feb. 25, 1993). GAO Contact Henry L. Hinton, Jr.,
(202) 512- 4300

Limit Commitment to Production of the F- 22 Fighter until Operational
Testing Is Authorizing committees Armed Services (Senate and House)

Complete

Appropriations subcommittees Defense (Senate and House) Primary agency
Department of Defense Account Aircraft Procurement, Air Force

(57- 3010) Spending type Discretionary Budget subfunction 051/ Department of
Defense- Military Framework theme Reassess objectives

The fiscal year 2001 Defense Appropriations Act provided funds for lowrate
initial production of 10 F- 22 aircraft, but prohibited award of a fully
funded contract until DOD met requirements specified in the Act. In
September 2001, DOD declared that it had met the requirements specified in
the Act and the Under Secretary of Defense for Acquisition, Technology and
Logistics approved award of the contract for 10 aircraft in fiscal year
2001. The fiscal year 2002 Defense Appropriations Act provided funds for
low- rate initial production of 13 F- 22 aircraft, and DOD plans to procure
23

aircraft in fiscal year 2003, 27 aircraft in fiscal year 2004, 32 aircraft
in fiscal year 2005 and begin full- rate production of 40 aircraft in fiscal
year 2006.

In several reports over the last 7 years, and as recently as March 2002, GAO
concluded that DOD should minimize commitments to F- 22 production until
completion of Initial Operational Test and Evaluation, now planned for
fiscal year 2004. Limiting initial production rates until completion of
Initial Operational Test and Evaluation affords the opportunity to confirm

the stability and soundness of a new system before committing large amounts
of production funding to purchase aircraft. In the past, buying production
articles before they can be adequately tested has resulted in buying systems
that require modifications to achieve satisfactory performance. Commercial
and Department of Defense (DOD) best practices have shown that completing a
system?s testing prior producing

significant quantities will substantially lower the risk of costly fixes and
retrofits. Conversely, lower production rates could increase average
procurement cost over the life of the program and, if the Air Force
maintains its current plan to procure 333 production aircraft, lead to
difficulties in completing the production program within the current

production cost estimate.

Low- rate initial production of 13 aircraft has been approved by the
Congress for fiscal year 2002. To avoid the acceleration of production until
completion of Initial Operational Test and Evaluation, low- rate initial
production could be maintained at 13 aircraft through 2004. If the

Congress were to limit funding to no more than 13 aircraft for fiscal years
2003 and 2004, and then proceed with the planned acceleration of production
to 23 aircraft in fiscal year 2005, 27 aircraft in 2006, and 32 aircraft in
2007 the following budget savings could be achieved during the

next 5 years.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 plan Budget authority 1, 812 2,144 1, 200 1,177 1, 859
Outlays 451 1,364 1, 667 1,415 1, 405 Source: Congressional Budget Office.

Related GAO Products Tactical Aircraft: Continuing Difficulty Keeping F- 22
Production Costs Within the Congressional Limitation (GAO- 01- 782, July 16,
2001).

Tactical Aircraft: F- 22 Development and Testing Delays Indicate Need for
Limit on Low- Rate Production (GAO- 01- 310, Mar. 15, 2001).

Defense Acquisitions: Recent F- 22 Production Cost Estimates Exceeded
Congressional Limitation (GAO/ NSIAD- 00- 178, Aug. 15, 2000).

F- 22 Aircraft: Development Cost Goal Achievable If Major Problems Are
Avoided (GAO/ NSIAD- 00- 68, Mar. 14, 2000).

Defense Acquisitions: Progress in Meeting F- 22 Cost and Schedule Goals
(GAO/ T- NSIAD- 00- 58, Dec. 7, 1999).

Fiscal Year 2000 Budget: DOD?s Procurement and RDT& E Programs (GAO/ NSIAD-
99- 233R, Sept. 23, 1999).

Defense Acquisitions: Progress of the F- 22 and F/ A- 18E/ F Engineering and
Manufacturing Development Programs (GAO/ T- NSIAD- 99- 113, Mar. 17, 1999).

F- 22 Aircraft: Issues in Achieving Engineering and Manufacturing
Development Goals (GAO/ NSIAD- 99- 55, Mar. 15, 1999).

1999 DOD Budget: DOD?s Procurement and RDT& E Programs (GAO/ NSIAD- 98-
216R, Aug. 14, 1998).

F- 22 Aircraft: Progress of the Engineering and Manufacturing Development
Program (GAO/ T- NSIAD- 98- 137, Mar. 25, 1998).

F- 22 Aircraft: Progress in Achieving Engineering and Manufacturing
Development Goals (GAO/ NSIAD- 98- 67, Mar. 10, 1998).

Aircraft Acquisition: Affordability of DOD?s Investment Strategy (GAO/
NSIAD- 97- 88, Sept. 8, 1997).

F- 22 Restructuring (GAO/ NSIAD- 97- 100BR, Feb. 28, 1997).

Tactical Aircraft: Concurrency in Development and Production of F- 22
Aircraft Should Be Reduced (GAO/ NSIAD- 95- 59, Apr. 19, 1995).

Weapons Acquisition: Low- Rate Initial Production Used to Buy Weapon Systems
Prematurely (GAO/ NSIAD- 95- 18, Nov. 21, 1994).

Tactical Aircraft: F- 15 Replacement Is Premature As Currently Planned (GAO/
NSIAD- 94- 118, Mar. 25, 1994). GAO Contact Jim Wiggins, (202) 512- 4530

Delay the Army?s Comanche Helicopter Program?s Low- Rate Initial Production

Authorizing committees Armed Services (Senate and House) Appropriations
subcommittees Defense (Senate and House) Primary agency Department of
Defense Account Aviation Procurement, Army (21- 2031) Spending type
Discretionary Budget subfunction 051/ Department of Defense- Military
Framework theme Reassess objectives

Since 1983, the Army has been developing its next- generation helicopter,
the Comanche, with the intention of significantly expanding the Army?s
capability to conduct attack and reconnaissance operations in all
battlefield environments, day or night and during adverse weather
conditions. With a projected total acquisition cost of about $48 billion,
Comanche is the Army?s largest aviation acquisition program. In June 2000,
the Comanche program awarded a 6- year engineering and manufacturing
development contract to Boeing- Sikorsky. The program office plans to begin
low- rate initial production in June 2005 and full- rate production in

December 2006. Current Army plans call for the acquisition of 1,213
Comanches through fiscal years 2026.

The Army is not likely to have the knowledge it should have to begin
production when scheduled. Before entering low- rate initial production, our
work has shown that successful commercial firms already know that (1)
technologies match customer requirements; that is, they can fit onto a
product and function as expected, (2) the product?s design meets

performance requirements, and (3) the product can be produced within cost,
schedule, and quality targets. It is unlikely that the Army will have this
level of knowledge about Comanche by the June 2005 scheduled lowrate
production decision. Further, program office officials acknowledge that
there is risk that the December 2006 full- rate production decision date
will not be met. In particular, the development and testing schedule has
become more compressed with many critical development and test events coming
close together or concurrently in the late stages of development. This, in
turn, has left the army with very little time to correct deficiencies found
during testing. Failure to do so during development could result in costly
retrofits and repairs to aircraft already produced. These costs could

be substantial because the Army is planning to buy a significant number of
pre production and low- rate production aircraft before design and testing
are completed. Finally, the Army continues to face the risk that critical
performance requirements may not be met-- at least for the helicopters it
initially produces. Specifically, the program is at risk of not (1)
achieving the ?rate- of- vertical- climb? requirement (2) completing
development and

integration of its mission equipment package, which is needed to support a
range of important functions including early warning, target acquisition,
piloting, navigation, and communications (3) completing development of the
system for detecting equipment problems and (4) achieving the

?beyond- line- of- sight? communications capability needed to perform its
mission.

In light of the current status and the significant challenges ahead, the
potential for undesirable outcomes for the Comanche program- including
higher than expected costs, longer than expected schedules, uncertain
performance, and affordability concerns- are high. As a result, Congress may
wish to consider the benefits of delaying the Comanche?s low- rate decision
date by 1 year. If the Congress elected to delay the decision date,

the following savings would be achieved.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from 2002 plan Budget authority 0 182 758 263 797 Outlays 0 41 261
465 452 Source: Congressional Budget Office.

Related GAO Products Defense Acquisitions: Comanche Program Objectives Need
to Be Revised to More Achievable Levels (GAO- 01- 450, June 7, 2001).

Defense Acquisitions: Comanche Program Cost, Schedule, and Performance
Status (GAO/ NSIAD- 99- 146, Aug. 24, 1999).

Comanche Helicopter: Testing Needs To Be Completed Prior to Production
Decisions (GAO/ NSIAD- 95- 112, May 18, 1995).

GAO Contact Jack L. Brock, Jr., (202) 512- 6204

Reassess the Army?s Crusader Program

Authorizing committees Armed Services (Senate and House) Appropriations
subcommittees Defense (Senate and House) Primary agency Department of
Defense Accounts Research, Development, Test, and

Evaluation, Army (21- 2040) Spending type Discretionary Budget subfunction
051/ Department of Defense- Military Framework theme Reassess objectives

According to information presented by the army in August 2000, the Army
plans to spend about $9 billion dollars to develop and procure the Crusader
self- propelled howitzer and its resupply vehicle as part of a broader
program to modernize its armored forces. The system?s five key performance
requirements call for improved performance over the Paladin- the Army?s
existing self- propelled howitzer. The Crusader artillery system has been in
development since 1994 and has undergone two major restructures. The first
was in 1996 in response to escalating cost and delays due primarily to
problems developing a liquid propellant cannon. The second was in January
2000, after the Army Chief of Staff concluded that the Army needed to be
able to respond more quickly

to contingencies and that the forces of the future needed to be more mobile
and quickly deployable, and required a much smaller logistics support
structure. To accomplish these goals, the Army is transitioning from large
and heavy armored systems to lighter, smaller, more fuel efficient, and more
reliable systems with a common chassis-- known as Future Combat Systems.
These systems are expected to replace the Crusader and other heavy armored
systems. After announcing its transformation plans, the

Army decided to continue development of the Crusader, but restructured the
program to make it more deployable by reducing its size and weight. Even,
with the weight reduction, the Crusader is expected to be about 20 tons
heavier than the Future Combat Systems and less deployable.

The Army?s transition to a lighter and more mobile force will require a
substantial investment in new combat vehicles, which is not fully reflected
in the army?s current outyear spending plans. To fund these new
requirements, the army will need to substantially increase funding or to

reduce planned spending on traditional large and heavy armored systems, such
as the Crusader, or make other funding tradeoffs. Given the Crusader?s high
acquisition cost, deployment limitations, plans to replace it with Future
Combat Systems, and other transformation funding priorities,

the Congress may wish to terminate this program. If the Congress elected to
terminate the program, the following savings would be achieved.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from 2002 plan Budget authority 474 498 596 931 1, 230 Outlays 341
437 478 630 760 Source: Congressional Budget Office.

Related GAO Products Defense Acquisitions: Steps to Improve the Crusader
Program?s Investment Decisions (GAO- 02- 201, Feb. 25, 2002).

Army Armored Systems: Meeting Crusader Requirements Will Be A Technical
Challenge (GAO/ NSIAD- 97- 121, June 6, 1997).

Army Armored Systems: Advanced Field Artillery System Experiences Problems
With Liquid Propellant (GAO/ NSIAD- 95- 25, Nov. 2, 1994).

GAO Contact Jack L. Brock, Jr., (202) 512- 6204

Reassess the Need for the Selective Service System

Authorizing committees Armed Services (Senate and House) Appropriations
subcommittees VA, HUD, and Independent Agencies (Senate and House)

Primary agency Department of Defense Accounts Selective Service System (90-
0400) Spending type Discretionary Budget subfunction 054/ Defense- related
activities Framework theme Reassess objectives

No one has been drafted since 1973 and the advent of the all- volunteer
force. Since 1980, after the Soviet invasion of Afghanistan, males between
the ages of 18 and 26 have continued registering with the Selective Service
System for a potential draft in the event of a national emergency. However,
it would still require congressional action to actually draft anyone into
the military. A return to a military draft seems unlikely even under the
current recruiting difficulties the military services are facing. One reason
for this is that the recruiting shortfalls represent only a minute
percentage of the over 13 million males of draft age and it would be very
difficult to ensure a fair and equitable draft to cover such shortfalls. The
likelihood of the United States engaging in a manpower- intensive conflict
in the future is very

remote, so alternative approaches to a draft could be devised to fill
personnel needs. Supporters of continuing registration maintain that it is a
relatively inexpensive insurance policy in case the government
underestimates the threat level the U. S. military may face in a future
contingency. Supporters also contend that registration maintains the link
between the military and

society- at- large and reinforces the notion that citizenship involves an
obligation to the nation. They also maintain that it would ensure a fair and
equitable draft should one need to be reinstated in the future.
Nevertheless, it was estimated in 1997 that it would take a little more than
a

year and cost about $23 million (or about 1 year?s appropriation) to bring
the Selective Service System back from a ?deep standby? status. If the
Congress chose to terminate the Selective Service System, the following
savings could be achieved.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from 2002 funding level Budget a uthority 13 27 28 29 30 Outlays 9
23 27 29 30 Source: Congressional Budget Office.

Related GAO Product Selective Service: Cost and Implications of Two
Alternatives to the Present System (GAO/ NSIAD- 97- 225, Sept. 10, 1997).

GAO Contact Henry L. Hinton, Jr., (202) 512- 5140

Consolidate Military Exchange Stores

Authorizing committees Armed Services (Senate and House) Appropriation
subcommittees Defense (Senate and House) Primary agency Department of
Defense Accounts Multiple Spending type Discretionary Budget subfunction
051/ Department of Defense- Military

Framework theme Improve efficiency

Since 1968, studies by GAO, DOD, and others have concluded that financial
benefits could be achieved through consolidation of military exchange stores
into a single entity. The Office of the Secretary of Defense has

proposed the integration of the Army/ Air Force Exchange System (AAFES) with
the Navy and Marine Corps exchange programs, and a task force commissioned
to review this consolidation plan in 1996 concluded that a merger would
result in annual recurring savings.

In January 1997, DOD advised its congressional oversight committees that it
planned to continue studying options for integrating exchange functions,
under the joint direction of the military departments. DOD stated that a
more rigorous analysis was needed before judgments could be made on the
optimal organizational structure. In April 1998, DOD awarded a contract to
study consolidation. The contractor?s April 30, 1999, report presented three
organizational options: (1) total consolidation, (2) integration of all
support functions, such as shipping and receiving, with separate exchange
front offices, and (3) maintenance of the status quo with best commercial

practices implemented at the exchanges. Based on the contractor?s April 1999
report, DOD projected at that time that total consolidation would take 3 to
5 years to complete, require an investment of $391 million over that period
(although a one- time savings from the liquidation of excess inventory were
expected to offset this investment), and produce 5- year savings of over $1
billion, based on annual recurring savings of about $206 million. However,
rather than take action at that time, DOD continued its contracted study
efforts through April 2000. At that time, DOD officials decided that rather
than pursue consolidation they should initiate a series of cooperative
efforts to maximize efficiencies across the exchange services. On July 31,
2000, the services were instructed to submit

implementation plans outlining a formal process with goals and timelines to
achieve efficiencies within individual exchange services and collectively
through cooperative efforts. The services were also instructed to report
progress of their plans annually. To what extent these current efforts can
produce savings comparable to those previously projected from consolidating
exchange services? operations is uncertain.

Another initiative is the Hybrid initiative, which DOD has been implementing
since 1995. These BXMARTS--- smaller versions of the larger stores- are
operated by the exchanges and often located at bases scheduled for closure.
The ?hybrid? stores sell both hard goods normally found in a military
exchange and the grocery- type goods associated with

military commissaries. According to DOD officials, this initiative could
result in financial benefits, but DOD has not yet quantified the savings.
Currently, four hybrids are operating in the United States. In addition,
there are 14 stores located in Europe that are variations of the combined

model; commissaries and the exchange service operate these small stores. In
light of the potential savings involved concerning the consolidation of
military exchanges, the Congress may wish to direct DOD to consolidate the
Navy and Marine Corps exchange operations with the existing Air Force/ Army
exchange operations. CBO has estimated that consolidating into a single
exchange system would yield the following savings.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 baseline Budget a uthority 20 40 60 62 63 Outlays 15
34 53 59 62 Source: Congressional Budget Office.

Related GAO Products Excess Equipment for Former Castle AFB (BXMART) (GAO/
NSIAD- 98- 94R, Feb. 27, 1998).

Morale, Welfare, and Recreation: Declining Funds Require DOD to Take Action
(GAO/ NSIAD- 94- 120, Feb. 28, 1994).

GAO Contact Henry L. Hinton, Jr., (202) 512- 4300

Assign More Air Force Bombers to Reserve Components

Authorizing committees Armed Services (Senate and House) Appropriations
subcommittees Defense (Senate and House) Primary agency Department of
Defense Account Multiple Spending type Discretionary Budget subfunction 051/
Department of Defense- Military Framework theme Improve efficiency Bombers
currently in the force (B- 2s, B- 1Bs, and B- 52Hs) were initially designed
and procured by DOD primarily to meet nuclear war- fighting

requirements. Since the end of the Cold War, DOD has placed increased
emphasis on the role of bombers in future conventional conflicts while
reducing the number of bombers significantly from a total of about 360 in
1989 to 208 bombers in fiscal year 2001. Senior DOD officials have said that
DOD cannot afford all of the services? stated requirements, and difficult
decisions must be made regarding which investment programs to cancel so that
DOD can develop and implement a long- term, sustainable

recapitalization plan. The Air Force has 18 B- 1Bs assigned to the Air
National Guard-- 9 to the Kansas Air National Guard and 9 to the Georgia Air
National Guard. No B- 1Bs are currently assigned to Air Force Reserve units.
Placing more B- 1Bs in the reserve component (either the Air Force Reserve
or the Air

National Guard) could reduce the cost to operate the B- 1B bomber force
without adversely affecting day- to- day peacetime training or critical
wartime missions or closing any bases. However, the availability of
recruitable personnel in some locations limits where reserve component

units can operate. B- 1B reserve component units have training, readiness,
and deployment requirements similar to active- duty B- 1B units and are
considered just as capable of carrying out operational missions as their
active duty counterparts. Moreover, the cost to operate a reserve component
unit is generally lower than for an active duty unit for several reasons.
First, reserve component aircrews are more experienced than their active
duty counterparts and require fewer flying hours to meet mission training

requirements. Second, reserve component units employ fewer full- time
military personnel than active units. Additionally, because of the part-
time manning of traditional reserve component units, there are fewer
requirements for permanent and costly base infrastructure-- such as family
housing and base medical care facilities-- necessary to support full- time
active duty personnel and their families.

Our analysis shows that the Air Force could select a variety of options if
it were to place more B- 1Bs in the reserve component. The cost savings
would vary depending upon the option selected. If an 18- aircraft aircrew
training squadron and 6- aircraft operational squadron were transferred to
the reserve component, the following savings could be achieved.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 plan Budget authority 0 24 98 177 208 Outlays 0 18 78
152 195 Source: Congressional Budget Office.

Related GAO Products Air Force Bombers: Moving More B- 1s to the Reserves
Could Save Millions Without Reducing Mission Capability (GAO/ NSIAD- 98- 64,
Feb. 26, 1998).

Air Force Bombers: Options to Retire or Restructure the Force Would Reduce
Planned Spending (GAO/ NSIAD- 96- 192, Sept. 30, 1996).

Embedded Computers: B- 1B Computers Must Be Upgraded to Support Conventional
Requirements (GAO/ AIMD- 96- 28, Feb. 27, 1996).

B- 1B Conventional Upgrades (GAO/ NSIAD- 96- 52BR, Dec. 4, 1995).

B- 1B Bomber: Evaluation of Air Force Report on B- 1B Operational Readiness
Assessment (GAO/ NSIAD- 95- 151, July 18, 1995).

Air Force: Assessment of DOD?s Report on Plan and Capabilities for
Evaluating Heavy Bombers (GAO/ NSIAD- 94- 99, Jan. 10, 1994).

Strategic Bombers: Issues Relating to the B- 1B?s Availability and Ability
to Perform Conventional Missions (GAO/ NSIAD- 94- 81, Jan. 10, 1994).

Strategic Bombers: Adding Conventional Capabilities Will Be Complex, Time-
Consuming, and Costly (GAO/ NSIAD- 93- 45, Feb. 5, 1993).

Strategic Bombers: Need to Redefine Requirements for B- 1B Defensive
Avionics System (GAO/ NSIAD- 92- 272, July 17, 1992).

Strategic Bombers: Updated Status of the B- 1B Recovery Program (GAO/ NSIAD-
91- 189, May 9, 1991).

Strategic Bombers: Issues Related to the B- 1B Aircraft Program (GAO/ T-
NSIAD- 91- 11, Mar. 6, 1991). GAO Contact Henry L. Hinton, Jr., (202) 512-
5140

Reorganize C- 130 and KC- 135 Reserve Squadrons

Authorizing committees Armed Services (Senate and House) Appropriations
subcommittees Defense (Senate and House) Primary agency Department of
Defense Account Multiple Spending type Discretionary Budget subfunction 051/
Department of Defense- Military Framework theme Improve efficiency

Currently, the majority of the Air Force?s C- 130 and KC- 135 aircraft are
in the reserve component- that is, assigned to the Air Force Reserve and the
Air National Guard. Typically, reserve component wings are organized in one
squadron of 8 C- 130 aircraft or 10 KC- 135 aircraft. However, active Air
Force wings flying the same aircraft are generally organized in two to three
squadrons of 14 C- 130 aircraft or 12 KC- 135 aircraft. Given this
organizational approach, reserve component C- 130 and KC- 135 aircraft are

widely dispersed throughout the continental United States, Hawaii, and
Alaska.

The Air Force could reduce costs and meet peacetime and wartime commitments
if it reorganized its reserve component C- 130 and KC- 135 aircraft into
larger squadrons and wings at fewer locations. These savings would primarily
result from fewer people being needed to operate these aircraft. For
example, redistributing 16 C- 130 aircraft from two 8- aircraft reserve
wings to one 16- aircraft reserve wing could save about $11 million

dollars annually. This reorganization could eliminate about 155 full- time
positions and 245 part- time positions; the decrease in full- time positions
is especially significant, since the savings associated with these positions

represents about $8 million, or 75 percent of the total savings. Fewer
people would be needed in areas such as wing headquarters, logistics,
operations, and support group staffs as well as maintenance, support, and
military police squadrons.

Several alternatives could be developed to redistribute existing reserve
component C- 130 and KC- 135 aircraft into larger squadrons. Sufficient
personnel could be recruited for the larger squadrons, and most locations?
facilities could be inexpensively expanded to accommodate the unit sizes.

Overall savings will depend on the organizational model selected, but each
should produce savings to help make additional funding available for force
modernization. The alternative that requires the most reorganizing would
increase the squadron size to 16 aircraft for the C- 130 and 12 for the KC-
135 by redistributing aircraft from 13 C- 130 squadrons and 5 KC- 135
squadrons

to other squadrons. The table below shows the potential savings from this
option.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 plan Budget authority 100 184 288 375 403 Outlays 91
175278 367399 Source: Congressional Budget Office.

Related GAO Product Air Force Aircraft: Reorganizing Mobility Aircraft Units
Could Reduce Costs (GAO/ NSIAD- 98- 55, Jan. 21, 1998). GAO Contact Henry L.
Hinton, Jr., (202) 512- 5140

Eliminate Unneeded Naval Materials and Supplies Distribution Points

Authorizing committees Armed Services (Senate and House) Appropriations
subcommittees Defense (Senate and House) Primary agency Department of
Defense Account Operations and Maintenance, Navy (17-

1804) Spending type Discretionary Budget subfunction 050/ Department of
Defense- Military Framework theme Improve efficiency Our broad- based
reviews of various aspects of the Department of the

Navy?s financial management operations and its ability to meet existing
management and reporting requirements 5 have identified numerous
deficiencies, some of which can have significant budgetary implications. For
example, in 1996 we reported that because of inadequate systems,

Navy item managers did not have sufficient visibility over $5. 7 billion in
operating materials and supplies on ships and at 17 Navy redistribution
sites. These 17 sites, which contained almost half of the excess items, were
often located in the same general area as other DOD suppliers. Because

about $883 million, or 15 percent of this inventory, was excess to current
operating allowances or needs, and because the Navy ordered or purchased
items that were already on hand in excess quantities, the Navy

incurred unnecessary costs of approximately $27 million in the first half of
fiscal year 1995. The Navy could achieve savings by providing item managers
with better visibility over these assets and by eliminating redundant or
unnecessary redistribution sites. Eliminating the 17 sites would cost about
$50 million over 3 years but would reduce associated operating costs by $3
million annually and could reduce redundant supply operations and streamline

5 The Chief Financial Officers Act of 1990, as amended, requires that each
agency chief financial officer (CFO) develop an integrated agency accounting
and financial management system that complies with applicable principles and
standards and provides for complete, reliable, consistent, and timely
information that is responsive to the agency?s financial information needs.
The act also specifies that each agency CFO should direct, manage, and
provide policy guidance and oversight of asset management systems, including
inventory management and control.

visibility efforts. Additionally, a significant one- time saving could occur
due to the reintroduction of previously unused inventory back into the
supply system. An estimate of this one- time saving cannot be performed
until a more current study of the supply system is undertaken. However, we
estimated in 1996 that this unused inventory may be valued at as much

as $445 million.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 funding level Budget authority -18 -16 -15 3 4 Outlays
-5 -13 -14 -9 0 Source: Congressional Budget Office.

Related GAO Products CFO Act Financial Audits: Programmatic and Budgetary
Implications of Navy Financial Data Deficiencies (GAO/ AIMD- 98- 56, Mar.
16, 1998).

High- Risk Series: Defense Financial Management (GAO/ HR- 97- 3, Feb. 1997).
Navy Financial Management: Improved Management of Operating

Materials and Supplies Could Yield Significant Savings (GAO/ AIMD- 96- 94,
Aug. 16, 1996).

CFO Act Financial Audits: Navy Plant Property Accounting and Reporting Is
Unreliable (GAO/ AIMD- 96- 65, July 8, 1996).

Financial Management: Control Weaknesses Increase Risk of Improper Navy
Civilian Payroll Payments (GAO/ AIMD- 95- 73, May 8, 1995). GAO Contact
Gregory D. Kutz, (202) 512- 9505

Acquire Conventionally Rather than NuclearPowered Aircraft Carriers

Authorizing committees Armed Services (Senate and House) Appropriations
subcommittees Defense (Senate and House) Primary agency Department of
Defense Accounts Multiple Spending type Discretionary Budget subfunction
051/ Department of Defense- Military Framework theme Improve efficiency
Throughout the 1960s and most of the 1970s, the Navy pursued a goal of
creating a fleet of nuclear carrier task forces. The centerpiece of these
task forces, the nuclear- powered aircraft carrier, would be escorted by
nuclearpowered

surface combatants and nuclear- powered submarines. In deciding to build
nuclear- powered surface combatants, the Navy believed that the greatest
benefit would be achieved when all the combatant ships in the task force
were nuclear- powered. However, the Navy stopped building nuclear- powered
surface combatants after 1975 because of the high cost.

The last nuclear- powered surface combatants were decommissioned in the late
1990s because they were not cost effective to operate and maintain.

Our analysis shows that both conventional and nuclear aircraft carriers have
been effective in fulfilling U. S. forward presence, crisis response, and
war- fighting requirements and share many characteristics and capabilities.
Conventionally and nuclear- powered carriers both have the same standard air
wing and train to the same mission requirements. Each type of carrier offers
certain advantages. For example, conventionally powered carriers spend less
time in extended maintenance and, as a result, can provide more forward
presence coverage. By the same token, nuclear carriers can store larger
quantities of aviation fuel and munitions and, as a result, are less
dependent upon at- sea replenishment. There was little difference in the
operational effectiveness of nuclear and conventional carriers in the
Persian Gulf War.

The United States maintains a continuous presence in the Pacific region by
homeporting a conventionally powered carrier in Japan. If the Navy switches
to an all- nuclear carrier force, it would need to homeport a nuclear-
powered carrier there to maintain the current level of worldwide

overseas presence with a 12- carrier force. Homeporting a nuclear- powered
carrier in Japan could prove difficult and costly because of the need for
support facilities, infrastructure improvements, and additional personnel.
The United States would need a larger carrier force if it wanted to maintain
a similar level of presence in the Pacific region with nuclear- powered
carriers homeported in the United States. The Navy currently has three

conventionally powered and nine nuclear- powered carriers. The life- cycle
costs-- investment, operating and support, and inactivation and disposal
costs-- are greater for nuclear- powered carriers than conventionally
powered carriers. Our analysis, based on historical and projected costs,
shows that life- cycle costs for conventionally powered and nuclear- powered
carriers (for a notional 50- year service life) are estimated at $14. 1
billion and $22.2 billion (in fiscal year 1997 dollars), respectively.

In assessing design concepts for the next class of aircraft carriers-- and
consistent with the Navy?s objectives to reduce life- cycle costs by 20
percent-- our analysis indicates that national security requirements can be

met at less cost with conventionally powered carriers rather than
nuclearpowered carriers. If the Congress chose to acquire a conventionally
powered carrier in 2006 instead of a nuclear- powered carrier, the following
savings could be achieved.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 plan Budget authority 330 490 130 430 50 Outlays 2090
170220 230 Source: Congressional Budget Office.

Related GAO Products Navy Aircraft Carriers: Cost- Effectiveness of
Conventionally and Nuclear- Powered Carriers (GAO/ NSIAD- 98- 1, Aug. 27,
1998).

Nuclear Waste: Impediments to Completing the Yucca Mountain Repository
Project (GAO/ RCED- 97- 30, Jan. 17, 1997).

Defense Infrastructure: Budget Estimates For 1996- 2001 Offer Little Savings
for Modernization (GAO/ NSIAD- 96- 131, Apr. 4, 1996).

Navy?s Aircraft Carrier Program: Investment Strategy Options (GAO/ NSIAD-
95- 17, Jan. 1, 1995).

Navy Carrier Battle Groups: The Structure and Affordability of the Future
Force (GAO/ NSIAD- 93- 74, Feb. 25, 1993).

Nuclear- Powered Ships: Accounting for Shipyard Costs and Nuclear Waste
Disposal Plans (GAO/ NSIAD- 92- 256, July 1, 1992).

GAO Contact Henry L. Hinton, Jr., (202) 512- 4300

Improve the Administration of Defense Health Care

Authorizing committees Armed Services (Senate and House) Appropriations
subcommittees Defense (Senate and House) Primary agency Department of
Defense Account Defense Health Program (97- 0130) Spending type
Discretionary Budget subfunction 051/ Department of Defense- Military
Framework theme Improve efficiency

Each of the three military departments (Army, Navy, and Air Force) operates
its own health care system, providing medical care to active duty personnel,
their dependents, retirees, and survivors of military personnel. To a large
extent, these separate, costly systems perform many of the same
administrative, management, and operational functions. Numerous studies
since 1949, with the most recent completed in 2001, have

reviewed whether a central entity should be created within DOD for the
centralized management and administration of the three systems. Most of
these studies encouraged some form of organizational consolidation. A
Defense health agency would consolidate the three military medical systems
into one centrally managed system, eliminating duplicate

administrative, management, and operational functions. No specific budget
estimate can be developed until numerous variables, such as the extent of
consolidation and the impact on command and support structures, are
determined.

Although CBO agrees that improving the administration of Defense health care
has the potential to create savings, it cannot develop a savings estimate
until a specific legislative proposal is identified.

Related GAO Products Defense Health Care: TRICARE Resource Sharing Program
Failing to Achieve Expected Savings (GAO/ HEHS- 97- 130, Aug. 22, 1997).

Defense Health Care: Actions Under Way to Address Many TRICARE Contract
Change Order Problems (GAO/ HEHS- 97- 141, July 14, 1997).

TRICARE Administrative Prices in the Northwest Region May Be Too High (GAO/
HEHS- 97- 149R, June 24, 1997).

Defense Health Care: New Managed Care Plan Progressing, but Cost and
Performance Issues Remain (GAO/ HEHS- 96- 128, June 14, 1996).

Defense Health Care: Despite TRICARE Procurement Improvements, Problems
Remain (GAO/ HEHS- 95- 142, Aug. 3, 1995).

Defense Health Care: DOD?s Managed Care Program Continues to Face Challenges
(GAO/ T- HEHS- 95- 117, Mar. 28, 1995).

Defense Health Care: Issues and Challenges Confronting Military Medicine
(GAO/ HEHS- 95- 104, Mar. 22, 1995). GAO Contact Cynthia A. Bascetta, (202)
512- 7207

Seek Additional Opportunities for VA and DOD Medical Sharing to Enhance

Authorizing committees Armed Services (Senate and House)

Services to

Vet erans? Affairs (Senate and House) Appropriations subcommittees Defense
(Senate and House)

Beneficiaries and

VA, HUD, and Independent Agencies Reduce Costs

(Senate and House) Primary agencies Department of Defense

Department of Veteran?s Affairs Accounts Defense Health Program (97- 0130)

Medical Care (36- 0160) Spending type Discretionary Budget subfunctions 051/
Department of Defense- Military 703/ Hospital and Medical Care for Veterans

Framework theme Improve efficiency

Together, the Department of Veterans Affairs (VA) and the Department of
Defense (DOD) provide health care services to more than 12 million
beneficiaries and operate more than 700 medical facilities at a cost of
about $34 billion annually. To promote more cost- effective use of these
health

care resources and more efficient delivery of care, in May 1982 the Congress
enacted the VA and DOD Health Resources Sharing and Emergency Operations Act
(Sharing Act). Specifically, the act authorizes VA medical centers (VAMC)
and military treatment facilities (MTF) to become partners and enter into
sharing agreements to buy, sell, and barter medical and support services.

Over the past two decades, the sharing program has yielded benefits in both
dollar savings and qualitative gains, illustrating what can be achieved when
the two agencies work together to identify where excess capacity and cost
advantages exist. Although VA and DOD continue to share resources to provide
quality and cost- effective health care services,

existing sharing agreements are not being taken full advantage of and
additional sharing opportunities could be pursued. For example, in fiscal
year 1998, 75 percent of direct medical care occurred under just 12
agreements for inpatient care, 19 agreements for outpatient care, and 12
agreements for ancillary care. Most joint venture activity was similarly
concentrated at two sites where many hospital services and administrative
processes are integrated. In addition, relatively few VA facilities reported
that they participate in the national joint disability discharge initiative-
an

initiative intended to eliminate duplicative physical examinations that
military personnel were required to undergo to be discharged and receive VA
disability benefits. VA and DOD continue to be hampered by longstanding
barriers, including inconsistent reimbursement and budgeting policies and
burdensome agreement approval processes. These longstanding barriers, along
with recent changes in how VA and DOD provide medical care, present
challenges for future collaboration and cost efficiencies. Although VA and
DOD have taken some recent actions to address these barriers and seek more
opportunities to maximize resources,

challenges still remain. VA and DOD sharing partners generally believe the
sharing program yielded benefits in both dollar savings and qualitative
gains, illustrating what can be achieved when the two agencies work
together. Although it may be difficult at times to quantify, it seems
worthwhile to continue to pursue opportunities to share resources, including
such activities as jointly procuring pharmaceuticals and medical and
surgical supplies, when clinically appropriate and cost advantages exist.
For example, based on our work, VA and DOD have made significant progress in
procuring

pharmaceuticals-- awarding 30 joint contracts by January 2001 estimated to
save $70 million. An additional 126 more are planned with possible savings
of $100 million. Despite this significant progress, much more potential
still exists-- particularly where VA and DOD medical facilities are

within close proximity of each other-- to maximize each system?s capacities
and result in the most cost effective delivery of care. Other opportunities
for increasing sharing- such as DOD?s use of VA?s consolidated mail
outpatient pharmacies, joint procurement of higher- cost brand name drugs,
medical and surgical supplies, and equipment- could

yield additional significant savings. VA and DOD need to continue to work
together to determine an appropriate course of action to ensure that
resource- sharing opportunities are realized to the maximum extent possible.
Related GAO Products DOD and VA Pharmacy: Progress and Remaining Challenges
in Jointly Buying and Mailing Out Drugs (GAO- 01- 588, May 25, 2001).

DOD and VA Health Care: Jointly Buying and Mailing Out Pharmaceuticals Could
Save Millions of Dollars (GAO/ T- HEHS- 00- 121, May 25, 2000).

VA and Defense Health Care: Rethinking of Resource Sharing Strategies Is
Needed (GAO/ T- HEHS- 00- 117, May 17, 2000).

VA and Defense Health Care: Evolving Systems Require Rethinking of Resource
Sharing Strategies (GAO/ HEHS- 00- 52, May 17, 2000).

GAO Contact Cynthia A. Bascetta, (202) 512- 7207

Continue Defense Infrastructure Reform

Authorizing committees Armed Services (Senate and House) Appropriations
subcommittees Defense (Senate and House) Primary agency Department of
Defense Accounts Multiple Spending type Discretionary Budget subfunction
051/ Department of Defense- Military

Framework theme Improve efficiency

Although DOD has made significant reductions in defense force structure and
military spending since the end of the Cold War, it has not achieved
commensurate reductions in infrastructure 6 costs. We previously reported
that the proportion of planned infrastructure funding in DOD?s budgets

would remain relatively constant at about 60 percent through 2005. DOD
recognized that it must make better use of its scarce resources and
announced a major reform effort- the Defense Reform Initiative (DRI). This
effort began almost 4 years ago in November 1997. A major thrust of

the DRI was to reduce unneeded infrastructure, primarily through a number of
initiatives aimed at substantially streamlining and improving the economy
and efficiency of DOD?s business operations and support activities. The
resulting savings were expected to help DOD modernize its war fighting
forces. While the new administration has not continued the formal DRI
program, it has recognized the need to continue reform efforts. Secretary of
Defense Rumsfeld announced on June 18, 2001, the creation of two new
management committees to recommend ways to improve DOD?s business activities
and transform the U. S military into a 21 st century fighting force. The
Senior Executive Committee, which includes the Secretary and Deputy
Secretaries of Defense and the Service Secretaries, is expected to meet

6 DOD defines infrastructure as those activities that provide support
services to mission programs, such as combat forces, and primarily operate
from fixed locations. They include such program elements as installation
support, acquisition infrastructure, central logistics, central training,
central medical and central personnel. In fiscal year 2001, approximately
$33 billion of infrastructure costs are expected to be related to
maintenance and upkeep of facilities across these program elements.

monthly and use its members? unique qualifications as business leaders to
recommend changes to DOD?s business practices. The second committee, the
Business Initiative Council, also includes the service secretaries but is
chaired by the Under Secretary of Defense for Acquisition, Technology, and
Logistics. Its mission is to recommend good business practices and achieve
cost savings that will help pay for other DOD priorities. Although the
agendas of these committees are not clear at this time, their members have
endorsed several ongoing initiatives that were part of the DRI program (e.
g., family housing and utilities privatization) and indicated that they
would consider 25 other areas that impact readiness and quality of life.

They also emphasized that the committees do not intend to conduct another
study. Rather, they will execute those initiatives or ideas that have
already been researched and offer opportunities to fundamentally change
DOD?s business practices and reduce infrastructure costs. Despite the change
in the management structure, a number of old initiatives continue. However,
progress in achieving the goals is mixed. For example:

 A major efficiency initiative was to subject over 200,000 government
positions to public- private competitions through fiscal year 2005. Since
the DRI was announced, this A- 76 initiative has been incorporated with the
department?s strategic sourcing initiative. Strategic sourcing introduces
the idea of applying manpower management techniques- such as reengineering,
reorganization, and privatization- as a way to improve efficiency and reduce
personnel requirements. In March 2001,

DOD set new targets for its A- 76 and strategic sourcing efforts. The A- 76
program is to study 160, 000 positions and the strategic sourcing effort is
to study 120,000 positions. Although its savings estimates are subject to
change, DOD expects the A- 76 competitions to save about $9. 2 billion by
2005 and $2.8 billion annually thereafter. It expects its strategic sourcing
efforts to save $2.5 billion by 2005 and recurring annual savings of $0.7
billion thereafter. We have raised questions about the precision of DOD?s
estimates and the likelihood that savings will be realized as quickly as DOD
projects. Nevertheless, we have noted that these efforts

can produce significant savings regardless of whether governmental
organizations or private contractors win the competitions.

 DOD has initiated a program to demolish and dispose of over 80 million
square feet of excess buildings on military facilities. The military
services were each given a demolition goal and expect to meet their goals
and complete the program by 2003.

 Closing unneeded research development test and evaluation (RDT& E)
facilities has proved to be more difficult. DOD?s RDT& E infrastructure
consists of 131 facilities that develop and test military technologies. Over
the years, DOD has tried to reduce the size of its RDT& E infrastructure and
expected to close 62 sites by 2001. In addition, DOD

reduced its RTD& E personnel by about 40,000 between fiscal years 1990 and
1997, saving an estimated $2.4 billion annually in personnel costs. Despite
these reductions, the RDT& E infrastructure continues to have excess
capacity. DOD estimates that excess capacity, in terms of square footage, is
between 20 percent and 60 percent, depending on the military

service and the method of estimation used. Moreover, DOD has stated that
estimated personnel reductions are somewhat inflated because many government
employees were replaced by on- site contractor employees who are conducting
essentially the same tasks as government employees.

 Privatizing utilities has also proved to be more complicated and costly
than anticipated and, consequently, progress has been very limited. The
department established the goal of privatizing utility systems on military
bases by September 30, 2003. However, as of June 2001, almost 4 years after
the goal was established, DOD had privatized only 23 of the approximately
1,700 systems it was considering for privatization. The effort has proven to
be more complex, time consuming, and expensive than originally anticipated.
Although exact costs are not known, DOD estimates that it could cost
hundreds of millions of dollars to complete required feasibility and
environmental studies and upgrade the facilities to make them attractive to
private investors. Additionally, instead of realizing significant savings,
as once envisioned, the program might

instead increase costs to the department?s operations and maintenance
budgets to pay for privatized utility services. By not privatizing, however,
DOD faces large capital costs (possibly in the billions) to repair the
utility systems and ensure they continue to operate at an acceptable level.
DOD sees privatization as a way to use private resources to finance these
needed capital repairs and to get out of a business that is clearly not
central to its mission.

 Privatizing family housing through private sector financing, ownership,
operation, and maintenance has also experienced delays. Since the program
began, the department has awarded a small number of contracts. DOD has not
implemented a departmentwide standard process for determining housing
requirements. DOD and the services have worked to develop the framework for
this process, but technical

concerns- such as standards for affordable housing and commuting distance-
have stalled its adoption. Also, DOD?s life- cycle cost analyses for housing
privatization have been incomplete and inaccurate, and have overstated
savings. Moreover, increasing military members? housing

allowance to secure private sector housing may be a better alternative to
more quickly increase the availability of quality housing to military
members.

The new administration also continues to emphasize the need for at least one
additional base realignment and closure round in 2003 to reduce unneeded
infrastructure and free up funds for readiness, weapon modernization, and
other needs. DOD projects that additional base closure rounds could produce
new savings of $3.4 billion a year once realignment and closure actions are
completed and the costs of implementing the actions are offset by savings.
While we have previously raised questions about the precision of DOD?s
savings estimate, our work has nevertheless

shown that the department will realize net annual recurring savings once
initial investment costs from implementing realignment and closure decisions
have been offset.

Undoubtedly, opportunities remain for DOD to reduce its infrastructure costs
through additional strategic sourcing, streamlining, consolidating, and
possibly privatizing efforts. However, DOD needs a plan and investment
strategy to maximize the results of these efforts. In particular, a
comprehensive integrated consolidation and downsizing plan that sets goals,
identifies specific initiatives, and sets priorities across DOD is needed to
guide and sustain reform efforts. Ongoing DRI initiatives from the previous
administration as well as initiatives involving the 25 business areas being
evaluated by the Business Initiatives Council need to be addressed by the
plan. Savings for this option cannot be fully estimated

until such a plan is developed. Related GAO Products Major Management
Challenges and Program Risks, Department of Defense (GAO- 01- 244, Jan.
2001).

Future Years Defense Program: Risks in Operation and Maintenance and
Procurement Programs (GAO- 01- 33, Oct. 5, 2000).

Defense Infrastructure: Improved Performance Measures Would Enhance Defense
Reform Initiative (GAO/ NSIAD- 99- 169, Aug. 4, 1999).

Defense Reform Initiative: Organization, Status and Challenges (GAO/ NSIAD-
99- 87, Apr. 21, 1999).

Defense Reform Initiative: Progress, Opportunities, and Challenges (GAO/ T-
NSIAD- 99- 95, Mar. 2, 1999).

Force Structure: A- 76 Not Applicable to Air Force 38th Engineering
Installation Wing Plan (GAO/ NSIAD- 99- 73, Feb. 26, 1999).

Major Management Challenges and Program Risks: Department of Defense (GAO/
OCG- 99- 4, Jan. 1999).

Army Industrial Facilities: Workforce Requirements and Related Issues
Affecting Depots and Arsenals (GAO/ NSIAD- 99- 31, Nov. 30, 1998).

Military Bases: Review of DOD?s 1998 Report on Base Realignment and Closure
(GAO/ NSIAD- 99- 17, Nov. 13, 1998).

Defense Infrastructure: Challenges Facing DOD in Implementing Reform
Initiatives (GAO/ T- NSIAD- 98- 115, Mar. 18, 1998).

Best Practices: Elements Critical to Successfully Reducing Unneeded RDT& E
Infrastructure (GAO/ NSIAD/ RCED- 98- 23, Jan. 8, 1998).

Future Years Defense Program: DOD?s 1998 Plan Has Substantial Risk in
Execution (GAO/ NSIAD- 98- 26 Oct. 23, 1997).

1997 Defense Reform Bill: Observations on H. R. 1778 (GAO/ T- NSIAD- 97-
187, June 17, 1997).

Defense Infrastructure: Demolition of Unneeded Buildings Can Help Avoid
Operating Costs (GAO/ NSIAD- 97- 125, May 13, 1997).

DOD High- Risk Areas: Eliminating Underlying Causes Will Avoid Billions of
Dollars in Waste (GAO/ T- NSIAD/ AIMD- 97- 143, May 1, 1997).

Defense Acquisition Organizations: Linking Workforce Reductions With Better
Program Outcomes (GAO/ T- NSIAD- 97- 140, Apr. 8, 1997).

Defense Budget: Observations on Infrastructure Activities (GAO/ NSIAD97-
127BR, Apr. 4, 1997).

GAO Contact Henry L. Hinton, Jr., (202) 512- 4300

Reduce Funding for Renovation and Replacement of Military Housing until
Authorizing committees Armed Services (Senate and House)

DOD Completes

Appropriations subcommittees Defense (Senate and House)

Housing Needs Primary agency Department of Defense

Assessment

Accounts Multiple Spending type Discretionary Budget subfunction Department
of Defense- Military (051) Framework theme Improve Efficiency One of DOD?s
most pressing problems is its outsized and decaying

infrastructure, and this problem is prominent in the family housing program.
7 By DOD?s estimates, about two- thirds of military housing is inadequate
and would require $16 billion and almost 30 years to renovate or

replace using traditional military construction. Efforts to use private
contractors to build and operate housing are off to a slow start and may
require a long- term (50 years or more) commitment from the government.
DOD?s policy is to rely on the private sector first for housing, but
military members that receive a cash allowance to live in private sector
housing must often pay out- of- pocket costs also. These additional costs
have been a significant disincentive for living in civilian housing.
However, in fiscal year 2001, the Congress authorized an initiative to
eliminate the service

members? out- of- pocket costs for living in civilian housing by fiscal year
2005. While the full impact of this initiative on military housing
requirements is not known, it will provide added incentive for service

members to move into civilian housing, thereby reducing the potential need
for DOD constructed housing. Despite efforts to improve the quality and
availability of housing for military families, DOD has not implemented a
departmentwide standard process for determining military housing
requirements. A requirementssetting

process that first considers the housing available around installations
would likely decrease the amount of needed military housing. Without an
accurate requirements- setting process based on the availability 7 The
Fiscal Year 2002 Defense Authorization Act authorized another round of Base
Realignment and Closure (BRAC) to be conducted in 2005.

of private sector housing, DOD will continue to have inadequate information
with which to make decisions about where it should renovate, build, or seek
to privatize military housing. Increasing the housing

allowance heightens the urgency for a consistent process to determine
military housing requirements because it is expected to increase demand for
civilian housing, and lessen the demand for military housing. Considerable
evidence suggests that it is less expensive to provide

allowances for military personnel to live on the civilian market than to
provide military housing. While overall program costs are increasing
significantly over the short term to cover increased allowances, DOD could
save money in the longer term by encouraging more personnel to move into
civilian housing. In the meantime, without an accurate determination of
military housing needs, the Department may spend millions of dollars to

construct, renovate, or privatize housing that in some locations is
unnecessary. In order to better ensure that DOD?s renovation and replacement
of military housing is needed, the Congress may wish to reduce spending on
noncritical housing construction and renovation until DOD completes a full
needs assessment to determine if less expensive alternatives exist in the
private market. Such a needs assessment would better enable DOD to target
its limited financial resources to where military housing needs are most
immediate. CBO cannot estimate the savings for this option until the

funds needed for noncritical construction and renovation projects are
identified. Although CBO agrees some savings would result from this option,
some of those savings would be offset in future years by additional spending
for projects that are delayed but ultimately funded.

Related GAO Product Military Housing: DOD Needs to Address Long- Standing
Requirements Determination Problems (GAO- 01- 889, August 3, 2001). GAO
Contact Barry W. Holman, (202) 512- 5581

Delay Production of Space- Based Infrared System- low Satellite System until
Testing Is

Authorizing committees Armed Services (Senate and House)

Complete

Appropriations subcommittees Defense (Senate and House) Primary agency
Department of Defense Accounts Missile Procurement, Air Force (57- 3020)
Spending type Discretionary Budget subfunction Department of Defense-
Military (051) Framework theme Reassess objectives The Air Force is
developing a new satellite system, called Space- Based

Infrared System- low (SBIRS- low), to expand DOD?s current infrared
satellite capabilities for supporting ballistic missile defense. The ability
to detect missile launches, track missiles throughout their flights, and
counter these threats is essential to ballistic missile defense. The primary
mission of SBIRS- low is to track ballistic missiles throughout the middle
portion of the flight (midcourse tracking) and discriminate between the
warheads and

other objects, such as decoys. DOD plans to begin launching SBIRS- low
satellites in fiscal year 2006 and estimates the life- cycle cost through
fiscal year 2022 to be about $14 billion. The Air Force?s SBIRS- low
acquisition schedule is at high risk of not delivering the system on time,
at cost, or with expected performance. While the Air Force?s previous
schedules for SBIRS- low provided for the flight test of crucial satellite
functions and capabilities to be available to support the decision to enter
satellite production, the current schedule does not provide for completion
of such tests until after production has started. If design changes are
identified as a result of the test, these changes will have to be
incorporated into satellites already under production, and parts that have
already been purchased based on the initial

design may become obsolete and replaced by new parts, increasing program
costs and causing schedule delays.

Testing a small number of SBIRS- low satellites before beginning full- scale
production can reduce cost and schedule risks to the government.
Consequently, the Congress may wish to require the Air Force to delay
production of SBIRS- low satellites until testing of the initial satellites
takes

place. This testing generally can be expected to take 1 or 2 years to

complete. Since the administration?s fiscal year 2003 budget request
proposes delaying deployment by 2 years, CBO estimates that the option would
have no budgetary impact. 8 Related GAO Product Defense Acquisitions: Space
Based Infrared System- low at Risk of

Missing Initial Deployment Date (GAO- 01- 6, Feb. 28, 2001). GAO Contact
Jack L. Brock, Jr., (202) 512- 4841

8 CBO estimates savings for some defense- related options relative to DOD?s
planned program levels.

Consolidate the Nuclear Cities Initiative and the

Initiatives for

Authorizing committees Energy and Natural Resources (Senate)

Proliferation

Energy and Commerce (House) Appropriations subcommittees Energy and Water
Development (Senate Prevention Program

and House)

into One Effort

Primary agency Department of Energy Accounts Defense Nuclear
Nonproliferation (89- 0309) Spending type Discretionary Budget subfunction
053/ Atomic Energy Defense Activities Framework Theme Improve efficiency The
Initiatives for Proliferation Prevention (IPP) program was established in
1994 to engage scientists in the former Soviet Union in peaceful

commercial activities to reduce the risk that unemployed weapons scientists
will sell sensitive information. In late 1998, the administration launched a
new program- the Nuclear Cities Initiative (NCI)- to create jobs for
displaced weapons scientists in the 10 cities that form the core of Russia?s
nuclear weapons complex. These programs are implemented through research and
development projects involving the Department of Energy?s headquarters and
national laboratories, U. S. industry, and scientific institutes in the
Newly Independent States. A major purpose of these programs is to identify
commercial opportunities through these projects to attract investment by U.
S. companies.

During its first 2 years, the NCI funded 26 projects that have had limited
success in meeting the program?s principal objectives- creating jobs for
weapons scientists and helping to downsize Russia?s weapons complex. Of the
roughly $15.9 million in program expenditures through December 2000,

about $11.2 million (or 70 percent) had been spent in the United States for
Department of Energy and National Laboratories? program- related expenses,
with the remainder spent for projects and activities in Russia. These
projects, based in Russia, employed about 370 people, including many weapons
scientists, working on a part- time basis, who continue to work on Russia?s
weapons of mass destruction program. About one half of the projects funded
by NCI are not designed to create jobs for weapons

scientists and instead focus on such activities as the delivery of medical
equipment and school exchange programs. Also, the NCI and IPP

programs have similar objectives and both serve Russia?s nuclear cities,
leading to duplication of effort.

Given the limited impact of NCI projects to date, the large percentage of
funds used to pay overhead costs, and the overlap with the IPP program, the
Congress may wish to consolidate the two programs into one effort.

While CBO agrees that consolidating the two programs could yield
administrative and programmatic savings, it cannot develop an estimate until
specific proposals are identified.

Related GAO Products Nuclear Nonproliferation: DOE?s Efforts to Assist
Weapons Scientists in Russia?s Nuclear Cities Face Challenges (GAO- 01- 429,
May 30, 2001).

Nuclear Nonproliferation: DOE?s Efforts to Secure Nuclear Material and
Employ Weapons Scientists in Russia (GAO- 01- 726T, May 15, 2001).

Nuclear Nonproliferation: Concerns With DOE?s Efforts to Reduce the Risks
Posed by Russia?s Unemployed Weapons Scientists (GAO/ RCED- 9954, Feb. 19,
1999).

GAO Contact Ms. Gary Jones, (202) 512- 3841

150 International Eliminate U. S. Contributions to Administrative Costs in
Rogue States Affairs Improve State Department Business Processes Streamline
U. S. Overseas Presence

Eliminate U. S. Contributions to Administrative Costs in Rogue States

Authorizing committees Foreign Relations (Senate) International Relations
(House)

Appropriations subcommittees Foreign Operations, Export Financing and
Related Programs (Senate and House) Primary agency State Department Account
International Organizations and Programs (72- 1005)

Spending type Discretionary Budget subfunction 151/ International
development and

humanitarian assistance Framework theme Reassess objectives

Organizations of the United Nations system, such as the United Nations
Development Program, fund projects in countries that are legislatively
prohibited from receiving U. S. funding under section 307 of the Foreign

Assistance Act of 1961, as amended. The list of countries varies over time
but has included Afghanistan, Burma, Cuba, Iran, Iraq, Libya, Serbia, and
Syria. To comply with the legislation, the Department of State withholds
from its voluntary contributions to United Nations organizations the U. S.

share of funding for projects in these countries. However, the department
does not withhold administrative expenditures associated with the operation
of field offices in these countries. Consequently, a portion of the U. S.
contribution still goes to states prohibited from receiving U. S. funds. We
did not attempt to calculate the total amount that the United States
contributes to all United Nations organizations for administrative expenses
in rogue states. However, in 1998 GAO estimated that the amount for one
United Nations organization, the United Nations Development Program, was
about $600,000. The Department of State has indicated that it would not, as
a matter of policy, withhold U. S. contributions to United Nations
organizations for administrative expenses in these countries. The department
believes the

legislative restriction invites politicization and contradicts the principle
of universality for participating in United Nations organizations.

Savings may be achieved if the Department of State were to include field
office administrative costs when calculating the amount of U. S.
withholdings for all United Nations organizations that are subject to
section 307 of the Foreign Assistance Act of 1961. Although CBO agrees

savings may be achieved, it cannot develop an estimate for this option until
a specific proposal is identified. Related GAO Products Multilateral
Organizations: U. S. Contributions to International Organizations for Fiscal
Years 1993- 95 (GAO/ NSIAD- 97- 42, May 1, 1997).

International Organizations: U. S. Participation in the United Nations
Development Program (GAO/ NSIAD- 97- 8, Apr. 17, 1997). GAO Contact Susan S.
Westin, (202) 512- 4128

Improve State Department Business Processes

Authorizing committees Foreign Relations (Senate) International Relations
(House)

Appropriations subcommittees Commerce, Justice, State, and the Judiciary
(Senate and House)

Primary agency Department of State Account Diplomatic and Consular Programs
(19-

0113) Salaries and Expenses (19- 0107) Security/ maintenance of U. S.
Missions (19- 0535)

Spending type Discretionary Budget subfunction 153/ Conduct of foreign
affairs Framework theme Improve efficiency

The Department of State has a number of outmoded and inefficient business
processes. For example, one of the problems confronting the department is
how to efficiently relocate its employees overseas, find

suitable housing abroad, and provide household furniture. Our work suggests
that millions of dollars could be saved while providing high- quality
services if the department adopted relocation practices used in the private
sector-- including outsourcing various parts of the transfer process. The
State Department?s employee transfer process has remained virtually
unchanged for years. Department employees are confronted with a myriad of
steps and multiple offices to navigate. The department also separately
contracts for each segment of most moves. In addition to incurring annual
direct costs of about $36 million to ship household effects, the State
Department incurs as much as $1,600 in overhead costs for each move. Moves
are typically processed in the State Department?s Transportation Division in
Washington, D. C.; one of its four regional dispatch agencies; and its
European Logistical Support Office. We found that leading companies in the
private sector use a number of ?best practices? to provide better service
and reduce costs. Such practices include having one point of contact for
assistance to employees, known as one- stop- shopping, and

using commercial, door- to- door shipments to lower the cost of shipping
employees? household effects. Private sector firms also generally use one
contractor for all segments of the move, minimizing in- house support
requirements and reducing total costs.

Another important State Department process is providing overseas housing.
The Department of State and other U. S. government agencies operating
overseas spend over $200 million annually to lease housing and purchase
furniture for employees and their families. This process appears to be more
costly than necessary. Our comparison of the State

Department?s processes with those of key private sector firms operating
overseas indicates that if the department adopted private sector practices
at a number of posts, it could potentially save the U. S. government
substantial amounts of money and still meet its employees? overseas
residential housing and furniture needs. Specific practices that can reduce
costs include (1) using relocation companies and similar service providers
to search for housing and negotiate leases to reduce in- house support costs

and shift some property preparation expenses to landlords, (2) providing
employees with housing allowances to select their own homes rather than
managing and maintaining a housing pool of government leases and
preassigning residences, and (3) acquiring residential furniture overseas
instead of buying and shipping it from the United States. The Overseas

Presence Advisory Panel convened by the Secretary of State also suggested
that the department explore incentives for greater private sector
involvement in managing residential property to improve operational
efficiency.

Our cost analysis of the U. S. mission?s housing office in Brussels and the
housing support function at the U. S. embassy in London illustrate how using
a relocation company could potentially yield significant savings at those
posts. For example, based on cost data provided by the mission in Brussels,
the annual salary cost alone attributable to the short- term leasing

process totaled about $700,000 in fiscal year 1996. If property preparation
and other support costs are included, the embassy?s direct and indirect
costs for short- term residential leases exceed $1.5 million annually. In
contrast, a relocation company would charge between $207,000 and $277,000
for home- finding services. For London, the support costs for residential
leasing totaled about $700, 000 annually. Outsourcing homefinding

services would cost between $118,000 and $151,000. While CBO agrees that
improving the State Department?s business processes could yield savings, it
cannot develop an estimate until specific proposals are identified.

Related GAO Products State Department: Options for Reducing Overseas Housing
and Furniture Costs (GAO/ NSIAD- 98- 128, July 31, 1998).

State Department: Using Best Practices to Relocate Employees Could Reduce
Costs and Improve Service (GAO/ NSIAD- 98- 19, Oct. 17, 1997).

GAO Contact Jess T. Ford, (202) 512- 4128

Streamline U. S. Overseas Presence

Authorizing Committees Foreign Relations (Senate) International Relations
(House)

Appropriation subcommittees Commerce, Justice, State and the Judiciary
(Senate and House) Primary agency Department of State Account Diplomatic and
Consular Programs (19-

0113) Salaries and Expenses (19- 0107) Security/ maintenance of buildings

Spending type Discretionary Budget subfunction 153/ Conduct of foreign
affairs Framework theme Improve efficiency

The Department of State maintains a physical presence in the form of
embassies in over 160 countries, usually in the capital city, and consulates
general, consulates, and other offices in the capital or other cities.
Almost 18, 000 U. S. direct- hire employees (over 6,400 from the State
Department

and 11,200 from other agencies) work overseas at a total of more than 250
diplomatic posts. In addition, U. S. direct- hire staffing levels have
increased over the years, most notably in the nonforeign affairs agencies.
The U. S. government also employs over 35,000 locally hired and contract
staff at its diplomatic posts. U. S. embassies have become bases to at least
27 other U. S. government agencies involved in more than 300 activities.

Security requirements and the increasing costs of diplomacy are directly
linked to the size of the overseas work force. Moreover, U. S. foreign
policy needs, which have changed dramatically with the end of the cold war,
call into question whether the current overseas post and staff structure is
appropriate. By reducing the number of Americans at posts where U. S.

interests are of lesser importance, consolidating functions, or using
regional embassies in certain regions, the State Department could reduce its
security requirements and enhance the safety of Americans overseas. In
addition to security concerns, the costs of maintaining Americans overseas
are high. It costs over $200,000 annually to station an American overseas,

which is about two times as much as for Washington- based staff. For several
years, we have been encouraging actions to reevaluate overseas staffing
requirements. In 1999, the Secretary of State established

the Overseas Presence Advisory Panel to review how the United States carries
out its activities overseas. In November 1999, the panel recommended the
formation of an interagency committee to review and streamline every
overseas post. Although the panel did not specify the amount of savings that
could be achieved through streamlining posts, it expressed the belief that
the savings would be substantial. If the Congress chose to reduce overseas
staffing by 1 percent, either through domestic

reallocation or elimination, the CBO estimates that the following savings
could be achieved.

Five- Year Savings Dollars in millions

FY03 FY04 FY05 FY06 FY07

Option: Relocate overseas staffing domestically by 1 percent Savings from
the 2002 baseline Budget a uthority 48 12 16 20 Outlays 36 10 14 18 Note:
CBO assumes that these direct- hire positions would be relocated gradually
or through attrition to minimize costs. This would occur at an even pace
over 5 years and, based on information from GAO, savings are estimated at
$100,000 per position.

Source: Congressional Budget Office.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Option: Eliminate overseas staffing by 1 percent Savings from the 2002
baseline Budget authority 1 14 21 28 35 Outlays 6 12 19 25 32 Note: CBO
assumes that these direct- hire positions would be eliminated through
attrition rather than a reduction- in- force, which would involve
significant costs. Attrition would occur at an even pace over 5 years and,
based on information from GAO, savings are estimated at $200,000 per
position eliminated.

Source: Congressional Budget Office.

Related GAO Products State Department: Major Management Challenges and
Program Risks (GAO/ T- NSIAD/ AIMD- 99- 99, Mar. 4, 1999).

Foreign Affairs Management: Major Challenges Facing the Department of State
(GAO/ T- NSIAD- 98- 251, Sept. 17, 1998).

Overseas Presence: Staffing at U. S. Diplomatic Posts (GAO/ NSIAD- 9550FS,
Dec. 28, 1994).

State Department: Overseas Staffing Processes Not Linked to Policy
Priorities (GAO/ NSIAD- 94- 228, Sept. 20, 1994). GAO Contact Jess T. Ford,
(202) 512- 4128

250 Science, Space, Continue Oversight of the International Space Station
and Related Support and Technology

Systems

Continue Oversight of the International Space Station and Related Support
Systems

Authorizing committees Commerce, Science, and Transportation (Senate)
Science (House)

Appropriations subcommittees VA, HUD, and Independent Agencies Primary
agency National Aeronautics and Space Administration Account Multiple
Spending type Discretionary Budget subfunction 252/ Space flight, research,
and supporting

activities Framework theme Reassess objectives

In December 1998, the National Aeronautics and Space Administration (NASA)
accomplished a significant step in its construction of the International
Space Station (ISS): coupling the first two elements of the station in
orbit. More recently, the first permanent crew boarded the ISS.

Notwithstanding these noteworthy achievements, there appears to be no
abatement in the number of challenges NASA will face in the years to come.
Recent GAO studies have focused on (1) the increasing cost of building the
space station, (2) uncertainties regarding costs of operating

the space station, and (3) the impact of Russia not meeting its commitments
as a partner. Specifically, NASA has estimated that the annual cost to
operate the ISS will average $1.3 billion, or $13 billion over a 10- year
mission life. However, this estimate does not include all funding
requirements, such as (1) costs associated with necessary upgrades to combat
component obsolescence, (2) end- of- mission costs to either extend or
decommission the ISS, and (3) a variety of supports costs (space shuttle
flights, personnel, space communications, etc.) that are currently shown in
other portions of NASA?s budget. Similarly, Russia?s ongoing problems in
funding its share of the station?s construction costs- problems which

delayed delivery of the first major Russian- funded component- have raised
questions about its ability to continue to support operations costs during
and after assembly. In addition, NASA is facing a potential estimated cost
overrun in excess of $4.5 billion for the space station.

ISS will impose significant demands on future budgets that warrant continued
congressional oversight. As evidence of continued congressional

concerns, the National Aeronautics and Space Administration Authorization
Act of 2000 also requires GAO to verify NASA?s accounting of certain cost
limitations the act imposes on the ISS and related space shuttle operations.
However, other areas would also benefit from congressional oversight. For
example, in addition to ongoing NASA efforts to resolve

human capital shortfalls in the space shuttle program, activities are now
underway to develop a reusable launch vehicle to support space
stationrelated and other activities now being done by the space shuttle. The
$4. 5 billion Space Launch Initiative in particular is a major NASA program
intended to develop the advanced technologies for a reusable launch vehicle
needed to achieve those capabilities, and to do so at a significantly lower
cost. Overall, continued congressional oversight also helps ensure that
NASA?s other priorities are not sacrificed to fund ISS operations.

Because specific reduction options have not been proposed, CBO is unable to
estimate cost savings.

Related GAO Products Space Shuttle Safety: Update on NASA?s Progress in
Revitalizing the Shuttle Workforce and Making Safety Upgrades (GAO- 01-
1122T, Sept. 6, 2001).

NASA: International Space Station and Shuttle Support Cost Limits (GAO- 01-
1000R, Aug. 31, 2001).

Space Transportation: Critical Areas NASA Needs to Address in Managing Its
Reusable Launch Vehicle Program (GAO- 01- 826T, June 20, 2001).

Space Station: Inadequate Planning and Design Led to Propulsion Module
Project Failure (GAO- 01- 633, June 20, 2001).

Space Shuttle: Human Capital and Safety Upgrade Challenges Require Continued
Attention (GAO/ NSIAD/ GGD- 00- 186, Aug. 15, 2000).

Space Station: Russian- Built Zarya and Service Module Compliance With
Safety Requirements (GAO/ NSIAD- 00- 96R, Apr. 28, 2000).

Space Station: Russian Commitment and Cost Control Problems (GAO/ NSIAD- 99-
175, Aug. 17, 1999).

Space Station: Cost to Operate After Assembly Is Uncertain (GAO/ NSIAD99-
177, Aug. 6, 1999).

Space Station: Status of Russian Involvement and Cost Control Efforts (GAO/
T- NSIAD- 99- 117, Apr. 29, 1999). GAO Contact Jack L. Brock, Jr., (202)
512- 4841

270 Energy Corporatize or Divest Selected Power Marketing Administrations
Recover Power Marketing Administrations? Costs Increase Nuclear Waste
Disposal Fees Recover Federal Investment in Successfully Commercialized
Technologies Reduce the Costs of the Rural Utilities Service?s Electricity
and Telecommunications Loan Programs Consolidate or Eliminate Department of
Energy Facilities

Corporatize or Divest Selected Power Marketing Administrations

Authorizing committees Energy and Natural Resources (Senate) Resources
(House)

Primary agency Department of Energy Spending type Direct Framework theme
Reassess objectives

The federal government began to market electricity after the Congress
authorized the construction of dams and established major water projects,
primarily in the 1930s to the 1960s. The Department of Energy?s (DOE) power
marketing administrations (PMAs)- Bonneville Power Administration,
Southeastern Power Administration, Southwestern Power Administration, and
Western Area Power Administration-- market primarily

wholesale power in 33 states produced at large, multiple- purpose water
projects. Our March 1998 report identified options that the Congress and
other policymakers can pursue to address concerns about the role of three
PMAs- Southeastern, Southwestern, and Western-- in emerging restructured
markets or to manage them in a more business- like fashion. Our work has
demonstrated that, although federal laws and regulations generally require
that the PMAs recover the full costs of building, operating, and maintaining
the federal power plants and transmission assets, in some cases federal
statutes and DOE?s rules are ambiguous about or prohibit the recovery of
certain costs. For fiscal years 1992 through 1996, the federal government
incurred a net cost of $1.5 billion from its involvement in the electricity-
related activities of Southeastern,

Southwestern, and Western. We also reported that the appropriated and other
debt that is recoverable through the PMAs? power sales totaled about $22
billion at the end of fiscal year 1997 and included nearly $2.5 billion in
irrigation costs. In addition, our work has demonstrated that the
availability of federal power plants to generate electricity has been below
that of nonfederal plants because the federal planning and budgeting

processes do not always ensure that funds are available to make repairs when
needed. Our March 1998 report outlines three general options to address the
federal role in restructuring markets: (1) maintaining the status quo of
federal ownership and operation of the power generating projects, (2)
maintaining the federal ownership of these assets but improving how they are
operated

(an example of which is reorganizing the PMAs to operate as federally owned
corporations), and (3) divesting these assets. The third option would
eliminate the government?s presence in a commercial activity and, depending
on a divestiture?s terms and conditions and the price obtained, could
produce both a net gain and a future stream of tax payments to the Treasury.
Corporatization or divestitures of government assets have been accomplished
recently in the United States and also overseas, and corporatization could
serve as an interim step toward ultimate divestiture. Our March 1997 report
concluded that divesting the federal hydropower assets would be complicated
but not impossible. Such a transaction would

need to balance the multiple purposes of the water project as well as other
claims on the water. CBO estimates that divesting the federal hydropower
assets for

Southeastern, Southwestern, and Western would result in the savings shown
below. The estimate assumes that the divestiture would not occur for 2 years
and is based on the net present value of outstanding debt for the
Southeastern, Southwestern, and Western PMAs. Terms established in
legislation would significantly change the estimate. Although the foregone
receipts result in a loss of revenue in 2004 and 2005, it is mitigated by
the large receipts from divestiture in 2004 and by the savings in
discretionary spending.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Discretionary spending Savings from 2002 plan Budget authority 0 0 0200200
Outlays 0 0 0100197 Source: Congressional Budget Office.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Direct Spending Savings from 2002 funding level Budget authority 0 0 -4, 900
530 540 Outlays 0 0 -4,900 530 540 Source: Congressional Budget Office.

Related GAO Products Budget Issues: Effective Oversight and Budget
Discipline Are Essential- Even in a Time of Surplus (GAO/ T- AIMD- 00- 73,
Feb. 1, 2000).

Potential Candidates for Congressional Oversight (GAO/ OGC- 00- 3R, Nov. 1,
1999).

Federal Power: The Role of the Power Marketing Administrations in a
Restructured Electricity Industry (GAO/ T- RCED/ AIMD- 99- 229, June 24,
1999).

Federal Power: PMA Rate Impacts by Service Area (GAO/ RCED- 99- 55, Jan. 28,
1999).

Federal Power: Regional Effects of Changes in PMAs? Rates (GAO/ RCED99- 15,
Nov. 16, 1998).

Power Marketing Administrations: Repayment of Power Costs Needs Closer
Monitoring (GAO/ AIMD- 98- 164, June 30, 1998).

Federal Power: Options for Selected Power Marketing Administrations? Role in
a Changing Electricity Industry (GAO/ RCED- 98- 43, Mar. 6, 1998).

Federal Electricity Activities: The Federal Government?s Net Cost and
Potential for Future Losses (GAO/ AIMD- 97- 110 and 110A, Sept. 19, 1997).

Federal Power: Issues Related to the Divestiture of Federal Hydropower
Resources (GAO/ RCED- 97- 48, Mar. 31, 1997).

Power Marketing Administrations: Cost Recovery, Financing, and Comparison to
Nonfederal Utilities (GAO/ AIMD- 96- 145, Sept. 19, 1996).

Federal Power: Recovery of Federal Investment in Hydropower Facilities in
the Pick- Sloan Program (GAO/ T- RCED- 96- 142, May 2, 1996).

GAO Contacts Bob Robinson, (202) 512- 3841 Jim Wells, (202) 512- 3841

Recover Power Marketing Administrations? Costs

Authorizing committees Energy and Natural Resources (Senate) Resources
(House)

Primary agency Department of Energy Spending type Direct Framework theme
Redefine beneficiaries

Four of the Department of Energy?s (DOE) power marketing administrations
(PMA)-- Bonneville Power Administration, Southeastern Power Administration,
Southwestern Power Administration, and Western Area Power Administration--
market primarily wholesale power in 33 states produced at large, multiple-
purpose water projects. Except for Bonneville, these PMAs receive annual
appropriations to cover operating and maintenance (O& M) expenses and, if
applicable, the capital investment in transmission assets. 9 Federal law
requires the PMAs to repay these appropriations as well as the power-
related O& M and the capital appropriations expended by the operating
agencies generating the power.

Current monitoring activities do not ensure that the federal government
recovers the full cost of its power- related activities from the
beneficiaries of federal power. The full cost of the power- related
activities- which are to be recovered under current legislation and DOE
policy- include all direct and indirect costs incurred by the federal
government in producing, transmitting, and marketing federal power. Neither
DOE nor the Federal

Energy Regulatory Commission, which reviews the PMAs? rate proposals, is
effectively monitoring the rate- making process and the amounts due and
repayments made to ensure their accuracy, completeness, and timeliness.
Unrecovered power- related costs relate to (1) Civil Service Retirement
System (CSRS) pensions and postretirement health benefits, (2) life

insurance benefits, (3) certain workers? compensation benefits, and (4)
interest on some of the federal appropriations used to construct certain
projects. The full magnitude of the underrecovery of power- related costs is
9 In 1974, the Congress stopped providing Bonneville with annual
appropriations and instead

provided it with a revolving fund maintained by the Treasury; however,
Bonneville remains responsible for repaying its debt prior to 1974 and debt
stemming from appropriations expended by the operating agencies on power-
related expenses.

unknown. Until an effective monitoring system is implemented, the federal
government will continue to be exposed to financial loss due to the
underrecovery of power- related costs. The federal government is also
incurring other substantial net costs annually- the amount by which the full
costs of providing electric power exceed the revenues from the sale of
power- from the electricity- related

activities of the PMAs. Although the PMAs are generally required to recover
all costs, favorable financing terms and the lack of specific requirements
to recover certain costs have resulted in net costs to the federal
government because these PMAs? electricity rates do not recover all costs
that are to be repaid through the sale of power. It is important to note
that the PMAs were generally following applicable laws and regulations
applying to the recovery of costs; however, in some cases, federal statutes
and an applicable DOE order are ambiguous about or prohibit the recovery

of certain costs. In part because the PMAs sell power generated almost
exclusively from hydropower, are not required to earn a profit, and do not
fully recover the government?s costs in their rates, they are generally able
to sell power more cheaply than other providers. Southeastern, Southwestern,
and Western sold wholesale power to their preference customers, such as
public entities and rural cooperatives, from 1990 through 1995, at average
rates from 40 to 50 percent below the rates nonfederal utilities charged. If
the PMAs were

authorized to charge market rates for power in conjunction with federal
restructuring legislation, some preference customers who now purchase power
from the PMAs at rates that are less than those available from other sources
would see their rates increase. However, we have reported that slightly more
than two- thirds of the preference customers, which are located in varying
portions of 29 states, that purchased power directly from Southeastern,
Southwestern, and Western would experience small or no rate increases-
increases of one- half cent per kilowatt hour or less- if those PMAs charged
market rates.

The Congress and/ or the Secretary of Energy may wish to consider directing
the PMAs to more fully recover power- related costs or revising DOE?s policy
on high- interest debt repayment. We have recommended a

number of specific actions aimed at enhancing DOE?s oversight. For example,
changes could be implemented to recover the full costs to the federal
government of providing postretirement health benefits and pensions for
current employees and operating agency employees engaged in producing and
marketing the power sold by the PMAs. We and CBO

agree that several PMAs have begun to address some of these actions. The
Congress has the option of requiring the PMAs to sell their power at market
rates to better ensure the full recovery of the appropriated and other debt
that is recoverable through the PMAs? power sales. This debt totaled about
$22 billion at the end of fiscal year 1997 and included nearly $2.5 billion
in irrigation costs that are to be recovered through the PMAs? power sales.
This option would likely also lead to more efficient management of the

taxpayers? assets. Although CBO agrees that savings would occur if the PMAs
were directed to fully recover power- related costs or set their power at
market rates, it cannot develop an estimate for this option until a specific
proposal is identified.

Related GAO Products Congressional Oversight: Opportunities to Address
Risks, Reduce Costs, and Improve Performance (GAO/ T- AIMD- 00- 96, Feb. 17,
2000).

Federal Power: The Role of the Power Marketing Administrations in a
Restructured Electricity Industry (GAO/ T- RCED/ AIMD- 99- 229, June 24,
1999).

Federal Power: PMA Rate Impacts, by Service Area (GAO/ RCED- 99- 55, Jan.
28, 1999).

Federal Power: Regional Effects of Changes in PMAs? Rates (GAO/ RCED99- 15,
Nov. 16, 1998).

Power Marketing Administrations: Repayment of Power Costs Needs Closer
Monitoring (GAO/ AIMD- 98- 164, June 30, 1998).

Federal Power: Options for Selected Power Marketing Administrations? Role in
a Changing Electricity Industry (GAO/ RCED- 98- 43, Mar. 6, 1998).

Federal Electricity Activities: The Federal Government?s Net Cost and
Potential for Future Losses (GAO/ AIMD- 97- 110 and 110A, Sept. 19, 1997).

Federal Power: Issues Related to the Divestiture of Federal Hydropower
Resources (GAO/ RCED- 97- 48, Mar. 31, 1997).

Power Marketing Administrations: Cost Recovery, Financing, and Comparison to
Nonfederal Utilities (GAO/ AIMD- 96- 145, Sept. 19, 1996).

Federal Power: Outages Reduce the Reliability of Hydroelectric Power Plants
in the Southeast (GAO/ T- RCED- 96- 180, July 25, 1996).

Federal Power: Recovery of Federal Investment in Hydropower Facilities in
the Pick- Sloan Program (GAO/ T- RCED- 96- 142, May 2, 1996).

Federal Electric Power: Operating and Financial Status of DOE?s Power
Marketing Administrations (GAO/ RCED/ AIMD- 96- 9FS, Oct. 13, 1995). GAO
Contacts Bob Robinson, (202) 512- 3841

Jim Wells, (202) 512- 3841

Increase Nuclear Waste Disposal Fees

Authorizing committees Energy and Natural Resources (Senate) Commerce
(House) Resources (House)

Primary agency Department of Energy Spending type Direct Framework theme
Redefine beneficiaries

Utilities pay a fee to the Nuclear Waste Fund to finance the development of
storage and permanent disposal facilities for high- level radioactive
wastes. The amount of this fee has not changed since 1983, making the fund
susceptible to future budget shortfalls. To help ensure that sufficient
revenues are collected to cover increases in cost estimates caused by price
inflation, the Congress should amend the Nuclear Waste Policy Act of 1982 to
direct the Secretary of Energy to automatically adjust for inflation the

nuclear waste disposal fee that utilities pay into the Nuclear Waste Fund.
If the fee were indexed to inflation, CBO estimates the following additional
receipts could be expected.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Added receipts 11 25 40 53 68 Source: Congressional Budget Office.

Related GAO Products Status of Actions to Improve DOE User- Fee Assessments
(GAO/ RCED- 92- 165, June 10, 1992).

Changes Needed in DOE User- Fee Assessments (GAO/ T- RCED- 91- 52, May 8,
1991).

Changes Needed in DOE User- Fee Assessments to Avoid Funding Shortfall (GAO/
RCED- 90- 65, June 7, 1990).

GAO Contacts Bob Robinson, (202) 512- 3841 Ms. Gary Jones, (202) 512- 3841

Recover Federal Investment in Successfully Commercialized Authorizing
committees Energy and Natural Resources (Senate)

Technologies

Science (House) Commerce (House)

Appropriations subcommittees Energy and Water Development (Senate and House)
Interior and Related Agencies (Senate and House)

Primary agency Department of Energy Account Multiple Spending type
Discretionary Budget subfunction Multiple Framework theme Redefine
beneficiaries

The Department of Energy (DOE) and the private sector are involved in
hundreds of cost- shared projects aimed at developing a broad spectrum of
cost- effective, energy- efficiency technologies that protect the
environment, support the nation?s economic competitiveness, and promote the
increased use of oil, gas, coal, nuclear, and renewable energy resources. In
June 1996, we reported that DOE generally does not require repayment of its
investment in technologies that are successfully commercialized. Our review
identified four DOE programs that require industry repayment if the
technologies are ultimately commercialized. The offices in which we focused
most of our work planned to devote about $8 billion in federal funds to
cost- shared projects over their lifetime, of which about $2. 5 billion is
subject to repayment.

Our June 1996 report discussed the advantages and disadvantages of having a
repayment policy and pointed out that many of the disadvantages can be
mitigated by structuring a flexible repayment requirement with the
disadvantages in mind. It also discussed the types of programs and projects
that would be the most appropriate or suitable for repayment of the federal
investment. Because opportunities exist for substantial repayment in some of
DOE?s programs, requiring repayment under a flexible policy would allow the
government to share in the benefits of successfully commercialized
technologies that could amount to hundreds of millions of dollars. The
potential for repayment can be illustrated by assuming that if only 50

percent of the funds planned for projects that are currently not subject to
repayment lend themselves to repayment, and if about 15 percent of research
and development funds result in commercialized technologies (which DOE
officials say is about average), then about $400 million could be repaid to
the federal government. However, repayment provisions would only apply to
future technology development projects not yet negotiated with industry. CBO
estimates that this option would have no effect on receipts in the next 5
years because of the time lag between research and commercialization.

Related GAO Product Energy Research: Opportunities Exist to Recover Federal
Investment in Technology Development Projects (GAO/ RCED- 96- 141, June 26,
1996). GAO Contacts Bob Robinson, (202) 512- 3841

Jim Wells, (202) 512- 3841

Reduce the Costs of the Rural Utilities Service?s Electricity and

Authorizing committees Agriculture, Nutrition, and Forestry (Senate)

Telecommunications

Agriculture (House) Appropriations subcommittees Agriculture, Rural
Development, and Loan Programs

Related Agencies (Senate) Agriculture, Rural Development, FDA and Related
Agencies (House)

Primary agency Department of Agriculture Accounts Multiple Spending type
Discretionary Budget subfunction 271/ Energy supply Framework theme Improve
efficiency

The Rural Utilities Service (RUS), created by the Federal Crop Insurance
Reform and Department of Agriculture Reorganization Act of 1994 (P. L. 103-
354, Oct. 13, 1994), was established to provide loan funds intended to
assist in the development of the utility infrastructure in the nation?s
rural areas. RUS finances the construction, improvement, and repair of
electrical, telecommunications, and water and waste disposal systems

through direct loans and through repayment guarantees on loans made by other
lenders. According to RUS reports, the outstanding principal owed on RUS
loans totaled about $41 billion as of September 30, 1998. From a

financial standpoint, RUS has successfully operated the telecommunications
loan program, but the agency has had, and continues to have, significant
financial problems with the electricity loan program. For example, during
fiscal years 1992 through July 31, 1997, RUS wrote off the debt of four
electricity loan borrowers totaling more than $1.5 billion.

Since then, the agency has written off $0.3 billion and is in the process of
writing off an additional $3. 0 billion, and it is probable that the agency
will continue to incur losses in the future.

RUS needs to take steps to increase the effectiveness and reduce the costs
of its loan programs. RUS could, for example, (1) target loans to borrowers
that provide services to areas with low populations, (2) target subsidized
direct loans to borrowers that have a financial need for the agency?s
assistance, and (3) graduate the agency?s financially viable borrowers from
direct loans to commercial credit. Also, to reduce its

vulnerability to losses, RUS could (1) establish loan and indebtedness

limits, (2) set the repayment guarantee at a level below 100 percent, and
(3) prohibit loans to delinquent borrowers or to borrowers who have caused
the agency to incur loan losses. CBO cannot develop an estimate for this
option until specific proposals to improve efficiency are identified.

Related GAO Products Rural Utilities Service: Status of Electric Loan
Portfolio (GAO/ AIMD- 99- 264R, Aug. 17, 1999).

Rural Water Projects: Federal Assistance Criteria and Potential Benefits of
the Proposed Lewis and Clark Project (GAO/ T- RCED- 99- 252, July 29, 1999).

Rural Water Projects: Identifying Benefits of the Proposed Lewis and Clark
Project (GAO/ RCED- 99- 115, May 28, 1999).

Rural Water Projects: Federal Assistance Criteria Related to the Fort Peck
Reservation Rural Water Project (GAO/ T- RCED- 98- 230, June 18, 1998).

Rural Utilities Service: Risk Assessment for the Electric Loan Portfolio
(GAO/ T- AIMD- 98- 123, Mar. 30, 1998).

Rural Utilities Service: Opportunities to Operate Electricity and
Telecommunications Loan Programs More Effectively (GAO/ AIMD- 98- 42, Jan.
21, 1998).

Federal Electricity Activities: The Federal Government?s Net Cost and
Potential for Future Losses (GAO/ AIMD- 97- 110, Sept. 19, 1997).

Rural Development: Financial Condition of the Rural Utilities Service?s
Electricity Loan Portfolio (GAO/ T- RCED- 97- 198, July 8, 1997).

Rural Development: Financial Condition of the Rural Utilities Service?s Loan
Portfolio (GAO/ RCED- 97- 82, Apr. 11, 1997).

GAO Contacts Bob Robinson, (202) 512- 3841 Lawrence J. Dyckman, (202) 512-
3841 Linda M. Calbom, (202) 512- 9508

Consolidate or Eliminate Department of Energy Facilities

Authorizing committees Energy and Natural Resources (Senate) Energy and
Commerce (House)

Appropriations subcommittees Energy and Water Development (Senate and House)

Primary agency Department of Energy Account Energy Supply, R& D Activities
(89- 0224)

Spending type Discretionary Budget subfunction 053/ Atomic energy defense
activities Framework theme Improve efficiency

Since 1982, many panels, commissions, and task forces, and several GAO
studies have addressed how the Department of Energy (DOE) could achieve
operational efficiencies in its research and development facilities.
Recommendations have included focusing unclear missions, aligning laboratory
activities more closely with DOE goals, consolidating facilities, and
replacing cumbersome, inefficient management structures. In

particular, with the end of the Cold War, DOE may no longer need to maintain
three nuclear weapons laboratories. A DOE- chartered task force- the 1995
Task Force on Alternative Futures for the Department of Energy National
Laboratories- reported that DOE?s entire laboratory system could be reduced
productively by eliminating obsolete and redundant missions and supporting
infrastructure. Because such consolidations have not occurred, science
budgets are being spent increasingly on maintenance of obsolete and
inappropriate infrastructure, rather than innovative research and
development, or to support other important DOE missions.

Congress recently reorganized DOE?s defense laboratories and put them under
control of the new semi- autonomous National Nuclear Security
Administration. However, what is still needed is a mission- by- mission

examination of DOE. This reassessment should explore alternative
organizational approaches to best implement DOE?s missions and, ideally,
should be part of a governmentwide restructuring of related programs and
activities. An outcome of this reassessment could be to reorganize existing
national laboratories to focus on specific DOE programs and activities,
eliminating duplication of both structures and personnel. This could

include converting some labs into private or quasi- private entities,
transferring labs to universities, or assigning them to different agencies
whose missions better match lab strengths.

One specific option that Congress could consider is consolidating the
nuclear weapons functions of the Lawrence Livermore facility into the Los
Alamos laboratory. In 1999, when funding requests at Lawrence Livermore
totaled about $500 million a year, DOE estimated that consolidating
engineering and testing efforts could save about $200 million in annual
operating costs. The table below reflects savings from phasing in such a

consolidation over a 5- year period.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2003 plan Budget authority 70 140 220 300 380 Outlays 50
110190 270350

Related GAO Products Department of Energy: Need to Address Longstanding
Management Weaknesses (GAO/ T- RCED- 99- 255, July 13, 1999).

Department of Energy: Key Factors Underlying Security Problems at DOE
Facilities (GAO/ T- RCED- 99- 159, Apr. 20, 1999).

Department of Energy: Uncertain Progress in Implementing National Laboratory
Reforms (GAO/ RCED- 98- 197, Sept. 10, 1998).

Federal R& D Laboratories (GAO/ RCED/ NSIAD- 96- 78R, Feb. 29, 1996).

Department of Energy: A Framework for Restructuring DOE and Its Missions
(GAO/ RCED- 95- 197, Aug. 21, 1995).

Department of Energy: National Laboratories Need Clearer Mission and Better
Management (GAO/ RCED- 95- 10, Jan. 27, 1995).

DOE?s National Laboratories: Adopting New Missions and Managing Effectively
Pose Significant Challenges (GAO/ T- RCED- 94- 113, Feb. 3, 1994).

Department of Energy: Management Problems Require a Long- term Commitment to
Change (GAO/ RCED- 93- 72, Aug. 31, 1993).

Nuclear Weapons Complex: Issues Surrounding Consolidating Los Alamos and
Lawrence Livermore National Laboratories (GAO/ RCED- 9298, Sept. 24, 1992).

GAO Contacts Bob Robinson, (202) 512- 3841 Ms. Gary Jones, (202) 512- 3841

300 Natural Resources Terminate Land- Exchange Programs and Environment

Defer Fish and Wildlife Service?s Acquisition of New Lands Deny Additional
Funding for Commercial Fisheries Buyback Programs Revise the Mining Law of
1872 Coordinate Federal Policies for Subsidizing Water for Agriculture and
Rural Uses

Reassess Federal Land Management Agencies? Functions and Programs Pursue
Cost- Effective Alternatives to NOAA?s Research/ Survey Fleet Increase
Federal Revenues through Water Transfers

Terminate LandExchange Programs

Authorizing committees Agriculture, Nutrition, and Forestry (Senate) Energy
and Natural Resources (Senate) Agriculture (House) Resources (House)

Appropriations subcommittees Interior and Related Agencies (Senate and
House)

Primary agencies Department of the Interior Department of Agriculture

Account Multiple Spending type Discretionary Budget subfunctions 302/
Conservation and Land Management Framework theme Reassess objectives

The Bureau of Land Management (BLM) and the Forest Service have long used
land exchanges- trading federal lands for lands that are owned by
corporations, individuals, or state or local governments- as a tool for
acquiring nonfederal land and conveying federal land. By law, for an

exchange to occur, the estimated value of the nonfederal land must be within
25 percent of the estimated value of the federal land, the public interest
must be well served, and certain other exchange requirements must be met.
Recognizing the importance of land exchanges in

supplementing the federal funds that were available for purchasing land, the
Congress, in 1988, passed legislation to facilitate and expedite land
exchanges. Since then, BLM and the Forest Service have acquired about 1,500
square miles of land through land exchanges.

Several fundamental issues create significant problems in the use of land
exchanges. For instance, in 1998, the cognizant inspectors general
identified exchanges in which lands were inappropriately valued and the
public interest was not well served. Also, although current law does not

authorize BLM to retain or use proceeds from selling federal land, BLM sold
federal land and retained the sales proceeds in escrow accounts. Further,
BLM did not track these sales proceeds in its financial management system.
At least some of BLM?s and the Forest Service?s continuing problems may
reflect inherent underlying difficulties associated with exchanging land-
rather than buying and selling land for cash. In most circumstances, cash-
based transactions would be simpler and less costly.

While both agencies have taken steps to improve their land- exchange
programs, the many controversies and problems associated with their programs
reflect, in part, the difficulties and inefficiencies inherent in these
exchange programs. On the basis of these difficulties and inefficiencies,
the Congress may wish to consider directing both agencies to terminate their
land- exchange programs. CBO was unable to develop a savings estimate for
this option.

Related GAO Products National Park Service: Federal Taxpayers Could Have
Benefited More From Potomac Yard Land Exchange (GAO- 01- 292, Mar. 15,
2001).

BLM and the Forest Service: Land Exchanges Need to Reflect Appropriate Value
and Serve the Public Interest (GAO/ RCED- 00- 73, June 22, 2000). GAO
Contacts Bob Robinson, (202) 512- 3841

Barry Hill, (202) 512- 3841

Defer Fish and Wildlife Service?s Acquisition of New Lands

Authorizing committees Environment and Public Works (Senate) Resources
(House)

Appropriations subcommittees Interior and Related Agencies (House and
Senate)

Primary agency Department of the Interior Account Land Acquisition (14-
5020)

Resource Management (14- 1611) Spending type Discretionary Budget
subfunction 303/ Recreational Resources Framework theme Reassess objectives

The Fish and Wildlife Service has increased its land holdings through
acquisitions with appropriated and nonappropriated funds and by accepting
donated land from nonfederal entities or transferred land that other federal
agencies have acquired. It has a goal of annually acquiring

land for refuges as it identifies acquisition opportunities or new areas of
biological value. Over the last 30 years, it has established more than 200
refuges and acquired about 63 million acres of land for the national
wildlife refuge system. While the Service does not have an estimate of the
number

of acres remaining to complete the refuge system, it did have estimates for
144 refuges as of fiscal year 1998. For these, the Service plans showed that
about 2. 8 million acres were still to be acquired with about $3. 8 billion
in appropriated funds. The Service continues to acquire land even though it
has an almost $2 billion backlog of operations and maintenance needs. It
focuses on acquiring lands- to meet its land protection mission- but has not
adequately considered whether funds will be available for future operations
and maintenance expenses. For example, in its fiscal year 2001

budget request, the Service requested a much larger increase for land
acquisition (116 percent or about $60 million) than it did for refuge
operations and maintenance (8 percent or nearly $20 million). For fiscal

year 2000, in comparison, the Service had requested a 53 percent increase
for land acquisition and about 11 percent for refuge operations and
maintenance.

Acquiring additional holdings, while a current backlog of operations and
maintenance needs continues to increase, could potentially exacerbate long-
term budgetary pressures and contribute to further deterioration of the
existing program. If the Congress chose to address this growing problem, one
approach would be to withhold all funding for additional land acquisitions
for 5 years, so that the Fish and Wildlife Service can focus on improving
its stewardship responsibilities. CBO estimates that deferring Fish and
Wildlife land purchases for 5 years would result in the following savings.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 funding level Budget authority 101 104 106 109 111
Outlays 38 64 86 98103 Note: This estimate is only for savings from
deferring land acquisition costs and does not account for any changes in
operations and maintenance expenditures.

Source: Congressional Budget Office.

Related GAO Products Fish and Wildlife Service: Agency Needs to Inform
Congress of Future Costs Associated With Land Acquisitions (GAO/ RCED- 00-
52, Feb. 15, 2000).

Fish and Wildlife Service: Agency Needs to Inform Congress of Future Costs
Associated With Land Acquisitions (GAO/ T- RCED- 00- 89, Feb. 15, 2000).

GAO Contacts Bob Robinson, (202) 512- 3841 Barry Hill, (202) 512- 3841

Deny Additional Funding for Commercial Fisheries Buyback Programs

Authorizing committees Commerce, Science, and Transportation (Senate)
Resources (House)

Appropriation committees Commerce, Justice, State, and the Judiciary (Senate
and House)

Primary agency Commerce Accounts Operations, research, and facilities (13-

1450) Spending type Discretionary Budget subfunction 306/ Other natural
resources Framework theme Reassess objectives

Fish populations in many commercial fisheries are declining, resulting in a
growing imbalance between the number of vessels in fishing fleets and the
number of fish available for harvest. In response to this growing imbalance,
the federal government has provided $140 million since 1995 to purchase
fishing permits, fishing vessels, and related gear from fishermen, thereby
reducing the capacity of fishermen to harvest fish. Generally, the
government designed these purchases, called buybacks, to achieve multiple
goals, such as reducing the capacity to harvest fish, providing economic
assistance to fishermen, and improving the conservation of fish. Coastal
states issue permits and develop and enforce regulations for fishing

in waters that are near their shores. In areas outside state jurisdiction,
the National Marine Fisheries Service (NMFS) within the Department of
Commerce is responsible for issuing permits and developing and enforcing

regulations for harvesting fish. Because excessive fishing capacity has been
a continuing problem in many fisheries, several additional buybacks have
been proposed that, if implemented, would be in excess of

$250 million. GAO found that buyback programs in three fisheries we
evaluated removed from 10 to 24 percent of their respective fishing
capacities. However, the experiences of these three cases demonstrate that
the long- term effectiveness of buyback programs depends upon whether
previously inactive fishermen or buyback beneficiaries return to the
fishery. For example, while 79 boats were sold in the New England buyback,
62

previously inactive boats have begun catching groundfish since the

buyback. In addition, several buyback participants purchased boats with
buyback funds and returned to the fishery. Long- term effectiveness of
buyback programs may also depend on whether fishermen have incentives to
increase remaining fishing capacity in a fishery. Importantly, buyback
programs by themselves do not address the root cause of excess fishing

capacity, that being the ongoing incentives fishermen have to invest in
larger or better equipped fishing vessels in order to catch fish before
someone else does.

The problems of past buyback programs should be addressed as part of the
design of any future programs. Given the experiences of buyback programs to
date- both in terms of their limited effects on reducing fishing capacity
and in terms of their inability to effectively address the root causes of
overfishing- one option the Congress may wish to consider is denying
additional funding for proposed programs until these fundamental weaknesses
are resolved. CBO cannot develop a savings estimate without a more specific
proposal.

Related GAO Product Commercial Fisheries: Entry of Fishermen Limits Benefits
of Buyback Programs (GAO/ RCED- 00- 120, June 14, 2000).

GAO Contact Jim Wells, (202) 512- 3841

Revise the Mining Law of 1872

Authorizing committees Agriculture, Nutrition and Forestry (Senate) Energy
and Natural Resources (Senate) Agriculture (House) Resources (House)

Primary agencies Department of the Interior Department of Agriculture

Spending type Direct Framework theme Redefine beneficiaries

The Mining Law of 1872 allows holders of economically minable claims on
federal lands to obtain all rights and interests to both the land and the
hardrock minerals by patenting the claims for $2.50 or $5.00 an acre--
amounts that do not necessarily reflect the market value of such lands
today. Since 1872, the federal government has patented more than 3 million
acres of mining claims (an area about the size of Connecticut), and some
patent holders have reaped huge profits by reselling their lands. For
example, lands that had been appraised at between $14.4 million and

$47.1 million in 1988 would have generated only about $16,000 for the
federal government in 1989 if the claims were patented. Furthermore, miners
do not pay royalties to the government on hardrock minerals they extract
from federal lands. In 1990, hardrock minerals worth at least $1. 2 billion
were extracted from federal lands, while known and economically recoverable
reserves of hardrock minerals remaining on

federal lands were estimated to be worth almost $64.9 billion. Among the
options that are available are to prohibit the issuance of new patents,
require the payment of fair market value for a patent, or otherwise modify
the requirements for patenting. Legislation could also be enacted to impose
royalties on hardrock minerals extracted from federal lands. As one possible
option, if the Congress adopted a 5- percent royalty on net smelter returns,
CBO estimates that he following receipts would be gained.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 funding level Offsetting R eceipts 7 7 7 7 7 Source:
Congressional Budget Office.

Related GAO Products Bureau of Land Management: Improper Charges Made to
Mining Law Administration Program (GAO- 01- 491T, Mar. 29, 2001).

Bureau of Land Management: Improper Charges Made to Mining Law
Administration Program (GAO- 01- 356, Mar. 8, 2001).

National Park Service: Agency Should Recover Costs of Validity Examinations
for Mining Claims (GAO/ RCED- 00- 265, Sept. 19, 2000).

Review of the Bureau of Land Management?s Administration and Use of Mining
Maintenance Fees (GAO/ AIMD- 00- 184R, June 2, 2000).

Mineral Royalties: Royalties in the Western States and in Major
MineralProducing Countries (GAO/ RCED- 93- 109, Mar. 29, 1993).

Natural Resources Management Issues (GAO/ OCG- 93- 17TR, Dec. 1992).

Mineral Resources: Value of Hardrock Minerals Extracted From and Remaining
on Federal Lands (GAO/ RCED- 92- 192, Aug. 24, 1992).

Federal Land Management: The Mining Law of 1892 Needs Revision (GAO/ RCED-
89- 72, Mar. 10, 1989). GAO Contacts Bob Robinson, (202) 512- 3841

Barry Hill, (202) 512- 3841

Coordinate Federal Policies for Subsidizing Water for Agriculture and Rural
Uses

Authorizing committees Energy and Natural Resources (Senate) Resources
(House)

Primary agency Department of the Interior Spending type Direct Framework
theme Redefine beneficiaries

Federal water programs to promote efficient use of finite water resources
for the nation?s agricultural and rural water systems have developed
inconsistencies that may cause the programs to work at cross- purposes. In
1995, as many as eight different federal agencies administered 17 different

programs in the area of rural water and wastewater systems. In the area of
irrigation, the multiplicity of programs and approaches has allowed for
inconsistencies and potentially counterproductive outcomes. To improve the
effectiveness and efficiency of federal water programs, the Congress could
consider several options to reduce duplication or inconsistencies, including
the following.

Collecting the Full Costs of Under the Reclamation Reform Act of 1982, as
amended, some farmers Subsidized Federal Water

have reorganized large farming operations into multiple, smaller for Large
Farms landholdings to be eligible to receive additional federally subsidized

irrigation water. The act limits to 960 the maximum number of owned or
leased acres that individuals or legal entities (such as partnerships or
corporations) can irrigate with federal water at rates that exclude interest
on the government?s investment in the irrigation component of its water

resource projects. However, due to the vague definition of the term ?farm,?
the flow of federally subsidized water to land holdings above the 960 acre-
limit has not been stopped, and the federal government is not collecting
revenues to which it is entitled under the act. Phasing Out the Double The
use of federally subsidized water to produce federally subsidized crops
Subsidies for Crops

results in the government paying double subsidies. According to the
Department of the Interior, from 1976 through 1985, an average of 38 percent
of the acreage served by the Bureau of Reclamation nationwide

was used to produce crops that are also eligible for subsidies through the
Department of Agriculture?s commodity programs. Estimates of the cost of
federal water subsidies vary but are substantial. The Department of the

Interior estimated that irrigation subsidies used to produce subsidized
crops throughout the 17 western states totaled $203 million in 1986; the
Bureau of Reclamation placed the figure at $830 million.

Accelerating the Repayment By the end of fiscal year 1990, after receiving
water from the Central Valley of Water Project

Project (CVP) in California?s Central Valley Basin for over 40 years,
Construction Costs irrigators had repaid only $10 million, 1 percent, of the
over $1 billion in construction costs that they owe the federal government.
In 1986, the

Congress required irrigators and other users to pay their share of the
federal investment in CVP by 2030. While construction costs ultimately may
be recovered by 2030, the dollars that eventually flow to the Treasury could
be worth much less than if they had been repaid sooner. The Congress may
wish to accelerate the repayment schedule. Fully Recovering the

Under the current repayment criteria, approximately $454 million of the
Federal Investments in federal investment in the Pick- Sloan Basin Program
(a comprehensive plan Rural Water Systems

to manage the water and hydropower resources of the Missouri River basin) is
unrecoverable. A portion of Pick- Sloan?s completed facilities was intended
for use with irrigation facilities that have not been completed and are no
longer considered feasible. In addition, as the overall federal investment
in the other aspects of the completed hydropower facilities

increases because of changes such as renovations and replacements, the
amount of the federal investment that is unrecoverable will increase.
Changing the terms of repayment to recover any of the $454 million
investment would require congressional action. Consistent with previous
congressional action concerning the program, the Congress could direct the
Western Area Power Administration to recover the investment through

power revenues and to take action to minimize any impact on power rates.
Phasing Out the Interest

Estimates of the current cost of federal water subsidies are substantial.
Subsidies for Irrigators

For example, the Department of the Interior reported that irrigation
subsidies throughout the 17 western states totaled $534 million in 1986,
while the Bureau of Reclamation placed the cost at $2. 2 billion. Estimates
differ because of different definitions of an irrigation subsidy, different
interest rates used to calculate the subsidies, and different methods for

compounding unpaid interest. Much has changed in the west since the
subsidies were established in 1902, and it is not known whether the
subsidies are still warranted or whether irrigators could pay more of the
cost of the water delivered.

CBO cannot estimate savings for these options without further information.

Related GAO Products Rural Water Projects: Federal Assistance Criteria and
Potential Benefits of the Proposed Lewis and Clark Project (GAO/ RCED- 99-
252T, July 29, 1999).

Rural Water Projects: Identifying the Benefits of the Proposed Lewis and
Clark Project (GAO/ RCED- 99- 115, May 28, 1999).

Rural Water Projects: Federal Assistance Criteria Related to the Lewis and
Clark Rural Water Project (GAO/ RCED- 98- 231T, June 18, 1998).

Rural Water Projects: Federal Assistance Criteria Related to the Fort Peck
Reservation Rural Water Project (GAO/ RCED- 98- 230, June 18, 1998).

Rural Water Projects: Federal Assistance Criteria (GAO/ RCED- 98- 204R, May
29, 1998).

Federal Power: Recovery of Federal Investment in Hydropower Facilities in
the Pick- Sloan Program (GAO/ T- RCED- 96- 142, May 2, 1996).

Rural Development: Patchwork of Federal Water and Sewer Programs Is
Difficult to Use (GAO/ RCED- 95- 160BR, Apr. 13, 1995).

Water Subsidies: Impact of Higher Irrigation Rates on Central Valley Project
Farmers (GAO/ RCED- 94- 8, Apr. 19, 1994).

Natural Resources Management Issues (GAO/ OCG- 93- 17TR, Dec. 1992).

Reclamation Law: Changes Needed Before Water Service Contracts Are Renewed
(GAO/ RCED- 91- 175, Aug. 22, 1991).

Water Subsidies: The Westhaven Trust Reinforces the Need to Change
Reclamation Law (GAO/ RCED- 90- 198, June 5, 1990).

Water Subsidies: Basic Changes Needed to Avoid Abuse of the 960- Acre Limit
(GAO/ RCED- 90- 6, Oct. 12, 1989). GAO Contacts Bob Robinson, (202) 512-
3841 Barry Hill, (202) 512- 3841

Reassess Federal Land Management Agencies? Functions and Programs

Authorizing committees Agriculture, Nutrition, and Forestry (Senate) Energy
and Natural Resources (Senate) Agriculture (House) Resources (House)

Appropriations subcommittees Interior and Related Agencies (Senate and
House)

Primary agencies Department of the Interior Department of Agriculture

Accounts Multiple Spending type Discretionary Budget subfunction 302/
Conservation and land management

Framework theme Improve efficiency

The responsibilities of the four major federal land management agencies--
the National Park Service, the Bureau of Land Management (BLM), and the Fish
and Wildlife Service within the Department of Interior, and the Forest
Service within the Department of Agriculture-- have grown more similar over
time. Most notably, the Forest Service and BLM now provide more noncommodity
uses, including recreation and protection for fish and wildlife, on their
lands. In addition, managing federal lands has become more complex. Managers
have to reconcile differences among a growing number of laws and
regulations, and the authority for these laws is dispersed among several
federal agencies and state and local agencies.

These changes have coincided with two other developments-- the federal
government?s increased emphasis on downsizing and budgetary constraint and
scientists? increased understanding of the importance and functioning

of natural systems whose boundaries may not be consistent with existing
jurisdictional and administrative boundaries. Together, these changes and
developments suggest a basis for reexamining the processes and structures
under which the federal land management agencies currently operate.

Two basic strategies have been proposed to improve federal land management:
(1) streamlining the existing structure by coordinating and integrating
functions, systems, activities, programs, and field locations and (2)
reorganizing the structure by combining agencies. The two strategies are not
mutually exclusive and some prior proposals have encompassed

both.

Over the last several years, the Forest Service and BLM have collocated some
offices or shared space with other federal agencies. They have also pursued
other means of streamlining, sharing resources, and saving rental costs.
However, no significant legislation has been enacted to streamline

or reorganize federal land management agencies and the four major federal
land management agencies have not, to date, developed a strategy to
coordinate and integrate their functions, systems, activities, and programs.
Without a specific restructuring proposal that would eliminate certain
programs or revise how the land is managed, CBO is unable to estimate
savings due to shared resources among the four major land management

agencies. Savings would depend on the extent of a workforce restructuring
and implementation proposal.

Related GAO Products The National Fire Plan: Federal Agencies Are Not
Organized to Effectively and Efficiently Implement the Plan (GAO- 01- 1022T,
July 31, 2001).

Land Management Agencies: Ongoing Initiative to Share Activities and
Facilities Needs Management Attention (GAO- 01- 50, Nov. 21, 2000).

Federal Wildfire Activities: Current Strategy and Issues Needing Attention
(GAO/ RCED- 99- 223, Aug. 13, 1999).

Land Management: The Forest Service?s and BLM?s Organizational Structures
and Responsibilities (GAO/ RCED- 99- 227, July 29, 1999).

Ecosystem Planning: Northwest Forest and Interior Columbia River Basin Plans
Demonstrate Improvements in Land- Use Planning (GAO/ RCED- 99- 64, May 26,
1999).

Land Management Agencies: Revenue Sharing Payments to States and Counties
(GAO/ RCED- 98- 261, Sept. 17, 1998).

Federal Land Management: Streamlining and Reorganization Issues (GAO/ T-
RCED- 96- 209, June 27, 1996).

National Park Service: Better Management and Broader Restructuring Efforts
Are Needed (GAO/ T- RCED- 95- 101, Feb. 9, 1995).

Forestry Functions: Unresolved Issues Affect Forest Service and BLM
Organizations in Western Oregon (GAO/ RCED- 94- 124, May 17, 1994).

Forest Service Management: Issues to Be Considered in Developing a New
Stewardship Strategy (GAO/ T- RCED- 94- 116, Feb. 1, 1994). GAO Contacts Bob
Robinson, (202) 512- 3841

Barry Hill, (202) 512- 3841

Pursue Cost- Effective Alternatives to NOAA?s Research/ Survey Fleet

Authorizing committees Commerce, Science and Transportation (Senate) Energy
and Commerce (House)

Appropriations subcommittees Commerce, Justice, State, and the Judiciary

Primary agency Department of Commerce Account Procurement, Acquisition and
Construction (13- 1460)

Spending type Discretionary Budget subfunction 306/ Other natural resources
Framework theme Improve efficiency The National Oceanic and Atmospheric
Administration (NOAA) has an aging in- house fleet of 15 ships that are used
to support its programs in

fisheries research, oceanographic research, and hydrographic charting and
mapping. Most of NOAA?s ships are past their 30- year life expectancies, and
many of them are costly and inefficient to operate and maintain and lack
latest state- of- the- art technology. NOAA?s ships are managed and operated
by a NOAA Corps of about 240 uniformed service commissioned officers who,
like the Public Health Service Commissioned Corps, perform civilian rather
than military functions but are covered by a military- like pay and benefits
system.

For more than a decade, congressional committees, public and private sector
advisory groups, the National Performance Review (NPR), the Commerce Office
of Inspector General (OIG), and our office have urged NOAA to aggressively
pursue more cost- effective alternatives to its inhouse fleet of ships.
Since 1990, NOAA has developed several fleet replacement and modernization
plans that call for investments of millions

of dollars to upgrade or replace these ships, and each has been criticized
by the Commerce OIG for not pursuing alternative approaches strongly enough.
In 1996, the OIG recommended that NOAA terminate its fleet modernization
efforts; cease investing in its ships; immediately begin to decommission,
sell, or transfer them; and contract for the required ship services.

In response, NOAA has decommissioned almost one- third of its fleet since
1990 and now outsources about 40 percent of its research and survey needs.
Although NOAA has increased its outsourcing for these services and expects
to further increase its use of outsourcing to about 50 percent over the next
10 years, NOAA continues to rely heavily on its old, inefficient

fleet and still plans to replace or upgrade some of these ships. In this
regard, the President?s budget for fiscal year 2000 proposed $52 million for
construction of a new fisheries research ship. In addition, Commerce?s
congressional budget presentation for fiscal year 2000 indicated that NOAA
planed to spend another $133 million during fiscal years 2001 through 2004
for three additional replacement ships.

The Congress approved the $52 million budget request for acquiring the first
of four new ships. However, in its September 1999 Semiannual Report, the
Commerce OIG stated that NOAA had not developed a contingency plan for
collecting fisheries data in the case that it does not receive followon

funding for the remaining vessels. According to the OIG, the absence of such
a plan places the fisheries program at serious risk and NOAA?s challenge
remains to thoroughly assess and aggressively pursue alternative approaches
instead of relying so heavily on owning and operating an inhouse fleet.
Pursuing cost- effective alternatives could help reduce the additional $133
million NOAA estimates is needed through fiscal year 2004 for fleet
replacement. CBO agrees that savings are possible depending on the specific
alternative that is proposed.

Related GAO Products Department of Commerce: National Weather Service
Modernization and NOAA Fleet Issues (GAO/ T- AIMD/ GGD- 99- 97, Feb. 24,
1999).

Major Management Challenges and Program Risks: Department of Commerce (GAO/
OCG- 99- 3, Jan. 1999).

Issues on the National Oceanic and Atmospheric Administration?s Commissioned
Corps (GAO/ GGD- 98- 35R, Dec. 2, 1997).

National Oceanic and Atmospheric Administration: Issues on the
Civilianization of the Commissioned Corps (GAO/ T- GGD- 98- 22, Oct. 29,
1997).

Federal Personnel: Issues on the Need for NOAA?s Commissioned Corps (GAO/
GGD- 97- 10, Oct. 31, 1996).

Research Fleet Modernization: NOAA Needs to Consider Alternatives to the
Acquisition of New Vessels (GAO/ RCED- 94- 170, Aug. 3, 1994). GAO Contact
J. Christopher Mihm, (202) 512- 6806

Increase Federal Revenues through Water Transfers

Authorizing committees Energy and Natural Resources (Senate) Resources
(House)

Primary agency Department of the Interior Spending type Direct Framework
theme Improve efficiency

Water transfers, in which rights to use water are bought and sold, are a
mechanism for reallocating scarce water to new users by allowing those who
place the highest economic value on the resource to purchase it. Water
transfers are a valuable tool for improving the efficiency of water use and
environmental quality and can be a promising way to increase federal
revenues for water development projects. Current reclamation law

provides the Secretary of the Interior with discretion in establishing
municipal and industrial charges to recover some of the costs of
constructing the projects. However, Interior?s principles governing water
transfers focus on facilitating transfers and placing the government in the

same or a better financial condition after a transfer is made, rather than
charging the highest amounts possible without discouraging transfers.
Increasing federal revenues will reduce the net benefits to the buyers and
sellers, thereby discouraging some transfers. Deciding how much the Bureau
of Reclamation should charge for transferred water involves balancing the
increase in federal revenues with retaining incentives for water transfers
to occur. Moreover, many reclamation projects have specified interest rates
in authorizing legislation that limit interest charges

below current levels. The Congress may wish to change reclamation law to
allow the use of current Treasury borrowing rates in establishing charges
for transferred water. If this change was implemented in 2000, CBO estimates
the following additional receipts. This estimate assumes that 3 percent of
the

outstanding irrigation- related debt of about $2 billion is annually traded,
with the interest rate tied to the 30- year Treasury rate.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Added r eceipts 3 4 4 4 4 Source: Congressional Budget Office.

Related GAO Products Bureau of Reclamation: Water Marketing Activities and
Costs at the Central Valley Project (GAO- 01- 553, May 4, 2001).

Water Markets: Increasing Federal Revenues Through Water Transfers (GAO/
RCED- 94- 164, Sept. 21, 1994). GAO Contacts Bob Robinson, (202) 512- 3841

Barry Hill, (202) 512- 3841

350 Agriculture Terminate or Significantly Reduce the Department of
Agriculture?s Market Access Program Lower the Sugar Program?s Loan Rate to
Processors Consolidate Common Administrative Functions at USDA Further
Consolidate USDA?s County Offices Revise the Marketing Assistance Loan
Program to Better Reflect Market Conditions

Terminate or Significantly Reduce the Department of Agriculture?s Market

Authorizing committees Agriculture, Nutrition, and Forestry (Senate)

Access Program

Agriculture (House) Appropriations subcommittees Agriculture, Rural
Development, and Related Agencies (Senate)

Agriculture, Rural Development, FDA, and Related Agencies (House)

Primary agency Department of Agriculture Account Commodity Credit
Corporation (12433- 6) Spending type Discretionary Budget subfunction 351/
Farm income stabilization Framework theme Reassess objectives

The Market Access Program is an export promotion program operated by the
Foreign Agricultural Service of the Department of Agriculture. The $90
million program subsidizes the promotion of U. S. agricultural products in
overseas markets. Through a cost- sharing arrangement, the program helps
fund overseas promotions conducted by U. S. agricultural producers,
cooperatives, exporters, and trade associations. About three- quarters of
the program budget supports generic promotions, with the remaining funds

supporting brand- name promotions. Beginning in fiscal year 1993, the
Congress directed that changes be made to the program in order to increase
the emphasis on small businesses, establish a graduation limit, and certify
that program funds supplement, not supplant, private sector expenditures.
From fiscal year 1994 through fiscal year 1997, program reforms resulted in
increases to the number of small businesses participating in the program as
well as small businesses? share

of program funds. In addition, in 1998, the Foreign Agricultural Service
prohibited direct and indirect assistance to large companies for brandname
promotions unless the assistance was provided through cooperatives and
certain associations. The Service also implemented a 5- year graduation
requirement for brand- name promotional activities but waived this
requirement for cooperatives. As a result, $5 million of promotional
activities by cooperatives for brand- name products remained eligible for
program funding.

Questions remain about the overall economic benefits derived from the Market
Access Program. Estimates of the program?s macroeconomic impact developed by
the Foreign Agricultural Service are overstated and

rely on a methodology that is inconsistent with Office of Management and
Budget cost/ benefit guidelines. In addition, the evidence from market-
level studies is inconclusive regarding program impact on specific
commodities in specific markets. Furthermore, it is difficult to ensure that
funds for promotional activities are in addition to private sector
expenditures because it is hard to determine what would have been spent in
the absence

of program funds.

The Conference Report on the Omnibus Consolidated and Emergency Supplemental
Appropriations Act of 1999 directed the Secretary of Agriculture to submit a
report that, among other things, estimates the economic impact of the Market
Access Program, analyzes the costs and benefits of the program in a manner
consistent with government cost/ benefit guidelines, and evaluates the
additional spending of participants and additional exports resulting from
the program. In its

report, the Foreign Agricultural Service plans to combine the results of an
external review of a sample of promotional programs with a study of overall
program impact. Unless the report provides convincing evidence

that the program has a positive economic impact, results in increased
exports that would not have occurred without the program, and supplements
and does not supplant private sector expenditures, the Congress might choose
to terminate the program or significantly reduce its funding. CBO estimates
the following savings could be achieved if the Market Access Program is
terminated.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 funding level Budget authority 5 73 90 90 90 Outlays 5
73 90 90 90 Source: Congressional Budget Office.

Related GAO Products Agricultural Trade: Changes Made to Market Access
Program, but Questions Remain on Economic Impact (GAO/ NSIAD- 99- 38, Apr.
5, 1999).

U. S. Agricultural Exports: Strong Growth Likely, but U. S. Export
Assistance Programs? Contribution Uncertain (GAO/ NSIAD- 97- 260, Sept. 30,
1997).

Farm Bill Export Options (GAO/ GGD- 96- 39R, Dec. 15, 1995).

Agricultural Trade: Competitor Countries? Foreign Market Development Program
(GAO/ T- GGD- 95- 184, June 14, 1995).

International Trade: Changes Needed to Improve Effectiveness of the Market
Promotion Program (GAO/ GGD- 93- 125, July 7, 1993).

U. S. Department of Agriculture: Improvements Needed in Market Promotion
Program (GAO/ T- GGD- 93- 17, Mar. 25, 1993). GAO Contact Loren Yager, (202)
512- 4128

Lower the Sugar Program?s Loan Rate to Processors

Authorizing committees Agriculture, Nutrition, and Forestry (Senate)
Agriculture (House)

Appropriations subcommittees Agriculture, Rural Development and Related
Agencies (Senate) Agriculture, Rural Development, FDA and Related Agencies
(House)

Primary agency Department of Agriculture Accounts Commodity Credit
Corporation Fund (124336)

Spending type Direct Budget Subfunction 351/ Farm income stabilization
Framework theme Redefine beneficiary

The sugar program, administered by the U. S. Department of Agriculture
(USDA), guarantees domestic cane sugar and beet sugar producers (growers and
processors) a minimum price for sugar, which during the past year has been
about three times the world market price. The sugar program supports
domestic sugar prices by offering loans to sugar

processors at a rate established by law: 18 cents per pound for raw cane
sugar and 22. 9 cents per pound for refined beet sugar, with the sugar
serving as collateral for these loans. The program has allowed processors to
forfeit their sugar to the federal government instead of repaying their
loans- which they are likely to do if domestic sugar prices fall below the
level of the loan rate plus certain costs that processors would no longer
incur if they forfeited. To minimize the likelihood of forfeitures, a direct

cost to taxpayers, the sugar program has maintained artificially high sugar
prices by using a tariff- rate quota to restrict the amount of sugar that
can be imported at a low tariff duty.

The sugar program increases users? costs. The program?s costs depend on the
world price of sugar and tend to be higher when the difference between the
domestic and the world price is greater. GAO estimated that the program cost
domestic sweetener users about $1. 5 billion in 1996 and about $1. 9 billion
in 1998 (in 1999 dollars). The program?s costs were higher in 1998 because
the world price dropped while the domestic price

remained about the same. The sugar program also added to the federal
government?s costs in fiscal year 2000. USDA spent $54 million to purchase
sugar on the domestic market to help maintain prices and prevent sugar

loan forfeitures in May and June 2000. USDA also took possession of about
950,000 tons of sugar valued at about $380 million that processors have
forfeited instead of repaying their sugar loans. The sugar program has an
additional effect on government costs because the government purchases sugar
and sugar- containing products for food assistance programs,

consumption by the military, and other purposes. The Congress and USDA may
want to take steps to gradually lower the loan rates and increase the
tariff- rate quota accordingly to reduce the costs of the sugar program to
both sugar users and the government. For example, if the Congress lowered
the loan rates for cane and beet sugar by two cents

per pound each, government savings might accrue in two ways. The lower loan
rates would reduce the likelihood of loan forfeitures and the resulting
lower market price for sugar would reduce the amount the government spends
for sugar and sugar- containing products that it buys for government feeding
programs, consumption by the military, and other purposes. While CBO agrees
that this proposal could lead to savings, they are not able to estimate
specific savings at this time.

Related GAO Products Sugar Program: Supporting Sugar Prices Has Increased
Users? Costs While Benefiting Producers (GAO/ RCED- 00- 126, June 9, 2000).

Sugar Program: Changing the Method for Setting Import Quotas Could Reduce
Cost to Users (GAO/ RCED- 99- 209, July 26, 1999).

Sugar Program: Impact on Sweetener Users and Producers (GAO/ TRCED- 95- 204,
May 24, 1995).

Sugar Program: Changing Domestic and International Conditions Require
Program Changes (GAO/ RCED- 93- 84, Apr. 16, 1993).

GAO Contact Lawrence J. Dyckman, (202) 512- 5138

Consolidate Common Administrative Functions at USDA

Authorizing committees Agriculture, Nutrition, and Forestry (Senate)
Agriculture (House)

Appropriations subcommittees Agriculture, Rural Development, and Related
Agencies (Senate) Agriculture, Rural Development, FDA and Related Agencies
(House)

Primary agency Department of Agriculture Accounts Multiple Spending type
Discretionary/ Direct Budget subfunction 352/ Agricultural research and
services Framework theme Improve efficiency

In accordance with the Federal Crop Insurance Reform and Department of
Agriculture Reorganization Act of 1994, USDA has engaged in a reorganization
and modernization effort targeted at achieving greater economy and
efficiency and better customer service by the Farm Service Agency, the
Natural Resources and Conservation Service, and the agencies in the Rural
Development mission. USDA?s efforts consist of five interrelated
initiatives: (1) collating the agencies? county and state offices,

(2) merging the agencies? administrative functions at the state and
headquarters level under a single support organization, (3) redesigning
agencies? business processes, (4) modernizing information technology, and
(5) changing the agencies? cultures to improve customer services.

USDA?s progress in these initiatives has been mixed. For example, despite
the agencies? collocation of county offices and other efforts, little has
changed in how the three agencies serve their customers. Also, many
modernization and reengineering projects have encountered delays.

To further streamline its organization, increase efficiency, and reduce
overhead costs associated with running separate offices, USDA could do more
to combine agencies? support functions, such as legislative and legal
affairs and public information, into a single office serving the needs of
all mission component agencies. In addition, even though USDA has developed
a plan to converge administrative functions for county- based

agencies, a number of obstacles need to be overcome if the plan is to be
successfully implemented, including the selection of a strong leadership

team to implement the convergence plan. CBO agrees that this option could
potentially yield savings, but did not develop a savings estimate due to
uncertainty of the extent to which improved efficiencies actually lead to
budgetary savings.

Related GAO Products USDA Reorganization: Progress Mixed in Modernizing the
Delivery of Services (GAO/ RCED- 00- 43, Feb. 3, 2000).

U. S. Department of Agriculture: Administrative Streamlining is Expected to
Continue Through 2002 (GAO/ RCED- 99- 34, Dec. 11, 1998).

U. S. Department of Agriculture: Update on Reorganization and Streamlining
Efforts (GAO/ RCED- 97- 186R, June 24, 1997). GAO Contacts Bob Robinson,
(202) 512- 3841

Lawrence J. Dyckman, (202) 512- 3841

Further Consolidate USDA?s County Offices

Authorizing committees Agriculture, Nutrition, and Forestry (Senate)
Agriculture (House)

Appropriations subcommittees Agriculture, Rural Development, and Related
Agencies (Senate) Agriculture, Rural Development, FDA and Related Agencies
(House)

Primary agency Department of Agriculture Accounts Multiple Spending type
Discretionary Budget subfunction 351/ Farm income stabilization Framework
theme Improve efficiency

USDA maintains a field office structure that dates back to the 1930s when
transportation and communication systems limited the geographic boundaries
covered by a single field office and when there were a greater number of
small, widely disbursed, family- owned farms. In 1933, the

United States had more than 6 million farmers; today the number of farms in
the United States is less than 2 million and a small fraction of these
produce more than 70 percent of the nation?s agricultural output. At

various times, the Congress has attempted to reduce the number of county
offices serving farmers and/ or reduce county office staffing. Most
recently, the Federal Crop Insurance Reform and Department of Agriculture
Reorganization Act of 1994 (P. L. 103- 354, Oct. 13, 1994) directed the
Secretary of Agriculture to streamline departmental operations by
consolidating county offices.

In response to the Agriculture Reorganization Act, USDA has closed over
1,000 county office locations and reduced staffing at its county offices.
However, as the agency states in its September 2001 Food and Agricultural
Policy: Taking Stock for the New Century, ?Further actions are necessary to
ensure that the USDA farm service structure is appropriately sized,

configured, and located for efficient provision of the new services demanded
by a rapidly evolving food and agriculture system.? USDA could further
consolidate its county office field structure, for example, by closing more
of its small county offices. Criteria for determining which small county
offices to close could include the

(1) distance from another county office, (2) time spent on administrative
duties, and (3) number of farmers who receive USDA financial benefits.
Although CBO agrees that closing offices that serve few farmers would
produce savings, it cannot develop a savings estimate until a specific
proposal is identified.

Related GAO Products USDA Reorganization: Progress Mixed in Modernizing the
Delivery of Services (GAO/ RCED- 00- 43, Feb. 3, 2000).

Farm Service Agency: Characteristics of Small County Offices (GAO/ RCED- 99-
102, May 28, 1999).

U. S. Department of Agriculture: Status of Closing and Consolidating County
Offices (GAO/ T- RCED- 98- 250, July 29, 1998).

Farm Programs: Service to Farmers Will Likely Change as Farm Service Agency
Continues to Reduce Staff and Close Offices (GAO/ RCED- 98- 136, May 1,
1998).

Farm Programs: Administrative Requirements Reduced and Further Program
Delivery Changes Possible (GAO/ RCED- 98- 98, Apr. 20, 1998).

Farm Programs: Impact of the 1996 Farm Act on County Office Workload (GAO/
RCED- 97- 214, Aug. 19, 1997).

GAO Contacts Bob Robinson, (202) 512- 3841 Lawrence J. Dyckman, (202) 512-
3841

Revise the Marketing Assistance Loan Program to Better

Reflect Market Authorizing committees Agriculture, Nutrition, and Forestry
(Senate)

Conditions

Agriculture (House) Appropriation committees Agriculture, Rural Development,
and Related Agencies (Senate)

Agriculture, Rural Development, FDA and Related Agencies (House)

Primary agency Department of Agriculture Accounts Commodity Credit
Corporation Fund (124336)

Spending type Direct Budget subfunction 351/ Farm income stabilization
Framework theme Improve efficiency

The U. S. Department of Agriculture?s (USDA) marketing assistance loan
program is designed to provide producers of certain crops- wheat, feed
grains, oilseeds, upland cotton, and rice- with interim financial assistance
at harvest, when prices are usually lower than at other times of the year.

The program is composed of two major components- loans and loan deficiency
payments. Under the loan component, producers can use their harvested crop
as collateral to obtain the loans. The program gives producers the choice of
one of three options for settling marketing loans, effectively guaranteeing
a minimum price for these crops. First, producers can sell their crop and
repay the loan with interest, which they are likely to do if the market
price is high. Second, if crop prices remain too low to allow producers to
repay the loan plus interest, they can sell the crop and

repay the loan at the posted county price and keep the difference, which is
called a marketing loan gain. Finally, if the price is low, producers can
forfeit their collateral and keep the loan amount. The program?s other
component- the loan deficiency payment- reflects the difference by which the
applicable county loan rate exceeds the posted county price on the day a
producer requests such a payment. If producers choose this component, they
receive a cash payment and can sell their crop whenever

they choose. The amount of a marketing assistance loan is based on the
amount of the crop offered as collateral multiplied by the county loan rate.
This rate is a per- unit price for each crop that is established on a
national basis by law and then adjusted by USDA to reflect county variations
in market prices across the country. In accordance with current farm

legislation, the Secretary of Agriculture may adjust the marketing

assistance loan rate annually within the national loan rates legislatively
established for specific crops.

Cash payments for this program have significantly increased in the last few
years. In 1996, the market assistance loan program served primarily as a
source of interim financing because crop prices were high enough to enable
producers to sell their crops and repay their loans. However, in

1998, when market prices fell below the loan rates, a large number of
producers turned to the program as a source of income. For 1998 crops, the
program provided $6. 7 billion in loans. It also provided $3. 7 billion for
cash payments (as of September 22, 1999), up from $162 million in payments
for 1997 crops. Payments grew to more than $15 billion for 1999 and 2000
crops combined. Although the Secretary of Agriculture has the authority to
adjust county loan rates, USDA has generally not done so since 1995 because
the demand for loans prior to 1998 was low. More recently, USDA did not want
to lower loan rates during the current period of low crop prices. According
to a USDA estimate, however, revising the

marketing assistance loan rate for the 1999 crop of wheat, corn, and other
feed grains to better reflect current market conditions would have reduced
outlays for marketing loan gains and loan deficiency payments by about $900
million. To ensure proper controls over program costs, the Congress could
direct the Secretary of Agriculture to annually adjust county loan rates for
wheat, corn, other feed grains, and oilseeds to accurately reflect current
market conditions. For example, in 1999, the Secretary was authorized to
lower the marketing assistance loan rate for corn by about 5 percent. If the
Congress had directed the Secretary to adjust the rates in 1999, USDA
estimated that savings of $900 million would have occurred. Although

future savings cannot be determined until final crop year prices are known,
CBO agrees that savings can accrue through more timely adjustments.

Related GAO Product Farm Programs: Changes to the Marketing Assistance Loan
Program Have Had Little Impact on Payments (GAO- 01- 964, Sept. 28, 2001).

Farm Programs: Information on Recipients of Federal Payments (GAO01- 606,
June 15, 2001).

U. S. Department of Agriculture: Marketing Assistance Loan Program Should
Better Reflect Market Conditions (GAO/ RCED- 00- 9, Nov. 23, 1999).

GAO Contacts Bob Robinson, (202) 512- 3841 Lawrence J. Dyckman, (202) 512-
5138

370 Commerce and Recapture Interest on Rural Housing Loans Housing Credit

Require Self- Financing of Mission Oversight by Fannie Mae and Freddie Mac
Reduce FHA?s Insurance Coverage

Merging USDA and HUD Single- Family Insured Lending Programs and Multifamily
Portfolio Management Programs Consolidate Homeless Assistance Programs

Recapture Interest on Rural Housing Loans

Authorizing committees Banking, Housing, and Urban Affairs (Senate)
Financial Services (House)

Appropriations subcommittees Agriculture, Rural Development, and Related
Agencies (Senate) Agriculture, Rural Development, Food and Drug
Administration, and Related Agencies (House) Primary agency Department of
Agriculture Account Rural Housing Insurance Fund (12- 2081) Spending type
Direct Budget subfunction 371/ Mortgage credit Framework theme Redefine
beneficiaries

The Housing Act of 1949, as amended, requires the USDA?s Rural Housing
Service (RHS) to recapture a portion of the subsidy provided over the life
of direct housing loans it makes when the borrower sells or vacates a
property. The rationale being that because taxpayers paid a portion of the

mortgage, they are entitled to a portion of the property?s appreciation.
Because recapture is not mandated when homes are refinanced, RHS? policy
allows borrowers who pay off direct RHS loans but continue to occupy the
properties to defer the payments for recapturing the subsidies. As of July
31, 1999, RHS? records showed that about $140 million was owed by borrowers
who had refinanced their mortgages but continued to occupy the properties.
RHS does not charge interest on the amounts owed by these borrowers.
Legislative changes could be made to allow RHS to charge market rate

interest on recapture amounts owed by borrowers to help recoup the
government?s administrative and borrowing costs. CBO?s estimate of the
savings for this option is presented on a net present- value basis as
required by the Federal Credit Reform Act of 1990. Actual savings could
differ depending on how this proposal would affect the rate at which homes
are

sold.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 funding level Budget a uthority 45 0 0 0 0 Outlays 45
0 0 0 0 Source: Congressional Budget Office.

Related GAO Product Rural Housing Programs: Opportunities Exist for Cost
Savings and Management Improvement (GAO/ RCED- 96- 11, Nov. 16, 1995).

GAO Contact Stanley J. Czerwinski, (202) 512- 7631

Require Self- Financing of Mission Oversight by Fannie Mae and Freddie Mac

Authorizing committees Banking, Housing, and Urban Affairs (Senate)
Financial Services (House)

Appropriations subcommittees VA, HUD, and Independent Agencies (Senate and
House) Primary agency Department of Housing and Urban

Development Accounts Office of Federal Housing Enterprise

Oversight, Salaries and Expenses (865272) Spending type Direct Budget
subfunction 371/ Mortgage credit Framework theme Redefine beneficiaries

The Congress established and chartered the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac) as government- sponsored enterprises. These enterprises are
privately- owned corporations chartered to enhance the availability of
mortgage credit across the nation. The Congress also charged the Department
of Housing and Urban Development (HUD) with mission oversight responsibility
for the enterprises, which includes

ensuring that housing goals established by HUD result in enhanced housing
opportunities for certain groups of borrowers. Other federal organizations
responsible for regulating governmentsponsored enterprises are financed by
assessments on the regulated entities. However, HUD?s mission oversight
expenditures are funded with taxpayer dollars from HUD?s appropriations.
Accordingly, HUD?s capability to strengthen its enterprise housing mission
oversight may be limited

because resources that could be used for that purpose must compete with
other priorities. For example, HUD?s capacity to implement a program to
verify housing goal data, which would necessarily involve a commitment of
additional resources, may be limited. Requiring Fannie Mae and Freddie Mac
to reimburse HUD for mission oversight expenditures would not only result in
the savings shown below but would also enable HUD to strengthen its
oversight activities.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 funding level Budget a uthority 10 10 10 10 10 Outlays
10 10 10 10 10 Source: Congressional Budget Office.

Related GAO Products Federal Housing Enterprises: HUD?s Mission Oversight
Needs to Be Strengthened (GAO/ GGD- 98- 173, July 28, 1998).

Government- Sponsored Enterprises: Advantages and Disadvantages of Creating
a Single Housing GSE Regulator (GAO/ GGD- 97- 139, July 9, 1997).
Government- Sponsored Enterprises: A Framework for Limiting the Government?s
Exposure to Risks (GAO/ GGD- 91- 90, May 22, 1991). GAO Contact Thomas J.
McCool, (202) 512- 8678

Reduce FHA?s Insurance Coverage

Authorizing committees Banking, Housing, and Urban Affairs (Senate)
Financial Services (House)

Appropriations subcommittees VA, HUD, and Independent Agencies (Senate and
House) Primary agency Department of Housing and Urban

Development Account FHA- Mutual Mortgage Insurance Fund (86-

0183) Spending type Discretionary/ Direct Budget subfunction 371/ Mortgage
credit Framework theme Improve efficiency

Through its Federal Housing Administration (FHA), the Department of Housing
and Urban Development (HUD) insures private lenders against nearly all
losses resulting from foreclosures on single- family homes insured

under its Mutual Mortgage Insurance Fund. The Department of Veterans Affairs
(VA) also operates a single- family mortgage guaranty program. However,
unlike FHA, VA covers only 25 to 50 percent of the original loan amount
against losses incurred when borrowers default on loans, leaving lenders
responsible for any remaining losses.

In May 1997, GAO reported that reducing FHA?s insurance coverage to the
level permitted for VA home loans would likely reduce the Fund?s exposure to
financial losses, thereby improving its financial health. As a result, the
Fund?s ability to maintain financial self- sufficiency in an uncertain
future would be enhanced. For example, if insurance coverage on FHA?s 1995
loans were reduced to VA?s levels and a 14 percent volume reduction in
lending was assumed, GAO estimated that the economic value of the loans
would increase by $52 million to $79 million. Economic value provides an
estimate of the profitability of FHA loans, which is important because
estimated increases in economic value due to legislative changes allow

additional mandatory spending authorizations to be made, other revenues to
be reduced, or projected savings in the federal budget to be realized.
Reducing FHA?s insurance coverage would likely improve the financial health
of the fund because the reduction in claim payments resulting from

lowered insurance coverage would more than offset the decrease in premium
income resulting from reduced lending volume.

Legislative changes could be made to reduce FHA?s insurance coverage.
Savings under this option would depend on future economic conditions, the
volume of loans made, how higher risk and lower risk borrowers would be
identified for exclusion from the program, and whether some losses may be
shifted from FHA to the Government National Mortgage Association. In
addition, reducing FHA?s insurance coverage does pose trade- offs affecting
lenders, borrowers, and FHA?s role, such as diminishing the federal role in
stabilizing markets. Low- income, first- time, and minority home buyers and
those individuals purchasing older homes are most likely to experience
greater difficulty in obtaining a home mortgage.

CBO did not provide a savings estimate for this option because the amount of
potential savings would depend on the reaction of lenders and the resulting
demand for FHA?s products.

Related GAO Product Homeownership: Potential Effects of Reducing FHA?s
Insurance Coverage for Home Mortgages (GAO/ RCED- 97- 93, May 1, 1997). GAO
Contact Stanley J. Czerwinski, (202) 512- 7631

Merging USDA and HUD Single- Family Insured Lending Programs and

Authorizing committees Banking, Housing, and Urban Affairs

Multifamily Portfolio (Senate) Financial Services (House)

Management Programs

Appropriations subcommittees Agriculture, Rural Development, FDA and Related
Agencies; VA, HUD and Independent Agencies (House)

Agriculture, Rural Development and Related Agencies; VA, HUD, and
Independent Agencies (Senate) Primary agency Department of Agriculture

Department of Housing and Urban Development

Account Multiple Spending type Direct/ Discretionary Budget subfunction 371/
Mortgage Credit Framework theme Improve efficiency

USDA, primarily through its Rural Housing Service (RHS), has jurisdiction
over most federal rural housing programs. HUD, primarily through its Federal
Housing Administration (FHA), has jurisdiction over the major nationwide
federal housing programs. As the distinctions between rural and urban life
have blurred and federal budgets have tightened, the need

for the separate rural housing programs, first created in the mid- 1930s to
stimulate the rural economy and assist needy rural families, is
questionable. Similarities exist between the RHS and FHA programs for
delivering rural housing, and efficiencies could be achieved by merging the
two programs. For instance, RHS? single- family guaranteed loan program and
FHA?s singlefamily insured loan program both primarily target low- and
moderateincome households, use the same qualifying ratios, and operate in
the same markets. Even though RHS? program offers more attractive terms for
the borrower and is available only in rural areas, whereas FHA?s program is
available nationwide, both programs could be offered through the same

network of lenders. Adapting each one?s best practices for use by the other
and eliminating inconsistencies in the rules applicable to private owners
under the current programs would improve the efficiency with which the

federal government delivers rural housing programs.

As we recently reported, to optimize the federal role in rural housing, the
Congress may wish to consider requiring USDA and HUD to examine the benefits
and costs of merging those programs that serve similar markets and provide
similar products. As a first step, the Congress could consider requiring RHS
and HUD to explore merging their single- family insured lending programs and
multifamily portfolio management programs, taking

advantage of the best practices of each and ensuring that targeted
populations are not adversely affected. CBO cannot estimate savings for this
option without a more specific proposal.

Related GAO Product Rural Housing: Options for Optimizing the Federal Role
in Rural Housing Development (GAO/ RCED- 00- 241, Sept. 15, 2000).

GAO Contact Stanley J. Czerwinski, (202) 512- 7631

Consolidate Homeless Assistance Programs

Authorizing committees Banking, Housing, and Urban Affairs (Senate)
Financial Services (House)

Appropriations subcommittees VA, HUD, and Independent Agencies (Senate and
House) Primary agency Department of Housing and Urban

Development Accounts Multiple Spending type Direct/ Discretionary Budget
subfunctions Multiple Framework theme Improve efficiency

In 1987, the Congress passed the Stewart B. McKinney Act (P. L. 100- 77) to
provide a comprehensive federal response to address the multiple needs of
homeless people. The act encompassed both existing and new programs,
including those providing emergency food and shelter, those offering
longterm housing and supportive services, and those designed to demonstrate
effective approaches for providing homeless people with services. Over the
years, some of the original McKinney programs have been consolidated

or eliminated, and some new programs have been added. Today homeless people
receive assistance through these programs as well as other federal programs
that are not authorized under the McKinney Act but are

nevertheless specifically targeted to serve the homeless population. In
February 1999, we reported that seven federal agencies administer 16
programs that are targeted to serve the homeless population. In fiscal year
1997, these agencies obligated over $1.2 billion for homeless assistance
programs, and the programs administered by the Department of Housing and
Urban Development (HUD) accounted for about 70 percent of this total.

While these federal programs offer a wide range of services to the homeless
population, some of these services appear similar. For example, food and
nutrition services can be provided to homeless people through eight
different programs administered by five different agencies. Moreover, our
work at the state and local level has found that state and local government
officials generally believe that the federal government has not done a good

job of coordinating its various homeless assistance programs. This

perceived lack of coordination could adversely affect the ability of states
and localities to integrate their own programs. Also, we recently reported
that, because different homeless assistance programs have varying sets of
eligibility and funding requirements, they can cause coordination

difficulties for the federal agencies administering them as well as
administrative and coordination burdens for the states and communities that
have to apply for and use these funds.

Congress may wish to consider consolidating all homeless assistance programs
under HUD because HUD (1) has taken a leadership role in the area of
homelessness, (2) has developed a well- respected approach for delivering
homeless assistance programs called the Continuum of Care, and (3) is
currently responsible for administering 70 percent of the funds for four key
programs targeted to the homeless. Consolidating all of the homeless
assistance programs under HUD should result in administrative and
operational efficiencies at the federal level as well as reduce the
administrative and coordination burdens of state and local governments.
However, without a specific legislative proposal, CBO is unable to estimate
the potential savings for this option.

Related GAO Products Homelessness: Consolidating HUD?s McKinney Programs
(GAO/ T- RCED00- 187, May 23, 2000).

Homelessness: State and Local Efforts to Integrate and Evaluate Homeless
Assistance Programs (GAO/ RCED- 99- 178, June 29, 1999).

Homelessness: Coordination and Evaluation of Programs Are Essential (GAO/
RCED- 99- 49, Feb. 26, 1999).

Homelessness: McKinney Act Programs Provide Assistance but Are Not Designed
to Be the Solution (GAO/ RCED- 94- 37, May 31, 1994). GAO Contact Stanley J.
Czerwinski, (202) 512- 7631

400 Transportation Eliminate the Pulsed Fast Neutron Analysis Inspection
System Restructure Amtrak to Reduce or Eliminate Federal Subsidies

Eliminate Cargo Preference Laws to Reduce Federal Transportation Costs
Increase Aircraft Registration Fees to Recover Actual Costs Improve
Department of Transportation?s Oversight of Its University Research

Apply Cost- Benefit Analysis to Replacement Plans for Airport Surveillance
Radars Close, Consolidate, or Privatize Some Coast Guard Operating and
Training Facilities Convert Some Support Officer Positions to Civilian
Status

Eliminate the Pulsed Fast Neutron Analysis Inspection System

Authorizing committees Multiple Appropriations subcommittees Multiple
Primary agency Multiple Account FAA- Research, Engineering and

Development (69- 8108- 07- 402) Spending type Discretionary Budget
subfunction 402/ Air Transportation Framework theme Reassess objectives

One type of technology under development for detecting explosives and
narcotics is a pulsed fast neutron analysis (PFNA) inspection system. PFNA
is designed to directly and automatically detect and measure the presence of
specific materials (e. g., cocaine) by exposing their constituent

chemical elements to short bursts of subatomic particles called neutrons. As
reported in our April 1999 report, U. S. Customs Service, Department of
Defense (DOD), and Federal Aviation Administration (FAA) officials stated

they do not believe that the current PFNA system would meet their
operational requirements because it was too expensive (at least $10 million
per unit to acquire) and too large for operational use in most ports of
entry or other sites. FAA currently has a PFNA development program and
estimates that completing a PFNA field test at an airport could occur as
late as 2005 and cost about $40 million. Customs has made a commitment to
conduct a controlled operational test of PFNA if the Congress provides

funding of $10 million. DOD is no longer involved in PFNA testing and
acquisition. If the Congress chose to eliminate PFNA- a system that the
agencies do not want- the Congressional Budget Office states that the
following savings would result for FAA. Because Customs did not receive
specific appropriations for PFNA, there would be no savings for Customs.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 funding level Budget a uthority 5 5 5 6 6 Outlays 3 5
5 5 6 Source: Congressional Budget Office.

Related GAO Product Terrorism and Drug Trafficking: Testing Status and Views
on Operational Viability of Pulsed Fast Neutron Analysis Technology (GAO/
GGD- 99- 54, Apr. 13, 1999). GAO Contact Laurie E. Ekstrand, (202) 512- 8777

Restructure Amtrak to Reduce or Eliminate Federal Subsidies

Authorizing committees Commerce, Science, and Transportation (Senate)
Transportation and Infrastructure (House)

Appropriations subcommittees Transportation (Senate and House) Primary
agency National Railroad Passenger Corporation Account Multiple Spending
type Discretionary Budget subfunction 401/ Ground Transportation Framework
theme Reassess objectives

The National Railroad Passenger Corporation (Amtrak) is the operator of the
nation?s intercity passenger rail service. As a private corporation, it
operated trains in 45 states, serving about 22 million riders in 2000 (about

60, 000 per day). Like major national intercity passenger rail systems
outside the United States, Amtrak receives government support. Since
Amtrak?s creation in 1970, the federal government has provided nearly $24
billion in operating and capital assistance to Amtrak. In 2000, the railroad
lost $944 million (exclusive of federal and state payments). In 1994, at the
request of the administration, and later at the direction of the Congress,
Amtrak pledged to eliminate the need for federal operating subsidies by the
end of 2002.

Amtrak has made relatively little progress in reducing its need for federal
operating subsidies. For example, in fiscal year 2000, Amtrak reduced its
need for operating subsidies by $5 million, substantially less than its plan
for reducing the need for operating subsidies by $114 million for the year.
Overall, in the past 6 years (fiscal years 1995 through 2000), Amtrak has

reduced its need for operating subsidies by only $83 million. It must make
an addition $281 million in progress in the next 2 years (2001 and 2002) to
achieve the goal of being free of operating subsidies. Given its lack of

overall progress, it will be difficult for Amtrak to eliminate the need for
federal operating subsidies by the end of 2002.

The Amtrak Reform and Accountability Act of 1997 generally prohibits Amtrak
from using federal funds for operating expenses after 2002. If Amtrak is not
operationally self- sufficient by then, the act provides for the Congress to
consider restructuring the national passenger rail system and

liquidating Amtrak. Several options are available to the Congress. For
instance, the Congress could retain intercity passenger rail in much the
same form as it is today, which would likely require increased subsidies
over current levels to meet both operating expenses and billions of dollars
in unmet capital needs. The Congress could also restructure intercity

passenger rail service by focusing on high- density corridors, which would
most likely also require continued federal assistance. Alternatively, if
Amtrak is liquidated and not replaced, then federal subsidies to it would be

eliminated. Eliminating federal subsidies for Amtrak by the end of 2002
would have many effects. One effect, if Amtrak was not replaced, is that the
public benefit of having intercity passenger rail as an alternative travel
choice to air and highways would disappear. CBO estimates that the

following savings could be achieved if the Amtrak subsidy is eliminated. CBO
could not estimate whether savings might occur if Amtrak service is limited
to high- density corridors until a specific proposal is identified.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 baseline Budget authority 633 646 659 672 685 Outlays
633 646 659 672 685 Source: Congressional Budget Office.

Related GAO Products Intercity Passenger Rail: The Congress Faces Critical
Decisions About the Role of and Funding for Intercity Passenger Rail Systems
(GAO- 01820T, July 25, 2001).

High- Speed Rail Investment Act of 2001 (GAO- 01- 756R, June 25, 2001).

Intercity Passenger Rail: Amtrak Will Continue to Have Difficulty
Controlling Its Costs and Meeting Capital Needs (GAO/ RCED- 00- 138, May 31,
2000).

Intercity Passenger Rail: Issues Associated With a Possible Amtrak
Liquidation (GAO/ RCED- 98- 60, Mar. 2, 1998).

GAO Contact John H. Anderson, Jr., (202) 512- 2834

Eliminate Cargo Preference Laws to Reduce Federal Transportation Costs

Authorizing committees Commerce, Science, and Transportation (Senate)
Transportation and Infrastructure (House)

Appropriations subcommittees Multiple Primary agency Multiple Accounts
Multiple Spending type Discretionary Budget subfunction 403/ Water
transportation

Framework theme Reassess objectives

Cargo preference laws require that certain government- owned or financed
cargo shipped internationally be carried on U. S.- flagged vessels. Cargo
preference laws are intended to guarantee a minimum amount of business for
the U. S.- flagged vessels. These vessels are required by law to be crewed
by U. S. mariners, are generally required to be built in U. S. shipyards,
and are encouraged to be maintained and repaired in U. S. shipyards. In
addition, U. S.- flag carriers commit to providing capacity in times of
national emergencies.

The effect of cargo preference laws has been mixed. These laws appear to
have had a substantial impact on the U. S merchant marine industry by
providing an incentive for vessels to remain in the U. S. fleet. However,
because U. S.- flagged vessels often charge higher rates to transport cargo
than foreign- flagged vessels, cargo preference laws increase the
government?s transportation costs. For fiscal years 1989 through 1993, four
federal agencies- the Departments of Defense, Agriculture, Energy, and

the Agency for International Development- were responsible for more than 99
percent of the government cargo subject to cargo preference laws. Cargo
preference laws increased these federal agencies? transportation costs by an
estimated $578 million per year in fiscal years 1989 through 1993 over the
cost of using foreign- flagged vessels. If the laws were eliminated, the
following savings could be achieved.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from CBO baseline Budget authority 400 427 517 536 549 Outlays 391
407 492 527 546 Source: Congressional Budget Office.

Related GAO Products Management Reform: Implementation of the National
Performance Review?s Recommendations, (GAO/ OCG- 95- 1, Dec. 5, 1994).

Maritime Industry: Cargo Preference Laws- Their Estimated Costs and Effects,
(GAO/ RCED- 95- 34, Nov. 30, 1994).

Cargo Preference: Effects of U. S. Export- Import Cargo Preference Laws on
Exporters, (GAO/ GGD- 95- 2BR, Oct. 31, 1994).

Cargo Preference Requirements: Objectives Not Significantly Advanced When
Used in U. S. Food Aid Programs, (GAO/ GGD- 94- 215, Sept. 29, 1994).

GAO Contact John H. Anderson, Jr., (202) 512- 2834

Increase Aircraft Registration Fees to Enable the Federal Aviation

Authorizing committees Commerce, Science, and Transportation

Administration to

(Senate) Transportation and Infrastructure (House)

Recover Actual Costs

Primary agency Department of Transportation Spending type Direct Framework
theme Redefine beneficiaries

In 1977, the Congress amended the Federal Aviation Act and identified three
categories of aircraft owners- U. S. citizens, resident aliens, and U. S.
based foreign companies- that may register aircraft in the United States. To
register an aircraft, an eligible owner submits a $5 fee. As of the end of

fiscal year 1999, 355, 518 aircraft were registered in the United States. In
fiscal year 1999, 54,329 certificate registrations were issued. In 1993 we
reported that the Federal Aviation Administration (FAA) was not fully
recovering the cost of processing aircraft registration applications and
estimated that, by not increasing fees since 1968 to recover costs, FAA had
foregone about $6. 5 million in additional revenue. To recover the costs of
services provided to aircraft registrants, we have recommended that FAA
increase its aircraft registration fees to more accurately reflect actual
costs. FAA plans to coordinate aircraft registration changes with the Drug

Enforcement Agency and the U. S. Customs Service by the end of 2004. If
those two agencies approve the proposed changes, FAA will prepare
legislation for congressional approval for a rate increase for registration
fees. FAA plans to complete changes to its aircraft registration system by
mid- 2005.

If the FAA recovers the full cost of processing aircraft registration
applications, the following additional revenue could be achieved.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Added C ollections 0 0 0 5 5 Source: Congressional Budget Office.

Related GAO Product Aviation Safety: Unresolved Issues Involving U. S.-
Registered Aircraft (GAO/ RCED- 93- 135, June 18, 1993). GAO Contact John H.
Anderson, Jr., (202) 512- 2834

Improve Department of Transportation?s Oversight of Its University Research

Authorizing committees Commerce, Science, and Transportation (Senate)
Transportation and Infrastructure (House)

Appropriations subcommittees Transportation (Senate and House) Primary
agency Department of Transportation Accounts Multiple Spending type
Discretionary Budget subfunction 401/ 402/ 403/ 407/ Ground, Air, Water, and
Other Transportation

Framework theme Improve efficiency

The Department of Transportation (DOT) conducts research at universities to
enhance safety, mobility, environmental quality, efficiency, and economic
growth in the nation?s transportation system. The results of DOT?s research

programs include prototypes of systems, new operating procedures, data used
to focus policy decisions, and regulations. DOT and each of its operating
administrations have several offices responsible for overseeing this
research to ensure that the awards? objectives are met and the costs are
appropriate. While DOT?s spending on research at universities has grown
significantly from fiscal years 1988 through 1993, DOT does not have an
integrated plan to ensure that research is needed to meet departmental
goals. In addition,

a lack of oversight on some university awards led to overcharges of almost
$450,000 and unpaid cost- sharing totaling $3 million in a sample of awards
that GAO reviewed in detail. More effective planning and management of the
research program could reduce costs by limiting duplicate research and
ensuring that recipients follow award guidelines on allowable costs and cost
sharing.

As GAO recommended, DOT has completed the development of a departmentwide
database to track the purpose and costs associated with each university
research award. GAO also recommended that DOT

evaluate the operating administrations? processes to ensure that they have
adequate policies and procedures to carry out their responsibilities for
monitoring awards. However, DOT has no plans to do so.

GAO findings of overcharges and unpaid cost sharing for a sample of grants
suggest that the Congress could slow DOT?s university research spending by
reducing appropriations until improvements in necessary planning and
management processes are made. CBO does not disagree that improved
monitoring and oversight of DOT?s university research can reduce outlays.
However, savings from this option would depend on which among many small
accounts are reduced and the amounts of these reductions.

Related GAO Product Department of Transportation: University Research
Activities Need Greater Oversight (GAO/ RCED- 94- 175, May 13, 1994).

GAO Contact John H. Anderson, Jr., (202) 512- 2834

Apply Cost- Benefit Analysis to Replacement Plans for Airport Surveillance

Authorizing committees Commerce, Science, and Transportation

Radars

(Senate) Transportation and Infrastructure (House)

Appropriations subcommittees Transportation (Senate and House) Primary
agency Department of Transportation Accounts Facilities and Equipment (69-
8107) Spending type Discretionary Budget subfunction 402/ Air transportation

Framework theme Improve efficiency

Before installing an airport surveillance radar (ASR), FAA typically
conducts benefit- cost studies to determine whether it will be cost
effective. In addition to the $5 million cost of the new radars, other costs
may be incurred for auxiliary equipment and infrastructure modifications.
Benefits of these improvements include travelers? time saved through
potential reductions in aircraft delays and lives saved and injuries avoided

through reduced risk of midair and terrain collisions. Because there is a
direct correlation between projected air traffic operations and the
potential benefits associated with radar installation, airports with higher
air traffic projections would receive more benefit from a radar than those
with lower projections.

FAA had planned to install technologically advanced ASR- 11 radars to
replace its model ASR- 7 and ASR- 8 radars, currently located at 101
airports, without applying its benefit- cost criteria. FAA?s rationale for
not applying its benefit- cost criteria to these 101 airports was its belief
that discontinuing radar operations at airports that no longer qualify could
lead to public perceptions that safety was being reduced, even if safety was
not compromised. However, some of these airports may no longer qualify for a
radar based on FAA?s benefit- cost criteria and 75 of them have less air
traffic than an airport whose radar request FAA recently denied using its

benefit- cost criteria. Furthermore, at some of these airports, the
circumstances that originally justified a radar no longer exist. GAO
recommended that FAA apply its benefit- cost criteria to all 101 airports
where it plans to replace the ASR- 7 and ASR- 8 radars and

determine whether those airports had a continuing operational need for

radar. In response to GAO?s recommendation, FAA asked it?s regional offices
to verify the operational need for radars at the 75 airports that had less
traffic than the airport whose radar was recently denied. FAA determined
that there continues to be an operational need for radars at all 75
airports. However, FAA does not plan to do the benefit/ cost studies that
GAO recommended, does not plan to decommission any of the radars, and plans
to proceed with replacing the old radars with the newer radars at all
airports. We continue to believe that savings may result if FAA were to
perform the benefit/ cost studies at the 101 airports.

Related GAO Product Air Traffic Control: Surveillance Radar Request for the
Cherry Capital Airport (GAO/ RCED- 98- 118, May 28, 1998). GAO Contact John
H. Anderson, Jr., (202) 512- 2834

Close, Consolidate, or Privatize Some Coast Guard Operating and Training
Facilities

Authorizing committees Commerce, Science, and Transportation (Senate)
Transportation and Infrastructure (House)

Appropriations subcommittees Transportation (Senate and House) Primary
agency Department of Transportation Accounts Operating Expenses (69- 0201)
Spending type Discretionary Budget subfunction Multiple

Framework theme Improve efficiency

The Coast Guard could achieve budget savings by downsizing its facilities.
The Coast Guard abandoned plans to close its Curtis Bay facility in 1988,
when GAO reported that it lacked supporting data. While the cost
effectiveness of this facility has been questioned, the Coast Guard has not
conducted a detailed study to compare the facility?s cost effectiveness with

that of commercial shipyards. In fiscal year 1996, GAO testified that the
Coast Guard could save $6 million by closing or consolidating over 20 small
boat stations. Also in 1996, GAO recommended that the Coast Guard

consider other alternatives- such as privatization- to operate its vessel
traffic service centers, which cost $20.2 million to operate in fiscal year
1999. Furthermore, in fiscal 1995, GAO recommended that the Coast Guard
close one of its large training centers in Petaluma, California- at a
savings of $9 million annually. The Coast Guard agreed that this may be
possible but did not close it largely because of public opposition.

Given the serious budget constraints the Coast Guard now faces, it will need
to achieve significant budgetary savings to offset the increased budgetary
needs of the future. Closing, consolidating, or privatizing training and
operating facilities, including the Curtis Bay facility, 20 small boat
stations, the vessel traffic service centers, and one of its training
centers in Petaluma, California, would help the Coast Guard to achieve

these required savings. While CBO agrees that closing, consolidating, or
privatizing Coast Guard facilities could yield savings, it cannot develop an
estimate until specific proposals are identified.

Related GAO Products Coast Guard: Budget Challenges for 2001 and Beyond
(GAO/ T- RCED- 00103, Mar. 15, 2000).

Coast Guard: Review of Administrative and Support Functions (GAO/ RCED- 99-
62R, Mar. 10, 1999).

Coast Guard: Challenges for Addressing Budget Constraints (GAO/ RCED- 97-
110, May 14, 1997).

Marine Safety: Coast Guard Should Address Alternatives as It Proceeds With
VTS 2000 (GAO/ RCED- 96- 83, Apr. 22, 1996).

Coast Guard: Issues Related to the Fiscal Year 1996 Budget Request (GAO/ T-
RCED- 95- 130, Mar. 13, 1995).

Coast Guard: Improved Process Exists to Evaluate Changes to Small Boat
Stations (GAO/ RCED- 94- 147, Apr. 1, 1994).

GAO Contact John H. Anderson, Jr., (202) 512- 2834

Convert Some Support Officer Positions to Civilian Status

Authorizing committees Commerce, Science, and Transportation (Senate)
Transportation and Infrastructure (House)

Appropriations subcommittees Transportation (Senate and House) Primary
agency Department of Transportation Account Operating Expenses (69- 0201)
Spending type Discretionary Budget subfunction 403/ Water Transportation

Framework theme Improve efficiency

The Coast Guard uses officers in operational positions-- to command boats,
ships, and aircraft that can be deployed during time of war-- and in support
positions, such as personnel, public affairs, data processing, and financial
management. Military standard personnel costs are paid out of the Coast
Guard?s discretionary budget and include all pay and allowances, permanent
change of station costs, training costs, and active- duty medical costs
associated with each pay grade. Certain allowances- housing and subsistence-
are provided to military personnel tax- free. Additionally,

military retirement costs are funded by an annual permanent appropriation
separate from the Coast Guard?s discretionary budget. Civilian standard
personnel costs are also paid out of the Coast Guard?s discretionary budget
and include basic, locality, overtime, and special pays as well as the costs

associated with permanent change of station, training, health insurance,
life insurance, and the accrued cost of civilian retirement. Of 5, 760
commissioned officer positions in the Coast Guard?s workforce (as of the end
of fiscal year 1999), GAO selectively evaluated nearly 1,000 in 75

units likely to have support positions. Of these positions, GAO found about
800 in which officers were performing duties that offered opportunities for
conversion to civilian positions. Such positions include those in, among
other things, personnel, public affairs, civil rights, and data processing.
In comparing all of the relevant costs associated with military and civilian
positions, GAO found that employing an active- duty commissioned officer in
the positions we reviewed is, on average, 21 percent more costly than
filling the same position with a comparable civilian employee. The cost
differential is based on a comparison of average annual pay, benefits, and
expenses associated with the Coast Guard?s commissioned officers at

different military ranks and federal civilian employees at comparable
civilian grades for fiscal year 1999. From March 1, 2000 through July 31,
2001, the Coast Guard had converted 45 commissioned officer positions to
civilian positions. Converting support positions currently filled by
military officers to civilian status would reduce costs associated with
delivering these services with no apparent impact on performance. By
converting commissioned officer positions to civilian positions, savings
would accrue to the federal government in the form of retirement savings,
tax advantage savings, and

savings to the Coast Guard?s discretionary budget. CBO agrees that this
option would lead to savings, but that those savings would primarily result
from differences between military and civilian retirement plans.
Consequently, the budgetary savings resulting from this shift would not
begin until ?new? civilian employees began to retire, which will occur after
the 5- year projection period. Related GAO Product Coast Guard Workforce
Mix: Phased- In Conversion of Some Support Officer Positions Would Produce
Savings (GAO/ RCED- 00- 60, Mar. 1, 2000). GAO Contact John H. Anderson,
Jr., (202) 512- 2834

450 Community and Limit Eligibility for Federal Emergency Management Agency
Public

Regional Development Assistance

Eliminate the Flood Insurance Subsidy on Properties That Suffer the Greatest
Flood Loss Eliminate Flood Insurance for Certain Repeatedly Flooded
Properties Consolidate or Terminate the Department of Commerce?s Trade
Adjustment Assistance for Firms Program

Limit Eligibility for Federal Emergency Management Agency Public Assistance

Authorizing committees Environment and Public Works (Senate) Transportation
and Infrastructure (House)

Appropriations subcommittees VA, HUD and Independent Agencies (Senate and
House)

Primary agency Federal Emergency Management Agency Account Disaster Relief
Fund (58- 0104) Spending type Discretionary Budget subfunction 453/ Disaster
relief and insurance Framework theme Redefine beneficiaries The Federal
Emergency Management Agency?s (FEMA) Public Assistance

Program helps pay state and local governments? costs of repairing and
replacing eligible public facilities and equipment damaged by natural
disasters. Many private nonprofit organizations, such as schools, hospitals,

and utilities, are also eligible for assistance. Since 1990, FEMA has
expended over $27 billion in disaster assistance, over half of which was
spent for public assistance projects such as repairs of roads, government
buildings, utilities, and hospitals damaged in declared disasters.

A number of options identified by program officials in FEMA?s 10 regional
offices, if implemented, could reduce program costs. The agency has taken
action to address some of these options. However, FEMA has not addressed
some other identified options, stating that congressional direction would be
needed for the agency to change policies. These include eliminating the
eligibility for facilities not actively used to deliver government services,
postdisaster beach renourishment, as well as increasing the damage threshold
for replacing a facility. 10 In addition, program costs could be reduced by
policy changes such as eliminating eligibility for all private nonprofit
organizations- many of which are revenue- generating facilities such as
utilities, hospitals, and universities- or eliminating funding for publicly
owned recreational facilities (e. g., boat docks, piers, and golf courses)
which generate portions of their operational revenue through user fees,
rents, admission charges, or similar fees. CBO 10 FEMA will now pay to
replace rather than repair buildings if the repair costs would be more than
50 percent of the estimated replacement cost.

estimates that eliminating eligibility for all private nonprofit
organizations would yield the following savings.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 funding level Budget a uthority 60 60 60 60 60 Outlays
0 15 30 45 54 Source: Congressional Budget Office.

Related GAO Products Disaster Assistance: Improvement Needed in Disaster
Declaration Criteria and Eligibility Assurance Procedures (GAO- 01- 837,
Aug. 31, 2001).

Disaster Assistance: Information on Federal Costs and Approaches for
Reducing Them (GAO/ T- RCED- 98- 139, Mar. 26, 1998).

Disaster Assistance: Improvements Needed in Determining Eligibility for
Public Assistance (GAO/ RCED- 96- 113, May 23, 1996).

Disaster Assistance: Improvements Needed in Determining Eligibility for
Public Assistance (GAO/ T- RCED- 96- 166, Apr. 30, 1996).

GAO Contact JayEtta Z. Hecker, (202) 512- 8984

Eliminate the Flood Insurance Subsidy on Properties That Suffer

the Greatest Flood

Authorizing committees Banking, Housing, and Urban Affairs (Senate)

Loss

Financial Services (House) Appropriations subcommittees VA, HUD and
Independent Agencies

(Senate and House) Primary agency Federal Emergency Management Agency
Account National Flood Insurance Fund (58- 4236) Spending type Mandatory
Budget subfunction 453/ Disaster relief and insurance Framework theme
Redefine beneficiaries

The National Flood Insurance Program is not actuarially sound because
approximately 27 percent of the 4.3 million policies in force are
subsidized. Federal Insurance Administration officials estimate that total
premium income from subsidized policyholders is currently about $800 million
less than it would be if these rates had been actuarially based and
participation

had remained the same. According to a Federal Insurance Administration
official, if true actuarial rates were charged, insurance rates on currently
subsidized policies would need to rise, on average, slightly more than
twofold (to an annual average premium of about $1, 500 to $1, 600).

Significant rate increases for subsidized policies, including charging
actuarial rates, would likely cause some owners of properties built before
the publication of the Flood Insurance Rate Map to cancel their flood

insurance. However, the ultimate cost or savings to the federal government
would depend on the actions of property owners. If these property owners,
who suffer the greatest flood loss, canceled their insurance and
subsequently suffered losses due to future floods, they could apply for low-
interest loans from the Small Business Administration or grants from

FEMA, which would increase the overall cost to the federal government. FEMA
received a May 1999 contractor?s study concerning the economic effects of
eliminating subsidized rates, and in June 2000 the agency transmitted the
study to the Congress with recommendations for reducing the subsidy.
According to FEMA, it is analyzing the impacts of specific alternatives for
carrying out the recommendations, as well as working with stakeholders to
refine and develop a comprehensive strategy to help it decide how to
implement the study?s recommendations. Some of the

recommendations for reducing the subsidy depend on legislative change. In
light of the potential savings associated with addressing this issue, FEMA
should develop and advance legislative options for eliminating the National
Flood Insurance Program?s subsidy for properties that are more likely to
suffer losses. Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Net increase in offsetting receipts Budget a uthority 0 0 0 0 0 Outlays (net
increased

45 135 182 181 181 receipts) Source: Congressional Budget Office.

Related GAO Products Flood Insurance: Information on Financial Aspects of
the National Flood Insurance Program (GAO/ T- RCED- 00- 23, Oct. 27, 1999).

Flood Insurance: Information on Financial Aspects of the National Flood
Insurance Program (GAO/ T- RCED- 99- 280, Aug. 25, 1999).

Flood Insurance: Financial Resources May Not Be Sufficient to Meet Future
Expected Losses (GAO/ RCED- 94- 80, Mar. 21, 1994). GAO Contact JayEtta Z.
Hecker, (202) 512- 8984

Eliminate Flood Insurance for Certain Repeatedly Flooded Properties

Authorizing committees Banking, Housing, and Urban Affairs (Senate)
Financial Services (House)

Appropriations subcommittees VA, HUD and Independent Agencies (Senate and
House)

Primary agency Federal Emergency Management Agency Account National Flood
Insurance Fund (58- 4236) Spending type Mandatory Budget subfunction 453/
Disaster relief and insurance Framework theme Redefine beneficiaries

Repetitive flood losses is one of the major factors contributing to the
financial difficulties facing the National Flood Insurance Program. A
repetitive- loss property is one that has two or more losses greater than
$1, 000 each within any 10- year period. Approximately 45, 000 buildings
currently insured under the National Flood Insurance Program have been
flooded on more than one occasion and have received flood insurance claims
payments of $1, 000 or more for each loss. These repetitive losses account
for about 38 percent of all program claims historically (currently about
$200 million annually) even though repetitive- loss structures make

up a very small portion of the total number of insured properties- at any
one time, from 1 to 2 percent. The cost of these multiple- loss properties
over the years to the program has been $3. 8 billion. Under its
repetitiveloss strategy, the Federal Insurance Administration intends to
target for mitigation the most flood- prone repetitive- loss properties,
such as those

that are currently insured and have had four or more losses, by acquiring,
relocating, or elevating them. FEMA reports NFIP paid out over $800 million
in claims for the most vulnerable repetitive loss properties (about 10,000)
over the last 21 years, or $1.3 billion when adjusted for today?s dollars.
One option that would increase savings would be for FEMA to consider

eliminating flood insurance for certain repeatedly flooded properties. In
its fiscal year 2002 budget proposal, FEMA requested to transfer $20 million
in fees from the National Flood Insurance Program to increase the number of
buyouts of properties that suffer repetitive losses.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 funding level Budget a uthority 0 0 0 0 0 Outlays 60
64 69 75 80 Note: Savings estimate assumes that coverage would be denied
after the fourth loss of at least 1,000 dollars in any 10- year period.

Source: Congressional Budget Office.

Related GAO Products Flood Insurance: Information on Financial Aspects of
the National Flood Insurance Program (GAO/ T- RCED- 00- 23, Oct. 27, 1999).

Flood Insurance: Information on Financial Aspects of the National Flood
Insurance Program (GAO/ T- RCED- 99- 280, Aug. 25, 1999).

GAO Contact JayEtta Z. Hecker, (202) 512- 8984

Consolidate or Terminate the Department of Commerce?s Trade

Authorizing committees Commerce, Science, and Transportation (Senate)

Adjustment Assistance Energy and Commerce (House)

for Firms Program

Appropriations subcommittees Commerce, Justice, State, and the Judiciary
(Senate and House)

Primary agency Department of Commerce Accounts Economic Development
Assistance

Programs (13- 2050) Spending type Discretionary Budget subfunction 452/ Area
and Regional Development Framework theme Reassess objectives The Trade
Adjustment Assistance (TAA) for firms program is administered

by the Department of Commerce?s Economic Development Administration. This
$10.5 million program is designed to assist domestic firms that have been
adversely affected by imports. Twelve regional centers help firms become
certified for benefits, assess their economic viability, and develop
business recovery plans. For fiscal years 1995 through 1999, an average of
157 firms were annually certified as eligible for assistance and 127 (an
average of 11 for each

regional center) had certified recovery plans. During this period, however,
most of the program funding- 61 percent- was used to fund operational and
administrative costs at the 12 regional centers, including helping firms
become certified for assistance and developing firm- specific recovery

plans. The remainder- an annual average of $3. 8 million, or approximately
39 percent of the total- was used to fund direct technical assistance. The
Economic Development Administration does not formally monitor and track the
outcomes of the assistance provided by the regional centers. As a result,
there is not sufficient data to systematically assess whether this program
is helping firms adjust to import competition. Given the low percentage of
TAA for firms funds used to provide direct

technical assistance and the lack of information on the impact of the
program, the Congress may wish to consider several options for this program.
First, the Congress may wish to have the Department of Commerce consolidate
the regional centers and therefore reduce administrative and overhead costs.
Another alternative would be to co

locate the TAA centers with an existing program such as the Department of
Commerce?s Manufacturing Extension Partnership, reducing overhead and
perhaps providing some synergy with other government efforts to assist
firms. If the Congress chooses to terminate the TAA for firms program, CBO
estimates that the resulting savings would occur.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from 2002 funding level Budget a uthority 11 11 11 11 12 Outlays 1 3
5 811 Source: Congressional Budget Office.

Related GAO Product Trade Adjustment Assistance: Impact of Federal
Assistance to Firms Is Unclear (GAO- 01- 12, Dec. 15, 2000). GAO Contact
Susan S. Westin, (202) 512- 4128

500 Education, Consolidate Student Aid Programs Training, Employment, and
Social Services

Consolidate Student Aid Programs

Authorizing committees Health, Education, Labor, and Pensions (Senate)
Education and the Workforce (House) Appropriations subcommittees Labor,
Health and Human Services,

Education, and Related Agencies (Senate and House) Primary agency Department
of Education Account Higher Education (91- 0201) Spending type
Discretionary/ Direct Budget subfunction 502/ Higher education Framework
theme Improve efficiency

The Department of Education provides loans and grants to students to help
finance their higher education. The federal government?s role in supporting
higher education is contributing about 50 percent of its education budget to
postsecondary education programs and activities, most of which are for
student financial aid. The largest programs provide federally insured loans
and Pell grants for students. The Federal Family Education Loan (FFEL)

and Federal Direct Loan (FDL) programs compose the largest source of federal
student financial aid. The FFEL and FDL programs are entitlements, but Pell
grants, the largest federal grant- in- aid program, are awarded to the most
needy eligible students, dependent on the availability of appropriated
funds.

Although the student loan and Pell grant programs provide the majority of
federal financial aid to students for postsecondary education, another 14
smaller programs are targeted to specific segments of the postsecondary
school population. The programs fund remedial and support services for
prospective students from disadvantaged families, programs to enhance the
labor pool in designated specialties, grants to students for volunteer
activities, and grants to women and minorities who are underrepresented in
graduate education.

These 14 programs, which were funded at $1. 8 billion in fiscal year 2002,
could be candidates for consolidation. For example, programs directed at
attracting minority and disadvantaged students could be consolidated into

one program. Or a certain amount of funds could be provided to states

through a single grant, in lieu of several smaller grants, to cover some or
all of the purposes of several small grant programs. In anticipation of the
administrative savings that could be achieved through consolidation, funding
for these programs could be reduced 10 percent each year as part of the
consolidation. Since all savings achieved through consolidation would be
administrative in nature, we assume that there would be no adverse impact on
students? access to postsecondary education- a principal object of the
enabling legislation, the Higher Education Act of 1965, as amended.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 funding level Budget authority 184 188 192 196 200
Outlays 30 141173 191195 Source: Congressional Budget Office.

Related GAO Products Department of Education: Information on Consolidation
Opportunities and Student Aid (GAO/ T- HEHS- 95- 130, Apr. 6, 1995).

Department of Education: Opportunities to Realize Savings (GAO/ THEHS- 95-
56, Jan. 18, 1995).

GAO Contact Cornelia M. Ashby, (202) 512- 8403

550 Health Improve Fairness of Medicaid Matching Formula Charge
Beneficiaries for Food Inspection Costs

Implement Risk- Based Meat and Poultry Inspections at USDA Prevent States
from Using Illusory Approaches to Shift Medicaid Program Costs to the
Federal Government Create a Uniform Federal Mechanism for Food Safety
Convert Public Health Service Commissioned Corps Officers to Civilian

Status Control Provider Enrollment Fraud in Medicaid

Improve Fairness of Medicaid Matching Formula

Authorizing committees Finance (Senate) Energy and Commerce (House)

Appropriations subcommittees Labor, Health and Human Services, Education and
Related Agencies (Senate) Labor, Health and Human Services and Education
(House)

Primary agency Department of Health and Human Services Account Grant to
States for Medicaid

(75- 0512) Spending type Direct Budget subfunction 551/ Health care services
Framework theme Reassess objectives

The Medicaid program provides medical assistance to low- income, aged,
blind, or disabled individuals. The federal government and the states share
the financing of the program through an open- ended matching grant whereby
federal outlays rise with the cost and use of Medicaid services.

The federal share of the program costs varies inversely with state per
capita income. Consequently, high- income states pay a larger share of the
benefits than low- income states. By law, the federal share can be no less
than 50 percent and no more than 83 percent.

Since 1986, we have issued numerous reports and testimonies that identify
ways in which the fairness of federal grant formulas could be improved. With
respect to Medicaid, we believe that the fairness of the matching formula in
the open- ended program could be improved by replacing the per capita income
factor with four factors- the number of people living below the official
poverty line, the total taxable resources of the state, cost differences
associated with the demographic composition of state caseloads, and
differences in health care costs across states- and by

reducing the minimum federal share to 40 percent. These changes could reduce
federal reimbursements by reducing the federal share in states with the most
generous benefits, the fewest low- income people in need, lower costs, and
greater ability to fund benefits from state resources. These

changes could redirect federal funding to states with the highest
concentration of people in poverty and the least capability of funding these
needs from state resources.

To illustrate the savings that could be achieved from changes in the
Medicaid formula, CBO estimates that, if the minimum federal share were
reduced to 40 percent, the following savings could be achieved.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the CBO baseline Budget authority 7, 280 7,910 8, 670 9,510
10,410 Outlays 7, 280 7,910 8, 670 9,510 10,410

Note: CBO assumes that the FMAP for the District of Columbia would remain at
70 percent. Source: Congressional Budget Office.

Related GAO Products Medicaid Formula: Effects of Proposed Formula on
Federal Shares of State Spending (GAO/ HEHS- 99- 29R, Feb. 19, 1999).

Medicaid Matching Formula: Effects of Need Indicators on New York?s Funding
(GAO/ HEHS- 97- 152R, June 9, 1997).

Medicaid: Matching Formula?s Performance and Potential Modifications (GAO/
T- HEHS- 95- 226, July 27, 1995).

Medicaid Formula: Fairness Could Be Improved (GAO/ T- HRD- 91- 5, Dec. 7,
1990).

GAO Contact William J. Scanlon, (202) 512- 7114

Charge Beneficiaries for Food Inspection Costs

Authorizing committees Agriculture, Nutrition, and Forestry (Senate)
Agriculture (House) Energy and Commerce (House)

Appropriations subcommittees Agriculture, Rural Development, and Related
Agencies (Senate) Agriculture, Rural Development, Food and Drug
Administration, and Related Agencies

(House) Primary agency Department of Agriculture Accounts Multiple Spending
type Discretionary Budget subfunction 554/ Consumer and occupational health
and

safety Framework theme Redefine beneficiaries

User fees- charges individuals or firms pay for services they receive from
the federal government- are not new but have begun to play an increasingly
important role in financing federal programs, particularly since the
Balanced Budget Act of 1985. In general, federal food inspection

agencies have charged user fees only to beneficiaries of premarket reviews,
such as the grading of grain and other commodities for quality. Federal food
inspection agencies generally do not charge user fees or fully cover the
cost of services provided for (1) compliance inspections of meat, poultry,
domestic foods, and processing facilities to ensure adherence to safety
regulations, (2) import inspections and export certifications to

ensure that food products in international trade meet specified standards,
and (3) standards setting and other support services essential to these
functions. OMB Circular A- 25, User Charges, states that user fees should be
charged to cover the full cost of federal services when the service
recipient receives special benefits beyond those received by the general
public. USDA?s Food Safety and Inspection Service (FSIS) provides a special
benefit to meat and poultry slaughter and processing plants that
incidentally benefits the general public.

Historically, federal food inspection agencies recover through user fees
only about $400 million of the $1. 6 billion they spend annually to inspect,
test, grade, and approve agricultural commodities and products. Although

the 2002 budget did not include funds to cover additional expenses for these
activities, federal appropriations have traditionally funded the remaining
75 percent of the agencies? expenses. Overall, federal food inspection
agencies could recover an additional $700 million each year

from the beneficiaries of food- related inspection and testing services
through user fees. For example, CBO estimates, based on the 2001 budget
request, that the following savings could be achieved if meat and poultry

inspections were funded through user fees instead of appropriations.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 funding level Budget authority 352 731 758 786 815
Outlays 352 731 758 786 815 Note: The CBO estimate, based on the 2001
budget, assumed the policy would become effective October 1, 2001. This
analysis excludes egg inspection costs, Grants- to- States, and Special
assistance for State Programs from the user fee program. This estimate
assumes that only 50 percent of fees will be collected in the first year
because of industry opposition and administrative delays.

Source: Congressional Budget Office.

Related GAO Products Food Safety: Opportunities to Redirect Federal
Resources and Funds Can Enhance Effectiveness (GAO/ RCED- 98- 224, Aug. 6,
1998).

Food- Related Services: Opportunities Exist to Recover Costs by Charging
Beneficiaries (GAO/ RCED- 97- 57, Mar. 20, 1997).

Food Safety and Quality: Uniform Risk- based Inspection System Needed to
Ensure Safe Food Supply (GAO/ RCED- 92- 152, June 26, 1992). GAO Contacts
Bob Robinson, (202) 512- 3841

Larry Dyckman, (202) 512- 3841

Implement Risk- Based Meat and Poultry Inspections at USDA

Authorizing committees Agriculture, Nutrition, and Forestry (Senate)
Agriculture (House)

Appropriations subcommittees Agriculture, Rural Development, and Related
Agencies (Senate) Agriculture, Rural Development, Food and Drug
Administration, and Related Agencies (House) Primary agency Department of
Agriculture Accounts Food Safety and Inspection Service Spending type
Discretionary Budget Subfunction 554/ Consumer and occupational health and

safety Framework theme Redefine beneficiaries

Foodborne illness in the United States is extensive and expensive. Foodborne
diseases cause about 76 million illnesses, 325,000 hospitalizations, and
5,000 deaths annually. In terms of medical costs and productivity losses,
illness from just the five principal foodborne pathogens alone costs the
nation about $7 billion annually, according to USDA?s estimates.

USDA?s meat and poultry inspection system does not efficiently and
effectively use its resources to protect the public from foodborne illness.
USDA?s system is hampered by inflexible legal requirements and relies on

outdated, labor- intensive inspection methods. Under current law, each of
the over 8 billion livestock and bird carcasses slaughtered annually must be
inspected. Further, USDA?s Food Safety and Inspection Service (FSIS) states
that current law requires it to inspect each of the approximately 6,000
processing plants at least once during each operating shift. While these
inspections consume most of FSIS?s budget ($ 712 million and 9,700

staff- years), they are unable to detect microbial contamination, such as
listeria, E. coli, and salmonella. While USDA has increased its microbial
testing, it has not been successful in implementing regulatory changes in
inspection practices- inspectors still rely on their sense of sight, smell,
and

touch to make judgments about disease conditions, contamination, and
sanitation.

Legislative revisions could allow FSIS to emphasize risk- based inspections.
Much of the funding used to fulfill current meat and poultry inspection
activities could be redirected to support more effective food safety
initiatives, such as increasing the frequency of inspections at high- risk
food plants. CBO agrees that this option could potentially yield savings,
but

cannot develop an estimate until specific proposals are identified. Related
GAO Products Food Safety: Opportunities to Redirect Federal Resources and
Funds Can

Enhance Effectiveness (GAO/ RCED- 98- 224, Aug. 6, 1998).

Food Safety: Risk- Based Inspections and Microbial Monitoring Needed for
Meat and Poultry (GAO/ RCED- 94- 192, Sept. 26, 1994).

Food Safety and Quality: Uniform Risk- based Inspection System Needed to
Ensure Safe Food Supply (GAO/ RCED- 92- 152, June 26, 1992). GAO Contacts
Bob Robinson, (202) 512- 3841

Larry Dyckman, (202) 512- 3841

Prevent States from Using Illusory Approaches to Shift Medicaid Program
Authorizing committees Finance (Senate)

Costs to the Federal

Energy and Commerce (House) Appropriations subcommittees Labor, Health and
Human Services,

Government

Education and Related Agencies (Senate and House)

Primary agency Department of Health and Human Services Account Grant to
States for Medicaid (75- 0512) Spending type Direct Budget subfunction 551/
Health care services Framework theme Redefine beneficiaries

Since 1993, we have reported on a number of state financing schemes that
inappropriately shift Medicaid costs to the federal government. In an early
report, we documented that Michigan, Texas, and Tennessee used illusory
financing approaches to obtain about $800 million in federal Medicaid funds
without effectively committing their share of matching funds. Under these
approaches, facilities that received increased Medicaid payments from the
states, in turn, paid the states almost as much as they received.

Consequently, the states realized increased revenue that was used to reduce
their state Medicaid contributions, fund other health care needs, and
supplement general revenue funding. For the period from fiscal year 1991 to
fiscal year 1995, Michigan alone reduced its share of Medicaid costs by
almost $1. 8 billion through financing partnerships with medical providers
and local units of government. Our analysis of Michigan?s

transactions showed that even though legislation curtailed certain creative
financing practices, the state was able to reduce its share of Medicaid
costs at the expense of the federal government by $428 million through other
mechanisms. We subsequently reported on similar schemes involving state
psychiatric hospitals and local government facilities, such as county
nursing homes. The state schemes that involve excessive federal payments
have been restricted by (1) the Omnibus Budget Reconciliation Act of 1993
that limits such payments to unreimbursed Medicaid and uninsured costs for
state- owned facilities, (2) the Balanced Budget Act of 1997 that further
limits Medicaid payments to state psychiatric hospitals, and (3) the
Medicare, Medicaid, and State Children?s Health Insurance Program

Benefits Improvement and Protection Act of 2000 (BIPA), 11 which mandated
that the Health Care Financing Administration (HCFA) issue regulations to
curtail financing schemes involving excessive payments to

local government providers. 12 Despite these legislative and regulatory
restrictions, states continue to develop schemes to draw down federal
Medicaid payments that grossly exceed costs. Moreover, the Centers for
Medicare and Medicaid Services (formerly HCFA) do not verify that such
moneys are used for the purposes for which they were obtained. We believe
that the Medicaid program should not allow states to benefit from illusory
arrangements and that Medicaid funds should only be used to help cover the
costs of medical care incurred by those medical facilities that provide care
to Medicaid beneficiaries. We believe the Congress

should continue its legislative efforts to minimize the likelihood that
states can develop arrangements that claim excessive federal Medicaid
payments and that inappropriately shift Medicaid costs to the federal
government. Specifically, the Congress should consider legislation that
would prohibit Medicaid payments that exceed costs to any government- owned
facility. Savings are difficult to estimate for this option because national
data on

these practices are not readily available. In addition, Medicaid spending is
influenced by the use of waivers from federal requirements, which allows
states to alter Medicaid financing formulas. Future requests and use of
waivers by states are uncertain.

Related GAO Products Medicaid: State Financing Schemes Again Drive Up
Federal Payments (GAO/ T- HEHS- 00- 193, Sept. 6, 2000).

Medicaid: Managed Care and Individual Hospital Limits for Disproportionate
Share Hospital Payments (GAO/ HEHS- 98- 73R, Jan. 28, 1998).

Medicaid: Disproportionate Share Payments to State Psychiatric Hospitals
(GAO/ HEHS- 98- 52, Jan. 23, 1998).

11 P. L. 106- 554. 12 See 42 C. F. R. sect.sect. 447.272; 447.304; 447.321.

Medicaid: Disproportionate Share Hospital Payments to Institutions for
Mental Disease (GAO/ HEHS- 97- 181R, July 15, 1997).

State Medicaid Financing Practices (GAO/ HEHS- 96- 76R, Jan. 23, 1996).

Michigan Financing Arrangements (GAO/ HEHS- 95- 146R, May 5, 1995).

Medicaid: States Use Illusory Approaches to Shift Program Costs to the
Federal Government (GAO/ HEHS- 94- 133, Aug. 1, 1994).

Medicaid: The Texas Disproportionate Share Program Favors Public Hospitals
(GAO/ HRD- 93- 86, Mar. 30, 1993).

GAO Contact William J. Scanlon, (202) 512- 7114

Create a Uniform Federal Mechanism for Food Safety

Authorizing committees Agriculture, Nutrition, and Forestry (Senate)
Agriculture (House) Energy and Commerce (House)

Appropriations subcommittees Agriculture, Rural Development, and Related
Agencies (Senate) Agriculture, Rural Development, Food and Drug
Administration, and Related Agencies (House) Primary agency Department of
Agriculture Accounts Multiple Spending type Discretionary Budget subfunction
554/ Consumer and occupational health and

safety Framework theme Improve efficiency

A multitude of agencies oversee food safety, with two agencies accounting
for most federal spending on, and regulatory responsibilities for, food
safety. The Food Safety and Inspection Service (FSIS), under USDA, is
responsible for the safety of meat, poultry, eggs, and some egg products,

while the Food and Drug Administration (FDA), under HHS, is responsible for
the safety of most other foods. The current food safety system emerged from
a patchwork of often archaic laws and grew into a structure that actually
hampers efforts to address existing and emerging food safety risks.
Moreover, the current regulatory framework addresses only a segment-
primarily food processing- of the continuum of activities that bring food
from the farm to the table. Finally, scientific and technical advances in
the production of food, such as the

development of genetically modified foods, have further complicated the
responsibilities of the existing federal food safety structure. Indeed, the
current food safety system suffers from gaps, overlapping and duplicative
inspections, poor coordination, and inefficient allocation of resources.

The Congress could consider the following options to improve the
effectiveness and efficiency of the federal food safety system and ensure a
comprehensive farm- to- table approach- one that starts with growers and
extends to retailers. One option would be to consolidate federal food safety
agencies and activities under a single, independent, risk- based food

safety agency responsible for administering a uniform set of laws. A second
option would be to consolidate food safety activities in an existing
department, such as USDA or HHS. CBO agrees that these options could
potentially yield savings, but did not develop savings estimates due to the
uncertainty of the extent to which improved efficiencies actually led to
budgetary savings.

Related GAO Products Food Safety: CDC Is Working to Address Limitations in
Several of Its Foodborne Surveillance Systems (GAO- 01- 973, Sept. 7, 2001).

Food Safety: Federal Oversight of Shellfish Safety Needs Improvement (GAO-
01- 702, July 9, 2001).

Food Safety: Overview of Federal and State Expenditures (GAO- 01- 177, Feb.
20, 2001).

Food Safety: Federal Oversight of Seafood Does Not Sufficiently Protect
Consumers (GAO- 01- 204, Jan. 31, 2001).

Food Safety: Actions Needed by USDA and FDA to Ensure That Companies
Promptly Carry Out Recalls (GAO/ RCED- 00- 195, Aug. 17, 2000).

Food Safety: Improvements Needed in Overseeing the Safety of Dietary
Supplements and ?Functional Foods? (GAO/ RCED- 00- 156, July 11, 2000).

Meat and Poultry: Improved Oversight and Training Will Strengthen New Food
Safety System (GAO/ RCED- 00- 16, Dec. 8, 1999).

Food Safety: Agencies Should Further Test Plans for Responding to Deliberate
Contamination (GAO/ RCED- 00- 3, Oct. 27, 1999).

Food Safety: U. S. Needs a Single Agency to Administer a Unified, RiskBased
Inspection System (GAO/ T- RCED- 99- 256, Aug. 4, 1999).

Food Safety: Opportunities to Redirect Federal Resources and Funds Can
Enhance Effectiveness (GAO/ RCED- 98- 224, Aug. 6, 1998).

Food Safety: Federal Efforts to Ensure the Safety of Imported Foods Are
Inconsistent and Unreliable (GAO/ RCED- 98- 103, Apr. 30, 1998).

Food Safety: Changes Needed to Minimize Unsafe Chemicals in Food (GAO/ RCED-
94- 192, Sept. 26, 1994).

Food Safety and Quality: Uniform Risk- based Inspection System Needed to
Ensure Safe Food Supply (GAO/ RCED- 92- 152, June 26, 1992). GAO Contacts
Bob Robinson, (202) 512- 3841

Lawrence J. Dyckman, (202) 512- 3841

Convert Public Health Service Commissioned Corps Officers to Civilian Status

Authorizing committees Health, Education, Labor and Pensions (Senate) Energy
and Commerce (House) Appropriations subcommittees Labor, Health and Human
Services,

Education, and Related Agencies (Senate and House) Primary agency Department
of Health and Human Services Account Multiple Spending type Discretionary/
Direct Budget subfunction 551/ Health care services Framework theme Improve
efficiency The Commissioned Corps of the Public Health Service (PHS) was
established in the late 1800s to provide medical care to sick and injured

merchant seamen. Over the ensuing years, the Corps? responsibilities have
grown, and Corps officers today are involved in a wide range of PHS
programs, such as providing medical care to Native Americans at tribal and
Indian Health Service facilities; providing psychiatric, medical, and other
services in federal prisons; and participating in health sciences research.

As the result of their temporary service with the armed forces during World
Wars I and II, members of the Corps were authorized to assume military ranks
and receive military- like compensation, including retirement eligibility
(at any age) after 20 years of service. Corps officers continue to receive
virtually the same pay and benefits as military officers, including

retirement. The functions of the Corps are essentially civilian in nature,
and some civilian PHS employees carry out the same functions as Corps
members. Further,

 the Corps has not been incorporated into the armed forces since 1952;

 generally, the Corps does not meet the criteria and principles cited in a
DOD report as justification for the military compensation system; and

 other than Corps officers who are detailed to the Coast Guard and DOD,
Corps members are not subject to the Uniform Code of Military Justice, which
underlies how military personnel are managed.

Corps officials maintain that uniformed Corps members are needed as mobile
cadres of professionals who can be assigned with little notice to any
location and function, often in hazardous or harsh conditions. However,
other agencies, such as the Environmental Protection Agency, the National
Transportation Safety Board, and the Federal Emergency Management Agency,
use civilian employees to respond quickly to disasters and other emergency
situations that could involve both hazardous and harsh conditions.

Based on 1994 costs, when all of the components of personnel costs-
including basic pay and salaries; special pay, allowances, and bonuses;
retirement; health care; life insurance; and Corps members? tax advantages-
were considered, PHS personnel costs could have been

reduced by converting the PHS Corps to civilian status. Any decision to
convert the Corps could be implemented in a number of ways to address a
variety of transition issues. For example, all officers with a specific
number of years in the Corps could be allowed to continue until retirement

or other separation, while all new entrants would be required to be civilian
employees.

Although CBO estimates that converting officers with fewer than 15 years of
service to civilian status would result in a net cost to the federal
government during the initial 5- year estimation period, it agrees that
annual savings of millions of dollars would continue to grow as new entrants
were

hired at a lower cost than PHS Corps recruits. Related GAO Products Federal
Personnel: Public Health Service Commissioned Corps Officers? Health Care
for Native Americans (GAO/ GGD- 97- 111BR, Aug. 27, 1997).

Federal Personnel: Issues on the Need for the Public Health Service?s
Commissioned Corps (GAO/ GGD- 96- 55, May 7, 1996).

GAO Contact J. Christopher Mihm, (202) 512- 6806

Control Provider Enrollment Fraud in Medicaid

Authorizing committees Finance (Senate) Energy and Commerce (House)

Appropriations subcommittees Labor, Health and Human Services, Education and
Related Agencies (Senate and House)

Primary agency Department of Health and Human Services Account Grants to
States for Medicaid (75- 0512) Spending type Direct Budget subfunction 551/
Health care services Framework theme Improve efficiency

Recent investigations of fraud in the California Medicaid program, which
could exceed $1 billion in program losses, involve cases in which closer
scrutiny would have raised questions about the legitimacy of the providers

involved. State Medicaid programs are responsible for processing millions of
providers? claims each year, making it impossible to perform detailed checks
on a significant portion of them. While most providers bill appropriately,
states need enrollment procedures to help prevent entry into Medicaid by
providers intent on committing fraud. Preventing such providers from billing
the program is more efficient than attempted recovery once payments have
already been made. Our July 2000 testimony highlighted several Medicaid
programs that have comprehensive procedures to check the legitimacy of
providers before they can bill the program. These states check that a
provider has a valid

license (if required) and no criminal record, has not been excluded from
other federal health programs, and practices from a legitimate business
location. However, only nine states report that they conduct all of these
checks. In addition, we found that many states poorly control provider
billing numbers. They either allow providers to bill indefinitely or fail to
cancel inactive numbers. Since billing numbers are necessary to submit
claims, poor control of them may allow fraudulent providers to obtain

other providers? numbers and bill the program inappropriately. At present,
the federal government has no uniform or minimum requirements in approving
providers? applications. As a result, we believe that it would be beneficial
for the Centers for Medicare and Medicaid

Services (CMS)- the agency formerly called the Health Care Financing
Administration (HCFA)- to assist states in developing effective provider
enrollment procedures. If states could limit entrance of even a small

percentage of dishonest providers by adopting such procedures, future
Medicaid costs would be reduced substantially. CMS currently has a work
group that is considering options for a limited pilot project to study
coordinating aspects of Medicaid and Medicare provider enrollment
activities. However, CBO cannot develop an estimate of the savings for this
option until specific strategies are identified. Moreover, savings would be
net of the additional resources required to implement such procedures.

Related GAO Products Medicaid: State Efforts to Control Improper Payment
Vary (GAO- 01- 662, June 7, 2001).

Medicaid: HCFA and States Could Work Together to Better Ensure the Integrity
of Providers (GAO/ T- HEHS- 00- 159, July 18, 2000).

Medicaid: Federal and State Leadership Needed to Control Fraud and Abuse
(GAO/ T- HEHS- 00- 30, Nov. 9, 1999).

Health Care: Fraud Schemes Committed by Career Criminals and Organized
Criminal Groups and Impact on Consumers and Legitimate Health Care Providers
(GAO/ OSI- 00- 1R, Oct. 5, 1999). Medicaid Fraud and Abuse: Stronger Action
Needed to Remove Excluded

Providers From Federal Health Programs (GAO/ HEHS- 97- 63, Mar. 31, 1997).

Fraud and Abuse: Providers Excluded From Medicaid Continue to Participate in
Federal Health Programs (GAO/ T- HEHS- 96- 205, Sept. 5, 1996).

Prescription Drugs and Medicaid: Automated Review Systems Can Help Promote
Safety, Save Money (GAO/ AIMD- 96- 72, June 11, 1996). GAO Contact William
J. Scanlon, (202) 512- 7114

570 Medicare Reassess Medicare Incentive Payments in Health Care Shortage
Areas Adjust Medicare Payment Allowances to Reflect Changing Technology,
Costs, and Market Prices Increase Medicare Program Safeguard Funding
Continue to Reduce Excess Payments to Medicare+ Choice Health Plans Modify
the Skilled Nursing Facility Payment Method to Ensure Appropriate Payments
Implement Risk- Sharing in Conjunction with Medicare Home Health Agency
Prospective Payment System

Eliminate Medicare Competitive Sourcing Restrictions Change Pricing Formula
for Medicare- Covered Drugs

Reassess Medicare Incentive Payments in Health Care Shortage Areas

Authorizing committees Finance (Senate) Ways and Means (House)

Appropriations subcommittees Labor, Health and Human Services, Education and
Related Agencies (Senate and House)

Primary agency Department of Health and Human Services Account Federal
Supplemental Insurance Trust Fund Account (20- 8004)

Spending type Direct Budget subfunction 571/ Medicare Framework theme
Reassess objectives The Medicare Incentive Payment program was established
in 1987 amid concerns that low Medicare reimbursement rates for primary care
services cause access problems for Medicare beneficiaries in underserved
areas.

The program pays physicians a 10- percent bonus payment for Medicare
services they provide in areas identified by the Department of Health and
Human Services as having a shortage of primary care physicians. In 1997,
bonus payments paid from the Medicare Supplemental Medical Insurance trust
found amounted to over $90 million.

This program, however, may not be the most appropriate means of addressing
medical underservice.

 The need for this program may have changed; since 1987 the Congress
generally increased reimbursement rates for primary care services and
reduced the geographic variation in physician reimbursement rates. In
addition, recent surveys of Medicare beneficiaries who have access problems,
including those who may live in underserved areas, generally

cite reasons other than the unavailability of a physician- such as the cost
of services not paid by Medicare- for their access problems.

 The relatively small bonus payments most physicians receive- a median
payment of $341 for the year in 1996- are unlikely to have a significant
impact on physician recruitment and retention.

 Specialists receive most of the program dollars, even though primary care
physicians have been identified as being in short supply, while shortages of
specialists, if any, have not been determined.

 The program provides no incentives or assurances that physicians receiving
bonuses will actually treat people who have problems obtaining health care.

 Centers for Medicare and Medicaid Services-- formerly the Health Care
Financing Administration-- oversight of the program also has limitations
that allow physicians and other providers to receive and retain bonus
payments claimed in error.

HHS has acknowledged problems in the program and agrees that making
incentive payments to specialists in urban areas appears to be unnecessary.
The department has stated that it is clear that certain structural changes
to

this program are necessary to better target incentive payments to rural
areas with the highest degree of shortage.

If the Congress determines that this program is not an appropriate vehicle
for addressing medical underservice, then termination is a reasonable
option. However, if it is decided to continue the program, then the Congress
could consider reforms that clarify the program?s intent and better
structure the program to link limited federal funds to intended outcomes.
For example, if the program?s intent is to improve access to primary care
services in underserved rural areas, the bonus payments should be limited to
physicians providing primary care services to

underserved populations in rural areas with the greatest need. Better
targeting of the payments and evaluations would also be needed to provide
assurances that the payments are achieving their intended outcomes. The
savings estimate that follows assumes that the Congress eliminates the
additional 10- percent payment for services delivered in urban and rural
HPSAs beginning in fiscal year 2001.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 funding level Budget authority 110 120 125 130 140
Outlays 110 120 125 130 140 Source: Congressional Budget Office. Note:
Estimate includes HMO interaction and is net of Part B premium effects.

Related GAO Products Physician Shortage Areas: Medicare Incentive Payments
Not an Effective Approach to Improve Access (GAO/ HEHS- 99- 36, Feb. 26,
1999).

Health Care Shortage Areas: Designations Not a Useful Tool for Directing
Resources to the Underserved (GAO/ HEHS- 95- 200, Sept. 8, 1995). GAO
Contact William J. Scanlon, (202) 512- 7114

Adjust Medicare Payment Allowances to Reflect Changing Technology, Costs,
and

Authorizing committees Finance (Senate) Energy and Commerce (House)

Market Prices Ways and Means (House) Appropriations subcommittees Labor,
Health and Human Services,

Education and Related Agencies (Senate and House)

Primary agency Department of Health and Human Services Account Federal
Supplementary Medical Insurance Trust Fund (20- 8004)

Spending type Direct Budget subfunction 571/ Medicare Framework theme
Improve efficiency

Medicare?s supplementary medical insurance program (Medicare Part B) allowed
almost $6 billion for durable medical equipment, supplies, prosthetics,
orthotics, enteral and parenteral nutrition, and outpatient drugs in 1998.
For most medical equipment and supplies, Medicare payments are primarily
based on historical charges, indexed forward, rather than current costs or
market prices. For example, the Medicare payments for such items as walkers,
catheters, and glucose test strips are based on supplier charges allowed in
1986 and 1987 and were adjusted for inflation each year. Beginning in 1998,
Medicare law was amended to freeze Medicare payments for medical equipment
and supplies and limit payment increases for prosthetics and orthotics to1
percent each year for 5

years. We have reported that Medicare payments for some medical equipment
and supplies are out of line with market prices. This can occur when
providers? costs for some procedures, equipment, and supplies have declined
over time as competition and efficiencies increased. For example, when
Medicare sets its payment rates for new items, the rates typically are based
on the high initial unit costs. Over time, providers? unit costs decline as
the equipment improves, utilization increases, and experience in using the
equipment results in efficiencies. In other cases, medical innovations and
advances have increased the cost of some procedures and products. However,
Medicare did not have a process to routinely and systematically review these
factors and make timely adjustments to the Medicare allowances. In fact,
through the years, the Congress has legislatively

adjusted Medicare allowances for some products and services, such as home
oxygen, clinical laboratory tests, intraocular lenses, computed tomography
scans, and magnetic resonance imaging scans. To respond to problems with
excessive payments, the Balanced Budget Act of 1997 provided the Health Care
Financing Administration (HCFA)- the agency now called the Centers for
Medicare & Medicaid Services (CMS)-

the authority to use a streamlined process for adjusting Medicare Part B
payments by up to 15 percent per year. (This revised authority does not
extend to adjusting Medicare payments for physician services.) In 1998,

HCFA issued an interim final rule with a comment period to implement the
revised process. Under the revised process, HCFA and its contractors have
each issued a notice proposing to reduce Medicare payments for different
items of medical equipment, supplies, and prosthetics. The contractors?
proposed payment reductions are based on retail prices that beneficiaries

would pay. HCFA used competitive prices paid by the VA to account for
supplier costs in proposing Medicare payment reductions. On July 2000, we
issued a report on HCFA?s and the contractors? actions to implement the
revised authority in adjusting payments. The Congress also passed
legislation requiring HCFA to publish a final rule that responds to issues
raised in GAO?s report and to public comments on the implementation of the
revised authority. The agency has not yet issued a final rule. Once the
final rule has been issued, CMS and its contractors plan to move forward

with the proposed payment reductions. An obstacle to effectively using this
new authority is that Medicare frequently does not know specifically what it
is paying for. CMS does not require suppliers to identify on Medicare claims
the specific items billed.

Instead, suppliers are required to use CMS billing codes, most of which
cover a broad range of products of various types, qualities, and market
prices. For example, one Medicare billing code is used for more than 200

different urological catheters, even though some of these catheters sell at
a fraction of the price of others billed under the same code. Unless
Medicare claims contain more product- specific information, CMS cannot track
what items are billed to ensure that each billing code is used for
comparable products. Although the health care industry is increasingly using
more specific universal product numbers and bar codes for inventory control,
CMS does not currently require suppliers to use these identifiers on

Medicare claims. CMS is exploring the use of universal product numbers as a
way to improve Medicare?s ability to pay for medical equipment and supplies.
In September

1999, HCFA awarded a 1- year contract to an outside consultant to gather
information on universal product numbers and determine how they could be
integrated into the Medicare claims processing system. CBO is also
collecting data on a Universal Product Code- based payment system and is
unable to provide saving estimates at this time.

There are a number of other options that could also help bring Medicare
allowances more in line with actual costs and market prices. For example,
the Congress authorized HCFA to implement competitive bidding demonstrations
for some Part B services and supplies (except for physician services). In
1998, HCFA announced plans for the first competitive bidding demonstration
project in Polk County, Florida. In the spring of 1999, HCFA selected
competing suppliers to provide, at reduced Medicare payment rates, oxygen
supplies, hospital beds, surgical dressings, enteral nutrition equipment and
supplies, and urological supplies. When the local payment rates took effect
for these items in October 1999 (and will remain in effect for 2 years),
HCFA achieved a 17- percent reduction in Medicare payments on average. In
2000, HCFA began a second competitive bidding demonstration project in three
counties near San Antonio, Texas for

oxygen supplies, hospital beds, manual wheelchairs, non- customized orthotic
devices (such as braces and splints), and nebulizer inhalation drugs. The
new payment rates for these items, which are on average 20 percent below
existing Medicare rates for Texas, will be in effect from February 1, 2001
through December 31, 2002.

These projects may eventually bring some Medicare payment rates more in line
with actual costs and market rates, but none of these projects specifically
targets expensive, evolving technologies. We believe significant program
savings would result from an ongoing, systematic process for evaluating the
reasonableness of Medicare payment rates for

new medical technologies as those technologies mature. Another approach for
paying more appropriately for medical equipment and supplies is basing
Medicare payments on the lower of the fee schedule allowance or the lowest
amount a provider has agreed to accept from other

payers. CMS would need legislative authority to pursue this option. Yet
another approach is to develop separate fee schedules that distinguish
between wholesale and retail acquisition to ensure that large suppliers do
not receive inappropriately large Medicare reimbursements. While the CBO
agrees that aligning Medicare allowances with costs and market prices could
yield savings, it cannot develop an estimate until CMS has completed its
demonstration projects and implemented specific proposals.

Related GAO Products Medicare Payments: Use of Revised ?Inherent
Reasonableness? Process Generally Appropriate (GAO/ HEHS- 00- 79, July 5,
2000).

Medicare: Access to Home Oxygen Largely Unchanged; Closer HCFA Monitoring
Needed (GAO/ HEHS- 99- 56, Apr. 5, 1999.)

Medicare: Progress to Date in Implementing Certain Major Balanced Budget Act
Reforms (GAO/ T- HEHS- 99- 87, Mar. 17, 1999).

Medicare: Need to Overhaul Costly Payment System for Medical Equipment and
Supplies (GAO/ HEHS- 98- 102, May 12, 1998).

Medicare: Home Oxygen Program Warrants Continued HCFA Attention (GAO/ HEHS-
98- 17, Nov. 7, 1997).

Medicare: Problems Affecting HCFA?s Ability to Set Appropriate Reimbursement
Rates for Medical Equipment and Supplies (GAO/ HEHS97- 157R, June 17, 1997).

Medicare: Comparison of Medicare and VA Payment Rates for Home Oxygen (GAO/
HEHS- 97- 120R, May 15, 1997).

Medicare Spending: Modern Management Strategies Needed to Curb Billions in
Unnecessary Payments (GAO/ HEHS- 95- 210, Sept. 19, 1995).

Medicare High Spending Growth Calls for Aggressive Action (GAO/ THEHS- 95-
75, Feb. 6, 1995).

Medicare: Excessive Payments Support the Proliferation of Costly Technology
(GAO/ HRD- 92- 59, May 27, 1992). GAO Contact William J. Scanlon, (202) 512-
7114

Increase Medicare Program Safeguard Funding

Authorizing committees Finance (Senate) Energy and Commerce (House) Ways and
Means (House)

Appropriations subcommittees Labor, Health and Human Services, Education and
Related Agencies (Senate and House)

Primary agency Department of Health and Human Services Accounts Federal
Hospital Insurance Trust Fund (208005)

Federal Supplementary Medical Insurance Trust Fund (20- 8004) Program
Management (75- 0511) Spending type Discretionary/ Direct Budget subfunction
571/ Medicare Framework theme Improve efficiency

Medicare program safeguard activities designed to combat fraud, waste, and
abuse have historically returned about $10 in savings for each dollar spent,
and HCFA has reported a return of $15 for each dollar spent in fiscal year
1999. These types of activities include pre- and post- payment medical

review of claims to determine if services are medically necessary and
appropriate, audits, and fraud unit investigations. The Health Insurance
Portability and Accountability Act of 1996 established the Medicare

Integrity Program (MIP) and provided HCFA- the agency now called the Centers
for Medicare & Medicaid Services- with increased funding for program
safeguard activities. CBO estimated a net savings of over $3 billion from
these increased resources given to HCFA, as well as other resources given to
the HHS Office of Inspector General and the Federal Bureau of Investigation
to identify and pursue individuals or entities that defraud federal health
care programs. As we recently reported, CMS has taken a number of actions
under MIP to promote more efficient and effective

contractor safeguard operations. However, measuring the effectiveness of its
actions is difficult because funding levels rose so recently and because the
agency does not have the kind of data needed to measure the effectiveness of
its efforts. While funding has increased, in 2002 it will still remain below
program

safeguard funding levels in the previous decade, adjusted for inflation.

Comparing program safeguard expenditures from fiscal years 1995 through
1998- 2 years before and after MIP implementation- shows that expenditures
increased by more than one- quarter to $544.6 million.

However, in constant 1998 dollars, the amount spent on program safeguards
per claim processed is still almost one- third less than was spent in fiscal
year 1989. Further, the combined effects of increased claims volume of 3 to
5 percent annually in recent years and inflation will erode part of the
benefits of increased funding authorized for future years. For example,
appropriated fiscal year 2002 funding of $700 million, adjusted for
inflation and claims growth, is expected to be about 10 percent below the

1991 through 1996 average. In response to reduced resources, contractors
apply fewer or less stringent payment controls resulting in payment of
claims that otherwise would not be paid.

We believe that additional program safeguard funding might better protect
Medicare from erroneous payments and yield net savings. As a result, we
recently suggested that the Congress consider increasing the agency?s MIP
funds to allow an expansion of postpayment and other effective program
safeguard activities. However, CMS needs a better understanding of costs and
savings from particular activities- such as desk reviews and cost audits. It
also needs to consistently code savings from different activities

to understand their relative value, as well as determine which contractors
are realizing the highest return on investment from their program safeguard
activities. Therefore, we also recommended that HCFA evaluate the
effectiveness of prepayment and postpayment activities to determine the
relative benefits of various safeguards. CBO did not prepare a savings
estimate for this option because it does not estimate changes in direct
spending due to changes in discretionary

spending. Related GAO Products Medicare: Opportunities and Challenges in
Contracting for Program

Safeguards (GAO- 01- 616, May 18, 2001).

Major Management Challenges and Program Risks: Department of Health and
Human Services (GAO- 01- 247, Jan. 2001).

Medicare: HCFA Could Do More to Identify and Collect Overpayments (GAO/
HEHS/ AIMD- 00- 304, Sept. 7, 2000).

Medicare: Health Care Fraud and Abuse Control Program Financial Reports for
Fiscal Years 1998 and 1999 (GAO/ AIMD- 00- 257R, July 31, 2000).

Medicare Contractors: Further Improvement Needed in Headquarters and
Regional Office Oversight (GAO/ HEHS- 00- 46, Mar. 23, 2000).

Medicare: Program Safeguard Activities Expand, but Results Difficult to
Measure (GAO/ HEHS- 99- 165, Aug. 4, 1999).

Medicare Contractors: Despite Its Efforts, HCFA Cannot Assure Their
Effectiveness or Integrity (GAO/ HEHS- 99- 115, July 14, 1999).

Medicare: Improprieties by Contractors Compromised Medicare Program
Integrity (GAO/ OSI- 99- 7, July 14, 1999).

Medicare: Fraud and Abuse Control Pose a Continuing Challenge (GAO/ HEHS-
98- 215R, July 15, 1998).

Medicare: Health Care Fraud and Abuse Control Program Financial Report for
Fiscal Year 1997 (GAO/ AIMD- 98- 157, June 1, 1998).

Medicare: HCFA?s Use of Anti- Fraud- and- Abuse Funding and Authorities
(GAO/ HEHS- 98- 160, June 1, 1998).

Medicare: Improper Activities by Mid- Delta Home Health (GAO/ OSI- 98- 5,
Mar. 12, 1998).

Medicare Home Health: Success of Balanced Budget Act Cost Controls Depends
on Effective and Timely Implementation (GAO/ T- HEHS- 98- 41, Oct. 29,
1997).

Medicare: Recent Legislation to Minimize Fraud and Abuse Requires Effective
Implementation (GAO/ T- HEHS- 98- 9, Oct. 9, 1997).

Medicare Fraud and Abuse: Summary and Analysis of Reform in the Health
Insurance Portability and Accountability Act of 1996 and the Balanced Budget
Act of 1997 (GAO/ HEHS- 98- 18R, Oct. 9, 1997).

Medicare: Control Over Fraud and Abuse Remains Elusive (GAO/ THEHS- 97- 165,
June 26, 1997).

Nursing Homes: Too Early to Assess New Efforts to Control Fraud and Abuse
(GAO/ T- HEHS- 97- 114, Apr. 16, 1997).

Medicare: Inherent Program Risks and Management Challenges Require Continued
Federal Attention (GAO/ T- HEHS- 97- 89, Mar. 4, 1997).

Medicare (GAO/ HR- 97- 10, Feb. 1997).

Funding Anti- Fraud and Abuse Activities (GAO/ HEHS- 95- 263R, Sept. 29,
1995). Medicare: High Spending Growth Calls for Aggressive Action (GAO/ T-
HEHS- 95- 75, Feb. 6, 1995).

Medicare Claims (GAO/ HR- 95- 8, Feb. 1995).

Medicare: Adequate Funding and Better Oversight Needed to Protect Benefit
Dollars (GAO/ T- HRD- 94- 59, Nov. 12, 1993).

Medicare: Further Changes Needed to Reduce Program and Beneficiary Costs
(GAO/ HRD- 91- 67, May 15, 1991). Medicare: Cutting Payment Safeguards Will
Increase Program Costs (GAO/ T- HRD- 89- 06, Feb. 28, 1989).

Medicare and Medicaid: Budget Issues (GAO/ T- HRD- 87- 1, Jan. 29, 1987).
GAO Contact William J. Scanlon, (202) 512- 7114

Continue to Reduce Excess Payments to Medicare+ Choice Health Plans

Authorizing committees Finance (Senate) Commerce (House) Ways and Means
(House) Appropriations subcommittees Labor, Health and Human Services,

Education and Related Agencies (Senate and House)

Primary agency Department of Health and Human Services Account Federal
Supplementary Medical Insurance Trust Fund (20- 8004)

Spending type Direct a Budget subfunction 571/ Medicare Framework theme
Improve efficiency a A small portion of this option includes administrative
expenses that are discretionary in nature.

The Balanced Budget Act of 1997 (BBA) created the Medicare+ Choice program
to encourage the wider availability of health maintenance organizations
(HMO) and permit other types of health plans, such as preferred provider
organizations, to participate in Medicare. BBA also

modified the methodology used to pay plans, in part because the government
was paying more to cover beneficiaries in managed care than it would have
spent if these individuals had remained in the traditional feefor-

service program. Since BBA was enacted, a substantial number of HMOs have
partially or completely withdrawn from Medicare or announced that they will
do so at the end of December 2001. Industry representatives have cited
inadequate Medicare payment rates and regulatory burdens as primary reasons
for the withdrawals. To address the HMOs? concerns, the Balanced Budget
Refinement Act of 1999( BBRA) and the Benefits Improvement and Protection
Act of 2000 (BIPA) moderated some of BBA?s payment reforms and introduced
new incentives for plan participation in the Medicare+ Choice program.

Our recent reports found that (1) HMO withdrawals were associated with many
factors, including competitive market forces and the inherent difficulty
HMOs have operating cost effectively in sparsely populated areas, and (2)
1998 payments to HMOs exceeded by an estimated $3.2 billion the amount that
Medicare would have spent to serve HMO enrollees in the traditional fee-
for- service program. These excess payments occurred because HMO payment
rates are largely determined by the cost of serving

the average beneficiary while HMOs tend to attract a favorable selection of
healthier- than- average beneficiaries with lower expected health care
costs. We have has also reported that Medicare?s administratively determined
payment formula for HMOs does not harness competitive market forces.
Competition among Medicare HMOs for market share may result in improved
benefits packages or reduced fees charged to beneficiaries, but it does not
produce program savings. We have suggested that Medicare pursue the
following strategies to address the problem of excess payments and help save
the government money when Medicare beneficiaries enroll in HMOs.

 Implement a risk adjustment method that uses comprehensive data to adjust
payment rates on the basis of a beneficiary?s expected annual health care
costs. BBA mandated that the Secretary of Health and Human Services
implement a health- based risk adjuster. In 2000, Medicare began to phase in
an interim method based on inpatient hospital data only. This method, if
fully implemented, would have reduced HMO payments by about 5. 9 percent, or
about half of the $3. 2 billion in excess payments caused by favorable
selection in 1998. However, BBRA and BIPA slowed the implementation of the
interim adjuster and mandated additional studies on risk adjustment methods.

 Shift to a system in which Medicare+ Choice rates are competitively
determined. Competitive bidding demonstrations were mandated by BBA, but
provisions in BBRA will delay implementation of such demonstrations until at
least January 1, 2002. CBO agrees that savings are possible if the above
strategies are followed,

but savings would depend on the interactions between price and enrollment
changes. Consequently, CBO cannot estimate savings for this option without a
more specific proposal.

Related GAO Products Medicare+ Choice: Plan Withdrawals Indicate Difficulty
of Providing Choice While Achieving Savings (GAO/ HEHS- 00- 183, Sept. 7,
2000).

Medicare+ Choice: Payments Exceed Cost of Fee- for- Service Benefits, Adding
Billions to Spending (GAO/ HEHS- 00- 161, Aug. 23, 2000).

Medicare: Better Information Can Help Ensure That Refinements to BBA Reforms
Lead to Appropriate Payments (GAO/ T- HEHS- 00- 14, Oct. 1, 1999).

Medicare+ Choice: Reforms Have Reduced, but Likely Not Eliminated, Excess
Plan Payments (GAO/ HEHS- 99- 144, June 18, 1999).

Medicare+ Choice: Impact of 1997 Balanced Budget Act Payment Reforms on
Beneficiaries and Plans (GAO/ T- HEHS- 99- 137, June 9, 1999).

Medicare Managed Care: Better Risk Adjustment Expected to Reduce Excess
Payments Overall While Making Them Fairer to Individual Plans (GAO/ T- HEHS-
99- 72, Feb. 25, 1999).

Medicare HMOs: Setting Payment Rates Through Competitive Bidding (GAO/ HEHS-
97- 154R, June 12, 1997). GAO Contact William J. Scanlon, (202) 512- 7114

Modify the New Skilled Nursing Facility Payment Method to Ensure Appropriate

Authorizing committees Finance (Senate) Ways and Means (House)

Payments

Energy and Commerce (House) Appropriations subcommittees Labor, Health and
Human Services,

Education and Related Agencies (Senate and House)

Primary agency Department of Health and Human Services Account Federal
Hospital Insurance Trust Fund (208005)

Spending type Direct Budget subfunction 571/ Medicare Framework theme
Improve efficiency

The Balanced Budget Act mandated the implementation of a prospective payment
system (PPS) for skilled nursing facilities (SNF) to help address concerns
about dramatic growth in Medicare spending for these services. A PPS
provides incentives to deliver services efficiently by paying providers-
regardless of their costs- fixed, predetermined rates that vary according to
expected patient service needs. The Health Care Financing

Administration (HCFA), now called the Centers for Medicare and Medicaid
Services (CMS), began phasing in such a system for SNFs in July 1998.
However, problems with the design of the PPS, the services excluded from the
daily rate, inadequate data used to establish rates, and inadequate planned
oversight of claims for payment could compromise Medicare?s

ability to stem spending growth while maintaining beneficiary access. We are
concerned that the PPS preserves the opportunity for providers to increase
their compensation by supplying potentially unnecessary services, such as
additional therapy services, or by increasing length of stay. In addition,
services that have been excluded from the daily rate, and are paid for
separately, may encourage service provision and unnecessarily increase
Medicare spending. For example, some services are excluded only when

provided in hospital outpatient departments, which may encourage providers
to use this setting when other, less costly ambulatory settings could be
appropriate. Furthermore, the payment rates were computed

using data that may overstate the reasonable cost of providing care and may
not appropriately reflect the differences in costs for patients with
different care needs. In addition, as part of the system, Medicare appears

to have changed the process for determining eligibility for the Medicare SNF
benefit. Beneficiaries with certain care needs are automatically eligible
for the SNF benefit, while other beneficiaries with different care needs are
required to be reviewed to ensure that they meet the eligibility criteria.
This could expand the number of beneficiaries who will be

covered. The planned oversight of claims to determine if a beneficiary is
entitled to Medicare coverage and how much payment a SNF should receive is
insufficient, increasing the potential to compromise expected savings.

We believed that CMS should modify the SNF PPS regulations to address these
concerns. Medicare needs to ensure that the payment rates reflect only
necessary services that the facilities actually provide. It also needs to
establish a process to review the services that are included and excluded
from the PPS. Medicare should also increase its viligance over claims review
and provider oversight so that payments are appropriate and made only for
eligible beneficiaries. CBO agrees that improved payment methods and
oversight could reduce

spending. However, by convention, CBO only estimates the costs or savings of
proposals that change current law, not administrative changes. Related GAO
Products Skilled Nursing Facilities: Services Excluded From Medicare?s Daily

Rate Need to be Reevaluated (GAO- 01- 816, Aug. 22, 2001).

Nursing Homes: Aggregate Medicare Payments Are Adequate Despite Bankruptcies
(GAO/ T- HEHS- 00- 192, Sept. 5, 2000).

Skilled Nursing Facilities: Medicare Payments Changes Require Provider
Adjustments But Maintain Access (GAO/ HEHS- 00- 23, Dec. 14, 1999).

Medicare: Better Information Can Help Ensure That Refinements to BBA Reforms
Lead to Appropriate Payments (GAO/ T- HEHS- 00- 14, Oct. 1, 1999).

Skilled Nursing Facilities: Medicare Payments Need to Better Account for
Nontherapy Ancillary Cost Variation (GAO/ HEHS- 99- 185, Sept. 30, 1999).

Medicare Post- Acute Care: Better Information Needed Before Modifying BBA
Reforms (GAO/ T- HEHS- 99- 192, Sept. 15, 1999).

Balanced Budget Act: Any Proposed Fee- for- Service Payment Modifications
Need Thorough Evaluation (GAO/ T- HEHS- 99- 139, June 10, 1999).

Medicare: Progress to Date in Implementing Certain Major Balanced Budget Act
Reforms (GAO/ T- HEHS- 99- 87. Mar. 17, 1999).

Balanced Budget Act: Implementation of Key Medicare Mandates Must Evolve to
Fulfill Congressional Objectives (GAO/ T- HEHS- 98- 214, July 16, 1998).

Long- Term Care: Baby Boom Generation Presents Financing Challenges (GAO/ T-
HEHS- 98- 107, Mar. 9, 1998).

Medicare Post- Acute Care: Home Health and Skilled Nursing Facility Cost
Growth and Proposals for Prospective Payment (GAO/ T- HEHS- 97- 90, Mar. 4,
1997).

GAO Contact William J. Scanlon, (202) 512- 7114

Implement RiskSharing in Conjunction with Medicare Home Health Agency

Authorizing committees Finance (Senate) Energy and Commerce (House)

Prospective Payment

Ways and Means (House)

System

Appropriations subcommittees Labor, HHS, Education and Related Agencies
(Senate and House) Primary agency Department of Health and Human Services
Account Federal Supplementary Medical Insurance Trust Fund (20- 8004)

Spending type Direct Budget subfunction 571/ Medicare Framework theme
Improve efficiency Medicare spending for home health care rose from $3. 7
billion in 1990 to $17.8 billion in 1997- an annual growth rate of over 25
percent- making it one of the fastest growing components of the Medicare
program. This

spending growth was primarily due to more beneficiaries receiving services
and more visits provided per user, because Medicare?s cost- based payment
method reimbursed home health agencies (HHA) for each visit provided. To
control spending, the Balanced Budget Act of 1997 (BBA) required the
implementation of a prospective payment system (PPS) for home health
agencies. Beginning October 1, 2000, Medicare will pay a fixed,
predetermined amount for each 60- day episode of care, adjusted for patient
characteristics that affect the costs of providing care. Under this system,

agencies will be rewarded financially for keeping their per- episode costs
below the payment rate and thus will have a strong incentive to reduce the
number of visits provided during an episode and to shift to a less costly
mix of visits.

However, under an episode- based payment system, HHAs will have an incentive
to provide the minimum number of visits necessary to receive a full episode
payment. While the initial episode payment is based on an average of 27
visits, agencies can receive an episode payment if they provide as few as 5
visits. Agencies providing more than the average number of visits in an
episode can reduce their level of service provision below that used to
develop the episode base payment, thereby increasing profits. Conversely,
HHAs could treat beneficiaries who need only a few visits during a 60- day
period and receive the full episode payment if they pass the 5- visit
threshold. Such responses are likely, given that HHAs

historically have responded quickly to Medicare payment incentives, and
because no agreed- upon standards exist for what constitutes necessary or
appropriate home health care against which such changes could be assessed.
Because the new PPS payment rates are based on 60- day service patterns
reflecting historically high utilization levels, many HHAs will not

have trouble keeping their service provision within the episode below these
levels. In such cases, Medicare would in essence be paying for services that
were not received by its beneficiaries. In order to reduce these incentives,
the Congress could require HCFA to implement a risk- sharing arrangement, in
which total Medicare PPS

payments to an HHA are adjusted at year- end in light of the provider?s
actual costs, to mitigate any unintended consequences of the payment change.
Such an arrangement could moderate the incentive to manipulate services to
maximize profits and the uncertainties associated with payment rates that
are based on averages when so little is known about appropriate patterns of
home health care. Limiting an HHA?s losses or gains would help protect the
industry, the Medicare program, and beneficiaries from possible

negative effects of the PPS until more is known about how best to design the
PPS and the most appropriate home health treatment patterns. CBO was unable
to estimate savings for this option due to a lack of data on how home health
agencies? costs compare to the new payment rates implemented on October 1,
2000. Related GAO Products Medicare Home Health Care: Prospective Payment
System Could Reverse

Recent Declines in Spending (GAO/ HEHS- 00- 176, Sept. 8, 2000).

Medicare Home Health Care: Prospective Payment System Will Need Refinement
as Data Become Available (GAO/ HEHS- 00- 9, Apr. 7, 2000).

GAO Contact William J. Scanlon, (202) 512- 7114

Eliminate Medicare Competitive Sourcing Restrictions

Authorizing committees Finance (Senate) Ways and Means (House) Energy and
Commerce (House)

Appropriations subcommittees Labor, Health and Human Services, and Education
(Senate and House) Primary agency Department of Health and Human Services
Account Program Management (75- 0511) Spending type Discretionary Budget
subfunction Medicare (571) Framework theme Improve efficiency

Medicare is a federal health insurance program designed to assist elderly
and disabled beneficiaries. Hospital insurance, or part A, covers inpatient
hospital, skilled nursing facility, hospice care, and certain home health

services. Supplemental medical insurance, or part B, covers physician and
outpatient hospital services, laboratory and other services. Claims are paid
by a network of 49 claims administration contractors called intermediaries

and carriers. Intermediaries process claims from hospitals and other
institutional providers under part A, while carriers process part B claims.
The intermediaries? and carriers? responsibilities include reviewing and
paying claims, maintaining program safeguards to prevent inappropriate
payment, and educating and responding to provider and beneficiary

concerns. Medicare contracting for fiscal intermediaries and carriers
differs from that of most federal programs. Most federal agencies, under the
Competition in Contracting Act and its implementing regulations known as the
Federal Acquisition Regulation (FAR), generally may contract with any
qualified

entity for any authorized purpose so long as that entity is not debarred
from government contracting and the contract is not for what is essentially
a government function. The FAR generally requires agencies to conduct full
and open competition for contracts and allows contractors to earn profits
and requires contractors to perform until the end of the contract term.

The Secretary of HHS, however, is authorized to enter into contracts without
regard to federal procurement statutes under provision of the Social
Security Act enacted in 1965. For example, there is no full and open

competition for intermediary or carrier contracts. Rather, intermediaries
are selected in a process called nomination by provider associations, such
as the American Hospital Association. Because the statutory language

authorizing Medicare claims administration contracting described a set of
functions to be performed, claims administration contractors have generally
been expected to perform the full set of functions, except when the Congress
gave specific authority to contract separately for a function. The Social
Security Act also generally calls for the use of cost- based reimbursement
contracts under which contractors are reimbursed for necessary and proper
costs of carrying out Medicare activities, but does not expressly provide
for profit. Furthermore, the Medicare statute

expressly limits the government?s ability to terminate these contracts at
its convenience, while allowing the claims administration contractors to
terminate their contracts without penalty by providing the government with
180 days notice. Freeing the Medicare program to directly choose contractors
on a competitive basis from a broader array of entities able to perform
needed tasks would enable Medicare to benefit from efficiency and
performance improvements related to competition. Allowing Medicare to have
contractors specialize in specific functions rather than assume all
claimsrelated

activities, as is the case now, also could lead to greater efficiency and
better performance. If the Congress chose to lift contracting restrictions
on the Medicare program, CBO estimates that the following savings costs
would occur over the next 5 years. Five- Year Costs

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from FY 2002 baseline Budget authority 165 170 175 180 185 Outlays
165 170 175 180 185 Source: Congressional Budget Office.

Related GAO Products Medicare: Improvements Needed in Provider
Communications and Contracting Procedures (GAO- 01- 1141T, Sept. 25, 2001).

Medicare: Comments on HHS? Claims Administration Contracting Reform Proposal
(GAO- 01- 1046R, Aug. 17, 2001).

Medicare Contracting Reform: Opportunities and Challenges in Contracting for
Claims Administration Services (GAO- 01- 918T, June 28, 2001).

Medicare Contractors: Despite Its Efforts, HCFA Cannot Ensure Their
Effectiveness or Integrity (GAO/ HEHS- 99- 115, July 14, 1999). GAO Contact
Leslie G. Aronovitz, (312) 220- 7767

Change Pricing Formula for MedicareCovered Drugs

Authorizing committees Finance (Senate) Ways and Means (House) Energy and
Commerce (House)

Appropriations subcommittees Labor, Health and Human Services, Education and
Related Agencies (Senate and House)

Primary agency Department of Health and Human Services Account Federal
Supplementary Medical Insurance Trust Fund (20- 8004)

Spending type Direct Budget subfunction Medicare (571) Framework theme
Redefine beneficiaries

While Medicare does not have a comprehensive outpatient drug benefit,
certain drugs and biologicals are covered under part B of the program. In
general, drugs are covered if they cannot be self- administered and are
related to a physician?s services, such as cancer chemotherapy, or are
provided in conjunction with covered durable medical equipment. In addition,
Medicare covers selected immunizations and certain drugs that can be self-
administered, such as blood clotting factors. Medicare bases its

reimbursement to physicians and other providers of drugs on average
wholesale price (AWP). Manufacturers periodically report AWPs to publishers
of drug pricing data. Publishers of AWPs and other drug prices

stated that they list the prices as reported to them by the manufacturers.
Medicare carriers, the contractors responsible for paying part B claims, use
published AWPs to determine the Medicare- allowed payment level, which is 95
percent of the AWP.

Physicians are able to obtain Medicare- covered drugs at prices
significantly below current Medicare payments, which are set at 95 percent
of AWP. Wholesalers? and group purchasing organizations? (GPO) prices that
would

be generally available to physicians were considerably less than the AWPs
used to establish the Medicare payment for these drugs. The difference
between these prices and AWP for physician- administered drugs in a GAO
sample study varied by drug. For example, the average discount from AWP on
physician- administered drugs varied from 13 percent to 34 percent.

Medicare could achieve significant savings from the more than $3 billion
spent annually on Part B drug benefits if it reimbursed providers at levels
that reflected acquisition costs or AWP, whichever is lower. While CBO
agrees that this option would result in budgetary savings and in the past
has developed a savings estimate for this option, it was unable to develop a
savings estimate this year due to time constraints.

Related GAO Products Medicare: Payments for Covered Outpatient Drugs Exceed
Providers? Cost (GAO- 01- 1118, Sept. 21, 2001).

Medicare Part B Drugs: Program Payments Should Reflect Market Prices (GAO-
01- 1142T, Sept. 21, 2001). GAO Contact William J. Scanlon, (202) 512- 7114

600 Income Security Develop Comprehensive Return- to- Work Strategies for
People with Disabilities Revise Benefit Payments under the Federal
Employees? Compensation Act Increase Congressional Oversight of PBGC?s
Budget Share the Savings from Bond Refundings Implement a Service Fee for
Successful Non- Temporary Assistance for Needy Families Child Support
Enforcement Collections Improve Reporting of DOD Reserve Payroll Data to
State Unemployment Insurance Programs

Improve Social Security Benefit Payment Controls Simplify Supplemental
Security Income Recipient Living Arrangements Reduce Federal Funding
Participation Rate for Automated Child Support Enforcement Systems Obtain
and Share Information on Medical Providers and Middlemen to

Reduce Improper Payments to Supplemental Security Income Recipients Provide
Congress More Information to Assess the Performance of the Special
Supplemental Nutrition Program for Women, Infants, and Children

Develop Comprehensive Return- to- Work Strategies for People Authorizing
committees Finance (Senate)

with Disabilities

Ways and Means (House) Primary agency Social Security Administration Account
Federal Disability Insurance Trust Fund (20- 8007)

Supplemental Security Income Program (20- 0406) Spending type Direct Budget
subfunction Multiple Framework theme Reassess objectives

The Social Security Administration (SSA) operates the Disability Insurance
(DI) and Supplemental Security Income (SSI) programs- the nation?s two
largest federal programs providing cash benefits to people with
disabilities.

For fiscal year 1999, DI benefits to disabled workers were about $46.5
billion and SSI benefits were about $22.9 billion. SSA data show that over
the past 10 years, the size of the working- age disabled beneficiary
population increased 65 percent, from about 4.5 million to 7.5 million. Such
growth has raised concerns that are compounded by the fact that less than
one- half of 1 percent of DI beneficiaries ever leave the disability rolls
by

returning to work. We found that return- to- work strategies and practices
may hold potential for improving federal disability programs by helping
people with disabilities return to productive activity in the workplace and,
at the same time, reducing benefit payments. Our analysis of practices
advocated and

implemented by the private sector in the United States and by social
insurance programs in Germany and Sweden revealed three common strategies in
the design of their return- to- work programs: intervene as soon as possible
after an actual or potentially disabling event to promote and facilitate
return- to- work, identify and provide necessary return- to- work assistance
and manage cases to achieve return- to- work goals, and structure

cash and medical benefits to encourage people with disabilities to returnto-
work.

In line with placing greater emphasis on return- to- work, we recommended
that the Commissioner of SSA develop a comprehensive return- to- work
strategy that integrates, as appropriate, earlier intervention, earlier

identification and provision of necessary return- to- work assistance for
applicants and beneficiaries, and cash and medical benefits that make work
more financially advantageous. SSA has recently taken steps to improve work
outcomes, including increasing access to private vocational rehabilitation
providers and awarding cooperative agreements to 12 states

to develop integrated services to assist beneficiaries, return- to- work.
Moreover, the Congress recently passed the Ticket to Work and Work
Incentives Improvement Act of 1999, which contains provisions, among others,
to safeguard medical coverage for workers with disabilities, enhance VR
services for beneficiaries, and demonstrate the effectiveness of allowing
working beneficiaries to keep more of their earnings. We acknowledge the
importance of the new legislation and of SSA?s initiatives

to improve work opportunities. However, these efforts would have greater
impact if benefits were structured to give beneficiaries greater impetus to
use VR services and attempt work, and if return- to- work assistance were
provided earlier in the decision- making process. We believe that
substantial savings could be achieved if SSA were to develop such a program.
However, such savings would be offset by program costs and any net savings
would depend on the program?s participation rate. CBO could not estimate
this option because no specific proposals are provided.

Related GAO Products Social Security Disability: Other Programs May Provide
Lessons for Improving Return to Work Efforts (GAO/ T- HEHS- 00- 151, July
13, 2000).

Social Security Disability: Multiple Factors Affect Return to Work (GAO/ T-
HEHS- 99- 82, Mar. 11, 1999).

Social Security Disability Insurance: Multiple Factors Affect Beneficiaries?
Ability to Return to Work (GAO/ HEHS- 98- 39, Jan. 12, 1998).

Social Security: Disability Programs Lag in Promoting Return to Work (GAO/
HEHS- 97- 46, Mar. 17, 1997).

People With Disabilities: Federal Programs Could Work Together More
Efficiently to Promote Employment (GAO/ HEHS- 96- 126, Sept. 3, 1996).

SSA Disability: Return- to- Work Strategies From Other Systems May Improve
Federal Programs (GAO/ HEHS- 96- 133, July 11, 1996).

SSA Disability: Program Redesign Necessary to Encourage Return to Work (GAO/
HEHS- 96- 62, Apr. 24, 1996).

GAO Contact Robert E. Robertson, (202) 512- 9889

Revise Benefit Payments under the Federal Employees? Compensation Act

Authorizing committees Health, Education, Labor and Pensions (Senate)
Education and the Workforce (House) Appropriations subcommittees Labor,
Health and Human Services, and Education (Senate and House)

Primary agency Department of Labor Account Multiple Spending type Direct/
Discretionary Budget subfunction 609/ Other income security Framework theme
Reassess objectives

Federal workers who are disabled as a result of a work- related injury are
entitled to tax- free workers? compensation benefits under the Federal
Employees? Compensation Act (FECA). Several GAO reviews have identified ways
in which benefit payment policies can be revised to better address
eligibility and/ or need or to bring FECA benefits more in line with other
federal and state workers? compensation laws.

Basing FECA Compensation For almost all totally disabled individuals, FECA
benefits are 66 and two

on Spendable Earnings thirds percent of gross pay for beneficiaries without
dependents and 75

percent of gross pay for beneficiaries with at least one dependent. We
reported that nearly 30 percent of the more than 23, 000 beneficiaries
included in our analyses received FECA compensation benefits that replaced
more than 100 percent of their estimated take- home pay. Another 40 percent
of these beneficiaries received FECA benefits that were from 90 to 99
percent of their take- home pay. Benefit replacement rates tended to be
higher for beneficiaries who (1) received higher amounts of pay before they
were injured, (2) were injured before 1980, (3) received the FECA

dependent benefit, and (4) lived in states that had an income tax. Workers?
compensation program analysts are reluctant to take a position on what the
?correct? level of workers? compensation benefits should be, leaving that
matter to the judgment of legislators. According to a 1985 Workers
Compensation Research Institute report, legislators in many

states must walk a fine line between benefits that are high enough to
provide adequate income, but not so high as to discourage an employee?s

return- to- work when he or she is no longer disabled. The 1972 Report of
the National Commission on State Workmen?s Compensation Laws recommended
that workers? weekly benefits should replace at least 80 percent of their
spendable weekly earnings, subject to a state?s maximum weekly benefit. Six
states use a percentage of spendable weekly earnings (ranging from 75 to 80
percent) rather than a percentage of gross wages as the basis for computing
compensation benefits. Spendable earnings (takehome

pay) are computed by taking an employee?s gross pay at the time of injury
and subtracting Social Security taxes and federal and state income taxes.
Taxes are based on published tax withholding tables, given an

employee?s actual exemptions and a standard deduction. If the Congress
judges that current FECA benefits are so high as to discourage employees
from returning to work, it could consider changing the current FECA benefit
structure from one that bases compensation on

gross pay to one that bases compensation on spendable earnings. The
following savings estimates assume that the new FECA benefit formula would
equal 80 percent of spendable earnings. The CBO estimates below assume that
changes in benefits would be made prospectively. Additional savings could be
achieved if changes were made to affect individuals who

were already receiving FECA benefits. Fewer savings would be achieved if a
higher percentage of spendable earnings were used as the basis for computing
FECA benefits.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Discretionary spending Savings from the 2002 baseline Budget a uthority 49
23 37 51 Outlays 49 23 37 51 Source: Congressional Budget Office.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Direct spending Savings from the CBO baseline Budget authority 9 18 19 19 19
Outlays 9 18 19 19 19 Source: Congressional Budget Office.

Revising Benefits for Retirement- eligible federal workers who continue to
be disabled as a result Retirement Eligible

of work- related injuries could receive tax- free workers? compensation
Beneficiaries

benefits under FECA for the remainder of their lives that would generally be
greater than amounts these workers would receive as retirement benefits.
FECA benefits are 75 percent of salary for a disabled employee with a
dependent; Civil Service Retirement System benefits for a 55- year

old employee with 30 years of service are 56 percent of salary. We reported
that 60 percent of the approximately 44,000 long- term FECA beneficiaries
were at least age 55, the age at which some federal employees are eligible
for optional retirement with unreduced retirement benefits. Proponents

for changing FECA benefits for older beneficiaries argue that an inequity is
created between federal workers who retire normally and those who, in
effect, ?retire? on FECA benefits. Opponents of such a change argue that
reducing benefits would break the implicit promise that injured workers have
exchanged their right to tort claims for a given level of future benefits.
We identified two prior proposals for reducing FECA benefits to those who
become eligible for retirement. One would convert compensation benefits
received by retirement- eligible disabled workers to retirement benefits.

However, this approach raises complex issues related to the tax- free nature
of workers? compensation benefits and to the individual?s entitlement to
retirement benefits. The second proposal would convert FECA benefits to a
newly established FECA annuity, thus avoiding the complexity of shifting
from one benefit program to another. To reduce benefits for retirement-
eligible FECA beneficiaries, the Congress could consider converting from the
current FECA benefit structure to a FECA annuity. The following savings
estimate assumes that such an annuity would equal two- thirds of the
previously provided FECA

compensation benefit, and that the annuity would begin following the
disabled individual?s eligibility for retirement benefits. The CBO estimate
assumes that changes in benefits would be made prospectively. Additional
savings could be achieved if changes were made to affect individuals who

were already receiving FECA benefits.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Discretionary spending Savings from the 2002 baseline Budget a uthority 25
12 19 26 Outlays 25 12 19 26 Source: Congressional Budget Office.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Direct spending Savings from the CBO baseline Budget authority 5 9 9 10 10
Outlays 5 9 9 10 10 Source: Congressional Budget Office.

FECA Cases Involving Third FECA authorizes federal agencies to continue
paying employees their

Parties regular salaries for up to 45 days when they are absent from work
due to

work- related traumatic injuries. In cases in which third parties are
responsible for employees? on- the- job injuries (e. g., dog bites or
automobile- related injuries), the Department of Labor may require that
employees pursue collection actions against these parties. However, based

on current interpretations of FECA by the Employees? Compensation Appeals
Board and a federal appeals court, the federal government has no legal basis
to obtain refunds from third parties for the first 45 days of absence from
work (called the continuation- of- pay (COP) period).

Recoveries from third parties continue to be allowed for payments of
compensation benefits following the COP period and for medical benefits.
Based on the current interpretation of FECA, employees can receive regular
salary payments from their employing agencies and reimbursements from third
parties- in effect, a double recovery of income for their first 45 days of
absence from work due to injuries for which third parties were was
responsible. We recommended that the Congress amend FECA to expressly
provide for refunds of amounts paid as COP when employees receive third-
party recoveries. CBO estimates that the following savings could be achieved
if the Congress redefined COP so that it could be included in amounts
employees are required to reimburse the government when they recover damages
from third parties.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Discretionary spending Savings from the 2002 baseline Budget a uthority *1 2
2 2 Outlays *1 2 2 2 Source: Congressional Budget Office. *Savings of less
than $500,000.

Comparability of FECA and We identified three major ways in which FECA
differs from other federal

Other Compensation Laws and state workers? compensation laws, each of which
results in relatively greater benefits under FECA. First, FECA authorizes
maximum weekly benefit amounts that are greater than those authorized by
other federal and

state workers? compensation laws. As of January 1, 2001, maximum authorized
weekly FECA benefits were equal to $1,495, 75 percent of the base salary of
a GS- 15, step 10. FECA also authorizes additional benefits for one or more
dependents equal to 8.33 percent of salary. Only seven states authorize
additional benefits for dependents, ranging from $5 to $10 per week per
dependent, with total benefits not exceeding maximum authorized benefit
amounts. Finally, FECA provides eligible workers who suffer traumatic
injuries with their regular salary for a period not to exceed 45 days.
Compensation benefits for wage loss begin on the 48th day, after a

3- day waiting period. All other federal and state workers? compensation
laws provide for a 3- to 7- day waiting period following the injury before
paying compensation benefits. In either case, if employees continue to be

out of work for extended periods ranging from 5 to 42 days, depending on the
jurisdiction, retroactive benefits to cover the waiting period would be
paid.

Reducing FECA?s authorized maximum weekly benefit to make it comparable to
other compensation laws would have little effect on compensation costs
because very few federal workers receive maximum benefits. However,
eliminating augmented compensation benefits for dependents and establishing
a 5- day waiting period immediately following the injury, and before the
continuation of pay period, would produce the following savings, as
estimated by CBO. Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Discretionary spending Savings from the 2002 baseline Budget a uthority 10
13 22 31 40 Outlays 10 13 22 31 40 Source: Congressional Budget Office.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Direct spending Savings from the 2001 baseline Budget authority 6 11 12 12
12 Outlays 6 11 12 12 12 Source: Congressional Budget Office.

Related GAO Products Federal Employees? Compensation Act: Percentages of
Take- Home Pay Replaced by Compensation Benefits (GAO/ GGD- 98- 174, Aug.
17, 1998).

Federal Employees? Compensation Act: Issues Associated with Changing
Benefits for Older Beneficiaries (GAO/ GGD- 96- 138BR, Aug. 14, 1996).

Workers? Compensation: Selected Comparisons of Federal and State Laws (GAO/
GGD- 96- 76, Apr. 3, 1996).

Federal Employees? Compensation Act: Redefining Continuation of Pay Could
Result in Additional Refunds to the Government (GAO/ GGD- 95- 135, June 8,
1995).

GAO Contact J. Christopher Mihm, (202) 512- 6806

Increase Congressional Oversight of PBGC?s Budget

Authorizing committees Health, Education, Labor and Pensions (Senate)
Education and the Workforce (House) Appropriation committees Labor, Health
and Human Services, and Education (Senate and House)

Primary agency Department of Labor Accounts Pension Benefit Guaranty
Corporation fund (16- 4204)

Spending type Direct/ Discretionary Budget subfunction 601/ General
retirement and disability insurance

Framework theme Reassess objectives

The Pension Benefit Guaranty Corporation (PBGC) insures the benefits of more
than 43 million participants against default of their employersponsored
defined benefit pension plans. Established in 1974 as a selffinancing
government corporation, PBGC?s primary responsibility is to assume
administration of underfunded plans that either terminate or

become insolvent. In 2000, about 227,000 retirees received over $903 million
in benefit payments from PBGC. To carry out its operations, PBGC relies
heavily on the services of contractors whose headquarters and

field employees account for almost half of its workforce. PBGC is self-
financing in that it receives no general revenues. Its operating budget of
$177 million is financed with funds from two sources: (1) insurance premiums
paid by plan sponsors and (2) trust assets. However, the portion of its
budget allocated to administrative expenses has been subject to a statutory
limitation since 1985. The Congress revised this limitation on two occasions
to provide PBGC more flexibility to address workload increases that followed
several large pension plan failures. These revisions exempted from any
limitation all expenses incurred in

connection with the termination and management of pension plans and provided
PBGC with discretion to determine which functions and activities qualified
as such. Over time, PBGC has expanded the range of activities and functions
classified as nonlimitation expenses and currently uses these resources to
fund nearly all of its operations. This has resulted in a steep increase in
PBGC?s nonlimitation budget from $29 million in fiscal year 1989 to $165
million in fiscal year 2001. During this period, PBGC?s

limitation budget decreased from $40 million to $13 million. Thus, by fiscal
year 1999, only 75 federal employees were funded out of PBGC?s limitation
budget, which receives shared OMB and congressional review and approval. The
remaining 1,359 employees were funded out of PBGC?s nonlimitation budget,
which is primarily subject to review and approval by OMB rather than the
Congress.

We recently reported that PBGC?s failure to strategically manage its
longerterm contracting needs, as well as weaknesses in its contractor
selection and oversight processes, could result in the corporation paying
too much for procured services. We also noted that PBGC?s budget structure
provides it with substantial flexibility to use nonlimitation funds that are
not directly subject to congressional review and approval. This budgetary
treatment shields most corporation spending for administration and

operations from congressional scrutiny, creating a potentially favorable
environment for management weaknesses. As a means of strengthening its
oversight over PBGC?s budget and

operations, the Congress could act to restrict the range of activities to be
supported by nonlimitation funds. This, however, would likely require a
similar increase in PBGC?s limitation budget in which the Congress has
direct appropriations oversight. Thus, more of PBGC?s spending for
operational activities and functions would fall within the normal
congressional appropriations process. Although this approach would not
necessarily reduce PBGC?s administrative spending initially, strengthened

oversight could result in management improvements, more efficient use of
funds, and slower spending growth in the future. CBO was unable able to
estimate savings from this option without a more specific proposal.

Related GAO Product Pension Benefit Guaranty Corporation: Contracting
Management Needs Improvement (GAO/ HEHS- 00- 130, Sept. 18, 2000).

GAO Contact Barbara D. Bovbjerg, (202) 512- 5491

Share the Savings from Bond Refundings

Authorizing committees Banking, Housing, and Urban Affairs (Senate)
Financial Services (House)

Appropriations subcommittees VA, HUD, and Independent Agencies (Senate and
House) Primary agency Department of Housing and Urban

Development Account Housing Certificate Fund (86- 0319) Spending type
Discretionary/ Direct Budget subfunction 604/ Housing assistance Framework
theme Redefine beneficiaries

During the 1970s and early 1980s, HUD administered programs to develop
housing for low- income households using various types of financing
arrangements and long- term Section 8 rental housing assistance contracts.
While some properties were financed by loans and grants from HUD, others
were financed by bonds issued by state and local housing finance

agencies. During the late 1970s and early 1980s, the cost to finance housing
development rose to unprecedented levels. In response, HUD authorized higher
Section 8 rental assistance payments to cover the higher bond

financing costs, first in 1980 and then in 1981. Since then, as interest
rates declined, many state and local housing finance agencies have refunded
the bonds they issued and issued new bonds at lower interest rates. This
action has generated substantial savings for the state agencies. These
savings represent the difference between the amounts needed to repay the
original bonds and the lower amounts needed to repay the new bonds. Agencies
typically use these savings to provide affordable housing in their

states. In 1999, we reported that HUD had not issued clear guidance on when
state agencies are required to share the savings associated with bond
refundings with the federal government. The need for clearer guidance
specifically

relates to state agency compliance with the bond refunding provisions in an
October 1992 amendment to Section 1012 of the McKinney Act. The amendment
was unclear as to whether the states were required to share the

savings from bond refundings with the federal government for all properties
covered by Section 8 rental assistance contracts that were entered into from
1979 through 1984. In the absence of clear guidance from

HUD, we found that some state agencies have shared the savings from bond
refunding for such properties with the federal government while other
agencies have retained the savings. Legislative changes could be made to
clarify the Congress? intent that state agencies should be required to share
bond refunding savings with the federal government for all properties
covered by Section 8 rental assistance contracts entered into from 1979
through 1984. CBO agrees that there

could be savings but does not have nationwide data to quantify the savings
amount. Related GAO Product Multifamily Housing: HUD Missed Opportunities to
Reduce Costs on Its

Uninsured Section 8 Portfolio (GAO/ RCED- 99- 217, July 30, 1999). GAO
Contact Stanley J. Czerwinski, (202) 512- 7631

Implement a Service Fee for Successful Non- Temporary Assistance for Needy

Authorizing committees Finance (Senate)

Families Child Support

Ways and Means (House) Primary agency Department of Health and Human
Services Enforcement

Account Family Support Payments to States (75-

Collections

1501) Spending type Direct Budget subfunction 609/ Other income security
Framework theme Redefine beneficiaries

The purpose of the Child Support Enforcement Program is to strengthen state
and local efforts to obtain child support for both families eligible for
Temporary Assistance for Needy Families (TANF) and non- TANF families.

The services provided to clients include locating noncustodial parents,
establishing paternity, and collecting ongoing and delinquent child support
payments. From fiscal year 1984 through 1998, non- TANF caseloads and

costs rose about 500 percent and 1200 percent, respectively. While states
have the authority to fully recover the costs of their services, states have
exercised their discretion and charged only minimal application and service
fees. Thus, they are doing little to recover the federal government?s 66
percent share of program costs. In fiscal year 1998, for example, state fee
practices returned about $49 million of the estimated $2.1 billion spent

to provide non- TANF services. Since 1992, we have reported on opportunities
to defray some of the costs of child support programs. Based on this work,
we believe that mandatory application fees should be dropped and that states
should be mandated to charge a minimum percentage service fee on successful
collections for

non- TANF families. Congressional action is necessary to put such a
requirement in place. Application fees are administratively burdensome, and
a service fee would ensure that families are charged only when the service
has been successfully performed. The costs recovered from such a

service fee would be determined by the percentage rate set by the Congress.
For example, CBO estimates that if the Congress set the service fee at 5
percent for each successful non- TANF child support collection, the federal
government could recover $2 billion in 5 years. The following savings
estimate is based on states implementing this option beginning October 1,
2002.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the CBO baseline Budget authority 460 500 540 590 630 Outlays
460 500 540 590 630 Note: Estimate assumes that all fees collected are split
between the federal and state government at the administrative cost match
rate: 66 percent federal and 34 percent state.

Source: Congressional Budget Office.

Related GAO Products Child Support Enforcement: Effects of Declining Welfare
Caseloads Are Beginning to Emerge (GAO/ HEHS- 99- 105, June 30, 1999).

Welfare Reform: Child Support an Uncertain Income Supplement for Families
Leaving Welfare (GAO/ HEHS- 98- 168, Aug. 3, 1998).

Child Support Enforcement: Early Results on Comparability of Privatized and
Public Offices (GAO/ HEHS- 97- 4, Dec. 16, 1996).

Child Support Enforcement: Reorienting Management Toward Achieving Better
Program Results (GAO/ HEHS/ GGD- 97- 14, Oct. 25, 1996).

Child Support Enforcement: States? Experience with Private Agencies?
Collection of Support Payments (GAO/ HEHS- 97- 11, Oct. 23, 1996).

Child Support Enforcement: States and Localities Move to Privatized Services
(GAO/ HEHS- 96- 43FS, Nov. 20, 1995).

Child Support Enforcement: Opportunity to Reduce Federal and State Costs
(GAO/ T- HEHS- 95- 181, June 13, 1995).

GAO Contact Cornelia M. Ashby, (202) 512- 8403

Improve Reporting of DOD Reserve Employee Payroll Data to State

Authorizing committees Finance (Senate)

Unemployment

Ways and Means (House) Primary agency Department of Labor

Insurance Programs

Account Unemployment Trust Fund (20- 8042) Spending type Direct Framework
theme Redefine beneficiaries

The Congress established the national unemployment insurance (UI) system in
the 1930s to provide partial income assistance to many temporarily
unemployed workers with substantial work histories. Today, UI is the major
federal program providing assistance to the unemployed.

Many workers covered by the UI system are also among the 1.25 million
personnel participating in the National Reserve forces (Army National Guard,
Army Reserve, Naval Reserve, Marine Corps Reserve, Air National Guard, Air
Force Reserve, and the Coast Guard Reserve).

Most UI claimants are required to report the income they receive while in
the Reserves so that state UI programs can reduce their benefits
accordingly. Our analysis of benefit and Reserve data from seven states
shows that some Reserve personnel are receiving improper benefit payments
from state UI programs. In the seven states in our analysis, we estimate
that UI claimants who were active participants in the Reserve failed to
report over $7 million in Reserve income in fiscal year 1994. This led to UI
benefit overpayments of approximately $3.6 million, of which federal trust
fund losses were about $1. 2 million. We expect that the federal and state
trust fund losses from all UI programs are much greater because the seven
states we reviewed account for only 27 percent of all

reservists. State officials cited various reasons why claimants may not be
reporting their Reserve income while receiving UI benefits. According to
state officials, the claimants may not understand their reporting
responsibilities,

are often not specifically informed of these responsibilities, and may have
incentives not to report all Reserve income- incentives that are amplified
by the states? limited ability to detect nonreporting.

The Defense Department and the Department of Transportation?s Coast Guard
have recently acted to ensure that reservists are reminded of their
responsibility to report income from reserve activity to state UI agencies.
All reservists now receive an annual notice with their leave and earnings
statements reminding them of their duty to disclose their affiliation and
any Reserve related earnings when filing an UI claim. In addition, the Labor
Department has issued a directive to all state employment security

agencies to ensure that they inform prospective and continuing UI benefit
claimants of their responsibility to report Reserve related income. These
actions should improve general reservist compliance with state UI program
income reporting requirements. However, to detect unreported Reserve income,
the most frequently suggested alternative by federal and state officials
would be to require the Department of Defense (DOD) to report Reserve
payroll and personnel data to states on a quarterly basis, as private-
sector employers are required to do, to permit verification of

claimant income regularly. DOD has stated that it will develop an action
plan to provide such data to the state UI programs. However, completion of
this plan has been delayed because of other competing agency priorities and
a recognition that the task was more complex than originally envisioned.

It is important to note that the nonreporting of claimant income appears to
be a broader problem involving all UI claimants who were former federal
civilian and military employees, rather than just those participating in the
Reserves. Officials from many of the state programs we analyzed reported
general difficulties in monitoring reported income from claimants who were
former federal employees.

DOD has made initial efforts to develop an action plan to implement it.
However, it now reports that, given its effort to ensure any action taken be
cost- effective and commensurate with potential savings, it does not intend

to take further action to respond to this recommendation. According to DOD,
13 states effectively exempt reserve wages from any unemployment insurance
payment offset, and there could be significant costs associated with
providing automated data on the earnings of part- time reservists. We do not
agree that implementation costs would necessarily outweigh

savings. We found millions of dollars in unemployment insurance overpayments
for just 7 states and 27 percent of the reservists, which would likely lead
to even greater levels of overpayments for the remaining states that offset
reservist wages.

If DOD was required to report Reserve payroll and personnel data to states
on a quarterly basis, CBO estimates that the savings shown in the table
would result from the reduction in overpayments.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the CBO baseline Budget authority 9 10 10 10 11 Outlays 9 10 10
10 11 Reduction i n r eceipts 0 1 3 6 8 Net e ffect o n d eficit 9 9 7 5 3
Note: Unemployment Insurance trust fund receipts are dependent on prior year
benefit outlays. CBO estimates that, in addition to savings, this option
would have the effect of reducing trust fund receipts in the out years.
Source: Congressional Budget Office.

Related GAO Product Unemployment Insurance: Millions in Benefits Overpaid to
Military Reservists (GAO/ HEHS- 96- 101, Aug. 5, 1996).

GAO Contact Sigurd R. Nilsen, (202) 512- 7215

Improve Social Security Benefit Payment Controls

Authorizing committees Finance (Senate) Ways and Means (House)

Primary agency Social Security Administration Accounts Federal Old Age and
Survivor?s Insurance

Trust Fund (20- 8006) Spending type Direct Budget subfunction 651/ Social
security Framework theme Improve efficiency

Social Security Administration (SSA) is required by law to reduce social
security benefits to persons who also receive a pension from noncovered
employment (typically persons who work for the federal government or state
and local governmental agencies). The Government Pension Offset provision
requires SSA to reduce benefits to persons whose social security entitlement
is based on another person?s social security coverage (usually their
spouse?s). The Windfall Elimination Provision requires SSA to use a

modified formula to calculate a person?s earned social security benefit
whenever a person also earned a pension through a substantial career in
noncovered employment. The modified formula reduces the social security
benefit significantly. We found that SSA payment controls for these offsets
were incomplete. For state and local retirees, SSA had no third- party
pension data to verify whether persons were receiving a noncovered pension.
At the time of our report (1998), an analysis of available data indicated
that this lapse in payment controls for state and local government retirees
cost the trust

funds between $129 million to $323 million from 1978 to about 1995. We have
recommended that SSA work with the Internal Revenue Service (IRS) to revise
the reporting of pension income on IRS tax form 1099R. IRS has advised SSA
that it needs a technical amendment to the Tax Code to obtain the
information SSA needs. We believe that millions of dollars in reduced
overpayments could be achieved each year with better payment controls.
However, it should be noted that these savings would be offset

somewhat by administrative costs associated with conducting additional
computer matching at SSA. CBO estimates that improved payment controls could
result in the savings shown in the table below.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Direct spending Savings from the CBO Baseline Budget authority 0 20 60 75 80
Outlays 0 20 60 75 80 Source: Congressional Budget Office.

Related GAO Product Social Security: Better Payment Controls for Benefit
Reduction Provisions Could Save Millions (GAO/ HEHS- 98- 76, Apr. 30, 1998).

GAO Contact Barbara D. Bovbjerg, (202) 512- 7215

Simplify Supplemental Security Income Recipient Living Arrangements

Authorizing committees Finance (Senate) Ways and Means (House)

Appropriations subcommittees Labor, HHS, Education and Related Agencies
(Senate and House) Primary agency Social Security Administration Accounts
Supplemental Security Income Program (28- 0406)

Spending type Direct/ Discretionary Budget subfunction 609/ Other income
security Framework theme Improve efficiency

Social Security Administration (SSA) administers the Supplemental Security
Income (SSI) program, which is the nation?s largest cash assistance program
for the poor. Since its inception, the SSI program has been difficult to
administer because, similar to other means tested programs, it relies on
complicated criteria and policies to determine initial and continuing
eligibility and benefit levels. One of the factors considered is the living
arrangements of the beneficiary. When determining SSI eligibility and
benefit amounts, SSA staff apply a complex set of policies to document an
individual?s living arrangements and any additional support they may be
receiving from others. This process depends heavily on selfreporting by
recipients of whether they live alone or with others; the relationships
involved; the extent to which rent, food, utilities, and other household
expenditures are shared; and exactly what portion of those expenses the
individual pays. These numerous rules and policies have made living
arrangement determinations one of the most complex and error prone aspects
of the SSI program, and a major source of overpayments. We recently reported
that SSA has not addressed long- standing SSI living

arrangement verification problems, despite numerous internal and external
studies and many years of quality reviews denoting this as an area prone to
error and abuse. Some of the studies we reviewed recommended ways to
simplify the process by eliminating many complex calculations and thereby
making it less susceptible to manipulation by recipients. Other studies we
reviewed suggested ways to make this aspect of the program less costly to
taxpayers. For example, in 1989, SSA?s Office of Inspector General

reported that a more simplified process that applied a shared expenditures
rationale to all SSI recipients living with another person would result in
fewer errors and reduce annual overpayments by almost $80 million. Such a
change would require legislative action by the Congress. In light of the
potential cost savings associated with addressing this issue, we recommended
in September 1998 that SSA develop and advance legislative

options for simplifying SSI living arrangement policies and ultimately
reduce program overpayments. SSA told us that it is continuing to study SSI
living arrangement policies and may ultimately consider proposing
legislative options for change.

Although CBO agrees that some changes that would simplify living arrangement
policies have the potential to create savings, it cannot develop a savings
estimate until a specific legislative proposal is identified.

Related GAO Product Supplemental Security Income: Action Needed on Long-
Standing Problems Affecting Program Integrity (GAO/ HEHS- 98- 158, Sept. 14,
1998). GAO Contact Barbara D. Bovbjerg, (202) 512- 7215

Reduce Federal Funding Participation Rate for Automated Child Support

Authorizing committees Finance (Senate)

Enforcement Systems

Ways and Means (House) Appropriations subcommittees Labor, HHS, Education
and Related Agencies (Senate and House)

Primary agency Department of Health and Human Services Account Family
Support Payments to States (75-

1501) Spending type Direct Budget subfunction 609/ Other income security
Framework theme Improve efficiency

The Department of Health and Human Services? (HHS) Office of Child Support
Enforcement (OCSE) oversees states? efforts to develop automated systems for
the Child Support Enforcement Program. Established for both welfare and
nonwelfare clients with children, this program is directed at locating
parents not supporting their children,

establishing paternity, obtaining court orders for the amounts of money to
be provided, and collecting these amounts from noncustodial parents.
Achievement of Child Support Enforcement Program goals depends in part on
the effective planning, design, and operation of automated systems. The
federal government is providing enhanced funding to develop these automated
child support enforcement systems by paying up to 90 percent of states?
development costs. From fiscal year 1981 through fiscal year

1999, the states have spent about $4.5 billion to develop these systems,
including about $3.3 billion from the federal government.

The 90 percent funding participation rate was initially discontinued at the
end of fiscal year 1995, the congressionally mandated date for the systems
to be certified and operational. However, the Congress subsequently extended
the deadline for these systems to the end of fiscal year 1997. The federal
government will continue to reimburse states? costs to operate these systems
at the 66 percent rate established for administrative expenses. Finally, the
Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (P.
L. 104- 193) provided additional funding for the states to meet new systems
requirements under this law. An 80 percent federal funding participation
rate, with a total national funding cap of $400 million was authorized
through fiscal year 2001. The 66 percent

federal funding participation rate was continued for systems operation and
administrative expenses.

The Congress could choose to reduce the federal funding participation rate
for modification and operation of these systems from 66 percent to the 50
percent rate now common for such costs in other programs, such as Food
Stamps and other welfare programs. CBO estimates that a reduced
participation rate would produce the following savings.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the CBO baseline Budget authority 215 230 250 265 275 Outlays
215 230 250 265 275 Source: Congressional Budget Office.

Related GAO Products Child Support Enforcement: Leadership Essential to
Implementing Effective Automated Systems (GAO/ T- AIMD- 97- 162, Sept. 10,
1997).

Child Support Enforcement: Strong Leadership Required to Maximize Benefits
of Automated Systems (GAO/ AIMD- 97- 72, June 30, 1997).

Child Support Enforcement: Timely Action Needed to Correct System
Development Problems (GAO/ IMTEC- 92- 46, Aug. 13, 1992).

Child Support Enforcement: Opportunity to Defray Burgeoning Federal and
State Non- AFDC Costs (GAO/ HRD- 92- 91, June 5, 1992). GAO Contact Joel C.
Willemssen, (202) 512- 6408

Obtain and Share Information on Medical Providers and Middlemen to Reduce

Authorizing committees Finance (Senate)

Improper Payments to

Ways and Means (House) Appropriation committees Labor, HHS, Education, and
Related

Supplemental Security

Agencies (Senate and House)

Income Recipients

Primary agency Social Security Administration Accounts Supplemental Security
Income Program (28- 0406)

Spending type Direct/ Discretionary Budget subfunction 609/ Other income
security Framework theme Improve efficiency

The Supplemental Security Income (SSI) program guarantees a minimum level of
income for needy aged, blind, or disabled individuals. In FY 2000, the SSI
program paid 6.6 million recipients about $31 billion in benefits.

Over the years, some SSI recipients may have improperly gained access to
program benefits by feigning or exaggerating disabilities with the help of
middlemen (particularly interpreters) and medical providers. Although it is
not possible to know the exact number of beneficiaries who became eligible
for benefits through these practices, analysis suggests that the SSI program
is vulnerable to this type of fraud and abuse. First, in an April 1998
sample, GAO found that more than 60 percent of the SSI beneficiaries suffer
from mental and physical impairments that are difficult to objectively
verify. Second, medical providers who were investigated for defrauding
Medicaid, Medicare, or private insurance companies provided

at least some of the medical evidence for 6 percent of the 208,000 disabled
SSI recipient cases we reviewed in six states. Third, over 96 percent of the
158 SSA officials and staff that we interviewed said that they believed that
the practice of middlemen helping people improperly qualify for SSI benefits
has continued. SSA has tried to address this problem by

developing ways to better identify and assess the initial or continuing
eligibility of applicants and recipients who may be feigning disabilities.
The agency has not, however, taken steps to systematically obtain and
distribute information on various medical providers and middlemen that would
better help identify such applicants and recipients. These steps are
important because past experiences have shown that a single middleman or
medical provider can help hundreds of ineligible beneficiaries get on the

rolls. Every individual who obtains benefits by feigning or exaggerating
disabilities will cost the federal government an estimated $122, 000 in SSI
and Medicaid benefits over the 10- year period 1999 through 2009.

In order to reduce the number of improper claims under the SSI program, the
Congress could consider requiring SSA to systematically obtain information
on various middlemen and service providers and routinely

share it throughout SSA. Such information could be collected from other
government agencies and private entities that also face similar fraud and
abuse issues as well as from SSA staff. SSA could use this information, for
example to determine which claims should receive increased scrutiny to
prevent applicants from receiving improper benefits and to target
investigations of current beneficiaries to determine if they should be
removed from the program. Although CBO agrees that efforts to reduce fraud
in the SSI program through greater information sharing about medical
providers and middleman have the potential to create savings, it cannot
develop a savings estimate until a specific legislative proposal is
identified. Related GAO Products Supplemental Security Income: Additional
Action Needed to Reduce

Program Vulnerability to Fraud and Abuse (GAO/ HEHS- 99- 151, Sept. 15,
1999).

Supplemental Security Income: Disability Program Vulnerable to Applicant
Fraud When Middlemen Are Used (GAO/ HEHS- 95- 116, Aug. 31, 1995).

GAO Contact Barbara D. Bovbjerg, (202) 512- 5491

Provide Congress More Information to Assess the Performance of the Special
Supplemental Authorizing committees Health, Education, Labor and Pensions
(Senate)

Nutrition Program for Ways and Means (House)

Women, Infants, and

Appropriations subcommittees Labor, Health and Human Services, and Children

Education (Senate and House) Primary agency Department of Agriculture
Accounts Special Supplemental Nutrition Program for

Women, Infants, and Children (12- 3510) Spending type Discretionary Budget
subfunction 605/ Food and Nutrition Assistance Framework theme Reassess
objective

The Special Supplemental Nutrition Program for Women, Infants, and Children
(WIC) is a federally funded $4. 1 billion- a- year nutrition assistance
program administered by the U. S. Department of Agriculture?s Food and
Nutrition Service (FNS). FNS provides annual cash grants to support program
operations at 88 state- level agencies that employ more than 1,800 local WIC
agencies to administer the program. FNS grants are used to support three
main activities- nutrition education, breastfeeding promotion and support,
and health referrals. The state agencies develop

guidelines intended to ensure that local agencies effectively deliver WIC
benefits to eligible participants, and monitor agencies? compliance with
these guidelines. Local agencies serve participants directly or through one

or more service delivery sites or clinics. Staff at local WIC agencies and
clinics approve applicants for participation, provide food benefits, and
make health referrals.

FNS has an outcome- based measure for one of its three nutrition services-
breastfeeding promotion and support. However, the measure, breastfeeding
initiation rate, examines only one of several important aspects of the
service?s possible impact on WIC participants. Other key

aspects, for which FNS has not established outcome measures, include the
length of time that WIC mothers breastfeed their infants and breastfeeding?s
contribution to an infant?s overall nutritional needs. Several obstacles
have hindered FNS? efforts to develop and implement outcome- based measures
for nutrition education and health referral services. These include
difficulties in identifying measures that would allow the agency to
appropriately link a particular service?s activity to a

desired outcome and resource constraints affecting FNS? ability to collect
data needed to implement a proposed measure.

Given the size and the importance of the WIC program and the apparent lack
of outcome- based performance measures, Congress may want to require that
the Department of Agriculture initiate a more active oversight role to
assess the impact of the program. Until there is a clearer understanding of
the extent to which child nutrition needs are being met, and the extent that
any improvement can be attributed to the WIC program,

it will be difficult for Congress to truly know to what extent this
important program is improving child nutrition. Related GAO Product Food
Assistance: Performance Measures for Assessing Three WIC Services (GAO- 01-
339, Feb 28, 2001). GAO Contact Marnie S. Shaul, (202) 512- 7215

700 Veterans Benefits Revise VA?s Disability Ratings Schedule to Better
Reflect Veterans? and Services

Economic Losses Discontinue Veterans? Disability Compensation for Nonservice
Connected

Diseases Increase Cost Sharing for Veterans? Long- Term Care Reassess
Unneeded Health Care Assets within the Department of Veterans

Affairs Reducing VA Inpatient Food and Laundry Service Costs

Revise VA?s Disability Ratings Schedule to Better Reflect

Veterans? Economic

Authorizing committees Veterans? Affairs (Senate and House)

Losses

Appropriations subcommittees VA, HUD, and Independent Agencies (Senate and
House) Primary agency Department of Veterans Affairs Account Compensation
and Pensions (36- 0153) Spending type Direct Budget subfunction 701/ Income
security for veterans Framework theme Reassess objectives

The Department of Veterans Affairs? (VA) disability program is required by
law to compensate veterans for the average loss in earning capacity in
civilian occupations that results from injuries or conditions incurred or
aggravated during military service. Veterans with such service- connected

disabilities are entitled to monthly cash benefits under this program even
if they are working and regardless of the amount they earn. The amount of
compensation received is based on disability ratings that VA assigns to the
service- connected conditions. In fiscal year 2000, VA paid more than $19
billion in compensation to about 2.3 million veterans, and more than 300,000
veterans? survivors and children, for these service- connected disabilities.
The disability ratings schedule that VA currently uses is still primarily
based on physicians? and lawyers? judgments made in 1945 about the effect
service- connected conditions had on the average individual?s ability to
perform jobs requiring manual or physical labor. Although the ratings in

the schedule have not changed substantially since 1945, dramatic changes
have occurred in the labor market and in society. The results of an economic
validation of the schedule conducted in the late 1960s indicated that
ratings for many conditions did not reflect the actual average loss in
earnings associated with them. Therefore, it is likely that some of the
ratings in the schedule do not reflect the economic loss experienced by
veterans today. Hence, the schedule may not equitably distribute

compensation funds among disabled veterans. The Congress may wish to
consider directing VA to determine whether the ratings for conditions in the
schedule correspond to veterans? average loss in earnings due to these
conditions and adjust disability ratings

accordingly. Generally accepted and widely used approaches exist to
statistically estimate the effect of specific service- connected conditions
on veterans? average earnings. These estimates could be used to set
disability ratings in the schedule that are appropriate in today?s
socioeconomic environment. The cost to collect the data to produce these
estimates was projected to be between $5 million and $10 million, which
would be a small fraction of the more than $19 billion VA pays annually in
disability compensation to veterans and their families. Any savings
associated with this option would depend on how the new disability schedule
alters payments to beneficiaries. A reexamination of the disability schedule
could find that some conditions are overpaid while others may require
increased payments. CBO is unable to estimate any costs or savings that
could result because a specific proposal for revising the disability ratings

schedule has not been presented. Related GAO Product VA Disability
Compensation: Disability Ratings May Not Reflect Veterans? Economic Losses
(GAO/ HEHS- 97- 9, Jan. 7, 1997). GAO Contact Cynthia A. Bascetta, (202)
512- 7101

Discontinue Veterans? Disability Compensation for Nonservice Connected

Authorizing committees Veterans Affairs (Senate and House)

Diseases

Appropriations subcommittee VA, HUD, and Independent Agencies (Senate and
House) Primary agency Department of Veterans Affairs Account Compensation
and Pensions (36- 0153) Spending type Direct Budget subfunction 701/ ncome
security for veterans Framework theme Redefine beneficiaries

In fiscal year 1999, the Department of Veterans Affairs (VA) paid about $18
billion in compensation to about 2.3 million veterans for serviceconnected
disabilities. A disease or injury resulting in disability is considered
service- connected if it was incurred or aggravated during

military service. No causal connection is required. In 1989, GAO reported on
the U. S. practice of compensating veterans for conditions that were
probably neither caused nor aggravated by military service. These conditions
included diabetes, chronic obstructive pulmonary disease,

arteriosclerotic heart disease, and multiple sclerosis. In 1993, GAO
reported that other countries were less likely to compensate veterans when
diseases are unrelated to military service, when the relationship of the
disease to military service could not be established, or for off- duty
injuries such as those that happen while on vacation. The Congress may wish
to reconsider whether diseases neither caused nor aggravated by military
service should be compensated as serviceconnected disabilities. In 1996, the
Congressional Budget Office (CBO) reported that about 230, 000 veterans were
receiving about $1. 1 billion in disability compensation payments annually
for diseases neither caused nor aggravated by military service. If
disability compensation payments to veterans with nonservice connected,
disease- related disabilities were

eliminated in future cases, CBO estimates that the following savings would
apply.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 baseline Budget authority 71 221 411 556 676 Outlays
65 208400 551670 Note: These estimates take into account an increase in DOD
retirement pay. Source: Congressional Budget Office.

Related GAO Products VA Disability Compensation: Disability Ratings May Not
Reflect Veterans? Economic Losses (GAO/ HEHS- 97- 9, Jan. 7, 1997).

Disabled Veterans Programs: U. S. Eligibility and Benefit Types Compared
With Five Other Countries (GAO/ HRD- 94- 6, Nov. 24, 1993).

VA Benefits: Law Allows Compensation for Disabilities Unrelated to Military
Service (GAO/ HRD- 89- 60, July 31, 1989).

GAO Contact Cynthia A. Bascetta, (202) 512- 7207

Increase Cost Sharing for Veterans? LongTerm Care

Authorizing committees Veterans Affairs (Senate and House) Appropriations
subcommittees VA, HUD, and Independent Agencies (Senate and House)

Primary agency Department of Veterans Affairs Account Medical Care (36-
0160) Spending type Discretionary Budget subfunction 703/ Hospital and
medical care for veterans Framework theme Redefine beneficiaries

State veterans? homes recover as much as 50 percent of the costs of
operating their facilities through charges to veterans receiving services.
Similarly, Oregon recovers about 14 percent of the costs of nursing home
care provided under its Medicaid program through estate recoveries. Many
other states also conduct estate recoveries. In contrast, in fiscal year
2001, the Department of Veterans Affairs (VA) offset an estimated less than
one- tenth of 1 percent of its costs through beneficiary copayments.

Potential recoveries appear to be greater within the VA system than under
Medicaid. Home ownership is significantly higher among VA hospital users
than among Medicaid nursing home recipients, and veterans living in VA
nursing homes generally contribute less toward the cost of their care than

do Medicaid recipients, allowing veterans to build larger estates. In the
Veterans? Millenium Health Care and Benefits Act of November 30, 1999,
Congress required VA to increase cost sharing for those veterans without
service- connected disabilities who use nursing home care, but VA has not
yet issued rules to establish these cost- sharing amounts. To implement this
requirement, VA may wish to establish cost sharing rules for

such care by (1) adopting cost- sharing requirements similar to those
imposed by most state veteran?s homes and (2) implementing an estate
recovery program similar to those operated by many states under their
Medicaid programs. If VA recovered either 25 or 50 percent of its costs of

providing nursing home and domiciliary care to veterans with nonservice
connected disabilities through a combination of costsharing and estate
recoveries, the savings shown in the following table would apply, as

estimated by CBO.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 baseline Option: Recovery of 25 percent of costs
Budget authority 596 615 634 654 675 Outlays 596 615 634 654 675 Source:
Congressional Budget Office.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY05 FY07

Savings from the 2002 baseline Option: Recovery of 50 percent of costs
Budget authority 1, 194 1,232 1, 272 1,311 1, 354 Outlays 1, 194 1,232 1,
272 1,311 1, 354 Source: Congressional Budget Office.

Related GAO Products VA Aid and Attendance Benefits: Effects of Revised HCFA
Policy on Veterans? Use of Benefits (GAO/ HEHS- 97- 72R, Mar. 3, 1997).

VA Health Care: Better Data Needed to Effectively Use Limited Nursing Home
Resources (GAO/ HEHS- 97- 27, Dec. 20, 1996).

VA Health Care: Potential for Offsetting Long- Term Care Costs Through
Estate Recovery (GAO/ HRD- 93- 68, July 27, 1993).

VA Health Care: Offsetting Long- Term Care Cost By Adopting State Copayment
Practices (GAO/ HRD- 92- 96, Aug. 12, 1992). GAO Contact Cynthia A.
Bascetta, (202) 512- 7207

Reassess Unneeded Health Care Assets within the Department

of Veterans Affairs

Authorizing committees Veterans Affairs (House and Senate) Appropriations
subcommittees VA, HUD, and Independent Agencies (House and Senate)

Primary agency Department of Veterans Affairs Account Medical Care (36-
0160) Spending type Discretionary Budget subfunction 703/ Hospital and
medical care for veterans Framework theme Improve efficiency

The Department of Veterans Affairs (VA) owns 4, 700 buildings and 18,000
acres of land, which it uses to operate 181 major health care delivery
locations. These locations operate in 106 health care markets nationwide.
These include 40 markets where multiple VA facilities compete with each

other to serve veterans (115 locations) and 66 markets served by a single VA
delivery location. VA spends a sizeable portion of its $21 billion health
care budget to operate, maintain, and improve its delivery locations. All VA
delivery locations project a declining veteran population base for their
primary market areas, with two- thirds expecting declines greater than 33
percent over the next 20 years. Without a major restructuring, billions of
dollars will be used in the operation of hundreds of unneeded VA buildings
over the next several years.

In November 2000, VA contracted with a private consulting firm to conduct
rigorous analyses of its networks. Such analyses are to include a
determination of veterans? health care needs in each network and

alternatives analyses to enable VA to evaluate options for meeting needs in
the most cost- effective manner. In June 2001, VA proposed an asset
realignment plan for its Great Lakes Health Care System, which is estimated
to yield savings of $720 million over the next 20 years. Following

receipt of public comments, VA plans to finalize its realignment plan. In
future years, VA plans to complete asset realignment plans for other
networks. Although CBO agrees that reducing unneeded health care assets at
the VA has the potential to create savings, it cannot develop a savings
estimate until a specific legislative proposal is identified.

Related GAO Products VA Health Care: VA Is Struggling to Address Asset
Realignment Challenges (GAO/ T- HEHS- 00- 88, Apr. 5, 2000).

VA Health Care: Improvements Needed in Capital Asset Planning and Budgeting
(GAO/ HEHS- 99- 145, Aug. 13, 1999).

VA Health Care: Challenges Facing VA in Developing an Asset Realignment
Process (GAO/ T- HEHS- 99- 173, July 22, 1999).

Veterans? Affairs: Progress and Challenges in Transforming Health Care (GAO/
T- HEHS- 99- 109, Apr. 15, 1999).

VA Health Care: Capital Asset Planning and Budgeting Need Improvement (GAO/
T- HEHS- 99- 83, Mar. 10, 1999).

VA Health Care: Closing a Chicago Hospital Would Save Millions and Enhance
Access to Services (GAO/ HEHS- 98- 64, Apr. 16, 1998).

VA Health Care: Opportunities to Enhance Montgomery and Tuskegee Service
Integration (GAO/ T- HEHS- 97- 191, July 28, 1997).

VA Health Care: Lessons Learned From Medical Facility Integrations (GAO/ T-
HEHS- 97- 184, July 24, 1997).

Department of Veterans Affairs: Programmatic and Management Challenges
Facing the Department (GAO/ T- HEHS- 97- 97, Mar. 18, 1997).

VA Health Care: Opportunities for Service Delivery Efficiencies Within
Existing Resources (GAO/ HEHS- 96- 121, July 25, 1996).

VA Health Care: Opportunities to Increase Efficiency and Reduce Resource
Needs (GAO/ T- HEHS- 96- 99, Mar. 8, 1996).

VA Health Care: Challenges and Options for the Future (GAO/ T- HEHS- 95147,
May 9, 1995).

GAO Contact Cynthia A. Bascetta, (202) 512- 7207

Reducing VA Inpatient Food and Laundry Service Costs

Authorizing committees Veterans? Affairs (Senate and House) Appropriations
subcommittees VA, HUD, and Independent Agencies (Senate and House)

Primary agency Department of Veterans Affairs Account Medical Care (VA) (35-
0160) Spending type Discretionary Budget subfunction 703/ Hospital and
Medical Care for Veterans Framework theme Improve efficiency The Department
of Veterans Affairs (VA) provides inpatient food services and laundry
processing for more than 36,000 inpatients a day in hospitals,

nursing homes, and domiciliaries at 177 inpatient locations. VA spends about
$324 million and $52 million, respectively, for these activities and employs
7,000 Nutrition and Food Service (NFS) wage- grade workers, not including
dietitians and 1,100 laundry processing workers. The NFS

workers cook and prepare food, distribute food to patients, and retrieve and
wash plates, trays, and utensils. The laundry processing workers sort, wash,
dry, fold, and transport laundry. VA has downsized its inpatient volume by
35 percent over the last 5 years while it has increased its outpatient
volume. The total number of patients treated has increased from 2.9 to 3.6
million. As a result of the reduction in inpatient volume, the volume of
inpatient food and laundry services has

declined. In food services, VA has consolidated 28 of its food production
locations into 10, began using less expensive Veterans Canteen Service (VCS)
workers in 9 locations, and contracted out in 2 locations. For

laundry services, VA has consolidated 116 of its laundries into 67 locations
and used competitive sourcing to contract with the private sector to operate
2 VA laundries and to contract with 10 commercial laundries.

VA has the potential to further reduce its inpatient food service and
laundry costs by systematically assessing, at all its health care delivery
locations, options it is already using at some of its health care locations.
For example, using the benchmark of employees to food service volume at the

consolidated Central Texas Health Care System, the Congress could require VA
to consolidate 63 food production locations within a 90- minute driving
distance of each other into 29 production locations. Also, the Congress

could require VA to use less expensive VCS employees at all inpatient food
locations. Competitive sourcing between in- house and private sector
operations is more cost- effective and could also save additional food
service costs. The Congress could also require VA to consolidate its laundry
operations. Using VA?s laundry productivity standard of 160,000

pounds per employee, VA could close 13 laundries and consolidate their
workload at other laundries within a 4- hour drive. Finally, competitive
sourcing to determine if VA- owned and operated laundries, private operation
of VA- owned laundries, or commercial laundries are most cost effective
could save additional laundry costs. If Congress required VA to

consolidate and competitively bid its food service and laundry operations
and use VCS employees at all impatient food locations, CBO estimates that
the following budgetary savings could be achieved over 5 years.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 baseline

Budget authority 4 40 82 98 101 Outlays 4 36 77 95 100 Source: Congressional
Budget Office.

Related GAO Products VA Health Care: Consolidations and Competitive Sourcing
of Laundry Service Could Save Millions (GAO- 01- 61, Nov. 30, 2000).

VA Health Care: Expanding Food Service Initiatives Could Save Millions (GAO-
01- 64, Nov. 30, 2000).

VA Health Care: Laundry Service Operations and Costs (GAO/ HEHS- 00- 16,
Dec. 21, 1999).

VA Health Care: Food Service Operations and Costs at Inpatient Facilities
(GAO/ HEHS- 00- 17, Nov. 19, 1999). GAO Contact Cynthia A. Bascetta, (202)
512- 7207

800 General Prevent Delinquent Taxpayers from Benefiting from Federal
Programs Government, 900 Net

Target Funding Reductions in Formula Grant Programs Adjust Federal Grant
Matching Requirements Interest, and 999 Replace the 1- Dollar Note with the
1- Dollar Coin

Multiple Eliminate Pay Increases after Separation in Calculating Lump- Sum
Annual

Leave Payments Increase Fee Revenue from Federal Reserve Operations
Recognize the Costs Up- front of Long- Term Space Acquisitions Seek
Alternative Ways to Address Federal Building Repair Needs Improper Benefit
Payments Could Be Avoided or More Quickly Detected if Data from Various
Programs Were Shared Better Target Infrastructure Investments to Meet
Mission and ResultsOriented

Goals Information Sharing Could Improve Accuracy of Workers? Compensation

Offset Payments Determine Feasibility of Locating Federal Facilities in
Rural Areas

Prevent Delinquent Taxpayers from Benefiting from Federal Programs

Authorizing committees Finance (Senate) Ways and Means (House)

Primary agency Internal Revenue Service Spending type Direct Framework theme
Redefine beneficiaries

The federal government?s operations are funded primarily through tax revenue
collected from the nation?s taxpayers. In fiscal year 1999, the federal
government, through the Internal Revenue Service (IRS), collected nearly $1.
9 trillion in federal tax revenue to finance government operations. However,
while most taxpayers comply with their tax obligation, a

significant portion of taxpayers do not. Over time, this has led to unpaid
taxes, penalties, and interest, which totaled about $231 billion at the end
of fiscal year 1999. Of this amount, the IRS estimates that only $21
billion, or about 9 percent, will be collected. A significant number of
taxpayers, both individuals and businesses, who owe the federal government
billions of dollars in delinquent taxes receive significant federal benefits
and other federal payments. In addition to Social Security Administration
benefit payments, federal civilian

retirement payments, and federal civilian salaries, payments on federal
contracts and Small Business Administration loans are also provided to these
delinquent taxpayers. Currently, federal law does not prevent businesses or
individuals from receiving federal payments or loans when they are
delinquent in paying federal taxes. The Office of Management and Budget?s
(OMB) Circular A- 129 provides policies for the administration of federal
credit programs. These policies specifically direct agencies to determine
whether applicants are delinquent on any federal debt, including tax debt,
and to suspend the processing of credit applications if applicants have
outstanding tax debt until such time as the applicant pays the debt or
enters into a payment plan. Unfortunately, these policies have not been
effective in preventing the disbursement of federal dollars to individuals
and businesses with delinquent taxes. On October 5, 2000, the House
Committee on Government Reform voted unanimously to approve HR 4181, ?The
Debt Payment Incentive Act of 2000.? The provisions of this bill are
designed to enhance federal debt

collection by providing an incentive for debtors to pay delinquent taxes and
to prohibit delinquent taxpayers from being able to obtain federal contracts
and certain federal financial assistance. This bill could serve as an
incentive for delinquent taxpayers seeking federal assistance to fulfill
their tax obligations, thus improving overall compliance and reducing the
federal government?s balance of uncollectible tax assessments. CBO

cannot score this option until a specific proposal is developed. Related GAO
Products Debt Collection: Barring Delinquent Taxpayers From Receiving
Federal Contracts and Loan Assistance (GAO/ T- GGD/ AIMD- 00- 167, May 9,
2000).

Unpaid Payroll Taxes: Billions in Delinquent Taxes and Penalty Assessments
Are Owed (GAO/ AIMD/ GGD- 99- 211, Aug. 2, 1999).

Tax Administration: Billions in Self- Employment Taxes Are Owed (GAO/ GGD-
99- 18, Feb. 19, 1999). GAO Contacts Steven J. Sebastian, (202) 512- 3406

James R. White, (202) 512- 9110

Target Funding Reductions in Formula Grant Programs Authorizing committees
Multiple

Appropriations subcommittees Multiple Primary agencies Multiple Accounts
Multiple Spending type Discretionary/ Direct Budget subfunctions Multiple
Framework theme Redefine beneficiaries

Many federal grant programs with formula- based distribution of funds to
state and local governments are not well targeted to jurisdictions with high
programmatic needs but comparatively low funding capacity. As a result, it
is not uncommon that program recipients in areas with greater wealth and
relatively lower needs may enjoy a higher level of services than available
in harder pressed areas. Alternatively, these wealthier areas can provide
the same level of services but at lower tax rates than harder pressed areas.
At a time when federal discretionary resources are increasingly constrained,
better targeting of formula- based grant awards offers a strategy to bring
down federal outlays by concentrating reductions in wealthier localities
with comparatively fewer needs and greater capacity to absorb the cuts. At
the same time, redesigned formulas could hold harmless the hardest pressed
areas that are most vulnerable. For example, three entitlement programs-
Medicaid, Foster Care, and Adoption Assistance- reimburse approximately 55
percent of eligible state spending,

with the federal share ranging from a minimum of 50 to a maximum of 83
percent depending on the per capita income of the state. There are a variety
of ways in which budgetary savings could be achieved to improve the
targeting of these programs, including:

 Reduce the minimum federal reimbursement rate to below 50 percent. This
example would focus the burden of the reduced federal share on those states
with the highest per capita income. To the extent that per capita income
provides a reasonable basis for comparing state tax bases, this example
would require states with the strongest tax bases to shoulder the burden of
a reduced federal share.

 Reduce federal reimbursement rates only for those states with
comparatively low program needs and comparatively strong tax bases. Under
this example, the matching formula could be revised to better reflect the
relative number of people in need, geographic differences in the cost of
services, and state tax bases. Under the revised formula,

states with comparatively low need and strong tax bases would receive lower
federal reimbursement rates while states with high needs and weak tax bases
would continue to receive their current reimbursement percentage. This
example would focus the burden of a reduced federal

share in those states with the lowest need and the strongest ability to fund
program services from state resources. Many other formulas used to
distribute federal grant funding do not recognize the different fiscal
capacities of states to provide benefits from their own resources. Moreover,
many of these formulas have not been reassessed for years or even decades.
One option that would realize budgetary savings in nonentitlement programs
such as these would be to revise the funding formula to reflect the strength
of state tax bases. A new formula could be calibrated so that funding is
maintained in states or local governments with weak tax bases in order to
maintain needed program services but reduced in high tax base states to
realize budgetary savings. Examples of these types of formula grant programs
include the following.

 Federal Aid Highways: This program, the largest nonentitlement formula
grant program, allocates funds among the states based on their historic
share of funding. This approach reflects antiquated indicators of highway
needs, such as postal road miles and the land area of the state.

 Community Development Block Grant: This program allocates funds among
local governments based on housing age and condition, population, and
poverty, and does not include a factor recognizing local wealth or fiscal
capacity. For example, Greenwich, Connecticut, received five times more
funding per person in poverty in 1995 than that

provided to Camden, New Jersey, even though Greenwich, with per capita
income six times greater than Camden, could more easily afford to fund its
own community development needs. This disparity is due to the formula?s
recognition of older housing stock and population and its exclusion of
fiscal capacity indicators. An option that illustrates the potential savings
from targeting formula grant programs is a 10 percent reduction in the
aggregate total of all close- ended

or capped formula grant programs exceeding $1 billion. 13 The savings
achieved through this option, as estimated by CBO, could serve as a
benchmark for overall savings from this approach but should not be
interpreted as a suggestion for across- the- board cuts. Rather, as the
above examples indicate, the Congress may wish to determine specific
reductions on a program- by- program basis, after examining the relative
priority and

performance of each grant program.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Discretionary spending Savings from the 2002 baseline Budget authority 3,
156 4,264 4, 388 4,509 4, 690 Outlays 1, 867 5,227 6, 925 7,703 8, 162
Source: Congressional Budget Office.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Direct spending Savings from the CBO baseline Budget authority 5, 478 5,703
5, 675 5,622 5, 649

Outlays 801 1,459 1, 967 2,902 2, 593 Source: Congressional Budget Office.

Related GAO Products Formula Grants: Effects of Adjusted Population Counts
on Federal Funding to States (GAO/ HEHS- 99- 69, Feb. 26, 1999). 13 In the
transportation function, several very small, close- ended grants could not
be easily isolated in the baseline and these are included in the estimate.

Medicaid Formula: Effects of Proposed Formula on Federal Shares of State
Spending (GAO/ HEHS- 99- 29R, Feb. 19, 1999).

Welfare Reform: Early Fiscal Effect of the TANF Block Grant (GAO/ AIMD98-
137, Aug. 22, 1998).

Public Housing Subsidies: Revisions to HUD?s Performance Funding System
Could Improve Adequacy of Funding (GAO/ RCED- 98- 174, June 19, 1998).

School Finance: State Efforts to Equalize Funding Between Wealthy and Poor
School Districts (GAO/ HEHS- 98- 92, June 16, 1998).

School Finance: State and Federal Efforts to Target Poor Students (GAO/
HEHS- 98- 36, Jan. 28, 1998).

School Finance: State Efforts to Reduce Funding Gaps Between Poor and
Wealthy Districts (GAO/ HEHS- 97- 31, Feb. 5, 1997).

Federal Grants: Design Improvements Could Help Federal Resources Go Further
(GAO/ AIMD- 97- 7, Dec. 18, 1996).

Public Health: A Health Status Indicator for Targeting Federal Aid to States
(GAO/ HEHS- 97- 13, Nov. 13, 1996).

School Finance: Options for Improving Measures of Effort and Equity in
Title: (GAO/ HEHS- 96- 142, Aug. 30, 1996).

Highway Funding: Alternatives for Distributing Federal Funds (GAO/ RCED- 96-
6, Nov. 28, 1995).

Ryan White Care Act of 1990: Opportunities to Enhance Funding Equity (GAO/
HEHS- 96- 26, Nov. 13, 1995).

Department of Labor: Senior Community Service Employment Program Delivery
Could Be Improved Through Legislative and Administrative Action (GAO/ HEHS-
96- 4, Nov. 2, 1995).

GAO Contact Paul L. Posner, (202) 512- 9573

Adjust Federal Grant Matching Requirements

Authorizing committees Multiple Appropriations subcommittees Multiple
Primary agency Multiple Account Multiple Spending type Discretionary/ Direct
Budget subfunction Multiple Framework theme Redefine beneficiaries

Intergovernmental grants are a significant part of both federal and state
budgets. From the first annual cash grant under the Hatch Act of 1887, the
number of grant programs rose to more than 900 in 2000 with outlays of $284
billion, about 16 percent of total federal spending. Grants serve many

purposes beyond returning resources to taxpayers in the form of state
services. For example, grants can serve as a tool to supplement state
spending for nationally important activities. However, if states use federal
grant dollars to reduce (i. e., substitute for) their own spending for the
aided program either initially or over time, the fiscal impact of federal
grant dollars is reduced. Public finance experts suggest that grants are
unlikely to supplement

completely a state?s own spending, and thus some substitution is to be
expected in any grant. Our review of economists? recent estimates of
substitution suggests that every additional federal grant dollar results in
less than a dollar of total additional spending on the aided activity. The

estimates of substitution showed that about 60 cents of every federal grant
dollar substitutes for state funds that states otherwise would have spent.

Our analysis linked substitution to the way in which most grants are
designed. For example, many of the 87 largest grant programs did not include
features, such as state matching and maintenance- of- effort requirements,
that can encourage states to use federal funds as a supplement rather than a
replacement for their own spending. While not

every grant is intended to supplement state spending, proponents of grant
redesign argue that if some grants incorporated more rigorous maintenance-
of- effort requirements and lower federal matching rates, then

fewer federal funds could still encourage states to contribute to
approximately the same level of overall spending on nationally important

programs. Critics of this approach argue that such redesign would put a
higher burden on states because they would have to finance a greater share
of federally aided programs.

The savings that could be achieved from redesigning grants to increase their
fiscal impact would depend on the nature of the design changes and state
responses to those changes. For example, faced with more rigorous financing
requirements, states might reduce or eliminate their own financial support
for the aided activity. The outcome will be influenced by the trade- off
decisions that the Congress makes to balance the importance of achieving
each program?s goals and objectives against the goal of encouraging greater
state spending and lowering the federal deficit.

We were unable to precisely measure the budgetary impact of
inflationadjusted maintenance- of- effort requirements because current state
spending levels are not reported consistently. However, it was possible to
estimate the impact of changes in the matching rates on many close- ended

federal grants. For example, many such grants do not require any state or
local matching funds. The federal share of these programs could be reduced
modestly, for example from 100 percent to 90 percent, a reduction

unlikely to discourage states from participating in the program. CBO
estimates that the introduction of a 10 percent matching requirement on some
of the largest federal discretionary grant programs that are currently 100
percent federally funded, and a corresponding 10 percent reduction from the
appropriated grant levels, would result in the savings shown below. If such
a change in match rates were combined with inflationadjusted maintenance-
of- effort requirements, states that choose to participate in the program
would have to maintain the same or increase levels of program spending in
order to receive federal funding.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Discretionary spending Savings from the 2002 baseline Budget authority 2,
480 2,973 3, 068 3,161 3, 261 Outlays 868 2,113 2, 720 2,975 3, 142 Source:
Congressional Budget Office.

Related GAO Products Welfare Reform: Early Fiscal Effects of the TANF Block
Grant (GAO/ AIMD- 98- 137, Aug. 22, 1998).

Federal Grants: Design Improvements Could Help Federal Resources Go Further
(GAO/ AIMD- 97- 7, Dec. 18, 1996).

Block Grants: Issues in Designing Accountability Provisions (GAO/ AIMD- 95-
226, Sept. 1, 1995). GAO Contact Paul L. Posner, (202) 512- 9573

Replace the 1- Dollar Note with a 1- Dollar Coin

Authorizing committees Banking, Housing, and Urban Affairs (Senate)
Financial Services (House)

Appropriations subcommittees Treasury and General Government (Senate)
Treasury, Postal Service, and General Government (House)

Primary agency Department of the Treasury Account United States Mint Public
Enterprise Fund (20- 4159)

Spending type Direct/ Governmental Receipts Budget subfunction 803/ Central
fiscal operations Framework theme Improve efficiency

Replacing the 1- dollar note with a new 1- dollar coin would save the
government hundreds of millions of dollars annually. Substituting a dollar
coin for a dollar note could yield over $450 million of savings to the
government per year, on average, over a 30- year period. The savings come
about because a coin lasts longer than paper money; the Federal Reserve

has lower processing costs with coins than paper money; and a coin would
result in interest savings from the additional seigniorage earned on a coin
(i. e., the difference between the face value of a coin and its production
cost). In the past, the executive branch has not supported the replacement
of the

$1 note with a coin because of the belief that the Congress would respond to
public pressure and allow both the coin and note to be used. All Western
economies now use a coin for monetary transactions at the same value that
Americans use the more costly paper note. These countries have demonstrated
that public resistance to such a change can be managed and overcome. The
United States has released a new gold- colored dollar coin this year. While
initial demand for the coin has been strong, for it to realize

its savings potential, the note has to be eliminated. About 1 billion coins
have been issued, but for the most part they are being held by collectors
and do not circulate. With proper congressional oversight, public resistance
to elimination of the $1 note could be overcome and public support for the
coin improved. For example the Congress could require the

Treasury or the Federal Reserve to conduct a public awareness campaign,

explaining the savings that could be achieved by eliminating the $1 note. In
addition, the Congress could require the Federal Reserve or the Treasury
Department to designate a central spokesperson who would handle all

public and press inquiries about the elimination of the $1 note. Even though
this option would result in significant long- term savings, it does not
yield savings over the first 5 years, as scored by CBO. First, seigniorage,
which would lower interest costs to the government by either replacing the
need to borrow from the public or allowing the government to pay down its
accumulated debt more quickly, is not included in the savings estimate
because it is not considered part of the budget. Second, while the initial
5- year window captures much of the additional cost for the U. S. Mint to
produce and stockpile a sufficient number of 1- dollar coins for

circulation, it includes only a fraction of the savings to the Federal
Reserve System from lower production and processing costs. Related GAO
Products A Dollar Coin Could Save Millions (GAO/ T- GGD- 95- 203, July 13,
1995).

1- Dollar Coin Reintroduction Could Save Millions if It Replaced the 1-
Dollar Note (GAO/ T- GGD- 95- 146, May 3, 1995).

1- Dollar Coin: Reintroduction Could Save Millions if Properly Managed (GAO/
GGD- 93- 56, Mar. 11, 1993).

National Coinage Proposals: Limited Public Demand for New Dollar Coin or
Elimination of Pennies (GAO/ GGD- 90- 88, May 23, 1990). GAO Contact Bernard
L. Ungar, (202) 512- 8387

Eliminate Pay Increases after Separation in Calculating Lump- Sum

Authorizing committees Governmental Affairs (Senate)

Annual Leave

Government Reform (House) Appropriations subcommittees Multiple

Payments

Primary agency Office of Personnel Management Account Multiple Spending type
Discretionary Budget subfunction Multiple Framework theme Improve efficiency
Employee pay and benefits is one of many areas of the federal budget
receiving congressional attention because of scarce federal resources. One
such benefit is an employee?s entitlement under 5 U. S. C. 5551( a) to
receive a lump- sum payment for any accumulated, unused annual leave upon
separation from federal service. In calendar year 1996, the cost of lumpsum

leave payments to separating civilian employees was about $562 million
governmentwide. We were requested to identify any personnel cost savings
that could be achieved from limiting the lump- sum leave payment to the
employee?s pay rate at the time of separation, instead of the current method
of assuming the employee had remained in service until the entire leave
balance had expired. Based in part on our information and analysis, CBO
estimated that agencies

could realize personnel cost savings of $20 million over 5 years if lump-
sum annual leave payments were limited to the rate of pay at the time of
separation. If the Congress enacted such a limitation, no General Schedule
(GS) pay increases that go into effect following an employee?s separation
would be added to the payment calculation. To illustrate how small the
maximum reduction in payments would be to individual separating employees,
we calculated what the maximum reduction in lump- sum leave payments would
have been to separating employees in January 1996 at various GS pay levels
if the net 2.54 percent pay increase had been

eliminated from their lump- sum leave payments. For example, we reported
that the maximum reduction for an average GS- 15 pay level would be from $86
to $481, depending on the amount of accrued annual leave.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 funding level Budget a uthority 4 4 5 5 5 Outlays 4 4
5 5 5 Source: Congressional Budget Office.

Related GAO Product Federal Civilian Personnel: Cost of Lump- Sum Annual
Leave Payments to Employees Separating From Government (GAO/ GGD- 97- 100,
May 29, 1997). GAO Contact J. Christopher Mihm, (202) 512- 6806

Increase Fee Revenue from Federal Reserve Operations

Authorizing committees Banking, Housing and Urban Affairs (Senate) Financial
Services (House) Primary agency Federal Reserve Board Spending type Direct
Framework theme Improve efficiency The Federal Reserve is responsible for
conducting monetary policy, maintaining the stability of financial markets,
providing services to financial institutions and government agencies, and
supervising and regulating banks and bank- holding companies. The Federal
Reserve is unique among governmental entities in its mission, structure, and
finances.

Unlike federal agencies funded through congressional appropriations, the
Federal Reserve is a self- financing entity that deducts its expenses from
its revenue and transfers the remaining amount to the U. S. Department of
the Treasury. Although the Federal Reserve?s primary mission is to support a
stable economy, rather than to maximize the amount transferred to Treasury,
its revenues contribute to total U. S. revenues and, thus, can help reduce
the federal deficit. One way to enhance the Federal Reserve?s revenue would
be to charge fees for bank examinations, thus increasing the Federal
Reserve?s return to taxpayers. The Federal Reserve Act authorizes the
Federal Reserve to charge fees for bank examinations, but the Federal
Reserve has not done

so, either for the state- member banks it examines or the bank- holding
company examinations it conducts. Taxpayers in effect bear the cost of these
examinations, which total hundreds of millions of dollars annually. If fees
were assessed similar to those charged national banks with a credit allowed
for fees paid to state regulators, the following savings could be

achieved.

Five- Year Savings

Dollars in millions

FY03 FY04 FY05 FY06 FY07

Savings from the 2002 funding level Added receipts 86 90 95 99 104 Note:
Estimates are presented net of the tax effect. Source: Congressional Budget
Office.

Related GAO Products Federal Reserve System: Current and Future Challenges
Require Systemwide Attention (GAO/ T- GGD- 96- 159, July 26, 1996).

Federal Reserve System: Current and Future Challenges Require Systemwide
Attention (GAO/ GGD- 96- 128, June 17, 1996).

Federal Reserve Banks: Internal Control, Accounting, and Auditing Issues
(GAO/ AIMD- 96- 5, Feb. 9, 1996).

GAO Contact Thomas J. McCool, (202) 512- 8678

Recognize the Costs Up- front of Long- Term Space Acquisitions

Authorizing committees Environment and Public Works (Senate) Transportation
and Infrastructure (House)

Appropriations subcommittees Treasury and General Government (Senate)
Treasury, Postal Service, and General Government (House)

Primary agency General Services Administration Account Federal Buildings
Fund (47- 4542) Spending type Discretionary Budget subfunction 804/ General
property and records management

Framework theme Improve efficiency

Building ownership through construction or lease- purchase- where ownership
of the asset is transferred to the government at the end of the lease
period- is generally less costly than meeting agencies? long- term
requirements through ordinary operating leases. However, we have reported
over the last decade that GSA relies heavily on operating leases to meet the
long- term space needs of the federal government. In March 1999,

we reported that for nine major operating lease acquisitions GSA proposed
between fiscal years 1994 and 1996, construction would have been the least
cost option in eight cases. In these eight cases, lease- purchase was
estimated to be more costly than construction, but less than the operating
lease option GSA proposed. For example, the present value cost for the

operating lease to meet the Patent and Trademark Office?s long- term
requirements in northern Virginia was estimated to be about $973 million.
Construction was estimated to be $925 million- or $48 million less- and
lease- purchase was estimated at $935 million- or $38 million less than the
operating lease option. In total for these eightcases, construction and
lease- purchase had cost advantages over operating leases estimated at about
$126 million and $107 million, respectively.

Historically, the Federal Buildings Fund (FBF) has not generated sufficient
revenue for constructing new office buildings. Operating leases have become
an attractive option because the total costs do not have to be scored up-
front for budget purposes and payments are spread out over time. However, as
shown above, they are a costly alternative to ownership over the long- run.
A lease- purchase would seem to be a desirable

alternative from GSA?s point of view. However, the budget scorekeeping rules
established by the Budget Enforcement Act of 1990 (BEA) effectively prevent
GSA from taking advantage of this option. Furthermore, we reported in August
2001 that the scorekeeping rules might result in shorter terms for some
leases, which could result in higher costs than for longerterm

leases. The scorekeeping rules require the total budget authority for lease-
purchases and capital leases to be recognized and recorded up- front in the
year they are approved. Although GSA has viewed the up- front funding
requirement as an impediment to meeting agency space needs in a cost-
effective manner, it is generally recognized as an important tool for
maintaining governmentwide fiscal control. That is, the rules prevent
agencies and Congress from committing the government to future payments that
may exceed future resources and spending priorities. Since lease- purchases
are not a viable option for improving the costeffectiveness of space
acquisition, an option that could result in long- term savings for the
government would be to recognize that many operating leases are used for
long- term needs and should be treated on the same basis as the ownership
options. This would make such instruments comparable in the budget to direct
federal ownership and would foster more cost- effective decisionmaking by
OMB and Congress. Applying the principle of up- front full recognition of
the long- term costs to all options for satisfying long- term space needs-
construction, purchases, leasepurchases, or operating leases- is more likely
to result in selecting the most cost- effective alternative than the current
scoring rules. It is important to note that there would be implementation
challenges if this option is pursued. If operating leases were scored up-
front, adjustments to

the BEA caps would be necessary to accommodate the scoring change. For
existing leases, the additional budget authority would need to be provided
and the caps would have to be adjusted upward initially to recognize the
higher up- front costs. The caps would be lowered in

succeeding years to recognize the lower annualized costs. 14 Such a change
may also need to be phased in because of resource constraints. Finally, it
would be difficult to reach agreement on what constitutes long- term space
needs that would warrant this up- front budgetary treatment. GSA officials
suggested in July 1997 that if changes to the scoring rules are made, all
operating leases should be scored up- front. The GSA officials said that its

14 Existing contracts could also be ?grandfathered? in as occurred under the
lease- purchase rule.

leases no longer contain a clause permitting the government to terminate
them for convenience and thus, its leases effectively commit the government
for the term of the lease when they are signed. Even though

this option should result in long- term savings, it does not yield savings
over the first 5 years, as scored by CBO. Related GAO Products Budget
Scoring: Budget Scoring Affects Some Lease Terms, but Full

Extent Is Uncertain (GAO- 01- 929, Aug. 31, 2001).

Federal Buildings: Funding Repairs and Alterations Has Been a Challenge-
Expanded Financing Tools Needed (GAO- 01- 452, Apr. 12, 2001).

General Services Administration: Comparison of Space Acquisition
Alternatives- Leasing to Lease- Purchase and Leasing to Construction (GAO/
GGD- 99- 49R, Mar. 12, 1999).

Space Acquisition Cost: Comparison of GSA Estimates for Three Alternatives
(GAO/ GGD- 97- 148R, Aug. 6, 1997).

Budget Issues: Budgeting for Federal Capital (GAO/ AIMD- 97- 5, Nov. 12,
1996).

Budget Issues: Budget Scorekeeping for Acquisition of Federal Buildings
(GAO/ T- AIMD- 94- 189, Sept. 20, 1994).

Federal Office Space: Increased Ownership Would Result in Significant
Savings (GAO/ GGD- 90- 11, Dec. 22, 1989).

GAO Contact Bernard L. Ungar, (202) 512- 8387

Seek Alternative Ways to Address Federal Building Repair Needs

Authorizing committees Environment and Public Works (Senate) Transportation
and Infrastructure (House)

Appropriations subcommittees Treasury and General Government (Senate)
Treasury, Postal Service, and General Government (House)

Primary agency General Services Administration Accounts Federal Building
Fund (47- 4542) Spending type Discretionary Budget subfunction 804/ General
Property and Record Management

Framework theme Improve efficiency The General Services Administration (GSA)
is the federal government?s real property manager, providing office space
for most federal agencies. In this capacity, GSA is responsible for keeping
the approximately 1, 700 federal buildings it manages in good repair to
ensure that the value of these assets is preserved and that tenants occupy
safe and modern space. Many buildings in GSA?s portfolio are more than 50
years old, monumental in design, and historically significant. Consequently,
unlike a private sector company, GSA cannot always dispose of a building
simply because it would be economically advantageous to do so. GSA
identifies needed repairs through detailed building inspections and sorts
them into three tiers based on costs. Repairs in the highest cost tier must
be approved by the Office of Management and Budget (OMB) and then authorized
for funding by the Congress. GSA receives annual authority for funding for
repairs in the other two tiers.

As of the end of fiscal year 1999, GSA data showed an unfunded inventory of
approximately $4 billion in repairs and alterations that needed to be
completed at its buildings. A major reason for this large and growing
backlog is the lack of available funding. For example, from 1995 through
2001, the Congress approved only 63 percent of the approximately $6. 8
billion GSA requested for repair and alteration projects.

Unless the Congress increases the funding available to GSA to address its
backlog of repair and alteration needs, it is likely that this backlog will
continue to grow given the age of the current federal inventory of
buildings.

Delaying or not performing needed repairs and alterations can have serious
consequences, including health and safety concerns, and lead to higher
operating costs associated with inefficient heating and cooling systems.
Given the current and likely increasing demands on discretionary
appropriations, the Congress may wish to grant GSA the authority to
experiment with funding alternatives, such as exploring public- private
partnerships, and retaining funds from real property transactions, like the
sale of unneeded assets. While CBO agrees that alternative funding sources
could potentially offset repair expenses, it could not develop an

estimate until a specific proposal is developed. Related GAO Products
General Services Administration: Status of Achieving Key Outcomes and

Addressing Major Management Challenges (GAO- 01- 931, Aug. 3, 2001).

Public- Private Partnerships: Pilot Program Needed to Demonstrate the Actual
Benefits of Using Partnerships (GAO- 01- 906, July 25, 2001).

Federal Buildings: Funding Repairs and Alterations Has Been a Challenge-
Expanded Financing Tools Needed (GAO- 01- 452, Apr. 12, 2001).

Federal Buildings: Billions are Needed for Repairs and Alterations (GAO/
GGD- 00- 98, Mar. 30, 2000). GAO Contact Bernard L. Ungar, (202) 512- 8387

Improper Benefit Payments Could Be Avoided or More Quickly Detected if

Authorizing committees Multiple

Data from Various

Appropriation committees Multiple

Programs Were Shared

Primary agency Multiple Accounts Multiple Spending type Direct/
Discretionary Budget subfunction Multiple Framework theme Improve efficiency

Many federally funded benefit and loan programs rely on applicants and
current recipients to accurately report information, such as the amount of
income they earn, that affects their eligibility for assistance. To the
extent that such information is underreported or not reported at all, the
federal government overpays benefits or provides loans to individuals who
are ineligible. In recent years, others and we have demonstrated that
federally funded benefit and loan programs, such as housing and higher
education assistance, have made hundreds of millions of dollars in improper
payments. Some of these payments were made improperly because the federal,
state, and local entities that administer the programs sometimes lacked
adequate, timely data needed to determine applicants? and current
recipients? eligibility for assistance. Our previous work has demonstrated
that improper payments can be avoided or detected more quickly by using data
from other programs, or data maintained for other purposes, to verify self-
reported information.

Federally funded benefit and loan programs provide cash or in- kind
assistance to individuals who meet specified eligibility criteria. Because
these programs require similar information to make eligibility

determinations, it is more efficient to share the necessary data with one
another rather than requiring each program to independently verify similar
data. These programs may verify self- reported information by comparing
their records with independent, third- party data sources from other federal
or state agencies as well as private organizations. For example, benefit and

loan programs can compare large amounts of information on applicants and
recipients by using computers to match automated records. Electronic
transmission of data and on- line access to agencies? databases are
additional tools program administrators can use to share important
information on applicants and recipients in a timely, efficient manner. If

used consistently, they can help program administrators check the accuracy
of individuals? self- reported statements as well as identify information
relevant to eligibility that the applicants and recipients themselves have
not provided.

Various opportunities exist for federal, state, and local agencies to save
taxpayer dollars by sharing information that affects individuals?
eligibility for benefits. For example, the Department of Education?s OIG
estimates

that underreported income contributed to about $109 million in excess Pell
Grant awards in 1995 and 1996. Access to IRS taxpayer information could have
helped Education prevent some of these overpayments. Improper payments could
also be avoided or detected more quickly in other programs. For example,
four states and the District of Columbia estimate

that they prevented about $16 million in improper TANF, Medicaid and Food
Stamp benefit payments by participating in the Public Assistance Reporting
Information System (PARIS). PARIS could also help other states save program
funds by identifying and preventing future improper payments.. The three
federally funded benefit and loan programs we examined-

Temporary Assistance for Needy Families, Tenant- Based Section 8 and Public
Housing, and student grants and loans- all use data sharing to varying
degrees to verify information that applicants and current benefit

recipients provide. However, the weaknesses in these programs? eligibility
determination processes could be mitigated if additional data sources were
available for sharing. For example, the Congress could grant the Department
of Education access to IRS taxpayer data which could reduce overpayments in
student loan programs. CBO could not estimate savings until a more specific
option is developed.

Related GAO Products Public Assistance: PARIS Project Can Help States Reduce
Improper Benefit Payments (GAO- 01- 935, Sept. 6, 2001).

The Challenge of Data Sharing: Results of a GAO- Sponsored Symposium on
Benefit and Loan Programs (GAO- 01- 67, Oct. 20, 2000).

Benefit and Loan Programs: Improved Data Sharing Could Enhance Program
Integrity (GAO/ HEHS- 00- 119, Sept. 13, 2000).

GAO Contact Robert E. Robertson, (202) 512- 7215

Better Target Infrastructure Investments to Meet Mission and ResultsOriented

Authorizing committees Multiple

Goals

Appropriations subcommittees Multiple Primary agency Multiple Accounts
Multiple Spending type Discretionary Budget subfunction Multiple Framework
theme Improve efficiency The federal government plays a prominent role in
identifying the nation?s

infrastructure investment needs and has spent an average of $149 billion (in
constant 1998 dollars) annually since the late 1980s on the nation?s
infrastructure. A sound public infrastructure plays a vital role in
encouraging a more productive and competitive national economy and meeting
public demands for safety, health, and improved quality of life. Little,
however, is known about the comparability and reasonableness of federal
agencies? estimates for infrastructure needs. In fact, infrastructure

?need? is difficult to define and to distinguish from ?wish lists? of
capital projects. In a recent review of seven federal agencies? investment
practices, GAO found that none of them followed leading practices for
capital decisionmaking. In particular, five of the agencies did not develop

assessments of the investments needed to meet outcomes. Rather, these
agencies developed estimates that were summations of the costs of projects
eligible to receive federal funding or projects identified by the Congress
and others. Also, agencies were not likely to (1) develop a longterm

capital plan, (2) use cost- benefit analysis as the primary method to
compare alternative investments, (3) rank and select projects for funding
based on established criteria, and (4) budget for projects in useful
segments.

Given the importance of federal infrastructure investment to the nation, the
Congress may wish to have the Office of Management and Budget to develop
standards for agencies to follow when submitting funding requests. At a
minimum, requiring agencies to link the benefits of investment projects to
the achievement of mission goals would give

decisionmakers better information to base funding decisions on.

Infrastructure investment requests based on other leading practices,
especially those enumerated above, could also increase the Congress?
capacity to make better investment decisions. CBO cannot develop a

savings estimate until a specific proposal is developed. Related GAO
Products U. S. Infrastructure: Agencies? Approaches to Developing Investment

Estimates Vary (GAO- 01- 835, July 20, 2001).

Executive Guide: Leading Practices in Capital Decision- Making (GAO/ AIMD-
99- 32, Dec. 1998). GAO Contact Peter F. Guerrero, (202) 512- 4907

Information Sharing Could Improve Accuracy of Workers? Compensation Offset

Authorizing committees Finance (Senate)

Payments

Ways and Means (House) Appropriations subcommittees Labor, Health and Human
Services, and Education (Senate and House)

Primary agency Social Security Administration Accounts Supplemental Security
Income Program (28- 0406)

Federal Disability Insurance Trust Fund (208007) Spending type Direct Budget
subfunction Multiple Framework theme Improve efficiency

Between 1991 and 1998, workers received an average of about $43 billion each
year in cash and medical benefits through the nation?s workers? compensation
(WC) programs to cover work- related injuries. Workers? compensation
consists of a complex array of programs that provide

benefits to persons injured while working or who suffer occupational
diseases. Each state and the District of Columbia requires employers
operating in its jurisdictions to provide WC insurance for their employees
and to report work- related injuries to the state WC agency. WC
beneficiaries may also be eligible for federal program benefits, such as

Social Security Disability Insurance (DI) and Supplemental Security Income
(SSI). In such programs, the law often limits access or reduces benefits for
those receiving workers? compensation. Generally, if a person receives both
DI and WC benefits, and together these benefits exceed 80 percent of the
injured worker?s average current earnings, the Social Security
Administration (SSA) generally reduces the DI benefit. This reduction in
benefits is referred to as the WC offset. A number of other federal programs
also rely on information on WC benefit payments as a

determinant of federal benefit payments. For example, Medicare covers
medical expenses for persons who have received DI benefits for 2 years, but
WC insurers are supposed to be the primary payer and Medicare the

secondary payer of medical expenses that arise from work- related injuries
and are covered under the WC program. Similarly, other federal programs,
including food stamps and Section 8 rental housing assistance consider WC
benefits as income or assets when determining program eligibility and
benefit payment amounts.

Because there is no national reporting system that identifies WC
beneficiaries, federal agencies largely rely on applicants and beneficiaries
to report their WC benefits. This fragmented reporting system has resulted
in federal agencies making erroneous payments. For example, evaluations by
GAO, SSA, and SSA?s Office of Inspector General (OIG) have found significant
overpayment and underpayment errors related to the WC offset provision.
Ongoing SSA reviews of benefit payments indicate that more

than 50 percent of DI beneficiaries whose benefits are being offset have
been paid inaccurately. Another study projected $1.5 billion in payment
errors related to the WC offset. About 85 percent of these errors are
underpayments of entitled benefits that result when DI beneficiaries do not
report reductions in their WC benefits. SSA?s administration of the WC
offset provision continues to be undermined by the lack of reliable

information identifying the receipt of WC benefits by DI beneficiaries.
Other federal programs, such as Medicare, food stamps, and Section 8 rental
housing also rely on self- reported WC information as a basis for
determining benefit payments, and similarly are vulnerable to payment errors
as a result. For example, Medicare relies on its applicants and
beneficiaries to self- report WC benefits and is vulnerable to payment
errors when they do not. HCFA officials have estimated that about 8 percent
of its beneficiaries have medical claims that may be the responsibility of
another health insurer, liability insurer or WC program. A GAO review of one
state

(not nationally representative) found that (1) Medicare?s interests relative
to the payment of future medical benefits were not considered in any of the
WC cases resolved through settlements (83 percent of our sample), (2) HCFA
was aware of WC benefits being received in only one- third of the cases
where it paid benefits under Part A (a nonrandom sample), and (3) about 39
percent of joint WC and Medicare beneficiaries had received Medicare
benefits for treatments that were potentially related to the WC injury.
Finally, an inability to obtain WC benefit information could affect the
accuracy of benefit payments for other federal programs such as food

stamps and Section 8 housing and could result in the overpayment of
benefits.

Given the fragmented nature of WC programs, the Congress could establish a
reporting requirement that WC Insurers provide SSA with information on
changes to WC benefit payments. SSA could use this information to make
adjustments to DI and SSI payments accordingly, and this information could
be shared with other federal agencies. Doing so would reduce the potential
for errors in the disbursing of benefits. Because budgetary savings would
depend on the key details of the requirements- such as

which insurers would be covered and how frequently they would be required to
report- CBO cannot estimate them without more information.

Related GAO Product Workers? Compensation: Action Needed to Reduce Payment
Errors in SSA Disability and Other Programs (GAO- 01- 367, May 4, 2001).

GAO Contact Barbara D. Bovbjerg, (202) 512- 7515

Determine Feasibility of Locating Federal Facilities in Rural

Areas

Authorizing committees Multiple Appropriations subcommittees Multiple
Primary agency General Services Administration Accounts Multiple Spending
type Discretionary Budget subfunction Multiple Framework theme Improve
efficiency The Rural Development Act of 1972 (RDA) and the Competition in
Contracting Act of 1984 (CICA), as well as executive orders, provide

guidance on site location decisions for federal facilities. While
considering areas in which to locate, RDA requires all executive departments
and agencies to establish policies and procedures giving first priority to
the location of new offices and other facilities in rural areas. 15 The
General Services Administration (GSA) is the central management agency for

acquiring real estate for many federal agencies, while some other agencies,
such as the Department of Defense, have their own authority to acquire
space.

A recent survey of 115 new federal site locations acquired between 1998 and
2000 for buildings over 25,000 square feet found that about 72 percent were
located in urban areas. Agencies said they selected urban areas primarily
because of the need to be near agency clients and related

government and private sector facilities to accomplish their missions. Eight
of the 13 cabinet agencies surveyed had no formal RDA siting policy, and
there was little evidence that agencies considered RDA?s requirements when
siting new federal facilities. Furthermore, GSA has not developed a

cost- conscious, governmentwide location policy. Federal site acquisition
practices differ from private sector practices in that private sector
companies are more likely to take advantage of local incentives and of

lower real estate and labor costs. 15 Government agencies have different
definitions of what constitutes a rural area. See GAO01- 805, p. 25 for more
detail.

Obviously, many factors are considered in site location decisions, and chief
among them should be the agency?s ability to accomplish its mission in the
best way possible and to retain an adequate number of skilled employees.

But, where there are opportunities to reduce costs and/ or improve service
by locating to rural areas, federal agencies may benefit from more closely
following private sector practices. Consequently, the Congress may wish to
follow through on the intent of RDA by requiring federal agencies to
establish siting policies consistent with RDA?s goals and also requiring GSA

to establish a formal governmentwide siting policy that takes into account
potential cost savings from locating in rural areas. Because specific
options have not been proposed, CBO is unable to estimate cost savings.

Related GAO Product Facilities Location: Agencies Should Pay More Attention
to Costs and Rural Development Act Has Had Limited Impact (GAO- 01- 805,
July 31, 2001).

GAO Contact Bernard L. Ungar, (202) 512- 8387

Receipts Tax Interest Earned on Life Insurance Policies and Deferred
Annuities Further Limit the Deductibility of Home Equity Loan Interest Limit
the Tax Exemption for Employer- Paid Health Insurance

Repeal the Partial Exemption for Alcohol Fuels from Excise Taxes on Motor
Fuels Index Excise Tax Bases for Inflation

Increase Highway User Fees on Heavy Trucks Require Corporate Tax Document
Matching Improve Administration of the Tax Deduction for Real Estate Taxes
Increase Collection of Returns Filed by U. S. Citizens Living Abroad
Increase the Use of Seizure Authority to Collect Delinquent Taxes Increase
Collection of Self- employment Taxes Increase the Use of Electronic Funds
Transfer for Installment Tax

Payments Reduce Gasoline Excise Tax Evasion Improve Independent Contractor
Tax Compliance Expand the Use of IRS?s TIN- Matching Program

Tax Interest Earned on Life Insurance Policies and Deferred Annuities

Authorizing committees Finance (Senate) Ways and Means (House)

Primary agency Internal Revenue Service Spending type Direct Framework theme
Reassess objectives

Interest earned on life insurance policies and deferred annuities, known as

?inside buildup,? is not taxed as long as it accumulates within the
contract. Although the deferred taxation of inside buildup is similar to the
tax treatment of income from some other investments, such as capital gains,
it differs from the policy of taxing interest as it accrues on certain other
investments, such as certificates of deposit and original issue discount

bonds. Not taxing inside buildup may have merit if it increases the amount
of insurance coverage purchased and the amount of income available to
retirees and beneficiaries. However, the tax preference given life insurance

and annuities mainly benefits middle- and upper- income people. Coverage for
low- income people is largely provided through the Social Security system,
which provides both insurance and annuity protection. The Congress may wish
to consider taxing the interest earned on life insurance policies and
deferred annuities. The table below reflects JCT?s estimated savings from
this option, effective taxable years beginning after December 31, 2001.
Investment income from annuities purchased as part of a qualified individual
retirement account would be tax- deferred until benefits were paid.

Five- Year Revenues

Dollars in billions

FY03 FY04 FY05 FY06 FY07

Revenue gain 11. 4 23. 2 23. 8 24. 5 25. 2 Note: JCT provided its revenue
estimates in billions of dollars. Source: Joint Committee on Taxation.

Related GAO Product Tax Policy: Tax Treatment of Life Insurance and Annuity
Accrued Interest (GAO/ GGD- 90- 31, Jan. 29, 1990).

GAO Contact James R. White, (202) 512- 9110

Further Limit the Deductibility of Home Equity Loan Interest

Authorizing committees Finance (Senate) Ways and Means (House)

Primary agency Department of the Treasury Spending type Direct Framework
theme Reassess objectives

The term home equity borrowing or financing is usually applied to mortgages
other than the original loan used to acquire a home or to any subsequent
refinancing of that loan. Interest is deductible on up to $100,000 of home
equity indebtedness and $1 million of indebtedness used to acquire a home.
Home equity financing is not limited to home- related uses and can be used
to finance additional consumption by borrowers. Use of mortgage- related
debt to finance nonhousing assets and consumption purchases through home
equity loans could expose borrowers to increased risk of losing their homes
should they default. Equity concerns may exist because middle- and upper-
income taxpayers

who itemize primarily take advantage of this tax preference, and such an
option is not available to people who rent their housing.

One way to address the issues concerning the amounts or uses of home equity
financing would be to limit mortgage interest deductibility up to $300,000
of indebtedness for the taxpayer?s principal and second residence.

Assuming an effective date of taxable years beginning after December 31,
2002, JCT estimates that this option would generate the following revenues.

Five- Year Revenues

Dollars in billions

FY03 FY04 FY05 FY06 FY07

Revenue gain 4.7 5. 1 5.7 6. 1 6.6 Note: JCT provided its revenue estimates
in billions of dollars. Source: Joint Committee on Taxation.

Related GAO Product Tax Policy: Many Factors Contributed to the Growth in
Home Equity Financing in the 1980s (GAO/ GGD- 93- 63, Mar. 25, 1993). GAO
Contact James R. White, (202) 512- 9110

Limit the Tax Exemption for Employer- Paid Health Insurance

Authorizing committees Finance (Senate) Ways and Means (House)

Primary agency Internal Revenue Service Spending type Direct Framework theme
Redefine beneficiaries

The current tax treatment of health insurance- amounting to revenue losses
of about $67. 6 billion in 2001- gives few incentives to workers to
economize on purchasing health insurance. Employer contributions for

employee health protection are considered deductible, ordinary business
expenses and employer contributions are not included in an employee?s
taxable income. The same is true for a portion of the premiums paid by self-
employed individuals. Although some employers or employees could drop
employer- sponsored coverage without the tax exemption, some analysts
believe that the tax- preferred status of these benefits has contributed to
the overuse of health care services and large increases in our nation?s
health care costs. In addition, the primary tax benefits accrue to those in
high tax brackets who also have above average incomes. Placing a cap on the
amount of health insurance premiums that could be

excluded- including in a worker?s income the amount over the cap- could
improve incentives and, to a lesser extent, tax equity. Alternatively,
including health insurance premiums in income but allowing a tax credit for
some percentage of the premium would improve equity since tax

savings per dollar of premium would be the same for all taxpayers.
Incentives could be improved for purchasing low- cost insurance if the
amounts given credits were capped. One specific option the Congress may wish
to consider would be to tax all employer- paid health insurance, while
providing individuals a refundable tax credit of 20 percent of premiums that
they or their employers would

pay, with eligible premiums capped at $500 and $200 per month for family
coverage and individuals, respectively. JCT did not develop a revenue
estimate for this option due to uncertainty in determining the amount of
health insurance that would be purchased given a repeal of the employer
exclusion.

Related GAO Product Tax Policy: Effects of Changing Tax Treatment of Fringe
Benefits (GAO/ GGD- 92- 43, Apr. 7, 1992). GAO Contact James R. White, (202)
512- 9110

Repeal the Partial Exemption for Alcohol Fuels from Excise Taxes on Motor
Fuels

Authorizing committees Finance (Senate) Ways and Means (Senate)

Primary agency Internal Revenue Service Spending type Direct Framework theme
Redefine beneficiaries

The tax code partially exempts biomass- derived alcohol fuels- made from
nonfossil material of biological origin- from excise taxes on motor fuels.
The tax code also provides that income tax credits for alcohol fuel use may

be claimed instead of the excise tax exemption. However, the credit is in
almost all cases less valuable than the exemption and is rarely used. Tax
incentives that encourage alternatives to fossil fuels might have merit if
energy security or environmental benefits were realized. However, if alcohol
fuel use was not subsidized it is unlikely that U. S. energy security or air
quality would be significantly affected. Even with tax subsidies, alcohol
fuels are not competitive in price with fossil fuels in most markets. In
1995, alcohol fuels accounted for less than 1 percent of total U. S. energy

consumption. The incentives have not created enough usage to affect the
likelihood of an oil price shock. Nor could their use be expanded enough to
counter such a shock given existing production technologies. Use of
oxygenated fuels such as ethanol- gasoline mixtures in motor vehicles
generally produces less carbon monoxide pollution than does straight
gasoline. However, the Clean Air Act Amendments of 1990 reduced the

need for an ethanol subsidy by mandating the minimum oxygen content of
gasoline in areas with poor air quality. The global warming effects of using
ethanol are likely to be no better than, and could be worse than, those of
gasoline. The Congress may wish to consider repealing the partial excise tax

exemption and the alcohol fuels tax credit. The repeal could result in
higher federal outlays for price support loan programs, but any increase in
outlays probably would be much smaller than the estimated revenue increase.
The excise tax exemption is currently scheduled to expire on October 1,
2008; the equivalent blender?s tax credit is scheduled to expire on January
1, 2008. The table below reflects JCT?s estimated savings from this option
assuming an effective date of January 1, 2003.

Five- Year Revenues

Dollars in billions

FY03 FY04 FY05 FY06 FY07

Revenue gain .6 .8 .8 .8 .9 Note: JCT provided its revenue estimates in
billions of dollars. Source: Joint Committee on Taxation.

Related GAO Product Tax Policy: Effects of the Alcohol Fuels Tax Incentives
(GAO/ GGD- 97- 41, Mar. 6, 1997).

GAO Contact James R. White, (202) 512- 9110

Index Excise Tax Rates for Inflation

Authorizing committees Finance (Senate) Ways and Means (House)

Primary agency Internal Revenue Service Spending type Direct Framework theme
Redefine beneficiaries

Federal excise taxes are sometimes set at a fixed dollar amount per unit of
taxed good. For example, alcoholic beverages are taxed at a set rate per
gallon or barrel, with the rate varying for different types of beverages and
differing concentrations of alcohol. When set in this manner, the real
dollar value of the tax falls with inflation.

The real dollar value of these taxes can be maintained over time if the tax
is indexed for inflation or set as a percentage of the price of the taxed
product or service. Tax policy issues would need to be considered, and
administrative difficulties may be encountered, but they are not
insurmountable. The Congress may wish to consider indexing excise tax rates
for alcohol and tobacco. The table reflects JCT?s estimated revenue gains
from this option with an effective date of December 31, 2002.

Five- Year Revenues

Dollars in billions

FY03 FY04 FY05 FY06 FY07

Revenue gain .2 .5 .9 1. 2 1. 5 Note: JCT provided its revenue estimates in
billions of dollars. Source: Joint Committee on Taxation.

Related GAO Products Alcohol Excise Taxes: Simplifying Rates Can Enhance
Economic and Administrative Efficiency (GAO/ GGD- 90- 123, Sept. 27, 1990).

Tax Policy: Revenue Potential of Restoring Excise Taxes to Past Levels (GAO/
GGD- 89- 52, May 9, 1989).

GAO Contact James R. White, (202) 512- 9110

Increase Highway User Fees on Heavy Trucks

Authorizing committees Commerce, Science, and Transportation (Senate)
Transportation and Infrastructure (House)

Primary agency Department of Transportation Spending type Direct Framework
theme Redefine beneficiaries

To develop and maintain highways, the government collects user fees
including fuel taxes, a heavy vehicle use tax, an excise tax on truck and
tractor sales, and an excise tax on heavy tires. In fiscal year 1999, about

$35.1 billion was collected from general highway user taxes. For many years,
questions have been raised concerning whether highway users, including
owners of heavy trucks, pay taxes in proportion to the wear and tear that
their vehicles impose on highway pavement. In 1982, the Congress passed the
first major increase in federal highway use

taxes since 1956 in order to increase highway revenues and to respond to a
Federal Highway Administration (FHWA) report that heavy trucks underpaid by
about 50 percent their fair share relative to the pavement damage that they
caused. FHWA also reported that lighter trucks were overpaying by between 30
and 70 percent (depending on weight), and

automobiles were overpaying by 10 percent. The 1982 tax increase required
that that the ceiling for the heavy vehicle use tax be increased from $240 a
year to $1, 900 a year by 1989. In response to the concerns of the trucking
industry about the new tax structure, the Congress again revised the system
in the Deficit Reduction Act of 1984. Under the act, the ceiling for the
heavy vehicle use tax was lowered from $1, 900 to $550 a year. To ensure
that this action was revenue neutral, the Congress raised the tax on diesel
fuel from 9 cents to 15 cents per gallon.

As GAO recommended in June 1994, FHWA conducted a cost allocation study. The
study, released in August 1997, noted that the overall equity of highway
user fees could be incrementally improved by implementing either a weight-
distance tax or eliminating the existing $550 cap on the Heavy

Vehicle Use Tax. However, the study made no recommendations; the
administration continues to monitor highway user fees but plans no action
unless the overall equity of highway user fees worsens. The Joint

Committee on Taxation (JCT) estimates that removing the $550 cap on the
Heavy Vehicle Use Tax, effective December 31, 2001, would result in the
revenue gains shown in the table below.

Five- Year Revenues

Dollars in billions

FY03 FY04 FY05 FY06 FY07

Revenue gain .1 .1 .1 .1 .1 Note: JCT provided its revenue estimates in
billions of dollars. Source: Joint Committee on Taxation.

Related GAO Product Highway User Fees: Updated Data Needed To Determine
Whether All Users Pay Their Fair Share (GAO/ RCED- 94- 181, June 7, 1994).
GAO Contact John H. Anderson, Jr., (202) 512- 2834

Require Corporate Tax Document Matching

Authorizing committees Finance (Senate) Ways and Means (House)

Primary agency Internal Revenue Service Spending type Direct Framework theme
Improve efficiency

IRS? document matching program for payments to individuals has proven to be
a highly cost- effective way of bringing in billions of dollars in tax
revenues to the Treasury while at the same time boosting voluntary
compliance. However, unlike payments to individuals, the law does not
require that information returns be submitted on most payments to
corporations.

Generally using IRS? assumptions, we estimated the benefits and costs for a
corporate document matching program that would cover interest, dividends,
rents, royalties, and capital gains. Assuming that a corporate document
matching program began in 1993, we estimated that for years 1995 through
1999, IRS? annual costs would be about $70 million and

annual increased revenues about $1 billion. This estimate did not factor in
compliance costs and changes in taxpayer behavior. Given increased corporate
noncompliance, and declining audit coverage, the Congress may wish to
require a corporate document matching program. JCT agrees that the option
has the potential for increased revenue but has not developed estimates of
revenue gain.

Related GAO Product Tax Administration: Benefits of a Corporate Document
Matching Program Exceed the Costs (GAO/ GGD- 91- 118, Sept. 27, 1991).

GAO Contact James R. White, (202) 512- 9110

Improve Administration of the Tax Deduction for Real Estate Taxes

Authorizing committees Finance (Senate) Ways and Means (House)

Primary agency Internal Revenue Service Spending type Direct Framework theme
Improve efficiency

IRS audits show that individuals overstated their real estate tax deductions
by about $1.5 billion nationwide in 1988. We estimate that this resulted in
a nearly $300 million federal tax loss, which would increase to about $400
million for 1992. However, this may understate lost revenues because our
review also found that IRS auditors detected only about 29 percent of $127
million in overstated deductions in three locations we reviewed. Revenues
could be lost not only for the federal government but also for the

31 states which in 1991 tied their itemized deductions to those used for
federal tax purposes. Two changes to the reporting of real estate cash
rebates and real estate taxes could reduce noncompliance and increase
federal tax collections. First, the Congress could require that states
report to IRS, and to taxpayers on Form 1099s, cash rebates of real estate
taxes. Second, the Congress could require that state and local governments
conform real estate tax

statements to specifications issued by IRS that would separate real estate
taxes from nondeductible fees, which are often combined on these statements.

For estimation purposes, the proposals would be effective for rebates issued
after December 31, 2001, and for amounts reported on tax bills after
December 31, 2002. JCT estimates that the proposals together, would increase
federal fiscal revenues as shown in the table below.

Five- Year Revenues

Dollars in billions

FY03 FY04 FY05 FY06 FY07

Revenue gain 0 * .1 .2 .2 Note: JCT provided its revenue estimates in
billions of dollars. * - less than $50 million Source: Joint Committee on
Taxation.

Related GAO Product Tax Administration: Overstated Real Estate Tax
Deductions Need To Be Reduced (GAO/ GGD- 93- 43, Jan. 19, 1993). GAO Contact
James R. White, (202) 512- 9110

Increase Collection of Returns Filed by U. S. Citizens Living Abroad

Authorizing committees Finance (Senate) Ways and Means (House)

Primary agency Internal Revenue Service Spending type Direct Framework theme
Improve efficiency

U. S. citizens residing abroad are generally subject to the same filing
requirements as citizens residing in the United States. The State Department
estimated the total population of U. S. citizens living abroad at about 3.1
million in 1995, excluding active military and current government personnel.
Some evidence suggests that the failure to file tax returns may be
relatively prevalent in some segments of the U. S. population abroad, and
the revenue impact, while unknown, could be significant.

IRS?s ability to identify and collect taxes from nonfilers residing abroad
is restricted by the limited reach of U. S. laws in foreign countries,
particularly U. S. laws on tax withholding, information reporting, and
enforced collection through liens, levies, and seizures. Another factor that
could contribute to nonfiling abroad is the ambiguity in IRS?s filing
instructions for its Form 1040 and related guidance. For example, it may not
be clear that income qualifying for the foreign earned income or housing
expense exclusions must be considered in determining whether one?s gross
income exceeds the filing threshold.

In pursuing nonfilers abroad, IRS has not fully explored the usefulness of
passport application data as a means of identifying potential nonfilers.
While passport applications contain no income information, they could be
used to collect applicants? social security number, age, occupation, and
country of residence.

IRS may want to take additional steps to enforce the current information
requirement that all passport applicants provide their social security
numbers as a means of identifying potential nonfilers abroad. IRS may also
want to clarify its instructions for determining what income must be
considered in determining whether gross income exceeds the filing threshold.
Initial projects to increase the number of returns filed from

overseas suggest that the potential increase in tax revenues would justify
the costs to improve compliance.

JCT agrees that the option has the potential for increased revenue but has
not developed estimates of revenue gain. Related GAO Products Tax
Administration: Nonfiling Among U. S. Citizens Abroad (GAO/ GGD98- 106, May
11, 1998).

IRS Activities to Increase Compliance on Overseas Taxpayers (GAO/ GGD- 93-
93, May 18, 1993). GAO Contact James R. White, (202) 512- 9110

Increase the Use of Seizure Authority to Collect Delinquent Taxes

Authorizing committees Finance (Senate) Ways and Means (House)

Primary agency Internal Revenue Service Spending type Direct Framework theme
Improve efficiency

IRS? use of its statutory authority to seize taxpayer assets has been
instrumental in bringing into compliance (i. e., full pay status) many
delinquent taxpayers who had been unresponsive to other tax collection
efforts, including demands for payment through letters, phone calls,
personal visits, and levies on bank accounts and wages. Of the approximate
8, 300 taxpayers whose assets were seized by IRS in fiscal year

1997, about 42 percent became fully tax compliant-- resolving about $186
million in tax debts-- as a result of the seizures. In total, the seizure of
taxpayer property in fiscal year 1997 resulted in resolving about $235
million or about 22 percent of the $1.1 billion of tax debts owed by the
8,300 taxpayers. IRS? use of seizure authority has been in a period of
transition as IRS adapts to the requirements of the IRS Restructuring and
Reform Act of 1998. During this transition the number of seizures has
declined over 98 percent. IRS employees told GAO that seizures have nearly
stopped because of their uncertainty over the act?s seizure requirements and
IRS? slow development of workable policies and procedures for implementing
the act.

IRS national office officials indicated to GAO that they expected the number
of seizures to rebound as changes to the seizure program are implemented and
employees adapt to the new requirements. The officials also indicated that
the expected rebound would be to levels significantly below preact
experience given (1) IRS program changes that provide taxpayers with
additional opportunities to resolve their tax delinquencies prior to
seizure, (2) expanded definition of taxpayer property statutorily exempt
from seizure, (3) increased time available to taxpayers to exercise

rights to challenge seizures, and (4) reductions in collection staff
available to make seizures.

Until the anticipated rebound begins, however, IRS is at risk of forgoing
the collection of millions of dollars as indicated by the 1997 data. To
facilitate the rebound and to help ensure that seizure authority is used
when warranted, GAO has made a number of recommendations to IRS. In part,

GAO recommended that IRS provide written guidance to employees on when
seizure action ought to be taken, that is, the conditions and circumstances
that would justify seizure action and the responsibilities of senior
managers to ensure that such actions are taken. Effective implementation of
the recommendations, particularly those involving the responsibilities of
IRS managers, is contingent on the success of the

ongoing time- phased organizational restructuring of IRS as mandated by the
1998 act.

JCT agrees that the option has the potential for increased revenue but has
not developed estimates of revenue gain. Related GAO Product IRS Seizures:
Needed for Compliance but Processes for Protecting

Taxpayer Rights Have Some Weaknesses (GAO/ GGD- 00- 4, Nov. 29, 1999). GAO
Contact James R. White, (202) 512- 9110

Increase Collection of Self- employment Taxes

Authorizing committees Finance (Senate) Ways and Means (House)

Primary agency Internal Revenue Service Spending type Direct Framework theme
Improve efficiency

Self- employed taxpayers can get Social Security benefits based on earnings
for which they did not pay taxes because the Social Security Act requires
the Social Security Administration to grant earnings credits, which are used

to determine benefit eligibility and amounts, and pay benefits without
regard to whether the Social Security taxes have been paid. As of September
1997, more than 1.9 million self- employed taxpayers were delinquent in
paying $6.9 billion in self- employment taxes. Also, more than

144,000 taxpayers with delinquent self- employment taxes of $487 million
were receiving about $105 million annually in monthly Social Security
benefits.

While IRS?s ability to collect self- employment taxes before taxpayers
become delinquent is hampered because there is no withholding on
selfemployment income, most self- employed taxpayers are required to make
estimated tax payments. However, as of September 1997, about 90 percent of
the delinquent self- employed taxpayers required to make estimated tax

payments did not. In the past, there have been proposals to deny social
security credits to taxpayers that fail to pay their self- employment taxes
and to require withholding on certain self- employment income. No actions
were taken on

these proposals. One way to collect self- employment taxes before taxpayers
become delinquent that does not require a law change would be to encourage
more self- employed individuals to make their required estimated tax
payments. IRS could do this by establishing a program to remind previously
noncompliant taxpayers (i. e., those who were assessed an estimated tax
penalty the previous year) to make such payments. JCT agrees that the option
has the potential for increased revenue but has not developed estimates of
revenue gain.

Related GAO Product Tax Administration: Billions in Self- Employment Taxes
Are Owed (GAO/ GGD- 99- 18, Feb. 19, 1999). GAO Contact James R. White,
(202) 512- 9110

Increase the Use of Electronic Funds Transfer for Installment Tax

Authorizing committees Finance (Senate)

Payments

Ways and Means (House) Primary agency Internal Revenue Service Spending type
Direct Framework theme Improve efficiency

The Internal Revenue Code authorizes IRS to allow taxpayers to pay their
taxes in installments, with interest, if this arrangement would facilitate
collection of the liability. As of September 2000, IRS had about 2.2 million

installment agreements outstanding, worth about $8. 3 billion. At the end of
fiscal year 2000, approximately 35 percent of these installment agreements
were in default. A number of states use electronic funds transfer (EFT) to
make their installment agreement program more efficient and effective. One
state, Minnesota, requires taxpayers to pay by EFT, with some exceptions. As
of late 1997, approximately 90 percent of Minnesota?s installment agreements
were EFT agreements, and the default rate had dropped from about 50 percent
to between 3 percent and 5 percent in the 2 years the EFT requirement has
been in effect. In California, within 6 months of implementing its EFT
procedures, its default rate for new installment agreements dropped from
around 40 percent to 5 percent. EFT payments also produce administrative
savings through lower processing costs involved in recording and posting
remittances, lower postage and handling costs associated with sending
monthly payment

reminders, and lower collection enforcement costs needed to pursue fewer
taxpayers in default. IRS?s initial comparison of the cost of EFT payments
with the cost of having taxpayers send installment payments to lockboxes in
commercial banks showed that EFT payment costs were about 37 percent less
than the lockbox costs. The reported benefits for IRS of using EFT for
installment agreement payments include the potential to reduce the
percentage of taxpayer defaults, decrease administrative costs, and achieve
faster collections. At the end of fiscal year 2000, less than 1.5 percent of
IRS? outstanding

installment agreements were EFT agreements.

JCT agrees that the option has the potential for increased revenue but has
not developed estimates of revenue gain. Related GAO Products Tax
Administration: Increasing EFT Usage for Installment Agreements Could
Benefit IRS (GAO/ GGD- 98- 112, June 10, 1998).

Tax Administration: Administrative Improvements Possible in IRS? Installment
Agreement Program (GAO/ GGD- 95- 137, May 2, 1995). GAO Contact James R.
White, (202) 512- 9110

Reduce Gasoline Excise Tax Evasion

Authorizing committees Finance (Senate) Ways and Means (House)

Primary agency Internal Revenue Service Spending type Direct Framework theme
Improve efficiency

Although no current and reliable estimate of gasoline excise tax evasion
exists, the most recent Federal Highway Administration estimate, from 1992,
was that evasion amounted to between 3 and 7 percent of gasoline excise tax
revenue. From a tax administration perspective, moving the collection point
for gasoline excise taxes from the terminal to the refinery level may reduce
tax evasion because (1) gasoline would change hands

fewer times before taxation, (2) refiners are presumed to be more
financially sound and have better records than other parties in the
distribution system, and (3) fewer taxpayers would be involved. However,
industry representatives raise competitiveness and cost- efficiency
questions associated with moving the collection point. In a May 1992 report,
we suggested that the Congress explore the level of gasoline excise tax
evasion and, if it was found to be sufficiently high, move tax collection to
the point at which gasoline leaves the refinery. JCT agrees that the option
has the potential for increased revenue but has not developed estimates of
revenue gain.

Related GAO Product Tax Administration: Status of Efforts to Curb Motor Fuel
Tax Evasion (GAO/ GGD- 92- 67, May 12, 1992). GAO Contact James R. White,
(202) 512- 9110

Improve Independent Contractor Tax Compliance

Authorizing committees Finance (Senate) Ways and Means (House)

Primary agency Internal Revenue Service Spending type Direct Framework theme
Improve efficiency

Common law rules for classifying workers as employees or independent
contractors are unclear and subject to conflicting interpretations. While
recognizing this ambiguity, the Internal Revenue Service (IRS) enforces tax
laws and rules through employment tax examinations. Through fiscal year
1995, 90 percent of these examinations had found misclassified workers. From
October 1987 through December 1991, the average IRS tax assessment relating
to misclassified workers was $68,000.

Establishing clear rules is difficult. Nevertheless, taxpayers need-- and
the government is obligated to provide-- clear rules for classifying workers
if businesses are to voluntarily comply. In addition, improved tax
compliance

could be gained by requiring businesses to (1) withhold taxes from payments
to independent contractors and/ or (2) file information returns with IRS on
payments made to independent contractors constituted as corporations. Both
approaches have proven to be effective in promoting individual tax
compliance. During 1993, the Congress considered but rejected extending
current information reporting requirements for unincorporated independent
contractors to incorporated ones. Thus, independent contractors organized as
either sole proprietors or corporations could have been on equal footing,
and IRS could have had a less intrusive means of ensuring

their tax compliance. In recent years, various proposals on clarifying the
definition of independent contractors and improving related information
reporting emerged. Congressional hearings dealt with some of these bills. We
believe that revenues from this option could possibly increase by

billions of dollars. JCT agrees that the option has the potential for
increased revenue but has not developed estimates of revenue gain.

Related GAO Products Tax Administration: Estimates of the Tax Gap for
Service Providers (GAO/ GGD- 95- 59, Dec. 28, 1994).

Tax Administration: Approaches for Improving Independent Contractor
Compliance (GAO/ GGD- 92- 108, July 23, 1992).

GAO Contact James R. White, (202) 512- 9110

Expand the Use of IRS?s TIN- Matching Program

Authorizing committees Finance (Senate) Ways and Means (House)

Primary agency Internal Revenue Service Spending type Direct Framework theme
Improve efficiency

The IRS and FMS have recently initiated a continuous tax levy program
designed to identify and levy federal payments to taxpayers that owe federal
taxes. The potential effectiveness of this program will be reduced because
payment records submitted to FMS by federal agencies often have an
inaccurate Taxpayer Identification Number (TIN) and/ or name.

Since 1997, IRS has had a TIN- matching program that federal agencies can
use to verify the accuracy of TIN and name combinations furnished by federal
payees that are necessary for issuing information returns. This program was
intended to reduce the number of notices of incorrect TIN and name
combinations issued for backup withholding by allowing agencies the
opportunity to identify TIN and name discrepancies and to contact payees for
corrected information before issuing an information

return. Monthly, federal agencies may submit a batch of name and TIN
combinations to IRS for verification. IRS matches each record submitted and
informs the agency whether the TIN and name submitted matches its records.
However, IRS cannot explicitly tell an agency what the correct TIN, name, or
both TIN and name should be if the records do not match. To do so would
violate tax disclosure laws.

In an April 2000 report, we found that about 33 percent of vendor payment
records submitted by federal agencies to FMS during one quarter in fiscal
year 1999 had TINs and/ or names that differed with the TINs and/ or names
in IRS? accounts receivable records. As a result, vendor payment records
totaling almost $20 billion were unsuitable for matching against IRS?s

accounts receivable records and therefore would not be included in the joint
FMS/ IRS continuous tax levy program for the purpose of reducing federal tax
delinquencies. The Congress may wish to expand the use of IRS?s TIN-
matching program for purposes other than information reporting to enable
federal agencies to

specifically verify the accuracy of vendor TINs and names. This would help
to reduce the number of federal payment records that are unsuitable for
matching against IRS?s accounts receivable records and to increase the
number of federal tax delinquencies that could be collected through the
continuous tax levy program. We estimate that resolving inconsistencies
between the names payees use to receive federal payments and the names
payees use on their federal tax returns could generate as much as $74
million annually. The table below reflects JCT?s estimated savings from

this option for contracts entered into after December 31, 2001.

Five- Year Revenues

Dollars in billions

FY03 FY04 FY05 FY06 FY07

Revenue g ain ***** Note: JCT provided its revenue estimates in billions of
dollars. * - less than $50 million Source: Joint Committee on Taxation.

Related GAO Product Tax Administration: IRS? Levy of Federal Payments Could
Generate Millions of Dollars (GAO/ GGD- 00- 65, April 7, 2000). GAO Contact
James R. White, (202) 512- 9110

Appendi x I V

Options Not Updated for This Report The following table provides information
on options presented in earlier versions of this series that are not
included in this product. Seventeen options from our last report are not
included in this report because (1) the option was fully or substantially
acted upon by the Congress or the cognizant agency, (2) the option was no
longer appropriate due to environmental changes or the aging of our work, or
(3) the Congress or the cognizant agency chose a different approach to
address the issues discussed in the option. We will continue to monitor many
of these options to assess whether underlying issues are ultimately resolved
based on the actions taken. It is possible that some of the issues discussed
below may appear in subsequent editions of this series.

Option (budget function) Comments

Limit Funding for Procurement of Antiarmor In response to antiarmor
inventories that are more than adequate to defeat current Weapons (050)
threats, the services have reduced spending on antiarmor programs to less
than $1 billion- the suggested spending ceiling in our option last year.
Eliminate or Retask Dedicated Continental Air

The remaining four Air National Guard units are no longer dedicated to air
defense. The Defense Units (050) Air Force has aligned these units with its
Aerospace Expeditionary Forces and expects them to participate in rotational
deployments to support contingency operations, as do all other Air National
Guard Units. Reduce the Risk Assumed by Export- Import

We will reconsider this option in light of recent Eximbank efforts to reduce
loans and loan Bank Programs (150) guarantees in high- risk markets. Monitor
Department of Energy?s Strategic This option was based on 1997 utilization
rate data and more recent data are not readily Computing Initiative and
Supercomputer available. Utilization (270)

Exempt Department of Energy?s Operating Recent data are not readily
available on the extent to which DOE contractors are Contractors from
Certain State Taxes (270) reimbursed by the federal government for state tax
payments. Reduce Department of Energy?s Contractors? Recent data are not
readily available on the extent to which DOE contractor separation
Separation Benefits (270) benefits exceed separation benefits provided to
federal employees. Rescind Clean Coal Technology Funds (270) DOE has acted
to reduce unobligated balances for this program. Increase Flexibility in
ATSDR?s Health

The Congress included language in P. L. 106- 74 that provides ATSDR with
flexibility in its Assessment Process to Better Meet EPA?s health assessment
process. Similar language was provided in EPA?s appropriation bill for Needs
in Evaluating Superfund Sites (300)

fiscal year 2001. Improve Oversight of Superfund EPA has acted to
periodically analyze Superfund expenditures for the purpose of
Administrative Expenditures to Better Identify

identifying opportunities to reduce non- site- specific expenditures.
Opportunities for Cost Savings (300)

Strengthen Controls Over Crop Insurance The Risk Management Agency and the
participating crop insurance companies Claims (350) announced a joint
initiative to strengthen oversight of improper payments.

(Continued From Previous Page)

Adequacy of Affordability and Contract DOT received $320 million for the
Deepwater Program in its fiscal year 2002 Approach of the Coast Guard
Deepwater appropriations act. The act prohibited the obligation or
expenditure of these funds until Project (400) DOT and OMB (1) jointly
certify that funding for the program for fiscal years 2003 through 2007 is
fully funded in the Coast Guard?s Capital Investment Plan and within OMB?s
budgetary projections and (2) jointly approve a contingency procurement
strategy for the recapitalization of Coast Guard deepwater assets and
capabilities.

Improve FAA Oversight and Enforcement to The Wendell H. Ford Aviation
Investment and Reform Act for the 21 st Century requires Ensure Proper Use
of General Aviation Airport that the Secretary of Transportation provide a
list of airports believed not to comply with Land and Revenue (400)

federal requirements for land and revenue use, along with plans for
corrective action. Design New Payment System so that The Health Care
Financing Administration (HCFA), now known as the Centers for Medicare Does
Not Overpay for Home Health Medicare and Medicaid Services implemented a new
prospective payment system under Care (570)

which Medicare makes a single payment for each 60- day episode of home
health care rather than paying home health agencies for their costs, subject
to limits, for services provided to beneficiaries. Limit Enrollment in
Veterans Affairs Health

VA has acted to collect and provide the Congress with information it needs
on VA?s Care System (700) workload.

Consolidate Asset Forfeiture Programs at the Given recent efforts by
Treasury and DOJ to better coordinate their asset forfeiture Departments of
Justice and Treasury (750) programs, including four joint pilot projects, we
will reassess this option and continue to

monitor their progress. Repeal the Davis- Bacon Act (999) The Department of
Labor has acted to improve the accuracy of wage data used to calculate
prevailing wage rates used as a floor in federal construction contracts.
Thus,

whether or not Davis- Bacon wage requirements inflate construction costs is
no longer an issue of the accuracy of wage rates. Impose Pollution Fees and
Taxes (Receipts) Administrative initiatives to ?reinvent? environmental
regulation represent alternatives to pollution fees or tax schemes in that
they retain a focus on compliance with environmental regulations, rather
than relying on pricing mechanisms, to determine the overall level of
pollution that is generated.

Appendi x V

GAO Contacts and Staff Acknowledgments GAO Contacts Hundreds of people
throughout GAO were responsible for either preparing the options included in
this product or producing the reports and testimonies that form the basis
for the options. At the end of each option, a key contact name is provided
to address questions pertaining to the specific option.

Staff Michael J. Curro, Assistant Director, Bryon Gordon, Senior Analyst,
and

Acknowledgments Landis Lindsey, Analyst, prepared this report. Questions may
be directed to these staff in the Strategic Issues Team, at (202) 512- 9573.

(450054)

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a

GAO United States General Accounting Office

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Contents

Contents

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Contents

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Contents

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Contents

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Page 1 GAO- 02- 576 Budget Implications of GAO Work United States General
Accounting Office

Washington, D. C. 20548 Comptroller General

of the United States A

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Appendix I

Appendix I Explanation of Conventions Used to Estimate Savings and Revenue
Gains

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Appendix II

Appendix II A Framework for Considering Cost Savings and Revenue Increases

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Appendix II A Framework for Considering Cost Savings and Revenue Increases

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Appendix II A Framework for Considering Cost Savings and Revenue Increases

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Appendix II A Framework for Considering Cost Savings and Revenue Increases

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Appendix II A Framework for Considering Cost Savings and Revenue Increases

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Appendix II A Framework for Considering Cost Savings and Revenue Increases

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Appendix III

Appendix III Options for Increased Savings and Revenue Gains

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Appendix III Options for Increased Savings and Revenue Gains

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Appendix III Options for Increased Savings and Revenue Gains

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Appendix III Options for Increased Savings and Revenue Gains

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Appendix III Options for Increased Savings and Revenue Gains

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Appendix III Options for Increased Savings and Revenue Gains

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Appendix III Options for Increased Savings and Revenue Gains

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Appendix III Options for Increased Savings and Revenue Gains

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Appendix III Options for Increased Savings and Revenue Gains

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Appendix III Options for Increased Savings and Revenue Gains

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Appendix IV

Appendix IV Options Not Updated for This Report

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Appendix V

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Address Correction Requested Presorted Standard

Postage & Fees Paid GAO Permit No. GI00
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